Tag: absorptive capacity

Strengthening the absorptive capacity of your organisation

This post is about the concept of absorptive capacity. When you are trying to improve a company, an industry, or promote innovation and learning in a region, this concept is very important. It is often poorly understood. My clients in the education sector always relate absorptive capacity to education levels. While this is true, it is only a part of the story. Business people, on the other hand, tend to focus their innovation efforts on product and process improvements, and they generally tend to not think much about their organisations absorptive capacity, nor do they think about how the environment beyond their enterprise affect their absorptive capacity.

Let me begin by unpacking absorptive capacity. My favorite recent definition is provided by UNCTAD (2014:23), where they define absorptive capacity as:

“The ability to recognize the potential value of new or novel knowledge and technology, and to transfer and assimilate it with the objective of bringing to market a product or a service. It determines if and to what extent a firm, an industry or, indeed, an economy, can use existing and new knowledge to compete”

Some researchers think of absorptive capacity as a completely distinct concept from innovation systems, but I do not agree with this. In our view technological capability (as captured by the description of the innovation system) describes the overall system dynamics: in essence at an aggregate level where it creates an ecology, whereas absorptive capacity describes the capability of individuals and smaller teams (such as a management team) within this ecology to identify knowledge gaps or new uses of knowledge, and to identify and access external knowledge and then combine it with existing knowledge. It is very hard to imagine what a dynamic innovation system would look like if it did not have strong absorptive capability at the levels of individuals, teams, organisations and networks.

This argument is based on the seminal work of Cohen and Levinthal (1990)who argued that:

  • Firms invest in basic research less for particular results than to be able to provide themselves with the general background knowledge to enable them to rapidly apply scientific and technological knowledge through their own innovations, or to respond quickly when competitors come up with a major advance. Thus firms do research to increase their knowledge base and learning which enables them to innovate when they need to.
  • The relationship between the absorptive capacity of firms and the broader technological capability present in the environment causes firms to be highly sensitive to the context within which they operate. This larger context not only provides inspirational ideas, but the implementation of the ideas depends on resources from this larger context, such as technical experts or specialists, professional, management and vocational skills, and even standards and financial or regulatory systems.

Cohen and Levinthal (1990) contend that the absorptive capacity of firms is more likely to be developed and maintained as a by-product of routine activity when the knowledge domain the firm wishes to exploit is closely related to its current knowledge base. This is different when a firm wishes to acquire and use knowledge that is more distant from its ongoing activity. The firm must then dedicate effort and resources to create absorptive capacity. It is hard to imagine how this can be done without reaching out to networks of institutions, skilled and professional employees, and networks of suppliers who are all striving to increase their relevant knowledge.

Hidalgo (2015) explains that with the increasing sophistication of technology, the ability of organisations to have all the relevant knowledge in-house is diminishing. Therefore knowledge is being increasingly spread among larger numbers of actors, who need to work together dynamically to produce and transact. Knowledge tends to flow more easily where there is a certain density of diverse actors. I have written about this often on my thinking out loud site.

This means that absorptive capacity is a dynamic capability that influences the nature and sustainability of a firm’s competitive advantage. As a side remark to policy makers, it means that incentivising R & D and then measuring patents is again only capturing half of the story. Most of the “R & D” that companies undertake are about deepening understanding, mastering variation and performance, and learning about boundaries, failure and so on.

Absorptive capacity is about knowledge and the ability to gain more knowledge, often through a process of iterative learning. Some years ago I wrote that  that this knowledge may be acquired in two different ways (Cunningham, 2012):

  1. In a solitary way where knowledge is gained through experimentation(as an individual or as part of a team) without much communication or interaction with other external actors, or through a process of deductive reasoning.Or it may involve a combination of tinkering and deduction (often referred to as deductive tinkering).
  2. By purposeful interaction with other external agents involving personal or non-personal communication with other people, specialists and knowledge sources.

The first point is mainly about absorptive capacity of the organisation or individuals. However, the second is a combination of absorptive capacity of the team, and the broader environment in which the organisation can reach out to other experts beyond its own boundaries. I argue that a large part of the knowledge a firm need is available internally, namely the knowledge of its engineers, managers, technicians and other employees.Their knowledge is partially acquired externally through previous formal training, and partially through a cumulative process of learning-by-doing. This internal knowledge, which is available at any given time, is the main innovation resource of a firm.  It is often highly tacit, which explains why firms of a particular type cluster together in regions. However, not all firms are able to tap into this internal asset, mainly because many are managed in a way that does not allow them to reflect on their own patterns of behaviour or the trends affecting their performance. When the day-to-day emphasis is on survival or routines, a tendency to under-invest in purposeful innovation activities may occur. This behaviour not only undermines the development of the internal knowledge base, but will also lead to underdevelopment of external networks that could lead to exchange or transactions with other knowledge sources.

Learning from others is only possible if the costs of interaction with peers and other organisations are low enough or if the density of networks makes this possible. One of my favourite innovation system gurus Malerba (2005:387) states that:

“knowledge is highly idiosyncratic at the firm level, does not diffuse automatically and freely among firms, and has to be absorbed by firms through their differential abilities accumulated over time.”

This accumulation often emerges through an iterative cycle combining deduction, experimentation, application, reflection, learning and adaptation between people working on the same problems, ideas or opportunities.

The implication is that in economic development we should focus on those firms, organisations and sectors that are able to innovate, and find ways to accelerate their learning journey. These are the companies that are already absorbing new ideas from their environment and beyond, and they are actively trying them out, experimenting, following or playing with ideas. They are usually not so hard to find, as they are curious about new ideas. At the same time, we must build bridges (or reduce the costs) for the rest of the economy so that future entrants and laggards can upgrade and step up and be more innovative and efficient than the incumbents, as the incumbents may also become complacent in future if new competitors do not challenge them.

For my business clients, it means that leaders must be sensitive to what their teams are learning about, and what can be done to encourage learning in the three ways I outlined earlier. I have developed a simple workshop format that I use with my coaching clients and students to asses which factors are hampering absorption and learning, and which factors are encouraging absorption.

Image credit: Images drawn by Lina Stoeckler during our annual Mesopartner Summer Academy where I usually teach on improving absorptive capacity.

Sources

COHEN, D. & LEVINTHAL, D. 1990.  Absorptive capacity: a new perspective on learning and innovation. Administrative Science Quarterly,Vol. 35(1) Pp. 128-152.

CUNNINGHAM, S. 2012. The fundamentals of innovation system promotion for development practitioners. Leveraging a bottom up understanding for better systemic interventions in innovation systems.Pretoria: Mesopartner.

HIDALGO, C.S.A. 2015. Why Information Grows: the Evolution of Order, from Atoms to Economies. New York: Basic Books.

MALERBA, F. 2005. Sectoral Systems. How and why innovation differs across sectors. In The Oxford handbook of innovation.Fagerberg, J., Mowery, D.C. & Nelson, R.R. (Eds.), Oxford ; New York: Oxford University Press.

UNCTAD. 2014. Transfer of technology and knowledge-sharing for development: Science, technology and innovation issues for developing countries. UNCTAD Current Studies on Science, Technology and Innovation. UNCTAD/DTL/STICT/2013/8: UNCTAD.   http://unctad.org/en/PublicationsLibrary/dtlstict2013d8_en.pdf

The difference between invention and innovation

This post is copied from a chapter in a book that I am working on about the fundamentals of innovation systems. I am responsible for the thematic area of innovation systems within the knowledge consultancy mesopartner that I am a partner of. If you want to stay abreast of the work I am doing on this topic then I urge you to subscribe to my blogsite so that you can receive an e-mail every time I add some content (click on the sign me up button on the top right).

We often find that development practitioners, business people and policy makers are not clear about the distinctions between innovation and invention.

A widely accepted distinction between invention and innovation is provided by Fagerberg et al. (2005:4). According to Fagerberg et al., invention is the first occurrence of an idea for a new product or process (first to the world), while innovation is the first attempt to carry it out in practice within a specific context (by, for instance, introducing a machine from another country into a local manufacturing process). Thus invention and innovation could be closely linked, although in most cases they are separated in time (sometimes decades or centuries), place and organisation. However, the fact that innovation typically emerges within a complex system is often overlooked. For instance, as Schumpeter (1964/1911) explained, the innovator who invented the steam engine still had to wait for others to develop the different aspects of the rail system before it could be commercially viable. The steam engine was initially invented in a completely different context, again illustrating how inventions are dependent on the context in which they arise.

While many innovations can be linked to well-funded research programmes, funding is not a pre-condition for innovation. In fact, in many cases a lack of resources could stimulate people to innovate. Firms usually innovate because they believe there is a commercial benefit to the effort and costs involved in innovating. This commercial benefit could be measured in terms of return on investment or profits, but it could also be about cost saving, resource optimisation, solving a recurring problem or responding to the demands of a customer. Often increased competition, changes in market structure or market demand, or changes in technological performance also affect the innovation process. However, innovation requires taking or at least managing risks. Therefore, firms with low capital or with tied up resources are less likely to innovate.

To turn an invention into an innovation, a firm typically needs to combine several different types of knowledge, capabilities, skills and resources from within the organisation and the external environment (Schumpeter, 1964/1911). The interaction between knowledge and learning will be discussed in more detail in the next section.

The willingness of an individual to tinker and explore better solutions is influenced in part by the organisational context of the innovator, but also by factors such as education, qualifications, meta-level factors such as culture, personal characteristics (such as patience, inquisitiveness or tolerance of failure) and the institutional environment. Other factors such as competitive pressure, problem pressure, or social and economic incentives also play a role. Locations with a more diverse economic and social make-up are more likely to be conducive to innovation, as actors interact with people with similar and different interests. The proximity of other actors and the density of interactions make imitation, cross-pollination of ideas, learning from others and the combination of different ideas into new products and services more viable (and less expensive). This feature could explain why urban areas are often hotbeds of innovation – there are more people with different ideas and perspectives that stimulates and often absorbs new innovations.

Why does this matter? Well, many countries (including South Africa) over emphasize “invention” (even when they say “innovation”). Many financial incentives, loans and support programmes prioritize novelty as opposed to absorption. Absorption is important for innovation, as it indicates how ready firms, industries or societies are to not only learn from their own mistakes (and success), but to also learn from the mistakes and the success of others.

Therefore innovation stimulation is about getting our developing countries ready and willing to absorb insights and ideas from others, as much as it is about getting our entrepreneurs to be creative.

As someone famous once said: “why re-invent the wheel?”. With our small budgets we are highly unlikely to out-invent our international peers on many of the topics that are now seen as “sexy” like climate technology etc.

Our priority should remain to get our entrepreneurs and enterprises to be innovative at product, process and business model level. Only once we improve our absorptive capacity will we be able to become inventive.

Sources:

FAGERBERG, J., MOWERY, D.C. & NELSON, R.R. 2005.  The Oxford handbook of innovation. Oxford ; New York: Oxford University Press.

SCHUMPETER, J. 1964/1911.  Theorie der wirtschaftlichen Entwicklung. Eine Untersuchung über Unternehmergewinn, Kapital, Kredit, Zins und den Konjunkturzyklus. Berlin: Duncker und Humblot.