Phelps (2010), A longitudinal study of the influence of alliance network structure

Hypothesis 1. The technological Hypothesis 2. The density of a firm's

diversity in a firm's alliance network has
an inverted U-shaped relationship with
the firm's subsequent degree of
exploratory innovation
alliance network moderates the
curvilinear relationship between
network diversity and exploratory in
novation in such a fashion that
increasing density will: (a) increase the
slope of the positive effect of diversity,
(b) increase the amplitude of the effect
of diversity, (c) increase the value of
diversity that maximizes exploratory
innovation, and (d) reduce the negative
effect of diversity.

1. What is the research question, and how is it motivated?

How do alliance network structure and composition influence a firm´s exploratory
innovations?
Motivation:
o Composition of firms in networks and its effect on innovation did not get
much attention until now
o Research yielded conflicting results about the influence of alliance network
structure on firm innovation: structural holes (disconnected networks
increase creativity, knowledge creation) etc. vs. dense networks (improved
knowledge transfer and innovation)
o Structural holes neither a necessary nor sufficient condition for timely access
to diverse information/ know how
o Social control benefits of network closure and access to diverse information
and know-how can coexist
o Research until know ignores novelty of the knowledge created and embodied
in the innovations measured (exploitive (incremental) vs. exploratory
(radical))
o Purpose of study to address these limitations

2. Hypothesis 1.
a) How can increasing network technological diversity be beneficial for
exploratory innovation?
o Increasing network diversity increases the relative novelty of the knowledge a firm
can access (access to dissimilar knowledge)
o The value of variance in distant search is that though it increases failures, it also
increases the number of highly novel solutions
o By searching diverse and novel domains, firms can develop multiple
conceptualizations of problems and solutions and apply solutions from one domain
to problems in another
o Diverse knowledge sources also provide firms with access to diverse problem-
solving heuristics

b) How can increasing network technological diversity be detrimental for

exploratory innovation?
 o As technological distance between partners increases, their ability to recognize,
assimilate, and apply each other´s knowledge declines, increasing the costs of
recombinatory innovation (greater effort and resources to understand and
integrate dissimilar knowledge)
o Integrating novel knowledge from dissimilar sources often requires changing
existing patterns of communication and social exchange
o Information overload, confusion, diseconomies of scale in innovation efforts

c) In light of these arguments, at which level of technological diversity in a firm’s

alliance network should the firm’s subsequent degree of exploratory
innovation be highest, and why?
o Low level of diversity: firm has a high degree of relative absorptive capacity in its
portfolio of partners, but the knowledge to which it has access provides little
novelty
o High level of network diversity: absorptive capacity costs are likely to outweigh the
benefits of highly novel knowledge
o Some degree of diversity is valuable for exploratory innovation: too much can be
detrimental

3. Hypothesis 2.

a) How does network density promote trust and reciprocity between alliance
partners?
o Dense networks facilitate the production of trust and reciprocity among networked
firms, which decrease exchange hazards in alliances, increase cooperation between
partners, and mitigate absorptive capacity problems
o Network density promotes trust and reciprocity between partners because they
share common third-party partners – reducing information asymmetries among
firms and increasing their knowledge-based trust
o Promotes by increasing the costs pf opportunism
o Generates reciprocity exchanges in which partners are privileged resources because
they expect recipients will repay them with something of equivalent value
o Protecting relationships from opportunism, increasing actors´ confidence that
obligations for repayment will eventually be met
o Trust and reciprocity generated by network density act as informal safeguards of
dyadic exchange, supplementing formal alliance governance mechanisms
o Network closure promotes intense social interaction, experimentation, joint problem
solving and triangulation, which enhances a firm´s ability to absorb and apply
increasingly diverse partner knowledge (intense interaction among personnel from
partnered firms)

b) What kind of exchange hazards emerge in alliance networks, and how does
network density mitigate some of them?
o Alliance network density also reduces absorptive capacity problems related to
growing network diversity
o Protecting relationships from opportunism, increasing actors´ confidence that
obligations for repayment will eventually be met
o Greater diversity reduces the odds partners share a common understanding of
technical issues, a language for discussing them, and an approach to codifying
knowledge
 o Partners have incentives to compete, the risk of opportunism is elevated
o Large measurement and monitoring problems
o Involuntary knowledge leakage, withholding of effort and resources
o Misrepresentation of newly discovered knowledge
o Challenge transferring tacit knowledge developed during the relationship
o High novelty and tacitness increase partner uncertainty and contractual hazards
o Technological diversity increases coordination problems and the potential for costly
contractual renegotiations
o The extent to which a firm´s alliance partners are densely interconnected mitigates
some of the costs and amplifies some of the benefits of increasing network diversity,
thus positively moderating its effect on exploratory innovation

c) How can network density reduce absorptive capacity problems related to a

growing network density?
o Network density promotes trust and reciprocity between partners because they
share common third-party partners. Dense networks allow firms to learn about
current and prospective partners through common third parties, reducing
information asymmetries among firms and increasing their "knowledge-based trust"
in one another

4. Data and Methods

a) What is the empirical context of the study? The behavior of what type of actor
is under study (firm, employee, platform, …)?
o Global telecommunications equipment industry
o Time: 1987-1997
o Only public companies
o Companies with the largest sales
o Top selling firms at the beginning of the study
o 77 firms, 13 countries (headquarters)
o Patent data for knowledge creation (only US patents to be comparable) (only from
delphion)
o Collaboration data from multiple sources -> SDC Alliance Database, annual reports
etc.

b)What is the dependent variable, and how is it measured?

o Exploratory innovation with the help of patent citations
o Table of all patent citations
o Differentiating between new ones (in the measured 7 years) and used ones
o Seven-year window because median age of cited patents in telecom technologies is
about 6.5 years (organizational memory in high-tech firms is imperfect, causing the
value of knowledge to depreciate rapidly over time)
o Exploratory innovationsit= new citationsit/total citationsit*
o The extent to which it uses citations with which it has no experience is indicative of
distant search and exploratory innovation
o As a robustness check, I applied an alternative measure of exploratory innovation
from prior research

c) What are the main independent variables, and how are they measured?
o Network technological diversity (measure of knowledge heterogeneity
 o Began at the dyad level and measured the technological distance between pairs of
firms using an index (Jaffe)
o Distribution of a firm´s patents across primary patent classes
o Moving four-year window
o This distribution located the firm in a multidimensional technology space captured
by a k-dimensional vector
o Measure was bounded between 0 (complete similarity) and 1 (maximum diversity)
o -> construct annual distance matrices Dt, which reflected the technological
distances between all possible pairs of sample firms
o The uniqueness of firm j is a function of the uniqueness of its partners, k, and firm
j´s distance from them
o Network density
o Annual adjacency matrices for the period 1987-1996 that indicated the presence of
technology alliance
o Of all sample alliances 89% involved only two firms and the average alliance had
2.38 firms
o Ego networks in which a firm´s alliance partners are themselves allied imply higher
values of density
d) How is hypothesis 1 tested?
o First network technological diversity is analyzed as a single value and then squared.
Single is statistically significant but squared isn´t
e) How is hypothesis 2 tested?
o Interaction term between network diversity x density and squared one because of
amplitude hypothesis

5. Results
a) Do the authors find support for hypothesis 1?
o Partial support: evidence of a positive linear effect of network diversity but no
significant curvilinear effect detected

b) Do the authors find support for hypothesis 2?

o Supported: Model 5-6 show the interaction had a significant, positive effect on
exploratory innovation
o Network density had a positive and significant effect on exploratory innovation
independent of diversity

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