Learning by grafting knowledge

Report from an ongoing case study in an “innovation centre”

Paper for the 14th Nordic Conference on Small business Research May 11 – 13

2006

by

Are Branstad

PhD student at:

Vestfold University College - Norway/ Bodø Graduate School of Business - Norway

Tel: 0047 33 03 12 70

Mail: Are.Branstad@hive.no

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Introduction
Learning by grafting knowledge has been described by Huber (1991) as the process where an
organization is acquiring knowledge by “grafting on to itself components that possess knowledge
needed but not possessed by the organization” (:88). Grafting knowledge denotes that new knowledge
often comes to an organization in the form of a new person and not as “pure” or impersonalized
knowledge. The present paper describes grafting knowledge in entrepreneurial contexts. It is a report
from ongoing field research in a Norwegian “innovation centre”, whose task is to develop early phase
entrepreneurial companies into maturity. The innovation centre takes ownership shares in innovative
young firms in return for access to relevant knowledge and expertise from its’ own network. Grafting
knowledge is used in this paper to describe a process that contributes to entrepreneurial learning by
putting a competent person or persons into a working and learning context within an entrepreneurial
team. Studies of organizational learning by grafting knowledge are scarce (Huber 1991) and there are
few studies of how an intermediate part, such as an innovation centre, can contribute to learning in
entrepreneurial companies through grafting on to them new competencies from an external network.

Inter-organizational learning and entrepreneurship

Knowledge is closely linked to learning, as it is “…the result of learning encompassing cognitive

development and behavioural change” (Johannessen and Olsen 2003). An underlying assumption
about organizational knowledge is that knowledge is the principal productive recourse of the firm
(Grant 1996, 1996a, Nonaka et al. 1996). In Recourse Based Theory, the long term access to recourses
determines the firms’ competitiveness (Selnznick 1957; Penrose 1959; Andrews 1971; Howells 1996).
Knowledge-based resources are important for providing competitive advantages, because they are
intangible and difficult for competitors to imitate (Wiklund and Shepherd 2003). All in all, these
perspectives suggests that the firms competitiveness is linked to its’ knowledge base (Nonaka 1994;
Grant 1996) or “knowledge reservoir” (Widding 2003).
According to Huber (1991), an organization learns “if through its’ processing of information,
the range of potential behaviours is changed” (:89). He further assumes that: “an organization learns if
any of its units acquires knowledge that it recognizes as potentially useful to the organization” (:89).
Learning processes may take place on an individual as well an organizational level. Individual learning
is necessary for organizational learning, but an organization can learn although not all of its’ members
participate in that learning (Huber 1991). New knowledge embodied in a new person may be
integrated in the organizations with varying breadth, elaborateness and thoroughness (Huber 1991).
Small, early stage companies often do not have the recourses to access knowledge through
hiring or acquisition. Building alliances to other organizations is a fast and flexible way for a firm to
access resources, markets, knowledge, finances etc. From a resource based view, access to outside

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knowledge and interorganizational learning is critical to firm competitiveness (Levinson and Asahi
1995; Dyer and Singh 1998). Interorganizational learning thorough learning alliances are supported by
trusting long-term relations (Larsson, Bengtson et al. 1998). Venture capital firms are possible long-
term alliance partners for interorganizational learning with their portfolio companies, and learning
between the VCF and the PFC can be obtained through trust and social relationships (De Clercq and
Sapienza 2001). Private investors and venture capital firms may not only be skilled in investing, but
may posess, or have access to, other types of knowledge that adds value to their portfolio companies
(Mason and Harrison 1994; Barney, Busenitz et al. 1996; Fredriksen 1997; Busenitz, Fiet et al. 2004).
The emergent concept of competent capital (Maskell and Malmberg 1995; Isaksen 1998; Aslesen
1999; Karaömerlioglu and Jacobsson 1999; Sætre 2001; Maskell and Lorenzen 2003; Sætre 2003) is
defined as “investors with relevant industry experience” (Sætre 2001:6). Competent capital are in short
investors that may provide “more than money” (Fredriksen 1997) or “financial institustions who can
bring competence to the firm” (Isaksen 1998). Thus competent capital captures the notion that
informal investors or venture capitalists can provide access to knowledge and networks that adds value
beyond their financial investment.
Until recently there have been few efforts to apply the body of knowledge from organizational
learning research to the field of entrepreneurship and new venture creation, and neither of the fields
have contributed to much progress in the other (Harrison and Leitch 2005). According to (Deakins and
Freel 1999) our limited understanding about how learning interacts with the entrepreneurial process
“remains one of the most neglected areas of entrepreneurship research” (Deakins and Freel 1999:23).
This neglect is even negative for practioners, since “to be successful, entrepreneurs must be able to
learn from decisions, from mistakes, from experience and from their networks. It is a process that is
characterized by significant and critical learning events” (Deakins and Freel 2006:17).
In studying grafting knowledge as a way to achieve organizational learning in an
entrepreneurial context, one should consider the dynamics between individual and organizational
levels of learning. More specifically, the ability of the receiving organization to absorb knowledge
presented in the form of a grafted member. Absorptive capacity defined as “the ability of a firm to
recognize the value of new external information, assimilate it, and apply it to commercial ends”
(Cohen and Levinthal 1990:128).
The concept “partner-specific absorptive capacity” comprises situations where the company’s’
ability to assimilate information depends on the source of the information (De Clercq and Sapienza
2001). Thus absorptive capacity may be relative to specific alliance partners. A venture capitalist -
entrepreneur dyad may involve various compositions of specific knowledge such as managerial-,
market- and technological knowledge. A degree of overlap in knowledge is beneficial to learning of
new knowledge, because a prior knowledge base helps the student partner to better evaluate the new
knowledge for its own undertakings (Lane and Lubatkin 1998). A firms’ absorption of new knowledge
is thought to be most efficient if it already possesses some basic knowledge in terms of a general

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understanding of the basics of a discipline. Similar basic knowledge but different specialized
knowledge is therefore expected to be favourable to interorganizational learning between an
entrepreneurial company and the innovation centre.

The relational view and relation rents theory

The relational view (Dyer and Singh 1998) suggests that competitiveness depend on inter-firm
resources and not only internal resources. The question is how inter-firm alliances are most effectively
governed. Effective governance of inter-firm cooperation can produce interorganizational competitive
advantage and the relational view asserts that informal trusting (a self-enforced governance
mechanism) takes the alliance partners further in creating value than relying on contracts (a third-party
governance mechanism). Trust and reputation are informal safeguards firms rely on. Sometimes in
combination with formal controls (Granovetter 1985). Trust reduces transaction costs of governance
compared to writing, monitoring and enforcing formal contracts and “provide incentives for value-
creation initiatives, such as investing in relation-specific assets, sharing knowledge, or combining
complementary strategic resources” (Dyer and Singh 1998:670).
Following De Clercq et al. (2001) a partnership between to firms can develop an inimitable
resource combination of firm-specific, idiosyncratic assets, through inter-firm commitment and trust
that create relational rents. Relational rents are linked to a specific alliance between two firms. A
definition of relational rents is: “supernormal profit jointly generated in an exchange relationship that
cannot be generated by either firm in isolation and can only be created through the joint idiosyncratic
contributions of the … partners” (Dyer and Singh 1998:662).
Four factors explain how relational rents are developed. The first, relation-specific
investments, are “investments that are specialized to combine optimally a firm’s assets with the assets
of an alliance partner” (De Clercq and Sapienza 2005:110). Also: “VCF value-contributing activities
are particularly effective if the VCF brings in resources that complement the venture’s current
resource bundle and organizational learning capabilities” (Wijbenga, Postma et al. 2003:245). The fact
that both need each other to acomplish the asset reduces each firms’ incentive to behave
opportunistically, thus giving rise to relational rents.
The second factor is knowledge sharing routines, which is “a regular pattern of interfirm
interactions that permits the transfer, recombination, or creation of specialized knowledge” (Dyer and
Singh 1998:665). According to De Clercq et.al. (2001), knowledge sharing routines are
interorganizational information flows or learning routines which connects to the partners absorptive
capacities (Cohen and Levinthal 1990),
Optimal learning outcomes are also contingent on the partners’ frequency and intensity of
interaction. Board meetings and other formal meetings, informal personal contacts by telephone face-
to-face and mail are examples of different communication forums that “may enable the transfer of

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complex, rich, and context specific information, facilitate problem solving, and enhance the
effectiveness in relationship building and development” (De Clercq and Sapienza 2001:114).
These findings indicate that an investor – entrepreneur partnership is strategically sensible. As
Fredriksen states: “Companies looking for a venture capital partner should work out beforehand the
benefits they seek in addition to capital, and actively look at the specific competence of different
possible partners to give those benefits” (Fredriksen 1997:263). Rather than to go for the first investor
that comes along with an offer, or to indiscriminately sell to the highest bidder, entrepreneurs should
look for competent capital. In a case study of four entrepreneurial companies, Sætre (2003) found that
the entrepreneurs were actively seeking and selecting investors with relevant capital; which means
niche-relevant expertise and networks. It was their knowledge about the VC market that helped select
the right investor to the right investment object. This again, can facilitate the value-adding activities
found in the investor – entrepreneur relationship. From this perspective, money is a generic asset,
whereas the investors’ competence and time-investment in their portfolio company is a highly
specialized asset that is much harder for competitors to imitate. From a relation rents perspective, this
may be even more so if, over time, the alliance gives rise to relation specific investments

Methods
This paper is based on qualitative data from four semi-structured interviews and participant
observation of the staffs at Kongsberg Innovation. Interviews were recorded and transcribed. Quotes
from the interviews have been translated to English by the author. The plan for future data collection is
to continue to follow up this organization for up to three years. The plan also involves investigating
the portfolio companies with the use of same methods. At present, only data from Kongsberg
Innovation has been collected. Thus the perspective taken in the paper is that of Kongsberg Innovation
staffs, entirely.
Using several data sources on one phenomenon may strengthen internal validity and reliability
and “strengthen the grounding of theory by triangulation of evidence” (Eisenhardt 1989:536). I have
been present at Kongsberg Innovation for approximately two days a week since 20.03.2006, observing
the staffs “as they go about their normal work activities” (Bryman 2000:142) and engaging people in
conversation at lunches etc. This way I have gained (although yet moderate) access to information
about human behaviour and interaction in the context of the workplace.

Sampling logic
Theory development is essential in guiding and justifying what data to collect and strategies for
analyzing the data (Yin 2003), and specifies the research projects’ contribution to the existing body of
theoretical knowledge. Yin emphasizes the role of existing theoretical knowledge in guiding data
collection and analysis. In writing this paper, I try to show how theoretical constructs from the

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organizational and interorganizational learning literature can provide some directions for further data
collection and analysis.
The goal of theoretical sampling (Glaser and Strauss 1967) is to get theoretically useful cases,
not to use statistical sampling for reasons of statistical external validity (Eisenhardt 1989). The
purpose of a case sample may be to extend and exemplify theory or to “fill theoretical categories and
provide examples of polar types” (Eisenhardt 1989:537). The case organization – the “innovation
centre” called Kongsberg Innovation – is chosen on the following background: First: Kongsberg
Innovation works to develop innovative business ideas from within entrepreneurial companies, by
“purchasing” equity for knowledge services to their portfolio companies. Second: The portfolio
companies are exclusively early stage companies. Kongsberg Innovation enters the PFCs in phases
before they become topical for financing through venture capital firms or private investors. Third:
Kongsberg Innovation is a mediating agent between the PFCs and an extensive network of
competencies, which Kongsberg Innovation can access and graft on to small entrepreneurial
companies who lack the resources to access this type of competence through other means. The logic of
selection is that Kongsberg Innovation provides a good environment for studying how an investor can
help young small companies to access knowledge and competencies, and whether/how this knowledge
and competence can be absorbed into the portfolio companies. The word investor is deliberately
chosen to indicate that this case may have the external validity to be representative of the dynamics of
venture capital firms and informal investors.

The case organization

Kongsberg Innovation is a four-year old innovation centre in the south region of Norway. It engages in
developing young firms in very early stages of development, connecting their PFCs to competence
from a network of industrial companies, R&D agencies, and venture capital firms. In return for various
resources, Kongsberg Innovation takes shares in the portfolio company (PFC). The aim is to develop
entrepreneurial companies from early start up to maturity. Exits are normally expected after 4 - 8
years. The flow of business ideas may come from within the owner companies or any other company
and individual. Some ideas are quickly dismissed, others are regarded as possible projects, but only
four have become portfolio companies. Company shares are not normally traded for money, but time,
know-how and network access (“knowledge for equity”). Such resources are hard to put a price on: It
depends on beliefs about the value of the “investment” and its’ effects in a fairly distant future. This
suggests that a high level of trust and mutual understanding between Kongsberg Innovation and the
aspiring portfolio company is a precondition.
Kongsberg Innovation is owned by some of the regions’ largest companies, such as The
Kongsberg Group, Kongsberg Automotive, Kongsberg Defence and Aerosystems, FMC Technologies.

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The other owners are Volvo Aero, Statoil and SIVA. From this set of owners, Kongsberg Innovation
does not only get board members with heavy industrial experience, but they are allowed to handpick
expertise found in the staff of each owner, in order to graft them on to the portfolio companies. It is
not, of course, a question of borrowing a full-time employee from the owner companies, but taking
advantage of a partial resource and matching it with a need for expertise in the PFC. Consequently,
they seek to invest in companies who can utilize the resources represented by the owners:

We work mainly in industries where we have contacts. That is one of our

criteria really; that the resources represented by our owners are important
inputs to the projects. So it ought to be within a branch or technology where
we have quite a few people in our network.

Thus the matchmaking service between the owner-companies and the PFCs is a central theme.
Kongsberg Innovation seeks to select cases where it can add value to the companies by making their
projects more potent through the resources available in the network. Other network resources include
R&D institutions, venture capital firms, government agencies and programmes and IPR-companies.
For instance: In the company MetaFil, a ballast-water treatment project was merged with a competing
ballast-water project which was found to use complementary technology. KI was instrumental in
spotting this opportunity and connecting the two projects as well as their idea-holders, which lead to
increased market potential for both. Financial support from (IFU) Innovation Norway and Statoil was
also added to the project through Kongsberg Innvoation, and more companies from the maritime
sector were brought in as “problem-owners” and demanding customers. This example is one of the
most successful business development processes in the history of Kongsberg Innovation. In this case,
two venture teams were asked to collaborate on the basis of a technological match, with Kongsberg
Innovation acting as the intermediary matchmaking agent.

Practical illustrations of grafting knowledge

The MetaFil case was exceptional in the way technology was merged, and resulted in new venture
creation. On a more day-to-day basis, the contribution from Kongsberg Innovation is focused on
bringing external competence to the portfolio companies in a piecemeal way. For instance, a two-day
workshop (a “pressure-tank”) was set up for MetaFil to scrutinize its’ business plan and come up with
a more potent business concept. Important input and counselling came from marked developers in
Kongsberg Maritime, who participated for two full days. This illustrates how piecemeal knowledge-
grafting can be done in a tailored way by Kongsberg Innovation in an intermediary role.
Other examples include recruiting competent board members: In the case of the ICT-company
Aentera, the KI-staffs believe that the CEO could use a sparring partner with industry experience so

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they want to introduce a new active board member. One staff says: “What we want is a person who is
a bit entrepreneurial and knows the ICT business. In my view, it ought to be a working board member
who does more than sit at the board and stay for a chat: Someone who can open some doors for them
and front the company out there. Someone with a name, who can bring the company the leverage it
needs.” The KI-staffs feel that it is a typical task for them: It involves actively searching within a
network of professional contacts for someone with a specific competence-profile to fit a specific need
in the PFC.
A third example illustrates grafting knowledge through recruiting and paying for operative
personnel: Kongsberg Innovation has initiated the employment of a sales-coach recruited by KI-staffs
to work part-time with two PFCs. In their view, this resource was the right input for the two PFCs in
question, who needed stimuli and motivation to boost their sales. “He is a sparring partner for the
sales manager and the CEO: He has given them some new perspectives on selling.” By this time, the
sales-coach had been with the companies for one day a week in over two months. The plan is now to
increase his operative involvement in the sales-unit. “The sales-coach is changing into a sales-muscle
for the company. He is going out there to get sales. Then he is a part of the organization and not just a
sparring partner. It is a genuine KI-contribution. We pay him and get shares in return. We proposed it
to the board, and it was expanded to two days per week.

Kongsberg Innovation acting as an intermediate part in grafting knowledge

Seen from the perspective of Kongsberg Innovation their task is to search for competence and
entrepreneurial opportunities that resides in their network. What competence to seek is defined by
what input the PFC needs. In most cases, it is Kongsberg Innovation and not the PCF who suggests
which needs to fill or which opportunities to pursue. A suggested need for new competence may be
immediately recognized by the PFC, but a conflict of interest arouses if the need for new competence
as suggested from Kongsberg Innovation is not recognized by the PFC. In that situation, the question
would be whether to start a grafting process or not, despite the lack of recognition on the part of the
PFC. Nevertheless, the staff at Kongsberg Innovation asserts that as a principle, whether to graft, and
what knowledge to graft should be driven by PFC needs. In other words; the process should be driven
by a “market-pull” from recognized needs, rather than by a “knowledge-push” from what is available
in the network. Kongsberg Innovation staffs plead CEO-initiatives about what their competence-needs
are, but CEOs have limited knowledge about available competencies in Kongsberg Innovations’
network, thus they can not know precisely what (or who) to ask for. Grafting knowledge seen from the
perspective of the intermediate part is a process that requires the ability to present knowledge to the
PFC in the form of a new person, without being perceived as controlling or “pushy”, but at the same

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time to firmly establish a definition of the need for new competence. It seems that the challenge is
lessened by establishing a trusting relationship to the CEO.

We have a very good dialogue going with this company. We feel that we
have complete trust in each other and can talk openly. The CEO is very open
to suggestions and has enough confidence in himself not to see such a thing
as criticism, but as an opportunity. … He is competent on both the
technological and the commercial side, but he may not be an expert on both.
So in this case we have offered it [the sales-coach] to match up his needs
and we found that “Yes, this is a good solution!” If he had said “No”, I do
not know whether we would have pushed it through in the board, but we
might not have.

This quote illustrates how Kongsberg Innovation, in acting out the role as a mediating partner in a
grafting process, is contingent upon the CEOs capacity to recognize knowledge on the individual
level. It also indicates how the mediating role yields sensitivity to internal aspects in the PFCs.
Another staff member puts it this way:

Take the case with the sales-coach: He is there to put some action on sales
in one of the companies. It cannot be easy for the one who has been used to
handling things on his own… It must be hard to accept that someone comes
in and takes over his “baby”?

According to KIs own staffs, a sense of personal “chemistry”, mutuality and trust between themselves
and the CEOs is a necessary precondition if they are to collaborate.

We try to identify the critical factors as early as possible. First of all, we

have to have faith in the person [idea-holder]. If we don’t have faith in
the person, and don’t think we can find someone we have faith in - we
drop it. But if we have a reasonable sense that this is a capable person
who is humble enough to join others to achieve something […] we go
for it.

The staffs are looking for personal traits of an entrepreneur – which is someone who is capable of
establishing a venture – as well as a person who is “humble enough” to share “ones own baby” with
others. The “faith in the person” is a critical factor, but as Shalman asserts in discussing the venture
capital firms relationship to their PFCs “the capabilities of the individuals involved are difficult to
gauge up front” (Sahlman 1990:506). This is also reflected in how KI-staffs experience the challenge
of establishing a faith in the persons’ latent capabilities in the course of a few meetings. This may
influence the partners future ability to develop mutual understandings which De Clercq and Sapienza
(2005) have found to positively influence knowledge exchange. Future fieldwork may focus on
collecting data on procedures and challenges linked to selection of PFC and their CEOs, including the
nature of Kongsberg Innovations’ influence on setting up the venture teams. Furthermore, more

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information should be gathered on how do Kongsberg Innovation and their PFCs reach a mutual
understanding of what competencies are needed. Are there examples of grafting initiatives being
rejected by the PFC? How does Kongsberg Innovation handle such a situation?
It seems reasonable that “humbleness” is also about recognizing the value of other peoples’
knowledge. Evidently this is a precondition for the principle of equity for knowledge. KI-staffs say
they meet idea-holders who do not understand that equity can be traded for knowledge, because they
only recognize economic capital.

Reflections upon further questions guiding data collection

It is also interesting to combine theories in order to understand the phenomena. For instance;
researchers in the field of venture capital research have built theories about the relationship between
investors and entrepreneurs that explains how venture capital and informal investors can add value to
their portfolio companies, but not explicitly developed concepts and propositions about how learning
effects may be one of the non-financial factors. The field of organizational learning offers theories
about inter-organizational learning, internal and external knowledge bases, information seeking
(Huber 1991), absorptive capacity (Cohen and Levinthal 1990), innovation and learning (Nonaka
1994) etc: Some studies investigates learning opportunities in buyer-seller relationships (Hippel 1988)
and supplier – customer relationships (Larsson 1992; Uzzi 1997). But it has not studied learning
between investors and entrepreneurs. According to Yli-Renko et al. “few studies have examined the
role of social capital in facilitating learning in interorganizational relationships” (Yli-Renko, Autio et
al. 2001:589). Finally, the strategic entrepreneurship field studies how a company builds its’ strategic
advantages, its’ “edge” over competitors, by utilizing the internal resources of the firm in a way that
makes it unique. Concepts and propositions from this field may also guide my approach because the
non-financial factor from competent capital are intangible resources (i.e. collaboration routines, and
knowledge-sharing routines etc.) that provide the portfolio company with an “edge” which is hard for
non-portfolio firms to replicate.
This leads me to believe that a case study of investment-firms may contribute to, and integrate several
topics. I also believe that “my” cases fill out or exemplify emerging theoretical categories such as
competent capital or relation rents, or even extend existing theories about dynamic capabilities and
organizational learning in small firms. The data from the Kongsberg Innovation case at this point
suggests that the relational view on inter-organizational learning can shed light to the case, and can
point out what to look for in the future. How can we understand Kongsberg Innovations’ role as
mediating partner in grafting processes, by using concepts developed within the relational view on
inter-organizational learning?

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 Competent capital is what the Norwegian government addresses in the white paper on
economic innovation and development. But competent capital in Norway is scarce. I believe
Kongsberg Innovation an alternative model to private investors with industry experience, which may
be successful in “bringing competence to the firm” (paraphrasing Isaksen (1998)). The Kongsberg
Innovation case shows that grafting knowledge on to young firms may bring about organizational
learning, but when new knowledge to the firm comes in the form of a new person, recognition and
acceptance of his or hers competence on the part of the PFC is conditional to the learning effects.

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