Increased levels of global trade integration, especially driven by the rise of China, have led to a fierce public debate about the winners and losers from international trade. Recently, calls for protectionism have become louder in many countries, leading to a backlash against globalisation (OECD 2017).

When it comes to firms, the increase in import competition has led researchers to re-examine an old and important economic question. Does more competition spur innovation, and thus productivity growth, or does it discourage it? The answer to this question remains far from determined. Recent empirical papers find mixed evidence, ranging from overwhelmingly positive effects in developing economies, to negative effects in North America (Shu and Steinwender 2019).

Examples for positive effects include Pavcnik (2002), Muendler (2004), Schor (2004), Fernandes (2007), Gorodnichenko et al. (2010), Bloom et al. (2016), Bombardini et al. (2017), and Brandt et al. (2017). Examples for negative effects in North America include Xu and Gong (2017), Kueng et al. (2017), and Autor et al. (2017).

In a recent paper (Chen and Steinwender 2019), we investigate this question from a new angle by focusing on how different types of managers respond to import competition. Specifically, we study how family managers respond to import tariff reductions differently from professionally managed firms in the context of Spain.

Family managers are special

Our focus on family managers and how import competition affects the productivity of family firms is motivated by two facts. First, many economies in the world are characterised by a large share of family firms. For example, in Europe 40% of large listed companies are controlled by families. In developing countries, family firms are even more dominant – out of large (>$1 billion) firms, 85% are family-run in South-East Asia, 75% in Latin America, 67% in India, and around 65% in the Middle East. Developing economies have also experienced most of the waves of extensive trade liberalisation in the past several decades. For instance, major trade liberalisation episodes happened in India and Brazil in the 1990s, and in China in the 2000s.

Second, family managers have been found to have very distinct preferences compared to professional managers. For example, family managers care about building a legacy by creating and sustaining the firm for their descendants, resulting in a long-run perspective that covers generations. They take strong pride in their firm and enjoy the pleasure of being their own boss. They also can use firm resources for personal purposes, or to provide jobs for relatives.  See, e.g., Bertrand and Schoar (2006), Villalonga and Amit (2006), Bennedsen et al. (2007), Bertrand et al. (2008), Hurst and Pugsley (2011), Bandiera et al. (2018), Belenzon et al. (2017), Lemos et al. (2016), and Mullins and Schoar (2016).

Family managers of the worst-performing firms increase productivity

We use Spanish firm-level data between 1993 and 2007 to investigate how increased import competition affected the labour productivity of both family-managed firms and professionally managed firms. The Spanish data and context present an ideal scenario for the purposes of this study. First, there were large increases in import competition, driven in part by both increased European integration and the unprecedented increase in Chinese exports that many other economies have also faced. Second, Spain’s import tariffs are determined at the EU level, and are therefore arguably exogenous to Spanish firms. Third, Spain has a large number of family firms (40% of the observations in our sample are family-managed firms).

Our empirical analysis uncovers a very specific pattern. After a reduction in import tariffs, the family-managed firms in the left tail of the initial productivity distribution (i.e. initially unproductive firms) increase productivity, while we do not see significant changes in the productivity of initially productive family firms or professionally managed firms.

In Figure 1, we plot the regression results for the initial (labour) productivity distribution of family managed firms. The effect on family firms decreases with firms’ initial productivity, but it is positive and significant even for the median-sized family firms, which indicates that our estimated effect is not just relevant for a handful of unproductive family firms.

Figure 1. Effect of import competition on the productivity of family managed firms, by initial productivity

In Figure 2, we plot the regression results for the entire initial (labour) productivity distribution of professionally managed firms. Overall, we do not see any significant productivity responses for professionally managed firms with any level of initial productivity.

Figure 2. Effect of import competition on the productivity of professionally managed firms, by initial productivity

Family management rather than family ownership

Firms with family managers differ from firms with professional managers in a variety of ways. In a number of robustness checks, we show that the type of manager is driving our empirical findings. For example, by comparing family-owned firms with family managers to family-owned firms with professional managers, we show that having a family member as a manager as well as an owner generates the productivity responses. However, the family member needs to be the manager of the firm, rather than a non-managing worker – the latter do not generate productivity responses to import competition. We can also show that our results are not driven by the size, R&D intensity, or capital intensity of family and non-family firms.

The results are not driven by access to imported inputs or export markets

We also check whether the productivity response is driven by import competition rather than other potentially correlated shocks such as improved access to imported inputs or foreign markets. [Papers focusing on the effect of access to export markets (e.g., Fernandes 2007, Lileeva and Trefler 2010, Bustos 2011, Mayer et al. 2016, and Coelli et al. 2018) or on access to intermediate inputs (e.g., Amiti and Konings 2007, Topalova and Khandelwal 2011, Brandt et al. 2017, and Fieler and Harrison 2018) tend to find positive effects of tariff reductions on firm productivity and innovations.] Controlling for changes of tariffs on inputs or the changes in foreign tariffs faced by Spanish exporters does not affect our results. Furthermore, the affected firms do not report significant changes in imported technologies or exports.

Managers exert effort in order to survive

Why is the productivity response to import competition concentrated among family-managed firms that are initially unproductive? We provide a stylised model to explain the finding. In this model, all managers care about the profits of the firm, but family managers derive some additional benefit (which may be non-monetary) from being a part of the family firm. Importantly, they lose this additional benefit if the firm goes bankrupt. Managers can increase the productivity of their firms, but this costs effort.

When an import competition shock hits the economy, potential profits of all firms fall. This increases the bankruptcy risk for unproductive firms. Since family managers care more about the existence of their firms, they exert an extra effort to avoid bankruptcy. However, this story does not hold for professionally managed yet unproductive firms, as their managers do not derive additional utility by keeping the firm alive. If the bankruptcy risk does not change, i.e. for firms with high initial productivity, there is no change in productivity.

Implications

Economists have long worried about the implications of family firms’ worse performance for aggregate productivity and economic growth. As an example, inherited family firms have been found to be one cause for slow economic growth in Canada (the ‘Canadian disease’) (Morck et al. 2000). There are, however, papers in this literature arguing that family ownership is associated with better firm performance (e.g., Anderson and Reeb 2003). For example, because family ownership facilitates monitoring inside the firm (Demsetz and Lehn 1985, Burkart et al. 2003) or reduces short-termism (Stein 1988, 1989).

We also find that family-managed firms are on average less productive than professionally managed firms. However, we demonstrate that the productivity of a firm can change, and that increased competition is a way to make family managed firms more productive.

Given that family businesses are expected to remain an important feature of the global economy for the foreseeable future, studying how family firms respond to policy reforms seems to be important for both academic research and policy debates. Beyond trade liberalisation programmes, pro-competitive policies such as industry deregulation and deregulations of foreign direct investment might generate similar effects on unproductive family firms, but we leave studies on these issues to future research.

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Notes:


Cheng Chen is an assistant professor at Clemson University. His current research interests include firm-level uncertainty, expectations and technology transfers. His doctoral thesis (“Essays on Firm Organization and International Trade”, 2014) investigates the impact of improvements in management quality on aggregate economic outcomes, such as the size distribution of firms, aggregate productivity, and welfare.

Claudia Steinwender is an assistant professor of applied economics at the MIT Sloan School of Management and is affiliated with the National Bureau of Economic Research (NBER), Center for Economic and Policy Research (CEPR), and Centre for Economic Performance at LSE (CEP).