Volume 14(1): 29–52

ISSN 1350–5084
Copyright © 2007 SAGE
(London, Thousand Oaks, CA
and New Delhi)

The Emerging Knowledge Governance

Approach: Challenges and
Characteristics
Nicolai J. Foss
Norwegian School of Economics and Business Administration, Bergen,
Norway and Copenhagen Business School, Denmark

Abstract. The ‘knowledge governance approach’ is characterized as a

distinctive, emerging approach that cuts across the fields of knowledge
management, organization studies, strategy and human resource
management. Knowledge governance is taken up with how the deployment
of governance mechanisms influences knowledge processes, such as sharing,
retaining and creating knowledge. It insists on clear micro (behavioural)
foundations, adopts an economizing perspective, and examines the links
between knowledge-based units of analysis with diverse characteristics
and governance mechanisms with diverse capabilities of handling these
transactions. Research issues that the knowledge governance approach
illuminates are sketched. Key words. governance; knowledge management;
organizational economics

The purpose of this article is to characterize an emerging approach—the

‘knowledge governance approach’ (henceforth, the ‘KGA’)—in terms of
how it differs from other parts of the knowledge-based literature, the
problems it seeks to solve, and the methods and ideas it applies.1 The
approach may be briefly defined as a sustained attempt to uncover how
knowledge transactions—which differ in their characteristics—and
governance mechanisms—which differ with respect to how they handle

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 Organization 14(1)
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transactional problems—are matched, using economic efficiency as the
explanatory principle. In terms of intellectual underpinning, the KGA
largely takes its cues from organizational economics (particularly trans-
action cost economics), but also recognizes a need to go beyond this body
of thought in terms of the treatment of motivation and cognition on the
level of individuals (Grandori, 1997; Osterloh and Frey, 2000), how trans-
actions are dimensionalized (Nickerson and Zenger, 2004), and the set
of governance mechanisms that are considered (Grandori, 2001). Cutting
thematically across the fields of knowledge management (‘KM’), human
resource management, organization theory and strategic management, the
KGA starts from the hypothesis that knowledge processes (i.e. the creation,
retention and sharing of knowledge; Argote, 1999) can be influenced and
directed through the deployment of governance mechanisms, in par-
ticular the formal aspects of organization that can be manipulated by
management, such as organization structure, job design, reward systems,
information systems, standard operating procedures, accounting systems
and other coordination mechanisms (Grandori, 2001). The KGA asserts
that such governance mechanisms should be seen as critical antecedents
of knowledge processes.
Philosophically, the KGA asserts the need to build micro-foundations based
in individual action and interaction for organizational knowledge-based
phenomena (knowledge sharing, organizational knowledge creation) (i.e.
‘methodological individualism’; Coleman, 1990; Felin and Foss, 2005; von
Hayek, 1955); it attempts to trace the specific mechanisms through which
organization exerts its influence on knowledge processes (‘mechanism-
based explanation’; Hedström and Swedberg, 1996; Machamer et al., 2000);
and it is unabashedly rational(istic) in its approach to explanation on the
scientific domain and to organization design on the managerial domain
(Williamson, 1996).
The article is structured as follows. I begin by locating the KGA in the
overall ‘knowledge movement’, that is, the broad interest in the manage-
ment of knowledge that has characterized many fields in business admin-
istration during the last decade. However, this movement is beset by some
fundamental weaknesses, and the KGA has arisen as a response to these
weaknesses. The article ends by giving a characterization of the KGA in
terms of the problems it addresses and how it may solve these. Examples of
existing research that may be seen as lying within the KGA are provided.

Why the Knowledge Governance Approach?

The Knowledge Movement
‘Knowledge’ has been all the rage for more than a decade in a number of
fields in management studies (e.g. Eisenhardt and Santos, 2002; Grandori
and Kogut, 2002). A ‘knowledge movement’ that cuts across traditionally
separate disciplines in business administration has emerged. The strategy
field has witnessed a proliferation of approaches that all place knowledge

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 The Emerging Knowledge Governance Approach
Nicolai J. Foss
centre stage (e.g. Grant, 1996; Kogut and Zander, 1996; Spender, 1996); the
international business field is in the process of developing a view of the
multinational corporation as a knowledge-based entity (Tallman, 2003);
network ideas that stress connections between knowledge nodes, often
based on sociological notions of network ties (Granovetter, 1973), are be-
coming increasingly influential (Kogut, 2000; Tsai, 2001, 2002; Tsai and
Ghoshal, 1998); and, of course, KM has become not only a huge body of
literature, but also a widespread organizational practice (Easterby-Smith
and Lyles, 2003; Spender, 2005).
It is appropriate to characterize all this as a ‘movement’ because of the
shared conviction that the management of knowledge of whatever kind has
become a critical issue for competitive dynamics, international strategy,
the building of resources, the boundaries of firms and many other issues.
There is also agreement that it is meaningful to speak of different kinds of
knowledge, each implying different management needs. And there seems
to be an inbuilt pluralism to the knowledge movement, an agreement that
no single established business administrative field or social science per-
spective is likely to carry us all the way towards a comprehensive under-
standing of the management of knowledge.
Those scholars who may be seen as working with the KGA are sympathetic
fellow-travellers in the overall knowledge movement. However, the KGA
stands out as a distinctive part of the knowledge movement because it
points to a number of central problems that have not yet been satisfactorily
addressed, and because there is a specific unity to the approach taken to
solve such problems. Before the boundaries of this emerging approach can
be identified, it is necessary to discuss the gaps in the extant literature that
the KGA has arisen as a response to.

Research Gaps
As indicated the knowledge movement is broad and highly diverse in terms
of research interests, underlying disciplines, research methods, results,
philosophical underpinnings, etc. In fact, the knowledge management field
alone is highly diverse. Nevertheless, there are a number of distinct shared
research gaps in the knowledge movement that the KGA may be seen as
reacting to. To get an idea of what these may be, consider the following
two examples: (1) the governance of knowledge intensive firms (Starbuck,
1992) or ‘human capital organizations’ and (2) the importance of knowledge
for competitive advantage. There are serious gaps in our understanding of
these and the KGA may help close the gaps.
Governance of human capital organizations ‘Human capital organizations’
are organizations where a significantly larger part of value-added can be
ascribed to human than to physical assets. They range from R & D-intensive
manufacturing firms to professional services firms, and rely on scarce
‘expert talent’. These changes with respect to an increasing human capital
component of firms’ productive inputs are often argued to take place in

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tandem with an increase of the ‘knowledge-content’ in outputs, a stepping
up of innovative activity, an increasing differentiation of demand, increasing
globalization, and increasingly inexpensive networked computing—
complementary changes that are taken to indicate the emergence of the
‘knowledge economy’ (Halal and Taylor, 1998) or at least a new paradigm
of ‘modern manufacturing’ (Milgrom and Roberts, 1990).
Fundamental changes in economic organization are also implied by the
increased prevalence of human capital organizations, as reflected in notions
of the ‘changing employment contract’, ‘new organizational forms’, ‘internal
disaggregation’, etc. In particular, many scholars have argued that the
boundaries of firms are being radically transformed, not just because firms
increasingly disaggregate (i.e. outsource, spin-off, etc.), but also because
the very notion of firm boundaries is becoming increasingly problem-
atic as (inalienable) human capital increasingly dominates (alienable)
physical capital as the most important category of productive capital (see
Foss, 2002).
As this suggests, the advent and increased prevalence of human capital
organizations have profound implications for the deployment of governance
mechanisms such as the allocation (and exercise) of authority and the design
of reward systems. In fact, according to a viewpoint that has almost acquired
the status of conventional wisdom, human capital organizations may be
differentiated from ‘traditional’ firms in terms of governance mechanisms
by relying less on direction through the exercise of authority, eschewing
high-powered performance incentives and embracing ‘culture’ and ‘clan’
modes of organizational control (at least for the core group of employees)
(e.g. Child and McGrath, 2001). Organizational control is exercised through
very different mechanisms in the two kinds of firms.
However, Teece (2003) develops a completely contrary view. Teece ex-
plains how the organization of his own firm (Law and Economics Consulting
Group, LECG), a professional services firm, is very much different from
the above portrayal of how human capital organizations are administered
and controlled. In particular, while indeed the traditional blunt authority-
mechanism (supervision, order-giving) is ‘extremely weak’ in this firm,
very high-powered performance incentives are used (instead). The two
features are related, for by setting compensation for ‘experts’ ‘… purely as a
certain percentage a of the expert’s own individual bill-out rate times hours
worked (as accepted by the client)’ (Teece, 2003: 909), strong incentives
are coupled with a small need for monitoring. Teece speculates that the
specific organizational design of LECG (and there are other features in
addition to those briefly mentioned here) ‘… may well portend the future
for professional service organizations endeavouring to leverage top talent’
(p. 914).
The point is, of course, not that Teece is right and those who argue differ-
ently are wrong or vice versa. Both may be right—for different kinds of
human capital organizations or for different environments. The problem is

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 The Emerging Knowledge Governance Approach
Nicolai J. Foss
rather that we do not have a good theory that will allow us to discriminate
between these alternative accounts in a clean manner. Such a theory would
start from a knowledge-related unit of analysis and explain how the efficient
deployment of governance mechanisms systematically varies when the
unit of analysis varies, given assumptions about agents’ knowledge and
motivation and given assumptions about the principle (e.g. efficiency) that
links the unit of analysis with alternative kinds of governance mechanisms
(or combinations thereof).
Knowledge and competitive advantage Strategic management may well be the
field in business administration (at least among the more traditional/
well-established fields) where knowledge-based approaches have been
developed and applied with the greatest success (measured in terms of
overall influence in a field) (e.g. Grant, 1996; Kogut, 2000; Kogut and
Zander, 1992; Spender, 1996). Thus, the dominant resource-based view,
while not logically committed to placing knowledge resources centre stage
nevertheless often does exactly this. The underlying argument seems to be
that knowledge resources empirically are particularly often the cause of
competitive advantages and are particularly difficult to imitate. In particu-
lar, much interest has centred on knowledge constructs such as capabilities
that are placed on the firm-level, as primary examples of value-creating
and difficult to imitate resources. A key idea here is that differential firm
performance can be traced to differential capabilities; successful firms
control capabilities that result in more appropriable value-added than
less successful firms. However, the explanatory stance typically taken in
the resource/capabilities view is not satisfactory. There are two reasons
for this.
First, the literature reasons directly from something placed on the firm-
level (i.e. capabilities are antecedents) to something else that is also placed
on the firm-level (e.g. competitive advantage). Aggregates are directly linked
to (in fact, claimed to cause) other aggregates. This is known as ‘meth-
odological collectivism’ (Coleman, 1990; von Hayek, 1955). In short, this
stance is problematic because it suppresses the level of individual action
and interaction. A recent attack on collectivism in strategy research has
been launched by Lippman and Rumelt (2003). They point out that arguing
that ‘firms’ (i.e. collective entities) earn a residual return called ‘profits’
is highly misleading. In particular, it obscures the complex process of
appropriating value where the appropriation is not undertaken by firms
(and certainly not by ‘capabilities’) but by the firm’s stakeholders that
come equipped with different bargaining powers. Thus, a ‘collectivist’
approach obscures important micro-mechanisms. In the present context,
what is obscured is the issue of how knowledge that ultimately resides on
the level of the individuals is somehow integrated through organizational
means into organization-level capability, and how this integration results
in knowledge being utilized in such a manner that competitive advantage
becomes the result.

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Second, the collectivist capabilities perspective in strategy neglects
organization—and does so at its peril. Although capabilities are often
taken to be organizational processes that enable managers to carry out
certain key tasks, organization itself seems almost conspicuous by its ab-
sence in most capabilities work. By ‘organization’ is here understood the
formal and informal allocation of decision (or property) rights and the
mechanisms that enforce such rights (Jones, 1983). This rights allocation
and the accompanying enforcement mechanisms constitute the distribution
of authority, the attributes of governance mechanisms, organizational struc-
ture and other aspects of formal organization, but clearly also relates to, for
example, social ties and networks inside firms. An allocation of property
rights is also an allocation of incentives (Barzel, 1997), including incentives
to search for knowledge, share knowledge, accumulate human capital,
leverage knowledge capital, etc. (Foss and Mahnke, 2003); moreover, pro-
perty rights influence bargaining powers (Hart, 1995). For example, social
ties and networks—much emphasized in KM research—are important for
understanding the links between knowledge and superior returns, not just
because of their potentially beneficial effects on returns, but also because
such ties and networks grant legitimacy to the claims that employees may
make on rents (Coff and Blyler, 2003). In turn, these appropriation issues
matter to knowledge processes, because employee incentives to search for,
share, create, and integrate knowledge are influenced by how much they
can appropriate (Coff, 1999).

Causes of Research Gaps

There are probably many reasons why the above research gaps exist.
The following discuss some of the major causes, concentrating on the
missing micro-foundations in the knowledge movement and the neglect
of governance mechanisms as antecedents of knowledge processes.
Missing micro-foundations Consider Figure 1 which builds on the work of
sociologist James Coleman (1990).
The Figure makes a distinction between the macro-level and the micro-
level. For example, it may be that the macro-level is organizational whilst
the micro-level is that of individuals. As shown, there are links between
macro-macro (Arrow 4) and macro-micro (Arrow 1), micro-micro (Arrow 2),
and micro-macro (Arrow 3). The Figure also makes a distinction between
what is to be explained (i.e. the explanandum) and its explanation (the
explanans). Usually, the aim is to explain either a macro-level phenomenon
(located in the upper right hand corner of Figure 1), such as a firm-level
outcome, or a correlation between macro-phenomena (i.e. Arrow 4). In
order to explain the analyst makes use of theoretical mechanisms implied
by the arrows (Hedström and Swedberg, 1996; Machamer et al., 2000).
Note that the arrows in Figure 1 are, from a theoretical perspective, empty
boxes. They may be filled with different kinds of theoretical mechanisms,
quite dependent on the choices of the analyst.

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The Emerging Knowledge Governance Approach
Nicolai J. Foss
Figure 1. A General Model of Social Science Explanation

The Coleman diagram can be used to diagnose in a more precise manner

some of the problematic features of extant work in the knowledge move-
ment; see Figure 2.

Figure 2. Capabilities as Antecedent to Competitive Advantage

Consider again the strategic management manifestation of the knowledge

movement, that is, the capabilities (or knowledge-based) view (e.g. Kogut
and Zander, 1992, 1996). In terms of the diagram depicted in Figure 2, cap-
abilities theorists usually posit a direct relation between capabilities and
competitive advantage, that is, they make use of Arrow 4. However, Arrow 4
explanation can only be used under special circumstances and only as a
shorthand way of representing more complex underlying behaviours. The
reason is fundamentally ontological: there are no conceivable mechanisms
that directly take us from the organization-level construct of capability to
organization-level outcomes such as competitive advantage. A research gap
in the capabilities view therefore concerns accounting for the impact on

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performance of capabilities in terms of other, more ‘micro’ mechanisms
(Arrows 1, 2 and 3). There is, of course, a substantial KM dimension to this.
For presumably firm-level capability is, among other things, a reflection
of representations, beliefs, information, etc. that, ultimately, is held by
individual employees and utilizing this knowledge in an optimal manner
is a key KM task. Thus, talking of the need to manage capabilities for the
purposes of achieving competitive advantage is simply shorthand for a
KM task that inherently involves the micro-level of organizations.
Organizational antecedents The Coleman diagram is also useful for under-
standing the role that organizational antecedents play in the knowledge
movement. Such antecedents may be thought of as being placed at the
North-Eastern node in Figure 2 (i.e. substitute ‘capabilities’ with ‘governance
mechanisms’). The deployment of information systems, incentive schemes,
allocations of decision rights and authority and so on directly impact on
the conditions of individual action. Governance mechanisms are, of
course, deployed in the belief that influencing the conditions of actions
(the south-eastern node) in a certain manner will lead employees to take
those decisions (the south-western node) that, when aggregated (Arrow 3),
lead to favourable organizational outcomes (the north-western node in
Figure 1). Thus, the attempt to better exploit certain knowledge assets
through knowledge sharing (an organizational outcome) may be imple-
mented by setting up reward systems for knowledge sharing (and know-
ledge searching), installing monitoring mechanisms that make sure that
knowledge that is shared (and for which rewards are paid) is actually
relevant knowledge and so on.
In general, the knowledge movement has a problem with organizational
antecedents. To be sure, organization issues often do get mention in various
discussions of knowledge processes within and between firms (e.g. Hamel,
1991; Hedlund, 1994; Lyles and Schwenk, 1992).2 Special issues of journals
have been devoted to the theme of the link between organization and
knowledge processes [e.g. Journal of International Business Studies, 35(5),
2004; Journal of Management Studies, 38(7), 2001]. A recent (excellent) text-
book on KM (Hislop, 2005) discusses communities of practice, boundary-
spanning processes, power and conflict, ICT, culture and HRM issues, virtual
organizations, MNC and knowledge-intensive firms, all in separate chapters.
In sum, it would be factually incorrect to argue that the knowledge/organiza-
tion link is a neglected one. However, some critical observations are still
pertinent here.
First, it is characteristic that many contributions to the organization-
knowledge link have a collective(ist) orientation in the sense that the analyt-
ical reduction indicated in Figures 1 and 2 is not performed. Instead, the
explanation takes place solely on the collective level; for example, theorists
discuss the role of ‘communities of practice’ (Brown and Duguid, 1998)—
that is, collective entities —for organization-level knowledge. As a telling
example, in none of the contributions to the Journal of Management Studies

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 The Emerging Knowledge Governance Approach
Nicolai J. Foss
special issue on KM do we find an explicit attempt to link organization
and knowledge by means of mechanisms corresponding to Arrows 1, 2
and 3 in Figure 1.
Second, it is characteristic that ‘organization’ predominantly means
‘informal organization’, that is, networks, culture, communities of practice
and the like, rather than formal governance mechanisms. The allocation of
authority and decision rights, the provision of incentives, and the creation
of organizational structure may be invoked—but they are seldom if ever
integrated into the analysis. A good example of this tendency is recent
work on knowledge sharing and innovation that takes Granovetter (1973)
as the main theoretical foundation. For example, Tsai (2001) argues that if
organizational units occupy a more central network position, they perform
better in terms of innovation. Social networks facilitate new knowledge
creation within organizations. Hansen (2002) develops a concept of
‘knowledge networks’ to explain why some business units are able to take
advantage of knowledge that resides in other parts of the organization,
while other units may not be. And so on. In almost all of this kind of work,
there is a neglect of formal organization.3 For example, the issue of incentive
compatibility in situations where employers wish employee to expend
effort on searching for and sharing knowledge, and how various kinds of
rewards may (or may not) prompt the desired behaviours have been sur-
prisingly neglected.
Organizational costs Foss and Mahnke (2003) note that the KM literature in par-
ticular, and arguably also the knowledge movement at large, are strangely
innocent of notions of cost (save, of course, for mention of costs of setting up
IT systems). In particular, organizational costs, they note, are almost univers-
ally ignored. Because of these neglects the question of whether knowledge
sharing is always beneficial is seldom raised. Thus, maximum knowledge
sharing is implicitly assumed to be desirable, although, of course, optimum
knowledge sharing is never equal to maximum knowledge sharing.
Organizational alternatives Although the issue of organizational alternatives
for knowledge processes (e.g. knowledge sharing) gets mention in the
knowledge movement, alternatives are seldom confronted in terms of an
economizing logic. The reason lies in the absence in the literature of an
explicit cost calculus related to knowledge processes and the organization
thereof. In the absence of any such (transaction) costs, decision-makers
would immediately pick those knowledge-related activities that maximize
value creation (Coase, 1960; Foss and Foss, 2005). Moreover, how these activ-
ities were organized would not matter for value creation (Coase, 1937).
However, in the presence of costs of, say, sharing knowledge the issue
of organizational alternatives becomes pressing. For example, a relevant
alternative to knowledge sharing may sometimes be more delegation of
decision rights: if the problem is to make better use of existing knowledge,
it can be better to allow the employees who hold this knowledge to make
better use of it than to spread it to the rest of the organization. What is best

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depends on the net benefits associated with each alternative. However,
such comparative assessments are virtually never performed.
The neglect of organizational costs is accompanied by a neglect of not
only organizational alternatives, but also of formal organization. If only
informal organization is considered, there is a tendency to become less nor-
mative. A concern with formal organization (as in the organization design
literature; e.g. Mintzberg, 1979) is usually accompanied by an attempt to
devise efficient organization; such a normative ambition appears to be
much less prevalent when the concern is with informal organization.4
The attempt to devise efficient organization involves a consideration of
organizational alternatives that are evaluated relative to some yardstick,
such as net benefits. Such a normative enterprise is a key component of
the KGA.

What is the Knowledge Governance Approach Trying to Accomplish?

Problems and Heuristics
Knowledge Governance Problems
The KGA identifies, grapples with, and solves problems that lie in the
intersection of organization and knowledge processes, problems that for
various reasons are hard to approach and solve within other knowledge-
based approaches or where these approaches give a different solution than
the KGA. In the following, examples of such problems are provided and
discussed.
Motivation and knowledge processes The KGA stresses micro-foundations,
implying that a starting point is taken in behavioural assumptions. In
contrast, explicit behavioural assumptions are seldom made in knowledge-
based contributions (but see Kogut and Zander, 1996). The choice of behav-
ioural foundations is partly determined by the kind of questions to which
answers are sought.
For example, Osterloh and Frey (2000) examine how knowledge transfer is
influenced by organizational design. This research question is embedded in
a broader discussion of how firms increasingly introduce market elements to
exploit the advantages of price mechanisms, by making exchanges between
departments or actors more explicit and enabling them to reward according
to the contribution to a firm’s profit. In order to theorize the mechanisms
lying between organizational variables and organizational-level knowledge
sharing, the authors begin by identifying a number of exchange hazards that
beset internal knowledge transactions. They argue that the transfer of tacit
knowledge cannot be accomplished by contracting, and that employees
cannot be sanctioned for holding back tacit knowledge. Therefore, the man-
agement of individual motivation becomes central. Firms have access to
mechanisms (that markets do not) to manage intrinsic motivation, such as
participation which signifies agreement on common goals and raises em-
ployees’ self-determination, thereby strengthening intrinsic motivation
and personal relationships, which allows for establishing psychological

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contracts based on emotional loyalties, which in turn raise the intrinsic
motivation to cooperate. In contrast, the heavy-handed use of market-like
incentives may destroy intrinsic motivation (i.e. the ‘crowding effect’). To
develop the argument the authors rely on psychological theories of indi-
vidual motivation.
Like Osterloh and Frey, Foss (2003) argues that infusing hierarchies
with market control in order to increase knowledge sharing and creation
is inherently difficult. The argument in this article is that there is a funda-
mental incentive problem of establishing credible managerial commitments
to not intervene in delegated decision-making (and heavy delegation is
an integral part of ‘internal hybrids’). The argument is illustrated with the
case of the organizational transformations that took place in the 1990s in
the world-leading hearing aids producer, Oticon. Frequent managerial
meddling with decision rights that, in accordance with the official Oticon
culture, had been delegated to employees led to a severe loss of motivation,
and arguably caused the change to a more structured organization from
the earlier extremely decentralized form. Thus, in order to understand the
influence of organizational form on knowledge processes, this article, like
Osterloh and Frey (2000) focuses on the level of individual employees and
their motivation.
These two articles provide insights into the motivational aspects of con-
scious management efforts to influence knowledge processes by means of
the deployment of governance mechanisms. However, one article is purely
theoretical (Osterloh and Frey) while the other single-case-based (Foss).
More systematic evidence needs to be assembled on these motivational
dimensions of knowledge governance. In addition theoretical enquiry
is needed into issues such as which kinds of incentives (and which in-
centive intensities) work best for which kind of knowledge processes.
Conceivably, one kind of incentive may work for knowledge sharing but not
for knowledge production. Or, only the strength of the incentives provided
should differ. Or, the incentives may be exactly the same. Or, they may
only work if combined with other kinds of incentives. In sum,

KGA Research Question 1

What is the impact of different kinds of (systems and strength of) incentives
on knowledge sharing, integration and creation, taking into account the
complex dynamics of motivation (e.g. the crowding effect)?
Deploying governance mechanisms to influence knowledge processes The issue
of what governance mechanisms are chosen to steer knowledge sharing,
integration and creation relates to organizational choice in a broad sense,
that is, it includes choices between the two levels of analysis of govern-
ance structures5 and organizational forms, that is, the specific combination
of elements of governance mechanisms inside organizational forms.
Consider the following examples of analyses that relate to these two levels
of analysis.

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Nickerson and Zenger (2004) seek to explain how alternative organizational
forms influence the efficient production of valuable knowledge. The unit
of analysis for knowledge generation is a specific problem, whose value
is determined by the values in the array of possible solutions and the cost
of discovering a particularly valuable problem. The solution to complex
problems is assumed to represent unique combinations or syntheses of
existing knowledge. Problems differ according to their decomposability.
Decomposable problems involve limited interaction, whereas non-
decomposable problems involve extensive interaction. This has important
implications for the type of searching for a solution. Directional search
refers to classic trial and error search. It is efficient only for decomposable
activities. Heuristic search refers to a group or team cognitively evaluating
probable consequences of design choices.
Non-decomposable problems require individuals to share their special-
ized knowledge. The ability or motivation to share knowledge is impeded
by two conditions: humans are cognitively constrained in the speed with
which they learn and are prone to self-interest. The wide distribution of
knowledge in conjunction with self-interest leads to two knowledge-
related exchange hazards: knowledge appropriation and strategic know-
ledge accumulation. Consequently, efficiency considerations dictate the
selection of an optimal governance mechanism and the provision of
incentives. Three distinct governance structures and their suitability for
problems with differing characteristics are examined: markets, authority-
based hierarchies and consensus-based hierarchies. Briefly, markets are
ideally suited when problems are decomposable and directional search is
desired; consensus-based hierarchy creates high organizational costs and
should only be adopted when the benefits for consensus are high, which
is for problems that are highly complex and non-decomposable; finally,
authority-based hierarchy is superior to markets in supporting heuristic
search, but inferior in supporting directional search. The authors propose
that authority based-hierarchies are best suitable for a range of problems
that are moderately complex.
Osterloh and Frey (2000) and Foss (2003) examine the impact of organ-
ization form on knowledge processes, making a sharp distinction between
firms and markets. The implicit argument is that ‘discrete structural alter-
natives’ such as firms and markets can be sharply distinguished because of
strong complementarities between the constituent organizational elements
(Milgrom and Roberts, 1990; Williamson, 1996). However, an open issue
concerns how strong such complementarities are. A prevalent claim is that
they tend to become less binding in the knowledge economy, as traditional
organizational forms have difficulties efficiently organizing knowledge-
transactions, giving rise to networks that mix firm and markets and cut
across the boundaries of firms (Liebeskind et al., 1996).
Grandori (1997, 2001) analyses the various kinds of governance
mechanisms that govern the transfer, sharing and integration of knowledge

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between and within firms. Firms have enriched their knowledge manage-
ment systems with explicit mechanisms to provide incentives for know-
ledge integration. Grandori (2001) argues that not only hierarchical and
(what she calls) ‘communitarian’ mechanisms are usually applied, but also
price-based (market-like) contracts and decentralized, but not identity-
based mechanisms. She concludes that the portfolio of mechanisms that
are effectively employable between firms to link nodes of specialized know-
ledge can hardly be distinguished from those mechanisms employable
within firms. An implication of her discussion is a denial of the strong em-
phasis on organizational elements that can be found in large parts of
organizational theory.
Grandori certainly has a point in suggesting that organizational theorists
may too strongly have emphasized the theme of complementarity between
‘governance mechanisms’, and that too much emphasis (therefore) has been
on ‘discrete structural forms’ of organization. She may also be right that
the increasing importance of the sourcing, coordination and deployment
of knowledge inputs in production makes complementarities between ele-
ments of governance mechanisms less strong. However, Grandori may also
be wrong. Clearly, what is needed here is (again) more systematic empirical
knowledge. However, more theoretical inquiry is similarly needed into how
different combinations governance mechanisms may impact knowledge
processes. Very little of this kind of design-oriented research exists (e.g.
Siggelkow and Rivkin, 2005).6

KGA Research Question 2

What combinations of governance mechanisms are best suited for promoting
knowledge sharing, integration, and creation within and between firms?7
Identifying knowledge-based hazards? Osterloh and Frey (2000), Grandori (2001)
and Foss (2003) all more or less explicitly argue that knowledge processes
have a number of salient features that set them apart from many ‘ordinary’
business processes (e.g. coordinating logistics, running an assembly line,
making a contract with a supplier, etc.) and that the increasing importance
of knowledge processes has an impact on which kinds of governance
mechanisms can be deployed how and in which combinations. However, a
deep and systematic analysis of what sets knowledge processes apart from
ordinary business processes in terms of giving rise to organizational prob-
lems or hazards is largely missing from the literature.
This is highly problematic, as arguments concerning the deployment
of administrative machinery to influence knowledge processes must ulti-
mately be based on analysis of which kind of knowledge-related problems
such deployment is supposed to solve. Moreover, existing claims may be
contested. For example, Osterloh and Frey’s arguments that the transfer of
tacit knowledge cannot (at all?) be accomplished by contracting, and that
employees cannot (at all?) be sanctioned for holding back tacit knowledge
are questionable; for example, agreements can be made that a senior

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 Organization 14(1)
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employee accepts a new employee as an apprentice and the outcome of
the arrangement can to a certain extent be monitored. In sum, what is
needed is a more thorough understanding of the organizational hazards
that knowledge processes may give to and how these may be remedied
by means of governance mechanisms (see also Buckley and Carter, 1996;
Heimannn and Nickerson, 2002).

KGA Research Question 3

What are the peculiar organizational and exchange hazards of knowledge
processes, and how does the deployment of governance mechanisms remedy
such hazards?
While the above research questions are highly abstract (and, of course,
do not exhaust the space of possible overall KGA research questions), they
are: (1) fundamental; (2) unique to the KGA and (3) necessary to address
in order to undertake more applied research. For example, hypothesis
development relating to how multinational corporations leverage human
resource management systems to promote knowledge sharing (Minbaeva
et al., 2003), research into how governance mechanisms are deployed
to knowledge-based strategic alliances (Heimeriks and Duyster, 2006;
Mowery et al., 1996; Oxley, 1997) or the understanding of the governance
of human capital organizations (Child and McGrath, 2001; Teece, 2003), the
organizational antecedents to absorptive capacity (Janssen et al., 2006),
the knowledge-based underpinnings of competitive advantage, the link
between control of knowledge assets and the appropriation of surplus from
relations (Coff, 1999; Coff and Blyler, 2003) and the provision of incentives
to knowledge workers (Osterloh and Frey, 2000), are furthered to the extent
that they are framed in ways that are akin to the above research questions
and build on the answers that can be given to these questions.

Explanation in the Knowledge Governance Approach

In terms of Figure 1, the KGA identifies as its overall explanandum the
relation between governance mechanisms and knowledge outcomes,
recognizing that correlational analysis of the relation between these
macro-entities and outcomes (i.e. Arrow 4 in Figure 1) is at best a starting
point and that ultimately the relations need to be accounted for in terms
of mechanisms that relate to Arrows 1, 2 and 3.
Microfoundations KGA explanation starts with the individual agent (even though
it may be permissible to introduce more collective concepts, such as organ-
ization structure, in the analysis as shorthand). This implies modelling
(i.e. making specific assumptions about) individual agents’ preferences,
knowledge, incentives, etc. This emphasis on individualistic foundations as
an attempt to meet the lacunae left in the knowledge movement by the over-
riding emphasis on collective constructs. As Argote and Ingram (2000: 156)
noted, to the extent that there has been progress in studying knowledge as
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the basis of competitive advantage, ‘… it has been at the level of identify-
ing consistencies in organizations’ knowledge development paths and
almost never at the level of human interactions that are the primary
source of knowledge and knowledge transfer’. The knowledge governance
approach attempts to address this ‘primary source’ by taking an explicitly
individualistic approach. For example, the fundamental idea of Osterloh
and Frey (2000) is understandable only if the analysis explicitly begins
from individual motivation. More generally, the KGA asserts that many
insights (including those that will emerge from addressing the research
questions outlined above) cannot be reached in lieu of a starting point in
individuals.
However, the question is, which micro-foundations? The general guide-
line is that this depends on the questions one tries to solve. Thus, econom-
ists have found that they have had to increasingly change the way they
model individual cognition and motivation towards greater realism as
they have moved from treating only market and macro-phenomena to also
address contracts, organizations, networks, trust, and so. Moreover, a gen-
eral rule is that the lower the level of analysis, the more fine-grained the
description of the individual agent (Machlup, 1967). Because the KGA is
intimately concerned with how the deployment of specific governance
mechanisms impacts knowledge processes (i.e. a low level of analysis),
rather specific assumptions need to be made about individual agents, and
these assumptions must ‘allow for’ the phenomena to which an explanation
is sought. Thus, assumptions that agents are always highly informed and
docile will not assist the KGA.
While the KGA is sympathetic to the behavioural assumptions of trans-
action cost economics—that is, bounded rationality and opportunism
(Williamson, 1996)—as these allow for the kind of organizational and
exchange hazards that the KGA is concerned with, these behavioural as-
sumptions may still be too coarse. Thus, ‘bounded rationality’ means many
things and ‘opportunism’ may manifest itself in multiple ways. Moreover,
bounded rationality and opportunism are not given, but can be influenced
by governance mechanisms. Relatedly, a more sophisticated view of mo-
tivation (e.g. as in Osterloh and Frey, 2000) than is conventional in the
economics of organization must be included in the KGA. Rather than merely
representing the personal aesthetics of the present author, this reflects that
a more nuanced view of motivation, one that is informed by advances in
social psychology and organizational behaviour, seems necessary to capture
the full complexity of the mechanisms that link governance mechanisms
and knowledge processes (Cabrera et al., 2006; Grandori, 1997, 2001;
Lindenberg, 2003; Osterloh and Frey, 2000).
Unit(s) of analysis It has been argued that the absence of a clear unit of analysis is a
source of confusion in the knowledge movement at large (Williamson 1999).
Is it routines (Nelson and Winter, 1982), or dynamic capabilities (Teece et al.,
1997), or practices (Spender, 2005), or knowledge assets (Winter, 1987)?
However, disciplines, fields, or approaches are not necessarily characterized

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 Organization 14(1)
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by unique units of analysis. Thus, the existing diversity in the knowledge
movement may simply reflect that different research problems are involved.
Moreover, the emphasis on micro-foundations in the KGA does not dictate
a specific unit of analysis, and is consistent with taking, for example, the
‘problem’ (Nickerson and Zenger, 2004) or the ‘transaction’ (Williamson,
1996) or a ‘knowledge unit’ (Simonin, 1999; Contractor and Ra, 2002) as the
unit of analysis.8 In general, what is the preferred unit of analysis should
depend on the relevant research problems. The unit may differ depending
on whether the focus is knowledge sharing or knowledge creation.
That being said, some units of analysis seem to be more generally
applicable than others. Thus, Nickerson and Zenger (2004) construct a
theory about the organization of knowledge creation, based on taking the
problem as the unit of analysis. However, this seems primarily designed
for understanding the governance of knowledge creation (i.e. solving prob-
lems by combining knowledge); it seems less well-suited for understanding
knowledge sharing or integration.9 The most generally applicable unit of
analysis for the kind of problems that the KGA seeks to solve is the know-
ledge transaction, that is, the transfer of an identifiable ‘piece’ of knowledge
from one actor to another one. Knowledge transactions are involved in
knowledge sharing, integration, and creation. Note that taking the know-
ledge transaction as unit of analysis has the added benefit of linking up
with organizational economics and an established framework for linking
transactions to alternative kinds of organizing.
Dimensionalizing knowledge transactions However, the way of dimensionalizing
transactions that has become dominant in organizational economics,
namely the transaction cost economics triad of frequency/uncertainty/asset
specificity, is at best incomplete for the purposes of treating knowledge
transactions (see also Grandori, 2001; Heimannn and Nickerson, 2002;
Nickerson and Zenger, 2004). It is not clear how dimensionalizing a know-
ledge transaction in these terms assist the understanding of, for example,
knowledge sharing where transactional problems may be caused more by
the degree of codification of the relevant knowledge than its ‘uncertainty’
(whatever that might mean in the specific context). The knowledge-
based literature is unfortunately not entirely forthcoming with respect to
dimensionalizing knowledge.10
An important exception is the Winter (1987) taxonomy, which has been the
basis for much subsequent empirical work (e.g. Kogut and Zander, 1993;
Simonin, 1999). Winter introduces the dimensions of tacitness versus
explicitness, system-quality versus stand-alone, teachability versus non-
teachability, and complexity versus non-complexity. Although these dimen-
sions have usually been applied to more aggregate knowledge constructs
(such as routines and capabilities) in the empirical literature, they can also
be used to characterize knowledge transactions. Accordingly knowledge
transactions can be dimensionalized in terms of the characteristics of the
underlying knowledge. Clearly, there is no need to stop the process of dimen-
sionalizing with the Winter taxonomy; other dimensions may be relevant.

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For example, scholars working from a transaction cost economics perspec-
tive have suggested adding ‘appropriability’ as a relevant dimension (e.g.
Oxley, 1997)11 and Contractor and Ra (2002) suggest adding how ‘novel’ the
knowledge is (knowledge with a higher degree of novelty is more costly to
contract, absorb, assimilate, integrate, etc.). In the context of the KGA, the
import of a dimensionalization of the unit of analysis is that the costs of
sharing, integrating, and creating knowledge vary systematically with the
relevant dimensions, and that the deployment of governance mechanisms
to curb such costs should take this into account.
Organizational hazards Knowledge transactions give rise to organizational hazards
and costs depending on how they score in terms of the above dimensions.
Thus, in the context of sharing knowledge, knowledge transactions that
are characterized by (explicitness, stand-alone, high teachability, non-
complexity) are likely to be significantly less costly to administer than
knowledge transactions with the opposite characteristics. Transactions
(in the context of knowledge sharing) that involve knowledge that is new,
tacit, has significant system-quality, is hard to teach, etc. are associated with
cost of transmitting the knowledge from sender to receiver, (measurement)
costs of ascertaining the extent to which knowledge has been shared,
(monitoring) costs of inspecting input performance, and other well known
organizational costs.
Knowledge governance As a positive approach the KGA shares a fundamental
aim with the economics of organization: to examine how knowledge
transactions—which differ in their characteristics—and governance
mechanisms—which differs with respect to how it handles transactional
problems—are matched, using economic efficiency as the explanatory
principle and given behavioural assumptions (see Buckley and Carter,
1996; Grandori, 2001; Heimannn and Nickerson, 2002; Nickerson and
Zenger, 2004; Williamson, 1996). As a practical and normative enterprise,
knowledge governance means deploying governance mechanismses that
mitigate costs of sharing, integrating and creating knowledge owing to the
above characteristics of knowledge (Heimann and Nickerson 2002: 98).
Knowledge governance therefore means deploying governance mechanisms
so as to maximize the net benefits from processes of transferring, sharing and
creating knowledge. This is similar to the transaction cost minimizing logic
of transaction cost economics.
Consider some examples of such ‘efficient alignment’. Knowledge sharing
usually involves at least two activities, minding one’s ordinary job and
sharing knowledge with somebody else. When the relevant knowledge is
tacit, it is usually costly to write it into a formal agreement (Osterloh and
Frey, 2000). Providing high-powered incentives to the presumed knowledge
sharer leads to a ‘multi-tasking problem’ (Holmström and Milgrom, 1991);
the incentive is to concentrate effort on the measurable task and not on
knowledge sharing which is costly to measure. Given tacitness, job-design
and rewards are clearly related with respect to their impact on knowledge

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sharing. A related problem may arise in the case where firms design pro-
duction and development teams as partly overlapping in order to improve
lead-time (Clark and Fujimoto, 1991). In this situation, it can be dangerous to
use performance-based rewards because of the externalities between the
activities of the two teams. Given the system-quality of knowledge in this
case, task allocation and the definition of organizational units interact with
reward systems in influencing the generation of knowledge. A third example
concerns the use of delegation in the context of the sharing of knowledge.
Given that tacitness increases the costs of making explicit agreements,
delegation of the right to initiate, carry out, etc. knowledge sharing with
colleagues seems to be an efficient alternative to instructing employees to
share specific knowledge. In contrast, when knowledge is explicit, such
delegation appears to be less necessary.
The crowning achievement of the KGA will be a discriminating align-
ment framework that can organize examples such as the above, bring out
the unifying logic, and allow for predictions. Some inspired beginnings
in this respect are Grandori (2001), Heimannn and Nickerson (2002) and
Contractor and Ra (2002). At the present stage of development, what is argu-
ably most needed, however, is empirical work that can assist in identifying
knowledge-based hazards, ascertain how organizations deal with such
hazards by deploying governance mechanisms, find out how these mech-
anisms are characteristically combined, and examine the performance
implications of knowledge. Empirical work that grapples with these kind of
issues has emerged within the last five years or so (e.g. Foss, 2003; Heimann
and Nickerson, 2004; Hoetker and Mellewigt, 2006; Macher, 2006; Mayer and
Argyres, 2004). The body of work is not large, but it is growing and may
be taken as evidence of the fruitfulness of the KGA.

Conclusions: Defining the Knowledge Governance Approach

Pondering the issue of what ‘knowledge approaches can contribute to
organizational theory’, Anna Grandori (in Grandori and Kogut, 2002: 225)
observed that what can be contributed is ‘… a new “contingency” factor
for understanding organizational arrangements … Knowledge complexity,
differentiation, and specialization, complementarity and interdependence
are emerging as important contingencies affecting effective organization and
governance solutions’. Grandori is indeed correct that an increasing number
of papers in organizational theory, organizational economics, international
business and strategic management incorporate new knowledge-based
‘contingency factors’. However, the contention of this article is that one can
go further and posit the existence of an emerging, distinctive approach—the
‘knowledge governance approach’ —that is taken up with theoretically
grounding and empirically exploring the interplay between knowledge-
based contingency factors and organization.
Accordingly, the purpose of the article has been to provide an identification
of the KGA in terms of how it has arisen as a reaction to shortcomings in the

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knowledge movement at large, the problems it seeks to solve and its approach
to solving these problems. These three themes all centre on the issue
of micro-foundations: the KGA is unique in accounting for the micro-level
mechanisms that link governance mechanisms and knowledge processes. It
is fundamentally because of this micro-emphasis that the KGA can uphold
the explanation (beyond correlation) of how governance mechanisms can
influence knowledge processes as a key research question. Similarly, it
is this emphasis that lends credence to the design ambitions of the KGA:
theories that explain and detail the mechanisms that mediate between
instruments and outcomes are inherently more useful than theories that
simply postulate a correlation (Coleman, 1990).
The emphasis on knowledge in a number of fields in business admin-
istration during the last two decades has been a major step forward. How-
ever, much of the relevant literature has been practice-driven and oriented
towards prescriptions, and has had little or unclear disciplinary foundations.
A hindrance for true application has been a certain explanatory naivety in
much of this literature (e.g. the emphasis on ill-understood ‘capabilities’).
The KGA can be seen as an attempt to simultaneously meet the insistence
on practical applicability of, for example, the KM field and the insistence
of relative rigour that characterizes fields such as organizational design
theory or organizational economics. In that respect, it marks a return to the
ideals that animated the organizational design literature of the 1960s and
1980s, which certainly also touched on issues that are related to the KGA
[e.g. the concern with how organizational structure impacts information
processes, the notion of ‘adhocracies’ in Mintzberg (1979) which acknow-
ledges organizations where human capital inputs are particularly important,
etc.]. In order to successfully meet both ambitions, much more work is
needed within the KGA. This article has sketched the kind of work that
should be done to further the KGA.

Notes
I am grateful to participants at the 2005 EGOS Conference for comments on the
talk that formed the basis of this article, to Andreas Scherer for urging me to put
my thoughts in a written format, to Peter Abell, Teppo Felin and J.-C. Spender for
very stimulating discussions on various occasions of fundamental issues that are
treated in this article, and to four anonymous reviewers for truly excellent feedback.
Thanks to Yvonne Borkelmann for research assistance.

1 The term ‘knowledge governance’ seems to have been first used by Grandori
(1997).
2 The organization/knowledge-and-information link is certainly not a recent one
either, as many writers have argued that organization is responsive to know-
ledge and information and that in turn organization may shape knowledge
and information. Thus, on a fundamental level the information-processing
emphasis in organization theory of the 1960s and 1970s illustrates the first
causality, and earlier, von Hayek’s (1945) famous argument concerning the need

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for decentralization when relevant knowledge is ‘knowledge of time and cir-
cumstance’ makes a similar point on an even more abstract level. Less abstractly,
the innovation management literature has long stressed that such organizational
issues as role definition, team composition, the distribution of authority, and
communication efforts should be very much responsive to the nature of the
development effort (e.g. Clark and Fujimoto, 1991).
3 An exception is Tsai (2002) who indicates that formal hierarchical structure,
in the form of centralization, has a significant negative effect on knowledge
sharing. In contrast, informal lateral relations, in the form of social interaction,
have a significant positive effect on knowledge sharing.
4 This is hardly surprising, as many of the components of informal organization,
such as culture, are semi-permanent traits of an organization that may be harder
to change than organizational design variables such as the components of organ-
izational structure, reward systems, etc. In the language of optimal control
theory, informal organization variables are more like ‘state variables’ whereas
formal organization variables are more like ‘control variables’.
5 In the sense of Williamson (1996), that is, the choice between hierarchies,
hybrids, and markets.
6 Some initial empirical investigations are Laursen and Foss (2003) who em-
pirically examine the impact of new HRM systems on innovation, Minbaeva et al.
(2003) who examine how HRM in the subsidiaries of multinational firms impact
knowledge transfer within such firms and Foss (2003) who use a case study to
argue that the combination of a strong authority mechanism (implying frequent
managerial intervention) with a high degree of delegation and project-based
organization is an inefficient one for the purpose of knowledge creation.
7 A derived research issue—too complicated and encompassing to treat in detail
here—concerns the interaction of formal and informal elements of organization
with respect to knowledge processes. For example, may formal reward systems
for knowledge sharing be destructive of psychological contracts that encourage
knowledge sharing? Some of this is touched upon in Osterloh and Frey
(2000).
8 Although notions of ‘firm-level’ knowledge, such as ‘capabilities’, do not seem
to have a clear foundation in individual action, and will be avoided in the
KGA.
9 For example, in the case of knowledge sharing, the solution may be obvious
(e.g. everybody should know X); however, the problem is inducing Jack to share
X with Jill and other employees.
10 The many studies of inter-firm imitation and intra-firm knowledge transfer
(e.g. Maritan and Brush, 2003) tend to develop dimensions of, say, capabilities
in an inductive manner and the explicit or implicit dimensionalizations differ
from study to study.
11 Appropriability is to some extent derivative of, e.g. the tacitness versus
explicitness dimension, but not fully, as it also includes the legal framework
surrounding the transaction.

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Nicolai J. Foss is Professor at Copenhagen Business School and the Norwegian School
of Economics and Business Administration. He is Director of the Center for Strategic
Management and Globalization at Copenhagen Business School. His research is
mainly concerned with firm strategy and economic organization. He is particularly
interested in the intersection between these two fields. His work has been published
in Journal of International Business Studies, Journal of Management and Governance,
Journal of Management Studies, Organization Science, Strategic Management
Journal, Strategic Organization and other journals. Address: Department of Strategy
and Management, Norwegian School of Economics and Business Administration,
Breiviksveien 40; N-5045; Bergen, Norway, and Center for Strategic Management
and Globalization, Copenhagen Business School, Porcelænshaven 24B, 2nd Floor,
2000 Frederiksberg; Denmark. [email: njf.smg@cbs.dk]

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