For decades, economists and business strategists have wrestled with a question that sits at the heart of economic growth and competitive advantage: why do some firms consistently outperform their peers, even within the same industry and market conditions? The answer, a growing body of theory suggests, lies not in access to capital or market power alone, but in the elusive bundle of intangible assets known as firm capabilities. These comprise everything from a company’s managerial expertise and production know‑how to its capacity for innovation, digital technology adoption, and environmental stewardship. The trouble has always been that capabilities, unlike quarterly sales or profit margins, resist easy measurement. They are embedded in tacit knowledge, organizational routines, and the collective experience of a workforce, making it exceptionally difficult to quantify them on a large scale. Now, a team of researchers has unveiled a pathbreaking method that not only measures firm capabilities objectively but also reveals a deeply structured, hierarchical order in which those capabilities are acquired — a veritable “capabilities ladder” that promises to transform how we understand corporate development.
The historical challenge of measuring capabilities has long frustrated efforts to turn rich theoretical insights into empirical, testable predictions. Until now, scholars have relied predominantly on detailed surveys, structured interviews with managers, and case‑study evaluations to assess what firms can actually do. While these methods yield valuable qualitative texture, they come with severe limitations. They are expensive to administer, often restricting sample sizes to a few hundred companies at most; they are time‑consuming, sometimes taking years to collect and analyze; and they are susceptible to a host of cognitive and social biases, from overconfident self‑reporting to the Hawthorne effect. More fundamentally, such approaches rarely produce the kind of large, longitudinal, and comparable dataset required to systematically map how capabilities evolve across an entire economy over decades. As a result, the literature on firm capabilities, although conceptually rich, has struggled to provide robust, scalable benchmarks for managers and policymakers. The new study, authored by Alex Coad of Waseda University, Nanditha Mathew of the United Nations University, and Emanuele Pugliese of UNU‑MERIT, directly tackles this empirical void with an ingenious, low‑cost solution.
The researchers’ core insight was to exploit a vast, untapped reservoir of revealed information about firm activities: the line‑item expenditures reported in companies’ annual financial statements. Every single rupee a company spends on advertising, raw materials, software licenses, export logistics, employee training, patent filings, or environmental compliance represents a concrete, verifiable commitment — a signal that the firm possesses, or is actively building, a particular capability. By mining these expenditure data, the team could bypass the subjectivity of surveys entirely and instead derive objective capability profiles from standardized financial accounts. They turned to the PROWESS database, maintained by the Centre for Monitoring Indian Economy, which holds detailed financial reports for tens of thousands of Indian firms. After cleaning, they assembled a final dataset of 44,971 companies spanning the two decades from 2000 to 2020, a period of rapid economic liberalization, technological disruption, and shifting global integration that provided an ideal laboratory for observing capability dynamics.
From these reports, the authors identified expenditures across 47 distinct activity categories, which they then consolidated into seven broader capability dimensions: managerial capabilities (covering accounting, human resources, and general administration), core production capabilities, basic communication, internet and ICT usage, knowledge absorption and technology adoption, international market reach, and a cluster of advanced activities including patenting, mergers and acquisitions, and environmental and welfare initiatives. This taxonomy captured a wide spectrum, from the mundane to the cutting‑edge, and allowed the team to ask a deceptively simple yet profound question: do these capabilities exhibit a nested hierarchy? In other words, is there a developmental sequence such that firms acquiring complex capabilities invariably possess simpler, more foundational ones, much like the way biological species on smaller islands form nested subsets of species on larger islands?
To answer this, the team borrowed a concept and a set of algorithms from network science and ecology — namely, nestedness analysis. Nestedness describes a pattern in which the species composition of less diverse communities is a proper subset of more diverse communities, implying a predictable order of presence or absence. Ecologists have long used metrics like the NODF (Nestedness metric based on Overlap and Decreasing Fill) to quantify such patterns in island biogeography or plant‑pollinator networks. Coad and his colleagues realized that a firm‑capability matrix, where rows represent firms and columns represent capabilities, could be analyzed with the very same tools. The algorithm works by simultaneously reordering rows and columns to maximize the degree to which the presence of a capability in a lower‑ranked firm guarantees its presence in all higher‑ranked firms. Through this iterative process, both capabilities and firms are assigned positions along a hierarchy, with capability complexity defined by how exclusive the activity is to the top‑ranked firms.
Applying this algorithm to the Indian data produced a clear, statistically robust nested structure — a capabilities ladder with three broad rungs. At the bottom, occupying the lowest rungs and therefore the most foundational, were basic managerial skills, core production capacity, internet access, and rudimentary communication functions. These were the sine qua non of modern business existence; virtually no firm that had climbed higher lacked these elementary attributes. The nestedness here was so pronounced that it indicated a near‑universal developmental bottleneck: without a professionalized administrative backbone and basic digital connectivity, firms were effectively barred from advancing into more sophisticated territory. This first tier acts as the broad, flat base of the ladder, encompassing the greatest number of companies.
Immediately above this base, the middle rungs were populated by capabilities that reflect a firm turning its attention outward and forward. Companies at this level typically demonstrate active engagement with international markets — not merely through opportunistic exports but through sustained investments in foreign sales and marketing, participation in trade fairs, and compliance with international standards. In parallel, they show a marked increase in knowledge absorption: spending on technology licensing, R&D collaborations, and training that enhances their absorptive capacity, enabling them to recognize, assimilate, and exploit external knowledge. This mid‑level cluster effectively transforms a locally competent firm into a learning, globally‑oriented organization. The study found that the transition from the bottom to the middle rungs was highly structured, suggesting that firms must first stabilize their domestic operations and digital foundations before they can successfully venture abroad or meaningfully engage with frontier external knowledge.
When the analysis peered at the very top of the capabilities ladder, however, the picture became more nuanced and less monolithic. The highest rungs hosted activities that are almost canonical markers of advanced industrial prowess: patenting and intellectual property protection, merger and acquisition activity, dedicated in‑house R&D, and proactive environmental and social‑welfare initiatives. Yet, unlike the lower tiers, these advanced capabilities did not line up in a single, rigid pecking order. Instead, the data revealed a diversification of feasible paths: some leading firms built their advantage around hefty patent portfolios and deep R&D, others around aggressive acquisition‑led growth, and still others around comprehensive sustainability programs. The nested structure weakened at this apex, implying that once a company crosses a threshold of sophistication, it gains strategic discretion to customize its capability profile. A one‑size‑fits‑all “top of the ladder” does not exist; rather, the ladder’s top unfolds like a branching tree.
The two‑decade span of the data allowed the researchers to observe how the ladder itself shifted in response to technological and social forces — and two shifts stand out as particularly illuminating. The first concerns Information and Communication Technology. In the earliest years of the sample, around 2000, ICT‑related capabilities were concentrated among the most advanced firms, a mark of digital pioneers. By 2005, however, the nestedness analysis revealed that ICT had cascaded down several rungs, becoming a foundational capability that even relatively small and unsophisticated firms had to possess to remain viable. This rapid, wholesale descent captures the global explosion of affordable internet, mobile telephony, and cloud computing and demonstrates that the floor of the capabilities ladder is continually being raised by external technological progress. What was once a differentiator can become a basic requirement in half a decade.
A similar, albeit slower and more subtle, transformation occurred with environmental and welfare capabilities. For much of the study period, these green initiatives were largely the province of top‑tier firms — perhaps a luxury for image‑conscious corporations or a response to international regulatory pressures. Around 2015, however, the timing of which coincides with the Paris Agreement and a global surge in environmental, social, and governance investing, the researchers detected a slight downward shift: these capabilities started to spread to somewhat lower rungs, becoming slightly more foundational for a broader set of firms. While still far from universal, this trend signals that sustainability is gradually being internalized as a necessary component of corporate legitimacy, not merely a premium differentiator, a change that the nestedness methodology can capture in near‑real time.
One of the study’s most provocative findings is what could be called the capabilities growth‑survival paradox. When the authors correlated firm size with ladder position, they found a strong and intuitive positive relationship among smaller firms: as micro‑ and small‑enterprises grow in scale, they tend to climb the ladder in a predictable manner, accumulating capabilities that enable and result from growth. Yet for larger firms, the correlation weakens dramatically; some giants continue to advance while others plateau or even slide down. This suggests that size alone is neither a guarantee of sophistication nor a substitute for deliberate capability building. More striking still was the relationship with performance: firms occupying higher rungs did indeed exhibit higher revenue growth rates, validating the idea that capabilities drive expansion. But simultaneously, companies that had adopted extremely advanced capabilities relative to their size — the “overreach” scenario — displayed lower survival probabilities. In plain terms, jumping too high on the ladder before your organizational size can support those complex activities appears to be hazardous, a cautionary tale against premature sophistication.
The capabilities ladder is not painted uniformly across the industrial landscape. The study uncovered significant sectoral heterogeneity that aligns with intuitive understanding of technological intensity but provides crucial empirical backing for it. Firms in ICT services and advanced manufacturing — think software developers, semiconductor fabricators, and precision engineering firms — were heavily concentrated at the upper rungs of the ladder, often possessing a dense portfolio of patenting, R&D, and global reach. In contrast, sectors like finance, real estate, and wholesale trade showed a wide dispersion, with companies scattered fairly evenly across all rungs from bottom to top. This variance implies that the ladder’s structure and the optimal trajectory for climbing it are industry‑specific. A real estate firm, for example, may rise to prominence without ever patenting a technology, whereas a pharmaceutical company almost certainly cannot. Policymakers and managers must therefore calibrate their strategies to the capability maps of their particular fields.
For corporate strategists, the capabilities ladder offers an evidence‑based framework to guide resource allocation and transformation efforts. By benchmarking a firm’s expenditure profile against the nested hierarchy revealed by the algorithm, managers can identify “under‑represented” capabilities — rungs that the firm has skipped or at which it lags behind its peers at similar hierarchical levels. The sequence provides a suggested order of investment: first, ensure solid digital connectivity and professionalized management; next, develop absorptive capacity and international market engagement; only after these are on firm footing should the organization plunge into heavy‑duty R&D, acquisitions, or sophisticated intellectual property strategies. The survival‑risk penalty associated with capability overreach adds a sober warning that attempting to mimic the top‑rung activities of industry leaders without building the requisite middle‑rung foundations may be a recipe for failure.
The ladder also has significant and actionable implications for public policy. Governments and multilateral development agencies collectively disburse billions of dollars annually on programs to promote innovation, digitalization, and export competitiveness, often with decidedly mixed results. The framework suggests a move toward conditional, graduated support: for instance, export promotion subsidies could be targeted only at firms that already demonstrate basic digital capabilities, thereby increasing the likelihood that the funds will catalyze sustainable international growth rather than be absorbed by organizations that cannot handle the logistical and informational demands of exporting. Conversely, basic capability‑building interventions — such as subsidized managerial training or low‑cost broadband access — could be aimed squarely at the vast pool of informal and micro‑enterprises to help them mount the first rung. The ladder thus transforms the vague notion of “building capabilities” into a measurable, sequential public‑investment roadmap.
Beyond its immediate managerial and policy utility, the study makes a major theoretical contribution by bridging previously separate intellectual traditions. It marries the resource‑based view of the firm with evolutionary economics and network science, and in doing so opens a new frontier for quantitative, data‑driven research into organizational learning and industrial evolution. The successful application of nestedness analysis to economic data demonstrates that concepts from ecology and complexity science can illuminate core business dynamics, complementing existing economic complexity indices and moving the field beyond purely descriptive accounts. It also challenges simplistic linear models of firm development, instead revealing a structured yet adaptable hierarchy where the ground floor continually rises as technologies like ICT and environmental practices become commoditized and democratized. For scholars, the methodology is inherently portable; it can be adapted to other countries, time periods, and even non‑corporate entities such as hospitals, universities, or government agencies, potentially spawning a new comparative literature.
As with any innovative methodology, there are important limitations and notes of caution. The approach depends on the accuracy and granularity of reported financial expenditures, which may not fully capture informal, tacit, or internally developed capabilities that require little monetary outlay. The Indian context, while rich in data and dynamic in its development, includes a massive informal sector that the PROWESS database does not cover, and the findings may differ in advanced economies with different institutional settings. The algorithm also treats capabilities as binary (present or absent above a certain expenditure threshold), potentially missing variations in quality or efficiency. Nevertheless, the robustness checks performed by the authors and the striking clarity of the nested pattern are reassuring. The capabilities ladder has arrived as a tangible, empirical construct that can measure what was once considered immeasurable. It offers a compass to firms navigating the fog of strategic choices and gives policymakers a rigorous way to design and evaluate interventions, promising to turn the art of capability development into a more precise science.
Subject of Research: Firm capabilities, nestedness hierarchy, and corporate development using large-scale financial data
Article Title: Positioning firms along the capabilities ladder
News Publication Date: 11 May 2026
Web References: https://doi.org/10.1093/icc/dtag021
References: Coad, A., Mathew, N., & Pugliese, E. (2026). Positioning firms along the capabilities ladder. Industrial and Corporate Change. Advance online publication. https://academic.oup.com/icc/advance-article/doi/10.1093/icc/dtag021/8675797
Image Credits: Professor Alex Coad from Waseda Business School, Waseda University
Keywords: firm capabilities, nestedness, capabilities ladder, economic complexity, business strategy, India, innovation, network science, firm growth, ICT diffusion
