Family firms and COVID-19.
80 percent of Pakistan's industrial base are family businesses. This is a misunderstood economic phenomenon which needs to be first understood in detail in order to draw out important lessons from it to create a positive impetus for overcoming the economic challenges posed by the COVID-19 crisis.
For economists, the theoretical debate on family firms (FFs), like the fable of the elephant and the blind men, remains rich in its parts, but poor in its whole. Recent research has explored various facets of family firms, but failure to reach a consensus on what defines family business and how to theorise the complex family-business dyad, has precluded the development of an integrated policy on the topic and hence the concept is often not discussed in mainstream debate. Only recently in a PIDE seminar related to the Competition Commission of Pakistan (CCP), a family business owner highlighted how his business could benefit from CCP and contribute positively towards the economy, but this too was not wholly accepted nor addressed by the participants. I would attribute it to lack of understanding of the basics of the concept which are explained below.
In economics, family firms are differentiated from non-family firms vis-a-vis two lenses of analyses: one is the agency theory perspective and the other is the resource based view. Agency theory highlights problems that stem from separating ownership from control in organisations. The concept of agency costs includes all actions of an agent that breach the interests of a principal and all contracts, efforts, incentives and policies, used by the principal to align the interests and actions of agent with their own. Applying this concept to family firms, it was largely believed that when ownership and management would reside within a family, agency costs would be negligible.
This assumption was challenged by various researchers who, by drawing on economic theories and data collected from 1,376 family firms, showed how family ownership may not be the kind of governance panacea that agency theory assumes it to be and that agency problems may be more pronounced in family firms due to altruism (familial bonds and preferences) than in non-family firms. Owners needed to manage agency problems caused by asymmetric altruism and self-control through monetary incentives to improve family firm performance. Similarly, another study found that principal-agent family bonds may increase agency costs but that these costs...
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