Absorptive Capacity and Social Capital: Innovation and Environmental Regulation

Norwegian paper and pulp mills are subject to strict environmental regulation. The mills conduct research and development for reducing pollution. Absorptive capacity indicates their competence. Firms are part of a social network of connections with external actors that include other paper and pulp mills, suppliers, customers, research institutes, and universities that help them in developing technologies. These relations represent their social capital. Some firms have access to more and better resources than other firms. Measuring firms' absorptive capacity and access to social capital, we analyze their success in reducing pollution levels. There is a strong interaction effect between absorptive capacity and social capital. The effectiveness of social capital depends on absorptive capacity, and absorptive capacity is not effective without social capital.