Innovative activity, substantive uncertainty and the theory of the firm

The inability to predict the future impact of innovations generates surprise and inconsistency of expectations, thereby giving rise to substantive uncertainty. In this paper I concentrate the analysis on organisational response to unforeseen transformations of environmental conditions stemming from innovative activity. Under substantive uncertainty, the capacity to overcome internal resistance to change and to exploit the flexibility characteristics of organisational coordination are both crucial factors in determining a competitive advantage of business organisations. Within organisations, flexibility is mainly obtained by means of reserves (such as warehouses and capabilities), which may be useful to face unpredicted contingencies, and longterm relational agreements that allow mediation among the organisation's stakeholders, provision of incentives, simplification and learning. The paper is structured as follows. The first section is dedicated to the relationship between innovative activity and substantive uncertainty. Sections 2 and 3 address the rigidity and flexibility elements that characterise business organisations consisting in firms or hybrid forms. Finally, Section 4 focuses on the main implications for the theory of the firm arising from the coexistence of different degrees of uncertainty and kinds of rationality, according to the level of agents'a abilities in relation to the specific problem to be faced.