Positioning firms along the capabilities ladder
Alex Coad, Nanditha Mathew & Emanuele Pugliese
#2021-031
We develop and apply a novel methodology for quantifying the capability
development of firms, and putting these capabilities (and hence also the
firms) in a hierarchy, that we refer to as their position on the
capabilities ladder. Our nestedness algorithm, inspired by biology and
network science, defines a capability as complex if it is performed by
only a few firms at the upper rungs of the ladder. We analyze balance
sheet and innovation data of almost 40,000 Indian firms for the time
period 1988-2015, and observe significant nestedness. Lower rungs of the
capabilities ladder correspond to basic managerial and production
capabilities. Mid-level rungs correspond to internationalization and
acquiring absorptive capacity. Higher level rungs are more related to
M&A and innovation. ICT capabilities have become more fundamental
lower-level rungs on the capabilities ladder in recent years. We find
that capability ranking can explain future growth patterns and survival
probability of firms, summing up in one number their future potential
trajectories.
Keywords: Capabilities, Competences, Complexity, Balance sheet data, Resources
JEL codes: L10, D22, O12