HONG KONG SAR – Media OutReach – October 28, 2021 – From its humble beginnings following economic reforms and openness enacted by the late Chinese leader Deng Xiaoping over three decades ago, family businesses have become the backbone backbone of China. economic growth. In China, family businesses contribute about 60% of the country’s GDP and hire 80% of the workforce, according to professional services firm EY. But what makes these family businesses vibrate and under what conditions do they thrive? It is with these questions in mind that a recent study in China examines the effect of culture on family businesses and finds that their formation (and subsequent prevalence) tend to be stimulated by companies of a more nature. collectivist.

Rice cultivation requires coordinated irrigation and shared work between farmers, which has probably led to a more interdependent cultivation in the rice-growing regions.

The study Collectivist cultures and the emergence of family businesses sought to examine how the level of collectivism in Chinese society affected the extent to which a company’s first generational founder was willing to divide the ownership of his businesses among family members as well as to employ them as managers and senior executives. In general, collectivist cultures place a strong emphasis on group accomplishments, and decisions are often made in the best interests of the group. Individualistic cultures, on the other hand, focus on personal goals and benefits. The research was co-led by Joseph Fan, professor of the School of Accounting and Finance Department of the Business School of the Chinese University of Hong Kong (CUHK), Dr Gu Qiankun of Wuhan University and Dr Yu Xin of the University of Queensland. .

Examining information on 1,103 private companies that went public in China from 2004 to 2016, the researchers compared the birthplace of their company founders with data on the shareholding of other family members as well as the number of family members who hold leadership positions within the organization. They concluded that business founders from a stronger collectivist cultural background tend to hire more family members as managers, retain more ownership of the business within their families, and share majority ownership with more family members.

To come to this conclusion, the researchers relied on the so-called “rice theory” of cultivation. “It’s no secret that China has a strong collectivist cultural history. But, what’s more interesting is that the degree of family ‘knitting’ actually depends on what they eat.” , said Professor Fan.

“Rice theory” of culture

Since ancient times, people in northern China grew wheat, while those in southern China grew paddy rice. Rice cultivation requires coordinated irrigation and shared work between farmers, which has probably led to a more interdependent cultivation in the rice-growing regions. However, such an agricultural arrangement is not necessary in wheat growing regions and, therefore, it has been theorized that wheat farmers are more individualistic than rice farmers. Studies have also shown that this cultivation disparity between rice growing and wheat growing extends far beyond the farming community and to those born and raised in these areas.

The sample used in the study includes private companies in 31 provinces of China, and more than half of them are located in Guangdong, Zhejiang and Jiangsu, which belong to the rice growing regions. Coincidentally, most of the founders in the sample were also born in these three provinces.

The results show that founders from rice-growing areas involved more family members (either through ownership or management) by 16.24 percent than those from wheat-growing areas. Business founders who were influenced by rice cultivation also owned an average of 10.38 percent more in their businesses (either through direct actions or through family ownership), but this was more distributed among members of the their family by 11.58 percent. In addition, a one standard deviation increase in the influence of rice cultivation was linked to a 5.32 percent increase in homestead ownership and a 5.93 percent decrease in ownership concentration. within the family.

“They say the family that plays together stays together. The stronger the collectivist influence on the founders, the more likely they would share ownership of their business with more family members,” says Professor Fan. “We believe that in a collectivist society, family orientation helps serve as an effective force for governance within an organization.”

Family governance

Professor Fan explains that in a collectivist culture, which places group benefits above all else, values ​​are learned and shared by family members and reinforced by family interactions. The family of a business founder, by getting involved in the business, can potentially serve as a corporate governance force as their unique and close relationship between members can bring discipline to the business, enhance sharing. information and knowledge and reduce the effort required for communication and monitoring activities.

As a result, researchers believe that family-run businesses may benefit from lower corporate governance costs than their non-family counterparts, and the same would be true to the extent that corporate governance costs are lower in the business. regions influenced by collectivist cultures as opposed to those which have been influenced by individualistic cultures.

“Since a higher level of family ownership and management is associated with a lower cost of governance, it makes sense that founders born in a collectivist cultural context would involve their family members more,†comments Professor Fan. , adding that it is the culture of the founders’ birthplace, rather than the cultures of where they work or usually reside, that has the strongest impact.

On the other hand, the researchers also considered the possibility that Confucian values, which are also deeply rooted in Chinese culture, could be at play in the formation of family businesses. In fact, rice-growing regions are also generally heavily influenced by Confucian culture. For example, Shandong Province – the hometown of Confucius, is also famous for its rice. Professor Fan and his co-authors also took this possibility into consideration. However, after performing several rounds of additional tests, they found no evidence supporting the role of Confucian values ​​in the formation of family businesses.

Company characteristics

According to the study, companies in traditional manufacturing and trading sectors, such as metal materials, wood and furniture, and wholesale trade, hire the most family members through the ownership or management. Companies in the machinery sector as well as the information technology sector involve significantly more founding family members if they are from a collectivist culture compared to those from individualistic cultures. Professor Fan says this may indicate that the costs and benefits of corporate governance of collectivist cultures may vary by industry.

Larger businesses are also more likely to have more founding family members and more family owners. However, founders with higher education levels and companies with more influence are less likely to involve family members in their business operations, but they are more willing to share ownership with members of their own. family.

As their current research has already established a strong relationship between collectivist cultures and the creation of family businesses, Professor Fan and his co-authors expect future research studies to further broaden the scope of culture’s roles. in the governance of relations with other stakeholders.

“Do founders from a collectivist culture compensate their managers with less emphasis on monetary rewards while individualistic business leaders tend to give their staff more incentive compensation that matches the market? Or, faced with uncertainties, will the former be more conservative while the latter is more willing to take risks? These questions deserve to be explored in the future, â€adds Professor Fan.

Reference:

Fan, Po Hung Joseph PH and Gu, Qiankun and Yu, Xin, Collectivist Cultures and the Emergence of Family Businesses (April 1, 2021). To appear in Journal of Law and Economics, available on SSRN: https://ssrn.com/abstract=3839978

This article was first published on the China Business Knowledge (CBK) website of CUHK Business School: https://bit.ly/3DWOFbl.

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