Utilizing absorptive capacity theory, this study examines whether organizations should outsource knowledge acquisition of employees i.e. by hiring employees with prevailing relevant knowledge, or whether to invest in the development of employees’ knowledge within the organization for different types of innovations. 335 Danish firms in the European Manufacturing Survey reveal that individual knowledge must be differently organized to achieve different innovative outcomes. For new product development, organizations benefit from investing in employees with the highest possible domain specific absorptive capacity, whilst for product-related service innovations employees with more general knowledge should be hired. For the latter, employees’ individual absorptive capacity should be developed internally for best innovation outcomes. Irrespective of the type of innovation, providing flexible work arrangements is beneficial for performance and this effect is further substantiated by firm’s cross-functional capabilities. Important implications emerge for the organization in terms of outsourcing versus developing individual absorptive capacity for different innovations.