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Absorptive capacity is the principle that assimilating new knowledge requires prior knowledge. The attendant prescription is to invest more in R it is that some firms have higher returns to R&D, thus they invest more. I conduct an empirical test of the competing views and find that (1) firms differ in the output elasticities of their own R&D (IQ) as well as the elasticities of spillovers from rivals, (2) absorptive capacity becomes insignificant when accounting for that heterogeneity, (3) R&D investment increases with IQ, but (4) R&D investment has no impact on a firm's ability to benefit from spillovers.
Anne Marie Knott (Thu,) studied this question.