Academic journal article Journal of Small Business Management

Social Networks: Effects of Social Capital on Firm Innovation

Academic journal article Journal of Small Business Management

Social Networks: Effects of Social Capital on Firm Innovation

Article excerpt

This paper aims to introduce some specific insights regarding social networks and the geographical proximity of firms in order to investigate factors involved in the innovation of firms. In particular, this study reviews ideas from the industrial district literature by analyzing the role played by the dimensions of social capital, that is, social interactions, trust, shared vision and involvement of local institutions, in the process and product innovation of firms inside the district. This paper draws on an analysis comparing district members and nonmembers based on a sample of 220 manufacturing firms in the Valencia Region (Spain). Findings suggest a positive association between district affiliation, social capital and involvement of local institutions and innovation that can offer relevant prescriptions for policy makers and individual entrepreneurs.


Territorial agglomerations of firms have received a significant amount of attention from researchers from diverse disciplines. Externalities from physical proximity have been described as a justification of the potential benefits for firms. Concepts such as the Industrial District have analyzed the content and nature of these externalities. The industrial district is a concept that defines the territorial agglomeration of firms. For the purposes of this research, we have used the definition by Becattini (1990, p. 39), who defined it as a "socioeconomic entity characterized by the active presence of a community of people and a population of firms within a natural and historically bounded area."

Broadly speaking, firms in territorial-based networks develop a set of relationships in the form of "untraded interdependencies" (Storper and Scott 1989), which benefit their innovation and competitive capabilities in different ways (Meeus, Oerlemans, and Hage 2001). Territorial networks, consisting of a number of nodes and their respective direct or indirect relations, are used as a metaphor to represent the actors involved in the innovation process in a territory. The use of this metaphor emphasizes an integrated approach and the systemic vision of the process.

In this context, previous research has sought to apply and describe the territorial agglomeration of firms with a social component, using developments from the social capital and embeddedness concept (Lam 1997). However, attempts to determine the real potential of this approach in the field of territorial networks are scarce. As social capital theorists argue, social networks are an important part of the learning process in which firms discover new opportunities and obtain new knowledge. They also have the opportunity to improve the knowledge they already possess by interacting with one another (e.g., Tsai 2000; Kogut and Zander 1992).

According to Cooke, Clifton, and Oleaga (2005) social capital affects firms' performance. In particular, the analysis looks at SMEs but it is also extended to the individual firm and regional levels. Findings supported the positive effect of social capital at the individual level but it was not so conclusive at a regional level.

Our research aims to introduce and operationalize a model based on the social capital perspective by including a set of factors such as social interactions, trust, shared vision, and the involvement of local institutions. This model provides an explanation for the level of innovation capacity of district firms and it may be useful to explain differences both among firms within the internal district and between districts or different territorial contexts.

We have structured the paper as follows: first, we explain the bases of the notion of social capital, and then we describe its characteristics and potential benefits and apply it to the analysis of the industrial district. Our research hypotheses are then formulated and finally we use a sample of 220 Spanish firms to analyze the causal relation between social capital factors and innovation outcomes. …

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