Family Owned SMEs, their competitiveness and adoption in Japan

Here's a fun trivial pursuit question, “Which country is consistently responsible for the highest adoption rates globally?” To be clear in this instance Adoption refers to the legal process of becoming a non-biological parent. Well the answer is the USA and is measured in the adoption rate per 100,000 adults. For example for the USA this rate was 59.0 in 2007, 58.3 in 2008 whilst the rate was 61.5 in 2000. Sociologists love this kind of data as it gives valuable insights into changes in society or even religious, socio-economic, cultural or economic impacts.

That's the boring part.

The UN have lots of interesting data and each year publish amoungst other things data on adoption, mortality, disease, etc. For example, is the typical summary report on adoption and is a 486 page heavy weight. From reading it you will see Japan is a clear outlier, unusually it has very low fertility rates as well as very low rates of adoption. More surprisingly, where a child is adopted before the ago of 5 years, it is almost certainly a blood relative. More noticeably the adoption rates before the ago of 5, 9 and 18 years, are way out of line with other counties especially those of the OECD. The data says this, if you are adopted and not a blood relative, then your adoption age will most likely, ~ 90% of the time, be over the age of 18! And this is in a country where adoption rates are unusually low. Sounds a little odd?

The summary states; "We should remember then that the purpose of adoption has evolved over time. Historically, adoption occurred primarily to preserve and transmit family lines or inheritance, to gain political power or to forge alliances between families. Adopted persons were usually adolescents or adults who could guarantee the continuation of the family line. The notion that adoption was a means for promoting children’s welfare did not take hold until the mid-nineteenth century. Today, the principle of ensuring that the best interests of the child are served by adoption is the paramount consideration enshrined in most adoption laws." This is reflected in the unarguable trend of the age of adoption lowering over the last century.

On page 24 of the summary, last paragraph, we find the confirmation of the data that caught our eye in various other parts of the document, especially the soporific Annex II. “... Japan, adoptions of sons-in-law or unrelated adults still occur in the context of agreements on inheritance and care for the elderly (Palmer, 1989; Goodman, 2000). As of the late 1980s, two-thirds of formal adoptions in Japan involved adults and the vast majority of persons adopted as minors were related to their adoptive parents (Bryant, 1990).”

Could there be more to this, something hidden in the data?

Another manner in which Japan “bucks the trend” is in the empirical data globally showing that in developed countries non-family firms outperform family run firms consistently. This is explained by the fact that intelligence, and talent are not reliably inherited, serendipitous timing and general good fortune certainly are not inheritable, and the motivation of heirs is often questionable. Of course there are exceptions to this, but over large samples of data over longer periods of time the under-performance of family-run firms is largely beyond dispute. Further explanations explain this poorer performance, such as the adverse selection induced by guaranteed succession of a family member. .

Thank goodness then that the likes of Vikas Mehrotra & Jungwook Shim exist and who took the time to do a very worthwhile study on the data supporting these various claims. They make a very interesting case with empirical data that sustainable family business requires patriarchs (or matriarchs) to make honest decisions about the talents of their children and to acknowledge the harm to both coerced children and a demoralized business when blind nepotism (euphemistically called Dynastic Governance) overalls compassionate logic. The Japanese have a solution to this, and this brings us back to adoption rates.

I have attached their original paper for you to read at your convenience. It is well worth the read, and I hope I have been obscure enough to tempt you to read it.

Here is the link for a download of the original paper. Adoptive Expectations: Rising Sons in Japanese Family Firms

and for the hardcore folk here is the summary I mentioned above.

Keep well