Interfirm Collaboration Networks: The Impact of Small World Connectivity on Firm Innovation

The structure of alliance networks strongly influences their potential for knowledge creation. Dense local clustering provides transmission capacity in the network by fostering communication and cooperation while non-redundant connections contract the distance between firms and give the network greater reach by tapping a wider range of knowledge resources. However, since firms are constrained in forming alliances, there appears to be a trade-off between creating transmission capacity versus reach. We argue that small world connectivity (i.e., simultaneity of high clustering and short average path lengths in a sparse, decentralized network) helps resolve this tradeoff by enabling transmission capacity and reach to be achieved simultaneously. We propose that firms embedded in alliance networks that exhibit high clustering and short average path lengths to a wide range of firms will experience greater knowledge creation than firms in networks that do not exhibit these characteristics. We find support for this proposition in a longitudinal study of the patent performance of 1106 firms in 11 industry-level alliance networks.