Firms as knowledge repositories

One reason firms exist is to serve as knowledge repositories. Firms compete against other firms and need profits to survive. Firms must be entrepreneurial to discover and act on profit opportunities. Knowledge required to spot profit opportunities is disbursed among economic actors and often is tacit knowledge that can only be obtained by those in close proximity. This gives rise to agglomeration economies, which can be leveraged within firms. In a competitive economy people have an incentive to keep knowledge from people in other firms, but to share it with those in their firm. One role of the firm is to act as a repository of knowledge for those within the firm’s boundaries, and to lower the cost of obtaining knowledge about profit opportunities. Entrepreneurs need firms to contain and capture the profits from their innovations.