Explaining Inter-Organizational Nework Formation MARK EBERS In recent years, we have witnessed remarkable growth in various forms of co-operation among organisations. There has been a considerable increase in inter-organizational alliances during the 1980s, particularly in high-technology industries (Haagedoom 1993; 1995; Hergert and Morris 1988; Mowery 1988), Within the US biotechnology industry, for example, firms without any formal co- ‘operative ties to other firms have become increasingly rare, while the connectivity of firms within the industry has increased y significantly (Powell ef al. 1996). In the hospital systems software industry, inter-firm co-operation was unusual up until 1970, increased slightly in the 1,970s, but showed significant growth in the 1980s and 1990s (Mitchell and Singh 1996), A similar pattem can be detected for the car industry. According to Helper (1991), beginning 'm the 1980s US car ‘manufacturers have been reducing their degree of vertical integration and have increasingly relied on longer-term contracts with a limited number of tightly linked suppliers. Many European ear companies also adopted this strategy at around the same time (Altmann and Sauer 1989; Morris and Imrie 1991. Tumbull et al 1989). In other industries inter-organizational co-operation has been a more long- standing practice. In construction, for example, consortia and enduring relationships are well- ‘entrenched forms of organizing large projects (Fecles 1981). In the US film industry, after World War IL progressively outsourced production of feature films while retaining finance and distribution (Robins 1993); therefore for some time now, persistent pattems of contracting are related less t0 format organisations such as the studios, but crystallize out of relatively stable networks of producers, directors, cinematographers, actors, and musicians (Faulkner and Anderson 1987). Regional industrial districts in the lalian textile and clothing (Brusco 1982; Lazerson 1988, 1993; Mariotti and 1986), German metak (Grabher 1993b; Sabel 1989; Herrigel 1995) or US electronies industries (Saxenian 1994) represent other often-mentioned examples of long-standing pattems of co-operative inter~ organizations, as do Japanese Keiretsu (Gerlach 1992) and Korean Chaebol (Steers et al, 1989), In the following, we shall refer to these and other forms of inter- organizational co-operation (such as contractual joint ventures) as infer- organizational networking relationships. If more than two organisations are linked through such networking relationships, they constitute an interorganisational network. At this point, it suffices to say that inter- organizational networking represents a particular form of organizing, or governing, exchange relationships among organisations. While networking ean take different forms, all these forms are characterized by recurring exchange relationships among, a limited number of organisations that retain residual control of their individual resources yet periodically jointly decide over their we. A more extensive characterization of inter-organizational networks will be offered later inthis chapter Irrespective of their precise definition, the rise and, extending scope in practice of co-operative inter= organizational relationships raises a number of questions for research. Why do firms (increasingly) ‘engage in inter-organizational co-operation and when? With whom are firms likely to ally and why? How do firms organize and control their co-operation? Why and when do they choose a particular organizational form of co operation? Which forms of network structure result? What are the outcomes ‘and implications for the networked firms and for third parties? ‘A surging wave of publications has addressed these and other relevant questions (¢.g. Alter and Hage 1993; Axelsson and Easton 1992; Burt 1992; Contractor and’ Lorange 1988; Grabher 19932;Hakansson and Snchota 1995; Jarillo 1993; Nohria and Eccles 1992). It would be beyond the scope of this chapter to try to comprehensively discuss the results and achievements of this and other pertinent rescarch (sce Grandori and Soda 1995; Mizruchi and Galaskiewicz 1993; Powell 1990; Powell and Smith-Doerr 1994; Sydow 1992). Instead, I shall try and indicate where and how the present volume might complement and ada to this body of literature. This book focuses on the formation(s) of inter-organizational networks, that is, on the contingencies and processes that lead to the emergence of inter-organizational networking relationships and to particular forms of organizing these relationships. Therefore, in the first section of this chapter I shall present a summary of the results of some earlier approaches to the analysis of the formation(s) of inter- “organizational networks. Secondly, I shall introduce the conceptual framework that was used to organize the contributions to this volume. This conceptual framework can be conducive to understanding and explaining inter- ‘organizational network formation. It takes as its vantage point three content dimensions of micro- level ties that ink organisations within inter-organisational networking relationships, namely resource flows, information flows, and flows of mutual expectations. I shall try to demonstrate the potential fruitfulness of the conceptual framework in two ways. On the one hand, I argue, it provides a common conceptual ground for systematically distinguishing network forms of organizing from altemative institutional forms of governing economic exchange relations, namely the market and the firm, It therefore provides a basis for systematically analysing and comparing these institutional alternatives, for example in terms of their relative merits and shortcomings under different circumstances. On the other hand, I shall try to show that the proposed conceptual framework can be helpful for analysing important contingencies and processes of inter-organizational network formation, This volume places particular emphasis on three such contingencies and related processes, each exemplilying one of the three abovementioned content dimensions of ties. Specifically, it highlights the roles that activity Jinks, trust, and catalysts play for the formations) of inter- organizational networks. For each of these concepts I shall therefore spell out in general terms how it relates to the formation of inter- “organizational networks. Thirdly, I shall briefly introduce the individual contributions to this volume, This overview highlights how the individual papers relate to the proposed conceptual framework and contribute to the aims of the book. I eave it to the concluding chapter by Bbers and Grandori to present a summary of the general argument of the book and to outline some implications for organizational research and practice, EXPLAINING THE EMERGENCE OF INTER-ORGANIZATIONAL NETWORKS. A, tich literature has developed that examines when, where, why, and how organisations engage in inter-organizational networking, As in the field of organisation studies as @ whole, pertinent research has employed @ number of different approaches and theories. These, include industrial economics, organizational economics, industrial marketing and purchasing, organizational sociology, game theory, resource dependence theory, population ecology, institutional theory, and social network approaches. Each of these major theoretical strands of research has produced distinct explanations of inter-organizational network formation that partially overlap and partially compete (for summaries and reviews see Alter and Hage 1993; Auster 1994; Grandori and Soda 1995; Mizruchi and Galaskiewiez, 1993; Sydow 1992), Rather than discussing these different approaches, in the following I shall summarize from this literature some of the more important factors that have been found to enable trigger, and influence the formation of inter- organizational networking relationships. It should be noted at the outset, however, that we currently know comparatively more about the factors that account for the emergence of inter-organizational networks than about the factors that influence the organizational forms of networking relationships. This is why this introductory chapter will give greater prominence to the first-mentioned issue, while the concluding chapter of this book, because ‘among other topics it addresses implications for future rescarch, win say a litle more about the latter. Research has tried to explain the formation of inter-organizational networks at three levels of analysis: the actor level, the level of pre-existing relations among actors, and the institutional level. At the actor level, research has mainly concentrated on discerning the motivations of corporate actors forforging networking relationships, whereas at the relational and institutional levels, scholars have sought to identify conditions that facilitate and constrain (different forms of) inter-organizational co- operation. Motives ‘The motives for engaging in an inter-organizational networking relation- ship can be quite varied. Nevertheless, in the realm of business organizations they ultimately boil down to two main sets of motives. On the one hand, through co-operation, organizations attempt to increase their revenue, Inter organizational networking can be conducive to this end, because co-operating organizations can collude against common rivals or reduce competition by binding competitors as allies (Porter and Fuller 1986). Furthermore, through networking, organizations can access complementary resources and/or capabilites or can closely co-ordinate their use of resources; in this way, they hope to enhance their competitive ness, for example, in terms of improved products, better market access, or faster market entry, and thus to inerease their revenues (Contractor and Lorange 1988; Harrigan 1985; Zajac and Olsen 1993). On the other hand, inter-organizational co-operation can also be motivated by cost reduction. Cost savings may be the result of economies of scale and/or scope that can be achieved, for example, through joint research, marketing, or production (Contractor and Lorange 1988; Hakansson and Snehota 1995). Moreover, in specific circumstances organizations may establish networking relationships in order to economize on the govemance costs of co-ordinating their activites (Hennart 1991; Thoreli 1986). For example, inter-organizational networking represents a cost-efficient way of gaining access to crucial know-how that can neither be made available intemally nor be easily transferred by licensing (Badaracco 1991; Dyer 1996; Kreiner and Schultz. 1993; Teece 1986) Relatedly, inter organizational networking iS seen as a fast, effective, and efficient way of leaming and of shorceircuiting the process of acquiring and appropriating skills (Dodgson 1993; Hamel 1991), Finally, risk reduction comes into play as a cost-related motivation for inter organizational networking ‘when organizations seck to spread financial or other risks, for example when shouldering (mostly large) innovations or other risky projects (Contractor and Lorange 1988; Mariti and Smiley 1983), Drawing on an analysis and integration of the earlier literature, Oliver (1990) offered a slightly different summary of the main reasons why organizations establish intr-organizational relationships with one another. She proposed the following six predictive contingencies of inter-organizational relationship formation: (I) necessity, when organisations are mandated through law or regulation by higher authorities to establish relationships; (2) asymmetry that allows one party to exercise power or control over another one or its resources; (3) reciprocity, when through co-operation organisations can pursue common or mutually beneficial goals or interests; (4) efficiency, when through co-operation organisations can achieve higher inputoutput ratios, (5) stability, when through co-operation organisations can better forestall, forecast, or absorb uncertainty affecting their activities; and (6) legitimacy, when through co-operation organisations ean establish or enhance their reputation, image, prestige, of congruence with prevailing norms. Glaister and Buckley (1996) conducted one of the few studies that have compared the relative importance of different motivations for inter- organizational networking (see also Mariti and Smiley 1983), In their empirical study of ninety-four intemational equity and non-equity joint ventures involving British firms, Glaister and Buckley distilled five under- lying factors from an original lst of sixteen strategic motivations in a factor analysis. In diminishing order of explained variance, these key motivational factors for engaging in infemational joint ventures were technology development, market power, market development, resource specialization (loading on higher margins, scale economics, faster payback), and large Project size (loading on the spreading of risks, low product diversification}. ‘The study further showed that the most important sets of motivating factors predominate irrespectiv of the contractual form of the alliance, relative partner size, primary geographical location, broad industry group of the alliance, and nationality of the nom British partner. Although it is important to