Firms invest in communication to create common languages or codes that the members of the organization must share, in order to develop an organizational culture directed towards attaining the maximum potential for the generation of income. Therefore, the managers of a firm face a trade-off between spending resources to stimulate such a culture, and using these resources to accumulate inputs such as physical and human capital. The article analyzes this trade-off by assuming a dynamic scenario. Under an inter-temporal set-up, a long-term equilibrium point can be achieved, which describes the moment that is no longer worthwhile to continue to invest in organizational capital, since the gains in terms of language sharing cease after this point: The investment costs exceed the marginal productivity gains resulting from increased understanding. The steady state result is analyzed and the convergence conditions are derived here. The model also includes the possibility of an external changing environment that forces a firm to revise its concept of culture.

A firm can be regarded as a collection of assets (Chowdhry and Garmaise (2003)). While this definition is substantially restrictive, it addresses a few fundamental points in the analysis undertaken along the sections that follow. Among these assets, one may identify a form of capital, which is specific to the firm and is accumulated along with the development of the firm’s activities. This is organizational capital, a capital variable that defines the tacit knowledge shared by the workers in a given organization. Several authors such as Prescott and Visscher (1980), Brynjolfsson, Hitt and Yang (2002) and Atkenson and Kehoe (2005) discuss the importance of this form of capital to the firm’s development and to the economy as a whole.

Organizational capital includes a set of intangible assets like organizational structures and processes, brand names, reputation, and accumulated knowledge. It also includes an entity that is hard to define but is central to the concept of organizational capital. The most popular notion of culture in the context of the firm, is proposed by Schein (1992). According to him, the idea of culture is related to a set of basic assumptions, which is shared by the individuals of a firm; these assumptions constitute a ‘correct’ way to deal with problems and situations, and such a notion of ‘correct’ comes from the fact that these assumptions are formed through learning and experience, and are found to work well in the past. Since culture corresponds to a pattern of well-succeeded assumptions, it tends to last and to be passed on to new members and also to the members who, that for some reason, are less attached to such a set of tacit assumptions (See also Morgan (1986) and Crémer (1993) for a discussion of organizational culture).

Management Research Journal, Organizational Culture, Corporate Culture, Political Economy, Federal Reserve Bank, Dynamic Environment, Communication System, Communication Process, Convergence Dynamics, Hamiltonian Function, Interpersonal Communication.