Us against Them: Network Dynamics under the Threat of New Entrants

Sarath Balachandran, London Business School

Abstract: Dealing with the threat of new entrants into its market is among the most fundamental strategic imperatives for any firm. This threat could be enhanced for various reasons, most prominently institutional or technological changes. Research examining firms’ responses to this threat has largely adopted an atomized actor perspective, without accounting for the influence of the social structures within which these firms are embedded. In this study we seek to bring a relational perspective (Dyer and Singh, 1998) to the study of this question by examining how firms alter the structure and composition of their alliance networks in response to increases in the threat of entry into their market by new firms. We employ time differentiated institutional shocks that resulted in sharp reductions in import tariffs in the US across different industries to set up a generalized difference-in-difference empirical design examining how elevated threat of entry into a market by outside firms affects the alliance behavior of incumbent firms in that industry. The effectiveness of these network responses could fundamentally shape who captures the economic value of innovations. Through this study we hope to contribute towards our understanding of the latter, which is among the key research priorities of the Mack Institute.