Introduction

This chapter begins with some notes on the development of stra- tegic management concepts in general, and the dynamic capabil- ities framework in particular. The dynamic capabilities framework draws from many intellectual streams, including entrepreneurship, the behavioral theory of the firm and behavioral decision the- ory, organization theory, transaction cost economics, and to some

The Foundations of Dynamic Capabilities: Strategic Management

The focus of the field of strategic management is on choices with respect to the direction of the evolution of the business enterprise. It covers subjects of primary concern to senior executives, and to anyone interested in the success and failure of the business enterprise. The field is grounded in practice and exists because

The Foundations of Dynamic Capabilities: Escaping the Zero-Profit Condition

The economic theory of (perfect) competition explains that in “equilibrium” firms will make only just enough to cover their cost of capital. This is sometimes referred to as the zero-profit condition. It occurs in the model because there are no points of differentiation amongst firms with respect to technology, markets, information, or skills. With

Dynamic Capabilities Defined

As discussed in Chapter 1, dynamic capabilities refer to the par- ticular (nonimitability) capacity business enterprises possess to shape, reshape, configure, and reconfigure assets so as to respond to changing technologies and markets and escape the zero-profit condition. Dynamic capabilities relate to the enterprise’s ability to sense, seize, and adapt in order to generate

Dynamics Capabilities as a Theory of Entrepreneurial Management

We now return to the dynamic capabilities perspective which builds on ideas from all of the above traditions. In addition to syn- thesizing ideas from different theoretical traditions, the dynamic capabilities approach seeks to provide a coherent framework which can both integrate existing conceptual and empirical knowledge, and facilitate prescription. First published in Teece

Implications of Dynamics Capabilities for Future Research on the Firm, the Role of the Manager, and Ecosystems

Based on the discussion of the intellectual roots and current con- tent of the dynamic capabilities research program, we can outline at least the following important implications for research on strategic processes and organizational change. 1. Finding a Place for the Manager in Economic Theory Ronald Coase was well aware that economists have neglected

Strategy as Evolution with Design

In 1978, Ronald Coase wrote in a comment in the American Eco- nomic Review: “The IQ of Natural Selection is zero. The IQ of busi- nessmen and politicians may not be too high but it is not zero.” While Coase was referring to the debate about the role of natural section versus intentionality in

Introduction

Edith Penrose’s many and varied contributions to business studies deserve recognition. In her later years, she focused on the oil industry and on multinational enterprises (MNEs).1 In this chapter, we note some of her earlier contributions which helped initiate important streams of research, including the resource-based theory of the firm. Her influence has also

The Resource-Based Theory of the Firm

Penrose defined the internal resources of the firm as “the pro- ductive services available to a firm from its own resources, par- ticularly the productive services available from management with experience within the firm” (p. 5). She presents the firm as an “autonomous administrative planning unit, the activities of which are interrelated and are

Penrose and the Theory of Dynamic Capabilities

As noted, and with the benefit of hindsight, Penrose appears to have underplayed growth driven by the entrepreneurial elements of management. She seems to recognize that know-how can be used to convert physical assets to different uses.10 The firm, she said, was “both an administrative organization and a collection of productive resources, both human

Other Growth Issues and the Penrose Effect

We have emphasized Penrose’s contribution to the resource-based theory of the firm. Some of her ideas are consistent with the dynamic capabilities framework; yet until two decades ago when strategy scholars picked up on this work (Teece, 1982), Penrose’s emphasis on fungible resources had not received much attention in either the economics or the

Entrepreneurship, Enterprise Design, and the Role of Markets

As implicitly recognized by Penrose, firms need to be viewed as human organizations, not computer-controlled machines. As such, firms must confront challenges in the realm of organizational design including imperfect incentive alignment, imperfect govern- ance, and bureaucratic decision-making. Organizations facilitate decisions because they constrain the set of alternatives as well as the relevant parameters

Dynamic Capabilities, Resources, and Competitive Advantage: Implications for MNEs

While Penrose may not have fully developed the capability con- cept, the subsequent development of the (dynamic) capabilities approach can be usefully applied to MNEs. Somewhat underre- searched in mainstream MNE theory (at least as far as internal- ization theory is concerned), has been consideration of the import- ance and the particulars of the

The Essence of the MNE and Hymer’s Thesis

Before Hymer, many economists viewed the MNE as simply an arbitrageur of capital, transferring equity capital from countries where returns were low to those where it was higher, earning the arbitrageurs rents and contributing to efficient resource alloca- tion. The capital arbitrage theory of the MNE predicted the MNEs would be headquartered in countries

Hymer and the Emergence of the Internalization School

As noted above, Hymer’s basic argument was that an MNE needed some special advantage to offset the hypothesized higher costs14 (relative to indigenous firms) of operating abroad. Given the indus- trial organization theories advanced at the time (in the Mason- Bain15 tradition) the visceral answer he provided was that special advantages led to market

Dunning’s Eclectic Paradigm

Dunning correctly notes that internalization alone is not sufficient to explain the (productive) activities of MNEs outside their own borders, or the production of foreign-owned firms in the MNE’s home country.20 The author (Teece, 1985) did recognize that MNEs will consider location factors in their decisions with respect to DFI, that is, DFI decisions

Challenges to the Theory of the MNE

1. Changing Nature of International Business In recent decades, increased globalization, and in particular out- sourcing and offshoring, appear to have gained momentum. This can be exemplified by industries from clothing to electronics. As a consequence, international trade in intermediate products has increased, enabled by the global dispersion of knowledge and capa- bilities, as

Injecting the Resources/Capabilities Perspective into the Theory of MNE

1. General The above analysis suggests that while the MNE theory has done quite well in an era of rapid globalization, there is nevertheless the need for a more robust theory of the MNE. As Peter Buckley put it, “the theory of the multinational firm therefore requires development in several directions—the general area of

Dynamic Capabilities, Resources, and Competitive Advantage

The general framework advanced in this book sees difficulty-to- imitate and globally scalable dynamic capabilities (and resources) as foundational to the competitive advantage of multinational enterprises. The greater the diversity and rate of change in business environments, the more critical are dynamic capabilities for the financial performance of the MNE. Some observers have identified

Imperfect Competition and Bargaining Theory

1. Introduction In Sections 6 and 7, efforts were made to explain how notions of enterprise capability can enhance our understanding of MNE. In this section, I wish to ask whether the theory of MNE would suffer if all references to market power and oligopoly theory were purged.57 I conclude that not much would