This paper inquires into the factors that make the international transmission of knowledge more efficient within multinationals than between unaffiliated parties. It provides evidence, drawn from a sample of contracts for the acquisition of technology by Spanish firms in 1991. As found in previous studies, the competitive advantage of multinationals lies in the transmission of tacit knowledge, a type of knowledge often transferred together with process technologies. Furthermore, evidence is found that the lower costs of internal transfers permit some transfers of tacit technology to be carried out in cases where it would be impossible by means of an unaffiliated agreement. Finally, the relative advantage of multinationals increases with the interrelation between the source and the host countries.

Multinational firms play a key role as carriers of technology across national borders. Indeed, most international trade in disembodied technology is made within Multinational Corporations (MNCs). For instance, the Bureau of Economic Analysis (2005) reports that in 2003, 75% of all US exports and 80% of all US imports of technology were transactions made between affiliated parties. International technology diffusion is found to have a positive effect on the host country's productivity. In particular, Mendi (2007a) finds that trade in disembodied technology has a positive effect on host country's productivity, using a sample of OECD countries and Hejazi and Safarian (1999) highlight the crucial role of multinationals in the technological diffusion process. Keller (2004) provides a survey of the empirical results obtained in the broad question of international diffusion of technology.

In line with these facts, the international transmission of knowledge lies at the core of several theories of MNCs. It is argued in Buckley and Casson (1976) that the incentives to internalize are strongest in the transmission of knowledge, since multinationals are able to transfer knowledge across national borders more efficiently than through external market mechanisms. This is because knowledge typically combines a codifiable and a non-codifiable component, which refers directly to routines and expertise that are specific to the firm that creates the technology, as argued in Cantwell (2001). The transmission of firm- or industry-specific knowledge increases transfer costs (Teece, 1977a and 1977b), especially if the transfer is to be made to an unaffiliated firm and the non-codified component of knowledge is important. Kogut and Zander (1993) argue that keeping this tacit knowledge internal to the firm prevents from possible imitation and permits the ulterior recombination of knowledge in foreign markets, maintaining the multinational's competitive advantage. Additionally, Teece (2000) points out that the competitive advantage of firms in today's economy stems from difficulty to replicate knowledge assets and the manner they are deployed.

This paper contributes to the literature on MNCs by identifying the sources of competitive advantage of multinationals in the international transmission of knowledge. The empirical analysis makes use of a sample of contracts for the transfer of technology to Spanish firms in 1991, including both affiliated and unaffiliated transactions. A contract is classified as affiliated if the foreign licensor is either the parent firm of the Spanish affiliate, or a foreign affiliate whose parent firm is the same as that of the Spanish affiliate. Variation in technology tacitness and in the interrelation between the source and the host countries will permit the identification of the factors that make international transfers of technology within multinationals more efficient than transfers between two unaffiliated parties.

Consistent with previous studies, such as Kogut and Zander (1993), the empirical analysis finds that the transfer of know-how increases the likelihood of the transfer being internal. By contrast, the transfer of codified knowledge is not associated with either type of transfer, affiliated or unaffiliated. Furthermore, stronger interrelation between the source and host countries favors internalization as the preferred transmission mechanism, consistent with the results in Arora and Fosfuri (2000), which use data from the chemical industry. It is also found in the data that the transfer of know-how involves longer contract duration within unaffiliated parties, but not if the transfer is made internally. By contrast, transfers of codified knowledge are not affected by duration, which suggests that there may be some transactions _those with shorter duration that are feasible if the transfer is internal, but do not take place if the transfer is to be made between two unrelated parties. Finally, the transfer of know-how is typically required whenever process technologies are to be transferred, consistent with the argument in Teece (1986), which states that process technologies are more likely to need the transfer of know-how.

Knowledge Management Journal, International Knowledge Diffusion, Multinational Corporations, Multinational Corporations, MNCs, Technological Innovation, Economic Cooperation and Development, International Business Studies, Foreign Direct Investment, Empirical Analysis.