This paper demonstrates the importance of knowledge for effective management of outsourcing. Drawing on an empirical study on automakers? management of supplier involvement in product development in Japan, this paper shows that the level of own knowledge is critical for automakers to gain better outcome from engineering outsourcing. While the actual tasks of designing and manufacturing components could be outsourced, automakers should retain the relevant knowledge to obtain better quality of component design. Knowledge partitioning should be distinguished from task partitioning. Furthermore, the results indicate that effective pattern of knowledge partitioning differs by the nature of component development project in terms of technological newness. For regular projects, it is more important for automakers to have a higher level of architectural knowledge (how to coordinate various components for a vehicle) than of component-specific knowledge, which is supposed to be provided by suppliers. However, when the project involves new technology for the supplier, it is important for the automaker to have a higher level of component-specific knowledge to solve unexplored engineering problems together with the supplier. In innovative projects effective knowledge partitioning seems to demand some overlaps between an automaker and a supplier, rather than efficient and clear-cut boundaries. This paper further reveals that some automakers manage knowledge better than others by combining various organizational mechanisms, including career development policies, extensive documentation of technological information, internal training programs, and incentive schemes. Difficulty of implementing those mechanisms in a consistent and complementary manner seems to explain why there is a significant variance among automakers in knowledge level.IMVP