Coevolution of Governance and Networks: Organizational Governance as a Driver of Network Evolution

This study examines the coevolution of inter-firm networks and the choices firms make about governance. Previous studies on inter-firm networks and alliance formation provide insights into how networks shape social mechanisms, and information and resource flow, and thus influence the firms’ economic actions. This stream of research has focused on the impact of networks on organizational governance, while not fully incorporating the impact of organizational governance on networks. This research aims to fill the gap by examining how firms’ actions to economize on transaction costs and maximize value creation and value capture shape network evolution. Through formal modeling and simulation experiments, this study shows that exchange conditions such as asset specificity and resource heterogeneity determine network formation in the first place, dictate how social capital is developed, and thereby determine the coevolutionary paths of organizational governance and networks. Implications for the network and governance literature are discussed.