Cool

Portfolios of Political
Ties and Business

Group Strategy in
Emerging Economies:
Evidence from Taiwan
Administrative Science Quarterly

59 (4)599638
The Author(s) 2014
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DOI: 10.1177/0001839214545277
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Hongjin Zhu1 and Chi-Nien Chung2
Abstract
Using data on 290 business groups, this study examines how ties with rival
political parties maintained by Taiwanese firms from 1998 through 2006
affected business strategies, specifically the unrelated diversification into new
industries. Taiwans recent democratization and emerging economy provide an
ideal setting for studying the economic impact of firms ties with rival political
parties. By focusing on a firms entire portfolio of ties instead of strictly dyadic
businessgovernment ties, we offer a novel model that demonstrates how the
interplay of various ties affects a firms strategy differently under different
forms of government. Our analysis shows that under a united government, ties
to the ruling party facilitate entries of business groups into unrelated industries,
while ties to the opposition parties inhibit such moves. Portfolios of ties to both
the ruling and opposition parties impose additional obstacles to market entry.
Under a divided government, however, ties to the ruling party are conducive to
market entry, and portfolios of ties to both the ruling party and the opposition
party with legislative authority offer a further boost. Regardless of type of government, the effect of having a portfolio of political ties tends to be mitigated
by a firms internal resources and capabilities: a firm with sufficient resources
and market entry experience has a better chance of achieving its goals even
when a dominant political party withholds its support. Our study highlights the
tradeoffs that politically connected firms confront in emerging economies with
underdeveloped political and market institutions.
Keywords: political ties, portfolios of political ties, political parties, market
entry, democratic emerging economies
Previous research has demonstrated that political ties influence firms market
value and performance (Peng and Luo, 2000; Fisman, 2001; Johnson and
Mitton, 2003). Relatively less attention has been paid to whether and how
1
2
DeGroote School of Business, McMaster University

National University of Singapore Business School
600
Administrative Science Quarterly 59 (2014)
political ties influence firms strategy. More importantly, previous studies

mainly examined businessgovernment (i.e., administrative or legislative) ties
(e.g., Fisman, 2001; Hillman, 2005), leaving another key component of political
ties, the relationships between firms and political parties, largely untouched.
Research shows that firms build ties and make campaign contributions to political parties (Cooper, Gulen, and Ovtchinnikov, 2010), but why they decide to
create ties, with which political parties, and how such choices affect firms strategic decision making remain unclear. This gap is critical, given political parties
significant role in setting policy agendas, nominating candidates, monitoring
elected representatives, and controlling government institutions when they are
in power.
Furthermore, the unit of analysis in previous studies has been dyadic ties
between firms and the political regime, which assumes that ties to
different political actors are independent of each other and that their influence on the focal firm is the aggregated effect of all ties. In democracies,
however, competition among political parties affects their dependence on
firms for resources such as campaign contributions (Bonardi, Holburn, and
Vanden Bergh, 2006), as well as their subsequent provision of administrative
favors to the firms (Baron, 1994). Firms connected to rival political parties are
thus exposed to opportunities and constraints that stem not only from individual political parties but also from competition among the parties. For
example, ties to both ruling and rival political parties may bring tertius gaudens advantages (Simmel, 1922; Burt, 1992) and political flexibility to the
firm. Focusing on individual dyadic ties would not capture such synergies or
conflicts among the ties that may make the overall effect on the focal firm
greater or smaller than the sum of the effect generated by each dyadic tie
(Vassolo, Anand, and Folta, 2004; Wassmer, 2010). Such a portfolio effect is
an aggregate property that can be captured only at the level of the collectivity
of ties.
Firms can build portfolios of political ties with various political parties, including opposing parties. An egocentric portfolio of political ties consists of the
focal firm (ego), its set of partners (alters), and their connecting ties
(Wasserman and Faust, 1994). The portfolio is hence a collection of dyadic ties
to different alters that can affect a firms strategy. A diverse portfolio of ties
with different political parties suggests that the focal firms target is multiple
political parties, whereas a focused portfolio implies more concentrated political
tactics. Dyadic ties and portfolio diversity can affect a focal firms strategy
under different forms of government: united government, in which a political
party controls both executive and legislative branches, and divided government,
in which different parties control the legislative and executive branches (Alt and
Lowry, 1994). Moreover, the focal firms internal resources and capabilities
may influence the strategic efficacy of resources acquired from portfolios of
political ties.
The portfolio effect is particularly important in dynamic and uncertain environments such as those in newly democratized emerging economies, where
competition among political parties is intense, regime change is frequent and
hard to predict, and market institutions are underdeveloped (Huntington, 1991;
Hoskisson et al., 2000). Taiwan presents such an environment and thereby
offers an ideal setting in which to investigate our research questions. As a typical case in the third wave of democratization (Huntington, 1991), Taiwan has
Zhu and Chung
601
experienced large-scale democratization since 1987 and realized the first electoral turnover from the dominant Nationalist Party, Kuomintang (KMT), to the
opposition, the Democratic Progressive Party (DPP), in 2000. Because of its
short democratic history, Taiwans political party institutions are more personalized, weak in policy accountability, and characterized by floating voters
and greater electoral volatility than those in established democracies such as
the United States (Mainwaring, 1999; Chu, 2006). Meanwhile, like other
emerging economies, Taiwan features underdeveloped market intermediaries, substantial information asymmetries and high transaction costs, dominant business groups, and evident state involvement in the market
(Hoskisson et al., 2000; Luo and Chung, 2005). As a result, firms tend to rely
on personal political ties to gain access to resources and information that are
otherwise difficult or costly to obtain from the market. Further, the dynamic
political environment, as demonstrated by the unanticipated regime change
in 2000, makes it imperative for political elites to seek support from firms
and drives firms to adjust their relationships with political parties in response
to regime changes. The evolution of diversity in a portfolio of ties along with
electoral results allows us to examine the strategic role of the evolution of
tie portfolios. More importantly, the democratization in Taiwan is typical of
many other emerging economies in terms of timing, causes, process, and
characteristics (Huntington, 1991), making our results potentially generalizable to more than a dozen newly democratized emerging economies, such
as Brazil, Poland, and South Korea (Chung, 2003; McMenamin and
Schoenman, 2007).
Our study also has implications for the research on portfolios of interorganizational ties (Wassmer, 2010). Lavie (2007) suggested that an alliance portfolio
with competing partners benefits the focal firm by enhancing its bargaining
power vis-a`-vis its partners. Our research on the portfolio of ties to political parties sheds light on two important and understated contingencies of such benefits. First, the third-party advantages to the focal firm depend on the relative
competitive status of partners. The benefits increase with comparable competitive status, whereas they decrease or even turn into costs with a disparate
competitive status between partners. Second, political parties have the punitive
power to direct discrimination and retaliation at focal firms (Siegel, 2007), but
business partners do not. Although large business partners may play against
small firms with their market power, their actions are not institutionally based
and are less detrimental. Clarifying the tradeoff of benefits and costs of portfolio diversity in portfolios of political ties helps build a more comprehensive theory of network portfolios.
RIVAL POLITICAL PARTIES, PORTFOLIOS OF POLITICAL TIES,
AND FIRM STRATEGY
The conventional research on dyadic political ties analyzes ties as if they were
independent. A firms portfolio of political ties, however, is composed of ties to
different political parties, and the relative competitive status of the parties
shapes the dynamics of ties between the firm and those parties and thus the
functioning of the ties. In general elections in democratic systems, two or more
political parties compete for the control of government institutionsexecutive
and legislative branchesand the party that wins the majority of votes gains
602
control of the government.1 If a political party controls both executive and legislative branches, it achieves dominant political power, and if different parties
control the legislative and executive branches, political power is relatively
evenly distributed.
In democratic systems, the effects of dyadic political ties on the focal firms
strategy are influenced by the prominence of political partiesthe resources
and privileges at their disposalas well as by the focal firms bargaining
powerits ability to acquire resources and privileges from the parties. The ruling party of a united government is a high-power and prominent partner for
firms because it allocates resources and shapes the regulatory environment
(Schuler, Rehbein, and Cramer, 2002; Holburn and Vanden Bergh, 2008). It also
confers legitimacy on focal firms that helps them manage constraints in the
external environment (Pfeffer, 1987). In contrast, opposition parties under a
united government are low-power partners because of the lack of mandatory
influence. In a divided government, however, the ruling party and the opposition party with legislative authority are comparably powerful and prominent
because the former sets and executes policies and regulations, whereas the
latter affects laws and rules via legislative power (Elgie, 2001). Ties to both parties can also confer legitimacy on a focal firm by signaling to stakeholders the
firms ability to maintain key relationships.
The competitive status of different political parties also shapes the focal
firms bargaining power: its ability to favorably change the terms of agreements, obtain accommodations from a party, and influence the outcomes of
negotiations (Yan and Gray, 1994). Unlike alliances or other business relationships between firms, ties between firms and political parties do not involve formal agreements and judicial enforcement, and hence the risks to firms of
opportunism are high (Dixit, 1996: 53). The focal firm has to leverage its bargaining power to initiate desired exchanges and ensure that politicians keep
their promises. Resource dependence theory (Pfeffer and Salancik, 1978;
Bacharach and Lawler, 1984) suggests that the bargaining power of a politically
connected firm over political parties depends on the firms stakes in the political ties, as well as the availability of alternatives. More alternatives enhance the
firms bargaining power over its political partners (Yan and Gray, 1994). The
firm is likely to enjoy stronger bargaining power under divided government than
under united government because of the availability of alternative political parties as allies. The alternative enhances the firms position in negotiations, rendering political parties more willing to satisfy its demands in exchange for
electoral support (Baron, 1994). By contrast, in a united government, alternative
1
The scope of government institutions controlled by the winning party differs among electoral systems. In parliamentary countries such as the United Kingdom and Canada, the executive branch is
typically a constituent part of the legislative branch (Moe and Caldwell, 1994). The majority party
that wins legislative elections controls both executive and legislative branches. In countries with
chief executives, or presidents, such as the United States, there is a greater separation of political
power between the executive and legislative branches (Hillman and Keim, 1995). Political control of
the legislature does not guarantee control of the executive branch because the chief executive is
elected separately and may represent another party. To the extent that political power is more concentrated in parliamentary systems (Hillman and Keim, 1995), our theoretical framework, which
focuses on the strategic interaction between firms and rival political parties, applies better to firms
operating in countries with a chief executive.
Zhu and Chung
603
political partners are not available and the firm is in a weak bargaining position,
compelling it to accept the ruling partys demands.
In addition to influencing dyadic ties, the competitive status of political parties may also influence the effects of the tie portfolio on firms by providing
tertius gaudens advantages and political flexibility that produces insurance
benefits. The competition among political parties for the firms electoral support
enables the firm to mediate among political parties and better control the
exchange of information and resources with them. The discretion in choosing
partners for pursuing particular strategic objectives and juggling among competing partners enhances the firms leverage on its partners and its access to partners resources (Burt, 1992). Further, the lack of full collaboration among
political parties creates an insularity that renders them unable to coordinate their
actions toward the firm, allowing the firm to maintain separate identities and
positions with each political party (Burt, 2000). Competing political parties are
likely to bring pronounced tertius gaudens advantages to the focal firm because
major political parties do not usually engage in collaboration in general elections.
This situation contrasts with strategic alliances in which partners engage in coopetition (Hamel, Doz, and Prahalad, 1989), which may compromise the focal
firms tertius gaudens advantages (Bae and Gargiulo, 2004; Lavie, 2007).
Furthermore, a diverse portfolio of political ties under a divided government
can benefit the focal firm by producing political flexibility, which allows firms to
sustain powerful political allies regardless of the electoral results and regime
changes. Connections to both the ruling and the opposition party reduce the
possibility of discrimination and retribution because both sides are the firms
allies, and their competitive status makes them dependent on firms electoral
support. This diversity of ties makes it possible for the firm to exchange information and resources continuously with the government regardless of regime
changes and thus facilitates its long-term strategic planning (Meyer and
Rowan, 1977; Cattani et al., 2008), such as for restructuring and entering new
markets. Such an insurance effect is akin to the concept of a diversified stock
portfolio in financial investment (Evans and Archer, 1968). Table 1 summarizes
our conceptual framework.
Dynamic electoral results make the value of a diverse portfolio contingent on
the status change of political parties, with the possibility that an initially valuable
Table 1. Conceptual Framework: Portfolios of Political Ties with Political Parties under United
and Divided Governments
United Government (limited party competition)
Divided Government (intense party competition)
Ruling party competitive status

Most powerful: administrative and legislative authority
Strong bargaining power over firms
Ability to implement discrimination and retribution toward
firms with diverse portfolios of political ties
Moderately powerful: administrative authority

Medium bargaining power over firms
May provide tertius gaudens benefits and political
flexibility to firms with diverse portfolios of political ties
Opposition party competitive status

Least powerful: no political power
Weak bargaining power over firms
May trigger discrimination and retribution from ruling
party toward firms with diverse portfolios of political ties
Moderately powerful: legislative authority

Medium bargaining power over firms
May provide tertius gaudens benefits and political
flexibility to firms with diverse portfolios of political ties
604
portfolio could turn into a liability overnight and vice versa (Siegel, 2007). This
possibility is particularly salient in newly democratized states because their nascent political institutions make the competition of political parties more
dynamic, regime change more disruptive, and potential retaliation by dominant
political parties more plausible (Huntington, 1991; Mainwaring, 1999). In addition, the effectiveness of political parties in providing resources, information,
and administrative privilege, as well as in conferring legitimacy on focal firms, is
likely to be stronger in emerging economies because of weak market institutions and strong state involvement in the market (Peng and Luo, 2000). Under
such circumstances, being connected to the right political party (or parties) and
maintaining a facilitating portfolio are critical for firms in pursuing strategic
goals.
In addition, the literature on the resource-based view of business groups
indicates that the effects of external resources on strategic maneuvers such as
market entry may depend on groups internal resources and capabilities (Kock
and Guillen, 2001). A groups ability to enter new industries depends on its
access to production factors and its coordination skills to set up new
plants (Guillen, 2000: 365). Because portfolios of political ties shape resource
and information flows to business groups, their impacts on market entries are
likely to vary across business groups with different levels of dependence on
resources such as financial capital and capabilities such as experience in market entry. These organizational attributes may amplify or reduce the significance of resources acquired through political ties, as well as the opportunities
and risks arising from such ties.
Portfolios of Political Ties in Newly Democratized Emerging Economies

Although critical, the forming of political ties and portfolios may not be completely intentional. The composition of a portfolio is often the product of a
firms initial social embeddedness in its environment, resource needs, and strategic response to the changing environment. Firms executives may be connected to political party leaders simply because they are family members,
classmates, or neighbors or share the same political beliefs (Johnson and
Mitton, 2003; Siegel, 2007). For instance, a few firms had political ties to the
Democratic Progressive Party (DPP) before it came into power in Taiwan in
2000. The innate social embeddedness serves as a seedbed that facilitates the
growth and evolution of ties between firms and political parties. At the same
time, firms may purposefully try to build ties with political parties to meet their
resource needs and terminate ties that have adverse impacts. Not all purposeful attempts succeed, however, because executives may not be able to establish connections with political actors who are on the other side of a significant
social divide or embrace a different or even opposite political ideology. For
instance, prior to 1987, when democratization began in Taiwan, the KMT, an
authoritarian ruling party, had long refused to interact with business group leaders holding different political views (Hsu, 1991; Chung, 2006). Likewise, it is difficult, if not impossible, for firms to cut their innate connections (e.g., kinship
relationships) to certain political parties despite their adverse impacts. The fact
that firms can proactively change portfolio diversity only to a certain extent suggests that political ties can be exogenous to firms strategic actions.
Zhu and Chung
605
Moreover, interviews we conducted with executives in Taiwan in connection

with this study indicate that almost all businessmen engage in building and
maintaining good relationships with politicians, even if they are unsure about
the specific benefits they will derive from such relationships. Many of them
view political ties as social capital that should be accumulated in advance for
future use (Lin, 2001). Such behavior tends to create political ties that then
exist before the firm pursues specific strategies. In this respect, the forming of
a portfolio of political ties likely follows a path-dependent process and coevolves with business executives social capital and the focal firms dependence on resources accessible from political partners, as well as strategic
actions taken by the firm in response to the changing market and political environment (Koza and Lewin, 1998; Lavie and Singh, 2012). The intensified party
competition during democratization and subsequent regime change around
2000 in Taiwan provided a setting similar to that of a natural experiment to
investigate the evolution of portfolios of political ties and their effects on firm
strategy.
Party Competition in Taiwan, 19982004
The KMT dominated Taiwans politics and economy from 1949 until 1987
(Gold, 1985), when the greatest wave of democratization in Taiwans modern
history took place. Martial law was lifted in 1987, allowing for new political parties, labor protests, and private mass media. Until 2000, the KMT remained the
dominant power in Taiwan, controlling not only government agencies but also
the Legislative Yuan (the Taiwanese legislature) and judiciary. The establishment of a major opposition party, the DPP, in 1987 intensified competition for
political power. Facing the competition, the KMT started seeking electoral support from enterprises in the 1990s, transforming the statebusiness relationship from a top-down structure into a more-balanced strategic partnership
(Huang, 2004). Political parties provide regulatory privileges and resources to
connected firms, and in return firms make campaign contributions to political
parties to cover huge electoral expenditures such as campaign-office rental and
charges for TV advertisements.2 Firms also mobilize their employees and suppliers to vote for the party candidates to whom they are connected, which can
affect the voting behavior of swing voters.
In the 2000 presidential election, Chen Shui-Bian, of the DPP, was victorious, putting an end to more than a half century of KMT domination. Although
Chen Shui-Bian was reelected in 2004, the DPPs success in the presidential
elections did not guarantee its control of the Legislative Yuan. The KMT still
held a majority of seats in the legislature between 2000 and 2008, a power
landscape parallel to that of the Democratic and Republican parties in the
United States from 1994 to 2000. This separation of legislative and executive
power further intensified political competition. In response to the political
regime changes, firms changed their portfolios of political ties with the KMT to
diverse portfolios consisting of ties to both the DPP and the KMT. For example,
our coding shows that Taiwan Cement Groups portfolio in 1998 included 39
2
It is estimated that a campaign in Taiwan might have cost $US 24 million in the late 1990s,
whereas successful candidates in U.S. congressional races would spend only $US 600,0001 million, even though American constituencies were twice as large (Robinson, 1999).
606
ties with the KMT and zero ties with the DPP. In 2004, it had changed to 33
ties with the KMT and 4 ties with the DPP, reflecting the impact of regime
change on the groups political ties portfolio. The diversity of portfolios of political ties has implications for firms strategy, particularly for entry into unrelated
industries, which involves considerable resources, investments, and risks.
Although unrelated diversification is regarded as undesirable in developed
markets because the costs arising from the lack of synergies between unrelated industries outweigh the benefits of general resources and capabilities
(Teece et al., 1994), the tradeoff of unrelated diversification features a different
balance for business groups in emerging markets because of their organizational structure and the distinct market institutions (Leff, 1978; Amsden and
Hikino, 1994; Kock and Guillen, 2001). Confronting underdeveloped market
infrastructures, business groups use their broad scope to create internal markets and gain access to capital, product, talent, and technology that are otherwise unavailable or difficult to obtain (Khanna and Palepu, 2000a; Khanna and
Yafeh, 2007). The benefits of having access to these resources increase with
the extent of unrelated diversification (Chang and Hong, 2000; Khanna and
Palepu, 2000b; Khanna and Rivkin, 2001), making the benefits of unrelated
diversification outweigh the costs. Moving into new industries is thus a sensible strategy for the growth of business groups in emerging markets. Moreover,
the wave of deregulation and privatization sweeping through emerging economies in the 1980s (Sachs and Warner, 1995) provided new opportunities for
business groups and made entry into new industries an institutionalized imperative for groups to remain competitive (Aldrich and Fiol, 1994). In addition, business groups capability to enter new markets, which hinges on the
combination of requisite resources for setting up new plants and is not industry-specific, enables them to seize opportunities arising from the deregulation
of various unrelated industries.
There is some evidence that being affiliated with diversified business groups
contributes to firm profitability. Khanna and Rivkin (2001) showed that group
membership enhanced member firms return on assets in several emerging
economies, including Taiwan. This finding, which contradicts the conventional
wisdom in developed economies, such as in the United States, that unrelated
diversification is detrimental, suggests that unrelated diversification might entail
differential financial performance that varies across institutional contexts.
Political Ties and Entry into New Industries
Because the politicaleconomic contexts of emerging economies make access
to privileged resources critical for market entry (Guillen, 2000), ties to political
parties with different competitive statuses substantially enable or constrain
market entries. Such political influence on market entry is less likely to exist in
developed economies because their relatively well-developed market institutions and the limited involvement of the state in the economy confine the strategic impact of political ties. Political ties and tie portfolios shape business
groups market entry under united and divided government in emerging economies in four particular ways.
First, under a united government, political ties to the ruling party facilitate
firms entry into new industries through the provision of information, resources,
administrative privileges, and legitimacy. Information transferred through
Zhu and Chung
607
political ties keeps firms updated about industrial policies and regulations that
help firms forecast changes in the environment and identify novel market
opportunities (Schuler, Rehbein, and Cramer, 2002; Luo, 2003). Studies have
shown that information acquired through boundary-spanning relations can
shape corporate strategic choices such as mergers and acquisitions
(Haunschild, 1993). Such information frames managers views of the external
environment and constructs the set of strategic options available for selection
(Geletkanycz and Hambrick, 1997). This information is particularly valuable for
firms in emerging economies, where information asymmetry is prevalent and
changes in policies and regulations are difficult to foresee (Khanna and Palepu,
1999). Because of the ruling partys dominant role in formulating and implementing economic and industrial policies, the information obtained from political ties with the ruling party tends to be more timely, tacit, and accurate than
that acquired from other sources (Potter, 2002; Li and Zhang, 2007). Insiders of
the Legislative Yuan remarked in our interviews that Taiwans legislative body
is a center of information flows about economic policies and industry regulations. Under the KMTs rule prior to 2000, business leaders connected to the
KMT were better able than those without such ties to access the latest information and used this advantage to plan new market strategies.
Second, the ruling party is able to steer resources such as financial credits
and foreign technology to politically connected firms through a variety of state
agencies. In particular, it has power to allocate financial resources via
government-owned banks. Politicians of the ruling party often channel funds to
favored firms to maintain and increase their political power (Rajan and Zingales,
2003). Khwaja and Mian (2005) found that politically connected firms in
Pakistan borrowed 45 percent more than nonconnected counterparts from government banks. Dinc
x (2005) showed that, compared with private banks,
government-owned banks increase their lending particularly in election years to
assist the ruling party in obtaining votes and campaign contributions from businesses. Financial resources facilitate strategic maneuvers such as new market
entry, particularly for firms in emerging economies where capital market intermediaries are missing or underdeveloped.
Third, firms tied to the ruling party likely have superior access to licenses,
permits, administrative privileges, and favors that facilitate market entry.
Research shows that firms connected to the winning party in the 2000 U.S.
presidential election experienced an increase in government procurement contracts (Goldman, Rocholl, and So, 2013). Such privileges are likely to be more
salient in emerging economies because of the prevailing state involvement in
the market (Peng and Luo, 2000). A well-known case is Yulon Motor Group,
founded by Yen Ching-Ling, whose original business was textiles. Backed by
his wifes friendship with Madame Chiang Kai-shek, in 1953 Yen established
the first automobile manufacturing company of Taiwan, Yulon Motor, which
was subsidized by the KMT government and protected by high tariffs throughout its various developmental stages. In 2000, Yulon Motor Group owned 121
subsidiaries, operated in 26 broad industries, and was ranked 28th among the
100 largest business groups in Taiwan (China Credit Information Service,
Business Groups in Taiwan, 2002).
Fourth, political ties to the ruling party promote firm legitimacy.
Organizations embedded in social and normative contexts are under pressure
to justify their strategic actions to a range of constituents in society, including
608
the government, suppliers, and shareholders (DiMaggio and Powell, 1983). An

effective means of legitimation is to establish ties to prominent and legitimate
actors and institutions because the ties signal the focal organizations conformance with taken-for-granted institutional prescriptions that promote stakeholders endorsement and receptiveness (Meyer and Rowan, 1977; Baum and
Oliver, 1991). Previous studies have demonstrated that enhanced legitimacy
through ties to government agencies enables firms to better access support
and resources and in turn brings about competitive advantages, such as higher
survival rates (Baum and Oliver, 1991).
In emerging economies, legitimacy offers even more significant benefits
because of the lack of market intermediaries that can provide open, timely, and
sufficient valuation and assessment of firms. Peng, Lee, and Wang (2005) indicated that network ties to dominant institutions (e.g., financial institutions, government) in emerging economies serve as sources of legitimacy and that such
ties are generic and nonindustry-specific, enabling business groups to diversify
into different industries. Because the ruling party forms the core of the dominant institution, business groups likely enjoy increased legitimacy because of
their ties to the party, which facilitates resource acquisition and market entry.
In addition to facilitating entry, the ruling party may persuade connected
firms to enter new industries that these firms would otherwise avoid. States in
emerging economies often formulate policies to develop specific sectors that
are of strategic importance to the national economy (Amsden, 2001), and the
government might request affiliated firms to take a lead in such initiatives.
During the early industrialization of South Korea, the government designated
capital-intensive industries such as steel and shipbuilding strategic sectors
and encouraged politically connected firms to diversify into these sectors by
providing them with foreign technology, bank loans, and administrative privileges (Amsden, 1989). The above arguments lead to our first hypothesis:
Hypothesis 1: The more political ties a business group has to the ruling party under
united government, the more unrelated industries it enters.
In contrast, ties to opposition parties under united government tend to

impede business groups market entry. Opposition parties without control of
the legislature can hardly provide information, resources, and privileges that
facilitate new market entry, and their failure in elections implies that their political agendas or candidates are less appealing and socially appropriate vis-a`-vis
the ruling partys. As a result, firms connected to opposition parties suffer from
impaired legitimacy, making it difficult for them to acquire from external stakeholders the information and resources necessary to implement their strategies.
Chi-Mei Group, a well-known loyal supporter of the DPP, suffered from a shortage of capital in its early years because banks, both state-owned and privately
owned, were reluctant to provide it with credit despite the healthy financial
standing of the group (Ju, 2003). As signals of focal firms distinct political position, ties to opposition parties are likely to result in the exclusion of resources,
information, and privileges and in impaired legitimacy, which inhibits focal firms
from entering targeted industries:
Hypothesis 2: The more political ties a business group has to an opposition party
under united government, the fewer unrelated industries it enters.
Zhu and Chung
609
The scenario is different under divided government. When the ruling party
controls only the executive branch, the resources it can steer to connected
firms are restricted. At the same time, facing power competition with the opposition party, the ruling party tends to rely on firms for electoral support and is
likely to try to satisfy their requests. Compared with the situation under united
government, firms are in a stronger bargaining position with the ruling party,
which improves their ability to extract desirable resources and privileges from
the executive branch. Our interviews in Taiwan indicated that after the DPP
came into power in 2000, most group leaders found it easier to make meeting
appointments with both the DPP and the KMT politicians, including President
Chen Shui-Bian. Chen, Shen, and Lins (2013) regression analysis of more than
69,000 bank-loan contracts showed that firms connected to the DPP received
more loan contracts and lower interest rates than firms connected to other
political parties. Although the ruling party under divided government is not as
powerful as its counterpart under united government, its success in a presidential election suggests that the majority of voters embrace its policy agenda and
administrative capability, rendering legitimacy to its governance and firms connected to it. Thus we hypothesize:
Hypothesis 3: The more political ties a business group has to the ruling party with
executive authority under divided government, the more unrelated industries it
enters.
Under a divided regime, ties to the opposition party with legislative authority
may also be conducive to new market entry. The opposition party can take
advantage of its legislative powers and propose bills that favor the connected
firms (Shaffer, 1995). It may also modify existing rules and regulations to
improve the firms competitive positions, such as by raising the costs for rivals
or lowering entry barriers for the firm (Siegel, 2004; Frynas, Mellahi, and
Pigman, 2006). Prior to 2001 in Taiwan, two large petrochemical corporations
dominated the petroleum industry. To enter this profitable field, Ho Tung, a
small petrochemical group, leveraged its political ties with the KMT legislators,
who lowered the requirements for daily oil-refining volume from 15,000 cubic
meters to 2,000, allowing the small group to enter the industry (Wealth
Magazine, 2001). Moreover, because the budget bill has to be passed each
year by the legislature, the opposition party with a majority in the legislature
may take this opportunity to make requests to the executive branch and divert
resources and privileges to favored firms. Thus we hypothesize:
Hypothesis 4: The more political ties a business group has to an opposition party
with legislative authority under divided government, the more unrelated industries
it enters.
Portfolio Diversity and Entry into New Industries

The hypotheses above treat political ties in a portfolio separately and emphasize their independent effects on the firm. But when a firm simultaneously connects to different political parties, the portfolio effectssynergies and conflicts
arising from the relationships among political parties, as well as those between
political parties and the firm (Vassolo, Anand, and Folta, 2004; Wassmer,
2010)may also influence the firms strategic actions. The paradox of such
610
portfolio effects is that a diverse portfolio that stands to produce tertius gaudens advantages and political flexibility for the focal firm may also induce discrimination and retribution from the ruling party and consequently constrain the
firms pursuit of strategies. The net effect of portfolio diversity is likely to vary
across different types of government, each of which represents a distinct competitive status of political parties.
Under united government, a diverse portfolio of political ties tends to inhibit
market entry by reducing the information and resources derived from ties to
the ruling party. Although ties to the ruling party facilitate market entry, being
friendly to rival political parties may reduce the level of trust granted by the ruling party so that the ties to the ruling party become less functional in accessing
resources. Research indicates that trust facilitates interorganizational
exchanges by motivating sharing, easing negotiations, and reducing conflicts
and opportunistic behavior (Gulati, 1995; Zaheer, McEvily, and Perrone, 1998).
The ruling partys distrust will adversely affect its exchange relationship with
the focal firm and the benefits offered to it. More importantly, maintaining ties
to opposition parties tends to be construed as disloyalty to the ruling party,
especially in new democracies where the prior authoritarian regime hardly tolerated opposition forces. Given the focal firms relatively weak bargaining power
under united government, diverse portfolios increase the probability that the
ruling party will direct discrimination and retribution toward the focal firm. In
South Korea, firms connected to the political enemies of the dominant parties
have difficulty in forming cross-border strategic alliances with foreign firms,
which offer advanced technological and managerial know-how, because of the
discrimination and resource exclusion imposed by the dominant political power
(Siegel, 2007). In Taiwan, Continental Engineering Group, which had been
linked to the KMT since its founding stage, started to build ties to and support
the DPP after the founders daughter took the helm. The group thereafter
found it increasingly difficult to bid successfully on government projects despite
its enduring ties with the KMT through its other senior family members.
Ultimately, it had to switch to foreign niche markets such as Saudi Arabia for
growth (Wealth Magazine, 2000). Under united government, while a focused
portfolio tied to the ruling party maintains continuous resource flow and facilitates new market entries of business groups, a diverse portfolio tends to constrain resource flow and reduce new market entries:
Hypothesis 5: The more diverse the portfolio of political ties a business group has to
political parties under united government, the fewer unrelated industries it enters.
Under a divided government, however, a portfolio of ties to both the ruling

party with executive authority and the opposition party with legislative authority
can promote market entry by providing tertius gaudens advantages, resource
diversity, and political flexibility while insulating the focal firm from political retribution. Unlike the case under united government, portfolio diversity under
divided government is less likely to motivate powerful political parties to punish
the focal firm because the firms bargaining position improves when its political
partners compete with each other. Each political party is more receptive to the
firms demands in return for electoral resources. Taking advantage of its role as
tertius gaudens (Simmel, 1922; Burt, 1992), the focal firm is able to secure a
variety of valuable resources and support, such as entry licenses and regulatory
Zhu and Chung
611
policies; cheap labor, land, and capital; and enhanced legitimacy, all of which
ease its market entries. Moreover, the focal firm may strategically allocate its
electoral resources, negotiate among competing parties to enhance its leverage on them, and maximize the return of its political capital. For instance, it is
alleged that prior to the 2004 presidential election, Formosa Plastic Group
secured promised policy favors from both the KMT and DPP candidates by
offering campaign contributions to both sides and providing the same information and policy recommendations for the chemicals industry (Wealth Magazine,
2004).
The political flexibility stemming from a diverse portfolio becomes particularly critical to successful market entry during the potential political turbulence
of divided government. By befriending politicians of different parties, the focal
firm is less likely to be targeted for retaliation by a new ruling party. As a result,
the firm can maintain a relatively stable and continuous flow of resources and
information from its portfolio of political ties during power transition.
Conversely, maintaining good relations with only one political party makes the
focal firm vulnerable to the adverse effects of regime change (Siegel, 2007).
Pacific Construction Group, an adherent of the KMT, experienced difficulty in
expanding its business portfolio because of the lack of financial resources after
the electoral turnover in 2000, with the average number of new market entries
dropping from 7 during 19941998 to only 1.6 during 20002004 and the ranking of its total assets among the largest business groups dropping from 31st in
1998 to 99th in 2004. In contrast, Formosa Plastic Group, once connected only
to the KMT, gradually diversified its political ties to both the KMT and the DPP
and continued to enter on average six new markets in the same periods. Its
ranking of total assets also remained stable (fourth in 1998 and fifth in 2004),
and it avoided adverse impacts when the DPP came to power in 2000 (Wealth
Magazine, 2002). Taken together, the favorable exchange conditions, tertius
gaudens advantages, and political flexibility afforded by diverse portfolios
enabled business groups to enter more unrelated industries:
Hypothesis 6: The more diverse the portfolio of political ties a business group has to
political parties under divided government, the more unrelated industries it enters.
Internal Resources and Capabilities, Portfolio Diversity, and Entry into

New Industries
Debt ratio as a contingency. The debt ratio of a firm indicates its dependence on external financial resources (Pfeffer, 1987; Baker, 1990). Highly leveraged firms have greater dependence on such resources relative to
counterparts with low debt ratios. Because political ties serve as an important
channel for external financial resources (Johnson and Mitton, 2003; Khwaja and
Mian, 2005), connections to the political power that controls sources of credit
are more valuable to highly leveraged groups than to less leveraged ones.
Under united government, the ruling party is likely to reward allies and constrain opponents by allocating bank loans to firms connected only to it but not
to firms tied also to other parties. Opposition parties are not able to provide
financial resources because of the lack of political power. As a result, a diverse
portfolio of political ties makes it more difficult for the focal firm to acquire bank
loans than for peers with focused portfolios and negatively affects the firms
612
strategic maneuvers. This negative effect on new market entry tends to be

greater for groups with a higher debt ratio because they have a more urgent
need for financial resources than groups with a low debt ratio:
Hypothesis 7a: The negative relationship between the diversity of a business groups
portfolio of political ties and its entry into unrelated industries under united government will be stronger as its debt ratio increases.
Under divided government, groups with a diverse portfolio of political ties

have opportunities to tap multiple sources of capital. On the one hand, the
ruling party can offer funds through state-owned banks. The DPP president
of Taiwan, Chen Shui-Bian, provided large amounts of preferential loans
through government-controlled financial institutions to groups that played an
important role in his reelection in 2004 (Wealth Magazine, 2004). On the
other hand, the opposition party with legislative authority may propose or
modify legislative bills in favor of the fundraising of connected groups.
Groups with diverse portfolios are able to enjoy greater financial flexibility
than counterparts with focused portfolios, and this benefit tends to be more
salient for highly leveraged groups than for those with lower debt ratios
because it relaxes the budget constraints of these groups and enables them
to invest in unrelated industries:
Hypothesis 7b: The positive relationship between the diversity of a business groups
portfolio of political ties and its entry into unrelated industries under divided government will be stronger as its debt ratio increases.
Experience in market entry as a contingency. Market entry is a learningby-doing process that allows firms to develop the internal capability to execute
projects and to accumulate and deploy tacit knowledge for setting up new
operations across different industries (Amsden and Hikino, 1994). Experience
in market entry therefore represents a firms internal capability of market entry
that can reduce its dependence on political ties to acquire resources and privileges for expansion. First, experienced firms are able to use available resources
efficiently to enter new markets by applying learned technologies and managerial skills (Amsden and Hikino, 1994; Kock and Guillen, 2001). They are able to
deploy fewer resources than less-experienced firms in entering new industries.
Second, besides political ties, experienced firms usually have multiple channels
for acquiring resources, including strategic alliances with foreign providers of
technology and finance (Khanna and Palepu, 1997). For instance, Formosa
Plastics, a petrochemical group with rich experience in market entry, had 21
external linkages with foreign companies and venture capitalists in 1998, while
a less-experienced counterpart, Chang Chun Petrochemical, had only six external linkages (Sheng, 2003).
When the ruling party dominates in political power, firms experienced in
market entry may be damaged less by diverse portfolios of political ties than
less-experienced ones. Because of their superior efficiency in deploying
resources, as well as more alternative sources of resources, experienced
groups suffer less from the resource exclusion imposed by the ruling party:
Zhu and Chung
613
Hypothesis 8a: The negative relationship between the diversity of a business groups
portfolio of political ties and its entry into unrelated industries under united government will be weaker as its experience in market entry increases.
By the same token, under divided government, experienced groups are less
susceptible to the political flexibility and tertius gaudens benefits of diverse
political ties than less-experienced groups when entering new markets.
Because of their highly efficient use of resources to set up operations in new
industries and their extensive links to various external organizations, groups
with rich experience in market entry do not necessarily rely on political ties
to gain access to desirable resources. Therefore they are likely to benefit to a
lesser extent from the stable and diverse flows of resources provided by
diverse portfolios of political ties than groups with scant experience in market entry:
Hypothesis 8b: The positive relationship between the diversity of a business groups
portfolio of political ties and its entry into unrelated industries under divided government will be weaker as its experience in market entry increases.
METHODS
Data Source and Sample
Our empirical analysis is based on a unique dataset of 290 distinct business
groups and their 5,997 member firms in Taiwan over two periods: 19982000
and 20042006. Our design captures rivalry situations in which the ruling and
opposition parties switched (i.e., before and after the 2000 presidential election). Because the regime change in 2000 was unexpected and driven by political and social forces largely exogenous to business groups (Yeh, Shu, and
Chiu, 2013), it was an external shock that helped identify the contingent role of
political ties in turbulent environments. By collecting information about political
ties in 1998 and 2004, we estimated the market entry activities of business
groups during 19982000 and 20042006.
Our main data source was the Business Groups in Taiwan (BGT) directory,
compiled by the China Credit Information Service (CCIS), the oldest and most
prestigious credit-checking agency in Taiwan and an affiliate of Standard &
Poors. The BGT lists information about the top groups, on the basis of sales,
whose principal firms are registered in Taiwan. The number of business groups
in the BGT differed slightly over the years: 180 in 1998 and 250 in 2004. The
CCIS defines a business group as a coherent business organization including
several independent enterprises, and it has long used the following criteria in
its selection of business groups to include in the BGT: (1) more than 51 percent
of ownership must be native capital; (2) the group includes three or more independent firms; (3) the group achieves more than NT$5 billion in total sales
(though this value has changed as business groups grew larger); and (4) the
core firm of the group is registered in Taiwan. This directory is the most comprehensive and reliable source of business groups in Taiwan and has been used
in previous studies (Guillen, 2000; Khanna and Rivkin, 2001; Luo and Chung,
2005). To our knowledge, our research covers the largest number of business
groups in Taiwan. In addition, we referred to the Largest Corporations in
614
Taiwan, also published by CCIS, to collect data on sales and return on assets
(ROA) at the industry level.
For each business group, the directory provides information about top management, size, history, and financial performance. For each member firm, it
also provides information about the line of business, which we used to identify
its industry. Because no ready-to-use industry coding is available in the BGT,
the first author assigned the 4-digit Standard Industrial Classification (SIC) code
to the industry of the firm by matching the product/service information and the
description of the 4-digit SIC industry in the Standard Industrial Classification
published by the Economic Ministry of Taiwan in 2006. The second author independently coded 10 percent of randomly selected cases and located 1 percent
as cases of divergent coding. According to the consensus of the two authors,
the first author then recoded all the cases with divergent coding. In total, a
4-digit SIC code was assigned for 2,454 group member firms in 1998, 5,865 in
2000, 7,534 in 2004, and 8,804 in 2006. We then used the first two digits of
the 4-digit codes as our 2-digit coding to denote unrelated industries. By aggregating the industry information of all member firms at the group level, we
determined the industrial portfolio of each group. We tracked entry activities by
comparing the groups industrial portfolios across the two-year spans (1998
2000 and 20042006). Groups entered unrelated industries if those 2-digit
industries that were not present at time t appeared at time t + 2 in their industrial profiles. We included groups that appeared in two consecutive issues of
the BGT. There were 167 observations in the 1998 sample and 227 in the 2004
sample.
For political ties, we relied on matching names from a wide range of publicly
available data sources. The names of group leaders, including board chairs,
CEOs, and major shareholders of the group affiliates, came from the BGT. For
group firms listed in the Taiwan Stock Exchange, we also collected the names
of CEOs, major shareholders, directors, and auditors of the board from the
Taiwan Economic Journal (TEJ) database. To the extent that Taiwanese firms
prefer to nominate family members, trusted persons, or business associates as
directors and auditors, it is the people in these positions who are likely to provide the conduits for firms to connect to their external environment. In total,
we collected 2,716 names in 1998 and 3,086 in 2004.
For political party figures, we gathered the names of the KMT and DPP central committee members from their websites (http://www.kmt.org.tw and
http://www.dpp.org.tw) and the proceedings of party conventions.3 We also
collected lists of national and provincial administrators (e.g., ministers and viceministers of different ministries, directors and deputy directors of departments,
major officers in provincial government) from the website of the Taiwanese
government directory (http://twinfo.ncl.edu.tw). We found members of the
national and provincial legislatures and judiciary, together with their party affiliations, on the legislative website (http://www.ly.gov.tw) and the website of the
judicial institution, the Judicial Yuan (http://www.judicial.gov.tw). In total, we
gathered 3,725 politicians names in 1998 and 3,905 names in 2004.
3
We did not include ties to other political parties because of their trivial influence on Taiwans politics. Other political parties collectively obtained 0.8 percent of the votes in the 2000 presidential
election, and their combined influence in the Legislative Yuan was limited to 10 to 14 percent of
the seats.
Zhu and Chung
615
We turned to three additional sources to identify the social relationships

between business group leaders and political actors. First, we checked the
Excellent Business Database System (EBDS) (http://ebds.anyan.com.tw),
which covers more than 200 periodicals and newspapers published in Taiwan
and provides full-text searching. Second, we searched Wealth Magazines database, which provides extensive periodical reports on interactions between
large business groups and political actors. The breadth and depth of these
reports is comparable to those published in Business Week, Fortune, the New
York Times, and the Wall Street Journal. Third, we examined research articles,
dissertations, autobiographies of group founders, and books devoted to this
topic (e.g., Xu, 1992; Chen, 1994; Wang, 2006).
Considering the various ways business leaders and political actors connect
in Taiwan, we differentiated two types of political ties: formal position interlocks and informal ties. For the formal ties, we matched the list of names of
business group leaders with that of political actors. The number of overlaps
indicated the number of formal political ties maintained by the business group.
For informal ties, we considered family and social relationships between group
executives and political party leaders. We coded three types of prevalent informal ties in Taiwan: (1) familial and marital ties, (2) close friendships and samehometown relationships, and (3) trade associations and social club memberships. We coded specific informal relationships that had been identified and
reported in the data sources rather than using demographic information (i.e.,
birthplace) or membership of social clubs to infer relationships between leaders
and politicians (Useem, 1979), as people from the same hometown or who join
the same social club do not necessarily know each other. We searched reports
in our data sources regarding each of the business groups by using group
names and group leaders names, as well as key words such as relationships
(guanxi) and businessgovernment relationships (cheng shang guanxi). Both
authors then read the entire article or monograph to identify and code the informal ties separately and subsequently exchanged the coding for doublechecking and confirmation.
A business group has a family/intermarriage tie if one of its top managers or
major shareholders has a tie of kinship or marriage with a political actor. For
example, Wang Yu-Chen, the top officer of Hwa Eng Wire & Cable Group, is
the younger brother of Wang Yu-Yun, who was once the mayor of Kaoshiung
City and a member of the KMTs central committee. Thus we coded Hwa Eng
Wire & Cable Group as having one informal political tie connected to the KMT.
Another example comes from Ho Tung Group: the eldest daughter of the former chairman of the KMT, Lien Chan, married the son of Ho Tungs deputy
chair of the board, Chen Ching-Chung.
A second type of informal political tie forms when top managers or major
shareholders of a business group are close friends with or are from the same
hometown as political actors. An example is the long-established friendship
between a major shareholder of Lin Yuan Group, Tsai Hung-Tu, and the president of Taiwan, Chen Shui-Bian. They were classmates at Taiwan National
University and have remained close.
Finally, informal political ties may be established when top managers or large
shareholders of business groups join national trade associations or elite social
clubs. For example, China Rebar Group was politically connected to the KMT
because its president, Wang Yu-Tseng, was the chairman of the National
616
Federation of Commerce, an important trade association through which the

KMT consulted and executed its economic policies. Chen Sheng-Tien, the top
officer of Sampo Group, was a member of a prestigious golf club where business magnates and political leaders often gathered to play golf.
After combining formal and informal political ties, we counted the number of
political ties with each political party according to the party affiliation of each
connected politician. We further supplemented our quantitative data with 15
interviews with political insiders such as legislators, journalists, management
scholars, and political scientists in Taipei during 2010 to 2011 to gain a better
understanding of the functioning of political ties.
Our coding and measure of political ties is unique in two respects. First,
instead of adopting indirect approaches, such as subject ratings or reports by
other agencies (e.g., Fisman, 2001; Bertrand et al., 2004), we used a direct
approach to locate specific ties between business executives and politicians.
Second, most existing studies have adopted synchronized research designs
that examine political ties and firm strategy at the same point in time. We collected data from two time periods (1998 and 2004), which not only enabled us
to identify the role of political ties in a changing political landscape but also
helped us address the causal ambiguity between political ties and firm
strategy.
Dependent Variable: Entry into New Industries
To test the proposed relationships between political ties and market entry activities, we counted the number of entries into new 2-digit SICs in two two-year
periods, from 1998 to 2000 and from 2004 to 2006. We also used a continuous
measure for unrelated entry by using the data of interindustry relatedness from
the inputoutput table, and our results were unchanged. Additionally, extending
the time span to four years (19982002 and 20042008) did not change our
results qualitatively.
Independent Variables
We counted the number of ties between a group and political parties, distinguishing ties with the KMT from ties with the DPP. We then measured the
diversity of portfolios using the Blau Index of Variability, which computes portfolio diversity as one minus the sum of the squared proportions of a focal business groups ties with each of the political parties (Blau, 1977). Specifically, the
diversity of a portfolio of political ties is given by
D =1
k
X
Pi2
i =1
where D represents the diversity measure, P represents the proportion of political ties with a particular political party out of all the political ties, and i is the
number of different political parties. The index ranges from 0 (a completely
homogeneous portfolio) to 1 (a perfectly heterogeneous portfolio with political
ties evenly distributed among all political parties). This measure has been
widely used in the social network literature to measure the heterogeneity of
Zhu and Chung
617
portfolios of ties (e.g., Baum, Calabrese, and Silverman, 2000; Jiang, Tao, and
Santoro, 2010).
Control Variables
As in previous studies (Chang, 1996; Khanna and Palepu, 2000a), we controlled
for group characteristics that may affect a groups entry activities. Group size
was the logged total group assets adjusted by the 2000 consumer price index
(Taiwan Statistical Data Book, 2000: 179). Group age was the number of years
since the first member firm of a group was established. Group ROA referred to
the annual return on assets for the group, and debt ratio was the ratio of liability
to
P total assets. For group diversification, we used the entropy formula
Pj 1n(1=Pj ), with Pj as the percentage of group sales in industry sector j
(Palepu, 1985). We identified the industry sector based on the 2-digit product
categories detailed in the 2006 SIC listing. Experience in market entry reflected
the total number of market entries conducted by the group since 1990, the
onset of large-scale economic liberalization in Taiwan.
The majority of Taiwanese business groups are family owned, and the controlling family plays a critical role in strategic decision making (Luo and Chung,
2005). We controlled for family ownership in a business group, calculated as a
weighted average (affiliate assets as a percentage of group assets) of family
ownership in all group affiliates. Family ownership in an affiliate is the percentage of shares owned by family members and other affiliates that are directly or
indirectly controlled by family members (La Porta, Lopez-de-Silanes, and
Shleifer, 1999). Previous studies have shown a significant association between
a firms political ties and the industries in which the firm operates (Agrawal and
Knoeber, 2001; Hillman, 2005; Li, Poppo, and Zhou, 2008). We calculated sales
from regulated sectors as the percentage of sales from regulated sectors relative to the total group sales. We identified the regulated sectors on the basis of
the industrial policies of the Ministry of Economic Affairs of the Taiwanese government (http://www.moea.gov.tw/Mns/populace/home/Home.aspx). Group
patents indicate the innovativeness of groups, which may affect their ability to
enter new industries and to establish political ties with political parties. We collected the number of successful patent applications of each member firm in
each group by referring to the Taiwan Intellectual Property Office (http://
www.patent.org.tw) and then aggregated the number of patents of each member firm to the group level. We also controlled for the main industry of the
group in 13 industriesagriculture, food, textile, wood, chemical, nonmetallic,
metals, machinery, electrical/electronic, construction, real estate and financial
services, wholesale and retail, and other service industriesusing the industry
with the largest proportion of group sales. On average, the major business line
contributed 67 percent to group sales. To the extent that entry and exit activities correlated, such as when business groups exited less-profitable industries
to focus on more-profitable ones (Chang, 1996; Chung and Luo, 2008), we controlled for the number of exits from incumbent 2-digit SIC industries.
Finally, we created two industry-level variables to capture the attractiveness
of entered industries (Porter, 1980). Industry profitability aggregated the ROA
of industries that business groups entered, weighted by the percentage of
group sales in the entered industries. Industry sales, indicating industry attractiveness in terms of sales volume, used the aggregate sales in industries that
618
groups entered, weighted by the percentage of group sales in the entered

industries.
RESULTS
Tables 2a and 2b show the summary statistics for the variables and their correlation matrix for 1998 and 2004, respectively. We find significant variance in the
entry activities of business groups, as well as in their political ties to the KMT
and the DPP, in both periods. The mean of portfolio diversity increases from
0.04 in 1998 to 0.18 in 2004, suggesting that business groups diversified their
portfolios of political ties during 19982004. We also find significant correlations among political tie variables and between political tie variables and group
characteristic variables. Yet the variance inflation factor (VIF) for each explanatory variable is less than 10, indicating that the multicollinearity problem might
Table 2a. Correlation Matrix (1998)

Variable
Mean
S.D.
1. Number of entries
2. Number of exits
3. Number of political ties with KMT
4. Number of political ties with DPP
5. Portfolio diversity
6. Group diversification
7. Group size (logged assets)
8. Group age
9. Group ROA
10. Group patents
11. Debt ratio
12. Experience in market entry
13. Family ownership
14. % of sales from regulated sectors
15. Industry profitability
16. Industry sales
17. Portfolio diversity Debt ratio
18. Portfolio diversity Experience
in market entry
4.33
1.38
4.43
.13
.04
.84
9.97
3.85
3.25
6.78
50.00
3.96
10.04
19.20
4.08
23.19
12.01
1.13
3.18
0
18
1.27
0
7
8.78
0
69
.50
0
5
.11
0
.50
.58
0
2.46
1.54
6.40 13.82
12.77
8
80
10.41 66.27 45.56
25.99
0
234
17.37 14.61 89.07
2.65
0
18
13.42
.61 84.41
33.14
.00 100.00
2.11 4.16 14.22
13.44 6.25 70.68
15.74
.00 34.01
1.43
.00 12.07
Variable
9. Group ROA
10. Group patents
11. Debt ratio
16. Industry sales
in market entry
p < .05.
Min.
Max.
.26
.57
.01
.14
.51
.61
.27
.01
.03
.13
.21
.23
.08
.17
.05
.24
.23
.08
.15
.14
.10
.08
.28 .42
.17 .45
.31 .26
.21 .08
.05
.00
.10
.31
.15
.36
.14 .21
.04
.17
.06
.11
.12
.01
.03 .20
.09
.03
.59
.09
.24
.04
.03
.07
.11
.03
.06
.14
.06
.07
.18
.25
.08
.06
.11
.09
.11
.16
.13
.06
.05
.06
.04
.07
.32
.49
.45
.12
.02
.23
.38
.44
.07
.09
.08
.21
.06
.30
.11
.24
.43
.26
.40
.32
.01
.03
.24
.06
10
11
12
13
14
15
16
17
.17
.13
.11
.08
.24
.02
.04
.06
.08
.16
.02
.41
.04
.03
.21
.01
.01
.05
.08
.11
.01
.01
.10
.10
.12
.09
.06
.18
.18
.48
.01
.05
.30
.06
.08
.08
.16
.01
.13
.32
.15
.08
.12
.10
.02
.08
.06
.14
.06
.08
.01
.07
.03
.08
.10
Zhu and Chung
619
Table 2b. Correlation Matrix (2004)

Variable
Mean
1. Number of entries
2. Number of exits
3. Number of political ties with KMT
4. Number of political ties with DPP
5. Portfolio diversity
6. Group diversification
7. Group size (logged assets)
8. Group age
9. Group ROA
10. Group patents
11. Debt ratio
16. Industry sales
in market entry
1.84
2.29
0
15
1.44
1.73
0
10
.47
2.81
7.27
0
65
.55 .62
.83
1.78
0
10
.38 .25 .34
.18
.20
0
.50 .32 .07
.12
.52
.95
.55
0
2.58 .34 .52 .42 .24
10.46
1.49
8.64
14.84 .40 .48 .30 .53
26.67 13.94
0
59
.29 .29 .28 .07
4.33
6.25 14.87
31.50 .10
.21 .12 .05
79.35 307.03
0
2805
.23 .03
.01
.15
56.42 18.41
6.89
96.24 .17 .25 .27 .26
6.71
5.68
0
44
.12
.27 .31 .21
8.46
7.85
.67
70.07 .19 .22 .22 .14
21.36 32.08
.00 100.00 .20 .26 .29 .34
7.77
3.89 4.76
33.53 .10
.13 .11 .02
27.59 15.23
2.04 107.13 .01 .07
.01
.09
11.85 14.22
.00
47.40 .19
.02
.07
.27
1.45
2.67
.00
15.45 .23 .09 .04 .04
Variable
9. Group ROA
10. Group patents
11. Debt ratio
16. Industry sales
in market entry
S.D.
Min.
Max.
.12
.44 .52
.04
.28
.01 .24
.02
.13
.12
.20
.08
.24
.09 .21
.25 .26
.05
.08
.01 .06
.34 .06
.08
.04
.05
.15
.32
.38
.20
.21
.54
.10
.12
.22
.07
10
11
12
13
14
15
16
17
.08
.04
.05
.04
.10
.13
.06
.03
.14
.22
.14
.51
.02
.10
.13
.01
.11
.15
.10
.10
.05
.10
.04
.04
.07
.02
.02
.10
.12
.41
.05
.28
.29
.08
.17
.09
.10
.08
.05
.20
.13
.00
.01
.01
.03
.10
.12
.15
.02
.14
.16
.06
.17
.02
.04
p < .05.
not be serious in the estimation (Neter, Wasserman, and Kunter, 1990). Among
the 103 politically connected business groups in 1998, 87 were connected only
to the KMT, and the remaining 16 were connected to both the KMT and the
DPP. In 2004, however, among the 103 business groups with political ties, 36
groups were tied solely to the KMT, 16 groups were connected only to the
DPP, and 51 were connected to both the KMT and the DPP.
Regression Results
Given that the number of market entries, our dependent variable, is a count
variable and that our market entry data are overdispersed, the Poisson model is
not appropriate. We adopted the negative binomial model because the majority
of groups in our sample entered at least one new industry during the research
periods (Greene, 1993). Models 1 and 7 in table 3 contain only the control variables and serve as our baselines. Including two variables of political ties in
620
Table 3. Effects of Political Ties on Business Groups Entry into New Industries: Negative
Binomial Models*
1998 (United Government)
Variable
Group
diversification
Group size
(logged
2004 (Divided Government)
Model
Model
Model
Model
Model
Model
Model
Model
Model
Model
Model
Model
10
11
12
0.001
0.079
0.088
0.122
0.081
0.121
0.104
0.103
0.050
0.075
0.042
0.066
(0.107)
(0.103)
(0.133)
(0.135)
(0.135)
(0.137)
(0.151)
(0.145)
(0.166)
(0.163)
(0.158)
(0.155)
0.438 0.432 0.389 0.401 0.383 0.397 0.056
0.133
0.197
0.194
0.189
0.185
(0.045)
(0.079)
(0.093)
(0.092)
(0.089)
(0.089)
(0.045)
(0.054)
(0.055)
(0.054)
(0.055)
(0.068)
assets)
Group age
Group ROA
Debt ratio
Number of exits
Experience in
market entry
Family ownership
% of sales from
regulated
0.004
0.003
0.006
0.003
0.008
0.005
0.017 0.015 0.009
0.010
0.005
0.006
(0.004)
(0.004)
(0.005)
(0.005)
(0.005)
(0.005)
(0.005)
(0.005)
(0.006)
(0.006)
(0.006)
(0.006)
0.014
0.001
0.001
0.010
0.008
0.010
0.009
0.010
0.011
0.003
0.009
0.008
(0.006)
(0.006)
(0.010)
(0.010)
(0.011)
(0.011)
(0.014)
(0.013)
(0.025)
(0.025)
(0.024)
(0.024)
0.006
0.008 0.009 0.015 0.009 0.015 0.001
0.001
0.002
0.006
0.002
0.006
(0.004)
(0.004)
(0.005)
(0.005)
(0.005)
(0.006)
(0.006)
(0.005)
(0.006)
0.064
0.091 0.077
0.099 0.069
0.092
0.212 0.230 0.146 0.158 0.132 0.144
(0.034)
(0.032)
(0.037)
(0.037)
(0.037)
(0.038)
(0.042)
(0.046)
(0.047)
(0.046)
(0.045)
0.012
0.002
0.009
0.012
0.016
0.011
0.006
0.015
0.001
0.007
0.006
0.006
(0.017)
(0.017)
(0.019)
(0.019)
(0.021)
(0.022)
(0.010)
(0.010)
(0.009)
(0.009)
(0.009)
(0.009)
0.004
0.004
0.006
0.006
0.005
0.005
0.030 0.032 0.020
0.018
0.020
0.017
(0.004)
(0.004)
(0.007)
(0.007)
(0.007)
(0.007)
(0.013)
(0.012)
(0.012)
(0.012)
(0.011)
(0.011)
1.014 1.001 0.986 0.909 0.900 0.847 0.295
0.324
0.118
0.125
0.284
0.292
(0.216)
(0.278)
(0.337)
(0.339)
(0.339)
(0.342)
(0.209)
(0.004)
(0.232)
(0.005)
(0.235)
(0.004)
(0.235)
(0.238)
(0.288)
(0.044)
sectors
Group patents
Industry
profitability
Industry sales
0.005 0.005 0.003
0.006 0.003
0.005
0.008 0.009 0.007 0.007 0.007 0.007
(0.002)
(0.002)
(0.002)
(0.002)
(0.002)
(0.002)
(0.002)
(0.002)
0.085 0.079 0.078 0.066 0.073 0.063
0.010
0.021
0.015
0.017
0.013
0.016
(0.022)
(0.015)
(0.014)
(0.015)
(0.014)
(0.014)
(0.014)
(0.002)
(0.021)
(0.002)
(0.025)
(0.026)
(0.002)
(0.026)
(0.026)
(0.002)
0.005
0.003
0.007
0.008
0.007
0.008
0.002
0.002
0.008
0.008
0.008
0.008
(0.004)
(0.003)
(0.004)
(0.004)
(0.004)
(0.004)
(0.004)
(0.004)
(0.005)
(0.005)
(0.005)
(0.004)
Independent
variable
Number of political
ties with KMT
Number of political
ties with DPP
0.013 0.012 0.012 0.017 0.011
0.014
0.012
0.013
0.013
0.015
(0.004)
(0.009)
(0.008)
(0.008)
(0.009)
(0.010)
(0.005)
(0.005)
(0.005)
(0.004)
0.276 0.189 0.186 0.193 0.187
0.099 0.097
0.090
0.089 0.092
(0.098)
(0.032)
(0.041)
(0.033)
Portfolio diversity
(0.081)
(0.074)
(0.062)
(0.060)
(0.042)
(0.034)
1.841 2.471 1.604 2.191
1.354 1.141 1.453 1.256
(0.657)
(0.415)
Portfolio diversity
Debt ratio
(0.706)
(0.670)
(0.717)
(0.420)
(0.392)
(0.396)
0.310
0.289
0.135
0.126
(0.097)
(0.099)
(0.060)
(0.057)
0.242 0.213
0.085 0.082
(0.086)
(0.032)
Portfolio diversity
Experience
(0.098)
(0.032)
in market entry
Constant
3.010 2.727 2.245 1.878 2.407 2.047 0.948
0.767
2.134
2.279
2.278
2.386
(0.650)
(1.301)
(1.007)
(0.986)
(0.959)
(0.938)
(0.646)
(0.725)
(0.738)
(0.726)
(0.741)
(1.261)
Log likelihood
342.676 334.628 207.416 203.408 205.245 201.734 359.943 349.321 191.333 188.788 187.852 185.425
Pseudo
18.33%
20.01%
24.18%
26.20%
26.33%
28.84%
13.75%
16.29%
14.75%
16.89%
16.30%
18.69%
167
167
103
103
103
103
227
227
103
103
103
103
R-square
Number
of observations
p < .10; p < .05; p < .01; two-tailed tests.
* Standard errors are in parentheses. Coefficient estimates of industry dummies are not reported. Models 1, 2, 7,
and 8 include both politically connected groups and nonconnected groups. Because nonconnected groups do not
have a single political tie, portfolio diversity is not applicable to them, so only politically connected groups remain in
models 36 and models 912.
Zhu and Chung
621
models 2 and 8 improves overall model fit compared with the baseline (d.f. =
2, p < .01 for both model 2 and model 8). In models 3 and 9, we added the
portfolio diversity while controlling for political ties to each party. We further
added the interaction term between portfolio diversity and debt ratio in models
4 and 10. These additions improve the overall fit compared with models 3 and
9 (d.f. = 1, p < .01). Similarly, including the interaction term between portfolio
diversity and experience in market entry in models 5 and 11 improves the
model fit relative to model 3 (d.f. = 1, p < .01) and model 9 (d.f. = 1, p < .05).
Model 6, the fully specified model, also provides enhanced overall fit compared
with model 4 (d.f. = 1, p < .05) and model 5 (d.f. = 1, p < .05). Similar results
were obtained for the comparison of model 12 with model 10 (d.f. = 1, p <
.05) and model 11 (d.f. = 1, p < .01).
Model 2 shows that the coefficient of political ties with the KMT in 1998
was positive and significant, supporting H1, which suggested that ties to the
ruling party under united government facilitate market entry. Specifically, an
increase of one political tie was correlated with 0.013 more entries into unrelated industries in 1998 (b = 0.013, [exp(0.013)*11] = 0.013). But political ties
with the DPP were negatively associated with business groups entries into
unrelated industries, so that one additional DPP tie in 1998 led to a decrease of
0.32 entries into unrelated industries. This is consistent with H2, which predicted that political ties with opposition parties under united government would
impede market entry.
H3 predicted that political ties to the ruling party under divided government
would lead to more market entries. The coefficient of political ties with the
DPP in model 8 was positive and significant, supporting H3. One more political
tie to the DPP was associated with an increase of 0.104 entries into unrelated
industries in 2004. H4 predicted that political ties with the opposition party with
legislative authority under divided government would promote market entry,
but it is not supported: the coefficient of the KMT tie in model 8 is positive but
not statistically significant.
Models 3 and 9 tested the impact of the diversity of a portfolio of political
ties. The results show that portfolio diversity has a negative effect in model 3
but a positive effect in model 9, consistent with our argument in H5 and H6
that portfolio diversity inhibits market entry under united government but facilitates market entry under divided government. An increase of one standard
deviation in portfolio diversity was associated with 0.31 fewer market entries in
1998 and 0.23 more market entries in 2004.
Models 4 and 10 tested the moderating effect of debt ratio on the relationship between portfolio diversity and market entry. Consistent with H7a and
H7b, the negative trend in model 4 and the positive trend in model 10 showed
that groups with high debt ratios were negatively affected by their diverse political ties in 1998 but benefited from them in 2004. For groups with a mean level
of portfolio diversity (0.04 in 1998 and 0.18 in 2004), increasing the debt ratio
by one standard deviation translated into 0.39 fewer entries into unrelated
industries in 1998 but 0.33 more entries in 2004.
Models 5 and 11 tested the moderating effect of experience in market entry
on the relationship between portfolio diversity and market entry. As predicted
by H8a and H8b, the interaction term between diversity of political ties and
experience in market entry took on a significant positive sign in 1998 and a significant negative sign in 2004. For groups with an average level of portfolio
622
Figure 1. Moderating effect of debt ratio on the portfolio diversitymarket entry relationship.
Number of Market Entries
30
25
20
Groups with high

leverage in 1998
15
Groups with low

leverage in 1998
10
Groups with high

leverage in 2004
Groups with low

leverage in 2004
0.1
0.2
0.3
0.4
0.5
Portfolio Diversity
Figure 2. Moderating effect of market entry experience on the portfolio diversitymarket entry
relationship.
Number of Market Entries
25
20
Groups with rich
experience in 1998
15
Groups with little

experience in 1998
10
Groups with rich

experience in 2004
Groups with little

experience in 2004
0.1
0.2
0.3
0.4
0.5
Portfolio Diversity
diversity, experience in market entry that increased by one standard deviation

increased their entry into unrelated industries by 0.12 in 1998 but decreased it
by 0.07 in 2004. These findings persisted in the fully specified models 6 and
12. Figures 1 and 2 demonstrate how the effects of portfolio diversity differ
across business groups with varying levels of financial leverage and experience
in market entry, respectively. In figure 1, high debt ratio is defined as one
standard deviation above the mean of debt ratio, and low debt ratio refers to
one standard deviation below the mean. In figure 2, rich experience is
defined as one standard deviation above the mean of market entry experience
and little experience refers to one standard deviation below the mean.
Analysis of the control variables (models 6 and 12) shows that group size
and number of exits from incumbent industries are positively associated with
Zhu and Chung
623
market entry. This suggests that large groups restructure their industrial profiles to enter new sectors, consistent with the expected organizational
responses in the context of postmarket-oriented transition (Luo and Chung,
2005). In 1998, the profitability of entered industries was positively related to
market entries, whereas debt ratio and proportions of sales from regulated sectors had negative effects, possibly because groups that were highly leveraged
and heavily affected by government policies under united government had
fewer resources and a lower incentive for unrelated diversification. These
effects dissipated in 2004, probably due to improved financial intermediation
resulting from the establishment of financial holding companies and the
increasing importance of operations in and sales generated from China since
2001.4 Our overall results remained after we controlled for business groups
investment in China. Group patents are related to more entries in 2004 but do
not have an impact in 1998.
Checks for Endogeneity
Political ties are plausibly endogenous to strategic actions because of simultaneous causality or unobservable group characteristics (e.g., groups superior
nonmarket capability) that drive both tie building and market entry. We adopted
several strategies to address this issue. First, we lagged the independent variables by two years in all our models. We also compared the date of establishing political ties to that of market entry and found that the former largely
predated the latter. In addition, we ran regressions using changes in each type
of political tie between 1998 and 2004 as dependent variables and the number
of market entries in 1998 as an independent variable while keeping the same
set of control variables. The coefficient of the number of entries is not significant, which indicates that new market entries do not lead to changes in political
ties.
Second, we used the instrumental variable method to address the endogeneity concerns. On the basis of theoretical antecedents of political tie formation and Taiwanese history and social contexts (Gates, 1981; Gold, 1985), we
selected three sets of instrumental variables that are likely to influence political
ties to different combinations of political parties and have no effects on market
entries other than through their influence on political ties. They are historical
properties of business groups (i.e., groups regional origins, KMT partnerships),
biological and cultural backgrounds of group leaders (i.e., group leaders ethnicity, generation), and group leaders contact capability (i.e., leadership of trade
associations, educational level). For instance, the ethnic divide between mainlandersthose who moved to Taiwan from mainland China around 1948
1950, when the KMT (Chiang Kai-shek) regime was defeated by the
Communist Partyand Taiwanese, whose ancestors migrated to Taiwan
long before 1949, is well documented (Gates, 1981) and has shaped election
4
Financial holding companies are financial organizations that integrate banking, securities, investment, venture capital, and insurance services under one roof. This new type of organization, which
started to take hold in Taiwan in 2001, may loosen the market entry constraints imposed by debts.
Also starting in 2001, business groups significantly increased their operations in existing sectors in
China to take advantage of cheap production factors there. Sales from China contribute on average
10 percent of group sales in Taiwan and hence may make groups less sensitive to the proportion of
sales from regulated sectors and industry profitability when entering new industries.
624
results since Taiwans democratization in 1987. Group founders from mainland

China share a similar language and cultural background with the KMT and
hence have a better chance of getting connected to the KMT regime. By contrast, Taiwanese group founders are ethnically distant from the KMT and are
more pro-DPP. At the same time, group founders ethnicity is exogenous to
market entries, making it an ideal instrumental variable. The rationale for the
other instrumental variables and details of data sources and measurement are
presented in the Online Appendix (http://asq.sagepub.com/supplemental). In
the first-stage regression, we adopted the negative binomial models for the
KMT tie and the DPP tie, because of the overdispersed count data of these
ties, and the OLS model for portfolio diversity. As shown in table 4a, the instruments are strong and jointly significantly different from zero, as indicated by
the high values of chi-square of models for the KMT and DPP ties, as well as
the high values of F-statistics of models for portfolio diversity. This suggests
that our instruments well predict diversity of portfolios of political ties and that
the emergence and evolution of tie portfolios follow a path-dependent process.
We then used negative binomial models in the second-stage regression analyses to predict the number of market entries. The results shown in table 4b are
consistent with those displayed in table 3, indicating that the endogenous process did not drive results in our case. In addition, our instruments are exogenous, as the Hansen J-statistic fails to reject the null hypothesis that the
instruments are not correlated with the main equation errors (p > .10).
Third, we followed Heckmans two-step procedure, which first predicts the
likelihood of a group being connected to the KMT, the DPP, or both with an
ordered probit model and then controls for that likelihood in the second-stage
regression (Heckman, 1979). The first stage included variables that were significantly related to the likelihood of being politically connected (e.g., group size,
group age, group ROA, group patents, group diversification, debt ratio, family
ownership, number of exits, experience in market entry, sales from regulated
industries, and core industry dummies) and other variables not included in the
main equation but that may also lead to political ties (e.g., regional origin of
group, the KMT partnership, DPP supporter, ethnicity of group founder, group
leaders generation, leadership of trade associations, and educational level). We
then used the estimates from the first-stage ordered probit model to construct
the inverse Mills ratio and included it in the second-stage regression as a control (Hamilton and Nickerson, 2003). The results of the second-stage regression
are similar to those reported in table 3, although the negative effect of the DPP
tie went away in the full model of 1998.5
The results above suggest that political ties affected market entry by
Taiwanese business groups but not vice versa. This may be attributable to the
fact that Taiwan is a largely relationship-based society, and interpersonal ties
have always been important in business and political dealings (Chen, 1994). As
indicated by one insider we interviewed, almost all Taiwanese businesspeople
view political ties as social capital and build and maintain good relationships
with politicians, even if they are unsure about the specific benefits they will
derive from such relationships.
5
This might be due to our sample of 103 observations, which is smaller than the proper size (200)
for the two-step Heckman procedure (Bascle, 2008).
Zhu and Chung
625
Table 4a. Selection Equations for Instrumental Variables Using Negative Binomial
Models and OLS*
Variable
Group diversification
Group size (logged assets)
Group age
Group ROA
Group patents
Debt ratio
Number of exits
Experience in market entry
Family ownership
% of sales from regulated
sectors
Industry profitability
Industry sales
Instrumental variable
Group regional origins
Group leader
with DPP belief
Group partnership
with the KMT
Group leader with
mainlander background
Group leader born after 1949
Group leader with
trade association leadership
Group leaders
educational level
Constant
First-stage chi-square
of KMT tie
First-stage chi-square
of DPP tie
First-stage F-statistics
of portfolio diversity
Log pseudo-likelihood
Pseudo R-square or R-square
Number of observations
Number of
Number of
Number of
Number of
political ties with political ties with Portfolio political ties with
political ties
Portfolio
KMT (negative
DPP (negative diversity KMT (negative with DPP (negative diversity
binomial model) binomial model)
(OLS)
binomial model) binomial model)
(OLS)
3.581
(1.142)
1.630
(0.483)
0.060
(0.042)
0.009
(0.042)
0.010
(0.016)
0.046
(0.038)
0.608
(0.534)
0.379
(0.446)
0.059
(0.026)
3.281
(2.053)
0.442
(0.224)
0.020
(0.030)
0.067
(0.107)
0.027
(0.047)
0.004
(0.003)
0.004
(0.005)
0.001
(0.003)
0.005
(0.003)
0.032
(0.041)
0.047
(0.035)
0.003
(0.002)
0.037
(0.226)
0.004
(0.012)
0.005
(0.003)
0.432
(0.031)
0.007
(0.015)
0.002
(0.001)
0.006
(0.005)
0.003
(0.002)
0.001
(0.001)
0.010
(0.009)
0.006
(0.004)
0.010
(0.009)
0.044
(0.047)
0.003
(0.005)
0.002
(0.002)
1.055
(0.910)
1.100
(0.320)
0.099
(0.031)
0.068
(0.045)
0.002
(0.001)
0.022
(0.031)
1.543
(0.584)
0.158
(0.122)
0.031
(0.024)
0.416
(0.673)
0.004
(0.111)
0.010
(0.023)
0.403
(0.193)
0.819
(0.158)
0.016
(0.010)
0.009
(0.012)
0.006
(0.004)
0.010
(0.006)
0.092
(0.096)
0.056
(0.018)
0.004
(0.008)
0.495
(0.453)
0.052
(0.023)
0.003
(0.008)
0.048
(0.053)
0.072
(0.021)
0.002
(0.002)
0.007
(0.006)
0.001
(0.001)
0.001
(0.001)
0.008
(0.012)
0.001
(0.002)
0.002
(0.003)
0.103
(0.099)
0.003
(0.003)
0.001
(0.001)
0.388
(1.364)
0.155
(0.044)
0.683
(0.212)
0.020
(0.036)
0.125
(0.057)
0.011
(0.036)
0.064
(0.025)
0.052
(0.023)
0.003
(0.002)
0.011
(0.005)
0.133
(0.128)
1.614
(0.920)
0.423
(0.173)
2.171
(0.602)
0.064
(0.059)
0.156
(0.063)
0.049
(0.021)
0.073
(0.030)
0.058
(0.025)
0.003
(0.001)
0.010
(0.046)
0.745
(0.254)
4.758
(1.586)
1.756
(0.732)
3.961
(1.707)
5.242
(1.638)
0.324
(0.241)
29.300
(7.348)
130.32
0.209
(0.117)
0.350
(0.219)
0.018
(0.169)
0.027
(0.020)
0.955
(0.543)
3.994
(1.332)
0.931
(0.372)
0.669
(0.268)
3.748
(1.890)
0.041
(0.124)
18.028
(4.660)
213.47
48.39
0.239
(0.126)
0.005
(0.220)
0.180
(0.291)
0.071
(0.035)
9.579
(1.803)
133.44
17.60
331.338
51.91%
167
41.599
23.66%
167
31.59%
103
19.89
295.778
59.28%
227
199.011
54.71%
227
37.66%
103
* Standard errors are in parentheses. Coefficient estimates of industry dummies are not reported. As portfolio
diversity applies only to politically connected groups, nonconnected groups were dropped from models with this
variable.
626
Table 4b. Effects of Political Ties on Business Groups Entry into New Industries: Instrumental
Variable Regression Analysis Using Negative Binomial Models*
Variable
1998 (United government)

Model 1
Group diversification
Group size (logged assets)
Group age
Group ROA
Group patents
Debt ratio
Number of exits
Experience in market entry
Family ownership
% of sales from regulated
sectors
Industry sales
Independent variable
Number of political ties
with KMT
with DPP
Portfolio diversity
Portfolio diversity
Debt ratio
Portfolio diversity
Experience in
market entry
Constant
Hansen J-statistic
(chi-square p-value
in parentheses)
Log pseudo-likelihood
Pseudo R-square
Number of observations
Model 2
Model 3
2004 (Divided government)

Model 4
Model 5
Model 6
0.061
(0.103)
0.433
(0.046)
0.006
(0.004)
0.001
(0.005)
0.005
(0.002)
0.007
(0.004)
0.079
(0.032)
0.006
(0.016)
0.004
(0.004)
1.011
(0.211)
0.077
(0.021)
0.003
(0.004)
0.069
(0.134)
0.405
(0.055)
0.007
(0.005)
0.011
(0.010)
0.004
(0.002)
0.069
(0.134)
0.072
(0.037)
0.014
(0.019)
0.004
(0.007)
1.014
(0.235)
0.077
(0.025)
0.007
(0.004)
0.117
(0.138)
0.412
(0.055)
0.006
(0.005)
0.008
(0.011)
0.005
(0.003)
0.014
(0.005)
0.092
(0.039)
0.007
(0.022)
0.004
(0.007)
0.912
(0.238)
0.075
(0.024)
0.007
(0.004)
0.024
(0.145)
0.129
(0.078)
0.012
(0.005)
0.013
(0.013)
0.002
(0.001)
0.001
(0.005)
0.229
(0.045)
0.015
(0.010)
0.033
(0.012)
0.331
(0.276)
0.020
(0.014)
0.002
(0.004)
0.026
(0.163)
0.185
(0.092)
0.008
(0.006)
0.009
(0.025)
0.002
(0.001)
0.002
(0.006)
0.151
(0.047)
0.002
(0.009)
0.023
(0.012)
0.059
(0.335)
0.013
(0.015)
0.007
(0.005)
0.051
(0.153)
0.173
(0.088)
0.005
(0.006)
0.019
(0.024)
0.002
(0.001)
0.006
(0.006)
0.149
(0.043)
0.004
(0.009)
0.019
(0.011)
0.231
(0.342)
0.014
(0.014)
0.008
(0.004)
0.101
(0.002)
0.256
(0.086)
0.115
(0.004)
0.244
(0.089)
1.474
(0.585)
0.109
(0.007)
0.259
(0.121)
1.662
(0.625)
0.259
(0.100)
0.206
(0.100)
0.051
(0.089)
0.188
(0.040)
0.048
(0.083)
0.102
(0.040)
1.361
(0.405)
0.051
(0.077)
0.116
(0.041)
1.266
(0.387)
0.118
(0.057)
0.080
(0.031)
2.789
(0.603)
3.188
(0.364)
2.251
(0.740)
0.915
(0.633)
2.018
(0.753)
1.661
(0.947)
1.003
(0.184)
1.626
(1.101)
3.887
(0.143)
1.862
(1.048)
348.462
16.50%
227
189.669
18.49%
103
176.104
21.97%
103
333.487
20.52%
167
207.687
24.81%
103
196.801
28.94%
103

diversity applies only to politically connected groups, nonconnected groups were dropped from models with this
variable, including models 2, 3, 5, and 6.
Zhu and Chung
627
Table 5. Effects of Political Ties on Business Groups Entry into Regulated Sectors: Negative
Binomial Models*
Variable
Group
diversification
Group size
(logged assets)
Group age
Group ROA
Group patents
Debt ratio
Number of exits
Experience in
market entry
Family ownership
Model
Model
Model
Model
Model
Model
Model
Model
Model
Model
Model
Model
10
11
12
0.345
0.231
0.069
0.076
0.034
0.040
0.478
0.327
1.008
0.894
1.139
1.014
(0.283)
(0.288)
(0.368)
(0.379)
(0.375)
(0.386)
(0.450) (0.465)
(0.560)
(0.556)
(0.589)
(0.583)
0.320 0.274
0.253
0.279
0.258
0.284
0.412 0.375
0.732 0.686 0.792 0.735
(0.118)
(0.125)
(0.148)
(0.151)
(0.148)
(0.152)
(0.254) (0.277)
(0.339)
(0.345)
(0.358)
0.001
0.002
0.003
0.005
0.002
0.004
0.026
0.025
0.005
0.003
0.005
0.005
(0.011)
(0.011)
(0.013)
(0.013)
(0.013)
(0.014)
(0.016) (0.016)
(0.019)
(0.019)
(0.021)
(0.021)
0.003
0.002
0.010
0.008
0.010
0.008
0.018 0.019
0.016
0.002
0.003
0.005
(0.015)
(0.014)
(0.026)
(0.025)
(0.025)
(0.025)
(0.058) (0.062)
(0.086)
(0.089)
(0.089)
(0.093)
0.015
0.012
0.010
0.013
0.010
0.012
0.001
0.001
0.001
0.001
0.001
0.002
(0.009)
(0.008)
(0.010)
(0.010)
(0.010)
(0.010)
(0.001) (0.001)
(0.001)
(0.001)
(0.001)
(0.001)
0.006
0.008
0.019
0.028
0.018
0.027
0.022
0.016
0.021
0.010
0.012
0.011
(0.009)
(0.009)
(0.012)
(0.014)
(0.012)
(0.015)
(0.016) (0.017)
(0.019)
(0.022)
(0.019)
(0.022)
(0.363)
0.044
0.002
0.048
0.079
0.039
0.069
0.143
0.172
0.045
0.010
0.014
0.008
(0.098)
(0.099)
(0.116)
(0.119)
(0.118)
(0.121)
(0.125) (0.147)
(0.170)
(0.170)
(0.170)
(0.168)
0.053
0.096
0.093
0.102
0.063
0.074
0.020
0.007
0.009
0.010
0.016
0.018
(0.047)
(0.052)
(0.059)
(0.062)
(0.068)
(0.071)
(0.025) (0.026)
(0.026)
(0.026)
(0.028)
(0.028)
0.011
0.010
0.005
0.006
0.005
0.006
0.106 0.079
0.089
0.076
0.107
0.089
(0.009)
(0.009)
(0.015)
(0.015)
(0.015)
(0.015)
(0.071) (0.072)
(0.078)
(0.073)
(0.087)
(0.081)
0.259
0.077
0.273
0.255
0.219
0.210
2.130 2.856 2.198
2.253 2.844 2.878
regulated sectors
(0.528)
(0.530)
(0.626)
(0.631)
(0.632)
(0.637)
(1.183) (1.397)
(1.188)
(1.244)
(1.448)
0.032
0.045
0.050
0.062
0.058
0.070
0.002
0.016
0.017
0.013
0.012
0.014
(0.010)
(0.057)
(0.073)
(0.076)
(0.074)
(0.077)
(0.078) (0.055)
(0.071)
(0.070)
(0.079)
(0.077)
% of sales from
Industry sales
0.017 0.029 0.031 0.033 0.030
0.032 0.015
(0.056)
(0.012)
(0.010)
(0.012)
(0.012)
(0.012)
(1.495)
0.019
0.028
0.023
0.025
0.021
(0.010) (0.012)
(0.025)
(0.024)
(0.025)
(0.024)
Independent variable
with KMT
with DPP
0.027
0.038 0.040 0.036
0.038
0.039
0.041
0.045
0.044
0.048
(0.011)
(0.014)
(0.015)
(0.025)
(0.029)
(0.029)
(0.029)
(0.030)
(0.014)
(0.015)
0.308 0.359 0.347 0.326 0.328
0.464 0.249
0.204
0.246
0.239
(0.124)
(0.130)
(0.102)
(0.112)
(0.100)
Portfolio diversity
(0.150)
(0.158)
(0.133)
(0.132)
(0.096)
4.049 4.627 3.855 4.426
3.646
3.396
3.714
3.452
(1.964)
(1.414)
(1.459)
(1.411)
(1.457)
Portfolio diversity
Debt ratio
(2.096)
(1.542)
(2.138)
0.369
0.355
0.222
0.227
(0.160)
(0.148)
(0.106)
(0.097)
Portfolio diversity
Experience in
0.258
0.240
0.095 0.092
(0.104)
(0.109)
(0.041)
(0.038)
market entry
Constant
Log likelihood
Number of
1.852
0.971
0.108
0.326
0.338
0.097
7.805 9.542
5.127
5.108
6.372
6.188
(1.307)
(1.413)
(1.644)
(1.700)
(1.662)
(1.724)
(5.649) (6.754)
(3.559)
(3.505)
(3.941)
(3.818)
140.722 134.081 89.611 89.054 89.197 82.711 59.125 50.036

167
167
103
103
103
103
227
227
46.926 43.475 43.989 40.871

103
103
103
103
observations

diversity applies only to politically connected business groups, nonconnected business groups were dropped from
models with this variable, including models 36 and models 912.
628
Robustness Checks
We considered several robustness checks for the results in table 3. First, we
found empirical evidence to support our argument that political ties affected
market entry by providing administrative privileges. As table 5 shows, political
ties had a greater impact on entry into regulated industries, implying that political ties altered groups access to favorable government policies and financial
resources and thereby their entry into challenging industries.6 Second, we
investigated the sensitivity of sample-group composition. To ensure that our
results were not sensitive to group composition in the two different periods,
we examined the entry activities of a subset of business groups that appeared
in both 1998 and 2004 (208 groups) using the models in table 3. The results
were qualitatively the same as those from the entire sample. Third, we distinguished two types of political ties to each political party, formal position interlocks and informal relationships, because they may involve distinct rules of
interaction. The effects of both formal and informal ties are qualitatively similar
to those of combined ties.
DISCUSSION AND CONCLUSION
Our study was motivated by the lack of understanding of the ties between
firms and political parties and their impact on corporate strategy, especially in
the newly democratized environment in emerging economies. Under such circumstances, firms need to decide whether they should maintain relationships
with the various parties, and the choice can have significant strategic implications. Using entry into unrelated industries by Taiwanese business groups as
an example, we developed a framework of the effect of political ties on firm
strategy, both for dyadic ties generally and for portfolios of ties in particular.
We differentiated between political parties on the basis of their competitive
status under united and divided governments.
Our results show that political ties to powerful political parties facilitate market entry but political ties to powerless parties impede entries. Ties to an opposition party with legislative authority did not provide the expected benefits,
possibly because the ruling party can intervene in the legislative process and
minimize the resources controlled by the legislators of an opposition party.
Moreover, we demonstrated the effects of portfolio diversity on market entry
by focusing on the synergies and conflicts between ties under united and
divided governments. On the one hand, the discrimination and retribution
imposed by the ruling party turn out to be key factors that inhibit focal groups
from entering new industries under united government. On the other hand,
tertius gaudens advantages and political flexibility derived from a diverse portfolio under divided government facilitate new market entry. This is consistent
with McMenamin and Schoenmans (2007) finding that under divided government, Polish firms connected to multiple political parties were more successful
6
Regulated sectors include power plants; buses and other passenger transport; taxis; passenger
car rental; freight trucking; shipping; shipping agents and sales; civilian air transport; air freight; production, distribution, and showing of movies; production and sale of radio/television programs; telecommunications; banking; insurance; and securities. We adopted negative binomial models
because there were no excess zeros in our data on entry into related industries. In 1998, 53.89 percent of the groups, and in 2004, 86.34 percent of the groups had zero market entries.
Zhu and Chung
629
in lobbying than those faithful to only one party. Statistically, our results indicate
that it is important to consider both dyadic ties and portfolios of ties when evaluating the magnitude of the strategic impact of political ties. Compared with
the effect of a dyadic tie on market entry, the effect of portfolio diversity is of
greater economic significance. In addition, we find that the internal resources
and accumulated capabilities of the group, such as its financial leverage and
experience in market entry, moderate the effects of diverse portfolios on new
market entry.
Our framework and results offer implications for research on corporate political ties, portfolios of ties, market entry strategy, and business groups.
Whereas the traditional political tie literature has emphasized the role of government, our study highlights the significance of political parties in the development of corporate political strategy, which is crucial to better understanding the
competitive strategies of firms in both developed and developing countries
(Pearce, De Castro, and Guillen, 2008). With a focus on market entries by diversified business groups in emerging markets, this study identifies the conditions
under which ties to political parties, both individual and collective ties (portfolios), enable and constrain firm strategy. Our framework advances the political
tie literature by highlighting the significance of portfolios of ties to different
political parties. Moreover, by taking the distribution of political power between
political parties into consideration, this study demonstrates that the form of
government is a critical contingency in the function and outcome of ties to political parties. It also provides implications for general political ties by revealing
another contingency of their strategic influence in addition to the competition
and hostility between political elites (Siegel, 2007).
Our study also indicates that political tie portfolios are not equally important
to all firms. Instead, the efficacy of political tie portfolios varies with the firms
internal resource profile and accumulated capabilities. Diverse political ties are
more important for firms with high debt ratios and limited experience because
they rely more on the resources and information transferred through political
ties than their counterparts with rich resources and experience do. As a way
for firms to manage their boundary-spanning activities, political tie portfolios are
of greater importance for firms with a heavy reliance on external resources.
Our results hence shed new light on the contingent perspective in the political
ties literature (Li and Zhang, 2007; Li, Poppo, and Zhou, 2008).
Our findings highlight two important and yet understated contingencies that
shape the operation and consequence of interfirm ties and alliance portfolios:
partners relative competitive status and ability to retaliate against focal firms.
First, our results demonstrate the importance of varying the competitive status
of partners in the portfolio. An 80/20 division of political power between political parties has considerably different implications for focal firms than a 50/50
division of political power. When a single party dominates, there will be a temptation for the party not only to favor its loyal supporters but also to punish disloyal friends through discrimination and resource exclusion. In contrast, in the
presence of balanced political power, the punitive power will be too costly to
deploy, and winning as many friends as possible becomes the top priority. Our
research setting enables us to evaluate such a competitive-status effect more
precisely because direct competition and rare co-opetition between political
parties in general elections minimize the potential mitigation of the tertius gaudens advantages derived from diverse portfolios of ties. Moreover, our finding
630
that the higher-power political party uses punitive tactics toward firms connected to both itself and lower-power rivals highlights the negative side of portfolio diversity. Such institution-based retaliatory power is rarely seen in
business alliance relationships. Our research thus helps build a more general
theory of interorganizational ties.
In terms of market entry activities, we show that external resources and
firms links to them are also influential in market entry because these resources
and ties modify firms internal resource profiles and external competitive environments (Peng and Luo, 2000; Fisman, 2001; Khwaja and Mian, 2005; Holburn
and Vanden Bergh, 2008). Our results contribute a more balanced view to the
current market entry literature, which has focused on how surplus internal
resources drive firms to move into new markets (Chang, 1996; Helfat and
Lieberman, 2002).
Further, this study has important implications for the business group literature. It indicates that group leaders political capital plays an important role in
enabling or constraining group strategy and growth. In particular, we show how
the value of a portfolio of ties with competing political partners varies along
with the turbulent political environment and how the internal resources and
capabilities of business groups may buffer such external influence. By doing
so, we respond to Khanna and Yafehs (2007) call to incorporate the interface
between business groups and external institutions, such as the polity, and thus
develop a more complete research program of business groups. Moreover, our
empirical evidence confirms the theoretical argument that business groups
ability to exploit political capital in emerging economies facilitates their expansion into unrelated industries (Kock and Guillen, 2001). We also highlight that
the contact capability of business group leaders is not always beneficial,
because being connected to the wrong person at the wrong time can be
detrimental.
Our study has several limitations. First, when examining the effect of ties to
the opposition party with legislative authority, we did not find the expected positive effect, probably because of the comparable influence of the ruling and the
opposition party in the Taiwanese legislature. Further research could verify our
argument in contexts in which the opposition party plays a dominant legislative
role. Second, our arguments and findings are based on the context of newly
democratized countries that experienced the first power transition from the
authoritarian state during the third wave (Huntington, 1991). Caution should be
exercised when generalizing these findings to other democratic systems.
Future research may investigate whether the effects of political ties and portfolio diversity continue after the second or third regime change. Third, our focus
on the first power transition resulted in a limited number of groups tied to specific political parties and might cause some concern about statistical power.
Although our sample size of 290 distinct groups was larger than that of previous studies that examined group-level data (Guillen, 2000; Luo and Chung,
2005), future research may expand the sample size and confirm the results.
Despite the foregoing limitations, we see this study as advancing our understanding of the relationship between political ties and firm strategy. In exploring
the market entry consequences and contingent effects of political ties between
multi-business firms and political parties in the context of a democratic political
system, our research has integrated and contributed to multiple streams of literature related to corporate political strategy, the portfolio of interorganizational
Zhu and Chung
631
ties, market entry, and business groups. It thus offers greater insights into the
broader question of when and how political ties matter for firms.
Acknowledgments
We thank Associate Editor Mauro Guillen for his detailed guidance and suggestions and
three anonymous reviewers for their helpful comments. We are grateful to Ishtiaq
Mahmood, Kulwant Singh, Will Mitchell, Sea-Jin Chang, Witold Henisz, Ivan Png,
Young-Choon Kim, and Chin-Fen Chang for their thoughtful comments on earlier versions. We thank Ji-Ren Lee and Zong-Rong Lee for introducing interviewees and TsungHao Huang for providing background information about politics in Taiwan. We also thank
seminar participants at Academia Sinica of Taiwan, McMaster University, National
Taiwan University, and University of Manitoba. Earlier versions of this paper were presented at the 4th Political Networks Conference; the 11th Annual Strategy and the
Business Environment Conference; the 2011 Paper Development Workshop Strategy
Research Initiative sponsored by the Administrative Science Quarterly, the Academy of
Management OMT Division, and HEC; the 2010 International Symposium of Young
Sociologists; the 2010 Academy of Management Annual Meeting; and the 2010
International Association for Chinese Management Research Biannual Conference.
Hongjin Zhu appreciates financial assistance from the Social Science and Humanities
Research Council of Canada and ARB research grant of McMaster University. Chi-Nien
Chung acknowledges financial assistance from the research grant (R-317-000-103-112)
of NUS Business School. Errors remain our own.
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Authors Biographies
Hongjin Zhu is an assistant professor at McMaster University, 1280 Main Street West,
Hamilton, Ontario, Canada L8S 4M4 (e-mail: zhuhongjin@mcmaster.ca). Her current
research examines how social ties evolve and affect organizational strategy in emerging
638
economies, particularly in the context of business group networks. She received her
Ph.D. in strategic management from National University of Singapore.
Chi-Nien Chung is an associate professor in the Department of Strategy & Policy at
National University of Singapore Business School, 15 Kent Ridge Drive, Singapore
119245 (e-mail: cnchung@nus.edu.sg). He received his Ph.D. in sociology from Stanford
University. His research interests center around business groups, family firms, and political ties in emerging economies, with a focus on the interaction between institutional
changes and organizational responses, in particular, how market-oriented transitions and
democratization moderate the relationships among firm strategy, governance, and performance. His work has appeared in Administrative Science Quarterly, Management
Science, Organization Science, Strategic Management Journal, and other refereed journals. He serves on the boards of AMJ, CGIR, MOR, and SMJ.
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Portfolios of Political

Ties and Business

Administrative Science Quarterly

Hongjin Zhu1 and Chi-Nien Chung2

DeGroote School of Business, McMaster University

Administrative Science Quarterly 59 (2014)

political ties influence firms strategy. More importantly, previous studies

Zhu and Chung

Administrative Science Quarterly 59 (2014)

Zhu and Chung

Divided Government (intense party competition)

Ruling party competitive status

Moderately powerful: administrative authority

Opposition party competitive status

Moderately powerful: legislative authority

Administrative Science Quarterly 59 (2014)

Portfolios of Political Ties in Newly Democratized Emerging Economies

Zhu and Chung

Moreover, interviews we conducted with executives in Taiwan in connection

Administrative Science Quarterly 59 (2014)

Zhu and Chung

Administrative Science Quarterly 59 (2014)

the government, suppliers, and shareholders (DiMaggio and Powell, 1983). An

In contrast, ties to opposition parties under united government tend to

Zhu and Chung

Portfolio Diversity and Entry into New Industries

Administrative Science Quarterly 59 (2014)

Under a divided government, however, a portfolio of ties to both the ruling

Zhu and Chung

Internal Resources and Capabilities, Portfolio Diversity, and Entry into

Administrative Science Quarterly 59 (2014)

strategic maneuvers. This negative effect on new market entry tends to be

Under divided government, groups with a diverse portfolio of political ties

Zhu and Chung

Administrative Science Quarterly 59 (2014)

Zhu and Chung

We turned to three additional sources to identify the social relationships

Administrative Science Quarterly 59 (2014)

Federation of Commerce, an important trade association through which the

Zhu and Chung

Administrative Science Quarterly 59 (2014)

groups entered, weighted by the percentage of group sales in the entered

Table 2a. Correlation Matrix (1998)

Zhu and Chung

Table 2b. Correlation Matrix (2004)

Administrative Science Quarterly 59 (2014)

2004 (Divided Government)

0.438 0.432 0.389 0.401 0.383 0.397 0.056

0.017 0.015 0.009

0.008 0.009 0.015 0.009 0.015 0.001

0.212 0.230 0.146 0.158 0.132 0.144

0.030 0.032 0.020

1.014 1.001 0.986 0.909 0.900 0.847 0.295

0.005 0.005 0.003

0.008 0.009 0.007 0.007 0.007 0.007

0.085 0.079 0.078 0.066 0.073 0.063

0.013 0.012 0.012 0.017 0.011

0.276 0.189 0.186 0.193 0.187

1.841 2.471 1.604 2.191

1.354 1.141 1.453 1.256

3.010 2.727 2.245 1.878 2.407 2.047 0.948

p < .10; p < .05; p < .01; two-tailed tests.

Zhu and Chung

Administrative Science Quarterly 59 (2014)