Abstract

People are often cited as the key source of competitive advantage for most firms (Pfeffer, 1994; Katz et al. 2000), particularly for those operating in knowledge-intensive sectors. While much is known on the utilization and protection of firm’s human capital stock in established corporations, our understanding on human resource management in entrepreneurial settings is still limited (Cardon & Stevens, 2000). In this paper, we explore the dynamic interplay of knowledge codifiability, employee flows and performance in the context of knowledge-based product and service firms. While employee outflows may at times benefit firms by reducing stagnation, encouraging innovation and eliminating poor performers (Abelson & Baysinger, 1984; Dalton et al. 1981), they are also associated with the erosion of firm specific human capital and social capital (Shaw, Gupta & Delery, 2005; Coff, 1997; Phillips, 2002; Chadwick & Dabu, 2009), which can be especially harmful for young, entrepreneurial firms. Employee inflows are generally thought to enhance firm performance, as they can serve as a mechanism for the acquisition of externally developed knowledge (Rao & Drazin, 2002), especially when knowledge to be acquired is “sticky” and tacit (Polanyi 1967; Dosi, 1988; Madsen, Mosakowski & Zaheer, 2003). The tacitness of the organization’s knowledge base can be both beneficial (protecting a knowledge resource from imitation) and detrimental (limiting the usefulness of that knowledge resource by making the adoption of knowledge more difficult for newcomers) (Mitchell, 2006).

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