Network Defense: Pruning, Grafting, and Closing to Prevent Leakage of Strategic Knowledge to Rivals

Abstract

We explore how firms protect themselves from the risks of knowledge spillover to indirectly connected rivals in a network of interorganizational ties. We argue that the safeguards to limit opportunistic behavior by directly linked firms in a dyad, which have been the focus of extant research, are insufficient to overcome extra-dyadic leakage risks. Instead, firms terminate or avoid ties that expose their knowledge to indirectly linked rivals ("pruning" and "grafting") and embed themselves in dense networks ("closing") to prevent strategic knowledge spillover. Through a longitudinal study of German board interlocks during 1990-2003, we find that firms are more likely to prune, graft, and close their networks as they accumulate strategic knowledge and as the firms to which they are interlocked increasingly generate indirect ties to competitors, even when controlling for dyadic safeguards discussed by prior research. We capture strategic knowledge by tracking firms' experience in the former Warsaw Pact countries from immediately after the sudden fall of communism in 1990 until 2003. The study introduces indirect links to rivals as a source of knowledge spillover in networks, shows how firms deal with extra-dyadic risks, and provides a defensive explanation for the evolution of network composition and structure.

Information and Knowledge Leakage in Supply Chain

“…IKL can occur intentionally or unintentionally according to past research (Frishammar et al, 2015;Ahmad et al, 2014;Nouh et al, 2014;Creese et al, 2015;Hernandez et al, 2014). In unintentional leakages, proprietary information and knowledge are accidentally or forcibly transferred to any unauthorized parties either through verbal or written communications.…”

Geographic Co-location of Partners and Rivals: Implications for the Design of R&D Alliances

“…For example, Pahnke et al (2015) investigated the situation where an entrepreneurial firm is indirectly connected to rival firms via common venture capitalists, showing that information leakage via these indirect ties to competitors negatively affected entrepreneurial firms' innovation activities. In addition, Hernandez et al (2015) examined the hazards of knowledge leakage to rivals via indirect ties formed by board interlock networks. The authors argued that firms control such risks by terminating and avoiding ties that could create indirect paths to rivals.…”

“…Our most immediate contribution to the alliance literature lies in building upon and extending the literature that investigates the competitive aspects of collaborations and the potential risks of partnering with rivals (Hamel et al, 1989;Khanna et al, 1998;Oxley & Sampson, 2004;Park & Russo, 1996). This literature has paid attention to dyadic competitive relationships with direct rivals while related research has just recently begun to consider the threats of knowledge leakage to rivals via indirect links such as through common suppliers, shared intermediary organizations, and board interlocks (Hernandez et al, 2015;Mesquita et al, 2008;Pahnke et al, 2015). We complement this emerging literature that has paid attention to shared formal ties among firms by suggesting that geographic co-location between a focal firm's partner and its rivals is an overlooked but important factor that can present risks of knowledge losses through other mechanisms (e.g., interpersonal interactions and mobility in a location and possible future interfirm transactions), and focal firms respond to the risks from partner-rival co-location through their alliance governance design choices.…”

“…Similarly, Hernandez, Sanders, and Tuschke (2015) focused on knowledge spillover concerns created when board interlocks result in indirect connections to rival firms. Beyond these connections to rivals resulting from shared formal relationships, our work draws upon agglomeration theory to explain how exposure to rivals may also result from the informal ties and interactions spanning organizations within a partner's geographic cluster.…”

Regenerative Medicine Translation:Cross-national analysis of entrepreneurial ecosystem development

“…Exploiting these opportunities requires absorptive capacity to understand, recognize and commercialize this knowledge (Qian and Acs, 2013). Entrepreneurs must find ways to distinguish partnerships that create exploitable knowledge, rather than expropriate otherwise protected knowledge assets (Hernandez et al, 2014;Katila et al, 2008).…”