Prescriptions for network strategy: Does evidence of network effects in cross-section support them?
Joel Baum, Robin Cowan & Nicolas Jonard
#2012-044
Although intuitively appealing (and common), drawing network strategy
implications from empirical evidence of network performance effects in
pooled cross-section is not necessarily warranted. This is because
network positions can influence both the mean and variance of firm
performance. Strategic prescriptions are warranted if empirically
observed network effects reflect increases in mean firm performance. If
network effects reflect increases in firm performance variance, however,
such prescriptions are warranted only if the increase in the odds of
achieving high performance is sufficient to compensate for the
concomitant increase in the odds of realizing poor performance. Our
simulation study, designed to examine network performance effects in
both pooled cross-section and within-firm over time across a wide range
of conditions, counsels caution in drawing implications for network
strategies. We discuss the implications of our findings for research on
network effects, and more broadly for drawing strategic inferences from
studies of firm performance in pooled cross-section.
JEL codes: L14 L2 D85 O3
Keywords: Network formation; strategic alliances; innovation; network strategy; interfirm networks