Challenges Facing Family Companies in the Gulf Region.(contains bibliography)(Industry Overview)

Introduction

In the 21st century, family businesses in all areas of the world face significant challenges and plentiful opportunities. The growth and survival of family firms depends on their ability to address these challenges, capitalize on their strengths, and take advantage of the opportunities facing them. Nowhere is this dictum truer than in the Gulf Region, where family companies are likely to experience dramatic changes to their environment in the next decade.

The family with its extended kinship network is probably the central element of the Gulf Region socioeconomic system. The family household unit in the Gulf, the extended family, and the family's close allies are the chief nurturers and arbiters of individuals' values, attitudes, and beliefs. A person's primary social and economic support comes from his or her nuclear and extended families. Social and business life revolves around the family.

There is a strong cultural preference that business opportunities should be pursued, if possible, first within the family, and then with other ally families. More than in any other area of the world, in the Gulf, business is viewed as a way to enhance a family's social standing rather than as an impersonal, wealth-generating, market-driven activity.

Of course, many factors interrelate with the family element to create the distinctive features of the Gulf socioeconomic system. The patriarchal system of government; comfort with traditional, seniority-based leadership; social and economic protectionism; the importance of the oil industry; welfare-state economics; fast-paced economic development; and a reliance on expatriate labor are the obvious ones.

This paper considers the above factors and their combined impact on family companies. It focuses on the countries of the Gulf Cooperation Council (GCC), including Bahrain, Kuwait, Qatar, Oman, Saudi Arabia, and the United Arab Emirates (UAE). Any relevant economic and social differences among GCC countries will be pointed out.

This research is based on interviews with 56 family business leaders, 20 nonfamily managers of family companies, and 26 experienced observers of the region, as well as an extensive review of statistics and literature on the economic and social life of the region. The interviews were conducted by telephone and in person between July and September 1997.

The paper first looks at the central role family companies play in the economies of the Gulf Region and reviews the new economic era that is emerging for these countries. It then describes the key challenges facing family companies globally and the challenges affecting family companies in this area of the world. The paper closes with some thoughts on the future of family businesses in the Gulf.

The Role of Family Companies in the Gulf

A family business is one in which a single family controls the ownership of and leads the business -- at least through its control of the board and usually also through its involvement in top management. According to Field (1985) and other regional experts, family businesses comprise most of the private sectors of the Gulf economies. Estimating the numbers and economic influence of family companies in the Gulf Region is problematic due to the difficulties of estimating the size of family company incomes or assets. Also, published statistics on many topics relevant to family companies in the Gulf Region are not available.

Many observations in this paper rely on the impressions of business people, professional service providers, consultants, educators, and others familiar with companies in the Gulf. We also relied on Michael Field's seminal work on family businesses in the Gulf Region, The Merchants, which describes the evolution of major family companies and how the political and economic currents of the region have influenced their growth and expansion. Table 1 estimates how much of the regional GDP derives from family companies. (See also Appendix A for comparative economic data on GCC countries.)

Extended families own and lead most of the major companies in the Gulf Region. Companies such as Alireza, Kanoo, and Al Gosaibi, which are very large and important players in their industries, are among the most visible and respected of the companies in the GCC. Saudi family companies comprise 10 of the top 30 companies in the Middle East (Hiel, 1997). As in other areas of the world, however, most of the family companies in the Gulf are not large and dynastic but rather young -- a generation or less old -- and small or medium in size.

We are unable to gauge the longevity of family companies in the Gulf. Outside the Gulf, only about one-third of family businesses stay in a family's hands passing from the first to second generation and from the second to third generation. Thus, only about 10% of family companies survive in the same family's hands to the third generation. Because of protectionist policies and the centrality of family in commerce, we suspect that a higher number of family companies are successfully passed in the family in the Gulf Region.

In most western countries, a single owner controls about 70% of all family companies, siblings 20%, and cousins 10% (Gersick, Davis, Hampton, & Lansberg, 1997). The stock market is in its early stages of development in GCC countries, so there is not much public ownership of family companies in this region. As a result, we are unable to estimate the likely proportions of family companies in the Gulf according to how they are owned. However, because of the tradition of involving one's younger brother in the startup of a company, we anticipate finding a higher percentage of sibling partnerships among family companies in the Gulf.

Table 3, comparing private and public sector employment for the local workforce in the GCC, shows that family companies play a significant role in employment in the region. We estimate that family companies employ 70% of Bahrain's and 57% of Oman's local workforce. In sharp contrast, family companies employ only 1.6% of Kuwait's and 10% of Saudi Arabia's workforce. The low percentages in these two countries suggest that the great majority of the family business workforce must be expatriates.

Over the last quarter century of increased petroleum output and national income, family companies in the Gulf have grown and diversified their operations. Increased consumer demand for imported goods, derived largely from increased government spending in the private sector, have spurred such changes. Today, many business families in the region have business activities in a wide array of industries, including construction, importing, shipping and travel, insurance, agriculture, exchange dealing, real estate, and light manufacturing. Some of the diversified family companies we examined have synergistic operations (one line of business links to and supports the next); other companies are financial conglomerates.

Importing is still the most popular business of family businesses in the Gulf Region. Commercial law in the region highly favors these businesses. Except for Bahrain, foreign companies that want to export into the GCC area must do business with a local company. Many GCC countries are gradually changing these protective policies as a requirement to join the World Trade Organization.

Even with protectionism declining, if foreign companies are allowed to operate independently in the GCC there is the question whether Gulf family companies will be able to compete well. Not all business people in the Gulf are concerned about competition from foreign companies. Some welcome competition, believing it will strengthen local firms. Indeed, they argue that local companies will still be needed because of their knowledge of the local market and that, when necessary, local and foreign companies can still partner.

If foreign companies can operate independently in the future, technology transfer may decrease to family companies, thereby weakening Gulf family firms. Much technology transfer to family companies in this region comes from the cooperative relationships of Gulf family companies with their foreign suppliers and partners.

Most family companies in the Gulf do business in their own backyards -- in their own and neighboring countries. Because of the small regional markets that they serve, many family companies underutilize their existing capacity. As a result, they have high average production costs (Regional Perspectives: Middle East and North Africa, 1996). Nevertheless, observers consider most family companies in the Gulf to be profitable and not lacking in growth capital.

Since 1970, government has provided leadership in economic development, particularly in building transportation and communications sector infrastructure. Family businesses like Bin Ladin and Olayan in Saudi Arabia and Shammas from Lebanon were among the major players in this infrastructure effort and established their reputations in these public sector projects. Family companies played two roles during this period -- participants in development projects and providers of products and services (food, health care, construction supplies, etc.) to the government, consumers, and other businesses. Now that many of the major infrastructure development projects are in place in the region, the government and the private sector have to assume new roles. The GCG now aims to increase the economic diversity in the region and encourage investment from abroad. In the process, the governments of the GCC no …