Inter-Firm Networking

Question 8: Discuss the strengths and weaknesses of inter-firm networks in relation to innovation (2508 words).

1. Introduction

Firms do not undertake innovation independently or in isolation. For successful innovation, they search for new sources of know-how. This enables them innovate new products and processes continuously. As a result, there are more dependencies between the firms in terms of new source of knowledge and technologies. They complement each other (Gilsing, 2005, p. 1). This essay will explore the various aspects of such dependency or inter-firm network in order to determine whether or not they become the strengths of the firms or they weaken them due to the inter-firm networking

2. Strenghts

Innovation processes comprise a considerable degree of interaction. Firms adopt a network approach, which reflects the interaction of the firms in respect to the innovation process (Schibany, Hämäläinen, & Schienstock, 2000). ’ Network is relevance in an environment where it is difficult to identify the firm or a group of firm that would develop new technologies or create a new innovation. An analysis of collaboration and firm networking projects uncertainties in the generation and shows new technologies are dispersed early (Freeman, 1991). The manner firms work in networks is subject to the particular circumstances and condition where the technical change and innovation operate. The particular circumstances and condition differ from on industry to another or across jurisdictions, which affect the firms’ behaviour. In this respect, innovation scholars, thus, argue that such behaviour is shaped by the relevant and existing conditions. It is path-dependent, which is prevalent at the firm and the network levels (Gilsing, 2005, p. 1).

Access to social capital and network capital. Firms in network have access to both the forms of capital. The former comprises the social relations and networks held by individuals. The latter comprises of the strategic and calculative relations and networks held by firms. The advantage of inter-firm networks is derived more from the social capital investment where firms can frequently interact with other actors in the same industry or jurisdiction. The more investment in development of inter-firm network enables firm to have access to external knowledge and higher levels of innovation. The firms shape patterns in knowledge network. If the network is dynamic, it itself becomes a source of innovation. This promotes network stability (Huggins & Johnston, 2010).

Network capital investment indicates network participation, which forms a strategic move of the firms. Firms in a network invest in calculative relations in order to gain access to knowledge with the ultimate purpose of enhancing expected economic returns. Network capital investment indicates network participation, which forms a strategic move of the firms. Firms in a network invest in calculative relations in order to gain access to knowledge with the ultimate purpose of enhancing expected economic returns (Huggins, Forms of network resource: knowledge access and the role of inter‐firm networks, 2010). Such inter-form network enables firms with strategic access and influence to flow of knowledge between themselves with the plausibility of converting them to economic objectives.

Cohesive and integrated structure. The capabilities of the firm are shaped by the particular characteristics associated with the network in which the firms have been competing and collaboration. This makes the capabilities of the forms highly content-specific and specialised (Gilsing, 2005, p. 2). As a result, based on a specific network structure, the policies, procedures and structures are designed accordingly. Hence, the advantages of an inter-form innovation are that of a cohesive and integrated structure within that specific network structure. This further leads to a competitive environment within that structure (Gilsing, 2005, p. 2).

The cohesive and integrated structure may be found in co-operative arrangements that bring technological standards particularly in services. Such arrangements aim at establishing of the standards that allow compatibility across different technologies. The standards arise after organisations interact at high level at early technological developments. This interaction occurs until a dominant technological design emerges and the technology matures (Schibany, Hämäläinen, & Schienstock, 2000).

Governance. The approach that firms undertake defines their inter-relationships. It can shape the success or failure of their competitiveness strategy. Value added chain is one such approach adopted in inter-firm networks. In the context of international trade, a value added chain can establish a global organisation of industries. It can establish governance patterns. It can govern a full range of activities, such as including coordination between the firms in order to conceptualise a product and see to its use (Megento, 2011, p. 21).

Alternatively, innovation also required substantial inter-firm interaction. As such, it creates governance mechanisms that are not subject to market mechanism or on hierarchy. It relies on cooperative arrangements between the firms. Such arrangements form the basis for further creation of network structure. The arrangements necessitate innovation by removing barriers and serve as sources of innovation (Paprzycki, 2013, p. 26).

With respect to innovation, real markets cannot be pure markets that comprise anonymous buyers and seller and exchanges between them in terms of price and quantity of a product. Real markets are organised markets, when one speaks of innovation, where product innovations are frequent. In that context, there is an information exchange that goes beyond the price and quantity of a product. Organised markets comprise various forms of inter-firm relationship, which facilitates uncertainty (Paprzycki, 2013, p. 26).

Cooperation, thus, brings innovation by reducing uncertainties and removing information deficiencies. The approach of value added chain shows that activities of the firms are interdependent. Such relationships facilitate efficient implementation of innovative ideas. They lead to pooling of ideas and capabilities of the forms, which give rise to competitive innovative environment.

Effective relationships. Whether or not a firm's action or outcome is effective is dependent on effective operations of inter-firm relationships and vice versa. This is supported by the observation that when a firm becomes comfortable with the current position and existing inter-firm relationship, they reject any new inter-firm relationship thereby rejecting new superior technologies (Woodside, 2010).

It has been observed that the complexity associated with innovation processes has created a tremendous increase in networks of small and medium sized enterprises (SMEs) (Zeng, Xie, & Tam, 2010). While examining the relationships between different firm networks and innovation performance of the SMEs, it found that inter-firm cooperation created the most significant positive impact on innovation performances. It found that cooperation with research institutions, universities and government agencies created lesser role than the cooperation across customers, vendors and other firms in the SMEs innovation process (Zeng, Xie, & Tam, 2010). It is also, however, found that the value of inter-firm relationship decreases when the impact of the innovative capability increases. The impact of such innovative capability increases with the firm age (Zheng, Liu, & George, 2010). This indicates that the effect of inter-firm cooperation decreases by the increased innovative capability.

Strategic inter-firm market orientation. The value added chain in inter‐firm partnerships can lead of forming market orientation. Such orientation can shape and impact firms’ performance in terms of transfer of knowledge transfer, innovation and market access. In respect to strategic inter-firm network, they could create value creation processes, which are impacted by how the firms conduct market orientation (Cambra‐Fierro, Florin, Perez, & Whitelock, 2011).

The strategic inter-firm network is a reflection of competitive networking and collaboration between the firms that is subject to their ability to apply new knowledge and technology. Such form of networking is essentially relevant given the rapid knowledge advancement and new technologies and innovative concepts, which are mostly outside the firms’ direct control (Schibany, Hämäläinen, & Schienstock, 2000).

OECD highlights that according to focus-group surveys by the Community Innovation Survey (CIS) and the Computer-assisted telephone interviewing (CATI), firms rarely innovate alone. The Product innovating firms interact with other organisations. Such interaction comprises a network of independent organisations possessing different competencies. Innovation is, therefore, a result of inputs from inter-networking and collaboration of firms. Innovation and networks cannot exist independently (Schibany, Hämäläinen, & Schienstock, 2000).

Survival chances. When viewed from customers’ perspective, companies that have good inter-firm networks have better merits than those companies without. Firms in inter-firms network have access to higher survival chances. This cannot be said so for those firms that maintain arm’s length relationships in the market. The survival chances means that the firm in the network can provide more stable services to the customers. They are able to effectively harness technological innovation (Zhenhua, 2020, p. 130).

The urban inter-firm networking is a good example of the advantage of inter-firm networking. Urban areas offer a shared environment where a firm is located. The firm is offered a larger range of different capabilities, even though the capabilities between the companies may be small. Firms in urban areas share labours from the same pool and customers from the same region (Zhenhua, 2020, p. 130).

The flexibility of human resources to jump from one firm to another for employment allows the flow and exchange of information. There is higher level of interaction between the resources as they are from the same profession and share private professional information. This brings a competitive environment where the expertise of the human resources becomes specialsed, inter-firm networks and similar expertise sharing platform increase in their popularity (Zhenhua, 2020, p. 130).

The urban inter-firm network reflects dense local clustering of firm. Such structure of alliance networks impacts the potential of the firms for knowledge creation. The dense local clustering creates information transmission capacity. It fosters communication and cooperation between the firms (Schilling & Phelps, 2007). There are non-redundant connections that reduce the distance between firms. It, therefore, provides the firms’ network greater reach with access to a wider range of knowledge resources. As such, the firms in the network due to their high clustering and high reach will produce greater innovative output (Schilling & Phelps, 2007).

3. Weaknesses

Ineffective relationships or weaker inter-firm relationship can affect the competitiveness of a value chain and consequently deter innovation. No doubt, inter-firm relationships can enable firm to access to products, inputs and specialised services. Such relationships encourage maximization of economies and quality and efficiency. However, there are side falls.

Manipulative and exclusive network. In case of inter-firm networks comprising powerful firms, low performing firms can be denied from accessing the firms’ network and associations. In addition there are support institutions that can affect businesses by adopting polices, infrastructure and legislation. Bigger firms have stronger access and relationships with such support institutions, which can enable such firm easier access to inputs, finance and innovation (Megento, 2011, p. 32).

This is one example of ineffective inter-firm relationship in terms of its manipulative possibilities where smaller or unfavourable are not a part of the bigger network squeezing them out of the access to innovation.

Challenges to economic quantification of social capital. Investing more on or over-relying on social capital may distract the firms from their capability to manage their knowledge networks. This means a firm that relies so much on social capital may not be able to bring in new ideas and innovation (Huggins & Johnston, 2010). Although, leveraging inter‐firm network is a strategic resource and investing on social capital may prove healthy for managerial action, it may become a challenge to quantify the transfer of knowledge arising from social capital investment (Huggins, Forms of network resource: knowledge access and the role of inter‐firm networks, 2010).

Social capital investments do not take into account the economic expectations out of sociability and socialization, the concepts associated with social capital. As such, social capital may become difficult to manage. In that context, how much of social capital is converted into innovation will be a difficult task to assess (Huggins, Forms of network resource: knowledge access and the role of inter‐firm networks, 2010).

More costs on maintaining relations. In case of a cluster of firms, a firm may spend more capital and investment in maintaining the network relationship. In case a network structure is not efficient where there are no non-redundant contacts and brokerage opportunities, it may lead to an increase number of linkages in an existing network, which may incur a firm more cost. This inter-firm network is not efficient in that the new linkages carry the same information as the redundant contacts (Burt, 1992).

The costs are incurred when the non-redundant contacts are not complementary and they overlap. This then devoid the firm to have structural holes where there are disconnection between the players in a concerned arena providing better opportunities to access information, referrals and control. As the firms lose such structural holes, they cannot have any competitive advantages (Burt, 1992).

Economic and sociological challenges. Inter-firm network may be in the form of collaborative contractual network. Such network may pose certain economic and sociological challenges. One such challenge is how to incentivise actors in the arrangement where there are chances of free riders to receive benefits (Baquero, 2020). This is an economic challenge.

When the economic challenges are read with a sociological perspective, there would be issues when generating social capital in the form of trust between the actors. The absence of trust, which is a key element in building inter-firm networking, will disrupt the successful cooperation between the actors. The absence of this element will make any legal rules and economic incentives pointless in respect to building the collaborative arrangements (Baquero, 2020).

4. Conclusion

Inter-firm network provides the firm the advantage of better access to social and network capital. The interchange of information and capabilities has led to cohesive and integrated structure of network. This enables firms a competing and collaborative innovation that builds governance patterns covering a full range of activities, including innovation.

Inter-firm networking allows strategic and competitive networking and collaboration. It allows firms to develop better ability to apply new knowledge and technologies. There is high level interaction between differentiating firms with different levels of competencies. As such, the survival chances and the capabilities to effectively harness technological innovation and provide services to customers are higher than those firms which are not able to do strategic networking.

Inter-firm networking reflects a cluster of firms in the form of pooling information and expertise through communication and collaboration. It allows firms to adapt to new technologies and accept new superior technologies. However, inter-firm networking does not always effectively promote competitiveness and innovation. There are certain core social and economic challenges.

In case of an inter-firm network comprising bigger firms, there will be an exclusivity not allowing smaller firm access new opportunities to innovate including resources, knowledge and expertise. The bigger firms may have an effective inter-firm arrangement, but that cannot be termed an effective inter-firm relationship where some firms are excluded.

Having a string network based on higher social capital may proof costly to firms. The issue of maintaining non-redundant network, which does not yield any economic result in the form of new innovation and processes may hinder a firm from focusing on innovation. In such situation, a firm may not be able to locate structural holes, which enables it access a competitive innovative environment.

Social and economic aspects are complementary in building inter-firm networking. Inter-firm networking becomes a weakness when they are not complementary, which occurs in case of failure to quantify social capital and incentivise social actors in a collaborative inter-firm arrangements.

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