Rolodex to the Rescue! - Social Capital & Corporate Responses to Market Shocks

Who you know and how you’re connected to them may be vital to your firm’s success when times are tough or turbulent. In this recent working paper, Professors Martin Gargiulo and Andrej Rus consider the effect of social networks on individual and firm performance after external market shocks. They formulate a new model of social capital, then test it on data drawn from Slovenian firms in the early 1990s.

by Martin Gargiulo, Andrej Rus
Last Updated: 23 Jul 2013

Does who you know have an effect on your performance and that of your organization? Absolutely, especially in times of trouble, say Martin Gargiulo, Associate Professor of Organizational Behavior, INSEAD, and Andrej Rus, Associate Professor of Organizational Behavior and Economic Sociology, University of Ljubljana. In this working paper, they formulate and test a new model of social capital.

Social capital has become a ubiquitous metaphor in the study of how social networks can create advantages for individuals and organizations. Across the board, it’s generally defined as the resources an individual or group can access through personal and business connections (contact networks).

Expanding on this concept the authors argue that certain factors change the effectiveness of social capital, specifically the type and salience of the uncertainty facing the “ego.” Actors operate along two dimensions of uncertainty: 1) accessing resources and information, and 2) mobilizing people who control the resources and information. Building on existing network theory, their model proposes that while ties to a sparse set of contacts optimizes access to resources and information, closely-knit networks are optimal for effectively mobilizing a team into action. In addition, they suggest that leaders, who could count on a cohesive implementation team, leaving them free to devote their attention to strengthening sparse networks for accessing resources and information, are better positioned to respond to external shocks that threaten the survival of their firms.

The authors test this model using data on company performance drawn from a sample of Slovenian companies after the country’s 1991 withdrawal from the Yugoslavian federation. Facing astounding levels of uncertainty, Slovenian CEOs had precious little time to find new markets and to mobilize their organizations to comply with the requirements of those markets. Prior to the country’s break from Yugoslavia, more than 60% of Slovenia’s GDP came from foreign trade, and of that, 62% within Yugoslav republics. By 1995, after the war had spread from Slovenia to Bosnia and Croatia, share of former Yugoslav republics represented just 13% of Slovenian foreign trade, with estimates of sales losses ranging from 25 to 33%. Besides economic contraction, these firms also had to contend with an onslaught of competition from small family-run businesses, whose numbers sharply increased after liberalization.

While all firms faced similar barriers, the authors found wide variations in their levels of success, which led them to wonder what put some companies ahead of others. Results showed that CEOs who could rely on the mobilization of a cohesive top management team and whose networks were relatively more focused on their external constituencies than on internal contacts were better positioned to increase sales to the domestic and Western markets, thus dampening the negative impact of the separation from Yugoslavia.

They conclude by asserting that when the key to success lays in having preferential access to scarce resources, sparse social networks confer a significant competitive advantage to leaders. When the key limiting factor is the ability to mobilize a set of people who control key resources, competitive advantage comes from close ties among the people to be mobilized, which facilitates their cooperation. On the contrary, when both access and mobilization of resources are certain, social networks do not offer significant advantages.

After further discussion of the possibilities offered by their model, the authors conclude with a discussion of the limitations of their data and of directions for future research.

INSEAD 2002

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