The Moderating Effect of Emerging Economies’ Institutions
The family business research, often grounded in the resource-based view (Khanna and Palepu 2010; Frank et al. 2010)(Khanna and Palepu 2010; Frank et al. 2010), has extensively studied what makes family firms different than non-family firms (Khanna and Palepu 2010; Frank et al. 2010)(Khanna and Palepu 2010; Frank et al. 2010). Through the theory of socioemotional wealth as well as the five FIBER dimensions it consists of, findings suggest that these firms are more long-term oriented and focus more on relationship building than non-family firms, amongst other factors (e.g. (Khanna and Palepu 2010; Frank et al. 2010; Gomez-Mejia et al. 2011)(Khanna and Palepu 2010; Frank et al. 2010; Gomez-Mejia et al. 2011)(Khanna and Palepu 2010; Frank et al. 2010; Gomez-Mejia et al. 2011). More recently, alongside the increasing focus on sustainability, research has considered the various ways in which family firms can differentiate themselves from their counterparts on their sustainability performance. Theoretically, family firm owners’ desire to protect the family’s reputation and their prioritization of long-term goals would lead to a positive effect of family ownership on firm sustainability (e.g., Berrone et al., 2010). However, previous research has presented mixed findings regarding the sustainability of family firms, drawing attention to their heterogeneous nature and the need for more research into moderating factors driving the relationship between family ownership and firm sustainability (Khanna and Palepu 2010; Frank et al. 2010)(Khanna and Palepu 2010; Frank et al. 2010). This heterogeneity is at the center of this paper. Namely, the degree and nature of family involvement appears influential to the amount of focus a firm spends on socioemotional wealth building, which is then theorized to impact a firm’s corporate sustainability performance (Khanna and Palepu 2010).
Additionally, a smaller share of the family business literature has focused on the institution-based view, such as research considering family firms’ entry strategies in emerging economies based on the local institutions (Khanna and Palepu 2010). Certain previous research has also considered family firms’ corporate sustainability in certain emerging economies, such as (Khanna and Palepu 2010) in China and (Khanna and Palepu 2010) in India. These studies were, however, merely looking at the relationship within a specific country, which happened to be an emerging economy, rather than on the larger group of countries forming this segment. Firms operating in a certain market need interact with local institutions, which, in emerging economies are often underdeveloped, leading to institutional voids (Khanna and Palepu 2010). This research theorizes that, thanks to their unique characteristics, family firms can react to these institutional voids differently, in a substitutive way, which allows them to increase their corporate sustainability performance.
Despite the existence of research on family firms’ sustainability in certain emerging economies, no research, to the best of the authors’ knowledge, exist on family firms’ relationship towards corporate sustainability in emerging economies compared to developed economies. Hence, this research aims at answering the following research question: “How does the relationship between family involvement and corporate sustainability differ in family firms in developed and emerging economies?”
By answering this question, this research contributes to the current literature in four ways. First, it contributes to the ever-growing field of sustainability research by utilizing a novel way of measuring corporate sustainability. Namely, this study utilizes TruValue Labs sustainability scores, which are computed from outside information, rather than self-reported ones. Second, it provides further understanding on the consequences of family involvement in family firms, which benefits the literature on family businesses. Third, it builds upon the institutional theory of emerging economies and considers its potential moderating effect. Finally, this research provides a first step in bridging the gap in these three fields and therefore opens the door for future research.
The preliminary testing within this study included various multiple ordinary least squares regression using cross-sectional data of 120 family firms in both emerging and developed economies. Overall, the empirical analyses provided mixed results. Specifically, analyses indicate a negative relationship between a family CEO and various measures of sustainability: ESG ratings, environmental performance, and leadership and governance. The findings related to the CEO family membership are in line with previous research from (Khanna and Palepu 2010), (Khanna and Palepu 2010), and (Khanna and Palepu 2010), but contrasting with results from (Khanna and Palepu 2010) as well as (Khanna and Palepu 2010).
This relationship was, however, only found in developed economies and not in emerging economies, providing evidence supporting the theory put forth in this research. Namely, family firms’ familiness – the intrinsically different resources and capabilities that family firms possess in comparison to their counterparts (Khanna and Palepu 2010; Frank et al. 2010)(Khanna and Palepu 2010; Frank et al. 2010) – would allow them to implement substitutive informal institutions alleviating institutional voids and therefore increasing their corporate sustainability levels. This relationship was confirmed for overall sustainability performances, environmental sustainability, leadership and governance, and human capital. Additionally, for environmental sustainability, while no direct relationship was found stemming from family ownership, its interaction variable was significant, implying that there is a positive relationship between family ownership and environmental performance in emerging economies. The same interpretation was also found between family board members and human capital in emerging economies.
Reasons for the moderating effect could be various. For example, it could be speculated that, since investing in research and development is cheaper in emerging economies (Khanna and Palepu 2010), family firms can do so more than in developed economies which, therefore, benefits their environmental sustainability. Additionally, due to lower formal institutions holding companies accountable in emerging economies (Khanna and Palepu 2010), family firms could recognize the added value of reputation and, therefore, focus on more sustainable leadership and governance. Moreover, institutional voids and lack of market intermediaries in emerging economies lead to difficulties in doing businesses (Khanna and Palepu 2010). By leveraging their capacity for long-term relationship with stakeholders, family firms could invest more in building relationships, therefore, benefitting their human capital. Overall, there are various potential arguments explaining the moderating effects institutions have on family firms’ sustainability levels.
Overall, and to answer the research question, this research founds a significant negative relationship between family involvement and corporate sustainability. Among the three family involvement variables, family CEO appears to be most influential to corporate sustainability performance. The relationship is, however, significantly different in emerging and developed economies. Namely, while the relationship in developed economies is significant detrimental, this is not the case in emerging economies.
The findings suggest certain recommendations for practice. Namely, family firms in developed economies should recognize the need for their business to work towards sustainability, as well as the potential socioemotional wealth building opportunities of following sustainable behaviors. To achieve these goals, it appears beneficial for family firms in developed economies to appoint external, non-family, CEOs. For family firms in emerging economies, appointing a family CEO appears to be beneficial to the firm’s sustainability level in terms of ESG ratings, environmental performance, and leadership and governance. Overall, the choice of CEO in family firms appears relevant to its sustainability performance and should therefore be considered seriously by firms. When doing so, firms should understand their institutional context and the impact the choice will have on various sustainability dimensions.
Family Firms, Emerging Markets, Institution-Based View, Sustainability, ESG Ratings.
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