Institutional Condition for Guanxi: The Social Organization of the Inner Circle and Business Group Performance in Taiwan, 1973-1996

Recent scholarship of business groups in institutional transition has not studied the role of the authority structure, one of the key dimensions to understand business group. Particularistic relationship (called "guanxi") has been identified as an essential feature of the authority structure in East Asia business groups, but its performance effect has not been empirically tested. This study examines how the market-oriented institutional transition moderates the effect of particularistic ties in the inner circle on business group performance in Taiwan. We propose that family and prior social relationship in the inner circle contributes more to business group performance after the transition than before the transition, and that the contribution of the relationship based on the same native origin or the same school does not change significantly. In addition, we propose that after the transition, family relationship has a curvilinear effect on business group performance and the relationship heterogeneity becomes more important in improving performance. We test our arguments over a longitudinal sample of the top 100 business groups in Taiwan between 1973 and 1996. Results support our arguments. This is the first longitudinal research that theorizes and empirically tests the relationship between the authority structure, institutional transition, and business group performance.