Family businesses thrive and grow as they fill the gap in institutional development in emerging markets. It could be lack of a strong capital market or a respectable product market institution that takes care of consumer interests.
"People buy products from say Tata Group companies because in the absence of a quality regulator, they can trust a product the companies from the group manufacture. In fact, one of the main reasons family business groups across the world thrive in emerging markets is this. What will happen to them once these institutions develop?" asked Prashant Kale, Associate Professor of Strategic Management, Jones School of Management, Rice University. They should typically fade away. Will they?
Phanish Puranam, Professor of Strategy and Organisation Design at INSEAD does not think so. "Traditionally these companies came to substitute weak markets or what is called institutional voids. But the development of institutions needs not necessarily lead to their demise. They should not be seen as substitutes but as alternatives," he said. There are some things which are very distinct about family businesses.
Most of them are private and they can focus on long term gains rather than short term profitability. Also, in a family business, each company is a different entity and a few of them are also listed in the stock markets. Thus the governance is split between the headquarters and capital markets. These factors will ensure that family businesses survive institutional development in emerging markets, he added.
Mallika Srinivasan, chairman and CEO of TAFE, India's second-largest tractor maker and part of the Amalgamations group-a large Chennai-based family business-agreed with Puranam. She said when India opened up its economy, a lot of concerns were raised about whether family businesses in India could adapt to the change and survive. Twenty years later, they are going strong, she added.
"Business groups are important building blocks in the Indian business landscape. They have adapted, evolved and thrived," she said.
The reason for this transformation, according to her, was the credibility the family businesses brought to bear. This enabled them to attract potential partners, raise money at attractive rates, develop a better relationship with the government and other stakeholders. Being part of a group helped member companies raise long term capital and also leverage the group's human resources and other infrastructure, she said. These factors enabled business groups to perform better.