Embedding strategic alliances in networks to govern transaction hazards: Evidence from an emerging economy

Abstract

While researchers have realized the crucial impact of embeddedness on governance structures of strategic alliances in the past two decades, most research has focused on relational embeddedness, ignoring the effects of structural embeddedness on governance design. Using data from strategic alliances among semiconductor firms in Taiwan, this study investigates how network structural embeddedness influences the design of alliance governance. Networks may disseminate information and develop norms, reputations and collective sanctions that mitigate opportunistic behavior. The study investigates three kinds of network: social, hierarchical and market (technology) networks. We find that the degree to which firms are embedded in social or hierarchical networks negatively moderates the positive relationship between transaction hazards and formal contract complexity, suggesting that network structural embeddedness mitigates concerns about transaction hazards. When firms entering alliances are simultaneously embedded in social and hierarchical networks, the negative moderating effects are even stronger, suggesting that these networks complement each other. However, the effects of market network embeddedness are not significant. Overall, this study finds that in an emerging economy where market-supporting institutions are weak and transaction hazards tremendous, network structural embeddedness mitigates concerns over opportunistic behavior and negatively moderates the relationship between transaction hazards and formal contract complexity.