Absorptive capacity (ACAP) is a firm’s ability to acquire, assimilate, transfer and exploit knowledge to introduce innovative products and thereby sustain competitive advantage. A firm must not only interact with the environment to acquire and transfer knowledge, but also needs to assimilate and exploit it through internal routines and processes for transmission. However, such recurring internal processes of knowledge transformation can lead to path dependence (Cohen and Levinthal, 1990). Path dependence creates lock-in effects for knowledge acquisition, transfer, assimilation, and exploitation capabilities. Thus, while the role of ACAP is widely acknowledged as a key capability leading to a firm’s innovation, the very capability is susceptible to “competency traps”. Levinthal (1992) explains firms can respond such competency traps by proactively altering routines and structures. More importantly, competency traps may also be addressed by introducing innovative routines and structures within the firm (Authene-Gima, 2005). To address how firms may proactively introduce innovative means to acquire and exploit external knowledge, the moderating role of entrepreneurial orientation (EO) is proposed as it explains the extent to which firms innovate, take risks and act proactively (Lumpkin and Dess, 1996).