Ordinary capabilities and firm performance: The role of capital market development

Abstract

Ordinary capabilities support the primary activities of a firm and are key to attaining competitive advantages. Past research indicates that there are limits to the contributions of ordinary capabilities to firm performance but has largely explored it via contingent effects of the industry context. We argue that these limits are also a function of the development of market-supporting institutions. Adopting an unbundling approach, we specifically investigate the role of developing capital markets. We argue that evolutionary pressures brought about by pro-market reforms in capital markets have a negative effect on a firm’s use of its ordinary capabilities. We trace the heterogeneity of this effect for two key firm resource attributes, investments in R&D and financial slack. We test our three-way interaction model using a sample of Indian firms over a twenty-year period of institutional reforms. Our findings contribute to integrating the organizational capability and institutional theory literature and advancing research on the sustainability of firm profits in emerging economies.