Family firms are champions of innovation

Innovation has always presented something of a conundrum for family businesses. Questions often arise about how a family firm can continue the innovation and entrepreneurship of its founder once it passes on to the second generation and beyond.

But a new piece of research published in the Academy of Management Journal says family firms are often more innovative than non-family firms and that innovation actually increases from the second generation.

The research, entitled Doing More With Less: Innovation Input and Output in Family Firms, argues that despite the fact than many family businesses spend less on innovation than non-family businesses they are more innovative. Using meta-analysis, the authors – Patricio Duran from Universidad Adolfo Ibáñez in Chile, Marc van Essen from the University of South Carolina, and Nadine Kammerlander and Thomas Zellweger from the University of St.Gallen – say that family firms spend less on innovation because of the risks and costs attached to such expenditure. Non-family businesses are more likely to finance innovation through bank loans and stock market listings than family businesses.

Nevertheless, despite their low level of input into the innovation process, the researchers argue that family firms have a greater conversion rate with their inputs than non-family firms. The authors says this is because family firms are more likely to take advantage of their “efficient processes” when supervising the innovation process, which come about through strong working relations between the owners and the workers, as well as the firm’s superior network access to suppliers and often customers as well. These relationships are often much stronger at family businesses than non-family businesses and this helps the innovation process.

Interestingly, the researchers found to their surprise that the output of innovation increases when family firms are under the control of the second generation or more. Despite the fact that most founder CEOs are less risk-averse and invest more into innovation to drive growth, their conversion rate appears much lower than in other firms. But the conversion rate was greater for firms run by a family CEOs in subsequent generation controlled businesses.

The authors felt that this might be explained by the fact that founder CEOs often engage in unfettered innovation, pursuing non-promising projects because they can do so and no one dares to stop them.