Managing Network Resources

Alliances, Affiliations and Other Relational Assets

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Managing Network
Resources
Alliances, Affiliations and Other
Relational Assets

Ranjay Gulati

1
3
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1 3 5 7 9 10 8 6 4 2
To my parents who gave me the thirst to learn
To my teachers, colleagues, and students from whom I have
learned so much
To my family who have supported me on this journey to learn
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 PREFACE

My research over the last decade has shown that interorganizational networks
not only influence the creation of new ties between organizations but also
affect their design, evolutionary path, and success. I subsequently extended
some of these ideas to other types of interorganizational ties in contexts
ranging from large to entrepreneurial firms. This book brings together much
of this research under one fold. Most of the chapters draw heavily from my
published articles, many of which are coauthored. At the start of each chapter,
I clearly indicate the published source from which the chapter has been drawn
and also acknowledge my, coauthors, if any for that published work. While
I have adapted the front end of these chapters to draw out the common
thread of network resources that cuts across the book, the research reported is
from the original articles mentioned at the outset of the chapter. Some details
on the data and methods have been abbreviated for the book. While some of
the chapters in this book are based on solo-authored articles, in the case of
coauthored chapters it is important to note that the research reported is based
on collaborative work with the listed authors.
This book is more than simply a retrospective collection of my published
work. All the chapters have been adapted to cohere under a common unifying
theme. In doing so, I have recrafted the conceptual underpinnings of the
articles to allow them to be parts of a broader story. In some sense this was
an exercise for me to try to draw out a common thread that ran across many
of my prior works and to do some retrospective sense-making.
In drawing on the sociological paradigm of embeddedness to explain inter-
firm behavior, I develop here the concept of ‘network resources’ as an impor-
tant but overlooked factor to explain both firm behavior and outcomes in
interorganizational collaboration. Network resources are valuable resources
that accrue to a firm from its ties with key external constituents including—
but not limited to—partners, suppliers, and customers, and thus exist outside
a firm’s boundaries and within its social networks. Networks thus become
conduits that make available to firms valuable resources and information
that may reside within their partners. The ties are thus sources of valuable
resources and information that can influence strategic behavior by altering
the opportunity set of actions available to a firm and also outcomes by making
available resources. They may also be viewed by external constituents as signals
of legitimacy inasmuch as they signal the availability of key resources to those
firms. Consequently, the manner and extent to which a firm is embedded
in a prior interorganizational network enable firms to obtain resources and
viii PREFACE

information that significantly influence the behavior and also key outcomes
for the participating firms.
While several chapters in the first two parts of this book focus on demon-
strating the impact of network resources originating in a firm’s network of
prior alliances, I also reflect in several subsequent chapters on other possible
networks from which such resources may be derived and how these influ-
ence firm behavior and outcomes. Further, I consider the likely dynamic of
co-evolution of disparate networks in which the accumulation of one may
facilitate the acquisition of the other, opening up multiple conduits for firms.
This suggests a complex interplay across disparate networks that shape each
other and through this coevolutionary process impact the cumulative net-
work resources that become available for participating firms. For example,
in some chapters I examine how accumulated prior alliances of firms shape
the creation of new such ties. In others I consider the role of interpersonal
ties such as board interlocks in influencing alliance formation. Finally, I also
study the influence of prior employment and board ties of upper echelons of
entrepreneurial firms on the likelihood of landing partnerships with higher
prestige investment banks. The settings in which these ideas are explored
range from large US and global corporations to start-ups in the biotechnology
sector.
In looking back at some of my own published work that is included here, I
discovered that I had not always referred to the core construct in those articles
as network resources. The terms I used before range from ‘embeddedness’ to
‘relational capital’. In bringing these disparate works together, I have tried to
streamline the terms and bring everything under the single rubric of network
resources. I hope that by doing so, I bring greater clarity to the reader and
sharpen the message while also providing a consistent thread that runs across
this work. As these articles were not written with this unifying theme in mind,
they contain elements that were important in the original presentation of the
research but are not given center stage here. In no way do I wish to detract from
the contributions of the original research. My de-emphasizing of a particular
point is simply to maintain my focus on the single theme around which this
book is woven. Yet in bringing a range of published work under a common
umbrella, I run the risk of making that umbrella too large. I acknowledge these
concerns and in the final chapter reflect on the need for further sharpening of
the concept of network resources. The field has already taken this message to
heart, and many recent studies—my own and those of others—have sought to
further delineate the concept of network resources.
This book has not been a solitary affair. It is the product of a joint effort I
began fifteen years ago when I first embarked on a research career. Numerous
colleagues have been very generous in guiding my thinking and without them
this work would not have been possible. I would like to acknowledge the many
people to whom I owe a debt of gratitude for helping me shape this research
 PREFACE ix

program. I must first thank my doctoral dissertation committee (the late Aage
Sorensen, Nitin Nohria, and Paul Lawrence) who worked tirelessly with me
to formulate these research questions. Upon graduation, I was fortunate to
work with an excellent set of research collaborators who joined me in discov-
ering new ideas and generously allowed me to use some of those collectively
researched papers for this book. These researchers include: Martin Gargiulo,
Monica Higgins, David Kletter, Harbir Singh, Lihua Olivia Wang, and Jim
Westphal. I would also like to thank a number of friends and colleagues who
generously agreed to read earlier drafts of the entire manuscript and provide
detailed comments. These include: Bruce Carruthers, Glenn Hoetker, Dovev
Lavie, Nitin Nohria, N. Venkatraman, and Jim Westphal. I also had a number
of helpful conversations about the book with Ha Hoang, Tim Rowley, M.
B. Sarkar, and Aks Zaheer. I would also like to thank the following indi-
viduals who helped me attend to the details of pulling this book together
and carefully read the entire manuscript, made editorial suggestions, and
cleaned up all references and text. These included: Lynn Childress, Alberto
Gastelum, Kate Heinze, Linda Johanson, Lisa Khan-Kapadia, James Oldroyd,
Andy Rich, Sharmi Surianarain, Maxim Sytch, Tom Truesdell, Bart Vanneste,
Franz Wohlgezogen, and Sachin Waikar. A number of my colleagues have over
the years been catalysts for many of the ideas that have appeared in my pub-
lished works that were the basis for this book. They include: Gautam Ahuja,
Bharat Anand, Ron Burt, Jerry Davis, Yves Doz, Bob Duncan, Jeff Dyer, Paul
Hirsch, Tarun Khanna, David Krackhardt, Ravi Madhavan, Mark Mizruchi,
Jack Nickerson, Willie Ocasio, Christine Oliver, Phanish Puranam, Hayagreeva
Rao, Jitendra V. Singh, and Ed Zajac. Finally, I would like to acknowledge my
family. My parents Satya Paul and Sushma Gulati nurtured in me the desire to
learn that has sent me on this lifelong journey. My wife Anuradha has given
me the encouragement and support so very essential for such a long-term
effort, while my children Varoun and Shivani provide the joy of distraction
that allows me to step away from it periodically.
 ACKNOWLEDGMENTS

Acknowledgment is made to the following for permission to adapt the follow-

ing material:
Chapter 2 adapted with permission from ‘Network Location and Learning:
The Influence of Network Resources and Firm Capabilities on Alliance For-
mation’ by Ranjay Gulati published in Strategic Management Journal, 1999,
(20/5): 397–420, © John Wiley & Sons Limited.
Chapter 3 adapted from ‘Social Structure and Alliance Formation Patterns: A
Longitudinal Analysis’ by Ranjay Gulati published in Administrative Science
Quarterly, © 1995, (40/4): 619–52, by permission of Johnson Graduate School
of Management, Cornell University.
Chapter 4 adapted from ‘Cooperative or Controlling? The Effects of CEO–
Board Relations and the Content of Interlocks on the Formation of Joint
Ventures’ by Ranjay Gulati and James D. Westphal published in Administrative
Science Quarterly, © 1999, (44/3): 473–506, by permission of Johnson Gradu-
ate School of Management, Cornell University.
Chapter 5 adapted with permission from ‘Does Familiarity Breed Trust? The
Implications of Repeated Ties for Contractual Choice in Alliances’ by Ranjay
Gulati published in Academy of Management Journal, © 1995, (38/1): 85–112.
Chapter 6 adapted from ‘The Architecture of Cooperation: Managing Co-
ordination Costs and Appropriation Concerns in Strategic Alliances’ by
Ranjay Gulati and Harbir Singh published in Administrative Science Quarterly,
© 1998, (43/4): 781–814, by permission of Johnson Graduate School of Man-
agement, Cornell University.
Chapter 7 adapted from ‘Size of the Pie and Share of the Pie: Implications
of Network Embeddedness and Business Relatedness for Value Creation and
Value Appropriation in Joint Ventures’ by Ranjay Gulati and Lihua Wang
published in Research in the Sociology of Organizations, © 2003, (20): 209–42,
with permission from Elsevier.
Chapter 8 adapted from ‘Shrinking Core, Expanding Periphery: The Rela-
tional Architecture of High Performing Organizations’ by Ranjay Gulati and
David Kletter published in California Management Review, © 2005, (47/3):
77–104, by The Regents of the University of California. By permission of The
Regents.
 ACKNOWLEDGMENTS xi

Chapter 9 adapted with permission from ‘Getting Off to a Good Start: The

Effects of Upper Echelon Affiliations on Underwriter Prestige’ by Monica C.
Higgins and Ranjay Gulati published in Organization Science, © 2003, (14/3):
244–63, the Institute for Operations Research and the Management Sciences,
7240 Parkway Drive, Suite 310, Hanover, MD 21076 USA.
Chapter 10 adapted with permission from ‘Which Ties Matter When? The
Contingent Effects of Interorganizational Partnerships on IPO Success’ by
Ranjay Gulati and Monica C. Higgins published in Strategic Management
Journal, 2003, (24/2): 127–44, © John Wiley & Sons Limited.
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 C ON TE N TS

LIST OF FIGURES xv
LIST OF TABLES xvi

Introduction 1
1 Overview of the book 13

PART I NETWORK RESOURCES AND THE FORMATION OF NEW TIES

2 Network resources and the proclivity of firms to enter into alliances 31

3 Network resources and the choice of partners in alliances 48
4 The contingent role of network resources emanating from board
interlocks in alliance formation 73

PART II NETWORK RESOURCES AND THE GOVERNANCE STRUCTURE OF TIES

5 Network resources and the choice of governance structure in alliances 99

6 The architecture of cooperation: the role of network resources in
managing coordination costs and appropriation concerns in strategic
alliances 119

PART III NETWORK RESOURCES AND THE PERFORMANCE OF FIRMS

AND THEIR ALLIANCES

7 Network resources and the performance of firms 151

8 The multifaceted nature of network resources 178

PART IV NETWORK RESOURCES IN ENTREPRENEURIAL SETTINGS

9 The effects of network resources arising from upper echelon

affiliations on underwriter prestige and performance 211
10 The contingent effects of network resources 241

11 Conclusions and future directions 258

APPENDIX 1: DATABASES 274

APPENDIX 2: METHODS 282
BIBLIOGRAPHY 286
INDEX 311
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 LIST OF FIGURES

3.1 Strategic interdependence theory of alliance formation 54

3.2 Social structural theory of alliance formation (adapted from Burt 1982) 54
8.1 The multifaceted nature of the relationship-centered organization 181
8.2 Customer relationship ladder 184
8.3 Trends in customer relationships, all respondents 185
8.4 Survey question: To what extent do you see a shift from selling
products/services to selling value-added solutions? 186
8.5 Evolution of solution value proposition 187
8.6 Supplier relationship ladder 192
8.7 Trends in supplier relationships, all respondents 193
8.8 Alliance relationship ladder 197
8.9 Organizational subunit relationship ladder 203
9.1 A typology of upper echelon affiliations 216
9.2 Interaction plots: The moderating effects of technological uncertainty 232
10.1 A contingency perspective on the effects of interorganizational
partnerships on IPO success 249
 LIST OF TABLES

2.1 Definitions and predicted signs of variables 39

2.2 Descriptive statistics and correlation matrix 40
2.3 Panel probit estimates 41
3.1 Descriptive statistics and correlation matrix, all spells 63
3.2 Random-effects panel probit estimates 64
4.1 Descriptive statistics and Pearson correlation coefficients for analyses
of board control and CEO–board cooperation 86
4.2 Logistic regression analysis of alliance formation 88
4.3 Heckman selection models of alliance formation 89
4.4 Supplementary Heckman selection models of alliance formation 91
5.1 Definitions and predicted signs of variables 109
5.2 Descriptive statistics and correlations 111
5.3 Results of logistic regression analysis 112
5.4 Estimates of fit of logistic regression models 114
5.5 Elasticities for logistic regression analysis results 115
6.1 Definitions and predicted signs of variables 138
6.2 Descriptive statistics and correlations 139
6.3 Multinomial logistic analysis of tendency to participate in minority
equity investments and joint ventures 140
7.1 Frequency of positive and negative cumulative stock market reaction
for all partners 166
7.2 Descriptive statistics of the major variables 167
7.3 Correlation matrix of the major variables 168
7.4 Regression analysis using total value creation (%) as the dependent
variable 169
7.5 Regression analyses using relative value appropriation (%) as the
dependent variable 171
9.1 Means, standard deviations, and correlations 229
9.2 Heckman selection models of investment bank prestige at time of IPO 230
10.1 Means, standard deviations, and correlations 253
10.2 The effects of interorganizational partnerships on IPO success 254
Introduction

Interorganizational networks: from alliances to a

constellation of ties
Over the past two decades, researchers have become fascinated with the grow-
ing array of cooperative ties that firms are entering into with each other. While
much of the previous research has focused on the dynamics of competition,
scholars are increasingly redirecting their interest to aspects of cooperative
behavior. One of the fastest growing sets of interorganizational ties has been
strategic alliances that firms enter into to achieve a common goal. Stra-
tegic alliances can be defined as any voluntary and enduring arrangements
between two or more firms involving the exchange, sharing, or codevelopment
of products, technologies, or services. The rapid proliferation of alliances
between firms in the past several decades has led to a growing stream of
research by strategy and organizational scholars who have examined some
of the causes and consequences of such partnerships, mostly at the dyadic
level. Researchers in various disciplines, including economics, sociology, social
psychology, organizational behavior, and strategic management, have sought
answers to several basic questions regarding alliances: What motivates firms to
enter into alliances? With whom are they likely to ally? What types of contracts
and other governance structures do firms use to formalize their alliances? How
do alliances themselves and firm participation patterns in alliances evolve over
time? What factors influence the performance of alliances and the benefits
partners derive from alliances?
In their quest to answer these questions, many researchers have examined
alliances from economic perspectives. Within economics, there have been
several approaches to the study of alliances, including industrial economics,
game theory, and transaction cost economics (Kogut 1989). Management
researchers have also begun to look at the formation of alliances, and common
questions asked in this research have revolved around why alliances occur with
such frequency and when firms are more likely to enter them (e.g. Barley,
Freeman, and Hybels 1992; Powell and Brantley 1992; Hagedoorn 1993). The
answers have varied. Transaction cost economists have argued that alliances
are hybrid forms intermediate to the extremes of markets and hierarchy
(Williamson 1985), and that they occur when transaction costs associated
with a specific exchange are too high for an arm’s length market exchange
but not high enough to mandate vertical integration (Hennart 1988). Other
2 INTRODUCTION

scholars have suggested that many firms enter alliances to learn new skills or
acquire tacit knowledge (Kogut 1988a, 1988b; Hamel, Doz, and Prahalad 1989;
Hamel 1991; Gulati, Khanna, and Nohria 1994; Amburgey, Dacin, and Singh
1996; Powell, Koput, and Smith-Doerr 1996; Khanna, Gulati, and Nohria
1998). Institutional theorists have suggested a bandwagon effect in which
firms succumb to isomorphic pressures and mimic other firms that have
entered alliances (Venkatraman, Loh, and Koh 1994). Others have pointed out
that alliances may result from firms’ quests for legitimacy (Baum and Oliver
1991, 1992; Sharfman, Gray, and Yan 1991). Lastly, scholars of corporate
strategy have suggested that firms enter alliances to improve their strategic
positions (Porter and Fuller 1986; Contractor and Lorange 1988; Kogut 1988a,
1988b).
While these perspectives have been influential and helpful, they have failed
to recognize some of the social factors that may shape the dynamics asso-
ciated with alliance formation. Industrial economics and transaction cost
economics, in particular, have focused on the influence of firm and indus-
try structure, and the nature of goods and services being transacted, but
have neglected the possible role that history and social relations between
organizations may play in shaping the formation of new alliances. Economic
sociologists, on the other hand, have suggested that economic action and
exchange operate in the context of historical relationships constituting a net-
work that informs the choices and decisions of individual actors (Laumann,
Galaskiewicz, and Marsden 1978; Granovetter 1985; White 1992).
Economic sociologists define a network as a form of organized economic
activity that involves a set of nodes (e.g. individuals or organizations) linked
by a set of relationships (e.g. contractual obligations, trade association mem-
berships, or family ties). This approach builds on the idea that economic
actions are influenced by the context in which they occur and that one such
source of social influence is the position actors occupy within a network of
organizations. Thus, from this vantage point organizations are treated as fully
engaged and interactive with the environment rather than as isolated atomistic
entities impervious to contextual influences.
Firms can be interconnected with other firms through a wide array of social
and economic relationships, each of which can constitute a social network.
These include supplier relationships (e.g. Dyer 2000), resource flows, trade
association memberships, interlocking directorates (e.g. Davis 1991), rela-
tionships among individual employees (e.g. Burt 2004), relationships with
endorsing entities such as investment banks (e.g. Podolny 1994; Higgins and
Gulati 2003), and prior strategic alliances (e.g. Gulati 1995a, 1995b). While
firms may be connected through a multitude of connections, each of which
could be a social network, some may be more or less significant than others
and researchers have rarely focused on more than one network at a time (for
a review of research on interorganizational relationships, see Galaskiewicz
 INTRODUCTION 3

1985a). Furthermore, to recognize the true importance of a social network,

it is important to understand the nature and purpose of the network as well
as the contents of information flowing through it (Stinchcombe 1990; Gulati
1999). In recent years, researchers have increasingly begun to explore the
complex interplay that may occur among disparate networks in shaping each
other and in simultaneously shaping firm behavior and outcomes (Gulati and
Gargiulo 1999).

Toward a more socialized account of firm behavior

The purpose of this book is to provide a more socialized account of firm
behavior and outcomes by introducing a network perspective to the study of
interorganizational ties, while taking care to avoid what Granovetter (1985:
483–7) referred to as the pitfalls that arise from either an oversocialized
account or an undersocialized account of behavior. The core construct I dis-
cuss is that of ‘network resources’, resources that accrue to a firm from its
ties with key external constituents including—but not limited to—partners,
suppliers, and customers, and thus exist outside a firm’s boundaries. These
ties become conduits for valuable information and resources that a firm can
tap, and these in turn are likely to shape their behavior and outcomes. While
the bulk of my book focuses on one type of interorganizational tie—strategic
alliances—the book is not restricted only to those ties and both the empirical
base and the conceptual underpinning here are relevant to a broader class of
interorganizational ties.
An important theoretical basis of my research is that the network of interor-
ganizational relations in which organizations are embedded influences their
economic action and performance. Underlying the embeddedness perspective
is the quest for information to reduce uncertainty, which is an important
driver of organizational action and can influence outcomes as well. I first
discovered the importance of interorganizational ties in shaping firm behav-
ior and outcomes during the completion of my doctoral dissertation, which
examined alliance formation. The following examples from my dissertation
illustrate my findings:
1. Every year the Personal Computers Division at the former Digital Equip-
ment Corporation (DEC) (since acquired by Compaq in 1998 and HP
in 2002) invited all its alliance partners to a four-day conference. DEC’s
primary goal in organizing this event was to share information with their
partners on their own strategic direction in the year ahead and to elabo-
rate on the broad role of alliances within this strategy. The partners were
encouraged to make similar presentations. Many DEC managers present
at this event took this opportunity to initiate new partnerships with
4 INTRODUCTION

other firms present. Perhaps of more interest, many of DEC’s partner

firms initiated new alliances among themselves at these conferences as
well. The event thus provided a forum much like a ‘bazaar’, where many
new deals took place.
2. Cadence Technologies, a leader in electronic design automation, has
entered into a number of ‘technology partnerships’ over time with their
leading customers such as Harris, Toshiba, National Semiconductor,
Ericsson, Intel, Phillips, IBM, Mitsubishi, Kawasaki Steel, and SGS-
Thompson. Within such partnerships, the customers share Cadence’s
development costs for new products that are especially useful for their
own purposes. Customers provide Cadence with financial resources and
maintain their own engineering staff on-site at Cadence to assist in the
ongoing development efforts. These technology partnerships, many of
which were initiated in the mid-1980s, have led to a number of sub-
sequent alliances by Cadence with the same set of firms. Many of these
relationships have been initiated and championed within Cadence by the
partner’s on-site engineering staff at Cadence.
3. Cadence Technologies had decided to incorporate some database fea-
tures within their software products in the early 1990s. Rather than
develop a database on their own, they sought an alliance with an exist-
ing database company. They were looking not only for quick access to
leading-edge technology but also for ongoing support and development
as the technology evolved. A number of promising companies were
short-listed. The final choice was ODI technologies, a company based in
Burlington, Massachusetts. The primary reason for this choice was that
two Cadence partners—IBM and Harris—had ongoing relationships
with ODI. A senior manager at Cadence Technologies commented:
We had included ODI in our final list based on its technological competence.
But then we were interested in knowing more about their business integrity and
support structure. Once we realized that they had prior relationships with IBM
and Harris, we called managers within those two and had extensive conversa-
tions about ODI. . . . These factors were very important in our decision to pick
ODI.

4. Oracle, a leading database company, was seeking access to some software

(an Ada compiler) for its customers in the early 1990s and sought an
alliance with a software company that had expertise in this technology.
Technological considerations enabled them to narrow their choice down
to five companies. Ultimately they chose Alsis software because both
Oracle and Alsis shared a common partner—Hewlett-Packard (HP).
Oracle and HP have had a close working relationship that encompassed
a number of alliances—HP had two full-time Oracle account managers
while Oracle had an entire HP accounts division. When the HP account
 INTRODUCTION 5

managers for Oracle heard about Oracle’s search for a partner, they
provided a strong recommendation of Alsis.

As these examples suggest, many contemporary ties are initiated in the con-
texts of existing sets of relationships that are conduits for valuable information
that in turn shape the behavior of firms. In some instances, these ties provide
a direct impetus for new ties; in other instances, they guide the choice of new
partners. In some of my subsequent research I found that in many instances
a prior context of ties also has beneficial consequences for the performance of
those ties as well which may come from the networks channeling information
and/or other resources from a firm’s partners. While some researchers have
highlighted the constraints that networks create for actors, I have focused
more on the opportunities networks offer. In this context, networks of con-
tacts among organizations can serve as important sources of information and
resources, and the pattern of ties among them may be as significant as the
number of ties.
While social network research originally focused on how the embedded-
ness of individuals influences their behavior, I have adapted and extended
this argument in new ways to interorganizational networks. My dissertation
research focused on two distinct components of a firm’s social network and
their impact in shaping firm behavior by serving as conduits of valuable
information. The first is the firm’s comprehensive experience with interorgan-
izational ties. The second derives from the overall structure of relationships
in which a firm is embedded and encompasses both its direct and indirect
relationships with other firms. DEC’s partners’ seeking out alliances with each
other because of their ties with DEC illustrates the latter component. Not only
does their shared tie create an opportunity for them to learn about each other
but also it predisposes them to enter an alliance with each other. Thus, both
the extent to which a firm is embedded in the social network and the specific
manner in which it is embedded are influential.
My dissertation developed the ideas of economic sociologists of the impor-
tance of social networks in shaping the flow of information and opportunities
(e.g. Granovetter 1985; Baker 1990; Mizruchi 1992), and provided evidence
suggesting that firms, as well as individuals, develop embedded ties charac-
terized by trust and rich information exchange across organizational bound-
aries (Eccles 1981; Useem 1982; Dore 1983; Powell 1990; Uzzi 1997; Zaheer,
McEvily, and Perrone 1998; Dyer and Chu 2000). The notion that a firm’s
social connections channel information and in turn guide its interest in new
ties and also provide it with opportunities to realize that interest is closely
rooted in the processes that underlie a firm’s entry into new ties. As some of
the examples discussed above suggest, in instances where firms independently
seek to initiate new ties, they often turn first to existing relationships for
potential partners or seek referrals from current allies to potential partners.
6 INTRODUCTION

Quotes from managers I interviewed at two organizations about their entry

into one specific type of organizational tie—strategic alliances—illustrate
these points:
On many occasions we are approached with new alliance opportunities by our prior
partners. Sometimes it’s about a project with them, and in other cases they refer
other firms with whom they are acquainted. As a result, in recent years it has become
increasingly rare for us to partner with somebody with whom we were not previously
acquainted directly or indirectly.
Many of our new alliance opportunities are not discovered by us in vacuum. Rather,
they emerge through our interactions with other firms and we collectively agree on
new projects. I believe an important part of this process is timing. For a new project
to be right for you and your partner, it is not only a question of content but also of
timing.

In aiming this theoretical lens at this phenomenon, in this book I expect to

both expand our understanding of the effects of interorganizational networks
and extend and enrich the theoretical underpinnings of network resources. I
examine the factors that influence the critical decisions firms face regarding
interorganizational ties (e.g. the number of alliances they enter, their choice
of partners, the governance structure they use to formalize alliances, and so
on) and consider social and behavioral influences on the performance of
such interorganizational ties. In short, I apply and extend a social network
perspective to some of the key questions associated with the formation of new
ties and discuss how this perspective provides new insights on important social
and behavioral factors that may influence both interorganizational ties and
firm performance. Introducing networks into the calculus of the interorgan-
izational ties of firms allows an examination of both the innate propensities
or inducements that lead firms into ties and also the opportunities and con-
straints that can influence their behavior. The network perspective also pro-
vides a unique context in which to observe the dynamics of network formation
and development over time, allowing development of a richer theory that
accounts for such dynamics (Gulati and Gargiulo 1999). By considering the
interplay across different kinds of networks such as strategic alliances, board
interlocks, investment bank ties, venture capital ties, and alliances, I can also
consider the multilevel nature of interorganizational networks that can arise
from the combination of different kinds of networks likely to reinforce or
impede one another.
Some of the key facets of interorganizational behavior can be understood
by looking at the sequence of tie-related events. These include the decision to
enter a tie, the choice of an appropriate partner, the choice of structure for the
tie, and the dynamic evolution of the tie over time. While all interorganiza-
tional ties may not necessarily progress through the same sequence of events,
the decisions these events entail constitute some of the key behavioral issues
 INTRODUCTION 7

that arise in ties. Mirroring this sequence are the following research questions
examined here: (a) Which firms enter interorganizational ties and whom do
they choose as partners? (b) What types of contracts do firms use to formalize
the ties? (c) How do the ties and the partners’ participation evolve over time?
A second important issue for interorganizational ties is their consequences
for performance, both in terms of the relationship itself and of the firms
entering the tie, leading to these two research questions: (a) What factors
influence the success of interorganizational ties? and (b) What is the effect
of interorganizational ties on the performance of firms entering them?
While several chapters of this book focus on the antecedents and conse-
quences of interorganizational alliances for firm behavior and outcomes, in
select chapters I take a broader look at the role of other types of interorgan-
izational connections. These include board interlocks, investment bank ties,
venture capital ties, supplier partnerships, customer partnerships, and intra-
organizational linkages. Furthermore, while the focus of the book is primarily
on the role of this multiplicity of networks in channeling information, I
acknowledge and discuss how network resources originate also from a firm’s
networks serving as conduits of material resources. I look at the effects of
network resources for both the behavior and outcomes for firms.
While the socialized account provided here focuses primarily on a social
network-based perspective, some chapters depart from this focus to consider
other social factors that may also shape important behaviors and outcomes
associated with the entry of firms into alliances. The accounts I provide also
do not preclude economic theories that may be important in explaining the
outcomes of alliances. A unifying theme, however, is the provision of a socially
grounded account that highlights the importance of network resources in
explaining firm behavior and outcomes associated with their interorganiza-
tional partnering activities.

Bringing in network resources

As highlighted above, an important focal point for prior research on interor-
ganizational ties such as strategic alliances has been to understand the material
imperatives that drive firms to enter into such partnerships. The emphasis
on material resources and capabilities as catalysts for interorganizational ties
resonates closely with the resource-based view of the firm, which highlights
the importance of material resource endowments (Wernerfelt 1984; Dierickx
and Cool 1989; Barney 1991; Mahoney and Pandian 1992; Peteraf 1993).
While resource-based strategy research has typically focused on explaining
sustained performance differences across firms, the role of resource hetero-
geneity in explaining strategic change and strategic actions is becoming more
8 INTRODUCTION

salient. Scholars developing the resource-based perspective have highlighted

the importance of social factors and the role of unique firm history, but no
attention has been given to the networks in which firms are situated (Barney
1991). Rather, the focus has remained on material resources that reside within
a firm’s boundaries. Only recently have researchers begun to probe the pos-
sibility that a firm’s network resources may be instrumental in channeling
information and resources to firms and in turn shaping their behavior and
outcomes (e.g. Gulati 1999; Jensen 2003; Zaheer and Bell 2005; Lavie 2006).
In this book, I draw on the sociological paradigm of social embeddedness
to explain interorganizational behavior. To do this I introduce the concept
of ‘network resources’ as an important but overlooked factor in both firm
behavior and outcomes. The networks in which firms are placed are conduits
that allow firms to leverage valuable information and/or resources possessed
by their partners. Such advantages bestowed by interorganizational networks
may be conceptualized as a network resource that may both restrict and
enlarge the opportunity set of actions available to firms by channeling valuable
information but can also shape actions and outcomes by providing resources
that their partners are willing to share with them. Distinct from the resources
that reside within a firm’s boundaries, network resources arise outside a firm’s
boundaries and within its social networks. Most broadly, such resources encom-
pass resources that a firm’s partners may possess and are available to a focal
firm through its connections with those firms.
The focus of this book is admittedly narrow and focuses primarily on
the informational advantages these same ties bestow on participating firms
and less on the flow of material resources that may flow through these very
same ties. I detail and discuss some of my research (solo-authored and in
collaboration with others) over the last decade that has shown that preexisting
interorganizational networks can cumulate into a valuable source of resources
that are resident not within a firm’s boundaries but accrue to it from its
networks that are valuable conduits for information and resources. In the
conclusion of this book I take a more forward-looking stance and detail how
network resources result not only from networks serving as conduits of valu-
able information but also serving as conduits for valuable material resources
that may be resident in the partners of a focal firm (see also Gulati, Lavie, and
Madhavan 2006).
The notion that a firm’s social connections and accompanying network
resources guide its interest in new ties—and provide it with opportunities
to realize that interest by providing valuable information—is closely rooted
in the processes that underlie a firm’s entry into new ties. I first observed
this when I was conducting field interviews at a number of firms: I found
that many new opportunities for alliances were presented to firms through
their board members and existing sets of alliance partners. In the instances in
which firms independently initiated new alliances, they turned first to their
 INTRODUCTION 9

existing relationships for potential partners or sought referrals from them

to potential partners. By making available more information about potential
partners, interorganizational networks could help a firm move toward viable
partnerships. Similarly, networks channel information to potential partners
and thus alter the extent to which partners consider a focal firm to be viable. I
concluded that these firms behaved this way because social networks are valu-
able conduits of information that have important implications for alliances.
Consequently, the manner in and extent to which firms are embedded is likely
to influence several key decisions, including the frequency with which they
enter alliances, choice of partner, type of contracts used, and the alliances’
development over time.
In my study of interorganizational alliances that I began with my disser-
tation and used as the basis of a number of the early chapters in this book,
the benefits of network resources accrue in two distinct forms. First, social
relationships are indicative of the extent of a firm’s access to network resources.
In the context of alliances, I argue that a firm’s cumulative prior alliances serve
as network resources in that they reflect the firm’s experience with alliances.
This experience in turn translates into specific skills related to the formation
and management of alliances (Lyles 1988). In addition, experience gives firms
visibility and external recognition, making them attractive partners to other
firms. These factors in turn increase the likelihood that the firm will engage in
additional future alliances. Take for instance the comments of a vice president
at Cadence:
Through our vastly successful technology partnerships program we have built our-
selves a reputation in the industry for being an effective and reliable alliance partner.
Today, we are pursued by other firms to enter alliances much more frequently than we
pursue potential partners.
A second benefit of network resources is the access to information they pro-
vide. A firm’s experience with alliances allows it access to information on its
prior partners—about both their specific capabilities and reliability. The role
of accumulated network resources in the formation of new alliances becomes
particularly relevant in the context of evidence that, despite their popularity
and presumed strategic importance, alliances often fail. Indeed, some skeptics
argue that interorganizational alliances are nothing more than a fad, or at
best, a transitory stage toward other more permanent organizational forms
(e.g. Porter 1990). In this context, network resources provide partners with
information that mitigates some of the risks associated with such alliances. As
the typical comments below indicate, firm managers rely extensively on their
partners from past alliances for information:
We have . . . close working relationships with most of our alliance partners. As a result,
we are familiar with many of their own goals and capabilities. Since they also know
about our specific skills and needs, many new deals are created interactively with them.
10 INTRODUCTION

In some cases we realize that perhaps our skills don’t really match for a project, and our
partner may refer us to another firm about whom we were unaware. . . . An important
aspect of this referral business is of course about vouching for the reliability of that
firm. Thus, if one of our longstanding partners suggests one of their own partners as a
good fit for our needs, we usually consider it very seriously.
We originally initiated technology partnerships with a number of key industry players
in the mid-1980s. These in turn have led to numerous repeated alliances with the same
set of firms. With each partner maintaining on-site staff at our facilities that was only
to be expected. They are familiar with many of our projects from their very inception
and if there is potential for an alliance we discuss it. Likewise, we learn about many
of their product goals very early on and we actively explore alliance opportunities
with them. . . . One thing that also makes it easier for us to enter new alliances is our
extensive experience with doing alliances. Forming a new partnership is not a big deal
any more—we have our own formula and we know it works!
These comments suggest that firms do indeed benefit from their past ties,
especially as related to their ability to enter new partnerships. An experience
with interorganizational ties provides firms the requisite skills to enter new
ties, the visibility to attract new partners, and access to crucial information
about new opportunities.
It is not only the magnitude of a firm’s prior ties that matters but also (a) the
distribution of those ties across partner firms and (b) the ties of past allies. A
firm may thus have numerous ties but they may all be with a limited number of
firms, or it may have widely dispersed ties but with isolated partners who have
no other alliances. In yet a third scenario, a firm may have numerous partners
who are well connected to other firms (Kogut, Shan, and Walker 1992). As
highlighted above, an important component of network resources is the access
to information a firm’s networks provide. If information is exchanged across
direct and indirect referrals, then the specific pattern of a firm’s ties allows it
access to different degrees of information. One manager at a larger computer
software firm put it this way:
No matter how much effort you expend in market intelligence efforts, you can never
know about all the firms there are out there. Furthermore, in many cases you don’t
know what you want until you see a particular product of a firm with certain skills
that triggers a new idea. In many such cases we rely upon our existing alliance partners
as well to point out new possibilities with other firms. Sometimes these firms have
alliances of their own with our partners, in other cases, they may have in turn been
referred to our partners, in other cases, they may have in turn been referred to our
partner by someone else. . . . If you step back and look at the entire industry, it’s
becoming like a spider’s web where we all learn something about each other through
the network.

Clearly, the network of prior ties is a rich source of information for firms.
Through their networks, firms may learn not only about new opportunities
with existing partners but also about firms of which they were unaware. Firms
 INTRODUCTION 11

regularly exchange information with their partners about themselves, as well

as about other firms. Thus, a firm’s specific location in the network can have
important ramifications for its future alliance behavior.
In the context of strategic alliances, I also discuss the accumulation of a
firm’s network resources and how these influence some of the fundamental
dynamics of subsequent alliances. That is, networks of prior ties and the
resources resulting from them influence not only the creation of new ties
but also their design, evolutionary path, and ultimate success. The concept
of network resources provides valuable insights into strategic alliances and is
an important contribution to the study of social networks. The creation of an
alliance is in itself an important strategic action, but the cumulation of such
alliances into a social network has major implications for future strategies.
Given the limited understanding of the dynamics of networks, alliances pro-
vide a unique arena in which action and structure are closely interconnected
and the dynamic coevolution of networks can be examined (e.g. Gulati and
Gargiulo 1999). Furthermore, the study of interorganizational networks is
now a burgeoning field of inquiry, and strategic alliances have proliferated,
meriting further examination (for a collection of articles on interorganiza-
tional networks, see Mizruchi and Schwartz 1987). Synthesizing insights on
alliance networks with those on interpersonal networks can provide an impor-
tant cross-level perspective of interorganizational relationships (Galaskiewicz
1985b; Zaheer, McEvily, and Perrone 1998; Rosenkopf, Metiu, and George
2001; Gulati and Sytch 2006a).
In some of the later chapters I broaden my horizons beyond only looking at
interorganizational alliances as the set of ties that enable a firm to accumulate
network resources. Further, I discuss how networks and the resultant network
resources can not only channel information and resources but also serve a
symbolic purpose by signaling the quality of the firm to key endorsers of
those firms. In some of the later chapters in this book, I discuss how network
resources signal valuable information about the firms holding them to other
key stakeholders. For example, the ties of entrepreneurial firms to venture
capitalists, investment banks, and alliance partners serve as powerful signals
to the investor community and thus may facilitate the success of their initial
public offerings (IPOs) (Gulati and Higgins 2003). Similarly, I discuss how
network resources based in the affiliations of the upper echelons of entrepre-
neurial firms are influential indicators of firm quality that enable these young
companies to attract prestigious investment banks (Higgins and Gulati 2003,
2006).
My definition of interorganizational ties that may constitute the basis for
the network resources a firm comes to possess is admittedly broad. While
the bulk of the book focuses on one set of interorganizational ties—strategic
alliances—several chapters look at additional ties that may also be crucial in
shaping firm behavior and outcomes. Such connections range from ties with
12 INTRODUCTION

investment banks at the time a firm goes public to the connections forged
through board interlocks. I further explore the interplay of these disparate
connection types by assessing how the accumulation of one type may facilitate
the creation of others.
An important goal of this book is to not only bring conceptual clarity to the
study of interorganizational networks by introducing the concept of network
resources but also to outline some important directions for further research in
this important and fruitful arena of research. The empirical research reported
here is intended to illustrate more the beginning than the end for research
in this burgeoning arena of inquiry. It is my hope that by bringing some
conceptual coherence that is grounded in empirical research, this book will
provide directions for promising future research.
1 Overview of the book
In the Introduction, I stated that the purpose of this book is to provide a more
socialized account of firm behavior. By applying a social network perspective
to some of the key questions associated with interorganizational ties, I hope
to provide new insights on important social factors that may influence both
firm behavior and performance. An important goal of this book is to make
salient the concept of network resources, which refers to valuable resources
based in the multitude of ties a firm may have with key constituents outside
its formal boundaries, including partners, suppliers, and customers. As I have
suggested in the Introduction, network resources can benefit participating
firms by serving as conduits of not only valuable material resources but also
information. Such resources can benefit firms by reducing their search costs
for new ties. They can also mitigate uncertainty by providing access to timely
information and creating reputational circuits that limit moral hazards. In
some instances, a firm’s network resources also provide signals to critical third
parties that offer potential benefits to those firms.
Introducing the concept of network resources expands the realm of the
resource-based perspective from resources within a firm’s boundaries to exter-
nal resources based on network membership and location. Furthermore, the
concept of network resources highlights the importance of unique historical
conditions and suggests a path-dependent process by which firms accumulate
network resources that are sticky and can become the basis of sustainable com-
petitive advantage. The concept of network resources adds specificity to this
understanding and suggests an important means by which history matters.
This book is organized into several sections, each with multiple chapters. I
also provide details of some of the data-sets used across some of the chapters
and the methods used in two appendices at the end of the book. A short
description of each chapter follows.

Part I: Network resources and the formation

of new ties
This section focuses on how network resources influence the behavior of
firms in forming new interorganizational ties. The focus here is primarily on
how networks are conduits of information that in turn shape the subsequent
behavior of firms. In Part I of this book in particular, I consider the impact
14 OVERVIEW OF BOOK

of such resources on the formation of one particular type of interorganiza-

tional tie—strategic alliances—and specifically how a firm’s network provides
it differential access to new partnership opportunities. Because new alliances
further contribute to the network resources available to those firms, in many
ways this is a situation where more begets more. In this part of the book, I also
explore two main aspects of alliance formation and the degree of influence of
firm network resources on each. I examine the factors that influence which
firms enter alliances, and correspondingly, I explore how network resources
may influence their choice of ally. I propose that firms derive valuable benefits
from their network of past ties in the form of timely and valuable infor-
mation, that in turn impacts and shapes their proclivities for entering into
new alliances as well as their choice of partners. As a result, this network of
past ties becomes an important channel for providing firms with network
resources that play a key role in shaping the alliance opportunities available to
them.
Although network resources can benefit firms in a variety of ways, they
are important here for two prime reasons. First, they can reduce search costs
by allowing firms to discover new opportunities for alliances with partners
who are simultaneously willing to form an alliance with them. This requires
a deep awareness of a firm’s own needs and those of others in the market—
specifically, what others want and when. Thus timing is a key element here
(e.g. Gulati 1995b).
A second benefit of network resources arises from their ability to mitigate
moral hazard concerns widespread in such alliances (Gulati 1995a). Despite
the rapid growth of both domestic and international alliances in many indus-
trial sectors, managers still consider alliances risky—firms entering alliances
face considerable moral hazard concerns because of the unpredictability of
partner behavior and the likely costs of possible opportunistic behavior by
a partner. Consequently, for firms to build alliances that both address their
needs and minimize the risks posed by moral hazards, they must first be
aware of potential partners and their needs and, second, have information
about the reliability of those partners (Balakrishnan and Koza 1993). Simul-
taneously, those potential partners must have requisite information on the
focal firm. The network resources a firm possesses can facilitate its entry
into new alliances by providing information that reduces uncertainties and
alleviates some of the risks of opportunism inherent to strategic alliances.
Firms that possess greater network resources by virtue of their embeddedness
in interorganizational networks are more likely to enter into new alliances
than more isolated players (Gulati 1998, 1999). Furthermore, firms with a
positive reputation in these networks are more likely to be identified as reli-
able alliance partners. In short, networks are valuable sources of informa-
tion that enable firms to learn about new alliance opportunities with reliable
partners.
 OVERVIEW OF BOOK 15

In this part of the book I also show that network resources can originate
from (a) a firm’s direct and proximate ties (relational embeddedness), (b) its
more distant and indirect ties (structural embeddedness), and (c ) its location
in the overall network (positional embeddedness). I examine the role of each
of these facets in reducing both search costs and moral hazard concerns. I
also consider the effect of network resources on proclivity to enter into new
alliances not only at the firm level, where I consider the frequency with which
individual firms enter into new alliances, but also at the dyadic level, where I
consider with whom firms ally.
In addition to determining which firms enter alliances and their choices of
partner, network resources provide information that significantly influences
how alliance networks originate and evolve. Alliances and the networks that
result from their cumulation are clearly dynamic entities that can evolve well
beyond their original designs and mandates, and the divergent evolutionary
paths alliances follow can have significant consequences for their performance
(Harrigan 1985, 1986). Network resources can thus be viewed as resulting
from firms’ specific relationships with prior partners, and the distribution and
impact of such resources in an industry can be shaped in important ways by
the cumulative networks of prior ties it contains.
Chapter 2 assesses the role of network resources in shaping which firms
enter into alliances and which do not. The results of a longitudinal study
demonstrate that the proclivity of a firm to enter new alliances is influenced
by the extent of material and network resources available to it. In particular,
network resources, accrued through a firm’s embeddedness in prior alliance
networks, significantly enhance the extent to which a firm enters into new
alliances. Using the firm as the unit of analysis here, I examine not only
the effect on alliance activity of the cumulative alliances it has entered but
also consider the implications of its relative location in the network of past
alliances. While exploring the relative importance of network resources, I also
consider the material resources that reside within firms that have typically
been theorized to explain the alliance behavior of firms.
In identifying the factors that influence alliance formation, this chapter
introduces and discusses interfirm network resources in depth. I propose that
firms accrue network resources from the interfirm networks in which they
are located. These resources, in turn, influence the extent to which firms
enter into new alliances by channeling valuable information to them. Thus,
network resources are sources of valuable and timely information residing
outside a firm’s boundaries that can influence alliance formation by alter-
ing the available opportunity set. Consequently, the tendency of firms to
enter new alliances is influenced by the magnitude of network resources they
have.
While Chapter 2 explores how network resources obtained from prior
alliance networks serve as a catalyst for firms to enter new alliances, Chapter 3
16 OVERVIEW OF BOOK

extends these findings by showing that network resources impact not only a
firm’s proclivity to enter new alliances but also its choice of partners. As in
dating or marriage, a firm’s decision to enter into an alliance is intertwined
with the general availability of appropriate partners and a given partner’s
availability and willingness. Consequently, firms must be able to identify
potential partners and have an idea of the candidates’ needs and requirements.
Firms also need information about the reliability of those partners, especially
when success depends heavily on partner behavior. Specifically, this chapter
demonstrates that the informational benefits of indirect ties between a focal
firm and its possible partners, both one-level-removed ties and more distant
ones, affect the likelihood of its entering a new alliance. A focal firm is more
likely to enter into an alliance with a previously unconnected firm if they have
common partners. Furthermore, the greater the distance between a focal firm
and a potential partner in a social network of prior alliances, the less likely they
are to ally. These findings suggest that the social network of indirect ties is an
important constituent element of the network resources that a firm possesses
and serves as an effective vehicle for bringing firms together. The findings also
indicate that dense colocation in an alliance network between a focal firm and
potential partners enhances mutual confidence by making firms more aware
of the possible negative reputational consequences of their own or others’
opportunistic behavior.
I conclude Chapter 3 with a brief discussion of a follow-up paper with
Martin Gargiulo (Gulati and Gargiulo 1999) that shows how network
resources provide essential information that influences not only the behav-
ior of individual firms but also the evolution of strategic alliance networks
themselves. Our research demonstrates that the entry of firms into alliances
can lead to the growing structural differentiation of the industry network
as a whole. This progressive differentiation enhances the magnitude of the
resources available to all firms within the network, which in turn shapes
their actions. As a result, the effect of proximate network resources on a
firm’s proclivity to enter alliances and its choice of partners is moderated
by the extent of the overall network’s differentiation. This follow-up study
also highlights the iterative process by which alliance networks emerge: new
ties modify the structure of the network of previous ties, which then shapes
the formation of future cooperative ties. Interorganizational networks there-
fore evolve from embedded organizational action in which new alliances are
increasingly embedded in the same network that has made them more likely
in the first place. To empirically test these claims, this study specifies the mech-
anisms through which the existing alliance network shapes a firm’s choice of
allies.
In Chapter 4, I shift the focus from network resources based on interor-
ganizational ties to those that arise from a firm’s interpersonal connections,
specifically board interlocks. Board interlock networks are unique formal
 OVERVIEW OF BOOK 17

mechanisms that create network resources by providing an opportunity for

corporate leaders to exchange information, observe the leadership practices
and styles of their peers, and witness the consequences of those practices.
Because of these mechanisms, the board interlock network can be con-
sidered an important element of network resources for a firm. The study
detailed in this chapter was conducted with Jim Westphal, and it shows
how board interlock ties to other firms—specifically, relationships among
CEOs and their outside directors—can increase or decrease the magni-
tude of network resources that accrue from those ties, in turn affecting
the likelihood of alliance formation, depending on the quality of those
relationships.
Exploring how board interlocks serve as network resources and affect
alliance formation provides a more comprehensive account of the constituent
elements of network resources because it not only allows an examination
of an interpersonal network—board interlocks—as a constituent element of
network resources but also because it allows an exploration of heterogeneous
social processes that underlie interlock ties and their effects on the creation
of strategic alliances. In other words, this chapter explores how board inter-
lock ties may both promote and discourage the creation of new alliances,
depending on the behavioral content of the tie. As a result, there may be both
advantages and disadvantages to embeddedness in social networks and their
contribution to a firm’s accumulated network resources. Thus, in the light of
this book’s larger discussion of how network resources impact alliances, this
study shows how network resources are affected not only by the presence of
network ties but also by the specific nature (positive or negative) of those
ties. Furthermore, it shows how a firm’s network resources originating in one
domain (i.e. board interlocks) enable it to accumulate additional network
resources by entering into other kinds of ties (i.e. alliances) that in turn benefit
the firm in other ways.
To summarize, Part I of the book addresses the formation of interfirm
alliances and proposes that the development of such alliances and the net-
works that result from their accumulation is the result of a dynamic process
involving both exogenous resource dependencies that prompt organizations
to seek cooperation and an evolving embeddedness dynamic, in which the
shifting network of prior alliances progressively influences the likelihood of
alliance formation and partner choice in each period by providing firms
with access to information through their partners. In the unique endoge-
nous process by which network resources accumulate, the network of prior
ties influences new ties, which in turn modify the network and lead to its
further development over time. Using longitudinal analysis, I further demon-
strate that the influence of interorganizational networks on the formation of
new alliances may change with the network’s development. To examine the
interplay that occurs across different kinds of interorganizational networks I
18 OVERVIEW OF BOOK

also study the role of board interlocks in shaping alliance creation. Part of
the discussion of network resources centers on how they help firms obtain
information about the reliability of potential partners, thus reducing both
search costs and potential moral hazards.

Part II: Network resources and the governance

structure of ties
Whereas Part I examines the role of network resources in the formation of
new ties by firms, Part II assesses how network resources influence the for-
mal structure used by firms in formalizing their ties. As highlighted above,
an important source of uncertainty in such partnerships arises from moral
hazard concerns regarding partner behavior. It is likely that network resources
originating in sets of prior ties between firms not only provide information
that allows them to enter into new partnerships but also impact the structure
they may use to formalize the alliance. In this section, I continue to explore
the role of network resources arising from networks serving as conduits of
information that reduce uncertainty and also consider their effects on the
governance structure of those ties.
In Chapter 5, I examine how the familiarity gained by firms through their
prior alliances engenders network resources for them that in turn foster
interorganizational trust and reduce the need for hierarchical controls in the
partnership. The empirical research presented suggests that trust mitigates
appropriation concerns and is in turn an influential determinant of the gov-
ernance structure of alliances. Consequently, what emerges is an image of
alliance formation in which cautious contracting gives way to looser practices
as partners become increasingly embedded in a social network of prior ties.
Although most research on this issue has focused on static situations, this
study looks at contracting between firms over time and demonstrates the role
of emergent network resources as a key factor in dynamically influencing the
choice of governance structure in new alliances. This chapter supports this
claim in two interrelated ways. First, it postulates that the familiarity gained
through prior alliances engenders network resources that foster interorganiza-
tional trust. Both knowledge-based trust resulting from mutual awareness and
equity norms and deterrence-based trust arising from reputational concerns
can substitute for contractual safeguards. Second, it shows empirically how
this trust reduces the need for strict controls in an alliance, thus making
alliance partners more likely to adopt less hierarchical structures for their
alliances. Consequently, cautious contracting and hierarchical controls lessen
as firms accumulate network resources through increasing embeddedness in a
social network of prior ties.
 OVERVIEW OF BOOK 19

While the transaction cost logic traditionally used to study the governance
of alliances recognizes that greater appropriation concerns result in more
hierarchical governance structures in alliances, it focuses primarily on task
attributes as a determinant of likely appropriation concerns and fails to con-
sider the role of network resources in creating trust that reduces appropri-
ation concerns. Chapter 5 corrects this oversight by acknowledging the role
of network resources arising from past ties in shaping governance structure.
In doing so, it also rectifies another omission: prior research has implicitly
considered each transaction between organizations an independent event,
ignoring the interconnection across them that emerges over time through
a series of interactions. By introducing the role of network resources, this
chapter opens the possibility that transactions may have history and this
in turn may make them temporally interdependent. It also suggests that
this history of prior interactions serves as a resource for firms, enabling
them to enter into looser contractual arrangements for even more complex
activities.
The remarks of a senior manager at a computer software firm where I con-
ducted interviews for my dissertation illustrate some of this dynamic (Gulati
1993):

Our technology partnerships are organized as detailed equity-based contracts. . . .

These in turn have led to numerous repeated alliances with the same set of firms. . . . In
our subsequent alliances we don’t bother to write detailed contracts. That would not
only be tedious but also an insult to our relationship. Sometimes we give our lawyers
only a few days to write up the contract, and that too after the project may already have
begun.

This type of behavior could result because once the firm in question has an
equity alliance in place, it is secure in the knowledge that it has a real hostage
and is comfortable entering into loosely contracted alliances with the same
firms in the future. However, informants later reported that the logic for their
use of looser contracts was not driven by such thinking. Rather, the most
important consideration for them was that they were now familiar with their
partners and deemed them ‘trustworthy’.
While appropriation concerns are clearly an important determinant of
alliance governance structures, Chapter 6, based on joint research with Harbir
Singh, highlights another influence. Just as network resources provide infor-
mation that mitigates appropriation concerns, such information can also
reduce the risks associated with the coordination of tasks between alliance
partners. In line with this idea, this chapter focuses on the expected costs of
coordinating tasks between alliance partners. Coordination costs are viewed
as distinct from more narrowly defined transaction costs that focus primarily
on moral hazard concerns. The notion of coordination costs is introduced
here to capture the uncertainty arising from the anticipated organizational
20 OVERVIEW OF BOOK

complexity of decomposing tasks among partners, along with the ongo-

ing coordination of activities to be completed jointly or individually across
organizational boundaries and the related magnitude of necessary communi-
cation and decisions. Because coordination in alliances is a significant chal-
lenge, the anticipated interdependence resulting from the logistics of coordi-
nating tasks can create considerable uncertainty. These costs are very distinct
from the appropriation concerns firms face in alliances. For instance, even if
two allied firms face no appropriation concerns, they must still coordinate the
division of labor and interface of activities and products. Whereas coordin-
ation costs arise from the coordination of tasks, appropriation involves coop-
eration issues among the actors. As for appropriation, this chapter suggests
that coordination uncertainty can be managed with hierarchical controls—
many researchers have noted that hierarchical controls facilitate superior
task coordination, especially in situations involving high interdependence
and coordination. Consequently, the alliance governance structure chosen
at the outset reflects not only anticipated appropriation concerns but also
anticipated coordination costs arising from the complexity of allocating and
coordinating joint tasks.
The empirical study in this chapter suggests that the choice of alliance struc-
ture is influenced by concerns regarding both appropriation and coordination
costs. Governance structures are thus a response not only to appropriation
concerns but also to those emanating from the likely coordination challenges.
By shaping both these anticipated concerns at the time of alliance formation,
network resources affect the type of governance structure used.
From the standpoint of my investigation of network resources in this book,
it is important to note that this study suggests that prior ties that engender
network resources by serving as channels of information can mitigate both
types of concerns. Thus, network resources can shape the contracts used to
formalize alliances not only because they limit appropriation concerns but
also due to their impact on the anticipated coordination costs in the alliance.
This research has significant implications for the study of the alternative bases
for hierarchical controls in alliances and is distinctive in three ways: (a) by
specifying the concept of coordination costs, it highlights the influence of
coordination uncertainty in determining the choice of governance structure
in alliances; (b) it reveals the multiple logics used by alliance participants in
determining governance structures by modeling the influence of anticipated
coordination costs after appropriation concerns have been accounted for;
(c ) it demonstrates that trust engendered by network resources and the
prior ties that create them can significantly reduce the coordination costs
of alliances, in turn shaping the governance structure used to formalize
them.
To summarize, the first two parts of this book explore how networks of
prior interfirm ties such as alliances and board interlocks generate network
 OVERVIEW OF BOOK 21

resources for firms by providing them with valuable and timely information
that influences their proclivity to enter into new alliances, their choice of part-
ner, and the type of governance structure they use to formalize their alliances.
I specifically demonstrate that the strong influence of network resources on a
firm’s behavior can be attributed to their role in providing timely information
about the reliability of potential partners. Simply stated, network resources
reduce search costs and provide information that helps firms minimize the
unpredictability of partner behavior. Furthermore, by minimizing uncertainty
and engendering trust between alliance partners, network resources also influ-
ence the governance structure of alliances.

Part III: Network resources and the performance

of firms and their alliances
Because of their role in channeling valuable information and resources, the
network resources firms possess can also be influential in determining the
success of ties those firms make and, more broadly, the success of the firms
themselves. In this part of the book, these insights are extended by exam-
ining how network resources influence the performance of firms that enter
into interorganizational partnerships. In other words, in this part I consider
whether firms with greater network resources extract greater value from their
new ties than other firms with fewer such resources. Most prior researchers
have struggled with methodological issues involved with studying the perfor-
mance of interorganizational partnerships and that of the firms that enter into
ties. While I do not provide detailed discussion or any empirical support for
the role of network resources in shaping the performance of individual ties, I
contend that such resources are likely to affect the outcomes of ties and that
this is an important arena for future research. I also discuss how firms with a
deep understanding of network resources discover the role of multifaceted sets
of ties in accumulating them and in learning how to deepen the increasingly
heterogeneous ties that they form.
Chapter 7, based on joint research with Lihua Olivia Wang, assesses whether
firms benefit from new interorganizational ties and the network resources that
these generate. The focus here remains on one particular type of interorgan-
izational tie—strategic alliances. I examine the effects of network resources on
the total value created and the relative value appropriated by each of the part-
ners in an interfirm alliance. The results show that network resources based on
the embeddedness of the partners’ prior ties affect total value creation for all
partners in the alliance but not the relative value appropriation between the
partners. This finding departs from those of prior research that has used event
study methodology to explore the likely benefits of new alliances for individual
22 OVERVIEW OF BOOK

firms. This study took a dyadic approach in assessing both the total value
created for all partners and the relative value appropriated by each partner
in a joint venture (JV). The empirical research in this chapter shows that
network resources resulting from the alliance networks affect the total value
creation of all partners but not the relative value appropriation between the
partners.
Chapter 8 is based on part of a larger research project I undertook with
David Kletter and his colleagues at Booz Allen and Hamilton. I take a more
expansive view of networks and the resources that ensue from them by
going beyond a single set of ties as the basis for a firm’s network resources.
The chapter suggests that many firms are now adopting a relational view in
their interactions with four key stakeholders: customers, suppliers, alliance
partners, and internal subunits. Faced with pressures of commoditization
in product markets many such firms are embracing a new architecture in
which they are simultaneously shrinking their cores—doing less and less
themselves—and also expanding their peripheries by addressing a larger por-
tion of customers’ needs. This necessitates a mutually reinforcing virtuous
loop in which firms try to deflect market pressures for price competition by
building closer connections to their customers and offering more solutions
to their problems. This requires firms to expand their peripheries through
alliances with others who may provide complementary products/services
required by their customers. At the same time, these same firms shrink their
core to benefit from other suppliers that are more narrowly specialized and
have the advantages of focus, economies of scale, or a local cost advantage.
Outsourcing of increasingly critical activities requires firms to collaborate
with suppliers much more frequently and deeply than before. Similarly, to
bring all these different pieces together seamlessly for the customer requires
much greater and smoother collaboration among the internal business
units.
Based on a comprehensive survey of senior executives at Fortune 1000 firms
and field interviews at several top-performing firms, the research reported in
this chapter indicates that this increasingly relational view of organizations
is being adopted more quickly by high-performing firms than their lower
performing counterparts. The findings suggest a more expansive view of net-
work resources that encompasses significantly more than those arising from a
firm’s alliance ties, with those originating from connections including a firm’s
ties to customers and suppliers, along with ties among its internal subunits.
Furthermore, firms can elevate the intensity of each of these relationships by
working up a ladder detailed in the chapter. Thus, network resources originate
from a heterogeneous array of ties and are in turn affected by the quality and
intensity of those ties. This phenomenon, evident across an array of industries,
is one of the hallmarks of a new operating model described in this chapter: the
network-resource-centered organization.
 OVERVIEW OF BOOK 23

Part IV: Network resources in entrepreneurial

settings
The discussion so far has focused on how prior interorganizational relation-
ships can channel information and resources that generate network resources
for participating firms, which in turn shape the formation and governance
structure of new ties, as well as the performance of focal firms. Network
resources specifically help firms reduce search costs for new partners, limit
the cost of coordination between partners, and minimize the unpredictability
and risks of hazardous behavior by alliance partners, which in turn can shape
behavior and outcomes for those firms. They can also be conduits of valuable
material resources that are resident within the partners of a focal firm.
The role of network resources in shaping behavior and outcomes for firms
is particularly evident in the entrepreneurial arena. Small companies represent
considerable risks, especially for external investors and for endorsers who
may assist those firms in obtaining capital. Such risks are particularly acute
in science-based industries, such as biotechnology, where long development
cycles often force firms to seek out capital markets and endorsers well before
they have any products or revenue streams. In this context, among the first
constituents seeking information on soon-to-be-public entrepreneurial firms
are potential underwriters. Underwriting organizations need information on
the reliability of start-up firms. Network resources available to entrepreneurial
firms in this context can allay endorser concerns by providing important evi-
dence of a start-up firm’s legitimacy. Thus, in this instance network resources
are beneficial to firms by signaling their quality to important intermediaries
whose support they may require.
In this context, I assess not only network resources that originate in a firm’s
prior alliances but also those created through interpersonal connections of its
upper echelon’s affiliations through prior employment and board member-
ships, as considered for larger firms in Chapter 4. Specifically, I examine the
network resources available to entrepreneurial firms through the interpersonal
connections of their upper echelon, and how these affect the procurement of
support from prestigious endorsers prior to the firm’s going public. In this
instance, endorsement ties with investment banks may be considered another
avenue for building network resources, reinforcing the notion that one form
of network ties often begets another through a system of complex interplay.
Part IV, based on a set of studies I conducted with Monica Higgins, shows
how network resources provide information that influences both behavior
and economic outcomes for smaller entrepreneurial firms. Our research began
by assessing the role of network resources in helping start-up biotechnology
firms overcome uncertainty by securing key endorsement ties from investment
banks and investors. Chapter 9 suggests that important intermediaries such as
24 OVERVIEW OF BOOK

investment banks look beyond objective signs (e.g. firm size, age, or product
stage) to symbols of a firm’s legitimacy, such as the career histories of its
upper echelon, when deciding whether to endorse a young firm. Here, as
in Chapter 4, the network resources available to firms originate from the
interpersonal ties of their upper echelon. In particular, we consider how a
firm’s upper echelon’s set of experience serves as a symbol of quality for others.
Our findings reported in Chapter 9 reveal that the proclivities of firms
to enter partnerships with prestigious intermediaries and to garner financial
resources are influenced by the specific kinds of career-based affiliations asso-
ciated with the firm’s upper echelon at the time of its IPO. Thus, the greater
the perceived legitimacy of a young firm, as indicated by the career experiences
of its upper echelon, the greater the prestige of the investment bank that firm
is able to attract as the lead underwriter for its IPO. This chapter examines this
effect across multiple facets of upper echelon affiliations and shows that young
biotechnology firms that have upper echelon affiliations with prominent phar-
maceutical and health care organizations are better positioned to garner the
support of prestigious underwriters. Similarly, upper echelon affiliations with
prominent biotechnology firms place new firms in a better position to secure
such endorsement. Finally, the reported results demonstrate that the greater
the range of upper echelon affiliations across the categories of upstream, hori-
zontal, and downstream organizations, the greater the prestige of the firm’s
lead investment bank.
I conclude Chapter 9 with a brief discussion of a follow-up study with
Monica Higgins (Higgins and Gulati 2006) that explores the effects of upper-
echelon-based network resources on the performance of a firm’s IPO. The
study further assesses whether this is a direct effect or one mediated through
the connections a firm builds with its chosen investment bank. The study
proposes that network resources here may not only arise from the interper-
sonal connections of firms but also through the endorsement ties that firms
may have created with their investment banks. The results suggest that net-
work resources originating from both upper echelon experiences and ties to
investment banks are beneficial to firms and help them obtain the support
of investors at the time of their public offering. Further, the upper-echelon-
based effects on performance occur both directly and indirectly by shaping a
firm’s choice of investment bank. This chapter illustrates the complex interplay
among network resources from different sources and their effects on a firm’s
performance.
This chapter offers a broader view of network resources that originate
in the prior employment experiences of the upper echelon of management,
showing how such resources may benefit those firms in obtaining new ties
with prestigious investment banks that in turn constitute yet another facet of
network resources that can be valuable to firms at the time of their public
offering. Both these avenues to network resources are theorized to be conduits
 OVERVIEW OF BOOK 25

of valuable information and resources for these entrepreneurial firms. Implicit

in the findings reported here is a claim that network resources beget more
network resources. In this chapter and elsewhere I also pose the question about
the possible limits to the benefits of network resources if any.
In Chapter 10, we extend this research by investigating the contingent value
of various types of interorganizational relationships at the time of a young
firm’s IPO. The focus here is on network resources that arise from the interor-
ganizational ties a firm possesses at the time of its public offering. The research
in this chapter focuses on the varying implications for firms of network
resources originating from their ties with three key stakeholders identified
in prior studies: venture capitalists, investment banks, and alliance partners.
This chapter explores which network ties matter when for a start-up firm. It
shows that the influence of network resources created from strategic alliances
and endorsement relationships differs depending on the market environment.
The findings suggest that different types of market uncertainty focus investor
attention on different factors, and because network ties provide important
signals of a firm’s potential, they become more or less important depending
on the nature of investor concerns in that specific market context. Building
on Chapter 4, the results here affirm that the effect of network resources may
be contingent on the type of the ties underlying those resources. Further, the
results show that the contingency may arise not only from the varying nature
of those ties but also from the overarching market context in which those ties
occur.
I conclude the book with a forward-looking chapter that delineates some of
the future trends and likely arenas for future research within the broad realm
of network resources. I have outlined what I view as some key domains for
fruitful inquiry and tried to provide some concrete research questions that
future researchers may want to consider.

The importance of understanding network resources

When I began my research on interorganizational networks, much of the prior
research on the causes and consequences of interorganizational ties was at the
tie or firm level, and the external context in which they occur was considered
only through measures of competitiveness in product or supplier markets.
However, I have found that although interorganizational partnerships are
essentially dyadic exchanges, key precursors, processes, and associated out-
comes can be defined and shaped by the interorganizational networks within
which most firms are embedded. Such networks engender resources in that
they may provide a firm with access to information, resources, and technology,
as well as efficiency advantages based on reduced governance and search costs.
They may also serve as important symbols of focal firms’ legitimacy for critical
26 OVERVIEW OF BOOK

third parties. This, in turn, may allow those firms to enter into new ties more
frequently, narrow their search for partners, and obtain additional benefits as
a result of endorsements from critical third parties.
Consequently, a more systematic study of a firm’s network resources can
have both descriptive and normative outcomes that provide valuable insights
for theories of strategic management, organizational theory, and sociology.
Incorporating social network factors into our account of the interorganiza-
tional behavior of firms not only provides a more accurate picture of the key
influences on the strategic actions of firms but also has important implica-
tions for managerial practice. For instance, an understanding of how network
resources influence the formation of new ties can provide insights for man-
agers on the path-dependent processes that may lock them into certain courses
of action as a result of constraints from their current ties. They may choose to
anticipate such concerns and proactively initiate selective network contacts
that enhance their informational capabilities.
Furthermore, by examining the specific way in which network resources
and the underlying networks may constrain their future actions and channel
opportunities, firms can begin to take a more forward-looking stance in regard
to the new ties they enter. They can be proactive in designing their networks
and considering the ramifications of each new tie on their future choices. They
may also selectively position themselves in networks to derive possible control
benefits (Burt 1992). Similarly, numerous insights result from understanding
the complexities associated with managing a portfolio of alliances and the rela-
tional capabilities required to do so successfully. Ultimately, managers want to
know how to manage individual ties and portfolios of ties, and a recognition of
some of the dynamics that influence the evolution and eventual performance
of ties at both the dyadic and network levels can be extremely beneficial. The
challenge for scholars studying networks and interorganizational ties is to
bridge the chasm between theory and practice by translating some of their
important insights into practical tactics for managers. I believe this book
accomplishes this task.
This book looks at a range of interorganizational ties that generate network
resources for participating firms. I began my research with an examination
of the role of interorganizational strategic alliances as formative elements
of network resources. In subsequent research, I discovered that the network
resources that may shape a firm’s behavior and outcomes need not necessarily
emanate from its prior alliance networks alone. I have expanded this view bit
by bit. First, I explored the antecedents of alliances entered by firms and found
that the entry of firms into new alliances is shaped not only by the network of
prior alliances but also by those arising from its board interlocks. I also found
that while the outcomes associated with a firm’s new alliances may be shaped
by the effects of its prior alliance network on competitive and cooperative
dynamics, outcomes for the firms themselves are likely to be impacted by
 OVERVIEW OF BOOK 27

the much broader set of ties that constitute its network resources. Such ties
encompass connections with key constituents including customers, suppliers,
alliance partners, and internal subunits. Each of these becomes respecified by
managers as ‘partners’ with whom the firm must work seamlessly to obtain
beneficial outcomes. Ultimately, in the context of start-up companies I looked
at the role of network resources emanating from the experience of firms’ upper
echelons and from ties to prestigious endorsers.
This page intentionally left blank
Part I
Network Resources
and the Formation
of New Ties
This page intentionally left blank
2 Network resources
and the proclivity
of firms to enter
into alliances
While there are numerous theoretical and empirical accounts of the formation
of alliances, their primary focus is on understanding the intra-organizational
resource-based considerations that promote alliance formation (e.g. Berg,
Duncan, and Friedman 1982; Mariti and Smiley 1983; Hagedoorn 1993). By
focusing on the existing material means and competence (or lack thereof) that
may propel firms to enter into new alliances, scholars approaching alliance
formation from a resource-based perspective have generally paid less attention
to important social factors that could influence the availability of and access
to alliance opportunities in the first place. That is to say, they have overlooked
the role of network resources in determining the opportunity set firms may
perceive.
As I discussed in Chapter 1, factors resulting from the embeddedness
of firms in a rich social context can be influential in altering the network
resources available to firms, which may in turn shape their behavior. By
neglecting such factors, prior research that focused on competence-based
drivers for alliance formation implies that firms are atomistic actors per-
forming strategic actions in an asocial context (Baum and Dutton 1996).
In such studies, the external context remains encapsulated within measures
of competitiveness in product or supplier markets, with limited consider-
ation of a firm’s social structural context or how this can influence stra-
tegic actions and outcomes in important ways. Economic sociologists have
demonstrated how the social structure of ties in which economic actors
are embedded can influence their subsequent actions (Granovetter 1985)
and that the distinct social structural patterns in exchange relations within
markets shape the flow of information (Burt 1982; Baker 1984), which in

This chapter is adapted with permission from ‘Network Location and Learning: The Influence of
Network Resources and Firm Capabilities on Alliance Formation’ by Ranjay Gulati published in
Strategic Management Journal, 1999, (20/5): 397–420, © John Wiley & Sons Limited.
32 NETWORK RESOURCES AND FORMATION OF TIES

turn provides both opportunities and constraints for actors and can have
implications for their behavior and performance. Such an embeddedness
perspective, which highlights the salience of networks, is applicable to both
individual and interorganizational networks (Baker 1990; Podolny 1993;
Gulati 1995b; Powell, Koput, and Smith-Doerr 1996; Gulati and Gargiulo
1999).
To develop a more socialized account of firm behavior, this chapter iden-
tifies the factors that determine which firms enter into alliances and which
do not. I focus here on the firm level and consider social factors related
to a firm’s network resource endowment that influence the extent to which
it participates in alliances over time. My extensive fieldwork suggests that
although strategic alliances are essentially dyadic exchanges, key precursors,
processes, and outcomes associated with them can be defined and shaped
by the networks within which most firms are embedded. Here I look at
the extent to which firms’ participation in alliance networks influences their
proclivity to enter new alliances. Furthermore, I propose that firms accrue
network resources from the interfirm networks in which they are located.
These resources, in turn, influence the extent to which firms enter into new
alliances.
This chapter makes two distinct contributions to the research on strategic
alliances and social networks. First, it expands the realm of the resource-
based perspective from resources within a firm’s boundaries to network
resources that result from network membership and location. I previously
defined network resources as sources of valuable information residing out-
side a firm’s boundaries that can influence strategic behavior by altering the
opportunity set available. Second, by introducing the concept of network
resources, I highlight the importance of unique historical conditions and
path-dependent processes that can be a significant basis for ‘sticky’ firm
resources.
The empirical study I conducted examined the influence of network
resources on the alliance behavior of a panel of firms over a nine-year period.
These network resources accrue from the participation of firms in the network
of accumulated prior alliances among industry participants. For each period
in this study, this network includes all alliances that have been formed up to
and including the previous period. This network of cumulative prior alliances
updates each year to incorporate the new alliances formed, and this new
network influences alliance formation for subsequent periods. Thus, when
observed over time, the formation of new ties in each period alters the very
network that influenced the ties in the first place. The passage of time, then,
results in an endogenous network dynamic between action among embedded
firms and the network structure that guides and is transformed by that action.
I explore this in further detail towards the end of Chapter 3.
 PROCLIVITY OF FIRMS TO ENTER ALLIANCES 33

Theory and hypotheses

NETWORK RESOURCES AND THE ENTRY OF FIRMS INTO ALLIANCES

To understand why network resources resulting from interfirm networks are
important to firms and their alliances, we must consider the factors usually
associated with the formation of alliances. One of these considerations is
partner reliability. In Chapter 1, I discussed how network resources facilitate
alliance formation by providing information that reduces uncertainties and
alleviates some of the risks of opportunism. In short, ties accumulated over
time can make available rich information regarding new alliance opportunities
with reliable partners (Kogut, Shan, and Walker 1992; Gulati 1995b; Powell,
Koput, and Smith-Doerr 1996).
However, networks may also constrain a firm’s set of choices for alliances
by (a) limiting the circle of potential partners about whom it has information
and (b) providing no information about nonparticipants. Indeed, the network
resources firms receive from their participation in interfirm networks are akin
to the social capital of individuals that Coleman (1988: S98) discussed in his
seminal essay on the topic:
[S]ocial capital inheres in the structure of relations between actors and among actors.
It is not lodged either in the actors themselves or in physical implements of production.
Because purposive organizations can be actors (‘corporate actors’) just as persons can,
relations among corporate actors can constitute social capital for them as well.

Earlier, scholars have described social capital as a resource akin to financial

and technological capital that exists within the social relationships in which
an actor is embedded (Loury 1977, 1987; Bourdieu 1986). At higher levels of
aggregation, social capital has generally been used to describe features of social
organization that facilitate coordination and cooperation for mutual benefit
(Putnam 1993: 35–6), while at the individual level, social capital accrues from
the pattern of contact networks in which individuals are placed. Scholars
within the resource-based perspective have also highlighted the role of organ-
izational capital resources, which include a firm’s contact network (Tomer
1987). In this context, I consider the implications of network resources not
so much for the performance of firms but, rather, as important enabling
conditions for future cooperation.
Most firms are embedded in a variety of interfirm networks, such as board
interlocks, trade associations, and R&D cooperatives. To view any of these
networks as a basis for network resources, it is important to consider the
extent to which the network serves as a channel of information and the kind of
information it transmits. As I suggest in Chapter 1, one increasingly important
network that has become an influential channel of information is the network
34 NETWORK RESOURCES AND FORMATION OF TIES

of prior alliances (Kogut, Shan, and Walker 1992; Gulati 1995b). This network
encompasses the set of alliances that industry participants have entered until
the previous year. With the rapid proliferation of alliances in the last several
decades, most firms are now embedded in a wider network of prior and cur-
rent alliances. Most alliances involve prolonged contact between partners, and
firms actively rely on such networks as conduits of valuable information that
can act as a catalyst for new alliances. Such networks are dynamic, however,
and can include all past alliances, whether active or not, at any given time.
With the formation of new alliances, the prior alliance network updates and
becomes influential for subsequent firm behavior.
The information provided by network resources can enable the creation of
new alliances by three distinct means: access, timing, and referrals (Burt 1992).
Access refers to information regarding the capabilities and trustworthiness
of current or potential partners. By providing such information, an existing
network can influence a firm’s available set of feasible partners and its attract-
iveness as a partner to other firms. The comments of an alliance manager I
interviewed vividly illustrate this point:
Our network of [prior alliance] partners is an active source of information for us about
new deals [alliances]. We are in constant dialog with many of our partners, and this
allows us to find many new opportunities with them and also with other firms out
there.

Thus, it seems that firm managers actively seek information about new alliance
opportunities from their prior alliance partners, and potential partnerships
may be with previous allies or others.
Timing entails having informational benefits about potential partners at the
right time. A firm seeking attractive alliance partners must approach them at
the right time and pre-empt their seeking alliances elsewhere. For example,
one alliance manager highlighted timing as a critical facet of the information
provided by his firm’s social networks:
In our business timing is everything. And so, even for alliances to happen the conflu-
ence of circumstances have to be at the right time. We and our prospective partner
must know about each other’s needs and identify an opportunity for an alliance
together in a timely manner. . . . Our partners from past alliances are one of our most
important sources of timely information about alliance opportunities out there, both
with them and with other firms with whom they are acquainted.

Thus, in addition to providing access to information about each other, the

close contact resulting from prior alliances ensures that partners learn about
joint opportunities for alliances in a timely manner.
The third benefit of the information firms receive through network
resources stems from the indirect referrals firms provide to each other about
 PROCLIVITY OF FIRMS TO ENTER ALLIANCES 35

their previous partners. Thus, the nature of information available to a firm is

based not only on its immediate network ties but also on where it is situated
in the broader network. For example, prior partners may refer their own allies
to a focal firm for partnership. As a result, two firms may learn about each
other via a shared alliance partner who introduces them and perhaps vouches
for their reliability. As one manager pointed out:
In some cases we realize that perhaps our skills don’t really match for a project, and our
partner may refer us to another firm about whom we were unaware. . . . An important
aspect of this referral business is, of course, about vouching for the reliability of that
firm. Thus, if one of our long-standing partners suggests one of their own partners as
a good fit for our needs, we usually consider it very seriously.

Such comments suggest that indirect ties in the network of past alliances influ-
ence a firm’s ability to enter new partnerships, allowing it to more easily enter
alliances with firms with whom it shares one or more partners. As networks
channel information through both direct and indirect contacts, such resources
accrue not only from the extent of a firm’s participation in networks but also
from a firm’s location within them. As a result, the specific patterning of a
firm’s ties allows it access to different types and degrees of information.
Furthermore, the information exchange in alliance networks can go beyond
indirect referrals to encompass the whole network.
The network of prior alliances is a rich source of information from
which firms can also learn about new firms of which they were previously
unaware, and these new firms join the focal firm’s set of potential alliance
targets, increasing the likelihood of partnership. Thus, I propose the following
hypothesis:
Hypothesis 1: The greater the extent of a firm’s network resources that originate from
its network of prior alliances, the greater the likelihood that it will enter a new alliance
in the subsequent year.

FIRM CAPABILITIES AND THE ENTRY OF FIRMS INTO ALLIANCES

In addition to providing informational advantages from prior alliances, net-
work resources also help firms develop managerial capabilities associated with
forming new alliances, which in turn enhance network resources. Membership
in a network of prior alliances requires firms to have entered such ties in the
past, and by participating in alliances, firms can develop alliance capabilities
that accrue as a result of historical learning (Dierickx and Cool 1989; Barney
1991; Dyer and Singh 1998). While strategy scholars have primarily applied
capabilities-based arguments to explain sustained performance differences
36 NETWORK RESOURCES AND FORMATION OF TIES

across firms, variation in capabilities can also be the basis for strategic behav-
ior (e.g. Kraatz and Zajac 2001). In this instance, my concern is not with
technological or material resource-based capabilities but with organizational
capabilities that enable firms to form alliances with greater ease.
Alliances are complex organizational arrangements that can require multi-
ple levels of internal approval, significant research to identify partners, detailed
assessments of contracts, and significant ongoing management attention to
sustain the partnership (Gulati, Khanna, and Nohria 1994; Ring and Van de
Ven 1994; Doz 1996). Due to the considerable managerial challenges asso-
ciated with forming alliances, let alone managing them, the possession of
alliance-formation capabilities can be a significant driver for firms considering
new alliances. The comments of one of the managers I interviewed exemplify
this:
Forming a new alliance is not as easy as you might think. There are considerable
political, legal, and organizational hoops to be jumped. . . . In my experience, some
firms are wonderfully adept with forming these things [alliances]. They have systems,
procedures, and personnel, all of which click together to make new alliances happen.

An important basis for alliance formation capabilities is experience-based

learning. Early evidence of organizational learning from experience, which
was provided by the extensive empirical research on learning curves, suggests
a lowering of production costs with experience (e.g. Fudenberg and Tirole
1983; Ghemawat and Spence 1985). There is also evidence from research
on organizational learning that firms may build organizational capabilities
from experience and then engage in repeat experiences that further refine
their capabilities. Levinthal and March (1993) talked about how firms engage
in exploitation of existing capabilities—as opposed to exploration of new
prospects—due to their propensity for continued use and development of
existing skills. Along similar lines, evolutionary economists and organiza-
tional theorists have suggested that firms are driven by routines, and once
routines are in place, firms may engage in similar sets of activities repeatedly
and improve on those routines (Nelson and Winter 1982; Amburgey, Kelly,
and Barnett 1993). Some of the bases for such learning include building
appropriate routines that result from a process of ‘error detection and cor-
rection in theories in use’ (Argyris and Schon 1978). With greater experience,
firms can also enhance their absorptive capacity from alliances (Cohen and
Levinthal 1990). Furthermore, top managers within the firm may acquire
mindsets that focus their attention on forming new alliances as a primary
strategic avenue for growth (Boeker 1997).
Evidence from previous research on strategic alliances suggests that the
benefits of experience can translate into specific skills for the formation
and management of alliances (Lyles 1988; Arregle, Amburgey, and Dacin
 PROCLIVITY OF FIRMS TO ENTER ALLIANCES 37

1996; Amburgey, Dacin, and Singh 1996; Dyer and Singh 1998; Anand and
Khanna 2000a). Once firms begin to enter alliances, they can internalize and
refine specific routines associated with forming such partnerships. One man-
ager I interviewed commented on the importance of experience in alliance
formation:
One thing that also makes it easier for us to enter new alliances is our extensive
experience with doing alliances. Forming a new partnership is not a big deal any
more—we have our own formula and we know it works!

Some of the firms that I interviewed enhanced their alliance capabilities

by setting up separate organizational units to assist with the creation and
management of their strategic partnerships (Dyer, Kale, and Singh 2001).
These units provide valuable initial input to specific divisions considering
alliances in the form of legal and managerial templates that cover relevant
issues. They also help divisions interface with the legal department and pro-
vide guidelines to consider in selecting a partner. In several instances, such
units also disseminated information about alliance formation as a strategy
to their managers and scanned the market for new alliance opportunities.
Other firms I interviewed had developed standardized procedures to facilitate
the creation of new alliances. These procedures included clarifying decision-
making authority, setting guidelines for projects considered appropriate for
alliances, specifying companywide legal frameworks for alliances, and creating
a checklist of ex ante issues to be considered for the future management of
alliances.
Because of these structures and systems, managers were more familiar with
alliances and the tasks associated with alliance creation were simpler. I found
consistent evidence that firms built these concrete alliance formation capabil-
ities with experience, which in turn enable them to form new alliances more
often and with greater ease, which leads to the following hypothesis:
Hypothesis 2: The greater a firm’s alliance formation capabilities, the greater the
likelihood that it will enter a new alliance in the subsequent year.

Empirical research

METHOD
I tested the impact of network resources and firm capabilities on strategic
alliances using longitudinal data from a sample of American, European, and
Japanese firms in three different industries from 1981 to 1989 (described
in Appendix 1 as the ‘Alliance Formation Database’). To compute network
38 NETWORK RESOURCES AND FORMATION OF TIES

measures, I constructed adjacency matrices representing the relationships

between firms, with separate matrices for each industry for each year (details
in Appendix 1 under the section labeled ‘Constructing the Social Networks’).
For each matrix, I included all alliance activity among industry panel members
up to the prior year.
Using these matrices, I examined the factors affecting the likelihood that a
firm would enter into an alliance in any given period. Each firm-year record
was given a dichotomous-dependent variable that indicated whether the firm
entered any alliances in the given year. Variables for cliques and closeness were
included to measure centrality, which indicates the magnitude of network
resources available to a firm. The number of all prior alliances a focal firm
had entered with any partners, new or old, captured the extent of the alliance
formation capabilities a firm may have developed from its experience. I also
assessed the alliance formation capabilities of focal firms by measuring the
diversity of their alliance experiences, based on the assumption that greater
diversity can lead to greater capabilities related to alliance formation (results
not reported here). Diversity was defined as (a) the kinds of governance struc-
tures the firm used to formalize its prior alliances, and (b) the nationalities
of its partners. Finally, I introduced an additional variable to assess possible
temporal factors associated with alliance formation capabilities. Presumably,
recent entry into an alliance would make alliance formation capabilities more
salient than an experience further in the past. This could also be interpreted as
the extent to which firms are likely to engage in activities similar to those they
have recently done (Amburgey, Kelly, and Barnett 1993). Thus, I examined
whether the length of time since a firm last entered an alliance influenced its
current likelihood of entering a new alliance. To do this I introduced a variable
measuring the length of time since the firm had previously entered an alliance.
Both linear and quadratic terms for this variable were introduced (results not
reported here).
In my analyses, I controlled for several factors that might also impact the
alliance behavior of firms. Firm-level control variables included financial size,
solvency, debt, and performance. I also included an industry-level control
variable capturing the density of cumulative alliances in each industry up to
the prior year.
I included a series of dummy variables for each year to capture any effects
of temporal trends related to current technological and environmental condi-
tions that may have influenced alliance formation. Dummy variables were also
used to control for the nationality of firms and sectoral differences.
Table 2.1 describes variables included in the analysis and the predicted
effects for each independent variable. All the independent variables are
time-varying and were updated each year for the period of this study. Each
variable was lagged by one year to predict firm behavior. Descriptive statistics
and correlations for all the variables included are provided in Table 2.2.
 PROCLIVITY OF FIRMS TO ENTER ALLIANCES 39

Table 2.1. Definitions and predicted signs of variables

Variable name Definition Predicted signa

Alliance Whether the firm entered an alliance in a given year Dep. variable
Cliques The number of cliques to which a firm belongs. Normalized to +
industry maximum
Closeness Freeman’s measure of closeness indicating how closely linked +
the firm is to all other firms in the panel. Normalized to
industry maximum
Experience Cumulative total of alliances the firm has entered until the +
previous year
Debt Long-term debt of the firm divided by current assets and NP
normalized to the industry median
Solvency Quick ratio: current assets minus inventory, divided by current NP
liabilities and normalized to the industry median
Performance Return on assets from previous year normalized to the industry NP
median
Size Total assets of the firm in the previous year normalized to the NP
industry median
Density Density of the network of alliances formed in the industry until NP
the prior year
Time Variable ranges from one to nine for 1981 to 1989 NP
DUSA Dummy variable set to one if the firm is American (default NP
European)
DJPN Dummy variable set to one if the firm is Japanese (default NP
European)
New materials Dummy variable set to one if firms are in the new materials NP
sector (default automotive)
Industrial automation Dummy variable set to one if firms are in the industrial NP
automation sector (default automotive)
Rho Indicator variable generated by the random effects model NP
which displays the extent to which there were unobserved
differences across firms that were accounted for by the
random effects model

a
NP, no prediction.

ANALYSIS
I modeled alliance formation using the following dynamic panel model, in
which a variable’s positive coefficients indicate that it promotes alliance for-
mation:

pi (t) = F (a + bx i + c y i (t − 1) + ui )

where pi (t) = the probability at time (t) of the announcement of an alliance

by firm i ; xi = a time-constant vector of covariates characterizing firm i ;
yi (t − 1) = a time-varying vector of covariates characterizing firm i ;
ui = unobserved time-constant effects not captured by the independent vari-
ables; and F = the normal cumulative distribution function. In running these
estimations, I used a random effects model to control for unobserved hetero-
geneity. See Appendix 2 for details.
40 NETWORK RESOURCES AND FORMATION OF TIES

Table 2.2. Descriptive statistics and correlation matrix

Variable Mean SD Lowest Highest

1. Alliance 0.18 0.38 0 1

2. Cliques 0.31 0.25 0.05 1.00
3. Closeness 0.38 0.21 0.02 1.00
4. Experience 4.28 6.60 0 46
5. Debt 1.09 0.93 0.11 15.06
6. Solvency 1.37 1.15 0.31 7.66
7. Performance 1.16 0.95 0.34 8.33
8. Size 1.22 1.07 0.21 12.27
9. Density 0.09 0.02 0.04 0.15
10. Time 4.0 2.58 0 8
11. DUSA 0.33 0.47 0 1
12. DJPN 0.39 0.49 0 1
13. New materials 0.37 0.48 0 1
14. Industrial automation 0.31 0.46 0 1

Spearman correlation matrix

(1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14)

(1) 1.00 — — — — — — — — — — — — —
(2) 0.37 1.00 — — — — — — — — — — — —
(3) 0.42 0.66 1.00 — — — — — — — — — — —
(4) 0.34 0.39 0.40 1.00 — — — — — — — — — —
(5) 0.21 0.03 0.18 0.06 1.00 — — — — — — — — —
(6) −0.05 0.25 0.24 −0.13 0.24 1.00 — — — — — — — —
(7) 0.00 0.35 0.11 0.42 0.15 −0.16 1.00 — — — — — — —
(8) 0.26 −0.05 −0.10 −0.04 0.05 0.23 0.11 1.00 — — — — — —
(9) 0.29 0.18 0.03 0.13 0.00 0.05 0.01 0.12 1.00 — — — — —
(10) 0.18 0.20 0.23 0.29 0.09 0.05 0.05 0.10 0.49 1.00 — — — —
(11) 0.02 −0.12 −0.16 −0.05 0.08 0.19 0.00 0.08 0.07 0.03 1.00 — — —
(12) 0.00 0.15 0.03 −0.01 −0.03 0.00 −0.06 −0.07 −0.06 0.07 −0.34 1.00 — —
(13) 0.19 −0.13 −0.15 −0.06 0.02 0.00 −0.06 −0.03 0.33 0.00 0.08 0.09 1.00 —
(14) −0.07 −0.14 −0.07 −0.10 −0.05 0.08 0.02 0.00 −0.12 0.00 0.03 −0.02 −0.37 1.00

RESULTS
I assessed the hypotheses sequentially in a series of panel probit models, pre-
sented in Table 2.3. Positive coefficients of variables indicate a higher propen-
sity to ally with respect to that variable; negative coefficients show a lower
propensity to enter an alliance. Asymptotic standard errors are in parentheses.
The first model is the base model, which includes the control variables and
examines the effects of the material-resource-based attributes of firms and
systemic factors. Models 2 and 3 provide two alternative tests for hypothesis 1.
Model 2 tests the additional effect of network resources, as measured by the
number of cliques to which a firm belongs (Cliques), on its alliance behavior.
Model 3 is identical to model 2 except that it uses an alternative measure
of network resources—closeness centrality (Closeness). The two measures of
 PROCLIVITY OF FIRMS TO ENTER ALLIANCES 41

Table 2.3. Panel probit estimates (standard errors in parentheses)

Variable I II III IV V

Constant −2.03∗ (0.18) −2.27∗ (0.19) −2.43∗ (0.21) −2.09∗ (0.20) −2.21∗ (0.18)
Cliques — 0.36∗ (0.08) — 0.22∗ (0.06) —
Closeness — — 0.94∗ (0.21) — 0.77∗ (0.24)
Experience — — — 0.17∗ (0.04) 0.22∗ (0.05)
Debt −0.31 (0.62) −0.44 (0.32) −0.40 (0.31) −0.41 (0.30) −0.34 (0.28)
Solvency −0.02 (0.06) −0.05 (0.07) −0.04 (0.07) −0.03 (0.07) −0.03 (0.07)
Performance 0.00 (0.00) 0.00 (0.00) −0.01 (0.01) 0.00 (0.00) 0.00 (0.01)
Size 0.01∗ (0.00) 0.02∗ (0.00) 0.02∗ (0.00) 0.01∗ (0.00) 0.02∗ (0.00)
Density 0.17∗ (0.05) 0.16∗ (0.05) 0.17∗ (0.04) 0.10∗ (0.02) 0.13∗ (0.02)
Time 0.08∗ (0.02) 0.07 (0.05) 0.07 (0.04) 0.03 (0.05) 0.04 (0.05)
DUSA 0.11 (0.14) 0.12 (0.09) 0.12 (0.08) 0.10 (0.09) 0.10 (0.08)
DJPN 0.08 (0.11) 0.08 (0.12) 0.07 (0.11) 0.05 (0.10) 0.05 (0.11)
New materials −0.66∗ (0.19) −0.15 (0.10) −0.17 (0.12) −0.10 (0.10) −0.14 (0.10)
Industrial automation −0.41∗ (0.11) −0.11 (0.08) −0.13 (0.08) −0.08 (0.07) −0.11 (0.08)
Rho 0.27∗ (0.06) 0.21∗ (0.07) 0.18∗ (0.05) 0.20∗ (0.06) 0.18∗ (0.06)
n 1,494 1,494 1,494 1,494 1,494
Log L −584.32 −551.17 −535.22 −527.56 −515.21
˜2 84.14∗ 91.15∗ 98.57∗ 102.49∗ 105.34∗

∗
p < .05.

centrality that serve as indicators of network resources are correlated and thus
are introduced in separate models. Models 4 and 5 introduce the measure of
firm capabilities (Experience) while retaining the two measures for centrality
separately in each model.
All five models in Table 2.3 were significant overall, as indicated by the
˜ 2 test using their log-likelihood values. In models 2 and 3, I sequentially
included the network-resource variables measuring the relative location of
the firm in the alliance network. The results confirm hypothesis 1, which
suggests that firms that are centrally located in the alliance network (based on
Cliques and Closeness) are more likely to form new alliances. Furthermore,
2
the significant improvement in the ˜ statistic suggests a better fitting model
once the measures of network resources are included.
The results for the influence of alliance formation capabilities on subse-
quent alliances are mixed. As Table 2.3 suggests, Experience, which measured
the effects of a firm’s cumulative history of alliances on its alliance behavior,
was positive and significant in both models 4 and 5. This indicates that the
more experience firms have with forming alliances, the more likely they are
to enter new alliances. It is important to emphasize that the use of a statistical
model accounting for unobserved heterogeneity ensures that estimates for this
2
variable were both consistent and efficient. The improvement in the ˜ statistic
further indicates the value of including this variable in the estimations.
42 NETWORK RESOURCES AND FORMATION OF TIES

While past experience with alliances had a significant effect, no significant

results were obtained for three additional measures of alliance capabilities that
assessed the diversity of alliances each firm had previously entered and the
length of time since it last entered an alliance (results not reported here).
Measurements of diversity in terms of contracts used and nationalities of
partners were nonsignificant. Furthermore, linear and quadratic specifications
of duration effects for alliances were also not significant (results not reported
here).
The results in Table 2.3 indicate no support for most of the material-
resource attributes of firms introduced as controls—Debt, Solvency, and Per-
formance were all nonsignificant at the .05 level, despite trends for all three
variables toward negative effects on the likelihood to form alliances.
Size, Density, and Time control variables had significant and positive coef-
ficients, suggesting a positive influence on a firm’s likelihood to enter an
alliance. The changes in significance of Time across models 1–5 point toward
some interesting trends. In model 1, Time has a positive and significant
coefficient (p < .05), suggesting that there may have been a broad tem-
poral trend toward increased alliances by firms in the last decade. In models
2 and 3, which include the network resources variables, however, Time is
nonsignificant, suggesting that these temporal effects are interpreted by the
network-resource variables included in these models. In other words, Time
was capturing differences in network resources over time. The inclusion of
a quadratic term for time did not alter these results; its coefficient was also
nonsignificant. Therefore, only results with a linear term for time are reported
here. The main effects for the key variables did not change when I included
dummy variables for each period.
The control variables for nationality and sector show mixed results. In
some instances, they were marginally significant and in others nonsignifi-
cant, suggesting that these factors may be of limited relevance. The variables
for nationality, DUSA and DJPN, were nonsignificant, suggesting that firms
from the United States and Japan are no more likely to ally than firms from
Europe.
Both sector dummies, New Materials and Industrial Automation, were
significant in model 1 but not so in models 2–5 (the default sector was
automotive), suggesting that intrinsic sectoral differences were interpreted by
the network-resource variables included in those models. In other words, in
model 1, New Materials and Industrial Automation were capturing sectoral
differences in firm network resources, which was explained away when the
firm network-resource variables were included.
While the relative significance levels of the sector dummies suggest intrinsic
differences across the three industries on the likelihood of alliance formation,
they do not tell us whether the main effects hypothesized in this chapter
 PROCLIVITY OF FIRMS TO ENTER ALLIANCES 43

differ across the three industries. Rather, they simply indicate that the constant
terms for each of the industries may differ. To assess the industry differences
further, I estimated unrestricted models for each of the industries (results
not presented here). By examining each of the industries independently, no
restrictions were imposed on the slope coefficients. The signs of the coeffi-
cients indicated that the postulated directionality of the main effects observed
in the pooled sample hold true in each of the sectors. I also conducted a similar
test for firms of different nationalities. The results suggested that the main
effects were consistent across firms of different nationalities when examined
separately.
The random-effects model used generates a coefficient Rho, which indicates
the extent to which unobserved heterogeneity was found and corrected for by
the model. The positive and significant coefficient for Rho across all models
suggests that unobserved factors that could influence the alliance behavior of
firms were accounted for by the statistical model.

Conclusion
The results of the longitudinal analysis confirm that, over time, the proclivity
of a firm to enter new alliances is influenced by the extent of network resources
available to it. Results show that network resources, as indicated by a firm’s
location in the interfirm network of prior alliances in which it is embedded
(and the positions of its partners), were a significant predictor of the frequency
with which firms entered new alliances.
There is also some evidence that the capabilities firms amassed by forming
past alliances positively affected the frequency with which they entered new
ones. One capabilities measure was a significant predictor of new alliance
activity by firms in all models, but other measures were nonsignificant. For
example, I found no effect for the length of time since a firm’s last alliance,
suggesting that there may be limited or no depletion of alliance capabil-
ities over time. In addition, neither of the two measures of the diversity of
prior alliance experience of firms (in terms of governance structures used
and nationalities of partners) was significant. This suggests that perhaps the
capabilities associated with managing a diverse set of alliances and partners
are not as important for firms as the partnership per se. This could occur
because once firms have developed the administrative control procedures for
creating new alliances, they are able to use that knowledge in any kind of
alliance. Additional facets of diversity of alliance experience that could have
been taken into account (e.g. diversity of objectives and scope of activities)
were not part of this study.
44 NETWORK RESOURCES AND FORMATION OF TIES

To ensure the robustness of the findings, I included numerous con-

trol variables postulated in prior research as important material-resource
considerations for firms entering alliances. Surprisingly, many material-
resource attributes of firms, such as liquidity, solvency, and performance, were
not significant predictors of alliance activity. Given the longitudinal context of
this study and the time-varying nature of most of the variables included, I
also ensured that I adequately accounted for any broad temporal trends that
could influence the findings. I tested for such temporal trends with dummy
variables for each year and a single linear term for time. The nonsignificance
of the time variable, which usually captures residual factors, in the models in
which network-resource factors were included is indicative of these variables’
explanatory power.
Results for the regional origin of firms reveal some interesting trends. Con-
trary to my expectations, there were no significant differences between the
propensities of American and Japanese firms to enter alliances and those of
European firms. In separate analyses, I also found no significant differences
between American and Japanese firms. Because these variables are nonsignif-
icant even in the baseline model, I believe that this result indicates that many
of the expected national differences are explained by some of the controls I
have included. This was confirmed by a separate estimation in which I found
that the dummy variables for nationality were significant when introduced
on their own but failed to retain significance once the remaining controls
were introduced. I also ensured the robustness of my findings by conducting
subgroup analyses in which I looked at firms from each region separately.
Results were consistent across the three subgroups, suggesting that network
resources and firm capabilities exert influence across national contexts.
I also explored sectoral differences in greater depth to ensure that similar
dynamics occurred across sectors. I conducted subgroup analyses in which I
ran models separately for each industry and found very similar results across
the three industries. This indicates the robustness of findings for the role
of network resources in alliance formation. An assessment of the dummy
variables for sector with the pooled sample reveals interesting trends. The
significant and negative effect of these variables in the baseline model sug-
gests that firms in both new materials and industrial automation sectors were
less likely to form alliances than those in the default sector of automotive.
These effects were no longer significant once I included measures for net-
work resources. This indicates that important differences in propensities for
alliances across sectors are explained by systematic differences in network
resources available to firms across those sectors. There may be important
institutional considerations underlying both sectoral and national differences
in alliance propensities that have not been fully explored here but could be
examined in future research.
 PROCLIVITY OF FIRMS TO ENTER ALLIANCES 45

EXPANDING THE RESEARCH DOMAIN

This chapter addresses several concerns with prior research on strategic
alliances. First, as I discussed in Chapter 1, the primary focus of research on
alliances has been to ask the ‘why’ question to understand some of the reasons
that firms enter alliances. Part of the problem with why questions is that they
may lead to a neglect of some of the conditions that make certain behaviors
likely (Oliver 1990). A second, related concern is that many prior studies have
considered the unit of analysis to be the alliance, as opposed to firm partici-
pation in alliances, rendering it difficult to undertake a firm-level analysis.
Also, much of the empirical research on alliances has been cross-sectional or
pooled cross-sectional in scope. Even the few efforts to introduce a network
perspective to the formation of alliances have typically taken a pooled cross-
sectional approach and thus have not been able to examine systematically how
the evolving financial, economic, and social circumstances of a firm may mod-
erate its alliance behavior over time. Finally, past consideration of firm and
industry imperatives and the description of external context in competitive
terms have typically taken an atomistic view of firms that does not account
for the actions of other firms or the relationships in which focal firms are
already embedded. Moreover, this perspective ignores the interactive nature of
the market, whereby participants discover market information through their
interactions in it (Hayek 1949; White 1981).
This chapter tackles some of the concerns above by assessing the alliance
behavior of firms over a period. The longitudinal research design allowed
me to examine the conditions under which the formation of alliances by
specific firms becomes more or less likely. Using a network perspective to
study strategic alliances also provides valuable insights into the broader
domain of interfirm networks. The creation of an alliance is an important
strategic action, and the accumulation of such alliances constitutes a network.
Thus, alliances may be studied as both endogenous and exogenous factors.
The former can be examined by looking at the influence of interfirm networks
on the formation of alliances, while the latter can be studied by considering
the effects of the network of accumulated alliances. In this study, both were
examined simultaneously by assessing the influence of the interfirm alliance
network on future alliances in a longitudinal study. Studying the development
of an alliance network over time provides unique insights into the evolution
of networks, where strategic action and social structure are closely intertwined
(Gulati and Gargiulo 1999).
Above all, however, this study expands the scope of the resource-based
perspective from resources residing securely within a firm’s boundaries to
external resources that result from network membership and location. The
ongoing cycle between a firm’s historical industry alliance network and the
46 NETWORK RESOURCES AND FORMATION OF TIES

formation of future alliances suggests a path-dependent process by which

firms accumulate network resources that are sticky and can become the basis
of sustainable competitive advantage (Barney 1991). Many scholars have sug-
gested the importance of unique historical conditions and path-dependent
processes as significant bases for firm resources (David 1985; Arthur 1989).
Thus, the notion of network resources adds specificity to this understanding
and suggests an important means by which history can matter.

MANAGERIAL IMPLICATIONS
Incorporating network factors into an account of alliance behavior not only
provides a more accurate representation of the key influences on the strategic
actions of firms but also has important implications for managerial practice.
For instance, the focus on the implications of network resources for enabling
a specific strategic action by firms could easily be extended to the role of
network resources for firm performance (see Part III for more on this). Net-
work resources are usually heterogeneously dispersed within an industry and
due to their unique historical basis can be difficult to imitate, making them
a viable avenue for sustainable competitive advantage. Moreover, this study
also suggests that the organizational search for alliances may result in a path-
dependent process in which the gradual formation of a network structure
increases the information available to select firms, albeit also limiting the
effective range of potential partners a firm is likely to consider (Arthur 1989).
Firms may thus become victims of their own history. Only firms with a rich
history that endows them with network resources and rich capabilities for
forming alliances are likely to consider entering new alliances, and some firms
with more limited resources may find themselves unable to enter new alliances
indefinitely.
Managers could choose to anticipate such concerns about their partici-
pation in networks and proactively initiate selective network contacts that
enhance their informational capabilities. They can be proactive in designing
their networks and in considering the ramifications of each new tie on their
future choices because network resources are based in part on the locations
of firms in the network. Furthermore, the informational advantages resulting
from network resources must be factored into the calculus for partner choice.
This choice must be influenced not only by the appeal of a potential partner
for the project at hand but also by potential partners’ locations in the net-
work. A firm should consider building up network resources by seeking out
strategic alliances with central firms that enable the further development of
new alliances, especially if it is considering embarking on a major strategic
initiative driven by alliances. Thus, once managers understand the dynamics
 PROCLIVITY OF FIRMS TO ENTER ALLIANCES 47

of alliance networks, they may choose path-creation strategies rather than

allowing their choices to become path-dependent. Specifically, they should
take a forward-looking perspective to visualize their firm’s desired alliance
network of the future and then work backwards from it to shape their current
alliance strategy.
3 Network resources
and the choice of
partners in alliances
In the previous chapter, I presented a dynamic, firm-level study of the role
of network resources in determining the frequency with which individual
firms enter into alliances. Extensive fieldwork along with detailed empirical
analysis of longitudinal data on firm behavior showed that by providing
firms with information about potential partners, network resources are an
important catalyst for entry into new alliances, especially because such ties
entail considerable uncertainty and hazards. Additionally, the study assessed
the importance of a firm’s material resources and alliance-formation capabil-
ities as determinants of its proclivity to enter into new alliances. The results
revealed that firms with greater network resources based on their positions in
prior interorganizational networks are more likely to enter into new alliances.
The results also suggested that firms’ capabilities with alliance formation—as
measured by their past alliance experience—can be significant predictors of
new alliance activity.
But with whom do these firms form alliances? Although researchers have
examined why and when firms enter alliances, they have left relatively unex-
plored the question of with whom firms are likely to ally. Transaction cost
economics, for example, assumes exchange relations between two partners
as a given and then seeks to explain how those relations will be formalized.
This omission of factors that may guide alliance formation is particularly
significant because ‘the forces which bring an organization to interact are not
the same as those which determine with whom the organization will interact’
(Paulson 1976: 312).
In many ways, the factors that influence alliance formation are similar to
those associated with marriage. Just as an individual’s decision to marry is tied
to the desired attributes, choice, and availability of specific partners, a firm’s
decision to enter an alliance is a function of the type of partner sought and the
availability and willingness of a given partner to enter into a relationship. One
research stream that views tie formation between organizations in this manner

This chapter is adapted from ‘Social Structure and Alliance Formation Patterns: A Longitudinal
Analysis’ by Ranjay Gulati published in Administrative Science Quarterly © 1995, (40/4): 619–52, by
permission of Johnson Graduate School of Management, Cornell University.
 CHOICE OF PARTNERS IN ALLIANCES 49

is resource dependence theory. Organizational sociologists who advocate this

theory have typically viewed tie formation as driven by resource dependence
among actors (Pfeffer and Salancik 1978; Burt 1983). In this view, organ-
izations create ties to manage uncertain environments and to satisfy their
resource needs. Consequently, they enter ties with other organizations that
have resources and capabilities that can help them meet these goals.
While resource dependence theory provides a good explanation of the
factors that influence the propensities of organizations to form ties with one
another, it overlooks the difficulties such organizations may face in deter-
mining with whom to enter such relationships. In the context of interfirm
alliances, this theory ignores specifically the mechanisms by which firms learn
about new alliance opportunities and overcome the fears associated with
such partnerships. Instead, a resource dependence perspective assumes that
firms exist in an atomistic system in which information is freely available
and equally accessible to all and opportunities for alliances are exogenously
presented.
To understand why network resources are important for firms in shaping
both their proclivity for entering into alliances and their choice of partners,
we need to consider the circumstances usually associated with such ties. As
I discussed in Chapter 2, firms entering alliances face considerable moral
hazard concerns because of the unpredictability of partners’ behavior and the
likely costs of opportunistic behavior by a partner. Such concerns are further
compounded by the inherently unpredictable nature of such relationships—
rapid changes in the business environment may cause organizations to alter
their needs and orientation, thus affecting their ongoing partnerships. Conse-
quently, to build ties that effectively address their needs while minimizing the
risks posed by such concerns, firms must be able to identify potential partners
and have an idea of a given partner’s needs and requirements. Firms also need
information about the reliability of those partners, especially when success
depends heavily on the partner’s behavior (Bleeke and Ernst 1993).
As highlighted earlier, an important source of information that guides the
interest of firms toward new alliances with specific partners is the social net-
works in which the focal firms are embedded. Faced with uncertainty, firms
usually leverage existing network resources to acquire information that lowers
search costs and mitigates the risk of opportunism in potential partnerships.
Granovetter (1985) noted that ‘the widespread preference for transacting with
individuals of known reputation implies that few are actually content to rely
on either generalized morality or institutional arrangements to guard against
trouble’ (490). Individuals rely on ‘trusted informants’ who have dealt with the
potential partner and found him or her trustworthy, or, even better, on ‘infor-
mation from one’s own past dealings with that person’ (490). By providing
firms with access to information about potential partners, network resources
based on prior ties play a critical role in helping firms mitigate uncertainties
50 NETWORK RESOURCES AND FORMATION OF TIES

regarding potential partners. At the same time, they influence the extent to
which firms become aware of potential partners and thus have a large impact
on the opportunity sets firms perceive for viable alliances.
While the previous chapter established the importance of network
resources as a catalyst for firms to enter new alliances, it set aside the ques-
tion of with whom those partnerships are formed. The study detailed in this
chapter considers how network resources determine partner choice rather
than when or why firms entered partnerships. This requires shifting the unit
of analysis from the firm to the dyad. Thus, the study examines the factors
explaining which of all possible dyads resulted in alliances during the observed
period and the role of network resources in shaping those outcomes. In
particular, I explore how network resources can drive the choice of partners
for alliances. While my focus here shifts the unit of analysis from the firm
to potential partner dyads, the overall perspective still very much involves
how firms’ network resources shape their proclivities to enter new alliances
and their partner choices. Thus, network resources reside not only within the
overall accumulation of ties a firm possesses but also within the pattern of
dyadic ties a firm creates through its specific partnerships. While exploring the
role of network resources in shaping which pairs of firms (of all possible pairs
of firms) enter into alliances, I also consider the effects of resource dependence
on these outcomes.

Theory and hypotheses

STRATEGIC INTERDEPENDENCE
Strategic interdependence describes a situation in which one organization has
resources or capabilities beneficial to, but not possessed by, the other and
vice versa. Aiken and Hage (1968) noted that organizations face such inter-
dependence ‘because of their need for resources—not only money, but also
resources such as specialized skills, access to particular kinds of markets, and
the like’ (914–15). Though much of the early research on strategic alliances
focused only on the firm or industry level, it was nonetheless influenced by
this perspective, which suggested that firms would ally with those with whom
they shared the greatest interdependence.
At the firm level, scholars have sought to show the role of resource con-
tingencies as an important predictor of a firm’s proclivity to enter alliances.
Eisenhardt and Schoonhoven (1996), for instance, found that firms in vulner-
able strategic positions were more likely to enter new alliances. Mitchell and
Singh (1992) explored the role of incumbency in guiding alliance behavior
in emerging technological subfields. Similarly, other scholars have looked at
 CHOICE OF PARTNERS IN ALLIANCES 51

firms’ attributes such as size, age, and financial resources as important pre-
dictors of their propensities to enter strategic alliances with one other (Barley,
Freeman, and Hybels 1992; Kogut, Shan, and Walker 1992; Burgers, Hill, and
Kim 1993). A rich literature on the formation of relations among social service
agencies that developed in the 1960s and 1970s also supported this perspective
(for a review, see Galaskiewicz 1985a). This research built on the original open
systems model of resource procurement but added an exchange perspective
that suggested that organizations enter partnerships when they perceive criti-
cal strategic interdependence with other organizations in their environments
(e.g. Levine and White 1961; Aiken and Hage 1968; Schermerhorn 1975;
Whetten 1977). Richardson (1972), in a theoretical economic account, also
proposed that the necessity for complementary resources is a key driver of
interorganizational cooperation. Applied to the dyadic context, these argu-
ments suggest that firms seek ties with partners who can help them manage
such strategic interdependencies (Litwak and Hylton 1962; Paulson 1976;
Schmidt and Kochan 1977).
Additional research efforts based on resource dependence perspectives have
been at the interindustry level: researchers have tested the role of strategic
interdependence empirically by predicting the number of alliances formed
across industries (Pfeffer and Nowak 1976; Duncan 1982). These studies have
revealed distinct patterns, such as densely linked cliques, and have tried to
explain these patterns using principles of strategic interdependence. Shan
and Hamilton (1991), for instance, described how country-specific resource
advantages within the biotechnology sector have guided Japanese firms’
choices of partners for specific kinds of alliances. Along the same lines, Nohria
and Garcia-Pont (1991) documented how the specific strategic capabilities of
automotive firms have moderated the pattern of alliances among them. This
research suggests a baseline hypothesis that firms are driven to enter alliances
by critical strategic interdependence.
Hypothesis 1: Two firms with high strategic interdependence are more likely to form
an alliance than are other, noninterdependent firms.

ALLIANCE FORMATION AND NETWORK RESOURCES

Although interdependence-based perspectives provide insights into tie forma-
tion between firms, they may not adequately account for alliance formation.
For example, not all possible opportunities for sharing interdependence across
firms actually materialize as alliances. An account of alliance formation that
focuses only on interdependence does not examine how firms learn about
new alliance opportunities and overcome the obstacles to such partnerships.
Implicit in such accounts is the assumption that firms exist in an atomistic
52 NETWORK RESOURCES AND FORMATION OF TIES

system in which information is freely available and equally accessible to all,

and opportunities for alliances are exogenously presented.
As highlighted earlier, contrary to the view presented above, there is con-
siderable perceived uncertainty surrounding the formation of new alliances
by firms. This uncertainty stems from two main sources. First, organizations
have difficulty obtaining information about the competencies and needs of
potential partners. This knowledge is essential to assess the potential value
of an alliance. An organization aware of the competencies and needs of a
potential partner is in a better position to assess whether the alliance can
simultaneously serve both its own needs and those of its partners. Yet organ-
izational needs and capabilities are multifaceted and ambiguous. Accurate
information on needs and capabilities of other organizations may be difficult
to obtain before an alliance is initiated. In most cases, it may require access
to confidential information that would not be revealed outside an established
partnership. This paucity of information is even more marked between firms
from different geographic regions.
The second source of uncertainty that affects strategic alliances is the
scarcity of information about the reliability of the potential partners, whose
behavior is a key factor in the success of an alliance (Gulati 1995a, 1995b).
Such behavioral uncertainty is intrinsic to voluntary cooperation; indeed, it
plays a central role in Coase’s theory ([1937] 1952) of the firm and in the trans-
action cost perspective (Williamson 1985). Organizations entering alliances
face considerable moral hazard concerns because of the unpredictability of
the behavior of partners and the likely costs of opportunistic behavior by a
partner (Kogut 1988a, 1988b; Hamel, Doz, and Prahalad 1989). A partner
organization may either free ride by limiting its contributions to an alliance or
may simply behave opportunistically, taking advantage of the close relation-
ship to use resources or information in ways that may damage its partner’s
interests. In addition, rapid and unpredictable changes in the environment
may lead to changes in an organization’s needs and its orientation toward
ongoing partnerships (MacIntyre 1981).
The paucity of reliable information about the capabilities, needs, and
behavior of potential partners creates a significant informational hurdle for
organizations considering strategic alliances. Yet the explosive growth of
strategic alliances suggests that organizations are able to overcome such hur-
dles with frequency. How do they do it? Are there systematic patterns in the
formation of alliances? Are these driven by the firm’s social contexts? And
what consequences does the behavior of partners have for the social context in
which new strategic alliances take place?
I propose here that by channeling information about the availability of
new opportunities and the reliability of potential partners, network resources
resulting from a firm’s network of prior alliances can be a powerful catalyst
in shaping not only the proclivity of a firm to enter into new alliances—as I
 CHOICE OF PARTNERS IN ALLIANCES 53

showed in the last chapter—but also with whom a focal firm partners. The
information shared in such networks guides alliance formation in two main
ways. First, networks make potential partners aware of each other’s existence,
needs, capabilities, and alliance requirements, and thus reduce search costs.
Without such information, an alliance between two firms is less likely (Van de
Ven 1976).
Second, network resources can mitigate moral hazards by providing infor-
mation to firms about potential partners that can diminish the risks of
alliances and significantly influence the formation of new alliances and the
firm’s choice of partners. As discussed in the previous chapters, interorgan-
izational networks create valuable network resources that provide information
about not only the availability of potential partners but also their reliability.
This can happen through both proximate and more distant network ties.
For instance, at the more proximate level, when two firms have common
third partners, either party’s damaging behavior will likely be reported to
the common partner, and the reputational consequences of this information-
sharing can serve as an effective deterrent (Kreps 1990; Raub and Weesie 1990;
Portes and Sensenbrenner 1993; Burt and Knez 1995). Thus, because network
resources not only provide information but also create reputational circuits,
they are likely to promote greater awareness and confidence among potential
partners, which in turn is likely to lead to more ties between them.
A broader view of the influence of network resources suggests that the rep-
utation and visibility of an organization among its peers is strongly influenced
by its status. The greater an organization’s status, the more it has access to a
variety of sources of knowledge, and the richer is its collaborative experience,
both of which make it an attractive partner. In this instance, as in many
others, the status of individual firms is intertwined with the network resources
available to them (Podolny 1994). The signaling properties of status are par-
ticularly important network resources in uncertain environments, where the
attractiveness of a potential partner can be gauged primarily from such indi-
cators, which in turn depend on the organizations (or types of organizations)
already tied to this partner (Podolny 1994). This phenomenon has important
behavioral consequences: if the status of the partners firms choose enhances
their own attractiveness, organizations will tend to seek high-status partners.
Figures 3.1 and 3.2 depict two different theoretical explanations for firm
action: (a) the atomistic, strategic interdependence view and (b) a social
structural view. In Figure 3.1, information is depicted as freely available and
equally accessible to all actors. Firms in such a context are rational actors
aware of the strategic interdependencies they face and thus systematically
identify partners through whom they can resolve those interdependencies.
By focusing exclusively on strategic interdependencies as drivers of alliances,
however, this perspective ignores factors that may lead to the availability of
alliance opportunities in the first place.
54 NETWORK RESOURCES AND FORMATION OF TIES

Strategic
Firm interests
interdependence

External
Alliance formation
opportunities

Figure 3.1. Strategic interdependence theory of alliance formation

In contrast, the social structural model (Figure 3.2) points to the impor-
tant role of social networks in guiding firm action through the exchange
of information about the availability, reliability, and specific capabilities of
current and potential partners. That social networks are conduits of valuable
information has been observed in a variety of contexts, ranging from inter-
personal ties, which can relay employment information (Granovetter 1973), to
interlocking directorates, which are channels of information on organizational
practices (for a review of the literature on interlocks, see Mizruchi 1996). One
theme throughout this body of research is that the social networks of ties in
which actors are embedded shape the flow of information between them (e.g.
Granovetter 1985, 1992; Emirbayer and Goodwin 1994). Differential access
to information in turn moderates the behavior of actors. A similar dynamic
is proposed here, in which a network of prior alliances shapes the likelihood

Strategic
Firm interests
interdependence

Social structure as
External
the context of Alliance formation
opportunities
action

Figure 3.2. Social structural theory of alliance formation (adapted from Burt 1982)
 CHOICE OF PARTNERS IN ALLIANCES 55

that participating firms will enter future alliances. I discuss the effects of prox-
imate and more distant components of networks and the network resources
they generate in greater detail below, labeling them relational and structural
embeddedness, respectively.
The feedback loop from action to social structure in Figure 3.2 indicates
the dynamic and iterative relationship of these two factors over time in the
current context: new alliances alter the social structure that influenced their
creation. This feedback makes the ontological status of the emergent alliance
network quite ambiguous and precludes conceptualizing it as either strategy
or structure. Most likely, it involves both. I provide a more detailed account of
this dynamic structure at the end of this chapter, when I discuss a follow-up
study.
Given this dynamic interplay between firm action and its social network,
network resources can be considered resident within a firm but also within
ties it has with others based on past interactions. At the firm level, a firm
possesses network resources that arise from the sum total of ties it has with
others and from its placement in the overall network. At the dyad level,
those network resources are resident in ties with specific others resulting from
intimate interaction with these others (Dyer and Singh 1998).
Two distinct components of network resources are relevant to this discus-
sion: the relational component, made up of the direct relationships within
which a firm is embedded, and the structural component, which encompasses
the overall social network within which firms exist (Granovetter 1992). The
relational component of social structure provides direct, experience-based
knowledge about current and prior alliance partners; the structural compo-
nent provides indirect knowledge about potential partners that firms obtain
from prior partners, from these allies’ partners, and so on. Both the relational
and structural components of social structure are influential in alliance for-
mation and affect the search costs and moral hazard concerns associated with
the formation of alliances.

Relational factors
The relational component of network resources results from closer ties
between firms that provide each firm with information about the other.
This first-hand information is particularly effective because (a) it is cheap,
(b) individual firm members have a cognitive bias toward trusting first-hand
information, (c ) partnering organizations have an economic incentive to be
honest and to prevent jeopardizing future ties, and (d) close interfirm ties
become suffused with social elements that enhance the likelihood of trustwor-
thy behavior (Granovetter 1985).
By providing access to information, the relational component of network
resources serves two important functions, both of which are likely to enhance
56 NETWORK RESOURCES AND FORMATION OF TIES

the possibility of further ties between firms. First, firms with relational con-
nections are likely to have greater understanding of each other’s needs and
capabilities and are thus more likely than those without such connections to
spot new opportunities for an alliance. Second, information about a partner
based on prior interactions can reduce the hazards associated with future
transactions and thus increase the parties’ interest in future ties (Zucker 1986;
Kogut 1989; Heide and Miner 1992; Gulati 1995a).
As indicated by one manager I interviewed, firm managers often embed
their new ties by relying extensively on information from past partners (Gulati
1993):
Our [past and current alliance partners] are familiar with many of our projects from
their very inception and if there is potential for an alliance, we discuss it. Likewise, we
learn about many of their product goals very early on and we actively explore alliance
opportunities with them.

Such comments reflect the link between past alliances and new partnerships.
Several researchers have written about the evolution of partnerships
between firms with prior relational ties. Levinthal and Fichman (1988)
described dyadic interorganizational attachments that develop over time as
firms accumulate experience through interactions. Granovetter (1973) distin-
guished strong and weak ties by the frequency of past interaction between
actors. Along the same lines, Krackhardt (1992) described trusting relations
between actors, which he called ‘philos’, as the outcome of positive effects of
both their current and past interactions.
Scholars have also examined the incentives for firms to engage in exchange
relations repeatedly. Cook and Emerson (1978) described a process of ‘com-
mitment’, in which economic actors develop distinct preferences for engaging
in subsequent exchanges with prior partners, a pattern inconsistent with con-
ventional microeconomic visions of individual decision-making in an asocial
market comprising many actors. Also, prior research on interorganizational
relations among human service agencies discussed ‘domain consensus’ as an
important prelude to new ties (Levine and White 1961; Litwak and Hylton
1962). Domain consensus refers to agreement among participants about the
role and scope of ties. Thus, firms with prior alliances are more likely to have
domain consensus than are others with more limited partnership experience.
Hence, this literature suggests that such firms would also be more likely to
form new ties. Along similar lines, Podolny (1994) argued that the greater the
market uncertainty, the more likely firms are to engage in repeated market
exchange with prior partners.
New ties between prior partners can also result from repetitive
momentum—once two firms enter an alliance, they do so repeatedly in the
future. Such repetitive behavior by organizations results from the establish-
ment of organizational routines. A vast amount of empirical research supports
 CHOICE OF PARTNERS IN ALLIANCES 57

this notion of repeated action (e.g. Miller and Friesen 1980; Amburgey and
Miner 1992; Amburgey, Kelly, and Barnett 1993). In the dyadic context, two
firms might develop specific routines for managing their interface, making it
easier for them to initiate new alliances with each other (Cyert and March
1963; Nelson and Winter 1982). Furthermore, each organization’s top man-
agers could acquire mindsets that not only focus their attention on forming
new alliances but also predispose them to making new ties with each other.
The theme across these explanations for repeated interorganizational ties
is that prior ties create a strong social connection, which in turn leads to
future interactions. From a focal firm’s viewpoint, prior cohesive ties with
other organizations provide channels through which it and its partner can
learn about the competencies and the reliability of the other, making strong
past ties a network resource that can have beneficial consequences for the firm
in the future. Through a close relationship, the firm may also become aware of
new opportunities for cooperation that would be difficult to identify outside
of a partnership. Thus, a history of cooperation can be viewed as an important
resource as it becomes a unique source of information about the partner’s
capabilities and reliability and increases the probability of new alliances with
a specific prior partner. The following, then, can be hypothesized.
Hypothesis 2a: The higher the number of past alliances between a focal firm and a
particular partner, the more likely they are to form new alliances with each other.

The above hypothesis assumes a positive monotonic effect of prior ties and
the network resources they generate on alliance formation. This assumption is
incompatible with two ideas. First, it conflicts with the notion that the number
of possible alliances between two firms is limited, a notion akin to carrying
capacity in population ecology (Baum and Oliver 1992). Even when two firms
are distinct and share numerous arenas for collaboration, such a limit prob-
ably exists—due to finite opportunities for collaboration or one or both
partners’ fears of overdependence. An additional discrepant notion is that
the marginal increment of information provided to firms entering multiple
alliances with each other diminishes with each new partnership. These issues
suggest that network resources may have diminishing marginal returns and
that strategic considerations may place limits on the benefits accruing from
network resources. As a result, the growth in network resources resulting from
a firm’s past ties with a particular partner may be followed by reduced alliance
activity between those two firms in the future.
Hypothesis 2b: There is an inverted U-shaped relationship between the number of
past alliances a focal firm shares with a particular partner, and the likelihood of their
forming new alliances with each other.

Temporal dynamics can also play a role in alliance formation. Temporal ele-
ments include the accumulation of prior alliances over time and the amount
58 NETWORK RESOURCES AND FORMATION OF TIES

of time that has passed since the initiation of the last alliance a focal firm
entered with a particular partner. Several researchers studying the dynamics of
organizational change have suggested that organizations have short memories:
they are more likely to engage in activities similar to those of the recent past,
but the likelihood of an action diminishes as the time elapsed since the last
similar action increases (e.g. Amburgey, Kelly, and Barnett 1993). This view
is consistent with the notion that routines drive organization action (Cyert
and March 1963); recently applied routines are more salient in driving firm
behavior than those utilized in the more distant past. Together, these ideas
suggest that network resources of a firm may deplete and thus diminish in
influence over time.
Hypothesis 3: The likelihood of an alliance between two firms diminishes as the time
elapsed since they last entered an alliance increases.

Structural factors
In many instances, the indirect connections of a focal firm with other firms
through common partners can also become an important network resource
and in turn mobilize its entry into new alliances. This can occur for the two
reasons highlighted earlier: first, the resources resulting from network ties
promote awareness and reduce search costs and second, network resources
can reduce moral hazard concerns for firms that reside within close proximity
in a network. Thus, beyond direct ties, the overall structural context in which
a firm is placed can also generate network resources that in turn influence
its choice of new alliance partners. The example of the conference hosted by
DEC discussed in the introduction illustrates such a dynamic.
As this example suggests, although the role of direct ties in fostering new
alliances is intuitively compelling and clearly visible, indirect connections
through common partners are also components of network resources that can
play an important role in the formation of new alliances. Like that gained
through previous direct ties, information gained through third-party ties can
also be a valuable resource for a focal firm by serving two purposes. First, by
serving as effective referral networks, indirect ties make a focal firm aware (or
more aware) of potential partners (Van de Ven 1976). Second, as highlighted
by both economists and sociologists, a given firm can leverage common ties as
an important basis for enforceable trust (Kreps 1990; Raub and Weesie 1990;
Portes and Sensenbrenner 1993; Burt and Knez 1995). The anticipated utility
of both a tie with a given partner and those with shared partners motivates
good behavior. Each partner’s knowledge that the other has much to lose from
behaving opportunistically enhances its confidence in the other.
Indirect ties can also influence alliance formation for technological reasons.
In sectors such as industrial automation, compatibility between firms across
product lines can be extremely beneficial to firms. To ensure compatibility
 CHOICE OF PARTNERS IN ALLIANCES 59

across their product lines, a focal firm may prefer an alliance with another
firm with whom they share many common partners. This reasoning is akin
to the ‘network externalities’ argument made by economists, in which consid-
erations of compatibility lead firms to participate in the same or competing
networks (Katz and Shapiro 1985).
The simplest form of an indirect tie is the sharing of a third partner. A
shared contact of a dyad (i, j ) is any firm in direct contact with both firms
i and j . A focal firm is likely to have access to more information about an
indirectly tied firm (and vice versa) than about a firm with no such connec-
tion, and the larger the number of third partners the focal firm shares with
another firm, the more information these two firms are likely to have about
each other.1
To isolate the role of the structural from the relational context and their
concomitant network resources, I examine whether the presence of common
ties enhances the likelihood of an alliance between two firms, in the absence
of prior direct ties:
Hypothesis 4: In the absence of prior direct ties between a focal firm and potential
partners, the larger the number of their common third-party ties, the more likely they
are to form new alliances with each other.

So far, I have assessed the possibility that direct and one-level-removed ties
between a focal firm and its potential partners increase the likelihood of their
entering an alliance together. In network terms, these are ties of path distance
one and two, respectively. Extending the analytical frame of reference from
dyads and triads to the whole social system of allied firms raises the question
of whether indirect ties beyond the first level also generate network resources
that shape the formation of new alliances. In other words, I assess whether the
network resources a focal firm possesses result not only from its proximate
ties but also from the overarching networks in which it is placed. If firms
use the shortest available routes to gain information, which is reasonable to
assume given the costs associated with indirect information access and the
¹ Having common third-party ties is different from structural equivalence (Burt 1976) because
the logic behind each construct and their basis of influence is different (Marsden and Friedkin
1993; Mizruchi 1993). Two actors are structurally equivalent to the extent that they have a similar
pattern of relations in a system and are thus equally tied to the same other actors. Two actors who
occupy the same structurally equivalent position in their social structure are expected to be of similar
status and to develop similar perceptions of the utility of pursuing a given behavior (Burt 1987).
Common third-party ties, by contrast, emphasize cohesion—behavioral communication between ego
and alter—instead of status-based processes. Operationally, as well, structural equivalence and sharing
common third-party ties are not identical. Although by definition two structurally equivalent firms
will have a number of common connections, the reverse need not be true. Two firms with many
partners in common are not necessarily structurally equivalent. More generally, although the third-
party argument focuses on the information benefits and the trust-enhancing properties of common
ties, the structural equivalence argument focuses on the status-formation value of similar relational
profiles. In the cohesion-based framework here, a firm is likely to enter an alliance with its partner’s
partner, regardless of the status of the third player.
60 NETWORK RESOURCES AND FORMATION OF TIES

diminishing value of indirect referrals, the distance between two firms in an

alliance network should affect the likelihood of their forming an alliance:
Hypothesis 5: The shorter the path between a focal firm and potential partners in a
network of prior alliances, the more likely they are to form new alliances with each
other.

SOCIAL STRUCTURE AND STRATEGIC INTERDEPENDENCE

I have postulated additive effects of strategic interdependence and network
resources and assumed in the hypotheses that network resources are equally
efficacious in influencing alliance formation in both interdependent and non-
interdependent dyads. However, alliances may be more likely to result from
simultaneous strategic interdependence. Specifically, indirect ties are likely
to be more effective in facilitating alliances for interdependent firms than
for noninterdependent firms. That is, common ties are likely to amplify the
possibility of alliances between interdependent firms more than they would
between other firms. I assess the possibility of this relationship for firms with
common third-party ties and those with a greater path distance.
Hypothesis 6a: Pairs of interdependent firms with common third-party ties will be
more likely to form new alliances with each other than noninterdependent firms with
similar third-party ties.

Hypothesis 6b: Pairs of interdependent firms connected through indirect ties of a given
path distance will be more likely to form new alliances with each other than non-
interdependent firms with indirect connections of similar distances.

Empirical research

METHOD
I tested the above hypotheses with comprehensive cross-sectional time-series
data on alliances within the industrial automation, new materials, and auto-
motive sectors among American, European, and Japanese firms between 1970
and 1989 (details in Appendix 1, as described in the ‘Alliance Formation Data-
base’). Although this was a large-sample study, it had qualitative antecedents.
Because I was interested in understanding how firms come to enter alliances,
I initiated the research with extensive field interviews conducted at eight firms
that had numerous alliances. At each firm, I asked ten to twenty managers
 CHOICE OF PARTNERS IN ALLIANCES 61

actively engaged in forming new alliances about some of the considerations

underlying their recent alliance decisions.
I examined the factors that affect the likelihood that a pair of firms will enter
an alliance at a given time. The unit of analysis was a dyad, with behavior
assessed over time. The opportunity set of potential alliances included all
feasible dyads in a given year. Given this initial set, I inquired into the factors
that increased the likelihood that firms in a particular dyad entered a strategic
alliance. I compared the alliance behavior of a panel of dyads during 1981–9, a
period that saw unprecedented growth in alliances. This panel design allowed
me to draw causal inferences and to assess the dynamics underlying alliance
formation. To compute network measures, I constructed adjacency matrices
representing the relationships between firms, with separate matrices for each
industry for each year. For each matrix, I included all alliance activity among
industry panel members up to the prior year (details in Appendix 1 under the
section labeled ‘Constructing the Social Networks’).
Each dyad-year record was dichotomously coded for a dependent variable
indicating whether the pair of firms entered an alliance with each other in the
given year. No dyad entered more than one alliance in a given year. Each dyad-
year record included various attributes of both firms as well as a number of
social structural measures based on the cumulative alliance activity within the
industry until the end of the year prior to the given year. Details on measures
of interdependence can be found in the source article.
To address concerns of heterogeneity, I employed a random-effects panel
probit model, developed by Butler and Moffitt (1982), for the statistical
analysis. Details are provided in Appendix 2. To ensure the robustness of
findings, I compared my results with those obtained with a fixed-effects model
(Chamberlain 1985). I employed a random-effects model for two reasons.
First, estimates based on fixed-effects models can be biased for panels over
short periods (Heckman 1981a, 1981b; Hsiao 1986; Chintagunta, Jain, and
Vilcassim 1991). This is not a problem with random-effects models. As all
the dyads in my sample were present for only nine years, random effects
was clearly the favored approach. Second, fixed-effects models cannot include
time-independent covariates, a limitation that would have meant excluding
interdependence, the key indicator for hypothesis 1, and the dummy vari-
ables for sector. An analysis without these variables would have been severely
limited.
Much like dyad-level heterogeneity, there is also the potential for firm-level
heterogeneity, which can occur if individual firms in the dyads display differ-
ing time-constant propensities to engage in alliances that are not captured by
any of the independent variables. This can further compound the problems of
interdependence discussed below. To account for such a possibility, I included
two control variables for each firm’s history (alliance history, firm 1 and
62 NETWORK RESOURCES AND FORMATION OF TIES

alliance history, firm 2). This is an effective method of controlling for firm-
level heterogeneity (Heckman and Borjas 1980).

RESULTS
Table 3.1 presents descriptive statistics for and correlations among the vari-
ables.
Table 3.2 reports the models explaining alliance formation. The first col-
umn reports the effects of the various firm- and dyad-level covariates included
as controls. In column 2, I include the measure of strategic interdependence.
Columns 3–7 show sequential introduction of the social structural variables
that assess the role of prior direct and indirect ties and the time elapsed since
the last alliance. Columns 8 and 9 report the results for each of the postulated
interaction effects. The results reported in Table 3.2 are based on a risk set
that includes only dyads of firms that had both previously entered at least one
other alliance. All analyses were also conducted with two additional risk sets:
one comprised all possible dyads in each sector regardless of whether dyad
members had ever entered an alliance; the other comprised dyads in which at
least one member had entered at least one past alliance. Results for these risk
sets were the same in terms of directionality and significance.
An assumption underlying such a dyadic analysis is that observations in
each year are independent of each other. For the analysis of dyads, this assump-
tion can be a concern because the presence of the same firm in multiple dyads
in the same year can lead to interdependence, also known as the common-
actor effect (Lincoln 1984). Such interdependence could in turn lead to inef-
ficient parameter estimates and difficulty in rigorously assessing the statistical
significance of results (cf. Fernandez 1991).
I treated the problem of interdependence as a sampling issue and consid-
ered multiple alliances by a firm in a given year as overrepresented. During
model estimation, I employed standard weighting methods and discounted
oversampled cases in proportion to their extent of oversampling (Hoem 1985;
Barnett 1993). According to such an approach, if a firm entered k alliances in
a given year, each record would be given a weight of i /k in the estimation.
A complication stemmed from the possibility that both members of a dyad
might have entered multiple alliances in a given year, which required weight-
ing for each partner. For the dyadic context, I decided to weight each record by
the average of the weights for each partner. The results reported in Table 3.2
include this correction. In Appendix 2, I discuss a number of additional tests
undertaken to address concerns of interdependence.
Several conclusions can immediately be drawn from the results in Table 3.2.
The positive and significant coefficient of the variable strategic interdepen-
dence introduced in column 2 supports hypothesis 1 and indicates that firms
Table 3.1. Descriptive statistics and correlation matrix, all spells

Variable Mean SD Lowest Highest 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19

1. Alliance .21 .09 0 1 — — — — — — — — — — — — — — — — — — —

2. Strategic interdependence .74 .44 0 1 .01 — — — — — — — — — — — — — — — — — —
3. Repeated ties .12 .40 0 5 .09 .03 — — — — — — — — — — — — — — — — —
4. Repeated ties × Repeated .17 .63 0 25 .07 .02 .84 — — — — — — — — — — — — — — — —
ties
5. Duration .21 .88 0 8 .07 .02 .56 .29 — — — — — — — — — — — — — — —
6. Duration × Duration .82 2.58 0 64 .05 .02 .40 .19 .93 — — — — — — — — — — — — — —
7. Common ties .56 1.21 0 9 .10 .06 .42 .15 .36 .26 — — — — — — — — — — — — —
8. Distance 2.18 1.85 0 7 .08 .05 .33 .21 .22 .15 .55 — — — — — — — — — — — —
9. Strategic interdependence .47 1.15 0 9 .08 .64 .37 .14 .29 .20 .92 .49 — — — — — — — — — — —
× Common ties
10. Strategic interdependence 1.77 2.15 0 7 .08 .67 .29 .19 .19 .13 .50 .86 .56 — — — — — — — — — —

CHOICE OF PARTNERS IN ALLIANCES 63

× Distance
11. Time 5.72 1.98 0 8 .00 −.04 .04 .03 .08 .07 .04 .12 .03 .09 — — — — — — — — —
12. Sector 1 .44 .49 0 1 −.01 .10 −.06 −.04 −.02 −.01 −.15 −.20 −.13 −.15 −.02 — — — — — — — —
13. Sector 2 .23 .42 0 1 .00 .07 −.03 −.02 .00 .00 −.09 −.14 −.08 −.10 .05 −.51 — — — — — — —
14. Total alliances 89.36 49.73 11 168 −.01 .09 −.04 −.03 .01 .01 −.14 −.16 −.13 −.13 .42 .44 −.14 — — — — — —
15. Alliance history, firm 1 3.00 2.79 0 16 .11 .09 .19 .13 .18 .13 .30 .28 .28 .27 .25 .04 −.04 .12 — — — — —
16. Alliance history, firm 2 3.13 2.90 0 16 .08 .09 .16 .10 .17 .13 .24 .27 .23 .27 .28 −.07 −.14 .00 −.04 — — — —
17. Size .27 .25 .09 .94 −.03 −.45 .06 .05 .05 .04 .08 .07 .02 −.05 .02 .02 .00 .02 .01 −.03 — — —
18. Performance .35 .29 .13 .90 .06 .02 .07 .03 .04 .02 .07 .01 .08 .01 −.01 −.03 .01 .08 −.04 .05 .04 — —
19. Solvency .24 .19 .07 .88 .17 −.20 .03 .01 .02 .01 .05 .06 .03 .01 .03 .02 .02 .04 .04 −.01 .52 .20 —
20. Liquidity .64 .22 .02 .80 −.09 −.36 .01 −.04 .03 .02 .03 .02 .03 .02 −.03 .09 −.07 .04 .04 .05 .05 .02 .07
 64 NETWORK RESOURCES AND FORMATION OF TIES
Table 3.2. Random-effects panel probit estimates (time-changing covariates)a

Variable 1 2 3 4 5 6 7 8 9

Constant −3.27∗ (.06) −3.55∗ (.13) −3.15∗ (.05) −3.15∗ (.05) −3.16∗ (.04) −3.17∗ (.05) −3.23∗ (.05) −3.22∗ (.05) −3.29∗ (.05)
Strategic interdependence — .26∗ (.08) .26∗ (.08) .30∗ (.03) .30∗ (.03) .28∗ (.03) .25∗ (.03) .36∗ (.03) .35∗ (.03)
Repeated ties — — .51∗ (.01) .63∗ (.03) .22∗ (.06) .26∗ (.06) .38∗ (.06) .28∗ (.05) .40∗ (.05)
Repeated ties × Repeated — — — −.04∗ (.01) −.05∗ (.02) −.03∗ (.01) −.03∗ (.01) −.03∗ (.01) −.03∗ (.01)
ties
Duration — — — — .31∗ (.036) .35∗ (.036) .31∗ (.036) .37∗ (.037) .32∗ (.035)
Duration × Duration — — — — −.04∗ (.005) −.04∗ (.005) −.04∗ (.005) −.04∗ (.005) −.04∗ (.005)
Common ties — — — — — .04∗ (.007) .001 (.008) .22∗ (.015) —
Distance — — — — — — −.07∗ (.005) — −.12∗ (.008)
Strategic interdependence — — — — — — — .20∗ (.015) —
× Common ties
Strategic interdependence — — — — — — — — −.06∗ (.008)
× Distance
Time .13∗ (.018) .13∗ (.018) .11∗ (.005) .11∗ (.005) .11∗ (.005) .11∗ (.005) .11∗ (.005) .11∗ (.005) .11∗ (.005)
Sector 1 −.68 (.12) −.07 (.12) −.04 (.04) −.05 (.03) −.03 (.03) −.003 (.03) .08 (.036) −.003 (.03) .08 (.03)
Sector 2 .21 (.09) .15 (.09) .17∗ (.03) .17∗ (.02) .19∗ (.03) .22∗ (.03) .32∗ (.03) .22∗ (.03) .32∗ (.03)
Total alliances .001 (.001) .001 (.001) .001∗ (.3E-03) .001∗ (.3E-03) .001∗ (.3E-03) .001∗ (.3E-03) .001∗ (.3E-03) .001∗ (.3E-03) .001∗ (.3E-03)
Alliance history, firm 1 .16∗ (.009) .15∗ (.009) .15∗ (.004) .15∗ (.004) .15∗ (.004) .15∗ (.004) .15∗ (.003) .15∗ (.003) .15∗ (.003)
Alliance history, firm 2 .13∗ (.009) .12∗ (.009) .12∗ (.003) .12∗ (.003) .13∗ (.003) .12∗ (.003) .12∗ (.003) .12∗ (.003) .12∗ (.003)
Size −.48∗ (.11) −.72∗ (.11) −.64∗ (.04) −.64∗ (.04) −.63∗ (.04) −.61∗ (.04) −.60∗ (.04) −.60∗ (.04) −.59∗ (.04)
Performance .8E-03 (.003) .8E-03 (.003) .001 (.007) .001 (.006) .001 (.006) .001 (.006) .001 (.006) .001 (.006) .001 (.006)
Solvency .06 (.10) .04 (.10) .03 (.04) .03 (.04) .03 (.04) .03 (.04) .02 (.04) .03 (.04) .013 (.04)
Liquidity −.11 (.13) −.12 (.13) −.14∗ (.04) −.14 ∗ (.04) −.14∗ (.04) −.15∗ (.04) −.16∗ (.04) −.17∗ (.04) −.17∗ (.04)
Rho .65∗ (.02) .67∗ (.02) .69∗ (.02) .70∗ (.02) .72∗ (.02) .72∗ (.019) .73∗ (.018) .73∗ (.018) .74∗ (.016)
n 7,266 7,266 7,266 7,266 7,266 7,266 7,266 7,266 7,266
Log-likelihood −955.03 −948.74 −936.59 −935.17 −933.34 −932.16 −925.11 −924.95 −923.40
˜2 31.97∗ 33.39∗ 54.18∗ 54.57∗ 59.72∗ 60.50∗ 60.70∗ 61.27∗ 61.83∗

a
Standard errors in parentheses.
∗
p < .01.
 CHOICE OF PARTNERS IN ALLIANCES 65

are more likely to seek alliances with partners with whom they share greater
interdependence.
The control variables generally have the predicted signs. With dummy
variables for each year, I observed no systematic temporal effects, but
the linear term for time is positive and significant, suggesting a general
increase in alliance propensity over time. The control variable for sector 1 is
nonsignificant, while the one for sector 2 becomes significant in later models.
This suggests that while there are no intrinsic differences in alliance forma-
tion between the new materials and automotive sectors, firms in industrial
automation show a higher propensity for alliances than those in automotive.
Because this finding does not reveal whether the main effects differ across the
three industries, I estimated unrestricted models for each industry. The signs
of the coefficients indicated that the postulated directionality and significance
of the main effects observed in the pooled sample held up for each sector.
There is also support for the influence of mimetic behavior on alliance for-
mation, as shown by the effects of total alliances formed in the industry in the
prior year. This variable is nonsignificant in earlier models but becomes more
significant later, suggesting a modest suppresser effect of the new variables
added. The variables for each firm’s history of alliances suggest that dyads with
more experienced members are more likely to form an alliance. As discussed
in Appendix 2, these variables also control for firm-level heterogeneity.
The ratios for dyad-member attributes show mixed results. Differences in
performance and solvency across the two firms in a dyad did not affect alliance
formation, but the negative and significant coefficients for size and liquidity
suggest that firms that differ in amount of assets and liquidity are more likely
to enter an alliance.
The results shown in columns 3–7 are by and large consistent with the
hypothesized main effects of social structure. In column 3, the positive and
significant coefficient of repeated ties, which indicates prior alliances between
two firms, supports hypothesis 2a and suggests that firms with a history of
alliances have a higher propensity to ally with each other repeatedly than do
firms with no such history. Addition of the squared term for repeated ties in
column 4 suggests there is indeed a diminishing effect: up to about four prior
alliances positively influenced current alliance formation; additional alliances
after that point were associated with a decline in the likelihood of alliance
formation.
Column 5 shows the effects of the time elapsed since a last alliance on
current alliance formation, considered in hypothesis 3. I also included here a
quadratic term to test for the possibility of nonlinear influence of this variable.
According to the linear and quadratic estimates, there is an inverted U-shaped
relationship between the time elapsed since a prior alliance and the likelihood
of a new alliance. The likelihood of two firms entering an alliance increases
during the first 3.8 years (approximately) and then diminishes over time.
66 NETWORK RESOURCES AND FORMATION OF TIES

The positive and significant coefficient of common ties and the negative
coefficient of distance in columns 6 and 7 support hypotheses 4 and 5 and
suggest that having common third partners or even indirect connections
enhances the probability that two firms will enter an alliance. The positive
coefficient of common ties indicates that the larger the number of com-
mon third partners shared by two unconnected firms, the more likely they
are to enter an alliance. The negative coefficient of distance in column 7
indicates that the more distant two firms are in an alliance network, the
less likely they are to seek mutual alliances. In column 7, the variable for
the number of common ties becomes nonsignificant when distance is intro-
duced. Because common ties refers to a path distance of two between firms,
while distance captures all distances of two or greater, this result is not
surprising.
The effects of the interactions of interdependence with common ties and
distance are introduced in columns 8 and 9. Hypotheses 6a and 6b pre-
dicted that connected firms would enter alliances more frequently if the firms
were interdependent to begin with, implying that there would be interactions
between interdependence and common ties and between interdependence and
distance. The effects of the interaction terms are strong and significant. The
coefficient of the interaction in column 8 supports hypothesis 6a, indicating
that there is a higher likelihood of alliance formation between interdepen-
dent firms if they have numerous third-party connections. The negative and
significant coefficient of the interaction in column 9 supports hypothesis 6b
and indicates a lower likelihood of alliance formation between interdependent
firms that are further apart in an alliance network. Taken together, the sig-
nificant interaction effects suggest that prior indirect connections are more
influential in alliance formation among interdependent dyads than among
other dyads.
The random-effects models applied here generate a parameter rho, an indi-
cator of heterogeneity. An estimate close to zero implies little heterogeneity,
and all the time dependence in the alliance formation rate can be ascribed to
the independent variables included in the models. A significant rho implies
heterogeneity. Economists typically treat such heterogeneity as an exogenous
factor indicating the personal propensity of a unit (here, the dyad) to engage
in the activity characterized by the dependent variable (cf. Black, Moffitt, and
Warner 1990). Thus, a significant coefficient here would suggest that obser-
vationally identical dyads display different alliance propensities that remain
fixed because of permanent differences in their alliance preferences and other
unobserved factors. These could include pairs of firms developing specific
managerial routines for entering into and managing alliances with each other.
Or, in the case of firms not forming alliances, it could indicate that some
pairs of firms are separated by insurmountable barriers to their entering an
alliance. Given the possibility of multiple and confounding interpretations
 CHOICE OF PARTNERS IN ALLIANCES 67

of heterogeneity (cf. Granovetter 1988), I am cautious about drawing direct

inferences from this coefficient. For my purposes, rho primarily indicates
that heterogeneity exists and is accounted for in the panel model, and its
significant coefficients do indicate that unobserved factors not completely
captured by the independent variables are accommodated by the statistical
model.

The dynamic evolution of interorganizational

networks and the changing role of network resources
A subsequent article titled ‘Where Do Interorganizational Networks Come
From?’ builds on the research reported in this chapter and examines in
greater depth the development of the network resulting from cumulative
prior alliances (Gulati and Gargiulo 1999). This study is distinctive in its
focus on explaining the formation and development of interorganizational
networks, an important issue that has received only limited attention in
prior research because of the lack of longitudinal network data and because
prior research has focused on interorganizational networks that are rela-
tively stable over time. If network resources originating from the network
of prior alliances are important in determining which firms enter alliances
and with whom they enter alliances, then it is likely that such resources are
a key factor in determining how the very alliance networks from which they
emanate may evolve. The networks that result from the accumulation of prior
alliances are clearly dynamic entities that can transform significantly beyond
their original design, and the varying evolutionary paths can have varying
consequences.
In this follow-up article with coauthor Martin Gargiulo, I explore in greater
depth the development of strategic alliance networks and how the distribution
of network resources among actors within them influences the subsequent
evolution of this network. We propose that network resources should be
viewed not only as resident within firms but also as being embodied in the
cumulative network of prior ties in the industry context in which they operate.
Thus, network resources can be embodied in the industry network as well
when we consider their aggregate level and distribution available to actors
within it.
Building on the work cited in this and the previous chapter, this article
proposes that as more ties are created in an industry and more internalized
information is available about potential partners, organizations are more
likely to resort to that network for cues to their future alliance decisions, which
are thus more likely to be shaped by this emerging network. In turn, these
68 NETWORK RESOURCES AND FORMATION OF TIES

new alliances engender additional network resources that further increase the
informational value of the network, further enhancing its effect on subsequent
alliance formation. In this iterative process, new partnerships modify the pre-
vious alliance network, which then shapes the formation of future cooperative
ties.
Thus, we model the emergence of alliance networks imbued with network
resources that can be tapped by participating firms in a dynamic process
driven by exogenous interdependencies that prompt organizations to seek
cooperation and by endogenous network embeddedness mechanisms that
help them determine choice of partner. Our model shows how the entry
of firms into alliances can lead to the growing structural differentiation of
the industry network as a whole. This progressive differentiation in turn
enhances the magnitude of the resources available to firms within the net-
work and shapes their actions. As a result, the effect of a firm’s proximate-
tie-based network resources on its proclivity to enter alliances and choice of
partners is moderated by the extent of differentiation of the overall network
as well. Interorganizational networks are therefore the evolutionary products
of embedded organizational action in which new alliances are increasingly
embedded in the very same network that has shaped the organizational deci-
sions to form those alliances.
To empirically test these claims, this article develops a model that specifies
the mechanisms through which the existing alliance network enables orga-
nizations to decide with whom to build new alliances and shows how the
newly created ties can increase the informational content of the same alliance
network, enhancing its potential to shape future partnerships. The results
show the emergence of alliance networks and the concomitant availability of
network resources as a dynamic process driven by exogenous interdependen-
cies that prompt organizations to seek cooperation and by an endogenous
network formation process that influences partner choice. In other words, the
model shows how network resources shape behavior by both their presence
in a firm’s proximate ties and their distribution across all members of the
network itself. Such resources provide essential information that significantly
influences the formation and evolution of strategic alliance networks. The
growing structural differentiation of the network enhances the magnitude of
the network resources available to firms within the network and in turn shapes
their actions. In this instance, the very actions studied here—formation of
alliances—shape the network from which they emerge. The model provides
a systematic link between the social structure of an organizational field—
understood in network terms—and the behavior of organizations within the
field. This link is bidirectional. On one hand, the emerging social structure
progressively shapes organizational decisions about whether and with whom
to create new ties. On the other hand, this social structure is produced by
the (structurally shaped) decisions to establish interorganizational ties. We
 CHOICE OF PARTNERS IN ALLIANCES 69

show that interorganizational networks result not only from exogenous drivers
such as interdependence but also from an endogenous evolutionary dynamic
triggered by the very way in which organizations select potential partners.
In this model, actors react to conditions they have helped create and in the
process reproduce and change those very conditions.

Conclusion
The primary study in this chapter provides an important bridge between net-
work and resource dependence theorists studying interorganizational ties and
demonstrates the role of network resources in shaping not only the proclivity
of a firm to enter into new alliances (Chapter 2) but also its choice of part-
ners. More broadly, this chapter also contributes to the growing literature on
interorganizational networks. Network theorists have established the impor-
tance of social structure in guiding firm behavior but have paid less atten-
tion to the origin and perpetuation of interorganizational relations. Resource
dependence theorists have examined the critical contingencies guiding the
creation of new ties but have assumed that those ties are created in a social
vacuum. They admit that significant unexplained variance remains in resource
dependence accounts of tie formation and that additional explanations for this
variance should be explored (e.g. Pfeffer 1987). This study unites and extends
these two perspectives, exploring the role of both critical contingencies and
social structural factors in guiding the formation of interfirm ties.
By focusing on the dyad as the unit of analysis, this study provides empirical
support for the importance of network resource and strategic interdependence
factors in bringing firms together as alliance partners. It demonstrates that
the social context resulting from cumulative prior partnerships influences
alliance formation between firms. It also shows that interorganizational net-
works are valuable conduits for information about specific organizational
practices and that they provide an important impetus for guiding the choice
of partners.
The results of this empirical study suggest that of all the possible dyads of
focal firms and potential partners that could enter alliances over a ten-year
period, those with many prior direct ties, or with more third-party ties in
common, or with greater proximity in the network of prior alliances were
more likely to result in alliances. Simply stated, this study documents the role
of network resources in bringing firms together as alliance partners. Clearly,
network resources resulting from cumulative prior alliances influence alliance
formation between firms by providing information about specific organiza-
tions’ needs, resources, capabilities, and behavior, and thereby guide firms in
their choice of alliance partners.
70 NETWORK RESOURCES AND FORMATION OF TIES

The observed effects of network resources result from both the direct and
indirect ties firms have. Previously allied firms are likely to engage in further
alliances. This finding for the role of direct previous ties supports Larson’s
observation (1992) (from an inductive field study) that firms entered alliances
with each other repeatedly. An important catalyst for repeated alliances is
the availability of information to each partner. Significant information about
another firm’s reliability as a partner, its operations, and possible alliance
opportunities becomes available only after an alliance is in place. Hence, over
time a firm acquires more information and builds greater confidence in its
partners, increasing the likelihood of a new alliance.
Although prior ties between a focal firm and its partners constitute a form
of network resources that leads to new alliances, the results of this study
suggest that beyond a certain point, additional alliances between firms dimin-
ish the likelihood of future alliances. This confirms the notion of carrying
capacity, implying that there are limits to the number of alliances two firms
can sustain (Baum and Oliver 1992). Fears of overdependence may also trun-
cate the number of ties two firms will seek. Additionally, at some point the
informational benefits of a durable shared history reach a peak as alliances
run their life courses.
The study also shows that the time elapsed since a previous alliance influ-
ences new alliance formation, and the effect is inverse and U-shaped. A
repetitive-momentum argument would suggest that as the duration since
the last alliance increases, the likelihood of the organization engaging in the
initial action again diminishes (Amburgey, Kelly, and Barnett 1993). In the
dyadic context, however, for the first several years after an alliance forms, the
firms’ enhanced mutual awareness actually increases the likelihood of their
forming another alliance. Over time, this effect gives way to diminishing infor-
mation as past alliances end, and the momentum for forming new alliances
declines.
Ultimately, the study provides evidence of the impact of a firm’s network
resources on its proclivity for new alliances and choice of specific partners. I
demonstrate that the informational benefits of indirect ties between a focal
firm and its possible partners, both one-level-removed ties of path distance
two and more distant ties, affect the likelihood of their entering a new alliance.
A focal firm is more likely to enter into an alliance with previously uncon-
nected firms if they have common partners. Furthermore, the greater the
distance between a focal firm and a potential partner in a social network of
prior alliances, the less likely they are to ally. These findings suggest that a
firm’s social network of indirect ties is an important constituent element of
the network resources it possesses and serves as an effective referral mecha-
nism for bringing it together with potential alliance partners. The results also
indicate that dense colocation between a focal firm and potential partners
in an alliance network enhances mutual confidence as firms become aware
 CHOICE OF PARTNERS IN ALLIANCES 71

of the possible negative reputational consequences of their own or others’

opportunistic behavior.
The results also suggest the relevance of dyadic interdependence in guiding
alliance formation, confirming prior research on ties between human services
agencies (Litwak and Hylton 1962; Hage and Aiken 1967; Schermerhorn 1975;
Paulson 1976; Schmidt and Kochan 1977; Whetten 1977) and suggesting that
focal firms are more likely to seek out as alliance partners those with whom
they share interdependence. The role of interdependence is further confirmed
by several financial attributes of focal firms entering alliances. The results
suggest that firms tend to seek out partners who differ from them in size. Not
only does the effect of size differences highlight the role of interdependence,
but it is also consistent with ecologists’ notion of size-localized competition,
according to which firms compete most intensely with others of similar size
(cf. Baum and Mezias 1992; Wholey, Christianson, and Sanchez 1992). In
addition, the relative liquidities of firms affect their decision to enter an
alliance. The greater the difference in liquidity, the more likely they are to
enter an alliance. Differences in performance and solvency had no influence
on alliance formation.
Finally, the interaction results suggest interesting dynamics between
interdependence, network resources, and alliance formation, implying that
strategic interdependence and social structural explanations for alliance for-
mation are not mutually exclusive and could simultaneously affect alliance
formation. Common third-party ties more effectively influence alliance for-
mation in interdependent dyads than in others. Similarly, distance has a
negative effect on the likelihood of an alliance among interdependent dyads.
Consequently, this study provides an important bridge between network and
resource dependence theorists studying interorganizational ties. Network the-
orists have focused on establishing the importance of social structure in guid-
ing firm behavior but have paid less attention to the origin and perpetuation
of interorganizational relations. Resource dependence theorists have looked at
the critical contingencies guiding the creation of new ties but have assumed
that those ties are created in a social vacuum. They admit that significant
unexplained variance remains in resource dependence accounts of tie forma-
tion and that additional explanations for this variance should be explored
(e.g. Pfeffer 1987). This study unites these two perspectives, exploring the
role of both critical contingencies and social structural factors in guiding the
formation of interfirm ties.
The social structural context studied here is unique in that it is dynamic
and closely linked to firm action. Thus, the formation of ties in a given
year modifies for subsequent years the very social structure that stimulates
it. Observed over time, the dynamics between social structure and alliance
formation suggest a dialectic of mutual influence between action and social
structure. This vividly illustrates Giddens’s notion (1984) of structuration in
72 NETWORK RESOURCES AND FORMATION OF TIES

the interorganizational context and suggests that within the studied organ-
izational fields there is an emergent social structure that influences firms’
behavior. Or, as White (1992) suggests, within industry disciplines networks
establish identities of their own as they grow and expand.
From a managerial standpoint, this research indicates that history matters
when firms make alliance decisions. In a seminal book, Penrose (1959) argued
that present investment decisions put a firm on an irreversible path-dependent
trajectory of future development. Penrose’s concern was the irreversibility
of firms’ financial and technological resource outlays. Their alliance choices
appear to have similar ramifications: today’s choice of an alliance partner
shapes the availability of future network resources that in turn affect tomor-
row’s alliance choices. This historical effect is further complicated by the fact
that the underlying social network is modified by the prior alliance decisions
of other firms. Hence, both a firm’s own past alliances and those of other
firms in a network interact to shape the network resources available to the
firm, which influence its future actions. Thus, in Penrose’s terms, the path
dependence of alliance decisions is not based only on economic resources, but
is also influenced by network resources. Thus, neither traditional resource-
based arguments nor network-resource-based ideas should dominate the dis-
cussion of alliances—in the final analysis, explanations for firm behavior must
encompass both.
4 The contingent role
of network resources
emanating from
board interlocks in
alliance formation
While the last two chapters focused on prior alliance networks as a source
of network resources, this chapter considers how additional interorganiza-
tional networks may also provide network resources that in turn influence
the formation of strategic alliances by selectively channeling information and
resultant opportunities to organizations. This additional source of network
resources may not only shape the alliance behavior of firms but also beget
more network resources by increasing firms’ proclivities for alliances. One
such source is the network of board interlocks, whose influence on firm behav-
ior has been considered in a wide variety of settings, none of which include the
formation of alliances. Director boards are unique formal mechanisms that
create network resources by providing an opportunity for corporation leaders
to exchange information and observe the leadership practices and style of their
peers, along with the consequences of those practices. Thus, board ties to other
firms have a strong influence over corporate policy and strategy decisions.
Because of this influence, the board interlock network can be considered
an important element of network resources and an ideal arena in which to
develop and test the role of such resources in shaping firm behavior.
By considering the possibility that an interorganizational network arising
from board interlocks may contribute to a firm’s network resources and in
turn shape the formation of new alliances, this chapter suggests the possibility
that network resources may result from a complex multilevel interweaving of
different types of interorganizational ties with bidirectional influence on one
another. In this instance, one set of ties that contribute to a firm’s network
resources can shape the creation of another set of ties that in turn can influence

This chapter is adapted from ‘Cooperative or Controlling? The Effects of CEO–Board Relations and
the Content of Interlocks on the Formation of Joint Ventures’ by Ranjay Gulati and James D. Westphal
published in Administrative Science Quarterly © 1999, (44/3): 473–506, by permission of Johnson
Graduate School of Management, Cornell University.
74 NETWORK RESOURCES AND FORMATION OF TIES

the network resources of those firms. Thus, network resources beget more
network resources. Some of these ideas are assessed here by considering the
role of one form of ties (board interlocks) in the creation of another (strategic
alliances), while others are posed as important directions for future research.
In assessing the interplay among network resources here, this chapter also
extends prior research by taking seriously the importance of the content of
network ties in shaping the quality and quantity of network resources available
to firms and their impact on firm behavior. Content here implies the specific
nature of the relationship and behavioral processes underlying a connection
between two actors. Although research in the governance literature suggests
that relationships between top managers on corporate boards may be charac-
terized by independence and distrust in some cases (Westphal 1999), in the
interlock literature all ties are generally treated as equally positive connections
that facilitate social cohesion and the exchange of information between firms.
This treatment ignores potential heterogeneity among interlocks and the
extent to which they create network resources that channel information and
engender trusting relations among board members. This issue is also impor-
tant for broader research on the embeddedness of ties, in that the presence of
ties alone does not explain behavior and thus specifying the composition and
content of ties is imperative.
This chapter explores how board interlocks serve as network resources
that can affect alliance formation. It isolates these board interlock effects
while controlling for the resources that may be generated by a firm’s prior
alliance ties. It also provides a more comprehensive and nuanced account of
the constituent elements of network resources by specifically examining the
influence of heterogeneous social processes that underlie interlock ties—and
the moderating effects of indirect network ties—on the creation of strategic
alliances. Some ties may promote the creation of new alliances, while others
could actually reduce their likelihood, depending on the behavioral content
of the tie. As a result, there may be both advantages and disadvantages to
embeddedness in interorganizational relationships.
While the previous chapters focused on how prior alliance networks create
resources that provide valuable information to potential partners about each
other’s reliability, capabilities, and needs, this chapter examines the role of
alternative networks in creating network resources and guiding the forma-
tion of new alliances.1 Specifically, this chapter considers how a focal firm’s
network resources result from both its direct and indirect board interlocks

¹ This chapter examines the role of board interlocks, focusing on a subset of alliances known as
joint ventures, which entail the creation of a separate legal entity in which the parent firms take equity.
In this chapter, I use the term ‘alliance’ to refer specifically to joint ventures. Such alliances typically
entail a considerable outlay of resources and create enduring and irreversible commitments between
partners, which can make the influence of the board interlock network on their formation even more
important.
 BOARD INTERLOCKS IN ALLIANCE FORMATION 75

and the content of those ties, and how these resources in turn influence the
firm’s choice of future partners. Studying the effects of direct and indirect
ties allows me to develop a more nuanced and comprehensive account of
the constituent elements of network resources. While the focus of this study
is on the behavior of pairs of firms (dyads), it is important again to clarify
that network resources, while ultimately resident in individual firms, can be
understood by considering the connections those firms build with specific
other firms. Thus, a relationship with another firm is an important element
of a firm’s network resources.

Theory and hypotheses

CONTENT OF INTERLOCK TIES AND EFFECTS ON ALLIANCES

Empirical studies of the consequences of interlocking directorates have typic-
ally viewed interlock ties in broad terms as a mechanism for resolving uncer-
tainty for top management decision-makers (Galaskiewicz 1985a). In doing
so, scholars have emphasized the value of direct communication between
managers and directors in reducing uncertainty about the implications of
adopting specific business practices. From this perspective, information from
fellow corporate leaders is particularly influential because it comes from a
trusted source (Davis 1991; Haunschild 1993). Along the same lines, it is also
likely that interlock ties can help resolve uncertainty for top management
decision-makers regarding the implications of forming strategic alliances—
in terms of the adoption of strategic alliances in general and the choice of
a specific partner. While prior research has typically described interlocks as
conduits of information about administrative innovations, it is reasonable to
expect that board members also communicate information about their respec-
tive parent organizations. One way this can influence a firm’s choice of alliance
partners is by reducing uncertainty regarding the motives and capabilities
of these organizations. Board interlocks can also provide information in a
timely manner, which can be important when a firm seeking attractive alliance
partners must approach them at the right juncture and pre-empt their seeking
alliances elsewhere.
By serving as conduits for valuable and timely information, then, board
interlock ties may be viewed as important constituent elements of network
resources for firms that allow them enhanced access to opportunities. This
suggests an initial, baseline hypothesis on the effect of interlock ties on alliance
formation.
Hypothesis 1: An interlock tie between two firms will increase the likelihood of subse-
quent alliance formation between them.
76 NETWORK RESOURCES AND FORMATION OF TIES

INDEPENDENT BOARD CONTROL AND ALLIANCES

The discussion thus far has assumed that interlock ties involve positive social
contact between top managers and outside directors of the focal firm. How-
ever, as interlock researchers have generally recognized, there is considerable
variation in the nature of management–board relationships, although the
consequences of this heterogeneity have yet to be systematically examined
(Herman 1981; Johnson, Hoskisson, and Hitt 1993; Mizruchi 1996). The
nature of management–board relationships can range from positive and rela-
tively cohesive to negative and independent, with very different consequences
for the likelihood of venture formation. As a result, not all interorganizational
ties can be considered positive and reinforcing elements of network resources.
According to agency perspectives, while top managers are responsible for
ongoing decision management, the board of directors is responsible for
decision control, which involves monitoring and evaluating management
decision-making and performance (Fama and Jensen 1983). In effect, the
board is viewed as an efficient control device that can help align manage-
ment decision-making with shareholder interest (Beatty and Zajac 1994).
For instance, to the extent that managerial preferences regarding executive
compensation, corporate diversification, or other strategy and policy issues
conflict with the interests of shareholders, boards can intervene to protect
shareholders’ interests (Hermalin and Weisbach 1988; Hill and Snell 1988).
Moreover, from this perspective outside directors in particular are critical to
the board’s ability to exercise control because, as nonemployee directors, they
are formally independent of management and thus better able to evaluate
management decisions and actions objectively on behalf of the shareholders.
In prior years, this agency model of the relationship between the CEO
and the board was dismissed as an anomaly. Organization theorists have
typically suggested that while outside directors are in a position to exercise
independent control over management, various behavioral factors effectively
limit the social independence of outsiders, diminishing their ability and will-
ingness to exert control. For instance, because CEOs traditionally dictate the
selection of new directors, several authors have suggested that chief execu-
tives can appoint personal friends or other individuals with whom they have
preexisting social ties (e.g. Finkelstein and Hambrick 1988; Wade, O’Reilly,
and Chandratat 1990; Cannella and Lubatkin 1993). Such ties are thought
to inhibit the board’s willingness to contradict management’s preferences on
behalf of shareholders. Moreover, organization theorists have long maintained
that generalized norms of support among managerial elites enforce a passive
role for outside directors in strategic decision-making (e.g. Herman 1981;
Whisler 1984). From this perspective, boards have little potential to serve as
independent agents of control and, in line with the assumptions of interlock
theorists, management–board ties are characterized by social cohesion.
 BOARD INTERLOCKS IN ALLIANCE FORMATION 77

However, recent research on boards of directors has provided some evi-

dence that widespread norms about the role of corporate boards may be
changing. Useem (1993) and Westphal and Zajac (1997) have documented
changes in board structure, composition, and executive compensation over
the past fifteen years. These suggest a trend toward increased board control
over management at large corporations. This shift may have originated as a
response to external criticism from institutional investors and other stake-
holders and the threat of lawsuits over perceived negligence in protecting
shareholder interest (Kesner and Johnson 1990; Davis and Thompson 1994).
External constituents have demanded evidence that boards are willing to chal-
lenge management’s decisions on their behalf, perhaps motivated in part by
recent public scandals such as those at Enron, Tyco, and NYSE, and backed by
the passage of the Sarbanes-Oxley Act. In this new environment, boards have
been told to expand the search for new directors beyond the CEO’s close circle
of friends and to alter board structure and processes in ways that limit the
CEO’s direct control over board meetings (Kaplan and Harrison 1993; Daily
1996). In effect, boards have been pressured to adopt a role characterized by
more independent monitoring and control over management. Nevertheless,
there remains considerable variance across boards in the extent to which they
have adopted this orientation.
Given our understanding of board ties as constituent elements of network
resources that impact alliance behavior, there are several possible effects of
independent board control on the prospects of alliance formation between
the focal firm and those of its manager-directors. On one level, a CEO–
board relationship characterized by monitoring and control simply entails
lower cohesion, or the absence of a strong tie, which limits the amount of
network resources that a focal firm has in that relationship. On another level,
independent board control over management may actually produce a negative
relationship between the CEO and the board, characterized by a lack of mutual
understanding and distrust, leading to the depletion of the network resources
woven into that relationship. When benevolence and support toward the CEO
is replaced with independent control over the CEO, leaders of the firm can
divide into separate groups: decision managers (i.e. the CEO and other top
managers) and decision controllers (i.e. outside directors) (Fama and Jensen
1983). The literature on intergroup relations has provided consistent evidence
that dividing a single group of individuals into two or more separate groups
has a variety of negative effects on relations between the groups (Brewer and
Miller 1996). Empirical studies have demonstrated that when individuals are
divided into separate groups, attitudes about out-group members become
significantly more negative (Gaertner et al. 1989; Messick and Mackie 1989).
Out-group categorization, which in the case of interlocks occurs when CEOs
view outside directors as controllers rather than supporters or fellow man-
agers, can promote distrust with respect to both the capabilities of the other
78 NETWORK RESOURCES AND FORMATION OF TIES

party (task-based trust) and the fear that they might limit their contributions
to the relationship (relational trust) (Creed and Miles 1996). This out-group
bias occurs even when the basis for group categorization is arbitrary or min-
imal (Brewer 1979). Moreover, Kramer (1994, 1996: 224) and others (Fenig-
stein and Vanable 1992) have found evidence that ‘a pattern of exaggerated
mistrust’ may develop when individuals are subjected to ‘evaluative scrutiny’
or control by out-group members.
In the CEO–board context, then, distrust can be expected to arise when
outside directors assert themselves as an independent group of controllers
accountable to shareholders rather than to management. Whereas outside
directors on passive and supportive boards are effectively insiders with regard
to their orientation toward management, they adopt the perspective of an
independent outsider on controlling boards. As a result, the perception of
a division between insiders and outsiders can reinforce a generalized sense
of distrust across groups and lead to escalating cycles of distrust when out-
group members exercise control (Sitkin and Stickel 1996). This intergroup
bias would lead each party of the management–board relationship to view
members of the other group as less trustworthy in both professional and
personal terms, reducing interest in various forms of cooperation.
Intergroup bias resulting from independent board control (as opposed
to passive support) can affect network resources by diminishing both task-
based and relational trust. Indeed, one might expect that when directors have
asserted themselves as an independent group responsible for controlling man-
agers rather than supporting them, CEOs may view them as less trustworthy
alliance partners. Board independence can also prevent top managers and
manager-directors from becoming familiar with each other’s management
and decision-making styles and developing a professional rapport. Moreover,
given that distrust toward an independent, controlling group is a basic and
powerful human response (Fenigstein and Vanable 1992; Kramer 1994, 1996),
independent board control may have a particularly strong negative effect on
alliance formation between top managers and manager-directors. In such
situations, we would expect that board ties actually deplete network resources
in those ties rather than reinforcing it.2 As a result, it is likely that:
Hypothesis 2: The greater the board’s control over the CEO, the lower the likelihood
of subsequent alliance formation between the focal firm and outside directors’ home
companies.

² This study is not suggesting that independent board control, by depleting network resources, is
necessarily bad for organizations as a whole. As recent events suggest, having such control may be
beneficial to shareholders. We are simply focusing here on the ability of such interlocks to generate
network resources by creating rich conduits of information that may in turn propagate the formation
of new alliances between those firms. Hence, we are exploring the potential for controlling boards
to create environments that do not provide as rich an informational context as those of cooperative
boards. Future research should explore such trade-offs in further detail.
 BOARD INTERLOCKS IN ALLIANCE FORMATION 79

CEO–BOARD COOPERATION AND ALLIANCES

While empirical research on boards has typically assumed that board involve-
ment in corporate affairs entails independent monitoring and control by
outside directors (Johnson, Hoskisson, and Hitt 1993), the larger literature
on boards suggests another form of involvement. In his classic qualitative
study, Mace (1971: 179) concluded that while boards often do not challenge
management’s final decisions, they may nevertheless provide advice and coun-
sel to management on strategic issues during the decision-making process.
Pfeffer and Salancik (1978: 170) also considered the provision of advice and
counsel a different form of board administration than board control (see
also Mintzberg 1983). In a large-sample empirical study, Westphal (1999)
found support for this general classification—factor analysis showed that
CEO–board relationships could be classified into three categories: indepen-
dent monitoring and control, close cooperation (i.e. advice and counsel),
or inaction. Moreover, qualitative and survey evidence suggests that advice
and counsel is typically provided at the CEO’s request (Lorsch and MacIver
1989; Demb and Neubauer 1992). Thus, rather than remaining independent
of top managers to permit objective monitoring and evaluation of managerial
decision-making, some boards enter closer working relationships with CEOs
by providing advice and counsel at the CEO’s request. In such cases, CEOs
direct a cooperative form of board involvement in which boards work closely
with them to govern the firm, rather than at a distance in a principal–agent
relationship.
Cooperative CEO–board relationships may influence the quality of infor-
mation transmitted through those ties and hence affect the magnitude of net-
work resources embodied in those ties, which can impact alliance formation
between the focal firm and manager-directors’ home companies in several
ways. One way in which CEO–board cooperation should enhance network
resources is by facilitating trust between top managers and outside directors by
fostering social interaction. Simmel’s theory (1964) of trust emphasized how
the mere occurrence of social interaction builds trust or the expectation of
faithfulness, and other theorists have suggested that more frequent interaction
increases trust by enhancing mutual affect and familiarity (Laumann, Galask-
iewicz, and Marsden 1978; Gulati 1995a; Creed and Miles 1996). Accordingly,
the heightened social interaction resulting from greater CEO–board cooper-
ation (e.g. advice seeking) should reinforce relational trust between CEOs and
outside directors.
The network resources created through cooperative interactions in CEO–
board relationships and the extent of trust between managers can also be
illuminated by considering some of the evidence from research on intergroup
relations. According to this literature, cooperative interactions between group
members make common goals more salient, which builds mutual trust and
80 NETWORK RESOURCES AND FORMATION OF TIES

respect (Gaertner et al. 1990, 1999). Thus, while independent board control
may reduce trust by effectively splitting top managers and outside directors
into separate groups, CEOs seeking advice from the board should enhance
trust by drawing outside directors into a collective decision-making team. In
effect, just as negative affect and distrust toward an independent, controlling
group is a basic and powerful human response, cooperation between group
members can engender in-group biases that lead to positive affect and higher,
even excessive levels of trust between individuals (Fenigstein 1979; Kramer
1996). As a result, in those instances characterized by cooperative interactions,
we would expect that the presence of ties reinforces network resources embod-
ied in those ties. Given the importance of intermanagement trust in alliance
formation, cooperative CEO–board relationships and the network resources
resulting from them should promote alliances between a focal firm and those
of outside directors by enhancing confidence in each other’s reliability and
managerial capability and lowering the perceived risk of opportunism.
Hypothesis 3: The greater the cooperation between the CEO and the board, the higher
the likelihood of subsequent alliance formation between the focal firm and outside
directors’ home companies.

THE ROLE OF INDIRECT TIES

While little empirical research has examined how broader social structural
factors moderate the effects of dyadic interlock ties and the resultant network
resources between firms, qualitative evidence suggests that managers may have
access to indirect information about directors through managers’ appoint-
ments on other boards (Useem 1984). An indirect or third-party tie could
be an important source of network resources that provides top managers with
information about outside directors who sit on their boards. For example,
CEO A is exposed to second-hand information about outside director B on
his or her board when A has a common appointment on another board with
director C, who sits on B’s board. These indirect ties are particularly relevant
in light of recent evidence suggesting that third-party ties can affect the level of
trust between individuals or organizations (e.g. Raub and Weesie 1990; Burt
and Knez 1995; Gulati 1995b; Gulati and Gargiulo 1999).
It is typically assumed that third-party ties will enhance trust between
parties in a relationship by increasing the reputational costs of noncooperative
behavior (Van de Ven 1976). For instance, if A is cheated by relationship
partner B, and A has third-party ties to B through C, A can impose repu-
tational costs on B by spreading the word to C that B cannot be trusted.
Given this threat, A can trust B not to defect from cooperative exchange
(Kreps 1990). The claim that third-party ties enforce cooperation through
reputational effects assumes that noncooperative behavior is illegitimate or
 BOARD INTERLOCKS IN ALLIANCE FORMATION 81

nonnormative, like cheating a friend (Granovetter 1992). In many cases,

however, noncooperative behavior involving competition or control is not
normatively proscribed in the larger social structure, or the related norms
are ambiguous. As several authors have noted, norms governing CEO–board
relationships have become uncertain: it is not clear whether independent
board control is any more normative or legitimate than CEO–board cooper-
ation (Lorsch and MacIver 1989; Useem 1993). Accordingly, noncooperative
behavior, such as exercising independent control, does not necessarily have
negative reputational consequences for the participants. Thus, third-party ties
between a CEO and his or her board members may not necessarily reduce the
likelihood of noncooperative behavior in CEO–board relationships and hence
fail to enhance network resources.
While traditional perspectives on indirect network ties may not apply to
board interlocks, recent research on third-party ties suggests a more germane
perspective. Burt and Knez (1995, 1996) have extended existing theories on
how social structure affects trust by proposing that third-party ties amplify
existing trust or distrust in professional relationships (see also Labianca, Brass,
and Gray 1998). They showed empirically that when the immediate relation-
ship between managers tends to foster trust, third-party ties further enhance
this trust. At the same time, third-party ties amplify any distrust already in the
relationship. Thus, they concluded that third-party ties influence the intensity
but not the direction of trust in managerial relationships. In developing their
theory, Burt and Knez suggested that managers exchange information about
third-party ties with other managers, and the social dynamics underlying such
interactions lead third parties to reaffirm whichever predisposition managers
have toward their colleagues. This is consistent with anthropological and social
psychological research on network gossip, which suggests that people gossip
with third parties in a search for affirmation of their feelings and beliefs
about other individuals in their network; in the process, gossip also serves
to reaffirm the values that underlie those beliefs (Cox 1970; Haviland 1977;
Besnier 1989). Moreover, by validating ego’s trust or distrust, a third party
strengthens his or her relationship with ego (Byrne, Clore, and Worchel 1966).
Such behavior can be motivated by political self-interest or simply by the
desire to maintain social cohesion for its own sake (Cox 1970; Burt and Knez
1995).
We can extend the previous hypothesis by considering that third-party ties
between a CEO and his or her board members resulting from appointments
on other boards may amplify the effects of these different relationships on
trust between CEOs and outside directors and thus impact the magnitude of
network resources embodied in those ties. As noted above, qualitative research
on boards suggests that the relationship between CEO A and outside director
B is influenced by third-party ties when A has a common appointment to
another board with director C, who sits on B’s board. From the third-party
82 NETWORK RESOURCES AND FORMATION OF TIES

gossip perspective, when A and C discuss B (or A’s relationship with B),
the social dynamics underlying such interactions will lead C to confirm A’s
predisposition by drawing on his or her experience with B. For example, if A
expresses doubt to C about whether B can be trusted to support A’s decisions,
C will tend to affirm A’s distrust, either by providing explicit information or
by ‘replicating accounts’ of B’s behavior or through more subtle affirmations
or nonverbal signals (Cox 1970; Burt and Knez 1995: 260). Such interactions
are especially likely now because top managers have become increasingly
concerned in recent years about whether they can count on the loyalty and
support of their outside directors (Lorsch and MacIver 1989). These findings
and theories suggest additional hypotheses as follows:
Hypothesis 4: Indirect interlock ties between the CEO and outside directors through
third-party directors will interact with the content of the focal CEO–board tie to pre-
dict alliance formation between the focal firm and outside directors’ home companies.
Hypothesis 4a: The more indirect interlock ties there are between the CEO and outside
directors through third-party directors, the stronger the negative relationship between
board control over the CEO and the likelihood of subsequent alliance formation
between the focal firm and outside directors’ home companies.
Hypothesis 4b: The more indirect interlock ties there are between the CEO and outside
directors through third-party directors, the stronger the positive relationship between
CEO–board cooperation and the likelihood of subsequent alliance formation between
the focal firm and outside directors’ home companies.

Empirical research

METHOD
The data-set used in this study is described in Appendix 1, under the head-
ing ‘Board and Alliance Database’. Alliance formation was measured with a
dichotomous variable coded 1 if the two firms in a dyad entered into an
alliance during the two-year period following the survey date (i.e. 1995–6).
Two separate analyses were conducted with alliance formation measured over
one year (1996) and over the period 1993–4. For each of these separate
analyses, results for the hypothesized relationships were very similar to the
results presented below, suggesting that the findings are robust for different
periods.
Board interlocks were measured as directional ties created by individuals
who are principally affiliated as officers or owners with the firms they connect
(Davis 1991; Haunschild 1993; Palmer et al. 1993). Thus, two firms, A and B,
are coded as having an interlock tie when at least one officer or owner from
firm A serves as an outside director at firm B, or vice versa.
 BOARD INTERLOCKS IN ALLIANCE FORMATION 83

A pretest involving in-depth pilot interviews with twenty-two top man-

agers and board members was used to refine and reword the survey items
of a survey conducted by my coauthor Jim Westphal (cf. Fowler 1993: 102).
Board control and CEO–board cooperation were measured with two multi-
item scales from the CEO survey that were carefully validated with responses
from the outside director survey and also with archival measures of board
characteristics. Items in the Control scale assessed key behavioral elem-
ents of board control that have been theorized to entail board independence
from management, including the board’s tendency to monitor and evaluate
CEO decision-making and performance and the frequency with which direct-
ors challenge the CEO’s position on strategic issues, rather than deferring
to the CEO’s judgment. Items in the Cooperation scale were based on prior
qualitative research about how CEOs may engage in ongoing collaboration
with outside directors by seeking their advice and counsel on strategic issues,
as discussed above.
A confirmatory factor analysis using LISREL was conducted and estimated
cooperation and control factors were estimated using the Bartlett method.
Interrater reliability was assessed by comparing CEOs’ and outside directors’
responses on the board control and cooperation items. We used the kappa
correlation coefficient, which corrects for the level of correlation that would
be expected by chance.
Convergent validity for the board cooperation and control measures was
also tested. First, an archival measure of each construct was developed, includ-
ing multiple aspects of board structure and practice that are thought to facili-
tate controlling behavior by boards: the use of stock to compensate directors,
institutional ownership, and the presence or absence of the specific commit-
tees listed above (Hoskisson, Johnson, and Moesel 1994; Belliveau, O’Reilly,
and Wade 1996; David, Kochhar, and Levitas 1998). Institutional ownership
was measured as the percentage of total common stock held by pension funds,
banks and trust companies, savings and loans, mutual fund managers, and
labor union funds (Hansen and Hill 1991). The dichotomous measures were
combined into a Guttman scale and then combined with institutional owner-
ship using principal components (Jackson 1991).
The archival measure of cooperation was a composite of three vari-
ables: joint tenure of the CEO and directors, complementary functional
backgrounds of the CEO and directors, and CEO stock ownership. The
organizational demography literature has provided consistent evidence that
higher joint tenure increases the level of task-related communication and
problem-solving behavior among group members (Zenger and Lawrence
1989; O’Reilly, Snyder, and Boothe 1993; Smith et al. 1994; Williams and
O’Reilly 1997). Moreover, the upper echelon perspective would suggest that
directors are more valuable to CEOs as a source of strategic advice and counsel
if they have a complementary base of functional expertise and experience
(e.g. if the CEO has a financial background and directors have marketing
84 NETWORK RESOURCES AND FORMATION OF TIES

backgrounds) (Hambrick, Cho, and Chen 1996). Functional background was

measured using Hambrick and Mason’s classification (1984), calculated as the
percentage of directors who had functional backgrounds complementary to
the CEO. Finally, given that stock ownership aligns CEOs’ interests with share-
holders’ interests, it may motivate CEOs to engage the cooperation of board
members in the strategic decision-making process (Murphy 1986; Jensen and
Murphy 1990). These three variables were combined into a composite measure
using principal components.
Indirect ties between CEOs and outside directors through third-party
directors (third-party ties) were measured for each dyad as the number of
board appointments shared by the CEO and board members of the outside
director’s home company board, excluding the focal board. The hypothe-
sized interaction effects between third-party ties and the focal CEO–board
ties were tested using the product-term approach (Jaccard, Turrisi, and Wan
1990).
To ensure the robustness of the results, a number of control variables were
included that were considered to influence the formation of ventures between
firms. To capture the role of resource considerations, the approach here built
on Burt’s measure (1983, 1992) of market constraint to capture the degree
of resource interdependence between firms. Our approach followed Mizruchi
(1992) in reducing the various operationalizations of constraint used by Burt
and subsequent researchers to a single variable using principal components
analysis. Mutual interdependence between firms in a dyad was then measured
as the total amount of constraint between them. This measure is highest
when both firms are in highly concentrated industries with a heavy flow of
transactions between them.
Because constraint is measured at the industry level, the analyses here also
controlled for industry overlap, measured as the percentage of total sales
between the two firms made to the same industry, to assess strategic com-
plementarity at the firm level (Mowery, Oxley, and Silverman 1996).
We included a number of measures that prior research suggests may be
important strategic and economic drivers for the creation of new ventures:
(a) size, measured as the log of total sales; (b) performance, measured as
a composite of return on assets and market-to-book value, which were
combined using principal components analysis; (c) solvency, measured as the
total amount of long-term debt divided by current assets; (d) research and
development (R&D) intensity, measured as research and development expense
divided by total sales of the focal firm; (e) advertising intensity, measured as
advertising expense divided by total sales of the focal firm; and (f) diversi-
fication, measured with the entropy variable, which takes into account the
number of segments in which a firm operates and weights each segment
according to its contribution to total sales (Palepu 1985). Each variable was
measured using data from the prior year.
 BOARD INTERLOCKS IN ALLIANCE FORMATION 85

The analyses here also controlled for the firms’ prior alliance history (Gulati
1995a, 1995b; Powell, Koput, and Smith-Doerr 1996). Thus, controls for the
number of prior alliance ties between firms in the dyad were included. To
control for the historical propensity of each firm to initiate alliances, vari-
ables indicating the total number of prior alliances initiated by each firm in
the dyad were included. To compute this measure as accurately as possible,
alliance activity from 1980 to 1994 was recorded and tested against varying
periods. These two sets of measures serve as useful controls for unobserved
heterogeneity that results from unobserved propensities by the actor to engage
in those activities in the future (Heckman and Borjas 1980).
Controls for two other kinds of board ties that could influence CEO–
board relationships and alliance formation were included. First, controls for
common board appointments (common appointments) held by the CEO and
the outside director on other boards were included. A common tie exists if
CEO A and an outside director B on the focal board both serve as outside
directors on another board. Second, we controlled for the total number of
appointments (total appointments) held on other boards by the CEO and the
outside director. As discussed above, the measure of third-party ties effectively
includes indirect ties with a distance of two links: if CEO A sits on another
board with C, who sits on outside director B’s board, A and B are separated
by two links. When this measure is held constant, the control variable for total
appointments captures the effect of indirect ties of greater length (i.e. three
links or more).
Given that alliance formation could also be influenced by the content of sent
interlock ties (i.e. relationships between top managers and manager-directors
at the latter directors’ home company boards, which are not included in
measures of cooperation and control), controls for reciprocated appointments
were included, coded as 1 if a top manager serves on the home company board
of an outside director who is on the focal firm’s board.
Finally, controls were included for several other possible exogenous influ-
ences on management–board relationships. A survey measure of friendship
ties was included, indicating the portion of the board composed of the CEO’s
personal friends. In separate analyses in which cooperation and control were
measured for each CEO–director dyad, friendship ties were also measured at
the dyad level.

ANALYSIS
Descriptive statistics and bivariate correlations are provided in Table 4.1.
Maximum-likelihood logit regression analysis was used to test the effect of
interlock ties on the likelihood of alliance formation (Aldrich and Nelson
1984; Hosmer and Lemeshow 1989). Because the appropriate risk sets to test
 86 NETWORK RESOURCES AND FORMATION OF TIES
Table 4.1. Descriptive statistics and Pearson correlation coefficients for analyses of board control and CEO–board cooperationa

Variable Mean SD 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19

1. Alliance .15 .36 — — — — — — — — — — — — — — — — — — —

2. Interlock tie .01 .11 .06 — — — — — — — — — — — — — — — — — —
3. Board control .00 .88 −.26 — — — — — — — — — — — — — — — — — —
4. CEO–board cooperation .00 .82 .31 — −.16 — — — — — — — — — — — — — — — —
5. Third-party ties 2.79 2.03 .12 .16 .05 .06 — — — — — — — — — — — — — — —
6. Prior alliance activity, 5.98 5.57 .29 .05 .07 .09 .11 — — — — — — — — — — — — — —
firm 1
7. Prior alliance activity, 6.35 5.94 .34 .07 .08 .09 .11 .02 — — — — — — — — — — — — —
firm 2
8. Prior alliance ties .09 .31 .23 .18 −.17 .21 .14 .17 .15 — — — — — — — — — — — —
9. Constraint .00 1.33 .17 .17 .18 .13 −.02 .12 .10 .14 — — — — — — — — — — —
10. Size 7.69 1.50 .02 −.05 −.04 −.08 .03 .06 .03 .01 −.08 — — — — — — — — — —
11. Performance .00 1.01 −.23 .05 −.08 −.04 −.01 −.13 −.08 .03 −.04 −.06 — — — — — — — — —
12. Solvency .38 .31 −.08 −.01 −.05 −.01 .01 .02 .05 .04 −.11 .36 .17 — — — — — — — —
13. R&D intensity .02 .02 −.18 .06 −.03 .00 .04 −.11 −.10 −.12 .03 −.31 .14 .27 — — — — — — —
14. Advertising intensity .02 .03 −.14 .02 .02 .06 .02 −.05 −.08 −.05 .01 −.09 .10 .05 −.18 — — — — — —
15. Diversification .74 .56 −.05 .08 −.12 −.17 .00 −.04 −.07 −.06 −.09 .26 −.03 −.12 .16 .15 — — — — —
16. Industry overlap .09 .25 .22 .25 −.10 .20 .04 .03 .03 .14 −.32 .18 −.03 −.06 .02 −.02 −.09 — — — —
17. Common appointments 1.23 1.01 .09 .15 −.08 .07 .18 .04 .03 .16 .05 .08 .01 .10 .07 .00 .13 .16 — — —
18. Total appointments 8.21 5.31 .07 .11 −.05 .02 .37 .01 .03 −.01 −.04 .04 −.02 .00 .05 .45 .08 −.11 .45 — —
19. Reciprocated .11 .31 .03 .29 −.09 .17 .03 .02 −.01 .04 .19 .06 .05 .04 .06 −.01 .03 −.02 .01 .00 —
appointments
20. Friendship ties .37 .34 .16 .02 −.18 .21 .04 .03 −.02 .17 .10 −.04 .09 .06 .03 .10 .04 .01 .06 −.07 .05

a Descriptive statistics and correlation coefficients are calculated for the sample of interlocked firms (n = 898), except statistics for interlock ties, which are calculated for the larger sample of all
possible dyads (n = 73,510).
 BOARD INTERLOCKS IN ALLIANCE FORMATION 87

each of the hypotheses differ somewhat, a number of additional analyses were

conducted to ensure consistency across the findings. Because hypothesis 1
examined the effect of interlock ties on alliance formation, the risk set for
this analysis included all possible dyadic combinations between each of the
focal firms in the final survey sample and all firms in the total sample frame
(73,510 dyads). Because hypotheses 2–4 assume that an interlock tie exists,
because board control or cooperation only occur when there is an interlock,
the risk set narrows here from all possible dyads to only those dyads for which
there was an interlock tie between the two firms. Thus, to test the effects
of board control versus cooperation on alliance formation, as well as the
moderating effects of third-party ties, an initial set of analyses was conducted
using logit regression on the sample of dyadic combinations between the
focal firm and each of the home companies of CEO–directors on the board
(n = 898). Moreover, for the sample of possible dyadic combinations that
included a responding outside director, the analyses also examined whether
individual CEO–board-member relationships mattered by estimating separate
models using each responding director’s assessment of his or her individual
relationship with the CEO (n = 412 dyads).
In addition, Heckman selection models were estimated to ensure that
logit estimates were not biased by any unmeasured differences between the
smaller sample of CEO–director dyads and dyads in the larger sample frame
used for testing hypothesis 1. This approach uses the larger risk set to assess
hypotheses 2–4 (i.e. n = 73,510). The Heckman model is essentially a two-stage
procedure that estimates the likelihood of interlock ties with probit regression
and then incorporates estimates of parameters from that model in a second-
stage regression model to predict alliance formation among dyads with an
interlock tie; the second-stage model is also estimated with probit regression
(van de Ven and van Praag 1981). More details on this are provided in the first
section of Appendix 2 on unobserved heterogeneity.

RESULTS
Table 4.2 provides the results of the logistic regression analysis of alliance
formation, and Table 4.3 gives the Heckman selection model results. The
hypothesized effects are in bold. Model 1 in Table 4.2 tests hypothesis 1 that an
interlock tie between two firms will enhance the network resources available
to them and thus increase the likelihood of subsequent alliance formation
between them. The results in model 1 do not support this hypothesis: after
controlling for the extent of market constraint (i.e. resource interdependence)
between firms, as well as other financial and strategic factors, the existence of
an interlock tie is not significantly related to subsequent alliance formation.
88 NETWORK RESOURCES AND FORMATION OF TIES

Table 4.2. Logistic regression analysis of alliance formationa

Independent variable 1 2 3

Interlock tie .44 (.047)

Board control −.391∗ (.149) −.589∗ (.203)
CEO–board cooperation .575∗ (.183) .757∗ (.249)
Third-party ties .006 (.005) .094 (.080) .098 (.080)
Third-party ties × Board control −.199∗ (.074)
Third party ties × CEO–board cooperation .227∗ (.073)
Prior alliance activity, firm 1 .002∗ (.0005) .037∗ (.009) .037∗ (.010)
Prior alliance activity, firm 2 .003∗ (.0007) .041∗ (.009) .040∗ (.009)
Prior alliance ties .057∗ (.018) 1.678∗ (.552) 1.701∗ (.555)
Constraint .022∗ (.008) .289∗ (.109) .290∗ (.109)
Size .002 (.004) .034 (.092) .045 (.092)
Performance −.013∗ (.005) −.292∗ (.132) −.288∗ (.132)
Solvency −.032 (.021) −.463 (.442) −.491 (.438)
R&D intensity −.323∗ (.161) −9.490 (4.837) −8.682 (4.850)
Advertising intensity −.377∗ (.159) −10.389∗ (4.169) −10.507∗ (4.176)
Diversification −.013 (.011) −.177 (.257) −.195 (.256)
Industry overlap .047∗ (.017) 1.330∗ (4.92) 1.356∗ (4.95)
Common appointments .010 (.007) .139 (.127) .168 (.127)
Total appointments .002 (.002) .053 (.036) .051 (.036)
Reciprocated appointments .011 (.050) .018 (.428) .008 (.428)
Friendship ties 2.839∗ (1.022) 2.906∗ (1.029)

Constant .041 (.045) 1.977 (1.011) 1.928 (1.017)

n 73,510 898 898
˜2 104.18∗ 118.44∗ 140.36∗

a Standard errors are in parentheses. Hypothesized effects are in bold.

∗
p < .01.

Model 2 in Table 4.2 tests hypotheses 2 and 3, which address the influence of
management–board relationships on subsequent alliance formation between
the focal firm and outside directors’ home companies. The results for board
control and CEO–board cooperation shown in model 2 provide strong sup-
port for these hypotheses. Consistent with hypothesis 2, board control over the
CEO depletes the network resources available to them and is thus negatively
related to the likelihood of forming an alliance between the focal firm and
outside directors’ home companies. The results also support hypothesis 3:
CEO–board cooperation enhances the network resources available to those
firms and is thus significantly and positively related to subsequent alliance
formation. The hypothesized effects of board control and cooperation were
also supported in Heckman selection models of alliance formation, as shown
in model 1 of Table 4.3.
In summary, the first set of results indicates that the mere presence of a
board interlock tie between firms does not predict the formation of strategic
alliances between firms; instead, such ties may either increase or decrease the
availability of network resources and the concomitant likelihood of alliance
formation, depending on the nature of the CEO–director relationship that
 BOARD INTERLOCKS IN ALLIANCE FORMATION 89

Table 4.3. Heckman selection models of alliance formation (n = 73,510)a

Independent variable 1 2

Board control −.480∗ (.184) −.678∗ (.266)

CEO–board cooperation .581∗ (.201) .767∗ (.270)
Third-party ties .142 (.114) .139 (.113)
Third-party ties × Board control — −.259∗ (.097)
Third-party ties × CEO–board cooperation — .268∗ (.092)
Prior alliance activity, firm 1 .034∗ (.010) .035∗ (.010)
Prior alliance activity, firm 2 .037∗ (.010) .036∗ (.010)
Prior alliance ties 1.627∗ (.564) 1.594∗ (.567)
Constraint .312∗ (.116) .311∗ (.116)
Size .044 (.096) .041 (.096)
Performance −.342∗ (.138) −.333∗ (.138)
Solvency −.419 (.460) −.424 (.460)
R&D intensity −10.756 (5.718) −9.383 (5.760)
Advertising intensity −11.085∗ (4.881) −10.691∗ (4.893)
Diversification .156 (.267) .179 (2.70)
Industry overlap 1.330∗ (.492) 1.346 (.494)
Common appointments .071 (.134) .089 (.137)
Total appointments .050 (.040) .052 (.040)
Reciprocated appointments .018 (.428) .011 (.428)
Friendship ties 2.799∗ (1.101) 2.882∗ (1.113)
Constant 2.446 (1.077) 2.386 (1.081)
˜2 132.45∗ 151.22∗

a
Standard errors are in parentheses. Hypothesized effects are in bold.
∗
p < .01.

underlies the tie. The greater the extent to which an interlock tie results in
cooperation between top managers of different firms in strategic decision-
making (i.e. at the focal firm), the greater the network resources available to
those firms and the concomitant likelihood of subsequent strategic cooper-
ation between the focal firm and the outside director’s home company. At
the same time, the greater the extent to which an interlock tie results in an
independent control relationship between top managers of different firms, the
lower the network resources embodied in those relationships and the lower
the likelihood of subsequent strategic cooperation between them.
The next set of results tests hypothesis 4 that third-party ties resulting
from appointments of focal-firm CEOs on other boards amplify the effects of
independent board control and CEO–board cooperation on alliance forma-
tion. The interaction effects in model 3 of Table 4.2 support this hypothesis.
Consistent with hypothesis 4a, the results show that as the number of third-
party ties between the CEO and outside directors increases, the negative rela-
tionship between board control over the CEO and the likelihood of subse-
quent alliance formation between the focal firm and outside directors’ home
companies becomes stronger. The results also support hypothesis 4b: as the
number of third-party ties between the CEO and outside directors increases,
the positive relationship between CEO–board cooperation and the likelihood
90 NETWORK RESOURCES AND FORMATION OF TIES

of subsequent alliance formation between the focal firm and outside directors’
home companies also becomes stronger. The hypothesized interaction effects
were also supported in Heckman selection models of alliance formation, as
shown in model 2 of Table 4.3.
Results for several of the control variables provide further insights. For
instance, the degree to which firms are mutually constrained by resource inter-
dependence, as indicated by resource flow between their respective industries,
is positively associated with subsequent alliance formation, consistent with
the traditional resource dependence perspective on alliance formation. While
this effect has previously been observed only at the interindustry level, the
results demonstrate that such effects for resource dependence occur at the
dyad level as well. Results also show that friendship ties between CEOs and
outside directors are positively and significantly related to subsequent alliance
formation between the focal firm and outside directors’ home companies in
each of the models. In contrast, common appointments to other boards are
not significantly associated with alliance formation, nor are the main effects
of third-party ties significant. In general, the various network variables do not
have independent effects on alliance formation; instead, network effects are
contingent on the content of CEO–director relationships.
While the theoretical argument presented in this chapter suggests that trust
in the CEO–board relationship can explain how control and cooperation
affect alliance formation, the primary analysis did not explicitly model the
mediating effect of trust. Thus, one might question whether other, related
social processes mediate these relationships. For instance, cooperation might
be associated with political influence processes such as ingratiation, which
could affect the likelihood of alliance formation between the focal firm and
manager-directors’ home companies by enhancing directors’ affect toward
the CEO, without necessarily enhancing trust in the relationship. Similarly,
cooperation could increase the board’s approval of the CEO’s performance
and thus increase the likelihood of alliance formation independent of CEO–
board trust. To assess the relative importance of these different social processes
in explaining how control and cooperation affect alliance formation, we con-
ducted further exploratory analyses using survey measures of trust, political
influence (ingratiation), and board approval of the CEO. As shown in models
3 and 4 of Table 4.4, CEO–board trust has a strong and positive relationship
with alliance formation, while the effects of ingratiation and board approval
are nonsignificant. In addition, when trust is added to the models, the effects
of cooperation and control become nonsignificant, suggesting that CEO–
board trust mediates the effects of cooperation and control on alliance forma-
tion (Baron and Kenny 1986). Moreover, the effects of ingratiation and board
approval of the CEO are nonsignificant in all models.
The results are not consistent with the view that preexisting trust in the
CEO–board relationship leads to cooperation, which then facilitates alliance
 BOARD INTERLOCKS IN ALLIANCE FORMATION 91

Table 4.4. Supplementary Heckman selection models of alliance formation (n = 73,510)a

With archival measures With measures of

of cooperation/control CEO–board trust
Independent
variable 1 2 3 4

Board control −.322∗ (.120) −.339∗ (.123) −.252 (.185) −.330 (.266)
CEO–board cooperation .603∗ (.230) .568∗ (.233) .311 (.203) .433 (.268)
CEO–board trust — .605∗ (.167) .599∗ (.167)
Third-party ties .139 (.113) .126 (.113) .141 (.114) .139 (.114)
Third-party ties × Board — −.161∗ (.073) — −.173 (.097)
control
Third-party ties × — .268∗ (.100) — .119 (.094)
CEO–board cooperation
∗ ∗ ∗ ∗
Prior alliance activity, .034 (.010) .035 (.010) .035 (.010) .036 (.010)
firm 1
Prior alliance activity, .036∗ (.010) .037∗ (.010) .037∗ (.010) .037∗ (.010)
firm 2
Prior alliance ties 1.566∗ (.565) 1.590∗ (.569) 1.589∗ (.565) 1.601∗ (.571)
Constraint .310∗ (.116) .306∗ (.115) .309∗ (.116) .311∗ (.117)
Size .053 (.093) .047 (.094) .045 (.094) .049 (.092)
Performance −.290∗ (.137) −.332∗ (.138) −.339∗ (.137) −.330∗ (.139)
Solvency −.427 (.453) −.431 (.460) −.436 (.463) −.434 (.462)
Research and development −10.729 (5.724) −9.384 (5.772) −10.192 (5.745) −9.150 (5.788)
intensity
Advertising intensity −10.937∗ (4.845) −10.625∗ (4.875) −11.677∗ (4.911) −11.392∗ (4.909)
Diversification .164 (.268) .186 (.268) .169 (.270) .185 (.270)
Industry overlap 1.333∗ (.494) 1.351∗ (.497) 1.358∗ (.500) 1.380∗ (.503)
Common appointments .071 (.133) .093 (.136) .070 (.134) .091 (.136)
Total appointments .041 (.039) .051 (.040) .050 (.040) .051 (.040)
Reciprocated appointments .022 (.427) .019 (.429) .019 (.425) .019 (.426)
Friendship ties 2.804∗ (1.103) 2.886∗ (1.114) 2.810∗ (1.103) 2.877∗ (1.113)
Board approval .124 (.208) .116 (.208) .118 (.208) .114 (.209)
Ingratiation .052 (.174) .053 (.074) .057 (.077) .062 (.074)
Constant 2.500 (1.071) 2.363 (1.077) 2.565 (1.083) 2.366 (1.094)
˜2 125.16∗ 139.38∗ 130.01∗ 148.15∗

a
Standard errors are in parentheses. Hypothesized effects are in bold.
∗
p < .01.

formation through some other mechanism. The findings suggest that trust
mediates the effects of cooperation and control, not the reverse. We also
measured trust using responses to the director survey, and results were sub-
stantively unchanged from results presented in Table 4.4. While researchers
have typically viewed trust and distrust as one bipolar construct, Lewicki,
McAllister, and Bies (1998) and others have suggested that these are separate
constructs that may exist independently. Thus, we conducted further analy-
ses using only items that refer to distrust. The results were nearly identical:
distrust was strongly (and negatively) associated with alliance formation, and
the control and cooperation variables became nonsignificant when distrust
was added to the models, suggesting that distrust mediates the effects of
control and cooperation on alliance formation. Thus, even if trust and distrust
are viewed as distinct concepts, the results suggest that both predict alliance
92 NETWORK RESOURCES AND FORMATION OF TIES

formation and mediate the effects of cooperation and control. Moreover, the
CEO–board relationship appears to satisfy several of Lewicki, McAllister, and
Bies’ conditions (1998) for a high (negative) correlation between trust and
distrust, including high value congruence and interdependence between the
parties.

Conclusion
This study shows how board interlock ties can have qualitatively different
effects on the magnitude of network resources they embody and in turn differ-
entially impact alliance formation between firms, depending on the behavioral
processes that underlie CEO–board relationships. In light of this book’s larger
discussion of how network resources impact alliances, this study shows how
network resources are affected not only by the presence of ties but also by the
specific valence (positive or negative) of those ties. By examining the interplay
across different sets of ties (interlocks and alliances), this chapter highlights
the likely multilevel nature of network resources that are shaped by different
kinds of networks that influence each other as well as organizational behavior
and outcomes.
The first set of results suggests that the mere presence of a board interlock
tie between two firms does not appear to increase or decrease the magnitude of
network resources as it does not affect their likelihood of entering a strategic
alliance. Further results show that these aggregate effects of board interlock
ties appear to mask more specific effects dependent on the content of the
tie—there can be up- and downsides to the presence of a board interlock
tie between two firms, depending on the underlying relationship. Thus, the
extent of network resources embodied in a tie between two firms may vary
depending on the nature of the tie. Higher levels of independent board control
over management actually decreased the likelihood of subsequent alliance
formation between them, suggesting that such ties may actually deplete net-
work resources between those firms. Conversely, higher levels of CEO–board
cooperation in strategic decision-making raised the likelihood that the two
firms would enter an alliance, indicating that such ties positively contributed
to the network resources between those firms. These results were confirmed
with both survey-based and archival measures of board cooperation and
control, and held true even after controlling for a variety of economic and
strategic variables that could influence alliance formation. Thus, the first set of
results demonstrates how the consequences of board interlock ties for network
resources and the resultant strategic cooperation depend critically on the
behavioral content of the tie.
Furthermore, the findings are consistent with the perspective that third-
party ties primarily amplify whatever relational dispositions already exist
 BOARD INTERLOCKS IN ALLIANCE FORMATION 93

among directly connected actors—they not only amplify trust resulting from
cooperative interaction in CEO–board relationships but also amplify distrust
resulting from independent board control. At the same time, such indirect ties
did not have significant main effects on alliance formation. Thus, the results
appear to support the proposition developed by Burt and Knez (1995) that
third-party ties tend to reaffirm or amplify whichever predisposition managers
have toward their colleagues (see also Labianca, Brass, and Gray 1998). These
findings suggest that in order to fully grasp the multifaceted nature of network
resources that arise from prior ties between firms, we need to take a more
nuanced view and consider not only the content of those direct ties but also
the indirect ties within which they are situated.
This reaffirmation or amplification resulting from third-party ties is not
consistent with the view that third-party ties uniformly enhance trust between
individuals by increasing the reputational costs of noncooperative behavior
(Kreps 1990; Raub and Weesie 1990). Third-party ties are not effective in
promoting cooperation when noncooperative behavior is normatively accept-
able in the larger social structure. Consequently, the reputation of an outside
director is not necessarily damaged by noncooperative behavior (i.e. exercising
independent control over CEOs), and directors may even be increasingly
rewarded for exercising independent control in the market for corporate
directors. As a result, in the absence of reputational costs from noncooper-
ation, third-party ties do not necessarily enforce such behavior. As we develop
a deeper and fuller account of the multiple facets of network resources, we
have to keep in mind the contingent nature of third-party ties in impacting
them.
The results on cooperation among boards are consistent with the view that
this behavior increases the magnitude of network resources and in turn the
likelihood of alliance formation by increasing trust between top managers
and manager-directors, while board control lowers network resources and the
likelihood of alliance formation by reducing trust between them. Nevertheless,
these additional analyses are merely exploratory, and further research should
use alternative measures of trust and sociopolitical influence to verify more
conclusively the social mechanism by which CEO–board interaction affects
alliance formation. This could be further supplemented with studies that
use alternative measures of cooperation and control. While this research is
perhaps unique in demonstrating support for hypotheses about CEO–board
relationships with both archival and survey measures of key constructs, there
is a great need for research that uses alternative approaches to measuring
cooperation, control, and other forms of CEO–board interaction as well as
the network resources that they generate.
The control variable results also provide some valuable insights. The logit
regression and Heckman selection model results show that previous ties
between dyad members increase the likelihood of alliance formation. This
94 NETWORK RESOURCES AND FORMATION OF TIES

is consistent with findings that show that prior alliance networks influence
subsequent alliance formation (Kogut, Shan, and Walker 1992; Gulati 1995b,
1998; Powell, Koput, and Smith-Doerr 1996; Gulati and Gargiulo 1999). Vari-
ables indicating prior alliance activity also capture any unobserved propen-
sities of the firms to enter alliances that are not captured by the independent
variables; results for these here further attest to the robustness of our results
(Heckman and Borjas 1980). Additionally, some of the resource dependence
measures were significant, indicating that resource dependence was indeed
an important consideration for the creation of new alliances. As expected,
the measure for dyadic constraint was positive and significant: the greater
the constraint, the greater the likelihood of alliance formation. Moreover, the
significant effect of friendship ties between CEOs and manager-directors pro-
vides further evidence that positive links between CEOs and board members
encourage alliance formation.
In delineating the critical role of tie content in moderating network effects
and then showing how it may be moderated further by third-party ties, this
study makes several related contributions to research on interorganizational
networks. First, it considers the interrelationship across the multiplexity of
interorganizational ties and the network resources that ensue from them by
directly examining the influence of one such tie (board interlocks) on the
creation of network resources that may be used to explain the formation of
another set of ties (strategic alliances). In some ways, this indicates the rein-
forcing nature of network resources in which one kind of tie that constitutes a
network resource enables the firm to accumulate other ties that in turn serve
as constituent elements of such resources. The results also suggest that the
influence of interorganizational network ties on the availability of network
resources that in turn shape firm behavior is strongly conditioned by the
content of those ties. In other words, ties alone do not automatically lead to
the accumulation of network resources—their content must be considered.
Second, this chapter suggests that board interlocks are heterogeneous and
goes on to demonstrate their positive and negative influence on the creation of
network resources that in turn shape the formation of new strategic alliances
between firms. Very little empirical research has examined when network ties
may lead to more negative relations between individuals or organizations.
By exploring how the content of network ties might diminish mutual trust
between individuals and thus impede the creation of network resources, this
study investigates what Burt and Knez (1995: 261) called the ‘dark side’ of
social networks. This is further developed by showing that both negative and
positive ties between dyads of firms are amplified by third-party connections
in which firms are embedded.
Finally, the study highlights the importance of indirect, third-party ties in
interorganizational networks on the accumulation of network resources and
their subsequent impact on firm behavior. Research on social networks has
 BOARD INTERLOCKS IN ALLIANCE FORMATION 95

typically treated network ties as exogenous; relatively little empirical research

has examined the origin of organizational networks (Gulati 1998; Gulati and
Gargiulo 1999). Thus, it is important to recognize that both interlocks and JVs
are interorganizational relationships that accumulate into a social network.
This study considers how the creation of interorganizational networks of
strategic alliances may be influenced in significant ways by the social networks
of board interlocks in which firms are placed. As a result, it examines the
multiplexity of ties in which firms are embedded and the relationship between
those ties: new social networks result from a social process in which preexisting
ties shape their creation in an iterative dynamic. This research is distinctive
because it examines simultaneously two networks that exist at different levels
of analysis: the relationships between corporate leaders that make up board
interlocks are interpersonal ties, while strategic alliances occur across firms.
Very little empirical research has considered how social ties between indi-
viduals can influence a different kind of network tie at the interorganization
level (for exceptions, see Galaskiewicz 1985b; Zaheer, McEvily, and Perrone
1998). Thus, the findings have implications for cross-level perspectives on the
accumulation of network resources and the formation of interorganizational
networks by showing how the microcontent of network ties between individ-
ual leaders can play an important role in the development of organization-
level ties.
This page intentionally left blank
Part II
Network Resources
and the Governance
Structure of Ties
This page intentionally left blank
5 Network resources
and the choice of
governance structure
in alliances
In Chapter 2, I discussed how firms entering alliances face considerable haz-
ards because of the potential for unpredictable partner behavior. Network
resources minimize these risks by providing information about the reliability
of potential partners. Moreover, firms with a positive reputation in these
networks and more connections with others through direct and indirect ties
are more likely to be identified as reliable alliance partners. As the network of
alliances itself grows, it becomes an expanding repository of network resources
and in turn asserts a greater influence on firm behavior. In Chapter 4, I also
considered the interplay among different kinds of network ties including
board interlocks and alliance networks in shaping firm behavior.
It is important to note, however, that the influence of network resources
extends beyond the identification of new alliance opportunities and potential
partners. Network resources can also affect the specific governance structure
used to formalize those alliances. Simply stated, the network-resource-based
familiarity and trust between two firms that may bring them into an alliance
in the first place are also likely to alter their choice of governance structure in
the initial and subsequent alliances.
In this chapter, I examine how the familiarity gained through prior alliances
provides firms with valuable information about each other and hence consti-
tutes a network resource that engenders interorganizational trust. This reduces
the need for hierarchical controls in future alliances, thereby influencing the
choice of the governance structure used in those alliances. As a result of
this process, cautious contracting gives way to looser practices as partners
become increasingly embedded in a social network of prior ties. Although
most research on this issue has followed a static logic, my research looks at
contracting between firms over time and demonstrates the role of emergent
network resources in dynamically influencing choice of governance structure

This chapter is adapted with permission from ‘Does Familiarity Breed Trust? The Implications of
Repeated Ties for Contractual Choice in Alliances’ by Ranjay Gulati published in Academy of Man-
agement Journal © 1995, (38/1): 85–112.
100 NETWORK RESOURCES AND GOVERNANCE

in alliances. While the focus here is on the nature of contracts between partic-
ular pairs of firms, with the dyad as the implicit unit of analysis, the underlying
logic easily translates to the firm level as this study explores how the network
resources that firms accrue through their prior ties can shape the kinds of
contracts they use to formalize new alliances.
Organizational scholars studying governance structures within and across
organizations tended to view hierarchical structures as mechanisms for man-
aging behavioral uncertainty. Prior research on contract choices in alliances
and the extent of hierarchical controls they employ had been carried out pri-
marily by transaction cost economists, who focused on alliance-based appro-
priation concerns that originate from contracting hazards and behavioral
uncertainty at the time of alliance formation (e.g. Pisano, Russo, and Teece
1988; Pisano 1989; Balakrishnan and Koza 1993; Oxley 1997). These econo-
mists have suggested that hierarchical controls are effective responses to such
concerns. The logic for hierarchical controls in this circumstance is their
facilitation of control by fiat, monitoring, and incentive alignment. Hence,
just as appropriation concerns and the perceived need for hierarchical controls
can influence a firm’s decision to make or buy a component, transaction
cost economists have suggested that these same considerations are at play
in exchange relations characterized by strategic alliances—and consequently,
they also shape the specific choice of governance structure for those alliances.
That is, the greater the appropriation concerns, the more hierarchical the
governance structures for organizing the alliance will be.
A number of researchers have challenged this view of hierarchical gov-
ernance as occurring primarily as a reflection of associated transactional
attributes. For example, Zajac and Olsen (1993) found that transaction cost
accounts focus in general on single-party cost minimization, yet alliances are
inherently dyadic exchanges, which raises the question of whose costs are min-
imized by a particular governance structure. They also claimed that the struc-
tural emphasis of transaction cost economics leads to the neglect of important
process issues resulting from the ongoing nature of alliances. More specifically,
I suggest here that alliances are usually not one-off transactions but rather rela-
tionships with ongoing exchange and adjustments, as a result of which process
issues become salient (Khanna, Gulati, and Nohria 1998). Perrow (1986)
echoes similar concerns when he suggests that transaction cost perspectives
grossly overstate the regulatory potential of hierarchical mechanisms.
A consideration of the history of interaction between firms and the possible
role of network resources in mitigating risks calls into question the primary
focus of transaction cost economists on transactional attributes and the asso-
ciated appropriation concerns as primary drivers of governance structure
choice. Unfortunately, much prior research on the governance structure of
alliances ignored the role of network resources in facilitating trust and dimin-
ishing risks.
 CHOICE OF GOVERNANCE STRUCTURE 101

My research here demonstrates that interorganizational trust gained

from network resources originating in past partnerships reduces the
appropriation concerns of potential alliance partners with such ties and
thus independently influences choice of governance structure. The presence
of network resources and concomitant interfirm trust is an extraordinary
lubricant for alliances because firms with prior network connections are
likely to have greater awareness of the rules, routines, and procedures
each follows. Both knowledge-based trust resulting from mutual awareness
and equity norms and deterrence-based trust arising from reputational
concerns create ‘self-enforcing’ safeguards in an exchange relationship and
can substitute for contractual safeguards (Bradach and Eccles 1989; Powell
1990). Consequently, familiarity and trust gained from network resources
can enable firms to work together even in the absence of formal hierarchical
controls.

Theory and hypotheses

GOVERNANCE STRUCTURE: EQUITY AND NON-EQUITY ALLIANCES

The specific governance structure of alliances, primarily communicated in
the form of a contract, is important for a number of reasons. First, such a
contract is an important mechanism by which firms protect themselves from
a partner’s opportunism. Evidence suggests that firms entering alliances are
potentially vulnerable to the opportunistic behavior of their partners (‘Cor-
porate Odd Couples’ 1986; Reich and Mankin 1986; Kogut 1988b, 1989;
Hamel, Doz, and Prahalad 1989). In the face of the hazards associated with
alliances, the contracts used reflect potential risks (Ring and Van de Ven
1992). Second, a contractual agreement serves as a framework for coopera-
tion between partners. Although alliance partners may not follow their initial
contract to the letter, it provides a set of normative guidelines: ‘The major
importance of a legal contract is to provide a framework . . . a framework [that
is] highly adjustable, a framework which almost never accurately indicates real
working relations, but which affords a rough indication around which such
relations vary, an occasional guide in case of doubt, and a norm of ultimate
appeal when the relations cease in fact to work’ (Llewellyn 1931: 736–7).
Third, the recent availability of an array of innovative contractual arrange-
ments opens up the possibility of new interfirm cooperative agreements. The
dramatic increase in the use of arm’s length contracts, which do not involve
shared ownership, is particularly noteworthy in this respect.
Transaction cost economists have typically classified the governance struc-
tures of alliances in terms of their use of equity ownership (e.g. Pisano, Russo,
102 NETWORK RESOURCES AND GOVERNANCE

and Teece 1988; Pisano 1989). Equity alliances, as defined by transaction cost
economists, take one of two forms: they may be organized either as an equity
JV, which involves the creation of a new and independent jointly owned entity,
or as an arrangement in which one of the partners takes a minority equity
position in the other partner or partners. Transaction cost economists justify
treating equity JVs and minority equity investments as a single category on the
grounds that ‘a direct equity investment by one firm into another essentially
creates an equity JV between one firm’s existing shareholders and the new
corporate investor’ (Pisano 1989: 111). In both types, the effective shared
equity stakes of the firms vary case by case. The important point is that
beyond a certain threshold, the shared ownership structure effectively deters
opportunistic behavior.
Equity-based ventures are considered hierarchical to the extent that they
more closely replicate some of the features associated with organizational
hierarchies than do other alliances. Nonequity arrangements, in contrast, do
not involve the sharing or exchange of equity, nor do they usually entail the
creation of a new organizational entity. In the absence of any shared own-
ership structure, nonequity alliances are more akin to arm’s length market
exchanges on the continuum of market to hierarchy. Members of the partner
firms work together directly from within their own organizational confines.
Nonequity alliances include unidirectional agreements, such as licensing, sec-
ond sourcing, and distribution agreements, and bidirectional agreements such
as joint contracts and technology exchange agreements.
From a transaction cost economics standpoint, quasi-market ties such as
nonequity alliances are the default mode for organizing alliances, and the
use of equity must be explained. The explanation offered is that firms use
equity alliances when the transaction costs associated with an exchange are too
high to justify a quasi-market, nonequity alliance. Researchers have identified
two sets of governance properties through which equity alliances effectively
alleviate transaction costs (Pisano et al. 1988). The first are the properties
of a ‘mutual hostage’ situation in which shared equity helps align the inter-
ests of all the partners. Not only are the partners required to make ex ante
commitments to an equity alliance but also their concern for their investment
reduces the possibility of their behaving opportunistically over the course of
the alliance (Williamson 1975, 1991). In the case of alliances that involve shar-
ing or developing new technologies over which property rights are difficult to
enforce, equity ownership also provides an effective means for allocating such
rights. Issues related to the ownership of intellectual property developed in the
venture are sidestepped because the property belongs to the venture itself.
The second set of properties are those of the administrative hierarchy that
not only oversees the day-to-day functioning of an alliance but also addresses
contingencies as they arise. In equity JVs, a hierarchy of managers serves this
function; in the case of direct equity investments, hierarchical supervision is
 CHOICE OF GOVERNANCE STRUCTURE 103

created when the investing partners participate in the board of directors of the
partner that received the investment. This participation is the mechanism by
which partners exercise their residual rights of control (Grossman and Hart
1986).
The benefits of equity alliances, however, must be weighed against their
costs. Equity alliances not only take a long time to negotiate and organize but
can also involve very high exit costs. Furthermore, significant administrative
costs can be associated with a hierarchical system of supervision. Similar
pros and cons must be assessed for nonequity alliances. One advantage of
nonequity alliances is that they can be negotiated rapidly and require only
limited investments from each partner. One disadvantage, however, is that
both partners are more vulnerable to each other’s opportunistic behavior, and
one may find it difficult to persuade the other to make significant alliance-
specific investments in light of this increased vulnerability (Joskow 1987). A
further difficulty may arise in alliances formed to share or develop new tech-
nologies; here, significant disagreements on the allocation of property rights
may arise. Even when there is agreement, it may be difficult to transfer tacit
knowledge across loosely connected firms (Hennart 1988; Badaracco 1991).
Furthermore, such agreements entail a fair amount of management effort,
albeit of a different nature than that required by equity alliances.
As in prior research on alliance governance, I chose to focus on the
dichotomy between equity and nonequity alliances. My primary goal was to
examine the factors underlying the use of equity in alliances. I looked at equity
for numerous reasons. First, its use in partnerships is a highly visible feature
that offers a means to distinguish most alliances. Most other classifications are
not based on such a readily measured feature, making alliances more difficult
to place on proposed scales. Second, the use of equity is an important measure
with which partners, especially first-time partners, address their concerns
about malfeasance. My previous fieldwork at firms entering alliances corrob-
orates this practice (Gulati 1993). Third, prior research by transaction cost
economists on these issues has focused on the use of equity, so an explanation
of the dichotomy between equity and nonequity alliances allows the present
findings to be compared directly to past results.

R&D ALLIANCES
A primary basis on which transaction cost economics has examined the costs
of alliances has been the activities involved with R&D. Prior research sug-
gests that transactions involving the sharing, exchange, or codevelopment of
knowledge can be somewhat problematic because of the peculiar character of
knowledge as a commodity (Arrow 1974). Many of these problems result from
104 NETWORK RESOURCES AND GOVERNANCE

the inability to accurately assess the value of the commodity being exchanged
as well as from concerns about opportunism resulting from poor monitoring
possibilities in such exchanges (Balakrishnan and Koza 1993). The challenge of
transferring R&D know-how across organizations compounds these problems
(Hennart 1988; Badaracco 1991). Because of these issues, alliances with an
R&D component are likely to have higher transaction costs than those that do
not involve joint R&D.
Transaction cost theorists claim that alliances involving R&D will most
likely be organized as equity-based partnerships because of the significant
transaction cost burden. Shared equity can align the interests of partners and
limit opportunistic behavior by focusing their attention on equity stakes in the
alliance. Furthermore, such alliances are usually accompanied by an indepen-
dent administrative structure, which fosters information flow and provides for
ongoing coordination.
In a study of the telecommunications industry, Pisano et al. (1988) explic-
itly tested the impact of transaction costs on alliance structure. They pre-
dicted that the greater the hazards associated with an alliance, the more likely
it will be equity based. Their findings supported these predictions. Pisano
(1989) observed similar results in the biotechnology sector. In both studies,
high transaction costs were measured as the presence of an R&D component
in the alliance. In a study of US–Japanese alliances, Osborn and Baughn (1990)
followed similar reasoning and showed that alliances encompassing joint R&D
were more likely to be equity-based. Thus, I propose the following:
Hypothesis 1: Alliances are more likely to be equity-based if they have a shared R&D
component.

THE ROLE OF INTERFIRM TRUST AND NETWORK RESOURCES

IN ALLIANCES
Numerous researchers have been critical of transaction cost economics’ nar-
row focus on transaction attributes and its implicit treatment of each trans-
action between companies as an independent event (e.g. Doz and Prahalad
1991; Ring and Van de Ven 1992). This assumption is particularly inappro-
priate when firms enter recurrent transactions. As I have discussed in previ-
ous chapters, network resources resulting from the cumulation of prior ties
between firms are key factors in reducing both search costs and associated
moral hazards concerns. Because they foster trust, network resources also play
an important role in a firm’s choice of governance structure for its alliances.
The term ‘trust’ has widely varying connotations (for excellent reviews on
the topic, see Luhmann 1979; Barber 1983; Gambetta 1988; and Kramer and
Tyler 1996). In this context, I conceived of trust as ‘a type of expectation
 CHOICE OF GOVERNANCE STRUCTURE 105

that alleviates the fear that one’s exchange partner will act opportunistically’
(Bradach and Eccles 1989: 104). This definition is akin to Simmel’s notion
(1978: 379) of mutual ‘faithfulness’ in social relationships. Gambetta gave this
cogent definition of such forms of trust:

Trust . . . is a particular level of the subjective probability with which an agent assesses
that another agent or group of agents will perform a particular action both before he
can monitor such action . . . and in a context in which it affects his own action. When
we say we trust someone or that someone is trustworthy, we implicitly mean that the
probability that he will perform an action that is beneficial or at least not detrimental
to us is high enough for us to consider engaging in some form of cooperation with
him. (1988: 217)

Can there be trust between two organizations that are simply agglomera-
tions of individuals? Intuitively, trust is an interpersonal phenomenon. Some
sociologists have argued that although expectations of trust do ultimately
reside within individuals, it is possible to think of interfirm trust in economic
transactions (Zucker 1986). At the organizational level, observers point to
numerous examples of preferential, stable, obligated, and bilateral trading
relationships to illustrate that firms develop close bonds with other firms
through recurrent interactions (Sabel 1993; Zaheer and Venkatraman 1995).
Accounts of industrial districts such as the modern woolens center at Prato,
Italy, the injection moulding center in Oyannax, France, the cutlery industry
in Sheffield, England, and the nineteenth-century Swiss watch-making region
(Piore and Sabel 1984; Weiss 1984, 1988; Sabel and Zeitlin 1985; Sabel 1993)
support this argument. Similar evidence has been observed from subcontract-
ing relations in the Japanese textile industry (Dore 1983), the French engi-
neering industry (Lorenz 1988), the American construction industry (Eccles
1981), and the Italian textile industry (Johnston and Lawrence 1988). A vari-
ety of terms have been used to describe this development of trust through
repeated interactions: Williamson (1985) labeled it as relational and obliga-
tional contracting; Eccles (1981) as quasi-firm arrangements; Johnston and
Lawrence (1988) as value-added partnerships; Dore (1983) as obligated rela-
tional contracting; and Zucker (1986) as process-based trust. Underlying all
these accounts is a single notion: interfirm trust is built incrementally through
recurrent interactions (Good 1988).
The link between trust and prior contact is based on the premise that
through ongoing interaction, firms come to be embedded in a set of historical
ties that serve as conduits of valuable information. This information in turn
enables partners to learn about each other and develop trust around norms of
equity, or ‘knowledge-based trust’ (Shapiro, Sheppard, and Cheraskin 1992).
There are strong cognitive and emotional bases for such trust, which are
perhaps most visible among individual organization members (Lewis and
Weigert 1985). Macaulay, in a seminal essay, observed how close personal
106 NETWORK RESOURCES AND GOVERNANCE

ties emerged between individuals in organizations that contracted with each

other; these personal relationships in turn ‘exert pressures for conformity to
expectations’ (Macaulay 1963: 63). Similarly, Palay (1985) found that the rela-
tionships between rail-freight carriers and auto shippers were characterized
by close personal connections among members of those organizations. He
described how these personal ties were important factors in the companies’
use of informal contracts in a high transaction cost situation that would
otherwise have demanded a detailed formal contract. Similarly, Ring and Van
de Ven (1989) pointed to the important role of informal, personal connections
across organizations in determining the governance structures used for their
transactions.
Other theorists have made similar claims about the role of repeat alliances.
In a survey-based empirical study, Parkhe (1993a) observed that the presence
of a history of cooperation between two firms limited their perception of
expected opportunistic behavior in new alliances and thus lowered the level
of contractual safeguards employed in those alliances. Drawing on an induct-
ive field study of seven pairs of firms in alliances, Larson (1992) observed
that firms rely extensively on mechanisms of social control, as opposed to
formal contracts, in the formation and maintenance of alliances, and that such
relational factors become increasingly important as relationships develop over
time (Nooteboom, Berger, and Noorderhaven 1997).
In this context, the emergent trust from prior ties between firms can be
considered an important element of network resources. Interorganizational
trust that results from each firm’s prior alliances is inherently dyadic in nature.
Through each of its dyadic ties, any participating firm is able to enter into
looser contracts with its prior partners for future alliances. Such a resource
can be the basis for speedier response to quick shifts in the marketplace
and reduced governance costs. As a result, network resources resulting from
their prior networks provide firms with the ability to build trusting ties with
specific partners. Thus, it is no surprise that Kenneth Arrow once described
trust as the most efficient mechanism for governing economic transactions
(1974).
One of the reasons that network resources and the concomitant trust may
enable firms to quickly execute new alliances is that the history of interaction
and information-sharing alters each firm’s perception of the potential trans-
action costs associated with new alliance opportunities. Trust counteracts fear
of opportunistic behavior and, as a result, may limit the perceived transaction
costs associated with an exchange. This process in turn should affect the gov-
ernance structure of new alliances between these two parties. In other words,
trust can substitute for hierarchical contracts in many exchanges by serving as
an informal control mechanism (Bradach and Eccles 1989).
It is important to distinguish the aforementioned knowledge-based trust
from deterrence-based trust, which also plays a role in repeat alliances
 CHOICE OF GOVERNANCE STRUCTURE 107

(Ring and Van de Ven 1989; Shapiro, Sheppard, and Cheraskin 1992). The
latter emphasizes utilitarian considerations that may also lead to believing
that a partner will behave in a trustworthy manner. Specifically, trust can
arise when untrustworthy behavior by a partner can lead to costly sanctions
that exceed any potential benefits of opportunistic behavior. Possible sanc-
tions include loss of repeat business with the same partner, loss of other
points of interaction between the two firms, and loss of reputation (Macaulay
1963; Granovetter 1985; Maitland, Bryson, and Van de Ven 1985). Thus, on
strictly utilitarian grounds it is to the firm’s benefit to behave in a trustworthy
manner.1
Based on the above discussion, I propose that firms embedded in prior
alliance networks are likely to trust each other more than other firms with
whom they have had no alliances. Firms are less likely to use equity in
repeated alliances than in a first-time alliance because interfirm trust result-
ing from network resources reduces the imperative to use equity. Actors are
thus willing to take what Williamson (1993) calls ‘calculative risks’ because
of their confident expectation that their counterparts will act responsibly.
Thus:
Hypothesis 2: The greater the number of previous alliances between the partners in an
alliance, the less likely the alliance is to be equity-based.

A question remains as to whether the character of firms’ previous alliances

affects the type of governance structure used for new alliances between
the same parties. In other words, does a firm’s perception of the trans-
action costs associated with a new alliance opportunity vary by the type
of tie that a focal firm may have entered with the same partner in the
past? It could be that two firms will prefer a nonequity alliance only when
they already have worked together in an equity-based alliance. According to
such logic, an equity alliance engenders greater network resources, in the
form of trust, by creating a hostage situation that requires ex ante com-
mitments by the partners and leads to partners’ concern for the value of
their investments. Once two firms share a hostage, the need for additional
hostages is obviated. This is similar to what Williamson (1983) described
as credible commitments. A singular focus on hostage-taking is, however,
too narrow. As highlighted earlier, prior equity alliance situations repre-
sent more than simple hostages. They entail close interactions between the
partners over prolonged periods, which can enhance trust through mutual
awareness.
Such behavior could be a result of having a hostage in the form of an equity
alliance already in place. However, informants also reported that the logic
¹ In recent years, there has been some debate on whether behavior with utilitarian motivations can
really be described as trust (Williamson 1993). For my purposes, interfirm trust encompasses such
utilitarian behavior, and I choose not to engage in this debate.
108 NETWORK RESOURCES AND GOVERNANCE

behind their use of loose contracts was based not so much on the existing
equity alliance, but on their familiarity with their partners and the judgment
that they were trustworthy (Gulati 1993).
An alternative to the above scenario is that two firms will prefer a nonequity
alliance even when they already have a prior nonequity tie that may be easy to
dissolve. This effect is likely to be less powerful than that based on the presence
of prior equity alliances, which not only creates shared hostages but may lead
to greater network resources and closer interaction among partners. Thus the
following two hypotheses:

Hypothesis 3a: The greater the number of previous equity alliances between the part-
ners in an alliance, the less likely an alliance is to be equity-based.

Hypothesis 3b: The greater the number of previous non-equity alliances between the
partners in an alliance, the less likely the alliance is to be equity-based.

Looking beyond the history of alliances between given firms, I also expected
firms to trust domestic partners more than international partners, not only
because network resources available to a firm are likely to generate more infor-
mation about domestic firms due to physical proximity but also because the
reputational consequences of opportunistic behavior are greater in a domestic
context (Gerlach 1992). Character-based trust, whereby firms trust others that
are socially similar to themselves, may also be higher among domestic firms
(Zucker 1986). Given such trust, I expect firms to be more willing to engage in
loose, quasi-market alliances with domestic partners than with international
partners:

Hypothesis 4: Alliances are more likely to be equity-based if they are among firms of
different nations.

Research on group behavior suggests that beyond a certain threshold, an

increase in the number of participants in any group can lead to dysfunc-
tional behavior within the group and to a decline in its ability to perform
assigned tasks (Steiner 1972; Hackman 1987). Within alliances, the presence
of more than two partners heightens the possibility of stalemates and con-
flicts. Inasmuch as multilateral alliances pose larger organizational problems
than bilateral alliances, I expected the former to more likely be equity based
regardless of the network resources available to those actors from their prior
ties.

Hypothesis 5: Alliances are more likely to be equity-based if they are among more than
two firms.
 CHOICE OF GOVERNANCE STRUCTURE 109

Empirical research

METHOD
The data-set used in this study is described in Appendix 1 under the heading
‘Alliance Announcement Database’. The dependent variable, mode of alliance,
was coded ‘1’ if an alliance involved the use of equity and ‘0’ if it did
not. The fundamental characteristic that distinguishes equity alliances from
nonequity alliances is that equity sharing creates shared ownership and is,
beyond a minimum threshold, effective in reducing exposure to opportunistic
behavior.
Table 5.1 describes the variables included in the analysis and provides sign
predictions based on the arguments made in this chapter. For consistency with
prior empirical research, I defined high-transaction costs as the presence of
an R&D component in an alliance (1 = R&D present, 0 = no R&D). R&D
alliances included those that encompassed basic R&D, product development,
or elements of both. Non-R&D alliances typically were those that involved
joint production or marketing.
Hypothesis 2 concerns the relationship between the current type of alliance
given partners share and their history of alliances. The variable repeated
ties recorded the number of prior alliances two firms had had since 1970

Table 5.1. Definitions and predicted signs of variables

Variable Definition Prediction

Mode Dummy variable indicating if alliance was equity Dependent variable

based
R&D component Dummy variable indicating presence of an R&D +
component in the alliance
Repeated ties Number of prior alliances between the firms —
International alliance Dummy variable set to one if the firms are of +
differing nationalities (default domestic)
Multilateral alliance Dummy variable set to one if the alliance has more +
than two partners (default bilateral)
Repeated equity ties Number of prior equity alliances between the —
firms (in the presence or absence of any
nonequity alliances)
Repeated nonequity ties Number of prior nonequity alliances between the —
firms (in the absence of any equity alliances)
New materials sector Dummy variable set to one if firms are in the new No prediction
materials sector (default biopharmaceutical)
Automotive sector Dummy variable set to one if firms are in the No prediction
automotive sector (default biopharmaceutical)
Year A year value for each record ranging from 1 to 19 No prediction
Percentage of equity alliances Percentage of equity alliances announced in the +
industry in the prior year
110 NETWORK RESOURCES AND GOVERNANCE

(0 = first-time alliance). I also calculated the variables repeated equity ties and
repeated nonequity ties, respectively indicating the number of prior equity
and nonequity alliances between two parties. These variables also took a zero
value for a first-time alliance of the given type.
An important clarification is necessary here. Three alternative scenarios
are possible in the history of alliances: (a) only nonequity past alliances,
(b) only equity alliances, and (c ) both equity and nonequity alliances. To
which category should the third scenario be assigned? Because hypothesis
3a predicts the role of prior equity ties, in the presence or absence of other
nonequity ties, repeated equity includes both the situation in which there are
only prior equity alliances and those in which there have been mixed alliances.
Hypothesis 3b, on the other hand, focuses on the effect of prior nonequity
alliances in the absence of any other ties. Hence, repeated nonequity ties does
not include situations with mixed alliances.
I included a dummy variable indicating whether an alliance was domestic
or international (1 = partners of differing nationalities, 0 = partners of the
same nationality).
To capture any effects of the number of partners in an alliance, I included it
as a variable. Since the alliances in the sample were either bilateral or trilateral,
this variable was recoded as a dummy variable with a value of ‘1’ if an alliance
was multilateral and a value of ‘0’ if an alliance was bilateral.
I included two control variables to represent the three sectors studied. One
dummy variable was coded ‘1’ if an alliance was in the new materials sector, ‘0’
otherwise, and the second was coded ‘1’ if the alliance was in the automotive
sector and ‘0’ otherwise. The default sector was biopharmaceuticals.
Another control variable captured the percentage of equity alliances
announced in an industry. I counted the number of alliances announced in
an industry in the year prior and computed the percentage of those that
were equity based. This variable broadly tested the institutionalist claim that
firms mimic the contracts other firms in their industry use. This variable can
also be interpreted as capturing the net effect of the various macroeconomic
factors within an industry that may influence the formation of equity alliances
(Amburgey and Miner 1992).
Finally, I included a dummy variable for each year to capture temporal
effects and control for any temporal autocorrelation.

RESULTS
Table 5.2 presents descriptive statistics and correlations for all variables. These
results reflect the diversity of alliances included in the pooled sample, in which
over 500 of the approximately 2,400 alliances were repeat links between firms.
Table 5.2. Descriptive statistics and correlations

Frequencya

Variable 0 1 Means SD Minimum Maximum 1 2 3 4 5 6 7 8 9 10

1. Mode 840 1,577 0.65 0.47 0 1 — — — — — — — — — —

2. R&D component 1,015 1,402 0.58 0.49 0 1 .17 — — — — — — — — —
3. Repeated ties 1.40 0.98 0 9 −.08 .04 — — — — — — — —
4. International alliance 1,322 1,095 0.45 0.49 0 1 .02 −.19 .01 — — — — — — —
5. Multilateral alliance 1,756 661 0.27 0.45 0 1 .05 .07 .06 −.22 — — — — — —

CHOICE OF GOVERNANCE STRUCTURE

6. Repeated equity ties 1.18 0.85 0 9 −.15 .02 .75 −.01 .05 — — — — —
7. Repeated nonequity ties 0.01 0.11 0 2 .01 .02 .12 .02 .00 −.05 — — — —
8. New materials sector 1,274 1,143 0.47 0.49 0 1 .05 −.04 −.13 −.09 .28 −.13 −.04 — — —
9. Automotive sector 1,924 493 0.20 0.40 0 1 .06 −.15 .09 .06 .01 .07 .00 .48 — —
10. Year 14.50 3.62 1 19 −.08 .00 .08 .02 .06 .05 .03 .07 −.16 —
11. Percentage of equity alliances 0.35 0.15 0.13 1.00 .10 −.06 −.02 .00 .03 −.01 −.01 .14 .15 −.35

a
Where no figure is given, value is a count. Totals = 2,417 except for the percentage of equity alliances, for which the total is 2,395.

111
112 NETWORK RESOURCES AND GOVERNANCE

The correlations show a few problems of multicollinearity. Notably,

repeated equity ties is highly correlated with repeated ties (r > .70); the high
correlation is no surprise because repeated equity ties is a nested subset of
repeated ties. Because of the collinearity, I introduced these variables separ-
ately in a logit analysis.
A logit model was used to assess the effects of the independent variables
on the likelihood that a given alliance would be equity-based (Aldrich and
Nelson 1984). A variable’s positive coefficient indicates its association with
equity alliances.
Table 5.3 presents the logistic regression estimates. The first column reports
the base model including all the control variables. The coefficients for the
sector variables were significant (p < .01) in all cases. Although this find-
ing suggests intrinsic industry differences in the likelihood of equity-based
alliances (the constant terms for each of the industries differ), it does not reveal
whether the main effects hypothesized differ across the three industries. More
specifically, the positive signs indicate that both the automotive and new mate-
rials sectors were more likely to have equity-based alliances than the biophar-
maceutical sector, once independent variables included in each model were
controlled. I later estimated unrestricted models for each of the industries
(results not presented here). The signs of the coefficients indicated that the
postulated directions of the main effects were indeed observed in each sector.
My original estimations included a dummy variable for each year. For
simplicity of presentation, I reestimated the models using a single variable,

Table 5.3. Results of logistic regression analysisa

Variable Model 1 Model 2 Model 3 Model 4 Model 5

∗∗ ∗∗ ∗∗ ∗∗
Constant −0.83 (0.26) −1.55 (0.27) −1.53 (0.28) −1.66 (0.28) −1.66∗∗ (0.28)
R&D component — 0.90∗∗ (0.09) 0.99∗∗ (0.09) 0.99∗∗ (0.09) 0.99∗∗ (0.09)
Repeated ties — — −0.23∗∗ (0.05) — —
International alliance — — 0.33∗∗ (0.09) 0.32∗∗ (0.09) 0.32∗∗ (0.09)
Multilateral alliance — — 0.12 (0.11) 0.15 (0.11) 0.15 (0.11)
Repeated equity ties — — — −0.97∗∗ (0.13) −0.97∗∗ (0.13)
Repeated nonequity — — — — 0.11 (0.37)
ties
New materials sector 0.36∗∗ (0.10) 0.50∗∗ (0.11) 0.47∗∗ (0.12) 0.41∗∗ (0.12) 0.41∗∗ (0.12)
Automotive sector 0.42∗∗ (0.13) 0.67∗∗ (0.13) 0.69∗∗ (0.14) 0.68∗∗ (0.14) 0.68∗∗ (0.14)
Year −0.03∗ (0.01) −0.03∗ (0.01) −0.02 (0.01) −0.02 (0.01) −0.02 (0.01)
Percentage of equity 0.90∗∗ (0.30) 0.99∗∗ (0.31) 1.03∗∗ (0.31) 1.08∗∗ (0.32) 1.08∗∗ (0.32)
alliances
n 2,395 2,395 2,395 2,395 2,395
−2 log likelihood 3,041.74 2,946.79 2,915.02 2,875.03 2,874.93
˜2 45.37∗∗ 140.31∗∗ 172.09∗∗ 212.08∗∗ 212.18∗∗
df 4 5 8 8 9

a
Standard errors are in parentheses.
∗
p < .05; ∗∗ p < .01.
 CHOICE OF GOVERNANCE STRUCTURE 113

year, which ranges in value from 1 to 19, indicating each year. No differences
in results for the other independent variables were observed in these two sets
of estimates, and the results are mixed for year, which is significant in some
models and not in others.
The positive and significant coefficient (p < .01) for the percentage of
equity-based alliances announced in an industry in a given year suggests that
this variable positively affects the use of equity alliances by firms in the indus-
try in the subsequent year. This finding holds true in the remaining models as
well and suggests that the form of contracts used in alliances may be linked to
an industry’s propensity to use equity alliances.
The second column in Table 5.3 shows results with the measure of transac-
tion costs introduced into the model. The results are consistent with hypoth-
esis 1: alliances involving R&D are more likely to be equity based than are
non-R&D alliances, a relationship indicated by the positive coefficients of the
variable R&D component (p < .01). This finding remains true in later models
as well.
The third column shows results with the three measures of trust arising
from its network resources and from contextual factors: the number of prior
alliances by the same pair of firms, whether they were domestic or interna-
tional, and the number of partners involved. Results suggest that the repetition
of ties is a significant determinant of mode of alliance (p < .01). Specifically,
the negative coefficient of the dummy variable repeated ties supports hypoth-
esis 2 and indicates that the larger the number of prior alliances between part-
ners, the less likely their current alliance is to be equity-based, even when the
presence of an R&D component is controlled for. The positive and significant
coefficient for international alliance supports hypothesis 4, which predicts that
such alliances are more likely to be equity-based than domestic alliances. No
support is found for hypothesis 5, however, which predicts that the use of
equity is more likely in multilateral than in bilateral alliances. These results
remain true in subsequent models.
Models 4 and 5 were estimated using the measures of prior equity and
nonequity alliances. The variable for repeated alliances was omitted because
of multicollinearity concerns. In both models, results suggest that the number
of prior equity-based ties between two firms reduces the likelihood that a
current alliance between them will be equity based, thus supporting hypo-
thesis 3a.
Results do not support hypothesis 3b, which postulates that even in the
absence of prior equity ties, the larger the number of nonequity alliances
between two firms, the less likely their future alliance is to be equity-based.
However, the number of alliances that actually fit this pattern was extremely
small (n = 23). Thus, the nonsignificant finding may be the result of too few
observations.
114 NETWORK RESOURCES AND GOVERNANCE

Table 5.4. Estimates of fit of logistic regression

models

Observed Predicted Percentage

correct
No event Event Total

Model 1
No event 20 807 827 —
Event 15 1,553 1,568 —
Total 35 2,360 2,395 65.7
Model 2
No event 125 702 827 —
Event 91 1,477 1,568 —
Total 216 2,179 2,395 66.9
Model 3
No event 173 654 827 —
Event 119 1,449 1,568 —
Total 292 2,103 2,395 67.7
Model 4
No event 199 628 827 —
Event 177 1,391 1,568 —
Total 376 2,019 2,395 66.4
Model 5
No event 199 628 827 —
Event 178 1,390 1,568 —
Total 377 2,018 2,395 66.3

Looking at the overall fit of each of the models indicated by their log

2
likelihoods and associated ˜ , I observed that the introduction of R&D in
model 2 significantly improved the fit of the base model. Another significant
improvement occurred in models 3 and 4, with the introduction of the
variables for repeated, international, and multilateral alliances and that for
repeated equity ties.
Table 5.4 presents the classification tables corresponding to each of the
models in Table 5.3. These tables highlight the association between predicted
and observed responses for each model. All five models perform better than
a random proportional chance model, which would have a ‘hit rate’ of p2 +
(1 − p)2 , where p is the probability of an event’s having occurred (Bayus and
Gupta 1992). On the basis of the observed proportion of events, I estimated
p to be .65 (1,568/2,395). Thus, the classification accuracy for a random
model is 54.25 percent. The percentage of correctly classified cases in the five
models reported ranges from 65.7 to 67.7 percent, a rate clearly superior to
the random model. The models also perform better than a simple model with
only the intercept (which would predict all nonevents), albeit not by a large
percentage difference. Although this pattern suggests a significant improve-
ment over a random proportional chance model, it also indicates that I may
have overlooked additional relevant variables.
 CHOICE OF GOVERNANCE STRUCTURE 115

Table 5.5. Elasticitiesa for logistic regres-

sion analysis results

Variables Model 3 Model 5

R&D 37.73 38.36

Repeated ties −14.13 —
International alliance 12.47 12.10
Multilateral alliance 5.74 7.46
Repeated equity ties — −13.70
Repeated nonequity ties — 7.51

a
Elasticity is the change in probability resulting from a
unit change in an independent variable.

The relative magnitudes of raw logit coefficients are not directly inter-
pretable because they refer to the increase in logarithmic odds resulting from
a unit increase in a variable. In Table 5.5, I present elasticities for the key
variables entered in two models shown in Table 5.3 (Ben-Akiva and Lerman
1985; Petersen 1985; Fernandez and McAdam 1988).2 Elasticities indicate the
percentage change in the probability of a hypothesized event for a one-unit
change in an explanatory variable.
The results in Table 5.5 must be interpreted with caution because each
variable has a different underlying measurement scale. In particular, for R&D,
a unit change indicates that non-R&D alliances possibly had an R&D com-
ponent. For repeated alliances, a unit change indicates the existence of one
more prior alliance. Thus, Table 5.5 shows that if two firms had entered
an R&D alliance instead of a non-R&D alliance, their likelihood of form-
ing an equity JV would have increased by about 38 percent. If two firms
entering an alliance had one more prior alliance of any kind, model 3 sug-
gests that their likelihood of forming an equity JV would have declined
by 14.13 percent. Model 5 suggests that one more prior equity alliance
reduced the likelihood of forming an equity alliance by 13.70 percent. Sim-
ilarly, the marginal effects of international and multilateral alliances are also
reported.

Conclusion
The results of models 1 through 5 (Table 5.3) provide strong evidence for
most of the present hypotheses. They show that (a) R&D-based alliances are
more likely to be equity-based than non-R&D alliances, (b) the larger the

² I computed these elasticity scores by looking across all individual records as opposed to simply
setting mean values for each independent variable and then looking at percentage shifts.
116 NETWORK RESOURCES AND GOVERNANCE

number of prior alliances between two firms, the less likely their subsequent
alliances are to be equity-based, (c ) the larger the number of prior equity
alliances between two firms, the less likely their subsequent alliances are to
be equity-based, and (d) international alliances are more likely to be equity
based than domestic alliances. However, no support emerged for the claim
that prior nonequity alliances alone reduce use of equity in new alliances. Also
the number of partners in an alliance does not seem to affect the form of gov-
ernance used. Taken together, the results suggest that firms select contractual
forms for their alliances not only on the basis of the activities they include
(R&D) but also according to information obtained through prior alliances
and the resultant network resources. What emerges from this account is an
image of alliance formation in which cautious contracting gives way to looser
practices as partner firms build confidence in each other as they accumulate
network resources. In other words, network resources based on prior ties
propagate valuable information to embedded firms that in turn promotes
familiarity between organizations that breeds trust, which impacts, in turn,
their governance structures.
Consequently, this chapter demonstrates an important additional benefit
of network resources. By engendering trust between a focal firm and its prior
partners, network resources can be a powerful lubricant not only in fostering
new alliances between them but also in enabling them to enter into increas-
ingly more complex relationships using looser contracts. As a result, network
resources can be a powerful catalyst for creating governance cost efficiencies. It
is worth noting that while trust resides inherently in a dyadic connection, it is
possible to envision how a focal firm can create diverse ties that cumulate into
a network resource allowing more frequent alliances with past partners and
looser contracts than the activities included within those partnerships might
typically mandate. An important direction for future research would be to
go beyond the dyadic level here to consider the role of additional sources of
network resources discussed before, such as more distant alliance ties in the
network and alternative ties such as board interlocks in shaping the gover-
nance structures of alliances.
In a review of the transaction cost economics literature, Bradach and Eccles
(1989) argued that three primary control mechanisms govern economic trans-
actions between firms: price, authority, and trust. They observed that, in
equity alliances, firms rely on a mix of price and authority—price because
of concern for the value of their equity and authority because of the hierarchy
created. Such an approach, however, examines alliances in a static context,
treating each transaction as independent, without taking into account how
the relationships can evolve over time. Observing interfirm alliances over time
suggests that repeated ties between firms engender trust that in turn shapes the
form of the contracts used in subsequent alliances. Firms appear to substitute
 CHOICE OF GOVERNANCE STRUCTURE 117

trust to some degree for contractual safeguards in their repeated alliances.

Thus, trust is also an important component of the control mechanisms used
within alliances.
The network resources a firm may possess and the concomitant trust in spe-
cific partners is most visible in the case of partners with whom equity alliances
are already in place. My earlier discussion of some of the processes underlying
interorganizational behavior suggests that prior equity ties are not simply
mutual hostages that enhance each firm’s ability to penalize partners that
behave opportunistically but also network resources that provide information
about partners, helping to build knowledge-based trust. The finding here that
only having prior equity alliances leads to looser contracts could very well
indicate that equity alliances foster closer interaction between partners than
do nonequity alliances and thus are an avenue to greater network resources
for those firms.
Although this study enhances our understanding of governance struc-
ture in alliances, it has broad implications for transaction cost economics
as well. Building on the original insights of Coase (1937), this theory has
reified the transaction as the unit of analysis, treating each transaction as
an independent event. It has ignored the work of Commons (1970), Coase’s
contemporary, who also placed importance on transactions as the appro-
priate unit of analysis but offered a more process-oriented and temporally
informed view of transactions (cf. Van de Ven 1993). Other scholars have
offered similar exhortations (cf. Zajac and Olsen 1993), but organizational
researchers have yet to take them up. This chapter, which is a step in this
direction, suggests that transaction cost economics must explicitly incorporate
the role of prior ties in its analytical framework. In particular, if the theory’s
emphasis on the transaction as the appropriate unit of analysis is to remain
viable, the interdependencies that result from prior transactions should be
included.
By highlighting a number of efficiency benefits that follow from network
resources and the trust it engenders, this study has several practical conse-
quences for interfirm alliance activity and interfirm cooperation. First, trust
obtained from network resources can significantly reduce the costs of and
time spent on detailed contracts. Business Week (‘Corporate Odd Couples’
1986) reported that executives can spend as much as 23 percent of their
time developing alliance plans and 19 percent of their time drafting legal
documents, so savings could be significant. Another benefit of trust is that
it enables firms to avoid detailed contracts that may stifle a partnership’s
adaptability to shifting environments. Trust may also expand the realm of
feasible alliances and allow firms to enter partnerships that may otherwise
have been deemed impossible, even with detailed equity contracts. Finally,
firms in trusting relationships enjoy reduced search costs. An important
118 NETWORK RESOURCES AND GOVERNANCE

concern for firms seeking new alliances is the availability of trustworthy part-
ners, and considerable effort can be devoted to identifying them (Nohria
1992a). Through network resources, firms are able to more easily identify
trustworthy partners, which can significantly reduce their search time and
costs.
6 The architecture of
cooperation: the role
of network resources
in managing
coordination costs
and appropriation
concerns in strategic
alliances
The last chapter detailed how choice of governance structures in alliances
is influenced not only by appropriation concerns and moral hazards arising
from the attributes of the specific transactions to be consummated within
a particular alliance partnership but also by the network resources available
to participating firms. It showed that the network of prior alliances pro-
vides firms with a valuable network resource in the form of familiarity with
prior alliance partners that engenders interorganizational trust, which in turn
reduces uncertainty and the need for hierarchical controls in new alliances
between previously allied parties. In other words, trust produced by network
resources is a distinct factor that obviates the need for hierarchical controls in
alliances.
Still, while the appropriation concerns highlighted in the previous chap-
ter and in much prior research on alliance governance structure are clearly
important, firms face another set of concerns when they enter an alliance.
These concerns relate to anticipated coordination costs at the outset, which
can be extensive in some types of alliances. This chapter draws on an article I
published with Harbir Singh. We introduced the notion of coordination costs

This chapter is adapted from ‘The Architecture of Cooperation: Managing Coordination Costs and
Appropriation Concerns in Strategic Alliances’ by Ranjay Gulati and Harbir Singh published in
Administrative Science Quarterly © 1998, (43/4): 781–814, by permission of Johnson Graduate School
of Management, Cornell University.
120 NETWORK RESOURCES AND GOVERNANCE

to refer to the anticipated complexity of decomposing tasks among partners

and the ongoing coordination of joint and individual activities across orga-
nizational boundaries, as well as any related communication and decision-
making. Some of these ideas date back to much earlier research. For instance,
Litwak and Hylton (1962: 399) noted that the specialized coordination in
interorganizational relations is a challenge, ‘since there is both conflict and
cooperation and formal authority structure is lacking’. Given this reality, inter-
dependence and the complexities of task coordination can create considerable
uncertainty at the outset of an alliance, uncertainty that is distinct from appro-
priation concerns. For example, even if an alliance is formed between two
firms that have complete confidence in each other and face no appropriation
concerns, they must still coordinate the division of labor and the interface
of activities and products between them. Consequently, they may still face
considerable uncertainty regarding how activities will be decomposed and
integrated and the extent to which there will be an ongoing need for mutual
adaptation and adjustment. In many ways, the problems identified in the last
chapter can be described as ‘cooperation’ issues while those discussed in this
chapter are more focused on ‘coordination’.
As with appropriation concerns, hierarchical controls can be an effective
remedy for coordination uncertainty, especially in those cases where antici-
pated coordination costs are high. As noted by Barnard (1938), Chandler
(1977), Thompson (1967), and others, an important basis for hierarchical
controls is their ability to provide superior task coordination, especially in
situations involving high interdependence and coordination. In the context of
alliance relationships, interdependence refers to situations in which a firm has
to rely at least partially on other firms for the attainment of its goals (Pfeffer
and Salancik 1978). The degree of interdependence and associated coordin-
ation costs perceived by prospective partners are important determinants of
the governance arrangement chosen for their alliance. Hence, the governance
structure of an alliance reflects not only the appropriation concerns antici-
pated by managers at the outset but also coordination costs arising from the
complexity of allocating and coordinating joint tasks between the partners.
This chapter proposes that the incorporation of hierarchical controls within
the governance structure, or hierarchical control of an alliance is not only a
method for managing appropriation concerns but also an effective mechan-
ism for coordinating complex and interdependent tasks across partners. The
results of the empirical study in this chapter validate that choice of governance
structure is influenced not only by appropriation concerns, as previously
suggested, but also by concerns about managing coordination costs. Further-
more, while the focus of the original article was primarily on coordination, I
adapt those ideas here to show that network resources can be instrumental
in shaping the choice of governance structure not only by influencing the
 MANAGING COORDINATION COSTS 121

magnitude of anticipated appropriation concerns but also by shaping firms’

expected concerns regarding coordination.
This research has implications for the study of alternative bases of hierarch-
ical control in alliances and for the study of organization design in general and
is distinctive in several ways: (a) it specifies the concept of coordination costs,
which highlights the importance of uncertainty resulting from task coordin-
ation across partners as a strong influence on the choice of governance
structure in alliances; (b) by directly modeling the influence of anticipated
coordination costs on the governance structure of alliances after accounting
for concerns about appropriation, it provides a window into the multiple types
of logic used by alliance participants in determining the governance structure
of alliances; (c) it suggests a typology of alliance governance structures and
provides details on the magnitude and type of hierarchical controls present
in each; and (d) it shows that network resources and concomitant interorgan-
izational trust can influence the chosen governance structure by mitigating
concerns of both cooperation and coordination.

Theory and hypotheses

COORDINATION COSTS AND INTERDEPENDENCE AS AN

ORGANIZING PRINCIPLE
As mentioned in the last chapter, the importance of behavioral uncertainty
and appropriation concerns as rationales for hierarchical controls in exchange
relationships are well understood. The role of anticipated coordination costs
in influencing the use of hierarchical controls in exchange relationships,
though less developed, may be equally important (e.g. Gulati, Lawrence, and
Puranam 2005). Organizational sociologists have referred to hierarchical con-
trols as superior information-processing mechanisms that have arisen from
an increasing division of labor within organizations and the concomitant
uncertainty originating from the need to coordinate interdependent subtasks
(Galbraith 1977: 93). This concept can be traced to the work of others. Barnard
(1938) noted the ability of organizational hierarchies to mitigate the uncer-
tainty associated with the coordination and control of complex and inter-
dependent tasks by enhancing cooperation among organizational members.
Similarly, Chandler (1977) emphasized the significance of coordination in
hierarchical structures. In more recent years, transaction cost economists have
examined issues such as temporal specificity, or the importance of timing in
receipt of goods or services, that are also related to coordination costs (Masten,
Meehan, and Snyder 1991).
122 NETWORK RESOURCES AND GOVERNANCE

Concerns about anticipated coordination costs are particularly salient in

strategic alliances, which can entail significant coordination of activities that
must be managed without the benefit of some of the structure and sys-
tems available in traditional hierarchies (Litwak and Hylton 1962; Gulati,
Lawrence, and Puranam 2005). Some observers have described alliances as
a hybrid organizational form between the extremes of market and hierarchy
(Williamson 1991). Coordination concerns arise in such hybrid forms from
the complexity associated with the ongoing coordination of activities to be
completed jointly or individually across organizational boundaries and from
the difficulties associated with decomposing tasks and specifying a precise
division of labor across alliance partners. The extent of such coordination
concerns in an alliance is a function of the level of ‘interdependence’ necessary
for the alliance partners to complete tasks (Thompson 1967). Interdependence
here refers to the extent to which partners need each other to accomplish
the agreed-on joint tasks. At one extreme, partners in an alliance may antici-
pate minimal interaction; while at the other, extensive coordination may be
necessary. Many researchers have testified to the complexities associated with
the interdependence of activities across partners in strategic alliances (Hamel,
Doz, and Prahalad 1989; Ring and Van de Ven 1992), yet the implications
of anticipated interdependence and coordination costs for the governance
structure of interfirm alliances remain unexplored.1
The concept of interdependence, a fundamental principle defining the costs
of coordination within organizations, dates back to the early work of sys-
tems theorists (Ashby 1956; Katz and Kahn 1966) and was further developed
by Thompson (1967) and others.2 Scholars have primarily applied interde-
pendence to studying the internal design features of organizations and have
devoted considerable effort to its elaboration and measurement. Organization
design scholars have in fact referred to the challenges posed by interdepen-
dence as ‘coordination costs’ (McCann and Galbraith 1981). As interdepen-
dence increases, information-processing costs may rise (Galbraith 1977), as
may pressure for faster responses (Emery and Trist 1965) and, ultimately,
conflict; this can lead to a decline in performance (Pondy 1970).

¹ Davis, Kahn, and Zald (1990) connected governance structure and interdependence in the context
of interactions between nation-states by using interorganizational ties as an analog to illuminate how
nation-states behave. Gerlach and Palmer (1981) looked at changing levels of sociopolitical interde-
pendence to explore the antecedents of interdependence and its consequences for the emergence of
new governance institutions.
² Teece (1992: 8) acknowledged that an innovator’s quest for complementary assets can lead to
varying degrees of interdependence and cospecialization, but he focused on the relative degree of
mutual dependence resulting from specialization of assets for the alliance; the greater the mutual
dependence, the larger the cospecialization. In contrast, our usage of interdependence focuses on the
partners’ anticipation of the extent of complexity in decomposing tasks and the degree to which it will
entail ongoing mutual adjustment and adaptation to accomplish joint tasks, which is akin to Teece’s
discussion of ‘coupling’.
 MANAGING COORDINATION COSTS 123

The anticipated extent of interdependence between partners at the time

they form an alliance can vary substantially and depends on the tasks included
and the likely division of labor in the partnership, all of which are a function
of the strategic rationale for the alliance. At one extreme, interdependence
may be minimal, such as those cases where an alliance has a simple division
of labor and little perceived need for ongoing adjustments and the sharing
of information to achieve alliance objectives. At the other extreme, interde-
pendence can be extensive, resulting from the anticipation of a complex and
overlapping division of labor that will entail continuing mutual adjustments
between partners and require each partner to coordinate specific activities
with other partners closely and regularly. The higher the anticipated inter-
dependence between alliance partners, the greater the magnitude of expected
coordination costs. While the anticipated interdependence in an alliance may
also influence the extent of the appropriation concerns partners experience
(Stinchcombe 1985), the primary interdependence-based concerns are the
administrative challenges of task coordination. Consequently, the greater
the need for ongoing task coordination and joint decision-making between
the partners in an alliance, the higher the anticipated level of interdependence
and coordination costs.
As highlighted in the previous chapter, alliances can be formalized using
an array of governance arrangements. While the previous chapter highlighted
how governance structure can be a powerful vehicle for addressing appropri-
ation concerns in alliances and hence reflects the level of such concerns regard-
ing an alliance at the outset, this chapter suggests that the governance structure
may also be a function of the anticipated coordination costs at the outset. Each
form of alliance governance structure provides differing degrees of control
over and coordination of activities in a partnership. As a result, firms will
seek the governance structures for alliances that provide the necessary ongoing
oversight and coordination that they anticipate needing at the time they form
the alliance. The higher the likely interdependence among partners, the greater
the amount of information they must process while the alliance is in place
(Galbraith 1977). Partners in such alliances must evolve mechanisms through
the governance structure to process the requisite information. Alliances with
more hierarchical controls are capable of providing greater coordination and
information-processing capabilities than those with fewer controls.

HIERARCHICAL CONTROLS IN STRATEGIC ALLIANCES

Contractual relationships such as alliances can include several embedded
hierarchical elements in their structures (Stinchcombe 1985): (a) a com-
mand structure and authority systems to put it in place, as well as systems
124 NETWORK RESOURCES AND GOVERNANCE

for certifying which communications are authoritative; (b) incentive systems

that facilitate performance measurement and link rewards to performance;
(c) standard operating procedures that enable quick decisions by anticipating
those decisions in advance; (d) dispute resolution procedures that bypass
courts and markets by specifying a hierarchy of entities or individuals to which
appeals can be made; and (e) nonmarket pricing systems, such as cost-plus
systems, that enable greater precision in remuneration when specifications
change. These hierarchical elements are present to varying degrees in different
governance structures for alliances. While incentive systems and nonmar-
ket pricing highlight some of the agency features of hierarchical controls,
other elements concern the coordination capabilities of hierarchical controls
in alliances. For instance, the command structure, authority systems, and
standard operating procedures help partners coordinate tasks by clarifying
decision-making procedures and anticipating issues before they arise.
Hierarchical elements in alliances can effectively alleviate anticipated coor-
dination costs resulting from interdependence because they coordinate tasks,
formalize partner interaction, and designate partner roles. The standard oper-
ating procedures, command structure, and authority systems in hierarchical
governance structures in alliances typically include planning, rules, programs,
or procedures, which March and Simon (1958) identified as key means for
task coordination. Planning involves presetting schedules, outcomes, and tar-
gets, while rules, programs, and procedures emphasize formal controls in
the form of a priori decisions for various likely scenarios. All of these serve
the common purpose of streamlining communication, simplifying decision-
making, reducing uncertainty about future tasks, and preventing disputes
(Pondy 1977).
Hierarchical controls also formalize the interactions and roles of partners,
which makes the division of labor and the interactions between partners more
predictable and allows joint decisions to be made more by rules than by excep-
tions. Furthermore, if division of labor and task coordination conflicts do
arise, hierarchical controls may also include procedures for resolving disputes.
These procedures anticipate potential disputes and try to bypass adjudication
by the courts by specifying a hierarchy of avenues for resolution. Such alter-
native forums not only limit the scope of disputes but also allow partners to
discover joint solutions to more effective coordination.
Hierarchical controls in alliances also exist in the form of incentive sys-
tems and pricing mechanisms that can simplify the contribution of partner
resources. Both of these hierarchical controls typically occur in alliances that
create autonomous entities, such as JVs. Creating a separate entity makes it
easier to monitor each party’s contributions and the performance of joint
activities while also aligning incentives for each of them. It also reduces
ongoing market price haggling between partners by locating all resources
and expenses within a single entity that is jointly owned. The creation of an
 MANAGING COORDINATION COSTS 125

autonomous entity can also simplify coordination in alliances. Such alliances

provide a high level of discretion to the entity in which joint activities are
being conducted, which provides a dedicated management with a mandate
to make decisions that optimize the activities contributed by each partner
toward the accomplishment of joint goals. An autonomous alliance such as
a JV thus echoes Galbraith’s notion (1977) of self-contained tasks because the
discrete entity is provided with its own set of resources to perform the assigned
task. Such alliances address anticipated coordination costs by limiting future
discussions between partners on the precise division of labor and focuses
attention on the outputs because the inputs have already been agreed on at
the outset.
Because such hierarchical controls are effective in alleviating coordination
costs in alliances, we propose the following hypothesis:
Hypothesis 1: The greater the anticipated interdependence (coordination costs) in an
alliance, the more hierarchical the governance structure used to organize it.

APPROPRIATION CONCERNS AND THE GOVERNANCE STRUCTURE

OF STRATEGIC ALLIANCES
The term ‘appropriation concerns’ is used here in the context of alliances to
refer to a firm’s concern about its ability to capture a fair share of the rents
from the alliance in which it is engaged. Such concerns arise from the uncer-
tainties associated with future specifications, cost uncertainties, and prob-
lems in observing partner contributions, all of which increase the potential
for moral hazards. As outlined in the previous chapter, these appropriation
concerns occur to varying degrees in most alliances. As shown earlier, the
anticipation of appropriation concerns at the time an alliance is formed is
linked to the specific governance structure used to formalize the alliance,
suggesting that the greater the potential concerns, the more hierarchical the
contract used. According to this logic, concerns about appropriation can vary
with the specific circumstances of an alliance at its inception and arise because
of the difficulty of writing complete contracts. This difficulty is exacerbated
when technology exchange or sharing is involved and the limits of the technol-
ogy transacted are difficult to specify (Merges and Nelson 1990; Oxley 1997;
Anand and Khanna 2000a, 2000b).
The previous chapter looked at one condition that can influence the
extent to which such concerns arise: the presence of a technology compon-
ent in the alliance, as represented by R&D. However, an additional fac-
tor that may shape the magnitude of such concerns is the appropriability
regime in the industry. Both factors can independently and jointly influ-
ence the extent of appropriation concerns of firms entering an alliance
126 NETWORK RESOURCES AND GOVERNANCE

by presenting challenges associated with specifying property rights and

monitoring and enforcing the agreement. Because the first factor was dis-
cussed in the last chapter, this chapter focuses primarily on the second fac-
tor, appropriability regime, and then turns to addressing the role of net-
work resources as an important catalyst that reduces appropriation con-
cerns and in turn impacts the selection of governance structure in exchange
relationships.

TECHNOLOGY IN ALLIANCES
A primary factor that prior researchers have examined in regard to con-
cerns of moral hazards and appropriation in alliances is the presence of a
technology component (e.g. Pisano, Russo, and Teece 1988; Pisano 1989).
Technology-based issues generally increase the extent of possible monitoring
problems and the possibility of unobserved violation of contracts. Monitor-
ing problems in technology alliances result from the ambiguity surround-
ing two key issues: the technology being transferred and the limits to its
use (Anand and Khanna 2000a, 2000b). In alliances that encompass tech-
nology, circumscribing, bounding, monitoring, and codifying the know-
ledge to be included within the alliance can be difficult, which may lead to
concerns about free riding and possible appropriation of key technology by
the partner. Such concerns are further compounded by the peculiar character
of knowledge, the commodity value of which is difficult to assess accurately
without complete information from all partners, some of whom may not
want to reveal such information because it is proprietary (Winter 1964; Arrow
1974; Teece 1980: 28). This dilemma, which is called the knowledge paradox,
can further aggravate concerns about appropriation of rents resulting from
poor monitoring possibilities in such exchanges (Barzel 1982; Hennart 1988;
Balakrishnan and Koza 1993). The difficulty of transferring tacit R&D know-
how across organizations inflates these problems (Teece 1980; Silver 1984;
Mowery and Rosenberg 1989).
Coordination costs can also be a concern in technology alliances, but they
are likely to be salient only in the subset that involves bilateral exchange or
joint development. The primary concern of participants entering alliances
with a technology component, then, has to do with anticipated appropriation
issues. Thus, firms entering an alliance with a technology component are likely
to prefer hierarchical alliances:

Hypothesis 2a: Alliances with an expected technology component are more likely
than those without a technology component to be organized with more hierarchical
governance structures.
 MANAGING COORDINATION COSTS 127

APPROPRIABILITY REGIME IN ALLIANCES

Another factor likely to influence the level of appropriation concerns is the
strength of the appropriability regime of the industry, which is the degree
to which firms are able to capture the rents generated by their innovations
(Anand and Khanna 2000a, 2000b). In a tight appropriability regime, firms
can retain the profits they earn from their proprietary resources, while in a
loose regime, these profits are subject to involuntary leakage or spillovers to
other firms. The strength of the appropriability regime of an industry is related
to patent strength, the value of first-mover advantage, and the ability to main-
tain the secrecy of an innovation (Teece 1986; Levin et al. 1987). For alliances,
a firm’s concerns about appropriation will vary depending on the industry in
which the alliance occurs and the degree to which the appropriability regime
in the industry is tight or loose (Teece 1986). If participants in an alliance
believe that the appropriability regime is strong—because patent protection
is significant, or they can keep trade secrets, or their first-mover advantage
is sufficiently large—they are likely to be less concerned about appropriation
in an alliance, and this will be reflected in the formal governance structure
used for the alliance.3 As a result, there should be a relationship between
the appropriability regime of the industry and the governance structure of
alliances, with more hierarchical structures expected in industries with weak
appropriability regimes.

Hypothesis 2b: Alliances in an industry in which appropriability regimes are weak are
more likely to be organized with more hierarchical governance structures than are
alliances in an industry in which appropriability regimes are strong.

The effects of a given industry’s appropriability regime are strongest for

alliances with a technology or other knowledge-sharing component. As a
result, partners in technology alliances are likely to experience concerns related
to appropriability regimes more acutely than those in alliances without a
technology component. More specifically, the appropriation concerns antici-
pated are likely to be amplified when potential partners consider a technology
alliance in an industry with a weak appropriability regime. Thus, the effect
of the appropriability regime on the governance structure of alliances is likely
to be moderated by the presence of a technology component in the proposed
alliance.

³ It is likely that the strength of the appropriability regime in an industry may be shaped by the
distribution of network resources in that sector. In sectors with dense sets of ties among firms and
easy access to network resources, the appropriability regime is likely to be stronger due to the creation
of reputational circuits in which participating firms are less likely to engage in malfeasance due to
reputational concerns. This intriguing idea is not tested in this study but is put forward as an exciting
arena for future research.
128 NETWORK RESOURCES AND GOVERNANCE

Hypothesis 2c: The negative relationship between the strength of the appropriability
regime in the industry and the extent of hierarchical governance structures of alliances
will be stronger for alliances with a technology component than for those without
one.

TRUST, NETWORK RESOURCES, AND GOVERNANCE STRUCTURE

As discussed in the previous chapter, network resources resulting from a firm’s
network of prior ties are likely to grant it greater confidence in the predictabil-
ity of its alliance partners’ actions and thus decrease appropriation concerns
related to a potential alliance. So, the presence of network resources at the time
of an alliance announcement can help firms address appropriation concerns
by making it easier to assess likely partner behavior. Network resources can
also help firms preserve intellectual property rights by creating reputational
circuits whereby partner malfeasance results in reduced prospects for future
alliance relationships among network participants.
In addition to mitigating appropriation concerns, network resources
can alleviate anticipated concerns about coordination costs. They do this
by fostering the development of interfirm trust, which can be an extraor-
dinary lubricant for alliances that involve considerable interdependence and
task coordination. Firms that trust each other are likely to have a greater
awareness—or at least a stronger willingness to become aware—of the rules,
routines, and procedures each follows. Furthermore, because the interorgan-
izational trust associated with network resources typically arises from prior
alliance relationships between given firms, these firms may already have devel-
oped efficient joint routines. Thus, interconnected firms may have greater
competence in transacting with each other, which makes the interface between
them easier to manage and the information-processing requirements asso-
ciated with anticipated coordination costs more easily addressed (Dyer and
Singh 1998).
While the presence of network resources and resulting trust may not allow
us to discriminate between coordination-cost and appropriation concerns,
trust is distinct in its ability to address both types of concerns. As a result,
the presence of trust between partners is likely to promote fewer hierarchical
controls in the alliances between them, not only because concerns of appro-
priation and behavioral uncertainty are effectively addressed by trust but also
because coordination costs are more easily managed in the context of trust.
Hypothesis 3: Alliances in which there is less trust between partners are more likely
to be organized with more hierarchical governance structures than are those in which
there is greater trust.
 MANAGING COORDINATION COSTS 129

CLASSIFYING GOVERNANCE STRUCTURES: JOINT VENTURES,

MINORITY ALLIANCES, AND CONTRACTUAL ALLIANCES
Research presented in the previous chapter was consistent with prior research
that has generally classified the governance structure of interfirm alliances in
terms of their hierarchical components and has differentiated alliances by the
presence or absence of equity, with alliances involving equity considered more
hierarchical than nonequity exchanges (e.g. Hennart 1988; Pisano, Russo, and
Teece 1988; Pisano 1989; Teece 1992). Equity alliances comprise any exchange
agreement in which the partners share or exchange equity, including agree-
ments in which partners create a new entity in which they share equity as well
as those in which one partner takes an equity interest in the other. Equity has
been considered an indicator of hierarchy because it is considered to be an
effective mechanism for managing the rent appropriation concerns associated
with partnerships (Pisano, Russo, and Teece 1988; Parkhe 1993a; Moon and
Khanna 1995). Thus, Teece (1992: 20) suggested, ‘Equity stakes provide a
mechanism for distributing residuals when ex ante contractual agreements
cannot be written to specify or enforce a division of returns.’ In JVs, this occurs
by creating a mutual hostage in the form of shared equity that helps align the
interests of all the partners, inasmuch as each partner is concerned about the
value of its equity in the alliance. In minority equity investments, the investing
partner has an interest in the value of its equity holdings, while the recipient
of investments can be legally required to furnish certain verified information
to its investors. In equity alliances, the effective shared equity stakes of the
firms vary, but beyond a certain threshold the shared ownership structure is
expected to provide an effective hierarchical control over the exchange.
While such categorization is parsimonious, it masks differences in hier-
archical controls across different types of structures and ignores the original
basis for classifying the governance structure of alliances: degree of hier-
archical controls. Also, because this typology considers the presence of equity
sharing a heuristic to indicate hierarchical controls, there has been little seri-
ous consideration of the specific governance structures of each alliance type
or their precise levels of hierarchical controls and how these manifest them-
selves. For instance, JVs and minority investments provide varying levels of
hierarchical control in a partnership, with JVs incorporating more hierarchical
elements than minority investments. To varying degrees, each includes several
‘mechanisms for collecting information, deciding, and disseminating infor-
mation to resolve conflicts and guide interdependent actions’ (Galbraith 1977:
40). In contrast with JVs, minority investments typically do not have a separate
organizational and administrative structure and are thus relatively limited in
their capacity for activity coordination. In addition to the exchanged equity,
JVs entail separate administrative entities, each with its own management
130 NETWORK RESOURCES AND GOVERNANCE

structure. Thus, separating out these different types of alliances may allow a
more fine-grained assessment of the factors that drive choice of governance
structure.
This chapter departs from prior efforts and further refines the typology
used in the last chapter by presenting a typology of alliance structure that
does not treat the presence of equity as synonymous with hierarchical controls
but, rather, defines three distinct types of alliance governance structures—
JVs, minority investment, and contractual alliances—and the types and mag-
nitudes of hierarchical controls typically present in each of them. Earlier in
this chapter, I noted that hierarchical controls in alliances typically include
the following: command structure and authority systems, incentive systems,
standard operating procedures, dispute resolution procedures, and nonmarket
pricing systems.
Together, these dimensions encompass both the agency and coordination
features of hierarchical controls that are likely to be part of various types of
alliances. Each of the three types of governance structure is typically associated
with a specific level and form of hierarchical control, though there may be
some variation. This typology of alliance structures is the basis for testing
the hypotheses on the factors influencing choice of governance structure and
extent of hierarchical control.
At the hierarchical end of the spectrum are JVs, in which partners cre-
ate a separate entity of which each owns a portion of the equity. In such
alliances, a separate administrative hierarchy of managers oversees day-to-day
functioning and addresses contingencies as they arise. This provides an inde-
pendent command structure and authority system with clearly defined rules
and responsibilities for each partner. The autonomous unit enables creation
of an incentive system because each partner is concerned about the value of
its equity in the JV. Furthermore, pricing discussions are internalized by the
JV, which simplifies much of the input and output resource flows between
the partner organizations. As part of creating a JV entity, partner firms also
typically establish standard operating systems and dispute resolution pro-
cedures. Together, these features provide JVs with considerable hierarchical
controls.
Minority alliances, in contrast, include partnerships in which the firms
work together without creating a new entity. Instead, one partner or a set
of partners takes a minority equity position in the other (or others). Such
alliances introduce a weaker form of hierarchical control, between that of
JVs and that of contractual alliances (Herriott 1996). Hierarchical super-
vision is typically created by the investing partner’s joining the board of
directors of the invested-in partner. This board membership introduces a
fiduciary role into the relationship and is also a vehicle for hierarchical con-
trols. Because boards ratify most major decisions, the presence of an indi-
vidual from the investing organization on the investee board ensures that
 MANAGING COORDINATION COSTS 131

the investor has some form of command and authority system. A concern
for the value of its equity provides appropriate incentives for the investor.
Furthermore, disputes may be easier to resolve through board member inter-
vention. Finally, while there may or may not be many standard operating
procedures with such alliances, board representation does create a forum in
which both partners exchange information and can initiate and ratify deci-
sions on a regular basis. Beyond board-level interactions, day-to-day activ-
ities are jointly coordinated by the partners and negotiated on an ongoing
basis.
Alliances in the third category, contractual alliances, do not involve the
sharing or exchange of equity, nor do they entail the creation of new organ-
izational entities. Lacking any shared ownership or administrative struc-
ture, contractual alliances are considered more akin to arm’s length mar-
ket exchanges. Members of the partner firms work together directly from
their own organizational confines. Few if any command structures, author-
ity systems, incentive systems, standard operating systems, dispute resolu-
tion procedures, or nonmarket pricing systems are necessarily part of such
arrangements. Ongoing activities are jointly coordinated, and new decisions
are negotiated by the partners. Contractual alliances include unidirectional
agreements such as licensing, second-sourcing, and distribution agreements,
and bidirectional agreements such as joint contracts and technology exchange
agreements. While some of the hierarchical elements discussed earlier may
occur in some contractual alliances, they are not widespread and do not occur
on a systematic basis.

Empirical research

METHOD
The data set used in this study is described in Appendix 1 under the heading
‘Alliance Announcement Database’. This study does not treat the presence of
equity as the sole indicator of whether hierarchical controls are present within
an alliance relationship. To assess more accurately the factors explaining the
degree of hierarchy in alliances, this study was conducted with three categories
of alliances, arrayed in increasing order of hierarchical controls (hierarchy):
contractual alliances (coded 0), minority equity investments (1), and JVs (2).
The focus here was on assessing the levels of interdependence the partners
in an alliance anticipated at the outset, when the alliance was announced.
Using Thompson’s distinction (1967) between pooled, sequential, and recip-
rocal interdependence offers a clear methodology for classifying the degree
of interdependence in alliances that underlies coordination costs. These three
132 NETWORK RESOURCES AND GOVERNANCE

types of interdependence, although previously discussed in the intraorgani-

zational context, can also be seen in the context of interfirm coordination of
activities (Borys and Jennison 1989). Pooled, or generalized interdependence,
denotes situations in which ‘each part renders a discrete contribution to the
whole, and each is supported by the whole’, is ‘coordinated by standardization,
and is least costly in terms of communication and decision effort’ because it
does not require any serial ordering of activities (Thompson 1967: 54, 64). It
exists in alliances when organizations pool their resources to achieve a shared
strategic goal, the common benefits arise from combining resources into a
shared pool, and each partner uses resources from the shared pool. These
relatively small interdependencies entail low coordination requirements but
provide partners with benefits from the pooled resources.
In situations of sequential interdependence, the activities of each partner
are distinct and are serially arrayed so that the activities of one partner precede
those of another, resulting in a higher degree of coordination relative to pooled
interdependence. Coordination in a sequentially interdependent alliance thus
goes beyond the pooling of resources to include the order in which the product
or service moves from one organization to the other. The partner producing
the original product or service has to perform the task as laid out in plans
for the alliance, and the subsequent activities in the alliance then have to be
performed in a coordinated fashion for the overall strategy to be successful.
Reciprocal interdependence occurs when units come together to exchange
outputs with each other simultaneously. Such exchange entails a pooling
of resources by different units, but in addition, each unit is simultaneously
dependent on the other because its outputs are the other’s inputs. In contrast
to pooled interdependence, reciprocal interdependence is more interactive
and requires ongoing mutual adjustment by both units and continuous adap-
tation to each other’s circumstances. Each unit must continually anticipate
the other’s output stream and communicate its own production schedule to
the other. These efforts require both units to work closely together to ensure
that there is requisite mutual adaptation and adjustment. These three types of
interdependence can be arrayed on a scale, with reciprocal interdependence
encompassing the highest coordination costs due to the need for extensive
coordination across the partners (Thompson 1967). Somewhat less uncer-
tainty is associated with sequential interdependence. The least amount of
uncertainty is associated with pooled interdependence, in which close ongoing
coordination is not essential, and coordination demands are limited to broadly
aligning the activities of the partners toward joint success.
Consistent with prior research, the anticipated interdependence in an
alliance relationship at the time of its inception was identified from its under-
lying logic of value creation (Borys and Jennison 1989; Zajac and Olsen 1993).
Alliances are usually formed to create value in a way that each partner alone
could not. Different logics for value creation require distinctly different levels
 MANAGING COORDINATION COSTS 133

of coordination between the partners and hence are indicative of different

types of interdependence (Borys and Jennison 1989: 241). For instance, an
alliance in which two partners seek to create value by one of them distributing
the other’s products is likely to have lower coordination and interdependence
than another in which the logic for creating value involves both partners
coming together to develop a new product. In Thompson’s classic (1967)
formulation as well, interdependence among units in an organization was
embedded in the logic by which they created value through interacting with
each other. That is, the logic for value creation led to distinct levels and types
of interaction between adjacent units in a value chain and indicated the level
of interdependence between those units.
The anticipated presence of reciprocal, sequential, or pooled interdepen-
dence in an alliance was gauged from the strategic rationales given by each
partner for its participation in the alliance. The rationales provided by each
partner for an alliance at the time of its announcement are an excellent indi-
cator of the interdependence they anticipate because each rationale suggests
a distinct logic for value creation that is associated with a specific level of
interdependence necessary for accomplishing the rationale. From an exten-
sive review of the alliance literature, we identified eight rationales that pro-
vided a comprehensive picture of all the value creation logics of firms that
entered alliances: (a) sharing costs/risks, (b) access to financial resources,
(c) sharing complementary technology, (d) reducing the time span of inno-
vation, (e) joint development of new technology, (f ) access to new markets,
(g) access to new products, and (h) sharing production facilities (Contract-
or and Lorange 1988; Hagedoorn 1993). We then identified which of these
rationales were stated by alliance participants (in our data-set) in their public
announcements—and coded them separately for each partner in each alliance.
In most instances, multiple alliance announcements were examined in a vari-
ety of public sources, including industry-specific trade journals, to gauge
this measure accurately. The eight categories are not mutually exclusive, and
an alliance could include multiple strategic objectives for any partner. Each
alliance was coded as involving reciprocal, sequential, or pooled interdepen-
dence, using the classification scheme discussed below. Two dummy variables,
reciprocal and sequential, capture this distinction and were used to test hypoth-
esis 1. The default category included instances of pooled interdependence. A
comparison of the coefficients of the two dummy variables allowed us to look
at the differences in effects across reciprocally and sequentially interdependent
alliances.
Alliances were classified as reciprocally interdependent if the strategic ra-
tionales of the partners included sharing complementary technology, jointly
reducing the time needed for innovation, or joint development of new tech-
nology. Such alliances include those in which the partners are actively seeking
to learn from the alliances to broaden or deepen their skills or to develop
134 NETWORK RESOURCES AND GOVERNANCE

new skills jointly, all of which require crucial ongoing inputs from all part-
ners and involve high levels of interdependence. Reciprocally interdependent
alliances overlap with but are not synonymous with alliances encompassing a
technology component. For instance, not all technology alliances are bilateral
learning ties, and some can thus include a unilateral transfer of technological
know-how that does not create reciprocal interdependence. Also, reciprocally
interdependent alliances may involve the joint development of marketing or
distribution skills and not include any technology component.
Sequentially interdependent alliances include partnerships in which the
output of one partner is handed off to the other, for whom it is an input.
An alliance was classified as involving sequential interdependence both when
one partner sought to expand its market access or tap into new markets and
did so through an alliance with a partner that had marketing and distribution
prowess in those markets and when an alliance involved one partner gaining
access to new products provided by the other.
Pooled interdependent alliances exist when alliance partners do not depend
on each other for inputs or outputs but, rather, pool resources toward shared
activities that need not be coordinated on a regular basis. Alliances were
classified as involving pooled interdependence when partners came together
to share high costs and risks, to share financial resources for expensive endeav-
ours, or to build joint production facilities.
Because the unit of analysis here is the individual alliance and not the firm,
and all partners usually have a voice in determining the alliance’s formal gov-
ernance structure, the goal was to capture the highest level of interdependence
anticipated by the partners entering the alliance. Each alliance was therefore
conservatively coded with the highest level of interdependence anticipated by
either partner within it. Alliances in which a partner had multiple strategic
rationales or in which the partners had differing rationales were thus placed
in one of the three categories according to the highest level of interdependence
among them. As a result, an alliance was classified with elements of both
reciprocal and sequential interdependence as reciprocal, one with sequential
and pooled interdependence as sequential, and so forth. This coding is consist-
ent with Thompson’s notion that the three types of interdependence can be
arrayed on a scale in which reciprocal interdependence may include elements
of sequential and pooled interdependence, and sequentially interdependent
situations may also have some pooled elements.
To ensure that the findings were robust, estimations were also done by
coding this variable with alternative specifications in which all eight original
dimensions were arrayed on a single ordinal scale of interdependence. This
was done by first constructing a single variable that took values from 1 to 8
and, second, by introducing seven dummy variables for the eight categories.
The results were consistent with those obtained using Thompson’s three-way
typology.
 MANAGING COORDINATION COSTS 135

Separate measures were included for each facet of appropriation con-

cerns that partners are likely to anticipate at the time they are forming an
alliance: presence of a technology component in the alliance and appropri-
ability regime of the industry. Following prior empirical research the measure
R&D was included to capture the presence of a technology component within
the alliance (1 = technology component, 0 = no technology component).
R&D alliances included those that encompassed a technology component in
the agreement. They could involve exchange, unilateral transfer, sharing, or
codevelopment of technology or elements of all the above. Such alliances
could encompass basic R&D, product development, or any other technology-
related efforts. Non-R&D alliances typically included those that primarily
involved production, distribution, or marketing. This variable was used to test
hypothesis 2a on the role of appropriation concerns resulting from the pres-
ence of a technology component in determining the governance structure of
alliances.
The magnitude of appropriation concerns was assessed by including meas-
ures to capture systematic differences in appropriability regimes across indus-
tries. Sector differences were controlled with two dummy variables, new
materials and automotive; biopharmaceuticals was the default sector. These
variables allowed us to test hypothesis 2b on the role of appropriation con-
cerns resulting from the appropriability regime of the industry in determining
the governance structure of alliances. Prior research suggests that biophar-
maceuticals has the strongest appropriability regime and automotives the
weakest, with new materials lying in between (Levin et al. 1987; Arora and
Gambardella 1994). While it is possible that the strength of appropriability
regimes may have changed over the twenty-year observation period, discus-
sions with experts suggests that there have been no dramatic changes in any of
these industries to alter the relative levels of appropriability regimes across
them. Thus, while there may have been shifts in the absolute levels of the
strength of appropriability regimes, relative differences across the three seem
to have remained stable. Since the concern here is with the relative differenti-
ation across the three, any changes over time should not affect the findings.
Interaction terms were used between the presence of technology and indus-
try participation to test hypothesis 2c, which predicted that the presence of a
technology component in an alliance would moderate the effect of appropri-
ability regimes on the structure of the alliance.
Several measures were included to capture interorganizational trust and
test hypothesis 3, which suggests that trust can reduce the likelihood of
hierarchical controls in alliances. One mechanism, which has been discussed
extensively, through which such trust is built is through prior alliances and the
network resources they create (Ring and Van de Ven 1992; Gulati 1995a; Gulati
and Gargiulo 1999). The idea of trust emerging from prior contact is based on
the premise that through ongoing interaction, firms learn about each other
136 NETWORK RESOURCES AND GOVERNANCE

and develop trust around norms of equity, or knowledge-based trust (Shapiro,

Sheppard, and Cheraskin 1992). Prior ties can also promote deterrence-based
trust, resulting from viewing prior ties as possible hostages, which deters part-
ners from untrustworthy behavior because they are concerned about potential
sanctions, including the dissolution of prior alliances and loss of reputation.
Firms having prior alliances with each other will trust each other more than
partners who have no history with each other. Although it is possible that
an experience may be a negative one, those firms with bad experiences are
unlikely to form subsequent alliances with each other. In fact, entering a
repeated tie can be a way to mitigate adverse selection problems because the
firms have reliable firsthand information on each other from prior interac-
tions (Balakrishnan and Koza 1993). Thus, repeated interaction between two
firms can be considered one reasonable indicator of trust between them.
Consequently, an indicator, repeated ties, was used to record the number
of prior alliances the two firms had entered into since 1970 to test hypothesis
3 (0 = first-time alliance). The models also examined whether the nature of
prior ties (i.e. if they were JVs, minority equity investments, or contractual
alliances) influenced the governance structure chosen in subsequent alliances.
Since this measure could also be capturing experience-related effects resulting
from the partners developing routines for working with each other, several
other measures for trust were included as well (Nelson and Winter 1982).
The discussion of trust in alliances has been extended to comparisons of
international and domestic and multilateral and bilateral alliances and is used
here to further test hypothesis 3. One rationale for a different level of trust
between two domestic firms compared to two firms from differing regions
of the world is that individual firms may enjoy greater network resources in
their domestic market than they enjoy in the broader international market—
and this differential in network resources could lead to a greater level of trust
between two domestic firms than would exist between two potential partners
from different regions. Furthermore, prior research indicates systematic differ-
ences in the behavior of participants in alliances involving partners of different
nationalities (Parkhe 1993b) and also in choices between modes of entry into
new geographic markets (Kogut and Singh 1988; Singh and Kogut 1989).
Recent evidence also suggests systematic differences in the level of patent
protection afforded by different countries (Mansfield 1993). Researchers have
also argued that cross-border alliances have greater obstacles for building
trust and a concomitant higher potential for appropriation concerns than
domestic alliances because the difficulties of specifying intellectual property
rights, legally enforcing intellectual property, and monitoring partner activi-
ties are greater in cross-border alliances (Pisano 1990; Oxley 1997). As a result,
greater trust is expected in domestic alliances than in others. To assess whether
alliances between cross-regional partners are likely to have more hierarchical
controls and to examine differences across local partner alliances in different
global regions, three dummy variables were included—United States, Europe,
 MANAGING COORDINATION COSTS 137

and Japan—indicating whether an alliance was between partners in those

regions. The default was a cross-region alliance (1 = partners of that region,
0 = partners of different regions).
Increasing the number of partners in an alliance can also limit the level of
trust between alliance partners. Including more partners in an alliance can
make identifying and realizing common interests more difficult, which com-
plicates the task of ensuring trust between alliance partners (Parkhe 1993b).
Furthermore, simply having more partners makes it less likely that all the part-
ners will trust all others in the alliance. Monitoring each partner’s contribu-
tions and introducing appropriate sanctions in the face of free riding is harder
to implement when there is a large group of participants involved. This makes
it difficult to introduce incentive structures that may foster trust. Another way
to describe this would be that there are greater network resources in dyadic as
opposed to multilateral alliances for some of the reasons suggested above. To
capture any effects that arose from the number of partners in the alliance, that
number was computed and recoded as a dummy variable, multilateral, with
a value of 1 if an alliance was multilateral and a value of 0 if an alliance was
bilateral.
Controls were introduced for temporal trends in alliances and included
dummy variables for each year. The models included nineteen dummy
variables for the twenty-year period covered in the study, with the default year
being 1970. For simplicity of presentation, the results for these dummy vari-
ables are not reported in the tables. Two control variables, percent joint venture
and percent minority investment, were also included to assess the influence of
the frequency with which specific types of alliances had been announced in
each industry on the choice of governance structure. The number of alliances
announced in an industry in the prior year was counted and the percentage of
those that were of each type was computed. Percent joint venture and percent
minority investment capture the percentage of alliances that were JVs and
minority equity investments, respectively, in the previous year. In a limited
way, this calculation tests the institutionalist claim that firms may mimic the
contracts other firms in the industry use to organize their alliances (Fligstein
1985; Davis 1991). An alternative interpretation of the variables is that they
capture the net effect of the various macroeconomic factors within an industry
that may influence the formation of particular types of alliances (Amburgey
and Miner 1992).
Table 6.1 describes the variables included in the analysis and summarizes
the predicted signs for the effects of each independent variable.

RESULTS
Table 6.2 presents descriptive statistics and correlations for all variables. The
descriptive statistics indicate that of the alliances in the sample, 52 percent
138 NETWORK RESOURCES AND GOVERNANCE

Table 6.1. Definitions and predicted signs of variablesa

Variable Definition Predicted sign

Hierarchy Dependent variable, set to 1 if alliance was a minority equity

investment and 2 if it was a joint venture (default:
contractual alliance).
Reciprocal Dummy variable set to one if reciprocal interdependence is +
present (default: pooled interdependence).
Sequential Dummy variable set to one if sequential interdependence is +
present (default: pooled interdependence).
R&D Dummy variable indicating presence of a technology +
component (default: no technology component).
New materials Dummy variable set to one if alliance is in new materials +
sector (default: biopharmaceutical).
Automotive Dummy variable set to one if alliance is in automotive sector +
(default: biopharmaceutical).
Repeated ties Number of prior alliances between the firms. −
USA Dummy variable set to one if firms are both American −
(default: cross-regional).
Japan Dummy variable set to one if firms are both Japanese −
(default: cross-regional).
Europe Dummy variable set to one if firms are both European −
(default: cross-regional).
Multilateral Dummy variable set to one if alliance is multilateral (default: +
bilateral).
Time 1–19 A series of 19 dummy variables for each year, 1971–89 NP
(default: 1970).
Percent joint venture Percentage of all alliances announced in the industry in the NP
prior year that were joint ventures.
Percent minority equity Percentage of all alliances announced in the industry in the NP
prior year that were minority equity investments.

a NP = No prediction.

involved reciprocal interdependence, 24 percent involved sequential inter-

dependence, and the remainder involved pooled interdependence. The total
sample of 1,570 alliances included 769 alliances in the new materials industry,
345 alliances in automotives, and 456 alliances in biopharmaceuticals. There
was considerable geographic diversity in the sample as well: 27 percent of
alliances were among US firms, 13 percent among Japanese firms, 22 per-
cent among European firms, and the remainder were cross-region alliances.
Also, 32 percent of the sample involved more than two partners. Of the total
alliances, 31 percent were JVs, 23 percent were minority equity investments,
and the remainder were contractual alliances. Overall, the results point to the
diversity of alliances included within the pooled sample of all three indus-
tries. The correlations show no significant problems of multicollinearity. The
dependent variable is moderately correlated with both dummy variables cap-
turing interdependence (reciprocal and sequential).
Table 6.3 presents the results of the multinomial logistic regression analysis
as estimated with LIMDEP 7.0. This set of analyses examined the choice
Table 6.2. Descriptive statistics and correlations

Variable Mean SD Low High 1 2 3 4 5 6 7 8 9 10 11 12

1. Hierarchy .89 .31 0 2 — — — — — — — — — — — —

2. Reciprocal .52 .38 0 1 .59 — — — — — — — — — — —
3. Sequential .24 .23 0 1 .47 −.73 — — — — — — — — — —
4. R&D .47 .42 0 1 .19 .25 .25 — — — — — — — — —
5. New materials .49 .50 0 1 .04 .11 −.04 .00 — — — — — — — —
6. Automotive .22 .21 0 1 .06 −.19 .09 .27 −.50 — — — — — — —
7. Repeated ties 1.46 1.04 0 9 −.13 .07 −.07 −.00 −.13 .12 — — — — — —

MANAGING COORDINATION COSTS

8. USA .27 .34 0 1 .01 .09 −.05 −.17 −.04 −.20 −.10 — — — — —
9. Japan .13 .33 0 1 −.22 .16 −.14 −.09 .09 .02 .17 −.23 — — — —
10. Europe .22 .40 0 1 −.03 −.03 −.04 .08 .11 .04 −.03 −.32 −.20 — — —
11. Multilateral .32 .42 0 1 .04 .15 −.21 .01 .31 .00 .05 .07 .14 .10 — —
12. % Joint venture .28 .10 .15 .68 −.14 .21 −.13 −.10 .34 .35 −.03 .07 .08 −.07 .18 —
13. % Minority equity .22 .08 .13 .31 −.10 .15 −.17 .01 .22 .24 .01 .02 .05 .01 .07 .33

139
 140 NETWORK RESOURCES AND GOVERNANCE
Table 6.3. Multinomial logistic analysis of tendency to participate in minority equity investments and joint venturesa

Model 1 Model 2 Model 3 Model 4

Minority Joint Minority Joint Minority Joint Minority Joint

Variable investment venture investment venture investment venture investment venture

Intercept −1.37∗ (.33) −2.41∗ (.49) −1.74∗ (.53) −2.16∗ (.68) −1.63∗ (.58) −2.03∗ (.59) −1.82∗ (.60) −2.26∗ (.47)
Reciprocal — — .85∗ (.21) 1.55∗ (.28) .67∗ (.22) 1.09∗ (.34) .62∗ (.20) 1.01∗ (.35)
Sequential — — .19∗ (.03) .95∗ (.15) .13∗ (.03) .88∗ (.15) .12∗ (.03) .85∗ (.15)
R&D — — — — .20∗ (.04) .53∗ (.11) .18∗ (.05) .45∗ (.12)
New materials — — — — .38 (.29) .68∗ (.13) .35 (.27) .70∗ (.15)
Automotive — — — — .27∗ (.09) .73∗ (.22) .20∗ (.05) .88∗ (.23)
Repeated ties — — — — −.32∗ (.05) −.50∗ (.07) −.28∗ (.05) −.46∗ (.07)
USA — — — — .48 (.34) .16 (.14) .46 (.34) .15 (.14)
Japan — — — — .16 (.09) −.77∗ (.16) .15 (.09) −.65∗ (.18)
Europe — — — — −.24∗ (.04) −.41∗ (.05) −.21∗ (.04) −.38∗ (.05)
Multilateral — — — — .57 (.46) .73 (.59) .54 (.45) .66 (.57)
R&D × New materials — — — — — — .42 (.33) .31 (.28)
R&D × Automotive — — — — — — 1.24∗ (.21) 1.98∗ (.25)
∗
% Joint venture .08 (.10) .06 (.02) .07 (.11) .05 (.03) .07 (.10) .03 (.07) .07 (.10) .04 (.07)
% Minority equity .12∗ (.01) .03 (.07) .08 (.04) .03 (.05) .09 (.04) .04 (.04) .07 (.06) .03 (.04)
Log likelihood −1,342.21 −1,186.48 −994.35 −952.72
˜2 774.72∗ 1,051.26∗ 1,289.52∗ 1,307.37∗

a
Coefficients show effects of covariates for each alliance type relative to effects that the covariates have for the base category, contractual alliances. Standard errors are in parentheses. n =
1,570. Coefficients for time 1–19 were included in all models.
∗
p < .01.
 MANAGING COORDINATION COSTS 141

between JVs, minority equity investments, and contractual alliances. These

results provide a detailed assessment of the choices firms make when enter-
ing alliances and the factors that may be guiding this choice. Each model
estimates coefficients for the choice of minority equity investments and for
JVs against the default category of contractual alliances. We later compared
the sets of coefficients to examine the choice between minority equity invest-
ments and JVs. Overall, the directionality and significance of the coefficients
are consistent with the hypotheses presented here. Furthermore, all models
2
included have significant explanatory power, as demonstrated by the ˜ test
on the observed log likelihoods. The negative and significant coefficient for
the intercept term suggests that, on average, minority equity investments and
JVs were used less often than contractual alliances.
Model 1 in Table 6.3 includes the control variables only, and model 2 shows
results with the addition of the two measures of interdependence, reciprocal
and sequential. Alliances can be arrayed from low to high interdependence
as pooled, sequential, and reciprocal. They can have contracts that vary from
less to more hierarchical and that range from contractual alliances to minor-
ity investments to JVs. Tests of hypothesis 1 assessed whether alliances with
higher levels of interdependence use more hierarchical contracts than those
with lower levels by comparing the presence of the three alternative types
of interdependence with the use of the three alternative types of governance
structure. The results in model 2 support hypothesis 1, which predicted that
alliances with higher interdependence are likely to be organized with more
hierarchical contracts than are those with less interdependence. This result
holds true in models 3 and 4 as well.
The positive coefficients for reciprocal in model 2 indicate that both JVs
and minority equity investments are more likely than contractual alliances
when interdependence is reciprocal than when it is pooled. A t-test of the
difference between the coefficients for reciprocal under JVs and minority
equity investments further supports hypothesis 1 and shows that JVs, which
encompass the most hierarchical controls, are more likely than minority
equity investments when interdependence is reciprocal rather than pooled.
The results in model 2 suggest that hierarchical contracts such as minority
equity investments and JVs are more likely for sequentially interdependent
alliances than for alliances with pooled interdependence. The positive coef-
ficients for sequential in model 2 indicate that both JVs and minority equity
investments are more likely than contractual alliances when interdependence
is sequential than when it is pooled. A t-test of the difference between the
coefficients for sequential under JVs and minority equity investments further
supports hypothesis 1 and shows that JVs are more likely than minority
equity investments when interdependence is sequential rather than pooled.
A comparison of the coefficients of reciprocal and sequential in model 2
142 NETWORK RESOURCES AND GOVERNANCE

under JVs and minority equity investments further suggests that reciprocally
interdependent alliances (vs. those with sequential interdependence) will be
more likely to take the form of JVs or minority equity investments than con-
tractual alliances. Finally, a t-test to compare the coefficients of reciprocal and
sequential for JVs and minority equity investments shows that JVs are more
likely than minority equity investments when interdependence is reciprocal
rather than sequential.
Overall, not only are the two interdependence indicators significant in
predictable ways in the models, but the significant improvement in log like-
2
lihood and ˜ statistics in model 2 indicates a much better model fit. This
finding makes clear the added value of incorporating coordination costs and
interdependence into the analysis.
Results of models 3 and 4 support hypotheses 2a–2c. The positive coeffi-
cient for R&D supports hypothesis 2a and shows that alliances with a technol-
ogy component are more likely than those without one to be organized with
hierarchical governance structures and, under such circumstances, firms will
prefer JVs and minority equity investments to contractual alliances. A t-test of
the difference in coefficients of R&D for JVs and minority equity investments
shows further support for hypothesis 2a and suggests that firms prefer JVs
over minority equity investments when an alliance includes a technology
component.
The industry dummy variables, which indicate the appropriability regime,
provide mixed support for hypothesis 2b. We expected more hierarchical con-
trols for alliances in sectors with weaker appropriability regimes. The dummy
variable for new materials, where the appropriability regime is of a strength
between those of the other two sectors, suggests that compared with biophar-
maceuticals, where the appropriability regime is stronger, JVs are more likely
than contractual alliances in new materials, which is consistent with hypoth-
esis 2b. Contrary to our expectations, however, there is no significant dif-
ference in the use of minority equity investments and contractual alliances
between new materials and biopharmaceuticals. In the automotive sector,
where the appropriability regime is the weakest, consistent with our expecta-
tions, both JVs and minority equity investments are more likely than contrac-
tual alliances when this sector is compared with biopharmaceuticals, where
the appropriability regime is strongest. The inclusion of dummy variables for
each sector does not reveal whether the remaining main effects differ across the
industries. To assess if the other effects observed differ systematically across
industries, we estimated unrestricted models for each industry separately
(results not reported here). The signs of the coefficients indicated that the
postulated directionality and significance of the other main effects observed
in the pooled sample held true for each sector.
Model 4 introduced the interaction term between R&D and the dummy
variables for industry to test hypothesis 2c and examine whether the effect of
 MANAGING COORDINATION COSTS 143

industrial sector was more salient for alliances with a technology component
than for those without one. Hypothesis 2c predicted that hierarchical controls
in alliances would be greatest when alliances have a technology component
and are in an industry with a weak appropriability regime. As expected, the
positive and significant coefficient for the interaction between automotive
and R&D shows that technology-based alliances are more likely to be JVs
and minority equity investments than contractual alliances in the automotive
sector, where appropriability regimes are relatively weak, than they are in
biopharmaceuticals, where appropriability regimes are stronger. Contrary to
our expectations, the statistically nonsignificant coefficient for the interaction
between new materials and R&D suggests that technology alliances in the new
materials sector, which has an intermediate-level appropriability regime, are
no different in their governance structures than technology alliances in the
biopharmaceutical sector, where the appropriability regime is strongest.
Model 3 also includes several measures of the trust developed among
alliance partners, and the associated amount of network resources. The neg-
ative coefficient for repeated ties, a measure of interorganizational trust and
the associated network resources, supports hypothesis 3 and indicates that
repeated ties are less likely than first-time alliances to be organized as JVs
or minority equity investments than as contractual alliances. A comparison
of the coefficients further supports hypothesis 3 and suggests that repeated
ties are less likely to be organized as JVs than as minority equity invest-
ments. While we are not able to empirically separate the role of network
resources and the associated interorganizational trust on coordination versus
appropriation concerns, the results do suggest that it does matter in shaping
governance.
The models also included dummy variables for nationality of partner and
alliance multilaterality to further assess the effect of trust on governance
structure, as predicted by hypothesis 3. The negative and significant coeffi-
cient for Japan and Europe in the second column of model 3 suggests that
alliances involving firms from only those regions are less likely than cross-
regional alliances to use JVs and minority equity investments than contract-
ual alliances. This is consistent with our intuition that there is likely to be
greater trust and associated network resources in alliances involving regionally
similar partners than cross-regional partners, which in turn is reflected in the
governance structure of the alliances. Contrary to our expectations, Japanese
domestic alliances are no different from cross-regional alliances in their use of
minority equity investments or contractual alliances. Similarly, the nonsignifi-
cant coefficient for the United States suggests that alliances between American
partners are no different from cross-regional alliances in their governance
structures and is contrary to hypothesis 3. Also contrary to hypothesis 3,
the positive but nonsignificant coefficients for multilateral alliances across all
models indicate that, compared to multilateral alliances are statistically no
144 NETWORK RESOURCES AND GOVERNANCE

more likely than bilateral alliances to be JVs or minority equity investments

than contractual alliances.
The first column of Table 6.3 also reports the base model including all the
control variables. The estimations included a dummy variable for each year
but one in all models. The results for these dummy variables (not reported
in tables for ease of presentation) broadly confirm the growing frequency of
minority investments and contractual alliances. In addition, the positive and
significant coefficient for percent JVs and percent minority equity investments
suggests that the use of these alliances within an industry positively affects
firms’ use of those types of alliances in that industry.
To assess the possible influence of firm-level attributes on choice of govern-
ance structure, a separate analysis was conducted with data on all alliances
formed by a subgroup of firms. Given the diversity of firms in the sample—
they were based in the United States, Europe, and Japan—it was not possible
to collect financial information on all firms. For the subgroup analysis, we
selected the fifty largest firms in each sector and collected information on their
size, performance, liquidity, and solvency. We reestimated all the models with
this sample and included variables to assess the role of partner differences by
computing a ratio of the smaller to the larger financial item to assess the effect
of differences across partners on their choice of governance structure. The
results (not reported here) for coordination costs and appropriation concerns
after controlling for these firm attributes were consistent with those based on
the original sample. The persistence of the hypothesized findings increases the
robustness of the results. Among the ratios themselves, the only significant
one was size, indicating that the greater the difference in size between the
partners, the more likely they were to use JVs or minority equity investments
than contractual alliances.

Conclusion
This study sheds light on the factors that underlie how firms choose to govern
their alliances. By using a typology of three types of alliance structure and the
magnitude and type of hierarchical controls present in each, we found that
both the anticipated extent of coordination costs and appropriation concerns
at the outset in the formation of an alliance could predict the use of par-
ticular governance structures. Furthermore, we found that trust engendered
by network resources is a powerful catalyst in shaping the governance struc-
ture in alliances. While this chapter does not empirically disentangle poten-
tial mechanisms of the effects of network resources and resultant trust on
governance, it is likely that these affect both anticipated coordination costs and
 MANAGING COORDINATION COSTS 145

appropriation concerns. Thus, this study suggests that network resources may
play an important role not only in shaping the likely appropriation concerns in
interorganizational relationships but also in facilitating greater coordination
among the partners.
While the study provides strong support for the importance of coordination
costs in determining alliance governance structure, one particularly important
finding was that the greater the anticipated coordination costs in relation to
a new strategic alliance—as reflected by the anticipated level of interdepen-
dence between firms—the more hierarchical the governance structure used to
formalize it. The findings confirm that reciprocally interdependent alliances
are likely to have structures with greater hierarchical control than those with
sequential interdependence, which in turn are likely to have more hierarch-
ically organized alliances than those with pooled interdependence. This result
suggests that the deliberations underlying the choice of alliance structure
are not dominated by concerns of appropriation alone, as previously sug-
gested, but that considerations associated with managing interdependence-
based coordination costs are also salient.
The further examination of the role of appropriation concerns and behav-
ioral uncertainty in alliance formation in this chapter provided mixed results.
Consistent with previous work (Pisano 1989), alliances involving a technology
component were likely to use more hierarchical structures than those that
did not. Contrary to our expectations, however, differences across industrial
sectors, which also reflect varying appropriability regimes, do not fully explain
the choice of governance structure. This is problematic in the comparison
of new materials alliances with those in biopharmaceuticals, and the results
show that while JVs are more likely than contractual alliances in the former
than the latter, there is no significant difference in the use of minority equity
investments and contractual alliances. The interpretation of this null result
is ambiguous, as it could be influenced by additional unmeasured factors,
such as localized institutional norms, historical imprinting of behavior by
industry participants, and the intensity, diversity, and niche-based dynamics
of competition in those industries.
The results for appropriation concerns were also confirmed by looking at
the simultaneous influence of the sector in which the alliance occurred and the
presence of a technology component in the alliance. The results suggest that
the presence of a technology component in alliances enhances the influence of
the appropriability regime of the industry on the governance structure used.
In particular, the combination of a technology component and an alliance in
a sector with a weak appropriability regime increases the likelihood of firms
choosing hierarchical governance structures.
Overall, the results for the effect of prior ties confirm that alliance networks
and the resources they create strongly influence the governance structures
of alliance. Network resources channel valuable information between
146 NETWORK RESOURCES AND GOVERNANCE

firms that not only affects the frequency of new alliances and the choice
of partners but also the specific structures used to formalize alliances. The
analyses here used several measures to assess the influence of interfirm trust
and associated network resources as another factor that can affect the choice
of alliance governance structure. Results for the first indicator of trust, the
presence of repeated ties, are consistent with our expectations: repeated ties
diminish the use of hierarchical controls in alliances. This result holds true
even after we separated out the history of alliances by specific type of alliance.
Thus, a history between the firms matters, regardless of the type of prior
alliance the firms entered. A topic for future research would be to explore more
precisely the role of network resources in shaping appropriation versus coor-
dination concerns and the resultant governance structure used in alliances.
The results for the regional origin of partners, which we also proposed
would capture trust and network resources, reveal some interesting trends.
The comparison between local versus cross-region alliances was broadly con-
sistent with our expectations of greater trust in local than in cross-regional
alliances, but breaking down local alliances by region suggests some provoca-
tive issues not fully explored here. While the results for European alliances
are consistent with the predictions, contrary to our expectations, Japanese
domestic alliances are no different from cross-regional alliances in their use
of minority equity investments or contractual alliances, although they do
differ in their use of JVs or contractual alliances. Even more remarkable is
the absence of significant differences in the governance structure of American
domestic alliances and cross-regional ones. While these results suggest some
systematic differences in the level of trust between local and cross-regional
alliances that is reflected in the governance structure of alliances, several alter-
native interpretations are possible for these results. These regional differences
may be the result of appropriation concerns resulting from greater difficulties
in specifying and enforcing property rights and monitoring problems in cross-
regional alliances than in local alliances, or they may be due to the greater
coordination challenges and coordination costs of cross-regional alliances
than local alliances. Local alliances in each region may also be influenced
by localized institutional contexts deeply embedded in normative practices
and authority structures (Hamilton and Biggart 1988). Or perhaps there
are historical and legal circumstances that mandate or encourage the use of
particular governance structures for alliances. These results, along with those
for sectoral differences, reveal some interesting patterns that remain to be
explored more deeply.
The results for the control variables suggest that both the time trend and
the frequency with which other industry participants used particular struc-
tures influence the choice of governance structure in alliances. The positive
influence of frequency of prior alliances by industry participants on the choice
 MANAGING COORDINATION COSTS 147

of structure reflects the likely occurrence of imitation or of industry impera-

tives not captured by other variables included in the study (Westphal, Gulati,
and Shortell 1997). This effect disappeared, however, once we introduced
the hypothesized variables in the framework. The findings in this study help
explain some of the reasons why the composition of structures used may have
shifted over time from more to less hierarchical. In particular, the nonsignifi-
cance of most of the dummy variables capturing time, once we introduced the
measures for interdependence, suggest that the time trend may have reflected
the changing patterns in underlying interdependence in alliances. Thus, a
likely explanation for the observed time trend may be that firms are entering
alliances with lower levels of interdependence.
In this study, we have considered two perspectives that suggest differing
factors that influence the extent of hierarchical controls in alliances: an eco-
nomic approach, which highlights appropriation concerns, and an organiza-
tional approach, which emphasizes coordination costs. We have also consid-
ered the influential role of network resources and resultant trust in shaping
choice of governance structure. Network resources directly affect governance
by engendering trust, mitigating appropriation concerns, and shaping antici-
pated coordination costs.
Overall, the results presented in this chapter have several ramifications.
First, they suggest that the formation of exchange relations between firms
is not entirely dominated by appropriation concerns—coordination costs,
arising from decomposing tasks between partners and the requisite ongoing
coordination and management of tasks across partners, play at least an equally
significant role. Underlying this study is the fundamental question of the
relative importance of alternative bases for hierarchical controls in alliances.
Both perspectives discussed point to the salience of bounded rationality and
concomitant uncertainty as important considerations for the emergence of
hierarchical controls. But each specifies the role of different facets of uncer-
tainty experienced by alliance participants as important in their decision to
introduce hierarchical controls in the formal structure. While one perspec-
tive highlights anticipated appropriation concerns resulting from contracting
hazards and manifest behavioral uncertainty, the other points to uncertainty
arising from the anticipation of the extent of ongoing task coordination and
the complexity of decomposing the division of tasks.
Network resources and the associated trust they engender cut across both
these distinct facets in that it is likely they shape both the anticipated appro-
priation and coordination costs, which in turn impact choice of governance.
This chapter does not claim that coordination costs can explain all the variance
in hierarchical controls in alliances; rather, it investigates the simultaneous
influence of both coordination- and appropriation-related costs. Yet these two
factors often overlap. As a result, it can be difficult to distinguish between their
148 NETWORK RESOURCES AND GOVERNANCE

influences empirically. While it may be difficult to isolate the occurrence of

each in its pure form, as was true with the hypothetical example discussed
earlier, we empirically demonstrate the distinct role of coordination costs in
guiding the choice of governance structure in alliances while also considering
the independent influence of appropriation concerns and network resources.
Second, the results here highlight the fundamental issue of the origin of
hierarchical controls in alliances: whether they arise from a concern with coor-
dination costs and interdependence across partners or result from anticipated
appropriation concerns. These results show that both sets of factors along
with the network resources that may shape them are important considerations
for alliances. Firms choose governance structures both to manage anticipated
coordination costs and to address appropriation concerns. This finding is
consistent with the belief that hierarchical controls are more than mechanisms
to control opportunism and provide incentive alignment across partners; they
also provide an organizational context that determines the rules of the game
and creates an administrative architecture within which the partnership pro-
ceeds. This architecture encourages alliance partners to use network resources
to coordinate tasks and responsibilities between themselves in a way that meets
their own needs for value creation and allays their particular concerns about
the alliance.
While this study focused on the origin of hierarchical controls in alliances,
its findings could spur an examination of the importance of coordination
costs in answering the question of why firms exist. Efforts to question the
singular importance of opportunism-based transaction costs economics have
introduced the role of knowledge and its application to business activities as a
basis for the existence of firms (Conner and Prahalad 1996). This work could
easily be expanded to examine the role of coordination costs as an important
basis for why firms exist and their influence on the scale and scope of firms.
Further research could examine how network resources can be a powerful
influence on coordination costs.
Part III
Network Resources
and the Performance
of Firms and Their
Alliances
This page intentionally left blank
7 Network resources
and the performance
of firms
Do firms benefit from entering strategic alliances and reaping the network
resources these generate? To answer this question, one must consider two
dimensions of performance: the performance of a given alliance and the
performance of the individual firms that enter it. This chapter, based on a
study I conducted with Lihua Wang, relates to the latter dimension, with a
focus on the performance consequences of alliances and the network resources
generated for firms entering such partnerships. A study of these performance
consequences is important because it allows us to assess the actual benefits
of network resources emanating from the alliance networks in which firms
participate.
Because the influence of other, nonalliance activities on firm performance
makes empirically linking alliance activity and associated network resources
with performance difficult, scholars have looked for a variety of direct and
indirect ways to test the relationship between alliance activity and firm per-
formance. The most common approach has been to conduct event study
analyses of the stock market effects of alliance announcements (e.g. Koh
and Venkatraman 1991). This approach has been further refined as schol-
ars have examined the differential benefits firms receive from different types
of alliances and how these benefits are influenced by the conditions under
which the alliances were formed (e.g. Balakrishnan and Koza 1993; Anand
and Khanna 2000a). Still, as stock market reactions portend the likely future
outcomes of alliances, these results provide only a prospective estimate of the
beneficial consequences of alliances for firms—and in many cases the resulting
evidence has been mixed.
After controlling for other factors that may influence firm performance,
several researchers have explained firm performance as a function of the extent
of alliance activity. For example, in an early study of the chemical industry,

This chapter is adapted from ‘Size of the Pie and Share of the Pie: Implications of Network Embed-
dedness and Business Relatedness for Value Creation and Value Appropriation in Joint Ventures’ by
Ranjay Gulati and Lihua Wang published in Research in the Sociology of Organizations © 2003, (20):
209–42, with permission from Elsevier.
152 NETWORK RESOURCES AND FIRM PERFORMANCE

Berg, Duncan, and Friedman (1982) found a negative relationship between

joint venture incidence and firm rates of return but were unable to defin-
itively establish a causal relationship. More recently, some researchers have
narrowed the domain of performance that might be explained by alliances
by focusing on the impact of technology alliances on the patenting activities
of firms and for their overall performance (Hagedoorn and Schakenraad 1994;
Mowery, Oxley, and Silverman 1996). This line of research has been extended
by linking firm performance not only to the frequency of past alliances but
also to the firm’s position in interorganizational networks (Ahuja 2000a).
Researchers have also used a similar approach to examine the relationship
between the extent to which firms are embedded in alliances and the likelihood
of their survival. Thus, firm survival has been considered a tentative proxy
for performance (e.g. Baum and Oliver 1991, 1992; Uzzi 1996). The alliances
studied in regard to firm survival have included those with vertical suppli-
ers and with key government institutions in the environment. The results
of these studies suggest that such ties are generally beneficial in enhancing
survival chances. Still, this relationship may not always be true and numerous
contingencies that may alter the relationship between alliances and firm sur-
vival have also been proposed (e.g. Mitchell and Singh 1996). The challenge
in this research has been to isolate the factors beyond embeddedness that
may also have an influence on survival and to examine all relevant factors
longitudinally.
While past studies have tried to link the alliance behavior of firms to
various facets of firm performance, they have not invoked nor focused on
network resources as the conceptual anchor for their theoretical and empirical
assessments. Despite its insights, the aforementioned body of research has also
largely overlooked the influence of overarching networks and the resources
they offer firms beyond immediate ties.
This chapter assesses the likely impact of such network resources on firm
performance by detailing an event study of stock market reactions to new
alliance announcements. The study examines the effects of a specific form
of strategic alliance that typically requires substantial investment and that
is likely to have a measurable impact on firm performance: the joint ven-
ture (JV). Prior research has typically assessed the value creation potential
of JVs by using an event-study methodology to examine stock market reac-
tions to JV announcements (Anand and Khanna 2000a). Because accurate
data that quantify the value created by JVs are difficult to collect, scholars
have looked at investor expectations regarding how much value a new JV
will create value for its parent firms as a reasonable estimate of the value
that a joint venture will generate. As a result, their judgment of whether a
JV is expected to create value for parent firms and how the created value
will be divided between partners is believed to incorporate all available
information.
 PERFORMANCE OF FIRMS 153

As mentioned earlier, one of the weaknesses of prior research has been

its limited recognition of the impact of network resources that firms may
possess on alliance outcomes. As previous chapters have demonstrated, prior
alliance ties generate network resources that are conduits of information,
which in turn engender trust and alter subsequent behavior. Given this impact,
investors may expect the network resources possessed by each firm entering
a new JV to affect the total value creation of the new JV and the relative
value appropriation between partners. While network resources may ulti-
mately reside within individual firms, this study accounts for such resources
by looking at the prior direct and indirect ties that exist between joint venture
partners. Furthermore, we assess the impact of these network resources on
investor perceptions of the benefit of firms entry into new joint venture rela-
tionships. In other words, we explore the extent to which the market reaction
to the announcement of a new alliance between two firms is influenced by
each firm’s existing network resources based on prior direct and indirect
ties.
Building on prior research, this chapter focuses not only on the total
value creation for both participating firms (e.g. Koh and Venkatraman 1991)
but also on the factors that may influence the relative value appropriation
among the partners when a JV is announced. This approach is supported by
theoretical accounts of alliances which have suggested that both total value
creation and relative value appropriation for each partner in a joint venture
are important (Hamel 1991; Gulati, Khanna, and Nohria 1994).
To gain a better understanding of the effect of network resources on firm
performance, we specifically examine the influence of network resources on
the stock market returns that firms realize when a new joint venture in which
they are involved is announced. The expectation is that firms with greater
network resources are likely to extract greater value from their new joint
ventures than firms with limited access to such resources. Because new joint
ventures contribute to a firm’s existing pool of network resources, another
way to state this would be that the effects of new ties on the performance
of participating firms will be contingent on the amount of existing network
resources that they have at the outset of their new relationship. The greater
the existing stock of such resources, the greater the benefits a firm can extract
from its new partnerships.
In addition to examining the role of firms’ existing network resources on the
total value creation associated with a new JV relationship (i.e. the size of the
total pie for all firms), this chapter also studies the impact of such resources on
the relative value appropriation (i.e. the share of the pie for each firm) for the
firms entering JVs. The results of this event study of stock market reaction to
JV announcements by the largest US firms during the 1987–96 period suggest
that network resources affect the total value creation of joint ventures but not
the relative value appropriation of each partner in a JV.
154 NETWORK RESOURCES AND FIRM PERFORMANCE

This study also considers the role of firms’ material resources and comple-
mentary capabilities by looking at the effect of ‘business relatedness’ among
JV partners in shaping their alliance outcomes. Business relatedness refers
to the similarities in products, markets, and technologies among business
units within a diversified firm (Rumelt 1974) and the similarities in products,
markets, and technologies between acquiring and acquired firms (Datta and
Puia 1995). In the analyses here, this concept refers to the similarities that
exist in the products, markets, and technologies of JV partners and their joint
venture. In particular, we consider the effects of business relatedness on both
the total value created by the JV and the relative value appropriated by each JV
partner.

Theory and hypotheses

NETWORK RESOURCES AND TOTAL VALUE CREATION IN

JOINT VENTURES
Total value creation refers to the stock market’s expectation of the total
value a JV is going to create for all partners collectively. As a separate
entity created by partners, a JV is usually an enduring arrangement for
a certain period in which two or more firms combine their resources in
order to achieve some common objectives (Lewis 1990). As in many negoti-
ation situations, it is not only the share of the pie that each party receives
in such arrangements but also the total size of the pie that is important
(Thompson 1998).
Prior studies of the total value creation of joint ventures at the time they
are announced have typically assumed that investors are only concerned with
the economic antecedents of the new JV and have used firm attributes (i.e.
size) or dyad attributes (i.e. business relatedness of two firms) as proxies for
these factors. As previous chapters have shown, however, network resources
that arise from prior alliances also play a significant role in the formation and
functioning of such relationships. As a result, they can have a large impact
on the total value created by a joint venture. One way they can do this is by
providing firms with information regarding the reliability, specific capabilities,
and trustworthiness of current and potential partners, information that can
serve as an important basis for trust between firms in a new JV. The know-
ledge obtained from firms’ prior network ties enables the JV partners to have
more accurate expectations of each other and also makes their behavior more
predictable. Furthermore, the circulation of information within the network
 PERFORMANCE OF FIRMS 155

also establishes accountability by communicating reputational concerns for

the firms and deterring them from acting opportunistically (Gulati 1995b).
For example, if both firms in a new JV have a previous JV with a common
third party, either partner’s behavior can be reported to the third party and
this information may spread through the wider network. The anticipation
of future interaction with firms in this network and the desire to develop
long-term relationships with existing partners will thus prevent firms from
engaging in opportunistic behavior that could be communicated across the
wider social network.

NETWORK RESOURCES, RELATIONAL EMBEDDEDNESS,

AND TOTAL VALUE CREATION
As discussed in Chapter 3, there are two distinct components of network
resources: the relational component, made up of the direct relationships
within which a firm is embedded, and the structural component, which
encompasses the overall social network within which firms exist (Granovetter
1992). The relational component of social structure provides direct
experience-based knowledge about current and prior alliance partners; the
structural component provides indirect knowledge about potential partners
that firms obtain from prior partners, their partners’ partners, and so on. Both
of these elements may influence investor perceptions of the total value to be
created by new joint ventures.
One reason why relational ties can affect the total value created by a joint
venture is that such ties provide valuable information to partner firms that can
make interactions in new joint ventures less uncertain and costly by limiting
different types of transaction costs such as monitoring and negotiation costs.
Monitoring costs may be reduced because prior direct interactions promote
interfirm trust that reduces the incentive for opportunistic behavior (Gulati
1995a; Gulati and Sytch 2006b). Negotiation costs are reduced because the
partner firms develop deeper knowledge of each other in terms of their
interests, needs, and capabilities through prior connections, and information
exchange can be more efficient. Moreover, the trusting relationship of the
partners facilitates open communication and private information exchange.
As prior research suggests, communication and information exchange are
considered keys to reducing the negotiation costs and increasing the chance
of integrative solutions (Thompson 1998).
Relational ties between firms can also make a new JV more product-
ive by reducing coordination costs. As detailed in Chapter 6, coordination
costs encompass the anticipated complexity of (a) decomposing tasks among
156 NETWORK RESOURCES AND FIRM PERFORMANCE

partners, (b) ongoing coordination of activities to be completed jointly or

individually across organizational boundaries, and (c ) managing relevant
communication and decision-making (Gulati and Singh 1998; Gulati,
Lawrence, and Puranam 2005). As partners build up experience with each
other, they not only have more information about each other’s strategies, cul-
ture, and capabilities but also develop shared norms of behavior and routines
of joint decision-making and coordination (Walker, Kogut, and Shan 1997).
As a result, coordination costs are reduced.
Finally, prior direct ties may enhance prospects for joint learning, which
is perhaps one of the most important sources of value creation in JVs (Dyer
and Singh 1998; Khanna, Gulati, and Nohria 1998). The ability of a firm to
recognize and assimilate valuable knowledge from a particular ally can be
referred to as a kind of partner-specific absorptive capability that should be
heightened as firms develop joint work routines (Cohen and Levinthal 1990;
Dyer and Singh 1998).
Given the various benefits JV partners may realize from the network
resources originating from their prior direct ties, we hypothesized the follow-
ing:

Hypothesis 1a: The degree of relational embeddedness between new JV partners has a
positive relationship with the total value creation of the JV.

While network resources gained from prior direct ties are indeed beneficial,
it is possible that when the number of direct ties between two firms grows
beyond a certain point, collaboration opportunities may reach a limit (Gulati
1995b). Indeed, two firms that have many prior direct ties may be at risk of
overdependence on each other through significant investments in relation-
specific assets. The increasing interdependence between the two firms places
them in a vulnerable situation if the priorities of one or both change. As
research has shown, when a firm is overly dependent on its partners, especially
in an asymmetric way, be they customers, suppliers, or collaborators, the
very source of competitive advantage from the collaborative relationship may
adversely affect the performance of both firms if the technology of one of the
firms becomes obsolete or the environment of one or both abruptly changes
(Lorenz 1988; Afuah 2000).
Network resources originating from direct ties can also encourage the
two firms to keep investing in those relation-specific assets to reap imme-
diate benefits—at the expense of investing in new opportunities with part-
ners with whom they have no experience. Unlike a JV between firms with
prior ties, a new JV between firms that have no prior direct ties may also
be important for firms’ levels of competitive advantage by allowing them
to extend their reach and explore new and unique rewarding opportun-
ities. Although risky at the outset, new relationships can enhance each firm’s
 PERFORMANCE OF FIRMS 157

opportunity set in the long run by creating network resources that pro-
vide access to the other party’s information sources for new deals with
additional partners. Such relationships also give each firm new opportunity
for referrals to rewarding opportunities within its newly expanded network
(Gulati 1998).
New JVs between firms with no prior direct ties may also benefit partici-
pants by providing opportunities for sharing complementary resources or for
pooling common resources to enhance economies of scale and scope (Ahuja
2000a), while also allowing them to acquire new and unique skills that could
potentially be used in their own activities beyond the JV (Khanna, Gulati, and
Nohria 1998). Finally, new JVs between firms with no direct ties can create
potential future opportunities for the two firms to cooperate and further
exploit the benefit of collaboration.
The discussion above indicates that as the number of direct ties between
two firms increases, the benefits accrued to partners from a new JV might
increase to a certain point and then diminish. Consequently, as two partners
become more relationally embedded, they may become overly dependent on
each other and under-explore new opportunities. Hence, while firms may
accumulate network resources by repeated interactions with the same part-
ners, the rate of accumulation of such resources from repeat ties may diminish
over time. This argument is consistent with the trade-off between exploration
and exploitation suggested in the literature on organizational learning (March
1991). Exploration refers to the behavior of a firm trying to discover new
information about alternatives to improve future returns, while exploitation
refers to the behavior of a firm using current information to improve present
returns. Koza and Lewin (1998), who have applied these concepts to the
study of JVs, suggest that the formation of an alliance is an indication of a
firm’s adaptive choice between exploration and exploitation. On one hand,
exploration of new alliance opportunities by participants with no prior direct
interactions may be more risky, but such behavior may also be more bene-
ficial. On the other hand, exploitation of cooperative relationships between
participants with prior direct ties may be safer now but less beneficial in the
future. Given these considerations, investors may expect that new JVs between
firms with an intermediate number of direct ties will balance exploration of
new opportunities with exploitation of existing ones.
The above rationale calls for the following alternative relationship between
network resources based on relational embeddedness and the total value cre-
ation of a JV:
Hypothesis 1b: The degree of relational embeddedness between new JV partners has
an inverted U-shape relationship with the total expected value creation of their new
joint ventures, with the highest value occurring at an intermediate degree of relational
embeddedness.
158 NETWORK RESOURCES AND FIRM PERFORMANCE

NETWORK RESOURCES, STRUCTURAL EMBEDDEDNESS, AND TOTAL

VALUE CREATION
As previously mentioned, in addition to a relational component, network
resources also entail a structural component that encompasses the overall
social network within which firms exist. In many instances, a firm may not
have prior direct ties to a potential partner, but it may be linked to that firm
by indirect ties through common partners. Here we consider the simplest case,
where two firms with no prior direct ties share direct ties with a common third
firm. When these two firms announce a JV, investors are likely to consider
two benefits of their indirect-tie-based network resources in enhancing the
value creation potential of the new partnership: information and reputation.
The indirect tie in this example promotes information exchange by allowing
each prospective partner to query the common partner regarding the reliabil-
ity, trustworthiness, and capabilities of the other firm. This information can
reduce uncertainty about the behavior of each partner and serve as the basis
for interfirm trust (Burt and Knez 1995; Gulati 1995b). The mere fact that the
two firms have entered a JV may signal to investors that both are considered
by the third party as suitable and trustworthy. In such cases, investors are
likely to expect that such JVs have a high probability to create value for
both firms. Therefore, a positive relationship between the degree of structural
embeddedness of JV partners and the total value creation of the JV can be
expected:

Hypothesis 2a: In the absence of relational embeddedness, the degree of structural

embeddedness between two JV partners has a positive relationship with the total value
creation of the JV.

Nevertheless, it is possible that as two partners become more structurally

embedded and accumulate more indirect ties, the rate of growth of network
resources and the concomitant information-based benefits may diminish as
the information becomes more redundant and less valuable (Coleman 1988;
Burt 1992). Multiple common third parties may have similar information
about partners and the value of the information may not increase proportion-
ally with an increase in indirect ties between partners. In terms of reputation
concerns, as two firms have more common partners and the local network
becomes extremely cohesive, behavioral constraints in the form of standard
norms of behavior may develop across the network. These norms may con-
strain the firms’ abilities to execute their joint strategies (Baum and Oliver
1991). Based on this argument, an alternative hypothesis suggests that the
degree of structural embeddedness of two partners may have a diminishing
positive relationship with investors’ estimates of the total value expected from
a new JV:
 PERFORMANCE OF FIRMS 159

Hypothesis 2b: In the absence of relational embeddedness between two firms, the
degree of structural embeddedness between two firms has a positive diminishing effect
on the investors’ expectation of the new JV’s total value creation.

NETWORK RESOURCES AND RELATIVE VALUE APPROPRIATION IN

JOINT VENTURES
The relative value appropriation of each partner in a JV refers to the relative
proportion of total value creation that each partner extracts from the JV. It is
important because the ultimate goal of each partner is to extract its own value
from the JV. Hamel (1991) was one of the first to highlight the importance
of relative value appropriation. Several recent studies have built on these
ideas by examining how interfirm partnerships may turn into learning races
in which each partner hopes to gain the greatest benefits from the alliance
(Khanna, Gulati, and Nohria 1998; Khanna, Gulati, and Nohria 2000). Still,
in spite of its importance, few empirical studies have examined the factors
that affect the relative value appropriation between partners in a JV. This
study attempts to examine this issue by looking at the relationship between
the relational and structural embeddedness of partnering firms and the rela-
tive proportion of total value creation they are likely to seek from new JV
relationships.
The relational embeddedness resulting from prior direct partnering experi-
ences between two firms serves as an important basis for a trusting relation-
ship to develop (Gulati 1995a; Gulati and Sytch 2006b). This trust between
two partners encourages reciprocity and consideration of mutual benefits. As
a result, firms with previous or current direct ties should be more likely to
consider not only their individual costs and benefits but also their mutual
costs and benefits when dividing the potential value of a new joint venture.
Consequently, they should be less likely to emphasize the pursuit of specific
individual economic returns in light of their interest in maintaining a har-
monious and mutually fruitful relationship. When two firms are relationally
embedded, they are more likely to view the JV transaction as part of a long-
term relationship, and this orientation should reduce the desire for the firms to
seek asymmetric returns (Dyer 1997). Given this expectation of firm behavior,
we would expect that investors would also anticipate symmetric returns for
both partners entering a JV.
While prior direct ties between two partners provide each first-hand
information about the other, prior indirect ties that indicate structural embed-
dedness provide similar types of information through common third par-
ties. Third parties are important go-betweens in new relationships, enabling
individual firms to transfer their expectations from well-established relation-
ships to others in which adequate knowledge or partnership history may
160 NETWORK RESOURCES AND FIRM PERFORMANCE

not be available. Because both firms have direct interaction with the third
common party, the common party passes on information about the trust-
worthiness of the two firms, and this information provides a basis for a
trusting relationship. Investors considering the announcement of a JV are
likely to expect that prior indirect ties promote trust between the parent
firms and encourage cooperative behavior. This trust and the cooperative
behavior it fosters should lead to parity in the benefits each party extracts from
the JV.
In contrast, two firms that have no direct or indirect ties lack accurate
information about each other and are more likely to consider the relationship
with private costs and benefits in mind and view the relationship in terms
of power and dependence. Thus, private benefits are likely to be emphasized
over mutual gains. Furthermore, because firm managers may feel uncertain
about the strategic intent of their JV partners, they are more likely to engage
in learning races to extract the most private benefits in the quickest possible
way (Khanna, Gulati, and Nohria 1998). In these situations, investors are
likely to expect that the relative value extractions of the two firms are more
likely to depart from an equal sharing of the expected total value created. The
discussion above suggests the following:
Hypothesis 3: As two firms are more relationally embedded, the relative value appro-
priation to each partner in the JV becomes more symmetric.

Hypothesis 4: As two firms are more structurally embedded, the relative value appro-
priation to each partner in the JV becomes more symmetric.

MATERIAL RESOURCES, ASYMMETRY OF PARTNER BUSINESS

RELATEDNESS, AND THEIR IMPACT ON TOTAL VALUE CREATION
AND RELATIVE VALUE APPROPRIATION
Business relatedness has been widely studied in the literature on diversification
strategy and mergers and acquisitions by firms. In these two literatures, the
term refers, respectively, to the similarities in products, markets, and tech-
nologies among business units within a diversified firm (Rumelt 1974) and
the similarities in products, markets, and technologies between acquiring and
acquired firms (Datta and Puia 1995). Current research suggests that a high
level of business relatedness vis-à-vis a target firm is beneficial to firms both
for diversification and for mergers and acquisitions because it creates value
for firms by enhancing economies of scale or scope, increasing market power,
and providing access to necessary technology in familiar industries (Seth 1990;
Datta and Puia 1995).
 PERFORMANCE OF FIRMS 161

The concept of business relatedness has also been extended to the study
of JVs, where the term is synonymous with market or technology over-
lap between partnering firms. Recent research suggests that greater overlap
between firms in a JV positively affects each firm’s capacity to learn from its
partner and, in turn, increases the economic rent the partners can extract
from their collaboration (Mowery, Oxley, and Silverman 1996; Dyer and
Singh 1998). Stuart (2000) suggests that technology overlap facilitates effective
collaboration among firms in an alliance because (a) the firms are better
at evaluating and internalizing each other’s technologies because they share
knowledge of technologies and market segments and (b) the firms provide
high value for each other in terms of information exchange and cost sharing,
especially in a crowded technological area.
Because JVs involve the creation of a third, neutral entity, not only the
overlap between two partners but also the overlaps between each of the parent
firms’ core activities and the activities undertaken by the JV are important. In
a JV, each partner’s business operation can be either related or unrelated to
that of the new partnership. When the business of a focal firm is related to the
JV, it is likely that the firm can more effectively use its core competencies in
the operation of the JV and further exploit any potential economies of scale
with its current resources. Relatedness is also likely to increase the market
power of the focal firm (Pfeffer and Nowak 1976). In addition, this overlap
provides potential opportunities for spillover effects that allow the focal firm
to apply the skills learned from the new JV to its other activities and thus fully
exploit new learning opportunities (Hamel, Doz, and Prahalad 1989). It is also
likely that firms that are closely related to their JV operations may have greater
absorptive capacity for knowledge coming from the areas of development in
the JV, and this is reflected in a greater ability to recognize the value of the new
knowledge, assimilate it, and apply it for their economic benefits (Cohen and
Levinthal 1990).
Building on the research in individual learning, studies on absorptive
capacity suggest that a firm’s absorptive capacity is closely associated with the
extent to which the firm possesses prior related knowledge of the technology
being developed outside its boundaries. Applying this logic, a firm operating
in areas related to the JV has prior related knowledge, is familiar with the
JV operation, and thus is likely to have the ability to recognize and absorb
the new knowledge from the JV and exploit it in its operations. The business
relatedness between the firm and the JV thus not only provides the firm with
potential opportunities for exploiting economies of scale and scope, as well
as with learning opportunities, but also provides conditions that enhance the
ability of the firm to realize such opportunities.
When assessing the potential value creation of a JV, the business related-
ness of each of the parent firms to the JV’s activities becomes significant.
162 NETWORK RESOURCES AND FIRM PERFORMANCE

Specifically, asymmetry of business relatedness for each of the partners with

the JV may negatively affect the investors’ expectations about the future coop-
erative relationship between the partners and thus the total value created in the
JV (Harrigan 1988; Borys and Jennison 1989). When one partner’s business
is related to the JV and the other partner’s is not, the partners themselves
are likely to value the JV differently because the benefits of economies of
scale, scope, and learning opportunities from the new JV are not symmet-
ric. Investors may expect that the firm more related to the JV may extract
private benefits that it can use in its own operations before both firms are
able to obtain any common benefits (Khanna, Gulati, and Nohria 1998). In
addition, in such asymmetric JVs, the abilities of the two partners to learn
and absorb the new knowledge are also likely to be asymmetric. This may
cause the advantaged firm to race with its partner to learn its partner’s skills
from the JV operation before the other party realizes its learning objective
(Khanna, Gulati, and Nohria 1998). The asymmetry of knowledge transfer
benefits between the two partners may lead to shifts in the bargaining power
within the JV, which may discourage knowledge-sharing between partners
and thus reduce the joint value created by the JV (Inkpen 1998; Chi 2000).
Moreover, asymmetry also encourages both partners to expand resources to
learn as much as possible from the other partner for private benefit while
making fewer efforts to take advantage of the potential synergy between them
to generate common benefits (Chi 2000).
The firm that receives fewer benefits may not be able to achieve its strategic
goals and may become dissatisfied with the JV. The likely unequal and possibly
unfair relationship in an asymmetric JVs may cause investors to expect that the
future cooperative relationship between the partners will not be fruitful and
that the JV may not perform well. Therefore, investor expectations of the total
value creation of a JV may be lower if the partnership includes asymmetry of
business relatedness:

Hypothesis 5: Asymmetry of business relatedness of the parent firms with the JV is

negatively related to the total value creation of the JV.

As mentioned above, the asymmetry of business relatedness of two firms with

the JV is likely to contribute to the partners’ extracting different levels of
value from the JV. Firms whose activities are more closely related to the JV
are more likely to extract greater value from the JV than their partners. As
a result, investors may expect that the asymmetry of business relatedness of
the two partners with the JV will promote greater differences in the likely
value extracted by the two partners. When the two partners both have similar
relatedness to the JV operation, however, their potential opportunities to
extract value are more likely to be similar. Based on the above discussion, the
following can be hypothesized:
 PERFORMANCE OF FIRMS 163

Hypothesis 6: Asymmetry of business relatedness of two partners with the JV is

associated with greater departure from an equal share of the created value of the
venture.

Empirical research

METHOD
The data-set used in this study is described in Appendix 1 under the heading
‘Joint Venture Announcement Database’. The most widely used market model
was used, based on residual analysis, to calculate the firm’s abnormal return,
which was the expected return that the market believed the firm would capture
by participating in a JV (Fama et al. 1969). The event (JV announcement) date
was designated as t = 0. Accordingly, t = −10 if the date is 10 trading days
before the announcement date and t = 10 if the date is 10 trading days after
the announcement and so forth. Daily data were used on the stock market
returns of each firm over a period 241 days prior to the event day (250 days
before the announcement of the JV until 10 days before the announcement of
the JV) to estimate the market model:
r i t = ·i + ‚i r mt + εi t
where r i t is the common stock return of firm i on day t, r mt is the correspond-
ing daily market return on the equal-weighted S&P 500, ·i and ‚i are firm-
specific parameters, and εi t is the error term.
Estimates from the above model were used to predict the daily returns for
each firm i over a two-day period and a 21-day period surrounding the event
date using the following equation:
r̂ i t = estimated ·i + estimated ‚i ∗ r mt
where the r̂ i t is the predicted daily return and the estimated ·i and estimated
‚i are the model estimates.
Next, the daily firm-specific abnormal returns are calculated as:
Estimated εi t = r i t − r̂ i t
The cumulative abnormal return of firm i during the event period was
calculated by summing the daily abnormal returns of the firm over the event
period, i.e.


CARi = (Estimated εi t )
t

where t is either from −1 to 0 or from −10 to 10.

164 NETWORK RESOURCES AND FIRM PERFORMANCE

Total return and relative return were used to measure total value creation
and relative value appropriation, respectively. Total return refers to the aggre-
gated abnormal return of the two firms involved in a JV and reflects the total
anticipated stock market gain of the two firms from the JV. Relative return
compares the abnormal returns of the two participating firms entering the
JV. It reflects the asymmetry of the two firms’ abnormal returns from the
JV participation. Both variables were calculated from the firms’ abnormal
returns.
The literature describes two ways to calculate the value creation of a new
JV to the partners—equal-weighted single security and value-weighted sin-
gle security (Anand and Khanna 2000a). The value-weighted single security
approach aggregates the abnormal return of the participating firms, using the
market value of the firms as weights, while the equal-weighted single secu-
rity approach gives each participating firm equal weights. The approach here
follows McConnell and Nantell (1985) in using the equal-weighted approach.
In those studies in which the value-weighted approach was used, one of
the major interests was to find out the absolute total dollar value creation
from the announcement of JVs. Total return was calculated as the simple
addition of the two firms’ cumulative abnormal return over the event period.
That is:

Total return = (CAR1 + CAR2)

where CAR1 and CAR2 are firm 1’s and firm 2’s respective cumulative abnor-
mal returns over certain event period (we use 2-day and 21-day event periods
in this study).
Relative return was calculated by first taking the exponential of the two
firms’ abnormal returns and then using the ratio of the absolute difference of
the two transformed returns and the addition of the two transformed returns
to represent the relative return:
{exp(max(CAR1, CAR2)) − exp(min(CAR1, CAR2))}
Relative return =
{exp(min(CAR1, CAR2)) + exp(max(CAR1, CAR2))}
The transformation corrects for the problem of a possible mixture of positive
versus negative cumulative returns for the two firms entering the same JV.
For example, if firm 1’s cumulative abnormal return is −.02 while firm 2’s
cumulative abnormal return is .001, then the absolute difference .021 is not
very intuitive. Thus, I used the exponential of their cumulative abnormal
returns to transform them into positive numbers. For example, if firm 1’s
transformed return is exp(−.2) = .82, and firm 2’s transformed return is
exp(.01) = 1.01, then the relative return is the absolute difference of the two
transformed returns, i.e. 0.19.
 PERFORMANCE OF FIRMS 165

This absolute difference, though, treats the difference between a return of

.01 and .02, for example, the same as the difference between .49 and .50. To
correct this problem, the absolute difference of the two above transformed
returns is divided by the addition of the two transformed returns. To continue
the above example, the final calculation of the relative return is:
.19
= 0.104.
(.82 + 1.01)
When the value of relative value appropriation is 0, the investors expect equal
shares of the pie for the two firms. The larger this value is, the less equal the
share of the pie for the two firms.
Relational embeddedness is indicated by the number of prior direct JV
ties between two firms while structural embeddedness is indicated by the
number of common third-party ties (indirect ties with the distance of two)
between two firms. The number of prior direct ties is measured by counting
the number of JV ties between two firms from 1970 to the year prior to the
JV announcement. The number of indirect ties is calculated by counting the
number of common third firms with which both parent firms have had a JV
from 1970 until the year before the JV was announced. This includes those
common third firms outside the sample.
The first two digits of the primary Standard Industrial Classification (SIC)
codes of the two firms and the primary SIC code of the JV were used to calcu-
late their respective business relatedness with the JV. The business relatedness
of firm A with the JV equals 1 if the first two digits of the primary SIC code of
firm A are the same as the first two digits of the primary SIC code of the JV. The
asymmetry of business relatedness of two firms with the JV equals 1 if only one
of the partner firms has the same SIC code as the new JV and equals 0 if both
or neither firm has the same SIC code as the new JV. The reliance on the first
two digits of the SIC code to indicate business relatedness is consistent with
that of Palepu (1985). Although subject to criticism, there is evidence that the
congruence between this approach and finer-grained approaches is very high
if the sample size is large (Montgomery 1982).
Some economic variables and firm characteristics were included as control
variables. First, the analyses here controlled for the business relatedness of
two parent firms using a binary variable with a value of 1 if the two parent
firms have the same two-digit primary SIC codes and 0 otherwise. Firm
size and performance indicators (return on assets and solvency) were also
included as control variables, lagged by one year. Firm size is indicated by
total sales; solvency was calculated as long-term debt/current assets. Because
the unit of analysis was a dyad, control variables were created for total size
by summing across the two partners’ total sales and taking a log. Control
variables were also created for total return on assets (ROA) and total solvency
166 NETWORK RESOURCES AND FIRM PERFORMANCE

Table 7.1. Frequency of positive

and negative cumulative stock
market reaction for all partners
(658 pairs and 1,316 firm cases)

Reaction Frequency Percentage (%)

Positive 605 45.97

Negative 609 46.28
Missing 102 7.75

as the simple sums of the respective return on assets and solvency of the two
firms.
The three control variables mentioned above were used when the depen-
dent variable was total return. Relative size, relative return on assets, and
relative solvency were used, respectively, when the dependent variable was
relative return. Relative size was calculated as the ratio of the smaller firm’s
size to the larger firm’s size. Relative performance was calculated as the ratio of
the exponential of the smaller value of return on assets (or solvency) between
the two firms to the exponential of the bigger value of return on assets (or
solvency) (Gulati and Gargiulo 1999). Data from input–output tables were
used to capture the possible effect of such a resource dependence on the value
creation of the JVs. The sum was used to compute total dependence and
the ratio to compute relative dependence. The first digit of the SIC code of
each firm in a JV was also used as an additional control variable because the
value creation and appropriation across different economic sectors could vary
(Madhavan and Prescott 1995).
Finally, to capture any unobservable time effect, dummy variables were
created for each year from 1987 to 1996 to control for the time effect in all
regression analyses. Some firms were also involved in more JV activities than
others. Firms involved in more than one JV create interdependence across
these cases. Although the event-study methodology controls for the firm-
specific characteristics in the calculation of firm abnormal returns, and thus
partially takes care of this problem, dummy variables for the top fifteen firms
with the most JV activities were also included as control variables.1

RESULTS
Table 7.1 presents the distribution of positive and negative cumulative stock
market reactions for all participating firms (658 pairs and 1,316 firm cases). In
45.97 percent of the cases, the abnormal returns are positive, in 46.28 percent

¹ Results for these control variables are not reported here.

 PERFORMANCE OF FIRMS 167

Table 7.2. Descriptive statistics of the major variables

Variable n Mean SD Min Max

1. Total value creation 570 0.001 0.043 −0.240 0.282

2. Relative value appropriation 570 0.012 0.013 0 0.126
3. The degree of relational embeddedness 658 0.716 1.696 0 15
(number of direct ties)
4. The degree of structural embeddedness 658 1.125 2.295 0 13
(number of indirect ties)
5. Asymmetry of business relatedness of two firms 658 0.351 0.478 0 1
with the JV
6. Business relatedness of two firms 658 0.347 0.476 0 1
7. Log (total size) 630 10.450 0.805 8.395 11.982
8. Total return on assets 630 0.084 0.098 −0.432 0.411
9. Total solvency 504 1.147 1.019 0.006 5.836
10. Total dependence of two firms 658 0.108 0.164 0 0.748
11. Relative size 630 0.410 0.275 0.010 1
12. Relative return on assets 630 0.942 0.058 0.552 1
13. Relative solvency 504 0.388 0.302 0 1
14. Relative dependence of two firms 658 0.374 0.430 0 1

of the cases, they are negative (the data for the remaining 7.75 percent of the
cases are missing).
Tables 7.2 and 7.3 provide descriptive statistics and the correlation matrix
among variables. The correlation matrix indicates that total value creation
is highly correlated with all major independent variables (degree of rela-
tional embeddedness, degree of structural embeddedness, and asymmetry
of business relatedness of two firms with the JV). Relative value appropria-
tion, however, is highly correlated only with degree of relational embedded-
ness. In addition, degree of relational embeddedness and degree of structural
embeddedness are highly correlated (r = .582). We do not include the two
variables simultaneously in any model, so this correlation does not pose a
problem.
Tables 7.4 and 7.5 present the results of the regression models using total
value creation and relative value appropriation as the dependent variable,
respectively. Models 1–8 use total value creation as the dependent variable.
Model 1 is the baseline model, including only control variables. Model 2
introduces the degree of relational embeddedness between two firms into the
regression equation to test hypothesis 1a. The result indicates that there is a
positive relationship between the degree of relational embeddedness between
two firms and total value creation. Hypothesis 1a is supported. The total value
creation from announcing a new JV is .342 percent more with an additional
prior direct tie between two firms. For example, for two firms with total
current value of $4 billion dollars, the benefits from having an additional
direct tie is $13.68 million. Model 3 tests hypothesis 1b, which predicts that the
degree of relational embeddedness (indicated by the number of prior direct
 168 NETWORK RESOURCES AND FIRM PERFORMANCE
Table 7.3. Correlation matrix of the major variables (n = 436)

Variable (1) (2) (3) (4) (5) (6) (7) (8) (9) (10) (11) (12) (13) (14)

(1) Total value creation 1.00 — — — — — — — — — — — — —

(2) Relative value 0.190∗ 1.00 — — — — — — — — — — — —
appropriation
(3) The degree of 0.116∗ 0.104∗ 1.00 — — — — — — — — — — —
relational
embeddedness
(4) The degree of 0.107∗ 0.065 0.582∗ 1.00 — — — — — — — — — —
structural
embeddedness
(5) Asymmetry of −0.144∗ 0.012 −0.053 −0.112∗ 1.00 — — — — — — — — —
business
relatedness of two
firms with the JV
(6) Business 0.057 −0.018 0.120∗ 0.111∗ −0.536∗ 1.00 — — — — — — — —
relatedness of two
firms
(7) Log (total size) 0.070 0.026 0.274∗ 0.330∗ −0.073 −0.066 1.00 — — — — — — —
(8) Total ROA −0.088∗ −0.086∗ −0.101∗ −0.158∗ 0.101 −0.097∗ −0.139∗ 1.00 — — — — — —
(9) Total solvency −0.034 −0.020 −0.221∗ −0.332∗ −0.006 −0.030 −0.104∗ −0.188∗ 1.00 — — — — —
(10) Total 0.061 0.052 0.189∗ 0.232∗ −0.351∗ 0.727∗ 0.026 −0.170∗ 0.009 1.00 — — — —
interdependence
(11) Relative size −0.038 −0.120∗ −0.161∗ −0.142∗ −0.015 −0.005 −0.423∗ 0.077 0.126∗ −0.069 1.00 — —
(12) Relative ROA −0.011 −0.093∗ −0.159∗ −0.160∗ −0.004 0.005 0.096 0.302∗ 0.131∗ −0.054 0.033 1.00 — —
(13) Relative solvency −0.047 −0.093 −0.130∗ −0.125∗ −0.083 0.038 −0.002 −0.051 0.032 −0.043 0.110∗ 0.251∗ 1.00 —
(14) Relative 0.035 −0.009 0.108∗ 0.135∗ −0.362∗ 0.647∗ −0.028 −0.138∗ 0.120∗ 0.731 −0.004 −0.009 0.037 1.00
interdependence

∗
p < .05.
Table 7.4. Regression analysis using total value creation (%) as the dependent variable

Variable Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7 Model 8

The degree of relational — 0.342∗∗ (0.151) 0.515∗ (0.282) — — — 0.376∗∗ (0.151) —

embeddedness (number
of direct ties)
The degree of relational — — −0.019 (0.026) — — — — —
embeddedness (number
of direct ties) squared
The degree of structural — — — 0.183 (0.228) 0.220 (0.480) — — 0.169 (0.227)
embeddedness (number
of indirect ties)
The degree of structural — — — — −0.005 (0.063) — — —
embeddedness (number
of indirect ties) squared
Asymmetry of business — — — — — −1.128∗∗ (0.556) −1.267∗∗ (0.555) −1.411∗∗ (0.618)
relatedness of two firms
with the JV

PERFORMANCE OF FIRMS 169

Business relatedness of 0.573 (0.666) 0.415 (0.666) 0.388 (0.668) 0.409 (0.728) 0.411 (0.730) −0.102 (0.742) −0.357 (0.744) −0.431 (0.811)
two firms
Log (total size) −0.075 (0.470) −0.059 (0.467) −0.058 (0.467) 0.054 (0.502) 0.050 (0.505) −0.070 (0.468) −0.052 (0.465) 0.065 (0.498)
Total return on assets −2.732 (2.700) −1.890 (2.712) −1.743 (2.721) 1.199 (3.252) 1.164 (3.283) −2.674 (2.689) −1.739 (2.698) 1.272 (3.227)
Total solvency −0.393 (0.268) −0.325 (0.268) −0.316 (0.268) −0.484∗ (0.288) −0.482∗ (0.289) −0.387 (0.267) −0.311 (0.267) −0.471 (0.286)
Total dependence 1.933 (1.944) 1.935 (1.935) 2.064 (1.944) 3.232 (2.106) 3.227 (2.110) 2.300 (1.945) 2.348 (1.933) 3.553∗ (2.094)
(continued)
 170 NETWORK RESOURCES AND FIRM PERFORMANCE
Table 7.4. (cont.)

Variable Model 1 Model 2 Model 3 Model 4 Model 5 Model 6 Model 7 Model 8

Period 88 1.294 (1.282) 1.169 (1.277) 1.133 (1.279) 2.190 (1.365) 2.194 (1.368) 1.274 (1.277) 1.135 (1.271) 2.135 (1.355)
Period 89 1.627 (1.336) 1.525 (1.330) 1.505 (1.331) 1.739 (1.413) 1.737 (1.415) 1.486 (1.333) 1.357 (1.326) 1.708 (1.402)
Period 90 2.693∗∗ (1.201) 2.571∗∗ (1.196) 2.548∗∗ (1.197) 2.895∗∗ (1.230) 2.895∗∗(1.232) 2.607∗∗ (1.197) 2.463∗∗ (1.191) 2.763∗∗ (1.221)
Period 91 −0.615 (1.114) −0.684 (1.109) −0.718 (1.110) −1.002 (1.143) −1.007 (1.147) −0.722 (1.111) −0.811 (1.104) −1.154 (1.136)
Period 92 1.280 (1.096) 1.190 (1.091) 1.144 (1.094) 0.962 (1.176) 0.956 (1.180) 1.102 (1.095) 0.981 (1.089) 0.754 (1.170)
Period 93 1.368 (1.154) 1.166 (1.152) 1.083 (1.158) 1.199 (1.308) 1.192 (1.313) 1.191 (1.153) 0.946 (1.150) 0.902 (1.304)
Period 94 1.350 (1.092) 1.024 (1.096) 0.974 (1.099) 1.391 (1.153) 1.384 (1.158) 1.082 (1.096) 0.691 (1.100) 0.957 (1.160)
Period 95 1.313 (1.176) 0.934 (1.182) 0.878 (1.185) 0.900 (1.293) 0.890 (1.301) 1.179 (1.173) 0.745 (1.178) 0.848 (1.284)
Period 96 1.986 (1.357) 1.385 (1.376) 1.376 (1.377) 2.582∗ (1.527) 2.574∗ (1.533) 1.723 (1.358) 1.029 (1.377) 2.215 (1.523)
Industry sector of firm 1 −0.034 (0.283) −0.030 (0.282) −0.027 (0.282) −0.224 (0.299) −0.226 (0.300) 0.019 (0.283) 0.029 (0.281) −0.155 (0.298)
Industry sector of firm 2 0.081 (0.288) 0.097 (0.287) 0.092 (0.287) 0.275 (0.294) 0.276 (0.295) 0.052 (0.287) 0.066 (0.285) 0.225 (0.293)
Constants −0.169 (4.901) −0.296 (4.876) 1.322 (4.879) −1.454 (5.274) −1.410 (5.309) 0.454 (4.891) 0.392 (4.860) −0.670 (5.245)
Number of cases 436 436 436 300 300 436 436 300
R2 0.101 0.112 0.113 0.194 0.195 0.110 0.124 0.210
Adjusted R 2 0.032 0.042 0.041 0.098 0.095 0.039 0.052 0.112

Notes: Fifteen dummy variables representing fifteen firms that participated in the most JVs are also entered as control variables for all models in Tables 7.4 and 7.5. For simplicity, the results are
not shown in the tables. These firms are: Apple Computer, AT&T, Bell Atlantic, B. F. Goodrich, Digital Equipment, Dow Chemical, Du Pont, Eastman Kodak, General Electric, General Motors, HP,
IBM, Intel, Motorola, and Sun Microsystems.
∗
p < .10; ∗∗ p < .05.
Table 7.5. Regression analyses using relative value appropriation (%) as the dependent variable

Variable Model 9 Model 10 Model 11 Model 12 Model 13 Model 14

The degree of relational embeddedness — 0.062 (0.043) — — 0.063 (0.044) —

(number of direct ties)
The degree of structural embeddedness — — −0.0004 (0.073) — — −0.0004 (0.073)
(number of indirect ties)
Asymmetry of business relatedness of — — — 0.015 (0.160) −0.007 (0.161) 0.006 (0.193)
two firms with the JV
Business relatedness of two firms −0.043 (0.174) 0.006 (0.176) 0.051 (0.206) 0.051 (0.194) 0.002 (0.196) 0.055 (0.233)
Relative size −0.366 (0.256) −0.373 (0.255) −0.313 (0.320) −0.366 (0.256) −0.373 (0.256) −0.312 (0.321)
Relative return on assets −3.012∗∗ (1.261) −2.831∗∗ (1.265) −2.248 (1.523) −3.011∗∗ (1.262) −2.831∗∗ (1.267) −2.248 (1.526)
Relative solvency −0.033 (0.227) −0.035 (0.226) −0.115 (0.282) −0.032 (0.228) −0.036 (0.227) −0.114 (0.284)
Relative dependence −0.072 (0.192) −0.064 (0.192) −0.105 (0.229) −0.073 (0.192) −0.064 (0.192) −0.105 (0.230)
Period 88 −0.260 (0.362) −0.268 (0.362) −0.260 (0.419) −0.259 (0.363) −0.268 (0.362) −0.260 (0.420)
Period 89 −0.711∗ (0.373) −0.711∗ (0.372) −0.551∗ (0.431) −0.709∗ (0.374) −0.712∗ (0.373) −0.550 (0.432)
Period 90 0.549 (0.339) 0.539 (0.338) 0.701 (0.376) 0.550 (0.339) 0.538 (0.339) 0.702∗ (0.378)
Period 91 −0.021 (0.312) −0.022 (0.311) −0.027 (0.349) −0.020 (0.312) −0.022 (0.312) −0.027 (0.350)
Period 92 −0.078 (0.314) −0.088 (0.314) −0.138 (0.364) −0.076 (0.316) −0.089 (0.315) −0.137 (0.365)
Period 93 −0.317 (0.333) −0.348 (0.334) −0.310 (0.407) −0.315 (0.335) −0.349 (0.335) −0.309 (0.410)
Period 94 −0.406 (0.312) −0.459 (0.314) −0.388 (0.357) −0.402 (0.315) −0.461 (0.317) −0.386 (0.362)

PERFORMANCE OF FIRMS 171

Period 95 −0.214 (0.331) −0.272 (0.333) −0.482 (0.395) −0.212 (0.332) −0.272 (0.334) −0.482 (0.396)
Period 96 −0.598 (0.372) −0.692∗ (0.377) −0.464 (0.455) −0.595 (0.374) −0.674∗ (0.380) −0.462 (0.459)
Industry sector of firm 1 0.075 (0.078) 0.076 (0.077) 0.064 (0.088) 0.075 (0.078) 0.076 (0.078) 0.064 (0.089)
Industry sector of firm 2 0.037 (0.079) 0.043 (0.079) 0.074 (0.088) 0.037 (0.079) 0.043 (0.079) 0.075 (0.088)
Constants 4.014∗∗∗ (1.260) 3.867∗∗∗ (1.263) 3.236∗∗ (1.516) 4.003∗∗∗ (1.267) 3.872 (1.268) 3.231∗∗ (1.524)
Number of cases 436 436 300 436 436 300
R2 0.141 0.146 0.167 0.141 0.146 0.167
Adjusted R 2 0.078 0.080 0.070 0.075 0.078 0.067

∗
p < .10; ∗∗ p < .05; ∗∗∗ p < .01.
172 NETWORK RESOURCES AND FIRM PERFORMANCE

ties) between two firms has an inverted-U-shaped relationship with total value
creation. The coefficient of the square term of the number of direct ties is not
significant. Hypothesis 1b is not supported.
Models 4 and 5 examine the relationship between degree of structural
embeddedness (indicated by the number of indirect ties between two firms)
and total value creation. Because the effect of structural embeddedness could
be confounded with the effect of relational embeddedness, we evaluate the
effect of structural embeddedness only in the absence of relational embed-
dedness between the firms. Model 4 examines the linear relationship between
degree of structural embeddedness and total value creation (hypothesis 2a).
The result shows no linear relationship between these variables. Model 5
tests hypothesis 2b, which predicts a curvilinear relationship between degree
of structural embeddedness between two firms and total value creation.
The coefficient for this variable is also not significant. Hypothesis 2b is not
supported.
Models 6–8 test hypothesis 5, which predicts a negative relationship
between asymmetry of business relatedness of two firms and total value cre-
ation. Model 6 introduces only asymmetry of business relatedness of two firms
with the JV in addition to the control variables. The result suggests that the
asymmetry of business relatedness of two firms with the JV significantly dis-
counts the investors’ expectations of the total value created by a new JV, which
supports hypothesis 5. If one firm is related to the JV operation while the other
firm is not, the total value creation will be 1.128 percent lower than if neither
or both firms are related to the JV operation. The result holds even when we
include embeddedness variables in the equations (models 7 and 8). To further
test the hypothesis, we divided all cases into three groups: (a) both partners’
primary businesses are related to JV activities (b) both partners’ primary
businesses are not related to JV activities (c ) one partner’s primary business is
related to JV activities while the other partner’s primary business is not (in this
case, asymmetry exists). We found that the total value creation amounts of the
first two groups (symmetric case) are not significantly different, but they are
significantly different from that of the third group, where the asymmetry of
business relatedness between two firms and the JV exists (results not reported
here).
Models 9–14 test the hypotheses using relative value appropriation as the
dependent variable. Model 9 is the baseline model, with only control variables
in the equation. The result indicates that the relative return on assets of
the two firms has a negative relationship with relative value appropriation,
indicating that JVs formed by partners with similar returns on assets are more
likely to have similar abnormal returns. Model 10 introduces the degree of
relational embeddedness (the number of direct ties) between two firms into
the regression equation to test hypothesis 3, which predicts that as the degree
 PERFORMANCE OF FIRMS 173

of relational embeddedness increases, the value to each partner becomes more

symmetric. The result is not significant, and hypothesis 3 is not supported.
Model 11 tests the effect of structural embeddedness in the absence of rela-
tional embeddedness (hypothesis 4). This hypothesis predicts that the more
structurally embedded the two firms are, the more likely they will have a
symmetric value appropriation. The nonsignificant result does not support
this hypothesis.
Models 12–14 test hypothesis 6, which predicts a positive relationship
between asymmetry of business relatedness of two firms with the JV and
relative value appropriation (i.e. asymmetry of business relatedness of two
firms with the JV promotes unequal sharing of the pie). Model 12 adds
asymmetry of business relatedness of two firms with the JV into the equation
in addition to control variables. The result shows that asymmetry of busi-
ness relatedness of two firms with the JV has no relationship with relative
value appropriation. The results do not change as embeddedness variables are
added into the equation (Models 13 and 14). Therefore, hypothesis 6 is not
supported.

Conclusion
This chapter seeks to determine whether firms benefit from entering strategic
alliances and whether those benefits are contingent on the existing network
resources available to them at the time of entry. In answering this question, we
have examined the effects of both network resources and business relatedness
asymmetry on the total value created and the relative value appropriated by
partners in a JV. Examining the influence of network resources on the stock
market returns for JV-announcing firms and examining the antecedents of
both total value creation and relative value appropriation has shown that
both network resources resulting from the embeddedness of partners and the
asymmetry of business relatedness of two firms with the JV affect the total
value creation of all partners but not the relative value appropriation between
partners.
This study used an event-study methodology to examine the conditions
under which a new JV is expected to create value for the shareholders of all
partners of a JV and how the value created is appropriated by each part-
ner. The study of the dynamics underlying dyadic-level value creation and
appropriation in JVs is important because any JV involves at least two firms
(Zajac and Olsen 1993). This study also extends prior research by considering
the importance of network resources in influencing the dynamics of value
174 NETWORK RESOURCES AND FIRM PERFORMANCE

creation and appropriation in JVs. The results show that the magnitude of
total value created in a JV is influenced by the extent to which the two
partners are embedded in prior alliance networks and that the degree of
network embeddedness between two parent firms creates network resources
that have a positive effect on total value creation from their new alliances.
The study also shows that the asymmetry of business relatedness of two firms
with the JV negatively affects the total value creation of the JV. Relative value
appropriation, however, was found to remain uninfluenced by either network
embeddedness or the asymmetry of business relatedness of two firms with
the JV.
An important finding of this study is that the degree of relational embed-
dedness and the network resources originating from ties between two firms
have a positive relationship with the total value creation associated with a
new JV. The results also indicate that there is no limit to the benefits a firm
can extract from a relationship with another firm with whom it has a rich
history of direct JV relationships. Investors expect that the more relationally
embedded two firms are, the more likely that the new JV is going to create
value. This finding is at odds with the arguments and the empirical evidence
that the benefits of relational embeddedness may reach a limit beyond which
an increase in relational embeddedness may not provide additional benefits
for JV partners or may even become a liability, preventing firms from pursuing
new opportunities, as hypothesis 1b suggested. It is possible that the sample
is not large enough and the time horizon not long enough for the degree of
the relational embeddedness between firms to reach the point of diminishing
returns. Future research with a larger sample size and a longer time horizon
could further test this hypothesis.
The study failed to find support for hypotheses 2a and 2b, two competing
hypotheses on the relationship between the degree of structural embedded-
ness two firms share and total value creation. Unlike many prior studies
showing the significant information and control roles provided by structural
embeddedness and the network resources they generate in the formation of an
alliance between firms or in the innovative capabilities of firms (Ahuja 2000a),
this one suggests that investors do not look beyond relational embeddedness
to search for cues about whether a JV will create more value for the parent
firms.
Underlying both relational embeddedness and structural embeddedness is
the creation of network resources that aid firms with information (learning)
and reputation (control) effects on total value creation. The strengths of
these effects, however, are likely to be different for relational and structural
embeddedness. In terms of information effects, although both relational and
structural embeddedness offer information about partners’ characteristics,
partners may value information resulting from relational embeddedness more
 PERFORMANCE OF FIRMS 175

than that from structural embeddedness. This is because the former is from
direct past interactions while the latter is based on third-party interactions.
Therefore, the former is likely to be considered more reliable, richer, and finer-
grained than the latter. In terms of reputation and control effects, the effect of
structural embeddedness may be more profound than the effect of relational
embeddedness. Reputation effects arising from the structural embeddedness
between partners spread to wider circles of partners and thus affect the repu-
tation of partners in a broader network. Conversely, the effect of relational
embeddedness is strongest between partners: thus if reputation is lost, the
damage does not extend nearly as far. Our study suggests that investors do not
look beyond the effects of relational embeddedness on total value creation. It
is quite possible that this finding comes from the fact that indirect ties are not
salient enough for investors to attend to signals resulting from them. It is also
possible that investors believe that information carried through prior indirect
ties may not be reliable and thus discount it.
Contrary to our expectations, the study did not produce any evidence that
embeddedness and concomitant network resources play a role in influencing
the extent of relative value appropriation between two partners. One pos-
sible explanation for the nonsignificant results is that the findings do not
demonstrate whether the differences in value extraction by firms in a JV result
from the anticipated relative contributions by the partners. Future research
should investigate this issue with richer data on projected contributions by
each partner.
However, the study did demonstrate that material resources shape alliance
outcomes. In particular, we found that the asymmetry of business related-
ness of the two firms is detrimental to total value creation in the JV. The
extent of total value created does not differ between those JVs in which both
partners are related to the new JV and those in which neither partner is
related to the new JV. The asymmetry of business relatedness (one partner
is related to the JV but the other partner is not) reduces the total value
creation, and it is possible that the asymmetry of knowledge transfer benefits
between the two partners may lead to shifts in the bargaining power in a JV,
which may discourage knowledge-sharing between partners and thus reduce
the joint value creation of the two partners from the JV (Inkpen 1998; Chi
2000).
Still, while the asymmetry of business relatedness of two firms in a JV
plays an important role in total value creation of a JV, it does not affect how
much of this value is appropriated by each partner. This is contrary to the
expectation that differences in potential learning opportunities and in the
absorptive capacity of the partners would cause investors to expect that the
returns to each partner would vary. One reason for this outcome may be that
investors expect the independent legal status of the JV to provide a buffer
176 NETWORK RESOURCES AND FIRM PERFORMANCE

that prevents either partner from gaining a differential advantage over the
other.

IMPLICATIONS FOR BROADER RESEARCH ON NETWORK

AND STRATEGIC ALLIANCES
The findings in this chapter have important implications for broader research
on network embeddedness and strategic alliances. Network researchers have
long elaborated on how cohesion and bridging mechanisms play different
roles for a variety of individual and organizational outcomes, such as job
search, manager promotions, and alliance formation (Granovetter 1974; Burt
1992; Gulati 1995b). Extending these ideas to the arena of value creation
in JVs shows that a cohesive relationship between partners resulting from
a large number of prior direct JV ties creates network resources that assure
investors that the new JV will create more value for partners. Investors
seem to value new JVs between two firms with no prior connections less
than those involving firms with previous ties. Research on exploration and
exploitation indicates that firms try to balance the exploitation of current
opportunities and the exploration of new ones (March 1991; Koza and Lewin
1998). This study suggests that firms may value the exploitation of safety
benefits resulting from the relational embeddedness between partners more
than the exploration of new opportunities in joint venture formation. Nev-
ertheless, firms may value exploration of new opportunities over exploita-
tion of existing ones in other contexts (Rowley, Behrens, and Krackhardt
2000).
More importantly, this study shows the value of recognizing interorgan-
izational networks and the resources they create in alliance research. In trying
to determine why firms differ in their conduct and profitability, researchers
have typically chosen to view firms as autonomous entities striving for com-
petitive advantage from either external industry sources (e.g. Porter 1980) or
internal resources and capabilities (e.g. Barney 1991). However, the image
of atomistic actors competing for profits against each other in an imper-
sonal marketplace is increasingly inadequate in a world in which firms are
embedded in networks of social, professional, and exchange relationships with
other organizational actors (Granovetter 1985; Gulati 1998; Galaskiewicz and
Zaheer 1999). Consequently, the conduct and performance of firms can be
more fully understood by examining the network of relationships in which
they are embedded and the network resources that they may accumulate as a
result. Adopting a relational, rather than an atomistic, approach deepens our
understanding of the sources of differences in firm conduct and profitability
by highlighting how strategic networks create resources that provide a firm
 PERFORMANCE OF FIRMS 177

with access to information, resources, markets, and technologies. Conversely,

a network approach should also account for the drawbacks of interorganiza-
tional networks by showing how networks may lock firms into unproductive
relationships or preclude their entering other viable partnerships. In other
words, firms do not always accumulate network resources monotonically, with
an increasing number of ties. Such varying effects should be the subject of
further inquiry.
8 The multifaceted
nature of network
resources
This chapter looks at how successful firms differ from less successful ones with
regard to the architecture of their intra- and interorganizational relationships.
An important component of this difference is that successful firms focus on
developing and elevating an array of relationships with key stakeholders that
in turn becomes a vehicle for them to accumulate network resources. This
chapter defines network resources more broadly to encompass not just a firm’s
ties with its alliance partners but also those with its customers and suppliers
and those that exist between its internal subunits. It further considers how
the quality of ties with each of these key stakeholders may evolve and become
richer in content that in turn will provide those firms with access to greater
network resources.1 This chapter shows that winning companies define rela-
tionships in a very consistent, specific, and multifaceted manner. They focus
extraordinary enterprisewide energy on moving beyond a transactional mind-
set as they develop trust-based, mutually beneficial, and enduring relation-
ships with key constituencies both inside and outside of their organizational
walls.
Ironically, as top performers expand their scope of activities by reaching out
to external partners and, in effect, rendering their borders more porous, they
are simultaneously contracting their organizational centers and outsourcing
increasing portions of their internal functions. They are shrinking their core
by increasing focus on fewer activities while outsourcing the remainder to
strategic partners. The firms in our study anticipated more benefits from
outsourcing in the future than garnered in the past in a range of areas

This chapter is adapted from ‘Shrinking Core, Expanding Periphery: The Relational Architecture of
High Performing Organizations’ by Ranjay Gulati and David Kletter published in California Manage-
ment Review ©2005, (47/3): 77–104, by The Regents of the University of California. By permission of
The Regents.
¹ In the original article, network resources were referred to as ‘relational capital’. For our purposes,
these two terms are synonymous and I have retained the term ‘network resources’ to be consistent with
the main thrust of this book. It is worth noting, however, that while the focus of many of the previous
chapters has been primarily on the benefits that accrue to firms through their alliances—and in a few
chapters other ties like board interlocks—our usage of the term network resources is broader in this
chapter and encompasses connections with suppliers and customers and between internal business
units.
 MULTIFACETED NATURE OF RESOURCES 179

including human resources, finance, manufacturing, logistics, customer ser-

vice, research and development, sales, and information technology.
At the same time that they are shrinking their cores, top-performing firms
are expanding their horizons by trying to provide customers with greater sets
of products and services, many of which may come through partnerships with
other firms and are bundled together into what are loosely called customer
solutions. This ‘shrinking core, expanding periphery’ phenomenon is evident
across an array of industries and is one of the hallmarks of a new operating
model in which multifaceted network resources come to play an important
role for those organizations. The relational architecture that such firms create
provides them with a pathway to profitable growth by allowing them to simul-
taneously focus on their top and bottom lines. They manage their costs by
shrinking the core and enhance revenue streams by expanding their periphery.
This is more challenging to execute than it sounds, and therein lies one of the
ultimate differentiators of successful firms.
Take Starbucks, for example. The company has long understood the
importance of relationship building, not only with its customers but also
with its suppliers, alliance partners, and internal business units. Indeed, the
‘Starbucks experience’ is predicated on the creation of enduring, multifaceted
relationships. While brewed from high-end Arabica beans, Starbucks coffee
is ultimately a high-priced commodity in a reasonably competitive space. To
retain its market leadership, the company needs a tie that binds consumers
to its brand on a very personal level, and that tie is not just the coffee
but also the relationship the local Starbucks barista enjoys with his or her
daily customers. Starbucks focuses the bulk of its energies on solidifying that
relationship. It creates a comfortable coffeehouse environment in which a
‘My Starbucks’ relationship can easily develop. It staffs its stores with well-
trained, highly motivated baristas who enjoy one of the best compensation
and benefits packages in the retail industry. Its line organization is closely
aligned with internal staff units that support it. It searches the world for the
highest quality coffee beans and pays a more-than-fair price to the subsistence
farmers who produce it. It allies with or acquires partners who can supplement
its brand experience with music or ice cream or a flight to Chicago. In short,
it develops a multidimensional relationship with its customers, which in turn
rests on the multiple relationships it cultivates as a company with and between
its internal subunits, suppliers, and alliance partners (Gulati, Huffman, and
Neilson 2002).
To explore the ways in which relationship-centered organizations are devel-
oping in today’s business world, and to discover the lessons that we can learn
from these developments, we conducted a survey of Fortune 1000 companies.
One hundred twelve CEOs and other senior executives from Fortune 1000
companies across a range of industries responded to a questionnaire compris-
ing 115 questions on the organizational challenges and imperatives companies
180 NETWORK RESOURCES AND FIRM PERFORMANCE

perceived in their markets. Of these firms, one hundred that were on the
Fortune 1000 list in both 2000 and 2002 were retained for the remainder of
the analyses reported in this chapter. We then stratified the performance of
Fortune 1000 firms into quartiles based on their total returns to shareholders
for the five years from 1995 to 2000 and 1997 to 2002 in order to isolate those
attributes that differentiated top quartile respondents from the others, as well
as to control for the market bubble in the late 1990s. The calculation of total
shareholder return included both share price appreciation and dividend yield
of the relevant stock. Needless to say, the gap in the valuations assigned top-
and fourth-quartile respondents in 2000 is dramatic, with a less dramatic gap
in 2002, driven by the overall market decline. The goal of our analysis is to
elucidate the attributes of the firms that were sustained performers—that is,
in the top quartile in both 2000 and 2002.
In addition to sending out the survey, we conducted a number of interviews
with top-quartile firm leaders who were willing to discuss their responses in
more detail. We also conducted a workshop on best practices in which we
invited all participating firms to send a representative.

Leveraging network resources

As companies refocus around their core businesses and build a simultaneously
expanding and shrinking firm, they have become increasingly reliant on their
network resources based on ties to four sets of critical stakeholders that span
both vertical and horizontal axes: customers, suppliers, alliance partners, and
intraorganizational business units. Such resources are not only dependent
upon the existence of ties to and between each of these constituents but also
on the quality of those ties (see Chapter 4 for a discussion on the importance
of tie content). As firms involve customers in product/solution development,
share more and more information with vendors, and build wider and longer
bridges with existing alliance partners (sometimes forging new ones), they
are also developing more collaborative relationships among organizational
subunits, at every level. Indeed, the relationship ‘wave’ sweeping successful
companies exhibits the classic ripple effect visually depicted in Figure 8.1 as
a move outward from the center on one or more of the four dimensions. On
each of these relationship dimensions, successful firms work their way up a
ladder in which they intensify their collaborative efforts with that particu-
lar constituent. Together these four dimensions and the quality of ties they
encompass constitute the different types of network resources that a firm may
come to possess.
Along each of these four dimensions, the relationship progresses from
transactions at one end to collaboration until, in an ideal world, a company
 MULTIFACETED NATURE OF RESOURCES 181

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Figure 8.1. The multifaceted nature of the relationship-centered organization

and its key stakeholders all have a vested interest in the continued health and
productivity of their relationship. What may start as an arrangement entailing
minimal coordination and cooperation quickly expands into one of synchron-
ous coordination and active cooperation. Suppliers are strategic partners,
internal subunits are mutually aligned collaborators, alliance partners are
part of a mutually reinforcing constellation of business relationships, and
satisfied customers are collaborators on solutions. Thus, network resources
are a function not only of the number of ties a firm may have on each of these
dimensions but also of the quality of those ties.
A network-resource-rich organization with the relational architecture
depicted in Figure 8.1 is a networked, agile, and highly adaptive entity that
transcends traditional boundaries as it develops deep and collaborative rela-
tionships with internal subunits, customers, suppliers, and alliance partners.
Such organizations appreciate that their competitiveness in today’s market-
place and their achievement of profitable growth hinge on their ability to
182 NETWORK RESOURCES AND FIRM PERFORMANCE

leverage their network resources by extracting full value from various

partners—both internal and external, spanning vertical and horizontal
boundaries—and they are creative and consistent in this endeavor. This chap-
ter examines the four facets of network resources represented in Figure 8.1—
customers, suppliers, alliance partners, and internal units—in greater detail.

FIRST DIMENSION OF NETWORK RESOURCES: CUSTOMERS

While customers have long been hailed by bumper sticker slogans and cor-
porate values statements as the ‘boss’, their central role in sustaining the
economic fortunes of the modern enterprise is being freshly acknowledged.
No longer is the customer merely the someone who buys your product or
service. Rather he or she is the someone whose problem your organization
exists to solve (Day 1999; Hammer 2001; Kumar 2003).
And customers’ expectations are on the rise. While 59 percent of our survey
respondents found meeting customer expectations to be a significant chal-
lenge in the past, 84 percent now consider it to be a significant challenge in
moving forward. Sixty-eight percent of the companies we surveyed project
that it will be increasingly difficult to access new customers, and 52 percent
believe it will be difficult to access new geographical markets. Underlying this
drive to cement high-value customer connections is the recognition that while
retaining customers remains far easier than acquiring them, ultimately both
are important. In our survey, network-resource-rich organizations joined
their poorly performing peers in acknowledging the difficulties associated
with attracting new customers and entering new markets in the current busi-
ness environment. An important element underlying the challenges of serving
customers profitably is the growing pressures of commoditization, one result
of which is increased competition on price. Through the confluence of an
array of factors ranging from growing international competition and matur-
ing technologies to open standards and reduced willingness of customers
to pay for premium products, many industries face emerging pressures of
commoditization. These can be particularly deadly in technology-intensive
industries where firms must generate enough of a surplus to invest in inno-
vation and development (Gulati et al. 2004).
What distinguishes successful organizations is their reaction to these
mounting challenges and expectations and their focus on developing network
resources through close ties with their customers to address these issues.
More than two-thirds of the top-quartile firms we surveyed devote primary
strategic focus to meeting customer expectations and building long-term
customer relationships, a much higher percentage than the bottom-quartile
companies, which tend to be far more focused on cutting costs and shedding
 MULTIFACETED NATURE OF RESOURCES 183

underperforming assets. Relationship development, as one might expect, thus

takes a back seat when the question of corporate survival arises.
Not only do successful firms develop a greater number of customer relation-
ships, but they also invest heavily in increasing the quality of those ties. Hence,
at the same time that winning companies are building new relationships,
they are also strengthening the ones they have already formed by climbing
a ladder of increasing mutual responsibility and commitment within these
customer relationships. This becomes particularly important for those firms
seeking ways to differentiate themselves by extending their products/services
into a broader array of customer solutions. As companies ascend these ladders
together with customers, each party shares more of the burden of sustained
collaboration and realizes more of the mutual benefit (see Figure 8.2).
On the lowest rung of the customer relationship ladder, no significant
relationship exists between buyer and seller, as products are only commodities,
bought and sold transactionally, and are not differentiated from each other in
the marketplace. In order to move one rung up from this state, companies
must strengthen the relationship between their customers and their products.
This is achieved by forming a set of expectations about a product in the
customer’s mind and creating a brand that represents the company’s implicit
promise to deliver against those expectations in the future. The relationship
here is between the customer and the product, not between the customer and
the seller; the relationship would thus be expected to move with the product if,
for example, the brand were sold to another company. On the third tier of the
ladder, the two parties invest in one another’s success by creating a ‘switching
cost’, which creates a bond of loyalty between them. This could take many
forms, including physical (e.g. colocation or establishing facilities in close
proximity), intellectual (e.g. sharing and/or licensing intellectual property),
personnel-based (e.g. dedicating staff to work the interface across the com-
panies), and monetary (e.g. use of ‘gainsharing’ or other financial rewards for
mutual success). At the highest rung of the ladder, the customer–seller rela-
tionship is strongest, transcending and redefining the traditional boundaries
of the two companies. Here the seller takes ownership for success of a portion
of the customer’s business, offering a solution to a problem that the customer
faces, and receives compensation not based on the volume of products or
services but on a successful outcome from the buyer’s standpoint. Of course, a
given company may operate at multiple points on the ladder simultaneously.
Many leading companies have effectively segmented their customer base and
created offerings tailored to different customer segments, with differing depths
of relationships.
Our survey and field interviews supported our contention that top-quartile
companies are ahead of their peers in moving their relationships with cus-
tomers up this ladder. But how are they accomplishing it? Survey responses
and follow-up interviews revealed that winning companies are more engaged
 184 NETWORK RESOURCES AND FIRM PERFORMANCE
Solutions: Finally, at the top of the ladder, the seller takes
ownership for solving a customer’s problem by creating Ownership
offerings with a higher value proposition

Loyalty: On the next rung, a customer and seller have invested

mutually in a relationship, creating a bond of loyalty between the Investment
parties that transcends individual product or service offerings

Branded offering: Up one rung, a customer is purchasing

based on a known relationship with a product or service, Enhancement
but not based on a relationship with the seller
Commodities: On the lowest rung, a customer spot buys
undifferentiated products and services based entirely on Transaction
price and terms

Figure 8.2. Customer relationship ladder

 MULTIFACETED NATURE OF RESOURCES 185

Increased information sharing

93%
with customers

Increased linkages to customers

92%
via computer networks

Increased focus on selling

78%
value-added solutions
Increased customer
participation in the development 73%
of products/services
Increased focus on promoting
59%
the longevity of customer
relationships
0% 20% 40% 60% 80% 100%

Figure 8.3. Trends in customer relationships, all respondents

in key collaborative behaviors with customers. Our survey results also suggest
that deep customer connections and the network resources they generate have
universal appeal for both top- and bottom-quartile firms, and both groups are
using a common set of activities to develop such connections. These include
the sharing of information with customers, the development of linkages to
customers via computer networks, and increased involvement in customers’
operations. They are also increasingly incorporating customer input into the
development of products and services, and shifting their focus from selling
products and/or services to selling ‘value-added solutions’ (see Figure 8.3).
Across these five activities, we saw uniformly high levels of intent to share
information with customers and link to them via computer networks among
top- and bottom-quartile performers (responding at a level of 5 or greater on a
7-point scale). In fact, in 2002 the difference between the sustained performers
and bottom-quartile performers was only 5 percent for information sharing,
with 100 percent of sustained performers reporting to us that they planned
to increase the amount of information they shared with customers, and
95 percent of bottom-quartile performers reporting to us that they planned
to do the same. Furthermore, computer networks seem to be the medium of
choice, with 100 percent of sustained performers reporting the plan to increase
systematic connections using the Internet, and 95 percent of bottom-quartile
performers reporting such plans.
The differences in practices between sustained performers and other com-
panies in the survey were most pronounced in the shift from selling products
and services to providing integrated solutions, in the degree that customers
provide into the development of new products/services, and in their focus on
longevity of customer relationships. We will elaborate on the shift to selling
solutions in greater detail below (see Figure 8.4).
186 NETWORK RESOURCES AND FIRM PERFORMANCE

100%

90% =7

80%
Percentage of responses

70% 78% of all companies

responding see
60% =6 a shift towards
selling solutions
50%

40%
=5
30%

20%

10% <= 4

0%
Scale: 1 = Decreasing 4 = Not changing 7 = Increasing

Figure 8.4. Survey question: To what extent do you see a shift from selling products/
services to selling value-added solutions?

From Selling Products to Providing Customer Solutions

As highlighted above, successful firms accumulate network resources not only
by building a larger number of ties with their customers but also by enhancing
the quality of those ties. An important consequence of the move by top-
performing firms to pay greater attention to their customers and develop con-
comitant network resources has been the shift from selling products to selling
what has loosely been described as customer solutions. In an increasingly com-
petitive and transparent global environment where customer expectations are
on the rise, it has become harder for many established companies to maintain
their profit margins while selling traditional products and services. Established
industry players are confronting the reality that product-based differentiation
is more costly and difficult to maintain than ever before, and product differ-
ences are increasingly less meaningful. Value has, in effect, migrated down-
stream from suppliers toward customers. Rather than continuing to resist the
inevitable, companies of all descriptions in diverse industries are looking for
opportunities to develop higher-margin ‘solutions’ businesses (Foote et al.
2001; Sharma, Lucier, and Molloy 2002).
Our survey indicated that most companies are trying to climb the rungs of
the customer relationship ladder as they move from a singular product/service
orientation to a more blended solutions-driven approach (see Figure 8.4).
A solution is not, despite what many believe, an extension of an existing
 MULTIFACETED NATURE OF RESOURCES 187

product line or the mere bundling of services with products. It is instead

a fundamentally new approach to creating incremental value for the cus-
tomer and, by extension, for the solution provider. A solution is typically
developed as a combination of products, services, and knowledge (e.g. risk
management, performance guarantees, and customer consulting), and is a
supplier’s customized response to a customer’s pressing business need. It is
the logical next step in the customer value proposition, one that promises
increased profits, stronger customer relationships, and greater competitive
differentiation to those providers who get it right (see Figure 8.5 for some
examples across a range of settings). For example, rather than selling sim-
ply lubricants, which may be tough to differentiate and may typically be
purchased as commodities at the lowest available price, a company with a
solution-focused value proposition could combine the products with deep
expertise in the application of lubricants. This would reflect a shift from a
pure ‘product’ sell, to selling a combined set of products and services that

Value- Traditional Solution

Traditional Added Value Value
Industry Product Services Proposition Proposition

Truck • Trucks • Financing “We sell & “We can help you
Manufacturing • Service service trucks” reduce your life cycle
transportation costs”

Chemicals • Lubricants • Product “We sell a “We can increase your

support wide range machine performance
of lubricants” and uptime”
• Application
design • Maintenance
Analysis
• Materials
• Performance
analysis
guarantees
• Product
Pharmaceuticals • Drugs “We sell “We can help you
support
pharmaceuticals” better manage your
• Outcomes- patient base”
driven
information
database

Telecom • Phones • Billing “We can serve “We can be

multiple needs your single-point
(e.g. voice, data)” connection to
the world”

Pharmacy • Benefit plan • Administration “We can lower “We can be your
Benefit management • Breaking bulk your health care single-source for
Management • Mail order costs” all benefits
prescription management,
delivery including long-term
care and disease
management”

Figure 8.5. Evolution of solution value proposition

188 NETWORK RESOURCES AND FIRM PERFORMANCE

together enhance a customer’s machine performance and guarantee the main-

tenance of the enhanced level of performance over time.
As companies transition from transacting in products and services to devel-
oping value-added solutions in partnership with their customers, the risks
they naturally assume increase. A common lament among fledgling solutions
providers is, ‘Our customers are thrilled, but we’re not making any money.’
One of the critical distinguishing features of a true solutions relationship is
that value is not reapportioned but rather new value is created—and shared.
Hence, in structuring solutions, successful companies and their customers
focus on the creation of value and on establishing performance-monitoring
metrics that will both measure gains and distribute them equitably.
Moreover, top-performing companies make sure they build solutions with
the customers that value them (Gulati and Oldroyd 2005). They also rigor-
ously segment their customer bases according to relative cost-to-serve and
profitability and account for such segmentation in their investment decisions.
Successful companies want to focus their greatest efforts on enhancing the
value proposition they offer to their most productive relationships because
not every customer is interested in buying solutions. One of the companies we
interviewed as part of our survey categorized customers as gold, silver, bronze,
and lead, reserving special resources and attention for its gold and silver
clientele—while encouraging the ‘lead weight’ to shop elsewhere. Examples
abound of companies trying to advance their customer base up this value
ladder. At the same time that they focus their attention on select customers,
successful firms also seek to extend the duration of those relationships. One
attribute on which top-quartile survey respondents differed was the degree of
emphasis they placed on improving the longevity of customer relationships:
67 percent of sustained performer respondents thought it was critical, but only
50 percent of bottom-quartile firms thought it was critical (as indicated by a
response of 5 or greater on a 7-point scale on the survey questions).
At the same time that successful firms focus their efforts on crafting solu-
tions for select customers, they also see the value in engaging customers in
this task (e.g. Prahalad and Ramaswamy 2004). As a result, another observed
attribute that sets sustained performers apart from their peers is the willing-
ness to incorporate customer input into product and service designs. Our sur-
vey showed that fully 92 percent of sustained performers planned to increase
the amount of collaboration with customers during product development as
compared to 73 percent of all survey respondents (as indicated by a response
of 5 or greater on a 7-point scale on the survey questions).
The move toward selling solutions appears in different forms in different
industries. In many traditional business-to-consumer markets, it takes the
form of a shift from offering products to offering experiences or lifestyles, such
as those purveyed by Starbucks or Harley Davidson. For instance, through
its Riders’ Edge program Harley Davidson tries to build closer relationships
 MULTIFACETED NATURE OF RESOURCES 189

with customers. The company provides its network of independent dealers

with all the tools and resources they need to get potential customers over
the biggest hurdle to owning a Harley: securing a license to drive it. Harley
Davidson, in partnership with state DMVs, has created an educational safety
course to teach people how to drive a motorcycle. After teaching customers
how to drive the bike, Harley dealers schedule them for road tests, trans-
port them to the test sites, and even lend them bikes to take the test—all
for US$250, which is credited toward the purchase of a Harley Davidson
motorcycle.
But Harley Davidson’s devotion to helping customers fulfill their dreams
does not end there. It actively cultivates a network of Harley Owners Groups,
or HOGs, across the country, with dues-paying chapters in 1,200 dealer com-
munities. In fact, one of the responsibilities of a Harley Davidson dealer is
to foster a local HOG by organizing rallies, rides, and other Harley-centric
activities in the service area. Now 800,000 owners strong, HOGs do a lot
to spread the Harley Davidson mystique. An active rental program also acts
as a great feeder system for new purchases. Credit services, branded parts
and accessories, and a full line of Harley Davidson attire and merchandise
complete the portfolio of customer products and services. Harley Davidson
does not pitch price or specs, but rather a way of life, or what the company
calls a ‘lifestyle’.
In many business-to-business markets where manufactured products are
bought and sold, the focus on solutions manifests itself in the form of com-
panies’ attempts to combine a broader array of products with complementary
services to create a more comprehensive offering for the customer. Many pure
services firms have also embraced these ideas and offer solutions that encom-
pass a broader array of services provided to customers in a more accessible
manner. In all these instances, the solution provider uses a solutions approach
to get closer to the customer and create meaningful differentiation between
their offerings and those of others.
One example of such a company is Teradata, a division of NCR. In the
mid-1990s, NCR began the process of consolidating a portfolio of hardware,
database software, and services into a combined offering focused on cus-
tomers, and soon began complementing its core database offering with com-
plementary applications and services. Today, Teradata has consolidated and
coordinated its entire company around providing such solutions, which are
combinations of Teradata’s portfolio of hardware, software, and services aimed
at specific business problems in specific industries, such as Yield Management
for airlines, Contract Compliance for the transportation industry, Customer
Retention for retail banks, and Network Optimization for communications
companies. The typical solution sale at Teradata is on average one-third hard-
ware, one-third software, and one-third professional services. The goal is to
make a solution greater than its individual parts, which can occur only when
190 NETWORK RESOURCES AND FIRM PERFORMANCE

Teradata develops a full understanding of customers’ problems and creates an

offering that can solve these.
A key component of Teradata’s solution orientation arises from its close
partnerships with customers, as evidenced by how it develops software. Rather
than build isolated applications around its own internal expertise, Teradata
forms partnerships with key customers to build integrated solutions for
industry-specific problems, infusing key insights from select customers to
create applications that fully leverage Teradata’s key strengths. An example
of this approach is National Australia Bank, which partnered with Teradata
to develop Relationship Optimizer, an Analytical CRM solution that enables
customer-oriented and personalized dialogs with hundreds of thousands or
even millions of customers of major business-to-consumer businesses, such
as retail banks. This application has allowed the bank not only to create an
effective communication channel with its large number of customers but also
to identify discrete individual customer events every day and react to them in a
timely manner (not an event like a birthday, but an event like a deposit of more
than 200 percent of the previous largest deposit a customer has made in the
past twelve months, or the discontinuance of an automatic paycheck deposit
for someone who is at least 55 years old, or the first time a specific person
has ever made an ATM deposit, etc.). Such events in turn allow the bank
to identify potential opportunities to contact the customer with product or
service offerings in a proactive and timely manner. This joint project between
Teradata and the National Australia Bank has resulted in a reliable and suc-
cessful application, now in its fourth generation (Teradata CRM), leveraged
by other industries worldwide.
In addition to partnering directly with select customers, Teradata also pro-
vides multiple forums to easily connect customers with each other and share
knowledge and best practices. Along with its annual users conference where
best-practice customers share their insights and experiences with others, Ter-
adata regularly schedules ‘webinars’ throughout the year and invites customers
and other experts to engage in interactive dialog with a business or technical
user of a specific solution. The customer usually leads the dialog, not Teradata.
Because so many firms are now embracing a customer-focused perspective,
perhaps the next logical question is: Are solutions also going to become table-
stakes and commodities in the years to come?

SECOND DIMENSION OF NETWORK RESOURCES: SUPPLIERS

Another practice through which firms may accumulate network resources is
the maintenance of strong and enduring ties with key suppliers. Many com-
panies see the importance of building partnerships in this critical vertical
dimension of the value chain as crucial to their success (e.g. Kumar, Scheer,
 MULTIFACETED NATURE OF RESOURCES 191

and Steenkamp 1995; Zaheer and Venkatraman 1995; Dyer 2000; Gulati,
Lawrence, and Puranam 2005). As firms realize the importance of cost-
containment in increasingly competitive markets, they see the logic of ‘shrink-
ing their core’ and begin to shift activities previously viewed to be core to
their business to external suppliers and in doing so, hope to reap benefits
from economies of scale or depth of specialization. The growing reach of
manufacturing and services industries to distant outreaches of the globe have
made it advantageous for firms to tap into local expertise on very economical
terms. In doing so, they recognize that suppliers are an integral part of the
value they offer their own customers, especially because complete solutions,
which require more pieces from suppliers, now constitute a greater portion of
their offerings.
As with customers, successful organizations are climbing a relationship
ladder with suppliers with whom they wish to develop closer partnerships
(see Figure 8.6). Suppliers have come to recognize the need to climb this
ladder with their key customers as well: thus, they are climbing a customer
ladder parallel to that described earlier. In doing so, each enriches the net-
work resources available to them. The most basic form of relationship that a
company can have with its suppliers is one in which the company purchases
each product or service as an isolated transaction. In this case, interaction
with the supplier occurs only to place the order, take delivery of product, and
arrange for payment; in an increasingly electronic world, this ‘interaction’ may
occur entirely between machines. Moving one rung up from this transaction
level, companies work with their suppliers to leverage their knowledge and
expertise. On this ‘enhancement’ rung, a richer and broader dialog occurs,
including discussion of the company’s objectives for the products and services,
exploration of alternatives, and often a contractual agreement that formally
establishes a relationship that transcends the transaction. This might include,
for example, the establishment of a service agreement that coincides with the
sale of a traditional product offering, an agreement designed to ensure that the
company achieves the best possible results from the supplier’s product.
On the third ‘investment’ rung, employees from the supplier become inte-
grated into the company’s operations and work as part of a team, side-by-
side with the company’s employees. This could be a temporary, project-based
arrangement such as a product development effort or improvement initiative
or, in the strongest case, part of ongoing operations. On the highest rung, the
company turns part of its activities over to a supplier, who takes ownership
of the successful execution of those activities. These could be mundane back-
office transactions like payroll or entire business functions such as manufac-
turing or customer care. At this level of ‘ownership’, companies focus on what
they do best, while accessing all other capabilities through their suppliers.
In these relationships, the supplier is given the greatest amount of latitude
in terms of how the activities are conducted. Success requires not only the
‘soft’ side of the relationship (i.e. trust and confidence) to be solid but also
 192 NETWORK RESOURCES AND FIRM PERFORMANCE
Strategic partnering: Finally, at the top of the ladder,
a supplier is given responsibility and accountability—in Ownership
part or in full—for successful business outcomes

Integration: On the next rung, expertise and resources are reciprocally

shared, with suppliers directly leveraged into operations, e.g. included Investment
in the product development process or in improvement initiatives

Bundling: Up one rung, products and services are purchased

as integrated combinations where the “whole is greater than the Enhancement
sum of the parts”

Arm’s length: On the lowest rung, products and services are

purchased as isolated transactions, without any supplier Transaction
involvement in efforts to integrate them into a cohesive whole

Figure 8.6. Supplier relationship ladder

 MULTIFACETED NATURE OF RESOURCES 193

the harder side: governance mechanisms that institute strong accountability

by measuring and rewarding successful business outcomes. In the extreme,
suppliers will in turn become solutions providers. It is important to note
that a company will not have the same relationship with each of its suppliers
and would therefore be likely to operate with them at several of the rungs
simultaneously. Indeed, we observed that most firms maintain a portfolio of
relationships that are on various rungs of the ladder. Firms may even operate
simultaneously on multiple rungs with a given supplier, accessing different
commodities or services within different operational contexts (Dyer 2000;
Gulati, Lawrence, and Puranam 2006). Thus, a firm’s network resources can
include its multilevel connections with an individual supplier, as well as those
across groups of suppliers. Some of these connections are deeper than others
but together they provide firms with an array of choices and opportunities
that may not be available to other firms.
Despite differences in the way a firm may ally with its suppliers, there
were some consistent trends revealed by our survey (see Figure 8.7). A
large percentage—88 percent—of survey respondents expected to increase
information-sharing with suppliers, and the vast majority—92 percent—was
experiencing a tightening of computer network linkages with suppliers, more
supplier input into development, and more involvement in suppliers’ oper-
ations (as indicated by a response of 5 or greater on a 7-point scale on our
survey questions). All of these specific behaviors point to a more intimate rela-
tionship with suppliers overall where product specifications and cost drivers
are increasingly shared. As companies pinpoint where on the value chain they
want to play and shed noncore operations, their relationships with suppliers
become increasingly vital, especially where critical components and comple-
mentary offerings are concerned. Winning suppliers have also recognized this

Increased information sharing

88%
with suppliers

Increased linkages to suppliers

92%
via computer networks

Increased supplier participation

in the development of 62%
products/services

Increased focus on promoting

the longevity of supplier 59%
relationships
0% 20% 40% 60% 80% 100%

Figure 8.7. Trends in supplier relationships, all respondents

194 NETWORK RESOURCES AND FIRM PERFORMANCE

need among their important customers and have tried to work harder to
climb this ladder with this group. Not only have they learned to develop close
communication channels and dedicated client teams but in some instances
have colocated staff on customer sites to simplify the coordination of tasks.
One of the ways for companies to strengthen supplier relationships, and
to move them from the lowest ‘transaction’ level to one or more rungs up
the ladder, is to develop and nurture trust with suppliers. Indeed, successful
companies recognize the power of trust in all their business relationships,
and they expend tremendous energy developing ways to institutionalize that
trust, particularly in their procurement processes (Zaheer, McEvily, and Per-
rone 1998; Gulati and Sytch 2006a). Developing this level of trust is not
easy, but some organizations are finding ways to breach traditional orga-
nizational boundaries and outsource activities closer and closer to the core.
Sustained performers among our survey respondents try to build long-term
relationships with their suppliers. The results show that while 59 percent of all
respondents anticipated an increase in the longevity of supplier relationships,
the difference between sustained performers and bottom-quartile companies
was significant: 75 percent of sustained performers intended to increase the
duration and strength of supplier relationships, while only 55 percent of
bottom-quartile companies intended to do so.
When it works, outsourcing operations to suppliers—and the network
resources this generates—offers compelling strategic and economic benefits.
It results in lower costs, greater flexibility, enhanced expertise and discipline,
and the freedom to focus on core business capabilities. At first confined to
nonstrategic business activities such as cleaning, transport, and payroll, out-
sourcing now encompasses even such functions as manufacturing. Not sur-
prisingly, top-quartile companies often lead by example. In their own dealings
with customers, they model the sort of supplier behavior they have come to
expect.
Sometimes value in partnerships with suppliers is measured by both entities
not in terms of short-term individual gains but in long-term joint returns, and
in other instances in terms of intangible (but equally remunerative) benefits
such as reputational capital. Starbucks, for instance, has a great deal of brand
equity invested in its reputation as a company focused on improving the
economic, environmental, and social conditions of the Third World coun-
tries where its coffee originates. It works with Conservation International
to develop environmentally sound sourcing guidelines designed to foster
sustainable coffee farms. Moreover, it works with Fair Trade to help coffee
growers form cooperatives and negotiate directly with coffee importers, who
are also encouraged to foster long-term relationships with growers and to
furnish financial credit. Starbucks pays Fair Trade prices for its Arabica beans
regardless of market prices, which quite often fall below subsistence level. In
fact, in October 2001 the company announced its intention to buy one million
 MULTIFACETED NATURE OF RESOURCES 195

pounds of Fair Trade Certified coffee within the next eighteen months, a real
commitment to improving the plight of coffee farmers who have sometimes
seen the market price for their coffee decline as a result of oversupply.
Starbucks has also developed very clear standards and a rigorous process
for selecting and maintaining its supply relationships with a wide range of
vendors, from the farmers who grow its beans to the manufacturer of its
cups. Specific criteria, robust training programs, regularly scheduled busi-
ness reviews, and a high degree of information exchange all distinguish and
guide the procurement process. Starbucks takes a holistic approach, engaging
representatives from not only its purchasing operations but also its technical
product development, category management, and even its business unit oper-
ations teams to understand, from an entire supply chain perspective, how a
supply relationship will ultimately impact operations. Buck Hendrix, VP of
Purchasing, says, ‘We are looking for, first and foremost, quality; service is #2
on our priority list; and cost is #3. Not that we want to pay more than we
should, because we negotiate very hard, but we are not willing to compromise
quality or service in order to get a lower price.’
Once a supplier is selected, Starbucks works diligently to establish a mutu-
ally beneficial working relationship. If the relationship is strategic, senior
management from both companies will meet face-to-face three or four times
the first year and then semiannually afterward. ‘Our biggest focus in these
sessions is how to team with our suppliers’, notes Buck Hendrix. ‘We want to
create a two-way dialog as opposed to dictating the conversation.’ Discussions
encompass not only Starbucks’ expectations but also supplier concerns and
suggestions about how to improve the productivity and profitability of the
relationship.
According to John Yamin, VP of the Food division, ‘We won’t go into
partnerships where the vendor won’t make money or grow with us.’ Michelle
Gass, VP of Beverages, adds, ‘Our vendors are willing to do what it takes to
stay with us. I am amazed by the flexibility of our vendors, which is driven
by our partnerships with them.’ For example, Solo, Starbucks’ cup manufac-
turer, bought a company in Japan and a manufacturing facility in the United
Kingdom so they could supply the coffee retailer’s operations there. In return,
Starbucks has committed to a long-term global supply agreement with the
disposable products company. It is this sort of give-and-take that characterizes
top-quartile supply relationships, and that helps firms to establish network
resources.
The benefits of leveraging network resources with one’s supply base are
manifold. In successful partnerships, both firms gain as they move up their
industry’s value chain together. Value is not reapportioned in such cases;
rather, it is created and shared. The sharing is often the thorniest part. First
of all, how do you fairly measure gains (from a total cost–benefit perspec-
tive) and split them so that both parties see a return on their investment?
196 NETWORK RESOURCES AND FIRM PERFORMANCE

Successful organizations that truly leverage this important facet of their net-
work resources have wrestled with this central challenge longer than most and
have developed best practices that help them establish win–win relationships
with their suppliers. Ultimately, some form of ‘open book’ arrangements com-
bined with joint mutual dependence in which both parties need each other
may furnish the transparency necessary to ensure true gain-sharing (Gulati
and Sytch 2006b). Building the trust that facilitates that sort of arrangement
is not a ‘feel good’ exercise; it is a business imperative.

THIRD DIMENSION OF NETWORK RESOURCES: ALLIANCES

The third dimension of network resources—discussed extensively in previous
chapters—arises from a firm’s strategic alliances (e.g. Gulati 1998; Gulati,
Nohria, and Zaheer 2000). The research underlying this chapter echoed some
of the previous findings and also revealed that the vast majority of the firms
surveyed placed a high level of importance on entering and carefully managing
strategic alliances. For example, 70 percent of firms were forging increased
linkages to their partners. Alliance partners were also reported to have increas-
ing input into the development of products and/or services in 63 percent of the
companies surveyed.
Such results suggest that successful companies are increasingly focusing
on what they do best and ‘alliancing’ the rest. Thus, as firms ‘expand the
periphery’ of their value proposition to customers, they increasingly rely on
not only vertical connections with suppliers but also their connections with
their alliance partners who may provide offerings complementary to their
own to fill any gaps in their product or service offerings, thus rounding out
their solutions packages. These partnerships can be not only along horizontal
and vertical dimensions of the value chain but also diagonal, when partners
from disparate industries come together to tackle new opportunities. The
survey findings here indicate that while 59 percent of bottom-quartile firms
expect to increase involvement of alliance partners in product development,
fully 75 percent of sustained performers plan such an increase. As companies
expand their network of alliances in this way, they move up a relationship
ladder that parallels the customer and supplier ladders (see Figure 8.8). This
ladder begins with one-off, mutually convenient agreements often sparked
by a specific need or opportunity, but never evolving into anything greater.
These ‘transactional’ relationships are often quite simple and may not even
involve financial terms. The Maytag repairman who appears in a car commer-
cial and talks about reliability can help build both brands—but the shared
environment is unlikely to evolve into anything deeper between the two com-
panies. At the next higher level, firms evolve toward creating ‘contractual
 Integrated: Finally, at the top of the ladder, an intricate
and interdependent relationship that is laden with trust Ownership
and that encompasses critical tasks is formed

Relational: On the next rung, companies come together to

each share the risks and rewards in more critical tasks Investment

Contractual: Up one rung, two parties begin to work

MULTIFACETED NATURE OF RESOURCES

together on select non-critical activities Enhancement

Transactional: On the lowest rung lives a series of one-off,

mutually beneficial agreements that do not substantially integrate Transaction
operations or share assets

Figure 8.8. Alliance relationship ladder

197
198 NETWORK RESOURCES AND FIRM PERFORMANCE

coordination’—in which they agree to coordinate select, typically noncritical

activities with each other. These ‘enhanced’ partnerships can take many forms,
such as distributing one company’s product through the other’s channel.
At the third rung of the ladder, the relationship shifts from simple coordin-
ation of tasks to active cooperation in which the partners begin to rely on each
other for more critical tasks. At the top of the ladder, in the ‘trusted partner’
stage, true partnerships form and are sustained, where each company shares
resources with the other toward a purpose neither company could achieve
alone, and they view each other as trustworthy partners.
As firms advance on this journey, they not only climb this ladder in their
specific dyadic partnerships but also begin to create an intricate and inter-
dependent web of collaborative entities, with each possessing a shared stake
in the success of others and the combined whole. In some instances, entire
industries form these relationship webs, most notably in the airline indus-
try, where competition occurs among constellations such as Star Alliance,
OneWorld, and SkyTeam (Nohria and Garcia-Pont 1991; Gomes-Casseres
1996). As with both the customer and supplier ladders, many companies will
operate simultaneously on multiple rungs, forming different level alliances for
different purposes.
As with the other ties that constitute a firm’s network resources, its alliances
may vary in strength. Not only are successful firms demonstrating greater
propensities to enter into alliances, but the ties they are binding are also
qualitatively different. They are more strategic, deeper, and more effective in
leveraging network resources. Successful firms recognize that alliances enable
them to do more with less. As they expand their peripheries, they need not do
it all themselves and can instead leverage their partners’ resource base much
more broadly and effectively. As a result, they are becoming more creative
in identifying alliance opportunities and potential partners with whom they
can collectively serve certain target markets. The result is a constellation of
business relationships populated with shifting alliances or webs that relate to
one another in new and nonlinear ways.
Alliances that constitute a firm’s network resources typically revolve around
four distinct categories of partners that transcend horizontal and vertical
boundaries: (a) the channel, (b) the licensee, (c ) the complementer, and
increasingly (d) the competitor. The implications of this expanded alliance
building are profound in terms of organizational structure and behavior.
The whole notion of ‘in-house’ becomes suspended as companies contend
with organizational boundaries that are newly fluid, transparent, and, indeed,
semipermeable. Web-based collaboration tools have accelerated this ‘bound-
arylessness’ and enhanced the channels of communication between partners
(Welch 2001). Among the firms that responded to our survey, 68 percent are
experiencing increased links to their partners via computer networks, and
63 percent are experiencing greater input from partners in the development
 MULTIFACETED NATURE OF RESOURCES 199

of products and services. With the availability of new communication tools,

alliance partners around the world can inexpensively share product specifi-
cations, opportunity alerts, blueprints, sales figures, expertise—all with the
click of a mouse. And the sharing of this knowledge in turn accelerates value
creation.
Companies in this new constellation context rely on external partners more
and more, not only for cost reasons or to handle peripheral, narrowly circum-
scribed activities as in the past, but for strategic purposes, such as accessing
new capabilities, improving quality, or sharing risk. New and powerful cooper-
atives are emerging, composed of multiple communities operating in a highly
interdependent network and armed with a collective sense of purpose. At
the extreme, we are witnessing unprecedented levels of cooperation between
direct competitors, a phenomenon dubbed ‘co-opetition’ by some observers
(Brandenburger and Nalebuff 1996).
While firms are exhibiting more enthusiasm toward alliances, there nat-
urally remain hurdles to success. Like supplier relationships, governance and
gain-sharing are two of the enduring challenges companies must address. In a
world where the boundaries within and among firms are collapsing and your
business is everyone’s business, defining the ‘rules of engagement’ in alliances
becomes a tricky issue. Previously guarded business processes are now open—
either partially or entirely—to outside partners. Controls, operating protocols,
and information technology standards must now be agreed on and embed-
ded in the processes of all participants to create the electronically linked,
real-time information-sharing network needed to ensure success. Leadership
and accountability need to be clearly defined in this space; otherwise, mul-
tiple points of contact overwhelm the efficient functioning of the alliance.
Thus, partners must fully understand their respective roles and responsibilities
(Dyer, Kale, and Singh 2001; Gulati, Lawrence, and Puranam 2005).
For these reasons and others, several studies suggest that up to 70 percent
of alliances ultimately fail. Most executives are not inclined to play those odds.
However, underlying that discouraging figure, some companies are struggling
with an abysmal track record, while others are enjoying an alliance success rate
over 90 percent. For companies who discover and hone the right success for-
mula, the alliance game becomes one of increasing the odds rather than simply
playing the averages. That success formula is commonsensical and yet eludes
many firms. It consists of careful partner selection, jointly articulated expect-
ations, management flexibility, and performance incentives designed to secure
a win–win outcome (Doz and Hamel 1998; Dyer and Singh 1998).
An example of a firm that has truly leveraged the network resources
originating from its strategic alliances is, again, Starbucks. Over the years,
Starbucks coffee has been served to millions of United, Horizon, and Cana-
dian Airlines flyers as well as to Marriott, Sheraton, Westin, and Hyatt
hotel guests through carefully constructed licensing agreements. Compass
200 NETWORK RESOURCES AND FIRM PERFORMANCE

cafeterias, Barnes and Noble bookstores, HMS Host airports, and Safeway
grocery stores all sell Starbucks coffee by the cup as licensees.
The company has also extended its product line in logical directions
through complementer alliances and joint ventures. Its highly successful bot-
tled Frappucino beverage is marketed, manufactured, and distributed through
a 50/50 joint venture agreement with Pepsi. Its ice cream—the number 1
brand of coffee-flavored ice cream—is made and distributed by Dreyer’s, and
the packaged whole-bean and ground Starbucks coffees you see in supermar-
kets are marketed and distributed by an arch competitor in the at-home coffee
consumption arena: Kraft.
In stark contrast to its domestic retail stores, which are all company-owned,
Starbucks has expanded internationally through joint venture agreements
with well-established local players. Today, they have expanded aggressively in
disparate markets outside North America sporting the Starbucks name and
logo.
Not all of Starbucks’ alliances have been so successful. Its early attempts
with Pepsi to produce a coffee-flavored carbonated beverage called Mazagran
flopped. Attempts to diversify coffee ice creams to other flavors did not prove
fruitful, and some of its more ambitious food-oriented ventures, such as the
Café Starbucks and Circadia restaurant concepts, were not successful. More-
over, highly publicized plans to create a Starbucks destination/affinity portal
on the Web with all sorts of lifestyle links came to naught.
But in each of these well-calculated risks was embedded a tremendously
valuable lesson. The same joint venture that launched Mazagran produced
Frappucino, a fabulously successful incremental revenue stream for Starbucks.
The experiments with non-coffee-flavored ice cream and full-service restaur-
ant concepts helped Starbucks establish parameters for customer perceptions
of its brand. And while the Internet portal never came to pass, Starbucks used
what it learned to design a wireless high-speed access network for its stores.
Maintaining these business alliances is, even at the best of times, a chal-
lenge, and Starbucks’ approach has steadily evolved as its experience grows.
According to Gregg Johnson, VP of Business Alliances,

Originally business alliances were intended to bring the Starbucks experience to

places where retail could not go . . . a fairly simple mission with a number of complex
components. First, the alliances we build need to be profitable for both partners.
Second, they need to be designed around delivering the experience, whether it’s
through a consumer product (e.g., packaged coffee) or on a United flight. If we are
not confident that we can do that, we don’t go to the next place. United, for example,
had to replace the coffee-making equipment on all of its planes to meet Starbucks’
exacting quality standards. Third, it has to be a place where the consumer expects to
find us. Yes, people expect to find Starbucks in Hyatt hotels, but not at Motel 6 at this
point. But what we see is a very natural expansion of those boundaries year after year as
consumers become more comfortable associating Starbucks with places and products
they did not a few years back.
 MULTIFACETED NATURE OF RESOURCES 201

Teradata is another firm in the business-to-business space that has also

made alliances an important component of its network resources. In devel-
oping solutions for customers, Teradata frequently finds that it neither pos-
sesses nor desires to possess all the missing links that may be critical for
a specific, industry-specific solution. In such instances, it seeks out alliance
partners to provide key components of the solution. Some of its alliance
partners include Siebel, SAS, Cognos, Fair Isaac, and Tibco. The offerings
obtained from its partners can vary and include elements such as specific
consulting services, specialized tools, or applications. Successful partnering
is critical to Teradata’s aggressive growth plans. As a result, even when there
is conflict with partners, the company tries to retain focus on the big-
ger picture. And sometimes that takes sacrificing something for the greater
good.
With the passage of the Sarbanes-Oxley Act, most companies have quickly
learned that changing accounting processes alone will not address the result-
ant concerns sufficiently and that the timely availability of financial infor-
mation on an ongoing basis across the enterprise is critical. To accomplish
this, enterprises are turning to technology to make their financial information
readily available, auditable, and analyzable. Teradata saw this opportunity
but also realized that they did not have all the key applications to serve this
market effectively. So they teamed up with Hyperion, a leading provider
of financial applications, to develop a technology solution that could give
customers greater insight into their financial performance. The agreement
allowed businesses using a Teradata data warehouse and analytical solutions
to link to Hyperion’s Essbase XTD platform and applications. The partnership
focused on two key goals: to drive core technology integration and optimiza-
tion and to develop products that would enable customers to analyze their
business results easier and faster. Since 2000 the companies worked together to
integrate their respective products by building a Teradata Analytic Accelerator,
a set of prebuilt analytics and reports centered on a subject area such as
general ledger or accounts receivable. The objective of an Accelerator is to
get analytics up faster and at less cost than by building analytic applications
in traditional ways. A financial analyst can look at business results easily via
graphs and reports at the summary level using information from the Teradata
Enterprise Data Warehouse. Implementing an Accelerator can shorten the
normal development and deployment of an analytic application by up to
two months. The two companies have also worked closely on defining how
they will support their joint customers in a coordinated manner. The sup-
port strategy involves having experts from both companies address customer
issues through a single, coordinated point of contact. A customer contacts
Hyperion for initial support for technical questions about the Accelerator. If
these questions relate to certain specific technical aspects of the solution, an
escalation process defines how they are conveyed within Teradata’s support
organization.
202 NETWORK RESOURCES AND FIRM PERFORMANCE

In some instances, it is a customer that forces two firms to work together.

One such alliance is Teradata’s partnership with Siebel systems to align their
suite of applications and make them compatible with Teradata’s data ware-
house. Both shared a customer—DirecTV, who urged them to work together
to deliver more convenience to the customer. As a result of these joint efforts,
Siebel provides the analytic tools and related consulting while Teradata pro-
vides the data-oriented expertise and consulting.

FOURTH DIMENSION OF NETWORK RESOURCES: INTERNAL UNITS

Successful organizations typically follow the same relational instincts with
their own business units as they do with customers, suppliers, and alliance
partners, and often discover that the fourth dimension of network resources
is in their very own backyards. This form of network resources results from
promoting greater collaboration among the firm’s own internal business units
which in turn can lead to significant external benefits (Hansen and Oetinger
2001; Hansen and Nohria 2004; Gulati 2006). To optimize their core and offer
customers complete solutions requires that firms create a seamless connection
not only with their external suppliers and alliance partners but also with
their internal business units and subunits that need to come together in a
harmonious fashion to offer customers an integrated experience. Successful
firms teach their subunits to treat their internal counterparts with the same
respect and focus that characterize their relationships with customers, suppli-
ers, and alliance partners. Hence, a similar ladder of increasing responsibility
and commitment can be applied to internal relationships at high-performing
companies (see Figure 8.9). In the weakest internal relationships, organiza-
tional subunits are treated as separate entities, perhaps even independent
profit centers. There is little interaction among them, with limited sharing of
intellectual or human capital. The relationship between the business units and
the corporate core is more akin to those among divisions of a holding com-
pany. At the second rung the organizations operate in a largely independent
fashion, but they come together for specific strategic initiatives, where focused
pooling of capital and other resources facilitates the drive to a single corporate
objective, after completion of which the constituent organizations return to a
mode of independent operation.
On the third rung, business units are integrated, working toward a common
corporate goal. They may have the power to independently define how they
reach that goal and are often left by senior management to meet their targets
using their own devices. But they are jointly accountable for corporate success,
share capital, infrastructure, and talent, and communicate on a regular basis.
The final rung represents a wholly integrated company with ‘no walls’. Infor-
mation, capital, and talent flow freely across any organizational boundaries.
 Seamless integration: Finally, at the top of the ladder, an
organization acts in a seamlessly integrated manner with Integration
all units working together

Tactical integration: On the next rung, the individual units have

distinct roles but operate in concert with one another at both the Alignment
strategic and tactical level to pursue well-defined common goals

Strategic coordination: Up one rung, individual sub-units

MULTIFACETED NATURE OF RESOURCES

operate largely in an independent fashion, but they come Coordination
together for specific initiatives

Separation: On the lowest rung, subunits are treated as separate

entities, perhaps even profit centers with loose guidance from the Separation
corporate core

Figure 8.9. Organizational sub-unit relationship ladder

203
204 NETWORK RESOURCES AND FIRM PERFORMANCE

While the first two stages afford some basic levels of coordination, higher
levels involve greater levels of active cooperation (Gulati and Singh 1998;
Gulati, Lawrence, and Puranam 2005). The intensity of interaction increases,
as does the interweaving of operations and outcomes across units. None of
this comes easy, and common wisdom holds that sometimes cooperation
with internal business units can be a greater challenge than with external
partners.
Different levels on the ladder are appropriate for different companies,
depending on their lifecycle stage and specific strategic goals. Furthermore,
the level of interaction may vary among different business units of a single
firm, depending on the nature of underlying synergy among their respective
operations. In spite of these potential differences among firms, the survey data
here show that the highest-performing organizations were those that fostered
tighter connections across business units, regardless of size. Comparing high-
and low-performing firms we find that among the former, business units
communicate more with each other (58% vs. 36%) and best practices are
deployed with greater frequency across groups/locations (83% vs. 55%) (as
indicated by a response of 5 or greater on a 7-point scale). This elevated level
of effective communication and coordinated action lays the groundwork for
accelerated innovation, increasingly a requirement for success.
One example of a firm that discovered the benefits of network resources
within its own intraorganizational units was Jones Lang LaSalle (JLL). In
2001, JLL was one of the largest commercial real estate services companies
in the world. The product of a 1999 merger of London-based Jones Lang
Wootton and Chicago-based LaSalle Partners, JLL was a global company
with more than 680 million square feet of property and more than US$20
billion in real estate funds under management in the United States, Europe,
and Asia. The previous few years had been financially difficult for JLL. By
early 2001, the company’s stock price warranted a market capitalization less
than the valuation of either of the two original firms. And the economic
downturn in the United States was further depressing sales. Senior manage-
ment realized that change was needed to halt the slide in margins and boost
revenue.
In the marketplace, corporate clients were beginning to demand more from
their real estate service providers. On one hand, the trend toward globalization
and heightened concerns about fees meant that the real estate marketplace was
becoming increasingly commoditized. On the other hand, many customers
were no longer satisfied with being sold just a product or service; they wanted a
complete solution for their real estate needs. Some of JLL’s largest customers—
especially the prized global multinationals—sought more integrated services
across the globe, often outsourcing their entire real estate operations.
Meeting such diverse requests strained JLL’s historically independent
business units, which offered disparate real estate services and operated
 MULTIFACETED NATURE OF RESOURCES 205

autonomously. The company’s management realized that significant changes

to their traditionally silo-based organization were needed to compete success-
fully on price and to integrate their services. So, in 2001, JLL’s Americas region
underwent a dramatic reorganization, dividing its nine business units into
two groups—Corporate Solutions and Investor Services—according to the
types of clients they served. Along with bringing its disparate services targeted
to large multinational clients under the one roof of Corporate Solutions,
senior management created a new account manager function to better provide
JLL’s clients with integrated service solutions. By establishing a single point-
of-contact for JLL’s largest clients, along with shared accountability, senior
management hoped to provide flexible and scalable resources for clients that
spanned the full breadth of JLL’s corporate service offerings. In establishing
this new organizational arrangement, however, JLL had to tackle several critic-
al internal issues. Most of these revolved around getting the internal business
units to collaborate with each other and with the integrating unit that worked
with the customers directly. Results so far have been excellent and they have
been successful in attracting some of the largest firms in the United States as
their clients including P&G, Microsoft, and Bank of America. Their success
is a testimony to the efforts put into building a more collaborative internal
environment.
Another company that has discovered the benefits of network resources
built on greater intraorganizational coordination is, again, Teradata. In their
efforts to differentiate themselves from the competition by providing cus-
tomers with integrated solutions, Teradata has recognized the importance of
aligning internal business units to create a seamless experience for the cus-
tomer. To harmonize their internal efforts, they have shifted most resources,
including technical specialists and industry specialists, into their sales organ-
ization. Further, they have devised what management calls a three-legged stool
to approach customers in an integrated manner. The first leg of the stool
is the sales account manager who owns the relationship with the customer
organization and remains the point person for that firm throughout their
interaction with Teradata. The second leg of the stool is the architectural
technology specialist who helps specify customer needs and which compon-
ents of Teradata’s offering may make sense for that customer. The third leg is
an industry specialist who also typically resides within the sales organization
and is a specialist on applications for the customer’s industry. This person
helps define the industry-specific applications that would allow Teradata to
customize the solution for the customer. While the sales account manager
is the key point person, he or she works closely with the other two legs of
the stool to ensure that the customer has a seamless experience. Along with
incentive alignment to ensure that these disparate individuals work closely
with customers, a customer-oriented culture also seems to be essential. As
Bob Fair, Chief Marketing Office at Teradata suggests, ‘The glue here is the
206 NETWORK RESOURCES AND FIRM PERFORMANCE

culture . . . . Since we are trying to embark on a lifelong journey with our

customers, we know clearly that the customer is critical and that we all need
to work together to help solve the customer’s problems.’

Combining the four dimensions of network resources

To achieve a shrinking core and expanding periphery, successful organizations
recognize the mutually reinforcing nature of activities on each of the four
dimensions of network resources discussed here. Hence, collaboration with
customers on solutions necessitates working closely with alliance partners and
suppliers, and among internal business units. As a result, what is notewor-
thy about relationships built by exemplar firms is their breadth and degree
of integration. Winning organizations have moved beyond a single-minded
focus on perhaps one or two facets of individual customer, supplier, or alliance
relationships and are now developing a more holistic and multidimensional
view of their entire network of relationships, one that takes into active account
the other relationships the firm may have on different dimensions, creating
exciting new opportunities for leverage and economies of scale. More and
more, these companies’ perspectives encompass a broader universe of involved
and interacting players who move into and out of the organization with an
unprecedented degree of freedom and flexibility.
In this new model, critical relationships along these three external
dimensions—customer, supplier, and alliance partner—are no longer distinct
and separate from the organization but rather are interconnected and syner-
gistic. In developing a total solution for a customer, for example, a network-
resource-rich organization will draw readily on such assets as the complemen-
tary capabilities of its alliance partners or its network of key suppliers. Recog-
nizing that its internal subunits and the employees within them are ambas-
sadors to customers, a network resource-centered organization will optimize
the former to serve the latter. While many companies make varying attempts
to leverage individual relationships, top performers build multifaceted rela-
tionships that are interdependent, and thus more than ‘the sum of the parts’.
And therein lies the difference.

Conclusion
This chapter sheds light on the particular strategies that top-performing
network resource-centered organizations utilize to achieve superior perform-
ance by optimizing the architecture of their network of relationships.
 MULTIFACETED NATURE OF RESOURCES 207

While organizational theorists have long focused on individual relation-

ships with, say, customers or suppliers, this chapter examined how four
key relationships—with customers, suppliers, alliance partners, and among
internal business units—work together in defining an organization and its
success in the marketplace. In each of these four dimensions, survey results
indicate that what clearly sets sustained performers apart from their peers
is a higher willingness to engage these entities, and a greater focus on
increasing the longevity of those relationships. That network resources are
unleashed through collaboration is beyond dispute. Not only does collab-
oration within and between all constituencies improve operating perform-
ance, but its vehicles—be they solutions, strategic outsourcing agreements,
alliances, or acquisitions—help companies leverage assets more effectively,
expand into new markets, mitigate risk, and increase market agility. Together,
these efforts shape their success by shrinking their cores and expanding their
peripheries to achieve enhanced growth and profitability.
Our findings, based on both quantitative and qualitative research data,
provide empirical support for a conclusion that many have already intuited: a
relationship-driven architecture and the business strategies that it facilitates
are inherently powerful. In addition, we can begin to build a more com-
plex model that layers the ‘how’ onto the ‘what’ of successful organization-
building. Already clear is the fact that no one relationship suffices to bring
success in today’s top competitive environment. Instead, it is a combination of
distinct and critical relationships and the way they interact across a seamless
and transparent organization as a network that leads to competitive advantage
and value creation.
Ultimately, companies want to build operating models that enable cus-
tomer orders to automatically trigger supplier orders or that appropriately
leverage employees as conduits to the customer. Think of the Starbucks barista
or the Harley Davidson dealer or the Jones Lang LaSalle account manager
and you have a compelling image of the powerful circle of relationships
that winning organizations create and foster. Organizations today are all too
often impediments to their own long-term success because they create bar-
riers rather than facilitating communication and coordination. The network
resource-centered organization is, in contrast, moving toward becoming a
friction-free facilitator.
It is important to reiterate that network resource accumulation is not a one-
dimensional activity any more, but rather an integrated, four-dimensional
campaign that encompasses relationships with suppliers, alliance partners,
internal constituencies, and, of course, customers. Where the emphasis in
recent years has typically been on a single dimension—such as outsourcing
agreements with suppliers, joint ventures with alliance partners, vision and
values exercises with employees to align goals of internal subunits and achieve
greater synergy, or CRM tools for aligning with customers—top-performing
208 NETWORK RESOURCES AND FIRM PERFORMANCE

organizations are now operating on all dimensions at once to build a coherent

and enduring whole greater than the sum of its parts.
Gaining—and maintaining—competitive advantage through strategy alone
is difficult, if not impossible. The universe of successful strategies is lim-
ited, and too many players pursue the most attractive options. The key to
true differentiation lies in effective implementation, and the key to effective
implementation is a winning organizational model. Based on survey data
and fieldwork, this chapter has assembled a composite architecture of how
successful organizations look and act. While the attributes and behaviors of
the relationship-centered organization are by no means a guarantee of success,
they do tend to differentiate the winners in many industries from the rest
of the field. Just as companies manage, monitor, and measure their phys-
ical resources, so should they actively manage, monitor, and measure their
network resources. Relationships are a mission-critical asset and should be
treated as such. Relationship-centered organizations recognize this reality and
organize in such a way to reflect it.
Part IV
Network Resources
in Entrepreneurial
Settings
This page intentionally left blank
9 The effects of
network resources
arising from upper
echelon affiliations
on underwriter
prestige and
performance
Research on entrepreneurship in technology-intensive settings is closely linked
with research on alliances because partnering is a critical activity for high-tech
start-ups. As in other arenas, interorganizational networks and the resources
they create are a key factor in determining both the success of start-ups and
the antecedent conditions that enable these firms to attract partners in the
first place. Start-up enterprises in technology-intensive settings operate amidst
considerable uncertainty and information scarcity. As a result, social networks
in which such firms are embedded create valuable network resources that
can provide information and thus influence both behavior and economic
outcomes.
This chapter is based on joint research with Monica Higgins, and it exam-
ines the role of interorganizational networks in the entrepreneurial arena by
focusing on the origin of one set of important ties that firms may have:
interorganizational endorsements in the context of a company’s IPO, one of
the most critical events in a young firm’s lifetime. Prior research has shown
that securing the endorsement of a prestigious investment bank can be critical
for IPO success (Carter and Manaster 1990). Firms that go public generally do
so with the endorsement of a lead investment bank that underwrites the firm’s
security offerings. These investment banks act as intermediaries, providing
certification of the value of new firms to potential investors, who rely on the

This chapter is adapted with permission from ‘Getting Off to a Good Start: The Effects of Upper
Echelon Affiliations on Underwriter Prestige’ by Monica C. Higgins and Ranjay Gulati published in
Organization Science © 2003, (14/3): 244–63, the Institute for Operations Research and the Manage-
ment Sciences, 7240 Parkway Drive, Suite 310, Hanover, MD 21076 USA.
212 RESOURCES IN ENTREPRENEURIAL SETTINGS

investment bank’s evaluation of the quality of a firm when deciding whether

to buy stock in a young company (Carter and Manaster 1990). Still, while the
consequences of underwriter prestige for IPO performance have been exam-
ined (e.g. Beatty and Ritter 1986; Carter, Dark, and Singh 1998; Stuart, Hoang,
and Hybels 1999), the antecedents to such critical endorsements have not. As
a result, it is still unclear what factors may enable firms to attract the endorse-
ments of prestigious underwriters during this critical event in their lives.
This chapter suggests that a network perspective can be effective in under-
standing how firms are able to secure endorsements from prestigious under-
writers. Previous chapters have established that network resources are con-
duits of valuable information that help firms identify potential partners and
reduce the risks of uncertainty and opportunistic behavior in alliances. Here,
some of these ideas are extended by suggesting that network resources avail-
able to a firm not only facilitate the dissemination of information about a
partner but also serve as indicators of firm quality. Such indicators can help
young firms to establish an aura of organizational legitimacy more likely to
attract prestigious endorsers. Hence, network resources can serve as substitute
measures for less observable firm characteristics and at the same time provide
the firm with valuable information that can help it achieve success.
This chapter extends my conceptualization of network resources described
in prior sections of the book by including the amount and type of upper
echelon experience as a component of such resources available to a firm.
Along the lines of Chapter 4, I suggest here that network resources may
originate not only in the interorganizational ties that firms enter into with
other firms but also in the network connections that its upper echelons
may have with others. Furthermore, just as Chapter 4 showed that network
resources originating in interpersonal ties (board interlocks) can help firms
to develop interorganizational ties (strategic alliances) that further contribute
to their network resources, this chapter will delineate how another form of
interpersonal ties (upper echelon prior employment and board affiliations)
can help a firm to accumulate another important set of ties (connections with
prestigious endorsement entities). I suggest that such resources reveal their
value not only by mitigating uncertainty and reducing search costs but also by
providing an important signal of a young firm’s legitimacy to critical outsiders
such as prestigious underwriters. The experience base of the upper echelon is
conceptualized here as an indicator of the network resources that arise from
the connections those individuals bring to the firm. This idea parallels the
ideas in Chapter 4—which showed how network resources may emerge not
only from interorganizational connections but also from those based on the
interpersonal connections of its upper echelon—and builds on the other chap-
ters in Part I, which demonstrated how network resources can beget further
network ties that constitute alternate forms of future network resources.
I propose that the experience of a young firm’s upper echelon consti-
tutes network resources because it is indicative of (a) the connections those
 EFFECTS OF NETWORK RESOURCES ON UNDERWRITER CHOICE 213

individuals can tap into for the benefit of this young firm and (b) the quality of
the firm’s management. Both of these factors make such resources a powerful
signal to potential prestigious endorsers who must sift through a vast number
of firms to identify promising candidates under conditions of considerable
uncertainty.
This chapter also introduces a typology of network resources based on
upper echelon experience that distinguishes between upper echelon upstream,
horizontal, and downstream employment-based affiliations and suggests that
these different types of upper echelon affiliations are each distinct facets of net-
work resources that provide information and allay different types of endorser
concerns regarding firm legitimacy, affecting the endorsement process. Fur-
thermore, it includes the hypothesis that the relationships between network
resources arising from upper echelon experience and investment bank prestige
will be moderated by technological uncertainty.
These ideas were tested on a comprehensive sample of public and private
biotechnology firms that were founded between 1961 and 1994 and went
public between 1979 and 1996. Analyses of the five-year career histories of
the over 3,200 executives and directors that make up the upper echelons of
these firms show that firms with specific upper echelon affiliations are more
likely to attract the endorsement of a prestigious investment bank. Specifically,
the results suggest that upper echelon affiliations with prominent downstream
organizations (i.e. pharmaceutical and/or health care companies) and with
prominent horizontal organizations (i.e. biotechnology companies) help to
attract the endorsement of a prestigious investment bank. The results also
show that the greater the range of upper echelon affiliations across the cat-
egories of upstream, horizontal, and downstream affiliations, the more presti-
gious the firm’s lead underwriter will be.
The research detailed in this chapter extends the previous sections on net-
work resources in the following ways: (a) it elucidates the role of network
resources that can originate from the experiences of a young firm’s upper
echelons, (b) it shows how network resources can be signals of legitimacy
that shape the nature of interorganizational endorsement ties established by
entrepreneurial firms, and (c ) it provides a robust taxonomy of the network
resources based on upper echelon affiliations.

Theory and hypotheses

SECURING AN IPO ENDORSEMENT

Research by Carter and Manaster (1990) has demonstrated that high-
prestige investment banks are more likely to underwrite lower-risk IPOs than
low-prestige investment banks. One explanation for this pattern lies in the
relative levels of reputational capital associated with these endorsers (Beatty
214 RESOURCES IN ENTREPRENEURIAL SETTINGS

and Ritter 1986; Tinic 1988). The ability to generate substantial business
enables prestigious underwriters to maintain their reputations (Hayes 1971),
and the likelihood of future offerings is greater for firms issuing low-risk IPOs.
Additionally, high-prestige banks prefer lower-risk IPOs because of the legal
implications of underwriting risky deals; prestigious underwriters may have
greater legal liabilities associated with due diligence, which dissuades them
from engaging in speculative IPOs. Indeed, prestigious underwriters have
become significantly less likely to underwrite risky issues since 1933, when
the Security Exchange Commission Act imposed legal liabilities for lack of
due diligence (Tinic 1988). Given these factors, a start-up is generally not in a
position to decide which investment bank will endorse it. While the firm may
seek out prominent underwriters, it may not ultimately attract such parties.
This is somewhat similar to a job market situation: job-seekers may approach
employers of their choosing, but it is not guaranteed they will receive any
offers. In like manner, young firms must first sell themselves to secure the
interest of potential endorsers.
The relationship with endorsers is also somewhat different from other
types of interorganizational relationships, such as strategic alliances, because
in this instance the partnership is short-lived and it is with an intermediary
(the investment bank) evaluating the firm on behalf of others (the firm’s
investors). Still, in the case of start-ups, the firm is not a passive party to the
endorsement process. Rather, IPO team members—a firm’s top managers and
board members—attempt to attract the attention of investment banks early
in the firm’s life. Promotional materials, including the backgrounds of the
firm’s managing officers and board members, profiles of the firm’s research
and technology, and publications, are sent to prospective investment banks
in advance of the firm’s filing with the SEC. Additionally, the CEO schedules
appointments with investment bankers to ‘pitch’ the company, generally cast-
ing a broad rather than narrow net in its solicitations.
This matching process is also facilitated by investment banks, whose
research analysts are dedicated to particular industries and, moreover, to
specific industry segments such as biotechnology (Zuckerman 1999). After
reviewing the information available—collected both through the bank’s own
efforts to scan and retrieve information and through the firm’s initiative and
marketing efforts—analysts identify certain firms as having greater potential.
Following this initial evaluation period, these firms are then actively courted
by interested investment banks; firms may be invited to annual conferences
sponsored by investment banks, and the banks also engage in on-site due
diligence with the firms.
Convincing a prestigious investment bank to endorse a young firm during
its IPO is the primary responsibility of the firm’s top managers and board
members. Some have argued that the better the technological quality of the
young firm, the easier it is for the firm to attract the attention of a prestigious
 EFFECTS OF NETWORK RESOURCES ON UNDERWRITER CHOICE 215

investment bank and to obtain a sizable IPO (e.g. Deeds, DeCarolis, and
Coombs 1997). But during the early stages of a young firm’s lifetime, and
particularly in industries in which the product’s underlying technology is
complex and uncertain, performance criteria are more obscure than clear. As
a result, the use and control of symbolic information to create perceptions of
firm legitimacy are extremely important (Feldman and March 1981).
One way to heighten the perceived legitimacy of a young firm is to show-
case externally validated symbols of credibility. For example, highlighting
the patents that a firm has obtained can increase perceptions of legitimacy
by conveying competence and laying claims to valued intellectual property
(Powell and Brantley 1992; Baum and Powell 1995). Unfortunately, external
criteria of worth, such as patents, may be insufficient to assuage a variety of
concerns held by the investment community regarding the ‘social fitness’ or
legitimacy of the organization—especially in the biotechnology industry, in
which product development cycles span many years into the future (Meyer
and Rowan 1977). Indeed, in the present context, empirical studies have found
that the number of patents held by a biotechnology firm has had mixed effects
on investors’ perceptions (DeCarolis and Deeds 1999).
In addition to relying on externally validated symbols of legitimacy, such
as patents, a young firm may showcase other symbols of legitimacy that
effectively communicate its potential. One such symbol is the experience
base of the firm’s upper echelons. Internal criteria of worth, such as upper
echelon experience reflecting the ‘most prestige’ or ‘latest expert thinking’ can
legitimate organizations with key stakeholders. This experience can also serve
as an indicator of the access that senior management have to key outsiders
via prior and current affiliations with other prominent organizations. Outside
evaluators may assign worth to such credentials whether or not there is direct
evidence that they contribute measurably to organizational outcomes (Meyer
and Rowan 1977). The value of information in this case is symbolic. The
benefit to young firms of using and citing such relevant information during
the IPO process lies in the information’s likelihood of inspiring confidence
in key outsiders (Feldman and March 1981), thereby increasing perceptions
of the firm’s legitimacy. In this context, we can conceptualize upper echelon
affiliations with prominent organizations as an element of network resources
that can affect the perceived legitimacy of a young firm in the eyes of external
parties. In this instance, network resources serve as enablers for firms, catalyz-
ing connections with key others—prestigious investment banks that in turn
provide access to greater resources.

A TYPOLOGY OF UPPER ECHELON AFFILIATIONS

This chapter proposes a typology of upper echelon experience (depicted
in Figure 9.1) that builds from theory regarding the social organization of
216 RESOURCES IN ENTREPRENEURIAL SETTINGS

Upper Echelon Elements of Symbols of

Affiliation Types Legitimacy Legitimacy

Rank of membership in
Upstream Product viability
scientific profession

Rank of membership
Horizontal Competitive efficacy
in industry hierarchy

Production/marketing Rank of membership

Downstream
efficacy in product markets

Figure 9.1. A typology of upper echelon affiliations

attention and decision-making (Simon [1947] 1997; Ocasio 1997). Given the
limited cognitive bandwidth of busy executives and the high level of ambiguity
associated with evaluating young firms, investment bankers are constrained
to focus their attention on a limited set of issues (March and Olsen 1976;
Simon 1997; Thornton and Ocasio 1999). These issues may be structured in
the form of ‘logics’ about appropriate firm behavior and how to succeed in
an industry (Ocasio 1997). In the present context, the logic regarding what it
takes to succeed in this industry centers on at least three questions: (a) Can a
firm produce a scientifically viable product? (b) Can a firm compete effectively
in the industry? (c ) Can a firm bring a product all the way through the
development cycle to market? Hence, this chapter conceptualizes legitimacy
in this context as a multifaceted construct.
Recent studies have shown that an industry’s institutional logics or rules
of the game may be associated with membership in markets in professions,
affecting executive attention (Thornton and Ocasio 1999; Thornton 2001).
This chapter builds on this general idea that certain prevailing guidelines
or logics may focus executive attention and affect decision-making—here,
regarding the decision of an investment bank to underwrite a young firm.
We also extend the idea that a firm’s rank and membership in professions
and markets may confer legitimacy that differentially affects executive atten-
tion and decision-making. In this case, we consider how upper echelon
affiliations, which are a form of network resources, are akin to symbols
of membership in professions, markets, and hierarchies (Powell 1990) that
may confer different forms of legitimacy and thus affect endorser decision-
making.
In this chapter, I propose that three different facets of network resources
are represented by three distinct types of upper echelon affiliation, each
of which touches on a specific issue relevant to the investment commu-
nity’s endorsement decision: (a) upstream: upper echelon affiliations with
 EFFECTS OF NETWORK RESOURCES ON UNDERWRITER CHOICE 217

prominent research institutions (e.g. Dana Farber Cancer Institute) are sym-
bolic of the firm’s rank and membership in the scientific profession and can
redress legitimacy concerns regarding technological viability; (b) horizontal:
upper echelon affiliations with prominent biotechnology firms are symbolic of
a firm’s position and membership in the hierarchy of the industry, assuaging
legitimacy concerns regarding a firm’s ability to compete effectively in its
specific market; (c ) downstream: upper echelon affiliations with prominent
pharmaceutical and/or health care organizations are symbolic of the firm’s
membership position in biotechnology product markets, allaying concerns
that the firm will be able to bring its products to the marketplace.

Upper Echelon Upstream Affiliations

Upstream affiliations in the biotechnology industry, which are one form of
network resources, originate in upper echelon members’ employment affili-
ations with prominent organizations such as research institutions, think tanks,
and/or universities. During the acquaintanceship period, when a firm seeks
funding for an IPO, investment bankers are likely to interact with several
members of the firm’s upper echelon, including those in high-level research
positions with the firm. In addition to calibrating the stage of the firm’s prod-
ucts, discussions with upper echelon members with major research institution
experience should bolster analyst confidence in the firm’s ability to conduct
high-quality research and manage the research process, assuaging legitimacy
concerns regarding the technological viability of the firm’s products. As one
executive explained:
Getting the prestigious researchers was certainly part of the formula . . . scientists with
lots of letters after their names. It gives you access to other research to broaden your
net a little bit, not to be solely dependent upon one individual’s work.
Organizational research on the biotechnology industry has shown that indus-
try contact with academia enables the diffusion of technological know-
ledge extremely valuable to young biotechnology firms (e.g. Zucker, Darby,
and Brewer 1994). During the acquaintanceship period a young firm and a
potential underwriter share, resources such as the social networks alluded to
in the prior quote may or may not be directly observable. Thus, at this point
a young firm’s upper echelon affiliations with prominent research institu-
tions are highly valuable symbols. The firm’s ability to garner support from
individuals with externally validated credentials of high worth symbolizes
its membership and position in the scientific professional hierarchy (Abbott
1981), which can allay endorser concerns regarding its ability to tap into the
latest scientific thinking (Meyer and Rowan 1977; Baum and Powell 1995).
By controlling and citing such information, the firm ‘shows off ’ its criteria
of worth, making its position more favorable and hence more legitimate in
the eyes of key outsiders (Meyer and Rowan 1977; Feldman and March 1981).
218 RESOURCES IN ENTREPRENEURIAL SETTINGS

Thus, firms that have IPO team members affiliated with prominent research
institutions convey possession of greater network resources than firms without
such affiliations and this, in turn, positions them better to attract the attention
of a prestigious investment bank.
Hypothesis 1: The greater the number of upper echelon members with prominent
upstream affiliations, the more prestigious the investment bank that underwrites the
firm’s IPO.

Upper Echelon Horizontal Affiliations

An upper echelon’s horizontal affiliations in the biotechnology industry,
another form of network resources, stem from upper echelon members’
employment and board affiliations with prominent industry organizations.
Such affiliations symbolize the firm’s experience in the industry hierarchy,
assuaging concerns regarding the firm’s ability to compete effectively. In
the biotechnology industry, competing effectively requires industry-specific
knowledge to secure important resources such as cash, scientists, equipment,
and laboratory space, as well as managerial means to structure, design, and
run a biotech organization to maximize innovation and learning (Pisano and
Mang 1993; Powell, Koput, and Smith-Doerr 1996). As one vice president
described:
It was all about protein-based drugs, working with proteins—manufacturing exper-
tise, operations knowledge . . . and an understanding of how biotech plays in the capital
markets—meaning raise as much money as you can because it isn’t always going to be
there; when the window is open, put your hands out.

To a young firm, the symbolic value of having upper echelon members affil-
iated with major biotechnology companies is high, because these network
resources assuage concerns regarding a firm’s ability to compete (or even
survive) in the industry. As recent research suggests, organizations can facili-
tate the transfer of valuable resources such as intellectual capital and ideas
by recruiting individuals from well-established organizations in the firm’s
industry (Rao and Drazin 2002). During the firm’s acquaintanceship period
with potential underwriters, the transfer of such industry-specific knowledge
by virtue of an IPO team member’s affiliations may not be directly observable
to the investment community. However, the symbolic nature of these affili-
ations can inspire endorser confidence, affecting the perceived legitimacy of
the young firm. One executive described how this network resource is benefi-
cial for a young firm:
The fact that experienced managers at larger [biotechnology] firms left to join a start-
up signals that there’s something credible there—enough for that manager to take a
risk.
 EFFECTS OF NETWORK RESOURCES ON UNDERWRITER CHOICE 219

The upper echelon’s affiliation with a major biotechnology firm indicates that
those with the latest expert thinking have essentially credentialed the young
firm, enhancing the firm’s reputation in its own industry hierarchy (Meyer
and Rowan 1977). Thus, a firm’s upper echelon affiliations with prominent
biotechnology firms should be viewed as important network resources that
signal a firm’s capacity to compete and this in turn should attract the endorse-
ment of prestigious underwriters.
Hypothesis 2: The greater the number of upper echelon members with prominent
horizontal affiliations, the more prestigious the investment bank that underwrites the
firm’s IPO.

Upper Echelon Downstream Affiliations

In biotechnology, an upper echelon’s downstream affiliations, which consti-
tute a third form of network resources, originate in team members’ affiliations
with prominent pharmaceutical and/or health care companies. Downstream
companies have valuable resources such as information, contacts, and funds
that can help a young firm bring its core technology, product, and/or service
to market (Pisano 1991). A young firm’s reputation as a legitimate producer in
its market can be enhanced through symbols of association with such firms.
One former member of an IPO team described the beneficial effect of such
associations:
People onboard from major pharmas are valuable for the [firm’s] drug development
process. They have experience getting a drug through clinical trials . . . as opposed to
being just a group of academics—these guys can get the drug from the bench to the
bottle . . . And, it’s the ability to get in and meet with people from the big pharmas—
connections—that can help make it all happen.
Unlike small biotechnology firms, prominent pharmaceutical companies are
particularly well equipped to bring a product ‘from the bench to the bottle’—
they have experience testing products (e.g. clinical trials), gaining Food and
Drug Administration (FDA) approval, marketing products, and selling tech-
nologies (Powell, Koput, and Smith-Doerr 1996). Consequently, upper ech-
elon experience with such firms can assuage legitimacy concerns regarding
the firm’s ability to bring a product all the way through the seven- to ten-
year product development cycle and successfully to market. In the biotechnol-
ogy industry, signs of market legitimacy associated with bringing a product
through the development stages and to the market are essential in garnering
support from the investment community:
One of the issues is that you need to start with fundamental research but you need to
quickly get away from that because no one is going to pay for fundamental research
for an extended period of time. You need to be in the development game.
220 RESOURCES IN ENTREPRENEURIAL SETTINGS

During the acquaintanceship period, meetings with executives who have

experience at major pharmaceutical companies are likely to increase the
underwriter’s confidence in the firms’ ability to be ‘in the development
game’. These affiliations constitute network resources that symbolize the firm’s
membership and position in the marketplace. Again, even if the networks or
social resources that derive from an IPO team member’s career experience are
not directly observable to a potential underwriter during the acquaintanceship
process, the perception conveyed by such affiliations is that the firm has gilt-
edged qualifications that lend it legitimacy (Finkelstein 1992). Specifically,
downstream affiliations have symbolic value in that they assuage outsider
concerns regarding the firm’s legitimacy as a producer in the biotechnology
marketplace. Therefore, firms with upper echelon affiliations with prominent
pharmaceutical and/or health care organizations can be viewed as having
network resources that signal their capacity to bring a product to market and
this in turn should attract the attention of prestigious underwriters.
Hypothesis 3: The greater the number of upper echelon members with prominent
downstream affiliations, the more prestigious the investment bank that underwrites
the firm’s IPO.

UPPER ECHELON RANGE OF AFFILIATIONS

Thus far this chapter has argued that more of each of the three types of net-
work resources emanating from upper echelon affiliations is better, enabling a
young firm to allay all three types of legitimacy concerns: that it can produce
a scientifically viable product, compete effectively in the industry, and bring
a product to market. Upper echelon affiliations are network resources that
have a direct impact on the concerns of endorsing organizations, collectively
presenting a coherent and compelling story or social construction of the new
firm’s value (Berger and Luckman 1966). Consequently, the greater the range
of affiliations represented by a firm’s upper echelon, the greater the cumulative
network resources available to it and the greater the confidence an endorsing
organization should have in the firm’s overall ability to deliver a return. Sym-
bols in each of these areas should complement one another; they are not per-
fect substitutes because they tap into different legitimacy questions relevant to
external evaluations of the firm’s potential. A diverse set of affiliations conveys
to outsiders both the breadth and depth of the firm’s ability to develop viable
technology, compete well in the industry, and effectively bring a product to
market:
Hypothesis 4: The greater the range of prominent upstream, horizontal, and down-
stream affiliations of a young company’s upper echelon, the more prestigious the
investment bank that underwrites the firm’s IPO.
 EFFECTS OF NETWORK RESOURCES ON UNDERWRITER CHOICE 221

MODERATING EFFECTS OF TECHNOLOGICAL UNCERTAINTY

In the IPO context and in the biotechnology industry in particular, a firm’s
top executives face significant challenges convincing outsiders to invest in their
company. A young biotechnology firm’s needs for resources are extraordinar-
ily high, and payoff for investors is less clear than in other industries, as firms
going public in this sector are typically several years away from initial product
launches and steady revenue streams. Thus, the biotechnology IPO process
is a highly uncertain context in which to study the network-resource-based
antecedents of interorganizational endorsements. Within this context, there is
considerable variance in the amount of uncertainty associated with individual
firms. Because the function of network resources here is to mitigate uncer-
tainty and thereby attract an endorsement from a prestigious underwriter, the
importance of upper-echelon-based network resources will likely vary with
the amount of uncertainty a young firm faces. In other words, the greater
the uncertainty, the larger the influence of the network resources and the
concomitant symbols of legitimacy associated with the affiliations of a firm’s
upper echelon.
In the biotechnology industry, a major source of uncertainty concerns
a firm’s scientific technology. Given the long product development cycles
unique to this industry, it is particularly difficult for young biotechnology
firms to convince outsiders that the firm will be able to produce a sound
scientific product. Technological uncertainty is higher when a biotechnol-
ogy firm has products in early stages of development. As organizational
research on legitimacy suggests, symbols derived from the firm’s use and
control of information are especially important in establishing legitimacy
when a firm’s core technology is unclear (Feldman and March 1981; see
also Baum and Powell 1995). More generally, studies have shown that
firm affiliations with prominent others are particularly important during
times of uncertainty (e.g. Burt 1992; Podolny 1994). This suggests that net-
work resources arising from individual members’ affiliations with prominent
employers can be especially valuable in alleviating outsider concerns dur-
ing times of high technological uncertainty. Thus, when externally validated
symbols of legitimacy such as development milestones are not convincing
to outsiders, the symbolic value of a firm’s internal credentials is particu-
larly important, and outsiders would be expected to look even more favor-
ably on the amount and quality of experience possessed by the firm’s IPO
team.
Hypothesis 5: Technological uncertainty will moderate the effects of the upper
echelon’s affiliations with prominent upstream, horizontal, and downstream organi-
zations on the prestige of the investment bank that a firm is able to attract such that
upper echelon affiliations with prominent organizations will be particularly valuable
when a firm’s technology is relatively uncertain.
222 RESOURCES IN ENTREPRENEURIAL SETTINGS

Empirical research

METHOD
The sample used for the findings reported in this chapter is described in
Appendix 1 as ‘Biotechnology Start-ups Database’. These data were collected
by my coauthor Monica Higgins. The main variables were drawn from the
career histories of the over 3,200 managing officers and directors who made
up the upper echelons of the 299 public firms in our core sample, as found
in the firms’ final prospectuses. In filing with the SEC, firms are required to
list the last five years of experience of the firm’s managing officers and board
members; additional information (e.g. educational background) may be listed
but is not required by the SEC. We consulted additional sources such as Dun
and Bradstreet for cross-verification.
Investment bank prestige was measured using an index developed by Carter
and Manaster (1990) and then updated by Carter, Dark, and Singh (1998).
Underwriter prestige information was available for all but twenty-five of the
underwriters in our database. Mann-Whitney and Kolmogorov-Smirnov tests
indicated that the firms for which this information was not available did not
differ significantly on our main variables from those for which information
was available. These prestige measures have been employed in recent organ-
izational research on biotechnology firms that went public during the same
period as our study (cf. Stuart, Hoang, and Hybels 1999); this scale has been
cited widely by finance and organizational scholars (Podolny 1994; Bae, Klein,
and Bowyer 1999; Rau 2000). The methods employed by Carter and colleagues
to create the prestige scale are similar to those used by Podolny (1993) to
analyze debt markets. In brief, Carter and colleagues’ indices were created by
looking at the hierarchy of investment banks as presented in the ‘tombstone
announcements’ for IPOs that appear in the Investment Dealer’s Digest or the
Wall Street Journal. The highest integer rank (9) was assigned to the first-
listed underwriter on the first announcement examined, the second highest
integer rank (8) to the next-listed underwriter(s), and so on. On the second
tombstone announcement, they checked to see if any underwriter not listed on
the first one was listed above any underwriter that had been listed on the first
one. If this was the case, the new, more highly ranked underwriter was assigned
the rank of the superseded underwriter, and the superseded underwriter and
all lower-ranked underwriters were shifted one point down on the scale. When
more than ten categories became necessary to preserve the hierarchy presented
on the tombstones, decimal increments were employed. The scale presented by
Carter, Dark, and Singh (1998) is incremented in units of 0.125. Scores range
from 0, indicating lowest prestige, to 9, indicating highest prestige. In our
data-set, the mean score was 7.63. Carter and Dark’s (1992) analyses suggest
that these measures provide a finer-grained evaluation than a simpler market
 EFFECTS OF NETWORK RESOURCES ON UNDERWRITER CHOICE 223

share alternative (e.g. Megginson and Weiss 1991). We obtained the name of
the lead investment bank from the front page of each firm’s final prospectus.
Upper echelon affiliations were assessed by manually coding the last five
years of managing officers’ and board members’ employment and board mem-
berships, as listed in the firms’ final prospectuses. We assessed whether or
not each upper echelon member had at least one tie to prominent upstream,
horizontal, or downstream organizations during the year the company went
public. We created indices of organizational prominence for each of our three
categories, only looking at ties linking individuals with prominent organiza-
tions. Because the number of ties covaries with the size of the upper echelon,
we divided upstream, horizontal, and downstream tie measures by upper
echelon size, consistent with methods of other research in this arena (e.g.
Geletkanycz and Hambrick 1997).
To gauge the prominence of downstream and horizontally affiliated insti-
tutions, we used the total of their domain-specific firm revenues as a proxy
for prominence. To gauge whether upstream affiliations were with prominent
organizations, we employed external evaluations of the research institutions.
For upper echelon upstream affiliations, we assessed the number of promin-
ent research-based affiliations of members of a firm’s upper echelon through
board seats or employment (e.g. professorship). Seven consecutive editions
of the Gourman Report (Gourman 1980, 1983, 1985, 1987, 1989, 1993, 1996)
were used to compile eighteen lists of prominent research institutions—one
for each IPO year. We coded academic institutions that appeared in the top ten
in any of the following disciplines as prominent: microbiology/bacteriology,
biochemistry, biology, biomedical engineering/bioengineering, molecular
biology, cellular biology, molecular genetics, chemistry, and medicine. Gour-
man Report rankings are developed by examining an institution’s perform-
ance in years prior to the publication of the report. For years in which a
Gourman Report was not published, we used rankings from subsequent rather
than preceding Gourman Report editions to code institutions. For example,
codings for IPO years 1981 and 1982 were created from the 1983 Gourman
Report. For each year, 19–24 institutions (depending on the degree of overlap
created by institutions with multiple top ten rankings in differing disciplines)
were coded as prominent. In addition, a number of national government
institutions such as the NIH were added to these lists, as were nonuniversity
research institutions that received a high amount of grant money per employee
(e.g. the Salk Institute) (n = 9). The upper echelons in our sample generally
had two individuals with at least one affiliation with a prominent research
institution. Thus, upper echelon upstream affiliations was measured as the
total number of upper echelon members with at least one affiliation with a
prominent research organization.
For horizontal affiliations, we assessed the number of affiliations that mem-
bers of a firm’s upper echelon had to prominent biotechnology firms through
224 RESOURCES IN ENTREPRENEURIAL SETTINGS

employment and/or board memberships. We generated the list of prominent

biotechnology companies by taking the list of worldwide revenues for the
top thirty biotechnology companies in each of the years 1990–6, from POV
Inc., ‘Biotechnology’s Top 50 in Pharmaceuticals and Diagnostics: A Competi-
tive Analysis’ (1997). We coded a biotechnology company as prominent if it
appeared anywhere on this top-thirty listing at any time from 1990 through
1996.1 Thirty-eight companies total were coded as prominent biotechnology
firms; therefore, this was a relatively stable list. The firms in our sample gen-
erally had one or two individuals with an affiliation to a prominent biotech-
nology company. Upper echelon horizontal affiliations was measured as the
total number of upper echelon members with at least one affiliation with a
prominent biotechnology organization.
For upper echelon downstream affiliations, we assessed the number of affili-
ations that upper echelon members had to prominent pharmaceutical and/or
health care institutions through prior employment and/or board member-
ships. To determine prominence, we used COMPUSTAT to generate eight-
een lists of the top pharmaceutical and health care organizations by sales
since 1979—one for each IPO year. International company rankings have
appeared on COMPUSTAT only since 1988, so our rankings are based on
the top thirty US organizations from 1979 to 1987 and on the top thirty US
and international organizations from 1988 to 1996. We coded the top thirty
organizations in a given year as prominent. We supplemented our lists with
major pharmaceutical and health care companies that were private or based
in Europe or Japan that were not listed in COMPUSTAT but were listed in
PharmaBusiness and had comparable sales because many young biotechnol-
ogy firms rely on international resources for support and talent. The firms
in our sample generally had two to three team members with at least one
tie to a prominent pharmaceutical or health care institution. Upper echelon
downstream affiliations was measured as the total number of upper echelon
members with at least one affiliation with a prominent pharmaceutical and/or
health care organization.
We measured range of upper echelon affiliations in two ways. First, we used
a variation of the Herfindahl-Hirschman index,


3
H =1− pi2 (1)
i =1

in which H is the measure of heterogeneity or range and p is the percentage

of individuals who have affiliations with prominent institutions in each of our
¹ Similar rankings were not available for the biotechnology industry prior to 1990. In looking at the
employment affiliations in our data, we found that very few individuals had spent time at more than
one biotechnology company prior to 1990, due in large part to the youth of the industry. Of those few
individuals, the firms at which the overwhelming majority had spent time were already classified as
prominent by the rankings we used.
 EFFECTS OF NETWORK RESOURCES ON UNDERWRITER CHOICE 225

three categories. This variable was set to equal 0 when the upper echelon
had no relevant affiliations. This measure is equivalent to Blau’s index of
heterogeneity (1977). Second, we measured range as the count, 0 to 3, of
the number of affiliation categories (upstream, horizontal, and downstream)
covered by the career experiences of each firm’s upper echelon. For example, a
firm with an upper echelon with ten members, two of whom had worked for
prominent pharmaceutical organizations, would receive a score of 1, while a
different firm with a ten-person upper echelon that included one member who
sat on the board of a prominent biotechnology company and another who had
worked for a prominent pharmaceutical company would receive a score of 2.
We included a comprehensive set of control variables to ensure the robust-
ness of our findings. First, to control for uncertainty associated with the stock
market for biotechnology companies at the time our firms went public, we
employed a financial index developed by Lerner (1994) and cited extensively
in biotechnology industry research (e.g. Zucker, Darby, and Brewer 1994;
Baum, Calabrese, and Silverman 2000) that gauges the receptivity of the equity
markets to biotechnology offerings. Specifically, we used the value of Lerner’s
equity index at the end of the month prior to the IPO date for each of our
firms.
In addition, we included a control variable for technological uncertainty:
product stage. Because one of the most relevant thresholds for evaluation is the
stage of clinical trials (Pisano 1991), our measure of product stage was based
on a three-category classification: whether a company’s lead product was in
preclinical stages of development (coded as 1), clinical stages of development
(coded as 2), or postclinical stages of development (coded as 3).
We also included controls for firm size and firm age, consistent with prior
research on entrepreneurial firms and studies of IPOs. And, while not a direct
indication of firm size, the amount of private financing the firm received prior
to the IPO provides a reliable measure of its past success in securing financial
capital and thus is an indicator of the firm’s potential for growth as well.
Private financing was calculated by summing the rounds of financing listed
in the final prospectuses. This measure was adjusted to constant 1996 dollars
and logged in our analyses.
We also coded geographic location of the firms. Young firms located in
areas that are rich with industry-related activity will likely have greater
access to resources—including qualified personnel, suitable lab space, and
technology—that can give them an advantage. A dummy variable for location
took a value of ‘1’ if the company was headquartered in one of the areas
consistently rated among the top biotechnology locations for the period of
our study (Burrill and Lee 1990, 1993; Lee and Burrill, 1995): San Francisco,
Boston, or San Diego. Location took a value of ‘0’ otherwise.
In addition, we controlled for the total number of alliances a firm has with
business and/or research organizations at the time of the IPO because prior
226 RESOURCES IN ENTREPRENEURIAL SETTINGS

research has demonstrated that strategic partnerships have important implica-

tions for organizational outcomes. And, given prior research on the important
role of venture capitalists during initial public offerings (e.g. Gompers et al.
1998), we controlled for the prominence of venture capital firms at the time
of the IPO. Firms were coded as 1 if any of the biotechnology firm’s venture
capital firms (with a minimum of a 5% stake) were listed among the top thirty
venture capital firms on the list of prominent firms for the year prior to the
firm’s IPO date and 0 otherwise.2
We also included four variables that account for characteristics of the top
management team (TMT), as opposed to the board, consistent with prior
TMT research (e.g. Geletkanycz and Hambrick 1997). First, we included a
variable for the average prior position level of TMT members that reflects
the caliber of the prior jobs the executives held. We used a 0 to 5 ranking,
from low to high, beginning with nonmanagement positions and ending with
CEO/president, similar to that employed by Eisenhardt and Schoonhoven
(1996) and then calculated the mean level of prior position for each TMT in
our sample. Second, we controlled for the average age of the executives, which
may be considered an indicator of the amount and breadth of experience of the
TMT. Additionally, we assessed the amount of dispersion of TMT members’
characteristics. We included a variable for the diversity of tenure with the firm
among TMT members. Consistent with prior research, we used the coefficient
of variation for the demographic variable of tenure in the group (Allison
1978; Bantel and Jackson 1989). And we included a variable for the functional
heterogeneity of the TMT members. We classified the previous functional
positions of all of the top managers in our dataset, based on an extension
of categories used by Hambrick, Cho, and Chen (1996) that also included
positions associated with younger research-based firms: chief scientific officer

² We investigated additional ways to code VC prominence, including, in particular, the age of the
‘lead’ VC firm at the time of a firm’s IPO, in which ‘lead’ was considered the earliest investor (cf.
Gompers 1996). In the present context, we found that such an approach was not possible to implement
due to methodological and conceptual challenges. Methodologically, due to the significant funding
requirements in biotechnology, many investors tend to come in prior to a firm’s IPO, such that the
initial seed investors often no longer hold a significant position when the firm goes public. Additionally,
identifying the ‘lead’ VC firm from the final prospectus is difficult because entities that have the longest
equity stake in a firm may not also have board membership and/or may not be recognizable VC firms
(but rather are collections of individuals who raised a fund for the express purpose of starting a
specific biotech firm). Conceptually, using the VC firm that was the oldest investor as the ‘lead’ VC
and evaluating whether or not the VC firm was prestigious based on its age is problematic, since we
want to capture the symbolic value associated with having any well-established VC firms on board
at the time of IPO, irrespective of when they invested. Since the oldest firm may not have the largest
equity stake at time of IPO and/or may not even be a recognizable VC firm, evaluating VC prominence
based on the age of the oldest investing firm would miss the positive symbolic value associated with
having the involvement of a well-established firm such as Hambrecht and Quist, which could have a
sizable position by the time of IPO and yet not be the earliest seed investor. Thus, we chose to employ
a time-sensitive measure of VC prominence, using one consistent data source (VentureXpert).
 EFFECTS OF NETWORK RESOURCES ON UNDERWRITER CHOICE 227

(CSO), founder, researcher, lab manager, and professor. Consistent with prior
research, we used a variation of the Herfindal-Hirschman index.
Finally, we included a variable that accounts for the type of business the
biotechnology company was in. From the main company descriptions in the
prospectuses, firms were coded as being in therapeutics, diagnostics, both
diagnostics and therapeutics, agriculture, chemical, or other. To verify the
firm’s business, we referred to the IBI database and BioScan. For business type,
we dummy coded whether the company was in a core biotechnology field (i.e.
therapeutics or therapeutics and diagnostics, or neither).

ANALYSIS
For each set of analyses, we used Heckman selection models to guard against
the possibility of sample selection bias (Heckman 1979). In general, sample
selection bias can arise when the criteria for selecting observations are not
independent of the outcome variables. For example, studies of earnings and
the status achievement of women can run the risk of sample selection bias if
they do not account for factors that affect women’s participation in the work-
force. To correct for potential bias in such studies, sample selection models
can be run that account for women’s entry into the labor market and for the
market rewards they receive (for a review, see Winship and Mare 1992).
Here, we are studying factors associated with upper echelon experience
that influence the prestige of the investment banks that underwrite the firms’
security offerings when a firm goes public. Therefore, to conduct analyses on
our core sample of public firms, we need to first compare the sample of firms
that did go public with a sample of private firms that were founded in the same
period but were not able to go public. This way, antecedent conditions that
impact a biotechnology firm’s ability to go public are considered. Including
these additional analyses (here, predicting whether a firm is able to go public)
guards the researcher against the possibility that there is some other factor, in
addition to those studied in the main analyses, that could be accounting for
the effects observed.
Heckman’s procedure generates consistent, asymptotically efficient esti-
mates that can enable us to generalize to the larger population of biotechnol-
ogy firms (cf. Heckman 1979). The Heckman model is a two-stage procedure
that uses the larger risk set of public and private firms, including firms
that ceased to exist as of 1996 in both categories (n = 858). Probit regres-
sion was used to estimate the likelihood of completing an IPO during the
first stage; estimates of parameters from that model were then incorporated
into a second-stage regression model to predict prestige of investment bank
(Van de Ven and Van Praag 1981). For the first-stage models, information
228 RESOURCES IN ENTREPRENEURIAL SETTINGS

available for both our public and private firms—geographical location, year
of founding, and type of business—was used to predict likelihood of going
public.3 In the second stage, though the sample includes public and pri-
vate firms, the standard errors reported reflect the smaller sample of firms
(n = 299).
To account for the fact that the financial information spanned two decades,
private financing estimates were transformed into constant 1996 dollars. In
order to account for the time-varying market conditions firms faced when
going public, the equity index variable described earlier was used in all analy-
ses. The numbers were calibrated not just by the year but also by the month
preceding the offering, which produces fairly fine-grained estimates.

RESULTS
Correlations between the main variables of interest are provided in Table 9.1.
This table shows that the relationships between key variables of interest are
in the directions predicted. Table 9.2 presents findings for the effects of upper
echelon affiliations with prominent upstream, horizontal, and downstream
organizations on the prestige of the firm’s lead investment bank. In this
main table, we begin with the selection equation variables and the firm and
industry-level control variables, and then include the traditional upper ech-
elon variables and core measures of upper echelon affiliations. The first-
stage probit models predicting whether a company was able to go public in
the first instance correctly classified 73 percent of our cases. As shown in
the Heckman selection models, all of the selection variables were significant
predictors.
Model 1 in Table 9.2 includes the control variables associated with the
firm and the industry. As expected, the prominence of the firm’s venture
capital firms and the amount of private financing raised were positively and
significantly related to the prestige of the young company’s lead investment
bank at the time of the IPO. Model 2 includes upper echelon variables that
have been investigated in prior research. Here we find that the average prior
position level of the upper echelon members and firm size are also positively
related to investment bank prestige. Hypothesis 1 predicted that prominent
upstream affiliations among upper echelons would be positively related to
the prestige of a firm’s lead underwriter. Model 3 shows that no support
for hypothesis 1 was found. However, models 4 and 5 show support for

³ Two-stage models do a particularly good job at estimation when there is at least one variable that
may be considered an ‘instrument’ that is a good predictor in the first stage but not the second stage
of the model; in this case, that ‘instrument’ was business type (see Winship and Mare 1992 for further
discussion).
Table 9.1. Means, standard deviations, and correlations (n = 299)

Variable X SD 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

1. Equity index 3.78 0.96 — — — — — — — — — — — — — — — —

2. Firm age 4.90 2.89 0.08 — — — — — — — — — — — — — — —
3. Firm size 85.64 120.85 0.02 0.08 — — — — — — — — — — — — — —
4. Location 0.50 0.50 0.15∗∗ 0.07 0.05 — — — — — — — — — — — — —
5. Number of 1.65 1.90 0.05 0.07 −0.02 −0.04 — — — — — — — — — — — —
alliances
6. VC prominence 0.32 0.47 0.17∗∗ −0.01 0.05 0.33∗∗∗ 0.04 — — — — — — — — — — —
7. Private 6.92 0.77 0.19∗∗ 0.10∗ 0.28∗∗∗ 0.19∗∗ 0.23∗∗∗ 0.20∗∗ — — — — — — — — — —
financinga
8. Product stage 1.84 0.85 0.04 0.25∗∗∗ 0.26∗∗∗ 0.05 −0.10† 0.03 0.14∗ — — — — — — — — —
9. Avg. prior 2.72 0.67 −0.00 −0.08 −0.08 0.01 −0.00 0.05 0.06 0.08 — — — — — — — —
position level
10. Age of 47.60 4.56 −0.10† 0.12∗ −0.02 −0.17∗∗ −0.03 −0.27∗∗∗ −0.07 −0.07 0.18∗∗ — — — — — — —
executives
11. Tenure with firm 0.65 0.33 0.04 0.08 −0.00 −0.04 0.05 −0.05 0.06 −0.05 −0.02 −0.00 — — — — — —
12. Functional 0.79 0.10 0.01 0.11† 0.14∗ 0.09 0.04 −0.01 0.25∗∗∗ 0.17∗∗ −0.39∗∗∗ −0.01 0.10† — — — — —
heterogeneity
13. Upstream 0.14 0.13 0.05 −0.09 −0.02 0.17∗∗ 0.03 −0.04 0.01 −0.20∗∗∗ −0.12∗ −0.05 −0.01 0.02 — — — —
affiliations
14. Horizontal 0.12 0.15 0.03 −0.09 0.03 0.27∗∗∗ 0.07 0.17∗∗ 0.26∗∗∗ −0.14∗ 0.04 −0.06 0.01 0.14∗ 0.10† — — —
affiliations
15. Downstream 0.24 0.17 0.03 0.02 0.02 −0.01 0.03 0.07 0.24∗∗∗ 0.01 0.20∗∗ 0.13∗ 0.02 0.03 −0.07 0.10∗ — —
affiliations
16. Range of 2.18 0.86 0.10† −0.01 0.12∗ 0.28∗∗∗ 0.13∗ 0.13∗ 0.40∗∗∗ −0.03 0.09 −0.07 0.10† 0.24∗∗∗ 0.33∗∗∗ 0.58∗∗∗ 0.28∗∗∗ —
affiliations
17. Underwriter 7.63 1.95 0.14∗ 0.13∗ 0.22∗∗ 0.12† 0.18∗∗ 0.27∗∗∗ 0.41∗∗∗ 0.17∗ 0.13∗ −0.03 0.05 0.12† −0.14∗ 0.27∗∗∗ 0.27∗∗∗ 0.33∗∗∗
prestigeb

Notes: a Adjusted to constant 1996 dollars, then logged.

b
n = 244 due to investment banks not ranked on Carter–Manaster scale.
∗
p < .05; ∗∗ p < .01; ∗∗∗ p < .001; † p < .10.
Table 9.2. Heckman selection models of investment bank prestige at time of IPOa

I II III IV V VI VII

Control variables
Equity index 0.06 (0.12) 0.06 (0.12) 0.08 (0.12) 0.08 (0.12) 0.08 (0.11) 0.05 (0.12) 0.08 (0.11)
Firm age 0.06 (0.04) 0.07† (0.04) 0.07 (0.04) 0.07† (0.04) 0.08∗ (0.04) 0.08† (0.04) 0.07† (0.04)
Firm size 0.00† (0.00) 0.00∗ (0.00) 0.00∗ (0.00) 0.00∗ (0.00) 0.00∗ (0.00) 0.00∗ (0.00) 0.00∗ (0.00)
Location 0.00 (0.26) −0.05 (0.26) −0.03 (0.26) −0.17 (0.26) −0.06 (0.26) −0.18 (0.26) −0.11 (0.26)
Number alliances 0.11† (0.06) 0.11† (0.06) 0.11† (0.06) 0.11† (0.06) 0.12∗ (0.06) 0.10† (0.06) 0.11∗ (0.05)
VC prominence 0.81∗∗ (0.25) 0.84∗∗ (0.25) 0.80∗∗ (0.25) 0.72∗∗ (0.25) 0.70∗∗ (0.24) 0.83∗∗ (0.25) 0.71∗∗ (0.24)
Private financingb 0.75∗∗∗ (0.16) 0.63∗∗∗ (0.17) 0.62∗∗∗ (0.17) 0.54∗∗ (0.17) 0.44∗∗ (0.17) 0.49∗∗ (0.17) 0.36∗ (0.17)
Product stage 0.28† (0.14) 0.22 (0.15) 0.19 (0.15) 0.28† (0.15) 0.25† (0.15) 0.27† (0.15) 0.24† (0.14)
Upper echelon variables
Avg. prior position level — 0.55∗∗ (0.21) 0.52∗ (0.21) 0.46∗ (0.20) 0.41∗ (0.20) 0.47∗ (0.20) 0.36† (0.20)
Age of executives — −0.01 (0.03) −0.01 (0.03) −0.01 (0.03) −0.02 (0.02) −0.01 (0.03) −0.02 (0.02)
Tenure with firm — 0.30 (0.33) 0.30 (0.33) 0.31 (0.32) 0.28 (0.32) 0.21 (0.33) 0.21 (0.32)
Functional heterogeneity — 2.08 (1.42) 2.04 (1.42) 1.40 (1.41) 1.39 (1.38) 1.28 (1.42) 0.98 (1.38)
Upper echelon affiliations
Upstream — — −1.33 (0.83) −1.31 (0.81) 0.99 (0.80) — −1.75∗ (0.88)
Horizontal — — — 2.37∗∗ (0.78) 2.31∗∗ (0.76) — 1.35 (0.89)
Downstream — — — — 2.15∗∗ (0.68) — 1.77∗ (0.70)
Range — — — — — 0.45∗∗ (0.14) 0.36∗ (0.18)
Constant 0.77 (1.18) −1.19 (1.85) −0.66 (1.87) 0.08 (1.85) 0.81 (1.83) −0.29 (1.84) 1.39 (1.84)
Selection equation variables
Location 0.55∗∗∗ (0.11) 0.55∗∗∗ (0.11) 0.55∗∗∗ (0.11) 0.55∗∗∗ (0.11) 0.55∗∗∗ (0.11) 0.55∗∗∗ (0.11) 0.55∗∗∗ (0.11)
Business type 1.23∗∗∗ (0.11) 1.23∗∗∗ (0.11) 1.23∗∗∗ (0.11) 1.23∗∗∗ (0.11) 1.23∗∗∗ (0.11) 1.23∗∗∗ (0.11) 1.23∗∗∗ (0.11)
Year founded −0.06∗∗∗ (0.01) −0.06∗∗∗ (0.01) −0.06∗∗∗ (0.01) −0.06∗∗∗ (0.01) −0.06∗∗∗ (0.01) −0.06∗∗∗ (0.01) −0.06∗∗∗ (0.01)
Constant 119.96∗∗∗ (21.53) 119.96∗∗∗ (21.53) 119.96∗∗∗ (21.53) 119.96∗∗∗ (21.53) 119.96∗∗∗ (21.53) 119.96∗∗∗ (21.53) 119.96∗∗∗ (21.53)
2
Wald ˜ 107.56∗∗∗ 118.98∗∗∗ 122.45∗∗∗ 135.29∗∗∗ 149.94∗∗∗ 132.44∗∗∗ 156.21∗∗∗
Rho −0.02 −0.13 −0.20 −0.19 −0.07 −0.08 −0.10
n 244 244 244 244 244 244 244

Notes: a Unstandardized regression coefficients reported; standard errors in parentheses.

b
Adjusted to constant 1996 dollars and logged.
∗
p < .05; ∗∗ p < .01; ∗∗∗ p < .001 (two-tailed tests); † p < .10.
 EFFECTS OF NETWORK RESOURCES ON UNDERWRITER CHOICE 231

hypothesis 2—that prominent horizontal affiliations are positively related to

investment bank prestige. In addition, support for hypothesis 3 was found:
there was a significant and positive relationship between upper echelon
affiliations with prominent downstream organizations and investment bank
prestige.
The study also showed substantial support for hypothesis 4, as shown
in model 6 of Table 2: upper echelon range of affiliations was significantly
and positively related to the prestige of a firm’s lead underwriter. Because
range was constructed from the three forms of upper echelon affiliations,
it is informative to present the results for range apart from the proportion
of variance explained by our three types of upper echelon affiliations (as
shown in model 6). The heterogeneity measure of range was highly correlated
(r > .90) with the count measure of range. The final model (model 7) includes
all upper echelon affiliation variables and shows a significant relationship
between both downstream affiliations (p = .011) and range of affiliations
and investment bank prestige. In this last model, the results also revealed an
unexpected negative relationship between upper echelon upstream affiliations
and investment bank prestige. It is likely that the loss of the significant effect
for horizontal affiliations in this final model is due to the significant correl-
ation between range and the other affiliation variables from which range was
constructed.
Subsequent analyses revealed support for hypothesis 5, which predicted
that technological uncertainty would moderate the effects of upper echelon
affiliations on prestige of the firm’s lead underwriter, such that upper ech-
elon affiliations with prominent organizations would be particularly valuable
when a firm’s technology is relatively uncertain. Product stage was employed
as the main indicator of technological uncertainty. The analyses tested for
interaction effects between product stage and each type of upper echelon affili-
ation on investment bank prestige. Specifically, the results show sig-
nificant negative interaction effects between product stage and upper
echelon range of affiliations on investment bank prestige (‚ = −0.3184,
p < .05). They also show significant and negative interaction effects between
product stage and upper echelon horizontal affiliations on investment bank
prestige (‚ = −2.16, p < .05).4 These interaction effects are depicted in
Figure 9.2.
An examination of the models in Table 9.2 reveals interesting patterns with
respect to the control variables. First, the prominence of the company’s ven-
ture capital firms and the amount of private financing the firm received prior

⁴ In additional analyses, we recoded product stage into three dummy variables, one for each stage
of product development, and reran the interaction analyses. The results remained consistent with
the results we obtained using our 1-2-3 count measure of product stage. In particular, the strongest
interaction effect was found between product stage and range of upper echelon affiliations. To be
parsimonious, this chapter presents the results using the 1-2-3 variable.
232 RESOURCES IN ENTREPRENEURIAL SETTINGS

Early stage Advanced stage

7.8592
Underwriter prestige

6.04294
0 3
Range

Early product stage Late product stage

9.47238
Underwriter prestige

6.87934

.727273
0 Horizontal affiliations (normalized)

Figure 9.2. Interaction plots: The moderating effects of technological uncertainty

to the offering had significant and positive effects on underwriter prestige. In

most instances, the results also suggest that larger firms tend to have more
successful IPOs. Additional results also suggest that firms with prestigious
strategic alliances received the endorsement of more prestigious underwriters.
 EFFECTS OF NETWORK RESOURCES ON UNDERWRITER CHOICE 233

Conclusion
The study detailed in this chapter suggests that network resources implicit in
a young firm’s upper echelon affiliations can be important signals of legiti-
macy to important intermediaries such as investment banks when they are
deciding whether to endorse a young firm. This study also shows that the
ability of firms to enter partnerships with prestigious intermediaries and to
garner financial resources from these is influenced by the specific kinds of
network resources that a firm possesses, which are directly associated with
the career-based affiliations of a firm’s upper echelon at the time of its IPO.
This study further suggests that the greater the perceived legitimacy of a
young firm, as signaled by its affiliation-based network resources, the greater
the prestige of the investment bank that a firm will be able to attract as
its lead IPO underwriter. This effect was examined for each facet of the
proposed upper echelon affiliation typology of network resources, and it
was found that young biotechnology firms with upper echelon affiliations
with prominent pharmaceutical and/or health care organizations are bet-
ter positioned to garner the support of prestigious underwriters. The study
also provided some evidence that upper echelon affiliations with promi-
nent biotechnology firms better position a company to secure the endorse-
ment of prestigious underwriters. Finally, it showed that the greater the
range of upper echelon affiliations with upstream, horizontal, and down-
stream organizations, the greater the prestige of the firm’s lead investment
bank.
Because our hypotheses centered on the symbolic value of upper echelon
affiliations, the reported study also tested whether the effects were especially
strong during times of high uncertainty. In particular, it tested whether having
ties to prominent organizations was especially valuable to a firm when its lead
product was in early stages of development. Results revealed significant and
negative interaction effects between product stage and both upper echelon
range and horizontal affiliations on investment bank prestige. These results
lend support to our claims regarding the moderating role of technological
uncertainty in the present context.
Surprisingly, this study did not find that network resources emanating
from upper echelon upstream affiliations were significantly and positively
associated with underwriter prestige. In fact, in one case, upstream affiliations
were negatively associated with investment bank prestige. One possible expla-
nation is that investment bankers look at alternative information to assess
whether a firm’s science is sound. Perhaps a firm’s ties with scientific orga-
nizations are not fully represented in the firm’s final prospectus, limiting the
extent to which we were able to capture symbols of technological legitimacy
associated with upstream affiliations. As an alternative explanation, it is also
possible that upstream affiliations send negative signals by implying that the
234 RESOURCES IN ENTREPRENEURIAL SETTINGS

firm’s products are in the basic research stages of development (cf. Baum,
Calabrese, and Silverman 2000). Thus, perhaps upstream affiliations at the
time of its IPO indicate to outsiders that a firm is trying to go public too
early.
Results for the other independent variables included here yielded additional
insights. In addition to amount of private financing, the prominence of a
firm’s venture capital partners was consistently and positively associated with
the prestige of a firm’s lead underwriter. There was also some evidence for
a similar relationship between number of strategic alliances and underwriter
prestige. Venture capital prominence was also significantly related to firm net
proceeds.
Together, these results are consistent with the view that external parties look
to the involvement of other firms when gauging whether to back a young
firm. The present research supports the idea that the firm’s affiliations with
prior organizations affects subsequent alliance formation, as was discussed
in Part I, and extends this research by suggesting the upper-echelon-based
affiliations of firms are network resources that enable firms to partner with
prestigious underwriters. In a following section of this chapter we see how
such endorsements are themselves powerful network resources that enable
firms to have successful public offerings.
The study detailed in this chapter focused on a novel set of interpersonal ties
arising from a firm’s upper echelons’ prior employment and board affiliation
ties. It assessed the role of such ties as network resources with strong sym-
bolic value to other key constituents on which the firm may be dependent.
Specifically, it showed how such ties can be a catalyst that enables firms to
build endorsement relationships with prestigious underwriters. Thus, this
study shows how one set of ties can enable a firm to accumulate other valu-
able ties. It echoes an earlier theme: network resources beget more network
resources.
This study also contributes to organizational research on endorsements,
legitimacy, and entrepreneurship in several respects. First, it considers the role
of network resources emanating from a young firm’s upper echelon experi-
ence in facilitating the establishment of endorsement ties. It further suggests
that such resources can be beneficial to firms not so much by connecting
potential partners, as was shown previously, but rather by serving as powerful
signals of legitimacy that can be especially important when there is significant
uncertainty surrounding a firm. It also provides a typology of such network
resources and describes in detail how each type may influence outcomes for
the firm.
Second, this study extends and further develops some of the research
reported in earlier chapters by showing how network resources arising from
a firm’s upper echelon allow firms to form potentially advantageous new
 EFFECTS OF NETWORK RESOURCES ON UNDERWRITER CHOICE 235

connections with other powerful intermediaries. Another way to conceptu-

alize this is as an examination of the origins of critical intermediary ties in the
early life stages of a firm. Whereas prior research has examined the role of third
parties in helping a firm obtain much-needed resources from its environment
(e.g. Stuart, Hoang, and Hybels 1999; Zuckerman 1999), the origins of these
intraorganizational endorsements have been overlooked. The results suggest
that the network resources arising from the type and quantity of experience
of those who lead and manage a young firm can provide important symbols
of legitimacy that affect the endorsement process. In mediated markets such
as the primary market for IPOs, organizations have limited prior interaction
patterns with one another. Further, there are ample ‘questions in the minds
of actors that [the firm] serves as the natural way to effect some kind of
collective action’ (Hannan and Carroll 1992: 34). In such contexts, symbols
of legitimacy derived from network resources can be especially valuable to
outsiders considering endorsement (Meyer and Rowan 1977; Feldman and
March 1981).
Third, this study adds to the significant stream of research that has shown
that affiliations with prominent institutions can yield beneficial consequences
for firms (Podolny 1994; Podolny, Stuart, and Hannan 1996). Such research
is based on the Matthew Effect, which refers to the tendency for credit or
benefits to accrue to those who have already achieved success: as Merton
(1973) argued in his study of elite scientists, prestige tends to beget prestige.
Unlike prior research, which has focused attention on the benefits associated
with having similarly prominent interorganizational ties, this study considers
whether the type of tie a firm has affects its outcomes. The typology we employ
introduces sharp distinctions between organizational affiliations, enabling a
richer understanding of the conditions under which transfers of status are
likely to occur. Also, focusing on one particular industry and on one critical
event in the life of a young firm, the IPO, affords an in-depth look at how
different types of prestigious affiliations associated with a firm’s upper echelon
may confer different symbols affecting outsider perceptions of a young firm’s
legitimacy in different ways.
Fourth, this study extends prior research on social networks and organiza-
tional legitimacy by arguing that a firm’s upper echelon’s experience base is a
network resource that can provide powerful symbols of legitimacy to external
parties, such as potential underwriters, who are considering endorsement.
Thus, unlike prior IPO research, which has focused on outsider perceptions
of firm quality that are based on specific resources that may transfer across
firm ties (e.g. Stuart, Hoang, and Hybels 1999), this chapter’s central argu-
ment is based on the notion that symbols of legitimacy arising from a firm’s
network resources can affect outsider perceptions of the firm. Thus, while an
investment bank may be the final arbiter in the decision to endorse a young
236 RESOURCES IN ENTREPRENEURIAL SETTINGS

firm, the theory and conceptualization of the IPO process described in this
chapter depicts the firm as an active rather than a passive player or ‘pipe’
through which resources flow (cf. Podolny 2001) during the IPO process.
The firm’s IPO team can use network resources to highlight organizational
credentials, such as upper echelon backgrounds, in order to demonstrate the
firm’s organizational legitimacy.
Furthermore, the present study is distinctive because it revealed how net-
work resources at the upper echelon level might allow firms to build valu-
able connections with other organizations that in turn constitute further
valuable network resources. Empirical research has seldom addressed how
individual-level affiliations can affect the formation of firm-level affiliations
or how group-level ties embedded in members’ employment and board mem-
berships affect the formation of interorganizational ties. Thus, the findings
of this study have important implications for research that links microlevel
interorganizational affiliations to more macrolevel relationships (Coleman
1990) and to the growth of young firms (Burton, Sørensen, and Beckman
1998).
Finally, it is worth noting that the qualitative and quantitative findings of
this research reached remarkable convergence. During the acquaintanceship
stage between a young firm and an investment bank, a firm faces uncertainty
on a host of fronts. During such times, important outsiders such as investment
bankers and potential investors are likely to attend to signs that the firm shows
promise and is a legitimate, collective entity (Hannan and Carroll 1992). Such
symbols are valuable beyond other more purely objective indicators such as
firm age, size, location, and product stage. Both empirical work and interviews
revealed that the backgrounds of a firm’s upper echelon may be instrumental
in convincing outsiders that a young firm is getting off to a good start and
is thus worthy of endorsement. While the findings do not suggest a specific
formula for designing an ideal upper echelon for a young firm, they do suggest
that the type and amount of network resources arising from this group’s
affiliations at the time of its IPO affect the company’s ability to receive the
endorsement of a prestigious third party. Consequently, because they provide
valuable information that reduces uncertainty and grants legitimacy to start-
up firms, upper echelon affiliations are indeed network resources key to the
formation of strategic alliances between start-up firms and their underwriters.

Follow-up research
A follow-up study (Higgins and Gulati 2006) extends the findings reported
in this chapter by suggesting that the composition of an entrepreneurial firm’s
 EFFECTS OF NETWORK RESOURCES ON UNDERWRITER CHOICE 237

TMT can endow a firm with valuable network resources that can signal organ-
izational legitimacy and thereby influence not only a firm’s ability to attract
prestigious underwriters but also its ability to influence investor decisions. The
study examines the effect of firms’ upper-echelon-based network resources on
their IPOs. Specifically, it examines the effect of these network resources on
a firm’s ability to attract high-quality investors at the time it goes public. It
proposes that the network resources implicit in the composition of a TMT
have a symbolic role at the time of a firm’s IPO, acting in concert with the
more concrete operational activities of the team to affect the decisions of
important resource-holders such as investors. As a result, this study refocuses
attention on the symbolic role of top management and their concomitant
network resources, a role that Pfeffer and Salancik (1978) proposed long ago
but that has received only cursory consideration in recent empirical research
on TMTs. The study also involves the context of entrepreneurial firms, where
little attention has been given to the role of the TMT in relation to firms’
IPOs.
This study proposes that young firms can influence investor decisions by
signaling organizational legitimacy based on three key dimensions: the firm’s
access to resources, the firm’s ability to fulfill key roles, and the firm’s ability to
attract the endorsement of prestigious partners. My coauthor and I developed
this typology of legitimacy benefits to examine how each form of legitimacy
may be associated with the composition of a young firm’s TMT. Specifically,
we propose that firms signal resource legitimacy through TMT employment
affiliations, role legitimacy through the kinds of positions held by the senior-
most members of the TMT, and endorsement legitimacy through a firm’s
prestigious partnerships. Our research examines how these multiple signals
of legitimacy that ensue from a firm’s network resources shape the quantity
and quality of investors who take part in a firm’s IPO.
As a result, this study assesses how different TMT structures influence
investor decisions. It thus focuses on the ways in which firms strive to enhance
perceptions of their legitimacy through TMT-based signals regarding firm
resources, roles, and endorsement.
The ideas proposed in this study are tested with the same comprehensive
data used in the previous study, which contains the career histories of 3,200
top managers who took biotechnology firms public between 1979 and 1996.
At the time of IPO, nearly all biotechnology firms are several years away from
generating revenues because it takes seven to ten years to bring a product from
research stages to market and the average age of firms at IPO is four and
a half years. Given this lack of profitability at the time such firms go public,
investors face significant uncertainty regarding their decisions to invest, mak-
ing this a particularly salient context in which to examine the role of network
resources, signals, and organizational legitimacy.
238 RESOURCES IN ENTREPRENEURIAL SETTINGS

Several important findings emerge from this study. One such finding is
that investor decisions are affected by the employment affiliations and roles
of TMT members and by a young firm’s partnership with a prestigious lead
underwriter. This suggests that network resources for a firm may emanate
from its TMT affiliations and that the benefits of such resources may ma-
terialize in the form of greater legitimacy in the eyes of key stakeholders for
firms. The findings specifically indicate that TMT employment affiliations
with downstream organizations such as pharmaceutical companies are posi-
tively related to the number of quality institutional investors that decide to
invest in young firms. No such effects were found for upstream or horizontal
employment affiliations. The results also show that the greater the diversity
of employment affiliations of a firm’s TMT across these three categories, the
greater the number and quality of institutional investors that take part in the
initial public offering of a young firm.
A second form of organizational legitimacy arising from the network
resources associated with upper echelon backgrounds was also introduced
in this study: ‘role legitimacy’ refers to the extent to which the firm is able
to fill top positions with individuals who have relevant role experience. This
study proposes that the greater the match between the backgrounds of C-level
managers and their roles at the time of IPO, the more likely investors would be
to invest in the young firm. This study found that the background of one key
top manager, the CSO, was related to investor decisions: specifically, having a
CSO with similar experience was positively related to the number of dedicated
institutional investors that invested in a young firm.
This study also considered a third form of legitimacy called ‘endorsement
legitimacy’. This type of legitimacy refers to the firm’s ability to secure an
endorsement from a prestigious partner by, for example, partnering with
a respected underwriter for its IPO. Extending previous findings that have
established a positive relationship between underwriter prestige and financial
indicators of firm performance (e.g. Carter and Manaster 1990; Stuart, Hoang,
and Hybels 1999), the results showed that underwriter prestige also affects the
amount and quality of institutional investors that decide to invest in a firm
undertaking an IPO.
This study also pointed to some interesting results when we included both
underwriter prestige and TMT affiliations in the reported analyses. It was
expected that investment bank prestige would mediate relationships between
TMT backgrounds and investor behavior. Instead, the results showed that
the effects of TMT backgrounds on investor decisions remained intact, even
after accounting for underwriter prestige. These results suggest that institu-
tional investors attend to multiple signals of a firm’s legitimacy in the IPO
context—those reflected in information about firm partnerships and top
managers’ backgrounds. Whereas prior organizational research on IPOs has
 EFFECTS OF NETWORK RESOURCES ON UNDERWRITER CHOICE 239

focused on the importance of interorganizational partnerships for issuing

firms (e.g. Stuart, Hoang, and Hybels 1999), the present research points to
the possibility of an additional factor—signals associated with top manager
backgrounds.
Focusing a lens on TMT research in this fashion affords not only empir-
ical learning but also important theoretical insights. Rather than directing
attention toward internal TMT processes and theory regarding information-
processing and teamwork (e.g. Hambrick, Cho, and Chen 1996), this study
focuses outward on the signaling value of the TMT to important external
constituents and thus also builds on theories of organizational legitimacy (e.g.
DiMaggio and Powell 1983). It further suggests that TMT affiliations can be
viewed as contributing to a firm’s network resources that in turn provide it
with various forms of legitimacy benefits. This reorientation suggests not only
that top managers take strategic actions that directly affect firm outcomes (e.g.
innovation, Keck and Tushman 1993), as has been documented in the past, but
also that their backgrounds can directly enhance their firms’ legitimacy in the
eyes of third parties.
This follow-up study extends prior research on upper echelons, network
resources, and legitimacy by simultaneously examining multiple forms of
legitimacy that originate from different types of network resources—those
that stem from the TMT and those that arise from interfirm partnerships.
Only a few recent studies of upper echelons have investigated the unique and
pressing issues facing young firms as they strive to gain legitimacy in industries
in which they have not yet developed reputations (Rao 1994; Eisenhardt and
Schoonhoven 1996). Furthermore, prior TMT research has not examined
whether or how top managers’ backgrounds complement other sources of
pre-IPO legitimacy, such as the endorsement of a prestigious intermediary. By
considering different kinds of network resources and the legitimacy benefits
they provide, we gain insight into how these resources affect the decisions of
key outsiders. This approach opens avenues for future theory and research that
considers more broadly how a firm can signal predictability through multiple
means (Suchman 1995). Indeed, this study suggests that mixed signals yield
anything but mixed messages. Perhaps, and as future research may show,
legitimacy strategies that entail mixing signals can lead to positive ‘success
spirals’, enhancing firm desirability to a magnitude beyond that reached via
simple additive effects.
In addition to having implications for research, the findings presented
in this study convey normative lessons, particularly for young firms con-
templating an IPO. As one primer on IPOs explained, while going pub-
lic may seem like a rather straightforward process—a new company sim-
ply pulls together the necessary documentation and a group of investment
bankers to sell and distribute the offering, price the deal, and collect the
240 RESOURCES IN ENTREPRENEURIAL SETTINGS

fees—it is generally the case that companies ‘walk a proverbial minefield in

the path to completing their IPO’ (Peterson 2001: 37–8). As this research
suggests, while securing a reputable bank to underwrite the IPO deal is a
crucial component of the IPO process, building an impressive team of man-
aging officers is as important a lever for a firm to acquire organizational
legitimacy.
10 The contingent
effects of network
resources
By focusing on the origin of interorganizational endorsements in the context
of IPOs, the first chapter in this section showed how prior upper echelon
affiliations engender network resources that are influential in helping start-
up firms secure endorsements from prestigious underwriters by serving as
powerful signals of legitimacy. I went on to suggest that such endorsement
ties with important intermediaries can themselves be considered a form
of network resource in turn beneficial to firms in other ways, especially
at the time they go public. This chapter extends these findings by directly
assessing the beneficial consequences for IPO-bound entrepreneurial firms
of their endorser-based network resources and those based in other such
ties.
This chapter shifts focus away from the role of interpersonal network
resources arising from a firm’s upper echelon to those generated by its interor-
ganizational connections. Because the setting here is entrepreneurial firms at
the time of their IPOs, the focus is on network resources based in organiza-
tional connections crucial at that time, including ties with investment banks
and venture capitalists.
In addition to assessing the aggregate impact of different types of net-
work ties on an entrepreneurial firm’s IPO, this chapter also evaluates the
possible contingent value of each type of interorganizational relationship. In
other words, I consider which ties matter when for firms. Prior research has
shown that network ties to prominent firms create network resources that can
enhance new venture performance (Carter and Manaster 1990; Baum 1996)
and signal a firm’s quality to key external resource holders, which in turn
affects IPO performance (Stuart, Hoang, and Hybels 1999). But there has
been little exploration into whether and how these effects of various types of
network ties on new venture performance vary.
A central theme here is that network ties are not uniform in their effects
on firm outcomes, but rather vary across the different types of network ties a
firm has. Further, the efficacy of network resources originating in different ties
This chapter is adapted with permission from ‘Which Ties Matter When? The Contingent Effects of
Interorganizational Partnerships on IPO Success’ by Ranjay Gulati and Monica C. Higgins published
in Strategic Management Journal, 2003, (24/2): 127–44, © John Wiley & Sons Limited.
242 RESOURCES IN ENTREPRENEURIAL SETTINGS

would vary depending on the type of tie and the contingent factors that shape
their efficacy. I refine this perspective by theorizing that the magnitude of the
effect of each type of tie varies with the uncertainty associated with the equity
market.
In assessing the contingent values of different kinds of ties, this chap-
ter compares the effects of network resources resulting from prior strategic
alliances with the effects of endorsement relationships with venture capital
(VC) firms and investment banks. It proposes that under different equity
market conditions, potential investors in an issuing firm attend to different
types of uncertainty, which affects investor perception of the relative value
of a young firm’s different endorsements and partnerships and, hence, IPO
success. In other words, different types of equity market uncertainty raise
different kinds of investor concerns, and because different network resources
(and the ties underlying them) provide different signals of a firm’s potential,
they become more or less important, depending on investor concerns in the
specific market context. As a result, network resources based on different kinds
of ties should vary in their levels of effectiveness, depending on the equity
market context.

Theory and hypotheses

As discussed in the last chapter, interorganizational ties between a start-up
and established firms provide network resources that mitigate uncertainty and
establish the start-up’s viability in the eyes of third parties (Stuart, Hoang, and
Hybels 1999). Consequently, the value of a young firm’s ties should not only
vary by type of tie but also depend on the nature of the uncertainty the firm
faces. Different types of uncertainty may raise different types of concerns for
key outsiders, such as investors, affecting the value of a firm’s risk-mitigating
partnerships.
For public investors in entrepreneurial firms, uncertainty associated with a
firm can arise due to characteristics associated with the firm itself, such as
firm age or location (e.g. Sorenson and Audia 2000). Uncertainty can also
arise from exogenous sources such as natural events, shifts in demand, or
regulatory changes (Sutcliffe and Zaheer 1998). How favorable or unfavor-
able the market is for specific equity offerings is another critical aspect of
uncertainty for investors. As research on the biotechnology industry has
shown, the receptivity of the equity markets to biotechnology offerings has
ebbed and flowed over the years, affecting the preferred timing of IPOs
(Lerner 1994). When the market window is relatively open or ‘hot’ for
equity offerings, the potential upside for both firms and investors is much
greater than when the market window is relatively closed or ‘cold’. Investor
 CONTINGENT EFFECTS OF NETWORK RESOURCES 243

decisions to provide financial resources to a young firm are thus likely to

be affected by the uncertainty associated with this window, or equity market
uncertainty.
This chapter proposes that equity market uncertainty entails two over-
arching types of investor concerns: investing in bad (low-potential) firms or
missing good (high-potential) opportunities. Although both of these concerns
surround any investment decision, investor attention shifts more toward one
or the other, depending on the receptivity of the equity markets. When the
equity markets are relatively hot for new issues, many firms try to go public,
making the probability of and concern about investing in unworthy firms
more salient. When the equity markets are relatively cold for new issues, few
firms try to go public, making the probability of and concern about over-
looking good firms more salient. Indeed, prior research has shown that when
equity markets are relatively hot, investors are overly optimistic about the
potential of young firms (Ritter 1984); thus, in this market context, investors’
effective null hypothesis is that a given new company represents a profitable
investment. At such times, investors are concerned about investing in firms
when they should not (i.e. making a type II error). On the other hand, when
the equity markets are relatively cold and few firms try to go public, investors
are concerned about overlooking firms in which they should invest (i.e. mak-
ing a type I error) (cf. Sah and Stiglitz 1986, 1988; Rosenthal and Rosnow
1991).
This perspective on investor decision-making is consistent with an
attention-based view of the firm. As Ocasio (1997) describes, attention
encompasses ‘the noticing, encoding, interpreting and focusing of time
and effort by organizational decision-makers’ (189). In the present context,
whether and how much investors decide to invest depends on the types of
concerns to which they attend, which may be influenced by factors in the
business environment (Ocasio 1997). Extending these ideas, it is likely that
investors can resolve specific concerns by considering the different network
resources implicit in the different ties of the focal firm. Here, we consider
the network resources that arise from two types of ties: (a) endorsement
relationships such as those with VCs and investment banks and (b) strategic
alliance partnerships. I propose that each type of tie, with its attendant net-
work resources, mitigates different types of uncertainty and thus varies in
importance at different times.

ENDORSEMENT RELATIONSHIPS
In an endorsement relationship, an organization serves as an intermediary
between the focal firm (i.e. the issuing firm) and a third party (i.e. public
investors). Endorsement by powerful organizations can enable young firms
244 RESOURCES IN ENTREPRENEURIAL SETTINGS

to overcome the external liability of newness problems associated with

the lack of a favorable reputation (Rao 1994; Thornton 1999). Securing
such an endorsement is of particular importance for firms facing medi-
ated markets, such as the primary market for IPOs, which are charac-
terized by significant ambiguity regarding firm valuation and are heavily
influenced by highly visible critics, such as investment analysts, who wield
tremendous influence over investor behavior. In the present IPO context,
endorsement relations include ties with VCs, accounting firms, law firms,
and investment banks (Bochner and Priest 1993). Studies in finance and
organizational strategy have demonstrated that two of these endorsement
relations play a particularly significant role: VCs and investment banks
(Carter and Manaster 1990; Jain and Kini 1995; Stuart, Hoang, and Hybels
1999). Relationships with both groups constitute important components
of the network resources a young firm may possess at the time it goes
public.
While prior research has established that ties to prominent organizations
such as these can enhance IPO success in general, I suggest that the value
of the network resources these ties create will be moderated in important
and systematic ways by equity market uncertainty. In particular, I expect the
signaling value of a tie to be the greatest when the information conveyed
by that type of tie is the one most keenly attended to by the IPO market.
Because ties to different types of partners signal different information that
may be more or less valuable at different times, variance associated with
the value of a new firm’s ties can be expected. Thus, market context can
significantly—and systematically—shift the effects of different types of net-
work resources.

VENTURE CAPITAL ENDORSEMENT

Prior research has demonstrated that VC backing is a tie that increases the
likelihood that a firm will have a successful IPO because VCs provide financial
resources and expertise that can enhance the quality of new ventures (Meg-
ginson and Weiss 1991). Studies have also demonstrated that VC quality is
associated with IPO performance. The greater the amount of monitoring by a
VC, the lower the underpricing—the spread between issuing price and offer-
ing price shortly after public trading begins—which is one measure of IPO
performance (Jain and Kini 1994; Lin 1996). Furthermore, VC endorsements
not only help certify the present value of issuing firms but also signal the
likelihood that firms will remain going concerns in the future. One reason
for this is that empirical studies show that the presence of VCs improves a
young company’s chances of survival in the post-IPO period (Khurshed 2000).
The logic behind this relationship is that in addition to providing financial
 CONTINGENT EFFECTS OF NETWORK RESOURCES 245

experience to a young firm in the form of knowledge regarding incentive

and compensation systems and deal structuring, VCs closely monitor their
companies following their initial investments (Gorman and Sahlman 1989;
Sahlman 1990). Therefore, the activities in which VCs are expected to engage
in the future, such as recruiting senior managers and developing business
strategy (Bygrave and Timmons 1992; Hellmann 1998; Hellmann and Puri
2000), should affect both post- and pre-IPO performance. In summary, a
firm’s partnership with a reputable VC is the source of valuable network
resources for a firm that signals both the present and future quality of a young
firm.
The research noted above assumes that the VC effect on firm IPOs is uni-
form across time. However, this may not always be the case: market swings
may alter the effect. As described earlier, partnerships with high-quality VCs
signal to the investment community that the new venture is a ‘good bet’ both
at the time of IPO and in the future. Because VC ties alleviate uncertainty
regarding the decision to invest in an IPO firm, it is also likely that the effects
of such ties will vary depending on the types of uncertainty that surround the
investment decision.
Recent research on the decision-making processes of VCs lends insight into
how the signals associated with VC ties may differ depending on the uncer-
tainty that characterizes the equity markets. During hot markets, ‘too much
money will chase too few deals’ (The Economist 1997). As this quotation by Bill
Hambrecht, chairman of well-known San Francisco VC Hambrecht and Quist,
suggests, VCs are likely to be overly optimistic about the upsides of IPOs when
the markets are favorable. And, with so many firms trying to go public during
a hot market, the amount of information that a VC must process in deciding
which firms to take public is likely to be greater than when fewer firms are con-
sidering IPOs. Indeed, extensive research has shown that precisely these two
conditions—overconfidence and information overload—tend to undermine
the accuracy of VC decision-making (Zacharakis and Meyer 1998; Zacharakis
and Shepherd 2001).
These differences in how and when VCs carefully and accurately attend to
the IPO market may affect investor perceptions of the value of VC partner-
ships. During a cold market, when VCs are not overwhelmed by the ‘fools rush
in’ phenomenon of a hot market, investors are likely to attribute greater value
to a focal firm’s tie to a prominent VC. A cold market environment stands
in contrast to the information-laden and hypercompetitive environment that
can lead to lower attention spans and suboptimal VC decision-making during
hot markets (for reviews of research on VC decision-making, see Zacharakis
and Meyer 2000 or Fried and Hisrich 1994). The time and attention taken
in the evaluation process during cold markets should result in fewer missed
opportunities, or type I errors, made by VCs. Therefore, while the evaluation
expertise underlying VC endorsements may, in general, signal firm quality to
246 RESOURCES IN ENTREPRENEURIAL SETTINGS

investors, investors will likely attribute greater value to such ties during cold
markets.
Hypothesis 1: Endorsement by a prestigious VC should be particularly beneficial to
the success of a young company’s IPO when the equity markets are cold.

UNDERWRITER ENDORSEMENT
Prior studies have established a clear role for underwriter reputation in IPOs;
these findings reinforce the notion that the underwriter endorsements can
generate network resources for firms. Both finance and organizational scholars
have demonstrated that firms with prestigious underwriters are more likely to
have successful IPOs (Carter and Manaster 1990; Stuart, Hoang, and Hybels
1999). Additionally, finance scholars have demonstrated that high-prestige
investment banks are unlikely to undertake speculative issues due to the legal
liabilities and potential loss of reputational capital that can be associated
with such deals (Beatty and Ritter 1986; Tinic 1988; Carter and Manaster
1990). Given this risk profile, prestigious investment banks generally prefer the
seasoned equity market over the IPO market (Wolfe, Cooperman, and Ferris
1994; Bae, Klein, and Bowyer 1999). Moreover, when prestigious investment
banks do engage in the IPO market, they tend to underwrite low-risk IPOs
instead of high-risk ones (Hayes 1971; Tinic 1988), with the hope that such
relationships will lead to opportunities for larger and more lucrative deals in
the future.
These findings point to the tendency for prestigious investment banks
to participate intermittently in the IPO market, depending on the receptiv-
ity of the equity market. Unlike prestigious VCs that specialize in a lim-
ited number of industries and often engage in new issues (Jain and Kini
1995), prestigious investment banks offer a wider range of financial instru-
ments and thus have greater choice as to what types of deals they engage
in (List, Platt, and Rombel 2000). Furthermore, unlike prestigious VCs that
take public those firms in which they have previously invested, prestigious
investment banks tend to be quite selective in picking firms at the IPO stage,
because post-IPO deals tend to generate the most attractive returns for them.
Thus, because prestigious investment banks are loath to incur significant risk,
they are more likely to engage in deals in an equity market hot for new
issues.
These differences in when and how extensively prestigious investment
banks attend to the IPO market may affect the types of signals associated with
their endorsements. Because prestigious investment banks attend most closely
to the equity markets when the market is hot, a young firm’s endorsement by
a prestigious underwriter should be particularly helpful in alleviating investor
 CONTINGENT EFFECTS OF NETWORK RESOURCES 247

concerns regarding the possibility of investing in bad deals, or making a type II

error. Public investors, like investment banks, must choose between many
possible firms to invest in when the equity markets are favorable because the
pool of firms trying to go public is relatively large (Ritter 1984). And, as is also
the case with investment banks, the number of firms that public investors can
support is limited due to their own financial constraints (Puri 1999). During
hot markets, then, considering the large number of firms seeking financial
capital and the limited number that prestigious investment banks can actually
underwrite, a young firm’s partnership with a prestigious underwriter is a
network resource that signals to potential investors that the issuing firm is
a relatively good low-risk bet, reducing investors’ concerns regarding type II
errors. Indeed, because prestigious investment banks are extremely risk-averse
(Beatty and Ritter 1986; Carter and Manaster 1990) and prefer to engage
in postoffering deals (Wolfe, Cooperman, and Ferris 1994), investors may
infer that the firm a prestigious underwriter chooses to endorse during a hot
market has long-term potential—in short, that it is a worthwhile investment.
Thus:
Hypothesis 2: Endorsement by a prestigious underwriter should be particularly bene-
ficial to the success of a young company’s IPO when the equity markets are hot.
Put another way, the hypothesis above suggests that the network resources
generated by a firm’s endorsement ties with a prestigious investment bank are
likely to vary in efficacy depending on equity market conditions. They will
be most beneficial to firms when the equity markets are hot as opposed to
cold.

STRATEGIC ALLIANCES
In previous chapters, I have discussed how substantial research has examined
the value of strategic alliances. Much of this research has focused on the per-
formance implications of strategic partnerships among established firms (e.g.
Mowery, Oxley, and Silverman 1996). This book, in particular, has examined
how prior alliance networks influence the new alliances’ formation, govern-
ance structure, and total value creation. In contrast, this chapter extends
research that has explored the value of strategic alliances for entrepreneur-
ial firms (e.g. DeCarolis and Deeds 1999; Baum, Calabrese, and Silverman
2000). For young firms in the biotechnology industry, strategic alliances with
prominent pharmaceutical and health care organizations engender network
resources that can send powerful signals to outsiders.
One of the biggest challenges for young biotechnology companies is the
long product development cycle they must endure before generating revenues
(Powell, Koput, and Smith-Doerr 1996). This is a major concern for investors
248 RESOURCES IN ENTREPRENEURIAL SETTINGS

as well. In the biotechnology industry, it takes seven to ten years on average

for a firm to advance from basic R&D through clinical trials and the FDA
approval process (Deeds, DeCarolis, and Coombs 1997). Due to these cycle
times, along with capital needs in the hundreds of millions of dollars, biotech-
nology firms tend to be far from generating revenues when they try to go
public (Pisano 1991). One way that biotechnology firms have tried to alleviate
investor concerns regarding the viability of their products is to ally with major
pharmaceutical and health care companies that have significant marketing and
sales expertise as well as access to cash that can support firms through this
lengthy process (Pisano 1990, 1991).
Because these types of alliances mitigate uncertainty for resource-holders, it
is likely that the signal value varies with the types of uncertainty that character-
ize different market situations and the extent to which major pharmaceutical
and health care companies actively engage in the evaluation of young biotech-
nology firms. During hot markets, a young biotechnology firm’s concerns
regarding its ability to sustain the long discovery and development process
are not as acute as during cold markets, when the availability of funding
is much more scarce. During cold markets, more young biotechnology firms
seek interfirm collaborations, leading to closer scrutinization of their potential
by prominent pharmaceutical and health care firms because so many firms
approach them for resources at these times (Lerner and Merges 1996). These
trends are likely to be transparent to investors.
This timing-based difference in how carefully potential partners evaluate
new biotechnology ventures should affect the impact of the signal that is
associated with their alliances. During cold markets, the signaling value of
a strategic alliance is stronger, because well-established firms have carefully
examined many young biotechnology firms to avoid missing a worthwhile
investment (Pisano and Mang 1993), which is precisely the sort of type I
concern that plagues investors during cold markets. Therefore, while a tie to
a major pharmaceutical/health care organization may signal firm quality to
outsiders, this should be particularly true when the signal-maker’s attention
is focused more intensely on evaluating the potential of young firms, as is
the case during cold markets. This suggests that the efficacy of the network
resources emanating from a firm’s alliances with prominent pharmaceutical
and health care companies may be contingent on the market context in which
they occur.
Hypothesis 3: Strategic alliances will be especially beneficial to the success of a young
company’s IPO when the equity markets are relatively cold.

In summary, when examining the idea that interorganizational ties create

network resources that have differential effects on IPO performance, this
chapter considers two questions: (a) Which ties matter (network factors)?
 CONTINGENT EFFECTS OF NETWORK RESOURCES 249

Network factors: tie type

Endorsement relations Strategic alliances

equity market conditions

Venture capital firms

Contextual factors:

Lead investment bank Downstream alliances

Hot H1: Less positive H2: More positive H3: Less positive

Cold H1: More positive H2: Less positive H3: More positive

Figure 10.1. A contingency perspective on the effects of interorganizational partnerships

on IPO success

(b) When do ties matter (contextual factors)? In this study of firms undergoing
IPOs, the contextual dimension was operationalized as the extent to which the
equity markets are favorable to new issues—in simplified terms, whether the
equity markets are hot or cold for new issues. The network dimension was
broken down into the following types of ties: VC partnerships, underwriter
endorsements, and strategic alliances. Figure 10.1 depicts this 2 (hot vs. cold
equity market) × 3 (tie type) contingency framework and summarizes the
aforementioned predictions.

Empirical research

METHOD
The sample used for the findings reported in this chapter is described in
Appendix 1 under the heading ‘Biotechnology Start-ups Database’. The mea-
sure of IPO success was calculated based on four different financial measures.
First, the value of a firm’s net proceeds was obtained from the first page of
its final prospectus. This is the amount of cash a firm received as a result
of the offering, less costs incurred during the IPO process. Second, the pre-
money market valuation of each firm, an IPO-success indicator employed in
previous organizational and strategic management research (Stuart, Hoang,
and Hybels 1999), was calculated. The premoney market value is calculated as
follows:

V ∗ = ( pu q t − pu q i )
250 RESOURCES IN ENTREPRENEURIAL SETTINGS

where pu is the final IPO subscription price as indicated on the firm’s final
prospectus, q t measures the number of shares outstanding, and q i is the
number of shares offered in the IPO. This is the firm’s market valuation
less the proceeds to the firm as a result of the IPO. V ∗ is therefore the
market valuation of the biotechnology firm just preceding the first day of
trading. Third and fourth, each firm’s 90-day market valuation and 180-day
market valuation after the IPO were calculated to gauge the early success
of the firm’s offering. The same formula that was used to calculate a firm’s
premoney market valuation was used to calculate these valuations, with
substitutions of the post-IPO price at 90 days out and 180 days out for
pu in the formula. Because these four financial measures were highly cor-
related with one another (Cronbach · close to .90), these measures were
standardized and averaged to create a composite financial indicator of IPO
success.
Equity market uncertainty was measured with a financial index (Lerner
1994) widely used in finance and strategy literature (e.g. Zucker, Darby,
and Brewer 1994; Stuart, Hoang, and Hybels 1999; Baum, Calabrese, and
Silverman 2000), which gauges the receptivity of the equity markets to
biotechnology offerings. Lerner’s index (1994) was constructed using an equal
amount of dollar shares of thirteen publicly traded, dedicated biotechnology
firms. Lerner’s findings (1994) imply that an industry-specific index is the
preferred method for capturing the favorability of the equity markets, as
times of high valuations vary across industries and do not always coincide
with trends in the general market. The index included in these models is a
finer-grained measure of market conditions than has been used recently in
IPO-related research on the biotechnology industry (in which dummy vari-
ables for ‘cold’ market years were included) (e.g. DeCarolis and Deeds 1999).
We used Lerner’s index as our indicator of industry uncertainty at the time
of the IPO. Specifically, we used the equity index value at the end of the
month prior to the IPO date for each of our firms. The equity market
measure thus ranges from low to high or from cold to hot (unfavorable to
favorable).
VC partner prominence was measured by making lists of prominent VCs
for each IPO year in the sample as follows: we obtained rankings of VCs from
VentureXpert, a Securities Data Corporation database; rankings were based on
total dollars invested by each VC in each of the eighteen years that made up the
time frame of our dataset. Firms were coded as 1 if any of the biotechnology
firm’s VCs with at least a 5 percent stake were listed among the top thirty firms
on the list of prominent VCs for the year prior to the firm’s IPO date, and 0
otherwise.
Underwriter prestige was measured with an index developed by Carter
and Manaster (1990) and updated by Carter, Dark, and Singh (1998).
The measures are based on analyses of investment banks’ positions in the
 CONTINGENT EFFECTS OF NETWORK RESOURCES 251

‘tombstone’ announcements for IPOs; this methodology has been cited widely
in both finance and organizational and strategic management research (e.g.
Podolny 1994; Bae, Klein, and Bowyer 1999; Stuart, Hoang, and Hybels
1999; Rau 2000). Information was available for all but 25 of the under-
writers in the data-set (accounting for 55 of our firms), yielding rankings
for 244 firms. Mann–Whitney and Kolmogorov–Smirnov tests indicated that
the firms for which this information was not available did not differ sig-
nificantly on any of our main independent variables of interest from those
for which it was. Carter and colleagues’ indices were created by examining
the hierarchy of investment banks presented in the ‘tombstone announce-
ments’ for IPOs that appear in the Investment Dealer’s Digest or the Wall
Street Journal. Please see the Empirical Research section of Chapter 9 for a
more detailed description of how these indices were created. The name of
the lead investment bank was taken from the front page of each firm’s final
prospectus.
The total number of strategic alliances that each firm had with promi-
nent pharmaceutical and health care organizations was also calculated. To
determine which institutions were prominent, eighteen lists were generated,
one for each IPO year, of the top pharmaceutical and health care organi-
zations by sales since 1979, using COMPUSTAT. International companies
are only ranked by COMPUSTAT from 1988 onward, so the rankings used
for this study were based on the top thirty US organizations from 1979
to 1987 and on the top US and international organizations from 1988 to
1996. For each year, the top thirty organizations in that given year were
coded as prominent. These lists were supplemented with major pharmaceu-
tical and health care companies that were private or based in Europe or
Japan that were not listed in COMPUSTAT but were listed in PharmaBusi-
ness and had comparable sales. The number of prominent strategic alliances
was measured as the number of alliances with prominent pharmaceutical
and/or health care companies the year prior to the offering, as defined
above.
A number of control variables used here are similar to those used in the
previous chapter, including measures for: product stage (of the most advanced
product of the firm), firm size, firm age, amount of private financing, and
location of firm. A control was also included for the type of business within
the broad realm of biotechnology in which the firm operated. Additional
controls accounted for characteristics of the TMT, including a variable for
the size of a firm’s upper echelon, because prior research has found this
measure to be positively related to the success of entrepreneurial firms (Eisen-
hardt and Schoonhoven 1996; Higgins and Gulati 2003). For this measure,
we used a count of the number of managing officers and outside board
members who were listed on the firm’s final prospectus. A variable for the
average prior position level held by members of the firm’s upper echelon,
252 RESOURCES IN ENTREPRENEURIAL SETTINGS

which reflects the calibre of the prior jobs the executives held, was also
included.

RESULTS
Correlations between the main variables in this study are provided in
Table 10.1. Table 10.2 presents the results from Heckman selection models
in which the first stage predicted whether or not a company was able to
go public and the second stage predicted IPO success. The first-stage probit
models predicting whether a company was able to go public correctly classi-
fied 73 percent of the cases. As shown in Table 10.2, the analyses predicting
IPO success begin with models that include firm and industry-level control
variables, then main effects for firm partnerships and equity market uncer-
tainty, then the interaction terms between equity market uncertainty and the
specific forms of endorsement relations and strategic alliances, as suggested in
hypotheses 1–3.
Hypothesis 1 predicted that having a prestigious VC partner when a firm
goes public would be particularly beneficial to IPO success when the equity
markets are cold for new issues. Model 3 in Table 10.2 tests this hypothesis.
Because equity market uncertainty was operationalized as a continuous mea-
sure ranging from cold to hot, support for hypothesis 1 would be indicated
if the results showed a significant and negative interaction effect between the
equity market index and VC prominence. The findings reveal a significant and
negative interaction, which supports hypothesis 1.
The results also support hypothesis 2, which predicted that underwriter
prestige would be positively related to IPO success, particularly when the
equity markets are relatively hot for new issues. As shown in model 3 of
Table 10.2, the interaction term between equity index and underwriter prestige
was positive and significant, as predicted. The main effect for underwriter
prestige also remained significant and positively related to IPO success in
all of our models, consistent with prior research (e.g. Carter and Manaster
1990). Model 5 of Table 10.2 included all of the interaction terms. The results
supporting hypotheses 1 and 2 remained significant and in the directions
predicted.
Hypothesis 3 predicted that prominent downstream strategic alliances
would be positively related to IPO success, especially when the equity markets
are relatively cold for new issues. This hypothesis was not supported; as shown
in model 4 in Table 10.2, the interaction effect between equity market uncer-
tainty and downstream alliances was not significant. In addition, no main
effects for strategic alliances on IPO success were found.
With respect to the control variables, firm size and the amount of private
financing a firm received prior to its IPO were significant, as was the size of
Table 10.1. Means, standard deviations, and correlations (n = 299)

Variable X SD 1 2 3 4 5 6 7 8 9 10 11 12 13 14

1. Firm age 4.90 2.89 — — — — — — — — — — — — — —

2. Firm size 85.64 120.85 0.08 — — — — — — — — — — — — —
3. Location 0.50 0.50 0.07 0.05 — — — — — — — — — — — —
4. Product stage 4.65 2.82 0.23∗∗∗ 0.27∗∗∗ 0.07 — — — — — — — — — — —
5. Private financinga 6.92 0.77 0.10† 0.28∗∗∗ 0.19∗∗∗ 0.12∗ — — — — — — — — — —
6. Size of upper 10.86 3.47 0.12∗ 0.29∗∗∗ 0.20∗∗∗ 0.11∗ 0.51∗∗∗ — — — — — — — — —
echelon
7. Average prior 2.72 0.67 −0.08 −0.08 0.01 0.11† 0.06 −0.06 — — — — — — — —
position of upper
echelon

CONTINGENT EFFECTS OF NETWORK RESOURCES

8. Equity index 3.78 0.96 0.08 0.02 0.15∗∗ 0.02 0.19∗∗∗ 0.13∗ −0.00 — — — — — — —
9. VC prominence 0.32 0.47 −0.01 0.05 0.33∗∗∗ 0.04 0.20∗∗∗ 0.20∗∗∗ 0.05 0.17∗∗ — — — — — —
10. Underwriter 7.63 1.95 0.13∗ 0.22∗∗∗ 0.12† 0.17∗∗ 0.41∗∗∗ 0.42∗∗∗ 0.13∗ 0.14∗ 0.27∗∗∗ — — — — —
prestigeb
11. Strategic 0.52 0.88 0.09 0.05 0.05 −0.17∗∗ 0.24∗∗∗ 0.27∗∗∗ −0.02 0.06 0.13∗ 0.20∗∗ — — — —
alliances
12. Equity index × 0.07 0.43 0.02 0.01 −0.02 0.01 −0.07 −0.05 0.01 −0.07 0.14∗ −0.05 −0.02 — — —
VC prominence
13. Equity index × 0.25 1.99 0.10 −0.07 −0.13∗ −0.08 −0.13∗ −0.13∗ −0.13∗ −0.09 −0.05 −0.27∗∗∗ −0.02 0.26∗∗∗ — —
Underwriter
prestigeb
14. Equity index × 0.05 0.82 −0.03 0.03 0.10 −0.06 −0.04 0.02 0.11† −0.04 −0.02 −0.01 0.06 0.12∗ 0.20∗∗ —
Downstream
alliances
15. IPO successc −0.01 0.87 0.18∗∗ 0.38∗∗∗ 0.25∗∗∗ 0.19∗∗∗ 0.58∗∗∗ 0.50∗∗∗ 0.04 0.17∗∗ 0.28∗∗∗ 0.54∗∗∗ 0.25∗∗∗ −0.10† −0.01 0.01

a
Adjusted to constant 1996 dollars, then logged.
b
n = 244 due to investment banks not ranked on Carter–Manaster scale.
c
Based upon average standardized scores for firm net proceeds, pre-money market value, 90-day market value, and 180-day market value, adjusted to constant 1996 dollars and logged.

253
∗
p ≤ .05; ∗∗ p ≤ .01; ∗∗∗ p ≤ .001; † p ≤ .10.
 254 RESOURCES IN ENTREPRENEURIAL SETTINGS
Table 10.2. The effects of interorganizational partnerships on IPO successa,c

1 2 3 4 5

Control variable
Firm age 0.02 (0.01) −0.01 (0.01) −0.01 (0.01) −0.01 (0.01) −0.01 (0.01)
Firm size 0.00∗∗∗ (0.00) 0.00∗∗∗ (0.00) 0.00∗∗∗ (0.00) 0.00∗∗∗ (0.00) 0.00∗∗∗ (0.00)
Location 0.08 (0.09) 0.01 (0.09) 0.06 (0.09) 0.00 (0.10) 0.06 (0.09)
Product stage 0.03† (0.01) 0.02 (0.02) 0.02† (0.01) 0.03 (0.02) 0.02 (0.01)
Private financingb 0.39∗∗∗ (0.06) 0.28∗∗∗ (0.06) 0.27∗∗∗ (0.06) 0.06∗∗∗ (0.06) 0.27∗∗∗ (0.06)
Size of upper echelon 0.06∗∗∗ (0.01) 0.04∗∗ (0.01) 0.04∗∗ (0.01) 0.04∗∗ (0.01) 0.04∗∗ (0.01)
Average prior position of upper echelon 0.07 (0.06) 0.04 (0.06) 0.06 (0.06) 0.03 (0.06) 0.06 (0.06)
Main effects
Equity index — 0.05 (0.04) 0.05 (0.04) 0.05 (0.04) 0.05 (0.04)
VC prominence — 0.14 (0.09) 0.16† (0.09) 0.14 (0.09) 0.16† (0.09)
Underwriter prestige — 0.12∗∗∗ (0.02) 0.14∗∗∗ (0.02) 0.12∗∗∗ (0.02) 0.14∗∗∗ (0.02)
Strategic alliances — 0.05 (0.05) 0.05 (0.04) 0.05 (0.05) 0.05 (0.04)
Interaction effects
Endorsement relations
Equity index × VC prominence — — −0.28∗∗ (0.09) — −0.28∗∗ (0.09)
Equity index × Underwriter prestige — — 0.09∗∗∗ (0.02) — 0.09∗∗∗ (0.02)
Strategic alliances
Equity index × Downstream alliances — — — 0.03 (0.05) −0.01 (0.04)
Constant −03.03∗∗∗ (0.43) −1.93∗∗∗ (0.49) −2.00∗∗∗ (0.47) −1.94∗∗∗ (0.49) −1.99∗∗∗ (0.47)
2
Wald ˜ 275.58∗∗∗ 272.08∗∗∗ 319.75∗∗∗ 272.70∗∗∗ 319.81∗∗∗
Rho −0.49 −0.36 −0.31 −0.36 −0.31
n 299 244 244 244 244

a
Unstandardized regression coefficients reported; standard errors in parentheses.
b
Adjusted to 1996 dollars and logged.
c
Based upon average standardized scores for firm net proceeds, pre-money market value, 90-day market value, and 180-day market value, adjusted to 1996 dollars and logged.
∗
p < .05; ∗∗ p < .01; ∗∗∗ p < .001 (two-tailed tests); † p < .10.
 CONTINGENT EFFECTS OF NETWORK RESOURCES 255

a firm’s upper echelon. And, as shown in two of the baseline models in the
tables, firms with more advanced products tended to have more successful
IPOs. With respect to the main effects, as expected, having a prestigious
underwriter on board was consistently and positively related to IPO success.
The main effect for VC prominence was marginally significant and positively
related to IPO success as well. These latter results, when considered in tandem
with the effects found for our interaction terms, highlight not only what types
of ties benefit firms but also when such ties are particularly influential.

Conclusion
This chapter investigated the contingent value of interorganizational relation-
ships and the network resources implicit in such ties at the time of a young
firm’s IPO, to determine which network ties matter when. While prior research
has shown that network ties to prominent firms create network resources that
can enhance new venture performance by signaling a firm’s legitimacy to key
external resource holders, the varying effects of such resources across tie type
and market context have not been examined. The effects of various facets of
network resources and the ties that generate them on firm outcomes are not
uniform, but rather vary by tie type and level of uncertainty associated with
the relevant equity market. This chapter demonstrates that different types of
market uncertainty create different types of investor concerns and that signals
from different network ties will be more or less influential in addressing those
concerns based on the credibility and strength of those signals in the relevant
market context.
Accordingly, results from our sample of biotechnology IPO firms show that
young firms benefit from partnerships with prominent organizations in dif-
ferent ways and at different times: whereas partnerships with prestigious VCs
positively affect IPO success when the equity markets are relatively cold for
new issues, partnerships with prestigious underwriters positively affect IPO
success when the equity markets are relatively hot. The results did not, how-
ever, yield significant effects for the contingent value of a new venture’s strate-
gic downstream partnerships on IPO success. The findings confirm the general
thesis that network resources have effects that are contingent on both the
nature of a firm’s ties and on the uncertainty associated with the marketplace.

EXTENDING PRIOR RESEARCH ON INTERORGANIZATIONAL

NETWORKS AND ENTREPRENEURSHIP
The present study extends prior research on interorganizational networks and
entrepreneurship in several respects. First, it expands on the growing research
256 RESOURCES IN ENTREPRENEURIAL SETTINGS

in strategy and organizations on social networks. As discussed in previous

chapters, examining the role of prior alliance networks and the resources they
create provides a more social account of strategic alliances than traditional
economic theories of firm behavior. This chapter not only assesses the multi-
ple facets of network resources of IPO-bound entrepreneurial firms but also
evaluates their impact on shaping the perceptions of investors at the time
the firm goes public. Building on prior research, this chapter investigated the
conditional effects of network resources. The contingency perspective built on
theories of the social organization of attention and decision-making (Simon
[1947] 1997; Ocasio 1997). Whereas prior research has suggested that certain
prevailing industry-based logics may focus the attention of a firm’s executives
(Ocasio 1997; Thornton and Ocasio 1999), this study considers how the
attention of external parties such as investors can be altered by the market
context and how this, in turn, can affect firm performance. The results of this
study showed that during cold markets, investor concerns center on avoiding
type I errors (i.e. missing out on worthwhile investments) whereas during hot
markets, investor concerns center on avoiding type II errors (i.e. investing
in firms that are not worthwhile). Consequently, this chapter suggests that
investors resolve these concerns by attending to the signals they receive based
on network resources resulting from the endorsements and partnerships of
the focal firm. The efficacies of these various ties are influenced by the market
context at that time.
In addition to contributing to social network research, this study extends
prior research on the sources and implications of uncertainty for new venture
performance. Prior research has conceptualized uncertainty for start-up firms
as associated with characteristics such as firm age and location (e.g. Sorenson
and Audia 2000). This chapter extends these studies of endogenous sources
of uncertainty by investigating the effects of uncertainty associated with the
equity markets. Furthermore, by considering how the concerns investors face
during a hot equity market differ substantially from those faced during a cold
equity market, this chapter broadens previous unidimensional conceptual-
izations of uncertainty, which have tended to characterize the construct as
either high or low (e.g. Stuart, Hoang, and Hybels 1999). The perspective put
forth here is consistent with the view that uncertainty is a multidimensional
phenomenon (Milliken 1987), which can alter the prevailing logic of strategic
decision-making.
Finally, this study extends prior research on the implications of uncertainty
for firm performance. Prior studies have focused on the effects of uncertainty
on firms’ strategic decision-making, such a firm’s scope resulting from deci-
sions regarding vertical integration (Sutcliffe and Zaheer 1998). This chapter,
however, considered how the uncertainty impacting third-party stakehold-
ers affects the performance of young firms. Thus, this study examined the
 CONTINGENT EFFECTS OF NETWORK RESOURCES 257

implications of uncertainty for interorganizational perceptions that, in turn,

affect firm performance.
Above all, this chapter demonstrates that network resources created from
interorganizational ties are indeed a key factor in influencing the performance
of entrepreneurial firms. Furthermore, the effects of network resources vary
by type of tie and market context. By communicating valuable informa-
tion regarding firm quality, network resources help start-up firms secure the
endorsements and subsequent funding from investors necessary for success.
Consequently, while the influence of network resources can vary with market
environment and tie type, their role as sources and signals of valuable infor-
mation is always notable.
11 Conclusions and
future directions
The study of interorganizational networks has broadened significantly in the
last decade, extending and building on past research that focused primarily
on interpersonal networks. While early studies in this area helped to estab-
lish the role of networks in shaping organizational behavior and outcomes,
recent research has explored nuances of the mechanisms underlying this inter-
action, delving into the contingencies around network effects. Along with this
growth has come an explosion of new terminology, which, while seemingly
related, often refers to somewhat distinct network constructs, making the
accumulation of knowledge a greater challenge. The excessive use of jargon
has now diluted the network metaphor almost to the point of irrelevance.
In the introduction to his volume of seminal research on organizations and
networks, Nohria (1992b) spoke to this issue when he pointed out the overin-
clusiveness of the network concept:
It is here that the failure to adopt a coherent network perspective becomes most prob-
lematic. It is precisely the lack of a clear understanding of a network perspective that
has led to the rampant and indiscriminate use of the network metaphor to describe
these new organizational forms (12).
In the decade and a half since this book was published, the explosion of
research into firm-based networks has expanded this theme into new domains
of organizational life. Despite the huge strides that have been made by the
vast array of studies into a broad range of network-related phenomena, the
aggregate contribution of this body of research toward the development of a
coherent knowledge base has been limited by the rapidly growing catalog of
network terms and constructs and the somewhat indiscriminate use of the
network metaphor itself.
In this book, I have sought to illuminate the role of network resources to
establish a conceptual anchor for this growing area of research. My hope is
that scholars in the field may use this theme to develop and share a com-
mon vocabulary and to shape a more coherent body of present and future
knowledge. Here, the term ‘network resources’ refers to valuable resources
that stem from the ties a firm may have with key constituents outside its
formal boundaries. In trying to bring together some of my prior research
under this conceptual umbrella I was forced to be somewhat fluid with my
definition of network resources. Furthermore, my research focus has primarily
been on some of the informational advantages that accrue to firms from their
 CONCLUSIONS AND FUTURE DIRECTIONS 259

network connections that in turn become valuable resources for those firms.
As I highlighted at the outset, a firm’s networks are conduits for not only
valuable information but also material resources possessed by the partner
firms. This is something I discuss in some of the last few chapters on entre-
preneurial firms. A comprehensive account of the various aspects of network
resources was not the focus of this book. My goal, however, was to delineate
this core concept in both broad and specific terms, with the hope that such
a treatment along with some concrete empirical illustrations of its applica-
tion would serve as a prod and catalyst for future scholars to develop even
sharper delineations and related taxonomies for this concept. Indeed, current
research focuses on precisely this task (e.g. Gulati, Lavie, and Madhavan 2006;
Lavie 2006).
This book has been unabashedly self-serving in that I have showcased
only my own prior studies as exemplars of and building blocks for the core
ideas underlying network resources. Because the chapters are based on articles
published in the last decade, even the studies cited in those chapters are largely
those that shaped my thinking at the time, and are in no way meant to reflect
the current state-of-the art thinking in those realms. Numerous recent papers
have explicitly embraced the term network resources or contributed findings
that have a direct bearing on the core ideas that underlie the concept. I will
not try to offer a comprehensive review of these ideas but will briefly highlight
some of the papers that I have found beneficial as I have developed my own
thinking on this concept. Thus, this chapter is organized around several key
themes that highlight related research within the context of potential arenas
for future inquiry.

Caveat emptor: The dark side of network resources

One of the obvious questions that arises from the overwhelmingly positive
story that I have presented in this book is whether there are limits to the
positive payoffs from the accumulation of network resources. This query could
range from the narrow question of whether there are diminishing returns
beyond a certain level of network resources, to the more extreme notion that
such resources may generate negative returns or may even lead to more nega-
tive relations between individuals or organizations (e.g. Brass and Burkhardt
1992; Burt and Knez 1995; Labianca, Brass, and Gray 1998). Granovetter
(1985) was perhaps the first to point out the possibility of limits to the bene-
fits of networks when he suggested that extremely tight links between social
actors present not only the prospect of great benefits but also ripe oppor-
tunities for malfeasance. The work of my colleague Brian Uzzi (1996, 1997)
has also focused on the limits to the benefits of close connections and—in
the extreme—the potential for such ties to negatively affect a firm’s very
260 RESOURCES IN ENTREPRENEURIAL SETTINGS

survival. Subsequent research has also revealed that too-tight ties can restrict
access to valuable information and otherwise create dysfunctional lock-ins in
relationships (Gulati, Nohria, and Zaheer 2000; Li and Rowley 2002).
Chapter 4, which considers the role of board interlocks in the formation of
new alliances, also hints at a specific cost associated with certain types of ties.
In this chapter, I highlighted how board interlocks have a greater propensity
to facilitate the formation of strategic alliances when board–management
relations are characterized by cooperation. My examination of the differen-
tial implications of controlling versus cooperative boards, however, is not
meant to imply that independent board control, which may deplete network
resources in this particular context, is necessarily bad for a given organization
as a whole. As recent events suggest, the presence of such control may be ben-
eficial to shareholders. Because cooperative boards are more likely to serve as
rich conduits of information regarding potential alliance opportunities, how-
ever, the potential dark side of controlling boards is their negative impact on
the degree of information-sharing that takes place within a network of board
interlocks. In delineating how specific types of network ties might diminish
trust between individuals and groups, thus impeding alliance formation, this
study investigates what Burt and Knez (1995: 261) termed the ‘dark side’ of
social networks. This idea is also extended via the notion that both negative
and positive ties between dyads of firms may be amplified by third-party
connections in which the firms are embedded. Future research should explore
the trade-offs between the governance benefits of controlling boards and the
reduced trust and information-sharing that such boards engender in further
detail.

The interplay between network and

traditional resources
Generally, this book has shown how network resources can influence firm
behavior and outcomes by enabling access to information and resources or
by providing signals to key outsiders. These benefits in turn can lead to
opportunities for firms to develop new ties, and can also affect various firm
outcomes (Gulati 1993). One natural way to extend these ideas would be to
conduct more research into the role that firms’ network resources play in
facilitating access to other, more traditional resources (e.g. Gulati, Nohria,
and Zaheer 2000; Zaheer and Bell 2005). My focus in this book has primarily
been on network resources that firms may accumulate by their participation
in networks that are conduits of valuable information. As highlighted at the
outset in this book, network resources may also result from a firm’s channeling
 CONCLUSIONS AND FUTURE DIRECTIONS 261

material resources that its partner makes available to it as well (e.g. Dyer
2000). I explicitly theorize about how network resources and the networks that
engender them can provide firms with potential access to both information
and material resources in Chapters 9 and 10 but am not able to empiric-
ally separate the flow of information from material resources through the
networks. Such considerations are clearly important for a fuller account of
network resources and the role they can play in shaping firm behavior and
outcomes and are an important arena for future research.
A natural extension of this research would also be a deeper evaluation of
how network resources can build on themselves and result in the accumulation
of such resources. As I have suggested in several chapters of this book, research
on social networks has typically treated network ties as exogenous; relatively
little empirical work has examined the origins of sets of organizational ties
that may in turn constitute a firm’s network resources (Gulati 1998; Gulati and
Gargiulo 1999). Chapters 2 and 3, in contrast, considered how prior ties may
shape the creation of subsequent alliances, suggesting that social networks
expand via an endogenous network dynamic. Similarly, Chapter 4 asserted
that both interlocks (our key independent variable) and joint ventures (our
dependent variable) are relationships that accumulate into a network of
social resources. This latter study specifically examined the influence of board
interlocks on the creation of strategic alliances. As such, it focused on the
multiple types of ties in which firms are embedded and the relationships
among these ties. The results of this study suggest that new networks can
result from a social process that is initiated by preexisting ties. One reason
why this study is distinctive is because the two networks considered exist at
different levels of analysis: the relationships between corporate leaders that
make up board interlocks are individual-level ties while strategic alliances are
interorganizational relationships that occur across firms. The study featured
in Chapter 9 is similar in that it also assessed the effects of individual-level
variables (upper echelon’s career history) on firm-level outcomes (affiliations
with investment banks). Beyond these studies, however, there has been very
little empirical research that has considered whether and how interpersonal
ties influence interorganizational bonds (some exceptions include work by
Galaskiewicz (1985b) and Zaheer, McEvily, and Perrone (1998)). Thus, the
findings reported in Chapters 4 and 9 provide new impetus for additional
research that links microlevel affiliations to macrolevel relationships
(Coleman 1990).
Another important question that merits further investigation has to do with
the interplay between network resources and those already resident within
firms in shaping behavior and outcomes. Several studies have begun this effort
by considering how network resources work in combination with resources
that are already resident within firms to shape firm outcomes (e.g. Hagedoorn
and Schakenraad 1994; Ahuja 2000a, 2000b; Chung, Singh, and Lee 2000).
262 RESOURCES IN ENTREPRENEURIAL SETTINGS

In these studies, researchers have explicitly considered how material resources

like R&D spending and a firm’s network of connections can individually and
together influence firm outcomes. In addition to the immediate synergies
generated from combinations involving network resources and internal firm
resources, firms may benefit by learning and internalizing network resources
as well as from the appreciation in the value of their internal resources
once network resources become available (e.g. Lavie 2006). Although these
investigations have broadened our understanding of the complex interplay
between network and other types of resources, there is still ample space for
further research in this area. One way to extend such research would be
to conduct a more detailed study, one that explicitly incorporates several
types of resources and capabilities in an effort to understand the coevolu-
tion of network resources and other firm-level assets resident within their
boundaries.

The heterogeneity of network resources

It is my hope that this book will motivate future researchers to more sharply
delineate the types of networks that can shape organizational behavior and
outcomes. This section promotes this objective by detailing some dimensions
that can be used to distinguish between the various networks that contribute
to a firm’s accumulation of network resources. Heterogeneity in a firm’s net-
work resources can typically be described in terms of three different axes:
(a) the level of a firm’s ties, which would entail a consideration of both inter-
personal and interorganizational links and their underlying mechanisms for
influencing behavior and outcomes; (b) the nature and types of a firm’s ties,
requiring a more careful consideration of the content of past and current ties;
and (c) the types of partners to which those ties connect the firm, requiring an
understanding of the firm’s partners’ attributes.

THE LEVEL OF A FIRM’S TIES

With respect to the level of firms’ network resources, this book was primarily
focused on those resources that arise from firms’ interorganizational ties. Yet
we recognize that organizations are often connected not only by links at
the organizational level but also by the numerous interpersonal ties among
organizational agents. In this book, I considered some of the individual-level
connections that link firms. In Chapter 4, for example, I discussed board of
director interlocks as a network resource that is likely to shape firm behavior.
 CONCLUSIONS AND FUTURE DIRECTIONS 263

In Chapter 9, the interpersonal ties implicit in upper echelon affiliations were

also considered network resources for entrepreneurial firms. Recent research
has similarly expanded our understanding of interorganizational networks
by specifically examining interpersonal ties such as those that exist within
CEO networks (e.g. McDonald and Westphal 2003) and those of mid-level
managers (e.g. Rosenkopf, Metiu, and George 2001). These studies have put
forward the compelling argument that both the interorganizational ties of
firms and the interpersonal ties of organizational agents shape the extent to
which network resources are enjoyed by firms. Given the multilevel nature of
ties that constitute firms’ network resources, an important arena for future
research is consideration of the independent and interactive effects of inter-
personal and interorganizational ties on firm behavior and outcomes.

THE NATURE AND TYPES OF A FIRM’S TIES

Another way to distinguish between different network ties is to consider the
specific types of connections that a set of ties represents and the underlying
mechanisms through which they benefit participating firms. Ultimately, if
we are to claim that a firm’s networks give it access to network resources, it
is important to clearly and fully explicate the exact nature of resources and
information that are channeled through those ties and precisely how they may
benefit participating firms. In recent years, several trends have contributed
to scholars’ increased focus on the diverse nature of ties from which firms
accumulate their network resources. One such trend is researchers’ increased
motivation to explore the role of networks in the domain of entrepreneurial
firms (see e.g. the introduction to the special issue of Strategic Management
Journal edited by Hitt, Ireland, Camp, and Sexton 2001). Not only is this
domain data-rich, but it is also one in which a broad variety of networks
have become immensely consequential for firms. Given the relatively small
size of most nascent firms and their significant vulnerability to environmental
pressures, plausible linkages may be drawn between their network resources
and immediate economic outcomes (e.g. Stuart, Hoang, and Hybels 1999;
Baum, Calabrese, and Silverman 2000; Rothaermel 2001; Pollock and Rindova
2003). The investigations featured in Chapters 9 and 10 provide a window into
the growing body of research on entrepreneurial firm ties, but represent only
a fraction of the studies that have considered the network-resource-related
ties of young firms. These connections range from those with other entre-
preneurial firms to ties with large incumbents and financing entities, such
as venture capitalists and investment banks, forcing researchers to consider
a broad array of links that influence firm behavior and outcomes. Indeed,
Chapter 10 highlights the richness of research opportunities in this area not
264 RESOURCES IN ENTREPRENEURIAL SETTINGS

only by looking at the diversity of ties entrepreneurial firms may enter but also
by considering how their relative influence may vary based on market context,
suggesting that the relative efficacy of network resources may be modulated
by environmental factors. In spite of the number of studies that have been
conducted in this space, this arena remains a fruitful area for future research,
with a number of important questions still to be answered around both the
antecedents and consequences of network resources for entrepreneurial firms.
Another trend spurring a closer look at the diverse types of firm ties
that exist is the growing tendency of enterprises to redefine the scope of
their operations and simultaneously enter into vertical partnerships (with
suppliers of products and services) and horizontal alliances (with partners
who may offer complementary goods and services). This development has
forced researchers to more explicitly consider the heterogeneity of firm ties as
firms enter alliances at distinct points in their value chain, with very different
entities, and for widely different reasons (Gulati and Kletter 2005). As prior
research suggests (e.g. Zaheer and Venkatraman 1995; Dyer 2000), not only
may firms enter into ties at distinct points in their value chain, but the nature
of those ties in terms of their quality of interaction is also likely to vary signifi-
cantly, forcing researchers to confront the heterogeneity of ties and consider
their varying implications for firms (e.g. Gulati, Lawrence, and Puranam 2005;
Gulati and Sytch 2006a).
While early research on firm ties focused more on traditional joint manu-
facturing and marketing agreements under the rubric of interorganizational
strategic alliances, the more recent focus on small entrepreneurial firms and
the growing vertical and horizontal restructuring of large-firms architecture
have now drawn researchers to consider the heterogeneity of various types of
ties. One piece of evidence for this is that scholars have been more thorough
and specific in distinguishing between component procurement (Gulati and
Sytch 2006a), research and development (Powell et al. 2005; Sytch and Gulati
2006), venture capital funding (e.g. Lee, Lee, and Pennings 2001; Baum and
Silverman 2004) and investment bank advisory ties (e.g. Stuart, Hoang, and
Hybels 1999; Higgins and Gulati 2006), among others. While many still elect
to group these studies together when discussing network research findings, it
is essential for researchers to recognize that these distinct types of ties can give
rise to differential portfolios of network resources and thus generate different
consequences for firms. In Chapter 8, I point out this trend and propose that
we maintain a holistic perspective on firm ties while at the same time respect-
ing the heterogeneity of the connections that shape a firm’s network resources.
Each type of tie that a firm may enter may be further classified in terms of
the intensity of interaction between the organizations that have formed them.
Lastly, several other categories of firm ties remain to be examined in depth.
For example, scholars may further broaden the array of interorganizational
ties that constitute a firm’s network resources by delving into its connections
 CONCLUSIONS AND FUTURE DIRECTIONS 265

with nonprofit and government agencies. They may also examine the extent
to which these different types of ties complement or substitute for each other
as sources of network resources.

THE TYPES OF PARTNERS CONNECTED TO FIRMS

The third axis that can be used to describe a firm’s network resources concerns
the unique features of the partners to which the firm is connected. Before
we even consider how the heterogeneity of partners may shape a firm’s access
to network resources it is important for researchers to more fully and clearly
articulate whether network resources are resident in the ties themselves or pri-
marily in the partners with whom firms are connected through those ties (e.g.
Gulati, Lavie, and Madhavan 2006). This is a subtle yet important distinction
since the former implies that to fully grasp network resources we need to delve
deeply into the nature of the ties a firm enters while the latter implies a more
detailed assessment of the partners to whom a firm may be connected through
those ties. From the definition of network resources adopted here, it is clear
that network resources accrue to firms because its networks are conduits of
valuable information and resources from its partners. As a result, the type of
partners a firm may have in its network is also likely to shape its cumulative
network resource base. Prior work on status (e.g. Podolny 1993) and relational
capabilities (Dyer and Singh 1998; Sytch and Gulati 2006) suggests that firms
could build very distinct network resource bases that are contingent on their
partners and the relative efficacies of these entities. Other characteristics of
a firm’s partners that could influence the formation and impact of network
resources include its partners’ technological expertise (Stuart, Hoang, and
Hybels 1999) and the complementarity of their resource bases relative to
those of the focal firm (e.g. Gulati 1995b; Gulati and Gargiulo 1999; Chung,
Singh and Lee 2000). Given these findings, it would be immensely valuable for
future researchers to build a taxonomy of partner attributes that are likely to
influence a firm’s access to network resources.
This multifaceted axis on which a firm’s network resources could be
assessed offers several valuable directions for future research. But such inves-
tigations will occur only when researchers explicitly embrace the diversity
of ties that may shape a firm’s access to network resources and begin to
develop a shared vocabulary and taxonomy for these connections. Researchers
have begun to make significant strides in this regard, with recent papers that
explicate some of the conceptual underpinnings of such resources by drawing
on the conceptual foundations of the resource-based view (Gnyawali and
Madhavan 2001; Lavie 2006). In some follow-up research, my colleagues and
I (Gulati, Lavie, and Madhavan 2006) seek to provide further clarity regarding
the mechanisms by which networks may shape firm behavior and outcomes.
266 RESOURCES IN ENTREPRENEURIAL SETTINGS

From individual ties to portfolios

As firms enter ties with external entities with growing frequency, many have
found themselves with dozens of partnerships, if not more—especially in
the case of larger companies. While issues concerning the management of
individual ties are still important and merit further consideration, new issues
around the management of a portfolio of ties have also arisen. Indeed, in
recent years, researchers studying the formation of alliances in particular have
invoked the ‘portfolio’ metaphor to suggest that the ties of a firm operate both
independently and in aggregate (e.g. Stuart 2000; Bamford and Ernst 2002;
Kale, Dyer, and Singh 2002; Parise and Casher 2003; Pinar and Eisenhardt
2005; Reuer and Ragozzino 2006).
The fact that a firm may have a wide array of ties suggests that it has
to simultaneously manage this portfolio and address potentially conflicting
demands from multiple partners. Furthermore, if the firm is centrally placed
in a network, it must pay particular attention to a series of strategic and
organizational issues (Lorenzoni and Baden-Fuller 1995). Thus, developing
a more comprehensive portfolio perspective on ties that fully explicates how
the sum of the parts resulting from individual ties aggregate or not to a
whole is important—especially given the increasing number of firms that are
facing these issues. There is also clearly room for further research to explicate
the role that such portfolios may play in shaping a firm’s access to network
resources.
Consideration of how a firm’s portfolio of ties can lead to the accumulation
of network resources also opens up numerous questions about the cooper-
ative capabilities of firms. For instance, evidence suggests that there may be
systematic differences in the cooperative capabilities that firms build as they
gain experience with alliances, and that the extent of this learning may affect
their success with alliances and in turn shape their relative access to alliance-
based network resources (Lyles 1988; Anand and Khanna 2000a; Hoang and
Rothaermel 2005; Gulati and Sytch 2006b). This body of work poses ques-
tions about what these alliance-related capabilities are and what systematic
tactics firms use to internalize them (e.g. Dyer and Singh 1998). Some of
these capabilities appear to include: identifying valuable alliance opportu-
nities and good partners, using appropriate governance mechanisms, devel-
oping interfirm knowledge-sharing routines, making requisite relationship-
specific asset investments, and initiating necessary changes to the evolving
partnership while managing partner expectations. There is still much room to
expand on these ideas and to consider how firms can accumulate and aggre-
gate their disparate ties into mutually reinforcing network resources while
at the same time minimizing potential trade-offs that may arise with such
aggregation.
 CONCLUSIONS AND FUTURE DIRECTIONS 267

Network resources within constellations of firms

The focus of this book has been on the relationship between firms’ network
resources and their behavior and relative success. In an increasingly networked
world where competition occurs not only between firms but also among
coalitions of companies (e.g. Nohria and Garcia-Pont 1991; Gomes-Casseres
1994, 1996), it is natural to ask whether influential network resources may
also be possessed by agglomerations of firms. For example, a recent study by
Venkatraman and Lee (2004) examined how the network structure of product
platforms in the US video game industry impacts product launches. Along
similar lines, Gomes-Casseres (1994) has looked at several industries in which
networks, rather than firms, have become the organizing level at which firms
compete. Such studies suggest that the performance of a firm is influenced
by the networks to which it belongs. This line of work has been expanded
to consider the relative success of competing networks of firms in particular
geographic regions (Saxenian 1990; Gerlach 1992). While these researchers do
not bring up network resources per se, their studies provide strong evidence
that we could extend several network resource concepts from the domain of
individual firms to the study of coalitions of firms.
Such network-focused approaches may be further refined by identifying
specific network characteristics that are more likely to result in benefits for
members of a network. For instance, in an ongoing study of hospitals and
health care networks, my colleagues and I suggest that not all networks provide
equal benefits to members (Westphal, Gulati, and Shortell 1997). We have
identified several key network-based factors that shape the effects of network
membership on firm performance—these may help explain why some net-
works provide greater benefits than others. A natural extension of these studies
would be to look not only at the network characteristics but also at the posi-
tions of the individual organizations within the network. Such research could
provide us with insights regarding the informational and control benefits that
may result from particular locations in specific networks. Furthermore, it
could help us to assess performance effects across the multiplicity of networks
in which firms are embedded. Other possible lines of inquiry include who
controls the network and why, and possible limits of network growth.

Network resources in institutional context

The unique features of the institutional environment in which firms reside
are likely to influence access to network resources (e.g. Dacin, Hitt, and
Levitas 1997). For instance, the strength of the appropriability regime of the
268 RESOURCES IN ENTREPRENEURIAL SETTINGS

industry, or the degree to which firms are able to capture the rents generated
by their innovations, may have enormous implications for how firms elect to
accumulate network resources and derive benefits from them (cf. Teece 1986;
Oxley 1997; Gulati and Singh 1998). More interestingly, the relationship here
could be reciprocal, as for instance the strength of the appropriability regime
in an industry may be shaped by the distribution of network resources in
that sector. In sectors with dense sets of ties among firms and easy access to
network resources, the appropriability regime is likely to be stronger due to
the creation of reputational circuits that make participating firms less likely
to engage in malfeasance. Additionally, considerations of legitimacy may vary
across institutional environments, at the extreme overshadowing the demands
of the immediate task environment and leading firms in those environments
to pursue unique stocks of network resources (cf. Meyer and Rowan 1977).
In my own research, I have uncovered interesting variations in the propen-
sity of firms to pursue network resources, and such patterns may be linked to
the institutional context. For example, in the study described in Chapter 2,
I found systematic cross-industry differences in the propensity of firms to
acquire new network resources (Gulati 1999). These effects were no longer
significant once I included measures for network resources. This indicates that
important differences in inherent propensities for alliances across sectors may
be explained by systematic differences in network resources available to firms
across those sectors.
My research summarized in Chapters 5 and 6 revealed intriguing results
when comparing not only the variations in alliance contracts between indus-
tries but also the variations between domestic and cross-border collaborative
ties of American and Japanese firms (Gulati and Singh 1998). The comparison
of local and cross-regional alliances was broadly consistent with our expect-
ations of greater trust in the former than the latter, but our breakdown of
local alliances by region suggests some provocative issues not fully explored
in the study. While the results for European alliances were consistent with
our predictions, contrary to our expectations, Japanese domestic alliances
were no different from cross-regional alliances in their use of minority equity
investments or contractual alliances. Even more conspicuous was the absence
of significant differences in the governance structures of alliances between
American partners and cross-regional alliances. While these mixed results sug-
gest some systematic differences in the level of trust between local and cross-
regional alliances, as reflected by the types of alliance governance structure
that were used, there are several alternative interpretations. The differences,
at least for European alliances and some Japanese alliances, may stem from
appropriation concerns resulting from greater difficulties in specifying and
enforcing property rights and monitoring problems in cross-regional alliances
relative to local ones, or they may be due to the greater coordination challenges
and costs of cross-regional alliances. Local alliances in each region may also be
 CONCLUSIONS AND FUTURE DIRECTIONS 269

influenced by geography-specific institutional contexts deeply embedded in

normative practices and authority structures (Hamilton and Biggart 1988).
Or perhaps there are historical and legal circumstances that mandate or
encourage the use of particular governance structures for alliances. But it was
beyond the scope of the study to examine fully the mechanisms underlying
geography-based differences in alliance governance structure, as well as the
lack of consistency in results by region. Thus, these areas of inquiry, along
with those concerning sectoral differences, merit further exploration.

Network resources as explanations for behavior

and outcomes
I have tried to demonstrate that network resources are powerful determinants
of a firm’s behavior and performance (for two excellent reviews of this bur-
geoning literature, see Kilduff and Tsai 2003; Monge and Contractor 2003). In
the first half of this book, this idea was supported by studies that documented
the relationship between a firm’s current and prior ties and its propensity to
enter into new ties. The rationale for the observed relationship was that a firm’s
current and prior network ties are conduits of valuable information that in
turn expose it to new alliance opportunities and reduce the level of uncer-
tainty that the firm faces regarding potential partner capabilities and behavior.
While linking network resources to such organizational actions continues to
be an important arena for future research, other important questions remain
regarding the specific mechanisms that underlie such relationships.
There is also considerable room for further exploration of the role of
network resources in shaping the governance structure of interorganizational
relationships. In Chapters 5 and 6, I provide some evidence for the role that
network resources play in shaping the contractual agreements used in new
alliances. These ideas have since been refined and extended in subsequent
research that has recast the selection of a governance structure as a choice that
allows us to ask the broader question of whether or not formal and informal
controls are substitutive or complementary in nature (e.g. Das and Teng 1998;
Kale, Singh, and Perlmutter 2000; Poppo and Zenger 2002; Casciaro 2003;
Gulati, Lawrence, and Puranam 2005; Gulati and Nickerson 2006; Gulati
and Sytch 2006b). While most of these studies consider the antecedents of
governance choice, few if any of them also consider and empirically assess the
consequences of governance choice. Thus, this remains an important arena
for future research (e.g. Gulati, Lawrence, and Puranam 2005). More broadly,
consideration of how network resources may shape and be shaped by govern-
ance structures—and how such interactions may influence firm outcomes also
remains a viable frontier for future research.
270 RESOURCES IN ENTREPRENEURIAL SETTINGS

In the third section of the book, I focused more on the performance

consequences of network resources—primarily by highlighting early research
that I conducted in this area. There is now a growing body of research that
does not allude to network resources per se, but does reveal how a firm’s
interorganizational ties may or may not have significant performance impli-
cations (e.g. Hagedoorn and Schakenraad 1994; Stuart 2000; Ahuja 2000a).
These ideas have been further developed to include not only a firm’s cumu-
lative experience with alliances but also the specific nature of that experience
(e.g. Reuer, Zollo, and Singh 2002; Hoang and Rothaermel 2005; Sytch and
Gulati 2006) and of prescribed roles within those firms (e.g. Kale, Dyer,
and Singh 2002). Others have extended the performance outcomes associ-
ated with network resources beyond proximate measures to more nuanced
ones, such as the cumulative growth option value (e.g. Tong, Reuer, and
Peng 2007).
Given the rich heterogeneity of network resources, scholars have also begun
to explore how different facets of network resources shape firms’ behavior and
performance. Some researchers, for example, have examined how different
types of ties have a differential impact on firm outcomes (e.g. Rowley, Behrens,
and Krackhardt 2000). Others have sought to develop a more contingent
argument that shows how different types of networks exert different effects
on firm outcomes depending on the market context (Sarkar, Echambadi, and
Harrison 2001; Gulati and Higgins 2003) or the firm’s developmental stage
(Lechner and Dowling 2003). Focusing on the potential transitivity of network
resources, others have shown how ties formed in one realm may have bene-
ficial consequences in others (e.g. Jensen 2003). Finally, some scholars have
reframed the question to suggest that we consider carefully the very notion
that networks of any kind are likely to shape firm behavior and outcomes (e.g.
Rangan 2000).
Given these different streams of research, it is clear that linking network
resources to concrete performance outcomes remains an important frontier
for future research. A critical prerequisite for effectively analyzing the behav-
ioral and performance impact of network resources, however, is to delve more
deeply into the ties we know about and to delineate the precise behavioral
mechanisms through which those ties shape behavior and outcomes (e.g.
Gulati and Sytch 2006a; Hoetker, Swaminathan, and Mitchell 2006; Reuer
and Arino 2006). If we are to move beyond using network resources as a
crutch or catch-all for assessing the role of networks in economic life, we
must be much more deliberate and precise in articulating the underlying
mechanisms through which those network resources exert their effects. One
line of thinking that scholars could consider in this regard is that network
resources can simultaneously affect firms’ abilities to appropriate and create
value in various interorganizational collaborations (e.g. Gulati and Wang
 CONCLUSIONS AND FUTURE DIRECTIONS 271

2003; Gulati and Sytch 2006a; Sytch and Gulati 2006). Because the tactics
for capturing a bigger share of the pie and those for expanding the pie itself
have very different underpinnings and are often guided by different logics of
action, they are also likely to have unique implications for firms’ performance.
One way to better understand these implications may be to study the dynamic
interaction processes between alliance partners over time. Such processes may
have a profound influence on the ongoing value creation and appropriation
that occurs between firms and hence, shape each partner’s respective access
to the network resources generated by those ties (Ring and Van de Ven 1992,
1994; Doz 1996; Doz and Hamel 1998).
Finally, it is also likely that a firm’s network resources not only influ-
ence the creation of new ties but also influence the performance of the ties
themselves—and consequently, the performance of firms participating in such
ties. Thus far, studies of how network resources impact firm behavior and firm
performance have proceeded separately—yet such studies are interconnected
and thus merit simultaneous consideration. For example, if network resources
resulting from a firm’s network of prior alliances have consequences for the
relative success of individual alliances that the firm enters, then they may
have long-term performance consequences for the firm as well. Furthermore,
a natural extension of the study described in Chapter 4 could consider the
implications of board interlocks not only for the creation of new alliances but
also for organizational outcomes. One could examine, for instance, whether
the nature of prior relationships (i.e. cooperative or controlling) between
top managers and boards affects the likelihood of forming strategic alliances
with other specific firms and the subsequent success of those strategies. In an
insightful study, Baker (1984) suggested that distinct social structural patterns
in the stock options market can alter the direction and magnitude of option
price volatility. Similarly, the social structure of board interlocks that influence
the creation of alliances may influence the relative terms of trade between
alliance partners and also dampen the volatility that usually occurs in such
partnerships. On one hand, good rapport between top managers involved in
cooperative relationships on third-company boards may lead to more success-
ful alliances between their companies by facilitating efforts to flexibly adjust
the roles and responsibilities of alliance partners as environmental conditions
change over time. On the other hand, in-group biases resulting from CEO–
board cooperation may lead to excessive levels of trust between top managers,
such that each party becomes overly optimistic about the capabilities and
contributions of the other. Thus, empirical research could help determine how
initial relationships between corporate leaders moderate the consequences of
alliance formation. Such possibilities suggest that considering behavior and
performance simultaneously is an important and fruitful direction for future
research.
272 RESOURCES IN ENTREPRENEURIAL SETTINGS

Managerial implications
By using the term ‘resource’ so centrally here I am clearly implying that
networks have beneficial consequences for those firms endowed with them
(notwithstanding the section titled ‘Caveat Emptor’). Yet we must go beyond
descriptive theory and empirical demonstrations of the benefits of network
resources to articulating pathways for firms to secure such resources.
The growing recognition among managers that interorganizational ties are
key strategic resources is partially offset by frustration that such ties are diffi-
cult to manage and carry a high failure rate. In response, a number of studies
have considered in detail some of the behavioral dynamics underlying individ-
ual alliances and uncovered some of the managerial practices that may impact
their relative success. The rich insights from these detailed clinical and theoret-
ical accounts have significantly advanced our understanding of the dynamics
within alliances (e.g. Ring and Van de Ven 1992, 1994; Gulati, Khanna, and
Nohria 1994; Doz 1996). Nevertheless, the focus of these efforts has remained
at the dyadic level of exchange, with a primary emphasis on interpartner
dynamics. Similar behavioral patterns can occur within multifirm networks as
well, but remain to be explored in detail (for an exception see Dialdin 2004).
There is now a parallel stream of research on some of the dynamics that
underlie a firm’s ability to manage its collection of interorganizational ties.
Studies in this area have introduced the idea of ‘relational capability’, which
denotes a number of related abilities including: effective integration and
exchange of resources in interorganizational collaboration, identification of
valuable alliance opportunities and good partners, use of appropriate gov-
ernance mechanisms for ties, development of interfirm knowledge-sharing
routines, appropriate investment in relationship-specific assets, initiation of
necessary changes to the partnership as it evolves, and management of partner
expectations (Dyer and Singh 1998; Kale, Dyer, and Singh 2002). Research on
relational capabilities has come a long way, from a deeper assessment of the
management of individual ties to a richer understanding of how firms leverage
and coordinate their collection or portfolio of ties (e.g. Doz and Hamel 1998;
Dyer 2000; Dyer and Nobeoka 2000; Gulati and Kletter 2005). Future research
should consider in further detail some of the managerial processes that allow
firms to accumulate such resources. Such capabilities could include scanning,
screening, structuring, and managing interorganizational ties to minimize the
costs of collaboration while maximizing the value created. On the cost side,
in particular, recent studies have gone beyond looking at the costs associated
with the risks of partner malfeasance to the costs associated with interorgan-
izational task-coordination (e.g. Gulati and Singh 1998; Gulati, Lawrence and
Puranam 2005). An important goal for future research would be to further
disentangle these two costs in interorganizational ties and to consider how
managerial practices focused on both types of costs may influence the efficacy
 CONCLUSIONS AND FUTURE DIRECTIONS 273

of firm efforts to accumulate and develop network resources. Furthermore,

more detailed studies could examine how firms cross-leverage different forms
of network resources for maximum value creation.
Despite efforts by researchers to unpack a firm’s relational capabilities,
relatively little is known about the role of key individuals involved in the
management of a firm’s ties with disparate entities. For example, we know that
interpersonal contacts between firms can affect intrafirm decision-making
(Gulati 1993), as boundary-spanning individuals can have crucial influence on
the decisions of their partner organizations (e.g. Kale, Dyer, and Singh 2002).
Despite some advances we have made in this realm, a number of interesting
arenas still remain for future research. For instance, when alliances entail the
creation of new entities, such as joint ventures, they can also lead to conflicting
identities for participating individuals, who may be torn between loyalties
to the venture itself and to their parent organizations. Furthermore, when
network-level decisions must be made among clusters of firms, specific multi-
lateral negotiations and dynamics may be poorly understood. Firms may also
use their network contacts to create control benefits proactively by utilizing
their advantageous position in social networks to play one partner against the
other. They may also seek to manage their networks to sustain advantages
(Lorenzoni and Baden-Fuller 1995). Little is known about some of these
intriguing behavioral dynamics that underlie complex interorganizational ties
that generate network resources for those firms.
 APPENDIX 1 DATABASES

Alliance Formation Database (Used in Chapters 2 and 3)

The data for these studies were gathered from a variety of sources. Initially, I conducted
field interviews with 153 managers in 11 large multinational corporations over a 2-year
period (Gulati 1993). These managers typically had authority over alliance decisions.
The open-ended interviews were unstructured and conducted to broadly understand
the factors associated with decisions to enter new alliances. These interviews provided
initial clues regarding the importance of a firm’s network of prior ties in alliance
formation, as well as insights into the mechanisms underlying this relationship.
The models in Chapters 2 and 3 were tested using longitudinal data on strategic
alliances in a sample of American, European, and Japanese organizations in three
industries from 1981 to 1989. Data were collected on a sample of 166 organizations
operating in the new materials, industrial automation, and automotive product sec-
tors. The selected panels included 50–60 of the largest publicly traded organizations
within each sector, and I estimated an organization’s size from its sector sales as
reported in various industry sources. Industry panels were also checked with multiple
experts to ensure they included all prominent competitors in each of the sectors. This
design led to the inclusion of 62 organizations in new materials, 52 in automotive
products, and 52 in industrial automation. Of these organizations, 54 were American,
66 Japanese, and 46 European.
For each organization, financial data were collected for each year between 1980 and
1989 from Worldscope, which provides detailed information about prominent organ-
izations in a wide range of sectors. For organizations not reported in Worldscope, data
were obtained from COMPUSTAT for US organizations, Nikkei for Japanese organ-
izations, and Disclosure for European organizations. For a number of Japanese organ-
izations, data were also obtained from Daewoo Investor’s Research Guide.1 Information
identifying the industry subsegment in which each organization had expertise was also
collected from numerous industry-specific trade journals about the subsegment of its
industry within which it had expertise. To make sure that these classifications were
correctly recorded, they were cross-checked with multiple experts from each of the
industries.

¹ For a few organizations, financial data were available only for some years. The gaps typically
resulted from the fact that Worldscope reports organization data in five-year continuous segments and
omits some organizations from some volumes. One alternative for dealing with this problem would
have been to use the ‘available-case method’, including only cases with the variables of interest in the
analysis. Although such an approach is straightforward, it poses a number of problems, including
variability in the sample base as the variables included in models change. Furthermore, it makes little
sense to exclude entire cases simply because a single variable is missing. Thus, I chose to estimate
the missing data using a time-trend-based imputation (Little and Rubin 1987). This procedure took
into account that the financial outcome for an organization is the result of its own past actions as
well as broad trends within its industry. I retained a dummy variable indicating imputation and later
compared the results obtained with and without imputed values.
 DATABASES 275

Information on the alliances formed in the three panels of organizations was

derived from a much larger and more comprehensive dataset that includes informa-
tion on over 2,400 alliances formed by American, European, and Japanese organ-
izations in the three focal sectors from 1970 to 1989. More than half the data came
from the Cooperative Agreements and Technology Indicators (CATI) database cre-
ated by researchers at the Maastricht Economic Research Institute on Innovation and
Technology (MERIT) at the University of Limburg. Additional alliance data were col-
lected from numerous other sources, including industry reports and industry-specific
articles reporting alliances. For the automotive industry, these sources included Auto-
motive News, Ward’s Automotive Reports, U.S. Auto Industry Report, Motor Industry
of Japan, and the Japanese Auto Manufacturers Forum; for the industrial automation
sector, Managing Automation (1988–89); for the new materials sector, reports from
the Office of Technology Assessment and the Organization for Economic Cooperation
and Development; and for all sectors, Predicast’s Funk and Scott Index of Corporate
Change. In all instances, only alliances that had actually been formed were recorded.
Consequently, the study excluded reports of probable alliances. The goal of this data
collection was to compile the most comprehensive database of alliances within each
focal sector that was possible, in terms of both depth and duration of coverage.
One concern with such a longitudinal design is left-censoring because many of the
sample firms existed prior to the start of the alliance observation period in 1981. To
avoid this problem, additional alliance data were collected for the alliance activity of
this sample of firms for an additional eleven years, dating back to 1970. These data
only confirmed what previous studies have reported, namely that alliance activity was
only a trickle until 1980, when it surged (Harrigan 1986).

Constructing the Social Networks (Relates to Chapters 2 and 3)

To compute the social structural measures associated with these studies, adjacency
matrices were constructed to represent the relationships between the actors in a
network. Because the focus here was on alliances formed within industries, separate
matrices were computed for each industry and year. Each matrix included all alliance
activity among industry panel members up to the prior year. Additional data on
alliances announced by the panel members between 1970 and 1980 were entered
into the initial matrix for 1981 to minimize left-censorship effects. All matrices were
entered into UCINET IV, a versatile software package that allows the computation of
various network measures (Borgatti, Everett, and Freeman 1992).
To construct the social networks of past alliances, three choices were made about
how to treat alliances. The first relates to the treatment of different types of alliances.
Alliances range from equity joint ventures in which partners are closely intertwined,
at one extreme, to arm’s length licensing agreements at the other. Each type entails
varying levels of organizational commitment and leads to differing levels of organiza-
tional interdependence. Thus, it is difficult to justify treating all alliances identically.
In constructing the adjacency matrices, a decision was made to weight each type of
alliance on the basis of the resulting relationship’s strength. The weighting scheme,
ranging from 1 (weak) to 7 (strong), was based on prior schemes used in alliance
research (Contractor and Lorange 1988; Nohria and Garcia-Pont 1991). To ensure the
276 APPENDIX 1

robustness of the findings, the results were tested against those obtained using a simple
dichotomous matrix that treated all alliances as the same.
The second methodological choice relates to the treatment of multiple ties between
two firms over the observed time period. Three possible approaches were identified:
(a) using an additive measure that yielded a higher score as firms made multiple ties,
(b) adding the scores and normalizing them by the maximum score possible in that
year, and (c) using a Guttman scale to capture the score of the strongest alliance the
firms had formed. A Guttman scale was used for the final analysis, but the results
obtained were compared against those yielded by the other two approaches.
The third choice relates to how long past alliances are likely to influence current
alliance formation. One possibility was to include all past alliances in a social network,
which meant assuming that any prior tie, no matter how long ago it occurred, would
moderate firm behavior. Another possibility was to use a ‘moving window’, which
implied that only the relationships formed in the previous few years affected current
behavior. The first approach, which defined a social network of alliances to include
all alliance activity that had taken place until the year before a given year, was used in
Chapters 2 and 3. These results were compared against those obtained by using a five-
year moving window because recent research suggests that the lifespan for alliances
is usually no more than that length of time (Kogut 1988b, 1989). A follow-up study
that I describe at the end of Chapter 4 (Gulati and Gargiulo 1999) uses a five-year
moving window and, in that case, obtained results are compared against a network of
cumulative ties.

Board and Alliance Database (Used in Chapter 4)

The research in this chapter is based on a sample of companies that included 600
firms selected from the Fortune and Forbes 500 indexes of US industrial and service
firms. Both archival and survey-based data on these firms were collected. Archival
information was collected on alliances formed, board interlocks and other board
characteristics, strategic variables, and financial data. To measure board control and
CEO–board cooperation, a questionnaire survey was distributed by my coauthor Jim
Westphal in April 1995 to all CEOs of the 600 firms. In addition, to assess interrater
reliability, another questionnaire was sent to individuals serving as outside directors at
one or more companies whose CEO responded (n = 1,312 directors).
Surveys of top managers have notoriously low response rates. To ensure the highest
possible response in this case, the following steps were taken by my coauthor (Forsythe
1977; Groves, Cialdini, and Couper 1992; Fowler 1993). First, an in-depth pretest was
used to refine the format and length of the survey. Second, the cover letter linked the
present study with prior surveys on top management issues that were conducted by
a major business school, while noting that hundreds of their peers had responded to
the prior surveys. The letter also highlighted the need for research on CEO–board
relations, which also engaged respondents’ natural interest in the topic (see Groves,
Cialdini, and Couper 1992). Third, nonrespondents were sent a second letter with a
new questionnaire about 21 days after the initial mailing. As a result of these efforts,
263 of the 600 CEOs in the sample frame responded, a response rate of 44 percent.
Moreover, 564 of the 1,312 outside directors responded, yielding a response rate of
 DATABASES 277

43 percent. These response rates are high compared with other top management
surveys (Pettigrew 1992).
To check for nonresponse bias, respondents and nonrespondents were compared
across a variety of firm characteristics using the Kolmogorov–Smirnov two-sample test
(Siegel and Castellan 1988). This assesses whether significant differences exist between
the distribution of respondents and nonrespondents for a given variable. The results of
this test (not included here) suggest that respondents and nonrespondents came from
the same population. We also assessed nonresponse bias according to the presence or
absence of specific board structures and practices thought to indicate board control
(cf. Hoskisson, Johnson, and Moesel 1994; Belliveau, O’Reilly, and Wade 1996). These
analyses provided further evidence that nonresponse bias was not present in our
data. In particular, a series of difference-in-proportions tests showed that respondents
and nonrespondents were not significantly different with respect to the existence of
(a) an executive committee on the board (D = .018; p = .260); (b) a nominating
committee composed of outsiders (D = .011; p = .585); or (c) a management devel-
opment and compensation committee (D = .009; p = .649). Moreover, respondents
were not significantly different in their use (vs. nonuse) of stock compensation for
directors (D = .019; p = .212), and CEOs of responding firms were neither more
nor less likely to serve as an ex officio nonvoting director on the board (D = .016;
p = .435).
Data were also collected on all alliances initiated by firms in the sample frame
from 1970 to 1996. This sample included all interfirm partnerships that entailed the
creation of a new legal entity in which both partners held equity, also referred to
as joint ventures. These data were coded manually from the Predicast’s Funk and
Scott Index of Corporate Change and from Lexis/Nexis. Only joint ventures that had
actually been formed were recorded. Hence, reports of probable joint ventures that
never materialized were excluded. An effort was made to ensure that these data were
comprehensive in covering all alliances during the previously mentioned time period.
In this study, alliance formation was predicted over the two-year period following
the survey date (1995–6), and the remaining historical alliance data were used to
compute some key control variables that are described in Chapter 4. Data on board
interlocks and board structure were collected for the period 1994–5 from Standard and
Poor’s Register of Corporations, Directors, and Executives, and the Dun and Bradstreet
Reference Book of Corporate Management. To calculate measures of market constraint
(discussed below), input–output data were obtained from the database created by
the Interindustry Economics Division of the Bureau of Economic Analysis (cf. Burt
1992; Mizruchi 1992). Data on financial characteristics and other firm attributes were
obtained from COMPUSTAT.

Alliance Announcement Database (Used in Chapters 5 and 6)

The unit of analysis used here was the transaction (i.e. each alliance). The data-
set included information on all publicly announced alliances in the period 1970–
89 in the biopharmaceuticals, new materials, and automotive economic sectors. The
biopharmaceutical sector includes applications in therapeutics, vaccines, and diagnos-
tics. The new materials sector includes metals, ceramics, polymers, and composites.
278 APPENDIX 1

The automotive sector includes both manufacturers of finished automobiles and

their suppliers. The data regarding alliances formed within these sectors origin-
ated from many of the same sources that were described earlier in relation to the
Alliance Formation Database, including the CATI database, industry reports, and
industry-specific articles. In the case of the biopharmaceutical sector, these lat-
ter sources also included: Bioscan, Ernst & Young Reports, and the Biotechnology
Directory.
The goal of this data collection was to comprehensively include all alliances formed
within the selected industries. While Chapters 2 and 3 examined only the alliances
formed by a select panel of firms from each sector, for these chapters no size restric-
tions were placed on the firms included. As for the dataset referred to in Chapters
2 and 3, only alliances that had actually been formed were recorded. The complete
dataset includes information on over 2,400 alliances among American, European, and
Japanese firms. The goal was to create the most comprehensive dataset on alliances
within each of the focal sectors that was possible, both in terms of the length of time
included and the depth of coverage.2
As highlighted above, the alliance data used above in the ‘Alliance Formation Data-
set’ were a subset of these data as they included all the alliances formed by the panel of
firms to which that data-set was restricted. In this data-set, no such restrictions were
placed.
The data segment acquired from MERIT (see Alliance Formation Database)
included codes for the form of an alliance (equity based or not) and the activities it
encompassed. The codings were based on precise criteria used to draw assessments
from the public announcement of an alliance. To maintain coding consistency across
the entire dataset, the same coding approach that was employed by MERIT was used
to code the alliance data that did not originate from the CATI database. This coding
required that the dichotomous choice process be carefully controlled by developing a
list of synonyms for each choice. The explicit coding rules were clarified and refined
using fifty nonsampled alliance announcements. The general rule was to code only
explicit references to each choice. Multiple public announcements were consulted
from a wide variety of sources described earlier. Because the dichotomous choices
were clearly specified, the rules for coding were kept simple and straightforward,
and multiple sources were consulted, the actual coding of alliances was not com-
plex. In addition, the clear specification of categories and the simplified coding rules
boosted the reliability of the coding. Attempts to assess this reliability were made by
periodically recoding a small number of alliances after some time had elapsed since
the original coding. Throughout the coding process, the recoding was almost identical
to the original, with agreement rates ranging from .96 to 1.00. The reliability of the
coding criteria was also assessed by asking two experts on strategic alliances to code a
random sample of twenty-five alliances using the information that had been collected.
There was complete coincidence in their coding and the coding that was independently
performed subsequently. Overall, these results suggested that the alliance data were
coded with a high degree of reliability.

² The number of alliances examined here far exceeds the numbers examined in previous studies:
Nohria and Garcia-Pont (1991) reported 96 automotive sector alliances for the period 1980–9 vs. the
493 reported here; Pisano (1989) reported 195 biopharmaceuticals alliances vs. the 781 reported here.
 DATABASES 279

During the coding process, an alliance was labeled as including R&D only if a public
announcement clearly stated that the agreement encompassed joint product develop-
ment or basic R&D. Similarly, an alliance was coded as equity based when a public
announcement said that an equity joint venture had been created or that a firm had
taken a substantive minority position in another company with the intent to pursue
joint projects. Fortunately, most public announcements of alliances report detailed
information on their governance structures, activities, and goals. When activities or
governance structure were ambiguous, additional public records were identified that
more clearly stated the goals of a partnership. For over 30 percent of the alliance
records that were collected, multiple sources were consulted.

Joint Venture Announcement Database (Used in Chapter 7)

Our sample included all bilateral joint ventures that were formed among the 300
largest Fortune/Forbes firms (in 1988) from 1987 to 1996. We excluded from the
analysis 20 firms that had no financial data available in the COMPUSTAT industrial
firms database, leaving 280 firms. Among these, 186 had at least one JV with another
firm in the sample, generating a total number of 658 JVs in the final sample.
Sample data were collected from a variety of sources. The longitudinal data on the
announcements of bilateral JVs came from two major sources: Lexis-Nexis and Secur-
ity Data Corporation (SDC). Rich descriptions of JVs in Lexis-Nexis were comple-
mented and cross-validated by SDC data. We resolved duplications and contradictions
between these sources by consulting additional sources, such as the Wall Street Journal
index. Data on each firm’s prior JVs during the 1970–86 period were also collected for
all companies in the sample. These data, which were used to control for firm history,
came from Lexis-Nexis, as SDC data only went back to 1986.
For all sampled firms, financial data were also collected for the 1986–95 period
(inclusive) from COMPUSTAT. These financial data were lagged by one year (i.e.
financial data from 1986 were used to predict the announcement of a JV in 1987,
etc.).
Data on stock market reactions to JV announcements were collected from the
Center for Research in Security Prices (CRSP). For each firm, we obtained data on
stock market movements for that company over 241 days (from 250 days before the
announcement until 10 days before the announcement) and over a two-day period
(1 day before the announcement and the announcement day) as well as over a 21-day
period (from 10 days before the announcement until 10 days after the announcement).
Event periods (windows) are used in event studies to capture the possible stock market
reaction to information leakage prior to the announcement of a JV and to additional
information that becomes available to the market after a JV announcement (Datta
and Puia 1995; Anand and Khanna 2000a). The most widely used 2-day event period
(Datta and Puia 1995; Chan et al. 1997; Anand and Khanna 2000a) and a longer
event period of 21 days were used (Bradley, Desai, and Kim 1983; Sicherman and
Pettway 1987; Black and Grundfest 1988; Datta and Puia 1995) to capture the stock
market reaction to JV announcements. The methodology is described in greater detail
in Chapter 7.
280 APPENDIX 1

Biotechnology Start-ups Database (Used in Chapters 9 and 10)

Our sample frame includes US biotechnology firms that were founded between 1961
and 1994. Of these 858 firms, 299 went public between 1979 and 1996. Approximately
86 percent of the public firms specialized in the development of therapeutics and/or
human diagnostics; the majority of the remaining firms specialized in agriculture
and/or other biological products, generally with the explicit intention of engaging in
therapeutic applications in the future. The average time to IPO in our dataset was
4.87 years.
We compiled our data from both published and unpublished sources, striving to
be as thorough as possible while remaining focused on true, dedicated biotechnology
firms. Our primary list of public biotechnology firms was obtained from the BioWorld
Stock Report for Public Biotechnology Companies in 1996 (n = 281). Unlike other
sources (e.g. BioScan), this listing does not include large corporations (e.g. General
Electric) that participate tangentially in the biotechnology industry; hence, ours is a
narrower definition of biotechnology than that which has been employed by other
researchers (e.g. Barley, Freeman, and Hybels 1992) and is in line with more recent
research on the industry (e.g. Powell, Koput, and Smith-Doerr 1996).
To guard against sample selection bias, we also collected information on firms that
went public in the same time frame as our sample but that had not survived in their
original forms by 1996. To do this, we obtained information from biotechnology
research organizations including BIO, the North Carolina Center for Biotechnol-
ogy Information, Recombinant Capital (ReCap), and the Institute for Biotechnology
Information. We also compared three editions of Biotechnology Guide USA (Dibner
1988, 1991, 1995). From these sources, we identified an additional 18 dedicated US
biotechnology firms that had gone public but were not in existence in their origin-
al forms in 1996; they had merged, been acquired, or experienced name changes.
These firms were founded in the same period and had gone public by the end of
1996.
We also collected information on biotechnology firms that were founded in the
same time period as our sample but had not gone public by 1996 (n = 468), from
the 1998 edition of the Institute for Biotechnology Information (IBI) database. We
added to this list private biotechnology companies that were listed as ‘dead’, merged, or
acquired in the first three editions of the Biotechnology Guide USA (Dibner 1988, 1991,
1995) and that had a founding date in the same period as our core sample (n = 90).
Combining these private firms with our sample of firms that did go public yielded a
final combined sample size of 858 firms.
The main variables of interest in the study described in Chapter 9, in particular,
were drawn from the career histories of the 3,200 managing officers and directors that
made up the upper echelons of the 299 public firms in our core sample. Information
on these individuals and their firms was manually obtained from the firms’ final
prospectuses. The upper echelon was defined as the directors and managing officers
listed in a firm’s final prospectus. In filing with the SEC, firms are required to list
the last five years of experience of the firm’s managing officers and board members;
additional information (e.g. educational background) may be listed but is not required
by the SEC. We consulted additional sources such as Dun and Bradstreet for cross-
verification.
 DATABASES 281

Finally, we conducted field and ethnographic analyses at fourteen biotechnology

firms in the United States, two investment banks, one venture capital firm, and one of
the Big 6 audit firms. The individuals to whom we spoke at the service organizations
were all intimately involved in various IPO deals in the biotechnology industry during
the time period of our study and provided extremely helpful information about the
complexities involved in taking a firm public. Among the biotechnology firms, we
completed 12 formal interviews, ranging in length from 1.5 to 4.5 hours each. Five
of those interviewed were in business-related positions (CEO, CFO, or chair of the
board), while the other seven were in senior research positions. We gathered career
history information through semi-structured interviews for all of the individuals in
the biotechnology firms, as well as information on their roles in their firms and in the
IPO process. In addition, we solicited ongoing input from one expert informant who
has worked at two different biotechnology firms, one large and one small, and who
was centrally involved in two IPO deals.
 APPENDIX 2 METHODS

Unobserved Heterogeneity (Used in Chapters 2, 3, and 4)

An issue that arises when analyzing data on a time series of cross sections, or panel
data, is the possibility of unobserved time-invariant effects known as ‘unobserved
heterogeneity’. This is of particular concern with respect to the claim that a firm’s
prior history of alliances affects its future likelihood of entering an alliance. In the
case of dyads, this issue arises when particular pairs of firms display a higher or lower
propensity to enter into ties compared to all other possible pairings of firms. There are
two distinct explanations for this empirical regularity, if it indeed occurs (Heckman
1981a, 1981b). One explanation is that a genuine behavioral effect exists whereby a
firm’s future preferences are altered by the prior alliances it has experienced. In econo-
metric terms, such a behavioral effect is called ‘state dependence’—the likelihood of
an event is a function of the state of the unit.
If state dependence alone encapsulated the empirical reality, there would be no
problem. But there is another possibility that could lead to spurious results if not
accounted for: firms may differ in their propensities to enter alliances because of
unobserved factors. In this instance, such unobservable effects could be based on
permanent differences between firms in their preferences for alliances—differences
which may not be captured by any of the independent variables. If this noise were
systematic for the same unit over time, it could lead to a serial correlation among
the error terms for those observations, which would yield inefficient coefficients,
rendering any statistical testing inaccurate. Furthermore, prior alliance experience
may appear to be a determinant of future alliance formation solely because it is a
proxy for temporally persistent unobservable factors that determine alliance formation
behavior. Improper treatment can lead to spurious effects when we attempt to assess
the influence of experience on current decisions; this phenomenon is termed ‘spurious
state dependence’ (Heckman and Borjas 1980; Heckman 1981a, 1981b; Hsiao 1986;
Black, Moffitt, and Warner 1990).
In a statistical sense, the problem of unobserved heterogeneity relates to model
specification (Petersen and Koput 1991). If a model is completely specified, no such
problem occurs. Most statistical models, however, suffer from some degree of omitted-
variable bias. Another way to think about this problem is to consider the appropriate
risk set. In the experimental design associated with these studies, I include all firms
within each industry for each year as the set of possible alliance partners. It is quite
likely that some of these firms are in fact not likely to enter an alliance in some
or all observation periods, while other firms have a high propensity to ally. This
suggests the possibility of misspecification of the risk set unless adequate allowances
are made for such unobserved differences in propensity. One way to deal with such
a bias is to clean up the risk set by eliminating firms that are unlikely to engage
in an alliance, a process analogous to removing men from pregnancy studies. The
difference in propensity is frequently a result of unobservable factors, however, making
 METHODS 283

it impossible to weed out records a priori from the sample without biasing the
sample.
Two approaches frequently used to address problems of unobserved heterogen-
eity statistically are fixed- and random-effects models. Fixed-effects models treat the
unobserved individual effect as a constant over time and compute it for each unit
(i.e. each firm). In other words, the method entails estimating a constant term for
each distinct unit and including dummy variables for each. This method is similar
to that employed in least-squares-with-dummy-variables (LSDV) regression models
(Hannan and Young 1977). Random-effects models treat the heterogeneity that varies
across units as randomly drawn from some underlying probability distribution.
To address concerns of heterogeneity I employed a random-effects panel probit
model developed by Butler and Moffitt (1982).1 Subsequently, I tested the robustness
of my findings with a fixed-effects model and found consistent results. My decision to
employ a random-effects model was based on the following. First, estimates computed
using fixed-effects models can be biased for panels over short periods (Heckman
1981a, 1981b; Hsiao 1986; Chintagunta, Jain, and Vilcassim 1991). This is not a
problem with random-effects models. Because all the firm-year records in Chapter 2
and dyad-year records in Chapter 3 were present for only nine years, using a random-
effects model was clearly the favored approach. Second, fixed-effects models cannot
include time-independent covariates, a limitation that would have meant excluding
several control variables. An analysis without some of these variables would have been
severely limited. The random-effects models were computed using LIMDEP 6.0. The
random effects approach used generates a coefficient Rho, which indicates the degree
of overdispersion of the variance. Specifically, Rho is the proportion of the variance
of the error term that is accounted for by the unobservable firm-specific variables
in Chapter 2 and by the dyad-specific variables in Chapter 3. The significance of
Rho suggests that observationally identical firms display different alliance propensities
because of permanent differences in their alliance preferences and other unobserved
factors.

Interdependence (Chapter 3)
A number of additional tests were conducted to address concerns of interdependence
across observations resulting from the presence of the same firm across multiple
dyads. First, a procedure akin to the Multivariate Regression Quadratic Assignment
Procedure (MRQAP) routinely used by researchers studying dyads (Krackardt 1987,
1988; Manley 1992; Mizruchi 1992) was employed. My approach, however, differed
from MRQAP in that a random-effects probit model, rather than OLS regression, was
used for each iteration of the simulation.
In the primary study described in Chapter 3, 500 iterations of a completely speci-
fied random-effects model with a new randomized dependent variable (obtained by

¹ Within random-effects models, numerous alternatives are possible, depending on the choice of
form for the distribution of unobservables. Although Butler and Moffitt specified a normal distri-
bution, other functional forms are also possible. Some studies have moved away from functional
specification of heterogeneity toward semiparametric random effects approaches that estimate the
probability distribution directly from the data (cf. Chintagunta, Jain, and Vilcassim 1991).
284 APPENDIX 2

random permutations of the rows and columns in the alliance matrix) were run (see
Table 3.2, model 8). The coefficients obtained were compared with those obtained in
the original formulation (also shown in Table 3.2). The percentage of frequency with
which the independent variables exceeded their original values divided by the number
of permutations plus 1 (in this case, 501) indicates the statistical reliability (pseudo
t-test) of the original results. This test can be interpreted similarly to conventional
tests of significance: a value of less than 5 percent (or even better, 1 percent) provides
evidence that the original estimates are indeed accurate. The benefit of a random-
ization procedure is that satisfactory results can be obtained without requiring an
assumption of independent observations, a random sample, or a specified distribution
function. Use of this procedure enabled an assessment of the efficiency of the results,
a primary concern given the potential for dyadic interdependence. The percentage
frequency with which the results in the random sample simulations exceeded the
original estimates was far less than 5 percent in all instances. Thus, it can be said with
some confidence that for these data reasonable coefficients were obtained.
In the follow-up research reported at the end of Chapter 3 (Gulati and Gargiulo
1999), a variation and extension of this approach was used to assess the effect of
structural differentiation and other network-level factors on the propensity for dyads
to form new alliances. Similar to the study described earlier, 500 iterations of a com-
pletely specified random-effects model were run with a new randomized independent
network variable that was obtained by random permutations of the rows and columns
in each alliance matrix for each industry and year. The coefficients obtained were
compared with those obtained in the original formulation in a manner similar to
that described earlier.2 The manner in which the network-embeddedness effects were
specified made this model akin to the P ∗ logit models recently proposed by Wasser-
man and Pattison (1996). Building on the pioneering work by Holland and Lein-
hardt (1970) and Strauss and Ikeda (1990), P ∗ models produce pseudo-maximum-
likelihood estimators of the probability of observing a binary tie xi j , conditional on
the rest of the data, without having to make the implausible assumption that the
observations (dyads) are independent. Specifically, these models build into a logistic
regression parameters that capture possible sources of interdependence between the
observed dyads—such as reciprocity, transitivity, the in and out degree of each dyad
member, and network density—and obtain estimators of the effect of these param-
eters on the conditional probability of {xi j = 1}. Here, these models include network
parameters similar to the ones of a typical P ∗ model—transitive triads, the degree of
each dyad member, and network density—but the analyses here measured these par-
ameters on the network at (t − 1), while a strict pseudo-likelihood estimation requires
parameters measured on the same network that contains the predicted tie. Because
the inclusion of the (t − 1) parameters cannot be considered an adequate safeguard
against the potential effects of nonindependent observations, the aforementioned
MRQAP-like procedure was used to test the robustness of the results and to limit
concerns of interdependence. The percentage of frequency with which the results in the

² A more complete specification of this test would have entailed randomly extracting the 500
permutations from all possible ones for each industry (Mizruchi 1992), which was not feasible here
due to the extremely large number of permutations that would be necessary for each industry and for
each year.
 METHODS 285

random-sample simulations exceeded the original estimates was far less than 5 percent
in all instances. Thus, it is possible to say with some confidence that for these data
reasonable coefficients were obtained.
Across Chapter 3 the problem of cross-sectional dyadic interdependence can
also be understood as one of model misspecification (Lincoln 1984). If a statistical
model incorporated all essential nodal (organization-level) characteristics that influ-
ence alliance formation, no unobserved effects resulting from common nodes would
remain. To capture any organization-level effects across dyads sharing the same organ-
ization, the analyses here controlled for each company’s cumulative history of
alliances. Organization history is an important factor that captures any residual
organizational propensities to engage in alliances (Heckman and Borjas 1980; Black,
Moffitt, and Warner 1990). As noted earlier, separate estimations were also run in
which a host of financial attributes related to each organization in a dyad were
retained, including firm size, performance, liquidity, and solvency. In addition to these
controls, the models used here account for unobserved heterogeneity and adjust for
such systematic biases resulting from missing variables. The expectation was that the
unobserved heterogeneity term (Ò) would capture any residual dyad-level effects not
included in the model.

Comparative Analyses (Chapter 3)

The primary theoretical basis for the use of network measures is that the links formed
in an industry are not random but are driven by the structure of historical rela-
tionships. The models that included network variables were expected to be powerful
predictors of alliance formation to the extent that (a) alliance formation among firms
arises from the flow of information via networks of preexisting relationships, and
(b) the specific structural models used to reflect these information flows cluster firms
that are densely connected by such informational links (Friedkin 1984).
To verify the claim that the formation of interorganizational alliances is systematic
in nature, the results for this study’s sample were compared against results obtained
with a sample in which the formation of alliances was assigned randomly. The implicit
null hypothesis here is that an observed pattern in the data is due purely to chance.
Such a comparative analysis serves as a valuable baseline (cf. Zajac 1988). Finding
no differences in the predictive power of the independent variables for the actual
and random dependent variables or finding greater predictive power for the random
dependent variable would suggest that the postulated independent effects could have
predicted the random occurrence of alliances just as well or better. As a result, the
claims for systematic patterning of alliances would be moot.
The predictive ability of each model specified in this chapter was tested against
random assignments on the dependent variable on the basis of its original distribution.
The results indicated that none of the hypothesized effects are better predictors of
randomly assigned alliances than those in the results tables in this chapter. Not a single
independent variable is significant in all the models. This finding allows a rejection
of the implicit null hypothesis and suggests that the postulated independent effects
are not at all good predictors of the random occurrence of alliances. The exogenous
interdependence and endogenous embeddedness effects explain the systematic pattern
of alliances.
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 INDEX

Abbott, A. 217 antecedents of endorsement ties 211–40

Afuah, A. 156 see also endorsement
Ahuja, G. 152, 157, 174, 261, 270 appropriability regime 126, 127–8, 267–8
Aiken, M. 50, 51, 71 automotive sector 138, 142
airline industry 198 biopharmaceuticals 135, 142
Aldrich, J.H. 85, 112 and hierarchical controls 127, 142–3, 144
Alliance Announcement Database 109, 131, and R&D alliances 125
277–9 technology component 135
alliance formation 6, 8, 285 appropriation concerns 19, 20, 119–48
access 34 and governance structure 100, 125–6
and alliance history 62, 63, 64 and network resources 128
announcements 151 Argyris, C. 36
and common partners 58–9, 70 Arino, A. 270
and distance in alliance network 60 Arora, A. 135
and existing alliances 8–9 Arregle, J.L. 36
identifying opportunities 34–5 Arrow, K.J. 103, 106, 126
increase over time 65 Arthur, W.B. 46
and independent board control 76–8 Ashby, W.R. 122
industry network differentiation 68 attention-based view of firm 243, 245
influencing factors 15, 48–9, 70–1, 72 Audia, P.G. 242, 256
and interdependence 50–1 automotive sector research 61–7, 109–15,
limits to 57, 70, 156 275, 277–8
managerial implications 46–7 appropriability regime 135, 142
and network resources 13, 51–60 hierarchical controls 135–44
as catalyst 13, 15, 48, 52
path-dependent process 46 Badaracco, J. 103, 104
reasons for 1–2 Baden-Fuller, C. 266, 273
referrals 34, 35 Bae, S.C. 222, 246, 251
repetitive momentum 56–7, 70 Baker, W.E. 5, 31, 32, 271
size and performance 84–5, 86, 88, 89, 91 Balakrishnan, S. 14, 100, 104, 126, 136,
temporal dynamics 57 151
timing 34 Bamford, J. 266
see also capabilities; partners; prior Bantel, K. 226
alliances Barber, B. 104
Alliance Formation Database 37, 60, 274–5, Barley, S.R. 1, 51, 280
278 Barnard, C.I. 120, 121
alliance relationships 196–202, 206 Barnett, W.P. 36, 38, 57, 62, 70
categories of partners 198 Barney, J. 8, 35, 46, 176
integrated 197, 198 Baron, R.M. 90
ladder 197 Barzel, Y. 126
relational 197 Baughn, C.C. 104
roles and responsibilities 199 Baum, J.A.C. 225, 234, 247, 250, 263, 264
Allison, P.D. 226 carrying capacity 57, 70
Amburgey, T.L. 2, 36, 37, 38, 57, 58, 70, 110, diminishing benefits 158
137 drivers for alliances 31
Anand, B.N. 37, 125, 126, 127, 151, 152, firm survival 152
164, 266, 279 IPO legitimacy 215, 217, 221, 241
312 INDEX

Baum, J.A.C (Cont.) hypotheses 75, 78, 80, 82

reasons for alliances 2 logit regression analysis 88
size-localized competition 71 measures 82–4
Bayus, B.L. 114 results 87–92
Beatty, R.P. 76, 212, 213–14, 246, risk set 87
247 survey response rate 276–7
Beckman, C. 236 friendship ties 85–7, 88, 89, 90, 91
behavior of firms functional background 84
in alliance formation 6–7 heterogeneity 94
and embeddedness 31–2 intergroup bias 78
and network resources 23, 68–9 out-group bias 77–8
Behrens, D. 176, 270 and outcomes 270
Bell, G.G. 8, 260 outside directors’ home companies 78, 80,
Belliveau, M.A. 83, 277 88, 90
Ben-Akiva, M.E. 115 role of indirect ties 80–2
Berg, S.V. 31, 152 sent interlock ties 85
Berger, H. 106 shaping behavior 262
Berger, P.L. 220 and strategic alliances 261
Besnier, N. 81 and subsequent alliances 75, 82
Bies, R.J. 91, 92 third-party ties 82, 84, 86, 88, 89–90, 91,
Biggart, N.W. 146, 269 93
biotechnology firms 23, 24, 51, 104 and timely information 75
affiliations with research institutions 217, and trust 77–8, 79–80, 90–2, 93
223 see also management-board relationships
appropriability regime 135, 142 Bochner, S.E. 244
FDA approval 219, 248 Boeker, W. 36
hierarchical controls research 141–4, 145, Boothe, J.N. 83
277 Borgatti, S.P. 275
investor concerns 247–8 Borjas, G.J. 62, 85, 94, 282, 285
IPOs research 249–55 Borys, B. 132, 133, 162
product stage 229, 230, 231, 234, 236, 248, boundarylessness of relationships 198–9
253, 254 Bourdieu, P. 33
research 213–40, 280–1 Bowyer, J.W. 222, 246, 251
Biotechnology Start-ups Database 249, Bradach, J.L. 101, 105, 106, 116
280–1 Bradley, M. 279
Black, B.S. 279 Brandenburger, A. 199
Black, M. 66, 282, 285 Brantley, P. 1, 215
Blau, P.M. 225 Brass, D.J. 81, 93, 259
Bleeke, J. 49 Brewer, M.B. 77, 78, 217, 225, 250
Board and Alliance Database 82, 276–7 Bryson, J. 107
board interlocks 2, 6, 7, 12, 16–17, 33, 73–95, Burgers, W.P. 51
261 Burkhardt, M.E. 259
and alliance formation 78, 82 Burrill, G.S. 225
common appointments 85, 86, 88 Burt, R.S. 94, 176, 221, 259, 260, 277
cooperation 79–80, 83–4, 88–9, 90–3 deterrence for unreliability 53
costs 260 drivers for alliance formation 49
effects on alliances 75, 88–9 employee relationships 2
empirical research 82–92 enforceable trust 59
analysis 85 information flows 31, 34
control variables 84–6, 88, 89, 91 market constraint 84
descriptive statistics and correlation resource dependence 49
coefficients 86 social structure theory 54
Heckman selection models 88, 90–1 third-party ties 80, 81, 82, 93, 158
 INDEX 313

Burton, M.D. 236 Clore, G.L. 81

business relatedness 154, 160–2 closeness 38, 39, 40, 41
asymmetry 160–2, 165, 173, 174, 175 Coase, R.H. 52, 117
and value creation 162, 173 Cohen, W.M. 36, 156, 161
Butler, J.S. 61, 283 Coleman, J.S. 33, 158, 236, 261
Bygrave, W.D. 245 command structure and authority
Byrne, D. 81 system 123–4, 130
commitment to prior partners 56
Cadence Technologies 4, 9 commoditization pressures 22, 182
Calabrese, T. 225, 234, 247, 250, 263 common ties and alliance formation 63, 64,
Cannella, A.A. Jr 76 66
capabilities for alliance formation 35–7, 41, Commons, J.R. 117
264 competitive advantage 13, 46, 156, 208
and diversity of alliance experience 38 Conner, K.R. 148
and proclivity for new alliances 43–4, 48 Constructing Social Networks 61, 275–6
specific skills 36 contingent effects of network resources
standardized procedures 37 241–57
Carroll, C.R. 235, 236 contextual factors 248–9
carrying capacity 57, 70 empirical research 249–55
Carter, R.B. 211–12, 213, 222, 238, 241, 244, control variables 251–2
246, 247, 250, 252–3 dependent measures 249–50
Casciaro, T. 269 effects of interorganizational
Casher, A. 266 partnerships 254
Castellan, N.J. 277 independent measures 250–1
CEO-board cooperation 17, 79–80, 88–9 means, standard deviations and
and alliance formation 80 correlations 253
see also board interlocks; results 252–5
management-board relationships hypotheses 246, 247, 248
Chamberlain, G. 61 network factors 248–9
Chan, S.H. 279 uncertainty 252, 255
Chandler, A.D. Jr 120, 121 equity market 242
Chandratat, I. 76 Contractor, F.J. 2, 133, 275
Chen, M.-J. 84, 226, 239 Contractor, N.S. 269
Cheraskin, L. 105, 107, 136 contractual alliances 129–31
Chi, T. 162, 175 arm’s length 101, 131
Chintagunta, P.K. 61, 283 governance study 131–44, 145
Cho, T.S. 84, 226, 239 Cook, K.S. 56
choice of partners 6, 48–72 Cool, K. 7–8, 35
empirical research 60–7 Coombs, J.E. 215, 248
descriptive statistics and correlation Cooperman, E.S. 246, 247
matrix 63 coordination costs 19–20, 23, 119–48,
interdependence issues 62 272–3
random-effects panel probit decomposing tasks 120, 122, 147, 148,
model 61, 64, 66–7 155–6
results 62–7 and hierarchical controls 125, 145
hypotheses 51, 57, 58, 60 hypotheses 125, 126, 127, 128
information from prior alliances 17 and interdependence 122, 123, 132–5
and network resources 69–70 and relational ties 155–6
Christianson, J.B. 71 Corporate Odd Couples 101, 117
Chu, W. 5 Couper, M.P. 276
Chung, S. 261, 265 Cox, B.A. 81, 82
Cialdini, R.B. 276 Creed, D.W.E. 78, 79
cliques 38, 39, 40, 41 cross-regional alliances 136, 143, 146, 268–9
314 INDEX

customer relationships 7, 22, 178, 181, Dutton, J.E. 31

182–90, 206 Dyer, J.H. 5, 55, 161, 261, 265, 273
branded offering 183, 184 alliance capabilities 35, 36
evolution of solution value asymmetric returns 159
proposition 187 coordination costs 128
improving longevity 188 performance consequences 270
ladder 183, 184, 186 portfolio of ties 266, 272
loyalty 184 relational capabilities 265
offering lifestyles 188–9 roles of partners 199
segmentation 183, 188 supplier relationships 2, 191, 193
switching costs 183 value creation 156
trends in 185 dynamic panel model 39–40
customer solutions 179, 180, 181, 183, 184,
185, 186–90 Eccles, R.G. 5, 101, 105, 106, 116
customers 3 Echambadi, R. 270
expectations 182, 186 economic sociology 2, 5, 31–2
sharing information with 185 Eisenhardt, K.M. 50, 226, 239, 251, 266
three-legged stool approach 205 embeddedness 8, 74
Cyert, R.M. 57, 58 advantages and disadvantages 17
and firm behavior 31–2
Dacin, M.T. 2, 36, 267 and growth of trust 18
Daily, C.M. 77 implications for further research 176–7
Darby, M.R. 217, 225, 250 positional and relational 15
Dark, F.H. 212, 222, 250 Emerson, R.M. 56
dark side of social networks 94, 259–60 Emery, F.E. 122
Das, T.K. 269 Emirbayer, M. 54
Datta, D.K. 154, 160, 279 endorsement and IPO 23, 211
David, P. 46, 83 empirical research 222–32
Davis, G.F. 2, 75, 77, 82, 122n, 137 analysis 227–8
Day, G.S. 182 control variables 225–7
DeCarolis, D. 215, 247, 248, 250 Heckman selection models 230
Deeds, D.L. 215, 247, 248, 250 independent measures 223–5
Demb, A. 79 means, standard deviations and
Desai, A. 279 correlations 229
deterrence-based trust 18, 101, 106–7 results 228–32
Dialdin, D.A. 272 variables 222–3
Dibner, M.D. 280 hypotheses 218, 219, 220, 221
Dierickx, I. 7–8, 35 legitimacy 237, 238–40
Digital Equipment Corporation 3–4, 5 market 219–20
DiMaggio, P.J. 239 perceived 215, 218, 220, 233, 238
dispute resolution procedures 124, symbols of 235, 236, 237
130 promotional materials 214
distance in alliance network and alliance role of TMT 237
formation 60, 63, 64, 66, 71 signals of predictability 239–40
diversity of alliance experiences 38, 41 and technological uncertainty 221, 225,
domain consensus 56 231
Dore, R. 5, 105 underwriter endorsement 246–7, 249
Dowling, M. 270 see also upper echelon
Doz, Y.L. 2, 52, 101, 104, 122, 161, 199, 271, endorsement relationships 243–7
272 venture capital 244–6
Drazin, R. 218 entrepreneurial firms 23–5, 263–4
Dun & Bradstreet 222, 280 information from ties 11
Duncan, J. 31, 152 interorganizational ties 241
Duncan, J.L. Jr 51 sources of uncertainty 242–3
 INDEX 315

equity alliances 101–3, 116, 129 Gargiulo, M. 45, 166, 261, 265, 276, 284
costs and benefits 103 embeddedness perspective 32
and international partners 108, 109, 111, network evolution 3, 6, 11, 16, 67–8
112 prior alliances 94, 95, 135
joint ventures 102 third-party ties 80
multilateral 108–9 Gass, Michelle 195
equity markets Geletkanycz, M.A. 223, 226
decisions in cold 245, 246 George, V.P. 11, 263
decisions in hot 245 Gerlach, L.P. 122n
effect of strategic alliances 248 Gerlach, M.L. 108, 267
uncertainty 242, 243, 252, 256 Ghemawat, P. 36
and investor concerns 243, 255 Giddens, A. 71
Ernst, D. 49, 266 Gnyawali, D.R. 265
European firms 37–43, 61–7, 274–5 Gomes-Casseres, B. 198, 267
cross-regional alliances 268 Gompers, P.A. 226
hierarchical controls study 136–48 Good, D. 105
Everett, M.G. 275 Goodwin, J. 54
exploitation 157, 176 Gorman, M. 245
exploration 157, 176 gossip, network 81, 82
Gourman, J./Report 223
failure of alliances 9, 199, 200 governance structures 18–21, 38, 99–118
Fair, Bob 205–6 and appropriation concerns 19–20, 100,
Fama, E.F. 76, 77, 163 120–1, 125–6
Feldman, M.S. 215, 217, 221, 235 classifying 129–31
Fenigstein, A. 78, 80 contractual alliances 129–31
Fernandez, R.M. 62, 115 and coordination costs 19–20, 120, 121,
Ferris, S.P. 246, 247 123
Fichman, M. 56 and cost minimization 100
financial attributes of firms 71, 84–5, 86, domestic versus international
88 partners 109, 110, 113, 146–7
Finkelstein, S. 76, 220 empirical research 109–15
first-mover advantage 127 definitions and predicted signs of
fixed-effects models 61, 62, 283 variables 109
Fligstein, N. 137 hypotheses 104, 107, 108, 109
Foote, N. 186 logistic regression analysis 112–13, 114,
Forsythe, J.B. 276 115
Fowler, F.J. Jr 83 results 112–15
free riding 126 variables 109–11
Freeman, J. 1, 51, 280 equity based 107, 109, 110, 111, 112,
Freeman, L.C. 275 113
Fried, V.H. 245 and non-equity 101–3, 116
Friedkin, N.E. 59n, 285 and shared R&D 104
Friedman, P. 31, 152 hierarchical 100, 120
Friesen, P.H. 57 joint ventures 129–31
Fudenberg, D. 36 minority investments 129–31
Fuller, M.B. 2 and network resources 104–9, 269
and prior alliances 106–8, 116
Gaertner, S.L. 77, 80 and property rights 102–3
Galaskiewicz, J. 2, 11, 51, 75, 79, 95, 176, R&D component 109, 110, 111, 112,
261 113, 114, 115–16, 138, 139, 140, 142,
Galbraith, J.R. 121, 122, 123, 125, 129 143
Gambardella, A. 135 repeated ties 109, 111, 115
Gambetta, D. 104, 105 and looser structures 99, 116
Garcia-Pont, C. 51, 198, 267, 275, 278n role of network resources 100
316 INDEX

governance structures (Cont.) heterogeneity

and trust 18–19, 20, 99, 101, 104–9, 119 board interlocks 94
see also hierarchical controls firm-level 62, 66–7
Granovetter, M.S. 2, 3, 5, 107, 176 of network resources 262–5
components of network resources 55, 155 of networks 264
heterogeneity 67 Hewlett-Packard 4–5
information conduits 54 hierarchical controls
on known reputation 49 and appropriability regime 127
limits to network benefits 259 and appropriation concerns 120, 135–6
social structure of ties 31 and coordination costs 123, 125
strong and weak ties 56 uncertainty 120, 121
third-party ties 81 decision-making 124
Gray, B. 2, 81, 93, 259 division of labour 124
Grossman, S.J. 103 empirical research 131–44
Groves, R.M. 276 controls 137–8
Grundfest, J.A. 279 definitions and predicted signs of
Gupta, S. 114 variables 138
dependent variable 131
Hackman, J.R. 108 descriptive statistics and
Hage, J. 50, 51, 71 correlations 139
Hagedoorn, J. 1, 31, 133, 152, 261, 270 multinomial logistic analysis of alliance
Hambrecht, Bill 245 type 140
Hambrick, D.C. 76, 84, 223, 226, 239 results 139–44
Hamel, G. 2, 52, 101, 122, 159, 161, 199, 271, and firm size 144
272 and interdependence 132–5, 145
value appropriation 153 origins of 148
Hamilton, G.G. 146, 269 in strategic alliances 123–5
Hamilton, W. 51 and task coordination 124
Hammer, M. 182 and technology component 126, 127–8,
Hannan, M.T. 235, 236, 283 145
Hansen, G.S. 83 and trust 128, 136–7
Hansen, M.T. 202 see also governance structures
Harley Davidson 188–9, 207 Higgins, M. 2, 11, 23, 24, 211, 222, 236, 241,
Harrigan, K.R. 15, 162, 275 251, 264, 270
Harrison, J.R. 77 Hill, C.W.L. 51, 76, 83
Harrison, J.S. 270 Hisrich, R.D. 245
Hart, O.D. 103 Hitt, M.A. 76, 79, 263, 267
Haunschild, P.R. 75, 82 Hoang, H. 235, 238, 242, 251, 263, 264,
Haviland, J.B. 81 270
von Hayek, F.A. 45 alliance capabilities 266
Hayes, S.L. 214, 246 investor uncertainty 256
Heckman, J.J. 227, 230, 252, 285 partner characteristics 265
control variables 62 underwriter prestige 212, 239, 241, 244,
unobserved heterogeneity 85, 282 246
fixed-effects models 61, 283 index 222, 249, 250
selection models 87, 89–91, 93 Hoem, J.M. 62
Heide, J.B. 56 Hoetker, G. 270
Hellmann, T. 245 Holland, P.W. 284
Hendrix, Buck 195 Hoskisson, R.E. 76, 79, 83, 277
Hennart, J.-F. 1, 103, 104, 126, 129 Hosmer, D.W. 85
Hermalin, B.E. 76 hostage situation 102, 107, 108, 129
Herman, E.S. 76 Hsiao, C. 61, 282, 283
Herriott, S.R. 130 Huffman, S. 179
 INDEX 317

Hybels, R.C. 1, 235, 242, 251, 263, 264, investor expectations 152, 153, 154
280 and business relatedness 161–2
attributes of firms 51 and relational embeddedness 175
investor uncertainty 256 and structural embeddedness 158–9
partner characteristics 265 uncertainty 242, 256
underwriter prestige 212, 239, 241, 244,
246 Jaccard, J. 84
index 222, 250 Jackson, E. 226
Hylton, L.F. 51, 56, 71, 120, 122 Jackson, J.E. 83
Jain, B.A. 244, 246
Ikeda, M. 284 Jain, D.C. 61, 283
incentive systems 124, 130 Japanese firms 37–43, 60–7, 274–5
independent board control cross-regional alliances 268
and alliances 76–8, 89 hierarchical controls study 136–48
and distrust 77–8 Jennison, D.B. 132, 133, 162
and subsequent alliances 78 Jensen, M. 8, 84, 270
see also board interlocks Jensen, M.C. 76, 77
industrial automation sector research 60–7 Johnson, Gregg 200
industrial economics 1, 2 Johnson, R.A. 76, 79, 83, 277
information 14 Johnson, R.B. 77
about potential partners 17, 47, 52 Johnston, R. 105
and appropriation concerns 19 Joint Venture Announcement Database 163,
conduits 5, 8, 259 279
from board interlocks 75 joint ventures 95
from network resources 9, 10, 13, 47, 52, appropriation concerns 129
99 equity 102
from prior alliances 34–5 governance structures 129–31
and repeated alliances 70 study 131–44
social structural theory 54 hierarchical controls 124–5, 129
information-processing capabilities 122, and prior alliances 154
123 relative value appropriation 159–60
initial public offerings 24, 25 value creation 152, 153, 154–5
Inkpen, A.C. 162, 175 see also performance of firms
innovation 127, 133, 239 Jones Lang LaSalle 204–5, 207
institutional theory 2 Joskow, P.L. 103
intellectual property rights 136
interdependence 50–1, 122–3, 132–5, 156, Kahn, R.L. 122, 122n
157, 283–4 Kale, P. 37, 266, 269, 270, 272, 273
and coordination costs 122, 123 Kaplan, M.R. 77
and governance structures 139, 142, 147 Katz, D. 122
pooled, reciprocal and sequential 131, Katz, M.L. 59
133–4, 141–2 Keck, S.L. 239
and vulnerability 156 Kelly, D. 36, 38, 57, 70
see also coordination costs Kenny, D.A. 90
internal subunits see subunits Kesner, I.F. 77
international partners 109, 110, 113, 146–7 Khanna, T. 2, 36, 37, 162, 266, 272, 279
interorganizational ties 7, 8, 11–12 appropriation concerns 127
interpersonal ties 262, 263, 273 benefits from alliances 151
investment banks 2, 11, 12, 23–4, 25 equity alliances 129
endorsement 6, 7, 211–12, 213–15, 246–7, knowledge asymmetry 162
249, 251 new JVs 157
and hot equity markets 246–7, 249 process issues 100
and lower-risk IPOs 213, 214 technology exchange 125, 126
318 INDEX

Khanna, T. (Cont.) Lewis, J.D. 105, 154

value appropriation 153, 159, 160 Li, S.X. 260
value creation 152, 156, 164 Lin, T.H. 244
Khurshed, A. 244 Lincoln, J.R. 62, 285
Kilduff, M. 269 List, P. 246
Kim, E.H. 279 Little, R.J.A. 274n
Kim, W.C. 51 Litwak, E. 51, 56, 71, 120, 122
Kini, O. 244, 246 Llewellyn, K.N. 101
Klein, D.P. 222, 246, 251 Loh, L. 2
Kletter, D. 22, 178n, 264, 272 Lorange, P. 2, 133, 275
Knez, M. 53, 58, 80, 81, 82, 93, 94, 158, 259, Lorenz, E.H. 105, 156
260 Lorenzoni, G. 266, 273
knowledge Lorsch, J.W. 79, 81, 82
acquisition 2 Loury, G.C. 33
asymmetric transfer 162 Lubatkin, M. 76
and boundaryless communication 198–9 Lucier, C. 186
paradox 126 Luckman, T. 220
knowledge-based trust 18, 101, 105, 106–7 Luhmann, N. 104
Kochan, T. 51, 71 Lyles, M.A. 9, 36, 266
Kochhar, R. 83
Kogut, B. 1, 2, 10, 33, 34, 51, 52, 56, 94, 101, McAdam, D. 115
136, 156, 276 McAllister, D.J. 91, 92
Koh, J. 2, 151, 153 Macaulay, S. 105–6, 107
Koput, K.W. 2, 32, 33, 85, 94, 218, 219, 247, McCann, J. 122
280, 282 McConnell, J. 164
Koza, M. 14, 100, 104, 126, 136, 151, 157, 176 McDonald, M.L. 263
Kraatz, M.S. 36 Mace, M.L. 79
Krackhardt, D. 56, 176, 270, 283 McEvily, B. 5, 11, 95, 194, 261
Kramer, R.M. 78, 80, 104 MacIntyre, A.C. 52
Kreps, D.M. 53, 58, 80, 93 MacIver, E. 79, 81, 82
Kumar, N. 182, 190–1 Mackie, D.M. 77
Madhavan, R. 8, 166, 259, 265
Labianca, G. 81, 93, 259 Mahoney, J.T. 7
Larson, A. 70, 106 Maitland, I. 107
Laumann, E.O. 2, 79 management-board relationships 76–8
Lavie, D. 8, 259, 262, 265 agency perspectives 76
Lawrence, B.S. 83 categories of 79
Lawrence, P.R. 105, 121, 122, 156, 191, 193, distrust 77–8, 91
199, 204, 264, 269, 272 independent board control 76–8, 81
Lechner, C. 270 and third-party ties 80–2
Lee, C. 264 see also board interlocks
Lee, C.-H. 267 managerial implications 26, 72
Lee, K. 225, 261, 264, 265 of alliance formation 46–7
Leinhardt, S. 284 path-creation strategies 47
Lemeshow, S. 85 Manaster, S. 211–12, 213, 222, 238, 241, 244,
Lerman, S.R. 115 246, 247, 250, 252–3
Lerner, J. 225, 242, 248, 250 Mang, P. 218, 248
Levin, R.C. 127, 135 Mankin, E.D. 101
Levine, S. 51, 56 Manley, B.F. 283
Levinthal, D.A. 36, 56, 156, 161 Mansfield, E. 136
Levitas, E. 83, 267 March, J.G. 36, 57, 58, 124, 157, 176, 215,
Lewicki, R.J. 91, 92 216, 217, 221, 235
Lewin, A. 157, 176 Mare, R.D. 227, 228n
 INDEX 319

Mariti, P. 31 and behavior and outcomes 269–71

Marsden, P.V. 2, 59n, 79 benefits of 9, 13, 14
Mason, P.A. 84 changing role of 67–9
Masten, S.E. 121 and characteristics of partners 265
Matthew Effect 235 concept of 8, 32, 258
Meehan, J.W. 121 contingent effects 241–57
Megginson, W.L. 223, 244 cross-level perspectives 95
Merges, R. 125, 248 customer dimension 182–90
Merton, R.K. 235 dark side of 259–60
Messick, D.M. 77 dimensions of 180–1
Metiu, A. 11, 263 combining 206, 207
Meyer, G.D. 245 diminishing benefits 158, 259
Meyer, J. 215, 217, 219, 235, 268 embodied in industry network 67–8
Mezias, S.J. 71 and future cooperation 33–6
Miles, R.E. 78, 79 heterogeneity of 262–5
Miller, D. 57 and heterogeneity of ties 264
Miller, N. 77 implications for managerial practice 26,
Milliken, F.J. 256 46–7
Miner, A.S. 56, 57, 110, 137 importance of 25–7
minority equity investments 102, 129 information from 99
governance study 131–44 in institutional context 267–9
Mintzberg, H. 79 internal subunits dimension 202–6
Mitchell, W. 50, 152, 270 leveraging 180–206, 207
Mizruchi, M.S. 5, 11, 54, 59n, 76, 84, 277, managerial outcomes 272–3
283 multifaceted nature of 178–208
Moesel, D.D. 83, 277 path-dependent process 13
Moffitt, R. 61, 66, 282, 283, 285 and portfolio of ties 264
Molloy, R. 186 relational component 55–8
Monge, P.R. 269 strategic alliance dimension 196–202
monitoring costs 155 structural component 55, 58–60, 158–9
Montgomery, C. 165 supplier dimension 190–6
Moon, J.J. 129 and traditional resources 260–2
moral hazard concerns 14, 15, 18, 49, and trust 104–9, 128, 147
52 within constellations of firms 267
reduction of 53, 58 network-resource-centred organization 22,
and social structure 55 181–2, 206, 207
Mowery, D. 84, 126, 152, 161, 247 networks 2
multilateral alliances 108–9, 111, 112, 113, as conduits for information 259
115, 137, 143 defined 2
Murphy, K.J. 84 differentiation of industry 16
mutual awareness and trust 107–8 dysfunctional aspects 259–60
mutual hostage situations 102 evolution of 67–9
heterogeneity of 264
Nalebuff, B. 199 levels of 262–3
Nantell, T. 164 multilevel nature of 6
negotiation costs 155 nature and types 263–5
Neilson, G. 179 Neubauer, F.-F. 79
Nelson, F.D. 85, 112 new materials sector research 60–5, 109–15,
Nelson, R. 36, 57, 125, 136 277–8
network resources 3 appropriability regime 135
and appropriation concerns 128 hierarchical controls 135–44, 145
begetting more network resources 23, 25, Nickerson, J. 269
235 Nobeoka, K. 272
320 INDEX

Nohria, N. 36, 196, 198, 267, 272, 275, 278n potential

dysfunctional ties 260 awareness of 50, 53, 59
joint learning 156, 162 distance from focal firm 16
network concept 258 identifying 49
new JVs 157 information from social network 49
process issues 100 information on 9, 10, 52, 53, 55, 56
reasons for alliances 2 reliability 21, 33, 58
strategic capacities and alliances 51 trustworthiness 49
subunit relations 202 referrals 9, 10, 34, 35
trustworthy partners 118 relationships 181
value appropriation 153, 159, 160 types of 265
nonequity alliances 102, 103 patents
and trust 107, 108 attracting endorsement 215
nonmarket pricing 124, 130 protection 127, 136
Noorderhaven, N.G. 106 Pattison, P. 284
Nooteboom, B. 106 Paulson, S.K. 48, 51, 71
Nowak, P. 51, 161 Peng, M.W. 270
Pennings, J.M. 264
Ocasio, W. 216, 243, 256 Penrose, E.T. 72
Oetinger, B. von 202 performance of firms 151–77, 267
Oldroyd, J.B. 188 empirical research 163–76
Oliver, C. 2, 45, 57, 70, 152, 158 asymmetry of business relatedness 165,
Olsen, C.P. 100, 117, 132, 173 173, 174, 176
Olsen, J.P. 216 correlation matrix 168
operating procedures 124, 130 descriptive statistics of variables 167
opportunistic behavior 49, 52, 71 regression analysis 169–70, 171
and governance structures 101 relational and structural
reducing risk of 14 embeddedness 165, 167, 168, 169,
role of trust 106–7 171–2, 174–5
and third party ties 155 relative value appropriation 164–5
opportunities for alliances 52 results 166–73
Oracle alliances 4–5 total value creation 164–5, 167, 168,
O’Reilly, C.A.III 76, 83, 277 172, 173, 174
organizational learning 36–7, 157 variables 163, 165–6
exploration and exploitation 157, hypotheses 156, 157, 158, 159
176 IPO 24
organizational sociology 49 network resources 21–2, 152, 175,
Osborn, R.N. 104 270–1
outsourcing 178–9, 204, 207 and total value creation 154–7
overdependence fears 70 and uncertainty 256–7
Oxley, J.E. 84, 100, 125, 136, 152, 161, 247, performance incentives 199
268 performance measurement 124
Perlmutter, H. 269
Palay, T.M. 106 Perrone, V. 5, 11, 95, 194, 261
Palepu, K.G. 84, 165 Perrow, C. 100
Palmer, D.A. 82 Peteraf, M.A. 7
Palmer, G.B. 122n Petersen, T. 115, 282
Pandian, J.R. 7 Peterson, R.J. 240
Parise, S. 266 Pettigrew, A.M. 277
Parkhe, A. 106, 129, 136, 137 Pettway, R.C. 279
partner choice see choice of partners Pfeffer, J. 49, 51, 69, 71, 79, 120, 161, 237
partners 3, 22, 25 Pinar, O. 266
attributes 262 Piore, M.J. 105
 INDEX 321

Pisano, G.P. 218, 219, 225, 248, 278n results 40–3

appropriation concerns 100 variables 39
cross-border alliances 136 and firm capabilities 35–7
equity alliances 101–2, 129 hypotheses 36, 37
technology component 126, 145 influencing factors 32, 33, 38
transaction costs study 104 and network differentiation 16, 68–9
Platt, G. 246 and network resources 33, 35–6, 52
Podolny, J.M. 2, 32, 53, 56, 221, 222, 235, extent of 43
236, 251, 265 and regional origin of firms 44
Pollock, T.G. 263 repetitive momentum 56–7, 70
Pondy, L.R. 122, 124 resource contingencies 50–1
pooled interdependence 131, 133–4, 141–2, sectoral differences 43, 44–5
145 temporal effects 42, 44
Poppo, L. 269 property rights 102–3, 126
Porter, M.E. 2, 9, 176 and cross-regional alliances 268
Portes, A. 53, 58 Puia, G. 154, 160, 279
portfolio of ties 264 Puranam, P. 121, 122, 156, 191, 193, 199,
positional embeddedness 15 204, 264, 269, 272
Powell, W.W. 1, 218, 219, 221, 247, 264, 280 Puri, M. 245, 247
embeddedness perspective 5, 32 Putnam, R.D. 33
information from network resources 33
legitimacy and IPO 215, 216, 217, 239 R&D alliances 33, 109, 110, 111, 112, 113,
prior alliance history 85, 94 114, 115–16, 135
reasons for alliances 2 and appropriability regime 125
on trust 101 governance structures 137, 139, 140, 142,
Prahalad, C.K. 2, 52, 101, 104, 122, 148, 161, 143
188 transaction cost perspective 103–4
Prescott, J.E. 166 R&D intensity 84, 86, 88, 89, 91
Priest, G.M. 244 Ragozzino, R. 266
prior alliances 4–5, 6, 256 Ramaswamy, V. 188
and board interlocks 85, 86, 88, 89, 91, 94 random-effects panel probit model 61–2, 64,
and choice of partner 17 66–7, 283
and creation of subsequent 261 Rangan, S. 270
effect of number of 57 Rao, H. 218, 239, 244
and governance structures 106–8, 116 Rau, P.R. 222, 251
influence of 11 Raub, W. 53, 58, 80, 93
as information source 10–11, 14, 34–5, 52 reciprocal interdependence 131, 133–4,
and joint ventures 154 141–2
network resources from 32 referrals 34, 35, 71
and new alliances 8–9, 10 regional origin of partners 109, 110, 113,
effect of time elapsed 66 146–7
limits to 57, 70 Reich, R.B. 101
proclivity for 43, 54–5 relational capability 272
performance consequences 271 relational component of network resources
and trust 18, 105–6, 107–8, 116–17, 135 55–8
proclivity for new alliances 14, 15, 31–47 relational embeddedness 15, 155–7, 165, 167,
assets and liquidity 63, 64, 65 168, 169, 171–2, 174–5
cross-sector differences 268 and network resources 175
empirical research 37–43, 44–6 and value creation 157, 159, 160
analysis 39–40 relational view of interactions 22
descriptive statistics and correlation relationship capital 195
matrix 40 relationship-centred organizations 179–80,
panel probit estimates 41 208
322 INDEX

relative value appropriation 159–60, 164–5, search costs 14, 15, 21, 23, 53
167, 173, 174 reduction of 58
and business relatedness 160–2 and social structure 55
and relational and structural and trust 118
embeddedness 160 Sensenbrenner, J. 53, 58
reliability of partners 14, 49, 52, 58 sequential interdependence 131, 133–4,
repetitive momentum 56–7, 70 141–2, 145
reputation 9, 16, 53 Seth, A. 160
consequences and third partners 52 Shan, W. 10, 33, 34, 51, 94, 156
of potential partners 49, 71 Shapiro, C. 59
reputational capital 194, 213 Shapiro, D.L. 105, 107, 136
resource dependence perspective 49, 50–1, shareholders and board interlocks 76
69, 72 Sharfman, M.P. 2
resource interdependence 84, 87, 90 Sharma, D. 186
resource legitimacy 237 Shepherd, D.A. 245
resource-based perspective 7–8, 33 Sheppard, B.H. 105, 107, 136
Reuer, J.J. 266, 270 Shortell, S.M. 147, 267
Richardson, G.B. 51 shrinking core, expanding periphery 178–9,
Rindova, V.P. 263 191, 206, 207–8
Ring, P.S. 36, 101, 104, 106, 122, 135, 271, Sicherman, N.W. 279
272 Siegel, S. 277
risks 14, 53, 101 Silver, M. 126
sharing 133 Silverman, B.S. 84, 152, 161, 247, 264
Ritter, J.R. 212, 214, 243, 246, 247 Silverman, S. 225, 234, 247, 250, 263
role legitimacy 237, 238 Simmel, G. 79, 105
Rombel, A. 246 Simon, H.A. 124, 216, 256
Rosenberg, D. 126 Singh, A.K. 212, 222–3, 250
Rosenkopf, L. 11, 263 Singh, H. 55, 161, 261, 269, 270, 273
Rosenthal, R. 243 alliance capabilities 36, 37
Rosnow, R.L. 243 coordination costs 119n, 120, 128, 156,
Rothaermel, F.T. 263, 266, 270 272
Rowan, B. 215, 217, 219, 235, 268 cross-border alliances 136, 268
Rowley, T. 176, 260, 270 portfolio of ties 266
Rubin, D.B. 274n relational capabilities 265
Rumelt, R.P. 154, 160 roles of partners 199
Russo, M.V. 100, 101–2, 126, 129 subunit relationships 204
Singh, J.V. 2, 37
Sabel, C.F. 105 Singh, K. 50, 152
Sah, R.K. 243 Sitkin, S.B. 78
Sahlman, W.A. 245 size-localized competition 71
Salancik, G.R. 49, 79, 120, 237 Smiley, R.H. 31
Sanchez, S.M. 71 Smith, K.G. 83
Sarbanes-Oxley Act 77, 201 Smith-Doerr, L. 2, 32, 33, 85, 94, 218, 219,
Sarkar, M.B. 270 247, 280
Saxenian, A. 267 Snell, S.A. 76
scale economies 161, 206 Snyder, E.A. 121
Schakenraad, J. 152, 261, 270 Snyder, R.C. 83
Scheer, L.K. 190–1 social capital 33
Schermerhorn, J.R. Jr 51, 71 social factors in alliances 2
Schmidt, S. 51, 71 social networks 2, 5, 8, 11, 55
Schon, D.A. 36 as conduits of information 54
Schoonhoven, C.B. 50, 226, 239, 251 dark side of 94, 259–60
Schwartz, M. 11 information from 34–5
 INDEX 323

and new alliances 5–6 subunit relationships 22, 178, 181, 202–6
see also networks ladder 202–4
social structural theory 53–4, 55 successful firms, characteristics 178–80
social structure Suchman, M.C. 239
and firm behavior 69 supplier relationships 2, 3, 7, 22, 178, 181,
and strategic interdependence 60 190–6, 206
Sǿrenson, J.B. 236 improving longevity 194
Sorenson, O. 242, 256 integration 191, 192
Spence, A.M. 36 ladder 191–3
stakeholder relationships 178 and reputational capital 194
Starbucks 179, 188, 194–5, 199–200, 207 strategic partnership 191, 192
start-up firms 211 trends in 193
see also endorsement and trust 194
status of firms and attractiveness 53 survival of firm 152
Steenkamp, J.-B. 190–1 Sutcliffe, K.M. 242, 256
Steiner, I.D. 108 Swaminathan, A. 270
Stickel, D. 78 Sytch, M. 11, 155, 159, 194, 196, 264, 265,
Stiglitz, J.E. 243 266, 269, 270–1
Stinchcombe, A.L. 3, 123
stock market reactions 151, 152, 153, technological compatibility 59
166 technology
strategic alliances 2, 3, 6, 94, 95, 145 and business relatedness 161
and board interlocks 261 and property rights 102, 103
coordination costs concerns 122 sharing new 133
defined 1 transfer 126
and equity market uncertainty 243 technology alliances 127, 133, 134, 152
hierarchical controls 123–5 and hierarchical controls 127–8, 143
and investor evaluation 247–8, 249, 251 technology components
and IPO success 252, 253, 254, 255 and hierarchical controls 126, 142, 143,
material imperatives for 7 145, 146
see also alliance formation technology exchange agreements 131
strategic interdependence 50–1 technology partnerships 9, 10, 19, 108
and alliance formation 63, 64, 65, 66, Teece, D.J. 100, 101–2, 122n, 126, 127, 129,
71 268
and indirect ties 60 Teng, B.-S. 269
and proclivity to form alliances 51 Teradata 189–90, 201–2, 205–6
theory 53–4 third-party ties 58–9, 80–1, 159–60
Strauss, D. 284 and alliance formation 60, 66, 71
structural component of network resources board interlocks 84, 86, 88, 91, 93
55, 58–60 and management-board
structural embeddedness 165, 167, 168, 169, relationships 80–2
171–2, 174–5 and opportunistic behavior 155
and value creation 158–9, 160 and proclivity for new alliances 60,
structuration 72 69–70
Stuart, T.E. 161, 235, 256, 263, 264, 270 and reputational consequences 52
equity market measure 250 and trust 59
IPO success indicators 249 Thompson, J.D. 120, 122, 132, 133, 134–5
partner characteristics 265 Thompson, L. 154, 155
portfolio of ties 266 Thompson, T.A. 77
and third parties 235, 242 Thornton, P.H. 216, 244, 256
underwriter prestige 212, 239, 241, 244, ties, interorganizational
246 as information conduits 5
measures 222, 251 positive and negative 94
324 INDEX

ties, interorganizational (Cont.) reducing 3, 13, 49–50

shaping behavior 3 by board interlocks 75
see also alliance; strategic alliances underwriter prestige 252, 253, 254
timing and new alliances 34–5 United States firms 38–43, 61–7, 274–5,
Timmons, J.A. 245 280–1
Tinic, S.M. 214, 246 cross-regional alliances 268
Tirole, J. 36 hierarchical controls study 136–48
Tomer, J.F. 33 stock market reactions to JVs 153
Tong, T.W. 270 unobserved heterogeneity 85, 282–3
top management team (TMT) 226–7 upper echelon affiliations 24, 211–40, 261,
trade associations 2, 33 263
transaction cost perspective 1, 2, 48, 148 downstream 213, 216, 217, 219–20, 224–5,
coordination costs 121 228, 229, 230, 231
and equity alliances 103, 116 experience base 212–13
governance structures 100, 101–2 horizontal 213, 216, 217, 218–19, 224, 228,
prior alliances 117 229, 230, 231–2
R&D alliances 103–4 as network resources 212–13, 216, 236–7,
Trist, E.L. 122 238, 239
trust prestige of investment bank 219, 220, 228,
and CEO-board cooperation 77–8, 79–80, 229, 230, 231, 233, 239
90–3 range and diversity of 220, 225, 231, 233
character-based 108 symbols of legitimacy 216, 217, 235, 236,
defined 104–5 237
and governance structures 99, 101, 104–9 typology of 215–17
113, 117–18, 119, 143–4, 145 upstream 213, 216–18, 223–4, 228, 229,
hierarchical controls 128, 136–7 230, 231, 234
international versus domestic see also endorsement and IPO
partners 108, 136–7, 144, 146–7 Useem, M. 5, 77, 80, 81
and mutual awareness 107–8 Uzzi, B. 5, 152, 259
and network resources 19, 20, 116, 117,
128 value creation 21–2, 148, 164–5, 270–1, 273
and prior alliances 18 and business relatedness 160–2
and repeated alliances 105–6, 107–8 and interdependence 132
and supplier relationships 194 joint ventures 152, 153
and third-party ties 59, 80, 81 logic for 132
and type of alliance 143–4 and network resources 153, 154–5
Tsai, W. 269 and relational embeddedness 156, 157,
Turrisi, R. 84 159, 160, 172, 174–5
Tushman, M.L. 239 and relationship capital 195
Tyler, T.R. 104 relative value appropriation 153
and structural embeddedness 158–9, 160,
uncertainty 18, 48, 147–8 172, 174–5
about competencies of partners 52 total value 153, 154–5
about reliability of partners 52 Van de Ven, A. 36, 101, 104, 106, 107, 122,
and coordination costs 19–20, 120, 121 135, 271, 272
equity market third-party ties 59, 80
endorsement relationships 243–7 Van de Ven, W.P.M.M. 53, 87, 106, 107, 117,
strategic alliances 243 227
and interdependence 132–3 Van Praag, B.M.S. 87, 227
for investors 242 Vanable, P.A. 78
in partner choice 269 Venkatraman, N. 2, 105, 151, 153, 191, 264,
and performance 256–7 267
 INDEX 325

venture capital endorsement 6, 7, 11, 25, Wholey, D.R. 71

244–6, 249, 250 Williams, K.Y. 83
and hot and cold markets 245 Williamson, O.E. 1, 52, 102, 105, 107, 122
and IPO success 244–5, 252, 253, 254, Winship, C.W. 227, 228n
255 Winter, S. 36, 57, 126, 136
Vilcassim, N.J. 61, 283 Wolfe, G.A. 246, 247
Worchel, P. 81
Wade, J.B. 76, 83, 277
Walker, G. 10, 33, 34, 51, 94, 156 Yamin, John 195
Wan, C.K. 84 Yan, A. 2
Wang, Lihua 21, 151 Young, A.A. 283
Wang, L.O. 270
Warner, J.T. 66, 282, 285 Zacharakis, A.L. 245
Wasserman, S. 284 Zaheer, A. 5, 8, 11, 176, 242, 256, 264
Weesie, J. 53, 58, 80, 93 dysfunctional ties 260
Weigert, A. 105 interpersonal ties 95, 261
Weisbach, M.S. 76 strategic alliances 196
Weiss, K.A. 223, 244 supplier relationships 191, 194
Weiss, L. 105 on trust 105
Welch, J. 198 Zajac, E.J. 36, 76, 77, 100, 117, 132, 173, 285
Wernerfelt, B. 7 Zald, M.N. 122n
Westphal, J.D. 17, 73n, 74, 77, 79, 147, 263, Zeitlin, J. 105
267, 276 Zenger, T. 269
Whetten, D.A. 51, 71 Zenger, T.R. 83
Whisler, T.J. 76 Zollo, M. 270
White, H.C. 2, 45, 72 Zucker, L.G. 56, 105, 108, 217, 225, 250
White, P.E. 51, 56 Zuckerman, E.W. 214, 235