Social Capital and Learning Advantages: A Problem of Absorptive Capacity

• Author: R. Duane Ireland,Mathew Hughes,Robert E. Morgan,Paul Hughes
• Published date: 01 September 2014
• Date: 01 September 2014
• DOI: http://doi.org/10.1002/sej.1162

SOCIAL CAPITAL AND LEARNING ADVANTAGES:

A PROBLEM OF ABSORPTIVE CAPACITY

MATHEW HUGHES,1* ROBERT E. MORGAN,2R. DUANE IRELAND,3and

PAUL HUGHES1

1Durham University Business School, Durham University, Mill Hill Lane,

Durham, U.K.

2Cardiff Business School, Cardiff University, Cardiff, U.K.

3Mays Business School, Texas A&M University, College Station, Texas, U.S.A.

Theoretically, social capital allows entrepreneurial firms to capitalize on learning advantages

of newness and gain access to knowledge as the foundation for improved performance. But

this understates its complexity. We consider whether learning through social capital relation-

ships has a direct effect on performance and whether absorptive capacity mediates and

moderates this relationship. We find that network-based learning has no direct relationship

with performance, but this is mediated in each instance by absorptive capacity and is moder-

ated twice. Our findings challenge the learning advantages of newness thesis and reveal how

absorptive capacity can enable business performance from a firm’s network relationships.

Copyright © 2014 Strategic Management Society.

INTRODUCTION

Entrepreneurial firms face resource constraints and

knowledge deficits that result in a disproportionably

high risk of failure (Freeman, Carroll, and Hannan,

1983). Yet some entrepreneurial firms are able to

better organize themselves to outperform others

despite the liabilities of newness to which resource

constraints and knowledge deficits contribute (Short

et al., 2009). In both strategic entrepreneurship and

strategic management research, efforts to understand

these performance differences have typically focused

on firm-based and industry-based explanations.

However, an alternative explanation may inform an

enhanced understanding of this phenomenon.

Gulati, Nohria, and Zaheer (2000) contend that

the performance of entrepreneurial firms can be

explained by the nature and network of relationships

they possess. Effective networking allows entrepre-

neurial firms to build high quality ties that enable the

transfer of knowledge (Carmeli and Azeroual,

2009), the building of new knowledge (Yli-Renko,

Autio, and Sapienza, 2001), and faster and more

comprehensive learning (Schulz, 2001). Access to

these additional knowledge stocks can improve busi-

ness performance (Carmeli and Azeroual, 2009),

unlock opportunities for growth (Ketchen, Ireland,

and Snow, 2007), and offer an opportunity to lever-

age young entrepreneurial firms’ purported learning

advantages of newness (Autio, Sapienza, and

Almeida, 2000).

To obtain these benefits, entrepreneurial firms

must create social capital by networking strategi-

cally so as to shape advantageous connections that

permit increasing and asymmetrical access to knowl-

edge and, thereby, stimulate improvements in busi-

ness performance (Adler and Kwon, 2002; Inkpen

and Tsang, 2005; Nahapiet and Ghoshal, 1998;

Stuart and Sorenson, 2007). Social capital theory

speaks to the nature of the entrepreneurial problem

Keywords: social capital; learning advantages of newness;

absorptive capacity; network-based learning; entrepreneurial

firms

*Correspondence to: Mathew Hughes, Durham University

Business School, Durham University, Mill Hill Lane, Durham

DH1 3LB U.K. E-mail: mat.hughes@durham.ac.uk

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Strategic Entrepreneurship Journal

Strat. Entrepreneurship J., 8: 214–233 (2014)

Published online in Wiley Online Library (wileyonlinelibrary.com). DOI: 10.1002/sej.1162

Copyright © 2014 Strategic Management Society

because meaningful interactions among young firms

can catalyze learning advantages of newness by

unlocking the knowledge needed to help these firms

overcome liabilities of newness and outperform

peers.

While the arguments underpinning this alterna-

tive explanation may be appealing, we propose two

important theoretical tensions that question assump-

tions about social capital and the learning advan-

tages of newness. First, the effect of any knowledge

acquired through social capital relationships on

business performance may depend on a firm’s

absorptive capacity. As a process, absorptive capac-

ity helps a firm convert the knowledge acquired

through social capital into valuable learning out-

comes relevant to its activities and performance

(Volberda, Foss, and Lyles, 2010). Autio et al.

(2000) proposed that owing to a lack of prior

knowledge, young entrepreneurial firms possess

learning advantages of newness, as they have fewer

biases and constraints to grasp novel meanings from

knowledge and, by extension, from the learning

encounters presented through social capital behav-

iors. By contrast, absorptive capacity arguments

suggest that prior knowledge is needed to filter

out information and knowledge of little relevance to

the firm (Cohen and Levinthal, 1990; Lane and

Lubatkin, 1998). This theoretical contradiction

warrants attention.

Second, social capital may unlock access to

knowledge that does not necessarily meet the entre-

preneurial firm’s needs (Gulati et al., 2000; Hite and

Hesterly, 2001). Hansen (1998) found occasions in

which the information benefits of social capital were

not cost efficient and Uzzi (1997) reported that it

may undermine performance unless safeguards are

in place. This presents a theoretical tension when

compared to Nahapiet and Ghoshal’s (1998) asser-

tion that learning that occurs under conditions of

social capital should generate new intellectual

capital that directly improves business performance.

Consequently, the performance returns from

network-based learning may depend on the entrepre-

neurial firm’s absorptive capacity as a means of

identifying, filtering, and applying only the knowl-

edge from network relationships that hold the best

value for the firm (Lane and Lubatkin, 1998; Schulz,

2001). Firms that are strongly tied together are more

capable of exchanging information (Andersson,

Forsgren, and Holm, 2002), and social capital

has been associated with more effective transfer

of complex knowledge (Sorenson, Rivkin, and

Fleming, 2006). But on the basis that an individual

firm does not have an equal capacity to learn from all

firms to which it is connected (Andersson et al.,

2002; Lane and Lubatkin, 1998), its ability to

assimilate and deploy knowledge it has gained from

network relationships is essential to improved per-

formance. Thus, absorptive capacity is likely to

moderate the relationship between network-based

learning and business performance.

These theoretical tensions raise three important

research questions. (1) What networking behaviors

can entrepreneurial firms deploy to generate social

capital and unlock network-based learning?

(2) Does network-based learning directly improve

business performance? (3) Does absorptive capacity

both mediate and moderate the relationship between

network-based learning and business performance

in entrepreneurial firms? Answering these yields

four contributions. First, we use social capital and

network-based learning theories to offer a relational

view of strategic entrepreneurship. This approach

answers calls by Carmeli and Azeroual (2009) and

Ketchen et al. (2007) to increase our understanding

of the role of ties in strategic entrepreneurship

endeavors. We theorize a model to explain how an

entrepreneurial firm’s network behaviors begin a

process by which it can realize entrepreneurial and

strategic benefits, contributing to a call by Stuart

and Sorenson (2007) to understand the mechanisms

underlying how firms create value from network

ties. Second, we challenge the core tenets of the

learning advantages of newness thesis put forward

by Autio et al. (2000) in that we theorize and find

that social capital explanations alone do not resolve

the entrepreneurial problem of persistent perfor-

mance differences among entrepreneurial firms. In

uncovering the importance of a firm’s absorptive

capacity, we cast doubt on present assumptions

about how and why young entrepreneurial firms

benefit from learning initiatives, and we offer solu-

tions to the theoretical tensions we encounter.

Third, we theorize absorptive capacity in young

entrepreneurial firms as a set of routines to over-

come the view of absorptive capacity as prior

experience. Fourth, our theorizing and findings

challenge Nahapiet and Ghoshal’s (1998) view that

learning that occurs under conditions of social

capital should directly improve business perfor-

mance. Our study offers a theoretical framework

and raises important questions to stimulate further

research into social capital, network-based learning,

and strategic entrepreneurship.

Social Capital, Learning Advantages, and Absorptive Capacity 215

Copyright © 2014 Strategic Management Society Strat. Entrepreneurship J.,8: 214–233 (2014)

DOI: 10.1002/sej