A Contingency Model of Centrality, Competition and Performance

Shao-Tzu Wu

Contact: shaotzu.wu@gmail.com

Traditional network studies argued that firms whose relationships allow them to occupy more central positions can enjoy superior performance, because they can access to better strategic resources and opportunities than peripheral actors. However, more recently, network researchers have moved on to the question of central positions sometimes place central actors at a disadvantage, because central actors need to bear the burden of maintaining relationships and are constrained by others. Based on these two contradictory arguments, this study finds that there is an inverted U-shaped curve between centrality and firm performance. In short, at low level, an increase in centrality improves firm performance, but, after a certain threshold, further increase in centrality are more likely to hinder firms’ ability to enhance the growth of performance. Therefore, a moderate degree of centrality can create the best performance. I believe that carefully choosing partners, instead of blindly building connections with everyone, is a better way to pursue high performance. In continuation, in diversified or multinational business groups, both collaborative and competitive relationships exist among group members. However, how does one group affiliate obtain resources and knowledge from sister affiliates through collaborative ties, while at the same time, achieve better performance through competing with sister affiliates? This issue not only presents a test on the wisdom of subsidiaries’ supervisors, but also a great challenge for top executives in the parent firm. When a group affiliate possesses network centrality, as well as high competitiveness with sister affiliate, network centrality and competitions then present two opposing forces on financial performance. So how would competition affect the relationship between centrality and performance or further transform this relationship? This study is aiming to explore it. Empirical results show that market competition and resource competition both have negative effects on the curvilinear relationship. When a focal firm competes fiercely with sister firms, it will reduce the benefits brought by an increase in network centrality and may also accelerate the speed of decline in performance due to a redundant amount of connections. The contributions made to the theory is that this study attempts to find out moderating effects of curvilinear relationships and assists readers in understanding the relationship via moderating effect diagrams. Additionally, due to the difficulty of collecting internal data, most business group studies use visible ties (such as cross-shareholding or interlocking board) to do empirical analysis. However, many scholars still encourage researchers to collect data on invisible tie to contribute to relevant literature. In addition, McDonald and Westphal (2003) argue that it is quite difficult to collect top managers’ advice network data, so there is a methodological contribution if researchers can collect this data and has high response rate. Therefore, I do my best to collect data about top executives’ advice network, interfirm transactions, and interfirm personnel flow, hoping to contribute to methodology.

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