Cohen Levinthal (1990) - Absorptive Capacity

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Has article title	Absorptive Capacity
Has author	Cohen Levinthal
Has year	1990
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• This page is referenced in BPP Field Exam Papers

Reference

• Cohen, W.M. and D.A. Levinthal (1990), "Absorptive Capacity: A New Perspective on Learning and Innovation," Administrative Sciences Quarterly 35, 569-596. pdf

Abstract

In this paper, we argue that the ability of a firm to recognize the value of new, external information, assimilate it, and apply it to commercial ends is critical to its innovative capabilities. We label this capability a firm's absorptive capacity and suggest that it is largely a function of the firm's level of prior related knowledge. The discussion focuses first on the cognitive basis for an individual's absorptive capacity including, in particular, prior related knowledge and diversity of background. We then characterize the factors that influence absorptive capacity at the organizational level, how an organization's absorptive capacity differs from that of its individual members, and the role of diversity of expertise within an organization. We argue that the development of absorptive capacity, and, in turn, innovative performance are history- or path-dependent and argue how lack of investment in an area of expertise early on may foreclose the future development of a technical capability in that area. We formulate a model of firm investment in research and development (R&D), in which R&D contributes to a firm's absorptive capacity, and test predictions relating a firm's investment in R&D to the knowledge underlying technical change within an industry. Discussion focuses on the implications of absorptive capacity for the analysis of other related innovative activities, including basic research, the adoption and diffusion of innovations, and decisions to participate in cooperative R&D ventures.

Absorbative Capacity

Absorbative capacity is defined as:

• The ability to evaluate and utilize outside knowledge
  • This includes recognizing and assimilating new knowledge and applying it to commercial ends
• It is a function of prior knowledge, including:
  • basic skills
  • a shared language
  • knowledge of the most recent scientific or technological developments in a given field

Cognitive Structures

Much of the foundation of the conceptual development in the paper is drawn from the literature on individuals.

Of particular note is that:

• Prior knowledge enhances learning - the ability to store and recall new knowledge
• There is "learning to learn"
• There is little to differentiate learning and problem solving - which includes creativity and insight - both are functions of prior knowledge
• Learning is cummulative, and performance is greatest when relevance (to pre-existing knowledge) is highest

Organizational Absorbative Capacity

An organization's absorbative capacity is a function of its members. It too develops cummulatively. The function has the following properties:

• It is not simply the sum of its employee's absorbative capacities.
• It does not depend just on the external interface of the organization
• It also depends on transfers across sub-units
• Communication between interfaces (external or internal) is facilitated through gatekeepers
• Gatekeepers:
  • Monitor the environment
  • Do not dictate the firm's absorbative capicity (with their own) - rather they pass absorbative capacity across interfaces
  • Use a shared language with both sides of their interface(s)
  • May trade-off inward looking versus outward looking
• Difficulties may arise during rapid change if the interface is centralized - then a broad range of receptors would be preferred
• Excessive specialization of a shared language might result in the Not Invented Here syndrome
• Critical knowledge is not just technical, it includes who to get information from or pass it to
• Complementary functions should be tightly intermeshed
• But excess overlap may reduce absorbative capacity; diversity is useful

Path Dependence

Knowledge assimilation is assumed to be path dependent. Some portion of the old knowledge should ideally be very closely related to the new knowledge to facilitate assimilation. Path dependency has two main consequences:

• Lock out is possible. If some crucial knowledge is not absorbed in the past, a branch of knowledge may be cut off in the future.
• Feedback and Feedforward: Low initial investment discourages future investment because it yields low payoffs, however, high investment in a period, the more sensitive it is to new opportunities, and the more likely it is that its aspiration level for the future will be more linked to the outside than the existing knowledge in the firm, making the firm more pro-active.

Both of these lead to self-enforcing cycles.

The Model

"The prior discussion does not address the question of whether
         we can empirically evaluate the importance of 
            absorbative capacity for innovation"
                                                  -The Authors

"...and the paper never does either, because you can't"
                                                  -Ed

The paper presents several "models" of how absorbative capacity might work. And then tests something completely different. The models are loosely as follows:

Model of Absorbative capacity and R&D Incentives:

• Technological Opportunity causes R&D Spending
• This causation is moderated by Absorbative Capacity
• Competitor Interdependence and Appropriability both jointly cause R&D Spending
• This (joint) causation is moderated by Absorbative Capacity
• Absorbative Capacity causes R&D Spending

Model of sources of a firm's technical knowledge:

• Own R&D causes Technical Knowledge (TK)
• Spillovers of Competitors' knowledge (SCK) and Extraindustry knowledge (EK) causes Technical Knowledge (TK)
• Own R&D causes Absorbative Capacity which moderates the causation between SCK/EK and TK.

The paper also introduces three constructs (not related to the models above):

1. Direct Effect of Ease of Learning: As learning becomes harder, a firm becomes more dependent on its own R&D and so increases R&D spending. However, absorbative capacity decreases because R&D becomes more of a private good (so they claim).
2. Technological Opportunity: An increase in TO, the amount of available relevant technical knowledge (sic), increases R&D and so absorbative capacity.
3. Appropriability: In this model spill-overs provide a positive incentive to conduct R&D in order to build absorbative capacity to capture spillovers.

Methods and Estimation

There is an empirical section, but it doesn't test anything related to anything above.