The Firm

The Firm

In business, the firm is defined as an organization, a partnership. For some reason the name calls to mind like-named film with Tom Cruise or the British rock band. Almost as if the human psyche is predisposed to associate with glamour more freely, appeal is often used to promote sales in business. To sum up, an old truth: ‘sex sells’. However, a marketing scholar would note that a product can be ‘sexy’ not in the Megan Fox sense, but in the way that a BlackBerry is stylish while practical.

Financial literacy is essential in this day and age. Ramifications touch everyone, not just finance professionals. Political turmoil overseas may lead to an investor losing money, as when the Nokia stock (NOK) plummeted in early 2011 due to unrest in Egypt.

Economic theory predicts that firms that save and invest have a better chance of becoming and remaining successful. Aside from start-up capital and business loans, capital can also be in the form of soft skills or knowledge. In this information-driven era, human capital in the form of skilled workers is ever more precious.

The theory of the firm rests on existence and production. Production explanations can take two paths, the Classical rationale asserts that costs determine prices, while the Austrian perspective maintains the reverse holds true. Views of the nature of the firm:

•     Neoclassical – firm as production function
•     Nexus-of-Contract – firm as legal fiction
•     Knowledge based – firm as stock of knowledge
•     Coasian – firm as ownership of assets

The divisions may be slightly superfluous; a combination of these definitions looks more appropriate. By the same token, the Austrian theory of imputation may also stand to benefit by acknowledging that both variants may be simultaneously valid.

A very old firm. Photo by Elena

Almeida & Carneiro (2008) examine the return on investment in human capital of a Portuguese sample of firms between 1995 and 1999.

The investment is defined as on the job training, a commonplace practice in many of today’s organizations, such as seminars designed to improve workforce performance. Training and internships are often paid. The estimated returns were 8.6% for those firms that were in the training supplied group. The findings prompted the researchers to conclude that the investment was a good one for these companies, in the same range as investments in material capital or schooling. A potential imitation of the study is that certain variables were absent from the analysis (e.g. who covers training costs, the employee or the firm?).

Reference:

    Almeida, R. & Carneiro, P. (2009). The return to firm investments in human capital. Labour Economics, 16 (1): 97-106.