Knowledge Protection in Firms: Theory and Evidence from HP Labs

Abstract

This paper develops a novel framework to examine organizational methods of knowledge protection. The model highlights a basic trade-off between improving task coordination through communication and mitigating security risks by imposing restrictions on communication flows. We develop an index that for each task measures the importance of protecting the information associated with that task. Using the index, we characterize when communication flows should be restricted or screened, and when they should be kept open. Evidence from HP Labs supports the basic predictions of model, in particular the importance of employee trustworthiness and internalized codes of behavior in promoting open communication. Our interviews also suggest a potential conflict between two of the most important appropriability mechanisms: secrecy and lead-time advantage.

Keywords: Secrecy, information security, organization design, trust, innovation, appropriability mechanisms

JEL Classification: L14, L23, M10, M14