Abstract number: Knowledge management between companies and local governance in industrial. clusters. Department of Production Engineering

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1 Abstract number: Knowledge management between companies and local governance in industrial clusters Rafael Henrique Palma Lima 1 and Luiz Cesar Ribeiro Carpinetti 2 Department of Production Engineering School of Engineering of Sao Carlos University of Sao Paulo 1 2 POMS 22nd Annual Conference Reno, Nevada, U.S.A. April 29 to May 2, 2011 Abstract Industrial clusters are regarded in the literature as fruitful environments for innovation and knowledge dissemination. There is, however, a gap in the literature with respect to how local governance and firms exchange knowledge. This paper hence reviews the literature on knowledge management in industrial clusters and proposes a new approach for knowledge dissemination in such environments. This new approach integrates the concepts of performance management, benchmarking, communities of practice and joint actions. Additionally, this paper proposes a web-based knowledge portal, in which local governance hosts the knowledge database. With this solution, both local firms and local governance should collaborate to create knowledge in areas specific to the cluster s activities. A typology of knowledge sources is proposed and a discussion is made on the barriers that may arise while implementing the knowledge portal. Keywords: Industrial clusters, knowledge management, local governance.

2 1. Introduction Industrial clusters have been a central topic in several research fields and disciplines and have drawn interest policy makers, as well as regional governments. Research on this topic has received much attention because it is widely believed that regional concentrations of firms may cause the emergence of several externalities that may serve as competitive advantage to firms (Porter, 1998; Mytelka and Farinelli, 2000; Sölvell et al., 2003). Besides the external economies that arise naturally in these regions, mainly resulting from cost-savings in transactions between firms, the success of these regions is often associated to collaboration, joint actions and localized knowledge spillovers (Schmitz and Nadvi, 1999; Breschi and Lissoni, 2001). This paper aims at addressing these three factors in the light of knowledge management theory. The literature emphasizes the importance of knowledge, as well as knowledge management within clusters, as a way to boost firms capabilities and foster innovation, thus increasing the competitive advantages of firms and the region as a whole. The objective of this paper is thus to show how local governance agencies can promote interactions between firms and consequently create new knowledge. The theoretical model is grounded in the work of Nonaka (1994) and Nonaka et al. (2006), who suggested that knowledge is created by means of conversions between tacit and explicit knowledge, which in turn requires a great amount of interaction among individuals. In addition, this paper describes which information technology tools should be implemented by the governance agency to support interactions among firms. It is suggested that these tools be implemented into a web portal that stores several types of knowledge sources and tools.

3 The paper is organized as follows. Section 2 discusses the basic concepts often related to industrial clusters and knowledge management. Section 3 relates the four modes of knowledge creation with the tools and techniques that can be implemented by local governance to stimulate knowledge creation and exchange. Finnally, Section 4 describes how a web portal should be implemented to support these tools and techniques and Section 5 outlines some concluding remarks. 2. Literature review 2.1 Industrial clusters Industrial clusters have gained much attention from national governments over the last decades in industrialized as well as in developing countries (Mytelka and Farinelli, 2000; Sölvell et al., 2003). This has stimulated many governments to formulate policies that aim at regional development (Navarro, 2008). A remarkable definition for industrial clusters is given by Porter (1998), who claims that an industrial cluster is a group of geographically proximate and interconnected companies and associated institutions in a particular field, linked by commonalities and complementarities. After Porter (1998) made the term industrial clusters popular in the literature, many other definitions and interpretations emerged. For example, Carrie (1999) defines a cluster as a network of companies, their customers and suppliers of all the relevant factors, including materials, components, equipment, training and so on. Jones (2002) contends that clusters are networks of interdependent firms, knowledge producing institutions, technology providing firms and customers, linked in a value creating production chain. An explanation to this great diversity may be that each country or region understands industrial clusters in a particular manner adapted to their own context (Raines, 2001). However, two aspects are noticeable in these definitions:

4 geographic concentration and network formation, which may lead to collaboration and knowledge exchange. To understand how companies may benefit from operating inside an industrial cluster we must shift back to the 19th century, when Marshal claimed that the concentration of firms in a geographic region might bring large scale gains and thus transform regional economies (Plummer and Taylor, 2001). He then explained such benefits by means of external economies, which are the cost-saving benefits of locating a company near external resources such as skilled labor, specialized training, raw material suppliers, research institutions, etc (Schmitz and Nadvi, 1999; Plummer and Taylor, 2001). Schmitz and Nadvi (1999) add that, besides external economies, companies may benefit from joint actions, which are enabled by the collaboration among companies. Two main ideas are often associated with industrial clusters: social capital and collective efficiency. The debate on industrial clusters has shifted its focus from mere external economies to more advanced benefits that companies may gain by deepening collaborative relationships and exploring commonalities and complementarities. As pointed out by Schmitz and Nadvi (1995, 1999), companies can act together by planning and implementing joint actions, which are planned initiatives that enable further benefits and may boost competitive advantages of the firms involved. The authors claim that joint actions can increase the collective efficiency of companies, which goes beyond the benefits of relying solely on external economies. It is also believed that clusters are favorable environments for the dissemination of knowledge among firms. In many industries, the proximity of firms may cause firms to exchange specialized knowledge and thus innovate at a higher pace than companies outside clusters (Schiele, 2008). The emergence of knowledge

5 spillovers can be explained in several ways, such as the existence of local research institutions, universities and specialized service providers, the mobility and interaction of employees among companies inside the cluster and the formation of regional organizational networks (Valkokari and Helander, 2007; Gilbert et al., 2008). The latter is a vital source of competitiveness within clusters, since companies can establish regional networks, both horizontally and vertically, and consequently obtain several benefits as the access to new markets, technologies, specialized knowledge, and so forth (McDonald e Vertova, 2001). 2.2 Knowledge management in industrial clusters One of the most commonly mentioned explanations as to the competitive advantages of industrial clusters is the emergence of localized knowledge spillovers (LKS). The existence of a specialized knowledge-base enable companies to introduce innovations at a faster pace than companies located outside the cluster (Breschi and Lissoni, 2001). Baptista and Swann (1998) found some evidence that geographically concentrated firms tend to innovate more due to knowledge externalities, which in turn attract more innovative companies to the region. Gilbert et al. (2008) also found that clustered companies have better innovative performance, though they believe that the concentration of specialized knowledge is not the only explanation for such performance results. Maskel (2001) suggests that the creation of advanced knowledge stemmed from the variations in the horizontal dimension of the cluster is the main reason for any cluster s existence. This is supported by the reduced costs for disperse knowledge coordination, the minimization of information asymmetry problems, as well as the facilitation of transactions occurring in the horizontal dimension of the cluster.

6 Bahlmann and Huysmann (2008) argue that the growing recognition of clusters as knowledge repositories, along with the idea that these regions can be managed by means of institutions and cluster policies, give way for the implementation of knowledge management practices in the cluster as a whole. There is a consensus in the literature that knowledge can be classified as either tacit or explicit. Explicit knowledge can be easily documented, codified and published, and is often structured, externalized and has fixed content. Due to its nature, explicit knowledge can be easily captured and shared with information technology. On the other hand, tacit knowledge resides within the minds, behavior and perception of individuals, which hampers its formalization and communication. Tacit knowledge evolves from the interaction of people and requires practical expertise (Martensson, 2000). Nonaka (1994) claims that knowledge is created and developed due to the interactions among individuals and through conversions between tacit and explicit knowledge. Figure 1 shows the four modes of knowledge creation. Socialization refers to knowledge created by people interacting and sharing experiences and expertise. On the other hand, combination is the process by which explicit knowledge bases in the hands of individuals are compiled and converted into new explicit knowledge material. Internalization involves both tacit and explicit knowledge, which emphasizes the interplay and complementary aspects between them. Internalization is the conversion of explicit knowledge into tacit knowledge, which resembles the learning process. Externalization aims at capturing tacit knowledge and translating it into explicit knowledge by means of codification.

7 Figure 1 Modes of knowledge creation. Source: Nonaka (1994) In the literature it is often claimed that information technologies may facilitate the implementation of knowledge management initiatives (Martensson, 2000; Randeree, 2006). However, most solutions found are centered on explicit knowledge, since it is easier to codify and communicate. Tacit knowledge is locally rooted, which raises obstacles for its codification and transmission. 3. Local governance and knowledge exchange within clusters Clusters are favorable environments for knowledge creation and dissemination. However, little coordination and cooperation among firms may inhibit knowledge exchange and thus limit the competitive advantages of firms within clusters. This raises the need of local governance as an agent that stimulates companies to interact and share knowledge and experiences in an effort to improve local innovative performance. The following subsections address how local governance can foster knowledge creation and exchange with respect to the four modes of knowledge creation proposed by Nonaka (1994). 3.1 Socialization

8 Clusters encompass a large numbers of firms doing business in the same economy sector or in complementary activities. The existence of interrelated activities and firms naturally creates an environment with many individuals with specialized knowledge. In order to develop this knowledge, these individuals must interact. These interactions may naturally occur within the boundaries of firms, mainly with internal knowledge management practices or even informal interactions between employees. Nevertheless, social interactions that go beyond the boundaries of firms are commonly informal and rare. These informal interactions, as well as the mobility of employees between firms within the cluster are believed to increase the knowledge of individuals and disseminate this knowledge among firms. The modes of socialization mentioned so far tend to occur randomly and naturally within clusters and thus they cannot bring about any further competitive advantage for local firms, since other clusters equally benefit from the same mechanisms of socialization. Local governance should play an active role in promoting socialization as a way of increasing overall cluster knowledge. Some initiatives can be undertaken for this purpose, such as problem solving workshops involving employees or managers of local firms. In these events, problems that commonly occur in many companies can be discussed and joint initiatives can be devised to solve or reduce their impacts. Workshops or meetings promoted by governance require trust between participating firms, as well as between firms and the governance agency. Another initiative that local governance may embrace is the identification and dissemination of market data and trends. Because clusters are often formed by a large number of small firms, they tend to have underdeveloped marketing and strategic planning capabilities. Therefore, local governance should identify market trends and

9 promote debates with firms to make them aware of possible shifts in the business environment, as well as new products that can be developed. 3.2 Combination Explicit knowledge generated by firms is commonly stored within the firms and are rarely communicated. Indeed, these knowledge-bases are firm-oriented and may not be of interest to other firms in the cluster. However, some sources of explicit knowledge should be disseminated among firms. Some examples are industry-specific norms and standards, as well as books and other types of written material that address issues related to the cluster s activities. Local governance can search for explicit sources of knowledge and make them available for local companies. Whenever it is possible, these explicit sources can be combined to form new codified material tailored to the needs of local companies. Examples of such materials are tutorials or manuals describing how specific norms or techniques can be implemented focusing the activities of the cluster. 3.3 Internalization Internalization combines the use of explicit knowledge to create new tacit knowledge within individuals. In the context of clusters, internalization can be viewed from the standpoint of firms absorbing explicit knowledge from different sources. The local governance, as a coordinating agent acting proactively should constantly identify sources of external knowledge and make them available for firms. Instead of combining this explicit knowledge into new explicit material, local governance may attempt to convert this new knowledge into tacit knowledge. Hence, local governance should promote short-duration courses for firms, during which explicit sources of knowledge

10 can be discussed among employees of different firms and converted into new tacit knowledge tailored to the needs of local firms. 3.4 Externalization Among the four existing modes of knowledge creation, the externalization mode is pointed by Nonaka (1994) as the most difficult process to implement. It is not always possible to transform all tacit knowledge into explicit material because tacit knowledge varies according to each individual s perception and experience. From the standpoint of local governance, some initiatives can be undertaken to implement externalization processes within the cluster. First, local governance can attempt to compile the discussions made during courses and workshops into tutorials and publish them so that companies can use this material in future training courses. Another form of externalization is the formulation of reports addressing cluster issues, such as market trends, outcomes of ongoing joint actions, performance results, meetings and future directions to be taken by the governance agency and the cluster. 4. Towards a web-based knowledge portal As mentioned in the literature review, information technologies can assist in the implementation of knowledge management practices. In the recent years there have been many developments in the area of interaction and education using the internet and web technologies. A web portal can be built by local governance as a way to foster knowledge exchange among firms. The web portal itself is not capable of increasing the interactions among firms, which calls for strong commitment and investments by the local governance to draw the attention of companies and to populate the knowledge database with relevant documents.

11 Socialization processes can be facilitated through the implementation of virtual solutions where employees and managers can exchange knowledge. An online discussion forum can be implemented into the web portal where employees can open discussion topics and exchange ideas and experiences about ad-hoc problems. Also, social networks can be used so that individuals can find other colleagues that do similar work so as to establish a new network by which tacit knowledge can be exchanged. The process of combination is more difficult to implement directly in the web portal. The combination of explicit knowledge sources to form new explicit knowledge requires human intervention. Thus, the web portal can be used to publish and disseminate this new explicit knowledge created by means of processes of combination. From the perspective of the web portal, internalization is the conversion of tacit knowledge from individuals into new explicit knowledge, so that other people can learn from the expertise and experiences of others. The difference between internalization and socialization using the web portal is that the internalized material is more structured and formal. A solution to this end would be the implementation of a Wiki, so that practitioners, researchers and lecturers can cooperate to form new explicit knowledge and publish them to local workers. This initiative could save a great amount of effort, because it is possible that many companies are trying to produce explicit knowledge in themes and issues common to several companies in the cluster. Externalization is seen as the process by which explicit knowledge published in the web portal can be used to generate tacit knowledge among local firms and workers. In this sense, internalization and externalization are complementary processes that are operated in two stages. First, tacit knowledge from experts is converted into explicit knowledge and then these explicit sources are used to generate

12 more tacit knowledge. This follows the concept of knowledge spiral introduced by Nonaka (1994), by which knowledge is continuously developed by conversions between tacit and explicit knowledge. Several initiatives and tools can be used to implement externalization functionalities in the web portal. First, distance learning could be implemented to increase local workers capabilities. Also, companies should be made aware of the cluster s developments regarding ongoing joint actions, as well as the cluster performance as a whole. Performance can be assessed both internally, by implementing performance measures and producing performance reports, and externally using benchmarking practices and databases. 5. Conclusion Cluster-wide knowledge management is still a challenge to which no sound solution has been found. Companies at the individual level usually implement some knowledge management practices, but it was argued in this paper that interactions between individuals from several firms within the cluster may be beneficial for new knowledge development and incremental innovation. Local governance agencies should thus play an active role in promoting interactions among companies by implementing knowledge management techniques. Information technology may be a crucial element in implementing such techniques, though they cannot be seen as an end. They should instead be viewed as a means to promote interactions, which in turn requires trust and willingness so that firms can make use of these tools. The web portal proposed in this paper is still at a preliminary stage of development. In spite of that, it is believed that its implementation will be beneficial to all the companies that undertake these initiatives, since they will gain access to a new

13 source of specialized knowledge. However, its implementation requires a certain amount of coordination and investment by the governance agency, in order to implement the tools, populate the knowledge databases and articulate companies to encourage companies to use the web portal. As mentioned earlier, this web portal is still under development and, once it is finished, new insight will emerge as to how it should be implemented and coordinated. Future attempts should be made at proposing new tools for inter-firm interactions and knowledge exchange. References Bahlmann, M. and Huysman, M. (2008). The emergence of a knowledge-based view of clusters and its implications for cluster governance. The Information Society, v. 24, n. 5, p Baptista, R. and Swann, P. (1998). Do firms in clusters innovate more? Research Policy, v. 27, n. 5, p Breschi, S. and Lissoni, F. (2001). Localised knowledge spillovers vs. innovative milieux: Knowledge "tacitness"reconsidered. Papers in Regional Science, v. 80, n. 3, p Carrie, A. (1999). Integrated clusters the future basis of competition, International Journal of Agile Management Systems, v. 1, n. 1, p Gilbert, B., McDougall, P. and Audretsch, D. (2008). Clusters, knowledge spillovers and new venture performance: an empirical examination. Journal of Business Venturing, Vol. 23, No. 4, pp Jones, A. (2002). Cluster and market failure in the small business sector, paper presented at the Competitiveness Institute 5th Annual Global Conference, Cairns.

14 Martensson, M. (2000) A critical review of knowledge management as a management tool. Journal of Knowledge Management, v. 4, n. 3, p Maskel, P. (2001). Towards a knowledge-based theory of the geographical cluster. Industrial and Corporate Change, v. 10, n. 4, p McDonald, F. and Vertova, G. (2001). Geographical concentration and competitiveness in the European Union. European Business Review, Vol. 13, No. 3, pp Mytelka, L. and Farinelli, F. (2000). Local clusters, innovation systems and sustained competitiveness, discussion paper, United Nations University, The Netherlands. Navarro, M., Gibaja, J. and Cermelli, M., 2008, Knowledge spillovers at a subregional level - the counties of the Basque Country, 11th EUNIP International Conference, San Sebastián. Nonaka, I. (1994). A dynamic theory of organizational knowledge creation. Organization Science, v. 5, n. 1, p Plummer, P. and Taylor, M. (2001). Theories of local economic growth (part 1): concepts, models, and measurement, Environment and Planning A, 33(2), Porter, M. (1998). Clusters and the new economics of competition, Harvard Business Review, nov-dec. Raines, P. (2001). The Cluster Approach and the Dynamics of Regional Policy-Making, Regional and Industrial Policy Research Paper #47, European Policies Research Center, University of Strathclyde, Glasgow. Randeree, E. (2006). Knowledge management: securing the future. Journal of Knowledge Management, v. 10, n. 4, p Schmitz, H. (1995). Collective Efficiency: Growth Path for Small Scale Industry, Journal of Development Studies, v. 31, n. 4, p

15 Schmitz, H., and Nadvi, K. (1999). Clustering and industrialization: introduction, World Development, 27(9), Schiele, H. (2008). Location, Location: the geography of industrial clusters, Journal of Business Strategy, Vol. 29, No. 3, pp Sölvell, Ö., Lindqvist, G. and Ketels, C. (2003). The Cluster Initiative Greenbook. Stockholm, Bromma Tryck AB. Valkokari, K. and Helander, N. (2007). Knowledge management in different types of strategic SME networks. Management Research News, Vol. 30, No. 8, pp

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