Abstract
The study by Khavul, Bruton, and Wood was an attempt to shed light on informal family businesses in East Africa, a group seldom studied. By applying the tenets of grounded theory the authors were able to successfully provide some insight into family business in this region. This commentary provides insight into the research by discussing the findings in light of the three–dimensional model of family business and attempts to limit agency costs based on cultural–based rights of the extended family. Also discussed here is a finding that may indicate a gender–related issue in opportunity identification and exploitation.
Introduction
Khavul, Bruton, and Wood (2009), in their paper “Informal Family Business in Africa,” use grounded theory, a small sample, and a case study approach to study the formation and operation of informal businesses in Kenya and Uganda. As one of the first studies of very small family businesses in Africa the research provides insights that might otherwise be missed on micro business operations and family firms in less developed countries. The nuances of the methodology and the findings deserve careful consideration, especially if one contemplates doing research outside of North America and Western Europe.
This commentary extends Khavul et al.'s study by discussing its results in the context of two theoretical frameworks that have received much consideration in family–business research. It also offers an alternative explanation for another finding of the study that is not considered in the article. In each of these three areas the implications of Khavul et al.'s findings will be discussed along with some suggestions for additional research. Before beginning the discussion on the theories a brief review of some salient parts of the culture in Kenya and Uganda is needed.
Cultural Aspects of Owning a Business in East Africa
Many researchers have called for family–business research to be conducted in different contexts than those in North America and Western Europe (Zahra, 2007). Certainly East Africa offers a strikingly different context. To begin, the family in East Africa is defined differently. Distant relatives in East Africa are treated more like siblings are treated in North America and Western Europe. When this is combined with the large number of children per parent, kin who are treated as siblings may number into the hundreds. The definition of family stretches the boundaries of Western definitions.
Beyond the extended size of families in East Africa there are additional “rights” of family membership. While these are discussed in the paper, it takes reflection to grasp their significance. For instance, a cousin can ask for a job, money, or other resources and expect to get them in the East African culture. A fourth cousin whom the family does not really know can show up at a business and say, “You have ten goats and I have none. I would like one of your goats.” Cultural norms would indicate that the business owner share his goats. In Western culture this would be akin to the owners of a trucking firm giving a truck to a cousin simply because he asked for it. In most Western–style family–owned businesses the moocher cousin would likely be shunned and all the relatives warned to avoid him. This cultural difference is central to understanding the paper.
Added to the size of the family and the expected largesse toward family members is the inheritance system. Women cannot inherit property. At the death of a man, any male relative can claim the property of that individual. If a husband and wife start a business and the husband dies leaving three small children, his adult fourth cousin has more right to the business than the widow and children. Think of this in Western terms. Suppose a husband and wife start and operate a successful restaurant and the husband dies. Further, suppose that a cousin of the husband that is virtually unknown to the wife attends the funeral and says to her, “Give me the keys to my restaurant and don't come back.” In most of the West the cousin's claim would have no legal bearing and he would be subject to public ridicule and lawsuits. In Uganda the cousin could get the business, leaving the widow and children with nothing.
Once one understands these and other differences in the culture/legal system, one can understand some of the actions of the eight businesses in Kenya and Uganda better. Some observations about the theoretical relevance of the findings of the study and the tie to the culture are discussed below.
Theoretical Relevance
Two theoretical frameworks seem intertwined with the findings of the research and the culture in East Africa. Also there is one finding that may have theoretical implications for the study of strategic management practices in small and family firms. Each theory is discussed below.
Three–Dimensional Development Model
Gersick, Davis, Hampton, and Lansberg (1997) proposed a three–dimensional model of the family business in their book Generation to Generation: Life Cycles of the Family Business (p. 17). One of the dimensions is the ownership development dimension. They state that most family businesses go through three phases of ownership—the controlling owner, the sibling partnership, and the cousin consortium. The cousin consortium usually occurs after three or four generations from the founding and usually only happens to large, complex firms that have been successful (Gersick et al., pp. 47–48).
In East Africa there is the potential for the cousin consortium to be reached much quicker. Cousins, possibly hundreds of them, can claim an owner–like control on the firm. They can ask for a job (with or without the intent of working), money, or other resources from the firm. Potentially the East African firm can reach the cousin consortium stage before the firm is of sufficient size to handle anyone taking resources from it. Therefore the firm often dies or languishes before it has a chance to succeed because of all the ownership claims against the assets. The observed fact that many businesses in East Africa are informal could be related to an attempt to protect the assets from relatives. This is rather an extreme illustration of the problems encountered when the flow of social capital between family and business is out of balance (Sharma, 2008).
The interaction of the cultural–based inheritance “laws” and the ownership development axis of the three–dimensional model also help to explain some of the findings. If the cousin consortium does not come into being early surely it will at the death of a founding male. All the cousins can claim the inheritance. In a micro firm or even a somewhat bigger one there are not enough assets to divide up and survive. As discussed in the preceding paragraph, some of the behaviors and ownership arrangements noted by Khavul et al. (2009) may be a consequence of efforts to circumvent inheritance norms. If there are multiple male owners, the problems of inheritance are reduced and the widow of the deceased partner may have some protection assuming the other male co–owners agree. With the female–owned businesses, inheritance may be a moot issue in a culture where women cannot officially own property. Further cultural anthropological–based research is needed to get a more exact interpretation of these results.
Agency Theory
Agency theory has often been used to help understand family business. A debate that is ongoing in the family–business literature involves the question of whether agency costs are higher or lower in family businesses than they are in other businesses (Carney, 2005; Chrisman, Chua, & Litz, 2004; Schulze, Lubatkin, & Dino, 2003; Steier, 2003). Research shows that altruism either makes agency costs higher or lower in family firms (Karra, Tracey, & Phillips, 2006). Some have suggested that the impact of altruism on agency costs follows a life cycle of influence and can be managed (Habbershon, 2006). Research with very small and very new family businesses could potentially shed light on this issue since in larger and/or established businesses the interplay between altruism and agency costs may be confounded by other issues. Likewise, informal businesses with little standing in law and without appreciable influence from lenders or outside investors may provide insight that studies of larger firms cannot provide. As noted above, a major confounding influence, however, involves the definition of family and the rights associated with being part of the family.
In East Africa the cultural norms related to distant relatives being treated more like siblings with “rights” to ask for and be granted jobs, money, or assets creates the potential for agency costs between the actual owners and family members with residual claims to ownership. Furthermore, even if the relatives only ask for a job the risk of free riding is substantial. While Karra et al. (2006) found that there may be positive aspects to giving relatives jobs in the early stages of a firm's development, as more relatives become involved and employment begins to be perceived as a right, free riding increases. In East Africa there is a significant probability that the free riding would begin immediately and continue. An extreme form of free riding would be taking a business from a widow and her children upon the death of the husband. Thus, the culturally demanded altruistic behavior toward distant relatives appears to create agency costs with little evidence of the offsetting “stewardship” behavior (Corbetta & Salvato, 2004) found in North America and Western Europe.
The male–owned firms all had multiple male owners which may provide some protection against free–riding relatives. That is, each male owner has plausible reasons to deny the requests of kin for money or assets from the business since the owner must ask his partners about the request. The female–owned firms that always included only females in ownership and operation may give some protection because females are not supposed to own property. These situations seem to be ripe for additional research.
The point from an agency perspective is that in East Africa, where agency costs are potentially high, owners take action to eliminate or reduce the risk. Further, risk–reducing behavior may become the primary cause of partner selection and decisions on whether the firm remains informal. Interestingly, Burkart, Panunzi, and Shleifer (2003) contend that family firms are more prevalent in less developed economies because of attempts to avoid opportunism associated with legal systems that make it hazardous to trust strangers. However, in East Africa, the contrary appears to be the case as partners are often selected from outside the family to control intrafamily agency costs.
Taking these different perspectives into consideration provides additional avenues for research in family firms from an agency perspective. For instance, research into any close–knit or clan–type organization might provide some guidance into interpreting the results of this research. Within North America, research related to Native Peoples might help since there is some similarity to the practices in East Africa in that the tribe may have cultural precedent to ask that a business and its proceeds be shared with the tribe. If the tribe provides no offsetting benefit in the form of capital, labor, or other resources, new firm formation would be stymied. Alternatively, clan ownership may mitigate the propensity of free riding by family members in such situations. It would also be helpful to have research on less economically developed regions dissimilar to East Africa in terms of cultural norms on family definition and quasi ownership rights. The work of Peredo and Chrisman (2006) might provide some additional insight in this respect.
Strategy Formulation, New Ventures, and Gender
A consistent finding from the study that relates to gender also deserves consideration. The firms that were women owned started businesses in fields that they knew such as food service, poultry, and so forth. Firms with males in the ownership structure sometimes went into ventures for which the entrepreneurs possessed no experience or skill—the business just seemed to be one with good potential. Further, the strong tendency among the women–owned firms was to stay in the business in which they started while the firms with males in the ownership structure often changed to unrelated businesses when one venture did not succeed or became problematic or when a more attractive opportunity appeared on the horizon. Thus, women in the sample tended to see opportunities based on new uses for existing resources, whereas men saw opportunities without regard to existing resources. Even with the small sample the consistency of these findings is intriguing.
This finding appears to be related to general strategic management and entrepreneurship concepts dealing with strategy formulation in the venture creation process. As Sharma, Chrisman, and Chua (1997) have indicated, the general strategic management process applies to family businesses and that appears to be the case with the East African firms in the study. Also, the male firms appear to be following the concept of entrepreneurship used by Stevenson and Jarillo (1990) in that they seem to look for opportunities regardless of resources. The women appear to follow the tenets of the Resource Based View (Barney, 2001). Gender is consistently the factor that influences whether the East African owners look at opportunities or resources as the main determinant of what business to enter.
Why is this finding so consistent? Is there a difference in the way that East African women and men look at opportunities? If there is a difference, is it related to the East African context or can it be generalized to other regions? Are men and women in developing countries alert to different types of opportunities? Do women in general view opportunities different than men? If so, why is this the case?
Additional research is needed on this subject. The literature on cultural anthropology may provide a starting point. An even more intriguing possibility may involve the risk assessment literature. Regardless of which direction one takes the point is that the Khavul et al. (2009) research has a very consistent finding that is not readily explained by existing theory. With the small sample the finding may be spurious. On the other hand, there may be something deeper going on.
Conclusions
In selected countries of East Africa the definition of family is so broad that it stretches the limits of existing understandings of family business. Further, the rights of male relatives, regardless of how distant, to make claims on a family business and even inherit the business to the exclusion of wives and children may cause avoidance behavior that is difficult for Westerners to understand. The three–dimensional development theory and agency theory can be used to explain some of the findings. Specifically, owners of firms in East Africa appear to take actions in the formation of their businesses that reduce the potential for a cousin consortium in the early stages of a firm's development as well as to avoid the potential of culturally induced agency costs.
An additional gender–related finding related to the strategic management of family ventures is ripe for additional research. It appears that men and women look at opportunities differently in East Africa. This difference is manifested in the type of business entered and the rapidity of changing from one business type to another. A natural question is whether the finding can be generalized to other regions.
The study and the commentary point more toward the need for other research than conclusive findings. Further studies of family firms in the East Africa region in other less developed and transitional economies and even among isolated cultural groups in developed economies are needed to more completely understand the implications of this research.