Path dependence is a concept related to complexity theory that recognizes that where you are going, or able to go, depends on where you have been. The economy and business organizations are nonlinear dynamic systems. Nonlinearities cause small differences in initial conditions to be magnified over time. Nonlinear dynamic systems are path dependent. Where they have been in the past determines where they can go in the future.
History matters in making decisions. The history of the business organization has shaped its chosen purpose, values, value of offerings, competencies, culture, its value system and perception in the market. As such, the future choices are both constrained by and enable by the past decisions and results.
In a dynamic world calling for radical innovation, requiring healthy
Path-dependency, lock-in, and dynamic capabilities (Source: Schreyögg, 2007) --
Path dependency means first of all that 'history matters' (David, 1985), i.e., that a company's current and future decisions capabilities are imprinted by past decisions and their underlying patterns (Arthur, 1989; Cowan and Gunby, 1996). In many cases, path dependency means more than mere historical imprinting: it refers to forceful dynamics called 'increasing returns' (Arthur, 1983). That is, once successful combinatorial activities generate positive feedback loops, thereby emergently constituting self-reinforcing processes. Empirical studies show that such self-reinforcing processes may establish strategic paths which are prone to dramatically narrowing the scope of strategic management. In the worst case, a specific orientation becomes locked, i.e., any other alternative is excluded.