A Strategic Theory of the Firm as a Nexus of Incomplete Contracts: A Property Rights Approach

Jongwook Kim and Joseph T. Mahoney
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Jongwook Kim: Western Washington U
Joseph T. Mahoney: U of Illinois at Urbana-Champaign

Working Papers from University of Illinois at Urbana-Champaign, College of Business

Abstract: This paper maintains that joining property rights theory and Austrian economics informs the dynamic capabilities approach by giving context to key constructs within this approach, particularly the nature of organizational processes and asset positions. By defining resources and capabilities as bundles of property rights, we can develop theory on how firms create, deploy, and renew those resources and capabilities. Developing, deploying and renewing capabilities involve a process of bundling and re-bundling resource combinations. Central to bundling resource combinations is the contracting process, which generates information that can lead to more efficient solutions achieved through bargaining and organizational innovation, which in turn leads to the discovery of new economic opportunities. In a world of positive transaction costs, the notion of the firm as a nexus of (complete) contracts is rightly discarded; rather, the firm is defined as a nexus of incomplete contracts, which allows for entrepreneurial alertness, creativity, and judgment under uncertainty. Thus, we maintain that the contracting process is a discovery process and entrepreneurial in nature, allowing firms to sense and seize new economic opportunities. Property rights theory enables a contractual process-oriented approach for how dynamic capabilities are developed, sustained and rejuvenated and in so doing intertwines firm boundary issues with the capabilities dimension of a strategic theory of the firm.

Date: 2008
New Economics Papers: this item is included in nep-bec, nep-cse and nep-ore
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