THE ANALYSIS OF THE RELATIONSHIP BETWEEN ...(emotional attachment), the moderating effect of human resource (HR) redundancy on the relationship between family involvement and innovative

THE ANALYSIS OF THE RELATIONSHIP BETWEEN

FAMILY INVOLVEMENT AND INNOVATIVE

CAPABILITY IN CHINESE FAMILY SMEs

Kaiyang Sun

Master of Management

Bachelor of Management

Submitted in fulfilment of the requirement for the degree of Master of Philosophy

School of Advertising, Marketing and Public Relations

QUT Business School

Queensland University of Technology

2020

The analysis of the relationship between family involvement and innovative capability in Chinese SMEs i

Supervisors

Principal Supervisor

Associate Professor Rumintha Wickramasekera, Queensland University of Technology,

School of Advertising, Marketing and Public Relations

Associate Supervisors

Dr Alvin Tan, Queensland University of Technology, School of Advertising, Marketing and

Public Relations

Dr Ingrid (Ying Xian) Wang, Queensland University of Technology, School of Advertising,

Marketing and Public Relations

ii The analysis of the relationship between family involvement and innovative capability in Chinese SMEs

Abstract

Innovative capability is one of the key factors assisting family businesses to achieve

their sustainable development (Champoux & Peters, 1987). Although prior studies have

investigated the effect of family involvement on family enterprises’ innovative capability,

these studies tended to overlook the importance of situation factors (especially those

characteristics that are unique to family business) and how they could influence the

relationship between family involvement and innovative capability. This study applies

agency theory and socioemotional wealth (SEW) theory to investigate the direct relationship

between family involvement (ownership, management and governance) and innovative

capability. Derived from the resource-based view (RBV) and the SEW perspective

(emotional attachment), the moderating effect of human resource (HR) redundancy on the

relationship between family involvement and innovative capability will also be explored.

For this study, relevant secondary data on listed Chinese family small and medium-

sized enterprises (SMEs) was collected through the China Stock Market and Accounting

Research Database (CSMAR) and analysed using hierarchical multiple regression models.

The findings suggest a negative effect of family involvement (ownership, management and

governance) on family firms’ innovative capability (both input and output). Furthermore, the

findings also reveal that the unique HR redundancy seen in Chinese family businesses could

moderate the relationship between family ownership and innovative input, as well as the

relationship between family governance and innovative capability (both input and output).

The analysis of the relationship between family involvement and innovative capability in Chinese SMEs iii

In terms of theoretical contribution, this research addresses the current limitation in

studies on family businesses and presents results that provide a better understanding of the

relationship between family involvement and innovative capability while clarifying the

moderating influence of HR redundancy. Further, this study extends the behaviour agency

model (BAM) in the context of Chinese family SMEs to better explain the effect of family

SMEs’ non-economical/socioemotional pursuit on the relationship between family

involvement and innovative capability. In terms of practical contribution, this study presents

important knowledge that may assist decision-makers in family SMEs to make better trade-

offs between their innovative strategies and their HR strategy.

iv The analysis of the relationship between family involvement and innovative capability in Chinese SMEs

Table of Contents

Abstract ..................................................................................................................................... ii

List of Tables ......................................................................................................................... viii

List of Figures ............................................................................................................................ x

Abbreviations ............................................................................................................................ xi

Statement of Original Authorship ........................................................................................... xii

Acknowledgements ................................................................................................................ xiii

Chapter 1: Introduction .............................................................................................................. 1

1.1 Introduction-Research Background ............................................................................. 1

1.2 Research Problem ........................................................................................................ 3

1.3 Objectives of this Study ............................................................................................... 4

1.4 Outline of this Thesis ................................................................................................... 5

1.5 Definition of Pertinent Terms ...................................................................................... 6

1.6 Delimitations of Scope and Key Assumptions .......................................................... 13

1.7 Conclusion ................................................................................................................. 13

Chapter 2: Literature Review ................................................................................................... 15

2.1 Introduction ................................................................................................................ 15

2.2 Literature Review Methodology ................................................................................ 18

2.3 Parent theories ............................................................................................................ 19

2.3.1 The perspective of agency theory ................................................................... 19

2.3.2 Behavioural Agency Model ............................................................................ 24

2.3.3 The Socioemotional Wealth (SEW) Perspective ............................................ 26

2.3.4 Resource Based View (RBV) ......................................................................... 29

2.4 The empirical study review about the innovative capabilities of family firms .......... 33

2.5 The dimensions of family involvement in family business ....................................... 36

2.6 The innovative capability in this research ................................................................. 39

2.7 Human resource (HR) redundancy in family firms ................................................... 42

The analysis of the relationship between family involvement and innovative capability in Chinese SMEs v

2.8 Research hypotheses .................................................................................................. 48

2.8.1 The main effect – family ownership and innovative capability (H1) ............. 48

2.8.2 The main effect – family management and innovative capability (H2) ......... 52

2.8.3 The main effect – family governance and innovative capability (H3) ........... 57

2.8.4 Moderating effect of HR redundancy (H4a, H4b, H4c) ................................. 60

2.9 Conclusion ................................................................................................................. 64

Chapter 3: Methodology .......................................................................................................... 65

3.1 Introduction ................................................................................................................ 65

3.2 Research Philosophy .................................................................................................. 66

3.3 Research Method – Quantitative Data Analysis ........................................................ 67

3.4 Sample and data collection procedure ....................................................................... 68

3.5 Measures .................................................................................................................... 70

3.5.1 Independent Variables .................................................................................... 71

3.5.2 Dependent Variables ....................................................................................... 72

3.5.3 Moderating Variable – The HR redundancy in family firms .......................... 73

3.5.4 Control Variables ............................................................................................ 75

3.6 Analytical strategy ..................................................................................................... 79

3.7 Ethical considerations ................................................................................................ 80

3.8 Conclusion ................................................................................................................. 81

Chapter 4: Results ................................................................................................................... 82

4.1 Introduction ................................................................................................................ 82

4.2 Descriptive statistics and correlations coefficients .................................................... 84

4.3 Multiple regression analysis – main effects (H1, H2, H3 in Figure 2.7) ................... 88

4.3.1 Family ownership and innovative capability – Family ownership will

negatively influence innovative capability (H1) ...................................................... 88

4.3.2 Family management and innovative capability – Family management will

negatively affect innovative capability (H2) ............................................................ 90

vi The analysis of the relationship between family involvement and innovative capability in Chinese SMEs

4.3.3 Family governance and innovative capability – Family governance will

negatively affect innovative capability (H3) ............................................................ 92

4.4 Moderating effects of HR redundancy ....................................................................... 94

4.4.1 The moderating role of HR redundancy on the relationship between ‘family

involvement in ownership’ and innovative capability (H4a) ................................... 95


involvement in management’ and innovative capability (H4b) ............................... 97


involvement in governance’ and innovative capability (H4c) ............................... 100

4.5 Summary of results .................................................................................................. 103

4.6 Conclusion ............................................................................................................... 106

Chapter 5: Discussion and Conclusion .................................................................................. 108

5.1 Introduction .............................................................................................................. 108

5.2 Summary of the results ............................................................................................ 110

5.3 The main effects of family involvement on innovative capability (H1, H2, H3

proposed in Chapter 2) ................................................................................................... 111

5.3.1 The effect of family ownership on innovative capability ............................. 112

5.3.2 The effect of family management on innovative capability ......................... 114

5.3.3 The effect of family governance on innovative capability ........................... 117

5.4 The moderating effects – HR redundancy in family business (H4a, H4b, H4c

proposed in Section 2.8.4) ............................................................................................. 119

5.4.1 The moderating effect of HR redundancy on family ownership and innovative

capability relationship ............................................................................................ 120

5.4.2 The moderating effect of HR redundancy on family management and

innovative capability relationship .......................................................................... 124

5.4.3 The moderating effect of HR redundancy on family governance and

innovative capability relationship .......................................................................... 126

5.5 Contributions............................................................................................................ 130

5.5.1 Theoretical contributions .............................................................................. 130

5.5.2 Practical implications .................................................................................... 133

The analysis of the relationship between family involvement and innovative capability in Chinese SMEs vii

5.6 Limitations and Future Directions ........................................................................... 135

5.7 Conclusion ............................................................................................................... 136

References .............................................................................................................................. 138

viii The analysis of the relationship between family involvement and innovative capability in Chinese SMEs

List of Tables

Table 1.1: Representative definitions of family business .......................................................... 7

Table 1.2: Definition of SMEs across different countries ...................................................... 10

Table 1.3: The criteria of Chinese SME in different industries ............................................... 11

Table 2.1: Dimensions of family involvement in prior research ............................................. 39

Table 2.2: Comparison with existing research models ............................................................ 47

Table 3.1: Industrial distributions of the sample family firms ................................................. 70

Table 3.2: Year distribution of the sample firms ..................................................................... 70

Table 3.3: The definition of different variables in this research .............................................. 77

Table 4.1: Descriptive Statistics .............................................................................................. 84

Table 4.2: Correlation coefficient between variables .............................................................. 87

Table 4.3: Hierarchical Regression Analysis for the effects of family ownership on innovative

capability - H1 .......................................................................................................................... 89

Table 4.4: Hierarchical Regression Analysis for the effects of family management

involvement on innovative capability – H2 ............................................................................. 91

Table 4.5: Hierarchical Regression Analysis for the effects of family governance on

innovative capability – H3 ....................................................................................................... 93

Table 4.6: Hierarchical Multiple Regression Analysis presenting moderating effect of human

resource redundancy on the relationship between family ownership and innovative capability

- H4a......................................................................................................................................... 96

The analysis of the relationship between family involvement and innovative capability in Chinese SMEs ix


resource redundancy on the relationship between family management and innovative

capability - H4b ........................................................................................................................ 99


resource redundancy on the relationship between family governance and innovative

capability - H4c ...................................................................................................................... 102

Table 4.9: Summary of results ............................................................................................... 104

Table 5.1: Theoretical contributions of this study ................................................................. 132

x The analysis of the relationship between family involvement and innovative capability in Chinese SMEs

List of Figures

Figure 1.1: Outline of Chapter 1 ................................................................................................ 3

Figure 2.1: Outline of the theories in this study ....................................................................... 16

Figure 2.2: The structure of Chapter 2 ..................................................................................... 17

Figure 2.3: Agency theory classification ................................................................................. 20

Figure 2.4: The behavioural agency model used in family firm study .................................... 25

Figure 2.5: F-PEC power scale ................................................................................................ 38

Figure 2.6: Mapping of the literature ....................................................................................... 46

Figure 2.7: Theoretical model of this study ............................................................................. 63



Figure 4.2: The modified research model based on the findings ........................................... 105

Figure 5.1: The structure of Chapter 5 ................................................................................... 109

The analysis of the relationship between family involvement and innovative capability in Chinese SMEs xi

Abbreviations

BAM: Behavioural agency model

CSMAR: China stock market & accounting research

F-PEC: Family-power, experience and culture

RBV: Resource based view

SEW: Socioemotional wealth

HR: Human resource

NBS: National bureau of statistics

SMEs: Small and medium-sized enterprises

QUT: Queensland University of Technology

xii The analysis of the relationship between family involvement and innovative capability in Chinese SMEs

Statement of Original Authorship

The work contained in this thesis has not been previously submitted for a degree at any

other higher education institutions. To the best of my knowledge and belief, the thesis

contains no material previously published or written by any other person except where due

reference is made.

QUT Verified Signature

Kaiyang Sun

Date

The analysis of the relationship between family involvement and innovative capability in Chinese SMEs xiii

Acknowledgements

I have to sincerely thank my principal supervisor Rumintha Wickramasekera, my first

supervisor and mentor overseas. Without your support and help, I would never get an

opportunity to start a higher level of research in Australia. You not only share your incredible

wisdom and knowledge with me, but also inspired me a lot to be confident and enthusiasm in

my study. The inner confidence you give me cannot be described in words. Thank you!

For my associate supervisors Alvin Tan and Ingrid Wang, I am sincerely appreciative

of your patience, and assistance in my study process, as well as helping me in overcoming the

language and culture barriers during these two years. Your meticulous style has always been

an example for me to work and learn from. My three supervisors’ persuasive teaching and

eclectic thinking have inspired me a lot during the past two years.

In addition, I have to thank my father and mother for their financial and spiritual support

to me during the past two years; your good health and happiness forever will always be my

biggest wish! I will study and work harder to live up to my parents' expectations in the future.

Besides, I would like to thank my best friends Jeremy Campell, Tahrima Ferdous and

Marita Smith in QUT business faculty. They have accompanied me in the past two years, and

I thank them for their thoughtful suggestions and help. With their support, encouragement

and help, I was fully able to make the most of two years of study life.

xiv The analysis of the relationship between family involvement and innovative capability in Chinese SMEs

Professional editor Jane Todd provided copyediting and proofreading services,

according to the guidelines laid out in the university-endorsed national ‘Guidelines for

editing research theses’.

Finally, to the selfless best teachers in QUT, your kindness and steady support helped

me through a lot of the difficulties during this period of time. I would like to thank all the

teachers in my courses sincerely, including Peter O'Connor, Paula McDonald, Ozgur

Dedehayir and Emma Nelms who generously shared their outstanding knowledge with me.

Thank you sincerely!

Chapter 1: Introduction 1

Chapter 1: Introduction

1.1 Introduction-Research Background

Family businesses are developing rapidly in both developed and developing countries

(Migliori et al., 2020). According to estimates, family-owned or operated businesses account

for between 65% to 80% of companies worldwide (Seaman & Bent, 2017). Family small and

medium-sized enterprises (SMEs) play an important role in supporting the economic stability

in many countries and regions, especially in emerging markets (Ahmad & Yaseen, 2018). In

China, the success of family enterprises is becoming increasingly important for the country’s

economy (Yang et al., 2020). However, similar to the situation in many other countries, the

rate of failure is notably high. According to statistics, 68% of Chinese family SMEs fail

within their first five years of operations, 19% survive up to around 6–10 years, and only

13% of these firms have a lifespan that exceeds 10 years (Zhu et al., 2012).

With intensifying competition in the global markets, innovative capability has received

much attention as one of the core factors that could assist family firms in remaining

competitive against rival firms (Fuetsch & Suess-Reyes, 2017). Empirical studies showed

that a firm’s high level of innovative capability (like higher R&D intensity) could positively

influence its performance (Sher & Yang, 2005) as well as its stainable competitive advantage

(Lee & Hsieh, 2010). Thus, it can be an important choice for family SMEs to improve their

innovative capability within a very competitive landscape (Massis et al., 2013).

2 Chapter 1: Introduction

The relationship between family involvement and innovative capability is an essential

consideration that has been explored frequently in prior studies, with most existing research

verifying and confirming the importance of innovation for family firms. However, a notable

limitation in these studies is that they tend only to focus on the main effects of family

involvement, such as investigating the impact of family ownership on firms’ innovative

capability (Chen et al., 2013). Moderating variables (those situation factors that could affect

the relationship between family involvement and innovative capability), however, have not

received sufficient research attention (Kotlar, De Massis, et al., 2014). This gap in the

literature potentially limits the ability for scholars and practitioners to better understand the

relationship between family involvement and innovative capability.

Analysing collected data on a sample of Chinese-listed family SMEs, this study explores

how family involvement will influence family firms’ innovative capability. As part of the

study, the potential moderating effects of family firms’ unique HR policy (see Section 2.7) in

terms of how it could affect the relationship between family involvement (Section 2.5) and

innovative capability (see Section 2.6) will also be looked into. This study was conducted

using a quantitative research methodology (see Chapters 3 and 4) and results are detailed and

discussed (see Chapter 5).

This introduction chapter presents the research background, research problem, research

objective, as well as the outline/structure of the whole thesis. In addition, a series of

definitions regarding pertinent key terms will be provided in this chapter. Figure 1.1 below

presents the outline of this introductory chapter.


Figure 1.1: Outline of Chapter 1

Source: Developed by this study

1.2 Research Problem

The main research problem of this study is ‘How family involvement will affect family

firms’ innovative capability’. In order to address this research problem, four hypotheses were

proposed for this study (see Section 2.8). Specifically, the first three hypotheses were

proposed based on prior studies from both Western-centric and Chinese literature (see


Sections 2.8.1, 2.8.2 and 2.8.3). The fourth hypothesis was proposed to fill the research gap

that exists in prior literature (see Section 2.8.4 and Section 2.7). The hypotheses of this study

are reproduced below:

H1: Family ownership involvement will negatively influence firms’ innovative capability.

H2: Family management involvement will negatively influence firms’ innovative

capability.

H3: Family governance involvement will negatively influence firms’ innovative capability.

H4: HR redundancy of family SMEs will: (a) weaken the negative relationship between

family ownership involvement and innovative capability; (b) weaken the negative

relationship between family management involvement and innovative capability; (c) weaken

the negative relationship between family governance involvement and innovative capability.

1.3 Objectives of this Study

This study is an attempt at addressing the current research gap as well as some of the

shortcomings noted in previous studies on family firms. The focus is on investigating the

relationship between family involvement and innovative capability, and developing a

theoretical model (see Figure 2.7) to explain how family firms’ loss-aversion to social-


emotional wealth (keeping redundant labour) could affect their propensity to conduct

innovative strategies. In terms of both theoretical and practical contributions, this study will

(a) investigate how a unique moderating variable (HR redundancy in family business)

will affect the relationship between family involvement and innovative capability.

(b) provide a variant of BAM (see Section 2.3.2 and Section 2.7) which is better suited

in the context of family business studies.

(c) provide guidelines that may assist family SMEs in making better trade-offs

between their HR strategies and their innovative strategies.

1.4 Outline of this Thesis

Following Perry (1998) guidelines, this study adopts the standard sequence of a five-

chapter structure thesis. The five chapters of this thesis are listed below and they each

represent a different stage of this study:

Chapter 1: Introduction

Chapter 2: Literature review

Chapter 3: Methodology

Chapter 4: Data analysis results

Chapter 5: Discussion and conclusion

Chapter 1 presents an overview of the research problem, highlights the background and

provides a brief justification for this study. Also included is a list of definitions for the


relevant key terms that are used in this thesis (see Section 1.5). Chapter 2 explores the

relationship between family involvement (see Section 2.5) and innovative capability (see

Section 2.6) from different theoretical perspectives including agency theory (see Section

2.3.1), BAM (see Section 2.3.2), SEW perspective (see Section 2.3.3) and RBV (see Section

2.3.4). Through a critical review of these theories as presented in the literature, a theoretical

model (see Figure 2.7) is proposed to address the overarching research question. In Chapter

3, the methodological design applied in this research is discussed, including the sample

source and data collection process (see Section 3.4), followed by the operationalisation and

measurement of the key variables (see Section 3.5). Data analysis method is also detailed (see

Section 3.6). Chapter 4 presents the descriptive statistics (see Section 4.2), followed by the

results of the standard multiple regression (see Section 4.3) and the moderated regression

analysis (see Section 4.4) in order to verify the hypotheses proposed in Chapter 2. Finally, the

overall findings and analysis are discussed in Chapter 5. The chapter discusses relevant

linkages between this study and the existing literature while highlighting the potential

theoretical and practical contributions (see Section 5.5). The chapter concludes by

considering the limitations of this study and presenting constructive suggestions for future

research directions (see Section 5.6).

1.5 Definition of Pertinent Terms

This section provides a series of definitions to explain the relevant terms that are used in

this thesis:


Family business: Family business has been defined slightly differently within the

literature due to the varying types of studies that were previously conducted. James (1999)

defines family business according to the dimension of ownership, management and

inheritance. Within academic circles, a family business is distinguished from a non-family

business based on four main criteria: (a) The proportion of family ownership in the enterprise

(Lansberg et al., 1988); (b) The family members’ involvement in their enterprises’

management or governance (Berent-Braun & Uhlaner, 2012; Reid et al., 2002); (c) The inter-

generational inheritance of the enterprise (Bjuggren & Sund, 2001); and (d) the multi-

condition restrictions (Matzler et al., 2015; Wiseman & Gomez-Mejia, 1998). Table 1.1

below summarises the representative definitions of family business in the existing literature.

Table 1.1: Representative definitions of family business

Dimension Definition Author Ownership A family business refers to a

business in which the family has legal ownership of the business.

(Lansberg et al., 1988)

Members of a family hold at least 5% or more of the company's shares.

(Chen et al., 2008), (Lee & Chu, 2017)

A family business is defined as an institution in which the total shareholding of internal family members exceeds 10%.

(Mok et al., 1992)

If multiple members from a same family play a role of owners in a firm, it is family business.

(Miller & Breton‐

Miller, 2006)

Management/ governance

Family business is a coalition dominated /controlled by members from the same family.

(Campopiano et al.,

2014)


Dimension Definition Author In a family business, the chief executive should be a family member. At least two generations of the family should be involved in firm governance.

(Alderson, 2011)

In a family business, the achievement of family-centered goals depends on the family’s control over the company.

(Chrisman et al., 2014)

Intergenerational Inheritance

If an enterprise is transferred from an entrepreneur to a younger generation or generations who retains the actual control of the enterprise, it can be defined as a family business.

(Bennedsen et al., 2007)

A family business is a company that proposes a corporate vision by a dominant group controlled by one or a few families, and can continue to develop business across generations.

(Chua et al., 1999).

Multiple

Perspectives

Family enterprises should have the characteristics of family inheritance. The power of corporate governance and management could be passed on to next generation.

(Davis et al., 1997)

Family enterprises should satisfy two conditions: first, the ownership and management of enterprises should be firmly in the hands of a family; second, the CEO of the enterprise recognises that the enterprise is a family enterprise. The family participation dimension should include family ownership and family management.

(Martin & Gomez-Mejia, 2016)

Family enterprises should be privately owned and all the important management positions should be assumed by family members.

(Matzler et al., 2015)

Source: Developed for this study


Considering the objectives of this study and the proposed research question, this study

combines aspects of previous definitions and will define a family firm as a firm that has: (1)

ownership belonging to one family or being distributed among several families and their

members, and the holding ratio is at least 5%. Although some past studies have suggested that

family shareholding should be more than 10% (Mok et al., 1992), a growing number of

recent studies tend to set 5% as the baseline criterion (Lee & Chu, 2017; Sun et al., 2019); (2)

family members who are involved in the management team and on the board of directors; and

(3) its main strategic decisions are made by family members based on the dominance of their

share of equity.

SMEs: Small and medium-sized enterprises (SMEs) are defined slightly differently

across international markets due to their different historical backgrounds, economic

development levels, economic structures, as well as socio-cultural backgrounds (Khan,

2014). Table 1.2 below highlights the most commonly used definitions for SMEs.


Table 1.2: Definition of SMEs across different countries

Country Basis Definition

Korea

Department of Small

and Medium Enterprises

For SMEs, the total number of employees should be less than 300 and the total capital should be less than 8 billion Won (Cin et al., 2017).

UK

2009 Corporation Law

For small-sized enterprises, the turnover should not exceed 6.5 million pounds, and the number of employees should not exceed 50. For medium-sized enterprises, the annual turnover should not exceed 25.9 million pounds, and the number of employees should not exceed 250 (Lee & Rodríguez-Pose, 2013).

US

Small Business Administration

For SMEs, the total capital should be less than 5 million dollars or the total number of employees should be less than 500 (Mikhailitchenko & Lundstrom, 2006).

Germany

SME Research Institute

For medium-sized enterprises, the total annual sales should be between 1 million and 50 million euros, and the total number of employees should be between 10 and 499. For small-sized enterprises, the total annual sales should be less than 1 million euros or total number of employees should be less than 10 (Olejnik, 2014).

Australia Australian Bureau of Statistics

SMEs are defined as the companies with fewer than 200 employees (Duan et al., 2012).

Source: Collected by this study

As this research is focused on studying Chinese SMEs, the definition adopted for

SMEs is based on the classification standards established in the Chinese market. According to

“the small and medium-sized enterprises standard provisions” released by China’s National

Bureau of Statistics (NBS) in 2017 (NBS, 2017), the classification for SMEs is differentiated


according to industries as detailed in Table 1.3 below.

Table 1.3: The criteria of Chinese SME in different industries

Classification of industry

Indicator Unit Medium-sized Small-sized

Manufacturing

Operation revenue (RMB)

Ten thousand 2000-40000 300-2000

Employee number 300-1000 20-300

Agriculture, forestry

and fishing

Operation revenue Ten thousand 500-20000 50-500


Wholesale trade



Retail



Storage Operation revenue Ten thousand 1000-30000 100-1000


Accommodation Operation revenue Ten thousand 2000-30000 100-2000


Information transfer



Real estate



Energy


Employee number 300-1000 20-300 Software and Information technology

service



Construction


Asset Ten thousand 5000-80000 300-5000

Leasing and commercial

services

Asset Ten thousand 8000-12000 100-8000


Other industry Employee number 100-300 10-100

Source: China’s National Bureau of Statistics (NBS) in 2017 (NBS, 2017)

Innovative capability: This study utilises both R&D input and output as two important


indicators to represent family SME’s innovative capability. Specifically, R&D expenditure

represents firms’ R&D input, while patent application counts represent firms’ R&D output.

This is detailed in Section 2.6.

Employee redundancy: According to Australian Fair Work Ombudsman (FWO, 2020),

the employee redundancy happens when an employer doesn’t need an employee’s job to be

done by anyone, or when the business introduces new technology (e.g. the job can be done by

a machine). In family business context, due to the influence of an internal network, nepotism

and the effort to maintain emotional ties, some redundant employees are still retained in the

corporation despite not having the required skills and knowledge (König et al., 2013).

Socioemotional wealth (SEW): The concept of SEW is proposed to explain the

difference in behaviour between family business and non-family business. This study applied

Gómez-Mejía et al. (2007)’s definition regarding SEW: socioemotional wealth refers to the

non-economic utility a family derives from its ownership position in a company, and it is the

referencing point of family firms’ behaviour. According to Berrone et al. (2012) study,

family firms’ socioemotional wealth has a set of dimensions: family control, identification of

family members, binding social ties, emotional attachment and intergenerational inheritance.

This study particularly emphasises the emotional attachment dimension. The detail of

socioemotional wealth perspective will be discussed in Section 2.3.3.


1.6 Delimitations of Scope and Key Assumptions

This focus of this study is on Chinese family-owned firms but the scope is restricted to

listed firms in China that fit the definition and classification of SMEs. According to Deng et

al. (2013), SMEs are important engines of economic growth and job creation in emerging

economies, especially in China, and within the Chinese market, private SMEs are mainly

owned and controlled by families (Li & Chen, 2006). Focusing on Chinese family SMEs as

the research target not only fits the requirements of this study but is also representative of the

enterprise study field in emerging economies. However, it should be noted that the restricted

scope means that the findings of this study cannot be generalised to foreign firms outside of

China as well as unlisted Chinese SMEs. As for the key assumptions, on the basis of SEW

perspective (see Section 2.3.3) and Resource-based view (see Section 2.3.4), this study

proposes that family firms’ unique HR policy (see the detail in Section 2.7) could influence

the effect of family involvement (ownership, management and governance dimension) on

innovative capability. It should be noted that the result of testing this hypothesis are based on

listed family SMEs in China and cannot be generalised beyond the restricted scope.

1.7 Conclusion

This first chapter elaborates the background of this research project and provides the

justification for conducting this study. The key components of this thesis are introduced,

starting with an overview of the overarching research question and the corresponding

hypotheses, followed by definitions of the key terms and discussion on delimitation. The next


chapter will present a comprehensive review of the literature to explore previous research in

this field as well as the relevant theoretical perspectives to develop an overall theoretical

framework for this study.

Chapter 2: Literature Review 15

Chapter 2: Literature Review

2.1 Introduction

The preceding chapter provided an introduction to the research background and

objectives. This chapter reviews the literature to propose a theoretical framework that models

the relationship between family involvement and enterprise innovative capability. The

chapter commences by looking into the major theoretical perspectives that have underpinned

studies in this area: Agency Theory (in Section 2.3.1), Behavioural Agency Model (BAM) (in

Section 2.3.2), Socioemotional Wealth (SEW) Theory (in Section 2.3.3) and Resource-Based

View (RBV) (Section 2.3.4). The following Section (2.4) reviews prior empirical studies

within the current literature that have explored the effect of family involvement on a family

firm’s innovative capability. Section 2.5 further identifies the three dimensions of family

involvement seen in family business according to the F-PEC scale of family influence

(Astrachan et al., 2002) while Section 2.6 provides an explanation of innovative capability in

this context. Next, Section 2.7 identifies the current gaps/limitation in the prior literature

while Section 2.8 proposes the hypotheses of this study and presents a synthesised theoretical

model to investigate the effect of family involvement on a firm’s innovative capability. An

outline of the key theories reviewed in this Section 2.3 is shown below in Figure 2.1, while

the overall structure of Chapter 2 is detailed below in Figure 2.2.

16 Chapter 2: Literature Review

Figure 2.1: Outline of the theories in this study



Figure 2.2: The structure of Chapter 2

Source: Developed for this research


2.2 Literature Review Methodology

In recent years, family enterprises’ innovative capability has become a topic of

increasing interest in the field of corporate governance (De Massis et al., 2013). For

conducting a literature review in this study field, this study conducted a comprehensive

search in peer-reviewed entrepreneurship, international business and management journals by

utilising databases like Google Scholar, ProQuest, Web of science and so on. Specifically, the

relevant academic journal articles were obtained by searching for relevant key words (like

‘family firms’, ‘family SMEs’, ‘family involvement’, ‘innovative capability’ and ‘R&D

investment’). Through reading these articles, this study analysed: (a) ‘the theoretical

relationships between family involvement and innovation capability’, (b) ‘the dimensions of

family involvement in enterprises’ and (c) ‘how do different dimensions of family

involvement influence the innovative capability of family firms.’ Through analysing and

summarising, this study found that the effect of family involvement on family firms’

innovative capability was investigated by prior representative studies mainly from four

theoretical perspectives: Agency theory (Block, 2012; Choi et al., 2015), Behavioural Agency

Model (Lim et al., 2010; Sanders & Carpenter, 2003; Wiseman & Gomez-Mejia, 1998), SEW

perspective (Gómez-Mejía et al., 2007), as well as RBV (Carnes & Ireland, 2013). Through

analysing the theoretical relationships between family involvement and innovative capability,

this study identified the research gap in existing literature. Then, by combining the empirical

evidence and reasonable logical reasoning, the theoretical model of this study was

constructed, and the hypotheses were proposed in this chapter.


2.3 Parent theories

2.3.1 The perspective of agency theory

Agency theory plays a leading role in many works that attempt to explain the

technological innovation of family enterprises. Previous studies have proposed that agency

relationships fall into two main categories: those that occur between shareholders and

managers (Zhang et al., 2018) and those that occur between major shareholders and minor

shareholders (Huddart, 1993). In addition, studies have also highlighted two other types of

agency relationships that are unique to family businesses: the relationship among family

members (Memili et al., 2015), and the relationship between family and non-family members

(Madison et al., 2018). This section will review the perspectives of the above four different

agency relationships as presented in Figure 2.3 below:


Figure 2.3: Agency theory classification

Source: Summarised and developed in this research

The agency relationship between shareholders and managers

Prior research has found agency conflicts between shareholders and managers to be

important in affecting corporate investment behaviour (Belloc, 2012). Agency conflicts

within listed companies have notably been caused by factors such as: the separation of

ownership and control (Claessens et al., 2000), information asymmetry (Fang et al., 2017)

between shareholders and managers, as well as the inconsistent goals of the managers and


shareholders (Shankman, 1999). It is common to find shareholders with ownership who do

not participate in the daily operation of their companies, and in these cases, the actual

authority and control power of the companies are usually in the hands of professional

managers (Lloyd et al., 1986). Under such circumstances, managers could likely have better

access to firm-specific information (Healy & Palepu, 2001) and may potentially engage in

opportunistic behaviours (Fosberg, 2004). Fong (2010) noted that information asymmetry

may give managers an opportunity to reduce R&D spending since there is a negative

relationship between R&D spending

and managers’ compensation (Bizjak et al., 1993). Studies have also found the interests of

managers and shareholders to be divergent in terms of addressing risk (Beatty & Zajac,

1994). In general, CEOs and managers tend to prefer short-term outcomes which are less

risky rather than long-term outcomes like R&D projects (Fong, 2010). Based on this

understanding, agency conflicts between shareholders and managers will negatively affect a

company's investment to engage in innovative activities.

Some studies have argued that the above agency problems can be alleviated in the

context of a family business since family firms usually have its family members as executive

members in order to keep both ownership and control of the company within the hands of the

family (James, 1999). Because of this, the benefits of the principal shareholders and the

managing agents are more closely aligned (Schulze et al., 2003). Specifically, the

participation of family managers, compared with hiring external non-family managers, can

effectively minimise the agency expenses in the operation of the company (Dawson, 2011).


Besides, due to the existence of family altruism (Samara et al., 2019), family participation in

the management team may also promote the exchange and sharing of knowledge within the

family enterprise (Zahra, Neubaum, & Larrañeta, 2007). In this situation, information

exchange and communication among enterprise members is conducive to the long-term and

effective development of innovative activities (Schilling & Phelps, 2007).

The agency issue between major shareholders and minor shareholders

Apart from agency problems between shareholders and managers, agency conflicts

between major and minor shareholders in an enterprise could also affect the innovative

capability of an enterprise (La Porta et al., 1999; Lodh et al., 2014). Previous research has

argued and verified that major shareholders of a corporation are often reluctant to take risks

in R&D investment in comparison with minor shareholders (Graves, 1988; Hill et al., 1988).

In a family business, the influence of family ownership on enterprise innovation that results

from the cooperation between major and minor shareholders may benefit in reducing agency

problems and in optimising resource allocation (Belloc, 2012). As a family property is

considered to be closely related to the operation of a family business, family major

shareholders would tend to be more conservative and risk averse in protecting it and its

reputation (Schmid et al., 2008).


The agency problem within family and the agency problem between family and non-family

members

In addition to the above two types of agency relationship, agency relationship among

internal family members and agency relationship between family and non-family members

are special relationships that only exist within family enterprises (Chua et al., 2003; Karra et

al., 2006). Although some scholars believe that altruism among internal family members can

promote collaboration and information exchange among family employees (Schulze et al.,

2003), other researchers have argued that altruism within a family business can result in

excessive company-paid private consumption (Kappes & Schmid, 2013) which may reduce

the cash flow that should have been applied to more important technological projects.

Furthermore, as the number of inheritance algebras increases, a family firm’s equity may

gradually be distributed among more family members and, as a consequence, potential

conflict of interests would emerge (Davis & Harveston, 2001), that could potentially distract

the firm’s focus on its long-term development of innovative capability.

In terms of the relationship between family employees and non-family employees, family

businesses provide a special working environment for non-family employees due to the way

that they are organised (Beehr et al., 1997). Non-family employees tend to face a peculiar

situation as they are not part of the family but are part of the business (Mitchell et al., 2003).

Nepotism is a unique feature of family businesses that can lead to non-family employees’

perception of injustice and unfair treatment (Padgett & Morris, 2005). Nepotism within

family firms could also limit their human resource quality and talent pool (Hayajenh et al.,


1994) as the hiring and promotion of less-educated family members could cause resentment

among more qualified non-family employees who have better skills and talents (Sciascia &

Mazzola, 2008). This resentment may impact negatively on non-family employees, reducing

their enthusiasm and motivation to assist family firms in pursuing longer-term innovative

strategies.

2.3.2 Behavioural Agency Model

Agency theory plays an important role in explaining the agency problem that may occur

between agents and principals due to their divergent interests (Bosse & Phillips, 2016). The

theory also emphasises different risk attitudes between principals and agents (Barney &

Hesterly, 2006). On the basis of that, Wiseman and Gomez-Mejia (1998) argued that ‘the

formulation of risk in agency theory has been too restrictive and naive’. Specifically, agent-

based corporate governance model tends to limit agents’ risk-taking behaviour to either risk-

aversion or neutrality, and accordingly ignore the possibility of seeking risk (Jegers, 1991;

Wiseman & Bromiley, 1996). Wiseman and Gomez-Mejia (1998) developed Behavioural

Agency Model (BAM) by combing traditional agency theory and prospect theory (Sitkin &

Pablo, 1992). According to prospect theory, decision-makers may have different risk

preference in different framing for the same problem (Tversky & Kahneman, 1981). Thus,

BAM combines the elements of internal governance with problem framing to investigate

decision-makers’ risk-taking behaviours (Wiseman & Gomez-Mejia, 1998).


BAM has been applied to family business research in past research (Chrisman & Patel,

2012; Lim et al., 2010; Sciascia et al., 2015). Chrisman and Patel (2012) research found that

family firms’ owners and managers tend to invest more in innovative strategies than non-

family firms if their firms’ performance level is lower than the targeted aspiration level. In

the eyes of a family-influenced firm, this performance gap could be a threat to both economic

goals and family non-economic goals. It is notable in this study that performance level was

used as the moderating variable to investigate family firms’ innovative capability. Figure 2.4

below shows that BAM was used in the comparison of R&D investments between family and

non-family firms.

Figure 2.4: The behavioural agency model used in family firm study

Source: Chrisman and Patel (2012)


2.3.3 The Socioemotional Wealth (SEW) Perspective

The SEW perspective provides a theoretical basis for the behaviour of many family

businesses and represents an extension of Wiseman and Gomez-Mejia (1998) BAM

(Minichilli et al., 2014). The SEW perspective holds that the target of preserving socio-

emotional wealth should be the primary objective of family firms’ strategic decision-making

(Berrone et al., 2012). The SEW perspective emphasises the non-financial aspects of firm

such as: family identity, reputation, family control, family ties and perpetuation of family

dynasty (Gómez-Mejía et al., 2007). Prior studies about family business have shown that

family enterprises’ concern about socioemotional wealth would likely influence their

decision on pursuing innovative opportunities (Block, 2012; Sciascia et al., 2015).

Family control

Families often view the maintaining of family control and inheritance as a fundamental

dimension in measuring SEW (Hauck et al., 2016). The adoption of innovation could put a

family firm’s non-economical utility at risk since innovation may weaken a family’s control

over the firm’s operation (De Massis et al., 2015). Family members tend to regard potentially

risky decisions as threats to family control and inheritance, thus reflecting a conservative

attitude in the decision-making process that may lead to family businesses’ aversion to long-

term activities like innovative strategies and investment (Patel & Chrisman, 2014).


Family identification

Apart from family control, family identification is another dimension of family SEW

(Gomez-Mejia et al., 2014). In a family business, family identification and corporate

identification tend to overlap (Dyer Jr & Whetten, 2006). On the one hand, this sense of

identification could make family employees more motivated to align their interests with the

benefits of the company, thus reducing agency costs (Jensen & Meckling, 1976). On the other

hand, family identification may weaken a firm’s innovative capability and motivation. First,

family identity could always be prioritised through a family employee’s kinship relationship

and through nepotism (Collin & Ahlberg, 2012). This kind of identity strictly distinguishes

family employees from non-family employees in the company, which may lead to inequality

in promotion opportunities and in the receiving of benefits between the two groups (Smith &

Amoako-Adu, 1999). This inequality could potentially reduce non-family members’ sense of

organisational commitment and they may likely focus more on short-term performance and

opportunistic behaviour (Sciascia & Mazzola, 2008), thus negatively affecting the firm due to

their lack of enthusiasm in engaging in longer-term innovation activities. This difference in

identity could create a barrier that leads to the lower willingness among non-family

employees to share their knowledge resource with family members (Zahra, Neubaum, &

Naldi, 2007). This barrier in communications may also weaken the innovative capability of

family enterprises. In addition, a rigid family role and relationship within the family system

could make family organisations less flexible in adjusting their strategies to keep pace with

the dynamic business environment (Michael‐Tsabari & Lavee, 2012). Notably, family


enterprises and organisations tend to focus more on existing technical structure and often fail

to respond to external environmental challenges (Barr et al., 1992), thus impacting on their

ability to grasp innovation opportunities more timely and accurately.

Emotional attachment/ties

Emotional attachment is another dimension of family firms’ SEW (Martínez-Romero

& Rojo-Ramírez, 2016) that affects family firms’ decision-making process (Fitz‐Koch &

Nordqvist, 2017), especially in making innovative decisions. Due to emotional attachment, a

company may become the place where family employees satisfy their needs for belonging,

influence and intimacy (Kepner, 1983). As such, family employees are emotionally

connected to their firms’ existing tangible/intangible resources and ecosystem (Burgelman &

Grove, 1996). If innovative activities get breakthrough, new/discontinuous technologies will

inevitably eliminate obsolete technologies. Under this circumstance, the stronger the

employees’ emotional attachment, the more painful it would be for family firms to accept

discontinuous technologies since new innovation will require the firms to reconfigure their

human resources and to divest older assets (König et al., 2013). Although the success of

innovation strategies can make family businesses achieve better financial performance (Ehie

& Olibe, 2010), it is often difficult for older family executives to be qualified for newer

executive positions since they may have difficulty adapting to new technological trends and

developments (Vandekerkhof et al., 2015). Studies have indicated that family firms’

innovative activities could put some older employees at the risk of being retrenched, thus

disrupting the emotional attachment/ties within the family firm.


Based on above, for the purpose to preserve different dimensions of SEW, family

enterprises would tend to carry out less innovative activities compared with other non-family

firms.

2.3.4 Resource Based View (RBV)

The basic assumption of RBV is that the internal resources and capabilities of

enterprises are heterogeneous across firms and it can constitute the competitive advantage of

enterprises (Barney, 1991). According to previous researchers, the ‘familiness’ of family

firms is considered as a unique organisational resource compared with other types of

enterprises (Carnes & Ireland, 2013). Familiness is caused by family presence in a firm’s

power structure and experience as well as the affinity between a family’s existing culture and

the culture within the firm (Klein et al., 2005). The interaction between family and business

may affect the management and allocation of resources in family firms (Sirmon & Hitt,

2003). Furthermore, familiness could influence family enterprises’ innovative capability by

changing the human capital, financial capital and social capital (Carrasco-Hernández &

Jiménez-Jiménez, 2013).

Human Capital

Reviewing prior studies, it can be seen that human capital in family businesses may

have both positive and negative effects on enterprise innovation. As family firms may have


already established social networks (Zahra, 2010), they would be more likely to hire

employees from within their existing networks (Cruz et al., 2011). Kotlar and De Massis

(2013) remarked that this behaviour could strengthen employees’ sense of commitment to

family‐centred goals. Furthermore, information asymmetry within family firms could be

reduced by hiring employees within the existing social network (Su & Lee, 2013), which is

beneficial to the firms’ supervision and control over the process of innovation activities. In

addition, family businesses tend to provide more informal training for their employees

(Kotey, 2007), which could enhance employees’ innovative ability and efficiency. The above

measures could improve family firms’ human resource competency in various innovative

strategies. However, some scholars hold an opposing view. First, nepotism within family

businesses could develop negative consequences over time (Vinton, 1998). Specifically,

nepotism in family firms often results in inept family members being employed as managers

and this may promote an unfair reward system that makes it difficult for family firms to

attract external talents (de Vries, 1993). Next, family businesses may pay more attention to

the kinship ties rather than actual abilities when hiring managers and other employees (Liang

et al., 2013). Scholars have found that enterprise technological activities have high

requirements for employees’ knowledge and professional abilities (Collins & Smith, 2006).

An employment policy that is based on a kinship/nepotism relationship would likely have a

negative influence on a small-sized family enterprise’s ability to introduce innovative

products and services (De Massis et al., 2013).


Financial Capital

Apart from human capital, conducting innovative activities cannot be separated from

the support of large amounts of funding (Jones & Williams, 2000). Financial resources of

family enterprises could potentially affect the innovative capability of family enterprises in

both positive and negative ways. From the positive perspective, for the purpose of protecting

family control, family businesses may adopt a control amplification mechanism to build a

family business group and an internal capital market (Masulis et al., 2011). With this

mechanism, the relevant enterprise unit within the family group can get preferential financial

support for innovation activities (Lodh et al., 2014). However, from a negative perspective,

family shareholders may not easily transfer their equity in exchange for funding so as to

maintain the control of the family business (Goetzmann & Koll, 2005), and thus, it is often

not conducive for a family business to obtain financial support from the stock market to

implement innovative strategies. In addition, family agents tend to have a thrifty attitude

towards risky investment when they participate in company management (Cassia et al.,

2012), which could also negatively affect the organisation’s atmosphere of conducting

innovative strategies and investment.

Social Capital

The resources of family businesses are not only limited to human resources and

financial capital. The social capital of family firms is another area of major concern

(Sorenson, 2011). The social resources inherent in certain relationships can be utilised to

achieve economic goals (Biggart & Castanias, 2001). In family firms, the family is


considered to be the user, source and builder of social capital (Bubolz, 2001). It has been

found that the social capital of family enterprises can be divided into internal social capital

(Carr et al., 2011) and external social capital (Kontinen & Ojala, 2012). From the perspective

of internal social capital, family firms have a higher level of knowledge integration and

sharing among family employees (Chirico & Salvato, 2008), which is beneficial for family

enterprises to carry out technological innovation activities since the development of

innovation activities has higher requirements for information exchange (Chesbrough &

Teece, 2003). Besides, a higher level of internal social capital in family firms could play an

important role in boosting both incremental and radical innovative capability (Subramaniam

& Youndt, 2005). In addition to internal interactions among family employees, family firms’

interactions with external stakeholders are also likely to be more vigorous and stable (Arregle

et al., 2007). For instance, prior research has shown that Chinese family enterprises have

strong interactions with their suppliers, clients and bankers (Redding, 1995). The active

engagement of family members with external stakeholders can keep their corporation aligned

with their customers’ needs, thus fostering a more positive impact on the market orientation

of innovative products (Cassia et al., 2012). Furthermore, prior research has shown that the

preservation of stable social networks with all stakeholders could be helpful for family

companies to obtain stable funding and appropriate human capital that are required for

conducting innovation-related research (Gomez-Mejia et al., 2011). However, the breadth of

family SME’s external social capital tends to be limited when compared with non-family

firms (Classen et al., 2012). Family SMEs’ limited cognitive diversity and absorptive ability


(Daily & Dollinger, 1993) will negatively affect their scope of searching for innovation-

related resources and collaborations (Classen et al., 2012), thus hindering the development of

innovative capability.

2.4 The empirical study review about the innovative capabilities of family firms

The review of empirical studies from the past has shown that most of the research

results, with a few exceptions, are relatively consistent in supporting that the involvement of

family tend to have a negative influence on the R&D investment of family enterprises.

A limitation of previous research is that most studies did not sufficiently consider the

heterogeneity of family involvement and would view family involvement as a dummy

variable. Thus, the specific components of ‘family involvement’ tend to be overlooked.

For instance, Kotlar, Fang, et al. (2014) conducted an empirical analysis by using panel data

from 431 private manufacturers collected in Spain between 2000 and 2006. Their research

indicated that most family firms’ primary concern is in preserving their control over the

organisation. Family‐centred non-economic goals tended to lead family firms to minimise

R&D investments. Another study by (Muñoz-Bullón & Sanchez-Bueno, 2011) that was based

on panel data collected from Canadian listed companies from 2004 to 2009 found that R&D

intensity in family companies is always lower when compared against non-family companies

because family members would often place their private benefits at the forefront at the


expense of minority shareholders. Similarly, Miller et al. (2008) study that relied on data

gathered from 676 small-sized family firms across four western Canadian provinces initially

proposed that family firms would make more future-oriented investments in R&D programs

than non-family firms due to family firm stewardship. However, their research results did not

support their hypothesis and instead, the study concluded that family members would always

prioritise personal benefits at the expense of long-term business development. Furthermore,

agency conflicts within the family would erode resources and potentially weaken the firm’s

competitiveness.

The studies mentioned above tend to regard ‘family involvement’ as a dummy

variable although subsequently, more researchers would pay attention to the impact of

specific dimensions of family involvement on a family firm’s innovative capability. For

instance, taking ownership involvement of family members as an independent variable was

part of Schmid et al. (2014) study that utilised panel data obtained from non-financial firms

listed in the German Stock Index. This study concluded that family ownership could

negatively affect the technological input of firms. Relying on agency theory, Kong (2019)

investigated Chinese family firms by applying data obtained from the CSMAR database. This

study found that higher family shareholdings would reduce technology-related innovative

investment. However, not all documentary evidence supports the view that family

involvement would impede business innovation. A research that was based on a sample of

Indian pharmaceutical companies actually shows that family ownership is positively

correlated with R&D spending (Ashwin et al., 2015).


Some other prior studies have used family management/governance as an independent

variable. For instance, Migliori et al. (2020) explored the relationship between family

management and innovative investment through the data collected from a sample of 1093

family SMEs located in Italy. Results present that family managers are more likely to pursue

non-economic goals, and may tend to make decisions based on preserving family authority,

even at the expense of a firm’s long-term economic profits. The negative impact of family

management on innovation investment propensity was further confirmed in the study through

regression analysis.

From the perspective of a human resources argument according to RBV, Schulze et

al. (2002) pointed out that when a large number of family members participate in the top

management team, it is easy for them to form into smaller family groups that could crowd out

external senior managers. This may lead to the blockage of vital information and impact

negatively on innovative thinking, and subsequently would hinder the innovation capability

of a family enterprise. However, scholars from mainland China have obtained different

results while studying the relationship between family management and firms’ innovative

investment. For instance, Yan (2014) study that relied on data collected from a sample of 634

Chinese listed companies between 2008 to 2011 concluded that a higher degree of family

management power is positively correlated with innovation capability.

Based on the aforementioned research reviewed, the majority of prior studies have

verified the negative impact of family involvement on a corporation’s innovative capability.

However, the presence of some studies that show opposing results would imply that the


relationship between family involvement and innovative capability is still worthy of further

exploration and research advancement.

2.5 The dimensions of family involvement in family business

In this section, three dimensions of family involvement will be reviewed. In line with

agency theory that concerns family businesses, it is found in studies (Block, 2012; Choi et al.,

2015; Su & Lee, 2013) that ‘family involvement’ is an essential characteristic which makes

family firms different from non-family firms. In the operational practices of family

businesses, the ways in which families would participate in enterprises are always multi-

dimensional. It is evident from empirical studies that these dimensions often do not function

independently, but would function in a combined form. Deephouse and Jaskiewicz (2013)

research, for example, considered the essential characteristics of family businesses and

proposed that family involvement could present a very important impact on the socio-

emotional wealth of family businesses. Their research divides family involvement into

ownership involvement and management involvement. Gill and Kaur (2015) study proposed

that the most important forms of family involvement are family equity involvement and

family members’ participation in the management team. In addition to family

ownership/equity involvement and management involvement, some researchers have further


considered the board of directors of a family business as the core of corporate governance

(Hillman & Dalziel, 2003) that oversees the role of strategic decision-making and

supervision. Due to its overall importance, most family enterprises would arrange for family

members to be involved in the board of directors (Liang et al., 2013). From the perspective of

family power, Klein et al. (2005) found in their research that the involvement of family

power in family enterprises is mainly reflected in three dimensions: ownership, management

power, and decision-making power, which collectively reflect the power and influence that

family members hold in shareholders’ meetings, in management teams and on the board of

directors. In summary, based on the F-PEC (Family- Power, Experience and Culture) model

(Astrachan et al., 2002) shown in Figure 2.5 below, this research focuses on the influence of

family ownership, management and governance on the innovative capability of family firms.

Table 2.1 below summarises and displays how each dimension of family involvement was

defined and measured in prior studies.


Figure 2.5: F-PEC power scale

Source: Astrachan et al. (2002)


Table 2.1: Dimensions of family involvement in prior research

Source: Collected by this study

2.6 The innovative capability in this research

Most scholars in prior literature tend to regard R&D investment/expenditure and

patent counts as two important indicators that represent the innovative capability of family

enterprises (Hottenrott & Peters, 2012). Although R&D investment does not always reflect

the innovative capacity of an enterprise, it is still representative in research studies (Shefer &

Frenkel, 2005). A company’s R&D expenditure tends to play an important and positive role

in influencing its productivity growth (Wakelin, 2001). Similarly, Hu (2001) also found

Dimension Definition Reference

Family

ownership Family shareholding

(Sciascia et al., 2015), (Choi et al.,

2015), (Veider & Matzler, 2016)

Family

management

The ratio of family executives to the

total number of executive teams

(Lv & Li, 2015), (Tata & Prasad,

2015)

Number of family executives (Kotlar, Fang, et al., 2014)

Dummy variable- Whether family

members are involved in the

executive team

(Ashwin et al., 2015)

Family

governance

Family board members／total board

numbers

(Steier, 2015) (Matzler et al.,

2015)

Dummy variable- Whether family

members are involved in the board (Kong, 2019)


through an empirical survey conducted using data obtained from 813 private SMEs in China

that high innovation expenditure could effectively promote the productivity of private SMEs.

In addition, a significant and positive relationship between R&D input intensity and

enterprise sales performance could be found (Belderbos et al., 2004). Ito and Pucik (1993)

research using data obtained from 271 manufacturing companies in Japan indicated that

enterprises’ export sales are also positively related to innovation-related expenditure.

According to this study, the effect of innovative/R&D spending on export sales is cumulative

over time and it enables firms to become stronger competitors in the international

environment. Morbey (1989) examined the relationship between innovative expenditure and

profit growth of 800 U.S. companies over a decade, and results from the analysis supported a

positive effect of R&D expenditure on profit growth in the computer, chemistry, paper and

machinery industries. Based on this review, the importance of R&D expenditure is identified

as an important dimension for measuring the innovative capability of family firms and would

be adopted for the purpose of this research.

Besides R&D expenditure, research studies have also identified patent counts as

another important determinant that reflects an enterprise’s innovative capability (Block et al.,

2013). Specifically, patent is usually regarded as the by-product (output) of various R&D

activities (Felk et al., 2011). Although there are natural limitations in using patent quantity as

an indicator (Pavitt, 1985), not all innovative R&D achievements result in patent applications

and variations in patents may also reflect a firm’s innovative capabilities quite differently

(Rassenfosse & Potterie, 2009). However, due to the availability and easy access to patent


data (Reinganum, 1982), it remains a commonly used indicator to gauge the innovative

capability of an enterprise (Lanjouw & Schankerman, 2004) or an organisation (Jung et al.,

2003). It has been pointed out by some researchers that patent data could be employed to not

only evaluate a firm’s innovative productivity, but also to evaluate the radicality of a firm’s

innovation (Katila, 2000). There is consensus among researchers that “radical” contributions

are different from “incremental” contributions because they are fundamentally transformative

in nature (these can also be called “revolutionary”, “discontinuity” or “disruptive”), which

makes the previous technology obsolete (Nelson & Winter, 2002). Accuracy in measuring

family firms’ radical innovation becomes pretty significant since radical innovation is

considered a dynamic capability that enables a firm’s products or services to be consistent

with rapidly changing customer needs in the high-velocity marketplace (Slater et al., 2014).

Companies that can generate radical innovation would have higher chances of emerging as

new leaders in the competitive global market (Mitchell, 1989) because radical innovation has

the potential to create entirely new markets or product categories. Radical innovation often

produces substantial positive externalities that benefit other companies (Colombo et al.,

2015). Furthermore, patent counts usually show a more accurate level of technical

competence than measuring the sale of new products (Wang et al., 2016). Therefore, the

number of patents that a firm possesses is still regarded as an important indicator for

measuring its innovative output (Nagaoka et al., 2010).


2.7 Human resource (HR) redundancy in family firms

Standard agency theory and BAM have noted that agents in firms are always

egocentric and would tend to maximise their self-interests rather than the principal’s

interest (Lionzo & Rossignoli, 2013). Furthermore, it can be seen from the BAM that

enterprises’ agents would tend to adjust their firms’ risk-taking strategies based on

economic concerns (Wiseman & Gomez-Mejia, 1998). However, studies have shown that

these assumptions do not necessarily apply to family businesses. The conventional

assumptions regarding family agents’ egocentric behaviour could be less valid as their self-

interests could actually be extended beyond economic benefits (Lim et al., 2010). Some

studies on family businesses have argued that altruism motivation could also affect family

firms’ behaviours (Lubatkin et al., 2005; Schulze et al., 2002). How this altruism behaviour

could affect firms’ risk-taking preference (like conducting innovative strategies) deserves to

be further explored and this is an issue that will be investigated in this study. Although the

BAM has been applied in prior research to investigate family firms’ business strategies

(Chrisman & Patel, 2012; Gomez‐Mejia et al., 2010), these studies tended to focus on how

family firms’ loss-aversion to economic wealth (like firm performance) could influence

firms’ behaviour (see Section 2.3.2). This study proposes that the BAM could be further

enhanced through a research adaptation in a family business context.

Based on the above review, this study proposes the inclusion of a moderating variable

that incorporates family firms’ socioemotional wealth preserving purpose and altruism


motivation to better investigate the relationship between family involvement and innovative

capability in family businesses. Adapting the SEW perspective (Emotional attachment in

Section 2.3.3) and RBV (Human resource in Section 2.3.4), this study acknowledges that

family-influenced firms would generally retain their older employees and managers even

though some of them may lack the required skills and knowledge to directly assist their

firms in the new technological-based environment (König et al., 2013). The reason is that

laying off these employees could significantly hurt these family companies’ social-

emotional ties (Berrone et al., 2012). In comparison with other non-family firms, highly

family-influenced companies are less likely to jeopardise the socioemotional relations

within their organisations (König et al., 2013) as securing employment for their internal

employees is considered one of the most important dimensions for family firms’ socio-

emotional wealth (Kellermanns et al., 2008). Based on this understanding, family

businesses would tend to retain some redundant employees in order to preserve the firms’

socioemotional wealth. For this study, the BAM’s egocentric assumption of an agent will be

replaced by a form of family altruistic behaviour. Doing so, firms’ risk-taking preference

could be predicted more accurately in the context of a study that focuses on better

understanding family businesses. Due to altruism, it is often difficult for family decision-

makers to deal with employment-related issues like promotion and retrenchment of their

internal members (Reid et al., 2002). Because of this, some internal employees who are not

competent enough are still appointed and retained in key positions in family firms even

though there might be external employees available who are more qualified and efficient


for these positions (Gibb Dyer Jr, 2006).

Based on the review of previous research studies, it can be postulated that family

firms’ unconventional HR policies likely originated due to family altruism motivation

(rather than an agent’s egocentric motivation as highlighted in prior BAM studies) and an

emphasis on preserving the firms’ emotional attachment. The high level of HR redundancy

in this study represents family firms’ loss-aversion to their socioemotional wealth (rather

than loss-aversion to economic wealth as noted in prior studies). Thus, unlike earlier

studies, this study proposes that the level of HR redundancy in family businesses could be

more suitably investigated as a moderating variable that is unique to the circumstances of

family businesses.

Reviewing previous theoretical models (see Table 2.2), it can be seen that prior

researchers have focused primarily on the main effects of family involvement on R&D

investment/ R&D output (patent counts). As mentioned before, prior literature based on

BAM has found a limited number of situational factors that can be used as moderating

variables, such as the performance dilemma of firms (Chrisman & Patel, 2012) and external

suppliers’ bargaining power (Kotlar, De Massis, et al., 2014). These existing moderating

variables have often been cited in non-family business research but may not be appropriate

in the current research context that seeks to better understand the relationship between

family involvement and innovative capability in family businesses. So far, prior studies

have tended to neglect the development of more specific moderating variables that can


relate to the unique characteristics of family businesses. Specifically, prior studies have

neglected the use of moderating variables that are more specific to analysing family firms’

non-economic/social-emotional goal and understanding how the relationship between

family involvement and innovative capability could be influenced by family firms’ non-

economic pursuit. Thus, this study aims to address this research gap by investigating how

HR redundancy in family firms could affect the relationship between family involvement

and a firm’s innovative capability. By adding this new moderating variable into the existing

theoretical model, this study will provide a new perspective (SEW perspective) to explore

how the unique situational factor (HR redundancy in family business) could affect the

relationship between family involvement and family firms’ risk-raking behaviour (such as

conducting innovative strategies). As an objective, a variant of BAM which is more suited

to understanding the family business context will be provided by this research.

Adapting from prior studies (Kong, 2019; Matzler et al., 2015), the three dimensions

of family involvement (ownership, management and governance) are proposed in this study

as Independent Variables (IV). Firms’ innovative capability (which encompasses innovative

investment and patent counts) is proposed as the Dependent Variable (DV). Finally, the

level of HR redundancy is proposed in this study as the moderating variable. The proposed

theoretical framework that includes a mapping of theories adapted in this study is presented

in Figure 2.6 below. In the next section, a series of hypotheses is proposed that discusses

the possible relationships between the aforementioned variables that will be further


investigated in this study.

Figure 2.6: Mapping of the literature



Table 2.2: Comparison with existing research models

variable

Schmid et al. (2014)

Su and Lee (2013)

Ashwin et al. (2015)

Schulze et al. (2002)

Gong (2018) Chrisman and Patel (2012)

Kotlar, De Massis, et al. (2014)

The research model of this research

Independent variables (IV)

Family ownership

(equity)

Family ownership

Family ownership

Family governance

(Family members in board)

Family management

(Family involved in management team)

Family ownership

and management

Family ownership

and management

Family Ownership,

Management,

Governance

Dependent variables (DV)

Innovative input

Innovative investment

R&D investment

R&D investment

R&D output

Patent

R&D investment

R&D investment

R&D input

R&D output

Moderating variables

Not mentioned

Not mentioned

Not mentioned

Not mentioned

Not mentioned

Performance dilemma

External Suppliers’ Bargaining power

The HR redundancy of family firms

literature


2.8 Research hypotheses

This research aims to explore the relationship between the three dimensions

of family involvement in enterprises (independent variables - IVs) and innovative

capability including R&D investment and patent output (dependent variables -

DVs）more comprehensively by analysing how human resource redundancy in

family business could affect the relationship between IVs and DVs. This thesis puts

forward a list of hypotheses and will try to verify these hypotheses through a

quantitative research methodology.

2.8.1 The main effect – family ownership and innovative capability (H1)

Most prior studies on family businesses have found that the higher the degree of

family involvement in the ownership/equity dimension, the more detrimental it is to

the improvement of innovative ability (Matzler et al., 2015; Su & Lee, 2013). Family

firm owners tend to regard their enterprise as an integral part of their lives (Berrone et

al., 2012). In order to ensure that family economic welfare and family-centric SEW

objectives can be achieved, a family firm’s owner would tend to avoid or minimise

risky innovative strategies (Sciascia et al., 2015) and would prefer to keep the control

of the enterprise in the hands of the family and to effectively perpetuate family

inheritance in the future (Masulis et al., 2011). As discussed earlier (see Table 2.1 ),

most prior scholars have tended to use the corporate equities owned by the family to

represent the dimension of family ownership involvement (Wang, 2006). The deeper


a family gets involved in the ownership/equity dimension; the more likely the

family’s financial capital/property will be invested in the enterprise (Maury, 2006).

Besides, the higher the proportion of family ownership, the stronger a family firm

would focus on maintaining continuing growth, health and profitability (Ward, 1997),

and thus, avoiding risky business decisions that may threaten the company’s equity

value while preserving the firm’s SEW for its family owners (Sciascia et al., 2015).

Based on prior studies, the negative relationship between family ownership and

innovative capability could be reviewed from the following perspectives:

Risk-taking preference

Some prior research have argued that family shareholders tend to be more

willing to carry out long-term innovative/R&D projects because they are more

concerned about their firms’ long-term prosperity (Bergfeld & Weber, 2011).

Notably, pursuing R&D investments and programs would be beneficial to the family

enterprises in ensuring sustained superior performance (Massis et al., 2013).

However, the reality is that there is often recognition among family owners that

most R&D innovative projects not only have no immediate tangible returns (as the

duration of payback period is usually quite long) (Coad & Rao, 2010), but also that

the failure rates of such projects tend to be much higher in comparison with more

conservative company strategies (Tishler, 2008). Innovation failure may lead not

only to both socioemotional and financial loss for the family business, but may also

threaten their long-term survival (Gomez-Mejia et al., 2014). Although successful


innovation programs could positively influence the family enterprises’ productivity

(Peters et al., 2017) and bring positive and beneficial returns to the enterprise in the

long run (Berrone et al., 2010), it is notable that many family enterprises would still

tend to avoid assuming excessive risks brought by uncertain innovative investment

so as to reduce the potential loss of both economic and socioemotional wealth (Patel

& Chrisman, 2014) while ensuring that the business can successfully survive to be

inherited by future offspring of the family owners (Owens, 2002). Similarly,

Muñoz-Bullón and Sanchez-Bueno's (2011) empirical study on family publicly

traded firms also found that family owners are less likely to waste an enterprise’s

funding in risky business decisions and would try to avoid potential risks/changes as

long as possible to pursue stable development that would ensure the survival of their

enterprises.

Financial limitation

Some technological strategies tend to be long-term and would always

require massive financial resources for support (Bosetti et al., 2009). Researchers

found that family enterprises’ investment, including R&D investment, is often

restricted by their limited internally generated funding (Muñoz-Bullón & Sanchez-

Bueno, 2011). The public equity and debt size that family firms could accumulate

before launching strategic business initiatives are usually limited for family owners

(Kim et al., 2008). Specifically, most family owners are often reluctant to transfer


their equity in exchange of financial support from external investors (Gomez‐Mejia

et al., 2010; Kim et al., 2008). The reasons can be attributed to the possibility that:

(a) external financing will negatively affect a family’s control over the family firms

(Muñoz-Bullón & Sanchez-Bueno, 2011), (b) the selling of family owners’ holdings

may hurt their firms’ reputation as trustworthy business partners, and the selling

would also reduce the shares that their offspring could inherit in future (Casson,

1999). Therefore, the behaviour of selling off family owners’ holdings in exchange

of external funding could potentially hurt family firms’ socioemotional wealth

because family’s control, reputation and inheritance are very significant dimensions

of their SEW (Berrone et al., 2012). In other words, family owners’ reluctance to

sell off shareholdings in exchange for financial support can significantly block the

development of technological innovation activities.

Agency conflicts between controlling and minority shareholders

Viewed from the perspective of agency theory, a higher level of family

involvement in ownership could intensify the conflict between major shareholders

(family shareholders) and minority shareholders (Jiang & Peng, 2011; Vilaseca,

2002). Family owners would opt to sacrifice their minor shareholders’ benefits in

order to prioritise the whole family’s wealth (Jiang & Peng, 2011). Specifically,

internal family shareholders would tend to allocate more firm resource to preserve

family benefits (Young et al., 2008). Family enterprises often take family socio-


emotional factors into account quite significantly when deciding how to allocate their

currently available resources to business operations (Matzler et al., 2015). In order to

preserve family non-economic wealth, family owners are often willing to sacrifice

even the economic performance of the company (Chen et al., 2014), and this would

have an adverse impact on the benefits to external minority shareholders. If minority

shareholders’ benefits are not sufficiently protected, they may lose confidence in the

family corporation and could refuse to continue their investment (Boubakri et al.,

2010). This would restrain potential resources that could be invested in the family

enterprise’s innovative projects. Based on above discussion, the first hypothesis of

this research is proposed:

Hypothesis 1: There is a negative correlation between family involvement

in ownership and innovative capability.

2.8.2 The main effect – family management and innovative capability (H2)

To distinguish from family involvement in ownership, which highlights a

family’s role as business owners (Liang et al., 2014), family involvement in

management focuses on family members’ participation in a businesses’ top

management teams (Sciascia et al., 2013). It has been observed by Hambrick et al.

(1996) that the management team is mainly responsible for the daily operations and

management of an enterprise, and it is the management team that would influence an


organisation’s development and in driving it to achieve an ideal performance target.

In the context of family businesses, family members’ management involvement

highlights the family’s role in operating/managing the enterprise (Liang et al., 2014).

Since the heterogeneity of top management teams could significantly impact on an

enterprise’s competitive behaviours and organisational performance (Hambrick et al.,

1996), the proportion of family members in the executive team of a family firm would

also create a direct impact on the management style and operational characteristics as

well as risk appetite of the family firm (Sanchez-Famoso et al., 2017).

There are scholars who hold the opinion that family members’ direct

participation in the operations and management of enterprises could bring about

certain advantages to a family enterprise. For example, Miller and Breton‐Miller

(2006) study that was based on agency theory indicates that family involvement in a

management team could effectively bring agency advantage to a family enterprise,

such as reducing its agency costs and increasing stewardship attitudes. External non-

family CEOs tend to be driven by their short-run opportunistic motivation, and would

have a tendency to take advantage of information asymmetry between an agent and

principal for their personal gain (Jensen & Meckling, 1976). In contrast, family

managers not only have stronger incentives and longer-term vision, they also play an

important role in monitoring external managers’ behaviour and would thus reduce the

degree of information asymmetry (Miller & Breton‐Miller, 2006). Resources derived

from reduced agency costs can be used to conduct innovative projects and generate


higher financial returns (Hoopes & Miller, 2006). However, there are notable studies

that hold an opposing view that family involvement in management could impact

negatively on the innovative capability of family firms. Key concerns include:

The socioemotional goal of managers

A higher level of family involvement in the management team may help a

family enterprise to build its managerial orientation that ensures organisational goals

are aligned with family goals (Hoffmann et al., 2016). According to the SEW theory,

the primary goal pursued by a family management team is the preservation and

accumulation of the family’s socioemotional wealth. Family members’ affective

endowment and socioemotional wealth could significantly affect a family enterprise’s

managerial decisions and strategies (Gomez-Mejia et al., 2011). In other words, the

gain or loss of socioemotional wealth is often the primary referencing point for an

enterprise’s managers to make decisions (Gómez-Mejía et al., 2007). Therefore, when

compared against external non-family managers, internal family managers are more

likely to maximise the achievement of fulfilling family-centred non-economic goals

like enhancing a family’s control over the firm (Chrisman et al., 2014). As a result,

family managers would tend to avoid innovative activities and investments that have a

higher level of risk since the uncertain payoff or the potential failure of such projects

could threaten a family firm’s SEW such as its control and reputation (Gomez–Mejia

et al., 2014; Martin & Gomez-Mejia, 2016) .


Human resource limitation

Given the agency relationship between family employees and external

employees, family involvement in management could potentially exacerbate the

nepotism phenomenon (Arasli et al., 2006) within family enterprises. To preserve

family SEW, family enterprises may hire more family members as senior managers,

which could in turn lead to a limitation in sourcing required managerial capabilities

and characteristics (Liang et al., 2014). Chrisman et al. (2014) found that non-

economical and family-centred goals have often resulted in the implementation of HR

policies that would severely restrict a family enterprise’s management talent pool. For

instance, an empirical study on small-sized private companies has shown that the

founders are biased towards internal family members’ entry into the management

team, resulting in unsatisfactory investments and low profit margins (Singell Jr &

Thornton, 1997). Innovative R&D activities often have a higher requirement for R&D

managers who can exhibit professional knowledge and comprehensive expertise

(Hagel III & Singer, 1999). Prior research has shown that a focus on hiring only truly

talented managers and employees could promote an enterprise’s innovative capability

(Chen et al., 2012; Kochanski et al., 2003). For example, Kochanski et al. (2003)

noted that R&D intensive organisations have the responsibility to attract and retain

talent to support the growth of new products and/or services. Chen et al. (2012) also

found that managers’ professional skills and their effectiveness at teamwork could

significantly influence the performance of innovative projects. A policy of limiting


top management positions solely to family members is harmful to a family business

since it could likely increase the firm’s risk of hiring low-quality managers (Schepers

et al., 2014), and this could eventually have a negative influence on a firm’s


Knowledge sharing problem

Nepotism in family enterprises not only hinders the introduction of talented

managers, but also hinders knowledge integration between family employees and

non-family employees (Lionzo & Rossignoli, 2013). Researchers have found that

those communities that are based on close social relationships (like family network)

are able to distinguish internal members and external members (Harvey & Evans,

1994). Family members who are employed in family enterprises develop their internal

relationships through blood ties and nepotism, and the dominance of such

relationships could enhance the closure of the family enterprise (Arregle et al., 2007).

As a result, externally hired managers and employees may tend to become more

distant, transitory, individualistic, and utilitarian (Block et al., 2011), which could

lead to the difficulty of communications between internal family employees and

external non-family managers. This may weaken the family firm’s capability to

integrate and utilise potentially rich knowledge resources that could be gained through

externally hired managers for the implementation of innovative activities.


Self-control problem

In terms of self-control problems, some family enterprises’ owner-managers

who hold large stakes in their companies’ equity would often enjoy almost unlimited

usage of their companies’ assets while also having the ability to “hold up” other

minority stakeholders (Lubatkin et al., 2005). Lubatkin et al. (2005) view the ‘hold

up’ problem as providing family owner–managers an opportunity to be free-riders

based simply on their status as major stakeholders, thus giving them too much

privilege in the form of excessive consumption in exchange for very little labour.

Such a problem with excessive consumption by family managers could take up

valuable cash flows that are needed for the firms’ technological innovation activities.

Based on the above discussion, the second hypothesis of this study could be proposed:

Hypothesis 2: Family involvement in management will negatively influence


2.8.3 The main effect – family governance and innovative capability (H3)

Family involvement in corporate governance (the board of family firms) is

another commonly used dimension to measure family involvement in enterprises

(Belloc, 2012; Corbetta & Tomaselli, 1996). Based on agency theory, Anderson and

Reeb (2004) noted that an independent board of directors can protect external

minority shareholders from opportunistic behaviour and from the potential abuse of


firm resources. In contrast, family companies with a majority of dependent board

members may tend to limit corporate R&D intensity since the dependent board

members are often influenced by a management team that is dominated by family

member CEOs and executives (Kor, 2006).

Family goal of dependent board members

The misuse of firm resources is more likely to occur if internal family

members dominate the board (Matzler et al., 2015), which may negatively influence

the implementation of R&D projects. Thus having independent directors would play

an important role in combating family opportunism and in preserving the benefits of

all shareholders rather than focusing on the protection of only the major family

shareholders’ rights (Anderson & Reeb, 2004). If family members have enough

power to pursue their own interests, they are more likely to pursue socio-emotional

wealth (like family identification and reputation) when considering business

strategies (Deephouse & Jaskiewicz, 2013), and thus, neglecting important needs

that may be more in line with the business economic/financial interests of all

shareholders. Miller et al. (2011) found that having family members in any position

on the company board could influence the corporate decision-making process,

making it beneficial for the achievement of family-oriented goals rather than

economic goals for a business. In order to preserve a family’s socioemotional

wealth, extra company-paid private consumption will occur when more family

members are involved as participants on the board of directors (Deephouse &


Jaskiewicz, 2013). This means that family enterprises may sometimes sacrifice their

economic performance in order to avoid the loss of family socio-emotional wealth,

and this may lead indirectly to insufficient investment in important R&D projects.

Limitation of professional abilities

Providing professional counsel/advice to management team is an important

function of board members (Dalton & Daily, 1999) and this advisory role played by

directors constitutes a large part of board’s activities (Frankel, 2008). In order to

provide valuable advice to develop relevant business strategies, board members

should have the appropriate expertise in the specific area (Fama & Jensen, 1983).

Wu (2008) found that board members’ industry-wide knowledge/experience could

positively aid a company in improving its innovation performance in relation to new

product development. However, in family-influenced firms, some internal family

members are often selected to be directors based solely on their status/power in the

family, and they do not have the necessary professional abilities in the relating

industry (Gallo & Sveen, 1991). Therefore, the lack of expertise from family board

members may hinder the development of innovative strategies such as development

of new products. Based on the above discussion, the third hypothesis is proposed:

Hypothesis 3: There is a negative correlation between family involvement

in governance and innovative capability.


2.8.4 Moderating effect of HR redundancy (H4a, H4b, H4c)

This study aims to investigate an alternative perspective that has not been

sufficiently addressed in previous research studies. Most prior studies hold the view

that labour redundancy would bring about negative effects to a firm (Hu et al., 2006;

Svejnar & Terrell, 1991). For instance, Svejnar and Terrell (1991) proposed that

minimising labour redundancy could help foster greater efficiency within a firm. They

further noted that a firm’s employment policies should be aimed at reducing human

resource redundancy. Rather than adhering strictly to this viewpoint, this study

considers the argument highlighted in some family business studies that a family

firm’s labour redundancy phenomenon need not always be viewed negatively.

As the creation of employment opportunities for the society is one key

objective of a country’s government (Liao et al., 2009), a family firm’s policy of

keeping a high level of HR redundancy could be seen as a form of assistance to local

government and communities. Prior studies have found that a firm’s reputation may

be positively enhanced if it is seen to be assisting local communities, especially in

relieving employment-related problems (Jones, 1980). A positive corporate reputation

could further improve customers’ and investors’ evaluation of a firm (Srivastava et

al., 1997), and thus, family enterprises with a good reputation could potentially

receive more opportunities in relation to external investments for pursuing innovative

strategies. This may alleviate most family firms’ ongoing financial dilemma of having


to restrict R&D activities due to their reluctance to fund such activities through the

selling of equity (see Section 2.8.1).

From a non-economic/socioemotional perspective, this study notes that family

shareholders’ aversion to the loss of socioemotional wealth could be relieved through

their firm’s HR policy. The discussion in Section 2.8.1 highlighted the possibility that

an introduction of external capital could harm a family’s control over a family

business to some extent, and this control is one of the key dimensions of family socio-

emotional wealth (Hauck et al., 2016). An adjustment to HR policy to improve a

firm’s reputation could potentially make up for the loss of socio-emotional wealth

caused by the introduction of external capital (Leitterstorf & Rau, 2014).

In terms of management and governance in family businesses, some

managers and directors were selected based on their status and identification, and

they do not have the required professional skills/knowledge unlike externally

recruited talents (Gallo & Sveen, 1991). It is especially difficult for some older

managers and directors to embrace discontinuous technology as they may either feel

threatened by the change or may resist the change due to their strong emotional

attachment to existing tangible and intangible resources within the enterprise (König

et al., 2013). In order to preserve their current status and authority, these managers

and directors are often reluctant to allocate resources to conduct innovative

activities that may introduce discontinuous technology (Matzler et al., 2015). In

such a situation, if the family firm owners have a strong motivation or commitment


to retain redundant employees (including redundant managers and board directors)

in the firm, the potential aversion to the innovative strategies/investments could be

relieved. Although such a HR policy may mean that some potentially talented

external employees would be turned away, the agency conflicts and costs between

internal and external employees could be accordingly reduced since the majority of

the employees come from the same family network (Dawson, 2011). These saved

agency costs may alleviate the shortage of family enterprises’ innovation investment

to some extent. Based on this discussion, the Hypothesis 4 is proposed:

Hypothesis 4: HR redundancy in family firms could moderate (weaken) the

negative relationships between (a) family ownership involvement and innovative

capability, (b) family management involvement and innovative capability, (c) family

governance involvement and innovative capability.

The proposed research model of this thesis is fully presented in below Figure 2.7.


Figure 2.7: Theoretical model of this study


2.9 Conclusion

This chapter critically reviews the extant literature to develop a research framework

for investigating the effects of family involvement in family businesses (including family

involvement in ownership, family involvement in management and family involvement in

governance) on the innovative capability of family firms. Specifically, four hypotheses are

proposed in this chapter: (1) Family ownership negatively affects family firms’ innovative

capability; (2) Family management negatively affects a family firm’s innovative capability;

(3) Family governance has a negative influence on a family firm’s innovative capability;

and (4) Human resource redundancy has a moderating effect on the relationship between

family involvement and family firm’s innovative capability. In summary, this study

proposes that HR redundancy in family firms could potentially weaken the negative

relationship between family involvement and a family enterprise’s innovative capability.

The next chapter will detail the research methodology adopted by this study.

Chapter 3: Methodology 65

Chapter 3: Methodology

3.1 Introduction

Chapter 2 provided a comprehensive literature review of past research studies to

develop an overall theoretical framework for this research. A model was presented that

identifies the relevant independent, dependent and moderating variables that will be further

analysed in this study.

This chapter details the research design and methodology adopted for this study. The

chapter begins with an overview of the philosophical stance then continues by discussing the

research design, the sampling process and the data collection procedure. Next, the

operationalisation of the variables is detailed as well as the analytical strategies which are

used to verify the proposed hypotheses. The structure of this chapter is presented below in

Figure 3.1.

66 Chapter 3: Methodology


Source: Created by this study

3.2 Research Philosophy

Identifying the philosophical stance of a research study is important as it has a major

influence over the appropriate research practice and methodology (Holden & Lynch, 2004).

Ontology explores the origin or substratum of the world while epistemology refers to the


ways of knowing them objectively or subjectively (Nonaka & Peltokorpi, 2006). Ontology

and epistemology exist side by side, forming the theoretical basis for research (Goertz &

Mahoney, 2012).

For this study, a positivist ontology and objectivist epistemology are adopted. According

to an objectivist epistemology, the existence of reality includes objective social factors that

could be measured (Mari, 2003). Based on this epistemological viewpoint, this study adopts a

positivist ontological approach to investigate the relationship between family involvement

and firms’ innovative capability in family businesses. By referring to the F-PEC (Family

influence on Power, Experience, and Culture) scale model (Astrachan et al., 2002), ‘family

involvement’ in this study includes the three dimensions of family ownership, management

and governance, which are all quantifiable and measurable (Patel & Chrisman, 2014).

Innovative capability, which includes innovative investments and patent counts can also be

measured (Block et al., 2013; Chrisman & Patel, 2012). By following the positivist paradigm,

this study aims to conduct a quantitative analysis to identify “objective, valid, and

generalizable” conclusions that would provide an explanation to the modelled relationship

between family involvement and firms’ innovative capability.

3.3 Research Method – Quantitative Data Analysis

To address the research question and to test the hypotheses proposed in Chapter 2 (see

Section 2.8), this study will utilise a quantitative research design. Quantitative approaches are

useful in positivists research as they allow a researcher to explore social phenomena from

representative samples and then generalise the findings to the population (Polit & Beck,

2010). In quantitative studies, hypothesis-testing is one of the most commonly used

approaches (Martin & Bridgmon, 2012). Using hypothesis-testing, this research aims to


investigate the underlying relationship between family involvement (including family

ownership, management, governance) and firms’ innovative capability as modelled in this

study through the analysis of secondary data collected from specific database. Through the

process, the proposed moderating effects of human resource redundancy will also be tested.

The collected data used in this research study will be analysed by using the SPSS software

(Burns & Burns, 2008). Chapter 4 will further detail the descriptive statistics, correlation

analysis, multiple regression analysis as well as moderated regression analysis procedures

that were conducted for this study. Thus, the procedure of this quantitative experiment are as

follows: (a) The data collection process, which is presented in Section 3.4, (b)

Operationalisation of variables, including independent variables (three dimensions of family

involvement), dependent variables (innovative input and output), moderating variable (HR

redundancy) and control variables (firm size, firm age, leverage and cash flow). All of these

are presented in Section 3.5, (c) the data entry process and conducting analysis, which are

presented in detail in Chapter 4.

3.4 Sample and data collection procedure

This study analyses data from listed family SMEs located in China that are collected

through Chinese Stock Market & Accounting Research (CSMAR) database (Lu &

Abeysekera, 2014). This database consolidates a comprehensive collection of statistics on

Chinese listed companies and has been widely used in past research studies that were focused

on Chinese businesses (Krause et al., 2019; Li et al., 2019). According to Shahab and Ye

(2018), CSMAR is the biggest financial database in China, and its reliability is assured due

to its extensive usage in studies that have been published in reputable international

academic journals (Du & Boateng, 2015; He et al., 2017). In China, a large amount of listed

family SMEs are concentrated in the Chinese SME board, and these firms are required to


disclose detailed and comprehensive information regarding the actual family control as well

as to declare all associated family members in their firms’ prospectus (Zhou et al., 2015).

For this study, Chinese companies listed in the 2011-2017 SME board were sampled.

The study population of this research are the 1129 listed firms in Chinese SME board. The

sampling process utilised procedures as follow: (a) Selection of enterprises whose actual

controllers are families (Campopiano et al., 2014), (b) Exclusion of firms where the

controlling shareholder holds less than 5% equity (Peng & Jiang, 2010), (c) Screening of

listed family firms across divergent industries according to the established classification of

SMEs in China. For instance, in manufacturing industry, the number of employees in each

chosen company should be between 20 to 1000 (Prange & Zhao, 2018). (d) Since R&D

investment and patent counts are not mandatory data for public disclosure, those companies

with insufficient data required for this study were omitted during the sampling process

(Kong, 2019). Following these procedures, this study obtained 504 small and medium-sized

Chinese listed firms. Table 3.1 presents the distribution of the sample firms chosen from the

study population. It can be seen that this sample includes firms that are mainly in the

manufacturing industry (n=192, 38.10%) and IT industry (n=182, 36.11%). Also, it can be

seen from below Table 3.2 that the number of firms in the sample shows an upward trend in

numbers, increasing annually between 2011(n=42, 8.33%) to 2017 (n=133, 26.39%). Within

the sample, firms recorded in the years 2016 and 2017 take up the largest proportion at

almost 46%.


Table 3.1: Industrial distributions of the sample family firms

Industry Number of firms (N)

Percentage

Manufacturing 192 38.10%

Information technology and software

182 36.11%

Commercial service 50 9.92%

Culture, sports and entertainment

33 6.54%

Water conservancy, environment and public

facility

26

5.16%

Scientific research and technical services

21 4.17%

Total number 504 100%

Table 3.2: Year distribution of the sample firms

Year 2011 2012 2013 2014 2015 2016 2017

N 42 49 51 57 73 99 133

Percentage 8.33% 9.72% 10.12% 11.31% 14.49% 19.64% 26.39%

3.5 Measures

The following sections will discuss the independent variables, dependent variables,

moderating variable, as well as the control variables used within this study. All variables

were measured using previously validated scales from publications in the top-ranking


journals. The independent variables (three dimensions of family involvement) are elaborated

in Section 3.5.1, followed by the dependent variables (two dimensions of innovative

capability) in Section 3.5.2, the moderating variable (HR redundancy) in Section 3.5.3 and

the control variables in Section 3.5.4.

3.5.1 Independent Variables

Due to the varying opinions among previous researchers on the topic, there is no

universally accepted definition on what constitutes a family business. Despite this, there are

three accepted criteria for determining a family’s influence over a firm (López-Gracia &

Sánchez-Andújar, 2007), which are: a. Ownership of the firm’s equity capital by family

members (Donckels & Lambrecht, 1999); b. Power and authority among family members to

manage the firm’s operations and to make significant strategic business decisions (Filbeck &

Lee, 2000); c. Family has members on the board of directors and can monitor the firm and

allocate its resources (Anderson & Reeb, 2004). According to the F-PEC model (Astrachan et

al., 2002), the nature of a family business can be further described by three key factors:

ownership, management and governance.

Consistent with prior research (Matzler et al., 2015), this study will use the following

three dimensions of family involvement as the independent variables. These are family

involvement in ownership, family involvement in management, and family involvement in

governance. First, family involvement in ownership is measured by the equity ratio owned by

the family, which should be higher than 5% (Chen et al., 2008). Second, family management

is calculated by dividing the number of family members in the top management team with the

total number of management positions in the company. Finally, family governance refers to


the ratio of the number of family members sitting on the company’s board of directors against

the total number of board members. For this study, the required data on family involvement

was manually collected and consolidated through the prospectus of the sampled companies.

The prospectuses are open to the public and can be accessed through the China Securities

Regulatory Commission (CSRC) website (http://www.csrc.gov.cn). In China, this is the only

government agency responsible for regulating securities instruments and overseeing market

regulations in China (Rousseau & Xiao, 2007; Tondkar et al., 2003).

3.5.2 Dependent Variables

For dependent variables, this study will focus on two indicators, which are innovation

input (R&D expenditure) and innovation output (patent application counts) for measuring the

innovative capability of family firms.

Innovation input

In this study, the innovative input of family SMEs will be measured through R&D

intensity, which is the ratio of a company’s R&D expenditure to total sales. This is a widely

accepted method in prior research for measuring corporation innovation input (Barker III &

Mueller, 2002; Chen & Hsu, 2009). R&D spending can be an appropriate indicator of

measuring innovation input since the firm’s R&D expenditure enables it to accumulate strong

technological/market capabilities for developing its innovative capability (Matzler et al.,

2015). In contrast with the absolute value of R&D expenditure, R&D expenditure as a

percentage of total sales is a more appropriate measure as it would permit relative comparison

between different companies (Chen & Hsu, 2009), and could better reflect a company’s

commitment to innovative activities (Hoskisson & Hitt, 1988).


Innovation output

As R&D intensity does not effectively reflect the quality of a firm’s innovation, this

study requires another measure for innovation output. For this, the study will rely on the use

of patent data, which is a similar approach used in prior studies on innovation output (Leten

et al., 2007; Matzler et al., 2015). Past researchers have proposed that the application year is a

better proxy for the actual time of innovation (Tan et al., 2015). This study focuses on the

number of patent applications filed by each sample enterprise within each year. Unlike using

R&D intensity as a dependent variable, patent data represents another way in which a

company’s radical innovative capability can be measured since it could better reflect how

effectively a company has utilised its R&D expenditure (Gao et al., 2016). Prior researchers

have argued that using patent data to measure R&D output has several advantages in

comparison with the use of other technology indicators because: (a) Patent data is readily

available from the database at the company level (Leten et al., 2007) and (b) The patent data

is countable not abstract (Brouwer & Kleinknecht, 1999), and thus easy to collect. Based on

the above justification, it is appropriate to use patents application counts as the indicator for

measuring innovative output in this study.

3.5.3 Moderating Variable – The HR redundancy in family firms

In Chapter 2, this study stated that family companies tend to hire and retain redundant

employees who have no required skills in order to preserve the family firms’ emotional

attachment (see Section 2.3.3). As mentioned in the theoretical model (see Figure 2.7) of this

study, HR redundancy is the moderating variable of this research.

This study applied Zhang et al. (2013) study’s method to measure a firm’s HR

redundancy level. The process is as below: The below formula (1) is applied to derive the


coefficients (α, β, γ, θ) which are needed to measure a sample firm’s employment size (full-

time equivalent) based on the firm’s total assets, growth rate, and fixed assets. In mainland

China, a firm’s total assets, revenue growth rate and fixed assets are the three most important

factors which could influence the firm’s employment size (Zeng & Chen, 2006).

Formula (1): Y = α + β × size + γ × growth + θ × capital + ε

Specifically, the dependent variable ‘Y’ in above formula (1) is a firm’s actual number of

employees divided by the total assets then multiplied by the scaling factor 1000000, used to

represent the actual employment size of a sample firm (Zhang et al., 2013). Further, the first

independent variable ‘size’ is the natural logarithm of the total assets of the enterprises

(Zhang et al., 2013). The log transformation could effectively reduce the effect of outliers

(Van Caneghem & Van Campenhout, 2012). The second independent variable ‘growth’ is the

sample firms’ revenue growth rate (Zeng & Chen, 2006; Zhang et al., 2013), used to measure

the growth of the firms. The third independent variable ‘capital’ represents a sample firm’s

fixed assets, measured by the ratio of a firm’s fixed assets to total assets (Avery, 1956; Cheng

& Lin, 2009). The redundancy level of human resources is not suitable for horizontal

comparison between different industries in mainland China (such as between labour-intensive

and capital-intensive enterprises). Thus, following Zhang et al. (2013) study, the sub-industry

regression was carried out for the whole sample firms through above formula (1) to derive the

sub-industry coefficient (α1, β1, γ1, θ1) used to measure employment size Y1 (the expected

employment size based on a sample firm’s total assets, fixed assets and revenue growth rate).

Specifically, the employment size Y1 of each sample firm could be calculated through below

formula (2):

Formula (2): Y1 = α1 + β1 × size + γ1 × growth + θ1 × capital


Through the above steps, this study obtained both actual employment size Y and the new

employment size Y1 of the sample firms, and then used formula (3) to get the HR redundancy

index of each sample firm.

Formula (3): HR redundancy =Y-Y1

The factors mentioned above including the sample firms’ actual number of employees,

total assets, fixed assets and revenue growth rate could all be collected through the CSMAR

database.

3.5.4 Control Variables

In order to control for other possible factors that may influence analysis, the following

series of control variables will be used in this study:

Firm size

First, this research will control for firm size. The size of a company may affect the

development of technological innovation activities (Kleinknecht, 1989; Shefer & Frenkel,

2005), and scholars noted that larger sized companies have tended to conduct more R&D

investment in comparison with smaller ones (Revilla & Fernández, 2012). Also, larger

companies could more easily diversify the potential risks of their innovative strategies and set

up barriers to prevent R&D imitations (Arrow, 1972). Notably, some studies have argued that

larger companies tend to be bureaucratic and less flexible, which may stifle creativity and

limit their innovative capability (Madsen, 2007). Based on this understanding, it is necessary

to set firm size as a control variable. In this research, firm size will be represented by the

natural logarithm of the total assets of the sample companies.


Firm age

Second, this research will control for the firm age. Prior researchers have found that the

age of an enterprise may affect its innovative strategies (Balasubramanian & Lee, 2008;

Huergo & Jaumandreu, 2004). Some studies have noted that older companies with more

experience may tend to develop more R&D innovations (like patent counts) (Sørensen &

Stuart, 2000). However, as companies become older, it may become increasingly difficult for

them to make structural and strategic adjustments to respond to changes in the environment

due to the organisational inertia (Balasubramanian & Lee, 2008). Based on this

understanding, a potential impact between firm age and innovative capability could be likely.

In this research, the age of an enterprise will be expressed as the difference between the date

of the recorded statistics in the database and the year when the enterprise was established.

Financial leverage

Next, the leverage of family SMEs will also be controlled in this research. For example,

Munari et al. (2010) research puts forward that companies are more inclined to use their

current funds to pay their debts rather than invest in R&D projects when they have higher

levels of debt. In other words, companies may prefer to reduce their investment in high-risk

technological R&D activities in order to relieve their debt situation. Lin and Luan (2020)

noted that having a higher level of financial leverage means that a firm may lack the required

resources to conduct innovative strategies. This shows an influence in the relationship

between a firm’s level of debt and its innovative capability. In this research, the sample

firms’ leverage will be measured using its asset-liability ratio.

Cash flow

The next control focuses on a firm’s cash flow as its importance has been noted in

many previous studies. For instance, Mairesse et al. (1999) put forward that a significant

positive correlation could be found between firms’ R&D activities and cash flow. Bae and


Noh (2001) research also found that irrespective of whether a firm is a domestic business or a

multinational company, there is a significant positive correlation between R&D expenditure

and cash flow. Studies have shown that cash flow is related to a firm’s ability and willingness

to engage in innovative activities. A reduction in cash flow could limit the pool of funding

available for R&D projects, and thus, would reduce a firm’s R&D spending (Rafferty &

Funk, 2008). Although the R&D spending is not heavily dependent on internal cash flow for

most well-established companies, small-sized high-tech companies and research-intensive

pharmaceuticals may be the exceptions. Based on this understanding, a firm’s cash flow will

be set as one of the control variables in this study since it may potentially impact on family

SMEs’ R&D expenditure. In this study, cash flow is defined as a firm’s net cash flow, which

is the difference between the amount of cash income and the amount of expenditure. Cash

flow data used in this study will be also be collected from the CSMAR database. In addition

to the above discussed control variables, this research also controls the industry and year

using dummy variables. All variables that were utilised in this study are further detailed in

Table 3.3 below:

Table 3.3: The definition of different variables in this research

Variable types Variable name Code Variable design

Dependent variable

R&D investment RD R&D investment/ sales revenue (RMB) (Schmid et al., 2014)

R&D output PA

Total number of patent applications for invention (Leten et al., 2007)

Independent variable

Family ownership

involvement FOI The share of equity owned by family (Choi et al., 2015)


Variable types Variable name Code Variable design

Family management

involvement FMI

Number of family members with executive positions/ Total number of executives (Matzler et

al., 2015)

Family governance

involvement FG

Number of family directors/Total board

members (Liang et al., 2013)

Moderating variable HR redundancy HR

The actual employment size minus the

employment size which based on a firm’s total assets, fixed assets and growth rate (Zhang et

al., 2013)

Control variables

Company Age AGE Company’s age

(Balasubramanian & Lee, 2008)

Company Size CS The company’s total

assets (Revilla & Fernández, 2012)

Cash flow CASH Cash inflow minus cash expenditure (Mairesse et

al., 1999)

Asset- liability ratio ALR The total amount of liabilities/total assets

(Kong, 2019)

Industry IN Dummy variable

(Gomez–Mejia et al., 2014)

Year YEAR Dummy variable (Feng,

2018)


3.6 Analytical strategy

In this study, the quantitative analysis was conducted using the SPSS (version 23)

software. SPSS is one of the most commonly used statistical software in social science

research and it has been widely utilised by researchers worldwide for several decades (Martin

& Bridgmon, 2012). Hypotheses 1, 2 and 3 of this research were tested using hierarchical

standard multiple regression analysis. Hypotheses 4a, 4b and 4c of this study were tested

using moderated multiple regression.

The reasons why this study used multiple regression analysis (including standard

multiple regression and moderated multiple regression) are first, the standard multiple

regression analysis is a frequently used technique by researchers to investigate the

relationship between a set of dependent and independent variables (Jeon, 2015). Therefore,

the main effects of three dimensions of family involvement could be well explored by using

standard multiple regression analysis. Second, besides detecting main effects, moderated

multiple regression was considered by prior studies as an appropriate technique to identify

the effect of moderating variables (Anderson, 1986). Several evaluations conducted over the

past four decades have shown that moderated multiple regression is the best choice to detect

the influence of moderator variable (Aguinis, 1995; Zedeck, 1971). Thus, the moderating

effects of HR redundancy in this context could be unambiguously identified through

conducting moderated regression analysis. Third, according to Champoux and Peters (1987),

if the moderator is continuous, conducting moderated regression analysis is a good method to

explore the change of association between independent variables and dependent variables.

Since the moderator in this study (HR redundancy level) is a continuous variable, moderated

regression is an appropriate technique to investigate how the HR policy could affect the


relationship between family involvement and innovative capability. Fourth, the sample size in

this study has met the requirement of conducting multiple regression analysis. Bonett and

Wright (2011) noted that the sample size of conducting regression analysis should be at least

‘50+k’ (k is the number of predictor variables). The sample size in this study is 504, and the

number of predictor variables is three. Thus, the sample size of this study has far exceeded

the minimum requirement.

Based on the above justification, multiple regression analysis (including standard

multiple regression and moderated multiple regression) was selected by this study as an ideal

technique to investigate how family firms’ special HR policy could affect the relationship

between family involvement and innovative capability. The details of the data analysis are

presented in Chapter 4.

3.7 Ethical considerations

As part of the Queensland University of Technology’s ethical clearance procedures, this

research has been classified as a project with negligible risk as the entire study relied

primarily on the use of secondary data and did not involve any direct contact with human

participants. The required secondary data were collected through the CSMAR database and

there were no predictable risks to any member of the research and supervisory team or any

member of the wider community. In accordance with research guidelines, all data collected as

a part of this project will be stored securely in accordance with the university’s management

of research data policy. Only the named researcher and members of the supervisory team will

have access to the collected data.


3.8 Conclusion

This chapter discusses the research design and methodology adopted for this study.

The chapter details the sampling procedures, data collection strategy as well as the

independent/dependent/control/moderating variables and analysis approach. The next chapter

will present the results of the study and discuss the quantitative analysis in detail to address

the proposed hypotheses.

82 Chapter 4: Results

Chapter 4: Results

4.1 Introduction

This chapter will report on the results of the analysis, including the descriptive statistics

along with the results of the hierarchical multiple regression analysis conducted to test the

hypotheses identified earlier in Chapter 2 (see Section 2.8 and Figure 2.7). The results of the

multiple regression analysis testing the main effects between the independent and dependent

variables (H1 to H3 in Section 2.8) will be presented in Section 4.3. Section 4.4 presents the

results of the moderating effects of HR redundancy (H4a to H4c discussed earlier in Section

2.8.4) The structure of this chapter is presented below in Figure 4.1.

Chapter 4: Results 83


Source: Developed in this study


4.2 Descriptive statistics and correlations coefficients

In this section, the descriptive statistics (see Table 4.1) and the correlation coefficients

(see Table 4.2) for all variables used in this study will be presented. Exploring descriptive

statistics is important in helping researchers better understand the characteristics of the

sample (Fisher & Marshall, 2009). For the sample of family SMEs analysed for this study,

Table 4.1 below presents the relevant descriptive statistics.

Table 4.1: Descriptive Statistics

As presented in Table 4.1, the ratio of family involvement in ownership, management

team, and board involvement is 36%, 37%, and 41%, respectively. This means that the

families involved in these businesses have a degree of involvement in all dimensions.

Notably though, it can be seen that there is a huge gap in the statistics across the different

sample firms. For example, the minimum level of family shareholding is only 6% but the

Variables

Mean SD Minimum Maximum Median N

Family ownership

.36 .15 .06 .72 .35 504

Family management

.37 .18 .09 1.0 .33 504

Family governance

.41 .15 .08 .78 .36 504

Labour redundancy

10.22 12.88 .05 22.51 6.08 504

Innovative investment

.08 .09 .00 .49 .05 504

Patent counts 11.24 11.46 0 70 8 504

Firm size 12.08 .95 10.11 14.74 11.85 504

Firm age 16.51 4.91 6 46 16 504

Leverage .29 .21 .01 .98 .23 504

Cash flow 11735.5 15707.64 -8951.7 112541 7826.46 504


highest shareholding held by a family reaches an extensive 72%. For both management and

governance dimensions, it can be seen that in these Chinese family SMEs, the families

involved vary in terms of their level of intervention and control in relation to pursuing

strategies and decision-making. For innovative capability, the average proportion of

innovation investment/ revenue and patent application counts is between 8% and 11%

respectively. This shows that the innovative capability of Chinese family SMEs still has a lot

of room for improvement. Next, the average labour redundancy index is 10.22, which means

that it is a common phenomenon for Chinese family business to adopt labour redundancy

strategies for the purpose of preserving employees’ emotional attachment (see Section 2.3.3),

albeit in varying degrees between different firms. Also shown is that the average leverage

value is .29. According to Table 4.1, the average firm size and age is 12.08 and 16.51

respectively.

In Table 4.2 below, it can be observed that almost all correlations are less than 0.5,

which indicate that multicollinearity is not a serious concern for this analysis (Aspelund et al.,

2005). According to (Zainodin & Yap, 2013), multicollinearity occurs when there is a high

correlation between explanatory variables, and in this situation, it may be difficult to

distinguish the contributions of these explanatory variables to the dependent variable.

Haitovsky (1969, p. 486) noted that an ‘explanatory variable should be truly independent

with another one’. Looking at the variables in this study, the correlation coefficient among

the three dimensions of family involvement are all less than 0.5, which verifies that the

impact of these three dimensions on innovation capability is independent from each other.

Therefore, no explanatory variable needs to be removed from this study. Table 4.2 also shows

that most control variables in this analysis are associated with the dependent variables. For

example, the firm size is positively correlated with firm’s innovative expenditure and patents

counts (r=.14, p<.01 and r=.13, p<.01, respectively), which indicates that when the size of a


company is larger, its investment in innovation and research will be higher and the patents

counts will increase as well. Besides, Table 4.2 also shows that the level of sample firms’

financial leverage will negatively predict both firms’ innovative investments and patent

counts (r=-.21, p<0.01 and r=-.17, p<0.01, respectively). In other words, a higher level of

financial leverage will lead to a negative influence on family firms’ innovative capability.

Next, it can be seen from Table 4.2 that the family firm age is not significantly

associated with innovative investment. The most important correlations are those between

family involvement (the ownership, management and governance as discussed in Section 2.5)

and innovative capability (innovative expenditure and patent counts as discussed in Section

2.6). The results reveal that all the three dimensions of family involvement (ownership,

management and governance) are significantly associated with both innovative investments

and patents. Specifically, family ownership, management and governance will negatively

affect family firms’ innovative expenditure (r=-.46, p<0.01, r=-.49, p<0.01 and r=-.20,

p<0.01, respectively). In addition, these three dimensions of family involvement also have a

negative influence on firms’ patent counts (r=-.39, p<0.01, r=-.46, p<0.01 and r=-.22, p<0.01,

respectively). This indicates that a higher degree of family participation in ownership,

management and governance, will result in weakening a family firm’s innovative capability.

The above results support the proposals in the first three hypotheses (H, H2, H3)

(previously proposed in Chapter 2 Sections 2.8.1, 2.8.2 and 2.8.3) that family ownership,

management and governance involvement will negatively affect a family firm’s innovative

capability. In Section 4.3, a series of regression analysis will be conducted to further verify

the first three hypotheses. In addition, the moderating effects of HR redundancy (H4a, H4b

and H4c proposed that HR redundancy will moderate the negative influence of family

involvement on innovative capability, see Section 2.8.4) will be investigated by using

moderating regression analysis in Section 4.4.

Chapter 8 87

Table 4.2: Correlation coefficient between variables

*p<0.05, **p<0.01

Variables 1 2 3 4 5 6 7 8 9 10

Independent Variable 1. Family ownership 1 .25** -.03 -.18** -.46** -.39** .09** -.09* .03 -.04

2. Family management .25** 1 .28** -.12** -.49** -.46** .12** -.08 .35** .03

3. Family governance -.03 .28** 1 .04 -.20** -.22** -.09* -.01 .03 -.14**

Moderator 4. HR redundancy -.18** -.12** .04 1 .38** .44** .13** -.05 -.02 .20**

Dependent Variable

5. Innovative investment -.46** -.49** -.20** .38** 1 .68** .14** -.007 -.21** .14**

6. Patents -.39** -.46** -.22** .44 .68** 1 .13** .006 -.17** .13**

Control Variables

7. Firm size -.09* .12** -.09* .13** .14** .13** 1 -.02 .45** .57**

8. Firm age -.09* -.08 -.01 -.05 -.007 .006 -.02 1 -.04 -.03

9. Financial leverage .03 .35** .03 -.02 -.21** -.17** .45** -.04 1 .26**

10. Cash flow -.04 .03 -.14** .20** .14** .13** .57** -.03 .26** 1

11. Industry Dummy

12. Year Dummy


4.3 Multiple regression analysis – main effects (H1, H2, H3 in Figure 2.7)

In order to test the hypotheses relating to the main effects of family involvement

(ownership, management, governance) on family firms’ innovative capability (see Sections

2.8.1, 2.8.2 and 2.8.3), a set of hierarchical multiple regression analysis results will be

reported in this section. Using the SPSS software, the control variables (which include firm

size, firm age, financial leverage and cash flow) were initially entered followed subsequently

by each separate independent variable (family ownership or management or governance). The

following sections (4.3.1, 4.3.2 and 4.3.3) present the results of the multiple regression

analyses regarding these relationships respectively: including (a) family ownership and

family firms’ innovative capability (see H1 in Section 2.8.1); (b) family management

involvement and innovative capability (see H2 in Section 2.8.2); and (c) family governance

involvement and family firms’ innovative capability (see H3 in Section 2.8.3).

4.3.1 Family ownership and innovative capability – Family ownership will negatively

influence innovative capability (H1)

According to the literature (see Section 2.8.1), H1 proposed that family ownership

involvement will have a negative influence on family firms’ innovative capability. In order to

test H1, family firms’ innovative investments and patents counts were separately regressed on

‘family involvement in ownership’ (see Table 4.3). The relevant control variables (including

firm size, firm age leverage, cash flow, industry dummy variable and year dummy variable)

were entered in Step 1 (see Model 1 in Table 4.3), then followed by ‘family involvement in

ownership’ in Step 2 (see Model 2 in the below table).


Table 4.3: Hierarchical Regression Analysis for the effects of family ownership on innovative capability - H1

Innovative investments Patents β (Model 1) β (Model 2) β (Model 1) β (Model 2) Control variable

Firm size .24*** .099*** .21*** .16**

Firm age -.014 -.05 .001 -.03

Financial leverage -.34*** -.30*** -.28*** -.25***

Cash flow .096† .099* .09 .09*

Industry (dummy)

Year (dummy)


Family ownership involvement

-.44*** -.37***

R2 .12 .30 .09 .22

F 16.44*** 43.01*** 11.58*** 27.97*** ∆R2 .11 .29 .08 .21

N 504 504 504 504 † p < 0.10; * p < 0.05; ** p < 0.01; *** p < 0.001

In terms of the relationship between family ownership and innovative investment, the

results in Table 4.3 indicate that the entry of the control variables in the first step accounted

for a significant amount of variance on family firms’ innovative investment, R2ch=.11, F

(4,499) =16.44, p<.001. In Step 2, the analysis shows that the independent variable (family

involvement in ownership) has a significant negative influence on firms’ innovative

investments (β=-.44, p<.001). Furthermore, it can be seen from Model 2 of Table 4.2 that

family involvement in ownership accounted for a significant increase in variance in

innovative investments, R2ch=.29, F (5, 498) =43.01, p<.001. These results indicate that a

higher level of family ownership could adversely affect family firms’ innovative investments.

In terms of the effect of family ownership on innovative output, the results in Table

4.3 show that entering the control variables in Step 1 would account for a significant amount


of variance on family firms’ patents counts, R2ch=.08, F (4,499) =11.58, p<.001. It is shown

in Step 2 that the independent variable (family involvement in ownership) has a significant

negative effect on family firms’ patent counts, which is seen in the standardised coefficient

(β=-.371, p<.001). As displayed in Model 2, the entry of the independent variable ‘family

involvement in ownership’ accounted for a significant increase in variance in the sample

firms’ patents counts, R2ch=.21, F (5, 498) =27.97, p<.001, which indicate that a higher level

of family involvement in ownership is negatively related to family firms’ patent counts.

Based on the above results, the proposal in H1 (see Section 2.8.1) is supported.

4.3.2 Family management and innovative capability – Family management will

negatively affect innovative capability (H2)

The second hypothesis (in Section 2.8.2) in this research has proposed that the

independent variable ‘family involvement in management’ would cause a negative influence

on family firms’ innovative capability. In order to verify H2, two dependent variables

(innovative investments and patent counts) were regressed on ‘family involvement in

governance’ (see Table 4.4 below). Specifically, the relevant controls including firm size,

firm age leverage, cash flow, industry dummy variable and year dummy variable were

entered in Step 1 (see the Model 1 column in Table 4.4 below), which was followed by

entering the independent variable (family involvement in governance) in Step 2 (see Model 2

in Table 4.4 below).


Table 4.4: Hierarchical Regression Analysis for the effects of family management involvement on innovative capability – H2


Firm size .24*** .23** .21*** .20***

Firm age -.014 -.044 .001 -.02

Financial leverage -.34*** -.17*** -.28*** -.12*

Cash flow .10 .07 .09 .06

Industry (dummy)

Year (dummy)


Family management involvement

-.47*** -.45***

R2 .12 .31 .09 .26 F 16.44*** 43.49*** 11.58*** 34.81*** ∆R2 .11 .30 .08 .25 N 504 504 504 504

† p < 0.10; * p < 0.05; ** p < 0.01; *** p < 0.001

In terms of the effect of family management on the innovative investment, Table 4.4

above shows that the entry of a series of control variables in Step 1 accounted for a

significant amount of variance on firms’ innovative investments, ΔR2 = .11, F (4, 499) =

16.44, p < .001. Next, as displayed in Step 2, the entering of the independent variable (family

involvement in management) negatively impacted on family firms’ innovative investments

significantly (β =-.23, p < .001). Furthermore, as displayed in the Model 2 column of Table

4.3, the entry of ‘family involvement in management’ accounted for a significant increase in

variance in innovative investments, ΔR2 = .30, F (5, 498) = 43.49, p < .001. This result

indicates that a higher level of family involvement in the management team will lead to a

lower level of firms’ innovative investments.


Similarly, by using patents counts as the dependent variable, the results in Table 4.4

show that the entry of the control variables in the first step accounted for a significant amount

of variance on patents counts, ΔR2 = .08, F (4,499) = 11.58, p < .001. Next, the entry of the

independent variable (family involvement in management) accounted for a significant

increase in variance in the dependent variable (patent counts), ΔR2 = .25, F (5, 498) = 34.81,

p < .001. Also, ‘family involvement in management’ is shown to have a significant negative

effect on family firms’ patents count (β =-.45, p < .001), which can be seen from the

standardised coefficient value. The above results show that the deeper the level of family

involvement in a management team, the fewer patents a family firm will likely have. Based

on these results in the data analysis, the proposal in H2 of this study (see Section 2.8.2) is

supported.

4.3.3 Family governance and innovative capability – Family governance will negatively

affect innovative capability (H3)

The third hypothesis of this study (see Section 2.8.3) proposed that family governance

involvement would be negatively associated with family firms’ innovative capability. For the

purpose of testing H3, innovative investments and patent counts were separately regressed on

‘family involvement in governance” (see below Table 4.5). A series of control variables were

entered in Step 1 (see Model 1 in Table 4.5 below) followed by the independent variable

(family involvement in governance) in Step 2 (see Model 2 in Table 4.5 below).


Table 4.5: Hierarchical Regression Analysis for the effects of family governance on innovative capability – H3


Firm size . .24*** .23*** .21*** .19***

Firm age -.01 -.02 .001 -.001

Financial leverage -.34*** -.32* -.28*** -.26*

Cash flow .10* .08 .09 .07

Industry (dummy)

Year (dummy)


Family governance involvement

-.15*** -.18***

R2 .12 .14 .09 .12 F 16.44*** 16.13*** 11.58*** 13.23*** ∆R2 .11 .13 .08 .11 N 504 504 504 504

† p < 0.10; * p < 0.05; ** p < 0.01; *** p < 0.001

In terms of the effect of family governance on innovative investments, the results in

Table 4.5 above show that entering the relevant control variables (firm size, firm age,

leverage and cash flow) in Step 1 accounted for a significant amount of variance on firms’

innovative investments, ΔR2 = .11, F (4, 499) = 16.44, p < .001. As shown in Step 2, it can be

seen that entering family involvement in governance accounted for a significant increase in

variance in family firms’ innovative investments, ΔR2 = .13, F (5, 498) = 16.13, p < .001.

Also, family involvement in governance has a significant negative effect on family firms’

innovative investments (β =-.09, p < .001). In other words, the results show that a higher level

of family involvement in the board of the family firms will lead to a lower level of family

firms’ innovative expenditure.


The results for setting the patents counts (DV) in Table 4.5 reveal that entering a

series of control variables in Step 1 accounted for a significant amount of variance on patents,

ΔR2 = .08, F (4, 499) = 11.58, p < .001. Next, as displayed in Step 2, entering ‘family

involvement in governance’ accounted for a significant increase in variance in family firms’

patents count, ΔR2 = .11, F (5, 498) =13.24, p < .001. The results shown in Table 4.5 indicate

that ‘family involvement in governance’ has a significant negative influence on family firms’

patent counts, which can be seen from the standardised coefficient value (β =-.18, p < .001).

In other words, the results verify that a higher level of family governance involvement in

family corporations will lead to fewer patents counts in firms. Based on the above results, the

proposal in H3 of this study is supported.

4.4 Moderating effects of HR redundancy

In Chapter 2 (see Section 2.8.4), H4 was discussed that included the following

proposals: H4a (HR redundancy would moderate the negative influence of family ownership

on innovative capability), H4b (HR redundancy would moderate the negative influence of

family management on innovative capability), and H4c (HR redundancy would moderate the

negative influence of family governance on innovative capability). For the purpose of testing

the above relationships, a series of hierarchical multiple regression analysis were conducted.

First, a series of control variables (firm size, firm age, leverage and cash flow) were entered

in Step 1, followed by the independent variables (the three dimensions of family

involvement) in Step 2. Next, the interaction terms (family ownership * HR redundancy,

family management * HR redundancy and family governance * HR redundancy) were

entered in Step 3 to verify the moderating effects of the moderating variable (HR

redundancy). Specifically, the interaction terms were created by multiplying the mean-


centred independent variables (three dimensions of family involvement) and the mean-

centred moderating variables (human resource redundancy) in order to reduce the collinearity

between variables and interaction terms (Smith & Sasaki, 1979). In the following sections

(Sections 4.4.1, 4.4.2 and 4.4.3), the moderating effects of HR redundancy on the relationship

between family involvement and innovative capability will be presented.


involvement in ownership’ and innovative capability (H4a)

H4a in this research focuses on the moderating effect of HR redundancy on the

relationship between family ownership involvement and firms’ innovative capability (see

Section 2.8.4). Table 4.5 below presents the regression analysis results related to the

moderating effect of HR redundancy. Initially, a series of relevant control variables including

firm size, firm age, cash flow and financial leverage were entered in Step 1 (see the Model 1

column of Table 4.6), followed by entering the independent variable (family involvement in

ownership) in Step 2 (see the Model 2 column of Table 4.6). Finally, the moderating variable

(HR redundancy in family SMEs) and the interaction term (family involvement in ownership

x human resource redundancy) were entered in Step 3 (see the Model 3 column of Table 4.6).


Table 4.6: Hierarchical Multiple Regression Analysis presenting moderating effect of human resource redundancy on the relationship between family ownership and innovative capability - H4a

Innovative investments Patents β (Model 1) β (Model 2) β (Model 3) β (Model 1) β (Model 2) β (Model 3) Control Variables

Firm size .24*** .18*** .16** .21*** .16** .13**

Firm age -.01 -.05 -.04 .001 -.03 -.01

Financial leverage -.34*** -.30*** -.28*** -.28*** -.25*** -.22***

Cash flow .096 .099 .061 .09 .09* .034

Industry (dummy variable)

Year (dummy variable)

Independent Variables

Family involvement in ownership -.44*** -.39*** -.37*** -.31***

Moderator

Human resource redundancy .287* .356*

Interaction term Family ownership involvement x HR redundancy

.067† .023

R2 .12 .30 .37 .09 .22 .33

F 16.44*** 43.01*** 41.59*** 11.58*** 27.97*** 35.09***

∆R2 .11 .29 .36 .08 .21 .32

N 504 504 504 504 504 504 † p < 0.10; * p < 0.05; ** p < 0.01; *** p < 0.001


As shown from the regression results in Table 4.6 above, the interactive effects

of family ownership x HR redundancy have a significant and positive influence on

family firms’ innovative investments (β=.003, p< .1), but not on firms’ patents counts

(β=.023, ns). This result revealed that the negative relationship between ‘family

ownership involvement and firms’ innovative input will be weakened when the level

of family firms’ HR redundancy is higher. However, the analysis also shows that the

moderating variable ‘HR redundancy’ did not have a significant effect on the

relationship between family ownership and firms’ innovative output. Based on the

results of this analysis, the proposal in H4a is partially supported (see Section 2.8.4

and Figure 2.7).


involvement in management’ and innovative capability (H4b)

H4b of this study has proposed that HR redundancy in family firms will affect

the relationship between one of the independent variables (family involvement in

management) and firms’ innovative capability (see Section 2.8.4 and Figure 2.7).

Specifically, it was proposed that the negative relationship between ‘family

involvement in management’ and ‘innovative capability’ will be moderated when the

family SMEs have a high level of HR redundancy.


Table 4.7 below presents the results of the moderating effects of HR redundancy

on the relationship between family management involvement and innovative

capability. Initially, relevant controls including firm size, firm age, financial leverage

and cash flow were entered in Step 1 (see the Model 1 column of Table 4.7) followed

by the independent variable (family involvement in management) in Step 2 (see the

Model 2 column of Table 4.7). Finally, the moderating variable (HR redundancy) and

the interaction term (HR redundancy x family involvement in management) were

entered in Step 3 (see the Model 3 column of Table 4.7).


Table 4.7: Hierarchical Multiple Regression Analysis presenting moderating effect of human resource redundancy on the relationship between family management and innovative capability - H4b

† p < 0.10; * p < 0.05; ** p < 0.01; *** p < 0.001

Innovative investments Patents

β (Model 1) β (Model 1) β (Model 1) β (Model 1) β (Model 1) β (Model 1) Control Variables

Firm size .24*** .23*** .21** .21*** .20** .17**

Firm age -.01 -.04 -.03 .001 -.02 -.01

Financial leverage -.34*** -.17*** -.14** -.28*** -.12*** -.09*

Cash flow .10 .07 .02 .09 .06 .01 Industry (dummy variable)

Year (dummy variable)

Independent Variables Family involvement in management

-.47*** -.42*** -.45*** -.39***

Moderator


Interaction term Family management involvement x HR redundancy

.03 .02

R2 .12 .31 .38 .09 .26 .38

F 16.44*** 43.49*** 44.01*** 11.58*** 34.81*** 43.85***

∆R2 .11 .30 .37 .08 .25 .37

N 504 504 504 504 504 504


The data analysis results in Table 4.7 show that the interaction term ‘family

involvement in management x HR redundancy’ did not have a significant influence

on family SMEs’ innovative investments (β=.002, ns) and on patents counts (β=.09,

ns). This result verifies that the moderating variable (HR redundancy in family SMEs)

will not significantly affect the relationship between ‘family involvement in

management’ and ‘innovative capability’. Thus, the proposal in H4b (see Section

2.8.4) of this study is not supported.


involvement in governance’ and innovative capability (H4c)

H4c of this study examines how the moderating variable ‘HR redundancy’ will

influence the relationship between ‘family involvement in governance’ and family

SMEs’ innovative capability (see Section 2.8.4 and Figure 2.7). Specifically, H4c

proposed that the negative relationship between ‘family involvement in governance’

and ‘innovative capability’ will be weakened when the level of family firms’ HR

redundancy is comparatively higher.

Table 4.8 below presents the analysis results regarding the moderating effects of

HR redundancy on family firms’ innovative capability. As can be seen in the Model 1

column, a series of control variables were entered in Step 1 followed by the

independent variable ‘family involvement in governance’ in Step 2 (see the Model 2


column in Table 4.8). Finally, the moderating variable ‘HR redundancy’ and the

interaction term (HR redundancy x family governance involvement) were both

entered in Step 3 (see the Model 3 column in Table 4.8).


Table 4.8: Hierarchical Multiple Regression Analysis presenting moderating effect of human resource redundancy on the relationship between family governance and innovative capability - H4c

Innovative investments Patents

β (Model 1) β (Model 2) β (Model 3) β (Model 1) β (Model 2) β (Model 3) Control Variables Firm size .24*** .22*** .19** .21*** .20** .13**

Firm age .-01 -.02 .004 .001 -.001 .02

Financial leverage -.34*** -.32*** -.27*** -.28*** -.26*** -.20***

Cash flow .10 .08* .02 .09 .07 -.004

Industry (dummy variable) Year (dummy variable)

Independent Variables

Family involvement in governance -.15*** -.19*** -.18*** -.23***

Moderator


Interaction term

Family governance involvement x HR redundancy

.08* .10*

R2 .12 .14 .26 .09 .12 .29

F 16.44*** 16.13*** 25.01*** 11.58*** 13.23*** 29.47***

∆R2 .11 .13 .25 .08 .11 .28

N 504 504 504 504 504 504 † p < 0.10; * p < 0.05; ** p < 0.01; *** p < 0.001


The data analysis outcomes shown in Table 4.8 above indicate that the

interaction term ‘family involvement in governance’ x ‘HR redundancy’ had a

significant influence on family SMEs’ innovative capability including firms’

innovative investments (β=.004, p<.05) as well as firms’ patents counts (β=.10,

p<.05), which indicates that HR redundancy in family SMEs had a significant

moderating impact on the relationship between family governance involvement and

innovative capability. Specifically, the negative relationship between family

governance involvement and a firm’s innovative capability will be weakened when

the level of family SMEs’ HR redundancy is relatively higher. Thus, the proposal in

H4c (see Section 2.8.4 and Figure 2.7) of this study is supported.

4.5 Summary of results

Table 4.9 presents a summary of the results related to the hypotheses testing.

This summary highlights the three main effects (H1, H2 and H3) as well as the

moderating effects of human resource redundancy on these three main effects (H4a,

H4b and H4c). The below Figure 4.2 presented the modified research model based on

the findings of this study.


Table 4.9: Summary of results

Innovative investments

Patent Hypothesis

Main effects

Family ownership -.44*** -.37*** H1 supported Family management -.47*** -.45*** H2 supported

Family governance -.15*** -.18*** H3 supported

Moderating effects

Family ownership × HR redundancy

.067† .023 H4a partially supported

Family management × HR redundancy

.03 .02 H4b not supported

Family governance × HR redundancy

.08* .10* H4c supported

† p < 0.10; * p < 0.05; ** p < 0.01; *** p < 0.001


Figure 4.2: The modified research model based on the findings


4.6 Conclusion

This chapter reports on the results of the quantitative data analysis that tested the

main effects of the three dimensions of family involvement in family SMEs

(ownership, management and governance) on firms’ innovative capability (input and

output). First, the results show that there is a significant negative relationship between

family ownership and innovative capability. Next, the negative relationship between

‘family involvement in management’ and innovative capability was confirmed. The

analysis also verified that ‘family involvement in governance’ will negatively impact

on family firms’ innovative capability significantly. Thus, the proposals in H1, H2

and H3 of this study can all be confirmed.

As for the moderating effects of HR redundancy, the data analysis results

supported its effects on these negative relationships: (a) ‘family involvement in

ownership’ and firms’ innovative investments, and (b) ‘family involvement in

governance’ and firms’ innovative capability (including both input and output).

Specifically, the results of the regression analysis show that the above negative

relationships can be significantly weakened by the moderating variable – HR

redundancy. However, the results did not support the moderating effect of HR

redundancy on these relationships: (a) ‘family ownership’ and innovative output, and

(b) ‘family management’ and innovative capability (including both innovative input

and output). Based on the analysis, H4a was partially supported, H4b was not


supported while H4c was supported. The theoretical and policy implications of the

results reported in this chapter will be discussed in Chapter 5.

108 Chapter 5: Discussion and Conclusion

Chapter 5: Discussion and Conclusion

5.1 Introduction

This thesis investigates the research problem of “How family involvement will

influence a family firm’s innovative capability”. In Chapter 1, the background of this

study was outlined, and the research rationale and objectives were introduced to

provide the foundation for the subsequent investigation and analysis. Chapter 2

reviewed the literature and presented a theoretical framework for this study that

proposed the relevant variables and hypotheses. The research methodology was

discussed in Chapter 3, while the previous chapter reported on the quantitative

analysis results.

This final chapter will present an overall discussion that links the findings of

this research back to the wider literature to highlight the key contributions presented

through the empirical testing. Specifically, how the three dimensions of family

involvement (which include ownership, management and governance, see Sections

5.3.1 to 5.3.3) will impact on Chinese family SMEs’ innovative capability (which

include firms’ innovative investments and patent application counts) will be further

considered by taking a more in-depth exploration of the analysis results in relation to

the literature. Also, the moderating effects of HR redundancy will be more thoroughly

explored in Section 5.4.

Chapter 5: Discussion and Conclusion 109

This chapter will conclude with a discussion on both the theoretical and

practical contributions (see Section 5.5) of this research, followed by the potential

limitations and future research direction (see Section 5.6). The structure of this

chapter is presented in Figure 5.1.


Source: Developed in this study


5.2 Summary of the results

As introduced in Chapter 1, this research aims to address the current gap in the

literature by seeking to understand the influence of family involvement on the

innovative capability of SMEs. Through a quantitative analysis utilising a sample of

Chinese SMEs, this study tested the hypotheses proposed in Section 2.8 with the

following results reported in the previous chapter: H1, H2 and H3 were supported,

which shows evidence that family involvement (ownership, management,

governance) has an significant influence on family SMEs’ innovative capability

(innovative investments) and output (patent counts); and that HR redundancy

moderates the relationship with H3a being partially supported, H4b not supported and

H4c being supported.

The results of this study contribute to the literature by highlighting important

issues relating to family-owned businesses that were either omitted or insufficiently

explored in previous studies. Prior research tended to focus only on the relationship

between independent variables (for example, family involvement) and dependent

variables (for example, firms’ innovative capability) (Matzler et al., 2015; Muñoz-

Bullón & Sanchez-Bueno, 2011; Sciascia et al., 2015). However, the effect of

moderating variables is still worthy of further investigation. Although a limited

number of studies have investigated moderating variables such as companies’

performance dilemma (Chrisman & Patel, 2012) and institution environment (Kong,


2019), these were always explored in the context of non-family businesses. The

proposal and testing of a moderating variable in this study (HR redundancy in family

businesses) that considers a unique characteristic of family-owned businesses presents

an important contribution to this research field. Focusing on a sample of Chinese

family-owned SMEs, this study analysed secondary data collected from the CSMAR

database to address the core research question: What are the influences of family

involvement on family firms’ innovative capability, and how this influence could be

moderated by HR redundancy level. Results of the data analysis were presented in

Chapter 4 and details were provided on the influence between the independent

variables (family ownership involvement, management involvement and governance

involvement) and the dependent variable (family firms’ innovative capability,

including both innovation input and output), as well as the moderating effects of HR

redundancy. The next section will discuss the analysis results by linking the findings

back to the literature. Potential implications of the findings and contributions to

theory and practice will be further explored.

5.3 The main effects of family involvement on innovative capability (H1,

H2, H3 proposed in Chapter 2)

This section will discuss the main effects of family involvement (ownership,

management and governance) on firms’ innovative capability, with each proposed

hypothesis covered in Section 5.3.1, Section 5.3.2 and Section 5.3.3 respectively.


5.3.1 The effect of family ownership on innovative capability

- Family ownership negatively affects innovative capability (H1 in Section 2.8.1,

supported).

The findings of this research have confirmed the proposed hypothesis that

family ownership has a negative influence on family firms’ innovative capability (See

Section 2.8.1 and Figure 2.7 in Chapter 2). The data analysis results show that when a

higher proportion of shares is held by family members, a firm’s innovative capability

will be weakened. Specifically, the findings show that family SMEs’ innovative input

and output will both decrease as the shareholdings owned by family members

increase. This is consistent with most prior research evidence that similarly found a

negative relationship between family ownership involvement and firms’ innovative

expenditure (Chen & Hsu, 2009; Sciascia et al., 2015). This can also be supported by

various theoretical perspectives. First, this can be linked to scholars’ findings based

on agency theory (see Section 2.3.1). For instance, Morck and Yeung (2003) found

that family-specific agency costs could have a negative impact on R&D investments

since family owners always tend to inhibit innovative activities/investments for the

purpose of preserving the existing businesses’ cash flow. Next, the results support the

socio-emotional wealth (SEW) perspective (see Section 2.3.3): In order to preserve

family control and maintain their inheritance, family firms always have a more

conservative attitude in their decision-making process (Patel & Chrisman, 2014),


which often influence their aversion to innovative strategies and investments. Also,

the results show consistency with the RBV (Section 2.3.4): Family shareholders are

usually reluctant to transfer their equity in exchange for external financial capital

(Goetzmann & Koll, 2005). As such, family firms do not consider it beneficial to

obtain financial support from external markets to conduct innovative investments.

The analysis in this study also found a negative relationship between family

ownership and innovative output. This explanation can be supported by the SEW

theory (Section 2.3.3): It is often viewed as a hassle by family firms to accept

discontinuous technology as this will require the firms to reconfigure their HR

structure and divest old assets. Such actions are often viewed negatively as they

potentially disrupt deeply ingrained emotional attachment and ties within these family

firms. Through this study, the negative effect of ‘family involvement in ownership’

on firms’ ‘innovative capability’ is verified and results from the study not only

confirm previous findings in the literature but also contribute to the body of

knowledge. Prior studies that explored the relationship between family ownership

and innovation tended only to consider R&D expenditure when analysing firms’

innovative capability/intensity (Chen & Hsu, 2009; Cirillo et al., 2019; Sciascia et al.,

2015), this research contributes by considering innovative output as another aspect of

firms’ innovative capability that presents a more thorough investigation on the

relationship between family ownership involvement and firms’ innovative capability.

Consequently, this study found that a higher level of family ownership involvement


will negatively influence firms’ innovative output (patent counts), which represents a

reduction in family firms’ radical innovations (Brem et al., 2016). According to

Keizer and Halman (2007), radical innovations are characterised by higher risk,

longer life cycle and a greater level of unpredictability. Prior studies on family firms’

risk-taking preference found that family shareholders tended to avoid higher-risk

projects (Naldi et al., 2007), and would restrict the pursuit of new opportunities

(Kellermanns et al., 2012) in order to preserve their property for future generations.

This shows consistency with the results of this study.

5.3.2 The effect of family management on innovative capability

- Family management negatively affects innovative capability (H2 in Section 2.8.2,

supported).

The results of the data analysis have confirmed the proposed hypothesis that

‘family involvement in management’ could negatively influence family firms’

innovative capability (See Section 2.8.2 and Figure 2.7 in Chapter 2). According to

the RBV perspective, the resource allocation process in family enterprises requires

family members’ participation in management and governance (Irava & Moores,

2010; Siebels & zu Knyphausen‐Aufseß, 2012). This research differs from prior

studies (Migliori et al., 2020; Sciascia et al., 2015) in that previous researchers only

focused on a limited number of dimensions of ‘family involvement’ when exploring

firms’ innovative capability. This study, however, has further considered the


heterogeneity and diversity of ‘family involvement’ based on the F-PEC model (see

Section 2.5) by exploring additional dimensions of ‘family involvement’ (including

ownership involvement, management and governance) to better understand potential

impact on family firms’ innovative capability.

The results of this study confirm that family management involvement has a

negative impact on family firms’ innovative investments, and this is consistent with

prior scholar’s findings: For example, König et al. (2013) found that family-run

businesses have greater discretion in the process of allocating their resources, which

allows them to seek opportunities that may run counter to rational economical

investment decisions (like conducting innovative investment). The reason behind this

behaviour is that family-influenced corporations often try to maintain organisational

independence for the purpose of preserving the family’s socioemotional wealth rather

than for financial purposes (Gómez-Mejía et al., 2007). As mentioned in Chapter 2

(see Section 2.8.2), the primary goal pursued by a family management team tends to

be on accumulating and preserving the family’s socioemotional wealth. Thus, the

family management team will tend to avoid innovative investments that may have

higher-risks and uncertain characteristics. Overall, the results of this study provide

confirmation on the negative relationship between family management and innovative

expenditure.

As for the relationship between family management and innovative output,

the findings of this study are consistent with the literature. For instance, Anderson et


al. (2012) identified that having a greater proportion of family members within a

company’s management team will result in a lower level of innovation output. Block

et al. (2013) also found that family managers’ involvement in companies is negatively

correlated with their number of patent citations. From a theoretical perspective, the

results support the RBV (see Section 2.3.4 and Section 2.8.2). Although employing

family members as managers is a source of socio-emotional wealth for a family firm,

family corporations that operate in competitive and dynamic industries will be likely

disadvantaged by this due to the lack of external management talents. Research shows

that internally sourced family managers are usually chosen from a smaller and less

promising talent pool and they may not have the necessary skills for fostering

effective innovations within their companies (Mehrotra et al., 2011). Therefore,

having a higher proportion of family members in a management team could

negatively affect a family firm’s innovative output. Hagel III and Singer (1999) study

similarly noted that for a firm to create radical innovative breakthroughs, it is always

important that quality managers with professional knowledge are available. Most

prior studies that looked into the relationship between family management

involvement and patent development tended to focus only on large family enterprises

(Block et al., 2013). This study contributes an additional perspective by focusing on

Chinese family SMEs. It can be seen that the study reached a conclusion that is

consistent with that in previous studies (Block et al., 2013; Burr et al., 2015), further


supporting the argument that family involvement in a management team will

negatively affect the innovation output of an enterprise.

5.3.3 The effect of family governance on innovative capability

- Family governance negatively affects innovative capability (H3 in Section 2.8.3,

supported).

Results from the data analysis confirm the proposed hypothesis that family

governance involvement will have a negative influence on family firms’ innovative

capability (see Section 2.8.3 and Figure 2.7 in Chapter 2). This finding provides

support that having a higher proportion of family members on the board will

negatively affect innovative capability, including both the family firms’ innovative

input and output. This supports the literature on agency theory (see Section 2.3.1). For

family firms, having an independent board of directors is important for ensuring that

external shareholders are protected from opportunistic behaviours and potential abuse

of resources because a board that is dominated by family members may be less

effective in monitoring the activities of an internally controlled management team

(Anderson & Reeb, 2004). In circumstances where family members’ opportunistic

behaviour and resources abuse are severe, any potential resources and funding that

could be available for beneficial long-term developments (like innovative R&D

strategies) will be reduced accordingly. This finding also supports the SEW

perspective (see Section 2.3.3 and Section 2.8.3). When considering their firms’


business strategies, family directors are more likely to pursue activities that will

increase the family firms’ socioemotional wealth such as reputation and identification

(Deephouse & Jaskiewicz, 2013). Thus, when internal family members dominate a

board, the likelihood for misuse of firm resources is potentially higher (Matzler et al.,

2015), and when this occurs, vital resources that could have been invested for the

development of innovative programs will be removed.

This study also provided evidence related to the negative relationship between

family governance and innovative output. This result supports the RBV perspective

(see Section 2.3.4 and Section 2.8.3). In family firms, some internal family members

are selected to be board members based on their status and power within their family,

and these directors often lack the required professional abilities and knowledge (Gallo

& Sveen, 1991). As a board of directors needs to play an important role in providing

professional advice to a firm (Dalton & Daily, 1999), any lack of expertise will

negatively influence the conduct of innovative strategies, including the creation of

new patents and products. Based on this understanding, H3 of this study is confirmed.

This study contributes to the existing literature (Kor, 2006; Su & Lee, 2013) by

further providing evidence that supports the proposals highlighted by previous

researchers.


5.4 The moderating effects – HR redundancy in family business (H4a,

H4b, H4c proposed in Section 2.8.4)

To date, there have been limited studies that focus on studying moderating

variables that may impact on the relationship between family involvement and

innovative capability in family enterprises (Chrisman & Patel, 2012; Gomez–Mejia et

al., 2014). In relation to BAM (see Section 2.3.2), Chrisman and Patel (2012)

achieved an important breakthrough in their study and reported that the effects of

family ownership involvement on R&D investments depend on the gap between a

family firm’s current performance level and aspiration level. This study expanded on

their research and explored how another moderator (HR redundancy) could affect the

relationship between family involvement and innovative capability. Considering the

non-economic and socio-emotional goal of family corporations, this study puts

forward HR redundancy as the moderating variable to investigate the relationship

between family involvement (ownership, management and governance) and

innovative capability (input and output). The finding of this study, as reported in the

previous chapter, confirms the moderating effects of HR redundancy on the

relationship between family ownership involvement and innovation input, but did not

support its effects on the relationship between family ownership and innovative

output (discussed in Section 5.4.1). No support was found for the moderating effects

of HR redundancy on the relationship between family management involvement and

innovative capability (both input and output) (discussed in Section 5.4.2) while there


was support for the proposal that a negative relationship between family governance

involvement and innovative capability (both input and output) will be weakened by

HR redundancy (discussed in Section 5.4.3). The following sections will provide

more details in relation to the proposed hypotheses.

5.4.1 The moderating effect of HR redundancy on family ownership and

innovative capability relationship

- HR redundancy could weaken the negative effect of family ownership on

innovative capability (H4a in Section 2.8.4, partially supported)

Chapter 2 of this study put forward a set of hypotheses regarding the

moderating role of HR redundancy in family business (see Section 2.8.4 and Figure

2.7). Hypothesis H4a proposes that HR redundancy in family firms will weaken the

negative relationship between family ownership involvement and firms’ innovative

capability, and this has been partially supported according to the analysis results as

presented in Chapter 4. In terms of the moderating effect of HR redundancy on the

relationship between family ownership and innovative input, the findings of this study

support that the negative relationship between family ownership and innovative input

could be weakened when the level of HR redundancy is relatively higher. According

to SEW theory (see Section 2.3.3), family business owners’ concerns about the safety

of the family’s socio-emotional wealth will influence their decision on whether to


pursue innovative opportunities (Block, 2012). Sciascia et al. (2015) found that as the

shares of family wealth invested in family corporation increase, family owners’

business strategy will tend to be more conservative as the referencing point of their

decision-making is on preserving family socio-emotional wealth. In order to preserve

their family control (one dimension of SEW, see Section 2.3.3), family firms are often

reluctant to accept the introduction of external capital, and thus, may not have the

required finances to conduct innovative investments and strategies. Given this

situation, this study has confirmed that family shareholders’ aversion to the loss of

socio-emotional wealth will be weakened due to a family firms’ unique HR policy.

The reason is as follows. As noted in Section 2.8.4, maintaining a high level of HR

redundancy could help the local community and society to relieve employment

pressure, and firms that do this may have their reputation improved accordingly. As

highlighted in a previous study, family firms’ reputation is an important dimension of

their socio-emotional wealth (Leitterstorf & Rau, 2014). This study shows further

evidence that the improvement of firm reputation could effectively relieve a family

firms’ aversion to the loss of socioemotional wealth caused by the introduction of

external capital. At the same time, when the firms’ reputation improves, customers

and investors’ perception of them will also be enhanced. In this way, family

enterprises may receive more external opportunities to obtain extra investments for

pursuing innovative strategies while avoiding the need to sell their equity in exchange

for financial support.


Based on the above discussion, it is possible to understand why the

relationship between family ownership and innovative investments could be

moderated by HR redundancy. In summary, the additional external investments that

could be obtained due to an improved social reputation (enhanced through HR policy)

could alleviate family owners’ difficulties with securing the required finances for

conducting innovative investments. Also, an enhanced firm reputation (one dimension

of socio-emotional wealth) could weaken the family owners’ aversion to the loss of

socio-emotional wealth, and thus, relieving their reluctance to conduct innovative

investments.

The results are consistent with RBV research (see Section 2.3.4) which has

noted that family firms’ social capital could effectively influence the relationship

between family involvement and innovative behaviour (Carnes & Ireland, 2013).

According to prior studies, some family employees were hired simply because of their

family identity (Hauck et al., 2016). Notably, these internally sourced employees

often do not have the necessary skills and knowledge to directly assist their enterprise

in achieving beneficial strategies and outcomes. However, these redundant employees

could continuously provide stable external capital for their family firms, such as

building stable and solid social networks with clients, suppliers and the local

community (Carney, 2005; Niehm et al., 2008). Prior research has revealed that these

stable social networks could more easily assist family companies in accessing


financial resources that are needed for successful innovations (Leenders & Dolfsma,

2016).

The results of this study do not support the hypothesis regarding the

moderating effect of HR redundancy on the relationship between family ownership

involvement and firms’ innovative output (patent counts). It can be inferred from the

results that although an enhanced firm reputation and external social network can

contribute to the increase of innovation input to some extent, these resources cannot

be effectively converted into technological output. This is consistent with findings in

previous studies. For instance, according to Munari et al. (2010) and Morck and

Yeung (2003), family owners who invest a large amount of family wealth in their

companies tend to prevent ‘creative destruction’ by restricting new ventures. Block et

al. (2013) study also noted that family-owned companies prefer to focus their

investments on incremental and conservative innovation projects rather than riskier

ones in order to avoid family SEW losses. However, such routine attempts at

innovation are far less likely to constitute ground-breaking discoveries that lead to

influential patents (Lanjouw & Schankerman, 2004; Suzuki, 2011).

In summary, the stable social resources and good reputation brought by HR

redundancy can effectively make up for the lack of innovative investments in family

businesses. However, radial innovation projects and incremental innovation projects

are different (Keizer & Halman, 2007). Specifically, the life cycle of a radical

innovation is longer, and also, the outcomes of a radical innovation tend to be more


unpredictable (McDermott & O'Connor, 2002). In contrast, incremental innovation

projects are usually more predictable and safe (Keizer & Halman, 2007). Therefore, in

order to achieve family owner’s need for security and their risk aversion tendency

(see Section 2.3.3), family corporations will tend to allocate additional social

resources (brought by HR policy) towards less radical projects that are focused only

on creating routine innovations.

5.4.2 The moderating effect of HR redundancy on family management and


- HR redundancy could weaken the negative effect of family management on

innovative capability (H4b in Section 2.8.4, not supported)

According to the results of this study (see Section 4.4.2), the moderating effects

of HR redundancy on the relationship between family management and innovative

capability (including both innovation input and output) is not significant. In other

words, HR redundancy cannot effectively mitigate the negative effect of family

management on enterprises’ innovative capability. In this study, the level of HR

redundancy represents family firms’ commitment and motivation to secure redundant

employees’ position in the company, and this kind of commitment and motivation

will also affect the appointment of management positions. According to prior

research, family firms tend to be more reluctant to appoint external employees as key


decision-makers for their management team (Le Breton-Miller et al., 2011) even

though these external professional managers could have better management skills and

a higher level of proficiency to guide family companies in streamlining their

workforce. A main reason for keeping redundant family managers in the company is

due to the fact that hiring internal managers to run the business is considered an

important source of family SEW (see Section 2.3.3) (Gomez-Mejia et al., 2011).

However, this HR policy may constrain companies’ funding which could have been

invested in important R&D projects since redundant managers and employees are

likely to incur excessive management costs. The findings confirm that conservatism

among family managers will make them risk-averse and may influence them to divert

funds from the business to serve narrow family purposes (Gómez-Mejía et al., 2007),

and as such, this policy of maintaining redundant family managers in the company

will not alleviate family firms’ aversion to innovative expenditure. It can be inferred

from the research results that the internal managers of family enterprises do not have

a strong sense of crisis regarding the introduction of new technologies, and thus, the

policy and motivation of maintaining HR redundancy in family enterprises cannot

effectively reduce the management’s opposition to innovation input. In terms of

innovative output, some internal family managers who cannot adapt to new

technological trends have not been eliminated due to the family firms’ socio-

emotional objectives (Adner & Kapoor, 2010). The lack of real managerial talents

resulting from redundant HR policy will constrain family enterprises’ capability to


implement innovative projects, and the influence and scope of their innovative

projects may also be limited. It has been noted that innovation projects with a narrow

scope and limited impact will not help increase a firm’s number of patents (Block et

al., 2013).

In summary, whether from the perspective of innovative input or output, the

findings of this study reveal that family firms’ unique HR policy cannot effectively

alleviate the negative relationship between family management involvement and a

company’s innovative capability.

5.4.3 The moderating effect of HR redundancy on family governance and


- HR redundancy could weaken the negative effect of family governance on

innovative capability (H4c in Section 2.8.4, supported)

The results from the analysis (see Section 4.4.3) confirm the proposed

hypothesis that the negative relationship between family governance and firms’

innovative capability (including both input and output) could be significantly

weakened by the moderating effect of HR redundancy. This study shows that a higher

level of HR redundancy represents family firms’ stronger motivation or commitment

to preserve family SEW by maintaining redundant employees in the company, and


this kind of commitment and motivation will also affect the appointment/removal of

board members. Consistent with the emphasis on SEW theory (Gallo & Sveen, 1991),

board members in family businesses are often selected due to their family ties identity

or because of nepotism, and these internally recruited directors are usually not as

talented or educated as those who can be recruited externally. Relating to this

situation, Gottardo and Moisello (2015) found that family businesses would still insist

on keeping these internal family members on the board due to their need to conserve

socioemotional wealth. The results from this research show that this behaviour of

protecting SEW (through a special internally-oriented HR policy) can weaken the

negative impact of family governance involvement on innovation capability. Past

research has found that the main role of the board directors is to provide services and

consulting rather than to play a supervisory role (Corbetta & Salvato, 2004).

Therefore, the introduction of new technologies will disrupt the status of some family

board members who are not adapted to these new technological trends and cannot

provide professional/technical advices to family firms. Under this circumstance, the

family business’ high motivation and commitment to retain redundant human

resources may preserve these board members’ sense of job security, and thus,

reducing their aversion towards innovative strategies while also encouraging them to

allocate more resources into innovative projects. This explains why a HR policy that

supports redundancy in family firms could actually weaken the negative relationship

between family governance and innovative investment.


The results of this study also support the resource-based view (social capital

perspective). Previous studies regarding RBV (see Section 2.3.4) have shown that the

provision of social resources, such as building external relations (Haunschild &

Beckman, 1998), facilitating access to financial capital (Mizruchi & Stearns, 1988), as

well as linking family companies with external stakeholders and other important

entities (Hillman & Keim, 2001) are key responsibilities of the board members. These

social resources brought by internal board members will not only further consolidate

the socio-emotional wealth of a family business, but may also provide potential

support for innovation-related investments. Based on this argument, the underlying

reason behind the moderating effect of HR redundancy on family governance and

innovative input can be better understood.

This study also reveals that in family businesses, a higher motivation to retain

redundant employees will actually weaken the negative effect of family governance

on innovative output. Although some of the internal family members sitting on the

board may not have the required professional or technical skills and cannot bring

along technical counsel and guidance to help with businesses innovations, it is still

considered vital to retain them as board members. This can be explained using the

research findings in prior studies. First, most internal family members on the board

are likely to have invested a significant proportion of their own wealth in the

company, and this provides an important assurance that they will try their best to

manage the company and to ensure the long‐term sustainability of the business


(Anderson et al., 2012). This also means that as long as these internal members

remain on the board, they may indirectly provide the foundation for the company to

create successful radical innovations.

Next, the results of this study could also be explained from a perspective of

agency theory. it has been noted in the literature that even family board members who

lack the required innovation skills may still play an important role in monitoring the

company (Johannisson & Huse, 2000). According to agency theory (Fama & Jensen,

1983), the principal owners will choose a board of directors to supervise the

management team (agent), and the information asymmetry or mistrust between

internal members and externally hired employees is also a major component in the

agency theory framework (see Section 2.3.1 and Figure 2.3). An increase in the

number of internal employees who are hired based on family relationship and network

ties could actually alleviate the information asymmetry between internal and external

employees as this facilitates the board’s supervision over the entire family enterprise.

This effectively reduces the leakage of innovative secrets, and the resulting reduction

of information asymmetry will assist in fostering a higher level of internal social

capital (see Section 2.3.4). Subramaniam and Youndt (2005) found that a high level

of internal social capital (knowledge sharing in the firm) can be beneficial to

enterprises’ radical innovation (innovative output). Based on the above discussion, it

can be seen that the negative effect of family governance (caused by board members’


lack of professional skills) on family firms’ innovative capacity could be weakened

through HR redundancy.

5.5 Contributions

The findings of this research provide several theoretical and practical

contributions, and these will be discussed in the following sections. Section 5.5.1 will

focus on the theoretical contributions while Section 5.5.2 will focus on the practical

implications.

5.5.1 Theoretical contributions

This study contributes to the existing literature about family business’s

innovation by utilising agency theory (see Section 2.3.1), SEW theory (see Section

2.3.3) and RBV (see Section 2.3.4) to explore how family involvement can affect

innovative capability. The study further adds to the BAM (see Section 2.3.2) through

additional considerations under the family business context. Prior studies (see

(Chrisman & Patel, 2012) have applied the BAM to investigate family firms’

innovative strategies. However, the emphasis was more on how family firms’ loss-

aversion to economic wealth (such as firm performance) will influence the firms’

behaviour. As mentioned in Section 2.7, this study noted that using an economic

indicator as the moderator is inconsistent with a family firms’ most important feature.

The SEW theory (Gómez-Mejía et al., 2007) proposes the duality of family

enterprises’ business objectives, and puts forward that the starting point of family

business decision-making is to protect the family’s non-economic and socio-


emotional needs. So far, no prior research has applied a specific moderator that is

related with family firms’ socioemotional purpose to explore the relationship between

family involvement and innovative capability. This study fills this gap by considering

the HR redundancy level in family SMEs as the moderating variable to investigate the

relationship between family involvement and innovative capability. In this way, the

study provides a variant of BAM that is better suited to the context of studying family

businesses.

Besides, another theoretical contribution is that the heterogeneity of family

involvement (see Section 2.5) is more comprehensively demonstrated in the

theoretical model (see Figure 2.7) of this study. In terms of the main effects, most

previous studies tend only to focus on the impact of one or two dimensions of family

involvement on innovative capability, and these usually mixed management and

governance dimensions into a single dimension (Block et al., 2013; Chen et al., 2013;

Choi et al., 2015). Based on RBV, the allocation of unique resources in family

enterprises requires the strong participation of both family management and

governance (Calabrò et al., 2009; Sirmon & Hitt, 2003). On this basis, this research

reveals how the relationship between the three dimensions of family involvement (see

Section 2.5) and innovative capability will be influenced by HR redundancy in family

businesses.

The theoretical contributions made by this study are presented in Table 5.1 below.


Table 5.1: Theoretical contributions of this study

Previous Studies Current Study Contributions of this study

Past research applied

moderating variables that

were cited from non-

family firms’ studies,

such as marketization

environment (Kong,

2019) and supplier

bargaining power

(Kotlar, Fang, et al.,

2014). These studies lack

the consideration of

family-influenced firms’

unique features.

This study further considers

the peculiar characteristic

(socioemotional goal) of

family businesses to extract

the moderating variable (HR

redundancy) that could affect

the relationship between

family involvement and


Based on the socio-

emotional goal of family

enterprises, a moderator (the

level of HR redundancy

within family firms) was

extracted and investigated

by this study (the findings

were presented in Section

4.5). This adds to the

understanding of

moderating variables within

the context of family firms.

Based on BAM (see

Section 2.3.2), family

firms’ performance level

(economic referencing

point) could influence

firms’ innovative

strategies (Chrisman &

Patel, 2012). Using

aneconomic indicator as

the referencing point is

not consistent with

family firms’ unique

feature.

Instead of using an economic

indicator, this study considers

that socio-emotional/non-

economic target is a family

firms’ referencing point in

their decision-making

process.

This study (Section 4.4)

verified how HR

redundancy (socio-

emotional/non-economic

goal) would influence the

relationship between family

involvement and innovative

capability. Thus, this

research provides a variant

of BAM (see Figure 2.7)

which is better suited for the

family business context.

In terms of main effect,

prior studies focused on

how one or two

dimensions of family

involvement would affect

Based on the F-PEC model

(see Section 2.5), this study

explores how the three

dimensions (ownership,

management and governance)

Since the heterogeneity of

family involvement was

more sufficiently

considered, how family

firms’ HR policy could


Previous Studies Current Study Contributions of this study

firms’ innovative

capability (Gomez–Mejia

et al., 2014; Migliori et

al., 2020).

of family involvement could

affect family firms’

innovative capability. This

provides a necessary basis of

investigating the moderating

variable.

influence the effect of

family involvement (each

dimension) on the

innovative capability was

holistically explored (the

results were presented in

Section 4.5.

5.5.2 Practical implications

This research provides some practical implications for family firms, especially

for family SMEs. An original objective of this study is to make a practical

contribution that may assist family SMEs in making sensible trade-offs between

innovative strategies and human resource strategies. The finding of this study could

assist family SMEs in addressing a realistic problem: ‘Is it necessary for family

businesses to streamline the staff size by dismissing those employees who have no

required skills but have been retained due to family relationship?’. Specifically, since

the proposed H4b (see Section 2.8.4) cannot be confirmed by the findings of this

study, there is implication that the motivation of employing redundant family

employees (including those in management positions) will not weaken the negative

relationship between family management involvement and innovative capability.

First, this shows that family SMEs should try to create a sense of crisis to eliminate

redundant managers so as to stimulate managers’ emphasis on innovative projects.

Besides this, the results reveal that the employment of redundant employees,


especially redundant managers, is unable to contribute to an enterprise’s innovative

capability and bring about any beneficial potential resources. Therefore, the findings

of this research suggest that, although it may weaken the emotional bond among

family members, family SMEs should still try to retrench some of the family

managers who cannot keep up with new technological trends, and try to source and

select external managers with the relevant professional skills so as to assist family

SMEs in improving their innovative capability and to eventually achieve success.

On the contrary, the proposal in H4c (see Section 2.8.4) of this study has been

sufficiently supported, which infers that family SMEs’ higher motivation of keeping

redundant employees (especially in the governance dimension) could be beneficial for

carrying out innovative projects since the increase of internal redundant employees

(especially internal board members) due to nepotism in a family business can

introduce potential social resources for enterprise innovation while effectively

strengthening the board directors’ supervision over the whole company. Finally, the

proposal in H4a (see Section 2.8.4) is partially supported, which indicates that

dominant shareholders in family SMEs should invest more in potential social

resources obtained through redundant employees and focus on radical innovative

projects that can improve the efficiency of innovative investments.


5.6 Limitations and Future Directions

There are some limitations in this study that should be noted. (a) This study

selects only Chinese listed SMEs as the research sample. Thus, the results of this

study may only apply to family SMEs, and not be potentially generalisable to larger-

sized family enterprises. Future research can be conducted with larger-scale family

businesses to explore whether the excessive size of HR redundancy will significantly

strengthen the negative impact of family involvement on the company’s innovative

capability. (b) This study only focuses on Chinese family firms, which could be

another potential limitation. The study results may only apply to family businesses in

China but not to family firms in other countries/regions. Thus, a future study could

investigate this research issue in different countries/regions, or make a cross-country

comparison. (c) This study only used a secondary database to collect data and

measure the level of HR redundancy, so as to investigate how family firms’ unique

HR policy could affect the relationship between family involvement and innovative

capability. According to Wennberg (2005) study, secondary data available through

databases are usually collected and consolidated for different purposes, and thus, they

may not always be optimal for addressing a specific research problem. In this study,

although family firms’ redundant HR size could be measured through the use of

secondary data, it should be noted that HR policy is just one of the behaviours used by

family businesses to protect their emotional attachment (one dimension of socio-

emotional wealth). Other abstract forms of family firms’ socioemotional wealth (such


as family identification) could not be measured and explored by only using secondary

data. Thus, a future study could collect primary data by conducting survey/interviews

to further investigate how family firms’ socioemotional pursuit could influence the

relationship between family involvement and innovative capability. (d) This study

acquiesced that all redundant employees are those internal family employees who

were hired and retained due to family firms’ SEW pursuit. Thus, the number of

redundant external employees are overlooked. It is very hard for this Master thesis to

distinguish redundant internal and external employees by only applying secondary

data. In future studies, primary data could be collected to address this limitation.

5.7 Conclusion

Innovative capability is one of the core factors that could influence family

firms’ competitiveness in the market. Prior studies have sufficiently focused on the

direct relationship between family involvement and innovative capability, but have

tended to neglect how this relationship could be influenced by special situational

factors, especially those factors which are related with a family firm’s unique feature.

This study complements prior research that studies the relationship between family

involvement and innovative capability by exploring a unique moderating variable

with the family business characteristic: HR redundancy in family firm. First, this

study fully considered the heterogeneity of family business and combined the three

dimensions of family involvement (ownership, management and governance) to


provide a more comprehensive understanding about the influence of family

involvement on innovation capacity (both innovative input and output). Overall, the

findings of this study supported the negative effect of family involvement (ownership,

management and governance) on family SMEs’ innovative capability (both input and

output). Next, this research also investigated how the moderating effects of HR

redundancy could influence the relationship between each dimension of family

involvement and family SMEs’ innovative capability. The findings revealed that a

higher level of HR redundancy in family business could weaken the negative

relationship between family ownership and innovative input, as well as the negative

relationship between family governance and innovative capability (both input and

output). These outcomes could potentially assist family organisations and

policymakers to design more appropriate HR policies that would make a better trade-

off between innovative strategies and HR strategies. In particular, this study

emphasises that the stronger motivation of a family business’s decision makers to

maintain highly redundant human resources could effectively stimulate/raise potential

resources through some internal employees, especially through those internal board

directors, and this could assist family SMEs to obtain more innovative achievements.

138 References

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THE ANALYSIS OF THE RELATIONSHIP BETWEEN ...(emotional attachment), the moderating effect of human resource (HR) redundancy on the relationship between family involvement and innovative