the theory of a firm consists

7/28/2019 The Theory of a Firm Consists

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1. Knowledge of the Firm, Combinative Capabilities, and the Replication of TechnologyBruce Kogut and Udo Zander Organization Science , Vol. 3, No. 3, Focused Issue:

Management of Technology (Aug., 1992), pp. 383-397

2. Gupta,Anil K. (04/2000). "Knowledge flows within multinational corporations. Strategicmanagement journal(0143-2095), 21 (4), p. 473.

We have studied various theories of the firm, and also have understood the factors that help a

firm attain sustainable competitive advantage. According to the resource based view of the firm,

VRIN resources helps firms attain sustainable competitive advantage and hence achieve higher

level of performance (Barney, 1991). Later the Dynamic capability of the firm added to the RBV

by explaining that a firm can attain competitive advantage not just by having VRIN resources but

by its ability to integrate, built and reconfigure these resources to address rapidly changing

environment. Now this article Knowledge of the firm, Combinative Capabilities, AndReplication of Technology states that a firm can attain competitive advantage by its ability to

generate new knowledge by the process of integrating or transferring information within the firm

that will help the firm to innovate, thus attaining a competitive advantage and hence leading to

higher performance.

According to this article knowledge is not limited to individual, and if this was the case then in

order for the firm to change it just had to hire new workers. But as firms cannot change its skill

by hiring new workers, so the knowledge is embedded in the organizations principle andculture. By understanding how firms can create knowledge they can innovate themselves into

new areas and will be able to perform better than the other organization. This article helps us

understand why firms exist and also the effect of knowledge on the boundaries of the firm.

Fig.1

Existence of thefirm

Effects of knowledge

on the boundaries of

the firm

Effects of knowledge

on Firms

performance


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The theory of the firm consists of a number of economic theories that describe why firms exist?

The question, why firms exist? hasbeen answered by transaction cost theory (Coase, 1937;

Williamson, 1975, 1985). The traditional explanation for the existence of the firm has been that

they help to keep in check the transaction costs arising from an exchange. According to

Williamson firms exist because they use price mechanism more efficiently than markets to

discover relevant information and to negotiate contracts. In contrast this article argues that firms

exist because of their ability to transfer and exploit knowledge more effectively and efficiently in

the intra-corporate context than through external market mechanisms.

This article gives a different view to the Transac tion cost theorys explanation of the firm

boundaries. According to TCA firms decide to internalize those activities that have higher

transaction costs if performed by the market. But according to Knowledge based theory firms

invest in those activities that correspond to a combination of current capabilities and expectations

regarding future opportunities.

Literature Review

The knowledge of the firm helps us understand how firms create new knowledge. The secret

ingredient for a successful firm is to be able to create new knowledge by rebundling its current

capabilities. But as it is not easy to acquire new ways of creating knowledge, firms can solve this

problem by creating social relationships within the firm that helps create new knowledge by the

transfer of information and know - hows. According to this paper opportunism is not the way to

explain why information is transferred within a firm, but firms exits because they are social

communities structured by organizing principles and are competent in transferring knowledge

within the firm.

Knowledge can be classified into two types:

Information: information refers to knowledge which can be transmitted without loss of integrityonce the syntactical rules required for deciphering it are known. Knowledge as information

implies knowing what something means. Information refers to a declarative type of knowledge

(e.g., monthly, financial results, data acquired by grocery store).


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Know-how: Know-how refers to the accumulated practical skill or expertise that allows one to

do something smoothly and efficiently. It must be learned and acquired. Knowledge as know-

how implies knowing how to do something. Know-how is a kind of procedural type of

knowledge (e.g., product designs, distribution knowhow, etc.)

As knowledge is not easily transmitted and replicated. This difficulty in transfer and imitation of

information can be analyzed in two dimensions: codifiability and complexity. Codifiability refers

to the ability of the firm to structure knowledge into a set of identifiable rules and relationships

that can be easily communicated. Complexity can be defined as the number of operations

required to solve a task. For the knowledge to be transferred effectively and efficiently it has to

be codified into simple terms and should be easily deciphered by the recipient.

Knowledge exists at the personal level, group level and organization level. According to Katz

and Kahn personal knowledge can be transmitted within close knot group by shared coding

schemes and a common language. Though common language and organizations culture

facilitates knowledge transfer within groups especially when the transfer is horizontal for

example when a same plant identical to the first is built, but it creates problem if technologies

have to be transferred vertically that is when a product is moved from development to

production.

We know that transfer of knowledge is the key ingredient for innovation and a firms rate of

growth is determined by the speed of replication of knowledge. Now, for the firm to facilitate

transfer of knowledge it has to encourage codification of knowledge and that in turn increases

the risk of imitation, which is the paradox of replication.

Combinitive capability: According to Scherer combinative capability refers to the intersection of

the capability of the firm to exploit its knowledge and the unexplored potential of the technology.

It is a local search that generates a condition commonly called path dependence, the tendency

for what a firm is currently doing to persist in the future, since proximate technologies do not

require a change in an organizations recipes of organizing research.

Application of the knowledge theory: According to Gokut and Zander technology is not

transferred within the firm because of opportunism but it is the cost associated with the transfer

of the firm that decides transfer of technology in the firm. Traditional theory claims that


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transaction costs associated with the suppliers lead to decisions to source internally. But

Knowledge of the firm theory argues that an important variable that determines this decision is

the firms capability that is whether the firm or the supplier is more cost efficient in production.

Thus the decision of make and buy is dependent on how good a firm is at doing something, how

good is it at learning specific capabilities.

The above could be summarized using the following diagram.

Thus a firm can innovate by acquiring new knowledge through knowledge transfer, which in turn

will help the firm attain competitive advantage and will lead to higher performance of the firm.

The concept of knowledge of the firm is evident in many industries. Most of the firms, these

days focus on learning from within the organization and try to innovate in the existing field

rather than diverging into the industry. This theory also explains the boundaries of the firm really

well. As we see in most of the industries today, manufacture products that they are expert in

house and purchase the ones which they are not efficient from the market. For example, Chrysler

Combinative

Capabilities

Internal Learning (Transfer

of knowledge with in the

firm)

External Learning (Transfer of

knowledge between the

subsidiaries)

Competitive

Advantage

Increased

Performance


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is an expert in making engines and it can do this work more efficiently with the available

knowledge than done by the market.

Though this article shows some insight on the new ingredient to innovation but fails to explain

how knowledge can be acquired. Moreover if the acquired knowledge is not integrated well with

the current knowledge to achieve something that is relevant to the firm, its of no use. Therefore,

Knowledge is like a double edge sword; it has its own benefits but it adds to cost if not utilized

efficiently.

Knowledge flows within Multinational Corporation

So we know that knowledge flows is one of the most important transaction within the

organization. Many previous researches have emphasized the importance of this transfer but

none of them have empirically investigated the factors that influence such communication. Gupa

and Varadrajans paper knowledge flows within Multinational Corporation empirically

investigates the determinants of intra-MNC knowledge transfer.

Gupta & Govindarajan distinguish two aspects of knowledge flows: the magnitude of

transactions (the extent to which subsidiaries engage in knowledge transfer) and the

directionality of the transactions (whether subsidiaries are the provider or receiver of

knowledge). Combining these two dimensions they examine the knowledge flows in each of the

four domains:

1) Knowledge outflows to peer subsidiaries.2) Knowledge outflows to the parent corporation3) Knowledge inflows from peer subsidiaries4) Knowledge inflows from the parent corporation.

According to Gupta and Varadrajan, knowledge flow is a function of the five factors:

1) Value of the source units knowledge stock: Value of the source units stock ispositively associated with the output of knowledge from the subsidiary. The three

variables that determine the value of the source units knowledge are:

a. Mode of entry: The experiment supported that as the pool of non-duplicativeknowledge would be higher in an acquired firm rather than in a greenfield


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subsidiaries so acquired subsidiaries will engage in greater knowledge outflows to

peer subsidiaries but there was no support for their prediction regarding the

impact of mode of entry on knowledge outflows to parent corporations.

b. Subsidiary Size: The experiment supported that larger subsidiaries will possessgreater amount of non-duplicative knowledge, the greater will be the knowledge

outflows from the subsidiary to peer subsidiary and to the parent corporation.

c. Relative economic level: As all societies want to achieve higher economic level,and if the host country has is economically developed than the home country than

the knowledge outflows will be higher from the subsidiary to the parent

corporation.

2) Motivational disposition of the source unit: The motivational disposition of asubsidiary to share its knowledge with other units will be positively associated with

outflows of knowledge from that subsidiary. The incentive of the subsidiaries manager

determines the motivational disposition of the source unit to transfer knowedge.

Therefore, the greater the extent to which a subsidiary presidents bonus is network-

focused rather than subsidiary-focused, the greater will be the knowledge outflows from

that subsidiary to peer subsidiaries but there was no support for their prediction regarding

the impact of incentive on knowledge outflows to parent corporations.

3) Existence and richness of transmission channels: the existence and richness oftransmission channels linking a subsidiary to other units within the MNC will be

positively associated with outflows of knowledge from that subsidiary. Knowledge

outflows to peer subsidiaries are higher in the case of

a. Subsidiaries that are tightly integrated with the rest of the corporation throughformal mechanisms, the greater will be the knowledge inflows into that subsidiary

from peer subsidiaries and from the parent corporation, and

b. Greater the presidents involved in lateral socialization mechanism, the greater willbe the knowledge outflows from that subsidiary to peer subsidiaries.

4) Motivational disposition of the target unit: the motivational disposition of a subsidiaryto Seek/accept knowledge from other units will be positively associated with inflows of


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knowledge into that subsidiary. Three variables determine the motivational disposition of

the target unit:

a) Incentive focus: The experiment supported that greater the incentive of thepresident(the lead) subsidiary focused rather than network focused the greater

will be the knowledge inflow into the subsidiaries from the parent corporation

but failed to support that subsidiary focused information will also increase the

information from the peer subsidiaries.

b) Relative economic level: Knowledge inflows from the parent corporation arehigher in the case of subsidiaries that are located in countries with a lower

level of economic advancement relative to the country of the parent

corporation.

c) Decentralization: Knowledge inflows from the parent corporation are higherin the case of subsidiaries that are given less decision making autonomy by

corporate headquarters.

5) Absorptive capacity of target unit: the capacity of a subsidiary to absorb incomingknowledge from other units will be positively associated with inflows of knowledge into

that subsidiary.

a. Mode of entry: The experiment supported that knowledge inflows from the parentcorporation are higher in the case of subsidiaries that were set up as greenfield

operations rather than acquired.

b. The greater the proportion of local nationals within the subsidiarys topmanagement team, the less will be the knowledge inflows into that subsidiary

from the parent corporation.

To conclude, the knowledge based theory of the firm helps us understand why firms exists, as

they do better than markets is the sharing and transfer of the knowledge of individuals and

groups within an org. Till now our understanding of the resource based theory helped us identifythe resources required to attain a competitive advantage but through knowledge based theory

helps us appreciate that New learning, such as innovations, are products of a firms combinative

capabilities to generate new applications from existing knowledge.

the theory of a firm consists

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