Close your eyes and imagine a world where the most innovative companies aren’t big tech giants but family-run businesses. Now open your eyes, because you don’t have to imagine it: It’s reality.
That’s what our team of business experts found in a recent global analysis of research into family-owned and family-run firms.
When we reviewed 193 studies published from 1996 through 2022 about the strategies, including innovation, that these businesses pursue, we saw that smaller family companies lead the charge in innovation – with a caveat.
Specifically, we found that small and medium-sized family companies in legal environments with strong property rights are the most innovative in the world. They surpassed large family businesses and non-family-run business of all sizes.
To determine which countries have stronger property rights protections, we used the most comprehensive ranking available, the International Property Rights Index.
The index takes several issues into account, including political stability, judicial independence, corruption, ease of access to loans, and copyright and patent protection.
The three countries with the strongest legal environments are Finland, Switzerland and Australia. The U.S. came in 12th place.
Why it matters
When business professors talk about “innovation,” we’re typically referring to investments in research and development, business process improvements, new product creation and other activities associated with product-related strategic change.
Previous research has suggested that family businesses are more or less innovative based on two things: how large they are and whether they’re in a country that protects property rights. When property rights aren’t protected, people have less incentive to innovate – because their ideas are liable to be stolen.
We’ve personally seen how this affects business owners. Some members of our team come from countries where property rights aren’t strongly protected – namely, Kazakhstan and China – and we’d heard from family-business owners about their struggles to innovate.
Our work illustrates the importance of property-rights protections to business growth. And while such legal protections enable growth for everyone, small and medium-sized family-run businesses stand to gain the most from them.
This isn’t entirely surprising. Large companies often have more robust systems in place to protect against risks such as theft and fraud. And they have less need to innovate thanks to their size and established market presence. In contrast, smaller companies must innovate continuously to compete and grow.
Family companies also care about passing firms to future generations, which gives them an extra incentive to innovate: If they don’t, they may cease to exist. This seems to be more relevant to smaller, less established family companies.
What still isn’t known
Our findings are qualitative rather than quantitative, which means that more research is needed to confirm them. We also don’t yet know what kind of innovations make smaller family companies stand out, or whether these innovations should be incremental or radical.
Our team wants to learn more about the legal environments in which family companies operate and how they affect behavior and performance. We plan to conduct more research on various strategies that family companies pursue, such as innovation, internationalization and mergers or acquisitions.
Ultimately, we hope to find best practices that will help family companies prosper everywhere in the world – not just in certain countries.
The Research Brief is a short take on interesting academic work.
