Kinship-Bound Firm Expansion and Delegated Governance
In developing countries with weak legal systems, business owners refuse to delegate operational decisions to professional managers due to fear of theft and expropriation. Consequently, firm expansion is limited strictly by the size of the owner's trusted family network.
Picture this
Think of a store owner who only trusts their own children to operate a cash register; the business can only open new storefront locations if the owner has enough adult children to staff them, regardless of customer demand.
What the evidence says
The number of male relatives (brothers and sons) of a firm owner directly predicts overall firm size and plant count; owners with multiple male relatives establish multiple plants even when poorly managed, whereas the best-managed firm with no male relatives operates only a single plant.
- Who
- Large Indian textile manufacturing plants in the BEMMR field sample.
- How
- Observational field study analyzing firm governance structure, ownership dynamics, and plant expansion.
What to do
Establish standardized accounting and inventory tracking data systems to mitigate managerial theft risks and enable delegation beyond immediate family members.
From the source
"Revealingly, the number of brothers and sons of the firm's owner is an excellent predictor of firm size in the BEMMR sample, because the owners trust relatives and so will delegate decisions to them (unlike a professional manager)."
533 firm management AEA2010.pdf