The Effects of Absorptive Capacity on Innovation Performance: A Cross-country Perspective*

Abstract

This article has two objectives: the construction of enterprise-level estimates of absorptive capacity to allow comparison of absorptive capacity levels across Europe and the analysis of whether the effects of absorptive capacity on R&D and innovation vary across countries. The dataset is the Community Innovation Survey, which provides information on the innovation activities of enterprises in Europe. The estimates of absorptive capacity are generated using a structural equation model that considers absorptive capacity to be a latent variable that predicts the use of information sources and cooperation partners for innovation activities. The effects of absorptive capacity are estimated econometrically using probit models. The results show that absorptive capacity levels vary substantially across European countries, with western European enterprises (particularly those in Germany) generally having higher absorptive capacity than eastern European enterprises (especially Romanian enterprises). The effects of absorptive capacity on R&D and innovation are uniformly positive but also demonstrate substantial heterogeneity across countries. This has important implications for policy as it suggests that not only should government aim to enhance absorptive capacity levels but it should also attempt to enhance the value of external knowledge available for enterprises to exploit.