Are family firms more or less innovative? This is a summary of our recent AMJ paper.
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.