Hindu Undivided Families

For the most part, businesses in India look a lot like businesses in the United States. General partnerships, corporations, limited liability companies, and sole proprietorships all exist, although some go by different names. One unique structure that India’s culture has fostered is the Hindu Undivided Family (HUF). The strong value placed on relationships, hierarchy, and top-down decision making are all distinctly apparent in this Indian business structure, though its role may be changing.


HUFs generally consist of “all persons lineally descended from a common ancestor and includes their wives and unmarried daughters.”1 Under this system, a karta, or a manager (often the patriarch or oldest son of the family) is responsible for managing the assets of the HUF. The HUF is a distinct taxable unit, and so members of an HUF are not subject to individual taxes on the amounts they receive from the HUF. The tax benefits don’t always outweigh the costs though.

HUFs are relatively easy to set up but can be difficult to break or modify. Because they are designed to keep property and assets together, HUFs can’t be partially dissolved, or rather, individual members can’t withdraw their interests without completely dissolving the HUF. Partitioning HUFs can lead to heavy taxes. The karta also can’t dictate who gets shares in an HUF, or how big those shares are; those elements are dictated by law.2 The challenges of new members, differing lifestyles, unclear lines of succession, and simple family conflict all take their toll on these businesses. Most family businesses in India last for about three generations before splitting.3

Cultural Implications

Hierarchical. Compared to many other countries, especially the United States, India is far more hierarchal than egalitarian.4 These values are clear in an HUF, where having a karta act as the boss helps to limit the consequences of conflict that might arise between members of the business. For a business that can’t always limit its number of members, respect for the leader becomes increasingly important. The reluctance of younger members to voice disagreement with the karta, or even older members, can also hurt a business facing modern issues.

Decision Making. Along a similar line, India follows a top-down decision-making approach.5 This cultural element allows HUFs to operate more easily because decision-making authority is centered with the karta. When conflict arises between members, the HUF could have a difficult time completing the simplest of transactions.6 However, having a single decision maker can help the business act decisively and move past issues that could prevent it from operating.

Relationship Based. In India, personal relationships are essential to business relationships.7 This is especially true for family businesses, where personal relationships are business relationships. Because family members can do very little to shut each other out of an HUF, maintaining positive relationships with each other is critical to the survival of the business. Sorting out HUF membership interests can take years to unravel if interests are transferred unexpectedly.8 Having strong personal connections helps prevent these complications and makes business transactions smoother.


Historically, sons and grandsons would receive an interest in the HUF equal to their father’s, but daughters would only receive a portion of their father’s interest. The Hindu Succession (Amendment) Act of 2005 made daughters’ inheritance rights equal to sons’, and a 2015 ruling confirmed that women could serve as kartas by virtue of birth order.9 John Ward, Professor of Family Enterprise at the Kellogg School of Management, believes that the shift to include women will help reduce the rate at which Indian family businesses split. As he states, “A family that only has brothers at the helm is the most unstable form of business enterprise. Brothers often end up with ego issues. If you involve daughters and other members then the bond is stronger.”10

Many HUFs turn to their younger members to solve new and complex issues. This makes sense—the younger generation is often more educated and open to new concepts. However, respect in these organizations often means remaining silent rather than disagreeing, so members of the younger generation may still remain silent on issues they have ideas about. The younger generation is frequently responsible for executing the decisions of the older generation, especially regarding succession. If the participants don’t agree with the plan, they won’t act on it, even if a legal document exists.11

Although HUFs may continue to be used as a family business structure, they are less common than in the past. Evolving business environments will undoubtedly lead to changes in how these businesses are run, but they continue to highlight major characteristics of business culture in India.

China’s National Champions: Demystifying China’s Stodgily Operated Entities

When Mao Zedong and the Communist Party of China (CPC) declared victory over Chiang Kai-shek and the Nationalists in 1949, the People’s Republic of China (PRC) that emerged bore the scars of Japanese invasion and two decades of civil war. In that moment, China began its resplendent recovery from a nation of broken cities, homes, and lives to the world’s second largest and most dynamic economy.


In facilitating this recovery, the PRC outlined numerous economic policies ranging from the Great Leap Forward to 13 different five-year plans. One of the key aspects of China’s economic recovery involves utilizing state-owned enterprises (SOEs).  The Organisation for Economic Co-operation and Development (OECD) defines SOEs as entities where “the state has significant control through full, majority, or significant majority ownership.” The PRC has provided tremendous support1 and protection2  to improve its adolescent enterprises’ competitiveness with more mature, foreign competitors.

In spite of the immensity of several Chinese SOEs,3  few outsiders understand what they are and how they operate. The dearth of understanding is driven by the SOEs’ black-box style business practices, which stem from the lack of public accountability and financial disclosure.4  These, in turn, have contributed to the current state of SOEs and challenge their feasibility moving forward.


Today the PRC has roughly 150,000 SOEs, which generate one-third of Chinese GDP and employ 20 percent of China’s workforce.5 Of the 150,000 SOEs, the central government directly manages 101 strategically important SOEs6  through the State Assets Supervision and Administration Commission (SASAC). The 101 SOEs alone have assets valued at nearly $7.7 trillion,7  8 and the three largest generated revenues of over $845 billion in 2016.9  While the size and performance of China’s SOEs appears impressive, their rosy exteriors belie severe faults: debt and corruption.

Debt. Chinese banks see loaning to an SOE as a risk-free investment. After all, the SOE is controlled by the government, and the government will step in and prop up the SOE if solvency issues arise. However, the perceived safety of loaning to SOEs has resulted in SOEs receiving 30 percent of all loans.10  This is troubling for two reasons:

  1. Chinese SOEs are vastly overleveraged with debt valued at $14.4 trillion11 – an amount representing 115 percent of Chinese GDP;12 and
  2. Private firms with high-growth potential could be precluded from accessing the capital that they need to grow.

Corruption. While the crushing debt load facing SOEs is troubling, the alleged corruption is far more worrisome. Research on firm corruption in the PRC indicates that SOEs have a 35 percent higher level of corruption than privately owned firms.13 Corruption among Chinese SOEs is generally borne out by embezzlement by 14 15 and alleged accounting improprieties. In July 2017, the Chinese National Audit Office (CNAO) confirmed suspicions relating to SOEs’ dubious accounting practices. The CNAO examined 20 of the 101 SOEs directly controlled by the Chinese government and found 18 were using improper accounting practices.16 In total, the examined SOEs overstated revenues by a combined 200.1 billion yuan (almost $30 billion) and income by 20.3 billion yuan (around $3 billion).17 While it’s unlikely that the rest of China’s other 150,000 SOEs are overstating revenues to the extent of the firms audited, the lack of transparency precludes the public from evaluating management’s stewardship of communal resources.

The Feasibility of SOEs Moving Forward

Although SOEs enjoy many benefits, they are encumbered with the incongruent expectations of both promoting societal welfare by maximizing employment and increasing profits by enhancing competitiveness and operating efficiency.18

In the past, SOEs benefitted from decades of overly indulgent handouts and protectionist policies from the PRC. However, if SOEs are to be a driving force of growth in the PRC, rather than the brakes, they need real reform. Although the PRC understands the need to reform its SOEs, their operation has largely remained unchanged for decades. Presently, the PRC is in the process of rooting out corruption and is actively considering consolidation and mixed-ownership as ways to fix its SOEs.

Rooting out Corruption. Since 2012, the PRC has been actively working to root out corruption in all aspects of itself – including its SOEs. While rooting out corruption is a major step in the right direction, the PRC must demand radical increases in transparency if it is to maximize the effect of its anti-corruption campaigns. In November 2017, Transparency International (TI) released its 10 Anti-Corruption Principles for State-Owned Enterprises. The PRC would do well to implement TI’s recommendations, including following best practices for governance, public reporting, and ensuring that third-parties interacting with SOEs adhere to anti-corruption policies.

Consolidation. In addition to the PRC’s efforts to root out corruption in its SOEs19, many party members are proposing consolidation as a way to improve firm competitiveness. Those who favor merging SOEs reason that combining companies will enhance existing economies of scale; however, many merging companies are unable to achieve the economies of scale that they desire. Typically, struggling businesses have real issues – making them bigger rarely yields remediation.

Mixed Ownership. Besides anti-corruption policies and mergers, the PRC is now attempting to transition from a state-ownership to a mixed-ownership model. The PRC is employing two methods to achieve mixed-ownership:

  1. Strategic Investment. The rationale underlying strategic investment is clear: a struggling, debt-ridden firm receives an infusion of capital, a strategic partner, and access to gifted management. For example, several of China’s largest tech giants invested $12 billion in state-owned China Unicom. The move was billed as a way for China Unicom to improve its 4G capabilities as well as make steps toward 5G implementation. In addition to profiting from Unicom’s future success, Unicom’s private investors are tech companies that are uniquely qualified to capitalize on Unicom’s improvement. In the future, PRC officials and businesses would do well to find potential win-win opportunities for strategic investment.
  2. SOE Listing on an Exchange. In addition to seeking investment and ownership from profitable, private entities, a number of SOEs are listing on PRC exchanges (i.e., Shanghai, Shenzhen, or Hong Kong). Currently, 66 of the 101 SOEs directly managed by the PRC are listed, albeit only a small percentage of ownership is available.20

While both forms of mixed-ownership inject desperately needed capital into SOEs, there is an ideological split surrounding the mixed-ownership movement among leading CPC21 officials. Those dissenting abhor mixed-ownership as a move towards privatization, which they decry as “wrong-headed thinking.”22  Still, other party members posit that mixed-ownership affords the SOEs the opportunity to improve productivity and innovation.23


Today, China stands strong as a global superpower; however, its long-term development remains hamstrung by its resistance to weaning its SOEs off of state support. Moving forward, SOEs need to eliminate corruption, deleverage, and improve operating efficiency. While these objectives are quite simple in theory, execution is elusive. Further, any real progress in reforming SOEs must include adapting expectations as a prerequisite. At the present, Chinese SOEs may be considered too big to fail; however, failing to enact real change just might make them too big not to.


Chinese Business Groups


Though many professionals and investors are familiar with the Japanese keiretsu or the South Korean chaebol, fewer are familiar with Chinese qiyejituan (business groups). While they have received less attention (to date) than their counterparts, the influence of Chinese business groups is considerably more profound.1 This is evidenced by the overall dominance of qiyejituan.2

Figure 1 – Qiyejituan Structure

Chinese business groups are characterized as “coalitions of firms, bound together by varying degrees of legal and social connection, that transact in several markets under control of a dominant, or core firm.”3 The Chinese State Administration for Industry and Commerce more quantitatively defines a qiyejituan as a group where the parent firm has a capitalization of more than 50 million yuan,4  five or more group members, and total group capitalization of at least 100 million yuan.5  The firms within qiyejituan are related by means ranging from direct equity ownership to connections that are vastly more informal (See Figure 1).

Business groups operate in the same way as members of a consolidated group in the USA, meaning that group members benefit from intragroup transactions and financing. In fact, interfirm financing among business groups is so important that business groups generally have a firm solely dedicated to facilitating intragroup lending.6  Essentially, qiyejituan resemble consolidated groups in the United States, merely lacking the requisite equity ownership.

Figure 2 – Qiyejituan hierarchy

Business groups operate at three distinct levels and maintain a form similar to   pyramids with the relative opacity of icebergs:

  1. At the top, there are a relatively small number of core firms (at the beginning of 2009, there were 2,971 recognized business groups operating in the PRC);
  2. First-tier subsidiaries comprise the second level (at the beginning of 2009, business groups directly owned over 30 thousand subsidiaries); and
  3. The tertiary level consists of other affiliated firms (these firms operate as part of the group but are not controlled through direct equity ownership).

Beyond explaining substance and form, contextualizing qiyejituan requires explaining why they exist and how they fit within the Chinese cultural context.

The Need for Groups

Business groups form for various reasons, one of which is compliance with regional laws. For example, if a firm wants to expand into a new province, the new province requires the firm to do one of two things: form a subsidiary in that region or amend its charter to include operations in that province.7  Chinese firms generally choose to incorporate a new subsidiary or find an affiliate in the province, a simpler solution than amending its corporate charter. Business groups forming in order to comply with regional laws tend more closely to resemble consolidated groups in the United States than those forming due to economic factors.

Beyond complying with China’s legal system, firms also group up for economic reasons, i.e. overcoming the difficulties associated with being a part of an emerging economy.8  Underdeveloped capital markets lack the requisite infrastructure and institutional professionals needed to ensure the efficient allocation of capital. The inefficient allocation of capital tends to make financing more expensive, if available at all. Thus, grouping up allows firms to achieve greater access to financing in two ways:

  1. Grouped firms have greater bargaining power than they would individually; and
  2. Business groups can engage in intergroup financing.

Accordingly, current research shows that members of the business groups tend to achieve better financial results and bear less risk of financial distress than their non-affiliated peers.9  This stems from greater realization of potential economies of scale and cost savings. Finally, grouping allows the members to compete more effectively with foreign and domestic competitors.10

Weaknesses of Qiyejituan. While there are many benefits associated with group membership, the fact that qiyejituan operate as a group leads to the propping up of underperforming firms.11  Subsidizing weaker firms is an example of inefficient capital allocation, which results in high-performing firms lacking resources to invest in profitable projects. Consequently, grouping up to save weaker firms can come at the expense of the collective well-being.

Cultural Context

The proliferation of business groups in fully developed economies (e.g., Japan and South Korea) demonstrates the need to consider additional explanations for the formation of business groups. Chaebols and keiretsu are remnants of a time without adequate infrastructure. Their continued existence demonstrates the need for additional explanations for business groups. One convincing explanation for their consistent use stems from the fit between qiyejituan and the cultural values of long-term orientation, collectivism, and relationship-based cultures.

Long-term Orientation. The Global Leadership and Organizational Behavior Effectiveness (GLOBE) study places China as part of a cultural group referred to as Confucian Asia.12  The countries included in the Confucian Asia cultural sub-group tend to display significantly greater levels of long-term orientation than those of other groups (e.g., the United States only scores a 26).13

Figure 3 – Confucian Asia’s Cultural Values, Source: Hofstede Insights

Hofstede Insights, a cross-cultural research group, defines long-term orientation as describing “how every society has to maintain some links with its own past while dealing with the challenges of the present and future.” Given China’s score of 87, we know that tradition represents a significant factor in the decision-making process. The long-term inclination leads to an abiding trust in tried-and-true methods. Keister posits this inclination led the Chinese government to encourage Chinese firms to form groups after seeing the success of keiretsu in Japan. Given that qiyejituan have continued to achieve great success, it is likely that we will see Chinese firms form business groups—even after the Chinese economy and markets have fully developed.

Relationship-based. Research performed by Erin Meyer indicates that China is one of the most relationship-based cultures in the world. Relationship-based cultures prioritize the building up and maintenance of business relationships as a prerequisite to doing business. The importance of relationships in the Chinese business world14  is demonstrated in the cultural imperative placed on guanxi (the practice of building relationships). Although guanxi translates to mean “relationships,” it is far more nuanced in practice. Guanxi is characterized as being long-term oriented, cultivated over “continuous, long-term association and interaction”15—representing “the totality of a relationship between two business partners and as being mainly utilitarian in nature.”16  Additionally, Luo (2014) describes guanxi as “the concept of drawing on connections in order to secure favors in personal relations” and that the end result of guanxi is the formation of “an intricate, pervasive relational network….” Thus, the development of qiyejituan follows the network of guanxi, representing a natural outcome of strong relationships between firms’ owners.

Collectivism. China scores 20 on Hofstede’s Individualism-collectivism index, indicating a predilection for communal well-being as opposed to individual gain seeking. Although collectivism tends to refer to one’s individual network rather than the corporate-level network, the importance of groups and community is a salient part of the Chinese psyche. The propensity to consider the collective group’s well-being makes Chinese firms more predisposed to forming and joining groups than their peers. The reliance that Chinese individuals place on “community” leads to an interdependence, which is reflected in qiyejituan.

While many could argue that business groups represent a network of relationships based on convenience, the fact that business groups “prop up” weak or struggling firms displays the imperative placed on the overall well-being of the group and its group members. In fact, research shows that members of qiyejituan have lower cash holdings than those not belonging to a group, indicating that they are lending to struggling members in the group.17 Group members have the philosophy that all members will succeed or fail together.


The communal nature of Chinese society combined with the legal and economic environments provides fertile ground for the growth and proliferation of qiyejituan. Americans conducting business with firms domiciled in the PRC need to understand the nuances of the Chinese business environment. Using this knowledge, foreigners will be able to evaluate properly their prospects of competing with qiyejituan—failure to do so will lead to being ganged up on.

Chinese Ownership: It can be a bit of a mixed bag…

From Marco Polo’s reports of Chinese grandeur to naval dominance under Zheng He, tales of the vaunted Middle Kingdom have fascinated and tantalized merchants from far-flung nations. While today’s China differs from its past iterations in many regards, its prowess in trade and commerce persists. What’s more, economists predict that China’s torrid growth should continue, with annual economic growth of 7 to 8 percent through 2030.1  China’s progress, both past and present, contributes to a tenor of prosperity. However, many speculate that outsiders’ rose-colored view of China is more attributable to carefully managed expectations than reality.


Amidst the deluge of information surrounding China, foreign businesspersons find their ability to evaluate conditions in the People’s Republic of China (PRC) becoming more and more inadequate. One particularly hazy concept is business ownership: i.e. who owns what? For countries like China, business ownership is difficult to determine for various reasons. First, few outsiders understand the current nature of state and private ownership in the PRC. Second, many Westerners question private firms’ ability to operate without hindrance from the Chinese government. While the PRC might not technically own a firm, the ability to exercise control over a firm is de facto ownership. Thus, any analysis of business ownership must consider whether the PRC controls business operations of privately owned firms or maintains a more laissez faire approach. Finally, few in the Western world have heard of (let alone understand) China’s complex form of indirect, group ownership, qiyejituan. Accurately determining the true nature of business ownership in the PRC requires understanding the difference between state and private ownership, the degree to which the state controls private enterprise, and the difference between direct and indirect ownership.

State-owned versus Privately-owned Companies

In the years after Mao Zedong and the Communist Party of China’s victory over the Nationalists, the government nationalized businesses. As China has become increasingly market-oriented, the PRC has relaxed its grip on private enterprises, and many privately owned firms have flourished. Evaluating state versus privately owned firms requires understanding the relative quantity of each firm type, as well as employment.

  1. Firm Type. Merely comparing the number of state-owned enterprises (SOEs)2 to private firms reveals that privately owned firms, numbered at over 77 million,3  dwarf the 150,000 SOEs. With 12,000 new businesses added daily, the expected the shift from state-owned behemoths to privately owned business will continue.
  2. Employment. Today, SOEs employ 1 in 5 Chinese workers.4As shown in Figure 1, the proportion of urban Chinese employed by SOEs has fallen from almost 58 percent in 2006 to just under 33 percent in 2016.5 While the proportion of urban Chinese employed by SOEs has decreased relative to the whole, the decrease is more indicative of the staggering increase in employment from private firms.

Figure 1 – Employing China’s Urban Population, Source National Bureau of Statistics China

In terms of overall quantity of businesses and employment, privately owned firms dominate China’s SOEs. While privately owned firms dominate the business landscape in China, state-owned firms formidably contribute 30 percent of China’s GDP6 and hold assets valued at $14.69 trillion.7 At this point, China is operating with an economy of state-owned behemoths and relatively smaller, privately owned businesses.

State Control of Privately-owned Firms

In spite of China’s many market-oriented reforms, foreigners associate China with communism – continuing to believe that the Chinese government controls all businesses. Given that perception, outsiders may incorrectly presume that private ownership does not exist in the PRC due to primary party organizations and the government’s ability exert influence.

Primary Party Organizations. Outsiders warily view primary party branches, or internal committee organizations, as tools for the PRC to monitor private firms and exert influence.8  Under Chapter V Article 29 in the Constitution of the Communist Party of China, any enterprise with three or more party members may establish a “Primary Party Organization.” The objective of primary party branches is to “ensure that the party’s theories and guidelines and policies are implemented.”9 While the purpose of the primary party branches is to reinforce party principles, the majority of private firms cite economic benefits10 as the chief motive for forming primary party branches.11 Thus, the nature of the relationship between private businesses and CPC party organizations appears to be based on convenience, as illustrated in this comment from Li Zhangzhu of Yuanfang Group:

What the boss of a private enterprise cares about most is business results. The boss will only pay attention to and support [Chinese Communist Party] building if it helps to promote the growth of the business and increases profits.12

Influence from the Government. In addition to the influence from internal party branches, many firms receive “recommendations” from the PRC. Thus, it is important to consider the degree to which private firms must comply. In one instance, Tencent received harsh criticism from the PRC and the military over its popular mobile game, Honour of Kings. In response to the backlash, Tencent imposed limits on adolescent game usage.13  In another instance of governmental influencing, Chinese tech giants invested $12 billion in state-owned China Unicom.14  The Chinese government solicited the investment in order to help bolster a struggling SOE. The negotiations lasted one year, and the investing companies touted the strategic investment as a ”win-win. “In spite of investor enthusiasm, one expert voiced everyone’s quandary: “You cannot say ‘no,’ but can you limit how many times you have to say ‘yes’?”15

While influence from internal party branches appears minimal, external influence is compelling. At the present, the relationship between the government and private enterprise consists of the PRC being able to exert high levels of influence on privately enterprises, albeit in limited situations. This begs the question, is influence tantamount to ownership, or is it merely on the spectrum?

Direct Versus Indirect Ownership

For Americans, the indirect form of ownership demonstrated in qiyejituan16  appears to be antithetical to the direct form of ownership embodied in Western ownership structures. In its most basic form, qiyejituan has three distinct levels: a core firm, directly owned subsidiaries, and lower-tier subsidiaries. The core firm will directly own several of the group members and rely on complex contracts and informal agreements17 to control the remainder.

The relative flexibility and alignment with Chinese cultural norms offered by qiyejituan makes it an ideal business structure for Chinese enterprises. Thus, both state (China Unicom, China Petrochemical) and privately owned (Legend Holdings, Haier Group) firms employ the structure in their operations. Today, there are nearly 3,000-registered qiyejituan, responsible for almost 60 percent18  of China’s industrial output.19


Overall Analysis

Figure 2 depicts, China’s positioning on a two-by-two matrix consisting of two spectrums: direct versus indirect, and private versus state ownership.20

Figure 2 – Chinese Business Ownership

Direct Versus Indirect Ownership. The overall size of and output from China’s qiyejituan is incredible. Considering output alone, registered qiyejituan dominate their non-affiliated counterparts, producing 60 percent of Chinese GDP.21  Given the past and continued success of qiyejituan, it is likely that more groups will form in the future. For now, China’s position on the scale in Figure 2 shows that ownership in Chinese businesses consists more of informal ownership than direct business ownership.

Private  Versus State Ownership. While private firms dominate China’s SOEs in terms of output and firm type in absolute numbers, the CPC’s ability to exercise control over private businesses skews the private-versus-state dimensional scale.

Figure 3 illustrates the positioning of China’s largest businesses on the same matrix. In Figure 3, there are three highlighted groupings: Private Qiyejituan, Chinese Conglomerates, and Listed SOEs. The non-highlighted firms include one private firm that operates with little indirect ownership, and state-owned firms at the bottom. The state-owned firms are the non-listed SOEs. Those in the direct, state owned quadrant are similar to Western SOEs, where those in the indirect quadrant are more representative of Chinese SOEs.

Figure 3 – Chinese Firms on the Business Ownership Matrix


From SOEs to VIEs22,  Chinese business ownership differs significantly from Western constructs. Nevertheless, American and Chinese business dealings are converging at an ever-increasing rate. Those who want to invest successfully in the world’s most dynamic economy must achieve cultural literacy in understanding the nuance of Chinese business. Understanding business ownership represents a viable start.