Pan-Pacific Conference XXXIV. Designing New Business Models in Developing Economies

Roles of Regional Absorptive Capacity and Social Capital in Enhancing Firm-
Level Absorptive Capacity
Pankaj Patel
Villanova University
pankaj.patel@villanova.edu
Sushil Sharma
Ball State university
ssharma@bsu.edu
Abstract
Using multilevel dynamics at the firm and at the
environmental level, we test the role of antecedents
– social capital and regional absorptive capacity – as
knowledge conduits enhancing firm absorptive
capacity. Using sample of 455 firms in 36 regions of
the UK in a multilevel moderated mediation model
we test the mediating role of absorptive capacity
between social capital and firm innovation. We find
that social capital is a more effective antecedent to
innovation when firms have higher levels of ACAP.
In addition, regional absorptive capacity, by
enhancing knowledge flows and conduits to firm,
moderates the mediating effect of absorptive
capacity.
Introduction
Absorptive capacity (ACAP) refers to a firm being
able “to recognize the value of new information,
assimilate it, and apply it to commercial ends”
(Cohen & Levinthal, 1990). However, exposure
alone to knowledge may not be sufficient for these
purposes. In fact, there may be antecedents to
acquiring knowledge that are critical. For example,
prior research has proposed that strategic alliances
and stakeholder interactions are useful vehicles
(Lane & Lubatkin, 1998; Renko, Autio & Sapienza,
2001). These activities, nevertheless, appear to be
transaction specific, which means that they would
not facilitate broader development or deployment
(Lane, Koka, & Pathak, 2006). Strategic alliances or
interactions with customers to develop a product
could provide for the targeted assimilation of
external knowledge (Prabhu, Chandy, & Ellis,
2005). Similarly, others have found that there are
inter-firm antecedents such as complementarities
among knowledge resources, compensation
practices and organizational structures, as well as a
familiarity with organizational problems and interorganizational
trust (Dhanaraj & Parkhe, 2006).
However, such inter-firm, transaction-focused
learning may only be partially indicative of other
types, which could also facilitate the acquisition of
knowledge, of which our understanding is still quite
limited. Nor do we know whether entrepreneurs can
increase absorptive capacity by how they position
their firms in the environment. For example, if a
firm could position itself so that it could take
advantage of an entrepreneur’s social capital, it is
possible that such an effort could be helpful.
Moreover, we do not know whether certain
geographic regions offer entrepreneurs more
opportunities to extend, assimilate and
commercialize what they know. We refer to this
regional positioning effect as regional absorptive
capacity (R-ACAP). It is possible that social capital
and R-ACAP could account for most of both
deliberate and accidental learning. More
importantly, we do not know whether a firm’s R-
ACAP could facilitate further development and
exploitation of its social capital.
In this study, we question whether firms with higher
levels of social capital use their ACAP more
effectively. If they do use it more effectively, we
follow up by asking what other factors could further
enhance the positive effect of social capital on
innovation related firm performance? In particular,
we test whether firms located in regions with higher
levels of R-ACAP are more efficient in acquiring
and processing information by using their social
capital. Thus, R-ACAP could increase (i.e.
moderate) the effectiveness of ACAP as a mediator
to social capital. Together, considering the roles of
R-ACAP and social capital could provide a more
comprehensive understanding of inter-firm
knowledge exchange, which would go beyond the
individual roles played by common structures,
language and symbols (Nahapiet & Ghoshal, 2005),
as well as that played by trust among the managers
of these organizations. As Lane et al. (2006)
suggest, our understanding of absorptive capacity
has tended to accumulate without building a
coherent body of knowledge, in part because it has
often failed to link its antecedents with a dependent
variable, such as innovation outcomes. It is our goal
to address both of these prior shortcomings in this
research.
The Research Setting and Data Collection
We use the social capital and small and mediumsized
enterprise (SME) data collected from a 2000-
2002 survey by (Cooke & Clifton, 2002). The
survey measured changes in SME performance
using (1) turnover, (2) profitability and (3)
employment during the last three years. It also
measured innovation as indicated by the
introduction of products and processes to a new
market. Using Likert scales, respondents were asked
to assess the level of social capital on a series of
questions. The geographical expanses of these
social capital linkages were also surveyed. The
survey was initially mailed to 3,600 SMEs,
consisting of 100 SMEs (