The Network Effect on the Performance of Local Economic Development

Abstract

Research on interlocal collaboration in economic development occupies one of the largest bodies of institutional collective action studies. Collaboration risks are embedded in transaction costs, and they impede forming an effective network operation among diverse actors to enhance economic development. Further, interest in a network boundary (e.g., through internal or external networks) is relatively marginalized. Collaborative network effects—both informal and formal—on economic development are investigated by analyzing the responses to the 2004 National Survey of Economic Development and Planning Officials from 382 municipalities in U.S. metropolitan areas. Based on intracity and intercity boundaries, interesting findings were discerned concerning the two different hypothesized network effects on economic development. Internal networks have an inverse U-curve shape with economic development, and external networks have a positive relationship with economic development. Further, a formal network form influences economic development. The results imply that a transaction cost level associated with collaboration risks differs depending on network boundaries, and the effect of the networks on economic development is no exception.

KEYWORDS:

• collaboration risk
• economic development
• formal networks
• informal networks
• transaction cost