The recognition of external agents as an important knowledge source to innovation processes means that the firms must face a key decision: generate in-house or acquire externally the required technological knowledge.Owing to its implications, this decision has become a very important topic between academics and practitioners of innovation, promoting the development of a body of theoretical and empirical literature about the factors and motivations which influence it.This paper provides a review of this literature via the analysis of three innovation strategies (make, buy, and cooperate) and considers the contributions coming from transaction cost theory and the firms' capabilities viewpoint.