Wesley M. Cohen Daniel Levinthal Reading III-6 Absorptive Capacity: A New Perspective on Learning and Innovation Wesley M. Cohen Daniel Levinthal

Outline Introduction Organizational Absorptive Capacity Path Dependence Models Research and Development Technical Knowledge Hypothesis Testing Methods Results Implications for Innovation Conclusion Likes/Dislikes

Introduction Most innovations result from borrowing Absorptive capacity: The ability of a firm to recognize the value of new external information, assimilate it and exploit it for commercial ends. Absorptive capacity is a byproduct of R&D investment Manufacturing operations Technical training

Introduction – Cognitive Structures Research suggests: Accumulated prior knowledge increases the ability to acquire and recall new knowledge Learning in one task may influence and improve the learning of another task A diverse background provides a more robust basis for learning Learning capability (i.e. absorptive capacity): The capacity to assimilate existing knowledge Problem solving (i.e. creative capacity): The capacity to create new knowledge Cognitively, these processes are very similar=> Absorptive capacity and creative capacity (i.e. innovation) are linked.

Organizational Absorptive Capacity An organization's absorptive capacity depends on: The capacities of its individual members The ability to communicate across external boundaries and between internal groups or sub-units “Gatekeepers” help monitor the environment and transfer information There is a trade-off between inward-looking and outward-looking absorptive capacities. Too much inward-looking can lead to NIH syndrome Awareness of complementary expertise (who knows what) is also vitally important.

Path Dependences Accumulating absorptive capacity in one period will permit its more efficient accumulation in the next The possession of related expertise permits a firm to better evaluate the import of intermediate technologies i.e. expectation formation Lockout: When a firm ceases investing in its absorptive capacity in a quickly evolving field, it may never assimilate and exploit new information in that field, regardless of the information’s value

Absorptive Capacity- R&D Spending R&D contributes to a firm’s absorptive capacity Determinants of R&D intensity Demand Appropriability Technological opportunity

Model- R&D Incentives Absorptive capacity will have a mediating effect on the determinants

Model- Sources of Technical Knowledge Key= must have absorptive capacity from your firm’s own R&D in order to use spillover

Hypotheses Ease of Learning- absorptive capacity will have greater impact in more difficult learning environments Competitors are less able to tap into spillover R&D becomes more of a private good because it is not readily usable by other firms Technological Opportunity- more available information will elicit more R&D Appropriability- Spillovers provide more incentive to conduct R&D

Methods Cross-Section Survey Data on technological appropriability conditions in the manufacturing sector. Technological opportunity was a 7 point likert scale on the relevance of 11 basic fields of science and the importance of external sources of knowledge to technological progress in their business. R & D intensity was the dependent variable.

Results Their hypothesis suggested that when learning is more difficult, an increase in knowledge would lead to an increase in R & D intensity. This hypothesis was confirmed by their test. Appropriability Confirmed that the ease of learning conditions on the effect of spillovers. In communities with greater difficulty of learning, the absorpitive incentive is greater.

Implications for Innovation 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.

Implications for Innovation 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.

Likes and Dislikes Dislikes- Lots of new terms that you had to fully grasp before you could understand the rest of the article Likes- The behavioral and cognitive psychology connections were interesting