Internationalizing small and medium sized enterprises (SMEs) are often struggling with limited resources. These resources might also set the limits for the opportunities to grow. Capabilities and resources have been studied within context of MNCs, but, SMEs have been left with less attention. Capability development gives a good perspective for the internationalizing SME, and it might give answer for the question of why some internationalizing SMEs perform better than others.

Capability development process starts from understanding resources and capabilities of the SME. Resource-Based View and Dynamic Capability Perspective gives a good grounding for understanding capability development. After the theoretical part, case study has been used for finding more sharpen perspective for finding answers to the research questions. Case study from Finnish firm Gravity has been included for scoping the subject through lenses of real-life SME. Questionnaire was used in a case study for collecting empirical data from the case firm.

This master thesis is aiming to find answer to research question: How an internationalizing SME have to develop their capabilities? In addition, as an additional research question, this master thesis is aiming for finding the answer the following question: How internationalizing SME have to adapt their capabilities in growing stage? In this study, the objective is focusing on the perspective scoped through a case firm. By using a case firm, it is excepted to find the concrete suggestions, the key factors of the capability development for an internationalizing SME.

The results showed that within RBV perspective, firm must know it resources including processes and products before developing capabilities. Internal factors work as a trigger for developing process. DCP emphasizes firm-specific managerial skill as critical aspect, with creating, extending and modifying the resource base for adapting changes in external environment. Both perspectives agree that capability development is much dependent on managerial skills and on perspective of how managers see those resources and capabilities. Resources might set limitations to grow, but these limitations can be stretch a little, e.g. by relationship building. The results give concrete proposition to develop capabilities for the case firm and general findings can be drawn giving answers to the research questions.

The case study strengthens and supported the findings found from the strategic management theories. The study itself offered a fresh perspective for the subject of capability development by bringing the internationalizing of the SME along. Further studies by utilizing bigger sample of internationalizing SMEs could bring more reliable results.