The Secret to Japan's Family Firms

Photo:SnippyHolloW

As 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.