The effect of proximity on knowledge network dynamics during economic recession: A study of the Great Recession
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The impact of recessions on firm performance is unequal across firms, but questions on what causes these differences remain unanswered. To explain firm performance, increasing attention has been given to interfirm knowledge networks. Existing studies showed that different forms of proximity can explain the dynamics of these interfirm networks, but none of these studies analysed the effect of the proximity dimensions during times of economic recession. This study addresses this knowledge gap by answering the following research questions: Which proximity dimensions drive the formation of innovation network ties in the European biotechnology industry? And did the effects of these driving forces change during the Great Recession? Previous studies found that firms prefer collaborations with proximate partners as this reduces the costs and uncertainty of collaborations. This study assumes that proximities will play an even larger role in partner selection during times of economic recession, as firms might try to minimize costs and avoid uncertainty even more than in normal times. In turn, this can harm firm innovativeness as too much proximity between partners reduces the scope of learning. With the use of the state-of-the-art stochastic actor-oriented model RSiena, the effect of cognitive, organizational, geographical and social proximity on tie formation was studied in a dynamic manner for Germany, the leader in the European biotechnology industry. With the use of patent data inventor networks were constructed. Next, estimations were made for four different time periods (2005-2007; 2007-2009; 2009-2011; 2011-2013) to study how the effects of the proximity dimensions on tie formation changed during the recession. As expected, inventors were significantly more likely to initiate collaborations with proximate partners. Strikingly, the effect of proximity on tie formation did decrease during the recession period. The German innovation strategy can partly explain these results. As governmental R&D investments increased during the recession, German firms might have been less inclined to reduce costs and choose more proximate partners. To validate the results of Germany, they were compared to those of Denmark (deploying a similar strategy) and the Netherlands (deploying a strategy based on reducing R&D expenses). The results of Denmark were similar to those of Germany. However, for the Netherlands opposite results were found as the effect of the proximity dimensions increased during the recession. Thus, if no specific innovation schemes are in place that financially support firms in crisis periods, the effect of the proximity dimensions increases, which can harm firm innovativeness.