Rapid technological advances and pressures of globalization have necessitated not only creation of innovation but faster innovation to gain or sustain competitive advantage. Open innovation paradigm answers this need by utilizing larger resources and expertise that firms involved in the open innovation process offer. The creation of open innovation, among other factors, depends on relative capacity, a firm's ability to retain knowledge outside its boundaries in the inter-firm relations. This conceptual paper first examines relative capacity and proposes its dimensions - realized and potential capacities. Secondly, the relation between relative capacity and creation of open innovation is addressed and how this relation can be affected by different external factors like regimes of appropriability and complementary assets is also discussed. Propositions are developed, managerial implications underscored and future research directions highlighted.