Network Hiring, Firm Performance and Growth

Network hiring — i.e. the preference for hiring workers who are referred by existing employees or have shared affiliations with them — is a prevalent practice across many industries. Considerable research shows that hiring within a firm's network provides soft information about potential hires as well as informal mechanisms of control once they join a company. While research shows that in-network hires perform better, little is known about the firm-level performance implications and the associated trade-offs of this practice. In this article, we study the impact of network hiring by using data on the universe of firms in Portugal between 1994 to 2017. We find that network hiring appears to increase firm performance but at the expense of growth. Furthermore, network hiring seems to provide firms with information on intrinsic motivation traits of the candidates, rather than information on skills. We conclude with a discussion on how this practice should affect the strategy of firms, particularly young ones.