Investing in capabilities: The dynamics of resource allocation
January (1st Quarter/Winter)
In this research, we examine the dynamic capability of resource allocation to invest in operational capabilities. Using a computer simulation, we model a process of firms competing in factor markets for opportunities to invest in existing capabilities and acquire new ones. Based on the simulation results we derive a set of propositions about the conditions under which there are and are not performance benefits from possessing a superior ability to search for new capabilities. Because the definition of what constitutes a new capability is based on a firm’s pre-existing capabilities, we also incorporate differences in initial endowments into the analysis. We find that endowment and search ability both matter and that in many circumstances, the effects of possessing a superior endowment dominate the effects of superior search ability.