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Definition of Absorptive Capacity

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Definition: Absortive capacity is a limit to the rate or quantity of scientific or technological information that a firm can absorb. If such limits exist they provide one explanation for firms to develop internal R&D capacities. R&D departments can not only conduct development along lines they are already familiar with, but they have formal training and external professional connections that make it possible for them to evaluate and incorporate externally generated technical knowledge into the firm better than others in the firm can. In other words a partial explanation for R&D investments by firms is to work around the absorptive capacity constraint.(Econterms)

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