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A subject of continuous debate in the field of organizational change research and management practices is on whether downsizing strategies result in improved firm performance. The purpose of this paper is to propose and empirically examine dynamic firm capabilities as a major missing mechanism of firm performance.

This study uses the data of 154 Taiwanese firms that employed an organizational downsizing strategy as the sample for testing the research question.

The results indicate that a responsible downsizing strategy can result in greater firm performance for the development and enhancement of dynamic firm capabilities.

This research introduces dynamic capabilities into the downsizing context, and the empirical results provide new theoretical insight into downsizing and dynamic capabilities research, suggesting that downsizing should be regarded by management as resource management rather than a cost-cutting action.