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SCOUTS AND INTEGRATORS : THE JOINT EFFECT OF NETWORK DENSITY AND FIRM CENTRALITY ON BUSINESS INNOVATIVENESS IN BUYER-SUPPLIER NETWORKS

Several studies in the social networks literature suggest that more central firms in a given network will be more innovative, but the literature not considered how variation in network density might affect any innovative benefits of centrality. This paper draws from evolutionary economics arguments to suggest that any benefits of centrality will decline as network density increases, because greater density creates tendencies toward local search that in turn limits firms’ access to resources that arise outside a network. We use patenting data from almost 2,000 affiliates of more than 260 Taiwanese business groups operating from 1980 to 2000 to test the idea the firm operating centrality will have fewer innovative benefits as network operating density increases. Firms throughout the world maintain ties within networks of other organizations, with substantial variation both in the position of individual firms within a network and in the overall density of ties in different networks. Several studies in the social networks literature have found that firms with more central positions in a given network tend to be more innovative (Ahuja, 2000; Baum, Calabrese, and Silverman, 2000; Tsai, 2001), presumably because central positions offer opportunities to integrate resources from multiple sources in order to create novel goods and services. However, existing studies of how a firm’s network position affects its activities typically focus on single inter-firm networks (Provan, Fish, and Sydow, 2007), so that prior work has not compared the impact of centrality across networks, particularly in considering how variation in network structure might affect the innovative benefits of centrality. Yet, ideas from the evolutionary economics literature (Nelson and Winter, 1982; Helfat, 1994) suggest that the benefits of centrality may decline as network density increases, because greater density creates tendencies toward local search that limits firms’ access to resources that arise outside a network. This study investigates how network operating density shapes the impact of operating centrality in multiple buyer-supplier networks. The benefits of centrality are likely to be particularly pronounced for buyer-supplier networks, because operating ties provide hands on experience with resources that firms can use for innovative activities (Clark and Fujimoto 1991; von Hippel, 1988). We begin by arguing that greater operating centrality, where we use Freeman’s (1977) notion of centrality to define operating centrality as the proportion of possible buyer-supplier ties that a firm has established within its buyersupplier network, provides firms with opportunities to integrate a wide range of resources from their partners and thereby gain innovative advantages. We then argue that greater operating density within a network will lead to an emphasis on local search, where density is the ratio of the actual number of ties within a given network to the total number of potential ties that organizations could forge within that network (Freeman, 1977) and local search is the tendency to look for new ideas within a particular organizational setting (Rosenkopf and Nerkar, 2001). The emphasis on local search in dense operating networks will attenuate the availability of novel resources available to central firms, causing the innovative benefits of operating centrality to decline. Hence, operating centrality will offer the greatest innovative benefits in sparse operating networks.