Absorptive Capacity

Conceptual Overview

The creation and transfer of knowledge within an organization has increasingly become a critical factor in that organization's success and competitiveness. Studies done in various organizations found that the two main knowledge activities that need to be balanced are the creation of knowledge and the transferring of knowledge across time and space. Many organizations are now concentrating their efforts on how knowledge can be transferred throughout the organization.

Increasingly important in the global organizations, such as the World Bank, attention has been given to the means by which knowledge is transferred to developing countries. This is seen to be particularly important in the development domain where knowledge is a large, critical, and changing component of policy-making processes.

Knowledge transfer is now considered a facilitator, and hence a necessary process, in the context of economic reform and adjustment for developing countries. Its major contribution is that it allows developing governments to access knowledge that is otherwise outside their reach. However, there are costs associated with knowledge transfer, possibly lowering the extent of efficient knowledge transfer. The costs of knowledge transfer between expert organization and recipient countries are little explored by researchers, as Szulanski noted in [Page 2]1996. Thus, keeping the transfer costs down must be in the interest of both expert organizations and recipient countries. Cost determinants may arise in the institutional arrangement, which refers to the institutional framework of the agents' interaction (in this case the interaction between government and an international development organization), and in the institutional environment, that is, contextual characteristics under which the knowledge transfer process takes place.

Moreover, Carayannis and colleagues in 2002 showed empirically, through longitudinal, time-series-data-based analysis, that there can be too little as well as too much technological learning taking place in firms. This is directly related to their intrinsic absorptive capacity in that learning activities may initially improve performance, but that there is some limit to a firm's absorptive capacity for learning. Larger increments of technological learning begin to depress performance, until a new critical point is reached and performance again improves. This suggests the presence of an optimal learning absorption bandwidth for each firm, where learning activities should not exceed the absorptive capacity of the firm but also must be sufficient to sustain improved performance.

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