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.

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.Cohen and Levinthal (1990), "Absorptive capacity: A new perspective on learning and innovation", ''Administrative Science Quarterly'', Volume 35, Issue 1 pg. 128-152. For them, absorptive capacity depends greatly on prior related knowledge and diversity of background. The investments a firm makes into its research and development (R&D) efforts are therefore 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 A patent is a type of intellectual property that gives its owner the legal right to exclude others from making, using, or selling an invention for a limited period of time in exchange for publishing an sufficiency of disclosure, enabling disclo ...

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 an 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 different 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 researchers 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 Shaker A. Zahra is the Robert E. Buuck Chair of Entrepreneurship and professor of strategy and entrepreneurship, Carlson School of Management, University of Minnesota. He is also the academic director of the Gary S. Holmes Entrepreneurship Center ...

and Gerry GeorgeZahra and George (2002), "Absorptive Capacity: A Review, Reconceptualization, and Extension", ''Academy of Management Review'', Volume 27, Issue 2, pg. 185-203 and a reformulation of the definition that expanded greatly the concept and further defined it as being made of two 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, transform and exploit knowledge to produce a dynamic organizational capability.”

Potential Absorptive Capacity

Zahra and George presented the potential absorptive capacity is made of two 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 refine 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 used 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) George and his colleagues (Zou, Ertug, George, 2018) conduct a meta-analysis of absorptive capacity and they find that: (1) Absorptive capacity is a strong predictor of innovation and knowledge transfer, and its effects on financial performance are fully mediated by innovation and knowledge transfer; (2) The firm size-absorptive capacity relationship is positive for small firms but negative for larger firms. The firm age-absorptive capacity relationship is negative for mature firms and not significant for young firms; (3) Social integration mechanisms, knowledge infrastructure, management support, and relational capability all have a positive and significant impact on the absorptive capacity-innovation relationship (whereas they do not find the breadth of external search or competitive intensity to impact that relationship). Environmental dynamism has a marginally significant negative impact on the absorptive capacity-innovation relationship; and (4) They also find that the absorptive capacity-innovation relationship is stronger when absorptive capacity is measured by surveys rather than when absorptive capacity is measured by archival proxies.

A refined model of Absorptive Capacity

A more recent contribution proposed to (a) reintroduce the original first component in Cohen and Levinthal's model. The contribution noted (b) that transformation is not a step after assimilation, but represents an alternative process. Consequently, it suggested that (c) the neat distinction between potential absorptive capacity and realized absorptive capacity does not hold any more. ad (a): Firms often fail to identify and absorb new external knowledge; recognizing the value of new external knowledge is often biased and needs to be fostered; it is not automatic. Managers have often problems in assessing the value of new external knowledge when it is not relevant for the current demands of key customers. ad (b): Both assimilation and transformation involve some degree of change of the new knowledge and its combination with the existing knowledge. When the new knowledge fits existing cognitive schemas well, it is assimilated. When the new knowledge cannot be assimilated, the cognitive structures must be transformed. Firms transform their knowledge structures when knowledge cannot be assimilated. Transformation does not follow assimilation, it is an alternative to it. ad (c): As transformation is an alternative to assimilation and not sequential to assimilation, it becomes part of potential absorptive capacity in Zahra and George's model; consequently, realized absorptive capacity simply relabels the component of exploitation. Further, without the effect of realized capacity, potential capacity cannot have any effect on a firm's competitive advantage; potential absorptive capacity cannot be meaningful separated from realized absorptive capacity in empirical studies on value creation. Accordingly, firms with high levels of absorptive capacity (1) recognize the value of new external knowledge, (2) acquire, (3) assimilate ''or'' transform, and (4) exploit new external knowledge. However, Zahra and George argue that the concept has a too broad definition as well as no clear dimensions or scales, evidenced by the variations among different studies that have used the absorptive capacity theory. Bosch et al. contend that absorptive capacity should not be based only on prior related knowledge, as Cohen and Levinthal originally proposed, but rather, organizational culture and combinative capabilities should be considered as antecedents to a firm’s absorptive capacity. For example, a business culture that appreciates and supports continued learning has a higher absorptive capacity than other business cultures that do not support individual learning and development. To further clarify concepts related to the absorptive capacity theory, Wheeler introduced an application derived from the dynamic capability and absorptive capacity theories for business innovations. Wheeler’s Net-Enabled Business Innovation Cycle facilitates understanding and predicting how firms transform its prior orientation and internal resources associated with net-enablement into business innovation and economical growth.

Other research on the subject

Researches on subjects related to the development of absorptive capacity have included studies focusing on research and development,CALOGHIROU, Yannis, Ioanna Kastelli et Aggelos Tsakanikas (2004), “Internal capabilities and external knowledge sources: complements or substitutes for innovative performance?”, Technovation, Vol. 24, p. 29-39LIN, Chinho, Bertram Tan et Shofang Chang (2002), “The critical factors for technology absorptive capacity”, Industrial Management + Data Systems, Vol. 102, No. 5/6, p. 300-308 knowledge management, organizational structures, human resources, external interactions, internal interactions, open innovation, 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 is the process of creating, retaining, and transferring knowledge within an organization. An organization improves over time as it gains experience. From this experience, it is able to create knowledge. This knowledge is bro ...

, industrial economics, the

resource-based view The resource-based view (RBV) is a managerial framework used to determine the strategic resources a firm can exploit to achieve sustainable competitive advantage. Barney's 1991 article "Firm Resources and Sustained Competitive Advantage" is widely ...

of the firm and

dynamic capabilities In organizational theory, dynamic capability is the capability of an organization to purposefully adapt an organization's resource base. The concept was defined by David Teece, Gary Pisano and Amy Shuen, in their 1997 paper ''Dynamic Capabilities an ...

. This theory has undergone major refinement, and today a firm's absorptive capacity is mostly conceptualized as a dynamic capability. As a complement to absorptive capacity in outward knowledge transfer, the notion of desorptive capacity was developed. Desorptive capacity may play a key role for managing innovation in networks. It is particularly important for networks and collaborations with mutual, bidirectional knowledge transfer. Other concepts related to absorptive capacity are: * Desorptive capacity: This is a complementary concept to absorptive capacity in outward knowledge transfer, following the logic of the chemical process of

desorption Desorption is the physical process where a previously adsorbed substance is released from a surface. This happens when a molecule gains enough energy to overcome the activation barrier of the bounding energy that keeps it in the surface. There ...

. Desorptive capacity is defined "as an organization’s ability to identify technology transfer opportunities based on a firm’s outward technology transfer strategy and to facilitate the technology’s application at the recipient." Thus, it influences the volume of knowledge transfer and comprises two process steps - identification and transfer. *Receptivity: The firm's overall ability to be aware of, identify and take effective advantage of technology. *

Innovative Routines Innovation is the practical implementation of ideas that result in the introduction of new goods or services or improvement in offering goods or services. ISO TC 279 in the standard ISO 56000:2020 defines innovation as "a new or changed entity ...

: Practiced routines that define a set of competencies the firm is capable of doing confidently and the focus of the firm's innovation efforts. In regions in the

Global South The concept of Global North and Global South (or North–South divide in a global context) is used to describe a grouping of countries along socio-economic and political characteristics. The Global South is a term often used to identify regio ...

, regional innovation agencies can work as knowledge gatekeepers to stimulate new technological trajectories by facilitating the acquisition, diffusion and engaging in the ‘tropicalization’ of extra-regional knowledge to facilitate its absorption within the regional innovation system.

Notes and references

{{DEFAULTSORT:Absorptive Capacity Organizational theory Research and development