A Network Model of Organization Formation

Abstract

This paper presents a network model of organization formation and builds upon theories of social and socioeconomic exchange. The model explains the transformation of exchange relationships from a set of relatively simple, often single-dimensional dyadic exchanges into a dense set—a network—of stable, multidimensional and multilayered interorganizatlonal exchange relationships. The model details three stages of entrepreneurial networking activity which are used to secure the critical economic and non-economic resources needed to start a business: (1) Focusing on the essential dyads; (2) Converting dyadic ties to socioeconomic exchanges; and (3) Layering the exchanges with multiple exchange processes. In all three stages, there is an iterative process which involves the exploration, screening and selective use of network dyads to match the business definition of the emerging firm. Organization formation results from the crystallization of stable, committed, revenue-generating, inter-organizational exchange relationships which extend beyond the earlier idiosyncratic and personalized relationships of the entrepreneur. A network model of organization formation appreciates the social embeddedness of economic relationships and the multidimensional nature and content of business relationships.