Import Competition and the Organization of Family Firms

About this event

How does competition in the product market influence the prevalence and organization of family firms? I propose that increased product market competition enhances the returns from external managers, incentivizing family firms to delegate managerial control to professional managers. To examine this link, I exploit a large, previously unstudied, product-specific import liberalization episode from India alongside novel datasets on non-tariff barriers and matched manager-firm panel data. I find significant management turnover in family firms exposed to import liberalization. Specifically, these firms replace family board members with external professional managers. This represents a significant shift from the traditional corporate culture in Indian family firms, where top management roles are typically reserved for male family members. Furthermore, firms that diversify their management in this manner demonstrate greater resilience to import competition compared to those retaining family-dominated boards. These findings also shed light on the broader question of X-efficiency—why firms in more competitive markets exhibit higher productivity. Understanding the mechanisms behind the relationship between competition and firm productivity has implications across various economic applications.