Family firms aren’t typically thought of as particularly innovative. More often, they’re viewed as risk averse, traditional, and stagnant. However, many family-owned businesses are among the most innovative in their industries. Consider Herr’s Potato Chips and Enterprise Rent-A-Car. There are countless other examples of family firms that have brought innovations to market. We wanted to determine how family firms actually compare to their nonfamily counterparts when it comes to being innovative. Our research, conducted with Patricio Duran and Thomas Zellweger, suggests the answer is not simple.
On average, family firms have a smaller R&D budget than other organizations of similar size, but that does not mean they are less innovative. On the contrary, our study found that family firms are more efficient in their innovation processes. For every dollar invested in R&D, they get more innovative output, measured by number of patents, number of new products, or revenues generated with new products. The level of innovation is higher in family firms.
Why might this be? We offer one explanation: Entrepreneurial families tend to concentrate their wealth in one or few firms — consider, for instance, the Walton family’s huge wealth concentration in Walmart. These families are very cautious about investments, aiming to avoid any waste. Family firm owners can use their powerful shareholder positions to ensure that managers engage only in prudent investments.
Their parsimony extends to their innovation process. We also find that the “less input, more output” effect is stronger when family members not only own but also lead the company. In such cases there are fewer conflicting interests between the owners and managers.
Yet this finding is not true for all family CEOs. Contrary to what we expected, our results show that firms led by later-generation family members are more innovative than other firms, while firms led by their founders are less efficient with regard to innovation. In other words, the latter spend more money on innovation but have less innovative outcomes. Based on existing theory on family firms, we argue that this is because the advantages of family firms build up over an extended period of time; they do not appear right away or when firms are led by first-generation members. In addition, one might argue that groups of dedicated owners, which most later-generation family firms have, are better able to identify and discard bad ideas, whereas founders may have largely unrestricted discretion to push risky ideas.
Source: Kammerlander, Nadine and Essen, Marc van, Harvard Business Review, January 25, 2017; https://hbr.org/2017/01/research-family-firms-are-more-innovative-than-other-companies