entrepreneurial orientation, risk taking, and performance in family firms

8/9/2019 Entrepreneurial Orientation, Risk Taking, And Performance in Family Firms

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Entrepreneurial Orientation, Risk Taking, andPerformance in Family FirmsLucia Naldi, Mattias Nordqvist, Karin Sjöberg, Johan Wiklund

This article focuses on risk taking as one important dimension of entrepreneurial ori-entation and its impact in family firms. Drawing on a sample of Swedish SMEs, we find that risk taking is a distinct dimension of entrepreneurial orientation in family firmsand that it is positively associated with proactiveness and innovation. We also find that even if family firms do take risks while engaged in entrepreneurial activities, they takerisk to a lesser extent than nonfamily firms. Moreover, and most importantly for our understanding of entrepreneurial orientation in family firms, we find that risk taking in

family firms is negatively related to performance. Both theoretical and practical impli-cations of our findings are provided.

Introduction

The relationship between entrepreneurship andrisk taking has long puzzled researchers.Researchat the individual level has found little empiricalevidence to support the idea that entrepreneurstake considerable risks. For example, on average,entrepreneurs do not take greater risks thanmanagers (Brockhaus, 1980), and terms such asrisk avoiders (Miner, 1990) or risk optimizers(McClelland, 1961) have been suggested for entre-preneurs. One important reason for these incon-clusive results is likely to be that the firm-levelgovernance structure in which entrepreneurialbehavior takes place influences managers’ riskchoices (Wiseman & Gomez-Meija, 1998). Moreprecisely, a problem with current literature onentrepreneurship and risk taking is that notenough attention has been paid to the role of theorganizational context in which this risk takingtakes place. Firms differ in terms of their organi-zational and governance structures and risktaking may be higher in some organizational con-texts than in others, as agency theorists argue

(Eisenhardt, 1989; Fama & Jensen, 1983; Wiseman& Gomez-Meija, 1998; Zajac & Westphal, 1994).

Corporate entrepreneurship literature alsoindicates that organizational context plays a rolein risk taking. A growing stream in this researchexamines the concept of entrepreneurial orienta-tion (EO) (Covin & Slevin, 1986, 1989; Lumpkin & Dess, 1996; Lyon, Lumpkin, & Dess, 2000; Miller,1983). EO is a construct that addresses themindset of firms engaged in the pursuit of venturecreation and provides a useful framework forresearch into entrepreneurial activity. Many schol-ars have used EO to describe a fairly consistent setof related activities or processes (e.g., Wiklund & Shepherd, 2003). Such processes incorporate awide variety of activities, including a firm’sstrategic decision-making styles and businesspractices, where EO reflects “the organizational

processes, methods and styles that firms use to act entrepreneurially” (Lumpkin & Dess, 1996, p. 139).This research has found positive associationsamong risk taking and other aspects of entrepre-neurial behavior (e.g., Rauch, Wiklund, Freese, & Lumpkin, 2004). For instance, in organizational

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contexts characterized by innovation and proac-tiveness, risk taking appears to be substantial.Companies generating new products based ontechnological innovations typically take risks, asthe demand for the new product is unknown.

This research on EO has contributed to ourunderstanding of some of the relationshipsbetween entrepreneurship and risk taking; thatis, it has shown that innovative and proactivestrategies are generally associated with risktaking. However, much more can be learnedabout how different organizational contexts mod-erate the strength of EO dimensions such as risktaking (Lumpkin & Dess, 1996; Lyon et al., 2000).Agency theory stresses that the extent of involve-ment in risky activities is likely to be influencedby the ownership and governance of the firm(Fama, 1980; Fama & Jensen, 1983; Jensen & Meckling, 1976). Scholars of EO and agency theory share an interest in how risk taking affectsperformance (e.g., Wiklund & Shepherd, 2003;Wiseman & Catanach, 1997). A meta-analysis of the relationship between EO and performanceshowed that across studies, the two constructswere positively correlated (Rauch et al., 2004).However, the analysis also showed that risktaking had a significantly smaller correlationwith performance than other aspects of EO. Simi-larly, in their review of the relationship betweenrisk taking and performance, Wiseman and Cata-nach (1997) found that arguments and results of positive as well as negative associations betweenrisk taking and performance existed in the litera-ture. In their empirical analyses, they found thatrisk taking had positive effects on performance incertain contexts, while the effect was negative inother contexts (Wiseman & Catanach, 1997). Justas the relationship between entrepreneurship andrisk taking may be context specific, we argue thatthe relationship between risk taking and perfor-mance is better understood by taking intoaccount the organizational context, and especially the relationship between and nature of owner-ship, governance, and management.

We believe that family firms constitute a rel-evant organizational context in which to examinethis concept. As we will argue, family firms are

likely to handle risk differently than other types of firms, partly because management and ownershipare not separated (Fama & Jensen, 1983; Daily & Dollinger, 1992) and partly because of the family nature of ownership and management (Carney,2005; Schulze, Lubatkin & Dino, 2003; Schulze,Lubatkin, Dino, & Buchholtz, 2001; Zahra, 2005).Research on entrepreneurship in family firms,including entrepreneurial orientation and the roleof risk taking, is increasing but still scarce (Hab-bershon & Pistrui, 2002; Zahra, 2005; Zahra,Hayton, & Salvato, 2004). Therefore, by combininginsights from the literature on entrepreneurialorientation, family firms, and agency theory, thepurpose of this article is twofold. First, we set outto investigate whether risk taking is an importantaspect of EO in family firms. Second, we examinethe relationship between risk taking and perfor-mance in family firms. Exploratory and confirma-tory factor analysis are used to investigate theformer; multiple regression analysis to investigatethe latter. The present study makes two importantcontributions. First, we extend our knowledge of EO in general and risk taking in particular withregard to its applicability in one distinct organi-zational context. Second, we shed light on theinfluence that the risk-taking dimension of entre-preneurial orientation has on performance infamily firms, thereby advancing our knowledge of corporate entrepreneurship in this common typeof firm. In the following section we present theory and hypotheses. Thereafter, the research methodis discussed, followed by the analysis and results.We then discuss the results, offer implications,and address the most important limitations of our research, before ending with our majorconclusions.

Theory and Hypotheses

Defining the Family FirmFamily firms can be viewed as a contextualhybrid—a unique combination of two sets of rules, values, and expectations: the family’s andthe business’s (Flemons & Cole, 1992; Gersick,Davis, McCollom, Hampton, & Lansberg, 1997;

Naldi, Nordqvist, Sjöberg, Wiklund

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Tagiuri & Davis, 1982). Family firms share certaincharacteristics that render them unique in termsof patterns of ownership, governance, and succes-sion (Chua, Chrisman, & Sharma, 1999; Steier,2003). For instance, owner-families share thedesire for ownership control and the continuity of family involvement in the firm. To fully appreciatethese special characteristics, it is crucial to focuson family firms where the family is likely to haveconsiderable impact on entrepreneurial activities.We therefore define family firms as firms whereone family group controls the company through aclear majority of the ordinary voting shares, thefamily is represented on the management team,and the leading representative of the family per-ceives the business to be a family firm (Westhead& Cowling, 1999).

Risk Taking and EntrepreneurialOrientation

Scholars disagree regarding to what extent family firms constitute an organizational context thatsupports or constrains an entrepreneurial orien-tation (Habbershon & Pistrui, 2002; Zahra, 2005).Family firms are often characterized as conserva-tive (Aronoff & Ward, 1997; Kets de Vries, 1993;Sharma, Chrisman, & Chua, 1997), resistant tochange and introverted (Hall, Melin, & Nordqvist,2001), contradicting what would be consideredentrepreneurial. The risk of losing family wealthcreated over a long period of time (Sharma et al.,1997) may also inhibit family firms from engagingin entrepreneurial activities. At the same time,family firms have been viewed as examples of entrepreneurial firms (Litz, 1995). There areseveral arguments supporting the view that family firms can preserve their entrepreneurial capacity and continue to engage in risky projects and ven-tures (Aldrich & Cliff, 2003; Rogoff & Heck, 2003;Zahra et al., 2004). Recent empirical research hasshown that entrepreneurial activity is a commoncharacteristic of many family firms (e.g., Hallet al., 2001; Steier, 2003; Zahra, 2005; Zahra et al.,2004). Indeed, in today’s rapidly changing andhighly uncertain markets, entrepreneurial firmsmust be willing to take risks:“without risk-taking,

however, the prospects for business growth wane”(Ward, 1997, p. 323).

One reason for these diverging views might berelated to unclear definitions in family businessresearch of “entrepreneurial behavior.” Miller(1983, p. 771) defines an entrepreneurial firm as“one that engages in product market innovation,undertakes somewhat risky ventures, and is firstto come up with ‘proactive’ innovations, beatingcompetitors to the punch.” As mentioned above,entrepreneurial orientation (EO) is a conceptthat has been coined to refer to this type of stra-tegic orientation. Miller’s (1983) original opera-tionalization contained three dimensions:innovativeness, proactiveness, and risk taking.EO mirrors Stevenson and Jarillo’s (1990)concept of entrepreneurial management as “itreflects the organizational processes, methodsand styles that firms use to act entrepreneur-ially” (Lumpkin & Dess, 1996, p. 139). Conceptualarguments have suggested that the dimensions of EO should be viewed as separate but related con-structs, rather than as one unifying characteristic(Lumpkin & Dess, 1996; Lyon et al., 2000). That is,firms can vary in degree of innovativeness, pro-activeness, and risk taking so that they are notequally entrepreneurial across all dimensions.However, the dimensions are suggested to bepositively correlated (Lumpkin & Dess, 1996),which has been validated empirically (Rauchet al., 2004).

Given the lack of agreement on the extent towhich family firms are entrepreneurial and theambiguity as to whether risk taking is an impor-tant element of entrepreneurship in family firms,it is important to explore the dimensionality of theEO construct among family firms. On the basis of previous research on EO, we anticipate that risktaking forms an independent dimension of EO infamily firms and that it is positively associatedwith the other dimensions of the construct. Thus:

Hypothesis 1a. Risk taking forms an important and independent dimension of EO in family firms.

Hypothesis 1b. Risk taking is positively associated with the other dimensions of EO in family firms.

Entrepreneurial Orientation, Risk Taking, and Performance in Family Firms

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Risk Taking in Family andNonfamily Firms

Whether family firms take risks to the same extentas nonfamily firms is controversial. Zahra (2005)found some support that family ownership andinvolvement promote risk taking in general, whilelongCEO-foundertenuresleadto the opposite.Yet,intheacademicliteratureandpopularpress,family firms are associated with weak risk bearingattributes that harm longevity and efficiency. Inaddition,it has been arguedthatfamilyfirms sufferfrom strategic inertia and become risk averse(Meyer & Zucker, 1989) and that an especially highconcentration of ownership may lead to risk-avoiding strategic choices (Chandler, 1990).

Agency theorists propose that a firm’s risktaking is influenced by its ownership and gover-nance structure (Fama, 1980; Fama & Jensen,1983;Jensen & Meckling, 1976). In Fama and Jensen’s(1983) view, family firms tend to bear fewer risksand choose lower levels of investments than domore widely held firms. Agency theory also pro-poses that equity ownership influences managers’risk-taking propensity (Eisenhardt, 1989; Zajac& Westphal, 1994), suggesting that managersbecome risk averse as their ownership in the firmincreases (Beatty & Zajac, 1994; Denis, Denis, & Sarin, 1997). On this basis, there are reasons tobelieve that risk avoidance is stronger in family firms than in nonfamily firms. First, in family firms, the management tends to have most of itswealth invested in the firm and so bears the fullfinancial burden of failed investments (Geda- jlovic, Lubatkin, & Schulze, 2004). Consequently,necessary but risky strategic decisions, such asinternational expansion, the launch of a new product, or committing resources to R&D, arepostponed due to concerns about the safety of thefamily wealth (Schulze, Lubatkin, & Dino, 2002).Second, there is more at stake in family firms thanthe family’s current wealth. As opposed to othertypes of firms, managers’ risk taking in family firms is done with the awareness that the accumu-lated family wealth might be at stake and that they thereby jeopardize the financial and social well-being of future generations (James, 1999; Schulze

et al.,2002). In addition, the family name and, withit,the family reputation, often built up over severalgenerations, might be compromised (Bartholom-eusz & Tanewski, 2006). This situation is not thesame in other types of firms, where the connectionto a wider family and to previous and future gen-erations is less clear. In light of this, we expect that:

Hypothesis 2. Family firms take less risk than nonfamily firms.

Risk Taking and Performance inFamily Firms

We have argued that family firms take risks but toa lesser extent than do nonfamily firms.We believethat it is also important to study the outcome of this behavior. Perhaps the most recurrent themeamong those interested in EO concerns the posi-tive implications that entrepreneurial processeshave on firm growth and performance (Lumpkin& Dess, 1996; Wiklund, 1998; Zahra, Jennings, & Kuratko, 1999). EO is regarded as inevitable forfirms that want to prosper in competitive businessenvironments. Empirically, the positive impact of EO on firm performance and growth has beensupported by several studies and in a meta-analysis. Rauch et al. (2004) found that therisk-taking dimension is positively related to per-formance, even if significantly smaller than otheraspects of EO. This led them to suggest that thelink between risk taking and performance is lessobvious than the one between proactiveness orinnovation and performance (Rauch et al., 2004).Lumpkin and Dess (1996, p. 163) suggest that thepositive implications of the EO dimensions onfirm performance are context specific and may vary independently of each other in a given orga-nizational context.

The relationship between risk taking and per-formance, in particular, appears to vary withcontext. As argued above, we can expect fromagency theory (Fama, 1980; Fama & Jensen, 1983;Jensen & Meckling, 1976) that there are specificfeatures of risk taking in family firms. In family firms, the overlap between ownership and man-agement means that owners and managers are the


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same individuals or represent the same owner-family. Traditionally, this lack of separation fromownership and management has led researchersto suggest that agency costs are low in family firms(Fama & Jensen, 1983) because of a lesser need of formal monitoring and control systems (Daily & Dollinger, 1992; Geeraerts, 1984; Randøy & Goel,2003). Agency theorists’ prediction about the lackof formal information and control systems hasbeen supported by scholars observing that family firms are less likely to have active boards withexternal board members (Brunninge & Nordqvist,2004; Schulze et al., 2001) and strategic planningprocesses (Ward, 1988). Moreover, Carney (2005)argues that the “personalism” and the overlap of ownership and management in family firms meanthat organizational authority is incorporated inone person or family. Hence, family firms whereownership and management is held within adefinable family operate under less pressure fromexternal constituents, such as minority sharehold-ers, market analysts, and institutional monitors,that demand accountability, disclosure, and trans-parency (Carney, 2005) than, for instance, publicly traded firms or other firms with external ownersor managers. This, in turn, renders family firmsmore vulnerable to self-control problems. Indeed,family managers have the authority and legiti-macy to pursue what they perceive as being the“best option” (Gedajlovic et al., 2004).

As argued above, entrepreneurial activities infamily firms do involve taking risks, but to a lesserextent than in nonfamily firms. If family firmsgenerally are characterized by less internal andexternal formal monitoring, risk taking in family firms is likely to mean that these firms make deci-sions that are less based on closely calculatedrisks; less grounded in a systematic, unbiased way;and with less incorporation of outsiders’ perspec-tives and opinions (Schulze et al., 2001, 2003). Thelack of more formal monitoring and controlsystems and practices for systematic collectionand analysis of information can result in family firms investing in projects without thoroughly considering the pros and cons in terms of risk.This logic suggests that managers in family firmshave less control and understanding of the risk

that they are taking. Moreover, they have less pres-sure to analyze and motivate different alternativesfor both internal and external stakeholders. Inother words, family firms “have greater latitude toallocate resources on the basis of‘animal spirits’or‘gut feel’ and to pursue opportunities that can only be rationalized by particularistic or intuitive cri-teria” (Carney, 2005. p. 23). Thus, we expect that:

Hypothesis 3. Risk taking is negatively related to performance in family firms.

Method

Research Design and Sample

To provide a baseline for comparing the risktaking of family firms with that of nonfamily firmsas stated in Hypothesis 2, we selected a samplethat includes nonfamily firms as well as family firms. A stratified sample of Swedish small andmedium-sized (SMEs) firms was surveyed and therespondents were later broken down into two sub-samples, that is, family and nonfamily firms. Sam-pling criteria for the whole sample were (1) fourindustrial sectors based on ISIC codes (manufac-turing, professional services, wholesale/retail, andother services); (2) employment size, divided intotwo groups (10–49, 50–249); and (3) corporategovernance (independent firms and members of business groups). The sampling population con-tained 2,455 firms obtained from StatisticsSweden (the Bureau of Census). We collected datausing telephone and mail surveys targeting theCEOs of the SMEs.

In 1997, we collected data for the independentand control variables. Data for the dependentvariable were obtained in 2000. We initially con-tacted the firms by telephone, resulting in 2,034responses (82.9%). All firms interviewed receiveda mail survey, generating 1,278 responses after tworeminders, for a response rate of 52.1% of theoriginal sample. In 2000, firms responding tothe 1997 survey were contacted again for a tele-phone interview for the dependent variable. T testchecks for response bias revealed no significantdifference concerning age, size, and ownership.This applied also to the family and nonfamily


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business subsamples. The final sample contained889 firms, with full information on 696 firms (28%of original sample; 54% of 1997 survey respon-dents). To test our hypotheses, we singled out thefamily firms. Following Westhead and Cowling(1999), two criteria were combined to identify family firms. The respondent had to answer yes totwo questions: (1) “Are ownership and manage-ment control of the company dominated by onefamily?”and (2)“Do you consider your business tobe a family business?” Our total sample conse-quently broke down into 265 family and 431 non-family firms, with answers from family firm CEOsand nonfamily CEOs. The family firm sample isused to test Hypotheses 1a, 1b, and 3,whereas bothsubsamples are used for testing Hypothesis 2.

Variables and Measures

The measures we used in the study are shownin the Appendix. All scales are adopted from pre-vious literature. Below we discuss the dependent,independent, and control variables.

Performance was measured by asking respon-dents in 2000 to compare the performance of theirfirm with the performance exhibited by their twomain competitors in terms of profit, sales growth,cash flow, and growth of net worth. These itemwere summed into an index (a = 0.82) and thescale has been validated in previous research(Wiklund & Shepherd, 2003).

Entrepreneurial orientation (EO) was measuredusing the original nine-item scale developed by Covin and Slevin (1986, 1989), which has domi-nated research on EO (Rauch et al., 2004). Thescale was included in the 1997 survey. More infor-mation regarding the factors and indices are pre-sented in the analyses section.

Control Variables

The multiple regression analyses also controlledfor firms’ past performance, environmental het-erogeneity, industry sector, firm age, indepen-dence, and size. These are variables that have beenincluded in previous research on the relationshipbetween EO and performance. All variables were

included in the 1997 survey. The scale for measur-ing past performance was identical to the onemeasuring the dependent variable. The scalefor measuring environmental heterogeneity wasadapted from Miller and Friesen (1982). We usedthree of the four original items (a = 0.85). Tomeasure industry sectors, we dummy coded firmindustry by SIC classification into manufacturing,professional services, retailers, and other services.Respondents were asked to state the year the firmwas founded, which was used to calculate firm age.Independence was measured by dummy codingwhether the firm reported being independently owned or belonging to a company group. Tomeasure size (small or medium-sized), we dummy coded whether the firm reported having more orless than 50 employees.

Analysis and Results

Exploratory and confirmatory factor analyseswere used to test Hypostheses 1a and 1b. Principalcomponent analysis with varimax rotation wasused for the exploratory analysis. One item per-taining to innovativeness (Item a in the Appen-dix), and one item pertaining to proactiveness(Item f in the Appendix) turned out to be prob-lematic, leading to unclear factor structure. Oncethese items were dropped and the remainingseven items were reanalyzed, three clean factorswith loadings above 0.69 and cross-loadingsbelow 0.30 appeared. It is important to note thatall three items were retained for risk taking—thecentral variable in our study. The total varianceaccounted for by the factors was 71.2% for family firms (72.9% for nonfamily firms). When summedto indices, the alpha values of the three variableswere 0.62 (0.72 for nonfamily firms) for risktaking, 0.83 (0.76 for nonfamily firms) for innova-tiveness, and 0.67 (0.67 for nonfamily firms) forproactiveness.

We kept these seven items for confirmatory factor analysis (Figure 1) and compared fit indicesof this factor structure with those of two alterna-tive factor structures suggested in the literature(Kreiser, Marino, & Weaver, 2002; Yoo, 2001).According to standard fit indices (e.g., Hair,


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Anderson, Tatham, & Black, 1998), the analysesshowed good fit for our model, superior to thoseof the alternative models.The correlation betweenrisk taking and the two other dimensions of EOis positive and statistically significant for family firms (0.37 and 0.42; p < 0.001). Based on theseanalyses, we conclude that risk taking forms onedistinct and independent dimension of EO andthat it is positively associated with the otherdimensions of EO (innovativeness, proactiveness)in family firms. Thus, Hypotheses 1a and 1b bothreceive support from our analyses.

Means comparison and Student’s t test wereused for testing Hypothesis 2 concerning theextent of risk taking in family and nonfamily

firms. We found that family firms take statistically significantly less risk than do nonfamily firms(mean difference = 0.15 on a seven-point scale;t = 2.04, p < 0.05), supporting Hypothesis 2. Thenext step was to investigate what impact risktaking in family firms has on their performance.Hierarchical multiple regression analysis wasused for testing Hypotheses 3. The hypothesisanticipates a negative relation between risk takingand performance in family firms. Multicollinear-ity was not a problem in our data according tocorrelation and variance inflation factor analysis.The base model shows that past performance is astrong predictor of performance and that beingindependent of a company group has a negative

Fit Indices for the EO Modelsa

Chi-

Square

RMS

EA

GFI AGFI CFI IFI NFI PGFI PNFI AIC

Family

firms

17.257 0.045 0.986 0.965 0.986 0.987 0.972 0.387 0.509 54.72

8

aRAMSEA = root mean square error of approximation; GFI = goodness-of-fit index; AGFI =

adjusted goodness-of-fit index; CFI = comparative fit index; IFI = incremental fit index; NFI =

normed fit index; PGFI = parsimony goodness of fit; PNFI = parsimony normed fit index; AIC =

Akaike information criterion.

.30

.42

.85

.84

.60

.86

.59

.66

.55

.35

.44

.30

.73

.35

.71

.72

.37

NEW PRODUCTS

RADICAL PRODUCT CHANGES

FIRST TO INTRODUCE

INITIATE CHANGE

FEARLESS AND POWERFUL

HIGH RISK PROJECTS

FEARLESS, AGRESSIVE

INNOVATIVENESSe1

e3

e4

e5

e6

e7

e2

RISK-TAKING

PROACTIVENESS

Figure 1 Confirmatory Factor Analyses and Fit Indices in Family Firms (Where e1–e7 Represent the Error Terms).


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influence on performance. Adding the threedimensions of EO, displayed in the right column of Table 1, significantly increases explained variance.A statistically significant negative impact can benoted for risk taking. This result supportsHypothesis 3. Stated differently: our findingssuggest that risk taking in family firms is nega-tively related to perceived performance.

DiscussionThere is reason to believe that the relationshipbetween risk taking, entrepreneurship, and per-formance may depend on organizational context.In this article, we have analyzed family firms.Family firms represent a relatively distinct cat-egory in terms of ownership and governance. Toexamine these issues, we relied on the entrepre-neurial orientation construct and focused on therisk-taking dimension of this construct. The key findings of this study are now discussed.

Risk Taking and EntrepreneurialOrientation

Consistent with our hypotheses, we found thatrisk taking was a distinct dimension of entrepre-neurial orientation and that it was positively

associated with proactiveness and innovation.This finding means that the EO construct seems tohave great generality across organizational types.Kreiser et al. (2002) found that the EO constructwas valid across different national contexts. Simi-larly, our findings suggest that the construct is alsovalid and relevant in the important organizationalcontext of family firms. Hence, this finding addsto the growing body of research that teases outfine-grained aspects of the EO construct (e.g.,

Lumpkin & Dess, 1996; Rauch et al., 2004), addingfurther to its validity and usefulness in researchpractice.

The results also suggest that in family firms theprocesses and practices related to entrepreneurialactivities involve an element of risk taking. Fur-thermore, risk taking is not an isolated phenom-enon. Processes and practices related to risktaking are correlated with innovative and proac-tive behaviors. This is an important result. Inrecent years firms, and not excluding family firms,have needed to be innovative and acquire new

skills to act proactively and strengthen their com-petitive position (Habbershon & Pistrui, 2002).

Level of Risk Taking in Family Firms

We also hypothesized, and found, that even if family firms do take risks as part of their entre-

Table 1 Results From Multiple Regression Predicting Performance for Family Firms

Context Variable Control Variables Full Model

Family Past performance 0.461*** 0.455***

Heterogeneity 0.011 0.008

Manufacturing -

0.057 -

0.070Professional services -0.016 -0.030

Retailing 0.067 0.058

Age -0.029 -0.036

Independent -0.130* -0.134*

Small or large 0.002 -0.017

Innovativeness 0.103†

Proactiveness 0.048

Risk taking -0.193**

R2 0.253*** 0.290***

R2 Adj. 0.230*** 0.260***DR2 0.253*** 0.037***

† = p < 0.1; * = p < 0.05; ** = p < 0.01; *** = p < 0.001.

Note: Standardized regression coefficients are displayed in the table. N = 265.


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preneurial activities, they do it to a lesser extentthan do nonfamily firms. These results are someexplanation of previous ambiguous findingsregarding the role of risk taking in entrepreneur-ship and family firms (Zahra, 2005). Risk takingmay be higher in some type of firms than inothers, supporting the argument that organiza-tional and governance contexts need to be takeninto account in order to gain a deeper understand-ing of the relationship between risk taking andentrepreneurship in established firms (Lumpkin & Dess, 1996; Lyon et al., 2000). Singling out family firms appears to be relevant in order to under-stand some of the context specificity of theserelationships.

Using a different conceptualization of bothfamily firms and risk taking, Zahra (2005) foundsome support that family ownership and involve-ment promote risk taking. Our study shows thatrisk taking is an important dimension of entre-preneurial behavior in family firms but thatfamily firms tend to take less risk than do nonfa-mily firms. This gives empirical support to thenotion that family firms tend to be more conser-vative and risk averse in their strategy making(Carney, 2005; Chandler, 1990; Meyer & Zucker,1989; Schulze et al., 2002). One explanation for thisbehavior can be that managers’ propensity to takerisk is related to their equity ownership (Eisen-hardt,1989; Zajac & Westphal, 1994) and is consis-tent with predictions based on agency theory.When managers’ ownership in the firm is high,they tend to be more risk averse, as Beatty andZajac (1994) and Denis et al. (1997) have argued.Moreover, in family firms, the risk of losing accu-mulated family wealth and jeopardizing the finan-cial and social well-being of future generations islikely to further accentuate this tendency (James,1999; Schulze et al., 2002).

Risk Taking and PerformanceNext we tested the link between risk taking andperformance. Earlier research has found that therisk-taking dimension is positively related to per-formance, even if significantly smaller than otheraspects of EO (Rauch et al., 2004). In this study,

taking into account the organizational and gover-nance context, we found some interesting results.Agency theory and previous empirical and con-ceptual research on family firms led us to hypoth-esize a negative relationship in family firms. Thiswas supported by our data and is an interestingfinding that advances our understanding of entre-preneurial orientation and risk taking in family firms. First, it is in conflict with previous researchthat addresses the link between EO and perfor-mance, without taking into account the specificorganizational and governance context of family firms. Research has not before addressed the linkbetween EO and performance in samples of family firms only and disentangled the aspects of risktaking, innovation, and proactiveness empirically.

Our result suggests that family firms take onrisks, but with negative implications for their per-formance. In line with our argumentation above,one explanation, albeit tentative, for this findingcan be the following: family firms with the sameindividuals or individuals from the same family dominating both ownership and management of the firm and who perceive the firm to be a family firm expect the firm to stay within the family overgenerations (James, 1999) and let key businessdecisions be influenced by the family (Chua et al.,1999). This type of firm is often characterized by little use of formal control systems (Daily & Doll-inger, 1992; Geeraerts,1984; Randøy & Goel,2003),few outside board members (Cowling, 2003;Schulze et al., 2001), and weak pressure fromexternal monitors demanding accountability andtransparency (Carney, 2005). At least partly as aresult of this, it is plausible to argue that thesefirms make decisions, invest in projects, andpursue new venture in a more informal, intuitive,and less calculated way. Put differently, risk takingin family firms might not be firmly grounded insystematic and formal procedures and not haveenough inclusion of outsiders’ perspectives andopinions (Schulze et al., 2001, 2003). Therefore,risk taking in entrepreneurial activities in family firms might be less understood and possible out-comes more difficult to predict.

If this explanation is correct,it seems to supportrecent arguments for family firms to install formal


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control and monitoring systems, such as activeboards, financial controls, and strategic planning,in order to improve performance, despite higheragency costs and risk of losing flexibility (Schulzeet al., 2001, 2003). Better control, evaluation, andexternal monitoring can support a more calcu-lated risk taking that is guided toward projectsthat are better evaluated and scrutinized and,thus, whose outcome is better understood. How-ever, this implies an important act of balancing,since the informality, flexibility, and entreprene-urial orientation that characterize risk taking infamily firms can be harmed by increased formal-ization. Some authors even argue that the intu-ition and flexibility with which many family firms pursue opportunities may be the source of a unique competitive advantage compared tononfamily firms (e.g., Carney, 2005; Miller & LeBreton-Miller 2005).

This seems to reveal an interesting paradox of risk taking in family firms: increased formaliza-tion and external monitoring may lead to a risk-taking behavior that leads to better outcomes interms of financial performance, but at the sametime, this formalization and external monitoringmay stifle the entrepreneurial activities that giverise to these opportunities and risky projects tobegin with. Unfortunately, our data do not allow us a more detailed test of this possible explanationfor risk taking in family firms leading to negativeperformance. We encourage future research tolook further into this.

Limitations

This article has several limitations that should bekept in mind. An increasing number of scholarshave argued that family firms do not constitute ahomogenous population of firms (Salvato, 2002;Sharma, 2004). Rather, family firms differ on arange of dimensions (Klein, Astrachan, & Smyrnios, 2005) and it is possible that differenttypes of family firms show different patterns interms of entrepreneurial orientation and risktaking. Our data consisted of Swedish SMEs andinference to other countries should be made withcaution. National culture and tradition may influ-

ence risk taking and entrepreneurial orientation,which has implications for the generalizability of our findings.

Moreover, we relied on a single respondent,the CEO, from each firm. Responses from moreindividuals within the firms would have given amore complete picture of the firm’s situation andbehavior. Finally, we used self-assessment and per-ceived measures for entrepreneurial orientationand performance. Even though this is an oftenpractice method in this field of research (Lyonet al., 2000), our data could be biased and reflectwishful thinking rather than a factual state.However, the longitudinal nature of our datamakes this problem less pronounced.

Implications for Managerial PracticeOur findings point to the danger of giving generaladvice on the benefits of EO without consideringcontext-specific issues. Family firms distinguishthemselves as an organizational context in impor-tant ways. Often, family firms are characterized by dominant ownership and the presence of family members at different levels of the firm’s opera-tions, but also in regard to goals for and attitudestoward business activities. Advice with regard toentrepreneurial processes must take this intoaccount. For instance, family firms are an organi-zational context in which entrepreneurship canflourish in the form of new products, ventures,and process ideas. However, our research suggeststhat it is important to secure systems and routinesfor careful evaluation of risky investments inorder to better understand the possible amountand outcome of the risk that is taken without ham-pering the creative and entrepreneurial milieu of the organization.

Implications for Theory and

Future ResearchThis article argues and finds empirical support forthe notion that risk taking and its relationshipwith performance is context specific. Among ourfamily firms, there was a negative relationshipbetween risk taking and future performance. This


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is an important finding and contribution to bothcorporate entrepreneurship and family firm lit-erature. In addition to rejecting or supportingtheories and models, research needs to establishthe boundary conditions of theories. Entrepre-neurial orientation (EO) is an established con-struct that has attracted substantial research.Generally, this research finds support for positiverelationships between all dimensions of EO(including risk taking) and performance. Ourfindings suggest that such statements may need tobe qualified. In some contexts, the relationshipmay actually be the opposite. This suggests thatfuture EO research would benefit from payingcloser attention to organizational context. Further,many EO studies use a one-dimensional sum-mated construct rather than a multidimensionalone. Our findings suggest that EO may better beviewed as a multidimensional measure where theimpact of the dimensions may vary across differ-ent organizational contexts.

Also our contributions to family businessresearch open up possibilities for future research.We did not distinguish between different types of family firms. Family firms constitute a heteroge-neous group and, therefore, future researchinvestigating the link between risk taking and per-formance in family firms will benefit from a morefine-grained distinction between different typesof family firms.For example,the role of risk takingand its relationship with performance may differdepending on whether the firm is a first-, second-,or third-generation family firm. More research isalso clearly needed to investigate more directly therole of formal control and external monitoringsystems for the performance implications of risktaking in family firms. One way of doing this is toinvestigate what impact active boards with nonfa-

mily members and the use of formal strategicplanning practices have on the relationshipbetween risk taking and performance. Suchresearch should,however, also consider the impor-tant act of balancing noted above: too muchformal control, planning, and monitoring may inhibit the overall entrepreneurial orientation of the family firm.

Conclusions

Research on corporate entrepreneurship andentrepreneurial orientation will advance by paying greater attention to the role of organiza-tional context for different dimensions of entre-preneurship. In this article, we have focused onrisk taking as one important dimension of entre-preneurial orientation and its impact in family firms. We conclude that risk taking is a distinctdimension of entrepreneurial orientation and thatit is positively associated with proactiveness andinnovation. This is a contribution to the literatureon entrepreneurial orientation and risk takingsince it shows that the EO construct seems tohave great generality across organizational types.Further, we conclude that even if family firms dotake risks while they are engaged in entrepreneur-ial activities, they take risk to a lesser extent thando nonfamily firms. Moreover, and most impor-tantly for our understanding of corporate entre-preneurship in family firms, we conclude that risktaking in family firms is negatively related to per-formance. This is a contribution to the literatureon family firms, which so far has not paid enoughattention to the specifics of corporate entrepre-neurship in this very important type of firmworldwide.


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Appendix: Measurements

Performance (adapted from Wiklund & Shepherd, 2003)

I will now mention four measures of outcome. For each of them I want to know if you think that youroutcome during the past 3 years has been better, worse or equal to that of other companies in yourindustry (5-point scale ranging from “much worse” to “much better”).

Net profit (i.e., sales minus operational costs)

Growth of the company’s value

Cash flow

Development of sales

Heterogeneity (adapted from Miller & Friesen, 1982)

Are there great differences amongst the products/services you offer, with regard to (seven-point scaleranging from “Approximately the same for all products” to “Considerable difference betweenproducts”)

Buying behavior of the customers

Nature of the competition

Market fluctuations and uncertainty

Innovativeness (adapted from Covin & Slevin, 1989)

Generally our company prefersto . . .a. Strongly emphasize themarketing of the company’spresent products.*

1 2 3 4 5 6 7 Strongly emphasize R&D.

How many new kinds of products

or services has your company introduced over the past 5 years?b. A lot of new products/services.

1 2 3 4 5 6 7 No new products/services.

c. The changes of the company’sproducts/services have beenradical.

1 2 3 4 5 6 7 There has been small changes of the present products/services.

Proactivness (adapted from Covin & Slevin, 1989)

Our company’s relation towardcompetitors:d. Normally we react uponinitiatives taken by our

competitors.

1 2 3 4 5 6 7 Normally we initiate changesupon which our competitors react.

e. Our company is seldom thefirst one to introduce new products or services,administrative systems, methodsof production, etc.

1 2 3 4 5 6 7 Our company is very often thefirst company to introduce new products/services, administrativesystems, methods of productionetc.


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f. Normally our company tries to avoidovert competition, but rather takes on a“live-and-let-live”-position.*

1 2 3 4 5 6 7 Normally our company takes on a very competitive oriented“beat-the-competitor”-position.

Risk Taking (adapted from Covin & Slevin, 1989)

Generally our company has . . .g. A strong tendency toward projectswith low risk (with normal and secureyield).

1 2 3 4 5 6 7 A strong tendency toward gettinginvolved in high risk projects (with achance for high yield).

Generally we believe that . . .h. The business environment of thecompany is such that fearless andpowerful measures are needed toobtain the company’s objectives.

1 2 3 4 5 6 7 The business environment of thecompany is such that it is better toexplore it carefully and gradually inorder to achieve the company’sobjectives.

When we are facing insecuredecision-making situations . . .i. We normally take up a fearless,aggressive position, in order tomaximize the chance of being able toexploit possible opportunities.

1 2 3 4 5 6 7 We normally take up a cautious“wait-and-see” position in order tominimize the hazard of making costly erroneous decisions.

* Items dropped in the analysis.

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Lucia Naldi is a Ph.D candidate and Lecturer at Jönköping International Business School, PO Box1026, SE-551 11, Jönköping, Sweden; fax: + 46-36-16 10 69; [email protected].

Mattias Nordqvist is Research Fellow and Co-Director, Center for Family Enterpriseand Ownership (CeFEO) at Jönköping Interna-tional Business School, and Research Associate and Visiting Scholar at the Arthur M. Blank Center for Entrepreneurship, Babson Park, MA, USA; PO Box1026, SE-551 11, Jönköping, Sweden; fax: + 46-36-16

10 69; [email protected] Sjöberg (now Hellerstedt) is a Ph.D candi-date and Lecturer at Jönköping International Busi-ness School; PO Box 1026, SE-551 11, Jönköping,Sweden; fax: + 46-36-16 10 69; [email protected].

Johan Wiklund is a Professor at Jönköping Inter-national Business School; PO Box 1026, SE-551 11,

Jönköping, Sweden; fax: + 46-36-16 10 69; [email protected] authors thank the FBR editor and two anony-mous reviewers for their helpful comments,which

improved the article. An earlier version of thisarticle was presented at the Babson KauffmanEntrepreneurship Research Conference, June2005, at Babson College, Babson Park, MA, USA.The authors are listed in alphabetical order andcontributed equally to the article.


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