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Asia Pacific Journal of Management
Published in: Asia Pacific Journal of Management 1/2021

01-07-2019

Who controls the Indian economy: The role of families and communities in the Indian economy

Author: Dalhia Mani

Published in: Asia Pacific Journal of Management | Issue 1/2021

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Abstract

Research on the concentration of corporate control frequently highlights the role of a few families, who control large swaths of their economies. The prominent role of certain communities is also evoked in these discussions, but the extent of their influence is unclear. Public and scholarly debate is also divided on the meaning of this kinship-based control; whether it reflects entrenchment or entrepreneurship. This paper examines questions about the extent and meaning of family and community control in the context of India. The results show that three trading communities (the Marwaris, Gujaratis and Parsis) play a disproportionate role in the control and ownership of Indian publicly traded firms. However, their role is skewed towards smaller, younger, and lower market share firms, and there is significant turnover in the identity of the largest firm over time. The results are similar for family control and ownership. Overall, the results do not support the entrenchment perspective, and instead supports the view that these social groups are the primary vehicle for raising funds among smaller, younger, and low market share firms. However, neither do the results support the view that Indian firms are rapidly embracing a managerial model with diffuse shareholdings.
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Appendix
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Footnotes
1
Veliyath and Ramaswamy (2000) is the only study, to my knowledge, that estimates the percentage of family owned firms in India. They find that 122 of the 250 largest firms in India (50%) were family firms. However, they use the median family ownership as the cut-off to distinguish family and non-family firms, and this design choice drives their finding.
 
2
The license raj is a term used to describe the regulations and bureaucracy involved in starting a business in India pre-liberalization. At the time, India was a planned economy, and the original purpose of this system was to ensure that the State could match production with demand.
 
3
This robustness check required a categorization of firms as family, non-family, community and non-community. This requires dichotomizing the continuous measures Family_Dir and _Percent (and Community_Dir and _Percent). I used cut-offs consistent with Anderson and Reeb (2003) for family: If two people on the owner-director list share the same last name, that firm is categorized as a family firm. For community, I used the least stringent possible cut-off: If one person on the owners-director list has a last name typical of a trading community, that firm is categorized as a community firm. In spite of this very lenient cut-off, I found a substantial portion of family firms which did not have community affiliation. In addition, as suggested by an anonymous reviewer, I also reran this same analysis using 10%, 20% and 25% shareholding as the cut-off, and I still found that a significant proportion of firms are family and not community. Note that dichotomizing the variables Family_Dir and _Percent (and Community_Dir and _Percent) is not needed for any of the subsequent tables and analyses.
 
4
As an interesting aside, L&T had a value of .1 on family_dir in 2001 (this changes to 0 in 2005 and 2009). Further investigation showed that in 2001, the Ambanis staged a takeover attempt of L&T, which L&T successfully thwarted, and this is reflected in L&T’s shareholding pattern in 2001, 2005 and 2009.
 
5
Conceptually and substantively business groups and family ownership are distinct firm-level characteristics: A family business need not adopt a business group form (characterized by multiple legally independent firms operating as a group) and a business group need not be family owned or controlled. For example, the L&T group and the ITC group are business groups but are not family owned. Similarly Nilkamal Industries is a family firm but does not follow the multi-entity form of a business group. Indeed, recent research indicates a negative correlation between family ownership and adoption of the business group organizational form (Gomez-Mejia, Makri, & Kintana, 2010; Mani & Durand, 2018), because of the risk of losing family control in this kind of a multi-entity form. In this paper, consistent with prior research, I treat these concepts as distinct and control for whether or not the firm is affiliated with a business group.
 
6
These figures of the total population proportion of the three communities were taken from the Indian census 2001 and from the “People of India Survey.” In the case of Parsis, the data was not available from either of these sources, and hence was taken from the Wikipedia entry about this community.
 
7
Note that the exact percentage of firms identified as “family firms” is very sensitive to the cut-off used. However, there is a monotonic increase in the percentage of family firms in the economy as the cut-offs are decreased (and the same is likely to hold in other countries). Therefore, the conclusion that the percentage of family firms in India is comparable to that in other Asian countries and greater than in the U.S. is unlikely to change by changing the cut-offs.
 
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Metadata
Title
Who controls the Indian economy: The role of families and communities in the Indian economy
Author
Dalhia Mani
Publication date
01-07-2019
Publisher
Springer US
Published in
Asia Pacific Journal of Management / Issue 1/2021
Print ISSN: 0217-4561
Electronic ISSN: 1572-9958
DOI
https://doi.org/10.1007/s10490-018-9633-5

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