Alliance-Network Externalities and Firm Innovation: Separating Endogenous from Exogenous Network Effects

Exequiel Hernandez, Management, The Wharton School; Jason Lee, Management, The Wharton School; and Myles Shaver, Carlson School of Management

Abstract: We investigate whether the effect of network position on innovation is causal or spurious. Although empirical evidence demonstrates that certain structural positions in alliance networks (e.g. structural holes) affect firm innovation (Phelps, Heidl, and Wadhwa, 2012), it is hard to disentangle the factors allowing a firm to put itself in a certain position from the innovation outcomes that stem from being in that position. In other words, do firms innovate more because of their network position, or do they occupy that position because of their innovation strategies and capabilities? While this might appear to be an empirical issue, it is fundamentally a theoretical one because the resolution depends on how scholars conceptualize the underlying mechanisms by which interfirm networks arise and change (Shaver, 2020).

To help disentangle cause and effect in this line of research, we advance a theoretical concept—alliance-network externalities. We describe how this helps distinguish network changes that are intentional (i.e., ego-driven or endogenous) from network changes that are unintentional (i.e., alter-driven or exogenous to the focal firm). From this theoretical foundation, we develop a novel methodological approach to identify if empirical relationships between network position and innovation are causal. We apply this approach to re-evaluate the relationship between structural holes and firm patenting in the biotechnology industry.

Read the full working paper here (PDF).