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How is technological change affecting the nature of the corporation?

Birkinshaw, J.

The transition to the Industrial era in the late 19th century brought a fundamental shift in the scale, scope and structure of firms. It also led to new institutions (limited liability corporations, competition laws, accounting standards) to support and monitor these firms. The history of that evolution demonstrates how the structures of corporations adapted, alongside the types of products and services, and the wider social context within which the firms operated.

An equally profound transition to a digital era is underway, causing firms and policymakers to re-think basic assumptions about what they do, and why. This paper looks at the collective effect of the digital revolution on the fundamental choices firms make about their size and scope and the implications for governments and policymakers.

Elements of the transition are already in place. The emergence of tech giants has highlighted the superiority of platform-based business models compared to traditional linear business in markets for digital goods. However, government policies are ill-equipped to deal with such corporations because regulations derive from the pre-digital era.

The author shows how changes in firm size and scope are occurring more rapidly than changes in internal organisation, which in turn are adapting more rapidly than the institutional structures surrounding firms. These lags are creating tensions between traditional and digital firms, and between digital firms and policymakers. Both management innovation and institutional innovation are needed.

Firms are shifting from hierarchical to platform models that bring users and providers of services together more efficiently. In a digital economy, the bigger firms are, the bigger they are likely to become. Large firms spend more on technological innovation which impacts the nature of work and the number of jobs. Transaction costs between firms are falling and need less human intervention. The greater transparency offered by technological processes makes it easier to resolve disputes and problems. On the other hand, the trend is from vertically integrated firms to horizontally specialised structures with deep expertise in one narrow area, and from standalone firms to ecosystems of interacting firms and individuals who co-evolve.

The author notes the widening gap between the growing digital economy and the shrinking industrial economy where firms employ capital and people in traditional ways. These firms often consolidate to counter the new threat. While this process of creative destruction may ultimately be good for society, the short-term costs are huge.

Institutional structures are responding even more slowly that most traditional firms. The paper examines four particular areas. Intellectual property ownership rules have adapted successfully to the economics of digital production. However, employment law, audit and measurement, and competition policy are moving more slowly. There is agreement that change is needed but not where or how. A major challenge is how to value to data and information which makes digital firms so powerful.

There have been attempts at institutional innovation, for example the General Public License for software, but instances are still rare and more research is needed to identify other successful innovations and the roles played by different actors (governments, activists, firms) in implementing them.

One theme that cuts across the entire review is the trend towards computer-based automation and how it is likely to result in wide-scale unemployment. In a competitive market, firms have to match the cost stricture of their competitors but job sharing, employing more people for fewer hours and expanding flexible and freelance arrangements present opportunities for progress.

For further information please contact the Project Manager on FOTC@thebritishacademy.ac.uk.

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