Coevolution of Governance and Networks: Governance Economization and Value Creation as Drivers of Network Evolution

Abstract

This study examines the coevolution of inter-firm networks and the choices that firms make about governance. Prior studies on inter-firm networks and alliances have provided insights into how networks shape firms’ decisions about organizational governance. This stream of research has focused on the impact of networks on governance without fully incorporating the impact of governance on networks. This research fills the gap by examining how network evolution is shaped by firms’ actions to economize on transaction costs and maximize value creation and value capture. Through simulation experiments, this study shows that exchange conditions such as asset specificity and resource heterogeneity dictate how social capital is developed, and thus determine the coevolutionary paths of governance and networks. Implications for the network and governance literature are discussed.

Keywords: coevolution, networks, organizational governance, exchange conditions, asset specificity, resource heterogeneity, simulation, model

JEL Classification: M10