Problemistic Search of the Embedded Firm: The Joint Effects of Performance Feedback and Network Positions on Venture Capital Firms' Risk Taking

The Behavioral Theory of the Firm suggests that performance below aspirations triggers problemistic search that can lead to risk taking. This prediction has received empirical support from most studies on the topic. However, this literature has typically focused on the internal determinants of firm search and risk-taking behavior and given little attention to the influences of social networks in which firms are embedded. To this end, we incorporate the network embeddedness perspective regarding firms' network positions and their roles in firm decision making. We suggest that a firm's search behavior is jointly directed by its performance feedback and network positions. Specifically, network brokerage and centrality play important yet distinct roles in guiding firm search behavior by differentially shaping the direction of problemistic search: high brokerage directs problemistic search to high-risk solutions, whereas high centrality directs problemistic search to low-risk solutions. Our theoretical predictions receive general empirical support based on analyses using longitudinal data from the Chinese venture capital industry. Our approach incorporates the crucial role of network structures into the problemistic search model and works toward building a problemistic search theory of the embedded firm.

Automated summary

The Behavioral Theory of the Firm proposes that performance below aspirations triggers problemistic search that leads to risk taking. While most studies have focused on internal determinants of firm behavior, our research incorporates the influence of social networks. We find that a firm's search behavior is influenced by its performance feedback and network positions, with network brokerage and centrality playing crucial yet distinct roles in guiding firm search behavior.