Impact of Family Businesses on Socio-Economic Development

by June 20, 2018 0 comments

Impact of Family Businesses on Socio-Economic DevelopmentWhether it’s a first-generation start-up or a dynasty that has operated in India for decades, family businesses make up the heart and soul of Indian economy. In fact, family businesses contribute an estimated 70% of the global GDP as they are generating long-term employment .

Traditionally, world over, it has been observed that family businesses are the mainstay of an economy, generating long-term employment and contributing to nation-building by adding to its gross development product (GDP). Although many family businesses are still small and medium enterprises, some have grown exponentially and transformed themselves from small shops round the corner to large publicly listed organisations.

In fact around 30 percent of S&P 500 companies, two-fifth of the 250 largest firms in Germany and France and more than two-thirds of large organisations in East Asia and Latin America are family businesses, where the important decisions are controlled by family members. In US alone, there are 5.5 million family businesses, creating jobs for 63 per cent of the workforce and in turn contributing 57 per cent to the GDP of the country. According to the EY report, the top 10 family businesses generated approximately $1,298.3 billion of North America’s GDP of $19.6 trillion in 2015 and employed more than 3.6 million people. UK is not far behind with more than three million family businesses providing 9.4 million jobs and generating 25 percent of GDP.

Family businesses are also deep-rooted in Asian cultures with Japan having the oldest family business in the world, presently run by the 40th generation. This region also boasts of a high concentration of family businesses at about 85 per cent. These family businesses contribute 34 per cent to the Asian GDP by employing 57 per cent of the workforce. Two-thirds of India’s GDP and 90 per cent of the gross industry output are contributed by family business in India.

Although family businesses are important contributors to the growth story of any nation, in the Indian context, family businesses faced a major challenge in competing with global giants after the economic liberalisation of 1991, as they showed resistance to change and innovation. However, in due course, Indian family businesses were able to change, modernise and compete with the multinational corporations.

Family businesses are generally traditional, risk-averse, close-knit businesses with generations taking the mantle forward which are not very open to new ideas. Additionally, lack of resources, both capital and human; smaller size, higher costs; lack of internal communication channels and dual role in family and business; and fear of upsetting the power balance of family can also render innovation less important.

However, the continuity of business across generations, longevity of the business and succession issues are the top priorities of family businesses and, hence, innovation becomes very important to survive, grow and remain competitive. In addition, integration of local markets with global markets and the continuous quest for sustainable growth are making family businesses innovate. In this era of globalisation, it is all the more difficult for organisations to maintain their competitive advantage and any firm has a competitive advantage if it is able to create economic value.

The digital revolution has erased the traditional borders, and organisations and customers are omnipresent. Customer needs and preferences have changed from being local or regional to a global platform. Therefore, it is very challenging for organisations to be unique in their products or services, efficient in operations.

Through innovation, firms are able to create entirely new products or services that catapult them to a category of high-growth companies with an opportunity to be market leaders giving them competitive advantage if the competitors are unable to keep pace with them. Age of the firm plays a significant role towards the tendency to be innovative. Since innovation is an important strategy to grow and to gain competitive advantage, all firms choose this strategy, albeit, at varying degrees of intensity. Although there is a general belief that younger firms do not have the capacity to innovate when compared to older firms, it is seen in several studies that younger firms undertake greater risks to be more innovative compared to older firms.

It is interesting to note that, worldwide, the size of the firms that innovate vary according to industry. In US, the degree of innovation is higher for smaller firms in manufacturing and computer modem industry whereas in Spain, larger firms innovate more in the engineering industry. With a number of firms leaving their domestic markets and offering their products and services to international markets and, in some cases, setting up their manufacturing bases there, internationalisation is also an equally important strategic decision.

It offers firms with new markets, new sourcing and production bases, in addition to cheap labour, saving up to 70 per cent of production costs. By reducing dependency on the local markets, internationalisation improves competitiveness of organisations but the choice of international market strategy is very pertinent as it involves huge costs and resources.

If the strategies of innovation and internationalisation give competitive advantage to organisations, the same concept should be applicable to family businesses and they should not be far behind to adapt these strategies. This leads to the question: Do family businesses adapt the strategies of innovation and internationalisation to keep pace with the global competitive environment? Further questions arise about the type of family businesses that adopt these strategies.

In a study of BSE 500 index companies spread across a period of 11 years, the writer analysed innovativeness and internationalisation of family businesses in India using R&D expenses as a proxy for innovativeness and the proportion of foreign income as a proxy for internationalisation and found that family businesses are more innovative and internationalised when compared to non-family businesses. Resource-dependency framework explains this phenomenon and suggests that family businesses are entrepreneurial in nature which makes them more innovative.

Further, to probe into the question as to what type of family businesses innovate and internationalise more, the impact of age and the size of family businesses on these variables was studied and it was also found that within the family businesses, younger firms were more innovative and internationalised than older firms in the Indian context. This can be explained by the theory of “learning advantages of newness”, according to which younger firms are more flexible, eager to learn, have less internal resistance and are able to adapt to the changing environment much faster. At the same time, “liabilities of aging” theory suggests that older firms become rigid, inflexible and lose their edge in fast decision-making.

This type of study has significant implications and can be extended to a large number of unlisted family businesses around the world. Governments need to create policies and platforms for family businesses to grow, innovate and internationalise. A positive business environment where family businesses can raise funds at lower interest rates, professional assistance for scaling up of their business and providing skilled labor and manpower can help family businesses in a big way.

(The writer is Assistant Professor, Amity University)

Writer: Hima Bindu Kota

Courtesy: The Pioneer

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