In this paper we will examine the role of embeddedness and social capital in the process of
cohesive subgroup formation in strategic technology alliance networks. More in particular,
we will investigate the social mechanisms that enable and enforce cohesive subgroup
formation. We will argue that the enabling effects of social capital in the beginning of the
group formation process can turn into paralyzing effects as the block formation process
progresses. Through the formation of subsequent ties, firms in social systems tend to rely
heavily on their direct and indirect contacts in forming new partnerships. This so-called
local search enables firms to create trustworthy and preferential relations. Over time,
those relations tend to develop into strong ties, as firms rely on the same partners by
replicating their existing ties. This enabling effect of social capital at the group level can,
however, turn into a paralyzing effect as actors become locked-in, as they only rely on
partners in their closed social system. Then searching for or switching to partners outside of the cohesive subgroup is hard to rationalize, in particular when trustworthy partners are
already available in this system. The firms in cohesive subgroups tend to become more
similar over time as a result of contagion and replication of their existing ties. This so-called
phenomenon of overembeddedness induced by the paralyzing effects of social capital at the group level can lead to decreasing opportunities for learning and innovation for
blockmembers involved
