Knowledge and Organizations Literature Review

The report overviews and synthesizes literature on various perspectives on knowledge in organizations. Knowledge-based view of the firm is compared to the transaction economics view of the firm. Then various theories on organizational knowledge creation are reviewed. A significant body of literature on knowledge sharing and creation in the inter-organizational context of joint ventures and supply-chain relationships is summarized. This is followed by an overview of intra-organizational knowledge sharing research. Finally, the role of technology and human resource management in creating and sharing knowledge in organizations is reviewed. Natalia Levina Please do not distribute withou the author's permission. Prepared for the Society for Organizational Learning, Cambridge, MA. 3 Theory of the Firm A prominent theme in the research on Knowledge and Organizations is the debate on the role of knowledge in the theory of the firm. Two main questions that are addressed under this theme are: 1. What role does knowledge play in providing firms with a competitive advantage? 2. What role does knowledge play in explaining the existence of the firm as opposed to the market governance structure? As one might suspect, both questions are juxtaposed with Transaction Cost Economics (TCE) (Williamson 1979) and the property rights (Hart 1989) theory of the firm (Kogut and Zander 1992; Conner and Prahalad 1996; Foss 1996b; Foss 1996a; Liebeskind 1996; Madhok 1996; Barney 1999). The roots of the so-called "knowledge-based" theory of the firm come from the resource-based view of the firm (Wernerfelt 1984; Barney 1986; Prahalad and Hamel 1990; Barney 1991; Barney 1996; Barney 1999). The theory of the firm emphasizes the role of organizational capabilities or competencies. Because organizational capabilities are hard to obtain in the marketplace, are difficult to copy, and are path-dependent, they have the potential to become a source of sustainable competitive advantage. The knowledge-based view of the firm is an outgrowth of the resource-based view of the firm which argues that knowledge is the key productive resource of the firm (Kogut and Zander 1992; Grant and Baden-Fuller 1995). The original idea behind the knowledge-based view of the firm is that "the central competitive dimension of what firms know how to do is to create and transfer knowledge efficiently within an organizational context" (Kogut and Zander 1992: 384). TCE and property rights approaches represents a contractual theory of the firm that emphasizes the role of firms in reducing opportunism and moral hazard through property rights, incentives, and formal contracts (Williamson 1985; Hart 1989). It argues that in the presence of specific investments and uncertainty, firms are more efficient at dealing with transaction costs than markets. On the other hand, the knowledge-based theory of the firm takes its economic roots from Penrose (1959) and emphasizes successful growth Natalia Levina Please do not distribute withou the author's permission. Prepared for the Society for Organizational Learning, Cambridge, MA. 4 strategies and technological development. In deciding firm boundary questions, the knowledge-based perspective directs firms to consider (Kogut and Zander 1992): 1. How good a firm is at doing something 2. How good it is at learning specific capabilities 3. The value of these capabilities as platforms into new markets. Since Kogut and Zander's (1992) pioneering work, a number of debates have developed in knowledge-based theory of the firm literature. Most of the knowledge-based theory perspectives make two critical assumptions about the nature of knowledge: they see knowledge as possessing a tacit component (Polanyi 1983) and they see individuals as having bounded rationality (Simon 1947). From these assumptions most authors conclude that a firm's primary function is to integrate/coordinate individual knowledge (Kogut and Zander 1992; Nonaka 1994; Grant and Baden-Fuller 1995; Zander and Kogut 1995; Conner and Prahalad 1996; Grant 1996a; Kogut and Zander 1996; Spender 1996; Kusunoki et al. 1998; Nahapiet and Ghoshal 1998). Yet, many authors go further to say that not only do firms coordinate individuals, but that they also create new knowledge that is social in nature (Kogut and Zander 1992; Nonaka 1994; Zander and Kogut 1995; Kogut and Zander 1996; Spender 1996; Kusunoki et al. 1998; Nahapiet and Ghoshal 1998). Still others express a completely different point of view, proposing that a firm's primary role is in protecting intellectual property that is not adequately protected by legal regulations in the environment (Liebeskind 1996). While knowledge-based theorists of the firm are often in disagreement with one another, they also need to defend themselves against the criticism that is based on TCE (Foss 1996b; Foss 1996a). This criticism insists that it is impossible to justify the existence of the firm without the notion of opportunism. Knowledge-based theorists reply to such criticism by developing more rigorous justifications for the knowledge-based view of the firm (Conner and Prahalad 1996; Kogut and Zander 1996). Natalia Levina Please do not distribute withou the author's permission. Prepared for the Society for Organizational Learning, Cambridge, MA. 5 A comprehensive analysis of the existence of firms from the knowledge-based perspective was offered by Connor and Prahalad (1996). These authors argued that even if opportunism played no role in economic relations (the main proposition of TCE), then firms would still exist as mechanisms for knowledge integration. They assumed that firms were distinguished from markets by the employment relationship, which made employees follow the employer's authority. The presence of the employment relationship affects the knowledge applied to business activity in two ways: 1) through knowledge substitution of managers’ wisdom for that of employees; and 2) through flexibility, which represents the costs of altering an individual's responsibilities in order to respond to new learning. If knowledge substitution provides positive net value, then firms will be preferred to markets. Similarly, if an employment contract produces cheaper flexibility based on the nature of knowledge that needs to be exchanged, then firms will again dominate markets. Otherwise, markets will dominate. There are also mixed cases, where tradeoffs need to be analyzed more carefully. The critique of the Connor and Prahalad (1996) approach is that knowledge substitution and flexibility can also be a part of the market exchange, i.e. can be written into a court enforceable contract (Foss 1996a). Hence, an employment contract based explanation does not explain the existence of the firm (Foss 1996a). Another defense of the knowledge-based theory of the firm was offered by Kogut and Zander (1996). They argued that firms exist because people have a preference for the moral communities and shared identities they supply. In the age of industrialization and the increased division of labor, firms provide people with a sense of community in which discourse, coordination, and learning are structured by identity. The symbolic role of identity enables speed and efficiency in the creation and transfer of knowledge. Unlike Connor and Prahalad's theory (1996), this is essentially an non-economic explanation for the existence of the firm. This argument's weakness is in the lack of explanation for the difference between autonomous contracting and the employment contract and for the "patterns of asset ownership observed in firms, monitoring, etc. -all of which are crucial aspects of firm organization" (Foss 1996a p. 520). Natalia Levina Please do not distribute withou the author's permission. Prepared for the Society for Organizational Learning, Cambridge, MA. 6 Yet another perspective in this debate is proposed in a recent network theory based explanation for the knowledge-based theory of the firm. It argues that organizations have advantages over markets because they can mobilize social capital embedded in human relations in order to create intellectual capital (Nahapiet and Ghoshal 1998). This explanation argues that social capital increases the efficiency of action and decreases transaction costs. Social capital is created and sustained through the exchange and, in turn, facilitates exchange. Intellectual capital is created through the combination and exchange facilitated by social capital. Because interdependence and coordination characterize organizations, they are conducive to the development of social capital, which is co-owned by parties in a relationship. At the same time, organizations provide institutional settings for human interactions, which also foster social capital. This approach is rooted in post-modernist thinking and moves away from the idea of objective knowledge. It has been criticized for paying insignificant attention to individual knowledge and the discovery of new knowledge (Locke 1999). Theory of Organizational Knowledge Creation Not only do knowledge-based theorists argue that firms integrate and create knowledge in order to compete with other firms and with market exchanges, but they also propose how firms engage (or ought to engage) in the knowledge creation process. Again most of the literature on this subject starts with the assumption that knowledge has a tacit component and hence is hard to transfer/integrate. In fact there are two managerial problems associated with knowledge integration in the firm: that of coordination and that of cooperation (Grant 1996b). Contractual theories of the firm have traditionally focused on the cooperation problem, looking at firms as means for reducing opportunistic behavior. Knowledge-based theories of the firm have traditionally preoccupied themselves with the coordination problem looking at how organizational members transfer, integrate, and create knowledge in view of its tacit nature. The focus on coordination is especially prominent in an early work on the knowledge-based theory of the firm. Natalia Levina Please do not distribute withou the author's permission. Prepared for the Society for Organizational Learning, Cambridge, MA. 7 A seminal paper by Kogut and Zander (1992) extended earlier work by Nelson and Winter (1982) by proposing several coordination mechanisms for knowledge creation operating on different organizational levels. This paper argued that transfer of knowledge from an individual to a group level occurred through the development of unique language or code which allowed group members to learn who knows what and to coordinate their activities. On the organizational level the transfer of knowledge within the same function (horizontally) is realized by boundary spanners. At the same time, a vertical transfer of knowledge among different organizational functions relies on the use of higher-order organizing principles, sharing of accounting data, and through formal and informal structures. The challenge that organizations face in this paradigm is how to reduce the cost of inter and intra-firm knowledge transfer while protecting that knowledge from imitation by competition. Kogut and Zander's work has been criticized for their lack of clarity around the concept of "higher-order organizing principles," which is fundamental to their discussion (Foss 1996b; Foss 1996a). Other knowledge-based theorists have been more specific in proposing organizational coordination mechanisms. These coordination mechanisms include: Rules and directives (Grant and Baden-Fuller 1995; Conner and Prahalad 1996; Grant 1996a; Grant 1996b) Sequencing (Grant 1996b) Routines (Nelson and Winter 1982; Grant and Baden-Fuller 1995; Grant 1996a; Grant 1996b; Hargadon and Sutton 1997) Group problem solving and decision making (Grant 1996b; Leonard and Sensiper