The Value of Networks: Does Network Position Really Enhance Innovation?

By Prof. Jason K W LEE

"Innovate or die." The phrase, often attributed to management guru Peter DRUCKER, has never been more relevant. While innovation is crucial, in high-tech industries where radical changes happen so often, no single firm can survive with only internal capabilities or knowledge. Thus, collaboration among firms is common and the locus of innovation is often found in inter-organizational relationships. In this regard, alliance network provides access to knowledge and resources that are internally unavailable for firms. A recent study explores deeply into how much a network position contributes to innovation.

Question remains regarding which comes first: does a firm's position in its alliance network drive innovation, or is it a mere reflection of the firm's inherent qualities, such as its resources, capabilities, or strategy? In other words, it can be that a firm is innovative because of its superior network position. On the other hand, a firm’s superior network position (e.g., have many partners or occupy a brokerage position) could be a result of its superior ability to innovate.

This research[1] explores this question by examining network changes outside a firm's control. Researchers analysed data from the biotechnology industry, tracking corporate actions (i.e., alliance formations and terminations, and acquisitions) between 1995 and 2007 and patenting outcomes through 2012. They examined the effects of network changes – formed through alliances or acquisitions – driven by two sources: a focal firm’s own actions or other companies’. Categorising these network changes as self-driven and other-driven, their findings suggest that a firm’s network position improves innovation when the network position achieved through self-driven changes, but not through other-driven ones. In other words, they find that bridging disconnected partners (structural holes) enhances innovation, but only when firms actively create these positions and not when these positions result from others' actions.

The findings suggest that network position alone is not sufficient to drive innovation. Network positions do matter—but only when firms actively leverage them. Companies that deliberately shape their networks through acquisitions or alliances can utilise its network position to drive innovation. Simply occupying a good position isn’t enough; what matters is how a firm uses it.

Intel’s legendary former CEO, Andrew GROVE once famously said that, “Only the paranoid survive.” Perhaps that maxim should be updated to Only the proactive paranoids do!

Reference:

[1]  Hernandez, E., Jee, J.K. & Shaver, J.M. (2024). Toward an improved causal test of network effects: Does alliance network position enhance firm innovation? Strategic Management Journal, 1-35. https://doi.org/10.1002/smj.3679