Economists often think ofa firm as a collection of assets. These assets are further classifled as tangible and intangible assets. Examples of tangible assets are physical capital such as plant and machinery. Examples of intangible assets are patents, brand names, R&D expertise and the knowhow that resides within the organization with its employees (Lev, 2001). Another classification, that is often invoked by scholars of the theory of theflrm, distinguishes human capital from non-human capital (Hart, 1989). We propose a taxonomy that divides firms assets into three classes: physical capital, human capital and organization capital.
We argue that this classification provides insights into the nature of the firm and suggests a consistent and coherent explanation of many empirical observations about firms. Prescottand Visschler (1980) argue that elucidating the role of organization capital is central to understanding the function of the firm. Our focus in this paper is to understand what constitutes organization capital and how it relates to firm value, labor practices, compensation and mergers.
We present a model of production in which a flrm'soutputdependson its physical assets, on the qualities (human capital) of its managers, and on their ability to communicate efiectivelywith each other. While performing their job functions, managers acquire tacit knowledge that can be useful to their peers but that maybedi-cult to convey. We posit that when a flrm undertakes anew projector task, its managers develop informal communication channels for talking about that task and sharing tacit knowledge. Informal work routines, convenient technical jargon and a vocabulary of patterns are developed in the course of carrying out the task. The richness of a firm's language is a measure of the breadth of the set of tasks covered by its communications channels and is the essential component of its organizational capital.
