WHY GOVERNANCE MATTERS IN KNOWLEDGE MANAGEMENT: EXAMINING ORGANIZAIONAL KNOWLEDGE CREATION FROM KNOWLEDGE GOVERNANCE PERSPECTIVE

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1 WHY GOVERNANCE MATTERS IN KNOWLEDGE MANAGEMENT: EXAMINING ORGANIZAIONAL KNOWLEDGE CREATION FROM KNOWLEDGE GOVERNANCE PERSPECTIVE Shih-Chieh Fang 1, Pei-Wen Huang 2 and Chi-Wei Liu 3 1 Professor, Department of Marketing and Distribution Management, National Kaohsiung First University of Science and Technology, Kaohsiung, Taiwan 2 Lecturer, Department of International Trade, Cheng-Shiu University, Kaohsiung, Taiwan Doctoral student, Graduate School of Management, I-Shou University, Kaohsiung, Taiwan 3 Lecturer, Management School, HungKuang Technology University, Taichung, Taiwan Doctoral student, Graduate School of Management, I-Shou University, Kaohsiung, Taiwan Correspondence: Lecturer, Management School, HungKuang Technology University, Taichung, Taiwan Doctoral student, Graduate School of Management, I-Shou University, Kaohsiung, Taiwan Tel: wliu01@ms15.hinet.net

2 WHY GOVERNANCE MATTERS IN KNOWLEDGE MANAGEMENT: EXAMINING ORGANIZAIONAL KNOWLEDGE CREATION FROM KNOWLEDGE GOVERNANCE PERSPECTIVE Abstract: In an era characterized by knowledge economy, knowledge creation is a key to the accumulation of competitive advantages. Thus, how to arrange a context to facilitate the creation of organizational knowledge is one of the vital issues. In this paper, we propose that the effect of organizational knowledge creation is to be achieved on the premise that there is an effective design of knowledge governance in the organization. Through the function of knowledge governance, intra-organizational knowledge transfer and flow will be facilitated even under the fact that knowledge is embedded and dispersed in individuals or departments. In doing so, the mechanisms of organizational knowledge creation, knowledge exchange and knowledge combination will function effectively and efficiently. Accordingly, the performance of the organizational knowledge creation will be embodied in the knowledge-based advantages. This study aims to extend a comprehensive concept of knowledge governance in terms of knowledge creation by investigating the underlying theoretical underpinnings of knowledge governance. We proposed that transaction cost theory, knowledge-based view, relational-embeddedness theory and cognition school could be regarded as the theories that knowledge governance deposits. Furthermore, in terms of these theoretical perspectives, five critical governance mechanisms affecting knowledge creation are generated as follows: an incentive mechanism of knowledge sharing; organization identification; trust; informal communication channels; and organizational learning. Specifically, we propose a conceptual model on organizational knowledge creation from knowledge governance perspective and we end the paper with some discussion for future research. Keywords: knowledge creation, knowledge governance, knowledge governance mechanism, knowledge-based advantage 1

3 INTRODUCTION The basic hypothesis and logic of knowledge-based view presume that an organization functions as a repository of knowledge, in which knowledge is dispersed and embedded in variant departments and employees (Kogut & Zander, 1992, 1996; Grant, 1996; Lam, 1997). In line with this view, in order to enhance the organization s knowledge repository, it is worth for investigating and exploring that how organizations organize the knowledge embedded and dispersed in different carriers through effective governance mechanism to facilitate knowledge transfer, knowledge integration, knowledge assimilation and knowledge application (Nonaka, 1994; Wong, 2000; Cross, Parker & Borgatti, 2001). Up to now, much of the earlier work on organizational knowledge creation could be broadly sorted into two approaches. One approach focused on the process of knowledge creation: Huber (1991), Hedlund (1994), Nonaka (1994), Nonaka, Toyama & Konno (2000), Schulz (2001) and Borgatti & Cross (2003) asserted that the nature of organizational knowledge creation functions as a process of either recombining the existing organizational knowledge or combining, absorbing, assimilating, and transforming new knowledge acquired externally. What this approach emphasizes is to examine knowledge creation from the perspectives of knowledge searching and organizational learning (Schulz, 2001). The other school shifted their focus to the structure of knowledge creation: Kogut & Zander (1992), Pisano (1994), Grant (1996), Okhuysen & Eisenhardt (2002), Hansen (2002) and Cummings & Teng (2003) put their stress on investigating how an organization cultivated a context beneficial to knowledge creation or designed proper intra/inter-organization structure and management mechanisms in order to facilitate the accumulation of organizational knowledge. The perspectives of knowledge creation these researchers posited could be categorized as knowledge sharing, knowledge transfer, and knowledge integration (Hansen, 1999). Though these two approaches proposed different theoretical and practical implications in terms of the content to be examined, similar arguments are concluded. The researchers assumed that the core concept of organizational knowledge creation is that the generation of new knowledge will occur when organizational members execute assigned tasks (cf., new product development and design) or participate in 2

4 activities of problem-solving or decision-making. To put the rationale further explained, the foregoing argument lies in the assertion that in order to perform the assigned tasks or activities, organization members will make every effort to search, integrate, assimilate and apply knowledge relevant to the tasks or activities. Accordingly, new knowledge will emerge during the process of task execution; thus, the newly-obtained knowledge will be further accumulated in the organizational memory or repository. Eventually this new knowledge would be transformed into one of the organizational competitive capabilities (Teece, Pisano & Shuen, 1997; Hansen, 1999; Postrel, 2002; Argote, McEvily & Reagans, 2003). However, one should notice that the above argument is based on the assumption that an organization is regarded as a social community with division of knowledge (Kogut & Zander, 1996; Postrel, 2002). Therefore, when organizational members execute the assigned tasks collectively, it is knowledge governance mechanisms (Grandori, 2001), organizing principles (Kogut & Zander, 1992,1995, 1996) or integrating mechanism (Grant, 1996) that organizes the dispersed and embedded knowledge in different carriers to help knowledge integration and application. To be precise, we define knowledge governance mechanisms as organizational arrangements which involves the activities of knowledge creation and knowledge exchange, such as the communication, negotiation, configuration or recombination of knowledge. With the arrangement of knowledge governance, the experience and new knowledge accumulated during the process of task execution further reinforce the organizational knowledge repository. (Lam, 1997; Grandori, 2001a, 2001b; Ravasi & Verona, 2001; Postrel, 2002; Takeishi, 2002; Uzzi & Lancaster, 2003). Furthermore, since organizational knowledge creation is a dynamic process including manifold phases such as knowledge flow, knowledge transfer, knowledge integration, knowledge learning and knowledge application, a proper mechanism to govern these knowledge-related activities is imperative. That is, a proper design of knowledge governance mechanism will facilitate knowledge flow and sharing (Lam, 1997; Grandori, 2001; Schulz, 2001; Madson, Mosakowski & Zaheer, 2002; Postrel, 2002), maximize proper learning and minimize improper learning (Mohr, 2002), speed the creation and application of organizational knowledge (Schulz, 2001; Foote, Matson, Weiss & Wenger, 2002), further reinforce the organization s knowledge repository and then eventually convert the organization memory into the cornerstone of organizational competitive capabilities (Teece, Pisano & Shuen, 1997; Hansen, 1999; 3

5 Postrel, 2002; Argote, McEvily & Reagans, 2003). In a nutshell, we assert that knowledge governance is a fundamental concept of knowledge management in that only through the effective and efficient knowledge governance mechanisms will the knowledge localized in organizational members be facilitated to flow and be shared. In doing so, the efficiency and effectiveness of knowledge exchange and combination in an organization will be promoted. Accordingly, the creation and utilization of organizational knowledge will be highly facilitated. To be specific, without the design of knowledge governance, an efficient and effective activity of knowledge creation will less likely be present in a firm. Hence, to examine organizational knowledge creation from knowledge governance perspective satisfies the theoretical justification and importance (Grandori, 2001). The related literatures on knowledge management in terms of knowledge governance mechanism are constructed with divergent theoretical foundations. There seems to be lacking in comprehensive understanding about the concept of knowledge governance. This study serves to fill up the literature gap to present a more global content of knowledge governance by synthesizing its theoretical underpinnings. Thus, one of the contributions of this research is to build up the concept of knowledge governance in terms of knowledge creation from its theoretical underpinnings. We would like to clarify the content of organizational knowledge creation and knowledge governance, to analyze some possible knowledge governance mechanisms facilitating organizational knowledge creation, to investigate the relationship between knowledge governance mechanism and knowledge creation as well as the relationship between knowledge creation and knowledge-based advantages, and then to develop a conceptual model of knowledge creation from knowledge governance perspective. The contribution of this research is four-fold. First, it provides a richer basis for understanding and interpreting the concept of knowledge creation. Second, it synthesizes a comprehensive understanding about the concept of knowledge governance by exploring the underlying theories. Third, it analyzes the decisive knowledge governance mechanisms in terms of the theoretical underpinnings the knowledge governance posits. Fourth, it provides a better understanding about the relationship among knowledge governance mechanism, knowledge creation and knowledge-based advantages by proposing a conceptual mode. This paper is organized as follows. In the next section, the literature on organizational knowledge creation from four perspectives organizational learning, 4

6 knowledge transfer/sharing, knowledge integration and knowledge spiral is briefly reviewed and then the content of organizational knowledge creation is analyzed. Next, based on earlier relevant researches, we propose four underlying theoretical underpinnings of knowledge governance transaction cost theory, knowledge based view, relational embeddedness theory and cognition school and then from the management implication, we generate five decisive knowledge governance mechanisms affecting organizational knowledge creation. Followed by this part, we move our attention to explore the content of knowledge creation performance. A conceptual model of knowledge creation from knowledge governance perspective is thus presented. Finally, this paper ends up with some discussion for the future research. APPROACHES OF ORGANIZATIONAL KNOWLEDGE CREATION Researchers of knowledge-based view proposed that an organization would accumulate the essential knowledge asset by utilizing variant methods to reinforce the quality and quantity of its knowledge repository. Organizational knowledge repository itself is actually an embodiment of the organizational competitive capability. The most common-used method to improve their ability in knowledge accumulation and application is to create more useful knowledge. In terms of the approaches of knowledge accumulation for an organization, four perspectives are discussed in the following section, namely organizational learning, knowledge transfer/sharing, knowledge integration and knowledge spiral. Huber (1991) claimed that organizational learning is a process of an organization s creating new knowledge or modifying its existing knowledge. Pisano (1994) also clarified the contention that through organizational learning, either learning by doing or learning before doing, knowledge could be recombined and then new knowledge would be created. Similar argument and implication of organizational learning were also proposed by Hedlund (1994), Schulz (2001) and Holmqvist (2003). Specifically, these scholars, examining knowledge creation from organizational learning perspective, emphasized that the creation of organizational knowledge lies in its capability of absorbing, imitating, digesting and utilizing knowledge. Yet, Hamel (1991) and Hansen (1999, 2002) moved their focus on examining organizational knowledge creation from the perspective of knowledge transfer/ sharing. They found 5

7 that the transparency of knowledge, intensive interaction of members, and successful knowledge sharing/transfer all promotes organizational knowledge creation. Furthermore, one of Tsai s (2000) study on multi-national enterprise (MNEs) also supported that knowledge sharing/transfer among the subsidiaries in MNEs had a positive impact on the knowledge-receiver s converting the shared knowledge into the new knowledge of the organization and then institutionalizing the newly-created knowledge. In terms of knowledge integration perspective, it is defined either as the reconfiguration of the existing organizational knowledge (Teece et al., 1997) or as the combination of external new knowledge under the process of exchange (Kogut & Zander, 1992; Grant, 1996; Okhusyen & Eisenhardt, 2002). Grant (1996) and Okhusyen & Eisenhardt (2002) argued that firms could effectively integrate professional knowledge localized in each department through the integrative mechanisms of routines, directions and group-decisions. In doing so, the assigned tasks would be executed and during the period of the execution new organizational knowledge would be further created. The last perspective towards organizational knowledge creation is the concept of knowledge spiral. Nonaka (1994) proposed this concept with the two dimensions: epistemology (cf., knowledge tacitness and explicitness) and ontology (cf. individual group organization). Nonaka (1994) asserted that because the subject of knowledge creation is an individual, during the process of the individual s participation in a group s or the organization s task activity, explicit knowledge transformed into tacit knowledge (Internalization, I), and then transformed into explicit knowledge (Externalization, E) or tacit knowledge (Socialization, S), or combined the explicit knowledge with other explicit knowledge (Combination, C). This concept emphasized that knowledge was cultivated through the SECI process with different stages of individual, group and organization, and knowledge will be created continuously in an organization under a proper design of Ba (Nonaka et al., 2000). Accordingly, based on the nature of our study and the generated contention of earlier research, we define organizational knowledge creation as when an individual department or organizational members execute the assigned tasks, solve certain problems or even make decisions, through the process of organizational learning, they will apply the newly-transferred and newly-integrated knowledge resulting from the organizational learning process to the task execution, problem solving or decision making and in due course they will transform or internalize the newly-created 6

8 knowledge into the accumulation of the organization s knowledge repository. Under the scope of the above definition, organizational learning is a process of searching, assimilating, and absorbing the internal existing knowledge and the external new knowledge. Hence, from organizational learning perspective and knowledge transfer/sharing perspective; we argue that the primary condition for a successful organizational learning or knowledge transfer/sharing exists in the fact that if there is a knowledge exchange mechanism constructed in the organization (Nahapiet & Ghoshal, 1998; Matson et al., 2003). By setting up this knowledge exchange mechanism, knowledge could smoothly flow and be shared in the organization and thus serves the purpose of organizational knowledge creation. As far as knowledge integration perspective and knowledge spiral perspective are concerned, researchers emphasized the organizational combinative capability (Nahapiet & Ghoshal, 1998) in knowledge integrating, applying and transforming, namely organizational capability in reconfiguration of diverse knowledge. Accordingly, we adopted the contention of Nahapiet & Ghoshal (1998) that the mechanisms of organizational knowledge creation could be categorized into knowledge exchange and knowledge combination ( Figure 1) Knowledge Creation Mechanism of Knowledge Exchange Mechanism of Knowledge Combination Organizational Learning Knowledge Sharing Knowledge Spiral Knowledge integration Figure 1: The relationship between the ways of knowledge creation and the mechanisms of knowledge Knowledge exchange creation Since knowledge is embedded and dispersed in individual members or departments in an organization, during the execution of their tasks, consequently, it is highly 7

9 possible that there would be the occurrence of knowledge exchange with other related departments or members (Davenport & Prusak, 1998). Successful knowledge exchange depends on two aspects, namely know what and know who (Cross et al., 2001; Wexler, 2001). The former means that the task performers know exactly about what kind of knowledge is essential and valuable for the execution of the assigned tasks; the latter denotes that the task performers have the information about who ( know who ) or where ( know where ) could provide important knowledge (Borgatti & Cross, 2003). Since the purpose of knowledge exchange is to gain new or complementary knowledge (Matson et al., 2003), an effective knowledge exchange mechanism will assist organization members to search, acquire and transfer related knowledge and then to proceed and to promote the organizational knowledge creation (Schulz, 2001). Knowledge combination Supposing that knowledge rather than labor or task is regarded as the fundamental component of a professional division in an organization, how to combine the variant professional knowledge to execute tasks becomes one of the most important management issues (Kogut & Zander, 1992; Okhuysen & Eisenhardt, 2002). The embodiments of organizational knowledge combination exist not only in the replication of existing knowledge (Kogut & Zander, 1992) but, what is more important, the reconfiguration of existing and new knowledge (Teece et al., 1997), and the application of the leveraging capability (Foote et al., 2002). In addition, Grant (1996) argued that the design of coordination mechanism could be the measure of organization combinative capability. He proposed that the scope, efficiency and flexibility of knowledge integration would determine the knowledge accumulation of the new product design in an organization. Nahapiet & Ghoshal (1998) also asserted that knowledge combination is one of the important mechanisms to create organization intelligence capital (the so-called organizational knowledge in this study). Thus, from the perspectives of replication, reconfiguration, or leveraging capability, we generate that the eventual purpose of knowledge combination in an organization is to enhance its competitive advantages. To sum up, we argued that under the function of the two organizational knowledge creation mechanisms, knowledge exchange and knowledge combination, at a given 8

10 situation, the efficiency and effectiveness of knowledge creation will be promoted and the organizational knowledge advantages will be further enhanced. KNOWLEDGE GOVERNANCE The concept of knowledge governance could be traced back to 1960 Peter Drucker s advocate of another inspiring management thought on knowledge workers. In recent years, many scholars have moved the argument to one that emphasized on division of knowledge (Kogut & Zander, 1996; Grant, 1996) and the embeddedness of organizational knowledge (Lam, 1997; Cross et al., 2001). The core contention of the variant concepts all highlighted that organization managers should regard knowledge as the core value while managing their organizations. Only through organizational design will the knowledge localized and dispersed in each carrier in the organization be effectively linked and be utilized. In doing so, knowledge resources could be allocated properly to relevant members and tasks. Appropriate or effective design of knowledge governance mechanism is a necessary condition for effective application of organizational knowledge (Nooteboom, 2001). The foremost principle of designing knowledge governance mechanism is about how to make the dispersed and embedded knowledge flow smoothly within organization (Almeida & Kogut, 1999; Gupta & Govindarajan, 2000a; Schulz, 2001). With the help of various incentive mechanisms, organization members would share and exchange their expertise of their own free will (Szulanski, 1996; Hansen, 1999; Grandori, 2001a; Postrel, 2002; Michaillova & Husted, 2003). To explore the nature and content of knowledge governance, four underlying theories were examined: transaction cost theory, knowledge-based view, relational embeddedness theory and cognition school. Transaction Cost Theory. Based on the logic of comparative institution, transaction cost theorists asserted that when the target of transaction is characterized by specificity, difficulty of measurability and causal ambiguity, firm would opt for internalizing the transaction due to opportunism. That is, in a context of high degree of uncertainty, the firm would adopt a hierarchical governance to secure the transaction (Hennart, 1994; Conner & Prahalad, 1996). Therefore, as regards knowledge transaction, hierarchical organization exists with legitimacy in contrast 9

11 with market (Lam, 1997; Nooteboom, 2000). However, hierarchical governance does not come without any cost. Since members in a hierarchical structure merely assume the designated authority via arrangement, they do not have power over residual claim or residual control right (Demsez, 1991; Chi, 1994). For that reason, motivation for organization members to share knowledge spontaneously is not attendant. When a market transaction, distinguished as its high-power incentive mechanism, turns into a low-power incentive kind of firm transaction, firms would face with difficulty of motivating effective knowledge transaction. This is the first dilemma, as regards knowledge transaction, that hierarchical organization should try to overcome (Hannert, 1994; Grant, 1996). Therefore, to inspect what an effective knowledge governance mechanism is from the transaction cost perspective calls upon the issue of incentive mechanism designing. The devise of incentive mechanism is to facilitate knowledge flow within organization and knowledge sharing among organization members. Feasible incentive measures include financial, non-financial, intrinsic and extrinsic reward systems (Gupta & Govindarajan, 2000b; Osterloh & Frey, 2000). Knowledge-based view. Kogut & Zander (1992) suggested that though organizations with competitive advantages face the dilemma of transferability and immitability, the higher-order organizing principle resided in hierarchical structure helps overcome the intricacy. Thus, hierarchical governance has its relative value in contrast to market governance in terms of knowledge transfer and knowledge sharing. Moreover, Conner & Prahalad (1996) indicated that in a hierarchical mode of governance, the employment contracts integrate diversified scope of expertise. As a result of the knowledge-substitution effect and flexibility effect, organizational competitive advantage is accumulated through organizational learning and experience. In comparison with market contracts, the knowledge governance mode in a hierarchical structure is more efficient and competitive in terms of knowledge transaction; therefore justifies its existence. By emphasizing that firms are capable of integrating specialist knowledge, Grant (1996) also confirmed that firm exists because of its hierarchical mode of knowledge governance. As a knowledge integrator, the firm builds up its own shared value to make use of the advantages of integration its efficiency, scope and flexibility. To sum up, the KBV scholars emphasized that the advantages of hierarchical knowledge governance mode comes from the assumption that organization is regarded as a social community and thus results in similar identity 10

12 (Kogut & Zander,1996; Brown & Duquid,2001). Such identity helps reinforce organization members cohesion, value and norms and further embodies on the interaction based on common language (Nonaka & Takeuchin, 1995; Grant, 1996). Under such organizational context, the effect of knowledge transaction, sharing, integration and application would be promoted and hence speed up the accumulation of organizational knowledge (the so-called organizational knowledge creation in this study). As such, the implication for managers is that managers should strengthen organizational culture in which organization members share strong value and commitment of the organizational objective as well as shape an organizational culture which is beneficial to knowledge sharing activities. Relational Embeddedness Theory. In recent years, some of the organizational theorists discussed related issues of knowledge sharing and creation from network perspective of inter-personal embeddedness within organizations (Nahapiet & Ghoshal, 1998; Hansen, 1999, 2002; Borgatti & Cross, 2003; Uzzi & Lancaster, 2003). The main point they tried to make is that through informal social ties and interaction within the internal network, organizational knowledge could be more transparent and thus facilitate the knowledge exchange and sharing of organization members (Borgatti & Cross, 2003). As observed by Cross et al. from empirical studies, for most of the engineers and scientists working in the corporations, the amount of knowledge acquired through informal relational interaction are five times of that acquired through formal mechanisms. In other words, such informal relational embeddedness plays a vital role both in the knowledge sharing within organizations and in the process of organizational learning (Davenport & Prusak, 1998; Hansen, 1999; Cross et al., 2001). In order to let the knowledge embedded in the relationships or flow in the network function well, trust is considered to be a basic requirement. Only when knowledge is communicated on the basis of trust, can the individual receiver aware that the shared knowledge is of value, importance and relevance (Cross et al., 2001; Hansen, 2002; Borgatti & Cross, 2003). More specifically, from the perspective of relational embeddedness in terms of knowledge governance, an effective governance mechanism is constructed on the informal relational interaction and mutual trust among members. The implication for managers is that top management should create a context favoring for building up the informal interaction channels and shape working ambience with mutual trust. 11

13 Cognition School. In the 1940s, Simon and March studied organizational behavior from cognitive perspective. They assumed that there exists an organization memory or mental model within the organization. The studies of cognition school follow a line of investigation regarding organization theories, including issues such as decision making, communication and coordination, design of incentive mechanism and governance mechanism (Moorman & Miner, 1997; Strati, 1998; Paoli & Prencipe, 2003). This line of study echoes the theme advocated in Journal of Management and Governance (2002) special issue for Cognition and Governance : exploring governance issues from cognitive point of view indeed opens another window for organization studies (Shapira, 2000). The main assertion of cognition school emphasizes on the fundamental rationale of bounded rationality in collective thinking and action. The consequence of bounded rationality is even impairment when the knowledge is characterized as embeddedness and tacitness. The embedded and tacit knowledge coupled with bounded rationality further limit the ability of organizations in decision making and problem solving (Lam, 1997; Grandori, 2001). Apart from the aforementioned problems, organization members would interpret and reflect differently (Strati, 1998) such issues as the problems encountered by organizations, organizational tasks and the goal to achieve because of cognition. In the same vein, there exist problems of conflicts and mutual adjustment among organizational members as an effect of different cognition. Studies of governance issues from cognition school mostly recognized the phenomenon of cognitive failure (Grandori, 2001) or cognitive distance (Nooteboom, 2001). Therefore, they postulated that to elevate the possibility of high degree of shared cognition, some measures of governance should be adopted such as interactive learning, promotion of communication and absorptive capability. Accordingly, the negative impact of cognitive failure and distance would be alleviated (Grandori, 2001; Nooteboom, 2001). Grandori (2001) further denoted that what organization management should do is to reinforce communication, knowledge sharing and organizational learning within organization in terms of effective governance of knowledge management. As the above subject is concerned, the management should shape a culture of knowledge sharing and build a shared context to reinforce communication between members. As such, organizational learning would be ultimately promoted. 12

14 In this section, we try to explore the content of knowledge governance and its managerial implication for organizations anchored in the theories of transaction cost, knowledge-based, relational embeddedness and cognition school. Five essential conditions are induced when effective knowledge governance is considered: the incentive mechanism for knowledge sharing, organization identity the cohesion and consistency in goals between members, mutual trust between members, informal communication channel and organizational learning. These factors would promote knowledge flow and knowledge sharing within the organization more effectively and thus strengthen the ability of organizational knowledge creation. Knowledge Advantages of Organization: performance of knowledge creation What we mean of organizational knowledge creation is that through knowledge exchange and combination, knowledge (or experience) could be cumulated and created during the process of task execution and decision-making. The cumulated and created knowledge then is to be stored in the organizational knowledge base or memory. That is to say, task execution and decision-making are the causes as well as the consequences of knowledge creation simultaneously. By virtue of the circulation of the causes and consequences, organization is able to construct its knowledge-based advantages to some extent. According to McEvily & Chakravarthy (2002), the knowledge-based advantage refers to the fact that the knowledge created by the organization could help construct its unique core competence, and further embody in the promotion of its competitive performance. More precisely, the knowledge-based advantages formed through knowledge exchange and combination would embody in organizational value creation activities. These value creation activities include, at least, the following activities. 1. Product innovation. Knowledge exchange and sharing within organizations would not simply help embody those embedded knowledge within individuals in new product development. The re-combinative capability of organizations at the same time facilitates their capability of product innovation (Madahavan & Grover, 1998; McEvily & Chakravarthy, 2002). 2. Innovation of manufacturing process. Just as the embodiment of knowledge-based advantages in product innovation, through combination of effective knowledge exchange, sharing and absorptive capability, the organizational manufacturing process would continuously be upgraded and innovated 13

15 (Argote et a., 2003). 3. Technological uniqueness. Since the knowledge-based advantage is the result of continuous knowledge creation and accumulation, undoubtedly it is with characteristics of path dependence and causal ambiguity (Teece et al., 1997). These specific advantages would further enhance the level of organizational technology with uniqueness and leading competence in contrast to its competitors. In summery, product innovation, innovation in manufacturing process and unique technology are the embodiment of knowledge-based advantages. They promote organizational competitive performance as well as construct organizational unique competence. PROPOSITION DEVELOPMENT As the prevailing paradigm of organization management shifted to a knowledge-based one, we regard it is imperative to explore the content of knowledge creation within organizations and the relationship between knowledge creation and knowledge-based advantages from knowledge governance perspective. Therefore, we propose that effective knowledge governance would facilitate knowledge exchange and combination among organizational members. It would be beneficial for the members to combine the shared and acquired knowledge through knowledge exchange, focusing on both quality and quantity, and further apply in task execution and decision-making. The knowledge created through knowledge exchange and combination would ultimately embody in the knowledge-based advantages of product innovation, innovation of manufacturing process and technological uniqueness. Accordingly, we try to construct a conceptual model exploring the issue of knowledge creation from knowledge governance perspective. Our model echoes the standpoint of Schulz (2001) that the premise of effective knowledge exchange and combination is to promote knowledge flow and sharing within organizations. In the following section we move our attention to the factors affecting organizational knowledge creation, that is, knowledge governance mechanism. The nature of these factors and their implication for knowledge flow and sharing is going to be discussed. Further, the effect of these factors on knowledge governance mechanism for knowledge creation would be discussed. Propositions were inferred to predict the relationship between knowledge creation and knowledge-based advantages. 14

16 Incentive Mechanism. It is believed that if management could provide necessary incentives for knowledge sharing among organization members, it could accelerate organizational knowledge sharing, exchange and transfer (Gupta & Govindarajan, 2000a). Osterloh & Frey (2000) proposed that there are two kinds of incentive mechanism: intrinsic and extrinsic ones. Intrinsic mechanism refers to non-financial reward such as praise publicly, peer affirmation and job promotion. It is similar to satisfaction in terms of psychological contract perspective. As for extrinsic mechanism is one characterized of materialism and financial reward. It is a kind of contingent punishment and reward. Gupta & Govindarajan (2000b) proposed similar assertion while they put more emphasis on the commitment and support of top management and the design of high-incentive and group-based incentive system. High-incentive system focuses on the fact that whether the reward system is able to distinguish the actual performance of member or groups; while the group-based incentive system, on the other hand, is about rewarding based on group performance rather than individual ones. To conclude the forgoing assertion, through the design of intrinsic or extrinsic incentive system, the organization members would be motivated by high-powered incentives to thoroughly and clearly share their knowledge in terms of problem-solving and decision-making. Hopefully, through such mechanism, a knowledge-sharing island could be established as claimed by Postrel (2002). At the same time, the efficiency of knowledge searching and acquiring for individual members would be improved and knowledge exchange and combination would be promoted under such context. That is, with the emergence of incentive mechanism, we postulated that knowledge creation within organizations could be highly strengthened. Proposition 1: The design of incentive mechanism could elevate the effectiveness of organizational knowledge exchange and combination for knowledge creation. Organization Identification. The shared value of organization members could provoke individuals to obey specific norms and routines within organizations (Grant, 1996). The congruent goals and high degree of cohesion among members also confirm the existing shared meaning. As a result, based on the existing shared value and meaning among organization members, individual members would achieve 15

17 common recognition of the empowered task from the organization (Grant, 1996). The fundamental rationale of the above contention is that organization identification, based on common value among organization members, means mutual agreement and high degree of cohesion toward organizational goals (Nahapiet & Ghoshal, 1998; Nooteboom, 2001). Since there is identity among organization members, individuals are likely to be motivated to share knowledge and therefore, assist knowledge flow thoroughly and exchange efficiently (Kogut & Zander, 1996; Brown & Duguid, 2001). In addition, under the consensus of accomplishing the assigned tasks, the knowledge shared and exchanged in terms of quality, quantity and relevance is naturally more likely to meet individual s expectation. As such, the acquired knowledge in the process of knowledge exchange and sharing is more readily to be applied and interpreted to further reinforce the knowledge combinative capability of organizations (Kogut & Zander, 1992; Grant, 1996; Brusoni, Prencipe & Pavitt, 2001). To sum up, organization identification is a vital organizational design for promoting exchange and combination of expert knowledge under complex division of knowledge (Kogut & Zander, 1996). In other words, it is one of the cornerstones of organizational knowledge creation. Proposition 2: The higher degree of organization identification, the more beneficial to the promotion of the effectiveness of knowledge exchange and combination is for knowledge creation. Trust. Trust stands for a multi-dimensional concept. The meaning of trust includes: 1. a status of cognition, not easy for objective evaluation; 2. a belief of expectation, the trusters do not expect disadvantageous action from the trustees ; 3. a behavior of mutual interaction 4. behavior of trust is advantageous to inter-personal or inter-divisional positive interaction (Dodgson, 1993; Davenport, Davis & Grimes, 1999). Regarding to the research question of this paper, we think that trust is the core concept of knowledge exchange and sharing. Davenport & Prusak (1998) indicated that trust is not only the necessary condition for knowledge exchange, it is also the consequence of knowledge exchange and sharing. Providing that trust-based interaction, in terms of knowledge exchange and sharing, is built among organization members, the knowledge exchange parties would specifically recognize the quality and quantity of the exchanged knowledge and be capable of evaluating the result of exchange. Therefore, we argue that mutual trust among organization members could 16

18 facilitate the knowledge flow thoroughly and transparently within the organization (Nahapiet & Ghoshal, 1998; Davenport, et al., 1999). A study of collaborative R&D project teams (Davenport et al., 1999) found that mutual trust among team members is essential for promoting the performance of R&D cooperation. Two types of trust are induced, namely competence-based and process-based trust, in this study. In terms of competence-based trust, it means that organization members trust that the knowledge embedded in individuals is of high quality and quantity. The syndrome of Not Invented Here or hierarchical barrier would thus less likely to happen (Michailova & Husted, 2003). In the context of competence-based trust, what individuals exchange and share is often with high relevance and value (Borgatti & Cross, 2003). Therefore, it is helpful for knowledge acquirers to effectively combine their knowledge and apply for solving specific issues. Process-based trust is built through organization members past positive experiences so that they do not expect any opportunistic behavior from the other party. Consequently, in the context of organizational knowledge exchange, the seller of knowledge is willing to exchange and share knowledge with the buyer according to past positive interaction. In conclusion, mutual trust among organization members would help remove the barriers of knowledge transaction in the internal knowledge market, enhance the quality and quantity of exchanged knowledge, promote the efficiency of knowledge exchange and combination and further reinforce organizational knowledge creation. Proposition 3: Higher degree of mutual trust among organization members would help promote the efficiency of knowledge exchange and combination for knowledge creation. Informal Communication Channels. Informal communication channels could be constructed through the informal relational network within the organization. It doe not merely improve the informal interaction between members; at the same time, it is the most effective mechanism of knowledge exchange within the internal knowledge market (Matson et al., 2003). The effectiveness results from the fact that when competitive advantages involved with tacit and embedded knowledge, it is more easily to transfer through informal interpersonal communication face by face (Lam, 1997; Gupta & Govindarajan, 200b). From informal interpersonal ties and social network perspectives, Cross et al., (2001), Borgatti & Cross (2003) and Uzzi & 17

19 Lancaster (2003) claimed that informal communication channels are advantageous to reinforce organization members capabilities of know what and know how. Knowledge exchanged and shared in a natural way is not only more valuable. It is especially with cost advantage. Thus, the efficiency of knowledge exchange and combination for knowledge creation is strengthened. The informal relational network is composed of inter-personal relationship, personal attraction and types and structure of relational ties. Nahapiet & Ghoshal (1998), Cross et al., (2001) and Borgatti & Cross (2003) all recognized that the interlocking of relational network within organizations exhibits communication between individuals or division, transparency and openness of interaction, which all contribute to knowledge sharing within organizations. Hansen (1999, 2002) and Uzzi & Lancaster (2003) further made clear that the aforementioned density of interlocking would contribute to more diversified knowledge available to individuals and more speedy knowledge flow and transmission. That is, informal communication channels help speed up the process of searching and transferring knowledge and further exert deeper impact on the knowledge exchange and combination for knowledge creation. Proposition 4: The more the informal communication channels appear in the organization, the more effective the knowledge exchange and combination for knowledge creation would be. Organizational Learning. To synthesize the above contention regarding knowledge creation and the nature of the research question in this paper, we adopt the assertion of Nahapiet & Ghoshal (1998) that the mechanism of knowledge creation is distinguished as knowledge exchange and combination. We define knowledge exchange as the smoothness of knowledge transaction and the outcome of exchanged knowledge in terms of quality and quantity in the internal knowledge market. When individual members are enthusiastically willing to devote to knowledge creation activities (Szulanski, 1996), knowledge exchange between organization members would continuously proceed and therefore routines for knowledge sharing are formed (Dyer & Singh, 1998). Through the process of knowledge exchange, knowledge would not be appropriated by any specific person (Grant, 1996). Moreover, acquiring new knowledge or complementary knowledge would reduce individuals cognitive limitation of knowledge creation 18

20 the so-called bounded rationality. Since the purpose of knowledge exchange is to acquire new or complementary knowledge (Matson et al., 2003), effective knowledge exchange mechanism would facilitate the searching, acquiring and transferring of relevant knowledge for individual members to elevate the efficiency of knowledge creation (Schulz, 2001) and reveal better performance of knowledge creation. The knowledge-based advantages would embody in the capability of product innovation, innovation of manufacturing process and technological uniqueness. Proposition 6: The elevated efficiency of knowledge exchange would help organizations construct better knowledge-based advantages. The combination of organizational knowledge illustrates in the replication of existing knowledge (Kogut & Zander, 1992) and the construction of organizational routines (Grant, 1996). It emphasizes on the re-allocation of existing and new knowledge (Teece et al., 1997) and its ability of leveraging (Foote et al., 2002). Thus, we define knowledge combination as individual members could recombine the existing knowledge into new knowledge by integrating existing and new knowledge and be able to leverage this reallocation of existing and new knowledge. The purpose of knowledge combination is to combine the individual knowledge which is embedded and dispersed within the organization. Through organizational capability of knowledge integration, effective combination of existing and new knowledge and recombination of existing knowledge (Kogut & Zander, 1992) would be achieved by making use of the scope, efficiency and flexibility of knowledge integration (Grant, 1996). The ultimate purpose would be to raise the speed of innovation (Tsai, 2002) and embody in the knowledge-based advantages to acquire competitive advantages (Ravai & Veron, 2001). Proposition 7: Organizational capability of knowledge combination would strengthen its knowledge-based advantages. Incentive Mechanism Organization Identify Trust Informal Communication Channels Organization Learning Knowledge Exchange Knowledge Combination Product Innovation Innovation of manufacturing process Technological uniqueness Conceptual Model :Organization Knowledge Creation from Knowledge Governance Perspective. 19

21 DISSCUSSION AND FUTURE DIRECTION FOR RESEARCH This paper serves to discuss the content of knowledge creation in terms of knowledge governance and at the same time try to build up a conceptual model for research. To construct a complete theoretical basis for knowledge governance perspective, we include transaction cost theory, knowledge-based view, relational embeddedness theory and cognition school to infer what the content of effective knowledge governance is and the influential factors are. According to the nature of our research question, we define knowledge creation of organizations as through the mechanism of knowledge exchange and combination, individual members would create new knowledge in the process of task execution and decision-making of new policy and at last strengthen organizational knowledge base. As for the knowledge governance mechanism, we think that it is the arrangement of every knowledge creation and exchange activity including integration, control, communication, coordination, reallocation and recombination. The performance of knowledge creation is embodied in the organizational knowledge creation activity in which knowledge-based advantages are achieved through individual knowledge exchange and combination. In the process of knowledge creation, we postulate that effective knowledge exchange and combination among individuals and acceleration of organizational knowledge accumulation should be mediated by appropriate knowledge governance mechanism if the performance of knowledge-based advantages is of concern. This study is based on the inference of conceptual model, therefore there leaves much room for further empirical test. For the sake of future research, we try to develop the measurement for the constructs and variables in the following section. Influential Factors of Knowledge Creation We conclude five factors influencing organizational knowledge creation based on the aforementioned theories. 1. Incentive mechanism. According to Davenport & Prusak (1998), Gupta & Govindarajan (2000b), and Osterloh & Frey (2000), incentive mechanism is to motivate individuals behavior of knowledge sharing. It is a reward system that could reflect the genuine individual behavior of knowledge sharing. Another factor of intrinsic motivation comes from the support of top management. 20

22 Therefore, we measure the situation of executing incentive mechanism when individuals proceed with knowledge sharing behavior from three aspects: if the knowledge sharer would feed back with a. financial reward (such as cash) b. non-financial reward (such as promotion, public praise) c. support from top management. Organization Identification. It refers to whether the organization members reach consensus or cohesion in terms of task execution. We adopt the standpoints of Kogut & Zander (1996), Nahapiet & Ghoshal (1998) and Brown & Duguid (2001) to measure organizational identity. These items include a. organization members understand the objective of task. b. organization members have common vision about the outcome of task (such as market share). c. organization members share the same destiny and prosperity to achieve task objective. Trust. We adopt the contention of Nahapiet & Ghoshal (1998), Davenport & Prusak (1998) and Borgatti & Cross (2003) that organization members trust each other on the basis of past experience of knowledge transaction and the affirmation of counter party s expertise. They are convinced that the transactional knowledge is of value, credibility and with relevance to task. Accordingly, the items asked to measure trust including: a. organization members trust in each other s expertise b. organization members trust that the acquired knowledge is beneficial to their task execution c. organization members trust that opportunistic behavior will not occur during the process of knowledge transaction. Informal communication channel. Informal communication channel is built on the basis of social inter-personal network. Cross et al., Borgatti & Cross (2003) and Uzzi & Lancaster (2003) emphasized that in such informal inter-personal network, individuals could more easily access valuable knowledge within a short period of time. Therefore, we measure informal communication channel from the following items: a. the informal inter-personal relationship is main communication channel for organization members; b. organization members often get together to discuss task related issues; c. there is much interaction within this informal inter-personal network. Organizational learning. Organizational learning means that organizational members 21