A rich literature argues that interorganizational networks foster learning and coordinated adaptation among their constituents, but embedded ties between organizations are not ubiquitous. What explains this heterogeneity? Acknowledging the influence of agency relationships within organizations can help refine the scope of embeddedness arguments. This idea is explored in an in-depth qualitative examination of sourcing practices in drug development. The outsourcing of central laboratory services is characterized by repeated interactions, relationship-specific investments, and fine-grained information transfer between buyers and suppliers. In contrast, embedded relationships with contract research organizations have failed to materialize, despite the repeated efforts of exchange partners. Drawing on fieldwork conducted at six pharmaceutical and biotechnology firms, I explain why outsourcing deals take the form of embedded relationships in the first setting, and of seemingly inefficient spot contracts in the second setting. The evidence suggests that the structure of constituent firms' internal labor markets powerfully shapes and constrains the scope of interorganizational networks.
