Knowledge Exchange and Combination

Research by Ken Smith

AS THE PACE OF BUSINESS QUICKENS AND THE PLAYING FIELD BECOMES MORE LEVEL WITHIN INDUSTRIES, FIRMS INCREASINGLY LOOK TO THEIR HUMAN CAPITAL AND PROPRIETARY KNOWLEDGE AS PRIMARY SOURCES OF COMPETITIVE ADVANTAGE. WHAT’S MORE, THE ABILITY TO KEEP AHEAD OF THE COMPETITION IN RAPIDLY CHANGING MARKETS INCREASINGLY REQUIRES FIRMS TO HAVE A KNOWLEDGE CREATION CAPABILITY.

Little is known about how firms can create a social climate which encourages and fosters knowledge creation. One view is that human resource departments can create such a social climate by developing commitment-based HR practices—those that seek to build longer-term relationships with employees and higher-levels of employer/employee investment in the firm. Recent studies of relatively stable businesses show that a link between commitment-based HR practices and a greater knowledge creation capability may exist. What has not been known are the mechanisms and processes by which these practices lead to better firm performance. In addition, there is a need to understand how these practices affect organizations such as high-tech firms that are more dynamic and rely heavily on the creation and combination of firm-specific knowledge.

Ken G. Smith, Dean’s Chair of Business Strategy at the Robert H. Smith School of Business, along with former doctoral student Christopher J. Collins, now an assistant professor at Cornell University, studied how human resource practices affect knowledge creation and firm performance through an organization’s social climate. Smith theorized that commitment-based HR practices would have a positive influence on three aspects of a firm’s social climate: trust, cooperation, and shared codes and knowledge. In turn, these three aspects would generate a higher level of knowledge exchange and combination that would in turn positively affect the firm’s performance.

Smith and Collins explore the effects of commitment-based HR practices on organizational
social conditions in a recent paper, “Knowledge Exchange and Combination: the Role of Human Resource Practices in the Performance of High Technology Firms.” The paper examines how commitment-based HR practices affect firm performance in rapidly changing environments such as technology firms and influence key knowledge workers—those who are likely to have the greatest impact on firm performance through knowledge exchange and combination.

The study included 136 firms in the high-tech sector, including the software, telecom-munications, IT consulting, computer electronics, and semi-conductors industries. Commitment-based HR practices were defined as employee selection practices that focused on creating internal labor markets for employees and assessing fit of the employee to the company rather than to specific job requirements; compensation practices that focused on group and organizational performance incentives; and training programs and performance appraisals that emphasized long-term growth, team building, and the development of firm-specific knowledge. The intent was to capture the practices that were specific to knowledge workers such as scientists, engineers, and executives that are responsible for firm innovation.

Smith and Collins found that commitment-based HR practices were indirectly related to firm performance through their effects on organizational social climate and knowledge exchange and combination. High levels of commitment-based HR practices enhanced the social climate of the organization, creating higher levels of trust, cooperation and shared language among knowledge workers. Higher levels of trust, cooperation and shared language directly affected the knowledge creation capability of the firm, which, in turn, was related to two measures of firm performance: revenue from new products and services, and sales growth.

"Our findings provide initial evidence that commitment-based HR practices may enable firms to create a social environment that is conducive to knowledge exchange and combination," says Smith. In rapidly changing markets where existing advantages are quickly eroded by competitors, this increased level of knowledge creation capability may allow a firm to stay ahead of the competition. 

Smith was somewhat surprised to find that the relationships between social climate
variables of trust, cooperation and shared language and the two measures of performance worked almost entirely through the knowledge creation capability. They speculate that the social climate variables may affect other unmeasured organizational capabilities such as experimentation and risk-taking or the motivation put forth by the employees. The researchers intend to extend their research to non-technology based firms and to explore the effects of HR practices beyond knowledge workers.

This research has been accepted for publication in Academy of Management Journal.

For further information, contact kgsmith@rhsmith.umd.edu.