The Changing Determinants of Economic Performance in the World Economy
New Horizons in Institutional and Evolutionary Economics series
Chapter 18: Long-term and more recent trends in economic organization
Besides emphasizing the wide variety of efficient organizational arrangements in modern economies, our theoretical framework provides a fruitful basis for discussing some of the long-term and more recent trends in economic organization. In the functional dimension it provides plausible explanations for: (1) historical shifts in private sector organizational paradigms (from small firms and competitive markets to large vertically integrated hierarchies and further to flexible inter-firm networks); (2) long-term growth in government role; (3) increasing importance of inter-firm networks and non-profit organizations; and (4) the privatization of state-owned enterprises. In the geographical dimension the framework can explain (5) the internationalization of corporate hierarchies and inter-firm networks and the historical rise in the geographical scope of public sector activities and (6) the recent emphasis on local governments and ‘subsidiarity’ among the different levels of government. We analyze each of these organizational trends below. Historical shifts in private sector organizational paradigms Historically the diffusion of major technological revolutions led to new ‘best practice’ organizational arrangements in value-adding activities (see Part 2; Freeman and Perez 1988). The first industrial revolution replaced the traditional geographically dispersed ‘putting-out’ system with centralized factory production (see e.g. Williamson 1985). The small firms that operated factories were best coordinated through the ‘invisible hand’ of the market mechanism. The second industrial revolution required a new change in the organizational paradigm. In the late nineteenth century in the USA, and a few decades later in Europe, small firms and competitive markets were to a large extent replaced by large, vertically integrated...
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