Photo: Jonathan Sachs

All in the family

New studies show that caste and ethnic identity play an outsize role in how business interacts with government in developing countries.

Leda Zimmerman | Department of Political Science • mit
June 4, 2024 9 minSource

It’s no news that companies use money to influence politics. But it may come as a surprise to learn that many family-owned firms — the most common form of business in the world — do not play by the same rules. New research by political science PhD candidate Sukrit Puri reveals that “family businesses depart from the political strategy of treating campaign donations as short-term investments intended to maximize profitmaking.”

Studying thousands of such firms in India, Puri finds that when it comes to politics, an important influence on political behavior is ethnic identity. This in turn can make a big impact on economic development.

“If family businesses actually think about politics differently, and if they are the most common economic actors in an economy, then you break channels of accountability between a business and the government,” says Puri. “Elected officials may be less likely to deliver effective policies for achieving economic growth.”

Puri believes his insights suggest new approaches for struggling economies in some developing countries. “I’d like to get governments to think carefully about the importance of family firms, and how to incentivize them through the right kinds of industrial policies.”

Pushing past caricatures

At the heart of Puri’s doctoral studies is a question he says has long interested him: “Why are some countries rich and other countries poor?” The son of an Indian diplomat who brought his family from Belgium and Nepal to the Middle East and New York City, Puri focused on the vast inequalities he witnessed as he grew up.

As he studied economics, political science, and policy as an undergraduate at Princeton University, Puri came to believe “that firms play a very important role” in the economic development of societies. But it was not always clear from these disciplines how businesses interacted with governments, and how that affected economic growth.

“There are two canonical ways of thinking about business in politics, and they have become almost like caricatures,” says Puri. One claims government is in the pocket of corporations, or that at the least they wield undue influence. The other asserts that businesses simply do governments’ bidding and are constrained by the needs of the state. “I found these two perspectives to be wanting, because neither side gets entirely what it desires,” he says. “I set out to learn more about how business actually seeks to influence, and when it is successful or not.”

So much political science literature on business and politics is “America-centric,” with publicly listed, often very large corporations acting on behalf of shareholders, notes Puri. But this is not the paradigm for many other countries. The major players in countries like South Korea and India are family firms, big and small. “There has been so little investigation of how these family businesses participate in politics,” Puri says. “I wanted to know if we could come up with a political theory of the family firm, and look into the nature of business and politics in developing economies and democracies where these firms are so central.”

Campaign donation differences

To learn whether family businesses think about politics differently, Puri decided to zero in on one of the most pervasive forms of influence all over the world: campaign donations. “In the U.S., firms treat these donations as short-term investments, backing the incumbent and opportunistically switching parties when political actors change,” he says. “These companies have no ideology.” But family firms in India, Puri’s empirical setting, prove to operate very differently.

Puri compiled a vast dataset of all donations to Indian political parties from 2003 to 2021, identifying 7,000 unique corporate entities donating a cumulative $1 billion to 36 parties participating in national and state-level elections. He identified which of these donations came from family firms by identifying family members sitting on boards of these companies. Puri found evidence that firms with greater family involvement on these boards overwhelmingly donate loyally to a single party of their choice, and “do not participate in politics out of opportunistic, short-term profit maximizing impulse.”

Puri believes there are sociological explanations for this unexpected behavior. Family firms are more than just economic actors, but social actors as well — embedded in community networks that then shape their values, preferences, and strategic choices. In India, communities often form around caste and religious networks. So for instance, some economic policies of the ruling Bharatiya Janata Party (BJP) have hurt its core supporters of small and medium-sized businesses, says Puri. Yet, these businesses have not abandoned their financial support of the BJP. Similarly, Muslim-majority communities and family firms stick with their candidates, even when it is not in their short-term economic best interest. Their behavior is more like that of an individual political donor — more ideological and expressive than strategic.

Engaged by debate

As a college first-year, Puri was uncertain of his academic direction. Then he learned of a debate playing out between two schools of economic thought on how to reduce poverty in India and other developing nations: On one side, Amartya Sen advocated for starting with welfare, and on the other, Jagdish Bhagwati and Arvind Panagariya argued that economic growth came first.

“I wanted to engage with this debate, because it suggested policy actions — what is feasible, what you can actually do in a country,” recalls Puri. “Economics was the tool for understanding these trade-offs.”

After graduation, Puri worked for a few years in investment management, specializing in emerging markets. “In my office, the conversation each day among economists was just basically political,” he says. “We were evaluating a country’s economic prospects through a kind of unsophisticated political analysis, and I decided I wanted to pursue more rigorous training in political economy.”

At MIT, Puri has finally found a way of merging his lifelong interests in economic development with policy-minded research. He believes that the behavior of family firms should be of keen concern to many governments.

“Family firms can be very insular, sticking with old practices and rewarding loyalty to co-ethnic partners,” he says. There are barriers to outside hires who might bring innovations. “These businesses are often just not interested in taking up growth opportunities,” says Puri. “There are millions of family firms but they do not provide the kind of dynamism they should.”

In the next phase of his dissertation research Puri will survey not just the political behaviors, but the investment and management practices of family firms as well. He believes larger firms more open to outside ideas are expanding at the expense of smaller and mid-size family firms. In India and other nations, governments currently make wasteful subsidies to family firms that cannot rise to the challenge of, say, starting a new microchip fabricating plant. Instead, says Puri, governments must figure out the right kind of incentives to encourage openness and entrepreneurship in businesses that make up its economy, which are instrumental to unlocking broader economic growth.

After MIT, Puri envisions an academic life for himself studying business and politics around the world, but with a focus on India. He would like to write about family firms for a more general audience — following in the footsteps of authors who got him interested in political economy in the first place. “I’ve always believed in making knowledge more accessible; it’s one of the reasons I enjoy teaching,” he says. “It is really rewarding to lecture or write and be able to introduce people to new ideas.”

Reprinted with permission of MIT News

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