Cultivating successors of the family firm: overseas training or domestic training

【Author】

ZHU Xiaowen;LYU Changjiang

【Institution】

School of Management, Fudan University;School of Management, Fudan University

【Abstract】

The succession process, during which a business is transferred from one generation to the next, represents the most critical issue confronting family firms (Morris et al., 1997; Burkart et al., 2003). The process includes the dynamics that lead up to the actual transition and its aftermath, with the cultivation of successors being the key factor in determining the success of the succession (Goldberg and Wooldridge, 1993). China is experiencing a transition of family firm leadership from the first founding generation to the second generation, and there are two main modes of cultivating successors in Chinese family firms (Forbes, 2014). Overseas training endows the second generation with an international vision and familiarizes them with foreign management practices (Giannetti et al., 2015), while domestic training facilitates the transferring of specialized assets and the development of commitment to family firms. Determining which cultivating mode is beneficial to family firms during the succession process is an empirical question. Our study investigates this question and provides empirical evidence. Two theories are related to this study. The first is specialized assets theory. Operation activities in family firms depend heavily on the families’ specialized assets (Nooteboom, 1993), which mainly include key operating knowledge and skills, long-established reputations, the founder’s political connections, and social capital (Fan et al., 2012). Domestically trained successors are more likely than overseas-trained successors to be involved in the family firm earlier, to acquire key knowledge and skills, and to establish social connections with various stakeholders. The second is commitment and identification theory. Successors’ commitment to family firms is considered a more crucial factor than other technical factors in determining the success of succession (Cabrera-Suárez, 2005). Early involvement in a firm makes domestic trained successors more likely to develop commitment and acquire credibility and legitimacy through the position promoting process (Barach et al., 1988). Based on a succession sample of Chinese listed family firms, this study investigates the effect of successors’ cultivation mode on post-succession performance. We find a significant decline in post-succession performance, and that successors with overseas training experience exhibit worse accounting and market performance than domestically trained successors. Cross-sectional evidence indicates that the difference in post-succession performance between the two groups is smaller when the successor has a longer period of internal development before the succession, a longer period spent managing the firm after the succession, and a shorter period of overseas training. The difference is smaller for successors who share similar academic backgrounds with founders and for firms from religions and industries that are less dependent on social capital. Further analysis shows that successors with overseas training experience find it more difficult to inherit founders’ specialized assets and to develop affective commitment to and identification with family firms. The difference in post-succession performance exists only in firms that lack a founder’s decision balance mechanism. Our study makes several contributions. First, it provides a new explanation for performance declines in the post-succession period from the perspective of successor training. Second, the current literature asserts that managers with foreign experience bring benefits to their firms, improve firm-level corporate governance, and identify beneficial foreign merger and acquisition opportunities (Giannetti et al., 2015). However, our findings indicate that this rule is not applicable for the cultivation of second generations, as overseas-trained successors may have a disadvantage in inheriting specialized assets and developing affective commitment to and identification with family firms, which are both crucial factors in promoting the firms’ competitive advantages. Third, our study provides practical advice for private entrepreneurs on cultivating successors effectively. Although it draws its conclusions from a sample of family firms, our study sheds light on how to cultivate managers in other private enterprises. Internally developed managers may be more productive than external managers.

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