Sourcing in or out: implications for social capital and tacit knowledge sharing

Transaction cost economies (TCE) and the knowledge based view of the firm (KBV) suggest that the requirement to exchange tacit knowledge is an important criterion for a firm’s choice between internal and external service provision. Yet, despite extensive research into the practice and effect of knowledge sharing, we still lack a fine-grained understanding of the mechanisms for tacit knowledge sharing in these sourcing settings. In particular, it is not clear how the structural, cognitive and relational dimension of social capital between the client firm and the internal and external service providers affect the ability to share tacit knowledge. Against this backdrop, this paper’s main objective is to examine the effect of sourcing mode, i.e. internal or external service provision, on the ability to share tacit knowledge and the role that social capital plays in each sourcing setting. Data were collected through a survey of 150 large UK and US firms that engage in contracting work to both internal and external service providers. Results suggest that tacit knowledge sharing as well as social capital are greater in an internal than the external sourcing mode, and that certain elements of the cognitive, structural, and relational dimensions of social capital mediate the relationship between the sourcing mode and the extent of tacit knowledge sharing. Our findings imply that social capital is an important factor in the transaction cost equation because it decreases transaction costs by facilitating tacit knowledge sharing. We therefore suggest that the make or buy decision should be based on a conjoint consideration of the required amount of tacit knowledge between sourcing partners and their extant or potential social capital.