The janus face of intra-firm ties: Group-wide and affiliate -level innovation by multi-business firms in Taiwan

Abstract

Business groups are multi-business firms in which network ties between affiliates shape the innovative incentives and abilities of the group's businesses. We consider three types of intra-firm linkages within business groups: operating, director, and investment ties. Such ties create both opportunities and constraints for innovation by units of a business group and, in aggregate, for the group as a whole C̈ opportunities that arise from access to information, people, money, and other resources, but also constraints that arise from entrenched relationships among different actors and a short term focus on immediate activities. We test our predictions by investigating 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 tight 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 are robust to both parametric and non-parametric estimation. We extend the implications to the more general setting of multi-business firms.