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

Abstract

This article maintains that insights gained by joining property rights theory with Austrian economics can contribute to the dynamic capabilities literature by giving context to key constructs in the dynamic capabilities approach, particularly the nature of organizational processes and resource positions. By defining resources and capabilities as bundles of property rights, scholars can theoretically consider how firms develop, deploy, and renew those resources and capabilities by a process of bundling and rebundling resource combinations. Furthermore, central to bundling resource combinations is the contracting process, which generates information that leads to more efficient solutions that are achieved through intense bargaining and ingenuity, that in turn lead to discovery of new economic opportunities. However, in a world of positive transaction costs, the notion of the firm as a nexus of (complete) contracts is less useful for the authors’ purposes; rather, the firm is defined as a nexus of incomplete contracts, which enables the possibility of entrepreneurial alertness and ingenuity. Thus, the authors maintain that the contracting process is a form of the entrepreneurial discovery process enabling firms to sense and seize new economic opportunities. Furthermore, the authors suggest that property rights theory informs a contractual process-oriented approach for analyzing 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.