On the Foundations of the Strategic Theory of the Firm: Should We Rely on Governance, Capabilities, or Both? (original) (raw)

Abstract This paper is taken up with discussing the extent to which existing economic theories of the firm are helpful for constructing what Rumelt called a “strategic theory of the firm”. Such a theory explains the existence, boundaries, organization and competitive advantage of the firm. The modern economics of organization (eg, agency theory, transaction cost economics, incomplete contracts theory) is characterized by the heuristic of reducing literally all aspects of economic organization to the alignment of incentives.