this paper extends the knowledge-based view of the firm by using relative measures of two fundamental classifications of knowledge as factors of production. it relates differences in relative quantities of these classifications of knowledge to the probability that a given stage of production is outsourced or de-integrated. the probability of de-integration of adjacent stages of production is found to increase on increasing reliance on tacit knowledge and decreasing reliance on encapsulated knowledge. the research was motivated by the belief that the cost and value of knowledge, as a factor of production, influence economic efficiency.