Research Applied: FBR Summaries for the Practitioner
Continuing our popular series of executive summaries of current FBR articles, assistant editor Karen Vinton and her colleagues Andrew Hier, Nava Michael-Tsabari and Lori Muse discuss the implications for practitioners from the following two articles:
The Internationalization of Family Firms: A critical review and integrative model
Chinese Private Firms and Internationalization: Effects of Family Involvement in Management and Family Ownership
What do we currently know about the internationalization of family firms? To find out, the authors did a critical review of 72 journal articles stemming from peer-reviewed journals published from 1980 up to the end of 2012 in the English language. The major conclusion was that the research findings on the impact of family ownership and influence on various aspects of internationalization are very inconsistent. However, the authors were able to develop a model that incorporated:
- The findings from the analysis of the journal articles;
- Theoretical knowledge from the field of international management; and
- Theoretical knowledge from the research on socioemotional wealth.
This integrated model should help future researchers develop more consistent findings on this important topic.
These are the four major themes found in the analysis of the journal articles:
- Family firm heterogeneity
- Internationalization processes
- Relational/network perspectives
- Firm-level resources and capabilities
Table 4 in the paper is an excellent summary of these themes and the research findings that relate to them.
To reconcile the inconsistent findings, the authors develop an integrative theoretical model for understanding the internationalization of family firms (see Figure 1). The model proposes that internationalization is driven by triggers such as external board members and incoming generations on the one hand, but is slowed by the reluctance of family principals to commit to the establishment of partnerships and the necessary learning about foreign markets on the other.
In the model, the impact of such triggers and the subsequent reluctance is reduced or enlarged depending on how family principals frame the current performance of the business. If the business is performing below aspirations, family principals will be more likely to risk internationalization in order to improve the situation, but if it is performing above aspirations, family principals will be more likely to avoid internationalization in order to avoid putting performance at risk.
The authors use the Uppsala model from the field of international management and social emotional wealth (SEW) when developing their model. *
Their model provides many avenues for future research. Until more research is done, however, there can be no clear recommendations for practitioners. Practitioners who are interested in learning more about internationalization can find numerous articles listed in the article’s bibliography.
*For more information about SEW, read “Socioemotional wealth in family firms: Theoretical dimensions, assessment approaches, and agenda for future research,” by Berrone, Cruz and Gomez-Mejia in the September 2012 issue of Family Business Review. To learn more about the Uppsala model, read “The Uppsala internationalization process model revisited: From liability of foreignness to liability of outsidership,” by Johanson and Vahlne in the Journal of International Business Studies (2009, pages 1411-1431).
Summary 2: Chinese Private Firms and Internationalization: Effects of Family Involvement in Management and Family Ownership
Xiaoya Liang, Lihua Wang, and Zhiyu Cui
This paper examines how family control in private Chinese firms affects whether firms tend to go international. The authors divide family control into two separate variables:
- Family involvement in management; and
- Family ownership percentage.
Findings empirically show how these two variables have a different influence on the likelihood of internationalization: family involvement in management has an inverted U-shaped relationship whereas ownership percentage has a U-shaped relationship with the likelihood of internationalization.
The importance of this study lies in a better understanding that can be gained by distinguishing between the effects of family involvement and family ownership — different, though related, characteristics of family firms.
The findings of U-shaped phenomena help explain previous contradictory findings concerning internationalization and point at the complex mechanisms influencing this relationship. The article looks at two separate manifestations of internationalization:
- Export; and
- Foreign Direct Investment (FDI)
Family involvement in management is defined as “how extensively the founding family controls daily operations” and is measured by the ratio of family members in top management teams. Family involvement was predicted to have a non-linear influence on export and FDI. (Higher family involvement is connected to lesser managerial resources and capabilities (because less outside expertise enters the management group), leading to lesser internationalization. However, family involvement is connected also to higher altruism, which promotes collective long-term goals even at the cost of short-term deprivation, thus leading to greater internationalization. These conflicting mechanisms suggest an inverted U-shaped relationship where medium levels of family involvement in management have the highest levels of internationalization.
Family ownership also was predicted to have a non-linear influence on internationalization: a higher ownership percentage may be linked to increased risk aversion, as owners tend to protect their wealth, thus lowering internationalization, which seems more risky. However, research of socioemotional wealth (SEW) shows that owners may pursue riskier business policies in order to protect their SEW, thus leading to more internationalization. These contradicting mechanisms lead to a U-shaped relationship where medium levels of ownership have the lowest levels of internationalization.
A sample of 902 Chinese private firms coming from five different industries tested these predictions. About half of the firms in the sample were small firms with annual sales revenue of less than US$1.7 million. The results controlled for firm age, size, performance, industry and founders’ management experience, meaning that the findings are significant even after controlling for variables that have been found in the past as also influencing internationalization.
Different findings were found for exporting and FDI. Specifically, as predicted, family involvement in management was found to have an inverted U-shaped relationship with FDI, but a positive relationship with exporting. This means that a simple relationship of higher family involvement was connected to higher levels of exporting. This result may be explained by a lesser degree of influence of the managerial resources constraint on the outcome of exporting.
Regarding family ownership – as predicted, it was found to have a U-shaped relationship with both exporting and FDI.
This study demonstrates the different effects of family control, namely family involvement in management and family ownership, on the two manifestations of internationalization, namely exporting and FDI. While more research needs to be done to see if these findings can be replicated in other situations, practitioners can make their clients aware that while a very high percentage of family members in management won’t harm export, it might lower the probability of FDI.
About the Contributor
Karen L. Vinton, Ph.D. is a 1999 Barbara Hollander Award winner and Professor Emeritus of Business at the College of Business at Montana State University, where she founded the University’s Family Business Program. An FFI Fellow, she has served on the FFI board of directors and chaired the Body of Knowledge committee. From 1997 through 2011, Vinton served on the editorial board of Family Business Review and is the current assistant editor. Karen can be reached at [email protected].
Stay tuned next week for another issue of The Practitioner.
Yours in Practice,