Liberalisation led to rise of family firms: Study

Suresh Dharur

Tribune News Service

Hyderabad, September 27

Economic liberalisation has led to the rise of standalone family firms (SFFs) that have become the primary drivers of accelerating growth of the services sector in India.

The family firms not only withstood the new rush of competitive forces in the economy, but also adapted to the changing business environment, according to a study conducted by the Indian School of Business (ISB), a premier B-school.

The study, conducted by the Thomas Schmidheiny Centre for Family Enterprise at the ISB, chronicled the evolution of family businesses since the onset of liberalisation in the country. It traces the progress of Indian family businesses from 1990 to 2015.

The authors Dr Nupur Pavan Bang and Prof Kavil Ramachandran, along with Prof Sougata Ray of Indian Institute of Management Calcutta, studied 4,809 firms listed on the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) as a part of the study.

The study shows that the representation of family businesses grew at a much faster pace than non-family businesses. The removal of restrictions and controls in the liberalised era unleashed their entrepreneurial spirit. In 1990, family firms represented 15.7 per cent of the GDP in terms of their total income, whereas by 2015, these represented 25.5 per cent of the GDP.

The process of liberalisation has enabled family firms to take stock, restructure and open up new opportunities in the services sector, thereby, increasing their contribution to the economy, the study said adding that a wave of entrepreneurial spirit got unleashed due to conducive environment.

“Indian family businesses have shown resilience and have progressed well over the years. These have increased their footprint in Indian economy. With better governance and more transparency, these will only get better. Their capacity to transcend time is their greatest strength,” the study said.

When reforms were introduced in 1991, there were apprehensions about the capabilities of the family-owned and managed businesses to withstand the pressure of the newly created freedom.

As the pace of reforms picked up with liberalisation, more and more standalone family firms started leveraging the changing business landscape. While the family business group firms did take advantage of the reforms in the early stages, it was the standalone family firms that emerged as the single largest ownership category in terms of number of firms.

The growth in the number of standalone family firms was driven primarily by the new firms in the services sector. Wholesale trade, financial services and information technology were the most favoured industries for the listed standalone family firms. This was reminiscent of the rising contribution of the services sector to the GDP.

Traditionally, family businesses were strong in manufacturing, but they showed an equal penchant for the services sector, when the opportunities arose. But, standalone family firms were the fastest growing category in the services sector. It was because of their entrepreneurial acumen that India’s services sector has grown so well in the recent years, the study said.

Succession remains a major concern for the most family businesses as the senior management comprises family members in most cases.