The power of embeddedness: how nodal power affects the value appropriation potential of firms in economic networks?

Abstract

PurposeThis paper explains why some firms manage to capture disproportionate value from their network of relationships, leading to superior performance. The paper examines how a firm's dependencies affect its value appropriation potential (VAP) in economic networks.Design/methodology/approachThe paper follows the axiomatic method and the embeddedness perspective of firms to develop an index called nodal power, which captures the power that accrues to a firm in exchange-based economic networks. Thereafter, using the formal method and simulation, it shows nodal power reflects a firm's VAP in economic networks.FindingsThe study analysis and findings prove that a firm's dyadic level exchange relations and the embedded network structure determine its VAP by affecting the nodal power. A firm with lesser nodal power is likely to appropriate less value from its relations even if it equally contributes to the value creation. This finding explains how the structural and relational characteristics of a firm's network enable disproportionate value appropriation.Practical implicationsNodal power furthers the scope of analyzing firms' economic relationships and changing power equations in dynamic networks. It can help firms build optimal strategic networks and manage the portfolio of relationships by predicting the impact of changing relations on firms' VAP.Originality/valueThe paper's original contribution is to explain, through formal analysis, why and how the structure and nature of relations of firms affect their VAP. The paper also formalizes the power-dependence principle through a dependency-based index called nodal power and uses it to show how interfirm dependencies are key to value appropriation.