Reconsidering network embeddedness: Effects on different forms of opportunism

Abstract

Whether a focal firm’s network embeddedness is capable of curtailing its partner firm’s opportunism is described as questionable in interfirm relationship literatures. Drawing on theories of business networks and opportunism governance, we examine the distinct effects of the focal firm’s network embeddedness on its partner’s strong and weak form opportunism. We argue that network embeddedness can curtail a partner’s weak form opportunism but cannot deter strong form opportunism due to the substantial benefits obtained from breaking contractual terms and the network’s lack of formal enforceability. Moreover, we draw from institutional theory to explore how network embeddedness, as an external informal institution, interacts with the formalization of the interfirm relationship and the focal firm’s government relations. Survey data on 227 firms’ interfirm relationship experience verify most of our hypotheses. Our findings provide implications regarding the role of network embeddedness and its synergistic effects with formalization and government relations in interfirm relationships.