Interfirm Collaboration Networks: the Impact of Small World Connectivity on Firm Innovation

While research has long recognized the importance of interfirm networks in firm innovation, nearly all of this work has treated the network concept as a metaphor rather than a construct with measurable properties. Only recently have researchers begun to assess the formal structural properties of alliance networks and their impact on firm innovation and knowledge acquisition. Most of this research has focused on a firm’s position within a broader network of relationships or the structure of its immediate network neighborhood rather than the structure of the overall network. To our knowledge, empirical research has not yet examined the impact of the structural properties of whole alliance networks on member firm innovation. This raises two questions: Does the structure of the whole interfirm network influence the rate of knowledge creation among firms in the network? If so, what structural properties enhance innovation? To address these questions, we draw upon recent graph theoretic research on “smallworld” networks. A fundamental insight from small-world network research is that a high degree of clustering and a short average path length can coexist in a sparse network. This finding has important implications for information diffusion. The dense connectivity of clusters creates bandwidth in a network, enabling large amounts of information to rapidly diffuse, while short path lengths to a wide range of firms provides reach in the network, ensuring that diverse information sources can be tapped. In a network with small-world connectivity there is almost no trade-off between bandwidth and reach -both can be achieved simultaneously, even in a very sparse network. We argue that small-world properties in interfirm networks will significantly enhance the creative output of member firms, irrespective of other idiosyncratic differences. We test this hypothesis using longitudinal data on the innovative performance of a large panel of firms operating in 11 industry-level alliance networks.