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What Determines the Level of Entrepreneurship in Family Firms?

By Jennifer M. Pendergast, Ph.D.

There are competing arguments about whether family firms are more or less entrepreneurial than their nonfamily peers. Family firms are thought to be more entrepreneurial because they:

  • have entrepreneurial history and genes of founders
  • have long-term perspective and willingness to invest
  • often have strong, supportive cultures

Family firms are accused of being less entrepreneurial because they:

  • can be risk averse
  • can fall into NIH (“not invented here”) syndrome
  • have less external talent and exposure
  • can experience family dynamics getting in the way of sound business practices

So, what decides which force will rule in determining the level of entrepreneurship in family firms? A recent study by Kellermanns, Eddleston, Barnett and Pearson, published in the March 2008 issue of Family Business Review, investigates several factors that may be related to the level of entrepreneurial behavior in family firms. Variables they consider include the age and tenure of the CEO and the number of generations in the firm. They hypothesize that these variables will affect entrepreneurial behavior, which in turn will affect business growth (measured as growth in number of employees).

CEO age and tenure are both expected to have a negative impact on entrepreneurial behavior. The justification for this relationship is that CEOs who are older or who have been in their jobs longer may become resistant to change and more risk averse. Involvement of multiple generations of family members is expected to lead to more entrepreneurial behavior. Younger generations may bring in fresh ideas and a greater variety of perspectives. Finally, entrepreneurial behavior is expected to create growth.

Results of the study, titled “Effects of Family Member Characteristics and Involvement on Entrepreneurial Behavior,” suggest that entrepreneurial behavior does drive firm growth. However, not all the variables studied are found to have a relationship to this behavior. Neither CEO age nor tenure shows a relationship to entrepreneurial behavior. The authors suggest that family firms may be different than nonfamily firms in this respect. While younger CEOs generally are expected to be more entrepreneurial, younger CEOs in family firms may not be given the latitude to impact the firm’s culture, particularly if they operate in a group decision-making mode with other family members.

The study did find that involvement of multiple generations was strongly related to entrepreneurial behavior. What are the implications for family firms? First, encouragement of an entrepreneurial culture benefits family firms that aspire to grow. Second, finding ways to engage next-generation employees and ensuring that their ideas are heard can lead to a more entrepreneurial culture.

 

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