A framework and model for absorptive capacity in a dynamic multi-firm environment

Researchers have made significant strides toward understanding how absorptive capacity influences firm performance. However, most of these developments have been theoretical in nature, and have been conducted in single-firm contexts. Our study answers prior calls for more empirical and mathematical treatments in multi-firm contexts that nurture a vibrant and balanced research stream. Our study adopts a mathematical modeling approach to investigate the influence of absorptive capacity on the performance of a firm in a dynamic multi-firm context. We develop a theoretical framework that drives the modeling exercise to gain insights on two research questions: (1) Relative to the dominant player in the industry, what level of ACap should a firm be endowed with to increase its long-term value in a dynamic environment? (2) Is there a threshold value of ACap endowment that makes it more likely for a firm to challenge the dominant player in the industry? We provide an analytical result, and further, we conduct a numerical study with two firms and seven periods. Our results suggest that there are ACap hurdle rates that a firm must meet to survive and grow. In addition, our model suggests that smaller firms in an industry may do well to strive for unique combinations of ACap, prior knowledge, and initial firm value, to compete successfully against the dominant player in the industry. Our work serves to open new avenues for future research that addresses the influence of ACap endowments on firm performance in dynamic multi-firm environments.