Paper to be presented at the DRUID Summer Conference 2004 on
INDUSTRIAL DYNAMICS, INNOVATION AND DEVELOPMENT Elsinore, Denmark, June 14-16, 2004
Theme F: Networks, Clusters and other inter-firm relations as Vehicles for Knowledge Building and Transfer
SOCIAL CAPITAL AS AN ANTECEDENT OF ABSORPTIVE CAPACITY OF FIRMS Rajesh S. Upadhyayula D1719, Indian Institute of Management, Vastrapur, Ahmedabd. 380015 (India) Phone: +91-79-26327719 (
[email protected]) & Rajiv Kumar (
[email protected]) Submitted on 12th June, 2004 Abstract: This paper theorizes about the causal relationship between a firm’s social capital (both internal and external) and its absorptive capacity. Structural, relational and cognitive dimensions of external social capital were posited to influence the potential absorptive capacity of a firm. We also propositioned that cognitive dimension of external social capital would mediate the influence of structural and relational dimensions on the realized absorptive capacity. Similar propositions were deduced for internal social capital of a firm and its potential and realized absorptive capacity. We also discussed the problems in measurement of absorptive capacity and social capital. Keywords: Social capital, absorptive capacity, knowledge transfer JEL Classification: D21, D23, L10, L14, O31
Introduction It is still debated whether the existence and boundaries of firms can be better explained by the contractual perspectives (Coase, 1937; Williamson, 1985) or by the knowledgebased/resource-based perspectives (Conner & Prahlad, 1996; Kogut & Zander, 1992; 1996). But if the purpose is to investigate the sources of competitive advantage, then knowledgebased conceptualization is quite useful (Foss, 1996). As changes in the international economy shifted the sources of firms’ competitive advantage from static price advantage to dynamic improvement, knowledge is increasingly considered a major source of such dynamic competitive advantage (Eisenhardt & Zbaracki, 1992; Maskell & Malmberg, 1999). Firms need to continuously modify, refine or create new knowledge to sustain their competitive advantage (Conner & Prahlad, 1996; Grant, 1996; Kogut & Zander, 1996). For example, firms like Coca Cola Company and Dell Computers have sustained their competitive advantage by continuously upgrading their marketing (for Coca Cola) and production (for Dell) capabilities (Zahra & George, 2002). As continuous upgrading of knowledge resources is crucial, firms need to possess routines that principally drive the creation, evolution or recombination of existing and/or new knowledge. These strategic organizational routines are labeled as dynamic capabilities of a firm (Eisenhardt & Martin, 2000). The dynamic capabilities change the knowledge base of a firm through the following two processes (Cohen & Levinthal, 1990).
A. Creation of new knowledge resources within the firm (e.g., through research and development) B. Recombination of existing knowledge with new knowledge acquired from outside
One should note that these two processes are not mutually exclusive. The distinction between them, however, stems from firm’s outward orientation in knowledge creation. The first process is relatively detached from outside linkages, while these very linkages drive the second process. This paper is primarily concerned with the second process. As knowledge transfer to
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firms is an integral ingredient of this process, it is necessary to consider the factors that influence knowledge transfer. Literature has identified three such factors, as discussed below.
Factors Influencing Knowledge Transfer
Three factors that influence knowledge transfer to firms are as follows.
a. Characteristics of knowledge getting transferred (Szulanski, 1996; Zander & Kogut, 1995) b. Motivation of source and recipient firms (Szulanski, 1996) c.
Absorptive capacity of firms (Cohen & Levinthal, 1990; Lane, Balaji & Pathak, 2002)
A closer examination of these factors reinforces the importance of absorptive capacity. Characteristics of knowledge viz., tacitness, context specificity, etc., affect knowledge transfer, but these characteristics are inherent to knowledge and recipient firms can not influence them. Firms providing knowledge can devise mechanisms (e.g., metaphors) to transfer even tacit or context specific knowledge to some extent (Nonaka, 1994), but recipient firms can not. Similarly, motivation of the source and recipient firms are important factors, however, in the absence of absorptive capacity, motivation alone can not help knowledge transfer much (Szulanski, 1996). Hence absorptive capacity emerges as the most critical 1
factor influencing knowledge acquisition from external sources .
Absorptive Capacity
Absorptive capacity is the ability of the firm to identify and value, assimilate and exploit external information (Cohen & Levinthal, 1990). Zahra & George (2002) stated that one of the 1
Although absorptive capacity is crucial for knowledge transfer, relative absorptive capacity between two firms is a
more important determinant of knowledge transfer (Lane & Lubatkin, 1998). However, this paper focuses on individual firm’s absorptive capacity only.
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principal lacunae of this specification of absorptive capacity is that it does not capture the dynamic nature of the construct, and accordingly they re-conceptualized it. Zahra & George (2002: 186) specified absorptive capacity as “a set of organizational routines and processes by which firms acquire, assimilate, transform and exploit knowledge to produce a dynamic organizational capability.” They further suggested two dimensions of absorptive capacity:
A. Potential absorptive capacity (PACAP) which comprises of knowledge acquisition and assimilation capabilities, and B. Realized absorptive capacity (RACAP) which includes knowledge transformation and exploitation capabilities.
Acquisition refers to firm’s capability to identify and acquire external knowledge that is critical to its operations. Assimilation refers to firm’s routines and processes which allow it to analyze, process, interpret and understand the information obtained from external sources. Transformation indicates firm’s ability to develop and refine the routines that help combine the existing knowledge with newly acquired and assimilated knowledge. Exploitation refers to the firm’s ability to incorporate new knowledge into its operations (Zahra & George, 2002).
Zahra & George (2002) improve the specification of absorptive capacity by identifying its subdimensions i.e., acquisition, assimilation, transformation and exploitation capabilities. They also capture the dynamic nature of the construct. Since the specification of Zahra & George (2002) is an improvement over the specification of Cohen & Levinthal (1990), we use the specification of Zahra & George (2002) in this paper.
Antecedents of Absorptive Capacity
Considering the importance of absorptive capacity, exploration of its antecedents becomes essential. There is not much literature on this topic though (Lane et al., 2002). Cohen & Levinthal (1990) have indicated prior related knowledge (including learning experience,
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shared language, etc.) as one important antecedent of absorptive capacity. Yli-Renko, Autio, & Sapienza (2001) have suggested that repeated interactions with other firms enhance the ability of firms to evaluate and acquire pertinent knowledge from other firms. Zahra & George (2002) mention some other factors like external sources, activation triggers and social integration mechanisms. External sources include acquisitions, licensing and contractual agreements, joint ventures and inter-organizational relationships (Zahra & George, 2002).
This paper focuses upon one major feature of the antecedents of absorptive capacity identified above, i.e., social capital. A few studies have established the relationship between strength of ties (an aspect of social capital) and knowledge transfer (Hansen, 1999; Uzzi, 1996, 1997, 1999). However, most studies on absorptive capacity only mention the importance of different aspects of social capital (e.g., inter-organizational relationships, shared language) for absorptive capacity, but fail to develop a full theory. For example, Tsai (2001) shows that position of a business unit in a network (a structural feature of social capital, as discussed below) significantly influences innovation in organization, and absorptive capacity mediates this relationship. However, the author does not examine the relation between other aspects of social capital and absorptive capacity. On the other hand, there are studies relating social capital of a firm to its performance, innovation, knowledge transfer and learning, but they have missed the concept of absorptive capacity in their discourse. These studies infer the relationship between knowledge transfer and social capital through the effect of social capital on performance (Ingram & Roberts, 2000; Reagans & Zukerman, 2001). For example, better performance of hotels in Sydney hotel industry was attributed to the information exchange between the competitors network, but absorptive capacity was not explicitly investigated (Ingram & Roberts, 2000).
Thus there is a need for a fuller and exclusive examination of relationship between social capital and absorptive capacity of a firm. This paper aims to fill this gap. The next section would briefly describe social capital. The subsequent sections would derive propositions relating social capital of a firm to its absorptive capacity. The penultimate section would
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highlight issues relating to the operationalization of both the concepts and then we conclude with a discussion on the directions for future research.
Social Capital
Social capital as a concept was used in the literature as early as in 1920. The earliest direct mention of the term can be found in Hanifan’s The community centre (1920: 78, as quoted in Osgood & Ong, 2001) as referring to “those tangible assets [that] count for most of the daily lives of people: namely goodwill, fellowship, sympathy and social intercourse among the individuals and families who make up a social unit.” The last two decades have seen the resurgence of this concept. The recent popularity of social capital followed the works of Coleman (1988), Grannovetter (1973, 1985), Nahapiet & Ghoshal (1998), Putnam (2000) and Uzzi (1997). However, as is true of many concepts, social capital literature highlights some serious problems like multiple specifications (at various levels of analysis) and multiple (and often improper) operationalizations. In fact, some skeptics commented that social capital is “a wonderfully elastic term” (Lappe & Dubois, 1997: 119, as quoted in Adler & Kwon, 2002) and it means “many things to many people” (Narayan & Lant: 1997: 2). Not so pessimist scholars have, however, pointed out some convergence on two issues.
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One agreement emerging in literature is that social capital refers to social relations, and is vested in these very relationships (Piazza-Georgi, 2002: 462, 471).
•
Another consensus growing in the literature is that social capital stands for the ability of actors to secure some benefits by virtue of their membership in a social network (Portes, 1998).
One such benefit of social capital is economic benefit. Social capital theory asserts that economic relations are embedded within the larger social, legal and political context (Granovetter, 1973, 1985). Social capital at times yields direct economic advantages, as in providing referrals while seeking information. However, it also provides some indirect
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advantages by freeing up resources. This is evident in the way social values like caring for an unknown child frees up time and energy for a mother (Coleman, 1990, as quoted in Tsai & Ghoshal, 1998: 465). Likewise, social capital also reduces monitoring costs in a firm (Dyer & Singh, 1998).
As mentioned, social capital has been conceptualized at many levels, ranging from family (Coleman, 1988; Parcel & Menaghan, 1994) to organization (Dess & Shaw, 2001) to community (Beaulieu, Israel, Hartless, & Dyk, 2001). This paper focuses on firm level social capital. We adopt the specification of Nahapiet & Ghoshal (1998: 243), who state that social capital is...
“…the sum of the actual and potential resources embedded within, available through, and derived from the network of relationships possessed by an individual or social unit.”
Dimensions of Social Capital
We have viewed social capital of a firm to be multidimensional, as suggested by Nahapiet & Ghoshal (1998). They have identified following three dimensions of social capital.
a. Structural dimension – This reflects the impersonal properties of the network of relations. Features like network ties, density, configuration and appropriability constitute this dimension. Essentially, this dimension can be assessed by answering following three questions.
1. Is there some hierarchy in the network? 2. How many times two actors in a network connect to each other? The depth/strength of such connections is not of concern here, only presence or absence of connections matter. 3. What is the overall pattern of all such dyadic linkages existing in a network?
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b. Relational dimension – Apart from presence or absence, it is useful to consider the kind of interpersonal relations actors have developed over time. Relational dimension of social capital captures this by considering the quality of dyadic ties (like trust, obligations, friendship, etc.), and the extent to which some such qualities are shared among all the dyadic ties (like a shared expectation that actors will trust one another). c.
Cognitive dimension – This dimension provides label for such properties as shared meanings, language, symbols, etc. across the members of a network.
External and Internal Social Capital of a Firm
A firm can have social capital inhering in its external relationships as well (Adler & Kwon (2002; Koka & Prescott, 2002; Nahapiet & Ghoshal, 1998: 257, 261). Further, Adler & Kwon (2002) suggest that the behavior of a collective actor (such as a firm) is influenced both by its external linkages to other firms and institutions and by linkages within the firm. Its capacity for effective action is typically a function of both (Adler & Kwon, 2002). Accordingly, we adopt the view that a firm has social capital inherent in intra-firm relationships, as well as in inter-firm relationships. We label them as “internal” and “external” social capital of a firm, respectively.
With this background on social capital of a firm, we move on to the main theme of this paper, i.e. relationship between social capital and absorptive capacity.
External Social Capital and Potential ACAP
Many authors (e.g., Starbuck, 1992) have described how social networks facilitate information exchange. This section discusses how external social capital of a firm influences its potential absorptive capacity (PACAP). The influence of the three dimensions of external social capital is discussed separately.
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Structural Dimension
Alliance partners are important sources of new, external knowledge (Inkpen & Dinur, 1998). Additionally, knowledge is more easily transferred among alliance partners than through market mechanisms (Shenkar & Li, 1999). Allen (1984, as quoted in McGrath, Vance, & Grey, 2003) postulated outside contacts to be a good source of novel ideas for the software firms. In general, network ties influence the ability to acquire information (Tsai & Ghoshal, 1998: 465). Ceteris paribus, a firm’s ability to acquire information is proportional to the number of ties it has. Burt (1992, as quoted in Nahapiet & Ghoshal, 1998: 252) has identified three informational benefits of a network membership. Two of these three benefits are:
a. Access to information b. Access to useful referrals
These benefits improve a firm’s ability to acquire relevant information. However, it is noteworthy that sparse network of ties add to this ability (Kraatz, 1998), while dense ties do not (Burt, 1992, as quoted in Nahapiet & Ghoshal, 1998: 252). At the same time, more complex information can flow only through strong ties (Hansen, 1999; Larson, 1992; Levin, Cross & Abrams, 2002)
Some network ties can serve multiple purposes, a property labeled as “appropriable organization” of such ties. The enhanced ability of the firm to identify and acquire relevant information can be one of such multiple purposes served by appropriable ties (Nahapiet & Ghoshal, 1998: 253). For example, Uzzi (1996) illustrates how both, arm’s length as well as close ties, can act as conduits for information.
Based on above discussion, we deduce the following proposition.
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Proposition 1a
Structural dimension of external social capital of firms contributes to their potential absorptive capacity.
Cognitive Dimension
Different firms can interact only if they share each other’s language. In fact, more knowledge is transferred if actors in a network share a similar language (Weber & Camerer, 2003). Thus to the extent that firms share the same language, it facilitates access to information (Nahapiet & Ghoshal, 1998). Shared language can be conceptualized as a degree. Then, the ability to acquire information is proportional to the degree of shared language in a network.
Firms also share codes among themselves, and these shared codes too can be conceptualized as a degree. Assimilation of new information is contingent upon, among other things, how different a heuristic this information represents and context specificity of information (Zahra & George, 2002). The ability to assimilate information is proportional to the degree of shared codes. Shared code among firms is particularly helpful in assimilation when new information is context specific and/or constitutes a significantly different heuristic. Orr (1990, as quoted in Nahapiet & Ghoshal, 1998) demonstrates how shared narratives, stories, etc. help transmit information in a firm.
Cohen & Levinthal (1990) indicate another important attribute of cognitive dimension of external social capital. They posit that a part of knowledge in a network of firms is shared amongst them. Firms also possess knowledge unique to them. This mix of shared and unique knowledge influences knowledge acquisition ability of a firm in that network. Lolstrom (2000, as quoted in Zahra & George, 2002: 183) showed shared understanding to be a pre-requisite
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for firm’s learning. Lane & Lubatkin (1998) also showed that when a student firm understood and shared the assumptions under the teacher firm’s systems, learning was facilitated.
The above discussion helps us deduce the following proposition.
Proposition 1b
Cognitive dimension of external social capital of firms contributes to their potential absorptive capacity.
Relational Dimension
The ability to acquire information from a tie is proportional to the trust in the tie (Fukuyama, 1995; Ring & Van de Ven, 1992, 1994). Trust is a very important factor in receiving useful knowledge from strong ties. After controlling for trust, the net receipt of useful knowledge from strong ties is worse than that from weak ties. Trust also plays a very important role in the transfer of tacit knowledge (Levin et al., 2002).
Norms represent a consensus about desired behavior in a social system (Nahapiet & Ghoshal, 1998). Cognitive processing of certain kinds of information is normatively driven (Channouf, Py, & Somat, 1999). Larson’s (1992) study on entrepreneurial firms’ relations with suppliers and customers showed that norm of reciprocity allowed firms to freely share information, to take risks and innovate. Thus we deduce the following proposition.
Proposition 1c
Relational dimension of external social capital of firms contributes to their potential absorptive capacity.
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External Social Capital and Realized ACAP
We also suggest that external social capital influences transformation and exploitation of externally acquired and assimilated information. Cognitive dimension of external social capital mediates the influence of structural and relational dimensions on the realized absorptive capacity of firms, as derived below.
Nahapiet & Ghoshal (1998: 252) suggest that structural dimension of social capital influences cognitive dimension. This happens as density of ties is proportional to the probability of development of shared language, codes, understanding and narratives. By intensifying the frequency, depth and breadth of information exchange, social interactions increase relation specific common knowledge. Thus repeated interactions among firms create knowledge common to them, a feature of cognitive dimension of external social capital (Yli-Renko et al., 2001).
Trust (relational dimension of external social capital) facilitates the willingness to engage in social exchange and cooperation (Fukuyama, 1995; Ring & Van de Ven, 1992, 1994). Thus by increasing the possibility of interaction (Nahapiet & Ghoshal, 1998: 258), trust in external relationships of a firm leads to development of shared codes and narratives. Appropriate norms of cooperation (Starbuck, 1992) like openness, loyalty, etc. also lead to more interaction among firms, and thus relational dimension of external social capital contributes to cognitive dimension of external social capital. Identification (another attribute of relational dimension of external social capital) also influences the frequency of cooperation (Lewicki & Bruner, 1996, as quoted in Nahapiet & Ghoshal, 1998: 256). And as mentioned earlier, increased interaction and cooperation contributes to cognitive dimension of external social capital.
Shared language, codes and understanding (cognitive dimension of external social capital), in turn, enhances the chances of occurrence of bisociation, thus contributing to transformation (a feature of RACAP) of externally acquired and assimilated information. Shared
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understanding allows members of an organization to firstly view externally acquired and assimilated information as a consistent block of information, which in turn facilitates its contrasting with an incompatible block of existing information (Boland & Tenkasi, 1995). Shared codes and narratives facilitate bisociation in case of tacit knowledge. Narrative mode of cognition (Bruner, 1990, as cited in Nahapiet & Ghoshal, 1998: 254) which employs metaphors and stories, etc. can also help this process of transformation (RACAP) through bisociation.
Thus, we derive the following proposition.
Proposition 2
Cognitive dimension of external social capital mediates the influence of structural and relational dimensions of external social capital on firm’s realized absorptive capacity.
The propositions derived so far are illustrated in the following diagram.
External Social Capital Structural Dimension
Absorptive Capacity
Potential Absorptive Capacity • Ability to acquire • Ability to assimilate Cognitive Dimension Realized Absorptive Capacity • Ability to transform • Ability to exploit
Relational Dimension
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The model developed in this section is in contrast with the model proposed and tested by Tsai & Ghoshal (1998). They found that structural as well as cognitive dimension of social capital leads to relational dimension. Their study also found that structural dimension of social capital did not have significant impact on cognitive dimension. However, their theorization and testing suffers from some weaknesses, as described below.
a. While deriving hypothesis for influence of structural dimension on relational dimension, one of the premises used by them stated that trust increases with interaction over time. But Stolle (1998, as quoted in Sullivan & Transue, 1999) found poor support for this assertion. b. They themselves suggest (on p. 465) that frequent and close interactions (a feature of structural dimension) leads to common viewpoint (a feature of cognitive dimension). However, they use this premise to derive the hypothesis that structural dimension of social capital leads to relational features. Hence it becomes less clear whether structural features lead to cognitive features of social capital through relational dimension, or cognitive dimension leads to relational dimension. c.
They mention common values, common beliefs and common vision as attributes of cognitive dimension, which is different from shared codes and shared language that we have taken. This may also explain weak relation between structural and cognitive dimension in their study.
d. While deriving hypothesis for influence of structural dimension on cognitive dimension, they suggest that social interaction among members leads to development of common goals in organizations. This may be true for interaction among top management, but not for interactions among other members. e. While hypothesizing for influence of structural dimension on cognitive dimension, they emphasize upon the informal interaction (p. 467), which is more of a relational feature than structural one. f.
There are measurement issues also. For example, structural dimension is measured through two questions asking respondents to tell with whom they spend most of their time during social occasions, and who all maintain close social relationships with the
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respondents. The obvious emphasis on closeness in ties in these two questions is opposite to the impersonal features of network, which is the characteristic feature of structural dimension of social capital (Nahapiet & Ghoshal, 1998). Similarly, cognitive dimension measurement instrument focuses only on shared vision and goals.
Moreover, in the context of inter-firm relations, it seems more plausible to posit that relational qualities of ties lead to shared understanding. Boundary spanners of two firms will not develop a shared understanding of their technology or common issues in marketing, policy, etc., unless they have the relational strength to confidently and securely share such information with each other. For example, in a long existing cluster, one can assume considerable degree of shared understanding between two old firms about issues of technology, marketing or policy. However, that does not necessarily mean that such two firms currently trust each other.
Internal Social Capital and Potential ACAP
Nutt (1984: 438) provides an example of how internal social capital influences potential absorptive capacity. He discusses an instance wherein “trusted” employees searched for information when requested by management. A study of 120 new product development projects in 41 business units of a large multiunit electronics company showed that project teams obtained more existing knowledge from other units and completed their projects faster to the extent that they had shorter inter-unit network paths (Hansen, 2002). Research also shows that trust among employees helps in increased understanding of the acquired knowledge, an attribute of assimilation sub-dimension of potential absorptive capacity (Abrams, Cross, Lesser, & Levin, 2003; Kubo, Saka & Pam, 2001). In another study, a positive relationship was found between perceived norms favoring technical information sharing (relational dimension of internal social capital) and a willingness to make technical information inquiries by employees of research & development (R&D) centers and commercial companies (Tan & Zhao, 2003). Starbuck (1992) also suggested that ability to
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acquire information is proportional to the norms for exchange of information. Roberts & O’Reilly III (1974) found that in subordinate-superior relationships, trust plays a vital role in exchange of information. Increased information sharing among employees may result in bisociation, as pointed out earlier (when contrasting information come together); alternatively it may also lead to better understanding of acquired information.
Shared codes among
employees of a firm (cognitive dimension of internal social capital) also help in interpreting and understanding externally acquired information. Thus we deduce the following proposition.
Proposition 3
Internal social capital of a firm contributes to its potential absorptive capacity.
Internal Social Capital and Realized ACAP
The previous section deduced that internal social capital of a firm enhances its ability to acquire and assimilate external information. We suggest that internal social capital also improves the ability of a firm to transform and exploit externally acquired and assimilated information.
Knowledge can be exploited serendipitously (without systematic routines) as well as through structural, procedural and systematic mechanisms (Zahra & George, 2002). In highly ambiguous settings, firms have unclear or ill-defined preferences, unclear technology and fluid participation of members. Such firms serendipitously exploit knowledge. In fact, garbage can model of organizational choice suggests that there would be an accidental or random confluence of problems, solutions, participants and choices (Cohen, March & Olsen, 1972). Although, questions have been raised on methodological validity of garbage can model (Eisenhardt & Zbaracki, 1992), it has also been conclusively proven that problems and solutions simultaneously exist in firms, with problem looking for solutions and solutions finding
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problems by chance. We suggest that internal social capital increases the probability of such occurrences, i.e., problems and solutions finding each other. Internal social capital thus increases the ability of a firm to transform and exploit externally acquired and internally generated knowledge.
In a study of information processing and problem solving, it was found that managers avoided sending problems to formally designated problem solvers, and instead sent problems to people in their personal ties (Stevenson & Gilly, 1991). Thus, internal social capital (personal ties in this case) increases the probability of information, solutions and problems meeting each other. In another study, it was shown that trust influences the extent of information exchanged, the scope of search for solutions and commitment of managers to implement solutions. It also established that shared trust (or lack of it) was a significant determinant of managerial effectiveness (Zand, 1972). Thus it can be concluded that trust helps in problem solving by increasing the probability of problems meeting solutions.
It was also established that social interaction, a manifestation of the structural dimension of internal social capital and trust, a manifestation of the relational dimension were significantly related to the extent of inter-unit exchange of information, which in turn had a significant effect on product innovation (Tsai & Ghoshal, 1998). Another study found that strong ties from workplace and educational background were considered important when employees sought work-related advice like using tools or setting up work environment. Similarly, advice on completing deliverable projects or services was sought from within the organization (McGrath et al., 2003). Thus, internal social capital enables a firm to exploit externally acquired and assimilated information as well as internally available information. Cohen (1962) also found that within an organization, various groups’ shared understanding of the network structure (a cognitive feature of internal social capital) helped in developing more efficient problem solving systems.
Based on above discussion, we deduce the following proposition.
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Proposition 4
Internal social capital of a firm increases a firm’s realized absorptive capacity.
Propositions 3 and 4 are depicted in the following diagram. The solid lines represent direct influence on the outcome, while dotted line indicates an underlying process.
Absorptive Capacity
Internal Social Capital Structural Dimension
Potential Absorptive Capacity • Ability to acquire • Ability to assimilate Cognitive Dimension
GARBAGE CAN
Relational Dimension
Problems - Solutions
Realized Absorptive Capacity • Ability to transform • Ability to exploit
Participants - Choices
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Problems in Measurement
Although the two constructs have been used extensively in empirical research, there are numerous problems in their measurement.
This section would describe some of these
problems.
Problems in Measuring Absorptive Capacity Most studies measure absorptive capacity through a set of proxy indicators like ratio of R&D expenditure to sales (Cohen & Levinthal, 1990), fully staffed R&D department, number of doctorates in the R&D department, the number of R&D departments engaged in fundamental research (Veugelers, 1997) and number of scientific publications (Cockburn & Henderson, 1998). These proxies do not tap the entire meaning of the construct.
Some other studies measure absorptive capacity through perceptive instruments (e.g., Jansen, Bosch & Volberda, 2003; Lane & Lubatkin, 1998; Szulanski, 1996; Wong, Shaw & Sher, 1999). These measures also suffer from some limitations. For example, an analysis of the scale used by Szulanski (1996) reveals that the operationalization is confined only to the practices in a manufacturing firm. Wong et al. (1999) have employed a measure that purports to capture the ability of the firm to acquire, assimilate, and exploit external knowledge. However, an analysis of the items shows that the measure is relevant only for a manufacturing set up. Thus, despite the existence of multiple measures of absorptive capacity, none of them captures the construct completely, or is general enough to be applied (with minor adaptation) to many firms.
Problems in Measuring Social Capital As compared to absorptive capacity, social capital measures are beset with significantly more problems. Social capital has been measured at various levels including nation, community,
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inter-firm and intra-firm. The multiplicity of specifications of social capital, even at the firm level, has given rise to multiple measures. However, most of the measures capture only the strength of ties, i.e., relational social capital (e.g., Uzzi, 1999) at the inter-firm level and ignore the structural and cognitive dimensions. The problem in measuring structural dimension at the inter-firm level arises due to non-closure of the network structure. Although, we have employed social capital at inter-firm level, it is important to understand this limitation in developing measures for the structural dimension of external social capital. While most of the studies at the intra-firm level (internal social capital) also measure only one of the dimensions (e.g., Hansen, 1999), one study tries to capture all three dimensions at the intra-firm level (Tsai & Ghoshal, 1998). But their operationalization of the three dimensions too are deficient (i.e., do not tap the constructs completely).
This status of measurement is not surprising, considering the state of theorization in social capital and absorptive capacity. As Kaplan (1965) pointed out, better theorization and development of better concepts and measures go hand in hand. Hence the research should focus on simultaneous improvement of measurement and theorization, as they contribute towards each other’s improvement.
Limitations
This paper attempts to develop a theory. However, due to lack of precision in related theories existing as of date, there is some degree of theoretical indeterminacy in this paper. More finegrained theorization is needed to address this limitation. For example, propositions can be derived linking each of the three dimensions of social capital and the four sub-dimensions of absorptive capacity. Additionally, this study suffers from following limitations.
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Dynamic nature of concepts is not fully utilized. Although the construct of absorptive capacity is dynamic in nature, the propositions derived do not capture the dynamic nature of the relationships.
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•
Social capital has both positive and negative consequences (O’Shea, 1999). This study focused on positive consequences of social capital, i.e., internal and external social capital leading to absorptive capacity of a firm. But the negative effects of external and internal social capital were not discussed here.
•
We have not discussed the relationship between external and internal social capital of a firm.
•
Firms with poorly developed technological capital have strong incentives to get access to the technological capital of other firms through inter-organizational alliances (Mitchell & Singh, 1996). However, firms that are already well endowed with technological capital have fewer incentives to cooperate (Ahuja, 2000). As these firms have already developed leading edge technological competencies, they are less likely to learn from their partners as compared to these partners (Kale, Singh & Perlmutter, 2000; Khanna, Gulati & Nohria, 1998). Hence, firms having unique technological resources need only a small alliance network to ensure high rates of innovation. Our paper has not considered this differentiation among firms while investigating the benefits of social capital.
Directions for future research
This paper has theorized the relationships between social capital and absorptive capacity of a firm. Future research on this subject needs to focus on the following issues.
a. Firstly, as mentioned in the limitations of this paper, fine-grained theorization is needed that can inter-relate each of the individual dimensions of social capital and absorptive capacity. b. Attention should also be given to measurement issues. As discussed previously, there is an urgent need to develop theoretically sound measures of absorptive capacity and social capital. c.
Both social capital and absorptive capacity have been conceptualized as multidimensional constructs. As suggested by Law, Wong, & Mobley (1998), theory should
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delineate the relationship between the multi-dimensional construct and its dimensions. For example, a multi-dimensional construct can be a higher order factor, with its various dimensions as factors; or it can be understood as some algebraic combination of the various dimensions. Concept specification should inform such issues (Law et al., 1998). d. Future research should also focus on practitioners’ concerns. For example, practitioners may like to know what works and what does not while nurturing external and internal social capital for their firms.
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