Entrepreneurship and the Family Firm

Schumpeter views founding a family business dynasty as a key reward for entrepreneurship. However, inherited corporate control restricts the talent pool from which the business’s subsequent leaders are drawn, exposing a fundamental time inconsistency in Schumpeter’s thesis – what is good motivation ex ante, results in a higher cost of new entry ex post. Absent explicit mechanisms to inhibit blood successions, family loyalty perseveres in broad swathes of the world, particularly where formal institutions are weak, so groups of firms controlled by members of a family can coordinate strategies where independent firms cannot. Big Push development requires extensive inter-firm coordination, perhaps explaining the importance of large family business groups in emerging markets and economic history. Completed development erodes such advantages, so powerful business families might employ rent-seeking to slow or stop the pace of development to preserve a favorable status quo. Major crises that weaken such entrenched elites appear important to achieving and sustained high-income status and growth by creative destruction.