Capabilities and Organizational Economics Once More

18 March 2012 at 9:54 am Nicolai Foss Leave a comment

| Nicolai Foss |

As readers of this blog will know, the dialogue between the firm capabilities literature and organizational economics has a long history in management research and economics. Co-blogger Dick Langlois has been an important contributor in this space. The forty years long discussion (dating it from George B. Richardson’s 1972 hint that his newly coined notion of capability is complementary to Coasian transaction cost analysis) has proceeded through several stages. Thus, the initial wave of capabilities theory (i.e., beginning to mid-1990s) was strongly critical of organizational economic. This gave way to a recognition that perhaps the two perspectives were complementary in a more additive manner. Thus, whereas capabilities theory provided insight in which assets firms need to access to compete successfully, organizational economics provide insight into how such access is contractually organized. However, increasingly work has stressed deeper relations of complementarity: Capabilities mechanisms are intertwined with the explanatory mechanisms identified by organizational economists.

In a paper, “The Organizational Economics of Organizational Capability and Heterogeneity: A Research Agenda,” that is forthcoming as the Introduction to a special issue of Organization Science on the the relation between capabilities and organizational economics ideas, Nick Argyres, Teppo Felin, Todd Zenger and I argue, however, that the discussion has been lopsided—hardly qualifying as a real debate—and that a reorientation is necessary.Specifically, the terms of the discussion have largely been defined by capabilities theorists. Part of the explanation for this dominance is that capability theorists have had a rhetorical advantage, because everyone seems to have accepted that organizational economics has very little to say about organizational heterogeneity. We argue that this rests on a misreading of organizational economics: while it is true that organizational economics was not (directly) designed to address and explain organizational heterogeneity, this does not imply that the theory is and must remain silent about such heterogeneity. In fact, we discuss a number of ways in which organizational economics is quite centrally focused on explaining organizational heterogeneity. Specifically, we argue that organizational economics provides guidance around how organizational design and boundaries facilitate the formation of knowledge, insight, and learning that are central to the heterogeneity of firms. We also demonstrate how efficient governance can itself be a source of competitive heterogeneity. We thus call on organizational economists to actively and vigorously enter the discussion, turning something closer to a monologue into real dialogue.

Here is the abstract:

For decades, the literatures on firm capabilities and organizational economics have been at odds with each other, specifically relative to explaining organizational boundaries and heterogeneity. We briefly trace the history of the relationship between the capabilities literature and organizational economics and point to the dominance of a “capabilities first” logic in this relationship. We argue that capabilities considerations are inherently intertwined with questions about organizational boundaries and internal organization, and use this point to respond to the prevalent “capabilities first” logic. We offer an integrative research agenda that focuses, first, on the governance of capabilities and, second, on the capability of governance.