The capability of a firm to instill innovation depends on its knowledge
resources. This capability can be utilized by facilitating knowledge
sharing and absorptive capacity in the context of small and medium
enterprises. The purpose of this research is to examine how knowledge
sharing can be transformed into innovation capabilities. Research
suggests that knowledge sharing will first influence absorptive capacity
before knowledge can be transformed to innovation capabilities. This
research was conducted in North Sulawesi which has excellent economic
growth by involving small and medium enterprises. The results show that
knowledge donating and knowledge collecting positively influence SME's
innovation capabilities if absorptive capacity is also developed. In
other words, the result of the research gives us empirical evidence that
new knowledge created from knowledge sharing can be transformed into
innovation capabilities if it is supported by higher absorptive
capacity. [ABSTRACT FROM AUTHOR]