Family Involvement,Political Connection And Institutional Environment

Family business is globally prevalent business organization. In the process of China’s Reform and Open-up, those private business, which play an important role, are also family owned, family managed, and/or family controlled. This dissertation focuses on family business. It starts from the perspective of alternative institutions of institutional environment, then discusses how business organization choose alternative institutions to match institutional environment, and decrease the long term dynamic transaction cost which leading to the increasing of organizational capacity and core competence. The governance of family business is also different from non-family business. Two available alternative institutions are family involvement and political connection. The main issues are how institutional environment affects family involvement and political connection and when institutional environment changes, the governance mechanism based on alternative institution will change as well.Based on literature review, this dissertation generalizes the institutional environment’s impact on family business choosing alternative institutions. When institutional environment is inefficient, enterprises need to deal with the agency problem and lack of human and financial capital. This problem can be partly solved by family involvement. Enterprises also need to deal with problem of the property right protection, justice and contract enforcement. These problems can be partly solved by political connection. In this dissertation, I build a three-stage game model to deduce the influence from institutional environment on family governance. Then I make a qualitative comparative analysis on three cases studying the behaviors of family business choosing family involvement and political connection. At last I test the relation between institutional environment and family involvement and political connection.The main conclusions of this dissertation are:the three stage model reveals that problematic legal environments lead increase the likelihood of founders retaining management in the family; high levels of altruism strengthen the tendency of allocation of management power; but high outside options of family-heirs leads to the separation of management and family ownership.The qualitative case study reveals that when institutional environment is inefficient, family business has the tendency to increase ownership and management power in the business, like the Rong Family. When the expectation diverse among family members about the institutional environment, those, who have higher outside option and pessimistic idea about the business, will sell out the shares. The optimistic family members will increase ownership and management, and intense the family involvement, like the Feng Family. In a good institutional environment, the ownership and management in family business have the tendency to separate. This will lead to the modernization of family business, like the Du Pont Family.The econometric analysis reveals that the relation between family involvement in management and institutional environment is inverse-U. Meanwhile, when institutional environment is at a lower level, the two alternative mechanism, family involvement and political connection, are positively related. After treating the endogeneity of economy development, we find institutional environment improvement decrease the probability of family involvement.The outstanding innovations of this dissertation are as follows:First, this dissertation builds a family business theoretical model based on alternative institution perspective, providing an explanation on how institutional environment affects family business governance. Second, this dissertation investigates the relation between family involvement, political connection and institutional environment, and also discusses the micro-mechanism. Third, this dissertation treats the endogeneity effect of economic growth making the result more robust and explanatory, especially on transition countries and emerging economies. The result and policy remarks can also benefit the future development and modernization of Chinese family business.