Director Interlocks and Group Affiliate Performance: Benefiting from Internal vs. External Ties

Abstract

While business group research has emphasized the impact of interlocking directorates within groups, research has neglected the role of interlocks with firms outside the group. We theorize that external interlock partners improve the performance of group affiliates because of access to fresh ideas. Moreover, drawing on theories of learning through network ties, we propose that interlocks with poorer-performing partners enhance affiliate performance to a greater extent than better-performing partners. We further examine how internal and external interlock partners shape the performance of focal affiliates interactively. Using a dataset involving manually coded director interlocks of 781 listed firms affiliated with business groups in Taiwan between 2006 and 2015, we show that the ratio of external interlocks enhances affiliate performance, but the effect increases at a decreasing rate. As predicted, only interlock partners with poorer performance relative to the focal affiliate enhance the focal affiliate’s performance. While this pattern applies to both internal and external partners, the positive performance effect of poorer-performing external partners weakens when the focal affiliate’s performance is highly dissimilar to that of better-performing internal partners. Our results present a nuanced understanding of combining learning from both internal and external board interlocks in group settings.