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Knowledge of the Firm, Combinative Capabilities, and the Replication of Technology Bruce 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. Strategic management 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, And Replication 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 and culture. 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.

Existence of the firm

Effects of knowledge on the boundaries of the firm Fig.1

Effects of knowledge on Firms performance

The theory of the firm consists of a number of economic theories that describe why firms exist? The question, why firms exist? has been 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 efciently in the intra-corporate context than through external market mechanisms. This article gives a different view to the Transaction 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 integrity once 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, nancial results, data acquired by grocery store).

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 knowhow 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

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.

Internal Learning (Transfer of knowledge with in the firm)

Combinative Capabilities

Competitive Advantage

Increased Performance

External Learning (Transfer of knowledge between the subsidiaries) 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

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 corporation 3) Knowledge inflows from peer subsidiaries 4) 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 is positively 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-duplicative knowledge would be higher in an acquired firm rather than in a greenfield

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 possess greater 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 a subsidiary to share its knowledge with other units will be positively associated with outows 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 networkfocused rather than subsidiary-focused, the greater will be the knowledge outows 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 of transmission channels linking a subsidiary to other units within the MNC will be positively associated with outows of knowledge from that subsidiary. Knowledge outows to peer subsidiaries are higher in the case of a. Subsidiaries that are tightly integrated with the rest of the corporation through formal mechanisms, the greater will be the knowledge inows into that subsidiary from peer subsidiaries and from the parent corporation, and b. Greater the presidents involved in lateral socialization mechanism, the greater will be the knowledge outows from that subsidiary to peer subsidiaries. 4) Motivational disposition of the target unit: the motivational disposition of a subsidiary to Seek/accept knowledge from other units will be positively associated with inows of

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 the president(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 are higher 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 higher in 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 incoming knowledge from other units will be positively associated with inows of knowledge into that subsidiary. a. Mode of entry: The experiment supported that knowledge inows from the parent corporation are higher in the case of subsidiaries that were set up as greeneld operations rather than acquired. b. The greater the proportion of local nationals within the subsidiarys top management team, the less will be the knowledge inows 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 identify the 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.