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Knowledge-based dynamic capabilities and innovation in networked environments

Suli Zheng, Wei Zhang, Xiaobo Wu and Jian Du

Abstract Purpose The purpose of this paper is to clarify the concept of dynamic capabilities from the knowledge-based perspective and investigate the mechanisms of dynamic capabilities on innovation performance in networked environments. Design/methodology/approach This paper designed a seven-point Likert questionnaire measuring the dynamic capabilities, innovation performance and network embeddedness and a sample of 218 Chinese manufacturing rms were surveyed. Structural equation modeling method was used to statistically test the theoretical hypothesis. Findings Signicant relationships were found between dynamic capabilities and innovation performance and knowledge combination capability played a mediating role in this relationship. For the links between network embeddedness and dynamic capabilities, knowledge acquisition capability was affected mainly by relational embeddedness and the diversity of network and joint problem solving contributed much to knowledge combination capability. Suli Zheng is Assistant Professor at the School of Economics and Management, China Jiliang University, Hangzhou, China. Wei Zhang is a Senior Manager at Xizi United Holding Corporation Hangzhou, China. Xiaobo Wu is Professor and Vice Dean and Jian Du is Associate Professor, both at the School of Management, Zhejiang University, Hangzhou, China. Research limitations/implications This paper deepened the understanding on dynamic capabilities and the mechanism between network embeddedness, knowledge-based dynamic capabilities and innovation performance. In the future, the construct of knowledge-based dynamic capabilities calls for more examination and verication. Originality/value Drawing on the literature of dynamic capabilities framework, knowledge-based view and the network model, this study extends the literature of dynamic capabilities and its link with innovation performance in networked environments. Using survey data and structural equation modeling, this study offers rich evidence on the contribution of dynamic capabilities on innovation performance and the antecedents of dynamic capabilities. Keywords Dynamic capabilities, Knowledge-based view, Innovation, Network embeddedness, Information networks, China Paper type Research paper

1. Introduction
Dynamic capability is one of the most important constructs in strategic management in recent decades (Teece et al., 1997). The dynamic capability framework is based on, but different from, the resource-based view in that it contributes to this eld by focusing on how rms renew their resource-based competitive advantage dynamically. The literature on this topic has grown rapidly since dynamic capability was rst introduced, but substantial gaps remain. On the one hand, many theoretical works emerged and deepened the understanding of this concept (Eisenhardt and Martin, 2000; Winter, 2003; Teece, 2007). On the other hand, little empirical research on dynamic capabilities has been taken out even though 14 years have passed. This paper proposes that such absence of empirical evidence is the result of two reasons. First, the concept of dynamic capability is still vague and inconsistent. Especially, what is the object that dynamic capabilities act on, resources, capabilities or knowledge? Second, the construct of dynamic capabilities is in need of operationalization. As the literature has not provided a measurable construct, testable propositions can hardly be put forward and tested.

The authors gratefully acknowledge support for this research from the National Natural Science Foundation of China (project nos 71002103, 70902059 and 70910107021) and Soft Science Project Zhejiang Science Technology Department (project no. 2010C25013). All opinions expressed as well as errors and omissions are entirely the authors. Received June 2011 Revised July 2011 Accepted July 2011

DOI 10.1108/13673271111179352

VOL. 15 NO. 6 2011, pp. 1035-1051, Q Emerald Group Publishing Limited, ISSN 1367-3270


PAGE 1035

The central research question of this paper is: How do knowledge-based dynamic capabilities contribute to rms innovation performance? The authors theorized and examined this central question in three steps. As a foundational issue, the rst step was to clarify the meaning and construct of dynamic capabilities from knowledge-based view. In the second step, the authors modeled and investigated the relationship of knowledge-based dynamic capabilities and innovation performance. The proposition of this relationship is not as straight and evident as people used to suppose and signicant mediating effects exist. Finally, this paper examined whether network embeddedness inuenced knowledge-based dynamic capability, and thus further worked on innovation. Taken together, these three sub-questions helped us to understand the contributions of dynamic capabilities to innovation performance, as well as to understand the antecedents of dynamic capabilities that may enhance or weaken it in networked environments. This paper is built on the work of dynamic capabilities, knowledge-based view and the networked innovation model. It contributes to the literature in the following three ways. First, this paper extends previous research on dynamic capabilities by conceptualizing dynamic capabilities as knowledge-based and consisting of acquiring, generating and combing knowledge resources. It further theorizes that there is a systematic structure between knowledge acquisition, generation, and combination and innovation performance. Second, the empirical work, based on 218 survey samples, validates the vital role of dynamic capabilities on rm innovation performance. Third, this paper suggests that network embeddedness is an important antecedent of dynamic capabilities in more and more networked environments; managers need to pay more attention to their alliance network and make adjustment according to their capability and performance. The following paper is organized into four parts. First, the authors developed the knowledge-based dynamic capabilities construct drawing on the knowledge-based view and dynamic capabilities perspectives. A theoretical model linking dynamic capabilities with innovation and network enbeddedness was put forward in the second section. In the third section, statistical analysis based on a survey of 218 Chinese manufacturing rms was taken out. The method of analysis is structural equation modeling with AMOS 7.0. Discussions and implications were given in the last section.

2. Literature review and construct development

A. From dynamic capabilities to knowledge-based dynamic capabilities In a fast-changing world, rms must explore, adapt to and exploit changes in their business environments. Teece et al. (1997) introduced the dynamic capabilities framework to explore rm behavior in turbulent environment and innovation-based competition. In their pioneering work, dynamic capabilities are dened as the ability to integrate, build, and recongure internal and external competences to address rapidly changing environments (Teece et al., 1997). This framework is illuminating in that it addresses the problem of how to gain competitive advantage in this fast-changing world. However, the concept received several critiques afterwards. First, the resource base of dynamic capabilities, or in other words the object of dynamic capabilities, was not clear. As Teece has put, the resource base to be changed by dynamic capabilities includes tangible, intangible, and human assets as well as capabilities the organization owns, controls, or has access to (Teece et al., 1997; Helfat et al., 2007). It is obvious that capability was also considered as a kind of resource in the general sense. This implies that dynamic capabilities can modify or extend dynamic capabilities themselves and thus will form an innite loop. Second, it is claimed that the framework was conceptually vague and tautological, short of mechanisms by which resources and capabilities actually contribute to competitive advantage. Put it in another way, the performance consequence of dynamic capabilities was uncertain. Since then, the emphasis of strategic management shifted to the ability to change and quickly develop new organizational capabilities, and subsequent work rened and expanded the original denition of dynamic capabilities. Eisenhardt and Martin (2000)


proposed that dynamic capabilities are a set of specic and identiable processes integrate, re-congurate and gain/release of resource. In this conception, dynamic capabilities take the form of organizational processes and have signicant commonalities across rms. In their opinion, dynamic capabilities are processes that can operate in both dynamic environments and environment that are not experiencing rapid change. Zollo and Winter (2002) explored dynamic capabilities with evolutionary ideas, dening dynamic capability as a learned and stable pattern of collective activity to modify their operational processes and improve their effectiveness. In their framework, learning mechanisms such as knowledge-related activities are prominent driver of the evolution of dynamic capabilities. The above-mentioned research constitutes the foundation of dynamic capability research, lots of literature has sprung up during the recent years. However, this concept has been used to explain a variety of organizational questions, but yielded little concrete or solid conclusions. One reason is that although this denition can be explained theoretically, the operationalization and empirical validation of this construct is still a great challenge. The research on dynamic capabilities to date has been largely theoretical or case-based. To investigate how well or poorly dynamic capabilities perform, a clear conceptualization of dynamic capabilities was required. Then further research can be taken out to translate such a conceptualization into empirical metrics. To address these problems, Helfat et al. (2007) suggested that researchers can measure dynamic capabilities with performance yardsticks, such as quality per unit cost and survival, growth, value creation and competitive advantage. The problem with performance yardstick is that although the dynamic capability framework deems resource as a source of competitive advantage, the link between capabilities and competitive advantage always needs to be tested rather than a perfect equal. In Teeces recent works he tried to rene dynamic capabilities as the capabilities that enable business enterprises to create, deploy, and protect the intangible assets that support superior and long business performance (Teece, 2007, 2009). This denition is different from the 1997 version in that the object of dynamic capability is those intangible assets, such as knowledge, which will probably promote the research work in this eld. In fact, the framework of dynamic capabilities overlaps a lot with absorptive capacity (Cohen and Levinthal, 1990) another inuential construct in strategic management that was developed in parallel since 1990. Introduced by Cohen and Levinthal (1990), a rms absorptive capacity refers to its ability to identify, assimilate, and exploit knowledge from the environments. Substantial extensions were made, such as relative absorptive capacity (Lane and Lubatkin, 1998), potential absorptive capacity and realized absorptive capacity (Zahra and George, 2002). It should be noted that these extensions of absorptive capacity have added valuable new insights but the essence of absorptive capacity remain relatively stable. The key idea of this concept remains as a rms ability to acquire knowledge from its external environments and absorptive capacity is in essence a special kind of dynamic capability (Zahra and George, 2002; Lane et al., 2006). The above literature in these two areas converged toward the same idea-the knowledge-related dynamic capabilities, which may promote our understanding and the validation of dynamic capabilities (Easterby-Smith and Antonacopoulou, 2006; Easterby-Smith and Prieto, 2008). According to the knowledge-based view, organizations are knowledge-bearing entities, the fundamental function of the rm is to integrate and use knowledge (Grant, 1996). Although Grant mentioned the role of relational networks on accessing explicit knowledge, the scope of knowledge integration/combination is mainly restricted within the organizational boundary and external knowledge is foreign to the combination framework. This paper synthesized these different streams of work and put forward the knowledge-based dynamic capabilities framework, which was dened as the ability to acquire, generate and combine knowledge resources to sense, explore and address environment dynamics. The underlying process of knowledge-based dynamic capabilities consists of knowledge related activities of both internal knowledge and external knowledge embedded in alliances and networks.


B. The construct of knowledge-based dynamic capabilities As mentioned above, dynamic capabilities are the ability to acquire, generate and combine knowledge resources to sense, explore and address environment dynamics. In this framework, knowledge is consistent with the traditional denition and includes various kinds of knowledge, such as explicit and tacit knowledge, information and know-how, technological, management and marketing knowledge. Three sub-capabilities knowledge acquisition capabilities (KAC), knowledge generation capabilities (KGC), and knowledge combination capabilities (KCC) represent three dimensions of knowledge-based dynamic capabilities and they build upon each other to produce the integrate dynamic capabilities of a rm (illustrated in Figure 1). Although these components inuence one another to a great extent, we will rst discuss them separately for analytical clarity and explain their internal structure in detail in the hypothesis development section. Following Eisenhardt and Martin (2000), the authors argue that although dynamic capabilities have some commonalities across different rms, they are idiosyncratic in the specic ways rms pursue, develop and employ them. Hence, in spite of the fact that all rms can develop dynamic capabilities, their level and form of dynamic capabilities can be quite different and leading to distinctive organizational performance. KAC. Knowledge is the principle productive resource of the rm. Considering rm boundary, knowledge can be categorized into internal accumulated/generated knowledge and external knowledge (Cohen and Levinthal, 1990). As the technological and market environments become more and more dynamic, external knowledge come to the center of stage. Scholars apply the concept of absorptive capacity (Cohen and Levinthal, 1990) to address such issues. In fact, absorptive capacity consists of a series of processes handling external knowledge-acquire, assimilate, transform, and exploit external knowledge, being dynamic in their nature and distinct with one another. To deep our understanding, this paper separates KAC out as the rst component of knowledge-based dynamic capabilities, knowledge acquisition means the rms ability to identify and acquire useful external knowledge. In fact, the knowledge of organization exist in two different forms: explicit knowledge and tacit knowledge, the latter draws much attention due to its limited transferability (Kogut and Zander, 1992). Hence, efforts spend on knowledge acquisition activities encompass creative searching and strategic sense-making and were greatly inuenced by the managers logic pattern and behavior (Pandza and Thorpe, 2009). KGC. The second component of knowledge-based dynamic capabilities is knowledge generating capabilities in the knowledge-based dynamic capability framework. Firms exist as repositories of knowledge and one attribute that differentiates one organization from the Figure 1 Theoretical model

Knowledge based dynamic capabilities Diversity H3a (+) H4a (+) Non-redundancy H4b (-) H5a (+) H2b (+) H5b (+) Trust H5c (+) H6a (+) H6b (+) Commitment H6c (+) KCC KGC H1c (+) H2c (+) H2a (+) H1b (+) Innovation performance H1a (+) H3b (+) KAC

Structural embeddedness Relational embeddedness

Joint problem solving


others is its knowledge generating capabilities. Generation denotes a rms ability to develop and rene the activities and processes that facilitate creating/generating new knowledge. The underlying processes include internal R&D, SECI process proposed by Nonaka (1994, 2005), and knowledge creation through external venturing (Wadhwa and Kotha, 2006). The KGC are especially stressed by those catching-up economies in recent decades. As Rosenberg (1982) pointed out very early that reliance on borrowed technology (by developing countries) perpetuates a posture of dependency and passivity, catching-up rms without knowledge generating capabilities have experienced the acquisition-lag out-acquisition in many later comer economies (Rosenberg, 1982). As a result, the generation of knowledge becomes the focus of rms, especially catching up rms. KCC. The third dimension of knowledge-based dynamic capabilities is knowledge combination capability. Combination capability is the rms ability to integrate and apply internal and external knowledge. Sometimes, combination gives birth to total new knowledge. Kogut and Zander (1992) suggest that rms learn new skills by recombining their current capabilities. New knowledge, such as knowledge in the process of innovation, is produced by combining new knowledge with existing knowledge or experimenting new applications of existing knowledge. It means that, combinative capability can be applied both within and out of the rm boundary. Van Den Bosch et al. (1999) distinguished three subtypes of combinative capabilities: systems capabilities, coordination capabilities, and socialization capabilities. For the purpose of simplicity, the authors do not include this distinction here and they synthesize this progress in the construct measurement section. The interaction between three dimensions. As discussed above, the three dimensions do not work alone without each other. They tend to develop cumulatively, be path dependent, and build on each other to form integrate dynamic capabilities of the rm. Acquisition of new knowledge requires a certain amount of knowledge stocks, at the same time, it will inuence the subsequent knowledge creation process. Knowledge combination refers to the process of bringing together and mixing different kinds of old knowledge or old and new knowledge. Hence, knowledge acquisition and generation form the important antecedents of combination. This paper will discuss the internal structure of this construct in-depth in the next section. C. Network embeddedness and innovation Since put forward by Schumpeter, innovation persistently attracted the attention of both economists and managers. In turbulent environments, innovation becomes central in the eld of strategic management as its vital role in gaining and maintaining competitive advantage. How to enhance innovation capability and improve innovation performance is the focus of many scholars. In recent years, more and more researchers come to agree that knowledge is the most critical input to innovation process and the ability to exploit and explore knowledge thus becomes a critical component of competitive advantages. Much work has been done to examine those separate knowledge management processes and their effects on innovation, however, an integrate framework clarifying the internal relationship of these processes and their inuence on performance as a whole is needed. In recent years, alliances and networks have become an integral part of a rms business environments. Alliances are formal or informal arrangements of rms that enable rms to gain and exchange resources or to engage in shared goals (Jarillo, 1988; Gulati, 1998). Firms are embedded in networks of such strategic relationships which will provide informational benet through different mechanisms. The rapid proliferation of strategic networks invoked the study on various kinds of networks, some studies focused on the effects of network resources on general performance (Gulati, 1999; Hoffmann, 2007; Lavie, 2007) and innovation (Hagedoorn and Schakenraad, 1994; Kotabe and Swan, 1995), other researchers have further explained the effect of network resource on capabilities acquisition (McEvily and Zaheer, 1999; McEvily and Marcus, 2005). A fundamental question can be drawn from these researches, that is, if dynamic capabilities were higher-order capabilities that governing operational capabilities change, this effect of network


resources on rst-order capabilities and performance must occur through its inuence on dynamic capabilities rst. However, little research has investigated how alliance networks inuence the dynamic capabilities and this gap inspires the authors to investigate the relationship between network embeddedness and dynamic capabilities.

3. Hypothesis development
As Powell et al. (1996) pointed out that the rapid growth of various alliances and networks has changed the modes of innovation and the locus of innovation shifted to the networks of learning. In this context, knowledge becomes the most critical input to innovation process, hence, the ability to exploit and explore knowledge turns to be a critical component of competitive advantages (Kogut, 2000). As dened in the above section, this paper conceptualizes dynamic capabilities as a series of knowledge-based capabilities. On one hand, these activities will improve innovation performance; on the other hand, external networks may have substantial inuences on these capabilities. Figure 1 illustrates the relationship between a rms knowledge-based dynamic capabilities and innovation performance and the role of network embeddedness in the process of knowledge-based dynamic capabilities development. Through their relationships with network partners in the environments, rms acquire or combine new knowledge that will greatly facilitate their innovation activities and hence promote their innovation performance. A. The link between knowledge-based dynamic capabilities and innovation Nowadays, companies must utilize not only internal resources but also external resources to tackle the ever-changing environments. Dynamic capabilities emphasize a rms constant pursuit to acquire, generate and combine/recongure their resource bases. Of these resources, knowledge resource gets more and more attention in this knowledge economy era. Knowledge-based dynamic capabilities enable the rm to renew their knowledge base continually and thus able to address the changing environments (Ambrosini and Bowman, 2009). Hence, by governing the change rate of knowledge, dynamic capabilities become the ultimate organizational capabilities that are conductive to long-term performance. Hence, this paper puts forward the following hypotheses: H1a. H1b. H1c. KAC are positively related to innovation performance. KGC are positively related to innovation performance. KCC are positively related to innovation performance.

As the paper put earlier, there is an internal structure between knowledge acquisition, knowledge generation and knowledge combination. Though knowledge acquisition capability and knowledge generation capability are important antecedents of innovation, the authors propose that knowledge combination capability contributes much more to innovation activities and performance. Knowledge combination transform exist internal and external knowledge to novel knowledge through new ways of conguration. Knowledge acquisition capability and knowledge generation capability consist of the preconditions for knowledge combination. They provide the knowledge foundation to be combined and effective knowledge acquisition and generation enlarged the knowledge base to be combined, which will result in more rapid and effective innovations. Taken together, the link between knowledge acquisition capability, knowledge generation capability and innovation performance is indirect, the rst two processes provide the raw material to be synthesized. Knowledge combination capability contributes directly to innovation as combination provides a locale for different knowledge to interact and experiment with new ways of conguration. In addition to affecting knowledge combination capability, knowledge acquisition capability contributes to knowledge generation capability as previous research has established, hence, this causal relation is also included in our model. Hence, this model supposes that: H2a. The relationship between KAC and innovation is mediated by KGC such that KAC are positively related to KGC.


H2b. H2c.

The relationship between KAC and innovation is mediated by KCC such that KAC are positively related to KCC. The relationship between KGC and innovation is mediated by KCC such that KGC are positively related to KCC.

B. The antecedents of dynamic capabilities: network embeddedness According to the literature, alliances and networks could improve the focal rms capabilities by providing potential information and resource advantage. As a result, the characteristics and structure of networks will inuence the rms level of dynamic capabilities. In order to investigate such effect, the authors introduced network embeddedness as the antecedents of dynamic capabilities. Network embeddeded is a multi-dimensional concept that can be dened from social, technical, relational and structural perspectives. This paper focused on two dimensions-structural embeddedness and relational embeddedness. Structural embeddedness analyzes the structure of the integrate network system and pays special attention to the benets it draws from the relative position in the network. Relational embeddedness underscores the characteristics of direct ties which will promote deep and extensive knowledge exchange. Structural embeddedness. Diversity. Successful innovation requires different kinds of knowledge. Firms can augment their knowledge by accessing to and assimilating relevant knowledge and resources of their partners. As innovation process becomes more and more open and interactive (Chesbrough, 2003), innovators must have the ability to grasp various knowledge existed in their partner networks. The knowledge of their suppliers, customers, competitors and so on are all important and they are complementary with each other in their nature. When the network partners are more diverse, the focal rm will have more potential to get needed knowledge and innovative use of knowledge. The use of different knowledge sources will also facilitate the combination of knowledge and enable the focal rm to complete the innovation more successfully. Based on these literatures, this paper argues that the nodal heterogeneity in the form of partner diversity will facilitate knowledge-based dynamic capabilities: H3a. H4a. Network diversity is positively associated with the KAC of rm. Network diversity is positively associated with the KCC of rm.

Nonredundancy. Granovetter (1985) emphasized the role of weak ties and pointed out that rms are more likely to get novelty knowledge through weak ties. The philosophy is that knowledge base between acquaintances may overlap greatly, leading to a high redundancy. Conversely, weak ties may transmit knowledge from totally different elds and inspire new ideas. Burt (1992) joined this argument and pointed out that the literature should shift their focus from the strength of a tie to the overall structure of the network. The existence of structural holes will decrease the frequency of interaction between rms and their collaborating partners and hence increase the information richness of the knowledge that the focal rm could acquire. All these arguments recognize that the potential of information advantage is largely determined by nonredundancy. Nonredundancy will improve the opportunity of acquiring new knowledge. However, nonredundancy implies diversity of knowledge and large volume of new knowledge which will bring a great challenge to knowledge combination. As opinions and behaviors are more heterogeneous between sparse network collaborators, more obstacles will appear during the combination. Hence, this paper expects that: H3b. H4b. Network nonredundancy will positively inuence the KAC of rm. Network nonredundancy will negatively inuence the KCC of rm.

Relational embeddedness. Trust between organizations is the state that rms feel condent about their partners and have positive expectations about the actions of their partners (McEvily and Marcus, 2005). Alliance partners may not share their information and


knowledge until they know that this knowledge will be used in the interest of their common goals. This condence will reduce uncertainty and hence makes rms more open with their network partners. When partners have developed a certain level of trust, they are not only more likely to share and exchange information with each other, but also have more condence in the information they get from this partner (Das and Teng, 1998). Trust often triggers reciprocal behaviors in that partners are more likely to work cooperatively when trust is high and thus provide the potential of knowledge combination. Hence, two hypotheses are proposed: H5a. H6a. Trust will positively inuence the KAC of rm. Trust will positively inuence the KCC of rm.

Joint problem solving means that the network partners share the responsibility to maintain the cooperation and to tackle the problems they meet during their cooperation (Heide, 1994). These activities are important domains of cooperation and certain pattern of problems solving and mutual adaptation are developed over time. During this process, partners not only share explicit knowledge, but also understand their partners more tacit knowledge and further promote knowledge exchange and assimilation (McEvily and Marcus, 2005). Combination of knowledge requires innovative use and conguration of knowledge, during joint problem solving process the focal rm can access and make use of external knowledge, even mixed them with internal knowledge. Hence, joint problem solving is a platform for rms to experiment different kinds of knowledge integration. The effect of joint problem solving on dynamic capabilities is predicted as follows: H5b. H6b. Joint problem solving will positively inuence the KAC of rm. Joint problem solving will positively inuence the KCC of rm.

Commitment. The sustaining and success of alliances or partnerships lie greatly on the existence and intensity of commitments. Interorganizational commitment means that a partner believes that the interorganizational relationship is very important and they are willing to exert greatest efforts to maintain it (Morgan and Hunt, 1994). Commitment among partners is also a decisive factor to achieve their shared goals. This attachment binds the alliance partners more tightly and they become more and more dependent on each other as time goes on. Commitment from both rms increases the level of knowledge sharing and transferring. When partners are committed to the relationship, partners will more open to disclose their knowledge pools. Moreover, partners are more likely to work together and help each other to achieve the shared goals through knowledge combination. Hence, commitment will positively contribute to knowledge-based dynamic capabilities: H5c. H6c. Commitment will positively inuence the KAC of rm. Commitment will positively inuence the KCC of rm.

4. Methodology
A. Research setting The propositions were tested in the context of China, the largest manufacturing center in the world, producing 18.6 percent of the worlds industrial goods in 2009 (data from Financial Times). As one of the most important emerging economies, the business environment is highly dynamic in China and innovation is the key strategic aim at both the national and rm level. Under such condition, knowledge-based capabilities play a vital role in innovation and market competition. The empirical work was based on a survey taken out during July 2008 to January 2009 in Yangtze River Delta region, one of the most advanced industrial regions in China. Our population consisted of manufacturing rms of various sizes, age, who has participated in alliance with customer, supplier, or other kinds of partnerships during the recent years.


B. Research design and data collection The questionnaire was developed through extensive literature research and eldwork. The rst draft of the questionnaire was developed based on the literature, and then this version was adapted according to the opinions of three kinds of experts: the authors consulted the content validity with two professors majoring in knowledge management, and then another professor good at survey design was asked to examine the whole structure of the questionnaire. After that, the survey was sent out to a subset of the target rms which were randomly chosen and some of the instruments were modied to be better understood based on their suggestions. After these adaptations, the questionnaire was ready to be sent out. Then the survey was complemented by the persons most familiar with knowledge related activities and alliance activities in each rm (chief technical ofcer, chief marketing ofcer, vice president). Data were collected through two different ways: 1. Face-to-face investigation. As this study is an important part of national funded research project, the authors conducted a lot of eld investigations and collected the survey. 2. E-mail. A manufacturing manager database consisting of managers information from the Yangzi delta region was formed in NIIM research center of Zhejiang University, the authors sent the electronic questionnaire to the managers in this database through e-mail. Altogether, 512 questionnaires were sent out and responses from 229 rms were received, with a response rate of 44.7 percent. Of these rms 11 were excluded as they did not provide clear and integrate information. Hence, in the following parts, the hypotheses were tested with the remaining 218 rms sample. C. Operational measures Dependent variable: innovation performance. This paper used four proxies to reect the innovation performance of various rms: number of new products, share of turnover with new products, the speed of new product development and commercialization, the ratio of successful product innovation. Knowledge-based dynamic capabilities. Parallel instruments were developed to measure the three components of knowledge-based dynamic capabilities, as shown in Table I. Knowledge acquisition is a ve-item instrument measured by a scale of Lane et al. (2001), Huber (1991), and Nooteboom (2000). The instrument captures the degree to which the focal rm could acquire technological, marketing, managerial, manufacturing and other relevant knowledge from its partners. Knowledge generation capability has the same structure as knowledge acquisition capability and the instrument includes ve items asking for the degree to which the rm could generate new technological, marketing, managerial, manufacturing and other relevant knowledge endogenously. Drawing on the work of Grant (1996), Kogut and Zander (1992), and Van Den Bosch et al. (1999) for knowledge combination capability, knowledge combination capability is measured with six items as shown in Table I. Independent variables: network embeddedness. Following the work of McEvily and Zaheer (1999) and McEvily and Marcus (2005), network embeddedness is dened as a two-dimensional construct: structural embeddedness and relational embeddedness. Structural embeddedness is measured with terms of nonredundancy and diversity, and relational embeddedness is made up of trust, joint problem solving and commitment. Nonredundancy. This item is operationalized as an ego-centered network measure following the work of McEvily and Zaheer (1999). The respondents were requested to write down the ve most important external relational partners and to evaluate if there is interaction between each pair of partners. Based on the matrix of these ve partners, the redundancy score can be calculated using the following formula: Nonredundancy number of potential ties 2 number of actual ties=number of partners:


Table I Measurement instruments and validity of knowledge-based dynamic capabilities

Construct Knowledge acquisition capability Measurement items Our rm could acquire Our rm could acquire Our rm could acquire Our rm could acquire knowledge Our rm could acquire expertise Our rm Our rm Our rm Our rm Our rm technological knowledge marketing knowledge managerial knowledge manufacturing and process other knowledge and 0.773 0.929 0.817 0.906 0.875 0.828 0.808 11.218 12.800 12.233 12.310 Internal consistency reliability (a) 0.911 Standard coefcients 0.867 0.830 0.817 0.790 CR

13.362 13.014 12.289

Knowledge generation capability

could create technological knowledge could create marketing knowledge could create managerial knowledge could create knowledge could create technological knowledge

Knowledge combination capability

Our rm could combine internal and external knowledge Our rm could integrate knowledge from different segments, team and individuals Our rm could combine knowledge in different technological or market elds Our rm could combine new knowledge with original knowledge pool Our rm could adapt the internal structure and process to combine knowledge effectively Our rm could coordinate internal and external networks to combine knowledge effectively


0.891 0.864 0.798 0.879 0.851 0.841

14.425 13.683 12.493 12.309 13.359 13.115

Notes: X 120:026; x =df 1:188; df 101; CFI 0:991; TLI 0:990; RMSEA 0:035

Hence, nonredundancy is a ratio and the range for this ratio is between zero and two when the number of partners is ve. Smaller ratios represent low nonredundancy and the existence of interactions between the focal rms partners will decrease the level of nonredundancy. Diversity. The network may consist of various kinds of relationships and this paper includes only the rms relationships with those partners that they had direct experience, such as customers, suppliers, trade associations, and even competitors and authorities. This item was constructed based on the work of Baum et al. (2000) and was dened as a number computed by the following formula. h X 2 i Diversity 1 2 i the number of alliance with ith type of partner=total number of alliance = total number of alliances: The range for this number is between zero and one and increase in this number indicates an increase in diversity of alliances partners. Trust. Four measures were used to capture interorganizational trust based on the work of McEvily and Marcus (2005), including: 1. our main partner negotiates fairly with us; 2. our main partner does not mislead us; 3. our main partner keeps its words; and 4. our main partner is reliable. Joint problem solving. Drawing on the work of McEvily and Marcus (2005), joint problem solving were measured using three items:


1. our main partner work with us to overcome difculties; 2. we are jointly responsible with our main partners for getting things done; and 3. we work with our main partner to help solve each others problem. Commitment. Three items were included in this measure based on the work of Morgan and Hunt (1994): 1. we are very committed to this relationship; 2. we make our maximum effort to maintain this relationship; and 3. this relationship is something my rm intends to maintain indenitely. Control variables. Size was included as control variable in this study since rm size may have signicant inuence on rm innovation behavior and results (Stock et al., 2002; Shefer and Frenkel, 2005). Large rms may have access to more or better resources than smaller rms and benet from scale economy, while smaller rms may be more entrepreneurial and have more exibility. Firm size was measured as the average annual revenue of the latest two years.

5. Results and analysis

A. Construct validity and reliability Before estimating the model, it is important to judge the reliability and validity of the constructs. Validity is the extent to which the measure actually measures what the construct is indicating for. As the measure for innovation performance and network embeddedness are drawn from established studies, this paper focuses on the measures of the newly developed construct of knowledge-based dynamic capabilities. The reliability of the knowledge-based dynamic capabilities was examined with Cronbachs alpha, and all scales have reliabilities greater than the recommended 0.90 level (shown in Table I), suggesting a high reliability. As the questionnaire is carefully designed based on in-depth literature review and eld interview, the content validity of this construct can be justied. Conrmative factor analysis was used to evaluate the convergent validity and discriminant validity and the result was shown in Table I. The factors loaded perfectly on the items as expected and all indicators were above 0.77 and statistically signicant. This result indicates that both the convergent validity and discriminant validity of these measures are good enough to do the following analysis. B. Hypothesis testing The hypotheses were tested using the method of structural equation modeling with the software of AMOS 7.0. Structural equation modeling was an appropriate method as it allows us to estimate the complex relationship between network embeddedness, dynamic capabilities and innovation at the same time, especially the mediation effects within the three components of dynamic capabilities. Moreover, it can accommodate the measurement error of survey data. The result for the structural equation model is shown in Figure 2. The path coefcients and their signicance of each hypothesis were reported. Several different indices were also provided to determine the overall t of the estimated model. Overall, the value of x 2 (478 df) is 860.755 and the value for x 2/df is 1.801. CFI and TLI indices are 0.927 and 0.920 (all above 0.9), and the value of RMSEA is 0.076 (below 0.08), these indices show that the estimated model has a reasonable t with the data. H1. As the model predicted, the positive relationship between dynamic capabilities and innovation performance are well supported. The relationship between knowledge combination capability and innovation performance is highly positive and signicant (g 20:629, t 3:881, p 0:000), the positive link between knowledge acquisition capability and innovation performance and knowledge generation capability are supported too, although the coefcients and signicance are lower than that of knowledge combination


Figure 2 Structural equation model

X1 X2 X3 X4 X5 X6 X7 X8 X9 X10 1 Commitment 1 Joint problem solving 1 Trust

11 = 0.378 (8.606)*** 12 = 0.005 (0.048) 21 = 0.136 * (0.146) 22 = 0.318 (5.082) *** 31 = 0.147 (2.693) ** 32 = 0.161 (2.291) *




Y4 Y6

Y5 Y7 Y8 1
11 = 0.331 (2.002)* 21 = 0.251 (2.378)*



12 = 0.708 (6.787) *** 13 = 0.492 (1.888) 23 = 0.584 (10.173) ***

SIZE = 0.101 (2.477)**



42 = -0.117 (-1.824)

31 = 0.629 (3.881)***

1 Y17 Y18 Y19 Y20

41 = 0.006 (0.108)

1 Y11 Y12 Y13 Y14 Y15 Y16

Model statistics 2 df 2/df

860.755 CFI 0.927 478 TLI 0.920 1.801 RMSEA 0.076


51 = 0.683 52 = 2.677 (1.030) (3.377)***


Note: *p < 0.05; **p < 0.01; ***p < 0.001, t-value in parentheses

capability (KAC: g 20:331, t 2:202, p 0:045, KGC: g 20:251, t 0:2:378, p 0:017). H2. The second hypotheses predicted the mediation effects within the three components of knowledge-based dynamic capabilities. The mediation effects are largely supported by the data. The relationship between knowledge acquisition capability and knowledge generation capability is signicant and positive (g 20:708, t 6:787, p 0:000), the link between knowledge generation capability and knowledge combination capability is positive and signicant too (g 20:584, t 10:173, p 0:000). The relationship between knowledge acquisition capability and knowledge combination capability is positive at a 0.059 level (g 20:492, t 1:888). H3. The hypothesized relationship between structural embeddedness and knowledge acquisition capability is not supported. Neither diversity (g 0:683, t 1:030, p 0:303) nor nonredundancy (g 0:006, t 0:108, p 0:914) showed any signicant inuence on knowledge acquisition capability. H4. The predicted relationship between structural embeddedness and knowledge combination capability is partly supported. The results show that the relationships between diversity and knowledge combination capability are positive and statistically signicant (g 2:677, t 3:377, p 0:000). However, out of our expectation the relationship between nonredundancy and knowledge combination capability is positive too, though not very statistically signicant (g 20:117, t 21:824, p 0:068). H5. The model states that relational embeddedness positively associated with knowledge acquisition capability and our result supported this hypothesis. As predicted, the link between trust and knowledge acquisition capability is positive and signicant (g 20:378, t 28:606, p 0:000), the relationship of joint problem solving and knowledge acquisition capability is positive and signicant too (g 20:136, t 23:146, p 0:002), commitment


contributes to knowledge acquisition capability positively (g 20:147, t 2:693, p 0:007). H6. The positive relationship between relational embeddedness and knowledge combination is largely supported. The result reported here indicates that positive relationships exist between joint problem solving and knowledge combination capability (g 20:318, t 5:082, p 0:000) and between commitment and knowledge combination capability (g 20:161, t 2:291, p 0:022). However, the relationship between trust and knowledge combination capability is not supported, the coefcient is very low and the signicance is much larger than critical level (g 20:005, t 0:048, p 0:962).

C. Robustness of the results Some additional analyses were taken out to test the robustness of the above results. In particular, the authors examined whether the mediation effects did exist. First, direct paths between network embeddedness and innovation performance were added. The coefcients for the additional paths are insignicant and the overall t of the model is not improved. Second, to test the mediation effects within the dynamic capabilities, three mediation paths the path linking knowledge acquisition capability and knowledge generation capability to knowledge combination capability and the path between knowledge acquisition capability and knowledge generation capability were removed. The direct path from knowledge acquisition capability is signicant at 0.1 level and the link between knowledge generation capability remain insignicant, however, the overall t indices get worse. These models offer consistent evidence to the theoretical model. From the theoretical model to the best model. In this section, insignicant paths were trimmed off step by step, each time the path with the lowest CR value was deleted. Finally, the result gave us a model in which all the coefcients were signicant (p , 0:05), as shown in Figure 3. Control variable was also included in the best model although the coefcient was not signicant. The authors compared this model with the hypothesized model and observed that most signicant paths were still signicant and the difference is that some marginally signicant paths became insignicant and at the same time the explanative power of signicant paths was enlarged. Hence, the best model gave us more concise structure between the independent and dependent variables.

Figure 3 The best model



23 = 3.746 (5.274)***


12 = 0.714 (6.962)***

41 = 0.142 (3.317)*** 42 = 0.271 (5.231)***

23 = 0.672 (8.265)***

23 = 0.625 (11.127)*** 31 = 0.980 (13.137)***

Innovation performance

Joint PS
51 = 0.177 (3.380)***



Model statistics 2 df 2/df

866.452 CFI 0.928 485 TLI 0.921 1.786 RMSEA 0.071

Notes: This model is estimated in AMOS too, we only displayed the coefficient of significant paths and omitted the latent variables considering the space limit; *p < 0.05; **p < 0.01; ***p < 0.001, t-value in parentheses


6. Discussion and conclusions

The literature agrees that dynamic capabilities are critical for innovation and competitive advantage, yet it is not clear how it contributes to innovation. This study extends and deepens our understanding of dynamic capabilities and its link with innovation performance in networked environments. The rst contribution of this study is that the authors proposed a concise construct of dynamic capabilities and validated it through empirical studies. Although 14 years have passed since dynamic capabilities were rst introduced, much confusion still remained in this eld. By reducing the subject of dynamic capabilities from the general resource to knowledge resource, this study developed a convergent construct that can be empirically tested. Conceptualize dynamic capabilities as a series of processes handling knowledge resources and aiming at addressing dynamic environments, their attributes and constitutions were claried. Additionally this conception made it possible to identify and measure dynamic capabilities practically and also facilitate us to examine the relationship between dynamic capabilities and innovation performance empirically. This paper offered rich evidence on the contribution of dynamic capabilities on innovation performance. Whereas most extant work demonstrates the contribution of dynamic capabilities theoretically, this paper put forwards a set of propositions linking dynamic capabilities to innovation performance systematically. The empirical study with 218 samples of Chinese manufacturing rms provided strong support for this effect. Further, intrinsic structure within the three dimensions was discovered. Our results reported that knowledge combination capability promotes innovation performance directly and mediates the process between knowledge acquisition, knowledge generation and innovation. In other words, knowledge acquisition capability and knowledge generation capability are important preconditions of knowledge combination and contribute to innovation performance indirectly. These ndings echoed the research of Kogut and Zander (1992) that rms innovations are products of its combinative capabilities. This study revealed that network embeddedness was an important antecedent of dynamic capabilities. The results showed that knowledge acquisition capability and knowledge combination capability were greatly inuenced by network embeddedness. The results of our empirical study indicate that relational embeddedness exhibits a greater inuence on the knowledge-based dynamic capabilities. Knowledge acquisition capability is mainly inuenced by trust, joint problems solving and commitment, while knowledge combination is mainly driven by joint problem solving and commitments. An interesting result was that nonredundancy has no signicant links with dynamic capabilities which is in controversy with the literature. A possible explanation is that the advantage of structural embeddedness is their ability to provide relatively new knowledge while the acquisition and combination of knowledge concerns mainly with in-depth knowledge exchange activities which will go on in a continuous period.

7. Limitations and direction for future research

While this research deepened our understanding on dynamic capabilities and the mechanism between network embeddedness, knowledge-based dynamic capabilities and innovation performance, further questions emerged in this study. First, the construct of knowledge-based dynamic capabilities calls for more examination and verication. The conceptualization and operationalization of dynamic capabilities in this paper will provide a starting point for future empirical studies based on large samples and different context and much work still needs to be done to yield a mature construct. Second, manufacturing is a broad context which includes both high-tech sectors such as chip manufactures as well as relative stable industries such as the steel industry, however, this paper does not examine the differences between different industries. Further studies may overcome this problem by adding control variables or restrict their investigations to specic kinds of industry. Third, the literature has recognized the evolutionary nature of dynamic capabilities, there is a possibility that rms will reconstruct their organizational environments deliberately to sustain


competitive advantage. In other words, managers may adapt their alliance networks dynamically. Hence, feedbacks between network environments, dynamic capabilities and innovation performance link the cycle of these constructs. In the future, scholars could investigate these relationships either though case studies or large scale empirical data.

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About the authors

Suli Zheng is an Assistant Professor of China Jiliang University; her research interests are innovation and strategy management. She has published several papers on innovation management and knowledge management. She is now leading a NSFC project on global manufacturing networks and innovation. Suli Zheng is the corresponding author and can be contacted at: Wei Zhang is a Senior Manager in Xizi United Holding Corporation; he holds a PhD degree in Management Science and Engineering. His major research interest was R&D management and knowledge management. Xiaobo Wu is Professor and Vice Dean of School of Management, Zhejiang University, China and the Director of National Institute for Innovation Management (NIIM). His research interests are in technological innovation, global manufacturing and business strategy. Jian Du is an Associate Professor of the School of Management, Zhejiang University; her major interests are FDI and innovation management.

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