1. Man Chun Li Steven Malbrant Emilia Mikola Tuomas Soikkeli
Knowledge of the firm and the evolutionary theory of the multinational corporation By Kogut & Zander
Man Chun Li
Steven Malbrant
Emilia Mikola
Tuomas Soikkeli

2. Agenda Market failure paradigm vs. Kogut and Zander’s view
Is knowledge a public good without a market?
Transaction costs and opportunism – why are they not applicable explaining the implications of tacit knowledge?
Expanding beyond strict advantage
Criticism

3. Market failure paradigm vs. Kogut and Zander’s view
Traditionally, boundaries of a firm determined by:
ownership advantage
internalization of market
Market failure
markets fail to allocate resources efficiently
not a Pareto optimal market
Evolutionary approach
the firm is a social community whose productive knowledge defines a comparative advantage

4. Market failure paradigm vs. Kogut and Zander’s view
Firms specialize in the creation and internal transfer of knowledge
comparative advantage
Choice of transfer determined by firm’s efficiency in transferring knowledge relative to other firms
not relative to market transaction
market failure considerations not required

5. Market failure paradigm vs. Kogut and Zander’s view
Is knowledge a public good without a market?
Transaction costs and opportunism – why are they not applicable explaining the implications of tacit knowledge?
Expanding beyond strict advantage
Criticism

6. Is knowledge a public good without a market?
Excludable?
Rival?

7. Is knowledge a public good without a market?
Johnson (1970), McManus (1972), Magee (1977):
knowledge can be transferred at zero marginal cost
Casson (1976) defines public good as:
Easily transferrable
Hard to protect
Rugman (1980): MNE is defined to create an internal market of its own in order to overcome failure of an external market to emerge for the sale of information

8. Is knowledge a public good without a market?
Kogut and Zander:
there are costs involved with the transfer of knowledge
The costs of transfer range from 2 – 59% of the total cost.
(Depends on the tacitness)
The more tacit the technology, the more likely technology will be transferred within the firm

9. Is knowledge a public good without a market?
There is, in fact, a market, license
Davidson and McFetridge (1984)
Experience of transfer to third in past encourage external transfer in the future, and the other way round.
Contractor(1981): Technology transfer (via licensing) increase with the number of other firms using a technology.
The number of firm using similar technology

10. Market failure paradigm vs. Kogut and Zander’s view
Is knowledge a public good without a market?
Transaction costs and opportunism – why are they not applicable explaining the implications of tacit knowledge?
Expanding beyond strict advantage
Criticism

11. Transaction costs and opportunism – why are they not applicable explaining the implications of tacit knowledge?
Opportunism is an effort to realize individual gains through a lack of candor or honesty in transactions.
strategic disclosure
(Oliver E. Williamson,1975)
Transaction costs result from opportunism
legal fees
the dissipation of technology

12. Knowledge is created and transferred by companies
Transaction costs and opportunism – why are they not applicable explaining the implications of tacit knowledge?
Knowledge is created and transferred by companies
what determines a company is its efficiency in the knowledge transformation process relative to other firms
the assumption of opportunism is not needed

13. Transaction costs and opportunism – why are they not applicable explaining the implications of tacit knowledge?
Research: testing whether the choice of transferring the knowledge within the firm or by license is explained by the degree of tacitness of the technology
codifiability
teachability
complexity
age of the technology
number of previous transfers

14. Results Low High Complexity 3rd party WOS Teachability Codifiability
Degree of
tacitness
Attributes
Low
High
Complexity
3rd party
WOS
Teachability
Codifiability

15. Market failure paradigm vs. Kogut and Zander’s view
Is knowledge a public good without a market?
Transaction costs and opportunism – why are they not applicable explaining the implications of tacit knowledge?
Expanding beyond strict advantage
Criticism

16. Expanding beyond strict advantage?
Recombining the firm’s knowledge acquired in its home market with gradual learning process in the foreign market
Relative efficiency in transferring technologies
Novel technologies that are difficult to codify offer firms expansion opportunities and new markets to tap into

17. Expanding beyond strict advantage?
Possession of higher order organizing principles
Markets are always imperfect and humans are motivated by self-interest  Firms carry out activities internally even if other companies are more efficient

18. Market failure paradigm vs. Kogut and Zander’s view
Is knowledge a public good without a market?
Transaction costs and opportunism – why are they not applicable explaining the implications of tacit knowledge?
Expanding beyond strict advantage
Criticism

19. Criticism Rejecting transaction cost economics
No clear conceptualization for knowledge
Incomplete explanation for the boundary of the firm

20. Conclusions
The firm is a social community whose productive knowledge defines a comparative advantage
Choice of transfer determined by firm’s efficiency in transferring knowledge relative to other firms
There are costs involved with the transfer of knowledge
The more tacit the knowledge, the more likely it will be transferred to a wholly owned subsidiary
Firms may carry out activities internally even if other companies are more efficient