Markets, culture and institutions: The emergence of large business groups in Taiwan, 1950s-1970s

Abstract

Business groups are a special type of enterprise system existing in almost every market economy. Member firms do not operate as isolated units in the markets but have institutionalized relationships with each other and work coherently as an entity. Groups play a central role in economies in which they operate. For Taiwan, the largest 100 groups produced one third of the GNP in the past 20 years. Why does this organizational form exist in the first place? This paper reviews three relevant theories, market-centred theories, culturalist perspective, and the institutional approach, and employs the data of 150 Taiwanese groups for the answer. The market-centred theories and the institutional arguments are examined statistically and the latter is supported by the data. Following this evidence, the Boolean comparison of group firms with non-group firms confirms that lacking a coherent core in ownership and management makes firms unable to respond to institutional incentives promptly. Finally, the structure of family ownership network in business groups refutes the cultural perspective which argues that the equal inheritance pattern of family property drives entrepreneurs to establish separate firms rather than single hierarchies. While both markets and culture play a distinct part in the story, it is regulatory institutions that lead to group formation.