INTERPRETING THE RELATIONSHIPS BETWEEN NETWORK CLOSURE AND FIRMS’ COMPETITIVE ADVANTAGES: A KNOWLEDGE-BASED PERSPECTIVE WANG XIAOYANG NATIONAL UNIVERSITY OF SINGAPORE 2007 INTERPRETING THE RELATIONSHIPS BETWEEN NETWORK CLOSURE AND FIRMS’ COMPETITIVE ADVANTAGES: A KNOWLEDGE-BASED PERSPECTIVE WANG XIAOYANG (B. Eng. Tsinghua Univ., M. Sc. Tsinghua Univ.) A THESIS SUBMITTED FOR THE DEGREE OF DOCTOR OF PHILOSOPHY DEPARTMENT OF INDUSTRIAL AND SYSTEMS ENGINEERING NATIONAL UNIVERSITY OF SINGAPORE 2007 Acknowledgements I am deeply grateful to my supervisor, Dr. Chai Kah-hin, not only for his suggestions and advice which were critical to the preparation of this manuscript, but also his emotional support and encouragement throughout the project. I also wish to express gratitude to my co-supervisor, Dr. Yap Chee-Meng, for his sharp opinions and input in both research topics and methodologies. I want to further thank members of my research group, in particular Foong Hing Wih (Awie), Xin Yan, Lin Jun, Wang Qi, Chang Hongling, Xing Yufeng (Esther), Yu Dan, Ulf Andreas Hamster, and colleagues from business school, in particular Dr. Lim Kwanghui, Dr. Soh Pek-Hooi, Manathattai S. Annapoornima (Poornima), Ruan Yi (Annie), Zhuang Wenyue, for their valuable suggestions and feedback. I extend thanks to project collaborators in China, in particular Dr. Wu Jinxi, Professor Gao Xudong (Tsinghua University), Dr. Yu Jiang (China Academy of Science), and collaborators in Taiwan, in particular Professor Liu Shang-Jyh, Chu Mei-Tai (Debbie) (National Chiao Tung University), for their valuable suggestions and kind help in administering large scale survey. I also show my gratitude to the many anonymous industrial association staff, practitioners, interviewees, and friends, for their support and valuable opinions. Finally, I would like to thank my wife, Guo Yan (Helen), and my parents, for their understanding during this most memorable period of time in my life. -i- Table of Content Acknowledgements i Table of Content . ii Summary v List of Tables viii List of figures x Chapter Introduction 1.1 1.2 1.3 Research background . Research objective . Structure of the dissertation Chapter Literature Review . 2.1 2.2 2.2.1 2.2.2 2.2.3 2.2.4 2.2.5 2.2.6 2.3 2.3.1 2.3.2 2.3.3 2.4 2.4.1 2.4.2 2.4.3 2.5 2.6 Chapter Introduction Organizational learning literature . Introduction to organizational learning . Firm-level interorganizational learning . Interorganizational learning through strategic alliance 10 Nexus between interorganizational learning and internal organizational learning 14 Knowledge attributes and its relevance to interorganizational learning . 16 Summary of organizational learning review 20 Social network literature 22 Contradictory results from studies combining organizational learning with social network theories 22 Recent efforts devoted to reconcile the contradictions and further gaps . 26 Summary of social network review . 27 Absorptive capacity 27 Classical absorptive capacity model 28 Advanced absorptive capacity models . 30 Summary of absorptive capacity review . 32 Conclusion . 32 Research questions . 33 Hypotheses Development . 36 3.1 3.2 3.2.1 3.2.2 3.2.3 3.2.4 3.2.5 3.3 3.3.1 3.3.2 3.3.3 Introduction 36 Preliminary case study and interviews . 36 Background of the case study . 36 Data collection . 37 Discussion of preliminary findings . 38 Additional interviews in other companies 47 Summary of findings from preliminary case study and interviews . 49 Hypotheses developed from existing literature 50 Working definitions of network structure, interorganizational learning and competitive advantages 50 Predicting direct effects – the impacts of social network structure on interorganizational learning and protection 52 Predicting direct effects – from learning and protection to competitive - ii - 3.3.4 3.3.5 3.4 Chapter Survey Instrument Development and Implementation . 69 4.1 4.2 4.2.1 4.2.2 4.2.3 4.3 4.3.1 4.3.2 4.3.3 4.3.4 4.3.5 4.3.6 4.4 4.4.1 4.4.2 4.5 Chapter 5.2.1 5.2.2 5.3 5.3.1 5.3.2 5.3.3 5.4 5.4.1 5.4.2 5.4.3 5.5 5.5.1 5.5.2 5.5.3 5.5.4 5.6 Introduction 96 Data Bias Analysis . 96 Non-response bias analysis 96 Excluding potential biases caused by different collection methods . 100 Descriptive Analysis 102 Firm size . 102 Ownership 103 Position and years of experience . 104 Measurement Models . 106 Choosing PLS as the analytical method . 106 Factor analysis and item reliability . 110 Convergent validity and discriminant validity . 117 Structural Models . 120 Testing direct effects by bootstrapping . 120 The mediating effects between NETDENS and COMPADV . 125 The moderating effects of SOCIINTE and ENVIDYNA 130 Analysis of different dimensions of formative structures 139 Summary 141 Discussion and Conclusions . 143 6.1 6.2 6.2.1 6.2.2 6.2.3 6.2.4 6.2.5 6.2.6 6.3 Introduction 69 Sampling Strategy 69 Network Type Selection 69 Defining Ties 70 Choosing industries 72 Questionnaire Design . 77 Measures: Outcome variables 77 Measures: Predictor variables . 80 Measurement variables: Network Variables 82 Measures: Moderating variables: 85 Measures: Control variables: . 86 Summary of definitions of the constructs . 86 Survey Implementation 88 Reverse translation issues and pre-test of the questionnaire . 88 Survey administration 89 Summary 94 Data Analysis . 96 5.1 5.2 Chapter advantages . 56 The mediating effects of knowledge identification and protection . 61 The moderating effects of social integration and environmental dynamics . 62 Summary 66 Introduction 143 Discussion of research findings . 143 Findings about the impacts of network density on learning process and knowledge protection . 143 Findings about the antecedents of firm’s competitive advantages . 144 Findings about the mediating effects of knowledge identification and protection . 145 Findings about the moderating effects . 146 Findings about the differences between the two industries 150 Summary of findings . 151 Implications of the study 151 - iii - 6.3.1 6.3.2 6.4 6.5 Implications for research . 151 Implications for practice 153 Limitations of the study and further directions 156 Conclusions 159 Appendix A: References . 161 Appendix B: Questionnaire (Cover letter) Appendix C:Questionnaire (English version) Appendix D:Questionnaire (Chinese version) - iv - Summary With the expansion of the knowledge bases of products/services, the sources of such expertise are becoming more widely dispersed outside a firm’s boundary. The current study aimed to examine a set of practical questions raised under such circumstances with regard to how firms operating in network environments could learn from their partner firms while protecting their core knowledge. Specifically, literature in organizational learning and social networks were reviewed. Several gaps were identified. Firstly, literature in organizational learning is limited to addressing the learning and protection dilemma only at dyadic level while the nexus between internal learning and external learning remains under-explored. Secondly, social network theories are inadequately incorporated with organizational learning and knowledge management studies. More often than not, existing studies applied social network theories only to a fraction of the overall learning process and a fine-grained examination has yet to be conducted. Realizing the importance of network structures for interorganizational learning under such network environment, a set of research questions was raised as below: 1) What are the impacts of network structures on a firm’s interorganizational learning process and knowledge protection? 2) What are the effects of interorganizational learning and knowledge protection on a firm’s competitive advantage? 3) What are the contingency factors that differentiate firms’ interorganizational learning outcomes? Based on literature inputs as well as empirical knowledge obtained from a preliminary -v- case study and a few complementary interviews, the current study synthesized the previous two literature bodies by establishing the mediating role of interorganizational learning and knowledge protection process between network closure and firms’ competitive advantages. It is hypothesized that network closure has both positive and negative impacts on different stages of interorganizational learning and knowledge protection process, and hence further affect the focal firm’s competitive advantages. In addition, internal social integration mechanism was hypothesized as the moderating factor that affects individual firms’ learning outcomes, and environmental dynamics was hypothesized as the moderating factor that affects the relative importance of knowledge identification and protection for enhancing the focal firm’s competitive advantages. Large scale surveys in petrochemical industry (in mainland China) and semiconductor industry (in Taiwan) were conducted, and PLS analysis as implemented in PLS Graph 3.0 yielded statistical evidences in favor of the above hypotheses. Specifically, the current study revealed that network closure is positively associated with a firm’s capability in knowledge transfer and protection, but the close structure restrains a firm’s capability in knowledge identification. For firms operating in a dynamic environment and with low internal integration mechanisms a sparse network is recommended to exploit the flexibility in knowledge identification without suffering badly from knowledge leakage. While for firms operating in a stable environment with strong integration mechanism, a dense network configuration is more appropriate to leverage the interorganizational learning benefit and protect the firm’s core competencies. As such managers could purposely design and monitor their social network structure so as to maximize the interorganizational learning benefits while - vi - alleviating risks raised by knowledge leakage issues. - vii - List of Tables Table 3-1 Data sources of the case study . 38 Table 3-2 A description of Alpha’s interorganizational learning . 38 Table 3-3 Summary of preliminary interviews 48 Table 3-4 Summary of Hypotheses sets . 67 Table 4-1 Summary of interviews for choosing industries 73 Table 4-2 A summary of definitions of the constructs and corresponding measurement items 87 Table 5-1 Response status for the survey in three industries 97 Table 5-2 Non-response bias test for petrochemical and semiconductor industries . 98 Table 5-3 Descriptive statistics and Chi-square for mail-based and telephone interview-based samples 100 Table 5-4 Firm size stats . 102 Table 5-5 Distribution of ownership in mainland China and Taiwan samples . 103 Table 5-6 Descriptive data on informants’ position and years of experience . 105 Table 5-7 EFA for the three dimensions of COMPADV 110 Table 5-8 EFA for the three dimensions of COMPADV (after trimming) .111 Table 5-9 EFA for constructs with reflective indicators 112 Table 5-10 Environmental dynamics revisited 113 Table 5-11 EFA for constructs with reflective indicators (excluding ENVIDYNA) .115 Table 5-12 Loadings for all measurement items (petrochemical dataset) 116 Table 5-13 Loadings for all measurement items (semiconductor dataset) .117 Table 5-14 Measurement convergent validity 118 Table 5-15 Correlation between constructs (Petrochemical) .119 Table 5-16 Correlation between constructs (Semiconductor) 119 Table 5-17 Multi-collinearity tests for semiconductor industry 120 Table 5-18 Path coefficients and significance 121 Table 5-19 Results of hypotheses testing (direct effects) . 123 Table 5-20 Analysis of the dimensions of competitive advantage (petrochemical - viii - References Schilling, M., Steensma, H. 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(2002) ‘Absorptive capacity: a review, reconceptualization, and extension’, Academy of Management Review, Vol. 27(2), pp. 185-203 - 169 - Appendix B: Questionnaire (Cover letter) Department of Industrial and Systems Engineering National University of Singapore Not EVERY Partnership Makes You Stronger ——A Survey on the Health of Firm’s Social Network Dear Sir / Madam: We are writing to invite your company to participate in a study on the health of your firm’s social network with partners. This questionnaire is designed by researchers at the Industrial & Systems Engineering Dept., NUS, with collaboration from SEM, Tsinghua Univ. It aims to help firms evaluating the attribute of their social networks of technological partners and can provide firms with suggestions on how to extract more value from their network and avoid leaking core knowledge to competitors. The questionnaire contains parts (21 questions), the estimated complete time is 20 minutes. Introduction: 21st century is characterized by rapid introduction of new products and close collaboration among firms. It is well known to managers that partnership is crucial for firms’ survival and further development, however many managers are unclear about how to build a network of partnership that benefits their firm but at the same time avoiding the risk of leaking core technologies to partners. 20 21 Confidentiality: It’s safe for you to answer this questionnaire as: 1), you can use initials for partner names; 2), the questionnaire will be accessed and analyzed only by experts in Singapore; 3), our profession ensures the security of your information. Your benefits: For each valid returned questionnaire, we can provide accordingly a comprehensive report on the current condition of your technological social network, as well as suggestions on possible improvements for better knowledge exploitation and protection. Please not hesitate to contact us if you need further information. Your time and effort is greatly appreciated. Yours truly, Yours truly, Mr. Wang Xiaoyang Email: wangx@nus.edu.sg Dr. Chai Kah Hin, Email: iseckh@nus.edu.sg 21 Appendix C: Questionnaire (English version) Confidential Part I——Background information Please provide true, detailed information, so that we can provide you with timely feedback 1. Company name:_________________________________________________ 2. Number of employees: _______ 3. Last financial year’s turnover: RMB __________ K 4. Last finacial year’s expense in R&D activities: RMB __________ K 5. Your contact number ___________Fax___________ Email______________ 6. Your position (please tick accordingly): General Manager Chief Technical Officer Senior technical engineer 7. Dept. / Project Manager Others How long have you joined this company (please tick accordingly) > years – years – years < year Part II ——Social network information This part will help you list those firms that your firm has strong technical relationship with. For higher confidentiality, you can use initials/ pseudo names for your partners 8. Regarding to your last collaborative project and / or Initials of partner firms ongoing project with technical partners, please list three to four firm names that you have most intensive technical knowledge exchange 9. Please recall your most important technical partner relationships before this year, please list three to four names of firms that have played key roles in advancing your firm’s technology 10. Generally speaking, please list three to four names of firms that you have intense informal technical discussion / communication with 10 Kent Ridge Crescent, Singapore 119260 Tel: (65) 6874 1929 Fax: (65) 6777 1434 © Industrial & Systems Engineering, NUS Website: www.ise.nus.edu.sg -1- Confidential 11. Please rearrange firm names that you just filled in for question 8, and 10. Please copy them to the right lower corner of this page (under the ‘final list’), delete those repeated names. Do make sure there are no repeated names in the list. Finally take a look at the list, is there any important technical partners missing? Do you miss any technical relationships that have played a key role in advancing your firm’s business? If so please add these firms’ names to the end of the list (if there is no place available, please leave the list as it is). 12. Now we come to the most important part of the questionnaire, however it necessitate a little patience: please describe the relationships between all your close partners in the final list, ‘C’ for Close and ‘A’ for Arm’s length relationship. You can fill in the Triangle in this way: a) Start from the right-hand side (last column), from top to the bottom, please circle your estimation of the relationships between your first technical partners and all the rest firms. For instance, if you think the first firm has a strong technical relationship with the sixth, then just circle ‘C’ in the dotted box. b) Start to fill in the second last column, from top to the bottom, circle the relationship between 2nd firm and all the rests, etc. Relationship between 1st firm and others Relationship between 2nd firm and others ect. C-A Final list C-A C-A C-A C-A C-A C-A C-A C-A C-A C-A C-A C-A C-A C-A C-A C-A C-A C-A C-A C-A C-A C-A C-A C-A C – A C-A C -A C-A C-A C-A C-A C-A C-A C-A C-A C-A 10 C-A C-A C-A C-A C-A C-A C-A C-A 10, 10 Kent Ridge Crescent, Singapore 119260 Tel: (65) 6874 1929 Fax: (65) 6777 1434 © Industrial & Systems Engineering, NUS Website: www.ise.nus.edu.sg -2- Confidential Part III ——Internal knowledge sharing information: Congratulations! You have finished the most difficult part of the survey. Please take a rest; the following questions are quite straight forward, and you only need to circle numbers to represent your opinions Scale: Strongly disagree Disagree Slightly disagree Neutral Slightly agree Agree Strongly agree 13. Capabilities in identifying knowledge a) We can detect the latest technical trends within our industry b) We can track the latest technical trends in relevant industries c) When there are radical innovations / major breakthroughs within the industry, we are able to get to know them and estimate their impacts on our business 14. Capabilities in transferring knowledge a) Our partners are willing to share their technical knowledge b) It’s not difficult for partner firms to explain their technical knowledge to us c) Generally speaking, our knowledge source is reliable and usable d) We encourage our employees / teams to learn technical knowledge from our partners 15. Capabilities in internal social integration a) Our technical knowledge gatekeepers are willing to share acquired partner knowledge to other employees / departments. b) Our technical knowledge gatekeepers can effectively share acquired knowledge to other employees / departments c) We have policies to motivate internal technical knowledge sharing 10 Kent Ridge Crescent, Singapore 119260 Tel: (65) 6874 1929 Fax: (65) 6777 1434 © Industrial & Systems Engineering, NUS Website: www.ise.nus.edu.sg -3- Confidential 16. Capabilities in knowledge institutionalization a) We can apply newly acquired technical knowledge to our product lines b) We have successfully institutionalized partners’ technical knowledge, so that key employees’ turnover won’t affect our performance 17. Capabilities in knowledge protection a) Our company has been able to protect its core capabilities or skills from the partner b) Our company has been successful in protecting its crown jewels from being appropriated by the partner 18. Firm’s environmental dynamics a) In general, our company’s main products have a rather short life-cycle (e.g. to months) b) The technology in our industry is changing rapidly c) It’s very difficult to forecast where the technology in our industry will be in the future d) Our R&D activities cover a wide range of relevant areas Part IV——Evaluation on firm’s competitive advantage: This is the last part of the questionnaire, please evaluate your firm’s performance 19. Strategic flexibility a) We are able to derive benefits from diversity (e.g. diversified customer needs and partners) in the environment b) We are able to derive benefits from variability (e.g. fast new product introduction rate) in the environment c) We are able to manage macro-environmental risks (i.e. political, economic, and financial risks) 10 Kent Ridge Crescent, Singapore 119260 Tel: (65) 6874 1929 Fax: (65) 6777 1434 © Industrial & Systems Engineering, NUS Website: www.ise.nus.edu.sg -4- Confidential 20. Innovativeness a) We have more innovative products / processes than our competitors b) We tends to lead the industry in introducing new products / new processes and adopting new technologies 21. Performance a) Over the past year, our financial performance has been outstanding b) Over the past year, our financial performance has exceeds our competitors’ c) Over the last year, our sales growth has exceeded our competitors’ This is the end of questionnaire, thank you for your participation! Please check if there is any question left unanswered. If everything is ok please put this answer sheet into the enclosed envelop and mail it back to us. You will get the report and suggestions in weeks! 10 Kent Ridge Crescent, Singapore 119260 Tel: (65) 6874 1929 Fax: (65) 6777 1434 © Industrial & Systems Engineering, NUS Website: www.ise.nus.edu.sg -5- Appendix D: Questionnaire (Chinese version) —— _____________________________________________________ 1. 2. 3. _________ __________ 4. __________ 5. ______________ _____________ ____________________ 6. / _______________ 7. >5 3-5 1-3 [...]... issue For instance, Kale et al (2000) stated that “know-how… is generally more sticky, tacit, and difficult to codify than information and thus more resistant to easy transfer, both within and across firms , and “strong relational capital usually engenders close interaction between alliance partners and thus facilitate exchange and transfer of information and know-how across the alliance interface” (pp.221)... organizational learning and interorganizational learning, where they came from, and how to manage them Thirdly, knowledge attribute and its relationship with strategic alliance and organizational learning were neglected at the beginning (Daghfous, 2004), and efforts are needed to continuously track the advances in both streams of literature and further bridge them Fourthly, while much emphasis was devoted to knowledge. .. protection activities Other researchers have also referred to organizational learning by studying the links between network structures and innovation Shan et al (1994) argued that the more cooperative relationships a startup possessed, the greater the innovation output; and the wider the range a startup participated in, the greater the innovation output Such an observation was explained through the firm’s access... based on a single case study, which necessitates further construct validation and exploration of the framework 2.2.5 Knowledge attributes and its relevance to interorganizational learning The organizational learning literature has been further augmented by the advent of the now well-established knowledge management research stream” (Daghfous, 2004, pp.70), and the increasingly used knowledge- based perspective. .. which represent a more common situation where knowledge was not ready to be learnt and a certain amount of effort should be paid to ensure a stable and cooperative alliance Lubatkin et al (2001) highlighted that the reciprocal learning alliance was ideal for dealing with the mutual knowledge creation process, rather than the traditional knowledge transfer process And for partners whose core knowledge resided... 1996) While theories have began to converge for organizational learning, studies on interorganizational learning are arguably deviated from their origin, and the two theory bodies are living in partly separate worlds (Holmqvist, 2003) Traditionally, interorganizational learning had been regarded as a way of developing the organizational learning literature by conceptualising another unit of analysis (Holmqvist,... in a social context” and 4) learning “is organized by existing standard operating procedures, practices and other organizational rules” (pp.97) By comparing Crossan et al (1995) and Holmqvist (2003)’s work, it is clear that organizational learning literature begins to converge in agreeing that organizational learning is an individual -based, socially embedded, multi-level organizational cognitional and. .. Steensma and Corley, 2000) As a matter of fact, from a resource -based view the purpose of organizational learning is mainly concerned with knowledge accumulation tasks Gupta and Govingranjan (2000) disaggregated this accumulation process into knowledge creation, acquisition, and retention, which resembles Levinson and Asahi (1995)’s interorganizational learning procedures Basic concepts in Knowledge Management... boundaries, and as Crossan et al (1995), Larsson et al (1998), and Lane and Lubatkin (1998) have criticized, little attention was paid to learning dynamics that resided between organizations Interorganizational learning, a stream of literature derived from organizational learning but relatively separated from its origin (Holmqvist 2003), was examined in expectation of covering research gaps in organizational... organizational learning /interorganizational learning issues and social network studies Moreover, absorptive capacity was examined and highlighted separately since it depicts the firm’s capability in converting its social capitals and transforming them into tangible learning results Therefore absorptive capacity could be viewed as the nexus between the previous two main literature blocks 2.2 Organizational . INTERPRETING THE RELATIONSHIPS BETWEEN NETWORK CLOSURE AND FIRMS’ COMPETITIVE ADVANTAGES: A KNOWLEDGE-BASED PERSPECTIVE WANG XIAOYANG NATIONAL UNIVERSITY OF SINGAPORE 2007 INTERPRETING. INTERPRETING THE RELATIONSHIPS BETWEEN NETWORK CLOSURE AND FIRMS’ COMPETITIVE ADVANTAGES: A KNOWLEDGE-BASED PERSPECTIVE WANG XIAOYANG (B. Eng. Tsinghua Univ., M. Sc. Tsinghua Univ.) A THESIS. dilemma under the setting of dyadic strategic alliance. Kale et al. (2000) suggested that relational capital and conflict management could achieve learning and protection simultaneously. Oxley and