Absorptive capacity
Encyclopedia
In business administration, absorptive capacity has been defined as "a firm's ability to recognize the value of new information, assimilate it, and apply it to commercial ends". It is studied on individual, group, firm, and national levels. Antecedents are prior-based knowledge (knowledge stocks and knowledge flows) and communication. Studies involve a firm's innovation performance, aspiration level, and organizational learning. It has been said that in order to be innovative an organization should develop its absorptive capacity.
and diversity of background. Therefore, they’ve put the investments a firm makes in its R&D central to their model of development of absorptive capacity. The absorptive capacity is seen as cumulative, meaning that it is easier for a firm to invest on a constant basis in its absorptive capacity than investing punctually. Efforts put to develop absorptive capacity in one period will make it easier to accumulate it in the next one.
“The cumulativeness of absorptive capacity and its effect on expectation formation suggest an extreme case of path dependence in which once a firm ceases investing in its absorptive capacity in a quickly moving field, it may never assimilate and exploit new information in that field, regardless of the value of that information.”
Absorptive capacity is also said to be a reason for companies to invest in R&D
instead of simply purchasing the results post factum (e.g. patent
s). Internal R&D teams increase the absorptive capacity of a company. A firm’s investment in R&D then impacts directly its absorptive capacity. The more a firm invests in research and development activities, the more it will be able to fully appreciate the value of new external information.
Cohen and Levinthal also stressed that diversity allows individual to make “novel associations and linkages”. They therefore encourage the hiring of diverse teams in order to have a variety of individuals working together and exposing themselves to other ways of looking at things.
and a reformulation of the definition that expanded greatly the concept and further defined it as being made of 2 different absorptive capacities: potential absorptive capacity and realized absorptive capacity. Their new definition of absorptive capacity is: “a set of organizational routines and processes by which firms acquire, assimilate, transforms and exploit knowledge to produce a dynamic organizational capability.”
Potential Absorptive Capacity
Zahra and George presented the potential absorptive capacity as made of 2 elements. First there is knowledge acquisition which “refers to a firm’s capability to identify and acquire externally generated knowledge that is critical to its operations.” Second, there is assimilation capability which “refers to the firm’s routines and processes that allow it to analyze, process, interpret and understand the information obtained from external sources.” “Potential absorptive capacity makes the firm receptive to acquiring and assimilating external knowledge.”
Realized Absorptive Capacity
Realized absorptive capacity is made up of transformation capability on one hand that can be defined as “a firm’s capability to develop and refines the routines that facilitate combining existing knowledge and the newly acquired and assimilated knowledge.” On the other hand realized absorptive capacity is also made of the exploitation capability of a firm which is basically the capacity of a firm to apply the newly acquired knowledge in product or services that it can get financial benefit from. “Realized absorptive capacity is a function of the transformation and exploitation capabilities.”
Zahra and George go on to suggest a series of indicators that can be use to evaluate each element of absorptive capacity.
Today the theory involves organizational learning
, industrial economics, the resource-based view
of the firm and dynamic capabilities
. This theory has undergone major refinement, and today a firm's absorptive capacity is mostly conceptualized as a dynamic capability
.
Two concepts related to absorptive capacity are:
Cohen and Levinthal's model
The concept of absorptive capacity was first defined as a firm's "ability to recognize the value of new information, assimilate it, and apply it to commercial ends" by Cohen and Levinthal. For them, absorptive capacity depends greatly on prior related knowledgeKnowledge
Knowledge is a familiarity with someone or something unknown, which can include information, facts, descriptions, or skills acquired through experience or education. It can refer to the theoretical or practical understanding of a subject...
and diversity of background. Therefore, they’ve put the investments a firm makes in its R&D central to their model of development of absorptive capacity. The absorptive capacity is seen as cumulative, meaning that it is easier for a firm to invest on a constant basis in its absorptive capacity than investing punctually. Efforts put to develop absorptive capacity in one period will make it easier to accumulate it in the next one.
“The cumulativeness of absorptive capacity and its effect on expectation formation suggest an extreme case of path dependence in which once a firm ceases investing in its absorptive capacity in a quickly moving field, it may never assimilate and exploit new information in that field, regardless of the value of that information.”
Absorptive capacity is also said to be a reason for companies to invest in R&D
Research and development
The phrase research and development , according to the Organization for Economic Co-operation and Development, refers to "creative work undertaken on a systematic basis in order to increase the stock of knowledge, including knowledge of man, culture and society, and the use of this stock of...
instead of simply purchasing the results post factum (e.g. patent
Patent
A patent is a form of intellectual property. It consists of a set of exclusive rights granted by a sovereign state to an inventor or their assignee for a limited period of time in exchange for the public disclosure of an invention....
s). Internal R&D teams increase the absorptive capacity of a company. A firm’s investment in R&D then impacts directly its absorptive capacity. The more a firm invests in research and development activities, the more it will be able to fully appreciate the value of new external information.
Cohen and Levinthal also stressed that diversity allows individual to make “novel associations and linkages”. They therefore encourage the hiring of diverse teams in order to have a variety of individuals working together and exposing themselves to other ways of looking at things.
Zahra and George's model
Cohen and Levinthal have focused a lot on investments in R&D to develop one’s absorptive capacity, but many other researches showed later on that several other areas could be explored to develop an organization’s absorptive capacity. This led to a review of the concept by Shaker Zahra and Gerry GeorgeGerry George
Gerry George or Gerard George is professor of innovation and entrepreneurship and founding director of The Rajiv Gandhi Centre at Imperial College London...
and a reformulation of the definition that expanded greatly the concept and further defined it as being made of 2 different absorptive capacities: potential absorptive capacity and realized absorptive capacity. Their new definition of absorptive capacity is: “a set of organizational routines and processes by which firms acquire, assimilate, transforms and exploit knowledge to produce a dynamic organizational capability.”
Potential Absorptive Capacity
Zahra and George presented the potential absorptive capacity as made of 2 elements. First there is knowledge acquisition which “refers to a firm’s capability to identify and acquire externally generated knowledge that is critical to its operations.” Second, there is assimilation capability which “refers to the firm’s routines and processes that allow it to analyze, process, interpret and understand the information obtained from external sources.” “Potential absorptive capacity makes the firm receptive to acquiring and assimilating external knowledge.”
Realized Absorptive Capacity
Realized absorptive capacity is made up of transformation capability on one hand that can be defined as “a firm’s capability to develop and refines the routines that facilitate combining existing knowledge and the newly acquired and assimilated knowledge.” On the other hand realized absorptive capacity is also made of the exploitation capability of a firm which is basically the capacity of a firm to apply the newly acquired knowledge in product or services that it can get financial benefit from. “Realized absorptive capacity is a function of the transformation and exploitation capabilities.”
Zahra and George go on to suggest a series of indicators that can be use to evaluate each element of absorptive capacity.
- Knowledge acquisition capability (the number of years of experience of the R&D department, the amount of R&D investment)
- Assimilation capability (the number of cross-firm patent citations, the number of citations made in a firm’s publications to research developed in other firms)
- Transformation capability (the number of new product ideas, the number of new research projects initiated)
- Exploitation capability (the number of patent, the number of new product announcements, the length of product development cycle)
Other researches on the subject
Researches on subjects related to the development of absorptive capacity have included studies focusing on research and development, knowledge management, organizational structures, human resources, external interactions, social capital, supplier integration, client integration and inter-organizational fit. All those researches provide a better picture of absorptive capacity that makes it possible for any firm to develop its absorptive capacity improving different areas of their organization.Today the theory involves organizational learning
Organizational learning
Organizational learning is an area of knowledge within organizational theory that studies models and theories about the way an organization learns and adapts....
, industrial economics, the resource-based view
Resource-Based View
The resource-based view is a business management tool used to determine the strategic resources available to a company. The fundamental principle of the RBV is that the basis for a competitive advantage of a firm lies primarily in the application of the bundle of valuable resources at the firm's...
of the firm and dynamic capabilities
Dynamic capabilities
Dynamic capability is defined as “the firm’s ability to integrate, build, and reconfigure internal and external competences to address rapidly changing environments”...
. This theory has undergone major refinement, and today a firm's absorptive capacity is mostly conceptualized as a dynamic capability
Dynamic capabilities
Dynamic capability is defined as “the firm’s ability to integrate, build, and reconfigure internal and external competences to address rapidly changing environments”...
.
Two concepts related to absorptive capacity are:
- Receptivity: The firm's overall ability to be aware of, identify and take effective advantage of technology.
- Innovative Routines: Practiced routines that define a set of competencies the firm is capable of doing confidently and the focus of the firm's innovation efforts.
See also
- InnovationInnovationInnovation is the creation of better or more effective products, processes, technologies, or ideas that are accepted by markets, governments, and society...
- Change managementChange managementChange management is a structured approach to shifting/transitioning individuals, teams, and organizations from a current state to a desired future state. It is an organizational process aimed at helping employees to accept and embrace changes in their current business environment....
- Adaptive capacityAdaptive capacityAdaptive capacity is the capacity of a system to adapt if the environment where the system exists is changing. It is applied to e.g., ecological systems and human social systems.As applied to ecological systems, the adaptive capacity is determined by :...
- Culture barriers and absorptive capacity