This short article is my entry on Richard R. Nelson in the Encyclopedia of Strategic Management
Richard R. Nelson (b. 1930) is an American economist who has had a significant influence on the field of strategic management. The fundamental question driving his work is how societies can be organized to improve their material well-being. In answering this question, Nelson identifies sustained technological innovation and a diverse range of often industry-specific institutional structures as the key engines of economic growth. He sees business firms as playing a key role in the growth process because firms are the carriers of the knowledge and abilities required to produce the complex product and services that characterize modern economies.
Keywords: evolutionary theory, firms, innovation, organizational capabilities, patents, Carnegie School, RAND Corporation; science policy, tacit knowledg
Richard R. Nelson is an American economist whose principal aim has been to develop a deeper understanding of technological change and economic growth. His career-spanning work on technological change (e.g., Nelson, 1962, 1993) has shaped scholarly thought in economics and many other fields. In the field of strategic management, Nelson has wielded strong influence on the study of innovation and how firms develop. This influence is based in large part on the landmark book that he and Sidney G. Winter published in 1982 under the title An Evolutionary Theory of Economic Change. As of May 2012, the book had received approximately 6,000 Web of Science Citations and 23,000 Google Scholar citations, making it one of the foundational texts in strategic management. The book has had such a strong impact on the field of strategic management for several reasons: First, it builds on the Carnegie School’s (Cyert and March, 1963) influential notion of routines as the key building block for organizational decision-making. Second, it offered a coherent theory of how firms and industries acquire capabilities through an evolutionary process that, of necessity, involves innovation and a substantial degree of trial and error. In explaining the sustained competitive advantage of individual firms there are two broad traditions. The first one points to favourable external market structures and the second to resources lying inside the firm that are difficult to trade, imitate and replicate. Nelson and Winter (1982) combine these traditions in their evolutionary view of capability development where markets select out those firms that do not have sufficient capabilities to compete.
Nelson’s long-term research on innovation (e.g. Nelson, Mowery and Fagerberg, 2006), intellectual property rights (e.g. Levin et al., 1987) and the larger institutional environment (e.g. Nelson, 1993; Nelson and Sampat, 2001) in which innovative activity takes place has also been very influential in strategic management because his ideas help explain how firms gain and lose competitive advantage.
Knowing a few details of Nelson’s biography can help to provide a better understanding of the intellectual trajectory of his work. He grew up in Washington, DC, in a family headed by a government economist who was trying to help the US economy get back on track in the wake of the Great Depression. After completing high school in the US capital (Winter, 2000), Nelson went on to study at Oberlin College in Ohio, a private liberal arts college, which has long been associated with progressive causes. He received a bachelor’s degree from the college in 1952 and then went to Yale, enrolling in the Ph.D. programme in economics. By today’s standards the ‘science of economics’ as implemented in the curriculum of the Yale Ph.D. programme was conceived broadly. It included, for example, economic history as a required field of study. Nelson (2003b) explains:
‘The orientation to economics as a discipline at Yale was very much that the goal of the subject was the understanding of real empirical phenomena, and that an important use of that understanding was to guide policy making to improve the human condition. Good economic theory was an important aspect of that understanding. But it was not all of that understanding; a good economist also ought to know a considerable amount of economic history, be a good empirical analyst, and also have a strong common-sense understanding of the economic world.’
Nelson completed his Ph.D. thesis in just three years, being awarded a Ph.D. degree in 1956. He had become convinced that technological advance was the key factor driving economic growth (Nelson, 2007) but realized that he knew too little about technology. Taking advantage of a scholarship programme offered by the US government, Nelson then enrolled in undergraduate engineering and science courses at MIT to complement his Ph.D. training in economics and he subsequently worked for a decade at the RAND Corporation, focusing on policy questions related to the organization of innovation and national security. Nelson (2003b) later described the research ethos at RAND as follows:
‘While methodological rigor was required [at RAND], the researchers knew that their principal task was to get the problem right, and to illuminate real solutions to the real problem.’
This means that both his graduate student days at Yale and the decade at RAND, which was interrupted by a stint on the Council of Economic Advisors in Washington, during the Kennedy Administration, solidified Nelson’s approach to research, focusing on explaining real problems. In 1968, Nelson left RAND to become professor of economics at Yale University and in 1986 he moved to Columbia University where he is presently a professor emeritus and director of the Center for Science Technology and Global Development.
For Nelson the central ‘real’ problem is to understand how society can bring about economic growth. When Nelson began his career as an economist, evidence had emerged that economic growth historically was not simply a matter of adding more labour or capital in the economy. Long-term data series on the US economy had shown that increases in productivity were at the core of economic growth and that only a small amount of this growth of output per worker was due to increased capital use per worker. This meant that technological change was likely playing a central role in productivity increases that allowed the average worker to generate ever larger amounts of goods and services (Nelson, 1962). For an economist interested in economic growth, the key questions therefore become: What is the optimal rate of investment in innovative activity? To what extent should the government be involved in funding and organizing innovative activity? and How should policymakers trade off the potential benefits of encouraging innovation through patents and the costs of granting temporary monopolies with patents?
To provide better answers to these questions, throughout his career Nelson mixed theoretical and empirical analyses. In an early paper (Nelson, 1959), Nelson showed mainly through theoretical analysis that basic R&D has the classic externality problem and that for this reason profit-seeking firms would underinvest in basic science since they would not be able to fully capture the returns from such investment. To provide a deeper understanding of the relationship between basic and applied research, Nelson next investigated how economically important new technologies such as the transistor actually came about (Nelson, 1962) and how new technologies diffused in the economy to lift overall productivity levels (Nelson, 1968). One central conclusion that Nelson reached by comparing technical change in the agricultural, medical and aircraft sectors is that the nature of the innovation process and the organizational and institutional factors facilitating it differed from sector to sector across the economy (Nelson and Winter, 1977).
A basic fact about technological innovation highlighted early on in Nelson’s work (1959) is the inherent uncertainty involved in the process of innovation: Ahead of time actors do not know which research efforts will yield great results and which will be a waste of time. This means that the only way to arrive at effective solutions is to carry out parallel experiments and reallocate resources as more is learned about the relative merits of alternative solutions (Nelson, 1962). The strength of capitalist economies is precisely that competing firms engage in a parallel search for new products and new ways to make them (Nelson and Winter, 1977). In Nelson’s theoretical writings, the diversity of firm capabilities and strategies are a fundamental engine of progress precisely because no one can predict in advance which strategy will turn out to be most effective (Nelson, 1991).
Nelson’s influence in strategic management is based in large measure on being able to construct a theoretical explanation for how firms are able to develop the capabilities to organize the often exceedingly complex research, development and production processes that characterize modern economies (Dosi, Nelson and Winter, 2000) where increasingly sophisticated products and services sweep away old ones (Nelson and Winter, 1977). Just how sophisticated the capabilities of firms are that can turn out such products as the modern commercial aircraft or notebook computers comes into full view when we remind ourselves of the limited abilities of a single individual human being (Nelson, 2003a). The theoretical structure unifying Nelson’s work on technological, corporate and industrial change is evolutionary theory. Modern technologies and firms come about through a combination of three processes: an inheritance mechanism that conserves already accumulated accomplishments; a variation mechanism that tries out multiple novel approaches; and a selection mechanism that identifies the more effective ones (Nelson and Winter, 1982). The explanatory power of this approach has been shown in many empirical studies of firms and industries (e.g. Mowery and Nelson, 1999; Murmann, 2003) and led to Nelson’s influence.
Nelson’s scholarly impact in part is due to his skill in organizing research projects in which he enlisted leading scholars to collaborate on an important topic and create a product that was much better than would have been produced if the scholars had worked in isolation. The most celebrated examples of this leadership skill are the volumes on The Rate and Direction of Inventive Activity (1962) and on National Innovation Systems (1993).
Through both his writings and extensive personal interactions, Nelson has also had a direct influence on many other strategy scholars who in turn have had a large impact on the field. For example, David Teece’s ideas on how firms can appropriate returns from innovation (Teece, 1986) and on dynamic firm capabilities (Teece, Pisano and Shuen, 1997) owe a great deal to Nelson. Helfat’s publications on dynamic firm capabilities (e.g. Helfat and Peteraf, 2003) are building on the foundations laid by Nelson and his frequent collaborator Sidney Winter. The same is true of Kogut and Zander’s (1992) work on capability replication as well as the work of a large number of other innovation and strategy scholars.
1959. The simple economics of basic scientific research. Journal of Political Economy 67, 297–306.
1962 (ed.). Introduction. The Rate and Direction of Inventive Activity: Economic and Social Factors, NBER Special Conference Series. Princeton, NJ: Princeton University Press.
1968. A ‘diffusion’ model of international productivity differences in manufacturing industry. American Economic Review 58, 1219–1248.
1977 (with S. G. Winter). In search of a useful theory of innovation. Research Policy 6, 36–76.
1982. The role of knowledge in R&D efficiency. Quarterly Journal of Economics 97, 453–470.
1982 (with S. G. Winter). An Evolutionary Theory of Economic Change. Cambridge, MA: Belknap Press of Harvard University Press.
1987. (with R. C. Levin, A. K. Klevorick, S. G. Winter) Appropriating the returns from industrial research and development. Brookings Papers on Economic Activity 3 (special issue on microeconomics), 783–820.
1991. Why do firms differ, and how does it matter? Strategic Management Journal 12, 61–74.
1993 (ed.). National Innovation Systems. New York: Oxford University Press.
1999. (ed with D. Mowery) Sources of Industrial Leadership: Studies of Seven Industries. New York: Cambridge University Press.
2000 (ed. with G. Dosi and S. Winter) The Nature and Dynamics of Organizational Capabilities. New York: Oxford University Press.
2001 (with B. N. Sampat). Making sense of institutions as a factor shaping economic performance. Journal of Economic Behavior & Organization 44, 31–54.
2003a. On the uneven evolution of human know-how. Research Policy 32, 909–922.
2003b. Sid Winter: origins and factors shaping our joint work developing an evolutionary theory of economic change. Paper presented at conference in honor of Sidney Winter at University of Pennsylvannia, 16 October 2003, Evolutionary Theory in the Social Sciences.
2006 (with D. C. Mowery and J. Fagerberg). The Oxford Handbook of Innovation. Oxford: Oxford University Press.
2007. Understanding economic growth as the central task of economic analysis. In Perspectives on Innovation, ed. F. Malerba and S. Brusoni. Cambridge: Cambridge University Press.
Cyert, R. M. and March, J. G. 1963. A Behavioral Theory of the Firm. Englewood Cliffs, NJ: Prentice Hall.
Helfat, C. E. and Peteraf, M. A. 2003. The dynamic resource‐based view: capability lifecycles. Strategic Management Journal 24, 997–1010.
Kogut, B. and Zander, U. 1992. Knowledge of the firm, combinative capabilities, and the replication of technology. Organization Science 3, 383–397.
Murmann, J. P. 2003. Knowledge and Competitive Advantage: The Coevolution of Firms, Technology, and National Institutions. New York: Cambridge University Press.
Teece, D. J. 1986. Profiting from technological innovation: implications for integration, collaboration, licensing and public policy. Research Policy 15, 285–305.
Teece, D. J., Pisano, G. and Shuen, A. 1997. Dynamic capabilities and strategic management. Strategic Management Journal 18, 509–533.
Winter, S. G. 2000. The evolution of Dick Nelson. Paper presented at the Richard Nelson Fest, Columbia University, 13 October 13, 2000, Evolutionary Theory in the Social Sciences.