This article suggests that the context and process of resource selection have an important
influence on firm heterogeneity and sustainable competitive advantage. It is argued that a firm’s
sustainable advantage depends on its ability to manage the institutional context of its resource
decisions. A firm’s institutional context includes its internal culture as well as broader influences
from the state, society, and inter firm relations that define socially acceptable economic behavior.
A process model of firm heterogeneity is proposed that combines the insights of a resourcebased
view with the institutional perspective from organization theory. Normative rationality,
institutional isolating mechanisms, and institutional sources of firm homogeneity are proposed
as determinants of rent potential that complement and extend resource-based explanations of
firm variation and sustainable competitive advantage. The article suggests that both resource
capital and institutional capital are indispensable to sustainable competitive advantage