Liberalisation helped rise of standalone family firms: ISB Study

The liberalisation has led to the rise of Standalone Family Firms (SFFs) in India and they were the primary drivers of accelerating the growth of the Services Sector in the country, according to a study conducted by Indian School of Business.

The study, done by the Thomas Schmidheiny Centre for Family Enterprise at ISB, chronicles the evolution of family businesses in India since the initiation of liberalisation in the country.

It traces the progress of Indian family businesses over a 26 year period from 1990 to 2015. The authors studied 4,809 firms listed on the Bombay Stock Exchange (BSE) and the National Stock Exchange (NSE) of India.

The year 1991 ushered in a new dawn in the Indian economy with sweeping reforms across sectors. There were widespread apprehensions about the capabilities of the family owned and managed businesses to withstand the pressure of the newly created “freedom”. However, the study finds that not only did the family firms withstand the new rush of competitive forces in the economy, but also adapted to the changing business environment.

As per the findings of the study, close to 73 per cent of the listed standalone family firms were incorporated in the period 1981 to 1995. In comparison, only 49 per cent of the business group affiliated family firms were incorporated in the same period.

As the pace of reforms picked up with liberalisation, more and more standalone family firms started to leverage the changing business landscape. While the family business group firms did take advantage of the reforms in the early stages, it was the standalone family firms that emerged as the single largest ownership category in terms of number of firms.

“The growth in the number of standalone family firms was driven primarily by the new firms in the services sector. Wholesale trade, financial services and Information Technology were the most favoured industries for the listed standalone family firms. This was reminiscent of the rising contribution of the services sector to the GDP,’’ ISB said in a release issued here on Tuesday.

The study shows that the representation of family businesses grew at a much faster rate than the non-family businesses. In fact, evidence suggests that removal of restrictions and controls in the liberalised era actually unleashed their entrepreneurial spirit.

In 1990, family firms represented 15.7 per cent of the GDP in terms of their total income, whereas by 2015, they represented 25.5 per cent of the GDP. In comparison, non-family firms formed 20.5 per cent of the GDP in 1990 and 26.6 per cent in 2015.

Family firms accounted for 28 per cent of all indirect taxes and 18 per cent of all direct corporate taxes in the financial year 2015, while non-family firms accounted for 26 per cent and 25 per cent respectively.

Though, the pattern has oscillated over the years, overall, the contribution of family firms has gone up from 1990 to 2015.

The study was done Nupur Pavan Bang and Professor Kavil Ramachandran of the Thomas Schmidheiny Centre for Family Enterprise at ISB and Sougata Ray of IIM Calcutta.