During the last 10 years, 400 out of the Fortune Top 500 have established at least one R&D unit in China. We investigate into this highly relevant phenomenon that seems to contradict existing theory on international R&D. We propose that there is a missing link in theory, developing this link by theory building that draws on Cohen and Levinthal's absorptive capacity. We test our propositions by using data from a survey we did on Western firms' R&D activities in China. Results show a good applicability of our concept and its relations to competitive advantage the-ory.