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Key Concepts


The word innovation is used often without further clarification. In product descriptions, press releases, company mission statements and even strategic objectives. It can mean many different things in many different contexts. For this report we use the Department of Trade and Industry broad definition of innovation as ‘the successful exploitation of new ideas’. This definition does not convey any assumption over the dimensions of the innovation in question. Even though the focus of this paper is on innovation and new product development in technology based SMEs; the innovation aspect is in no way limited to technical innovation.

DTI’s definition leads to two other questions 1) what is success and 2) where do the ideas come from. The answer to the first question is that success is where value is obtained from the innovation that is attributed to the owner of the innovation. The benefit of innovation is usually expressed in terms of competitive advantage. Core to the competitive advantage innovation provides is the capability to recognise and adjust to the changing environment and be differentiated from the competition. This dynamic capability is a central feature of innovation capacity. The second question of where do ideas come from is the subject of this study.

Absorptive Capacity (ACAP)

The value of innovation to a firm is derived from the explicit success in the definition. In considering ‘the successful exploitation of new ideas’ there are two processes inferred 1) the generation of ideas, and 2) the exploitation of ideas. Cohen and Levinthal (1990) originally defined ACAP as a firm’s "ability to recognize the value of new information, assimilate it, and apply it to commercial ends". The information needed to generate an idea or concept can come from anywhere, but there are access limitations. First the value of this information must be recognised, this requires that the information is accessible and understood to be relevant. Secondly the information must be understandable; think back to the case of the Stone Age man in Singapore! Cohen and Levinthal (1990) identified these processes as capabilities that had to be developed as they are cumulative. Two factors are important from their work; that ACAP is path dependant in the way that knowledge can only be built upon a foundation of associated relevant knowledge, and secondly the ability of a firm to quickly respond to and exploit new information in a field requires a high level of ACAP in that field. So both the path dependency and need to sustain an appropriate level of ACAP in fields of value to a company mean a company must invest constantly in this capability.

Zahra and George (2002) further divide the concept of ACAP into four knowledge related dimensions: acquisition, assimilation, transformation and exploitation. They also grouped these dimensions into two components:

Potential Absorptive Capacity (PACAP) which ‘makes the firm receptive to acquiring and assimilating external knowledge’ and thus consists of the acquisition and assimilation dimensions.
Realized Absorptive Capacity (RACAP) which ‘is a function of the transformation and exploitation capabilities’ relating to the transformation and exploitation dimensions.