Knowledge and venture capital as a driver of innovation

17 February 2023 Consultancy-me.com 9 min. read
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Innovation is the lifeblood of growth and competitive success. Without innovation, an organization will fall behind its competition and become obsolete. However, innovation – and the knowledge needed to innovate – can be expensive. This is where venture capital comes in, write Paul Lalovich and Emilija Vukovic from Agile Dynamics.

Venture capital is one of the most common sources of financing for organizations that want to invest in innovation. Venture capital is a type of dedicated financial help that funds businesses to make a capital gain until publicizing them or even selling them outright.

A distinguishing feature of venture capital involves screening, monitoring, and advising on a portfolio of its businesses. These non-financial services enable venture capitalists to choose businesses with high growth potential and make them succeed. The three distinctive features discussed before adding to the venture capital’s edge over other types of financing that are not as dedicated.

Paul Lalovich and Emilija Vukovic - Agile Dynamics

Venture capitalists normally select companies that they can exit fast enough. This means that they select innovative organizations whose ROI is expectedly high. Therefore, such organizations are those that use knowledge to generate innovative capabilities to create profit in the short term.

Innovation is a process of continuous improvement and growth. It leads to the creation of new value or business ideas, which in turn contributes to the growth of any organization. The ability to innovate helps in increasing the revenue and profit margins of an organization by making it competitive in its industry.

Venture capitalists are interested in investing in innovative startups because they believe this will help them achieve their financial goals faster compared to the companies that do not invest in innovation. Venture capitalists want their investment to grow fast so they can exit quickly after making their money back at a higher rate than what they invested initially into it.

In the age of the knowledge economy, innovation is a main source of competitiveness. Based on what is known as the knowledge-based vision, the performance of the organization lies in its capacity to create, blend, recombine, and make use of knowledge.

Therefore unstated, knowledge is indispensable to the capacity of an organization to innovate and favorably compete with others, causing it to be a strategic resource. The knowledge inside a firm is normally formed internally or by the outward acquisition of information and know-how. Accordingly, the knowledge absorptive capacity of a firm is vital for the creation of value inside a firm.

According to research by Davenport and Prusak, knowledge cannot be completely dispersed without the backing of absorptive capacity. At the same time, the transfer of knowledge within a firm will come up as a main hindrance without the backing of absorptive capacity, inserting value on the significance of absorptive capacity within firms.

Absorptive capacity has been described as the capacity of an organization to acknowledge the value of fresh outward information, integrate it, and implement it for business goals. Besides, it has become amongst the most dominant research scopes in business management. Other research also notes that absorptive capacity refers to a group of organizational practices that need to recognize and use knowledge, stressing the significance of absorptive capacity in the process of managing knowledge.

Most studies back the idea of absorptive capacity directly or indirectly prompting innovation and organizational financial outcomes. The procedures of absorption of outward knowledge have grown into key aspects for innovation in organizations, making them to better adjust to transformations within the competitive atmosphere. Because of this, there are still many opportunities for research within the scopes of relational learning, absorptive capacity, as well as the attainment of a competitive edge.

Two vital gaps restrict deep hypothetical and empirical progresses in the management of absorptive capacity. Foremost, some programs of research have considered diverse proportions of absorptive capacity, while this dimensional separation of the construct and its function is not clear, conceptually and practically. Nonetheless, some studies have concentrated on the relationship between the diverse measures of absorptive capability and the innovation performance of a firm.

Absorptive capacity is a tacit and intricate concept, making it challenging to measure. Learning the connection between venture financing and absorptive capacity can hence enhance our comprehension concerning how the source of financing impacts the innovation tactic of entrepreneurial organizations.

Absorptive capacity and innovation

Companies are working within a very competitive setting and need great measures of knowledge, which has turned into one of their most vital resources. To compete favorably, organizations cannot depend only on their external knowledge web but must progress their absorptive capacities to dynamically source new knowledge. This imposes methods that enable learning, allowing them to disperse and use the knowledge that will offer them fresh organizational innovations.

Furthermore, the merging of this acquired knowledge is decided by an organization's absorptive capacity. Hence, firms are required to possess and create, internal absorptive capacity to enhance innovation performance. This is vital since this form of capacity can impact the efficiency of innovation actions.

The first parties to describe absorptive capacity as the ability of an organization to assess fresh knowledge from outside, integrate it, and use it for commercial reasons were Cohen and Levingthal in 1990. A firm can obtain and efficiently utilize external and internal knowledge that will impact its innovation.

This style looks at absorptive capacity as an outcome of not just research and development activities but similarly the variety or depth of the knowledge base of an organization, its former learning encounter, a mutual language, the presence of cross-functional points, and the mental frameworks, as well as problem-solving capability of the members in an organization. In this manner, absorptive capacity is vital for organizations to utilize outward knowledge and hence trigger inner innovation.

Knowledge has become the most vital resource for organizations; outward knowledge concerning markets and technologies is thought to be key for generating inner knowledge in research and development units. Using absorptive capacity, organizations can change outward knowledge into innovative capabilities.

Originally, absorptive capacity begins with gaining knowledge from the environment and it culminates by getting the best out of it. This dynamic ability enables organizations to be in a better place to grow any form of innovation. Organizational learning theory recommends that an organization's innovation actions are an outcome of its knowledge base.

Earlier research discovered that organizations having a greater absorptive capacity were more predisposed to undertake product, process, organizational, or even marketing innovations. In the same way, Calero-Medina and Noyons mapped programs of research connected to absorptive capacity and its connection to diverse domains, identifying substantial relations between absorptive capacity and innovation within the organization.

More current work, like the one by Chen and Chang discovered that the more the level of absorptive capacity of the organization, the more the level of innovativeness within the organization. They also discovered within their systematized literature review that most prevailing research concerning innovation literature accentuates the capacity to use outward knowledge. Moreover, this relation with fresh external knowledge enhances the absorptive capacity.

According to a research program undertaken in 2007, empirical proof was given that innovation stems from the necessity for sharing knowledge, instigated by its absorptive capacity. When absorptive capacity progresses, it becomes very simple for anyone to form a noteworthy innovation grounded on acquired knowledge. Indarti similarly notes that absorptive capacity can be observed as a procedure by which a certain entity establishes innovative business goals.

Notwithstanding the proof connecting absorptive capacity to innovation, this notion has developed in due course. The most comprehensive reconceptualization was suggested by Indarti. They connected the idea to a set of company-wide routines and strategic procedures by which organizations acquire, change, and utilize knowledge to establish an active organizational capacity.

Dimensions of innovation capacity

Innovation is a vital element of the research enterprise, is very developed, and exists in all business procedures. Nonetheless, the function of innovations, a main driver concerning a venture's performance, has transformed in the latest years because of globalization and improved foreign competition.

As a result, we comprehend innovation as the capacity of a firm to use knowledge and create novel products, services, and processes. Nonetheless, innovation typically encompasses some level of risk, which explains why outcomes are not always satisfying.

Various studies have demonstrated that innovativeness allows organizations to attain results, for instance, enhancement of the organization's performance; growing exports; making a competitive edge; and or adding to the growth of the business. Generally, innovation assists organizations to react to competitive difficulties in globalized settings.

Innovativeness is an intricate capacity through which fresh knowledge and ideas are constantly used to attain excellent business performance using the integration of new offertories, product innovation, and the development of new processes for creating and distributing those novel offerings, and process innovation. These improve or sustain their efficiency and competitiveness.

Process innovation concentrates on enhancing the efficiency and inner operations of an organization's procedures to produce, bring together, or deliver the product. In this manner, another process can lessen the expenses or bring about extra production ability for an organization.

Product innovation, conversely, is where an organization can present improved, distinguished, or even new products to the market to satisfy the needs of the consumers. Product innovation concentrates on the market and depends on robust abilities like quality, efficiency, speed, and flexibility, whereas process innovation has its place within the space of technical innovation.

Both forms of innovation are closely connected and make up intricate procedures that normally encompass all functional sections of the organization.

About the authors: Paul Lalovich is a partner at Agile Dynamics, where Emilija Vukovic is a principal. For their article, they made use of an extensive list of academic papers.