Title: Vertical integration: applying an economic calculus to knowledge

Authors: Herman A. Van Den Berg

Addresses: Faculty of Business Administration, Lakehead University, 500 University Ave., Orillia ON, L3V 0B9, Canada

Abstract: This paper applies an economic calculus to knowledge to address one of the most strategically important questions firms face Рdeciding which activities are more economically organised in a unified firm rather than in two autonomous firms. The conceptual and empirical framework presented here proposes that specialisation leads to differences in cost and technical efficiency of knowledge-based factors of production between adjacent stages in a value chain. These divergent costs and technical efficiencies in turn shape the economics of inter-firm boundary location. A number of dimensions are suggested as being useful for distinguishing between the tacit, codified and encapsulated forms of productive knowledge inputs. Knowledge, so classified, is substituted for labour and capital as factors of production in the traditional microeconomic isocost-isoquant model. This paper applies |an economic calculus to knowledge| [Simon, (1999), p.34] by using ||…marginal rates of substitution between one form of knowledge and another|| [Simon, (1999), p.24].

Keywords: knowledge-based views; tacit knowledge; economics; vertical integration; factors of production; economic calculus; unified firms; autonomous firms; economic organisation; conceptual frameworks; empirical frameworks; specialisation; cost differences; adjacent stages; value chains; divergent costs; technical efficiencies; inter-firm boundaries; boundary locations; productive knowledge; knowledge inputs; codified knowledge; encapsulated knowledge; labour; Herbert Simon; capital; microeconomics; isocost models; isoquant models; marginal rates; substitution; learning; intellectual capital.

DOI: 10.1504/IJLIC.2011.043063

International Journal of Learning and Intellectual Capital, 2011 Vol.8 No.4, pp.399 - 417

Published online: 27 Nov 2014 *

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