R&D Activities in Family Firms

R&D Activities in Family Firms

Inna Sousa Paiva (Lusófona University of Humanities and Technology, Portugal) and Isabel Costa Lourenço (Lisbon University Institute (ISCTE-IUL), Portugal)
DOI: 10.4018/978-1-4666-8216-0.ch016
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Abstract

This chapter investigates R&D investment in publicly listed family firms, and highlights the distinctions between these and non-family firms. The empirical study draws on data on German firms and their level of R&D expenditure between 2001 and 2012. The study finds that family firms spend more on R&D than non-family firms, confirming findings from the literature that long-term business orientation, superior performance and entrepreneurial success are characteristics of family firms. The research helps explain the differences between the R&D investment activities of family and non-family firms and contributes to the understanding of R&D activities of family firms, suggesting that family ownership is responsible for their strong entrepreneurial and innovation orientation.
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Introduction

The research and development activity, or more precisely investments in research and development (R&D), is of the utmost extremely importance to the entrepreneurial and innovation orientation of firms, and plays a major role in the economic growth of countries. Historically, the economic importance of innovation was underlined by Schumpeter (1939) who argued that the creative entrepreneur is indispensable to assuring the growth of capital. Since then, the technological innovation of firms has become a topic of increasing interest in empirical research, and it has been shown that R&D investments have a positive impact on economic growth (Corrado, Hulten, & Sichel, 2009; Goel & Ram, 1994), firms’ value (Cho, 1998) and performance (Anderson & Reeb, 2003; Hill & Snell, 1988).

Family firms represent a large number of businesses in the economy. For example, family-owned and family-controlled firms account for approximately 90% of incorporated business in the United States (Poza, 2010). Moreover, one-third of the S&P 500 corporations are family firms (Anderson & Reeb, 2003). In East Asian countries, over two thirds of the firms are controlled by founding families or individuals (Claessens, Djankov, Fan, & Lang, 2002). In the United Kingdom, the family business sector is estimated to represent 75% of all enterprises, including about 10% of listed firms (Poutziouris, 2006). More than 60% of all German firms with a revenue of over one million euros belong to the group of family firms (Klein, 2000). Family firms and their role in the economy have been widely debated in academic literature. Technological innovation and R&D investment in family firms is a relevant research area because theoretical frameworks and empirical reasons justify the analysis of how R&D investment in family and non-family firms differs.

Some previous empirical studies suggest that a firm’s ownership structure affects R&D investment but provide controversial evidence (e.g., Di Vito, Laurin, & Bozec, 2010; Francis & Smith, 1995; Hill & Snell, 1988; Yafeh & Yosha, 2003). Others find that family firms invest less in R&D than non-family firms (Block, 2012; Chen & Hsu, 2009; Munari, Oriani, & Sobrero, 2006; Muñoz-Bullón & Sanches-Bueno, 2011). On the other hand, some studies contradict these findings and indicate that firms with a higher level of family ownership spend more on R&D investments than non-family firms (Chrisman & Patel, 2012; Block, 2009). To be more precise, we have limited knowledge about family-controlled firms’ use of R&D expenditure as an indicator of entrepreneurial innovation vis-à-vis that of non-family firms.

The question of R&D investment in family firms is particularly important in light of the lack of recent studies and given its significant consequences for technological innovation and entrepreneurial orientation in firms, as well as their economic growth. Our main research question is therefore: are family firms spending more on R&D than non-family firms? Our study addresses the family business model and investment decisions, which is an issue of increasing interest to practitioners and scholars in the corporate fields. Family firms account for such a large percentage of the corporate sector worldwide that it is extremely important to examine the effects of family control on specific corporate dimensions (La Porta, Lopes-de-Silanes, & Shleifer, 1999).

Key Terms in this Chapter

Agency Theory: An agency relationship is described as a situation in which one party (the principal) delegates work to another party (the agent). Agency theory attempts to explain two problems. Type I agency problem consists of the separation between ownership and control, which leads to a divergence between management and owner interests. Type II agency problem arises from conflicts between controlling and non-controlling shareholders, which can result in executive entrenchment.

Family Firm: The typical family business has generally been characterized as an organization controlled and usually managed by multiple family members, often from various generations.

Technological Innovation: Technological innovation comprises activities that contribute to the research, development and design of new products, services or techniques, or to improving existing products, and generates new technological knowledge.

Succession Decision: The process of identifying and developing internal people with the potential to fill key business leadership positions in the company. Founders seek continuity of their business through the next-generation family members: children first, followed by other family members.

R&D (Research & Development): Research is original and planned investigation undertaken with the prospect of gaining new scientific or technical knowledge and understanding. Development is the application of research findings or other knowledge to a plan or design for the production of new or substantially improved materials, devices, products, processes, systems or services before the start of commercial production or use.

Long-Term Orientation: The propensity of firm to prioritize the long-range involvement and impact of decisions and actions that come to fruition after an extended time period.

Family Control: One or several families hold a significant part of the capital, family members retain significant control over the company, and family members hold top management positions.

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