Photo:SnippyHolloWAs we’ve written here before, family firms in which a founder hands the business off to the next of kin tend to perform worse than equivalent non-family firms. This isn’t very surprising: what are the chances that the best person to succeed the founder just happens to be his/her son or daughter?
The topic is of such interest (to me at least) that we are making an hour-long Freakonomics Radio program about, ahem, the Church of Scionology.
One of the most interesting stories we’ve run across is summarized in a working paper called “Adoptive Expectations: Rising Sons in Japanese Family Firms” (summary here; pdf here) by Vikas Mehrotra, Randall Morck, Jungwook Shim, and Yupana Wiwattanakantang. It raises an interesting puzzle — family firms in Japan tend to do considerably better than elsewhere — and then delivers a fascinating answer: many family firms in Japan, rather than relying on blood progeny, adopt an adult to run the family firm. The best of both worlds, no?
This is plainly a minor, minor Japanese story to be exposing in light of the ongoing earthquake/tsunami tragedy but if nothing else, it does point to Japan’s ability and appetite for handling problems in unusual ways. Here’s the paper’s abstract:
The practice of adopting adults, even if one has biological children, makes Japanese family firms unusually competitive. Our nearly population-wide panel of postwar listed nonfinancial firms shows inherited family firms more important in postwar Japan than generally realized, and also performing well – an unusual finding for a developed economy. Adopted heirs’ firms outperform blood heirs’ firms, and match or nearly match founder-run listed firms. Both adopted and blood heirs’ firms outperform non-family firms. Using family structure variables as instruments, we find adopted heirs “causing” elevated performance. These findings are consistent with adult adoptees displacing blood heirs in the left tail of the talent distribution, with the “adopted son” job motivating star managers, and with the threat of displacement inducing blood heirs to invest in human capital, mitigating the so-called “Carnegie conjecture” that inherited wealth deadens talent.
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This Japanese practice may be unusual compared to how things work in the rest of the world now – but the Roman Empire once worked in much the same way. Augustus adopted his successor as emperor and started a tradition of adoption as a means of succession to the throne. In the ruling class of Rome it was quite normal to adopt an heir or successor, this also served to strengthen ties between families. See here: http://en.wikipedia.org/wiki/Adoption_in_ancient_Rome.
I was thinking the exact same thing. Is it just me or were most of the really crummy Emperors, blood relatives of the reigning Emperor?
Nero and Commodus spring readily to mind.
It’s not just you.
It’d also be interesting to look at the pre-modern European practice of assuring succession in the nobility by finding a good, strong husband for one’s daughter if one didn’t have a son. Did the rulers who got the title through marriage do better than the ones who inherited?
While you are on the topic of Japan, perhaps it’s time to revisit your old column http://www.freakonomics.com/2007/09/15/freakonomics-in-the-times-magazine-the-jane-fonda-effect/ and update it in light of current events. Yes, nuclear power can reduce dependence on energy sources that contribute to global warming, but cutting corners for profit and potentially losing Tokyo and other communities along the way doesn’t seem like good longterm economics, let alone environmental policy.
Good find. Yes, in my experience adopting an heir is quite common here in Japan. A lot of blood heirs aren’t that interested in dad’s rubber mould factory or mom’s flower shop, so they tend to be cool about it and just adopt someone from the staff. Or, which is also common, have their daughter marry the most promising guy in the company. That way they keep it within the family without adopting!
Yes, there’s still quite a few arranged marriages in Japan.