The objective of this research is to obtain a better understanding of the possibilities and impossibilities that Small to Medium Enterprises (SMEs) in the Dutch IT-services industry face when trying to implement open innovation. A lack of absorptive capacity is presented as a potential barrier for these SMEs to implement open innovation successfully. Firms increasingly build innovation capacity by tapping into external knowledge sources (Chesbrough, 2003; Laursen and Salter, 2006). At the same time, it is widely accepted that critical knowledge is not always easily available through external sources (Argote, 1999), which fosters a need for creating knowledge internally (Nonaka, 1994). However, with respect to both modes of knowledge sourcing, the capacity to absorb knowledge has become crucial (volberda, et. al., 2009). To achieve a better understanding, first let's focus on some of the theories that have shaped this research.
KNOWLEDGEBASED VIEW:
The knowledge based view claims that knowledge is the most important strategic resource that a firm has at its disposal. Its supporters argue that because knowledge based resources are often difficult to imitate and acquire, having a heterogeneous knowledge base is a major determinant of gaining a sustainable competitive advantage. The assumption is that firms should be seen as heterogeneous bundles of largely tacit knowledge assets; firms engage in a specialization process based on cognitive constraints (Gentile-Lüdecke and Giroud 2009). This view is supported by Grant (2006) who states that "Knowledge is the most strategically important among a firm's resources". This is further supported by the statement that the competitive advantage of the firms cannot be uniquely attributed to internal resources but also depends on resources and capabilities externally acquired (Squire, Cousins, and Brown 2008).
This knowledge is embedded and carried through multiple entities including organizational culture and identity, policies, routines, documents, systems, and employees. Originating from the strategic management literature, this perspective builds upon and extends the resource-based view of the firm initially promoted by Penrose (1959) and later expanded by others (Wernerfelt 1984, Barney 1991, Conner 1991).
The use of externally acquired knowledge can lead to competitive advantages and enhanced innovative performance (Gentile-Lüdecke and Giroud 2009).Therefore, organizations that seek to enhance their knowledge base acquire knowledge from external entities. This does however present some difficulties, as Spender (1996) states; "Firm-specific, intangible, non-tradable, and inimitable knowledge is the only durable source of sustainable competitive advantage of the firm", it is at the very least difficult, to trade and exchange knowledge between firms and/or stakeholders.
One of the models that attempts to achieve this, is the Open Innovation (OI) model. To get a better understanding of open innovation, first we take a look at the closed innovation model, also known as traditional innovation.
Closed or traditional innovation:
Traditionally, firms have relied on vertical integration where internal R&D activities lead to internally developed new products and services that are then distributed by the firm (Chesbrough et al., 2006). In this so-called 'closed innovation model' firms hired the best researchers and engineers for the technology involved (Dittrich & Duysters, 2007), and thus, innovation primarily took place within the firm. In addition, this innovation model argues that successful innovation requires control and ownership of the intellectual property (Chesbrough, 2003b), and therefore, firms should control the creation and management of new ideas by themselves.
For most of the 20th century, the closed innovation model worked well. Firms invested more heavily in internal research & development than their competitors and they hired the best researchers and engineers (Chesbrough, 2003c). Due to these investments they were able to discover the best and greatest number of ideas, which allowed them to get to the market first (Chesbrough, 2003c).
In addition, firms, such as General Electric, established central research labs to identify and commercialize a variety of new products and/or services (Chesbrough, 2003c). Thus, they could reap most of the profits, which they protected by aggressively controlling their IP in order to prevent competitors from exploiting it (Chesbrough, 2003c). Furthermore, they could reinvest profits in carrying out more R&D, which then led to additional breakthrough discoveries, creating a virtuous cycle of innovation (Chesbrough, 2003c).
The term innovation has become a popular term in business and is so widely used its meaning has become somewhat blurred (Skarzynski & Gibson, 2008). Therefore, first a distinction must be made between innovation and invention. Where invention is the first appearance of an idea for a new product, process, etc. The innovation is the first attempt to put the invention into practise (Fagerberg et al, 2004.), or as Hauschildt and Salomo (2011) describe it "solely originating an idea is not sufficient, rather the commercialization of the innovation makes the final and decisive contribution towards an innovation". Innovation is not a single action but a process which composed of sub-processes (Myers and Marquis, 1969). In order to successfully implement an innovation it therefore becomes necessary for the firm to have a large number of skills such as product and production knowledge, market research, human and financial resources and so on. This already creates a pivotal role for the concept of absorptive capacity, a role which is further multiplied in the open innovation model as we will describe later.
Myers and Marquis (1969) state that innovation is a continous process, it is therefore tempting to view innovation as not only continous, but also as liniear with research followed development, then production followed by marketing. This liniear model is however inaccurate (Kline and Rosenberg, 1986) as it does not take into account the feedback and failures that occur during any innovation proces resulting in a number of loops in the process. Chesbrough (2003) gives the model below as a representation for the closed innovation model and pictures it as a liniear, continous process. When viewing this model we must keep in mind the failures, feedback and resulting loops as described by Kline and Rosenberg (1986).
Source: Chesbrough (2003)
The closed innovation process firmly sets the boundaries of the firm, allowing for little to no external knowledge or actors to have an impact on the innovation process.
Open Innovation (OI):
"Not all the smart people are working for us" (Chesbrough, 2003), with this famous quote the spiritual father of the open innovation model sums up the core of the reason why open innovation can be more successful than the traditional innovation model. Further motivation for the use of the open innovation model can be found in the increased uncertainty that firms face and the rapid speed of technological change (Vinding, 2000). The model of open innovation promises a greater return on innovative activities and their intellectual property (IP) by loosening control over both (West, 2006). The open innovation paradigm is often contrasted to the traditional vertical integration or "proprietary" model where internal R&D activities lead to products that are developed and distributed by the firm (Chandler, A.D., 1990). In Open Innovation firms commercialize external (as well as internal) ideas by deploying outside (as well as in-house) pathways to the market (Chesbrough, H.W., 2003).
Source: Chesbrough (2003)
Open innovation in risk laden activities such as corporate venturing has the following advantages: (i) benefits from early involvement in new technologies or business opportunities; (ii) delayed financial commitment; (iii) early exits reducing the downward losses; and (iv) delayed exit in case it spins off a venture (Van Haverbeke, W. et al, 2008). Depending on its business model, a firm decides whether or not external and internal knowledge is valuable to be further developed and commercialized into a new business. When the venture project is expected not to be profitable enough or when it does not fit a firm's business model, the firm will not simply abort the project (as in the closed innovation framework), but it will try to license or to sell it to other firms who can use the innovation productively because they have different business models (Van Haverbeke, W. et al, 2008).
Open innovation offers firms the advantage of an early exit, and the ability to realize some value from projects that do not go forward internally. At the same time, open innovation allows firms to benefit from delaying an exit. The creation of corporate ventures that reside outside the organization allows firms to monitor its developments while delaying the exit decision (Van Haverbeke, W. et al, 2008). The possibility of realizing value from a project that will not be completed means that the negative consequences of an exit are reduced and therefore allows for increased investment in risky innovations.
However open innovation is not without its risks. There is for instance the risk of appropriating the mistakes that the supplier of your open innovation has made. This can even include the use of patented IP resulting in lawsuits. A prime example of this is exemplified by SCO's lawsuit accusing Linux contributors of stealing copyrighted source code from SCO's proprietary Unix implementation (West and Gallagher, 2006). There have even been suggestions that open source projects have been deliberately sabotaged in this manner (Cargill and Bolin, 2004). Another key problem despite the quality of knowledge obtained is that firms integrating internal and external innovations can face higher coordination costs and risks than if all activities were internalized if the firm is not prepared or suited to integrate the external knowledge (West and Gallagher, 2006).
To realize Open Innovation a number of internal requirements have been identified.
Absorptive capacity. The existence of external knowledge provides no benefits to the firm if the firm cannot identify the relevant knowledge and incorporate it into its innovation activities. This requires scanning, absorptive capacity, and also the political willingness to incorporate external innovation (West, J. & Gallagher, S., 2006).
Motivation to share. Prior open innovation research assumes that external sources of innovation will arise. To date this has clearly been true. However, external sources of innovation are supplied by some person or entity. How can firms work to insure that this stream of external innovation is replenished? Why would firms contribute IP that was going to be made available to their rivals (West, J. & Gallagher, S., 2006)?
Hence, to work effectively, firms that adapt to the open innovation approach have to develop new skills, routines and strategies decision (Van Haverbeke, W. et al, 2008). The acquisition of knowledge implies the transfer of knowledge from an external entity, but it does not automatically increase the knowledge base; organizations benefit from externally acquired knowledge only when it becomes integrated with their existing stock of knowledge (Grant 1996). Firms learn about new technologies and opportunities by making small learning steps. This accumulation of absorptive capacity over time is an important precondition for an effective and efficient selection of options. By gradually improving its absorptive capacity, firms gain knowledge about the future potential of the projects. When a follow-on investment decision has to be made, this knowledge is necessary to select the best options ahead (Van Haverbeke et al., 2008). Thus absorptive capacity is essential to implementing an open innovation strategy within the firm.
Absorptive capacity
In their study on international technology transfer, Kedia and Bhagat (1988) first coined the term
"absorptive capacity". However, the contribution by Cohen and Levinthal (1990) is generally accepted as the founding paper where they define absorptive capacity as a firm-level construct. Since then a lot of theoretical and empirical studies have been devoted to further our understanding of absorptive capacity in the firm. With some researchers taking the concept from the firm level and expanding it to the individual up to the nation level (Van Den Bosch et al., 2003; Narula, 2004). This flexibility in the concept is not only shown on this level but also means that it has proven to be applicable for many fields of research such as strategic management, industrial organisation, international business, and technology management (Zahra and George 2002).
With the wide variety of application of the concept, one would almost expect there to be uncertainty about its specific features. However, absorptive capacity has been used in most cases as a firm's ability to "identify, assimilate and exploit knowledge from the environment" (Cohen and Levinthal, 1989;p. 569). This definition is further supported by Schmidt (2005) who states that the three components of absorptive capacity are "identification, assimilation and exploitation of external knowledge within the firm". In essence, absorptive capacity is the firm's capability to deal with external knowledge. There has been some discussion as to whether there are more than three components, identification, assimilation and exploitation to define absorptive capacity. For example Zahra and George (2002) add transformation of knowledge to the definition whilst retaining the three other components. Even though this is an interesting addition, it can be said that transformation of knowledge is an essential part of the exploitation of knowledge. After all, without a successful transformation of knowledge there can be no successful exploitation of knowledge.
There is some uncertainty about how to measure absorptive capacity within the firm. A large number of different approaches have been used in the past. These include R&D budgets, -stocks, and -intensities (Belderbos et al., 2004; Cassiman and Veugelers, 2002; Oltra and Flor, 2003; Stock et al., 2001), following up on the arguments presented by Cohen and Levinthal (1989). Other proxies and measures (primarily used by researchers from the field of business administration) include organizational structure and practices, like incentive systems and human resource and knowledge management, (Lenox and King, 2004; Van Den Bosch et al., 1999; Vinding, 2000).
Follow up and structure
The importance of absorptive capacity in (open) innovation is clear, there is however a shortage of research to determine the degree of absorptive capacity in SMEs. The objective of this research is to explore the existence of absorptive capacity in SMEs in the Dutch ICT-sector. This research will have an exploratory nature as little to no research has as of yet been done in this field. Furthermore, there is a lack of direct empirical measurements of absorptive capacity (Schmidt, 2005).
Chapter 2 will provide a more in-depth look at absorptive capacity and will state a number of propositions. Chapter 3 will provide a description of the methodology used in this research where chapters 4 and 5 will state the conclusions and recommendations for further research in the future.
Further definition of terms
To come to a more focussed and thus feasible research it is necessary to determine a specific target group on which to focus the rest of the research. First of all, this research will be limited to Dutch SMEs that are registered in the Dutch chamber of commerce (Kamer van Koophandel). Furthermore this research will be focussed on the IT services industry. This because the sector is well known for not just the need, but also the willingness to innovate.
Small and medium-sized enterprises (SMEs)
SMEs are defined differently by the EU and The Netherlands. For the purpose of this research, the definition that will be used will be that of The Netherlands. This means that a business with either less than 100 employees or an annual turnover below € 23.000.000 is considered an SME. Unfortunately, given the legal form of most SMEs, determining turnover is difficult. To circumvent this problem, only companies that have up to 100 employees are considered part of the target group for this research.
(Roth, M., 2011)
IT services industry
The Dutch government uses SBI-codes (Standaard Bedrijfsindeling) to differentiate between the activities of enterprises. SBI-code 62 relates to companies that are active in the IT industry and is defined as Services and activities in the area of Information technology (source: www.cbs.nl 23-6-2012).
Combining the criteria of SMEs and the SBI-code 62 gives us the amount of target enterprises for this research. The data is provided by the Dutch Chamber of Commerce (Kamer van Koophandel).
1 -10 employees
11-50 employees
51-100 employees
Enterprises
36.740
1.500
190
Figures based on data supplied by www.statline.nl, 1 January 2012.
To ensure comparability between the research subjects, only research subjects that are active in SBI group 6201 which relates to companies that develop, produce and publish software.
Chapter 2 absorptive capacity in depth
In chapter 1 an introduction to the role of absorptive capacity in open innovation was presented. In chapter 1 it is also said that whilst R&D plays an important part in developing and creating absorptive capacity (Belderbos et al., 2004; Cassiman and Veugelers, 2002; Oltra and Flor, 2003; Stock et al., 2001), there is also a role for Human resources and individual skills & knowledge as well as the Company structure (Lenox and King, 2004; Van Den Bosch et al., 1999; Vinding, 2000). The next step will be to look at these three different components in turn and therefore get a better understanding of them.
Research & Development
The First element that will be looked at is Research & Development (R&D), traditionally the most commonly known factor in determining the measure of absorptive capacity. It is therefore also the most looked at, however little research has been found with regards to determining absorptive capacity through R&D in SMEs.
In their pioneering articles on Absorptive Capacity, Cohen and Levinthal (1990, 1994) contend 'that the ability of a firm to recognize the value of new, external information, assimilate it, and apply it to commercial ends is critical to its innovative capabilities' (Cohen and Levinthal, 1990). In their formulations, absorptive capacity is a relatively compact idea that links learning and innovation, and maintains that 'Fortune Favours the Prepared Firm'. Although the possibility of other options is mentioned, their basic argument centres on engagement in Research and Development as a means for organisations to bolster their absorptive capacity and hence their competitiveness. This is visualized in Figure 1 where "Own R&D" does n ot just benefit the "innovations" but also increases absorptive capacity, which in turn has a positive effect on "Interfirm acquisition of knowledge".
Figure 1. Model of absorptive capacity and R&D incentives.
Source: Cohen and Levinthal (1990)
Therefore, while R&D obviously generates innovations, it also develops the firm's ability to identify, assimilate and exploit knowledge from the environment (Cohen and Levinthal, 1989).
This is confirmed by Bosch, Volberda and De Boer (1999) whose their main argument is that the learning potential for absorptive capacity is primarily determined by prior related knowledge and R&D investments, labelled as the "cumulativeness feature" by Cohen and Levinthal. Many empirical studies support this (recursive) notion of absorptive capacity (Ahuja, 2000; Cockburn and Henderson, 1998; Lane and Lubatkin, 1998; Lyles and Salk, 1996; Mowery et al., 1996; Pennings and Harianto, 1992; Pisano, 1994; Powell et al., 1996; Shane, 2000; Stuart, 1998; Tsai, 2001).
Gambardella (1992) found evidence from 14 case studies of large US drug manufactures using patent data as the output indicator. Firms who are in a position of better in-house scientific capabilities (measured as scientific publications) are able not only to make more efficient use of internal knowledge but also to exploit more effectively external knowledge. This is in line with Henderson and Cuckburn (1996), who found similar results of large firms in pharmaceuticals and Arora & Gambardella (1990) in biotechnology.
However, not all empirical research supports the assumption of R&D being a determinant
of absorptive capacity (Lane and Lubatkin 1998). Absorptive capacity is cumulative in its nature and accumulation will permit a more efficient accumulation in the next period because of already accumulated some knowledge in that field thus easier to assimilate new knowledge. Therefore the existence of a certain level of knowledge in that particular path will thus provide better signals to predict and import new technological opportunities, which is especially important in uncertain environments (Vinding, 2000). The firm further increases the attractiveness to partners and thus increase the firm's collaboration opportunities (Ahuja 2000). Mangematin et. al. (1999) argues that a high degree of absorptive capacity extends the assimilation to all kinds of applied, fundamental form of knowledge and through all modes of vehicles like PhD students, scientific staff, technical devices etc..
Cohen and Levinthal themselves argue that whilst own R&D produces not only new knowledge in the sense of innovations but contributes also to the absorptive capacity of the firm it does so in part by increasing the skills of the employees who have been involved in the R&D process. These stocks of skills or of prior knowledge determine the ability to assimilate and utilise external knowledge (Cohen and Levinthal, 1990). Prior related knowledge includes fundamental skills or knowledge of the recent technological and managerial developments in a given field (Cohen and Levinthal 1990; Lane and Lubatkin 1998) and up-to-date information on knowledge domains (Szulanski 1996, 2003). This implies there is an important role to be played for individual skills and getting those skills to the right people in the right positions.
It can however not be denied that R&D plays an important role in acquiring absorptive capacity which can be a perquisite for successful open innovation. However, many firms have low R&D intensity, either due to size (e.g. small businesses) or industry characteristics (low tech). Are they pursuing "external innovation,""open innovation,"or (as commonly assumed) "no innovation" strategies? (West, J and Gallagher, S. 2006). Acquiring enough absorptive capacity through R&D therefore seems to be a challenge for SMEs.
Propisition 1:
SMEs implement little R&D initiatives which hinders them in acquiring sufficient absorptive capacity.
Human resources and individual skills & knowledge
Absorptive capacity is also determined by factors such as employees' abilities and the ability to communicate and share knowledge. Therefore, absorptive capacity can include aspects within the knowledge base of the firm other than R&D. Human resources provide a strong capacity to learn, as in for instance, skills and training (Giuliani and Bell 2005); and ''qualified human resources are essential in monitoring the evolution of external knowledge and in evaluating its relevance, and for the integrating of these technologies into productive activities'' (Narula 2004). Responsibility for this aspect of the firm lies in the Human Resources (HR) department. Human resources (HR) as a department has been defined as; "The department or support systems responsible for personnel sourcing and hiring, applicant tracking, skills development and tracking, benefits administration and compliance with associated government regulations" (entrepreneur.com). What it comes down to for this research is ensuring that the right skills and knowledge are available at the right place in the company at the right moment in time.
In this section the research distinguishes between the role of HR and the role of "gatekeepers".
The importance of HR
For innovation to work, the workforce needs to be willing as well as able to adopt changes if innovation is to properly succeed (Leonard-Barton, 1988; Miettinen, 2006; Orlikowski and Scott, 2008). In practice firms who apply a high degree of HR practices are in a better position to innovate (Vinding, 2000). The result is also in line with Laursen and Foss (2000), who finds that the application of HR practices is more effective in influencing the innovative performance when these practices are applied together rather than alone. Hence, HR practices are complementary to one another.
Besides being willing to accept and implement changes, Reagans and McEvily (2003) support the concept of knowledge accumulation by showing that people absorb knowledge more easily when they already have some common knowledge in terms of expertise, training or back ground characteristics. This is further proven by Cohen and Levinthal (1990) who state that prior related knowledge gives the frame of reference to understand new knowledge. Even though in this they refer to prior knowledge from R&D projects, the same is true for the knowledge and experience that employees possess. HR plays a central role in matching the different skills and experienced employees together.
To understand how an individual's skills and knowledge have an effect on absorptive capacity, which is mostly considered on the firm-level, this research looks at Cohen and Levinthal. Although they define absorptive capacity as an organization construct, Cohen and Levinthal (1990) also suggest that absorptive capacity exists on the individual level. As Cohen and Levinthal (1990) point out, individual level absorptive capacity is an important antecedent to organization level absorptive capacity. Even stronger, the latter is supervenient on the former in the sense that there is no organization level absorptive capacity without individual level absorptive capacity. Therefore, the learning behaviour of individuals and the choices they make with respect training, education, knowledge sharing, etc., are important foundations of organization level absorptive capacity.
The pivotal role that HR plays in matching up individual skills and experience cannot be underestimated. In SMEs the HR department often plays a purely administrative role, ensuring and checking payroll etc. In practice this means that there is usually no official HR department, however there are the basic tasks that need to be performed. This leads to the following proposition:
Proposition 2:
HR departments or the people that fullfill the basic HR tasks in SMEs do not have the capacity to successfully increase the absorptive capacity in the firm.
The importance of gatekeepers
As stated before, in the work of Cohen and Levinthal R&D budgets determines the absorptive capacity by increasing the firm's stock of knowledge. But they are also aware of the fact that absorptive capacity is dependent on individuals working in the organisation. Especially people located at the interface of either the firm or its environment or at the interface between subunits within the firm. These gatekeepers are essential and Tushman and Katz (1980) also emphasise that gatekeepers are able to reduce the mismatch in language and cognitive orientation among two systems and are particularly important in development projects. Inside the firm an important task for the gatekeeper is to transmit the information to the rest of the organisation and if these gatekeepers are in a position of a high level of expertise the transmission process will become easier. The higher educated the gatekeeper, the more efficiently the transfer of knowledge in general. This is in line with Mangematin et al. (1999). They argue that especially high-educated employees will naturally, by their daily task, increase the stock of knowledge in the organisation. They will further encourage relations with other individuals with similar competencies outside the firm, thus facilitate access to external networks of knowledge, especially in the case of utilising scientific knowledge (Rothwell and Dodgson 1991). This is especially true if the high-educated worker is in a management position.
Carter (1989) argues that higher educated employees are the main contributors of know-how trading due to high level of knowledge embodied in these people. This statement in further supported by Guellec (1996) who emphasise skilled labour to be in a better position to generate new knowledge because they master state of the art knowledge and thus are better to manage new technology. Canto (1999) finds that intangible resource - divided into human and commercial issues is the main determinant of carrying out R&D compared to financial and physical resources. Florida (1995) generalised the importance of the issue by arguing that we are entering into a new age of knowledge creation and continuous learning where the main source of value and economic growth is the human mind instead of the firm. According to Florida (1995) the competitiveness of the firm is determined by a unique combination of individual competencies as a result of acquired skills, education, qualification and training.
Naturally an organization's absorptive capacity is not resident in any single individual, but depends on the links across a mosaic of individual capabilities (Cohen and Levinthal, 1990). Absorptive capacity requires porous boundaries, scanning broadly for new knowledge, and identifying and using those employees who serve as gatekeepers and boundary spanners (Volberda, 1996). Management capabilities may synthesize and apply current and acquired knowledge and may be influenced and limited by the cognitions and dominant logics of managers. In line with Adner and Helfat (2003), a dynamic managerial capability refers to the capacity of managers to create, extend or modify the knowledge resource base of an organization. Examples of these managerial capabilities and skills are the structure of communication, the character and distribution of expertise, gate-keeping or boundary-spanning roles, cross-functional interfaces and job rotation. In this regard the manager clearly takes on the role as gatekeeper. We need more research on the relative effect of these management skills and capabilities on absorptive capacity (Volberda 2009).
Moreover, there are important managerial capabilities that complement one another. For instance, Jansen et al. (2005) studied the separate and joint impact of different combinative capabilities: coordination, systems and socialization capabilities and their differential effect on absorptive capacities. Moreover, various formal and informal managerial incentives may differently influence absorptive capacity and knowledge sharing. Besides managerial capabilities and incentives, firm absorptive capacity will be strongly influenced by cognitive processes on the managerial level and existing dominant logics of management teams (Mom, Van den Bosch and Volberda, 2007).
Bibliometric analysis by Volberda (2009) shows that managerial antecedents are among the most important for studies on absorptive capacity. These typically address managerial actions, dominant logic, and human resource mechanisms.
In conclusion gatekeepers play a pivotal role in communication and knowledge transfer within the company and on the inter-company level. The higher educated the gatekeeper is, the better. Often the manager will take on the role as gate-keeper, especially in a SME it is expected that the role of the manager, as well as the board of directors will be larger, simply because of the size of the company. With an increased influence for the manager, the effect on absorptive capacity within the firm is also increased.
Proposition 3:
Absorptive capacity is reduced, the larger the influence of the manager is on the firm.
Company structure
The final aspect this research will look at in determining the amount of absorptive capacity in a firm is the company structure. The absorptive capacity of a firm is determined by its expertise in stimulating and organizing knowledge sharing (Schmidt 2005; Van Den Bosch, Volbeerda, and De Boer 1999); this is related to the difficulty for the organization as a whole to stimulate and organize the transfer of knowledge across departments, functions, and individuals. Thus, the organizational structure and cross-functional communication have been found to improve absorptive capacity if they lead to improved knowledge sharing among departments and individuals within a firm (Daghfous 2004; Lane and Lubatkin 1998; Van Den Bosch et al. 1999).
This is confirmed even in the early research on the subject by Cohen and Levinthal (1990) that also determine that distinct organizational mechanism can influence the level of absorptive capacity, such as the transfer of knowledge across and within units, the structure of communication between the external environment and the firm (i.e. the centralization of the interface function), a broad and active network of internal and external relationships, and cross-function interfaces (Van den Bosch, Volberda and De Boer, 1999). Volberda et al (2009) point out that absorptive capacity refers not only to the acquisition or assimilation of information by an organization, but also to the organization's ability to exploit it. Therefore, an organization's AC does not simply depend on the organization's direct interface with the external environment. It also depends on transfers of knowledge across and within subunits and the capacity for utilizing that knowledge.
Here the role of the manager and managerial cognition surfaces once again. Theory on managerial cognition suggests that managers perceive things through their own cognitive lenses. Thus, managers can be considered as "cognizers" (Calori, Johnson, and Sarnin, 1994), who reduce the complexity they face by developing mental maps that result in a "dominant management logic" (Prahalad and Bettis, 1986; Bettis and Prahalad, 1995). This dominant logic evolves over time, directly influencing the organizational form (Dijksterhuis, Van den Bosch, and Volberda, 1999) and indirectly the level of absorptive capacity (Van den Bosch et al, 1999). For example, managers applying a classical management logic (Dijksterhuis et al., 1999: 572; Volberda, 1998) favour traditional functional organizational forms and do not consider the environment as a source of valuable knowledge to be absorbed (Van den Bosch et al., 1999). In such a classical management logic, managers portray organizations as tools designed to achieve preset ends and ignore or minimize the perturbations and opportunities posed by connections to a wider environment (Scott, 1987). Therefore, these managers will seriously limit the level of absorptive capacity of the firm. Lenox and King (2004) show that managers can however directly affect a firm's absorptive capacity for a new practice by providing information to potential adopters in the organization. The effectiveness of these managerial actions is contingent on the degree to which other sources of information are available to individuals. Previous adopters and past events seem to dampen the effect of central information, while related experiences seem to amplify it.
Minbaeva et al. (2003) emphasize the importance of individuals' ability (education and skills) as well
their motivation to absorb external knowledge. As managers continuously develop theories about the
world around them and embed them in their dominant logic (Sanchez, 2001), firm AC will be strongly
influenced by cognitive processes on the managerial level. This is consistent with Van den Bosch and
Van Wijk's (2001) plea to recognize the strong effect managers can have on knowledge-related processes in organizations. Van den Bosch, Volberda, and De Boer (1999) emphasize that the characteristics of a firm's absorptive capacity relate to the nature of the knowledge in its environment. They support Cohen and Levinthal's notion (1990) that: "Absorptive capacity is more likely to be developed and maintained as a byproduct of routine activity when the knowledge domain that the firm wishes to exploit is closely related to its current knowledge base". However, they show that knowledge embedded in the organizational form (Grant, 1996) as well as the firm's combinative capabilities (Kogut and Zander, 1992) influence a firm's absorptive capacity. Not only limitations in a firm's current knowledge base, but also the rigidity of organization forms and the combinative capabilities to synthesize and apply current and acquired knowledge may generate inertia in adapting absorptive capacity. Van Wijk, Van den Bosch, and Volberda (2003) and Malhotra, Gosain, and El Sawy (2005) show that interorganizational networks and supply chains can be rewarding for firms to gain access to knowledge, to facilitate learning processes, and to foster knowledge creation. Furthermore, from an internal network perspective, Andersen and Foss (2005) find that the development of strategic opportunities is increased by internal communication between business units, establishing clearly the relevance of knowledge transfer and AC within multi-unit firms. Jansen, Van den Bosch, and Volberda (2005) provide evidence of the distinct effects of organizational antecedents on the components of absorptive capacity. They show in an empirical study within a multi-unit firm that coordination capabilities, such as "cross-functional interfaces, participation in decision-making, and job rotation" (2005: 999) enhance potential absorptive capacity.
A firm's knowledge base cannot be separated from how it is currently organized (Grant, 1996b). An organization form can be viewed as a structure that carries out multiple knowledge-related tasks, such as evaluating, assimilating, integrating, utilizing, and building knowledge (Loasby, 1976). Given this overall insight, various multi-unit organization forms differently influence the level and type of absorptive capacity (Van den Bosch et al., 1999). Issues of internal informal networks are also important for the identification and assimilation of new knowledge. Dhanaraj et al. (2004) identify the importance of social embeddedness in transferring tacit and explicit knowledge. Thus networks of individuals influence what knowledge is shared or assimilated. For instance, absorptive capacity can be transferred through hiring new personnel or corporate acquisitions. Unit structure, firm size and informal networks are the source of heterogeneity of absorptive capacity. The lack of research regarding intra-organizational antecedents is surprising, especially since Cohen and Levinthal (1990) emphasized the importance of organizational mechanisms and suggested considering what aspects of absorptive capacity are distinctly organizational. Even when organizational antecedents have been considered (Lane et al., 2001), their relationships with different dimensions of absorptive capacity have not been tested empirically.
Cohen and Levinthal (1990) articulate that not only the gatekeeper's absorptive capacity matters, but also that the group as a whole must have some level of relevant background knowledge.
Proposition 4:
SMEs' traditionally short lines of communication improve communication and thus improves absorptive capacity within the firm.
Proposition 5:
The higher the amount of highly-educated personnel that are involved in innovation and research at a firm, the higher the absorptive capacity.
Chapter 3, Research Method:
Setting and participants
This research is conducted in the Dutch provinces of "Noord-Brabant, Utrecht, Limburg and Gelderland". All the companies that have been approached for this research are SMEs in the IT sector that have SBI code 6201 and are thus active in software research, development and sales.
This research is based on eight semi structured interviews with either the Chief operating officer or chief operational officer within the company. As some of the questions are also targeted to the HR activities of the firm, either the person responsible for HR or personnel was present or had answered questions in advance. In one instance a call-back was planned after the interview itself. Table 1 shows the representative that was present at the time of the interview. "X" means that representative was present whereas "-" means he or she was not. "S" means that this position was filled by the same person that was already present. In all instances this was the CEO taking on other tasks. In all instances, and as requested, in all instances the interviewee was responsible for R&D activities.
Table 1 participants and position within the company
CEO present?
COO present?
HR rep. Present?
Responsible for R&D?
Company A
-
X
-*
X
Company B
X
-
S
X
Company C
X
S
X
X
Company D
X
S
X
X
Company E
-
X
X
X
Company F
-
X
X
X
Company G
X
-
X
X
Company H
-
X
X
X
Semi-structured interview
Absorptive capacity is a difficult concept to measure, among others, Becker and Peters (2000) state: "The empirical measurement of absorptive capacities of firms is difficult." This due to the somewhat immaterial nature of the concept leading to descriptions as presented by Mowery and Oxley (1995), who define absorptive capacity as a set of skills needed to deal with tacit knowledge. A "fluffy" concept like this means that there are practically no organisations or individuals that can give a straightforward indication of their measure of absorptive capacity. This has resulted in the use of proxies to develop some sort of empirical concept to measure absorptive capacity in surveys.
A number of proxies have been used to capture absorptive capacity in a number of research fields. In the field of innovation and cooperation behaviour of firms popular proxies have been R&D budgets, -stocks, and -intensities (Belderbos et al., 2004; Cassiman and Veugelers, 2002; Oltra and Flor, 2003; Stock et al., 2001). Other proxies that are used in different fields but mainly in the field of business administration include organizational structure and practices, like incentive systems and human resource and knowledge management, (Lenox and King, 2004; Van Den Bosch et al., 1999; Vinding, 2000) and "production line performance in terms of labour productivity and conformance quality" (Mukherjee et al., 2000). Furthermore, penetration and adaptation of technologies within the firm can be used to assess absorptive capacity (Petroni and Panciroli 2002).
This difficulty in measuring absorptive capacity has also resulted in difficulties with regards to comparing research results as well as little research "on the process by which absorptive capacity is developed" (Lane et al., 2002). This research shortage on the determinants of absorptive capacity was stressed not only by Lane et al. (2002), who reviewed about 180 papers citing Cohen and Levinthal (1998,1990), but also by Veugelers (1997). She writes that "More work is needed to identify specific firm characteristics generating this absorptive capacity" (p.314). Mahnke et al. (2005) also state that
there is a lack of empirical literature on how a firm can increase its absorptive capacity.
The qualitative interview is used in qualitative research of all kinds, whether positivist, interpretive or critical. It is used in case studies, in action research, in grounded theory studies, and in ethnographies (Hesse-Biber & Levy, 2006; Klein & Myers, 1999; Myers, 1997, 1999; Northcutt & McCoy, 2004). The qualitative interview permits us to see that which is not ordinarily on view examine that which is looked at, but seldom seen (Rubin & Rubin, 2005). The difficulty in measuring absorptive capacity in surveys means that for this exploratory research the interview methodology is a valid method for the field research.
Fontana and Frey (2000) distinguish a various amount of types of qualitative interviews, three of these are:
Structured interview. In a structured interview there is a complete script that is prepared beforehand. There is no room for improvisation. These types of interviews are often used in surveys where the interviews are not necessarily conducted by the researcher.
Unstructured or semi-structured interview. In an unstructured or semi-structured interview there is an incomplete script. The researcher may have prepared some questions beforehand, but there is a need for improvisation. The interviewer is the researcher or is one of a team.
Group interview. In a group interview two or more people are interviewed at once by one or more interviewers. This type of interview can be structured or unstructured.
This research will make use of the semi-structured interview, some questions are prepared beforehand, but there is room for improvisation. See attachment #### for the prepared questions.
There are however a number of problems with using interviews as a tool for qualitative research as distinguished by Myers and Newman (2006).
Artificiality of the interview - With qualitative interviews it is important to note that an artificial situation is created where a relative stranger is asked to answer inquisitive questions in a limited amount of time.
Lack of trust - When someone who is unknown to the interviewee is asking personal or sensitive questions trust-issues may arise. This can result in the interviewee not divulging information he or she sees as "delicate". This can result in incomplete or false results.
Lack of time - Interviews are normally undertaken within a set time-frame. This can have two negative outcomes, first of all that the interviewee does not get to voice his or her strong opinions on relative issues. Secondly the exact opposite may be the case, opinions that are not held in high regard re voiced with urgency due to the time pressure. Either way this can have the effect of gathering incomplete or false data.
Level of entry - Entry level for the interviewer within the firm is absolutely vital (Buchanan, Boddy, & McCalman, 1988). For example, when the interviewer has a low entry level within the firm, there is the possibility that the researcher will find it hard to interview upper management.
Elite bias - Elite bias occurs when an interviewer only interviews high ranking managers or "stars" (Miles and Huberman, 1994) within the firm. This may result in the interviewer failing to get a clear picture of the broader situation. Elite bias concerns overweighting data from articulate, well-informed, usually high-status informants and, conversely, under-representing data from intractable, less articulate, lower-status ones (Heiskanen & Newman, 1997).
Hawthorne effects - The interviewer is not invisible, even though he or she is supposed to be a neutral party, the interviewer can change the situation with his or her presence (Fontana & Frey, 2000).
Constructing knowledge - Interviewers are actively constructing knowledge (Fontana & Frey, 2000). In reply to an interviewer, the interviewee will think about subjects that they have not thought about before. The interviewee will wish to appear well informed and rational and may construct knowledge to reflect this.
Ambiguity of language - Fontana and Frey (2000) say that ''Asking questions and getting answers is a much harder task that it may seem at first. The spoken or written word has always a residue of ambiguity, no matter how carefully we word the questions or how carefully we report or code the answers'' (Fontana & Frey, 2000).
Interviews can go wrong - If the interviewer offends or angers the interviewee, the interviewee may cancel the interview completely (Hermanns, 2004).
Measuring absorptive capacity
As described, measuring absorptive capacity proves to be a difficult, if not impossible, challenge. With a concept that is as untouchable as absorptive capacity this is a common problem. To circumvent this problem, instead of measuring the absorptive capacity, the eight companies that will be approached for this research will be put in an order based on absorptive capacity. From highest to lowest. This order can be used to create a synergy with the other research data as it emerges.
To get an idea of the amount of absorptive capacity, the research will focus on the three aspects of absorptive capacity:
Observation
Understanding
Applying
Both understanding and applying can be asked in a direct question. Observation provides a bigger challenge. To get an idea on how well a firm observes their environment with regards to innovation, the question that is of interest is how many developments the firm's key managers (COO/CEO) see within the market.
Proposition 1:
SMEs implement little R&D initiatives which hinders them in acquiring sufficient absorptive capacity.
The R&D initiatives can be simply asked per company. Of interest are the number of R&D initiatives that are being undertaken each year, the percentage of personnel that are actively involved in R&D and the percentage of turnover that is spent on R&D each year. Lastly the basic question that can be asked is, how important is R&D for the firm?
With these results, the companies will be put in order and compared with the results from measuring absorptive capacity.
Proposition 2:
HR departments or the people that fulfil the basic HR tasks in SMEs do not have the capacity to successfully increase the absorptive capacity in the firm.
The proposition will be tested by a short interview with either the HR manager or whoever fulfils the HR tasks within the company. Important questions are figuring out if there is a specific HR budget for training and if so, what percentage of turnover is spent on it. It is important to get a general idea of the HR environment within the firm and creating an order within the companies and comparing this to the results from measuring absorptive capacity.
Proposition 3:
Absorptive capacity is reduced, the larger the influence of the manager is on the firm.
Measuring the influence of the manager on the firm is difficult. Besides looking at the organisational structure this research will ask questions about the proximity of the manager to the innovation process and the process-control the manager has built into the organisation. Furthermore personal preferences of the managers will be looked at, if these personal preferences have found their way onto the work floor, this is an indication of an increased influence of the manager on the firm.
Proposition 4:
SMEs' traditionally short lines of communication improve communication and thus improves absorptive capacity within the firm.
For this proposition taking a look at the organisational structure and internal processes is important. Is there an open door policy and how visible and involved is the manager on the work floor?
Proposition 5:
The higher the amount of highly-educated personnel that are involved in innovation and research at a firm, the higher the absorptive capacity.
To be able to make a comparison this research will try to find the percentage of personnel involved with R&D that are highly educated and compare this percentage to other departments within the firm.
Analysis
All material was given structure and summarized by constructing a data matrix that included 176 squares. Each square summarized an answer to a question using sentence concentration (Kvale, 1989). The total data matrix provides an overview of all answers to all the questions, where N = 22. This data matrix was then summarized further by relating them to the five propositions. Finally, adding the order by which the companies perform with regards to absorptive capacity and correlating this with the summaries from the data matrix, this results in the conclusions of this research.
Chapter 4; results
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