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The concept of benefiting from external knowledge is not new. Elements of this phenomenon have been examined in a number of different arenas, including research on economic development the attributes of innovation networks and firm research investment and productivity. The focus of this work has been on estimating the amount of knowledge that is available to be spilled and the impact of this knowledge on growth (at the region level) and research productivity (at the firm level).

From a managerial perspective, these studies are not particularly illuminative as the primary firm factor incorporated into (firm level) spillover models is corporate research expenditures. While initially the effect of knowledge spillovers on research expenditures was hypothesized to be negative (Nelson, 1959), scholars of technological change have observed that firms invest in R&D to be able to utilize research information that is available externally. Tilton (1971), for example, states that one of the main reasons firms invested in R&D in the semiconductor industry was to keep abreast of technological advances in the field and facilitate the assimilation of exogenous research information.

Cohen and Levinthal (1989) build on these reasons and argue that a firm invests in R&D not only to generate innovations, but also to develop the ability to identify, assimilate, and exploit knowledge from the environment. They refer to these capabilities as a firm's absorptive capacity. This capacity is becoming increasingly important as the world’s economic borders dissolve and the market for knowledge expands (Leonard–Barton, 1995). Empirical tests of this phenomenon have focused on using a firm’s investment in research as a proxy for absorptive capacity. Cohen and Levinthal (1990) found that the relationship between externally available information and a firm's incentive to invest in R&D is mitigated by the firm's capacity to recognize, assimilate, and exploit external information and they interpret this as evidence of a portion of research expenditures being used to generate absorptive capacity.

While theoretically appealing, absorptive capacity remains an illusive construct. Research expenditures, while related to absorptive capacity, are perhaps a more accurate reflection of the technical knowledge and expertise that resides in the firm. Leonard–Barton1(1995) contends that absorptive capacity involves much more than just investment in research, and the management of absorption of external knowledge involves the ability to identify, access, and use technology from a wide range of sources. This perspective is consistent with the organization learning literature which identifies several stages to the learning process, including external knowledge acquisition, internal knowledge dissemination, and knowledge interpretation (Huber, 1991).2

This research addresses the problematic operationalization of absorptive capacity by decomposing it into its base elements. This study builds on the definitions of absorptive capacity (Cohen and Levinthal, 1990; Leonard–Barton, 1995) and draws on the calculus by which organizations learn from external knowledge (as discussed by Huber2 1991) to posit that absorptive capacity consists of three major elements: external knowledge acquisition, knowledge dissemination within the firm, and the technical competence that resides in the firm. External knowledge acquisition is consistent with the identification function of Cohen and Levinthal’s (1990) definition. Internal knowledge dissemination reflects assimilation. And technical competence is concordant with the organization’s ability to exploit external information. The advantage of decomposing absorptive capacity into distinct elements is that it offers the potential of both a more accurate picture of the true firm absorptive capacity and increased measurement opportunities. The next sections briefly review the literature that pertains to each element of absorptive capacity.

External Knowledge Acquisition

The effect of external knowledge acquisition has come under scrutiny in a number of areas. Research in the product development literature has advocated the use of external information as a way of increasing the likelihood of a product’s fit with customer needs while simultaneously lowering development costs. This strategy has been utilized by Japanese with a number having comprehensive systems for gathering competitive intelligence (Leonard–Barton, 1995; Kokubo, 1992). Japanese firms expend significant resources to obtain current knowledge about the development of new technologies, with the goal of realizing new technological developments by means of "technology fusion" (Kodama, 1990).

Levin (1988) examined the mechanisms used by firms to acquire technical knowledge of process and product innovations developed by a competitor. Seven methods were identified after extensive interactions with advisers and pretest subjects from the industrial R&D community, including licensing technology, patent disclosures, publications or technical meetings, conversations with employees of innovating firms, hiring of employees from innovating firms, reverse engineering of products, and independent R&D. The primary result from this study is that most of the methods of learning (acquiring external knowledge) require some commitment of resources. In fact, the methods which were rated as being most effective by R&D executives (Levin, 1988)–licensing, reverse engineering, and undertaking independent R&D–are likely to require the most investment.

The importance of acquiring technology from external sources is clearly recognized. Firms cannot access knowledge from outside sources passively; importing technology requires enormous effort (Leonard–Barton, 1995). One can conclude therefore, that the ability of a firm to acquire external knowledge will vary depending on the resources allocated for this process. Firms that are proactive in collecting external information will experience a greater positive effect of external knowledge on research productivity than firms that are not (Daft et. al., 1988).

This gives rise to the following hypothesis:

Hypothesis 1: The success of a firm’s research and development efforts will be positively correlated with firm external knowledge acquisition activities.

Information can be obtained from a wide variety of sources, using a variety of media and the generation of external information is not the sole function of any one department, which suggests that firms should scan frequently and broadly. However, there is some indication that the most important areas of knowledge generation are competitors and customers. Consequently, Hypothesis 1 can be expanded as follows:

Hypothesis 1a: The success of a firm’s research and development efforts will be positively correlated with firm external knowledge acquisition activities focused on competitor research and development efforts.

Hypothesis 1b: The success of a firm’s research and development efforts will be positively correlated with firm external knowledge acquisition activities focused on customer needs.

Intra–Firm Knowledge Dissemination

The second element of absorptive capacity, knowledge dissemination involves the communication of the generated knowledge to all relevant departments and individuals concerned with new product development. Just as successful generation of knowledge requires the participation of many organization departments, successful dissemination requires significant information flows to ensure that the information reaches the research personnel. The organization must be structured so that both formal and informal networks use is maximized in order to transfer information.

With regard specifically to innovation and product development, communication between the R&D, marketing, and manufacturing departments has been identified as the key junction (Moenaert and Souder, 1990; Rochford and Rudelius, 1992). The original thesis was that R&D and marketing personnel depend on each other for the creation of new product innovations. R&D cannot design products that fit customer requirements unless it has (and attends to) information about customer needs. In most organizations this knowledge resides within, or is most easily obtained by, the marketing department. More recently, the interface between manufacturing and R&D has been identified as critically important because of manufacturing’s role in determining how easily the new product can be developed. The ease of manufacturing has implications for both the quality and price of the product (Rochford and Rudelius, 1992). Increased knowledge dissemination between these departments will increase the flow of external research information from those department gathering the information to the individuals who need it. This leads to the following hypothesis:

Hypothesis 2: The impact of external knowledge on the success of firm research and development efforts will be positively correlated with intra–firm knowledge dissemination between the marketing, manufacturing, and R&D departments.

Firm Technical Capabilities

The final element of absorptive capacity, technical capability, reflects the technical knowledge that currently resides within the firm which is most likely a function of prior firm research and development (Pakes and Griliches, 1984). The greater the technical capability, the greater the ability the organization has to understand and assimilate the external knowledge. This view is consistent with that of Cooper (1984) who contends that truly successful product innovators ensure the interplay and balance between inputs from the market and the technical skill base of the firm. Organizations that have higher technical capabilities will realize greater benefits from external knowledge than organizations with lower technical abilities. Therefore,

Hypothesis 3: The impact of external knowledge on the success of firm research and development efforts will be positively correlated with firm technical capabilities.

Moderating Factors 

The impact of external knowledge of external knowledge on research productivity is liable to be moderated by a number of factors, including, industry dynamism and firm size. In dynamic industries organization knowledge will quickly become outdated and knowledge from external sources may be critical to enhance the productivity of internal research expenditures.

Firm size has a number of implications for the importance of external knowledge on research productivity. External knowledge offers potential for small firms whose internal knowledge base may be small. However, gathering external knowledge requires the commitment of resources which small firms may not be able to expend. Due to resource constraints it is likely that small firms will periodically tap external sources of technology, following a punctuated equilibrium model. Which ever effect is dominant, it is important to investigate the effect of organization size on the relationship between absorptive capacity and research productivity.

1The relationship between R&D expenditures and technical knowledge is often made in the economics literature, see Pakes and Griliches (1984) for an explanation of this relationship.

2Huber (1991) used information instead of knowledge. I am treating these terms as synonymous.

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