How does family involvement affect a firm's internationalization? An investigation of Indian family firms

• Author: Arindam Mondal,Sougata Ray,Kavil Ramachandran
• Published date: 01 February 2018
• DOI: http://doi.org/10.1002/gsj.1196
• Date: 01 February 2018

SPECIAL ISSUE ARTICLE

How does family involvement affect a firm’s

internationalization? An investigation of Indian

family firms

Sougata Ray

1

| Arindam Mondal

2

| Kavil Ramachandran

3

1

Indian Institute of Management Calcutta,

Kolkata, India

2

School of Management and Entrepreneurship,

Shiv Nadar University, Greater Noida, India

3

Indian School of Business Hyderabad,

Hyderabad, India

Correspondence

Sougata Ray, Indian Institute of Management

Calcutta, Diamond Harbour Road, Kolkata

700104, India.

Email: sougata@iimcal.ac.in

Funding information

Thomas Schmidheiny Centre for Family Enterprise

at Indian School of Business; Thomas

Schmidheiny Centre

Research Summary: We investigate whether and how

family ownership and management influence firms’inter-

nationalization strategies in an emerging economy in

which family firms are dominant. Anchoring on the will-

ingness and ability framework and drawing on the socioe-

motional wealth perspective and agency theory, we

theorize how the heterogeneity among family firms in

their ownership structures, concentration, and family

involvement in management shapes the firms’interna-

tionalization strategies. We also theorize how certain con-

tingencies, such as the presence of foreign institutional

ownership and family management, moderate the rela-

tionship between family ownership and internationaliza-

tion strategy. We test our predictions by using a

proprietary, longitudinal panel dataset of 303 leading

family firms from India and find support for most of our

theoretical predictions.

Managerial Summary: Internationalization has emerged

as a dominant strategy forfirms in a globally interconnected

world. We observe that ownership structure and manage-

ment have significant bearing on internationalization strate-

gies of family firms, as family owners and managers are

more averse to internationalization. Family firms’aversion

to internationalize is more pronounced when families can

exercise greater control on firms’actions through the com-

bined effect of higher family ownership (primarily through

strategic control) and family’s participation in management

(through strategic, administrative, and operational control).

However, certain contingencies, such as the higher owner-

ship of foreign institutions and presence of professional

managers, help business families improve their understand-

ing of international markets, reduce the fear of the

Received: 31 January 2016 Revised: 24 July 2017 Accepted: 25 July 2017

DOI: 10.1002/gsj.1196

Copyright © 2017 Strategic Management Society

Global Strategy Journal. 2018;8:73–105. wileyonlinelibrary.com/journal/gsj 73

unknown, and better appreciate the benefits of internation-

alization, thereby aiding greater internationalization of fam-

ily firms.

KEYWORDS

ability and willingness perspective, family ownership

and management, foreign institutional investors,

internationalization, professionalization of family firms

1|INTRODUCTION

Over the past two decades, research on the internationalization of firms promoted by families (here-

after, family firms) has gained prominence, with numerous research papers published in leading

journals (see Arregle, Duran, Hitt, & Essen, 2017; Kontinen & Ojala, 2010; and Pukall & Calabrò,

2014 for a review). The dominant theme of this research often emphasizes the uniqueness of family

firms and explores whether and why family firms internationalize more or less than nonfamily firms

do (Arregle et al., 2017; Sciascia, Mazzola, Astrachan, & Pieper, 2012). However, scholars

(Arregle, Naldi, Nordqvist, & Hitt, 2012; Gomez-Mejia, Makri, & Kintana, 2010; Melin & Nordq-

vist, 2007; Sanchez-Bueno & Usero, 2014; Segaro, 2012) have recently highlighted that family

firms differ widely on various dimensions, advocating more research to examine the impact of het-

erogeneity on family firms’internationalization strategies. This article is an attempt to contribute to

that emerging stream of research.

The most recognized sources of heterogeneity among family firms are family ownership (family

control) and family involvement in management (family management) (Banalieva & Eddleston,

2011). Some studies rooted in the developed economies (Arregle et al., 2012; Calabrò, Torchia,

Pukall, & Mussolino, 2013; Zahra, 2003) as well as from China (Liang, Wang, & Cui, 2014) have

observed both a direct and a moderating effect of family involvement on family firms’international-

ization strategies. Some scholars find that family ownership and managerial involvement have a pos-

itive influence on internationalization (e.g., Carr & Bateman, 2009; Zahra, 2003), whereas others

find a negative influence (e.g., Fernández & Nieto, 2006; Graves & Thomas, 2006), and a few

report no effect at all (e.g., Carlos Pinho, 2007; Cerrato & Piva, 2012). In a recent meta-analytical

review, Arregle et al. (2017) find wide variations in the relationships of family ownership and man-

agement with the internationalization of family firms across studies. They conclude that because of

their unique formal and informal institutions, diverse country contexts make a major contribution to

the divergence across studies and that more studies from under-researched institutional contexts are

required. We observe that emerging economies (EEs) such as India have a long history and ubiqui-

tous presence of family firms; the large family firms that are listed in the stock markets dominate

the industrial landscape. Many of these firms nurture the aspiration not only to dominate domestic

markets, but also to emerge as global giants (Ghemawat & Hout, 2008). Further, agency effects

function differently in such contexts because family firms differ significantly in their ownership pat-

terns, particularly those that participate in both domestic and international capital markets for equity

capital (Daily, Dalton, & Rajagopalan, 2003). Therefore, it is evident that the manner in which het-

erogeneity in ownership and management amongst family firms influences internationalization

74 RAY ET AL.

strategy remains an open question (Chua, Chrisman, Steier, & Rau, 2012; Nordqvist, Sharma, &

Chirico, 2014; Schulze & Gedajlovic, 2010). Studies on the internationalization of family firms

rooted in underexplored, yet unique institutional contexts such as Asia (Sharma & Chua, 2013;

Wright, Chrisman, Chua, & Steier, 2014) would enrich the theory of the internationalization of fam-

ily firms.

Consequently, we are motivated to investigate larger family firms of Indian origin listed on the

stock markets, keeping in mind the following research questions: How does family ownership influ-

ence family firms’internationalization strategies? Do managers from owner families (henceforth,

family managers) shape family firms’internationalization strategies differently than nonfamily pro-

fessional managers? How does the presence of other types of owners, such as foreign institutional

owners, alter the relationship of family ownership and management with family firms’internationali-

zation strategies? We use a framework that is anchored in the willingness and ability perspective

(De Massis, Kotlar, Chua, & Chrisman, 2014) as this study’s overarching conceptual framework.

This framework is based on two drivers of family governance: willingness (disposition to act)

and ability (discretion to act). We draw from the existing literature to build our theoretical argu-

ments about why and how heterogeneity in ownership structure and the management of family firms

shapes family owners’and family managers’willingness and ability to influence firms’internation-

alization strategies. Drawing primarily on the socioemotional wealth (SEW) perspective (Gómez-

Mejía, Haynes, Núñez-Nickel, Jacobson, & Moyano-Fuentes, 2007) and, to an extent, from agency

theory (Eisenhardt, 1989; Fama & Jensen, 1983; Jensen & Meckling, 1976), we argue that family

owners and managers are not favorably disposed toward the risky strategy of internationalization.

This lack of willingness (unfavorable disposition) toward internationalization guides the behavior of

family members as owners and/or managers while exercising control over managerial actions related

to internationalization. We argue that the greater the control of the family through either higher fam-

ily ownership or management control attributable to the participation of family members in manage-

ment (or both), the greater the family’s ability to influence managerial actions. Consequently, the

owning family’s unwillingness to internationalize is reflected in such a way that firms subjected to

greater strategic, administrative, and operational family control will pursue an internationalization

strategy less vigorously. Family firms’reluctance to internationalize is more visible when the family

can exercise greater control on the firm’s action through the combined effect of higher family own-

ership (primarily through strategic control) and the presence of family management (through strate-

gic, administrative, and operational control). However, certain contingencies, such as the presence

of foreign institutional owners, help family members improve their understanding of international

markets, reduce the fear of the unknown, and appreciate the benefits of internationalization. As a

result, family owners and managers’aversion to internationalization decreases, and firms with domi-

nant family ownership and/or family management internationalize more than family firms with no

or little foreign institutional ownership. Therefore, we posit that foreign institutional ownership posi-

tively moderates the relationship of both family ownership and family management with family

firms’internationalization strategies.

We test our hypotheses using a proprietary, longitudinal panel dataset of 303 family-owned

Indian firms listed on the S&P Bombay Stock Exchange (BSE) 500 Index covering a six-year period

from 2007–2008 to 2012–2013. We argue that India provides a unique natural experiment research

setting for this study because it is one of the world’s most important emerging economies and has a

large percentage of family firms listed on the stock markets, many of which have become emerging

multinational enterprises (EMNEs) in recent years. India has also experienced significant inward

and outward trade as well as investments in capital markets and foreign direct investment (FDI) over

RAY ET AL.75