Innovation in Family Business?

The latest from the Harvard Business Review’s ongoing inquiry into family businesses has yielded a surprising result.  Research recently published in the Academy of Management Journal indicates that family businesses actually tend to be more innovative than their counterparts.  Many of us tend to attribute to family businesses the virtues of tradition, family culture, and long term perspective – all great characteristics, but none that seems particularly compatible with innovation and risk-taking.  Nevertheless, the numbers suggest a different result, and the Harvard Business Review offers three compelling reasons why:

1. While the numbers suggest that family businesses tend to invest less in innovation, they also suggest that – particularly in the later generations – family businesses tend to be substantially more efficient with the investments they do make.
2. The close relationships of owners and managers in many family businesses actually provide a better environment for risk-taking and mistake-making than one might find in a business where employees and managers are constantly being reviewed on their short term performance.
3. Multi-generational family businesses benefit from an impressive institutional knowledge about their company and industry.  While this could result in a mentality of “we do it this way because we have always done it this way”, it also equips them to better understand long-term trends and to avoid the pitfalls that might trip up their competitors.

As with many things, the study suggests that the characteristics that tend to come with a family business are not altogether good or altogether bad.  When a family has the perspective to capitalize on its strengths, it can be competitive in any arena or aspect of business – including innovation.

Read the full story, “Research: Family Firms Are More Innovative Than Other Companies” by Nadine Kammerlander and Marc van Essen, here.  

Drew Steen is a business transactions attorney at Davis Wright Tremaine, LLP.  He represents both buy-side and sell-side clients in mergers and acquisitions, venture capital investments, joint ventures, equity co-investments and restructurings.  He also serves as regular corporate counsel for several closely-held and family-owned companies.  Drew can be reached via email at andrewsteen@dwt.com or directly at 206.757.8081.