Protecting property rights helps family businesses innovate and grow
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Protecting property rights helps family businesses innovate and grow

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Editor’s note: This article, distributed by The Associated Press, was originally published on The Conversation. The Conversation is an independent, nonprofit source of news, analysis, and commentary from academic experts.

Close your eyes and imagine a world where the most innovative companies are not giant tech giants but family businesses. Now open your eyes, because you don’t have to imagine: it’s real.

These are the conclusions our team of business experts reached in their latest global analysis of research on family businesses.

When we analyzed 193 studies published between 1996 and 2022 on the strategies of these businesses, including innovation, we found that smaller family businesses are the innovation leaders—with a caveat.

Specifically, we found that small and medium-sized family firms in strong property rights environments are the most innovative in the world. They outperformed large family firms and nonfamily firms of all sizes.

To determine which countries provide stronger property rights protections, we used the most comprehensive ranking available, the International Property Rights Index.

The index takes into account a range of issues, including political stability, independence of the judiciary, corruption, ease of access to loans and protection of copyrights and patents.

The three countries with the strongest legal environments are Finland, Switzerland, and Australia. The US is in 12th place.

Why is this important?

When business professors talk about “innovation,” they typically mean investments in research and development, business process improvements, new product creation, and other activities related to strategic product change.

Previous research suggests that family businesses are more or less innovative based on two things: how big they are and whether they are located in a country that protects property rights. When property rights are not protected, people have less incentive to innovate—because their ideas are vulnerable to theft.

We’ve seen firsthand how this affects business owners. Some of our team members come from countries where property rights aren’t strongly protected—namely Kazakhstan and China—and we’ve heard from family business owners about their struggles with innovation.

Our work illustrates the importance of protecting property rights for business development. While such legal protections enable everyone to thrive, small and medium-sized family businesses can benefit the most from them.

This isn’t entirely surprising. Larger companies often have more robust systems in place to protect against risks like theft and fraud. And they have less need to innovate because of their size and established presence in the market. Smaller companies, on the other hand, must constantly innovate to compete and grow.

Family businesses also care about passing on their businesses to future generations, which gives them an additional incentive to innovate: if they don’t, they risk going out of business. This seems more important for smaller, less established family businesses.

What is not known yet

Our findings are qualitative, not quantitative, meaning more research is needed to confirm them. We also do not know what innovations distinguish smaller family firms, or whether these innovations should be incremental or radical.

Our team wants to learn more about the legal environments in which family firms operate and how they affect behavior and performance. We plan to conduct more research on the different strategies that family firms pursue, such as innovation, internationalization, and mergers and acquisitions.

Ultimately, we hope to find best practices that will help family businesses thrive around the world—not just in select countries.

Vitaliy Skorodziyevskiy is an assistant professor of management and entrepreneurship at the University of Louisville.

Emma Su is an assistant professor of management at the University of Dayton.

Jim Chrisman is a professor of management at Mississippi State University.

Chelsea Sherlock is an assistant professor of management at Mississippi State University.