Absorptive capacity and economic development- Valutrics
The geography of innovation is diverse and uneven. Each city or region’s specialist knowledge depends on its economic and industrial structure; these structures consequently create diversity between places.
By the 1950s, the ‘absorptive capacity’ of regions and countries had been identified as critical to economic development. Due to their limited access to capital, technical training and formal education, and their poor industrial knowledge base, developing countries have to rely on external sources of capital, technology and knowledge. In a recent report, the World Bank states that domestic absorptive capacity both conditions and attracts external flows. The report adds: “the bulk of technological progress in developing countries has been achieved through the absorption and adaptation of pre-existing and new-to-the- market or new-to-the-firm technologies, rather than the invention of entirely new technologies”.
According to the World Bank, two main factors affect the absorptive capacity of developing countries: the extent to which a country is exposed to foreign technologies; and its ability to absorb and adapt those technologies.
The importance of ‘absorptive capacity’ in reaping the benefits of foreign investment has gained more significance with the global growth of FDI flows. For example the strength of local absorptive capacity in the Chinese regions ensured that such investment drove knowledge-based development. Likewise, a weaker capacity in Indonesia and Mexico is said to have prevented these countries from taking advantage of growing foreign investment. The strength of absorptive capacity of regions is crucial for the spread of knowledge and ideas through and across multinational enterprises.Indeed, international alliances between firms are the main route for their transfer between countries and territories.
While firms are not necessarily the sole agents of absorptive capacity, they are the most relevant players in local innovation activities.
There are fewer innovating than imitating companies. This is why a great share of absorptive capacity literature has focused on firms. In this context, the concept of ‘absorptive capacity’ was first coined by Cohen and Levinthal (1990) to refer to a firm’s ability to identify, assimilate and exploit knowledge from external sources.
source: world bank
The ‘absorptive capacity’ of a firm is mediated by the wider environment in which it competes and operates. A firm that is part of an industrial cluster characterised by a strong absorptive capacity will be better positioned to benefit from high levels of spillovers, learning and growth. The role of the wider innovation environment has triggered a greater interest in the concept of the absorptive capacity of places. This has been implicit in the various bodies of work underlying the learning regions paradigm, such as innovation milieux, innovation networks, and regional productive systems, as well as national and regional innovation systems. The learning region concept stipulates that the coordination and integration of the production and innovation processes requires a reciprocal exchange of information and knowledge along the supply chain. The extent to which this happens drives firms to create and draw on territorial networks that either reinforce ties of proximity or break existing territorial networks to develop extra- territorial links.