Knowledge Spreading Mechanisms in America and Britain: Differences and Implications

Maastricht University EBC2069 International Business History: Essay 2

Knowledge Spreading Mechanisms in America and Britain: Differences and Implications

Introduction

The American and British industries were arguably the largest and most important players during the Second Industrial Revolution and the debate over their collective history is ever complex. In the comparison between American and British industries we have seen a clear difference in levels of success. As we delve deeper into the reasons for this, we realize that how knowledge was spread between companies in each country was explicitly linked to the type of capitalism prevalent and had a direct impact on the success of the firms within their industries. In this paper, we will thus examine the different mechanisms through which knowledge was transferred in America and Britain, how they arose, and their effects on the various industries. Through this we hope to understand how success was shaped by the movement of knowledge and how this can be relevant to modern industries today.

Merger and Acquisition in America

In America, the separation of ownership and management meant that the control of a company could be transferred between different owners very easily. This system of competitive managerial capitalism made it possible to have aggressive mergers and acquisitions that enabled integration and consolidation between competing companies. The mergers and acquisitions between companies facilitated the exchange of knowledge as they often involved a movement of managers, workers and equipment between firms. With this, all the knowledge in one firm can be acquired by another firm and be combined with their existing knowledge. Eventually, this process became the most important channel through which knowledge was transferred between companies in America.

An example of this would be the formation of the Standard Oil Trust. The merger enabled the centralization of administration and with it the combination of knowledge from the constituent companies. By 1886 the trust had the world’s largest industrial managerial hierarchy which allowed the exchange of information between the entireties of its large operations(Chandler, 1990, p. 74). The case in point would be Tide Water’s innovation which was the long-distance oil pipelines. Even though Tide Water was the first innovator, it eventually came under the financial control of Standard Oil. With this, the technical knowledge of Tide Water was transferred and incorporated into the administration of the Standard Oil Trust(Chandler, 1990, p. 95). This process was again seen in the rubber industry where United States Rubber and Goodrich were both involved in aggressive consolidated acquisitions of other smaller companies.

Contractual Cooperation in Britain

The British bias for small scale operations and personal management caused the development of a different kind of mechanism for knowledge transfer which was the system of contractual cooperation. The key difference between Britain and America was that this movement did not bring about administrative centralization and the owners of the companies retained independent control. The inter-company sharing of information was done on a smaller scale because these arrangements often ended up as loose federations with their governing boards of company representatives only occasionally making decisions for joint research(Chandler, 1990, p. 288).

An important example illustrating this would be the federation formed by Imperial Tobacco. The federation consisted of 17 firms in 1901 with each of these personally managed companies continuing to carry out their own independent production and development. The exchange of knowledge only took place in their Executive Committee where its small number of staff consisting of members of the controlling families pooled technical and accounting information (Chandler, 1990, p. 247). Even then, the main responsibility of the Executive Committee was more of setting prices and budgets for the subsidiaries than to consolidate administration. This system of limited knowledge pooling was also seen in the cooperation between Cadbury and J.S. Fry & Sons of the chocolate industry where a few family members were put on each other’s boards while the two companies remained separate in operation (Chandler, 1990, p. 246).

Comparison

Comparing the two differing knowledge transferring mechanisms in America and Britain, we can see that the spread of knowledge through aggressive merger and acquisition in America was much more efficient and speedy. The easy movement of both human and physical capital across firms encourages the adoption of best practices within industries which is beneficial. This is in comparison to the slower mechanism of British firms where the movement of knowledge is impeded within the federations of firms that operate mostly independently of each other.

However, this can also be a weakness of the mechanism as the efficient movement of knowledge makes it harder to control knowledge. Firms may find it difficult to keep competitors from acquiring knowledge through the movement of managers and employees between firms and this will lead to a loss of competitive advantage. Therefore, on the opposite end we can say that a more limited knowledge transfer between firms has its strengths in the ability of firms to control the spread of knowledge. This was apparent in the British industries through their mechanism of contractual cooperation where there was selective knowledge transfer between firms which are cooperating.

Conclusion

When we take a step back to compare the performance of the American and Britain industries during the Second Industrial Revolution, we are inclined to conclude that the American industries have generally done better. In light of this, we can conclude that the advantages of an efficient knowledge spreading mechanism outweigh the disadvantages. In the short term, it is true that an efficient mechanism may mean that firms will tend to lose their competitive advantage to other firms that acquire the knowledge. However, as the benefits of the knowledge is spread across firms in the long term, the entire industry benefits from the improvements built on that knowledge. Clearly, this will in turn benefit the individual firms in the industry as well. We should relate this concept to today’s industries and thus focus our efforts on encouraging the spread of knowledge which will eventually lead to improvements in industry and society as a whole.