Inter-firm networks and innovation: The difference between the horizontal and vertical type

The literature has long recognized the important role that the closed kind of Japanese business group network has played in the innovative strengths of Japanese firms, yet at the same time the constraint that this type of network places upon the firms' technological connections to the rest of the world. In this article, this phenomenon is revisited taking into account the critical difference between two types of business group networks: the horizontal type and the vertical type. Using data on the US patents granted to the largest Japanese industrial firms, the results show that there are important differences between the impacts of these two types of networks on firm innovation and global learning. First, both horizontal and vertical networks promote innovation, but in different ways. In the horizontal network, its inter-industry conglomerate character works to facilitate novel re-combinations and wider applications of knowledge across different industries; while in the vertical networks, its intra-industry supply chain nature works to facilitate integration and coordination of interdependent technologies in the manufacturing of complex multi-technology products or systems. Furthermore, horizontal networks are shown to constitute a substitute for and thus a constraint upon developing global networks for diverse knowledge access, while vertical networks do not show this negative effect on the development of global knowledge networks. Thus, it is argued that these two types of business group networks represent two distinct models of innovation networks: they each facilitate different knowledge creation and technological innovation processes, and they have different capacities to engage with and leam from more open international networks.