Dynamic capabilities, firm performance and firm adaptation in New Zealand

This thesis investigates empirically how the innovation and adaptation practices and capabilities of New Zealand firms relate to long-term firm performance and growth.

Understanding of these issues at the whole-economy level remains incomplete. Endogenous growth models in economics have long placed innovation at the core of the economic growth process. But they do not usually represent the actual firm behaviours, practices and capabilities that drive innovation in much, if any, detail beyond R&D investment choices. They also tend to abstract from aspects of innovation that relate to adaptation to a changing environment. Some more recent papers have shown that management capabilities are important to firm performance in a static-efficiency sense, but do not explore in much detail the performance implications of capabilities specifically related to change.

By contrast, the “dynamic capabilities” literature from the strategic management discipline focuses squarely on firms’ purposeful and diverse efforts to drive and adapt to change. This literature shares common conceptual ideas with the endogenous growth literature. In both approaches, firms are motivated to innovate by the prospect of economic rents, and new ideas render old ones obsolete in a process of creative destruction. The dynamic capabilities literature also draws parallels with successful adaptation.

I empirically investigate and test the proposition that dynamic capabilities underpin long-term firm performance, as claimed by the literature. I also look at whether dynamic capabilities affect intermediate outcomes for the firm - profitability, sales, productivity, wages and employment - that are important for economic performance and public policy.

I proceed by first using the dynamic capabilities framework to guide the selection of 87 innovation- and change-related business practices and attitudes from an official, nationally representative survey of 14,146 New Zealand firms from 2005 to 2017. I extract five common factors explaining the correlations in the data on the selected practices. The factors represent the underlying dynamic capabilities of the firms. Using survival and linear regression models, I then test whether these dynamic capabilities factors are positively associated with the firm performance measures, in the presence of a range of controls. Finally, I test whether dynamic capabilities improve firm adaptation and resilience in the face of a major shock, when a firm’s challenge is to adapt rapidly in the context of diverse disruption across and within industries. I use the natural experiment of the earthquakes that devastated the city of Christchurch, New Zealand in February 2011, with a subsequent large-scale government response.

I find that dynamic capabilities related to external cooperation, proactive reorientation of marketing, openness to internal process change, expertise-intensive internationalisation, and situational awareness and responsiveness are all significantly positively associated in various contexts with long-term performance, and with sales and employment growth in the shorter term. I find that higher dynamic capabilities enabled superior performance of construction and infrastructure firms exposed to the earthquake shock, compared to their exposed peers with lower capabilities.

The study goes beyond existing literature by using a large, highly granular dataset of business practices from a nationally representative official survey to test the relationship of dynamic capabilities with firm survival, with careful attention to identification of dynamic capabilities effects on firm performance after a natural disaster.