Absorptive Capacity: A New Perspective on Learning and Innovation.

Discusses the notion that the ability to exploit external knowledge is crucial to a firm's innovative capabilities. In addition, it is argued that the ability to evaluate and use outside knowledge is largely a function of the level of prior related knowledge--i.e., absorptive capacity. Prior research has shown that firms that conduct their own research and development (R&D) are better able to use information from external sources. Therefore, it is possible that the absorptive capacity of a firm is created as a byproduct of the firm's R&D investment. A simple model of firm R&D intensity is constructed in a broader context of what applied economists call the three classes of industry-level determinants of R&D intensity: demand, appropriability, and technological opportunity conditions. Several predictions are made, including the notions that absorptive capacity does have a direct effect on R&D spending and spillovers will provide a positive incentive to conduct R&D. All hypotheses are tested using cross-sectional survey data on technological opportunity and appropriability conditions--collected over the period 1975 to 1977 for 1,719 business units--in the American manufacturing sector from Levin et al. (1983, 1987) and the Federal Trade Commission's Line of Business Program data on business unit sales, transfers, and R&D expenditures. Results confirm that firms are sensitive to the characteristics of the learning environment in which they operate and that absorptive capacity does appear to be a part of a firm's decisions regarding resource allocation for innovative activity. Results also suggest that, although the analysis showing a positive effect of spillovers in two industry groups do not represent a direct test of the model, positive absorption incentive associated with spillovers may be sufficiently strong in some cases to more than offset the negative appropribility incentive. (SFL)