Asia Pac J Manag (2013) 30:657675

DOI 10.1007/s10490-012-9302-z

Can Chinas family firms create intellectual capital?

Emma Su & Michael Carney

Published online: 19 May 2012

# Springer Science+Business Media, LLC 2012

Abstract Intellectual capital is a firms knowledge and knowing capability that

enriches and aggregates the firms human capital. In so doing, it increases a firms
capacity for innovation and strategic differentiation. Since intellectual capital is a
function of the firms social capital, and because Chinas family firms tend to exhibit
a unique social capital profile, we develop three propositions about the relationship
between social capital, capacity for knowledge transfer, and intellectual capital
formation. These propositions arise from our cross-case study methodology, based
on findings from case studies of intellectual capital formation in fifteen family firms,
located in the city of Wenzhou, China. Consistent with the resource-based view of the
firm, we show that the processes involved in creating intellectual capital are both
socially complex and causally ambiguous, and are distributed heterogeneously
among Chinas growing population of family firms.
Keywords China . Family firms . Social capital . Knowledge sharing . Intellectual
capital
There is a large body of theory and evidence supporting the proposition that timely
and efficient knowledge-sharing among executives and employees can create intellectual capital, which in turn enhances a firms, capabilities (Argote & Ingram, 2000;
Kogut & Zander, 1992; Nonaka & Takeuchi, 1995). Intellectual capital refers to the
the sum of all knowledge firms utilize for competitive advantage (Subramaniam &
Youndt, 2005: 451). In this respect, intellectual capital is much more than the sum of
E. Su
Organizational Behavior and Human Resource Division, Sauder School of Business, University of
British Columbia, 2053 Main Mall, Vancouver, BC, Canada V6T1Z2
E. Su
e-mail: emma.su@sauder.ubc.ca
M. Carney (*)
Department of Management, John Molson School of Business, Concordia University, 1455 De
Maisonneuve Blvd. West, Montral, Qubec, Canada H3G 1M8
e-mail: mcarney@jmsb.concordia.ca

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E. Su, M. Carney

individual members human capital; rather, intellectual capital is an organizationlevel phenomenon that enables the exchange and integration of many individuals
knowledge and human capital (Nahaphiet & Ghoshal, 1998). Since intellectual capital
aggregates and enriches individual knowledge, it can increase a firms capacity for
innovation and strategic differentiation (Hall & Soskice, 2001; Ling, 2012; Subramanian
& Youndt, 2005). The question of creativity, intellectual capital, and innovation potential are becoming more pressing for scholars and managers, with the progression of
Chinas economic development (Phan, Zhou, & Abrahamson, 2010). However, much of
the existing literature on intellectual capital focuses on large, publicly listed, and
professionally managed firms, but little is known about the effects of family ownership and family involvement in management on intellectual capital creation.
This paper addresses this gap by focusing on intellectual capital formation in
Chinas family firms. While the family firm literature suggests that family control
can have a positive, negative or neutral effect on the firms overall financial performance (Jiang & Peng, 2011), there is strong support for the view that family firms,
generally, are disadvantaged in developing and appropriating value from intellectual
capital (Gedajlovic & Carney, 2010). Chandler (1990) argued famously that the
personalized management styles of family firm owners, and the firms simple organizational structures, are incompatible with the demands of knowledge-intensive and
technologically dynamic industries. Existing research suggests that Chinese family
firms are especially prone to constraints on their innovative capabilities (Ahlstrom,
Young, Chan, & Bruton, 2004; Carney & Gedajlovic, 2003). Institutional factors such
as weak protection for intellectual property, restricted access to venture capital, and
the risk of state predation on private firms can deter investment in innovative projects
(Batjargal & Liu, 2004; Chen, 2007; Peng, 2004; Zhu, Wittman, & Peng, 2012).
Redding and Witt (2009) predicted that product and organizational innovation will be
a continuing challenge for Chinas family firms, and that the accumulation and
preservation of wealth will remain their primary concern in the foreseeable future.
Despite this, privately owned and managed family firms are playing a growing role in
Chinas economic growth (Anderson, Li, Harrison, & Robson 2003: He, 2009). Some
scholars believe that private entrepreneurship, facilitated by family flexibility and
access to private capital, was the engine that powered Chinas take-off in the 1980s
(Huang, 2008). Others believe that Chinas economic success, in the past two decades,
was the product of the private sector, comprised of a large population of family firms,
which has outperformed the state-owned sector (Tsui, Bian, & Cheng, 2006). According
to Wu (2006), non-state-owned firms contributed more than 66.7 % of the share of the
GDP in China in 2000. Indeed, recent surveys suggest that many of Chinas private
family firms have developed high-quality manufacturing processes and reached the
frontier of technology development in several fields, to become internationally
competitive (Yiu, Lau, & Bruton, 2007). Zeng and Williamson (2007) proposed that
several Chinese firms have created disruptive innovations that are reshaping global
value chains. This accumulating body of research suggests that a growing number of
Chinas family firms may have transcended their supposed constraints, and are
beginning to compete on the basis of higher-order organizational advantages.
In this paper we adopt a social capital perspective on the question of intellectual
capital creation. Scholars agree that a firms stock of social capital is an antecedent of
intellectual capital formation (Arregle, Hitt, Sirmon, & Very, 2007; Nahapiet &

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659

Ghoshal, 1998). However, several streams of research find that Chinas family firms have
a unique social capital profile, as typically, they possess high endowments of family social
capital deriving from kinship relations (Wong, 1985). Many also possess a strong
capacity to cultivate and utilize bridging social capital, or guanxi (Luo, 2000).
However, Chinas family firms are sometimes characterized as possessing comparatively low levels of organizational and communitarian forms of social capital (Fukuyama,
1995; Redding & Witt, 2007), in which their radius of trust does not extend much
beyond the family (Lin & Si, 2010). This archetypal social capital profile can result in
both competitive advantages and disadvantages (Keister, 2001; Woolcock, 1998).
Based upon a cross-case comparison methodology (Miles & Huberman, 1994), we
report findings from a sample of fifteen family firms located in the city of Wenzhou,
China. We develop three propositions concerning the role of social capital in promoting and inhibiting knowledge sharing, and the development of a firms intellectual capital. In particular, we focus on the question of how family and organizational
types of social capital interact to influence the creation of intellectual capital. The
contribution of this paper is to extend our understanding of the link between social
and intellectual capital, in the context of Chinas booming family firm sector.

Prior research
Types of social capital in Chinas family firms
While Coleman (1988) reminds us of the importance of family social capital in
developing human capital, the core idea expressed in this paper is that excessive
family social capital can also inhibit the development of the organizations intellectual capital. We reason that entrepreneur-founders and their relatives that participate
in the firms activities and have strong ties with one another, will exhibit lower trust in
non-family members of the firm, and will be less motivated to interact and share
knowledge with them. However, the relationship between the various forms of social
capital and intellectual capital creation is a socially complex process, and we expect
to find variation among family firms with regard to the extent to which they appear to
develop intellectual capital. In this section we unpick the concept of social capital to
consider how different types of social capital affect knowledge-sharing practices that
contribute to intellectual capital creation. In so doing, we develop three propositions
to guide future research in this area.
Adler and Kwon proposed that the basic intuition driving social capital research is that,
goodwill others have towards us is a valuable resource (2002: 18). However, social
capital has become an elastic concept that includes a wide variety of social relations
and multiple levels of analysis (Portes, 1998). In this paper we will refer to four types
of social capital: family; bridging; organizational; and community. We recognize that
each of these types can overlap and interconnect with one another, yet each is sufficiently
distinct since they function at different levels of analysis, and among different social
aggregates. Family social capital derives from Colemans (1988) idea of the family as a
resource for its members, including, benefits from available information, influence
and solidarity provided by other members of the family that allow the family to
operate as a team (Arregle et al., 2007: 77). Bridging social capital refers to brokering

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between otherwise unrelated individuals, through which one receives opportunities to use
ones financial and human capital (Burt, 1992: 9). In the context of China, brokering
social capital comes closest to the notion of guanxi (Luo, 2000). Organizational social
capital pertains to the firm employees, and is a resource reflecting the character of
social relations within the firm (Leana & van Buren, 1999: 538). Community social
capital is based on Putnams (1993) idea that social capital also resides in geographical and social aggregates, such as cities, regions, associations and professional
societies, and refers to shared values, trust, norms of reciprocity, and social support
shared broadly among members of a community (Lester & Cannella, 2006: 756). We are
concerned primarily with the relationship between family and organizational forms of
social capital, because it is their high endowment of organizational social capital that
Nahaphiet and Ghoshal (1998) believe are primarily responsible for the creation of
intellectual capital. However, we also believe that family firms bridging and community social capital is also instrumental in creating intellectual capital.
As Chinas economy modernizes, the social capital profiles of private family firms
are likely to change (Gold, Guthrie, & Wank, 2002; Luo, 2008). Much is written
about the importance of guanxi, a type of bridging social capital, as a means for
accessing resources from extended social networks (Luo, 2000; Peng & Luo, 2001).
Recent research suggests that guanxi ties, especially those with state-owned organization, are of decreasing relevance to private firms as the institutional environment
develops (Luo, Huang, & Wang, 2011). Of growing importance for private firms, are
local interlocking directorate networks among industrial peer groups (Ren, Au, & Birtch,
2009). It seems probable that as continuing economic growth mitigate resource
shortages then guanxi ties will weaken, and private firm network ties will form
around shared concerns (Lin & Si, 2010). However, participation in such networks is
likely to vary; Lester and Cannella (2006) showed that family firms differ in the degree
to which they participate in activities that develop their communal social capital.
Changing patterns of social capital and differences among family firms in adapting to
these changes suggest that our understanding of the relationship between family
firms social capital and their capacity for intellectual capital formation is limited,
and demand greater research attention. Accordingly, in this paper we address the
following two research questions: 1. How does social capital affect the formation of
intellectual capital in Chinas family firms? 2. How do family and organizational
types of social capital interact to influence the formation of intellectual capital in
Chinas family firms?

Methods
Research context
This study was carried out in family firms located in Wenzhou, Zhejiang Province of
China. Wenzhou, has one of the most dynamic and developed private sectors in
China, and is illustrative of the potential of the private sector in Chinas development.
Wenzhou can also be considered as an archetypal, localized, emerging marketlearning laboratory that propels some firms to engage in accelerated levels of
exploratory learning (Hitt, Li, & Worthington, 2006).

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661

Sample
We approached a number of firms through a snowball and opportunistic sampling
method, to identify family firms to include in this study. We mainly found our sample
through recommendations by one of the authors friends and relatives. To determine
the family status of the firms we applied three criteria: (1) whether the business was
founded by a family; (2) whether the control and ownership belonged to one family;
and (3) whether family members were involved in the management. We selected
firms purposefully across a wide range of industries through this process we identified 15 family firms whose chief executive officer (CEO) was willing to discuss
knowledge-sharing practices and intellectual capital formation processes with us. See
Table 1 for a descriptive summary of the firms.
Data collection
Before we carried out our semi-structured interviews, we conducted pilot interviews
with several firms. The interview questions were designed in English, and then translated into Mandarin. The interviews were conducted mainly in Mandarin, and some
Table 1 Summary of sample family firms.
Participating
firms

Industry

Size (the
number of
employees)

Firm 1

Printing

356

Firm 2

Gifts

Firm 3

Number of family
members involved
in the business

Formal interviews

Informal
interviews

With CEO With one family

member employee

2 non-family
members

687

With CEO

Printing

330

12

With CEO

2 non-family
members

Firm 4

Printing

283

With CEO With one family

member employee

Firm 5

Printing

172

With CEO

Firm 6

Chemical

310

10

With CEO

Firm 7

Textile

185

With CEO With one family

member employee

2 non-family
members

Firm 8

Printing

136

With CEO

1 non-family
member

Firm 9

Printing

45

With CEO

Firm 10

Glasses

1,170

20

With CEO With one family

member employee

Firm 11

Printing

110

With CEO

Firm 12

Gifts

405

With CEO With one family

member employee

Firm 13

Textile

68

With CEO

Firm 14

Printing

30

With CEO

Firm 15

Printing

23

With CEO

1 non-family
member

1 non-family
member

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E. Su, M. Carney

were conducted in a local dialect (i.e., Hokkien dialect). Then the interviews were
translated back into English. In total, we conducted twenty formal interviews with
the CEOs of participating firms, and with family member employees and nonfamily member employees in some other cases. Sometimes, repeat interviews were
conducted with key informants. The interviews were conducted over a period of
6 months (between the summer of 2007 and the spring of 2008). In addition to the
formal interviews, we also conducted nine informal interviews with non-family
members. Such informal interviews were conducted mainly during the employees
breaks and at lunchtime.
Data analysis
Data analysis consisted of a two-stage process. In the first stage, we developed a
series of narratives based upon our interview data. The narratives describe how and
why certain factors impact the formation of intellectual capital. In the second stage of
the analysis, we applied the narratives to our two research questions. We applied
Miles and Hubermans (1994) technique of cross-case analysis to compare and
contrast the narratives, and sought to identify patterns and similarities across cases,
rather than differences.
Stage 1: Developing narratives of intellectual capital formation This stage consisted
of developing a narrative of between three and five double-spaced pages that capture
the factors affecting knowledge sharing, and the intellectual capital formation for
each family firm sample (Eisenhardt & Bourgeois, 1988). Based on these narratives,
we then listed the major issues that appeared to impact upon knowledge sharing
and intellectual capital formation. An issue that appears to impact knowledge
sharing is then defined as a topic of discussion. The list of all the issues was
reduced to a comprehensive set of typical issues confronting all the participating firms. Following Maitlis (2005) approach, we used the following two criteria
for defining typical issues: (1) a factor that has to have arisen in all fifteen
participating firms; (2) a factor that all interviewees consider to be of real importance.
During this process, we relied on a process of data reduction (Maitlis, 2005; Strauss
& Corbin, 1998). This condensed set of issues was then discussed with the interviewees in the participating firms. All interviewees reviewed and agreed that this set
of issues covered the major issues related to knowledge sharing and the creation of
intellectual capital in their firms. We then grouped these issues into three major
domains, namely: (1) knowledge form; (2) knowledge recipients; and (3) the strength
of family ties in the firm.
Stage 2: Identifying how these three domains affect knowledge sharing and intellectual capital creation We next analyzed the three major domains in relation to
our two research question. In searching for patterns of the impact of social
capital on intellectual capital creation, we were concerned with potential consistencies in the ways in which knowledge sharing is affected by the form of
knowledge and the recipient of knowledge. We explored potential patterns across cases
in relation to the effects of the domains that affect intellectual capital creation in family
firms.

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663

Results and propositions

In the following sections, we discuss how these three domains affect distinctively the creation of intellectual capital in the surveyed family firms. We then
link the findings to prevailing literature about the domain, and conclude with
three propositions about the relationship between social capital and intellectual
capital formation
Knowledge form and intellectual capital formation
We observed that most family firms in our sample do not have a formal system of
documentation in place, to capture and codify their organizational processes. For
example, one of the interviewed CEOs said: We do not have a comprehensive
documentation system to capture the knowledge now, but we are thinking of building
one. However, I am concerned we might neither have the skill nor budget to
implement it. It is too costly to do. The lack of a documentation system is perceived
to be a problem in transferring knowledge, especially to non-family members. For
example, one of the interviewed non-family members said, I had a hard time when I
first joined the firm, and I had to figure many things out myself, and it took me a lot of
effort and time doing that. It certainly would be very helpful if there was something
written down. In general, we found that large amounts of knowledge remain
uncodified in Chinas family firms, in part because of the perceived high cost of
doing so.
Knowledge varies in its causal ambiguity, the extent to which there is a precise
understanding of what the necessary production factors are, and how they interact
during production processes (Szulanski, 2003). Strategically valuable forms of
knowledge may be either relatively codifiable or tacit. Codified knowledge can be
precisely understood and represented in documents, manuals, and computer programs, and is easily reproducible through the creation of organizational routines,
which transfer knowledge to new and existing organizational members (Szulanski,
2003). Although the codification of knowledge into routines is costly, codification
can promote rapid firm growth because it facilitates the reliable reproduction and
transfer of bundles of relatively simple organizational processes, such as those found
in the operation of budget hotels and fast food restaurants (Winter & Szulanski,
2001). In contrast, much tacit knowledge is valuable, but can neither be precisely
understood by its owner nor easily represented. Tacit knowledge is difficult to codify
(Nonaka & Takeuchi, 1995) and cannot be easily replicated or transferred to other
individuals. Consequently, much tacit knowledge is possessed by individuals and is
inalienable or sticks to its owner (Szulanski, 2003). In an organization, tacit
knowledge can be developed by the employees who learn to work together over long
periods of time (Kogut & Zander, 1992). However, collectively created tacit knowledge requires significant interaction and continuity among stable groups of individuals; high employee turnover is likely to be an obstacle to collective tacit knowledge
(Leana & van Buren, 1999).
Our data show that in the early stages of their development, Chinas family firms
are less likely to invest in knowledge codification owing to inherent high costs of
codification. We also expect that family members will prefer to utilize their discretion

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and decision-making prerogatives, without being restricted by bureaucratic procedures. For example, in recruiting important personnel a founder-entrepreneur may be
more inclined to exercise personal judgment, rather than follow the procedures
determined by a human resource management department. Instead, we expect family
firms to make greater use of clan controls, which are socialization mechanisms
used to define appropriate employee attitudes based on organizational norms, shared
values, and beliefs (Li, Lee, Li, & Liu, 2010: 223), and of which Li et al. (2010) find
moderate knowledge codification in Chinese firms. For these reasons we expect
Chinas family firms to eschew codified systems, policies, and procedures that
embody knowledge.
Our findings are consistent with the literature that Chinas family firms exhibit a
preference for creating and using tacit knowledge. We reason that family firms are
likely to excel at generating and utilizing tacit knowledge compared with other types
of organizations, such as state-owned enterprises which must justify their decisions in
formal reports to state agencies and regulatory bodies. In contrast, the owners of
family firms are not required to explain the logic of their actions to outsiders
(Schulze, Lubatkin, Dino, & Buchholtz 2001). Instead, founder-entrepreneurs can
base important decisions on intuitive criteria and information known only to themselves. Family firms are also at an advantage of transferring tacit knowledge between
family members, and from one generation to another (Dou & Li, 2012). This is
because tacit knowledge is best acquired and transferred in a learning-by-doing
manner. Unlike paid employees, who are likely to have shorter tenure in the firm,
family members are likely to have long-lasting ties to the family business, and are
likely to have multiple opportunities in the home and in the workplace to observe and
absorb valued tacit knowledge. For example, Sirmon and Hitt (2003) proposed that
the early involvement of young family members in the firms activities can produce
deep levels of tacit knowledge. In family firms, multiple family members, who
participate in the top management teams, can more readily achieve consensus about
decisions that are not fully articulated (Ensley & Pearson, 2005). Based on our
observations and extant literature we reason that family firms have distinctive
propensities with respect to the utilization and sharing of codified and tacit knowledge, which we summarize in the following propositions:
Proposition 1a Chinas family firms are unlikely to create and transfer knowledge
through codified routines.
Proposition 1b In Chinas family firms, it is more likely that family members share
knowledge (especially tacit knowledge) with other family members than with nonfamily members.
The recipient of knowledge
Our interview data suggest that potential knowledge recipients, especially non-family
members, typically display low motivation with respect to knowledge acquisition. We
identified three factors which feature prominently in accounts of this tendency a
found three reasons for this phenomenon. First, CEOs suggested that employees
typically regard knowledge seeking as acknowledging an inferior position or as

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665

Shi Mian Zi (losing face), since Chinese people generally put a high value on
Mian Zi (face) and will seek to preserve their face at any cost. For example, upon
asking whether he consults other colleagues for information, one of the interviewed
non-family members said, I do not like to ask others for information, and I just
figure it out myself. Upon further probing, he replied, No one wants to look a fool.
Second, CEOs believe that the majority of their employees have not attained a high
level of education, which means they often lack much prior related knowledge for the
effective performance of their tasks. Yet recipients prior related knowledge is
important for them to fully realize and absorb the value of transferable knowledge
(Cohen & Levinthal, 1990). However, we observed that the majority of firms show
little concern for developing employees prior knowledge, such as through training or
formal classroom learning. Indeed, many CEOs held the view that employee training
or education programmes mean, potentially, training the employees for the benefit of
rival firms. A common saying goes, Employee training is to make bridal clothes for
competitor firms. Third, we inferred that non-family employees do not feel psychologically attached to the business. For example, one of the interviewed non-family
member employees said, We, at the lower level of the business, do not need to
understand how the business goes. We are happy as long as we have jobs.
The recipients motivation and retentive capacities are two key factors that determine
a knowledge recipients potential for knowledge acquisition (Szulanski, 2003). The
retentive capacities of employees are likely to be a function of their prior human
capital. Rapid advancements have been made in the quality of Chinas public
education system, but China has yet to attain the world-class standards of primary
and secondary level education found in neighboring South Korea and Japan. Publicsector vocational training is also underdeveloped, and there is a continuing shortage
of well-trained accountants and business graduates. As a result, many forms of
advanced technical and organizational skills are in short supply in China (Reddong
& Witt, 2009). Moreover, many small and medium-sized family firm CEOs said they
were are unwilling or unable to make significant investments in training. These
factors may lead to the potential recipient of knowledge being unable to realize the
value of potential knowledge, and being unlikely to engage in acquiring firm-specific
knowledge. In addition, some degree of firm-specific knowledge is required in order
to know where specialized and technical knowledge should be applied, to fully
realize the potential value of transferred knowledge. We reason that because many
employees are engaged in informal or short-term contracts, and can be easily dismissed, they will have little incentive to engage in acquiring firm-specific knowledge.
Whether employees, as either recipients or as contributors of knowledge,
participate actively in knowledge transfer depends upon the kind of psychological contract they have with their employer (Rousseau, 1995). Psychological
contracts determine an employees motivation because they influence the employees
perception of their status and tenure in the firm. We expect rank-and-file employees
psychological contract with their firm to incline them toward low engagement, a low
willingness to cooperate, and be less likely to exercise ingenuity in performing their
tasks (Robinson & Morrison, 1995). Since owner-managers appropriate profits they
are highly sensitive to employment costs and will typically be lean and mean in
their compensation policies toward rank-and-file employees (Miller & Le BretonMiller, 2005). In contrast, owner-entrepreneurs may devise discretionary and

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subjective compensation schemes that favor family members at the expense of other
employees (Schulze et al., 2001). The personal character of the family firm and its
nepotistic employment practices can produce great loyalty from employees who are
favored by the firms management but favoritism engenders a strong sense of
injustice by less favored employees (Lubatkin, Ling, & Schulze, 2007). Moreover,
favoritism undermines meritocratic human resource practices, and can lead to diminished motivation and commitment by non-family members. Similarly, the absence of
due process and a weak commitment to employee career development can limit the
ability of family firms to attract, recruit, and retain high-quality employees. Consequently, we expect that employees, with a psychological contract based upon poor
employment terms and characterized by a sense of injustice, are likely to perceive
their employment in highly instrumental terms. Accordingly, we propose that:
Proposition 2 In Chinas family firms, potential recipients of knowledge sharing,
especially non-family-member employees, will be poorly disposed to acquire
knowledge.

Strength of family ties

Our data show that there is generally an absence of mutual trust between family and nonfamily members. We observed that lack of mutual trust is more pronounced in family firms
that have a larger numbers of family members involved in the business. We reason that the
more family members involved in the business, the more likely CEOs are to interact with
family members involved in the business, instead of interacting with non-family employees. In contrast, family businesses with fewer family members involved are more likely to
have more opportunity to interact with non-family member employees. Moreover, we
observed that non-family members sometimes perceive the participation of a large number
of family members in the business as an indication that their employer does not trust them.
One non-family employee told the interviewer that, The big boss seldom comes to the
office, and one of his nieces is working in the business. Her main responsibility is to
keep an eye on us on behalf of the big boss. He will be less worried about the business
if his people are in the office.
However, family and non-family members may not necessarily mistrust one
another. Compared with relationships in non-family firms, long-term family ties
may foster and deepen interpersonal trust (Pearson, Carr, & Shaw, 2008). Several
scholars believe that a familys social capital can generate organizational capital that
is favorable to knowledge sharing and intellectual capital formation (Arregle et al.,
2007; Pearson et al., 2008; Sirmon & Hitt, 2003). There are several reasons why the
familys social capital may impact positively on organizational social capital. First, a
familys desire for cross-generational continuity may strengthen family members
identification with the firm, resulting in a stewardship orientation among the firm
managers, and a longer time horizon for decision-making (Miller & Le Breton-Miller,
2005). Second, family firms have also been linked with high levels of survivability
capital, which refers to the pooled personal resources that family members are
willing to loan, contribute, or share for the benefit of the family business (Sirmon
& Hitt, 2003: 343). For example, family members may reduce their own salaries in

Can Chinas family firms create intellectual capital?

667

difficult economic periods to avoid laying-off employees. Third, the family CEO may
adopt a paternalistic and caring attitude towards employees.
Families that develop their reputation in the wider community for honoring their
contracts are likely to enjoy a competitive advantage over firms who lack a comparable reputation (Zhou & Peng, 2010). A respected reputation can promote adaptation
and timely knowledge exchange with outsiders, without recourse to cumbersome
formal contracts. A familys favorable reputation can also widen the circle of contacts
and provide access to resources such as knowledge of best practice (Lester &
Cannella, 2006) and information about competitors (Florin, Lubatkin, & Schulze,
2003). Each of these factors will tend to promote knowledge transfer into the firm,
either directly or indirectly, and enhance the firms intellectual capital.
However, whether family social capital can be appropriated by the firm and be
converted into organizational social capital remains an open question. Ermisch and
Gambetta (2010) provided evidence that individuals with strong family ties have lower
levels of trust in strangers compared with individuals with weaker family ties. This is
because intensive interactions within the family will reduce exposure, experience, and
motivation to deal with outsiders. In contrast, individuals with weaker family ties have
more opportunities and motivation to interact with non-family members. However, too
much closure among family members may produce blind spots and inertia (Pearson et
al., 2008). For example, it is often suggested that Chinese family firms exclude
professional managers and scientific personnel from participation in strategic
decision-making, which limits their capacity for understanding and processing complex technological information (Tsui-Auch, 2004). Increases in the total number of
employees who participate in the firm may also be harmful. The CEOs of family
firms that employ many family members will tend to be responsive to family stakeholders needs, which can reduce their ability to respond to non-family members
needs. In many cases, family stakeholders needs are connected with preserving
socio-emotional wealth, which can impair the development of organizational capabilities (Berrone, Cruz, Gomez-Mejia, & Larraza-Kintana, 2010).
Luo and Chung (2005) found that the positive contribution made to the firm by
family members tends to rise to a threshold and then become negative with the
participation of additional family members. The diminishing marginal contribution
of additional family participation is supported by the literature on the performance
of sole founder-managed firms, that do not employ any family members and which
are found to outperform family firms in which more than one family member
participates in management (Miller, Le Breton-Miller, & Lester, 2010; Villalonga &
Amit, 2006). Taken together these arguments and research findings suggest that the
involvement of additional family members may have a negative impact on organizational social capital.
Consequently, we expect that whether the positive tendencies of family social capital
will lead to the generation of organizational capital will depend upon the intensity of
family ties and the number of family members active in the firm. We reason that a
golden mean of family social capital will be associated with positive organizational
outcomes. We expect that weaker family ties and fewer family members participating in
the firm can have beneficial effects on the development of organizational social capital.
However, intermediate to strong family ties and high numbers of family involvement
may be counterproductive, and reduce the extent to which the family is motivated to

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interact and share information with non-family members in the firm. The following
proposition summarizes the relationship between the strength of family ties in the
business, and the creation of intellectual capital in Chinas family firms.
Proposition 3 Chinas family firms with relatively weak family ties and fewer family
members involved in the firms activities will exhibit higher trust in non-family
members and will be more motivated to interact and share knowledge with them.

Discussion
Leaving aside for a moment our main question of whether Chinas family firms can
create intellectual capital, our propositions and the illustrations reported in our
findings from our interviews suggest that Chinas family firm capacity for intellectual
capital creation is broadly consistent with a resource-based view (RBV) of the firm.
This is because it highlights the socially complex and causally ambiguous relationship between social capital processes and intellectual capital formation (Reed &
DeFillippi, 1990). Consistent with the RBV, we argued that certain types of social
capital have greater value for intellectual capital creation than other types. Scholars
agree that family social capital is ubiquitous in China. However, because this is not
rare and can do little to improve any family firms competitive advantage since rival
family firms are likely to have comparable endowments of family capital. Indeed,
some scholars propose that family social capital is actually destructive (Lin & Xi,
2011). Scholars also agree that bridging (guanxi) forms of social capital are distributed heterogeneously across firms, and those firms who possess such ties have an
advantage over those that do not, at least in the near-term. However, less attention has
been given to the prevalence and value of organizational and community types of
social capital. We reason that these forms of social capital are potentially very
valuable because they are relatively rare in Chinese firms and society.
Our propositions and preliminary findings provide several nuances on this view.
First, if firms strive simultaneously to inhibit the accumulation of harmful types of
social capital, while cultivating types of social capital that are both valuable and
comparatively rare, then they are more likely to create a social capital combination
that can create a firm-specific competitive advantage. In this respect, family and
guanxi forms of social capital are relatively prevalent among Chinas family firms,
and both types are recognized as having advantages and disadvantages. We propose
specifically that family social capital has positive effects at relatively low levels, but
has increasingly adverse effects on organizational social capital, with increasing
levels of family involvement and stronger family ties. In addition, there is a growing
consensus that the costs of guanxi forms of social capital outweigh the benefits,
because: (1) Chinas institutional environment is becoming more congenial to armslength forms of contracting; and (2) because guanxi relationships can establish
harmful firm-specific path dependencies; once the firm prospers on the basis of these
contacts they find them difficult to give up, even though they are becoming less
valuable. Reliance on relational contracting can become institutionalized in the firm
and inhibit the adoption of more productive organizational processes (Keister, 2001).
The result is that firms that once prospered from guanxi relationships will become

Can Chinas family firms create intellectual capital?

669

increasingly out of touch with the steady progression of Chinas institutional

transitions.
Second, scholars suggest that communal forms of social capital are relatively rare
in the context of China, especially with regard to collective goods such as support for
industry-level R&D, or education and training that enhances aggregate levels of
human capital in an industry (Redding & Witt, 2009), but few articulate the firmspecific benefits from actively cultivating communal social capital (Lester & Cannella, 2006). However, data from our sample sheds some light on the possible
dynamics of this complex interaction. One recurring observation arising from our
study is that many family firm CEOs view investment in employee training as
wasteful, either because employee turnover is high and firms cannot benefit from
the investment, or because the benefits of training investment is enjoyed by rivals.
The absence of shared understanding about the collective value of employee training
is damaging to the productivity of all firms in the community.
However, we note that there were exceptions to this rule. For example, one of our
sample firms, high growth Firm 1 (printing company) undertook a range of activities
to improve the human capital of its employees, but invested in incentives to retain
those employees in the firm. At the same time Firm 1 undertook the exceptional step
of conducting joint research programs with the local university, establishing the kind
of cooperative linkage that scholars believe is the essence of communal social capital
(Hall & Soskice, 2001). Subsequently, the university initiated industry-specific training programs for employees in the print industry. From one perspective, the universitys involvement in cooperative research and training programs potentially benefits
the whole industry, and Firm 1s attempt to create communal social capital with the
university served to provide positive externalities to rivals. However, we reason that
many of Firm 1s rivals may have insufficient absorptive capacity to take advantage
of the availability of such programs, since they tend to underinvest in their R&D and
employee skills. In contrast, Firm 1 has undertaken a range of initiatives that are
consistent with developing its organizational social capital, and is better positioned to
benefit from the universitys training programs. In this regard, Firm 1s organizational
and communal social capital produces a virtuous circle of complementarities between
its organizational practices and the changing quality of the educational and training
environments. This mutual and two-way interaction between organizational and
communal social capital may be both co-evolutionary and self-reinforcing, and
generates hard to imitate advantages for Firm 1, in terms of its capacity for intellectual capital formation. Moreover, the initiation and nurturing of this interaction
represents a socially complex and causally ambiguous process that rival firms will
find difficult to imitate, especially if they are over-endowed with family and underendowed with communal types of social capital.
Fukuyama (1995) notoriously described Chinas population of individualistic and
small scale family firms as a, loose tray of sand arising from a low trust economy
lacking the social capital to enable firms to engage in beneficial communal actions.
One vexing scenario arising from Fukuyamas analysis suggests that, as the private
sector expands, a population of politically connected and large scale oligarchical
family firms may materialize. In other transitional economies, oligarchic families
have come to dominate important sectors of the economy and perpetuated a low trust
equilibrium. Yet the virtuous circle described by the example of Firm 1s enlightened

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E. Su, M. Carney

self-interest in promoting community education and training, that in turn offers a

fertile environment for its continued prosperity, suggests a more benign dynamic.
Research in other contexts suggests enlightened self-interest by business elites and
family firms can constitute an establishment (Marcus, 1983) that engages in
socially responsible activities, community developments, and philanthropic activities
(Berrone et al., 2010, Dyer & Whetten, 2006). In this view, owners of large business
corporations, by virtue of their many corporate and political connections, became
involved in other institutions, such as hospitals, universities, non-profit organizations,
and policy associations. The business elites participation in multiple organizations
can result in the transcendence of parochial self-interest, and the promotion of the
more general interests of economic and social development (Useem, 1979).
While some scholars emphasize the impact of a long-lasting, invariant cultural
heritage on Chinese organizations, others argue that that culture has a mainly negative
impact on the development of intellectual capital. However, our study reveals significant variations in the extent to which owner-entrepreneurs are active in combating
unproductive norms and beliefs, and in promoting new social and organizational
norms among employees. In this respect, family firm CEOs enjoy the freedom to
experiment with unconventional management philosophies, which may manifest in
transformational leadership and the establishment of new environment work values,
that support behaviors such as speaking out (Liu, Zhu, & Yang, 2010). Nontraditional settings can provide an opportunity for individuals to gain face by
demonstrating competence and by sharing knowledge (Huang, Robertson, & Gu,
2008). We expect that the continued growth of the family business sector is likely to
produce continued variance in leadership styles of CEOs.
Furthermore, the insights generated by this study have practical implications for
managers. Conventional wisdom suggests that improving the competitive capabilities
of family firms requires that family members should disengage from the firm
progressively, and gradually increase reliance upon professional management (Ahlstrom
et al., 2004; Zhang & Ma, 2009). The simple prescription may oversimplify the
problem for two reasons. First, as we have noted, family involvement and family
social capital can contribute ongoing rare, value, and hard to imitate organizational
and community social capital. Second, making the transition towards a professional
management structure does not involve simply a change of management; it implies a
major overhaul of multiple organizational elements, including corporate governance
arrangements, compensation, and the formalization of authority relations (Gedajlovic,
Lubatkin, & Schulze, 2004). We suggest that even when family firms make greater
use of professional management, their effectiveness can be diminished if a founderentrepreneur is not willing to fully engage professional management, by actively
facilitating the transfer of knowledge between family and professional managers.
Clearly there are limits with our research methods. Our interviews of knowledge
transfer practices cannot, and are not intended to, formally test or refute specific
hypotheses about the relationship of social capital, intellectual capital, and their
impact upon the firms performance, rather they are intended to be illustrative and
indicative of variations in these factors among a local population of archetypal family
firms. Despite these limits, we suggest that our paper makes three contributions to the
literature on the development of Chinas family firms. First, while scholars believe
that knowledge sharing can provide competitive advantages for the firm (Argote &

Can Chinas family firms create intellectual capital?

671

Ingram, 2000), there is little research in the context of the family firm, and none in
China (Li & Yang, 2006), we have taken some primary steps in this direction.
Second, much of our understanding of Chinese family firms is based upon those
established by diaspora or migrant Chinese entrepreneurs, but China represents a
large, distinct institutional environment and Chinas family firms are likely to differ in
important ways (Zhang & Ma, 2009). Third, we show that Nahaphiet and Ghoshals
(1998) thesis, that social capital is the antecedent of intellectual capital formation, is
an oversimplification. In this paper, we have deconstructed social capital into four
constituent parts, and shown that in the family firm context some types of social
capital can inhibit intellectual capital formation.
In closing, we note that the vast majority of research on family firms has focused
upon their unique qualities and differences relative to other types of firms (Gedajlovic
et al., 2012). However, this comparative approach ignores important differences
among the general population of family firms. Accordingly, research may not be
generalizable across the total population of family firms. Future research should begin
to investigate the structural and strategic characteristics of different types of family
firms that go beyond the typical ownership distinctions used to distinguish family
firms from non-family firms (e.g., Chung & Chan, 2012; Jiang & Peng, 2011). For
example, recent research suggests there are important performance differences between lone founder owned and managed firms and firms owned by multiple family
members (Miller, Le Breton-Miller, & Lester, 2011) and firms managed by first and
subsequent generation family members (Perez-Gonzalez, 2006). Recent qualitative
and theoretical papers have begun to identify similar differences in Chinas family
firms (e.g., Dou & Li, 2012; Liu et al., 2012) but future empirical research should
explore the processes and causal mechanisms that underlie performance in different
types of family firm. We anticipate that family firms founded in the early stages of
economic reform will soon enter a period of transition as their founders contemplate
retirement and seek to appoint successors. Given the growing role of family firms in
Chinas continuing development we suspect that the processes and impact of succession on firm performance and capability development represents a fruitful area for
future research.

Conclusions
So to return to the initial questionCan Chinas family firms create intellectual
capital?our answer has focused upon the importance of the relationship between
family and organizational social capital and, in this regard, we believe family social
capital is a value to be optimized, but not maximized; too much family involvement is
likely to inhibit the development of intellectual capital. On the other hand, some
degree of family involvement, along with the cultivation of bridging, organizational,
and community types of social capital, is likely to result in a social capital profile that
can produce valuable and difficult-to-imitate forms of intellectual capital. However,
since the process involved in producing this profile is causally ambiguous and
socially complex, we believe firms will vary in their creative capacities, and that
creativity will be distributed heterogeneously over Chinas growing population of
family firms.

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E. Su, M. Carney

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Emma Su (MSc, University of British Columbia; MSc, Nanyang Technological University, Singapore) is
currently a research assistant with the Business Families Centre, Sauder School of Business, University of
British Columbia. Her research focuses on knowledge management in family businesses, Chinese family
businesses, family business succession, and conflicts in family businesses. Her research has been presented
at the Academy of Management conference, Asia Pacific Journal of Management Conference, and
International Family Enterprise Research Conference.
Michael Carney (PhD, University of Bradford, UK) is Concordia University Research Chair in Strategy
and Entrepreneurship at John Molson School of Business, Concordia University, Montral. He is the
incoming Editor-in-Chief of Asia Pacific Journal of Management. His research focuses upon Asias family
owned business groups. This is his 9th contribution to the Asia Pacific Journal of Management.