Dynamic Capabilities Under Constraint: Extending Teece's Framework Through Contextualized Micro Foundations and Capability Elasticity

ABSTRACT Dynamic capabilities research has made significant progress in explaining firm adaptation under environmental change, yet existing frameworks largely assume conditions of resource abundance and institutional stability. This paper develops a theory‐extending framework that explains how small and medium‐sized enterprises (SMEs) operating under resource scarcity and institutional constraint build and deploy dynamic capabilities. Drawing on a structured evidence synthesis of 52 peer‐reviewed studies published between 2000 and 2024, informed by PRISMA‐guided reporting procedures, the study identifies recurring mechanisms through which constrained firms enact sensing, seizing, and reconfiguring activities. Building on these insights, the paper introduces the concept of capability elasticity to explain how firms transform limited resource inputs into disproportionate adaptive outcomes. The resulting Dynamic Capabilities under Constraint (DCuC) framework clarifies boundary conditions of existing theory and offers a mechanism‐based explanation of innovation, performance, and resilience among SMEs. The study contributes to business research by extending dynamic capabilities theory to constrained environments and providing a foundation for future empirical research on strategic adaptation in resource‐limited contexts.