We integrate institutional theory and the resource-based view of capability to examine the interplay of institutional environments and firm-specific capabilities on value-creating synergy by emerging market firms (EMFs). We argue that EMFs expand into countries with better-developed institutions as a means to overcome poor institutions at home. EMFs that develop strong absorptive capacity and knowledge transfer capability are better able to benefit from a portfolio of complementary sources of knowledge across multiple markets. We analyze data on a sample of manufacturing firms’ international expansion to demonstrate that expansion into a host country with a better-developed institutional environment promotes innovation success. This effect was found to be stronger for firms with strong absorptive capacity and well-developed knowledge transfer capability.