Regime Change and Family Firm Responses in Indonesia

Economics and Finance in Indonesia Vol. 57 (1), Page 25 - 46

Punctuations in Emerging Markets: Regime Change and Family Firm Responses in Indonesia

Marleen Dieleman Peter Post

Abstract

We investigate organizational change in family firms under conditions away from equilibrium, and look at family firm strategy in the face of external shocks. To better understand how organizations behave under such conditions, we carried out two longitudinal studies of family firms in Indonesia, in which we investigate the effects of violent regime change on family business strategy. Interpreting our results within the framework of punctuated equilibrium, we explicate I) the positive effect of social capital on family firm governance during periods of equilibrium and its negative effects during periods of regime change; and 2) internal factors facilitating or impeding survival in the face of regime change such as generational change in leadership and alignment with new regime ideology. Our residts show that internal factors are interdependent with external conditions, but both matter for survival or demise.

Keywords: Change, Punctuated Equilibrium, Family firms. Emerging Markets.

JEL classification: L20, C62, Dl

1. INTRODUCTION Most research on organizational change in emerging markets assumes that firms will adapt to modernizing institutions, thereby incrementally moving from typical emerging market designs, such as widely diversified family business groups, towards tjrpical Western organizational designs, such as large, focused firms with dispersed ownership structures as the institutions supporting economic activity become stronger (e.g. Peng, 2003). We argue that this approach is valid only for short periods of stable growth in emerging markets. Most coimtries, if investigated over a longer period, are not continually "emerging", instead they witness periods of relative stability punctuated by crisis and profound changes, after which a new equilibrium is reached. Our aim is to better understand how companies respond to situations that move away from equilibrium, and instead can be characterized as punctuations.

The institutional perspective on strategy in emerging markets is a recent theory of change covering only a few decades, which happened to be a period of considerable economic growth worldwide. However, many "emerging" markets have also witnessed periods of strong institutions, decline, and instability. Rather than linear and progressive change, most nations face long periods of relative stability, punctuated by pervasive changes. Accordingly, a punctuated equilibrium paradigm (Gersick, 1991), which assumes periods of stability punctuated by radical change, is more applicable. We focus on one type of punctuation: political regime change, and we study two firms with an ubiquitous governance form in non-Western economies: the large diversified family business group (La Porta, Lopez-de-Silanes & Shleifer, 1999). Periods of intense environmental change are problematic for family firms. Conditions of chaos and hostility may endanger property and people, putting the continuity of the firm at stake. It may not be clear what type of new regime will emerge next, and different scenarios may co-exist with the company left with a choice of how to adapt to an uncertain future. While we have insights on how family businesses behave under stable conditions, we have only scant evidence on family firm responses to disruptive conditions such as political regime changes.

While there is anecdotal evidence of family firms facing external shocks (e.g. German family firms during Word War II), there has not yet been an attempt in the management literature to systematically advance our understanding of the effect of punctuations on family firms, especially when family firms from emerging markets are concerned. Yet, emerging markets often witness punctuations, and firms operating in these contexts are thus more likely to face such external shocks.

26 Punctuations in Emerging Markets: Regime Change and Family Firm Responses in Indonesia Accordingly, our research question is how do family firms from emerging markets cope with violent regime change? What is the role of capabilities previously developed in stable settings? What is the role of leaders during tmstable periods? These questions would increase OUT imderstanding of organizational change in family businesses. To answer them, we conducted two case studies of two large and prominent family firms in Indonesia in different eras. Both witnessed disruptive regime changes in the course of their development. Our study contributes to the literature in two ways. Firstly, we explore an important topic - disruptive environmental change - and apply it to family firms operating in emerging markets, where such external shocks are more frequent, and where research on organizational change is still scarce. We present novel insights on family firm adaptation to external shocks, complementing existing literature on incremental institutional change in emerging markets. Our results point at the changing role of social capital, which may be conducive in conditions of equilibrium, but may turn against the firm in periods of regime change, and the role of generational leadership change in family firms, which we contend frequently coincides with radical external changes. The extent to which the new leaders can align the family firm with the upcoming ideology is an important factor in firm survival. As such, we provide a better imderstanding of strategy patterns triggered by external shocks. In choosing both a current and a past setting, we address calls by scholars to learn more from historical research (Jones & Khanna, 2006; James, 2008). Accordingly, our results show that scholars need to redirect their attention beyond contemporary theories of institutional change, which have limited applicability. We proceed as follows. We first discuss the extant literature on family business groups in emerging markets, and the literature on discontinuous change. We then discuss our methodology, and subsequently present our two cases: the Salim Group and the Oei Tiong Ham concern. In the next section, we compare the cases and discuss the results. The last section outlines our contributions to the family business literature, and it discusses limitations and suggestions for future research.

2. THEORETICAL BACKGROUND

Scholars of business in emerging markets often take an institutional perspective. Institutional theory (North, 1990; Scott, 1995) assumes that companies adapt to the "rules of the game", or formal and informal norms and regulations. As institutions in non-Western settings are thought to be weak, scholars argue that companies adapt to situations

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such as lack of law enforcement, poor infrastructure, and so forth. In this view, institutions are taken to be relatively stable entities. Literature on institutional change in emerging markets gravitates towards incremental change, focusing on convergence from weak to strong institutions (Peng, 2003; Hoskisson et al., 2005). The application of institutional theory to "emerging markets" is of a recent time, in which countries like those in Asia were thought to soon become "like contemporary Western economies". While we use the term emerging markets, we also acknowledge that several of those economies have had stronger institutions than many Western economies in a more distant past. In order to understand disruptive institutional change and corporate responses, we propose that the concept "punctuated equilibrium" is more adequate. Viewing change as a punctuated equilibrium has gained ground in different scientific fields (Gersick, I99I). The concept also entered organization science, for instance to explore the dynamics of project groups (Gersick, 1988; Chang, Bordia & Duck, 2003); or organizations (Haveman, Russo & Meyer, 2001; Romanelli & Tushman, 1994). The basic notion is that systems develop stable routines, until a shock destabilizes the status quo and presents new realities, until a new equilibrium is reached. We now review the literature on family firms in emerging markets during equilibrium, on which there is a large body of literature, and during punctuations, on which there is less literature.

Equilibrium: Tushman and Romanelli (1986) argue that in a stable environment, organizations become increasingly adapted to the prevalent rules of the game, making only small adjustments. In this article, we focus on family firms as a governance type in emerging markets, and a rich body of research documents how family firms adapt to conditions that are prevalent in emerging markets. Family firms are argued to be a competitive design in an environment with low security (Carney, 2007), and large non-Western family firms tend to be widely diversified (Kock & Cuillen, 2001, Hoskisson, Eden, Lau & Wright, 2000), both in terms of geographical diversification and in terms of industry diversification. Covemance of family firms tends to be tightly controlled by a family patriarch, and group boundaries may be somewhat hard to define given the complexity of large numbers of companies controlled directly or indirectly by the family.

Frequently, family firms in emerging markets are observed to posses tight social networks (Cranovetter, 1995). Social networks of family business owners, especially large and established ones like the ones we analyze, tend to have ties within the social group, in our case with other Chinese migrants (bonding capital, e.g. Fortes & Sensenbrenner, 1993)

28 Punctuations in Emerging Markets: Regime Change and Family Firm Responses in Indonesia and ties across different social and ethnic strata, for example with the government (bridging capital). Networks reduce transaction costs if they increase trust among members, for example in ethnic networks (Bonachich, 1973) and the advantages of political ties for family firms are well-documented (e.g. Frynas, Mellahi & Figman, 2006). Competitive advantage resulting from networks is termed social capital (Adler & Kwon, 2002; Nahapiet & Choshal, 1998; Xin & Fearce, 1996). In general, social capital is considered "a good thing" for owners, although researchers also point at the risk over over-embeddedness (e.g. Uzzi, 1997).

Punctuation: Less is known about family firms in periods of turmoil. We lack theories on how family firms reconfigure their resources to ensure survival in crisis periods. It is clear that disruptive situations, like wars or regime changes, pose considerable threats for firms operating in areas affected by such external shocks. Some scholars argue that, since family firms are well adapted to an uncertain setting under stable conditions, as described above, one may expect that they would be better able to withstand shocks of a more profound nature. James, for example, concludes that: "family capitalism has been particularly important in countries and societies with profound shocks and discontinuities. It is a way of managing risk in a high risk environment" Qames, 2008: 21). j How family firms adapt to external shocks is not yet well documented. We therefore reviewed the literature on change management and external shocks more generally, to derive from it insights that we combine with the general literature on family firms to derive insights on family adaptation to radical change. Based on our literature review, we suggest three likely responses to discontinuous regime change: leadership change; changing the scope of the organization; business re-alignment to a new environment. The organizational change literature suggests that, when faced with an acute transition period, a company needs to move away from deeply embedded routines. If organizations do not adapt to radically new circumstances due to inertia and rigidity, they often decline (Staw, Sandelands & Dutton, I98I). A break-away from the status quo is difficult, and therefore more likely to come from external leaders, rather than from those embedded in the old equilibrium (Tushman & Romanelli, 1986). In family firms, this is likely to be a leader from the next generation. Succession is an important topic in family business research (Le Breton-Miller, Miller & Steier, 2004; Sharma, Chrisman, Fablo & Chua, 2001), and is argued to be a trigger of organizational transformation. Most family leaders, especially in Asia, maintain a strong grip on the firm until age impedes it. This implies a long gestation period for a new generation. Therefore, at any given moment, a new generation

29 Marleen Dieleman ; Peter Post of trained leaders is usually available. We expect firms facing external shocks to transfer leadership to a new generation. Another aspect of revolutionary change is that the newly emerging rules of the game open up possibilities for new organizational forms or new strategies, while it renders some old strategies ineffective (Haveman et al., 2001). As such, crises also contain opportunities. Given that most large family firms in emerging markets generally operate in a range of related and unrelated industries, both at home and abroad, we suggest that shifting activities abroad or entering new industries with emerging opportunities is the most likely response for family groups under threat. Prior firm capabilities may become obsolete and new strategies that match the new environment must be built (Haveman, 1992). The existence of an external threat can reduce the sources of inertia in an organization and stimulate managers to initiate changes in the organization (Gilbert, 2006) and be flexible (Hatum & Pettigrew, 2004). The strategy literature suggests that successful organizations align themselves with the environment (Venkatraman & Camillus, 1984; Zajac, Kraatz & Bresser, 2000). Given that our particular focus is on family firms facing regime change, it is reasonable to assume that the firm's success depends on aligning the strategy with new political ideologies of the upcoming regime. In summary, we reviewed the literature on the role of institutions for companies in order to understand family firms in stable periods. We found that diversification and nurturing social networks are among the strategies that make family firms successful in "normal" hostile settings. Subsequently, we examined organizational change and punctuated equilibrium approaches to understand how family firms might cope with periods of profound change, deriving from the literature possible adaptation strategies. We now present our comparative study.

3. METHODS We treat punctuations as complex processes occurring at different levels of society, and understanding their impact requires research covering both organizational and institutional levels. In such situations, exploratory case studies can advance theory (Yin, 2003) as they can look at organizations and their context in a holistic manner, covering different levels of analysis from macro to micro, and in addition investigate the interdependence of processes occurring on each of those levels. Each crisis is idiosyncratic, but some underlying patterns may lead to new theoretical development. In studies where this is the goal, the use of "extreme" rather than representative cases is a good strategy to come to new insights on imderstudied topics (Eisenhardt, 1989, Pettigrew,

30 Punctuations in Emerging Markets: Regime Change and Family Firm Responses in Indonesia 1990), and our cases showed periods of equilibrium and radical change (wars, violent regime changes) very clearly. We conducted a comparative case study of two firms. The study did not initially focus in particular on regime change, but more in general on understanding the development of family firms. As will be addressed later in this section, we slowly came to imderstand how our data served the purpose of extending theories on radical external shocks. Research Setting. We focused on Indonesia, which witnessed long and relatively stable periods punctuated by violent regime changes. One such punctuation was the transition from colonial Dutch rule to independence. The period started with the Japanese occupation of Indonesia in 1942, which incited hopes among indigenous leaders for an independent country. But it also led to the internment of the previous colonizers and many of the Chinese minority, whose loyalties to the Japanese were doubted. Upon the Japanese surrender, a new independent nation materialized only after a civil war against the Dutch, who intended to return to power after the war. The post-war independence period, in which Sukarno was the leader, was characterized by socialism and extensive state intervention in the private sector. This period ended in 1965 with a bloody coup that came with widespread killings of real or imagined communists including members of the Chinese minority. Both our cases are business families that belonged to the Chinese minority. After this coup, Suharto prevailed and ruled the country for 32 relatively stable years. In 1998, the Asian crisis brought down the dictator, and the country again witnessed violence against the ethnic Chinese minority. Suharto was replaced by a several democratically chosen presidents. As such, Indonesia clearly shows a sequence of periods of regime change and stable periods that could be characterized as equilibriums.

Case Selection. The studies initially were not part of a single research program, but were carried out separately. Both were very extensive, with in-depth research carried out over several years. Both studies were initially single case studies that aimed at observing in detail how family firms develop over time within a changing institutional context. In both cases, firms were selected that were not representative for a larger population. Instead, the cases were chosen because of their prominence, size and visibility. As such, the phenomenon of adaptation to external shocks was 'transparently observable' (Eisenhardt, 1989). Both firms became obvious success stories as they developed into the largest firms in the region. Our cases, the Oei Tiong Ham Concern (OTHC) and the Salim Group, were the largest Southeast Asian family firms of their time, but operated in different times in history. Both studies used theoretical sampling principles, which imply that we do not aim at generalizing our results towards a population of family business. Instead, we both aimed

31 Marleen Dieleman ; Peter Post at unraveling patterns that we generalize into theoretical insights. As such, both studies were designed to be of an inductive nature. After we (the authors) met and both presented papers at a seminar, we were struck by the fact that the cases seemed to have so many similarities. Both companies evolved into diversified conglomerates and belonged to Sino-Indonesian families, an economically powerful minority group in Southeast Asia and more so in Indonesia. In view of their prominence, both families became part of the ruling elite and enjoyed close relations with political players. Due to their size, the family firms became both symbolic of capitalism in Indonesia in their respective era's. However, we had studied polar cases when it comes to the survival of critical changes: the OTHC was able to survive the Japanese occupation and the Indonesian Revolution, but unable to regain its glory after being nationalized by the Sukarno regime, while the Salim Group staged a comeback after being nearly nationalized during the Asian Crisis. Of course, the concept of failure is a relative term, considering that the OTHC witnessed a century of successful operations, which is indeed a very respectable achievement for any family firm.

Data Collection. Both case studies took a historical approach. The OTHC case covered a century while the Salim Group evolved over the last 70 years. Using a classical case approach, the studies emphasized triangulation of information from different sources (Yin, 2003). The research for both cases was carried out from 2003 to 2007, using a variety of sources including personal interviews, annual reports, news, secondary literature and corporate documents. Both studies used the same data collection method and sources. Of course, the particular historical setting and the availability of data meant that the relative importance of certain sources differed.

The OTHC research, which had its glory days in the colonial period, naturally relied more on archival research, in particular the archives of the Netherlands Ministry of Colonies; the archives of the Netherlands Trading Society {Nederlandsclie Handelmaatsdiappij); the archives of the Netherlands Indies Commercial Bank {Nederlandscli Indische Handelsbank); and the archives of the Association of Java Sugar Producers {Vereeniging Javaasclie Suikerproducenten), all in The Netherlands. We also collected data from the archives of the Java Bank (the central bank) in Jakarta. Furthermore, we conducted extensive interviews with two former director-shareholders of the Oei family (3 each), the former bookkeeper (5 interviews), two former branch managers (2 each), and various shorter interviews with members of the Oei family and former employees. We used an unpublished manuscript by one of the former top-managers, which gave an inside story on the company. We also studied annual reports of the Chambers of Commerce (Semarang, Surabaya and Batavia),

32 Punctuations in Emerging Markets: Regime Change and Family Firm Responses in Indonesia in addition to reviewing newspapers and economic/business magazines from the period. Research on the Salim Group, many of whose leaders were still alive, relied more on interviews. We searched the archives of the State Printer in Jakarta, which contains articles of association of Indonesian companies as they developed over time. We also used 69 annual reports of Salim Group companies and a 1996 corporate brochure. Furthermore, we retrieved news articles from the Lexis Nexis database with keywords Salim and Liem Sioe Liong, as well as names of Salim-companies, resulting in over 6,000 articles. We conducted 58 interviews, of which 2 with the CEO; 14 with 7 other top-managers of the Salim Group; and 42 interviews with other stakeholders such as business partners, competitors, bankers and other experts, 3 of which with former Indonesian cabinet members. Several people were interviewed more than once to obtain a more trusting relationship. Table 1 gives an overview of sources for the two studies.

Table 1: Sources

Oei Tiong Ham Concern Salim Croup

Archival Research • National Archives (The • Archive of Articles of Hague); Association at the

• Archive of the Java Bank Indonesian State Printer (Bank Indonesia, Jakarta). (Jakarta).

Corporate Information • Annual reports of the • 69 Annual reports of Salim Chambers of Commerce; companies;

• Manuscript of former Oei • Salim Group brochure. Tiong Ham Concern top manager.

Interviews • 6 Interviews with family • Interviews with 8 top heirs; 9 with top-managers; managers, including 2 with the family heir; • Background interviews with other family members and • Interviews with other stakeholders. stakeholders such as partners, bankers and politicians.

News analysis • Various newspapers and • News analysis based or magazines at the time were searches the lexis nexis reviewed. database and local newspaper clippings from the CSIS library (Jakarta).

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Analysis. Both authors relied on interpretative techniques. We triangulated our materials (Yin, 2003) and transformed them into a time series analysis. A rich chronological narrative of the corporate history of both firms was then compiled, one in the form of a book (withheld, 2007) and the other in the form of a long paper (withheld, 2007). Both studies, independent of each other, identified periods of start-up, of consolidation, of crisis, and of decline. Factors influencing the transition to a new phase, both internal and external, were analyzed. It was at this stage that the authors met and started to engage in a discussion that evolved into a more systematic comparative analysis where the factors we identified were compared and similarities and differences between the cases discussed. It was only in this comparative stage that the focus on responses to regime changes evolved, and we felt that the two cases together could illustrate issues that both cases, each alone, would not be able to. The comparative dimension, in particular the different historical contexts, offered us richer ways to contextualize the factors we thought influenced adaptation to regime change. After deciding that the two studies together had the potential to advance our understanding of family firms during regime changes, we condensed the stories and positioned them within extant theory.

Communicating Results. The flow of this article is "traditional" (outlining the key research question, discussing literature, then presenting data and conclusion), but, in fact, this contrasts with the flow of our studies - which we only positioned within the literature at a later stage (moving from data, comparison, theme development, and finally we moved towards theory building). In addition, we chose to communicate our data in a thematic rather than chronological manner, which is known as "telling" rather than "showing" (Golden-Biddle & Locke, 2000; Pratt, 2008). We refer to our publications in which a detailed narrative is available, with the use of thick description and elaborate quotes from original sources (withheld, 2007; withheld, 2007). To avoid overlap, we focus in this paper on the comparative analysis of the two companies.

4. DATA For the purposes of our comparative analysis we have divided this section into seven separate sub-sections. The first looks at how the two companies were based on a stable business model that was developed during a period of equilibrium. The second section expands on this and explains how the two firms were able to achieve great successes during the equilibrium period, overcoming various constraints to growth. The third section looks at internal change factors, namely generational changes for both firms, contextualizing the families that were in charge of

34 Punctuations in Emerging Markets: Regime Change and Family Firm Responses in Indonesia our two cases. This section is important, because we find that generational changes are intertwined with external changes for both firms, and imderstanding them also increases our insight in the subsequent adaptation to regime change. The fourth section, then, describes the punctuations that affected the OTHC, and in the fifth section we describe the firms' responses. The sixth section describes the punctuations faced by the Salim Group, our second case, and the last section describes responses. We thus present our data in a flow from equilibrium to punctuation, ending with family firm responses. Business model rooted in history. Both companies developed during an authoritarian regime that lasted for decades. This allowed the companies to build up a business model that was a product of their time. The OTHC was established in 1863 by Oei Tjie Sien, a Chinese migrant, and he subsequently passed the firm to his son Oei Tiong Ham in 1890. The basic business model of the OTHC was exporting commodities from Indonesia, which was common given the colonial time in which Indonesia was seen by its colonizers mainly as a source of commodities. The OTHC also diversified into pawnshops, postal services, transport, wholesale, and plantations. Over time the main product moved from opium to sugar. Several sugar factories came in the OTHC's possessions after its owners were unable to pay their debts to Oei Tiong Ham during the sugar crisis of the 1880s. When sugar prices kept on falling in the late 1920s, and more in particular after trade was severally depressed during the Great Depression, the conglomerate in 1933 started to switch to rubber, which was in demand at the time, and to tapioca. As the conglomerate flourished, it also intemationalized, building branches in cities like London and Shanghai, as part of its attempts to open up overseas markets for its products, both in the East and in the West.

The Salim Group business model was rooted in the Suharto era. The company was established by Chinese migrant Liem Sioe Liong (alias Sudono Salim) and started operations in the late 1930s. It achieved some stability through the 1950s by linking up with the army as a supplier, but remained fairly small. Starting from the mid 1960s, Suharto opened up the economy and provided incentives to develop and industrialize the country. The Salim Group founder, Liem Sioe Liong, had already established himself as a supplier of the Diponegoro division of the army, where he also came in contact with Suharto (Elson, 2001). After Suharto rose to power, he went on to produce goods and services for Indonesian consumers, whose spending power increased rapidly under Suharto's rule. Suharto chose Liem, with whom he kept close relations, as a "crony of choice", and an instrument to build up Indonesia's economy and industries. Suharto showered Liem with stimuli, including (semi) monopolies in certain markets and access to credit, which facilitated th^ diversification of the Salim Group into a range of industries, in line with

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Suharto's goal to industrialize to substitute imports. In industries such as wheat milling and noodles, automotive, cement, steel, and chemicals the Salim Group played an important if not monopolistic role. All these companies catered to local demand. The Salim Group also invested abroad. Both companies were diversified, but with a different orientation. Overcoming constraints to groivth. Many family businesses are small organizations, and families have to overcome constraints to growth. This goes also for family businesses nm by families of Chinese descent, as literature on these types of family firms states that limitations of Confucian values prevent family firms from growing further, because of a lack of trust in strangers (Fukuyama, 1995), or cultural and structural constraints (Redding, 1990). Both companies studied here overcame these limitations, and became major capitalists by adopting management practices such as including professional managers in the firm, and by extending social networks beyond ethnic circles.

Both firms blended family and professional management to oversee the rapidly expanding corporate empires (e.g. Yoshihara, 1989). Oei Tiong Ham was ahead of his time by hiring Dutch engineers for his sugar mills, and ethnic Chinese accountants. Contrary to custom among Chinese businesses in colonial Indonesia, he relied on written agreements and had a sophisticated accounting system, which, amongst others, allowed him to take collateral if loans were not re-paid, something that led to his control of several sugar factories. The Salim Group also structured its empire into various separate legal entities and hired various professional CEOs, with some of its companies listed on regional stock exchanges. Given that in family groups, with large numbers of different firms, in the case of the Salim Group estimated at around 300, administration and consolidation of figures is complex. The Salim Group hired a large group of internal controllers and auditors and maintained what even critics concede is one of the most professional administration and management of all Indonesian groups. As a result of this well-run financial administration, the group was able to easily negotiate with the government when it was under pressure from debts in the Asian Crisis, and it settled its debts much faster than its peers.

The two companies also overcame limits to growth by spreading their networks beyond narrow ethnic or domestic circles. Oei Hong Ham established networks with the Dutch colonial elite, the Chinese elite, Japanese business, and with China. Members of the Oei family traveled extensively and maintained contacts in many of the world's most vibrant business cities, including Shanghai, Tokyo, Singapore, London, and New York. Through its trading role, the family dealt with a variety of companies ranging from Dutch colonial, Chinese and Japanese. Next to its professional management, the ability to extend business networks also

36 Punctuations in Emerging Markets: Regime Change and Family Firm Responses in indonesia allowed the OTHC to overcome limits to growth. Similarly, Liem Sioe Liong linked up with the army and the political elite, from whom he obtained extraordinary advantages in local business. He also was active in ethnic circles regionally, for example linking up with other tycoons such as Robert Kuok. Hrough his business interests in developing industries producing for local markets, he - and increasingly also his son - came to set up joint ventures with Western and Japanese large multinationals, such as Dow Chemical and Sumitomo. The incorporation of professionals and the advanced accoimting systems made it possible to rationalize and run the expanding empires using economies of scale, and networking facilitated transcending industry and national boundaries. Family business life cycle. The families Oei and Liem differed in size and in the stage of the family business life cycle. While the OTHC leadership was passed on several times to new family members of different generations, the Salim Croup leadership has only been transferred once. Family leaders not only require managerial capabilities to run diversified portfolios, but also social skills, as business in Asia is largely based on personal relationships. Cenerational change, therefore, involves transferring responsibilities and social capital (Steier, 2001). With regard to succession, the two firms had different strategies, rooted again in different eras. Liem Sioe Liong had a small family and ignored the Chinese tradition of passing the eldest son as the heir (Yan & Sorenson, 2006), choosing his third son instead. Oei Tiong Ham had eight wives and twenty-six official children. He gave his daughters and some sons cash, making eight sons heirs to the business. After Oei Tiong Ham's death in 1924, Oei Tjong Swan (1899-1944) headed the Concern. In 1930, Tjong Swan sold his shares, making his brother Oei Tjong Hauw (1904- 1950) - twenty-six years old - the leader of some twenty five thousand employees until his death in 1950 - when Indonesia had just gained independence from the Dutch and a new government with socialist tendencies was forming. When he died unexpectedly, tension erupted and the leadership was split along geographic lines.

The number of heirs, the transitions, and the stage the family business was in thus differed, and this fact has obvious implications for how the two companies handled crisis. How exactly this mattered is described below when we subsequently describe how the OTHC and the Salim Croup dealt with punctuations. Punctuations: The End of Colonialism. The Japanese occupation of the Netherlands East-Indies was the beginning of the end of the colonial era. Despite hostilities and considerable destruction of property and jailing of personnel, the OTHC fared relatively well imder Japanese occupation. The move from a semi-open colonial system to a closed Japanese system of trade opened up opportunities for black market trade, and the OTHC

37 Marleen Dieleman ; Peter Post tried to do business as well as it could. The OHTC leaders opted for a strategy of cooperative negotiation with the Japanese and were allowed to continue their business, albeit under Japanese trusteeship. International trade was limited to the Japanese zaibatsu, so they focused on retail trade, which marked a shift away from the commodity-export model. On a social and political level, the Oei family played an important role under Japanese military occupation as leaders in various committees and the Chinese association. The family also maintained contacts with Indonesia's future leaders Sukarno and Hatta with whom Oei Tjong Hauw discussed the economic structure of an independent Indonesia. After 1959, the period after Sukarno's 'Cuided Democracy', two groups had important roles in Indonesia, which Sukarno tried to balance. One was the army and the other was the communist party. It became clear that the new left-leaning leaders had a different institutional setting in mind. OTHC was subjected to government influence more than ever. In 1957, following a sharp deterioration of Indonesia's relations with the Netherlands, Dutch enterprises were targeted by trade unions and subsequently nationalized in 1959. After 1963, US and UK firms were taken over following a worsening of relations between Indonesia and the US and UK due to the 'Crush Malaysia' campaign of the Sukarno regime, in this atmosphere OTHC was also targeted.

OTHC's Responses. Anticipating the Pacific War, the OTHC already started to internationalize, and stepped this up after Japanese surrender. The OTHC was able to reorganize itself after the Japanese occupation had ended in 1945 and started to expand again in 1947/1948 with increased import and local distribution business in Indonesia. By diversifying its activities and spreading its assets outside Indonesia the OTHC management hoped to spread risks in case business in Indonesia would go wrong.

The mental change necessary to cope with the different business environment forced Tjong Hauw to reorganize the company structure and personnel based on existing contacts and loyalties. Senior personnel often were unwilling or incapable to deal with the new nationalist ideology and young staff sometimes had better connections with the new regime. Meanwhile, some of the other sons of Oei Tiong Ham's seven* wife (the Ho-side) had reached majority and entered the business. While in the middle of this reorganization Oei Tjong Hauw died of a heart attack in Jakarta in 1950. With his death OTHC suddenly lost its one-man leadership and a capable and knowledgeable president-director well- connected in fast changing Indonesia. A division soon emerged between the "Hauxv" and tlie "Ho" groups (sons of different mothers) in the family. After Tjong Hauw's death it was decided to split the conglomerate along geographical dimensions.

38 Punctuations in Emerging Markets: Regime Change and Family Firm Responses in Indonesia The leadership of the Indonesian office fell to Oei Tjong Tjay, who had spent most of his life in Europe and had no Indonesian experience or network. Several family members, especially those educated in the West, refused to go back to Indonesia, where anti-Chinese and anti-business sentiments thrived. Mistrust in the family came to the forefront, resulting even in a court case in Switzerland. The frictions hampered adequate adaptation to a new environment in Indonesia, where most of the business was still located. | Some leaders envisioned linking up with the military, since by the late 1940s it was clear that the military would be an important political force in the country. Others, especially the Dutch-oriented, favored collaboration with politicians. This became a hot-debated but unresolved issue. Worse, while one family member cultivated ties with politicians, others would engage in "illegal" trading, undermining the trust of the new Indonesian leadership in the firm. Meanwhile, pressure on the Oei heirs, who lived luxurious lifestyles, to demonstrate loyalty to Indonesia mounted. Some left Indonesia for this reason. Wherever they went, they encountered a strong anti-Chinese popular sentiment, and they were under pressure to show their true nationalism. In Indonesia, business became more difficult, and Sukarno nationalized Dutch businesses in 1957/1958. In this climate, hostile to both business in general, and ethnic Chinese business in particular, the OHTC was found guilty of violating foreign currency rules, and in 1961 its Indonesian assets were confiscated. Although the concern continued to do business outside Indonesia, it was never as successful. Most trade previously went past the Jakarta office, and without the Indonesian business, it was unable to survive.

Punctuations: The Asian Crisis. The Salim Group witnessed its most severe shock during the Asian Crisis. Liem Sioe Liong was very close to Suharto, and had received numerous favors from the regime, resulting in protected and profitable businesses in a range of industries. Because of this, the company was the most prominent business player in Suharto's crony regime. As the currency slid from 1997 onward, IMF, under its structural reforms programme, put pressure on Suharto to stop his crony practices, which he did partly and reluctantly. By the time the crisis reached its peak, the financial sector was in ruins, many companies bankrupt, and Suharto was forced to resign. The demise of Suharto's New Order had severe consequences for the Salim Group. Having been so closely associated with the Suharto regime, the Salims were seen as a symbol of it. The group became a target for public anger, with mobs destroying their property and attacking their bank. Bank Central Asia, which they eventually handed over. Observers thought this marked the end of the mighty Salim Group.

39 Marleen Dieleman ; Peter Post

Most Indonesian businesses became insolvent, and the new government had to consider ways to restore the economy. Ethnic Chinese were seen as the culprits for the crisis, and the Salim Croup was clearly a symbol of "dirty crony capitalism", making it a candidate for public castigation. The new government eventually recapitalized the Salim- owned bank, demanding from the Salim family repayment amounting to USD 5 billion. Salim's Responses. Liem, said to be disappointed by the anti-Chinese riots in which his portrait appeared as a symbol of crony capitalism, never returned from exile in Singapore and let his son Anthony Salim deal with the crisis in Indonesia. The leadership of the Croup was thus, as a side-effect of the regime change and economic crisis, suddenly centralized in the person of Anthony Salim, who had to save it from complete collapse and remove the blemish of cronyism. Some other businessmen were arrested, but not Anthony Salim, who opted for cooperative negotiation with the government, similar to the OTHC under Japanese occupation. He handed the government (shares in) hundred seven companies by way of payment, which implied the nationalization of large parts of the Salim Croup. The Salims tried hard to keep the most profitable companies away from the government, or to buy them back later, even if it meant selling off their foreign assets. After the crisis, the Salim Croup reshuffled assets in order to re-arrange their portfolio, shifting ownership of some companies abroad. Even after the debt settlement, the group was a large player. Because the Croup was seen as the most cooperative during the crisis, it could become a new symbol, this time of a professional firm: one that could survive without political support.

After the Asian crisis, the company also started to focus on opportunities outside Indonesia, and Anthony Salim told the authors he wanted 50% of the business outside Indonesia. Although politicians still saw the group as a corrupt crony, people closer to Anthony Salim, such as bankers and competitors, admired him for his professional attitude.

5. DISCUSSION Both the OTHC and Salim built up diversified portfolios under authoritarian regimes, and were strongly embedded in the old regime by the time it was overthrown. When the OTHC and the Salim Croup were confronted with regime change, their size and social capital made them a symbol of the old regime, thus making subsequent adaptation to a new ideology more difficult. In both cases, social capital turned against them. Oei Tiong Ham's heirs were cosmopolitan and displayed their riches, which was despised by large segments of society under the Sukarno

40 Punctuations in Emerging Markets: Regime Change and Family Firm Responses in Indonesia regime. The Salim Group emerged out of Suharto's crony model, which was despised by post-Suharto governments. | The OTHC survived the turbulent Pacific War and transition into independence. But the entrance of more of Tiong Ham's sons into the business and the death of Tjong Hauw in 1950, increased internal family problems over the company direction. Soon after, the Sukarno government forced the business to adapt to a socialist ideology. Internal conflict however, impeded this change. The leaders, who were educated and oriented towards the West, were unable to adapt in the face of a business-unfriendly environment during 1950-1960. The lack of fit between the corporate strategy and the economic nationalism that prevailed led to the demise of the family business as it was finally nationalized after being accused of violating foreign currency regulations. The Salim heir, however, also educated in the West, saw his ideas of a modem capitalist environment increasingly coincide with the upcoming ideology. When Suharto fell, the Salim Croup was a symbol of crony capitalism. But Anthony Salim, contrary to the divided OTHC leaders, steered the business clear of more trouble. Two factors played a role in this. First, the regime change also marked the transition of leadership from his father to him. Anthony Salim was clearly and undisputedly the leader. Secondly, he was able to adapt to and speak the language of markets. Unlike the Westem educated OTHC leaders, who were faced with an institutional environment that was alien to them, Anthony Salim was better able to adapt the corporate strategy to changing times. He succeeded partly because he was the undisputed leader and partly because of his ideas that helped him align the Salim Croup with the new open-market environment. The differences observed point at the importance of generational changes.

Interestingly, both firms engaged in internationalization as a way to moderate political risks in Indonesia, but both were so embedded domestically that internationalization could not provide a way out. The OTHC could not be successful once its Indonesian businesses were nationalized. The Salim Croup had the opportunity to leave the country, but chose to sell foreign businesses to save its Indonesian companies. The Salim Croup now engages in international diversification more seriously than before, but the two cases show that firms that emerged in a certain period and location, and cannot easily disentangle themselves from it, even in the face of a crisis. In summary, although the OTHC and the Salim Croup differ in many ways, a comparative study suggests that social capital of large firms with a stable regime can become a liability. Social capital also impeded adaptation to a new regime, because both firms became symbols of a previous regime. Physical and social capital abroad was not Marleen Dieleman ; Peter Post enough to ensure survival outside the home market. The interplay of generational and regime changes and the fit of the ideas of the upcoming generation with the upcoming regime was clearly a key factor in their demise/success of our two cases. Generational change could moderate the backlash against those associated with a previous regime, but only if the new generation adopted a consistent policy that was adapted to a new ideology. In this respect, the Salim Group was more successful than the OTHC.

6. CONCLUSION The motivation for this study was to investigate family business responses to discontinuous institutional change. We first surveyed the literature on change management in order to understand how family groups in emerging markets might react to punctuations. Given that not many such studies existed, our first theoretical contribution is that we combined insights from organization change in general with family business theories to identify three types of responses to regime changes. We predicted that companies were likely to see changes in family leadership, in the scope of the firm, and in alignment to new institutions. We found support for these family business strategies in our study.

We found that successful strategies imder stable conditions can backfire under conditions of discontinuity. Our two cases show that social capital enabled the companies to overcome limitations to growth. However, the more embedded the firm was domestically, the more difficult to adapt, in particular when both firms became symbols of overthrown regimes. Our second contribution is therefore that we point at the negative effects of social capital in situations of regime change. Social capital is generally perceived as positive, in particular for family firms (Dyer & Mortensen, 2005). Some authors discuss disadvantages of social capital, but usually in terms of maintenance cost or opportunity cost (Carney, Dieleman & Sachs, 2008; Uzzi, 1997). Our study explicates the disadvantages of social capital and connects it to political risk. It shows that intimate political connections can backfire when a regime is overthrown.

Our third contribution is to combine regime change with generational change in family firms. We postulate that regime changes often coincide with generational change, just as they create CEO succession in non-family firms (Tushman & Romannelli, 1986). In both our cases, we saw that regime change coincided with a generational change in leadership, although one such change was planned while the other was caused by the death of a family leader. While the circumstances both business families found themselves in differed, in both cases the

42 Punauations in Emerging Markets: Regime Change and Family Firm Responses in Indonesia new leaders were forced to accommodate their business strategies to the ideologies of the new regime. Our study suggests that generational changes in leadership that coincide with a regime change can only succeed if the new leaders are comfortable with the upcoming ideology. The study has various limitations. The two companies are not selected to be representative for family businesses, and one cannot generalize case study results in this manner. However, our results do offer a promising avenue into inquiries on other family groups. Future research can shed more light on how other companies coped with regime changes and generational changes. Secondly, we criticized institutional theory as applied to emerging markets and argued that it is anachronistic in the context of the OTHC, since it mostly operated in the colonial era, which could be argued to be a period of strong institutions. Yet, the OTHC had many of the characteristics of what we now call emerging market family business groups, including strong social capital within and outside the ethnic group, diversification and family ownership. While this is beyond the scope of our study, we encourage other scholars to reflect on the applicability of institutional theory in historical settings in places that later became "emerging markets". In conclusion, our study shows that family business strategies for stable situations are not necessarily effective imder situations of regime change. We explicated the negative effect of social capital with local elites in the face of institutional discontinuities and the inability of the companies to moderate political risks, despite local and international diversification. We show that adaptation to regime change often coincide with generational changes in family firm leadership, and that companies experiencing a "fit" of the ideologies of the new family leaders with those of the new regime are most likely to successfully overcome institutional turmoil.

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