Institutions, Technology and Markets in Industry Evolution: Causal and Evolutionary Mechanisms in a Regulated Industry

Abstract

This study focuses on the interplay between institutions, technology and markets in industry evolution. Existing research on industry evolution may be categorized into two distinct explanatory logics. At one end there are market based explanations, which assume competition and imitation, and emphasize the role of technological change as a key determinant of long term change. At the other end is the institutional approach, where the focus is on the impact of history and social structures. Most industries exhibit both explanations. The key goal of this study is to build a bridge between these distinct streams of research and to identify the characteristics of the focal mechanisms that explain organizational survival and death and subsequently the patterns of industry lifecycles in regulated industries. This study conveys the principles of causality as addition to the prevailing theories of industry evolution and evolutionary economics. In order to provide causal explanations the analysis is extended to multiple levels. The empirical analysis of the study focuses on a heavily regulated, and later deregulated, industry – the electric power industry in Finland between 1889 and 2005. This study provides four key contributions. First, it offers causal explanations as a complementary element to provide an evolutionary explanation. Second, in addition to the existing constructs, the research provides an evolutionary explanation through mechanisms, which are either evolutionary or causal, and either emergent or with identified agency. Consequently, the long-run change is seen as a result of the interplay of both the causal and evolutionary mechanisms. Third, the study produces a multilevel research framework, which is needed when giving a causal explanation in evolutionary research. Fourth, compared to the extant studies of industry life cycles, the causal explanations provide explication of the differences in the industry life cycle caused by public policy actions and external shocks. The research also has implications for practice. It shows that public policies have primary causal and secondary emergent impacts on industry structure and firm survival. It also provides evidence that evolutionary path dependence and asset constraints cause far-reaching impacts on public policies at both industry and firm level. Moreover, its shows how external shocks intervene the ‘normal’ evolution of the industry and the antecedent intended causal impacts of public policies. And finally, it provides evidence that in a deregulated industry a firm’s business model and its vertical integration act as a key selection criteria both prior to and after deregulation.