R&D outsourcing, that is, the purchasing of R&D or technological knowledge from external providers, can provide the firm with many advantages (for a recent review of international R&D outsourcing, see Contractor et al., 2010). Thus, some scholars argue that R&D outsourcing is beneficial for the firm’s competitive advantage, because a firm increases its diversity of knowledge, helping it innovate more (Berchicci, 2013; Bertrand and Mol, 2013; Nieto and Rodrı´guez, 2011). However, other scholars counter that R&D outsourcing may have a negative effect on the firm’s competitive advantage, because the firm is not developing the capability to create the technological knowledge it purchases since firms typically learn by doing (e.g., Bettis et al., 1992; Helfat, 1994; Pe´ rez-Lun˜o and Valle-Cabrera, 2011; Weigelt, 2009). Thus, it appears that we have a debate regarding the benefits of R&D outsourcing, and this debate may be driven in part by a limited understanding of the drivers that lead firms to invest more in R&D outsourcing. Therefore, this study fills an important gap in the literature by developing theory to explain firms’ investments in R&D outsourcing. I use the knowledge-based view of the firm (KBV) (Grant, 2013; Kogut and Zander, 1992, 1993) and link it to the concept of absorptive capacity (Cohen and Levinthal, 1990; Zahra and George, 2002) to propose a separation between the mechanisms that enable the firm to identify and integrate outsourced R&D knowledge into the firm, and the mechanisms that enable the firm to use outsourced R&D knowledge to innovate. I propose that outsourced R&D knowledge can be viewed as a type of external knowledge and that firms with particular characteristics that build their absorptive capacity are more likely to invest more in R&D outsourcing. Specifically, first, I propose that firms that engage with foreign customers and with foreign suppliers are more likely to invest more in R&D outsourcing. The reason is that these firms develop an ability to understand new and complex external knowledge in their relationships, and this ability becomes useful for integrating outsourced R&D knowledge. These mechanisms reflect the potential absorptive capacity of the firm. Second, I argue that firms that have more skilled employees and invest more in internal R&D are also more likely to invest more in R&D outsourcing.