A Knowledge-based Theory of the Firm - A Problem-solving Perspective

Knowledge-based theorists have developed two primary arguments to explain the existence of firms: one based on avoiding knowledge transfer and the other based on facilitating knowledge transfer. These arguments are not only contradictory, but also fail to predict when hierarchies supplant markets and when markets prevail. This paper develops a knowledge-based theory of governance choice that addresses these shortcomings by explaining how knowledge formation needs, described by various solution landscapes, dictate governance selection. Governance modes of market, authority-based hierarchy, and consensus-based hierarchy are prominently featured in the theoretical analysis.