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Knowledge of the firm and the evolutionary theory of the multinational corporation

  • 2003 Decade Award Winning Article
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Abstract

Firms are social communities that specialize in the creation and internal transfer of knowledge. The multinational corporation arises not out of the failure of markets for the buying and selling of knowledge, but out of its superior efficiency as an organizational vehicle by which to transfer this knowledge across borders. We test the claim that firms specialize in the internal transfer of tacit knowledge by empirically examining the decision to transfer the capability to manufacture new products to wholly owned subsidiaries or to other parties. The empirical results show that the less codifiable and the harder to teach is the technology, the more likely the transfer will be to wholly owned operations. This result implies that the choice of transfer mode is determined by the efficiency of the multinational corporation in transferring knowledge relative to other firms, not relative to an abstract market transaction. The notion of the firm as specializing in the transfer and recombination of knowledge is the foundation to an evolutionary theory of the multinational corporation

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Notes

  1. The seminal work on an evolutionary theory of the firm is obviously Nelson and Winter (1982). See Kogut and Zander (1992) and Kogut (forthcoming) for the expansion of these ideas in the context of firm knowledge in general and the evolution of the multinational corporation, respectively.

  2. See Dunning (1977) for the original statement of ownership, location, and internalization advantages. Firm-specific advantage has been discussed by Rugman (1981).

  3. There are obviously other advantages, such as the monopoly ownership of raw materials. We concentrate on those advantages that can be considered as giving the superior capability to do something, such as innovate or advertise.

  4. Caves (1982, 4ff.) clearly recognizes this point in his textbook, where he states the standard reasons for market failure. There is also a third condition (as explicit in Dunning's (1977) eclectic theory) of location. According to Caves (1971, 5), ‘the general positive reason favoring the service to a market by local production is some complement between such production and the rents attainable from local sales.’

  5. By public good, it is meant that one party may enjoy the use of a common good (such as the rose bush planted on the property of the other party) without diminishing its availability to the other. The issue of market failure arises out of a problem whether the owner of the rose can ‘appropriate’ a pecuniary payment from the neighbor.

  6. Of course, this argument is one among many given by Buckley and Casson as a motive for internalization. It should be noted that the concept of internalization is much more broad than the notion of ‘transaction costs’ by Williamson (1975), as the latter does not exclude the case of market power considerations.

  7. Though we focus on the internalization school of thought, it can be noted that Williamson does not fare much better in consistency in this regard. In his 1975 book, he appealed to the quasi-morality of the firm without definition; Hennart spells out a consistent logic concerning why this morality arises from better information in the context of opportunism.

  8. The following is discussed at length in Kogut and Zander (1992). Our line of reasoning is indebted to Pavitt (1971) where the two factors of technological capability and experience were joined for the understanding of the multinational corporation.

  9. See also Buckley (1983, 39–40).

  10. As an illustration, consider the difficulty of reading a text on theoretical physics; the same information is available to all readers, but the capability of interpretation varies.

  11. See, for example, the discussion of Hall and Johnson (1970) and Teece (1977). We leave out observability, because it is highly correlated with these measures. See Zander (1991b) for a discussion.

  12. With reference to the questionnaire items 4 and 5 in the appendix, it should be observed that high school education and vocational training are alternative ways of education, one of which is chosen by students at the age of 16.

  13. Wallmark and McQueen defined innovations as new technological products or methods that have been commercialized in Sweden by innovators living in Sweden. Major innovations were chosen on the basis of generated annual turnover, with US$3.5 million serving as the cutoff, and the presence of a patent and positive revenue growth serving as additional criteria. The purpose was to identify the type of innovations that constituted the foundation on which large Swedish MNCs like SKF, Electrolux, Ericsson, ASEA, Sandvik, Alfa-Laval, Nitro Nobel, Atlas Copco, and Tetra Pak were built.

  14. Reflecting the trade and investment pattern of Swedish firms, the most important recipient countries were the USA (nine transfers), Canada (seven), France (seven), Australia (seven), Japan (six), England (four), and Norway (four).

  15. For complexity, we a priori stipulated the items to be used in the scale as the sum of the importance of various processes to manufacturing. There is no reason to expect these items to be correlated.

  16. The validation of the questionnaire design and the reliability and validity of the constructs are discussed in detail in Zander (1991a) and Zander and Kogut (forthcoming).

  17. An interpretation contrary to the one we propose is that complexity and asset specificity are related. Complexity in knowledge leads to asset specificity (that is, a party to the transaction cannot easily exit the relationship), and asset specificity, by the arguments given in Williamson (1979), leads to market failure and hence to what the direct investment literature calls internalization. For our study, we would have to believe that potential licensees refuse to purchase a complex technology because complexity is likely to lead to greater asset specificity. We find this argument unconvincing. First, while others have previously found a positive relationship between complexity and internalization (see Masten, 1984), it is important to note that the label ‘complex’ is not standardized and the measurement of complexity varies by author. We have defined our complexity construct to reflect the degree to which different disciplinary knowledge must be combined, which is in accordance with theoretical concerns, and the relationship of our construct to asset specificity is tenuous. Second, this argument still ignores the finding of the significance of codifiability in our study.

  18. As Casson (1987) has explained, internalization of markets can be a sufficient explanation of direct investment, as in the arbitrage of imperfect markets due, for example, to differential taxation of profits.

  19. See Kogut and Zander (1992) and Kogut (1992) for a link between this notion of combinative capabilities and the options, or platforms, to expand in the future.

  20. We know from Stopford and Wells (1972) and Dyas and Thanheiser (1976) that firms expand overseas on the basis of their organization structure designed for competing in the home market. A common observation is that the MNC does not adapt its technology significantly to the foreign markets. We are thus not surprised that foreign direct investment is the extension of organizing principles (which constitute the firm's knowledge) to new markets. Not always is this knowledge entirely well understood, which leads to different experiments in different countries. The results of these experiments will over time be disseminated in the ‘multinational network’.

  21. See Nelson and Winter (1982) for models along these lines.

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Acknowledgements

We thank Peter Buckley, Jean-François Hennart, Will Mitchell, Mira Wilkins, and the anonymous referees for their comments.

Author information

Authors and Affiliations

  1. Wharton School, University of Pennsylvania, USA

    B Kogut

  2. Institute of International Business (IIB), Stockholm School of Economics, Sweden

    U Zander

Authors
  1. B Kogut
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  2. U Zander
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Corresponding author

Correspondence to B Kogut.

Additional information

This paper was previously published in Journal of International Business Studies (1993) 24, 625–645.

Appendices

Appendix A

The constructs and variables

Codifiability: perceived odifiability

  1. 1

    A useful manual describing our manufacturing process can be written.

  2. 2

    Large parts of our manufacturing control are embodied in standard type software that we modified for our needs.

  3. 3

    Large parts of our manufacturing control are embodied in software developed within our company exclusively for our use.

  4. 4

    Extensive documentation describing critical parts of the manufacturing process exists in our company.

Coefficient alpha: 0.678.

Teachability: perceived teachability

  1. 1

    New manufacturing personnel can easily learn how to manufacture the product by talking to skilled manufacturing employees.

  2. 2

    New manufacturing personnel can easily learn how to manufacture our product by studying a complete set of blueprints.

  3. 3

    Educating and training new manufacturing personnel is a quick, easy job.

  4. 4

    New manufacturing personnel know enough after a normal high school education to manufacture our product.

  5. 5

    New manufacturing personnel know enough after vocational training to manufacture our product.

Coefficient alpha: 0.785.

Complexity: different types of manufacturing processes

How important are the following to manufacturing:

  1. 1

    Processes for changing physical characteristics of a material (for example: chemical reactions, refinement, heat treatment).

  2. 2

    Processes for changing the shape of material (for example: casting, pressing, rolling, bending).

  3. 3

    Processes for giving materials certain dimensions (for example: turning, milling, drilling, sawing).

  4. 4

    Processes for assembling different parts to a whole (for example: welding, soldering, gluing, screwing).

Appendix B

List of innovations

  1. 1

    Exchangeable Inductor for Steel Melting 1960 (ASEA)

  2. 2

    Pressductor 1960 (ASEA).

  3. 3

    Emulsified Fats for Intravenous Injection: INTRALIPID 1960 (KABI VITRUM/STATSFORETAG).

  4. 4

    Rail-Bound Hauling Car for Mines 1961 (HAGGLUND & SONER).

  5. 5

    Rubber Details for Rotating Drums 1961 (SKEGA/INCENTIVE).

  6. 6

    Milk Sterilizer 1961 (ALFA-LAVAL).

  7. 7

    Machine for Fluidized Freezing of Foodstuffs: FLOFREEZE 1961 (FRIGOSCANDIA CONTRACTING/AGA).

  8. 8

    Quintus Type Steel Press for Use in the ASEASTORA Process 1962 (ASEA).

  9. 9

    Air-Cushioned Lawn Mower 1963 (ELECTROLUX)

  10. 10

    Cross Cable 1963 (ERICSSON).

  11. 11

    Matrix printer 1964 (FACIT/ELECTROLUX)

  12. 12

    Beta-Blocker: APTIN 1965 (HASSLE/ASTRA).

  13. 13

    Pulp Dryer with Airborne Pulp Web: Type FC 1966 (FLAKT/ASEA).

  14. 14

    Drug for Expansion of Bronchi: BRICANYL 1966 (DRACO/ASTRA).

  15. 15

    Thyristor-Controlled Spin Control System for Locomotives 1967 (ASEA).

  16. 16

    Isostatic Press for Steel Processing 1967 (ASEA).

  17. 17

    Explosive: DYNAMEX 1967 (NITRO NOBEL).

  18. 18

    Gel for Filtering: CNBr-Method 1967 (PHARMACIA/FORTIA).

  19. 19

    High Resolution Copying Machine: MULTINEX 1968 (MISOMEX/INCENTIVE).

  20. 20

    Ball Bearing: HUB 3 1969 (SKF).

  21. 21

    Ore Transporter: HAGGLOADER 1969 (HAGGLUND & SONER/ASEA).

  22. 22

    Flash Dryer for Pulp 1969 (FLAKT/ASEA).

  23. 23

    Semi-Synthetic Penicillin: PENGLOBE 1970 (ASTRA).

  24. 24

    Selective Beta-Blocker: SELOKEN 1970 (HASSLE/ASTRA).

  25. 25

    Roller Bearing: CC 1972 (SKF).

  26. 26

    Ventilation System: OPTIVENT 1972 (FLAKT/ASEA).

  27. 27

    Ignition Mechanism for Explosives: NONEL 1972 (NOBEL).

  28. 28

    Machine for Feeding Metal Sheets: DOPPINFEEDER 1972 (VOLVO).

  29. 29

    Ventilation System: DIRIVENT 1974 (FLAKT/ASEA).

  30. 30

    High Temperature Steel 153 MA & 253 MA 1974 (AVESTA JERNVERK/NORDSTJERNAN).

  31. 31

    Chemical for Wound Treatment: DEBRISAN 1975 (PHARMACIA/FORTIA).

  32. 32

    Hydraulic Rock Drill 1975 (ATLAS COPCO).

  33. 33

    Telephone Switching System: AXE 1976 (ELLEMTEL/ERICSSON).

  34. 34

    Stainless Steel: 245 SMO 1976 (AVESTA).

  35. 35

    Self-Emptying Railway Car for Ore 1978 (LIKAB).

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Kogut, B., Zander, U. Knowledge of the firm and the evolutionary theory of the multinational corporation. J Int Bus Stud 34, 516–529 (2003). https://doi.org/10.1057/palgrave.jibs.8400058

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