DFT calculations are used to investigate the mechanism and regioselectivity of Rh‐catalyzed decarbonylative [5+2–1] cycloaddition reaction between isatins and alkynes. Computational calculations provide mechanistic insights into C–C and C–H bond cleavage pathways leading to the two products observed experimentally: (1) the C–C bond cleavage pathway involves four steps including decarbonylation, alkyne insertion, and reductive elimination to complete the C–C bond activation cycle. Alkyne insertion is the rate‐determining step for the favorable C–C bond‐activation pathway. (2) Three steps, namely C–H bond cleavage, alkyne insertion, and reductive elimination, are essential for the C–H bond‐cleavage pathway and the alkyne insertion process is also the rate‐determining step. The results of our calculations are consistent with the experimentally observed major product from C–C bond activation for both 3‐methyl‐2‐pyridyl and 2‐pyridyl as directing groups in the reactants, with the former directing group leading to higher product selectivity than obtained with the latter. The origin of the regioselectivity of alkyne insertion is revealed by a distortion/interaction model. The results reveal that the regioselectivity is mainly controlled by the interaction energies.