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Profitability goals, control goals, and the R&D investment decisions of family and non-family firms

Research output: Contribution to journalJournal article

Published

Journal publication date2014
JournalThe Journal of Product Innovation Management
Early online date8/05/14
Original languageEnglish

Abstract

R&D investments can help build sustainable competitive advantages and improve firm performance as well as foster industry transformations and economic growth. Nevertheless, managers also acknowledge the difficulties associated with managing R&D and the low chances of success of innovation programs. For this reason, researchers have long been interested in understanding how managers make R&D investment decisions and, more specifically, identifying the conditions under which managers are most likely to increase or decrease R&D investments. Research grounded in the behavioral theory of the firm suggests that a primary driver of R&D investment decisions is profitability: when profitability goals have not been met, managers are more likely to initiate a problemistic search through increasing R&D investments. While emphasizing profitability goals and their relationship with R&D investments, prior research largely downplays the role of goals beyond profitability that exist in a significant number of firms (family firms) that are owned and managed by family members whose primary concern is preserving their control over the organization. Research indicates that these family-centered non-economic goals lead family managers to minimize R&D investments and that the coexistence of multiple goals produces highly variable R&D investment behavior in family firms. Yet, how family-centered goals for control and profitability goals enter decision-making in family firms is not fully understood nor has any empirical study directly examined how these two apparently incompatible classes of goals jointly affect R&D investment variations in family firms. In this study, we propose that family managers form distinctive reference points that capture supplier bargaining power and are used to evaluate the degree of external obstruction to their managerial control. Accordingly, we hypothesize that family managers use reference points for profitability and for control jointly when making R&D investment decisions. The empirical analysis of panel data on 431 private Spanish manufacturing firms observed over the period 2000-2006 shows that the importance of profitability and control goals follows a sequential logic in family firms, such that family firms react more strongly to increasing supplier bargaining power when their profitability reference points have been reached. This study extends current understanding of the distinctive organizational processes engendered by family management in business organizations leading to new perspectives and research opportunities at the intersection of the innovation management and family business literatures.