Why Don't Old Firms Do New Things?

Since at least Schumpeter (1942), young firms are commonly associated with innovation. Yet limited economics research exists to explain when and why new technologies require new firms. We examine the view that old firms struggle especially when innovations require different organizational styles, which may clash with existing business models. We measure organizational styles based on occupation compositions and their corresponding workstyles. In the data, young firms grow significantly faster than old firms when new technologies in an industry generate greater changes in the industry’s overall workstyles (due to the types of workers they require), whereas the sheer volume of new technologies (e.g., the number of all or breakthrough patents) does not matter. These results show the role of organizational frictions in shaping companies’ adaptability, and provide new perspectives for the Coase (1937) boundary of the firm question. Venture investment and government policies that support entrepreneurship are especially important when innovations alter organizational styles.