Learning by interaction: Absorptive capacity, cognitive distance and governance

This article analyses problems and solutions in the governance of knowledge exchange and joint knowledge production. The analysis is based on a theory which combines elements of transaction cost economics, social exchange theory and theory of knowledge. The theory of knowledge yields an analysis of absorptive capacity, communicative capacity and learning by interaction. In that setting, the paper analyses problems of governance: hold-up problems as a result of specific investments in setting up knowledge exchange, spill-over problems, a trade-off between stability and change of exchange relations, and a trade-off between novelty and understand ability ('cognitive distance'). A survey is given of contingencies that affect the size of problems and the efficacy of instruments for their governance. © 2000 Kluwer Academic Publishers.