Decentralization, Social Networks, and Organizational Learning

Research on the exploration and exploitation of knowledge in organizations suggests that the autonomy of subsidiaries or units encourages innovation. However, that same autonomy potentially discourages the exploitation of innovations through inter-unit communication – suggesting a tradeoff between innovation, associated with exploration, and communication, associated with exploitation. Analyzing data on the operational decisions of captains in the English East India Company, we find that high unit autonomy encourages the transfer of information via social networks, whereas centralization depresses the use of social networks. Further, the information transferred via social networks does make its way into the formal knowledge base of the firm.