Academy 01 Monogemen: Rcvlew 1998. Vol 23 No 2. 212-2% SOCIAL CAPITAL, INTELLECTUAL CAPITAL, AND THE ORGANIZATIONAL ADVANTAGE JANINE NAHAPIET Templeton College, University of Oxford SUMANTRA GHOSHAL London Business School Scholars of the theory of the firm have begun to emphasize the sources and conditions of what has been described a s "the organizational advantage," rather than focus on the causes and consequences of market failure. Typically, researchers see such organizational advantage a s accruing from the particular capabilities organizations have for creating and sharing knowledge. In this article we seek to contribute to this body 01 work by developing the following arguments: (1) social capital facilitates the creation of new intellectual capital. (2) organizations. a s institutional settings. are conducive to the development of high levels of social capital. and (3) it is because of their more dense social capital that firms. within certain limits. have a n advantage over markets in creating a n d sharing intellectual capital. We present a model that incorporates this overall argument in the form of a series of hypothesized relation- ships between different dimensions of social capital and the main mechanisms and processes necessary for the creation of intellectual capital. Kogut and Zander recently have proposed "that a firm be understood a s a social commu- nity specializing in the speed and efficiency in the creation and transfer of knowledge" (1996: 503). This is a n important and relatively new perspective on the theory of the firm currently being formalized through the ongoing work of these (Kogut & Zander, 1992, 1993, 1995, 1996 Zander & Kogut, 1995) and several other authors (Boisot, 1995 Conner & Prahalad, 1996 Loasby, 1991 Nonaka & Takeuchi, 1995 Spender, 1996). Standing in stark contrast to the more estab- lished transaction cost theory that is grounded in the assumption of human opportunism and the resulting conditions of market failure (e.g., Williamson, 1975), those with this perspective essentially argue that organizations have some particular capabilities for creating and sharing knowledge that give .them their distinctive ad- vantage over other institutional arrangements, such as markets. For strategy theory, the impli- This research w a s supported in part by a grant from the Sundridge Park Research Fund. We a r e grateful to John Stoplord, Peter Moran. Morien Hansen, Richard Pascale, Max Boisot. Wen-Pin Tsai. Nitin Nohria, Paul Willman. Anthony Hopwood. Tim Ambler, Martin Waldenstrom, a n d three anonymous referees for their helpful comments on earlier drafts of this article and in discussions of its subject matter. cations of this emerging perspective lie in a shift of focus from the historically dominant theme of value appropriation t-o one of value creation (Moran & Ghoshal, 1996). The particular capabilities of organizations for creating and sharing knowledge derive from a range of factors, including the special facility organizations have for the creation and transfer of tacit knowledge (Kogut & Zander, 1993, 1996 Nonaka & Takeuchi, 1995 Spender, 1996) the organizing principles by which individual and functional expertise are structured, coordinated, and communicated, and through which individ- uals cooperate (Conner & Prahalad, 1996 Kogut & Zander, 1992 Zander and Kogut, 1995) and the nature of organizatio'ns as social communities (Kogut & Zander, 1992, 1996). However, notwith- standing the substantial insights we now hcrve into the attributes of organizations a s knowl- edge systems, we still lack a coherent theory for explaining them. In this article we seek to ad- dress this g a p and to present a theory of how firms can enjoy what Ghoshal and Moran (1996) have called "the organizational advantage." Our theory is rooted in the concept of social capital. Analysts of social capital are centrally concerned with the significance of relation- ships a s a resource for social action (Baker, 1990 Bourdieu, 1986 Burt, 1992 Coleman, 1988, 1990

1998 Nahapiet and Ghoshol 243 Jacobs. 1965 Loury, 1987). However, as Putnam (1995) recently has observed, social capital is not a unidimensional concept, and. while sharing a common interest in how relational resources aid the conduct of social affairs, the different au- thors on this topic have tended to focus on dif- ferent facets of social capital. In this article we (1) integrate these different facets to define so- cial capital in terms of three distinct dimen- sions (2) describe how each of these dimensions facilitates the creation a n d exchange of knowl- edge and (3) argue that organizations, a s insti- tutional settings, a r e able to develop high levels of social capital in terms of all three dimensions. Our primary focus, however, is on the interrela- tionships between social a n d intellectual capi- tal since, as w e have already noted, there is already a clear stream of work that identifies and elaborates the significance of knowledge processes as the foundation of such organiza- tional advantage. Our aim here is to provide a theoretical explanation of why this is the case. SOCIAL CAPITAL The term "social capital" initially appeared in community studies, highlighting the central im- portance-for the survival a n d functioning of city neighborhoods--of the networks of strong, crosscutting personal relationships developed over time that provide the basis for trust, coop- eration, and collective action in such communi- ties Uacobs, 1965). Early u s a g e also indicated the significance of social capital for the individ- ual: the set of resources inherent in family rela- tions a n d in community social organizations useful for the development of the young child (Loury, 1977). The concept h a s been applied since its early use to elucidate a wide range of social phenomena, although researchers in- creasingly hcwe focused attention on the role of social capital as a n influence not only on the development of human capital (Coleman, 1988 Loury, 1977, 1987) but o n the economic perfor- mance of firms (Baker, 1990), geographic regions Putnam, 1993, 1995), a n d nations Fukuyama, 1995). The central proposition of social capital the- ory is that networks of relationships constitute a valuable resource for the conduct of social af- fairs, providing their members with "the collec- tivity-owned capital, a 'credential' which enti- tles them to credit, in the various senses of the word" (Bourdieu, 1986: 249). Much of this capita] is embedded within networks of mutual ac- quaintance and recognition. BOL rdieu (1986). for example, identifies the durable obligations c r i s - ing from feelings of gratitude, respect, a n d friendship or from the institutionally guaran- teed rights derived from membership in a fam- ily, a class, or a school. Other resources a r e available through the contacts or connections networks bring. For example, through "weak ties" (Granovetter, 1973) and "friends of friends" (Boissevain, 1974), network members can gain privileged access to information and to opportu- nities. Finally, significant social capital in the form of social s t a t u s or reputation can b e de- rived from membership in specific networks. particularly those in which such membership is relatively restricted (Bourdieu, 1986 Burt, 1992 D'Aveni & Kesner, 1993). Although these authors agree on the signifi- cance of relationships as a resource for social action, they lack consensus on a precise defini- . - - - - - -- . - tion of social capital. Some, like Baker (1990), lim-itth-emscope of the term to only the structure of the relationship networks, whereas others, like Bourdieu (1986, 1993) a n d Putnam (1995), also in- clude in their conceptualization of social capital the actual or-potential resources that can be accessed through such networks. For our pur- poses here, we adopt the latter view a n d define social capital a s the sum of the actual a n d po- tential resources embedded within, available through, a n d derived from the network of rela- tionships possessed by a n individual or social unit. Social capital thus comprises both the network a n d the a s s e t s that may b e mobilized through that network (Bourdieu, 1986 Burt, 1992). As a set of resources rooted in relationships, social capital h a s many different attributes, a n d Putnam (1995) h a s argued that a high research priority is to clarify the dimensions of social capital. In the context of our exploration of the role of social capital in the creation of intellec- tual capital, we suggest that it is useful to con- Gder these fccets in terms of three clusters: the structural, the relational, and the cognitive di- --- mensions of social capital. Although we sepa- rate these three dimensions analytically, w e recognize that many of the features we describe are, in fact, highly intenelated. Moreover, in our analysis we set out to indicate important facets

244 Academy 01 Man of social capital rather than review such facets exhaustively. In making the distinction between the struc- tural and the relational dimensions of social capital, we draw on Granovet ter's (1992) discus- sion of structural and relational embeddedness. Structural embeddedness concerns the proper- ti'es'of the social system a n d of the network of relations as a whole.' The term describes the impersonal configuration of linkages between people or units. In this article w e use the concept of the structural dimension of social capital to refer to the overall pat tern of connections 'be- tween actorsLthat is, who you reach and how you reach them (Burt, 1992). Among the most important facets of this dimension a r e the pres- ence or absence of network ties between actors (Scott, 1991 Wasserman & Faust, 1994) network configuration (Krackhardt, 1989) or morphology (Tichy, Tushman, & Fombrun, 1979) describing the pattern of linkages in terms of such mea- sures'-asaensify, . . . . . - . connectivity, a n d hierarchy and appropriable organization-that is, the ex- . . , . - . . . - - . istence of networks created for one purpose that may . - be used for another (Coleman, 1988). In contrast, the term "relational embedded- ness" describes the kind of personal relation- ships people have developed with each other through a history of interactions (Granovetter, 1992). This concept focuses on the particular re- lations people have, such a s respect and friend- ship, that influence their behavior. It i s through these ongoing personal relationships that peo- ple fulfill such social motives as sociability, a p - proval, a n d prestige. For example, two actors may occupy equivalent positions in similar net- work configurations, but if their personal a n d emotional attachments to other network mem- - . . . . - . bers differ, their actions also a r e likely to differ in important respects. For instance, although one actor may choose to stcry in a firm because ' We recognize that this terminology deviates from much that is customary in the iield of network analysis. In partic- ular. the focus of network analysis i s relational data, but included under its heading are attributes that we label structural here. Scott, for example, describes network anal- ysis a s being concerned with "the contacts, ties and connec- tions, the group attachments and meetings which relate one agent to another. . . .These relations connect pairs of agents to larger relational systems" (1991: 3). However, we justify our usage both through reference to Granovetter and be- cause we believe this terminology cuptures well the per- sonal aspect of this dimension. agement Review April of a n attachment to fellow workers, despite eco- nomic advantages available elsewhere, another without such personal bonds may discourlt working relationships in making career moves. In this article we use the concept of the rela- tional dimension of social capital to refer to those assets created and leveraged through re- lationships, and parallel to what Lindenberg (1996) describes as behavioral, as opposed to structural, embeddedness and what Hakansson a n d Snehota (1995) refer to a s "actor bonds." Among the key facets in this cluster are trust and trustworthiness (Fukuyama, 1995 Putnam, 19931, norms and sanctions (Coleman, 1990 Put- nam, 1995), obligations -- - and expectations (Burt, 1992 Coleman. 1990 Granovetter, 1985 M a w s , 1954), a n d identity and identification (Hakans- son & Snehota, 1995 Merton, 1968). The third dimension of social capital, which w e label the "cognitive dimension," refers to those resources providing shared representa- tions, interpretations, a n d systems of meaning among parties (Cicourel, 1973). We have identi- fied this cluster separately because we believe it represents a n important set of assets not yet discussed in the mainstream literature on social capital but the significance of which is receiv- ing substantial attention in the strategy domain (Conner & Prahalad, 1996 Grant, 1996 Kogut & Zander, 1992, 1996). These resources also repre- sent facets of particular importance in the con- text of our consideration of intellectual capital, including shared language and codes (Arrow, 1974 Cicourel, 1973 Monteverde, 1995) a n d shared narratives (On, 1990). Although social capital takes many forms, each of these forms h a s two characteristics in common: (I) they constitute some aspect of the social structure, a n d (2)-they facilitate the ac- tions of individuals within t h e structure (Coleman, 1990). First, as a social-structural re- . source, social capital inheres in the relations between persons a n d among persons. Unlike other forms of capital, social ccrpital is owned jointly by the palties in a relationship, and no one player has, or is capable of having, exclu- sive ownership rights (Burt, 1992). Moreover, al- though it h a s value in use, social capital cannot be traded easily. Friendships and obligations do not readily pass from one person to another. Sec-. ond, social ccrpital makes possible the achieve- ment of ends that would be impossible withoh it or that could be achieved only at extra cost.

1998 Nahapiet ar td Ghoshal 245 In examining the consequences of social cap- ital for action, we can identify two distinct themes. First, social capital increases the effi- ciency of action. For example, networks of social relations, particularly those characterized by weak ties or structural holes (i.e., disconnections or nonequivalencies among players in an are- na), increase the efficiency of information diffu- sion through minimizing redundancy (Burt, 1992). Some have also suggested that social cap- ital in the form of high levels of trust diminishes the probability of opportunism and reduces the need for costly monitoring processes. It thus re- duces the costs of transactions (Putnam, 1993). Whereas the first theme could be regarded a s illustrative of what North (1990) calls "aJlocative efficiency," the second theme centers on the role a social capital a s a n aid to adaptive-efficiency and to_thhee creativity and learning it implies. In particular, researchers have found social capi- tal to _encourage cooperative behavior, thereby facilitating the development of new forms of association a n d innovative organization (Fukuyama, 1995 Jacobs, 1965 Putnam, 1993). The concept, therefore, is central to the under- standing of institutional dynamics, in-novation, and value creation. We should note, however, that social capital is n-ot a uniyersally beneficial resoGrce. As Coleman observes, "[A] given form of social cap- ital that is useful for facilitating certain actions may be useless or harmful for others" (1990: 302). For example, the strong norms and mutual iden- tification that mcry exert a powerful positive in- fluence on group performance can, at the same time, limit its openness to information and to alternative ways of doing things, producing forms of collective blindness that sometimes have disastrous consequences Uanis, 1982 Per- row, 1984 Turner, 1976). The main thesis of the work we have reviewed thus far is that social ccrpital inheres in the re- lations between and among persons and is a productive asset facilitating some forms of so- cial action while inhibiting others. Social rela-, tionships within the family and wider commu- nity have been shown to be a n important factor in the development of human capital (Coleman, 1988). In a parallel argument we suggest that social relationships-and the social capital therein-re an important influence on the de- velopment of intellectual capital. In elaborating this argument, we focus on the firm a s the pri- mary context in which to explore the interrela- tionships between social and intellectual capi- tal. Later in the article we consider how our analysis may be extended to a wider range of institutional settings. INTELLECTUAL CAPITAL Traditionally, - - -- economists have examined physical and human capital a s key resources for the firm that facilitate productive and economic activity. However, knowledge, too, has been rec- ognized a s a valuable resource by economists. Marshall, for example, suggests that "capital consists in a great part of knowledge and organ- ization. . . . [Klnowledge is our most powerful engine of production" (1965: 115). He goes on to note that "organization aids knowledge," a per- spective also central to the work of Arrow (1974). More recently. Quinn has expressed a similar view, suggesting that "with rare exceptions, the economic and producing power of the firm lies more in its intellectual and service capabilities than its hard assets-land, plant and equip- ment . . . . Wlirtually all public and private enter- prises-including most successful corpora- tions--are becoming dominantly - - -- - -- - - repositories and coordinators - of intellect" (1992: 241). In this article we use the term "intellectual capital" to refer to the knowledge and knowing capability of a social collectivity, such a s a n organization, intellectual community, or profes- sional practice. We have elected to adopt this terminology because of its clear parallel with the concept of ---- human - capital, which embraces the acquired knowledge, skills, a n d capabilities that e n a b l e persons to act i n new w a y s (Coleman, 1988). Intellectual capital thus repre- sents a valuable resource and a capability for action based in knowledge and knowing. This orientation to intellectual capital builds on some central themes and distinctions found in the substantial a n d expanding literature on knowledge and knowledge processes. Many of these themes have a long history in philosophy a n d Western thought, dating back to Plato, Aristotle, and Descartes. Two issues are of par- ticular relevance to our consideration of the special advantage of organizations as a n in- stitutional context for the development of intellectual capital. These are, first, debates about the different -- . types of knowledge that h a y exist and, - second, - the issue of the level of anal-

246 Academy of Management Review April ysis in knowledge . . . . processes, particularly the ing a s action or enactment in which progress is question of whether social or collective knowl- made through active engagement with the edge exists and in what form. world on the basis of a systematic approach to knowing. Dimensions of Intellectual Capital Types of knowledge. Arguably, the most per- slstent theme in writing about the nature of knowledge centers on the proposition that there are different types of knowledge. For example, a key distinction scholars frequently make is be- tween practical, experience-based knowledge and the theoretical knowledge derived from re- flection and abstraction from that experience-* distinction reminiscent of the debate of early philosophers between rationalism and empiri- cism (Giddens & Turner, 1987 James, 1950). Var- iously labeled "know-how" or "procedural knowledge," the former frequently is distin- guished from know-that, know-what, or declar- ative knowledge (Anderson, 1981 Ryle, 1949). It concerns well-practiced skills and routines, whereas the latter concerns the development of facts and propositions.2 Perhaps the most-cited and influential dis- tinction of this sort is Polanyi's identification of two aspects of knowledge: tacit and explicit. This is a distinction he aligns with the "knowing how" and "knowing what" of Gilbert Ryle (Polan- yi, 1967). Polanyi distinguishes tacit knowledge in terms of its incommunicability, and Winter (1987) has suggested that it may be useful to consider tacitness-asp variable, with the degree of tacitness a function of the extent to which the knowledge is or can be codified and abstracted (see also Boisot, 1995). However, close reading of Polanyi indicates that he holds the view that some knowledge will always remain tacit. In so doing, he stresses the importance of knowing, as well a s knowledge, and, in particular, the active shaping of experience performed in the pursuit of k n ~ w l e d g e . ~ Discussing the practice of sci- ence, he observes that "science is operated by the skill of the scientistznd it is through the exercise of this skill that he shapes his scientific knowledge" (Polanyi, 1962: 49). This suggests--, both a view of knowledge a s object and of know- ' To this recent authors h a v e added the concept of know- why (Hamel, 1991 Kogut & Zander. 1992). Indeed, his much-relerenced chapter, in which he intro- duces the tacit dimension, is entitled "Tacit Knowing," not "tacit knowledge.'' Levels of analysis in knowledge and knowing. Another equally fundamental cause for debate within philosophical and sociological circles centers on the existence, or otherwise, of partic- ular phenomena at the collective level. That is, what is the nature of social phenomena that is different from the aggregation of individual phenomena (Durkheim, 1951 Gowler & Legge, 1982)? In the context of this article, the question concerns the degree to which it is possible to consider a concept of organizational, collective, or social knowledge that is different from that gf individual organizational members. Simon represents one extreme of the argu- ment, stating that "all organizational learning takes place inside human heads an organiza- tion learns in only two ways: (a) by the learning of its members, or (b) by ingesting new members who have knowledge the organization didn't previously have" (1991a: 176). ~ n @ n ~ a s t , ' Nelson and Winter take a very different position, assert- ing that the possession of technical "knowledge" is an attribute of the firm as a whole, as an organized entity, and is not reducible to what a n y single individual knows, or even to any simple aggre- gation of the various competencies and capabil- ities of all the various individuals, equipments and installations of the firm (1982: 63). A similar view is reflected in Brown and Du- guid's (199 1) analysis of communities of practice, in which shared learning is inextricably located in complex, collaborative social practices. Weick and Roberts (1993) also report research demonstrating collective knowing a t the organ- izational level.' Our defktion of intellectual capital reflects the second of these perspectives and acknowledges the significance of socially and contextually embedded forms of knowledge and knowing as a source of value differing from the simple aggregation of the knowledge of a set of individuals. These two dimensions of explicitltacit and in- dividuaYsocia1 knowledge have been combined by Spender (1996), who created a matrix -. of four 'See a l s o Walsh's (1995) comprehensive discussion o r organizational cognition.