The paper expands theoretical and empirical understanding of capabilities development in the mediated offshore outsourcing model whereby a small or a medium-sized firm delivers offshore software services to a larger information technology firm that in turn contracts and interfaces with the actual end-client onshore firms. Such a mediated model has received little prior research attention, although it is common particularly among Chinese firms exporting services to Japan, the largest export

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... t for Chinese software services. We conducted case studies in four China-based software companies to understand the mechanisms used to develop their operational capabilities. We focused on client-specific, process, and human resources capabilities that have been previously associated with vendor success. We found a range of learning mechanisms to build the capabilities in offshore firms. Results show that the development of human resources capabilities was most challenging in the mediated model; yet foundational for the development of the other capabilities. This paper contributes to the information systems literature by improving our understanding of the development of operational capabilities in small-and medium-sized Chinese firms that deploy the mediated model of offshore software services.