Cohen, Wesley, M. & Levinthal, Daniel A. Absorptive Capacity: A New Perspective on Learning and Innovation, ASQ, 35 (1990), 128-152.


Absorptive capacity, the ability of a firm to recognize the value of new, external information, assimilate it, and apply it to commercial ends is critical to its innovative capabilities. Its a function of the firms prior knowledge.

Introduction

Most innovations result from borrowing. Prior knowledge gives one the ability to acquire new information.

But firms that have their own R&D are better able to use external information. Absorptive capacity may be a byproduct of R&D investment or manufacturing or through training

 

Cognitive Structures and Learning

Accumulate prior knowledge increases the ability fo put new knowledge into memory and recall it. There may also be a transfer of learning skills across bodies of knowledge -- learning in one task may affect learning in another task. Prior knowledge and heuristics constitute the related problem-solving knowledge that permits individuals to acquire related problem-solving capabilities.

Learning capabilities involve the development of the capacity to assimilate existing knowledge, while problem-solving skills represent a capacity to create new knowledge. They are not much different. Therefore creative capacity and absorptive capacity are similar.

The more effort applied to learning the better the subsequent retrieval. Practice makes perfect. A diverse background provides a more robust basis for learning in uncertain situations and stimulates creativity by associating to more linkages.

 

From individual to organizational absorptive capacity.

An organization's absorptive capacity depends on individual capacities. It depends on transfers of knowledge across environmental boundaries and across sub-units. Gatekeeper help transfer info across boundaries. More gatekeepers are needed in turbulent environments to increase reception of new ideas.

Effective communication with gatekeepers requires knowledge and a shared language. There is a trade-off between inward-looking and outward-looking absorptive capacities. Internal and external language capabilities are needed. Avoid NIH. The level of external communication declines with project-group tenure.

There are also benefits to diversity across individual absorptive capacities. Diverse knowledge structures in the same ming elicit the sort of learning and problem solving that yields innovation. It increases the chance for more novel linkages.

Critical knowledge is only part of the need -- the ability to know where complementary expertise (who knows what) is also crucial. Building a strong network of internal and external relationships increases awareness of other's capabilities and knowledge.

There is an organizational trade-off between diversity and commonality of knowledge across individuals. Gettting too specialized will hurt communication, too much communication may hurt diversity. Learning by doing my increase expertise in one area and reduce experimentation and alternative ideas.

Cross-function absorptive capacities can be useful. Createing knowledge through job rotation may also work. One can also buy it via hiring new workers, but the effects may be limited. Its hard to train new people to understand the organizaitons needs. Diversity of knowledge structures must co-exist to some degree in the same minds. Muct of R&D skills are tacit.

 

Path Dependence and Absorptive Capacity

Accumulating absorptive capacity in one period will help its more efficient accumulation in the next. Also, the possesion of related expertise may permit the firm to better understand and evaluate the import of intermediate technologies. If one quits absorbing, it may never catch up. When new opportunitues emerge, the lagging firm may not recognize them.

Low initial investment will make it more expensive to acquire it in later periods. Firms can get "locked-out". Ideas might be too distant from their existing knowledge base to be either appreciated or assessed. NIH may be pathological behavior only in retrospect. Technical performance does not necessarily depend on past or referential performance, but on absorptive capacity. Firms with high absorptive capacity will exploit new ideas regardless of past performance. Firms with only modest levels will be more reactive. High aspiration levels are also important.

Highly reactive firms with high absorptive capacities don't wait for failure to spur development. These self-reinforcing capacities can create Tushman's competency-destroying tehnical change. A firm needs some absorptive capacity to value it appropriately.

 

Absorptive Capacity and R&D Investment

R&D not only generates new knowledge but contributes to the firms absorptive capacity. Thus the responsiveness of R&D activity to learning incentives is an indication of the empirical importance of absorptive capacity.

They measure R&D intensity as R&D/sales. Economists define three determinants of R&D intensity -- demand, appropriability (ability to exploit profit opportunities and prevent spillover), and technology opportunity conditions (how costly to achieve a technical advance in a given industry).

They assert that absorpitive capacity will mediate the effects of these economic determinants.

Two factors affect a firm's incentives to learning -- quantity of knowledge and difficulty (cost) of learning. For a given level of R&D, the level of absorptive capacity is diminished in environments in which it it more difficult to learn. The marginal effect of R&D is higher in more demanding environments.

Learning is also determined by the characteristics of the knowledge. Complexity and fit to firm are important. Less targeted knowledge require more work from R&D. The more a field is based on prior knowledge, the more important is R&D. The faster the pace of knowledge development the more staff required to keep up.

In their model the firm's own R&D knowledge that originates in competitors R&D, spillovers, and what which originates outside the industry. The firm starts with its own R&D and adds knowledge from other sources. Absorptive capacity depends on the firms own R&D. The exploitation is realized through the interaction of the firm's absorptive capacity with competitors spillovers. To utlize outside research the firm must actively use R&D and is constrained by its own absorptive capacity.

 

Direct Effect of Ease of learning

As learning becomes harder, R&D spending increases to adjust absorptive capacity. But R&D also becomes more of a private good because competitor's ability to tap into spillover is reduced.

 

Technological opportunity

More opportunity will elicit more R&D in difficult learning environments to increase absorptive capacity to utilize the abundant external environment.

 

Approbriability

Interestingly, the more R&D spending the more spillover (bad) but can exploit others spillover (good). When absorptive incentive is large and learning difficult, spillovers may encourage R&D. The effect is less in low interdependent markets (i.e. competitive ones).

 

Methods

They measured technological opportunity and approbriatility conditions in R&D labs. R&D intensity was R&D/sales. Technical opportunity was a 7 point likert scale on relevance of basic fields is importance of external sources. Spillovers were measured as effectiveness scores of protecting competitive advantages.

 

Results

Technological Opportunity

The results confirmed that when learning is difficult, an increase in relevance spurs R&D intensity.

Approbribility

When learning is difficult, high absorptive capacity becomes more important. As the market becomes more competitive, a high approbriability becomes important too. It also seems that the positive absorption incentive associated with spillovers can overcomes the negative approbriability incentive.

 

Implications for Innovative Activity

Therefore, firms may engage in basic research that has high spillover because it also gives them the skill to exploit innovations quickly (or copy others fast). As the firms progress becomes more tied to basic research, they will conduct more basic research. As the relevant fields become more diverse, R&D spending will increase to understand each field and increase absorptive capacity in each one.

Thus diffusion of innovations will occur more rapidly in firms that already have prior knowledge in relevant fields.

 

Conclusion

When a firm wishes to acquire and use knowledge unrelated to its ongoing activity, it must develop absorptive capacity