UNSW Business School/ Banking and Finance

FINS2622 Session 2, 2017

Family Business in Asia Part I

Reference
Morten Bennedsen et al; The Family business map:
Framework, selective survey, and evidence from
Chinese family firm succession, Journal of corporate
finance 33 (2015) 212-226

Liu Bai: A Chinese Successor's Dilemma (attached file) or

Link:

https://cb.hbsp.harvard.edu/cbmp/pl/65391584/662274
Liu Bai: A Chinese Successor's Dilemma
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Prevalence of family businesses in Asia

Why?
Underdeveloped financial markets; hence lack of access to
financing.
Also related is the voids that we discussed earlier.
In particular, refer to the earlier statistics/graphs that show
relatively small size of stock markets.
Definition

Starting a business: entrepreneur is often the businesss

sole owner and manager and/or together with his family
members. Hence family business
Evolution of ownership and control results in 4 types
(models) of family firms:
1. Closely Held
Family Ownership
Family Management
2. Delegated
Family Ownership
External Management
3. Family Driven
Ownership Dilution
Family Management
4. Exit/Passive
External Ownership
External Management
Types (models) with reference to assets
(strengths) and roadblocks (obstacles/barriers)
All these 4 types exist in Tokyo Stock Exchange in Japan;
even the family management/ownership dilution
constitutes around 20% of public traded Japanese firms.
What model (type) of family firm that emerges depends on
the interaction between property rights and transaction
costs. That is the extent of owning property has
attendant costs. Essentially the balance between costs
(roadblocks) and benefits (assets) as explained below.
Assets (Strengths/Advantages)
Name
Family name
History and legacy of family and the business
Values
Religious values
Cultural values
Personal and family values
Networks
Marriage networks
Business networks
Political networks
Examples

1. Hshi () is a ryokan (Japanese traditional inn) in the

Awazu Onsen area of Komatsu, in Ishikawa
Prefecture, Japan. Founded in 718, it was once thought
to be the oldest operating hotel in the world until the
realization that another Japanese hotel, Nishiyama
Onsen Keiunkan, in Yamanashi, Japan, had claim to this
title: it was founded in 705.[ The Hoshi Ryokan has been
operated by the same family for forty-six generations.
2. Yangjiang Shi-Ba-Zi (18 sons) Company
Knife making company in Yangjiang (tourist city in Canton
province) Shi-Ba-Zi, dated back to 557 AD.
3. Wang Yung-ching founder of Formosa Plastic Group.
4. Suharto family businesses
Some largest Indonesian business groups were controlled
by his family.
Others were controlled by his long-time allies.
Time Asia (1999) estimated Suharto familys fortune at
US$73 billion.
5. On 6 January 2001 13 business tycoons ran for election
to the Thai parliament and all were elected. 9 were
supported by Thaksin and were referred to as Thatsin
Connected (TC) firms. All these firms did very well
during the period when Thatsin was in power.
6. In China, political patronage is critical for businessmen to
gain access to resources controlled by bureaucrats at
various levels.
Fok Ying Tung (Hong Kong) had strong ties with the central
government of China.
Smuggled weapons through Hong Kong to mainland China
during the Korean War despite a UN arms embargo.
When China opened doors to the West in 1978 he was
among the first to invest in China.

Political connections are an important family business

asset. But there is cost when a political leader falls from
power of removed from office.
Family Roadblocks (barriers/hindrances)

1. Power of number: families grow over time, generation

after generation, hence dilution of ownership and more
importantly sibling rivalry, self destruction.
2. Ratio of involved/non-involved family members;
especially participation of daughters (and family) after
the first generation
3. Family involvement in management and board
Family members are not bound by contractual
arrangements (like salaried employees) but by informal
constraints such as norms, traditions and codes of
conduct.
Note informal nature that can throw up roadblocks if
circumstances change.
For example, an important event like succession.
Manifestations of roadblocks

In what ways these roadblocks affect the family firms

decisions (financial and strategic)?
1. Dividend versus growth challenge: struggle between
insiders(management) and outsiders (passive) with
respect to dividend or reinvestment?
2. Ownership design
To pre-empt or prevent outside corporate raiders (M&A),
consider transfer controlling blocks of shares to active
family members; hence reducing the power/interest of
passive members. But consider unfairness and source of
conflicts.
3. Effective of corporate governance in firms with diluted
family ownership: difficult
to maintain the balance between dispersed ownership and
effective management.
4. Rules for career opportunities in the family firm: hopes
and expectations of strong-willed fathers; roles of
daughters in Asian culture and inheritance customs
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