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time? What would happen if it canceled the order after inputs had already been produced? Since such issues cannot be settled in court because in Russia there is no enforceable business code, an organizational network of subcontractors was created to deal with these issues.10

In a few cases, we observed the creation of institutions providing information about potential demand to customers of enterprises undergoing conversion. Thus a defense enterprise in St. Petersburg contributed space for the exhibition of civilian products manufactured in the defense sector. The exhibition has a database of specific outputs required by customers in the St. Petersburg area. It is open to everyone, but in order to join, an enterprise must include in the database the range of its output, along with relevant price and delivery data. The database has proven useful to the extent that a number of matches between customers and suppliers have been accomplished. What is noteworthy in this example is that the database and exhibition have emerged as a cooperative effort of defense enterprises frustrated by the wasteful way they were entering the civilian market,11 rather than the creation of an entrepreneur who perceived and seized the opportunity. There were nonmarginal start-up costs in terms of managerial time for the organizers; as in every cooperative effort, benefits and responsibilities had to be negotiated.

New institutions are invariably created when a firm starts exporting. All relevant firms in the sample had to establish (with the help of Western consulting firms) agencies dealing with the preparation of export contracts, and had to set up service and customer networks abroad. Investment was involved, but it was investment in intangible capital rather than fixed assets.

The list of examples showing that serious adjustment involves the creation of a new institution requiring start-up costs can easily be extended. At this point it is important to note that, as in every situation involving increasing returns, there is a probability that innovation requiring fixed costs will fail to appear. As usual, there are two basic reasons for this. The first is lack of capital: because of capital market deficiencies, the firm is unable to raise the capital required to undertake the investment. The second is the deficiency of the revenue stream (because of a lack of demand, for instance) for recouping the fixed costs. Although we are concerned here with organizational innovations, these two basic reasons still apply. A lack of intangible capital (the

10  

Kuznetsov (1995) shows that such a network implies settlement of business disputes on the basis of personal reputation and the threat of expulsion in case of noncompliance. There are designated individuals within networks—modern equivalents of law merchants—who prepare settlements and make recommendations to top management of enterprises in the network.

11  

In the manufacturing of consumer durables, one can clearly observe the phenomenon of waves of excess competition emerging as a result of the lack of information about market demand. For instance, in 1993 the market for refrigerators became profitable, and no fewer than ten defense sector companies were unaware that other firms also doing this had entered the market. The database was created with the modest objective of avoiding such situations.



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