Contribution of Family Businesses in Economic Development of the Country

by July 18, 2018 0 comments

Contribution of Family Businesses in Economic Development of the CountryRegardless of many benefits, business families experience many challenges to take their business to the next level. The failure of members of successive generations to make same efforts and share same values is the major drawback that must be addressed.

Family businesses provide a critical infrastructure for economic activity and wealth creation. Many of the world’s biggest corporations today like Acer, Walmart, Ford Motor Company, Tetra Pak, DuPont, Cadbury et al started as family businesses. In fact, over two-third of the worldwide businesses are owned or managed by family enterprises and account for about half of the Gross Domestic Product(GDP).

The contribution of family businesses in economic development of the country is crucial both in developed and developing nations. Quite evidently, they provide the much-needed employment opportunities. In the US, family businesses currently account for 80 per cent of all business organisations, including 35 percent of the largest 500 companies creating over 50 per cent of the Gross National Product (GNP) and hiring over 50 per cent of the domestic workforce.

Similarly, in Canada, 80 per cent of the businesses listed on the Toronto Stock Exchange are closely held in family trusts or the founders’ hands. Nearly 27 per cent of firms listed on the Australian Stock Exchange are family-controlled. Small businesses account for 96 per cent of all businesses in Australia, out of which about 60 per cent are family-run that hire more than 59 per cent of the employees.

In Europe, more than 14 million family firms provide over 60 million employment in the private sector. In numerous European countries, family businesses signify from 55 per cent to 90 percent of all companies, and they are present in businesses of all sizes — from corner shops to large corporations. For example, 40 per cent of the 250 biggest companies in France are family-owned and in the UK, family business sector is estimated to have employed 9.2 million people, making it 41 per cent of the total employment in the private sector.

In Scotland, 69 per cent of all businesses are recognised as family businesses and 41 of the 100 biggest firms in that country are family-owned which create 45 per cent of the country’s GNP and employ 50 per cent of the employees in the private sector. In Sweden, Luxembourg and Norway, nearly 30 percent of the biggest businesses are family businesses with Belgium having a higher share of family businesses at 50 per cent. Family businesses are of high significance for the German economy as well with 93-95 per cent of the family businesses contributing anywhere between 40-48 per cent to the GDP and generating about 55-60 per cent of employment.

In eastern Europe, particularly Slovenia, family businesses employ a minimum of 26 per cent of the active adult population and contribute 30 per cent to the total value added of the Slovenian economy. Spain is not far behind with 50 per cent of the top 3,000 businesses being family-owned that are responsible for 85 per cent of the Spanish business sector; 70 per cent of national GDP; and 70 percent of employment in the private sector.

Family firms are also a major way of doing business in the developing countries. Back home, according to a Credit Suisse report, India has the third highest publicly-listed family-owned businesses, while China tops the tally, followed by the US. Today, approximately 80 percent of South African businesses are family-owned and their influence as well as numbers can be projected to enhance significantly in the future.

In Indonesia, family business is responsible for 80 per cent of the GDP and in Taiwan, small and medium-sized family business account for more than 98.5 percent of companies, 80 per cent of employment and 47 per cent of the total economy. In Lebanon, the influence of family-owned businesses is noteworthy. They play a vital role as providers of innovation opportunities and act as main players for local expansions.

Large family-owned businesses are responsible for more than 85 percent of all businesses in OECD nations. Although family businesses are the mainstay of any economy, there is no standard definition or a strong consensus of what is recognised as one. Traditionally, a family business is defined as a company where the voting majority is in the hands of the controlling family, including the founder(s) who plan to pass the business on to their successors. However, several researchers have come up with their own interpretations and stand distinguished between definitions that concentrate on family business components. For example, ownership, transgenerational succession, governance and management, and those that concentrate on what exactly a family business is, comprising the intent of the family to have control, firm behaviours and particular resources deriving from family involvement.

Are family businesses different from non-family businesses? If yes, in what aspect? Family businesses are more focused towards long-term existence, survival of the business and retention of control in the hands of the family, while comparing with the short-term, more profit-oriented purposes of non-family businesses. The family owners are considered as the guardians of the business, which also indicates a dissimilar set of success criteria, rather than direct profitability. This can facilitate profitability and lesser turnover growth.

Family participation can also reduce agency clashes between shareholders and managers and support long-term approaches. The concentration of family owners in continuing firm control over generations as well as status, longer relationships and altruism that typically describe family owners, can also lessen agency clashes with suppliers and creditors.

Moreover, family businesses advance robust culture and precise values, for example, centralised group, internal and long-term orientation, which can be a key strategic resource. As compared to non-family businesses, family enterprises are also more entrepreneurial in nature. For example, Indian family businesses are ahead in aspects of entrepreneurship and are also able to withstand the impact of recessions better when compared to their global counterparts. Although family businesses contribute tremendously to the nation, they are not without challenges.

One of the major challenges of family businesses is the scale. They are majorly characterised by features such as owner-manager control and single product and are unable to scale up their operations.

Family businesses in the start-up stage are characterised by informal organisational structures, owner-manager and more inclined to appoint family members as CEOs. This affects the overall performance, competitiveness and innovative development of family businesses. Family businesses are also characterised by a very low survival rate. Thirty percent of family firms make it to the second generation and only a third survives to the third generation. Because of lack of professional help, they tend to remain smaller in size and market value; more risk averse; less innovative; less productive and less international.

Succession planning, talent management and ensuring the next generation in the firm is willing, able and ready to meet the challenges of running the business on a day-to-day basis is one of the prime challenges of family businesses not only in India but around the world.

Developing a management and corporate governance structure that is able to meet the growing day-to-day demands of an ever-changing business landscape while also looking at the long-term development of the business is challenging. The ability to make changes and to bring outside advice into the firm and wealth management and development for family businesses, as the wealth of the family is tied up in the financial health of the business. These are some other challenges of family businesses.

Family  businesses should strike a balance and avoid nepotism. Instead of only promoting the family members, they should hire, promote and pay someone based on his/her merits than familial relations. And last but not the least, internal conflicts that typically arise from the inability to separate business and personal lives,  can increase employee turnover and create a hostile work environment.

Despite these challenges, we must remember that many of the world’s best known brands have their origins in family businesses. Common characteristics of the most successful family-run firms include flexibility, innovation, connectivity and great culture. Since family businesses are the backbone of our country, the Government needs to provide a suitable environment for their growth, like increasing financing options, ones that match their long-term outlook.

The Government should also support generational transfer and create a policy for giving out tax relief for the transfer of business, either during someone’s lifetime or as part of their estate like in other developed nations. This will make sure that family businesses are transferred to the next generation smoothly and continue to thrive.

(The writer is Assistant Professor, Amity University)

Writer: Hima Bindu Kota

Courtesy: The Pioneer

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