1 The Evolving Impact of Combinatorial Opportunities and Exhaustion on Innovation by Business Groups as Market Development Increases : The Case of Taiwan , 1981 - 2000

Business groups are key sources of innovation in emerging market economies, but we understand little about why innovativeness differs across groups and over time. Variation in the density of intra-group buyer-supplier ties, which are common structural linkages among group affiliates, can help explain both cross-sectional and temporal heterogeneity of group innovativeness. We argue that greater buyer-supplier density within a group initially creates combinatorial opportunities that contribute to group innovativeness but ultimately generates combinatorial exhaustion that constrains innovation. Combinatorial exhaustion sets in at lower levels of density as the market environment becomes more developed and the opportunity costs of local search increase. The research introduces a dynamic argument to studies of business group innovation.