Measuring Absorptive Capacity Stephanie Schmidt Freie Universit��t Berlin, Germany s.schmidt@fu-berlin.de Abstract: The concept of absorptive capacity was introduced by Cohen and Levinthal in 1989. Since then it has been enhanced through reconceptualizations and extended by various empirical studies. Despite the growing interest in absorptive capacity it is unclear what this large stream of papers has collectively accomplished. The used definitions, antecedents, components and outcomes of the construct are extremely heterogeneous. Due to this heterogeneity, the empirical study of the construct remains difficult. There is no standard measure and no standard method of measurement, which can be used in empirical research. To bring more clarity into this research area, this paper provides a critical review of previous empirical treatments of absorptive capacity. For this purpose, different methods of measurement are classified in the following way: within quantitative methods proxy indicators and perceptive instruments are differentiated. Proxy indicators use single firm-level data for measuring absorptive capacity and can be input-oriented (R&D efforts, R&D human capital) or output-oriented (R&D patents, R&D publications). Perceptive instruments imply that researchers develop single questions or a set of questions, which reflect absorptive capacity or parts of it at the operational level. The main weakness of both proxy indicators and perceptive instruments is that they don���t meet the complexity and emergence of the construct. Only few qualitative studies have started to adopt a new perspective, recognizing the process and practice-based character of absorptive capacity. In summary, the critical review prints out the necessity of advancing research in this area. For this reason, we set out to develop an alternative approach to capture absorptive capacity. It is a practice-oriented approach that allows studying actual absorptive practices in real world situations and enables researchers to capture the complex, embedded, and context-dependent patterns of acting. Keywords: Absorptive capacity, capabilities, routines, practices, measuring 1. Theoretical background Studies based on the resource-based view of the firm have suggested possessing unique capabilities may be an important source of sustainable competitive advantage (Wernerfelt 1984 Barney 1986). One particular capability critical to innovation and performance is a firm���s absorptive capacity. With regard to this insight, it is no surprise that a large number and broad range of papers use this construct in different areas of research. Despite the growing interest in absorptive capacity it is unclear what this large stream of papers has collectively accomplished. The used definitions, components, antecedents, and outcomes of absorptive capacity are extremely heterogeneous. In this article we use a combination or rather a modification of previous definitions of the construct. Firstly, we adopt the assumption of Zahra and George (2002) that absorptive capacity is a capability to address rapidly changing environments. It is a higher order competence that consists of different individual capabilities building on each other to yield absorptive capacity and give the firm a foundation on which to achieve a competitive advantage. Secondly, and similarly to Cohen and Levinthal (1990) and Todorova and Durisin (2007), we assume three major components of absorptive capacity: external knowledge acquisition, intra-firm knowledge assimilation and/or transformation, and knowledge exploitation. The first defines the firm���s capability to recognize the value of new knowledge and access it, the second implies a firm���s capability to disseminate, assimilate and transform the new knowledge within the organization, and the third defines the capability to implement and use the knowledge. For measuring absorptive capacity it is important to define these capabilities in more detail. The capabilities of absorptive capacity can be seen as process capabilities (Kusunoki et al. 1998), because they emerge from within the process of knowledge interaction. In comparison with ���local capabilities��� and ���architectural capabilities��� in the sense of organizational structure and strategy, ���process capabilities��� are more complex and deeply embedded in idiosyncratic social context. Some authors refer to the concept of routines as the building blocks of organizational capabilities (Dosi et al. 2000 Nelson and Winter 1982). Routines are socially constructed and collective recurrent programs of action, which are outcome of complex evolutionary processes (Nelson and Winter 1982). They are the basic components of organizational behaviour, and the repository of organizational capabilities (Cyert and March 1963 Nelson and Winter 1982). Consequently, firms can be seen as entities that possess heterogeneous absorptive capabilities as a function of their routines. 254

Stephanie Schmidt 2. Previous empirical research Employing the concept of absorptive capacity (ACAP) in empirical research has turned out to be somewhat difficult (Becker and Peters 2000). The available methods are heterogeneous and inconsistent. There is no standard measure, especially since different definitions have often led to different operationalizations. In this section, we will discuss how the construct of absorptive capacity was measured in previous empirical research. For this purpose existing measures are classified as reported in Table 1. Within quantitative measures proxy indicators and perceptive instruments are distinguished. While the first one uses single firm-level data for measuring absorptive capacity, the second one develops special questions representing absorptive capacity. A second part concentrates on some qualitative studies measuring absorptive capacity. Table 1: Methods of measuring absorptive capacity Classification What is measured? Examples Methods of Measurement Quantitative Methods Proxy Indicators Input-oriented R&D efforts R&D expenditure (Rocha 1999), R&D intensity (Stock et al. 2001), existence of a R&D human capital Percentage of R&D personnel with a doctorate degree (Veugelers 1997), R&D Output-oriented R&D patents and publications Number of publications (Cockburn and Henderson 1998), number of patents (George Perceptive Instruments One- dimensional ACAP at the operational level Szulanski (1996) designed questions to capture the ability to value, assimilate, and Multidimensional Multiple components of ACAP Jansen et al. (2005) developed multiple items for every component of ACAP according to Single Components Single components of ACAP Nieto and Quevedo (2005) designed questions that refer to the links between the Qualitative Methods Case Studies One Case ACAP, influencing factors and outcomes Kim (1998) studied the influence of proactively constructed crises on ACAP. Jones and Craven (2001) studied the influence of coordination capabilities on Jones (2006) studied the influence of individual agency on ACAP. Multiple Cases ACAP, influencing factors and outcomes Van den Bosch et al. (1999) studied the influence of organizational forms and Easterby-Smith et al. (2008) observed specific stories and events to illustrate the processes 2.1 Quantitative measures 2.1.1 Input-oriented proxy indicators R&D efforts Cohen and Levinthal (1990) were the first who measured absorptive capacity. They argued that while R&D obviously generates innovations, it also develops the firm���s ability to identify, assimilate, and exploit knowledge from the environment. Thus they used R&D intensity as proxy for absorptive capacity. To date, using R&D expenditures (Rocha 1999) or R&D intensity (Stock et al. 2001, Rocha 1999) is still the most popular way to measure absorptive capacity. It is argued that higher levels of R&D investments automatically improve a firm���s ability to exploit sources of knowledge outside its boundaries. There are even empirical tests that confirm and support the argument (Gambardella 1992 Mowery et al. 1996). Other studies go beyond the financial view of R&D and use proxy indicators as the existence of a formalized R&D department (Becker and Peters 2000, Veugelers 1997), a fully staffed R&D department or the number of R&D departments engaged in fundamental research (Veugelers 1997). The authors argue that the existence of R&D departments is attended by a higher knowledge base of the firm. Since the absorptive capacity relies on the existing knowledge base of the firm (Cohen and Levinthal 1990), the firm���s expertise for in-house development has a considerable positive effect on its capability to assimilate and convert external knowledge into new products, processes or services. Research also shows that firms, which conduct their own R&D, are better able to use externally available information (e.g., Allen 1977, Mowery 1981). 255