Service Absorptive Capacity: Its Evolutionand Implications for Innovation

Bertha Jimenez & Bojan Angelov & Bharat Rao

Received: 17 May 2011 /Accepted: 16 December 2011 /Published online: 4 February 2012# Springer Science+Business Media, LLC 2012

Abstract The concept of absorptive capacity has been part of the strategy andinnovation discourse for a few decades. As industry and business practices haveevolved, so has the understanding of the mechanisms responsible for developing andgrowing the absorptive capacity of contemporary organizations. In this paper, wetrace the evolution of this concept and its operationalization and measurement. Weparticularly investigate how absorptive capacity can be used as a potential anchor ofinnovation research in service industries. We suggested the conceptualization of aservice absorptive capacity and propose different measures that could aid to thisconceptualization. We also provide an alternative to the predominant focus on thefunctional characteristics and research and development practices in innovationstudies to date.

Keywords Absorptive capacity . Service industries . Innovation . Strategy

Introduction: Absorptive Capacity, Innovation, and Competitive Advantage

Today’s management literature abounds with research attempting to identify thesources of innovation and competitive advantage. In addition, as service activitypermeates every pore of value creation and capture, today’s economies are indeedservice-based economies [15, 71, 85, 87]. Given the changing dynamics of thecompetitive landscape, of particular interest are the mechanisms underlying theinnovation process in service firms. While there has been a significant and growing

J Knowl Econ (2012) 3:142–163DOI 10.1007/s13132-011-0078-z

B. Jimenez (*) : B. Angelov : B. RaoDepartment of Technology Management, Polytechnic Institute of New York University, 5 MetroTechCenter, Brooklyn, NY 11201, USAe-mail: btj213@nyu.edu

B. Angelove-mail: b.angel@gmail.com

B. Raoe-mail: brao@poly.edu

interest in understanding the innovation processes in service industries [15, 22, 31,32, 41, 42, 59, 83], little has been done in identifying the core principles that governservice-specific innovation activities. In this paper, based on an extensive literaturereview, we aim to understand whether research on absorptive capacity (ACAP)follows the same trend of not focusing on service-specific activities and dynamics.

Innovation has always been of interest to management scholars. There are differentschools of thought when it comes to identifying what gives companies a competitiveadvantage and how they are able to sustain it [47, 58, 69, 72]. In its simplest form, itis possible to look inside the company for firm-specific factors (take for example thestudies using a resource-based view of the firm) and/or outside of the company, in theindustry structure and the firm’s relationship with its environment (studies from theindustrial organization economics stream of research being the most prominentexample of such an approach). Therefore, the sources of competitive advantagemay lie in the firm’s valuable resources, its distinctive competencies and capabilities,the range of strategic choices, and in its position within the industry. Innovationresearch has joined a similar quest. The resource-based view (RBV) and knowledge-based view of the firm were in essence trying to identify “something” in possession orunder influence/control of the firm which led to competitive advantage [4, 36, 90].This “something,” a resource or knowledge in its most abstract form, does not operatein isolation, and the context, thus, determines its impact on the firm’s bottom line, but,even more broadly, on the related environment. According to the RBV of the firm,ownership of valuable and rare resources that are difficult to imitate or substitute forrepresents a potential source of competitive advantage. If specific resources aredrivers of competitive advantage, it is essential for a company to identify, develop,utilize, and continuously upgrade these resources. Resources are usually defined asthe inputs into the production process, resembling stocks of factors owned orcontrolled by the firm such as physical capital, human capital, patents, licenses etc.[1, 19, 35]. Capabilities reflect a firm’s capacity to deploy resources using organiza-tional processes in order to reach a specific goal [1]. They are firm-specific, usuallydeveloped in functional areas and a result of complex organizational activities. Forcapabilities and competencies to be considered as potential sources of competitiveadvantage, they have to be distinctive. To be distinctive means to be firm-specific andto disproportionately contribute to the provision of superior customer value and/orallow for a more cost-effective value delivery [19]. The research on capabilities(specifically strategic management and innovation management studies) is for themost part adopting a functional perspective with a very limited focus on the serviceindustries. We are particularly interested in the service-specific sources of competitiveadvantage.

In sum, researchers in strategy have focused on explaining and predicting what arethe key factors in obtaining competitive advantage, improving firm performance, andincreasing innovative activity [22]. However, most empirical studies have a focus onmanufacturing or technology-based service industries, in line with what Vargo andLusch [85–87] have considered a goods-dominant logic. This approach, in our view,often masks the dynamics distinctive to service firms and service relationships. Webelieve that there is an opportunity to use ACAP as the lens in understanding serviceinnovation. In the last 20 years, ACAP has been used in explaining issues pertainingto organizational learning, management of strategic alliances, knowledge

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management, and innovation strategy, among others [48, 51]. Given its use, ACAPwas operationalized as a very flexible concept which allows for application in avariety of research fields with different units of analysis [13]. Our focus is on servicefirms since they have not been properly covered in scholarly research on innovationand competitive advantage, and ACAP might be the appropriate viewpoint in thisquest.

The Services Context

It has become a standard to introduce services as the most dominant and ever-increasing part of the economy, both in developed and developing countries. Livingup to this view, service industries account for more than two thirds of value added andemployment in the USA (2002). This, however, paints a very homogenized picture towhat is otherwise an intensely heterogeneous part of the economy. In this section, weprovide a brief introduction to the concept of service and the potential use of ACAPin understanding service innovation (and innovation in service).

At the highest level of abstraction, a service can be seen as a relationship realizedthrough a series of interactions in which competencies and capabilities are identifiedand applied for the benefit of the client. Service interactions are interwoven in andbetween organizations, making everyone a provider and consumer at the same time.There are many definitions of services, each capturing some of their unique character-istics. The United States government followed Hill’s [40] definition as the basis fordefining service products in the North American Product Classification System: “Aservice is a change in the condition of a person, or a good belonging to someeconomic entity, brought about as the result of the activity of some other economicentity, with the approval of the first person or economic entity” [15]. Similarly,Gadrey [30] depicted a service as being “[a] set of processing operations carriedout by a provider (B) on behalf of a client (A) in a medium (C) held by (A) andintended to bring about a change in the medium (C)” [31]. A definition by Gronroos[37], where a service is considered to be “[an] activity or series of activities of moreor less tangible nature that normally, but not necessarily, take place in interactionsbetween the customer and service employees, and/or physical resources or goods and/or systems of the service provider, which are provided as solutions to customerproblems,” emphasized some of the most prevalent characteristics of services alsoknown as IHIP (intangibility, heterogeneity, inseparability, and persishability).According to IBM [43], a service is a “[provider/client interaction] that creates andcaptures value,” reflecting the fact that today’s services are practically a ubiquitouspart of the economy.

It is evident from these definitions that services involve an interaction componentbetween the service provider and the client that is often responsible for co-producingthe value on both sides of that interaction. Not all services (or service products/offerings) fit the ideal type and display all characteristics equally. However, not allservices are provided by service firms (with respect to their industrial classification)and not all service activities result in a service product (marketable service offering ofsome value). Miles [59] described service functions as “transformations of the state ofartifacts, human beings, or data” that are accomplished by service products, “typically

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a service function or set of functions marketed as a commodity or public service.”Service products can be derived from goods or created by consumers and provided byany sector (including manufacturing). While service products can be provided by anysector, service industries and firms have the provision of service products as theirmain function. These characteristics of services will be used to formulate ourframework and propositions with the absorptive capacity concept. Moreover, it isimperative to recognize the heterogeneity of the service sectors since it may havean important influence on the development of any measure. In the USA, servicesaccounted for the majority of gross output in 2007, with Finance, Insurance, andReal Estate (FIRE) representing the dominant sectors among service industries(about 26% of all services) and almost three times the value added of any otherservice sector (with the exception of government services; [82]). Professional,scientific, and technical services, along with educational services, health care, andsocial assistance, followed suit with about 10% of value added of all services(including wholesale and retail trade) each. Information services, not countingwholesale and retail trade, are fourth on the list with about 6% of the total servicesvalue added. While FIRE dominate the service sectors with more than 26% of valueadded, they only employ 6% of the total employment in services. The situation issimilar with professional, scientific and technical services, and information services.Educational services, health care, and social assistance on the other hand account formore than 15% of employment in services. This shows that while services aredominating economic activity, the significant heterogeneity of service industrieswarrants special attention by researches. This is, in part, one of the motivationsbehind this study.

In addition, the trends indicate increased integration between manufacturing andservices and convergence between technological and non-technological innovations[42, 83], resulting in increasingly “service-oriented manufacturing sector” and “grad-ually industrialized service sector” [31]. Neely [62] referred to the process by whichmanufacturing firms provide high value-added services as servitization of manufac-turing and identified in his initial research that large US firms are most prevalent inservitization. This rationale is sometimes viewed as a strategic shift in the firm’s valuechain requiring that “every business must become a service business in order tosurvive [70]. The implications of such a shift (particularly with respect to innovation)are further amplified by the global character of services and outsourcing trends [10,42]. With respect to the process of servitization, an important question refers to thenecessary service activities and capabilities that firms have to develop and apply intheir value creation strategies in order to become service providers and positionthemselves better in the value chain (move up or down the chain).

We consider the concept of ACAP to have the required flexibility to identify theinnovation specificities in the service industries. Using the concept of ACAP is oneway of looking at that “something” which is leading to sustained competitiveadvantage, and in its broadest definition, it includes the resources, knowledge,capabilities, processes, and people required to create and capture value in a firm’secosystem. We attempt to shift the focus to the particularities of service firms andservice activities since they have not been properly covered in scholarly research oninnovation and competitive advantage, and ACAP might be the appropriate view-point in this quest.

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Methodology

The method that we have chosen for our study is based on meta-analysis. Meta-analysis is a systematic approach that is used to collate information from a body ofresearch. [18]. This methodology is simply a statistical analysis employed to identify,evaluate, synthesize, and integrate the findings [16, 76]. This methodology had beenused in different streams of research including education, medicine, marketing,management, and sociology, among others.1 Even though this type of methodologyhad its limitation, which will be discussed in the last section, it is appropriate toindicate where there is a need of more research in a specific area. We believe thatmeta-analysis is the right framework to use, given that it will allow us to do asystematic review of prior studies.

In order to better understand the place of ACAP in the study of innovation andcompetitive advantage in service industries, we reviewed the extant research literatureusing this concept. By using a meta-analytic framework, we present evidence of thelack of studies that integrate ACAP and the service sector. For each reviewed paper,we focused on the definition of absorptive capacity, its operationalization and mea-surement, the industry sectors covered in the studies, and the size of the firmsincluded in the studies. In addition, we delve deeply on the empirical papers thatwere based on the service industry to understand whether they have a specific servicefocus. We searched for the keyword “absorptive capacity” in the abstracts of scholarlypapers, which resulted in 444 potential papers for review. We limited our review topapers published in journals during the period from 1990 to 2009, assuming Cohenand Levinthal’s [17] work as the first to formally use the concept in the context asdiscussed in this paper. Given this filter, the number of papers was reduced to 399,with 312 relevant to our topic of interest. The 87 discarded papers discussed ACAP inother contexts, including environmental contexts (natural environment, animals,natural disaster, materials, agriculture—35 papers), clinical contexts (24 papers),social contexts (society, migration, country history, policy and government—19papers), and financial contexts (trading and investment—9 papers). The top tenjournals in business management where chosen according to the ranking of JournalCitations Reports and Journal Performance Indicators [79], released by the Instituteof Scientific Information, currently part of Thomson Reuters. The impact factorconsidered in this ranking was management. An impact factor refers to the averagenumber of citations to articles published in science and social science journals in agiven year or period. According to this ranking, the top ten journals in this area are:MIS Quarterly, Academy of Management Journal, Academy of Management Review,Organization Science, Administrative Science Quarterly, Strategic Management,Journal of Management, Information System Research, and International Journalof Business Study. Given that the above ranking only provided us the top ten journals,we used other rankings such as the ESSEC Business School Ranking of Journals [26]and Research Assessment Exercise ranking [67] to differentiate between tier 1 and 2journals. Tier 1 journals are high-quality generalist journals that have internationalrecognition, long-standing tradition, and high academic impact [79]. Representativesof tier 1 journals include Research Policy, R&D Management, Journal of Marketing,

1 Source: EBSCOHost database.

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Journal of Business Venturing, Journal of Operation Management, and others. Tier 2journals are high-level business and scientific journals with a more practitioner andspecific focus, also having international reputation and circulation. Tier 2 journalsinclude Technovation, Entrepreneurship Business and Practice, Industry and Inno-vation, IEEE Transaction on Engineering Management, etc. The following tableshows the papers considered for our review by year and place of publication asretrieved from the EBSCO Host database.

Table 1 shows a clear growth in research papers published under the topic ofACAP. In the last 5 years, the number of published papers (irrespective of journalrankings) has more than doubled when compared with the first 15 years (from 97 to215 papers). Table 1 also shows that the topic of ACAP has grasped the attention ofthe practitioners group during the last 15 years. In the last 10 years, the number ofpapers published in tier 1 and 2 journals is comparable, implying that ACAP is a topicstill heavily studied and of considerable interest to a broader audience. However, inspite of the increased interest in ACAP in the last 5 years, it is hard to determinewhether this has resulted in a more standardized construct/measure of ACAP. Thegrowing popularity of ACAP research has not solved the problems related to the lackof a clear definition and non-standard operationalization and measures [38, 48, 81].

Table 2 portrays the distribution of ACAP research in the top ten journals during thelast 20 years. Strategic Management Journal (32%) followed by Organization Science(21%) are the journals that have published most of the papers related to ACAP. Thisshows that ACAP is seen as primarily of strategic importance to the organization.

What Does Absorptive Capacity Really Mean?

It has been 20 years since the concept of ACAP was first introduced in scholarlyresearch. Before we provide the results of our analysis of the ACAP literature withrespect to the service industries, we will first discuss the meaning of the concept. Thefollowing explores how ACAP was defined and expanded upon since its firstintroduction by Cohen and Levinthal in [17].

Definitions of ACAP

The concept of absorptive capacity (ACAP) was ushered by Cohen and Levinthal in apaper published in 1990 in order to better understand organizational learning in firms.

Table 1 Reviewed papers on absorptive capacity

1990–1994 1995–1999 2000–2004 2005–2009

Total number from initial search 7 38 92 262

Papers relevant for the review 4 26 67 215

Papers in the top ten journals 2 10 9 23

Papers in tier 1 journals (excluding the top 10) 2 7 29 82

Papers in tier 2 journals 0 9 29 110

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ACAP was defined as the “the ability to recognize the value of new, externalinformation, assimilate it and apply it to commercial ends” [17]. Since its introduc-tion, ACAP has grasped the attention of the research community (in differentmanagement disciplines) with several different operationalizations expanding onthe concept as originally introduced by Cohen and Levinthal. According to them,ACAP consists of three main components or dimensions: (1) recognition of externalvalue, (2) assimilation of external value, and (3) application of external value tocommercial ends. Initially positioned at the heart of the firm’s innovative capabilities,ACAP is being directly related to the firm’s prior related knowledge (having thecharacteristic of path dependency). Innovation in large part depends on sources ofknowledge outside of the organization, and this is reflected in how ACAP isdeveloped. ACAP is viewed by Cohen and Levinthal [17] as a firm-level constructcreated through the accumulation of a relevant base of knowledge. According tothem, a broad ACAP is achieved and maintained by advanced technical training andas a by-product of a firm’s research and development (R&D) activity. OrganizationalACAP depends on individual capacities and abilities, in addition to the organizationalability to transfer knowledge across firm boundaries and subunits. A higher level ofACAP makes the firm more proactive and dedicated to innovation, given that it willbe more likely to notice and investigate the opportunities present in the environment[2, 17, 25]. Therefore, ACAP has a direct impact on business performance andorganizational competence [14, 17]. Since ACAP was introduced in a time wheneconomic activity was still dominated by large manufacturing corporations, Cohenand Levinthal relied on data collected from R&D laboratory managers in the Amer-ican manufacturing sector. ACAP was measured by the R&D expenditure of the firm.Therefore, even though the model presented by Cohen and Levinthal pioneered a newapproach to understanding the process of innovation, its measures were static andfocused on a single factor (with the firm as the unit of analysis).

Lane and Lubatkin [49] reconceptualized ACAP by expanding the unit of analysisfrom a firm level to a learning dyad level (inter-firm) and named it relative absorptivecapacity. The relative ACAP still had the three components initially proposed by

Table 2 ACAP research papers in the top ten journals from 1990 to 2009

Journal 1990–1994 1995–1999 2000–2004 2005–2009 Total

Strategic Management Journal – 3 4 7 14

Organization Science – 5 4 9

Academy of Management Review – 1 2 2 5

Academy of Management Journal – – 1 3 4

MIS Quarterly 1 – – 2 3

International Journal of Business Studies – – – 3 3

Administrative Science Quarterly 1 1 2

Journal of Management – – – 2 2

Information System Research – 1 1 – 2

Research Organizational Behavior – – – – 0

2 10 9 23 44

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Cohen and Levinthal, but the context also included the networking capabilities offirms. According to Lane and Lubatkin, a firm’s ability to learn from another firm isrelated to the likeness of both firms’ (1) knowledge bases, (2) organizational struc-tures and compensation policies, and (3) dominant logics. Lane and Lubatkin useddata from R&D alliances between biotechnology and pharmaceutical firms in theiranalysis of ACAP. Their reconceptualization was widely accepted by scholars study-ing the ACAP of strategic alliances (including joint ventures). In this study, R&Dexpenditure was also used as a measure of ACAP as in Cohen and Levinthal’s study.However, other measures were also used, such as overlap of product characteristics,formalization of management practices, degree of centralization of decision taking,similarities in pay and benefit packages, and bibliometric data to measure knowledgebases and organizational problems of the alliance partners.

Zahra and George [92] offered another widely accepted and used reconceptuali-zation of ACAP. They reviewed, reconceptualized, and extended the concept byseeing ACAP as “a set of organizational routines and processes, by which firmsacquire, assimilate, transform, and exploit knowledge to produce a dynamic organi-zational capability” [92]. This definition was the first to change the three dimensionsintroduced by Cohen and Levinthal. This concept of ACAP has two stages and fourdimensions: potential absorptive capacity, PACAP (which includes knowledge ac-quisition and assimilation), and realized absorptive capacity, RACAP (which includesknowledge transformation and exploitation). Given that the authors recognizedACAP as a dynamic capability related to obtaining competitive advantage, theyneeded to recognize the different roles and components of ACAP. In the case ofPACAP, the role was to make the firm receptive in acquiring and assimilating externalknowledge. However, the knowledge itself does not guarantee that the firm will becapable of its transformation and exploitation. Hence, RACAP has the role ofleveraging the absorbed knowledge. Zahra and George clearly expanded on Cohenand Levinthal’s [17] work by adding the concepts of knowledge transformation,social integration mechanism, and activation trigger. A key difference with theoriginal concept is that their representation of ACAP is represented “as a set ofknowledge-based capabilities embedded within the firm’s routines and strategicprocesses.” This made ACAP more dynamic than the original conceptualization byCohen and Levinthal [17].

In 2006, Lane et al. [48] reviewed and “rejuvenated” the ACAP construct.According to them, <2% of their 289 reviewed papers attempted to refine or extendthe construct as introduced by Cohen and Levinthal. They believed that ACAP was aconstruct of major importance for organizational research, but nevertheless, thedevelopment of the concept has stagnated. Lane at al. advocated for a multidimen-sional and dynamic view of ACAP. In doing so, they proposed several new factorsthat affected ACAP, but recognized that it is almost impossible to test all of them dueto the lack of appropriate measures. Their definition saw ACAP as “a firm’s ability toutilize externally held knowledge through three sequential processes: (1) recognizingand understanding potentially valuable new knowledge outside the firm throughexploratory learning, (2) assimilating valuable new knowledge through transforma-tive learning, and (3) using the assimilated knowledge to create new knowledge andcommercial outputs through exploitative learning.” Furthermore, this concept depictsthe multidimensional view of absorptive capacity. This definition also uses the three

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dimensions introduced by Cohen and Levinthal. However, they treat them separatelyas three different processes to explore each of the components. For each dimension,there are internal and/or external drivers that impact the absorptive capacity of a firm.

One of the last important reviews of ACAP was done by Todorova and Durisin in[80]. In the review, they examined the concept of ACAP as proposed by Zahra andGeorge [92] and reintroduced Cohen and Levinthal’s component of recognizing thevalue of knowledge. This component was not used as a step, but as an alternativeprocess that connected to the assimilation of knowledge. They also examined whetherknowledge assimilation and knowledge transformation are two different sequences.According to them, if the external knowledge fits the firm’s cognitive schema, thenno transformation is necessary and it can be applied and exploited directly. Contin-gency factors, such as socialization and the role of power relationships, and newfeedback links were also added to their model. According to Todorova and Durisin[80], ACAP allowed “firms [to] recognize the value, acquire, transform or assimilate,and exploit knowledge.” The authors suggested that the measurement for ACAPshould be based on transformation knowledge structures during the absorption of theknowledge. In addition, the drivers of transformation should differ from the drivers ofassimilation.

From the above discussion, we can observe that most conceptualizations includedCohen and Levinthal’s dimensions. However, the main differences are the proposedmeasures and the external or internal drivers that can affect the ACAP. Furthermore,Cohen and Levinthal’s construct is static and operationalizes ACAP as a one-factorconstruct. Subsequent research has seen ACAP as a multivariable construct. Zahra andGeorge’s reconceptualization of ACAP has played an important role in giving ACAP adynamic character. We also find ACAP as being inherently dynamic and situated.

Operationalization of ACAP

Given the different definitions of ACAP, it is important to understand how thisconcept was operationalized in empirical research. Our analysis shows that ACAPwas mainly used as an independent variable (in 68% of the reviewed papers), but alsoas a dependent variable (24%), moderating variable (5%), and a control variable(3%). When ACAP was used as an independent variable, the dependent variabledepicted the following:

(a) Innovation: New products, breakthrough innovation intensity, innovationperformance, and innovation effort [25, 28, 39, 54, 64–66, 75]

(b) Firm performance: Responsiveness, financial and operating performance,corporate entrepreneurship [7, 33, 52, 53, 68, 91]

(c) Knowledge: Knowledge transfer, network partners, knowledge creation [56, 57,78, 84, 94]

(d) Strategic alliance: IJV performance, acquisition performance, inter-organizationallearning [6, 8, 24, 49, 55]

(e) Technology: Technology performance, technology transfer, technology learning[11, 45, 89]

(f) Other types of competitive advantage: Value added to customer, market valueadded [20, 81]

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In contrast, when ACAP was used as a dependent variable, the independentvariables were associated with:

(a) Firm’s characteristics: Size, firm collaboration units, technology usage, humanresources management, organizational structure [17, 27, 88]

(b) Components of ACAP [12, 13](c) Knowledge: Inter-firm knowledge, knowledge creation, coordination, system

and social capabilities [44, 60, 77](d) R&D: Research activities, expenditures, intensity, internal and external R&D

[8, 29, 63](e) Other: Strategic posture, technology acquisition [9, 34]

ACAP was also used as a moderating variable [5, 48, 61, 93], in which casethe dependent variables were firm performance and innovation. Furthermore, whenACAP was a control variable [3], the dependent variables were innovation activitiesand capabilities and the independent variables were appropriation and operationalintegration. The following figure portrays a summary of the variables used in theprevious literature. The variables on the left side portray the independent variablesused to understand what the sources are for an organization to maximize its ACAP.The right side of the picture depicts ACAP as an independent variable used toenhance innovation and competitive advantage, among others.

Evolution of the Concept: Operationalization and Measurement over Time

Table 3 shows the different definitions of ACAP as used in the studies over time.It is important to clarify that the order of the authors portrayed in this table isfrom the most to the least cited. For instance, in the third period, the most citeddefinition was the one from Cohen and Levinthal, followed by Zahra andGeorge.

From the table, we can also observe that Cohen and Levinthal’s [17] definition ofACAP (along with its measures) is still used by management scholars through all theperiods. However, a mixed approach, in which several conceptualizations of ACAP

Table 3 Definitions of ACAP used in research papers

1990–1994 1995–1999a 2000–2004 2004–2009

1. Cohen and Levinthal[17]

1. Cohen and Levinthal 1. Cohen and Levinthal 1. Mixed approach: C&L,L&L, Z&G, Lane 2006,T&D

– 2. Lane and Lubatkin[49]

2. Zahra and George[92]

2. Zahra and George

3. Mixed approach:C&L, L&L

3. Mixed approach:C&L, L&L, Z&G

3. Cohen and Levinthal

4. [48]

5. Todorova and Durisin [80]

a During these periods, others authors, such as Szulanski [78], Van den Bosch et al. [84], and Dyer andSingh[23], also came with different constructs for ACAP. However, from our review, in the subsequentperiods, these definitions were cited less than 7% of the time

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are combined, is the most widely used method in the most recent literature. Thisentails that there is not a standardized definition of ACAP being employed.

Measurement of ACAP

At its outset, R&D-related measures (expenditures, research intensity) of ACAP werebeing predominantly used by management scholars in their research. It is important tounderstand that there, the researchers had used the ACAP concept in differentcontexts such as industry, inter-industry, or scientific-based industry. Thus, R&Dintensity as a proxy of ACAP is not always the best measure [73]. Researchers havetried using other measures of ACAP. For instance, Szulanski [78] expanded theconcept of ACAP by introducing measures reflecting the characteristics of theknowledge, characteristics of the provider, and characteristics of the receiver (throughitems rated on a 1–5 scale). In addition, organizational learning was seen as a key partof ACAP. Kim’s [46] case study of Hyundai Motor suggested that the “catching upprocess” of the company (caused by a crisis) was the key factor for individuals toincrease their learning efforts. Jansen et al. [44] explored the effects of diverseorganizational antecedents on potential and realized ACAP. Their measures reflectedthe coordination capabilities (cross-functional interfaces, participation, and job rota-tion), system capabilities (formalization and routinization), and socialization capabil-ities (connectedness and socialization tactics). Research on strategic alliances has alsobeen used to provide a context for ACAP with respect to network measures. Lane etal. [50] studied strategic alliances (international joint ventures, IJV) and proposeddifferent measures for each of the original components of ACAP (as in [17]). For thefirst component (ability to understand foreign parent’s knowledge), the measureswere the trust between IJV’s parents, cultural compatibility, prior knowledge fromforeign parent, and relatedness of IJV and foreign parents. For the second component(ability to assimilate foreign parent’s knowledge), the measures being used were IJVflexibility and adaptability, management support by foreign parent, training byforeign parents, formal goal for IJV, and specialization of IJV’s parents. The lastcomponent of ACAP (ability to apply external knowledge) was measured by IJV’sbusiness strategy and IJV’S training competence. In the same vein, Dyer and Singh[23] examined how partner-specific ACAP (as a part of knowledge-sharing routines)leads to relational rents. Eriksson and Chetty [24] looked at the network importance toACAP by measuring ACAP through a dyadic relationship (previous experience) andfrom the customer’s network (previous experience of customer’s customers, customer’ssuppliers, and competing suppliers). And while there are other studies offering differentmeasures of ACAP, R&D-related measures are still being most widely used. Thefollowing table lists the different measures of ACAP as used in the reviewed papers.

Table 4 clearly shows that ACAP was operationalized predominantly by usingR&D measures. However, “hybrid measures” of ACAP are gaining momentum andare currently in wide use. Figure 2 depicts the different measures of ACAP as usedover time.

We can conclude from Fig. 1 that while R&D and related measures were among thefirst in operationalizing ACAP, their direct influence has decreased over time. Atpresent, the approach taken by researchers treats ACAP as a multi-construct, wherehybrid measures, combining R&D, organizational, and network measures for example,

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are gaining in importance. However, the R&D component (by itself or as part of thehybrid measures) is still present in more than 60% of the reviewed studies.

Industry Sectors Covered in the Reviewed Studies

It is imperative to investigate the industry sectors covered in the research using ACAP.We thus attempt to determine whether some of the ACAP measures are inherent to the

Table 4 Different ACAPmeasures

R&D-related measures 39.4%

R&D system, expenditures, investment, etc. 57%

R&D+patents 18%

Patents 7%

R&D+technology staff 11%

Managerial IT knowledge 7%

Organizational structure and design-related measures 11.3%

Communication in the organization 25%

Organizational culture 13%

Human assets (skills, motivation, performance) 50%

Formalization (routines, repetition) 13%

Network-related measures 11.3%

Suppliers, costumers, competitors, universities, others 25%

Ventures, alliances, associates 63%

Customers 13%

Hybrid measures 38.0%

R&D+organizational 30%

R&D+network 15%

R&D+organizational+network 26%

Organizational+network 30%

Fig. 1 Previous operationalizations of ACAP

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sector being studied and whether the measures themselves limit the application of theconcept to specific industries (that is, ACAP being firm- or industry-specific). Themanufacturing sector (covered in more than half of the reviewed studies) clearlydominates the research literature, with only 10% of the reviewed papers focusingspecifically on the service sectors. About one third of the papers are focusing on amixed sector sample, but their analysis does not differentiate manufacturing fromservice firms. Boynton et al. [11] were among the first to exclusively examine ACAPin the service sector. Their focus was on information technology mainframe systemsin large organizations. They argued that information sharing and participatorydecision-making structures are related with management knowledge and effective-ness. The ACAP measure was the managerial IT knowledge of business processes.This facilitated ACAP development and helped in the implementation of IT [38].Table 5 lists the industry sectors covered in the reviewed papers.

Figure 2 (below) depicts the evolution of the studies on ACAP with respect to theindustry sector being covered. Using our data, we aggregated all industry sectors intothree main categories: services, manufacturing, and mixed sectors. Mixed sectorscovered both services and manufacturing sectors. Each of the three categories consistsof several sectors. For instance, manufacturing includes pharmaceutical, automotive,and the chemical industry, to name a few. It is important to notice that a considerablenumber of studies did not clearly specify the industries that were being examined.

It is important to notice that even though services account for 75% of the US valueadded [21], they have been represented poorly in the reviewed studies compared withthe manufacturing sectors. The heterogeneity of service industries and the fluidity ofthe boundaries between manufacturing and service firms further amplify the issues of

Table 5 Industry sectors coveredin the reviewed papers

aOr very similar percentages

Manufacturing 51%

Pharmaceutical+biotechnical 23%

Pharmaceutical 10%

Automotive 10%

Different sectors (known percentage or sectors or both) 10%

Different sectors (unknown sectors) 35%

Chemical–pharmaceutical 3%

Computer 3%

Other 6%

Service sector 10%

IT 55%

Financial 18%

Consulting 9%

University 9%

Hospital 9%

Mixed sectors 31%

50–50 manufacturing and servicea 16%

More manufacture companies 21%

Unknown (%) 26%

Unknown (industry) 37%

154 J Knowl Econ (2012) 3:142–163

detecting idiosyncrasies in service activities, resources, skills, and organizational andmanagement structures that pertain to competitive advantage.

Industry Sectors and Measures of ACAP

We have examined the measures of ACAP as used in studying different industrysectors. Figure 3 (below) shows the sole dominance of R&D-related measures of ACAPduring the first 5 years, irrespective of the industry sector. The following period (1995–1999) marked the introduction of other measures (organizational and network), althoughR&D-related measures were still the most widely used. While first used in studyingmanufacturing organizations, R&Dmeasures of ACAPwere also introduced in studyingthe service sectors. This was particularly convenient since the first service sector to bestudied was the IT services sector. During the third period (2000–2004) reviewed in ouranalysis, we have noticed the emergence of hybrid measures of ACAP. Hybrid measuresare a combination of R&D, organizational, and network measures. These measures wereparticularly used in studies covering the service sectors, although studies of manufac-turing firms also started to use them in greater number during the last 5–10 years. Thelast period being reviewed (2005–2009) clearly shows the growing popularity of hybridmeasures of ACAP irrespective of the industry sector (Fig. 4).

1990-1994

1995-1999

2000-2004

2005-2009

Measured Used in Reviewd Studies

Organizational + Networks

R&D + Organizational + Networks

R&D + Networks

R&D + Organizational

Network (customers, alliances)

organizational (HR, skills)

R&D, patents, technical staff

Fig. 2 Different measures of absorptive capacity

0%

10%

20%

30%

40%

50%

60%

70%

80%

1990-1994 1995-1999 2000-2004 2005-2009

% In

du

stry

Sec

tors

in R

evie

wd

S

tud

ies

Services

Manufacturing

Mixed

Fig. 3 Industry sectors covered in the studies of ACAP

J Knowl Econ (2012) 3:142–163 155

Firm Size in the Reviewed Studies

Firm size is an important characteristic that we wanted to explore when reviewing thepapers using ACAP as a concept. According to data and research funded by the Office ofAdvocacy [74], small and medium enterprises (SME) represent more than 85% of allfirms. In addition, these businesses create more than 60% of the net new jobs.

In spite of the shift in the economy from large companies to SMEs, in the first15 years of the operationalization of ACAP, the focus of ACAP has been primarily onlarge companies (Fig. 5). During the last 5 years, there has been a growing interest inintroducing SMEs in the studies. This can imply that ACAP was first tested in largecompanies, given that the most important indicator was R&D. This indicator isusually performed in larger businesses since they have the resource to do it.

Our Proposed Research Framework: Service Absorptive Capacity

Our literature review and analysis of scholarly research using the ACAP conceptreveals an insufficient representation of service sectors in empirical studies in spite of

0%10%20%30%40%50%60%70%80%90%

100%

R&

D a

nd r

elat

ed

Org

aniz

atio

nal

Net

wor

k

Hyb

rids

R&

D a

nd r

elat

ed

Org

aniz

atio

nal

Net

wor

k

Hyb

rids

R&

D a

nd r

elat

ed

Org

aniz

atio

nal

Net

wor

k

Hyb

rids

R&

D a

nd r

elat

ed

Org

aniz

atio

nal

Net

wor

k

Hyb

rids

1990-1994 1995-1999 2000-2004 2005-2009

Manufacturing

Services

Mixed

Fig. 4 Industry sectors and measures of ACAP

0%10%20%30%40%50%60%70%80%90%

100%

1990-1994 1995-1999 2000-2004 2005-2009

s/m

l

s/m/l

Fig. 5 Firm size in ACAPresearch

156 J Knowl Econ (2012) 3:142–163

their prominence in today’s economy through value added and employment. In theprevious section, we showed that service-specific studies of ACAP account for only10% of the overall papers on the topic. In addition, the main focus in these studieswas the IT sector. One reason for such a choice might be the ability to apply similarframeworks as used in the studies covering the manufacturing sectors since themeasures of ACAP in these studies were based primarily on the R&D function.During the last 5 years, research on ACAP has been increasingly using what wenamed “hybrid” measures in an attempt to better understand the mechanisms behindthe development of ACAP. This has been particularly the case in studies covering theservice industries. Hybrid measures are a combination of R&D-related, organizational,and network-related measures. As such, we believe that they have the ability torecognize the inherent dynamics in ACAP development and utilization. Also, we thinkthat a conceptualization of service absorptive capacity (SACAP) operationalized as ahybrid measure can help in identifying service-specific characteristics of ACAP. Basedon previous work, we intend to operationalize SACAP with hybrid measures. Werecognize that this approach is in line with the service-dominant logic of marketingsince it depicts service as the applications of capabilities and highlights the co-creationof service/value and recognizes these capabilities as the main source of competitiveadvantage.

Based on our analysis of ACAP and the literature in services, Fig. 6 depicts ourpreliminary framework of SACAP. SACAP represents the manifestation of ACAP asit relates to service activities and, in the extreme case, to a service firm. Weconceptualize the notion of ACAP as applied to services by recognizing servicespecificity, which implies sensitivity to the co-creation and inherit dynamism ofservices. In addition, we emphasize the capabilities as related to service activities,which make SACAP highly situated. As a result of service specificity transformation,we want to arrive at a theoretical conceptualization of SACAP. The service compo-nent of SACAP is twofold: (1) it represents the service firm and (2) it representsservice activities and functions. Thus, both service and non-service firms can haveSACAP since all organizations are based on service functions. This approach wouldhelp in covering more service sectors and service activities in ACAP research,something that was seriously lacking in the past. At the same time, SACAP can beused as an anchor in innovation research in services given the flexibility it can

Fig. 6 Service absorptive capacity (SACAP) framework

J Knowl Econ (2012) 3:142–163 157

provide and the ability to include measures beyond the traditional R&D focus. Inaddition, a more holistic approach to studying ACAP is required in order to fullyexplore its potential. This conceptualization will help us understand better innovationand sources of competitive advantage in service.

We believe that ACAP is a dynamic and situated characteristic of the organizationand not another independent variable in search of better performance. Based on ouranalysis, we think that SACAP should represent the firm’s ability to identify andrecognize knowledge and relationships within the extended context, make sense ofthem, embed them in the organization’s value systems, and translate them into a valueproposition. The existing hybrid measures are a good start in operationalizingSACAP, although new measures specific to service activities need to be developed.

To some extent, by conceptualizing SACAP, we aimed to bring ACAP closer tothe service-dominant logic of marketing (as introduced by [85, 86]). We can sum-marize that services can be thought of as possessing a particular level of the idealizedservice characteristics, but not necessarily all of them. Understanding how servicecharacteristics may influence the development of specific capabilities (necessary forcreating and delivering service propositions to the customers) is very much neededwhen analyzing the sources of competitive advantage in the service industries. Inaddition, it is important to emphasize that service is a vital part of any industry sector.At the core of every service activity is the value-creating relationship and its co-creation between the service provider and client. This also has to be the core of theSACAP. Furthermore, as was stated in the previous sections, an important part inconceptualizing SACAP is the heterogeneity of the service industry. The measures ofACAP should reflect some of the service specificities, and they should also addresssome of the issues implied by its heterogeneity. Therefore, we believe that hybridmeasures can capture these characteristics.

By proposing a framework for SACAP, we are in fact trying to understand theinnovation process in services. Much of the research in business strategy and strategicmanagement addresses the issues of identifying sources of competitive advantage, butthe focus has traditionally been on manufacturing industries. Similar traditions can betraced in the literature on innovation, although there is an ongoing trend of includingservices more holistically in the innovation research agenda. Services were originallythought of as technological laggards with low productivity gain and limited innovativeactivity.

We believe that the concept of ACAP can be very helpful in studying the innovationprocess in the service industries. When seen beyond traditional R&D (or its by-product),ACAP can address the specificities of service activities by focusing on the relationshipsand interactions identified and built over time. This can be done through the networkmeasures as part of the SACAP. In addition, focusing on SACAP can help in expandingthe innovation inquiry beyond the technology-dominated innovation frameworks.

Conclusion

Our analysis of ACAP research showed that the concept of absorptive capacity hasbeen part of the strategy and innovation discourse for a few decades and has evolvedas new industry and business practices have emerged. Nevertheless, there was, and

158 J Knowl Econ (2012) 3:142–163

still is, a serious lack of studies focusing specifically on the service sector and serviceactivities. Given the profile of today’s economies, it is imperative that we further ourunderstanding of the mechanisms responsible for developing and growing the ab-sorptive capacity of service organizations. In this paper, we traced the evolution of theconcept of ACAP and its operationalizaton and measurement. While research onACAP is increasing in quantity, its conceptualization is yet to mature. It is importantto notice that the measures have evolved to incorporate a more holistic approach,from being predominantly R&D-oriented to a more hybrid or mixed combination,including organizational and network-related measures. While R&D-related meas-ures are still dominant, we believe that these hybrid operationalizations hold apromise in expanding our understanding of ACAP, in particular in helping includethe service industries on the research agenda.

Limitations and Future Work

This research has some limitations. First, we did our analysis using papers from theEBSCO Host database. This could lead to an avoidance of other articles fromdifferent databases. Furthermore, there is the possibility that other researchers orpractitioners are doing similar studies, however are not using the terminology ofACAP. Given that we only search for papers that were using ACAP as a framework,we might have overlooked some articles that were analyzing a similar construct.

Despite the limitations, our literature review is very useful in setting furtherinvestigation toward the operationalization of ACAP with a service-specific focus.In order to better study ACAP in services, we suggested the conceptualization of aservice absorptive capacity (SACAP). Given the flexibility of operationalizing ahybrid ACAP, SACAP can be used as a potential anchor of innovation research inservice industries. SACAP can be seen as the firm’s ability to identify and recognizeknowledge and relationships within the extended context, make sense of them, embedthem in the organization’s value systems, and translate them into a value proposition.As such, SACAP can address the specificities of service activities by focusing on therelationships and interactions being identified and built over time. This can be donethrough the network measures as part of the SACAP. The main characteristics ofSACAP are its service specificity, inherent dynamism, situated nature, and temporal-ity. By relaxing the R&D-related measures, SACAP can help in expanding theinnovation inquiry in services beyond the technology-dominated innovation frame-works. Given that we only hinted at conceptualizing SACAP and offered a possibledirection of studying service innovation and competitive advantage through ACAP,the next steps would include developing SACAP as an empirical construct and testingits validity. This involves using service-specific case studies to develop and advancethe construct. The existing hybrid measures are a good start in operationalizingSACAP, although new measures specific to service activities need to be developed.

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