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July 2001

The Value of Tacit Knowledge that You Gain in a Diverse Student Body

Masahiko AOKI (Professor, Stanford University)

(The commencement address at the International University of Japan on June 27, 2001)

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Dr. Masahiko AokiChairman of the Board, President, Distinguished Guests, Parents and Families, Members of Faculty and Administration, and above of all, graduating students, it is a great honor and pleasure to have an opportunity to address to you on this great occasion. I would like to express my heartfelt congratulations on the commencement of the class of 2001.

The International University of Japan is a truly unique professional school. Inspired by the admirable insight of the university's founder, Sohei Nakayama, IUJ has made diversity of the student body in national, cultural, and ethnic backgrounds one of its explicit objectives since the time of its inception. I have learned that more than half of the alumni of the University are from outside Japan, coming from 80 countries.

Professional graduate schools were almost non-existent in Japan about twenty years ago. In the late 1980s when some Japanese industries seemed to be enjoying a competitive edge, a joke circulated around in the US that the strength of the Japanese industry was due to the absence of business schools. The implication was that the near-sighted stock price maximization alone might not be conducive to the competitiveness of the industry. The atmosphere has changed since then. Some elements of the strength of the Japanese management have been incorporated and refined even in the curricula of American Business schools. On the other hand, the demand for sound professional schools is greater than ever and its value is highly appreciated in Japan, as the Japanese economy has suffered a decade of slump. Many professional schools have been organized by established Japanese universities and began offering classes in recent years. Considering that educational reform is an urgent policy agenda in Japan, I predict that many more such schools will be founded. However, there has not been any other school yet that has achieved the same extent of student diversity as IUJ. I am confident that the graduating students from this university will benefit tremendously in the future from the education it offers in this particular environment.

In the age of information technology, we can easily, and almost instantaneously, exchange messages with each other on a global scale. Very soon many of the curricula offered by first-rate professional schools will become available on-line through the Internet. Indeed, long-distance teaching can connect various learning sites on a global scale. It may thus be able to achieve a higher degree of diversity in its virtual student body than any real university located on a particular geographical site of the globe, such as here in Niigata. Why then is the diversity of student body in real universities valuable? This is an intriguing issue that I would like to address.

A key to answering this is suggested by considering the nature of the knowledge that one gains at a school. Let us start with distinguishing two types of knowledge that human beings can create and possess, either individually or collectively. One kind of knowledge may be characterized as formal. Or, in the context of the development of information technology (IT), it may be characterized as codifiable or digitalizable. This is the kind of knowledge that can be explicitly codified in the form of books, mathematical formulas, home page contents, e-mail messages and attachment, and accounting documents, as well as knowledge derived from their formal analysis. The other kind may be characterized as tacit. This is knowledge that can be generated through particular personal experiences and/or by inherently personal qualities and competence, but does not become immediately available in digital forms to others. A prominent chemist and philosopher of the twentieth century, Michael Polanyi, highlighted this distinction by saying: "We know more than we can explicitly express." Some of you must have read and studied the writings of Professor Ikujiro Nonaka, one of the most creative business economists from Japan. Professor Nonaka has made a similar distinction of knowledge, between codified and tacit, and discussed the importance of tacit knowledge for the efficient operation of business and work organizations.

You might think that uncodified and tacit knowledge will eventually be codified and digitalized, namely formalized. For example, tacit skills of the worker on the shop floor are being increasingly copied and simulated by robotics. You might consider that the progress of science, management techniques, etc., essentially consists of the codification of knowledge. But this is not generally true. Citing Michael Polanyi once again: "[As] tacit thought forms an indispensable part of all knowledge, the ideal of eliminating all personal elements of knowledge would, in effect, aim at the destruction of knowledge. The ideal of exact science [as a strictly detached, objective knowledge] would turn out to be fundamentally misleading and possibly a source of devastating fallacies."

By the same token, if all the professional knowledge necessary for management and international relations consists of only formal, objective knowledge, one could eventually learn it through distance teaching provided in the form of digital data in cyberspace. But obviously this will not happen. The knowledge that you can obtain only through face-to-face contacts with teachers, and above all through face-to-face interactions among fellow students, is actually an important component of the learning process. The paradox is that the more digital information is available to everybody, the more valuable the tacit knowledge that you can obtain only through unique personal experiences becomes. Thus, for example, Stanford University, where I teach, is now putting more and more emphasis on small classroom teaching, while providing more wide-ranging standard courses through the Internet. Faculty members are given financial incentives for conducting small special-topic seminars to freshman and sophomores. The idea behind this is that small seminars are a unique way of learning that cannot be duplicated in Internet teaching.

You must have been able to guess by now where I am heading. Yes, I submit that the skills and knowledge you have learned and acquired from, and together with, your fellow students of many diverse backgrounds will become extremely valuable to you in your future professional careers in international business and relations. Management skills, effective in increasingly globalized business environments, will not be only those that will enable you to present a business plan in fluent English using power point, analyze accounting figures of transnational companies and derive profitable investment strategies, or design and implement e-commerce business models in cyberspace, etc. Those skills are doubtlessly essential. Without them, you will not be able to work effectively in a competitive international business environment. However, their value will be enhanced if you are also equipped with the ability to understand and interpret the nature of diverse business environments, and the ability to communicate effectively with people of different national and ethnic backgrounds. These abilities may be nurtured tacitly by interacting and communicating with people of diverse backgrounds. The educational and learning environment of IUJ provides an ideal place for such nurturing.

To those of you who might still be skeptical of the value of tacit knowledge in a globalized business environment, let me quote two examples. The first example is drawn from the most advanced domain of financing, venture capital financing as observed in Silicon Valley where I am living. The reason why venture capitalists tend to cluster together with entrepreneurial start-up firms in a particular locality, such as in Silicon Valley, is that they can gain the information necessary for their operations through continual face-to-face contact with entrepreneurs who are close by. Venture capital financing is generally characterized as staged financing. It starts from seed financing to experimental projects, moving to start-up financing if they look promising, then to early-stage financing, to later-stage financing, and finally ending with the so-called mezzanine financing just before Initial Public Offerings or buyouts by established firms. The venture capitalist initially finances more than one entrepreneurial project of a similar type and then gradually selects promising ones for a next stage financing while weeding out unpromising ones by denying next stage financing. The essence of this process is thus a tournament among entrepreneurs and one function of the venture capitalist is to act as a referee of such a tournament, so to speak. A large-scale innovative system is then formed by combining the final outcomes of successful projects. Large companies in the information and communications industry, such as Cisco System and Micro Soft, have grown in such a way. Namely they expand their operations by acquiring technologies invented and developed by successful small firms instead of relying exclusively on their own in-house R&D.

The type of knowledge used or gained by the venture capitalist, particularly at the initial stage of staged financing, is highly tacit and less articulated because initial technological and market uncertainties are so great.. A unique feature of the Silicon Valley model does not lie solely in the ability of venture capitalists to supply risk capital per se. It lies more in their ability to judge and select promising projects that may constitute modules of a large-scale innovative system. Knowledge and judgment based on experience can be highly complementary to specialized technical expertise in selecting projects in staged financing. When I asked Arthur Rock the question: "If you were to name only one important quality of the venture capitalist, what would it be?," this pioneer of venture capitalism who funded Intel, Apple, and Scientific Data Systems, etc., replied simply: "Judgement of the people." As you might already know, presently half of the venture capital funds are supplied by traditional financial institutions such as mutual funds, banks, and insurance companies. These financial firms operate primarily on digitalized information such as stock prices, accounting data, etc., and lack such experience and expertise to judge the quality of entrepreneurs and their highly uncertain development projects. Thus they need to delegate the monitoring and governance of entrepreneurial start-up firms to venture capitalists.

AnnaLee Saxenian, a Berkeley social scientist who has done very interesting research on Silicon Valley, recently turned her research focus to the Silicon Valley-Taiwan connection and observed the following. These two regions are now closely connected by bi-directional flows of engineers and entrepreneurs of predominantly Chinese origin, but educated in the US. The Xinchu district of Taiwan has emerged as one of the most advanced high tech centers. She characterized the interactive process of the two regions as "brain recycling," rather than as a uni-directional brain drain as we observed some 30 years ago. She argued then that not only the government and transnational companies, but the professional community of engineers and entrepreneurs, can play a very important role, in fact a more important role, in transmitting and disseminating information and knowledge. Such communities may be thought of as formed and bound, partially by the sharing of tacit knowledge as well as implicit professional norms facilitating the reciprocity of information exchange. This community is predominantly of Chinese origin, but it is not closed. It is open-ended to others of different ethnic and national origins, particularly residing in Silicon Valley.

The second example of the value of tacit knowledge in the business domain may be drawn from financing in emerging markets. The prospect of financing for new, as well as incumbent, firms in developing and transitional economies can be highly uncertain. Digitalized information, such as accounting data, is relatively scarce and unreliable. Therefore, financing decision may require the exercise of judgment based on less standardized, unquantifiable knowledge, such as on the quality, traits, personality, and reliability of entrepreneurs and managers who seek financing. Also knowledge about organizational competence placed at the entrepreneur's disposal may be highly relevant as well. In the absence of developed, legal enforcement mechanisms, contract enforcement may need to be supplemented by personal trust based on specific information regarding the past conduct of entrepreneurs. All these requires tacit and local knowledge about entrepreneurs.

Why did international financiers such as big banks lend short to indigenous banks prior to the East Asian currency crisis? A major reason was precisely that those international lenders lacked accessibility to local information about the quality and trustworthiness of potential local borrowers. They therefore insured themselves by lending short instead of committing to productive long-term investment to indigenous financial institutions and securing the flexible withdrawal of funds. When they became aware that the domestic boom was close to its end in East Asian economies, they started to withdraw funds in mass and the currency crisis was triggered. However, blaming ex post the lack of information transparency on the borrowing countries as a sole cause of the crisis does not seem very constructive. The lack of competence to gain and use tacit knowledge in a local environment on the side of international lenders should also be considered as one of fundamental causes of the crisis.

I hope that you will be able to think of many other examples where tacit and local knowledge plays very important roles in present-day business and international domains. And, as I mentioned before, in the increasingly global environment, tacit knowledge that is useful in international businesses will undoubtedly include the ability to communicate with people of diverse ethnic and national backgrounds. It also includes the ability to make judgement in highly uncertain and idiosyncratic business environments that cannot be simply reduced to digitalized knowledge in the form of numbers and letters. It is this fundamental communication ability that you have been able to acquire during the past few years at this university, but that you might not have acquired so easily in other educational institutions, at least in Japan. I predict that these communication skills and their associated tacit knowledge will complement your achievements in formal training of a high standard in economics, business economics, international relations, and other disciplines. Namely, the tacit knowledge you have gained while you were here will enhance the value of your formal training.

I urge you to cherish and sustain the network you have built with your fellow students from all over the world. This network is an essential part of what I mean by tacit knowledge. Trusted friends will be helpful, not only in your future career, but also in your individual development at various stages and junctures of your life. Finally, I solicit you to consider giving back in the future to this unique university that has done so much for you. As I mentioned in the beginning, the idea of the founder of the university to create this unique educational institution about a quarter of a century ago was indeed inspiring and far-sighted. The value of the university has been amply proved since then and you can be really proud of your accomplishments at this university. In turn, this university will need your help and support in order to grow steadily in future. It is your reciprocal obligations to give back something to it - financially, spiritually and/or mentally - when you enter and become successful in your careers in business, public service, or academia. I have observed that the practice of such reciprocal relations has been one of the most important factors in leading American educational institutions to achieve their excellence in the world. It is the practice that can be really worthwhile to emulate.

Let me conclude my brief address by expressing once more my heartfelt congratulations on the successful completion of your training program. I wish you the very best in your career development in many years to come.

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