See discussions, stats, and author profiles for this publication at: https://www.researchgate.

net/publication/283579702

Developing a National Absorptive Capacity System for Transition Countries

Conference Paper · January 2010

CITATION READS
1 402

3 authors, including:

Ramdas Chandra Ruth Clarke

Nova Southeastern University Nova Southeastern University
11 PUBLICATIONS 237 CITATIONS 19 PUBLICATIONS 163 CITATIONS

SEE PROFILE SEE PROFILE

All content following this page was uploaded by Ruth Clarke on 09 November 2015.

The user has requested enhancement of the downloaded file.

 AIB-MENA, 2010

Developing a National Absorptive Capacity System for Transition Countries

1. Introduction

A significant body of scholarly work draws attention to the ability of firms to absorb new

technology or processes that are capable of enhancing their capabilities. This attention usually

tends to define national systems somewhat narrowly (Freeman, 1995). A smaller number of

recent papers have begun to seriously look at the construct of absorptive capacity at the national

level. These works reflect the growing consensus that national absorptive capacity is an

important concept, which can be understood by examining the interaction of absorptive capacity

determinants. National absorptive capacity is arguably composed of complex relationships and

potentially the value created benefits both the firm and the national economy as a whole.

The importance of relationships and subsequent value creation involves not just the

effects uniquely attributable to the firm, but also the relationships between firms and the

community as a whole. Absorptive capacity in general and national absorptive capacity in

particular, is created through a gamut of dynamic relationships. These developments occur

within the context of major changes in the business environment, such as the transition to a

market economy. Some scholars have argued that a country’s absorptive capacity is not simply

an aggregation of the absorptive capacity of its firms or its industries (Criscuola and Narula,

2002). Nations as well as firms are thus being challenged on two fronts: first, to broaden their

view of absorptive capacity by considering a range of different elements where competitive

value is created and second, to examine and place a value on the worth of these relationships.

Thus, the need is urgent for research to develop a more complete understanding of absorptive

capacity at the national level.

1
 AIB-MENA, 2010

The main purpose of this paper is to develop an integrated framework of national

absorptive capacity. The framework includes the major determinants of national absorptive

capacity, including national resources and institutions, and is the main engine driving economic

performance. This paper aims to explain how and why this framework is helpful for identifying

possibilities to advance economic development and growth and attempts to show the necessity of

implementing the integrated framework of NACS in transition countries, especially in the

Middle East region. As the region develops economically, politically and socially, academic

inquiry is also growing, as evidenced by the new AIB-MENA chapter.

We argue here that the two main elements of a national absorptive capacity system are

the level of national capital stock (NCS) and the level of the national innovation system (NIS).

The former element provides the basis for national development in terms of capital resources,

while the later provides the processes by which national development takes place. For example,

capital stock refers to monetary and physical assets as well as the level of institutional

development, while national innovation refers to spending on R&D, support to SMEs, and

support to high-tech activities. Governmental decisions regarding national competitive

positioning relate to the enhancement of these elements. In order to build up national absorptive

capacity, the additional value added of building innovation processes versus focusing on capital

stock must be measured. Nations face difficulties as they determine their own identity and build

up their absorptive capacity. In such a situation, defining the right framework becomes more

closely aligned with the overall performance of the nation.

There are four reasons for our interest in this topic. The first reason is that, though there

is much research on the topic ‘absorptive capacity’, it is still necessary to continue to clarify the

main elements of a national absorptive capacity system. It is also necessary to clarify the role and

2
 AIB-MENA, 2010

function of each factor at all levels of a country in making absorption happen. The second reason

is that it remains a priority to examine how to bring absorptive capacity environment to a

country. What mechanisms can we use? For every country and even for a region, it is likely that

the factor-mix that will bring the best results is specific to that place. In this context, the wider

the discussion, the more comprehensive the integrated system can be. Therefore, we need to

examine major factors of capital stocks and their effects on the creation of a national absorptive

capacity system. The third reason is that we are living in a period of great uncertainty: financial

turbulence lurks in every corner of the globe. These uncertainties and the economic downturn

require analytical reasoning, and a capacity not only to examine the best ways of establishing a

national absorptive capacity system, but also the courage to implement the suggested system.

Finally, the fourth reason is that although many studies discuss the absorptive capacity at

different levels (firm/country) and in different geographic locations, not a single study examines

the national absorptive capacity for any country in the Arab region.

2. Theoretical Framework

The following section presents the theoretical background for national absorptive capacity,

and then we proceed to discuss the proposed conceptual framework and propositions.

2.1 Learning, Knowledge and Absorptive Capacity

The basis for the concept of absorptive capacity is the literature examining learning

processes. Organizational learning capacity develops over time as firms acquire external

knowledge and become adept at identifying, assimilating and exploiting knowledge from the

environment (Cohen and Levinthal, 1989), creating absorptive capacity. The role of the learning

experience is to help firms assess the quality of knowledge and value of the learning in context,

3
 AIB-MENA, 2010

thus facilitating assessment and decision-making by the firm. Traditionally, the learning

experience is used to describe and understand experience--an intensive situation in which firms

integrate what they perceive and encounter. Cohen and Levinthal (1989) posit that to describe

and analyze a firm’s knowledge experience, we need to focus on both the external and internal

environments, which in combination create what is termed, the knowledge experience room,

where pre-learning experience takes place.

The process of knowledge sharing through learning is primarily through first or second

order learning (Hedberg, Nystrom and Starbuck, 1976; Fiol and Lyles, 1985) or, equivalently,

between single loop and double loop learning (Argyris and Schon, 1978). First order or primary

knowledge resources are those that contribute to absorptive capacity generally, and secondary

knowledge resources are those that emerge in relation to specific issues. First order learning may

cover given forms of thought, and second order learning a change of forms of thought, that is of

the way in which the domain is mapped into the cognitive range (Nooteboom, 2000). Cognitive

distance can be bridged through communication, which entails a mapping from one’s cognitive

range to another’s cognitive domain and insertion into the latter’s absorptive capacity, or making

someone else make sense of the world (Nooteboom, 2000). Reducing cognitive distance between

individuals per se is a more time consuming task.

Cohen and Levinthal (1990) further develop the concept of absorptive capacity by

examining individuals’ cognitive structures and problem-solving techniques in order to develop a

richer explanation of the construct that puts more emphasis on the processes underlying this type

of organizational learning. Understanding the role of knowledge structure in enhancing

organizational absorptive capacity receives special attention. The extent to which an organization

develops a broad and active network of internal and external relationships will strengthen an

4
 AIB-MENA, 2010

individual’s awareness of others’ capabilities and knowledge. The essence of absorptive

capacity is that the firm uses internal and external resources and capabilities as the basic building

blocks to create new technologies and to obtain a sustainable competitive advantage

There are two factors that will affect a firm’s incentives to learn and, therefore, its

incentives to invest in absorptive capacity via its R&D expenditure. First, there is a quantity of

knowledge to be assimilated and exploited: the more there is, the greater the incentive. Second,

there is difficulty understanding or, conversely, potentially the case of learning (Cohen and

Levinthal, 1990). The phenomenon of knowledge transfer not only poses challenges to the

conventional definition of absorptive capacity; it also provides a possible solution to a long–

lasting debate in the absorptive capacity studies. In absorptive capacity literature there is a

consensus that knowledge spillovers bring benefits while growth spillovers have been considered

only a deterrent to R&D activity (Nelson, 1959; Arrow, 1962; Spence, 1984). New knowledge is

often the product of a firm’s combinative capabilities to generate new applications from existing

knowledge components (Kogut and Zander, 1992). Cohen and Levinthal (1990) assume that

firms purposefully invest in R&D to generate profit and take into account R&D’s dual role in

both directly generating new knowledge and contributing to absorptive capacity.

In considering these aspects, Van den Bosch, Volberda, and De Boer (1990) note that

important organization determinants of absorptive capacity may be distinguished. Lane and

Lubatkin (1998) report their findings that the ability of a firm to learn from another firm is

jointly determined by the relative characteristics of two firms. Conversely, Jaffe, Trajtenberg,

and Henderson (1993) argue that knowledge flows do sometimes leave a paper trail in the form

of citations in patents. By studying the geographic localization of knowledge spillovers they

argue that if knowledge spillovers are localized within countries, then citations of patents

5
 AIB-MENA, 2010

generated within the United States should come disproportionately from within the United

States. This raises a question regarding the extent to which knowledge externalities are localized.

The most difficult problem confronting the effort to test for spillover localization is the difficulty

of separating spillovers from correlations that may be due to a pre-existing pattern of geographic

concentration of technologically related activities. Jaffe et al. found evidence that geographical

localization fades over time.

A central tenet of knowledge spillovers is the consideration of exchange over time, and

therefore both firm and external environments are critical. Every industry has its own industry

recipe for success, the conventional wisdom on how a firm’s resources, knowledge and processes

should be combined and utilized to cope with the environment (Spender, 1989). Lane and

Lubatkin (1998) shift the unit of analysis of Cohen and Levinthal from the firm to the learning

dyad. They argue that the ability of a firm to learn from another firm is jointly determined by the

relative characteristics of the student firm and the teacher firm. A student firm’s absorptive

capacity, its ability to value, assimilate, and apply new knowledge from a learning alliance

partner depends upon the specific type of new knowledge afforded by the teacher firm, the

similarity between the student firm’s and the teacher firm’s compensation practices and

organizational structures, and the student firm’s familiarity with the teacher firm’s set of

organizational problems.

Given the differentiated nature of the assimilation process, knowledge from the external

environment is expected to encompass a rich diversity. Firms tend to initially respond to

diminishing prospects by adapting their existing capabilities or developing new capacities from

existing organizational knowledge (Leonard–Batin, 1992; Walsh and Ungson, 1991). Learning

such complex knowledge requires face-to-face interactions between student and teacher through

6
 AIB-MENA, 2010

interorganizational learning and alliances, rather than through bench-marking (Daft and Huber,

1987; Huber, 1991). Absorptive capacity is also seen as internal information provisioning (Lenox

and King, 2004), or the breadth of the firm’s R&D activities (Nichollos-Nixon and Woo, 2003).

Nooteboom (2000) argues that organizations need to be able to reduce the cognitive

distance between members, that is achieve a sufficient alignment of mental categories, to

understand each other while utilizing complementary capabilities to achieve a common goal. In

the literature of organization, the crux of the firm is to serve as a sense making system (Weick,

1979, 1995), or a system of shared meaning (Smircich, 1983) or an interpretation system (Choo,

1998). As knowledge plays a central role in the process of absorptive capacity, it serves both as

input and as output. We therefore expect to look into a variety of sources to have a sustainable

absorptive process. Consequently, communication and coordination could be a valuable source

of knowledge for firms. Once key resources of knowledge have been identified, it is necessary to

begin to assess their strategic significance according to their contribution to absorptive capacity.

This process may consider resources’ value relations and has three stages: knowledge resources

identification, knowledge resources prioritization, and identification of the nature of the

exchange. Absorptive capacity has been linked to valuable organizational outcomes such as

learning and innovation (Kim, 1998; Mowery, Oxley, and Silverman, 1996).

2.2 Alliances and absorptive capacity

As firms develop relationships to gain access to external knowledge, their ability to

process and transfer the knowledge gained in one context to another context becomes critical

(Powell, 1998). Alliances with other firms can provide the firm with adequate exposure and

experience necessary to develop its absorptive capacity (Cohen and Levinthal, 1990). In

7
 AIB-MENA, 2010

particular high technology firms can no longer rely exclusively on their internal skills knowledge

to maintain innovative products, goods, and services (Arora and Gambardella, 1994; Deeds and

Hill, 1996; Grant, 1990; Zahra and Bongner, 2000).

In their work, George, Zahra, Wheathley, and Khan (2001) examine how absorptive

capacity mediates the relationship between alliance portfolio characteristics and a high

technology company’s innovative and financial performance, integrating insights from two

complementary theoretical perspectives. The first is the relational perspective of the firm (Dyer

and Singh, 1998; Gulati, 1998, 1999; Koza and Lewin, 1998). This relationship has major effects

on creating and transferring knowledge. The second perspective is learning theory, which views

the value of knowledge as a key source of competitive advantage (Grant, 1996). This view

encourages not only creation of new knowledge but also (and more important) the transfer of that

knowledge to new products or processes. It suggests that while the creation of knowledge is

important, the conversion of this knowledge into new products is the foundation of superior

performance (Leonard-Barton 1995; Moon, 1999; Nonaka and Takeuchi, 1995).

George, Zahra, Wheatly, and Khan (2001) examine alliances as a portfolio of strategic

agreements. They examine two characteristics of the alliance portfolio: structure and knowledge

flow. Structure refers to whether an alliance is completed with a firm at the same level of the

value chain (horizontal) or at a different level (vertical). Alliance structures, whether horizontal

or vertical, are associated with varying degrees of innovativeness (Hagedoorm, 1993; Kotabe and

Swan, 1995). Knowledge flows refer to the direction of knowledge transmission and the sharing

that occurs among alliance partners (Hagedoorn and Schakenraod, 1994). Baun et al. (2000)

argue that firms enter into alliances with different motivations that include learning new skills or

8
 AIB-MENA, 2010

gaining access to complementary resources (Dyer and Singh, 1998). Portfolio analysis may

provide better inferences about a firm’s competence because of path dependency and the

accumulation of skills and resources (Christensen, 1997; Dosi, 1999).

Knowledge flow represents building blocks in the absorptive capacity process, which

may take different forms, such as joint R&D with generative alliances. Hagedoorn (1993) argues

that alliances are important to the firm in supporting new technology and, therefore, are useful in

shortening the learning cycle, expediting product development and reducing R&D costs. Dyer

and Singh (1998) demonstrate the importance of generative alliances and frequent interactions

that induce trust, making partners more willing to exchange ideas and share sensitive

information. Learning values are assumed to develop over time after repeated exposure to

external environments. Absorptive capacity can improve a firm’s performance by exploiting

existing internal and external firm-specific competencies to address changing environments

(Teece, Pisano and Shuen, 1997).

Granstrand and Sjolander (1990) conceptualized and operationalized the value

dimensions at the firm level to gain knowledge by scanning the external environment and then

transforming the knowledge throughout the firm to create value. An interesting set of exchanges

concerns relationships between firm cultures and acquired and assimilated knowledge. Zander

and Kogut (1995) suggest that combining knowledge is an important way to create new products

and improve financial performance. Cockburn and Henderson (1998) define a firm’s absorptive

capacity as a product of relationships and access to knowledge from external sources. Such a

definition leads us to the benefits of alliance characteristics when alliance partners combine,

exchange, or invest in assets and knowledge capabilities (Nooteboom, 1999). Alliance partners

can improve their productivity by making relationship–specific investments in site, physical

9
 AIB-MENA, 2010

assets and human assets (Williamson, 1985). Site specifically refers to the successive stages that

are immobile in nature, being located close to one another, thereby reducing inventory

transportation and manufacturing coordination (Dyer, 1996). Human assets refer to developing

knowhow through repeated interactions between alliance partners. The results of George, Zahra,

Wheatley and Khan (2001) highlight the importance of the absorptive capacity construct for firm

performance, its role within the alliance performance, and its role within the characteristic

alliance portfolio framework. Absorptive capacity enables the firm to transform knowledge

gained from the external environment into commercial ends or advanced processes.

2.3 National innovation system and national absorptive capacity

The idea of a national innovation system (NIS) goes back to 1841 when Friedrich List

introduced the concept of “the national system of political economy”. A century and a half later

Bengt, Ake and Lundvall used the expression ‘national system of innovation’ (1992). Freeman

(1982), Lundvall (1992), and Nelson (1982) introduced the concept of a national innovation

system as a core conceptual framework for analyzing technological change, which is the driving

force for economic growth. The history and development of this innovation system indicate that

it can be useful for analyzing less developed economies. List (1841) first developed the national

system of innovation as the basis for a German ‘catching–up’ strategy. His concept of a

‘national system of production’ took into account a wide set of national institutions, including

those engaged in education and training and in infrastructure, such as networks for the

transportation of people and commodities (Freeman, 1995).

Discussion of the innovation concept generally refers to issues such as new products,

technology, and discontinuous improvement, while discussion of the national innovation system

10
 AIB-MENA, 2010

(NIS) generally concerns matters such as firms, institutions, and knowledge sources. Some

scholars, however, have studied NIS in developing countries, such as Korea, Taiwan, and

Singapore (Kim, 1993; Hou and Gee, 1993; Wong, 1996; Wong, et al., 1999). In the second half

of the 1980s, economists began to develop this concept as a new paradigm. The idea of the

innovative capability of a national production system was introduced by Lundval in 1985.

Freeman (1987, 1988) and Nelson (1988) develop this concept further and argue that the NIS is

the system that connects all knowledge procedures in an interactive system. Noisoi et al. refer to

the NIS as the interaction among institutions, private and public firms, universities and

government agencies. This interaction may be technical, commercial, legal, social and financial

inasmuch as the goal of the interaction may be development, protection, financing or regulation

of new science and technology (Niosi et al., 1999).

The notion of the NIS concept tends to emphasize the importance of human resources in

developing the NIS system. Dahlman and Nelson (1995) analyze the relationships among social

absorptive capacity, NIS and economic performance by measuring and comparing 14 developing

countries technological capability. Mere social absorptive capacity by itself, as measured by high

technical human capital, is not sufficient to explain why some economies have performed much

better than other economies (Dahlman and Nelson, 1995). NIS is connected not only with the

development of human resources but also, in a broad sense, with hyper reality through simulation

of how activities and service processes are carried out to affect society and improve quality

through meaning, values, and better performance. The NIS deals with how institutions and

systems are built and shaped to produce ‘intensive learning’ which facilitated technological

catching-up processes in newly industrializing economies in Asia, namely, Korea, Taiwan and

Singapore (Kim, 1993; Hou and Gee, 1993; Wong, 1996; Wong et al.). These authors argue that

11
 AIB-MENA, 2010

one of the most important factors behind the successes of these countries is the embedded

autonomy of their governments. These governments can formulate and implement economic

policies that do not simply reflect those of individual firms. Furthermore, these countries have

sufficient and positive linkages with other actors, especially the private sector (Evans, 1989,

1998; Chang, 1997).

Arocena and Sutz (1999) and Gu (1999) provide understanding and insights on the NIS in

developing countries, arguing that NIS is ‘ex ante’ as opposed to an ‘ex post’ concept, more

suitable for developed countries whose institutions are working in a systemic manner. They show

that industrial innovation in developing countries is highly informal, that is not a product of

formally articulated R&D activities. Arocena and Sutz’s (1999) view of formal R&D is that,

unlike in developed countries, it is not an illustrative and complete indicator of innovativeness in

developing countries. Dahlmon and Brimble (1990) argue that developing countries tend to focus

on the short-term and are very commercially oriented. Gu (1990) suggests that NIS in a

developing country should be studied in the context of economic development and is related to

the country’s development level. Therefore promoting learning in developing countries needs to

be perceived differently from that in developed countries and capital accumulation rather than

intangible assets and learning are the main contribution to technical progress in developing

countries.

In finding the main determinants of national absorptive capacity, it is important to note

that the concept of national absorptive capacity is governed by the level of technology embodied

in capital stock. The level of absorption is associated with the level of technology, which in turn

is embodied in the country’s capital stock. Abramovitz (1986) identifies technical competence,

and political, commercial, industrial and financial institutions as the main factors of social

12
 AIB-MENA, 2010

capability, introducing the term “technological congruence” for the catching-up processes.

Hence, when the absorptive process occurs at the national level, the status of the country which

goes under absorptive processes influences the absorptive performance. For this reason,

countries can be seen as different systems that have their own dynamics.

While NIS represents a major factor of national absorptive capacity, its presence in itself

is not sufficient for successful absorption results, as it is the state of the country that creates the

absorption processes. The national absorptive capacity system is a dynamic process continuously

shaped and constrained by the nation’s capital stock, which might include firm capital stock,

economic capital stock, and environmental/institutional capital stock. Considering the totality of

capital stock, the accumulated effects and interplay of different forms of capital stock are the

outcomes of the integrated framework of the national absorptive capacity system.

2.4 National Capital Stock and National Absorptive Capacity

The concept of national absorptive capacity is complex, multilevel and dynamic. The

challenge in building an integrated framework contains multiple factors, which are

simultaneously collectively comprehensive enough to point out the sources of the country’s

growth and prosperity. The ability of a firm to learn from another firm is jointly determined by

the relative characteristics of the two firms, or relative absorptive capacity (Lane and Lubatkin,

1998). A nation’s knowledge-absorbing system can be conceived as drawing certain blocks of

capital around the absorption processes. We suggest that a nation’s absorptive capacity system is

drawn from four sources of capital stock: firm capital stock, economic capital stock,

institutional/environmental capital stock and the national innovation system. To build a sound

13
 AIB-MENA, 2010

national absorptive capacity system, a country must possess various competitive competencies in

these areas.

We suggest that combinative capabilities of the national capital stock and national

innovation system are important determinants of the national absorptive capacity system. The

ability of the national absorptive capacity system to succeed is largely a function of many

capabilities and competencies of the nation. In order to bridge the gap between the current focus

of the field and a more holistic understanding of the national absorptive capacity and its role in

transition economics, we propose an approach that first examines antecedents of national

absorptive capacity, subsequently considers factors influencing its absorbing processes and

explores outcome of an integrated framework of national absorptive capacity.

Arocena and Sutz (2000) argue that for using the NIS approach in the “South”, the

approach has to be complemented by a southern perspective, as the concept of NIS has been

developed in the “North”, e.g. in developed countries. Furthermore, “Southern heads are also

needed for adapting such intellectual tools when the situation and possible futures of a peripheral

country are studied.”( Arocena and Sutz, 2000: 55.). Szogs (2008) examines the role of a

mediator between foreign and local sources of knowledge and how a better level of absorptive

capacity can be developed through a mediator especially in least developed countries. Moreover,

these mediator or intermediate organizations may be highly important in a least developed

country context in order to (a) be able to facilitate knowledge transfer from foreign sources, (b)

assimilate it to local context and contribute to building absorptive capacity in indigenous firms

(Stankiewicz ,1995; Bessant&Rush,1995; McEvily& Zaheer,1999; Mantel & Rosegger,1987;

Hargadon & Sutton,1997; Lynn,et al.,1996; Sapsed et al., 2007).

14
 AIB-MENA, 2010

Criscuola & Narula (2002) argue that there are considerable parallels between the firm

and national level of analysis of absorptive capacity, a country’s absorptive capacity is not

simply a aggregation of its firms or its industries. There are numerous additional, combinational

and multiplicative effects which – although negligible at the firm level – take a considerable

significance at the national level. Dahlman and Nelson (1995) make a significant contribution to

the international business literature by focusing on the potential of a network of public and

private institutions and agents that support scientific and technological activities, including

research and development, technology diffusion, and creation of technical human capital, besides

networks that affect the introduction of technology that is new to the economy. They suggest that

the innovation system is strongly affected by the general macro policy environment and

incentive regime refocusing national absorptive capacity on national innovation system (NIS) as

opposed to hard/soft infrastructure capabilities and environmental /Institutional issues. The key

to this view is that it involves processes of interactive meaning between two sides of input NCS

and NIS.

Insert Figure 1 here

The integrated model presented here is useful in understanding the main categories of

variables in the absorption process model. Figure 2 exhibits both theoretical and contextual

domains linking the nation’s capital stock and national innovation system in which a perceived

integrated national absorptive capacity system is a key outcome. From a theoretical standpoint,

this study offers an examination of a perceived integrated framework of a national absorptive

capacity system. The essence of combining NCS and NIS are that the nation should capture,

adapt, develop, share and utilize its recourses and capabilities as basic building blocks to

15
 AIB-MENA, 2010

establish a national absorptive capacity system, which is the main engine for sustainable growth.

Dahlman and Nelson (1995) define national absorptive capacity as the ability to learn and

implement the technologies and associated practices of already developed countries. Much

research into economic growth, upgrading, innovation and economic development has focused

on the accumulation of competencies or the creation of markets as the cornerstone of the

development process (Astrid, Cristina, Ruzana, 2008).

Lundvall (1992) and Edqist (1997) stated that the innovation system approach focuses on

and emphasizes the innovation process as being of a systemic nature. An increasing amount of

research links R&D to the process of ‘learning to learn’ (Lundvall, 1992), but here we should

refer to Cohen and Levinthal’s concept of spillover: firms must be able to exploit other firms’

knowledge to the degree that it has ‘spilled out’ and the process of absorption is not purely about

imitation. Edquist and Johnson (1977) refer to the institutions that determine and regulate the

interaction between individuals and groups. Freeman (1992), Johnson (1992), and Narala (2002)

define the job of institutions as that of creating the milieu within which innovation is undertaken

and of establishing the ground rules for interaction between the various economic actors.

This approach implies a sort of ‘culture’ of innovation and therefore influences the

dynamics of the learning process. Lall and Pietrobelli (2005) emphasize the firm’s own

technological efforts to be able to identify, select and acquire the external technological

knowledge, and these technological efforts vary between developed and developing countries.

Dahlman and Nelson (1995) refer to technological efforts as technological capabilities that cover

knowledge and skills needed to acquire, assimilate, utilize, adapt and create technology, and the

better a country is able to accumulate these capabilities , the more successful the intended catch-

up process will be. While the concept and practice of national absorptive capacity has made

16
 AIB-MENA, 2010

significant advances in the past two decades, there have still been much debate and calls for

better ways to conceptualize and measure national absorption. For example, Barro and Sala-i-

Martin (1997) argue in their model of technological diffusion that backward countries can select

for imitation only from the uncopied subset of the lead country’s technology stock and that the

follower will first choose to imitate technologies that are easier and cheaper to imitate. For this

reason, counties can be seen as separate systems that have their own dynamics (Lundvall, 1992b;

Nelson, 1993a). Balaguer, etal. (2008); Kam, Wong and Singh (2008), and Lim (2008) all

express their concern about the difference between those technological capabilities that are

product–related and those that are process-related. They explain that the technological effort in

developing countries is usually oriented towards the absorption of technologies developed

elsewhere (which in turn requires process innovations), rather than towards development of their

own innovations (product innovations). Zahra and George (2002) argue that there are two

different types of absorptive capacity: first, potential absorptive capacity (PACP), which

comprises knowledge acquisition and assimilation capabilities and, second, realized capacity,

which focuses on knowledge transformation and exploitation.

We argue that a nation’s commitment to locating, adapting, developing, sharing and

utilizing refers to the extent to which NCS and NIS are available to create an integrated system

of national absorptive capacity. As increasing levels of NCS and NIS are committed to NACS,

dynamic processes improve and implement more adaptive strategies, as the integrated system

requires greater resources. Without appropriate NCS and NIS resources committed to national

absorptive capacity, the nation is unable to engage in the necessary adaptation of its absorptive

capacity strategy in order to enhance economic, political, social and learning environments.

Thus, this approach seems particularly suitable to theory building in a national setting, and it

17
 AIB-MENA, 2010

could be accepted as a unique and integrated system of building a national absorptive capacity.

Figure 2 summarizes all the determinants playing the foundation roles in the current system.

3. Conclusion

This paper has discussed the issue of national absorptive capacity as the basis for an

empirical study in transitioning countries. Further discussion of the concept at the AIB-MENA

conference will assist in developing a efficacious model which can be tested in the region. We

propose to examine the national absorptive capacity of three major countries in the Arab region:

Egypt, Saudi Arabia and United Arab Emirates. Each of these countries holds a prominent

position in the Arab region. The United Arab Emirates is the country in the Arab region most

connected to the world economy, inasmuch as the biggest number of international companies and

international universities are there. Saudi Arabia’s economy is the biggest in the Arab region,

and Egypt has the biggest population in the region. The diversity among these three economies:

the UAE’s openness, Saudi Arabia’s single resource economy, and Egypt’s human resources

lend balance to the study and give it a more precise outlook.

A second motivation for studying national absorptive capacity of these Arab countries

arises from the need for a strategy to improve the degree of national absorptive capacity and thus

national competiveness. Given higher costs, greater competition and increasing population,

nations seek to increase the efficiency of their economies. As a consequence, nations need a

more thorough understanding of absorptive capacity as a basic requirement for making better

strategic decisions about institutional structure, firms’ competiveness, human capital, R and D,

and a national innovation system.

18
 AIB-MENA, 2010

References

Abramovitz M. (1986). “Catching up, forging ahead, and falling behind.” The Journal of
Economic History, Vol. 46 No. 2, pp. 385-406.

Argyris, C. and Schon, D. (1978). “Organisational learning: A theory of action perspective”.

New York: McGraw-Hill.

Minbaeva, D. B. (2007). “Knowledge transfer in multinational corporations.” Management

International Review, Vol. 47 No. 4, pp. 567-593.

Barney, J. (2000). “Firm resources and sustained competitive”. Advances in Strategic

Management , Vol. 17, pp. 203-227.

Van den Bosch, F.A.J., Volberda, H. W. and de Boer, M. (1999). “Coevolution of firm
absorptive capacity and knowledge environment: organizational forms and combinative
capabilities.” Organization Science, Vol. 10, pp. 551-568.

Branstetter L. (2001) . Are Knowledge spillovers international or intranational in scope?

Microeconometric evidence from the U.S. and Japan. Journal of International Economics , 53,
53-79.

Claeser E., Porta R. and Silanes F. (2004). Do Institutions Cause Growth? Journal of Economic
Growth , 9, 271-303.

Cohen, W. M. and Levinthal, D. A. (1989). “Innovation and Learning: The Two Faces of R&D”.
Economic Journal, Vol. 99, pp. 569-596

Cohen W. M. and Levinthal D. A. (1990). A new Perspective on Learbing and Innovation.

Administrative Science Quarterly , 35 (1), 128-152.

Criscuolo P. and Narula R. (2002). “A novel approach to national technological acccumulation

and absorptive capacity: Aggregating Cohen and Levinthal.” MERIT - Infonomics Research
Memorandum Series.

Danneels E. (2002). The Dynamics of Product Innovation and Firm Competencies . Strategic
Management Journal , 23, 1095-1121.

Deeds D. (2001). The role of R and D intensity , technical development and absorptive capacity
in creating entrepreneurial wealth in high technology start-ups. Journal of Engineering and
Technology Mnagement , 18 (1), 29-47.

Fabrizio K. (2009). Absorptive Capacity and the Search for Innovation . Research Policy , 38,
255-267.

19
 AIB-MENA, 2010

Fiol, C.M. and Lyles, M.A. (1985). “Organizational learning.” Academy of Management Review,
Vol. 10 No. 4, pp. 803-813.

Freeman C. (1995). The 'National System of Innovation' in historical perspective. Cambridge

Journal of Economics , 19, 5-24.

George G., Zahra S., Wheatley K . and Khan R. (2001). The effects of alliance portfolio
characteristics and absorptive capacity on performance a study of biotechnology firms. Journal
of Hihj Technology , 12, 205-226.

Haskel J, Pereira S . and Slaughter M. (2007). Does Inward Foreign Direct Investment Boost
the Productivity of Domestic Firms? The Review of Economics and Statistics , 89 (3), 482-496.

Hedberg, B. L. T., Nystrom, P. C., and Starbuck, W. H. (1976). "Camping on seesaws:

Prescriptions for a self-designing organization." Administrative Science Quarterly, 21: 41-65

Henisz, W. (2000). The Institutional Environment of Economic Growth. Economics and Politics
(1), 1-31

Hoekman B., Maskus K . and Saggi K. (2005). Transfer of Technology to Developing Countries:
Unilateral and Multilateral Policy Options. World Development , 33 (10), 1587-1602.

Intarakumnerd P., and Chairatana P. A . and Tangchitpiboon T. (2002). National innovation

system in less successful developing countries: the case of Thailand. Research Policy , 31, 1445-
1457.

Jaffe A., Trajtenberg M. & Henderson R. (1993). Geographic Localization of Knowledge

Spillovers as Evidenced by Patent Citations. Quarterly Journal of Economics , 108 (3), 577-598.

Kogut B. and Zander U. (1992). Knowledge of the Firm, Combinative Capabilities, and the
Replication of Technology . Organization Science , 3 (3), 383-397.

L., B. (2006). Is foreign direct investment a channel of knowledge spillovers?Evidence from

Japan's FDI in the United States. Journal of International Economics , 68, 325-344.

Lane P. and Lubatkin M. (1998). Relative Absorptive Capacity and Interorganizational

Learning. Strategic Management Journal , 19, 461-477.

Lane P.,Koka B. and Pathak S. (2006). The Reification of Absorptive Capacity: A Critical
Review and Rejuvenation of the Construct. Academy of Management Review , 31, 833-863.

Leahy D. and Neary P. (2007). Absorptive capacity, R and D spillovers, and public policy.
International Journal of Industrial Organization , 25, 1089-1108.

20
 AIB-MENA, 2010

Levine, R. (1997). Financial Development and Economic Growth: Views and Agenda. Journal
of Economic Literature , XXXV, 688-726.

Liao S., Fei W . and Chen C. (2007). Knowledge sharing, absorptive capacity, and innovation
capability: an emprical study of Taiwan's knowledge-intensive industries. Journal of Information
Science , 33 (3), 340-359.

Limongi F. and Przeworski A. (1993). Political Regimes and Economic Growth . The Journal of
Economic Perspective , 7 (3), 51-69.

Minbaeva, D. (2007). Knowledge Transfer in Multinational Corporations. Management

International Review , 47 (4), 567-593.

Morck R., (2004). Absorptive capability and economic growth: how do countries catch-up. The
Journal of Economic Perspective 28, 577-596.

Morck R., Wolfenzon D . and Yeung B. (2005). Corporate Governance, Economic

Entrenchment, and Growth. Journal of Economic Literature , 43 (3), 655-720.

Narula R. (2003). Understanding Absorptive Capacities in an " Innovation Systems" Context:

Consequences for Economic and Employment Growth. DRUID Working Paper No 04-02

Nooteboom B. (2000). Learning by Interaction: Absorptive Capacity, Cognitive Distance and

Governance. Journal of Management and Governance , 4, 69-92.

Posner R. (1998). Creating a Legal Framework for Economic Development. International Bank
for Reconstruction and Development/ The world Bank .

Rogers, M. (2004). Absorptive capability and economic growth: how do countries catch-up? 28,
577-596.

Romain A. and Pottelsberghe B. (2004). The Economic impact of Venture Capital. Studies of the
Economic Research Center, Series 1:18/2004.

Sofka W. (2008). Globalizing Domestic Absortive Capacities. Management International Review

, 48 (6), 769-792.

Temple J. and Johnson P. (1998). Social Capability and Economic Growth. The Quarterly
Journal of Economics , 113 (3), 965-990.

Todorova G. and Durisin B. (2007). Absorptive Capacity: Valuing a Reconceptualization. 32 (3),

774-786.

Woolcock M., Isham J., Pritchett L. and Busby Gwen. (2005). The Varieties of Resouce
Experience: Natural Resource Export Structures and the Political Economy of Economic

21
 AIB-MENA, 2010

Growth. Oxford University Press on behalf of the International Bank for Reconstruction and
Development/The World Bank .

Yli-Renko H., Autio E. and Sapienza H. (2001). Social Capital, Knowledge Acquistion, and
Knowledge Exploitation in Youing Technology-Based Firms. Strategic Management Journal,
22, 587-613.

Zahra S. A. and George G. (2002). Absorptive Capacity: A Review, Reconceptualization, and

Extension. Academy of Management Review , 27 (2), 185-203.

22
 AIB-MENA, 2010

Figure 1

National Absorptive
Capacity System ((NACS)

National Capital Stock National Innovation

(NCS) System (NIS)
ssysysysysysyssyyyyyste
m (NIS)

23
 AIB-MENA, 2010

Figure 2

National Absorptive Capacity System (NACS)

Firms Capital Stock

 Product Innovation and firm Competences.
 Firm's ability to acquire new technologies.
 Local firms that sell branded products in
international market.
Environmental / Institutional
Capital Stock.
 Political institutions.
develop
 Intendance of legal system.
 Intellectual property system.

An Integrated
adapt

utilize
Framework

Economic Capital Stock Of NACS National Innovation System (NIS)

 Venture Capital.  Learning organization.

 Productivity spillover from FDI.
 National resources
capture
 R&D expenditure as percentage of GDP
(business/ public/ higher education).
 Public expenditure in education and health
sectors as percentage of GDP.

24

View publication stats