Failure in Motion: A Framework for Capability Erosion and Institutional Dysfunction

ABSTRACT Drawing on the literature on capability erosion and institutional dysfunction (ID), this study develops a conceptual framework that sheds new light on how the interaction between capability erosion and ID creates conditions for business failure across borders. By articulating two dimensions of heterogeneous capability and resource erosion (i.e., sudden and incremental) and two types of ID (i.e., formal and informal), the paper clarifies the nature of, and mechanisms through which, organizations become increasingly susceptible to the risks of obsolescence and resource erosion that culminate in business failure. The analysis explicates the dynamic and intricate interplay between capability erosion and the institutional difference hypothesis, highlighting the role of time and the pace at which failure manifests. The resulting multidimensional typology advances a more practice‐oriented scholarly discourse on business failure worldwide.