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Fortune Favors the Prepared Firm


  • Wesley M. Cohen

    (Department of Social and Decision Sciences, Carnegie Mellon University, Pittsburgh, Pennsylvania 15213-3890)

  • Daniel A. Levinthal

    (The Wharton School, University of Pennsylvania, Philadelphia, Pennsylvania 19104-6370)


A critical factor in industrial competitiveness is the ability of firms to exploit new technological developments. We term this ability a firm's absorptive capacity and argue that such a capability not only enables a firm to exploit new extramural knowledge, but to predict more accurately the nature of future technological advances. We develop a stylized model in which we focus exclusively on firms' decisions to invest in their absorptive capacities. We first examine a monopolist's investment decision, analyzing the path dependence of its investment and the effect of uncertainty. We then consider the effect of competition by modeling the impact of entry on an incumbent's investment behavior. Implications for management and public policy are then discussed.

Suggested Citation

  • Wesley M. Cohen & Daniel A. Levinthal, 1994. "Fortune Favors the Prepared Firm," Management Science, INFORMS, vol. 40(2), pages 227-251, February.
  • Handle: RePEc:inm:ormnsc:v:40:y:1994:i:2:p:227-251

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