Foreign Knowledge

New knowledge opportunities (and following that growth and innovativeness) exist when combining knowledge across domains. This recombination view of existing physical and conceptual resources dates back to the work of Schumpeter (1934). Thus, organizations are encouraged to tap into foreign and different technological knowledge in order to create breakthrough innovation. However, absorptive capacity of a company (Cohen & Levinthal, 1990) limits the assimilation of distant knowledge.

An interesting study by Phene, Fladmoe-Lindquist & Marsh (2006) looked at how geographical or/and technological distance affects chances of breakthrough innovations. Knowledge takes on specific national characteristics due to various institutional factors, culture, technological development, demand and supply conditions, scientific, technological and regulatory environments. Knowledge outside existing technological boundaries may help firms overcome the competency traps (Levinthal & March, 1993) and lead to breakthrough innovation.

Findings, even though based on US biotechnology industry, offer interesting words of advice to managers on crafting a strategy that selects external knowledge inputs based on their geographic and technological context:

1) Technologically distant knowledge has a significant impact on breakthrough innovation only when coming from the same national context; however, the effect is curvilinear, therefore choice of external technologies should be made selectively and cautiously.

2) Breakthrough innovation is likely to occur when technologically proximate knowledge is used in international (geographically distant) context.

3) Tapping into technologically and geographically distant knowledge simultaneously is unlikely to yield breakthrough innovation results, as due to distances on both dimensions, difficulties are likely to appear in its acquisition and especially absorption.

4) Absorptive capacity limitation is significantly reduced in case of multinational corporations (MCNs) that have national subsidiaries embedded in local environments; tapping into both technologically and geographically distant knowledge is for MCNs thus less difficult (as “international” knowledge is almost “national”).

SOURCES:
Cohen, W. M., & Levinthal, D. A. (1990). Absorptive Capacity: A New Perspective On Learning And Innovation. Administrative Science Quarterly, 35(1), 128-153.

Levinthal, D. A., & March, J. G. (1993). The myopia of learning. Strategic management journal, 14(Winter), 95-112.

Phene, A., Fladmoe-Lindquist, K., & Marsh, L. (2006). Breakthrough Innovations in the US Biotechnology Industry: The Effects of Technological Space and Geographic Origin. Strategic Management Journal, 27(4), 369-388.

Schumpeter, J. A. (1934). The theory of economic development : an inquiry into profits, capital, credit, interest, and the business cycle. Cambridge, Mass.: Harvard U.P.

[Summary Prepared by: Pete]