Here’s what our meta-analysis* shows:
You ever wondered whether family firms are more or less innovative?
Well, both views hold some merit. First, yes, family firms invest indeed less into innovation. But why are they so stingy? Agreeing with some other researchers, we claim this has several reasons: First, family firms prefer less uncertain or “risky” investments such as increasing production capacity. Just imagine, all your wealth is concentrated into one asset (this is what many family owners’ portfolio actually looks like): Would you like the idea of investing in risky projects? Probably not. Second, innovation is really expensive. Often, industry average is that firms invest more than 10% of revenues into R&D. That’s a lot. And the money needs to come from somewhere, for instance, from banks or the stock market. But both options, bank loans and equity shares, would reduce the family’s control over the firm – something that family owners dislike a lot.
The story could end here… And too often, researchers and practitioners alike have stopped with the claim that family firms are less innovative. But wait: What about the innovation process? Isn’t it the outcome of the innovation process that actually counts? Indeed, we argue and show that family firms have a greater conversion rate than non-family firms. As a consequence, they even have greater innovation output – despite lower input.
The reasons for this increased conversion rate? We argue that it is the efficient processes available in family firms, the family firms acting as “sophisticated and dedicated” owners when supervising innovation processes, the workers’ and managers’ experience and loyalty, as well as the firm’s superior network access, for instance to suppliers or customers. Based on those capabilities, family firms can achieve more – even when they invest less.
You think that not all family firms are the same?
Right. Indeed, the effects are even stronger when there is a (non-founder) family CEO at the helm of the company. So, the innovation input in those firms is even lower and the innovation output even higher. We reason that this is because of the family CEO’s own wealth concentration in the firm (and thus desire to keep investments into uncertain projects really low) and his or her own desire to keep processes simple and efficient. Moreover family CEOs (in particular if they carry the same name as the firm) might benefit particularly from the network partners’ trust.
And what about founder CEOs?
As you might have guessed, founder CEOs are less risk-averse and invest more into innovation, in order to drive their firms’ growth. But, to our great surprise, the conversion rate appears much lower than in other firms, leading to lower innovation output in those firms. While this is not what we initially expected we explain it as follows: Maybe founder CEOs often engage in unfettered innovation, pursuing non-promising projects because nobody dares to stop them? And maybe some of the family firm advantages really only build up over time?
How did we measure this?
We used a meta-analysis (MASEM and MARA, for the method experts), based on 108 primary studies, covering 42 countries and a time span from 1981 to 2012. In an additional analysis, we also revealed that the findings of our study depend to some degree on the country, in particular on the level of minority shareholder protection (but not in the way you might guess!) as well as the level of education of the workforce in the respective country.
P. Duran, N. Kammerlander, M. van Essen, T. Zellweger. Doing more with less: Innovation input and output in family firms. 2015. Academy of Management Journal. In press. DOI: 10.5465/amj.2014.0424