Opportunities or Constraints: The Role of Network Closure in Interorganizational Reciprocity

Lisha Liu

Contact: liulisharuc@gmail.com

A large amount of interorganizational cooperation occurs in the form of temporary and informal arrangements between pairs of organizations. Without formally structured arrangements, the more successful rules of conduct are based on reciprocity and balanced exchange rather than on bounded self-interest in a market or effective control in a hierarchy. This study examines the effects of network closure on interorganizational reciprocity. It investigates two levels of network closure, local-level common third parties and group-level network density, which in the network governance literature are both expected to boost cooperation and yet have opposite effects on dyadic reciprocity. I suggest that the key to understand the divergent effects is whether organizations view their network surroundings as opportunities or constraints. Common third parties are negatively linked to dyadic reciprocity. It can be explained by the opportunities provided by the common third parties for actors in the focal dyad to leverage against their existing partner. It is the more powerful actor in the dyad that can utilize the opportunities as it can attract and obtain assistance from the common third parties. By contrast, group-level network closure facilitates dyadic reciprocity by putting constraints on the focal actors and safeguarding the norm of reciprocity. I test the effects of network closure on dyadic reciprocity in an empirical setting of intercorporate loan guarantees between Chinese publicly listed firms during the period 2008-2016. Direct reciprocity is vital in incentivizing and maintaining this type of interorganizational exchanges as there are no formal institutions ensuring cooperation. The analysis of reciprocity in this setting reveals the opposite effects of local and group-level network closure on dyadic reciprocity: firms are less likely to reciprocate their partners when there are common third parties but more likely to reciprocate when they are in a denser group. I present analytical extensions to validate my interpretations of the effects of network closure. To test the mechanism that common third parties provide opportunities for actors to leverage against the existing partners, I conducted an additional analysis that shows only the relatively more powerful actor in the focal dyad becomes less likely to reciprocate its partner when they have more common third parties. To examine the effect of social sanctions on promoting dyadic reciprocity, I tested the influence of a failure of reciprocity on receiving loan guarantees from fellow group members and the moderating effect of group density. The results provide evidence that firms in denser networks experience bigger losses of received loan guarantees after they violate the norm of reciprocity. I concluded that organizations’ decisions on cooperation with exchange partners are influenced by their interpretations of the surrounding interorganizational network.

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