Family Business Research: A Literature Review

1. Introduction

Family firms are said to be the originating form of any business activity (Wakefield, 1995),
dominating the economic landscape of most major economies in the world (Shanker et al., 1996;
Klein, 2000; Heck et al., 2001; Morck et al., 2003; IFERA, 2003; Astrachan et al., 2003). Two
thirds of all enterprises worldwide are said to be family-owned and/or managed (Gersick et al.,
1997). In Germany, between 60% and 90% of all firms can be considered as family firms
(Terberger, 1998). The life span of family firms is however often relatively short, as only a
limited number survives the transition to the second generation, and hardly one-third even into
the third (Beckhard et al., 1983; Neubauer et al., 1998; Shanker et al., 1996; Paisner, 1999).

Due to this high importance of family firms, academia has finally recently begun to recognize
their necessity as a research object (Chrisman et al., 2006). According to Dyer Jr., 2003, the field
of management studies has paid insufficient attention the family firms’ unique theoretical and
practical problems so far. The interest in family firm research has accordingly grown
significantly increased in the recent years, leading to a distinctive legitimate and emerging field
of study in business research. The underlying supposition therein is the question whether family
firms do really behave differently from non-family firms, and if so, how and why they are
different. Several researchers suggest that the family-form of organization holds essential
advantages (Anderson et al., 2003; McConaughy et al., 1998).

Nevertheless, despite the progress made especially in the last decade, research on family firms
remains a new field which trying to gain legitimacy within management studies (Hoy, 2003),
although much remains to be done, as Chrisman et al., 2003b state.

This article attempts to summarize and structure current research on family firms by seeking out
and the findings and themes from that literature of likely interest to business school scholars.
Therefore, an analysis of the 120 most important articles on family firm research from the last
two decades is applied.
2. Definitions and theoretical foundation

2.1. Defining family firms

The justification for the emergence of the field of family firm research lays in the assumption that
family and non-family firms are different. Recent empirical studies, such as one amongst S&P
500 firms (Anderson et al., 2003) show that firms being under the influence of the founding
families outperform their counterparts. Especially in terms of performance (such as size, growth,
profitability etc), significant differences between family and non-family firms could be identified
(Gallo, 1995; McConaughy et al., 1999; Westhead et al., 1998).

Nevertheless, there is no universal definition of what a “family firm” is yet. Westhead et al., 1998
have reviewed and analysed existing definitions of family firms that have been used in previous
research. It seems that the problem is less differentiating between a firm that is clearly a family
firm and one that is clearly not; the problem is rather the “grey area” in between. The authors
found for example that the ratio of family firms varies dramatically depending on the definition
used in the study. Accordingly, there are numerous definitions of what a family firm is out there.

For instance, researchers define a family firm operationally by the components of a family’s
involvement in the business: ownership, management, or business succession (Chrisman et al.,
2003b). Regrettably, they have enormous problems in making a precise definition. Definitions
reach from one hundred percent ownership over the majority of shares until the majority of
control (Chua et al., 1999), or they deal with the question whether governance by the family is
enough or management of the firm would be necessary. Some studies even consider a company a
family firm when the firm considers itself to be one (Westhead et al., 1998).1 Shanker et al., 1996
differentiate between a narrow and a broad definition of family firms – where in the former, the
family is involved in the daily business, whereas in the latter, the family only sets the strategic
direction for the firm.

Accordingly, researchers have proposed a broad variety of combinations of the named

components. When different definitions are applied, the percentage of family business in one
sample can vary from 15% to 80% (Westhead et al., 1997).

1
This approach may be operationally convenient, but poses the vast disadvantage that firms might be excluded from
this definition which would under objective criteria very well be considered as a family firm, or vice versa.
On the empirical side, e.g. Astrachan et al., 2002 have developed a scale for assessing the extent
of family influence on a business organization, using the dimensions power, experience, and
culture. Klein et al., 2005 measure the family influence on power, experience, and culture within
a firm, developing their so-called “F-PEC scale”.

Family firm research has so far about 4 different streams on the individual level. Research objects
on the level of the individual have predominantly been:

- the company founders (e.g. Kelly et al., 2000; Kenyon-Rouvinez, 2001; Sorenson, 2000),

- the next-generation members (e.g. Eckrich et al., 1996; Goldberg, 1996; Stavrou, 1998),

- women in family firms (e.g., Cole, 1997; Dumas, 1998; Fitzgerald et al., 2002; Poza et al.,
2001), or

- external managers within family firms (e.g. Mitchell et al., 1997).

Aditionally, at group level, popular research topics have been:

- conflict within family firms (e.g., Boles, 1996; Drozdow, 1998; Habbershon et al., 1996;
Kaye, 1996; Sorenson, 1999; Kellermanns et al., 2004), and

- business succession (e.g., Cadieux et al., 2002; Davis et al., 1998; Harveston et al., 1997;
Miller et al., 2003; Morris et al., 1997).

Due to their dissatisfaction with existing definitions, several authors have recently shifted their
approach to identify the “essence” of a family firm, e.g. through the question of the family’s
influence in strategic decision-making (Davis et al., 1989; Handler, 1989, Shanker et al., 1996).
The idea behind is that the family could be the critical variable in family firm research
(Astrachan, 2003; Dyer Jr., 2003; Habbershon et al., 2003a; Rogoff et al., 2003; Zahra, 2003).
Litz, 1995 for instance advocates that the essence of a family firm is the family’s purpose of
retaining control over the company for more than the present generation. Habbershon et al.,
2003a introduced a new perspective called “familiness” which describes unique, inseparable, and
synergistic resources and capabilities emerging from family involvement and interactions.

Accordingly, an integrated definition of a family firm could e.g. include 1) familiness as

described before, 2) control over the business for current and 3) next generations (Chrisman et
al., 2003a; Habbershon et al., 2003b).
Concluding, both theoretical and empirical attempts to define “family firm” are still open for
discussion, and the development of objective methods for separating family from non-family
firms is still in its infancy (Chrisman et al., 2003b).

2.2. Particularities of family firms

- Mainly due to facts like long CEO tenures (typically more than 15 years) and concern for
subsequent generations of the family, family firms are more likely to take a long-term
orientation in making strategic investments (Le Breton-Miller et al., 2006).

- Family firms tend toward sustaining strategy over a longer period of time (Ensley, 2006).

- Family firms have to deal with additional – namely family issues (Paisner, 1999; Lester et al.,
2006), which might be resource-consuming.

- Family firms often experience slower growth as well as slower decision-making processes
(Meyer et al., 1989).

- family firms are more hesitant to invest in risky projects (Cabrera-Suárez et al., 2001; Gersick
et al., 1997), and thus could miss opportunities.

- Non-family firms are often regarded as being more innovative than family firms (Gomez-
Mejia et al., 2003).

- Resist change, and become fixated on maintaining the status quo (Kellermanns et al., 2006).

Family is a multifaceted term that includes variables like values, ethnicity, culture or generations.
Families consist of people with a shared history, experience, emotional bonding and sets of
common future goals. These groups can also include persons without direct biological kinship
(Stewart, 2003), but emotional relationship, such as in-laws, and can therefore be called “non-
biological family” (Carsrud, 2006) or “quasi-family” (Karra et al., 2006). A view in the
sociological literature on families might help to better understand what family really is (Bengtson
et al., 2005).
Often, the majority of employees within family firms are non-family members (Barnett et al.,
2006).

2.3. The resource-based view as theoretical foundation for family firm research
The resource-based view (RBV) of the firm argues that firms are able to outperform others if they
can develop valuable resources or capabilities which cannot be easily imitated or substituted by
its competitors (Barney, 1991; Teece et al., 1997).

In that respect, one of the major considerations in family firm research is the question whether is
whether family involvement can lead to a competitive advantage. Accordingly, several scholars
suggest that the connection between family and business may lead to unique advantages in the
acquisition of resources (Haynes et al., 1999; Aldrich et al., 2003; Stewart, 2003).

The RBV can contribute to investigating how family firms identify and develop distinct unique
capabilities, and how those might be transferred (e.g. during business succession) to new owners
and structures (Habbershon et al., 1999). Barney et al., 2002 suggest that family ties may provide
an advantage in opportunity identification due to a higher willingness to share information with
each other between members of the same family.

Sirmon et al., 2003 apply the RBV to family firms, and distinguish between five sources of so-
called “family firm capital”: human, social, survivability, patient, and governance structures. The
authors argue that family firms acquire, bundle and leverage their resources differently to non-
family firms.

However, not all firms do have unique resources, and it is possible to survive without them. It can
thus also be argued that not all family firms have such a “familiness” capability which is are
unique and inseparable, and lead to a competitive advantage (Nordqvist, 2005).

2.4. Entrepreneurship and family firm research

As Aldrich et al., 2003 state, “‘very little attention has been paid to how family dynamics affect
entrepreneurial processes” (p.574). It seems surprising that there is a need to signal the theoretical
link between entrepreneurship and family business research, since there are various relationships
between these two areas (Fletcher, 2005). Firstly, most family firms are SMEs. Secondly,
founders of family firms are obviously entrepreneurs, having perceived an opportunity through
the creation of a new firm (Aldrich et al., 2003). Though, the extent of entrepreneurial behavior
within the organization tends to change over time (Kellermanns et al., 2006). The founders often
become more conservative and risk-averse decision-makers because they fear losing family
wealth (Sharma et al., 1997). The entrepreneurial impetus becomes diluted over time, and
entrepreneurial practices become subsumed by other concerns (Fletcher, 2005). Here, corporate
entrepreneurship, e.g. through the hiring of external managers who assist or even replace family
managers sets in (Kellermanns et al., 2006).

3. Major areas of family firm research

3.1. Goals and performance of family firms

The majority of mainstream theories within business research consider economic reasoning, i.e.
wealth creation, as the major goal for any business organization. In family firms, the situation
could be different, and also non-economic goals play a major role in the decision-making
processes of the firm (Stafford et al., 1999; Olson et al., 2003). The success of a family firm
would accordingly depend on effective management of the intersection between the family and
the business (Sharma, 2004).

Recognizing that family firms almost always include family as well as business dimensions,
performance of family firms will also most like include both family and business dimensions
(Mitchell et al., 2003). Understanding how the influence of a family might affect a business and
its performance opens up interesting new avenues of research, as Chrisman et al., 2006 state.

If family firms do have economic as well as non-economic goals, the measurement of the overall
performance may be particularly difficult (Hienerth et al., 2006). Besides, it is not said that there
is heterogeneity within the group of family firms.

Results of previous empirical studies indicate that family goals are often more important to the
owners of family firms than to the owners of non-family firms, or in other words – financial goals
might be traded in account of (non-financial) family goals (Lee et al., 1996). Although there have
been previous studies about the goals of family firms (Tagiuri et al., 1996), the driving forces
behind these goals is still in its infancy. Altruism, fairness, justice and generosity have been
investigated as some of these drivers for non-economic goals (Schulze et al., 2001; Eaton et al.,
2002; Lubatkin et al., 2002). Nevertheless, goals of different family members can also be
different, and vary over time, i.e. an individual’s life cycle, as Hoy, 2006 calls it, which might
also result in differences in power and status of family members.

Using the RBV as foundation (cp. previous chapter), the creation of “familiness” as proposed by
Habbershon et al., 1999 and Habbershon et al., 2003b) might be a further driver for a family
firm’s goals. Summarized, they say that the intersection of family and business lead to hardly
duplicatable capabilities that make family firm peculiarly suited to survival and growth. If this
familiness can be transferred from one generation to another as a heritage, this might be core of
the family firm concept (Baker et al., 1998; Kelly et al., 2000; Poza et al., 2001). Aldrich et al.,
2003 apply a so-called “family embeddedness perspective” by including the characteristics of
family systems in their research approach (Aldrich et al., 2003).

When it comes to performance of family firms, empirical studies such as the one from Morck et
al., 2006 conclude that it is worse than in non-family firms due to reasons as the family’s desire
for capital preservation, stability, and risk aversion. Authors like Schulze et al., 2003 see
potential for inefficiencies that will have a negative impact on profit when ownership is
concentrated in the hands of a single family. They argue that the owner-managers’ desire for
family harmony and a tendency for altruistic behavior towards family members, coupled with
ineffective control authorities create inefficiencies that outweigh the positive effects of alignment
of interests that comes with the concentration of ownership and management.

However, other authors see family firms ahead in terms of performance, and claim this through
families being better stewards of firm resources due to less managerial opportunism within the
company (Anderson et al., 2003; Lester et al., 2006).

3.2. (Psychological) Ownership

The basic model of ownership can be described as follows: the owner (subject), the ownable
object (object) and the relationship between them (ownership) (Ikävalko et al., 2006). In family
firms, the owner is the connector between the social systems family and firm (Terberger, 1998).

But ownership is not only an economic, but also always a psychological phenomenon Etzioni,
1991. Psychological ownership deals with the relation between individual persons and ownable
objects, but does not necessarily also include legal ownership (Pierce et al., 2001; Pierce et al.,
2005). Psychological ownership has been predominantly studied with regards to employee
ownership (e.g. Buchko, 1992; Bartkus, 1997; Gample et al., 2002), e.g. by comparing employee-
and conventionally-owned firms Frohlich et al., 1998.

Pierce et al., 2001 summarized previous research on that topic and came to the conclusion that
the psychological ownership emerges because it satisfies both generic and socially generated
motives of individual persons. Existing SME research is filled with notions of owner-managers
mentally connecting themselves to the firm, which constitutes a central part of the owner’s life
and self-identity. In this context, the firm is both ends and means, being partly the result of
action, partly a target of actions, and also an instrument to reach other targets. The owner-
manager's mental connection to the firm is very unique – each owner-manager has his own way
to look at his firm.

The concept of psychological ownership has been developed for already existing larger
organizations. In that part of entrepreneurship research which is about new venture creation, the
situation can be quite opposite, since the entrepreneur creates the organization. The object of
ownership is accordingly the result of the owner’s actions. The owner-manager is at the same
time the lawful owner and he may feel psychological ownership to the company that he owns.
Churchill, 1983 suggested that the entrepreneur’s and the company’s goals need to be
differentiated in order to allow firm growth.

Recent entrepreneurship and family firm research regards psychological ownership as a complex
multidimensional construct Mattila et al., 2003. Four different dimensions of ownership can be
summed up; 1) social, 2) legal, 3) ‘real’, and 4) psychological. Accordingly, the significance of
psychological ownership has been pointed out also in the context of family firms (e.g. Brundin et
al., 2005).
3.3. Business Succession
3.3.1. Business transfer

Since the inception of academic research in family firms in the early 1980s, the leading topic has
been business succession (Dyer Jr. et al., 1998).

In the next decade, about one third of all SMEs in the European Union are expected to be
engaged in a business transfer. For Germany, it is estimated that around 700,000 enterprises,
providing 2.8 mn. jobs, will have to be transferred to new owners every year (Commission, 2006,
Schröer et al., 1999). These business transfers may result in a major restructuring of many
industries, and, they could lead to substantial destruction of (tangible and intangible) capital, in
case successors and acquirer cannot be found in sufficient numbers (van Teeffelen et al., 2005).

Within this context, the European Commission tends to see business succession as a threat to the
survival of small and medium-sized firms, and, as a threat to overall employment and economic
growth (Commission, 2006). Due to the importance of a successful transfer of management
within family firms, there has been much written about succession issues (Harvey et al., 1995).

As is apparent from previous research, only a limited number of family firm survive the transition
to second generation and more than two-thirds cease or pass to new owners (Beckhard et al.,
1983; Shanker et al., 1996). The transfer of top management from one generation to the next
represents a crucial strategic issue of the firm (Barach et al., 1995). Business succession can be
considered as a part of entrepreneurship, since the latter does not necessarily require persons to
found new ventures.

Brockhaus’ recent review of family firm research summarizes the key issues concerning business
succession with the requirements for analysis “[…] from the perspectives of family, management,
and ownership system in order to understand adequately the perspectives of the different
stakeholders” (Brockhaus, 2004: 165).

According to Sharma et al., 2001, the business owner’s inability of letting go is the most cited
obstacle to effective succession. Kommers & van Engelenburg (2003) also mention the
psychological aspect as the most decisive, but offer no suggestion or solution. Emotional aspects
lead to indecisiveness and delays of transfer (Landsberg, 1999; Flören, 2002).
3.3.2. Social capital

As Steier (2001) notes, there has been little attention devoted to the transfer of social capital
within family firms. Social capital can be characterized e.g. by personal business contacts or
networks (Brüderl et al., 1998).

Although general interest in social relationships has been constantly rising within the field of
entrepreneurship research (Jarillo, 1989), a recent literature review from Anderson et al., 2002
suggests that there is still a vast research gap with regards to transfer of social capital in the
context of business succession within family firms.

3.3.3. Success of business succession

According to a study from the Netherlands which investigated the consequences of business
transfer on business performance (Meijaard et al., 2005), corporate success can have several
dimensions within this context:

1.) Survival and continuity of the business.

2.) The (subjective) degree to which different stakeholders are satisfied with the business
transfer. The satisfaction with the business transfer corresponds to possible changes in the
commitment to the business and the motivation of the different stakeholders to continue the
business (Sharma et al., 2003).

3.) Quantitative (objective) measures, such as profits, sales and growth.

Subjective (satisfaction with the business transfer) and objective measures (changes in firm
performance) can yield very different results. For example, a business transfer that results in
increased profits does not necessarily need to be perceived as satisfactory by all stakeholders.
4. Conclusion and Implications

This article has tried to give an overview about what family firms actually are, and how far extant
academic literature is in researching these particularities. Accordingly, this article has delivered
an extensive overview of existing literature on family firm research, and confirmed that this
research area is still in its infancy.

As our article discovered, not all family firms are alike, and not all family firms will therefore
perform similarly (Lester et al., 2006). Moreover, family firms are – like SMEs – an extremely a
homogeneous group of firms, and future research should thus concentrate more on the inherent
differences within the large population of family firms (Nordqvist, 2005).

The traditional process of family firm research is to produce theoretically grounded, valid, and
reliable knowledge with the aim to transfer it to specific real-life situations later on. This picture
of the scientific process is very close to the understanding of natural scientists. However, social
science copes with another kind of reality: Social realities are autopoetic in that they are self-
referring und constructed only within the social process itself. Thus, a research program that has
been developed in order to gain knowledge on nomological reality cannot be transferred to social
science. The social reality is extremely complex and dynamic. This is especially true for the
family firm setting, where social phenomena such as power, love, hate, trust and self-
commitment play an important role.

We will of course by no means be able to produce enough knowledge in time order to understand
the ever-changing social reality. Thus, following the ideal of the objective (non-normative)
research program of natural sciences, we will also never be able to give practitioners useful
advice that is tailored to the specific situation. Neither will we be able to give them orientation in
decision-making processes. However, that is exactly what researchers – especially in family firm
research – have set out to generate.

One possible way out of this dilemma is not to the never-ending test of objective, abstract
theories using too small, too specific and biased samples, but to train family firm managers to
develop their own ideas about the causal structures behind social processes (subjective theories).
These theories do not have to be true – an ideal idea which obviously will never be reached. The
subjective theories have to be useful for the family firm manager!

Researchers can support this individual theory building by providing information on typical
situations and processes observed in social reality. Testing hypotheses on mono-causal
relationships cannot perform this task. We have to apply a holistic approach in order to typify
social situations with as much variables as possible. For the resulting typology of configuration,
the historical conditions of development have to be investigated. Once, there has been drawn a
path of past development considering all relevant variables we are able to formulate prognoses on
the future development within a specific corridor. On the bases of such prognoses, we can
formulate practically useful suggestions for the management of family firms for each type of
situation.

This calls for a new, research program in family firm research, which is grounded on a holistic
approach to social reality and reverts to heuristic methods.
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