The Costs of Creating Network Relations and the Implications for Firm Performance: The Case of High Technology Firms

Abstract

Abstract The benefits of network relations for firms’ competitive advantage are increasingly acknowledged in the strategic management literature. Yet, the cost implications of engaging in network-specific relations, stemming from the irreversibility of sunk costs invested in creating network relations, are largely ignored. Such costs tend to be especially pronounced in high technology firms. It follows that the costs of creating network relations may mask the benefits of such relations, suggesting that networks can be a competitive risk for firms in cases where network relations unexpectedly terminate. This chapter adopts a cost-benefit approach to an empirical analysis showing that while in the long term, network relations enhance high technology firms’ performance, short-term efforts in creating network relations may hamper their performance. Furthermore, we show that greater technological intensity intensifies the negative performance implications of short term network participation and the positive performance implications of long term network participation.