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date: 28 June 2022

Innovation in Family Businessfree

Innovation in Family Businessfree

  • Alfredo De Massis, Alfredo De MassisFree University of Bozen-Bolzano; IMD Business School; Lancaster University Management School
  • Emanuela RondiEmanuela RondiEconomics & Management, Free University of Bozen-Bolzano
  •  and Samuel Wayne AppletonSamuel Wayne AppletonEconomics & Management, Free University of Bozen-Bolzano

Summary

The involvement of families in firms’ ownership, management, and governance is a key driver of organizational attitudes, behaviors, and performances, especially those related to innovation. Starting from the beginning of the 21st century, the academic interest toward family firm innovation has bloomed. This body of research has mostly emerged from family firm scholars, while mainstream innovation scholars have often overlooked family variables in their studies. Indeed, innovation is one of the main areas in family firm research, integrating family and business aspects, leading to a plethora of sometimes contradictory findings. Initially, research compared innovation between family and nonfamily firms. While this approach has been beneficial to the rise of this stream of research and underlined the idiosyncratic characteristics of family firms on this matter, it soon emerged that within family firms there is a high degree of heterogeneity, especially in their attributes and the way they relate to innovation. Therefore, scholars have delved deeper into the heterogeneous influence that different types and degrees of family involvement in the firm can exert on innovation. This vast body of literature can be reconciled according to an antecedents–activities–outcomes framework allowing to attune current understanding of family firm innovation and recommend directions for future research. While most of current research has examined the antecedents of family business innovation, further examination of the activity of innovating in family firms is needed. Fostering accessibility to this literature allows students, practitioners, and scholars to grasp and digest this insightful area of family business research. It also encourages an extension of the range of perspectives adopted to examine innovation in family firms, contributing to advance current knowledge.

Subjects

  • Entrepreneurship
  • Organization Theory
  • Technology and Innovation Management

The Uniqueness Brought by the Family in the Business

Family firms represent a unique context for investigation due to the overlap of two fundamental sociological systems, the family and the business (Holt et al., 2018). Family ownership is the most common form of firms’ ownership worldwide (La Porta et al., 1999). Not only the vast majority of small- and medium-sized firms are family owned and managed, but also large public firms are often controlled by families.

Conceptually, what constitutes a family business is the subject of great debate in family business research—see Daspit et al. (2021) for a discussion. In this study, a family firm is conceived according to the most reputable comprehensive definition:

The family business is a business governed and/or managed with the intention to shape and pursue the vision of the business held by a dominant coalition controlled by members of the same family or a small number of families in a manner that is potentially sustainable across generations of the family or families.

This definition helps distinguishing family from nonfamily firms. In further explaining such distinction, Gomez-Mejia et al. (2007) introduced the concept of socioemotional wealth, defined as “non-financial aspects of the firm that meet the family’s affective needs, such as identity, the ability to exercise family influence, and the perpetuation of the family dynasty” (p. 106). Under circumstances of potential loss or gain of the socioemotional wealth, the family involved in the business is willing to make decisions that are not driven by economic logics (Cennamo et al., 2012). Other elements of distinction refer, for instance, to the long-term orientation, meaning that they act in the long-run interests of the company and its stakeholders (Lumpkin & Brigham, 2011; Miller & Le Breton-Miller, 2005), and the intrafamily succession process, the transition from the senior to the junior generation of family leaders and/or owners (Barnes & Hershon, 1976).

Family business research seeks to understand family firms in order to provide recommendations and/or frameworks to guide practitioners to improve their performances, increase their growth, and ensure their sustainability in the long run (Miller & Le Breton-Miller, 2005). Innovation is a means to stay relevant and competitive. Thus, developing knowledge about family firm innovation can help family firms to thrive, thereby contributing to global economic prosperity. An endeavor to understand family firm innovation requires consideration of the aspects related to the family, the business, and the context wherein they are embedded.

Managing Innovation

Innovation, here defined as the “development and implementation of new ideas by people who over time engage in transactions with others within an institutional order” (Teece, 1986, p. 590), is necessary for firms to remain competitive. The benefits of this necessity extend beyond the firm, contributing to the economic prosperity, so that it is “an essential condition of economic progress and a critical element in the competitive struggle of enterprises and of nation-states” (Freeman & Soete, 1997, pp. 1–2). The debate on innovation has deepened with the identification of various characteristics defined by typologies, constructs, and dimensions (e.g., Garcia & Calantone, 2002): the degree, type, and approach.

Innovativeness captures the degree of newness of an innovation in terms of discontinuity in marketing and/or technology (Garcia & Calantone, 2002). A firm’s innovativeness can be explained using a continuum between incremental and radical innovation in relation to the extent of discontinuity from an existing solution (Utterback, 1996). Another important characteristic relates to the type of innovation, which encompasses new products (in terms of new goods and new quality of goods), processes (new methods of production), new services, new markets, and new ways of organizing business (e.g., Snihur & Wiklund, 2019).

A further characteristic is the approach through which organizations and individuals innovate. Research has considered diverse approaches that influence a firm’s innovativeness. For example, approaches take form on the continuum between open and closed innovation. Closed innovation is the approach coherent with a traditional paradigm of innovating with full control within organizational boundaries, hidden from the external world and characterized by secrecy (Almirall & Casadesus-Masanell, 2010). Conversely, open innovation is “a distributed innovation process based on purposively managed knowledge flows across organizational boundaries, using pecuniary and non-pecuniary mechanisms in line with the organization’s business model” (Chesbrough & Bogers, 2014, p. 17).

Innovation approaches also concentrate on exploration or exploitation. Exploratory innovation involves a shift to a different technological trajectory, whereas exploitative innovation focuses on the improvements in existing technological trajectories (Benner & Tushman, 2003). While exploration and exploitation approaches were initially considered two extremes of a continuum, Katila and Ahuja (2002) found empirical support for conceptualizing them as orthogonal dimensions that might even be balanced. Some organizations pursue both simultaneously to develop a form of “organizational ambidexterity,” which is considered an important driver of firm performance (O’Reilly & Tushman, 2013). Ambidextrous innovation is achieved when organizations develop differentiated, yet integrated, subunits distinctively devoted to exploration and exploitation (Benner & Tushman, 2003). Overall, these characteristics help people understand the approach to and result of innovation.

Research has examined what drives innovation. Antecedents include a firm’s governance in terms of ownership and leadership, resource investments (also in terms of allocation of employees), firm size, absorptive capacity, a firm’s attitude and posture toward innovation, organizational culture, degree of internationalization, group and teams functioning in innovation project management, and interorganizational networks. Innovation antecedents influence a firm’s innovation activities, which reconfigure orchestrating organizational resources that leads to the creation of value (Lumpkin et al., 2011). Innovation activities include the mechanisms and processes that organizations implement in their approach to innovation. For example, developing new products through an open/closed innovation strategy and pursuing explorative or explorative innovation are both known as ambidexterity. It is not uncommon for a firm to engage in more than one innovation activity at time. The orchestration of innovation antecedents through activities may lead to direct and indirect innovation outputs. In terms of direct innovation outputs, firms can develop new products, processes, services, and business models. Direct innovation outputs also include registered patents, often used to measure the level of innovativeness of a firm in empirical research. In terms of indirect innovation outputs, by commercializing patents and introducing new products, processes, services, or business models, firms can increase their sales or profits, enter new markets, and grow.

It is important to note that innovation is a risky activity that does not guarantee that deploying higher levels of inputs leads to higher levels of outputs, and even when it does, there is a time lag between innovation activities and innovation outputs, making the success of the innovation activity difficult to measure (Kafouros et al., 2008). Therefore, innovation outputs are measured using a variety of ways such as the number of new registered patents per year, the percentage of new products/processes introduced into the market, the number of new ventures created, firm growth, and firm performance outcomes (e.g., total revenues, increased market ratio, market share, firm growth).

In the analysis of the antecedents, activities, and outcomes, innovation management research has embraced different (multiple) levels of analysis, spanning from micro to macro. Former studies have examined, sometimes simultaneously, the role of individuals and their intuition as engines for innovation, group and team functioning in innovation project management, and organizational aspects. The focus of these studies can be internal, external, or across the firm’s boundaries. Yet, organizations do not exist in a vacuum, and it is beneficial to think about how contextual aspects also shape innovation management within the firm. Formal and informal institutions form the regulatory function covering intellectual property rights, security, and environment regulation (i.e., pollution), which are critical for innovation (Holmes et al., 2013). Economic inducement mechanisms include influences from supply, demand, and competitive rivalry, considering, for example, macro-phenomena as economic downturns (Prabhu, 2010), environmental jolts, and particular stages of the industry life cycle (Audretsch & Feldman, 1996). Moreover, the environmental munificence shapes the potential for a firm to innovate in terms of available resources; the system level can be configured to develop innovation (Tidd & Bessant, 2014). The system in which the firm is embedded might encourage knowledge spillovers, market knowledge, access to distribution channels, and facilities for product support (e.g., Liu & Buck, 2007). Thus, family firm innovation is likely to be influenced by the environment it inhabits.

Innovation in Family Business

Examining the body of research that has focused on family business innovation since the beginning of the 21st century, first the main theoretical lenses are depicted and summarized in Table 1. Following a discussion of the theories applied, the antecedents–activities–outcomes framework (introduced in the previous section) is used to review the relevant research, and each element is discussed in detail; Figure 1 provides an illustrative synthesis.

Theoretical Lenses in Family Business Innovation

Family firm innovation research has been an increasingly important focus of scholarship since the beginning of 2000s —for former reviews on this topic, see Calabrò et al. (2019), De Massis et al. (2013), del Pilar Casado-Belmonte et al. (2021), Feranita et al. (2017), Hu and Hughes (2020), and Röd (2016). Table 1 summarizes the main theoretical lenses that have been adopted in family business innovation research (Calabrò et al., 2019). Agency and stewardship theories consider the governance structure of the firm as a driver of a managers’ innovation behavior. According to agency theory, the unification of ownership and management in the hands of the family ensures high discretion in innovation investments, yet the risk aversion and nepotism might limit innovative initiatives (De Massis et al., 2013). Following stewardship theory, family owners and managers are custodians of the business, prioritizing the benefit of the family and the future generations over self-interests. Coherently, they might encourage long-term investments but are sometimes more cautious about risking family wealth (Scholes et al., 2021), while the resource-based view (e.g., Carnes & Ireland, 2013), knowledge-based view (e.g., Kallmuenzer & Scholl-Grissemann, 2017), attention-based view (Kammerlander & Ganter, 2015), social capital theory (e.g., Andrade et al., 2011), and familiness—the unique bundle of resources and capabilities of family firms (Habbershon & Williams, 1999)—mostly explain the involvement of the family as an enhancement of the firm’s innovation. Heterogeneity occurs depending on the level of familiness and family social capital. Both provide the firm with a natural advantage that helps them remain competitive and therefore naturally more innovative. More recently, a broader range of lenses has been adopted, including institutional theory (e.g., Brinkerink & Rondi, 2021; Mazzelli et al., 2018), contingency theory (e.g., Craig & Moores, 2006), identity theory (Brinkerink & Rondi, 2021; Sasaki et al., 2020), and transactive memory theory (Madison et al., 2021). Research on family business innovation has often adopted multiple theoretical lenses, also combining some of the theories depicted in Table 1; the multiplicity of the theories adopted has been enriching the understanding of the phenomenon by shedding light on different facets of family business innovation (Calabrò et al., 2019).

Table 1. Main Theoretical Lenses in Family Business Innovation Research

Main theoretical lenses

Contribution to family firm innovation research

Illustrative studies

Agency theory

The family acts in its own interest against the business logic (such as nepotism and suboptimal behavior) constraining innovation. In contrast, the family can act quicker and more decisively enhancing innovation. Decision-making likely to be centralized and absorptive capacity may not be increased by research and development (R&D) efforts.

Bennedsen and Foss (2015); Decker and Günther (2017); Werner et al. (2018); Lodh et al. (2014); Block (2012); De Massis and Rovelli (2018)

Dynamic capabilities

Families may draw on their histories as a source of tacit knowledge that enhances their ability to innovate (i.e., innovation through tradition, absorptive capacity).

Casprini et al. (2017); De Massis et al. (2018); Daspit et al. (2019)

Entrepreneurial orientation/culture

Family firms exhibit a higher long-term orientation that leads them to innovative activities.

Arzubiaga, Iturralde, et al. (2018); Brigham et al. (2014); Leal-Rodríguez et al. (2017)

Identity theory

There is a reciprocal influence between organizational, social, family, or individual identity and innovation in family firms.

Sasaki et al. (2020); Brinkerink and Rondi (2021); Brinkerink and Bammens (2018)

Imprinting theory

Senior generations imprint values and attitudes on junior generations (through first- and second-hand imprinting) that mold innovation behavior.

Erdogan et al. (2020); Kammerlander et al. (2015); Hammond et al. (2016); Jaskiewicz et al. (2015)

Institutional theory

Formal and informal institutions, including the family itself, influence innovation in family firms.

Brinkerink and Rondi (2021); Mazzelli et al. (2018)

Resource-based view

The family acts as an additional resource for the firm furthering innovation activities (e.g., long-term orientation).

McDowell et al. (2018); Hillebrand et al. (2020)

Social capital theory

The family has enhanced (external) bridging and (internal) bonding social capital that increase innovation activity (e.g., collaborative and open innovation). The familial contribution is a resource to the firm, providing competitive advantage and a higher propensity to innovate.

Ahluwalia et al. (2017); Andrade et al. (2011); De Clercq and Belausteguigoitia (2015); Carnes and Ireland (2013)

Socioemotional wealth

Explains further the restriction on innovation from a desire to control the firm to preserve socioemotional wealth. Families may restrict collaborative and open developments. However, in some circumstances, socioemotional wealth enhances innovation.

Diéguez-Soto et al. (2016); Hauck and Prügl (2015); Vandekerkhof et al. (2017); Patel and Chrisman (2014); Gomez-Mejia et al. (2014); Miller et al. (2015); Classen et al. (2014); Block et al. (2013); Fitz‐Koch and Nordqvist (2017); Rondi, De Massis, et al. (2021)

Stewardship theory

The family influences the firm to be risk averse, avoiding some innovations. In contrast, the family may perceive the firm as an extension of themselves, and this may enhance innovation.

Carney (2005); Miller et al. (2008); De Massis, Di Minin, et al. (2015); Ashwin et al. (2015)

Transaction memory theory

In some cases, when family and nonfamily employees have a shared understanding of their reciprocal knowledge resources, family firms have higher innovation outputs; conversely, the divergence of such perception leads them to innovate less.

Madison et al. (2021)

Drawing on the antecedents–activities–outcomes framework reported in Figure 1, in the following sections, each element of this framework is examined by reviewing the key body of research.

Figure 1. Integrative framework of research on family business innovation.

Antecedents of Family Business Innovation

Among the 23 articles that De Massis et al. (2013) examined in their literature review, most focused on the antecedents of family business innovation. Scholars have compared family and nonfamily firms to identify whether the involvement of the family in the business spurs higher or lower innovation, without reaching a conclusive answer, which highlights that the reality is more complex than initially thought. Here the body of research on the antecedents of family business innovation is organized into three clusters: family firm governance; attitudes, goals, and values; and resources and capabilities.

Governance

A first investigated cluster of innovation antecedents is constituted by family firm governance. Specifically, family governance has been identified as a driver of a firm’s innovative activities, and this depends on the family characteristics (involvement, size, and generation number). The family-managed firms are more prone to engage in both exploitation and exploration activities. For example, family governance through family guardianship (e.g., the existence of a family council) spurs solely exploration. Family influence may avoid traditional innovation barriers as ensuring lower levels of formalization and lower dependence on external capital and political resistance. By avoiding these barriers, family firms are able to quickly adopt discontinuous technologies deemed relevant (König et al., 2013), hereby enhancing innovation.

Spriggs et al. (2013) found that family firm governance structure has a positive effect on the firm when high ownership dispersion, new collaborative networks, and innovative capability are present. Cucculelli et al. (2016) found that family firm governance for new product development has distinctive authority structures, incentive systems, and accountability norms. However, the employment of family firms to head up choices was sometimes the reason for their failure, supporting both the constraining and enhancing perspective. Interestingly, the CEO did not consider skills and experience in the selection process; this credits research by De Massis, Kotlar, et al. (2016) that emphasized the need for alignment between firm governance and new product development processes. Liu et al. (2017) found that increased family ownership restricts innovation activities, yet the negative effect on internal innovation is limited in the presence of organizational slack.

Scholars have also examined whether leadership influences a firm’s innovation activities. Arzubiaga, Kotlar, et al. (2018) researched the board of directors in family small and medium sized enterprises (SMEs) and found that the activity of the board engagement influences the level of entrepreneurial orientation and ambidextrous innovations in the firm. They used family firm heterogeneity to explain their arguments. Specifically, the number of family members involved in the board heavily influences the level of activity, where too much and too little engagement have negative effects. Therefore, family members of boards with low-intensive or extremely intensive engagement tend to make a firm less innovative, so in this situation, they recommend an alternative approach to manage innovation activities. In addition, the generation number creates a unique situation, the intergenerational leadership transition. This is a crucial process for family firms as family members’ goals tend to diverge, offering fertile ground for innovation activities (Kotlar & De Massis, 2013). Furthermore, Kraiczy et al. (2015) found that when a family owns a high share of the firm and a family member is CEO, stewardship behaviors are encouraged and catalyze proenvironmental innovation activities. Madanoglu et al. (2016) found that family involvement increased organizational risk aversion. To mitigate this, the authors suggest decentralizing decision-making, thereby reducing the control and power of family members.

Attitudes, Goals, and Values

Families manifest distinctive goals and values that drive the innovation strategy of their organization, sometimes raising tensions and paradoxes (Ingram et al., 2016). Bennedsen and Foss (2015) presented innovation trajectories in family firms that are shaped by the entrepreneurial spirit internalized by the family; the legacy, history, and tradition of the family; and the family network ties. In the analysis of the antecedents, it is thus crucial to consider a second cluster that includes the family’s intention and attitudes shaping a firm’s innovation. For example, the investment in innovation is contingent upon the performance aspirations of the firm, which are manifestations of the family’s attitudes and values (Chrisman & Patel, 2012). One way of identifying, sharing, and transferring values and attitudes in the family is through storytelling. In turn, research has found storytelling to influence the innovation activity. Kammerlander et al. (2015) explored the relationship between shared family stories and innovation at wineries in Sardinia. The research proposes that when the stories told are focused on the founder, the next generation exhibits lower decision-making power and thus its motivation to innovate is reduced. Conversely, when stories are focused on the family, the continuity of the legacy positively affects innovation.

The family brings its own attitudes into the organization. On the one hand, the family’s intention to ensure the business survival for future generations may spur firms to engage in more innovative long-term investments, also known as patient capital (Sharma & Sharma, 2019). Yet, innovation is uncertain and family firms that want to preserve the control over the business might be risk averse (Kets de Vries, 1993) and conservative (Habbershon et al., 2003), all of which constrains innovation activities, consequently undermining future family prosperity (Sirmon et al., 2008). Cassia et al. (2011) identified the main enabling and constraining factors that family SMEs encounter when pursuing new product development (illustrated in Table 2). This was extended by Cassia et al. (2012), who found that the long-term orientation influences the new product development thrust (the time from conception to market). Regarding innovation approach, this study found that despite the desire of connecting to stakeholders, the family culture may override the connections to social networks, reinforcing a closed culture negatively associated with new product development. Thus, family involvement can inhibit creativity through the closed culture and may also create conflicts that disturb new product development projects, supporting the idea that innovation is constrained (agency and stewardship theory).

Table 2. The Enabling and Constraining Factors of Innovation

Enabling factors

Constraining factors

Long-term orientation and ambition of the incumbent to expand the “entrepreneurial dream” through generations

Low levels of professionalization and objectivity in the management and organizational practices and routines

Shared family values, high motivation, cohesiveness, and commitment of the employees

Fear and low propensity of the family entrepreneur to “open” the ownership to external investors

Desire to raise the family name and reputation with key stakeholders and the business community

Risk aversion of the family entrepreneur and propensity to be cautious to avoid exposing the family to high levels of risk

High level of communication and sharing of information among family members (possible also through family councils)

Conflicts deriving from the mixture of blood and professional relationships (e.g., conflicts between family and nonfamily members)

Low agency costs and consequent closer monitoring

“Closure” attitude toward the external environment and less propensity to leverage on assets outside the organization

Source: Adapted from Cassia et al. (2012).

Indeed, one of the obstacles to innovation in family firms is constituted by rigidity due to the emotional ties to family assets and the rigidity of mind-sets (Roessl et al., 2010), constraining innovation. The distinctive resources, the long-term orientation, and the noneconomic goals that characterize family firms are framed into the “ability-willingness innovation paradox,” due to their higher ability but lower willingness to innovate than nonfamily firms, enhancing or constraining innovation (Chrisman et al., 2015). Family firms’ lower formalization, higher discretion to allocate resources, and long-term orientation are conditions that increase their ability to innovate; however, the fear of compromising the family wealth (both in terms of financial and socioemotional wealth) constrains the innovation. As such, the tension between willingness and ability becomes critical to enhance family firm innovation (Rondi et al., 2019).

Through a contingency perspective, De Massis, Di Minin, et al. (2015) depict a framework labeled “family-driven innovation,” suggesting that a family’s goals, discretion, and resources can facilitate a coherent set of strategic decisions that allows the firm to manage the ability–willingness paradox, enhancing innovation. Rondi et al. (2019) extended the family dynamics in terms of cohesion and traditional attachment, articulating the posture of family firm innovation as the strategic orientation that the owning family imprints on the firm, shaping the innovation climate, philosophy, and practices.

Furthermore, Holt and Daspit (2015) proposed a model to evaluate a family firm’s innovation readiness prior to the innovation process. In their framework, the authors consider the antecedents in structural and psychological factors. These were examined at the individual, family, and firm levels to understand the degree to which the organization, individually and collectively, is able and willing to innovate. Similarly, Diaz-Moriana et al. (2020) created a typology for family firms occupying different innovation styles of family business conserving, persisting, and legacy building. These and further studies reinforce this paradox as a way to consider the antecedents to innovation.

Resources and Capabilities

The third cluster of antecedents includes different types of research and development (R&D) resources (financial investments, social relationships, and knowledge) and capabilities. The general question is whether family firms invest more (less) in R&D than nonfamily firms. This is a question that has been addressed in a vast number of studies, considering the type and level of family involvement in the firm, combined with a range of moderators and mediators. The variation in the percentage of family ownership influences innovation investments (Kellermanns et al., 2012). For instance, Liang et al. (2013) found that the level of R&D intensity increases when the family is involved in the board of directors but not when they are in the management of the firm. Compared to family firms, empirical evidence shows that R&D investments of family-owned Indian pharmaceuticals are higher than those of nonfamily firms, especially when the CEO is a family member (Ashwin et al., 2015). This is attributed to the long-term understanding that the family has of the industry it inhabits. In this case, R&D is fundamental for the success of pharmaceutical firms, so this may not apply to other low-tech industries. Overall, growing evidence shows that family firms invest less in R&D than their nonfamily counterparts (Duran et al., 2016). Interestingly, despite the lower R&D intensity, Classen et al. (2014) found that family SMEs have a higher propensity to innovate than nonfamily SMEs, supporting the enhancement of innovation as explained below.

Furthermore, the family attitude influences R&D. For example, Tsao et al. (2015) found evidence that information advantage and longer time horizons (superseding risk aversion) in family firms enable them to invest more effectively in R&D than nonfamily firms. Another example shows the different attitudes toward innovation are influenced by the performance reference. Kotlar et al. (2013) found that when the discrepancy between aspirations and performance is negative, family firms tend to assume higher risk to protect their socioemotional wealth. Additionally, Patel and Chrisman (2014) compared family and nonfamily firms in their investments in R&D for exploitative and explorative innovations. The study found that family firms that do not meet performance aspirations are more inclined to invest financial resources into explorative R&D, whereas when performance is above aspirations, the opposite occurs. Counterintuitively, the study claimed that when socioemotional wealth is threatened due to a decreased level of performance, the family is more risk-taking and increases R&D spending that spurs innovation activity. Adding to this, research shows that families whose wealth is only partially dependent on the business are less cautious in their investments and tend to exhibit higher R&D intensities (Sciascia et al., 2015).

Connected to innovation investments is the ratio of employees dedicated to R&D, which can be difficult to measure, especially in smaller firms, because they have less structure compared to large firms. Compared to nonfamily firms, Llach and Nordqvist (2010) found that family firms allocate a higher percentage of qualified personnel to R&D, although this is influenced by external (contextual) factors because they found that the same family firms shrink the R&D-dedicated employees in periods of economic downturns. Furthermore, Ahluwalia et al. (2017) found that investing in employees’ training and learning does not positively influence innovation but increases the commitment and role of family member employees. Yet, this investment pays dividends in the long run, as Rondi, Überbacher, et al. (2021) found that long-tenured employees are able to develop tacit-specific knowledge and a distinctive organizational culture that enhances family firms’ innovation.

In terms of management capabilities, scholars have analyzed dynamic capabilities, familiness, organizational learning, and knowledge sharing. Dynamic capabilities have been an important focus of research interested in family firm innovation. De Massis, Frattini, et al. (2016) build on the dynamic capabilities model, offering a framework that explains the product innovation strategy of “innovation through tradition,” examining sources of past knowledge and forms of past knowledge that, through interiorization (searching, sourcing, and internalizing knowledge from the tradition of the firm and its territory) and reinterpretation (making knowledge marketable by combining past knowledge with updated technological solutions) capabilities, lead to product innovation. The research offers a model to interpret the innovation to tradition, strengthening the argument that family firms are not victims of inertia as some scholars assume. Furthermore, Erdogan et al. (2020) extended this by identifying four strategies to deal with the innovations versus tradition paradox. While literature assumed tradition and innovation to be an oxymoron because the former focuses on the past and the latter on the future, this study identifies strategies through which family firms can capitalize on their past to innovate by protecting the heritage, maintaining the essence, embracing nostalgia, and restoring the legacy. This adds to the arguments that family firm tradition and innovation is not an oxymoron and can be a strategic resource when the imprinting from the founder is appropriately placed. In so doing, tradition becomes a driver for innovation activities with the goal to preserve tradition over time.

Familiness is an effect of the family involvement in the management of the firm, leading to organizational advantage (Habbershon & Williams, 1999). This is due to the inimitable complex social ambiguities derived from family social capital (Arregle et al., 2007; Pearson et al., 2008). Carnes and Ireland (2013) introduced the role of familiness in innovation activities and proposed that it produced stabilizing, enriching, and pioneering mechanisms. Stabilization has a negative influence on innovation because it discourages change. Enriching increases tacit knowledge from long-term employees and thus increases the recognition of opportunities to innovate. Pioneering suggests that familiness reduces closure and thus the absorption of new information (absorptive capacity) and the discovery of holes in networks. From this perspective, closedness (found in closure) is the opposite to openness and constrains innovation activities. A related concept to innovativeness is the recognition of opportunities. Patel and Fiet (2011) proposed that family firms more effectively apply their tacit knowledge, maintain continuity of the knowledge, identify more valuable opportunities, are less constrained by profit maximization objectives, and respond faster to opportunities than nonfamily firms.

Furthermore, Andersén (2015) and Daspit et al. (2019) thought about familiness in more depth and proposed that family firms have both unique potential and realized absorptive capacity—“the ability to identify, assimilate, and exploit knowledge from the environment” (Cohen & Levinthal, 1990, p. 569). A consequence of a high level of closure in the family network is excessive information access and associability between kin. This can enhance realized absorptive capacity but restricts potential absorptive capacity. This is attributed to the ideas that family members share and transfer existing information but then do not seek external sources, a source of nonredundant information (Burt, 1992). Family members routinely seek out other family members to solve problems, which in turn increases dependency and hence the high level of closure. Higher involvement of nonfamily members can reduce dependency by providing another new source of information and/or thinking, reducing the reliance on family members needed to absorb information. Brinkerink (2018) sheds light on the family influence as enhancing absorptive capacity performance of R&D regarding exploitative innovation but tends to diminish the absorptive capacity performance of R&D regarding exploratory innovations. This discussion has been conceptually extended through a series of propositions illustrating how family influence can be both or either positive and negative on absorptive capacity (Kotlar et al., 2020).

A conceptual evaluation of familiness from a family science perspective identified communication style as one of the most important factors that facilitates innovation (Penney & Combs, 2013). Disengaged families are characterized by low levels of commitment and misalignment of goals, and such situations lead to communication styles that make the firm less likely to engage in innovation activities. Whereas the flexible communication style tends to communicate more and have alignment of goals, this style of communication is expected to be manifest in innovation activities.

Knowledge management and organizational learning are key for successful innovation activities and have been examined in family firm innovation research. Andrade et al. (2011) proposed that family could positively influence learning, change, and organizational innovation practices development in family business by shaping the ability to change, absorb information, and build an entrepreneurial culture. Not only the composition of the top management team in terms of family versus nonfamily members but also the time devoted to gather novel information outside the firm and the dedication to share such information internally shape the opportunity realization of family firms (Rondi & Rovelli, 2022). Knowledge influences innovation activities in family firms, and one perspective previously used to explain this is transactive memory system theory. Madison et al. (2021) examined the interdependence of family and nonfamily employees’ cognition in family firm innovation. When family and nonfamily employees have a shared understanding of their reciprocal knowledge resources, family firms have higher innovation outputs. Conversely, leading them to innovate less is the difference in such understandings between family and nonfamily members.

Innovation Activities

Innovation activities configure the orchestration of the organizational resources leading to the creation of value (Lumpkin et al., 2011). Through a meta-analysis, Duran et al. (2016) showed that family firms, despite the lower innovation investments, are able to develop higher innovation outcomes. Therefore, the authors point to a higher efficiency of family firms’ innovation to achieve more innovation outputs with less innovation inputs. For example, in their analysis of Mittlestand family firms in Germany, De Massis et al. (2018) reveal that despite the limited financial and human resources, these family firms were highly innovative. It has since become crucial to deal with questions that examine how family firms innovate by analyzing family firm innovation activities and the related concepts such as the behaviors and strategy (Röd, 2016).

Innovation activities are influenced by the heterogeneity of the involvement of the family. Matzler et al. (2015) found that family ownership, governance, and management have a negative impact on innovation input, yet family management has a positive impact on innovation output. An important area of research on innovation activities deals with innovation behavior. König et al. (2013) extended the four Cs framework (Miller & Le Breton-Miller, 2005) of continuity, command, community, and connection by detailing how family firm innovation adapts to the barriers presented by discontinuous technologies (formalization, resource dependence on external capital providers, political resistance, emotional ties to existing assets, and rigid mental models). The model proposed that the family influences the firm’s approach to discontinuous technology adoption, but the family is less likely to exhibit the behaviors required to do this successfully (formalization, reliance on external funding, emotional detachment, nonrigid mental models, early recognition, and flexibility) but more prone to experience less political resistance speeding up implementation and to have a higher stamina required for discontinuous technology adoption. Thus, the model can be used as a framework to evaluate the extent of the family’s influence on the firm’s innovation activities.

In comparison to the antecedents, less attention has been given to family business innovation activity (De Massis, Frattini, et al., 2015; De Massis, Di Minin, et al., 2015; Kotlar & De Massis, 2013). This may be due to innovation activity being quite difficult to capture. This body of research is summarized into three main clusters briefly introduced earlier in the section on innovation: research and development, open/closed approach, and exploitative/explorative activity.

Research and Development

Similarly, new product development has been explored using a socioemotional wealth perspective and institutional theory. Mazzelli et al. (2018) compared the different motivations and propensity to conform to external pressures between family and nonfamily in relation to new product development. The study identified a configuration of rationales for conformity-distinctiveness and revealed that in industries in which products tend to be exclusive, family firms are in fact more innovative because they desire to “fit in” but at the same time outperform their peers. Under the socioemotional wealth perspective, Miller et al. (2015) developed a typology of four types of innovators based on their activities to achieve the socioemotional wealth objectives: entrepreneurial innovators, conservative innovators, tardy innovators, and turnarounds (successful and not successful). Examining the distinctive behavior of family firms in terms of new product development in an internationalization context, Chirico and Salvato (2016) found that later generations introduce new product offerings but take safe bets by introducing similar products not undergoing competency renewal (i.e., risk aversion), favoring the idea that the family involvement constrains innovation.

Open/Closed Approach

Stereotypically, family firms are thought to be less inclined to adopt an open innovation strategy than their nonfamily counterparts. Conversely, Lambrechts et al. (2017) found socioemotional wealth plays a role in fostering social networks that facilitates open innovation and a diversity of ideas. When this is combined with a strong family commitment, it produces strong leadership, counteracting nepotism that tends to decrease the level of goal diversity and outside talent. Furthermore, open innovation while gaining from outside resources enables the family to maintain control and align values with potential partner values for the process to work properly. Casprini et al. (2017) found that imprinting and fraternization are important mechanisms to enhance knowledge creation when using open innovation. The study recommends family firms delegate innovation activities to increase the resources available for knowledge creation. This will then increase the speed of knowledge transfer, thereby developing the required ecosystem for effective open innovation activities. Briefly returning to the ability–willingness paradox introduced in the antecedents section, it also influences open innovation strategies. Rondi, De Massis, et al. (2021) have conceptually investigated the ability–willingness paradox relationship to open innovation, in circumstances of servitization conducted by family manufacturing SMEs.

Exploratory/Exploitative Activity

Whether a family firm tends to undertake exploratory or exploitative activities has also been included in family firm innovation research. The research found that family firms were more inclined to exploit and be incremental innovators than nonfamily firms (Classen et al., 2012; De Massis, Frattini, et al., 2015). However, studies focusing on ambidexterity found that family firms are consistently ambidextrous over time, including during dramatic changes (internally and externally induced) (Allison et al., 2014), and when the family influence increases (Stubner et al., 2012). Ambidextrous innovation activity is key to surviving critical incidents (McAdam et al., 2010) and to ensuring a family firm’s long-term viability (Bergfeld & Weber, 2011).

Furthermore, family firms adopt a distinctive approach to manage ambidexterity with the owning family acting as the innovation explorer and employees conducting exploitation (Weismeier-Sammer, 2014). Curvilinear relationships exist in the relationship between family involvement in the top management team and the firm’s activities regarding exploration, exploitation, and ambidexterity. The firm’s innovation activities are affected by the CEO’s family-centered noneconomic goals (Kammerlander et al., 2020).

Innovation Outcomes

The impact of innovation antecedents and activities leads to the innovation outcomes. Many different innovation outcomes occur, including direct (knowledge, patents, new products/services) and indirect (firm performance, firm growth, increased market share).

Direct Innovation Outcomes

Innovation results have been captured in terms of higher versus lower innovation outcomes than nonfamily firms in relation to different degrees (e.g., radical vs. incremental) and types (e.g., new products, processes, services, business models) of innovation. While the range of innovation outputs analyzed in the literature is wide and diverse, a large portion of these studies examines the number of new products/processes introduced as well as the number of patents registered. A smaller portion of studies analyzes the innovation adoption in terms of technological adoption, green innovation adoption, organizational innovativeness, and innovation opportunity realization. In terms of empirical analysis, studies dealing with the level of innovation outcomes are often based on self-reported measures.

Combining internal and external R&D increases the introduction of new products or processes in family firms more than in nonfamily firms (Muñoz-Bullón et al., 2020). Scholars converge toward the evidence that family firms tend to produce incremental rather than radical innovation outcomes (Hu & Hughes, 2020). Nieto et al. (2015) found that family firms are less likely to radically innovate than nonfamily firms and perform fewer innovative acts (such as R&D) than nonfamily firms. Family firms are less likely to seek external funding in comparison to nonfamily firms; however, they are likely to pursue incremental innovations. Whether this reduces innovation outcomes is a question for future research.

Family firms led by later generations tend to be produce less innovation outputs and resist the introduction of risky products (Cucculelli et al., 2016). In terms of innovation types of outcomes, Classen et al. (2014) identify a negative relationship between family-owned SMEs and the development of new processes, but the same does not hold for new products. Academic interest in business model innovation (see Foss & Saebi, 2017, for a literature review) is increasing, and so is the interest for this phenomenon in family firm research. A positive relation exists between family influence and digital business model innovation, a relation that is mediated by dynamic capabilities and weakened by environmental dynamism (Soluk et al., 2021). Yet, this area of research is still in its infancy, and further examination of business model innovation in family business is needed.

The number of registered patents is largely adopted as a proxy for innovation outputs (Duran et al., 2016), also considered able to capture innovation degree and quality. De Massis, Frattini, et al. (2015) found that patenting in family firms is facilitated by access to external sources of knowledge due to their unique social contexts. Family involvement was found to enhance firm propensity to patent (Matzler et al., 2015), especially in first-generation family firms (Memili et al., 2015). In contrast, other scholars suggested that family firms limit patenting activities (Classen et al., 2014) and tend to file fewer patent applications (e.g., Anderson et al., 2012); this is also apparent in studies examining public family firms (e.g., Block et al., 2013). These divergent findings were reconciled by Chirico et al. (2020), who went beyond the concept of patent as proxy for innovation outcomes but examined the strategic implications of patenting in family firms. In so doing, the study identifies a U-shaped relationship between family ownership and propensity to patent.

Indirect Innovation Outcomes

The organizational performance as an indirect innovation output has been mostly examined in terms of sales, profitability, and market shares. Spriggs et al. (2013) empirically found that innovative capacity served family firms as an advantage, and this relationship is moderated by collaborative network orientation and the dispersal of ownership of the family firm. Supporting this logic, Hatak et al. (2016) found that a firm’s innovativeness positively influenced the performance of the firm and that the family’s commitment moderates the size of this influence. When firm ownership is concentrated in one generation, the firm is better able to convert a firm’s innovativeness into higher levels of performance than those organizations whose ownership is dispersed across generations (e.g., growth in sales, profitability, market shares, growth in the number of employees) (Kellermanns et al., 2012).

Context

To understand the root causes of variations in innovation, it is crucial to consider the broad geographic, economic, political, and sociocultural context wherein firms reside (Porter & Stern, 2001). Unfortunately, research on family firm innovation has only scratched the surface of the role of context in shaping organizational attitudes and behavior. Family firm density has been identified as a driver of their regional innovation output (Block & Spiegel, 2013). Further examination of the influence that the industrial sector shapes innovation phenomena and processes in family firms is needed. The mosaic of formal and informal institutions in which organizations are embedded shapes their R&D investments (Brinkerink & Rondi, 2021). More specifically, the degree to which a firm relies on strong formal intellectual property rights institutions in R&D decisions depends on the configuration of informal institutions in its environment, including family and societal culture. This study shows that the involvement of the family in the ownership and management may fill institutional voids.

Exogenous shocks can also spur family firm innovation. During crises, such as the one brought about by the coronavirus pandemic, resource constraints and the family’s fear of losing socioemotional wealth trigger behavioral changes in family firms. Evidence shows that risk-averse family firms might suddenly become risk takers and mobilize slack resources to back up innovation and renewal (Leppäaho & Ritala, 2021). Moreover, family firms might become more prone to adopt new alliances and digital platforms, thereby challenging their traditional behavior. This ability of family firms to adapt to change and be more resilient (De Massis & Rondi, 2020) has been evidenced also under other challenging circumstances. Salvato et al. (2020) provide evidence of family firms’ superior resilience in overcoming the crisis in the aftermath of a disaster event (earthquake) by seizing posttraumatic entrepreneurial opportunities for recovery and growth. Contextual factors influence family firm innovation not only in terms of activities and outcomes but also in the innovation antecedents, for instance, by shaping a family firm’s willingness to engage in innovation (Chrisman et al., 2015). However, these preliminary findings underscore the need to examine the effect that contextual drivers exert on family firm innovation to unveil how such exogenous aspects influence organizational behavior and how their effect combined with family firm heterogeneity affects innovation.

The chrono-context refers to temporal aspects of the family, the business, the industry, or the environment that shape the innovation process of family firms. Innovation in family firms is shaped by the generation number, and research suggests that first-generation (founder) firms are more innovative than subsequent-generation ones (Kraiczy et al., 2015). Later-generation family firms tend to have a lower value creation capability than nonfamily firms (Muñoz-Bullón & Sanchez-Bueno, 2011). Part of learning is knowledge sharing and unlearning, and both are antecedents of innovation activities. Woodfield and Husted (2017) found that, in family firms that have bidirectional knowledge sharing between generations, the senior generations tend to bring their tacit knowledge to the discussions, whereas the junior generations bring their outside experience and explicit knowledge (derived from education programs). In terms of unlearning, Leal-Rodríguez et al. (2017) show that family ownership and organizational unlearning increase the ability to generate new knowledge, which is crucial for innovation activities.

Naturally, a family firm develops when more generations are included. Decker and Günther (2017) found that when family involvement in the firm increases, by the entry of the second generation, the level of innovativeness decreases. Similarly, De Massis et al. (2014) identified a horizontal S-shaped effect of proactiveness when thinking about the temporality of family firms. As it ages, the family firm’s proactiveness first declines, then increases, and finally decreases again, implying a nonlinear relationship between family firm age and its innovativeness. Under the same temporal perspective, Diéguez-Soto et al. (2016) found R&D intensity and continuous technological innovation were negatively influenced by family management in the short term but positively influenced in the long term.

Future of Research on Family Firm Innovation

This review article presented insights on the structure and evolution of research on family firm innovation according to an antecedents–activities–outcomes framework. This was an important endeavor that helps divulge and organize the current state of knowledge on innovation in family firms that initially emerged as a niche area of study but now is of growing interest to a broader set of management scholars. Despite the body of evidence examined herein, further arenas for future work on family firm innovation offer the opportunity to deepen and extend current understanding.

First, based on this analysis, the gap surrounding innovation activities persists as a large portion of the literature concentrates on innovation antecedents. Within this, there is a lack of understanding of how other important strategic dynamics of the organization are linked to innovation. For instance, international and multinational family firms’ networks can provide access to knowledge and resources abroad that shape innovation activities and boost innovation outcomes. Future research could examine how teams and groups are managed when they cross geographical boundaries within and among multinational organizations and how the family can contribute/hamper the knowledge transfer across domestic boundaries. Meanwhile, more dispersed family firms need to protect their knowledge-intensive assets to preserve control and competitive advantage in the long run, yet little on this topic has been explored so far (Rondi et al., 2022). Similarly, when business families owning holdings are involved in diverse industries, do they manage knowledge acquired across industries differently than nonfamily firms? Studies on innovation can also embrace a family business restructuring perspective, examining what are the drivers, mechanisms, and effects of the process through which family firms reconfigure and transform their businesses by relying on strategic tools such as acquisitions, mergers, divestments, and buyouts (King et al., 2021). These interdisciplinary areas of research that intersect innovation with other strategic initiatives such as internationalization, diversification, merger, and acquisitions are ripe for further investigation. Moreover, we also welcome scholars to consider, beyond the family business(es), other possible family boundary organizations established by entrepreneurial families to administer their assets (e.g., family offices, family holdings, family investment companies, family museums) (De Massis et al., 2021) to unearth if and how innovation dynamics change using this broader and more holistic perspective that contemplates the variety of assets they create or acquire over time that jointly generate financial and socioemotional wealth for the family.

Second, digitalization represents a key trend in innovation management, shaping how people conduct their job in organizations, how information is generated and shared, and how executives make strategic decisions. Are family firms engaging in digitalization differently from nonfamily counterparts? Are family and firm tradition obstacles to digitalization? Is digitalization different from other types of innovation for family firms? Digitalization is likely to shape innovation antecedents (e.g., information access, social network), innovation activities (project management, new product development), and also innovation outcomes (innovative products that integrate digital functionalities, digitalized processes, etc.). Despite some initial research (Ceipek et al., 2021), these are questions that need to be addressed to understand how family firms can contribute to entrepreneurship and society in the future to come. Family firms that involve the cohabitation of multiple generations, where usually the leadership is in the hands of a senior generation that is not always able to detect the potential of digitalization, are a distinctive context wherein to examine digitalization.

Third, the family sociohistorical trends have challenged family formation and transformation in the past centuries, so that the “family” notion is subject to debate, and phenomena such as divorces, blended families, and never-married and childless adults are increasing (Aldrich et al., 2021). However, the family firm innovation literature has mostly adopted a “nuclear view” of the family so far, missing the opportunity to grasp those trends and their organizational implications. It is crucial to extend the perspective on family firm heterogeneity to understand the role of family heterogeneity on family firm heterogeneity and its implications on organizational innovation. Indeed, scholars interested in delving into family firm innovation should further embrace the family perspective by considering the influence that family-specific characteristics exert on innovation antecedents, behaviors, and outcomes.

Fourth, family firms represent a revelatory context for investigating innovation from a temporal perspective. The long-term orientation, the influence of past and tradition, family legacy, and multigenerationality are intrinsic temporal aspects characterizing family firms (Magrelli et al., 2020). As such, the broad innovation management literature interested in examining how organizations develop for the future should focus on family firms as the revelatory context that offers fertile ground for unveiling temporal aspects of innovation behavior. This effort could be helpful also for other types of organizations where temporal dynamics are important but less explicit.

Fifth, emotions have been found to be crucial for organizations and their members, and this is especially relevant for family firms whose goals are led by socioemotional wealth logics (Humphrey et al., 2021). Scholars should examine the role of family and nonfamily members, as well as collective emotions in family firm innovation, to understand why creative ideas that trigger R&D investments might encounter organizational obstacles in their implementation.

Finally, research on family firm innovation should extend the theoretical perspectives adopted. Promising avenues for future studies are, for instance, offered by organizational identity theory and stakeholder theory. The organizational identity theory in innovation has unveiled the reciprocal influence between identity and innovation (Anthony & Tripsas, 2016), and embracing identity theory in family firms might allow consideration of how the central, distinctive, enduring traits of the organization are shaped by the family and their relationship with innovation. Moreover, family firms are particularly sensitive to sustainability aspects related to environment, society, and governance. However, scholarly interest in this direction is still scarce, and there is need for further examining whether the long-term orientation of family firms is translated in sustainable innovation decisions that have a positive impact on their stakeholders.

Conclusion

Family firms are pervasive organizations in all economies worldwide, and evidence shows that the presence of the family in the business affects the firm in a wide range of circumstances. Innovation is a prominent one, and this study has examined how the family influences innovation antecedents, activities, and outcomes. The purpose of the framework is to synthesize current understanding of family firm innovation and identify future directions that require further academic attention to deepen and extend knowledge about this crucial phenomenon.

Further Reading

  • Muñoz-Bullon, F., Sanchez-Bueno, M. J., & De Massis, A. (2019). Combining internal and external R&D: The effects on innovation performance in family and non-family firms. Entrepreneurship Theory and Practice, 44(5), 996–1031.

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