Influence of Social Identity on Family Firms' FDI Decisions: The Moderating Role of Internal Capital Markets.

Date01 Octubre 2020
AuthorWei, Qiao

1 Introduction

The drivers of firms' internationalization have been well-studied by international business (IB) scholars (Hennart 2009), based on theories such as the electric paradigm (Dunning 1988, 2000), internalization theory (Rugman 1981), the Uppsala model (Johanson and Vahlne 1977, 2009), the resource-based view (Barney 1991; Lien et al. 2005), and the agency theory perspective (Dagnino et al. 2019; Sanders and Carpenter 1998). Yet, for family firms, the prediction of their foreign direct investment (FDI) using existing IB theories become less clear as they have not explicitly taken into account the special features of family firms where decisions are made based on the bivalent attributes of the business and family systems (Tagiuri and Davis 1996). While recent literature has combined IB theories with agency theory (Ray et al. 2018), stewardship theory (Calabro et al. 2016) and socioemotional wealth (SEW) perspective (Liang et al. 2014) and recognized family firms' unique characteristics in their FDI decisions, findings regarding the impact of family governance on FDI are limited and also inconclusive (De Massis et al. 2018).

In this paper, we argue that one of the key reasons underlying such inconclusive findings is that extant research has largely assumed family firms as homogeneous groups and thus examined FDI of family firms compared to nonfamily firms (Chung 2014; Liang et al. 2014; Ray et al. 2018; Singh and Delios 2017). It is widely acknowledged that there are significant variations among family firms (Chrisman et al. 2012) that lead to heterogeneous FDI decisions (Arregle et al. 2019). Therefore, this paper attempts to join this strand of literature by questioning "what drives the heterogeneity of FDI decisions among family firms?".

To answer this question, we focus on the impact of types of family owners on family firms' FDI decision. Studies have shown that family owners are key decision-makers and their strategic decisions including FDI commonly mirror the perceptions of family owners (James 1999). An emerging literature has divided family firms into lone-founder firms and family-controlled firms based on the type of family owners (Cannella et al. 2015; Miller et al. 2011). Specifically, lone-founder firms are the family firms owned by a single or lone founder while family-controlled firms are those owned by multiple family members of the controlling family (Cannella et al. 2015). More importantly, scholars draw on social identity theory and argue that different types of family owners that could be attributable to the identity of those family owners lead to family firms' various strategic decisions (Chrisman et al. 2012; Miller and Le Breton-Miller 2011; Miller et al. 2011). Following this perspective, we argue that the extent to which family firms are willing to engage in FDI depends on how their identity is coherent with FDI. When there is a coherence, family firms tend to carry out FDI otherwise deter FDI (Cannella et al. 2015; Miller et al. 2011).

Different from nonfamily firms maximizing economic goals, family firms tend to pursue their family interests over firm economic goals and focus on preserving family control, family reputation, success succession, familial harmony, and so on, which are called as family's SEW (Gomez-Mejia et al. 2007). Meanwhile, the extent in the concern of protecting SEW of the family is different among family firms. Lone founder is often identified as an entrepreneur who would prioritize firm business and target at goals of firm growth and economic returns (Alsos et al. 2016; Miller and Le Breton-Miller 2011); by contrast, controlling family members are commonly identified as family guardians who prioritize family's benefits and focus attention on the goals related to SEW of the family (Cesinger et al. 2016; Gomez-Mejia et al. 2019; Luo et al. 2019). While FDI is an important approach to achieve firms' long-term growth (Lu and Beamish 2001), FDI as a risk-taking activity may go against family's interests in SEW (Oon et al. 2015; Sanchez-Bueno and Usero 2014). As such, drawing on social identity theory and SEW perspective, we predict that lone-founder firms will have higher propensity and intensity of FDI than those of family-controlled firms.

In addition, given that FDI is a resource-consuming and risk-taking activity (Bhaumik et al. 2010), we argue that the positive relationship between lone-founder firms and their FDI is contingent on whether there are adequate financial resources available for funding FDI projects. Notably, the condition of financial capitals is salient in our research context as access to external financial markets is normally dominated by large firms or state-owned firms, particularly in China (Allen et al. 2005; Du et al. 2015; Li et al. 2008; Poncet et al. 2010), leaving family firms' FDI projects on hold. In this regard, financial resources in supporting family firms' FDI will be largely dependent on their access to internal capital markets. Specifically, we identify pyramidal ownership structure and financial slack as two key sources of internal capital markets to enable family firms' FDI. Pyramidal ownership structure depicts a divergence between controlling rights and cash flow rights, which allows family owners to use relatively small cash flow to garner huge financial resources for FDI from the internal capital market created by the pyramid (Almeida and Wolfenzon 2006; Bena and Ortiz-Molina 2013; Stein 1997); financial slack exists as the financial resources exceed the necessary amount for sustaining existing businesses, and it can be redeployed to develop new businesses (Baker and Nelson 2005; George 2005; Natividad 2013). Therefore, we argue that lone-founder firms with a pyramidal ownership structure or high levels of financial slack will enjoy internal resources support and have a greater FDI propensity and intensity than those of family-controlled firms.

We test our framework on a panel data set of 3879 firm-year observations of Chinese family listed firms from 2009 to 2014, and found empirical support for our hypotheses. By doing so, we aim to contribute to the literature in three ways. First, we can reconcile the conflicts regarding the relationship between family governance and FDI and offer important determinants of FDI decisions in family firms. We move beyond the extant research that focuses on the boundaries between family and nonfamily firms, and identify types of family owners as a key factor among family firms that will drive variation in their FDI decisions. Such attempt confirms that there are substantial differences among family firms. Second, our integration of social identity theory and SEW perspective that are widely used in family business area advances traditional IB theories in explaining family firms' FDI decisions. As such, it enriches our understanding of how the unique characteristics of family firms contribute to the explanation of their FDI decisions. Finally, by investigating boundaries in the family owner--FDI decision linkage, our findings confirm that both pyramidal structure and financial slack are important source of internal capital markets to enable family firms' FDI strategies. Such insights have pivotal implications under the context in which external financial markets are underdeveloped.

2 Theoretical Background

2.1 Family Firms' FDI in IB Research

Internationalization is a long-term process with full of uncertainties and risks (Cuervo-Cazurra et al. 2007; Johanson and Vahlne 1977). In general, IB scholars have well-documented that internalization (Rugman 1981), possessing ownership-advantages (Dunning 1988) or firm specific advantages, and having international experience (Johanson and Vahlne 1977) are crucial for firms to overcome such uncertainties and risks in the foreign operations. When applying these to explaining drivers of family firms' internationalization, particularly FDI decisions, findings seem inconclusive. To some extent, as the SEW perspective suggests, the uniqueness of family firms is that they establish and operate foreign subsidiaries not only to make economic profits, but also to maintain non-economic benefits that meet the family's affective needs, i.e., preserving SEW of the family (Gomez-Mejia et al. 2007; Gomez-Mejia et al. 2010). Family firms' FDI decisions, as one of important strategies for firm growth, are also subject to such consideration.

On one hand, one stream of research finds that family firms are willing to conduct FDI because of their unique human and social capitals, which can be defined as "resources and capabilities related to family involvement and interactions" (Carney et al. 2017; Chrisman et al. 2003; Lien et al. 2005). First, family firms' strong kinship network is beneficial for FDI (Hayton et al. 2011; Kontinen and Ojala 2011). This is because kinship network serves as an important channel for information communication and experience sharing among family members to reduce uncertainties during FDI decision-making (Chen 2004) and transaction costs associated with foreign investment (Rugman and Verbeke 1992), and to recognize FDI opportunities (Buckley and Casson 1993; Chen et al. 2014). This also shares with Johanson and Vahlne (2009) who highlight the importance of network in the internationalization process. Family firms are better at leveraging this advantage and able to react more quickly to FDI opportunities due to greater flexibility in implementing strategies (Craig et al. 2014). Second, family firms' long-term orientation may encourage FDI strategies. Compared with nonfamily firms, family firms generally have a stronger desire to pass on heritage assets and businesses to the succeeding generation (Miller and Le Breton-Miller 2005), which motivates them to plan long-term strategies such as FDI (Walsh and Seward 1990; Zellweger 2007). For the reasons above, family governance is expected to facilitate FDI strategies.

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