Friends or Strangers? Firm-Specific Uncertainty, Market Uncertainty, and Network Partner Selection

Abstract

In this study, we address the topic of interorganizational network change by exploring factors that affect the choice of alliance and interlock partners. While many studies have been devoted to investigating various factors driving network partner choice, there is also an interesting and unexplored tension in this body of work. On the one hand, much work emphasizes change in social structureshowing that firms expand networks by forming new relationships with new partners. At the same time, other scholars emphasize stability of social structure -showing that firms tend to choose past exchange partners. We seek to reconcile this tension by proposing that firms form new relationships with new partners as a form of exploration, and form additional relationships with existing partnerships as a form of exploitation (March, 1991). Further, whether exploration or exploitation is chosen depends on the type of uncertainty that firms are facing: whether it is firm-specific or market-level uncertainty. We test our hypotheses using data on both interlock and alliance networks for the 300 largest U.S. firms during the 1988-1993 period. Our results provide some evidence that whether networks are stable or changing depends on the type of uncertainty experienced by firms.During the past twenty-five years, scholars have conducted substantial research on factors that affect partner selection in interorganizational networks. Partner selection is critical to network theory, as it is a fundamental driver of network stability and change. Pfeffer and Salancik (1978) were among the first scholars to draw attention to network change by showing that firms expand their networks by incorporating new players in an effort to alleviate the uncertainty and constraint that comes with being dependent on others (see also Burt, 1983;Gargiulo, 1993). Firms also expand their networks to learn about new practices and technologies (Kogut, 1988;Powell, Koput and Smith-Doerr, 1996).While this research focuses on network change through the alteration of network structure with new ties, a second stream of research emphasizes the stability of social structure (Wellman and Berkowitz, 1988). These studies suggest that firms will, under certain conditions, reinforce their existing network ties, forming additional relationships with pre-existing partners. For example, Podolny (1994) showed that in markets with a high degree of market uncertainty investment bankers tend to interact with those they have interacted with in the past, and Gulati (1995) showed that firms tend to repeat alliances with previous alliance partners. From this perspective, firms tend to reinvest in present network structures, rather than expanding them.The purpose of the current study is to reconcile these two perspectives and understand what determines how firms alter their network relationships. We seek to predict when firms will add new relationships and when they will expand the relationships already in place. The idea of expanding to new network partners versus reinforcing with exis...

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