Knowledge stock and absorptive capacity of small firms: the moderating role of formalization

Purpose Despite the established significance of absorptive capacity, there is a worrying lack of research that empirically examines its antecedents. With a call for investigation guided by the knowledge-based theory, the purpose of this paper is to bridge any probable gap by exploring the effect that an organization's knowledge stock and its knowledge integrating mechanisms have on the development of its absorptive capacity. Design/methodology/approach On the basis of a survey administered to a sample comprising owners of small Indian automotive firms, this paper empirically examines the direct effect of an organization's knowledge stock (including knowledge breadth and depth) and the moderating role of its structure-related mechanisms (e.g., formalization) on its potential and realized absorptive capacities. The study uses survey data from 226 small business owners and multiple linear regression analysis to examine the significance of its hypotheses. Findings The results show that knowledge stock has a statistically notable influence on a small firm's absorptive capacity. The enabling role of formalization in the relationship between knowledge stock and absorptive capacity is also evident. Practical implications Given the handicap of small firms vis-a-vis large firms to deploy internal R&D capabilities, business owners must ensure not to confuse absorptive capacity with the pre-existence of R&D capabilities. Originality/value The unbundling of knowledge stock into breadth and depth of knowledge enables business owners and researchers to understand how any particular knowledge stock can relate to an organization's absorptive capacity.