Understanding how companies develop managerial skills, adopt technology and build innovation capacity can help explain why some outperform others and how less advanced firms can improve. Yet, unlike sales or profits, company capabilities are difficult to measure. Previous research has often relied on surveys and interviews, which can be expensive, time-consuming and vulnerable to bias.

Researchers led by Professor Alex Coad of Waseda Business School at Waseda University in Japan have developed and tested a new method for measuring company capabilities and organising them into a hierarchy of basic, intermediate and advanced activities. The low-cost approach uses widely available company data and algorithms from network science. The international research team also included Nandita Mathew of the United Nations University Institute on Comparative Regional Integration Studies and Emanuele Pugliese of the UNU Maastricht Economic and Social Research Institute on Innovation and Technology. Their findings were published online in Industrial and Corporate Change on May 11, 2026.

The researchers analysed annual reports from 44,971 Indian companies between 2000 and 2020 using the PROWESS database developed by the Centre for Monitoring Indian Economy. They assessed company spending across 47 activities, grouped into seven capability categories, and applied a “nestedness” algorithm to determine whether capabilities follow a predictable hierarchy. The algorithm ranked activities according to their complexity and placed companies on a “capabilities ladder”, with capabilities considered more complex when they were found primarily among a small number of highly advanced firms.

The results revealed a clear hierarchy, particularly among companies at the lower and middle levels. Firms at the bottom of the ladder typically possessed basic managerial, production, internet access and communication capabilities. At intermediate levels, companies were more likely to expand into international markets and use new knowledge to support future innovation. At the highest levels, firms engaged in activities such as patenting, mergers and environmental initiatives. However, these advanced capabilities did not follow a strict sequence, suggesting that highly capable companies have greater freedom to develop customised pathways. In contrast, less capable firms generally need to establish foundational capabilities before progressing.

The overall capability hierarchy remained remarkably stable from 2000 to 2020, although some capabilities shifted over time. Information and Communication Technology (ICT) capabilities, initially concentrated among advanced firms, had become widespread and foundational by 2005. Environmental, welfare and amenities capabilities also became somewhat more fundamental by 2015. The researchers further found that company size was positively associated with capability development among smaller firms, but this relationship weakened as companies grew larger. Advanced capabilities were generally linked to higher growth, although firms pursuing highly sophisticated activities relative to their size tended to have lower survival probabilities. Capability profiles also differed across industries, with ICT services and technologically advanced manufacturing firms concentrated near the top of the ladder.

The findings could help companies identify which capabilities they should strengthen before pursuing more complex activities and allow policymakers to design more targeted business support. Coad said the analysis could guide firms towards areas that need upgrading while identifying the foundational capabilities required for advanced activities. Governments could use this information to direct assistance towards companies that are ready to take the next step. For example, export support might be targeted at firms that already possess basic digital capabilities, helping businesses progress through the capabilities ladder more effectively.

More information: Alex Coad et al, Positioning firms along the capabilities ladder, Industrial and Corporate Change. DOI: 10.1093/icc/dtag021

Journal information: Industrial and Corporate Change Provided by Waseda University