Over the past three decades I have spent my professional life studying entrepreneurs who want to create and grow successful businesses. In the course of doing research and consulting in this field, two facts have become clear to me:
1. Entrepreneurship is critical to the economic growth of any society. New businesses create important goods and services, wealth, jobs, and opportunities that serve as the economic growth engine for a society.
2. The families of entrepreneurs often play a crucial role in providing the resources—human, social, and financial—necessary for fledgling businesses to succeed. In order for a society to encourage entrepreneurship, strong families must be encouraged to flourish.
Despite this critical link between strong families and entrepreneurship, disturbing trends, both in the United States and around the world, are undermining family capital—the resources families provide to their members. Fortunately, there are ways to strengthen families and, in turn, support entrepreneurship.
Types of Family Capital
Family capital refers to the human, social, and financial resources that are available to individuals or groups as a result of family affiliation.
Human capital is built as families provide skills and knowledge to family members. Parents can teach their children how to be successful and, in cases where a family business exists, how to run a business. This knowledge encourages family members to become entrepreneurs and provides a road map for success. Research has shown that children of self-employed parents are three times more likely to become self-employed.
Those who learn how to run a business from family members also do better once they start their enterprises. One study, entitled "Race and Entrepreneurial Success" by Robert W. Fairlie and Alicia M. Robb, noted: “Business outcomes are 15 to 27 percent better if the owner worked in a family business prior to starting his or her own business.” By imparting important knowledge, families provide potential entrepreneurs with a key resource.
Moreover, family members can become employees or partners of the entrepreneur’s new firm. Family members working together are often more successful since family members are highly motivated to see the business succeed.
Social capital, the connection between an entrepreneur’s family and key stakeholders, is crucial to the success of a new enterprise. Families have unique advantages in developing social capital—members may have close, long-standing relationships with people who can help them launch a business.
For example, Bill Gates was able to get his disk operating system into IBM personal computers because his mother sat on the board of a foundation with IBM’s CEO. As a result of this connection, Gates was able to convince IBM to bundle Microsoft’s software with its computers.
Financial capital, such as family real estate, vehicles, phones, computers, or money, can help start new ventures. Sam Walton, the founder of Walmart, borrowed start-up funds from his wealthy father-in-law to launch his business.
Advantages of Family Capital
Family capital allows entrepreneurs to compete successfully since such capital is difficult for competitors to imitate, can be mobilized quickly, and generally costs less to obtain than capital from other sources.
Take the hypothetical case of a son who wants to start a new enterprise; he needs advice, labor, connections, and capital. His father has his own business, but the son is also friends with the president of the town’s largest bank. To whom should he go for help?
If he meets with his father, the son can get advice and help quickly. His father might let him know that he has a cousin who could help at little or no cost. He might also introduce his son to contacts who could help him launch the new business. And, assuming he has the resources, the father can immediately write a check for seed money or identify who in the family could help the son financially.
If the son were to approach the bank president, he would likely need to set up an appointment. Once in the president’s office, he would get some advice, but obtaining seed money would require time and collateral. Informal agreements are less likely in this case; significant paperwork would need to be completed, and a formal review might be required before any funds could be released. Moreover, the bank president would be unable to transfer his social capital quickly and easily to the entrepreneur.
In this scenario, the son would likely turn to his father, who could supply him with family capital to start his business quickly. Although not all families have relationships that encourage the sharing of human, social, and financial capital—and clearly some nonfamilial relations can act in a family-like manner—this example highlights how family ties can effectively facilitate obtaining resources.
Through my consulting work I have found that family capital is strengthened in several ways. Human capital is built as family members work and learn together, particularly in a family-owned enterprise. Social capital is bolstered by the size of an entrepreneur’s nuclear and extended family and by opportunities to interact within this network. Financial capital is developed as the family builds wealth and shares it across generations. These factors, how- ever, have been weakened dramatically by societal trends.
Marriage provides a potential entrepreneur with several direct sources of family capital. A spouse can help the entrepreneur with both labor and ideas to grow a new business. As in Sam Walton’s case, social connections through one’s spouse are also helpful in start- ing a new business. In fact, firms founded by married entrepreneurs are more likely to have staying power than those founded by single entrepreneurs. This is likely due to the financial and psychological support that a spouse can provide to someone starting a risky venture. One study of Asian and Latino immigrants in the United States by Jimy M. Sanders and Victor Nee, entitled “Social Capital, Human Capital, and Immigrant Self-Employment: The Family As Social Capital and the Value of Human Capital,” found that “being married and living with the spouse increases the odds of self-employment for each ethnic group,” and another study reported that being married increases one’s chance for self-employment by 20 percent. Marriage seems to influence not only start-up rates but business success as well. One study concluded that married business owners have the best business outcomes, while never-married owners have the worst.
Recent demographic trends in the United States, however, point to a societal shift. The age at first marriage in the United States has increased for both men and women over time. Today individuals are older before gaining access to the family capital acquired through marriage (see Age at First Marriage chart).
In addition, overall marriage rates in the United States have decreased from 76.5 marriages per one thousand unmarried women in 1970 to 36 in 2009. With the decline in marriage rates, many individuals will never have the emotional, social, and financial support of a spouse if they attempt to start a business.
Cohabitation is often seen as a stepping stone or an alternative to marriage, but research suggests that it undermines family capital. Cohabiting couples tend to have poorer relationships with their parents, are not as connected to the larger community, and are less likely to pool their resources, acting more as individuals than as a pair. Compared to their married peers, cohabiting couples have less family capital to draw upon.
Cohabitation rates in the United States have increased dramatically in recent years—more than 450 percent between 1977 and 1997. Recent estimates from the National Survey of Family Growth cited by Sheela Kennedy and Larry L. Bumpass in “Cohabitation and Children’s Living Arrangements: New Estimates from the United States,” indicate that the share of women who have ever cohabited increased from 45 to 54 percent between 1995 and 2002. Cohabiters marry only 60 percent of the time and, when they do marry, are 46 percent more likely to divorce than those who did not live together before they were married. This instability further undermines family capital.
Divorce generally disrupts the ties between parents and children, making it more difficult to transfer family capital. Divorce may also make it more difficult for children to work with parents or family members, particularly if parents live significant distances from one another. One study by Fairlie and Robb, entitled "Race and Entrepreneurial Success," reported that “having only one parent at home limits potential exposure to family business, particularly if the absent parent is the father.”
The number of divorces per 1,000 married women in 1960 was 9.2. The divorce rate rose sharply to 14.9 in 1970 and peaked at 22.6 in 1980; it leveled out at 16.4 in 2009. When divorce occurs, a family is less likely to sustain the social bonds and connections needed to start a business. Additionally, family finan- cial capital is also diluted since assets are usually divided up between divorced spouses and cannot be pooled to start a business.
Research has reported that family size can affect a person’s decision to start a business. One study found that 25 percent of sampled firms employed family members at the time of start-up. The more available family members, the larger the network in which to gain resources. In the Amish community, for example, it is not uncommon for couples to have ten children. The average Amish person has ninety first cousins (180 if you count the spouse’s first cousins), “each of whom is available as a potential lender,” according to a 2008 study by Ivan Light and Stephen J. Gold called "Ethnic Economies."
But finding family members to work in one’s busi- ness or to provide loans may prove more difficult in the future. Total fertility rates in the United States plum- meted from 3.65 children per woman in 1960 to 1.84 in 1980 and have since risen slightly to about 2 children per woman today.
Out-of-wedlock births also have a negative impact on family capital. The Fragile Families Study found that children born to unwed parents often grow up in poverty, have more anxiety and depression, show more behavioral problems, and perform worse in school than peers with two married parents. While there are certainly exceptions, children nurtured by only one parent tend to have fewer family resources to enable them to meet the demands of an entrepreneurial career. The percentage of out-of-wedlock births in the United States has skyrocketed in the past several decades, increasing from 5 percent of live births in the 1960s to 41 percent in 2009.
The marriage, cohabitation, fertility, and divorce trends seen in the United States mirror much of the world. Despite recent declines, however, the United States generally leads the world in marriages—9.8 per 1,000 people per year. Other selected countries’ marriage rates per 1,000 are as follows: Russia, 8.9; Portugal, 7.3; Israel, 7; New Zealand, 7; Australia, 6.9; Denmark, 6.1; Greece, 5.8; Japan, 5.8; Italy, 5.4; France, 5.1; Finland, 4.8; and Sweden, 4.7.
Birthrates are also declining globally. A population’s replacement rate is 2.10. At current rates many countries will see precipitous declines in the future (see Birthrates table). For instance, there will be 20 to 100 million fewer people in Europe by 2050 if current trends remain steady.
Other studies have reported that due to selective abortions—mostly in India and China—there are more than 100 million fewer women than men in Asia. In this environment, many young people will not be able to find a spouse who can help them found and perpetuate a business by supplying family capital.
One of the more significant changes in families around the world has been the increase in out-of- wedlock births. Much like fertility rates, the rates out-of-wedlock birth vary by country (see Out-of-Wedlock Birthrates table). In Japan and Korea only about 2 percent of all births occur out of wedlock. But other countries—particularly in Europe—have rates that are significantly higher. For example, in 1980 the out-of- wedlock birthrate in the Netherlands was 4 percent, but it had increased to 40 percent by 2007.
These trends indicate that families in Asia are generally stronger than those in the West, but small families and fewer women have also had an adverse impact on family capital in that part of the world. In North America, Europe, and Australia, shrinking family size, disadvantageous marriage and divorce rates, and an increased number of out-of-wedlock births are likely to undermine the family capital that encourages entrepreneurship. The picture is less clear in Africa and South America. Birthrates on those continents are relatively high, but the number of out-of-wedlock births, the high incidence of divorce, and the low marriage rates are likely to pose a problem for economic development.
Global studies indicate that entrepreneurial activity is connected to strong families. Statistics from the Global Entrepreneurship Monitor (GEM) suggest a connection between these family demographics and entrepreneurial activity. In 2011 GEM researchers interviewed more than 140,000 adults regarding their intentions toward entrepreneurship. The countries with the highest entrepreneurial intentions were Colombia (55 percent), Chile (46 percent), China (42 percent), and Algeria (41 percent). European countries, in general, had the lowest percentage of those who intended to start a new business (Russia, 3.6 percent; Germany, 5.5 percent; and Ireland, 5.8 percent).
The GEM survey also captured the percentage of people who had engaged in what is called “early-stage start-up activity," according to Donna J. Kelley, Slavica Singer, and Mike Herrington in "The Global Entrepreneurship Monitor: 2011 Global Report."On this dimension, China ranked first (24 percent), with Chile (23.7 percent) and Peru (22.9 percent) close behind. People in European countries exhibited significantly lower rates of entre- preneurial activity (Slovenia, 3.7 percent; Russia and Denmark, 4.6 percent; and Germany, 5.6 percent). The data suggest that Europe has entered a period of declining family capital, while countries like China, despite its low birthrate, have increasing family capital. Of course industrialization and other factors affect entrepreneurship, but the link between family capital and entrepreneurial activity on the global stage cannot be ignored.
Encouraging Family Capital
The demographic trends I have described do not paint an optimistic future for the family capital that is needed to launch a business. And there are no easy solutions to the problem, although many governments are attempting to encourage start-up activity. Still, without strong families, economic growth and stability will weaken. To counteract the trend of declining family capital, I offer a few general suggestions:
1. Governments should foster conditions that discourage divorce and encourage marriage and child-rearing within the bonds of marriage. Whether through tax incentives, assistance programs, or other means, governments must do what they can to strengthen families. In the long run, this investment will pay off handsomely with increased economic growth through entrepreneurial activity and a decline in individuals who may have to rely on government agencies for help or support.
2. Cultural values need to shift to encourage stronger families. This will be difficult since many opinion leaders and cultural icons denigrate marriage and parenting and see divorce or cohabitation as reasonable options. However, we need to recognize the costs associated with such values. From an economic standpoint, the outcome of undermining traditional family bonds is clearly negative. It is crucial that government, religious, and societal leaders emphasize the value of maintaining strong families.
3. Families should recognize, develop, and utilize the family capital they have. When I consult with family businesses, I encourage them to take an inventory of the family’s assets, such as skills and contacts, and to develop a strategy that uses those assets to create opportunities. Families need to make a conscious effort to strengthen their human, social, and financial capital, which can then be passed on to future generations.
Family capital is critically important to societies that want to encourage entrepreneurship. Given the societal trends we see today, family capital will likely continue to be in short supply. Thus, it is important for those who are interested in creating strong economies to encourage and strengthen families.
About the Author
W. Gibb Dyer is the O. Leslie Stone Professor of Entrepreneurship at the BYU Marriott School and the academic director of the Ballard Center for Economic Self-Reliance. He is a recognized authority on family business and entrepreneurship and has been quoted in publications such as Fortune, the Wall Street Journal, and the New York Times. He was recently ranked one of the top ten researchers in the world in the field of family business. This text is adapted from Dyer’s article
“Toward a Theory of Family Capital and Entrepreneurship: Antecedents and Outcomes,” which was published in the Journal of Small Business Management earlier this year.
This article originally appeared in BYU’s Marriott Alumni Magazine. For comments or inquiries, email email@example.com.