Institutional Analysis Of The Family Business In East Asia

Family business is defined as a family or a several close allied families own the all or part ownership of the business and master the business'control right by all kinds of ways, at the same time these rights can inherit in the internal of family business. Due to people's in born trust in and depend on the family, it can be said that the early-emerged businesses in the history were all family businesses. Affected by the development of technology and institution, family business has experienced classical family business, modern family business and contemporary family business three stages, many of them have become modern corporations that ownership and control are separated. Nevertheless, being the most important enterprise organizational form, now whether in the developed country or the developing country, a lot of family businesses still stubbornly exist. In nearly all countries of East Asia, family business is the most important enterprise organizational form. The family ownership is prevalent not only in the small and medium-sized enterprise, but also in the strong listed company. Owing to dependence on the co-efficient result of historical path dependence and realistic institution restrictions, the enterprises in East Asia adopt family ownership. Because of the traditional political and legal system and the experiences of colonization and immigration history, the businesses in the region and countries of East Asia are inclined to family ownership. After the Second World War, the institutional restriction faced by the family business in East Asia include both informal institutional restriction, which is the deeply Confucianism cultural tradition, and formal institution restrictions, which are the imperfect law protection of share holder and incomplete market of capital and manager. Family ownership institution is an institutional complementarity of informal Confucianism culture and it is an institutional substitution of inadequate law and incomplete capital and manager market. The choice of the family ownership is a kind of adaptation to these institutional restrictions, which can reduce economic costs. Family business is a kind of institution arrangement, it has abundant meanings, including both business internal institution, such as the ownership institution, management institutions, decision making and information institutions and employment and motivation, and also including external institutional complementarity structure that surrounding the enterprise, such as the relations between enterprise and enterprise, enterprise and bank, as well as enterprise and government. In the internal institution of family business in East Asia, ownership institution is the determined factor of the internal institution. Family usually centralizes family business'ownership. In many family businesses, families manipulate the power by the separation of the cash flow right and vote right .The separation methods primarily contain pyramid structure, cross-ownership and deviation from one share one vote. Consistent with family ownership, the management power of family business in East Asia is largely held in the family members. Influenced by Confucian culture, family business'management presents the characteristic of the patriarchal system: on the one hand, the management to employee expresses extensive familism, on the other hand, it shows the importance of the patriarchal authority in the decision making. An important aspect of family business's internal institution is information delivered institution. In the family business, the combination between vertical hierarchy and family manager's horizontal communication causes the "A "type information delivering institution. Moreover, since people in East Asia pay attention to the particularism and the different mode of association in their interpersonal relation mode, the family business'owneradopts the different incentive institutions to different employees and these form the dual managerial mode which is based on both relation and market contract . The exterior institution's complementary structure of the family business in East Asia is more complicated. Different from that in Japan, Germany and the USA, the relation between the business and the bank in the East Asian family business presents non-market, weak bank-typed characteristics. The bargaining between business and bank depends on relations, the bank dose not implement the creditor's supervising duty even though it is the supplier of business funds, it couldn't supervise business effectively, sometimes it is even affected and controlled by the business. The trade relation between family business and other enterprise doesn't completely follow market principle, also not completely relies on administrative coordination of enterprise internal, so it is a kind of medium-typed relation between enterprise and market. Due to the influence of catching-up economy and authoritative government in East Asia, the characteristic of the relation between East Asian family business and government can be generalized into government-ruling type. Its characteristics show as follows. Firstly, the power of the business and government is not symmetry; secondly, the relation of government and business is decided by the government's beneficial target; thirdly, family business establishes various informal contacts with government in order to protect and develop itself. The institutional arrangements mentioned above make family business institution have the numerous advantages at starting a business, decision, cost and the relation network etc. Relying on these competitive advantages, family business in East Asia achieves quickly development and occupies the prominent position in economy of the East Asia countries. They play an important role in promoting industrial structure updating, accelerating export and providing employment opportunities etc. Certainly, these achievements don't mean that family business institution is perfect. Family business institution of East Asia has its inherentcontradiction and defect. Firstly, there is a contradiction in the selection between the financial and management capital and family control right; secondly, there is a contradiction between the limit life cycle of entrepreneur and family business development continually; the third is the defect of family-typed management; the fourth is the ownership system's defect of listed company running by family; the fifth is that the close relation between the government and the family business may arise enterprise's moral hazard. Although family business institution has its inherent contradiction and limitation , yet before the mid 80s, family business institution of East Asia could adapt to the economic development stages and the external economical environment. Firstly, the technique and the managing ability conform to requirement of the early stage of economic development. Secondly, the undertaking cycle of entrepreneur is consistent to the early stage of economic development. The existence of entrepreneur authority guarantees the corporate cohesion. Thirdly, before the mid 80s, the feature of the ownership of family business is complete ownership or absolute holding, which can make the corporate supervise itself, help it to overcome agency problems and prevent minority shareholders from expropriation. Fourthly, before the mid 80s, the comparative loose competitive environment of the international market enables the corporate to maintain the high liabilities and diversification. The factors, which are mentioned above, to some extent, get rid of the weakness of family business institution of East Asia, and provide more space for family business institutional advantages to take effect. As a result, the accelerating effect of the family business institution of East Asia to the economic development becomes distinct. After the mid 80s, with the trend of economic globalization, the internal and external economic environments of East Asian countries and Areas are changing. In the trend of the political democratization, economic liberalization and globalization, the inherent defects of family business institution have exposed gradually. The harmony between the institution arrangement and theinstitution environment has declined. The unbalance state comes into existence. It shows as follows. Firstly, family business institution shows its weakness in promoting industrial structure updating and in elevating industrial competitive ability. Secondly, after financial liberalization, non-market bank-corporate relationship has reinforced on the contrary. The stimulating and restricting mechanism of the bank and the corporate behavior becomes more unbalanced, moral hazard becomes more serious, and the behavior becomes more distorted. Thirdly, the ownership structure of the family business has turned into another form that the family controlling shareholder can obtain excess control right by less share, which leads to decreased performance. The disequilibrium of family business institution of East Asia together with the other macroscopic factors is one of the important elements in resulting in Financial Crisis. The problems exposed in the Financial Crisis actually reflect that the family business institution of East Asia is caught by surprise in dealing with economic globalization. Economic globalization, as an objective historical process, which cannot be changed by human will, surges against the foundation of the culture and the structure of family business institution of East Asia. And at the same time, it requires family business to reform its closed, non-transparence running system. Meanwhile, the development of the Internet, which is the technical base of globalization, weakens the importance of family business net relationship. In order to cope with the challenge of globalization, East Asian countries must accelerate the process of reforming the family business institution; it becomes possible to reform the family business institution under the pressure of public and international economic organization after the Financial Crisis. The reform of the family business institution in East Asia is comprehensive; on the one hand, a complete transition from governmental-controlling economic system to market economic system provides a necessary prerequisite to improve the relationship between government and business, bank and government; one the other hand, the internal institution of family business isobliged to change. East Asian countries try to absorb the popularly modern company governance standards of western countries to train their companies with competitive advantages, the basic requirements are as followings: paying attention to stockholder's rights and values; emphasizing the functions of board; improving the transparence and information disclosure etc. Under the help of IMF, the reforming of East Asian family business is progressing in all courtiers. However, the problems of unmatched foreign company governance rules with local institution environments and the limitations of forced governmental reform make the family business reform difficult. There is a long way ahead the reforming process for family business in East Asian countries. Since the reforming and opening-up in China Chinese family business has gotten a fast development and become an important main-strength of Chinese socialist modernization construction. But the development of Chinese family business is still limited by some factors: except the restriction of internal institution in enterprise, the financing difficulty becomes the most important problem limiting enterprise's healthy development. In addition, the protections from laws and rules are not enough and external policy environment is not smooth. From my point of view, in the future, if Chinese family businesses are expected to develop healthily by absorbing some experiences from family business in East Asia, they should reform the subsidiary structure between internal family business institution and the external complementary institution circling enterprises to achieve a balancing and coordinating development for both enterprises'internal and external institution. For the aim to concretely study, firstly family business should be guided gradually to transform into modern enterprise system and try its best to extend the period of validity for combining family business's ownership to management authority; Secondly, the government should improve the efficiency of family business's financing system and extraordinarily establish good cooperation-ship between enterprise and bank; Thirdly, we should makethe relationship between government and enterprise more smoothly, prevent political corruption and provide good policy circumstances for enterprise; Finally, we should establish family business cooperation nets and improve its competitive advantages. Comparing with the domestic studies of this field, this research possesses following characters: the first one is that this article, which is different from domestic researchers who take into account family business from management and culture angle, tries researching family business in East Asia from enterprise institution, by doing so, it could enrich family business theory; the second one is this paper analyzes the arrangement of family business's ownership by employing the method of Comparative Institutional Analysis(CIA) and the concepts of institution complementing and institution substituting, then proposes that family business ownership is a kind of institution adaptation as a result of current economic environment and institution restrictions; the third one is that the paper expands the meaning of enterprise's institution by putting the structure of institution complementing into the concept of enterprise institution and builds a bridge between the microcosmic internal institution of enterprise and the macroscopical external economical institution environment; finally, the article provides a dynamic analysis framework of studying how family business affects economic development, the framework is also applied later into analyzing family business institution , and then put forward a reasonable explanation for the success and failure of family business in East Asia.