where i indexes firms or SBUs in the sample observations, _X i
contains the various
capabilities (and/or resources) as independent variables, y i is a performance variable of
interest, and 1 i denotes an error term. Heterogeneity in this framework, i.e. differences
in performance, can arise from at least three sources. Unexplained heterogeneity in this
additive representation can be represented in terms of the variance of the error terms 2
.