Trust, Transaction Cost And The Governance Mechanism Of China's Family Firms

At present, although most of China's family firms still commonly adopt the mode of relational governance, a few of them have boldly attempted to take professional management. Some of them succeed, some may lose. Undoubtedly however, the actual situation which these two governance modes coexist symbolizes a significant first step in the evolution of Chinese family firms' governance, although compared with many western developed countries (such as USA), the development of Chinese family firms has lagged behind largely.Aiming at the current development phase of China's family firms, this thesis studies the problems with concentration in the choice and evolution of family firms' governance mechanism. Firstly, under the study of China's institutional environment, this paper below indicates that two kinds of trust concept exist in China's family firms: one is 'family trust', and the other is 'temporary trust'. The former exists between owners and their inside members (including their own children and relatives) in the family firms which adopt the mode of relational governance, more representing some cultural, ethical and moral factors in traditional Chinese society. Correspondingly, the latter exists between owners and outside professional managers in those which take the professional management mode. Being lack of perfect institutional environment as a calculative basis for both sides, the 'temporary trust' is destined to be a kind of human trust that can only be maintained temporarily. Secondly, using the theory of Internal and External Transaction Cost, this thesis also analyses the internal mechanism concerning a conflict which the owners of China's family firms have to face when they decide between hiring a professional manager or leaving management to their heirs and also establishes a decision model to strengthen this point. In the end, this paper, from an angle of institutional transition, studies the transitional route of China's family firms' governance and argues that, with the perfection of Chinese institutional environment, the governance mechanism of China's family firms will be sure to step into the phase of professional administration along with the path of 'relational governance - mix governance - professional management'.