A recent paper in Management Science titled “Fortune Favors the Prepared Firm” (Cohen and Levinthal [Cohen, W. M., D. A. Levinthal. 1994. Fortune favors the prepared firm. Management Sci. 40(2) 227–251.]) is a pioneering work insofar as it introduces the concept of a firm's absorptive capacity—the ability to evaluate, assimilate, and exploit extramural technological developments. We appreciate the paper's extensive qualitative discussion of the nature and role of absorptive capacity. We also commend the authors' idea of constructing a mathematical model to analyze a rational firm's incentives for an investment in absorptive capacity. However, we find that the authors' model overlooks one key element of a firm's absorptive capacity, namely, the firm's ability to defend itself against the threat of an external technology. In the absence of that element, the authors' model may be able to explain a firm's incentives for an innovation rather than incentives for the development of an absorptive capacity. We also identify several internal inconsistencies in the authors' mathematical model. For example, the assumed profit maximization function seems inconsistent with the assumed degree of sophistication of the firm's probability assessment behavior. We believe that the inconsistencies and shortcomings noted here raise serious questions about the validity of the authors' findings. However, we hope that this note does not detract from the pioneering nature of the authors' work, but instead increases its value by stimulating further work on the important topic of absorptive capacity.

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This paper reports the development and testing of a normative model for determining how firms should select the countries to be used in the information search for foreign direct investment. After a subset of countries is selected in the first stage of the decision process, a final selection process chooses the country with the best score within the subset: A "percentile method of subset selection" for singling out clusters of countries for information search and for identifying the best of the subset is presented that performs better than maximum country rankings ("top means") and maximum uncertainty ("top variance") techniques of subset selection. As an illustration, the percentile selection method is applied empirically.The research reported in this paper focuses on the development and testing of a normative model on how firms should specify the countries for which to carry out the information search for foreign direct investment (F.D.I.) The term "foreign direct investment" is used herein as the investment in a manufacturing facility in a host country to produce a given * Chaim Ehrman, receivedhis Ph.D. in Marketing from the Wharton School, University of Pennsylvania, 1984. He is an AssistantProfessorat LoyolaUniversity, and this paper was written while he was an AssistantProfessorat the University of Illinois at Chicago. His currentresearchinterestsareInternational Marketing, Consumer Behavior, and subsetSelectionProceduresfor Business Applications. ** Morris Hamburg is Professorof Statistics and Operations Researchat the Wharton School. His publications include research monographs,books, and numerousarticles in professionaljournals. He has been the directorof researchstudiesandhas servedas a consultant to corporations and as an expert witnessto law firmsandto government agencies. This articlestemmedfrom work begun by ChaimEhrmanin a doctoraldissertation supervisedby Morris Hamburg. t The authors acknowledge The Center for InternationalBusinessStudies at TheWhartonSchool of the University of Pennsylvania for financial support. The first author acknowledges ProfessorAbba Krieger,University of Pennsylvania andDr. Harold R. Shirefor guidance,encouragement, andfor constructivecomments.

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A model of the resource allocation behavior of a group of firms demonstrates that unaided industry allocation to basic (inappropriable) research is suboptimal. Furthermore, provision of seed money is generally counterproductive, while the provision of a matching subsidy is not very cost-efficient in increasing the allocation. Innovative policy alternatives are proposed.research and development, government, engineering, economics