The value of formative investment in organizational federations



Public goods theories highlight an incentive system that rewards ‘free riding’ on the contributions of early contributors toward collective actions. However, because such theories focus on creation of the good, they may underestimate returns that accrue to early contributors subsequent to the good's realization. The concept of formative investment is introduced here to describe the extent to which organizations help to create public goods such as interorganizational linkages like participatory federations. Data from the CEOs of 48 organizations involved in a participatory federation were used to assess how an organization's level of formative investment is related to later patterns of dependency and interaction among federation members. Findings suggest that from a long-term perspective, and for goods that involve communication and interaction, the incentive structure may not be so favorable for free riders. To the extent that organizations with high formative investment have the capability to envision the future and communicate that vision to potential federation partners, they may be able to both reduce free riding and secure for themselves advantageous positions in the subsequent network of relations.