Converting knowledge into financial value: Lessons from a joint-venture project

In recent years, there is a growing attention on the role of knowledge within the value creation process as it is considered one of the most important factors of production for enterprises. If knowledge of an enterprise encompasses characteristics such as heterogeneity, imperfect imitation, imperfect substitutability or imperfect mobility, it creates a more lasting competitive advantage for the enterprise (Barney, 1991; Wernerfelt, 1984). The capabilities-based view also argues that the root of lasting competitive advantage is an organisation’s capacity to create new knowledge (Edvinsson and Malone, 1997; Stewart, 1997). Thus, how an enterprise updates its knowledge base to bring innovation to its products, services, operation processes, management methods and strategies is a subject of urgent interest to researchers. Knowledge creation and development processes can be internal or external. Due to the increasing level of competition that is characterizing the market and to the fact that knowledge requires time to be created, more and more companies tend to prefer acquiring new knowledge rather than developing it internally. Consequently, alliances become a strategic device useful to effectively apply and integrate the firm’s knowledge resources portfolio very quickly, to build and enforce a sustainable competitive advantage (Baden-Fuller and Grant, 2004; Das and Teng, 2000; Parise and Sasson, 2002; Schildt, et al., 2005). Enterprises can acquire new knowledge or techniques through various modes of inter-organizational cooperation or alliance; these include: research contracts, licensing agreements, minority investments, equity acquisitions and joint ventures (JV). Among these cooperation or alliance modes, the deepest level of commitment and resource investment that can occur between cooperative partners is that of JV (Hyder and Eriksson, 2005; Spekman, et al., 1996). A JV can be described as an independent business entity that is co-created and co-owned by two or more legally distinct organizations (the parent organizations) that combines resources provided by partner enterprises. The importance of knowledge flows in JVs has been attracting an increasing amount of attention from the research community. The focal point of these analyses are the relevance of the selection of the right partner, or the mechanisms, tightness and focus of JV control (Bleeke and Ernst, 1991; Gulati, 1999; Kogut, 1988; Kumar and Seth, 1998; Parkhe, 1993). Despite the importance of knowledge in JV, there are few studies concerning the role that knowledge measurements can play in JVs’ context (Ordonez de Pablos, 2004; Zhao and Richards, 2012). In accounting the adage “you can manage what you can measure” has boost the studies about how to measure knowledge (Andriessen, 2004; Guthrie, et al., 2012; Sveiby, 2004). These methods and tools underlie the idea that through measurement it becomes possible to mobilise knowledge in order to create value (Catasús, et al., 2007). More in depth, it is possible to find two main research perspectives: the static and the dynamic one. While the first perspective focuses on the stock of knowledge (static approach) in order to understand the difference between market value and book value, the dynamic perspective is centred on flows. Several scholars have highlighted that investigating knowledge dynamics allows understanding how knowledge creates value, how it works and what it does within the organisations (Kianto, 2007; Marr, et al., 2004; Mouritsen, 2006). Studies about accounting for knowledge tend to be focused on intra-organizational knowledge, i.e. the stock and flows of knowledge created and developed within a specific organization (Chaminade and Roberts, 2003; Hensler and Huq, 2005; Mouritsen and Flagstad, 2004; Mouritsen, et al., 2001b), and therefore there is little research about inter-organizational knowledge, i.e. knowledge created and developed through cooperation or alliances. Considering the call for investigations on inter-organizational knowledge flows, the aim of this study is to analyse a JV project from a value creation-value conversion perspective, i.e. the purpose of this investigation is to understand how the development of a JV can contribute to the transformation process of knowledge into financial capital. Within this aim, it will be also considered the role that a knowledge measurement system plays in order to support the management and control of the knowledge inflows and outflows within a JV project. In order to achieve this aim, the implementation process of an accounting system useful to control the inter-organizational knowledge flows of a parent company will be analysed adopting an interventionist research approach (Dumay, 2010; Jönsson and Lukka, 2005). In comparison with previous studies, this one does not focus on accounting for knowledge flows within the firm but on inter-organizational knowledge flows. Moreover, due to the analysis of a case study adopting an interventionist approach, this study tries to bridge the gap between theory and practice. The main results are as follows. First, it emerges that a JV can be considered as a value-conversion device as it allows to transform knowledge into financial capital (Quevedo and Roberts, 2005). This result enriches the studies about how knowledge creates value and how it influences the financial performance of a company showing that this process can occur not only within an organization but also between organizations. Second, within a JV development process, knowledge measurements assume different purposes and arise different accounting challenges in dependence of the phase in which the JV is (find, design or manage). Moreover, it emerges that the implementation of specific indicators allows better controlling of the knowledge inflows and outflows in order to balance them and to grasp the managerial attention on aspects of the relationships with the JV and the partner that are often overlooked.