Family firms playing catalytic role in reshaping Indian economy: Study
Family firms are playing a catalytic role in reshaping Indian economy and charting new vibrant businesses portfolio,according to a recent study by Thomas Schmidheiny Centre for Family Enterprise at Indian School of Business (ISB).
While ample studies have traced India’s movement from an agrarian economy to a services-focused nation, this report is the first to study the evolution of Indian family firms in terms of their areas of operation in the post-liberalization period. The white paper titled – ‘Family businesses and India’s transition to a service led economy (1991 – 2018)’ was released today in the presence of BVR Mohan Reddy, Chairman, Cyient and former Chairman NASSCOM; Sonu Bhasin, Family Business Historian and Founder and Editor-in-Chief: The FAB Magazine and the authors of the report -Nupur Pavan Bang, Nandil Bhatia and Professor Kavil Ramachandran of the Thomas Schmidheiny Centre for Family Enterprise at ISB and Professor Sougata Ray of IIM Calcutta; and industry stakeholders.
The study analysed industry-wise affiliation of 4,589 companies over a period of 28 years.
Professor Kavil Ramachandran, Clinical Professor, Entrepreneurship and Executive Director, Thomas Schmidheiny Centre for Family Enterprise underlined that “family firms’ willingness to adapt to rapidly growing sectors such as digitization and IT shows their agility and hunger to succeed. Overall, this study reinforces the importance of family firms to the Indian economy and dispels any doubts that Indian family firms have failed to catch up with the evolving trends in the economy.”
Further explaining the findings of the study Nupur Pavan Bang said: “We found that Indian family firms rapidly moved from manufacturing to services post-liberalization and then from traditional to modern services as the millennium ended. While the entry of Standalone Family Firms (SFFs) in the second half of the 1980s decade kick-started the movement of family firms into the services sector, Family Business Group Firms (FBGFs) continue to dominate SFFs today on measures of both size and profitability across the services sector.”
Family firms witnessed a significant shift into services from a prior bias towards manufacturing with the onset of liberalization, unlike non-family firms (a significant number of which were already into services). A number of Standalone Family Firms were incorporated in the late 1980s and the first half of the 1990s which took advantage of the newfound demand from both global and domestic fronts for services. Fast forward to 2018 and family firms are leading in the manufacturing sector and most of the services sectors (excluding financial services). Family entrepreneurs have proactively restructured and diversified their businesses where new opportunities have arisen and taken advantage of them.
The other findings of the study are
- Post the rapid influx of IT and digitization in the early 2000s, financial services, IT & technology enabled services and telecommunications have been some of the strongest and vibrant sectors. For Family Firms as well, Financial Services, IT & Technology Services and Telecommunications have been some of the strongest sectors in the past 25 years. In these sectors as well, Family firms have gained a more dominant presence (in terms of share of total assets) compared to non-family firms in most of these modern services sectors.
- Consolidation of Traditional Service Sectors: While there has been a significant upsurge in family firms embracing newer sectors, traditional sectors including- trade, construction, warehousing, and logistics have continued to generate consistent profits for Indian family firms.
- Dominance of Family Business Group Firms in Services: From 1991 to 2018, the dominance of FBGFs has remained and is possibly here to stay for a considerable period. Business Group firms, on an average, were larger and borrowed more than their standalone counterparts. Business Group firms maintained this dominance across both manufacturing and services (across traditional and modern services). They were also, on average, for the same net sales, valued higher than standalone firms in the manufacturing sector over the past couple of decades and recently overtook the average valuation of standalone firms in the services sector as well.
- Upsurge of debt in the services sector: New regulations post the financial crisis of 2008-09 and the sharp rise in NPAs between 2009 and 2016 have meant that growth in total debt of the family firms in the manufacturing sector has slowed down considerably. Service sector family firms have increasingly felt the need to borrow to fund expansion amongst stagnating consumer demand. Among family businesses, business group affiliated firms are found to carry significantly more debt than Standalone Family firms in the Service sector.
- Implication for Policymaking: India’s overdependence on services, build-up of an informal sector and failure to move a sizeable chunk of the workforce out of the primary sectors suggests the need to have a more enabling industrial policy. Appropriate policy incentives and interventions will facilitate family firms to contribute more extensively to employment, trade, and domestic output.