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A phenomenon of the last 20 years has been the rapid rise of the network form of governance. This governance form has received significant scholarly attention, but, to date, no comprehensive theory for it has been advanced, and no sufficiently detailed and theoretically consistent definition has appeared. Our objective in this article is to provide a theory that explains under what conditions network governance, rigorously defined, has comparative advantage and is therefore likely to emerge and thrive. Our theory integrates transaction cost economics and social network theories, and, in broad strokes. asserts that the network form of governance is a response to exchange conditions of asset specificity, demand uncertainty. task complexity, and frequency. These exchange conditions drive firms toward structurally embedding their transactions, which enables firms to use social mechanisms for coordinating and safeguarding exchanges. When all of these conditions are in place, the network governance form has advantages over both hierarchy and market solutions in simultaneously adapting, coordinating, and safeguarding exchanges.
Many industries increasingly are using network governance-coordination characterized by informal social systems rather than by bureaucratic structures within firms and formal contractual relationships between them-to coordinate complex products or services in uncertain and competitive environments (Piore & Sabel, 1984; Powell, 1990; Ring & Van de Ven, 1992; Snow, Miles, & Coleman, 1992). This type of governance has been observed in such industries as semiconductors (Saxenian, 1990), biotechnology (Barley, Freeman, & Hybels, 1992), film (Faulkner & Anderson, 1987), music (Peterson & Berger, 1971), financial services (Eccles & Crane, 1988; Podolny, 1993, 1994), fashion (Uzzi, 1996, 1997), and Italian textiles (Lazerson, 1995; Mariotti & Cainarca, 1986). Although network governance is widely acknowledged and is seen as producing important economic benefits, "the mechanisms that produce these benefits are vaguely specified and empirically still incipient" (Uzzi, 1996: 677). This vague specification lacks clarity on what network governance is, when it is likely to occur, and how it helps firms (and nonprofit agencies) resolve problems of adapting, coordinating, and safeguarding exchanges.
A synthesis of transaction cost economics (TCE) and social network theory can resolve this vague specification of network governance in multiple ways. TCE provides a comparative framework for assessing alternative governance forms (Williamson, 1994), and it allows us to go beyond descriptive observations of where network...