This study examines the link between international diversification, organizational knowledge capabilities and corporate performance. The success or failure of international corporate diversification depends to a large extent on the capability of parent firms to transfer knowledge to subsidiaries, and for those local subsidiaries to effectively utilize that knowledge. However, according to the resource-based view of the firm, knowledge capabilities are likely to be rare, valuable and resistant to imitation and substitution. Thus, parent firms may find it difficult to transfer knowledge to subsidiaries, leading to a paradox. This paper explores the effect of four knowledge capabilities on the performance of diversified firms. Data were analyzed on 5,000 Japanese subsidiaries over a period of 12 years. The results suggest that knowledge that is valuable, but not rare, positively affects subsidiary performance in the short-term, but not the long-term. By contrast, knowledge that is valuable and rare affects subsidiary performance in the long-term, but not the short-term. Implications of these findings are explored and discussed.