UNIVERSITI TEKNOLOGI MARA

ABSORPTIVE CAPACITY AND PERFORMANCE IN

MALAYSIAN MANUFACTURING
SMEs

ZARINA DENAN

Thesis submitted in fulfillment of the requirements

For the degree of

Doctor of Philosophy

Faculty of Business Management

October 2011
 Candidate's Declaration

I declare that work in this thesis was carried out in accordance with the regulations of

Universiti Teknologi MARA. It is original and is the result of my own work, unless

otherwise indicated or acknowledged as referenced work. This thesis has not been

submitted to any other academic institution or non-academic institution for any degree

or qualification.

In the event that my thesis be found to violate the conditions mentioned above, I

voluntarily waive the right of conferment of my degree and agree to be subjected to

the disciplinary rules and regulations of Universiti Teknologi MARA.

Name of Candidate ZARINA BINTIDENAN

Candidate's ID No. 2005393806

Programme Management

Faculty Business Management

Thesis Title Absorptive Capacity and Performance in Malaysian

Manufacturing SMEs

Signature of Candidate

Date October 2011

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 ABSTRACT

Many small and medium-sized enterprises (SMEs) presently evolve in a complex

business environment characterized by globalization the internationalization of markets
and the need for greater efficiency effectiveness and competitiveness based on innovation
and knowledge. This has put increasing pressure upon the management of these firms
especially manufacturing and technological SMEs that must now compete globally.
Many entrepreneurial researches have highlighted the significance of potential strategies,
technological innovation, or entrepreneurial orientation in improving SMEs productivity.
However, a few have identified the SMEs capabilities in knowledge process leading to
excellent business performance. This research is concerned with identifying those
answers through various knowledge capabilities that small business in Malaysia can
adopt to enhance their performance, by employing the knowledge-based view approach.
SMEs represent more than 95% of total manufacturing establishments in Malaysia, 75%
of which encompasses textiles and apparel sector, food and beverages, metal and metal
products, publishing, printing and reproducing of recorded media, furniture sector, rubber
and plastics products and wood and wood products industry. Questionnaires were
personally administered to 180 companies belonging to the above industries. Simple,
multiple and hierarchical regression analyses were performed to examine relationships
among the variables under study. The simple regression analysis suggested a significant
and positive relationship between SMEs owners/managers' prior knowledge and
absorptive capacity. The results also indicated that there was a significant and positive
relationship between the SMEs owners/managers' prior knowledge and absorptive
capacity. A positive and significant relationship between absorptive capacity and
financial performance was also found. The other two performances (operational and
innovation were found to have insignificant relationship with absorptive capacity.
Hierarchical regression was utilized to test the impact of moderating variables,
environmental dynamism, strategic planning formality and strategic decision making
process on absorptive capacity-performance relationship. The study highlighted only
strategic decision making process had some impact on absorptive capacity-operational
performance relationship. The study also obtained significant and negative effect of
strategic decision making process on absorptive capacity-innovation performance
relationship. In summary, findings highlighted the importance of SMEs to develop their
own knowledge-based not only for survival but to have sustainable competitive
advantage.

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 ACKNOWLEDGMENTS

Assalamualaikum,

I wish to express my gratitude to both my supervisors, Associate Professor Dr. Noraini Ismail and
Professor Dr Noormala Dato' Amir Ishak. I would like to extend a special thanks to Associate
Professor Dr Noraini Ismail for her constant supervision and advice. I will always be indebted to
her for sharing with me her valuable time, knowledge and most of all, her trust.

My sincere thanks to Prof. Ramayah, Dr. Norzanah Muhammad and Dr. Primadita Sharmala
who have validated my questionnaire. Not forgetting Dr Siti Zaleha Abdul Rasid for her kind
assistance and advice.

I really appreciate the understanding and support from my husband, Mohd Yaakop, my son Razin,
my brothers and sisters, my friends in UiTM Segamat and my officemates (MNI room) in UiTM
Shah Alam, without whose encouragement would make my Phd journey impossible. Also I
would like to thank all my Phd colleagues, Noorasyikin, Fahmi, Nizam, Ani @ aini and Zatul for
making my Phd journey the most memorable one.

I also would like to dedicate this thesis to my late parents Yatimah Hassan and Denan Timin who
were there when I needed them the most and without their blessings my PhD journey might not
reach its destination. My prayer will always be with you both.

Last but not least, thank you to Universiti Teknologi MARA for the financial assistance and
support throughout the duration of my project.

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 TABLE OF CONTENTS

CANDIDATE'S DECLARATION ii
ABSTRACT iii
ACKNOWLEDGEMENT iv
TABLE OF CONTENTS v-viii
LIST OF TABLES ix-x
LIST OF FIGURES xii
GLOSSARY ACRONYMS xiii

CHAPTER 1: INTRODUCTION
1.1 Background of the Study 1
1.2 Problem Statement 5
1.3 Objectives of the Study 7
1.4 Research Questions 7
1.5 Justification 8
1.6 Significance of study 10
1.7 Scope of the Study 11
1.8 Outline of the Thesis 12

CHAPTER 2: SMEs in MALAYSIA

2.1 Introduction 14
2.2 A Profile of SMEs in Malaysia 18
2.3 Overview of Study on SMEs' Performance 21
2.4 Current Status of KM in Malaysia 26
2.5 Summary 32

CHAPTER 3: LITERATURE REVIEW

3.0 Theoretical Foundation 34
3.1 Resource Based View 34
3.2 Knowledge Based View 37
3.3 Performance 40

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 3.3.1 Innovation Performance 43
3.3.2 Financial Performance 46
3.3.3 Operational Performance 48
3.4 Absorptive Capacity 49
3.5 Dimensions of Absorptive Capacity 54
3.5.1 Knowledge Acquisition 55
3.5.2 Knowledge Dissemination 57
3.5.3 Knowledge Exploitation 60
3.6 Prior Knowledge 63
3.7 Discussion and Gaps in Previous Studies 67
3.8 Environment 70
3.9 Strategy 73
3.9.1 Strategic Planning Formality 73
3.9.2 Strategic Decision Making Process 76
3.10 Theoretical Development 77
3.10.1 Influence of SMEs Owner Prior Knowledge
on Absorptive Capacity and its Dimensions 78
3.10.2 Influence of Absorptive Capacity on Overall
Performance 80
3.11 Moderating Roles of Environment, Strategic Planning Formality and
Strategic Decision Making Process 82
3.11.1 Moderating Impact of Environmental Dynamism on
Absorptive Capacity- Performance Relationship 82
3.11.2 Moderating Impact of Strategic Planning Formality on
Absorptive Capacity- Performance Relationship 84
3.11.3 Moderating Impact of Strategic Decision Making Process
on Absorptive Capacity-Performance Relationship 86
3.12 Summary 89

CHAPTER 4: RESEARCH METHODOLOGY

4.1 Research Design 90
4.1.1 Preliminary Investigation 90

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4.2 Sampling 92
4.2.1 A Selection of SMEs Industries 92
4.2.2 Sampling Selection 93
4.3 Unit of Analysis and Respondents 96
4.4 Questionnaires Design 97
4.4.1 Section A; Firms Profile 101
4.4.2 Section B; Owner's Prior Knowledge and Dimensions of Firms 102
4.4.3 Section C; Firm's Performance 104
4.4.4 Section D; Business Environment - Environment Dynamism 105
4.4.5 Section E; Strategic Planning Formality& Strategic Decision
Making Process 105
4.5 Questionnaire Pretest 106
4.6 Data Collection 106
4.7 Data Analysis 108
4.7.1 Data Cleaning & Screening 108
4.7.2 Profile Analysis 108
4.7.3 Inferential Data Analysis 109
4.8 Summary 110

CHAPTER 5: ANALYSIS and FINDINGS

5.1 Profile of Respondent Surveyed 111
5.2 Profile of Firms Surveyed 113
5.3 Factor Analysis 115
5.3.1 Owners'Prior Knowledge 117
5.3.2 Absorptive Capacity 118
5.3.3 Performance 123
5.3.4 Environmental Dynamism 129
5.3.5 Strategic Decision Making Process 129
5.4 Normality, Linearity, Homoscedasticity and Homogeneity Test 130
5.5 Results of Hypotheses Testing 134
5.5.1 Descriptive Statistics and Correlations of Independent and
Dependent Variables 135
5.5.2 Owner's Prior Knowledge and Absorptive Capacity 137

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 5.5.3 Absorptive Capacity and Financial Performance 138
5.5.4 Moderating Effect of SDM on AC-OP Relationship 139
5.5.5 Moderating Effect of SDM on AC-IP Relationship 142
5.7 Summary 143

CHAPTER 6: CONCLUSIONS
6.1 Introduction 147
2
6.2 Low R Square (R ) Value 148
6.3 Discussions 150
6.3.1 The Influence of OPK on AC 150
6.3.2 Association between AC and Performance 154
6.3.3 The Moderating Effects of Strategic Decision Making Process
AC-Firms Performance Relationship 156
6.3.4 The Role of Strategic Decision Making Process as Moderator
on AC-Innovation Performance Relationship 159
6.4 Theoretical Implications 160
6.5 Practical Implications 161
6.5.1 Government/Policymakers 161
6.5.2 SMEs 164
6.6 Limitation & Suggestions for Future Research 165
6.7 Conclusion 168
6.8 Summary 169

REFERENCES 170-195

APPENDIX A

APPENDIX B

APPENDIX C

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 LIST OF TABLES

Table Page

2.1 Profile of SMEs establishment 19

2.2 Distribution of SMEs by States 19

2.3 Distribution of SMEs by Sectors 20

4.1 Targeted Samples from Seven Main Industries 94

4.2 Targeted Samples from Seven Main

Industries based on Region 95

4.3 Summary of Questionnaire Design 98-101

5.1 Profile of Respondents Surveyed 112

5.2 Profile of Sample Firms 113-114

5.3 PCAonOPK 117

5.4 Items and Coding for AC Construct 118

5.5 Factor Loading for AC Construct 119

5.6 Factor Loadings for AC construct after first round 120

5.7 Final Stage of Factor Loadings for AC Constructs 121

5.8 CITC, Reliability and Extracted Variance for the Absorptive

Capacity (AC) Scale 121

5.9 Correlation matrix for all 11 items used in the scale 122

5.10 Factor Loading for Performance Construct 123

5.11 Factor Loading for Performance Construct 124

5.12 Factor Loading for Performance Construct 125

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5.13 CITC, Reliability and Extracted Variance for the

Performance Scale 126

5.14 Correlation matrix for all 18items used in the scale 128

5.15 PCAonED 129

5.16 PCAonSDM 130

5.17 Summary of Normality Test 132

5.18 Summary of Levene' s Test in Homogeinity Analysis 134

5.19 Descriptive Statistics and Correlations of Independent, and

Dependent Variables 136

5.20 AC as independent variable and OPK 137

5.21 FP as the dependent variable and Dimensions of AC 139

5.22 Moderating Effect of SDM on AC - OP Relationship 140

5.23 Moderating Effect of SDM on AC - IP Relationship 142

5.24 Summary of the Hypothesis Testing 144-146

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 LIST OF FIGURES

Model of Absorptive Capacity based on Zahra &

George(2002:192)

A conceptual framework

Effect of SDM on KD-OP Relationship

Effect of SDM Process on KE-PF Relationship

Effect of SDM on KA-IP Relationship

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 CHAPTER 1

INTRODUCTION

This chapter presents the background of the study, problem statements,

objectives, justification, scope, contribution of the study, the research questions and

organization of thesis.

1.1 Background of the Study

Many small and medium-sized enterprises (SMEs) currently evolve in a

dynamic business environment which caused by the impact of globalization,

technology improvement and knowledge on overall performance (Hitt, Ireland, Camp

& Sexton, 2001). Past research on SMEs performance has shown that absorptive

capacity influenced SMEs innovation performance (Wang, Wang & Horng, 2004;

Jantunan, 2005; Therin, 2007), operational performance (Liao, Welsh & Stoica, 2003;

Therin, 2007) and financial performance (Therin, 2007). SMEs' performance will

increase when they have more knowledge and able to identify opportunities in the

environment through the process of knowledge acquisition and intrafirm knowledge

dissemination. Specifically, it will permit SMEs to better understand the merit of

environmental signals (Liao et al, 2003).

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 This study plans to examine how performance of manufacturing SMEs in

Malaysia is influenced by their absorptive capacity since they possess a distinctive

way of managing knowledge (Desouza & Awazu, 2006). It is widely recognized that

SMEs are the driving force of Malaysia's industrial development (Normah, 2006)

however; they are facing with a lot of challenges especially in terms of skilled

manpower, managerial skills and information gathering. Although SMEs cannot

afford to have specialized manpower or proper level of education, yet they are bound

to certain networks which provide them with the source of knowledge (Noteboon,

1988; Sparrow, 2001; Gray, 2006; Chen, Duan, Edwards and Lehaney, 2006). Thus,

the question now arises as to how manufacturing SMEs in Malaysia use their

capabilities in acquiring, disseminating and exploiting knowledge to influence the

firms' performance.

Researchers such as Winter (1998); Quinn (1992); Nonaka and Takeuchi

(1995) have advocated the idea of knowledge as a source of competitive advantage.

According to Thorpe, Holt, Macpherson and Pittaway (2005), much of the

entrepreneurial research have highlighted how performance is related to the ability of

entrepreneurs in integrating their knowledge of markets, technology with their

routines, norms and physical spaces that govern everyday organizational activities.

Managers of today's organizations are recognizing that not only organizations should

be fast and flexible in order to survive in complex and dynamic environment but also

be efficient in managing knowledge (Bhatt, 2002). Pertaining to SMEs, according to

Liao et al (2003) they need to have capabilities in acquiring external knowledge and

disseminating the knowledge amongst them then the firms could response faster to the

market. While Wang et al's (2004) study found that knowledge acquisition is

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important in influencing SMEs' product innovation. Therm (2007) using samples

from SMEs Australia substantiated Wang et al.'s (2004) study and added that the four

dimensions of absorptive capacity; acquisition, assimilation, transformation and

exploitation would allow firms to be more innovative.

Although creating knowledge is an important activity, knowledge needs to be

harnessed and leveraged to be useful. There are so many ways on how organizations

can leverage the knowledge around them - reducing failure rates in Texan Pizza

Restaurant through exploiting the franchisor's local experience (Kalnins & Mayer,

2004), is an example. Studies of organizational learning (Cohen & Levinthal, 1990;

Decarolis & Deeds, 1999; Matsuo & Kusumi, 2002; Boudreau, 2002; Groen, 2005)

provide useful information to understand how knowledge is being exploited and

leveraged. Liao et al. (2003) highlighted that the better the absorptive capacity of

SMEs, the more able it is to recognize opportunities in proactive rather than reactive

ways. They found that high levels of responsiveness (acting upon knowledge

acquired) are associated with such things as a capacity for external knowledge

acquisition and internal knowledge dissemination, a proactive strategy of new

opportunity exploration as opposed to exploiting existing ones and the ability to focus

outwardly.

One particular research by Cohen and Levinthal (1990), has triggered many

researchers to study and extend the concept of absorptive capacity. Their study

suggested that firm's ability to acquire, assimilate and exploit knowledge, or in other

words firms' absorptive capacity is influenced by firm's intensity in R&D.

Nevertheless, recent research has further extended the concept of absorptive capacity

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instead of treating absorptive capacity as byproduct of firm's R&D to absorptive

capacity as byproduct of firm's processes. Absorptive capacity's function has been

widened from solely looking at the impact on R&D but more on firms' process and

behavior. Studies done by Liao et al. (2003), Wang et al. (2004) and Jantunan (2005)

have adopted Zahra and George's (2002) new concept of absorptive capacity as a set

of organizational routines and processes, which permit firms to acquire, assimilate,

transform, and exploit knowledge.

In addition to the competitive environment, SMEs are also facing other

challenges in globalized environment such as lack of financing, low productivity, lack

of managerial capabilities, access to management and technology, and heavy

regulatory burdens, among many others (Wang, 2003). This will put increasing

pressure upon the management of manufacturing firms as the challenging environment

might threaten firms' survival and their profitability. Therefore, having competitive

advantage in order to survive and maintain profitability is increasingly becoming

crucial for firms such as SMEs.

Although the concept of absorptive capacity has been reconceptualized, prior

knowledge remained to be the underlying factor of absorptive capacity as proposed by

Cohen and Levinthal (1990). Prior knowledge, which can be in a form of basic skills,

shared language, also include knowledge of the most recent scientific or technological

developments in a given field (Cohen & Levinthal, 1990), and knowledge that

determines the ability of a firm to acquire, to assimilate and to exploit the external

knowledge and hence influence the performance of firms (Liao et al., 2002; Wang et

al, 2004 and Jantunan, 2005). This study adopts Zahra and George's (2002) definition

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of absorptive capacity which portrays absorptive capacity as organizational process

that requires firms' ability in acquiring, disseminating and exploiting knowledge.

1.2 Problem Statement

It is important for the study to be carried out and relate SMEs performance to

absorptive capacity because since it was introduced absorptive capacity has been

hypothesized to bring about change to firms in terms of innovation. Some studies on

absorptive capacity have shown that external knowledge when combined with the

existing knowledge through the routines and processes of firms will turn into firms

valuable assets such as new product development, ability to recognize and improve

financial performance. However, absorptive capacity seems unpopular amongst

SMEs probably because their priorities are overwhelmed by other capabilities such as

market capability building or social networking. According to Xiao and Fu (2009),

though SMEs have external information around them it might not necessary lead to

competence development unless the firms have a certain degree of absorptive capacity

embedded in firms' routine.

Performance of Malaysian SMEs is crucial not only to the firm itself but also

to the economy in general. Reports showed that Malaysian SMEs failure rates are at

least triple as compared to country such as Australia (Noor Hazlina & Pi-shen, 2009).

They highlighted the causes of failure amongst Malaysian SMEs are due to issues

such as lack of personal contacts and problem in maintaining close personal

relationships with customers. Thus, it is important for Malaysian manufacturing

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SMEs in particular to find ways to improve their performance in order to survive as

they are so vulnerable to the global economic shocks. There is a need to focus on

knowledge-based assets such as absorptive capacity because it is recognized to be

critical to SMEs innovation performance (Wang et al., 2004; Jantunan, 2005).

Positive firm performance can be achieved by creating new knowledge through the

process of acquiring, assimilating, transformation and exploitation of knowledge or

absorptive capacity.

There were several studies that examine factors which contribute to SMEs

performance: SMES' characteristics (Khairuddin, 2001), technology strategies

(Noraini, 2002), learning (Ramayah, Mohamed, Muhamad & Ng, 2004),

entrepreneurial orientation (Za'faran & Oswald, 2006), top management role (Arawati

& Za'faran, 2008), internationalization (Chelliah, Muhamad & Yusliza, 2010)

accounted for Malaysian SMEs' performance. These studies highlighted firms'

various competitive advantage which are significant to Malaysian SMEs'

performance. Recently, many studies have focused on SMEs, yet study that focuses

on Malaysian manufacturing SMEs are still lacking (Ramayah et al., 2004). Thus, this

study intended to investigate other firms' capability, absorptive capacity in particular

that might contribute to the performance of Malaysian manufacturing SMEs. It is

vital for them to leverage the capabilities such as absorptive capacity because SMEs'

survival and long-term viability also depend on their ability to innovate (Zahra,

Uchbasaran & Newey, 2009).

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Objectives of the Study

This study is carried out to achieve these objectives:

1. To investigate the relationship between absorptive capacity and firms'

performance.

2. To examine the relationship between SMEs owners' prior knowledge and

absorptive capacity.

3. To examine if the relationship between firms' performance and

absorptive capacity is moderated by the environment.

4. To investigate whether the relationship between firms' performance and

absorptive capacity is moderated by the firms' strategic planning

formality and strategic decision making process.

Research Questions

More specifically, the following broad questions were addressed in this study:

1) Is there a relationship between absorptive capacity and firm's

performance?

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 2) Will prior knowledge influence firm's absorptive capacity in SMEs?

3) Will environmental dynamism moderate the relationship between

absorptive capacity and firm's performance?

4) Will strategic planning formality and strategic decision making process

moderate the relationship between absorptive capacity and firm's

performance?

Justification

This study was inspired by these factors:

1. Lack of empirical data on absorptive capacity in relation to knowledge

management (hereafter KM) especially in identifying the relationships

between absorptive capacity and performance, particularly for small

businesses.

2. Malaysia's Small and Medium Industry Development Plan (SMIDP) (2006-

2010) reported that SMEs are not only facing the macro challenges but also

confronted with micro issues such as limited capability for technology

management and knowledge acquisition as well as general lack of knowledge

and information.

3. The Second Industrial Master Plan (IMP 2) and Third Industrial Master Plan

(IMP 3) aim to accelerate the production of value-added products, reflecting a

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 higher degree of capital and technological utilization, efficient use of human

resources as well as intensive use of knowledge and information in production

processes, to enhance productivity and competitiveness. Since SMEs make up

80-90% of Malaysian manufacturing establishment, it is essential to develop

competitive Malaysia SMEs with a global orientation and a world class

operation structure in order to achieve sustainable and resilient growth in this

manufacturing sector. This development requires that SMEs be equipped with

knowledge and skills in various areas.

4. Not only that SMEs' contribution to the economy is vital but SMEs are also

the driving force of innovation-led economy. They are believed to be

innovative because of their unique characteristics and constraints. There are

few factors which are considered to be an advantage to SMEs as innovators

such as leadership, people and culture (Davenport & Bibby, 1999, Culkin &

Smith, 2000); rapid decision making (Wiele & Brown, 1998).

5. The New Economic Model which was launched in 2010 highlights the

importance of knowledge as a key to solve the problems of Malaysian

workforce. Malaysia believes that reformed education system would be able

to develop a quality workforce and knowledge-based infrastructure. Thus, it

explained how important this study to be carried out.

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1.6 Significance of the Study

This study was very significant because it attempted to make several

contributions to the entrepreneur ship literature:

1. It contributed to body of knowledge through the development of

absorptive capacity and owner prior knowledge constructs.

2. It provided a theoretical extension of the new concept of absorptive

capacity by Zahra and George's (2002) which highlight SMEs owner

prior knowledge and strategic planning formality with the knowledge

based view as the underlying theory. This study also develops the

performance implications of absorptive capacity under dynamic

environments.

3. It attempted to understand the absorptive capacity amongst SMEs in

Malaysia.

4. The manufacturing SMEs are vital to the Malaysian economy. In the

Malaysian economy, manufacturing SMEs have created many new jobs

in the last twenty years, i.e. estimated to provide 57 per cent of the total

employment and 37 per cent of gross domestic product in 2010 (National

SME Development Council, 2010). Because of their importance to the

economy, it is important to understand how they operate and what makes

them successful. One important area for SMEs, particularly in Malaysia

that has received little attention is how these firms manage knowledge to
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 create competitive advantage. A study done by Rahman (2004), on KM

initiatives in Malaysia showed that out of 120 SMEs surveyed, only 36

per cent practice formal KM. The finding also demonstrated that

Malaysian SMEs still believe that IT was the major source of KM,

despite the fact that IT is only a tool in KM initiatives (Wong &

Aspinwall, 2005). In sum, Malaysian SMEs are still unclear about KM

and lack of understanding on how organizational knowledge can be

exploited in their daily activities. A growing body of research on

organizational knowledge suggests that knowledge may be a key source

of competitive advantage for firms (Grant, 1996; Boisot, 1998; Teece,

1998). Most of these researches have addressed larger, established firms

and has not examined the unique needs of smaller firms.

1.7 Scope of Study

The focal point of this study was on the performance of Malaysian

manufacturing SMEs which was influenced by firms' absorptive capacity. It also

revealed the role of SMEs owner prior knowledge in influencing absorptive capacity

of SMEs. Eventually, other variables such as environmental dynamism and strategic

planning formality were hypothesized to moderate the relationship between absorptive

capacity and SMEs performance.

This study only focused on manufacturing sector as this sector is so vulnerable

and largely dependent on global demand as well as was adversely affected by the

global recession (10th Malaysia Plan, 2010). Since SMEs have a lot of constraint, the

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high dependency on global demand would add up to their obstacles in achieving

Malaysia's goal to become industrialized nation by the year 2020. Thus, it explained

why this study had been carried out.

Data was collected from manufacturing SMEs throughout peninsular

Malaysia. To ensure the composition of seven main industries in manufacturing

sector represented, proportionate samples were taken from seven main industries in

manufacturing sector; textile and apparels, food and beverages, metal and metal

products, publishing, printing and reproducing of recorded media, furniture, rubber

and plastics products and wood and wood products. These sectors were chosen

because they accounted for 75.1 per cent of the total manufacturing SMEs

establishments (Department of Statistics Malaysia, 2006)

1.8 Outline of the Thesis

This section outlines the structure of the subsequent chapters of this thesis.

Chapter 1 has provided an overview of the proposed research and identified the

objectives of the study. Chapter 2 provides some insights on Malaysian

manufacturing SMEs. This chapter relates absorptive capacity concept and

performance. Chapter 3 provides a review of the theoretical and empirical literature

on absorptive capacity and the role of owner prior knowledge plays in building

absorptive capacity in organizations. This chapter also outlines the theoretical

framework adopted for the thesis and the research hypotheses to be tested. Chapter 4

describes the methodology used, the sample and the analytic approach. Chapter 5

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presents the results of the data analysis. Chapter 6 provides a discussion of the

findings, conclusions and recommendations for future research.

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