Journal of Knowledge Management

Knowledge-based dynamic capabilities and innovation in networked environments

Suli Zheng Wei Zhang Jian Du
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Suli Zheng Wei Zhang Jian Du, (2011),"Knowledge-based dynamic capabilities and innovation in networked environments", Journal of
Knowledge Management, Vol. 15 Iss 6 pp. 1035 - 1051
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 Knowledge-based dynamic capabilities
and innovation in networked environments
Suli Zheng, Wei Zhang, Xiaobo Wu and Jian Du
Downloaded by ZAGAZIG UNIVERSITY At 11:35 08 January 2016 (PT)
Suli Zheng is Assistant
Professor at the School of
Economics and
Management, China Jiliang
University, Hangzhou,
China. Wei Zhang is a
Senior Manager at Xizi
United Holding Corporation
Hangzhou, China.
Xiaobo Wu is Professor and
Vice Dean and Jian Du is
Associate Professor, both at
the School of Management,
Zhejiang University,
Hangzhou, China.
The authors gratefully
acknowledge support for this
research from the National
Natural Science Foundation of
China (project nos 71002103,
70902059 and 70910107021)
and Soft Science Project
Zhejiang Science Technology
Department (project
no. 2010C25013). All opinions
expressed as well as errors and
omissions are entirely the
authors.
Received June 2011
Revised July 2011
Accepted July 2011
DOI 10.1108/13673271111179352
Abstract
Purpose The purpose of this paper is to clarify the concept of dynamic capabilities from the
knowledge-based perspective and investigate the mechanisms of dynamic capabilities on innovation
performance in networked environments.
Design/methodology/approach This paper designed a seven-point Likert questionnaire measuring
the dynamic capabilities, innovation performance and network embeddedness and a sample of 218
Chinese manufacturing firms were surveyed. Structural equation modeling method was used to
statistically test the theoretical hypothesis.
Findings Significant relationships were found between dynamic capabilities and innovation
performance and knowledge combination capability played a mediating role in this relationship. For the
links between network embeddedness and dynamic capabilities, knowledge acquisition capability was
affected mainly by relational embeddedness and the diversity of network and joint problem solving
contributed much to knowledge combination capability.
Research limitations/implications This paper deepened the understanding on dynamic capabilities
and the mechanism between network embeddedness, knowledge-based dynamic capabilities and
innovation performance. In the future, the construct of knowledge-based dynamic capabilities calls for
more examination and verification.
Originality/value Drawing on the literature of dynamic capabilities framework, knowledge-based view
and the network model, this study extends the literature of dynamic capabilities and its link with
innovation performance in networked environments. Using survey data and structural equation
modeling, this study offers rich evidence on the contribution of dynamic capabilities on innovation
performance and the antecedents of dynamic capabilities.
Keywords Dynamic capabilities, Knowledge-based view, Innovation, Network embeddedness,
Information networks, China
Paper type Research paper
1. Introduction
Dynamic capability is one of the most important constructs in strategic management in
recent decades (Teece et al., 1997). The dynamic capability framework is based on, but
different from, the resource-based view in that it contributes to this field by focusing on how
firms renew their resource-based competitive advantage dynamically. The literature on this
topic has grown rapidly since dynamic capability was first introduced, but substantial gaps
remain. On the one hand, many theoretical works emerged and deepened the
understanding of this concept (Eisenhardt and Martin, 2000; Winter, 2003; Teece, 2007).
On the other hand, little empirical research on dynamic capabilities has been taken out even
though 14 years have passed. This paper proposes that such absence of empirical
evidence is the result of two reasons. First, the concept of dynamic capability is still vague
and inconsistent. Especially, what is the object that dynamic capabilities act on, resources,
capabilities or knowledge? Second, the construct of dynamic capabilities is in need of
operationalization. As the literature has not provided a measurable construct, testable
propositions can hardly be put forward and tested.
VOL. 15 NO. 6 2011, pp. 1035-1051, Q Emerald Group Publishing Limited, ISSN 1367-3270 j JOURNAL OF KNOWLEDGE MANAGEMENT j PAGE 1035
 The central research question of this paper is: How do knowledge-based dynamic
capabilities contribute to firms innovation performance? The authors theorized and
examined this central question in three steps. As a foundational issue, the first step was to
clarify the meaning and construct of dynamic capabilities from knowledge-based view. In
the second step, the authors modeled and investigated the relationship of knowledge-based
dynamic capabilities and innovation performance. The proposition of this relationship is not
as straight and evident as people used to suppose and significant mediating effects exist.
Finally, this paper examined whether network embeddedness influenced knowledge-based
dynamic capability, and thus further worked on innovation. Taken together, these three
sub-questions helped us to understand the contributions of dynamic capabilities to
innovation performance, as well as to understand the antecedents of dynamic capabilities
that may enhance or weaken it in networked environments.
This paper is built on the work of dynamic capabilities, knowledge-based view and the
networked innovation model. It contributes to the literature in the following three ways. First,
this paper extends previous research on dynamic capabilities by conceptualizing dynamic
capabilities as knowledge-based and consisting of acquiring, generating and combing
knowledge resources. It further theorizes that there is a systematic structure between
knowledge acquisition, generation, and combination and innovation performance. Second,
the empirical work, based on 218 survey samples, validates the vital role of dynamic
capabilities on firm innovation performance. Third, this paper suggests that network
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embeddedness is an important antecedent of dynamic capabilities in more and more

networked environments; managers need to pay more attention to their alliance network and
make adjustment according to their capability and performance.
The following paper is organized into four parts. First, the authors developed the
knowledge-based dynamic capabilities construct drawing on the knowledge-based view
and dynamic capabilities perspectives. A theoretical model linking dynamic capabilities with
innovation and network enbeddedness was put forward in the second section. In the third
section, statistical analysis based on a survey of 218 Chinese manufacturing firms was taken
out. The method of analysis is structural equation modeling with AMOS 7.0. Discussions and
implications were given in the last section.

2. Literature review and construct development

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

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PAGE 1036 JOURNAL OF KNOWLEDGE MANAGEMENT VOL. 15 NO. 6 2011
 proposed that dynamic capabilities are a set of specific and identifiable processes
integrate, re-configurate and gain/release of resource. In this conception, dynamic
capabilities take the form of organizational processes and have significant commonalities
across firms. In their opinion, dynamic capabilities are processes that can operate in both
dynamic environments and environment that are not experiencing rapid change. Zollo and
Winter (2002) explored dynamic capabilities with evolutionary ideas, defining dynamic
capability as a learned and stable pattern of collective activity to modify their operational
processes and improve their effectiveness. In their framework, learning mechanisms such
as knowledge-related activities are prominent driver of the evolution of dynamic
capabilities.
The above-mentioned research constitutes the foundation of dynamic capability research,
lots of literature has sprung up during the recent years. However, this concept has been
used to explain a variety of organizational questions, but yielded little concrete or solid
conclusions. One reason is that although this definition can be explained theoretically, the
operationalization and empirical validation of this construct is still a great challenge. The
research on dynamic capabilities to date has been largely theoretical or case-based. To
investigate how well or poorly dynamic capabilities perform, a clear conceptualization of
dynamic capabilities was required. Then further research can be taken out to translate such
a conceptualization into empirical metrics. To address these problems, Helfat et al. (2007)
suggested that researchers can measure dynamic capabilities with performance yardsticks,
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such as quality per unit cost and survival, growth, value creation and competitive advantage.
The problem with performance yardstick is that although the dynamic capability framework
deems resource as a source of competitive advantage, the link between capabilities and
competitive advantage always needs to be tested rather than a perfect equal. In Teeces
recent works he tried to refine dynamic capabilities as the capabilities that enable business
enterprises to create, deploy, and protect the intangible assets that support superior and
long business performance (Teece, 2007, 2009). This definition is different from the 1997
version in that the object of dynamic capability is those intangible assets, such as
knowledge, which will probably promote the research work in this field.
In fact, the framework of dynamic capabilities overlaps a lot with absorptive capacity (Cohen
and Levinthal, 1990) another influential construct in strategic management that was
developed in parallel since 1990. Introduced by Cohen and Levinthal (1990), a firms
absorptive capacity refers to its ability to identify, assimilate, and exploit knowledge from
the environments. Substantial extensions were made, such as relative absorptive capacity
(Lane and Lubatkin, 1998), potential absorptive capacity and realized absorptive capacity
(Zahra and George, 2002). It should be noted that these extensions of absorptive capacity
have added valuable new insights but the essence of absorptive capacity remain relatively
stable. The key idea of this concept remains as a firms ability to acquire knowledge from its
external environments and absorptive capacity is in essence a special kind of dynamic
capability (Zahra and George, 2002; Lane et al., 2006).
The above literature in these two areas converged toward the same idea-the
knowledge-related dynamic capabilities, which may promote our understanding and the
validation of dynamic capabilities (Easterby-Smith and Antonacopoulou, 2006;
Easterby-Smith and Prieto, 2008). According to the knowledge-based view, organizations
are knowledge-bearing entities, the fundamental function of the firm is to integrate and use
knowledge (Grant, 1996). Although Grant mentioned the role of relational networks on
accessing explicit knowledge, the scope of knowledge integration/combination is mainly
restricted within the organizational boundary and external knowledge is foreign to the
combination framework. This paper synthesized these different streams of work and put
forward the knowledge-based dynamic capabilities framework, which was defined as the
ability to acquire, generate and combine knowledge resources to sense, explore and
address environment dynamics. The underlying process of knowledge-based dynamic
capabilities consists of knowledge related activities of both internal knowledge and external
knowledge embedded in alliances and networks.

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VOL. 15 NO. 6 2011 JOURNAL OF KNOWLEDGE MANAGEMENT PAGE 1037
 B. The construct of knowledge-based dynamic capabilities
As mentioned above, dynamic capabilities are the ability to acquire, generate and combine
knowledge resources to sense, explore and address environment dynamics. In this
framework, knowledge is consistent with the traditional definition and includes various kinds
of knowledge, such as explicit and tacit knowledge, information and know-how,
technological, management and marketing knowledge. Three sub-capabilities
knowledge acquisition capabilities (KAC), knowledge generation capabilities (KGC), and
knowledge combination capabilities (KCC) represent three dimensions of
knowledge-based dynamic capabilities and they build upon each other to produce the
integrate dynamic capabilities of a firm (illustrated in Figure 1). Although these components
influence one another to a great extent, we will first discuss them separately for analytical
clarity and explain their internal structure in detail in the hypothesis development section.
Following Eisenhardt and Martin (2000), the authors argue that although dynamic
capabilities have some commonalities across different firms, they are idiosyncratic in the
specific ways firms pursue, develop and employ them. Hence, in spite of the fact that all
firms can develop dynamic capabilities, their level and form of dynamic capabilities can be
quite different and leading to distinctive organizational performance.
KAC. Knowledge is the principle productive resource of the firm. Considering firm boundary,
knowledge can be categorized into internal accumulated/generated knowledge and
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external knowledge (Cohen and Levinthal, 1990). As the technological and market
environments become more and more dynamic, external knowledge come to the center of
stage. Scholars apply the concept of absorptive capacity (Cohen and Levinthal, 1990) to
address such issues. In fact, absorptive capacity consists of a series of processes handling
external knowledge-acquire, assimilate, transform, and exploit external knowledge, being
dynamic in their nature and distinct with one another. To deep our understanding, this paper
separates KAC out as the first component of knowledge-based dynamic capabilities,
knowledge acquisition means the firms ability to identify and acquire useful external
knowledge. In fact, the knowledge of organization exist in two different forms: explicit
knowledge and tacit knowledge, the latter draws much attention due to its limited
transferability (Kogut and Zander, 1992). Hence, efforts spend on knowledge acquisition
activities encompass creative searching and strategic sense-making and were greatly
influenced by the managers logic pattern and behavior (Pandza and Thorpe, 2009).
KGC. The second component of knowledge-based dynamic capabilities is knowledge
generating capabilities in the knowledge-based dynamic capability framework. Firms exist
as repositories of knowledge and one attribute that differentiates one organization from the

Figure 1 Theoretical model

Knowledge based dynamic

capabilities
embeddedness

Diversity
Structural

H3a (+)

H4a (+) H3b (+) KAC

Non-redundancy
H4b (-) H5a (+) H1a (+)
H2b (+) H2a (+)
H5b (+)
H1b (+) Innovation
Trust KGC
H5c (+) performance
embeddedness

H1c (+)
Relational

H6a (+) H2c (+)

Joint problem
solving
H6b (+) KCC

Commitment H6c (+)

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PAGE 1038 JOURNAL OF KNOWLEDGE MANAGEMENT VOL. 15 NO. 6 2011
 others is its knowledge generating capabilities. Generation denotes a firms ability to
develop and refine the activities and processes that facilitate creating/generating new
knowledge. The underlying processes include internal R&D, SECI process proposed by
Nonaka (1994, 2005), and knowledge creation through external venturing (Wadhwa and
Kotha, 2006). The KGC are especially stressed by those catching-up economies in recent
decades. As Rosenberg (1982) pointed out very early that reliance on borrowed
technology (by developing countries) perpetuates a posture of dependency and passivity,
catching-up firms without knowledge generating capabilities have experienced the
acquisition-lag out-acquisition in many later comer economies (Rosenberg, 1982). As a
result, the generation of knowledge becomes the focus of firms, especially catching up
firms.
KCC. The third dimension of knowledge-based dynamic capabilities is knowledge
combination capability. Combination capability is the firms ability to integrate and apply
internal and external knowledge. Sometimes, combination gives birth to total new
knowledge. Kogut and Zander (1992) suggest that firms learn new skills by recombining
their current capabilities. New knowledge, such as knowledge in the process of innovation,
is produced by combining new knowledge with existing knowledge or experimenting new
applications of existing knowledge. It means that, combinative capability can be applied
both within and out of the firm boundary. Van Den Bosch et al. (1999) distinguished three
subtypes of combinative capabilities: systems capabilities, coordination capabilities, and
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socialization capabilities. For the purpose of simplicity, the authors do not include this
distinction here and they synthesize this progress in the construct measurement section.
The interaction between three dimensions. As discussed above, the three dimensions do not
work alone without each other. They tend to develop cumulatively, be path dependent, and
build on each other to form integrate dynamic capabilities of the firm. Acquisition of new
knowledge requires a certain amount of knowledge stocks, at the same time, it will influence
the subsequent knowledge creation process. Knowledge combination refers to the process
of bringing together and mixing different kinds of old knowledge or old and new knowledge.
Hence, knowledge acquisition and generation form the important antecedents of
combination. This paper will discuss the internal structure of this construct in-depth in the
next section.

C. Network embeddedness and innovation

Since put forward by Schumpeter, innovation persistently attracted the attention of both
economists and managers. In turbulent environments, innovation becomes central in the
field of strategic management as its vital role in gaining and maintaining competitive
advantage. How to enhance innovation capability and improve innovation performance is
the focus of many scholars. In recent years, more and more researchers come to agree that
knowledge is the most critical input to innovation process and the ability to exploit and
explore knowledge thus becomes a critical component of competitive advantages. Much
work has been done to examine those separate knowledge management processes and
their effects on innovation, however, an integrate framework clarifying the internal
relationship of these processes and their influence on performance as a whole is needed.
In recent years, alliances and networks have become an integral part of a firms business
environments. Alliances are formal or informal arrangements of firms that enable firms to
gain and exchange resources or to engage in shared goals (Jarillo, 1988; Gulati, 1998).
Firms are embedded in networks of such strategic relationships which will provide
informational benefit through different mechanisms. The rapid proliferation of strategic
networks invoked the study on various kinds of networks, some studies focused on the
effects of network resources on general performance (Gulati, 1999; Hoffmann, 2007; Lavie,
2007) and innovation (Hagedoorn and Schakenraad, 1994; Kotabe and Swan, 1995), other
researchers have further explained the effect of network resource on capabilities acquisition
(McEvily and Zaheer, 1999; McEvily and Marcus, 2005). A fundamental question can be
drawn from these researches, that is, if dynamic capabilities were higher-order
capabilities that governing operational capabilities change, this effect of network

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VOL. 15 NO. 6 2011 JOURNAL OF KNOWLEDGE MANAGEMENT PAGE 1039
 resources on first-order capabilities and performance must occur through its influence on
dynamic capabilities first. However, little research has investigated how alliance networks
influence the dynamic capabilities and this gap inspires the authors to investigate the
relationship between network embeddedness and dynamic capabilities.

3. Hypothesis development
As Powell et al. (1996) pointed out that the rapid growth of various alliances and networks
has changed the modes of innovation and the locus of innovation shifted to the networks of
learning. In this context, knowledge becomes the most critical input to innovation process,
hence, the ability to exploit and explore knowledge turns to be a critical component of
competitive advantages (Kogut, 2000). As defined in the above section, this paper
conceptualizes dynamic capabilities as a series of knowledge-based capabilities. On one
hand, these activities will improve innovation performance; on the other hand, external
networks may have substantial influences on these capabilities. Figure 1 illustrates the
relationship between a firms knowledge-based dynamic capabilities and innovation
performance and the role of network embeddedness in the process of knowledge-based
dynamic capabilities development. Through their relationships with network partners in the
environments, firms acquire or combine new knowledge that will greatly facilitate their
innovation activities and hence promote their innovation performance.
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A. The link between knowledge-based dynamic capabilities and innovation

Nowadays, companies must utilize not only internal resources but also external resources to
tackle the ever-changing environments. Dynamic capabilities emphasize a firms constant
pursuit to acquire, generate and combine/reconfigure their resource bases. Of these
resources, knowledge resource gets more and more attention in this knowledge economy
era. Knowledge-based dynamic capabilities enable the firm to renew their knowledge base
continually and thus able to address the changing environments (Ambrosini and Bowman,
2009). Hence, by governing the change rate of knowledge, dynamic capabilities become
the ultimate organizational capabilities that are conductive to long-term performance.
Hence, this paper puts forward the following hypotheses:
H1a. KAC are positively related to innovation performance.
H1b. KGC are positively related to innovation performance.
H1c. KCC are positively related to innovation performance.

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

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PAGE 1040 JOURNAL OF KNOWLEDGE MANAGEMENT VOL. 15 NO. 6 2011
 H2b. The relationship between KAC and innovation is mediated by KCC such that KAC
are positively related to KCC.
H2c. The relationship between KGC and innovation is mediated by KCC such that
KGC are positively related to KCC.

B. The antecedents of dynamic capabilities: network embeddedness

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

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

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

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VOL. 15 NO. 6 2011 JOURNAL OF KNOWLEDGE MANAGEMENT PAGE 1041
 knowledge until they know that this knowledge will be used in the interest of their common
goals. This confidence will reduce uncertainty and hence makes firms more open with their
network partners. When partners have developed a certain level of trust, they are not only
more likely to share and exchange information with each other, but also have more
confidence in the information they get from this partner (Das and Teng, 1998). Trust often
triggers reciprocal behaviors in that partners are more likely to work cooperatively when trust
is high and thus provide the potential of knowledge combination. Hence, two hypotheses are
proposed:
H5a. Trust will positively influence the KAC of firm.
H6a. Trust will positively influence the KCC of firm.

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

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

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

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PAGE 1042 JOURNAL OF KNOWLEDGE MANAGEMENT VOL. 15 NO. 6 2011
 B. Research design and data collection
The questionnaire was developed through extensive literature research and fieldwork. The
first draft of the questionnaire was developed based on the literature, and then this version
was adapted according to the opinions of three kinds of experts: the authors consulted the
content validity with two professors majoring in knowledge management, and then another
professor good at survey design was asked to examine the whole structure of the
questionnaire. After that, the survey was sent out to a subset of the target firms which were
randomly chosen and some of the instruments were modified to be better understood based
on their suggestions. After these adaptations, the questionnaire was ready to be sent out.
Then the survey was complemented by the persons most familiar with knowledge related
activities and alliance activities in each firm (chief technical officer, chief marketing officer,
vice president).
Data were collected through two different ways:
1. Face-to-face investigation. As this study is an important part of national funded research
project, the authors conducted a lot of field investigations and collected the survey.
2. E-mail. A manufacturing manager database consisting of managers information from the
Yangzi delta region was formed in NIIM research center of Zhejiang University, the
authors sent the electronic questionnaire to the managers in this database through e-mail.
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Altogether, 512 questionnaires were sent out and responses from 229 firms were received,
with a response rate of 44.7 percent. Of these firms 11 were excluded as they did not provide
clear and integrate information. Hence, in the following parts, the hypotheses were tested
with the remaining 218 firms sample.

C. Operational measures
Dependent variable: innovation performance. This paper used four proxies to reflect the
innovation performance of various firms: number of new products, share of turnover with new
products, the speed of new product development and commercialization, the ratio of
successful product innovation.
Knowledge-based dynamic capabilities. Parallel instruments were developed to measure
the three components of knowledge-based dynamic capabilities, as shown in Table I.
Knowledge acquisition is a five-item instrument measured by a scale of Lane et al. (2001),
Huber (1991), and Nooteboom (2000). The instrument captures the degree to which the
focal firm could acquire technological, marketing, managerial, manufacturing and other
relevant knowledge from its partners. Knowledge generation capability has the same
structure as knowledge acquisition capability and the instrument includes five items asking
for the degree to which the firm could generate new technological, marketing, managerial,
manufacturing and other relevant knowledge endogenously. Drawing on the work of Grant
(1996), Kogut and Zander (1992), and Van Den Bosch et al. (1999) for knowledge
combination capability, knowledge combination capability is measured with six items as
shown in Table I.
Independent variables: network embeddedness. Following the work of McEvily and
Zaheer (1999) and McEvily and Marcus (2005), network embeddedness is defined as
a two-dimensional construct: structural embeddedness and relational embeddedness.
Structural embeddedness is measured with terms of nonredundancy and diversity,
and relational embeddedness is made up of trust, joint problem solving and
commitment.
Nonredundancy. This item is operationalized as an ego-centered network measure following
the work of McEvily and Zaheer (1999). The respondents were requested to write down the
five most important external relational partners and to evaluate if there is interaction between
each pair of partners. Based on the matrix of these five partners, the redundancy score can
be calculated using the following formula:

Nonredundancy number of potential ties 2 number of actual ties=number of partners:

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VOL. 15 NO. 6 2011 JOURNAL OF KNOWLEDGE MANAGEMENT PAGE 1043
 Table I Measurement instruments and validity of knowledge-based dynamic capabilities
Internal consistency Standard
Construct Measurement items reliability (a) coefficients CR

Knowledge acquisition Our firm could acquire technological knowledge 0.911 0.867
capability Our firm could acquire marketing knowledge 0.830 13.362
Our firm could acquire managerial knowledge 0.817 13.014
Our firm could acquire manufacturing and process
knowledge 0.790 12.289
Our firm could acquire other knowledge and
expertise 0.773

Knowledge generation Our firm could create technological knowledge 0.929 0.817 11.218
capability Our firm could create marketing knowledge 0.906 12.800
Our firm could create managerial knowledge 0.875 12.233
Our firm could create knowledge 0.828
Our firm could create technological knowledge 0.808 12.310

Knowledge combination Our firm could combine internal and external

capability knowledge 0.938 0.891 14.425
Our firm could integrate knowledge from different
segments, team and individuals 0.864 13.683
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Our firm could combine knowledge in different

technological or market fields 0.798 12.493
Our firm could combine new knowledge with original
knowledge pool 0.879 12.309
Our firm could adapt the internal structure and
process to combine knowledge effectively 0.851 13.359
Our firm could coordinate internal and external
networks to combine knowledge effectively 0.841 13.115
2 2
Notes: X 120:026; x =df 1:188; df 101; CFI 0:991; TLI 0:990; RMSEA 0:035

Hence, nonredundancy is a ratio and the range for this ratio is between zero and two when
the number of partners is five. Smaller ratios represent low nonredundancy and the
existence of interactions between the focal firms partners will decrease the level of
nonredundancy.
Diversity. The network may consist of various kinds of relationships and this paper includes
only the firms relationships with those partners that they had direct experience, such as
customers, suppliers, trade associations, and even competitors and authorities. This item
was constructed based on the work of Baum et al. (2000) and was defined as a number
computed by the following formula.
h X
2 i
Diversity 1 2 i the number of alliance with ith type of partner=total number of alliance =
total number of alliances:

The range for this number is between zero and one and increase in this number indicates an
increase in diversity of alliances partners.
Trust. Four measures were used to capture interorganizational trust based on the work of
McEvily and Marcus (2005), including:
1. our main partner negotiates fairly with us;
2. our main partner does not mislead us;
3. our main partner keeps its words; and
4. our main partner is reliable.
Joint problem solving. Drawing on the work of McEvily and Marcus (2005), joint problem
solving were measured using three items:

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PAGE 1044 JOURNAL OF KNOWLEDGE MANAGEMENT VOL. 15 NO. 6 2011
 1. our main partner work with us to overcome difficulties;
2. we are jointly responsible with our main partners for getting things done; and
3. we work with our main partner to help solve each others problem.
Commitment. Three items were included in this measure based on the work of Morgan and
Hunt (1994):
1. we are very committed to this relationship;
2. we make our maximum effort to maintain this relationship; and
3. this relationship is something my firm intends to maintain indefinitely.
Control variables. Size was included as control variable in this study since firm size may have
significant influence on firm innovation behavior and results (Stock et al., 2002; Shefer and
Frenkel, 2005). Large firms may have access to more or better resources than smaller firms
and benefit from scale economy, while smaller firms may be more entrepreneurial and have
more flexibility. Firm size was measured as the average annual revenue of the latest two
years.

5. Results and analysis

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A. Construct validity and reliability

Before estimating the model, it is important to judge the reliability and validity of the
constructs. Validity is the extent to which the measure actually measures what the construct
is indicating for. As the measure for innovation performance and network embeddedness
are drawn from established studies, this paper focuses on the measures of the newly
developed construct of knowledge-based dynamic capabilities. The reliability of the
knowledge-based dynamic capabilities was examined with Cronbachs alpha, and all scales
have reliabilities greater than the recommended 0.90 level (shown in Table I), suggesting a
high reliability. As the questionnaire is carefully designed based on in-depth literature review
and field interview, the content validity of this construct can be justified. Confirmative factor
analysis was used to evaluate the convergent validity and discriminant validity and the result
was shown in Table I. The factors loaded perfectly on the items as expected and all
indicators were above 0.77 and statistically significant. This result indicates that both the
convergent validity and discriminant validity of these measures are good enough to do the
following analysis.

B. Hypothesis testing
The hypotheses were tested using the method of structural equation modeling with the
software of AMOS 7.0. Structural equation modeling was an appropriate method as it allows
us to estimate the complex relationship between network embeddedness, dynamic
capabilities and innovation at the same time, especially the mediation effects within the three
components of dynamic capabilities. Moreover, it can accommodate the measurement error
of survey data.
The result for the structural equation model is shown in Figure 2. The path coefficients and
their significance of each hypothesis were reported. Several different indices were also
provided to determine the overall fit of the estimated model. Overall, the value of x 2 (478 df)
is 860.755 and the value for x 2/df is 1.801. CFI and TLI indices are 0.927 and 0.920 (all
above 0.9), and the value of RMSEA is 0.076 (below 0.08), these indices show that the
estimated model has a reasonable fit with the data.
H1. As the model predicted, the positive relationship between dynamic capabilities and
innovation performance are well supported. The relationship between knowledge
combination capability and innovation performance is highly positive and significant
(g 20:629, t 3:881, p 0:000), the positive link between knowledge acquisition
capability and innovation performance and knowledge generation capability are supported
too, although the coefficients and significance are lower than that of knowledge combination

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VOL. 15 NO. 6 2011 JOURNAL OF KNOWLEDGE MANAGEMENT PAGE 1045
 Figure 2 Structural equation model

X1
Y1 Y2 Y3 Y4
Y5
X2
11 = 0.378
X3 Trust (8.606)*** deta1 Y6 Y7 Y8 Y9 Y10
1
X4 12 = 0.005 KAC 1
(0.048) 21 = 0.136
(0.146)* SIZE
X5 11 = 0.331 = 0.101
12 = 0.708
Joint (6.787) *** (2.002)* (2.477)**
X6 22 = 0.318
1 problem
solving (5.082) *** 13 = 0.492
X7 21 = 0.251
(1.888) KGC (2.378)* IP
31 = 0.147
(2.693) ** 23 = 0.584
X8 (10.173) ***
32 = 0.161
Commit- 31 = 0.629
X9 (2.291) * 1
1 ment (3.881)***
KCC Y17 Y18 Y19 Y20
X10
42 = -0.117 Model statistics
(-1.824)
2 860.755 CFI 0.927
1 df 478 TLI 0.920
41 = 0.006
(0.108) Y11 Y12 Y13 Y14 Y15 Y16 2/df 1.801 RMSEA 0.076
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51 = 0.683
Non-redundancy (1.030) 52 = 2.677
(3.377)***

Diversity

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

capability (KAC: g 20:331, t 2:202, p 0:045, KGC: g 20:251, t 0:2:378,

p 0:017).
H2. The second hypotheses predicted the mediation effects within the three components of
knowledge-based dynamic capabilities. The mediation effects are largely supported by the
data. The relationship between knowledge acquisition capability and knowledge generation
capability is significant and positive (g 20:708, t 6:787, p 0:000), the link between
knowledge generation capability and knowledge combination capability is positive and
significant too (g 20:584, t 10:173, p 0:000). The relationship between knowledge
acquisition capability and knowledge combination capability is positive at a 0.059 level
(g 20:492, t 1:888).

H3. The hypothesized relationship between structural embeddedness and knowledge

acquisition capability is not supported. Neither diversity (g 0:683, t 1:030, p 0:303)
nor nonredundancy (g 0:006, t 0:108, p 0:914) showed any significant influence on
knowledge acquisition capability.
H4. The predicted relationship between structural embeddedness and knowledge
combination capability is partly supported. The results show that the relationships
between diversity and knowledge combination capability are positive and statistically
significant (g 2:677, t 3:377, p 0:000). However, out of our expectation the
relationship between nonredundancy and knowledge combination capability is positive
too, though not very statistically significant (g 20:117, t 21:824, p 0:068).
H5. The model states that relational embeddedness positively associated with knowledge
acquisition capability and our result supported this hypothesis. As predicted, the link
between trust and knowledge acquisition capability is positive and significant (g 20:378,
t 28:606, p 0:000), the relationship of joint problem solving and knowledge acquisition
capability is positive and significant too (g 20:136, t 23:146, p 0:002), commitment

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PAGE 1046 JOURNAL OF KNOWLEDGE MANAGEMENT VOL. 15 NO. 6 2011
 contributes to knowledge acquisition capability positively (g 20:147, t 2:693,
p 0:007).
H6. The positive relationship between relational embeddedness and knowledge
combination is largely supported. The result reported here indicates that positive
relationships exist between joint problem solving and knowledge combination capability
(g 20:318, t 5:082, p 0:000) and between commitment and knowledge combination
capability (g 20:161, t 2:291, p 0:022). However, the relationship between trust and
knowledge combination capability is not supported, the coefficient is very low and the
significance is much larger than critical level (g 20:005, t 0:048, p 0:962).

C. Robustness of the results

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

Figure 3 The best model

Non-redundancy

23 = 3.746 KAC
Diversity (5.274)*** 12 = 0.714
(6.962)***

23 = 0.672 Innovation
KGC
Trust (8.265)***
performance
41 = 0.142 23 = 0.625
(3.317)*** (11.127)***
42 = 0.271 KCC 31 = 0.980
Joint PS (13.137)***
(5.231)***

51 = 0.177 Model statistics

(3.380)*** 2 866.452 CFI 0.928
Commitment df 485 TLI 0.921
2/df 1.786 RMSEA 0.071

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

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VOL. 15 NO. 6 2011 JOURNAL OF KNOWLEDGE MANAGEMENT PAGE 1047
 6. Discussion and conclusions
The literature agrees that dynamic capabilities are critical for innovation and competitive
advantage, yet it is not clear how it contributes to innovation. This study extends and
deepens our understanding of dynamic capabilities and its link with innovation performance
in networked environments.
The first contribution of this study is that the authors proposed a concise construct of
dynamic capabilities and validated it through empirical studies. Although 14 years have
passed since dynamic capabilities were first introduced, much confusion still remained in
this field. By reducing the subject of dynamic capabilities from the general resource to
knowledge resource, this study developed a convergent construct that can be empirically
tested. Conceptualize dynamic capabilities as a series of processes handling knowledge
resources and aiming at addressing dynamic environments, their attributes and
constitutions were clarified. Additionally this conception made it possible to identify and
measure dynamic capabilities practically and also facilitate us to examine the relationship
between dynamic capabilities and innovation performance empirically.
This paper offered rich evidence on the contribution of dynamic capabilities on innovation
performance. Whereas most extant work demonstrates the contribution of dynamic
capabilities theoretically, this paper put forwards a set of propositions linking dynamic
capabilities to innovation performance systematically. The empirical study with 218 samples
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of Chinese manufacturing firms provided strong support for this effect. Further, intrinsic
structure within the three dimensions was discovered. Our results reported that knowledge
combination capability promotes innovation performance directly and mediates the process
between knowledge acquisition, knowledge generation and innovation. In other words,
knowledge acquisition capability and knowledge generation capability are important
preconditions of knowledge combination and contribute to innovation performance
indirectly. These findings echoed the research of Kogut and Zander (1992) that firms
innovations are products of its combinative capabilities.
This study revealed that network embeddedness was an important antecedent of dynamic
capabilities. The results showed that knowledge acquisition capability and knowledge
combination capability were greatly influenced by network embeddedness. The results of
our empirical study indicate that relational embeddedness exhibits a greater influence on
the knowledge-based dynamic capabilities. Knowledge acquisition capability is mainly
influenced by trust, joint problems solving and commitment, while knowledge combination is
mainly driven by joint problem solving and commitments. An interesting result was that
nonredundancy has no significant links with dynamic capabilities which is in controversy
with the literature. A possible explanation is that the advantage of structural embeddedness
is their ability to provide relatively new knowledge while the acquisition and combination of
knowledge concerns mainly with in-depth knowledge exchange activities which will go on in
a continuous period.

7. Limitations and direction for future research

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

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PAGE 1048 JOURNAL OF KNOWLEDGE MANAGEMENT VOL. 15 NO. 6 2011
 competitive advantage. In other words, managers may adapt their alliance networks
dynamically. Hence, feedbacks between network environments, dynamic capabilities and
innovation performance link the cycle of these constructs. In the future, scholars could
investigate these relationships either though case studies or large scale empirical data.

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