The dominance of family firms across the world is now well established: Among the largest publicly traded companies, family firms account for 44% of large firms in Western Europe, and over 66% in East Asia, with their dominance in around the world being stronger in countries with relatively weaker capital markets and institutions. Family firms’ dominate a broad range of capital-light industries such as retail, transportation, and publishing. Because of their important role for national economies, data has increasingly been collected and studied to find out the opportunities and limitations in present and future of this business model.
While family business is present, there are commonalities as well as differences between the western and eastern economies based on the social and cultural realities in which the family and business coexist and influence each other reciprocally. Consequently over time the family tends to become more business-like and the business more family-like. The more the family grows and the ownership of the business sub-divides as generations pass, the more probability is that family management of this corporate ownership can no longer be taken for granted.
As problems arise adhoc solutions are found initially. By the third or fourth generation, the family business is often owned by several nucleus families who realize they must put in place formal governance structures to conduct and manage business-related communications and thus the family organization.
Facts established regarding family businesses underscore their importance for most national economies. Fact one is that family businesses show higher profitability in the long run. In an economic crisis, family businesses are less likely to lay people off and more likely to hire despite the economic risk involved.
They are aware of their social responsibility, contribute to local and regional development and give charitably to their respective communities and engage in extensive philanthropic activities. Family businesses have a more long-term strategic outlook due to their main motivation consisting of creating a legacy for generations to come. And last but not least, family businesses are less likely to raise debt and are widely deemed financially prudent.
Just to bring some examples, family-controlled firms now make up 19% of the companies in the Fortune Global 500, which tracks the world’s largest firms by sales. That is up from 15% in 2005. (McKinsey 2014). There are 5.5 million family businesses in the US. (FEUSA, 2011) Family-owned businesses contribute 57% of the US GDP (that’s $8.3 trillion), employ 63% of the workforce (FEUSA, 2011), and are responsible for 78% of all new job creation. (Astrachan & Shanker, 2003) 35% of Fortune 500 companies are family-controlled. (Businessweek.com, 2006)
These data for the US are not exceptional. According to a Tharawat Magazine study, the percentage of family businesses to national GDP is 55% in Germany, 60% in France and Portugal, 70% in UK. The numbers for Asian economies are 48% South Korea, 65% China, 67 % Malaysia, 76% Philippines. Even higher the rate is in South America: 75% Peru, 80% Dominica, 85% Brazil, 90% Mexico.
Even more impressive is the rate of the workforce employed by family businesses. All numbers determined by Tharawat are above 50% (Brazil and Portugal) but reach 94% for Italy. That means family businesses are the main source of new job creation – an important lesson to keep in mind.
There are considerable parts of the world where the role of family businesses is largely undocumented. Key regions such as Africa, the Middle East and large parts of Asia have long gone unstudied. The difficulty that results from having no accurate data on the role of family businesses in these economies in turn leads to a lack of understanding on how family businesses can expand their roles in supporting their economies and what aid can be provided by government institutions to enable their sustainability. Pakistani data is largely also missing despite the fact that collecting such data reliably may help develop our economy and create badly needed new jobs.
In addition, international family businesses do have a strong competitive edge of their own, with many customers even actively seeking out family-owned entities to do business with because they are widely considered to be trustworthy. The 2019 Edelman Trust Barometer has revealed that family businesses are trusted by 69% of the general population, which is a 13-point advantage over trust in business in general.
A family business vouches for accuracy, quality and promptness of its service personally with the name of the owner family. Strong family businesses are an asset for every national economy, advertising not only the name of the owner family but the country they belong to as well. They have a tendency to networking within the country and beyond which gives them an international dimension.
While the future of family businesses seems secured with a continuous line of new family businesses arising day by day, their form is changing. For the time being, it is important to note the usefulness of family businesses. In spite of these promising qualities, it is also known that merely 30% of family firms make it to the 2nd generation and only a third because of that survive to the 3rd generation.
Usually, family conflict is the impetus of this disappointing statistic. However, another factor may come into play. The institutional environment provided by the state family businesses operate within may not always recognize their importance and do not provide much support. Therefore, while family businesses undoubtedly have a considerable impact on the economy at large, the question is often raised of whether economic institutions are engaging enough to safeguard the survival of family-owned companies. Problems of sustaining them in the second and third generations that certainly exist will be explored in our next article.
While the future of family businesses seems secure with a continuous line of new family businesses arising day by day, merely 30% of family firms make it to the 2nd generation and only a third of that survive to the 3rd generation. The reasons thereof are several and may differ slightly from place to place. Certainly one major reason for the sustainability of family business is the market environment.
With their market access and presence dominant big companies with strongly institutionalized leadership, more often than not multinationals, prevail have larger and easier access to capital. For a family business to find a niche for its produce or service or to come to an agreement with the companies dominating the market thus takes quite some effort. (This is the SECOND part of a series on “FAMILY BUSINESS”, Ikram Sehgal gratefully acknowledges the research-in-depth by Dr Bettina Robotka).