Value creation: knowledge flow, direction, and adaptation

To a large extent, the value of an organisation is imbedded in its intellectual capital and its ability to flow information and knowledge directed at creating value. This is particularly true in the organisation's innovation and creation activities. While information/knowledge stocks speak to an organisation's static value, the flows and the leveraging of stocks release and enhance the value imbedded in intellectual capital. This paper provides a framework for understanding the mechanism by which an organisation creates value through information/knowledge flows and develops four aspects of this framework. First, in the spirit of the Theory of the Firm, the paper explores the organisational nexus of contracts and the nexus' impact on the manner in which information/knowledge flows or does not flow. Second, the paper examines the transactions costs or frictions that are imbedded in the contracts nexus and proposes approaches to transactions costs reduction. Third, in the spirit of the physical sciences, the paper explains the importance of including both dimensions of flow velocity, speed and direction. Finally, the paper develops a mathematical model showing the importance of knowledge flow direction and new knowledge adaptation in creating value. The paper demonstrates the importance of linearity and nonlinearity to understand knowledge creation and discusses additional complexities for the model.