Purpose – Despite the recognized importance of knowledge management for small family firms, relatively little empirical research has been done so far to understand the mechanisms through which absorptive capacity (AC) assists their performance. The purpose of this study is to understand the relationship between absorptive capacity and performance in small family firms. Design/methodology/approach – In this study, the authors theoretically argue and empirically validate that AC enables the creation of entrepreneurial, market and technology orientations in small family firms, which, in turn, lead to superior firm performance. They also tested the study’s hypotheses using mediation and multiple linear regression analyses on data collected from 272 small Indian family firms. Findings – The study’s findings suggest indirect relationship between AC and performance. The strategic orientations provide a mechanism through which investments in small family firms’ AC results in firm performance. Practical implications – This study offers crucial insights to practitioners and small firm managers regarding the use of knowledge-based capabilities in creating appropriate strategic postures, which, in turn, assist firm performance. Originality/value – This study is among few research attempts in understanding the knowledge aspects of small family firms. The present research contributes to the existing literature by unravelling the relationship between knowledge management and small family firm performance. Also, by bringing in data from an under-studied context of an emerging economy, this study strengthens the theoretical applicability of knowledge management in different contexts.

Introduction

The ability of a firm to recognize, acquire and commercialize external knowledge, known as its absorptive capacity (Cohen and Levinthal, 1990), merits special attention for small family firms for numerous reasons. As small family firms often face stiff competition, dynamic environment, resource constraints and threats of survival (Chirico and Salvato, 2008), acquiring and utilizing accurate and relevant knowledge becomes one of the most crucial sources of sustained competitive advantage (Schiuma, 2012). Also, small family firms typically generate a lot of tacit knowledge owing to long tenures of leaders in such firms (Lee et al., 2003; Sharma, 2000), making it all the more difficult to manage knowledge. The family firms also face difficulty in valuing and acquiring new ideas, and intra-firm knowledge transfer owing to cultural attitudes (Casprini et al., 2017). Finally, given that family firms are “based on a culture of continuity, inclinations to consider the future and support for perseverance” (Moss et al., 2014, p. 53), managing knowledge across generations becomes imperative. To be successful, family firms need to have a very clear understanding of opportunities that exist in the environment and an ability to exploit those opportunities (De Massis et al., 2012a). Accordingly, given the importance of knowledge acquisition and assimilation for small family firms, it is imperative to understand the linkages of absorptive capacity (AC) with the firms’ performance. AC represents the ability of the firms to recognize, assimilate and apply external knowledge for meaningful commercial use (Cohen and Levinthal, 1990). Extant research on AC has offered different perspectives. On one hand, it is argued that firms with a higher AC are in a better position to understand the value of useful external knowledge prevailing in the environment, and exhibit an ability to transform this knowledge into enhanced performance (Lane and Lubatkin, 1998). AC also enables identification and modification of external knowledge to generate indirect benefits such as strategic decision-making effectiveness and innovation (Kostopoulos et al., 2011; Donate and Guadamillas, 2011). Thus, AC becomes a source of sustained competitive advantage by enabling the integration of new and existing knowledge (Arbussa and Coenders, 2007; Escribano et al., 2009). On the other hand, there are researchers who argue negative or no benefits of AC (Lichtenthaler, 2016; Wales et al., 2013). Accordingly, the exact nature of the AC-performance relationship remains ambiguous as there is “disagreement as to whether this impact is direct or mediated by some other variables, such as organizational processes, decision-making and other intermediate performance indicators” (Mills and Smith, 2011). We believe that one of the reasons for these inconclusive findings is the contextual impact of AC on firm performance. As firms of different age, size and characteristics utilize different mechanisms of knowledge acquisition and exploitation, it is unlikely that the relationship would be straightforward. In this study, we make an attempt to address the research question – what is the nature of AC–performance relationship and what are the mechanisms through which AC creates an impact on small family firm performance?