Bounded rationality and tacit knowledge in the organizational capabilities approach: an assessment and a re-evaluation

The famous three chapters in Nelson and Winter's An Evolutionary Theory of Economic Change (1982) that focus on firm routines and capabilities are often taken to be solidly founded on an assumption of bounded rationality. I argue that, in actuality, bounded rationality plays a rather limited role in Nelson and Winter (1982), that the very different assumption of tacit knowledge is much more central, and that the links between bounded rationality and routines-capabilities are not clear. I then argue that the absence in Nelson and Winter of a clear methodological individualist foundation for notions such as routines, capabilities, competencies, etc., has resulted in certain explanatory difficulties in the modern organizational capabilities approach that has taken so much inspiration from their work. Copyright 2003, Oxford University Press.