In an era of hefty marketing budgets and clever advertising, we tend to believe that corporate icons such as Microsoft, Apple, Coca-Cola and Walt Disney , together with banking giants like J.P. Morgan, Citi and Goldman Sachs, define our global economy. However, in reality, it is a more private, low profile subset of the business world that turns out to be the main driver: family businesses.
Family-owned businesses are the backbone of global economy, contributing nearly 70-90% to the world’s GDP, and accounting for nearly one third of the Fortune 500 companies. These firms represent more than 70% of the overall businesses in many countries, thereby playing a crucial role in economic growth and workforce employment.
For instance, in the U.S., around 85% of the enterprises are family firms, generating 50% of the GDP and 60% of the employment. In France and Germany, the figure is more than 50% while in the U.K., family businesses contribute over 30% to the GDP and offer employment to one third of the population.
From a regional perspective, the dominance of family-owned businesses is far greater in MENA (compared to globally), thanks to our long history of trade and entrepreneurship coupled with a culture that honors family ties. Family businesses account for 90% of the companies in the Middle East, generating nearly 80% of the region’s GDP, and employing more than 67 million personnel (70% of the workforce in the GCC).
According to Ernst & Young, the top 10 family businesses generated approximately US$88.5 billion to MENA’s $1.5 trillion GDP in 2012, and they employed nearly 221,740 people. These impressive statistics clearly demonstrate that this business model is the essence of local societies and regional economies.
Most importantly, the family-owned businesses (both globally and in MENA) have thrived for many generations, despite economic downturns, wars, family feuds, and other challenges. A comparative analysis of the Credit Suisse Family Index vis-à-vis MSCI (a broad index of publicly traded firms) indicates that the family firms have outperformed publically traded firms on the back of an entrepreneurial mindset, long-term thinking and quick and flexible decision making coupled with a greater commitment to jobs and the community.
It is also important to note that regional family firms also vary considerably in size and shape, from very small enterprises to multinational conglomerates, with thousands of employees and multi-sector interests. Further, SMEs form the backbone of family-owned businesses in the region, accounting for 80%-90% of the family firms and collectively contributing more than 30% of all private sector employment in the MENA.
Accordingly, SMEs are the lifeblood of most GCC economies, generating employment for growing youth population and facilitating economic diversification by acting as a seedbed for innovation.
However, in spite of their significant contribution to economic development, the MENA region remains among the least effective at cultivating a SME friendly business environment. Family-owned SMEs face substantial barriers to growth and sustainability ranging from limited access to finance, unfavorable regulatory environment, lack of business management skills and market linkages needed to grow and succeed.
Gladly, the regional governments have recently made SME support as a top priority and enormous resources and efforts are being devoted for the cause, both by the government institutions and the private sector.
For instance, in the UAE, several state-backed enterprises such as Dubai World, Khalifa Fund, Dubai SME, the Chambers of Commerce and the Mohammed Bin Rashid Establishment for SMEs were established/revamped to offer financial and business management support services to the SMEs.
From a private sector perspective, the capital raising options available for family firms have also evolved in the past few years, with family firms exploring private equity and IPO listing as viable options in addition to the traditional bank lending.
Despite these initiatives, regional family-owned SMEs still have a long road ahead before realizing their full and true potential as support measures often suffer from poor coordination and limited execution capacity while the products and services provided lack suitable terms, capital structure and sustained business assistance. Therefore, there is a need for an integrated and coordinated support model that addresses these barriers and creates a flourishing environment for the SMEs.
Also, given that MENA region has the lowest rates of entrepreneurial activity amongst women (at merely 4% of the population), targeted efforts are needed on multiple fronts to capitalize this unexploited source of economic growth.
In addition to challenges related to size, GCC based family-owned businesses are also contending with rapidly changing internal fundamentals largely driven by uncertain global economic environment and increasing competition from both regional and worldwide firms.
Accordingly, many firms may find themselves cash constrained over the next few years, as their businesses will demand management attention and capital to survive and prosper in a more competitive environment. Moreover, the family firms may also face hurdles posed by the transfer of company control to third generation.
Therefore, it is imperative that regional family businesses focus on building a scalable and sustainable organization through adoption/ implementation of corporate governance principles. A holistic business plan based on managed growth and long-term goals coupled with a transparent financial and operational reporting will allow business owners to attract capital while a robust succession plan and governance system will assist in conflict resolution and ensuring fairness amongst family members.
Moreover, family businesses should also overcome the restless entrepreneur syndrome, and let go of emotional attachment to businesses that are no longer viable or part of the long-term plan.
Going forward, the business environment for family-owned firms will remain conducive with evolving capital raising options and government’s emphasis on SME sector.
However, it will be equally important that family businesses focus on scalable and sustainable operations by eliminating or curbing restless entrepreneur syndrome, letting go of emotional attachments to core but less profitable businesses, and institute guidelines that provide clear lines of separation between family and business activities.