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Introduction Despite growing recognition of engineered wood products as a critical enabler of low-carbon and circular construction, the diffusion of cross laminated timber (CLT) remains comparatively slow relative to its technical maturity and sustainability potential. This suggests that timber adoption is shaped not only as a design challenge but also by firms’ capabilities, collaborative practices, and the broader conditions under which innovations are developed and commercialized. Such conditions include organize renewal, manage interdependencies, allocate responsibilities, and align around shared value propositions across projects. This study explores how dynamic capabilities, understood as situated practices embedded in recurring cross-project interactions, may enable co-innovation in CLT-based new-build and renovation across projects within the contextual boundary of emerging innovation ecosystems (IE). Methods Drawing on an exploratory case study of Swedish CLT-based construction, the empirical material consists of transcribed interviews, focus groups and observation notes representing and contextualizing activities indicative of dynamic capabilities among collaborating firms. Thematic analysis was applied for developing activities into capabilities. Results Activities were developed into three levels: project-specific value proposition reconfiguration and resource coordination (Level 1, operational capabilities), joint development and technology implementation (Level 2, dynamic capabilities), and knowledge exchange and actor alignment (Level 3, dynamic capabilities). Capability development occurred through iterative adaptations, informal coordination, and relational negotiations rather than fixed or rule based processes, making it emergent and context-dependent. Discussion These findings show that IE structures may create conditions that facilitate collaborative adaptation and learning, potentially supporting innovation beyond individual projects. By foregrounding co-innovation at the firm level, the study shows how these dynamic capabilities can create conditions for scaling CLT adoption beyond isolated projects, supporting broader timber uptake and sustainability ambitions.