Effects of a firm's and their partners' alliance ego–network structure on its innovation output in an era of ferment

Abstract

A technological discontinuity can disrupt an existing technological regime and it has a profound effect on firms' economic activities and outcomes. The period between the discontinuity and the establishment of the new regime is defined as an era of ferment, which can unleash significant innovation opportunities while creating great uncertainty in the business environment. Although it is well‐known that firms often use alliances both to respond to uncertainty and facilitate innovation, little is known about the alliance behavior of firms during an era of ferment and how it can affect their exploratory and exploitative innovation output. The article tests this relationship using as large panel sample of alliances during the era of ferment in the biotechnology industry and the exploitative and exploratory innovation output of biotechnology firms during that time. The results suggest that managers in charge of innovation and alliance formation should proactively optimize the design their firms' ego–network structure as follows: First, alliance ego–network centrality supports exploitative innovation because a central firm coherently and reliably performs experiential search to source complementary knowledge through ‘pipeline’ alliances to the ‘whole’ network. Moreover, very high centrality offers little additional gains in coherence and reliability of knowledge received from the network because it restricts access to novel information beyond the focal firm's ego–network neighborhood. Second, ego–network structural holes support exploratory innovation because they provide efficient access through cognitive search to non‐redundant flows of information and knowledge, offering ample opportunities for knowledge recombinations. Third, a focal firm's partners' centrality positively affects its exploratory innovation because the focal firm can learn by observing and cognitively evaluating the behavior and associated innovation outcomes of their central partners.

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