Why family businesses run the business world, yet fear international expansion
By Kellie Podsednik
If you manage a family business, you’re a part of a global majority. You and your kind (and kin) run the business world.
Not only are 70% of businesses family owned worldwide, but according to research conducted by associate professor Bart Debicki of Towson University’s Management Department, family businesses can outperform nonfamily firms despite the fact they tend to put a higher priority on goals such as family security, influence, and legacy.
“Since the main difference between family and nonfamily firms seems to be the pursuit of socioemotional wealth benefits, the conclusion is that pursuing socioemotional wealth benefits can actually be profitable to family businesses,” says Debicki.
Socioemotional wealth is a set of non-financial benefits originating from business operations that are specifically associated with the well-being and affective needs of the family. In other words, it is the perceived value of the company and its benefits that go beyond actual financial worth. These benefits include an emotional connection to the firm, or the sentimental value of the company to its founders and employees related to the owner’s family by blood or marriage —as well as the ability to hire family members—increase in the family’s good standing within the community, and creation of wealth and opportunities to pass down to future generations, among other things.
“When a family business focuses too keenly on their socioemotional wealth, they can face serious financial issues. However, they still need to keep these benefits in mind even when pursuing economic profits.”
Though these benefits psychologically enrich a family business and its owners, sometimes a business forgoes potential growth by focusing too keenly on them.
In particular, family businesses can miss out on the financial gains of internationalization because they fear giving up too much familial control to an outsider. This is especially true when a majority of the firm is directly controlled by the family. Evidence then suggests that when it comes to internationalization, “the more your family owns, the lower the willingness to internationalize, might hold,” Debicki says.
However, when a family business does want to expand internationally, they will more often than not lack the appropriately skilled blood- or marriage-related managerial talent to head such an overseas effort. In this instance, it becomes essential to hire a non-family member to upper levels of management to get the job done, which contradicts a substantial socioemotional wealth benefit. And because family businesses may put socioemotional wealth benefits ahead of economic goals, they can further resist internationalization because of this.
So while prioritizing socioemotional wealth objectives ultimately helps the family business’ bottom line, they must be balanced, says Debicki.
“Economic and noneconomic goals do complement each other, and in family businesses in particular, they are both very important,” he says. “[But] when a family business focuses too keenly on their socioemotional wealth, they can face serious financial issues. However, they still need to keep these benefits in mind even when pursuing economic profits.”
Ultimately, when a family business steps outside of its comfort zone and sacrifices non-economic goals to increase profit through internationalization, it can use those financial gains to pursue socioemotional wealth benefits on a higher and more impactful level to benefit both the current and future familial generations.
Bart Debicki is an associate professor in the department of management teaching international business and multinational management and culture, among other courses. His research interests include family business, international management, and strategy.