Absorptive Capacity - Cohen and Levinthal's Model

Cohen and Levinthal's Model

The concept of absorptive capacity was first defined as a firm's "ability to recognize the value of new information, assimilate it, and apply it to commercial ends" by Cohen and Levinthal. For them, absorptive capacity depends greatly on prior related knowledge and diversity of background. Therefore, they’ve put the investments a firm makes in its R&D central to their model of development of absorptive capacity. The absorptive capacity is seen as cumulative, meaning that it is easier for a firm to invest on a constant basis in its absorptive capacity than investing punctually. Efforts put to develop absorptive capacity in one period will make it easier to accumulate it in the next one.

“The cumulativeness of absorptive capacity and its effect on expectation formation suggest an extreme case of path dependence in which once a firm ceases investing in its absorptive capacity in a quickly moving field, it may never assimilate and exploit new information in that field, regardless of the value of that information.”

Absorptive capacity is also said to be a reason for companies to invest in R&D instead of simply purchasing the results post factum (e.g. patents). Internal R&D teams increase the absorptive capacity of a company. A firm’s investment in R&D then impacts directly its absorptive capacity. The more a firm invests in research and development activities, the more it will be able to fully appreciate the value of new external information.

Cohen and Levinthal also stressed that diversity allows individual to make “novel associations and linkages”. They therefore encourage the hiring of diverse teams in order to have a variety of individuals working together and exposing themselves to other ways of looking at things.