The significance of Bruce Kogut's and Udo Zander's article, ‘Knowledge of the firm and the evolutionary theory of the multinational corporation’

Abstract

The Journal of International Business article ‘Knowledge of the firm and the evolutionary theory of the multinational corporation’, by Kogut and Zander (1993), is an important marker in the transition of the dominant conceptual model of the multinational firm from the market failure approach of internalization theory and transaction cost economics theory to the market imperfections approach of capabilities or knowledge-based theories of the firm. In a similar manner, Peter Buckley and Mark Casson’s 1976 book, The Future of Multinational Enterprise, while not the first or necessarily the most comprehensive contribution to the application of Coasian economics to the MNE, marked the switch of focus from market power to market failure as an explanation for the existence of MNEs. While the article itself is an important and well-cited contribution, it is also a fundamental statement that a new theory has arrived to supplement, and partly to displace, the old. Also similar to Buckley and Casson, it arrived at a time that the same transition was gaining traction in the more generic field of business policy and strategy – the ascendancy of Williamson’s (1975) version of transaction cost economics in the earlier case and the rise of a variety of resource-based, capability-based, and knowledge-based models (Barney, 1991; Teece et al., 1997; Grant, 1996) in the case of Kogut and Zander. The critical distinction made by Kogut and Zander is that if the value of the firm is defined as its store of knowledge, and expansion of the firm’s boundaries is related to the transfer of knowledge, then inescapable uncertainties about the value of this knowledge are enough to explain internal transmission, and therefore the existence of firms – opportunism is not required. Therefore, they find the critical role that opportunistic behavior by transactional partners in markets plays in internalization models is not necessary but leads to an overdetermined model. Kogut and Zander maintain that differential costs of transmission of knowledge within the firm Journal of International Business Studies (2003) 34, 495–497 & 2003 Palgrave Macmillan Ltd. All rights reserved 0047-2506 $25.00