Absorptive Capacity

The absorptive capacity of a firm, developed by Cohen and Levinthal (1990; 1994; 1989), represents the organizational routines within a firm that allow it to “recognize the value of new external information, assimilate it, and apply it to commercial ends” (Cohen & Levinthal, 1990: 128). It is rooted in the understanding that most knowledge that is needed to innovate comes from outside the workgroup, but in order to capitalize on external knowledge, a firm (or workgroup) must have the internal resources to recognize and exploit that external knowledge.

In their original work, Cohen and Levinthal operationalized absorptive capacity as the R&D intensity of a firm. While R&D was merely the way they operationalized their construct and was not necessarily central to their theoretical understanding of the

construct, absorptive capacity became associated with firm level R&D intensity.

However, Cohen and Levinthal’s theorizing clearly demonstrates that absorptive capacity is a multidimensional construct (Zahra & George, 2002) that can include organizational change and development activities throughout the organizations (Benner & Tushman, 2003; Jansen, Van Den Bosch, & Volberda, 2006).

The absorptive capacity argument is that in order for a firm to capitalize on

available external knowledge, they must possess the requisite routines. While a firm can invest in resources, human or other, to improve its ability to act on external knowledge in

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the present, its prior activity or lack of activity in a particular area will affect both its attention to and beliefs about types of external knowledge. In this way, absorptive capacity is path dependent (Cohen & Levinthal, 1994). Exploration and exploitation activities of a firm are a highly complex mix of explicit and tacit knowledge that is embedded throughout the organization (Kim, 1997). One period’s exploration and exploitation activities determine the activities of the next period.

However, because of its emphases on path dependency and R&D, absorptive capacity became associated with the stock of knowledge that a firm possesses that allows it to exploit external sources of knowledge (Lane, Koka, & Pathak, 2006). It also became overly concerned with the types of innovation, such as product and process development, associated with R&D activity. In this way, absorptive capacity was viewed as a more static capability. In addition, it was viewed as an organizational level construct rather than a multi-level construct that encompasses individuals in workgroups that together with other workgroups make up the organization (Van Den Bosch, Van Wijk, & Volberda, 2003). Because R&D is most often a firm level variable, it was difficult to capture absorptive capacity at the workgroup level.

Turning away from a static understanding, Zahra & George (2002) frame

absorptive capacity within a dynamic capabilities perspective. Dynamic capabilities are higher-order routines that enable an organization to reconfigure its operating routines by incorporating new knowledge and resources and shedding outmoded routines in order to create new sources of competitive advantage (Eisenhardt & Martin, 2000). When

understood as a higher-order routine, a firm’s absorptive capacity is less path determinant (Zahra & George, 2002) and less associated with typical innovation activities that would

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be represented by R&D. While a firm is shaped by its past decisions, it can change directions and reposition itself through managerial choice (Teece, 2007). Thus, absorptive capacity depends both on past experience and the diversity of knowledge sources available to it in the present (Zahra & George, 2002).

Looking at absorptive capacity as a dynamic capability allows the construct to be understood as a non-linear process rather than as a static resource (Lane, et al., 2006; Lichtenthaler, 2009; Zahra & George, 2002). A process view of absorptive capacity enables the researcher to more closely examine each of the dimensions of the construct. Thus, in this study, we take up the call by Lane et al. (2006) to “view absorptive capacity as a capability rather than a “thing” divorced of its context.” A process view also allows absorptive capacity to be viewed as dynamic over time. New resources—particularly human resources—can increase the absorptive capacity of an organization.

A growing body of literature suggests that groups must have a balance of knowledge diversity and similarity in order to both explore and exploit knowledge. Highly socialized and formalized environments, because they are associated stable institutional logics, are efficient for exploiting knowledge. Organizations with more diversity, in contrast, are needed for firms to acquire and assimilate new external knowledge (Boschma, 2005; Jansen, Van Den Bosch, & Volberda, 2005). In highly socialized groups, there is very little diversity or tension amongst the members’

understanding of institutional logics. However, as stated above, significant change can only occur when the institutional logics of the workgroup are challenged with new knowledge.

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In critiquing the Zahra & George (2002) use of the term ‘acquiring external knowledge’ instead of the original Cohen and Levinthal (1990) term ‘recognizing the value of external knowledge’, Todorova & Durisin (2007) offer a key insight into the problematic nature of exploration that is often under-explored in the absorptive capacity literature. They argue that “the capability to recognize the value of new external

knowledge represents an important component of absorptive capacity because the valuing is not automatic, it is biased, and it needs to be fostered to allow the absorption to begin at all” (2007: 777). Very distant and more abstract knowledge may be discounted before it has a chance to be tested. Recognizing the value of distant knowledge is hard because it will be discounted at a much higher rate than more familiar solutions. Knowledge that challenges existing institutional logics, and is thus highly psychologically distant, is most likely to be outside of the absorptive capacity of the workgroup.

It is not enough for the workgroup to merely acquire the knowledge; the workgroup must be able to recognize that the knowledge can create value for them if incorporated. In order to capture a process based view of absorptive capacity that allows for an

emphasis on groups of individuals, we define absorptive capacity as a workgroup’s collective ability to recognize the value of external knowledge, assimilate that knowledge into the workgroup so that it can be available to relevant members, and transform and exploit that knowledge into tangible outcomes (Cohen & Levinthal, 1990; Jansen, et al., 2005; Todorova & Durisin, 2007; Zahra & George, 2002). Absorptive capacity relates to both a workgroup’s ability to absorb new knowledge and its motivation (Minbaeva, Pedersen, Björkman, Fey, & Park, 2003). From a psychological perspective, absorptive capacity has a significant connection to the zone of proximal development. New

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knowledge must challenge the workgroup, but not be outside of its capacity to absorb. This is challenging as the value of more distant knowledge is more likely to be

discounted over more familiar knowledge.

The path dependency of absorptive capacity rests in the understanding that the attention of the workgroup is situated in a context; this context is determined by the internal routines of the workgroup and the external structures of the environment in which the organization is embedded (Nelson & Winter, 1982; Ocasio, 1997). The ability to capture the new international knowledge from a returnee depends on the historically and situational embedded logics of the workgroup members. These include the policies that the workgroup has in place to integrate new knowledge and new approaches that may conflict with current institutional logics, the international exposure of workgroup

members, and external focus of the workgroup (Oddou, et al., 2009).

To a large extent, a person’s former experience determines their choice set (Elkjaer, 2003). When groups of people are highly socialized and thus have little cognitive

diversity, they are more likely to face cognitive lock-in “in the sense that routines within an organization obscure the view on new knowledge or new market possibilities”

(Boschma, 2005: 64). Cognitive lock-in reflects the psychological distance of the new knowledge. Groups with lower diversity and more dense structures and routines are more likely to view knowledge from the outside as more abstract and foreign. This lock-in leads to satisficing behaviours (see: Simon, 1997) at a much less optimal level than could be achieved by groups with higher diversity and thus a broader perspective and range of alternatives (Taylor & Osland, 2003). In fact, satisfaction with a working solution can

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block the creation of new knowledge by shutting down the search process (Calhoun & Starbuck, 2003).