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Knowledge management practices and innovation performance in Finland

Article in Baltic Journal of Management · October 2015

DOI: 10.1108/BJM-10-2014-0178

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Knowledge Management Practices and Innovation Performance in Finland

Author 1 Name: Henri Inkinen

Department: School of Business and Management
University/Institution: Lappeenranta University of Technology
Town/City: Lappeenranta
Country: Finland

Author 2 Name: Aino Kianto

Department: School of Business and Management
University/Institution: Lappeenranta University of Technology
Town/City: Lappeenranta
Country: Finland

Author 3 Name: Mika Vanhala

Department: School of Business and Management
University/Institution: Lappeenranta University of Technology
Town/City: Lappeenranta
Country: Finland

Abstract:

Purpose
Recent empirical studies have suggested that knowledge-based issues are closely related to companies’
innovation performance. However, the majority of research seems to be focused either on static knowledge
assets or knowledge processes such as knowledge creation. This study concentrates on the conscious and
systematic managerial activities for dealing with knowledge in firms (i.e. knowledge management practices),
which aim at innovation performance improvements through proactive management of knowledge assets.
The study explores the impact that knowledge management practices have on innovation performance.

Design/methodology/approach
We provide empirical evidence on how various KM practices influence innovation performance. Our results
are based on survey data collected in Finland during fall 2013. We use partial least squares (PLS) to test the
hypothesized relationships between KM practices and innovation performance.

Findings
We find that firms are capable of supporting innovation performance through strategic management of
knowledge and competence, knowledge-based compensation practices, and information technology practices.
We also point out that some of the studied KM practices are not directly associated with innovation
performance.

Originality/value
This study adds to the knowledge-based view of the firm by demonstrating the significance of the
management of knowledge for innovation performance. Furthermore, the division of KM practices into ten
types and the provision of the validated scales for measuring these add to the general
understanding of KM as a field of theory and practice. This study is valuable also from
 Knowledge Management Practices and Firm Performance in Finland

managerial perspective, as it sheds light on the potentially most effective KM practices to improve
companies’ innovation performance.

Keywords: Knowledge Management, Knowledge Management Practices, Performance, Innovation, Survey

Article classification: Research paper

Introduction

In recent decades, knowledge management (KM) has been one of the most influential and visible novel
approaches to the art and science of management. Nowadays KM is a widely based discourse, promoted by
academics, consultants, practitioners, and business press alike (e.g. Scarbrough et al., 2005). Recent research
has established that KM influences firm performance by providing organizations an effective framework to
implement their innovation strategies (Ciabuschi and Martin, 2012; Moustaghfir and Schiuma, 2013;
Quintane et al., 2011; Rasmussen and Nielsen, 2011). Thus, it seems that KM is an effective means for
increasing the innovation performance of an organization (Andreeva and Kianto, 2011; Chen et al., 2010; Lee
et al., 2013; Lin et al., 2012).

A great deal of research has focused on issues such as the relationship of generic knowledge processes like
knowledge acquisition, sharing, and creation (e.g. Chen et al., 2010; Lee et al., 2013) or knowledge-based
assets like human, structural, and relational capital (e.g. Subramaniam and Youndt, 2005; Wang and Chen,
2013; Castro et al., 2013; Menor et al., 2007; Aramburu and Saenz, 2011) on innovation performance.
However, few studies have examined the impact that the implementation of conscious and systematic
managerial activities (i.e. KM practices) have on firm innovation performance. In fact, even though some
previous studies have examined the association between KM practices and a firm’s innovation performance,
they have either considered only one or a few KM practices (e.g. Camelo-Ordaz et al., 2011; Chen and
Huang, 2009; Donate and Canales, 2012; Hurmelinna-Laukkanen, 2011; Sarin and McDermott, 2003; Soto-
Acosta et al., 2014; Yang et al., 2009; Vanhala and Ritala, forthcoming) or firm performance outcome
indicators aside from those related to innovation (e.g. Gold et al., 2001; Lee and Choi, 2003; Atapattu and
Jayakody, 2014). Furthermore, the Global KM Network, coordinated by Dr Peter Heisig, has conducted a
ground-breaking study interviewing more than 200 KM experts world-wide. According to this international
expert panel, the key research gap in the field is a better understanding of the relationship between KM and
firm performance (Heisig, 2014; Perez-Arrau et al., 2014). Therefore, a topical issue worthy of further study
is the demonstration of how engaging in KM practices enhances firm performance in terms of direct financial
benefits or indirectly through e.g. increased innovation performance.

To bridge this gap in the existing knowledge, this paper addresses the question of how KM practices impact
the innovation performance of companies. The goal of this research is to increase knowledge on the abilities
of firms to increase their innovation performance through engaging in KM activities. By dividing intentional
KM activities into ten types and exploring their impact on innovation, we add to the knowledge-based view
of the firm and the literature on KM. In addition, we contribute to knowledge on innovation management by
exploring novel sets of managerial methods to improve company innovativeness.

This paper is structured as follows: First, we theoretically explore KM practices by defining them and
examining how they are likely to impact a firm’s innovation performance. Then we empirically examine the
relationship of ten types of KM practices and innovation performance. The dataset contains information
collected from a cross-industry sample by means of a structured survey involving 259 Finnish firms, each
 Knowledge Management Practices and Firm Performance in Finland

with at least 100 employees. We conclude by discussing our findings and their implications for managing
knowledge in a beneficial manner and for the knowledge-based view of the firm.

Knowledge management practices

Andreeva and Kinato (2012) defined KM practices as the set of management activities conducted in a firm
with the aim of improving the effectiveness and efficiency of organizational knowledge resources. KM
practices refer to the aspects of the organization that can be manipulated and controlled by conscious and
intentional management activities (Andreeva and Kianto, 2012; Foss and Michailova, 2009). Accordingly,
we conceptualize them as the set of management activities that enable the firm to deliver value from its
knowledge-based assets.

The existing literature has typically discussed four major categories of critical success factors for KM: (1.)
human-oriented, which includes culture, people, and leadership; (2.) organization-oriented, which consists of
processes and structures; (3.) technology-oriented, which relates to both infrastructure and applications; and
(4.) management processes-oriented, which involves strategy, goals, and measurement (Heisig, 2009). In this
study, we divide KM practices into ten main categories which can be tracked back to the quartet that Heisig
mentioned. Our ten KM practices are related to supervisory work, knowledge protection, strategic
management of knowledge and competence (strategic KM), learning mechanisms, information technology
(IT) practices, work organization, and four dimensions of human resource management (HRM) practices –
recruiting, training & development, performance appraisal, and compensation practices. We separated
knowledge protection from other strategic activities because of the increased attention it has attracted during
the discussion on open innovation (e.g. Chesbrough, 2003; Huizingh, 2011). In addition, we split the HRM
practices into four categories in order to enable more fine-grained analysis.

Supervisory work is arguably the most crucial factor in developing organizational culture. The management-
level has a direct impact on how the rest of the company deals with e.g. key KM activities, as they act as
natural example-setters for the others. It can be even argued that, if KM does not unfurl to all levels of the
organization, with the management taking the highest responsibility, it is unlikely that it will ever catch on
(DeTienne et al., 2004). Leadership is a catalyst for inspiring, mentoring, setting examples, creating an
atmosphere of trust and respect, installing a creative culture, establishing a vision, listening, learning,
teaching, and sharing knowledge (Holsapple and Singh, 2001). Therefore, we regard supervisory work as a
mean to establish an innovative culture within a company.

Building on the reasoning presented above, we formulate the following hypothesis:

H1: KM supportive supervisory work is positively associated with the firm’s innovation performance.

Protecting the strategically significant knowledge of the firm from competitor imitation is a key issue for
ensuring the appropriability of intangibles-based profits (Teece, 1998). Knowledge in general is a public
asset, and the mere act of marketing it makes it available more widely. As a result, having conscious
practices in place for protecting the key value-creating intangibles in the firm is highly important. Firms that
utilize both informal and informal mechanisms of knowledge protection (Olander, 2011) are likely to be
more successful in terms of both competitiveness and innovation performance (Hurmelinna-Laukkanen and
Puumalainen, 2007).

Consequently, we formulate the following hypothesis:

 Knowledge Management Practices and Firm Performance in Finland

H2: Knowledge protection practices are positively associated with the firm’s innovation performance.

Strategic KM can be defined as the strategic planning, implementation, and updating activities related to the
knowledge-based assets in the firm (Kianto et al., 2014). It taps into identifying the key strategic knowledge
within the organization and building a knowledge-based strategy, as well as activities for monitoring and
measuring knowledge assets in the firm, and their developmental needs in relation to the business
environment (Dalkir, 2005; Kianto, 2008; McKeen et al., 2005; Skyrme and Amidon, 1997; Zack, 1999a).
Strategic KM activities can increase organizational performance through the following mechanisms: First,
they enable the organization to focus on the most value-creating activities of the firm, which is important as
researchers have suggested that the intangible assets are the focal sources of competitive advantage (Barney,
1991; Conner and Prahalad, 1996; Grant, 1996). Second, strategic KM also enables the organization to craft
strategies based on the knowledge-based advantages they have over their competitors (Zack, 1999b).
Furthermore, strategic KM practices enable the organization to make strategic decisions of allocation,
utilization, expansion, and sharing of the company’s knowledge base that follow the overall strategic aims of
the company (as suggested by Zack, 1999b; see also Von Krogh et al., 2001).

Given the above considerations, we formulate the following hypothesis:

H3: Strategic management of knowledge and competence is positively associated with the firm’s innovation
performance.

HRM practices play a significant role in KM (Hislop, 2003; Scarbrough, 2003; Wong, 2005). HRM is
typically defined as the management of the organization’s employees (Foot and Hook, 2008). Usually HRM
functions include tasks such as recruiting, compensation, performance appraisal, and training & development.
The ultimate goal of HRM is to find and select the best-fitting employees, and to use appropriate
remuneration, training, and evaluation mechanisms to retain and bring out the best in them. KM-focused
HRM practices can increase innovation performance through four main mechanisms. First, by paying
attention to the candidates’ knowledgeability and social skills in the recruitment process, the firms increase
the availability of a knowledgeable workforce for producing effective and efficient performance in
knowledge-intensive tasks (Chen and Huang, 2009; Currie and Kerrin, 2003; Scarbrough, 2003). Also, the
likelihood of matching the person with the best expertise to the right task is increased by defining work roles
and positions based on competences. Second, training & development is another HRM practice that greatly
influences the firm’s knowledge base. A firm that actively plans and arranges courses, seminars, and other
training for their employees keeps its knowledge base updated and competitive. The HR management’s task
is to assess and analyse training needs and provide and evaluate training (Senge, 1994). Third, performance
appraisal is a regular employee performance review and career development session between an employee
and his/her superior(s). Traditionally employees are evaluated based on their economic performance, but a
KM-based system highlights knowledge activities (i.e. knowledge sharing, creation, and utilization). The
probability that employees will contribute to knowledge activities increases when they are valued as much or
more than straightforward economic performance. Fourth, a compensation scheme based on knowledge
activities (i.e. knowledge sharing, creation, and utilization) increases the likelihood that employees will
engage in such activities. Moreover, through acknowledging expertise in career advancement, the knowledge
activity-based compensation scheme increases employee motivation to utilize more of their knowledge in
their work. Finally, HRM practices are related with retention of knowledgeable employees within the
organization with remuneration, compensation, and other means of acknowledging them (intangible and
tangible motivations).

In view of the above, we formulate the following hypotheses:

 Knowledge Management Practices and Firm Performance in Finland

H4: Knowledge-based recruiting practices are positively associated with the firm’s innovation performance.
H5: Knowledge-based training & development practices are positively associated with the firm’s innovation
performance.
H6: Knowledge-based performance appraisal practices are positively associated with the firm’s innovation
performance.
H7: Knowledge-based compensation practices are positively associated with the firm’s innovation
performance.

Learning mechanisms (i.e. the improvement and increase of organizational knowledge and competence) are a
key facet of effective knowledge-based operation. In the organizational context, learning mostly takes place
as workplace learning through learning-by-doing or practice-based learning (Gherardi, 2009 Lave, 2009) or
through vicarious social learning, that is, learning from others by observing their behaviour and its
consequences. Specifically, learning-related KM practices increase innovation performance by improving
access to collegial tacit and explicit knowledge, thereby increasing the quality of performance. By
legitimizing vicarious learning, firms can increase employees’ motivation to share and create knowledge.
Also, learning practices improve a firm’s innovation performance by providing opportunities for mentoring
and coaching in the organization; in addition, providing opportunities for learning-by-doing will help
employees share, build, and develop knowledge for organizational benefit.

Based on this understanding, we formulate the following hypothesis:

H8: Learning mechanisms are positively associated with the firm’s innovation performance.

Practices related with utilizing technologically mediated information systems are another important means
for improving the leverage of knowledge in a firm (Alavi and Leidner, 2001; Davenport and Prusak, 1998).
Several IT practices for KM influence innovation performance. First, the improved, increased, and quicker
access to a vast amount of electronic information, including social networks (social media), has opened up
possibilities to utilize new sources of information in improved decision-making. Second, IT has improved
possibilities for knowledge codification, which Nonaka and Takeuchi (1995) defined as turning tacit
knowledge into explicit knowledge. Third, IT has provided means for advanced knowledge storage, and thus
built organizational memory further and enabled efficient re-use of knowledge. IT practices can also
contribute greatly to systematic knowledge analysis, improve knowledge combination from various sources,
allow for location-independent, seamless access to knowledge and information within the organization and
beyond, and increase the means and channels for collaboration and interaction among the organization’s
experts (e.g. Kankanhalli et al., 2003). Finally, IT can also enable more rapid application of knowledge
through workflow automation (Alavi and Leidner, 2001).

Therefore, we formulate the following hypothesis:

H9: KM supportive IT practices are positively associated with the firm’s innovation performance.

Practices for organizing work include the organizational design issues that facilitate the leverage of
knowledge in an organization. These entail decisions made concerning the division of work and
responsibilities as well as the coordination of work (Mintzberg, 1992). For example, the distribution of power
and decision-making rights to knowledge workers has been suggested to speed up organizational activities as
well as to promote innovativeness in firms (Davenport and Prusak, 1998). Furthermore, the establishment
and utilization of cross-functional teams may stimulate knowledge creation, whereas too hierarchical a
 Knowledge Management Practices and Firm Performance in Finland

structure slows knowledge flows (Nonaka and Takeuchi, 1995). The legitimization of various types of
communities of practice and interest is likely to create powerful forums of knowledge development (Brown
and Duguid, 2001; Mohrman et al., 2002) that are therefore likely to enforce innovation performance.

Based on this argumentation, we formulate the following hypothesis:

H10: KM supportive work organization is positively associated with the firm’s innovation performance.

Impact of knowledge management practices on innovation performance

According to the pioneering studies on a knowledge-based view of the firm, performance differences
between organizations accrue due to their different stocks of knowledge and their differing capabilities in
using and developing knowledge (Grant, 1996; Kogut and Zander, 1992; Spender and Grant, 1996). This
means that the more an organization is utilizing management practices aimed to support efficient and
effective management of knowledge for organizational benefit, the more likely it is to achieve high business
performance.

Several empirical studies have examined the influence of different aspects of knowledge-based assets and
KM on innovation performance. One stream of papers has revealed that generic knowledge processes – such
as knowledge creation and sharing (Chen et al., 2010), knowledge sharing, application, and storage (Lee et
al., 2013), and knowledge creation, documentation and storage, sharing, and acquisition (Andreeva and
Kianto, 2011) – have positive impacts on a firm’s innovation performance. Another avenue of research has
focused more on the knowledge-based assets and how the possession of those assets is associated with firm
innovativeness. For instance, Wang and Chen (2013) found that the institutionalized knowledge and codified
experience (i.e. organizational capital) and the interaction-based knowledge among individuals and their
networks (i.e. social capital) mediate the relationship between HRM practices and incremental innovative
capability, whereas social capital acts as a mediator between HRM practices and radical innovative
capability. Moreover, Castro et al. (2013) discovered that highly creative, skilled, and experienced employees
(i.e. human capital) supplemented with well-structured networks of the company’s clients (i.e. customer
capital) are the key ingredients in achieving a high degree of innovation performance. Menor et al. (2007)
continued on the same stream of thought by stating that employees’ skill levels and the relative
organizational learning capabilities (i.e. human capital), the codified knowledge embedded in the processes
and information systems (i.e. structural capital), and the degree of internal and external integration with
suppliers and customers (i.e. social capital) constitutes an important antecedent for product innovation. Other
researchers have found organizational culture to be an important enabler of knowledge-related behaviour at
work (e.g. De Long and Fahey, 2000; Alavi et al., 2006; Travica, 2013).

In sum, researchers have provided substantial information on the relationship between knowledge processes
and innovation performance, as well as on the influence of knowledge assets such as intellectual capital on
innovation performance. What seems to be lacking is empirical evidence of the relationship between the
conscious and systematic managerial activities, the KM practices, and a firm’s innovation performance.
Among the few such studies, Chen and Huang (2009), Camelo-Ordaz et al. (2011), Soto-Acosta et al. (2014),
and Vanhala and Ritala (forthcoming) pointed out a positive association between HRM practices and the
firm’s innovation performance. Andreeva and Kianto (2012) studied the combined impact of HRM practices
and information and communication technology (ICT) practices on firm competitiveness outcomes including
innovativeness. They noted a direct relationship between ICT and innovation performance, as well as a
mediated link between HRM practices and innovation performance (Andreeva and Kianto, 2012). Further,
empirical literature has provided evidence that innovation performance can be facilitated by means of IT
 Knowledge Management Practices and Firm Performance in Finland

support (Yang et al., 2009), knowledge strategy (Donate and Canales, 2012), knowledge protection
(Hurmelinna-Laukkanen, 2011), and leadership behaviour (Sarin and McDermott, 2003). However, these
examples are quite a rarity among the body of literature.

Based on the argumentation above, we posit that KM practices increase effective and efficient performance
of knowledge-intensive tasks, and thereby the innovation performance of a firm. Specifically, this hypothesis
can be broken into the smaller parts previously described, each representing a particular set of KM practices.
More formally, we claim that the more intensively an organization applies a given KM practice, the higher
innovation performance it is likely to attain.

Methods

Sample and data collection

We tested the hypotheses with survey data that was collected in Finland in 2013 by means of a structured
survey, using the key-informant technique. The initial population comprised a cross-industry sample of
Finnish companies that included only firms with at least 100 employees. We used the Intellia database to
identify the companies. A total of 1523 companies were considered suitable for the initial sample. An
external research company contacted all the eligible firms by telephone to ask the person in charge of human
resources to respond to the questionnaire. The company emphasized confidentiality and promised to provide
a summary of the results to the respondents. Out of the 1523 companies, we received 259 responses,
representing a response rate of 17.0%. The most represented industries were manufacturing (37.8%) and
wholesale and retail trade (16.2%). Other notable industries were services (9.7%) and transportation and
storage (8.1%). Based on statistical comparison (the chi-square test) with the whole population of Finnish
companies, we determined that manufacturing is over-represented and services is underrepresented in our
sample, as these industries form 29.8% and 13.5% of the entire population of the Finnish companies,
respectively. In terms of number of employees, the largest group (39.8%) employed 100-200 employees.
One-fifth (20.0%) of the companies employed 250-500 employees, 9% employed 500-1000 employees, and
8% employed over 1000 employees. Most of the respondents held position such as a HR director or manager
(77.9%), other director or manager (8.8%), or managing director (6.9%), indicating their expertise and key
position regarding the issues of knowledge management and innovation performance.

Measures
Independent variables. We measured KM practices using primarily scales that we developed. Specifically,
we created the supervisory work scale, the training & development scale, and the work organization scale.
We created the learning mechanisms scale based upon inspiration from Becerra-Fernandez and Sabherwal
(2001). We drew additional inspiration from the literature for the following scales: the strategic KM scale
(inspired by McKeen et al., 2005; Kianto et al., 2014; Boumarafi and Jabnoun, 2008), the recruitment scale
(inspired by Yanga and Linb, 2009; Cabello-Medina et al., 2011), the performance appraisal scale (inspired
by Andreeva and Kianto, 2012), the compensation scale (inspired by Andreeva and Kianto, 2012), and the IT
practices scale (inspired by Handzic, 2011; Negash, 2004; Pirttimäki, 2007). We adopted the remaining scale,
the knowledge protection scale, from Levin et al. (1987), Cohen et al. (2000), Hurmelinna-Laukkanen and
Puumalainen (2007), Hurmelinna-Laukkanen and Ritala (2012), and Lawson et al. (2012). All of the
measures were based on five-point Likert scales (1-strongly disagree, 5-strongly agree).

Dependent variables. The innovation performance scale relied on work by Weerawardena (2003). The scale
(Likert scale from 1-very poorly to 5-very well) consisted of five items wherein respondents were requested
to compare their company’s success to the competitors’ in terms of creating innovations and new operating
methods.
 Knowledge Management Practices and Firm Performance in Finland

Control variables. We used three variables (i.e. firm age, the number of employees, industry) as control
variables to eliminate whatever effects they might have had on innovation performance. We measured firm
age in terms of years gone since establishment, and we utilized the number of employees as a proxy value for
the firm size. For the industry variable, we used an adapted classification of eight classes based on the
European statistical classification of economic activities.

Statistical methods
We analysed the data collected with the structured survey method in several steps and using various
statistical methods. First, we used correlation analysis in order to identify any interconnectedness between
our independent and dependent variables. This was assessed by statistical significance as well as strength of
the correlation.

Second, we conducted internal consistency analyses in order to test whether our measures were applicable to
measure the constructs we were interested in. We evaluated internal consistency by two measures: construct
reliability (based on the value of construct reliability) and convergent validity. Convergent validity was
assessed by value of construct reliability, the strength and statistical significance of the factor loadings, as
well as with the value for the average variance extracted.

Third, we tested discriminant validity of the constructs in our study. Discriminant validity indicates whether
the constructs actually differ from each other. We assessed discriminant validity by comparing the average
variance extracted by the individual constructs and the shared variance between a given construct and the
other constructs in the model. The shared variance was calculated as squared correlation between two
constructs; that is, we calculated it by squaring the correlations between each pair of constructs.

Finally, we used structural equation modelling for statistical testing of the hypothesized relationships. We
utilized partial least squares (PLS) software for the analyses. We focused on the signs of the path estimates,
the statistical significance and strength of the path estimates, and the amount of variance our independent
variables (i.e. KM practices) were able to explain out of the dependent variable (i.e. innovation performance).
We estimated a one direct effect model including all of our independent variables, three control variables (i.e.
firm age, the number of employees, industry) and the dependent variable.

Results

We drafted a model that was built on sound theoretical premises in order to test the hypothesized
relationships between the KM practices and innovation performance. We utilized PLS software for the
analyses. The first steps were to assess the reliability and validity of the measurement model. After that, we
used the structural model to test our hypotheses.

Correlation analysis
Table 1 presents the mean values, standard deviations, and correlation matrixes for the KM practices and
innovation performance.
 Knowledge Management Practices and Firm Performance in Finland

Table 1 Correlation matrix for the research model

ariable Mean SD 1 2 3 4 5 6 7 8 9 10

1. Innovation performance 3.29 0.52

2. Supervisory work 3.46 0.59 .315**
3. Knowledge protection 3.96 0.80 .174* .323**
4. Strategic KM 3.40 0.74 .351** .490** .325**
5. Knowledge-based
4.18 0.55 .189** .456** .393** .374**
recruiting
6. Knowledge-based training
3.93 0.74 .267** .532** .311** .449** .533**
& development
7. Knowledge-based
2.99 0.81 .171* .519** .272** .536** .489** .519**
performance appraisal
8. Knowledge-based
2.73 0.96 .271** .401** .270** .489** .437** .386** .521**
compensation
9. Learning mechanisms 3.39 0.78 .182** .495** .183** .432** .435** .503** .598** .454**
10. IT practices 3.57 0.59 .302** .421** .489** .444** .408** .407** .369** .369** .399**
11. Work organization 3.78 0.55 .273** .574** .358** .374** .480** .651** .394** .363** .417** .506**
Notes: ** Correlation is significant at the 0.01 level (2-tailed), * Correlation is significant at the 0.05 level

The matrix shows significant correlations throughout between the independent variables (i.e. KM practices)
and the dependent variable (i.e. innovation performance). These findings indicate and support our
expectations of interconnectedness between the KM practices and innovation performance.

Measurement models
In order to test the measurement models, we assessed the internal consistency as well as the discriminant
validity.

Measures of construct reliability (CR) and convergent validity represent internal consistency. The results of
the CR test showcase that all the constructs had a value above the generally accepted threshold of 0.7
(Bagozzi and Yi, 1991) (see Appendix 1). In the test for convergent validity, we examined CR, the factor
loadings, and average variance extracted (AVE). First, all the items had high and statistically significant
loadings throughout (see Appendix 1). This result tells us that all the items related to their specific constructs,
verifying the posited relationships among the indicators and constructs. Second, the AVE measures exceeded
the cut-off point of 0.50 (see e.g., Fornell and Larcker, 1981) in all of our constructs. Thus, taking into
account all the criteria for convergent validity, our measures seem to be applicable.

The test for discriminant validity indicates the extent to which the constructs differ from each other. In order
to show discriminant validity, the AVE of the construct should be greater than the variance shared between
that construct and the other constructs in the model (i.e. the squared correlation between two constructs)
(Fornell and Larcker, 1981). All the constructs in our study met this condition; specifically, the diagonal
elements (AVEs) were greater than the off-diagonal elements in the corresponding rows and columns (see
Table 2).
 Knowledge Management Practices and Firm Performance in Finland

Table 2 Discriminant validity

Variable 1 2 3 4 5 6 7 8 9 10 11
1. Innovation performance .67
2. Supervisory work 0.10 .55
3. Knowledge protection 0.03 0.10 .62
4. Strategic KM 0.12 0.24 0.11 .59
5. Knowledge-based recruiting 0.04 0.21 0.15 0.14 .65
6. Knowledge-based training & development 0.07 0.28 0.10 0.20 0.28 .58
7. Knowledge-based performance appraisal 0.03 0.27 0.07 0.29 0.24 0.27 .71
8. Knowledge-based compensation 0.07 0.16 0.07 0.24 0.19 0.15 0.27 .79
9. Learning mechanisms 0.03 0.25 0.03 0.19 0.19 0.25 0.36 0.21 .69
10. IT practices 0.09 0.18 0.24 0.20 0.17 0.17 0.14 0.14 0.16 .56
11. Work organization 0.07 0.23 0.13 0.14 0.23 0.42 0.16 0.13 0.17 0.26 .50
Notes: AVE associated with the construct is presented diagonally.
The squared correlations between the constructs are presented in the lower left triangle.

In sum, the model assessments gave good evidence of validity and reliability for the operationalization of the
concepts.

Testing the research models

Our direct effect model for KM practices is able to explain 15% of the variance in the innovation
performance (see Table 3).

The empirical evidence is mixed. On one hand, the results obtained suggest that the path estimates from
strategic KM (B=0.20, p < 0.05), knowledge-based compensation (B=0.21, p < 0.05), and IT practices
(B=0.20, p < 0.05) were as hypothesized. Thus, our Hypotheses 3, 7, and 9 were supported. On the other
hand, the path estimates from knowledge-based recruiting (B=-0.13, p < 0.05) and learning mechanisms (B=-
0.11, p < 0.1) were contrary to Hypotheses 4 and 8. The remainder of the posited relationships were
statistically insignificant, and thus rejected Hypotheses 1, 2, 5, 6, and 10 (see Table 3).

Second, the path estimates from the control variables to the firms’ innovation performance were insignificant.
Thus, it seems that the conditions such as the firm size measured in the number of employees, the firm’s age,
and the industry do not influence the firms’ ability to innovate.
 Knowledge Management Practices and Firm Performance in Finland

Table 3 Testing the research models for KM practices and innovation performance

Path Path coefficient (B) t-value

Independent variables
Supervisory work  Innovation performance -0.01 n.s. 0.10
Knowledge protection  Innovation performance -0.04 n.s. 0.58
Strategic KM  Innovation performance 0.20* 2.10
Knowledge-based recruiting  Innovation performance -0.13* 1.93
Knowledge-based training & development  Innovation performance -0.08 n.s. 1.08
Knowledge-based performance appraisal  Innovation performance -0.01 n.s. 0.17
Knowledge-based compensation  Innovation performance 0.21* 2.11
Learning mechanisms  Innovation performance -0.11 a 1.31
IT practices  Innovation performance 0.20* 2.23
Work organization  Innovation performance 0.07 n.s. 0.71
Control variables
Employees  Innovation performance -0.02 n.s. 0.40
Firm age  Innovation performance 0.03 n.s. 0.83
Industry  Innovation performance 0.05 n.s. 1.10
R2 .15
Notes: *** Significance < 0.005; ** Significance < 0.01; * Significance < 0.05; a Significance < 0.10

Discussion

Overall, this study contributes to a better understanding of how knowledge should be managed for
organizational benefit.

Strategic management of knowledge and competence

According to our results, strategic KM was positively associated with the firm’s innovation performance. The
findings of the structural model suggested that innovation performance tends to be higher in the firms that
consider knowledge and competences as the key factors in their strategy and strategic planning, and that
update the strategy regularly and disseminate it thoroughly within the entire organization. Consequently, this
study supports the argument that Donate and Canales (2012) made about the superiority of a proactive
knowledge strategy in terms of maintaining a broad understanding of knowledge as a strategy, setting
objectives, utilizing KM-specific tools, and recognizing the importance of KM culture and other tools for
product and process innovation performance. In addition, this study partially confirms Theriou et al.’s (2011)
finding about the crucial role of leadership for the sake of KM effectiveness and firm performance. Our
results also add to the knowledge-based view of the company (e.g. Barney, 1991; Grant, 1996; Conner and
Prahalad, 1996) by demonstrating that the knowledge resources possess strategic value in relation with the
firm’s innovation performance.

Knowledge-based compensation
Another KM practice that is likely to be an influential contributor for firm’s innovation performance is
knowledge-based compensation. This HRM practice encourages employees to engage in knowledge-
intensive activities through rewarding and promotion systems that recognize involvement in knowledge
processes such as knowledge sharing, knowledge creation, and knowledge utilization. This finding reaffirms
the prevailing understanding of how HRM practices could positively influence the firm’s innovation
performance by increasing the knowledge processes (Chen and Huang, 2009), by adding to the employees’
affective commitment (Camelo-Ordaz et al., 2011), by increasing knowledge sharing (Soto-Acosta et al.,
2014), and by supporting impersonal trust (Vanhala and Ritala, forthcoming).
 Knowledge Management Practices and Firm Performance in Finland

KM supportive IT practices
Furthermore, KM supportive IT practices could be an influential factor in a firm’s innovation performance.
This finding is in line with Yang et al. (2009), who determined that IT support for collaboration,
communication, information search, real-time learning, simulation, and prediction was highly beneficial for a
firm’s innovativeness. Likewise, it aligns with findings by Andreeva and Kianto (2012), who wrote that ICT
practices directly support firm performance, including innovation performance, and also mediate the effect of
HRM practices. Further, Alavi and Leidner (2001) once stated that IT gives a big helping hand for a modern
knowledge worker when it is utilized in information search and discovery, and in establishing new and
efficient communication channels between a firm’s internal and external stakeholders. IT can be also used to
establish a new sort of capacity, such that a man cannot handle, as well as to collect and analyse business
critical information from countless sources in order to assist in better decision-making (Cody et al., 2002).

Table 4 A summary of the findings

Hypotheses
Hypothesis 1: KM supportive supervisory work is positively associated Not supported
with the firm’s innovation performance.
Hypothesis 2: Knowledge protection practices are positively associated Not supported
with the firm’s innovation performance.
Hypothesis 3: Strategic management of knowledge and competence is Supported
positively associated with the firm’s innovation performance.
Hypothesis 4: Knowledge-based recruiting practices are positively Not supported
associated with the firm’s innovation performance.
Hypothesis 5: Knowledge-based training & development practices are Not supported
positively associated with the firm’s innovation performance.
Hypothesis 6: Knowledge-based performance appraisal practices are Not supported
positively associated with the firm’s innovation performance.
Hypothesis 7: Knowledge-based compensation practices are positively Supported
associated with the firm’s innovation performance.
Hypothesis 8: Learning mechanisms are positively associated with the Not supported
firm’s innovation performance.
Hypothesis 9: KM supportive IT practices are positively associated with Supported
the firm’s innovation performance.
Hypothesis 10: KM supportive work organization is positively Not supported
associated with the firm’s innovation performance.

Knowledge-based recruiting
Contrary to our hypotheses, knowledge-based recruiting had a statistically significant negative association
with the firm’s innovation performance. Even though this finding comes as a surprise and is against the
established empirical evidence (e.g. Chen and Huang, 2009; Camelo-Ordaz et al., 2011), it is explainable.
First, recruiting is a cornerstone for any functioning modern firm because new talent must be brought in as a
replenishment due to the eventual retirement of senior staff members and other reasons such as lay-offs.
Further, a well-conducted recruiting process improves the chance that a firm catches the right people to fill in
the right positions. However, the labour market nowadays is vast and equally open practically for all the
companies within the European Union, so there are good resources available for all the companies in an
increasing fashion. Thus, firms are experiencing a diminishing chance to gain a competitive edge over their
rivals by investing heavily in acquiring the key talent directly from the labour market. Instead, more decisive
factors could be other KM practices which aim at increasing and extracting the value of the acquired human
capital in the long run. Such practices could be a re-configured compensation plan, training & development
programmes, and appropriate information systems.
 Knowledge Management Practices and Firm Performance in Finland

Learning mechanisms
Also, the learning mechanisms were negatively associated with the firm’s innovation performance, although
the result was only a statistically marginal one. Learning mechanisms in our study consist of knowledge
transfer from senior staff members to more inexperienced ones through mentoring programmes,
apprenticeships, and job orientation, as well as the organized collection and utilization of the best practices.
Therefore, it seems that too heavy a reliance on lessons learned from past experiences or the dissemination of
already existing knowledge may even turn against the firm’s innovation performance, making outdated
knowledge an innovation-hindering core rigidity for the firm (Leonard-Barton, 1995). One explanation for
this phenomenon is that knowledge gets rapidly outdated in today’s heavily turbulent business environment,
and utilization of such knowledge in, for instance, research and development may lead to end products that
do not generate the desired level of sales.

Other KM practices
An additional five KM practices in our research model did not showcase statistically significant associations
with the firm’s innovation performance. This result could be partially explained by the theoretical
contribution by Kianto et al. (2014), who suggested that improvements in firm performance outcomes could
accrue from the combined effect of knowledge assets (i.e. intellectual capital) and systematic and deliberate
managerial activities (i.e. KM practices). Thus, there are underlying potential interaction effects in terms of
moderation and mediation, which cannot be detected by solely focusing on KM practices and firm
performance outcomes. In order to increase understanding about the knowledge assets and innovation
performance, the research path rising from these arguments should be a subject of future research.

Conclusion

Overall, this study adds to a better understanding of how knowledge should be managed for organizational
benefit. It contributes to the knowledge-based view of the firm by utilizing empirical data with a large sample
size in order to demonstrate the most efficient management mechanisms for increasing innovation.
Furthermore, the division of KM practices to ten types and the provision of the validated measurement scales
adds to the general understanding of knowledge management as a field of theory and practice, and offers
avenues for further research with the same instruments. The research also adds to innovation management
literature by demonstrating the impact of knowledge management as a managerial tool for advancing
innovation.

The results of this study increase understanding of the potentially most effective KM practices that are likely
to improve a firm’s innovation performance, and therefore serve as a guideline for the managers. Our
findings are especially valuable for managers, as we examined the influence of actual managerial practices on
innovation performance. Thus, this study relates to the managers’ daily work and could spark interest and
actions among them.

Strategic planning, implementation, and updating activities which consider knowledge as the main
component seem to be positively linked with company’s innovativeness. In the practical level, strategic KM
is about assessing current knowledge and the need for future knowledge. Then, KM strategy is formulated to
bridge the gap between what there already is and what there should be. Equally important practice is to
communicate and disseminate the strategy throughout the organization, in order to ensure that everyone is
working for the common goal. Consequently, strategic KM supports innovation performance because it helps
to identify a strategic knowledge gap which emphasizes the need for knowledge creation and new inbound
knowledge flows.
 Knowledge Management Practices and Firm Performance in Finland

Employees are typically being compensated based on their economic performance. For instance, salespersons
receive bonuses for achieving or surpassing the set sales quotas, and project managers are compensated for
steering projects to meet their goals in terms of time and budget. The findings of this study, however, indicate
that firms are potentially better off, innovation performance-wise, if they base the incentive/compensation
system on knowledge activities. When the traditional economic figures are replaced with indicators such as
knowledge creation, sharing, and utilization, the employees will more probably engage with those activities
and therefore improve the entire company’s innovation performance.

Information and communication technology can be also utilized to make a difference in innovation
performance. Nowadays, the amount of available information for companies is enormous. It could be seen as
either a threat or an opportunity. The companies that see the positive side of the situation take advantage of
IT support in searching, gathering, and analysing the information in order to support their decision-making
and innovation performance. IT can also assist in open innovation by providing platforms to joint innovation
with external parties, as well as establishing various communication channels for the internal and external
stakeholders. Thus, managers should consider IT as not only a support system, but also as a means to achieve
improved innovativeness and firm performance.

This study has some limitations due to the chosen research design and context, which also serve as a basis for
further research directions. First, our study examined the relationship of KM practices and innovation in a
country that belongs to the group of economically highly developed countries, accompanied with well-
educated inhabitants; therefore, the results may not be generalizable to other national contexts. In future
studies, this phenomenon should be examined also in other contexts. Second, single respondents were used to
assess all the variables examined in the study. Further studies could improve on this limitation by utilizing
more objective measures of innovation performance. This is also concern in terms of possible common
method bias. Although it is not a major problem in this study, we suggest that future studies should involve
different respondents with different organizational roles for independent and dependent to improve
methodological rigor. Third, knowledge-intensity and innovation management vary greatly between
industries. Thus, a comparative study about KM practices and innovation performance between different
industries could be interesting to carry out. The findings from such a study could prove to be highly
influential in industry-specific decision-making. Fourth, the current study is a correlational one-time study,
conducted in a cross-sectional research setting. However, in order to examine the causal relationships
between the independent and dependent variables, a longitudinal study should be carried out. Collecting
time-series data would allow researchers to gain a greater understanding of the causal and longitudinal nature
of the effect of KM practices on innovation performance.

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Appendix 1 Measurement items

Factor
Concept Item AVE CR
loading
Compared to its competitors, how successfully has your company managed to
create innovations/new operating methods in the following areas over the past
year? (1 = very poorly, 5 = very well)

Innovation performance Products and services for customers .822***

Production methods and processes .762***
Management practices .844***
.67 .91
Marketing practices .796***
Business models .851***
To what extent do the following statements on supervisory work apply to your
company? (1 = completely disagree, 5 = completely agree)

Supervisors encourage employees to share knowledge at the workplace. .818***

Supervisors encourage employees to question existing knowledge. .699***
Supervisors allow employees to make mistakes, and they see mistakes as learning
Supervisory work
opportunities. .656***
Supervisors value employees’ ideas and viewpoints and take them into account.
.55 .90
.828***
Supervisors promote equal discussion in the workplace. .642***
Supervisors share knowledge in an open and equal manner. .764***
Supervisors continuously update their own knowledge. .765***
To what extent do the following statements on knowledge protection apply to your
company? (1 = completely disagree, 5 = completely agree)
Knowledge protection
Protecting strategic knowledge from those stakeholders to whom it is not intended .562***
Utilization of patents, agreements, legislation and other formal means. .870***
.62 .82
Utilization of confidentiality, employee guidance and other informal means. .880***
To what extent do the following statements on strategic knowledge and
competence management apply to your company? (1 = completely disagree, 5 =
completely agree)

Strategic management of Strategy is formulated and updated based on company knowledge and
knowledge and competence competences. .777***
Strategy addresses the development of knowledge and competences .774***
.59 .85
Strategic knowledge and competence is systematically benchmarked against the
competitors. .770***
The responsibility for strategic knowledge management has been clearly assigned
to a specific person. .755***
To what extent do the following statements on human resources management apply
to your company? (1 = completely disagree, 5 = completely agree)
Knowledge-based
recruiting Special attention to relevant expertise .786***
Special attention to learning and development ability. .806*** .65 .85
The candidates’ ability to collaborate and work in various networks is evaluated. .831***
 Knowledge Management Practices and Firm Performance in Finland

To what extent do the following statements on human resources management apply

to your company? (1 = completely disagree, 5 = completely agree)

Knowledge-based training Employees are provided with opportunities to deepen and expand their expertise. .715***
& development The company offers training that provides employees with up-to-date knowledge.
.525***
The employees have an opportunity to develop their competence through training .58 .84
tailored to their specific needs. .922***
The employees’ development needs are discussed with them regularly.
.815***
To what extent do the following statements on human resources management apply
to your company? (1 = completely disagree, 5 = completely agree)

The sharing of knowledge is one of our criteria for work performance assessment.
Knowledge-based
.739***
performance appraisal
The creation of new knowledge is one of our criteria for work performance
assessment. .837*** .71 .88
The ability to apply knowledge acquired from others is one of our criteria for work
performance assessment. .934***
To what extent do the following statements on human resources management apply
to your company? (1 = completely disagree, 5 = completely agree)
Knowledge-based
compensation The company rewards employees for sharing knowledge. .870***
The company rewards employees for creating new knowledge.
.885*** .79 .92
The company rewards employees for applying knowledge.
.917***
To what extent do the following statements on learning practices apply to your
company? (1 = completely disagree, 5 = completely agree)

Learning mechanisms Knowledge is transferred from experienced to inexperienced employees through

mentoring, apprenticeship and job orientation, for example. .510***
The company systematically collects best practices and lessons learned. .969*** .69 .86
The company makes systematic use of best practices and lessons learn .938***
To what extent do the following statements on IT management practices apply to
your company? (1 = completely disagree, 5 = completely agree)

Technology is utilized to enable efficient information search and discovery. .776***

Technology is utilized to enable internal communication throughout the
organization. .616***
IT practices
Technology is utilized to communicate with external stakeholders. .767***
.56
Technology is utilized to analyse knowledge in order to make better decisions. .763***
Technology is utilized to collect business knowledge related to its competitors,
customers and operating environment, for example. .792*** .88
Technology is utilized to develop new products and services with external
stakeholders. .770***
To what extent do the following statements on work organizing apply to your company?
(1 = completely disagree, 5 = completely agree)

Employees have an opportunity to participate in decision-making in the company. .673***

Work duties are defined in a manner that allows for independent decision-making. .507***
Work organization Informal interaction is enabled between members of our organisation. .793***
Face-to-face meetings are organized when necessary. When necessary, working groups .50
with members who possess skills and expertise in a variety of fields. .653***
Working groups with members who possess skills and expertise in a variety of fields. .720*** .85
When needed, our company makes use of various expert communities. .828***

Notes: *** Significance < 0.005

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