A Social Homophily Model of Political Ties in Emerging Economies

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While resource dependence theorists have indicated that firms connect with political powers for desirable resources, little attention has been directed at the social foundations that foster firms’ political ties. We develop a framework that specifies how the social homophily and heterophily of firms with political powers affect the formation of political ties in turbulent environments. We use data of listed Taiwanese firms that experienced an unexpected regime change to show that social homophily of a firm with the political regime promotes ties between them, whereas social heterophily of a firm with the political regime deters its ties with the regime. Some types of homophily persistently promote the firm’s ties to its original political ally despite environmental changes. However, such imprinted effects of homophily weaken when the firm operates in regulated industries.