Balancing potential and realized absorptive capacities to enhance firms' innovation and financial performance

Abstract

This study takes firms' absorptive capacity as a multi-dimensional construct consisting two capability subsetspotential and realized absorptive capacities. Instead of studying their individual impact on organizational performance as most previous studies do, we study how their relative magnitude (trade-offs) and combined magnitude (interaction) affect innovation and financial performance, and their variations at different levels of market competitiveness. We use the survey method and empirically prove that the relative magnitude of absorptive capacity can significantly affect firms' innovation activities in highly competitive markets, whereas the combined magnitude can enhance firms' financial performance in the absence of intense competition. Our perspective provides a more nuanced view of organizational learning. It is consistent with the latest theoretical trend in absorptive capacity studies where the focus has shifted from the static and simplistic view to the dynamic perspective that emphasizes “balancing”, “trade-off”, and “interaction”.