Dr Adrian Pabst, Senior Lecturer in Politics, School of Politics and IR, University of Kent; Visiting Professor, Institut d'Etudes Politiques de Lille (Sciences Po), specially for wpfdc.org
The global economic crisis since 2008-09 has revealed deep-seated structural imbalances linked to the primacy of finance over the real economy and the predominance of speculative over productive capital. Five years after the crash, small- and medium-sized enterprise (SME) remains starved of sufficient funds to invest and create jobs. In some of the fastest growing parts of Europe such as Germany, northern Italy and Central/Eastern Europe, family businesses play a key role in diversifying the economy, providing sustained employment and fostering innovation. Linked to this is the importance of families and family businesses in harnessing social capital, i.e. the trust and cooperation on which economic efficiency and social progress depend.
I. The nature of family businesses and their distinct characteristics
If family businesses include all those companies that have a share of family ownership and control, then they are the most widespread form of private enterprise. Indeed, according to this broad definition, 9/10 of all private companies in advanced economies such as Germany, Italy or the USA are family businesses. There as elsewhere, family businesses stretch from micro enterprises with 2-3 staff to corporations such as the Fiat Group in Italy, which is largely owned by the Agnelli family.
However, there are number of defining characteristics that tend to apply to most family businesses. Broadly speaking, we can distinguish general principles and specific features. The general principles include, first of all, a personal stake in, and leadership of, a company. This encompasses both family ownership and family involvement in management. Second, the handing on of assets from generation to generation and the responsibility for a workforce that has frequently life-long links with the business. Third, the management of a business as a member of a community with both rights and responsibilities. Fourth, a culture of cooperation and consensus that requires high levels of social trust and dense social networks.
Among the specific features of family businesses, there is (1) a commitment to long-term investment, not short-term profits, which is linked to the absence of a ‘corporate culture’ of quarterly reporting; (2) efficient and effective decision-making – based upon a ‘lean’ chain of command with quick responses and reliable feedback loops and without any complex, corporate structures; (3) a combination of competition and consensus (i.e. competition at home but modes of cooperation to gain a share in export markets abroad); (4) a close relationship with local and regional banks, including cooperative banks and credit unions which decide on loans based upon trust, reputation and loyalty.
II. The contribution of family businesses to socio-economic development
In line with their specific characteristics (as outlined in the previous section), family businesses make a distinct contribution to socio-economic development. Their contribution is both quantifiable (in terms of economic results) and non-quantifiable (in terms of wider social and cultural outcomes).
The economic results include, first of all, responsible management and profit optimisation in the medium run, not short-term profit-maximisation at all costs. Second, family businesses tend to treat their workforce fairly and invest in their skills and in a cooperative work environment, rather than adopt a policy of hire & fire, which can be very costly in both economic and social terms. Third, family businesses are more like partnerships where the wealth of owners and managers is directly linked to the fortunes of the businesses (not the golden handshakes and huge payouts involved in corporate contracts). As a result, family businesses reject excessive remuneration and bonuses in favour of salary restraint and rewards for long-term performance. Connected with this is higher risk aversion and more responsible management. Fourth, family businesses create sustainable jobs and foster a specialised workforce with high levels of both human and social capital. Fifth, family-owned and family-run businesses are characterised by a careful use of capital equipment (e.g. specialised machines for high-tech manufacturing). Sixth, they re-invest a large part of their profits into the business. That means one of two things. Either they do not have any need for external finance or else they work closely together with cooperative banks and credit unions. Seventh, levels of motivation and innovation tend to be very high as family businesses are horizontally organised and operated, and individual staff members can make a difference to the business strategy and core activities.
The wider social and cultural effects include, first of all, giving back to society, e.g. by setting up foundations that channel money into specific good causes (educational, social, cultural and charitable). This is also done by large corporations on a bigger financial scale but in a less personal way that is further removed from localities and communities. Second, family businesses promote social cohesion as a result of investing in local and regional economies, not relocating to lower-wage countries or outsourcing their activities to suppliers around the world. Third, family businesses create and strengthen a culture of interpersonal trust and loyalty to both people and place, which improves economic efficiency and social benefit.
III. Challenges to family businesses in an increasingly globalised world
In light of the global financial crash and the ensuing recession around the world, it is crucial to highlight the numerous challenges to family businesses. One challenge is that the periodic crises of global capitalism lead to the destruction of small- and medium-size enterprises (including family businesses) and also to structurally higher unemployment, which undermines vibrant local economies on which family businesses significantly depend. In other words, there is a vicious cycle because economic slumps favour ‘big players’ and thus reinforce monopoly and cartels, which reduces competition and makes it increasingly difficult for SMEs to survive.
Another challenge is that financial shocks and the global ‘credit crunch’ have bequeathed a long-term banking crisis and a dysfunctional system wherein lending has dried up, especially to SMEs. It is true that many family businesses do not rely on the commercial banking sector but they do depend on credit unions and cooperative banks which have also been hit hard by the crisis or the regulatory response.
A third challenge is the overall economic environment that privileges ‘big business’. For example, SMEs and family businesses lack the kind of resources to engage in branding and marketing activities on a similar scale as multinational corporations. Moreover, due to fierce price competition and global pressures to cut cost amid fledgling consumer demand, many businesses relocate elsewhere in search for lower wages. That adversely affects family businesses that rely on local customers and supply chains. There is also a lack of loyal suppliers and customers (connected with the rise of unscrupulous behaviour that is implicitly promoted by the ruling elites). All this undermines mutual trust and the dense social networks on which family businesses depend.
Further challenges include, first of all, the non-availability of resources to train and maintain the standards of a fast-growing workforce (including the lack of personal, specialised knowledge); second, the mounting pressure on the second/third generation to succeed (in both senses of the word); third, the danger of becoming ‘too big’ and therefore a potential prey to larger competitors.
In other words, the dominant model of globalisation favours the convergence and collusion of ‘big business’ with ‘big government’ – a mutual dependence in terms of credit, debt and regulatory capture. However, there is another possibility. This is that transport and communications could truly provide the pre-conditions for the emergence of a global village, that is to say, where the local is more primary than the global and where social bonds and cultural ties embed economic transactions and political cooperation. The current mode of globalisation mostly destroys locality, but also renders it more and more possible for one locality to communicate directly with another in a totally distant part of the world. That includes a growing potential for SMEs, family businesses and hyper-local companies to trade with one another. In this way it just could once more come to seem ‘common sense’ that the entire economy should be subordinate to social reciprocity and that the polity reflects the relational nature of mankind.
IV. Potential and limits of creating family businesses in emerging markets
Despite destructive revolutions and Communist rule for many decades, emerging markets such as Russia and China exhibit tremendous potential for the creation and flourishing of family businesses in a wide variety of sectors. The potential for family businesses is based on the following features. First of all, large, dynamic and growing economies with increasing domestic demand. Second, a culture of start-ups (e.g. in the IT sector in Russia or retail in China). Third, a substantial pool of talents and skills (linked to science education during Communist rule) but also the expansion of universities and vocational training colleges over the past two decades or so. All this provides more propitious conditions for SMEs and family businesses.
However, there are many more limits and obstacles to the creation and flourishing of family businesses in emerging markets such as Russia but also China. First, an absence or lack of dense social networks and/or stable family structures – certainly a lack of social trust in people and institutions such as the administration or the court system. Second, there is still a lack of individual initiative and self-organisation, as the ‘old mentality’ of top-down, command-and-control economy and society persists and only changes very slowly. Third, there is a lack of training for managers and other staff of family businesses (both academic and vocational), which is a challenge to universities, business schools and technical colleges alike. Fourth, the monopolistic and/or cartel structure of the Russian economy and the dominance of state corporations or large, private businesses, which reduces competition and raises the barriers of entry for SMEs and family businesses and also prevents their effective cooperation across different sectors. Fifth, the lack of trust in law enforcement agencies in a country that is characterised by a strong state, weak institutions, and the lack of rule of law.
Sixth, there is also a lack of adequate child care provision and other support services to make SMEs and family businesses viable, including training and R&D investment. Seventh, both ‘soft’ and ‘hard’ corruption are obstacles to a more vibrant business culture, including favouritism/nepotism but also the phenomenon of ‘corporate racketeering’ whereby rogue elements seize private assets using state power. Eight, the system of legislation and regulation is largely in favour of state corporations and large corporate businesses. Ninth, Russia lacks chambers of commerce and businesses associations that can lobby local, regional and federal government in favour of SMEs and family businesses.
These challenges are not unique to emerging markets but now extend to advanced economies where the monopolies and cartels of ‘big business’ dominate a number of markets and are squeezing out smaller enterprise.
V. Policies to support family businesses and possible forms of cross-border cooperation
There are a number of policies that would benefit most family businesses in both developed economies and emerging markets. First of all, promoting both knowledge and training with a focus on high-tech goods and services. Linked to this is the creation of new networks bringing together research universities, businesses and organisations that could provide investment, for example cooperative banks, credit unions but also venture capital. Second, creating new sources of finance, including creating new types of cooperative banks and/or credit unions as well as public investment banks constrained to lend within certain regions and/or sectors. Third, reducing the tax burden on SMEs and family businesses as much as possible and improve both incentives and rewards for companies that create stable, long-term employment and make a positive contribution to the common public good.
Fourth, boosting vital infrastructure, especially transportation, communication but also education, training, health, child care and many other essential services, as I have already indicated. Fifth, reducing the regulatory burden that is biased in favour of large, corporate businesses and against SMEs and family businesses at all levels (local, regional, national, supranational and global), such as burdensome taxes or employment rules. Sixth, promoting cultural change and a new mentality of taking initiative and self-organisation, including new forms of training and new institutions.
Among the specific policies that would favour the cross-border cooperation of family businesses between advanced economies and emerging markets, there are a number of possibilities such as improving the operation of chambers of commerce, creating economic-social councils that bring together different stakeholders (federal and local government, business associations, trade unions’ representatives, consumer associations, etc.) as well as setting up cross-border associations dedicated to family businesses that brings together entrepreneurs from both countries who can share good practice and jointly call for supportive policies. Other options include certifying of goods and services and joint apprenticeships.
There is no doubt that family businesses and/or SMEs are the backbone of some of the most vibrant economies in today’s world. Family businesses have many virtuous characteristics including a sense of entrepreneurship (high personal passion and commitment), a fair business culture that rewards long-term success, a strong sense of mutual loyalty (between employers and employees, businesses and suppliers, producers and consumers, savers and investors, etc.) and a sustained contribution to society (via foundations).
There are complex links between family businesses, SMEs and the emergence of a middle-class that underpins society and the State, based on relationships of trust and cooperation within the framework of the law, culture and religious traditions. As such, the family as the most fundamental unit of society is also absolutely central to economic and political development.
Family businesses face a series of fundamental challenges that threaten their survival in both advanced economies and emerging markets. Given their crucial contribution, they need both public recognition and specific support if they are to thrive in an increasingly interdependent, financialised world economy.