Indian firms in the IT sector have entered into a variety of inter-firm alliances in recent years. Many of these alliances have been with foreign firms. There is growing evidence internationally that such linkages affect the development of new technologies. However, it is not very clear how inter-firm linkages mediate the process of development of technological capabilities that in turn affect the extent of technology development. In this paper we focus on the telecom segment of the IT sector with an objective to understand the nature and extent of inter-firm linkages in the industry, the role these linkages play in developing technological capabilities in participating firms, and the extent to which firms utilize these capabilities for growth and diversification. The study is based on a survey of large and small in the telecom sector and case studies of two interesting alliances-Nortel's alliances in India and China and technology development network in Indian Institute of Technology, Chennai. The survey data as well as the case studies suggest that inter-firm linkages have helped Indian firms build technological capabilities. This paper analysed inter-firms alliances and their role in capability building at different levels. Insights from published data were combined with results of a primary survey and case studies to identify the key processes at work. The survey findings and the case studies add to the growing evidence that technology alliances of developing country firms with other entities (multinational or domestic) having excellent manufacturing and/or technology development capabilities in areas where the technology gap is relatively narrow can potentially play a crucial role in upgrading capabilities of developing country firms. While the participating Indian companies have gained a lot through the multinational arrangements, it needs to be ascertained whether such linkages can result in significant spillover benefits for the rest of the sector/economy. The key policy challenge therefore is to create conditions that facilitate the emergence of such alliances. Policies that help create pools of skilled manpower are likely to achieve both these objectives.