political connections and business strategy in dynamic

POLITICAL CONNECTIONS AND BUSINESSSTRATEGY IN DYNAMIC ENVIRONMENTS: HOWTYPES AND DESTINATIONS OF POLITICAL TIESAFFECT BUSINESS DIVERSIFICATION IN CLOSEDAND OPEN POLITICAL ECONOMIC CONTEXTS

ISHTIAQ MAHMOOD,1 CHI-NIEN CHUNG,1 and WILL MITCHELL2*1National University of Singapore Business School, Singapore, Singapore2Rotman School of Business, University of Toronto, Toronto, Ontario,Canada

Research summary: This article studies how the strategic benefits of political ties changeas a closed political-economic system opens, focusing on types and destinations of con-nections between business leaders and political actors. We examine how formal and infor-mal ties (types) to party leaders, government officials, and elected legislators(destinations) facilitated diversification by business groups in Taiwan between 1986 and1998. During this period, Taiwan underwent political and economic liberalization thatled to changes in tie accountability, public scrutiny, and diffusion of power overresources. We show that formal position interlocks with dominant party or senior govern-ment officials provide greatest benefits in a closed political-economic system, while infor-mal social ties to a wider range of political actors, particularly legislators, providegreater benefits as the system becomes more open.

Managerial summary: As a closed political economy becomes more open, the typesand destinations of political ties that generate strategic benefits for firms change. Inclosed markets, the greatest benefits arise from formal ties to central political leaders.In more open markets, the benefits shift to informal ties with a broader range of politicalactors, including legislators. We demonstrate the change in targets for strategic benefitsby studying how political ties influenced business diversification in Taiwan as the coun-try moved from closed markets in the 1980s to more open markets in the 1990s. Copy-right © 2016 Strategic Management Society.

INTRODUCTION

Business groups in emerging markets often func-tion as diversified entities in multiple industries;groups commonly become established in emergingmarkets with relatively closed political economicsystems while continuing to operate as the marketsbecome more open (Granovetter, 1995; Khannaand Yafeh, 2007). Although research has examinedhow diversification affects group performance in

Keywords: political ties; diversification; business groups;political-economic systems; strategic benefits*Correspondence to: Will Mitchell, Rotman School of Man-agement, University of Toronto, 105 St. George Street,Toronto M5S 3E6, Canada. E-mail: [email protected] made on 3/31/2017, after first online publication:The “Research Summary” abstract was mislabeled as a “Tech-nical Summary”, while the “Managerial Summary” abstractwas mislabeled as a “Plain Language Summary.” This hasbeen corrected.

Copyright © 2016 Strategic Management Society

Global Strategy JournalGlobal Strategy Journal, (2017)

Published online in Wiley Online Library (wileyonlinelibrary.com). DOI: 10.1002/gsj.1148

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business environments with varying degrees ofpolitical economic openness (Khanna and Palepu,2000b), there has been less focus on the antece-dents of diversification. Recent studies suggest thatpolitical ties between executives and governmentofficials are likely to influence diversificationwithin business groups (Guillén, 2000; Peng, Lee,and Wang, 2005; Zhu and Chung, 2014), but haveonly begun to tease out how the relationships mightvary in differing political economic conditions. Thisarticle contributes to the understanding of businessgroup diversification and political relationships bystudying how the types (formal or informal) and des-tinations of ties (which actors are connected by theties) affect diversification when a historically closedpolitical economic system becomes more open. Weargue that the strategic benefits of formal business-government position interlocks and informal socialties of business executives to dominant political par-ties, government officials, and legislators will changeas a closed political economic context opens.

The political strategy literature commonlyargues that firms with political ties gain benefitssuch as regulatory favors and investment resources(Faccio, 2006; Fisman, 2001). However, while theliterature sometimes distinguishes between differenttypes and destinations of ties (Johnson and Mitton,2003; Leuz and Oberholzer-Gee, 2006), few studiesdiscuss how the types and destinations of ties willhave different impacts in different political eco-nomic contexts. Zhu and Chung (2014), forinstance, study how ties affect business strategyunder united and divided governments, but they donot distinguish between types of ties. Zheng, Singh,and Mitchell (2015) distinguish how local and cen-tral ties affect business performance, but they donot consider changing political and economic con-texts. Moreover, historically the literature hasfocused on industry- and country-level studies(Bauer, de Sola, and Dexter, 1972; Evans, 1995;MacIntyre, 1994; Schneider, 1998; Wank, 2002),only recently beginning to examine the impact ofconnections between individual business leadersand political actors (e.g., Faccio, 2006; Siegel,2007). Furthermore, the literature most commonlyfocuses on business performance, with only limitedexamination of the factors driving the underlyingbusiness strategies such as diversification.

Political connections are linkages between indi-vidual business leaders and political actors such asparty leaders, senior government officials, andelected legislators (Fisman, 2001; Siegel, 2007).

This definition reflects the idea in the social net-works literature that interpersonal linkages can serveas conduits of resources (Coleman, 1988; Granovet-ter, 1985; Han, Shipilov, and Greve, forthcoming),while recognizing the differences in destinations ofties driven by the heterogeneity of political actors(Knoke, 1990; Lin, Vaughn, and Ensel, 1981).Political ties may involve formal position interlocksin which business leaders serve as political actors(Faccio, 2006) or may involve informal social lin-kages between corporate leaders and family, friends,or members of social organizations who hold politi-cal posts (Bertrand et al., 2004; Siegel, 2007). Theties commonly create strategic benefits for con-nected firms, where strategic benefits are resourcesthat a firm can use to facilitate its business activities.

We argue that the strategic benefits of differenttypes and destinations of political ties vary in openand closed political economic systems, which differin the extent of political and market liberalizationthat a country has undergone at a given time. Wepredict that formal position interlocks to politicalactors with direct influence on resource allocation,such as party leaders and senior government offi-cials, will be particularly beneficial for businessdiversification in closed political economic sys-tems, but that the benefits will decline as a politicaleconomic system becomes more open. In parallel,we argue that informal social ties to a wider rangeof political actors, including actors with more indi-rect influence on resource allocation (such aselected legislators) will offer increasing benefits forbusiness diversification as a political economic sys-tem becomes more open. The differences arise viathree mechanisms: tie accountability, public scru-tiny, and diffusion of power over resources in dif-ferent political economic contexts.

The analysis focuses on diversification by the100 largest business groups in Taiwan from 1986to 1998, before and during a period when the coun-try underwent extensive economic and political lib-eralization. The flagship firms in many industries inemerging economies are members of businessgroups, which collectively produce significant por-tions of national GDP and influence the directionof national development through their expansionchoices (Fisman and Khanna, 2004; Granovetter,1995; Khanna, 2000). Diversification by businessgroups is an important strategic activity that has amajor impact on economic development in theircountries. At the same time, group owners andbusiness executives commonly have strong ties

2 I. Mahmood, C.-N. Chung, and W. Mitchell

Copyright © 2016 Strategic Management Society Global Strategy Journal, (2017)DOI: 10.1002/gsj

with political actors in their countries (Morck, Wol-fenzon, and Yeung, 2005). This research designallows us to assess how political ties affect diversi-fication strategy at different stages of political eco-nomic development within a country. We use dataon formal position interlocks and informal socialties, based on a wide range of public sources. Indoing so, we offer insights for the political strategyliterature that are relevant to many countries thatare undergoing structural changes in political andmarket institutions.

BACKGROUND

The significance of business diversificationin emerging economies

Diversification is a key element of business strat-egy, with impact on both corporate evolution andsocial welfare. Firms diversify into new productmarkets for multiple reasons, including extendingexisting resources (Montgomery, 1994; Penrose,1959), responding to changing markets (Rumelt,1974; Wernerfelt, 1984), and building managerialempires (Jensen and Meckling, 1976). Diversifica-tion, whether related or unrelated, can affect corpo-rate performance in both developed (Montgomeryand Singh, 1984) and emerging economies(Khanna and Rivkin, 2001).

Beyond corporate strategy, business diversifica-tion plays an important role in mobilizing and dis-tributing resources throughout a country,particularly during developmental stages whencountries face substantial voids in market-basedinstitutions (Dutt et al., 2016; Mair and Marti,2009). Economic theory and data show that theprocess of industrialization often causes developingcountries to first broaden their industrial bases inorder to mobilize resources, diversify risk, and pro-vide greater consumption opportunities beforeeventually specializing in order to take advantageof economies of scale (Acemoglu and Zilibotti,1997; Imbs and Wacziarg, 2003). Whereas indus-trial transformation in developed market economiesis often led by new entrants (Mansfield, 1996),voids in market-based institutions in many emer-ging economies mean that established firms tend tobe the primary actors that possess the financial,technical, and managerial infrastructure needed toexpand the industrial base (Khanna and Palepu,1999). Hence, firm diversification commonly

contributes to economic development in emergingeconomies (Amsden, 2001; Leff, 1978). Examplesinclude Germany and England in the nineteenthcentury, the U.S. and Scandinavia in the earlytwentieth century, Japan in the mid-twentieth cen-tury, South and East Asian economies such asIndia, Korea, Hong Kong, and Taiwan in the latetwentieth century, and Southeast Asian economiessuch as Malaysia in the twenty-first century.

Research also suggests that business diversifica-tion is not always positive for an economy.Ultimately, as an industrial base expands, diversifi-cation activities of multibusiness firms in emer-ging economies may preempt use of scarceresources such as capital, technology, and talent(Morck et al., 2005). Even during developmentalperiods, there is no assurance that diversificationwill create economic benefits because of factorsranging from firm-level idiosyncrasies to govern-ment policies to industry infrastructure (Mahmoodand Mitchell, 2004). We seek to shed light onhow different forms of political ties facilitatediversification strategy in different political eco-nomic contexts, as a step toward providing a dee-per understanding of how business entities createand manage resources at different stages of institu-tional development.

Diversification benefits from political tiesin closed and open institutional contexts

Political ties often provide firms with preferredaccess to legal support, financial resources, andother strategic benefits. We define diversificationbenefits as strategic benefits that allow a firm toincrease its diversification from one period tothe next.

Political ties offer strategic benefits generally,and diversification benefits in particular, in bothclosed and open political economic contexts. Rela-tively closed economies are countries in which reg-ulations on business entry and other forms ofeconomic activity are abundant (e.g., Cuba todayand the former Soviet Union), while open econo-mies are countries with only limited regulatory con-straints on business activity (e.g., the U.S., theU.K., and Chile today) (Sachs and Warner, 1995).In parallel with closed and open economies, closedpolities are countries in which there is a singledominant party and/or ruler (e.g., the CommunistParty in the former Soviet Union and the PRI in

Benefits of Political Ties in Closed and Open Markets 3


Mexico for much of the twentieth century) that hasoverwhelming power and suppresses political com-petition (Almond and Powell, 2004). By contrast,an open polity is one in which two or more politi-cal parties actively vie for electoral success, suchas the United States, Korea, and Taiwan today(Almond and Powell, 2004). The following discus-sion addresses polities and economies separately,because economic and political liberalization canoccur concurrently or at different rates in a particu-lar country. Although open versus closed is a mat-ter of degree rather than a dichotomy, we willdiscuss polar cases in order to highlight theircharacteristics.

Closed economies

First, consider diversification benefits of politicalties in closed and open economies. In closedeconomies, ties to powerful political actors offerbusinesses access to privileged resources such asinformation, contracts, bank loans (Khwaja andMian, 2005), favorable regulatory conditions suchas entry permits (Agrawal and Knoeber, 2001), andtechnology that firms can use to pursue new busi-ness opportunities (Amsden and Hikino, 1994;Peng et al., 2005). Kock and Guillén (2001) sug-gest that multibusiness firms in emerging econo-mies seek to link to domestic regulators forresources and permits, thus shaping diversificationpatterns in tightly controlled environments.

Open economies

Political ties continue to offer diversification bene-fits as an economy becomes more open. In transi-tional economies, the state possesses information,money, administrative privileges, and favors to dis-tribute when state enterprises and monopoly indus-tries start to open to competition, because there isoften a time lag between removing red tapeand establishing effective market institutions(Ghemawat and Khanna, 1998). For example, awell-functioning financial market needs ratingagencies, financial press, investment banks, andventure capitalists, all of which require an effectivelegal system and transparent political environment;these are institutions that often take time to develop(Khanna and Palepu, 1999). Indeed, political net-works create conduits for resources even in well-established market economies, in which access toinformation, financial investments, and regulatory

favors continue to be valuable (Bauer et al., 1972;Geletkanycz and Hambrick, 1997). Research onpolitical action committees in the U.S., for instance,demonstrates their impact on political decisions thatsupport business strategy (Burris, 2001; Clawson,Neustadtl, and Scott, 1993). Therefore, political tiesoften assist business strategy in closed and moreopen economic stages.

Closed polities

Now we turn to the diversification benefits of polit-ical ties in closed and open political systems. In aclosed political system, centralization of politicalpower means that a dominant party and keyappointed officials act as the dispensers ofresources necessary for critical business activitiessuch as diversification. Examples include Golkar inSuharto’s Indonesia, UMNO (United Malays’National Organization) under Mahathir’s Malaysia,and the KMT (Kuomintang) during Chiang Kai-Shek’s Taiwan. Qualitative evidence indicates thatpolitical parties played important roles in shapingwhich companies were able to grow and diversify(Friedland, 1990; Johnson and Mitton, 2003).

Open polities

Under a more open political system with multipleactive parties, actors throughout the political struc-ture often seek resources from businesses and, inturn, influence the flow of resources that businessescan use for diversification and other strategy. Busi-ness leaders frequently become sought-after patronsfor political parties due to the many potentialvoters (e.g., employees, subcontractors, and custo-mers) they can mobilize, as well as the cash theycan contribute (Hillman and Hitt, 1999; Morckand Yeung, 2004); in turn, the parties can provideresources that support the continued growth of thebusinesses. Rose-Ackerman (1999) found thatstate-business relationships continued to be strongin countries such as Russia after democratizationand deregulation began to take place, due to thegrowth in pluralistic political power and electoralsystems. In Taiwan, meanwhile, Cheng and Chu(2002: 196) found that ‘the KMT party and manyleading business groups began to cement an alli-ance for mutual benefit’ after political liberaliza-tion began to take hold in the late 1980s and early1990s.



Thus, political ties offer resources that supportbusiness diversification in varied political economiccontexts. Predicting how particular ties will influ-ence business strategy in different contexts requiresunpacking the effects of different types of ties withdifferent political actors.

Types and destinations of political ties

Types of ties

The social network literature highlights the distinc-tion between formal position interlocks and infor-mal social relationships (Lin, 2001; Mizruchi,1996; Uzzi, 1997). Formal position interlocks arisewhen the same person occupies two distinct posi-tions, thereby creating a linkage between differentdomains. An example would be a major corporateshareholder who is also a central figure of thedominant political party or government. In Tai-wan, for instance, Koo Chenfu, the chairman ofthe China Trust Group, was a member of theKMT Central Standing Committee during ChiangKai-Shek’s presidency. In Italy, as another exam-ple, Silvio Berlusconi, who held office as primeminister from 1994 to 1995 and 2001 to 2006, atthe same time owned a media empire includingthree nationwide commercial television stations, aprominent newspaper, and Italy’s largest publish-ing company.

By contrast, informal social ties are based onface-to-face interactions involving different people(Adler and Kwon, 2002). An informal political tiein our setting would be a relationship between acorporate leader and a leading political figure, suchas the friendship between Koo Chenfu and Li Den-ghui (the fourth KMT President of Taiwan) throughmembership in a golf club. An example in theU.S. would be the friendship between former Presi-dent Bill Clinton and Vernon Jordan, who servedas a board member on about a dozen Fortune500 companies.

Social network studies suggest that formal posi-tion interlocks and informal social ties have differ-ent advantages and disadvantages that relate to themechanisms of accountability and scrutiny (Adlerand Kwon, 2002; Coleman, 1988; Granovetter,1985; Uzzi, 1996). From the point of view of thebusiness leader, one advantage of formal overinformal social ties is that position interlocks pro-vide greater tie accountability by limiting principle-agent conflict. Accountability is the degree to

which political actors can be held responsible fortheir actions (Almond and Powell, 2004); in ourcontext, tie accountability is the degree to whichbusiness executives can ensure that political actorswill fulfill their agreements. With position inter-locks, there is no principal-agent problem betweenthe business executive and political actor becausethe principal (corporate executive) and the agent(politician) are the same person. Agreements madevia social ties, by contrast, are more difficult toenforce. Informal social ties typically need to beregularly updated through exchanges of gifts orfavors, as well as via face-to-face interactions suchas banquets and weddings (Uzzi, 1997; Yang,1994), which may create ambiguity, disagreement,and conflict. Hence, the actors involved in socialties may find it difficult to hold each otheraccountable.

By contrast, a benefit of informal social ties isthat they are more inconspicuous than formal posi-tion interlocks (Adler and Kwon, 2002). Unobtru-siveness makes it more difficult for actors who areconcerned about potential biases in resource alloca-tion, such as the media and market analysts, totrack the existence and impact of political ties.Hence, informal ties tend to face less public scru-tiny from the media and other observers than doformal interlocks.

Destinations of ties

In addition to types of ties, the social network lit-erature suggests a further distinction based on tiedestinations, due to the mechanism of diffusion ofpower over resources (Lin, 2001; Lin et al.,1981). In the context of political ties, it is usefulto contrast destinations that have direct influenceon resource flows with destinations that have moreindirect influence. Political actors with direct influ-ence include leaders of the dominant party andsenior government officials, while actors with indi-rect influence include legislators in national andlocal assemblies. Party leaders in the dominantpolitical party set agendas for developing andimplementing regulatory frameworks that facilitateor inhibit diversification, while senior governmentofficials make day-to-day decisions about award-ing licenses, investment credits, and other bene-fits (Pye, 1997). By contrast, legislators havemore indirect influence on resource allocation,via activities in shaping laws, regulations, andfinancial benefits. In turn, the strategic benefits



of tie destinations will depend upon the diffu-sion of power among political actors, where dif-fusion of power is the degree to which differentactors can influence key decisions such asbestowing political resources (Strange, 1996); aswe will discuss, power diffusion varies by insti-tutional context.

DIVERSIFICATION BENEFITS INPOLITICAL ECONOMIC CONTEXTS

The previous section suggests that the strategicbenefits of specific types of political ties dependon the level of tie accountability of political actorsand the level of public scrutiny that political tiesface, while the strategic benefits of specific desti-nations of ties depend on the control overresources and degree of diffusion of power amongpolitical actors. This section predicts that thesefactors will lead to variation in the diversificationbenefits of particular types and destinations ofpolitical ties in different political economiccontexts.

The predictions compare contexts in which bothpolitical and economic systems are closed(e.g., Taiwan under Chiang Kai-Shek’s KMTthrough the mid-1980s and the Communist Party inthe Soviet Union of the 1970s) to contexts thathave undergone substantial transition to active mul-tiparty states with more open economies(e.g., Korea and Taiwan today). We refer to coun-tries with closed political systems and economiesas closed political economic systems and countrieswith active multiparty competition and more openeconomies as open political economic systems. Weaddress the off-diagonal cases (open/closed politieswith closed/open economies) later in the article.

Diversification benefits of formal positioninterlocks in closed political economies

We first argue that diversification benefits in closedpolitical economic systems arise most stronglyfrom formal position interlocks with party leadersand senior government officials, who directly influ-ence resource allocation. The prediction stems fromconcentrated power among political actors whocontrol access to resources, limited tie accountabil-ity of political actors, and limited public scrutiny ofpolitical ties.

Diffusion of power influences which tie destina-tions offer strategic benefits. Control over resourceallocation is relatively concentrated in closed politi-cal economic systems. In closed polities and closedeconomies, leaders of the dominant party and sen-ior government officials typically have primarycontrol over laws, regulations, investment deci-sions, and other key resources that would supportbusiness diversification and other strategy (Johnsonand Mitton, 2003). By contrast, legislators tend tobe weak in authoritarian regimes and closed econo-mies. In closed polities, legislators commonly serveat the discretion of the ruling party, while legisla-tors in closed economies typically have only lim-ited influence on the major decisions that influenceregulated industries.

Thus, concentrated power in closed politicaleconomic contexts means that the primary strategicbenefits of political ties stem from the ruling politi-cal party and senior government officials, who havedirect influence on resource allocation. Relevantexamples include Golkar in Indonesia, the Commu-nist Party in the Soviet Union, and the KMT inpre-liberalization Taiwan.

In turn, the degree of tie accountability and pub-lic scrutiny influences which types of ties offer thegreatest strategic benefits. We begin by consideringtie accountability.

In closed political economic contexts, politicalactors face only limited accountability to followthrough on their promises to business actors whoseek favors. In closed polities, business leaderswho do not receive promised resources have fewremedies: they cannot switch political alliancesnor can they rely on the courts to enforce agree-ments, even if they are willing to make the agree-ment public, because dominant political actorstypically control or co-opt the legal system(O’Donnell, 1999). In closed economies, mean-while, political actors face limited tie accountabil-ity in their promises to allocate business resourcesbecause their tight control of the economic envi-ronment means that business leaders have fewimmediate economic alternatives if the politicalactors renege. In India in the 1960s, for instance,business leaders in regulated industries had fewoptions for reinvestment or alternative strategies ifsenior government officials or current party leaderschanged their policies. Because of the limitedtie accountability in closed political economiccontexts, businesses that seek strategic resourcesfrom political sources will find greater reliability



from formal position interlocks than from informalsocial ties.

Now consider the role of public scrutiny. Activepublic scrutiny helps hold politicians accountableto the broader civil society rather than to their tieswith individual business leaders or other partners(Smulovitz and Peruzzotti, 2006). Civil societyoften views business-government ties as illegiti-mate or illegal, so that the public scrutiny of highlyvisible position interlocks will be politically dam-aging (Besley and Burgess, 2001). Limits on publicscrutiny in closed political economic contexts,therefore, will reduce the political costs that canarise from publicity about formal position inter-locks and will reinforce the value of formal posi-tion interlocks.

Public scrutiny in closed political economic con-texts faces several constraints. The lack of activepublic media means that there is little public discus-sion of position interlocks between business leadersand political actors. A lack of free press may meanthat the general public is not aware of particular tiesthat exist between government officials and businessleaders. Furthermore, authoritarian regimes oftenhave control and/or surveillance of social organiza-tions and interest groups in civil society. This inhibitsshareholder activism, which demands informationdisclosure and transparency in firm governance butcan take place only with the presence of autonomousand independent social organizations, such as thePeople’s Solidarity for Participatory Democracy(PSPD) in Korea (Rho, 2006). Closed economies,meanwhile, may have a public press, but commonlylack other forms of public scrutiny such as activemarket analysts and financial press (Khanna andPalepu, 1999). In closed political economic contexts,therefore, formal position interlocks offer the benefitsof greater tie accountability and also incur only lim-ited costs of public scrutiny.

This argument does not mean that informal tieshave no benefit in closed contexts. Johnson andMitton (2003), for instance, showed that firms withpolitical ties in Malaysia gained more market valuethan non-linked counterparts during capital controlin 1997–1998, when a single political party domi-nated the political landscape. They coded ties identi-fied in a book by Gomez and Sundaram (1997);while the study did not explicitly distinguishbetween formal and informal ties, most links listedin the book were informal linkages. Hence, theirresults suggest that informal ties may contribute tomarket value in a closed political economic context.

Our argument, though, suggests a relative predic-tion, with formal positions having greater benefitsthan informal ties in this context. The combinationof concentrated power among those who controlaccess to resources, limited tie accountability, andlimited public scrutiny in closed political economiccontexts provides the logic for the first hypothesis.

Hypothesis 1 (H1): In a closed political economicsystem, the diversification benefits that a firm gainsfrom formal position interlocks with the rulingpolitical party and government officials will begreater than benefits from formal position inter-locks with legislators or informal social ties withany type of political actor.

We note that H1’s prediction concerning formalversus informal ties has a counter-argument con-cerning the accountability mechanism. Some for-mal ties, such as board memberships that pay feesfor the use of a politician’s name, might be quiteshallow; such formal interlocks could involve onlylimited accountability. In contrast, some friendshipnetworks could have strong social bonds andimpose strong punishments for deviating fromagreements. If such differences in accountability offormal and informal ties arise systematically, thenH1 would not hold. Our core logic, though, drawsfrom social network logic to focus on the idea thatmost, even if not all, formal ties generate substan-tial accountability owing to the reduction inprincipal-agent conflict; even seemingly shallowformal ties can generate ongoing relationships thatfoster accountable resource exchange. The analysiswill help tease out the alternatives.

Reduced benefits of formal position interlocksin open political economies

We next argue that the diversification benefits offormal position interlocks with the ruling party andgovernment officials will decline as a political eco-nomic system becomes more open. The changeoccurs because increased public scrutiny reducesthe strategic benefits of formal position interlocks.Public scrutiny in open polities increases due toretreat of political control of mass media (Almondand Powell, 2004), while scrutiny increases in openeconomies due to increased presence of financialpress, market analysts, rating agencies, accountingfirms, and shareholder activism that facilitate



information disclosure about corporate governance(Khanna and Palepu, 2000a).

In a liberalized society, public media highlightbusiness-government connections more activelythan in closed polities. In Taiwan, for instance,there were few newspaper reports or studies aboutpolitical ties before 1986, when Taiwan was underthe control of Chiang Kai-Shek and his son ChiangChing-Kuo. After democratization, by contrast,reports and studies flourished. Headlines such as‘Business Ties of the Parliament Members’ and‘The Family and Relatives of the President’appeared in mass media (Chen, 1999).

Public scrutiny can deter power holders andbusiness leaders from leveraging interlocks thatwould provide easy targets for criticism (Besleyand Burgess, 2001). As Leuz and Oberholzer-Gee(2006: 416) point out, ‘High levels of transparencyand public attention may be difficult to reconcilewith political favors of often dubious legality.’Even when interlocks exist, actors will tend to limitthe advantage they take from these ties due to thecosts of illegitimacy and public sanction. The exist-ence of a more independent legal system increasesthe possibility of paying a high price for attempt-ing to leverage position interlocks. Fisman et al.(2012), for instance, find no evidence that busi-nesses connected to former U.S. Vice PresidentDick Cheney benefited from their ties; they specu-late that the lack of identifiable benefits stemmedfrom the visibility of the ties. Thus, the strategicbenefits of formal position interlocks will declinein open political economic contexts, althoughwhether any benefits remain is an empiricalquestion.

Hypothesis 2 (H2): The diversification benefits offormal position interlocks with multiple politicalactors will decline as a country’s political eco-nomic system becomes more open.

Increased benefits of informal social ties in openpolitical economies

Finally, we argue that the diversification benefits ofinformal social ties with multiple political actorswill increase as a country’s political economic sys-tem becomes more open. Greater tie accountabilityand increased diffusion of power over resourcesdrive this change.

Politicians in open polities and economies incurgreater accountability for commitments to businessactors because business actors have more optionsto support rival politicians (Morck and Yeung,2004). General elections, competition for contribu-tions, and competition among different locationsfor business activities make politicians moreaccountable to the interests of the businesses withwhom they have ties. The more balanced powerrelationship between state and business reduces theagency costs embedded in informal social relation-ships which, in turn, increases the strategic benefitsof informal social ties in open political economiccontexts.

Increased public scrutiny plays an indirect rolehere because greater tie accountability allows actorsto take advantage of the lower public scrutiny thatinformal social ties face. Because it is more diffi-cult and costly to trace evidence for social ties thanposition interlocks, increased public scrutiny inopen political economic systems increases the rela-tive value of informal social ties.

Moreover, political power tends to diffuse morebroadly in open political economic contexts, whichincreases the range of political actors who can con-fer strategic benefits. Huntington (1991) notes thatthe locus of political power often moves from adominant political party in closed systems to moreheterogeneous sets of national and local politicalbodies in pluralistic systems. Diffusion of poweralso occurs when an economy becomes more openbecause economic deregulation opens previouslymonopolized industries and firms carve out nichesin the new industries (Carroll and Hannan, 2000).In turn, new laws and regulations that govern eco-nomic transactions emerge, creating new power forthe wide range of legislators and other politicalactors who are responsible for initiating rules.Thus, although party officials and senior adminis-trators may still be influential, they are no longerthe dominant power sources in an open economy.In China during the early 2000s, for instance,national and local legislators had substantial impacton investments and laws that supported corporateexpansion (Zheng et al., 2015). More generally,studies on emerging economies suggest that infor-mal ties are important in dynamic economies dueto complexities and uncertainties during institu-tional change (Ghemawat and Khanna, 1998;Wank, 2002).

This shift of power in more open polities andeconomies means that political ties with a greater



range of political actors offer strategic benefits.Although which actors carry the most power willvary depending on the context, the core point isthat in a pluralistic political economic context, awider range of destinations will offer strategic ben-efits than in more closed state. Hence, informal tiesmay become more important after political liberali-zation because informal ties provide a means tomanage relationships with a growing set of veto-holding political players. Thus, the value of infor-mal social ties will increase in open political eco-nomic contexts owing to two complementarymechanisms: the greater ability to hold politicalactors accountable plus greater diffusion of poweramong political actors who can allocate resources.

Hypothesis 3 (H3): The diversification benefits ofinformal social ties with multiple political actorswill increase as a country’s political economic sys-tem becomes more open.

The predictions reflect the argument that politi-cal and economic openness will reinforce eachother so that changes in the diversification benefitsof formal position interlocks and informal socialties will be particularly marked in countries that areeither open or closed on both dimensions. Nonethe-less, the argument suggests that the effects ofincreased openness will be at least moderatelyinfluential in a country that becomes more openeconomically while remaining politically closed(e.g., China in the 2000s) or a country thatbecomes more open politically while remainingeconomically closed (e.g., India before the 1990s).The locus of power might differ in the off-diagonalcases, however, with the ruling political party hav-ing greatest power in the closed polity-open econ-omy case (e.g., China today) and seniorbureaucrats having the greatest power in the openpolity-closed economy case (e.g., India in the1960s).

We will test the hypotheses in a context inwhich a country undertook substantial though stillincomplete transition to an open political economiccontext: Taiwan in the 1990s. We believe that thelogic of Hypotheses 2 and 3 is valid in countrieswith even more open political economic systems,such as the U.S. or Western European countries.An empirical question for our analysis concernswhether informal social ties provided greater abso-lute benefit than formal position interlocks in

Taiwan’s stage of political economic openness inthe 1990s.

INSTITUTIONAL TRANSITIONAND POLITICAL CONNECTIONSIN TAIWAN

Our setting of Taiwanese business groups in the1980s and 1990s has three strengths. First, thegroups have undertaken extensive diversification,triggered by the economic growth of the countrysince the 1970s (Chung and Mahmood, 2006). Sec-ond, ties between Taiwanese groups and theNationalist Party regime (KMT) are common(Fields, 1995). Kang (2002) suggests that Taiwanis an example of crony capitalism, featuring votebuying and outspread clientism, which may arisefrom the fact that the social-political structure inTaiwan is characterized by low trust (Fukuyama,1995), so that networking activities occur in bothpolitical and business arenas (Peng, 2003). Incom-plete market transparency also contributes to theabundance of ties, as there are no regulations aboutownership and directorship of private enterprisesby political party leaders or parliament members(Faccio, 2006). Third, Taiwan experienced large-scale political democratization and economic liber-alizations during the late 1980s and early 1990s,which scholars labeled the Great Transition (Tien,1989). The frequency of ties together with the tran-sition makes Taiwan a relevant setting in which tostudy how institutional contexts shape the strategicbenefits of political ties.

The KMT Nationalist Party dominated Taiwan’spolitics and economy from its retreat from Main-land China in 1949 until 1987 (Gold, 1985; Hsieh,2002; Wade, 1990). Before the transition, Taiwan’sgovernment was authoritarian, sometimes describedas quasi-Leninist (Cheng, 1989). Indeed, for almost40 years, Taiwan was under martial law, with onlythe KMT permitted to participate as a politicalparty. Parliament members were selected by theKMT, rather than being elected by local voters; theKMT also appointed government and military offi-cials. State agencies functioned as executive armsof the KMT, while the parliament served as a low-powered actor that lent the state agencies legiti-macy. During this authoritarian period, the relation-ship between business groups and the politicalregime was mainly top-down and co-optive. Inorder to gain support from large business groups,



the KMT regime allocated well-linked groups withentry permits to oligopolistic or monopolisticindustries. Business groups had little leverage toplay against the KMT and needed to cultivate andmaintain good relationships with the regime(Chung, 2006).

The evolution of Taiwan’s political and eco-nomic institutions began in 1987. Martial lawended, while new political parties, labor protests,and private mass media emerged. The death ofPresident Chiang Ching-Kuo in 1988 reduced thecohesion of the central leadership of KMT andexpedited the pace of democratization. The estab-lishment of a major opposition party, the Demo-cratic Progressive Party (DPP), intensified thecompetition in political elections. On the economicside, deregulations of the legal framework alsooccurred within a short period (Pistor and Wellons,1998). Cheng and Chu (2002) estimate that the Tai-wanese state introduced more deregulatory mea-sures from 1988 to 1993 than in the previous twodecades. The changes led to deregulation of manymonopolized industries and privatization of stateenterprises. Large-scale reductions of import controland tariffs occurred, as well as liberalization of for-eign investment, bank interest rates, and exchangerates. Appendix S1 lists political and economic indi-cators before and after the institutional transition.

Taiwan also underwent substantial changes inmarket monitoring during the 1990s. Before 1990,no foreign equity analysts followed Taiwanesecompanies. The number then grew to 46 in 1994and 138 in 1998 (Nelson’s Directory of InvestmentResearch). In addition, independent credit ratingagencies became established during the late 1990s(http://www.taiwanratings.com/tw/).

Even though the KMT remained the largestpolitical party until the 2000s, the party facedstrong challenges from the DPP after democratiza-tion took hold during the 1990s. In response, theKMT sought suggestions, donations, and votesfrom business groups to help retain its position. Inthe process, the relationship between businessgroups and the KMT turned from top-down co-optation to a more balanced partnership. The open-ing of parliamentary elections also contributed tobusiness group leverage. Firms could now senddelegates into parliament to defend their interestsand no longer relied as directly on the KMT. Thischange strengthened after 1993, the first year whenall members of parliament were elected directly.Due to pressures from supporters, legislators could

now sometimes act independently of party disci-pline and exert pressures on government officials.Also due to pressure from the DPP, governmentagencies became decoupled from KMT operationsand could act with greater neutrality.

DATA, MEASURES, AND METHODS

Political connections

The research design addresses three issues arise inidentifying political connections. First, determininga reliable measure of a firm’s political connectionis a challenging task. Some studies adopt indirectapproaches by using subject rating, indexes, andreports collected by other agencies. For example,Fisman (2001) employed the Suharto DependencyIndex, developed by a consulting firm in Jakarta,which uses consultants’ subjective assessments ofdependency. Other studies search backgrounds ofmajor corporate stakeholders and key political fig-ures (Siegel, 2007; Useem, 1984). Bertrand et al.(2004) trace education and working experience ofFrench CEOs, for example and suggest that CEOswho went through elite schools and had workingexperience in the civil service will have social,political, and ideological connections with politicalelites. Interpersonal ties are fluid, however, andoften extend across different associations or geo-graphical boundaries, so indirect and backgroundapproaches may miss many ties.

We adopt a more direct approach that locatespublicly reported ties between executives and poli-ticians. Faccio (2006), similarly, used publiclyavailable sources to identify political connectionsand found that large shareholders and top officialshave substantial relationships with parliamentmembers and governmental ministers in manycountries. While following this approach, we wereable to obtain access to a wider set of sources thanFaccio’s study.

The second issue is that most existing studiesexamine only political connections and firm strat-egy within the same period, which does not allowone to consider endogeneity in diversification andpolitical ties. In contrast, we collected ties anddiversification data for three periods (1986, 1990,1994), plus diversification data for 1998, so thatthe study extends across pre-transition and post-transition contexts in Taiwan. The major datasource is a series of trade directories called



http://www.taiwanratings.com/tw/

Business Groups in Taiwan (BGT), as AppendixS2 describes in more depth. The BGT directory ispublished every two years; we used a four-year lagbetween measuring ties, both for coding efficiencyand to allow sufficient time for us to observechanges in connections.

Third, most studies use single firms as the unitof analysis, although many firms in emergingeconomies follow group-influenced strategies.While some studies include a dummy variable tocontrol for group effects (Fisman, 2001; Leuz andOberholzer-Gee, 2006), no large-scale empiricaltest uses the group as the research unit, largelybecause group-level information is difficult to iden-tify and collect (Khanna and Yafeh, 2007). Using adatabase with key stakeholders of every memberfirm in the group (including private and publicgroup affiliates), we code group-level political con-nections and analyze their effects on groupdiversification.

The sample of formal interlocks and informalties between business groups and the politicalregime included the largest 100 groups based onsales. Due to slight variations in data collection indifferent years in our data source, we have informa-tion for 97 groups in 1986, 101 groups in 1990,115 groups in 1994, and 100 groups in 1998. Thecombined sales of these groups constitute 30 to40 percent of national GDP in these periods(Chung and Mahmood, 2006).

Appendix S2 describes the data sources and cod-ing of political ties. For formal position interlocks,we have data on key position holders in businessgroups and the political circle. We cross-checkedthe names of business groups with the names in themajor political institutions to identify position inter-locks. For informal social ties, we sought to iden-tify family, friendship, and social organizationrelationships between group executives and politi-cal figures. By examining social structure and theprinciples of how political ties operate in Taiwan(Hsu, 1991), we used multiple published sources toidentify three major types of social ties: (1) family/intermarriage ties; (2) close friend/same hometownties; and (3) trade associations/social clubsmembership.

We recognize that the measure of informal tiesis likely to be incomplete because our approachdepends on ties revealed in published works, whichmight underestimate ties of less visible groups orof ties that business and political leaders seek tokeep secret. The lack of accounting for hidden

social ties might produce biases for H1 and H3 ifhidden ties systematically provided greater diversi-fication benefits than visible social ties during pre-liberalization contexts. Nonetheless, we determinedthat 75.4 percent (236 of 313) of the groups in oursample had informal ties with the political regime.This value is substantially larger than in other stud-ies that have used Taiwanese data. For example,among the 237 Taiwanese listed firms included inFaccio’s (2006) study, only six firms were identi-fied with close social relationships with politicians.To be cautious, though, we need to interpret theresults most strictly in terms of visible social ties.

During the course of the study, we discussed thecontext with several experienced scholars andexecutives in Taiwan. They noted that social tiesbetween business and political actors have beencommon in the country and that the visible ties wemeasure based on family, hometowns, and socialorganizations are likely to be relevant conduits forresource transfer. Our respondents were reluctant tobe specific about particular cases, owing to sensi-tivity about the nature of the activities. Nonethe-less, the discussions suggested the politicalconnections were likely to influence business strat-egy both before and after democratization, althoughthey did not express strong opinions about whetherthe strategic value of different types of social tieswould differ pre- and post-liberalization, which ouranalysis can address.

Measures: connections, diversification, andcontrol variables

Political ties

We use the number of formal and informal tiesbetween a group and the political regime in 1986,1990, and 1994 as our measure of politicalconnections.

Diversification

We used the number of two-digit Standard Indus-trial Classification (SIC 2) codes as our primarymeasure for group diversification, measured in1986, 1990, 1994, and 1998. SIC 2 is primarily ameasure of unrelated diversification. Sensitivityanalysis found similar results with an entropymeasure of total diversification (Palepu, 1985).During the period, there was little related diversifi-cation, based on an entropy measure (Chung and



Mahmood, 2006), so it was not useful to distin-guish between related and unrelated diversification.Amsden and Hikino (1994) argue that unrelateddiversification is the primary form of diversificationin emerging economies because firms lack the pro-prietary technology needed to diversify around acore technology. Following Khanna and Palepu(2000b), we constructed group-level diversificationaccording to the product information of eachmember firm.

The BGT directory did not provide a digitalformat until 2000. Therefore, we examined thepaper directory and manually assigned an industrycode to each of the member firms. We employedthe SIC codes published by the Taiwanese govern-ment in 1996, which include 66 industries at thetwo-digit level and 667 industries at the four-digitlevel.

Controls

We controlled for group characteristics that mayaffect group diversification: group age, group size,group profitability, group liability, and group mainindustry. We used the year when the first memberfirm was established as the birth of the businessgroup. We measured size by logged total assets,adjusted by the 1996 consumer price index (TaiwanStatistical Data Book, 2000). We measured profita-bility as return on assets and liability as the ratio ofdebt to net worth. We used dummy variables to con-trol for the main industry of the group across13 industries (agriculture, food, textile, wood, chemi-cal, non-metallic, metals, machinery, electrical/elec-tronic, construction, retailing, real estate and financialservices, and other services). The industry with thelargest proportion of group sales was coded as themajor business line which, on average, contributed56 percent of group sales. We coded group character-istics from the BGT directories in relevant years.

Unobservable group-specific factors might cor-relate with a group’s diversification activities andpolitical ties. The lack of proprietary technologiesmight lead to greater incentives for groups toforge more ties with political authorities, forinstance, which may also create incentive forgroups to diversify in order to reduce group-specific risk (Amsden and Hikino, 1994). Familystakes in ownership may increase diversification inorder to reduce concentration of family assets inone industry; at the same time, family ownershipmay also drive the group to build and maintain

ties to political power to ensure the longevity offamily fortune (Morck and Yeung, 2004). Theindustry fixed effects help address such unob-served heterogeneity (13 industries, as wedescribed earlier); we also use fixed effects foreach business group.

Model specification

The following specification tested relations betweendiversification and political ties:

Change of diversificationt, t + 1 = β + β1 avector ofðpolitical connection variablesÞt

+ β2 avector of group characteristic variablesð Þt+ β3 industry dummiesð Þ+ β4 group dummiesð Þ+ β5 year dummiesð Þ+ ε:

Change of diversification is the difference of diversi-fication of the same group between the current yearand four years later (e.g., we use the covariates in1994 to estimate the change of diversificationbetween 1994 and 1998). Four years provides suffi-cient time in which to observe changes, while match-ing the four-year difference in our measures ofpolitical ties.

Table 1 reports summary statistics. Social tiesare more numerous than formal interlocks (mean =4.87 versus 0.59), with social ties to the KMT andadministrators being most common. The tablereports low correlations of profitability (return onassets) with the measures of political ties(r = −0.11 to 0.09) and diversification (r = −0.05).

ANALYSIS

Descriptive overview

We first distinguish politically connected groupsfrom unconnected groups, comparing their organi-zational features and industrial distribution. Startingfrom formal position interlocks, Table 2 shows thatabout 30 percent of the groups had formal inter-locks. The ratio is higher than the 0.84 percent (outof 237 listed Taiwanese companies) reported byFaccio (2006), likely due to different units of anal-ysis (business groups versus listed firms) andgreater comprehensiveness of our sources. For-mally connected groups are older and larger than



unconnected groups, consistent with previous stud-ies (Agrawal and Knoeber, 2001; Faccio, 2006;Johnson and Mitton, 2003). Formally connectedgroups have only slightly superior financial profile(i.e., return on assets and liability/assets), in linewith the inconclusive evidence presented in exist-ing studies regarding political ties and firm finan-cial returns (Bertrand et al., 2004).

In terms of industrial participation, formally con-nected groups tend to be less common in traditionalindustries, such as the food, textile, wood, chemi-cal, and non-metallic industries (Sector 1). Thissector took off in Taiwan’s industrialization duringthe 1960s. By contrast, formally connected groupsare heavily represented in the financial sector (Sector3), in which government license and contracts, bankloans, and market information are essential. Mostimportantly, both the number of two-digit SIC codesand total entropy show that formally connectedgroups are significantly more diversified than non-connected groups. Formally connected groups parti-cipated in, on average, about three more two-digitindustries than non-connected groups.

The results for informal political ties in Table 2are similar to the patterns of formal position inter-lock. Socially connected groups tend to be older,larger, and more diversified. This consistency isnotable given that 75 percent of the groups aresocially linked to the political regime, as comparedto the 30 percent of groups that have formal posi-tion interlocks.

Contingencies of ties: effects of different typesand destinations in different contexts

We use OLS with robust standard errors toaddress potential heteroskedasticity, clusteringstandard errors by group. To reflect correlationsamong different destinations of social ties, weestimate the contingency of ties by includingboth interlock and social ties to a given destina-tion (e.g., ties to the KMT) in the same model,with different models for different destinations.The analysis pools the data for 1986, 1990,and 1994.

Table 1. Summary statistics and correlations (n = 313)

Variable Mean S.d. 1 2 3 4 5 6 7 8 9 10 11 12

1 Formal positioninterlocks

0.59 1.16 1.00

2 Informal social ties 4.87 7.45 0.43 1.003 Formal position

interlocks to theKMT

0.35 0.77 0.87 0.41 1.00

4 Formal positioninterlocks tolegislators

0.17 0.49 0.64 0.23 0.24 1.00

5 Formal positioninterlocks toadministrators

0.07 0.28 0.60 0.22 0.41 0.19 1.00

6 Informal social ties tothe KMT

1.89 2.90 0.38 0.91 0.38 0.21 0.15 1.00

7 Informal social ties tolegislators

0.36 0.81 0.36 0.77 0.34 0.21 0.19 0.65 1.00

8 Informal social ties toadministrators

2.62 4.38 0.41 0.96 0.39 0.22 0.23 0.76 0.70 1.00

9 Diversification(Number of two-digit SIC)

5.30 3.30 0.40 0.44 0.39 0.19 0.22 0.45 0.29 0.39 1.00

10 Return on assets 6.00 5.84 0.07 −0.09 0.09 −0.02 0.07 −0.11 −0.08 −0.07 −0.05 1.0011 Liability 1.96 4.45 −0.01 0.10 −0.01 0.02 −0.03 0.12 0.06 0.08 0.04 −0.18 1.0012 Group age 29.59 10.41 0.18 0.14 0.24 −0.02 0.11 0.15 0.04 0.13 0.37 0.00 −0.01 1.0013 Group size (logged

assets)9.20 1.40 0.42 0.56 0.42 0.22 0.17 0.53 0.43 0.53 0.62 0.02 0.06 0.30



Table2.

Descriptiv

estatisticsof

politicalconnectio

nsforTaiwanesebusiness

groups,1

986to

1994

Formal

positio

ninterlocks

Inform

alpolitical

ties

All

Connected

(A)

Unconnected

(B)

Difference

(A)–(B)

All

Connected

(A)

Unconnected

(B)

Difference

(A)–(B)

1.Num

berof

groups

313

94(30%

)219(70%

)313

236(75%

)77

(25%

)45%

***

2.Group

age

3032

293*

*30

3028

2**

3.Totalassets(m

illionTaiwanese$)

29,520

54,276

18,894

35,382***

29,520

37,246

5,841

31,405

***

4.Num

berof

employees

3,894

6,480

2,784

3,696***

3,894

4,673

1,506

3,167***

5.Num

berof

mem

berfirm

s8.5

11.96

7.07

4.89***

8.5

9.38

5.95

3.43***

6.Num

berof

listedmem

berfirm

s0.80

1.40

0.53

0.87***

0.80

0.97

0.25

0.73***

7.Returnon

assets

6.00

6.46

5.80

0.67

6.00

5.67

7.00

−1.33**

8.Liability/assetsratio

1.96

1.81

2.02

−0.21

1.96

2.12

1.45

0.67

9.Num

berof

two-digitSIC

industries

5.30

7.38

4.41

2.97***

5.30

5.79

3.82

1.97***

10.T

otalentropy

0.92

1.11

0.84

0.27***

0.92

0.96

0.81

0.14***

11.P

ercentageof

groups

inSector1

(traditio

nalindustries)a

[50.2%

]68.0%

[43.6%

]72.3%

[53.0%

]66.2%

[50.2%

]68.0%

[46.6%

]66.9%

[61.0%

]71.4%

12.P

ercentageof

groups

inSector2

(machinery

andelectronics/electrical)

[15.3%

]50.8%

[14.9%

]56.4%

[15.5%

]48.4%

[15.3%

]50.8%

[16.5%

]52.1%

[11.7%

]46.7%

13.P

ercentageof

groups

inSector3

(financialindustry)

[6.7%]

40.9%

[11.7%

]54.3%

[4.6%]

81.9%

[6.7%]

40.9%

[8.0%]

47.9%

[2.6%]

19.5%

14.P

ercentageof

groups

inSector4

(farming,

metals,constructio

n,retail)

[19.5%

]68.7%

[23.4%

]80.8%

[17.8%

]63.5%

[19.5%

]68.7%

[19.9%

]70.3%

[18.2%

]63.6%

15.P

ercentageof

groups

inSector5(service

industry)

[8.3%]

71.6%

[6.4%]

78.7%

[9.1%]

68.5%

[8.3%]

71.6%

[8.9%]

73.3%

[6.5%]

66.2%

a Sectors:The

five

sectorsinclude13

industries.Sector1includes

thefood,textile,wood,

chem

ical,andnon-metallic

industries;Sector2includes

themachinery

andelectronic/electrical

industries;Sector3encompasses

thefinancialindustry;Sector4includes

theagricultu

re,metals,

constructio

n,andretailing

industries;Sector5includes

theserviceindustry.Weuse

industry

fixedeffects(13industries)in

theanalysisin

Table

3,whilereportingsummariesbasedon

thefive

sectorsin

thisdescriptivetable.

***p

<0.01;**

p<0.05

;*p

<0.10.

The

sector

figuresin

[squarebrackets]reportthedistributio

nof

‘primarysectors’

(the

figuressum

to100%

across

thefive

sectors),w

hile

thelarger

figure

reportsthepercentage

ofgroups

with

anyactiv

ityin

thespecified

sector

(hence,sum

mingto

morethan

100%

).



Table 3 reports estimates of how political tiesinfluence per-period change in diversification.Columns 1a to 1c report effects without usingpolitical economic context as interactions with

political ties. Columns 2a to 2c add the interac-tions as the political economic context becamemore open in 1990 and 1994; these models testthe hypotheses.

Table 3. Effects of different types and destinations of political ties on the change in group diversification using fixedeffects OLS (DV: change in two-digit SIC between period t and t + 1; 246 cases)

1aKMT

1bOfficials

1cLegislators

2aKMT

2bOfficials

2cLegislators

Formal position interlocks 0.926 0.064 0.402 2.038 2.233 0.549(H1: see Table 4) (0.319) (0.702) (0.277) (0.610) (2.252) (0.664)

0.004 0.93 0.15 0.001 0.32 0.41Formal interlocks × year 1990 dummy −1.059 −2.399 0.618(H2: -) (0.331) (2.348) (0.614)

0.002 0.31 0.32Formal interlocks × year 1994 dummy −1.334 −2.395 −0.489(H2: -) (0.649) (2.809) (0.764)

0.042 0.40 0.52Informal social ties 0.011 0.087 1.119 −0.046 −0.063 0.548

(0.158) (0.187) (0.387) (0.145) (0.126) (0.337)0.94 0.64 0.005 0.75 0.62 0.107

Informal ties × year 1990 dummy 0.063 0.028 0.081(H3: +) (0.061) (0.056) (0.253)

0.30 0.62 0.75Informal ties × year 1994 dummy 0.241 0.194 1.132(H3: +) (0.138) (0.073) (0.271)

0.083 0.009 0.000Year 1990 dummy (v. 1986) 0.192 0.315 0.518 0.423 0.316 0.367

(0.338) (0.355) (0.379) (0.352) (0.361) (0.355)0.57 0.38 0.17 0.23 0.38 0.30

Year 1994 dummy (v. 1986) 0.805 1.270 1.443 0.881 0.719 1.039(0.609) (0.623) (0.647) (0.617) (0.580) (0.610)0.19 0.044 0.028 0.16 0.22 0.091

Group age −0.010 −0.028 −0.026 −0.001 −0.016 −0.010(0.029) (0.030) (0.031) (0.031) (0.029) (0.032)0.74 0.35 0.42 0.96 0.58 0.75

Group size (logged assets) 0.302 0.489 0.236 −0.045 0.383 −0.008(0.512) (0.493) (0.460) (0.459) (0.459) (0.414)0.56 0.32 0.61 0.92 0.41 0.98

Return on assets (ROA) 0.035 0.052 0.052 0.038 0.054 0.047(0.021) (0.024) (0.024) (0.021) (0.023) (0.023)0.105 0.034 0.031 0.071 0.019 0.046

Liability 0.008 0.013 0.007 −0.003 −0.006 −0.009(0.012) (0.011) (0.010) (0.011) (0.011) (0.011)0.48 0.24 0.50 0.81 0.63 0.45

Diversification in period t −0.850 −0.873 −0.852 −0.812 −0.912 −0.800(0.129) (0.137) (0.134) (0.129) (0.139) (0.124)0.000 0.000 0.000 0.000 0.000 0.000

Constant 2.264 1.131 3.379 4.636 1.752 4.857(5.158) (4.998) (4.461) (4.630) (4.538) (3.960)0.66 0.82 0.45 0.32 0.70 0.22

Industry and group fixed effects Yes Yes Yes Yes Yes YesR2 0.51 0.46 0.50 0.56 0.55 0.57

p values reported below coefficients and standard errors (s.e. in parentheses; adjusted for 121 group clusters).



Two baseline results stand out in Models 1a to1c. First, among formal position interlocks, withouttaking interactions with the political economic con-text into account, only KMT ties contributed todiversification (Model 1a; b = 0.926, p = 0.004).Second, among informal social ties, only ties withlegislators contributed to diversification (Model 1b;b = 1.119, p = 0.005).

Table 4 uses the results in Models 2a to 2c totest H1, which predicted that during the closedpolitical economic context, formal ties to the KMTand officials would have greater diversificationbenefit than formal ties to legislators or informalties to any type of actor. The results support theprediction, although the benefits of formal ties withofficials needs to be assessed cautiously becausethe main effect does not differ significantly fromzero, even though it is large in magnitude. The keyimplication for H1 is that the most consistentsource of diversification benefits during the closed

political economic era arose from formal ties withthe dominant political party (KMT), with govern-ment officials offering higher variance in benefits.

Models 2a to 2c of Table 3 also test H2 and H3.The key tests are the interactions of the year 1990and 1994 dummies with the formal interlock(H2) and informal ties (H3) variables. The resultsdemonstrate that the diversification benefits of for-mal ties with the KMT declined significantly by1990 (b = −1.059, p = 0.002) and 1994(b = −1.334, p = 0.042), supporting H2. In parallel,consistent with H3, the diversification benefits ofinformal ties increased as the environment liberal-ized, reaching significance in 1994, with weak sig-nificance for ties to the KMT (b = 0.241,p = 0.083) and strong significance for ties to offi-cials (b = 1.132, p = 0.000) and legislators(b = 0.194, p = 0.009).

Thus, the results support H2 and H3. The corepoint is that formal ties tend to decline in value, while

Table 4. Comparison of coefficients from Table 3 to test Hypothesis 1

H1: In a closed political economic system, the diversification benefitsthat a firm gains from formal position interlocks with the rulingpolitical party and government officials will be greater than benefitsfrom formal position interlocks with legislators or informal social tieswith any type of political actor.

1. KMT 2. Officials 3. Legislators

A Formal: pre-liberalization (1986) 2.038 2.233 0.549B Informal: pre-liberalization (1986) −0.046 −0.063 0.548Pair-wise comparisons: formal KMT and officials versus other ties(H1 +)

A1 v. A3, B1, B2, and B3: supportA2 v. A3, B1, B2, and B3: directional support

H1: Compares formal position interlocks with the KMT (A1) and officials (A2) to position interlocks with legislators (A3) and toinformal social ties with all destinations (B1, B2, B3) in the closed political economic context (1986).

Panel A. Formal ties

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

1986 1990 1994

Ch

an

ge

in

div

ers

ific

atio

n

Formal: KMT Formal: Officials Formal: Legislators

Panel B. Informal ties

-0.5

0.0

0.5

1.0

1.5

2.0

2.5

1986 1990 1994

Informal: KMT Informal: Officials

Informal: Legislators

Figure 1. Impact of formal and informal ties on diversification, pre- and post-liberalization. Solid lines indicatestatistically significant coefficients (vertical axis: positive values = greater increase in diversification).



informal ties gain value. The more nuanced point isthat informal ties with legislators have the most sub-stantial impact in the post-liberalization era, reflectingtheir increased power in an open political economy.This stands in striking contrast with their lack ofbenefit—whether via formal interlocks or informalsocial ties—during the autocratic era.

Figure 1 depicts the net impact on diversificationof each combination of type and destination of tiein the three periods of the study. Panel A showsthat the diversification benefits of formal ties toboth the KMT and officials decline sharply,although only the KMT results are statistically sig-nificant. The results are material: the KMT benefitsdecline from about 2.0 to 0.75 units of diversifica-tion, where the reduction of 1.25 is about 24 per-cent of the 5.3 mean value of diversification. PanelB shows an increase in benefits for informal ties tolegislators (about 20% of the mean value of diversi-fication) and a smaller increase for informal ties tothe KMT and to officials (4 to 5% of the meanvalue of diversification).

Several controls in Table 3 warrant comment.First, the post-liberalization dummy for 1994 has apositive impact on diversification in the initial modelsfor ties with officials and legislators, suggesting thatmany groups took advantage of expansion opportu-nities once the economy and polity became moreopen. Nonetheless, the effect weakens in columns 2band 3b, suggesting that the post-liberalization effectprimarily arises for groups with extensive informalsocial ties (informal ties had the strongest effect onpost-liberalization diversification in the full models).Second, group profitability (ROA) is positive, withsignificance in most models. Third, highly diversifiedgroups undertake less subsequent diversification.

Sensitivity analysis and robustness checks

We undertook six sets of sensitivity analyses. First,we found similar results using an entropy measureof diversification. Second, two other controls hadinsignificant impact: (1) the number of Taiwanesepatents a group owned as a measure of access toproprietary technology, which may substitute forresources from political ties; and (2) insider owner-ship measured by the share of group ownershipheld by the controlling family as well as groupaffiliates that the family directly or indirectly con-trolled, which might affect both political tie build-ing and diversification (Morck and Yeung, 2004).

Third, we plotted diversification and number ofties over time to ensure that the apparent relationshipbetween informal social ties and increased diversifi-cation during the liberalization period did not arisefrom common time trends (in spite of the controls fortime in the regressions). The mean number of infor-mal social ties per group was similar in 1986, 1990,and 1994, even as diversification increased, demon-strating that the statistical results do not reflect a spu-rious relationship between informal social ties andincreased diversification over time.

Fourth, we assessed possible correlations amongrepeated observations, in two ways: (1) we clus-tered years within groups; and (2) because groupsoperating in the same industry face similar policyexposures and external changes, we clusteredgroups within industries. In both cases, the resultswere materially equivalent to those in Table 3.

Fifth, we used a bracketing technique to assesswhether the coefficients and standard errors ofinterest are stable in models with fixed effects only,lagged dependent variable only, and both laggeddependent variable and fixed effects. Owing to thelagged variables, bracketing loses a period from thethree-period panel; nonetheless, the results aredirectionally consistent. Most strikingly, informalties have increased benefit for ties with legislatorsand administrators in 1994, with significance inboth the fixed effect and lagged dependent variableapproach (insignificant positive for fixed effect andlagged dependent variable combined).

Sixth, we examined whether there was a consist-ent shift toward or away from unrelated diversifica-tion during the study period, to help investigatepotential unobserved heterogeneity stemming fromchanges in the political economy. There was noconsistent shift; the industries in our study wereequally likely to increase or decrease their unre-lated diversification. Nonetheless, in future work, itwould be useful to examine whether incentives forthe nature of diversification change as a politicaleconomy becomes more open.

We explored instrumental variables to address pos-sible endogeneity between ties and diversification,such as concerns of potential reverse causality(Hillman, Keim, and Schuler, 2004) and, more gener-ally, unobserved heterogeneity (Bascle, 2008). Somestudies address causality by arguing that most ties arepredetermined because they relate to family and kin-ship with long histories (Johnson and Mitton, 2003).Other studies have used unexpected shocks (Siegel,2007) or instrumental variables (Leuz and Oberholzer-



Gee, 2006). In our study, panel data allow us to usegroup fixed effects to address unobserved heterogene-ity; nonetheless, endogeneity remains a potential con-cern. Although we used multiple instrumentationstrategies, we found it impossible to identify a reliableinstrument. Because imperfect identification can intro-duce substantial biases (Bound, Jaeger, and Baker,1995; Stock and Yogo, 2005), we decided to rely onthe correlational results that we report. Therefore, theresults need to be interpreted as associations, ratherthan as unambiguous causal relationships; we believethat the correlations provide relevant insights.

DISCUSSION AND CONCLUSION

We examine how types and destinations of politicalties influence business strategy in varied politicaleconomic contexts. The argument focuses on the roleof public scrutiny, tie accountability, and controlover resources, and diffusion of power in shapingstrategy, with focus on diversification benefits. Weshow that formal position interlocks to the rulingpolitical party facilitate diversification in a closedpolitical economic system, while informal social tiesto multiple political actors—especially legislators,who gain power over resource flows as a politicaleconomy becomes more open—have greater impactin a more open political economic system. Theresults advance the emerging literature on business-political ties (Faccio, 2006; Fisman, 2001; Johnsonand Mitton, 2003; Leuz and Oberholzer-Gee, 2006;Siegel, 2007; Zheng et al., 2015) by incorporatinglongitudinal institutional changes into the theory aswell as by examining group-level data.

The first-order contribution here is that formalties decline in value after liberalization, while infor-mal ties increase in value. This may be somewhatintuitive, although there are counter arguments thatmight expect informal ties to have substantial bene-fits in autocratic periods. Nonetheless, there isvalue in carefully documenting the changing effectsof the nature of ties, both to demonstrate the trendsand to help tease out alternative arguments.

In turn, complementary effects involving tie des-tinations offer greater nuance. The shift from thepattern in which primary benefits during autocracyarise from formal ties to the dominant party to thepattern in which stronger benefits during liberaliza-tion arise from informal ties to all three actors(KMT, legislators, officials) is intriguing. Moreo-ver, the relative magnitudes of the informal

benefit—substantially greater with legislators thanwith the other two types of actors—are important.This combination of change in value based onnature of ties and shift in destinations helpsadvance the literature on political ties.

It is useful to consider how the results mightapply in even more open political economic contextsthan that of Taiwan in the 1990s. During the studyperiod, Taiwan became more open, but positioninterlocks continued to provide substantial benefits.For the U.S., which is substantially more open thanTaiwan in the 1990s, it is likely that formal positioninterlocks tend to offer fewer benefits. Diffusion ofpower, public scrutiny, and tie accountability result-ing from greater ability to punish broken promiseslimit the strategic benefits of position interlocks.Nonetheless, informal social ties will have value inthe U.S., especially if business leaders and politicalactors substitute inconspicuous informal social rela-tionships for visible interlocks.

The results have implications for the politicaleconomy, social networks, diversification strategy,and business group literatures. The political economyliterature highlights relationships between privatebusinesses and the state (e.g., Bauer et al., 1972;Evans, 1995; MacIntyre, 1994; Schneider, 1998),paying less attention to personal ties that connectpoliticians and business leaders. The literature tendsto treat political ties as a homogeneous category andconfines the investigation within trade associationsand similar peak organizations. By specifying threemechanisms of how different types and destinationsof ties function, our research helps indicate the desti-nations where the ties will matter in different politicaleconomic contexts. In studying the creation of indus-trial and economic policies, future studies of politicaleconomy could usefully examine social ties betweenparliament members and large businesses, as well asmemberships in trade associations.

The social network literature highlights theimportance of social relationships in shaping eco-nomic behavior (Granovetter, 1985; Uzzi, 1996,1997). While this approach provides insightsregarding different types and destinations of socialrelationships, the literature has understated theinfluence of macro contextual forces, with limitedassessment of how contingencies from the institu-tional environment influence the effects of socialties. As Lie (1997: 351) points out, ‘the embedded-ness approach must itself be embedded in larger,historically transient, social structures.’ More recentstudies have started to explore institutional



contingencies for different types of ties, such asinterfirm ties in the IPO process, social ties amongbusiness group affiliates, and director interlocks(Gulati and Higgins, 2003; Luo and Chung, 2005;Mizruchi, Stearns, and Marquis, 2006). Our studyspecifies how contingencies of political and eco-nomic systems shape the ways political ties facili-tate business strategy. Moreover, while politicaland economic contexts are relevant to political ties,they also apply to other kinds of ties, such as strate-gic alliances and interlocking directorates. Themechanisms of tie accountability, public scrutiny,and diffusion of power over resources may moder-ate choices of alliance partners as well as the per-formance effects of alliance and director ties.

The study advances diversification studies by add-ing a political component that the literature oftenomits (Boddewyn and Brewer, 1994). Traditionaldiversification strategy studies focus on how internalresources drive firms to move into new product mar-kets (Hoskisson and Hitt, 1990). The resource-basedtheory (Penrose, 1959; Wernerfelt, 1984) views firm-specific tangible and intangible internal resources asthe heart of a firm’s decision to diversify. Beyondinternal resources, as we show, elements of firms’external environments, such as governmental policiesand political connections, can influence diversifica-tion strategy. Our argument is consistent with theinstitutional perspective (Dobbin and Baum, 2000;Ingram and Silverman, 2002), which contends thatthe choice of business strategy is not simply drivenby firms’ inherent resources, but is also shaped byprevailing institutional contexts. Future studies mayclarify the role of external linkages in shaping afirm’s behavior by examining interactions betweeninternal resources and political ties.

Studies of business groups, meanwhile, havefocused on the organizational form of the groupand on relationships between the group form andperformance. Khanna and Palepu (1999) suggestthat business groups exist because the group formaddresses voids in market-based institutions. Themore diversified a group is, the more extensive thereplacement of internal markets and, hence, the bet-ter the group performs (Khanna and Palepu,2000b). However, other aspects that may shapehow business groups operate and perform havebeen underemphasized. Our research highlights theimportance of examining the interface betweenbusiness groups and external institutional sectorssuch as political bodies (Granovetter, 2005) andhelps create a more comprehensive theory of

business groups in emerging markets. Future stud-ies of business groups may want to examine howpolitical ties of a group affect group performancesuch as financial returns and innovation outputs(e.g., Mahmood and Mitchell, 2004).

Six limitations of the study point to avenues forfuture research. First, it would be useful to considernonlinearities in the relationships; for instance,extreme cases of political ties might constraindiversification rather than facilitate it. Exploratoryanalysis found no systematic nonlinear influences,but such effects merit further study. Second, wefocus on one key aspect of business strategy, diver-sification; other elements of strategy and perfor-mance merit consideration. Third, our results arecorrelational and, as such, provide meaningfulinsights, but further work could establish causalityof the relationships with more reliability.

Fourth, it would be useful to examine the role ofpolitical ties in countries that have had higher inci-dence of state-owned enterprises (SOEs) thanTaiwan, such as Mexico and China. While it is possi-ble that formal and informal interlocks of leaders ofstate-owned firms with bureaucrats and party officialsmight have different effects on diversification than inthe case of the privately owned firms we focus on inTaiwan, there is evidence that political ties are com-mon and provide resources that affect the strategyand performance of SOEs (e.g., Nehru, 1996; Zhenget al., 2015). We expect similar results, althoughempirical analyses might differ from that expectation.

A fifth limitation concerns identifying informalsocial ties. Studies of social ties that rely on pub-lished data suffer potential selection bias. Reportedrelationships commonly highlight prominent busi-ness leaders and politicians, which may understatethe impact of less prominent ties. Nonetheless, wefound significant results, even for a possibly under-estimated measure. However, it would be useful tofind ways of identifying hidden social ties, whichmight have different effects than the visible socialties we measure for this article.

Sixth, future studies can move a step further toexamine whether the nature of ties moderates theeffects on business strategy. This would be particu-larly useful for analyzing the effects of social ties.Firms can be connected to politicians informallythrough family or marriage, through friendship orformer classmates, and though trade associations orclub memberships. These different ties may beardifferent strengths and, hence, may have differenteffects on firm strategy.



Other questions also warrant attention. Forinstance, in Table 3, the large magnitude of coeffi-cients for formal position interlocks with officialscoupled with large standard error is intriguing. Thepattern suggests that some ties with officials facili-tate diversification while others may deflate diversi-fication and, therefore, on average, cancel eachother out so that the coefficient is statistically insig-nificant despite the magnitude. The idea that only asubset of officials has access to resources that sup-port diversification merits investigation.

In sum, the relationship between political tiesand business strategy is an important topic inglobal strategy and related research. Our studydemonstrates that different types and destinationsof ties help shape firm diversification strategy as apolitical economy evolves, highlighting the institu-tionally contingent nature of the influences. Wehope this study will encourage research that exam-ines the effects of ties across multiple countries andperiods, further clarifying the institutional contin-gencies of political ties.

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APPENDIX

I. INDICATORS OF POLITICAL ANDECONOMIC CHANGES BEFORE ANDAFTER INSTITUTIONAL TRANSITION

Key indicator (sources)

Beforetransition(1970–1987)

Aftertransition(1988–1998)

Politicaldemocratization

Number of TV andcable channels(Cheng, 2002)

3 115

Number of newspapers(Lin, 1999)

2 17

Average number ofregistered socialorganizations

616 1,967

Average number ofregistered politicalparties

0 77

Average number oflabor protests

52 296

Average number ofnational scale generalelections

0 4

Economic deregulationNumber of industriesderegulated (Chu andHung, 2002)

0 42

Number of publicenterprises privatized(Chang, 2001)

0 21

Average tariff burden 7.6% 4.8%Average amount offoreign directinvestment

704,778 2,658,225

Average exchange rateof 1 $US

37.3 27.2

Economic freedomindex

5.2 6.5

Note: The numbers of social organizations, politicalparties, and general elections are quoted and calcu-lated from the website of the Ministry of InteriorAffairs (http://www.moi.gov.tw/stat/). The unit ofbank loan and foreign investment is in millions ofTaiwanese dollars and is adjusted by consumer priceindex based in 1996 (quoted from Taiwan StatisticalData Book, 2000). The values of tariff burdenbefore transition is the average of 1980–1987 (Chen,2001). The value of economic freedom index for thepre-transition period is the average of the index in1975, 1980, and 1985, and the value for the post-transition period is the average of 1990 and 1995(The Fraser Institute, 1997). The number of laborprotests in the pre-transition period is the average ofprotests between 1983 and 1988 (Chu, 1992).

II. DATA SOURCES AND CODING OFPOLITICAL CONNECTIONS

Formal position interlocks

A formal position interlock occurs when someonewho holds a formal leadership position in a



business group also holds a formal political office.We coded the names of the chairman of the board,CEO (general manager), and major shareholders ofeach group affiliate. These names are recorded fromthe directory of Business Groups in Taiwan (BGT)and compiled by the China Credit InformationService (CCIS) in Taipei, which is the most prestig-ious credit-checking agency in Taiwan and an affil-iate of the U.S.-based Standard & Poor’s. Thedirectory is the most comprehensive source forbusiness groups in Taiwan and has been used inprevious studies (Claessens, Djankov, and Lang,2000; Khanna and Rivkin, 2001; Luo and Chung,2005). For group firms that are listed in the mainboard of the Taiwan Stock Exchange, we coded thenames of all directors and auditors, in addition tothe board chair, CEO, and major shareholders.Because Taiwanese firms preferred to nominatefamily members, trusted persons, or associates tobe directors or auditors (Yeh and Woidtke, 2005),we considered directors and auditors of the firm asimportant conduits that the dominant family usedto link to the external environment. The names ofdirectors and auditors are coded from the TaiwanEconomic Journal (TEJ) database.

We then identified whether the business leadersalso held political office. We considered three typesof political offices in Taiwan: (1) leaders of theKMT (the dominant political party); (2) administra-tors within the central and provincial governments;and (3) members of the national and provincial leg-islatures and judiciary.

KMT

We coded the names of the members of KMT’scentral committee (150–180 persons) and regularcentral committee from the proceedings of KMT’sparty conventions. Because the power center ofKMT, the regular central committee (10–15 per-sons), is nominated from within the central com-mittee, being a member of the central committee isconsidered to be close to the power center andinfluential.

National and provincial administrators

For the central government, we coded (1) thenames of the ministers and vice ministers of differ-ent ministries and (2) the directors and deputydirectors of all departments one level under theministries. We also coded the names of major

officers in provincial governments. The informationabout local officials was important because theymight provide links to the central government (Fac-cio, 2006). The names of government officers arecoded from the website of the directory of Taiwangovernment (http://twinfo.ncl.edu.tw).

Legislators and judges

For the parliaments, we coded the names of parlia-ment members at the national level and the prov-ince level. We obtained the names of legislatorsfrom the parliament website (http://www.ly.gov.tw)as well as from newspapers. In addition, weincluded the names of the top officers in the judi-cial institution, the Judicial Yuan (http://www.judi-cial.gov.tw). While the judicial institution was notconsidered independent during KMT’s domination,its members might provide a linkage to the KMTand to administrative agencies.

In total, we have 2105 distinct names from busi-ness groups in 1986, 2,222 in 1990, and 3,453 in1994. We also have 2,066 distinct names from dif-ferent political institutions in 1986, 1,137 in 1990,and 1,119 in 1994.

Informal social ties

We relied on three major published sources foridentification of informal relationships based onbased on family, hometown, and social organiza-tions. First, the Excellent Business Database System(EBDS) (http://ebds.anyan.com.tw) is an electronicdatabase that covers more than 200 periodicals andnewspapers published in Taiwan and provides fulltext search.

Second, Wealth Magazine (‘Tsai Hsun’) data-base provides full text of the magazine in a CD-rom format. Wealth Magazine is an important busi-ness journal, which has periodical reports on largebusiness groups in Taiwan. The style of extensiveand deep coverage of this magazine is comparableto that of Fortune and Far Eastern EconomicReview. We used the name of the top executive andshareholders of business groups to search the data-bases, and then we screened the reports to locatethe social ties to political figures.

Third, we surveyed autobiographies of groupfounders (e.g., Huang, 1991; Hsieh, 1994; Hsu,1994), as well as dissertations (e.g., Lin, 1995;Numazaki, 1992; Peng, 1989) and books (e.g.,



http://twinfo.ncl.edu.tw

http://ebds.anyan.com.tw

Chen, 1999; Hsieh, 1992; Hsu, 1991) devoted tothis topic. These sources provided extensive cover-age. For instance, Chen (1999) covers details of thefamily genealogy and marriage ties of more than4,000 individuals associated with 43 prominentpolitical and business elite families in post-warTaiwan.

Using these public sources, we took three stepsto identify informal social ties between businessgroups and the political actors.

Family

We first identified family/intermarriage ties. Agroup has such a tie if a top officer or major share-holder has a relative with the same family name (ora relative with a different family name but with arelationship via marriage) serving in the politicalinstitutions mentioned earlier. For example, WangYuzhen, the top officer of Hwa Eng Wire & CableGroup, has an elder brother Wang Yuyun, who usedto be the mayor of Kaoshiung City (the second-lar-gest city in Taiwan) and a member of the KMTcentral committee. Therefore, Hwa Eng Wire &Cable Group is coded as politically connected, withWang Yuyun as the primary connection. Similarly,the Asia Trust Group is politically connected toLian Zhan, the former chairman of KMT, throughthe intermarriage between one of Lian Zhan’s rela-tives and Zheng Mianmian, the president of AsiaTrust Group.

Friends

Second, we identified close friend/same-hometownrelationships. The group officers or large share-holders have close friends or have known peoplewho are from the same hometown, who are impor-tant figures in the political regime. An example isthe long-lasting friendship between the founder ofTaiwan Cement Group, Gu Zhenfu, and the Presi-dent of Taiwan, Lee Teng-Hui, built while playinggolf. Tainan Spinning Group is also politically con-nected to Wu Sanlian, a famous political figurewho used to be Taipei’s mayor and a KMT centralcommittee member, who is from the same home-town of Wu Xiuqi, one of the top executives of Tai-nan Spinning Group.

Social organizations

Third, we identified trade associations/social clubs.The top directors or large shareholders of businessgroups have memberships in national trade associa-tions and/or other prestigious social clubs that havesignificant political figures as members. Forinstance, the top officer of China Rebar Group,Wang Youzeng, has been the chairman of the Fed-eration of Commerce, which is the peak trade asso-ciation of the service industry. Another example isCheng Shengtian, the top officer of the SampoGroup, who is a member of a prestigious golf club,a usual gathering place for important business mag-nates and political leaders.



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