Knowledge Economy: Impact on Firms’ Performance

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Topic Outline

The emergence of the knowledge economy decreased reliance on physical inputs and natural resources to produce goods and services. Modern companies utilize high-efficiency methods that require specialized skills and knowledge to maximize profits (Hadad, 2017). The knowledge economy relies on technology, information management, and innovative practices to ensure the best possible outcomes (Hadad, 2017). Thus, knowledge is expected to have a significant influence on the performance of firms.

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Currently, the awareness of the global community concerning environmental problems together with social and economic challenges is rising. In 1987, the United Nations (UN) coined the principles of sustainable development, which is meeting the needs of the current generation without compromising the ability of future generations to do so (UN, 2015). In order to achieve sustainable development, the UN (2015) set seventeen comprehensive goals associated with 163 targets to achieve by 2030 to address the problems related to poverty, inequality, climate change, environmental degradation, peace, and justice. The realization of these principles is impossible without significant changes in the production process of firms. These changes are facilitated by the latest knowledge; thus, firms need are required to adopt knowledge to adhere to the high standards set by the UN’s agenda.

Utilization of the latest knowledge is known to have a significant impact on firm-level innovation. On the one hand, the acquisition of knowledge can enhance the innovative performance of firms (Bloodgood, 2019). In particular, regular reviews of effective practices can help to find erroneous policies that limit the development firms (Bloodgood, 2019). Such assessments can improve the efficiency of management and production. However, more knowledge does not always mean improved outcomes. According to Bloodgood (2019), the impact of knowledge on companies can be negative depending on various factors. In particular, managers need to be aware of the sources of knowledge and critically evaluate its applicability to every situation (Bloodgood, 2019). Thus, it is critical to understand what kind of knowledge can be beneficial for different types of firms.

The impact of knowledge on the innovative performance of firms in the modern age is a widely discussed topic among researchers. Various journals frequently publish articles examining different aspects of the topic. For instance, an article by Protogerou, Caloghirou, and Vonortas (2017) describes the impact of knowledge on the performance of young firms, while Crescenzi and Gagliardi (2018) discuss the influence of knowledge on firms in heterogeneous environments. Every research article touches upon very specific subjects, contributing to the overall body of knowledge. However, it may be difficult for managers to navigate through the abundance of information available on the subject. Thus, periodic synthesis of knowledge is needed to summarise and evaluate its current state.

The present paper aims at reviewing current studies on the impact of knowledge on the innovative performance of firms. After describing common themes, a critical analysis of literature is included to draw conclusions. The paper is expected to help entrepreneurs to understand the latest trends in research concerning the topic and understand the importance of knowledge for firms’ success. At the same time, this paper can help researchers to overview the topic and find current gaps in knowledge.

Critical Reflection on Methods

The method utilized in the present paper is a narrative literature review. There are two types of literature review used by researchers: systematic reviews (SRs) and narrative reviews (NRs). SRs formulate a comparatively narrow question and conduct qualitative and quantitative analyses of the topic using strict guidelines (‘Narrative Literature Review’, 2017). While such reviews generate top-quality knowledge, there are several disadvantages to the method. On the one hand, the approach requires special skills and much time to accomplish (‘Narrative Literature Review’, 2017). The authors of SRs need to be experienced to avoid biases and flaws. On the other hand, studies included in SRs need to be fairly heterogeneous, which implies that they need to utilize similar methods and have similar research questions (‘Narrative Literature Review’, 2017). This requirement may lead to the fact that much information is left unnoticed as it does not fit specific criteria.

Even though NRs are associated with more biases, it is a preferred method for the present paper for several reasons. First, the process is appropriate for inexperienced writers, as it is associated with a decreased chance of making crucial errors (‘Narrative Literature Review’, 2017). Second, it suits the purpose of the present paper to provide a broad overview of the topic without having to coin a highly specific research question (Green, Johnson, and Adams, 2006). Finally, narrative reviews are less time-consuming in comparison with systematic reviews, making the method suitable for completing the paper in a reasonable timeframe (‘Narrative Literature Review’, 2017). In summary, narrative literature reviews are useful pieces of writing that help to synthesize information on a particular subject in the shortest possible time with some possibility of methodological errors.

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Literature Review

Internal Knowledge for Innovation

The analysis of how internal knowledge affects firm performance included ten peer-reviewed articles published during the past 18 years. Six of the reviewed papers were five years or younger, which implies that the knowledge presented is recent and can be used for discussing implications for today’s managerial, scholar, and educational practices. Four other papers were introduced to the literature review to provide historical background. The findings of older studies do not contradict the results of recent research. Instead, recent articles provide a more in-depth understanding of the influence of internal knowledge on innovation.

The majority of research reviewed in the present paper utilized the sample of Europe-based firms. However, the research conducted by Martin and Javalgi (2019) that analyzed Mexican companies and the article by Heij et al. (2020) that examined companies from around the globe do not contradict the results of the other research. Instead, these articles add to the generalisability of findings confirming the idea that internal knowledge and firm-level innovation are closely correlated.

The authors of the research reviewed in the present section utilized the quantitative correlational design for their research. Such choice is appropriate, as all the researchers aimed at clarifying relationships between internal knowledge and firms’ performance. According to Park and Park (2016), correlational studies aim at testing narrow hypotheses about the inter-relationships of concerts, which was the purpose of the research described in the present. All the articles reviewed in the present paper describe significant correlations between knowledge acquired from internal sources and firms’ performance.

All the research described in the present paper confirms that there is a positive correlation between the amount of internal knowledge and firm-level innovation. However, different research touched upon different types of knowledge from internal sources. Some researchers viewed R&D as the primary source of internal knowledge and operationalized knowledge as the number of patents. Bloom and Van Reenen (2002) identified that the number of patents is positively correlated with firms’ performance. Patents provide exclusive rights for innovative developments, giving the option to the managers to postpone investment in innovation (Bloom and Van Reenen, 2002). However, Artz et al. (2010) questioned the ability of patents to secure financial prosperity. The researchers concluded that the relationship between R&D spending and new product announcements had a U-shaped dependency (Artz et al., 2010). Even more intriguing, the number of patents is negatively correlated with return on assets and sales growth (Artz et al., 2010). Thus, the impact of R&D on firms’ innovation performance was found unclear.

The variation of the effect of investment in R&D was explained in a recent study conducted by Heij et al. (2020). The researchers suggest that companies should invest in both product and managerial innovations to improve internal policies and practices together with the product line (Heij et al., 2020). In summary, investment in R&D has a significant positive impact on the firm level; however, managers need to find an optimal amount of investment in the sphere and remember about the development of managerial innovations.

There are certain limitations that should be mentioned when discussing the researcher about investments in R&D. The sample of all the studies in the present literature review included only large and medium-sized firms. Thus, the findings should apply only to those types of companies, as investments in R&D in small firms were not covered. It can be hypothesized that since smaller companies do not have enough money available to invest in R&D, their benefits from such knowledge may be reduced or even absent.

Another source of internal knowledge was the investment in big data analysis. Ferraris et al. (2019) confirmed that big data analysis was associated with significant improvements in customer retention, sales growth, profitability, and return on investment. Chierici et al. (2019) added that big data analysis of all types of knowledge also positively affects innovative performance. The results were confirmed firms of all sizes; thus, it can be stated big data analysis is a vital source of internal knowledge that has a positive impact on firm-level innovation. However, there are two important limitations to these findings. First, both articles viewed discussed in the present paper that touch upon big data analysis studied a sample of Italian firms. Therefore, the results are limited only to this country. Second, there is little research available about the influence of big data analysis on the innovation performance of firms. Thus, it can be stated that the correlation between firm-level innovation and internal knowledge acquired from big data analysis is an emerging theme among scholars that requires further research.

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The researchers also claim that internal knowledge availability does not guarantee improvements in firm-level innovation. The primary idea is that internal knowledge needs to be associated with effective managerial practices and commitment to utilize the knowledge (Chierici et al., 2019; Martin and Javalgi, 2019; Aloini et al., 2017; Han and Li, 2015; Heij et al., 2020). The researchers touched upon three aspects of managerial practices that support the utilization of internal knowledge. First, Ghasemzadeh et al. (2019) mention that workplace culture plays a moderating role between internal knowledge and innovation. The idea is that innovation culture is expected to positively affect organizational learning, which can facilitate the adoption of new practices by the personnel. Second, product and process innovations may be useless if the commitment to innovation in managerial practices is inadequate (Aloini et al. et al., 2017; Martin and Javalgi, 2019). Finally, innovation is impossible if it is not a crucial part of corporate strategy and vision (Chierici et al., 2019). Therefore, it is crucial that internal knowledge availability is accompanied by appropriate managerial practices.

In summary, the review of literature on correlations between internal knowledge and firm-level innovation revealed a significant positive correlation between the two matters. However, the correlation is moderated by various factors, including workplace culture, managerial practices, and corporate strategy. This implies that even though the accumulation of internal knowledge is crucial for firm-level innovation, managers should remember to invest time and resources in matters that mediate and moderate the effect of knowledge on innovation. The primary source of innovation suggested in the reviewed papers is R&D and big-data analysis. However, these sources of internal knowledge are beneficial only for large companies. The tabular analysis of research on the influence of internal knowledge on firm-level innovation is provided in Table 1 below.

Table 1. Tabular analysis of effects of internal knowledge on innovation

Study Sample Context Dependent Variables Key results
Ghasemzadeh et al. (2019) 625 questionnaires Pharmaceutical companies Innovation Firms should create an innovation culture to maximize the effect of organizational learning on innovation.
Bloom and Van Reenen (2002) 200 firms Major British firms Financial performance Knowledge has a more significant impact on financial performance rather than operational performance.
Artz et al. (2010) 272 firms International companies Firms’ financial performance Utilization of patents to secure knowledge is ineffective for improving financial performance.
Heij et al. (2020) 10,000 companies Dutch medium-sized firms Firms’ financial performance Companies should invest in both product and managerial innovations to improve performance.
Han and Li (2015) 110 questionnaires European firms Innovation Intellectual property and the ability to adopt new knowledge are crucial for improving firm-level innovation.
Thornhill (2006) 845 firms Canadian manufacturers Innovation Internal knowledge has a different effect on different types of firms.
Martin and Javalgi (2019) 1422 firms Mexican exportin companies Financial performance The availability of knowledge-based resources needs to be combined with the entrepreneur’s motivation to use these resources to improve performance.
Stolwijk et al. (2012) 22 firms International programmable logic device manufacturers Innovation The exploitation of internal sources of knowledge was found to have a positive effect on the companies’ market performance.
Ferraris et al. (2019) 159 Italian firms Italian companies Financial performance Analysis of big data affects all four aspects of firms’ performance.
Chierici et al. (2019) 418 questionnaires Italian companies Competitive performance Accumulation of knowledge gained from big data analytics is positively correlated with firms’ performance in terms of innovation.
Fallatah (2018) 70 companies US biotechnology industry Firms’ financial performance Entrepreneurs should invest in more valuable R&D projects instead of trying to increase the number of the registered patents.

External Knowledge for Innovation

The analysis of how external knowledge affects the innovative performance of firms was made based on a sample of 12 articles. Eight articles were five years old or younger, which implies that the majority of findings are up-to-date and can be used to draw conclusions about the current state of knowledge. As in the case of internal knowledge, the findings of different research do not contradict each other; instead, the conclusions of recent studies address the gaps in previous research.

The sample of articles utilized in the present paper analyses different types of companies around the globe. However, it should be mentioned that the companies from Africa and South America are not mentioned in the sample, and the majority of studies focus on European companies. This implies that the conclusions about the utilization of external knowledge may be biased. In particular, the findings should be used outside the context of European countries with caution.

The majority of researchers utilized a quantitative correlational research design to test highly specific hypotheses and look for subtle correlations. However, there are two studies that utilized semi-structured interviews and qualitative analysis methods. In particular, the study by Levine and Prietula (2012) described the expert opinions of employees of a large US-based consulting firm. Additionally, the study by Basit and Medase (2019) also utilized the method of narrative literature review, which makes the sample and the context difficult to define. The results of these two research should be used with caution due to an increased possibility of being biased.

The analysis of the literature revealed that the effect of external knowledge on firm-level innovation is uncertain. The relationship between exposure to external knowledge and innovation is moderated by the firm’s size, internal practices, and amount of investment. First, the analysis of the effects of external knowledge on firm-level innovation closes the gap identified in Section 3.1. In particular, it was unclear how investment in R&D affected innovation in small firms. Doran, McCarthy, and O’Connor (2019) answer this question by stating that smaller firms do not have sufficient funds to invest in R&D without harming financial performance. Instead, these firms should focus on the exploitation of external sources of knowledge (Doran, McCarthy, and O’Connor, 2019). The most common sources of external knowledge are alliances and hiring new employees. Papa et al. (2020) suggest that small firms should consider hiring highly qualified employees possessing valuable knowledge. Additionally, Protogerou, Caloghirou, and Vonortas (2017) suggest that CEO’s exposure to knowledge can also improve the innovative performance of small companies. Knowledge acquired from other sources may cause a disturbance in resource distribution and decrease the marketing performance of small firms.

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Second, large firms need also to be cautious while acquiring external knowledge. Large firms can acquire external knowledge by both hiring new personnel and collaborating with companies from different industries. However, companies should be aware that inter-firm collaborations are not always associated with increased innovation. Entrepreneurs should remember that the relationship between the number of alliances and firm-level innovation has a U shape. This implies that there is a critical number of alliances that will start helping firm-level innovation (Wang, Chin, and Lin, 2020). If the firms are unable to engage in enough alliances to benefit from external knowledge acquisition, they should consider refraining from forming alliances to improve innovation.

At the same time, Aloini et al. (2017) proposed that it is vital to utilize the best practices to protect the exclusive knowledge of companies. Improved protection of intellectual property leads to a decreased sense of vulnerability, allowing firms to be more open to collaborations and alliances. This, in turn, leads to improved innovation performance of companies. Thus, there is an indirect positive link between the quality of intellectual property protection practices and firm-level innovation, which is mediated by the degree of openness.

Third, the impact of external knowledge on firm-level innovation is moderated by the amount of investment. Similar to the situation with internal knowledge, investment in external knowledge has an inverted U-shaped relationship with firm-level innovation (Erden et al., 2014). This implies that increased investment does not always mean improved performance (Erden et al., 2014). Therefore, managers should find an optimal amount of investment in external knowledge accumulation.

Fourth, new knowledge from alliances is adopted faster if there is a large overlap between the knowledge bases of the partners (Knudsen, 2007). Thus, companies tend to partner with firms from the same industry, which significantly reduces innovation in the sphere (Knudsen, 2007). Even though knowledge from firms from other industries may be difficult to adopt, such partnerships are beneficial in terms of innovation (Knudsen, 2007). Therefore, companies should look for ways to create alliances with companies from other industries.

Finally, external knowledge needs to be aligned with internal knowledge and practices to improve innovation performance. Crescenzi and Gagliardi (2018) examined how the availability of knowledge from inside and outside sources affected innovation in English companies. The results revealed that exposure to outside knowledge influences innovation only if firms make exploitation of external knowledge an essential part of their strategy. Otherwise, spontaneous adoption of the latest knowledge is possible only if firms hire new staff with significant exposure to R&D. Basit and Medase (2019) examined how combinations of different knowledge sources affected innovation in different types of firms. The researchers concluded that knowledge from the public sector combined with internal information increases innovation, while data from customers in the private sector combined with internal knowledge is associated with decreased innovation. Thus, Basit and Medase (2019) concluded that the blend of knowledge sources has a significant impact on firms’ performance in terms of innovation.

In summary, the analysis of recent literature revealed that external knowledge is extremely important for firms of all sizes. However, the effect of various types of external knowledge may differ depending on the situation. Smaller firms are recommended to acquire external knowledge by hiring new employees, while large firms should focus on forming an adequate number of alliances. When forming alliances, managers should prioritize companies from other industries to increase benefits. Moreover, when acquiring external knowledge from alliances, managers should remember to address safety concerns, as protection of internal knowledge is vital to ensure open information exchange. The tabular analysis of research on the influence of external knowledge on firm-level innovation is provided in Table 2 below.

Table 2. Tabular analysis of effects of external knowledge on innovation

Study Sample Context Dependent Variables Key results
Doran, McCarthy, and O’Connor (2019) 3000 SMEs Irish firms Innovation External knowledge is extremely important for small firms.
Wang, Chin, and Lin (2020) 400 companies Vietnamese construction companies Innovation The correlations between external knowledge availability and innovation have an inverted-U shape.
Knudsen (2007) 632 firms Major companies in Europe Innovation Collaborations with firms from other industries are crucial for improving innovation.
Erden et al. (2014) 1260 firms Biopharmaceutical firms Innovation The correlation between the number of alliances and innovation has a U shape.
Blanca de Miguel, José Luis, and Rafael, (2018) 167 museums Museums in 43 countries Innovation Creative industry benefits from external knowledge
Levine and Prietula (2012) One firm US consulting industry Financial performance Companies should take precautions before adopting external knowledge.
Protogerou, Caloghirou, and Vonortas (2017) 23,405 firms Small firms around Europe Innovation External knowledge has a positive impact on innovation in small firms.
Papa et al. (2020) 129 firms European firms Innovation Firms should acquire knowledge by hiring qualified employees.
Serrano-Bedia, López-Fernández, and Garcia-Piqueres (2016) 25 firms European firms Innovation External knowledge affects the performance of small family enterprises in Europe.
Crescenzi and Gagliardi (2018) 2936 firms English private companies Innovation Exposure to outside knowledge influences innovation only if firms make exploitation of external knowledge an essential part of their strategy.
West and Noel (2009) 83 CEOs European start-ups Competitive performance The study found significant correlations between firms’ performance and knowledge from external sources.
Basit and Medase (2019) Not mentioned Not mentioned Innovation Knowledge from the public sector combined with internal information increases innovation.
Aloini et al. (2017) 477 firms European firms of different sizes Innovation The relationship between intellectual property and innovation is mediated by the degree of openness.

Knowledge Management for Innovation

The effect of knowledge management practices on innovation was discussed based on 13 articles on the topic published during the past 15 years. The majority of research reviewed in the present paper was older than five years old. Since only five articles were relatively recent, the findings of the present literature reviewed may be biased, as acquired knowledge may be outdated. However, it was noticed that the results of older and recent research do not contradict each other. Additionally, the articles included in this section align with articles discussed in Sections 3.1 and 3.2 of the present paper. Therefore, the reliability of the findings is satisfactory.

The papers included in the present sections examined the relationship between firm-level innovation and knowledge management practices in various contexts. The samples included companies from around the world. However, it appears that the companies from South America and Africa were underrepresented. Therefore, the findings of the present literature review should be applied to companies from these regions with caution.

As in the previous section, the majority of researchers utilized correlational design when answering the research question. However, the study by Soriano et al. (2012) provided a narrative literature review, while Firestone et al. (2005) failed to specify the research method. It can be supposed that Firestone et al. (2005) used experts’ opinions to arrive at the conclusions. However, since the methodology of the research was unclear, its results were considered with caution.

The analysis of the literature revealed that the availability of external and internal knowledge is insufficient to guarantee a positive effect on firm-level innovation. Managerial practices are central to facilitating both product and process innovation, as they help to combine knowledge from all sources and use it to gain a competitive advantage over rivals (Jantunen, 2005). Ali, Musawir, and Ali (2018) created a quantitative model that explained the relationship between knowledge governance, knowledge sharing, absorptive capacity, and firms’ performance. The model demonstrated that knowledge governance and sharing practices positively affect companies’ absorptive capacities, which in turn improve performance. This implies that companies need to invest in the creation of comprehensive knowledge governance and sharing practices to gain a competitive advantage over rivals. Michaelis, Wagner, and Schweizer (2015) viewed knowledge as the mediator between high-performance systems and workplace productivity. In other words, knowledge management efficiency was hypothesized to be the key to the relationship between the productivity of employees and high-performance systems. After conducting a series of tests, the researchers concluded that efficient knowledge management practices have a positive impact on knowledge exchange among employees, which in turn leads to improved workplace productivity.

Dang, Le-Hoai and Kim (2018) contributed to the evidence concerning relationships between knowledge and companies’ performance by examining construction companies. The study identified ten descriptors of a firm’s performance, including new useful ideas, new methods of work, error minimization, improved decision-making, work efficiency, reasonable use of resources, responsiveness to market changes, clients’ satisfaction, improved management processes, and effectiveness of training. The study created the hierarchy of knowledge-related factors affecting these descriptors. The results of data analysis revealed that the culture of knowledge promotion and sharing with written regulations and procedures are most impactful on construction firms’ performance. At the same time, instantaneous and independent decision-making together with regular evaluation practices has the least effect of companies’ performance.

One of the central ideas that were mentioned in several articles is that knowledge management cannot be viewed separately from HR practices. Chen and Huang (2009) suggest that knowledge is a valuable resource possessed by the employees of a firm. The researchers created several regression models to confirm the correlation between strategic HR practices and innovation performance of firms with knowledge management capacity being a mediator between the two matters. The study provided significant empirical evidence to confirm that strategic HR practices are positively correlated with knowledge management capacity, which is, in turn, positively correlated with the innovation performance of firms. Thus, Chen and Huang (2009) offer to look at the impact of knowledge through the prism of HR practices, which was confirmed to be reasonable.

HR practices are also vital to prevent knowledge loss and associated problems with innovation. In particular, knowledge loss is associated with decreased morale, strategic misalignment of staff, reduced quantity, and quality of products, increased risks, and reduced knowledge base. Massingham (2018) also suggests that efficient knowledge management practices can mitigate the negative effects of knowledge loss, as learning organizational capacity improved when knowledge loss was high. Thus, HR practices are crucial to retain valuable employees and preserve the knowledge they possess. The idea of the importance of HR practices for innovation was also discussed in previous sections, as it was recommended to acquire external knowledge by hiring talents and improve internal knowledge adoption by training the personnel.

The final crucial point that connects HR practices and knowledge management is the availability of needed personnel to help top managers focus on innovation. Grimpe, Murmann, and Sofka (2019) studied the impact of middle management on the adoption of innovative practices. The researchers argue that managers of start-ups are often preoccupied with operations and have little time to dedicate to the integration of innovative practices and products. The establishment of middle management, however, helps the founders to have more time for the implementation of innovative ideas (Grimpe, Murmann, and Sofka, 2019). A correlational analysis confirmed that the impact of middle management on innovation tended to increase if the founders had a large stock of pre-existing knowledge (Grimpe, Murmann, and Sofka, 2019).

The researchers also touched upon the importance of knowledge transfer and knowledge-sharing practices. Weber and Weber (2010) combined knowledge-based view and social capital theory to understand how the relatedness and social capital (relational fit) affect the performance of firms. A study based on a sample of German firms demonstrated that relational fit facilitates knowledge transfer and creation. In other words, the adoption of relevant knowledge by appropriate people significantly improves sustainability in and of companies.

In summary, knowledge management was found extremely important for improving the innovative performance of all types of firms. When trying to improve innovation, managers need to understand that mere exposure and accumulation of external and internal knowledge does not guarantee its positive influence. Firms need to ensure that external and internal knowledge is perfectly aligned to be used for innovation. At the same, knowledge should be distributed using efficient knowledge transfer and sharing practices. The central finding of the present review is that knowledge management cannot be viewed separately from HR practices. The companies need to ensure to implement effective hiring and retention practices to avoid knowledge loss and support knowledge inflow and adaptation. The tabular analysis of research on the influence of knowledge management on firm-level innovation is provided in Table 3 below.

Table 3. Tabular analysis of effects of knowledge management on innovation

Study Sample Context Dependent Variables Key results
Ali, Musawir, and Ali (2018) 133 firms Pakistani project-based organisations Competitive performance Companies need to create comprehensive knowledge governance and sharing practices to gain a competitive advantage.
Michaelis, Wagner, and Schweizer (2015) 68 respondents Small German enterprises Workplace productivity Effective knowledge management practices improve companies’ performance.
Dang, Le-Hoai, and Kim (2018) 374 respondents Chinese firms of different types Competitive performance Culture of knowledge promotion and sharing with written regulations and procedures are most impactful on construction firms’ performance.
Grimpe, Murmann, and Sofka (2019) 2,431 firms German high-tech start-ups Innovation Establishment of middle management helps the founders to have find time to implement innovative ideas.
Soriano et al. (2012) 30 studies Aeroplane industry Financial performance Flexibility is the central factor that modifies the performance of firms in the same industry that use seemingly similar business models.
Jantunen (2005) 217 firms Finnish companies of different sizes Innovation Knowledge flow is crucial for increasing the number of adopted innovations.
Chen et al. (2013) 55 companies Taiwanese mobile smartphone companies ROA, Tobin’s Q, EVA, MVA Technological diversification is positively correlated with firms’ performance.
Olavarrieta and Friedmann (2008) 49 top business executives European firms of various sizes Financial performance Knowledge management is correlated with firms’ performance.
Chen and Huang (2009) 150 firms Chinese firms Innovation Strategic HR practices are positively correlated with knowledge management capacity and innovation
Massingham (2018) 150 entrepreneurs Australian companies Financial performance Efficient knowledge management practices can mitigate the negative effects of knowledge loss.
Wang, Wang, and Liang (2014) 228 firms High technology firms in China Financial performance Knowledge sharing is crucial for improving financial performance.
Weber and Weber (2010) 12
investment professionals
German high-innovative portfolio holders Financial performance Relational fit facilitates knowledge transfer and creation.
Firestone et al. (2005) Not applicable Not applicable Firms’ success Learning needs to be integrated into every activity, as event-training does not automatically mean the adoption of knowledge.

Analysis and Critical Discussion

Major Findings

The literature review included studies that discussed the influence of knowledge on firms’ innovative performance. The topic was found to have increased attention from the researchers, as a literature search using keywords “knowledge innovative performance” generated more than 3 million results. The literature review concluded that the topic of the influence of knowledge on firms’ performance is well studied; however, there are some gaps in knowledge that are yet to be addressed.

The literature review included studies utilizing various methods to answer the researcher’s questions. The majority of studies included in the present paper use a correlational design. According to Park and Park (2016), the choice of methods is appropriate, as correlational studies are usually used to find inter-relationships between two or more variables. Additionally, the choice of quantitative methods is also rational, as the purpose of the studies was to accept or reject a highly specific hypothesis, which is common for well-researched topics (Park and Park, 2016).

The articles reviewed in the present paper described original research that discussed the importance of knowledge for competitive, financial, and innovative performance. Even though initially it was considered to include research that used the innovative performance of firms as the dependent variable, it was decided to include studies that used different dependent variables due to high correlations between the types of performance (Gök and Peker, 2017; Cegarra-Navarro et al., 2016; de Azevedo Rezende et al., 2019). The context of research differed between the studies, which is associated with improved generalization (Sekaran and Bougie, 2016).

The majority of studies included in the present review utilized either resource-based or knowledge-based approaches. Resource-based view is a model that acknowledges resources as the key to gaining competitive advantage (Barney, 2001). The supporters of this view believe that companies should look inside for sources of competitive advantage instead of finding opportunities provided by the environment (Barney, 2001). The researchers view knowledge as an intangible resource that should be acquired and carefully managed to ensure the best possible performance (Barney, 2001). The theory proposes that all resources are heterogeneous (different across the companies) and immobile (they cannot move from one company to another) (Barney, 2001). While this approach is beneficial for explaining the majority of findings, there are certain limitations to the model.

The knowledge-based view is based upon the resource-based view but has some significant modifications to it (Felin and Hesterly, 2007). Knowledge-based resources are always characterized by difficulties of transmission, imitation, and social complexities (Felin and Hesterly, 2007). Thus, the supporters of the theory believe that firms need to establish heterogeneous structures of knowledge across the management hierarchies to achieve sustainable knowledge-based competitive advantage (Felin and Hesterly, 2007). This approach helped the researchers to understand the importance of knowledge sharing among employees.

In general, the researchers found a positive correlation between knowledge and the performance of firms. However, different types of knowledge have varying impacts depending on the context. Researchers found significant positive correlations between the amount of knowledge from both internal and external sources on companies’ innovative performance (Stolwijk et al., 2012; Wang, Chin, and Lin, 2020; Doran, McCarthy, and O’Connor, 2019; Blanca de Miguel, José Luis, and Rafael, 2018; Serrano-Bedia, López-Fernández, and Garcia-Piqueres, 2016; Knudsen, 2007). At the same time effect of external and internal knowledge on financial and competitive performance was inconsistent (Stolwijk et al., 2012; Wang, Chin, and Lin, 2020; Doran, McCarthy, and O’Connor, 2019). These inconsistencies can be explained by the variation in methods, contexts, and conceptualization.

The differences and contradictions in the findings of different researchers can be explained in several ways. First, researchers conceptualized knowledge and innovation differently from study to study. Some scholars quantified knowledge as the number of patents (Bloom and Van Reenen, 2002; Artz et al., 2010). However, it was later declared that the number of patents was a faulty metric as it does not provide a holistic explanation of the concept of knowledge, and entrepreneurs should also consider the quality of knowledge (Fallatah, 2018). Other researchers viewed knowledge as people that possess it and focused on human research practices. The researchers viewed knowledge losses and gains as employee exit and joining (Massingham, 2018). Additionally, the education level of employees was often considered as firm-level knowledge (Serrano-Bedia, López-Fernández, and Garcia-Piqueres, 2016). Finally, some scholars viewed knowledge as intellectual capital, which included all intangible resources, including human capital, relational capital, structural capital, and intellectual property (Han and Li, 2015). Similarly, innovation was measured using different instruments, which may have contributed to the inconsistency.

Second, some researchers failed to acknowledge factors that moderate the influence of knowledge on firms’ performance. Several studies suggested that mere accumulation of knowledge does not guarantee improved innovative or competitive success (Papa et al., 2020; Han and Li, 2015). Knowledge management, firm-level strategy, and HR practices were found to modify the impact of knowledge on innovative and competitive performance (Weber and Weber, 2010; Ali, Musawir, and Ali, 2018). Thus, it is clear that knowledge needs to be effectively distributed among all employees. Moreover, managers need to maintain innovative workplace culture and make innovation one of the firm’s priorities to ensure high levels of innovation (Crescenzi and Gagliardi, 2018). Additionally, there should be enough human resources to ensure that knowledge is converted to innovation and the firm’s success (Grimpe, Murmann, and Sofka, 2019). In summary, knowledge needs to be facilitated by efficient mechanisms to integrate it into practice.

Finally, some researchers failed to acknowledge different types of innovation. There are two general types of innovation: on the product level and on the process level. The majority of researchers measured innovation on the product level (Fallatah, 2018; Bloom and van Reenen, 2002; Artz et al., 2010). However, knowledge has a different impact on different types of innovation (Doran, McCarthy, and O’Connor, 2019). Moreover, process innovation is known to improve the company’s performance, while product type of innovation often has a subtle effect on companies’ performance (Heij et al., 2020). In summary, inconsistency in conceptualization and methods may have led to differences in findings.

Implications for Managers

Knowledge was found to be a crucial determinant of firms’ innovative, competitive, and financial performance regardless of the company’s size and industry. Thus, managers of all firms need to dedicate attention to knowledge acquisition and management to encourage innovation and ensure profits and market share. Knowledge from all sources is important; however, there are some specific recommendations for firms of different sizes. Large firms should exploit both outside and inside sources of knowledge. Among outside sources, alliances were found the most beneficial. However, it should be remembered that knowledge sharing with partners is more open if companies ensure the security of knowledge. Thus, managers need to employ effective policies and the latest technology to protect the knowledge base. When speaking of internal sources, large firms should focus on investing in R&D to maximize innovative potential. However, it should be remembered that the correlation between innovative performance and investment in R&D has an inverted U shape, which implies that managers should search for an optimal amount of investment in the field. Excessive investments in R&D may harm the firms’ finances and prevent innovation. At the same time, managers should focus more on the quality of knowledge than on its quantity.

Managers of small and medium-sized firms can also benefit from exploiting external and internal knowledge; however, they should be focused on different channels. Since smaller firms have modest budgets, it is unlikely they can benefit from R&D as much as larger companies. Instead, managers need to invest in employee training, which was found as the most beneficial source of internal knowledge. Another vital source of internal knowledge that emerged recently is big data analytics. This source of information is crucial for firms regardless of their type and size. Speaking of external sources, firms can gain knowledge by hiring talented and qualified personnel.

While knowledge acquisition is crucial, the accumulation of information does not guarantee improvements in innovative performance. Knowledge acquisition should be supported by effective management practices that convert knowledge into innovation. Thus, managers need to dedicate time and resources to reviewing the latest practices of knowledge management to ensure efficient use of acquired knowledge. In order to improve innovative performance, companies need to make innovation an essential part of their vision and long-term strategy. Moreover, a workplace culture that encourages innovation should be maintained.

Managers need to remember that knowledge management practices are closely correlated with HR management. Thus, firms need to employ the best available HR specialists to ensure the best outcomes. Special attention should be paid to protection from knowledge loss. Knowledge loss is associated with employee exit that leads to decreased productivity of personnel and increased spending. Thus, managers should utilize appropriate turnover reduction practices and encourage knowledge sharing. However, investment in knowledge sharing should be thoughtful, as firms’ performance may decrease if knowledge sharing is encouraged in firms with a high level of availability of internal knowledge to employees. At the same time, top managers should have enough time to dedicate to innovation. Thus, there should be enough middle managers that can help top manager take their attention to everyday operations and focus on innovation. In summary, knowledge acquisition needs to be supported by efficient knowledge management and HR practices to promote firm-level innovation.

Implications for Scholars

Scholars interested in researching the topic can benefit from the findings of this study. First, the influence of knowledge on firm-level innovation is a well-studied matter. Thus, scholars should aim at making knowledge more specific for different types of firms and contexts. Second, researchers should utilize correlational design for their studies, as it is the most appropriate for understanding the influence of knowledge on innovative performance. Scholars are encouraged to acquire first-level data and utilize regression analysis to test hypotheses. Other types of quantitative analyses can also be utilized as long as they are relevant for answering the research question. However, researchers should avoid using qualitative methods as they are associated with a higher degree of bias in comparison with quantitative methods. Third, researchers can use either the resource-based approach or the knowledge-based view as a theoretical basis for future research. Both frameworks appear beneficial for explaining the results of studies included in the present literature review.

The present study revealed at least two gaps in knowledge that can be addressed in future research. On the one hand, the influence of knowledge acquired from big data analytics appeared an understudied matter. Currently, the utilization of big data analytics is gaining popularity in all industries (Amado et al., 2018; Bilal et al., 2016). Managers need to understand how big data analysis can affect innovative performance and what specific practices can help to convert the acquired data into valuable knowledge that promotes innovation. Thus, future research should focus on helping managers answer these questions. On the other hand, scholars should consider focusing on the influence of knowledge on firm-level performance in African and Arab countries. The present literature review revealed a lack of knowledge concerning the relationship between knowledge and innovative performance in these regions.

Implications for Education

The present study has significant implications for the education of managers. The study suggests that higher education facilities should put a significant emphasis on knowledge acquisition and management when providing education for future managers. Knowledge management courses may be integrated into the HR-related courses, as the two matters are closely correlated. Additionally, a greater emphasis should be put on the quantitative analysis of data to improve the ability of managers to accumulate internal knowledge. Higher education institutions should understand the important role of innovation in reaching sustainable development goals.

Future Research Avenues

The present literature revealed a significant gap in the current body of knowledge. In particular, there is little research available on how knowledge impacts innovation in African and South American countries. Therefore, future research should focus their attention on studying correlations between the two matters using samples of companies from these regions. Additionally, it was noticed that the current body of knowledge lacks evidence on how big data analysis affects firm-level innovation. Two studies mentioned in the present paper utilized samples of only Italian companies. Thus, future research should improve the generalisability of findings concerning the effect of big data analysis on innovation by analyzing companies from other countries.


The relationship between knowledge and innovative performance of firms is a matter of increased attention of scholars and managers. The present study demonstrates that knowledge has a significant influence on the innovative performance of firms regardless of their type and size. The present literature review revealed that almost all sources of knowledge are valuable for improving firm-level innovation. However, smaller firms seem to benefit more from external sources of knowledge, such as hiring talents or forming alliances, while large companies are recommended to exploit the internal sources of knowledge, such as R&D and big data analytics.

Knowledge accumulation should be accompanied by efficient knowledge management practices. Companies need to maintain a workplace culture that encourages learning and innovation. Additionally, knowledge needs to be adequately distributed and protected to promote innovation and improve competitive performance. Thus, the present study suggests that managers should review the latest knowledge sharing and management practices to ensure the most favorable outcomes. HR practices are also of extreme importance in promoting innovation. Knowledge is always possessed by people; thus, HR practices and knowledge management practices are closely correlated.

While knowledge always has an influence on innovation, it may be both positive and negative. Knowledge acquired from customers, for instance, is usually negatively associated with innovation, while knowledge from big data analytics is helpful for improving innovative performance. However, innovation has varying impacts on the overall competitive and financial performance of firms. Companies need to prioritize process innovation over product innovation to increased profits.

Studying State

The present activity was extremely valuable for me for several reasons. First, I learned the differences between the two general types of literature review: systematic and narrative. SR requires specific knowledge, skill, and practices; therefore, NR was chosen as the primary method for the present paper. I learned the benefits of NR, and I will be able to utilize it in the future. It will be especially helpful for writing my thesis, as the literature review is the second essential part of every dissertation. My experience confirmed that one of the most efficient strategies to conduct a literature review is to follow five simple steps: selecting a topic, finding the sources while documenting the process, organizing sources into categories, conducting tabular analysis, and writing the findings. At the same time, studying SRs captured my interest, and I want to try and conduct an SR in the future.

Second, I learned efficient searching strategies to acquire knowledge on a needed topic. I first considered that using Google Scholar was the most convenient way to search for relevant articles. However, not all the articles were in open access, and the search engine provided many irrelevant results. Thus, I decided to search for needed information in the most authoritative journals on the topic of my interest. I asked for advice about what journals I should consider covering the topic of the relationship between knowledge and firm-level innovation. After conducting a thorough internet search and receiving relevant advice, I searched every journal separately using the same keywords and downloaded the articles I considered appropriate. While this search strategy may be associated with source selection biases, I found it effective for acquiring relevant knowledge on the topic.

Third, I acquired valuable experience in managing and organizing multiple sources of information. After conducting a search for relevant articles, I selected more than 100 sources that could be potentially included in the literature review. After reading the abstracts of all articles, I decided that 54 of the sources were irrelevant or distant from my topic. After reading all the remaining articles, I sorted them into three categories that I used as subheadings in the third section of the present paper. The categories were Internal Knowledge for Innovation, External Knowledge for Innovation, and Knowledge Management for Innovation. After categorizing the articles, only 38 sources were left.

Fourth, the present activity helped me synthesize knowledge acquired from various sources. I learned that researchers often come to controversial conclusions adding to the uncertainty concerning the topic of interest. I started to pay more attention to the methods and the context of research to understand the reason for seemingly opposing views. This helped me to acquire an understanding of the limitations of research and areas of applicability of findings. Information synthesis resolved the inconsistencies and helped me arrive at logical conclusions.

Fifth, I learned to make judgments and understand the implications of acquired knowledge. Accumulation of knowledge is worthless unless a person can understand how to use it appropriately to benefit humanity. However, the same information may have different significance for different people. The present project helped to distinguish between implications for managers and for scholars and formulate them in a concise manner.

Sixth, the present paper improved my writing and editing skills. I practiced my Microsoft Word skills using the latest version of the software. Moreover, I reviewed the Harvard citation style manual and conducted several plagiarism scans to comply with legal and ethical regulations as well as the University policy. Mechanical writing skills will help me both in my studies and in my future career.

Finally, working on the paper improved my understanding of the influence of knowledge on firm-level innovation. Before conducting the study, I supposed that all knowledge acquired from any source could promote innovation. However, I was surprised to find out that information acquired from customers often prevents innovation (Knudsen, 2007). I learned to distinguish between product innovation and process innovation. Finally, I was struck by the idea that knowledge cannot be viewed without people that possess it. Before conducting the research, I understood knowledge as something abstract that is written in policies or research findings. However, the present project revealed close interrelationships between knowledge management and HR practices. In summary, the project was beneficial for me for a wide variety of reasons.

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