Examining formal and relational governance in family small medium enterprises: Evidence from Indonesia
Journal of Entrepreneurship in Emerging Economies
ISSN: 2053-4604
Article publication date: 25 September 2019
Issue publication date: 23 March 2020
Abstract
Purpose
The purpose of this study is to investigate factors that influence the application of governance mechanism in family small and medium-sized enterprises (SMEs) in Indonesia.
Design/methodology/approach
This study used multiple regression analysis to examine the hypothesis. For data collection, questionnaires were distributed to 337 owners and managers of SMEs around 7 districts in Java Island in Indonesia.
Findings
The result indicates that uncertainty influences the application of formal governance in family SMEs in Indonesia. Meanwhile, asset specificity has impact on both formal and relational governance in the context of firms. Financial and non-financial objectives did not impact both formal and relational governance.
Research limitations/implications
Though this research was carried out in a particular cultural context, this study was not specifically designed to examine the interaction between cultural variables and family corporate governance variables. In the future, there is need for a study that examines how culture can influence the practice of formal and relational governance in family business.
Practical implications
The study will give guidance to owners or managers of family business in terms of governance mechanism when uncertainty increases. This evidence suggests that family firms need to adopt formal governance within family firms when uncertainty exists.
Social implications
The research finding indicated that uncertainty influenced the application of formal governance in family SMEs in Indonesia. This research finding suggests that family firms need to adopt formal governance when uncertainty exists. The adoption of formal governance, however, may implicate to some others organizational areas in family firms such as leadership, recruitment and selection and corporate culture.
Originality/value
This study is one of the few on family SMEs, which applied the transaction cost theory. Most of the studies use agency theory for investigating governance mechanism in the family business. This study is one of the few on family SMEs, which applied the transaction cost. This study provides an explanation about a factor that influences a family firm to choose formal and relational governance within the firm.
Keywords
Acknowledgements
The authors wish to thank Ross Muir for the English translation. They are also grateful to the Directorate of Indonesian higher Education (DIkti) for the research grant and Charles Darwin University for offering the opportunity to study entrepreneurship and family business. The authors also thank Dr Anton Agus Setiawan, Dr Abhisek Shukla and Dr Susan Bandias for constructive discussions along the course of the research.
Citation
Kussudyarsana, K., Soepatini, S., Maimun, M.H. and Vemuri, R. (2020), "Examining formal and relational governance in family small medium enterprises: Evidence from Indonesia", Journal of Entrepreneurship in Emerging Economies, Vol. 12 No. 2, pp. 231-257. https://doi.org/10.1108/JEEE-10-2018-0108
Publisher
:Emerald Publishing Limited
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