chapter  3
Knowledge and capabilities
Pages 22

In recent years there has been a remarkable flowering of ideas on the theory of the firm, the principal purpose of which is to break open the black box which normally constitutes the firm and to seek to understand its behaviour in terms of its internal properties, that is to say its capabilities. There are several admirable reviews and commentaries on this literature (Montgomery 1995; Foss and Knudsen 1996; Foss 1997) so we do not intend to repeat their findings here. Rather our purpose is fourfold: to explore the wider significance of the capabilities view in terms of a number of important controversies in relation to the role of firms; to attempt to construct a simple framework in which the main features of the capabilities view can be clearly expressed; to provide some necessary supplements to the capabilities approach in relation to the notions of rationality and knowledge, particularly technological knowledge; and to draw some implications in relation to the role of mergers and acquisitions in enhancing a firm’s capabilities. This last theme is particularly significant for us because it involves a movement away from treating capabilities as if they can be generated only within the firm. We should also note here that we shall speak of the firm and its constituent business units interchangeably, thus sweeping under the carpet important distinctions between capabilities at the corporate and at the business level. For the present, this issue remains unfinished business. The framework within which these ideas are developed is evolutionary, and in the conclusion we summarise briefly our understanding of the link between capabilities and economic evolution.