Why Family Businesses are the Hidden Gems of Latin America

A Conversation with Prof. Claudio Müller

Book cover courtesy of Claudio Müller

Family businesses are the backbone of Latin American economies. More than 85% of companies in Latin America are family-owned. They account for 60% of the region’s GDP and employ more than 70% of its workforce. Despite these statistics however, relatively little study has been done on family businesses in the region and much is yet unknown when it comes to their challenges and recipes for success.

Our guest on this episode is Prof. Claudio Müller who leads a team of academic researchers who are determined to change that. Claudio is a teaching professor at the School of Economics and Business at the University of Chile. He and his colleagues collaborated on the book, Family Firms in Latin America, which aims to provide an academic understanding of family business dynamics within the region’s context.

Professor Müller recently joined Ramia El Agamy on the Family Business Podcast to discuss their methodology and some of the more surprising findings that came out of their comprehensive research of Latin American Family Businesses.

Family Firms in Latin America can be found on Amazon.

Welcome to another episode of our podcast for family businesses and entrepreneurs. Today we have a very special guest from quite far away, from Chile. Professor Claudio Müller is a Teaching Professor at the School of Economics and Business at the University of Chile. He has recently published a book on Latin American family businesses. Welcome, Claudio, to this conversation.

Thank you, Ramia. I’m very excited to talk to you about this project.

Let’s get started on why you are so passionate about the subject of family business. How did it first come to your attention and why do you think it’s an important subject to discuss within the geographical context of Latin America?

Two issues are very important to me. Historically, the Latin American region has been significantly underrepresented in scholarly article titles, less than 1%. If you take a look at reputed journals like Family Business Review, just 8 of the 685 are titles that provide data from Latin America. With books, the picture is not much better. Last year, there was only one book that focussed on the entity and evolution of the largest family businesses in Latin America alone. Filling this information vacuum was the impetus behind the book. The idea is to explore the different dynamics of family firms in Latin America and to compile a set of cases that show the growing strengths and challenges of family businesses in this region.

You have collaborated on this great work with some colleagues. Can you please tell us a little bit more about how you found each other and how you got started on what I’m sure was a lot of work? You are a pioneer, so tell us more about your co-authors.

Absolutely. It’s definitely a collaborative work. The effort that went into gathering more than 32 authors for this book was arduous. But, at the same time, it was very rewarding because we connected with new colleagues from different regions of Latin America. The contributors to this book represent over 15 different countries. The important prerequisite for the authors was their ability to draw from researchers who have close interactions with family business firms across Latin America.

I see.

The finished product was a total team effort and I want to say thank you to my enthusiastic colleagues and co-authors of the book, specifically, Dr Isabel Botero and Dr Ram Subramanian from Stetson University and Dr Allan Discua Cruz from Lancaster University. Isabel and Allan, both of whom have roots in the region are prestigious researchers in entrepreneurship and family business.

Prof. Claudio Müller on the Family Businesses of Latin America
Some of the authors of the book, image courtesy of Claudio Müller

This is a key point in this part of the world because Latin America mainly has roots from Spain, with the exception of Brazil, which has Portuguese roots. In the mid 19th century, a huge immigration movement significantly shaped the network of family businesses in this region. For example, in Peru, many families are from Chinese and Japanese backgrounds. The same goes for Argentina with immigration from Italy. Over two million people moved from Italy to Argentina towards the end of the 19th century. In each of these cases, immigrants brought skills, drive, and resilience that complemented the unique knowledge held by indigenous people to create a different method of entrepreneurship. This produced a unique culture of family business in this region.

Let’s talk a little bit about entrepreneurship. As we all know, the driving force behind any successful family business is entrepreneurship. What have you discovered in terms of differences between the 13 countries that you studied? Are there clear differences in the mentality towards entrepreneurship? What are some commonalities that have made family businesses successful through entrepreneurship?

Successful family firms in Latin America have five key components. The first is people because Latin American family businesses are characterized by having people who are hard workers, resilient, flexible, creative and concerned about social relationships. Another key point is a sense of responsibility towards others, especially within the family. This means finding ways to work together and align interests between family and business. Another very important point is entrepreneurial spirit. By this, I mean the need to continue the business process, a drive to increase the creation of wealth for future innovations and family growth.

The region is rapidly changing, so the capability to adjust and thrive in a high-risk fluctuating environment is critical to success. The last point for me is reputation. For Latin American family businesses, having credibility and prestige plays a critical role in competitiveness. It is a hard point for a lot of families here.

It’s so interesting that you have been able to identify these points. These commonalities are very important insights, very important things for families to work on. But tell us what the reality actually looks like today Claudio. What are the survival rates for family businesses in Latin American countries and where do you think families go wrong? What are some common causes for their mortality?

 I don’t have a lot of data on the generation to generation survival rate. It’s not different in other regions, but in Chile, a lot of companies start first-generation as we learn from businesses in Europe and the USA. There is a lot of interest in creating family business structures designed to keep the business in the family. In my opinion, the survival rate here is higher compared to other regions because of this.

So, awareness is very high regarding issues that can negatively affect family businesses. Is that what you’re saying?

Yes, correct.

In terms of how you went about writing the book, what has been your approach? Have you spoken to many families from different countries? Has it been a purely theoretical approach? Tell us more about the methodology behind it.

The approach was very practical, using case studies. We worked on different issues including innovation, internationalization, and those related to corporate governance. For every chapter, we worked on three or four unique cases from different countries in the region with local researchers or professors.

In Colombia, we have two unique case studies from two colleagues in different regions of the same country. Often, demographics and socio-economic realities vary widely from place to place.

In the north of Chile, the dynamic is totally different compared to the capital city. We looked at different countries and different issues in the book, but the strength of the book is that it’s based on actual case studies. It’s real stories about real companies.

The cover of Prof. Müller’s book, image courtesy of Claudio Müller

That’s what makes it so accessible to people outside the academic community as well, which has to be mentioned here. This is definitely not just an academic work, it’s actually targeted towards being useful to the family businesses themselves, which is a great contribution to make. From your perspective, Claudio, when you were working on the book together with your colleagues and you were creating these case studies, were there moments where you were surprised by the things that you found out?

Yes. We discovered businesses in the Peruvian market are more focused on entrepreneurship. They are very entrepreneurial people. They create small businesses and corporations at different levels. We discovered from working with other colleagues that in Central America, there is more focus on the family. Maintaining a healthy family dynamic is more important than the business. It’s very interesting.

Different regions have different areas of focus within the family business. Here in Chile, companies put a lot of effort into the professionalization of the family, growth and internationalization. We have one case from Venezuela, today, where the intent is to leave the country and start a new business elsewhere, either in Latin America or the United States. Because of the current economic conditions in Venezuela, it’s hard to start a business. And it’s very hard for a Venezuelan family to start a business in another country when some of the family has had to stay behind.

I think one trend that affects everybody globally now, and your region is no exception is the fact that we’re faced with rapid change and the need for digitalization of business in all areas, from marketing to operations. We were wondering whether in the book or even just your conversations or your own experiences with the family business community, if you have gleaned any insights as to how willing, how able and how quickly family businesses in Latin America are adapting to this trend.

Yes, it’s very interesting because big companies are constantly utilizing new technology and finding new ways to operate their businesses. In my opinion, however, family businesses are not taking advantage of the opportunities this new technology provides.

Here in Chile, the penetration of technology is very high. Over 95% of the population has access to smartphones and the internet. It’s very common for transactions to be processed by smartphone or on the web, but I believe as a general trend, most family business in the region are more traditional. They prefer to keep to the traditional ways of distribution and are, therefore, slower in my opinion to embrace new technologies.

Do you think that the infamous millennial generation that everyone talks about is going to greatly impact the mentality that you’ve just described? Do you feel like things are going to change more rapidly or radically? Tell us your thoughts.

It’s a very interesting question because millennials today are often motivated by different values than the founding generation. This can be beneficial in instances where families promote their members’ entrepreneurial spirit from an early age.

This could be by encouraging the younger generation to bring in new ideas for resource allotment, providing financial support to help this new venture work under the family conglomerate – like an umbrella. It’s like a small spin-off, the patriarch or the current generation puts the money up, just like in Shark Tank. Different families are supporting the launch of new ventures with a special focus on the next generation.

I think the new generation, just like the older generation, is faced with a problem. In the priorities that you’ve seen, you mentioned first the people – the right people, the right talent, etc? We know that traditionally this has been an issue in Latin America. The lack of a skilled workforce in some countries is a real challenge. Many families have dedicated a considerable amount of effort towards changing this. But do you think that family businesses in the future will have to invest even more into educating the people around them in order to gain a competitive advantage? How do you see the future there, the responsibility of the family business?

I think there are two issues at play here. For one, the families in this region tend to be more socially responsible and actively contribute in a tangible way to development. The environment can be hostile in any number of ways and as such families have a strong belief that they need to share with others.

Our country is characterized by social and economic inequalities, and many families put a lot of money into philanthropic foundations to help in different ways. At the same time, some families invest heavily in educating the new generation. They try and grow the business by creating more professionalism. Also, they share these values with the new generation by putting them to work in the family at an early age. Whether it’s an internship or something else, this is a common phenomenon in the region.

And one that we will surely see the impact of in years to come and that hopefully will also be documented by your academic community. In order to understand the economic context, the Latin American region, as you mentioned before, has seen some instability in recent years that has put a lot of obstacles in the way of private sector growth. Yet, many of your economies have been exceptionally successful in bringing forward family businesses that have internationalized, become multinationals, become huge. How do you think this is going to develop in the years to come, Claudio? What do you think are going to be the contextual obstacles that you will face as family businesses, and where do you think family businesses will find competitive advantage through policies? Where do you think this is going?

The region has different ways to create businesses. It’s hard to create a business here because this region has seen a lot of change in the past century. In the 60s, it was characterized by regional protectionism and promoted the development of the small national markets. However, between the 70s and 2000s, there was a big shift towards international trade and open markets that created greater stability.

The transition also enabled the shift in many countries from a state-owned enterprise to privatization. Countries like Mexico, Columbia and Chile saw major changes in the business landscape. At the same time, other countries in the region changed from private to state-ownership.

For example, Venezuela, Ecuador, and Bolivia moved from private to state-owned companies. Family firms were forced to move to other markets, undergo internalization or move their operations to other countries. This combination of factors created an economic environment which could be characterized as fragile, volatile and in constant flux.

And hence your remark in saying that the most important characteristic will be agility, very much in common with other regions in the same situation. Claudio, what do you think are the key things family businesses need to pay attention to in order to be able to show the world what Latin America has to offer? What do you wish to see? Also, maybe in relation to the insights you’ve gained with your book, what do you feel should be the biggest focus for family businesses going forward?

There are two relevant issues that we touched on in the book. First, there is the need to focus not only on the business, but also on family structures and governance such as the family assembly, or family constitution.

Patriarchs are mainly focused on growing the business and pay less attention to the family and family infrastructure. There needs to be considerable attention paid to preparing the next generation, the next leaders. Secondly, the role of women in upper management and corporate governance is very important because it’s a mostly untapped and very well educated capable workforce.

In my country, people are more focused on the first son. If the firstborn is male, the patriarch is very happy. Creating opportunities for women of the next generation is very important because we need to achieve gender balance. This means creating equality within the company itself and at the corporate governance level. We explore these ideas in our book surrounding this critical task for the future.

Very clear and very tangible advice, ladies and gentlemen, from Latin America listening to this from Professor Claudio Müller, who has brought out a very interesting book called Understanding Family Businesses in Latin America. Below this podcast, you will find links to the work, which you can hopefully buy and read, spreading the word about this wonderful region and its wonderful family businesses. Claudio, thank you very much for your time and for this podcast episode. We really appreciate it.

Thank you for this conversation and your questions. This is a very interesting book not only for the academic community but for the families as well.