AbstractRecent literature on international technology diffusion has demonstrated the positive effect in foreign country productivity on the domestic economy. Using a sample of Organization for Economic Co‐operation and Development (OECD) manufacturing industries we search for evidence that the effect of this foreign technology varies according to the level of absorptive capacity and physical distance. We find evidence that both help to explain differences in the level of productivity across countries, but that absorptive capacity is quantitatively more important. Physical distance had a greater effect at the start of the time period and in industries in which trade is local and technology is high‐tech.