Absorptive Capacity and Innovation: Exploring Interdependencies by Simulation

Since Cohen and Levinthal (1989) emphasized the role of absorptive capacity in assimilating and applying new knowledge, a lot of research on the determinants of this capacity has been done. Among others, it was confirmed that proximity among cooperation partners (in terms of organizational and cognitive distance) has an inverted ‘U’–shaped relation with the value of learning the partners obtain. Furthermore, it was found that cooperation partners can increase their proximity over time and thus, affect potential of further learning. These features, however to the best of our knowledge, are not jointly integrated into any theoretical or simulation model. This paper offers a revision of the original model by Cohen and Levinthal (1989) accounting for those empirical findings and contributing to understanding cooperation and R&D investment preferences of companies. Since in the dynamic scenario with many firms analytical solution becomes intractable, an agent based model is introduced and simulated. The study has important applications for both company managers and policy makers.