Arguments for and against are presented to make the reader aware of the issues surrounding the topic. In the end, a synthesis shall be made of the ideas presented and a conclusion on whether firm performance is indeed path dependent or not is made.
Firm performance is at the very heart of business management because it is the time test of any business strategy and theories. Nonetheless, there is little consensus on how to best measure the construct. Researchers and experts with strong finance or economic background use the term to refer to how efficient the firm utilizes its assets in generating profits. While this is certainly an appealing definition, it can be considered to be too narrow the reason being that it disregards the social performance of the firm. This definition only focuses on the financial part whereas firm performance can also be related to how happy its employees, suppliers and customers with its services. In this paper, I will be holding a stakeholder's perspective and consider firm performance as a combination of financial and social performance. To illustrate this construct further, I will be using the model developed by North (1990) as shown in Figure 1:
The reason for our choice of defining firm performance as a function of financial and social constructs is that both have an effect on the other. Consider for example that to reduce costs and increase returns, a firm wishes to outsource. While the firm can improve financially, it can suffer socially due to employee morale decline and customer dissatisfaction. We can see this already happening with business entities with Chinese-sourced products. Enhancing employee satisfaction and job security may increase the social performance of the firm but it can also corrode its financial standing. Thus, we need to consider both as necessary constructs in understanding firm performance. This definition will prove to be invaluable in analyzing whether firms are indeed path dependent or not.
Defining Path Dependence
There is much academic and scholarly words discussing the theory of Path Dependency but to make it easier to understand, I will be using a hiking analogy to describe the concept. When a person goes hiking, steps and turns taken in the beginning or in the course of the travel will ultimately define its present status. For example, a wrong turn could lead a person getting lost or ending up in a wrong checkpoint. A small decision could provide good or severe consequences in the outcome of the hiking experience. Following this analogy, Path Dependency argues that small, even inconsequential and random events at the beginning or in the course of the path can define the options and decisions available at the present state of affairs (Pierson, 2000).
Firm Resources and Path Dependency
In the 1980's, there was a view stating that the performance of firms can only be understood thru an analysis of resources and mobility independent of particular historical events and other idiosyncratic attributes (Levin et al 1987). However, the importance of the path-dependent theory has since been recognized. In this section, the path-dependency of firm performance is explored through the analysis of firm