Knowledge of the Firm, Combinative Capabilities, and the Replication of Technology

TLDR: In this paper, the authors argue that what firms do better than markets is the sharing and transfer of the knowledge of individuals and groups within an organization, and that knowledge is held by individuals but is also expressed in regularities by which members cooperate in a social community (i.e., group, organization, or network).

Abstract: How should we understand why firms exist? A prevailing view has been that they serve to keep in check the transaction costs arising from the self-interested motivations of individuals. We develop in this article the argument that what firms do better than markets is the sharing and transfer of the knowledge of individuals and groups within an organization. This knowledge consists of information (e.g., who knows what) and of know-how (e.g., how to organize a research team). What is central to our argument is that knowledge is held by individuals, but is also expressed in regularities by which members cooperate in a social community (i.e., group, organization, or network). If knowledge is only held at the individual level, then firms could change simply by employee turnover. Because we know that hiring new workers is not equivalent to changing the skills of a firm, an analysis of what firms can do must understand knowledge as embedded in the organizing principles by which people cooperate within organizatio...