Networks, Sustainable Differentiation, and Economic Development

An economic network is a constellation of firms linked to each other by partnership arrangements to confer mutual advantages on its participants. It represents an intermediate form of governance between spot transactions on one hand—being the “purest” form of clearing deals in market economies—and full integration within a single firm. In network organizations, firms preserve their identity and are free to operate in the open market, but find it to their advantage to maintain a long-term relationship with their partners, fostering mutual confidence and cooperation. Participants share the risks of specialization, to some extent, while establishing patterns of exchange of information that internalize knowledge and technology transfers within the network. This form of interaction parallels the practice of raising funds through the limited responsibility mechanism, a point to which we shall come back later. In this chapter we aim to understand the fundamental drive behind a network’s formation over the last years, and to explore the rationale and impact of this tendency in the context of managing technical change and sustaining growth.