A KNOW HOW THEORY OF TECHNOLOGY

Abstract

This paper develops a formal theory of organizational capabilities by breaking production up into a series of small steps called activities. Activities must be chained together in a routine in order to produce an output. Thus a routine also formalises the way in which output depends on a firm’s capabilities. The theory provides a new foundation for neoclassical production theory in which synergies and new products can be generated by firms merging their capabilities. These new aggregation results deviate from the Neoclassical Theory of the Firm and have important implications for industrial policy and anti-trust regulation.