Abstract
Motivated by a lack of consensus in the current literature, the objective of this paper is to reveal whether family firms are more or less productive than non-family firms. As a first step, this paper links family business research to the theoretical notion that family involvement has an effect on the factors of production from a productivity standpoint. Second, by using a Cobb–Douglas framework, we provide empirical evidence that family labour and capital indeed yield diverse output contributions compared with their non-family counterparts. In particular, family labour output contributions are significantly higher, and family capital output contributions significantly lower. Interestingly, differences in total factor productivity between family and non-family firms disappear when we allow for heterogeneous output contributions of family production inputs. These findings imply that the assumption of homogeneous labour and capital between family and non-family firms is inappropriate when estimating the production function.
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Notes
Burns and Whitehouse (1996) report that 85% of businesses in the European Union and 90% of businesses in the United States are family controlled. It is also generally recognized that family businesses are critical to entrepreneurship and socioeconomic development and industrialization in unstable, low income, or transitional economies.
Handler (1994) describes the issue of succession as the most important issue that all family firms face; Chua et al. (2003) found that succession is the number one concern of family firms; and Ward (1987) goes so far as to define all family firms specifically as those that will be “passed on for the family’s next generation to manage and control”.
Some studies listed in Table 1 have concentrated on the partial productivity of family firms in that they focus on the ratio of output to a single input factor, usually labour; however partial analysis only provides a general indication of total factor productivity, because it fails to consider tradeoffs between other input factors.
One notable exception is Martikainen et al. (2009) who tested whether factor elasticities (namely the coefficient estimates for both labour and capital) are invariant across both family and non-family firms. They found that, for their sample of 159 manufacturing firms, there is no such variance in elasticity, and proceeded to test differences in productivity using fixed factor elasticities for both family and non-family firms.
According to Gómez-Mejía et al.(2007), “the socioemotional wealth of family firms comes in a variety of related forms, including the ability to exercise authority… the perpetuation of family values through the business… the preservation of the family dynasty… the conservation of the family firm's social capital… the fulfilment of family obligations based on blood ties rather than on strict criteria of competence… and the opportunity to be altruistic to family members. Losing this socioemotional wealth implies lost intimacy, reduced status, and failure to meet the family's expectations”.
If both principal and agent have the same interests, there is no conflict of interest and no “agency problem” (Berle and Means 1932; Ross 1973); thus by virtue of their intra-familial altruistic element, family firms should be exempt from agency problems (Becker 1974; Jensen and Meckling 1976; Parsons et al. 1986; Eisenhardt 1989; Daily and Dollinger 1992). However, more recent investigations have looked into other types of agency problem that may be specific to family firms (Morck and Yeung 2003; Chrisman et al. 2004).
In their analysis, Cobb and Douglas (1928) investigate production in manufacturing firms and, as a result, land is excluded as a factor of production.
In the log transformed Cobb–Douglas production function, the value of the constant coefficient is independent of labour and capital. This assumption has been made to ignore the qualitative effects of any force for which there is no quantitative data. The coefficient is thus made a “catch-all” for the effects of such forces (Cobb and Douglas 1928).
An important consideration is the simultaneous equation bias that may arise when specifying management variables in the production function (Hoch 1958). In the case of the added family firm variable, we may find that productivity depends on whether the firm is a family firm and whether the firm is a family firm depends on productivity. For example, whether a firm remains in the control, management, and ownership of the family may be endogenously determined by the performance of the firm. Poorly performing family firms may resort to outside management as a potential remedy and, on the other hand, families may be less inclined to relinquish ownership, management, or control of a highly performing firm (Demsetz and Lehn 1985; Demsetz and Villalonga 2001). If correlations between the error term and independent variables exist, coefficient estimates of Eqs. 1 and 2 may end up being biassed and therefore inconsistent, because it is assumed that independent variables are in fact independent or exogenous.
The BLS samples were drawn from the ABS Business Register, with 8745 business units being selected for inclusion in the 1994–1995 survey. For the 1995–1996 survey, 4,948 of the original selections for the 1994–1995 survey were selected, and this was supplemented by 572 new business units added to the ABS Business Register during 1995–1996. The sample for the 1996–1997 survey included 4,541 businesses which were previously sampled, and an additional sample of 529 new businesses from the 1995–1996 interrogation of the Business Register, and 551 new businesses from the 1996–1997 interrogation of the Business Register.
The equivalent ratio is simply calculated as average part-time hours per week divided by average full-time hours per week for all non-managerial employees. This information is from the Australian Bureau of Statistics’ “Employee Earnings and Hours, Australia” report as of 1998 and from the previously known “Earnings and Hours of Employees, Distribution and Composition, Australia” report.
Of all family firms responding to question 2, 34.91% selected i only; 27.45% selected both i and ii; 11.79% selected i, ii and v; 4.39% selected i and v; 3.18% selected i, ii, iv and v; and 3.18% selected i, ii and iv. On this basis, and out of 64 possible permutations, nearly 95% of all family firms at least selected i, which is understandable, because we would expect small to medium sized family firms to have a more operational classification; however, not excluding these, approximately 37% also selected iv and v, which is associated with the essence-based classification of a family firm.
“Personal and other services” was excluded and used as the benchmark industry.
Notable exceptions are the construction, accommodation, and personal services industries.
For a discussion on the relationship between capital intensity and labour productivity, see Wolff (1991).
Note that the measure of total workers, as the denominator in the part-time ratio, has not been converted to FTE workers and is simply reported as the total number of all employees in any given firm.
Considering that our sub-sample of the BLS is relatively small (i.e. the number of cross-sectional subjects, N = 3364, is greater than the number of time periods, T = 4), the family ownership dummy specified in Eq. 2 is, in fact, constant for each family firm across the entire period under analysis.
An important assumption of the random effects model is that the unobserved random disturbance, u i, is uncorrelated with the individual regressors in Eq. 3. As is the case with many panels, the Hausman test has revealed that the coefficients estimated by the efficient random effects estimator are not the same as those estimated by the consistent fixed effects estimator. In such cases a fixed effect model would be preferred; for reasons already stated, however, and to directly estimate the family firm intercept, we require a random effects approach. To overcome this issue, the Hausman–Taylor random effects procedure, with instruments, can be used to control for endogeneity (Hausman and Taylor 1981).
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Acknowledgments
The authors wish to thank the Grand Valley State University’s Family Owned Business Institute for their generous funding of this study. Further acknowledgements are extended to Dr. Gulasekaran for his econometric expertise and Dr. Khalid and Dr. Craig for their support in develo** this paper.
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Barbera, F., Moores, K. Firm ownership and productivity: a study of family and non-family SMEs. Small Bus Econ 40, 953–976 (2013). https://doi.org/10.1007/s11187-011-9405-9
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DOI: https://doi.org/10.1007/s11187-011-9405-9