9. knowledge management of high- tech...

9. KNOWLEDGE MANAGEMENT OF HIGH-TECH FIRMS

Chung-Ming Lau, Yuan Lu and Shige Makino

The Chinese University of Hong Kong

Xiaohong Chen

State Development Research Center, PRC

and

Ryh-Song Yeh

Peking University

Abstract: Based on an analysis of six high-tech firms in mainland China, this chapter examines knowledge management issues by focusing on its acquisition, dissemination, and commercialization. We found that most firms emphasized knowledge acquisition. SOE-based firms relied more on their parents for early key technologies, confirming that institutional support and social capital are influential in knowledge acquisition. Social capital also help firms to overcome barriers to organizational knowledge dissemination. Its role in knowledge commercialization is also identified. Absorptive capacity is important for knowledge dissemination, since appropriate organizational arrangements have not been purposely designed.

Knowledge has been regarded as a critical resource in a firm that gives rise to competitive advantages (Hoskisson, Hitt, Wan, & Yiu, 1999; Spender, 1996). The management of knowledge is recognition of the strategic value of each of a firm’s different stocks of knowledge in different contexts (Sanchez & Heene, 1997). The focus is on a firm’s ability to create, transfer, and use the knowledge in order to build up sustainable competitive advantages. Knowledge management in a firm thus receives a lot of attention from researchers and practitioners. However, the process of

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Knowledge Management of High-Tech Firms 184

managing knowledge is still not widely researched (De Long & Seemann, 2000).

In high-tech industries, the conventional belief is that firms that possess a higher technological and innovative capacity have higher competitiveness than those without this capacity. Thus, in general, firms from emerging economies are usually in a disadvantageous position to compete in the global market since they lack technological capacity (Makino & Lau, 1998). In emerging economies like China, firms generally face difficulties with acquiring advanced technological knowledge from external sources for three main reasons. First, as compared to developed countries, there exist few industrial clusters where knowledge-intensive firms operate in close geographical proximity. Firms in emerging economies therefore tend to have a disadvantage in access to knowledge spillovers and knowledge workers. Second, in emerging economies there exist few well-developed networks of manufacturing and distribution through which firms could capitalize on acquired technological knowledge for both production and commercial application in a local market. Third, since in most emerging economies, legal protection of intellectual property is limited, foreign investors make technology transfer difficult. Thus, critical to most knowledge-intensive business enterprises based in China is how to explore the external sources of advanced technological knowledge, how to develop cultural and social contexts that facilitate both the transfer and dissemination of acquired technology across subunits within an organization, and how to turn acquired technology into commercial products or services.

Nevertheless, some Taiwanese and mainland Chinese high-tech firms are successful in the global market. For instance, some Taiwanese firms (such as Acer and Taiwan Semiconductor) and mainland firms (such as Legend and Founder) have international presences and receive attention. Their development is by and large a result of the changing economy, the revived entrepreneurship, and the government’s initiative in establishing new and high-tech zones to engage in this global industry. Despite the three limiting factors mentioned earlier, these companies have found ways to acquire necessary technology and transformed it into competitive advantage. Therefore, it is interesting to explore why firms in China, with relatively weaker competitiveness in the beginning, can become strong players and able to compete in the global marketplace and be successful in some instances.

The competence-based view of competition argues that firms must have certain resources and knowledge in order to be innovative (Durand, 1997; Hoopes & Postrel, 1999). The process of knowledge management in the high-tech firms is therefore focused on developing their competitiveness in an unstable and volatile market. Firms have to build up their sustainable competitive advantages through developing and/or acquiring strategic

Chung-Ming Lau, Yuan Lu, Shige Makino, Xiaohong Chen and Ryh-Song Yeh 185

resources. Conner and Prahalad (1996) asserted that knowledge is a critical resource and is the basis of the resource-based view. McEvily, Das, and McCabe (2000) also suggested that knowledge sharing allows a firm to avoid competence substitution. Oliver (1997) noted that firms differ in their selection and variation of resources. This leads to the notion that firms have different ways to create knowledge (or to source knowledge) under different institutional environments. Since knowledge is an intangible resource that is valuable and costly to imitate for competitors, the process of creating and commercializing knowledge would be the key to development of competitive advantage.

Based on an analysis of six firms in the electronics, chemical, and communications industries, this chapter examines the knowledge management issues of high-technology industries in mainland China. The focus is to uncover the knowledge acquisition, dissemination, and commercialization process of high-tech firms in the region. Owing to the transitional nature of the economy and the youth of the high-tech area, we expected that the Chinese model could be different from that current in the literature. This chapter first outlines the theoretical underpinnings in the knowledge management process of high-tech firms. The review is primarily based on existing findings in the literature. The applicability of these findings to the Chinese context is not yet known. A plausible framework that integrates the established findings and institutional and organizational factors of the Chinese firms is then presented. Then, the six firms are discussed and compared to illustrate the major issues in knowledge management in a Chinese context. This allows us to compare the established ideas from the literature with the actual practices of Chinese firms. Research implications are then discussed.

1. THEORETICAL PERSPECTIVES

The focus of knowledge management is on the development of organizational competencies through effective management of strategic knowledge. Hence, both environmental and firm-specific factors are crucial in enhancing a firm’s competitiveness. There are several ways to conceptualize the knowledge management process. Normally, it includes the acquisition, dissemination and integration, and commercialization of knowledge (Gupta & Govindarajan, 2000b). From a life-cycle view, De Long and Seemann (2000) suggested that the credibility of knowledge management has to go through the stages of appreciation, articulation, adoption, and institutionalization. Further, the Minnesota Innovation Studies focused on common elements in the innovation process, namely, the initiation period, the developmental period, and the implementation and termination period (Van de Ven, Polley, Garud, & Venkataraman, 1999).


These periods primarily correspond to the knowledge creation and sharing stages. Though we have different categorizations of the process, we can broadly divide it into three phases: acquisition, dissemination, and commercialization.

Researchers have developed models around specific phases of the process. These include models of creation or acquisition (Inkpen, 2000; Nonaka, Toyama, & Konno, 2000), sharing or integration (Damanpour & Gopalakrishnan, 2001; Dixon, 2000; Dyer & Nobeoka, 2000; Hansen & Von Oetinger, 2001; McEvily et al., 2000), and, to a lesser extent, adoption and commercialization (Pfeffer & Sutton, 2000). Knowledge sharing at a global level has also been investigated (Gupta & Govindarajan, 2000a; Subramaniam & Venkatraman, 2001). Below, we first discuss the three stages of and the issues involved in the knowledge management process as described in the current literature, especially issues in the knowledge acquisition, dissemination, and commercialization processes of high-tech firms. Drawing from organizational learning theory, we identify two factors, social capital and absorptive capacity, that are critical for analyzing knowledge acquisition and transfer issues as well as for reducing knowledge management problems. We then discuss the role of supporting mechanisms from organizational design and institutional views in facilitating knowledge acquisition, dissemination, and commercialization. Although the supporting mechanisms are common practices in most instances, they are especially eminent in an emerging economy like China.

1.1. Issues in the Acquisition, Dissemination, and

Commercialization of Knowledge

The literature has suggested that several factors influence the acquisition of technological knowledge from external sources and the transfer of the knowledge within an organization. The knowledge management literature suggests that the efficiency of knowledge acquisition and transfer will be significantly influenced by the types of knowledge to be acquired and transferred. In this literature, knowledge is classified on the basis of its scientific antecedents (whether it is built on basic or applied science); its purpose (whether it is used to improve the process of production systems or the content of product functions); and its characteristics, such as tacitness (whether it is tacit or explicit), complexity (whether it is complex or simple), and organizational embeddedness (whether or not it is separable from its organizational context) (cf. Ahlstrom & Nair, 2000; Dasgupta & David, 1994; Garud & Nayyar, 1994; Kogut & Zander, 1992; Polanyi, 1962; Spender, 1996; Winter, 1987). The consensus in the literature is that, as knowledge becomes more tacit, complex, and organizationally embedded, firms will have more difficulty acquiring it from


external sources and transferring it between organizational subunits (Kogut & Zander, 1992, 1993). Hence, effective knowledge management in high-tech firms requires institutional and organizational facilitation.

In addition, studies have suggested that difficulties in knowledge transfer within and between firms will occur because of organizationally embedded barriers (Child & Rodrigues, 1996; Kedia & Bhagat, 1988; Kostova, 1999; Kostova & Zaheer, 1999). Kostova (1999), for example, suggested that the process of knowledge transfer within an organization is embedded in social, organizational, and relational contexts. These contextual factors include the institutional distance between source and recipient, the organizational culture of the recipient unit, attitudes of the transfer coalition, and the dependence of a recipient unit on its source.

The organizational learning literature suggests two ways for firms to circumvent organizationally embedded barriers to the acquisition and transfer of tacit knowledge. They include development of social capital between source and recipient units and development of the absorptive capacity of recipient units.

Social capital is defined as “the sum of the actual and potential resources embedded within, available through, and derived from the network of relationships possessed by an individual or social unit” (Nahapiet & Ghoshal, 1998: 243). Nahapiet and Ghoshal (1998) identified three dimensions of social capital: the structural, relational, and cognitive. They suggested that knowledge will be transferred more efficiently between subunits when the managers of these subunits possess strong social interaction ties, develop trusting relationships, and share common values and norms. Social capital facilitates knowledge transfer in two ways. First, social capital creates a set of higher-order organizing principles that act as mechanisms for codifying knowledge into a common language accessible to a wider group of individuals (Kogut & Zander, 1992). Second, social capital increases the efficiency of the actions of individuals (both transferrers and recipients of knowledge) and reduces the probability of opportunism as well as the need for costly monitoring processes, and hence, the costs of transactions (Nahapiet & Ghoshal, 1998; Ouchi, 1980; Sohn, 1994). Researchers have suggested that successful development of social capital facilitates creation and transfer of knowledge within a firm (Kostova, 1999; Nonaka & Takeuchi, 1995). It also facilitates the combination and exchange of resources, and, thus, the value-creating activities of the firm (Nahapiet & Ghoshal, 1998; Tsai & Ghoshal, 1998).

In support of this view, research suggests that technology will be transferred easily from external sources when managers have social interaction ties or have developed common values and trusting relationships. Von Hippel (1988) studied sources of innovation and found that many firms actually acquired new ideas from their suppliers. Dyer and Nobeoka (2000)


studied the role of networks at Toyota in creating and maintaining high performance. They found that a strong-tie network has established a variety of institutionalized routines that facilitate multidirectional knowledge flows. Ernst (2000) also studied interorganizational knowledge outsourcing and argued that it was the competitive edge of Taiwanese firms in the computer industry. Hence, social capital based on networks of relationships has been found to be effective in enhancing the acquisition of knowledge.

Absorptive capacity also plays a critical role in knowledge acquisition and transfer. Absorptive capacity is defined as prior related knowledge, including knowledge of the most recent scientific or technological developments, that confers an ability to recognize the value of new information, assimilate it, and apply it to commercial ends (Cohen & Levinthal, 1990). Underlying the notion that absorptive capacity is a function of prior related knowledge is the idea that knowledge acquisition is most effective when the target knowledge is related to what is already known, and it is the most difficult in novel domains (Cohen & Levinthal, 1990). That is, acquisition of new knowledge from external sources tends to be more successful when a firm possesses existing knowledge related to the new knowledge being acquired. And, internal transfer of the acquired knowledge tends to be more efficient when the recipient unit of the firm possesses prior knowledge related to the knowledge being transferred. Several researchers (Hamel, 1991; Inkpen, 2000; Lyles & Salk, 1996) have focused on the ability of firms to learn and they have suggested that the effectiveness of learning between organizational units is closely related to Cohen and Levinthal’s (1990) notion of absorptive capacity.

In sum, the literature suggests that social capital and absorptive capacity are able to reduce the barriers to knowledge acquisition and dissemination between and within firms created by organizational embedded factors. Specifically, tacit and complex knowledge is available with higher social capital, and it can be acquired more easily through higher absorptive capacity. Institutional distance can be reduced through building up social capital. Knowledge dissemination can also be more efficient if the organizational culture of the recipient unit values new knowledge. This kind of organizational culture requires a higher absorptive capacity. The literature, however, does not explicitly discuss the factors relating to the commercialization stage. The enabling mechanism for knowledge management is also not addressed thoroughly in the organizational learning literature, not to mention in a transitional economy context.

How do firms create the social capital and absorptive capacity that are essential in the knowledge management process? Below we describe a number of supportive or enabling mechanisms from organizational design and institutional perspectives that are especially important in the acquisition


stage but also influence the later stages of dissemination and commercialization.

1.2. Supportive and Enabling Mechanisms

Organizational design can influence effective knowledge acquisition and sharing (Myer, 1996). Leonard (1995) identified factors leading to a “core rigidity” in relation to changes that limit a firm’s capacity to develop new knowledge. Pfeffer and Sutton (2000) also warned about the discrepancy between knowing and doing. The literature suggests that firms must develop a certain organizational arrangement in order to enhance knowledge creation and change. This arrangement broadly includes structural design, organizational culture, information-processing capability and processes, and human resource systems (Huber, 1991; Van den Bosch, Volberda, & Boer, 1999; Whittington, Pettigrew, Peck, Fenton, & Conyon, 1999).

Specifically, Tushman (1977) suggested the importance of the role of boundary-spanning individuals in acquiring external knowledge and disseminating knowledge within a firm. Gupta and Govindarajan (2000a, 2000b) examined the relationship of parents and overseas subsidiaries in a knowledge-sharing context and noted the importance of incentives for individuals in a firm to share knowledge. De Long and Fahey (2000) also noted that a certain organizational culture is needed for knowledge creation, sharing, and use. The organizational arrangement examined in the literature therefore ranges from individual-level incentives and boundary-spanning roles to the broader culture of an organization. In addition, Teece, Pisano, and Shuen (1997) suggested a dynamic capability approach to describing a firm’s ability to integrate the process and structure necessary to achieve new and innovative competitive advantage. Crossan, Lane, and White (1999) further suggested the importance of an institutionalized learning process in making individual knowledge groups or corporate knowledge. Moreover, there is institutional pressure on organizational design to maintain legitimacy through engaging in alliances and developing flexibility (Cyr, 1999; Huber, 1991; Van de Ven & Poole, 1995; Woodman, Sawyer, & Griffin, 1993). Hence, the literature suggests that a certain organizational arrangement is conducive to effective knowledge acquisition and dissemination.

Another important factor for understanding the process of knowledge management is the institutional support that a firm can obtain from key local industrial players and regulative authorities (Aldrich & Fiol, 1994; Oliver, 1997), especially in emerging economies such as China (Hoskisson, Eden, Lau, & Wright, 2000; Peng & Heath, 1996). Institutional support from local industrial players includes provision of supporting


business activities, or what Teece (1986) called “complementary assets.” Teece (1986) suggested that commercialization of technology would require a firm to gain access to supporting business activities provided by other firms, such as distribution networks. Another source of institutional support is provided by the local government. Many of the high-tech firms in Taiwan and China are characterized by appropriate infrastructure and government policy support. Many firms in high-tech zones in the region acquire competitive advantage from institutional authorities. The fast development of Hsinchu Science Park in Taiwan is an example of institutional support. High-tech firms cluster together in these zones to obtain critical resources such as initial capital and other intangible support, such as information and exchange of human resources. In addition, because in China, most high-tech firms are still owned by the state or have origins in government bureaus, the institutional ties are still pervasive. Take the example of the city of Chongqing. The city’s administrative committee invests like a venture capitalist in “outstanding” firms. The administrative committee also has placed all government offices, including auditing, taxation, customs, and others, together in one building complex, so that high-tech companies can easily get approvals and go through administrative procedures.

Hence, we can roughly categorize three types of institutional support in the Chinese context. The first level is the provision of infrastructure in which firms are engaged in better communication, learning, and operating environments. The creation of clusters can foster knowledge creation and diffusion. The second level of institutional support is primarily incentive policies from the central or local government, including tax holidays, licenses to import and export, and so forth. The last level of support is the most direct one; it includes the provision of critical resources such as capital and land, as well as key technologies. The institutions thus become investors or fund providers.

The above discussion suggests several major features of firms that will facilitate the knowledge acquisition, dissemination, and commercialization process. Figure 9.1 shows a schematic model that depicts the links among the supportive mechanisms, critical organizational factors, and the knowledge management process. The model is primarily based on current literature. However, in the case of Chinese firms, higher reliance on institutional support is expected. For example, firms can seek institutional support for gaining legitimacy and competitive advantage, and they can acquire strategic resources through their parent firms in most state-owned enterprises (SOEs). These resources include social capital and absorptive capacity. At the organizational arrangement level, firms can develop flexible structures, skills- and performance-based reward systems, and innovative

Knowledge Commercialization

Knowledge Management Process

Knowledge Acquisition

Knowledge Dissemination

Institutional support (parent, government, university)

Organizational Arrangement (culture, structure, incentives)

Social Capital Absorptive Capacity

Figure 9.1. A Schematic Model of Factors Influencing the Knowledge Management Process


group culture, to enhance competitiveness. This new organizational form, as in contrast to traditional SOEs, depends very much on the capability of a firm’s top management team or leadership to integrate resources and develop the appropriate culture. This conceptual framework is used to guide our analysis of the knowledge management process of six Chinese high-tech firms. The appropriateness and limitations of this framework are then discussed. 2. THE STUDY 2.1. The Firms

Most new and high-technology firms, especially in China, are not yet mature. They are in an early stage of learning and they are adjusting to a new competitive landscape, not only in their own industry, but also in the global market and the country’s economy. Additionally, there are many outliers this new competitive field. Thus, this study employs a case methodology to examine in depth several notable firms (Lee, 1999). Several major studies in the knowledge management and strategic management area have used this methodology, for example, Black and Boal (1997), Gupta and Govindarajan (2000b), Hoopes and Postrel (1999), and Zack (1999). Hoskisson et al. (1999) also suggested that a more qualitative approach is appropriate for understanding the “intangible” nature of resources.

Three of the six firms analyzed in this study are from Beijing’s Zhongguancun area, namely, Legend Computer Systems, Beijing Kehua, and Zhongke Sanhuan. The other three are from Guangdong Province, including Huawei Technologies and Rihai Communication Equipment, which are from Shenzhen, and Huayang Industries from Weizhou. The three Beijing firms and Huayang are SOEs, and the two from Shenzhen are private enterprises. The firms are manufacturers of electronics, chemical, and magnetic components and products related to the computer and communications industries. The firms vary in terms of ownership, history, scale of operations, and maturity in their own specialized product areas. A comparison of these firms allows us to examine the knowledge management process at different life cycle stages and in different environments.

Interviews were conducted with either the CEOs or senior managers in charge of technology and operations. In most cases, two to three researchers were present at the interviews, which primarily followed a structured questionnaire. The notes taken (and tape recordings, if allowed) were compared after interviews. The information obtained was then recorded and checked by the interviewers, and some of the observations and data collected were cross-checked against reports and documents supplied


by the firms. Further, information on the backgrounds of the firms was supplemented with documents published by other sources. The information gathered during the interviews includes the history of a firm, an environmental assessment, and data on internal resources development and acquisitions, the product development process, commercialization, interfirm collaboration, organizational design, human resource system, and organizational culture.

Table 9.1 provides a brief description of these six firms. The three firms in Zhongguancun (Legend, Kehua, and Sanhuan) were mostly established by research institutes of the Chinese Academy of Science (CAS). They are still connected closely with the institutes. Huayang is an enterprise group with a strong SOE background. Huawei was established as a private enterprise from its very beginning, and Rihai had a connection with the Shenzhen post office but became a private enterprise later.

The studied firms are of very different sizes. For example, the sales turnover of Legend had reached US$3,480 million in 2000 and Huawei reached US$2,600 million in 2000. Huayang and Rihai only had sales turnovers of US$426 million and US$402 million. Sanhuan had around US$45 million for the listed company (the group, however, had a much larger turnover). The smallest is Kehua, with a turnover of merely US$2.2 million.

In terms of staff numbers, Huawei and Legend are the largest (16,000 and 7,850 respectively), and Huayang has around 5,000 staff. Sanhuan has 199 staff in the listed firm, but around 1,000 in the group. Rihai has 620 staff. Kehua is again the smallest, with 75 staff only, excluding the sales people in several branches and the manufacturing plant at Chongpeng.

The proportions of technical people (including engineering, R&D, and technicians) in these firms are relatively very high, just as in other high-tech firms. However, their annual R&D expenditures are not very high, ranging from 0.5 percent to 5 percent of sales, except Huawei’s, which is more than 10 percent of annual revenues. These levels are low when compared with those of the firms’ counterparts in developed countries.

The knowledge management process of these firms is described below. For ease of discussion, the findings are listed under three major phases of knowledge management: knowledge acquisition, knowledge dissemination, and commercialization. 2.2. Knowledge Acquisition

In the early stage of development, the SOE-origin firms acquired technology mostly from the major shareholders, namely the institutes at the Chinese Academy of Science and related research institutes and

Table 9.1. A Profile of the Firms Studied

FIRM DETAILS

Legend Computer Systems Beijing Kehua Zhongke Sanhuan Huayang Industries Huawei Technologies

Rihai Communications

Ownership SOE A subsidiary of Beijing Legend of Legend Holdings (HK).

SOE Solely owned by Chinese Academy of Science Chemistry Institute.

SOE CAS holds 33.9% of shares; some US firms, Ningbao Group and other associated companies are major shareholders.

An SOE group Owned by the city of Weizhou, established in 1993. A joint venture with a Japanese company (Xinhua ) is a key subsidiary.

Private enterprise. Established in 1988, fully owned by all employees, with President Ren holding a larger share.

Private enterprise. Owned by Mr. & Mrs. Wang (the founder) and Mr. Zhou (major capital contributor).

Business Develop, manufacture, and sell Internet access devices such as home PC, commercial PC, notebook and set-top box. Major technology: design of PC and mother board.

Manufacture chemical products and related equipment for semiconductor firms.

Permanent magnetic materials for application in household appliances, communication equipment, energy, medical, etc.

Electronics, optics, and medical appliances, such as CD, VCD, DVD laser heads, car audio, server circuits, etc.

A network (fixed, mobile, data, and optic communications) solutions provider.

Communication network interfaces.

Sales & Profits

Sales: US$3490 million in 2000; net profit of US$110 million.

Sales in 1999: US$2.2 million, pofit after tax is around 20-30% of sales, and 80-90% belongs to new products.

Sales in 2000 US$45 million, with profit after tax of US$3.4 million.

Total sales of the group amounted to US$426 million in 2000, with Xinhua having the largest share (85%). Total profits was 12 million.

Total sales: US$2600 million in 2000.

Annual sales: US$402 million.

Market Around 20% of the PC market in China. 60% of customers are retailers.

Primarily domestic sales.

90% of products are for export. Annual production is 40% of China’s share and 10% of global output, ranked the third in the world.

90% exports or MNCs in China. Mostly industrial buyers and hospitals.

Ranked ninth in the “global switch top ten” in 1999. 90% of sales is in China.

90% sales to domestic market. Recent sales are mainly broad-band related products, total output is around 10% share of the China market. Optic connection alone is 15% share.

R & D Expenditure

1.5% of sales 3-5% of sales.

0.5% of sales. 5% of sales. No less than 10% of annual revenues

3% of sales.

Employees 7,850 employees as of 2000, with 3,500 production workers. 16% of total staff are technical persons, R&D staff are roughly 12% of total,

75 employees (excluding branches and plants in Chongpeng). 75% are technical people, and 12% managers.

About 1,000 staff. Around 300 R&D staff (150 technicians). In the listed company: 199 employees: 70 production, 62 R&D.

Over 5,000, with around 13% are engineers, technicians, and managers. 50 holding master degrees or above, and 360 with tertiary education.

More than 16,000 staff, with 7,000 in R&D (45%). 60% of staff holding masters’ degree or above.

Around 620 employees in 2000. Approx. 9% are technicians and engineers.


laboratories. Hence, technology was transferred from the CAS to these firms. The CEOs were also experts in their respective sectors, and they themselves were sources of knowledge. Take, for example, the CEO of Sanhuan, a Fellow of the CAS who is also a top scientist in magnetic materials. The CEOs brought to the firms their own expert technologies. The technologies used by these firms are, however, more applied in nature. The role of the firms is to adapt technologies into marketable products. Legend’s original computer technology was the mother board knowledge, which came from CAS research. This is an example of the necessary social capital for many of these SOE-origin firms. The institutional affiliation with CAS also helped the development of their absorptive capacity.

In the case of Sanhuan and Kehua, the basic technologies were in magnetic materials and chemical compositions. These technologies were not created from scratch, but, rather, they were shaped and framed through association with the CAS. Kehua focused more on a production process based on innovations at the CAS. The CAS supplied the basic chemical composition, and Kehua was responsible for transforming chemicals to products through the design of scale economy and production. The quality of Kehua’s staff is higher than its competitors’. Among the four new products introduced in 1998 and 1999, two were production innovations. Sanhuan also received a lot of support from the CAS. The magnetic material “Nd-Fe-B” is a joint research product of the CAS and Sanhuan. Thus, at the beginning, these firms relied heavily on CAS knowledge.

After the initial stage, the firms shifted their focus from production knowledge to knowledge of market needs, which is more tacit in nature. For example, Legend specialized in the distribution of computer products in the early days of its development. It purchased hardware and operating systems from suppliers. Their contribution at this initial stage was in product development. The R&D function was primarily in product design. Hence, the new knowledge created after the firm was established was primarily commercial knowledge or operation knowledge. In general, the knowledge developed at this stage was explicit and codified knowledge. There was not much tacit knowledge developed inside the firms at this stage. However, the technical knowledge that was close to tacit knowledge was based in their parents. They had close ties with the parent institutes.

Later in the firms’ development, some had to look for other sources from which to acquire technology in order to maintain competitiveness. The latest developments of Legend, in Web-based technologies and products, primarily came from within. Sanhuan, which had gained around 40 percent of its local markets already in 1993, needed to go into the global market. The quality of its existing products, however, was not high enough to meet international standards. They therefore had to import technology from Japan. However, the connection with the CAS or government was still very strong,


despite the partnership with foreign firms. The Guangdong SOE group, Huayang for example, was designed from the beginning to acquire technology through a joint venture partner (a Japanese firm); it nevertheless relied on support from the provincial and city governments. The support from the CAS was evident in a US$4 million grant for DVD semiconductor laser research, and some funds for infrastructure development. Sanhuan, for its part, received over US$6 million from the State Planning Commission and the CAS.

The connection with and support from CAS that the three Zhongguancun firms and Huayang enjoy basically follow an institutionalized pattern that can be found in most high-tech firms with an SOE background. Although the association may not be formally structured (especially in the case of listed companies), the social ties are a major source of technological capital. The development of each of these companies depended very much on the CEO and the basic technology acquired from the parent and the CAS. The firms were originally set up as the sales and marketing arms of the research institutes. Thus, there was a lot of support given to them. As economic reform progresses and there is a need to decouple government and enterprises, the firms will have more room to source and develop more market-based technologies. Nevertheless, their SOE background allows them to take advantage of social capital and enhance their absorptive capacity.

Huawei and Rihai, being private enterprises, have not had much direct support from the state. They have had to acquire technology from the open market. They have relied on their own expertise and conducted joint research projects with other firms and universities. They have also worked with major customers. However, their technology may not be state-of-the-art because their customers are mostly local customers. In the case of Rihai, for example, its current technology for most products is comparable to an international standard, but the technology of its high-end product is still not cutting-edge.

These private enterprises have also enjoyed some form of support from government-related bodies. Besides the land and tax subsidies of the high-tech zones, they have obtained research grants from CAS institutes as well as venture funds from the central government or city. Nevertheless, these two firms have a higher need to develop their technology internally. They have to source technology from business partners (including suppliers and customers) and marketing personnel. At Huawei, because of the uniqueness of telecommunications equipment, integrated circuits have to be designed in-house for specific applications. Huawei has also made good use of overseas branches in both sales and R&D. For example, they have acquired people from Bangalore, India, and from Russia, who are good at software technology and wireless technology, respectively. Rihai also has


established procedures to integrate customer feedback in different departments, including technology promotion and product development. Relatively speaking, they do not possess as much social capital as the SOE-based firms.

In general, the SOE-based firms did not involve customers very much to acquire technology. Legend, however, is an exception. Because the technology they need to develop relies more on product knowledge that cannot be transferred from the parent, they work closely with institutional customers and suppliers. Until recently, the Legend Research Institute was set up for technology development on a three-to-five-year plan and therefore was able to develop technology in other areas, such as networking and Internet applications for the development of new businesses. The product divisions are responsible for new product development. Around 85 percent of R&D staff are in product divisions. Structurally, knowledge creation is coordinated by a Technology Planning Department, which also serves as the technology advisor for the CEO.

It is also important to examine some contextual factors that might hinder the acquisition of technology. Representatives of Kehua mentioned that customers could import some materials from abroad tax-free, whereas the materials were taxable if purchased locally. Thus, customers do not have much incentive to buy from local firms. They further noted that the development of technology is influenced by macroeconomic policies, the development of an industry, and a firm’s management, as well as capital. In addition, since most competitors can also purchase technology from CAS, it is highly imitable.

The two private firms, Huawei and Rihai, had closer contacts with customers. Their customers were directly involved in product design, with communication channels designed into their structures to facilitate customers’ input. Hence, they were able to source technology from customers readily.

2.3. Knowledge Dissemination

Table 9.2 summarizes the major characteristics of the knowledge acquisition stage of these six firms. Technology knowledge related to product development is a critical resource in most of the firms. This knowledge is acquired mainly from networking relationships with the parent or government. The parent-firm link in the SOE-origin firms is therefore a type of social capital that is also a major advantage of these firms. Because of previous association with the parents, the new firms have a prior knowledge of technologies, and hence a higher absorptive capacity. The role of institutional support is very strong in all these six cases, though it is less extensive for the private enterprises. The private enterprises, however,

Table 9.2. Knowledge Acquisition

Knowledge creation

Legend Computer Systems

Beijing Kehua Zhongke Sanhuan Huayang Industries Huawei Technologies Rihai Communications

Institutional factors (industry and government support)

A subsidiary of CAS in initial stage. Benefited from the technology of the research centers. Lower taxes, cheaper land, and injection of capital from government.

Financial support from new venture funds and city committee, and some major customers.

Heavy CAS investment.

Guandong Province has taxation subsidy for new high-tech firms. Personal ties with scientists.

Not much R&D support received, except land and tax subsidiaries in high-tech zone.

Some support from bureaus’ research institutes at later stages only.

Technology & R&D

Technology is applied and product-based, not only in production, but also product chain concepts. Has a research lab in California’s Silicon Valley, but only for coordination.

More applied technology (intermediary scale economy and quality control in production). CAS provides most original chemical technology. No other labs. Some technology is purchased from abroad by the Academy. Product attributes: high value-added, smaller quantity, large variety.

Early stage: Technology and equipment are directly from CAS. Research center and labs supported by government. Later: Import technology and equipment from outside, obtain license from Japanese company (Sumitomo) for technology transfer.

Early stage: Learned from partners in manufacturing and management. Now: own R&D, may surpass the partner in some areas. Some technology is developed in-house, and some from JV partners, and research institutes. No overseas R&D centers.

Doing R&D on its own. Design IC for specific use. Research institutes in 6 mainland cities.

Mostly applied product technology. Four sources of technology: self-development, communication with customers, feedback from marketing personnel, and international conferences & workshops. No overseas labs.

Partners & customers

Work with customers (institutional buyers) and suppliers (e.g., Intel, Microsoft, Hitachi).

Some customers participated in the development process (e.g. testing).

No customer involvement in new product design/ R&D.

Customers’ participation is minimal.

Cooperates with key players in industry (IBM and German National Research Institute of Technology) and work with customers. Collaborate with major universities in research.

Established procedures to integrate customer feedback in different departments.

Incentives for sourcing / developing technology

Individuals’ motivation for achievement is important.

Former CEO’s personal network with overseas firms is pivotal in the initial transfer of technology.

Customer demand – higher quality in global market – a need to upgrade product quality for export.

Market needs customers are electronics, computing, precision instruments manufacturers which require latest technology.

Customer demand – mostly complicated and large-scale.

Business needs – clients are major telecommunication providers, and require sophisticated and tailor-made solutions.


source technology from the market, or develop it in-house. The role of organizational structure, culture, and leadership is not very obvious at this stage. The only exception is the personal ties of the top management with the parents. Nevertheless, market-related knowledge is not readily available. The SOE-origin firms cannot obtain this type of knowledge from the parents. They have to learn from their experiences, partners, and customers to acquire this knowledge, just like the private enterprises.

2.4. Knowledge Dissemination

The framework suggests that knowledge dissemination is facilitated by appropriate organizational design. Structurally, these Chinese organizations are, however, not very well integrated for knowledge dissemination. Most of the time, a technology group is set up to coordinate scientists and engineers only. For example, Kehua is more concerned about the manufacturing process and hence has only one department to focus on R&D. They do not see a great need for technology integration. Only Huayang had developed some communication and collaboration between R&D and engineering, for developing DVD laser-head and “optic-color paint” projects. This development was due to the conviction of a senior VP who was in charge of the two departments. Sanhuan’s parent firm has around 30 people engaged in integration of important technology, but they are not in the company itself. These technologies, nevertheless, are explicit knowledge that can be easily codified and transferred. Huawei is more advanced; it employs a matrix structure to enhance communication between marketing and product development personnel. Rihai also has a vice president and a technology committee responsible for technology integration. The CEO is also pivotal in product development because of personal knowledge in marketing and technology. These firms exemplify the variation of organization structures employed by firms to manage knowledge (Myer, 1996). Kehua and Rihai use a more direct personal coordination approach, Sanhuan relies upon a department, and Huawei employs a matrix structure. The variation could be due to the different developmental stages of the firms, or to differences in ownership. In terms of a learning mechanism, Legend just started to emphasize a “technology development” culture recently. They have established an e-mail system to disseminate news, and developed ad hoc groups to introduce new products or ideas. Skill-based performance measurement is a relatively new system at Legend. Sanhuan has developed a technology-driven culture mainly because of its CEO/chairman, a scientist, who has the charisma to attract young and high-caliber researchers. The employees have confidence in their abilities and hence are willing to contribute to the fast growth of the company. The


sense of achievement for young scientists, a relaxing atmosphere of simple interpersonal relationships, and opportunities to use their potential have been cited as key success factors of this company. This kind of company culture is effective in reducing the core rigidity issue mentioned by Leonard (1995).

Huawei considered “technology” one of the six core values of the company and built mechanisms to encourage teamwork in order to develop and share technology. With these core values, the high-caliber employees are equipped with a team spirit and are open to cooperation. This has led to several independently developed core technologies. Rihai, though not so structured, emphasizes exchange of ideas during workshops and lectures. They also encourage a lot of sharing among the existing staff and hire experienced project managers. In order to support this learning culture, a technology-based human resources system has been introduced. Rihai put in place a technology-based salary and rewards structure for research excellence. Huawei adopted a bonus and stock-option system to reward good technology. Huayang links research achievements with rewards. Sanhuan emphasizes nonmonetary incentives, such as cross-training in joint ventures and overseas. The other SOE-based firms, however, do not have such human resource system support.

These observations on the dissemination phase of the knowledge management process are summarized in Table 9.3. In this phase, the influence of institutional support is not very obvious. The focus is more on the organizational arrangement. However, most SOE-based firms did not pay too much attention to the organization design. Rather, the role of a CEO or chief scientist is emphasized more. A supportive human resource system is not consciously developed. To a certain extent, the social capital within a firm (connections between the leaders, engineers, and scientists) is important in dissemination of technology.

Given differences in their cultures, firms’ absorptive capacity may also vary. The firms also identified several barriers to integrating and disseminating knowledge within themselves. Huayang’s interviewees explicitly mentioned barriers in human resources, capital, sources of new technology, rates of technology development, and engineering. These factors are not very different from those mentioned by Huber (1991) and Whittington et al. (1999). Rihai’s people noted the difficulty of merging their old and new technologies. The products are different in terms of basic techniques and production flow, and the teams have different cultures. One of their projects, on “intelligent connectivity,” failed because of the incompatibility of the product process, and the different cultures of the hardware and software teams. This reflected a lack of the absorptive capacity needed for technology acquisition and dissemination within the

Table 9.3. Knowledge Dissemination

Dissemination Legend Computer Systems

Beijing Kehua Zhongke Sanhuan Huayang Industries Huawei Technologies Rihai Communications

Structure

Product technology is integrated through product teams. Technical know-how integration is done by the research institute, with the aid of information technology and the use of ad hoc teams.

Not much integration is needed. Basic production method is the same.

Spearheaded by chief engineers who lead cross-functional and cross-discipline teams. Around 2-3 project chief engineers in each subsidiary (6 firms).

Close integration of inducted and self-developed technologies.

Matrix structure that integrates marketing and product development.

VP (R&D) is responsible for integration. R&D division led by VP in charge of product research & development, and VP (production) is also responsible for product planning and production technology.

Learning mechanisms & culture

Has a culture of emphasizing “technology,” hopes to become a technology-driven enterprise. E-mail systems for sharing new information, training workshops conducted by experts.

Has a department responsible for R&D

Infrequent lectures & sharing sessions. Not very structured. HQs’ R&D will transfer technology to subsidiaries.

Consensus in developing new technology. Except for the projects of specific subsidiaries, the executive VP coordinates core technology.

Technology and Teamwork as core values. Constant dialogue with customers. Meetings, intranet, and teamwork culture.

Emphasizes workshops, attending lectures, and technology committees to assess technology and knowledge sharing and learning among existing staff; and hiring relevant project managers.

HR System Not very strong monetary incentive. A new skill-based compensation is now in place.

No specific HR system, relie on the leadership of senior management

Above-average salaries – with bonuses for research output. Cross-training in JVs, and training scheme inside China and overseas. Around 20 are PhD students overseas. Promotion.

Rewards for research achievements and introduction of new products, including shares for technology. Compensated for technological skills

A lot of R&D staff. Recruits from mainland institutions, not exclusively from top universities. Bonus and stock options. Emphasizes on-job training, recruits fresh graduates. Courses available.

Just implemented a technology-based salaries and rewards structure for research achievement in addition to basic salaries.


firm. Since not all firms have developed a formal structure, the integration requires judgement by the person in charge at various times. As technology knowledge becomes more tacit and complex, more elaborate mechanisms are needed. For example, Rihai, after learning from previous failures, set up a new company to develop software technology. By so doing, they can improve their absorptive capacity. Relatively speaking, the two private enterprises are more open to new structural forms and are more successful in integrating technology. 2.5. Knowledge Commercialization

In terms of commercialization, the SOE-origin firms were able to secure customers during the initial stage of development through their association with the CAS and government, as well as through the personal ties of the CEOs. They also made use of business partners to gain access to markets. Sanhuan, for example, has partners to explore the international market. They also acquired a U.S.-based firm to secure the market. Hence, they had markets in mind before they entered design and production. Huayang is very similar. Through their joint ventures with the Japanese, they have already secured the market. They are producing according to their partners’ needs. Kehua, the chemical technology firm, has involved some customers in product testing, and it basically relies on customers and the government for information. Technology can be commercialized without much problem owing to connections with the CAS or partners. In most cases, the markets have not been difficult to locate since parent companies and the CAS already had close connections with the markets. Institutional support is therefore important in understanding and accessing markets for many firms. In addition, the social capital built up during the early association with the CAS and customers is also critical to commercializing the technology. Legend is the most market-driven among the SOE-based firms. They engaged in a lot of market studies and extensive product design in the beginning. Hence, their product ideas can meet the needs of the market. They therefore enjoy a brand name reputation in the industry. They were able to achieve this because they incorporated customers’ ideas in the initial stage of knowledge creation. Table 9.4 provides the key findings on the commercialization phase.

However, as the market became more mature and competitive, Legend, Sanhuan, and Huayang had to develop new capabilities to meet the needs of new markets. When they reached the technology threshold for their original products, they needed to expand beyond the mature markets. Commercialization of new technology became an issue at this time. Thus,

Table 9.4. Knowledge Commercialization

Commercialization Legend Computer Systems

Beijing Kehua Zhongke Sanhuan Huayang Industries Huawei Technologies

Rihai Communications

Market knowledge Customer contacts

Own brand name. Market research. More market-driven in most products, but technology-driven in high-end products.

The government provides technology information, meets with customers about their needs and with trading companies for raw materials information. Lower costs, matches technology with needs. Government provides incentives, policies, and regulations that would encourage sales and technology commercialization.

Joint ventures with MNCs (LG, Siemens, Philips, and TDK) to explore the international market. Acquired GM’s subsidiary (MQ) and owned the production patent for the US market.

Market research and feasibility study. Markets are secured through JVs. Stable groups of customers. After gaining reputation, could explore new customers. But found it hard to compete with major US suppliers.

Mostly customized design and project-based. Provide a wide range of support.

Mostly from customers, with small portion from profession. Early stage: use personal ties to enter market. Now: brand name and direct contact with carriers and manufacturers. Extensive and intensive customer network (firms, R&D departments, professors, and bureaus) - can thus focus on customer needs in development and marketing.


they had to develop new technologies for new markets by working closely with customers. This situation is very similar to those of the two private enterprises, Huawei and Rihai, which had to face market competition in the very beginning. In the early years of its development as well as in the present, Huawei, owing to the nature of its products, has had to customize products and services. Rihai, on the other hand, is a supplier to many manufacturers and hence has an extensive feedback network with customers as well as with research institutes. Rihai knew what the customers needed at the beginning of product design and hence had less of a problem with technology commercialization.

Nevertheless, the success of getting this type of knowledge depends very much on social capital, specifically, on network relationships with partners and customers, not necessarily with the parents. For Huawei and Rihai, most products are customer-specific, and the knowledge required is therefore relatively tacit. It is more difficult for them to generate this type of commercialization knowledge on their own without any market contacts. Hence, they are relatively more conscious of developing a structure that integrates customers’ feedback into the knowledge development process. Thus, these firms are aware of the need to develop their absorptive capacity through a built-in mechanism. This was not so obvious with the SOE-based firms. They had prearranged customers, acquired through their parents or networks, and hence not much need to commercialize technology. 3. DISCUSSION

At the initial stage, most of the SOE-based firms had to rely on their parents. The CAS and related institutes provided a lot of support to their initial technology development. The firms therefore focused on market needs and transformed technology into business applications. They acquired their key technologies from their parents; these served as their competitive resources in the initial stage. The social and administrative ties were important factors in knowledge acquisition. The firms’ unique role in the reforming economy also allowed them to secure major markets without much difficulty. This outline confirms the framework developed from the literature, in which institutional support and social capital are influential in knowledge acquisition.

As the firms moved toward higher-end or related markets, the support of institutions for knowledge creation dissipated. This was especially so when the government was pushing for corporatization. When a firm is corporatized, the management has to reduce reliance on the parent (the CAS or bureaus). At the least, there is a customer-buyer relationship between the parent and the firms. They have to explore new markets and


new products in order to survive and remain competitive. However, if the major customers in the past were from the domestic market, they did not have the pressure to develop the latest technology. It is only through global competition that they find a need and desire to upgrade technology. Social capital (the tie with the parent or CAS) alone does not enhance their acquisition and integration of new knowledge. Hence, these SOE-origin firms have to develop their own resources to acquire both technology and market-related knowledge in order to remain competitive. In a transition economy like China, the institutional support is important for the firms to take off. Once they are able to develop their own resources, their reliance on institutions is less important.

However, the social capital built up earlier plays a different role at later stages. The influence on knowledge commercialization seems to be more important. The partnership with foreign firms is now increasingly important, not only to secure the latest technology, but also to secure foreign markets. This practice has become a legitimized action to enhance global competitiveness. Inkpen (2000) also suggested that learning through joint ventures is ideal for strategic complementarity. With the accession to the World Trade Organization, the joint venture is likely to become a dominant form of high-tech venture. The problem will then be how new and valuable technology can be transferred to the SOE-based firms. The private enterprises, however, will not have serious problems since they are already operating in such an environment.

Knowledge dissemination is not well established in most firms. They rely much more on a functional organizational structure and small project teams to disseminate information. The integration work is not very coordinated, except that an individual like the CEO or a top management person is responsible for integration. In most firms, the CEO is also the chief technology person because of his or her background. The firms focus on developing technologies in small teams, rather than integrating technology within the whole firm. This may due to several factors. The first is that most of the firms are still young in their industries, and the products are very focused. The market is not so complicated and, hence, cutting-edge technology and formal mechanisms are not yet necessary. As the product-markets grow more complex and sophisticated and innovations become a necessity, mechanisms that provide more frequent interactions and tight integration will be required for successful dissemination.

In addition, there is not much incentive to share knowledge among various departments. Learning is more at the individual level, instead of at the departmental or organizational level. In view of the current high labor mobility in high-tech industries, it is not surprising that motivation to share knowledge across departments and throughout firms is absent. Hence, social capital is necessary to facilitate the dissemination of knowledge by


overcoming these organizationally embedded barriers. As appropriate organizational arrangements have not been purposely designed, reliance on more tacit and intangible relationships, such as social networks and personal charisma, is more important. These kinds of intangible resources could also raise the absorptive capacity of the firms.

The larger firms and the private enterprises have better market focus. They have tailored their products to the needs of the customers by involving them in the early stage of product development. This was especially so because the customers were easily identified. The commercialization process, however, has not been consciously integrated with knowledge dissemination or knowledge creation. The customers are used as feedback mechanisms, much more than as participants in technology development.

The Chinese firms, nevertheless, provide evidence that social capital can influence commercialization of knowledge. This phenomenon has not been identified in the literature yet. Moreover, the relative importance of institutional support and organizational arrangements to the knowledge management process has not been fully explored. It is known that institutional support plays a lesser role in knowledge dissemination than in acquisition and commercialization. The institutional role also diminishes over the development cycle of firms. The current knowledge management of the Chinese high-tech firms is still very leader-oriented, and not yet institutionalized within the firm. The reliance on a learning structure and mechanism is not readily identified. Nevertheless, the acquisition and dissemination of knowledge is not greatly hindered, though a supportive learning structure is absent.

In response to the lack of a cluster of networks, social capital allows Chinese firms to create a network of companies from their SOE backgrounds. This network includes their parents, research institutes, universities, and even customers. This network helps to circumvent the problems in accessing knowledge spillovers. The private enterprises have also developed their networks to acquire and commercialize knowledge. However, the problem of protection of intellectual property is still not resolved.

4. CONCLUSION

This study examined the knowledge management process of six high-tech firms in China. We found that most of these firms emphasized the acquisition phase of knowledge management more and stressed integration and commercialization less. This pattern could be due to the youth of these companies, in that they are still in the early learning stage. Thus, we were not able to observe interactions between organizational design, absorptive


capacity, and knowledge integration in building comparative advantages. For future research on high-tech firms in emerging economies, examination of the interplay of institutional and organizational factors with the various phases of knowledge management will be promising. More specific relationships should be developed.

When these firms move into more competitive and more global markets, institutional support and social capital may become less important. The firms will have to develop other value-added resources in order to sustain their global competitiveness. This is an especially big challenge for the SOE-based firms. These firms will have to break their core rigidities of relying on parents for most of their resources. Further, the role of government has changed. Governments not only build infrastructure, but also often play the role of venture capitalist. Research institutions, including universities, have also been involved in developing the firms’ advantages. The interactions between these parties and the corporate governance structure for knowledge integration and dissemination should be considered in future studies of the more mature high-technology firms.

Some Chinese companies have been able to achieve their current leading role because of their focus on the local market and on cost advantages over other global firms. However, when an industry gets more sophisticated and the market becomes more global, these companies can no longer sustain their competitiveness. Firms have to develop new ventures, markets, and products. The question is how they can apply their current knowledge to obtain synergy in the new ventures. What is the mechanism needed to achieve successful integration? What types of leadership or leadership competencies are required to sustain the competitiveness of these firms? These are the questions future studies of high-tech firms in China should address.

ACKNOWLEDGEMENT

In addition to the support of The Chinese University of Hong Kong and Hong Kong University of Science and Technology Joint Grant on Chinese Business and Management, a grant from the Research Grants Council of the Hong Kong Special Administrative Region (Project No. CUHK4052/99H) partially supported the work described in the chapter.

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