Absorptive capacity in New Zealand firms: Measurement and importance

To the best of our knowledge, this paper reports the first set of nationally representative results on the importance of ‘absorptive capacity’ (generally defined as a firm’s ability to internalise external knowledge) for firms. Using data principally from the Business Operations Survey 2005–15, we measure absorptive capacity in New Zealand (NZ) firms across a 10-year period and investigate if it remains stable in the long term. This is followed by considering how firms’ characteristics vary across levels of absorptive capacity and most importantly whether such capacity determines firms’ productivity performance across the primary, manufacturing and service sectors. Our results show that relative to other influences, absorptive capacity as measured here—net of the impact of, for example, foreign-ownership and human capital—has a substantial influence on exporting, innovation and undertaking R&D, and thus consequently firm-level productivity. Set against relatively poor productivity performance, the paper concludes with a discussion of how government should consider helping firms to boost their levels of absorptive capacity in NZ.