The evolution of firm networks: from emergence to early growth of the firm

Abstract This paper addresses whether cohesive networks of socially embedded ties or sparse networks rich in structural holes are more conducive to the success of new firms. We propose that the networks of emerging firms evolve in order to adapt to the firm's changing resource needs and resource challenges. As firms emerge, their networks consist primarily of socially embedded ties drawn from dense, cohesive sets of connections. We label these networks identity based. As firms move into the early growth stage, their networks evolve toward more ties based on a calculation of economic costs and benefits. This shift from identity‐based to more calculative networks is manifested in the evolution of the firm networks: (1) from primarily socially embedded ties to a balance of embedded and arm's‐length relations; (2) from networks that emphasize cohesion to those that exploit structural holes; and (3) from a more path‐dependent to a more intentionally managed network. Thus, this paper suggests that both cohesive and sparse networks are conducive to firm performance when they are aligned with and address firms' evolving resource challenges. Copyright © 2001 John Wiley & Sons, Ltd.