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Absorptive Capacity - A New Perspective On Leaning and Innovation - Cohen & Levinthal
Absorptive Capacity - A New Perspective On Leaning and Innovation - Cohen & Levinthal
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AbsorptiveCapacity:A In this paper, we argue that the ability of a firm to recog-
New Perspective on nize the value of new, external information, assimilate it,
and apply it to commercial ends is criticalto its innovative
Learningand Innovation capabilities. We label this capability a firm's absorptive
capacity and suggest that it is largely a function of the
Wesley M. Cohen firm's level of prior related knowledge. The discussion fo-
CarnegieMellon University cuses first on the cognitive basis for an individual's ab-
Daniel A. Levinthal sorptive capacity including, in particular,prior related
Universityof Pennsylvania knowledge and diversity of background. We then charac-
terize the factors that influence absorptive capacity at the
organizational level, how an organization's absorptive ca-
pacity differs from that of its individual members, and the
role of diversity of expertise within an organization. We
argue that the development of absorptive capacity, and, in
turn, innovative performance are history- or path-depen-
dent and argue how lack of investment in an area of ex-
pertise early on may foreclose the future development of
a technical capability in that area. We formulate a model
of firm investment in research and development (R&D),in
which R&Dcontributes to a firm's absorptive capacity,
and test predictions relating a firm's investment in R&Dto
the knowledge underlying technical change within an in-
dustry. Discussion focuses on the implications of absorp-
tive capacity for the analysis of other related innovative
activities, including basic research, the adoption and dif-
fusion of innovations, and decisions to participate in co-
operative R&Dventures.'
INTRODUCTION
Outside sources of knowledge are often criticalto the inno-
vation process, whatever the organizationallevel at which the
innovatingunit is defined. While the example of Japan illus-
trates the point salientlyat the nationallevel (e.g., Westney
and Sakakibara,1986; Mansfield,1988; Rosenbergand
Steinmueller,1988), it is also true of entire industries,as
pointed out by Brock(1975) in the case of computers and by
Peck (1962) in the case of aluminum.At the organizational
level, Marchand Simon (1958: 188) suggested most innova-
tions result from borrowingratherthan invention.This obser-
vation is supportedby extensive researchon the sources of
innovation(e.g., Mueller,1962; Hamberg,1963; Myers and
Marquis,1969; Johnston and Gibbons,1975; von Hippel,
1988). Finally,the importanceto innovativeperformanceof
informationoriginatingfrom other internalunits in the firm,
outside the formalinnovatingunit (i.e., the R&Dlab),such as
? marketingand manufacturing,is well understood(e.g., Mans-
1990 by CornellUniversity.
0001-8392/90/3501-0128/$1.00. field, 1968).
The abilityto exploit externalknowledge is thus a critical
We appreciatethe comments of Kathleen
Carley,RobynDawes, MarkFichman,Tom component of innovativecapabilities.We argue that the
Finholt,SaraKiesler,RichardNelson, abilityto evaluate and utilizeoutside knowledge is largelya
LindaPike,and three anonymousref-
erees. The representationsand conclu-
functionof the level of priorrelated knowledge. At the most
sions presented hereinare those of the elemental level, this priorknowledge includes basic skills or
authors.They have not been adoptedin even a shared language but may also include knowledge of
whole or in partby the FederalTrade the most recent scientific or technologicaldevelopments in a
Commission,its Bureauof Economics,or
any otherentitywithinthe commission. given field. Thus, priorrelated knowledge confers an abilityto
The FTC'sDisclosureAvoidanceOfficer recognize the value of new information,assimilate it, and
has certifiedthat the data includedin this
paperdo not identifyindividual company applyit to commercialends. These abilitiescollectivelycon-
line-of-businessdata. stitute what we call a firm's "absorptivecapacity."
128/AdministrativeScience Quarterly,35 (1990): 128-152
Absorptive Capacity
affects the return per unit of R&D effort. This model is devel-
oped in the broader context of what applied economists have
come to believe to be the three classes of industry-level de-
terminants of R&D intensity: demand, appropriability,and
technological opportunity conditions (Cohen and Levin, 1989).
Demand is often characterized by the level of sales and the
price elasticity of demand. The latter indicates the degree to
which a firm's revenue will increase due to a reduction in
price. For example, in the case of a process innovation that
reduces the cost of production and, in turn, the product price,
the price elasticity of demand reflects the associated change
in total revenue that influences the economic return to inno-
vative effort. Appropriabilityconditions refer to the degree to
which firms capture the profits associated with their innova-
tive activity and are often considered to reflect the degree to
which valuable knowledge spills out into the public domain.
The emphasis here is on valuable knowledge, because if a
competitor's knowledge spills out but the competitor has al-
ready exploited a first-mover advantage in the marketplace,
this knowledge is no longer valuable to the firm and does not
constitute a spillover by our definition. The level of spillovers,
in turn, depends on the strength of patents within an industry,
the efficacy of secrecy, and/or first-mover advantages. Tech-
nological opportunity represents how costly it is for the firm
to achieve some normalized unit of technical advance in a
given industry. As typically conceived, there are two dimen-
sions of technological opportunity (Cohen and Levin, 1989).
The first, incorporated in our model, refers simply to the
quantity of extraindustry technological knowledge, such as
that originating from government or university labs, that ef-
fectively complements and therefore leverages the firm's
own knowledge output. The second dimension of technolog-
ical opportunity is the degree to which a unit of new knowl-
edge improves the technological performance of the firm's
manufacturing processes or products and, in turn, the firm's
profits. For example, given the vitality of the underlying
science and technology, an advance in knowledge promises
to yield much larger product-performance payoffs in the
semiconductor industry than in steel.4
The basic model of how absorptive capacity affects the de-
termination of R&D expenditures is represented diagramati-
cally in Figure 1. We postulate that learning incentives will
have a direct effect on R&D spending. We also suggest that
where the effect of other determinants, such as technological
opportunity and appropriability,depend on the firm's or rivals'
assimilation of knowledge, absorptive capacity-and there-
fore learning incentives-will mediate those effects. Finally,
we suggest that the effect of appropriabilityconditions (i.e.,
spillovers) will be conditioned by competitor interdependence.
In this context, we define interdependence as the extent to
which a rival's technical advances diminish the firm's profits.
4
Thissecond dimensionis incorporatedin There are two factors that will affect a firm's incentives to
the model developedin Cohenand Le- learn, and, therefore, its incentives to invest in absorptive ca-
vinthal(1989a).We do not incorporatethis
second dimensionin the presentmodel pacity via its R&D expenditures. First, there is the quantity of
because all the qualitativetheoreticaland knowledge to be assimilated and exploited: the more there is,
empiricalresultsassociatedwith this the greater the incentive. Second, there is the difficulty (or,
second dimensionof technologicaloppor-
tunityare the same as those associated conversely, the ease) of learning. Some types of information
with the firstconsideredhere. are more difficultto assimilate and use than others. We inter-
139/ASQ, March 1990
Figure 1. Model of absorptive capacity and R&Dincentives.
|Capacity r
|R&D Spending|
pret this to mean that per unit of knowledge, the cost of its
absorption may vary depending on the characteristics of that
knowledge. As learning is more difficult, more prior knowl-
edge has to have been accumulated via R&Dfor effective
learning to occur. As a result, this is a more costly learning
environment. In such a setting, R&D is more important to
building absorptive capacity and the more R&Deffort the firm
will need to have expended to achieve some level of absorp-
tive capacity. Thus, for a given level of a firm's own R&D, the
level of absorptive capacity is diminished in environments in
which it is more difficult to learn. In addition, we are sug-
gesting that a more difficult learning environment increases
the marginal effect of R&D on absorptive capacity. In con-
trast, in environments in which learning is less demanding, a
firm's own R&D has little impact on its absorptive capacity. In
the extreme case in which external knowledge can be assim-
ilated without any specialized expertise, a firm's own R&D
would have no effect on its absorptive capacity.
We have argued that the ease of learning is in turn deter-
mined by the characteristics of the underlying scientific and
technological knowledge. Although it is difficult to specify a
prioriall the relevant characteristics of knowledge affecting
the ease of learning, they would include the complexity of the
knowledge to be assimilated and the degree to which the
outside knowledge is targeted to the needs and concerns of
the firm. When outside knowledge is less targeted to the
firm's particular needs and concerns, a firm's own R&D be-
comes more important in permitting it to recognize the value
of the knowledge, assimilate, and exploit it. Sources that pro-
duce less targeted knowledge would include university labs
involved in basic research, while more targeted knowledge
may be generated by contract research labs, or input sup-
pliers. In addition, the degree to which a field is cumulative, or
the field's pace of advance, should also affect how critical
R&D is to the development of absorptive capacity. The more
that findings in a field build on prior findings, the more neces-
sary is an understanding of prior research to the assimilation
of subsequent findings. The pace of advance of a field affects
the importance of R&D to developing absorptive capacity be-
cause the faster the pace of knowledge generation,the larger
140/ASQ, March 1990
Absorptive Capacity
Absorptive Capacity
Own R -- Technical
I ~~~~~~~~Knowledge
METHODS
Data and Measures
To test the predictions of our framework for R&D activity, we
used cross-sectional survey data on technological opportunity
and appropriabilityconditions in the American manufacturing
sector collected from R&D lab managers by Levin et al. (1983,
1987), and the Federal Trade Commission's Line of Business
Program data on business unit sales, transfers, and R&D ex-
penditures. The dependent variable, R&D intensity, was de-
142/ASQ,March 1990
Absorptive Capacity
RESU LTS
Technological opportunity. Our theory suggests that when
the targeted quality of knowledge is less (i.e., learning is more
difficult), an increase in the relevance (i.e., quantity) of knowl-
edge should have a more positive effect on R&D intensity.
Therefore, the coefficient estimates of the variables mea-
suring the relevance of the four basic scientific fields should
exceed those of the variables measuring the relevance of the
seven applied scientific fields. Confirming the prediction,
Table 1 indicates that the estimated coefficients for the ap-
plied sciences are, with the exception of computer science,
lower than that for the basic sciences. The similarity of the
estimate of the effect of the relevance of computer science,
an applied science, to those of some of the basic sciences
suggests that the assumption may not be correct that only
one determinant of the ease of learning, the targeted quality
of the field, varies systematically across the fields of applied
and basic science. Another determinant of the ease of
learning postulated above is a field's pace of advance, where
faster pace should require more R&D to permit assimilation,
and the pace of advance in computer science has been rela-
tively rapid over the past two decades.
To further test the prediction that the coefficient values of the
less targeted, basic science field variables would exceed
those of the applied fields, we estimated a specification, oth-
erwise identical to the first, in which we constrained the co-
efficients of the basic sciences to be the same and the
coefficients of the applied sciences to be the same. This
shows the effect on R&D spending as the overall technolog-
ical opportunity associated with basic science and applied
science, respectively, change. The constrained coefficient es-
timates of the effect of the technological opportunity asso-
ciated with the basic and applied sciences are significantly
different (at the p < .01 level) across all estimation methods,
with the former equal to .189 and the latter equal to -.080 in
the GLS estimation. Therefore, relative to the effect of an in-
crease in the technological opportunity associated with ap-
plied science, an increase in that associated with basic
science elicits more R&D.
Our predicted ranking of the coefficient magnitudes asso-
ciated with the extraindustry sources of knowledge, reflecting
increasingly targeted knowledge from these sources, is
largely confirmed. The coefficient estimate for the importance
of knowledge originating from universities exceeds that for
government labs, which, in turn, is greater than that for ma-
terials suppliers, which exceeds that for equipment suppliers.
The difference between coefficient values is statistically sig-
nificant in the case of government sources versus materials
suppliersfor both the OLSand Tobitresults (p < .01) and in
the case of materialssuppliersversus equipme~ntsuppliersin
145/ASQ, March 1990
Table1
Analysis of R&DIntensity*
Regression Coefficient
OLS GLS Tobit
Variable (N = 1302) (N = 1302) (N = 1719)
Intercept - 5.184m -2.355 - 4.086m
(1.522) (1.037) (1.461)
x C4
APPROPRIABILITY .213 .342 .368w
(.128) (.103) (.130)
APPROPRIABILITYx PELAS - .192 - .200 - .176
(.106) (.091) (.103)
x DUMAPP
APPROPRIABILITY .448- .248 .211
(.202) (.143) (.194)
x DUMBAS
APPROPRIABILITY .302 .174 .094
(.208) (.144) (.206)
USERTECH .470w .397w .612w
(.104) (.069) (.107)
UNIVTECH .374w .318w .395s
(.131) (.091) (.147)
GOVTECH .221- .069 .137
(.106) (.079) (.107)
MATERIALTECH - .258w - .074 - .303w
(.098) (.070) (.100)
EQUIPTECH - .401 - .484w - .574w
(.111) (.077) (.117)
Biology .314w .185w .276-
(.102) (.071) (.114)
Chemistry .289w .081 .191-
(.084) (.062) (.088)
Math .184 .151 .123
(.131) (.097) (.143)
Physics .373w .323w .310
(.117) (.091) (.128)
AgriculturalScience -.441w -.273w -..308w
(.088) (.064) (.099)
Applied Math/Operations Research -.237 -.117 -.366-
(.148) (.102) (.152)
ComputerScience .294 .116 .433w
(.124) (.090) (.122)
Geology - .363w - .240w - .365w
(.084) (.061) (.097)
MaterialsScience -.110 -.150 .116
(.125) (.095) (.118)
MedicalScience -.179 -.133 - .133
(.093) (.070) (.103)
Metallurgy -.315w -. 195w -.393w
(.077) (.053) (.089)
NEWPLANT .057w .049w .045w
(.008) (.006) (.007)
PELAS .936 1.0820 .892
(.611) (.527) (.573)
INCELAS 1.077w .587w 1.112w
(.170) (.131) (.188)
DGROWTH .068 - .074 .004
(.090) (.053) (.105)
R2 .287
*p < .05; Up < .01.
* Reproducedfrom Cohenand Levinthal(1989a: 590-591, 569-596). Standarderrorsare in parentheses.
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