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Plain language summary Globalization has transformed the international business environment into an increasingly more complex, uncertain, and diverse entity. Multinational enterprises are under greater pressure to develop their dynamic capabilities to not only adapt to, but also proactively cope with, the speed and complexities of the fast‐changing environment. Some research suggests that dynamic capabilities are closely correlated with top management functions, while counterarguments stress that dynamic capabilities are embedded in organizational activities. From the perspective of organizational knowledge creation, making a distinction between the creative and adaptive aspects of dynamic capabilities, this article argues that ‘creative’ dynamic capabilities are rooted in the activities of teams in middle levels of the organization. The article also presents leadership practices that are favorable to fostering dynamic capabilities. Technical summary This article examines the theoretical foundations of an organization's dynamic capabilities—sensing, seizing, and transforming—from the perspective of organizational knowledge creation. Making a distinction between the creative and adaptive aspects of dynamic capabilities, this article argues that the foundation of creative aspect is ‘meso:’ it stems from team‐level interactions of frontline workers' capabilities facilitated by middle managers, rather than from individual‐level (or micro‐level) capabilities. In this middle‐up‐down management model, top management sets the vision of the organization, but middle managers grasp and solve the gap between the top and the frontline by facilitating team‐level dialectic interactions of employees. The leadership practices of both top and middle management that facilitate this process are illustrated with four Japanese multinational companies—Fujifilm, Eisai, Mayekawa Manufacturing, and Toyota. Copyright © 2016 Strategic Management Society.

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