Abstract
Firms downsize to improve their bottom line results often in reactive response to negative external shocks, such as economic downturns, but even in proactive efforts to enhance organizational performance when they are financially ‘healthy’, such as restructuring. Research reveals, however, that not only does downsizing generally fail to improve a firm’s financial performance, but that it may even lead to reduced financial performance. To investigate this puzzling outcome, we build on previous research and integrate the concepts of downsizing, social capital, dynamic capabilities and performance in a multi-level model as well as discuss how social capital mediates the relationship between downsizing and dynamic capabilities. Thereafter, we develop (a) four propositions to elucidate how changes to the structural dimension of social capital due to downsizing, i.e. the removal of three key social network positions and changes to the firm’s network structure, negatively mediate the relationship between downsizing and a firm’s dynamic capabilities, and (b) two propositions incorporating internal (knowledge intensity) and external (institutional pressures) contextual variables in our model. We conclude by discussing how our research contributes to the downsizing and SHRM literature as well as the resource-based view and social capital literature before providing suggestions for future research and practitioners.