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One of the primary questions of interest in the field of management is how does a firm gain a (sustainable) competitive advantage. With continual evidence of firms earning supernormal profits in practice, scholars have been motivated to construct various models to explain this phenomenon. While numerous theses have been proposed, such as membership in an industry with high entry barriers (Bain, 1956), the dominant perspective is based on the characteristics of a firm’s resource bundle. This perspective, termed the resource–based view of the firm, depicts a firm as a collection of resources whose characteristics predicate firm success.

Wernerfelt (1984) introduced the term "resource–based" in his characterization of firms as collections of resources rather than sets of product–market positions. Barney (1986) emphasized resources that have positive attributes and suggests that the critical problem facing the firm is how to maintain the distinctiveness of its products, while not investing so much in obtaining this difference as to destroy the above–normal returns. To sustain a long–run competitive advantage a resource must be valuable, rare, imperfectly imitable, and without a strategically equivalent substitute (Barney, 1991).

Recently, the type of resource that has these characteristics has come under examination. Schendel (1994) proposes that "the assets that matter are not those elemental ones that are easily duplicated by all firms, but rather those that are built hierarchically out of compound assets." (pp. 2). One such compound asset or resource, organization knowledge, has come under increasing scrutiny and the importance of this resource is increasingly recognized. As stated by Nonaka (1991), "In an economy where the only certainty is uncertainty, the one sure source of lasting competitive advantage is knowledge." Organization knowledge has the ability to impact a number of important functions and offers a plethora of opportunities for earning profits. However, value only accrues to a firm when a resource generates rents. Rents occur when an resource earns revenues that exceed the cost of deployment. Four types of rents have been identified in the literature: monopoly rents, quasi rents, Ricardian rents, and entrepreneurial rents.

The focus of this paper is entrepreneurial rents which arise when an organization discovers a new rent generating combination of resources (Knight, 1921). It is the anticipation of entrepreneurial rents that motivates firms to pursue innovations and develop new products (von Hippel, 1988). However, the process of discovery is not without cost. An organization will only realize profits if the cost of discovery is lower than the rents these resources can actually produce (Peteraf, 1993). Unfortunately, the process of innovation is not easy and apriori a firm does not know the scope of resources necessary for research and development. This uncertainty arises due to discrepancies between the firm's current knowledge base and the knowledge required to develop and commercialize a new product (which we term innovation knowledge). The higher the level of organization innovation knowledge, the less the level of innovation uncertainty, and thus the greater the likelihood of successful product development (Tushman, 1978).

According to Moenaert and Souder (1990), there are four major sources of uncertainty in the innovation process: consumer uncertainty, technological uncertainty, competitor uncertainty, and resource uncertainty. These four sources of uncertainty comprise an organizations level of innovation uncertainty, which Leonard–Barton (1995) refers to as a capability gap. To reduce the level of uncertainty the use of integration mechanisms between the R&D department and other functions (primarily manufacturing and marketing) is advocated (e.g. Souder, 1988). This coupling of development, production, and marketing activities generates an internal network that increases the research knowledge base and reduces the level of innovation uncertainty. Regardless of the level of integration between functionally specialized activities, it is still likely that a certain level of innovation uncertainty will remain.

To deal with this capability gap, an organization needs to acquire new knowledge. The primary mechanisms of learning are congenital learning, experimental learning, vicarious learning, grafting, and searching and noticing (Huber, 1991). Congenital and experimental learning [as outlined by Huber (1991)] apply to intra–organization knowledge generation and are consistent with the view that internal firm capabilities are the prime determinant of innovation success (Clark and Wheelwright, 1993). However, the process of generating solutions internally to reduce innovation uncertainty often requires significant resource commitments and may not be efficient for a firm to pursue. This is particularly true when the pace of technological discovery is rapid. In such cases, a firm does not have the time to conduct in–house research and knowledge critical to new product development resides in outside sources of technology and the market (Leonard–Barton, 1995).

Vicarious learning, grafting, and searching and noticing are all mechanisms used by firms to acquire external knowledge. When a firm does not provide economic compensation for this knowledge (to the organization that created it) this is known as exploiting a "spillover" effect. A spillover occurs when one firm uses information from research conducted by another firm (Griliches, 1992). In the world of spillovers, innovation and new product development by one firm depends not only on its own research efforts but also on the knowledge created by both competitors and firms in other industries.

The impact of spillovers has been studied in conjunction with economic growth and evolves from Marshall's (1890) work on economic development. While emphasizing the importance of spillovers, this literature has not addressed firm differences in accessing and exploiting spillovers. The current study incorporates insights from distinct research streams to develop new measures and investigates the degree to which firm differences in external

knowledge acquisition, intra–firm knowledge dissemination and technical capabilities impact firm performance. The hypotheses are tested on a sample of firms from the medical device and supplies industry. Results suggest that the judicious use of external knowledge and intra–firm knowledge dissemination can increase both firm sales growth and research productivity, and the results vary depending upon firm size.

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