Under the spotlight: contextualizing the firm vs. industry debate through the introduction of neighborhood effects

Abstract The relative importance of firm and industry effects, contrasting resource-based and industrial organization theories, is often discussed in the strategy and international business literature. Several studies indicate that firm effects (i.e., variability in firm-specific internal resources) are the primary drivers of competitive differences between firms. Leveraging insights from several theoretical lenses such as location economics, relational strategy, and institutional theory, we argue that considering the micro-geographic locations (neighborhoods) of firms challenges two implicit but potentially unrealistic assumptions in the firm vs. industry effects academic debate: That (a) firm boundaries are clearly defined, and (b) industry effects are spatially homogenous. We argue that including a neighborhood and neighborhood-industry interaction effect is thus more appropriate to contextualize the classic firm vs. industry debate. We demonstrate that firm effects are much smaller than previously identified (e.g., dropping from 43.9 to 11.5%). Our results thus challenge conventional wisdom and established empirical findings, while adding nuance to the fundamental debate regarding the locus of competitive advantage of firms.