Embedding Search in Interfirm Networks: Investment Patterns in the U.S. Venture Capital Industry

• In Event: 342 - Regular Session. Organizations: Network Comparisons and Economic Outcomes

Abstract

This paper examines how a firm’s search for new business domains are embedded in existing interfirm relationships. A firm’s search for a new domain is constrained by the lack of knowledge in the domain and resultant domain-specific uncertainty. Interfirm networks, as a venue of vicarious learning among partners, reduce such domain-specific uncertainty by sharing knowledge derived from its collaboration experience. Thus, we suggest that a firm’s explorative search be directed towards the domains in which their collaborators have experience. Investigating the empirical context of the U.S. venture capital firms, we find that VC firms’ search for unfamiliar or new business domains are sorted into those in which their network partners have already made investment. This explorative search directed towards network partners’ experience is especially salient in the absence of non-collaborators in the domain as well as in the unfashionable domain. This paper suggests that interfirm networks place structural constraints that bound a firm subsequent search behavior.

Authors

• Young-Choon Kim, Ulsan National Institute of Science and Technology

• Alexey Makarevich, Stanford University