THE IMPACT OF ABSORPTIVE CAPACITY ON SMES

COLLABORATION
Alessandro Muscio

Dipartimento di Scienze Economiche e Aziendali (DPTEA)

Universit Luiss Guido Carli
Via O. Tommasini, 1 - 00162 Roma (Italy)
Tel: + 39 06 86506530
Email: amuscio@luiss.it

Abstract: Absorptive capacity plays a key role in determining firms capability to

access and make use of external knowledge. However, little evidence has been provided
about this important determinant of knowledge acquisition in the SMEs context. This
paper investigates the importance of absorptive capacity created and accumulated in
R&D efforts and in qualified human resources, on SMEs' capabilities to collaborate
with other firms, with universities and with technology transfer centres. The empirical
evidence is based on a survey of interviews with 276 manufacturing SMEs located in
the Lombardy region (Italy). The estimation of several probit models demonstrates that
even in SMEs absorptive capacity has a relevant impact on the ability of firms to
establish collaborations with external organisations.

Key words: absorptive capacity, collaboration, SMEs

JEL classification: D21, D83, L20, L60, O30

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1 INTRODUCTION
The complexity of the innovation process explains the attention that both economists
and policy makers have increasingly been paying in understanding the role of different
institutions and organisations in creating a favourable environment for the introduction
of innovation (Branscomb and Keller, 1998; Edquist, 1997; Tassey, 1992).

In order to produce and successfully commercialise innovation, firms must synthesize a

wide variety of expertise and knowledge produced by different complementary sources.
Firms both learn from internal sources of knowledge such as through R&D activity and
from a wide variety of external sources (Malerba, 1992). These external sources are
represented by many organisations such as universities and research institutions,
government laboratories and agencies, competitors, suppliers and customers (Dosi,
1988). Firms collaboration with external institutions allows the expansion of their
range of expertise and can support the development of new products. However, in order
to successfully access new knowledge through collaborations with firms and
institutions, firms must manage the capability to search, find, access and interpret for
their own use information embodied in external organisations (Forfs, 2005).

In the last fifteen years, this aspect of learning has been targeted and widely studied in
the literature on absorptive capacity. Starting from the seminal work of Cohen and
Levinthal (1989, 1990), the literature on absorptive capacity has explored several
dimensions of firms technological capabilities, investigating the factors determining a
firms ability to access new knowledge. Although early empirical works on this issue
have focused on large firms and on high tech industries, a growing interest has been
shown for the context of SMEs. In fact, despite SMEs limited R&D activity - which is
generally considered in the literature as the core of absorptive capacity - SMEs do
network with external organisations, overcoming their often limited internal knowledge
resources.
Accordingly, in the case of SMEs the arguments in support of R&D efforts as
determinants of firms ability to access new knowledge need to be revisited. In fact, in
SMEs alternative components of firms learning processes such as learning by doing
and learning by using (Cooke and Morgan, 1998; Feldman, 1994; Maskell and
Malmberg, 1999), very often expressed in a tacit form (Lundvall and Johnson, 1994;
Von Hippel, 1994) assume a key role in developing knowledge and in generating
absorptive capacity. Therefore, in order to determine SMEs capacity to absorb external
knowledge, together with the capacity generated from in-house R&D activity - which in
many cases is carried out informally one should consider learning capabilities
embodied in their human resources (HR). The skills, training and experience of SMEs
human capital represent the essence itself of their knowledge base and contribute
extensively to the overall capability to absorb external knowledge.

Following these arguments, this paper investigates the determinants of firms

collaboration with external organisations in a sample of 276 innovative SMEs located in
the Lombardy region of Italy. This paper considers several components of absorptive
capacity and provides evidence of, whether and how they contribute to firms capability
to interact with other organisations. The arguments are tested in the case of firms

2
collaboration with other firms, with universities and with technology transfer
institutions.
This work is organised as follows: Section 2 outlines the theoretical background and the
research hypothesis; Section 3 reports some descriptive analysis of the sample of firms
selected and the results of the empirical evidence. Concluding remarks follow.

2 THEORETICAL BACKGROUND
2.1 Cooperation and Innovation
Innovation studies have underlined the crucial role played by the interaction of different
organisations in fostering the innovation process (Coombs et al., 1996; Dodgson and
Rothwell, 1994; Von Hippel, 1988). Firms innovation activity is enhanced, and
sometimes depends upon, cooperation between firms and other organisations (Freeman,
1991, 1994) such as universities and research centres (Cohen et al., 2002; Jaffe, 1989),
suppliers and users (Lundvall, 1988; Sako, 1994; Shaw, 1994) or even competitors
(Coombs et al., 1996).

In order to carry out innovative activities firms must accumulate and process internal
and external knowledge, establishing learning processes based on different sources
(Malecki, 1991; Stiglitz, 1987). Innovating firms actively seek and recombine different
knowledge inputs originated by different sources whose flows rarely follow a linear
process (Kline and Rosenberg, 1986). Firms can internalise knowledge sources or rely
on external transactions. However, between these two possible alternatives:

external transactions may be preferred if knowledge sources are too

costly, too specialised or somehow otherwise constrained from becoming a
part of the firm (Feldman, 1994:26).

Both innovation (Nooteboom, 1994, Dodgson and Rothwell, 1994) and regional studies
(Cossentino et al., 1996; Garofoli, 1992; Maskell and Malmberg, 1999) conclude that
SMEs success against larger competitors may be determined by their ability to utilise
external networks efficiently. In general, SMEs overcome barriers to growth due to
absolute limits to resources by the astute use of alliances (Ahern, 1993; Noteboom,
1994; van Dijk et al., 1997) and development of collective efficiency (Schmitz, 1999).
For the purpose of innovation links between actors inside the firm and the external
environment are considered to be an asset especially for SMEs (Noteboom, 1998). In
fact, due to the nature of their operation and their size (Waalkens et al., 2004), SMEs are
less R&D driven and rely more on their external environment in undertaking innovation
activity. Therefore, as also the literature on territorial systems suggests (Brusco, 1982;
Piore and Sabel, 1984), a firms competitiveness may in fact be determined more by its
external network than its size (Mytelka, 1991).

2.2 The role of absorptive capacity in acquiring knowledge

Acquiring external knowledge and establishing suitable channels for its transmission is
not a straightforward process. In order to acquire new knowledge, firms should know
where and how to find it, and how to assimilate it back through their own corporate

3
structure. In general, in order to access any kind of knowledge firms should improve
their ability to learn, often referred to as appropriability (Cohen and Levinthal, 1990).
This ability is achieved through the previous accumulation of knowledge via different
modes of learning. While the outcome of internal learning activities is completely
dependent on the firms efforts, the access to external sources of knowledge may vary
depending on the kind of knowledge firms are looking for, on its availability and on its
transmissibility.
The ability to interpret and exploit such sources of knowledge is a critical factor in
accessing new knowledge and lack of it can sometimes undermine firms innovation
capabilities. Starting from this assumption, Cohen and Levinthal (1989, 1990) argued
that the ability to exploit external knowledge is largely influenced by the level of prior
knowledge, which includes basic skills, shared language and/or most recent scientific or
technological developments. All these factors point out some very important aspects of
organisational learning and constitute what the authors label as absorptive capacity,
generated by R&D activities or developed as a by-product of a firms manufacturing
operations, or more directly through staff training.

Cohen and Levinthal appeal to the cognitive and behavioural literatures on learning to
explain absorptive capacity. These suggest that, in effect, prior knowledge gives the
conceptual framework or frame of reference needed to understand new knowledge. This
prior knowledge may itself represent a set of learning or problem-solving capabilities
which may differ in their learning outcome: in fact while the first one would lead to the
development of the capacity to assimilate existing knowledge, the second represents the
capability to create new knowledge. Accordingly, a close relation exists between firms
technical change and R&D activity. In fact, R&D satisfies two functions: they generate
new knowledge and contribute to the firms innovative capacity. According to this,
R&D can generate new information and at the same time enhance the firms ability to
assimilate and exploit existing information. In other words:

while R&D obviously generates innovations, it also develops the firms

ability to identify, assimilate and exploit knowledge from the environment
what we call a firms learning or absorptive capacity (Cohen and
Levinthal, 1989:569).

This property of R&D activities allows the exploitation of outside knowledge spillovers,
providing the basis for subsequent applied R&D. Access to external knowledge would
also be supported by greater capacity in undertaking external exploration in distant
technological areas (Rosenkopf and Nerkar, 2001).
Since the publication of Cohen and Levinthals seminal work on absorptive capacity a
number of studies have used this concept in analysing firms technological capabilities.
The literature has explored the relationship between absorptive capacity and inter-
organisational relationships (Frenz et al. 2003, Narula, 2001; Laursen and Salter, 2004)
and its impact on inter-organisational learning and innovation (Lane and Lubatkin,
1998; Lane et al., 2001; Lewin and Massini, 2003; Simonin, 1999).

Despite, some attempts to refine and extend the concept of absorptive capacity (for a
review see Van Den Bosch et al., 2003), according to Lane et al. (2002) the literature is
disappointing as a guide to understanding what absorptive capacity actually is. The

4
authors have reviewed 189 papers that cite Cohen and Levinthals 1990 article, and
conclude that one of the major shortcomings of this literature is the fact that only few
attempts have been made in measuring it outside of the R&D context. In fact, there is no
consensus among researchers on how identify it and measure it. This problem is
particularly relevant when the concept of absorptive capacity is applied to the case of
SMEs, where R&D activity is generally low.

R&D efforts are rightly seen as viable proxy of absorptive capacity. Extensive evidence
has been provided regarding the positive impact of R&D efforts on firms capability to
access knowledge from external sources and ultimately on innovation performance.
In the context of SMEs however, the focus in the economic literature on R&D needs to
be reassessed. In fact, problems arise in using R&D-related indicators when SMEs are
considered. After all, Cohen and Levinthal themselves used firm-based R&D data as
proxies for absorptive capacity in the empirical section of their 1990 paper, even though
the authors were aware of the importance of human capital with respect to absorptive
capacity (Cohen and Levinthal, 1994). Indeed, R&D data are often used as indicators of
absorptive capacity simply because they exist as a statistical category. However, due to
the limited scope of R&D activities in SMEs (Brouwer and Kleinknecht, 1997;
Gottardi, 2000), alternative sources of learning such as learning by doing and learning
by using (Malerba, 1992) and acquisition of tacit forms of knowledge (Lundvall and
Johnson, 1994; Johnson et al. 2002; Vinding, 2004) assume a key role in developing
absorptive capacity.

Giuliani and Bell (2005) claim that at least when absorptive capacity is analysed at the
firm level, there is a convergence in the literature on the importance of human capital
for the purpose of a firms capability to access external sources of knowledge. Overall,
in the literature, absorptive capacity is often described in terms of the knowledge base
of the firm. This is usually identified in terms of human resources (skills, training,
experience, etc.) and also in terms of in-house knowledge-creation efforts such as via
R&D (Giuliani and Bell, 2005). Indeed,

Qualified human resources are essential in monitoring the evolution of

external knowledge and in evaluating its relevance, and for the integration
of these technologies into productive activities." (Narula, 2004:17).

With regard to human resources, conventionally numbers of qualified scientists and

engineers in firms are also seen as a proxy measure of absorptive capacity (Mangematin
and Nesta, 1999; Rothwell and Dodgson, 1991). Similarly, Vinding (2004) stresses that
formal education, work experience, the organizational set-up and development of a
closer relationship with external and internal actors, all matter for the determination of
absorptive capacity. There is also extensive evidence that investments in employee
training and acquisition of new skills develop a firms absorptive capacity. In fact,
investments in training pay off in terms of enhancing the human capital of the firm and
that in general there is a positive relationship between employee training and
organizational performance, (Delaney and Huselid, 1996; Koch and McGrath, 1996).
Human resource management practices have been shown to have positive linkages to
absorptive capacity (Huselid, 1995; MacDuffie, 1995; Michie and Sheehan, 1999).
Finally, Human resources are also analysed from the point of view of organisational

5
routines, which are elements directly related to individual skills (Eisenhardt and Martin,
2000; Teece, 2000). Therefore, firms ability to learn will depend on the internal
characteristics of the company and on its organizational learning capabilities (Teece et
al., 1997; Zahra and George, 2002).

Also in the case of SMEs, the capabilities to access and absorb knowledge that is
externally available are largely influenced by the quality of their absorptive capacity.
However, much of the empirical evidence of absorptive capacity at the firm level is
focused on larger firms and on R&D intensive sectors (Cockburn, and Henderson, 1998;
Lane and Lubatkin, 1998; Narula, 2001; Rosenkopf and Almeida, 2003). Very little
evidence has been provided about how this important determinant of knowledge
acquisition is able to activate SME capabilities to establish and maintain stable
relationships with other firms and institutions. Similarly, little evidence has been
provided about absorptive capacity with respect to low-tech manufacturing industries.
The reasons for this are again to be found in the excessive focus of the relevant
literature on the analysis of R&D related issues. When R&D activity becomes less
evident (such as in the case of SMEs) or less intensive (such as in low-tech industrial
sectors) research becomes scarce or inconclusive.
The investigation of the determinants of networking between innovative SMEs and
external organisations can display how absorptive capacity elements could play a key
role in establishing collaborations and therefore access knowledge externally available.
In the SMEs context absorptive capacity can be embodied both in formalised R&D
activity and in HR elements. In fact, within small firms the extent of R&D activity can
be difficult to identify as it is often carried out informally or outside dedicated
laboratories. Accordingly, whilst R&D activity can be difficult to identify in SMEs, HR
elements of absorptive capacity such as education, skills and training could represent
better proxies of their absorptive capacity. In small firms such HR elements can play a
key role in determining firms ability to network with organisations and access external
sources of knowledge.

Following these arguments, the aim of this paper is to estimate the impact of absorptive
capacity on SMEs capability to access external knowledge. This paper focuses on
human capital and investigates how R&D employment, along with other human
resources elements of absorptive capacity influence the capacity of SMEs to collaborate
with other firms, Universities and technology transfer centres. From this, the research
hypothesis elaborated is the following:

Hypothesis: R&D employment and human resources elements of absorptive capacity

foster SMEs collaboration with external institutions.

The empirical evidence is focused on the Lombardy region, core of industrial and
innovation activities in Italy. The regional dimension of the study provides the
opportunity to focus the attention of this exercise on HR-related elements of absorptive
capacity. In fact, whilst such elements are essential for the absorptive capacity of SMEs
(Giuliani, 2005), in densely industrialised regions such as Lombardy, disparities in the
availability of infrastructures and services (Criscuolo and Narula, 2001; Narula, 2004)
and in social absorptive capability (Fagerberg et al., 1994) do not represent an issue in

6
research analysis.1 Furthermore, since innovation depends significantly on existing
knowledge (often located outside the firm) as well as new knowledge, absorptive
capacity is especially important as a way to take opportunities in environments that are
rich in externalities. This is especially the case of innovative regional systems such as
Lombardy, where in many cases specialised knowledge is locally readily available,
being embodied both in firms and in the institutional framework (Asheim and Isaksen,
1997; Cooke, 2001; Muscio, 2005a).

The paper is organised as follows: Sections 3.1 and 3.2 respectively report a brief
description on Lombardys regional system and some information on the composition of
the sample of companies interviewed; Section 3.3 reports some descriptive statistics on
innovation and collaboration activities in firms interviewed; Finally, Section 3.4 reports
the test of the research hypothesis via econometric analysis.

3 EVIDENCE FROM THE LOMBARDY REGION

3.1 Introduction on the regional context of Lombardy
Lombardy is one of the most industrialised and innovative regions in Europe. The
region accounts for over 762 000 enterprises corresponding to 15.5% of total national
economic activities. Regional employment is very high (only 3.7% unemployment) and
largely concentrated in small firms (some 90% of employees work in firms with less
than 50 employees tightly networked in a highly urbanised territory. Manufacturing
activities represent 17% of economic activities.

Lombardy accounts for the greatest part of Italys R&D and patent activity; It accounts
for 26% of national expenditure in R&D and for 21.5% of total R&D employment. A
large share of regional R&D activity is carried out by private firms: 42.4% of national
business expenditure and 29.6% of R&D employment in private businesses is
concentrated in Lombardy. Lombardy also concentrates most of national patent activity,
accounting for 40% of total national patenting activity.

A large number of research facilities and support institutions are located in the region.
At present there are twelve universities, many of which are located in the city of Milan.
The regional government has also put much effort in developing new policy schemes in
support of research and innovation activities, providing financial support to innovation
activity and supporting the creation of several technology transfers and service centres
(TSCs) (Muscio, 2005b).
In conclusion, in Lombardy there is a wide array of public and private institutions with
the competencies to support the innovative activities of the regional industry base.

1
Narula (2004) identifies several components of absorptive capacity at the country-level. Besides
human capital-related components, he stresses the role of infrastructures and presence of
institutions.

7
3.2 Results of a survey analysis
The Universit Insubria Varese (Italy) carried out an extensive survey of interviews
with SMEs located in Lombardy. The aim of the survey was to collect information on
innovation activities in regional SMEs and identify the local dynamics of innovation
patterns. Firms interviewed were selected with the help of local industry associations
who were asked to nominate local SMEs of any manufacturing industry which they
considered were more concerned about innovation issues. It follows that the selection
process is conditioned by a high degree of subjectivity and that the database collected is
not representative of the whole regional population of firms as the research targeted
only innovating SMEs. 276 interviews with entrepreneurs and R&D representatives
were undertaken by direct visits to local SMEs. Interviews were carried out during the
period 1999-2001. The survey focused on five main sectors: production of electrical and
electronic products, machinery, metal products, plastics, textiles and garments
(including silk products); few more firms interviewed produce pulp and paper, chemical
products and wood and furniture.

Firms interviewed all have less than 250 employees and on average employ 65 staff.
Table 1 reports the distribution by industry of firms interviewed.

Table 1 Industry distribution of firms interviewed

3.3 Innovation and cooperation

The large majority of company representatives interviewed consider their firms
innovative (Table 2). Some 75.7% of firms have recently introduced innovative
products and 36.6% of them have applied for patent applications. Innovations generate
on average 25% of turnover and despite the small size of companies interviewed, the
majority of them have a formalised R&D unit. On average, such units employ some
7.3% of total firms employment.

Table 2 Firms innovation activity

Over 31% of companies collaborate with other firms and/or institutions in the
development of innovations (Table 3). Some 52% of SMEs has contacted regional TSCs
and in the majority of cases they are completely satisfied with the quality of services
provided by centres. Over 30% of firms have recently collaborated with universities,
especially with Universities located in Lombardy. Finally, nearly 45% of firms
collaborate with other firms. In general, such collaborations target explicitly innovation
issues.

Table 3 Firms collaboration

SMEs face several obstacles in the innovation process, which may limit or undermine
their innovation capabilities (Table 4). Interviewees were asked to list the three main
obstacles hindering the development of innovations. The majority of firms pointed out
problems related to financial issues, lack of know-how and difficulties in accessing
external institutions.

8
Firms find particularly difficult accessing skilled labour on the local labour market and
would like to raise their own scientific know-how. Firms demand for labour is not
completely fulfilled on the local labour market. This is due to the extremely positive
trend in employment figures that Lombardy has had in the past decade.2
Around 30% of firms have complained about high production costs and around 23% has
had problems in funding innovation activity. In general, investments in innovation are
made using firms own financial assets. Despite the fact that access to loans or public
funds is relatively common (67%), the need for external financial resources represents
an issue for many firms.
Finally, 17% of firms complained difficulties in collaborating with external research
centres and 19.2% of them claimed that they cannot find suitable external services in
their area. Despite the large number of research institutions and service centres located
in the Lombardy region, lack of external support and problems in communicating with
local research institutions represent an issue for a large number of firms. Indeed, such
obstacles may evidence the limited absorptive capacity of some firms, which may also
limit their capability to identify potential external partners on innovation issues and
interact with them.

Table 4 Obstacles to innovation activity

Over 62% of firms employ graduates, even though on average the number of graduates
employed is rather low (Table 5). Despite the problems of low scientific know-how
evidenced above, firms continuously invest in upgrading human capital as over 73% of
firms undertake at least occasionally training courses for employees. Many firms are
committed to upskilling their staff through training programmes and in over 43% of
cases they have recently employed personnel with new (for the firm) and specialised
skills. However 82% of companies have problems in finding skilled employees in the
local labour market.

Table 5 Firms human capital

There are significant differences in terms of human capital between those firms which
have recently collaborated with organisations such as universities, TSCs or other firms
and those which have not (Table 6). Firms collaborating with external organisations
have a higher number of R&D employees and a higher number of graduates. They are
also more likely to be committed in continuous training programmes. Finally supporting
the arguments on firms absorptive capacity, interviewees in firms collaborating are also
more likely to be aware of innovation activity taking place in the firms surrounding
environment.

Table 6 Absorptive capacity and firms collaboration

In summary, firms interviewed are highly innovative and tightly networked with
external partners. Qualified personnel and R&D employment really seem to be
fundamental features of collaborating SMEs, yet the majority of firms struggle to find
qualified employees in the local labour market and upgrade in-house know-how. The
2
Lombardy has an average unemployment rate (3.7%), which is less than half of the National
average. In some industrial areas like industrial districts the unemployment rates falls below 2%.

9
following section investigates how absorptive capacity influences SMEs capacity to
collaborate with potential partners in innovation activity.

3.4 Determinants of firms cooperation

The test of the research hypothesis is based on a set of probit regressions and one
ordered probit regression. The probit regressions estimate the impact of absorptive
capacity on the probability of firms establishing collaborations with other firms,
universities and TSCs. The ordered probit regression evaluates the impact of absorptive
capacity on the cumulative probability of firms to network with one or more different
kinds of organisations. A brief description of the variables introduced in the regression
and some descriptive statistics is provided in Table 7.

Table 7 Description of variables

Absorptive capacity is measured using firm-level indicators. In the literature, firm-level

absorptive capacity is described in terms of the knowledge base of the firm. This is
usually identified in terms of in-house knowledge-creation effort via R&D, and in terms
of quality of human resources, such as education, skills and training. Here, it is
considered as indicators of absorptive capacity share of employment involved in R&D
activity, employment of graduates and staff training. The regressions also include a
softer indicator of absorptive capacity: the interviewees awareness of being part of an
innovation system. This qualitative variable controls the intensity of innovation activity
in the area where the firm is located, and for the interviewee's capability to 'sense'
innovation activity of neighbour firms. Finally, the regressions also control for firms
characteristics (size, age and industry), for investments and access to public funding.

The model used here is the following:

Yi = ! 0 + ! 1 SIZE i + ! 2 AGE i + ! 3 INVi + ! 4 FUNDS i + ! 5 EMP _ RDi

+ ! 6 EMP _ GRADi + ! 7 TRAINING i + ! 8 AWARE _ IS i (1)
+ ! 9 industry _ dummies i

Where Y represents the variables C_UNI, C_FIRMS, C_TSC, respectively accounting

for firms collaboration with universities, with other firms and with TSCs. Lastly, in the
ordered probit regression Y corresponds to C_MULTI, accounting for multiple
collaborations with different kinds of organisations (C_MULTI=1,2,3). Table 8 reports
probit estimates and marginal/impact effects.

Table 8 Probit estimates

Overall, the results show that absorptive capacity has a vast impact on firms capability
to network with other organisations. Confirming the insights of Cohen and Levinthal
(1990), in all the regressions R&D employment (EMP_RD) fosters firms collaboration.
The finding that R&D intensity has a positive coefficient is in line with the absorptive

10
capacity hypothesis: firms need to do some R&D to be able (and be motivated to)
contact external partners. Therefore, in the case of innovative SMEs, the absorptive
capacity accumulated and generated by R&D employment improves their capability to
establish networks with other organisations and to access new knowledge.
Overall, other indicators of absorptive capacity deliver positive results, even if
coefficients are not always significant. In the case of firms collaboration with
universities and with other firms, employment of graduates (EMP_GRAD) and firms
involvement in continuous training programmes (TRAINING) foster firms capability to
collaborate.
The positive impact of employing graduates supports the outcomes of recent studies on
firms collaboration with research institutions, mainly focused on larger companies
(Adams et al., 2001; Cassiman and Veugelers, 2002; Laursen and Salter, 2004).
The positive impact of training on firms collaboration supports the original insights of
Cohen and Levinthal (1990), who evidenced how firms also invest in absorptive
capacity directly, as when they send personnel for advanced technical training.
Moreover, these results are consistent with the arguments put forward by the HRM
literature concerning the positive impact of upskilling on collaboration (Michie and
Sheehan, 1999). HR variables complement R&D indicators in benchmarking innovation
efforts in SMEs. In fact, R&D efforts are difficult to measure in the SMEs context
(Brouwer and Kleinknecht, 1997; Cohen et al., 1987) as they are often linked to firms
size (OECD, 2005) and conducted informally (Kleinknecht, 1987; Kleinknecht and
Verspagen, 1989).
At least in the case of TSCs, awareness of being part of an innovation system
(AWARE_IS) significantly enhances the probability of establishing collaborations. Few
interpretations can be provided about this result. If on the one hand this variable
controls the intensity of innovation activity performed in the area where the firm is
located, on the other hand it could also be a measure of the interviewees capability to
detect innovation activity in the area. It follows that this awareness may also
determine a firms ability to gain from localised knowledge spillovers. Therefore, the
positive estimate for the variable AWARE_IS can prove that high awareness about local
innovation activity, developed via the accumulation of absorptive capacity and outward
orientation, fosters a firms capability to access external knowledge.

Access to financial instruments (FUNDS) does not influence firms collaboration.

However, at least in the case of collaboration with universities and TSCs, investment
efforts in the production process (INV) have a great impact on firms collaboration.
Technology accumulation expressed through upgrading of machinery and investments
in capital goods supports firms productivity and increases sensibly the capability to
interact with TSCs. Therefore, firms that worry about upgrading the production
processes tend to actively seek external opportunities to access knowledge as well.

Finally, firms size and age have a very low impact of firms capability to collaborate.
In the case of collaboration with universities the variable SIZE is significant, yet the
coefficient is near to zero. Similarly, in the case of firms collaboration, the coefficient
for the variable AGE is significant, yet low.

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Differences between industrial sectors are generally not relevant and limited to the case
of firms collaboration with TSCs.3 However, such differences could be explained
considering the relevant industry specialisation of services provided by TSCs in
Lombardy (Cusmano et al., 2000; Muscio, 2005b).

Overall, the results of probit regressions are confirmed by the ordered probit regression,
illustrated in Table 9.

Table 9 Ordered probit estimates

Table 9 reports ordered probit estimates and marginal/impact effects for C_MULTI=1,2
and 3. Column 3,4 and 5 present the probability of each score for C_MULTI=1,2,3 with
all other variables held at their means. The marginal effects of changes in independent
variables in an ordered probit model are not easy to interpret. They can be significantly
different from the ordered probit coefficients and their signs as in this case - do not
necessarily correspond to the coefficients signs (Long, 1997). In fact, as Greene (2002)
indicates, in an ordered probit model, the sign of any parameter can only clearly
determine the marginal effect of each variable on the extreme probabilities (the
probability of no collaboration and the probability of all collaborations).

The coefficient for INV is statistically significant and the calculated marginal effects
suggest that investments efforts positively affect the probability of establishing
collaborations. On the contrary, the marginal effect of firms size (SIZE) is significant
and yet close to zero.

Absorptive capacity indicators have significant and positive marginal effects on the
probability of establishing collaborations. When the firms cumulative capability to
establish simultaneously different networks with different organisations is considered,
the importance of absorptive capacity is even greater (Mohnen and Hoareau, 2002).
R&D employment, together with employment of graduates and continuous training
greatly affects a firms capacity to collaborate with more than one partner. In addition
awareness of being part of an innovation system plays an important role in detecting
potential partners. In summary, it can be concluded that absorptive capacity allows the
small firm to act as a gatekeeper for its own innovation activities and capacity,
systematically monitoring external potential sources of information that could be
relevant for its own future prosperity (Fritsch and Lukas, 2001).

4 CONCLUDING REMARKS

This study outlines the determinants of firms collaboration with external organisations
in the Lombardy region. The empirical evidence is carried out on a sample of innovative
manufacturing SMEs.
Overall, in the majority of firms interviewed the main sources of information on
innovation activity are internal R&D units and external organisations, especially

3
The industry dummy ID_OTH was not included in the regressions in order to avoid problems of perfect
multicollinearity.

12
companies. Collaboration represents a vital source of knowledge for most of SMEs
interviewed as they continuously establish collaborations with external partners. The
intensity of firms collaboration with other firms, universities and technology transfer
centres was investigated in this study. The empirical analysis presented here provides
evidence that when collaborating firms and non-collaborating firms are observed
separately, relevant differences in the quality of human capital employed emerge.

R&D employment and qualified and skilled human capital represent an asset when
firms capability to collaborate is considered. In order to access new knowledge
embodied in external partners, or more generally in order to be able to establish and
maintain linkages with external partners, firms need to invest in their own research
processes, in qualified human resources and in continuously upskilling personnel. This
is particularly the case when the capacity to establish simultaneously networks with
diverse organisations is considered. In fact, the empirical evidence reported here
confirms that the probability of a firm having the capability to maintain collaborations
with universities, technology centres and other firms dramatically increases if the firm is
endowed with qualified human capital and if its R&D efforts are high.

The empirical evidence presented in this paper provides a strong endorsement of the
central messages of the literature about absorptive capacity. In particular, it underlines
the importance of appropriate human resources and the benefits of deliberate
management of innovation through intense R&D activity. In fact, the results of this
study provide support to Lundvalls arguments in support of ice breaker programmes,
making it attractive for firms to hire an academically qualified person (Lundvall, 2002).

Furthermore, in the light of the focus of recent EU and national policies on SMEs
networking and clustering, the results of this study provide some further elements of
analysis. In fact, R&D efforts and other identified elements of absorptive capacity have
the collateral effect of increasing firms capability to access external knowledge
spillovers and network with potential partners in innovation activity. This provides the
scope to conclude that in innovative SMEs internal investments in absorptive capacity
on aspects such as training and skills improvement also appear to be key factors for the
reinforcement of the collective efficiency of innovation systems.

Acknowledgements
This work has benefited from the many helpful comments of Martin Bell, Elisa Giuliani
and Philip Sowden. I would also like to thank the staff of Technopolis ltd Brighton for
their support.

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LIST OF TABLES

Table 1 Industry distribution of firms interviewed

Sector n. firms % firms
Electrical / electronic products 33 12,0
Machinery 72 26,1
Metal products 58 21,0
Plastic products 36 13,0
Textiles, garments 67 24,3
Other sectors:
Pulp and paper 2 0,7
Chemical products 5 1,8
Wood, furniture 3 1,1
TOTAL 276 100,0

Table 2 Firms innovation activity

% firms
Self-definition of innovativeness 84.8
Introduction of innovative products 75.7
Turnover generated by innovative products (%) 25.0
Application for patents 36.6
Presence of R&D department 61.2
R&D employees (%) 7.3

Table 3 Firms collaboration

% firms
Firms developing innovative products in collaboration with external 31.5
partners
Cooperation with Technology Transfer Centres (TSCs) 51.8
Cooperation with Universities 30.4
Cooperation with other firms 44.9

Table 4 Obstacles to innovation activity

% firms
Obstacles to the development of innovative products (y/n) 73.2
Major problems:
Lack of skilled workforce 34.8
Low scientific know-how in the firm 17.4
High costs 30.4
Access to funds 23.2
Poor knowledge of the market 8.0
No information on industry innovation activities 6.9
Obstacles in collaborating with external research centres 17.0
Lack of external services 19.6
Distance from main centres of prod. Of innovation 5.1
Uncertainty / excessive risk 14.1
Other 4.0

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Table 5 Firms human capital
% firms
Firms employing graduates 62.32
Graduates (%) 4.35
Training courses for employees 73.19
Recent employment of workers with new specific skills (y/n) 43.48
Problems in finding skilled workers 81.88

Table 6 Absorptive capacity and firms collaboration

Collaboration No Independent
collaboration samples
T-Test
(1 tail)
Share of employment involved in R&D activities (%) 0.08 0.03 **
Employment of graduates (y/n) 0.64 0.54
Systematic training courses for employees (y/n) 0.28 0.13 **
Awareness of being part of an innovation system (y/n) 0.45 0.31 *
Note: * significant at 5%; ** significant at 1%.

Table 7 Description of variables

Acronym Description Type Obs Mean Std.
Dev.

Dependent variables
C_FIRMS collaboration with other firms. Discrete 276 0.304 0.461
C_UNI collaboration with Universities or Discrete 276 0.449 0.498
Research Centres.
C_TSC collaboration with Technology Transfer Discrete 276 0.522 0.500
and Services Centres.
C_MULTI n. of different types of firm's Categor. 276 1.275 0.909
collaborations (1~3).

Independent variables
- Control variables
SIZE size of the firm (total number of Cont. 276 65.101 60.905
employees).
AGE years of firm's activity (n.). Cont. 276 37.500 20.903
INV share of turnover reinvested in the Cont. 263 0.155 0.131
company's activities (%).
FUNDS access to financial funds in support of Discrete 266 0.669 0.471
innovation/collaborative research (y/n).

- Indicators of human capital and absorptive capacity

EMP_RD share of employment involved in R&D Cont. 276 0.072 0.140
activities (%).
EMP_GR employment of personnel with a Discrete 274 0.628 0.484
university degree (y/n).
TRAINING continuous training programmes (y/n). Discrete 276 0.254 0.436
AWARE_IS awareness of being part of a local Discrete 274 0.423 0.495
innovation system (y/n).

20
- Industry dummies
ID_MEC machinery Discrete 276 0.261 0.440
ID_MET metal products Discrete 276 0.210 0.408
ID_ELE electrical/electronic products Discrete 276 0.120 0.325
ID_PLA plastic products Discrete 276 0.130 0.337
ID_TEX textiles and garments Discrete 276 0.243 0.430
ID_OTH other sectors Discrete 276 0.036 0.187

Table 8 Probit estimates

Independent C_UNI Marginal C_FIRMS Marginal C_TSC Marginal
variables effects effects effects
SIZE 0.006*** 0.002 0.000 0.000 0.002 0.001
(3.48) (0.02) (1.30)
AGE -0.001 -0.000 -0.006 -0.003 0.009** 0.003
(0.26) (1.43) (2.14)
INV 0.300 0.100 1.086 0.433 1.659** 0.637
(0.40) (1.56) (2.55)
FUNDS 0.376* 0.120 -0.028 -0.011 0.315 0.122 +
(1.65) (0.15) (1.53)
EMP_RD 1.420* 0.473 1.575** 0.628 1.599** 0.613
(1.93) (2.04) (2.21)
EMP_GRAD 0.510** 0.163 0.370* 0.146 0.299 0.115 +
(2.19) (1.66) (1.28)
TRAINING 0.383* 0.134 0.410* 0.162 -0.059 -0.023 +
(1.78) (1.84) (0.28)
AWARE_IS 0.252 0.084 0.088 0.035 0.604*** 0.227 +
(1.26) (0.48) (3.21)
ID_MEC -0.883* -0.248 -0.123 -0.049 0.628 0.224 +
(1.71) (0.23) (1.34)
ID_MET -0.403 -0.124 -0.655 -0.251 1.511*** 0.444 +
(0.77) (1.23) (3.12)
ID_ELE -0.109 -0.035 -0.414 -0.161 0.549 0.191 +
(0.19) (0.72) (1.05)
ID_PLA -0.566 -0.163 -0.741 -0.277 -0.752 -0.293 +
(1.00) (1.34) (1.38)
ID_TEX -0.190 -0.062 0.269 0.107 1.288*** 0.419 +
(0.37) (0.51) (2.72)
Constant -1.470** -0.199 -2.045***
(2.53) (0.35) (3.83)
Obs 250 250 250
Log likelihood -125.557 -155.532 -126.614
Wald chi2 50.010 28.960 64.440
Pseudo R2 0.189 0.102 0.252
T ratio in parentheses
* significant at 10%; ** significant at 5%; *** significant at 1%
+ impact effects for discrete change of dummy variable from 0 to 1.

Table 9 Ordered probit estimates

21
 Marginal effects
Independent C_MULTI Pred. Pred. Pred.
variables outcome=1 outcome=2 outcome=3
0.473 0.317 0.088
SIZE 0.003** -0.001 0.001 0.001
(2.12)
AGE 0.000 0.000 0.000 0.000
(0.06)
INV 1.226** -0.228 0.279 0.196
(1.98)
FUNDS 0.272 -0.046 0.063 0.041 +
(1.61)
EMP_RD 2.014*** -0.375 0.458 0.322
(3.72)
EMP_GRAD 0.469*** -0.078 0.107 0.071 +
(2.62)
TRAINING 0.390** -0.082 0.082 0.071 +
(2.14)
AWARE_IS 0.390** -0.073 0.087 0.064 +
(2.49)
ID_MEC -0.172 0.029 -0.040 -0.026 +
(0.30)
ID_MET 0.125 -0.025 0.028 0.021 +
(0.22)
ID_ELE -0.063 0.011 -0.015 -0.010 +
(0.11)
ID_PLA -1.002 0.041 -0.226 -0.099 +
(1.62)
ID_TEX 0.556 -0.120 0.113 0.105 +
(0.97)
Obs 250
Log likelihood -280.029
Wald chi2 73.780
Pseudo R2 0.135
T ratio in parentheses
* significant at 10%; ** significant at 5%; *** significant at 1%
+ impact effects for discrete change of dummy variable from 0 to 1.

22