Family firms and technology innovation: Testing competing hypotheses

Abstract

we study how different aspects of family ownership and control influence technology innovation in a firm. Prior literature has drawn mainly from principal-principal agency theory and stewardship theory to explain the influence of family involvement on various strategic decisions and outcomes in a firm. Arguments drawn from stewardship theory and institutional void frameworks support a positive influence of family control and business group affiliation on technology innovation. In contrast, arguments from principal-principal agency theory hypothesize a negative influence. Based on the above conflicting theoretical frameworks we study how family involvement in ownership, management and board of directors in a firm, and business group affiliation influence R&D investments and patents obtained by the firm. The hypotheses are empirically tested on a seven year panel of 172 firms from Indian pharmaceutical industry. Results broadly support the stewardship theory and institutional voids framework as against the principal-principal agency predictions. We find that family shareholding and family control over the CEO and chairperson position have a positive influence on firm’s investment in R&D. We also find a positive influence of group affiliation on investments in R&D and patents applied by the firm. We attribute the positive influence to high technological opportunity in Indian pharmaceutical industry. We further argue that higher technological opportunities reduce agency costs and facilitate stewardship behavior, in turn promoting innovation in family firms.