External knowledge plays important roles in firms' internal innovation activities. Firms need to develop absorptive capabilities and carefully manage the knowledge absorbing processes to better benefit from external knowledge. This study adopted a qualitative approach to investigate how Chinese SMEs absorb external knowledge. We examined how external knowledge is recognized, assimilated, utilized in a sample of 16 SMEs, and what barriers they may face when absorbing external knowledge. This paper extends current literature on organizational absorptive capabilities by revealing some of the key issues or sub-activities underlying each dimension of the concept of absorptive capabilities.