APROS 11

Asia-Pacific Researchers in Organization Studies

11th International Colloquium
Melbourne, Australia
4-7 December 2005

Coevolution of the Firm in the Transition Economy

Der Chao Chen

Graduate School of Knowledge Science
Japan Advanced Institute of Science and Technology
Ishikawa, 923-1292, Japan
derchao@jaist.ac.jp

Ryoko Toyama
Graduate School of Knowledge Science
Japan Advanced Institute of Science and Technology
Ishikawa, 923-1292, Japan
rtoyama@jaist.ac.jp

Abstract

Organizations do not live alone but interact with other agents within their idiosyncratic
environments. Such interdependences between different agents and environments have studied
through the coevolutionary perspective in the field of organization studies. There are only a few
works discuss how coevolution happens in organizations embedded in those emerging markets.
In this study, we use coevolutionary perspective to construct a theoretical framework to describe
the catch up activities of latecomer firms in the transition economies. Individual constituent is
discussed in detail. Further discussions and conclusions are given in the end of this work.

Keywords: coevolution, transition economies, latecomer firms.

Introduction

How organizations interact with its environment and vice versa already discussed for a long time
(Lawrence and Lorsch, 1967; Pfeffer and Salancik, 1978; Scott, 2003). If we analogize organizations
as the organisms and the environment they lived as the ecosystem, it is apparently that organizations
do not live alone but interact with other agents within the idiosyncratic environments (Kauffman, 1993;
Moore, 1997; Rothschild, 1990). This kind of interaction and interdependence between different
agents and environments has studied by many organization theorists through the coevolutionary
perspective. While the coevolutionary perspective mainly defined as the joint outcomes of managerial
intentionality, environment, and institution effects, there are many other studies considered different
joint connections as the coevolutionary approach to explore various inquiries (Baum and Mckelvey,
1999; Baum and Singh, 1994; Geels, 2005; Lewin and Volberda, 1999, 2003; Lewin, Long, and
Carroll, 1999; Mckelvey, 2002; Murmann, 2003; Nelson, 1994; Volberda and Lewin, 2003). It is
expectable that different observations and implications can bring from different joint connections
correspondingly.

The uniqueness of emerging markets inspires us to find out how those indigenous firms in these
markets interact with the changing institutional context and changing themselves to response the

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dynamic environment (Hoskisson, et al., 2000; Wright, et al., 2005; Peng and Heath, 1996). However,
the answer about how the firms in the transiting economy coevolves with different actors remain limit
(Rodrigues and Child, 2003; Meyer and Nguyen, 2005). In this study, we intend to construct a
coevolutionary framework to describe catch up of latecomer firms in the transition economy. Our
model considers interactions among managerial logic, organization form, the catch up strategies within
the firm, and their interactions with institutions and environment in the transition economy context. In
this paper, we will discuss individual element covered by our framework, respectively followed by the
discussions and conclusions.

Our Framework

Due to the lack of resource, market knowledge and lagged entry timing, firms in the developing
countries or transition economies always play as the latecomer in the chosen industries (Mathews and
Cho, 1999, 2000; Mathews, 2002a; Peng and Heath, 1996). These latecomers essentially depend on
external vendors to secure their technologies and market opportunities, either transfer or contract out
from foreign leading competitors, to establish their own capabilities for competing in the new arenas,
regardless they are state-owned enterprises or new start up in the transiting context (Amdsen and Chu,
2002; Mathews, 2002a; Peng, 2003). Mathews (2002a, 2002b) argued latecomers can link, leverage,
and learning, in terms of the resource based view of the firm, to catch up with other incumbents in the
field. However, there are not much elaborating discussions about how those latecomers may coevolve
with the transition economies, in spite of his elaborating discussions mainly based on the studies of
industry development in the newly industrialized countries.

Since these three generic catch up strategies-leverage, learning, and linkage- was proved to be applied
in the latecomers of the emerging markets (Chen and Toyama, 2005), we are interesting to explore the
micro-coevolution between these strategic actions (catch up strategies), managerial intentionality, and
organization forms, while Burgelman (2002), Dijksterhuis, et al. (1999), Lewin and Volberda (1999),
and Van den Bosch, et al. (1999) considered these joint outcomes, respectively. Besides, we do not
ignore the macro-coevolution of the firm in the transition economise that across the industry and
institutional levels (Rodrigues and Child, 2003).

Our coevolutionary framework considers the joint effects of the evolution among institutions
environment, technology development, strategic actions and insider mechanisms of the latecomer
firms (Mckelvey, 1997; Volberda and Lewin, 2003). Since we can not discuss all these actors at the
same time, the following sub-paragraphs discuss each element we use to construct our coevolutionary
framework, respectively.

The characteristics of transition economies

The opening of China and post-Communism countries from ex-Soviet Union and East Europe bring up
new opportunities both for local and foreign firms. Either they are known as emerging economies or
transition economies, some common characteristics shared among these countries (Hoskisson, et al.,
2000; Lukas, Tan, and Hult, 2001; Wright, et al., 2005). In this study, we follow the statements of
Hoskisson, et al (2000) to define countries with fast economic development pace that pursue free
market system and economic liberalization from their government policies as the transition economies,
and also describe it as the emerging markets in our text, interchangeably.

In the planned economy, the centralized economic plans dominate the local economic development
directions and domestic production capacities, therefore, knowing who is in charge of individual plans
and what is critical in that context are more important than having sufficient know-how or capital to
run business over there (Peng and Heath, 1996; Peng and Luo, 2000). During the transiting processes,
a series of institutional changes implemented both at political and societal levels, that also makes
competitive environment of the firms move from personal contact into contract based and changes
market transaction changes from central, bureaucratic planning into free market mechanisms; therefore,

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local and foreign firms had also forced to adjust their organization forms and strategies
correspondently (Boist and Child, 1999; Hoskisson, et al., 2000; North, 1990; Peng and Heath, 1996;
Rodrigues and Child, 2003). Even these emerging economies are moving toward deregulating and
opening market, local firms still remain close connections with local authorities both in legal and
personal contacts than those foreign firms; these characteristics give those local firms unique pre-
emptive advantages, even not the most sustainable, to differentiate from other new competitors in their
domestic markets (Hoskisson, et al., 2000; Peng and Heath, 1996; Peng, Lee, and Wang, 2005).
Nevertheless, if the catch up of local latecomers face direct competition in the worldwide markets,
their competitiveness in the worldwide basis can not guarantee through institutional changes in the
local market and/or personal linkages within the domestic market, compare with their connection with
external partners (Mathews, 2002a). Therefore, we propose the following propositions:

Proposition 1a: In the transition economy, local authorities prefer institutionalize their change favour
the catch up of latecomer firms.

Proposition 1b: Institutional changes in the transition economy only coevolve with the domestic
development for these indigenous latecomer firms.

Organization forms

The change of organization forms is one significant representation to reflect the evolution of the
organizations and how organizations change. That is also one critical element in the coevolutionary
approach (Lewin and Volbreda, 1999, 2003; Lewin, Long, and Carroll, 1999). Many studies claim
change of organization forms is the response toward the environment change and treat these changes
as the arguments between selection and adaptation or known as the result of organizational learning in
terms of exploitation and exploration perspectives (Cyert and March, 1963; Lawrence and Lorsch,
1967; Lewin, Long, and Carroll, 1999; Lewin and Volbderda, 2003; March, 1991).

Along with the deregulation, change on market mechanisms, and privatization, organization forms of
those firms in the transition economies coevolve with these transition processes. When start up, join
ventures, strategic alliances, foreign owned enterprises pervasively enter into the emerging markets,
therefore, different division of labour within the organizations becomes significant. Here, different
organization forms not only reflect different approaches those firms use to response environmental
changes, but also related with their absorptive capacity and organizational learning (Chandler, 1962;
Lewin and Volberda, 1999; Scott, 2003; Van den Bosch, Volberda, and de Boer, 1999). Van den
Bosch, et al. (1999) showed the emerging of organization forms coevolve with the firm’s combinative
capabilities, and since combinative capabilities of the firm is the critical factor for latecomers’ catch
up activities (Amsden and Chu, 2003; Mathews, 2002a; Mathews and Cho, 1999), it warrants our
arguments that joint evolution between the organization forms and combinative capabilities of the
latecomer firms, especially when the coevolution between firm capabilities and industry competition
were also examined in other studies (Huygen et al., 2001). Therefore, we argue the evolution of
organization is mediated by the evolution of combinative capabilities and ignore possible direct
connection between organization forms and catch up activities, but propose as follows.

Proposition 2: The organization forms of latecomer firms coevolve with their combinative capabilities.

Managerial intentionality and managerial logic

Managerial intentionality is one major component for the studies of coevolution in the organization
fields (Lewin and Volberda, 1999; Volbreda and Lewin, 2003). It may treat as the essential unit to
structure the whole coevolution of the organization, if we do not bound into the debates of selection
and adaptation of organizations or how the organization or environment domain the selection,
variation and retention of organizations (Child, 1972; March, 1963; Lewin and Volbreda, 1999, 2003).

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Even the specific definition of managerial intentionality is unclear, we follow the seminal work of
Lewin and Volberda (1999) and argue managerial intentionality is the purposeful or intentional
behaviours made by the leader or management team of the organization to show how the organization
expect to achieve, regardless the magnitude of time. That mean the managerial intentionality can
reflect from the actions and decisions made from the top executive teams within the firm, such as
business directions they pursue and organizational change they implement. Burgleman’s work (2002)
about the strategy making of Intel in 1980-1990 is one significant example related with the effect of
managerial intentionality in the coevolution of strategy and environment.

Due to the deregulation and institutionalization of the corporate governance and market mechanisms,
the managerial intentionality of the firm in the transition economies faces two direct impacts; one is
the possible change of management team may bring new business direction or implement strategies
totally different from what the firm had done before, the other is about the change of the managerial
intentionality embedded in the managerial logic within the macro- and institutional environment in
the transition economises (Lewin, Long, and Carroll, 1999; Lewin and Volberda, 1999). The latter one
has proved to be a major source of coevolution for emerging new organization forms and shaped the
managerial schema of the firm for making strategic design action to response dynamic environment
changes (Dijksterhuis, Van den Bosch, and Volberda, 1999). That implies once the members of
management team change, either in part or as the whole, may bring different managerial logics, then
different strategies and the organization forms may come up that reflect the change of managerial
intentionality within the organization. Collectively, there are at least three propositions can be
expected.

Proposition 3a: Managerial intentionality changes for accommodating the change of managerial logic
happened in the transition economies collectively.

Proposition 3b: Managerial logic in the transition economies coevolves with the institutional change
in the macro-environment.
Proposition 3c: Organization form of the firm coevolves with the change of managerial intentionality
in the transition economies collectively.

Technology development

Since different natures and trajectories of technological development become endogenous elements in
the coevolutionary framework, we logically consider the coevolution between technology and the firm
in the transition economies (Murmann, 2003; Nelson, 1994; Rosenkopf and Tushman, 1994). When
advance in technology helps organizations to improve its efficiency and effectiveness, organizations
themselves also try to catch the lead or follow the technological development they need. However, one
can not underestimate the effect of institutions on supporting or prohibiting the development of
technologies that can rewrite the rules of the game for those players in related organization fields
(Nelson, 1994; Murmann, 2003). Therefore, the reciprocal interaction exhibits the coevolution not
only between technology development and organizations, but also between those and institutions.

In the transiting environment, changing institutional design may prefer some particular industries or
technologies that become a signal to push indigenous latecomer firms incline to one particular
direction than others. Various institutional instruments, such as tariff, tax incentives, are arranged to
encourage the development of some particular industries in the domestic market first and stimulate
indigenous firms to compete in the worldwide market afterward (Amsden and Chu, 2003; Lin, et al.,
1995; Lin, 1999; Mathews and Cho, 2000). Industries and technologies specified by governing
organizations may change the dynamics of that particular field in the domestic and later in the
worldwide markets. Thus, we suggest following propositions.

Proposition 4a: The direction of technology development in the transition economies coevolves with
the institutional change directed by the governing organizations.

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Proposition 4b: The technology development of indigenous latecomer firms coevolves with the
direction of institutional change made by the governing organizations.

Combinative capabilities

Combinative capabilities is defined as the integrative capacities for the firm, especially those
latecomers, to absorb and synthesize existing and acquired technologies and knowledge to establish
and sustain its competitive in the market; it relates with the receptivity and developing capacities of
the organization to select, develop what they need for sustaining the competitiveness (Kogut and
Zander, 1992; Mathews and Cho, 1999; Mathews, 2002a). Van den Bosch, et al. (1991) showed how
different knowledge environments coevolve with the emergence of new organization forms and
combinative capabilities of the firm. This kind of coevolution clarifies the interactive connection
between combinative capabilities and organization forms. On the other hands, organizations or their
management teams, may also influence their combinative capabilities and vice versa, especially while
we consider the managerial intentionality plays the critical role for making organization toward the
better link between organization and environment (Philippidou, Söderquist, and Prastacos, 2002; Peng
and Luo, 2000; Tan and Tan, 2005).

We consider the coevolution between combinative capabilities, organization forms, and the
managerial intentionality within the firm as the black box for understanding how latecomer works
toward the catch up, therefore, we propose following arguments, in spite of the concern about the
coevolution with organization forms already discern on the proposition P2 in the earlier part of this
paper.

Proposition 5a: The combinative capabilities of latecomer firms coevolve with the change of
managerial intentionality with the firm.

Proposition 5b: The catch up activities of latecomer firms coevolve with the change of their
combinative capabilities.

Discussions

All actors we discussed have studied under different circumstances or contexts (Baum and Mckelvey,
1999; Baum and Singh, 1994; Lewin and Volberda, 2003; Volbderda and Lewin, 2003). In this
framework we not only consider the joint outcomes of managerial intentionality, environment, and
institutions, but also the micro-coevolution between the combinative capabilities, organization forms,
and managerial intentionality. Our framework spotlights the coevolution of the catch up of latecomer
firm in the transition economies; this thrust both fill up current inquiry about how those latecomers
chase or lead other leading incumbents and how the coevolution of the firms happened in the
institutionalized context (Cho, Kim, and Rhee, 1998; Rodrigues and Child, 2003; Mathews and Cho,
2000; Tan and Tan, 2005).

Apparently, how and to what extent these actors coevolve with each other depend on their
interdependence among each others. Nelson (1994) first emphasized the coevolution between
technology and institution, that reminds people that the development track of technology is not
linearity process but mutually interactive with institutions and organizations in which it embedded
with (Geels, 2005; Murmann, 2003). Changes on institutions or organizations bring new variations for
corresponding actors and make them to select the proper fit for survival in the field (Mckelvey, 1997,
2002; Lewin and Volberda, 1999). That selection and search behaviour are also true for those
latecomer firms in the transition economise, regardless their relatively rigid political system,
insufficient strategic factor market, and legal framework (Peng and Heath, 1996).

Challenges and opportunities the firms in the transition economise face, include not only evolve with
the opening of internal market and pressures outside the industry or country levels, but also from those

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international organizations and industrial alliances. One significant example is the participations for
those emerging markets in different international organizations, such as European Union, World Trade
Organization (WTO). Those external influences and pressures intervene the original plans that those
governing authorities may have in minds, and bring new variations that beyond firms’ expectations.
In our framework, external selection pressures, correspond to the actors we identified, are treated as
the institutional changes that macro- coevolve through managerial logic and technology development
toward the firms’ behaviours via managerial intentionality, collectively.

Catch up activities of the firm are as the intermediate to bridge the coevolution between the firms and
industry levels in our framework. While strategy making is the result of interorganizational ecology of
the firm and the dynamics between firm’s capabilities and industry competition, we also argues those
catch up strategies coevolve with the connection among combinative capabilities, organization forms,
and the managerial intentionality of the firm that outline the micro-coevolution of our model
(Burgelman, 2002; Huygens, et al., 2001; Lampel and Shamsie, 2003; Volberda and Lewin, 2003).

Through the consideration both at macro- and micro-coevolution of the organization from the
perspective of the latecomer firms in the transition economies, our framework spotlight how one
organization lives in such a vibrant and uncertain environment evolves with other actors.

Figure 1 is the description of our framework; each proposition is marked by the letter P with
corresponding items of propositions.

Figure 1. The Coevolution of the Firm in the Transition Economies

Transition economy
Institutions Change

P3b
P1b P1a P4a

Managerial Catch Up Activities Technology

Industry
Logic Development

P5b

Combinative P4b
Capabilities

P3a Firm P2 P5a

Organization P3c Managerial

Form Intentionality

Conclusions

Once we analogy our organizations and societies as organisms from the biological perspective, it is
naturally to admit that they are coevolve with other actors and the environment they embedded, and

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what they urge to do are struggle among rivals for the niches they need for survival (Kauffman, 1993;
Mckelvey, 1997; Rothschild, 1999). Most coevolutionary works in the organization studies targets at
capitalism societies, but only few works concern about those in the emerging, non- or pre- market
mechanism context (Boist and Child, 1999; Rodrigues and Child, 2003, Tan and Tan, 2005). Recent
research in the emerging markets call for using coevolutionary perspective to examine how firms in
the emerging markets develop their competitive advantages that also encourage the emergence of the
framework we discussed here (Wright, et al. 2005).

In the next stage of this work, we will examine the validity of this framework. Because empirical
research of coevolutionary approach in the organization studies needs to satisfy criteria Mckelvey
(1997) proposed and essential considerations highlighted by Lewin and Volberda (2003), such as
multilevel structure, longitudinal data, multidirectional causalities, consideration of institutional
changes in different levels and actors. Future work should try to follows these criteria and
operationalize these constructs for future empirical study. When evolving transition economies make
each individual firm or industry in such an environment an unique research opportunity, we believe
the framework presented here can not only expand our understanding about how latecomers in the
transition economies catch up in the intensive competition, in terms of the coevolutionary approach,
but also provide a new integrative view to see the how organizations live in such dynamic
environment evolve collectively with each others.

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