This paper discusses the internal patterns of competence building in the multinational enterprise (MNE), with a focus on the creation of capabilities in its foreign subsidiaries. We present a new framework to synthesize 10 types of MNE–subsidiary linkages leading to capability development. We find that several of the 10 capability development processes are associated with subsidiary-specific advantages. We discuss the process of subsidiary-specific advantage development within the organizational structure of the MNE when it is a differentiated network of dispersed operations. Copyright © 2001 John Wiley & Sons, Ltd.