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The animation industry, like many information-technology-enabled services sectors, has been of interest to many developing countries interested in developing services outsourcing industries. We analyze the case of the Philippines' animation industry. This paper investigates the outsourcing process in animation and the nature of capabilities within that, with the goal of contributing to a more general understanding of services outsourcing. We examine the industry's history, interview data with industry participants, and secondary data. We find that strong labor force skills have been central to capabilities rather than organizational abilities. Outsourcing of production takes place only so far as the work is codifiable, i.e., instructions and interface documents, or that tacit interactions between providers and their clients can facilitate the transfer of the work. This makes it extremely difficult for the industry to move into higher value work such as the conceptualization stage of product development. A major downturn in the past and technological automation shows that the industry has not been sustainable in the face of external influences, but stronger policies and company strategies that support investments in upgrading capabilities and workforce skills could ameliorate some of these effects. A strong foreign presence has also been found to support the development of the industry.