Academic journal article IUP Journal of Business Strategy

Why Do Firms Relocate Headquarters?: An Examination of Stable and Dynamic Industries

Academic journal article IUP Journal of Business Strategy

Why Do Firms Relocate Headquarters?: An Examination of Stable and Dynamic Industries

Article excerpt

Introduction

In strategic management, firms create competitive advantage either by picking resources or building capabilities. Those capabilities that are firm-specific can be sources of advantage, and as such they should be built up, organized and protected. This approach is called 'dynamic capabilities' in order to emphasize the exploitation of existing internal and external company-specific competencies to address changing environments (Teece et al., 1997). The framework is based on the development of managerial competencies and difficult-to-imitate mixtures of executive, functional and technological skills. It also integrates and draws on research in administration of R&D, product and process development, transfer of technology, intellectual ability, manufacturing, human resource management and organizational learning.

There have been many studies defining dynamic capabilities and arguing why they can be a source of competitive advantage for a company (Barney, 1991; Constance, 1997; Eisenhardt and Martin, 2000; and Blyler and Coff, 2003). Dynamic capabilities have been found to represent a specific type of knowledge (Makadok, 2001; and Malik and Kotabe, 2009). However, further implications that derive from the knowledge aspect of dynamic capabilities have not been analyzed. For instance, one of the key attributes of knowledge, according to numerous studies, is geographical-localization that implies that knowledge flourishes in specific locations (Jaffe et al., 1993; Zucker et al., 1998a; and Keller, 2002). Therefore, dynamic capabilities, being a special type of knowledge, must be geographically bounded.

The knowledge-intensive nature of headquarters makes them a perfect place to store a large portion of dynamic capabilities, and an interesting subject for study. Traditional functions of headquarters include being a major source of knowledge and competencies (Ambos et al., 2006). This paper aims at analyzing the evolution of the notion of dynamic capabilities and its associated concepts, arguments about the geographical localization of knowledge and analysis of knowledge networks.

In the strategic management field, it is suggested that firms create economic rents by means of two separate fundamental mechanisms: (1) resource-picking; and (2) capability-building. While employing resource-picking mechanisms, executives collect information and perform analyses to outmaneuver the resource marketplace in selecting resources. This approach is analogous to the technique used by mutual fund managers who seek to outsmart the stock market in selecting securities. While employing capability-building mechanisms, executives plan and build organizational systems to improve the output of any resources the company acquires. These two rent-producing approaches are not mutually exclusive, and in many cases firms employ both of them either consciously or unconsciously. One of the examples of simultaneous use of two rent-producing mechanisms is the relocation of corporate headquarters. Headquarter relocation can be viewed as both a resource-picking and a capability-building mechanism (Figures 1 and 2).

Research on the interaction between these two rent-producing methods revealed that the two mechanisms are complementary in some situations, but substitutes in others (Richard, 2001). The basic assumption is that firms produce a sequence of 'temporary' advantages by adding and reconfiguring resources, which may develop into a sustained advantage once the full pattern is considered. This process allows the company to obtain higher rent by achieving new forms of competitive advantage (Carmeli and Tishler, 2004). Higher rent is a rate of return generated in "excess of the minimum needed to attract resources" (Milgrom and Roberts, 1992). Dynamic capabilities are treated as a special type of knowledge, and defined as firm-specific capabilities that can be sources of advantage by exploiting existing internal and external company-specific competencies to address changing environments (Teece et al. …

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