Absorptive and Transformative Capacity in Technology Innovation

The emergence of radically new technology typically creates radical differences in performance among competing firms. Research has shown that incumbent firms experience a decline in their performance when competing against firms building their knowledge base around an emergent technology. Reasons identified range from: firms being locked in to customer expectations that prevent them reacting to disruptive technology; demand conditions; an inability to reconfigure the knowledge base due to inertia; managerial cognition unable to understand new technology; and a mix of economic, organisational and strategic factors. Despite a consensus that incumbent firms find it difficult to compete in emergent technology environments, they can constructively respond, for example where an incumbents’ performance improves if the complementary assets needed to commercialise the new technology are highly specialised. In such a context, incumbent firms are able to exploit technology developments from new and innovative firms for example those where large pharmaceutical and smaller bio-tech firms collaborate. This co-existence is important because it shifts the research focus away from the incumbent competing with new entrants to an awareness of cooperation and collaboration within particular innovation systems.

Research has also highlighted the potential benefits of establishing collaborative multi-firm networks in which knowledge easily flows and members of the network strive to continuously innovate. Networked links to ‘outside’ knowledge lends a sense of identity and substance to productive activities. In creating such productive co-existence, however, firms need to recognise the tendency of networks themselves to develop myopia and inertia if relations are too formal.

Studies of emergent technology networks highlight the importance of the notion of absorptive capacity in knowledge flows. Absorptive capacity is the organisational capability to recognise, value and assimilate external knowledge in order to increase firm innovativeness. Studies adopting the notion of absorptive capacity link firms’ innovative capability to use of external knowledge sources as sources for new ideas; finding partners in new technology ventures; or the creation of new products. Such firms scan the environment and then filter and judge novel technologies so as to guide future action. From this demand side perspective, the suppliers of knowledge are viewed as static owners of relevant knowledge awaiting discovery by active searchers in possession of adequate absorptive capacity. Network studies suggest, however, that suppliers of knowledge are not so mute, nor the dispersed knowledge so easily recognised and readily integrated. This is especially so in emergent technology environments where many firms lack the in-house knowledge and established routines necessary for absorptive capacity because of a lack of both prior experience and a suitably entrepreneurial orientation to knowledge.

Absorptive capacity is therefore not solely responsible for knowledge flows among actors in a technology innovation system. In addition to firms, other actors such as universities behave actively in attracting industrial partners and overcoming scepticism in customer perceptions by helping to broadcast potential applications. This catalysing role also holds true for highly innovative small firms acting as suppliers in markets for technology. Here the actors, such as universities and smaller technology-driven firms, who have established an identity based on their expertise in aspects of an emergent technology, have a smaller need for absorptive capacity than transformative capacity. Where absorptive capacity is concerned with exogenous technological change, transformative capacity describes the capability to constantly redefine a portfolio of product or service opportunities based on knowledge endogenous to the firm. There is also a significant difference between having a pool of knowledge that is potentially available for other applications and actually being capable of using internal knowledge for novel and unanticipated applications. In such cases, novel applications ultimately trigger novel progressions of knowledge, whilst making the most of existing knowledge. In the context of emergent technology, a major challenge exists in transforming endogenous knowledge into applications across a myriad of industry contexts.

So within emergent technology innovation systems, knowledge flows through the mechanisms of demand-driven absorptive capacity and supply-driven transformative capacity. Different contributors are differently endowed with these organisational capabilities and, consequently, a network is rarely complete. It contains missing links in the knowledge flows. This creates a need for knowledge brokers in the form of intermediate agencies whose role is bridge the holes between the industries, firms and universities. These could be fully independent or agencies within larger organisations such as universities.

Within emergent technologies, knowledge is heavily dispersed and the nature of the technology is such that potential applications and associated problems appear limitless. There is potential for different innovation system forms to operate depending on specific situations. In such an environment it is envisaged there could potentially be many more actors involved and these may include shareholders, venture capitalists, patent lawyers and government regulators.

Reference
K. Pandza, R. Holt, Absorptive and transformative capacities in nanotechnology innovation systems, 2007, J. Eng. Technol. Manage. 24 (2007) 347–365


Dr Simon Wilkins, University of Leeds (May 2008)