In this paper, we argue that the ability of a firm to recognize the value of new, external information, assimilate it, and apply it to commercial ends is critical to its innovative capabilities. We label this capability a firm's absorptive capacity and suggest that it is largely a function of the firm's level of prior related knowledge. The discussion focuses first on the cognitive basis for an individual's absorptive capacity including, in particular, prior related knowledge and diversity of background. We then characterize the factors that influence absorptive capacity at the organizational level, how an organization's absorptive capacity differs from that of its individual members, and the role of diversity of expertise within an organization. We argue that the development of absorptive capacity, and, in turn, innovative performance are history- or path-dependent and argue how lack of investment in an area of expertise early on may foreclose the future development of a technical capability in that area. We formulate a model of firm investment in research and development (R&D), in which R&D contributes to a firm's absorptive capacity, and test predictions relating a firm's investment in R&D to the knowledge underlying technical change within an industry. Discussion focuses on the implications of absorptive capacity for the analysis of other related innovative activities, including basic research, the adoption and diffusion of innovations, and decisions to participate in cooperative R&D ventures. **

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Absorptive capacity: a new perspective on learning and innovation

Given assumptions about the characteristics of knowledge and the knowledge requirements of production, the firm is conceptualized as an institution for integrating knowledge. The primary contribution of the paper is in exploring the coordination mechanisms through which firms integrate the specialist knowledge of their members. In contrast to earlier literature, knowledge is viewed as residing within the individual, and the primary role of the organization is knowledge application rather than knowledge creation. The resulting theory has implications for the basis of organizational capability, the principles of organization design (in particular, the analysis of hierarchy and the distribution of decision-making authority), and the determinants of the horizontal and vertical boundaries of the firm. More generally, the knowledge-based approach sheds new light upon current organizational innovations and trends and has far-reaching implications for management practice.

Toward a Knowledge-Based Theory of the Firm,” Strategic Management Journal (17), pp.

https://memberfiles.freewebs.com/84/90/65819084/documents/TOWARD%20A%20KNOWLEDGE-BASED%20THEORY%20OF%20THE.pdf

Toward a Knowledge-Based Theory of the Firm

The authors assume that firms invest in R&D not only to generate innovations, but also to learn from competitors and extraindustry knowledge sources (e.g., university and government labs). This argument suggests that the ease of learning within an industry will both affect R&D spending, and condition the influence of appropriability and technological opportunity conditions on R&D. For example, they show that, contrary to the traditional result, intraindustry spillovers may encourage equilibrium industry R&D investment. Regression results confirm that the impact of appropriability and technological opportunity conditions on R&D is influenced by the ease and character of learning. Copyright 1989 by Royal Economic Society.

Innovation and Learning: The Two Faces of R & D

A central part of the innovation process concerns the way firms go about organizing search for new ideas that have commercial potential. New models of innovation have suggested that many innovative firms have changed the way they search for new ideas, adopting open search strategies that involve the use of a wide range of external actors and sources to help them achieve and sustain innovation. Using a large-scale sample of industrial firms, this paper links search strategy to innovative performance, finding that searching widely and deeply is curvilinearly (taking an inverted U-shape) related to performance. Copyright © 2005 John Wiley & Sons, Ltd.

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Open for innovation: the role of openness in explaining innovation performance among U.K. manufacturing firms

A Note on the Dual Prices of Integer Programs

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Explaining Regulatory Policy

or statistical relevance. Money turns on it, and immediately. " We do not mean that the classic Learned Hand test was in fact applied in so totally an ex ante fashion. Indeed we doubt that it was. See, for example, note 24 supra. But this just suggests that ex post approaches are neither so totally new nor manifestly odd. 6 See Grenada Steel Industries v. Alabama Oxygen Co., 695 F.2d 883, 888 (5th Cir. 1983) ("Ithe jury's attention should be directed to whether the product was reasonably safe at the time it was manufactured .... The introduction of evidence about subsequent changes in the product or its design threatens to confuse the jury by diverting its attention from whether the product was defective at the relevant time to what was done later"). This, of course, again suggests that, albeit surreptitiously, the traditional ex ante test admitted ex post data and hence serves once again somewhat to justify use of open ex post tests. 9 Compare Columbia & Puget Sound Ry. Co. v. Hawthorne, 144 U.S. 202, 12 S. Ct. 591, 36 L. Ed. 405 (1892); Fed. R. Evid. 407 (evidence of remedial actions is incompetent) with Stevens v. Boston Elevated Ry. Co., 184 Mass. 476, 69 N.E. 338 (1903) (violation of internal safety rules probative of negligence). HeinOnline -14 J. Legal Stud. 623 1985 THE JOURNAL OF LEGAL STUDIES Since the ex post test makes such data clearly relevant, it would have a distinct advantage over the ex ante test. Unfortunately, if the ex post test creates incentives to find facts, it may also create incentives to hide them. Under an ex ante test, Marshall has significant reasons to learn whether, hereafter, the product is knowably too dangerous and to take postaccident safety measures. And Taney would seem to have no reason to hide previously unexpected safety costs. Under an ex post test, however, Marshall may well seek to hide new and damaging evidence about the product's dangers or new information about possible accident-reducing measures, at least until earlier injury cases are settled. 98 (Taney may similarly seek to hide data suggesting that "safety" is riskier than was predictable.) Such a strategy on Marshall's part is, to be sure, very dangerous. It can give rise to avoidable future accidents for which Marshall would clearly be held liable, 99 and it can lead to punitive damages in such accidents. Nevertheless, if the burden of possible liability for past accidents is great enough, and if it extends far enough back in time, Marshall may well decide that it is worthwhile to hide data tending to show that products sold in the past were in retrospect unreasonably risky-at least until the past cases are settled.'0 One can imagine, for example, that, operating under an ex post test, a pharmaceutical company might be more reluctant to examine, as thoroughly as it could, reports of earlier severe side effects than it would were its liability only prospective. As with the issue of possible errors, then, the question of relative 98 The court addressed this policy argument in Ault v. Int'l Harvester Co., 13 Cal. 3d 113, 117 Cal. Rptr. 812, 528 P.2d 1148 (1975), a case admitting evidence of ex post remedial measures in a products liability case: "The contemporary corporate mass producer of goods, the normal products liability defendant, manufactures tens of thousands of units of goods; it is manifestly unrealistic to suggest that such a producer will forego making improvements in its product, and risk innumerable additional lawsuits and the attendant adverse effect upon its public image, simply because evidence of adoption of such improvement may be admitted." 13 Cal. 3d at 120, 528 P.2d at 1152. Note, however, that this analysis presupposes a continuing marketing of the product. The incentives may be materially different when the product has been discontinued, and the question is whether the manufacturer should conduct further testing to uncover additional health effects from the product. On balance, the decision whether to undertake remedial actions will hinge on the effectiveness of the actions in reducing future liability relative to their prejudicial effect on current litigation. 9 See Noel v. United Aircraft Corp., 342 F.2d 232 (3d Cir. 1964) (continuing duty not only to warn of newly discovered hazard but also to research and develop adequate safety devices); Robert B. Patterson, Products Liability: The Manufacturer's Continuing Duty to Improve His Product or Warn of Defects after Sale, 62 Il1. B. J. 92 (1973). 00 Henderson provides an exhaustive catalog of the incentives for manufacturers to "freeze" their product designs to avoid a "confession by implication" that the original design was flawed. James A. Henderson, Jr., Product Liability and the Passage of Time: The Imprisonment of Corporate Rationality, 58 N.Y.U. L. Rev. 765 (1983). HeinOnline -14 J. Legal Stud. 624 1985 FOUR TESTS FOR LIABILITY advantage in stimulating useful fact finding is an empirical one. Each kind of test-ex ante and ex post-may have significant merits; neither kind of test dominates the other. The same is true if one compares the Learned Hand tests (1 and 3) with the ex ante strict liability test (2). Under that strict liability test, once it is decided that Marshall (say) is in the best position to strike and to act on the cost-benefit balance, there is little incentive for Taney to find new facts or for Marshall to hide them. The loss falls on Marshall in any case.' 0 Marshall, because he will be liable in the future anyway, has every reason to find and use new data about the safety cost/accident cost tradeoff, for with such information he can hereafter choose the cheaper alternative. Once the strict liability decision is made, the party freed from loss bearing becomes relatively passive with respect to future cost avoidance (and hence fact finding). The party held liable, instead, has every incentive to become very active in seeking data relevant to future accident and safety costs. There are, again, limits to this analysis. The party on whom the loss does not fall may bear some noncompensable losses, and these may create some incentives. 0 2 Also, too much passivity may ultimately result in a ruling that the previously immune party is ignoring relevant choices and hence trigger at least a partial reversal of the original strict liability determination. Finally, the strict liability decision may itself divide losses between the parties and thereby create limited fact-finding incentives for each. Still, the basic point remains that, by resting its decision on the relative fact-finding capacities of the parties, the strict liability test (2) tends to create excellent fact-finding incentives for some parties and poor ones for others. It also tends to diminish the dangers of fact hiding.' 0 3 Whether this combination of incentives is a good or a bad one, relative to the two Learned Hand tests (1 and 3), once again, is an empirical ques-

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Four Tests for Liability in Torts

One has to be impressed by the volume of research produced in the last fifteen years that has applied economics to analyze legal issues-in particular, the subjects of torts and crimes. The nature of the inquiry has been diverse. It has included normative analysis of the implications that economics has for the design of a particular rule of law' as well as positive analysis, using economic arguments, of why the common law has taken the form it has.2 The economic approach has featured both theoretical analysis3 and empirical work4 on legal issues. The literature has developed not only in publications explicitly devoted to law and economics5 but in law reviews and leading economics journals as well. Volumes have been produced that provide comprehensive

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Legal Theory and The Economic Analysis of Torts and Crimes

It has been almost 20 years since Phillip Areeda and Donald F. Turner introduced their proposals for antitrust policy toward predatory pricing. Their 1975 Harvard Law Review article, "Predatory Pricing and Related Practices under Section 2 of the Sherman Act," sparked a lively debate among legal scholars and economists that continued, mostly in law reviews, for several years. The controversy focused on the core Areeda-Turner (AT) test, which put forward short-run marginal cost as the appropriate, but difficult-to-measure, standard of a lawful price and recommended reasonably anticipated average variable cost as a surrogate. The discussion included consideration of other cost-based measures, as well as alternative rules restricting dominant-firm pricing and output policies and both structured and open-textured rule-of-reason analyses. The controversy also helped to illuminate the qualifications that Areeda and Turner imposed on their proposal. One of the central issues in the debate concerning the AT test was whether or not it gave sufficient weight to the dynamic and strategic character of predatory pricing. All the participants in the discussion, including Areeda and Turner themselves, recognized that since the essence of predatory pricing is the predator's sacrifice of short-run gains for longer-run gains (and consequent harm to the public), the problem being addressed is inherently strategic. The lawyers and economists engaged in the debate differed, however, about whether anything practical could be done to cope with the intertemporal strategic issues. Areeda and Turner's reliance on a static model of dominant-firm behavior to derive their test reflected their doubt that a sound legal rule could be fashioned to cope with the inherently "speculative and indeterminate" assessment of longrun considerations. Curiously enough, just as the debate in the law reviews was winding down, the market-organization literature was beginning to see an infusion of contributions that used modern game-theoretic concepts and techniques to analyze well-specified models of strategic firm behavior in oligopolistic markets. In particular, several important contributions analyzed models of markets in which predatory pricing emerged as part of a set of equilibrium strategies. These contributions effectively undermined the view that, because of its costs to the would-be predator, predation is irrational and hence not likely to occur. This work is well categorized and well surveyed in the chapter that Janusz Ordover and Garth Saloner (1989) contributed to The Handbook of Industrial Organization. A central feature of this class of models is some asymmetry of information between market actors. The dominant incumbent firm is better informed than its smaller rival in models where the predator induces exit of competitors; the incumbent is better informed than potential entrants in models where predation takes the form of entry deterrence; and firms in general are better informed about their prospects than are their sources of financing. The new market-organization literature on predation offered three major types of models. First, there were well-developed game-theoretic analyses of the long-purse or deep-pocket theories of predation, theories which Lester G. Telser (1966) had analyzed earlier in a perfect-information tDiscussants: Paul Joskow, Massachusetts Institute of Technology; Joseph Stiglitz, Stanford University.

Alvin K. Klevorick

Papers

A Note on the Dual Prices of Integer Programs

Explaining Regulatory Policy

Four Tests for Liability in Torts

Legal Theory and The Economic Analysis of Torts and Crimes

The Current State of the Law and Economics of Predatory Pricing