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Abstract This paper studies firms' choices of internal vs external sources of new capabilities. We first compare transaction cost, knowledge‐based, and institutional arguments, which all emphasize the attributes of capabilities, including contractual hazards, capability gaps, and legitimacy. We next contrast these arguments with propositions that emphasize constraints on external availability as drivers of internal development. We then propose that a firm's internal reconfiguration and external reconfiguration routines affect its capability sourcing decisions as interactions with the capability attributes and external constraints. The empirical analysis draws on a survey of 162 telecommunications firms operating in Europe, North America, Latin America, or Asia.
Capron et al. (Wed,) studied this question.