Asia Pacific Business Review iFirst, 2011, 1–21 Family and non-family business resilience in an economic downturn Bruno Amanna* and Jacques Jaussaudb Université de Toulouse, Université Paul Sabatier Toulouse 3, France; bUniversité de Pau et des Pays de l’Adour, France FAIR USE ONLY a As widely documented in academic literature, family businesses perform better and enjoy a sounder financial structure than non-family businesses, a trend that applies to Japan as well, which is the context of this paper. Therefore, conventional wisdom suggests that family businesses should recover better or more easily from an economic downturn and persist in their stronger performance. This study tests this hypothesis, especially in reference to the current global economic crisis, by drawing lessons from the Asian crisis of 1997, for which relevant data are available. The study pertains specifically to the case of Japanese family and non-family companies. The empirical investigation uses a matched pair methodology, which allows for strong controls of size and industry variables. The sample consists of 98 carefully selected pairs (one family and one non-family) of firms that are of the same size and from the same industry. According to the results, family businesses achieve stronger resilience both during and after an economic crisis, compared with non-family businesses. They resist the downturn better, recover faster, and continue exhibiting higher performance and stronger financial structures over time. Keywords: Asia; downturn; family business; Japan; organizational resilience Introduction Research on family businesses suggests that they perform better and enjoy a sounder financial structure than do non-family businesses. Recent investigations in Japan confirm this conclusion (Kurashina 2003, Allouche et al. 2008). The strong performance of family businesses aligns with several theoretical perspectives, which imply that family businesses should recover better in the face of an economic downturn. In particular, the theory regarding the concept of organizational resilience suggests that a resilient firm can take situation-specific, robust and transformative actions when confronted with unexpected and powerful events, such as economic recessions (Lengnick-Hall and Beck 2009). Japan is of particular interest in this setting because of its long tradition of family businesses, beginning even before the country opened its borders to the rest of the world at the end of the nineteenth century. During the feudal Tokugawa period (1603 –1868), Japanese firms were owned entirely by families or, perhaps more properly, by clans (Morck and Nakamura 2007). Following the Meiji Restoration of 1868, rapid industrialization in Japan promoted the development of Zaibatsu, defined as pyramidal groups controlled by families, such as the Mitsui family’s control over the Mitsubishi group. During the first decades of the twentieth century, prior to World War II, the Japanese economy remained structured around such Zaibatsu. *Corresponding author. Email: publications@bruno-amann.fr ISSN 1360-2381 print/ISSN 1743-792X online q 2011 Taylor & Francis DOI: 10.1080/13602381.2010.537057 http://www.informaworld.com FAIR USE ONLY 2 B. Amann and J. Jaussaud However, by the second half of the twentieth century, the dominant position of family businesses in Japan began to falter. First, allied forces dismantled Zaibatsu, and when Keiretsu emerged in the 1950s and 1960s as a new form of inter-firm cooperation, companies had lost the family dimension (Miyashita and Russell 1994). In addition, according to Morikawa (1996) and Morck and Yeung (2003), Japanese enterprise ownership has undergone dramatic changes in recent decades, mainly at the expense of family businesses. This history raises some key questions for the modern day (see Allouche et al. 2008): Do family businesses remain a significant force in the Japanese economy? How do they perform and financially structure themselves compared with non-family businesses? Are they comparable to parallel firms in Western countries? A study by Kurashina (2003) found that 42.68%, or 1074, of Japanese listed companies (1st sector) in 2003 were family businesses. Saito (2008) gives the same percentage. Another study by the Nihon Keizai Shimbun (2006), shows that, between 29 December 1989 and 15 January 2003, 99 enterprises increased capitalization, and of the top 10 firms, eight were family businesses. In most countries in the world, family businesses account for a major share of business, employ a significant portion of total employees and record significant amounts of turnover, added value, investments, and accumulated capital (Allouche et al. 2008). Beyond that, the question of being a significant force in an economy is closely related to the comparative performance of family businesses vs. non-family businesses. In the case of Japan, Allouche et al. (2008) confirm that family businesses in Japan achieve better performance than non-family businesses, for both profitability and financial structures. Empirical results from Saito (2008) indicate that family businesses slightly outperform nonfamily businesses in Japan, but the family business premium mainly results from the active founders. After the retirement of the founders, the results become mixed (Saito 2008). Even if some factors can mitigate the family business premium (founders for Saito 2008, importance of family control for Allouche et al. 2008) globally speaking, despite the huge and radical changes in the Japanese economy, family businesses in Japan, as in Western economies, globally outperform non-family businesses. Furthermore, the evolution of the Japanese economy and its effects on family businesses may provide an insight into global economies. For example, without data regarding the current global economic crisis, we cannot test the effects of the modern recession. Instead, this study compares the performance of family and non-family businesses during and after the 1997 Asian financial crisis. The crisis caused the financial and real estate bubbles to burst, leaving the ailing Japanese economy unable to recover fully until the 1990s, this period became known as Japan’s ‘lost decade’. By 2003 the Japanese economy had fully recovered. Therefore, this context provides a long-range view of the effects of an economic crisis on family and non-family businesses. In Japan, it implies that family businesses are particularly resilient, both during and after the crisis. In the next section, we provide an overview of broadly accepted interpretations of why family businesses tend to enjoy better performance and stronger financial structures than do non-family businesses. We also extend these interpretations to recovery situations during and after economic downturns, such as the Asian financial crisis of 1997. Methodology and data collection are then described, we conclude with test results and a discussion of the pertinent findings. Background and hypothesis As in any emerging field of research, some fundamental questions, both theoretical and practical, remain unsolved for family business studies. For example, how can we define a Asia Pacific Business Review 3 family business precisely, and to what extent do family businesses differ from non-family businesses? For this study, we apply the concept of organizational resilience to family businesses, using the context of the 1997 Asian crisis to structure our empirical investigation. FAIR USE ONLY Family business and performance Defining family business Academic literature includes family business definitions based on both single and multiple criteria. The former focuses on ownership or control through management; the latter feature both these dimensions (Rosenblatt et al. 1985, Handler 1989). For example, Miller and Le Breton-Miller (2003, p. 127) define a family business as ‘one in which a family has enough ownership to determine the composition of the board, where the CEO and at least one other executive is a family member, and where the intent is to pass the firm on to the next generation’. Regarding the availability of several definitions, without a consensus on any one in particular, Villalonga and Amit (2004) note that many include three key dimensions: . A significant part of the capital is held by one or several families. . Family members retain significant control over the company through the distribution of capital among non-family shareholders and voting rights, with possible statutory or legal restrictions. . Family members hold top management positions. For this study, in line with prior literature (Kurashina 2003, Villalonga and Amit 2004, Alllouche et al. 2008), we define a family business as one in which family members hold top management positions, such as chief executive officer, or sit on the board of directors, and are among the main shareholders. Varied interpretations of performance Most empirical investigations find better performance among family businesses compared with non-family businesses, largely according to their financial performance (Monsen et al. 1968, Monsen 1969, Charreaux 1991, Gallo and Vilaseca 1996), though some investigations also consider non-financial performance dimensions such as growth. Accordingly the better performance by family businesses may be interpreted in several ways. One explanation relies on agency theory, following Berle and Means (1932) and Galbraith (1967). According to this perspective, family businesses perform better because they reduce agency costs by minimizing the separation between ownership and management. The objectives of owners and managers are similar in family businesses, which allows for less control over managers (Fama and Jensen 1983). However, this approach suffers some limits (Arrègle et al. 2004). For example, family businesses may suffer other costs, such as a premium needed to balance the risk for minority investors and prevent owners from exploiting the business only for their own profit (Shleifer and Vishny 1997; La Porta et al. 1999). Scholars also have identified several additional agency costs (Barclay and Holderness 1989, Kets de Vries 1993, Schulze et al. 2001, 2003, McConaughy et al. 2001, Burkart et al. 2003, Morck 2003, Morck and Yeung 2003, Chrisman et al. 2005). Therefore, we cannot exclusively assert that agency costs are lower or higher for family businesses compared with non-family businesses. Rather, agency costs vary and must be specified precisely in each case (Morck and Yeung 2003). Carney (2005) highlights three propensities of a family-based governance system that could mitigate agency costs: parsimony (capital deployed sparingly and used intensively), FAIR USE ONLY 4 B. Amann and J. Jaussaud personalism (unification of ownership and control in the owner) and particularism (families can employ decision criteria other than those based on pure economic rationality). Another explanation takes the perspective of stewardship theory and argues that family members act as stewards because they strongly identify with the firm (Davis et al. 1997). According to Miller and Le Breton-Miller (2009), stewardship can take three forms. First, stewardship over continuity means that family members want to ensure the longevity of the company and therefore invest to create conditions for the long-lasting benefit of all family members. Second, stewardship over employees implies that family businesses attempt to nurture the workforce through motivation and training, as well as by transmitting a set of constructive values to employees. Third, stewardship over customers means that family businesses strengthen their connections with customers to sustain their prosperity and survival. The better performance of family businesses results from the long-term orientation of family shareholders. This argument stems from Porter (1986), although he underlines that pressure from financial markets leads to short-term management by listed companies. Pressures from financial markets are less for family business, which reduces ‘managerial myopia’ (Stein 1988, 1989). Perhaps family businesses dominate as a form of organization because family managers have longer prospects than managers in non-family companies (Harvey 1999). Additional interpretations rely on a neo-institutional perspective, in which the enterprise is a social construction. Therefore, success draws on the set of values that family members share, such as trust (Fukuyama 1995, Chami 1999) and altruism (Van den Berghe and Carchon 2003). Finally, family businesses might achieve increased efficiency through their intricate connections, according to the concept of ‘familiness’1 (Habbershon and Williams 1999). Such connections can provide additional resources and competencies, which eventually should strengthen the firm’s potential competitive advantage (Habbershon and Williams 1999, Habbershon et al. 2003, Arrègle et al. 2004, Chrisman et al. 2005). Financial structure Research also emphasises differences in the financial structure between family and nonfamily businesses, such that the former tend to take more cautious attitudes toward debt. The main challenge for family businesses is to promote growth without challenging the permanence of family control (Goffee 1996, Abdellatif et al. 2010). This approach is consistent with the proposed longer-term perspectives adopted by family businesses, according to stewardship theory. A contingency-based view also suggests the possibility of varied risk preferences (Gomez-Mejia et al. 2007, Abdellatif et al. 2010). For example, socio-emotional wealth may be a key goal for family businesses, which would be more likely to perpetuate the owner’s direct control over the firm’s affairs (Gomez-Mejia et al. 2007). Although owners want to preserve their socio-emotional wealth and diversification, a strategic choice such as going international, implies a loss of socio-emotional wealth therefore family owners are likely to avoid that strategic choice, even if it would confer some risk protection to the company (Gomez-Mejia et al. 2010). Finally, family businesses in general are developed and managed for the benefit of current and future generations, therefore, their strategic decisions are not limited to purely economic considerations. Organizational resilience and family businesses The question of organizational resilience involves the relationship between crisis planning and effective adaptive behaviours during a crisis. FAIR USE ONLY Asia Pacific Business Review 5 Definition The concept of organizational resilience is a generalization of the concept of resilience from psychology. It refers to a fundamental quality in people, groups, organizations or systems to respond to a significant change that disrupts the expected pattern of events without engaging in an extended period of regressive behaviour (Horne and Orr 1998). Although organizational research lacks a clear consensus about its meaning, resilience captures the firm’s ability to take situation-specific, robust and transformative actions when it confronts unexpected and powerful events that have the potential to jeopardize its long-term survival (Lengnick-Hall and Beck 2009). Coutu (2002) highlights three characteristics of resilient organizations: (1) Facing down reality. These organizations are pragmatic, even optimistic, as long as their optimism does not distort their sense of reality. (2) The search for meaning, or a propensity to make meaning of terrible times. (3) Ritualized ingenuity, which is the ability to suffice using whatever is at hand. Coutu clearly links this characteristic to the French term ‘bricolage’. (This concept comes from the French anthropologist Claude Levi-Strauss and relates closely to the concept of resilience.) The term, in its modern sense, means a form of inventiveness or the ability to improvise a solution to a problem without proper or obvious tools or materials. Bridge to family business The various interpretations of the stronger performance of family businesses clearly link to the resilient organizations characteristics (Coutu 2002). Because the intrinsic characteristics of family businesses are quite similar to the features that mark resilient organizations, we expect family businesses to be more resilient than other organizational forms, as Table 1 shows. From these interpretations, we derive three hypotheses: H1: Family businesses resist economic downturns better than non-family businesses. H2: In economic downturns, family businesses are better able to mobilize their resources than non-family businesses. Table 1. Resilient and family business characteristics. Argument # Resilient organizations’ characteristics 1 Facing down reality 2 The search for meaning 3 Ritualised ingenuity Family businesses’ characteristics - Long-term orientation (Stein 1988, 1989, Miller 2005) - Familiness (Habbershon and Williams 1999, Chrisman et al. 2003) - Familiness (Habbershon and Williams 1999, Chrisman et al. 2003) - Stewardship theory (Davis et al., 1997, Miller et al. 2006, 2009 - Social capital (Arregle et al. 2007) - Parsimony - Personalism - Particularism (Carney 2005) - Socio-emotional wealth (Gomez-Mejia et al. 2010) 6 B. Amann and J. Jaussaud H3: In economic downturns, family businesses have stronger financial structures than non-family businesses. FAIR USE ONLY Resilience and economic downturns To study the specific impact of an economic downturn on family and non-family businesses, we split the Asian crisis into three significant periods: . 1998, the worst year in economic terms. This year provides a basis for investigating the behaviour of firms in an economic downturn and thereby determining if family businesses offer a greater resistance to the crisis. . 2003, the year of confirmed recovery in Japan. With this timing, we study the behaviour of companies at the end of the economic downturn and thus determine if family businesses have a greater ability to exit the crisis. . 2007, or a few years after the confirmation of the recovery. This period enables us to investigate the behaviour of companies and whether family businesses perform better, even after an economic downturn. To test our three hypotheses accurately, we translate them into sub-hypotheses related to each period, 1998, 2003 and 2007, as follows: H1: Family businesses resist economic downturns better than non-family businesses. H1a: During an economic downturn, family businesses enjoy better financial performance than non-family businesses. H1b: After an economic downturn, family businesses recover better in terms of financial performance than non-family businesses. H1c: After recovery from an economic downturn, family businesses keep their advantages in term of financial performance over non-family businesses. H2: In economic downturns, family businesses are better able to mobilize their resources than non-family businesses. H2a: During an economic downturn, family businesses better mobilize their resources than non-family businesses. H2b: Family businesses mobilize their resources better than non-family businesses at the end of an economic downturn. H2c: Family businesses mobilize their resources better than non-family businesses after the end of an economic downturn. H3. In economic downturns, family businesses have stronger financial structures than nonfamily businesses. H3a: During an economic downturn, family businesses have stronger financial structures than non-family businesses. H3b: Family businesses have stronger financial structures than non-family businesses at the end of an economic downturn. H3c: Family businesses have stronger financial structures than non-family businesses after the end of an economic downturn. The conceptual model in Figure 1 displays this set of hypotheses. The 1997 Asian crisis The Asian currency crisis in 1997 affected not only Asia but the whole world until 1998. It began in Thailand and other South-East Asian countries (e.g. Indonesia, Malaysia) and Asia Pacific Business Review 7 H1. FBs resist the economic downturn better than NFBs. Family businesses (FBs) FAIR USE ONLY H2. In economic downturns, FBs mobilize their resources better than NFBs. Non family businesses (NFBs) H3. In economic downturns, FBs have stronger financial structures than NFBs. During an economic downturn At the end of an economic downturn After an economic downturn Figure 1. Conceptual model. quickly spread to Korea as a financial and currency crisis (Stiglitz 2003). The gross domestic product (GDP) of most countries decreased in 1998, including those of the United States (2 0.4%), the European Union (2 0.4%), and elsewhere (Japan Economic Almanac 1999). Japan was especially affected, compared to most other industrialized nations, with a 2 1.3% decrease in its 1998 GDP. As a consequence, this setting is particularly relevant for comparing how Japanese family and non-family businesses recovered from the downturn. It took several years for many Asian countries to recover, mostly under the aegis of the international monetary fund (IMF) (cf. Malaysia, which did not accept the IMF’s conditions for support). As Table 2 shows, the Japanese economy enjoyed significant growth again as soon as 2000, but it then faced difficulties in 2001 and 2002. Only after 2003 was the economy officially recovered. Although it is beyond the scope of this paper to analyze the Asian crisis mechanisms, it is important to recognize that in Japan, the crisis led to a massive banking and financial sector rescue; this sector would not have been able to recover on its own from the burden of bad loans from the beginning of the 1990s. Japanese authorities encouraged the main financial institutions to merge and take over the weaker institutions, although some went bankrupt. The whole process took several years and ended in 2005 with the merger of Tokyo Mitsubishi Bank and the UFJ group. This reorganization process in the financial industry is generally regarded as just one more difficulty that Japanese enterprises must confront in order to receive funds from banks and other financial institutions. Table 2. GDP growth rate of Japan (in real terms), by civil year. Year 1996 1997 1998 1999 2000 2001 GDP Year GDP 3.9% 2002 20.3% 0.8% 2003 1.4% 21.3% 2004 2.7% 0.1% 2005 1.9% 2.8% 2006 2.2% 0.2% 2007 Source: Keizai Koho Center (1999, 2004, 2006, 2008). 8 B. Amann and J. Jaussaud FAIR USE ONLY Methodology and data Matched pair methodology When comparing the performance and financial structures of family and non-family businesses, even industry by industry (Kurashina 2003), external sources of influence might affect them differently, such as historical reasons. In this case, it is difficult to ensure that the true reason for performance differences is related to the family or non-family nature of the business. A matched pair methodology, as applied by Allouche and Amann (1998, 2000) to the French case and Allouche et al. (2008) and Abdellatif et al. (2010) to the Japanese case, addresses this question; we use it for this contribution as well. The idea behind our application of the approach is to compare systematically family and non-family businesses with the same profiles, in the same industry, and of nearly the same size. We first set up pairs of business (one family business, one non-family business) in the same industry and of approximately the same size (in terms of sales or number of employees). This approach helps mitigate two key reasons for performance and financial structure variance and thereby sheds more light on the influence of family control on both performance and financial structure. To identify the firms’ industries, we use the four-digit standard industrial classification (SIC). Using this widely adopted classification ensures that companies in each pair conduct similar activities. Our measures of the size of the business reflect sales and number of employees. Two companies in the same industry are regarded as similar in size if their sales or number of employees are within 20% of each other. Assuming a sufficient number of such pairs of family and non-family businesses, we can compare their performance, financial structure, and other indicators, having controlled for size and industry. We therefore compute the following indicators: return on assets (ROA), return on equity (ROE), return on investments (ROI), long-term debt to total capital, cash to current assets and so on. For each indicator, we compute the difference between family and non-family businesses as averages. Then for each indicator, we test (t-test, paired sample) whether the difference is significant at a 5% threshold; if it is not, we also consider whether it is significant at a 10% threshold. We assessed these comparisons in all three years under investigation, 1998, 2003 and 2007. Data We collected data from two sources, the well-known Worldscope database (1998, 2003, 2007) for financial indicators and the list of family and non-family businesses in Japan from Kurashina (2003). To identify family and non-family businesses, Kurashina (2003) used various published materials, including directories, and relied on the help of several financial institutions, such as brokerage firms and others, as well as the companies themselves. Worldscope (2003) provides a wide range of financial and non-financial data, including SIC codes, for 3194 Japanese companies, which constitute almost all of those listed. Cross-referencing the data from Worldscope and Kurashina (2003) to build the sample of pairs, represented a massive undertaking, so we limited our investigation to firstsection firms on the Tokyo Stock Exchange. From the 1638 companies listed in the first section in 2003, we excluded purely financial firms and companies with too many missing values in Worldscope. Therefore, our sample includes 1271 companies, 491 of which were family businesses. In most cases (416, or 84.72%), family control encompassed both capital (family members are among the largest shareholders) and management (family members hold influential positions, such as CEO). Asia Pacific Business Review 9 On the basis of this sample (1271 companies, 416 family businesses), we built our pairs for companies for which we had data in Worldscope for all three years (1998, 2003 and 2007). We thus had a sample of 98 pairs of companies that we investigated over three years. Using a consistent sample across all three years ensured that we compare the ability of specific family and non-family-businesses to recover. Major findings FAIR USE ONLY Hypothesis 1: even in a downturn, family businesses achieve better performance We base H1 on extant literature and divide our analysis into periods of time, that is, during the crisis, immediately after the downturn, and subsequently. In all cases, we predict that family businesses perform better than non-family businesses. With regard to our performance metrics (i.e. ROA, ROE, ROI and net income indicators), the results in Table 3 indicate that in 1998, family businesses enjoyed greater profitability than non-family businesses. However, only ROI is significantly different at a 5% threshold; at 10% (a threshold considered in some settings and that requires great care) ROE and net income are also significantly different between family and non-family businesses, and the former has the advantage. Therefore, we cautiously regard H1a as validated. In 2003, the contrasts grow more evident. The differences are greater than they were in 1998 and more often significant at the 5% threshold. The ROA and ROI, as well as the pretax margin, indicate that family businesses perform significantly better; at the threshold of 10%, the ROE is also significant. We thus consider H2b validated. Family businesses recover better than non-family businesses, then they retain that advantage. The reason, as previously stated, may involve family businesses’ greater investments and ability to mobilize their resources to recover, as tested with H2. Alternatively, the advantage may reflect the links between the characteristics of resilient organizations and those of family businesses. H2: Even in a downturn, family businesses can mobilize their resources We again consider our hypothesis across three different periods: during the downturn (1998, H2a), during the recovery period (2003, H2b), and after recovery (2007, H2c). According to the data in Table 5, in 1998, family businesses invested more than nonfamily businesses, which shows the family businesses’ apparent willingness to prepare for the future, even in an adverse situation. Two ratios that reflect funds used to acquire fixed assets, namely, the capital expenditure-to-fixed assets and capital expenditures-to-total assets ratios, are significant at the 5% level and indicate the greater determination of family businesses. The ability of family businesses to mobilize their resources both during an economic downturn and after (H2) may explain their stronger performance (H1) and their ability to recover. The financial structures of both kinds of businesses also may play a role. H3: Even in a downturn, family businesses have stronger financial structures To confirm our claim that during the downturn, the recovery process, and thereafter, family businesses maintain stronger financial structures than do non-family businesses, we again test three sub-hypotheses, distinguished by the period to which they refer. Table 7 provides the results related to H3a and H3b. Table 8 contains the comparison pertinent to H3c. FAIR USE ONLY 10 1998 2003 Average Number Indicators of pairs Return on Assets Return on Equity Return on Invested capital Net income Pretax margin Non Family Businesses Family Businesses Average Différence Signification % of pairs in favor of family businesses Number of pairs Non Family Businesses Family Businesses Différence Signification % of pairs in favor of family businesses 91 0.869 1.060 0.191 0.521 56.94% 93 1.878 3.440 1.562 0.002 61.29% 94 0.881 3.067 2.185 0.073 60.81% 95 3.147 6.642 3.495 0.057 47.36% 95 0.906 1.788 0.881 0.049 55.40% 95 3.029 5.136 2.107 0.002 60.02% 0.06 0.60 0.269 46.31% 0.974 53.33% 0.007 58.51% 95 94 1844.57 2.142 5104.30 2.262 3259.73 0.120 95.00 94 4389.79 3.505 5396.06 6.228 1006.27 2.723 B. Amann and J. Jaussaud Table 3. Profitability of family and non-family businesses in an economic downturn. FAIR USE ONLY Table 4. Profitability of family and non-family businesses after economic downturn. 2003 2007 Signification Number of pairs % of pairs in favor of family businesses Average Indicators Signification % of pairs in favor of family businesses 93 95 1.878 3.147 3.440 6.642 1.562 3.495 0.002 0.057 61.29% 47.36 89 89 3.344 5.868 4.337 7.728 0.994 1.859 0.059 0.08 60.60% 58.81% 95 3.029 5.136 2.107 0.002 60.02% 88 4.418 5.716 1.298 0.047 67.04% 0.269 46.31% 87 0.475 48.27% 0.007 58.51% 94 0.001 63.83% Number of pairs 95 94 Non Family Businesses 4389.79 3.505 Family Businesses 5396.06 6.228 Différence 1006.27 2.723 Non Family Businesses Family Businesses Différence 10557.43 4.352 15951.20 8.295 5393.77 3.943 Asia Pacific Business Review Indicators Return on Assets Return on Equity Net income Pre tax margin Average 11 FAIR USE ONLY 12 1998 2003 Average Indicators Capital Expenditures / fixed Assets Capital Expenditures / sales Capital Expenditures / Total Assets Reinvestment rate per share Retained Earnings PctEquity Research&dev to sales Cash/current assets Cost of goods/ sales Foreign assets/ tot Assets Foreign Sales/tot Sales Average Number of pairs Non Family Businesses Family Businesses Signification % of pairs in favor of family bus inesses 59.78% 94 3.858 6.397 2.539 0.002 63.44% 0.237 50.71% 94 2.279 3.704 1.425 0 64.51% 1.854 0.035 58.60% 94 2.397 3.248 0.541 0.002 56.38% 0.919 0.241 53.35% 92 1.907 5.211 3.304 0.003 56.52% Shortage of data 95 37.172 51.878 14.706 0.007 63.15% Shortage of data 94 65 1.238 2.254 1.017 0.002 48.38% 27.890 34.202 6.312 0.004 62.16% 92 24.205 35.523 11.318 0.001 56.69% 70 70.610 70.581 20.029 0.988 56.12% 92 73.348 65.277 28.071 0.001 76.08% 57 3.581 7.328 3.747 0.007 63.42% 68 8.312 11.547 3.235 0.034 55.88% 65 6.604 10.354 3.750 0.025 61.35% 72 10.799 15.266 4.467 0.033 55.56% Signification % of pairs in favor of family businesses 1.945 0.003 2.707 0.511 1.736 3.590 0.052 0.970 Number of pairs Non Family Businesses Family Businesses 92 3.327 5.272 94 2.196 96 92 Différence Différence B. Amann and J. Jaussaud Table 5. Mobilization of resources in an economic downturn. FAIR USE ONLY Table 6. Mobilization of resources after an economic downturn. 2003 2007 Average Indicators Family Businesses Différence Signification % of pairs in favor of family businesses Number of pairs Non Family Businesses Family Businesses Différence Signification % of pairs in favor of family businesses 94 3.858 6.397 2.539 0.002 63.44% 93 4.848 7.696 2.847 0.003 59.13% 94 2.279 3.704 1.425 0 64.51% 93 2.798 4.407 1.609 0.004 55.78% 94 2.397 3.248 0.541 0.002 56.38 92 2.977 4.027 1.05 0.009 59.97% 92 1.907 5.211 3.304 0.003 56.52% 84 3.535 5.389 1.854 0.057 61.90% 95 37.172 51.878 14.706 0.007 63.15% 98 44.029 56.559 12.530 0.001 59.60% 65 1.238 2.254 1.017 0.002 48.38% 62 2.039 3.446 1.406 0.027 60.29% 92 24.205 35.523 11.318 0.001 56.69% 96 23.794 32.025 8.231 0.001 70.83% 92 73.348 65.277 28.071 0.001 76.08% 97 71.633 66.561 25.072 0.009 64.94% 68 8.312 11.547 3.235 0.034 55.88% 50 11.097 18.170 7.074 0.007 60.00% 72 10.799 15.266 4.467 0.033 55.56% 58 14.318 23.088 8.770 0.006 56.89% Asia Pacific Business Review Capital Expenditures / fixed Assets Capital Expenditures / sales Captial Expenditures / Total Assets Reinvestment rate per share Retained Earnings PctEquity Research&dev to sales Cash/current assets Cost of goods/ sales Foreign assets/ tot Assets Foreign Sales/tot Sales Non Family Number of pairs Businesses Average 13 FAIR USE ONLY 14 1998 2003 Average Indicators Long Term Debt / Total Capital Tot Debts/ Tot Common equity Equity/Total Common equity Current ratio Quick ratio Fixed Charge Coverage Ratio Average Signification % of pairs in favor of family businesses 0.400 0.257 67.041 218.195 74.895 80.624 93 1.514 95 89 1.052 9.282 % of pairs in favor of family businesses Number of pairs Non Family Businesses Family Businesses 50.70% 95 16.406 15.700 20.705 0.795 57.85% 0.266 56.16% 95 117.177 49.267 267.910 0.069 62.10% 5.729 0.032 64.21% 95 76.718 84.333 7.615 0.011 61.05% 2.039 0.525 0.002 66.66% 95 1.100 1.862 0.762 0.008 56.84% 1.577 40.940 0.525 31.658 0.001 0.039 63.20% 58.41% 95 94 1.233 185.385 1.780 398.835 0.548 213.450 0.003 0.269 63.15% 58.51% Number of pairs Non Family Businesses Family Businesses 93 19.656 20.056 94 85.235 95 Différence Différence Signification B. Amann and J. Jaussaud Table 7. Financial structures in an economic downturn. FAIR USE ONLY Table 8. Financial structures after an economic downturn. 2003 2007 Average Indicators Signification % of pairs in favor of family businesses Number of pairs Non Family Businesses 20.705 0.795 57.85% 85 14.633 9.953 24.680 0.047 58.82% 49.267 267.910 0.069 62.10% 85 65.852 36.777 229.075 0.05 67.05% 76.718 84.333 7.615 0.011 61.05% 86 82.483 87.884 5.401 0.375 59.30% 95 1.100 1.862 0.762 0.008 56.84% 93 1.772 2.402 0.631 0.004 60.41% 95 94 1.233 185.385 1.780 398.835 0.548 213.450 0.003 0.269 63.15% 58.51% 91 74 1.306 50.079 1.860 215.590 0.554 165.511 0.004 0.027 59.78% 58.10% Number of pairs Non Family Businesses Family Businesses Différence 95 16.406 15.700 95 117.177 95 Family Businesses Différence Signification % of pairs in favor of family businesses Asia Pacific Business Review Long Term Debt / Total Capital Tot Debts/ Tot Common equity Equity/Total capital Current ratio Quick ratio Fixed Charge Coverage Ratio Average 15 FAIR USE ONLY 16 B. Amann and J. Jaussaud In 1998, we found no significant difference between family and non-family businesses in terms of debts (both long-term and total). However, family businesses enjoyed better liquidity than non-family businesses, according to the current ratio and quick ratio, which implies greater flexibility. In addition, the fixed charge coverage ratio is significantly different at the 5% threshold, in favour of family businesses, which also indicates their greater flexibility. These results partially validate H3a; however, we find no difference with regard to long-term or total debt. In 2003, the picture is almost the same, except the long-term debt-to-total capital ratio improves for both kinds of businesses, still without significant differences between them. In addition, the ratio of total debts to total common equity diverges, deteriorating for nonfamily businesses and improving for family ones. Therefore, we draw the same conclusion for H3b, namely, that it is partially validated. In 2007, family businesses revealed sounder financial structures, in terms of both debts and liquidity. All the ratios except equity to total capital indicate significant differences in favour of family businesses at a 5% threshold. Thus, we regard H3c as validated. Discussion Family business performance in a downturn (H1) The wider differences between family and non-family businesses in 2003, at the end of the downturn, compared with those in 1998 indicate that family businesses recovered better from the recession than did non-family businesses. Is this recovery success just a matter of time – such that non-family businesses eventually catch up to family businesses on the path to recovery? In H1c, we predict instead, that family businesses maintain at least some of their advantage, and in Table 4, we show that the differences between the types of business persisted in 2007, still in favour of family businesses. All businesses achieved better performance than in 2003. However, at the 5% threshold, the ROI and pretax margin of family businesses were significantly stronger than those of non-family businesses, and at the 10% threshold, ROA and ROE also significantly supported the benefits of family businesses. We thus find support for H1c. The finding supports our hypothesis that family businesses resist economic downturns better than non-family businesses. In a clear reflection of the ability of family businesses to face down reality, these firms achieve their success because of both their long-term orientation (Stein 1988, 1989, Miller 2005) and their so-called ‘familiness’ (Habbershon and Williams 1999, Chrisman et al. 2003). This fundamental quality – which may appear in individual people, groups, organizations or systems – to respond to significant change that disrupts the expected pattern of events without behavioural regressions (Horne and Orr 1998) strongly suggests the greater organizational resilience of family businesses. Family business and mobilisation of resources in a downturn (H2) Family businesses adopt long-term orientations. Even during a crisis, compared with nonfamily businesses, family firms ‘invest for the future or undertake initiatives with significant short-term costs’ (Miller and Le Breton-Miller 2006, p. 78). In addition, the cash-to-current assets ratio is significant (5%), which indicates greater flexibility among family businesses. More so than non-family businesses, these companies also are keen to exploit opportunities abroad. Their ratios of both foreign assets to total assets and foreign sales to total sales differ significantly at a 5% threshold, in support of H2a. FAIR USE ONLY Asia Pacific Business Review 17 Similar findings pertaining to the superiority of family businesses in 2003 indicate that by this point every ratio in Table 5 significantly favours (5%) family businesses. They invest more, conduct more research and development, take the lead in overseas markets and control costs better, all in support of H2b. In addition, our findings show that during this immediate post-crisis period, investment in innovation (in a broad sense) offers firms an effective means to resist. The organizational resilience of family businesses emerges in the form of ‘ritualized ingenuity’. Because the differences are greater in 2003 than in 1998, as well as more systematically significant, we can assert that family businesses moving from a crisis into a recovery phase can better mobilize their resources than can non-family businesses. Even well after the recovery, family businesses continue to display a better ability to mobilize their resources; in Table 6 every ratio remains at nearly the same levels, with significant differences between family and non-family businesses in 2007. Thus we also have support for H2c. Family business and stronger financial structures in a downturn (H3) The interpretation of these results rests on two previously mentioned explanations. First, academic research notes that family businesses tend to adopt more cautious attitudes toward debt. Second, some interpretations suggest varied risk preferences for family versus non-family businesses (Gomez-Mejia et al. 2007). We posit that during an economic downturn, family businesses renounce their traditional or classical debt-related behaviour and acknowledge the need to vary their risk preferences. After the crisis, they re-adopt their traditional behaviours. The results clearly support our first argument, with regard to facing down reality, and our third claim, pertaining to the translation of ritualized ingenuity into socio-emotional wealth. A contingency-based view suggests the possibility of varied risk preferences (GomezMejia et al. 2007, Abdellatif et al. 2010), such that socio-emotional wealth may be a key goal for family businesses. Accordingly, firms with these goals are more likely to perpetuate the owner’s direct control over the firm’s affairs (Gomez-Mejia et al. 2007). Because owners want to preserve their socio-emotional wealth, which they cannot do through diversification (e.g. going international), family owners likely avoid that strategic choice, even if it would confer some risk protection on the company (Gomez-Mejia et al. 2010). However, during a downturn, family businesses are flexible enough to temporarily accept changes to their traditional goals. Implications By addressing three different periods (in the crisis, the end of the crisis and after the crisis), this contribution makes a threefold contribution to extant literature, particularly with regard to the organizational resilience of family businesses in a Japanese context: . First, during the crisis, family businesses, compared with non-family businesses, achieve better performance (H1), have a greater ability to mobilize their resources (H2) and are able to alter or adapt their behaviour when it comes to debt (H3). In short, they resist better. . Second, at the end of the crisis, these businesses still enjoy better performance than non-family businesses; the differences between the two groups even increases, granting greater favour to the family business. On the two other points, the findings are quite similar. In short, they recover faster. 18 B. Amann and J. Jaussaud FAIR USE ONLY . Third, after the crisis, the differences in the performance of family versus nonfamily businesses again increase, in support of the superiority of family businesses. We find similar results pertaining to their ability to mobilize their resources. Regarding their recourse to debt, we show that family businesses go back to their classical behaviours. In short, they still outperform non-family businesses. This study thus contributes to the broad research stream that addresses questions related to the performance and financial structure of family businesses; we find consistent results in contexts of both economic downturn and recovery. In addition, our study takes a step toward integrating the concept of organizational resilience with family business studies and understanding (and explaining) the behaviours of various businesses in economic downturns. These two points represent original contributions. Moreover, by gleaning lessons from the 1997 Asian financial crisis, this study provides some potentially helpful insights for dealing with the current global economic crisis. Thus, although it has scarcely been used to refer to family business settings, the concept of organizational resilience should be of greater interest in this field. Several unexplored questions remain however, in relation to the concept of resilience. Our findings suggest a general debate: Is the resilience displayed by family businesses a matter of nature (i.e. their innate qualities) or nurture (i.e. experience)? This argument is quite well documented in entrepreneurship literature (Roderick et al. 2007) but insufficiently considered in family business literature. Without taking any position in this debate, we note that the managerial implications of our findings likely support the nurture position. We have also not addressed the question of how to measure organizational resilience, a topic that demands greater research attention (see Somers 2009). Both questions should be at the top of the research agenda for the family business field. Conclusion By carefully investigating how Japanese family and non-family businesses weathered the 1997 Asian crisis, we have revealed that family businesses achieved stronger resistance than non-family businesses, recovered faster, and eventually persisted in enjoying higher performance and sounder financial structures. In other words, they exhibited greater organizational resilience than non-family businesses. However, even as we provide an in-depth analysis, we acknowledge some limitations to this research. First, we compare large family and non-family businesses, all of which are listed companies. However, most family firms, including those in Japan, are small and medium-sized enterprises. It is therefore necessary to keep this limitation in mind when considering the generalizability of our findings to other family businesses facing an economic downtown. Second, our research addresses only two of the three characteristics of resilient organizations (see Table 1; Coutu 2002): facing down reality and ritualized ingenuity. Data from this research cannot illustrate the implications of the search for meaning characteristic; a qualitative approach based on interviews of managers of both types of businesses would provide a means to address this point. Third, our study focuses solely on Japanese firms. Further studies should confirm if our results apply to other contexts, within and outside the Asia-Pacific rim, including North America, Europe and less developed areas. Comparing the organizational resilience of family and non-family businesses to the 1997 Asian crisis against their resilience in the current economic crisis (once sufficient data become available) would provide an interesting basis for assessing the strength of our Asia Pacific Business Review 19 FAIR USE ONLY results. The two crises indicate similarities, particularly from a Japanese perspective: Both derive from financial challenges resulting from an excess of debts, both private and public, and both have caused significant harm to a wide range of industries. In accordance with our research and findings, it would be helpful to investigate the same hypotheses, using both a quantitative approach as we have and a qualitative approach that relies on interviews with a sample of carefully selected managers of both kinds of firms, especially if they have been able to retain their key positions throughout the crisis and recovery periods. Acknowledgements This research has benefitted from funding from the French National Agency for Research (ANR), under the auspices of the MNC Control program (2009 – 2011). Note 1. According to Chrisman et al., (2003), ‘the family firm exists because of the reciprocal economic and non-economic value created through the combination of family and business systems. In other words, the confluence of the two systems leads to hard-to-duplicate capabilities of “familiness” that make family business particularly suited to survive and grow’ p. 444. Notes on contributors Bruno Amann is Professor in Management Sciences at the University Paul Sabatier of Toulouse. He is the Director of the “Management and Cognition” Research Team of that University. He has published a number of contributions in leading academic journals on Family business, Corprorate governance, and on International Management. Bruno Amann’s most recent publications have been released in the Asia Pacific Business Review (2011), the Journal of Transition Economies (2010), Ebisu (2010), the Journal of Family Business Strategy (2010) and Family Business Review (2008). Jacques Jaussaud is Professor in Management Sciences at the University of Pau, and is the Director of the CREG Management Research team of that University. He is currently driving a three year research program with Yokohama National University, financed by the Agency for National Research (ANR, France) and the Japan Society for the Promotion of Science (JSPS, Japan). This research investigates organisation and control in Japanese and French multinational firms in Asia. Jacques Jaussaud has published in several academic journals, including Asian Business and Management (2004, 2007), Ebisu (1996, 2003, 2010), Journal of International Management (2006), Asia Pacific Business Review (2011). References Abdellatif, M., Amann, B., and Jaussaud, J., 2010. 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