WHAT FIRMS DO - COORDINATION, IDENTITY, AND LEARNING

Firms are organizations that represent social knowledge of coordinatio n and learning. But why should their boundaries demarcate quantitative shifts in the knowledge and capability of their members? Should not k nowledge reside also in a network of interacting firms? This line of q uestioning presents the challenge to state an alternative view to the ''theory of the firm,'' a theory that has moved from Cease's early tre atment of what firms do to a concern with ownership, incentives, and s elf-interest. We return to Cease's original insight in understanding t he cost and benefits of a hrm but based on a view that individuals are characterized by an ''unsocial sociality.'' Does the perception of op portunism generate the need to integrate market transactions into the fimi, or do boundaries of the firm lead to the attribution of opportun ism? This basic dichotomy between self-interest and the longing to bel ong is the behavioral underpinning to the superiority of firms over ma rkets in resolving a fundamental dilemma: productivity grows with the division of labor but specialization increases the costs of communicat ion and coordination The knowledge of the firm has an economic value o ver market transactions when identity leads to social knowledge that s upports coordination and communication. Through identification, proced ural rules are learned, and coordination and communication are facilit ated across individuals and groups of diverse specialized competence.A firm is distinct from a market because coordination, communication, a nd learning are situated not only physically in locality, but also men tally in an identity. Since identity implies a moral order as well as rules of exclusion, there are limitations and costs to relying upon a firm for exchange as opposed to the market. These costs are not necess arily those traditionally assigned to the category of decreasing retur ns to hierarchy. For example, an identity implies that some practices, and business, may be notionally inconsistent with each other. Norms o f procedural justice that are identified with a firm imply that not al l technically feasible complements are permissible within the logic of a shared identity. There is consequently a cost to an identity that o ffsets the benefits. Because the assemblage of elements that compose a n organization are subject to requirements of consistency, identities rule out potentially interesting avenues of innovation and creativity. We illustrate these ideas by returning to the original prisoners' dil emma game and by an analysis of the coherence of a firm as a search fo r complements that are consistent with norms of procedural justice. We argue that the underlying dynamic of a prisoners' dilemma game reveal s the problems of coordination, communication, and conflicts in norms of justice when players are deprived of social knowledge and shared id entity. Similarly, the determination of a firm's coherence arises out of the demand for a moral and notional consistency in the ''categoriza tion'' of its activities, as opposed to a technological necessity. The se ideas are illustrated through an empirical examination of logical c omplements in high performance work systems.