Knowledge that Transforms

We analyze the effects of founding conditions on the survival of new firms. Based on arguments from several theoretical perspectives, namely economics, organizational ecology, and the resource‐based view of the firm, we develop hypotheses that relate the survival of firms to the conditions confronted by firms at each moment and to those prevailing at the time of founding. We develop an empirical model that allows the effects of founding conditions to be transitory and estimate how long such effects last. The results of estimating such a model indicate that founding effects are important determinants of exit rates. Moreover, in most cases, their effect on survival seems to persist with little attenuation for several years following the founding of the firm. Overall, our findings suggest that there is no absolute superiority of any of the aforementioned theoretical perspectives over the others, and there are important elements in all of them to explain the survival of firms.

An interesting theoretical debate arises when considering firm heterogeneity in learning from exporting. One perspective intimates that technologically lagging firms stand to benefit more from exporting because exposure to technological knowledge in foreign markets allows these firms to close the gap with their more technologically endowed counterparts. A contrasting perspective posits that technologically superior firms benefit more from exporting since these firms are better equipped to translate knowledge acquired in foreign markets into innovation. Using a sample of 1,744 Spanish manufacturing firms from 1990–1997, this study empirically investigates how exporting differentially influences the patent output of technologically leading versus technologically lagging firms. We find that exporting is associated with the ex post increase in innovative productivity for both technologically leading and lagging firms. However, subsequent to exporting, technologically leading firms apply for more patents than technologically lagging firms.

Boards of directors' attention to monitoring represents an understudied topic in corporate governance. By analyzing hundreds of board meeting transcripts, we find that board members do not maintain constant levels of attention toward monitoring, but instead selectively allocate attention to their monitoring function. Drawing from the attention‐based view, prospect theory, and the literature on power, we find that deviation from prior performance and CEO duality affect this allocation. Specifically, while negative deviation from prior performance increases boards' attention to monitoring, positive deviation from prior performance reduces it. The presence of duality also reduces the boards' allocation of attention to monitoring. Additional analysis demonstrates that the effects of duality are realized in part by the CEO‐chair's control of the meeting's agenda and location. Finally, the results show that duality and deviation from prior performance interactively affect boards' attention to monitoring. In total, we find that board members do not consistently monitor management in order to protect shareholder value, a proposition often assumed within governance research; rather, our results demonstrate that board members' monitoring behaviors are contextually dependent. The contextual dependency of board attention to monitoring suggests that additional efforts may be needed to ensure the protection of shareholders' interests.

Foundational RBV work suggests that firms possess capabilities that represent strengths and others that represent weaknesses. In contrast, contemporary research has examined capability strengths while largely ignoring weaknesses. Addressing this oversight, we examine the direct and integrated effects of sets of capability strengths and capability weaknesses on competitive advantage and its empirical correlate—relative performance. Additionally, we explore how environmental and firm‐specific factors influence change in these drivers of competitive advantage over time. Results suggest that weakness sets have a negative effect on relative performance, while strength sets have an increasingly positive effect. The integrative effects of strength and weakness sets affect relative performance in a complex manner. For example, while high strength/low weakness firms perform at high levels, firms integrating high strength with high weakness perform well, but experience considerably more variance in their realized outcomes. Lastly, we find that the strength and weakness sets change significantly over time in markets where competition is more intense, thereby undermining the durability of competitive advantage. Our theory and results indicate that achieving temporary advantage is more difficult than previously thought and that the erosion of advantage occurs routinely as a result of dynamic and interactive rivalry.

A firm that manages for stakeholders allocates more resources to satisfy the needs and demands of its legitimate stakeholders than would be necessary to simply retain their willful participation in the firm's productive activities. We explain why this sort of behavior unlocks additional potential for value creation, as well as the conditions that either facilitate or disrupt the value‐creation process. Firms that manage for stakeholders develop trusting relationships with them based on principles of distributional, procedural, and interactional justice. Under these conditions, stakeholders are more likely to share nuanced information regarding their utility functions, thereby increasing the ability of the firm to allocate its resources to areas that will best satisfy them (thus increasing demand for business transactions with the firm). In addition, this information can spur innovation, as well as allow the firm to deal better with changes in the environment. Competitive advantages stemming from a managing‐for‐stakeholders approach are argued to be sustainable because they are associated with path dependence and causal ambiguity. These explanations provide a strong rationale for including stakeholder theory in the discussion of firm competitiveness and performance.

The resource‐based view on firm diversification, subsequent to Penrose (), has focused primarily on the fungibility of resources across domains. We make a clear analytical distinction between scale free capabilities and those that are subject to opportunity costs and must be allocated to one use or another, thereby shifting the discourse back to Penrose's () original argument regarding the stock of organizational capabilities. The existence of resources and capabilities that must be allocated across alternative uses implies that profit‐maximizing diversification decisions should be based upon the opportunity cost of their use in one domain or another. This opportunity cost logic provides a rational explanation for the divergence between total profits and profit margins. Firms make profit‐maximizing decisions to increase total profit via diversification when the industries in which they are currently competing become relatively mature. Due to the spreading of these capabilities across more segments, we may observe that firms' profit‐maximizing diversification actions lead to total profit growth but lower average returns. The model provides an alternative explanation for empirical observations regarding the diversification discount. The self‐selection effect noted in recent work in corporate finance may not be indicative of inferior capabilities of diversifying firms but of the limited opportunity contexts in which these firms are operating.

In contrast to the traditional approach that typically views entry solely as a threat, we argue that our understanding of this important phenomenon will remain incomplete until we consider the possibility that entry may also provide opportunity for incumbent firms. Drawing from agglomeration theory, which describes the benefit from colocating with competitors, we explicitly examine the combined impact of the competitive and agglomeration effects of entry using a unique dataset of Texas hotels. We find that incumbent establishments price higher when facing entrants whose agglomeration benefits are more likely to outweigh their competitive effects. This association is stronger for incumbents that have greater experience with entry. Our results bring a new perspective to the entry response literature helping clarify inconsistent empirical results. Further, we apply agglomeration theory to a new question, incumbent behavior, and demonstrate that experience appears to play an important role in recognizing situations that generate agglomeration externalities.

We develop the construct of board capital, composed of the breadth and depth of directors' human and social capital, and explore how board capital affects strategic change. Building upon resource dependence theory, we submit that board capital breadth leads to more strategic change, while board capital depth leads to less. We also recognize CEO power as a moderator of these relationships. Our hypotheses are tested using a random sample of firms on the S&P 500. We find support for the effect of board capital on strategic change, and partial support for the moderating effect of CEO power.

Small and medium enterprises (SMEs) in the manufacturing sector make a significant contribution to economic growth, yet most of the research into innovation management in the manufacturing sector has focused on large organizations. This article, however, identifies innovation drivers and their performance implications in manufacturing SMEs. Its study gathered survey data from a sample of 600 Australian SMEs and found that SMEs are similar to large firms with respect to the way that innovation strategy and formal structure are the key drivers of their performance, but do not appear to utilize innovation culture in a strategic and structured manner. This study therefore concludes that SMEs' performance is likely to improve as they increase the degree to which they mirror large manufacturing firms with respect to formal strategy and structure, and to which they recognize that innovation culture and strategy are closely aligned throughout the innovation process.

The creation and management of temporary competitive advantages has emerged as an alternative to sustainable models of competitive advantage in the strategy literature. We review the literature and discuss questions related to the antecedents, consequences and the management temporary advantage in the introduction of this special issue. The overall goal is to ask: What would the field of strategic management look like if sustainable advantages did not exist? We summarize the papers published in this special issue and highlight directions for future research.