The Knowledge-Based View of the Firm

Robert M. Grant

McDonough School of Business
Georgetown University (Washington DC)
City University (London)


The emerging "knowledge-based view of the firm" is not a theory of the firm in any formal sense. It is more a set of ideas about the existence and nature of the firm that emphasize the role of knowledge. At its foundation are a number of assumptions and observations concerning the nature of knowledge and its part in production. These include:

1. Knowledge is the overwhelmingly important productive resource in terms of market value and the primary source of Ricardian rents (Machlup, 1980; Grant, 1996a).

2. Different types of knowledge vary in their transferability: explicit knowledge can be articulated and easily communicated between individuals and organizations; tacit knowledge (skills, know-how, and contextual knowledge) is manifest only in its application--transferring it from one individual to another is costly and slow (Nonaka, 1994; Kogut and Zander, 1992).

3. Knowledge is subject to economies of scale and scope. A characteristic of all knowledge is that its initial creation is more costly than its subsequent replication. As I have already argued, economies of scale in knowledge together with the complementarity of different types of knowledge imply increasing returns in knowledge-intensive industries—a fundamental feature of the "new economy" (Arthur, 1994). To the extent that knowledge is not specific to the production of a specific good, economies of scale translate into economies of scope. The extent of economies of scale and scope vary considerably between different types of knowledge. They are especially great for explicit knowledge, information in particular, which is "costly to produce, but cheap to reproduce (Shapiro and Varian, 1999: 3). Tacit knowledge tends to be costly to replicate, but these costs are lower than those incurred in its original creation (Winter, 1995).

4. Knowledge is created by human beings and to be efficient in knowledge creation and storage, individuals need to specialize (Simon, 1991: 127).

5. Producing a good or service typically requires the application of many types of knowledge (Kogut and Zander, 1992).

An important implication of these assumptions is the dichotomy between two types of knowledge-based activity in the economy. There are those activities that are concerned with increasing the stock of knowledge -- what March (1991) refers to as "exploration," and Spender (1992) calls "knowledge generation" -- and those activities concerned with deploying knowledge in order to produce goods and services -- what March (1991) refers to as "exploitation," and Spender (1992) calls "knowledge application".

Reconciling the dichotomy between knowledge creating and knowledge applying activities represents a key challenge for economic organization: knowledge creation requires specialization (points 3 and 4 above), while knowledge application requires diversity of knowledge (point 5). Given the limited transferability of knowledge (point 2), this presents considerable difficulty for the institutions of production. The solution lies in some process of knowledge integration that permits individuals to apply their specialized knowledge to the production of goods and services, while preserving the efficiencies of specialization in knowledge acquisition (Demsetz, 1991).

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