Conceptualizing and measuring capabilities: Methodology and empirical application

This paper attempts to operationalize and measure firm-specific capabilities using an extant conceptualization in the resource-based view (RBV) literature. Capabilities are conceived as the efficiency with which a firm employs a given set of resources (inputs) at its disposal to efficiency certain objectives (outputs). We expand on extant theoretical literature on relative capabilities, by delineating the conditions that have to be met for relative capabilities to be measured non-tautologically. We then proceed to suggest an estimation methodology, stochastic frontier estimation (SFE), that allows us to infer firm capabilities. We illustrate this technique with a sample of firms in the semiconductor industry. Our findings underscore the heterogeneity in R&D capability across firms in this industry, as well as the persistence in these capabilities over time. We also find that the market rewards high R&D capability firms, in that they show the highest average values of Tobin's q. Copyright (C) 2004 John Wiley Sons, Ltd.