Richard Nelsons Dynamic Capabilities.docVIP

Richard Nelson’s Dynamic Capabilities J. Lamar Pierce, Christopher S. Boerner, and David J. Teece* *J. Lamar Pierce and Christopher S. Boerner are doctoral candidates, and David J. Teece is the Mitsubishi Bank Professor of International Business and Finance, Haas School of Business, UC Berkeley, 94720.  Introduction The essence of firm strategy is that a firm’s performance is largely determined by its ability to match its capabilities to its ever-changing environment. Over the years, a handful of scholars have made major strides toward explicating and expanding on this basic insight. Particularly influential in this regard are the works of Schumpeter (1934), Penrose (1959), Cyert and March (1963), Williamson (1975, 1985), Barney (1986), Teece (1982, 1994), and, importantly, Nelson and Winter (1982). What sets these scholars apart is that, unlike many of their contemporaries (particularly in economics), they recognized that firms should not be understood as mere manifestations of production functions. Rather, understanding the purpose, behavior and boundaries of firms entails conceptualizing firms as unique modes of organization, possessing distinct competencies and costs. It is in formulating this more sophisticated understanding of firms and firm strategy that the work of Dick Nelson has had perhaps its greatest impact. Indeed, Nelson’s (1982) work with Sidney Winter represents an important precursor to much of our current understanding of firm strategy, particularly the dynamic capabilities literature. To fully appreciate the influence of Nelson and Winter (1982), it is useful to situate it within a broader intellectual context. One of the most significant early contributions to our understanding of firm behavior is Cyert and March’s (1963) The Behavioral Theory of the Firm. In The Behavioral Theory, Cyert and March pose a critical challenge to economic orthodoxy by redefining the firm as a unique organization, possessing difficult t