The backbone of the economies of Latin America, and of most emerging markets, has traditionally been family-owned businesses, whether they be huge conglomerates or corner bodegas. In more developed economies, stock markets tend to view family-owned businesses1 with suspicion: when family members aren’t squabbling, it is thought, they are looking after their own interests rather than those of the business. Empirical evidence suggests that there is some truth to the common observation that the first generation builds the company, the second preserves it, and the third squanders it. In fact, fewer than 15 percent of family-owned businesses survive under family control beyond the third generation.
But family-owned businesses have their purposes, especially in areas that lack developed capital markets and a cadre of professional managers: if successful, they provide investors in emerging markets with an alternative to holding illiquid or volatile shares in opaque public companies. Last year, the market capitalization of Latin America’s stock exchanges represented only 32 percent of gross domestic product, while the corresponding figure in Southeast Asia was 114 percent of GDP; in Europe, 115 percent; and in the United States, 164 percent (Exhibit 1).
Nevertheless, the representation of family-owned businesses in the...