From Economic Theory Towards A Knowledge-Based Theory of The Firm: Conceptual Building Blocks

Georg von Krogh
Simon Grand

Institute for Management
University of St. Gallen

Abstract

Only recently have strategy research and economic theory begun to attract interest in information and knowledge and their relations to a theory of the firm. Unlike other assets, knowledge still has a quality of being a highly arbitrary concept, which is difficult to observe and to conceptualize. Still it remains an empirical fact that knowledge is important for explaining economic growth, competitive success, sustainable advantage, and technological innovation. Moreover, firms play a substantial role in the creation and use of knowledge in the economy. Recent insights from strategy research, management science, and organization theory basically incorporate this argument, however there lacks an analysis of two major processes: the creation of strategically relevant organizational knowledge, as well as the process of appropriating rents from organizational knowledge. This book chapter contributes to a knowledge-based theory of the firm by developing an in-depth understanding of these two processes, as well as their dynamic interplay.

We first demonstrate why economic theory, the still pre-dominant theoretical foundation for strategy research, is unable to study these processes. Second, we discuss that the recent contributions from the evolutionary theory underlying the resource-based theory of the firm are sensitive to these issues, thereby reducing knowledge creation to the reconfiguration of existing routines, while at the same time neglecting rent appropriation as a key process. Any attempt to build a knowledge-based theory of the firm on the base of economic or evolutionary theory is therefore limited in its ability to incorporate our two key processes.

Third, we discuss the recent contributions from a knowledge perspective that try to overcome these conceptual limitations. While they provide interesting theoretical and empirical insights into the local processes of knowledge creation, they are weak in understanding how local knowledge is turned into relevant organizational knowledge. However, this is key in order to understand how knowledge shapes the strategic behavior of firms, as well as how firms appropriate rents.

To appear in "Strategic Management of Intellectual Capital and Organizational Knowledge" edited by Nick Bontis & Chun Wei Choo (Oxford University Press).