R&D investments in family and founder firms: An agency perspective
Section snippets
Executive summary
Investments in R&D, particularly in research-intensive industries, are necessary for innovation. These investments increase the firm's learning or absorptive capacity, that is, its ability to make use of existing information. However, they are different from other investments in that they take time to pay off and often fail to achieve their goals. An agency problem may occur, for example, if the manager of a firm has better information about the nature of the R&D investments and their
R&D as investment
Investments in R&D are more difficult to finance than other types of investments (Arrow, 1962, Nelson, 1959). Hall (2002) provides a comprehensive overview of the literature regarding this issue. There are two arguments for why R&D investments are difficult to finance.
The first argument concerns R&D output, namely knowledge. Knowledge is a non-rival good (Arrow, 1962). Once it is made publicly available, its use by one actor does not preclude its use by other actors and knowledge spillovers may
Lone founder ownership and R&D investments
As described above, moral hazard may exist on the part of the management team that undertakes R&D decisions. This problem may arise when the ownership and management of a firm are separate and when the two groups have different levels of risk tolerance. Managers are generally interested in job security, and they wish to promote their good reputation in the external job market for executives. Thus, they prefer to stay away from R&D projects with uncertain and long-term payoffs and will instead
Sample
In November 2003, Business Week (2003) ran a list of all the family firms in the S&P 500 as of July 31 of that year. This information led me to use Standard & Poor's 500 (S&P 500) as of July 31, 2003 as a starting point from which the sample is constructed. This resource is helpful because it provides qualitative information about the ownership structure and management composition of family firms. To obtain the sample, I excluded 346 firms that did not belong to R&D-intensive industries.
Descriptive statistics and univariate analyses
Using the definition of Miller et al. (2007), approximately 28% of the observations in the sample fall into the category of family firms, and 11% are classified as lone founder firms. Thus, approximately 61% of the observations are neither family nor lone founder firms. These figures are slightly lower than the data in Miller et al. (2007), which may be explained by the fact that the sample only includes research-intensive industries and is based on S&P 500 firms (Miller et al. (2007) use
Discussion
In summary, strong evidence is found that founder ownership has a positive impact on both R&D intensity and R&D productivity (Hypotheses 1 and 2). Moreover, I conclude that family-owned firms have a lower level of R&D intensity and R&D productivity (Hypotheses 3 and 4) than founder-owned firms. In the following subsections, I discuss these results and the contributions to the literature.
Implications for practice
I note practical implications for family and lone founder firms. The paper's findings show that family firms invest less in R&D than do other firms. As a result, family firms may weaken their competitiveness. Lone founder firms are found to invest more in R&D relative to other firms. But what happens when a lone founder firm turns into a family firm? I argue that, over time, family firms may become hostile to change and will follow conservative strategies that limit future growth (Miller et
Conclusions
This is the first research effort to analyze R&D intensity and its productivity in family and lone founder firms relative to other firms. Due to its long-term horizon and the stronger alignment of ownership and management, most other research to date has hypothesized that family firms should exhibit a higher level of R&D intensity than non-family firms (Anderson and Reeb, 2003, James, 1999). However, I did not find any evidence of family firms investing more in R&D. I found the opposite to be
Acknowledgements
Comments from Oliver Alexy, Joachim Henkel, Peter Jaskiewicz, Dietmar Harhoff, Oliver Klöckner, Phil Phan, Roy Thurik, and two anonymous reviewers are much appreciated. The author is indebted to Andreas Thams for his research support and enormous help on earlier versions of the paper. This research was supported by the Deutsche Forschungsgemeinschaft through the SFB 649 “Economic Risk” and the individual grant “Long-term Orientation in Family Firms.” An earlier version of the paper won the Best
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