SME'S SUPPORT AND REGIONAL POLICY IN EU - THE NORTE-LITORAL PORTUGUESE EXPERIENCE

1.1. A Paradigm Shift in the Theory of the Firm

1.1.1 The Traditional Thought and its Criticism

No matter how paradoxical it might seem, the firm does not constitute a true object which can
be studied within the neo-classical economy framework, due to fact it has been turning into an
abstract entity, thereby represented by a production function which establishes a mechanical
relation between inputs and outputs. The theory relies upon three major assumptions: 1. The
firm is considered as a single agent responsible for the decision process making; 2. The firm
has one single objective, the profit; 3. To reach the prime objective, the firm uses optimising
processes.

Nonetheless, the notions developed by Herbert Simon such as ‘bounded rationality’ and
‘procedural rationality’, the work of Cyert and March about the existence of several actors,
with their own interests, and other more recent contributions (Hodgson, 1988), have seriously
damaged the neo-classical assumptions. Hence, adopting part of the behaviourist thought,
Williamson’s (1975) ‘transaction costs’ approach had a great influence in the theory of the
firm.

Refusing to accept the neo-classical rational behaviour assumption, Williamson’s work and
his followers has been designed as the ‘new-institutionalism’ although it corresponds to a
compared static analysis. However, if we go any further, we may legitimately ask the
following questions: How do entrepreneurs acknowledge and evaluate the relative advantages
springing from each firm structure? How do they search for information on which they
depend upon? How do entrepreneurs acquire new knowledge? The New Institutionalism has
failed to analyse these issues.

Nevertheless, these aspects have thoroughly been studied by Nelson and Winter (1982);
indeed, many others have widely contributed for this issue, thereby embodying the ‘neo-
evolutionism’ within the study of technological innovation and change (Dosi et al, 1988).

As there are quite a few available synthesis (cf. Saviotti and Metcalfe, 1991; Dosi and Nelson,
1994), we will solely focus upon some of the most significant aspects, whilst unveiling the
evolutionist thought on the firm:

• The firm develops collective learning, acquisition competence processes and selection
of technologies as it has to adapt to the changing environment;

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