Will family firms continue to dominate emerging markets?

Nanjing Road in Shanghai. Picture by Agnieszka Bojczuk. 

Nanjing Road in Shanghai. Picture by Agnieszka Bojczuk. 

Just how widespread will the family business model be in the future? One way to answer this question is to look at their prevalence in emerging markets, because over the next 20 to 30 years these countries - in Africa, emerging Asia and South America - will come to influence the world’s economy far more than they do now.

The picture there is quite different to the developed world. According to a paper in the most recent edition of McKinsey Quarterly, in 2010 about 60% of emerging market companies with revenues of $1bn or more were family or founder controlled. They estimate that there will be 4,000 more such companies by 2025, meaning that 40% of the world’s biggest companies will be family or founder controlled, up from 15% in 2010.

As the graphic below makes clear, family firms dominate some of the fastest-emerging economies, and 70% of more firms are family-controlled in India, South East Asia and Latin America.

Well, nobody knows whether things will pan out as McKinsey suggest. Being founder-owned is not the same as being a family firm. At Family Capital we usually define a founder-owned firm as a family business if there is an intention to pass it to the second generation. We don’t know how many of the firms in McKinsey’s sample qualify.

Also, as capital markets become more mature in emerging markets they might also slide towards a shareholder ownership model. If private equity firms get involved that could also change things. Governments might also decide to make life hard for family companies, wary of the example of South Korea where a few family conglomerates have an unhealthy grip on the economy.

But there are powerful reasons to hope that family companies will continue to flourish. To mention just two, owner-managed firms can make decisions far faster than ones which have to go to a disparate shareholder base first. Also, in 100% family-owned firms the principal-agent problem that bedevils shareholder-owned firms is absent.

Of course the cultures in emerging markets differ massively, and some might prove to be better environments for family ownership than others.

McKinsey also have one fascinating extra piece of information that argues in favour of family firms. For the past decade they have surveyed over a million employees about the “health” of businesses, and have found that family firms perform better than others in most areas, and far better in some.

Without a crystal ball it is impossible to know whether family ownership will remain the dominant model in emerging markets, but this data suggests that it would be a good thing if it did.