Scholars in a variety of disciplines, including organizational theory, strategic management, and economics, have devoted substantial attention to two related questions: why are some firms more innovative than others, and when does innovation contribute to a firm's financial success. These questions warrant attention because innovative firms are critical drivers of technological progress and long-term economic growth. This study will enhance our understanding of these relationships by investigating how characteristics of a firm's scientific and technological knowledge, often referred to as its absorptive capacity, and a firm's alliance network jointly affect its ability to innovate. We focus particularly on how characteristics of absorptive capacity and alliance networks affect the number and value of patents firms produce, because these innovation outcomes positively affect firm profits and indicate how quickly technologies are advancing. Absorptive capacity is believed to enhance a firm's innovative capacity by enabling it to recognize the value of externally generated discoveries, to assimilate novel insights, and to apply this knowledge to technological development. However, attributes of firms' knowledge stocks, and hence their absorptive capacity, vary greatly, and these differences may influence innovative productivity. We examine how the breadth and depth of a firm's absorptive capacity affect the number and value of the patents it produces. Whereas absorptive capacity facilitates the utilization of external knowledge, a firm's alliance network shapes the type and volume of external scientific and technological knowledge it has access to. Certain attributes of a firm's network, such as its size and the density of connections among its partners, have been related to the number of patents it produces. Studies have not yet explored how the type of knowledge a firm is exposed to through its network affect the value of its innovations, or how network variables and absorptive capacity interact to affect patent production. By exploring specific characteristics of absorptive capacity and network structure, and by investigating their interactive effects on innovation, we will learn when these two facets of innovative capacity complement each other and when they may substitute for one another. This is central to understanding how firms can make the best use of their investments in research and development. Alliances present opportunities for a firm to leverage the scientific and technological knowledge it acquires through its own research and development. However, the best mix of alliance partners may vary according to specific characteristics of a firm's absorptive capacity, particularly the breadth and depth of that knowledge. Some network structures may augment the value of a firm's absorptive capacity, while others may play essentially the same role in the innovation process as a firm's internal knowledge and hence could be viewed as a substitute for absorptive capacity. Our study will also shed light on when firms are better served by choosing between maximizing the quantity and the quality of their innovations, and when they can achieve both outcomes with an appropriate configuration of network partners and absorptive capacity. Finally, we expect to provide some insight into the role of alliance networks in directing and pacing technological progress. This study is set in the global pharmaceutical industry, where scientific and technological knowledge is critical to innovation, alliances are increasingly prevalent, and patents are effective and widely used to prevent product imitation. The study may have some value for policy discussions of how to spur innovation in a system of firms.
