Organizational Economics of Capability and Heterogeneity

For decades, the literatures on firm capabilities and organizational economics have been at odds with each other, specifically relative to explaining organizational boundaries and heterogeneity. We briefly trace the history of the relationship between the capabilities literature and organizational economics, and we point to the dominance of a “capabilities first” logic in this relationship. We argue that capabilities considerations are inherently intertwined with questions about organizational boundaries and internal organization, and we use this point to respond to the prevalent capabilities first logic. We offer an integrative research agenda that focuses first on the governance of capabilities and then on the capability of governance.