Firm-specific knowledge resources and competitive advantage: The roles of economic- and relationship-based employee governance mechanisms (2009) Presented by Jiyoon Chung Modified by Jong-kyung Park Heli Wang, Jinyu He, Joseph T. Mahoney

Overview The need for research Introduction Background and hypothesis development Firm-specific resources and the potential for sustainable competitive advantage Firm-specific knowledge resources and employee governance mechanisms Economic-based governance mechanism: employee stock ownership Relationship-based governance mechanism: firm-employee relationships Employee governance and performance and advantage based on firm-specific knowledge Data and Method Results Conclusion

The need for research According to the resource-based view of the firm, a firm’s ability to achieve and sustain a competitive advantage is directly related to the strength of ‘isolating mechanisms’ that protect the firm’s valuable and rare resources from imitation by rivals. An important isolating mechanism is the firm-specificity of resources. Firm-specific knowledge has the greatest potential to serve as a source of sustainable competitive advantage. However, firm rarely can automatically achieve superior economic performance from its firm-specific knowledge resources. Firm usually requires its key employees to make complementary investments in human capital in the process of absorbing and deploying firm-specific knowledge.

The motivation of this article is based on the logic that a firm’s resource base and the effectiveness of its governance system jointly influence its economic performance (Gottschalg and Zollo, 2007; Kim and Mahoney, 2005;Makadok, 2003) The study focuses on two general types of employee governance mechanisms that can help firms mitigate their employees’ reluctance to make firm-specific human capital investments an economic-based governance mechanism a relationship-based mechanism Introduction

Resource-based view Firms are considered as bundles of heterogeneous resources that include tangible and intangible assets, operational processes, and products. Among these, knowledge is often considered a firm’s most important resource. Economic-based governance mechanism: employee stock ownership When the key resource involved is firm-specific knowledge, granting some equity ownership to the key employees who must absorb and deploy such knowledge becomes economically desirable. Hypothesis 1: Everything else equal, a firm’s level of firm-specific knowledge resources is positively associated with its use of employee stock ownership as a governance mechanism. Relationship-based governance mechanism: firm-employee relationships Employees’ concerns about hold-up by the firm maybe based on perceptions that the firm is in a position to unfairly expropriate their investments infirm-specific human capital, the firm’s efforts to build trust may help reduce the threat of such perceptions. Hypothesis 2: Everything else equal, a firm’s level of firm-specific knowledge resources is positively associated with the extent to which it places emphasis on establishing good relationships with its key employees. Background and hypothesis development

The inappropriate functioning of a firm’s governance system will hinder the flow of firm-specific knowledge resources toward full realization of economic rents. Hypothesis 3a: Everything else equal, the relationship between the level of firm- specific knowledge resources and firm-level economic performance is positively moderated by employee stock ownership. Hypothesis 3b: Everything else equal, the relationship between the level of firm- specific knowledge resources and firm-level economic performance is positively moderated by firm-employee relationships. Shirking or free-rider problem Shirking or free-rider problem can be especially severe if key employees need to work in a group. Hypothesis 4: The moderating role of employee stock ownership in the relationship between the level of firm-specific knowledge resources and firm- level economic performance will be weaker in larger firms. Background and hypothesis development

Data and methods Panel data contained 211 firms in manufacturing industries and 1329 firm- year observations between 1994 and 2002 Measures Firm economic performance (Tobin’s Q) Firm-specificity of knowledge resources (FS) – number of self-citations made Firm-employee relationships – the ‘employee relations’ dimension of the KLD data Employee stock ownership – the EDGAR database Control variables R&D intensity Patenting intensity Firm size, firm age, and financial slack

Data and methods

The first and second equations were formulated to test whether the level of firm- specific knowledge resources was associated with the degree of employee stock ownership and with the cultivation of good firm-employee relationships. The third equation examined whether or not the level of firm-specific knowledge resources affects firm performance and whether the relationship between firms- specific knowledge resources and performance is moderated by employee stock ownership and firm-employee relationships.

Results Two measures of the level of firm-specific knowledge resources (share of self- citations made and the weighted number of self-citations made) were highly correlated. Both measures were positively correlated with the performance measure, logged Tobin’s Q. As expected measures of firm-specific knowledge showed significant, positive correlations with the measures of the two employee governance mechanisms.

Results Firms with higher levels of firm-specific knowledge resources were more likely to adopt appropriate governance mechanisms to align key employees’ efforts with the interests of the firm. Hypotheses 1 and 2 Employee stock ownership and firm-employee relationships were negatively associated with each other Maybe Substitutive

In Models 2 and 7, The interaction term was positively related to firm performance for both measures of firm-specific knowledge, although the coefficients on the interaction terms were only marginally significant. Some support for Hypothesis 3a In Models 3 and 8 a three-way interaction Term was negatively related to firm performance for both measures of firm-specific knowledge. Support for Hypothesis 4 In Models 4 and 9 the coefficients on the interaction terms were positive and statistically significant. Support for Hypothesis 3b Employment of Minorities

Firms with greater firm-specific knowledge resources are more likely to adopt governance mechanisms appropriate for reducing key employees’ concerns about hold-up by the firm. The increased use of these governance mechanisms strengthens the relationship between the level of firm- specific knowledge and a firm’s economic performance. Employee governance mechanisms are endogenous to the nature of firm knowledge resources. Discussion and Conclusions