[To appear in Academy of Management Journal 1997]
David Eccles School of Business
University of Utah
Salt Lake City, UT 84112
TEL: (801) 581-6378
FAX: (801) 581-7214
Organization Studies Department
Carroll School of Management
Chestnut Hill, MA 02167
TEL: (617) 552-0452
FAX: (617) 552-0433
Acknowledgments: We thank Susan Jackson as AMR editor, Jim Walsh as Consulting editor, and five anonymous reviewers for their insights, suggestions, and comments which pushed us to substantially improve the manuscript. We also thank our colleagues Charles Kadushin, Benyamin Lichtenstein, Aya Chachar, Steve Tallman, and Anoop Madhok for their comments on earlier drafts. The errors and omissions are our own.
A phenomenon of the last twenty years has been the rapid rise of the network form of governance. This governance form has received significant scholarly attention, but to date no comprehensive theory has been advanced, nor has a sufficiently detailed and theoretically consistent definition appeared. The objective of this paper is to provide a theory that explains under what conditions network governance, rigorously defined, has comparative advantage, and is therefore likely to emerge and thrive. The theory integrates Transaction Cost Analysis and Social Network theories. In broad strokes, the theory says that the network form of governance is a response to exchange conditions of asset specificity, demand uncertainty, task complexity, and frequency. These exchange conditions drive firms toward structurally embedding their transactions. Structural embeddedness enables the use of social mechanisms for coordinating and safeguarding exchanges. When all these conditions are in place, the network governance form has advantages over both hierarchy and market solutions in simultaneously adaptating, coordinating, and safeguarding exchanges.