Perspectives from ISB

A 2011 report estimated that around 80 percent of China’s private companies were family-run. If we define family enterprises as any enterprise where the founder or their family holds more than 50 percent of the shares, then they probably number in the millions.

In the early days of the reform and opening-up era, a shortage of freely flowing skilled labor meant that most entrepreneurs chose to involve their family in their businesses. Today, the vast majority of Chinese family enterprises are still run by the generation that founded them, with their children gradually becoming more involved in their operations.

Many members of the second generation were either born or reached adolescence when their parents started their companies. This meant that at the time when children needed their parents the most, the latter were preoccupied with getting their businesses off the ground and couldn’t afford to spend time with the kids.

In order to compensate for their absence, parents not only tried to meet their children’s every material need, but also spent vast sums on their children’s education, sending them to the best overseas schools and universities. Yet this emphasis on their children’s futures only further estranged the two generations. It also led the younger generation to have almost no understanding of, or attachment to, the family business.

It is not uncommon for the first generation to attach strong emotions to the success of their businesses. But their children tend to view them as just another piece of property, with a market value like any other. In such instances, it’s easy for conflicts to brew between the two generations. Only around 15 percent of family enterprises have founders willing to hand over the business and the younger generation who are willing to inherit.

The problem is compounded by the fact that many low-end manufacturing businesses, established early in the reform and opening-up era, are no longer viable cash cows. Instead, the younger generation tends to view them as sunset industries and look instead toward the internet, financial, fashion, and creative industries. Rather than rejecting their families’ money, they use it as a kind of angel investment when they start their own businesses in more trendy sectors.

There are still many in the younger generation who are willing to take charge of their parents’ companies. Yet in such cases, acceptance generally comes with a stipulation that their parents will endorse and support such changes to the business that their children deem necessary. In practice, as the first generation grows older, the power dynamic between them and their heirs will gradually start to tilt in favor of the latter.

Source: Hao, Wang., December 28, 2017;

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