Using a sample of 893 SMEs over a ten year period, we test how firms may reduce the inefficiencies in their absorptive capacity (ACAP) due to path dependence. Our research shows that for frequent innovators, potential absorptive capacity (PACAP) has a greater effect than realized absorptive capacity (RACAP). The reverse is also true for firms that innovate infrequently. Greater conversion efficiency (η) between PACAP and RACAP is counterproductive for innovators, indicating they are better off enhancing PACAP. For infrequent innovators, efficiency is critically important. For firms to reduce the effects of path dependence, η must be lower i.e. they must expand their PACAP to alter effectively knowledge paths and routines. Finally, alliances may help further increase the effectiveness of η on path creation and innovative performance. Our research has notable implications for the types of ACAP that are relevant under different innovation regimes and how firms may reduce inefficiencies due to path dependence by emphasizing path creation. Guidelines developed from this research could potentially provide assistance in urging firms to develop the most beneficial types of ACAP, which could be a source of competitive advantage.