How does open innovation contribute to the firm's dynamic capabilities?

A pressing management issue exists to understand how firms can develop dynamic capabilities (DC) through processes such as open innovation (OI). Our study aims to expand knowledge in this area by explicating the underlying mechanisms of OI that contribute to a firm's DC. Adopting a microfoundations perspective, we examined three separate new product development projects in a UK manufacturer over a period of two years. Our findings demonstrate that manufacturing firms can exploit technological and market-based knowledge resources during OI activities and we have developed a process model to reflect these findings. We were able to identify three underlying mechanisms of OI: realization, engagement, and appropriation, that contribute to the creation of firm resources and the firm's DC. Our study reveals that each mechanism links the process of OI to a firm's DC by sequentially and reciprocally altering the firm's abilities for sensing and seizing opportunities. This improved understanding of the microfoundations of OI enables us to explain how external knowledge search and the ensuing knowledge appropriation can correct misalignment between a firm's current capabilities and its future market opportunities, and, thus, enhance the firm's DC.