Corporate governance dynamics of political tie formation in emerging economies: Business group affiliation, family ownership, and institutional transition

• Published date: 01 July 2021
• Author: Chi‐Nien Chung,Hongjin Zhu
• Date: 01 July 2021
• DOI: http://doi.org/10.1111/corg.12367

ORIGINAL ARTICLE

Corporate governance dynamics of political tie formation in

emerging economies: Business group affiliation, family

ownership, and institutional transition

Chi-Nien Chung

1

| Hongjin Zhu

2

1

Department of Strategy and Policy, National

University of Singapore Business School,

Singapore

2

DeGroote School of Business, McMaster

University, Hamilton, Ontario, Canada

Correspondence

Chi-Nien Chung, Department of Strategy and

Policy, National University of Singapore

Business School, 15 Kent Ridge Drive,

Singapore 119245.

Email: bizccn@nus.edu.sg

Abstract

Research Question/Issue: Despite the importance of political ties to firm strategy

and performance, little is known about why and how firms form political ties. This

study examines how firm-specific governance structures function as important deter-

minants of the formation of political ties and how the impact of governance struc-

tures evolves during institutional transition of emerging economies.

Research Findings/Insights: Our empirical analysis is based on a longitudinal data set

involving manually coded political ties of listed firms in Taiwan between 1996 and

2005. We find that business group affiliation and family ownership facilitate the for-

mation of political ties but that such effects diminish as market infrastructures and

regulatory institutions develop.

Theoretical/Academic Implications: This study systematically examines how corpo-

rate governance structures affect the formation of political ties. It identifies an over-

looked explanation for the dynamics of political ties that resides in the internal

governance structures of firms. It contributes to the corporate governance research

by demonstrating how governance structures other than the board of directors can

provide resources to facilitate strategic actions such as political tie establishment. It

also enriches research on corporate governance bundles by showing the

interdependence among multilevel governance mechanisms in the context of political

tie formation.

Practitioner/Policy Implications: This study offers insights for business executives

interested in managing interdependence with government. While business group

affiliates and family firms are better able to link to politicians, such advantages dimin-

ish during institutional transition. Hence, group leaders and family owners should

consider other political activities to effectively manage political risks as institutions

develop.

KEYWORDS

Corporate governance, business group affiliation, emerging economies, family ownership,

institutional transition, political ties

Received: 5 February 2020 Revised: 7 February 2021 Accepted: 11 February 2021

DOI: 10.1111/corg.12367

Corp Govern Int Rev. 2021;29:381–401. wileyonlinelibrary.com/journal/corg © 2021 John Wiley & Sons Ltd 381

1|INTRODUCTION

Research on firms' political ties has generated insights into the effects

of such ties on access to resources, information, and privileges, thus

shaping firms' market value, profitability, and strategies

(Fisman, 2001; Shin et al., 2018; Siegel, 2007; Sun et al., 2015). Given

the significant impact of political ties on firms, it is surprising that only

limited attention has been paid to the antecedents of political ties.

While the resource dependence perspective suggests that firms facing

the same level of dependence on government, such as those operat-

ing in regulated industries, tend to adopt the same form of political

activity (Pfeffer & Salancik, 1978), it provides little insight into why

firms dependent on government in the same way differ in their politi-

cal embeddedness (Holburn & Vanden Bergh, 2008;

Okhmatovskiy, 2010). Viewing political ties as driven predominantly

by a firm's external dependence may overlook internal attributes of

the firm that can affect its incentive and resource in political network-

ing. Indeed, scholars have called for the integration of resource

dependence theory with other intrafirm theoretical lenses to investi-

gate the dynamics of political ties (Hillman et al., 2009, p. 1416).

In this study, we combine the agency perspective and the

resource-based view of the firm to probe the variation in political ties

across firms by focusing on firm-specific governance structures. As

corporate governance structures such as ownership and internal net-

works determine the rights of the various stakeholders of a firm

(Aguilera & Jackson, 2010), which in turn shape managerial incentives,

resource allocations, and organizational processes (Gulati et al., 2000),

several theoretical works (e.g., Morck et al., 2005) have highlighted

the relationship between corporate governance structures and politi-

cal ties. Yet this relationship has not been systematically examined,

and the underlying mechanisms remain understudied. As a result, the

comment from an influential review 16 years ago that “econometric

evidence on which sorts of firms are best at political rent-seeking is

scant”(Morck et al., 2005, p. 697) remains valid today.

We address these gaps by studying how two unique governance

structures that dominate firms in emerging economies, business group

affiliation and family ownership (Fogel, 2006; Granovetter, 2005;

Lins, 2003), affect political tie formation. These two governance struc-

tures feature evident theoretical mechanisms that are core to agency

theory and the resource-based view of the firm, providing ideal gover-

nance contexts that demonstrate the theoretical value of incorporat-

ing firm's governance structures into studies of political tie

establishment.

Specifically, business groups are a set of legally independent firms

that are under common financial and administrative control through a

variety of formal and informal interfirm relationships (Khanna &

Rivkin, 2001). Such a chain of ownership and relational governance

structure can provide affiliated firms with strong incentives and

unique advantages to form political ties. Family owners, distinct from

other owners, have the ultimate goal of preserving family wealth for

future generations (Gómez-Mejía et al., 2011) and thus may view

political ties as particularly useful for minimizing political risks and

avoiding economic recessions. These firm-specific motivations and

capabilities resulting from governance structures likely embed firms in

political networks to varying degrees.

In contrast to the relatively stable institutional setting of developed

economies, emerging economies typically undergo dramatic institu-

tional changes that may make firms' tie formation efforts highly adap-

tive. Such institutional characteristics of emerging economies allow us

to build and test a dynamic theory on how firms' governance structures

enable or constrain political tie formation as institutions develop. For

example, the fast-developing market infrastructures and regulatory

institutions in emerging economies may change firms' motivation and

capabilities of political networking (Sun et al., 2012) and thereby alter

the function and effectiveness of firm-specific governance structures

(Aguilera & Jackson, 2010; Davis, 2005) in this regard. Such institu-

tional variations also enable us to demonstrate the theoretical mecha-

nisms underlying our argument and hypotheses on how business group

affiliation and family ownership affect political tie formation.

Our empirical analysis is based on a longitudinal data set involving

manually coded political ties of listed firms that arose when business

executives served as political leaders or vice versa in Taiwan between

1996 and 2005. Taiwan is a typical emerging economy that has gone

through significant institutional changes (Luo & Chung, 2005). The

economic significance of business groups and family firms as well as

the prevalence of political networks in Taiwan make it an ideal setting

to test our argument (Claessens et al., 2000; Claessens & Fan, 2002).

The position interlocks between politicians and executives represent a

type of durable political connection that is prevalent and significant in

both emerging and developed economies (Faccio, 2006; Lester

et al., 2008; Zheng et al., 2015). Our coding of position interlocks fol-

lows existing studies that adopt large-scale and longitudinal political

tie data (Faccio, 2006; Hillman, 2005; Shin et al., 2018). While other

forms of political ties may arise between firms and the political

regime, position interlocks provide a precise date of tie establishment,

allowing us to address the issue of endogeneity. We further discuss

this issue and the role of informal political ties that arise from family

relationships and friendships in the methodology section. It is often

difficult to identify the exact establishment date of such informal

social relationships.

Our results show a significant influence of governance structures

on firm's political ties. Firms affiliated with business groups have more

political ties than stand-alone firms. Family ownership is also posi-

tively associated with the political ties of firms. However, the effects

of business group affiliation and family ownership weaken as market

infrastructures and regulatory institutions develop. Our results are

robust in terms of the potential endogeneity between governance

structures and political ties and different measures of independent

variables.

By showing how governance structure attributes lead to varia-

tions in political ties across firms, we go beyond the traditional focus

of prior literature on firms' external dependence and identify an over-

looked explanation for the heterogeneity in firms' political ties that

resides in their internal governance structures. Thus, we contribute to

the political tie literature by engaging intrafirm theoretical views such

as the agency theory and the resource-based view of the firm and

382 CHUNG AND ZHU