Does Family Governance Encourage Innovation?

Abstract

Starting with the fact that family companies have higher financial performances
as well as market predominance, the purpose of this paper is, first, to determine
whether the particular governance structure of family businesses leads to higher
innovation performances, and then, to assess the link between innovation and the
financial performances of these companies. The governance of family companies
– where the family owns and manages the company - induces different objectives
in regard to the classical scheme of profit maximization. Indeed, the
development of specific family resources, associated with a long term strategic
vision, could be favorable to innovation. The empirical study was based on a
sample of large Belgian companies’ family and non-family. Multiple linear
regression models were used to measure innovation discrepancies, and the
influence of these differences on the financial performance of family businesses.
Firstly, the results show a positive and significant relation between innovation,
in terms of patents and R&D, and global financial profitability. This emphasizes
the explanatory power of innovation regarding financial performance of
organizations. Secondly, our study demonstrates a positive and significant
relation between financial profitability and a company’s investments in R&D
and patents. However, we cannot assert that family companies are significantly
more active in R&D, even if it is the case in our sample. The study concludes
that even if family companies are not necessarily more innovative, their
governance structure enables them to generate more profitability from
innovation performance, long term orientation and social components - such as
cooperation or communication which allows them to allocate their innovative
resources strategically and effectively.