Intangible assets, absorbing knowledge and its impact on firm performance: theory, measurement and policy implications

The use of intangible assets (IA) is widely recognised as a key driver of enterprise performance. A concept that is closely linked to IA is absorptive capacity, which is defined as the ability to exploit knowledge that is embodied in IA. The main objective of this paper is to explore what is meant by absorptive capacity, before examining the empirical relationship between absorptive capacity and various dimensions of firm performance. The latter is not straightforward because there is no agreed approach to measuring absorptive capacity. The approach taken here is to use data on whether firms sourced knowledge or collaborated externally from the UK Community Innovation Survey. This allows us to show that there is a clear and important link between absorptive capacity and various dimensions of firm performance. In this paper, we aim to contribute to the special issue by focusing on the role mobilising knowledge can play in improving the performance of firms in the private sector, which has a particular resonance in these difficult economic times. Our central message is that for firms to perform better in hard times, they need to mobilise their absorptive capacity. Government must therefore consider whether they should focus their efforts on helping firms directly to increase their own absorptive capacity or on improving the flow of (local) knowledge through supporting networks. Our view is that, while maintaining existing policies that aim to increase connections and encourage collaborations between firms, there should be a greater emphasis on the firm because evidence shows that unless firms have sufficient absorptive capacity, they will not be able to fully internalise the benefits of any knowledge spillovers, no matter how large such spillovers may potentially be.