With evolving disruptive technologies, many family businesses in Asia are confronted by new challenges. Professor Roger KING, Founder and Director of the Tanoto Center for Asian Family Business and Entrepreneurship Studies at HKUST, together with Professor Winne PENG, the Center’s Associate Director, look closely into family businesses in the region and examine if they are better positioned to nurture innovation and adopt new technologies.
Family business is the dominant form of business worldwide, and even more so in many economies in Asia, where family ownership is often more concentrated and contributes a greater proportion to a country’s GDP. For example, nearly 70 per cent of listed companies in Hong Kong are family businesses, and the top 15 families contribute over 80 per cent of GDP. In Mainland China, despite of a much shorter history of family businesses (around 40 years), it contributed over 60 per cent of GDP, and employed 80 per cent of the workforce by 2017.
With rapidly evolving innovation and disruptive technologies, many family businesses in this region are confronted by new challenges which now supersede the issue of family business succession, according to a few recent studies. In Mainland China, transformation and upgrading, together with succession, are the two pressing issues for family businesses (Jaffe & Peng, 2019). In Asia, the emergence of wide-ranging disruptive technologies (AI, Big Data, IOT, and Robotics) is fast suppressing the business cycle, and threatening the longevity of the family businesses (King & Cheng, 2018).
Innovation can be defined as the adoption of a system, technology, program, policy, product or service, which is new to the adopting organization. Technology can be defined as a kind of knowledge applied to the development and commercialization of new products or services (Chiesa et al., 2008). Technological changes can support some of the innovative ideas, and have attracted most industry attention in recent years. Compared with non-family businesses, family businesses are often regarded as more conservative, stagnant, risk averse, and less willing to collaborate with external parties. They are considered slower to make innovations in new products and markets, and slower to embrace new technology.
Family businesses seem to have a lower propensity and capacity to explore radically new innovations, since current technologies are seldom questioned. Moreover, their unwillingness to involve themselves in external collaborations, and their inward-looking orientation, is thought to reduce network-based innovation and knowledge sharing in technology strategies (Alberti & Pizzurno, 2013).
Family business is a better place to nurture innovation and adopt new technologies
Contrary to the stereotypical understanding of family business practices, more and more research has discovered that a family business is a better place to nurture innovation and adopt new technologies. First, the long-term orientation of a family business represents an ideal condition for innovation. It usually takes long time for research and development, and family businesses are much more patient. They aim for a long-term goal rather than a short-term objective.
Second, family businesses have more flexible management and governance structures, especially when the family manage the business and control the board at the same time. That is fairly common in Asian family businesses. Decision-making processes which lead to innovation, or the adoption of new technology, can be much more efficient in family businesses. Professional managers in non-family businesses need more time, and more board discussions, to gain approval to implement new ideas.
Third, the spirit of entrepreneurship and innovation is in the blood of the family, as without those qualities, the founders would not have been able to start up the business in the first place. The necessary genes will probably be passed on to the next generation, who will be as innovative and entrepreneurial as the founder.
Fourth, as the lifecycles of businesses get shorter and shorter, the families that survive more than one generation are more likely to possess in-depth knowledge of the industry. That is another necessary condition of nurturing innovation.
So are Asian family businesses more innovative and flexible when it comes to adopting new technologies? The following findings are based on our recent research.
Leading family businesses invest much more in R&D than non-family businesses in Mainland China
In general, R&D expenditure in listed companies in Mainland China accounts for less than 2 per cent of total revenue, while the ratio of the 43 industry-leading family businesses reached more than 4 per cent, doubling the industry average (Jaffe & Peng, 2019). The aim for these family businesses is to boost product innovation and maintain technological leadership in the industry. Quite a few of them invest heavily in R&D centers, or scientific research funds for developing new equipment and technologies for product manufacturing.
Moreover, the R&D centers they create continually collaborate with top local research institutes and leading international associations to drive product development. Collaboration does not seem to be a problem for these family businesses.
Industry transformation and upgrading in the first generation help with succession and innovation in Mainland China
Out of the 43 family businesses in our sample, more than half started industry transformation and upgrading in the first generation, and most have experienced a smooth succession (Jaffe & Peng, 2019). We found that the first generation’s openness and willingness to change provided more flexibility and understanding for the second generation to adopt new changes and innovation. When such changes only happened in the second generation, children found it difficult to convince their parents about the need, and this led to a less smooth transition period.
Therefore, the two pressing issues in Mainland China (transformation and upgrading) and succession, are closely related and intertwined. If the founders of the business hope to pass the business to the next generation, they need to think about transforming and upgrading the business from their generation to the type of the business that fits the next generation.
The diversification strategies of Chinese family businesses lead to longevity
One of the factors that contributes to the longevity of century-old overseas Chinese family businesses is diversification strategy (King & Peng, 2017). A few Chinese family businesses have survived more than one hundred years. In our limited sample (seven median-to-large size business), they adopted diversification strategies throughout the generations. Specifically, they focused on product diversification and globalization, and this required transgenerational entrepreneurship and innovation in products and markets.
Similarly, we found most leading family businesses in Mainland China adopted diversification strategies during the first generation in which the business had grown big enough. This is a way to reduce both financial and political risk, as well as to encourage business innovation.
The next generation of Asian family businesses are tech educated and have innovative ideas
Our research showed that over 70 per cent of the next generation in Asia preferred to start their own ventures (King & Cheng, 2018). Some Asian families provide a star-up fund for the next generation to try out their ideas, as they know they are tech educated with innovative ideas. If successful, the new venture can become part of the company’s diversification strategy, and this also helps with succession planning.
However, the younger family members need to bear in mind that family control of tech industry enterprises can be very challenging, as the industry itself requires a high rate of growth. After several rounds of financing and talent intake, the shares that a family owns can drop dramatically (King & Peng, 2013).
Conclusion
According to our findings, many Asian family businesses put a lot of effort and emphasis on innovation and technology. This helps with succession, and allows the company to keep pace with the changing world. However, we cannot be overly optimistic, as there are many other family businesses in the region, especially those of a smaller size and those with less resources, that face enormous challenges. They lack aggression and the long-term resource commitment needed to manage technological disruption. Barriers also include rigid mental models, emotional ties to loyal staff, and internal political resistance. The key to their survival is developing the ability to refocus their natural propensity for long-term orientation, and learning how to embrace technology and encourage innovation.
Reference
Fernando G. Alberti and Emanuele Pizzurno, Technology, innovation and performance in family firms, International Journal of Entrepreneurship and Innovation Management, 17(1/2/3):142 - 161, June 2013
Chiesa, V., Manzini, R. and Pizzurno, E. (2008) ‘The market for technological intangibles: a conceptual framework for the commercial transactions’, International Journal of Learning and Intellectual Capital, Vol. 5, No. 2, pp.186–207.
Dennis Jaffe and Winnie Peng, From Village to Global in Little More Than a Generation, Evidence from Mainland China Family Enterprises, Wise Counsel Research, 2019
Roger King and Jeremy Cheng, Where technological disruptors meet Asian family businesses: rethinking next-generation leadership and career, Lombard Odier Report, 2018
Roger King and Winnie Peng, Unfolding the Surviving Secrets of Century-Old Ethnic Chinese Family Businesses, under review, 2017
Roger King and Winnie Peng, Family Control Longevity: Evidence from the S&P 500, Journal of Family Business Strategy, 2013