Tracing the links between

absorptive capacity, university

knowledge exchange and
competitive advantage in SMEs
Helen Fogg

Abstract: Can university knowledge exchange give small businesses the

ability to gain competitive advantage? The main purpose of this study is,
first, to understand the limitations for small firms in absorbing knowledge
from higher education institutions and, second, to ascertain whether
access to knowledge resources, such as a university, can be an antecedent
factor for building absorptive capacity in small and medium-sized enter-
prises (SMEs) and creating business value. The paper is a conceptual
study in which a model for knowledge exchange between a management
school and SMEs is proposed. The model was developed, drawing on the
literature and prior SME knowledge exchange expertise of the manage-
ment school, to deliver a three-year project funded by the European
Regional Development Fund. The project, ‘Innovation for Growth’, is
designed to embed innovation in the business processes and practices of
300 SMEs in the north-west of England. This paper offers recommenda-
tions for improving policy aimed at supporting the innovation process of
small firms; a proposed model of knowledge exchange between university
and small firms; and a strategy for small businesses to improve their
absorptive capacity.
Keywords: absorptive capacity; knowledge exchange; entrepreneurial
learning; SMEs
Helen Fogg is a Project Manager with the Institute for Entrepreneurship and Enterprise Develop-
ment, Lancaster University Management School, Bailrigg, Lancaster LA1 4YX, UK. E-mail:
h.fogg@lancaster.ac.uk.

Cohen and Levinthal (1990) used the term ‘absorptive
capacity’ (AC) to capture the notion that firms may have
differing capabilities to innovate and to recognize the
value of new knowledge, assimilate it and apply it to
creating business value. Knowledge transfer (KT)
describes how knowledge and ideas move between a
knowledge source to the potential users of that knowl-
edge. This paper considers business and management
schools of higher education institutions (HEIs) as a
knowledge source and small and medium-sized enter-
prises (SMEs) as potential users of that knowledge.
Knowledge exchange (KE) reflects a belief that the
processes involved in knowledge transfer must be two-
way in order to be successful. The term ‘knowledge
exchange’ is used extensively throughout this paper as
the author recognizes that a two-way process between
business schools and SMEs is a vital part of a cyclical
value chain that also informs and renews the knowledge

ENTREPRENEURSHIP AND INNOVATION Vol 13, No 1, 2012, pp 35–44 doi: 10.5367/ijei.2012.0061 35

Absorptive capacity and university knowledge exchange in SMEs
of a university. Lockett et al (2008) note that KT has
been identified as an essential element of innovation,
driving competitive advantage in increasingly knowl-
edge-driven economies. Yet, whilst large firms are often
engaged in KT with HEIs, it is acknowledged that SMEs
play an important role in any economy and are increas-
ingly being encouraged to engage with the HEI sector.
Over the past decade the Institute for Entrepreneur-
ship and Enterprise Development (IEED) within
Lancaster University Management School (LUMS) has
focused on the application of its research expertise
through the development and delivery of SME KE
programmes in the areas of innovation, enterprise
development, leadership and business management.
Through its various projects it has assisted more than
1,000 regional SMEs, resulting in significant improve-
ments in the businesses supported. Evidence to support
this can be found in Wren and Jones (2006). IEED has
recently been awarded funding from the European
Regional Development Fund (ERDF) for three years to
deliver a project, Innovation for Growth (IFG), to embed
innovation in the business processes and practices of
300 SMEs from the north-west of England. This fully
funded project draws upon the skills and expertise of
academics, students and KE professionals within LUMS
and builds on previous successes in business engage-
ment.
Relevant literature concerned with KE, AC and
entrepreneurial learning was reviewed prior to a KE
model for IFG being proposed. This was combined
with tools developed through previous delivery of KE
programmes to propose a robust framework for the
project to ensure that maximum competitive advantage
was derived for participant businesses. Rarely is theory
reviewed prior to designing a programme for delivery;
thus this paper makes a contribution to research in this
area and also adds to the call for evidence-based
practice made by Frese et al (2005) for the domain of
entrepreneurship. Bruneel et al (2010) also suggest that
few studies have attempted to investigate what might
attenuate the barriers to successful knowledge ex-
change. In this paper, AC is proposed as a framework
to help explain how heterogeneous SMEs are able to
assimilate new knowledge and then exploit it for
competitive advantage. This is combined with literature
concerned with how SMEs – or specifically how
entrepreneurs in SMEs – learn, to propose a model of
KE for business and management schools to develop
AC in SMEs.
The paper is structured as follows. Initially, a review
of the relevant literature is provided, and this is followed
by discussion of the proposed IFG delivery model and
how it was derived. The final section offers concluding
remarks.
36
Literature review
Cohen and Levinthal (1990) defined AC as a firm’s
‘ability to recognise the value of new external knowl-
edge, assimilate it and apply it to commercial ends’. KT
describes how knowledge and ideas move from the
knowledge source to the potential users of that knowl-
edge. Barney (1991) suggests that firms endowed with
greater AC are expected to outperform their rivals. Thus,
KT from a business school can provide an SME with a
competitive advantage, if the new knowledge is applied
to commercial ends. Jenson et al (2007) argue that
knowledge and innovation are intertwined as innovation
is based on the application of new knowledge, and at the
same time the application of new knowledge leads to
change and innovation. Galankis (2006) notes that, in
order to survive, an organization has to innovate con-
stantly, and thus innovation provides competitive
advantage for an SME.
Kim (1997) defines AC as the capacity to learn and
solve problems. Cope and Watts (2000) recognized that
the mode of learning for entrepreneurship education
differed from that of typical students of management
studies: whereas the latter require knowledge retention
to gain qualifications, entrepreneurial learning by
owner-managers of SMEs is a specific, situated, prob-
lem-centred process. Therefore, to increase AC in
SMEs, there is a need to develop for SMEs specific
models of KE that encompass the body of research
concerned with how entrepreneurs learn.
Knowledge transfer/exchange and SMEs
The terms ‘knoweldge transfer’ and ‘knowledge ex-
change’ are often used interchangeably; however, KE
reflects the notion that the processes involved constitute
a two-way process in which those involved share
learning, ideas and experiences. KT has been identified
as an essential element of innovation, driving competi-
tive advantage in increasingly knowledge-driven
economies. Lockett et al (2008) comment that, whilst
large firms often engage in KT with HEIs, it is acknowl-
edged that SMEs play an important role in any
economy, and they are increasingly being encouraged to
engage with the HEI sector.
Murovec and Prodan (2009) point out that, in order
for innovation activity to provide a desired output, an
organization needs to possess knowledge from many
different fields. However, Cosh and Hughes (2010)
acknowledge that the dominant direct sources of
knowledge for innovative companies in the UK and the
USA are customers, suppliers and competitors and the
internal knowledge sources of the firms themselves. In
both the USA and the UK, universities are ranked as
ENTREPRENEURSHIP AND INNOVATION Vol 13, No 1
 Absorptive capacity and university knowledge exchange in SMEs

relatively low in frequency of use as a direct knowledge existing competencies or creating new ones by
source. In the UK, relatively low value is placed on incorporating acquired and transformed knowledge
universities as a source of knowledge, which may reflect into operations, leading to the creation of new
difficulties in extracting knowledge; this is particularly goods, systems, processes, knowledge or organiza-
prevalent in small firms. Finally, Cosh and Hughes tional forms.
(2010) highlighted the need to consider universities’
The above dimensions can be used neatly to describe the
roles in the innovation systems of low-tech sectors as
steps an SME must take to absorb new, external knowl-
well as high-tech manufacturing. This suggests that
edge from a business school and ultimately exploit this
universities must expand KT activity beyond that
knowledge to gain competitive advantage.
traditionally undertaken in the areas of technology
Zahra and George (2002) also identified two subsets
transfer and, therefore, that there is an increasing role
of AC: potential absorptive capacity (PAC), which
for business schools in stimulating innovation in both
enables a firm’s receptiveness to external knowledge
high-tech and low-tech SMEs.
(that is, the acquisition and assimilation of new knowl-
Johnston et al (2008) advise that, historically, HEIs
edge), and realized absorptive capacity (RAC), which
have interacted with SMEs in a number of ways – for
reflects a firm’s capacity to leverage absorbed knowl-
example, through bespoke research and consultancy,
edge. Fosfuri and Tribo (2008) confirm that it is the
teaching, training, skills development, clustering, spin-
ultimate exploitation of new knowledge that provides
outs, venture capital activities and knowledge transfer
the competitive advantage, finding that firms with higher
partnerships. These connections form attempts to create
levels of such capability systematically obtained larger
the necessary infrastructure and increase the capacity for
shares of their sales from new or substantially improved
SMEs to engage with HEIs and gain access to an
products. Thus, increasing RAC should be a critical
increasing knowledge base, international networks and
component of any KE programme. However, it is
markets. However, Link and Tassey (1989) noted five
suggested that short training programmes and one-off
intrinsic characteristics that restricted collaborative
events, often provided for SMEs by a university, serve to
relationships between universities and businesses:
increase only PAC. The knowledge imparted at these
differences in mission and objectives; incompatibility of
events must be transformed and exploited in order to
structures and policies; differential orientation and
provide competitive advantage for the SME. Theory
interests of individual researchers; effectiveness of
concerned with entrepreneurial learning can add to the
university–industry arrangements and mechanisms for
process of enhancing RAC and help develop an inte-
collaboration; and benefits versus cost and difficulties
grated KE mechanism.
concerned with how to evaluate university–industry
Todorova and Durisin (2007) advise that the ability to
relationships. Twomey and Quazi (2000) highlight that
evaluate and use outside knowledge is a function of the
for business schools and businesses, the scarcity of
knowledge source, level of prior related knowledge and
effective interactions means failure to promote and
ability to appropriate this external knowledge. Bessant et
facilitate optimally the creation, transfer and use of
al (2009) propose a crude typology for SMEs to organ-
knowledge. Thus the landscape around HEI–SME
ize and manage the innovation process in its entirety –
engagement is littered with conflicting aims and objec-
assuming different states of development of capability or
tives: government papers encourage engagement, yet
AC – from search through selection to effective imple-
traditional university activity struggles to embrace the
mentation of new knowledge. Originally focused on
needs of SMEs.
technological change, the author suggests that these four
‘states’ could equally be applied to absorbing new
Absorptive capacity knowledge from a business school and help us under-
stand SMEs’ limitations with regard to absorbing new
Zahra and George (2002) propose four dimensions of knowledge:
AC for firms:
‘Unaware or passive’ – SMEs that do not recognize the
• acquisition: identification of relevant external need for change and do not know what might be im-
information from knowledge sources; proved. These SMEs, with very low or no AC, require
• assimilation: routines and processes to analyse, support to recognize the need for change and longer-
process, interpret and understand the information; term support to develop a strategic framework. Initially,
• transformation: modification and adaptation of they must recognize the need to acquire knowledge.
external knowledge and its combination with ‘Reactive’ SMEs recognize the need for change, but are
existing and internally generated knowledge; and unclear as to how to go about achieving it effectively.
• exploitation: refining, extending or leveraging With limited internal resources and often poorly

ENTREPRENEURSHIP AND INNOVATION Vol 13, No 1 37

Absorptive capacity and university knowledge exchange in SMEs
developed external networks, this group tends to treat
symptoms rather than root causes. These SMEs require
support to develop a strategic framework, address
priority areas, explore new concepts and acquire new
product and process capabilities. With low levels of AC,
they may be able to acquire new knowledge, increasing
PAC rather than RAC.
‘Strategic’ SMEs understand the need to change and to
have good implementation capability. They take a
strategic approach to innovation and have clear priori-
ties. However, they may lack the capabilities to create
new market opportunities and tend to compete within an
existing industry. Support is required to complement
existing internal capability and challenge existing
business models – for example, by enabling access to
new networks, thinking ‘outside the box’ and idea
generation. With moderate AC, they may already be able
to begin to develop RAC.
‘Creative’ SMEs have well developed capabilities and
are able to operate and lead effectively on an interna-
tional basis. They have strategic frameworks for
innovation, strong internal resources and high AC,
which enables them to diversify, plus extensive networks
to keep them informed of opportunities. They tend to
have collaborations already established with partners,
such as universities, and may utilize established KE
programmes such as knowledge transfer partnerships.
It is proposed that the above typology could assist in
grouping heterogeneous SMEs, to identify those for
whom a university is a suitable knowledge source, and
to determine the appropriate entry point to a university
KE programme.
Entrepreneurial learning
Gold and Thorpe (2008) stated that in order to interact
meaningfully with SMEs, one needed both to enter
‘their world’ and then gain an understanding of it. Zhang
and Hamilton (2010) confirm that HEIs are beginning to
embrace this concept, delivering functional knowledge
not through traditional means such as lectures and
tutorials, but rather with innovative methods focused on
the competence of the individual manager and business,
based upon studies of how SMEs learn.
Smith (2011) describes a series of ‘learning spaces’,
which demonstrate where and how learning takes place
within a networked learning programme. The focus of
this study was a 10-month leadership and development
programme developed by IEED to equip SME owner-
managers with the skills and ability to run a successful
and profitable business. These learning spaces have a
role to play in developing innovative methods of
delivery for SMEs, helping to break down the barriers to
university–SME engagement:
38
• ‘Peer-to-peer’ learning space, in which a group of
like-minded SME owner-managers can share similar
issues. Attention is given to creating a learning
environment in which trust and respect are fostered
by the group. Research found that participants could
share experiences on different elements of the
programme, but also they were surprised at how
similar the issues they faced were, and how their
own situations as owner-managers of small busi-
nesses were relevant and salient to each other.
Bruneel et al (2010) also identified that trust was
likely to be especially important in facilitating
university–industry links, as trust expresses the
capacity of firms and universities to work together
to resolve problems.
• ‘Social’ learning spaces, such as refreshment
breaks, allow discussion to take place between
SMEs not only about the session they are attending,
but about their businesses and their own situations.
• ‘Reflective’ learning space is conceptual and crosses
the boundaries of interventions and other spaces. It
may be more individualistic to the participant SME;
however, it provides space for processing informa-
tion reflectively and often results in self-affirmation:
that is, that they are doing some things well within
the business.
• ‘Peripheral’ learning space. Learning needs to be
applied to the business, and because many SME
owner-managers do not have a defined line between
home and work, it is natural to think of the learning
infiltrating other parts of the delegates’ lives in an
informal way. This space is concerned with enhanc-
ing the learning to help this process to occur, hence
assisting the transformation of knowledge.
The above spaces increase AC by aiding the assimila-
tion, transformation and exploitation of new knowledge
in a learning environment specifically tailored for
entrepreneurial SME owner-managers, providing a set
of tools to enhance and develop a KE mechanism. This
was validated by research undertaken by Gordon and
Jack (2010), who found that the learning environment
provided the opportunity to create social capital and had
a positive impact on the development of the SME and
the individual.
To summarize, we can conclude that for SMEs,
increasing AC through recognizing the value of new
external knowledge, assimilating it and applying it to
commercial ends can lead to innovation and ultimately
to a competitive advantage. KE provides a sustainable
means of transferring new knowledge from a university
to an SME; however, there are a number of barriers
currently inhibiting this, including the heterogeneity of
SMEs, their current level of AC, the manner in which
ENTREPRENEURSHIP AND INNOVATION Vol 13, No 1
 Absorptive capacity and university knowledge exchange in SMEs

SME competitive
advantage
Knowledge exchange
Business school
knowledge
Entrepreneurial
learning
Figure 1. The university–SME knowledge exchange
process.
entrepreneurs learn and the low value placed upon
university knowledge by business. A business school
can develop novel KE mechanisms to increase AC and
innovative capacity in both high- and low-tech SMEs to
improve the transfer and use of knowledge. Figure 1
summarizes this process. The second part of this paper
will propose a KE model that begins to address these
issues.
Fig 1 n h
The IFG knowledge exchange model
IEED recognizes that entrepreneurial learning differs
from that of traditional learning and has developed
capacity to address this issue. IEED has recently been
awarded funding from the European Regional Develop-
ment Fund to deliver the IFG project. The KE model,
shown in Figure 2, is proposed to deliver IFG and draws
Absorptive upon the theory outlined in the literature review above
capacity and the KE mechanisms already developed within
IEED. The four dimensions of AC simplistically provide
a process for KE from business schools to SMEs, further
divided into two subsets: PAC, enabling SMEs to
become receptive to new external knowledge; and RAC,
which reflects a firm’s ability to leverage that new
knowledge. The four dimensions of AC each provide an
opportunity to undertake some form of engagement with
the SMEs to facilitate new knowledge absorption.
Drawing upon the entrepreneurial learning literature and
that of Bruneel et al (2010), we are able to identify some
overarching themes that should be included in an SME
KE mechanism. Importance is placed upon the develop-
ment of trust, both between universities and SMEs and
amongst SMEs themselves. Trust is required if universi-
ties and businesses are to work together to solve
problems. Trust develops over time; therefore there need
to be sufficient interactions between the university and
the SME to allow this to develop. In addition, research

Potential absorptive capacity (PAC) Realized absorption capacity (RAC)

Knowledge Knowledge Knowledge Knowledge
acquisition assimilation transformation exploitation

Peer-to-peer learning
Reactive state SMEs enter the programme

Social learning
Problem definition

Gateway Bespoke support:

workshops
Large programmes – Student projects Reunited cohorts
audience for cohorts of
– Academic mentoring
recruitment 20–25 SMEs – Reflect and
events – Small group intensive develop
master classes action plans
1 2 3 4

Reflective learning

Strategic state SMEs

enter the programme
Peripheral learning

Evaluation (qualitative and quantitative)

Virtual learning environment

0 months
3 months 6–9 months
500 SMEs 300 SMEs 150 SMEs

Figure 2. Innovation for Growth knowledge exchange model.

ENTREPRENEURSHIP AND INNOVATION Vol 13, No 1 39

Absorptive capacity and university knowledge exchange in SMEs
has shown that peer-to-peer learning develops trust and
respect amongst participants (Smith, 2011). Thus, a six-
to nine-month programme is specified, working with
cohorts of 20 to 25 SME owner-managers and/or
decision makers. The model also attempts to incorporate
the ‘learning spaces’ at each step to increase the AC of
participant SMEs.
The IFG model also draws upon experience obtained
though the delivery of a number of previous projects to
regional SMEs. KE takes place by drawing upon the
skills and expertise of academics, students and knowl-
edge exchange professionals within LUMS. One
intended outcome of IFG is the creation and develop-
ment of a network of knowledgeable, engaged SMEs
whose owners have a desire to learn about, develop and
enact practices that will bring about innovation. How-
ever, with each element of engagement, it is also
important to consider the benefit to the university in
terms of developing a fertile environment for research,
increasing the employability of students or generating
income and ultimately sustainable KE.
Bessant et al’s (2009) typology for segmenting SMEs
is based upon their level of AC. This provides some
guidance for business schools in terms of where re-
sources to support heterogeneous SMEs are best spent.
Due to the vast number of SMEs, it is unrealistic to
suppose that a business school could offer support to all
SMEs or that it would be effective for all. Therefore, it is
proposed that just ‘reactive’ state SMEs should be
encouraged to participate in the entire programme, with
‘strategic’ SMEs entering the programme at a later stage.
‘Unreactive/passive’ SMEs with no AC are not equipped
to receive support from universities, and ‘creative’ SMEs
have already developed levels of AC too advanced for
this programme.
The IFG model takes SMEs on a learning journey,
initially making them aware of business schools as a
source of new knowledge, through to exploitation of this
new knowledge to provide a competitive advantage. AC
is used as a framework for this journey. In this scenario,
new knowledge concerned with innovation will be
drawn from LUMS. However, it is suggested that this
model could be adapted for use in a broader university
context. Dependent on the pre-existing level of AC in
the SME, the model offers some flexibility in terms of
the entry point to the KE programme. This division
seems appropriate as, regardless of the SMEs’ sector,
age or size (all methods commonly used to categorize
SMEs), the typology enables business support to be
targeted based on their state of development. Many
SMEs, particularly microfirms, share similar problems
concerned with innovating business and management
processes and practices, regardless of their sector, size
or age, yet the ability to recognize and address these
40
issues varies considerably and may impede an SME in
moving successfully along a learning journey. Bessant’s
typology can direct SMEs to an appropriate entry point
for their learning journey, enhancing their learning
experience.
The learning spaces cut across all elements of the
model, and every effort will be made to introduce these
elements at each stage of delivery to provide a successful
learning environment. These domains of entrepreneurial
learning are seen to be of equal importance to the new
knowledge provided by the business school. The use of a
simple virtual learning environment (VLE) will encour-
age participants to continue dialogue, share ideas and
experiences and develop peer-to-peer learning both
during and after the programme. This will be important as
peer-to-peer contact during the knowledge transformation
stage may be limited if businesses choose bespoke
student projects or mentoring. The cohort will then be
reunited during the knowledge transformation stage for
learning reflection and action planning.
The model commences with large audience events to
encourage SMEs to consider universities as a knowledge
source, and then continues through attendance of a
workshop programme, bespoke support and a final
reflective action planning session to determine how new
knowledge will be exploited. It is acknowledged that the
actual implementation of activity within the business
cannot be the responsibility of the university, but, as
outlined later, every effort is made to enable the SME to
exploit the knowledge.
At each stage it is anticipated that there will be a drop
in attendees due to the participants’ level of engagement
and their business needs changing. Thus, for IFG it is
intended that 500 SMEs should be engaged initially,
with 150–200 SMEs completing the programme.
This leads us to identify several sequential research
questions:
(i) Can KE programmes be developed that enable
business schools to become a more important
source of knowledge for SMEs?
(ii) Can KE programmes be developed that improve
the value placed upon business schools by SMEs
as a knowledge source?
(iii) Can AC provide business schools with a frame-
work to facilitate how SMEs identify a business
school as a knowledge source and acquire valuable
knowledge?
The following discussion will provide further insight
into the proposed delivery to the SMEs in order to
realize the four dimensions of AC.
Knowledge acquisition
Knowledge acquisition forms the initial step in develop-
ENTREPRENEURSHIP AND INNOVATION Vol 13, No 1

ing PAC, which Fosfuri and Tribo (2008) identified as
crucial for innovation. A business school would seem an
obvious place to seek knowledge, yet research (Cosh
and Hughes, 2010) has shown that a university is not a
top source of new knowledge for SMEs, and that its
knowledge is not highly valued. Therefore, SMEs must
be encouraged to consider this knowledge source and
universities must make the knowledge accessible and
implementable. However, levels of AC are distributed
differently across the SME population. Nine out of ten
SMEs in Europe are micro, with fewer than 10 employ-
ees, and many of these may be ‘unaware/passive’,
(Bessant et al, 2009) due to limited human resources
and capital. It may be a waste of resources encouraging
these SMEs to participate in university knowledge
exchange programmes, as they have little or no AC, and
initially they need help in identifying their need to
absorb new knowledge, most likely from knowledge
sources such as customers, competitors and suppliers.
Fosfuri and Tribo (2008) identified knowledge
search as a key antecedent to PAC. ‘Reactive’ SMEs
have low levels of AC, and are more likely already to
be engaged with some type of business support organi-
zation, thus showing higher rates of accumulation for
this. Therefore, it is more effective, in terms of both
cost and impact, to encourage ‘reactive’ SMEs to
attend large audience recruitment events. Initially, they
must be made aware of the relevance of ‘acquiring’
knowledge from a university and understand that this
knowledge can be easily implemented within their
business.
The benefit of SMEs’ engagement with low AC is
twofold, in that they must be made aware of business
issues that are reducing their competitive advantage and
then why engagement with a business school could
attenuate this. This requires the development of trust,
which was identified as important by Bruneel et al
(2010). Also, recruitment materials must clearly articu-
late the benefits of engagement, as their resources for
attending business support events are limited. The
‘differential orientation and interests’ of university
versus SMEs can make the ‘packaging’ and language of
university knowledge difficult for SMEs to identify with
easily and perceive as beneficial. It will take time to
build brand awareness, networks and trust, and a
business school needs capacity to do this. Face-to-face
encounters at networking events develop trust, and
intermediaries (such as cluster groups) and word-of-
mouth referrals to the university are also important.
Introductory large audience events can break down
barriers for SMEs engaging with a business school
through offering an environment that provides a wel-
coming ‘social space’. This includes such matters as the
availability of parking, appropriate event timings and
ENTREPRENEURSHIP AND INNOVATION Vol 13, No 1
Absorptive capacity and university knowledge exchange in SMEs
encouraging informal networking through, for example,
the provision of delegate lists. SME ‘ambassadors’ who
have previously benefited from engaging with the
business school can help develop trust. These events
should be easily digestible and offer some form of hook
to the SMEs in order to obtain a ‘quick win’. As all
SMEs are short of the resource of time, it is essential
that SMEs can quickly see the value of engaging with a
business school via the applicability and relevance of the
knowledge provided. This might be just one nugget of
new external information that an SME can easily
combine with internal existing knowledge, assimilate
and transform it, to the benefit of the business. From
these large audience events, SMEs can be encouraged to
participate in smaller group workshop programmes.
Knowledge assimilation
Knowledge assimilation is also important for developing
PAC. IEED has developed a series of practical and
interactive workshop programmes, delivered over a
period of several weeks, in half- or full days, in order to
limit the time SME owner-managers have to be away
from their business to attend. These programmes have
been well received, and attendance remained high
throughout the programmes. Within this model, innova-
tion-themed workshop programmes could be developed
and delivered to cohorts of 20–25 SMEs, drawing upon
academic and industry expertise. The academic expertise
provides thought-provoking, innovative insights,
drawing upon current research and bringing academic
rigour whilst industry experts deliver practical, experi-
ence-based knowledge to enable interpretation and
understanding of the new knowledge. Facilitation will
enable peer-to-peer, social, reflective and peripheral
learning to take place, through interaction drawing on
relevant case studies. Workbooks and a VLE could help
tailor the knowledge to individual SMEs’ issues, and
these can be taken back to the SME to encourage the
knowledge to be shared with other employees, thus
ensuring that the knowledge does not continue to reside
solely with the participant, enhancing the (Smith, 2011)
‘peripheral’ learning space. Networking amongst
participants is encouraged to build trust and validate
new knowledge. Innovative methods of delivery are
embraced rather than more traditional lecture-style
delivery. Due to the ever increasing importance placed
upon the role of SMEs within the economy, the SMEs
themselves offer a bountiful opportunity for research,
thus enabling two-way KE to take place. As many of the
business and management issues that SMEs face are
similar across a mix of industries, sector-specific events
are not essential.
These first two stages within the model – knowledge
acquisition and assimilation – relate to the development
41
Absorptive capacity and university knowledge exchange in SMEs
of PAC, which enables a firm’s receptiveness to external
knowledge. Many forms of support for SMEs conclude
at this point, hence the new knowledge is not being
exploited. Without further steps to ensure this new
knowledge is integrated with existing knowledge, it is
suggested that the competitive advantage sought by
SMEs will not be realized.
Knowledge transformation
Knowledge transformation begins to develop RAC and
leverage the new knowledge. A variety of KE techniques
are included in this next stage of the process, including
bespoke student projects, intensive small group master
classes and academic mentoring. These mechanisms
allow participants to connect issues from within their
business – that is, internally generated knowledge – with
new knowledge assimilated in a workshop programme.
These mechanisms are underpinned by the provision of
reflective learning space to enable the participant to
consider how the new knowledge is relevant to his or her
individual organization and can be connected to that
already existing within the SME. For example, a
workshop programme may enable an SME to identify
certain strategic business issues preventing innovation.
Recognizing that SMEs are generally short of resources,
a group of students (undergraduate or postgraduate) can
develop this unique, specific business issue. This
expedites the combining of existing knowledge within
an SME with external knowledge assimilated from a
workshop programme, with the students acting as a
conduit. It also enhances the employability of the
students involved in the project and ensures the issues
being presented by the SME to the students are articu-
lated clearly, within a developing strategic framework.
Intensive small group master classes provide SMEs with
the opportunity to analyse in depth a specific, individual
business issue and combine it with new knowledge
assimilated in the workshop programme with peer-to-
peer support. Academic mentoring offers a similar
opportunity but on an individual basis. The VLE will
continue to support the peer-to-peer learning space
during this stage. These scenarios will also provide a
fertile plain for research. For those SMEs that are
already ‘strategic’ (Bessant et al, 2009), support is
required to complement existing internal capability and
to challenge existing business models. This may be the
entry point into the KE model.
Knowledge exploitation
Knowledge exploitation is the final and most crucial
step of the four dimensions of AC. It involves the SME
transforming the knowledge for competitive advantage.
The participant and other key stakeholders from the
SME must be provided with space to reflect on the
42
entire process and to develop strategic action plans that
will be implemented within the business. A university
with its non-competitive environment away from
operational issues can be ideal for this, and a skilled KE
professional within the university could facilitate this
process, ensuring that the business clearly identifies
objectives to exploit the knowledge. By bringing the
workshop cohorts back together, peer-to-peer learning
can validate this process. To be transformational and
achieve buy-in, the knowledge must be shared by a
larger audience within the SME than the programme
participant. The concept of the peripheral learning space
has helped address this. Innovative materials such as
action plans or inspirational posters that can be shared
within the SME, clearly defining the implementation of
new ideas, will help achieve buy-in for new operations.
A desired outcome will be the commitment of resources
to introduce new business processes and practices in the
SME. This element of the model may be an iterative
process, to be repeated over time in order to ensure the
knowledge is exploited.
Conclusions
This paper has presented a conceptual KE model,
drawing upon the theory of AC to provide a step-by-step
approach to transferring knowledge from a business
school to SMEs, ensuring it is transformed to provide a
competitive advantage. Considering the importance of
SMEs within the economy and the fact that KT has been
identified as an essential element of innovation, driving
competitive advantage, the development of such models
could make an important contribution to policy makers.
The context of this paper has been the development of a
KE model for a specific project at LUMS. However, it is
suggested that if empirical evidence validates its effec-
tiveness, then it could be used in a broader context.
The learning spaces underpin all elements of the
model, connecting the various ‘physical’ stages, and
provide an important context for the development of any
SME KE model. As the population of SMEs is large and
heterogeneous, the typology of SMEs provided by
Bessant et al (2009), which assumes different states of
development of capability or AC, provides direction for
a university in terms of the SMEs it should attempt to
engage with and how this should be done, by appreciat-
ing that SMEs have differing levels of AC. The model
attempts to attenuate some of the barriers SMEs face
when searching for new knowledge from a university,
and presents a means of reducing barriers to engage-
ment, providing an effective university–industry
arrangement and a mechanism for collaboration.
KE mechanisms that make the knowledge within
business schools accessible and easy to absorb will have
ENTREPRENEURSHIP AND INNOVATION Vol 13, No 1

a twofold outcome. Initially, potential absorptive
capacity (PAC) will be enhanced so that the SME will be
more receptive to the external knowledge of a business
school; and second, once the SME has engaged with the
HEI, the model suggests how to increase the realized
absorptive capacity (RAC) of the SME so that the
knowledge can be leveraged and transformed into
competitive advantage, ultimately leading to business
growth and corresponding economic growth. The model
could be used to raise the profile of universities as a
source of new knowledge for SMEs and could provide a
mechanism to increase the value of that knowledge.
Limitations and further research
This paper presents a conceptual ex ante KE model,
which in itself obviously has limitations in terms of its
contribution to knowledge. Empirical evidence needs to
be gathered to evaluate and validate this model. Further
work needs to be undertaken to devise methods of
measuring the propositions made above. Quantitative
research over the duration of the project could contribute
to AC and entrepreneurial learning research as some
studies currently try to explain the concept of AC and its
determinants; however, there is a great lack of quantita-
tive support for their findings. As Murovec and Prodan
(2009) observe, this is probably due to the fact that the
qualitative nature of AC makes it a very difficult concept
to measure quantitatively. Also, very few empirical
studies have been able to capture the rich theoretical
arguments and the multidimensionality of the AC
construct. Leitch and Harrison (2005) advise that most
research pertaining to entrepreneurial learning consists
of conceptual papers; therefore a quantitative study
could offer empirical insight into how to design and
implement entrepreneurial KE mechanisms for SMEs.
However, there is also a case for combining or develop-
ing a qualitative study based on this project.
Rauch and Frese (2006) suggest that, since entrepre-
neurship is a relatively new field, there are not enough
studies in some areas of entrepreneurship research, and
most reviews in the field of entrepreneurship use
narrative methods, which can be subject to bias and
individual judgment. This model could potentially
contribute to the field of entrepreneurship by providing
an evidence-based study to develop practice recommen-
dations. Practice recommendations can guide policy
makers: for example, entrepreneurship curricula can be
developed based on empirical evidence. There is also a
need for more cumulative evidence-based models of
entrepreneurship research and the development of
manuals of evidence-based best practices of how to
intervene in given situations.
Bruneel et al (2010) suggest that there is relatively
ENTREPRENEURSHIP AND INNOVATION Vol 13, No 1
Absorptive capacity and university knowledge exchange in SMEs
little explanation of ways to reduce the barriers to
university–industry collaboration and which mecha-
nisms might lower the barriers. This lack of research on
the obstacles to collaboration is a serious hindrance to
the design of effective policy. Few studies have at-
tempted to investigate what might attenuate barriers that
prevent successful KE. Much of the research on univer-
sity–industry links relies on secondary information on
problems and challenges involved in collaboration.
There is little information on the firms actually involved
in these collaborations. Also, most existing research
focuses on the effects of university–industry links on
innovation-specific variables such as patents, rather than
on the multi-source-dependent models that have en-
hanced university–industry collaboration. Thus there is a
clear need to develop evidence-based practice models
which can attempt to improve the value of university KE
for SMEs and which can then be empirically evaluated
to identify the benefits for the firms involved in the
programme. Theory concerned with entrepreneurial
learning can assist in the development of mechanisms to
overcome this problem. It would also be useful to
undertake a more critical review of AC theory in relation
to business schools and SMEs.
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