Abstract Herbert Simon’s bounded rationality offers three principles for building a theory of behavior: (i) to study the process of actual decision making (as opposed to as-if models of expected utility maximization), (ii) to study how decisions are made in situations of uncertainty and intractability (as opposed to risk and ambiguity alone), and (iii) to study how minds adapt to environments (as opposed to modeling solely the mind or the environment). Economists hijacked bounded rationality by reinterpreting it to mean optimization under constraints, and psychologists by reinterpreting it as the study of cognitive biases, that is, deviations from optimization. This contradictory double-takeover silenced the revolutionary essence of Simon’s program. My colleagues and I have revived and extended Simon’s lost program, choosing the term ecological rationality to avoid any confusion. As opposed to the cognitive biases program, the study of ecological rationality is both descriptive and prescriptive. It investigates the repertoire of heuristics individuals or institutions have at their disposal (their adaptive toolbox) as well as the conditions under which each heuristic is successful and thus should be used, as measured by real-world criteria (the ecological rationality of heuristics). The study of the adaptive toolbox relies on observation and experimentation; the study of the conditions under which various heuristics should be used relies on mathematical analyses and computer simulations. This combination of descriptive and prescriptive analysis offers a novel perspective for behavioral economics and the study of decision-making in general.

Abstract We examine the Finnish pulp and paper industry’s century-long catch-up journey, focusing on the intertwined development of technical and institutional capabilities. Using historical methods, we highlight how a private, self-organized R&D alliance evolved into an institutional architect, ultimately shaping not only governance but also regulation and entire innovation systems. Our findings demonstrate that sectoral systems of innovation emerge from both technological advancements and from private actors crafting adaptive institutions. The role of private actors is critical when governments are incapable of formulating and enforcing industrial policy. Overall, we propose that substantive experts contribute not only to technical but also to institutional capability.

Abstract Green innovation is critical for the green transition, yet little is known about green knowledge spillovers across industries. Based on the knowledge-spillovers literature and using empirical evidence from German manufacturing small- and medium-sized enterprises (SMEs) during 2009–2019, this analysis reveals that SMEs benefit from horizontal green knowledge spillovers to boost green innovation and from backward spillovers to enhance productivity and profitability. SMEs can leverage these green innovations to expand into international markets through exporting. These effects vary across industries and sub-national locations.

Abstract This paper, written in honor of Paul David, explores the need for a new “assessment” discipline, called innovation assessment (IA). Such a new assessment discipline is needed as innovation has gradually disconnected itself from primarily technological based breakthroughs to broader social and organizational change issues and as a result seized progressively more or less all fields of economic policy. Contrary to the old field of technology assessment (TA), which involved ex ante technological experimentation performed in engineering laboratories, IA should consist of ex post observation and evaluation following ideally the full deployment of the innovation in the economy. As a result, IA will be a more complex process creating many policy dilemmas and trade-offs, some of which were already at the center of Paul David’s writings in the late 80s, in particular what he called the “Blind Giant dilemma.”

Abstract The economics of science, and thus the subject of what has come to be known as “open science,” is omnipresent in Paul David’s work. Throughout his writings, David has never ceased to return to it, enriching it with new contributions. Better still, with the emergence of the Internet—whose importance is asserting itself at a time when the evolution of Intellectual Property law was threatening the “scientific commons” themselves—David renewed and enriched his approach by examining the opportunities offered by the emergence of digital commons and e-science as supports and elements for the renewal of open science, some of whose foundations were under t hreat.

Abstract The most creative inventions—i.e., inventions that are both novel and highly valuable—in the lithium-ion battery field are developed by inventors that exploit their own field-specific knowledge base, leveraging scientific and technological knowledge components they previously developed. This observation contrasts with the findings of prior literature, which has argued that exploration driven by inventors new to a field tends to drive novel and breakthrough inventions. We argue that the technological context and characteristics of the recombinant search process underlying technology development provide important theoretical boundaries to these prior findings and should be considered. In a complex and science-driven technology field, we expect an inventor’s own accumulated scientific and technological field-specific knowledge base to play an important role in advancing that technology field and to matter more for generating novel and breakthrough inventions.

Abstract The notion of the “adjacent possible” has been advanced to theorize the generation of novelty across many different research domains. This study is an attempt to examine in what way the notion can be made empirically useful for innovation studies. A new theoretical framework is construed based on the notion of innovation as a search process where knowledge is recombined to discover the adjacent possible. The framework makes testable predictions about the rate of innovation, the distribution of innovations across organizations, and the rate of diversification of product portfolios. The empirical section examines how well this framework predicts long-run patterns of new product introductions in Sweden, 1908–2016, and explores the long-run evolution of the product space of Swedish organizations. The results suggest that, remarkably, the rate of innovation depends linearly on cumulative innovations, which explains advantages of incumbent firms but excludes the emergence of winner-take-all distributions. The results also suggest that the rate of development of new types of products follows Heaps’ law, where the share of new product types within organizations declines over time. Finally, the study also demonstrates that the structure of the Swedish product space carries important information about adjacent possible innovations.

Abstract This paper studies how the Covid-19 pandemic affected firm productivity. The focus is on the reallocation channel measured by the responsiveness of firm employment growth to productivity. The analysis leverages high-quality firm-level data covering 11 euro area countries over 2 decades, from the early 2000s to 2020 in most sample countries. The results show that: (1) Productivity-enhancing reallocation has weakened over time, with its contribution to aggregate productivity declining in the majority of the sample countries. (2) The strength of this reallocation process varies largely across countries, accounting for 0.7–5.2 log points of aggregate yearly productivity growth. (3) Various estimation approaches and productivity proxies suggest that productivity-enhancing reallocation was weaker in more countries during the pandemic than in the Great Recession.

Abstract We analyze the operating performance of horizontal acquisitions between firms that differ in their growth potential: (I) low-potential firms that buy targets with high potential; and (II) high-potential firms that buy low-potential targets. These two types of acquisition have been the topic of research at three levels of analysis: the industry, the firm, and the transaction. At the industry level, incumbents in the core and innovative startups in the periphery are presumed to have complementary assets managed more effectively through co-ownership. In this vein, studies have focused chiefly on incumbents buying startups. We redress this imbalance. At the firm level, research on real options for growth has examined how multi-business firms exploit their relatedness in entry and exit decisions. Here, we study growth potential in terms of real options in horizontal deals and analyze their effect on post-acquisition performance. At the transaction level, a number of studies have focused on post-acquisition organizational structure and the transfer of knowledge between incumbents and startups. We expand this research by estimating the presumed flow of growth potential capabilities in both High–Low and Low–High deals. Our method uses a difference-in-differences fixed effect model design with Coarsened Exact Matching and Kernel-weighted Propensity Score Matching among comparable firm pairs to measure synergy and to control for endogeneity and portfolio effects using data on U.S. firms over 30 years. We also use a novel accounting adjustment formula to calculate comparable post-M&A operating performance.