In Search of the Missing Link

Part 1: Why are family firms important for regional development?

By Rodrigo Basco, Ph.D.

Part 1I walked in El Cairo, where the smell of spices at the markets is deeply tied to long traditions of family business traders. In Germany, I visited a technological fair, where several family businesses proudly presented their innovations. In La Salada Buenos Aires, the huge flea market in South America, most of the shops are family owned and serve as livelihoods for their families. In New York Dagny’s plans to keep the regions of the United States of America connected are intrinsically motivated by the prestigious family name. In Vilnius, a bakery is growing at the hand of a Lithuanian-French family. No matter where I go, no matter what industry I visit, no matter how big the business is, no matter . . . the ghost of family business is there.

The family firm is a dominant form of organization in the world. This is a repetitive phrase at any family business event as well as in scientific articles or practitioner columns to say that family firms are important for our region, country, or supranational unions. However, what does “family firm is a dominant form of organization” mean for our life? The quantity of something does not mean anything good or bad a priori. In the Germany, more than 85% of firms are family businesses, whereas in Spain, the percentage of family businesses is similar, and in Argentina, Canada, South Africa, etc., the rate varies.

So what? So, why are family businesses such an important phenomenon—for good or for bad—for our economic and social lives? That is the question.

Family ownership and management logic has evolved with and adapted to historical economic and social changes—from family artisan production to big corporations owned and controlled by wealthy families in the social and economic shift produced by the Industrial Revolution as well as from big family corporations to small and medium family enterprises and family entrepreneurs in the social and economic shift produced by the information technology revolution. Family capitalism is embedded in our economic and social life. Thus, family business in not a new phenomenon but an old one that was recently discovered for business consultants, policymakers, politicians, and academics.

What was behind the selfish butcher of Adam Smith? The family and the family firm. The family firm enables the connection between family institutions and market institutions, both of which have different logics. Family firms are able to develop economic and non-economic objectives that humanize the firm as something more than an efficient black box with inputs and outputs. What was behind the agglomeration effect of economic development of Alfred Marshal? The family and the family firm. Family firms are locally embedded, which makes them an economic and social actor in our local communities, regional economies, and national environments.

Consequently, the importance of family firms lies not in the number of family businesses per se but in how they interconnect family, market, and society within their embedded environment. How interactions occur within the geographical space as well as their evolution over the time make the family business seem like Dr. Jekyll and Mr. Hyde. That is, the family business can be a positive phenomenon and a negative phenomenon for regional economic growth and development.

In this journey, I invite you to think about the role family firms (no matter the size or the industry) play in our lives, in our local communities, and in our regions and to what extent family firms are responsible for regional development.

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