Tracing the links between Absorptive Capacity, University Knowledge Exchange and

Competitive Advantage in SMEs

Helen Fogg, Project Manager, Lancaster University Management School.
Institute for Entrepreneurship and Enterprise Development, Lancaster University Management School,
Lancaster LA1 4YX
Tel.: 01524 510706 E-mail: [email protected] Website: www.lums.lancs.ac.uk/ieed
Gill Peers, Knowledge Exchange Manager, Lancaster University Management School
Keywords: Absorptive capacity;knowledge exchange, SMEs, entrepreneurial learning

Objective
Can university knowledge exchange give small businesses the ability to gain competitive advantage? The
main purpose of this study is as follows. Firstly, is to understand the limitation of absorbing knowledge for
small firms from HEIs. Secondly, to find out if access to knowledge resources, such as a university, will be an
antecedent factor for building absorptive capacity in SMEs and creating business value.
Prior studies
Knowledge has been recognized as a new driving factor behind the growth of firms. In order to maintain
competitive advantage firms need to absorb knowledge. However, the rate of firm growth depends on a
number of factors including ability to recognise the value of new knowledge, their networks, culture and
availability of knowledge. An ability to absorb external knowledge is important as studies have shown that the
more an organisation absorbs new knowledge, the more competitive advantages they will obtain in the
process. In the literature, there is much evidence that proximity with universities as a knowledge resource may
determine the performance of firms. However, the process of transformation from university knowledge into
innovation in a small business is not clear. Absorbing knowledge may be hampered by lack of resources and
skills or network and cultural restraints. Small firms are also limited in terms of access to knowledge resources
and capability to utilize knowledge. In addition a university may lack the mechanisms to successfully transfer
their knowledge into practise, especially in the case of small businesses.
Approach
This paper is a conceptual study in which an ex-ante model for knowledge exchange between a Management
School and SMEs will be proposed which has been developed drawing upon the literature and the prior SME
knowledge exchange expertise of the Management School, to deliver a project funded by the European
Regional Development Fund, for three years, to work with 300 SMEs in the North West of England region on
the area of Innovation for Growth (IFG).
Implications
This study offer several benefit
Improving policy aiming to support the innovation process of small firms.
Recommendation for a model of knowledge exchange between university and small firms
Strategy for small business to improve their absorptive capacity
Value
This study will be of use to knowledge exchange practitioners, policy makers and academics

Introduction
Cohen and Levinthal 1990 used the term absorptive capacity to capture the notion that firms may have
differing capabilities to innovate and to recognise the value of new knowledge, assimilate it and apply it to
creating business value. Zahra and George (2002) reconceptualised absorptive capacity as a dynamic
capability pertaining to knowledge creation and utilization that enhances a firms ability to gain and sustain a
competitive advantage. Knowledge transfer (KT) describes how knowledge and ideas move between a
knowledge source to the potential users of that knowledge. In this paper we will consider the business schools
of higher education institutions as a knowledge source and small and medium sized enterprises (SMEs) as a
potential user of that knowledge. Knowledge exchange reflects a belief that the processes involved in
knowledge transfer must be two-way in order to be successful. Therefore the term knowledge exchange is
used extensively throughout this paper as the author recognises that a two-way process between business
schools and SMEs is a vital part of a cyclical value-chain that also informs and renews the knowledge of a
University. KT has been identified as an essential element of innovation, driving competitive advantage in
increasingly knowledge driven economies. While large firms are often engaged in KT with higher education
institutions (HEIs) it is acknowledged that small and medium enterprises (SMEs) play an important role in any
economy and are increasingly being encouraged to engage with the HEI sector. (HM Treasury 2004, 63).
Over the last eight years the Institute for Entrepreneurship and Enterprise Development (IEED), a Department
within Lancaster University Management School, has focused on the application of its research expertise
through the development and delivery of a comprehensive suite of Small Medium Enterprises (SMEs)
knowledge exchange programmes in the areas of innovation, enterprise development, leadership and
business management. Through its various projects it has assisted more than 1000 regional SMEs, resulting
in significant improvements in the businesses supported. The Department has recently been awarded funding
from the European Regional Development Fund, for three years, to work with 300 SMEs in the region on the
area of Innovation for Growth (IFG). This project draws on the Departments innovation research and builds on
previous successes in business engagement. To do so it utilises the integrated learning models of SME
engagement already developed within IEED. SMEs will be formed into cohorts consisting of 20-25 members
(12 cohorts running across the region throughout the three year project) and innovation themed programmes
will be developed lasting from three to nine months. The programmes are designed to encourage the
development of SMEs through the introduction of new products, processes, services and networks. Delivery
will draw up the skills and expertise of academics, students and knowledge exchange professionals within the
Management School. The outcome of this project will be the creation and development of a network of
knowledgeable, engaged SMEs who have a desire to learn about, develop and enact practices that will bring
about innovation.
In this paper absorptive capacity is proposed as a framework to help explain how heterogeneous SMEs are
able to assimilate new knowledge and then exploit it for competitive advantage. This is combined with
literature concerned with how SMEs or specifically entrepreneurs within SMEs learn to propose a model of
knowledge exchange for business schools within higher education institutions (HEIs) to develop absorptive
capacity within SMEs. This ex-ante model of knowledge exchange has been developed to deliver the
Innovation for Growth project which aims to take the knowledge from within the Management School, the
knowledge source, and deliver it into regional SMEs. This paper is conceptual paper, reviewing literature
concerned with absorptive capacity, knowledge exchange and entrepreneurial learning and then combining
this with expertise from within IEED, gained through the development of a suite of knowledge exchange
mechanisms over many years and high levels of SME interaction, to propose a revised knowledge exchange
mechanism. The paper is structured as follows; initially a review of the relevant literature concerned with
absorptive capacity, SME learning and knowledge exchange is provided, followed by an overview of IEED,
whose expertise has contributed to the development of the knowledge exchange model and then the paper
concludes with discussion of the proposes knowledge exchange model.
Literature Review
Cohen and Levinthal (1990) defined absorptive capacity as a firms ability to recognise the value of new
external knowledge, assimilate it and apply it to commercial ends. Zahra and George (2002) reconceptualised
absorptive capacity as a dynamic capability pertaining to knowledge creation and utilization that enhances a
firms ability to gain and sustain a competitive advantage. Knowledge transfer (KT) describes how knowledge
and ideas move between the knowledge source to the potential users of that knowledge. In this paper we
propose how new knowledge from a business or management school of a higher education institution, the
knowledge source, can be moved to an SME, the potential user, in order to increase the absorptive capacity
of the SME. J.Barney 1991 suggested that firms endowed with greater absorptive capacity are expected to
outperform rivals, thus for SMEs the knowledge from the business school may ultimately provide the SME with
a competitive advantage when the new knowledge is applied to commercial ends.

Kim (1997) defines absorptive capacity as the capacity to learn and solve problems. It is recognised that the
mode of learning for entrepreneurship education differs from that of typical students of management studies:
whereas the latter require knowledge retention to gain qualifications, entrepreneurial learning by ownermanagers, of SMEs, is a specific situated, problem-centred process (Cope & Watts, 2000). Therefore in order
to increase absorptive capacity within SMEs there is a need to develop specific models of knowledge
exchange for SMEs which encompasses the body of research concerned with how entrepreneurs learn.
Knowledge Transfer (Exchange) and SMEs
KT encompasses the systems and processes by which knowledge, expertise and skilled people transfer
between the research environment (universities, centres and institutes) and its user communities in industry,
commerce, public and service sectors (Definition of Knowledge Transfer agreed by the Research Councils UK
(RCUK), Department for Innovation, Universities and Skills (DIUS, previously OSI) and the Research
Councils). It is suggested that this definition of KT could also refer to knowledge exchange, a term preferred
by the author as it reflects a belief that the processes involved are two-way. KT has been identified as an
essential element of innovation, driving competitive advantage in increasingly knowledge driven economies. A
number of recent UK government reports have sought to increase awareness of the importance of knowledge
transfer, most noticeably the DTIs Innovation report (DTI 2003) and the Lambert Review (Lambert, 2003)
(Lockett et al 2008).
While large firms are often engage in KT with higher education institutions (HEIs) it is acknowledged that small
and medium enterprises (SMEs) play an important role in any economy and are increasingly being
encouraged to engage with the HEI sector. (HM Treasury 2004, 63). SMEs are highly heterogeneous and
contribute significant proportions of employment and turnover in both European and US economies. For
example, in Europe 99% of all businesses are SMEs. They provide two out of three of the private sector jobs
and contribute to more than half of the total value-added created by businesses in the European Union (EU).
What is even more intriguing is that nine out of ten SMEs are actually micro enterprises with less than 10
employees. Hence, the mainstays of Europe's economy are micro firms, each providing work for two persons,
on average. (EU2007). With this recognition of the importance of SMEs to an economy the need to assist
SMEs to gain competitive advantage by increasing their absorptive capacity becomes apparent, when
absorptive capacity is defined as a firms ability to recognise the value of new external knowledge, assimilate
it and apply it to commercial ends. (Cohen and Levinthal 1990).
Knowledge and innovation are intertwined: innovation is based on the application of new knowledge and at
the same time the application of new knowledge leads to change and innovation. (Jenson et al 2007).
Galankis 2006 points out that, in order to survive an organisation has to innovate constantly. Innovation
provides competitive advantage for an SME. Murovec & Prodan 2009 point out that in order for innovation
activity to provide a desired output, an organisation needs to possess knowledge from many different fields.
To be able to set up a broad knowledge base, an organisation has to absorb information from all kinds of
sources not just internal, but also all available external sources. Hence the ability to exploit external
knowledge is a critical component of developing innovative capability and competitive advantage. This paper
considers how the knowledge contained within a business school of a HEI can be recognised by an SME as a
valuable source of new knowledge and then how can this knowledge be exploited by them.
Historically, HEIs have interacted with SMEs in a number of ways, for example, through bespoke research
and consultancy, teaching, training and skills development, clustering, spin-outs, venture capital activities and
knowledge transfer partnerships. These connections form attempts to create the necessary infrastructure and
increase the capacity for SMEs to engage with HEIs and gain accessibility to an increasing knowledge base
through international networks and markets. (Johnston et al 2008). Recent research undertaken by Arino et al.
(2008: 22) has pointed towards a string of positive benefits for entrepreneurial firms embarking upon strategic
alliances. For example, the ability to tap into new markets, access scale economies, obtain complementary
resources in underdeveloped value chain activities, respond to environmental uncertainties, and receive
endorsements from reputable incumbents.
However, Link and Tassey (1989: 44) noted five intrinsic characteristics that restricted collaborative
relationships between universities and businesses: differences in mission and objectives; incompatibility of
structures and policies; differential orientation and interests of individual researchers; effectiveness of
universityindustry arrangements and mechanisms for collaboration and, benefits versus cost and difficulties
in how to evaluate university industry relationships. For business schools and businesses, the scarcity of
effective interactions means failure to optimally promote and facilitate the creation, transfer, and use of
knowledge. (Twomey, Quazi 2000). Thus the landscape around HEI-SME engagement is littered with aims
and objectives that conflict, government papers encourage engagement yet traditional university activity

struggles to embrace the needs of SMEs. This provides an opportunity to develop knowledge exchange
models which attempt to redress this conflict.
Absorptive Capacity
Zahra and George (2002) propose four dimensions of absorptive capacity. These have been defined by
Fosfuri and Tribo 2006 as:
Acquisition: A firms capability to identify relevant external information over the total amount of information
that surrounds the firm. That is, the initial step is for a firm to know where the sources of information are.
Assimilation: A firms routines and processes that allow it to analyse, process, interpret and understand
the information obtained from external sources.
Transformation: A firms ability to modify and adapt external knowledge and combine it with existing and
internally generated knowledge.
Exploitation: A firms ability to transform this knowledge into competitive advantage.
The above dimensions can be used to describe the steps an SME must take to absorb new, external
knowledge from a business school and ultimately exploit this knowledge to gain competitive advantage.
Zahra and George (2002) identified two subsets of absorptive capacity: Potential absorptive capacity (PAC)
which enables a firms receptiveness to external knowledge, that is the acquisition and assimilation of the new
knowledge and realized absorptive capacity (RAC) which reflects a firms capacity to leverage absorbed
knowledge and transform and exploit it. It is suggested that short training programmes and one-off events for
SMEs may often only serve to increase potential absorptive capacity due to the short term nature of the
interaction and because the way in which the owners and managers of SMEs learn has not been taken into
consideration. The new knowledge must be connected with the internal knowledge of the SME, transformed
and then exploited in order that higher levels of realized absorptive capacity can be achieved. Theory
concerned with the entrepreneurial learning of SMEs can add much to the process of enhancing realized
absorptive capacity in SMEs and helps us develop an integrated knowledge exchange mechanism.
Murovec and Prodan (2009) considered whether there exist different kinds of capacities to assimilate external
information regarding the nature of this information. At basic level Mowery 1984 pointed out that an
organisation is far better equipped to absorb the output of external R & D if it is also performing some amount
of R&D internally. This leads us to consider what internal capability an SME requires in order to be able to
absorb the knowledge of a Business School? Education has long been recognised as significant in improving
innovation systems (Lundvall et al 2002) and since a higher level of absorptive capacity leads to innovation it
is suggested that a certain level of education existing within an SME may better equip them to absorb the
knowledge of a business school. However, this may exclude many SME owners and managers who do not
necessarily have HEI qualifications, so again this substantiates the need to consider carefully the SMEbusiness school knowledge exchange model as traditional managerial learning may not be effective.
Bessant, Tsekouras and Rush 2009 propose a crude typology for SMEs to organise and manage the
innovation process in its entirety, assuming different states of development of capability or absorptive
capacity, from search through selection to effective implementation of new knowledge. Their terminology is
particularly focused on technological change but the author suggests that these states could equally be
applied to a non technological innovation, such as absorbing new knowledge from a Business School. This
typology helps us understand SMEs limitations to absorbing new knowledge.
Four states are suggested
1.
Unaware/Passive SMEs do not recognise the need for change and do not know what might be
improved. Bessant et al suggest these SMEs require support to recognise the need for change and longer
term support to develop a strategic framework. These organisations have a very low or no absorptive
capacity. It is likely that the first task for these SMEs will be to recognise the need to acquire knowledge,
possibly a university would not be the best place for these SMEs to begin their journey due to the diversity of
the two organisations.
2.
Reactive These SMEs recognise the need for change but are unclear how to go about the process
in an effective fashion. They have limited internal resources and usually have poorly developed external
networks. Typically this group treats symptoms rather than root causes. These types of SMEs require support
to develop a strategic framework, to address priority areas, explore new concepts and in acquiring new
product and process capabilities. Support can be reduced over time as strategic capability is developed
internally. These organisations have low levels of absorptive capacity. These SMEs may be able to acquire
knowledge more easily than Unaware/Passive SMEs and may be able to assimilate knowledge but at the
point where they initially engage with a business school, both Unaware/Passive and these SMEs will be
developing potential absorptive capacity rather then realised absorptive capacity.

3.
Strategic These SMEs have a well-developed sense of the need to change and have good
implementation capability. They take a strategic approach to innovation and have a clear idea of priorities.
However they may lack the capabilities to create new market opportunities and they tend to compete within
the boundaries of an existing industry. Support is required to complement existing internal capability and
challenge existing business models. For example, improving access to specialist marketing expertise,
enabling access to new networks, getting them to think outside the box and generate new ideas. These
organisations may benefit from access to graduates, project based support and have moderate absorptive
capacity. Thus these types of SMEs are already at a point where they can begin to develop realised
absorptive capacity.
4.
Creative These SMEs have well developed capabilities and are able to operate and lead effectively
on an international basis. They have strategic frameworks for innovation and strong internal resources and
high absorptive capacity which enables them to diversify and extensive networks to keep them informed of
opportunities. They tend to have collaborations already established with partners. Support would be to
complement existing internal capability and more likely to require specialist bespoke support. Knowledge
Transfer Partnerships many be considered.
The above typology of the differing states of absorptive capacity within SMEs as proposed by Bessant et al
helps explain the barriers which business schools must assist SMEs to overcome when trying to engage with
them in knowledge exchange, it suggests that there may be a number of differing entry points into knowledge
exchange programme for SMEs dependent upon their current level of absorptive capacity when initially
interacting with the business school.
Entrepreneurial learning
On the basis of studies of how owner-managers learn, higher education providers have begun delivering
functional knowledge not through traditional means such as lectures and tutorials, but rather with innovative
methods, focused on the competence of the individual manager and the business. (Zhang & Hamilton 2008).
The following describes a series of Learning Spaces which demonstrate where and how learning takes place
within a networked learning programme (Peters 2010). The focus of this study was a ten month leadership
and development programme, called LEAD, for owner managers of SMEs. As described previously this is
obviously an important concept when considering the development of knowledge exchange mechanisms
specifically for SMEs as traditional management learning has proven not to be effective amongst this group.
These concepts can play an important role in breaking down SMEs barriers to absorptive capacity some of
which were outlined using the typology proposed by Bessant et al above.
The learning spaces identified are:
Peer-to peer (social theory of learning): Space where a group of like-minded people can share similar
issues. Attention is given by the facilitators to creating a learning environment where trust and respect is
fostered by the SME delegates. Peters research found that participants could share experiences on
different elements of the programme (LEAD) but delegates also continue to be surprised at how similar
the issues they face are and how their own situations as owner managers of small businesses are
relevant and salient to each other.
Social: These spaces such as refreshment breaks or lunch following a workshop allow discussion to take
place between SMEs not only about the session they are attending but about their businesses and their
own situations.
Reflective: A conceptual learning space that crosses the boundaries of interventions and other spaces.
This space may be more individualistic to the participating SME delegate, however this reflective learning
space is conceived of as a space for processing information reflectively and often results in self
affirmation, i.e. that they are doing some things well within the business.
Peripheral: As it is anticipated that learning from the SME delegate will be applied to their business, and
because many owner managers of small businesses do not have a defined line between home and work,
it is natural to think of the learning infiltrating other parts of the delegates lives in an informal way. This
space could be concerned with enhancing a space that helps this process to occur hence assisting the
transformation of knowledge.
The above spaces provide us with a set of tools that can be used in the development of a university - SME
knowledge exchange model.
To summarise the findings from the literature review we can conclude that absorptive capacity provides us
with a framework to better understands the barriers SMEs face when absorbing new external knowledge.
SMEs are recognised as important to an economy and as such need to be encouraged to absorb new
knowledge from a broad range of places including business schools within HEIs, however there is a mismatch
between the aims and objectives of HEIs including business schools and SMEs which are detrimental to this

process. Theory concerned with entrepreneurial learning can assist in the developing mechanisms to
overcome this problem. The findings of the literature review are summarised below.
SME-Business School Knowledge Exchange Process

SME Competitive Advantage

Business School
Knowledge

Absorptive
Capacity
Entrepreneurial
Learning

Background to the Development of the Business School-SME Knowledge Exchange Model

The Institute for Entrepreneurship and Enterprise Development (IEED), a Department within Lancaster
University Management School, has been engaged with teaching and researching entrepreneurship since the
1980s alongside building dialogue with business. Over the last eight years IEED has focused on the
application of its research expertise through the development and delivery of a comprehensive suite of Small
Medium Enterprises (SMEs) knowledge exchange programmes in the areas of innovation, enterprise
development, leadership and business management. Through projects part-financed by ERDF, NWDA, ESF
and HEIF it has assisted more than 1000 regional SMEs, resulting in significant improvements in the
businesses supported. The Department recognises that entrepreneurial learning differs from that of typical
management students and has developed capacity to address this issue.
The Department has recently been awarded funding from the European Regional Development Fund, for
three years, to work with 300 SMEs in the region on the area of Innovation for Growth (IFG). IFG takes the
experience from the last round of ERDF and from development of the LEAD programme and builds on this for
the new programme. It utilises the integrated learning models of SME engagement already developed within
IEED, which emphasises the importance of peer to peer and social learning as well as reflection, as the basis
for the programme and incorporates feedback taken from SMEs involved in the last round. The result is a new
improved programme that capitalises on IEEDs experience of working within SME networks but also applies
the expert innovation research emerging from one of the top ranking management schools in the region The
programmes within the knowledge exchange model are designed to encourage the development of SMEs
through the introduction of new products, processes, services and networks. Delivery will draw up the skills
and expertise of academics, students and knowledge exchange professionals within the Management School.
The outcome of this project will be the creation and development of a network of knowledgeable, engaged
SMEs who have a desire to learn about, develop and enact practices that will bring about innovation.
The knowledge exchange model is developed to provide a step by step approach to building the absorptive
capacity within the participating SMEs leading to innovation and competitive advantage.

The Knowledge Exchange Model Innovation for Growth (IFG)

The above model uses absorptive capacity as a framework for developing the innovative capacity and
competitive advantage of SMEs. Drawing upon a broad range of knowledge, around the theme of innovation,
from within Lancaster University Management School, knowledge is pushed into the SMEs in a way that
provides maximum benefit to the business. Appreciating the diversity and heterogeneity of SMEs, the model
offers some flexibility depending on the level of absorptive capacity that the SME has at the outset. The
typology suggested by Bessant, Tsekouras and Rush 2010 suggests that SMEs can be sub divided
dependent upon state' of development or absorptive capacity.
The learning spaces (Peters 2010), peer to peer, social, reflective and peripheral cut across all elements of
the model and underpin the knowledge exchange model in that they connect each step of the process and
represent the way in which SMEs learn. These domains of entrepreneurial learning are seen to be of equal
importance to the actual new knowledge provided by the business school. The challenge for a model such as
this is to establish these learning spaces in timescales which are significantly reduced to that of LEAD, the
programme for which the spaces were developed, which is an intensive 10 month programme. For example,
research has shown peer to peer learning is often vital for the validation of SME learning. Through use of a
simple virtual learning environment (VLE) efforts will be made to begin to form the cohortness and associated
trust of SME participants prior to the first workshop programme, commencing by asking people to introduce
themselves and their business on the VLE following registration. Following the workshop programme
businesses will then be encouraged to continue dialogue and peer to peer learning via the VLE. This will be
important as peer to peer contact during the knowledge transformation stage may be limited if businesses
choose bespoke student projects. Peer to peer learning will then be rejuvenated during the knowledge
transformation stage when the workshop programme cohort will be reunited for learning reflection and action
planning. This model is at the time of writing conceptual so empirical data concerned with its success is yet to
be captured and beyond the scope of this paper.
If we can make KE mechanisms that make the knowledge within the Management School accessible and as
easy to absorb as that for instance as knowledge generated by customers, then the outcome will be twofold.
Initially, potential absorptive capacity (PAC) will be enhanced so the SME will be more receptive to the
external knowledge of a business school of a HEI. Secondly, once the SME has engaged with the HEI the
model suggests how to increase the realised absorptive capacity of the SME in order that they can leverage
the knowledge and transform it into competitive advantage. Depending on the level of absorptive capacity of

the SME when it initially comes into contact with the business school, the SME may enter the knowledge
exchange programme at differing points. Ultimately this will enable more SMEs to gain competitive
advantage, leading to business growth and corresponding economic growth.
Based upon the theories detailed within the literature review the following model has been devised:
Knowledge Acquisition: A firms capability to identify relevant external information over the total amount of
information that surrounds the firm.
As SMEs are heterogeneous it is likely that absorptive capacity will be distributed differently across the
population. If we consider that 9 out of 10 SMEs in Europe are actually micro SMEs with less than 10
employees it seems likely that many of these SMEs may sit in either the category of Unaware/passive or
Reactive due to limited human resource and capital. Thus they are likely to have very low levels of absorptive
capacity. This would suggest that these companies need initially to be made aware of the importance of
acquiring new knowledge from an external source.
This process can be divided into two stages:
i.
Recruitment
SME recruitment materials are crucial in that they must be written in a language accessible to SMEs and
highlighting the benefits of SME/business school engagement. Due to the differing missions and objectives of
SMEs and business schools, the complex, often wordy language used by HEIs can often be an immediate
turn off to SMEs. With only 5% of firms interacting with universities it is possible that unaware/passive
SMEs will not wish to engage with universities, however, recruitment events can be used to build brand
awareness and trust through network development with reactive state SMEs. A business school needs to
develop capacity in terms of SME engagement in order to bridge the gap between the two. Face to face
encounters at networking events are important as well as a network of intermediaries such as Business Link
and cluster groups who will refer the business school onto to SMEs. The issue is two-fold for engagement
with SMEs with little or no absorptive capacity, in that SMEs must firstly be made aware of problems/issues
within the business that are preventing it developing competitive advantage, for instance why innovation is
essential for the survival of their business and secondly why they would want to seek support from a business
school. Recruitment mechanisms need to offer benefit to an SME since they tend to be short of resources
they must easily be able to understand why it would be worthwhile them leaving their business to attend an
event. Clearly the differential orientation and interests of university versus SME employees can make the
packaging of university knowledge difficult for SME to easily identify the benefits. These events, if successful,
can be termed as an external activation trigger (Zahra & George 2002) and induce or intensify a firms efforts
to seek external knowledge. Past experience, knowledge complementarity and the diversity of the knowledge
source will also influence an SMEs desire to engage with a business school.
ii.
Introductory Events
The first step in the IFG KE mechanism is to make firms aware not only of the need to innovate but who can
help them to innovate. The term innovation is liberally used by policy makers, academics and knowledge
exchange intermediaries and professionals but for many SMEs it is likely to have mixed or little meaning.
Business Link Northwest define innovation as the commercial application and successful exploitation of an
idea and further divide this into either making money through the development of new products and services
or exploiting new markets or saving money through enhanced productivity, people or processes. This
definition of innovation which is more closely aligned with SME needs may not comfortably sit with an HEI but
can convey a powerful message to SMEs.
Before a business school can begin to build innovative capacity within an SME it must:
Define innovation in a context where the benefits of innovating are highlighted to the SME
Break down the barriers to SMEs engaging with a Business School through offering an environment
which is accommodating and accessible to SMEs. This can be done by providing a welcoming social
space including such matters as ease of parking, time event to suit SMEs and encouraging informal
networking between SMEs attending events. SME ambassadors can be involved in the event, that is
SME owners managers who have higher levels of absorptive capacity and have beneficially engaged
with the business school. In addition delegate lists which provide details of other businesses at the
event are beneficial, as this breaks down some of the SMEs barriers if they are able to identify like
minded peers and/or business participants.
Offer some form of taster or hook to the SMEs in order to get a quick win. A resource that all
SMEs, particularly micro SMEs, are short of is time. It is essential that SMEs can quickly see the
value of engaging with a business school i.e. the applicability and the relevance of the knowledge of
the business school. This might be just one nugget of new external information that an SME can
very easily combine with internal existing knowledge, assimilate and transform, to the benefit of the
business.

Attracting new SMEs to a business school can be challenging and may be a poor use of resources to those
Unaware/Passive SMEs. It may be better use of resources to focus upon Reactive state SMEs.
Knowledge Assimilation: A firms routines and processes that allow it to analyse, process, interpret and
understand the information obtained from external sources.
For those SMEs that are already reactive according to Bessant et al 2010 typology this may be the entry
point into the knowledge exchange model.
IEED has developed a short series of half day, practical and interactive workshops, delivered once a week
over a period of several weeks, in order to limit the time SME/owner managers have to take from their
business at any one time. Innovation themed programmes are being developed and will be delivered to
cohorts of 20-25 SMEs in order to encourage interaction, reflection and peer to peer learning. The content
must be interactive and made easily applicable in the SME context through drawing on relevant examples and
case studies and through a relatively large number of facilitators to help discuss with the SMEs how that
knowledge is applicable to them and to help them analyse, process, interpret and understand the information
obtained from external sources, that being management school academics. Workbooks can be used to help
tailor the knowledge immediately to individual SMEs issues and also so this can be taken back to the
organisation by the participant in order to encourage that the knowledge is shared with other employees of the
SME, thus developing the business, and does not continue to reside in with the participant, this relates to
Peters 2009 peripheral learning space, this is further supported by resources being made available through
the VLE. The models and concepts presented to the SMEs need not lack academic rigour. Due to the ever
increasing importance placed upon the role of SMEs within the economy the SMEs themselves offer a rich
and fertile ground for research. Many of the issues that SMEs face are similar across a mix of industries
therefore sectoral delivery has not been encouraged by IEED, however, absorptive capacity potentially offers
a means by which heterogeneous SMEs can be divided to be sign posted towards appropriate support within
a business school. Although it may be likely that many micro SMEs may have lower absorptive capacity than
larger this will probably not be true across the spectrum of SMEs other factors such as length of establishment
and the SME owner manager will also affect this. Also since we have recognised that entrepreneurial learning
differs significantly from typical management learning the level of education of the SME participant cannot be
used as an indicator per se, also we have acknowledged that culture also has a role to play thus a
measurement of non technical absorptive capacity within SMEs which is beyond the scope of this paper is
critical to the further development of this model.
These first two stages within the model, knowledge acquisition and assimilation relate to the development of
potential absorptive capacity within an SME, and many forms of support for SMEs conclude at this point. This
is more in line with traditional management learning however using the absorptive capacity framework we are
able to appreciate that without further steps to ensure this new knowledge is then integrated with existing
knowledge within the SME, transformation followed by exploitation it is likely that the competitive advantage
sought by SMEs will not be realised.
Knowledge transformation: Consists of the firms ability to modify and adapt external knowledge and
combine it with existing and internally generated knowledge.
A variety of KE techniques are proposed for this next stage of the process including bespoke student projects,
intensive small group master classes and academic mentoring. However, all these mechanisms are
underpinned by the reflective learning space proposed by Peters 2009, which provides the participant with the
space consider to how the knowledge is relevant to their individual organisation and gives an opportunity to
connect the new knowledge with that already existing within the SME thus leading to competitive advantage.
For those SMEs that are already strategic according to Bessant et al 2010 typology this may be the entry
point into the knowledge exchange model.
The emphasis is upon combining the knowledge assimilated through the workshops with specific business
issues identified by the SME participant at the end of the workshop programme. For example, with student
projects the participants have been provided with business models and concepts in the workshop
programmes where knowledge was being assimilated. Following identification of a specific business issue the
SME can then request that a group of students, undergraduate or postgraduate, develop this. Thus, this
expedites the combining of existing knowledge of issues problems within an SME with external knowledge
assimilated from a workshop programme. It also provides valuable resource to SMEs. The workshop
programme ensures the issues being presented by the SMEs to the students for development are being
articulated more clearly, within a developing strategic framework, which is beneficial to the student in the
terms of the experience they receive and also to the SME who ultimately need to think more strategically for
long term competitive advantage. Intensive smaller group master classes again provide SMEs with the
opportunity to analyse in depth a specific business issue within their own organisation and combine it with new
knowledge assimilated in the workshop programme and then transformed during the master class lead by an

academic. Academic mentoring again offers a similar opportunity but on an individual basis. The VLE will
continue to support the peer to peer learning space during this stage.
Knowledge exploitation: The SMEs ability to transform this knowledge into competitive advantage.
The final step is the SMEs ability to convert this new knowledge, that is, new external knowledge which has
been combined with internal knowledge, to provide a competitive advantage to the business. This again
involves providing the business with space to reflect on this new knowledge and develop strategic and action
plans that will be implemented within the business and change the business. Also the knowledge must to be
shared by a larger audience within the SME than the participant, which is peripheral learning. Social
integration mechanisms can facilitate the sharing and eventual exploitation of knowledge. (Zahra and George
2002). This may be via informal mechanisms such as networks where ideas are exchanged or formal
networks for example through an organisational structure which ensure employees are brought together to
undertake problem solving. Knowledge needs to be provided in a format that can easily be integrated into the
rest of the SME, for example via works books, slideshare, video clips and inviting other important decision
makers to the various elements of the programme. An SME owner manager often needs to be provided with
an environment away from daily operational issues where strategic decisions can be made and actions plans
determined to bring about innovation it may also be necessary to bring other colleagues from the business to
this session to get business buy in. An SME will need to commit resources to introducing new products,
processes and services based on the new knowledge which has been absorbed. It is unclear at this stage if
this element of the model is in fact an iterative process that needs to be repeated several times over a period
of time in order to ensure the knowledge is actually exploited and how best to engage SMEs in this phase, as
the softer skills being developed by SMEs may not appear that attractive to them unless for example a strong
peer to peer learning space has been developed.
Conclusions
This paper has presented a conceptual knowledge exchange model, drawing upon the theory of absorptive
capacity, which may be useful in assisting the movement of knowledge between a HEI business school and
SMEs in order to provide them with competitive advantage. The concept of learning spaces, which helps us
understand how SME learn, underpins all the elements of the model connecting the various physical stages
and provides an ethos for model. By increasing the competitive advantage of SMEs, who contribute
significantly to the economy, there are significant policy implications concerned with developing effective
models of knowledge exchange targeted specifically at SMEs.
We know need to consider how these primarily theoretical concepts can be measured in an empirical context
such as that provided by the project Innovation for Growth described in this paper. Work needs to be
undertaken not only to measure the level of absorptive capacity of SMEs being targeted by a project such as
this but how to evaluate the success of the knowledge exchange mechanism at each of the four stages of
absorptive capacity as proposed by Zahra and George (2002).
Limitations and Further research
Further development of this study will be to devise methods of measuring the propositions made above. This
paper is a conceptual paper in which literature concerned with absorptive capacity, knowledge exchange and
entrepreneurial learning is reviewed and a knowledge exchange model for the project Innovation for growth is
presented. However, this paper could with further quantitative research over the duration of the project
contribute to absorptive capacity and entrepreneurial learning literature since while some studies try to
explain the concept of absorptive capacity and its determinants, there is a great lack of quantitative support for
their findings. To a large extent this is probably due to the fact that the qualitative nature of absorptive
capacity makes it a very difficult concept to measure quantitatively. (Murovec and Prodan). Generally very
few empirical studies capture the rich theoretical arguments and the multidimensionality of the absorptive
capacity construct. (Muravec and Prodan 2009).
Also most learning pertaining to entrepreneurial learning
consists of conceptual papers (Harrision and Leitch 2005), whereas this study offers insight into how to design
and implement entrepreneurial knowledge exchange mechanisms for SMEs in a staged approach.
The value would be that the absorptive capacity within an SME could be identified in order that the SME could
be directed to the support that is most beneficial.

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