The Firm as a Potemkin Village: Individual Performance in a World of Firms

Ethan Mollick

MIT Sloan School of Management

emollick@mit.edu

The organizational literature generally assumes that the performance differences between firms are explained by organizational factors - such as routines, knowledge, and strategy - rather than by the individuals within firms.  However, especially in knowledge-driven industries, research suggests that the performance of individuals can vary widely.  The importance of individual variation challenges the assumption that organizational factors explain firm performance, since individual performance may vary by orders of magnitude in industries such as software development or biotechnology.  This paper employs an empirical analysis of over 1,500 products across 602 companies in the computer game industry, backed up by interviews with firm founders, to test the assumption that organizational factors are responsible for variations in firm performance. The results indicate that variations among individuals matter far more in organizations than generally assumed, and that organizational factors contribute relatively little to performance.  This suggests that firms do not always serve a purely economic function.  Instead, the persistence of firms is due to an unrecognized implication of the neoinstituional  and ecological  perspectives that makes firms socially necessary to facilitate and enable individual action.

This is the first paper out of a projected three papers on the origins of firms.

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