Network Defense: Pruning, Grafting, and Closing to Prevent Leakage of Strategic Knowledge to Rivals

We explore how firms protect themselves from the risks of knowledge spillover to indirectly connected rivals in a network of interorganizational ties. We argue that the safeguards to limit opportunistic behavior by directly linked firms in a dyad, which have been the focus of extant research, are insufficient to overcome extra-dyadic leakage risks. Instead, firms terminate or avoid ties that expose their knowledge to indirectly linked rivals ("pruning" and "grafting") and embed themselves in dense networks ("closing") to prevent strategic knowledge spillover. Through a longitudinal study of German board interlocks during 1990–2003, we find that firms are more likely to prune, graft, and close their networks as they accumulate strategic knowledge and as the firms to which they are interlocked increasingly generate indirect ties to competitors, even when controlling for dyadic safeguards discussed by prior research. We capture strategic knowledge by tracking firms' experience in the former Warsaw Pact countries from immediately after the sudden fall of communism in 1990 until 2003. The study introduces indirect links to rivals as a source of knowledge spillover in networks, shows how firms deal with extra-dyadic risks, and provides a defensive explanation for the evolution of network composition and structure.