Before World War II, Dutch State Mines, the national, state owned coal corporation, was confronted with major challenges, specifically that foreign coal was sold at dumping prices in the home market. At the same time, coal cleaning needed to be improved in order to offer higher quality coal against lower coal processing costs. In this paper we illustrate how State Mines relied on its innovative capacity in order to overcome the economic, technological and market changes. The coal cleaning innovations at State Mines show how absorptive capacity was of prime importance for the firm's innovative capacity. External knowledge acquisition as well as internal knowledge building proved to be relevant, although the balance changed over time. While initially acquisition and assimilation of external knowledge (potential absorptive capacity) were essential to improve the existing coal cleaning processes, internal knowledge building was needed to come to real improvements in coal cleaning. The establishment of a licensing company was essential to exploit this knowledge. An important feature was that State Mines was always well aware of its lack of capabilities and knowledge and open to search for and learn from knowledge outside its firm boundaries. Moreover, expectations determined the search for external knowledge.