Innovation and Virtue in the Firm

This chapter extends our neo-Aristotelian theory of the firm by arguing that firms exist not merely to minimize transaction costs but also to foster entrepreneurial agency that contributes to human flourishing. Building on the theory-based view of the firm (Felin & Zenger, 2009; 2017), we contend that firms institutionalize eudaimonic efficiency by enabling members to specialize in value creation through collaborative experimentation and moral development. Whereas the Market Failure Approach (MFA) is bound to static efficiency and Pareto optimality, our neo-Aristotelian account emphasizes the dynamic, epistemic role of the firm in discovering new combinations of resources, which markets alone cannot coordinate. Drawing further on McDowell’s notion of Bildung , we argue that the moral formation of employees in the firm involves a range of virtues that support firm innovation, including benevolence, justice, entrepreneurial perceptiveness, and humility. This virtue-based framework offers a rich account of the way managerial authority can be morally justified, namely when it supports employees’ flourishing and the discovery of better ways to meet human needs. In short, firms are moral communities that inculcate and are sustained by virtues that support collaborative innovation.