Measuring Firms’ Capability to Absorb External Knowledge

As the economy has become increasingly knowledge-based, firms' capability to benefit from external knowledge has grown in importance. We construct a measure of this capability-absorption intensity-from information in firms' patents. To validate the measure, we exploit the American Inventors Protection Act (AIPA), which exogenously increased patent information availability. A triple-difference design shows that firms with higher absorption intensity experience greater innovation growth when more exposed to the reform. Beyond AIPA, absorption intensity predicts stronger innovation outcomes and firm growth. Our measure offers a tool to study how differences in absorption capability shape returns to external knowledge.