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Competitive dynamics and economic

learning: an extended resource-based viewJohn A. Mathews

In this paper a conceptual framework for the analysis of economic learning is

developed. Economic learning, by analogy with organizational learning, results in

the development of economic competences, or capabilities, shared between firms,

which rest on a foundation of economic resources, from which value is generated,

and economic routines, through which resources are utilized. It is the mobility of

resources, and their exchange and production dynamics, along evolutionary

pathways, which underpins the plausibility of a notion of economic learning. The

paper elaborates this framework as a resource-based view (RBV) of the economy

as a whole, as an extension of the RBV of the firm. Such a framework captures the

dynamics of exchange and circulation of technologies, know-how and intangible

assets, as well as of tangible assets and capital goods; it is concerned with

investment behavior by entrepreneurs rather than with the behavior of producers

and consumers in goods and services markets. Within this resource economy

framework, it is possible to generate an account of the resource dynamics that

underpin production of goods and servicesincluding resource propagation,

diffusion, imitation, replication and recombination. These processes encompass

evolutionary pressures, experienced through resource variation, selection and

retention. Entrepreneurial initiatives take the form of resource recombinations,

while resource innovation captures the creation of new economic resources, such

as technological standards. Such a perspective brings into focus the resource

specialization and configurations that drive real economies, within firms and

between firms, that translates into enhanced or diminished performance of the

economy as a whole.

1. Introduction

It is a striking feature of successful economic sectors and districts that they display

adaptive responses to changing circumstances, bringing firms into alignments with

each other, in ways that mimic a process of learning. The success of Japan as an

industrial power, and of other East Asian countries like Taiwan, Korea and Singapore,

clearly owes more to learned patterns of economic behavior, oriented towards national

goals of industrial catch-up, than to firms responding independently as programmedprofit maximizers to random price signals. Similar patterns can be found in the

Industrial and Corporate Change, Volume 12, Number 1, pp. 115145


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advanced countries of the West. The success of firms in Silicon Valleyis clearly grounded in

a rich industrial ecology where firms and institutions such as venture capitalists

co-evolve in learned patterns of adaptation to new technological opportunities.

Clusters of complementary firms in industrial districts, once thought to be charac-

teristic of the nineteenth century but marginalized by mass production developments

in the twentieth century, continue to flourish, through patterns of collective adaptation

and co-ordinated response to external challenges. All these represent systemic patterns

of behavior that I suggest is best captured as a notion of economic learning.

Economic learning, by analogy with organizational learning, results in the develop-

ment of competences, or capabilities, which rest on a foundation of economic resources,

from which value is generated, and economic routines, through which resources are

utilized. Economic learning, then, seems to be associated closely with the availability of

resources, whose specialization and configuration both within and between firms can

be seen to be critical to the outcome of economic adjustment. It is also closely

associated with the development of economic routines, such as routines involved in

facilitating the founding of new firms, or routines involved in sharing and transfer of

technologies within R&D consortia. It is the mobility of resources, and the availability

and replicability of routines, their exchange and production dynamics, along evolu-

tionary pathways, which underpins the plausibility of a notion of economic learning.

Economic learning may be viewed as one of the contributors to what Baumol (2002)

has recently called the growth miracle of capitalism. Accounts of the economic system

that fail to differentiate the free-market innovation machine of capitalism from other

variants miss the mark, according to Baumol. A focus on economic learning that arisesfrom inter-firm interaction is therefore in the spirit of Baumols challenge, and

addresses the issue of how it is that capitalism renews itself so successfully. Just as

successful companies routinize the processes of innovation, so successful economies

routinize the processes of economic adaptation and learning.

This focus on routines, and the resources that underpin them, in an economic con-

text, is the prime contribution of this paper. I elaborate this framework as a resource

economy (RE)by which I mean an economy of circulating resources, encompassing

such tangible assets as technologies and capital goods, and intangible assets as

know-how, patents and intellectual property rights. The recognition and identificationof such entities is one of the most striking features of recent scholarship (Teece, 1998;

Arora et al., 2001). Markets for such entities are emerging, giving firms new pathways

for the acquisition of critical resources and routines, and expanding their options for

entering new production activities. This can be conceived as a resource-based view

(RBV) of the economy as a whole, in conscious extension of the RBV of the firm.

Such a framework, to be credible, would need to be able to generate an account of

firms that is consistent with the conventional RBV; firms would be seen as encapsulated

bundles of resources and routines, thus reproducing the strategic insights of the

conventional RBV of the firm, namely that firms base their success in their distinctivecompetences which are grounded in their resources and routines. But the extended

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framework does so without remaining trapped in an internalistperspective, which has

to date been a serious limitation on the wider application of the RBV. On the contrary,

an extended resource-based perspective sees firms as being able to draw on a wide array

of external resources, through both market-mediated transactions and through various

kinds of resource exchange and resource leverage relations that link firms in value-

chains that criss-cross the economy. Unlike the conventional RBV, which remains tied

to the analysis of the resource choices of incumbents and their extraction of Ricardian

rents, this extended view applies as much to challengers as to incumbents, generating an

evolutionary perspective on the competitive dynamics through which industrial sectors

rise and fall. It is concerned with firmsdeveloping competitive strategies in terms of the

capture of Schumpeterian entrepreneurial profits, both through individual action and

through inter-firm mechanisms that underpin economic learning.

Over and above these matters, the extended RBV of the economy can be expected to

generate further interesting insights based on the propagation, specialization anddiffusion of resources within the economy and their evolutionary and co-evolutionary

dynamics, all underpinning the astonishing innovative capacities of the free-market

economy. To facilitate discussion, the paper introduces a simple qualitative model,

involving five basic, or elemental, categories, and their interactions. These are firms

(actors); their activities; the resources used by firms to generate value; the routines they

build to activate resources; and the strategic values (fitness functions) through which

firms differentiate themselves. In this framework, firms are seen as the basic drivers of

the industrial system, capturing resource bundles and building routines to capture the

services of the resources, which together enable the firms to engage in activities(transformation of inputs into outputs). In activities we see the realm of costs and

microeconomic analysis; this is the familiar world of producers and consumers

interacting in the economy of goods and services. The RE, by contrast, is the dual of

this; it is the world of investment in resources by entrepreneurs, with all the learning

dynamics that characterize such activities. It is a world of increasing returns and

disequilibrium dynamics, consistent with Austrian theorizing.1 Firms develop dynamic

capabilities as they interact to create the routines involved in economic learning.

Consistent with Baumol, it is the interaction between firms which must be seen as the

source of innovative capacity, and economic learning.

The approach explored provides a way of dealing with the fundamental links

between economic performance and industrial organization. Resources may be

clustered locally, as in industrial districts, or distributed vertically, as in subcontracting

pyramids, or configured through various kinds of competitive-cum-collaborative

consortia and networks. Knowledge resources can be generated in public institutions

such as universities, and propagated through the wider economy. Resources can be

1See Arora et al. (2001) for a pioneering account of emerging markets for technological resources, and

Teece (1998) for an account of markets for know-how (knowledge resources). For the contributions of

Austrian traditions to current strategic management and economic analysis, see Lewin (1997) andLewin and Phelan (1999).

Competitive dynamics and economic learning: an extended resource-based view 117


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time, as they develop and accumulate their dynamic capabilities.5 Organizational

learning implies the existence and acquisition of organizational competences as the

outcome of learning. The learning organization is one that can translate the learning

of individual members or individual business units into something that belongs to an

organization as a wholeinto its organizational capabilities. It refers to the creation of

competences/capabilities that transcend those held by individuals. Quick and nimble

organizations are those that can call on such capabilities. Learning in this context

implies the existence of an organizational memory in the form of behavioural routines

such as standard operating procedures and the ability to learn from mistakes.

Likewise at the economic level, the notion of economic learning refers to the

capacity of a given economy to react intelligently to changing circumstancesby forms

of economic adjustment that follow certain learned routines and which demonstrate a

capacity to improve over time. Examples of such economic learning routines would

include the case where a national economy structures consortia within which firmslearn to work collaboratively on R&D projects in order to accelerate the process of new

product development, or the case where a regional economy structures consortia

within which firms cooperate to expand export sales, or the case where public sector

research institutes take a lead in replicating a new technology and diffusing the fruits of

its development efforts across to constituent firms. If such institutional arrangements

modify firms routines, and develop a capacity for improvement of their own institu-

tional processes, then we can justifiably talk of economic learning. Such longer-term

institutional learning concerns the optimal institutional arrangements for such

experiencesfor example, long-term versus short-term consortia, private financingversus public financial support, prototype development versus component standard-

ization, and other such strategic choices.6

By analogy with the case of organizational learning, the outcome of economic

learning will be a set of competences or capabilities that we might call economic

namely dynamic capabilities to do with economic or industrial adjustment; the

spawning and upgrading of industries; the phasing out of old industries; the formation

of new firms and the absorption of old firms. Such capabilities rest on three economic

attributes that have their counterparts at the level of the firm, namely resources,

routines and values (or national goals). Resources are common to the two levels of

analysis, providing the link between them. Routines refer to economic routines, such as

routines for the formation of product development consortia, or for the creation and

protection of intellectual property rights, or for the preparation of firms for initial

public offering (IPO)one of the specialisms of the Silicon Valley learning economy.

Values or national goals refer to the criteria used in making judgments as to what kinds

5These are the terms pioneered by scholars such as Teece and Pisano (1994), Teece et al. (1994, 1997).

On organizational learning and its links to economic performance, see Malerba (1992) and Marengo

(1995).

6

See Mathews and Cho (2000: 325), Mathews (2001b) as well as Mathews (2002c) on Taiwans R&Dconsortia and the economic learning embodied in them.



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of industries should be phased in and what kinds phased out, what kinds of tech-

nologies should be supported and what kinds not. The distinguishing values of many of

the successful late developing nations in East Asia were a strong desire to catch-up with

more advanced countries, and to employ institutional forms designed to achieve this

national goal. The distinguishing values of the Silicon Valley learning economy, with its

relentless bias towards innovation,generate the processes through which new firms and

new technologies are spawnedwhich is the overwhelming strength of the system.

Bringing the focus onto the resources themselves, as the fundamental units of value

generation, helps to clarify what is going on in these cases of economic learning. I

propose that it is the heterogeneity of such resource aggregations that lies at the heart of

national competitive systems, just as it is the heterogeneity of resource clusters within firms

that accounts for their firm-level competitive advantage. And it is the capacity of an

economy to form such resource configurations, and to adapt them as circumstances

change, that constitutes what I am calling economic learninga notion that has noplace in mainstream equilibrium analysis. It is a product of the interaction between

firms in the economy as a wholeit is an emergent property of the economy seen as

a complex adaptive system.7 In each case, it is mobility of resourcesthe capacity

of firms to exchange resources between themselves, and develop new combinations of

resourcesthat underpins this process. Let us then place these resource dynamics, the

production and exchange of resources, at the center of analysis, to see what insights may

be generated.8

3. The resource economy

Consider, then, an entity to be called the resource economy. By this is meant the totality

of productive entities that make the production of goods and services possible. As

noted above, these productive entities include technologies and capital goods; patents

and intellectual property rights; trademarks, brand names and other market assets; as

well as intangibles like customer lists, supply chains and rights to landing slots at

airports, or to parts of the electromagnetic spectrum. The RE provides a way of

discussing all these elements of the new economy within a single framework, to focus

on their common properties and forms of dynamic evolution. The focus in thisframework is not the familiar production and consumption activities of consumers and

producers (as captured in mainstream microeconomics) but the investment activities

7The phrase the economy as a wholereferring to the sum total of interactions within the economy

resulting in dynamic and cyclical behaviorwas used by Schumpeter in his long-lost seventh chapter

to his 1912 masterpiece, The Theory of Economic Development (Schumpeter, 1912/1934/1983). This

chapter was recovered and published in English translation in 2002 in the journal Industry and

Innovation; see Schumpeter (1912/2002).For an intellectual biography of Schumpeter that discusses his

approach to the economy as a whole, see Swedberg (1991).

8

See Mathews (2001a, 2002b) for earlier expositions of the framework. The management literature isnow addressing such issues; see e.g. Ghoshal et al. (1999) as well as Moran and Ghoshal (1999).

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of entrepreneurs, which are characterized by disequilibrium dynamics, by increasing

returns, and by a myopia relieved only by entrepreneurial discovery and the experi-

mental dynamics of actually engaging in economic activities. This is, in other words, a

world completely at odds with the familiar world of microeconomics.

We shall distinguish between five categorical elements in a simple, qualitative model,

or framework, that corresponds to the RE. Our aim is to demonstrate how these

elementary categories can then account for a great deal of observed economic pheno-

mena and processes, including notions of dynamic capabilities at the level of the firm,

and at the level of groups of firms (economic learning) within the economy as a whole.

Formally, we represent the RE in terms of the set {A,X,Q,P,}, where A is the set of

actors (firms)allowing for new firm formations and extinctions over time; Xis the set

of activities carried by the actors; Qis the set of resources available to firms at any time;

Pis the set of routines that firms have fashioned to make use of their resources; and is

the set of fitness functions employed by the actors.The RE may be formalized through a variety of methods, such as graph theoretic

methods, and simulated in terms of intelligent agents, or Markov processes, or NK

models of fitness landscapes, or through other means. The details of formalization

and computation will not concern us in this paper.9 Let us start by elaborating on these

elemental categories, and the reasons that inform this choice.

Actors (firms). Firms are the basic driving entities in the RE, and the prime objects of

interest. Firms are instruments of action; they exist to carry out activities in ways that

are both effective and efficient. They control the resources needed for activities; they

build the routines through which resources are utilized; they establish relations with

each other. They make choices about all these things in terms of their goals, strategic

values or fitness function.

Activities. Firms are differentiated in terms of their activities, which complement each

other. Very few firms perform all the activities necessary to bring some raw materials

through a lengthy process of transformations to finished products in the hands of

end-users. These activities are accomplished by firms specialized in certain aspects

of the process. This differentiation of activities constitutes the division of labor of the

economy, which, as Adam Smith first noted, is a function of the size of the market, i.e.the more extensive the market, the more specialized the differentiation between firms

activities can be, and the more complex their interlinked chains of activities. The

interactions, with their complementarities, underpin the collaborative and competitive

features of the behavior of firms, and form the foundation for the organization of

industry.10

9As Metcalfe (1998: 8) put it: Computational models are undoubtedly of great help in providing a

more general treatment [of economic evolutionary dynamics] but I think that it is necessary at first to

get the basics straight. That is what I propose to do in this paper.

10Activities can be considered in terms of the value-chain approach, as in Porter (1985) and in terms of



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Resources. Resources are the productive assets of firms, the means through which

activities are accomplished. The basic insight that separates the RBV of the firm, and

evolutionary economics generally, from conventional economic and industrial

organization analysis, is that resources are seen as lending distinctiveness to firms, i.e.

generating heterogeneity. There is no representative firm in the RE; the point is to

model firms in all their heterogeneity, starting with their different resource endow-

ments, and moving on to the dynamics of the processes through which these resource

endowments may be changed (extended, contracted) through the development of

routines and the interrelations between firms. Actors resources set limits to what the

company can do.11 As such, resources include tangible entities such as production

systems, technologies, machinery, as well as intangibles such as brands, patents, and

rights such as landing rights for an airline or bandwidth for a telecoms company.12

Resources are utilized in the firms activities to convert inputs into outputs; the inputs

themselves are not counted as resources. In this sense we are making a distinctionbetween the services provided by resources, which enable the firm to accomplish its

activities, and the stock of resources themselves. Think of resources in this sense as the

catalysts that moderate a chemical reaction; they affect the rate, but they themselves are

not consumed in the process. In the conventional RBV, it is the firm itself that is seen to

be in control of its own resources. This gives rise to an extensive strategic management

literature concerned with how to preserve advantages based on resources which are

held to be non-imitable, non-transferable, etc.13 But in the RE this is complemented by

an approach which sees firms being able to access further resources by virtue of their

relations with other firms, i.e. through their membership of various networks. This

access to a range of resources expands the strategic options available to firms. At the

same time the resource dependence of firms on others with which they have links,

constitutes a constraint on strategic initiative.14

interfirm activity chains (Dubois, 1998); the latter approach derives from the Scandinavian markets as

networks perspective; see e.g. Hkansson (1982).

11Rumelt (1984: 561) was one of the first to link strategic direction with resources; he argued that the

firms strategic significance is characterized by a bundle of linked and idiosyncratic resources and

resource conversion activities.

12Teece et al. (1997: 521) prefer the term specific assets by which they mean the firms specialized plant

and equipment, its difficult-to-trade knowledge assets and assets complementary to them, such as

reputational and relational assets. This is consistent with the treatment offered here, with the proviso

that relational assets could be treated as a separate category. This is an issue subject to lively debate in

the accounting profession, in regard to valuation of intangible assets.

13See Barneyet al. (2001) for a summary of the past ten years of the RBV of strategic management of

the firm, and Barney (2001) for a personal retrospective.

14An initial exploration along these lines is provided by Dyer and Singh (1998), while Ahuja (2000)

provides an account of strategic networks that likewise emphasizes the issues that induces firms to formlinkages with each other.

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Routines. Firms act on the real world through their routines, otherwise known as

processes or standard operating procedures. It is routines that lie behind the

effectiveness and efficiency of firms as instruments of action. Thus firms sell outputs to

other firms and end-users, and do so through sales and marketing routines, invoicing

processes, stock adjustment processes and so on. Firms purchase inputs, and they do so

through purchasing routines, goods inward checking and storing processes; and

various kinds of search processes and comparison processes. Firms purchase resources,

such as capital equipment, through routines such as capital asset budgeting procedures

and investment evaluation routines. Firms have routines for employing staff; for

conducting their activities (production, product and service development, customer

support); for conducting audits and accounting for their costs and revenues. Their

value lies precisely in their being able to function repetitively, giving stability to the

firms operations. But again this conservative character means that firms can be stuck

in behavioral patterns that become maladaptive as circumstances change. It is variationin routines that can generate selective dynamics among firms and thus an evolutionary

process.15 Learning by firms is embodied in their routines.

Strategic values/fitness functions. Firms are intelligent agents, and assess their current

choice of resources, routines and relations against the alternatives available, and against

the performance of their activities relative to that of their competitors. Thus the

actors/firms in the RE are equipped with a goal-setting function that we may identify as

providing the firms values, or its theory of its own efficacy, or what Drucker (1994) has

called its theory of the business. This strategy function allows the firm to make choices,

or to discriminate between courses of action.16 It is the function through which the firmdetermines its activities and their intensity, and how it makes choices as to the resources

and routines needed to support these activities.

3.1 Resource economy

These basic elements constitute a self-contained whole whose behavior over time will

emerge, based on the core features of the actors, namely their resources and routines,

and their strategic theories of how they may best adapt to their environment in terms of

these resources. It is thus the stickiness of routines and resources, and the relations that

firms build between themselves, that lends stability to such industrial systems; while thevariability in these elements promotes adaptation and response to changing circum-

stances not just by the firm on its own, but by the networks as a whole. The RE thus

15Cyert and March (1963) introduced the concept of standard operating procedures and made them

the basis for a behavioral theory of the firm, seeing them as sticky attributes which are difficult to

change. Nelson and Winter (1982) added an important evolutionary and purposive dimension to the

concept, calling them routines. On business processes as organizational routines, see Garvin (1998);

the vast literature of the 1990s on business process re-engineering attests to the significance of

routines for successful business operation.

16

Christensen and Overdorf (2000) likewise ground firms capabilities in the three categories, resources,routines (processes) and strategic values.



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offers the simplest possible representation of the inter-firm dynamics of a real economy,

in terms of these five basic elements and their interactions.

What is of interest in such a representation of economic reality is the capacity of the

firms to respond and adapt to change, both individually and in collaboration with other

firms in networks. In this sense the firms are intelligent agents capable of generating

emergent behavior that is not predictable in advance; what is of interest is the worlds

they mutually create.17 It is the dynamics of the firms ability to vary their activities in

terms of their underlying resources, and to engage in resource-sharing and resource-

extending behavior through network dynamics, that gives them enhanced competitive

capacities. It leads to behavior that builds networks, alliances, development blocks and

other supra-firm structures. These are the real engines of dynamic economic response

to changing conditions, as discussed by Baumol (2002). But they are suppressed in

conventional microeconomic analysis which is focused almost exclusively on what goes

on in product markets and in individual firms

3.2 Emergent features within the RE

Some economic features are not mentioned as fundamental, although in practice they

are extremely important. Our object is to demonstrate plausible processes through

which they may be produced by the firms in the RE. The first to mention is the category

of interfirm relations, which can be defined here as the set of resources and routines

that are shared between actors (firms). No business is an islandas expressed by

Hkansson and Snehota (1989). The reality is that firms exist and develop an identity

based on the relations they build with other firms, either directly as suppliers orcustomers, or indirectly as collaborators or as competitors. Within the RE, we are

concerned to demonstrate how this is accomplished through the investment by firms in

jointly held resources, and the building of common routines, that enables firms to

derive advantages not otherwise available to them as individuals.18

Markets. Rather than assume that markets exist, as is done in mainstream economic

analysis, the model of the RE takes the view that markets emerge as a result of the

exchange relations between actors. The point is that as interfirm relations multiply,

these come to resemble markets, at least industrial markets (or business-to-business

markets). Thus it becomes an interesting issue to explore the economic processes

through which markets emerge, and through which markets actually function.19 The

emergence of markets for various kinds of resourcessuch as technologies and know-

17The phrase comes from Kauffman (1996) as representative of the Santa Fe approach.

18Such issues are captured in the strategic management literature in the notion of strategic networks

(e.g. Gulati, 1999). But the approach taken in this literature is to assume that networks can be formed if

firms will it; in the RE, by contrast, firms strategize around the identification of potential partners and

ways of winning them to an alliance.

19

In this the RE is Austrian in inspiration, and it fits the markets-as-networks views developed inScandinavia.

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howis changing fundamentally the way that firms strategize and seek advantages with

respect to each other.

Dynamic capabilities. Another category that does not appear as a root term is the

notion of firm capabilities. Again this is done for the reason that capabilities are

derivable from the way that firms choose and activate their resources, through their

development of routines, and through their choice of linkages with other firms, i.e. the

relations they build.20 We may impute a sense of the firms capabilities to the breadth

and depth of the routines which it is able to call upon as its operating circumstances

change. Our interest lies in how actors (firms) build dynamic capabilities through the

use of resources, routines and the relations that bind them to other firms.21

Supra-firm categories. Several other categories are not mentioned, and can be taken to

emerge through the actions of actors, individually and in combination. For example,various kinds of supra-firm structures can emerge, described as development blocks

or competence blocs or clusters or technological systems or technological trajec-

tories or consortia of various kinds, which shape the responses of economies to

changing conditions.22 Within the RE these can all be seen as various kinds of

co-evolutionary phenomena that emerge from the complexity of the system, as actors

seek to create systemic substructures for their mutual advantage. Institutions them-

selves emerge to shape economic behavior. In the context of the RE, institutions can be

treated as generalized routines.23 In an instantiation of the RE modeled as, for example,

an agent-based simulation, emergent behavior could include cyclical phenomena of

20Likewise in much of the RBV literature, an important distinction is maintained between resources

(assets) and capabilities; see e.g. Amit and Schoemaker (1993) as well as the contributions to the

dynamic capabilities view, as developed by Teece and Pisano (1994) and Teece et al. (1997). Eisenhardt

and Martin (2000) explore the concept and its relations with the RBV, while the contributors to Dosi et

al. (2001) provide the most recent treatment.

21Teece et al. (1997) employ the conceptual framework of positions, processes and pathways in their

exposition of dynamic capabilities. In the terms of the RE, we may take positions to represent the firms

resources; processes are their routines, both as individuals and collectives; and pathways are the

evolutionary trajectories along which they are launched by their strategic decisions. In this sense, thetwo expositions are equivalent.

22On development blocks, see Dahmn (1989) for an exposition by the concepts inventor; the notion

was applied by the Wallenberg Bank in Sweden to guide investment activity that would plug gaps in

value chains.On competence blocs, see Eliasson and Carlsson (2001); the notion captures the ideaof an

economy-wide analog of the firm-level absorptive capacity (Cohen and Levinthal, 1990). On tech-

nological systems, see Carlsson and Stankiewicz (1991) or Carlsson (1997). On learning in clusters, see

e.g. Feldman (2001), Foss and Eriksen (1995), Foss (1999) or Lawson (1999).

23Of course the RE does not exist in a vacuum. Rather it is embedded in a set of institutions, laws and

conventions that enable it to work. These institutions are what differentiate capitalism as an engine of

progress from capitalism as a system of organized criminality. But the details of these institutions, andtheir mode of operation, lie outside our immediate concern in elaborating the dynamics of the RE.



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a Schumpeterian kind. In this sense, the RE is an exemplar of bottom-up social

science.24

One particular aspect of supra-firm phenomena that is of interest is the emergence

of routines across many firms, or blocs, or technological systems, or clusters. The

capture of such routines is what can be described as economic learning, or the

development of economic capabilities. Our interest lies in analyzing how their emer-

gence lends robustness to economic systems, which is ultimately the foundation of what

is meant by competitiveness and economic performance. In Taiwan, for example,

suprafirm routines in the form of R&D consortia were developed, based on earlier

Japanese and European experiences, as a means of accelerating uptake of technologies

by small and medium-sized Taiwanese firms. This form of economic routine was

systematically improved upon as experience was obtaineda typical instance of eco-

nomic learning involving multiple firms and public institutions.25

Thus the idea of the conceptual framework of the RE is to bring out the implicationsof firms being placed in positions of mutual dependenceas is actually the situation in

the real economy. The purpose in constructing such a model as an abstraction of a real

capitalist economy is to concentrate a discussion of competitive and evolutionary

dynamics utilizing these five fundamental categories and those derived from them, such

as networks, markets and firm capabilities, and on nothing else. This forces the focus on

the resource dynamics that underpin firms advantage, and the nature of the inter-firm

resource exchanges that shape these dynamicsrather than the activities of firms

producing goods and services, and the costs involved in these, which distracts attention

from fundamentals.

4. Competitive dynamics and resource heterogeneity

We now turn to an examination of the dynamics of the RE. The resources in a real

economy are in a constant state of flux, accounting for observed phenomena of

competitive and evolutionary dynamics. Resources are being developed by firms and

being exchanged between firms, through open-market deals (e.g. as in the sale of a

division of one firm to another) or more commonly through various kinds of con-

tractual arrangements (e.g. technology transfer agreements, subcontracting/originalequipment manufacturer agreements, licensing arrangements) or through resource

24See Epstein and Axtell (1996) for an exposition of this approach, which is based on the interaction of

intelligent agents and the emergence of non-programmed behavior. Tesfatsion (1997) provides an

initial exploration of the theme of an artificial economy, where the emphasis is on the dynamics of

interaction between the elements, rather than on the complexity of the elements (agents) themselves.

Bruun and Luna (2000) provide an example of such a bottom-up economy that exhibits Schumpeterian

patterns of cyclical behavior.

25

See Mathews (2002c) for a recent account of the origins and dynamics of Taiwans R&D consortia,and the routines involved in their operation.

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transfers effected as a result of mergers or acquisitions. Economists have been slow to

recognize the reality and significance of the multiple contacts between firms in an

industrial economy, as contractors, collaborators, suppliers and customers as well as

competitors. It is through these contacts that resources are exchanged and shared

between firms, either voluntarily or involuntarily, through markets or through non-

market transactions. These processes can be identified as cases of resource propagation,

resource replication, resource exchange, resource redeployment, resource sharing and

resource leverage.26 All are captured within a strategic framework, rather than in the

causeeffect or deterministic framework developed within mainstream economics. All

are involved in the dynamics of the RE. We shall look first at competitive dynamics from

a resource perspective at a point in time, and then at their evolutionary dynamics as the

competitive landscape changes over time.

The starting point in applying the extended RBV is to consider how resources

may be encapsulated within firms, and how firms may generate either Ricardian orSchumpeterian rents from this bundling. By Ricardian rents is meant the extraction of

profits from the rareness and superiority of a firms resources, and the distinctiveness

of the routines built to exploit these resources. By Schumpeterian profits, we mean the

entrepreneurial profits extracted by a firm from a bundle of resources assembled from

a variety of sources, through the capture of synergies between these resources.27 This

leads to questions such as what determines the rate of growth of firms as resource

bundles, the limits to this growth, the circumstances under which firms divest resources,

and how these matters are translated into entrepreneurial and management practice.

As firms translate their newly discovered activities into routines, so management

attention is liberated for further discovery, and they are led to grow and diversify,

building on their excess resource base, i.e. on a disequilibrium in their resources.

Successful diversification is based on co-specialization of resources which act syner-

gistically with each other. Firms seek complementary resources from other firms with

which they have direct dealings, through the dynamics of resource propagation,replica-

tion, leverage and transfer.28

These constitute the exchange dynamics of the RE, driven by disequilibrium

26On resource exchange, see Moran and Ghoshal (1999); on resource recombinations within the firm,

see Galunic and Rodan (1998); on resource redeployment, as a result of horizontal mergers and

acquisitions, see Capron and Mitchell (1998); on resource leverage, see Prahalad and Hamel (1990). On

resource leverage as a resource-focused catchup strategy, see Mathews (1997, 1998, 2002d) and

Mathews and Cho (1999), and as a strategy for accelerated internationalization, see Mathews (2002a).

27On Schumpeterian versus Ricardian rents, in the context of the RBV, see Winter (1995) or Mahoney

and Pandian (1992). Resource synergies correspond in the resource realm to complementarity assets, or

co-specialized assets, leading to economies of scope, in the activities realm.

28In the same spirit, Granstrand (1998: 477) discusses the means by which firms acquire resources

as encompassing generation, combination, transformation, regeneration and recombination ofresources.



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considerations (rather than the equilibrium considerations which govern neoclassical

analysis of the goods and services economy). What drives firms in these patterns of

behavior is the competitive dynamics of an industrythe role played by rival firms, as

well as by potential partners and other kinds of organizations.

4.1 The challengers perspective: reliable imitability

It is through the fundamental imitability and transferability of resources that

challengers are able to invade industry segments occupied by incumbents. Challengers

acquire the requisite resources through internal development and through external

leverage, where they are guided in their choice of which industry segment to attack by

the availability of resources which are most easily imitated and transferred. We may

coin the expression reliable imitability for such an approach, to bring out the com-

plementarity with the uncertain imitability of Lippman and Rumelt (1982).

Now the imitability of non-tradeable resources by competitor firms is held, in the

RBV literature, to be linked to five features of the resource accumulation process: time

compression diseconomies; asset mass efficiencies; interconnectedness of asset stocks;

asset erosion and causal ambiguity.29 The extended RBV of the economy invites us to

consider these issues in a wider perspective. Reliable imitability also can be linked to

attributes of the resource accumulation process, as seen from the perspective of

the challenger. For example, time compression diseconomiesin certain resources can be

countered by time-related advantages of othersas in the case when a new tech-

nological trajectory is being launched, and incumbents have no advantages over

challengers (indeed may have disadvantages, when the new trajectory entails newresource architecture).30 Asset mass efficienciescan be countered by resource free riding

on the part of the challengeras when a challenger is able to take advantage of market

infrastructure created by early movers. Asset stock interconnectednessrefers to the fact

that an incumbents position can be strengthened by the way that one set of strategic

assets (resources) can work synergistically with another. A potential challenger may be

able to replicate one of these sets, but lack the other.31 By the same reasoning, a

challenger may succeed if resources being targeted for acquisition or leverage are

complemented by resources already in the challengers possession. Thus a challenger

can build an effective resource base, where each addition complements the others.32

Causal ambiguity may work to the advantage of the incumbentbut as knowledge

29For discussion of these attributes, see Dierickx and Cool (1989).

30This case therefore provides a contrast with the lock-in studied by David (1994) and others.

31An example might be the case where a challenger successfully replicates an incumbents product but

fails commercially because it lacks the complementary customer service network required to make the

product attractive.

32An example might be a contract manufacturing firm moving through a succession of contracts with a

multinational, starting with simple original equipment manufacturing (OEM) then moving throughown design and manufacture (ODM) to global logistics contracting (GLC), where each step com-

128 J.A. Mathews


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transfers, which dynamically reconfigure the distribution of resources across the

economy as a whole.36

5. Evolutionary resource dynamicsThe extended RBV generates important insights into the evolutionary and co-

evolutionary dynamics of economies, based on the variation, selection and retention of

resources within and between firms. The ingredients of an evolutionary approach in

economics are now reasonably well-defined.37 It was Nelson and Winter who first

formulated a clear evolutionary account, as an alternative to the static, optimizing

account of mainstream neoclassical economics. They did so in terms of firms (as

phenotype) and their organizational routines as genes (or genotype), seeing these as

lending continuity to economic life, as opposed to the random fluctuations and

optimizing responses to prices envisaged by the neoclassical view. The RBV as extendedin this paper can appropriate this description provided by Nelson and Winter, and sub-

sequently elaborated, with the proviso that it is not just routines but resources which

are acting as the units of variation, selection and retention. The RBV of the economy

thereby provides a unifying account of the processes of economic evolution, via the

dynamics of resource variation, selection and retention. The Darwinian synthesis as

utilized today makes use of a fundamental distinction between replicators, where

variation occurs, and interactors, where selection occurs.

5.1 The replicatorinteractor perspective

The ruling idea behind the replicatorinteractor perspective is that evolution proceeds

through variations in the replicators, which give distinctive advantages (or dis-

advantages) to the actors embodying these replicators.38 In the biological world the

replicator is genetic material, and the interactors are organisms. In the cultural and

behavioral world, the replicators are memes, and the interactors are people whose

brains carry the memes. In the business world, the replicators are firms resources,

routines and the relations they build with each other, and the interactors are the firms

themselves. The firms are then selected, through market competition, and hence

reproduce the replicators that conferred on them the advantage. The special feature of

the evolutionary model is that it takes a replicator perspective rather than the usual firmperspective, seeing the dynamics of the system through the operation of these two levels

36See Itami (1987) for a definitive treatment, and Penrose (1959/1995) for the origins of this view. Von

Hippel (1989) treats the general case of supplier networks and know-how trading between rivals; see

Bonaccorsi and Giuri (2001) for an interesting application to the aircraft-engine industry.

37For excellent introductions, see Dosi and Nelson (1994) or Metcalfe (1998); Langlois and Everett

(1994) provide an illuminating discussion informed by a reading of the current evolutionary debates in

the biological sciences. Andersen (1994) and Witt (1992, 2002) provide expositions of the evolutionary

approach to economics from different perspectives, while Vromen (1995) provides an extended

comparison of evolutionary schools of thought. The modern field was essentially started by Nelson andWinter (1982).

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or interlinked processes. Three issues then present themselves for immediate analysis.

How are variations effected in the replication of resources, routines and relations? How

do firms competitive prospects depend on these variations? How are the successful

variations transmitted? And how does learning relate to evolutionary development?

First, let us consider the replication of resources, routines and interfirm relations.

Resourcesare replicated when the firm which developed them, or more usually a rival

firm, seeks to re-create the resources using both tacit and explicit elements. Com-

petition through imitation is the most powerful driver of economic dynamics.

Franchising arrangements, which have exploded in popularity in the past half-century,

are cases of what we shall call resource replication. Routinesare replicated when a firm

re-creates routines to which it has had access, and applies them to its own activities. We

may posit the existence of selfish resources and selfish routines that may be viewed as

if they are seeking embodiment in some firm as convenient vehicleby analogy with

the selfish genes of the biological world.39 This provides yet another vantage point toview the economy-wide propagation of resources and routines. Firms are constantly

striving to learn about other firms routines, with a view to replicating them within their

own operations. Imitators of a fast food set of routines, for example, might replicate the

routines of fast food preparation and customer service, but do so with a twist of their

own. Imitators of Amazon.com might establish online book-selling businesses in their

own national jurisdictions, and thereby reap competitive advantages through not

having to pass on international mail charges to their customersprovided they can

match the resources and routines of the pioneer.40 Relationsbetween firms are repli-

cated when a firm moves to a new area of operations and re-creates the bonds withother companies that it has built originally. The simplest example is the case of Japanese

automotive producers moving abroad. They derive advantages from the fact that they

can draw on a system of relations replication.41

Variations in these processes of replication may be propagated through the economy,

resulting in differential selection pressures being experienced by firms embodying the

variations in resources, routines and interfirm relations. Here we shift the focus, as in

evolutionary theorizing, to see resources, routines and relations as replicators, i.e. as

propagating independently of the wishes of the firms that generate them in the first

place. The key issue is to demonstrate how variety within the economic system, which isthe key to adaptive responsiveness to changing external conditions, may be generated

by variation in underlying replicators, here taken to be resources, routines and firms

relations. The variation is Darwinian in the sense of its sheer variety and in the sense

38See Knudsen (2000) for an exposition of this perspective.

39See Dawkins (1976/1989) for the original exposition, and Andersen (2003) for an application.

40The issues of the replication of routines, and of capabilities more generally, can only be touched on

here. See Zander and Kogut (1995) for a discussion that is informed by empirical findings, and Winter

and Szulanski (1999) and Zollo and Winter (2000) for recent approaches.

41On such cases, see Dyer and Singh (1998).



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that even though the variations are purposively introduced by firms, their implications

within the wider economy cannot be predicted in advance.42 Resource variety is also

generated by new combinations and, sometimes, by genuinely new resources, as in

the case of a new technological standard emerging and driving the spawning of a new

industry.

5.2 Co-evolutionary resource dynamics

In biological evolution, the phenomenon of species co-adapting to changes in their

environment is frequently observed, so that they become co-specialized with respect to

each other. This is termed co-evolution. Numerous examples include the micro-

organisms that evolve in the guts of certain mammalian species, or the ants that

co-evolve with certain kinds of acacia to provide mutual advantages. Now it is coming

to be observed that business works also according to co-evolutionary principles. Some

firms, for example, encourage business units to evolve in different but complementarydirections, allowing them to seize opportunities for collaboration where they present

themselvesrather than imposing predetermined patterns of divisionalized operation

on them.43 From a resource perspective, the notion of co-specialization of resources

both within and between firms can be interpreted as the expression of co-evolutionary

dynamics, which in turn underpin economic learning.

If resources can be described in terms of their evolutionary and co-evolutionary

dynamics, what then is the significance of this perspective for economic performance?

Resource variety provides the linking variable. Variety is the driver of evolutionary

dynamics, whether we are talking about technologies, firms or resources.44

The keyissue is how resource creation can exceed resource destruction to enhance the resource

variety and diversity that drives economic learning and adaptation, i.e. evolutionary

success.

Resource variety is generated by new combinations and, sometimes, by genuinely

new resources, as in the case of a new technological standard emerging and driving the

spawning of a new industry. This brings consideration of entrepreneurship, innovation

42In his Graz lectures on Evolutionary Economics and Creative Destruction, Metcalfe (1998) expresses

the view that economic evolution is not Darwinian because there is insufficient variety. I cannot agree

with him on this point. Adopting a perspective on the economy as a whole, the capitalist economicsystem appears not just to be an amazing engine of progress but an equally amazing engine of variety.

43See Eisenhardt and Galunic (2000) for a recent exposition of this perspective.

44This is the core of the Fisher principle, the fundamental theorem of systems in evolutionary motion.

It states, when applied to competitive economic systems, in the words used by Metcalfe (1994: 328) that

the rate of change of average behavior within a population of competing firms is governed by the

degree of variety in behavior within that population. Metcalfe (1994: 3289) notes that: Implicit in this

view are the four central themes of the evolutionary perspective: that it is differences in behaviour

between firms which drive the evolutionary process; that these differences are evaluated economically

within a population of competing behaviours; that this evaluation generates selective pressure to

change the relative performance of each distinct form of behaviour in the population; and, that thesebehaviours are subject to inertia, changing slowly relative to the changes imposed by selection.

132 J.A. Mathews


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and technological dynamics, involving issues such as path dependencies, lock-in,

adaptive learning and technological trajectories, into the ambit of the RE. New re-

sources are created as firms discover new ways of accomplishing activities, and others

learn of their improvements.45 One of the critical pathways of new resource creation is

through the development of new technologies and their standardization. Mainstream

economic analysis has no place for the process of standardization, which is generally

discussed only in non-mainstream literatures of technological dynamics.46 But in the

RE, standardization is a central and critical process . . . it is the process through which a

new resource, available to all, is created.

The resource view ultimately demands a perspective be taken on the overall resource

cycles of the economyby analogy with the cycles of water or carbon in the biological

world. We are not talking here of resource cycles in a physical sense (i.e. in terms of their

material constituents) but in terms of the creation, circulation and destruction of

value-generating entities. A healthy and productive economy clearly is able to com-mand a wide variety or diversity of resources, which in turn call for healthy processes of

resource creation as well as satisfactory disposal of resources no longer required. This

creates what may be termed a dynamic resource equilibriumin the sense in which

the term is used in ecological analysis, which in turn is essential for a healthy economy,

generating the resource diversity that drives adaptation and learning.

6. Industrial organization and economic performance

The RE perspective is concerned not primarily with individual firm development, butabove all with the interactions between firmsor with the organization of industry

itself. It was Richardson (1972) who first drew attention to these issues, by introducing a

range of firm interactions laid out across a spectrum whose endpoints were the

integrated firm at one end and the open, anonymous market at the other.

Resource configurations within the economy usually span firmsin development

blocks or technological systems or national systems of innovationand call for

supra-firm modes of organization that facilitate the sharing of resources.47 These are

45For a comprehensiveoverview of the issues involved in technological innovation, see Freeman (1994);

for an exploration of empirical experience, see Malerba and Orsenigo (1995), and for sharing ofresources and routines between firms in R&D, Coombs and Metcalfe (1999).

46Standards can be interpreted as equilibria where users are agents with multiple technical choices

(Cowan and Miller, 1998). But such game-theoretic formulations, while illuminating, miss the essential

dynamic features of standardization. Often it is not foresight and calculation on the part of agents

which leads to the emergence of a standard, but the outcome of unforeseen technological dynamics.

47On development blocks, see Dahmn (1989); on technological systems, see Carlsson (1997) or

Carlsson and Stankiewicz (1991). Foss (1996) refers to all these forms of industrial organization as

operating at the meso levelbetween the firm and the national industry. On national systems of inno-

vation, see Lundvall (1992); this concept spans firms as well as supporting institutions such as public

R&D laboratories. From the resource perspective, these concepts all embody the notion of resourcesheld in common and shared within a specified group of firms and institutions.



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the suprafirm structures that emerge in any real economy, and shape its performance.

Yet we find that they are usually ignored in most microeconomics treatments. Our task

is to demonstrate how some of these supra-firm adaptive responses can be captured

within the conceptual framework of the RE.

Enhanced performance at the economic level, as at the organizational level, can be

captured through specialization and the emergence of intermediate input suppliers,

which in turn is associated with decomposing a process into a finer division of labor.

Consider the case of a group of firms, each specializing in a particular range of products

and overlapping with each other in terms of their resources and routines. As the market

expands, some firms can specialize in intermediate subassemblies, to create more

complex value-adding pathways within the industry. Standardization of subassembly

modules enables potential economies of scale to be captured, and an organizational

reconfiguration of resources to be effected.48 It is the possibility of intermediate special-

ist activities emerging, as the scale of the market expands, that drives specialization of

resources. If these activities are conducted by new, specialist firms, it is a case of

horizontal division of labor; if the activities are conducted within the same firm, it is a

case of vertical division of labor. We thus have a resource interpretation of the process

first alluded to by Adam Smith, in his theorem proposing that the division of labor and

its beneficial effects is limited by the extent of the market.49

Sometimes the required further specialization is not achieved, and the economic

performance of a group of firms is thereby degraded. This has occurred over and over

again as industrial districts wax and wane. The district of Okayama, in western Japan,

for example, provides a striking case. It became a flourishing center of production ofvaried kinds of farm engines in the 1950s and 1960s, as Japans farmers moved en masse

to mechanize their operations. Over thirty manufacturing firms arose in the Okayama

district to service this need, producing small, light engines of variable but low horse-

power to a variety of end-specifications, for distribution by specialized distributors

throughout Japan. But nothing remains of this district today. It was wiped out by the

rise of mass producing firms in Tokyo and other metropolitan centers, who were much

more vertically integrated and connected to lengthy subcontracting chains than were

the small Okayama producers who encapsulated all the technical capabilities needed to

produce an engine in one small firm.50 From the resource perspective, these Okayamaproducers were not able to make the breakthrough from self-sufficiency in resources to

a new configuration where some resources are shared between firms. There was appar-

ently no mechanism in this case to shift the cluster of firms to a new configuration.

Successful clusters of firms, such as in a Silicon Valley, are able to make these con-

48See Langlois (2002) for a recent exposition of this perspective.

49See Stigler (1951). For commentary on Smiths argument, in the context of increasing returns and

economic performance, see Richardson (1975).

50See Tokumaru (1998) for a description and analysis of this episode.

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figuration shifts; others stay locked in to a particular configuration and decline. The

issue is how such shifts are accomplished, and whether they call for specific institutional

interventions, or are accomplished by the strategic actions of the actors themselves.

From a resource perspective there is a clear interpretation to be offered for the

phenomenon of clustering, which is that clusters constitute a form of economic

organization where resources and routines are shared between firms locally. The two

operative words are shared, and local. Resources can be utilized by more than one

firmthis is the very point of adopting a resource perspective on the economy (as

opposed to the usual perspective which treats the firm on its own). Resources such as

specialized manufacturing knowledge and technical capabilities can be shared in the

form of a common culture of excellence and leading-edge technical intelligence

where the latest developments are exchanged in cafes and meeting points, in workshops

and seminars, and through rapid job-hopping, as in Silicon Valley. These are all ways in

which one might describe resources as being in the air to adapt Marshalls tellingphrase.51 But they are also local. Other forms of shared resource do not have to be

localas in worldwide R&D collaborative structures, for example. But the point of the

cluster is that it draws benefits from resources shared between firms which are closely

co-located.52

The point of the sharing is to develop shared capabilities, or collective capabilities,

which are the foundations of economic learning. So local sharing of resources in

clusters can be expected to improve economic performance, as numerous historical and

contemporary examples attest. But again organizational configuration of resources

holds the key. Not all locally clustered firms thrive economically. There are many

examples of industrial districts, for example, which have declined, not because of poor

management or technical capabilities, but because of their inability to adjust to

changing external economic circumstances.53 They were locked in to one particular

kind of organizational configuration (of resources). And when economic circum-

stances changed, and this proved to be a suboptimal configuration, they were unable to

pull themselves spontaneously into a new configuration. This can be counted as a case

of failure to engage in economic learning.

51Marshall (1920) tried to incorporate increasing returns (which is the essence of manufacturing) byplacing their sources external to the firm (i.e. externalities that are in the air) while keeping the fiction

of diminishing returns inside the firm; see Prendergast (1992) for a discussion of this interesting

sidelight on intellectual history. Young (1928) provided a dynamic account of externalities, which is a

much more satisfying explanation of increasing returns.

52See Foss and Eriksen (1995), and Foss (1996, 1999) for a discussion of this phenomenon in an

explicitly resource-based context; Lawson (1999) and Best (1999) provide a similar argument,

extending the competence perspective from the individual firm to the region. Schmitz (1999) adds the

point that firms in industrial districts develop collective action through conscious strategic inter-

vention, as in the formation of consortia, therebyaccounting for increasing returns.

53

See e.g. the study of the Italian footwear industrial districts of Fusignano and San Mauro Pascoli byNuti and Cainelli (1996).



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6.1 Economic learning and industrial catch-up

The goal of our analysis is to characterize the economic creativity and adjustment that

occurs in real cases of superior, learned economic performance, in terms of the shared

resources and routines involved. Consider cases of what we are terming economiclearning that can be found in Japan, Korea and Taiwan, to do with technological up-

grading in an industry such as semiconductors. In Japan, the various consortia formed

to accelerate industrial catch-up with the United States moved through several stages or

forms, as economic learning accumulated. The FONTAC program was an initial

economic learning experiment, in which the new institutional form of the Engineering

Research Association (ERA)a formal consortiumwas tested; it proved to have some

survival value for the firms which became participants. So it was varied and refined over

time, to become an economic routine (by analogy with organizational routines) which

Japan was able to invoke each time there was a step change in technological competence

to be accomplished by Japanese firms, culminating in the famous VLSI program of

19761979.54 Likewise in Korea the early attempts to promote major changes in

technological capabilities on the part of the chaebolby simple imitation of Japanese

organizational formsas in the 19881989 ULSI programwere not very successful;

but later programs launched by the industry association have embodied the learning

from these earlier experiences and have demonstrably been more effective.

Consider the case ofR&D consortia, fashioned through private initiative or through

public policy. Again from a resource perspective, the rationale and source of success is

clear: it is through managed sharing of resources. Firms participate in such consortia in

order to acquire access to knowledge and techniques which would be too difficult or

expensive for each to acquire individually. But the consortium can allow Smiths

division of labor to operate. Each firm or group of firms can specialize in certain aspects

of a problem, while the consortium as a whole pools the results for the benefit of all. In

Taiwan the number of cases of economic learning are numerous, a case being the

changes in organizational form of the R&D alliances, which became more effective in

diffusing technological capabilities to participant firms as experience in their operation

was accumulated.55

What does the strategizing framework of the RE add to that already available for the

analysis of such R&D consortia? In the terms used by conventional microeconomicanalysis, such consortia constitute a means of internalizing externalities, bringing

them within the operation of a specific group of cooperating firms. This is an ex post

rationalization of the process. But the approach based on resources, routines and their

sharing focuses on ex antestrategic calculations. How large should the consortium be to

maximize diffusion, without being slowed down by cumbersome inter-firm trans-

actions? How should firms pay for entryas a proportion of overall costs, or with a

54See Fransman (1995) for a comprehensive description of these experiences.

55

For details of the Taiwanese R&D consortia, focusing on their origins and dynamics, see Mathews(2002c).

136 J.A. Mathews


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fixed price entry fee to maximize participation? The strategic perspective encompassed

by the RE takes such issues as fundamental.

It is the institutional frameworks within which the economic learning takes place

that provides the critical difference. It is clear that in the sense we are using the term,

some countries learn economically better than others. In the case of the Finnish and

Danish furniture industries, for example, Maskell (2001) demonstrates how a set of

institutions in Finland favoring wood pulp extraction militated against the develop-

ment of a furniture industry, while the opposite case applied to Denmark. Once we are

equipped with the conceptual lenses to identify and analyze these cases, they are seen to

be extremely common; indeed, this empirical bias is one of the key advantages to be

drawn from the use of a RE conceptual framework.

Thus within the RE, it is intuitively plausible to see structures like development

blocks and industrial clusters develop, but there is no assumption made that these are

necessarily desirable or a good thing. Firms can draw advantages from supra-firmclusters if the clusters are well adapted to economic circumstances. But if the cluster is

poorly adapted, or generates destructive inter-firm competitive dynamics (such as a

downward price spiral), then it can be a source of disadvantage for the firms that are

caught within it. Thus it becomes clear how a firms strategic options depend not just

on its own choices, but also on its market position and network position within wider

industrial structures. The pursuit of these kinds of questions should properly be seen as

the domain of industrial dynamics.

7. Concluding remarks

The purpose of this article has been to open up to strategic scrutiny an area neglected

by mainstream economics, namely the world of dynamic exchange of technologies,

patents and other intangible assets that constitute the investment behavior of entre-

preneurs. The dynamics, and the strategic calculations operating in this realm, are quite

distinct from those prevailing in the world of production of goods and services. The

clue to treating such entities as a generalization of the capital goods that have been

analyzed by economists in the past is found in the RBV of competitive advantage, in the

strategic management literature. As outlined in the Introduction, the RBV has already

proven its worth in the strategic management field where it has helped to rejuvenate the

theory and practice of developing and understanding coherent corporate strategies.

Many scholars are of the view that the resource perspective has wider application,

precisely because it gets at the fundamentals of firm heterogeneity and firm fitness

two of the principal issues in an evolutionary approach.56 But a persistent problem in

expanding the scope of the RBV from its home in the management sciences has been

the very manner of its use in that discipline. The leading RBV scholars in strategy see

56See Nelson (1994) for such an approach, where it is argued that the resource-based view needs to be

combined with the evolutionary economics approach. This is also argued in texts such as Montgomery(1995).



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resources as underpinning what they insist on calling sustainable competitive advantage

and they insist on discussing resources in a context of non-imitability, non-transfer-

ability and non-substitutabilitywhich not only flies in the face of all experience to the

contrary, but also makes it difficult to establish connections with the evolutionary

approach where the emphasis is on, precisely, imitation, transferand substitution. So the

starting point for this exercise has been to find a way to break out of this intellectual

strait-jacket of sustainable competitive advantage. In my own case, this was done

through consideration of the experiences of latecomer firms from East Asia which

broke their way into advanced high-technology industries, in spite of all the so-called

sustainable competitive advantages of the incumbents. On investigation, it turned out

that they owed their success not to any simplistic capital or labor considerations, but to

determined efforts to leverage resources from advanced firms, utilizing both open-

market transactions as well as various forms of inter-firm alliances and contractual

relations, such as OEM arrangements. It was the transmissibility and availability ofresources in the wider economy that had to be seen as the necessary condition govern-

ing the success of East Asian latecomer strategies.57

Thus the extended RBV is not concerned to rebut the conventional view of Ricardian

rent extraction by firms. This is analytically tractable from a conventional resource

perspectiveas demonstrated by Barney (1995, 2001), Peteraf (1993) and many others.

The point is to widen the stage on which these resource dynamics take place, and open

up the prospect of firms extracting Schumpeterian, or entrepreneurial profits, as the

foundation of their competitive strategies. On this wider stage, the strategic evaluation

of resources and routines will depend on what can be done with them. Resources thathave little strategic value to one firm, because of its choice of activities, will have great

value for another. While one firm will be building Ricardian rents from its immobile

resources, another challenger will be seeking to enter the same industry through

appropriating resources that are perceived to be the most mobile, or transferable, e.g.

through technology licensing. This is, after all, exactly what happened in case after case

of industrial catchup by latecomer firms, underpinning their economic learning.

From this it is but a short step to formulate a view of the economy in terms of the

effects of these available and transmissible resources.But it turns out to be a big step for

economics to do so. It means placing the emphasis not on the paraphernalia of the

goods and services economyproducts, prices, output vectors, production functions,

etc.but on the quite different dynamics of the resource economy where resource

propagation, replication and exchange underpin firms competitive strategies, and

resource variation, selection and retention drive the evolutionary dynamics of the

economy as a whole.

The framework as sketched is preliminary in nature, drawing attention to the

57Mathews and Cho (2000) provide a detailed discussion of the process of creation of a semiconductor

industry in East Asia through guided mechanisms of resource leverage. This is to be contrasted with

the standard neoclassical account, utilizing total factor productivity explanations couched in terms ofcapital and labor inputs only: see Krugman (1994) for a popular example.

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existence of economic learning, and seeking to account for it in terms of the mobility of

resources in the dynamic resource economy. But it has the merit that it is grounded in

the phenomena that come increasingly to the fore in discussions of the new economy

such as the role of technology licensing (markets for technologies), the trading of

know-how, the use of IPR. It has the merit of being empirically oriented,and as work in

this vein expands, it will encourage empirical investigations of competitive resource

dynamics, evolutionary resource dynamics, pathways and adaptations, and many other

phenomena that the neoclassical synthesis ignores or downplays. It may be anticipated

that the issues touched on here, relating to resource investments by entrepreneurs and

the disequilibrium resource dynamics they trigger,will come to overshadow the present

concerns of economics with its focus on the equilibrium comparative statics of the

production- and consumption-oriented goods and services economy.

Address for correspondence

John A. Mathews, Macquarie Graduate School of Management, Macquarie University,

Sydney, NSW 2109, Australia. Email: [email protected].

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