1

Where Firms Change: Internal Development versus External Capability Sourcing In the

Global Telecommunications Industry

Laurence Capron

INSEAD Bd de Constance

77305 Fontainebleau Cédex, France Phone: +33 1 60 72 44 68; Fax: +33 1 60 74 55 08

Email: laurence.capron@insead.edu

Will Mitchell The Fuqua School of Business, Duke University

Durham, North Carolina, USA Phone: 919.660.7994; Fax: 919.681.6244

Email: Will.Mitchell@duke.edu

September 16, 2004

Abstract

This paper studies firms’ choices of internal versus 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.

Keywords : Change, Constraints, Internal v. external, Business dynamics

Acknowledgements: We appreciate thoughtful comments from two anonymous reviewers and

from the editor.

2

Firms regularly must chose between internal and external sources to obtain new

capabilities. Existing research suggests that three attributes of needed capabilities influence the

decisions, including the degree of transaction costs (Williamson, 1975), the extent of existing

knowledge stocks (Kogut and Zander, 1992; Ghoshal and Moran, 1996), and how needed

capabilities fit with internal institutional norms (Oliver, 1997). This research has three limits.

First, few studies examine the three types of capability attributes together, so that it is not clear

whether one set of factors dominates the others. Second, studies rarely ask whether the apparent

influence of capability attributes simply masks external constraints that force firms to choose

internal development, either because external capabilities do not exist or because firms lack the

ability to import external capabilities. Third, little research assesses firm-specific differences in

the ability to manage internal and external exchanges of seemingly similar capabilities. Thus, we

need a more general understanding of how firms obtain new capabilities.

This paper develops a framework for assessing firms’ capability sourcing choices. We

first examine the transaction cost, knowledge-based, and institutional arguments. These

arguments share an emphasis on the attributes of capabilities. We next consider an alternative

argument to the influence of capability attributes, which is that external constraints determine

firms’ choices of internal development. Finally, we develop the concept of firm-specific

reconfiguration routines, proposing that a firm’s internal and external reconfiguration routines

moderate its capability sourcing decisions as interactions with the capability attributes and

external constraints.

The empirical analysis draws on a detailed survey of 162 telecommunications firms

operating in Europe, North America, Latin America, or Asia in 2000-2001. The international

telecom industry provides rich data concerning the processes by which firms change as they seek

to acquire new capabilities in the face of rapid industry changes. The telecom industry has faced

intensive deregulation, price competition, telecom and information technology convergence, and

foreign competition in recent years. Firms in the industry have used multiple modes of capability

acquisition in the face of such pressures.

Our results suggest that internal development and external sourcing present differences in

their capacity to cope with contractual hazards, strategic gaps, and internal legitimacy

difficulties. Consistent with transaction cost arguments, we find that managers are more likely to

choose internal development over external sourcing when the targeted capabilities face

3

contractual hazards. Consistent with knowledge-based theorists, we find that firms prefer internal

development over external sourcing when the strategic gap between the targeted capabilities and

the firm’s existing capabilities is narrow. Consistent with institutional theorists, we find that

internal development is more suitable than external sourcing to develop capabilities that do not

depart significantly from the firm’s routines and social values. In turn, though, we also find that

some reconfiguration routines moderate the capability attributes. The results contribute to a more

general understanding of how firms seek new capabilities when they face environmental

pressures to change, while also identifying constraints that limit their ability to select modes of

change.

DEFINITIONS

We distinguish between internal development and external sourcing. Internal

development refers to the changes that a firm undertakes by recombining its existing resources or

developing new resources on its own. Examples of internal development include internal

training, internal product development, and building new plants. External sourcing means trading

in a strategic capability that stems from external sources. Trading in a strategic capability can

occur by one of the three means (Chi, 1994): 1) purchase of a resource or service from the firm

that possesses it, 2) collaborative ventures that transfer skills and organization routines, and 3)

acquisition of an entire firm or part of a firm in which the resource resides. Thus, we define three

modes of external sourcing: purchase contract, alliances, and outright acquisition. Purchase

contracts are cases in which firms buy distinct resources from third parties, such as purchasing

off-the-shelf technologies and services, licensing technology, hiring and employing consulting

services. Alliances are ongoing relationships with other organizations that retain strategic

autonomy but agree to work together for a period of time. Examples of alliances include equity

and non-equity joint ventures, R&D and marketing partnerships, and multi-party consortia.

Acquisitions involve obtaining majority control of another firm or entity, and encompass both

acquiring entire corporations and acquiring individual businesses from ongoing multi-business

corporations. Of course, no knowledge is entirely internally accumulated or externally acquired

(Foss and Eriksen, 1995). Nevertheless, some knowledge largely is internally produced, while

other knowledge derives strongly from external knowledge inputs.

The study groups the three external modes into a single external category, which we will

compare to internal development. We recognize that the conceptual split between internal and

4

external capability sourcing masks significant variation within the external category. The

advantages and disadvantages of the external modes (purchase contracts, alliances, acquisitions)

differ from one another, and accordingly, they might be appropriate responses to distinct

situations, such that finer conceptual distinctions arise within the external sourcing category. For

example, Cassiman & Veugelers (1999) classify the external modes of sourcing according to

their nature as embodied (acquisitions) or disembodied (licensing, R&D contracting) activities.

Leonard (1995) ranges the different modes of external sourcing along a continuum expressing

the extent of mutual commitment between the parties implied by the particular form of

agreement (from nonexclusive licensing and R&D contracts to full acquisitions). She also ranges

these modes according to their potential for acquiring an entire new capability, with acquisitions

and joint ventures being more suitable to acquire a new core capability than nonexclusive

licenses and R&D contracts.

Although differences among the different external sourcing modes will be important in

extending our understanding on how firms create new capabilities, their study is beyond the

scope of this paper. Instead, the paper focuses on the firm’s choice between internal and external

sourcing modes, so that we can understand the factors that enable and constrain the firm to

pursue internal development and the conditions that trigger an external search process. As we

investigate this research question, we bear in mind that the external modes of capability

acquisition – and the conditions that might evoke them - differ from one another. Indeed, we

view the three external sourcing modes as part of a continuum, where the motives for turning to

external sourcing get stronger as firms move from purchase contract to an outright acquisition,

with collaboration being between these two extreme external modes. In that sense, the drivers for

the external modes are similar, but may change in magnitude. Moreover, while we focus on the

choice between internal and external pursuit of new capabilities, we recognize that a firm may

chose not to pursue needed capabilities at all.

THEORY

Figure 1 depicts the model that we develop in the paper. The model combines three forms

of capability exchange attributes with alternative explanations based on external constraints. In

addition, the model considers how a firm’s internal and external reconfiguration routines will

moderate the capability attributes and external constraints.

********** Figure 1 here **********

5

Firm Boundary Choice as a Function of Capability Exchange Attributes

Transaction-based attributes. A substantial body of conceptual and empirical work

suggests that transaction costs influence governance structure choices. The central argument of

transaction cost economics is that firms prefer internal sourcing instead of trading in capabilities

when the transaction is subject to high transaction costs, whether ex ante costs of search and

negotiation or ex post costs to execute and enforce the contract, because such transactions place

firms at risk of opportunistic behavior by external agents (Williamson, 1975). The probability of

observing transaction costs depends upon the underlying properties of the transaction, such that a

higher degree of transaction-specific assets, greater uncertainty, or more frequent exchange lead

to more integrated governance.

Asset specificity has a particularly strong impact on governance choices, because it

increases the degree of market failures that external exchanges would face (Williamson, 1985).

Asset specificity increases the need for contractual safeguards because it has the effect of placing

contracting parties in a dependency relationship. As a result, this relationship can entail under-

investment by the supplier, which has little incentive to make specific investments that are of

lesser value in alternative uses and whose rents can be appropriated by the buyer. Asset-

specificity can also create ex-post bargaining problems, because partners have incentives to

appropriate the quasi rents that transaction-specific investments create (Klein et al., 1978).

These market failures decline when firms bring capability development within their

boundaries. Internal organization enjoys three kinds of advantages over market modes of

contracting when transaction-specificity is high (Williamson, 1975). First, the parties to an

internal exchange are less able to appropriate subgroup gains at the expense of the overall

organization. Second, firms often can audit internal organization more effectively. Third, the

organization realizes an advantage in dispute settling.

Internal organization not only serves to curb opportunism but also adds centralized

coordinating properties that are critical as relationship-specific investments increase (Coase,

1937). The knowledge-based perspective, which emphasizes the firm’s coordinating properties,

echoes this theme. Relative to markets, organizations provide governance and socialization

mechanisms for transferring routines across firms because they act as social communities, which

create productive and administrative routines embodied in people and procedures (Kogut and

6

Zander, 1996). The opportunism and coordination forms of market failure tend to arise jointly, as

the same factors that give rise to the need for ongoing cooperation also create opportunism risks.

TCE and knowledge-based theorists reach a common prediction concerning boundary

choice: increasing asset specificity leads to the diminishing effectiveness of market governance

and promotes the choice of internal organization. Numerous empirical studies support this

prediction (Monteverde and Teece; 1982; Anderson and Schmittlein, 1984; Joskow, 1985;

Mowery and Rosenberg, 1989; Pisano 1990). For example, Mowery and Rosenberg, (1989) find

that R&D contracting is more likely to occur for generic, non-firm specific R&D. Using data

from biotech projects from pharmaceuticals companies, Pisano (1990) finds support for the small

number hazard problem as a driver of internal sourcing.

Transaction costs also arise because of capability leakage (Teece, 1986; Gulati and Singh,

1998). Trading with a third party entails risks of uncontrolled knowledge spillovers. The third

party that obtains proprietary knowledge has incentives to expropriate that knowledge for its own

use or to leak it to competitors (Liebeskind, 1996:96). Unlike exchanges on external markets, the

particular governance capabilities of firms protect resource value from appropriation more

effectively than the market by aligning incentives among the contracting parties (Teece, 1986;

Chi, 1994). Liebeskind (1996:94) notes that “Firms, as institutions, play a critical role of

protecting valuable knowledge. Specifically, because property rights in knowledge are weak, and

are costly to write and enforce, firms are able to use an array of organizational arrangements that

are not available in markets to protect the value of knowledge”. When the targeted capability is

of high strategic value to the firm, internal development can provide stronger safeguards than

markets to protect its value and prevent leakage to third party.

In summary, sourcing new capabilities from external partners meets frictions due to the

presence of contractual hazards, including supplier underinvestment, opportunistic expropriation

in relation-specific transaction, and leakage of proprietary knowledge. This influence applies to

all three forms of external sourcing. First, contractual hazards interfere with the ability to

undertake purchase contracts. Second, contractual hazards limit a firm’s ability to negotiate and

manage alliances. Third, contractual hazards limit a firm’s ability to undertake acquisitions, by

interfering with attempts to undertake due diligence needed to determine prices and terms.

Hypothesis 1. A firm is likely to use internal development rather than external sourcing when the targeted capabilities face high contractual hazards.

7

Although there has been considerable empirical support for the TCE framework, some

scholars have questioned the approach. One question concerns whether the effects of asset

specificity on the performance of internally governed exchange differ in any way from the

effects of asset specificity on market performance. Eccles and White (1988) contend that the

same problems of bargaining and negotiation that plague market exchanges also plague

exchanges governed by hierarchy. Internal costs linked to influence activities that encourage

division or individual self-interest, such as bargaining costs in inter-divisional exchanges (Poppo,

1995), may offset the advantages of internal control. Influence activities are politically motivated

actions that further employees’ private gain and do not serve the organization’s best interest

(Milgrom and Roberts, 1990). This line of reasoning deemphasizes the relevance of asset

specificity and argues that boundary decisions turn on other factors. Other arguments hold that

transaction cost reasoning is atemporal, in the sense that it describes the optimal firm boundaries

at a given time but does not make predictions as to the original source of the internalised

capabilities. We aim to combine the core predictions of TCE with those of other theoretical

perspectives, focusing on knowledge-based and institution-based factors, which will help tease

out issues of internal failures and dynamic sourcing choices.

Knowledge-based attributes. In contrast to a perspective based on the failure to align

incentives in a market as an explanation for the choice between internal development or external

modes of acquisition, the resource-based view of strategy and knowledge-based theories begin

with the view that firms are repository of capabilities and emphasize capability gaps as primary

drivers of governance mode (Penrose, 1959; Nelson and Winter 1982).

The resource-based view posits that a firm’s specific capabilities determine the range of

strategic options that the firm can use to create new resources (Penrose, 1959). The basis on

which the firm makes this decision is its assessment of the distance between its existing

capabilities and the targeted capabilities, that is, when strategically important expertise is

unavailable or inadequate internally to support the development of this capability (Leonard,

1995). In addition, providing capabilities that require a different set of skills and knowledge can

be time-consuming for firms that lack experience in requisite activities.

When the capability gap is narrow, a firm can typically make the effort to develop the

targeted capabilities internally (Leonard, 1995), assuming that these capabilities are critical to the

strategy (otherwise, capabilities that the firm is familiar with and capable in but that are low in

8

strategic value may be outsourced to specialist firms). When the capability gap is wide, i.e.,

when the firm possesses only a limited subset of the skills required to develop the new

capabilities, firms seek to acquire them from outside the firm (Penrose, 1959).

Drawing on the resource-based view, the diversification and mode of entry literatures

examine the relationship between capability gap and mode of entry. RBV and diversification

arguments hold that the type of diversification and the mode of entry are directly related. An

entrant with a high degree of relatedness to a market favors direct entry (Yip, 1982; Chatterjee,

1990). As a rule, the probability that an entrant’s current excess physical and knowledge-based

resources can reduce operating costs in a new market is higher the more related the new market

is to the entrant’s core markets (Teece, 1982). If an entrant expects a large reduction in operating

costs from excess resources and requires few complementary resources, it is likely to prefer

direct entry. Conversely, for unrelated entrants, external development helps a firm acquire skills

needed to compete in the new industry. Unrelated entrants will gain fewer reductions in

operating costs from using excess resources and face higher requirements for complementary

resources (Chatterjee, 1990).

Empirical studies in the strategy literature have found that markets that firms are familiar

with and have resources that can be readily leverage favor de novo entry (Busija, et al., 1997;

Sharma, 1998). Empirical studies in the foreign direct entry (FDI) literature generally support

this pattern showing that as Japanese firms enter new lines of business in the U.S., they prefer

joint ventures or acquisitions to greenfield investment (Hennart and Park, 1993). Similarly,

Barkema and Vermeulen (1998) found that firms that expanded abroad into related industries

were more likely to set up new ventures than firms expanding into unrelated businesses, which

were more likely to acquire existing firms.

In parallel, the knowledge-based perspective emphasizes organizational factors that

constrain firms to develop new capabilities closely related to their existing capabilities. As a

result, the firm’s search process for new capabilities is likely to be local, in the sense that a firm

is likely to search in the neighborhood of its current technological position (Nelson and Winter,

1982; Dosi, 1982). Cohen and Levinthal (1990) argue that firms tend to undertake internal

changes that build on their existing ability to evaluate and utilize particular knowledge, which

they refer to as absorptive capacity.

9

The notion of local search suggests that the organization focuses inwardly by relying on

internally generated developments (Rosenkopf and Nerkar, 2001). As the firm moves away from

its knowledge base, its probability of success converges to that for a start-up operation (Kogut

and Zander, 1992). The firm may even consider abandoning the development of the targeted

capabilities if the knowledge gap is too wide. The alternative to abandonment can be to search

outside the firm and attempt to import external knowledge that the firm could not have created

with its existing internal routines. Kogut (1992) argues that firms develop internally projects that

build related capabilities and rely on joint ventures or acquisitions when the capabilities are

distantly related. Similarly, Cuervo-Cazurra (1999) argues that firms develop capabilities

internally once they have already achieved a competitive level close to that required for effective

competition, and will seek externally when they face a large competitive gap.

Empirical evidence suggests that firms focus their search process for new capabilities on

closely related technological domains (Helfat, 1997; Martin and Mitchell, 1998). In their study

on the development of technological variation among Japanese semiconductor companies, Stuart

and Polodny (1996) find that Matsushita, through the extensive use of alliances with other firms

that gave them access to different technologies, was able to reposition itself technologically by

moving away from local search.

In parallel, the acquisitions and alliances literatures show that managers often search for

targets or allies with strong capabilities that complement the acquiring firm’s weaknesses,

planning to redeploy the stronger capabilities from the target (Capron, 1999) or use the ally’s

strength (Inkpen and Beamish, 1997; Dussauge, Garrette, and Mitchell, 2000). Examining the

product line evolution of firms in the U.S. medical equipment sector, Karim and Mitchell (2000)

find that acquisitions provide opportunities for undertaking path-breaking changes by seeking

targets that offer resources that differ markedly from a firm’s existing skills. They also found that

acquirers were more likely than non-acquirers to possess resources that have only recently

entered the industry, suggesting that firms that use internal development are more likely to

pursuing path-dependent change than path-breaking changes. Examining the evolutionary

patterns of 25 firms over three decades, Barkema and Vermeulen (2001) find that acquisitions

can broaden a firm’s knowledge base and decrease its inertia. Through acquisitions, firms both

acquire unfamiliar new capabilities and learn how to use their existing capabilities in new

organizational settings and competitive conditions (Mitchell, 1994; Singh and Zollo, 1997). In

10

their study on the optical disk industry, Rosenkopf and Nerkar (2001) find that radical

exploration builds upon distant technology that resides outside of the firm, while local search

builds upon similar technology residing within the firm. These works suggest that spanning

interfirm boundaries leads to spanning more technological boundaries.

Studies in the foreign direct investment literature, meanwhile, show that firms with strong

technological capabilities have less need to buy or ally with existing firms and are more likely to

enter foreign markets through greenfield ventures (Hennart and Park, 1993). That is, greater

capability strength relative to local firms favors the choice of internally developed investment

rather than alliance or acquisition. In general, a firm has greater incentives to develop new

capabilities internally when the firm has a strong competitive position in the targeted area.

In summary, we expect that firms will resort to external modes when the strategic gap

between the targeted capabilities and the existing capabilities is wide, and to internal modes

when the gap is narrow.

Hypothesis 2. A firm is likely to use internal development rather than external sourcing when the strategic gap between the targeted capabilities and the firm’s existing capabilities is narrow.

Institution-based attributes. Complementing the RBV and knowledge-based

perspectives, which focus on strategic gaps as explanations for the choice between internal

development and external sourcing , evolutionary and institutional theories emphasize the role of

social stability and legitimacy as key underlying enabling factors of capability development

(Nelson and Winter 1982; Kogut and Zander, 1992; DiMaggio and Powell, 1983; Oliver, 1997).

As we noted earlier, the evolutionary view stresses that firms learn in areas closely

related to their existing capabilities. Kogut and Zander (1992) argue that individual limitations in

learning new skills are not a sufficient explanation of the localized search. What makes the

capability search localized is that proximate capabilities do not require change in an

organization’s recipes of organizing research. In other words, firm tend to develop capabilities

that do not disrupt their existing routines and processes, thereby maintaining the social fabric that

weaves together the firm’s capabilities (Cyert and March, 1963; Nelson and Winter, 1982).

Therefore, switching to new capabilities is difficult, both because the social knowledge

embedded in the current capabilities is only partially understood and it is unclear what social

fabric would be required to support the new learning (Kogut and Zander, 1992). It is the stability

of this social fabric within existing relationships that yields valuable firm specific capabilities. At

11

the same time, the fear of disrupting existing routines and social stability is a powerful force

tending to hold organizations on relatively inflexible paths.

The evolutionary argument concerning social relationships yields a boundary condition

concerning internal and external sourcing. Nelson and Winter (1982) stress that a firm's

irreversible investments and limited range of operating routines constrain its ability to develop

and use capabilities within the firm, so that firms turn to external sources when their existing

routines differ from the routines needed to create new capabilities. Internal development will be

more common for capabilities that reinforce the existing systems and build incrementally on

existing routines. Conversely, when a firm needs capabilities that conflict with its existing

routines, it will turn to external modes of change to gain access to routines that internal people

will not or can not develop within the firm. External sourcing of capabilities that disrupt the

firm’s existing routines provides a means of overcoming internal barriers to developing such

needed capabilities.

In parallel, although starting from a different research tradition, the institutional view

argues that the firm’s institutional context, and notably the social legitimacy and political

acceptance of its capabilities, is key to capability sourcing decisions. From an institutional

perspective, firms operate within a social framework of norms, values, and taken-for granted

assumptions about what constitutes appropriate or acceptable economic behavior (DiMaggio and

Powell, 1983; Scott, 1987). These institutional factors surrounding resource decisions constrain

the potential of firms to develop new capabilities (Oliver, 1997; Ginsberg, 1994). Firms are more

likely to be able to develop resources that are socially accepted. Developing capabilities that

depart from firm values and traditions entail internal resistance and social rejection. Social

rejection is even more severe when the targeted capabilities compete with or replace the firm’s

existing capabilities. Replacing the firm’s existing capabilities with new ones, even when those

changes are economically rational, is likely to entail social rejection as individuals are reluctant

to alter entrenched organizations habits and switch to less familiar practices. Individuals may

also perceive the replacement of traditional capabilities and practices with new ones as disloyal

to firm norms and values (Oliver, 1997).

The presence of cognitive sunk costs, which are the “social and psychological costs

associated with altering firm habits and routines” (Oliver, 1997: 702), leads managers to

reinforce the existing capability position and makes internal development for radically new

12

capabilities less likely. As a result, firms are more likely to turn to external sourcing for

capabilities that face social rejection, i.e., depart significantly from the firm’s traditions, culture,

and value. When capabilities require significant change, and particularly if the needed changes

conflict with the existing capabilities, firms will tend to use external sourcing modes. The core

reason is that the firm will have less need to attempt immediately to adjust existing routines in

the face of substantial resistance. Instead, the firm can attempt to obtain new capabilities from

outside the firm and only then undertake the process of adjusting existing routines. In extreme

cases of social rejection, the firm might also consider abandoning external pursuit of the needed

capabilities. We refer to the degree to which a capability fits with a firm’s existing social

institutions as internal legitimacy.

The notion of internal legitimacy complements the earlier discussion of capability gaps,

because the social conflict involves non-rational, emotional components of the firm’s capacity to

develop new capabilities internally. Internal development of capabilities that build on new

routines meets institutional barriers. The targeted capabilities might, in theory, be close to

existing skills of people but also might, in practice, violate corporate traditions, break people’s

working routines, and disrupt the organization by bringing about internal competition. Oliver

(1997: 701) notes that “Whereas knowledge-based theorists assume that managers make rational

choices bounded by uncertainty, information limitations, and heuristic bias, institutional theorists

assume that managers commonly make nonrational choices bounded by social judgment,

historical limitations, and the inertial force of habit”.

The internal legitimacy argument closely parallels Abernathy and Clark’s (1985) and

Tushman and Anderson’s (1986) notion of competence destruction, which arises when new

capabilities will reduce the value of existing capabilities. The initial argument concerning

competence destruction is that firms will tend to avoid changes that involve substantial

competence destruction. An extension of the argument, though, is that the presence of

competence destruction will influence the mode of capability sourcing of firms that attempt to

change despite the potential for competence destruction. Most often firms will search externally

in such cases, rather than undertake the immediate risk of attempting to change existing routines

and social institutions.

Empirical studies provide support for the institutional view. In several case studies,

Menon and Pfeffer (2001) find that managers tend to view external knowledge more favorably

13

than internal knowledge for reasons of internal competition and self-enhancement. They argue

that, when the targeted capabilities pose status threats for insiders, external sourcing may provide

a better solution due to the high symbolic and social costs of using internal knowledge. These

status threats are less present when acquiring knowledge from more indirect external sources.

In summary, we expect that firms will resort to external sourcing when the targeted

capabilities face social rejection and resort to internal development when the targeted capabilities

fit with the firm’s existing social institutions.

Hypothesis 3. A firm is likely to use internal development rather than external sourcing when the targeted capabilities are consistent with the firm’s existing social institutions.

Alternative Explanations: External Constraints

Rather than being an outcome of the capability exchange attributes, the choice of internal

development may reflect the firm’s inability to pursue external modes of capability acquisition.

Barriers may arise due to the lack of external availability or tradability of the targeted

capabilities. In addition, barriers might stem from a firm’s difficulties in importing targeted

capabilities from external sources into its own context.

External availability. Firms may need to turn to internal sourcing when targeted

capabilities do not exist outside the firm. This situation can arise with emerging capabilities, for

which the internal development is the only option available to the firm. Firms also may not be

able to resort to external sources when the targeted capabilities, even if they do exist externally,

can not be traded through markets or across firms. Resource-based theorists argue that imperfect

mobility is a prerequisite for a resource to sustain any competitive advantage (Peteraf, 1993).

Some theorists maintain that there exist reasonably competitive, albeit imperfect, markets for

strategic resources (Barney, 1986). By contrast, others assert that unique and valuable resources

are not tradable (Dierickx and Cool, 1989). Competitors that need a nontradable resource are

constrained to develop it internally through steady investments accumulated over time. The

dynamism and efficiency of markets also can vary across period of time and geographical areas.

For example, the market for corporate control and the enforcement of contract and property

rights vary significantly depending on the institutional regime in which the firm operates (Oxley,

1999). Thus, firms will be more reluctant to turn to external sourcing when they perceive the

markets for trading the targeted capabilities as nonexistent or highly inefficient.

14

Hypothesis 4: A firm is likely to use internal development rather than external sourcing when it perceives the market for trading targeted capabilities as nonexistent or highly inefficient.

Importation capacity. Targeted capabilities, even if they exist and reside within external

partners, may not be easily imported into the firm’s specific context. We previously argued that

firms might not be able to develop targeted capabilities internally due to the lack of absorptive

capacity. Similarly, firms may not be able to obtain external resources due to their lack of

importation capacity. Some capabilities can be difficult to trade because they require complex

organizational processes to protect, integrate, and diffuse them within the receiving firm. The

inherent nature of the targeted capabilities can force a firm to set up safeguarding devices,

sophisticated coordination mechanisms, and lengthy procedures to adapt the imported knowledge

into the firm’s context. Transferring capabilities across firms can require ongoing cooperation

between the seller and the buyer so that the purchasing firm will be capable of reproducing an

appropriate context in terms of culture, processes, and incentive systems to obtain the value from

the new capabilities. Capabilities, when transferred outside of their original setting, lose part of

their value because firms are not capable of providing a suitable home for the transferred

capability. Reproducing this context or adjusting knowledge to the buyer’s context requires a

tight coupling between the seller and the buyer, which is not easily enforceable in external

markets. As a result, a firm that faces difficulties in importing the targeted capabilities into its

own context is less likely to undertake external sourcing than internal development.

Hypothesis 5. A firm is likely to use internal development rather than external sourcing when it lacks the capacity to import targeted capabilities into its own context.

Clearly, hypotheses 4 and 5 will hold only if the firm believes it has the capability to

develop capabilities internally. Hypotheses 1 to 3 examine conditions that allow a firm to

undertake internal development. Nonetheless, the more barriers to external sourcing that the firm

perceives to exist, such as those that hypotheses 4 and 5 address, the more willing a firm will be

to attempt to overcome internal constraints to develop targeted capabilities.

Moderating Effects: The Firm’s Search Attributes

Finally, we consider the moderating influence that the firm’s search processes, i.e., its

capacity to search within and outside the firm, have on the firm’s choice to pursue internal

development or external sourcing. The firm’s ability to recombine its internal capabilities and

recombine them with acquired capabilities takes its theoretical roots in the dynamic capabilities

15

view (Henderson and Cockburn, 1994; Teece, Pisano and Shuen, 1997). Dynamic capabilities

are “the antecedent organizational and strategic routines by which managers alter their resource

base – acquire and shed resources, integrate them together, and recombine them- to generate new

value-creating strategies” (Eisenhardt and Martin, 2000:1107). Reconfiguring firm capabilities

can take place within the firm (Galunic and Eisenhardt, 1996; Szulanski, 1996; Hansen, 1999) or

by establishing linkages with external partners (Gulati, 1999; Capron, Mitchell and

Swaminathan, 2001). Rosenkopf and Nerkar (2001) distinguish between internal boundary-

spanning exploration and external boundary-spanning exploration. Similarly, Kogut and Zander

(1992) define combinative capability as the ability to synthesize and apply current and acquired

knowledge.

Internal reconfiguration routines. Firms differ in their ability to recombine internal

capabilities into new configurations of capabilities (Henderson and Clark, 1990; Galunic and

Rodan, 1998). Internal reconfiguration requires that firms develop efficient routines for

conducting internal search and processes to make internal capabilities readily available and

transferable within the firm. We previously argued that firms that wished to develop capabilities

that are close to their existing capabilities and would reinforce existing routines and social values

were more likely to pursue internal development than external development. However, what

might prevent a firm that has relevant capabilities and systems to develop such capabilities

internally? One major impediment is the lack of efficient internal processes that allow the firm

itself to tap into its internal capabilities and recombine them into new configurations, which we

refer to as internal reconfiguration routines.

We expect firms to develop their internal reconfiguration routines as they gain experience

in internal development. By experience, we mean the extent to which the firm has engaged and

invested in internal development in the past, and the success of prior experience. Firms that

frequently undertake internal development will develop and retain relevant routines to recombine

and add to existing routines in order to create new capabilities. Examples include knowledge

sharing incentives, hiring routines, and employee integration mechanisms such as active internal

labor markets, job rotation, transversal committees, and internal consulting services. These

arguments parallel the literatures on intra-firm social networks (Tsai, 2000). For instance,

Hansen (1999) shows that the existence of strong ties across business units facilitates intra-

organizational transfer of complex knowledge. By contrast, when such mechanisms are weak,

16

the firm will have greater need to turn to external sourcing modes if it wishes to develop new

capabilities.

In sum, firms that possess effective internal reconfiguration routines are able to reduce

the extent of internal stickiness that interferes with efforts to share knowledge among

organizational subunits and build on a firm’s existing capabilities (Szulanski, 1996). In contrast,

firms with weak internal reconfiguration routines tend to suffer from internal stickiness. As a

result, even if a firm possesses relevant capabilities to develop the targeted capabilities, it may

not be able to do so if its lacks the capacity to incorporate the new skills with its existing internal

knowledge. We expect internal reconfiguration routines to moderate the relationship between

the capability exchange attributes and the decision to pursue internal development.

Hypothesis 6a: The stronger a firm’s internal reconfiguration routines, the more influence that contractual hazards will have on the choice of internal development.

Hypothesis 6b: The stronger a firm’s internal reconfiguration routines, the more influence that narrow strategic gaps will have on the choice of internal development.

Hypothesis 6c: The stronger a firm’s internal reconfiguration routines, the more influence that internal legitimacy will have on the choice of internal development.

External reconfiguration routines. Firms also differ in their ability to trade in

capabilities, i.e., to scan their external environments, negotiate with and protect against undesired

leakage to external partners, and recombine imported capabilities with their existing capabilities.

External reconfiguration requires that firms develop efficient routines for conducting external

search and processes to identify, import, and leverage external capabilities. External

reconfiguration also requires firms to adjust internal routines, particularly for capabilities that are

far away from internal capabilities. We refer to these processes as external reconfiguration

routines.

We expect firms to develop their external reconfiguration routines as they gain

experience in external sourcing. Firms with many external linkages to other organizations tend to

have greater access to substantial elements of capabilities that reside outside the firm. Strong ties

with external partners facilitate identification of an appropriate seller, enforcement of contracts,

and transfer of complex knowledge. Familiarity breeds trust and tighter collaboration and

facilitate the exchanges of capabilities that are difficult to value and transfer via external ties

(Ahuja, 2000; Uzzi; 1996).

17

A firm’s ability to deal with external knowledge sources is likely to influence its

perception of the availability and tradability of targeted capabilities. First, firms that possess

effective external reconfiguration routines are able to reduce the difficulties in searching and

trading in capabilities from external sources, so that limits on external availability will create

fewer constraints.

Hypothesis 7a: The stronger a firm’s external reconfiguration routines, the less influence that limits on external capability availability will have on the choice of internal development.

Second, firms with strong external reconfiguration routines tend to suffer less from

market failures. Therefore, we expect external reconfiguration routines to moderate the

relationship between importation capacity and the decision to pursue internal development.

Hypothesis 7b: The stronger a firm’s external reconfiguration routines, the less influence that a firm’s importation capacity will have on the choice of internal development.

METHODS

Empirical Setting

We chose the international telecom sector as a fruitful arena in which to study modes of

capability sourcing. Throughout much of the world, telecom network operation and service

provision have been changing rapidly during the past two decades, owing to changes in the

regulatory, technical, competitive, and market environments (Beardsley, Raghunath, and

Wilshire, 2000). Deregulation has brought about many changes to network operation. In the U.S.

and the European Union, for instance, continental and national regulators are increasingly

forcing incumbents to unbundle services and allow competitors to use the incumbents’ local

customer-access networks to compete with the incumbents for both traditional and new

telecommunications services. Meanwhile, traditional telecom companies, spurred by innovative

competition and by attempts to capture economies of scale and scope, have invested heavily in

new technologies and introduced new infrastructure.

Competition in the network operation segment also has implications for the service

provision segment of the telecommunications industry. As the battle for access to infrastructure

heats up, pure infrastructure providers run the risk of seeing much of the value in the industry

accrue to content providers and aggregators, potentially relegating infrastructure providers to the

role of commodity sellers of bandwidth. To prosper, infrastructure providers must secure

18

customer relationships by offering distinctive value-added services. The market for most

enhanced services is highly competitive and firms with strong information technology

competencies are challenging telecom incumbents (Armstrong, 1998). Therefore, telecom firms

face strong incentives to obtain new capabilities, owing to the extensive environmental changes

that are affecting the industry.

Changes that firms in the industry seek to undertake emphasize four key aspects of

Schumpeter’s (1934) change typology: products, production processes, markets, and

organization. Most strikingly, changes in the telecom sector entail more than changing a firm’s

capability endowment; change also means transforming the firm’s organization and the processes

needed to integrate new capabilities. The telecom sector, including the information technology

area within it, suits this research because the firms have used extensive internal and external

capability acquisition to create new capabilities and change their internal organizations.

Sample and Data

Our data consist of survey responses from 162 telecommunications firms operating in

Europe, North America, South America, or Asia. During late 2000 and early 2001, following

detailed in-person pretesting, we mailed the survey to firms throughout the industry. The survey

asked senior managers to assess the incentives, prevalence, and success with the four modes of

capability acquisition, as well as answer questions concerning barriers to creating capabilities

and general firm demographics. We asked them to answer the survey from either the perspective

of their entire corporation or their business unit, depending on the scope of their responsibilities.

Owing to senior managerial level from which we needed responses and the length of the survey

instrument, which included more than 250 questions and 20 pages of text, we sampled heavily.

We were able to obtain names and addresses for about 1,500 firms and senior managers, with

about 40% based in the United States, 40% based in Europe, and the remainder distributed

throughout the world. Overall, our response rate is 11%; the extent of the information that we

were able to obtain balances the moderate response rate. In this sample, we handed the

questionnaire directly to 90 senior executives of leading telecom and IT firms with whom we

have a direct and privileged contact as they were attending Telecom Strategy Executive

Programs at our universities. We obtained a response rate of 30% for this population (27

participants). We caution that, like any survey, one must interpret the responses in the context of

the characteristics of the responding firms.

19

Table 1 reports demographic characteristics of the respondent firms. The respondents

have extensive geographic dispersion of home countries, with 20% based in the U.S., 43% in

Western Europe, 10% in Northern Europe, 8% in Southern Europe, and 5% in the Asia Pacific

region. The responses provide a reasonable size distribution, with about 33% having fewer than

500 employees, 27% having 500-5000 employees, and 39% having more than 5,000 employees.

About half have less then $500 million annual corporate sales, while the other half have up to

$60 billion corporate sales. Firm profitability also varied widely, in terms of both ROA and

ROE. Similarly, the geographic scope of the respondent’s activities varied widely. Firm age is

the main factor that clusters more strikingly, with 69% of the respondents being more than 10

years old. In addition, most respondents have a high proportion of their sales in the telecom

industry, often complemented by sales in the information technology (IT) sector (there is some

overlap of the telecom and IT sectors). Thus, the sample reflects a wide variety of established

traditional telecommunications firms.

********** Table 1 here **********

Measures

We used scale-based measures to assess the drivers of the choice between internal

development and external sourcing. The composite reliability values for the constructs range

from 0.65 to 0.95, all above the cutoff suggested by Baggozi and Yi (1988). We based the items

in the constructs on the firms’ responses to questions that asked them to assess the extent to

which the drivers we identified earlier (contractual hazards, strategic gaps, internal legitimacy,

capability external availability, and importation capacity) led them to use internal development

rather than external modes of change.

Contractual hazards. A three-item Likert scale (1 to 7, strongly disagree to strongly

agree) assessed how contractual hazards influenced the choice of internal development over

external sourcing. One item recorded the extent to which the firms wished to have full control of

the targeted capabilities. Two items assessed the extent to which the targeted capabilities would

differentiate the firm from its competitors and the extent to which the firm wished to protect its

differentiated capabilities, based on the argument that such differentiation tends to involve the

idiosyncratic assets that typically face high levels of market failure. The higher the score, the

more that the contractual hazards influence internal development. The reliability (Cronbach’s

alpha) of the scale is 0.65.

20

Strategic gap. A five-item Likert scale assessed how the gap between the targeted

capabilities and the firm’s existing capabilities influenced the choice of internal development

over external sourcing. Two items pertained to whether the firm was familiar with the targeted

market, and three items pertained to whether the firm’s existing technical, marketing or

managerial capabilities were closely related to the targeted capabilities. The higher the score, the

more that a narrow strategic gap influences internal development. The reliability of the scale is

0.77.

Internal legitimacy. A four-item Likert scale assessed how internal legitimacy influenced

the choice of internal development over external sourcing. One item assessed the extent to which

the targeted capabilities fit with the firm’s internal systems. Three items assessed the extent to

which the new capabilities would create competition, resistance, and obsolescence among the

firm’s existing capabilities. The higher the score, the more that internal legitimacy influences

internal development. The reliability of the scale is 0.73.

Capability external availability. A five-item Likert scale assessed how external

availability influenced the choice of internal development over external sourcing. Two items

addressed whether the targeted capabilities were available from external partners and if they

were of good quality. Three items assessed the extent to which the firm had access to active

external markets, alliance markets, and acquisition markets. The higher the score, the more that

limited external availability influences internal development. The reliability of the scale is 0.72.

Importation capacity. A four-item Likert scale assessed how importation capacity

influenced the choice of internal development over external sourcing used. Three items

addressed whether the firm was able to protect, learn, and diffuse within the firm the imported

capabilities. One item addressed the firm’s ability to manage external sourcing. The higher the

score, the more that limited importation capacity influences internal development. The reliability

of the scale is 0.69.

Firm internal reconfiguration routines. The indirect effect of how internal

reconfiguration routines influenced the choice of internal development over external sourcing

drew on a five-item Likert scale. Three items pertained to the firm’s experience with internal

development, measured by frequency, investment, and internal training. Two items recorded the

extent to which the firm possessed culture and incentive systems to encourage internal

21

development and sharing of capabilities within the firm. The higher the score, the stronger the

firm’s internal reconfiguration routines. The reliability of the scale is 0.77.

Firm external reconfiguration routines. The indirect effect of how external

reconfiguration routines influenced the choice of internal development over external sourcing

drew on a five-item Likert scale for each external sourcing mode (purchase contract, alliances,

acquisitions), representing 15 items in total. We took the mean value of these three modes. For

each mode, three items addressed the firm’s mode experience, and two items addressed the

firm’s culture and incentive systems to encourage that mode. The higher the score, the stronger

the firm’s external reconfiguration routines. The reliability of the scale is 0.88 for purchase

contract, 0.93 for alliance, and 0.95 for acquisitions.

Control variables. In sensitivity analysis, we examined the influence of twelve control

variables. “Firm size” denoted the number of employees of the firm at the corporate level. “Firm

profitability” accounted for the firm’s return on asset. “Firm R&D intensity” and “Firm

advertising intensity” reflected the proportion of the firm’s sales to R&D and advertising

expenses, respectively. “Firm age” accounted for the age of the firm. “Firm telecom share” and

“Firm IT share” recorded the proportion of the firm’s corporation sales in the

telecommunications and IT industry, respectively. “Firm geographic scope” referred to the

geographical spread of the firm’s operations at a corporate level. “U.S. firm” recorded whether

the company was based in the United States. “Western Europe firm” recorded whether the

company was based in Western Europe. “State-owned firm” reflected whether the firm was

owned in majority by the State. “Recently privatized firm” reflected whether the firm had been

privatized in the past five years.

Appendix 1 presents the variables and lists the final items in the scale-based measures.

Table 2 reports summary statistics for the variables that we used in the analysis.

********** Table 2 here **********

Data Reliability

Several steps assess the quality of the survey instrument and measures: 1) content validity

of our measures through an extensive pre-testing process based on expert panel assessment, cross

validation with interviews of senior executives, and a pilot test; 2) careful design of the survey

through the sequence of questions and use of multiple items; 3) analysis of reliability and

discriminant validity of the measures, and 4) analysis of respondent bias.

22

Content validity. The survey process proceeded in four phases. In the first phase, we

developed measurement scales by reviewing the relevant literature and by conducting twenty-

five on-site interviews with CEOs from large firms, academics, and consultants in the

telecommunications and IT industries. This first phase led us to generate a rich list of items

pertaining to our core theoretical constructs. In the second phase, we pre-tested the preliminary

version of the questionnaire in site interviews and with senior executives who were attending

telecommunications executive education programs at our business schools located in the United

States and in Europe. The executives had a wide range of backgrounds, including finance,

marketing, and production. The pretests aimed at ensuring that the respondents understood the

questions in the context that we intended. This second phase led us to clarify some questions and

to add items that the executives suggested. Our third stage consisted of a pilot survey using the

revised survey instrument during on-site interviews with CEOs and executives in charge of

corporate development. This resulted in the final version of the questionnaire. We base the

content validity of our measures on this careful process of developing the categories and pre-

testing the questions. In the fourth stage of the data collection process, we designed and

administered the mail survey under guidelines established in Dillman’s (1978) Total Design

Method. We addressed the surveys to the chief executives in charge of corporate development.

We also sent two follow-up letters and two replacement questionnaires within the three weeks

following the first mail. Appendix 2 lists responding firms that agreed to be cited as participants

of this survey.

Survey design. In our survey design, we separated items specific to constructs from each

other to minimize consistency bias. We also introduced control questions at different points. For

example, for the use of a specific sourcing mode, we introduced questions pertaining to the

frequency, the ranking of that mode compared to other modes, and the degree of investment in

that mode. We deleted the few cases that lacked convergence across similar questions.

The survey design addressed concerns about biases that might arise from response styles.

We worded some items in a scale positively and other items negatively, to control for stylistic

responding because a high (low) score cannot be obtained simply because of yea-saying (nay-

saying) (Baumgartner and Steenkamp, 2001). We also performed paired-samples t-test to

compare the means across pairs of drivers (e.g., market failures versus strategic gaps). This

procedure computes the differences between values of the two variables for each respondent and

23

tests whether the average differs from 0. For the nine pairs of drivers, seven exhibited significant

differences, which suggests that respondents were able to discriminate among the questions.

Finally, we asked the respondents to reflect on their practices of internal development and

external sourcing modes of the last three to five years to avoid requiring that they select a

successful transaction, which would introduce sample selection bias. Thus, we require them to

analyze their own practices and draw general rules and patterns of behavior.

Measure reliability and discriminant validity. To examine the drivers of internal

development versus external sourcing, we use multiple scale measures to enrich the reliability of

our data. Cronbach’s alpha ranged from 0.65 to 0.95. We also performed a factor analysis to

ensure that each item associated with its appropriate construct. Table 2 reflects the low

correlations across the theoretical constructs.

Respondent bias. We performed several tests to address respondent bias. We compared

the industry and geographical profile of the respondent and non-respondent samples. The data set

has a broad distribution of acquiring and target firms across all the countries in the sample,

although Western European firms and U.S. firms are somewhat over-represented in the data set

and Asian firms are somewhat under-represented. This is due to our superior access to the

European and American executives.

We undertook several respondent comparisons. We compared the financial and economic

profile of the 27 Executive Program respondents with whom we have direct access to the 63

Executive Program participants who did not respond, and did not find significant differences. We

also compared the patterns of responses of these 27 Executive Program respondents and the rest

of the respondents of our sample, and found no differences. Finally, we found no material

differences in the responses of early and late respondents, on the assumption that later

respondents will tend to share characteristics with non-respondents (Armstrong and Overton,

1977). Overall, we believe that the data reflect representative characteristics of established firms

in the telecommunications industry and, more generally, of firms that operate in rapidly changing

and technologically-intensive industries.

Statistical methods

To test the propositions concerning the drivers of the choice of internal development

versus external sourcing (Propositions 1 to 5), we used t-tests to measure whether the mean of

each variable differs from the mid-point value of the scale (4.0), which the survey stated was the

24

neutral point between fully agree and fully disagree. To explore the respective predictive power

of these five drivers, we used paired-samples t-tests to compare the mean difference for the nine

pairs of drivers we have in our model. To test the propositions concerning the moderating effects

of the firm’s internal and external reconfiguration routines on the relationship between those five

drivers and the choice of internal versus external sourcing, we used the independent-samples t-

test procedure that compares the means of each driver for two groups of firms: firms with low

versus high internal or external reconfiguration routines. We used the same procedure to test the

effect of the control variables.

RESULTS

Table 3 reports the tests of hypotheses 1 through 3. The results support the three

capability exchange attribute predictions. Internal sourcing is more likely for resources that face

contractual hazards (H1), have low gaps relative to existing resources (H2), and have high

internal legitimacy (H3). Thus, transaction cost theory, the resource and knowledge based views,

and institutional and evolutionary perspectives offer complementary explanations for firms’

choices between internal and external capability sourcing.

********** Table 3 here **********

Table 4 explores the relative predictive power of the three capability exchange attributes.

Among the three pairs, only one has a significant difference, with contractual hazards having

somewhat greater effect than internal legitimacy. The other two comparisons suggest equivalent

impact on sourcing choices: the importance of strategic gaps is similar to both contractual

hazards and internal legitimacy. Overall, then, the internal context of strategic gap and internal

legitimacy tends to be as important as transaction attributes in determining sourcing decisions.

********** Table 4 here **********

Table 3 also reports the tests of the hypotheses 4 and 5, concerning capability external

availability and a firm’s importation capacity. The tests did not support either hypothesis. That

is, problems of external constraints did not drive the firms’ sourcing decisions. Thus, internal

development is not simply a default option due to the firm’s inability to pursue external growth,

but much more a deliberate choice that firms make after assessing the characteristics of the

capabilities that they desire.

25

In Table 4, we explore the relative predictive power of each of the three capability

exchange drivers versus the external constraints. We find significant differences for the six pairs

of variables, suggesting that internal development is driven more by contractual hazard, strategic

gap, and internal legitimacy than by external availability or importation difficulties. This

reinforces the conclusion that firms base sourcing decisions on capabilities attributes, rather than

simply using default options that external constraints impose.

Table 5 reports the tests of H6, concerning the moderating effects of internal

reconfiguration routines. The results support the predictions. The stronger a firm’s internal

reconfiguration routines, the more that high contractual hazards (H6a), narrow gaps (H6b), and

high internal legitimacy (H6c) lead to internal development.

********** Table 5 here **********

Table 5 also reports the tests of H7, concerning the moderating effects of external

reconfiguration routines. The results support H7b, but do not support H7a. The stronger the

firm’s external reconfiguration routines, the less that importation difficulties influence the choice

of internal development (H7b). That is, firms with weak external reconfiguration routines

perceive the difficulties imposed by limited importation capacities as a stronger driver of the

choice of internal development than firms with strong external reconfiguration routines. By

contrast, external reconfiguration routines have no moderating influence on the effect of external

capability availability (H7a). This null result for H7a reinforces the limited influence of external

resource availability, which Table 3 showed to have no main effect on sourcing decisions.

We examined the moderating impact of the control variables in sensitivity analyses. Four

variables produced significant influences. First, firms with high R&D intensity put more

emphasis on contractual hazard threats. Second, large firms put less emphasis on internal

legitimacy. Third, large firms have weaker internal reconfiguration routines and stronger external

reconfiguration routines. Fourth, older firms have stronger external reconfiguration routines.

DISCUSSION

This research compares how three types of capability attributes and two types of external

constraints influence firms’ sourcing decisions. We show that three conceptual perspectives

concerning capability attributes – transaction cost, knowledge-based, and institutional arguments

– provide complementary influences on firms’ capability sourcing decisions. Firms tend to

develop capabilities internally when they face high contractual hazards, narrow capability gaps,

26

or high internal legitimacy. In parallel, firms seek externally when capabilities have lower

contractual risks, wide gaps, or low legitimacy. By contrast, we show that external availability

and the strength of firms’ importation capacities have much weaker influence on sourcing

decisions. The key implication of this set of results is that sourcing decisions involve choices

between options rather than default options in the face of strong external constraints.

We also investigate how internal and external reconfiguration routines influence sourcing

decisions. We show that strong internal reconfiguration routines moderate the capability

attributes: the stronger a firm’s internal reconfiguration routines, the stronger the influence of

capability attributes on sourcing decisions. External reconfiguration routines also have a

moderating influence, such that firms with weak importation capabilities and weak external

reconfiguration routines are particularly likely to use internal development as a change mode.

The key implication of this set of results is that firms differ in their abilities to combine resources

in the process of creating new capabilities and, in turn, these differences influence the modes of

change that they undertake.

The overall implication of the results is that no one existing theory dominates in

explaining how firms attempt to change themselves. Instead, we require a richer conceptual

perspective that combines issues of opportunism, knowledge, and institutional forces.

Firms face strong inertial forces that limit their abilities to change. At the same time,

though, firms face strong competitive pressures to undertake ongoing changes or risk failing.

Economists and organization theorists have developed strong theories concerning both the

inertial forces and the needs for change. Strategists now need to develop new theories concerning

the intersection between the inertial and dynamic pressures. We believe that such theories of

business dynamics can usefully explore the complementary influences of contractual risks,

knowledge bases, and institutional forces.

27

REFERENCES

Abernathy, W. J., & Clark, K.B. 1985. Innovation: Mapping the winds of creative destruction, Research Policy, 14: 3-22.

Ahuja, G. 2000. Collaboration, networks, structural holes, and innovation: A longitudinal study. Administrative Science Quarterly, 45:425-455.

Anderson, E. & Schmittlein, 1984. Vertical integration and technological innovation. Review of Economics and Statistics, 62: 470-474.

Argyres, N.S. 1996. Capabilities, technological diversification and divisionalization. Strategic Management Journal, 17: 395-410.

Armstrong, J.S., & Overton, T.S. 1977. Estimating non-response bias in mail surveys. Journal of Marketing Research, 14: 396-402.

Armstrong, M. 1998. Telecommunications. In D. Helm and T. Jenkinson (eds.), Competition in Regulated Industries, 6:132-159. Oxford: Oxford University Press.

Bagozzi, R.P., & Yi, Y. 1988. On the evaluation of structural equation models. Journal of the Academy of Marketing Sciences, 16: 74-94.

Barkema, H., & F. Vermeulen. 1998. International expansion through start-up or acquisition: A learning perspective. Academy of Management Journal, 41: 7-26.

Barkema, H., & F. Vermeulen. 2001. Learning through acquisitions, Academy of Management Journal, 44(3): 457-476.

Barney, J.B. 1986. Strategic factor markets: Expectations, luck, and business strategy. Management Science. 32:1231-1241

Baumgartner, H, & Steenkamp, J.B. 2001. Responses styles in marketing research: A cross-national investigation. Journal of Marketing Research, 38:143-156.

Beardsley, S.C., R. Raghunath, & Wilshire, M.J. 2000. The emergence of broadland in Europe. McKinsey Quarterly, Europe, 2: 39-42.

Busija, E.C., O’Neill H., & Zeithaml, C.P. Diversification strategy, entry mode, and performance: Evidence of choice and constraints. Strategic Management Journal, 18(4): 321-327.

Capron, L, Mitchell, W., & Swaminathan, A. 2001. Asset Divestiture Following Horizontal Acquisitions: A Dynamic View. Strategic Management Journal, 22 : 817-844

Capron, L. 1999. The long-term performance of horizontal acquisitions. Strategic Management Journal. 20: 987-1018

Cassiman, B., & Veugelers, R. 1999. External technology sources : Embodied or disembodied technology acquisition. Working paper, University of Pompeu Fabra, Spain and Leuven, Belgium.

Chatterjee, S. 1990. Excess resources, utilization costs, and mode of entry. Academy of Management Journal, 33(4): 780-800.

Chi, T. 1994. Trading in strategic resources: Necessary conditions, transaction cost problems,

28

and choice of exchange structure. Strategic Management Journal, 15: 271-290.

Coase, R.H. 1937. The nature of the firm. Economica, 4, 386-405.

Cohen, W. M. & Levinthal, D. 1990. Absorptive capacity: A new perspective on learning and innovation. Administrative Science Quarterly, 35: 128-152.

Cuervo-Cazurra, A. 1999. Resource development through the co-evolution of resources and scope. PhD dissertation, MIT.

Cyert, R. M., & March, J. G. 1963. A Behavioral Theory of the Firm. Englewood Cliffs, NJ: Prentice-Hall.

Dierickx, I., & Cool, K. 1989. Asset stock accumulation and sustainability of competitive advantage. Management Science, 35:1504-1513.

Dillman, D. 1978. Mail and telephone surveys: The total design method. New York: Wiley.

DiMaggio, P.J., & Powell, W.W. 1983. The iron cage revisited: Institutional isomorphism and collective rationality in organizational fields. American Sociological Review, 48:147-160.

Dosi, G. 1982. Technological paradigms and technological trajectories. Research Policy, 11: 147-162.

Dussauge, P., Garrette, B., & Mitchell, W. 2000. Learning from competing partners: Outcomes and durations of scale and link alliances in Europe, North America and Asia. Strategic Management Journal, 21(2): 99-126.

Eccles, R., & White, H. 1988. Price and authority in inter-profit center transaction. American Journal of Sociology, 94: 17-51.

Eisenhardt, K.M., & Martin, J.A. 2000. Dynamic capabilities: What are they? . Strategic Management Journal, Special issue: 21: 1105-1121.

Foss, N.J., & Eriksen, B. 1995. Industry capabilities and competitive advantage, in Montgomery C., ed 1995. Evolutionary and resource-based theories of the firm, Boston: Kluwer.

Galunic, D. C, & Rodan, S. 1998. Resource recombinations in the firm: Knowledge structures and the potential for Schumpetarian recombination. Strategic Management Journal, 19(12): 1193-1201.

Galunic, D. C., & Eisenhardt, K.M. 1996. The evolution of intracorporate domains: Divisional charter losses in high-technology multidivisional corporations. Organization Science, 7: 255-282.

Ghoshal, S., & Moran, P. 1996. Bad for practice: A critique of the transaction cost theory. Academy of Management Review, 21: 13-47.

Ginsberg, A. 1994. Minding the competition: From mapping to mastery. Strategic Management Journal, Winter Special Issue, 15: 153-174.

Gulati, R. 1999. Network location and learning: The influence of network resources and firm capabilities on alliance formation. Strategic Management Journal, 20(5): 397-420.

Gulati, R., & Singh, H. 1998. The architecture of cooperation: Managing coordination costs and appropriation concerns in strategic alliances. Administrative Science Quarterly, 43: 781-814.

29

Hansen, M. T. 1999. The search-transfer problem: The role of weak ties in sharing knowledge across organization subunits. Administrative Science Quarterly. 44(1):82-111.

Helfat, C.E. 1997. Know-how and asset complementarity and dynamic capability accumulation: The case of R&D. Strategic Management Journal, 18(5): 339-360.

Henderson, R. M., & Clark, K.M. 1990. Architectural innovation: The reconfiguration of existing product technologies and the failure of established firms, Administrative Science Quarterly, 35: 9 -30.

Henderson, R., & Cockburn I. 1994. Measuring competence? Exploring firm effects in pharmaceutical research. Strategic Management Journal, Winter Special Issue, 15: 63-84.

Hennart, J.F., & Park, R.Y. 1993. Greenfield vs. acquisitions: The strategy of Japanese investors in the United States. Management Science, 39(9): 1054-1070.

Inkpen, A. C., & Beamish, P.W. 1997. Knowledge, bargaining power, and the instability of international joint ventures. Academy of Management Review. 22: 177-202.

Joskow, P. 1985. Vertical integration and long-term contracts: The case of coal-burning electric generating plants. Journal of Law, Economics, and Organization, 1(Spring): 33-80.

Karim, S., & Mitchell, W. 2001. Reconfiguring business resources following acquisitions in the U.S. medical sector, 1978-1995. Strategic Management Journal, Special Issue, 21: 1061-1081.

Klein, B., Crawford, R.G. & Alchian, A.A. 1978. Vertical integration, appropriable rents, and the competitive contracting process. Journal of Law and Economics, 21: 297-326.

Kogut, B. & Zander, U. 1992. Knowledge of the firm, combinative capabilities, and the replication of technology. Organization Science, 3: 383-397.

Kogut, B. & Zander, U. 1996. What firms do ? Coordination, identity and learning. Organization Science, 7(5): 502-518.

Kogut, B. 1991. Joint ventures and the option to expand and acquire. Management Science, 37(1): 19-33.

Leonard, D. 1995. Wellsprings of knowledge. Boston, MA: Harvard Business School Press.

Liebeskind, J. 1996. Knowledge, strategy, and the theory of the firm. Strategic Management Journal, 17 (Winter Special Issue): 93-107.

Martin, X., & Mitchell, W. 1998. The influence of local search and performance heuristics on new design introduction in a new product market. Research Policy, 26:753-771.

Menon, T., & Pfeffer, J. 2001. Valuing internal vs. external knowledge: Explaining the outsider preference. Working paper, University of Chicago & Stanford University.

Mitchell, W. 1994. The dynamics of evolving markets: The effects of business sales and age dissolutions and divestitures. Administrative Science Quarterly, 39: 575-602.

Monteverde, K., & Teece D.J. 1982. Supplier switching costs and vertical integration in the automobile industry. Bell Journal of Economics, 13: 206-213.

Mowery, D., & Rosenberg, N. 1989. Technology and the pursuit of economic growth. Cambridge

30

University Press.

Nelson, R. R., & Winter, S. G. 1982. An evolutionary theory of economic change, Cambridge: Belknap Press.

Oliver, C. 1997. Sustainable competitive advantage: Combining institutional and resource-based views. Strategic Management Journal, 18: 697-713.

Oxley, J.E. 1999. Institutional environment and the mechanisms of governance: The impact of intellectual property protection on the structure of inter-firm alliances. Journal of Economic Behavior and Organization, 28: 283-309.

Penrose, E. 1959. The Theory of the Growth of the Firm. New York: Wiley.

Peteraf, M. 1993. The cornerstones of competitive advantage: A resource-based view. Strategic Management Journal, 14: 179-191.

Pisano, G. 1990. The R&D boundaries of the firm: An empirical analysis. Administrative Science Quarterly, 35(1): 153-176.

Poppo, L. 1995. Influence activities and strategic coordination: Two distinctions of internal and external markets. Management Science, 41(12): 1845-1859.

Poppo, L., & Zenger, T. 1998. Testing alternative theories of the firm: Transaction cost, knowledge-based, and measurement explanations for make-or-buy decisions in information services. Strategic Management Journal, 19: 853-877.

Rosenkopf, L, & Nerkar, A. 2001. Beyond local search: Boundary-spanning, exploration, and impact in the optical disc industry. Strategic Management Journal, 22(4): 287-306.

Schumpeter, Joseph A. 1934. The Theory of Economic Development. Cambridge, MA: Harvard University Press.

Scott, W.R. 1987. The adolescence of institutional theory. Administrative Science Quarterly, 32: 493-511.

Sharma, A. 1998. Mode of entry and ex-post performance. Strategic Management Journal, 19 (9):879-900.

Silverman, B. 1999. Technological resources and the direction of corporate diversification: Toward an integration of the resource-based view and transaction cost economics. Management Science, 45(8): 1109-1124.

Singh, H., & Zollo, M. 1997. Knowledge accumulation and the evolution of post-acquisition management practices. Paper presented at the Academy Management Conference, Boston, Massachusetts, August 8-13.

Steensma, H.K., & Corley, K.G. 2001. Organizational context as a moderator of theories on firm boundaries for technology sourcing. Academy of Management Journal, 44(2): 271-291.

Stuart, T.E. & Podolny, J.M. 1996. Local search and the evolution of technological capabilities. Strategic Management Journal, Summer Special Issue, 17:21-38.

Szulanski, G. 1996. Exploring Internal Stickiness: Impediments to the transfer of best practice within the firm. Strategic Management Journal, Winter Special Issue, 17: 27-43.

Teece, D. J. 1986. Profiting from technological innovation: Implications for integration,

31

collaboration, licensing, and public policy. Research Policy, 15: 285-305.

Teece, D. J., 1982. Towards an economic theory of the multiproduct firm. Journal of Economic Behavior and Organization, 3: 39-63.

Teece, D.J., Pisano, G., Shuen, A. 1997. Dynamic capabilities and strategic management. Strategic Management Journal, 18(7): 509-533.

Tsai, W. 2000. Social capital, strategic relatedness and the formation of intraorganizational linkages. Strategic Management Journal, 21(9): 925-939.

Tushman, M. L., & Anderson, P. 1986. Technological discontinuities and organizational environments. Administrative Science Quarterly, 31: 439-465.

Uzzi, B. 1996. The sources and consequences of embeddedness for economic performance of organizations: The network effect. American Sociological Review, 61: 674-698.

Williamson, O. E. 1975. Markets and Hierarchies, New York: Free Press.

Williamson, O. E. 1985. The Economic Institutions of Capitalism, New York: Free Press.

Yip, G.S. 1982. Diversification entry: Internal development versus acquisition. Strategic Management Journal, 3: 331-345.

32

FIGURE 1

Model for the Choice of Internal Development versus External Sourcing of New Capabilities

Capability exchange attributes . Contractual hazards (H1) . Strategic gap (H2) . Internal legitimacy (H3)

Boundary Choice Internal development

versus external sourcing

Alt. External constraints . Capability external availability (H4) . Importation capacity (H5)

Firm internal reconfiguration capability . Contractual hazards (H6a) . Strategic gap (H6b) . Social legitimacy (H6c)

Firm external reconfiguration capability . Capability external availability (H7a) . Importation capacity (H7b)

33

Table 1. Sample Description

A. Regional area Country # G. Sales emphasis Western Europe Belgium 9 B. Number of employees % Telecom sales

France 18 <200 21 Sales limit % Cum. Germany 9 200-500 12 10% 0.9 0.9 Ireland 2 501-1000 9 15% 0.9 1.7

Luxembourg 2 1001-5000 18 20% 1.7 3.5 Switzerland 8 5000 39 30% 1.7 5.2 The Netherlands 8 Total 100 40% 1.7 7.0

UK 13 50% 0.9 7.8 Total 69 (43%) 60% 3.5 11.3 Northern Europe Denmark 8 65% 0.9 12.2

Finland 2 C. Firm's ROA 70% 4.3 16.5 Norway 1 <5% 21 75% 2.6 19.1 Sweden 6 5-10% 24 76% 0.9 20.0

Total 17 (10%) 11-15% 20 80% 7.0 27.0 Southern Europe Greece 1 16-20% 11 85% 1.7 28.7 Italy 5 >20% 23 90% 7.0 35.7

Portugal 5 Total 100 95% 4.3 40.0 Spain 2 98% 0.9 40.9 Total 13 (8%) D. Firm's ROE % 100% 59.1 100.0

Mid East Israel 8 <5% 20 Saudi Arabia 1 5-10% 18 Total 9 (5%) 11-15% 23

North America USA 32 16-20% 14 IT sales Total 32 (20%) >20% 25 Sales limit % Cum. Latin America Argentina 2 Total 100 0% 2.3 2.3

Brazil 1 2% 2.3 4.5 Trinidad & Tobago 1 5% 20.5 25.0 Total 4 (2%) 10% 13.6 38.6

Asia Pacific Australia 2 15% 2.3 40.9 China 1 E. Firm's geographic scope % 20% 15.9 56.8 Hong Kong 1 Domestic 35 25% 4.5 61.4

Indonesia 1 International (regional focus) 23 28% 2.3 63.6 Japan 1 Global 42 30% 11.4 75.0 Singapore 1 Total 100 40% 4.5 79.5

Thailand 1 60% 2.3 81.8 Total 8 (5%) F. Firm's age % 80% 4.5 86.4 Central & Eastern Hungary 1 <2 years 2 100% 13.6 100.0

Europe Russia 1 2-5 years 16 Slovenia 1 6-10 years 12 Total 3 (2%) 11-20 years 22

Other 1 (1%) >20 years 47 Na 6 (4%) Total 100

Total 162

34

Table 2. Summary Statistics

Variable 1. 2. 3. 4. 5. 6. 7. 8. 9. 10. 11. 12. 13. 14. 15. 16. 17. 18. 19. 1. Contractual hazards 1 2. Strategic gap .23 1 3. Internal legitimacy .12 .22 1 4. Capability external availability .07 .10 -.01 1 5. Importation capacity .23 -.06 .12 .27 1 6. Firm internal reconfiguration routines .36 .27 .27 .13 .09 1 7. Firm external reconfiguration routines -.06 -.03 -.06 -.08 -.28 -.06 1 8. Firm size -.03 -.04 -.23 -.07 .08 -.18 .21 1 9. Firm profitability .14 .22 -.05 .05 .01 .16 .05 .15 1 10. Firm R&D intensity .29 .00 -.01 -.15 .07 .09 .11 .09 .10 1 11. Firm advertising intensity .09 -.06 -.12 .05 -.07 -.10 .08 .19 .04 .18 1 12. Firm age .07 .12 -.04 -.13 .11 .00 .20 .32 .18 .06 -.28 1 13. Firm telecom share -.18 -.04 .02 .04 .06 -.11 .29 .29 -.12 .04 .16 -.06 1 14. Firm IT share .17 .08 .32 -.18 -.06 .17 -.02 -.21 .38 .25 .12 -.11 -.46 1 15. Firm geographic scope .18 .02 .01 -.14 .12 -.05 .12 .49 .21 .44 -.05 .43 -.03 .16 1 16. U.S. firm -.10 .03 .08 .25 -.01 .11 .11 -.41 -.05 -.22 -.08 -.02 .05 .13 -.36 1 17. Western Europe firm .07 .04 .13 -.11 .02 -.03 -.05 .17 -.02 .14 .00 .06 .01 .07 .29 -.43 1 18. State-owned firm -.15 -.11 -.13 -.10 -.01 -.01 .11 .13 .18 -.16 .11 .12 .12 -.14 -.12 -.07 .02 1 19. Recently privatized firm -.01 -.10 .04 .05 .03 -.04 .10 -.04 .10 -.17 .18 -.03 .15 .36 -.16 .12 -.10 .36 Mean 5.07 4.91 4.77 3.67 3.75 5.22 3.87 3.41 2.93 2.68 2.14 3.96 88.05 31.60 2.07 0.20 0.43 0.10 0.12 Median 5 5 4.75 3.40 3.50 5.40 3.80 4 3 2 2 4 100 20 2 0 0 0 0 Standard deviation 1.28 0.98 1.06 1.43 1.31 0.99 1.22 1.60 1.47 1.38 1.16 1.20 20.90 32.74 0.88 0.40 0.49 0.30 0.33 n=162

35

Table 3. T-Tests of Drivers of Choice of Internal Development versus External Sourcing

Variable Mean Mean difference

(test value=4) t-value Sig. (2-tailed) Prediction Capabality exchange attributes Contractual hazards 5.07 1.08 10.55 0.00 H1 Supported Strategic gap 4.91 0.91 11.75 0.00 H2 Supported Internal legitimacy 4.77 0.77 9.13 0.00 H3 Supported Alternative explanations: External constraints Capability external availability 3.67 -0.33 -2.89 0.04 H4 Not supported Importation capacity 3.75 -0.24 -2.35 0.02 H5 Not Supported n=162

Table 4. Paired Samples Test- Respective Strength of Drivers of Choice of Internal Development vs.. External Sourcing Variable Pair Mean difference t-value Sig. (2-tailed)

Capabality exchange attributes Contractual hazards vs. Strategic gap 0.16 1.44 0.15 Contractual hazards vs. Internal legitimacy 0.29 2.35 0.02 Strategic gap vs. Internal legitimacy 0.15 1.44 0.15 Capabality exchange attributes vs. External constraints Contractual hazards vs. External capability availability 1.42 9.55 0.00 Contractual hazards vs. Importation capacity 1.31 10.12 0.00 Strategic gap vs. External capability availability 1.24 9.47 0.00 Strategic gap vs. Importation capacity 1.15 8.58 0.00 Internal legitimacy vs. External capability availability 1.11 7.81 0.00 Internal legitimacy vs. Importation capacity 1.00 7.92 0.00

N=162

36

Table 5. Independent Samples Tests Examining Moderating Effects of Boundary-Spanning Capacity on the Drivers-Choice of Internal Development versus External Sourcing Relationship

Variable Firm internal reconfiguration routines * N Mean Mean

difference t-value Sig.

(2−tailed) Prediction Contractual hazards High 82 5.46 0.79 4.04 0.00 H6a Supported

Low 76 4.67 Strategic gap High 82 5.13 0.44 2.52 0.00 H6b Supported Low 78 4.69 Internal legitimacy High 81 5.05 0.57 3.43 0.00 H6c Supported Low 76 4.48 External reconfiguration routines ** External capability availability High 78 3.54 -0.28 -1.22 0.22 H7a Not supported Low 80 3.82 Importation capacity High 77 3.51 -0.48 -2.33 0.02 H7b Supported Low 79 3.99 * We split the sample at the median value of 5.40. ** We split the sample at the median value of 3.80. n=162

37

APPENDIX 1. Constructs and Questionnaire Items Theoretical Constructs Final items: Respondents indicated extent of agreement with the statements (1=fully disagree,

4=neutral, 7=fully agree). Transaction-Based: Contractual Hazards (α = .65) Capability firm-specificity, knowledge leakage

In the past 3 to 5 years, we used internal development rather than external modes when: o We wanted to have full control/exclusive access to the needed capabilities. (item 1) o We wanted to develop different products and services than those of our competitors. (item 2) o We wanted to protect our differentiation and unique capabilities. (item 3)

Knowledge-Based: Strategic Gap (α = .77) Market familiarity, capability closeness

o We already knew the customers in the targeted capability area. (item 4) o We already had market credibility in the targeted capability area. (item 5) o Our existing technical capabilities were close to the needed technical capabilities. (item 6) o Our existing marketing capabilities were close to the needed marketing capabilities. (item 7) o Our existing managerial capabilities were close to the needed managerial capabilities. (item 8)

Institution-Based: Internal Legitimacy (α = .73) Routine fit, internal competition

o The needed capabilities fitted our system of incentives and culture. (item 9) o Developing the needed capabilities triggered little or no internal competition. (item 10) o De o veloping the needed capabilities created little or no internal resistance. (item 11) o Developing the needed capabilities did not make our existing capabilities obsolete. (item 12)

External Availability (α = .72) Existence & quality of external capabilities, external market buoyancy

o The needed capabilities were not available from external sources (markets or other firms). (item 13)

o The capabilities of potential external partners were of poor quality. (item 14) o There was no active external capability/technology/knowledge market. (item 15) o There was no active alliance market. (item 16) o There was no active M&A market. (item 17)

Importation Capacity (α = .69) Safeguarding, coordination, & importing difficulties, external sourcing skills

o We feared information leakage when negotiating with external partners. (item 18) o We lacked skills to learn and import the needed capabilities from external sources. (item 19) o We did not believe that capabilities imported from external sources could be a platform for

future developments. (item 20). o We lacked skills to manage external modes of capability acquisition. (item 21)

Internal Reconfiguration Routines (α = .77) Experience, systems & culture

In the past 3 to 5 years, if you look at the way your firm has acquired new capabilities, how often have you used and encouraged internal development?

o We have frequently used internal development. (item 22) o We have dedicated substantial investments to internal development. (item 23) o We have dedicated substantial resources to training our internal people to develop the needed

capabilities (item 24). o Our culture and system of incentives have encouraged internal development. (item 25) o We have adopted incentives to share best practices and capabilities with other units of our

firm (active internal networking). (item 26). External Reconfiguration Routines (α = .88 for purchase contract, .93 for alliance & .95 for M&A) Experience, systems & culture

In the past 3 to 5 years, if you look at the way your firm has acquired new capabilities, how often have you used and encouraged mergers & acquisitions?

o We have frequently used mergers & acquisitions. (item 27) o We have dedicated substantial investments to mergers & acquisitions. (item 28) o We have carried out an intensive acquisition program. (item 29) o We have dedicated substantial investments to assessing potential acquisition targets. (item 30) o Our culture and system of incentives have encouraged mergers & acquisitions. (item 31)

- The same items apply for alliances (items 32-36) and purchase contracts (37-41).

38

Appendix 2. Respondent firms (these firms agreed to be listed as participants)

Firm name Country Firm name Country

TELECOM ARGENTINA Argentina INFOSTRADA Italy

ASIA PASIFIC NETWORK Australia ITALTEL Italy

ALCATEL Belgium WIND TELECOMUNICAZIONI Italy

BELGACOM Belgium SOCIETE EUROPEENNE DES SATELLITES Luxembourg

MOBISTAR Belgium ENT Portugal

SAIT-STENTO Belgium TELECEL Portugal

UUNET INTERNATIONAL Belgium TV CABO PORTUGAL Portugal

NOKIA NETWORKS Brazil ISKRATEL Russia

GREAT NORTHERN TELEGRAPH COMPA NY Denmark ADVANCES ELECTRONICS COMPANY Saudi Arabia

LASAT NETWORKS Denmark ISKRATEL Slovenia

POST DENMARK Denmark JAZZTEL TELECOMMUNICACIONES Spain

RAD SCANDINAVIA Denmark RSL Com Espana Spain

SONOFON Denmark ALLGON MOBILE COMMIUNICATIONS Sweden

TELE DANMARK Denmark ERICSSON Sweden

RIIHIMAEEN Finland POST OCH TELE STYRELSEN Sweden

A NOVO France TELLA Sweden

EUTELSAT France ABB POWER AUTOMATION Switzerland

GLOBAL ONE France ORANGE COMMUNICATIONS Switzerland

GTS OMNICOM France SWISS ABS Switzerland

NATURAL MICROSYSTEMS France SWISSCOM Switzerland

PHILIPS France ERICSSON The Netherlands

SOGETREL France LUCENT TECHNOLOGIES The Netherlands

TRANSNUMERIC France NOKIA NEDERLAND The Netherlands

UUNET France ORIGIN The Netherlands

ATLANTIK ELECTRONIC Germany TELECOM SERVICES OF TRINIDAD Trinidad & Tobago

AUERSWALD Germany ATT- CONCERT COMMUNICATIONS UK

BEDEA BERKENHOFF & DREBES Germany PATHFINDER UK

DATUS Germany RACAL AVIIONICS UK

HUGHES NETWORK SYSTEMS EUROPE Germany RAM MOBILE DATA UK

MOTOROLA Germany TERTIO LIMI UK

RITTAL-WERK Germany CORNING CABLE SYSTEMS USA

PANAFON Greece ENTERWORKS USA

MATAV Hungary TELOR USA

TELKOMSEL Indonesia VIRATA USA

LAKE COMMUNICATIONS Ireland CHECK POINT Israel ECI TELECOM Israel MICROKIM (MICEL) Israel PELEPHONE COMMUNICATIONS Israel RAD DATA COMMUNICATIONS Israel VOCALTEC Israel