Political Connections and Business Strategy in Dynamic Environments: How Types and Destinations of Political Ties Affect Business Diversification in Closed and Open Political Economic Contexts

• DOI: http://doi.org/10.1002/gsj.1148
• Date: 01 November 2017
• Published date: 01 November 2017

Political Connections and Business Strategy in

Dynamic Environments: How Types and Destinations

of Political Ties Affect Business Diversification in

Closed and Open Political Economic Contexts

Ishtiaq Mahmood,

1

Chi-Nien Chung,

1

and Will Mitchell

2

*

1

National University of Singapore Business School, Singapore, Singapore

2

Rotman School of Business, University of Toronto, Toronto, Ontario,

Canada

Research summary: This article studies how thestrategic benefits of political ties change

as a closed political-economic system opens, focusing on types and destinations of con-

nections betweenbusiness leaders and political actors. We examine how formaland infor-

mal ties (types) to party leaders, government officials, and elected legislators

(destinations) fac ilitated diversification by business groups in Taiwan between 1986 and

1998. During this period, Taiwan underwent political and economic liberalization that

led to changes in tie accountability, public scrutiny, and diffusion of power over

resources. We show that formal position interlocks with dominant party or senior govern-

ment officials provide greatest benefits in a closed political-economic system, while infor-

mal social ties to a wider range of political actors, particularly legislators, provide

greater benefits as thesystem becomes more open.

Managerial summary: As a closed political economy becomes more open, the types

and destinations of political ties that generate strategic benefits for firms change. In

closed markets, the greatest benefits arise from formal ties to central political leaders.

In more open markets, the benefits shift to informal ties with a broader range of political

actors, including legislators. We demonstrate the change in targets for strategic benefits

by studying how political ties influenced business diversification in Taiwan as the coun-

try moved from closed markets in the 1980s to more open markets in the 1990s. Copy-

right © 2016 Strategic Management Society.

Introduction

Business groups in emerging markets often func-

tion as diversified entities in multiple industries;

groups commonly become established in emerging

markets with relatively closed political economic

systems while continuing to operate as the markets

become more open (Granovetter, 1995; Khanna

and Yafeh, 2007). Although research has examined

how diversification affects group performance in

business environments with varying degrees of

political economic openness (Khanna and Palepu,

Keywords: political ties; diversification; business groups;

political-economic systems; strategic benefits

*Correspondence to: Will Mitchell, Rotman School of Man-

agement, University of Toronto, 105 St. George Street,

Toronto M5S 3E6, Canada. E-mail: william.mitchell@rotman.

utoronto.ca

Correction made on 3/31/2017, after first online publication:

The “Research Summary”abstract was mislabeled as a “Tech-

nical Summary”, while the “Managerial Summary”abstract

was mislabeled as a “Plain Language Summary.”This has

been corrected.

Copyright © 2016 Strategic Management Society

Global Strategy Journal

Global Strategy Journal, 7: 375–399 (2017)

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

2000b), there has been less focus on the antece-

dents of diversification. Recent studies suggest that

political ties between executives and government

officials are likely to influence diversification

within business groups (Guillén, 2000; Peng, Lee,

and Wang, 2005; Zhu and Chung, 2014), but have

only begun to tease out how the relationships might

vary in differing political economic conditions. This

article contributes to the understanding of business

group diversification and political relationships by

studying how the types (formal or informal) and des-

tinations of ties (which actors are connected by the

ties) affect diversification when a historically closed

political economic system becomes more open. We

argue that the strategic benefits of formal business-

government position interlocks and informal social

ties of business executives to dominant political par-

ties, government officials, and legislators will change

as a closed political economic context opens.

The political strategy literature commonly

argues that firms with political ties gain benefits

such as regulatory favors and investment resources

(Faccio, 2006; Fisman, 2001). However, while the

literature sometimes distinguishes between different

types and destinations of ties (Johnson and Mitton,

2003; Leuz and Oberholzer-Gee, 2006), few studies

discuss how the types and destinations of ties will

have different impacts in different political eco-

nomic contexts. Zhu and Chung (2014), for

instance, study how ties affect business strategy

under united and divided governments, but they do

not distinguish between types of ties. Zheng, Singh,

and Mitchell (2015) distinguish how local and cen-

tral ties affect business performance, but they do

not consider changing political and economic con-

texts. Moreover, historically the literature has

focused on industry- and country-level studies

(Bauer, de Sola, and Dexter, 1972; Evans, 1995;

MacIntyre, 1994; Schneider, 1998; Wank, 2002),

only recently beginning to examine the impact of

connections between individual business leaders

and political actors (e.g., Faccio, 2006; Siegel,

2007). Furthermore, the literature most commonly

focuses on business performance, with only limited

examination of the factors driving the underlying

business strategies such as diversification.

Political connections are linkages between indi-

vidual business leaders and political actors such as

party leaders, senior government officials, and

elected legislators (Fisman, 2001; Siegel, 2007).

This definition reflects the idea in the social net-

works literature that interpersonal linkages can serve

as conduits of resources (Coleman, 1988; Granovet-

ter, 1985; Han, Shipilov, and Greve, forthcoming),

while recognizing the differences in destinations of

ties driven by the heterogeneity of political actors

(Knoke, 1990; Lin, Vaughn, and Ensel, 1981).

Political ties may involve formal position interlocks

in which business leaders serve as political actors

(Faccio, 2006) or may involve informal social lin-

kages between corporate leaders and family, friends,

or members of social organizations who hold politi-

cal posts (Bertrand et al., 2004; Siegel, 2007). The

ties commonly create strategic benefits for con-

nected firms, where strategic benefits are resources

that a firm can use to facilitate its business activities.

We argue that the strategic benefits of different

types and destinations of political ties vary in open

and closed political economic systems, which differ

in the extent of political and market liberalization

that a country has undergone at a given time. We

predict that formal position interlocks to political

actors with direct influence on resource allocation,

such as party leaders and senior government offi-

cials, will be particularly beneficial for business

diversification in closed political economic sys-

tems, but that the benefits will decline as a political

economic system becomes more open. In parallel,

we argue that informal social ties to a wider range

of political actors, including actors with more indi-

rect influence on resource allocation (such as

elected legislators) will offer increasing benefits for

business diversification as a political economic sys-

tem becomes more open. The differences arise via

three mechanisms: tie accountability, public scru-

tiny, and diffusion of power over resources in dif-

ferent political economic contexts.

The analysis focuses on diversification by the

100 largest business groups in Taiwan from 1986

to 1998, before and during a period when the coun-

try underwent extensive economic and political lib-

eralization. The flagship firms in many industries in

emerging economies are members of business

groups, which collectively produce significant por-

tions of national GDP and influence the direction

of national development through their expansion

choices (Fisman and Khanna, 2004; Granovetter,

1995; Khanna, 2000). Diversification by business

groups is an important strategic activity that has a

major impact on economic development in their

countries. At the same time, group owners and

business executives commonly have strong ties

with political actors in their countries (Morck, Wol-

fenzon, and Yeung, 2005). This research design

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

Copyright © 2016 Strategic Management Society Global Strategy Journal, 7: 375–399 (2017)

DOI: 10.1002/gsj