Organizational Learning of Absorptive Capacity and Innovation: Does Leadership Matter?

• Date: 01 March 2020
• DOI: http://doi.org/10.1111/emre.12320
• Author: Mohammad Rezaei Zadeh,Jing Zeng,Tamer K. Darwish,Washika Haak‐Saheem
• Published date: 01 March 2020

Organizational Learning of Absorptive

Capacity and Innovation: Does

Leadership Matter?

TAMER K. DARWISH,

1

JING ZENG,

2

MOHAMMAD REZAEI ZADEH

1

and WASHIKA HAAK-SAHEEM

3

1

The Business School, University of Gloucestershire, Cheltenham, UK

2

Kent Business School,University of Kent, UK

3

Henley Business School, University of Reading, Reading, UK

Following the process-based definition of absorptive capacity, this study seeks to explore the mediating role of

transformational and transactional leadership styles in the relationship between the three learning processes of

absorptive capacity and innovation. Based on a survey in the United Arab Emirates (UAE), it was found that

transformational leadership mediates the relationshipbetween exploratory and transformational learningprocesses

and innovation.It was also found that transactionalleadership did not mediate therelationship between the internal

exploitative learning process and innovation. While several researchers have noted a need to develop a better

theoretical understanding of the mechanisms explaining the interplay between absorptive capacity and innovation,

we provide theoreticalexplanations of the underlyingmechanism and further offer explanationsas to why some firms

are better ableto convert external knowledge intostrategic innovations whencompared with others. The implications

of these findings for theory and practice are delineated.

Keywords: absorptive capacity;learning processes; transformational leadership;transactional leadership;innovation

Introduction

The increasing complexity and high-velocity business

environment has ensured focused attention on innovation

as the key drivers of a company’s long-term success

(see Tzokas and Saren, 1997; Baker and Sinkula, 2002;

Lyon and Ferrier, 2002; Bruni and Verona, 2009;

Trantopoulos et al., 2017). Many firms are increasingly

seeking external knowledge to foster innovation in an

effort to enhance their competitive advantage (Ireland

et al., 2002; Zollo et al., 2002; Chesbrough and

Appleyard, 2007; Nonaka and Von Krogh, 2009).

Absorptive capacity has emerged as a crucial source to

assist firms in recognizing new external knowledge,

completing its assimilation and applying it to commercial

ends (Cohen and Levinthal, 1990; Bongsun et al., 2016),

which is the key to innovation success (Chang and Cho,

2008; Lynn et al., 2000;Rezaei-Zadeh and Darwish,

2016). Through departure from the original definition,

various conceptualizations of absorptive capacity have

emerged (Lane and Lubatkin, 1998; Nahapiet and

Ghoshal, 1998; Lane et al., 2006). This paper adopts the

process-based definition, where absorptive capacity

refers to a firm’s ability to utilize external knowledge

through the three sequential processes of exploratory,

transformative and exploitative learning (Lane et al.,

2006). Exploratory learning relates to the acquisition

of external knowledge and corresponds with the notion

of potential absorptive capacity (Zahra and George,

2002). Exploitative learning refers to applying acquired

knowledge, and accordingly reflects the concept of

realized absorptive capacity (Zahra and George, 2002;

Xia and Roper, 2016). Transformative learning bridges

these two processes, making reference to retaining

knowledge over time (Garud and Nayyar, 1994; Lane

et al., 2006). Accordingly, absorptive capacity is not

static, but rather evolves through learning processes

(Todorova and Durisin, 2007).

Although the impact of absorptive capacity on

innovation is controversial, organizational mechanisms

affecting the relationship between absorptive capacities

and innovation is not well understood (see, for example:

Correspondence: Tamer K Darwish, The Business School, University of

Gloucestershire, Cheltenham, UK. E-mailtdarwish@glos.ac.uk

DOI: 10.1111/emre.12320

©2018 European Academy of Management

European Management Review, Vol. 17, –(2020)

83 5

–,

100

Jansen et al., 2005; Lane et al., 2001). In other words, a

firm’s ability to absorb new external knowledge can create

significant benefits, such as innovation (Cockburn et al.,

2000); however, organizational mechanisms may have a

different effect on the learning process of absorptive

capacity and subsequently lead to different innovation

performance outcomes (Zollo and Winter, 2002). This

limited attention is remarkable, especially since Cohen

and Levinthal (1990) highlight the importance of

organizationalmechanism in influencing the effectiveness

of absorptive capacity in contributing firms’innovative

performance.

Although few studies trace the path of organizational

mechanisms such as organizational culture, strategy,

structure, coordination capabilities and environmental

factors (see, for example, Carroll, 1998; Fiol and Lyles,

1985; Jansen et al., 2005),understanding of this particular

relationship remains limited and largely conceptual (see,

for example, Lan e et al., 2001; Van Den Bosch et al.,

1999). To date, limited attention has been directed

towards linking leadership with the relationship between

different dimensions of absorptive capacity and

innovation. The lack of research regarding this particular

link is also surprising, especially considering leaders are

‘ultimately, account for w hat happens to the organization’

(Hambrick, 1989: 5) and act as the guiding force behind

organizational learning (Lahteenmaki et al., 2001; Vera

and Crossan, 2004). There is a growing literature

emphasizing that leadership is one of the most important

individual influential predictors of innovation and

learning as they can directly decid e to introduce new ideas

into organization, set specific goals, and encourage

innovation initiative from subordinates (Jansen et al.,

2009; Nemanich and Vera, 2009; Rosing et al., 2011;

Liu et al., 2014; Flatten et al., 2015; Chen and Hou,

2016). Creating an understanding of the mediating role

of leadership in the interaction between organizational

learning process of absorptive capacity and innovation

can explain why, in a similar business environment,some

firms are able to generate greater competitive advantages

than others, through converting external knowledge into

strategic innovations.

Therefore, the objective of this study is to address the

following question: to what extent do differentleadership

styles, particularly transformational and transactional

leadership styles,affect the relationship between different

learning processes of absorptive capacity and innovation

in the context of an Arabian Gulf Country? There is

some evidence which suggests transformational and

transactional leadership styles facilitate absorptive

capacity and innovation (Chang et al., 2015), although

these results about the transactional leadership style are

controversial. Additionally, most of these studies were

conducted in a Western context with limited reference to

emerging economies. Hence, the institutional setting

under study is of particular interest to probe our research

question.

Like countries such as Bahrain, Kuwait, Oman, Qatar

and Saudi Arabia, the United Arab Emirates (UAE) is a

member of the Gulf Cooperation Council (GCC). In

addition, it is a member of the Organization of Petroleum

Exporting Countries (OPEC), and about 40% of the

country’s gross domestic product is based directly on oil

and gas output (World Bank, 2012). Since the discovery

of oil in the UAE, the country has become a modernstate

with a high standard of living, rooted in deep Islamic

based societal structures. Further, over the last few

decades, the UAE has applied an economic

developmental model that strongly emphasizes market

liberalism and economic openness, embracing

globalization while at the same time refraining from

challenging the traditional neo-patrimonial leadership

structure in the country (Hvidt, 2009). Furthermore,

expatriates form the majority of the population in the

UAE; notably, recent research reveals that, 99% of the

employees in the private sector are expatriates (Al Waqfi

and Forstenlechner, 2014). Therefore, the dominance of

the international workforce across a wide range of jobs

constitutes a unique environment challenging existing

theories and concepts on leadership, learning processes,

absorptive capacity and innovation. Moreover, the rapid

economic and social development has created a large

demand for foreign employees. Given the rapid emerging

economy of the UAE and its demographic and social

characteristics, organizations offer very different nature

of jobs to a wide breath of expatriates (Haak-Saheem

and Brewster, 2017; Haak-Saheem et al., 2017).

However, the government aims to enhance the national

participation in the workforce by enforcing localization

policies (UAE Vision 2021, n.d.). Similar to localization

policies in other GCC countries, the UAE has embraced

emiratization to reduce reliance on foreign and increase

local participation in the workforce. The impact of these

and associated challenges on leadership, learning processes,

absorptive capacity and innovation is not fully understood.

This study contributes to the existing literature in both

theory and practice. While scholarly work has noted the

need to develop a better theoretical understanding of the

mechanisms explaining the interplay between absorptive

capacity and innovation (see, for example, Cockburn

et al., 2000; Jansen et al., 2005; Zollo and Winter,

2002), we advance research on leadership and absorptive

capacityby theoretically extending and empirically testing

the role of different leadership styles in mediating the

relationship between three different learning processes of

absorptive capacity and innovation in an unconventional

setting (Meyer and Peng, 2016). Notably, the context of

an emerging market pushes for further contextualization

to advance existing knowledge on the determinants of

innovation such as leadership, learning processes,

T.K. Darwish et al.

©2018 European Academy of Management

84