Causal Relationships among Technology Acquisition, Absorptive Capacity, and Innovation Performance: Evidence from the Pharmaceutical Industry

Abstract

This paper discusses the importance of absorptive capacity in improving a firm's innovation performance. Specifically, we examine firm interaction with the knowledge and capabilities of outside organizations and the effect on the firm's bottom line. We use the impulse-response function of the vector auto-regressive model to gain insight into this relationship by estimating the time required for the effect of each activity level to reach outputs, the spillover effects. We apply this methodology to pharmaceutical firms, which we classify into two sub-groups - large firms and medium and small firms - based on sales. Our results show that the impact of an activity on any other activity is delayed by three years for large firms and by one to two years for small and medium firms.