Comments on “Fortune Favors the Prepared Firm”

Abstract

A recent paper in Management Science titled “Fortune Favors the Prepared Firm” (Cohen and Levinthal [Cohen, W. M., D. A. Levinthal. 1994. Fortune favors the prepared firm. Management Sci. 40(2) 227–251.]) is a pioneering work insofar as it introduces the concept of a firm's absorptive capacity—the ability to evaluate, assimilate, and exploit extramural technological developments. We appreciate the paper's extensive qualitative discussion of the nature and role of absorptive capacity. We also commend the authors' idea of constructing a mathematical model to analyze a rational firm's incentives for an investment in absorptive capacity. However, we find that the authors' model overlooks one key element of a firm's absorptive capacity, namely, the firm's ability to defend itself against the threat of an external technology. In the absence of that element, the authors' model may be able to explain a firm's incentives for an innovation rather than incentives for the development of an absorptive capacity. We also identify several internal inconsistencies in the authors' mathematical model. For example, the assumed profit maximization function seems inconsistent with the assumed degree of sophistication of the firm's probability assessment behavior. We believe that the inconsistencies and shortcomings noted here raise serious questions about the validity of the authors' findings. However, we hope that this note does not detract from the pioneering nature of the authors' work, but instead increases its value by stimulating further work on the important topic of absorptive capacity.

Keywords

Affiliated Institutions

• La Salle University US
• University of Pennsylvania US

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