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.
The findings, published in the Academy of Management Journal, show that family firms invest less in innovation than other firms (both public and private) that aren’t family-owned. 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. In contrast to many other shareholders, family owners have the ability to make sure that money is invested in the right projects and that resources are employed in an effective way. Because of their long relationship with the firm, family owners typically have a deep knowledge of the industry, the firm, and its stakeholders. They also spend considerable time with the organization and communicate frequently with employees, clients, and other stakeholders. Moreover, many family firms profit from their “family-like” culture and their close relationships with a handful of partners, from suppliers to customers, who can help these firms develop their creative ideas, products, and processes.
Read the full “Family Firms Are More Innovative Than Other Companies” article by Nadine Kammerlander and Marc van Essen on HBR.org.