This conceptual paper looks at dynamic capabilities as a specific type of knowledge that is geographically localized. Dynamic capabilities are knowledge-based processes that are developed over time by means of interactions among a firm’s resource bundles and capabilities. Dynamic capabilities enhance a firm’s capacity to leverage resources and organizational processes to increase profitability. Corporate headquarters were selected as a unit of analysis because of their knowledge-intensive nature. Empirical evidence suggests that just over 5% of headquarters relocate every year and that the reasons for the relocations go beyond tax incentives. It is argued that the geographical proximity of headquarters causes spillover of operational knowledge during interactions between managers. This operational knowledge includes various routines and contains dynamic capabilities. This paper links studies on dynamic capabilities and studies on geography of knowledge and headquarter relocations. The information gathered can help to explain why corporate headquarter relocations take place, and how firms may increase profitability by moving their headquarters to a location favorable to building particular dynamic capabilities.

In strategic management, firms create competitive advantage either by picking resources or building capabilities. Those capabilities that are firm-specific can be sources of advantage, and as such they should be built up, organized and protected. This approach is called ‘dynamic capabilities’ in order to emphasize the exploitation of existing internal and external companyspecific competencies to address changing environments (Teece et al., 1997). The framework is based on the development of managerial competencies and difficult-to-imitate mixtures of executive, functional and technological skills. It also integrates and draws on research in administration of R&D, product and process development, transfer of technology, intellectual ability, manufacturing, human resource management and organizational learning.

There have been many studies defining dynamic capabilities and arguing why they can be a source of competitive advantage for a company (Barney, 1991; Constance, 1997; Eisenhardt and Martin, 2000; and Blyler and Coff, 2003). Dynamic capabilities have been found to represent a specific type of knowledge (Makadok, 2001; and Malik and Kotabe, 2009). However, further implications that derive from the knowledge aspect of dynamic capabilities have not been analyzed. For instance, one of the key attributes of knowledge, according to numerous studies, is geographical-localization that implies that knowledge flourishes in specific locations (Jaffe et al., 1993; Zucker et al., 1998a; and Keller, 2002). Therefore, dynamic capabilities, being a special type of knowledge, must be geographically bounded.

Business Strategy, Why Do Firms Relocate Headquarters?, An Examination, Stable, Evolution of Dynamic Capabilities, Resource-Based View, Dynamic Industries.