Motivation in a Knowledge-Based Theory of the Firm

Motivation in a Knowledge-Based Theory of the Firm

MARGIT OSTERLOH University of Zurich Institute for Research in Business Administration Plattenstrasse 14 CH - 8032 Zürich E-mail: [email protected]

JETTA FROST University of Zurich Institute for Research in Business Administration Plattenstrasse 14 CH - 8032 Zürich E-mail: [email protected]

Paper presented at the workshop “Learning, Incentives and Corporate Disaggregation: Theories and Methods for Understanding New Organizational Forms”, organized by the „Learning, Incentives, and Knowledge“ program, Copenhagen, 26-27 October 2000, Copenhagen Business School.

Acknowledgement We are very grateful to Eric Brousseau, Nicolai Foss, Bruno S. Frey, and Anna Grandori for critical comments.

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Abstract The theory of the firm is dominated by two approaches: transaction cost economics and the knowledge-based view. While these theories have extended our understanding about the existence of the firm, they have considerable weaknesses concerning the motivational assumptions. Within both theories motivation is assumed to be exogeneously given. This (a) has consequences for finding a solution for social dilemmas and (b) hinders using the management of motivation as a source of distinctive firm competences. We apply public choice theory to firms and explain their existence with the production of firm specific public goods or common pool resources. Relating on crowding theory, we discuss an approach which makes motivation an endogeneous variable and integrates it as a crucial link in the theory of the firm.

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1. Introduction The theory of the firm is dominated by two approaches: the transaction cost economics and the knowledge-based view. In the meantime, there is a nearly innumerable amount of literature explaining the partially contradictory assumptions between both approaches in detail (e.g Connor & Prahalad 1996; Foss 1993; Fransman 1994; Hodgson 1998; Langlois & Foss 1999; Liebeskind 1996; Montgomery 1995; Poppo & Zenger 1998; Williamson 1999).1 In this paper we concentrate on the underlying motivational assumptions of both approaches (section 2). Within transaction cost economics as well as within the knowledge-based view, motivation is assumed to be exogeneously given. This (a) has consequences for finding a solution for social dilemmas and (b) hinders using the management of motivation as a source of distinctive firm competences. The existence of social dilemmas in firms refers to public choice theory and concerns the concept of common pool resources (Miller 1992; Ostrom 1990) which have been little worthy of notice in this discussion till now. We ask what kind of motivation is needed to invest in common pool resources (section 3). Our purpose is to argue that motivation is an endogeneous variable of management in firms and integrate it as a crucial link with this concept of common pool resources. We relate on the crowding theory of motivation (Frey 1997), i.e. that extrinsic and intrinsic motivation are not merely additive but systematically depend on each other on under identifiable and important conditions (section 4). Combining motivational and knowledge requirements leads to a typology of organizational forms. We show the type of motivation these forms should engender for effective knowledge production (section 5).

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2.

Motivational Aspects within Transaction Cost Economics and the Knowledge-Based View

Why do firms exist? The view of transaction costs economics According to its classic economic definition, the theory of the firm seeks to answer the following two questions (Holmström & Tirole 1989: 65): “What is the purpose of firms?” and “What determines their scale and scope?“. Grazing the unit of analysis to describe the firm and the behavioral assumptions quite briefly, transaction cost economics traces the existence of the firm to the thinking, planning and contracting costs that accompany any transaction. The existence of hierarchical firms results from the failure of market efficiency. Reasons for market failure involve the different transaction costs of negotiating, monitoring, and enforcing contracts (Coase 1937). They include team production externalities (Alchian & Demsetz 1972), market power (Klein, Crawford & Alchian 1978), and information asymmetry (Williamson 1975). In Williamson’s view (1975, 1985), the greater the level of uncertainty and of transaction specific investment in a transaction, the greater the threat of opportunism. The fear of such post contractual hold-up determines the ex ante investment decisions. Bringing a transaction from the market into the firm under common ownership mitigates the hazards that accrue to opportunistic behavior and improves investment incentives. The reason is that hierarchical forms of governance bring parties to an exchange under the direct control of a third party. This authoritative party monitors the behavior of all involved parties. In transaction costs

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See also the Academy of Management Symposia „Integrating management and economics perspectives on competitive strategy. An oasis or a mirage?“ and “Towards a knowledge- and motivation-based theory of the firm”, Toronto 2000.

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economics the existence of firms is explained as resulting from incentive problems, especially opportunism.2 Another important aspect of transaction costs economics concerns the distinction between production costs and transaction costs. By focusing on transactions as the basis unit of analysis transaction costs economics regards economic exchange decisions as primary. It is assumed that the production function of firms is more or less identical which allows scholars to focus on the allocation and exchange of goods and services. A shift from static to dynamic efficiency is not encompassed as Williamson (1985: 144) rightly concedes. Thinking in given choice sets, however, neglects the ability of a firm to foster innovations, learning, and knowledge creating processes for new products. This is the central theme of the knowledgebased view.

Why do firms exist? The Knowledge-based view The knowledge-based view (e.g. Barney 1991; Dierickx & Cool 1989; Grant 1991, 1996a, 1996b; Spender 1996) extends Holmstöm & Tirole’s (1989) definition of the theory of the firm with the question: “Why do firms differ and how does it matter?” (Nelson 1991: 61). It changes the perspective “from the historically dominant theme of value appropriation to the one of value creation” (Nahapiet & Ghoshal 1998: 242). The existence of the firm is explained as a heterogeneous bundle of resources. Those firms with hard to imitate resources will earn rents and gain a sustained competitive advantage that other firms find too costly to imitate. Distinctive skills, routines and knowledge are treated as the most important resources that establish a dynamic capability or a competence (e.g. Kogut & Zander 1992; Prahalad &

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For a detailed critique see Ghoshal & Moran (1996).

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Hamel 1990; Teece & Pisano 1994). Emphasis is placed on the firm’s internal processes and arrangements of production. In contrast, the role of incentive issues is suppressed (Langlois & Foss 1999; Williamson 1999) Although, the knowledge-based view zeroes out the assumption of opportunism and goal conflict (Conner & Prahalad 1996), it is not determined why firm members should be willing to share and integrate their knowledge. Insofar, within both approaches the motivational assumptions are assumed to be exogeneously given. The two approaches, however, rely on a different kind of motivation: While transaction cost economics focuses on opportunistic or extrinsic motivation, the knowledge-based view gears to the existence of non-opportunistic or intrinsic motivation.

Extrinsic and intrinsic motivation Extrinsic motivation obtains when employees are able to satisfy their needs indirectly, most importantly, through monetary compensation. Money as such does not provide direct utility but serves to acquire desired goods and services (de Charms 1968, Deci 1975). Extrinsically motivated coordination in firms is achieved by linking employees’ monetary motives to the goals of the firm. The ideal incentive system is strict pay-for-performance. Opportunism is a strong form of extrinsic motivation when individuals are not constrained by any rules. Motivation is intrinsic if an activity is undertaken for one’s immediate need satisfaction. Intrinsic motivation “is valued for its own sake and appears to be self sustained” (Calder & Staw 1975: 599; Deci 1975). Intrinsic motivation can be directed (a) to the activity’s flow – for example reading a novel (Csikszentmihalyi 1975), (b) to a self-defined goal – for example climbing a mountain (Loewenstein 1999), or (c) to the obligations of personal and social 6

norms for their own sake (March 1999: 377), e.g. norms of distributive fairness (Fehr & Gächter, forthcoming) and procedural fairness (Cropanzano & Folger 1996; Tyler 1994). The ideal incentive system consists of the work content itself which must be satisfactory and fulfilling for the employees. It follows that “if you want people motivated to do a good job, give them a good job to do” (Hertzberg as quoted by Kohn 1993: 49). The existence of extrinsic and intrinsic motivation has important consequences concerning the problems of social dilemmas and the incentive to invest in common pool resources. We will argue that common pool resources determine the main characteristics of firms.

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Common Pool Resources within Transaction Costs Economics and the Knowledge-based View

What are common pool resources? The term common pool resources refers to public choice theory and was coined by Elinor Ostrom (1990).3 Common pool resources are characterized as resource systems regardless of the property rights involved in which “(a) exclusion of beneficiaries through physical and institutional means is especially costly, and (b) exploitation by one user reduces resource availability for others” (Ostrom et al. 1999: 278). In public choice literature these characteristics are named (a) “non-excludability” and (b) “rivalry in consumption”.4 We use the term common pool resources because on the one hand we want to focus on the characteristics s of firm specific public goods respectively collective goods. On the other

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See also Ostrom, Gardner & Walker (1994); Ostrom & Ostrom (1977). Ostrom (1990: 32) argues that the appropriation and use of common pool resources are more closely related to the theory of private goods than to the theory of public goods, while on the other hand, the process of designing, implementing , and enforcing a set of rules to coordinate provision activities is equivalent to the provision of a local collective good. 4

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hand, we want to pick up the thread of the debate on dependence relations (Thompson 1967) and complementarities (Grandori 2000) in organization theory. In this paper, we differentiate between tangible and intangible common pool resources. The most prominent examples for tangible common pool resources in public choice are earthsystem components such as fishing grounds, groundwater basins, and grazing areas, but also irrigation canals, parking grounds, or bridges. Within firms, examples for tangible common pool resources are mainframe computer systems, intranet solutions, the department for human resources, and the commission for equal opportunity. The main problem of tangible common pool resources is the danger of overusing them without concerning for the negative effects on others. Examples for intangible common pool resources are corporate culture, mutual commitment, common organizational rules and routines, and accumulated firm specific knowledge or absorptive capacity as they are widely discussed within the knowledge-based theories of the firm (e.g. Grant 1996a, 1996b; Kogut & Zander 1996, Nonaka & Takeuchi 1995, Spender 1996; Teece & Pisano 1994; Winter 1995). Organizational rules and routines are the repository of firm-specific knowledge (e.g. Nelson & Winter 1982). Organizational learning means accommodating these rules continuously (Kieser & Koch forthcoming). Intangible common pool resources are strongly intertwined with the organization itself. They are extremely hard to codify because they are based to a great deal on tacit knowledge. Intangible common pool resources are non-observable and non-verifiable because of their credence qualities. Credence qualities of a good are those which, although worthwhile, cannot be evaluated in normal use (Darby & Karni 1973).5 The most important intangible common pool resource is organizational knowledge which can be thought of being the “feed stock” of

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Darby & Karni (1973) extend the classification of Nelson (1970) who distinguishes the search and the experience qualities of a good.

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competences and capabilities. It is nearly impossible (1) to calculate which percentage these pool resources amount to the offered products and services of a firm, and (2) to single out individual, highly idiosyncratic contributions to these joint efforts. If one person cannot be excluded from obtaining the benefits of a collective asset once the asset is produced, she has little incentive to contribute voluntarily to the joint effort but to free-ride on the efforts of others. If all firm members choose to free-ride, the common pool resources will not be produced. Therefore, there is an immediate danger that intangible common pool resources are undersupplied. It is not possible to sanction a firm member if it holds back her tacit knowledge. In this sense, only the criteria (a) “exclusion of beneficiaries” of the common pool resources definition refers to intangible resources. The criteria (b) of “overexploitation” holds only for tangible common pool resources.

The problem of social dilemmas From the common pool resources’ perspective, the advantage of hierarchies over markets derives from obtaining joint benefits if firm members are motivated to invest in common pool resources although the property rights are unassigned.6 In this situation, there is an immediate danger of a social dilemma.7 Miller (1992: 35) even claims it as the heart of the managerial problem. The situation of social dilemmas arises whenever many individuals use common pool resources Firm members have to choose whether to pursue their own interest or to contribute to a cooperative solution. This trade-off between self-interest and social efficiency is modeled in the prisoners’ dilemma game (e.g. Dawes 1973). It explains how rational

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Milgrom & Roberts (1992) also mention this problem. But they do not discuss any consequences concerning the theory of the firm. 7 The situation of a social dilemma is also discussed as the tragedy of the commons in public choice (Hardin 1968), the public good- or collective good-problem (Olson 1965; Samuelson 1954), shirking (Alchian & Demsetz 1972), and the free-rider problem (Grossman & Hart 1986).

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individuals can produce outcomes that are not rational when viewed from the perspective of all those involved. The traditional solutions to the prisoners’ dilemma are hierarchical authority (Alchian & Demsetz 1972; Williamson 1975), the “visible hand” (Chandler 1977), and in political economy the Leviathan (Hobbes 1651). But these solutions do not work in the situation of information asymmetry (Miller 1992: 74). This is especially true whenever tacit knowledge is of high importance. In this situation mutual commitment to rules is needed for the provision and use of common pool resources. This leads to a second-order-socialdilemma (Bates 1988; Elster 1989: 40): To provide, adapt, and put through common rules is costly for individuals while the benefits of the rules are diffusely distributed over the firm members. Common rules are the repository of firm-specific knowledge. They facilitate knowledge integration so that the firm’s intellectual capacity exceeds the capacity of individuals (Demsetz 1991; Grant 1996b). At the same time they are a second-order common pool resource. Self-interested firm members would not contribute to this common pool resource voluntarily. Contributing, however, to common pool resources is the reason why firms exist. In the case of rules based on tacit knowledge, the contribution to establish those rules is not observable. It follows: Firms exist because “they provide a social community of voluntaristic action structured by organizing principles that are not reducible to individuals” (Kogut & Zander 1992: 384). How do both approaches, the knowledge-based view and transaction costs economics, deal with the problem of social dilemmas and the incentives to invest in common pool resources?

Common pool resources and social dilemmas within the knowledge-based view Within the knowledge-based view, the generation of dynamic capabilities as the most important intangible common pool resources is the major theme. Firms function on the basis 10

of organizational and cultural rules, informal relations, and tacit norms. These are knowledge assets that are based on firm-specificity, social complexity, and causal ambiguity. They are assembled in integrated clusters spanning firm members so that cooperation and coordination is achieved. This approach, however, does not focus on the situation of social dilemmas. It is assumed that firm members behave non-opportunistic and trust each other (Conner & Prahalad 1996).8 They engage voluntarily in a course of collective action and contribute to common pool resources that can only be generated in the body of an organized group of individuals. However, this kind of knowledge would not survive in a world of contracting and re-contracting individual agents (Hodgson 1998: 192). Therefore, the knowledge-based view takes non-self-interested intrafirm commitment to cooperate for granted implicitly while (external) incentive issues do not matter really.9

Common pool resources and social dilemmas within transaction costs economics In contrast, transaction costs economics acknowledges the existence of social dilemmas. It is presumed that those dilemmas can easily be solved through monitoring and sanctioning arrangements (Williamson 1985: 205). In this view, without monitoring, there is no credible commitment to follow rules and generate common pool resources. Thus, in transaction costs economics the main attributes that describe a mode of governance are incentive intensity, administrative control, and legal rules regime (Williamson 1991, 1993). The burden of investing in those arrangements to organize collective action is undertaken by one individual (the entrepreneur), whose returns are directly related to the surplus generated. Consequently, its threats to punish are credible (Williamson 1983).

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Even in the absence of goal conflict, the coordination necessary for integrating the specialist knowledge resident in individuals is not a trivial issue (Grant 1996b: 120). 9 Exceptions are discussed by Hamel & Doz (1989) and Coff (1999).

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Still, it is very questionable whether social dilemmas are solvable this way. In transaction costs economics, the solution of social dilemmas does not pose a problem because the focus on the exchange of goods and services results in the possibility that all knowledge can be “bought as required” (Coase 1937: 400). All competences and knowledge assets are regarded as potentially contractible.10 This means that they can be isolated measured and controlled clearly in principle. This, however, is not possible for intangible pool resources like tacit knowledge in teams. Investing in those resources is not observable and not verifiable. Freeriding can take place (first-order-social-dilemma). Innovations in measurement, stemming from improvements in information technology, cost accounting, or benchmarking do not solve the dilemma. Nor do they solve the second-order-social-dilemma of providing and putting through common rules.11 Some authors who recognize these problems try to offer another solution: They argue, if a firm member’s contribution to common pool resources is not objectively measurable, it can be subjectively assessed by managers who are well placed to observe the subtleties of its behavior and opportunities (Baker, Gibbons & Murphy 1994; Gibbons 1998). But these subtleties (e.g. excessive overtime or punctuality) tend to result in an adverse selection. For these reasons we follow Hardin (1968: 1243): The social dilemma has no technical solution. In this sense, social dilemmas are a problem of managing motivation and not a problem of precise measuring and monitoring. The key question is how firms can induce the right kind of cooperation – the motivation of their members to share their knowledge and deviate from self-interested behavior.

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For a more detailed critique see Foss (1993); Hodgson (1998) and Langlois & Foss (1999). Zenger & Hesterly (1997) discuss innovations in measurement in detail. They argue that these innovations support infusing market elements in hierarchy. They do not consider the second-order-social-dilemma. 11

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4. The Motivation-Based View of the Firm In the last three sections we argued: Whenever tacit knowledge is the basis of common pool resources, social dilemmas are not solvable by hierarchical authority. As a consequence, the existence of firms cannot be explained if firm members are solely extrinsically motivated. For our further argumentation, the intrinsic motivation of individuals is (also) a necessary precondition for the existence of firms. Without intrinsic motivation, firm members do not contribute voluntarily to non-observable and non-verifiable resources. Firms exists because firms members are intrinsically and extrinsically motivated. Managing motivation has to taken both kinds of motivation into account. Therefore, the motivation-based view asks: Which factors influence the intensity and quality of the production of - especially knowledge based - common pool resources? How can firms induce the right kind of cooperation – the motivation of their members to share their knowledge and deviate from self-interested behavior – when the price system and monitoring fail? An important part of the answer to these questions relates to motivational factors concerning crowding effects.

Crowding effects There exists overwhelming theoretical and empirical evidence that intrinsic and extrinsic motivation are not additive. Rather, there is a systematic dynamic relationship between the two. This dependence has been shown to exist in a large number of careful experiments undertaken by Deci and his group (Deci 1975; Deci & Flaste 1995; Deci, Koestner & Ryan 1999a, 1999b; Deci & Ryan1980, 1985) as well as in field research in economics (Barkema 1995; Frey 1997).12 These relationships between intrinsic and extrinsic motivation are called

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For a comprehensive discussion of the empirical evidence see Frey & Jegen (forthcoming) and Osterloh & Frey (forthcoming).

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crowding effects (Frey 1997).13 These effects make both kinds of motivation endogeneous variables. Crowding effects can be subdivided in a crowding-out- and a crowding-in-effect. The crowding-out-effect posits a negative relationship between intrinsic and extrinsic motivation. When external incentives - rewards or commands – are perceived to be controlling by the firm member affected, intrinsic motivation tends to be undermined. In particular, firm members’ work morale may be reduced when they receive monetary incentives that are contingent on their performance (“pay for performance”). Crowding-out takes place only if there is no intrinsic motivation in the first place.14 The crowding-in-effect posits a positive relationship between intrinsic and extrinsic motivation. An outside intervention via rewards or commands may strengthen intrinsic motivation if it is perceived to be supportive of intrinsic motivation. Thus, a raise in pay or an another external incentive may under some conditions be considered to reflect an appreciation of one’s works by the superiors and therefore tends to increase work morale. Theoretical foundations for the crowding effects are based on cognitive evaluation theory (Deci 1975) and on psychological contract theory (Rousseau 1995; Schein 1965). Taken together, they specify the conditions under which intrinsic motivation is decreased or increased. According to cognitive evaluation theory, self-determination can be reduced. When people perceive an external intervention as a restriction to act autonomously, intrinsic motivation is substituted by these external interventions. The locus of control shifts from inside to outside the person (Rotter 1966). Each internal intervention or incentive, however, has two aspects: (1) The controlling aspect strengthens perceived external control and the

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In psychology this effect is known as „hidden costs of rewards“, see Lepper & Greene (1978). If there is no intrinsic motivation in the first place – as it obtains for simple jobs, empirical evidence shows that relying on the price-effect (extrinsic motivation) increases performance, see Lazear (1996). 14

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feeling of being stressed from the outside. (2) The informing aspect influences one’s perceived competence and strengthens the feeling of internal control. Depending on which aspect is prominent, intrinsic motivation is reduced or raised. According to psychological contract theory, reciprocity can be violated. The implicit contract based on a mutual acknowledgement of one’s engagement is violated when a task undertaken by intrinsic motivation is rewarded extrinsically (Gouldner 1960; Rousseau 1995). Conversely, maintaining norms of reciprocity causes a higher willingness to perform and reduces shirking of work.

Balancing intrinsic and extrinsic motivation As a consequence, motivation has to be managed that the needed intrinsic motivation is not crowded out. In particular, strong monitoring, pressure of sanctions, high-powered incentives as piece rates, bonuses, or other forms of variable pay for performance undermine firm members’ work ethics especially in complex jobs where intrinsic motivation is necessary to contribute to collective action and intangible common pool resources. There is less empirical evidence for the crowding-in- than for the crowding-out-effect. Although the general crowding-effects are not yet fully explored, it is possible to indicate the consequences of specific organizational designs on motivation. We focus on four aspects which should be taken into consideration when efforts are made to design a firm’s internal organization (Osterloh & Frey, forthcoming; Osterloh, Frey & Frost 1999). (1) Participation is directed to an agreement on common goals. If this agreement primarily serves as self-control and self-obligation, participation raises the perceived selfdetermination of employees (Schwartz 1990). Therewith, it strengthens intrinsic motivation. 15

(2) Self organizing principles enable the willingness to obligate social norms for their own sake. In this sense, they can foster the coordination of divergent interests of different firm members for cooperative interactions. (3) Personal relationship is a precondition for establishing psychological contracts based on emotional loyalties, often called team spirit. Team-based structures enable such personal relationship. As experimental research shows, personal relationship strongly raises the intrinsic motivation to cooperate (e.g. Dawes, van de Kragt & Orbell 1988; Frey & Bohnet 1995). (4) Contingency of reward on performance can crowd out intrinsic motivation. This holds provided the perceived controlling effect of reward is stronger than the perceived informing effect and the price effect is overruled. Thus, the crowding-out-effect provides a possible explanation for the empirical evidence that there is generally no significant connection between pay and performance, except for simple jobs, (Gibbons 1998; Prendergast 1999). To summarize, managing motivation means balancing the tension between intrinsic and extrinsic motivation. Both kinds of motivation have their own advantages. Intrinsic motivation is indispensable when external incentives lead to undesired consequences: (1) The generation of tacit knowledge requires intrinsic motivation because it is almost impossible to single out individual contributions and to pay accordingly. More generally spoken, high powered incentives are dysfunctional in “multiple tasking” when not all tasks vital to the creation of value can be effectively measured (Holmström & Milgrom 1991; Prendergast 1999). One of these tasks hard to measure is contributing to collective tacit knowledge (first-order-social-dilemma). 16

(2) Providing, adapting, and putting through common rules based on tacit knowledge requires intrinsic motivation because it is costly for individuals while the benefits are collective and the effort is not attributable (second-order-social-dilemma). Solely extrinsic firm members would free-ride. On the other hand, extrinsic motivation is sometimes indispensable: Intrinsic motivation can have an undesirable content, like envy or vengeance. Uncontrolled passions can be disciplined by extrinsic rewards. In situations where no intrinsic motivations exists in the first place, monetary rewards can increases performance.

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Designing a Firm’s Internal Organization by Combining Motivational and Knowledge Requirements Managing motivation is an important source of distinctive firm-specific competences. This

capability is crucial for all task where it is not possible to measure particular firm members’ contribution to the joint benefits. As pointed out, contributing to non-observable and nonverifiable common pool resources - although the property rights are unassigned - constitutes such a task. At the same time, these resources are the most crucial resources of a firm and explain the advantage of hierarchies over markets. Balancing intrinsic and extrinsic motivation makes both kinds of motivation endogeneous variables. In this sense, motivation is treated as varying upon organizational measures. In this section we show how various organizational forms have an impact on the relationship between intrinsic and extrinsic motivation and common pool resources. In our context the most important common pool resource is (1) contributing to the collective tacit knowledge and (2) contributing to collective explicit knowledge. Combining motivational and 17

knowledge requirements leads to a typology of organizational forms (Osterloh & Frey, forthcoming; Osterloh, Frey & Frost 1999). It is presented in figure 1 and contains organizational forms that can best enable the contribution to the knowledge production with respect to the required extrinsic or intrinsic motivation.

Knowledge Production Explicit Knowledge

Tacit Knowledge

1

2

- Profit Centers

- Independent Knowledge

- Molecular Units

Worker

(Internal Contractual Solution)

(Internal Contractual Solution)

4

3

- Knowledge Producing Teams,

- Knowledge-based Production

e.g.

Teams, e.g.

- Task Forces and

- Cross Functional Teams,

Extrinsic

Motivation

Intrinsic

-

Quality Circles

(non contractable tasks)

-

Linking Pin Organization -

(non contractable tasks)

Figure 1: Combining Motivational and Knowledge Requirements to Organizational Forms

Cell 1: profit centers and molecular units Cell 1 contains organizational forms that are as autonomous as possible. Examples are profit centers or molecular units. Coordination efforts are mainly done by disaggregation through infusing market elements, e.g. contracts and transfer prices (Zenger & Hesterly 1997). These market like internal governance structure can be connected with high-powered extrinsic incentives. This is well taken if the necessary knowledge to be transferred among the 18

decentralized units is either encapsulated in a marketable product or is otherwise explicit and attributable. Only explicit tasks are communicable by means of contracts and can be measured easily. In situations of a marketable product or a contract, monetary rewards and extrinsic motivation fulfill their task.15 However, extrinsically motivated competition between decentralized units hinders sharing knowledge with each other prevent the flow of tacit knowledge across unit boundaries to where it is needed. The members of a unit have no incentive to give up their individual competitive knowledge advantage as long as they are compensated according to the unit’s profitability.

Cell 2: independent knowledge worker Cell 2 concerns independent knowledge workers in a firm. They are independent in the sense that they are not working in a team with co-specialized workers with whom they share knowledge. Examples are lawyers or experts in computing or finance. These workers rely strongly on their specific tacit knowledge. This knowledge raises their value (Nonaka et al. 2000). The production of tacit knowledge itself cannot be measured but its output can be compensated according to its contribution to the firm performance. This output can be attributed to the independent knowledge worker. In this case no intrinsic motivation is needed. But such independent knowledge workers do not contribute neither to common pool resources nor to a sustainable competitive advantage. The reason is, that the tacit knowledge produced resides in that individual. Individuals are transferable between firms (Grant 1996a). Other firms can easily woo the independent worker away and profit from its tacit knowledge (Leonard & Sensiper 1998).

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This is also true in situations where coordination is effected by commands inside the firm, as envisaged by the authority-based view of the firm, e.g. Conner & Prahalad (1996) and Williamson (1975). Commands can transfer explicit knowledge only.

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Cell 3: knowledge-based production teams Cell 3 considers the case of “knowledge-based production teams”. Examples for this kind of teams are cross functional teams (Clark & Fujimoto 1991) and teams within the linking pin organization (Likert 1961). To perform a productive task, the specialist knowledge of a number of firm members has to be integrated. The firm members are reciprocally interdependent. (Thompson 1967).16 An important form of reciprocal interdependence is integrating tacit knowledge. The tacit knowledge is embodied in the product itself or in the firm-specific routinized processes leading to the product. Because of the tacitness of this knowledge, it can neither be made explicit via reverse engineering nor can it be encapsulated in an expert-system software. Because of the uncodifiable nature of tacit knowledge as part of the multiple task problem, the transfer of tacit knowledge cannot be assured by a complete contract (e.g. Madhok 1997), nor be measured by (even non-financial) performance measures. This is the main difference to the profit centers or molecular units in cell 1. It is not possible to identify and sanction individual team members if they hold back their tacit knowledge. Therefore, intrinsic motivation is needed.

Cell 4: knowledge producing teams Cell 4 deals with “knowledge producing teams”. Examples are quality circles or task forces. Both are widely used to enhance total quality and continuous improvement in many industries, e.g. in car manufacturing (e.g. Berggren 1994). Participants contribute their mostly tacit knowledge about the production process by using e.g. narratives. The tacit knowledge of

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Thompson (1967: 54) defines three categorizations on dependence relations in organization. Reciprocal interdependence is the strongest form of interdependence. Reciprocal interdependence exists when firm members must work together, interacting during task performance in order to complete their work and fulfill the tasks When interdependence is of serial form with outputs of one unit become inputs of another unit, then it is called sequential interdependence. The weakest form is pooled interdependence which is the collective dependence of employees on

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the team members is made partly explicit.17 The aim is to produce collective explicit knowledge which serves as a basis for common rules. These rules become part of the common pool resources. In contrast to cell 1, there does not exist a market price for these outcomes of knowledge producing teams. The results of those teams expand their value within firm specific context only. Compared to cell 3, the knowledge transfer itself also cannot be observed and measured. However, its outcome can be observed. But this outcome can not be attributed to an individual working member in a team. Hence, the conversion from tacit to explicit knowledge requires intrinsically motivated team members committing to the team. For this reason, in most cases these teams are formed voluntarily and their tasks are defined by themselves to support self-determination.

“Avoiding the negative” versus “creating the positive” To summarize, the first row (cell 1 and cell 2) refers to what Foss (1997) claims the “negative view”.18 The coordination task of the firm is reduced to design effective incentive schemes and to provide monitoring arrangements so that opportunistic behavior as morally hazardous sub goal pursuit can be controlled. Focusing solely on extrinsic motivation by injecting high-powered incentives, may well be destructive of cooperative activity. There is an immediate danger, that intrinsic motivation is crowded out. This suppresses the voluntarily contribution to non-observable and non-verifiable common pool resources as the main source

the continued success of the organization: “each part renders a discrete contribution to the whole and each is supported by the whole”. 17 This process of externalization is described by Nonaka & Takeuchi (1995) within the SECI knowledge spiral. 18 Foss (1997) addresses the rationales of corporate headquarters (CHQ). They have a role in influencing the performance implications of diversification through decisions on organizational structure. Foss (1997: 316) views this role as a matter of both „avoiding the negative“, e.g. CHQ as a solver of agency problems: designing structure so

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of competitive advantage. The second row (cell 3 and cell 4) refers to what Foss (1997) claims the “positive view”. Firms are able to accomplish tasks that cannot be accomplished by the market or solely by individuals: the capability of enabling and integrating firm members’ contribution to those common pool resources. This capability brings synergies across the different business units. Intrinsic motivation is a necessary precondition.

6. Conclusion Managing motivation or balancing intrinsic and extrinsic motivation is an important source of distinctive competences which neither transaction costs economics nor the knowledge-based view has taken into account. In this paper we argued: Firms exist because they profit from common pool resources which are not provided by the market. Today, common knowledge, routines and rules are the most important common pool resources. First- and second-ordersocial-dilemmas arise if firm members behave mainly extrinsically motivated or opportunistic. Whenever tacit knowledge is the basis of common pool resources, social dilemmas are not solvable by hierarchical authority but by enabling intrinsic motivation. The motivation-based view of the firm proposed in this paper is able to make motivation endogeneous and therefore manageable.

7. References Alchian, A.A./Demsetz, H. (1972): Production, Information Costs and Economic Organization. American Economic Review, 62: 777–795. Baker, G./Gibbons, R./Murphy, K.J. (1994): Subjective Performance Measures in Optimal Incentives Contracts. The Quarterly Journal of Economics, 109: 1125-1156.

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