Path Creation, Path Dependency, and Alternative Theories of the Firm

During the 1980s, Paul David and Brian Arthur published several papers that are now regarded as the foundation of path dependency. The basic assertion in these and related essays is that sub-optimal or inefficient technologies can be become locked in as industry standards, and in instances where there are significant network effects, these inefficiencies may persist for extended periods of time. While convinced by the path dependency insight that inefficiencies may become locked in, the theory of the firm, or more precisely, the lack of a theory of the firm in David's and Arthur's leading papers is troubling. This paper begins by critiquing how path dependency papers have failed to flesh out exactly how these inefficient processes emerged and became locked in. The rest of the paper focuses on an emerging line of analysis called path creation that combines the insight of sub-optimal lock-in with an emphasis on the active role firms play in shaping their environments.