While we know much about how organizations are designed to organize the collection and transfer of data within their boundaries, we know comparatively little about how information is organized and accessed in markets (Kogut 2000). Organization and financial theorists have speculated on how arm’s-length ties, which are low in embeddedness, increase an actor’s ability to access and transfer public information circulating in the market (Peterson and Rajan 1994, 2002; Uzzi 1999).
Arm’s-length ties reflect the conventional view of inter-firm ties and market learning described by Hirschman (1970) and Macneil (1980). In these ties, relationships are cool, impersonal, atomistic, and actors are motivated by instrumental profit seeking. In contrast, embedded ties embed their commercial transactions in social attachments. These relationships create behavioural expectations that are considered irrelevant in the atomistic view of transacting and market learning because they shift the logic of opportunism to a logic of trustful cooperative behaviour in a way that creates a new basis for knowledge transfer and learning across firm boundaries (Uzzi 1997, Arrow 1998).
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Because arm’s-length ties require little investment in time or mutual obligation, they enable actors to economically maintain many ties to other actors who may be scattered throughout a market. Consequently, when public information is scattered unevenly among actors in a market, arm’s-length-ties should provide an effective means for acquiring it.
Knowledge Transfer in Markets
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In addition, research has shown that even if public information is available through newspapers, job listings, or other freely available sources, people typically gather public information from their arm’s-length ties. Specifically, they initiate searches through networks, which often have lower transaction costs than other means of search (Granovetter 1974, Geertz 1978). For example, Granovetter (1974) found that job seekers typically discover novel public information about employment through acquaintances rather than close ties: While the job seeker and the job seeker’s close ties typically share comparable information, acquaintances tend to possess different information.
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Uzzi (1999) showed that arm’s-length ties between firms and banks promoted the flow of public information. Firms were better able to acquire knowledge about the range of standard loan terms of banks in a market through arm’s-length ties than they were through sources in the public domain. Similarly, Hansen (1999) found that managers in a large consulting firm were best able to search for information available in the company’s public records through weak ties.
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In contrast, embedded ties have been argued to promote private knowledge transfer because expectations of trust and reciprocity provide assurances that the transfer will be used to the mutual benefit of both parties (Uzzi 1999). For example, Ingram and Roberts (2000) showed that hotel managers with close ties to one another transferred unpublicized client preference data that enabled them to learn how to better model the price of their rooms, giving them an advantage over hotel managers not linked to the network by embedded ties.
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Both embedded ties and arm’s-length ties entail learning costs. While arm’s-length ties promote wide access to public information, this information can be of only limited novelty because it is not specific to an exchange partner and is not restricted to certain actors in the market. In contrast, when time and other resources are limited, the capital dedicated to creating an embedded tie constrains an actor’s ability to invest in other ties, thereby restricting the actor’s ability to access knowledge not possessed by the dyadic tie. This constraint poses a potentially serious obstacle to learning in markets, where it is infeasible for any single actor to know the full scope of information circulating in the market (Eccles and Crane 1988).
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The complementary advantages and disadvantages of embedded and arm’s-length ties lead us to two conclusions. First, arm’s-length ties can act as conduits for gathering and transferring public information from a wide range of actors. Second, though embedded ties draw from a limited pool of knowledge, they are well suited for the transfer of novel and private information.
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These arguments suggest that types of exchange ties influence knowledge transfer and learning in markets, particularly in markets where knowledge is distributed widely and unevenly among actors, or where no central authority such as a firm is in place to organize the collection and distribution of knowledge (Udell 1999, Kogut 2000, Keister 2002).
Ref:
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- Eccles, R. G., D. B. Crane. 1988. Doing Deals: Investment Banks at Work. Harvard Business School Press, Boston, MA.
- Geertz, C. 1978. The bazaar economy: Information and search in peasant marketing. Amer. Econom. Rev. 68 28–32.
- Granovetter, M. 1974. Getting a Job: A Study of Contacts and Careers. Harvard University Press, Cambridge, MA.
- Keister, L. 2002. Financial markets, money, and banking. Annual Rev. Soc. 28 39–61.
- Kogut, B. 2002. The network as knowledge: Generative rules and the emergence of structure. Strategic Management J. 21 405–425.
- Petersen, M. A., R. G. Rajan. 1994. The benefits of lending relationships: Evidence from small business data. J. Finance XLIX 3–37.
- Hansen, M. T. 1999. The search-transfer problem: The role of weak ties in sharing knowledge across organization subunits. Admin. Sci. Quart. 44 82–111.
- Hirschman, A. 1970. Exit, Voice, Loyalty. Harvard University Press, Cambridge, MA.
- Ingram, P., P. Roberts. 2000. Friendships among competitors in the Sydney hotel industry. Amer. J. Soc. 106 387–423.
- Macneil, I. 1980. The New Social Contract. Yale University Press, New Haven, CN.
- Uzzi, B.1997. Social structure and competition in interfirm networks: The paradox of embeddedness. Admin. Sci. Quart. 42 35–67.
- Udell, G. 1999. The small business lending relationship. J. Blanton, A. Williams, S. Rhine, eds. Business Access to Capital and Credit. Federal Reserve, Washington, D.C.
- Uzzi, B. 1999. Social relations and networks in the making of financial capital. Amer. Soc. Rev. 64 481–505.
