This paper examines the role of absorptive capacity in managing external knowledge flows and its impact on innovation performance. It argues that firms with higher absorptive capacity can more efficiently manage external knowledge flows and stimulate innovation. Using data from 2265 Spanish firms in the Community Innovation Surveys (CIS) for 2000 and 2002, the study finds that absorptive capacity is a key source of competitive advantage, especially in sectors with high knowledge turbulence and strong intellectual property rights (IPR) protection. The research highlights that absorptive capacity moderates the impact of external knowledge flows on innovation performance, with a stronger effect in turbulent and IPR-protected environments. The study also shows that absorptive capacity is positively correlated with innovation performance and that firms with higher absorptive capacity benefit more from external knowledge flows. The findings suggest that investing in absorptive capacity can enhance a firm's ability to absorb and utilize external knowledge, leading to better innovation outcomes. The paper contributes to the empirical literature on absorptive capacity and its impact on innovation, emphasizing the importance of absorptive capacity in managing external knowledge flows and fostering innovation in dynamic knowledge environments. The study also provides policy implications, suggesting that governments should focus on enhancing firms' absorptive capacity to improve their ability to absorb and utilize external knowledge, particularly in high-tech sectors with strong IPR protection.This paper examines the role of absorptive capacity in managing external knowledge flows and its impact on innovation performance. It argues that firms with higher absorptive capacity can more efficiently manage external knowledge flows and stimulate innovation. Using data from 2265 Spanish firms in the Community Innovation Surveys (CIS) for 2000 and 2002, the study finds that absorptive capacity is a key source of competitive advantage, especially in sectors with high knowledge turbulence and strong intellectual property rights (IPR) protection. The research highlights that absorptive capacity moderates the impact of external knowledge flows on innovation performance, with a stronger effect in turbulent and IPR-protected environments. The study also shows that absorptive capacity is positively correlated with innovation performance and that firms with higher absorptive capacity benefit more from external knowledge flows. The findings suggest that investing in absorptive capacity can enhance a firm's ability to absorb and utilize external knowledge, leading to better innovation outcomes. The paper contributes to the empirical literature on absorptive capacity and its impact on innovation, emphasizing the importance of absorptive capacity in managing external knowledge flows and fostering innovation in dynamic knowledge environments. The study also provides policy implications, suggesting that governments should focus on enhancing firms' absorptive capacity to improve their ability to absorb and utilize external knowledge, particularly in high-tech sectors with strong IPR protection.