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Strategic Alliances As Social Capital: A

Multidimensional View

Article in Strategic Management Journal · September 2002

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 Strategic Management Journal
Strat. Mgmt. J., 23: 795–816 (2002)
Published online 7 May 2002 in Wiley InterScience (www.interscience.wiley.com). DOI: 10.1002/smj.252

STRATEGIC ALLIANCES AS SOCIAL CAPITAL: A

MULTIDIMENSIONAL VIEW
BALAJI R. KOKA1 and JOHN E. PRESCOTT2 *
1
College of Business, Arizona State University, Tempe, Arizona, U.S.A.
2
Katz Graduate School of Business, University of Pittsburgh, Pittsburgh, Pennsylva-
nia, U.S.A.

Defining social capital in terms of the information benefits available to a firm due to its strategic
alliances we present a theory of social capital that conceptualizes it as a multidimensional
construct. We draw from the literature to argue that social capital yields three distinctly different
kinds of information benefits in the form of information volume, information diversity, and
information richness. This extends current theoretical and empirical research by specifying and
empirically demonstrating three interrelated yet distinct dimensions of social capital. Firms vary
in their levels of social capital not just on their structural position in an alliance network but also
in the dynamics that underlie alliance formation and maintenance. More importantly, the different
dimensions of social capital theoretically provide differential benefits. We establish the construct
validity of our proposed three-dimensional conceptualization of social capital using longitudinal
data on the population of strategic alliances formed during the period 1980–94 by firms in
the global steel industry. In addition, we establish predictive validity by demonstrating that the
information dimensions have differential effects on firm performance, using firm nationality as a
contingency. Copyright  2002 John Wiley & Sons, Ltd.

The rapid proliferation of strategic alliances has
been one of the more enduring features of the busi-
ness environment over the last two decades. This
trend of multiple alliances with multiple partners
has embedded firms in intricate webs of interfirm
networks. Recognizing the complex interdepen-
dencies between firms, strategy researchers have
increasingly moved from a dyadic level of analysis
to a network level in order to understand the nature
and effect of such networks (Shan, Walker, and
Kogut, 1994; Madhavan, 1996; Ahuja, 2000). Such
research has explicitly but more often implicitly
focused on the notion of social capital to explain
the nature and benefits to firms through these net-
works.
Key words: strategic alliances; social capital; interfirm
networks
*Correspondence to: John E. Prescott, Katz Graduate School of
Business, University of Pittsburgh, Pittsburgh, PA 15260, U.S.A.
Defined as the ‘sum of resources that accrue to
a firm by virtue of possessing a durable network of
inter-firm relationships’ (Bourdieu and Wacquant,
1992: 119), social capital is an exciting and a par-
ticularly apposite construct to study interfirm rela-
tionships. First, it provides a way to characterize a
firm’s complete set of relationships. Second as the
definition indicates, the focus is on the access to
and flow of resources—knowledge, information,
and other capital—to the firm through its alliances.
Understanding the nature of social capital is thus
important because it enables us to explain perfor-
mance differences among firms.
We conceptualize social capital as a multidimen-
sional construct that yields three distinctly differ-
ent information benefits in the form of informa-
tion volume, information diversity, and informa-
tion richness. We develop a theory of social capital
focusing on the contingent nature of these informa-
tion benefits on firm performance. We empirically

Copyright  2002 John Wiley & Sons, Ltd. Received 27 June 2000
Final revision received 15 February 2002
796 B. R. Koka and J. E. Prescott
demonstrate the construct validity of our concep-
tualization by utilizing longitudinal alliance data
from the global steel industry. We then establish
its predictive validity. Specifically, we demonstrate
that firm nationality is a key contingency that
affects the relationship of the information dimen-
sions of social capital to firm performance. In addi-
tion we provide exploratory (graphical) evidence
that firms differ in the level of the three social cap-
ital dimensions, suggesting the pursuit of different
alliance strategies and benefits.
Developing a multidimensional model of social
capital and establishing its construct and predic-
tive validity contributes to the strategic alliance
stream of research in at least two ways. First,
it clarifies and validates the construct of social
capital. Empirical studies with few exceptions
have identified social capital with some aspect of
the firm’s structural position (Burt, 1992; Pow-
ell, Koput, and Smith-Doerr, 1996; Walker, Kogut,
and Shan, 1997). However, Portes and Landolt
(1996) argue that a structural view of social cap-
ital results in confusing the sources of social cap-
ital with its benefits. We address this issue by
moving away from such structural conceptions of
social capital to focus on the underlying bene-
fits that firms derive because of their structural
positions. Such an approach enables us to dis-
cern that the different structural positions (cen-
trality and structural holes) identified with social
capital actually provide different information ben-
efits, a fact obscured in most studies. They are in
essence two different dimensions of social capital.
Recently, Nahapiet and Ghoshal (1998) and Tsai
and Ghoshal (1998), among others, theoretically
suggest that in addition to structural dimensions,
social capital should include a relational dimen-
sion that is a function of repeated relationship
dynamics between the partners. However, even
these authors have not acknowledged the indi-
vidual and unique information benefits of struc-
tural and relational dimensions of social capital.
The situation is further compounded by the fact
that researchers have rarely explicitly developed
or operationalized the construct of social capital
nor has there been any attempt in a single study to
establish both its construct and predictive validity.
Given the investment in alliance activity, there is
a critical need to validate a theory of social capi-
tal that delineates its multidimensional nature and
effects.
Copyright  2002 John Wiley & Sons, Ltd.
Second, validating social capital as a multidi-
mensional construct enables us to specify a con-
tingency aspect to the study of social capital. The
need to identify the different information dimen-
sions of social capital arises because they have
differential effects on firm performance depending
on the firm’s context. We identify one such con-
tingency, namely firm nationality. At its most fun-
damental level, the purpose of designing interfirm
networks is to enhance performance. Identifying
the contingencies that have a differential impact on
performance across the three dimensions of social
capital is central to the advancement of the strate-
gic alliance stream of research. As a first step, we
establish the construct and predictive validity of
social capital at the firm level.
THEORY AND CONSTRUCT
DEVELOPMENT
Social capital at the firm level
Since its introduction by Coleman (1988), social
capital has evoked considerable interest. Given that
firms can be seen as purposive social actors, it
is inevitable that researchers have extended the
logic of social capital to the firm level (Burt, 1992;
Tsai and Ghoshal, 1998). That firms in the course
of their business activities establish a variety of
interfirm ties has been well documented. Such
ties include buyer–supplier relationships, strategic
alliances, and joint memberships in industry asso-
ciations, amongst others. These ties enable firms
to exchange a variety of information, knowledge,
and other forms of capital. Interfirm relationships
thus represent social capital for two reasons. First,
they are conduits of information. Possession of key
information and control of information flow create
entrepreneurial opportunities (Burt, 1992, 1997).
Second, interactions between firms establish a pat-
tern of obligations and expectations that are based
on norms of reciprocity and equity.
The view that firms possess social capital is cor-
roborated by anecdotal evidence from the corpo-
rate world. In the steel industry, Sumitomo Metal
Industries Limited signed an agreement in 1981 to
provide technical assistance to J & L Steel. In the
press release, Sumitomo Metal stressed that pro-
viding technical assistance would help it fulfill a
‘moral debt’ because J & L Steel had in the 1950s
provided similar assistance to Sumitomo Metal. In
Strat. Mgmt. J., 23: 795–816 (2002)

another instance, Nucor Steel in 1988 handed over
all proprietary information that it had acquired in
the implementation of a new steel-making tech-
nology to Florida Steel. In return, Florida Steel
agreed to share with Nucor the information and
experience it would gain in the implementation
of the shared technology. Both firms characterized
this as a ‘gentlemanly’ agreement. These examples
provide evidence, albeit anecdotal, for the exis-
tence between firms of obligations, expectations,
and norms of reciprocity that underlie the idea of
social capital (Coleman, 1988), providing further
justification to extend this construct to study inter-
firm relationships.
From dyadic to network level of analysis
Interfirm relationships have increasingly become
a core component of strategy. They constitute
valuable capital because they provide access to
capabilities and resources that may otherwise be
unavailable. The underlying logic for this argument
lies in the view that firms are heterogeneous enti-
ties that are differentially endowed with capabili-
ties and resources (Wernerfelt, 1984). Firms resort
to strategic alliances to access capabilities nec-
essary for competitive advantage. Such alliances
are also essential because the capabilities are often
assumed to be tacit and incapable of being trans-
ferred across organizational boundaries through
other means. Accompanying this view has been
the growing realization among strategy researchers
to move from a dyadic to a network level of
analysis (Dyer and Singh, 1998; Gulati, Nohria,
and Zaheer, 2000). The focus on an individual
alliance as the unit of analysis rests on the assump-
tion that a firm’s set of alliances is independent.
The fallacy of this assumption is strikingly evident
from a comment by Paul Phoenix, former President
of Dofasco Steel, following a technical assistance
agreement with Nippon Steel in 1983: ‘We share
all information that we receive from our partners
with our other partners’.1
Such a shift was also hastened by the need to
include the effect of social context on a firm’s
actions (Granovetter, 1985). Social context oper-
ationalized as the network of interfirm relations
constrains and shapes a firm’s action with regard
to alliance formation and partner selection (Gulati,
1
We thank an anonymous reviewer for pointing out that such
sharing may not be common to all alliances or partners.
Copyright  2002 John Wiley & Sons, Ltd.
Strategic Alliances as Social Capital 797
1995; Ahuja, 2000), which in turn determines its
position in the network. Thus firms have to go
beyond traditional cost–benefit analysis of partic-
ular individual alliances. They need to evaluate
particular alliances not only in the context of the
other alliances that they already possess but also in
the context of the entire network of relationships.
While social context provides a theoretical justifi-
cation for the concept of social capital, the role of
knowledge spillovers within networks presents an
operational and economic justification.
Research dealing with knowledge spillovers and
its effect on innovation in a densely tied network
focuses on the issue of network externalities in
providing social capital. The network created by
interfirm alliances can be viewed as conduits for
information. Information flows through these con-
duits because people in different firms linked to
each other meet and talk. For instance, a material
uniformity project in the steel industry involved
monthly meetings of research personnel from 17
steel firms for a year. The meeting objective was
to exchange information regarding the research at
their labs. Consequently, information and knowl-
edge diffuse through the network. Such network
externalities provide increasing returns to scale.
However, the access to knowledge spillovers and
the ability to leverage the information in the net-
work is differentially distributed. The number and
type of alliances, nature of the partners and their
alliance structures as well as relationship dynamics
determine access. The information benefits avail-
able to a firm thus differ based on its alliance
structure and its relationship management.
Underdevelopment of the social capital
construct
While theoretically the importance of the construct
has been well established, the empirical evidence
of its effect is less convincing. One reason is
the differing conceptualization of social capital.
Most studies that have assumed the existence of
social capital when evaluating the merits of net-
work positions (Shan et al., 1994; Ahuja, 1996;
Madhavan, 1996) have implicitly operationalized it
as some form of network structure. Network con-
structs such as centrality, structural holes, range,
connectivity, and embeddedness have individu-
ally or in some combination been operationalized
as social capital (Uzzi, 1997). Even the opera-
tionalization of these constructs has varied across
Strat. Mgmt. J., 23: 795–816 (2002)
798 B. R. Koka and J. E. Prescott
studies. For instance, centrality has been opera-
tionalized as degree (number of partners) centrality
(Ahuja, 2000), betweenness (information control)
centrality (Madhavan, 1996), and Bonacich cen-
trality (Ahuja, 1996). As a result it is not surprising
that studies have reported conflicting results. Mad-
havan (1996) found negative effects for the impact
of centrality on performance; Shan et al. (1994)
found positive effects and Ahuja (1996) found that
centrality had both a negative and positive rela-
tionship depending on the nationality of the firm.
A common feature is that they have all eschewed
the formal development and testing of a model
of social capital, making it difficult to determine
which combination of structural measures actually
represents social capital. Establishing the construct
validity of social capital is thus an important first
step before we can draw any meaningful inferences
of contingent effects of social capital on firm per-
formance.
One way to address the inconsistencies in the
evidence is to argue that they are outcomes of an
approach that has sought to develop universal pre-
scriptions. Such an approach to operationalizing
social capital presumes the existence of one unidi-
mensional form that provides information benefits
for all firms in all situations. Several researchers
(Burt, 1998; Nahapiet and Ghoshal, 1998) have
questioned this unidimensional view. Burt (1998)
tried to reconcile the different structural measures
by arguing that they may be differentially effec-
tive under varying conditions of network equilib-
rium. Nahapiet and Ghoshal (1998) argued that
social capital has a relational dimension in addi-
tion to the structural dimension. Neither, however,
specified the differential benefits that these differ-
ent dimensions provide. They presumed that the
dimensions are integral parts of all relations; an
implicit assumption being that the nature of the
information benefits is the same irrespective of
a structural/relational position. We challenge this
assumption. Focusing on the information benefits
underlying alliances reveals that the nature and
type of benefits for each dimension are actually
distinctly different, indicating a need to treat them
as separate but integral components of the social
capital construct.
We accordingly propose that a firm’s set of
alliances provides differential benefits/limitations
in terms of information volume, information
diversity, and information richness. We argue
that information volume and information diversity
Copyright  2002 John Wiley & Sons, Ltd.
dimensions of social capital depend on the alliance
structure of the firm, while information richness
depends on the overall alliance experience and
history between the firm and its partners. We
develop theory and provide empirical evidence to
motivate and justify a three-dimension model of
social capital, which is illustrated in Figure 1. We
recognize that the three dimensions are intricately
interrelated. However, we discuss them separately
to specifically delineate both theoretically and
empirically the nature of the three information
dimensions. Our position is that there are trade-
offs among the three dimensions that must be
recognized and managed. We treat these issues as
an empirical question and test for the discriminant
validity.
Information volume as a dimension of social
capital
The information volume dimension emphasizes the
quantity of information that a firm can access and
acquire by virtue of its alliances. The focus is
primarily on the number of partners that a firm
possesses and the number of ties it has with each
partner. It is a reflection of the embeddedness of
the firm in its network of relationships. As Cole-
man (1988) argued, social capital arises because of
dense interactions between social actors that cre-
ate an intricate web of relational network. Such
interactions facilitate the exchange of information,
creation of obligations or expectations, and impo-
sition of sanctions on those who fail to meet their
obligations. Because of the dense interactions part-
ner firms tend to possess similar information that
enables validation of the information enhancing its
reliability. Such an alliance structure provides tim-
ing benefits. Information is available at a shorter
distance to well-connected firms and is therefore
available early (Burt, 1992). Direct access reduces
search costs. More importantly, strong ties with
similar partners lead to exploitative learning that
results in increase in efficiency and productivity
(Levinthal and March, 1994). Since information
acquisition and dissemination are time consuming
and costly, alliance structures that embed the firm
within a dense network of relationships provide
significant social capital.
However, the information volume dimension of
social capital could have adverse consequences,
such as when it is imperative to make fast decisions
(Eisenhardt, 1989). This dimension places little
Strat. Mgmt. J., 23: 795–816 (2002)
 Strategic Alliances as Social Capital 799

Eigen
Vector
Centrality
1.00

0.864 Information
Number of Volume
Partners (0.0867)
9.956
39
1.5 )
907
Number of (0.0 76
. 9
Ties 16

7.
87
(1 300

1
.48
5.

5)
Techno-
logical 0.859
Diversity
(0.0485) Information Social
17.723 0.156
1.00 Diversity Capital
(0.00982)
Country 15.85
Diversity SECOND
96 ORDER
-1.2 )
569 LATENT
(0.0 .777 VARIABLES
-22
Holes
9
39

)
0.0

54 84
4.0 09
. 0
(0

Multiplex 1.116
(0.191) Information
5.829 Richness
1.00
Repeated FIRST ORDER
Ties LATENT VARIABLES

INDICATOR
VARIABLES

Figure 1. Second-order confirmatory factor analysis structural equation model: results for year 1992. All arrows
significant at p < 0.01; numbers above arrows are parameter estimates; numbers in parentheses are standard errors;
numbers below are t-values

emphasis on partner characteristics and attributes,
the assumption being that all partners are sim-
ilar in terms of the information they possess.
Firms high in this dimension of social capital may
focus on acquiring indiscriminately large quanti-
ties of information that may be redundant and
obsolete. More importantly, it may result in the
firm limiting its search horizon to its immediate
network due to information-processing limitations
and perceived confidence that it has captured
Copyright  2002 John Wiley & Sons, Ltd.
all relevant information. This could lead to a
reliance on information that is largely similar and
sometimes obsolete that may have negative con-
sequences when competitive conditions change
(Levinthal and March, 1994).
Information diversity as a dimension of social
capital
The information diversity dimension of social cap-
ital emphasizes the variety and to a somewhat
Strat. Mgmt. J., 23: 795–816 (2002)
800 B. R. Koka and J. E. Prescott
lesser extent quantity of information that a firm
can access through its relationships. The focus is
not only on the number of partners but also on the
characteristics of the partners and their relation-
ships. Social capital benefits arise in two ways.
First, diversity of information occurs because of
the structure of a firm’s ego network. Unlike the
information volume dimension, social capital here
lies in designing sparse networks around the firm
whose partners are not intricately linked in the
network. Firms emphasizing this dimension have
access to a wider range of information arising out
of nonredundant contacts. Opportunities in terms
of new and different partners/new skills are avail-
able earlier to the firm that has diversity in its
contacts.
Secondly, this dimension recognizes that firms
possess different kinds of information. Since firms
linked in the network operate in different market
segments, utilize different technologies and belong
to different industries, they are sources of different
kinds of information. Between two firms having
the same number of alliances, the firm that has
more diverse contacts (say, ties distributed among
firms in different strategic groups) has access to
more nonredundant and diverse information. Such
ties provide benefits that are additive rather than
redundant (Burt, 1997). Thus, alliance structures
with diversity of contacts provide social capital
since it encourages the incorporation of diverse
perspectives.
The information diversity dimension of social
capital under certain conditions (such as when effi-
ciency is a key success factor) could adversely
impact firm performance. Firms with informa-
tion diversity may focus exclusively on explo-
rative learning at the expense of exploiting the
knowledge they possess (Levinthal and March,
1994). In stable environments, this places the
firm at a disadvantage that could adversely affect
performance.
Information richness as a dimension of social
capital
The information richness dimension of social cap-
ital emphasizes the quality and nature of infor-
mation that a firm can access through its rela-
tionships. It focuses on both the firm’s overall
alliance experiences and its history with current
partners. Firms emphasizing this dimension have
access to information that is imbued with value,
Copyright  2002 John Wiley & Sons, Ltd.
context, and meaning. Information exchange here
is enriched with context, fine-grained in terms of
product–market specifics, and is geared towards
joint problem solving (Uzzi, 1996). Such informa-
tion exchange is a reflection of the firm’s experi-
ence in managing relationships and the relationship
dynamics with its partners.
Social capital benefits here arise from a vari-
ety of mechanisms. First, firms that have had
considerable alliance experience are more likely
to get access to richer information. Adopting a
learning-by-doing argument, Bereiter and Scar-
damalia (1993) propose that as organizations gain
experience in solving a particular problem, they
need to pay less and less conscious attention
to it. That leads to progressive problem solv-
ing as it frees up resources to seek out and
solve more complex problems. Experienced orga-
nizations are thus likely to be more effective
than others less experienced. Extending this argu-
ment to alliances, repeated practice contributes to
enhanced alliance capabilities by helping organiza-
tions understand and develop processes and effec-
tive routines to access information (Eisenhardt and
Martin, 2000). Such practice results in formal-
ization and internalization of alliance know-how,
resulting in the better management of alliances
and consequently better and richer information
flows.
The nature of such information flows is par-
ticularly enhanced when the partners share prior
history with each other. Opportunities for learning
about each other are enhanced when firms form ties
with other firms with whom they had a previous
alliance in the past (repeated ties) or with those
with whom they have multiple current alliances
(multiple ties). As Nelson and Winter (1982) noted,
repeated ties create a common language between
the partners that is nearly opaque to outsiders. Mul-
tiple partnering experiences with each other thus
result in enhanced understanding and knowledge
of each other’s motives, processes, and routines.
As partners jointly gain experience solving par-
ticular problems, it frees up resources to jointly
tackle more complex problems (Bereiter and Scar-
damalia, 1993). More specifically, the partners’
focus shifts from value appropriation concerns to
value creation issues.
Repeated and multiple ties also indicate another
mechanism may be at play in affecting value cre-
ation. Madhok and Tallman (1998) argue that the
relationship process is itself a specialized resource.
Strat. Mgmt. J., 23: 795–816 (2002)

They recognize the crucial distinction between
potential value that can be created and the actual
value that is appropriated. They argue that the
relationship process determines to what extent the
potential value is actually realized. The ability to
tap the underlying potential is greater when the
relationship process is characterized by positive
orientation than just by the avoidance of oppor-
tunism. Where the relationship process is dom-
inated by opportunism, partners will not make
the unilateral and voluntary commitments neces-
sary to develop synergistic potential (Dyer, 1997).
However, the realization that an alliance is the
best vehicle to achieve synergistic capabilities that
may not be available through other means ensures
that firms make commitments dedicated to build-
ing relationships that enhance the access to flows
of rich information. However, such relationship-
specific investments are costly, time consuming
and often irreversible (Bureth, Wolff, and Zan-
fei, 1997). Repeated ties and multiple ties are
a reflection of the partners’ efforts to leverage
such relationship-specific assets across multiple
projects.
Apart from joint development of the skills in
managing the process, repeated and/or multiple
(ties) between partners may also act as a signal
and mechanism of trust (Gulati, 1995). High levels
of trust between partners are positively and sig-
nificantly related to the access of rich information
between the partners.2 Partners share rich informa-
tion with confidence because the development of
norms of reciprocity and sanctions for the violation
of trust dampens opportunistic behavior (Coleman,
1988). For instance, Uzzi (1996, 1997) found that
the development of trust between alliance part-
ners changed the nature of information that was
exchanged. Such exchange is geared towards value
creation as both partners commit to joint problem
solving. In contrast, in arm’s-length relationships
information exchange is restricted to price-based
information that is stripped of its context.
The dysfunctional effect of this dimension arises
when firms get locked into their current networks,
inhibiting their flexibility in creating new ties.
Such networks could have an adverse effect on
2
While high levels of trust may never materialize due to
co-opetition and other competitive dynamics, at a minimum,
repeated ties with a partner enables a firm to better understand
and appreciate their partner’s goals, motives and likely responses
to competitive initiatives. We thank an anonymous reviewer for
this insight.
Copyright  2002 John Wiley & Sons, Ltd.
Strategic Alliances as Social Capital 801
firm performance when the environment changes,
as they may not have the capabilities or the infor-
mation necessary to compete in the new environ-
ment (Pouder and St. John, 1996).
RESEARCH METHODOLOGY
Context of the study
We tested our model using alliance data over the
period 1980–94 from the global steel industry. The
global steel industry over the last two decades
has witnessed substantial alliance activity rang-
ing from licensing activities to technology trans-
fers to joint ventures (Madhavan, 1996). These
alliances were seen as a means to transfer tech-
nology and best practices, reduce capacity by con-
solidating operations and plants, cross-regulatory
borders and reduce competition. They emerged as
a significant component of a steel firm’s strat-
egy to achieve and maintain competitive advantage
as firms adopted them as a strategic response to
the changing environmental dynamics (Madhavan,
Koka, and Prescott, 1998). Apart from being a sig-
nificant component of strategy, such alliance activ-
ities were also a response to the changing environ-
mental dynamics. This makes the steel industry an
appropriate site to test our proposition.
As noted, we test for both construct and pre-
dictive validity of the proposed three-dimensional
model. Since these two aspects of validity testing
involve different analyses and methods, we first
describe the test for construct validity, followed
by a description of the test for predictive validity.
Test for construct validity
Data
We conducted the analysis on a population of
strategic alliances formed in the steel industry
between 1980 and 1994. We defined an alliance
to include any durable collaborative activity that
involved exchange of resources between firms
(Ahuja, 1996). To determine the boundary of the
alliance network we adopted a relationship crite-
rion whereby only those steel firms that had formed
at least one alliance during the period of the study
(1980–94) and their partners were included in the
study (Laumann, Marsden, and Prensky, 1983).3
3
Defining the network boundary is a critical decision in network
studies because of its effect in determining the position of firms
Strat. Mgmt. J., 23: 795–816 (2002)
802 B. R. Koka and J. E. Prescott
The primary alliance data source is the American
Metal Market (AMM), which is a trade journal of
the steel industry. We collected the alliance infor-
mation by analyzing every day’s issue of the AMM
for all 15 years.4 Overall, 706 alliances involving
422 firms from 48 countries were formed during
this period. Of the 422 firms in the database, 162
firms belonged to the steel industry. Seventy-two
firms were integrated steel firms; 54 were steel
mini-mills and 36 were specialty steel mills. The
database includes alliance history with informa-
tion on start date, type and nature of alliance,
alliance end date and scope and purpose. We cre-
ated alliance networks and matrices for each year.
These matrices were utilized to operationalize the
network and non-network measures for the differ-
ent dimensions of the social capital construct. Net-
work matrices for every year included all alliances
that were active that year. This enables a year-wise
test of the hypotheses.
Operationalization
We developed multiple measures for the structural
and relational dimensions. Since our objective was
to develop a complete model of social capital at
the firm level, we developed both network and
non-network measures. Developing non-network
measures is consistent with our focus to develop
the construct of social capital by identifying the
benefits underlying the different dimensions.
Information volume (INFOVOL). We identified
three measures to operationalize the information
volume dimension of social capital. The informa-
tion volume dimension corresponds closely to the
network structural concept of centrality. Of the
in the network (Laumann et al., 1983). Inaccurately specified
networks may provide misleading and inaccurate specifications
of firm positions. To the extent that previous studies (Gulati,
1995) have chosen to restrict their network to include only a
subset of all firms in the industry, the network may not be
completely reflective of the alliance activity in the industry. The
approach adopted in this study of including all steel firms that
have had at least one alliance in the network provides for a more
complete and accurate representation of the network.
4
In addition to the AMM we tried to ascertain the accuracy
of the data by checking with other data sources. These include
the Metal Bulletin, Dow Jones Retrieval Index, annual reports
of various firms, several Steel Industry Monitoring Reports
published by the U.S. International Trade Commission as well as
several books published on the steel industry, such as Mangum
et al. (1996) and Hogan (1991). These other sources provided
information that helped complete the data collection process as
well as confirm the data collected from the AMM.
Copyright  2002 John Wiley & Sons, Ltd.
many network measures that have been utilized to
capture the notion of centrality the eigen vector-
based measure of centrality (EIGENCEN) is par-
ticularly apposite (Bonacich, 1987; Ahuja, 1996)
because it utilizes the intensity of the relationships
to calculate centrality. The network matrix was
used to calculate this measure using the UCINET
V software program (Borgatti, Everett, and Free-
man, 1999). In addition, we operationalized infor-
mation volume using a count measure of the num-
ber of partners (PARTNER) a firm had as well as
a count measure of the number of ties (TIES) that
the firm had in each year. The count measure of
the number of partners is the number of partners
with whom the firm had at least one tie. The count
measure of the number of ties is the number of
direct ties that a firm had with all its partners.
Information diversity (INFODIV). We opera-
tionalized information diversity using the net-
work measure structural holes developed by Burt
(1992, 1997) and two heterogeneity index mea-
sures. ‘Structural holes’ represents the extent to
which the partners of the firm are themselves con-
nected to each other. Thus this concept explicitly
focuses on the relationship patterns of the firm’s
partners. Specifically we used the constraint mea-
sure (HOLES) to operationalize the structural holes
concept. A high constraint indicates that the firm’s
partners are densely connected to one another,
while a low constraint measure indicates that the
firm’s ego network is sparsely connected. The con-
straint measure was calculated using the UCINET
V software program. In addition, we developed
two other diversity measures: one to measure the
diversity in the nationality of the partners of the
firm and the other to measure the diversity in terms
of the technology groups to which the firm’s part-
ners belong. We used Blau’s heterogeneity index
(Blau, 1977: 78) to calculate this measure. A
high heterogeneity index indicates high diversity
in terms of nationality/technology of the partners.
For nationality heterogeneity index (COUN-
TRY) we classified firms in terms of their nation-
ality. Similarly for technology heterogeneity index
(TECH) we classified firms into the following
six groups: Integrated Steel firms, Specialty Steel
firms, Mini-mill, Downstream (to the steel indus-
try), Upstream, and Others, in accordance with
previous studies (Madhavan et al., 1998).
Strat. Mgmt. J., 23: 795–816 (2002)

Information richness (INFORICH). We devel-
oped three measures to operationalize informa-
tion richness. Consistent with our theoretical argu-
ments, we developed an index of cumulative
alliance activity that captures the firm’s overall
experience with alliances. In addition, we oper-
ationalized information richness in terms of the
number of repeated ties with the same partner and
current multiple ties with the same partner for each
firm. Firms that share alliance history and experi-
ence with partners by forming many repeated and
multiple ties with each other are likely to exchange
information that is rich with value and context
because of the increased opportunities to learn-by-
doing, leveraging relationship-based investments
and possibly trust. Thus our measures emphasize
the overall experience of a firm with alliances and
its history with partners. We accordingly developed
the following measures:
(a) Cumulative index of alliance activity (CU-
MACT). We calculated the cumulative index
of alliance activity as a ratio of the cumulative
number of years of alliance activity that the
firm has to the cumulative number of years
of total alliance activity in the network. As
noted above, this measure is a reflection of the
experience and history of the firm in managing
alliances in the network over time.
(b) Multiplex ties (MULTIPLE). This was mea-
sured as the ratio of the total number of multi-
plex partners of the firm to the total number of
partners. Multiplex ties reflect the satisfaction
of the partners with their initial collaborative
venture that leads them to form other alliances
with the same partner in order to take advan-
tage of their cooperative dynamics.
(c) Repeated ties (REPEAT). This was measured
as the ratio of the total number of partners with
whom the firm had repeated ties to the total
number of partners. We used a moving 3-year
window to identify repeated ties to incorporate
the previous history of cooperation between
partners.
Results
We tested the construct validity of social capital as
a second-order confirmatory factor analysis using
structural equation modeling (SEM). SEM enables
hypothesis testing of the proposed factors because
it explicitly tests both the overall qualities of the
Copyright  2002 John Wiley & Sons, Ltd.
Strategic Alliances as Social Capital 803
proposed model and the specific parameters com-
posing the model. We used LISREL to test for
construct validity. The first-order latent constructs
are information volume, information diversity and
information richness. As hypothesized, these three
together define the second-order latent variable
construct—social capital. The operationalized net-
work and non-network measures are the indicator
variables that measure the three first-order latent
constructs.
We conducted the analysis year-wise for the 10-
year period 1983–92. We restricted the analysis to
this period (even though the data set covers the
years 1980–94) in order to address time-censoring
issues. Consistent and stable results across the
years enhanced our confidence in validity and
reliability as well as attesting to the stability of
the social capital construct.
Before discussing the results, we first examine
descriptive statistics to establish the face valid-
ity of the measures (Table 1). We examined the
descriptive statistics year-wise separately for all
the 10 years and found similar results. The dis-
cussion below pertains to the complete data set.
A review of the descriptive statistics reveals
that there is significant correlation between the
measures. This is not surprising. Theoretically,
the different components of social capital are not
orthogonal constructs. Additionally, the measures
are calculated from the same database. Finally,
the magnitude of correlation is as expected. That
is, the within-dimension variable correlations are
higher than the correlations of variables between
dimensions. The information volume (INFOVOL)
measures are all correlated with each other as
expected. The count number of ties (TIES)
has a high correlation to eigenvalue centrality
(EIGENCEN) (0.896; p < 0.001) and count mea-
sure of partners (PARTNER) (0.956; p < 0.001).
Similarly, PARTNER and EIGENCEN are also
correlated (0.787; p < 0.001), providing evidence
that they are measuring the same underlying com-
ponent, indicating support for the convergent valid-
ity of this dimension. Support for the conver-
gent validity can also be discerned by examin-
ing the correlations of the information diversity
(INFODIV) measures and the information richness
(INFORICH) measures. Technology heterogeneity
(TECH) and country heterogeneity (COUNTRY)
are, as expected, highly correlated with the HOLES
measure (−0.716, p < 0.001; −0.774, p < 0.001
respectively) as they are all measures of the same
Strat. Mgmt. J., 23: 795–816 (2002)
 804

Copyright  2002 John Wiley & Sons, Ltd.

Table 1. Descriptive statistics for the social capital variables for the period 1983–92

MEAN S.D. TECH COUNTRY MULTIPLE CUMACT PARTNER TIES EIGENCEN HOLES REPEAT
B. R. Koka and J. E. Prescott

TECH 0.2488 0.272 1.000

COUNTRY 0.2385 0.2857 0.636 1.000
MULTIPLE 0.0923 0.2122 0.144 0.193 1.000
CUMACT 0.0229 0.04856 0.445 0.459 0.271 1.000
PARTNER 3.9201 5.653 0.536 0.557 0.241 0.875 1.000
TIES 5.2885 10.1426 0.458 0.471 0.296 0.929 0.956 1.000
EIGENCEN 3.5796 9.2029 0.344 0.315 0.25 0.897 0.787 0.896 1.000
HOLES 0.719 0.3123 −0.716 −0.774 −0.212 −0.583 −0.724 −0.614 −0.465 1.000
REPEAT 0.0863 0.2074 0.135 0.186 0.821 0.299 0.251 0.295 0.251 −0.217 1.000

N = 2052
All correlations are significant at p < 0.001 level

Strat. Mgmt. J., 23: 795–816 (2002)


social capital component—Information diversity.5
Similarly multiplex ties (MULTIPLE) and repeated
(REPEAT) ties are correlated as expected (0.821;
p < 0.001), indicating that they are measuring the
same component—INFORICH.
The correlations between the Index of cumu-
lative activity (CUMACT) and the information
volume measures EIGENCEN (0.897; p < 0.001),
PARTNER (0.875; p < 0.001) and TIES (0.929;
p < 0.001) was surprising because we had oper-
ationalized CUMACT as the experience of a
firm in creating alliances. However, its correla-
tions with the other information richness mea-
sures such as MULTIPLE (0.271; p < 0.001)
and REPEAT (0.299; p < 0.001) is comparatively
low. Given the low correlation of CUMACT
we dropped it from the rest of the analysis.
This had the effect of reducing the observed
indicator variables for the social capital com-
ponent—INFORICH—from three to two vari-
ables. Apart from this, there is discriminant valid-
ity for the measures. TECH and COUNTRY
are less correlated with EIGENCEN (0.344, p <
0.001; 0.315, p < 0.001 respectively) and the
other information volume measures.6 Similarly,
MULTIPLE and REPEAT are also less correlated
with the other dimension measures, providing pre-
liminary evidence for the argument that INFO-
DIV, INFORICH, and INFOVOL are different
constructs. Finally all the measures are signifi-
cantly correlated in the same direction, indicating
that they are all indicators of a similar construct.
Thus, they provide face validity for the inclusion of
both network and non-network measures to opera-
tionalize social capital because the nature of social
5
The negative correlations are an outcome of the way we
operationalized the variables. A high TECH and COUNTRY
measure indicates high INFODIV, just as a low HOLES measure
indicates high INFODIV.
6
An issue here is the correlation between the constraint measure
for structural holes (HOLES) and the information volume
measures EIGENCEN (−0.465; p < 0.001) and PARTNER
(−0.724; p < 0.001). The high correlation between HOLES
and PARTNER may be explained if we examine the
operationalization of the constraint measure. HOLES calculates
if the partners of a firm are themselves connected. In other
words, a firm can have a large number of partners who are
not connected amongst themselves, resulting in a position that
provides high nonredundancy and therefore low constraint to
the firm. A significantly lower correlation with EIGENCEN can
be attributed to the fact that EIGENCEN, on the other hand,
depends on denser relations between the partners.
Copyright  2002 John Wiley & Sons, Ltd.
Strategic Alliances as Social Capital 805
capital available through the non-network mea-
sures seem to be different from those available
through the network measures.
Lisrel analysis results. We tested for construct
validity by individually examining every year of
the 10-year period of the study (1983–92). We
checked for the reliability of the tested model by
developing a structural model for one year (1983)
and testing the same model for each of the other
years. Stable and consistent goodness-of-fit indices
over the years enhance our confidence in the valid-
ity of the model as well as the reliability of its
structure. Our approach thus addresses a criticism
of LISREL analysis that the data can be manip-
ulated to fit the model under study (Schumacker
and Lomax, 1996). The second-order structural
model is depicted in Figure 1. We addressed the
issue of multivariate non-normality by utilizing the
asymptotic covariance matrix. Under conditions of
multivariate non-normality, maximum likelihood
estimates do not provide consistent estimates and
standard errors. Utilizing the asymptotic covari-
ance matrix provides more consistent and reliable
estimates and standard errors.
We provide multiple measures to assess over-
all fit of the model since tests that provide fit
along multiple indices are more robust and valid
than tests that fit along fewer indices. Interpreta-
tions of the model fit are heuristics-based (Schu-
macker and Lomax, 1996). The Satorra–Bentley
scaled chi-square assesses whether the difference
between the data-driven covariance matrix and the
model-driven covariance matrix is significant. The
Satorra–Bentley chi-square adjusts for the non-
normality in the data and therefore is more appro-
priate than the minimum fit function chi-square.
In addition we examined other model fit measures
such as goodness-of-fit index (GFI), normed fit
index (NFI), non-normed fit index (NNFI), com-
parative fit index (CFI), incremental fit index (IFI),
and relative fit index (RFI). Goodness-of-fit indices
ranging between 0.9 and 1 indicate good fit.
A second issue is to look at the significance of
the parameters of the specified paths (see figure 1).
LISREL provides both the estimates as well as the
standard errors for each of the paths. The overall fit
indices provide support for the model. Significance
tests for the parameters of each path test the
accuracy and validity of the model specifications.
Table 2 shows the parameter estimates for the
Strat. Mgmt. J., 23: 795–816 (2002)
 806

Table 2. Construct validity of the social capital model using Lisrel: three-factor solution Year-wise results for the path coefficients

1983 1984 1985 1986 1987 1988 1989 1990 1991 1992

Measurement model

Copyright  2002 John Wiley & Sons, Ltd.

Country: 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00
INFODIV
Tech: 0.843 0.86 0.897 0.873 0.949 0.895 0.81 0.812 0.816 0.859
INFODIV (0.0705) (0.0632) (0.0717) (0.0652) (0.0636) (0.0575) (0.0525) (0.0505) (0.0439) (0.0485)
11.963 13.594 12.498 13.393 14.906 15.558 15.415 16.090 18.609 17.723
B. R. Koka and J. E. Prescott

Holes: −1.246 −1.203 −1.315 −1.239 −1.474 −1.421 −1.258 −1.219 −1.178 −1.296
INFODIV (0.0875) (0.0604) (0.0757) (0.0724) (0.0753) (0.0651) (0.0530) (0.0570) (0.0476) (0.0569)
−14.245 −19.917 −17.380 −17.110 −19.56 −21.812 −23.722 −21.405 −24.728 −22.777
Partner: 0.438 0.424 0.487 0.529 0.70 0.762 0.665 0.689 0.725 0.864
INFOVOL (0.0779) (0.0937) (0.0806) (0.0854) (0.0538) (0.0809) (0.0719) (0.0844) (0.0885) (0.0867)
5.624 4.520 6.050 6.198 13.015 9.420 9.256 8.166 8.187 9.956
Ties: 0.828 0.805 0.969 0.923 1.10 1.372 1.235 1.274 1.411 1.539
INFOVOL (0.0879) (0.0982) (0.0912) (0.0921) (0.0532) (0.0881) (0.0826) (0.0968) (0.0998) (0.0907)
9.413 8.193 10.618 10.020 20.671 15.566 14.955 13.163 14.142 16.976
Eigencen: 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00
INFOVOL
Multiple: 0.900 0.988 1.281 0.875 1.155 0.951 1.298 1.083 1.09 1.116
INFORICH (0.0996) (0.18) (0.182) (0.101) (0.188) (0.183) (0.29) (0.149) (0.175) (0.191)
9.033 5.487 7.038 8.686 6.14 5.198 4.482 7.249 6.226 5.829
Repeat: 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00 1.00
INFORICH

(continued overleaf )

Strat. Mgmt. J., 23: 795–816 (2002)

 Table 2. (Continued )

1983 1984 1985 1986 1987 1988 1989 1990 1991 1992

Structural model
INFOVOL: 9.741 9.555 9.33 8.583 8.422 8.264 8.306 7.989 7.938 7.871

Copyright  2002 John Wiley & Sons, Ltd.

SOCIAL (2.334) (2.502) (2.167) (2.022) (1.259) (1.550) (1.649) (1.562) (1.55) (1.485)
CAPITAL 4.173 3.819 4.306 4.246 6.691 5.331 5.036 5.115 5.123 5.300
INFODIV: 0.169 0.171 0.149 0.165 0.156 0.147 0.157 0.164 0.162 0.156
SOCIAL (0.0145) (0.0125) (0.0116) (0.0132) (0.0100) (0.00892) (0.0102) (0.0108) (0.0103) (0.00982)
CAPITAL 11.655 13.689 12.844 12.468 15.57 16.443 15.439 15.241 15.704 15.85
INFORICH: 0.0683 0.036 0.0554 0.07 0.0557 0.0579 0.0298 0.047 0.0435 0.0399
SOCIAL (0.0120) (0.0178) (0.0108) (0.0107) (0.0104) (0.00963) (0.0133) (0.0111) (0.0118) (0.00984)
CAPITAL 5.705 2.018 5.152 6.525 5.363 6.011 2.244 4.238 3.687 4.054
Sample size 145 154 170 190 208 218 222 238 250 257
d.f. 17 17 17 17 17 17 17 17 17 17
Satorra–Bentley 28.338 23.672 28.032 27.233 12.249 12.866 32.808 17.901 23.237 25.73
chi-square (p < 0.04) (p < 0.13) (p < 0.05) (p < 0.06) (p < 0.79) (p < 0.75) (p < 0.01) (p < 0.40) (p < 0.14) (p < 0.08)
Fit indices
GFI 0.96 0.97 0.97 0.97 0.99 0.99 0.97 0.98 0.98 0.98
RMSEA 0.068 0.051 0.062 0.056 0.0001 0.0001 0.065 0.015 0.0384 0.078
NFI 0.98 0.98 0.98 0.98 0.99 0.99 0.98 0.99 0.99 0.99
NNFI 0.99 0.99 0.99 0.99 1.00 1.00 0.99 0.99 0.99 0.99
CFI 0.99 0.99 0.99 0.99 1.00 1.00 0.99 0.99 0.99 0.99
IFI 0.99 0.99 0.99 0.99 1.00 1.00 0.99 0.99 0.99 0.99
RFI 0.96 0.97 0.97 0.97 0.98 0.98 0.97 0.98 0.98 0.98
SRMR 0.075 0.092 0.071 0.062 0.045 0.053 0.085 0.066 0.072 0.054

First row of each cell contains the parameter estimates. Numbers in parentheses are standard errors. Third row of each cell are the t-values. GFI, goodness of fit index; RMSEA,
root mean square error of approximation; NFI, normed fit index; NNFI, non-normed fit index; CFI, comparative fit index; IFI, Incremental fit index; RFI, relative fit index; SRMR,
standardized root mean square residual
Strategic Alliances as Social Capital

Strat. Mgmt. J., 23: 795–816 (2002)

807
808 B. R. Koka and J. E. Prescott
specified paths, their significance, and the overall
fit measures for every year.
All of the paths specified in our model are sig-
nificant at p < 0.01 (t-value greater than 2.90) or
above. The results provide strong support for con-
vergent validity. The hypothesized paths are signif-
icant and in the predicted direction, as proposed.
Second, the paths of each of the first-order dimen-
sions are significant in measuring the second-order
construct—social capital. All fit indices are above
0.9 for all years. Another point that lends further
support to the hypothesized model is the stability
and consistency of all the parameter estimates for
every year of the analysis, testifying to the reli-
ability and robustness of the model. To eliminate
the alternative rival hypothesis that social capital is
two-dimensional, as proposed by Burt (1998) and
Nahapiet and Ghoshal (1998), we compared the
three-dimensional model fit with two-dimensional
model fit. The three-dimensional model fit pro-
vided consistently better results.7
We further conducted a factor analysis8 to check
for discriminant validity: are the network and non-
network measures actually reflective of three dif-
ferent dimensions or are they measuring the same
dimension? We conducted factor analysis using the
principal component method with varimax rota-
tion. We found strong support for the three-factor
model presented in this paper utilizing a variety
of criteria such as total and individual factor vari-
ance explained, eigenvalues for each of the fac-
tors and the loading of the individual variables
on the appropriate factors. Using multiple statis-
tical methods and arriving at similar conclusions
is thus evidence of the robustness of the results
while enhancing our confidence in the conclusions
that we can derive from the two analyses.
Both analyses provide strong support for a mul-
tidimensional view of social capital. There are
several arguments to accept the three-factor solu-
tion. First, there is the empirical evidence with
the consistently strong model fit in the LISREL
analysis and high loadings of the different mea-
sures onto three factors, suggesting that there are
three different forms of social capital and that
these different measures capture different aspects
of this construct. Second, the three-factor solution
7
Results are with the first author.
8
Since the results are consistent with the LISREL analysis we
do not report them here. Both the LISREL and factor analysis
results strongly support a three-factor solution as hypothesized.
The results are available from the first author.
Copyright  2002 John Wiley & Sons, Ltd.
provides further evidence supporting the hypothe-
sis that the three dimensions are information vol-
ume, information diversity, and information rich-
ness. Third, the strong loading of MULTIPLE and
REPEAT on the third factor indicates that firms dif-
fer in terms of the relationship dynamics they share
with some partners. Another reason is the imper-
ative to develop managerial prescriptions. Treat-
ing information volume, information diversity, and
information richness separately helps in provid-
ing more nuanced prescriptions. Such prescriptions
lead managers to focus on issues such as partner
characteristics, the partner’s relationships, alliance
dynamics, and management, in addition to their
other criteria for alliance activity. For all these rea-
sons, we conclude that there is considerable and
significant support for a three-dimensional model
of social capital.
Test for predictive validity and the contingent
nature of social capital
Having established construct validity for the infor-
mation dimensions of social capital, we further
tested for its predictive validity. Predictive validity
for a construct in social sciences is the degree of
correspondence of the construct with a particular
criterion (Carmines and Zeller, 1979). Our primary
reason for developing a multidimensional view of
social capital is to explore its contingent effect
on firm performance. As we argued, the need to
identify the different information dimensions of
social capital arises because they have differen-
tial effects on firm performance depending on the
firm’s context. In other words, predictive valid-
ity for the multidimensional construct of social
capital can be established by demonstrating that
under particular contexts the different information
dimensions have differential effects. We demon-
strate predictive validity by focusing on the insti-
tutional context (country of origin) of the firms.
Specifically, we propose that the nationality of the
firm is a contingency that affects the relationship
of the information dimensions of social capital to
firm performance.
We focused on firms from the triad, North Amer-
ica, Japan and Europe, in order to examine our
proposition. As Mangum et al. (1996) point out,
competitive dynamics among firms from the triad
was more interdependent than with firms from the
other countries. Second, much of the alliance activ-
ity in the industry was concentrated among firms
Strat. Mgmt. J., 23: 795–816 (2002)

from the triad. For instance, over 95 percent of the
alliances formed between 1980 and 1994 involved
at least one firm from the triad. More importantly,
the institutional context of these three regions as
reviewed below is different, making nationality an
appropriate contingency.
The North American market was the largest mar-
ket for the steel industry, accounting for almost
100 MT per year. In the early 1980s, less than
20 percent of the production capacity of the North
American firms was under continuous casting tech-
nology, resulting in higher cost and lower pro-
ductivity. Competitive pressure from cheaper steel
from Japan and Europe forced North American
firms to undertake a series of restructuring actions
that involved shutting down plants with obsolete
technology, laying off people, seeking technical
assistance and continuous casting technology, and
lobbying the government for protection through
Voluntary Restraint Agreements (VRAs) (Madha-
van et al., 1998). While protectionist measures
gave a temporary respite by reducing the flow of
imported steel, firms still needed to streamline their
operations in order to compete. It is in this con-
text that alliance effects became important for firm
performance.
Japanese firms, on the other hand, were techno-
logically more advanced in the early 1980s, with
more than 70 percent of their production under
continuous casting technology. Since their produc-
tion capacity was much larger than the Japanese
market, these firms had to seek markets outside
the borders of Japan. The size of the North Amer-
ican market, VRA restrictions in the U.S. market
and the presence of Japanese auto transplants were
a significant factor in driving alliances between
Japanese and American integrated steel firms. Thus
all six Japanese integrated steel firms formed joint
ventures with U.S. integrated steel firms during
this period. In addition, Japanese steel makers
sought to expand their reach in emerging markets
such as China, the Middle East and South Asia
through a series of build-operate-and-sell agree-
ments. Finally, Japanese integrated steel firms were
also seeking to reduce their dependence on steel
by forming alliances with companies from other
industries in a bid to diversify.
European firms, however, were constrained in
their activities. Although 50 percent of their pro-
duction was under continuous casting technology,
European firms had to deal with an institutional
context that was different from the Japanese and
Copyright  2002 John Wiley & Sons, Ltd.
Strategic Alliances as Social Capital 809
American firms. Actions with regard to restruc-
turing were closely coordinated by a multitude of
groups that included the European Coal and Steel
Community (ECSC), national and regional gov-
ernments, and unions. Thus, steel firms’ efforts
to shut down production plants, form joint ven-
tures, lay off employees, and cut back on produc-
tion were the result of complex negotiations with
a variety of interest groups (Houseman, 1991).
One important decision heuristic used in the nego-
tiations was the geographic proximity of firms.
For example, to minimize the disruptive effects
of lay-offs within a geographical area, if two
facilities were in close proximity one would be
closed and the remaining facility would oper-
ate as a joint venture between the two original
owners. In other words, restructuring decisions
were based less on market-based considerations
of increasing efficiency (by increasing capacity
utilization) and more on institutional consider-
ations. In addition to influencing alliance deci-
sions, such firms also had to operate under a
variety of regulations that included production
quotas and minimum price requirements that fur-
ther affected their operations. Given their different
institutional contexts (restructuring/protectionist,
market expansion needs and constrained coordina-
tion) we thus expect to find a contingency relation-
ship between our information dimensions of social
capital and performance for these three nationality
groupings.
Data
Given our contingency variable, the analysis was
restricted to firms from the steel industry that
belonged to the triad to ensure theoretical and sta-
tistical consistency. From the 162 steel firms in our
data set, we conducted the analysis on a sample
comprising 68 steel firms with 530 observations
over 10 years (1983–92). Even though we col-
lected alliance data from 1980–94, we conducted
the analysis only for the 10-year period 1983–92 in
order to address time-censoring issues. The selec-
tion of 68 firms included the top 50 firms in the
steel industry from the chosen countries in terms
of sales turnover and is consistent with current
methodological approaches that restrict analysis to
a selected group of firms (Gulati, 1995). Compet-
itive dynamics among firms from the triad was
more interdependent than with firms from the other
countries (Mangum et al., 1996), indicating that
Strat. Mgmt. J., 23: 795–816 (2002)
810 B. R. Koka and J. E. Prescott
much of the alliance activity was concentrated
among the firms in the sample. To ensure that
there was no bias in the validity of the results
due to sampling, we also conducted a random-
effects model analysis. The random-effects model
tests for the assumption that the 68 firms are
a random sample of the population. We found
results consistent with the fixed effects model
reported below, reinforcing our confidence in their
robustness.
Operationalization
We utilized the factor scores derived from the
principal components factor analysis in order to
develop a single composite measure for each of
the three dimensions of social capital.
Performance. Based on discussions with sev-
eral steel industry analysts at World Steel Dynam-
ics and Prudential Securities, we operationalized
firm performance in the steel industry as sales per
employee in constant U.S. dollars (Productivity).
The sales-per-employee variable measures produc-
tivity,9 which is a reflection of the efficiency of
the firm’s operations. We collected performance
data from Worldscope and supplemented it where
necessary with information from annual reports.10
We lagged the performance variables by 1 year. A
1-year lag is consistent with our productivity mea-
sure since productivity improvements are likely to
have an immediate impact. We used a 2-year lag
and found consistent but not as strong results.
Analyses
In order to test our proposition longitudinally
we used a fixed-effects panel model. This model
addresses the issue of serially correlated errors that
could otherwise affect the result’s validity. It also
addresses the issue of unobserved heterogeneity
within firms by introducing each firm as a dummy
9
Ideal performance measures for the steel industry should prob-
ably be based on steel tonnage. Thus, a better productivity mea-
sure would be tonnage per employee and profitability measure
would be operating income per ton. However, tonnage details
were not available for all the firms for all the years on a consis-
tent basis.
10
We adjusted for currency differences by converting all figures
to U.S. dollars by taking the exchange ratio between the U.S.
dollar and the foreign currency that was in effect on June 30 of
each year. In addition, we adjusted for inflation by developing
constant price measures with the year 1991 as a base.
Copyright  2002 John Wiley & Sons, Ltd.
variable in the regression equation (Greene, 1993).
Modeling each firm as a dummy variable acts as
a control for all other unobserved and unknown
time-invariant and firm-specific factors that may
affect the dependent variable. However, using the
firm as a dummy variable may be so powerful that
it may capture all the variance in performance,
leading to inconclusive results for our proposition.
In other words, the fixed-effects model is a con-
servative test. To the extent that the hypothesized
variables are significant in such a model, we argue
that it provides strong support for the predictive
validity of the results as well as the theoretical
logic underlying it. We conducted the test using
the TSCSREG procedure in SAS.
Results
Tables 3 and 4 provide the results of the analy-
sis. Model 1 provides the results for the complete
sample. Models 2, 3, and 4 are separate results
for the American, European, and Japanese firms.
A study of the four models in Table 3 indicates
that there is significant difference across the dif-
ferent institutional contexts for the effect of the
different dimensions of social capital on firm per-
formance. These results provide support for our
proposition, thus establishing predictive validity
and establishing the contextual nature of the infor-
mation dimensions of social capital.
In Model 1, both the information volume and
information diversity dimensions are significantly
and positively related to firm performance. How-
ever, when we look at the results for the different
nationality subgroupings, we find that the results
change. While the overall pattern is replicated for
Japanese firms (Model 4), American and Euro-
pean firms exhibit different patterns. For Amer-
ican firms (Model 2) only information volume
significantly affects performance. The results are
even more interesting for European firms, where
none of the dimensions are significant (Model 3).
An explanation for these findings can be found
in the different competitive dynamics and insti-
tutional context of the groups. Japanese firms
clearly needed to form many ties across a wide
spectrum of firms. The size of their market and
their industry capacity forced them to look for
markets elsewhere. Instead of setting up green-
field ventures on their own (which would further
Strat. Mgmt. J., 23: 795–816 (2002)
 Strategic Alliances as Social Capital 811
Table 3. Fixed effects model with nationality as contextual variable

Complete set American firms European firms Japanese firms

Model 1 Model 2 Model 3 Model 4

Intercept 0.421∗∗∗∗ 0.252∗∗∗∗ 0.198∗∗∗∗ 0.458∗∗∗∗

(0.032) (0.0203) (0.014) (0.058)
Information 0.056∗∗∗∗ 0.022∗∗∗∗ 0.0104 0.089∗∗∗∗
volume (0.008) (0.0045) (0.009) (0.0182)
Information 0.028∗∗∗ 0.008 −0.002 0.063∗∗
diversity (0.008) (0.0049) (0.006) (0.022)
Information 0.008 0.007 0.002 0.012
richness (0.009) (0.0046) (0.006) (0.0316)
Firm effects Included Included Included Included
No. of firms 68 26 23 19
R2 0.8714 0.808 0.73 0.75
F -value 43.38∗∗∗ 25.55∗∗∗ 15.89∗∗∗ 25.8∗∗∗
d.f. 459 171 150 132

Dependent variable: sales per employee (productivity)

Numbers in parentheses: standard errors
∗∗∗∗
p < 0.0001; ∗∗∗ p < 0.001; ∗∗ p < 0.01; ∗ p < 0.05; + p < 0.1

Table 4. Fixed effects model with nationality-integrated as contextual variable

Complete set American European Japanese

Model 1 integrated integrated integrated
Model 5 Model 6 Model 7

Intercept 0.421∗∗∗∗ 0.202∗∗∗∗ 0.148∗∗∗∗ 0.491∗∗∗∗

(0.0320) (0.02) (0.013) (0.054)
Information 0.056∗∗∗∗ 0.022∗∗∗∗ 0.007 0.107∗∗∗∗
volume (0.008) (0.004) (0.009) (0.016)
Information 0.028∗∗∗ 0.007 −0.005 0.102∗∗
diversity (0.008) (0.006) (0.007) (0.038)
Information 0.008 0.009∗ −0.013+ 0.035
richness (0.008) (0.004) (0.007) (0.0262)
Firm effects Included Included Included Included
No. of firms 68 15 16 10
R2 0.8714 0.7573 0.5128 0.59
F -value 43.38∗∗∗ 19.98∗∗∗ 6.01∗∗∗ 8.87∗∗∗
d.f. 459 112 106 77

Dependent variable: sales per employee (productivity)

Numbers in parentheses: standard errors
∗∗∗∗
p < 0.0001; ∗∗∗ p < 0.001; ∗∗ p < 0.01; ∗ p < 0.05; + p < 0.1

increase capacity), these firms adopted a strat-
egy of building a network of alliances that pro-
vided them with access to several diverse markets.
Japanese firms that formed multiple alliances with
different partners from many countries were thus
more successful.
In the 1980s, American firms needed to
upgrade their technology to continuous casting
technology to remain competitive. In order to do
that, American firms formed multiple alliances
with Japanese firms. Thus, almost all American
Copyright  2002 John Wiley & Sons, Ltd.
integrated firms formed one or more alliances
(focusing on information volume and richness)
with some Japanese integrated firms during
this period. Diversity does not seem to be
important for American firms, for two reasons.
First, continuous casting technology was proven
technology, available since the 1960s. There
was no exploration involved in accessing that
technology. Second, the size of the American
market ensured that they did not need to look
beyond their own borders for their markets.
Strat. Mgmt. J., 23: 795–816 (2002)
812 B. R. Koka and J. E. Prescott
On the other hand, European alliance strategy
was less successful. As pointed out in the
theory section, alliance strategy for European
firms in terms of timing, choice of partners,
and purpose of alliance appear to be driven by
coalition-based institutional considerations rather
than market-efficiency norms resulting in absence
of any significant effect of social capital on firm
performance (Houseman, 1991; Ahlbrandt and
Giarratani, 1992). For instance, in France this
involved the consolidation of several smaller steel
firms into two large firms, Usinor and Sacilor,
that again combined to form Usinor–Sacilor.
Similarly, Cockerille and Sambre combined to
form Cockerille –Sambre in Belgium, which in
turn consolidated their operations with Arbed in
neighboring Luxemburg. The story in Germany
was similar, with a progressive consolidation
of plants belonging first to Thyssen and Krupp
Stahl and later on with Hoesch, resulting in the
formation of Thyssen–Krupp–Hoesch in the early
1990s.
Since these nationality groups included inte-
grated mills, mini-mills and specialty plants, we
examined our proposition for the integrated mills
in each of the nationality groups.11 Again, we
focused on integrated mills because they were
involved in over 80 percent of the alliances
formed during the period. While the results for the
Japanese integrated firms (Model 7 in Table 4) are
again similar to the complete sample (Model 1),
the results changed again for American and Euro-
pean integrated firms. For American integrated
firms (Model 5 in Table 4), information richness
and volume were significant and positively related
to performance. Given that technical assistance
was one of the motivations for the alliances, firms
that were able to access rich information flows
through repeated ties with the same firms seemed
to have performed better. On the other hand, for
European integrated firms (Model 6 in Table 4),
high levels on the information richness dimen-
sion were significant and negatively related to firm
performance. It appears that in an institutional con-
text where constrained coordination is required
across multiple groups, often with divergent inter-
ests, repeated and multiple ties between partners
affect the firms negatively. Since efficiency did
11
We did not do this analysis for other technology groups
because there were not enough firms from the other technology
groupings in the sample.
Copyright  2002 John Wiley & Sons, Ltd.
not seem to be the primary criterion for making
alliance decisions, the development of rich infor-
mation flows developed ties that bound partners in
nonproductive ways.
Our tests provide support for the predictive
validity and thus contingent nature of the mul-
tidimensional construct of social capital. Differ-
ent dimensions of social capital have differen-
tial effects on firm performance depending on the
firm’s context. Sometimes these effects are even
dysfunctional. While we have offered explanations
as to why such differences exist in our sample,
clearly more needs to be done in terms of hypoth-
esis testing in order to develop a more complete
theory of social capital.
DISCUSSION
This study is a step towards developing a more
comprehensive theory of social capital. By explic-
itly conceptualizing social capital at the network
level, this study brings to the attention of man-
agers the need to consider the entire set of alliances
when making alliance decisions. However, while
the construct of social capital itself has found
widespread acceptance, there is still considerable
confusion regarding its meaning, measures, and
effects (see Portes and Landolt, 1996). This study
is one of the few that formally tests for the con-
struct validity and contingent nature of social cap-
ital. In the process it brings together a wide range
of measures that have been utilized by the different
studies. The key to the integration and reconcilia-
tion of the seemingly different measures and oper-
ationalizations of social capital lies in the fact that
this study focuses on understanding the differen-
tial information benefits available to firms through
their alliances. This enabled us to move away
from a predominantly structural and network-based
view of social capital to include non-network and
alliance dynamics-oriented concepts and measures
in order to validate a multidimensional construct
of social capital. The considerable support from
both the LISREL and factor analysis for the theo-
rized models, as well as establishing the contingent
nature of social capital, provides a foundation for
its use.
Establishing the construct and predictive validity
of social capital as a multidimensional construct
provides an opportunity to explore a variety of
core research questions across multiple levels of
Strat. Mgmt. J., 23: 795–816 (2002)
 Strategic Alliances as Social Capital 813

analysis. As an illustration of the possibilities,
Figure 2 graphically displays the positions of 59
steel firms along the three dimensions for the years
1983 and 1992. The results of the factor analysis
allowed us to create standardized factor scores for
the three dimensions for each firm. Calculating a
relative score created a profile of social capital for
each firm. The relative score is computed as the
ratio of its level of social capital on a dimension
divided by the highest level of social capital on
the dimension. A relative score is an appropriate
measure for examining the degree of differences
across firms for each dimension.
At least three important implications of our work
are evident from the figures. First, firms differ in
their level of social capital, indicating that they
pursue and receive different benefits. While the
graph illustrates this implication visually, correla-
tion analysis demonstrates it statistically. The Pear-
son correlations across the three dimensions are
not significant, indicating that firms differ in their
structural and relational positions. The rank order
correlations across the three dimensions reveal one
significant correlation (0.38, p < 0.01), albeit at
a lower level between the information volume
and information richness dimensions. These results
illustrate that firms that rank high along one
dimension are not typically high along the other
two dimensions. For example, the largest steel
firm, Nippon Steel, ranks first on information

Arbed --- 1983

0.8
Information

0.6
Richness

Nippon
0.4

0.2

0 1
0.7
0.4
-0.2 0.1
-0.2 0 -0.2 Information
0.2 0.4 -0.5 Diversity
0.6 0.8 -0.8
1
Information Volume

Arbed
--- 1992

0.8
Information

0.6
Richness

0.4 Nippon
0.2

0 1
0.7
0.4
-0.2 0.1
-0.2 Information
-0.2 0 -0.5 Diversity
0.2 0.4 -0.8
0.6 0.8 1
Information Volume

Figure 2. Graphic display of social capital for steel firms: 1983 and 1992. Note: the scales for the graphs represent
the relative level of social capital for each firm. The relative score for each firm is computed as the ratio of its level
of social capital on a dimension divided by the highest level of social capital on the dimension
Copyright  2002 John Wiley & Sons, Ltd. Strat. Mgmt. J., 23: 795–816 (2002)
814 B. R. Koka and J. E. Prescott
volume, 53rd on information diversity, and 36th
on information richness. One intriguing question is
whether firms actively seek certain types of social
capital benefits from their set of alliances.
A second implication is that some firms change
their relative positions along dimensions, while
others remain static. For example, Arbed moved
from a low to moderately high position (from a
rank of 50 to 29 from 1983 to 1992) on the infor-
mation diversity dimension. On the other hand,
Nippon retained its number one rank on infor-
mation volume across the 10 years without any
significant change on the other two dimensions.
The results suggest that firms may maneuver to
establish social capital. Research into the causes,
purposefulness, contingencies, and outcomes of
alliance moves which change a firm’s level and
type of social capital would assist managers as they
implement their alliance strategy.
The graphs reveal a third implication, namely
that the entire network has changed. The
Pearson correlation for each social capital
dimension between 1983 and 1992 is significant.
Information volume (0.95) shows the greatest
stability, followed by information diversity (0.60)
and information richness (0.55). The rank
order correlations—information volume (0.66),
information diversity (0.65), and information
richness (0.39)—indicate that network change
between 1983 and 1992 is even more significant.
The largest changes in the entire network seem
to be in the information richness and information
diversity dimensions. Between 1983 and 1992,
the graphical evidence indicates that many firms,
on average, have sought to increase the diversity
and quality of the information benefits through
their alliances. The entire network had more social
capital in 1992 than in 1983, suggesting that it
is not a fixed commodity but can increase and
decrease over time. That is, there are more firms in
the network and many of them had more alliances
in 1992 than in 1983. While industry network
structures are sticky, our evidence demonstrates
that they do exhibit change. With few exceptions,
research into the causes and consequences of
evolution at the industry network level has
rarely been studied (Madhavan et al., 1998). The
above examples of research opportunities are
strong evidence for the merits of establishing the
construct and predictive validity of social capital
as a three-dimensional construct.
Copyright  2002 John Wiley & Sons, Ltd.
Establishing social capital as a multidimensional
construct enables researchers to specify a contin-
gency approach to the study of social capital and
its effect on firm performance. We provided evi-
dence for the contingency effect by demonstrating
that the nationality of a firm influenced the social
capital performance relationship. Given that the
different dimensions of social capital may have
both functional and dysfunctional effects on social
capital, it is important to identify the contingen-
cies under which particular forms of social capital
may be effective. What this also emphasizes is the
need for a strategic approach to the design and
management of strategic alliances.
The contingency approach addresses another
limitation of current research that has almost exclu-
sively emphasized the beneficial aspects of social
capital. It can be argued that not only do the
different dimensions of social capital affect per-
formance differentially, they may actually have
adverse effects on performance if they do not fit
specific contingencies. We illustrated this point in
the case where the integrated European steel firms
high on the information richness dimension had
significant and negative performance outcomes. In
other words, possessing an inappropriate form of
social capital may actually have negative conse-
quences. This again creates the need to be strate-
gic in the design and development of the firm’s
alliance set.
A limitation of the study with respect to
the operationalization of the information richness
dimension points to another area for future
research. We utilized proxy measures such as
multiple and repeated ties to assess dynamics of
relationships. We were constrained to adopt proxy
measure because of the longitudinal nature of our
study that covered alliance activity over a period
of 15 years, involving over 400 firms (many of
whom do not exist) across 48 countries. However,
the results provide strong support to the argument
that firms vary in terms of how they manage
at least some of their relationships. Historic, in-
depth studies can thus both validate and extend
research in this area by exploring further how
the relationship dynamics affect the nature of
information flows.
An alternative approach to the study of social
capital would be to develop a configurational the-
ory of social capital. Given the evidence that firms
seem to pursue different informational benefits and
different social capital combinations provide such
Strat. Mgmt. J., 23: 795–816 (2002)

benefits, a configurational theory may help classify
firms in terms of their alliance strategies and their
relationships to firm performance. That would be
the first step towards developing a comprehensive
theory of alliance strategy that focuses not just on
the number of alliances but also on the type and
nature of alliances. Clearly the concept of social
capital holds exciting possibilities for managers
and researchers. Future studies that focus on fur-
ther clarifying and developing this construct hold
the key to realizing these possibilities.
ACKNOWLEDGEMENTS
We gratefully acknowledge the comments and
feedback from Bob Atkin, John Camillus, David
Krackhardt, Ravi Madhavan, Ajay Mishra, Sue
McEvily, Emery Yao, and two anonymous review-
ers for suggesting the establishment of predictive
validity.
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