Introduction Shorter innovation cycles, the huge cost of R&D and dearth of resources compel firms to search for new innovation sources (Gassmann and Enkel 2004). Current research argues that firms need to open up their solid boundaries and seek valuable knowledge from external partners so that firms can extend the innovation function beyond their four walls (Chesbrough 2003). In this context past research has identified universities, or higher education institutions (HEIs) as an important source of innovation (e.g., Lambert 2003). Indeed, universities undertake a “third mission” in addition to their core mission of research and teaching, by focusing on “technology transfer” that engages in the process of the commercialization of science (Etzkowitz et al. 2000). Thus, firms can take huge advantages through the collaboration with universities. While relationships between firms have the risk of opportunism embedded in them, support provided by universities are hard to imitate by competitors due to the novelty and uniqueness in the ideas they provide their partner firms. Despite this important role that universities play, no systematic theoretical treatment has been attempted in academia. Ironically, university and industry links have been studied much less frequently and have been valued lesser than other sources (e.g., suppliers and customers) in terms of knowledge transfer for firm innovation (Hughes 2011). Extant research examines collaborations between universities and firms using simple descriptive analysis (e.g., Laursen and Salter 2004) and illustrates the relationship with anecdotal evidence (e.g., Cosh and Hughes 2010). Thus, extant literature provides little-to-no empirical evidence regarding firm performance, such as a firm’s innovation outcomes, when the firms are supported by universities. Our broad-based investigation makes several key contributions. First, our study is the first to demonstrate empirically what types of HEIs’ activities enhance a firm’s innovation outcomes. Because the two different types of HEI activities have different features, it helps us get a more precise understanding of which specific type of HEI-supported activity influences which firm innovation outcome. Second, our research finds that a firm’s absorptive capacity influences the relationship between HEI-supported activities and a firm’s innovation outcomes. This finding helps to identify how firm capability to absorb outside knowledge influences the relationship of HEIs’ involvement on a firm’s innovation outcomes. Conceptual Framework The most frequent form of a firm’s interaction with universities is people-based activities (Hughes 2011). Universities transfer knowledge through people-related activities such as conferences, special lectures, education programs, and social networks supporting firm innovation. Such people-based activities can influence firm innovation performance. People-based activities involve the activities conducting by firms to increase their business competitiveness. Since a firm’s employees are key to discovering new products and processes, special training programs provided by universities will help supplementing knowledge towards specific firm innovation outcomes. Additionally, other people-related activities such as placing university staff on a firm’s board of directors can also encourage exchange of knowledge and information resulting in cutting-edge new product and process innovation. Tether and Tajar (2008) found that firms that have participated in professional meetings or conferences held by HEIs have a better chance of surpassing their current innovation performance. A firm can improve its innovation performance by making human assets supported by its partners. As partners work together, this helps increasing work efficiency by improving communication, knowledge sharing, and their relative capacity to absorb knowledge for innovation. Research suggests that universities may have lower barriers to engagement with firms by removing bureaucracy, lowering transaction costs and speeding up reaction times (Mateos-Garcia and Sapsed 2011). Therefore, universities have an important role in transferring new knowledge through people-based activities, resulting in new products and processes for the firm. Thus, we hypothesize as follows: Hypothesis 1A (H1A). A firm’s people-based activities with HEIs are positively related to the introduction of new products in the firm. Hypothesis 1B (H1B). A firm’s people-based activities with HEIs are positively related to the introduction of new processes in the firm. Universities have a distinct role in affecting a firm’s innovation performance through problem-solving activities. Firms that acquire knowledge from universities improve their competitive position that helps firm acquire a competitive advantage over other firms that do not collaborate with universities (Gassmann and Enkel 2004). Universities provide problem-solving activities such as joint research, contract research, consulting services, informal advice and provision of access to specialized instrumentation, equipment or materials and of product prototyping. For example, in 2009, US firms sponsored more than $4 billion worth of university research (Kurman 2011), as a result of which U.S. universities own nearly one-quarter of new U.S. patents in the fields of nanotechnology and biotechnology. Thus, firms that collaborate with universities can achieve cutting-edge product and process innovation (Kurman 2011). Hosting workshops and performing joint research with universities are core problem-solving activities. For example, IBM, one of the most successful and established enterprises in the IT market, hosted 350 workshops per year and has had 50-100 ongoing research projects with universities, helping IBM to successfully launch new products into the market (Gassmann and Enkel 2004). Further, firms can also integrate partners (i.e., HEIs) to combine their different competencies to enrich their own innovation process (Gassmann and Enkel 2004). Based on the above, we hypothesize as follows:Hypothesis 2A (H2A). A firm’s problem-solving activities with HEIs are positively related to the introduction of new products. Hypothesis 2B (H2B). A firm’s problem-solving activities with HEIs are positively related to the introduction of new processes. Shorter time-to-market strategies, increasing R&D costs and a dearth of resources cause firms to search for new innovation strategies. This phenomenon is reinforced by a rapid churn in technology and customer demands. In this competitive environment, HEIs’ involvement is increasingly important for a firm’s innovation success because integrating external sources of knowledge from HEIs can result in major advantages for firms (Rappert et al. 1999). Further, people-based and problem-solving activities supported by HEIs do not replace a firm’s internal innovation activities and, as a result, the firm undertakes a great deal of its own innovation activities. Also, scholars argue that collaboration with other partners does not always provide better innovation performance because of the lack of a firm’s capability to processing valuable knowledge from the outside partners (Cohen and Levinthal 1990). This indicates that the mere acquisition and exploitation of knowledge from universities do not guarantee successful firm innovation outcomes. To create successful firm innovation, the firm should possess absorptive capacity, which is the learning capability to processing knowledge acquired from the HEIs into their internal work. Thus, firms can be expected to invest in their absorptive capacity in this situation (Tether and Tajar 2008). Further, Keller (1996) argues that successful R&D spillover (i.e., absorptive capacity) effects are dependent on the activities of human capital (i.e., people-based activities). Also, Cohen and Levinthal (1990) argue that firms can increase their absorptive capacity directly, as when they send personnel for advance technical training (i.e., people-based activities). Further, Kim (1998) argues that absorptive capacity is the major factor in developing problem-solving skills that allow a firm to create new knowledge that influences firm innovation performance. As such, absorptive capacity stresses the internal capability to acquire and assimilate outside knowledge into a firm while HEIs’ involvement is a resource that is created by external source enhancing a firm’s innovation outcomes. Therefore, identifying the role of absorptive capacity is a useful tool to explain the relationship of HEIs’ people-based activities and problem-solving activities on firm innovation performance. However, Nooteboom and colleagues (2007, pp. 1031) argue that “while there may be increasing returns in absorptive capacity, improving the general ability to understand and appreciate novelty value in collaboration, there are decreasing returns to knowledge in finding further novelty: the more one knows the further away one has to look for novelty.” This indicates that too much absorptive capacity in a firm negatively affects the impact of people-based activities on a firm’s innovation performance. While people attending conferences or lectures supported by universities may acquire novel knowledge that can influence a firm’s innovation performance, their activities may have negative impact on a firm’s innovation outcomes when a firm has greater absorptive capacity, due to diminishing impact of a firm’s absorptive capacity to create novel idea. Extant research suggests that the greater a firm’s absorptive capacity, the lesser the firm can find further novelty (Noteboom et al. 2007), which suggests that absorptive capacity makes firm innovation activities less efficient. Based on the above discussion, we hypothesize as follows:Hypothesis 3A (H3A). People-based activities with HEIs positively related to the introduction of new products and/or processes will become weaker at a higher level of absorptive capacity. Hypothesis 3B (H3B). People-based activities with HEIs positively related to new product radicalness will become weaker at a higher level of absorptive capacity. Hypothesis 4A (H4A). Problem-solving activities with HEIs positively related to the introduction of new products and/or processes will become stronger at a higher level of absorptive capacity. Hypothesis 4B (H4B). Problem-solving activities with HEIs positively related to new product radicalness will become stronger at a higher level of absorptive capacity. Methods We test the hypotheses presented across two studies. The purpose of Study 1 is to validate our prediction about how HEI activities affect firm innovation performance (H1A to H2B). Study 2 expands this initial research frame by validating the moderating effects of a firm’s absorptive capacity on firm innovation outcomes (H3A to H4B). Implications There is an argument to transfer knowledge from HEIs to firms due to the cultural differences between them (Lambert 2003). Nevertheless, universities are playing an increasingly strategic role in stimulating innovation in firms though the transfer of technology (Hughes 2011). Scholars have largely disregarded the more specific activities performed by HEIs such as people-based and problem-solving activities. Little attention has been paid to how people-based and problem-solving activities affect firm innovation performance. Further, firm innovation outcomes can be affected differently by some specific HEI activities because each activity supported by HEIs plays a different role in impacting certain types of firm innovation outcomes. Based on our results, problem-solving activities are related to new product innovation while people-based activities are related to new process innovation. Additionally, absorptive capacity had a negative moderating effect with people based activities and a positive moderating effect with problem solving activities on a firm’s innovation outcomes. This is important to theoretical and practical implications because a firm is able to know which activities are required to improve their new product or process innovation. This leads a firm to save huge costs to achieve successful innovation.