RESOURCE IDLING AND CAPABILITY EROSION

Why would some firms persist with continued operations when facing unfavorable economic conditions? Although prior studies have investigated the roles of uncertainty and sunk costs as sources of inertia, an unacknowledged type of sunk cost associated with temporary suspensions of operations is related to the erosion of existing capabilities. Building on the resource-based view and real options theory, we argue that resource idling contributes to capability erosion and that the anticipated capability loss motivates firms to refrain from idling their resources under demand uncertainty in the first place. The negative effects of uncertainty on resource idling are likely to be particularly strong for firms with superior capabilities and for those having a greater reliance on human capital. Using data on oil drilling contractors in Texas, the empirical evidence lends support to our theoretical arguments. Our insights suggest that resource idling shapes the development path of capabilities and risks jeopardizing firms' competitive advantages. The seemingly operational decision of temporarily idling resources can therefore be quite strategic for a firm, and hysteresis, or inertia in continuing operations, can preserve firms' capabilities.

Automated summary

Why do some firms continue operations in unfavorable economic conditions? This study explores the concept of temporary suspensions of operations and their impact on existing capabilities. The research argues that idling resources leads to capability erosion, and the anticipated loss of capabilities motivates firms to avoid resource idling in the first place. Uncertainty has a stronger negative effect on resource idling for firms with superior capabilities and a higher reliance on human capital.