How family firms can leverage firm-specific advantages even in an era of macroeconomic shocks

When we think of successful businesses, we often picture large multinational corporations run by a diverse group of corporate managers, and driven by shorter-term gains demanded by their shareholders.

However, what many industry watchers overlook is the essential role that family-owned businesses play in shaping the global economy. These firms not only generate a substantial portion of the Gross Domestic Product (GDP), but they also create countless job opportunities across various markets.

In the 2023 Ernst & Young (EY) and University of St. Gallen Family Business Index, it was found that the largest 500 family businesses collectively generate US$8.02 trillion in revenue, and employ 24.52 million people.

According to EY, the 500 companies in question make such a significant contribution to the economy that if they were treated as a national economy, they would rank as the third-largest among the 19 existing "trillion-dollar economies," behind only the United States and China.

Besides boasting enviable bottom lines, family firms possess distinct firm-specific advantages (FSAs). These include a longer-term orientation, distinct culture and set of values, a time-honoured reputation, and relationship-based management.

On the flip side, the structure of family firms also creates unique challenges in areas such as succession planning, governance, potential conflicts of interest, and biased treatments of family-related assets.

Understanding these advantages and challenges can affect the success and sustainability of family firms, especially during times of macroeconomic shocks, such as economic downturns or supply chain disruptions. By grasping their unique position and making strategic changes when appropriate, family firms can position themselves for long-term success regardless of what external factors might come their way.

In their paper “Multinational family firms’ internationalisation depth and breadth following the global financial crisis”, SMU Lee Kong Chian School of Business Professor of Strategic Management Reddi Kotha, along with his co-authors Professors Sebastian Fourné, Miriam Zschoche, and Christian Schwens built upon New Internalisation Theory (NIT) to argue that family firms recombine their own family-related resources with non-family ones in the face of unexpected shocks.

By bridging NIT and family firm literature, Prof Kotha and his co-authors formulated a theory on how large family firms respond to macroeconomic shocks. They found that family firms develop firm-specific advantages by leveraging resources unique to their business structure, as well as external resources. These advantages help them navigate the uncertainties of doing business across borders and enable Foreign Direct Investments (FDI) after a shock.

Responding to shock by drawing on undervalued non-family resources

While previous studies have focused on the resilience of family firms in the face of natural disasters or political upheaval, and how their domestic operations changed under such pressure, it is also essential to examine how these firms adapt and respond to international crises.

Hence, the authors sought to fill the gap in studies relating to how and why family firms may change their international portfolio of operations differently than non-family firms.

“We realised that it takes recovery planning sessions following a shock to trigger family firm leaders to overcome the rather cautious treatment of family firms’ FSAs and to rely more on non-family talent and to listen to subsidiary executives’ perspectives,” says Prof Fourné.

“The recombination of family firms’ social capital and reputational resources enhances the opportunities for FDIs, and help to reduce uncertainty in foreign markets,” he explains.

A crucial benefit of this approach is that it facilitates a more objective evaluation of how family-firm-specific resources can be leveraged for FDI. As a result of the recovery planning and family firms’ long-term orientation, they are more likely to make international investments following a macroeconomic shock.

Moreover, the scholars found that changes brought on by global crises can have significant impacts on the internationalisation strategies of large family-owned multi-national enterprises (MNEs). The depth and breadth of international operations can be affected as family firms reconsider and adjust their plans for expansion and recovery.

“Most obviously, we found that family-firms recovery planning tends to focus on a 10-year period, compared to non-family firms who tend to plan only for the next year or a maximum of 3 years following a macroeconomic shock,” states Prof Zschoche.

Leaning into findings for future action

Based on the findings of the study, there are certain actions that can be taken to improve a family firm’s success during times of macroeconomic shock. Prof Schwens advises that an important step is for family firm managers to curtail the so-called bifurcation bias. Bifurcation bias is the preferential and often cautious treatment of family assets relative to non-family assets.
 

“To achieve this, and this should be done not just following a shock, family firms can recombine their family firm-specific resources like bonding and bridging social capital and the reputation of a family firm with non-family resources such as non-family executive talent and international management capabilities,” he explains.

While the findings of this study shed light on the benefits of family firms' unique advantages and strategic approaches to international crises and FDI, there is still a need for further research to provide a more robust set of recommendations for family firms.

The authors believe that additional studies in this area will build upon the current findings and offer more specific guidance to family firms seeking to navigate global crises and succeed in international markets. The goal is for such studies to help family firms optimise their unique strengths and develop strategies that enable them to thrive in an ever-changing global business environment.

As Prof Kotha expresses: “We hope our work encourages new research on when and how family firms can economise on bifurcation bias, and leverage the unique resources that some family firms and built and carefully protected over decades, even centuries.”