Cohen and Levinthal's model
The concept of absorptive capacity was first defined as a firm's "ability to recognize the value of new information, assimilate it, and apply it to commercial ends" by Cohen and Levinthal. [1] [2] For them, absorptive capacity depends greatly on prior related knowledge and diversity of background. The investments a firm makes into its research and development (R&D) efforts are therefore central to their model of development of absorptive capacity. The absorptive capacity is seen as cumulative, meaning that it is easier for a firm to invest on a constant basis in its absorptive capacity than investing punctually. Efforts put to develop absorptive capacity in one period will make it easier to accumulate it in the next one.
The cumulativeness of absorptive capacity and its effect on expectation formation suggest an extreme case of path dependence in which once a firm ceases investing in its absorptive capacity in a quickly moving field, it may never assimilate and exploit new information in that field, regardless of the value of that information. [1]
Absorptive capacity is also said to be a reason for companies to invest in R&D instead of simply purchasing the results post factum (e.g. patents). Internal R&D teams increase the absorptive capacity of a company. A firm's investment in R&D then impacts directly its absorptive capacity. The more a firm invests in research and development activities, the more it will be able to fully appreciate the value of new external information.
Cohen and Levinthal also stressed that diversity allows an individual to make "novel associations and linkages". They therefore encourage the hiring of diverse teams in order to have a variety of individuals working together and exposing themselves to different ways of looking at things.
Zahra and George's model
Cohen and Levinthal have focused primarily on investments in R&D to develop one's absorptive capacity, but many other researchers showed later on that several other areas could be explored to develop an organization's absorptive capacity. This led to a review of the concept by Shaker Zahra and Gerry George [3] and a reformulation of the definition that expanded greatly the concept and further defined it as being made of two different absorptive capacities: potential absorptive capacity and realized absorptive capacity. Their new definition of absorptive capacity is "a set of organizational routines and processes by which firms acquire, assimilate, transform and exploit knowledge to produce a dynamic organizational capability". [3]
Potential absorptive capacity
Zahra and George presented the potential absorptive capacity is made of two elements. First there is knowledge acquisition which "refers to a firm's capability to identify and acquire externally generated knowledge that is critical to its operations". [3] Second, there is assimilation capability which "refers to the firm's routines and processes that allow it to analyze, process, interpret and understand the information obtained from external sources". [3] "Potential absorptive capacity makes the firm receptive to acquiring and assimilating external knowledge." [3]
Realized absorptive capacity
Realized absorptive capacity is made up of transformation capability on one hand that can be defined as "a firm's capability to develop and refine the routines that facilitate combining existing knowledge and the newly acquired and assimilated knowledge". [3] On the other hand, realized absorptive capacity is also made of the exploitation capability of a firm which is basically the capacity of a firm to apply the newly acquired knowledge in product or services that it can get financial benefit from. "Realized absorptive capacity is a function of the transformation and exploitation capabilities." [3]
Zahra and George go on to suggest a series of indicators that can be used to evaluate each element of absorptive capacity. [3]
- Knowledge acquisition capability (the number of years of experience of the R&D department, the amount of R&D investment)
- Assimilation capability (the number of cross-firm patent citations, the number of citations made in a firm's publications to research developed in other firms)
- Transformation capability (the number of new product ideas, the number of new research projects initiated)
- Exploitation capability (the number of patent, the number of new product announcements, the length of product development cycle)
George and his colleagues (Zou, Ertug, George, 2018) [4] conduct a meta-analysis of absorptive capacity and they find that: (1) Absorptive capacity is a strong predictor of innovation and knowledge transfer, and its effects on financial performance are fully mediated by innovation and knowledge transfer; (2) The firm size-absorptive capacity relationship is positive for small firms but negative for larger firms. The firm age-absorptive capacity relationship is negative for mature firms and not significant for young firms; (3) Social integration mechanisms, knowledge infrastructure, management support, and relational capability all have a positive and significant impact on the absorptive capacity-innovation relationship (whereas they do not find the breadth of external search or competitive intensity to impact that relationship). Environmental dynamism has a marginally significant negative impact on the absorptive capacity-innovation relationship; and (4) They also find that the absorptive capacity-innovation relationship is stronger when absorptive capacity is measured by surveys rather than when absorptive capacity is measured by archival proxies.
A refined model of absorptive capacity
A 2007 article [5] proposed to (a) reintroduce the original first component in Cohen and Levinthal's model. The contribution noted (b) that transformation is not a step after assimilation, but represents an alternative process. Consequently, it suggested that (c) the neat distinction between potential absorptive capacity and realized absorptive capacity does not hold any more.
ad (a): Firms often fail to identify and absorb new external knowledge; recognizing the value of new external knowledge is often biased and needs to be fostered; it is not automatic. Managers have often problems in assessing the value of new external knowledge when it is not relevant for the current demands of key customers.
ad (b): Both assimilation and transformation involve some degree of change of the new knowledge and its combination with the existing knowledge. When the new knowledge fits existing cognitive schemas well, it is assimilated. When the new knowledge cannot be assimilated, the cognitive structures must be transformed. Firms transform their knowledge structures when knowledge cannot be assimilated. Transformation does not follow assimilation, it is an alternative to it.
ad (c): As transformation is an alternative to assimilation and not sequential to assimilation, it becomes part of potential absorptive capacity in Zahra and George's model; consequently, realized absorptive capacity simply relabels the component of exploitation. Further, without the effect of realized capacity, potential capacity cannot have any effect on a firm's competitive advantage; potential absorptive capacity cannot be meaningful separated from realized absorptive capacity in empirical studies on value creation.
Accordingly, firms with high levels of absorptive capacity (1) recognize the value of new external knowledge, (2) acquire, (3) assimilate or transform, and (4) exploit new external knowledge.
However, Zahra and George [3] argue that the concept has a too broad definition as well as no clear dimensions or scales, evidenced by the variations among different studies that have used the absorptive capacity theory. Bosch et al. [6] contend that absorptive capacity should not be based only on prior related knowledge, as Cohen and Levinthal originally proposed, but rather, organizational culture and combinative capabilities should be considered as antecedents to a firm's absorptive capacity. For example, a business culture that appreciates and supports continued learning has a higher absorptive capacity than other business cultures that do not support individual learning and development. [7] To further clarify concepts related to the absorptive capacity theory, Wheeler [8] introduced an application derived from the dynamic capability and absorptive capacity theories for business innovations. Wheeler's Net-Enabled Business Innovation Cycle [9] facilitates understanding and predicting how firms transform its prior orientation and internal resources associated with net-enablement into business innovation and economical growth.
Other research on the subject
Researches on subjects related to the development of absorptive capacity have included studies focusing on research and development, [10] [11] [12] [13] knowledge management, [14] [15] organizational structures, [10] [12] [16] [17] human resources, [10] [18] [19] external interactions, [10] internal interactions, [20] [21] open innovation, [22] social capital, [23] supplier integration, [24] [25] [26] client integration [27] and inter-organizational fit. [28] All those researches provide a better picture of absorptive capacity that makes it possible for any firm to develop its absorptive capacity improving different areas of their organization.
Today the theory involves organizational learning, industrial economics, the resource-based view of the firm and dynamic capabilities. This theory has undergone major refinement, and today a firm's absorptive capacity is mostly conceptualized as a dynamic capability. As a complement to absorptive capacity in outward knowledge transfer, the notion of desorptive capacity was developed. [29] Desorptive capacity may play a key role for managing innovation in networks. [30] It is particularly important for networks and collaborations with mutual, bidirectional knowledge transfer. [31]
Other concepts related to absorptive capacity are:
- Desorptive capacity: This is a complementary concept to absorptive capacity in outward knowledge transfer, following the logic of the chemical process of desorption. Desorptive capacity is defined "as an organization's ability to identify technology transfer opportunities based on a firm's outward technology transfer strategy and to facilitate the technology's application at the recipient". [32] Thus, it influences the volume of knowledge transfer and comprises two process steps - identification and transfer. [33]
- Receptivity: The firm's overall ability to be aware of, identify and take effective advantage of technology. [34]
- Innovative routines: Practiced routines that define a set of competencies the firm is capable of doing confidently and the focus of the firm's innovation efforts. [35]
In regions in the Global South, regional innovation agencies can work as knowledge gatekeepers to stimulate new technological trajectories by facilitating the acquisition, diffusion and engaging in the 'tropicalization' of extra-regional knowledge to facilitate its absorption within the regional innovation system. [36]
Innovation is the practical implementation of ideas that result in the introduction of new goods or services or improvement in offering goods or services. ISO TC 279 in the standard ISO 56000:2020 defines innovation as "a new or changed entity, realizing or redistributing value". Others have different definitions; a common element in the definitions is a focus on newness, improvement, and spread of ideas or technologies.
Organizational learning is the process of creating, retaining, and transferring knowledge within an organization. An organization improves over time as it gains experience. From this experience, it is able to create knowledge. This knowledge is broad, covering any topic that could better an organization. Examples may include ways to increase production efficiency or to develop beneficial investor relations. Knowledge is created at four different units: individual, group, organizational, and inter organizational.
Knowledge transfer refers to transferring an awareness of facts or practical skills from one entity to another. The particular profile of transfer processes activated for a given situation depends on (a) the type of knowledge to be transferred and how it is represented and (b) the processing demands of the transfer task. From this perspective, knowledge transfer in humans encompasses an expertise from different disciplines: psychology, cognitive anthropology, anthropology of knowledge, communication studies and media ecology.
In business, a competitive advantage is an attribute that allows an organization to outperform its competitors.
A core competency is a concept in management theory introduced by C. K. Prahalad and Gary Hamel. It can be defined as "a harmonized combination of multiple resources and skills that distinguish a firm in the marketplace" and therefore are the foundation of companies' competitiveness.
A strategic partnership is a relationship between two commercial enterprises, usually formalized by one or more business contracts. A strategic partnership will usually fall short of a legal partnership entity, agency, or corporate affiliate relationship. Strategic partnerships can take on various forms from shake hand agreements, contractual cooperation's all the way to equity alliances, either the formation of a joint venture or cross-holdings in each other.
Open innovation is a term used to promote an information age mindset toward innovation that runs counter to the secrecy and silo mentality of traditional corporate research labs. The benefits and driving forces behind increased openness have been noted and discussed as far back as the 1960s, especially as it pertains to interfirm cooperation in R&D. Use of the term 'open innovation' in reference to the increasing embrace of external cooperation in a complex world has been promoted in particular by Henry Chesbrough, adjunct professor and faculty director of the Center for Open Innovation of the Haas School of Business at the University of California, and Maire Tecnimont Chair of Open Innovation at Luiss.
In organizational theory, dynamic capability is the capability of an organization to purposefully adapt an organization's resource base. The concept was defined by David Teece, Gary Pisano and Amy Shuen, in their 1997 paper Dynamic Capabilities and Strategic Management, as the firm’s ability to engage in adapting, integrating, and reconfiguring internal and external organizational skills, resources, and functional competences to match the requirements of a changing environment.
Capability management is the approach to the management of an organization, typically a business organization or firm, based on the "theory of the firm" as a collection of capabilities that may be exercised to earn revenues in the marketplace and compete with other firms in the industry. Capability management seeks to manage the stock of capabilities within the firm to ensure its position in the industry and its ongoing profitability and survival.
Communities that support innovation have been referred to as communities of innovation (CoI), communities for innovation, innovation communities, open innovation communities, and communities of creation.
Value chain management capability refers to an organisation's capacity to manage the internationally dispersed activities and partners that are part of its value chain. It is found to consist of an international orientation, network capability, market orientation, technological capability and teamwork management capability. Value chain management capability is a higher level capability that draws together a variety of lower level capabilities.
In social science research and organizational psychology, boundary spanning is a term to describe individuals within an innovation system who have, or adopt, the role of linking the organization's internal networks with external sources of information. While the term was coined by Tushman, the concept was being developed by social scientists from the late 1950s onwards. Most of the early work was conducted in large American corporations with well-established R&D laboratories. The term has since been used in relation to more general innovation networks.
Shaker A. Zahra is the Robert E. Buuck Chair of Entrepreneurship and professor of strategy and entrepreneurship, Carlson School of Management, University of Minnesota. He is also the academic director of the Gary S. Holmes Entrepreneurship Center.
The composition-based view (CBV) was recently developed by Luo and Child (2015). It is a new theory that explicates the growth of firms without the benefit of resource advantages, proprietary technology, or market power. The CBV complements some existing theories such as resource-based view (RBV), resource management view, and dynamic capability – to create novel insights into the survival of firms that do not possess such strategic assets as original technologies and brands. It emphasizes how ordinary firms with ordinary resources may generate extraordinary results through their creative use of open resources and unique integrating capabilities, resulting in an enhanced speed and a high price-value ratio that are well suited to large numbers of low- to mid-end mass market consumers. The CBV has been commented as “a new view with significant application” for emerging market firms and for small and medium sized enterprises in many countries. The view cautions though that composition-generated advantages are temporary in nature and that composition itself mandates special skills in distinctively identifying, leveraging, and combining open or existing resources inside and outside the firm.
Clusters of Innovations (COI) have been defined in 2015 as "global economic hot spots where new technologies germinate at an astounding rate and where pools of capital, expertise, and talent foster the development of new industries and new ways of doing business."
Technology intermediaries are an important actor of the innovation system. According to Howells their role is to act as brokers or third parties in order to build the bridges between the various participations within the open system.
Innovation management measurement helps companies in understanding the current status of their innovation capabilities and practices. Throughout this control areas of strength and weakness are identified and the organizations get a clue where they have to concentrate on to maximize the future success of their innovation procedures. Furthermore, the measurement of innovation assists firms in fostering an innovation culture within the organization and in spreading the awareness of the importance of innovation. It also discloses the restrictions for creativity and opportunity for innovation. Because of all these arguments it is very important to measure the degree of innovation in the company, also in comparison with other companies. On the other hand, firms have to be careful not to misapply the wrong metrics, because they could threaten innovation and influence thinking in the wrong way.
Sofia Börjesson is a Swedish Professor (chair) in Technology Management Department at Chalmers University of Technology in Gothenburg Sweden. Her academic research field evolves around questions of how large, mature organizations change and develop, with focus on the management of innovation work. She works on applying innovation as an organizational transformation and in particular in a context of business model innovation. She applies qualitative methods, often collaborative research methods, cooperating with industrial partners with the intent to create actionable knowledge. She has published her work in journals such as R&D Management, Journal of Change Management, Int. J. Operations and Production Management, Technovation and Creativity and Innovation Management.
Research quotient (RQ) is a measure of companies' innovation capability introduced in the 2008 article, R&D Returns Causality: Absorptive Capacity or Organizational IQ. The measure was originally referred to as IQ (innovation quotient), but because IQ and innovation quotient were already in use commercially, it was referred to as RQ in subsequent work. The motivating argument in the 2008 article was that the main prescription from absorptive capacity — that the more a company spends on R&D, the greater its ability to absorb spillovers from rivals' R&D, seemed implausible. This is because the greater the R&D, the closer a company gets to the knowledge frontier, and accordingly, the less likely it can use spillovers. Instead, Knott proposed and found, it was not that spending more led to higher returns, it was that companies have inherently different returns (RQ), and those with higher RQs spend more.
In business administration, desorptive capacity has been defined as "an organization’s ability to identify technology transfer opportunities based on a firm’s outward technology transfer strategy and to facilitate the technology’s application at the recipient". It is considered as a complement to absorptive capacity, and it may be a driver of a successful knowledge transfer.