Many scholars have studied the importance of local factions in Taiwan’s political economy since 1945. However important historical and theoretical questions about Taiwan’s local factions remain unanswered, possibly affecting the accuracy of scholarly analyses. Understanding the dynamics of Taiwan s factional politics requires an understanding of the political institutional environment and development dating back to Japanese and early Kuomintang (KMT) rule. This paper finds that the historical and institutional relationships between the “foreign” rulers and the local elite were very similar during these two periods. Similarities existed in government structure, initial control strategy, initial administrative quality, administrative reform, political control, local elite reaction to “foreign” rule, government rewards to the local elite (the third realm), and the business and social connections among the elite.