How Absorptive Capacity is Formed in a Latecomer Economy: Different Roles of Foreign Patent and Know-how Licensing in Korea

Different from previous studies that tend to use in-house research and development (R&D) as a proxy for absorptive capacity but fail to reveal the origins of this R&D ability, this paper attempts to determine the origin of absorptive capacity (AC) after defining such concept as the capability of a firm to conduct in-house R&D and to generate innovation outcomes. This paper distinguishes three forms of foreign technology acquisitions based on unique data from Korea, namely, know-how-only licensing, know-how-and-patent licensing, and patent-only licensing. An econometric analysis demonstrates that a firm tends to involve know-how licensing before it starts in-house R&D, whereas patent licensing is not significantly related to conducting R&D. Therefore, a substitution effect is found between foreign patent licensing and conducting in-house R&D, which is in contrast to the inducing effect of know-how licensing for in-house R&D. It is also found that conducting in-house R&D, and know-how licensing by a firm, respectively, is significantly related to a generation of innovations or patent applications in next periods. This study shows that a learning process that involves foreign technology, especially tacit knowledge in the form of know-how, occurs before firms can conduct in-house R&D and innovations.