1. Reading III-6Absorptive Capacity: A New Perspective on Learning and Innovation Wesley M. Cohen Daniel Levinthal

2. Outline • Introduction • Organizational Absorptive Capacity • Path Dependence • Models • Research and Development • Technical Knowledge • Hypothesis • Testing Methods • Results • Implications for Innovation • Conclusion • Likes/Dislikes

3. Introduction • Most innovations result from borrowing • Absorptive capacity: • The ability of a firm to recognize the value of new external information, assimilate it and exploit it for commercial ends. • Absorptive capacity is a byproduct of • R&D investment • Manufacturing operations • Technical training

4. Introduction – Cognitive Structures • Research suggests: • Accumulated prior knowledge increases the ability to acquire and recall new knowledge • Learning in one task may influence and improve the learning of another task • A diverse background provides a more robust basis for learning • Learning capability (i.e. absorptive capacity): • The capacity to assimilate existing knowledge • Problem solving (i.e. creative capacity): • The capacity to create new knowledge • Cognitively, these processes are very similar=> Absorptive capacity and creative capacity (i.e. innovation) are linked.

5. Organizational Absorptive Capacity • An organization's absorptive capacity depends on: • The capacities of its individual members • The ability to communicate across external boundaries and between internal groups or sub-units • “Gatekeepers” help monitor the environment and transfer information • There is a trade-off between inward-looking and outward-looking absorptive capacities. • Too much inward-looking can lead to NIH syndrome • Awareness of complementary expertise (who knows what) is also vitally important.

6. Path Dependences • Accumulating absorptive capacity in one period will permit its more efficient accumulation in the next • The possession of related expertise permits a firm to better evaluate the import of intermediate technologies i.e. expectation formation • Lockout: • When a firm ceases investing in its absorptive capacity in a quickly evolving field, it may never assimilate and exploit new information in that field, regardless of the information’s value

7. Absorptive Capacity- R&D Spending • R&D contributes to a firm’s absorptive capacity • Determinants of R&D intensity • Demand • Appropriability • Technological opportunity

8. Model- R&D Incentives • Absorptive capacity will have a mediating effect on the determinants

9. Model- Sources of Technical Knowledge • Key= must have absorptive capacity from your firm’s own R&D in order to use spillover

10. Hypotheses • Ease of Learning- absorptive capacity will have greater impact in more difficult learning environments • Competitors are less able to tap into spillover • R&D becomes more of a private good because it is not readily usable by other firms • Technological Opportunity- more available information will elicit more R&D • Appropriability- Spillovers provide more incentive to conduct R&D