Towards a capability theory of (innovating) firms: implications for management and policy

Business enterprises lie at the core of ecosystems that drive economic development and growth in market economies; yet, until recently, mainstream economics has mostly treated firms like homogeneous black boxes run by opportunistic managers. The field of strategic management has developed a more nuanced approach to the understanding of how firms are created, organized and grow, how they innovate and compete and how managers manage. One of the leading paradigms in the field is the dynamic capabilities framework. In this paper, contrasts and complementarities are drawn between dynamic capabilities and economic theories of the firm, including transaction cost economics and agency theory. Connections to the Cambridge school are highlighted, including the duality between Keynes's 'animal spirits' and the dynamic capabilities entrepreneurial owner/manager. Leibenstein's x-inefficiency is juxtaposed here with d-ineffectiveness. Knowledge-based theories of the firm consistent with Cambridge conventions emerge. Intellectual exchange between strategic management and economics is encouraged to help improve the intuition behind models of firms and the economy.