How Capability Gap and Internal Friction Affect the Selection and Effectiveness of Modes of Acquiring New Capabilities

Recent arguments in the dynamic capabilities literature suggest that firms need to use both internal development and external sourcing in order to thrive over time. We have a limited understanding of the conditions that best suit the choice of internal versus external sourcing, however, and no large-scale study has examined the extent to which firms’ ability to select appropriate sourcing modes improves their ability to renew their capabilities and survive in dynamic environments. This study examines how constraints that arise from firms’ existing stocks of capabilities and from their internal institutional contexts shape their choices of capability sourcing modes and, in turn, their ability to successfully create new capabilities and survive in their industries. Thus, the research focuses on an under-emphasized form of dynamic capability: the ability to select appropriate modes of capability sourcing. We test the arguments with a detailed survey and longitudinal study of the international telecommunications industry. We find intriguing variations in the way that heeding capability constraints and various forms of institutional constraints influences firms’ ability to change successfully.