THE JANUS FACE OF INTRA-FIRM TIES : GROUP-WIDE AND AFFILIATE-LEVEL INNOVATION BY MULTI-BUSINESS FIRMS IN TAIWAN

Business groups in developing economies are a network form of multi-business firm in which ties between group affiliates shape the innovative incentives and abilities of the affiliated businesses. We consider three types of intra-group linkages: operating, director, and investment ties. The ties create opportunities and constraints for innovation by affiliates and, in aggregate, for the group as a whole – opportunities that arise from access to information, people, money, and other resources, but also constraints that arise from entrenched relationships among different actors. We investigate how the overall density and individual centrality of ties affects group and affiliate innovativeness within 267 business groups in Taiwan between 1981 and 2000. The most innovative groups tend to be those with loosely-connected operating and director relationships, along with investment ties that allow them to share financial resources among affiliates. In turn, the most innovative affiliates tend to be central businesses in the loosely-connected groups. The results have implications for the more general issue of multi-business firm innovation. Business groups are a common type of multi-business firm in developing economies, frequently dominating a substantial fraction of a country’s productive assets and influencing their countries' technological development (Amsden and Hikino, 1994; Granovetter, 1995). Business groups were common in the traditional economies of Europe, North America, and Japan during the 19 and much of the 20 centuries as well as in contemporary developing economies, where they take names such as grupos economicos in Latin America, business houses in India, chaebols in South Korea, family holdings in Turkey, and mining houses in South Africa. Although precise definitions vary across countries, the common point is that business groups are conglomerations of nominally independent firms that operate in multiple product markets with shared administrative and financial management, often under the control of a central family (Chang and Hong, 2000). Groups provide intermediation functions in lieu of widely available capital markets (Leff, 1979) and labor markets (Khanna and Palepu, 1997). Despite growing recognition of their intermediation role, business groups represent a puzzle in innovation studies. Traditional arguments in the innovation literature concerning multibusiness firms imply that groups and the individual units within them should be highly innovative, because they have incentives to spread costs across varied development activities and the ability to gain access to information spillovers and complementary resources within businesses that span different product markets (Nelson, 1959; Scherer, 1980; Cohen and Klepper, 1996). Indeed, some business groups have high levels of patenting and new product introduction, such as Samsung in Korea, Tata in India, and TSMC in Taiwan. Many groups are less innovative, however, and studies find high variance in group innovative activity (Hobday, 1995; Mahmood and Mitchell, 2004). Although technology studies struggle to piece together this puzzle, recent arguments in the organizational network literature offer insights that help explain which groups, and which of their affiliated units, are highly innovative and which are not. This paper draws from the network literature to argue that the structure of relationships within business groups influences the incentives and abilities of a group’s individual businesses to innovate and, in aggregate, the overall innovativeness of the group. That is, simply examining the number of product markets in which a group operates will not explain its innovativeness, because the presence in different markets creates only the potential to influence innovation. Instead, one must consider how the ties among different parts of the group translate the potential influences into actual effects. We consider three types of intra-group linkages: operating, director, and investment ties. Operating ties arise when affiliates engage in buyer-supplier