THE ETHNIC FACTOR IN INTERGENERATIONAL SUCCESSION IN BUSINESS AMONG THE SMALL AND MEDIUM ENTERPRISES IN NAIROBI, KENYA

Dr. J. MaaluDr. V. Machuki

Lower Kabete Campus, Nairobi, Kenya: 10th July 2015

Paper presented to the

Paper presented to the

Introduction

Simply defined as any business in which majority of ownership and control lies in within a family in which two or more family members are involved (Gersick, 1997, Lansberg,1999) )

It is a dual system of the family and the business. Others actually say it is a tri-system of family, ownership and management

Family business succession has over the years attracted significant attention in research (Chrisman, et al.., 2003) largely because of the high failure rates in trans-generational succession.

According to the Price Waterhouse Coopers (PwC) global family business survey of 2007/2008, only one-third of family businesses worldwide manage the transition from one generation to the next (PwC 2009).

While succession is not unique to family firms, it takes on added importance in that context because of the interactions of the family system and the business system

This interaction takes on more complicated direction within the small and medium enterprises where the familiness is heavily concentrated.

According to Yinger (1985) for example, an ethnic group is ‘a segment of a larger society whose members are thought, by themselves or others, to have common origin and to share important segments of a common culture and who, in addition, participate in shared activities in which the common origin and culture are significant ingredients’.

In entrepreneurship literature, ethnicity has emerged strongly to explain differences in level of entrepreneurship amongst indigenous and immigrant communities.

Ethnicity in Kenya

In Kenya, the ethnic communities are grouped as such based on languages spoken with 42 main tribes and a significantly large Asian and European communities.

The latter are mostly immigrants (Ferrand, 1996).

SMEs

The SMEs are particularly vulnerable to changes in their operating environment due to their size and resource base.

The SMEs particularly face unique challenges of growth and transition which, in emerging economies, has led to a situation where they are either “missing” (Kilby, 1971; Ferrand 1996) or they are “invisible” (Esuha and Fletcher, 2000).

Research Problem

Family businesses are cultural creatures defined by the culture of the family owning it

Ethnicity influences the cultural practices. Succession is hence largely expected to be influenced by the culture of the particular community.

It is against this background that this study attempts to determine whether there is any significant relationship between ethnicity and succession in family businesses.

Theoretical Basis

Sociology, anthropology and labor economics literature have each contributed to the development of theoretical frameworks addressing the effect of ethnicity and race on entrepreneurship.

Study relied largely on the insitutional theory

Institutional theory is "A widely accepted theoretical posture that emphasizes rational myths, isomorphism, and legitimacy (DiMaggio, and Powell, 1983)

Institutional theory focuses on the deeper and more resilient aspects of social structure.

It considers the processes by which structures, including schemes, rules, norms, and routines, become established as authoritative guidelines for social behavior (Scott, 2004)

Methodology

This study employed a cross sectional survey method.

Data was collected via a questionnaire from a sample of 249 SMEs within Nairobi metropolis

Data was analyzed by use of both descriptive and inferential statistics.

Chi square test of independence and correlation analysis were used to determine the relationship between various aspects of succession and ethnic factor.

Analysis, Findings and Discussion In using the Pearson Chi-Square when one or

more cells contain less than 5 observations the results cannot be trusted.

In order to reduce the number of cells with less than 5 observations, the researchers adjusted the number of categories by merging some of them to create fewer clear categories.

The ethnic categories of African, Asians and “others” were used but the “others” were merged with Asians to form “Asians and others”.

These findings are then interpreted on the basis of the p value compared to the critical p value of 0.05.

If the computed p value on the table is greater than the 0.05, then we fail to reject the null hypothesis.

The chi-square test of significance is useful as a tool to determine whether or not it is worth the researcher's effort to interpret a contingency table.

A significant result of this test means that the cells of a contingency table should be interpreted. A non-significant test means that no effects were discovered and chance could explain the observed differences in the cells.

Ethnicity and Business Sector

Sector business is in Total

Ethnic origin of business owner Manufacturing Service Commerce

Indigenous African Count 8 142 39 189

% within sector business is in42.1% 82.1% 68.4% 75.9%

% of Total 3.2% 57.0% 15.7% 75.9%

Std. Residual -1.7 .9 -.6

Asian and others Count 11 31 18 60

% within sector business is in57.9% 17.9% 31.6% 24.1%

% of Total 4.4% 12.4% 7.2% 24.1%

Std. Residual 3.0 -1.7 1.2

Total Count 19 173 57 249

% within sector business is in100.0% 100.0% 100.0% 100.0%

% of Total 7.6% 69.5% 22.9% 100.0%

Results

There was a significant relationship between the two variables χ2 (2) = 17.221, p < .000.

On examination of the standardized residuals, we find that only the cells on the Asian row are the significant contributors to the chi-square relationship with standardized residual value of 3.0.

Asians are over represented in the manufacturing sector and that this accounts for the significant results.

No other cell presented any significant differences. This implies that the Asians and others are more in

manufacturing businesses than the indigenous Africans.

Ethnicity and Age of Business

Age of business Total

Ethnic origin of business owner Below 10 years 11 - 20 years 21-50 years Over 50 years

Indigenous African Count76 99 13 1 189

% within Age of business88.4% 81.8% 38.2% 12.5% 75.9%

% of Total 30.5% 39.8% 5.2% .4% 75.9%

Std. Residual 1.3 .7 -2.5 -2.1

Asian and others Count10 22 21 7 60

% within Age of business11.6% 18.2% 61.8% 87.5% 24.1%

% of Total 4.0% 8.8% 8.4% 2.8% 24.1%

Std. Residual -2.4 -1.3 4.5 3.7

Total Count 86 121 34 8 249

% within Age of business100.0% 100.0% 100.0% 100.0% 100.0%

% of Total 34.5% 48.6% 13.7% 3.2% 100.0%

Results

There was a significant relationship between the two variables χ2 (3) = 53.584, p < .000.

The Asians are more represented in older businesses while the Africans are underrepresented in that category.

The standardized residual values for Asians in older businesses are 4.5 and 3.7 for the age brackets 21-50 and over 50 respectively.

Ethnicity and Succession Plans There was a marginally significant

relationship between the two variables χ2 (3) = 6.196, p < .045. This leads us to reject the null hypothesis and conclude that the ethnic background and the age of the business are not independent.

Ethnicity and Successor Identification

There was a significant relationship between the two variables χ2 (1) = 7.775, p < .005. This leads us to reject the null hypothesis and conclude that the ethnic background and the successor identification are not independent.

Examining standardized residuals, we find that no cell exceeds the critical alpha error of 1.96.

Neither of the two ethnic groups is over or under represented in any of the yes or no cells.

Ethnicity and Succession Strategy

The succession strategies in this study were measured in terms of the extent to which they are planned or emergent.

Eleven dimensions of succession below were considered.

A correlation analysis between ethnic background and succession strategy was carried out.

For the ethnic background, the researchers employed dummy variables

Succession strategy dimensions

Goals & Objectives Exit strategy Business Valuation Tax & Legal Estate Plan Successor Selection Successor training Contingency Planning Conflicts Resolution Timeliness Communication Plan

Correlations matrix for Ethnicity and Succession Strategy

Chi-Square Testsa 1 cells (12.5%) have expected count less than 5. The minimum expected count is 1.93.

AFRICAN ASIAN OTHERS

A Goals & Objectives -.050 .003 .102

B. Exit strategy -.105 .075 .078

C Business Valuation -.164(*) .150(*) .050

D Tax & Legal -.245(**) .234(**) .054

E Estate Plan -.055 .020 .081

F Successor Selection -.133 .087 .115

G Successor training -.004 -.033 .077

H Contingency Planning-.212(**) .181(*) .091

I Conflicts Resolution -.002 .031 -.060

J Timeliness -.020 .012 .019

K communication Plan -.030 -.038 .145(*)

** Correlation is significant at the 0.01 level (2-tailed).* Correlation is significant at the 0.05 level (2-tailed).

Interpretation

The findings indicate a significant but weak correlation in areas of business valuation, tax and legal planning and contingency planning.

For the African ethnic group, there were negative correlation with business valuation, tax and legal and contingency planning of -.164, -.245, -.212 respectively.

For the Asian ethnic group, the correlations were .150, .234, and .181.

These results indicate that there is more formalized planning for these aspects (business valuation, tax and legal and contingency planning) among the Asians than the Africans.

Conclusions

Using the chi-square analysis technique, it was established that there were significant differences in the nature of businesses carried out, with Asians being more in manufacturing than African.

In addition, the Asians operated slightly older businesses than the Africans.

There was however no significant differences in specific succession practices of having written succession plans and formalized successor identification.

This was equally supported by the correlation analysis which indicated weak correlations.