Cog in the Wheel: Resources Release and the Scope of Interdependencies in Adjustment Routines

We characterize and test interdependencies in corporate activities used to adjust a firm’s resource bundle. Because each activity contributes a partial result and depends on others to realize its value, constraining one can create a bottleneck that traps multiple other activities. We argue that such interdependencies are much more pervasive than suspected, linking a wide range of seemingly independent activities that have been examined in isolation. In testing our theory, we leverage the staggered adoptions of employment protection laws intended to constrain one specific adjustment to one specific resource: dismissing employees. The constraint, however, not only affects the contraction but also the expansion in labor as well as capital investments, acquisition, divestiture, CEO turnover, and other adjustments made by firms in responding to positive and negative performance. The expansive scope of interdependencies is critical to understanding firm rigidity, the dynamics of firm resource adjustments, and the persistence of firm performance.