Faultlines in Family SMEs: The U-Shape Effect of Family Control on Innovativeness and Performance

Naeem Ashraf; Waqar Wadho; Subhan Shahid

doi:10.37725/mgmt.2023.8135

Naeem Ashraf Faculty of Management and Humanities, EDHEC Business School, Roubaix, France https://orcid.org/0000-0002-2817-4235
Waqar Wadho Faculty of Economics, Lahore School of Economics, Lahore, Pakistan
Subhan Shahid Strategy, Sustainability and Entrepreneurship Department, KEDGE Business School, Marseille, France

DOI: https://doi.org/10.37725/mgmt.2023.8135

Keywords: Family control, Innovativeness, Product innovation, Firm performance, Faultlines, SMEs

Abstract

Studies on innovation have yielded contradictory results regarding the influence of family control, giving rise to competing perspectives that either emphasize the stewardship role of family managers or the agency problems that their presence creates. Recent research integrates both perspectives, theorizing an inverted U-shaped relationship between family control and innovativeness. However, scholars typically focus on the family agenda, neglecting the dynamics of family–non-family members, particularly in SMEs, which may also influence innovation and performance. Drawing from faultline theory and based on the Spanish Innovation Survey panel data, the present paper examines family control’s direct U-shape effect on firm innovativeness and its indirect effect on firm performance. By demonstrating a U-shaped relationship between family control and firm innovativeness, we highlight the relevance of ‘faultlines’ between family – non-family organizational members.

Downloads

Download data is not yet available.

Author Biographies

Naeem Ashraf, Faculty of Management and Humanities, EDHEC Business School, Roubaix, France

Naeem Ashraf, PhD is a professor of sustainability management at EDHEC Business School, France. His areas of research interest are inter-organizational relationships, organizational behavior, and business ethics. He has published in Organization, Journal of Management Studies, Long Range Planning, and Journal of Business Ethics besides other journals.

Waqar Wadho, Faculty of Economics, Lahore School of Economics, Lahore, Pakistan

Waqar Wadho, PhD is an associate professor of economics, director of graduate studies (Economics), and a senior research fellow at Center for Research in Economics and Business (CREB) at Lahore School of Economics. His research interests lie in the fields of economics of innovation and entrepreneurship, political economy, and growth theory with a substantive focus on developing countries. He has published in Research Policy, World Development, Economic Inquiry, and Economics & Politics besides other journals.

Subhan Shahid, Strategy, Sustainability and Entrepreneurship Department, KEDGE Business School, Marseille, France

Subhan Shahid is a PhD candidate in entrepreneurship and innovation at Grenoble École de Management (GEM), France. His areas of research interest are entrepreneurial exit, sustainability, and wellbeing.

References

Antino, M., Rico, R. & Thatcher, S. (2019). Structuring reality through the faultlines lens: The effects of structure, fairness, and status conflict on the activated faultlines-performance relationship. Academy of Management Journal, 62(5), 1444–1470. doi: 10.5465/amj.2017.0054

Arosa, B., Iturralde, T. & Maseda, A. (2010). Outsiders on the board of directors and firm performance: Evidence from Spanish non-listed family firms. Journal of Family Business Strategy, 1(4), 236–245. doi: 10.1016/j.jfbs.2010.10.004

Arregle, J.-L., Hitt, M. A., Sirmon, D. G. & Very, P. (2007). The development of organizational social capital: Attributes of family firms. Journal of Management Studies, 44(1), 73–95. doi: 10.1111/j.1467-6486.2007.00665.x

Arzubiaga, U., Iturralde, T., Maseda, A. & Kotlar, J. (2018). Entrepreneurial orientation and firm performance in family SMEs: The moderating effects of family, women, and strategic involvement in the board of directors. International Entrepreneurship and Management Journal, 14(1), 217–244. doi: 10.1007/s11365-017-0473-4

Avlonitis, G. J. & Salavou, H. E. (2007). Entrepreneurial orientation of SMEs, product innovativeness, and performance. Journal of Business Research, 60(5), 566–575. doi: 10.1016/j.jbusres.2007.01.001

Bammens, Y., Notelaers, G. & Van Gils, A. (2015). Implications of family business employment for employees’ innovative work involvement. Family Business Review, 28(2), 123–144. doi: 10.1177/0894486513520615

Barnett, T. & Kellermanns, F. W. (2006). Are we family and are we treated as family? Nonfamily employees’ perceptions of justice in the family firm. Entrepreneurship Theory and Practice, 30(6), 837–854. doi: 10.1111/j.1540-6520.2006.00155.x

Barth, E., Gulbrandsen, T. & Schønea, P. (2005). Family ownership and productivity: The role of owner-management. Journal of Corporate Finance, 11(1–2), 107–127. doi: 10.1016/j.jcorpfin.2004.02.001

Basco, R., Campopiano, G., Calabrò, A. & Kraus, S. (2019). They are not all the same! Investigating the effect of executive versus non-executive family board members on firm performance. Journal of Small Business Management, 57(sup2), 637–657. doi: 10.1111/jsbm.12535

Bauweraerts, J. & Colot, O. (2017). Exploring nonlinear effects of family involvement in the board on entrepreneurial orientation. Journal of Business Research, 70, 185–192. doi: 10.1016/j.jbusres.2016.08.020

Blanco-Mazagatos, V., de Quevedo-Puente, E. & Delgado-García, J. B. (2016). How agency conflict between family managers and family owners affects performance in wholly family-owned firms: A generational perspective. Journal of Family Business Strategy, 7(3), 167–177. doi: 10.1016/j.jfbs.2016.07.003

Brinkerink, J. (2018). Broad search, deep search, and the absorptive capacity performance of family and nonfamily firm R&D. Family Business Review, 31(3), 295–317. doi: 10.1177/0894486518775187

Bunderson, J. S. & Van der Vegt, G. S. (2018). Diversity and inequality in management teams: A review and integration of research on vertical and horizontal member differences. Annual Review of Organizational Psychology and Organizational Behavior, 5(1), 47–73. doi: 10.1146/annurev-orgpsych-032117-104500

Calabrò, A., Campopiano, G. & Basco, R. (2017). Principal-principal conflicts and family firm growth: The moderating role of business family identity. Journal of Family Business Management, 7(3), 291–308. doi: 10.1108/JFBM-02-2017-0005

Chirico, F. & Baù, M. (2014). Is the family an ‘asset’ or ‘liability’ for firm performance? The moderating role of environmental dynamism. Journal of Small Business Management, 52(2), 210–225. doi: 10.1111/jsbm.12095

Chu, W. (2009). The influence of family ownership on SME performance: Evidence from public firms in Taiwan. Small Business Economics, 33(3), 353–373. doi: 10.1007/s11187-009-9178-6

Chua, J. H., Chrisman, J. J. & Sharma, P. (1999). Defining the family business by behavior. Entrepreneurship Theory and Practice, 23(4), 19–39. doi: 10.1177/104225879902300402

Cœurderoy, R. & Lwango, A. (2012). Social capital of family firms and organisational efficiency: Theoretical proposals for a transmission model through bureaucratic costs. M@n@gement, 15(4), 415–439. doi: 10.3917/mana.154.0416

Cucculelli, M., Le Breton-Miller, I. & Miller, D. (2016). Product innovation, firm renewal and family governance. Journal of Family Business Strategy, 7(2), 90–104. doi: 10.1016/j.jfbs.2016.02.001

Czarnitzki, D. & Delanote, J. (2013). Young innovative companies: The new high-growth firms? Industrial and Corporate Change, 22(5), 1315–1340. doi: 10.1093/icc/dts039

Daspit, J. J., Madison, K., Barnett, T. & Long, R. G. (2018). The emergence of bifurcation bias from unbalanced families: Examining HR practices in the family firm using circumplex theory. Human Resource Management Review, 28(1), 18–32. doi: 10.1016/j.hrmr.2017.05.003

Delmar, F., Davidsson, P. & Gartner, W. B. (2003). Arriving at the high-growth firm. Journal of Business Venturing, 18(2), 189–216. doi: 10.1016/S0883-9026(02)00080-0

Deman, R., Jorissen, A. & Laveren, E. (2018). Family control and innovativeness in private firms: The mediating role of board task performance. Management Decision, 56(2), 295–310. doi: 10.1108/MD-09-2016-0665

De Massis, A., Kotlar, J., Campopiano, G. & Cassia, L. (2015). The impact of family involvement on SMEs’ performance: Theory and evidence. Journal of Small Business Management, 53(4), 924–948. doi: 10.1111/jsbm.12093

Diaz-Moriana, V., Clinton, E., Kammerlander, N., Lumpkin, G. T. et al. (2020). Innovation motives in family firms: A transgenerational view. Entrepreneurship Theory and Practice, 44(2), 256–287. doi: 10.1177/1042258718803051

Drucker, P. F. (1999). Management: Tasks, responsibilities, practices. Butterworth-Heinemann.

Duran, P., Kammerlander, N., van Essen, M. & Zellweger, T. (2016). Doing more with less: Innovation input and output in family firms. Academy of Management Journal, 59(4), 1224–1264. doi: 10.5465/amj.2014.0424

Elbanna, S., Thanos, I. C. & Jansen, R. J. G. (2020). A literature review of the strategic decision-making context: A synthesis of previous mixed findings and an agenda for the way forward. M@n@gement, 23(2), 42–60. doi: 10.37725/mgmt.v23i2.4621

Falahat, M., Knight, G., & Alon, I. (2018). Orientations and capabilities of born global firms from emerging markets. International Marketing Review, 35(6), 936-957. doi: 10.1108/IMR-01-2017-0021

Fang, H., Chrisman, J. J., Daspit, J. J. & Madison, K. (2022). Do nonfamily managers enhance family firm performance? Small Business Economics, 58, 1459–1474. doi: 10.1007/s11187-021-00469-6

Filser, M., De Massis, A., Gast, J., Kraus, S. et al. (2018). Tracing the roots of innovativeness in family SMEs: The effect of family functionality and socioemotional wealth. Journal of Product Innovation Management, 35(4), 609–628. doi: 10.1111/jpim.12433

Franco, M. & Franco, S. (2017). Organizational commitment in family SMEs and its influence on contextual performance. Team Performance Management, 23(7–8), 364–384. doi: 10.1108/TPM-05-2016-0020

Gast, J., Filser, M., Rigtering, J. P. C., Harms, R. et al. (2018). Socioemotional wealth and innovativeness in small- and medium-sized family enterprises: A configuration approach. Journal of Small Business Management, 56(S1), 53–67. doi: 10.1111/jsbm.12389

González-Cruz, T. F. & Cruz-Ros, S. (2016). When does family involvement produce superior performance in SME family business? Journal of Business Research, 69(4), 1452–1457. doi: 10.1016/j.jbusres.2015.10.124

Gnan, L., Montemerlo, D. & Huse, M. (2015). Governance systems in family SMEs: The substitution effects between family councils and corporate governance mechanisms. Journal of Small Business Management, 53(2), 355–381. doi: 10.1111/jsbm.12070

Haans, R. F., Pieters, C. & He, Z.-L. (2016). Thinking about U: Theorizing and testing U- and inverted U-shaped relationships in strategy research. Strategic Management Journal, 37(7), 1177–1195. doi: 10.1002/smj.2399

Hayes, A. F. (2017). Introduction to mediation, moderation, and conditional process analysis: A regression-based approach. The Guilford Press.

Hoffmann, C., Wulf, T. & Stubner, S. (2016). Understanding the performance consequences of family involvement in the top management team: The role of long-term orientation. International Small Business Journal: Researching Entrepreneurship, 34(3), 345–368. doi: 10.1177/0266242614550500

Hughes, M., Filser, M., Harms, R., Kraus, S. et al. (2018). Family firm configurations for high performance: The role of entrepreneurship and ambidexterity. British Journal of Management, 29(4), 595–612. doi: 10.1111/1467-8551.12263

Ibrahim, B., Dumas, C. & McGuire, J. (2001). Strategic decision making in small family firms: An empirical investigation. Journal of Small Business Strategy, 12(1), 80–90.

Jaskiewicz, P., Combs, J. G. & Rau, S. B. (2015). Entrepreneurial legacy: Toward a theory of how some family firms nurture transgenerational entrepreneurship. Journal of Business Venturing, 30(1), 29–49. doi: 10.1016/j.jbusvent.2014.07.001

Jehn, K. A., Greer, L. L. & Rupert, J. (2008). Diversity, conflict, and their consequences. In A. Brief (Ed.), Diversity at work (pp. 127–174). Cambridge University Press. doi: 10.1017/CBO9780511753725.007

Jun, J., Lee, T. & Park, C. (2021). The mediating role of innovativeness and the moderating effects of strategic choice on SME performance. Journal of Small Business Management, 59(4), 627–647. doi: 10.1111/jsbm.12517

Kellermanns, F. W., Eddleston, K. A., Sarathy, R. & Murphy, F. (2012). Innovativeness in family firms: A family influence perspective. Small Business Economics, 38(1), 85–101. doi: 10.1007/s11187-010-9268-5

König, A., Kammerlander, N. & Enders, A. (2013). The family innovator’s dilemma: How family influence affects the adoption of discontinuous technologies by incumbent firms. Academy of Management Review, 38(3), 418–441. doi: 10.5465/amr.2011.0162

Kotlar, J., De Massis, A., Frattini, F., Bianchi, M. et al. (2013). Technology acquisition in family and nonfamily firms: A longitudinal analysis of Spanish manufacturing firms. Journal of Product Innovation Management, 30(6), 1073–1088. doi: 10.1111/jpim.12046

Kraiczy, N. D., Hack, A. & Kellermanns, F. W. (2015). What makes a family firm innovative? CEO risk-taking propensity and the organizational context of family firms. Journal of Product Innovation Management, 32(3), 334–348. doi: 10.1111/jpim.12203

Kunze, F. & Bruch, H. (2010). Age-based faultlines and perceived productive energy: The moderation of transformational leadership. Small Group Research, 41(5), 593–620. doi: 10.1177/1046496410366307

Lau, D. C. & Murnighan, J. K. (1998). Demographic diversity and faultlines: The compositional dynamics of organizational groups. Academy of Management Review, 23(2), 325–340. doi: 10.2307/259377

Lau, D. C. & Murnighan, J. K. (2005). Interactions within groups and subgroups: The effects of demographic faultlines. Academy of Management Journal, 48(4), 645–659. doi: 10.5465/amj.2005.17843943

Le Breton-Miller, I., Miller, D. & Bares, F. (2015). Governance and entrepreneurship in family firms: Agency, behavioral agency and resource-based comparisons. Journal of Family Business Strategy, 6(1), 58–62. doi: 10.1016/j.jfbs.2014.10.002

Lewis, D., Manolchev, C., Pursell, L., Hodgins, M. et al. (2020). The SME paradox? Investigating ill-treatment behaviours in small and medium-sized enterprises in Ireland. International Small Business Journal: Researching Entrepreneurship, 38(8), 746–767. doi: 10.1177/0266242620940165

Lumpkin, G. T., Brigham, K. H. & Moss, T. W. (2010). Long-term orientation: Implications for the entrepreneurial orientation and performance of family businesses. Entrepreneurship & Regional Development, 22(3–4), 241–264. doi: 10.1080/08985621003726218

Madanoglu, M., Altinay, L. & Wang, X. (Lorna). (2016). Disentangling the effect of family involvement on innovativeness and risk taking: The role of decentralization. Journal of Business Research, 69(5), 1796–1800. doi: 10.1016/j.jbusres.2015.10.058

Martínez-Alonso, R., Martínez-Romero, M. J. & Rojo-Ramírez, A. A. (2022). Refining the influence of family involvement in management on firm performance: The mediating role of technological innovation efficiency. Business Research Quarterly, 25(4), 337–351. doi: 10.1177/2340944420957330

Maseda, A., Iturralde, T., Aparicio, G., Boulkeroua, L. et al. (2019). Family board ownership, generational involvement and performance in family SMEs: A test of the S-shaped hypothesis. European Journal of Management and Business Economics, 28(3), 285–300. doi: 10.1108/EJMBE-07-2018-0071

Matzler, K., Veider, V., Hautz, J. & Stadler, C. (2015). The impact of family ownership, management, and governance on innovation. Journal of Product Innovation Management, 32(3), 319–333. doi: 10.1111/jpim.12202

Minichilli, A., Corbetta, G. & MacMillan, I. C. (2010). Top management teams in family-controlled companies: ‘Familiness’, ‘faultlines’, and their impact on financial performance. Journal of Management Studies, 47(2), 205–222. doi: 10.1111/j.1467-6486.2009.00888.x

Miralles-Marcelo, J. L., del Mar Miralles-Quirós, M. & Lisboa, I. (2014). The impact of family control on firm performance: Evidence from Portugal and Spain. Journal of Family Business Strategy, 5(2), 156–168. doi: 10.1016/j.jfbs.2014.03.002

Mowery, D. & Rosenberg, N. (1979). The influence of market demand upon innovation: A critical review of some recent empirical studies. Research Policy, 8(2), 102–153. doi: 10.1016/0048-7333(79)90019-2

Muñoz-Bullón, F., Sanchez-Bueno, M. J. & De Massis, A. (2020). Combining internal and external R&D: The effects on innovation performance in family and nonfamily firms. Entrepreneurship Theory and Practice, 44(5), 996–1031. doi: 10.1177/1042258719879674

Nordqvist, M. (2012). Understanding strategy processes in family firms: Exploring the roles of actors and arenas. International Small Business Journal: Researching Entrepreneurship, 30(1), 24–40. doi: 10.1177/0266242611407413

Ortega-Argilés, R., Moreno, R. & Caralt, J. S. (2005). Ownership structure and innovation: Is there a real link? The Annals of Regional Science, 39(4), 637–662. doi: 10.1007/s00168-005-0026-6

Oswald, S. L., Muse, L. A. & Rutherford, M. W. (2009). The influence of large stake family control on performance: Is it agency or entrenchment? Journal of Small Business Management, 47(1), 116–135. doi: 10.1111/j.1540-627X.2008.00264.x

Randolph, R. V., Fang, H. C., Memili, E. & Nayir, D. Z. (2021). Family and non-family sources of knowledge diversity in family firms: The role of causation logics. International Small Business Journal, 39(1), 64–85. doi: 10.1177/0266242620953359

Rubera, G. & Kirca, A. H. (2012). Firm innovativeness and its performance outcomes: A meta-analytic review and theoretical integration. Journal of Marketing, 76(3), 130–147. doi: 10.1509/jm.10.0494

Salavou, H. & Avlonitis, G. (2008). Product innovativeness and performance: A focus on SMEs. Management Decision, 46(7), 969–985. doi: 10.1108/00251740810890168

Sanchez-Famoso, V., Maseda, A. & Iturralde, T. (2014). The role of internal social capital in organisational innovation. An empirical study of family firms. European Management Journal, 32(6), 950–962. doi: 10.1016/j.emj.2014.04.006

Schulze, W. S., Lubatkin, M. H., Dino, R. N. & Buchholtz, A. K. (2001). Agency relationships in family firms: Theory and evidence. Organization Science, 12(2), 99–116. doi: 10.1287/orsc.12.2.99.10114

Songini, L. & Gnan, L. (2015). Family involvement and agency cost control mechanisms in family small and medium-sized enterprises. Journal of Small Business Management, 53(3), 748–779. doi: 10.1111/jsbm.12085

Tabor, W., Chrisman, J. J., Madison, K. & Vardaman, J. M. (2018). Nonfamily members in family firms: A review and future research agenda. Family Business Review, 31(1), 54–79. doi: 10.1177/0894486517734683

Turner, S. F., Mitchell, W. & Bettis, R. A. (2013). Strategic momentum: How experience shapes temporal consistency of ongoing innovation. Journal of Management, 39(7), 1855–1890. doi: 10.1177/0149206312458704

Urbinati, A., Franzò, S., De Massis, A. & Frattini, F. (2017). Innovation in family firms: A review of prior studies and a framework for future research. In A. Brem & E. Viardot (Eds.), Revolution of innovation management: Internationalization and business models (Vol. 2, pp. 213–246). Palgrave Macmillan. doi: 10.1057/978-1-349-95123-9_8

Vallejo, M. C. (2009). The effects of commitment of non-family employees of family firms from the perspective of stewardship theory. Journal of Business Ethics, 87, 379–390. doi: 10.1007/s10551-008-9926-6

Vandebeek, A., Voordeckers, W., Lambrechts, F. & Huybrechts, J. (2016). Board role performance and faultlines in family firms: The moderating role of formal board evaluation. Journal of Family Business Strategy, 7(4), 249–259. doi: 10.1016/j.jfbs.2016.10.002

Vandekerkhof, P., Steijvers, T., Hendriks, W. & Voordeckers, W. (2015). The effect of organizational characteristics on the appointment of nonfamily managers in private family firms: The moderating role of socioemotional wealth. Family Business Review, 28(2), 104–122. doi: 10.1177/0894486513514274

Verbeke, A. & Kano, L. (2012). The transaction cost economics theory of the family firm: Family-based human asset specificity and the bifurcation bias. Entrepreneurship Theory and Practice, 36(6), 1183–1205. doi: 10.1111/j.1540-6520.2012.00545.x

Wadho, W. & Chaudhry, A. (2018). Innovation and firm performance in developing countries: The case of Pakistani textile and apparel manufacturers. Research Policy, 47(7), 1283–1294. doi: 10.1016/j.respol.2018.04.007

Wadho, W. & Chaudhry, A. (2022). Innovation strategies and productivity growth in developing countries: Firm-level evidence from Pakistani manufacturers. Journal of Asian Economics, 81, Article 101484. doi: 10.1016/j.asieco.2022.101484

Wadho, W., Goedhuys, M. & Chaudhry, A. (2019). Young innovative companies and employment creation, evidence from the Pakistani textiles sector. World Development, 117, 139–152. doi: 10.1016/j.worlddev.2019.01.002

Wang, Y. & Shi, H. X. (2021). Particularistic and system trust in family businesses: The role of family influence. Journal of Small Business Management, 59(4), 700–734. doi: 10.1111/jsbm.12533

Werner, A., Schröder, C. & Chlosta, S. (2018). Driving factors of innovation in family and non-family SMEs. Small Business Economics, 50(1), 201–218. doi: 10.1007/s11187-017-9884-4