Summary of Knowledge Based View

Knowledge-based view (KBV) answers the question of performance heterogeneity (why do firms differ?) and the boundary of firm (what determine growth of the firm?).

knowledge can be categorized through four dimensions. First, transferability measures how easy it is for knowledge to transfer between firms and within firms. Along this dimension, we have a) explicit knowledge, where the knowledge is transferred through communication. When the communication is smooth, the cost of transferring is low. b) tacit knowledge, where the knowledge is transferred through application. When the knowledge cannot be applied or codified, the cost of transferring is high and transfer in a slow and uncertain way.

Second, the potential for knowledge to be aggregated: absorptive capability of new knowledge is determined by the recipients’ ability to add new knowledge to existing knowledge (Cohen and Levinthal, 1990). When knowledge can be expressed in common language, they are easy to be aggregated. Conversely, knowledge, that is hard to aggregate- referred as “knowledge of the particular circumstances of time and place” (Hayek, 1945)-needs to be allocate to several locations. The ability to exploit outside knowledge is a function of prior related knowledge or the absorptive capacity as the ability of a firm to recognize the value of new, external information, assimilate it, and apply it to commercial ends.” (Cohen and Levinthal, 1990).

Third, appropriability refers to the ability of the owner of a resource to capture the whole value created by the resources (Teece, 1987). Tacit knowledge is not easily appropriated, because it can only transfer through application. Explicit knowledge can be appropriated from two ways. First, it is a non-rivalrous good, anyone can acquire and selling it without losing it (Arrow, 1984). Second, the mere act of marketing knowledge makes it available to potential buyers (Arrow, 1971). Without property rights, knowledge is generally inappropriable by means of market transactions, which harms transfer and creation of new knowledge. Knowledge free-riding problem: formal financial incentives or informal norms of reciprocity (Nickerson and Zenger, 2004). Fourth, Specialization in knowledge: people’s rationality is bounded, therefore, it is hard for them to be experts in every domain of knowledge.Therefore, the function of the manager is to accumulate and protect valuable knowledge and firms capabilities (Rumelt, 1984)


Current Stream of Research

The existence of firms

The production process needs to coordinate experts with different types of knowledge. Market is not proper in this case because of two reasons. First, the tacit knowledge is immobile. Second, the risk of expropriation of explicit knowledge, firms are institutions to apply knowledge to. Firms’ advantage lies in the factors that they can “govern certain types of economic activities from a logic that is very different from that of a market.”

Mechanisms to organize knowledge

Firms organize the knowledge in several ways. First, the language people use.Second, other symbolic communication, such as Motorola and Texas Instruments show that investments in literacy, numeracy and basic statistics raise the common knowledge of the employees and increase the effectiveness of the rules and meetings in implementing TQM. Third, through commonality of specialized knowledge. Fourth, shared meaning makes sure that people can communicate their tacit knowledge 5) recognition of others’ knowledge (group memory). There are also four set rules to coordinate the activities in the firms. First, rules and directives, such as plans, schedules and standardized information communication system, will organize (Van de Ven et al., 1976). Second, sequencing is the order production process in a time-patterned sequence so that each specialists’ inputs occur independently through being assigned a separate slot. Third, routines are defined as a relatively complex pattern of behavior, triggered by a relatively small number of initiating signals or choices and functioning as recognizable unit in a relatively automatic fashion. Fourth, group problem solving and decision making: Interpersonal interaction.

Structure of the firms

Hierarchy of the firm rely on the rules and routines, while team-based structure rely on knowledge transfer and multiple roles and memberships. Decentralized decision making if local knowledge is needed. Centralized knowledge is needed if broad level of knowledge is needed. If markets transfer products efficiently but transfer knowledge inefficiently, vertical integration will happen to increase the knowledge interaction. Horizontal boundaries between firms are likely to occur at gaps ocurring between constellations of products and knowledge.


Contentions in the literature

First,the process to avoid opportunism and the process of create knowledge should be orthogonal to each other (Foss, 1996). KBV only focus on one and deny TCE.
KBV claims that firms as organizational forms exist to economize on the exchange of knowledge rather than to attenuate opportunism.
Second,others criticized this literature has primarily focused on the role of firms in providing efficient knowledge exchange rather than their role in efficiently producing knowledge or capabilities (e.g., Nickerson and Zenger, 2004).
Last, people kept on questioning whether we have a knowledge based “theory” of firm, because this theory only highlights the virtues of hierarchy, not its limits in forming and transferring knowledge. Hierarchy is always assumed to be superior, leaving factors other than knowledge transfer and formation to constrain firm boundaries (Conner and Prahalad 1996).



References:

Kogut, B., & Zander, U. 1992. Knowledge of the Firm , Combinative Capabilities , and the Replication of Technology. Organization Science, 3(3): 383–397.

Cohen, W., & Levinthal, D. 1990. Absorptive capacity: a new perspective on learning and innovation. Administrative science quarterly, 35(1): 128–152.

Hayek, F. A. (1945). The use of knowledge in society. The American economic review, 519-530.

Teece, D. D. J., Pisano, G., & Shuen, A. 1997. Dynamic Capabilities and Strategic Management. Strategic management journal, 18(7): 509–533.

Arrow, K. J. (1984). The Economics of Agency (No. TR-451). STANFORD UNIV CA INST FOR MATHEMATICAL STUDIES IN THE SOCIAL SCIENCES.

Nickerson, J., & Zenger, T. 2004. Organization of the Firm-The A Knowledge-Based Theory Perspective. Organization Science, 15(6): 617–632.

Rumelt, R. P. (1984). Towards a strategic theory of the firm. Competitive strategic management, 26, 556-570.

Van de Ven, A. H., Delbecq, A. L., & Koenig Jr, R. (1976). Determinants of coordination modes within organizations. American sociological review, 322-338.

Foss, N. J. (1996). Knowledge-based approaches to the theory of the firm: Some critical comments. Organization Science, 7(5), 470-476.

Conner, K. R., & Prahalad, C. K. (1996). A resource-based theory of the firm: Knowledge versus opportunism. Organization science, 7(5), 477-501.