Regional Familiness – The missing link

This is the second piece in a three-part series on family business and regional development. Read part one: “in search of the missing link”

Part 2: How do family firms interact with the geographic space to boost or hinder regional development?

By Rodrigo Basco, Ph.D.

RegionalI would like to think that there is something in common between the neighborhood of Kreuzberg in Berlin, where the Turkish community has created a dynamic commercial space, and the Herzogenaurach area in Bavaria, where the Adidas headquarters manages one of the biggest footwear businesses in the world. Even more, these two geographical spaces have something in common with the Veneto region in northeastern Italy, where strong export-oriented small- and medium-sized firms dominate the industrial structure.

It is not the location, the size of the firm, or the religion of the owners. . . . rather, what creates certain kinds of regional/local economic dynamism is the existence of family firms in their geographic productive structure.

Family firms link three main institutions in our economic capitalist system: family, market, and society. In this role, family firms may boost or hinder regional processes such as social interactions, learning processes, information exchange, spillovers, and competition dynamic which are important for regional economic development. However making regional processes work is not a spontaneous event, family firms implicitly or explicitly alter one important characteristic of the regional space: proximity.

Turkish shops in Kreuzberg are locally embedded, as Adidas is entrenched in Herzogenaurach and Italian firms are rooted in their region. Family firms are embedded in the local geographical space, thus compelling them to stay where they feel they belong to even during external (e.g., economic and financial) crises. Why is Adidas located in Herzogenaurach when there is likely to be a better fashion location for this kind of firm?

Even though physical proximity operates as a necessary condition for regional processes, it does not guarantee the quality and durability of social interactions, learning processes, information exchange, and spillovers. Family firms shape and re-shape other aspects of proximity dimensions: cognitive, social, organizational, and institutional proximity.
The links between Italian family firms and their family and local traditions has determined the cognitive proximity (i.e., similar mental frame to perceive, interpret, understand, and evaluate the world), making interactive learning processes among actors more efficient, accelerating knowledge transmission, and increasing regional absorptive capacity. In addition to cognitive proximity, family firms are able to shape social proximity, adding trust to economic relationships based on friendship, kinship, and similar experiences and thus facilitating and simplifying them with less agency costs (e.g., control for opportunistic behaviors). The powerful industrial districts in Italy based on incremental innovation and particular style are, to a certain extent, supported by the cognitive and social proximity built by the economic and social actors.

But it is under the structure of an organization, organizational proximity, the way family firms internally formalize economic and social interactions that exist in the family, in the market, and in society. Adidas itself represents an important organization for its location (Herzogenaurach). That is, organizational proximity generates common relationships within the organization and among organizations (stakeholders), developing communication channels and oiling networks to coordinate economic transactions and social interactions by reducing uncertainty as well as by enabling information transfer.

Finally, family firms are able to alter formal and informal norms and codes of conduct that regulate relationships and interactions among individuals, institutions, and organizations – institutional proximity. This has significant consequences for regional/local development because institutions are affected by agents and by their economic and social organizations, while institutions themselves reinforce individual and organizational behavior. For instance, is Adidas behaving with the same moral spirit (i.e., code of conduct) in Herzogenaurach and outside this geographical space, such as in the third world where Adidas shoes are produced through subcontractors? Sure, you have your own answer after knowing the scandals related to production relocation.

The way family firms affect proximity dimensions within geographical space may create positive or negative consequences for regional development. The dark or bright side of family firms in relation to proximity dimensions will be reflected on external agglomeration effects (e.g., industrial clusters and urban agglomerations) and externalities (e.g., innovation, firm performance, firm internationalization, resilient regions, and entrepreneurial spirit). Take a look at your local community, your region, or your country and ask yourself: What role does the family firm play?

Basco, R. (2015). Family business and regional development. A theoretical model of regional familiness. Journal of Family Business Strategy.

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