By Michael Moreton (UK)
The family firm is one of great importance in all countries
of the world today and throughout history. To accurately measure
the importance, however, is a difficult feat with the many
family firm definitions that fly around the academic arena.
But in order to quantify, a chosen definition – “controlled
or owned by one or two families” by the International
Institute for Management Development, (The
Economist, 1994) – highlights that in Italy family
firms make up 99% of all businesses, similarly that figure
is 96% for the USA, 90% for Sweden, 80% for Spain, 75% for
Britain and 70% for Portugal (The Economist,
1994).
It is clear that even allowing for doubt the family firm
is a thriving business model, making up the majority of businesses
in an economy. However the range of statistics also means
that there are some distinct differences that exist between
family firms in different countries. This paper will go on
to explore how much family firms differ and suggest some reasoning
behind the trends.
As a starting point a framework model has been created that
identifies the foundations that all family firms are built
on, independent of country of origin. The four foundations;
Environment, Culture, Government and the Economy, will be
used to analyse the differences that family firms face in
different countries and the outcome.
Figure 1: The Foundations of a Family
Firm.
Environment
* Financial Markets – The transparency, access to capital
funds and stock market operation.
* Education - The education level of the population and available
further education, including specialised business schools.
* Legal Structure – The laws that govern business operation
and ownership.
Culture
* Attitude to Risk – The cultural attitude to taking
risk, risk lending and the view of business failure.
* Family Values – The extension of the family values
in conducting business, the cultural status of family members
Government
* Stability - The political system, and the duration of
parties in power.
* Policies – The taxation, government assistance and
general attitude to family firms.
Economy
* Structure – The makeup of individual industries,
and the tradition of firms operating.
* Performance – The relative performance of key indicators
on an international basis.
Using the foundations framework the differences of family
firms in an international context – narrowing to United
States, Britain, Italy and where possible China - will be
explored.
The family firm as a business model rose in the European
nations during the industrial revolution. As a response to
market failure the family firm provided a sound platform to
build a business, using personal finance and resources to
create the firm, and family values to govern it. The United
States was a later entrant with regards to its industrial
shift, both from its later industrial revolution and from
the import of European business leaders to its firms.
From this point family firms have developed differently,
the United States and British family firms have followed a
similar path, the Italian family firms have gone a different
way and the Chinese family firms are still on the development
road.
Today the United States and Britain have highly developed
and transparent financial markets, with capital available
from Banks, venture capitalists, foreign investment and other
sources. Italy has only recently (1980s / 90s), developed
its financial system with the privatising of its main Banks
and allowing institutional investors into the market. China
is still developing its financial system and is yet to reach
that of US and European levels - its stock market has not
been transparent as firms rarely report to their shareholders.
However following the Enron and WorldCom scandals, family
firms have all been cautious towards stock markets.
Britain started its development with the creation of the
Bubble Act in 1720 (the outlaw of joint-stock companies),
however the move did not discourage the business model and
it was dominant for start-ups. The industry dictated the need
for capital and so the repeal of the Act in 1825 was a help
to those capital-intensive industries that could not raise
sufficient capital from within the family – those such
as steel and insurance. In Italy it was not until 1865 that
joint-stock companies were covered by law, and so its capital-raising
activities were restricted to the family for a more prolonged
period. When the firms did want to raise capital they often
created complex organisation structures with holding companies
so that control could remain in the family. In China, the
state-owned Banks tended to focus lending to state-owned firms,
starving the private sector (including family firms) of capital
needed for growth.
A related subject to the financial systems is the attitude
to risk that countries have, here the countries analysed show
similar traits dependant on the continent they are part of.
In Europe there is a risk adverse culture both from the lending
and the investment side. This may in part be attributed to
the cultural view of business failure being linked to personal
failure. In the United States, attitude to risk is somewhat
more liberal, with failure being part of a business process
rather than the end, hence family firms in the US tend to
exhibit more risk taking than their European counterparts
- the firm is seen more as an organisation rather than a personal
extension. In China, risk mitigation is to spread the risk
out as much as possible, with diversification common place
for family firms, often in un-related industries.
The culture of the country is therefore an important determinate
in the shaping of the firm and can attribute to the differences
between the family firms in the countries. In the United States
in 1983, the average age of the family firm was just 24 years
(Lansberg, 1983), with family firm break-ups
and business take-overs common. The values of the family passing
on the baton – the primogeniture idea – were not
taken onto the future generation. Family ties were often broken
due to the relative new age of the country and the mobility
of family members. Recently in the United States and Britain
especially, the changes in culture with regard to marriage
and divorce have affected the family firms, as family values
change. In Italy the family was and still is core to the business,
and the workings of the firm are very much linked. There have
been instances where non-family members have been fired for
giving commercial interests higher priority than family issues.
In China the family firm is run like the family, with the
head, often the eldest, having both economic and social power.
The firm is run through the use of moral authority and trust
– the limited non-family senior employees tend to be
made ‘honorary’ family members, but in general
‘outsiders’ are not trusted.
The relationship between the creation of education institutions
and the percentage of family firms in the different countries
is important. Italy with the highest percentage of family
firms established its specialised business schools in the
1950s. The schools were setup and financed by local family
firms, hence they were used by family firms to educate chosen
family successors. In the United States and Britain the schools
were state financed and were used to train people to become
professional managers ready to take over businesses –
a rise to corporate enterprise. The connection here is that
family firms account for proportionally less of businesses
in the US and Britain, possibly as a result of the different
training from the schools. British schools were setup later
than Italy’s, in the 1960s, however the United States
business schools were much older, having been established
in the 1930s.
The legal framework that family firms operate within varies
internationally, and this links in to government policy through
inheritance tax. In the United States, the estate tax has
been known to restrict family firms from making investments
and taking on new staff. In Britain inheritance tax is more
favourable, the tax threshold has been raised higher with
recent governments, in line with what the British Chancellor
of the Exchequer of 1996 promised - “reducing and then
abolishing capital gains tax and inheritance tax” (Treasury.gov.uk).
However this was not always the case, back in 1949 there was
a sharp rise in death duties that resulted in some family
firms choosing not to pass on the business to their family.
The legal framework in Italy directs the share of the business
to be equal amongst the family, however the primogeniture
system of passing from father to eldest son is still very
much used by way of passing an equal share to all but passing
the voting to just one family member. From the 1980s China
has relaxed some of its state control and the number of private
firms has increased, however due to the legal structure, these
private firms are often restricted to small enterprises.
For women, the early part of the nineteenth century law in
Britain saw them under their husband’s protection and
so they had no formal right to the capital and ownership of
the family firm. Only in the latter part of the nineteenth
century were they able to inherit. Italy was very much the
same however women did inherit the business, in the case of
a younger son, to keep the business moving until the son was
old enough - again women lost rights when in a marriage.
The power and political influence of family firms can be
related to the number of leading family firms in the economy.
Family firms tend to yield considerable influence in industrialised
countries, Colli (2003) noted. In the United
States, the family firm accounts for over a third of the Fortune
500 companies (Anon, 2001). In Britain
the story is different, there are fewer world leading family
firms and so they are much less influential. Italy is dominated
by family firms and the large ones – the likes of Fiat,
Pirelli, Benetton and Gucci – are able to exert their
power not only on the market they operate in, but also the
government in power. As an example, Fiat accounted for more
than a quarter of the Milan stock exchange in 1993 (Andrews,
1993).
Following World War Two there was a remarked change in the
structure of family firms within the domestic economy. In
Britain, the powerful manufacturers that had been important
in the war effort were sidelined for the financial institutions
needed to rebuild the economy. Family firms were not typically
in the finance industry - as such a firm required vast sums
of capital not available to the family firm. Changes to the
law, such as the 1948 Companies Act (making financial reporting
mandatory) further changed the structure of family firms through
hostile bids and take-overs. In Italy the story was quite
different, following post-war rebuild private firms sprouted
up in clusters of inter-related industries that acted as an
alternative to the large firms – such as the North Italian
clothing. However in Italy finance was intertwined with the
state, hence the large family firms had huge power and political
leverage. The United States saw an increase in technology,
brought about by research completing during the war, and new
products such as Henry Ford’s ‘Model T’
saw the rise of capital-intensive goods. At the same time,
financial backing moved away from the family to financial
markets, which were able to supply the funds needed.
Today the United States has a huge economy, and so its family
firms have a large market to sell to. Typically the family
firms operating in the market have stuck to their core competencies,
examples like Ford still produce cars and Wal-Mart are still
operating as a retailer. Chinese firms face a similarly huge
market, however their family firms have tended to diversify,
producing a whole range of products. This displays a marked
difference between American and Chinese family firm strategies
– the United States concentrate on core processes versus
the Chinese spread risk. In Europe, the creation of the EU
has created a enlarged market for British and Italian family
firms. Italian firms, who at one time had favourable government
policy directed towards them, have seen changes – come
about by privatisation and the shift of EU policy to competing
on a global basis - in order to compete against the giants
of the US and China.
In conclusion the family firms are different across the countries
studied, yet it should be noted that no family firm is a-like
and grouping by country is made to try to distinguish general
differences across the international landscape. The countries
studied were deliberately chosen to illustrate the extremities
in the international spectrum. It must be noted at this point
that with limited space, this paper has attempted to cover
many of the important foundations of a family firm and to
keep analysis on each topic concise.
The outcome has been to show that the United States and British
family firms have tended to show similar traits, with financial
institutions more powerful than their manufacturing counterparts.
Government policy to promote the family firm, and taxes to
aid it have allowed the firms to play an important role in
the economy without being able to influence the political
system to too much a degree. On the other hand, Italian firms
are intertwined with the notoriously corrupt government and
they yield tremendous influential power. They remain the important
part of the economy even after recent changes of privatisation
and the opening up of the finance markets. Even the education
system is linked in with family firms and it is clear the
family firm has been and still is the dominant business model
used. In China, the recent changes brought about to open up
the economy have allowed some analysis of business workings.
The family is core to the family business and cultural power
and status is used in the business as a hierarchical organisation.
More research is needed into the family firms on an international
basis. Historic comparison offers us some evidence on what
the family firm has done for the economy and its influence
in the past and this can help look to the future. But up-to-date,
relevant research is needed for better accuracy in order to
report to governments for their policies and in order to be
able to fully appreciate the family firm role. |
