Does your neighbor’s absorptive capacity matter? The effect of the local dimension on firms’ absorptive capacity and business failure

Despite extensive research on absorptive capacity (ACAP) and its role in firm performance, the impact of geographical proximity and external knowledge flows on ACAP in small and medium-sized enterprises (SMEs) remains underexplored. This study aims to fill that gap by testing and validating how neighboring firms influence a company’s ACAP and its probability of business failure within the context of SMEs. Utilizing the Resource-Based View (RBV) as a theoretical framework, this research explores the “neighbor effect” as a boundary condition that may offset some limitations in SMEs’ absorptive capacities. Using data from over 13,000 SMEs in Spain, we employ spatial modeling techniques to reveal external mechanisms that strengthen ACAP. Our findings demonstrate that geographical proximity to knowledge sources, coupled with the integration of external flows, significantly enhances the ACAP of SMEs, which, in turn, positively impacts their performance and reduces the likelihood of business failure. This study also extends existing literature by providing empirical evidence of how proximity and external knowledge flows can influence a firm’s success. Contrary to some common assumptions, our results indicate that while proximity is beneficial, it is the integration of external knowledge flows into the ACAP framework that plays a crucial role in achieving competitive advantage. These findings contribute to a deeper understanding of the dynamics between proximity, knowledge flows, and absorptive capacity, providing valuable insights for policymakers and business leaders aiming to foster innovation and resilience in SMEs.