Presented by: Jeff Savage Cohen, W. M. and D. A. Levinthal (1990). "Absorptive Capacity: A New Perspective on Learning and Innovation." Administrative Science Quarterly 35(1): 128-152. Presented by: Jeff Savage

Introduction What is Absorptive Capacity? How is it generated? The ability to recognize the value of new information, assimilate it, and apply it to commercial ends. How is it generated? Most innovations result from borrowing from others Prior knowledge gives one the ability to acquire new information Firms that have their own R&D are better able to use external information. Note: Absorptive capacity may be a byproduct of R&D investment or manufacturing or through training

Cognitive Structures The Premise The organization needs prior related knowledge to assimilate and use new knowledge. Cognitive Science Research: accumulated prior knowledge increases the ability to put new knowledge into memory as well as the ability to recall and use it. For example: Learning a 3rd language is always easier than learning a 2nd language. PS-What do you call someone who speaks 2 languages? 3? 1? Learning in one skill may even transfer across bodies of knowledge through associative learning or ‘learning how to learn.’ (Dierickx & Cool 1989)

Learning There is little difference between Learning Capabilities and Problem Solving Skills` LC: The development of the capacity to assimilate existing knowledge PSS: A capacity to create new knowledge 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. 2 Keys to Assimilating information: 1. Learning is cumulative 2. learning performance is greatest when the object of learning is related to what is already known.

The Firm’s Absorptive Capacity Not simply the sum of the AC of employees It depends on the transfers of knowledge across environmental boundaries & between subunits What does effective communication require? Gatekeepers can help transfer information across boundaries, translate hard-to-understand information, and serve as repositories of knowledge. Shared language and symbols (ex: Blueprints) Maintaining the balance between inward- and outward-looking absorptive capacities is HARD. In a turbulent environment, a centralized gatekeeper may not be the best option for the firm to follow; instead, the firm should have a broad range of ‘receptors’ to the environment.

The Firm’s Absorptive Capacity cont. Diversity is key! Diverse knowledge structures in the same mind elicit the sort of learning and problem solving that yields innovation Interactions among diverse structures should lead to more novel linkages and associations During this part of the discussion, think on how/if this logic echoes Montgomery and Wernerfelt’s (1988) idea that firms that diversify should expect the lowest average rents How to do this? Hiring new workers; job rotation, etc. It’s about What you know and Who you know. Critical knowledge isn’t sufficient; the ability to know where complementary expertise resides is critical. Building a strong network increases awareness of other’s capabilities and knowledge

Path Dependence & Absorptive Capacity A low initial investment can have big consequences 1. New opportunities may not be recognized 2. Firms may be ‘locked out’ of new ideas, as they may be too distant to be properly appreciated/assessed. 3. NIH Syndrome. 2 More Benefits Highly reactive firms don’t (necessarily) wait for failure to spur development. Firms that have their own R&D are better able to use external information. Asset Mass Efficiencies: Success breeds success; firms with a stock of R&D know-how are more likely to make the next breakthrough. Not Invented Here Syndrome

Absorptive Capacity and R&D Investment Not only generates new knowledge but contributes to the firms absorptive capacity 2 Factors affect a firm’s incentive to learn Quantity of knowledge (More=Greater Incentive) Difficulty (cost) of learning. For a given level of R&D, the level of absorptive capacity is diminished in environments in which it more difficult to learn. 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.

Model: How does Absorptive Capacity affect R&D? R&D Intensity -Demand Level of sales and elasticity of demand -Appropriability Degree to which firm captures profits associated with their innovation; captures knowledge spillovers to public -Technology Opportunity How costly is it to achieve technical advance in industry -Elasticity of Demand: Degree to which a firm’s revenue will increase due to a reduction in price Also, where the effects of other determinants, such as technological opportunity and appropriability, depend on the firm’s or rivals’ assimilation of knowledge, absorptive capacity will mediate those effects.

Model: Sources of a firm’s technical knowledge Key Assumption Exploitation of competitors’ research is realized through the interaction of the firm’s absorptive capacity w/ competitors’ spillovers Also, where the effects of other determinants, such as technological opportunity and appropriability, depend on the firm’s or rivals’ assimilation of knowledge, absorptive capacity will mediate those effects.

Technological Opportunity Measure Operationalization Results Ease of Learning Due to data constraints could not observe direct of effects or its determinants on firms’ R&D spending When learning is difficult, high absorptive capacity becomes more important. Technological Opportunity Survey w/ managers on the relevance and importance of the science base and of industry sources of knowledge The results confirmed that when learning is difficult, an increase in relevance spurs R&D intensity. Appropriability Used Levin et al.’s survey of the effectiveness of several IP protection mechanisms, including patents, secrecy, lead time, etc. As the market becomes more competitive, a high appropriability becomes important too. It seems that the positive absorption incentive associated with spillovers can overcomes the negative appropriability incentive.

Implications and Discussion Firms may engage in basic research that has high spillover because it gives them the skill to exploit innovations quickly. When a firm wishes to acquire and use knowledge unrelated to its ongoing activity, it cannot simply partner with other firms, or buy the technology, it should be prepared to invest internally in the absorptive capacity that will permit effective exploitation. Is absorptive capacity a core capability, a core rigidity, or something else entirely? The authors mention that the cumulative quality of absorptive capacity (and its conditioning expectations) tend to confine firms to operating in a particular technological domain; though it can certainly be argued that ‘learning to learn’ should usually have an expected positive effect. It could be a core rigidity due to disruptive technology. Let's say that we know the film industry really well; we know what the next 3 steps are going to be: the next products, likely improvements, etc. This makes it REALLY hard to see something coming from left field.