Why are family firms so widespread?
Family firms represent 90 per cent of the world’s businesses, but with the exception of occasional behemoths such as the Waltons (Walmart) or the Murdochs (News Corp), they are mostly small enterprises. One of the GCC’s distinguishing traits is the prevalence of family-owned conglomerates, with family businesses accounting for up to 80 per cent of non-oil GDP. Why do family firms continue to play such an important role in the global economy?
The modern incarnation of economics coincided with the industrial revolution, a period of unprecedented economic growth, driven by the rise of joint stock companies owned by spatially dispersed capitalists, unbound by blood ties. Perhaps for this reason, economists have traditionally paid little attention to family firms. However, in the past 20 years scholars such as Marianne Bertrand (University of Chicago) and Antoinette Schoar (MIT) have been paying more attention to family firms, including those outside the West, and have greatly enhanced our understanding of how they function.
A key purported operational advantage of family firms is that they are inherently more long-term in their outlook than widely held corporations, because the current ownership generation in a family business has much stronger ties to future generations. The 2008 global financial crisis exposed alarming levels of myopia in the financial sector, potentially explaining the success of perennial financial monolith Rothschilds, one of the most famous family conglomerates. In fact, during the company’s ascent circa 1800, its founder stipulated that family members were to marry first or second cousins to reinforce the commitment among kinsman.
An additional benefit associated with family firms is that the trust between family members holding executive authority can substitute for weak contract enforcement by the government, a serious concern in many developing countries, where embezzling managers can more easily evade legal sanctions. The value of this advantage is accentuated during periods of expansion into new territories, when the costs of monitoring the management team charged with expanding operations are elevated; assigning responsibility to trustworthy offspring frees up managerial oversight resources for core tasks. While the GCC courts enforce contracts impartially, businesses sometimes complain that the legal process is slow, reinforcing the attractiveness of hiring kinsmen for important positions within the company.
Families’ trust networks also extend beyond the confines of the company. The presence of family members in key partner organisations, such as suppliers or various governmental organisations that regulate the private sector, can confer additional commercial benefits upon family firms. The comparative long-sightedness of family businesses is a key driver of this advantage, as it facilitates the establishment of long-term, reciprocal links between different stakeholders. In the GCC, social gatherings such as weddings and funerals operate as de facto forums for the establishment and maintenance of such relationships.
In addition to exhibiting enhanced levels of trust, families are also characterised by homogeneity in their abilities; both due to nature (the genetic heritability of managerial skills) and nurture (good managers tend to raise good managers). Beyond this, the shared values of a common upbringing can contribute to higher levels of cooperation and understanding between family members working together in the same company, resulting in a performance advantage compared to conventional organisations.
In practice, however, blood relations are a double-edged sword, as the sometimes bitter feuds that erupt between brothers or cousins can lead to the impairment or dissolution of profitable enterprises for non-commercial reasons. This “personalisation” of disputes is a key reason why consultants advising family firms emphasise the need to separate ownership from control. Conferences designed to preemptively tackle such problems are common in the Arabian Gulf.
Family firms also risk nepotistic decision-making, resulting in the appointment of incompetent kinsmen to important positions. These risks are accentuated in the GCC by the importance of family to day-to-day life, as the western, secular option of walking away from one’s relatives is unavailable. More generally, within family firms in the GCC and beyond, business is never just business.
We welcome economics questions from our readers via email (omar@omar.ec) or tweet (@omareconomics).
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How to wear a kandura
Dos
- Wear the right fabric for the right season and occasion
- Always ask for the dress code if you don’t know
- Wear a white kandura, white ghutra / shemagh (headwear) and black shoes for work
- Wear 100 per cent cotton under the kandura as most fabrics are polyester
Don’ts
- Wear hamdania for work, always wear a ghutra and agal
- Buy a kandura only based on how it feels; ask questions about the fabric and understand what you are buying
The National Archives, Abu Dhabi
Founded over 50 years ago, the National Archives collects valuable historical material relating to the UAE, and is the oldest and richest archive relating to the Arabian Gulf.
Much of the material can be viewed on line at the Arabian Gulf Digital Archive - https://www.agda.ae/en
How to get there
Emirates (www.emirates.com) flies directly to Hanoi, Vietnam, with fares starting from around Dh2,725 return, while Etihad (www.etihad.com) fares cost about Dh2,213 return with a stop. Chuong is 25 kilometres south of Hanoi.
The Perfect Couple
Starring: Nicole Kidman, Liev Schreiber, Jack Reynor
Creator: Jenna Lamia
Rating: 3/5
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How to protect yourself when air quality drops
Install an air filter in your home.
Close your windows and turn on the AC.
Shower or bath after being outside.
Wear a face mask.
Stay indoors when conditions are particularly poor.
If driving, turn your engine off when stationary.
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Company%20profile
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COMPANY%20PROFILE
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COMPANY%20PROFILE%20
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Results
2pm: Handicap (PA) Dh80,000 1,600m; Winner: AF Al Baher, Bernardo Pinheiro (jockey), Ernst Oertel (trainer).
2.30pm: Handicap (TB) Dh100,000 1,600m; Winner: Talento Puma, Xavier Ziani, Salem bin Ghadayer.
3pm: Handicap (TB) Dh90,000 1,950m; Winner: Tailor’s Row, Royston Ffrench, Salem bin Ghadayer.
3.30pm: Jebel Ali Stakes Listed (TB) Dh500,000 1,950m; Winner: Mark Of Approval, Patrick Cosgrave, Mahmood Hussain.
4pm: Conditions (TB) Dh125,000 1,400m; Winner: Dead-heat Raakez, Jim Crowley, Nicholas Bachalard/Attribution, Xavier Ziani, Salem bin Ghadayer.
4.30pm: Jebel Ali Sprint (TB) Dh500,000 1,000m; Winner: AlKaraama, Antonio Fresu, Musabah Al Muhairi.
5pm: Handicap (TB) Dh100,000 1,200m; Winner: Wafy, Richard Mullen, Satish Seemar.
5.30pm: Handicap (TB) Dh90,000 1,400m; Winner: Cachao, Tadhg O’Shea, Satish Seemar.
THE CARD
2pm: Maiden Dh 60,000 (Dirt) 1,400m
2.30pm: Handicap Dh 76,000 (D) 1,400m
3pm: Handicap Dh 64,000 (D) 1,200m
3.30pm: Shadwell Farm Conditions Dh 100,000 (D) 1,000m
4pm: Maiden Dh 60,000 (D) 1,000m
4.30pm: Handicap 64,000 (D) 1,950m