The majority of family businesses in Jordan seem to have their hands in everything, and many times in unrelated business ventures. However, such an approach is recognized to lead to lower profitability and thus less competitiveness in sectors and across the whole economy.
Are family businesses acting rationally in this regard? Or do they know something others don’t?
The reason for opting to diversify is possibly due to the mode of decision making, not only in Jordan but throughout the MENA region where economic decisions made are based on some objective criteria by the elites in an economy
Basic finance theory states that diversification reduces risk at the cost of lowering profits. Mark Twain, the American satirist, once said: “Behold the fool saith/Put not all thine eggs in the one basket.”
This is but a manner of saying: “Scatter your money and your attention.” The wise man says, “put all your eggs in one basket and watch that basket.”
Michael Porter, the business strategy and competitiveness guru, underscores in his book “The Competitiveness of Nations” that businesses should specialize in order to increase value and must never go into more than one field unless they can create synergistic gains from such businesses.
For starters, businesses in Jordan are not highly profitable. Furthermore, the majority of investment in Jordan is risk averse, which partially explains the large bias towards real estate investment.
The reason for opting to diversify is possibly due to the mode of decision making, not only in Jordan but throughout the MENA region where economic decisions made are based on some objective criteria by the elites in an economy.
It could be also that the uncertainties and regional instabilities that plague MENA lead investors to diversify
A sector that may be in vogue and a favorite among policy makers could become undesirable overnight, thus quickly moving the entrepreneur that is heavily invested in the sector to move from riches to rags. Such mode of decision making can lead to a sudden, unpredictable reversal of fortune for investors. Indeed, it was recognized by some researchers, such as C. Jaffe from USC, as the major cause of the low level of foreign direct investment in MENA.
It could be also that the uncertainties and regional instabilities that plague MENA lead investors to diversify. The external environment and the relative smallness of the economies and their high exposure to regional turmoil lead to a fuzzy planning horizon and market risks.
But are families more risk averse than the non-owner/manager?
They are!
However, this is not the whole story. Families that tend to run their own businesses have on average lower skills than those that choose to hire professional managers with proven track records in management and leadership. After all, the leadership can only be selected form within the family and thus, the search pool and selection criteria are handicapped by this self-imposed conditionality.
Hence, with shallow expertise and lack of desire or incentive to impress the business owner (dad, mom or uncle) who would love and cherish the family member/representative anyway, diversified business investment across the economic landscape becomes more apparent in family businesses than in others
Relative lack of expertise and training of the selected family member leads to autocracy in decision making, selection of yes-persons and derogation from corporate governance. Mostly, however, it leads to a hit-and-run mindset of investing instead of digging deeper within the business, entrenching it and building competitive advantages. It also dictates that the owner/manager should maintain the status quo; he would be replaced only if he loses badly, yet mediocre performance will go unnoticed.
Hence, with shallow expertise and lack of desire or incentive to impress the business owner (dad, mom or uncle) who would love and cherish the family member/representative anyway, diversified business investment across the economic landscape becomes more apparent in family businesses than in others.
Other sentiments lead to the selection and retention of management, and herein lies the reason for diversification. In other words, if the boss (my close relative) loves me anyway, and non-family members will never aspire to replace me, why should I watch the basket carefully; instead, I will put my eggs in different baskets and enjoy the job.
Alas, this type of thinking and consequent lack of competitiveness do not lead to greater overall competitiveness for the economy where businesses have to, by definition, compete in markets other than the local markets and with those who do not care about their family relations and filial status
*Published in Jordan's THE JORDAN TIMES on September 15, 2009.
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