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

Research was largely consistent in predicting a negative relationship between family ownership and research anddevelopment (R&D) intensity until Chrisman and Patel, using a behavioral agency model (BAM), called this generalassumption into question. They argued that publicly owned family firms typically invest less in R&D than nonfamily-owned firms. This behavior may however be reversed if economic performance levels are below family aspirations orif family long-term goals, such as pursuing strong transgenerational family control, are highly valued. While mostresearchers, like Chrisman and Patel, primarily focused on large listed firms, more research on the relationshipbetween 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 paper it is argued that Chrisman and Patel’s results can be extendedto the context of SMEs, albeit with one important specification: the relationship between family ownership and R&Dintensity is likely to be contingent on the way the family has invested its wealth. Specifically, it is contended that in thecontext of SMEs, where goals are more fluid and mixed, when there is a high overlap between family wealth and firmequity (i.e., most of the family’s wealth is invested in the firm) the relationship between family ownership and R&Dintensity is negative because of the family owners’ greater desire to protect their socioemotional wealth (SEW).However, if the overlap between the family’s total wealth and single firm equity is low (i.e., firm equity is just a smallpart of the total family wealth), the relationship between family ownership and R&D intensity is positive as the lowoverlap between family wealth and firm equity reduces the family’s loss aversion propensity. In such a situation, familyownership is likely to foster R&D intensity because of the long-term orientation of family owners that increases thefamily firm’s propensity to bear the risk of investing in R&D activities. The hypothesis is tested and confirmed in a studyof 240 small- and medium-sized firms based in Italy. The paper 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 drivesor inhibits R&D investments in SMEs when a family is involved in the ownership of the firm. This is particularlyimportant because research on innovation management, as well as research on R&D intensity in family firms, isprimarily focused on large firms and much less on SMEs. Second, the study complements arguments from prior researchon the correlates of R&D intensity in large listed firms, showing that the BAM and SEW perspective offer a theoreticalframework 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