Understanding Chinese Family Firms from Multiple Theoretical Perspectives: An Introduction to the Collection of Family Business Studies by MOR

Xiaowei Rose Luo, INSEAD, France

Despite the different definitions, family firms are characterized by the involvement of family in business. The interweaving of the two institutions – family and business – gives rise to the interesting organizational practices, processes, and consequences researchers seek to explain. Indeed, the prevalence and significance of family businesses throughout the world underscores the importance of considering social relationships and dynamics, those that are family-related in particular, in business organizations. As family-controlled businesses contribute to about 70 to 90 percent of global GDP (McKinsey & Company, 2014), studying family firms is in itself central to understanding management, business, and economics. In addition, family firms also provide a fertile context to test and extend fundamental organization and management theories.

This collection of articles published by Management and Organization Review includes studies related to family businesses, to varying degrees, in the (greater) China context, from multiple theoretical perspectives. Table 1 lists these articles and the major theoretical perspectives used. They show the strength of the different perspectives in understanding different aspects of family firms in the Chinese context.

            The article ‘The Internationalization of Chinese Family Enterprises and Dunning's Eclectic MNE Paradigm’ adopts a resource/capability-based perspective to explain the success of overseas Chinese family enterprises. It argues that these family firms have unique relational resources and capabilities such as risk management and operational control. Such advantages based on family ownership in their home market enable them to internationalize. This article offers some important insights. For example, even though these family enterprises tend to engage in unrelated diversification, the types of industries they spread into tend to have certain patterns and the family enterprises’ resources and capabilities are aligned with the characteristics of these industries.

            Also adopting the resource-based view, the article ‘Internationalization and Performance of Chinese Family Firms: The Moderating Role of Corporate Governance’ finds that the relatively small size of family firms and limited resources constrain the firms’ performance in internationalization. However, based on the contingency perspective, the authors point out that board independence can alleviate such a constraining effect, while family dominance in the top management team can worsen such an effect.

            Two articles mainly rely on agency theory and shed light on two interesting outcomes: ‘Family Ownership and the International Involvement of Taiwan’s High-Technology Firms: The Moderating Effect of High-Discretion Organizational Slack’ and ‘The CEO Horizon Problem and Managerial Slack in China’. The former reveals that family ownership, especially excess in family ownership control, is associated with less internationalization for Taiwanese high-tech firms. The uncertainties involved in international expansion, risk of failure, and the dilution of family control in this process, make family owners perceive higher costs than benefits for themselves, and lead to their self-serving decisions to resist internationalization. In retrospect, the international expansion of the high-tech industry in Taiwan was a huge success story but was mainly achieved by firms with relatively less family control. The latter finds that the typical CEO’s horizon problem (i.e., becoming short-term oriented when close to retirement) was reduced in firms with characteristics of family business (i.e., a majority of the non-state controlled listed firms in China are family businesses). While this study is not focused on family firms, it clearly shows the advantage of family ownership over state ownership in curbing CEO’s horizon problem. Based on agency theory, the agent (CEO) does not always behave in the interest of the principal (owners). This is why the CEO in an SOE is likely to be more concerned with one’s own career interests than with those of the firm or owners. But in a family business, the CEO (who is usually a family member) is likely to be aligned with the owner’s interest throughout the career.

            Two articles combine agency and institutional perspectives to explain how the agency problem created by family ownership can vary: ‘Multiple Large Shareholder Structure and Governance: The Role of Shareholder Numbers, Contest for Control, and Formal Institutions in Chinese Family Firms’ and ‘Governance Structure and Related Party Loan Guarantees: The Case of Chinese Family Business Groups’. In the first article, the authors identify two important conditions under which the large family owner’s expropriation behavior will be reduced: the number of other large shareholders and the strength of market-based institutional development. In other words, when there is low to medium level of other large shareholders and the regulatory institutions are strong enough, family owners can be effectively monitored and restrained from expropriating minority shareholders. In the second article, the authors examine a type of minority shareholder value expropriation practice, issuing loan guarantees to related parties in family-controlled business groups. Interestingly, affiliated firms with non-family chair but family senior executives or board members are more likely to engage in such behavior, probably to make it less visible. Moreover, this tendency is reduced in regions in more developed market institutions.   

            The article ‘From Personal Relationship to Psychological Ownership: The Importance of Manager–Owner Relationship Closeness in Family Businesses’ starts with an important assumption of the stewardship perspective, the combination of financial ownership and management engenders stewardship behavior. It asks the important question how nonfamily managers can also identify with the family interests despite the lack of financial ownership. It finds the relationship closeness with the family owners to be crucial in generating psychological ownership and stewardship behavior.

            The article ‘Why Do Family-controlled Firms Donate to Charity? The Role of Intrafamily Succession Intention, Social Status, and Religiosity’ uses behavior agency perspective to explain family firms’ philanthropy. Based on this perspective, family business has a unique goal of preserving socioemotional wealth across generations. This incentive can guide family owners’ decision-making over and above financial calculations. The authors find that the family firms with stronger intension for family leadership succession are more likely to engage in philanthropy, as such behavior enhances firm reputation and family value.  

            Integrating the agency and organizational justice perspectives, the article ‘Family Involvement in Middle Management and Its Impact on the Labor Productivity of Family Firms’ argues for a negative effect of family involvement in the middle management on labor productivity. The authors explain that due to the family owners’ self-interest of providing employment for family members, unqualified middle managers who are part of the family are usually appointed to supervise front-line employees. These middle managers can hurt operational productivity when treating differentially those with and without connections with the family. 

            While the article ‘How Does Firm Life Cycle Affect Board Structure? Evidence from China’s Listed Privately Owned Enterprises’ does not examine family firms specifically, it has direct implications for understanding how family firms manage the tension between the need for stronger monitoring and more resources through the board structure. This study looks at private (non-state controlled) listed firms in China, many of which are family controlled. Integrating agency and resource dependence perspectives, the authors argue that board serves both monitoring and resource acquisition functions, and show how these evolve over the course of the firms’ life cycle.  

            The article, ‘Research on Chinese Family Businesses: Perspectives’, highlights the uniqueness of the institutional environment facing Chinese family firms and the uniqueness of these family firms as an institution. Adopting an institutional lens, the authors view the strategies adopted by these firms, such as political and social relationship building, as shaped by the firms’ lack of legitimacy and the weak market infrastructures. It is indeed remarkable that Chinese family firms have overcome such obstacles – lack of legitimacy and lack of access to state-controlled resources – and achieved phenomenal growth and profits. However, whether the advantages of family governance and strategies they adopted will continue to exist given the rapidly changing institutional and market conditions remains a pertinent question for future research.   

            In summary, this collection of articles adopts multiple theoretical perspectives to illuminate how family businesses are at work. Viewed from these different perspectives, family businesses are viewed as unique resources, relationships, values, governance devices, interests, and institution interacting with other external institutions. While they each have advanced our understanding, they also suggest interesting tensions and even contradictions with one another. These studies thus point to future opportunities of research on Chinese family businesses.

            Two areas of research are particularly promising: First, more research on the contingencies on the effects of family business on various outcome is needed (Schulze & Gedajlovic, 2010). Do family relationships mainly engender nepotism or a sense of identification (Hu, Zhang, Yao, 2018; Zhu, Chen, Li, & Zhou, 2013)? Does the intention for family succession (or long-term orientation) lead to more prosocial behavior or expropriation of minority shareholders (Chen, Arnoldi, & Na, 2015; Fang, He, & Conyon, 2018; Li, Chen, Chua, Kirkman, Rynes-Weller, & Gomez-Mejia, 2015)? Will political and social network strategies produce rapid growth or deter international expansion (Erdener & Shapiro, 2005; Li et al., 2015; Liu, Lin, & Cheng, 2011; Lu, Liang, Shan, & Liang, 2015)? Some of the contingencies may reside in the different value, culture, and governance within the family firms, or the different market, industry, and political environments (Luo & Chung, 2013). Understanding these contingencies can provide important boundaries for our theories, more precise insights about family businesses, and more actionable business and policy implications.

            Second, given the rapid market and institutional changes in China, how have family businesses changed in response? While some studies have demonstrated the benefits of family firms under relatively weak market-based institutions such as providing trust and access to resources, the decline of such benefits in more mature market economies does not dramatically shrink the presence of family businesses. This points to the need to better understand how family businesses cope with changes.

            With the unprecedented speed of change, the Chinese market and society provides an ideal context to study how family businesses respond to change. For instance, do family relationships, values, and desire for cross-generational control facilitate or impede innovation and corporate entrepreneurship? Do family businesses embrace governance reforms in order to build stronger ties with stakeholders? Especially given the one-child policy which is now negatively affecting the family succession, whether and how do family firms keep the family tradition and control? How do family firms respond to the anti-corruption campaign and the call to build a new type of political-business ties from the government? Addressing these questions can significantly enhance our knowledge of family businesses in today’s world and contribute to our theories on organizational change and business-environment interactions.               

 

REFERENCES

Chen, X., Arnoldi, J., & Na, C. 2015. Governance structure and related party loan guarantees: The case of Chinese family business groups. Management and Organization Review 11(4): 599–619.

Chun, X., Chen, L. L., Chua, J. H., Kirkman, B. L., Rynes-Weller, S., Gomez-Mejia, L. 2015. Research on Chinese family businesses: Perspectives. Management and Organization Review¸11(4): 579–597.

Erdener, C., & Shapiro, D. M. 2005. The internationalization of Chinese family enterprises and Dunning’s eclectic MNE paradigm. Management and Organization Review 1(3): 411–436.

Fang, J., He, L., & Conyon, M. J. 2018. The CEO Horizon problem and managerial slack in China. Management and Organization Review, 14(2): 343–376.

Hu, Q., Zhang, Y., Yao, J. Family involvement in middle management and its impact on the labor productivity of family firms. Management and Organization Review, 14(2): 249–274.

Li, W., Au, Y.-f., He, A., & Song, L. 2015. Why do family-controlled firms donate to charity? The role of intrafamily succession intention, social status, and religiosity, Management and Organization Review, 11(4): 621–644.

Liu, Y., Lin, W.-T., & Cheng, K.-Y. 2011. Family ownership and the international involvement of Taiwan’s high-technology firms: The moderating effect of high-discretion organizational slack. Management and Organization Review, 7(2): 201–222.

Lu, J. W., Liang, X., Shan, M., & Liang, X. Internationalization and performance of Chinese family firms: The moderating role of corporate governance. Management and Organization Review, 11(4): 645–678.

Luo, J.-h., Wan, D.-f., Cai, D., & Liu, H. 2013. Multiple large shareholder structure and governance: The role of shareholder numbers, contest for control, and formal institutions in Chinese family firms. Management and Organization Review, 9(2): 265–294.

Luo, X. R., & Chung, C.-N. 2013. Filling or abusing the institutional void? ownership and management control of public family businesses in an emerging market. Organization Science, 24: 591–613. 

McKinsey & Company. 2014. Perspectives on founder- and family-owned businesses, October 2014 ed.

Schulze, W. S., & Gedajlovic, E. R. 2010. Whither family business? Journal of Management Studies, 47(2): 192–204.

Zhu, H., Chen, C. C., Li, X., & Zhou, Y. 2013. From personal relationship to psychological ownership: The importance of manager-owner relationship closeness in family businesses. Management and Organization Review, 9(2): 295–318.

Table 1. Summary of the theoretical perspectives used and advantages/disadvantages emphasized in the MOR collection of Chinese family business studies

Article	Year of Publication	Authors	Major Theoretical Perspectives used	Advantages/Disadvantages of Chinese family businesses emphasized
The Internationalization of Chinese Family Enterprises and Dunning's Eclectic MNE Paradigm	2005	Carolyn Erdener and Daniel M. Shapiro	Resource/capability-based view	Advantage
Family Ownership and the International Involvement of Taiwan's High-Technology Firms: The Moderating Effect of High-Discretion Organizational Slack	2011	Yunshi Liu,Wen-Ting Lin, and Kuei-Yang Cheng	Agency theory	Disadvantage
Multiple Large Shareholder Structure and Governance: The Role of Shareholder Numbers, Contest for Control, and Formal Institutions in Chinese Family Firms	2013	Jin-hui Luo, Di-fang Wan, Di Cai, and Heng Liu	Agency and institutional theories	Disadvantage
From Personal Relationship to Psychological Ownership: The Importance of Manager–Owner Relationship Closeness in Family Businesses	2013	Hang Zhu, Chao C. Chen, Xinchun Li, and Yinghui Zhou	Stewardship theory	Advantage
Governance Structure and Related Party Loan Guarantees: The Case of Chinese Family Business Groups	2015	Xin Chen, Jakob Arnoldi, and Chaohong Na	Agency and institutional theories	Disadvantage
Research on Chinese Family Businesses: Perspectives	2015	Xin Chun Li, Ling Chen, Jess H. Chua, Bradley L. Kirkman, Sara Rynes-Weller, and Luis Gomez-Mejia	Institutional theories	Advantage
Why Do Family-controlled Firms Donate to Charity? The Role of Intrafamily Succession Intention, Social Status, and Religiosity	2015	Weiwen Li, Kevin Yuk-fai Au, Ai He, and Lihong Song	Behavioral agency theory	Advantage
Internationalization and Performance of Chinese Family Firms: The Moderating Role of Corporate Governance	2015	Jane Wenzhen Lu, Xueji Liang, Mengmeng Shan, and Xiaoya Liang	Resource-based and contingency perspectives	Disadvantage
How Does Firm Life Cycle Affect Board Structure? Evidence from China’s Listed Privately Owned Enterprises	2018	Yunhe Li and Xiaotian Tina Zhang	Agency and resource dependence theories	Advantage
The CEO Horizon Problem and Managerial Slack in China	2018	Junxiong Fang, Lerong He, and Martin J. Conyon	Agency theory	Advantage
Family Involvement in Middle Management and Its Impact on the Labor Productivity of Family Firms	2018	Qiongjing Hu, Yanlong Zhang, and Jingjing Yao	Agency and organizational justice theories	Disadvantage