Internationalization of Family Firms

Abstract

We infuse new internalization theory (NIT) with insights from family firm research, specifically, micro-foundational drivers of family managers’ decision-making such as socio-emotional wealth (SEW) preferences and bifurcation bias. We argue that the international governance of family firms is best explained through a model that combines efficiency-based logic (rooted in NIT) and affect-based logic (rooted in SEW). Such explanation expands the boundaries of NIT by addressing both international competitive success of family firms vis-à-vis their non-family counterparts and their divergence from efficient international governance and consequent failure in host markets. Disciplined pursuit of functional (as opposed to dysfunctional) aspects of SEW can facilitate the firm’s ability to economize on bounded rationality and reliability and create an environment conducive to value generation in host markets. However, unconstrained pursuit of SEW will lead to governance inefficiencies. Family firms can enhance the functional impact of SEW by implementing anticipative, large-scale strategies to economize on bifurcation bias. Ultimately, the main prediction of NIT holds—only efficient governance will be sustained in the long run.