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

Jongwook Kim and Joseph T. Mahoney


First Author :

Jongwook Kim
Western Washington University, College of Business and Economics
516 High Street
351 Parks Hall
Bellingham, WA 98225


Second Author :

Joseph T. Mahoney
Business Administration
University of Illinois at Urbana-Champaign, College of Business
1206 S. Sixth Street
140C Wohlers Hall, MC 706
Champaign, IL 61820


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.
Keywords :
Dynamic capabilities, entrepreneurship, incomplete contracts, property rights
Footnotes & Acknowledgements :
We thank Brandon Dupont, Vinit Jagdish, and Tom Roehl for their insightful comments. The usual disclaimer applies.
Manuscript Received : 2008
Manuscript Published : 2008
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