303 Knowledge Sharing Capability, Absorptive Capacity, and Innovation: An Empirical Study of Indonesia’s Information and Communication Technology Industries Luciana Andrawina and Rajesri Govindaraju Institut Teknologi Bandung Indonesia Email : luciana_andrawina@yahoo.com ABSTRACT This research investigates the relationships between knowledge sharing capability, absorptive capacity, and innovation. We propose statistical hypotheses and Structural Equation Modeling to study these relationships based on the data sampled from 104 companies of Indonesia’s information and communication technology industries, including, telecommunication service provider, support service provider, network vendors, and consumer devices vendors. By testing three hypotheses, this study finds that absorptive capacity is the intervening factor between knowledge sharing capability and innovation. It also shows that potential absorptive capacity has a positive effect on realized absorptive capacity, and realized absorptive capacity has positive influence on product and process innovation. Keywords: knowledge sharing capability, absorptive capacity, innovation 1 INTRODUCTION Globalization impact facilitated by the use of information and communication technology results in increasing tightness of interfirm competition. This circumstance demands every company to increase its competitive advantage continuously in order to survive and be able to win the competition. According to Barney (1991), there are many ways that can be undertaken by the company to achieve competitive advantage; however, the most important aspect required in the dynamic environment is the success in generating innovation. The company’s ability in generating innovation continuously is viewed as the main source which could sustain the company’s competitive advantage and could avoid the risk of being eliminated from the market. Choo (1998) reinforces that companies which manage to survive in and manage to continuously develop its business in a long term not determined by their size from the size or the fortune of the company, but it is because the company is able to perform its capacity to adapt faster and to continuously innovate. The resource to generate innovation is the knowledge proprietary. An organization’s available knowledge is becoming an increasingly important resource (Hooff & Weenen, 2004). To make knowledge available, it is crucial that individuals and departments are involved in the process of knowledge sharing (O’Dell & Grayson, 1998). Previous research claim that knowledge has a relationship with absorptive capacity. The company’s absorptive capacity has a significant influence on the ability to innovate. For example the research in conceptual level conducted by Zahra and George (2002) investigates the relationship among knowledge, absorptive capacity, and competitive advantage. Quinn et al. (1996) states that the foundation of a company’s competitive advantage is to make use of its absorptive capacity to develop unique competitive ability. However, in line with Liao et al. (2007), current related studies present little discussion on how to improve or develop the company’s absorptive capacity. This study investigates the relationships among knowledge sharing capability, absorptive capacity and innovation in Indonesia’s information and communication technology industries. In this researh, we define absorptive capacity as the company’s ability to acquire and assimilate knowledge (potential absorptive capacity) and the ability to transform and explore the knowledge (realized absorptive capacity) Zahra and George (2002). We use LISREL on the sampled data from 104 companies of Indonesia’s information and communication technology industries. These firms include telecommunication service provider, support service provider, network vendors, and consumer devices vendors. 2 LITERATURE REVIEW 2.1 Knowledge sharing capability Szulanski (1996) defines knowledge sharing as the exchange or transfer process of facts, opinions, ideas, theories, principles and models within and between organizations including trial and error, feedback and mutual adjustment of both the sender and receiver of knowledge. Hooff and Ridder (2004) states that knowledge sharing is a concept defined as process where individuals exchange their knowledge (tacit and explicit knowledge) and collectively create new knowledge. This definition implies that every knowledge sharing behavior consists of bringing (donating knowledge) and getting (collecting knowledge).