How do firms learn and become more effective?

Feb 22, 2018

Being able to learn is a large part of becoming more innovative, especially for businesses. Up until now however, it’s been hard to understand how firms learn and the impact that has on their productivity.

Now Trinh Le, a Fellow at Motu Economic and Public Policy in New Zealand, and Richard Harris of Durham University in the United Kingdom, have examined kiwi firms’ business performance and how it relates to how the firm learns.

“If firms are not able to learn, then new strategies or technology designed to help firms become more productive are likely to have only limited impact,” said Dr Le. “Absorptive capacity measures how a firm learns – usually by using knowledge from the external environment to improve their productivity.”

Business productivity has been a key concern for central government for some time in New Zealand. The stereotype is that New Zealanders work nearly the same hours as the Japanese but are as productive as the Greeks.

“Our work shows that increasing external knowledge leads to improvements in innovation. For the primary sector it increases innovation by around 21 percentage points, for the service sector things improve by 41 percentage points and for the manufacturing sector innovations increase by 50 percentage points,” said Dr Le.

There are two common strategies used to improve firm productivity, the first is to improve economic conditions that influence the business environment, while the second works at a more individual organisation level.

“Our work suggests that influencing the business environment may not be sufficient,” said Dr Le. “Building a firm’s ability to learn is generally not reflected in today’s mainstream approaches to industrial policy, where developing networks and systems are favoured over directly helping firms,” said Dr Le.

The research found that firms with a high ability to learn tend to undertake research and development and be New Zealand-based multinationals. They also tend to be larger firms with high numbers of professionals, managers and technicians.

The paper suggests that the activities of NZ Trade and Enterprise and Callaghan Innovation, while important, are limited in their impact on absorptive capacity as they have focused on boosting exports in around 700 firms (NZTE) and on smaller firms that are limited in their ability to export (Callaghan Innovation).

“This research suggests that competencies and capabilities can’t be bought, they can only be developed by the firm. Because the market for knowledge about new opportunities isn’t developed, the firm must build capabilities inside the business to assist knowledge creation and capture,” said Dr Le.

Richard Harris and Trinh Le’s paper “Absorptive Capacity in NZ firms: Measurement and Importance” is now available on the Motu website. This work was partially funded by the New Zealand Productivity Commission.

Summary haiku:

Internalising   
knowledge from outside the firm   
is key to success.