Network Embeddedness and the Dissolution of Joint Ventures

Existing research in the social network and alliance literatures shows that the embedding of alliance activity in the network structure that results from prior partnerships influences patterns of new tie formation, but has not examined whether such network embeddedness affects the failure rate of the ties that are formed. We focus empirically on the unplanned dissolution of joint ventures between competitors to examine whether the informational and reputational benefits that arise from positional embeddedness, as well as the social monitoring benefits associated with structural embeddedness, enhance the longevity of interorganizational ties. We report three main findings. First, in the aggregate, network embeddedness has a reinforcing dual effect on network dynamics: as prior research showed, new ties between partners tend to mirror the preexisting social structure and, as this paper shows, the ties that the partners form are more likely to persist for a longer period. Second, the benefits of positional and relational embeddedness are to some extent substitutive. Finally, the marginal value of network embeddedness is highest in situations where the economic incentives to behave opportunistically are especially strong. Longitudinal data on joint ventures formed by 97 global chemical firms from 1979 to 1991 provide support for our arguments. Existing research demonstrates that the embedding of alliance activity in the wider network structure resulting from previous alliances influences patterns of new alliance formation. A central argument in this literature is that firms resort to the network of pre-existing alliances to ascertain the capabilities and reliability of potential partners and, in turn, to mitigate the inherent uncertainty in interorganizational exchange relations (Gulati, 1995b; Walker, Kogut and Shan, 1997; Gulati and Gargiulo, 1999). Several studies have investigated how firms’ embeddedness in a network structure, i.e., the extent to which firms have direct and indirect ties to other actors in the network, affects which alliances the firms create (Powell, Koput and Smith-Doerr, 1996; Walker, Kogut and Shan, 1997; Gulati and Gargiulo, 1999; Rosenkopf, Metiu and George, 2001). However, prior research has paid minimal attention to how network embeddedness might influence the failure of existing alliances. This paper shifts the research focus from how embeddedness influences the genesis of interorganizational ties to how embeddedness affects the mortality of ties. We focus empirically on the dissolution of joint ventures. Studying tie dissolution helps clarify the mechanisms through which embeddedness exerts its influence on interorganizational relationships, as well as helps identify benefits and limits of embeddedness. Prior research on tie dissolution has generally taken a dyadic perspective and focused on the effects of relational embeddedness (Levinthal and Fichman, 1988; Seabright, Levinthal and Fichman, 1992). The literature on joint venture dissolution has shown that direct ties between partners mitigate collaboration hazards (Kogut, 1989; Park and Russo, 1996; Park and Ungson, 1997). We approach this issue from a broader network perspective and show how positional and structural embeddedness may also exert distinct effects on tie dissolution. This is theoretically important because in a dyadic perspective the key sociological mechanism for maintaining order in a relationship between two actors is the trust developed between exchange partners and “the shadow of the future”, i.e., the benefits of