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Family involvement and firms’ establishment mode choice in foreign markets

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Abstract

Extant literature on foreign entry increasingly recognizes firms’ heterogeneity as a potential reason for inconsistency in results on the establishment mode choice, that is, whether and under which conditions firms should choose to enter a new country through a greenfield investment or an acquisition. Our study contributes to this debate by identifying family ownership and family involvement in management as potential powerful sources of such heterogeneity. Integrating international business studies with both corporate finance literature on family firms and recent contributions from the Socio Emotional Wealth perspective on family ownership, we claim that, due to greater risk aversion and lower access to information, the family involvement both in the firm ownership and management leads to a higher propensity towards greenfield initiatives (vs acquisitions). However, we also find that such a propensity decreases with international experience especially in family-owned firms given the greater ability of professionalized management to overcome family-related concerns on making acquisitions. Our analysis on 1045 foreign initiatives undertaken by 311 Italian family and non-family firms between 2003 and 2013 confirms our expectations, indicating family ownership as a significant driver of firms’ international strategies.

Abstract

La littérature existante sur l’entrée à l'étranger reconnaît de plus en plus l'hétérogénéité des entreprises comme une raison possible concernant l'incohérence des résultats sur le choix du mode d’implantation ; c’est à dire, si et à quelles conditions les entreprises doivent choisir d'entrer dans un nouveau pays par un investissement ex nihilo ou une acquisition. Notre étude contribue à ce débat en identifiant la propriété familiale et la participation managériale familiale comme des sources potentielles fortes expliquant cette hétérogénéité. Intégrant les études d’international business avec - à la fois - la littérature sur la finance d'entreprise sur les entreprises familiales et les récentes contributions de l’approche de la richesse socio-émotionnelle sur la propriété familiale, nous considérons que, en raison d'une plus grande aversion au risque et d’un plus faible accès à l'information, la participation de la famille à la fois au niveau de la propriété et du management conduit à une propension plus élevée d’initiatives ex nihilo (par rapport aux acquisitions). Cependant, nous constatons également qu'une telle propension diminue avec l'expérience internationale, en particulier dans les entreprises appartenant à des familles compte tenu de la plus grande capacité de gestion professionnalisée à surmonter les préoccupations des familles à effectuer des acquisitions. Notre analyse de 1045 initiatives étrangères développées par 311 entreprises italiennes familiales et non familiales entre 2003 et 2013 confirme nos attentes, ce qui indique que la propriété familiale est un facteur important pour les stratégies d’internationalisation des entreprises.

Abstract

La literatura existente en entradas internacionales reconoce cada vez más la heterogeneidad de las empresas como una razón potencial de la inconsistencia en los resultados para la elección del modo de establecimiento, es decir, cuando y en qué condiciones las empresas deben escoger entrar a un nuevo país mediante una inversión totalmente nueva (greenfield) o mediante una adquisición. Nuestro estudio contribuye a este debate mediante la identificación de propiedad familiar o participación de la familia en la gestión como poderosas fuentes potenciales de esta heterogeneidad. Integrar los estudios de negocios internacionales con la literatura de finanzas corporativas y con los recientes aportes de la perspectiva de riqueza socio emocional en propiedad familiar, afirmamos que, debido a una mayor aversión al riesgo y un menor acceso a información, la participación de la familia, tanto en la propiedad de la empresa y como en la gestión lleva a una alta propensión a iniciativas totalmente nuevas (versus adquisiciones). Sin embargo, también encontramos que esta propensión disminuye con la experiencia internacional especialmente en empresas de propiedad familiar dada la mayor habilidad de la gestión profesionalizada para superar preocupaciones por asuntos familiares al hacer adquisiciones. Nuestro análisis de 1.045 iniciativas extranjeras por 311 empresas italianas familiares y no familiares entre los años 2003 y 2013 confirma nuestras expectativas, mostrando que la propiedad familiar es un motivador significante de las estrategias internacionales de la empresa.

Abstract

A literatura existente sobre a entrada em país estrangeiro reconhece a heterogeneidade das empresas como uma razão potencial para a inconsistência nos resultados sobre a escolha do modo de estabelecimento, isto é, se, e em que condições empresas devem optar por entrar em um novo país através de um investimento greenfield ou de uma aquisição. Nosso estudo contribui para este debate ao identificar a propriedade familiar e o envolvimento da família na gestão como fontes potencialmente poderosas de tal heterogeneidade. Integrando estudos de negócios internacionais com a literatura sobre finanças corporativas em empresas familiares e com contribuições recentes da perspectiva da riqueza sócio-emocional sobre a propriedade familiar, afirmamos que, devido a uma maior aversão ao risco e menor acesso à informação, o envolvimento da família, tanto na propriedade da empresa quanto na gestão, leva a uma maior propensão para iniciativas greenfield (versus aquisições). No entanto, também concluímos que tal propensão diminui com a experiência internacional, especialmente em empresas familiares, dada a maior capacidade de gestão profissionalizada para superar as preocupações relacionadas com a família em fazer aquisições. Nossa análise em 1045 iniciativas estrangeiras empreendidas por 311 empresas familiares e não-familiares italianas entre 2003 e 2013 confirma as nossas expectativas, indicando a propriedade da família como um importante fator nas estratégias internacionais das empresas.

Abstract

关于进入外国的现存文献越来越认识到公司的异质性是一个潜在的原因, 它使进入模式选择结果不一致, 即是否和在什么条件下公司应该选择通过绿地投资或收购进入一个新国家。我们的研究通过识别家族所有权和家庭参与管理作为这类异质性的强大的潜在来源, 从而对这一辩论做出了贡献。通过整合国际商务研究与家族企业公司财务研究以及家庭所有权社会情感的近期研究, 我们主张, 由于有较大的风险规避和较低的信息获取, 家庭参与企业所有权和管理导致较高倾向的绿地举措 (对比收购) 。然而, 我们也发现这种倾向随着国际经验而减少, 特别是在职业化管理能力较大能克服与家庭相关的收购问题的家族企业里。我们对311家意大利家庭和非家族企业2003年到2013年间的1045个外国举措的分析证实了我们的预测, 表明家族所有权成为公司国际战略一个显著的驱动力。

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Notes

  1. FFs dominate not only in emerging economies, such as Asia (where they constitute approximately 95% of all firms), but also constitute 70% of all publicly traded firms in the United States and almost half of the largest Fortune 1000 firms.

  2. For instance, let us consider the case of a technological change that makes the firm’s family-specific assets outdated and no more effective to sustain the firm’s competitive advantage in the international market. On the one hand, this circumstance affects the family ownership since it may push the owning family to exit the firm, because their idiosyncratic competitive advantage is no longer exploitable. On the other hand, the firm has to access the resources needed to remain competitive through the acquisition of a foreign firm that incorporates the new technology.

  3. Even if a FF explores the opportunity to acquire a foreign firm, it will likely lose the competition on the international market for corporate control. Let us compare the competitive positions of two bidders, the focal FF and a non-FF. The more relevant information a firm has, the more correctly it assesses the risk of the acquisition. The non-FF is endowed with more information and is able to access and process further relevant information at lower cost. Furthermore, because family principals concentrate their wealth in the single FF, they do not generally benefit from wealth changes tied to other diversified assets and therefore err on the right-hand side of the risk distribution (i.e., they do not rely on the mean risk but rather something higher). Under conditions of lower information, wealth concentration and risk aversion, the FF faces a higher discount rate in obtaining the deal price; then, the non-FF will incrementally outbid the FF, and the transaction will result in an acquisition for the non-FF. If this continues (or the market for existing opportunities dies), then the FF will be forced to simply make a decision whether to establish a project from scratch, and the set of strategic alternatives will be consequently constrained. We are particularly grateful to an anonymous reviewer for suggesting such an interpretation, which strengthens our hypothesis.

  4. To better clarify the point, let us return to the example of competition on the international market for corporate control (see note 3). Thanks to their more talented managers, when information arrives, FOs update their assessment of the riskiness of acquiring the target firm in the host country. Acquisition target prices are now more in line with those of non-FFs, and bidding is more competitive because of the better understanding and tolerance of risk. As a result, more acquisitions occur. In other words, in comparison with non-FFs, FOs experiment a stronger (negative) marginal effect on their propensity to choose greenfield investments.

  5. Firms operating in industries with 2-digit NACE codes from 10 to 33, according to the European Union classification of manufacturing firms.

  6. The choice of such high thresholds is justified because the Italian market for corporate control is characterized by large blockholdings (Miller et al., 2014).

  7. It is worth highlighting that the high share of FFs in our data set is not the result of a sampling bias but rather is a characteristic of the Italian economy, where FFs largely exceed their non-family counterparts.

  8. As one reviewer notes, it seems that there, non-FFs avoid investing in certain countries. We investigate this issue by interacting FOs and FMs with each of the country-level controls, and no particular bias seems to emerge with reference to the object of this study. The results are available from the authors upon request.

  9. We also specify the models without year fixed effects. The findings are comparable to those with such effects. Both the coefficients and marginal effects are reported in Appendix B.

  10. The number of controls employed is high to rule out potential omitted variable endogeneity. However, we run additional models with varying numbers of controls to check the robustness of the results, and the main effects always hold. Sensitivity analyses with fewer controls are available from the authors upon request.

  11. It may be worth noting that, to analyze whether financial constraints have different effects for FOs and FMs, we interact the relevant dummy variables with leverage and cash flow on assets; however, the interaction terms never come out significant. The results are available upon request.

  12. To correspond to the debate in the IB literature, we also employ the index proposed by Kogut and Singh (1988) and based on Hofstede’s five dimensions of cultural distance. However, because the findings are similar in every model, we do not report the latter. Again, the results are available upon request.

  13. A complementary explanation relies upon the specific structure of control in Italian FFs, which exhibits high concentration, with families often acting as powerful blockholders (Miller et al., 2013). Under this condition, families can more closely monitor non-family managers through formal and moral suasion, thus easily aligning the firms’ choices with their preferences.

  14. In our sample, the share of minority operations of the total is the same for greenfields and acquisitions (11.36 vs 11.44% – Table 1).

  15. The Hausman – McFadden test on the irrelevance of independent alternatives (IIA) rejects the null hypothesis that omitting any category affects the ratio of the probabilities of choosing any pairs of alternatives, with a p-value lower than 0.01. Furthermore, no category can collapse to others because the Wald test is always significant with p-values lower than 0.01.

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Acknowledgements

We would like to thank the Editor, David Reeb, and two anonymous reviewers for their insightful comments and suggestions during the review process. We also thank the participants in the 40th EIBA conference in Uppsala where an earlier version of the article was presented. Finally, we thank Mario Amore for his valuable comments on an earlier draft of the manuscript.

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Authors and Affiliations

  1. DIG – Politecnico di Milano, Milan, Italy

    Andrea Boellis, Sergio Mariotti & Lucia Piscitello

  2. Bocconi University, Milan, Italy

    Alessandro Minichilli

Authors
  1. Andrea Boellis
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  2. Sergio Mariotti
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  3. Alessandro Minichilli
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  4. Lucia Piscitello
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Correspondence to Andrea Boellis.

Additional information

Accepted by David Reeb, Area Editor, 17 March 2016. This article has been with the authors for four revisions.

Appendices

APPENDIX A

Controls Description

Deal-level controls

We collected and cross-checked information from different sources: Zephyr – Bureau van Dijk database (4-digit industry codes of parent companies and relevant subsidiaries), annual reports, and other companies’ releases. Accordingly, we built the following four mutually exclusive categories (and the related dummies):

  • Expansion in services, that is, investments in forward and backward service activities, such as sales & marketing, maintenance & servicing, technical support, logistics & transportation, and other services related to the core activity of the firm;

  • Horizontal expansion, that is, investments in the same manufacturing activities of the parent firm;

  • Vertical expansion, that is, investments in activities that are vertically (backward or forward) related to the parent firm’s manufacturing activities; this category refers both to production in manufacturing, extraction, energy and construction and to functions strictly related to production, that is, design, development & testing, and research & development;

  • Diversification, that is, investments in activities that are new to the parent firm.

Firm-level controls

Parent size

We measure the parent’s size with the logarithm of the parent’s number of employees. Parent age is measured by the difference between the year of the foreign entry and the parent’s foundation year. Parent diversification is operationalized by counting the number of 4-digit industry codes in which the parent is active. Labor intensity is the ratio between the aggregate expenses for employees and the revenues of the firm; we log-transform it because of the log-normality of the distribution. Listed is a dummy variable taking the value 1 when the parent firm is listed and 0 otherwise. The variable Leverage is the ratio between the parent firm’s debt and common equity. Cash flow on assets is the operating cash flow divided by the total assets to rescale it. All the firm-level data come from the AIDA – Bureau van Dijk database.

Country-level controls

To measure the Psychic distance between Italy and the host countries, we adopt the Dow and Karunaratna’s (2006) indicator, which encompasses five dimensions (languages, religions, levels of industrial development, levels of education, and political systems):

where:

I ijk is the distance between country i (i.e., Italy) and country j (with j=1, …, 63 host countries) for the k-th dimension; and Var(k) is the variance of the k-th dimension and aims to normalize for scale and heterogeneity across dimensions.

We collect Geographic distance between Italy and the foreign countries’ capital cities from the CEPII database. Because of right-skewness of the distribution, the variable is log-transformed. GDP growth, GDP per capita and Market capitalization data come from the World Bank databases. Time to start a new business is the number of calendar days needed to complete all the required procedures to establish a firm. This number is then divided by 100 to rescale it. Data come from the World Bank’s Doing Business database. Economic freedom is an index, developed by the Heritage Foundation and the Wall Street Journal, ranging from 0 to 100 (it has been divided by 100 in the analyses to rescale it). Higher values indicate economically freer countries

APPENDIX B

Table B1

Table B1 Probit models (Coefficients and average marginal effects). Dependent variable: establishment mode choice (Greenfield=1)
Full size table

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Boellis, A., Mariotti, S., Minichilli, A. et al. Family involvement and firms’ establishment mode choice in foreign markets. J Int Bus Stud 47, 929–950 (2016). https://doi.org/10.1057/jibs.2016.23

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