Governing Firm-Specific Knowledge Assets

31 October 2009 at 6:25 am Nicolai Foss 1 comment

| Nicolai Foss |

In spite of book titles such as Competitive Advantage Through People, a whole subfield dedicated to linking human resources and firm-level performance outcomes (i.e., strategic HRM), and a general recognition that many knowledge-based competitive advantages are ultimately rooted in a web of complementary and firm-specific human capital, surprisingly little serious quantitative research exists that links firm-specific knowledge, employee governance mechanisms, and firm-level performance. In fact, there are few theoretical contributions that accomplish this. Work by Russ Coff as well as Gottschalg and Zollo come to mind (as well as this paper).

In “Firm-Specific Knowledge Resources and Competitive Advantage: The Roles of Economic- and Relationship-based Employee Governance Mechanisms,” in the December issue of the Strategic Management Journal (I received my copy October 28!), Heli Wang, Jinuy He, and former O&M guest blogger Joe Mahoney explore the economic- and relationship-based governance mechanisms that mitigate the latent underinvestment problem of employees making firm-specific human-capital investments. Overall, their results suggest that firms with more firm-specific knowledge resources are more likely to adopt those governance mechanisms that can reduce key employees’ concerns about potential hold-up.

The paper is very neat and clear, and my personal candidate for the best research paper in SMJ in 2009. Here is the abstract:

The resource-based view of the firm emphasizes the role of firm-specific resources, especially firm-specific knowledge resources, in helping a firm to achieve sustainable competitive advantage. However, the deployment of firm-specific knowledge often requires key employees to make specialized human capital investments that are not easily redeployable to other settings. Thus, in the absence of effective safeguards and trust building devices, employees with foresight may be reluctant to make such specialized investments. This study explores both economic- and relationship-based governance mechanisms that might mitigate this underinvestment problem. Effective use of these governance mechanisms enables a firm to obtain greater performance from its efforts to deploy firm-specific knowledge resources. Empirical results further support these key arguments.

Entry filed under: - Foss -, Recommended Reading, Strategic Management, Theory of the Firm.

Multitasking Terence Hutchison Special Issue

1 Comment Add your own

1. Russ Coff | 31 October 2009 at 10:05 am

Thanks for the shout-out ;-). It is really great to see some progress being made. I have long felt that there was some degree of irrational exuberance about human assets and firm performance. We cannot really predict competitive advantage from this type of asset until we understand the barriers that must be surmounted to achieve an advantage.

The problem is greatly compounded if we were trying to predict empirical measures of firm performance (ROA, ROE, Tobin’s q, etc.) as opposed to economic rent.