Family businesses are the dominant organizational form in the world. Asian family firms in particular have been a key driver of their local economies. Yet, while the success of family businesses may provide some mystique, their private nature and a scarcity of research about them can lead to misperceptions.
The Tanoto Center for Asian Family Business and Entrepreneurship Studies (the Center) at HKUST Business School runs research and programs that specialize in family businesses – and, in particular, ethnic Chinese family businesses. Given that nearly 70% of listed companies in Hong Kong and almost 50% of A-shares in China are family businesses, it is not surprising there is a lot of demand for in-depth research in this subject.
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Professor Roger King, Director of the Center, says the Center has three primary objectives: to develop research that are targeted at academics as well as practitioners and policy-makers; to educate on family business-related subject; and also to help bridge the knowledge gap between academics and practitioners, often through Center’s Roundtable forums, speaking events, tailor-made programs for individual companies and open enrollment programs.
Professor King, PhD in finance, trained as an engineer and worked for Bell Labs in the U.S. His resumé includes a series of start-ups, a spell as President and CEO for Sa Sa International Holdings Limited, the family-owned cosmetics chain, and a number of directorships worldwide. He was the COO and is a family member of Oriental Overseas International Ltd., the Hong Kong based global container shipping company, where he now serves as a Non-Executive Director. A former HKUST Council Member, he joined HKUST in 2006.
Professor Winnie Peng, who is the Associate Director of the Center, has been with HKUST since the end of 2007. She completed her finance PhD at HKUST, and obtained her bachelor degree at Tsinghua University in Beijing.
Both Professor King and Professor Peng see the importance of studying and educating the role family businesses play, how they work and the issues they face.
Research into Family Businesses Overlooked Until Recently
“Research into family businesses and entrepreneurship for a long time hasn’t been fully recognized by academics. There have been few research studies that examine their operational efficiency or sustainability,” says Professor King. Part of the reason is that there’s a misperception that family business is small and insignificant, which is not true,” he says. Family businesses account for about 85% of Hong Kong’s gross domestic product, are pervasive in mainland China and include a big portion of Asia’s largest companies.
“Family businesses vary across cultures. It’s also very difficult to get sufficient data for quantitative research. People are very reluctant to talk about details of their family businesses,” Professor King says. “In fact, it’s only been the last 20 years that the subject has been picked up by prominent researchers. So there’s a lack of real in-depth research.”
According to Professor King and Professor Peng, the nature of family businesses is very distinctive from that of non-family businesses. Family businesses tend to have a longer vision than non-family ones, which tend to focus on short-term performance because most CEO’s tenure is likely to be 5-10 years. Family business founders also have a strong desire to retain control over generations.
Also, in family businesses, the owner and CEO is usually the same person, creating alignment of interest between principals and agents. “The decision-making process is more efficient than in non-family businesses,” says Professor King, adding that this is same around the world, not just in Asia. While noting the frugal culture that often exists in a family business, he adds: “It’s a better place to work because there’s less hiring and firing. Family businesses normally don’t fire people in bad times, reflecting longer vision. It’s also because they only hire when they know they real need them.”
“Chinese family business is often quoted as a banyan tree, the branches of which drop shoots to the ground that take root and support their parent branches,” says Professor Peng. By expanding in this way, one tree will often cover a large expanse of ground. “The branches are very similar to many sons with a strong desire for starting up their different businesses to further support their parent business or family.” Banyan trees are known for their strength, stability, sturdy, health, and longevity.
Big Challenges for Family Businesses
However, there are some very real challenges. One lies in education and cultural change. The founders of family businesses often didn’t have the opportunity of a formal education. So it’s something they believe to be extremely important for their children. “Most study abroad; many study at the Ivy League schools,” says Professor King. “The problem is that when they come out, they look Chinese, but their thinking process has changed. They have moved towards Anglo-Saxon individualism and away from Asian collectivism.”
Professor King creates the notion of “CCKP”, the four success factors for the young generation – commitment, confidence, knowledge and passion. These are not always present in the successors, who may have other ideas and aspirations. Add to that the complex ownership structure caused by equal inheritance disbursements to all sons through generations, and the prospect of returning away a well-paid job as, say, an investment banker to fulfil a family obligation can be less than enticing.
Another problem is the lack of a sustainable business model. The Chinese are entrepreneurial, but not when it comes to the development of new products and branding. There’s a tendency towards a lack of innovation and a copycat approach, Professor Peng says. One reason for this is insecurity – especially in mainland China – which is not conducive to long-term investment. It is also not conducive to trusting people outside the family.
“As you know, a lot of successful rich people have US passports. They don’t have that sense of security or self-confidence. This is not just China, it’s much of Asia. In the last 150 years, it’s been colonized and there’s been a lack of political stability,” added Professor King. “In China the rule of law doesn’t really exist, it tends to being very localized and interpretive. Those Chinese that go overseas, especially countries in Southeast Asia, are vulnerable to regime change and prejudice that could leave them out of luck. So we have this notion of ‘bags are packed’.”
New Research Initiatives
Recently the Center has started a project on birth order in family businesses. “In China, the first-born son traditionally inherits the business, not the second-born. Yet, according to psychological and social research, the first-born son tends to be more conservative, while the second- or third-born are more creative and entrepreneurial. For a family business to be sustainable, an entrepreneurial spirit is very important,” says Professor Peng, “in today’s business environment, where things change so rapidly, if you’re not willing to change, sticking to the old business structure, can you survive?”
Besides, Professor Peng is working on a project with two other institutions on access to finance for family businesses in China and the role of the private equity. The nature of this research will be more quantitative owing to the amount of data available. “Finance researchers gravitate towards quantitative – or numbers – which can be challenging for family business studies, as privately-held family businesses don’t disclose information,” Professor Peng says.
As a result, qualitative research – mostly through case studies – is more appropriate in the study of family businesses. Such research is also more popular and digestible for a mainstream audience and, of course, students. Recent HKUST case studies such as Pacific Coffee Company, Crown Pacific and Chevalier Group. “We and the students prefer local cases where we can invite the protagonist or central figure of the case study to come in and talk to the students, and allow them to ask questions directly,” says Professor King.
Through actual cases, the Center aims to provide students tools to make an impact, be it in their own family business, family companies that works closely with, or companies that intend to enter into the China market where there is a predominance of family owned businesses.