Absorptive Capacity Theory Absorptive capacity theory examines the extent to which a fem ‘ean recognize the yalue of new external information, asimilate it, and apply it toward achieving organizational goals (Cohen & Lesinthal, 1989, 1900). The theory assumes that absorbing’ new knowledge can help an onganization become more innovative and flexible and achieve higher levels of performance than it would ‘without absorbing new knowledge The theory also assumes th firms that have higher abies for absorbing new knowledge will have a competiive advantage over firms with Tower abilities. “A firm's technical knowledge tends to come from four srces, (1) The firm conddaes its own research and development (RED). (2) The fim derives new knowiedge from i own current man facturing operations, (8) The firm bostows new knowledge from ‘other organizations or other sources. (4) The firm purchases new Knowledge, such a through buying new equipment, hiring new knovledgeable people, or paying a consultant to train ind ‘ichale in the nse of new method. ‘The theory assumes that organizations require a knowledge hase to be able to absorb and use new Knowledge. Fisms that Ihave no knowledge base may never be able o absorb new know! crdge, no matter how Uhey obtain it or how much they spend to ‘obiain it. Firms that have never developed a knowledge base are sid tobe “Tocked-out” for subsequent knowledge and technologi: fal developments, a situation that can result in the creative destruction of an organization (Schumpeter, 1942), “The possession of prior knowledge is helpful for organize tions in fo ways. First, creating an absorptive capacity for new18. stanacanenr ano Oncastzaion Tony knowledge in one period will help the absorption of new knowl: ‘edge in the next period. Second, the successful use of new Knowledge can be’ selFreinforcing and can motivate a firm to continue to absorb new knowledge indefinitely. Fins with higher absorptive capacities tend to proactively search for and absorb new knowledge regardless of ewsrent performance, but, Firms with lower ahsorpdve capacities tend to reactively scrounge for new knowledge in response to some failure or decline in performance In order to recognize, assimilate, and use new knowledge, firas must have a knovledge base that is relatively similar to the new knowledge that is heing procesed. However, the new know edge must be fairly diverse in relation to the firm's existing knowledge base in order for the new knowledge to be applied in ‘new; helpful ways. Most organizational innovations come from horrowing ideas from other people, rather than through invent ing them (March & Simon, 1958). However, the firm must have some idea of how the borrowed new knowledge can be applied {o current methods for the process to be successful "There are wo factors thac wll affect an organization's incen- tives to acquire new knowledge: (1) the quantity of knowledge availble to absorb and exploit and (2) the difheuley and costs involved in absorbing that new knowledge. Some (pes af new knowledge andl expertise are more expensive to assimilate than others. Therefore, firms wll tend to absorb new knowledge when doing is inexpensive and ell tend not to do 40 when itis ‘expensive, However, a potential mediator of those evo influences Js the firms interdependence with its als, The more tha co petitors tend to benefit from absorbing and using new knowledge, ‘he less a fitm willbe motivated to inerease its absorption of new knowledge. A firms ability 10 find and use new knowledge depends on the absorptive capacity ofits employees. However, a firm's absorp- fe capacity is not just the sim of its individvall members absorptie capacities’ Organizations depend on knowledgeable individuals to asess and evaluate the potential postives and nega. tives of new knowledge, These people can serve as "gatekeepers" ‘who can prevent or facliae the absorption of new knowledge. ‘These individuals must be excellent transmitters, dsseminatos, and disciples of new methods, who champion and advocate the Ansonrnve Cancery none 19 use of new knowledge in the firm. Organizations rely on these ‘strong, knowledgeable, “boundary spanners” w help absorb and utilize new knowledge. “Zahra and George (2002) reconceptualized part ofthe theory ‘They took the steps of recognizing the value of new knowiedge and sisinuating and applying it, and created four capabilities or ‘dimensions (1) acquisition, (2) assimilation, (3) transformation, ‘and (4) exploitation. (They refer to acquisition and assimilation a “potential” absorptive capacity: transformation and exploit tiom ate “realized” absorptive capacity) The acquisition eapabilty refers tothe firm’s prior expenditures prior knowledge hase; and intensity, speed, and direction for obtaining new knowledge. The assimilation capability refers to the firm's routines and processes that enable it to assess, interpret, understand, and learn new knowledge. The tansformation capability refers 10 the firm's ability to add, dele, recombine, and reconfigure the new know ‘edge for use in the company: The exploitation capability refers the firm's ailty to actualy change is routines and processes and use the new knowledge. Zahra and George separated potential ‘versus realized absorptive capacity hecanse yom firms may have strong potential to absorb new knowledge, but are then unable to aetnally use that knowledge (Baker, Miner, & Besley, 2003). “Murovec and Prodan (2009) demonstrated that there can be ‘wo kinds of absorptive capacity: demmand-pall and science-push. Demandpull refers 0 new knowledge derived from market sources (for example, customers, competition, and supplies). Science-push refers to new knoviedge derived from research and scientific sources (such as books, journals, conferences, trade shows, and other academic sources). Organizations will need assimilate new knowledge from both sontces iF hey want to be as tective and innovative as possible. Criticisms and Critiques of the Theory ‘The theory has been eriiczed for not adequately defining the term “absorpive capacity” of for using various aifering definitions (Murovee & Prodan, 2008; Volberda, Foss, & Lyles, 3010). Some researchers have used the term without providing a definion (for example, Gass & Sag, 1998; Keller, 1996). Also, most often the concept of absorptive capacity has been defined20 Masnoramse aso Oncrsesrion Taro according to RED axpects and not according to ocher onan tonal aypects ‘As noted ear, Murowee and Prodan (2008) found chat there are two diferent Kinds of absorptive capaci: demand-pll and sccneepush, Asa est of this nding, they argued that researchers should not use a singleconstruct SNe} to measure atworpdve capacity “Tortrova and Durkin (207) criticized the Zara and George (2002) reconceptalzation of the theory. saying thatthe changes didnot build enough om the original work. Fs, they exitlzed the reformulation for removing the wep of orocogizing the value" of new knowledge, Todorra and Durst recommended {har the fit step inthe proces of absorbing new knowledge Sheu be recoglzing the value ofthat hoowleige. They ersps- Sed theinportnce of thst in thats often flo ety and absorb new knowledge because they are hindered By their citing inowledge bass tslesble cpabisies, and path lepen- Sencies (Gavel & Levinthal 2000; Tripsas & Get, 2000). SForove and Duriin thus recommended vat “aluing new Inowledge” shoul! be put back nto the deory as was originally formulated by Cohen and Leva (1989, 190). Second, Teoria and Dussin (207) ee the reform lation of the theory for stating that ansformation was conse- {quence of asinilaing new knowledge, Insead of specing that tsion and assmaaton of new knowlege lead to anor ton and exploitation of new knowledge, Todoreva and Duran fhyued fora more complex relationship among sequin, ani iatng, transforming, and exploking new Knowledge. Todorora tnd Darin argued that hese four seps can influence each other nd do not ace near from ane to the ater Avia tems Todorora and Dorin (2007) remarked that the “neat” new concepis of potential and realized aborpive capacity would have to be removed om the theory (p. 775). ala and George (2002) asgued that potential absorptive capac iy (acqustion snd asinilaon) lead to realied. absorp Ccpaciy (transformation and. exploitation). However, tf o0e Sdlnowiedges the existence of complex restionship among Sequiring,asimilatng, transforming, and exploiting new know trig, the concep of potental and realized absorptive capacity frould noc work Asonrrve Casciry Turon 21 ‘Third, Todorova and Darisin (2007) argued chat the theory should be reconceptuaized as an ongoing process that involves feeadhack loops. They angvied that Cohen and Levinthal’s original formulation ofthe theory (1989, 1900) emphasized the accumsl tion oF nowledge over ime and the absorption of new knowledge into current routines and processes. Therefore, Tadorova and Dutisin argued for the inclusion of feedback loops in which the ‘successful process of absorbing new knowledge looped hick and luenced future absorption actions, ‘Measuring Variables in the Theory Absorptive capacity measure. Cadi, D. Savyer JE & Grilfith, 1.1. (2009, December), Developing and validating field ease: rent scales for abwoptive capacity and experienced community practice, Eaneatinat and Pychalgal Mesourement, 69, 1085-1058, Absorptive capacity measure. jimener-Barrionwevo,M.M. Garcia. ‘Morales, V.J., & Molina, LM, (2011). Validation of an insirument to measure absorptive capacity, eohnvoation, 31, 190-202, Absorptice capacity measure. Camison, C., & Fores, B. (2010) Knowledge absorpive capaci: New insights fr its concepenal sion and measurement. Journal of Busines Reeerch, 63, 707 Absorptive capacity scale, Fasten, T. C., Enyelen, Ax, Zara, S ‘A. & Brettel, M. (2011). A measure of absorptive capacigs Seale development and salidation. European Management Journal, 2, 98-116. Absorptve capacity measures. Kotabe, M. Jiang, C.X.. Murray, J.-¥. G01). Managerial ties, knowledge acquisition, realized absorptive capacity and new product market performance of ‘emerging multinational companies: A case of China, Journal of World Business, 46, 165-176. Suggestions for Further Research 1, Explore the idea that the faster the pace of technological change, the greater the impact of absorptive capacity on firm’ profitability2 Nysacesner ano Oncanestion Tuzony 2, Examine the tradeof& between complementary versus sup- plementary resources in absorbing new knowledge. 55, Compare the cosis and benefit of obtaining both types of new knowledge from various sourees (for example, licensing, contracting). 4, Explore the influence of firm size on firms’ absorptive capaci ties and the effecs on organizational outcomes. 5, Examine both the positive and negative effects of absorption ‘of spillovers and other sources of absorption on firm performance. 46, Compare and contrast the infiuences of intraindusty, inter Jndusty, and scientific absorptive capacity on organizational Examine 4 range of types of knowledge (for example, domes: tie vermis foreign) snd the influence of those ypes on absorp- tion and use, 8, Explore ancl empirically test the similarities and differences among onganizaional learning and absorptive capacity models 9, Study the infiaence of absomptlve capacity on what individuals know and what they can do, and how absorptive capacity influences their interactions 10, Examine the influence of ownership type, R&D investment Jevels, and alliance tes with foreign fms on absorptive capacity: References to Know Cohen, W. M., & Levintal, D. A. (1989, September). Innovation ‘nd learning: The two faces OF RED. Hzonomic Journal, 9397), 560-506 Cohen, W. M., & Lesinthal, D. A. (1990, March), Absorptive ‘eapacig: Anew perspective on leaming and innovation, Admnavrtive Scene Qua, 35(1, Special Issue), 128-182. Lane, P J, Koka, B. R. & Pathak, S, (2006). The reficaion of ‘absorptive capaciy: A extcal review and rejuvenation of the ‘construct. Acadony of Managenent Rives, 37, 833-863. Lane, PJ, & Lubatkin, M. (1998). Relative absorptive capacity ‘and interorganirational learning. Sac Management journal, 19, 461-477 Awsonrnive Carscrny ‘iron 23 Zahra, 8. A, & George, G. (2002). Absoxptive capacity: A review, reconceptualiztion, and extension. Academy of Managenent Revie, 27, 185-208 Implications of the Theory for Managers Absorptive capacity cheory examines how firms recognize the value of new knowlege, assimilate it, and use it toward achieving “organizational goals. Firms that ate able to absorb and use new knowledge will have a competitive advantage over those that ‘Your job asa manager is to help your firm better absorb and use new knowledge t accomplish your organizational goals Fire, you'll need to build a strong knowledge base by helping everyone fee and understand what your organization eurrendy dock Second, set up a knowledge culture in which everyone sees the importance of learning about and incorporating new knowledge that can help the company better reach ts goals. Third, find ways for the organization to monitor the environment and identify Dester and never ways of doing things. Fourth, select knowledge able people who can adapt and modify the new knowledge for your organization. Fifth, create teams of people whe can promote acceptance and use of the new knowledge. Last, monitor the progress of the new knowledge, Reep track of what went well and what didn’, and use that information to keep the cjele going for finding and absorbing new knowledge into Your organization to rake it the best chat it can be, This theory examines why some firms perform better than others. This book will examine other theories that use this sue approach but employ a diflerent vari able, such as the dynamic capabilities, resources, and knowledge of a finn,