Family involvement, innovation and product market competition

Abstract

The paper constructs a theoretical framework suggesting a moderating impact of product market competition in determining the relationship between family ownership/control and innovation. We argue that the elimination of ‘career concerns’ of CEOs in firms with greater family share may explain the mechanism followed to encourage R&D investments. Empirical testing of the hypotheses is performed using data from the Indian manufacturing industry for the period 2001–2018. The findings suggest that the domestic product market competition complements the relationship between family ownership/control and R&D investments. This indicates that family firms tend to invest more in R&D as domestic product competition increases. The data suggest that the effect of family involvement on innovation is due to the reduction of managerial career concerns, as we find that managerial turnover (conditional on poor performance) is lower if family involvement is higher. This effect is significantly stronger under higher degrees of competition.