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Understanding Family Businesses in China: the Path, the Trend, and the Future
Understanding Family Businesses in China:
the Path, the Trend, and the Future
Editor: IE Foundation / IE University & CKGSB (Cheung-Kong Graduate School of Business).
C/ de María de Molina, 11. 28006 Madrid. Tel. 915 68 96 00
4 Understanding Family Businesses in China: the Path, the Trend, and the Future
Understanding Family Businesses in China:
the Path, the Trend, and the Future .................................. 7
SUMMARY
I. The engine of growth ....................................................... 8
II. The “vanishing” family in a growing business ................ 10
III. In the time of pandemic and uncertainty ....................... 11
IV. The influence of culture on post-pandemic recovery .... 13
V. Cultural comparison takeaways ..................................... 14
Conclusions .......................................................................... 15
Double Transformation for family businesses
in China ..................................................................................... 16
Understanding Family Businesses in China: the Path, the Trend, and the Future 5
THE WORLD SEEN FROM 3020 CHINESE INVESTMENTS ABROAD: RECENT
JOSÉ FÉLIX VALDIVIESO. PATTERNS AND POTENTIAL PATHS GOING
Chairman of IE China Center ................................................. 06 FORWARD
PEDRO GETE.
UNDERSTANDING FAMILY BUSINESSES IN CHINA: Professor and Chair, Department of
THE PATH, THE TREND, AND THE FUTURE Finance IE Business School and IE University. ...................... 24
Dr. BIN MA.
Academic Director of IE China Center. ................................. 07 HOW TO DO BUSINESS WITH FAMILY-RUN COMPANIES IN
THE WEST
DOUBLE TRANSFORMATION FOR FAMILY MANUEL BERMEJO.
BUSINESSES IN CHINA Director - Family Business Programs in IE
Dr. XINYU FAN. Exponential Learning ............................................................. 25
Assistant Professor of Economics, Cheung Kong Graduate
School of Business.................................................................. 16 WHAT’S THE BEST APPROACH TO DOING
BUSINESS WITH CHINESE FAMILY-RUN
THE SPAIN-CHINA FOUNDATION’S VISION OF COMPANIES?
RELATIONS WITH CHINA LISA WANG.
CARLOS MORALES. Founder of Link The World Advisers. ................................... 26
Former Secretary-General of the Spain-China Council
Foundation, Ministry of Foreign Affairs, the European IT IS NOT ABOUT THE WEST. THE FUTURE OF FAMILY
Union and Cooperation ......................................................... 18 PHILANTHROPY IN CHINA
REGINA LLAMAS.
CHINA’S ECONOMY AND THE “GREAT Associate Professor in the Humanities,
LOCKDOWN” IE University .......................................................................... 27
GONZALO GARLAND.
Prof. of Economics. Executive Vice President at
IE Foundation ........................................................................ 19
FAMILIES IN BUSINESS: A BRIGHT FUTURE IN
EUROPE AND CHINA
CARLOS MAS.
President, IE Center for Families in Business ......................... 20
WHY CHINESE FAMILY BUSINESSES WILL BE CRUCIAL
TO GLOBAL TRADE OVER THE NEXT DECADE
MARGARET CHEN.
Optimus Horizon, Founder. .................................................. 21
ARE WE HEADED TOWARD A MORE CHINA-
CENTERED FORM OF GLOBALIZATION?
RAFAEL BUENO.
Casa Asia Director of Policy & Society & Educational
Programs ............................................................................... 23
6 Understanding Family Businesses in China: the Path, the Trend, and the Future
JOSÉ FÉLIX VALDIVIESO / Chairman of IE China Center
The world seen
from 3020
I
f, in a bid to unravel the knots of our re- ongoing change—namely family business-
cent history and identify the most impor- es and start-ups, and all this from the per-
tant events of the first two decades of the spective of China, which will play a key role
21st century, we were to tele-transport our- in this new century.
selves into the living room of a historian in the According to different estimates, fami-
year 3020—and in the absence of a further sur- ly businesses (家族企业 jiazuqiye, to use the
prise by the goddess Clio—I believe our his- Chinese term) represent more than 70% of
torian would undoubtedly highlight the im- Global Domestic Product. Across the world, “IF WE WERE TO TELE-TRANSPORT OURSELVES
pact of two things on our world. the family remains crucial for human surviv- INTO THE LIVING ROOM OF A HISTORIAN IN THE
Firstly, the fall of the Twin Towers in 2001, al, and for this reason its economic activities YEAR 3020 I BELIEVE OUR HISTORIAN WOULD
and secondly, today’s economic/health crisis: will continue to help drive the global econo- UNDOUBTEDLY HIGHLIGHT THE IMPACT OF TWO
both events can only be seen as creating an my, sharing many ways of working, regardless THINGS ON OUR WORLD.FIRSTLY, THE FALL OF
inescapable part of a new paradigm of glo- of where they are based. THETWIN TOWERS IN 2001, AND SECONDLY,
bality, as yet to be defined. I introduced last year´s report by referring TODAY’S ECONOMIC/HEALTH CRISIS: BOTH EVENTS
Which is why I don’t think our historian to the Ancient Greek myth that Zeus released CAN ONLY BE SEEN AS CREATING AN INESCAPABLE
would be much interested in the Great Re- two eagles at either end of the world, East and PART OF A NEW PARADIGM OF GLOBALITY, AS YET
cession of 2008: too similar to other reces- West, decreeing that wherever they met, a TO BE DEFINED. WHICH IS WHY I DON’T THINK
sions in the past; nor in the digital revolution sacred stone, the omphalos, or navel of the OUR HISTORIAN WOULD BE MUCH INTERESTED IN
of the early years of the century, which is likely world, would be erected so as to provide a THE GREAT RECESSION OF 2008: TOO SIMILAR
to be overtaken by future digital changes that means to communicate with the gods. De- TO OTHER RECESSIONS IN THE PAST.”
will make the current technological transfor- veloping the idea, I commented that may be
mations of our social, economic, and cultural we should start behaving differently and stop
networks pale into insignificance. putting the center of things where it suits us, It is also possible that our historian would
It is within this context of profound change and considering, for example, that the cent- not detect any such change and we would go
and uncertainty that Cheung-Kong Gradu- er is our own planet. largely unnoticed.
ate School of Business and IE China Center The current pandemic has again reminded With this in mind, perhaps we should re-
present Understanding Family Businesses in us of the fragility of our lives and how fickle member that there are families in every part
China: the Path, the Trend, and the Future. we are in choosing our priorities. So, sitting of the world, which regardless of their apparent
This report follows on Chinese vs. European in her living room in 3020, perhaps our histo- differences, are united by a range of factors as
Entrepreneurship: A comparison published rian would tell us that ours was a time when they work to strengthen their respective econ-
by IE China Center in October, 2019. In both new approaches and perspectives, beyond omies. Our hope in producing this report on
cases, the aim is to shed light on what we national borders, began to be explored to China’s family businesses is to contribute to a
believe will continue to be one of the pil- try to solve the problems of the planet, rath- broader understanding of the factors shared
lars of the global economy—regardless of er than those of our own countries. by this universally successful institution.
Understanding Family Businesses in China: the Path, the Trend, and the Future 7
Dr. BIN MA / Academic Director of IE China Center
Understanding family businesses in
China: the path, the trend, and the future
From Australia to Alaska, from South Africa to South Korea, family ownership, governance, and/or manage-
ment(4). In this report, in order to reflect the
businesses are the unsung heroes of the global economy, supporting developmental trend of family businesses
more families, industries and sectors than most people imagine. in China, based on the definitions in family
business research, we accept a commercial
organization as a family business as long
as its decision-making process has been
A
cross almost every sector of the influenced by a founding family over an ex-
world’s economies, family-run en- tended period of time; such influence may
terprises include small, medium or may not have been weakened or trans-
and large privately owned businesses oper- ferred to a professional executive team by
ating as partnerships, trusts or a company. the time of the publication of this report.
On average, the total economic impact of Based on the records of 338 companies
family businesses to global GDP is more during a five-year time span, we have been
than 70%. able to achieve a more complete under-
China is no exception: since the econom- standing of family businesses in China
ic reforms of the late 1970s, huge numbers and their role in the country’s economic
of private family enterprises have been set success, while anticipating some develop-
up and now play a major role in the econ- mental patterns for the near future.
omy, helped by a raft of regulations and Additionally, in response to the ques-
policies. A range of statistical sources(1,2,3) tion of how the COVID-19 pandemic may
suggests the contribution of the private affect Chinese family businesses and their
sector to GDP in China has grown to at least strategies in the post-pandemic economic
60% in recent years, of which 85% are from recovery, we conducted semi-structured in-
family-owned private enterprises, making terviews with the owners of 20 family-run
a major contribution toward technological businesses. Based on an understanding of
innovation, as well as creating jobs. There- Chinese culture and the way it influences
fore, given their overall economic contri- family business operations in China, we
bution, we believe that in the context of would like to explain the findings of our
the post-pandemic economic recovery, data analyses and interviews in a cultural
research on private family-run enterprises context and, further, offer some takeaways
in China is more timely than ever. for how best to do business with Chinese
Family businesses have been defined family enterprises in today’s global envi-
in various ways from the perspective of Bin Ma / Academic Director of IE China Center ronment.
8 Understanding Family Businesses in China: the Path, the Trend, and the Future
I. The engine of growth
■ GEOGRAPHIC DISTRIBUTION (Figure 1 )
As shown in Figure 1, the geographic
location of sampled companies covers
29 provinces throughout China, which HARBIN
provides a foundation for us to demon-
strate a general developmental record of WULUMUQI
CHANGCHUN
Chinese family businesses from 2012 to
2016. Research on the economic growth SHENYANG
of China usually pays more attention to BEIJING
TIANJIN
the south-east of the country, where the
economic reforms started more than forty YINCHUAN
TAIYUAN JI’NAN
XI’NING
years ago. However, after decades of NANJING
LANZHOU
development, as well as the Chinese gov- ZHENGZHOU
XI’AN SHIJIAZHUANG
ernment’s efforts to balance economic
development throughout the country,(5,6) SHANGHAI
LHASA HEFEI
it is necessary to geographically zoom CHENGDU
CHONGQING
WUHAN HANGZHOU
NANCHANG
CHANGSHA
FUZHOU
GUIYANG
SHENZHEN
GUANGZHOU
INDUSTRY DISTRIBUTION (Figure 2)
Energy
HAIKOU
2%
Information
Technology Materials
15% 11%
out so as to provide a more comprehen-
Financials
sive vision of China’s economic growth.
9%
Industrials In addition, Figure 2 shows the industrial
20% distribution of our sample, which cov-
Health Care ers eight sectors categorized by GICS
13% (Global Industry Classification Standard)
including energy, materials, industrials,
Consumer consumer discretionary, consumer sta-
Consumer ples, health care, financials, and informa-
Staples Discretionary
22% tion technology.
8%
Understanding Family Businesses in China: the Path, the Trend, and the Future 9
■ FAMILY BUSINESS GROWTH (Figure 3)
11,02 11,14
In Figure 3, we show the growth tra- 50 11
jectory of our sample of Chinese family
businesses, which largely reflects GDP
growth in China(7), suggesting that (1) 49,9’
10,44
private family enterprises can serve as
an engine of national economic growth, 40 10
and (2) the growing national economy
has provided private companies with 9,57
39,97
a healthy business environment within
which to develop. These patterns mutu-
30 9
ally confirm one another and, thus, give
31,48
us confidence in the future growth of 8,53
both family businesses and the national
27,73
economy of China.
Furthermore, Figure 4 shows the 20 22,02 8
increasing rate of gross profit of the
sampled businesses, which provides fur- 2012 2013 2014 2015 2016
ther evidence of a healthy growth trend
for these enterprises. It is not easy to Company size. (Average Total Assets GDP of China (In USD, Trillion)
maintain sustainable growth, and these in CNY, Million)
■ AVERAGE GROSS PROFIT ■ COMPETITION SEVERITY
(IN CNY, MILLION) (Figure 4) (FROM 1 - LOW TO 5 - HIGH) (Figure 5)
firms typically face tough competition:
Figure 5 illustrates the degree of com-
petition Chinese family-run businesses
37,48 operate under. 4,49
Overall, by applying financial indicators 4,38
28,63 and illustrating their statistical patterns, 4,20
25,59 we have revealed the growth trends of 4,06
22,67 Chinese family businesses in terms of both 3,94
17,64 assets and profits, as well as the impor-
tance of family businesses for the national
economy. Next, in order to explain the un-
derlying mechanisms behind their growth,
we have to examine the founding families
in these enterprises in the context of their
2012 2013 2014 2015 2016 control over the businesses. 2012 2013 2014 2015 2016
10 Understanding Family Businesses in China: the Path, the Trend, and the Future
II. The “vanishing” family in a growing business
THE ROLE OF FOUNDING FAMILY
■ NUMBER OF COMPANIES UNDER ■ AVERAGE NUMBRER OF FOUNDING ■ AVERAGE SHAREHOLDING RATIO
THE FOUNDING FAMILY CONTROL FAMILY MEMBERS IN TOP OF FOUNDING FAMILY (%)
(Figure 6) MANAGEMENT TEAM (Figure 7) (Figure 8)
1,64
33 33 33
1,55
32
1,48
18,59
17,94 17,90
1,37 17,42
1,31 17,18
30
2012 2013 2014 2015 2016 2012 2013 2014 2015 2016 2012 2013 2014 2015 2016
Essentially, what makes a family business TMTs in family enterprises usually These results are consistent with the re-
different from other forms of enterprise is contain both family and non-family search on family business life cycles found
the involvement of family members and members, the proportion of which can in samples from western countries,(8,9) which
the hybridity of both family and business also indicate the founding family’s control suggests that the control of the founding
systems within a single organization. In- over the business. Generally speaking, in family usually diminishes as the business
volvement in decision-making (e.g., being the history of a family business, we develops. In other words, while we are
a member of the top management team usually see fewer family members in primarily concerned here with identifying
- TMT) and the shareholding ratio of the critical administrative roles (e.g., CEO) as what makes Chinese family businesses
founding family indicate its control over time passes, indicating a more modern different, it is equally important to recog-
the enterprise.(4) and mature managerial structure. In nize the similarities they share with family
Specifically, Figure 6 shows the number Figure 7, we can see that the number of businesses in the West. The declining
of companies out of our sample of 338 founding family members holding TMT involvement of founding families in general
under the control of the founding family, positions is also gradually declining over indicates that we may conclude that the
which can make decisions without the the years, suggesting that the founding Chinese family businesses in our sample
need to consult non-family members. It family is involved less and less in making are on the path to becoming more modern
should be noted that while the number is strategic decisions. Similarly, in Figure 8, commercial organizations run by trained
relatively stable for the first few years, it the shareholding ratio of the founding executives and management teams, which,
has begun to show a significant decline family also shows the same downward in turn, provides insights on the general
more recently. trend. development of Chinese family businesses.Understanding Family Businesses in China: the Path, the Trend, and the Future 11
Figures 9 and 10 demonstrate that the III. A time of pandemic and
average age of TMT members as well as
their shareholding ratios are relatively
uncertainty
stable, respectively. These are two more
indicators showing that Chinese fam-
ily businesses are enjoying a period of ■ INDUSTRY DISTRIBUTION OF INTERVIEW SAMPLES
stability and maturity, which piques our (GICS 2ND TIER CATEGORY) (Figure 11)
academic curiosity about their strategies
# OF COMPANIES
to handle the impact of external factors
such as the COVID-19 pandemic. HOTELS, RESTAURANTS & LEISURE
4
TEXTILES, APPAREL & LUXURY GOODS
■ TMT AVERAGE AGE (Figure 9) 8
FOOD & STAPLES RETAILING
47,24 3
46,72
46,61 REAL ESTATE MANAGEMENT & DEVELOPMENT
46,25 2
45,90
SPECIALTY RETAIL
3
■ PERCENTAGE OF LOSS ON GROSS INCOME COMPARED TO THE SAME
2012 2013 2014 2015 2016 SEASON OF 2019 (Figure 12)
(NOTE: 0% MEANS NO DAMAGE)
■ AVERAGE SHAREHOLDING RATIO
80-100% 3 4 7
OF TMT (%) (Figure 10)
60-80% 1 5 6
3,18
3,07 3,05
2.92 40-60% 1 1
2,83
20-40% 1 3 4
ONLINE RETAILERS
0-20% 0 FOOD PRODUCERS
REAL ESTATE DEVELOPER
GROWTH 2 2 GARMENT FACTORIES
2013
2016
2012
2014
2015
HOTEL AND TRAVELING
0 1 2 3 4 5 6 7 AGENCIES12 Understanding Family Businesses in China: the Path, the Trend, and the Future
In order to answer the questions related
to the COVID-19 pandemic and any
economic recovery, we conducted semi-
structured interviews with 20 Chinese
family business owners in late June
of 2020, by which time the pandemic
was relatively under control in China.
As shown in Figure 11, the businesses
include hotel and travel agencies, gar-
ment factories, food producers, real
estate developers, and online retailers.
Figure 12 demonstrates the impact of
the COVID-19 pandemic on the gross
income of these family businesses.
Although it varies across different in-
dustries, with two companies experienc-
ing growth, we can generally conclude ■ MAIN CHALLENGES IN RECOVERY (Figure 13)
that the pandemic has posed a major
challenge for most family businesses, # OF COMPANIES
which led to our further question about LOGISTIC ISSUES 10
how long our interviewees thought it
would take for their businesses to return HIRING AND OTHER HR ISSUES 13
to normality. The average expectation SALES AND MARKETING ISSUES 15
was two-and-a-half months, with a 4.28 CASH FLOW AND OTHER FINANCIAL ISSUES 16
rating of general confidence on the ef-
fectiveness of the Chinese government’s
recovery policies (from 1= little confi-
dence to 5 = significant confidence).
■ MAJOR FINANCIAL SOURCES (Figure 14)
In particular, these policies include
government-initiated investment, mon- # OF COMPANIES
etary policy for lower financing costs, a GOVERNMENT FUNDED PROGRAMS IN NATIONAL BANKS 12
tax break for small- and medium-sized
enterprises, employment training and LOCAL/COMMUNITY BANKS 14
consultation services for both individual BUSINESS PARTNERS 14
and company and, most importantly, a FAMILY AND FRIENDS 16
strict public health tracking system to
prevent possible relapses of the pan-
demic, which provides the confidence
in the stability of the business environ- in Figure 13. The top-four common chal- challenges, all considered their families
ment. lenges are cash flow and financial issues, and friends as the primary source of help,
Further, we asked about the major sales and marketing, hiring and HR, and followed by business partners, local/com-
challenges they will face in the recovery logistics. Among the 16 family businesses munity banks, and finally, national banks
period, the results of which are depicted experiencing cash flow and financial (Figure 14).Understanding Family Businesses in China: the Path, the Trend, and the Future 13
IV. The influence of culture on post-pandemic recovery
People in different countries and regions ■ CHINESE CULTURE BASED ON HOFSTEDE MODEL (Figure 15)
have reacted differently to the challenge
of the COVID-19 pandemic, which can be 100
explained, at least partially, by the cultural 87
80
norms that shape people’s behaviors. Re-
80
search in the cross-culture management field 66
identifies six dimensions that distinguish
60
cultures from one another: power distance;
individualism versus collectivism; masculin-
ity versus femininity; uncertainty avoidance; 40 30
24
long-term orientation versus short-term ori- 20
entation and indulgence versus restraint.(10) 20
Based on an understanding of national
cultural differences, we conjecture that, in 0
the post-pandemic recovery period, the Power Individualism Masculinity Uncertainty Long Term Indulgence
challenges, resources, and strategies that Distance Avoidance Orientation
are critical for family business recovery will
come in different forms and shapes in differ- Individualism versus collectivism indicates them. A low score, such as 30 in the case
ent countries based on cultural differences. the independence/interdependence among of China, is viewed favorably at a time of
In particular, Figure 15 shows the scores of people in a society. A score of 20 shows a crisis and uncertainty, showing that people
the six dimensions of Chinese culture.(10) low level of independence and a high level in China can tolerate uncertainty and live
We will focus on the first five dimensions, of interdependence. In Chinese society, peo- and deal with it. In addition, a lower uncertai
which we believe to be most relevant in a ple tend to make collective decisions based nty avoidance score is also associated with
business context, to explain the reactions on shared resources. Moreover, members of more flexible, adaptable, and entrepre-
and strategies of Chinese family businesses a collective society prioritize in-groups, such neurial solutions.
in the post-pandemic economic recovery as family members. This is the reason why Long-term orientation shows a society’s
period that we have discussed in Section 3 our interviewees primarily rely on family and link with its past while dealing with the pres-
of this report. friends for financial help. ence and future. A score of 87 indicates that
Power distance describes people’s level of A high score on masculinity, 66 in the Chinese people are long-term oriented,
acceptance of unequally distributed power, case of China, indicates the extent to which plan ahead, and develop and maintain
regarding which, a score of 80 shows a high Chinese society is driven by competition, ef- lasting relationships with their business
level of such acceptance. This dimension has ficiency, achievement and success, meaning partners. The fact that our interviewees put
a big impact on the relationship between that many people are prepared to sacrifice business partners as their second source of
government and society. In our case, the family and leisure time if necessary. The rap- financial help, after family, demonstrated
family business owners we interviewed ex- id growth of the Chinese economy provides this point. Moreover, a high score is also as-
pressed a high degree of confidence in the some evidence of this shared quality among sociated with significant levels of saving and
effectiveness of the Chinese government’s Chinese people, especially the owners of investment, which are particularly important
recovery policies, scoring 4.28 on average private family businesses. during times of uncertainty. This may be
on a scale ranging from 1= little confidence Uncertainty avoidance describes how why the business owners we interviewed
to 5 = significant confidence. This is a good severely people feel threatened by ambigu- expected a speedy recovery (two-and-a-half
example of such impact. ity or uncertainty and, thus, tend to avoid months on average).14 Understanding Family Businesses in China: the Path, the Trend, and the Future
V. Cultural comparison takeaways
■ CULTURAL COMPARISON (Figure 16)
100 91
89 86 86 87
80 83
80 76 75
71 70
68 67 66 66 66
62 65 63 61
57
60 51
50 46 48 51
40 42 43
40 35 35 30 35
26
20
20
0
Power Distance Individualism Masculinity Uncertainty Long Term
Avoidance Orientation
CHINA SPAIN FRANCE GERMANY ITALY UNITED KINGDOM UNITED STATES
Continuing with a cultural perspective, tween China and most Western countries. Spanish culture enjoys a balance
Figure 16 shows cultural comparisons However, as shown in the figure, French between individualism and collectivism,
between five major European countries culture also shows a relatively high score of reflected by a score of 51. Compared to
(Spain, France, Germany, Italy, the United 68, followed by 57 for Spain, which makes China’s 20 and significantly higher scores,
Kingdom), as well as China and the United it easier for French and Spanish companies ranging from 67 to 91 in the other five
States.10 Based on these cultural differ- to understand the importance of respect countries, this balance in Spanish culture
ences, we have developed the following in Chinese society. For those from a culture provides an advantageous position for
practical takeaways for business owners scoring low on power distance, we encour- business owners from Spain to cope with
in the West who are interested in working age you to work on the sense of power the collective tendency of Chinese society.
with Chinese family-run businesses. As dynamics and respect, starting with small In China, people highlight the value of
we can see, although each country has a gestures. For example, in the initial stage in-group friendships, dependency among
unique cultural profile, some share similar of developing a business partnership with family members and collective decision-
points on certain dimensions of culture, Chinese companies, we suggest that gift- making, even in a business and profession-
making the understanding of each other giving, regardless of the value, is a good al context. It takes time to break into an
and further collaborations easier than way to break the ice. This is especially the inner circle, but the effort usually pays off.
those of other countries. case if your Chinese business partner is For those from a country sharing a simi-
Power distance used to be considered significantly older than you or occupies a larly high score of cultural masculinity (66
one of the biggest cultural differences be- more senior position. for Germany, 70 for Italy, 66 for UK, and 62Understanding Family Businesses in China: the Path, the Trend, and the Future 15
for the United States) such as China’s 66,
the seeming obsession with efficiency and
achievement in successful Chinese enter-
CONCLUSIONS
prises will come as no surprise. Mean- Over the last four decades, Chinese family busi- Meanwhile, cultural values are also expected to
while, Spain and France score 42 and 43, nesses have shown steady and healthy growth, shape the post-pandemic strategies of Chinese
respectively on this dimension, which may becoming a key driver of Chinese economic family businesses in terms of setting long-term
pose some barriers for business own- development (Figures 3 & 4). With a presence visions and strategic goals, building synergy with
ers from these two countries in terms of throughout the country and operating in a wide business partners, reserving more cash flow for
understanding their Chinese business range of sectors, China’s family-run companies risk control, developing a close relationship with
partners’ “rhythm” at work. Nowadays, provide a wide range of opportunities for global the government based on trust, and so on. Thus,
it is hard to overstate the importance of investment and collaboration. we predict a relatively fast recovery of Chinese
success and being seen to be successful At the same time, the impact of the founding family businesses from the COVID-19 pandemic.
in China, especially for family-run private families in managing their businesses has steadily In general, Chinese culture still plays an influen-
companies. begun to wane (see founding families’ control in tial role in the way Chinese family businesses are
Perhaps the most drastic cultural dif- Figure 6, family members in TMTs shown in Figure run, an understanding of which is a must for any
ference shown in Figure 16 is uncertainty 7, and shareholding ratios of founding families Western company looking to create partnerships.
avoidance, regarding which we have a in Figure 8). (See Section 5 for practical takeaways.)
clear boundary between two similar-sized This trend reduces the influence of family Last but not least, there is no evidence in
groups: China, the United States and the events (founders’ health, divorces, etc.) on the this report that would question our confidence
United Kingdom have very low scores, business, making the operation and performance in China’s ongoing growth or that the country,
while Spain, France, Germany, and Italy of Chinese family businesses more predictable with the help of family-run businesses, can be
have very high scores. For those from a and transparent. In this sense, Chinese family expected to continue playing a major role in the
country in the latter group, when doing businesses have become mature, modern com- global economy.
business in China, please be flexible and mercial organizations interested in global joint
ready for surprises: most rules, and some- projects, offering many opportunities for outside
times the important ones, are unsaid. To players. 1. People’s Daily: http://finance.people.com.cn/
avoid misunderstandings or mistaken as- Our interviews show that the COVID-19 pan- 2. CampdenFB: http://www.campdenfb.com/
3. PWC Hong Kong:
sumptions, simply ask when you have any demic has posed a huge challenge for Chinese https://www.pwchk.com/en/migration/pdf/gfbs-cnhk-
doubts. Your Chinese business partner will family businesses; a general setback for family nov2016-hk.pdf
be more than happy to explain in detail, business development is expected in China. How- 4. Astrachan, J. H., Klein, S. B., & Smyrnios, K. X. (2002).
because your interest and seriousness can ever, this influence varies across industries (Figure The F-PEC scale of family influence:
A proposal for solving the family business definition
be taken as a mark of your respect. 12). Similar influential patterns have also been problem1.
Building trust and creating collabora- observed in other countries, showing growth for Family business review, 15(1), 45-58.
tions takes time, especially in long-term internet-based businesses such as distance edu- 5. Wikipedia.org: https://en.wikipedia.org/wiki/China_
Western_Development
oriented societies like China and Germany, cation platforms, online retailers and gaming, etc.
6. Wikipedia.org: https://en.wikipedia.org/wiki/Rise_of_
which have a significantly higher score of Chinese family business owners show a high de- Central_China_Plan
87 and 83 respectively. However, if you are gree of confidence in a return to normality, based 7. World Bank: http://datatopics.worldbank.org/world-
patient enough to build a bond in these on their expectations of both a relatively short re- development-indicators/
two countries, it is usually strong, sustain- covery period and effective assistance policies ini- 8. Davis, J. A., Hampton, M. M., & Lansberg, I. (1997).
Generation to generation: Life cycles of the family busi-
able, and beneficial. Moreover, long-term tiated by the government. This confidence is also ness. Harvard Business Press.
orientation is considered advantageous, built upon the cultural values of collectivism (e.g., 9. Neubauer, F., & Lank, A. G. (2016). The family busi-
especially in times of uncertainty and crisis, prioritizing family and friends as financial sources) ness: Its governance for sustainability. Springer.
when your partnership with Chinese and and a long-term outlook (e.g., maintaining high 10. Hofstede insights: https://www.hofstede-insights.
com/product/compare-countries/, https://hi.hofstede-
German companies will be of extra value. levels of saving) common to Chinese society. insights.com/national-culture.16 Understanding Family Businesses in China: the Path, the Trend, and the Future
Dr. XINYU FAN / Assistant Professor of Economics, Cheung Kong Graduate School of Business
Double Transformation for Family
Businesses in China
F
ew in history have witnessed a define the Chinese economy in the gen-
wave of wealth generation as Chi- We believe it is a unique erations to come.
na has experienced since 1978. opportunity for a “double A key challenge in family businesses
The unprecedented economic reforms transformation”: the next- is related to inter-generational commu-
cultivated a large class of successful nications. Business insights rightfully ac-
generation entrepreneurs use cumulated by the parents’ generation
family businesses that have profoundly
reshaped the Chinese economy. In ad- their knowledge and passion sometimes may seem overconfident,
dition to the economic growth, family for technology to embrace assertive, or even outdated to the next
businesses have also contributed to the and advocate for digital generation. Conventional wisdom is rare-
institutional and operational transfor- transformation in their family ly sufficient to ensure consistent compet-
mation of China. From the early-days itive advantages in the fast-paced real-
businesses. Meanwhile, digital ity of China’s business landscape. The
township-village enterprises (TVE) to
the agile, smart-manufacturers of today, transformation also facilitates next generation of entrepreneurs often
family businesses have played a pivotal the transformation of family must prove themselves in the business
role in China’s economic growth. Across businesses because the next- and to not only impress their parents but
the nation, family businesses continue generation entrepreneurs their experienced staff before they can
to contribute to the on-going ‘Pover- put their own stamp to the company. In
accumulate authority, the NextGen Program at Cheung Kong
ty Alleviation’ campaigns, where rural-
born entrepreneurs return home to re- expertise, and management Graduate School of Business (CKGSB), a
vive local villages, while e-commerce skills during the process”. reputed program designed to prepare
platforms link millions of products made next-generation entrepreneurs running
in the countryside to tens of millions some of the most successful private en-
of urban consumers. In the past forty terprises in China prepare for their roles,
years, family businesses have always the most commonly asked question
been in the spotlight of the Chinese among the young entrepreneurs is “how
economy. Now in the second decade to win a vote of confidence from senior
of the 21st century, many experienced family members.”
entrepreneurs find themselves facing Meanwhile, industry landscapes in Chi-
common challenges in their family busi- na and around the world are experienc-
nesses as they struggle with succession, ing vast restructuring. Aided by AI algo-
delegation, transition, and diversifica- rithms and big data cloud computing,
tion – their choices thus will collectively traditional manufacturers are becomingUnderstanding Family Businesses in China: the Path, the Trend, and the Future 17 significantly more efficient through the use of data which allows companies to accurately predict consumption needs, and even preempt future trends. The digital transformation of companies is becoming a necessity for a way forward. Many of these manufacturers are, not sur- prisingly, family businesses (many are run by CKGSB alumni). At CKGSB, our Exec- utive Education Programs, our Masters of Entrepreneurship and Technology and Innovation (METI) and Chuang Commu- nity (early stage incubator) not only equip tech entrepreneurs and traditional man- ufacturers the skills and knowledge to grow their businesses but also offer an environment for exchange in expertise. Manufacturers gain a better understand- ing of what sort of data technology are available and how it can improve effi- ciency, while technical experts discover where innovations may be needed in the production process. In light of the transformations taking place in China’s family businesses and the digitization taking place inside com- panies, we believe this is a unique op- portunity for a “double transformation,” where family-owned firms must transform themselves to meet the demands of to- day’s digital changes. On the one hand, we expect the next generation of entre- preneurs to use their knowledge and passion for technology to embrace and advocate for the digital transformation of their family businesses, while accumu- lating authority, technical expertise, and management skills in the process. On the With the ever-changing business land- “vanishing” as modern corporate struc- other hand, digital transformation can fa- scape in China, CKGSB not only aims to tures take hold. But the essence of family cilitate the transformation of family busi- guide the future direction of family busi- business shall be passed on – not only in nesses, as the next generation of entre- nesses, but to also shed light on family- the physical assets or profit numbers, but preneurs exemplifies their qualities and owned firms. As illustrated in the previous in the entrepreneurial spirit that brought vision for the future. report, traditional family ownerships are the founding generation and us here.
18 Understanding Family Businesses in China: the Path, the Trend, and the Future
CARLOS MORALES / Former Secretary-General of the Spain-China Council Foundation,
Ministry of Foreign Affairs,the European Union and Cooperation
The Spain-China
Foundation’s vision
of relations with China
T
he Spain-China Council Foundation is provided a platform to generate and share
a private, non-profit institution estab- knowledge for more than a decade, while one
lished in 2004 with the mission of foster- of the consequences of the current pandemic
ing deeper knowledge and closer ties between has been the need to rapidly adapt and digitize
our two countries and their peoples. It is a clear how we work.
example of public diplomacy. The foundation has a presence on China’s by keeping in contact with these professionals,
The initiative was set up under the auspices most popular social network, Wechat, so as to while creating a talent pool, a network of influ-
of the Spanish Ministry of Foreign Affairs at a establish direct communication with Chinese ential professionals made up of friends of Spain
time when new formulas were being sought people interested in knowing more about and linked to the foundation, its patrons, and
to facilitate Spanish civil society’s contact with Spain. The website www.spain-china-founda- other Spanish counterparts that might serve
Beijing and with Chinese society in general, at tion.org covers bilateral current affairs, in ad- as a channel to facilitate specific activities. In
a time of growing interest in China. dition to the activities of the foundation itself. short: to nurture China’s ties with Spain and cre-
One of its characteristics is therefore public- Technology is key among the topics explored ate knowledge jointly within the context of the
private cooperation. With this in mind, the Board at our China in-depth discussion groups, par- program.
of Trustees, as the foundation’s administrative ticularly 5G, the digital agenda, artificial intel- The pandemic and its impact on geostra-
body, has brought together around 30 com- ligence and e-commerce. tegic relations, global supply chains and the
panies, universities, local authorities, business At the same time, our Chinese Leaders of the ongoing technological revolution have led the
schools, cultural and sporting entities noted for Future visitor program, aimed at generating foundation—in its capacity as a meeting point
their activities, interest and presence in China. ties with China’s professional elite, has invited between civil society and government—to
The foundation has been adapting to its en- some of the leading figures in the Chinese tech- commit further to defending Spain’s interests
vironment in parallel with the evolution of bila- nological revolution in areas such as startups, in China.
teral relations and to the two countries’ internal artificial intelligence or sustainability. Thirteen With this in mind, its strategy and action plan
transformation and international projection. years on, a total of 95 Chinese business leaders for 2020-2021 focuses on activities to help with
The China of 2020 has little in common with have come to Spain to share their experiences. the economic recovery of our country, either
the country of two decades ago. We have wit- In April 2019, inspired by the alumni chap- by supporting areas that have suffered during
nessed first-hand the changing reality of China, ters set up by prestigious business schools the crisis such as exports, tourism, services and
and worked to share these changes with civil such as IE Business School, the Chinese Soci- international mobility, or those looking to the
society through forums, leadership programs, ety of Friends of Spain was constituted at the future such as smart cities, innovation along
seminars, discussions and colloquiums. Embassy of Spain in Beijing to bring together with areas such as biomedicine, health tech-
Connecting our two societies has been one former participants of the Chinese Leaders of nologies, the environment, smart manufactur-
of our earliest priorities. Social networks have the Future program. The idea is to capitalize ing and the food industry.Understanding Family Businesses in China: the Path, the Trend, and the Future 19
GONZALO GARLAND / Executive Vice President of the IE Foundation
China’s economy and the
“great lockdown”
T
he International Monetary Fund’s April casts in June instead of July this year. In these
2020 World Economic Outlook report forecasts the world’s GDP is expected to fall by
defines the current global economic 4.9% in 2020, and all major regions and virtually
crisis as the “Great Lockdown”, following the all larger countries will be expected to fall into a
tradition of the “Great Depression” of the late recession. The advanced economies would see
1920s and early 1930s, and of the “Great Re- a drop of 8%, including decreases of 8% in the
cession” of the late 2000s and the early 2010s. United States, 10.2% in the euro area, 5.8% in
Time will tell whether this is eventually how Japan, and 10.2% in the United Kingdom. The
history will remember the present crisis, but Emerging and Developing countries will also
no doubt there is originality in maintaining the see a decrease of 3% in their GDP’s, with drops
“Great” adjective to describe these three major of 9.4% in Latin America, 5.8% in Emerging and
economic crises, each one different but at the Developing Europe, 4.7% in the Middle East
same time showing common elements. and Central Asia, and 3.2% in Sub-Saharan Af-
There is no question that the world is under- rica. Even the region defined as Emerging and
going - and will be for some time - one of its Developing Asia, that includes both China and
most profound economic crisis in history, on India, would see a decrease of its GDP of 0.8%.
top of the very serious health and humanitarian Almost all of the large world economies will This may be explained by several factors: the
crisis produced by COVID-19. In the economic also go through recessions, including all of previous dynamism and higher growth rates of
dimension it seems clear that it will show sig- the euro area economies and Canada among the Chinese economy, although recently slow-
nificantly larger drops in GDP than the “Great the high income countries. This will also be ing down; the fact that China experienced the
Recession”, and this time not only will the high the norm among the most important emerg- worst effects of the COVID-19 epidemic earlier
income countries be going through deep re- ing countries. In fact, the IMF forecasts drops in the year, thus leading to a recovery over most
cessions, as was the case then, but most of the of GDP of 10.5% in Mexico, 9.1% in Brazil, 8% of the rest of the year; and the more rapid con-
developing and emerging economies will as in South Africa, 6.8% in Saudi Arabia, 6.6% in tainment of the larger effects of the pandemic.
well, something that only occurred in some of Russia, 5.4% in Nigeria, and 4.5% in India. The However, there is still high uncertainty on all
these countries in years 2008 and 2009. So the only major economy of the world that would fronts: the health situation, which may drasti-
most relevant comparisons will almost surely be escape a yearly drop in GDP according to these cally affect the length and severity of the eco-
centered around the severity of the present cri- forecasts would be China, which would grow a nomic effects, both negatively but hopefully
sis with that of the “Great Depression”. weak 1%, being the only exception among the positively, or the magnitude of the economic
Under normal conditions the IMF publishes major world economies in 2020. There are a few crisis all over the world. The situation is rapidly
4 quarterly reports on the World Economic other smaller countries, mostly in Africa, which evolving and time will tell how accurate the
Outlook every year in January, April, July and will be growing somewhat faster in 2020 due to forecasts are. Although it does seem that again
October. But given the extreme severity of the among other things their relative isolation from China will be showing more resilience amid the
current crisis it decided to update its April fore- the rest of the world. general negative environment.20 Understanding Family Businesses in China: the Path, the Trend, and the Future
CARLOS MAS / President, IE Center for Families in Business
Families in business: a bright policies implemented during the 1980s: a lower
fertility rate means the pool of potential heirs
future in Europe and China to many family businesses will be smaller. Thus,
the risks of not finding the right heir have in-
creased for many firms. Some family businesses
will have a hard time identifying and training
F
amily-run businesses play a key econom- well-prepared candidates in the family or, failing
ic role in Europe, as well as in China. that, looking for external executives to bridge
In the absence of up-to-date or official the gap. The expertise and knowledge we have
information, estimates suggest that of more at the IE Center for Families in Business helps
than 27 million private enterprises in China, to identify the factors that can aid a smooth
around 80% are family concerns, some of transition of ownership.
which are major players in the role of growing Another major issue for family-run firms is
and transforming the Chinese economy. As how to grow without losing control, particu-
such, the increasing relevance of family busi- larly when undertaking jnternational expansion
nesses in China is similar to that historically ob- and teaming up with Western companies. Part-
served in Europe and other parts of the world. nership with local families firms can be a very
There are several reasons to be optimistic successful way into China, hopefully leading
about the future of family companies. Firstly, to a long-term win-win relationship. But the
we live in a world in constant change, where in- future partnership needs to be assessed and
novation is the key to success: business families approached very carefully: it will involve a fit
have the flexibility and creativity to innovate. between both families based on values and
State-owned or publicly-listed enterprises may nying them throughout their professional and mission, socio-emotional capital and risk and
not have such advantages and are thus likely to life journeys. The center has a global reach: their mutual expectations, all of which are as
be more cautious in decision-making. Whereas through the academic, training and teaching relevant as the business opportunity under
family-run firms, which have an entrepreneur- activities of our team, we are in contact with consideration. Sharing experiences with fami-
ial mindset, are more willing to take risks and members of major families in business across lies that have been successful in building such
create new products and markets. Moreover, the world, especially in Europe, home to busi- partnerships can highlight best practices and
the family structure encourages better man- nesses dating back centuries, as well as in Latin help avoid common pitfalls.
agement practices, thanks to their long-term America. This intense interaction with business To conclude, families in business play will
vision and a higher shareholder commitment families enriches our understanding of the chal- continue to play a major role in the European
to the firm. These characteristics reinforce the lenges others may face. It has also created an and Chinese economies. Profitable and suc-
competitive advantages of family firms, allow- international community of leaders who share cessful firms are already helping both to grow
ing them to navigate changing environments. knowledge and experience. and improve living standards. As discussed
The IE Center for Families in Business con- Among the many issues that we discuss with above, these firms have specific advantages
tributes to the development and impact of families in business, succession is among the and challenges. Our mission at the IE Center
business families by helping them to operate most important, and can cause many problems for Families in Business is to help them make the
better in their environment through training re- when the handover to the next generation takes most of their unique characteristics to harness
sources and by leveraging our experience with place. This will likely be a big issue in China over opportunities for sustainable growth while pur-
families and our academic research, accompa- the coming years, in part due to the one-child suing family cohesion and a smooth succession.Understanding Family Businesses in China: the Path, the Trend, and the Future 21
MARGARET CHEN / Optimus Horizon, Founder
Why Chinese family businesses will be
crucial to global trade over the next decade
T
he private economy in China uses had surpassed that of the United States.
less than 40% of social resources, The private economy played a major role in
contributes more than 50% to state this, and can be traced through the following
tax revenue, carries out more than 60% of stages:
fixed-asset investment and foreign direct • the start-up of 1978-1988
investment, and is the home of over 70% • the frustration and recovery of 1989-1991
of high-tech enterprises. At the same time, • the adjustment and state guidance of
more than 80% of urban employment has ab- 1992-2001
sorbed some 90% of new employment, all of • the progress of 2002-2007
which has played a positive role in strength- • the impact and growth of 2008-2012
ening China’s economy, which at present, • the transformation and take-off stages of
is in the process of shifting from a stage of 2013 - 2020
rapid growth to high-quality development, • the unknown post-covid19 stage from 2020
while the private economy is set to usher in China’s private sector has become an im-
new historical opportunities. portant part of the national economy:
Family businesses account for about 90% • in building for a harmonious society
of China’s 21.6 million private firms, which are • as source of power for industrial transfor-
distributed as follows: manufacturing (38%), mation
restaurant and food (22%), construction (6%) • has been participant in market competition
and agriculture (6%). Meanwhile nine out of • form part of technological innovation
the first 10 richest self-made female billion- driver
aires in the world are Chinese entrepreneurs, Surveys show that about 25% of the top
according to the Hurun 2019 Report. management posts in Chinese family-run
Since the late 1970s, when China launched fi rms are held by outsiders. Also, Chinese
its economic reforms and opened up to the China’s family-run firms family-run firms tend to be relatively small
world, the country’s private sector, including and, based on the sample of listed compa-
are approaching what will likely
family businesses, has made considerable nies, on average, have been set up over the
progress. At a time when some in the West be the largest generational last 12 years, compared to many of the older
still called China communist, the country’s handover in the world. About family companies in Europe and the United
leadership was steadily working to lift 800 three million family businesses States, which date back half a century. As a
million people out of poverty and privat- result, most Chinese family businesses are
ize the manufacturing and services sectors.
are due to be taken over by still being run by the founding generation.
Four decades later, thanks to this astonish- the second generation in the
ing progress, by 2014, China’s GDP (PPP) coming decade.” ∑∑∑∑22 Understanding Family Businesses in China: the Path, the Trend, and the Future
Family businesses account
for about 90%
of China’s 21.6 million private
firms, which are distributed
as follows: manufacturing
(38%), restaurant and food
(22%), construction (6%) and
agriculture (6%).
∑∑∑∑
China’s family firms go global
Nevertheless, China’s family-run firms are
approaching what will likely be the largest
generational handover in the world. About
three million family businesses are due to be The internationalization of Chinese family- How to maximize the opportunities in
taken over by the second generation in the run enterprises will be a four-stage process tourism, agriculture, food products, educa-
coming decade. Managing this handover will that will first see sporadic exports, then tion, and industry?
require a combination of wisdom, creativity regular exports through agents, setting up How to attract more investment from
and innovation. marketing agencies abroad, and finallly China?
At the same time, younger Chinese family creating foreign manufacturing companies We believe that more developing
firms are facing the challenges of transition- to manufacture and sell products locally. countries will participate in the global value
ing to the economic new normal: slower So far, although there are many successful chain. Meanwhile, developed countries
GDP growth, structural adjustments, stimulus examples of private enterprises transform- have attracted domestic and foreign
policies, digital transformation, and deglo- ing into multinational companies, most industrial capital and production , raising
balization. private enterprises have only entered the the threshold for investment and techni-
The backdrop to the growth of China’s second and third stages of internationaliza- cal cooperation. At the same time, the
private economy has been a healthy and tion. There are very few companies in the space for seeking complimentary capacity
stable political environment, scientific and fourth stage. cooperation among EU countries and China
institutional innovation, outstanding en- Meanwhile, in recent years, China-US has greatly increased. If the potential for
trepreneurial spirit, abundant and effective economic and trade relations have entered China-Spain collaboration is substantially
labor supply, a harmonious and inclusive a period of friction, reflecting wider political promoted, high value-added, mutually
culture, and diverse and frequent social tensions. Faced with the trend of deglo- beneficial scenarios can be created. Family
interaction. The continued development balization and the sustained slowdown of firms represent 95% of Chinese companies
of the private economy will be focused on the global economy under the effect of venturing abroad. China has expressed its
economies of scale, competitive advantages, Covid19, the key questions are: firm commitment to global collaboration
effective corporate governance, the growth How to maintain and improve China’s and multilateralism. We are looking for-
of multinational operations and a successful trade and investment relationship with ward to a closer relationship with Chinese
intergenerational handover. Spain? family firms.You can also read
