Reality is different from what we see: Knowledge management and firm innovation

Abstract

In today's knowledge-driven business environment, firm innovation hinges on effective knowledge management. Organizations are thus motivated to continuously create and apply knowledge to sustain competitive advantage through innovation. This study investigates how various knowledge management dimensions uniquely impact firm innovation within an integrated framework, examining both linear and non-linear relationships—an approach not previously explored. Using a deductive, quantitative approach, data were collected via an online survey of 437 banking employees, with Structural Equation Modelling (SEM) employed to analyze quadratic relationships. Findings reveal that knowledge creation has an inverted U-shaped relationship with firm innovation, while knowledge application shows a U-shaped relationship. In contrast, knowledge sharing, application, and protection exhibit linear relationships, with knowledge sharing being most impactful in driving innovation within the banking sector. These results underscore that overestimating the impact of knowledge management can be counterproductive, as its dimensions do not consistently follow linear paths. The study offers critical insights for management, particularly in knowledge-intensive industries, to monitor and calibrate each knowledge management dimension's influence on firm innovation for optimal performance.