Story external is a term I first learned on Rec.alt.books.tolkien, but that can be used in many other literary criticisms.
Story external is a method of examining a text by examining the author's possible motives in writing the story, and the historical circumstances around the writing.
To give an example from Hamlet, the debate about whether or not Hamlet is truly mad can be answered by saying that Shakespeare wrote the play in a flash of inspiration, and didn't have time to sort out his character's motivations. To contrast, trying to figure out this problem in a story internal manner would involve trying to figure out Hamlet's motivations and mental state strictly from the text.
Many people consider story external to be a type of a cop out. After all, when trying to delve into literary mysteries, coming up with the answer "The author was tired and forgot the details" is seen by many as cheap.