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The dynamic capabilities literature suggests that firms need to use both internal development and external sourcing to thrive over time, but we have a limited understanding of the conditions that best suit different sourcing choices. This study examines how constraints that arise from firms' existing stocks of capabilities and from their internal social contexts shape their choices of capability-sourcing modes and, in turn, their ability to obtain new capabilities. Thus, the research focuses on an underemphasized form of dynamic capability: the ability to select appropriate modes of capability sourcing. We test the arguments with a survey and longitudinal survival study of the international telecommunications industry. We find intriguing variations in the way that firms' selection capability influences their ability to renew their capabilities and, ultimately, to survive.
Key words: modes of capability acquisition; selection capability; resource gap; institutional gap; internal development; external sourcing
History: Published online in Articles in Advance April 7, 2008.
Recent arguments in the dynamic capabilities literature suggest that firms need to develop skills in both internal development and external sourcing to be able to renew their capabilities and thrive over time (Helfat et al. 2006). As Agarwal and Helfat (2009) highlight, we are beginning to understand some of the means by which firms can undertake such strategic renewal both in implementing changes and, more fundamentally, in developing the ability to undertake both internal and external modes of change. Internal development allows a firm to exploit and protect its specific knowledge while also coordinating its development activities (Helfat 1994). In parallel, external sourcing of new capabilities through acquisitions, alliances, and purchase contracts helps a firm develop new capabilities that both guard against obsolescence and resolve organizational inertia (Rosenkopf and Nerkar 2001, Vermeulen and Barkema 2001). Firms that select appropriately between internal development and external sourcing as modes of obtaining new capabilities may renew their capabilities more effectively and gain long-term performance advantages.
Yet firms often struggle to discriminate between conditions that suit internal development and those that suit external sourcing. Although we have a growing understanding of the conditions under which internal development and external sourcing are most appropriate, questions remain concerning the nature of such contingencies (Eisenhardt and Martin 2000) and firms' ability to select modes of sourcing new capabilities...