Family ownership and R&D intensity in small and medium-sized firms

Sciascia, S. and Nordqvist, M. and Mazzola, P. and De Massis, Alfredo (2015) Family ownership and R&D intensity in small and medium-sized firms. The Journal of Product Innovation Management, 32 (3). pp. 349-360. ISSN 0737-6782

Abstract

Research was largely consistent in predicting a negative relationship between family ownership and R&D intensity until Chrisman and Patel (2012), using a behavioral agency model (BAM), called this general assumption into question. They argued that publicly owned family firms typically invest less in R&D than non-family owned firms. This behavior may however be reversed if economic performance levels are below family aspirations or if family long-term goals, such as pursuing strong transgenerational family control, are highly valued. While most researchers, like Chrisman and Patel (2012), primarily focused on large listed firms, more research on the relationship between family ownership and R&D intensity in privately held small and medium sized enterprises (SMEs) is required. This is because firm size can play an important role in understanding the innovation management behavior of firms. Building on the BAM perspective, in the present article it is argued that Chrisman and Patel’s (2012) results can be extended to the context of SMEs, albeit with one important specification: the relationship between family ownership and R&D intensity is likely to be contingent on the way the family has invested its wealth. Specifically, it is contended that in the context of SMEs, where goals are more fluid and mixed, and when there is a high overlap between family wealth and firm equity (i.e., most of the family’s wealth is invested in the firm), the relationship between family ownership and R&D intensity is negative due to the family owners’ greater desire to protect their socioemotional wealth (SEW). However, if the overlap between family’s total wealth and single firm equity is low (i.e., firm equity is just a small part of the total family wealth), the relationship between family ownership and R&D intensity is positive as the low overlap between family wealth and firm equity reduces the family’s loss aversion propensity. In such a situation, family ownership is likely to foster R&D intensity due to the long-term orientation of family owners that increases the family firm’s propensity to bear the risk of investing in R&D activities. The hypothesis is tested and confirmed in a study of 240 small and medium-sized firms based in Italy. The article contributes to the literature in several ways. First, adding to the literature on innovation management and R&D intensity, it increases the understanding of what drives or inhibits R&D investments in SMEs when a family is involved in the ownership of the firm. This is particularly important since research on innovation management, as well as research on R&D intensity in family firms, is primarily focused on large firms and much less on SMEs. Second, the study complements arguments from prior research on the correlates of R&D intensity in large listed firms, showing that the BAM and SEW perspective offer a theoretical framework that is also able to illustrate the complex nature of innovation management in the context of SMEs. Third, the study contributes to research on the effects of family ownership on the general functioning of a firm. In particular, it provides new insights into how family ownership may affect R&D intensity.