Embeddedness, Tie Dissolution, and the Stability of Interorganizational Networks

Previous literature has shown that interorganizational networks tend to be stable, but evidence of that stability stems from analysis showing that existing network structure reinforces itself through the formation of new ties. However, discontinuation of existing ties also affects the degree of network stability. If the same factors that lead to tie replication also lead to tie dissolution, then networks will be less stable than might otherwise appear. This paper investigates how two types of network embeddedness affect the dissolution of interorganizational ties. We distinguish between ab initio and evolving embeddedness, to account for the influence of social factors inherent in the network structure at the time of alliance founding, as well as the impact of factors that arise during the evolution of network structure. We argue that combined embeddedness between partners at alliance founding and common partners in the evolving structure reduce the hazards of dissolution, whereas social asymmetry and competitive intensity increase the likelihood of dissolution. We also argue that the presence of common partners is particularly important in stabilizing relationships that are at special risk of dissolution, those characterized by high partner asymmetry and mutual competitive intensity. This highlights the more general principle that the lubricant of social structure is most valuable when the incentives to behave opportunistically are especially sharp. We use longitudinal data on joint ventures formed by global chemical firms to test the hypotheses. One of the central insights of the sociological view of markets is that interorganizational social structures create and reinforce a stable social order (White, 1981; Burt, 1988). In this vein, the literature on interfirm collaboration emphasizes that the social structure influences patterns of alliance formation (Walker, Kogut and Shan, 1997; Gulati and Gargiulo, 1999; McEvily and Zaheer, 1999), such that the network of firms’ previous relationships serves as a map for future associations and gives rise to embeddedness of relationships. Research suggests that such interorganizational networks generate social stability by acting as repositories of information (Gulati, 1995; Koka and Prescott, 2002) and as means of enhancing trust and enforcing obligations (Gulati and Gargiulo, 1999; Gulati and Westphal, 1999; Gulati, Nohria and Zaheer, 2000). It is possible that such an inference over-states the stability of social order, however, because most evidence of the stability of interorganizational networks is based on patterns of alliance formation, without considering alliance termination. The argument that interorganizational networks reproduce themselves over time assumes that tie dissolution follows patterns consistent with the self-reproduction of the pre-existing social structure. This is a strong assumption. To assess the validity of this assumption we shift the focus from how network embeddedness influences the genesis of interorganizational ties to how embeddedness affects the mortality of ties. Studying tie dissolution complements extant literature in three ways. First, examining how firms’ embeddedness in a network structure affects the mortality of interorganizational ties will inform the literature on network dynamics. Embeddedness is the degree to which an actor has direct and indirect ties to other actors in a network, where an organizational network consists of all actors that operate within a defined commercial or social space. Several studies argue that the presence of highly embedded actors contributes to the stability of network structures, given that the formation of new ties is more likely to involve organizations that are already central to the social structure (i.e., have many ties to other actors) (Powell, Koput and Smith-Doerr, 1996; Walker et al., 1997; Gulati and Gargiulo, 1999; Rosenkopf, Metiu and George, 2001). However, a given structure of interorganizational relationships changes not only through the formation of new linkages but also through the dissolution of existing ties. Hence, to understand how embeddedness affects the aggregate balance of network dynamics we also need to