Uzzi 1996

THE SOURCES AND CONSEQUENCES OF EMBEDDEDNESS FOR THE ECONOMIC PERFORMANCE OF ORGANIZATIONS: THE NETWORK EFFECT

Scheme 

How embeddedness and network structure affect economic action 

-> The concept of embeddedness beyond the level of a programmatic

Statement 

Theory and original ethnographies of 23 apparel firm 

-> A systematic scheme

Test 

A set of refutable implications and test their plausibility 

-> Another data set on the network ties of all better dress apparel firms in the New York apparel economy

Result 

1) Embeddedness is an exchange system with unique opportunities relative to markets

2) Firms organized in networks have higher survival chances than do firms which maintain arm's-length market relationship

+ A threshold effect

* Introduction

How social structure assists or impedes economic performance

The competitive advantage of social forms of the organization relative to market-based exchange systems (Powell 1990; Inzerilli 1991; Perrow 1992).

Embeddedness: the process by which social relations shape economic action in ways that some mainstream economic schemes overlook or misspecify when they assume that social ties affect economic behavior only minimally or, in some stringent accounts, reduce the efficiency of the price system (Granovetter 1985; Crosby and Stephens 1987).

Concretely how social ties affect the economic outcome?

A scheme that specifies how embeddedness and network structure affect economic behavior

1) A scheme based on existing theory and original ethnographic analysis that describes the features, functions, and sources of embeddedness. 

2)Derive refutable implications and statistically test their plausibility using another data set on network ties among "better dress" firms in the New York apparel economy

Organizational networks operate in an embedded logic of exchange 

(+) Promotes economic performance through interfirm resource pooling, cooperation, and coordinated adaptation 

(-) but that also can derail performance by sealing off firms in the network from new information or opportunities that exist outside the network

-> Threshold

1) I concentrate on the concept of structural embeddedness that concerns the material quality and structure of ties among actors.

2) I examine organization performance by comparing firms that operate in organization networks with those that operate in arm's-length markets.

New York's apparel industry: Because of the low barriers to entry, the low start-up costs, the low search costs, and the many substitutable shops, this industry approximates the ideal conditions under which atomistic market exchange relationships should be most successful relative to alternate forms of organization (Roberts 1989; Wilson 1989; McLean and Padgett forthcoming).

1) This research uses data on the modern apparel industry, which is multicultural and populated by a diverse group of degree-holding management and marketing professionals (Waldinger 1986).

2) Another advantage of these data is that the departmental biases that can distort interviewee's views in complex firms were partly controlled because the CEOs and management personnel whom I interviewed were involved in all key aspects of the business.

3) Finally, the analysis combines the strengths of ethnography and the statistical analysis of large sample network data to examine the effects of tie content and structure on economic performance.

THEORY: TOWARD A STRUCTURAL EMBEDDEDNESS APPROACH

The structure and quality of social ties among firms shape economic action by creating unique opportunities and access to those opportunities

1) The type of network defines the opportunities potentially available

2) Its position in that structure and the types of interfirm ties it maintains define its access to those opportunities

Loose collections of firms: At one extreme, interfirm networks may be composed of loose collections of firms. These structures resemble prototypical markets and tend to be impersonal, diffuse, and shifting in membership (Baker 1990). 

Close-knit groups of firms: At the other extreme, networks are composed of finite, close-knit groups of firms.

When firms keep arm's-length ties with one another, the pattern of exchanges produces a market-like structure; 

When they maintain embedded ties, the pattern of exchange produces a network (Powell 1990).

The logic of exchange differs from the logic of markets

The level of embeddedness in an exchange system produces opportunities and constraints that are particular to network forms of organizations and that result in outcomes not predicted by standard economic explanations.

The Problem of Embeddedness in Markets and Networks

Network -> Trust reduces transactional uncertainty and creates opportunity

Identity in embedded relationships -> Assigns a value to the transaction and enriches the social capital

Network -> Transfers tacit knowledge 

Integration mechanism -> Solve problems of coordination and adaptation

-> Interfirm networks facilitate the creation of important economic outcomes. 

Nonetheless, the mechanisms that produce these benefits are vaguely specified and empirically still incipient (Powell 1990).

ETHNOGRAPHIC FIELDWORK

Sample

An ethnographic study

I interviewed the CEOs and select staff members off 23 New York-based apparel firms with annual sales between $500,000 and $1 billion

A total of 117 hours of interviews were completed with 43 persons.

Methods

on the basis of a stratified random sampling procedure

UoA: the interfirm relationship was the unit of analysis

Enables the researcher to understand the causes, consequences, and mechanisms by which social structure affects economic outcomes, and provides a rich source of data for generating specific, testable hypotheses

Findings: The Features and Functions of Embedded Ties

Interviewees believed that the content and structure of ties among firms directly affected social and economic behavior, 

An actor's level of embeddedness varied from low to high depending on the type of interfirm ties he or she maintained, 

The different accounts of exchange relationships could be defined accurately by two elementary forms of exchange, which interviewees referred to as "market" or "arm's-length" relationships and "special" or "close" relationships

# The arm's length principle (ALP, 독립기업의 원칙/獨立企業原則) refers to the global principle that transfer prices (이전가격/移轉價格) shall be established based on analysis of pricing in comparable transactions between two or more unrelated parties dealing at arm’s length. The OECD has published guidelines based on the arm's length principle,[1] which are followed, in whole or in part, by many of its member countries in adopting rules.[2] [One sentence tip] 독립기업의 원칙이란 이전가격 여부를 판정함에 있어서 아무런 특수관계가 없는 기업과의 거래조건을 기준으로 하는 원칙을 말한다.

Embedded ties perform unique functions and have three features: 

(1) Trust, (2) Fine-grained information transfer, and (3) Joint problem-solving arrangements

1) Trust acted as the governance mechanism of embedded relationships

Resource: It facilitated the exchange of resources and information that are crucial for high performance but are difficult to value and transfer via market ties

# How trust enables and facilitates the inter-firm, out boundary relationships

Govern: It promotes voluntary, non-obligating exchanges of assets and services between actors

# Stake = Reputation

2) Information exchange in embedded ties is more proprietary and more tacit than the information exchanged at arm's-length

It includes strategic and tacit know-how that boosts a firm's transactional efficacy and responsiveness to the environment

+ (Information asymmetries or asset specificity): The identity of the individuals and the quality of their social ties are as important as the information itself

Not only increases the transfer of information but also makes it interpretable and valuable

3) I found that embedded ties entail joint problem-solving arrangements that enable actors to coordinate functions and work out problems "on the fly."

Supplant the simple exit/stay response of markets by enabling actors to work through problems on the fly and to innovate

The Formation of Embedded Networks and Behavioral Outcomes

How do embedded ties develop the characteristics discussed above and combine into networks of organizations?

I found that embedded ties develop primarily from (1) third-party referral networks and (2) previous personal relations which

(1) set expectations for trust between newly introduced actors and 

(2) equip the new economic exchange with resources from preexisting embedded ties.

 # Simmel tertious garden

Process of change

With this initial set of expectations and resources, an arm's-length tie tends to be recast into an embedded tie if a trial period of reciprocal exchange results in voluntary contributions of new resources to the relationship and in a concretizing of cooperative expectations

# Co-opted?

Both referral networks and previous personal ties facilitate the rise of embedded ties by applying opportunities and expectations from preexisting embedded relations to new relationships and situations.

(1)

He or she (1) transfers expectations of behavior from the existing embedded relationship to the newly matched firms, and (2) "calls on" the reciprocity "owed" him or her by one exchange partner and transfers it to the other.

(2)

Like third-party referral networks, previous ties enable resources and open-handed expectations from an existing relationship to be engaged in a new relationship or to elaborate the multiplexity of the relationship

Surprisingly, the use of generalized reputation (i.e., market knowledge of another firm's typical behavior) to match new firms were also less common than expected because reputations were viewed as elusive and contradictory by business people in this industry.

The weak effect of reputation appeared to result from the high turnover of firms, the size, and diversity of the market, and the prevalence of contradictory information, which made reputations difficult to build and signal. 

This result reinforced the finding that embeddedness was difficult to develop in the absence of a patterned social structure that interpreted mixed signals and transferred beliefs, values, and resources among firms.

# Trust is not reputation

A causal order. The findings suggest that a "primed" relationship develops into ongoing embedded ties in stages that begin with the initial stock of trust appropriated from a preexisting social relation.

Exchange -> Trust -> Transfer of fine-grained information -> Less search for alternative information sources or exchange partners (1. Acquisition of information is costly, 2. Information from the trust is better) -> Joint problem-solving

A key behavioral consequence of embeddedness is that it becomes separate from the narrow economic goals that originally constituted the exchange and generates outcomes that are independent of the narrow economic interests of the relationship.

The above case demonstrates that once embedded relationships form, firms continue to cooperate even after the endgame obtains.

They enhance organizational survival through resource sharing and commitment that is born from a concern for finding positive-sum outcomes and supported by embedded ties.

Structuration. The significant structural shift due to the constitution of embedded ties is that the original market of impersonal transactions becomes concentrated and exclusive between sets of partners, forming networks of organizations.

Links together multiple dyads into a network composed of embedded ties

How the formation of a network indicates and reinforces embeddedness

Embeddedness cannot be developed in atomistic relationships

Summary

Embeddedness is a unique logic of exchange

Unit of analysis is the nature of the social relationship between and among exchange partners

Embedded ties promote, and enable the greatest access to, certain kinds of Embedded ties promote, and enable the greatest access to, certain kinds of exchanges that are particularly beneficial for reducing monitoring costs, quickening decision-making, and enhancing organizational learning and adaptation

These benefits not only accrue to the individual firms of a network connected via embedded ties, but to the network as a whole, which also acts as a social boundary of demarcation around these unique resources.

Consequently, knowledge of a firm's embeddedness-its position in a network, the quality of its ties to network partners, and the structure of the network- provide the basis on which to make predictions about organizational performance and capability, both positive and negative.

EMBEDDEDNESS AND ORGANIZATIONAL PERFORMANCE

The association between (1) embeddedness and production market structure and (2) embeddedness and organization performance

Networks, Embeddedness, and Production Market Structure

Several theories argue that the most competitive form of organization will predominate in a distribution of similar organizations (Hannan and Freeman 1989; North 1990).

Embedded networks of organizations achieve certain competitive advantages over market arrangements, even in product markets with many substitutable shops and low search and start-up costs.

Production markets should be characterized by networks of organizations rather than by loose dispersions of unitary firms.

White's (1981) theory of market

Dense networks of social ties exist for reasons that complement my own

Markets are primarily viewed not as price determining mechanisms, but as devices that link firms through signaling and direct communication because most firms have the ability to match their production schedules to their production costs with greater accuracy than they can forecast matches between supply and demand based on abstract price information

"Markets are tangible cliques of producers watching each other. Pressure from the buyer side creates a mirror in which producers see themselves, not consumers" (White 1981: 543)

Consequently, successful producers best manage production by examining the prior performance of their collaborators and competitors, rather than market data

H1: Competitive production markets will be characterized by embedded networks of organizations rather than by an atomistic mass of discrete firms.

Network Effects and Economic Performance: A Focus on Organization Survival

The basic premise of the structural embeddedness approach-that embeddedness is an opportunity structure-suggests that two conditions specify the relationship between embeddedness and economic performance.

(1) How a firm is linked to its network. This condition determines an organization's access to the benefits circulating in the network. 

(2) The second condition concerns the level of benefits apportioned in the network and is set by the kind of network structure to which the focal firm is tied.

How a firm should be connected to its network to tap the benefits of embeddedness: H2, H3

# Organizations as a society -> Status

# There was no inner allocation of resources in structural autonomy

# Embeddedness complement the gap

H2: Organizations tied to network partners by embedded, as opposed to arm's-length, ties increase their probability of survival.

# What is the unit of analysis? Group of organizations?

# With direct ties

Business groups are a particular kind of organizational network that tends to be composed of independent firms that are linked by ties of friendship, family, or shared equity, but are not controlled formally by a legal or administrative entity (Granovetter 1994).

# It is a business group

This form of embeddedness is related to the above type, on which I concentrate on this paper, but varies from it in that the firms in the network are not necessarily linked by resource exchanges.

H3: Organizations increase their likelihood of survival when linked to a business group network formed around embedded ties.

# Even without ties

# What is embedded tie? Network closure, Clique?

The kind of network that is likely to contain the most benefit: H4

How the performance benefits of embeddedness can reverse themselves under certain conditions

Embeddedness - A threshold -> Clique (less flow of new or innovative information)

1) There are few nonredundant links to outside members who potentially could introduce new ideas into the network (Burt 1992).

# Extent of what?

Over time, isomorphic processes can also decrease network diversity and increase organizational inertia so that change is difficult and costly for network partners (Hannan and Freeman 1989).

2) In highly embedded networks, feelings of obligation, friendship, or betrayal may also be so intense that emotions override eco- nomic imperatives

I hypothesize that a theoretic optimum between the countervailing effects of under- and over-embeddedness exists when a network is composed of a mixture of arm's-length and embedded ties

# Under v.s. Over

On one hand, networks constituted of embedded ties benefit from the trust, joint problem solving, and thick information exchange, which enhance coordination and resource sharing. 

On the other hand, networks composed of arm's- length ties have wide access to information circulating in the market and an enlarged ability to test new trading partners.

H4: The probability of organization survival increases as the network with which the focal firm transacts tends toward an integrated network of embedded and arm's- length ties; conversely, the probability of organizational survival decreases as the network with which the focal firm transacts tend toward (1) all arm's-length ties or (2) all embedded ties.

DATA AND METHODS

Data on the network ties among all better dress apparel firms in the New York apparel economy were obtained from the International Ladies Garment Workers Union, which keeps records on the volume of exchanges between contractors and manufacturers (see Uzzi 1993).

(1) firm-to-firm resource exchanges, (2) business group membership, and (3) a company's product lines, age, size of employment, and location

Network exchange data was available from the beginning of the second quarter of 1990 to the end of 1991 for union firms only and did not specify the date for individual trans- actions-it was only known that a specific percentage of firm's exchanges was due to each of its network partner. Over 80 percent of New York's better dress firms are unionized; nonunion firms typically are illegal shops evading taxes and labor laws (Waldinger 1989).

One issue concerns the modeling of the causes of failure before the year of observation because it is likely that the causes of survival are a function of characteristics that existed before that year

I include controls for the main predictors of survival, which have been found to capture the effects of prior organization characteristics: Organizational age, size, and geographic location

It could be that surviving firms have embedded ties because they are regarded as economically reliable enough to gain business, not because embedded ties help them to adapt.

First, the ethnographic data help to untangle competing interpretations of the direction of causality.

Second, the possibility that the results spurious reflect economic stability rather than the social determinants of survival is reduced insofar as the age and/or size of an organization measures stability (Hannan and Freeman 1989).

Third, my argument turns on the distribution of exchanges, not on the absolute volume of a firm's business.

# Highly competitive industry's failure rate: 125/484 failed

DV

I modeled a firm's likelihood of failure during the period 1991 using logit analysis

If a firm failed between January 1, 1991 and December 31, 1991 it was coded as 1; 0, otherwise.

The logit analysis models the survival likelihood of contractor firms only because only 8 of 89 manufacutrers closed in 1991 

IV

1) First-order network coupling: Summation of the squared proportion of work done by a contractor for each of its manufacturers

The degree to which a firm uses the embedded tie to its network # Contractor as main 

Firms that concentrate their exchanges with a few trading partners 

1: Concentrated / 0: Sparse (H2)

2) Social capital embeddedness

Coded 1 if a contractor has network ties to a business group (defined above); 0 otherwise. (H3)

3) Second-order network coupling: the degree to which a focal firm's network partners maintain arm's-length or embedded ties with their network partners (H4)

- 0: Arm's length tie ~ Medium: Integrated network composed of mix ~ 1: Embedded tie

# manufacturer

Control variables

Network size: size of the focal firm's network

~ The number of manufacturers a contractor worked for during the observation period

Network centrality: indirect ties to structurally equivalent actors

~ A number of indirect ties (Knoke and Burt 1983) and equals the number of indirect ties of the focal contractor;

Organization age

~ The number of years a contractor has been in business and is based on the date when the firm is organized

Organization size

~ The number of unionized workers in the contractor's factory during 1991

# No sales data # if controlled

Ecological and economic model variable

1) Generalist 

~ a binary variable equal to 1 if a contractor makes multiple products (e.g., dresses and pants); 0 otherwise.

2) Region

Manhattan, Brooklyn/the Bronx, and outside New York City (Queens, New Jersey, Pennsylvania) based on cost differences in these re- gions.

RESULTS

Production Market Structure

Figure 1 shows the cumulative distribution of trading ties for all better dress firms in the New York regional economy from the second quarter of 1990 to the end of 1991.

Figure 1 suggests that the market structure of the garment economy is composed mostly of arm's-length ties.

# Contractors have more concentrated ties than Manufacturers

# Status Differences

Figure 2 displays the distribution of principal ties and suggests that embeddedness is an important component of interfirm exchanges for some companies (i.e., the exchange ties accounting for the highest percentage of a firm's business)

These results suggest that although most firms use arm's- length ties routinely, a major portion of their business is managed through the use embedded ties.

Organization Performance: Multivariate Analyses

DISCUSSION

Embeddedness is a logic of exchange that shapes motives and expectations and promotes coordinated adaptation

Actors do not selfishly pursue immediate gains but concentrate on cultivating long-term cooperative relationships that have both individual and collective level benefits for learning, risk-sharing, investment, and speeding products to market.

# Relation itself becomes a goal

These actions and motives are not assumed to be due to the hard-wired orientation of economic actors or conformity to abstract norms, but to the emergent properties of concrete network relationships

# Network -> Embeddedness

How social relations promote thick information exchange, rapid and heuristic decision-making, and the search for positive-sum outcomes

<-> Self-interest maximization, generalized reputation, and repeated-gaming

The network acts as a social boundary of demarcation around opportunities that are assembled from the embedded ties that define membership and enrich the network

An actor's level of embeddedness and attendant performance capabilities depend on the type of ties it uses to connect to its network partners as well as the type of ties used by firms in its network

Field-work

1) Arm's-length and embedded ties are distinct forms of exchange and that embedded ties can produce competitive advantages that are difficult to emulate with arm's- length tie

2) Embedded ties develop through stages, beginning when existing embedded ties match up new exchange partners. In such cases, go-betweens with embedded ties to actors previously unknown to one another prime the relationship between those newly introduced actors for embeddedness by setting expectations for trust and reciprocity and by equip- ping it with resources that are "rolled over" from the go-between's existing embedded tie to one of the new network partners (Structure + Agency)

Statistical analysis

1) the distribution of organizational forms found in this sample suggests that industries are complex structures composed of multiple, simultaneously coexisting modes of organizing rather than unitary structures consisting wholly of either market, hierarchies, or networks.

-> If firms choose between embedded and arm's-length competitive strategies, these results raise significant questions as to what determines the choice of a strategy and under what conditions a particular strategy creates benefits for individual firms and for society

# DV Form ~ Firm-level attribute

2) Embeddedness increases economic effectiveness along a number of dimensions that are crucial to competitiveness in global economy-organizational learning, risk-sharing, and speed-to-market

3) Embeddedness, however, yields positive returns only up to a threshold point. Once this threshold is crossed, returns from embeddedness become negative.

3-1) How a firm links to its network partners. 

Firms that connect to their networks by embedded ties have greater chances of survival

3-2) The kind of network to which a firm links itself

In this case, a paradox appears: Optimal networks are not composed of either all embed- ded ties or all arm's-length ties, but integrate the two

Embedded networks offer a competitive form of organizing but possess their own pitfalls because an actor's adaptive capacity is determined by a web of ties, some of which lie beyond his or her direct influence

# Web of ties? Controlled by network size?

Limitation

One alternative interpretation of the results is that the association between embeddedness and survival reflects a correlation between large, stable orders and survival, not the effect of social ties on survival

Seems unlikely for several reasons. 

1) controlling for age, a prime indicator of economic stability (Hannan and Freeman 1989), does not lessen the embeddedness effect

2) the effect of embeddedness over firm size and network size variables-controls for order size and capacity-suggests that the embeddedness effects are net of an association between order size and survival

3) because order size is controlled, my interpretation is further supported because it appears that the important factor is how social ties are distributed across a firm's total business, not whether a firm's order sizes are large or small in an absolute sense.

4) given that the ties of a firm's partners matter (i.e., second-order network coupling), it is difficult to argue that exchange intensity indicates the effect of order size because alternative approaches offer no explanation for the association between these kinds of network effects and performance

5) respondents felt that embedded ties were indicated by concentrated exchange networks.

Future

How ethnicity, organization size, and the fashion sensitivity of markets condition the function and origin of network forms

How the institutional and cultural underpinnings of society, first examined by Weber ([1920] 1958) in The Protestant Ethic and the Spirit of Capitalism, construct the values and beliefs that shape economic life

	Manufacturers	Contractors
# of firms in sample	91	504
Reliance on principle partner	50% send 25%+ to principal	15% send 100% to principal; 45% send 50%+ to principal
Exchanges that account for 10% or less of total business	80%	55%

* An interesting table made by Pai