A study conducted by EY and the IE Center for Families in Business examines 2,000 family firms facing the challenge of innovation

• FFs’ commitment to innovation translates into 56% more accumulated R&D stock than NFFs.
• Investment in innovation allows FFs to obtain 22% more patents and 14% more product innovations.
• FFs are more efficient than NFFs at innovation to management: for every million euros spent on R&D, they obtain more patents (16%) and more product innovation (23%).
• Being “apostles of innovation” but delegating execution, designing a transversal innovation strategy, and consolidating the role of new generations are some of the key points of the report’s 10 recommendations for FFs to promote innovation.

MADRID, April 2022.- Family firms (FFs) in Spain invest 66% more in innovation than non-family firms (NFFs) and are more efficient at innovation management, a report by EY and IE University concludes.

These are some of the conclusions of the first “Las empresas familiares ante el reto de la innovación” (ENG: “Family firms and the challenge of innovation”), a report carried out by IE University’s IE Center for Families in Business and EY Empresa Familiar.

The report is based on information provided by 2,045 companies from the industrial sector which take part in the Survey of Business Strategies (Encuesta de Estrategias Empresariales) carried out by SEPI, the Spanish state holding company, as well as from the information obtained in 16 interviews with owners and managers of Spanish FFs that are leaders in innovation. The report compares the investment decisions, as well as the innovation management process, between FFs and NFFs.

The report highlights the generally smaller size of FFs compared to NFFs. Almost half of the FFs surveyed employ between 10 and 49 people, while only 23% of the NFEs belong to this group. In addition, FFs are concentrated in sectors such as textiles, clothing, and food products, with a smaller presence in the chemical and pharmaceutical sectors. Taking these differences into account, the report shows that the “family factor” is key in the decision to innovate: FFs invest more in innovation in all size groups, without exception.

Thus, spending on innovation in FFs is 66% higher than in NFEs, which over time translates into 56% more accumulated R&D stock than in FFFS. In addition, thanks to these investments in innovation, FFs garner 22% more patents and 14% more product innovations than NFFs.

Another of the study’s conclusions is that FFs manage innovation more efficiently (calculated as the number of patents and product innovations per million euros invested in innovation). The report shows how efficiency in innovation management drops drastically when a company is no longer controlled by a family group.  On average, the efficiency ratio falls by 19 patents per million euros invested in R&D. In contrast, when the company becomes part of a family group, there is an estimated increase of eight patents per million euros invested in R&D expenditure.

One of the features that distinguishes Spain from other countries is that 89% of companies are family-owned. An environment in which, according to the report, the “family factor” drives innovation, since, all things being equal, size and stimuli, FFs innovate more and better than NFFs. The analysis also shows that FFs not only invest more in innovation than NFFs, but are also more efficient in managing innovation.

Eurostat data shows that innovation expenditure in Spain in relation to its GDP is 41% lower than the European average. Juan Santaló, professor at IE University and a co-author of the report, explains: “Spain’s innovation deficit is largely due to the smaller size of the average Spanish company in a world where large companies invest most in R&D. In this context, the capacity of Spanish companies to innovate is not the same as in the rest of the rest of the world. In this context, the capacity of Spanish family firms to innovate more and better in relation to other non-family-owned firms of the same size represents a great opportunity to alleviate the innovation deficit in our country.”

“Spain’s innovation deficit is largely due to the smaller size of the average Spanish company in a world where large companies invest most in R&D. In this context, the capacity of Spanish companies to innovate is not the same as in the rest of the rest of the world. In this context, the capacity of Spanish family firms to innovate more and better in relation to other non-family-owned firms of the same size represents a great opportunity to alleviate the innovation deficit in our country.” Juan Santaló, professor at IE University and a co-author of the report

David Ruiz-Roso, a partner in charge of EY Empresa Familiar, says: “We believe that, in a world in which business is constantly changing, companies with a long history are successful not because of their aversion to change but, on the contrary, because they know how to adapt and take advantage of new trends and paradigms produced by technology and the economic and social environment. In other words, they know how to innovate and respond to the demands of an increasingly demanding market and customers”.

Regarding the impact on productivity, by increasing the stock of R&D, average business productivity rises, which is more pronounced in FFs.

The EY Empresa Familiar report concludes that what sets FFs apart are other objectives than simply making a profit. These include the desire to maintain control of the family business and to pass on the legacy to future generations. Achieving these objectives provides the shareholder with a socioemotional wealth perceived as worth saving, so that innovation becomes a survival strategy not only for the company but also for the family legacy. “The presence of these socioemotional traits not only boosts investment in innovation, but also improves innovation management,” says David Ruiz-Roso.

Cristina Cruz, professor at IE University and a co-author of the report, adds: “the presence of this duality of financial and socioemotional objectives implies that the great challenge for business families is to learn to innovate based on tradition, that is, to preserve certain values and traditions, while transforming the company’s business models to compete successfully”. For this reason, the authors of the report highlight the important role of the new generations as architects of change, but also as guarantors of the family legacy.

The report identifies some best practices, including the following:

• FFs tend to apply innovation management to all areas of the company
• FFs are committed to collaborative innovation to a greater extent than NFFs. The percentage of FFs that collaborate with customers, suppliers, competitors and universities on innovation is higher than NFFs.
• FFs formalize the innovation process more than NFFs, but with nuances. The comparative analysis by the size of the formalization of activities shows that a higher percentage of the FFs in each group have innovation committees, along with innovation indicators and plans. However, the interviews conducted show that the decision-making processes of these bodies are highly flexible, so as not to detract from the agility of decision making
• Family-run businesses explore innovation to a greater extent than comparable non-family businesses by size and industry. Although they place emphasis on their traditional sectors and encourage incremental innovations, FFs are also very active in looking for “out of the box” opportunities.

Stimulating innovation in FFs, in practice

The EY Empresa Familiar and IE Center for Families in Business report also includes 10 key recommendations for leading innovation management in FFs. These include driving change, being passionate about innovation; designing strategies transversally; learning to delegate strategies; promoting intra-entrepreneurship, and consolidating the role of new generations so that innovation continues to be a lever of growth in the future.

The role of the family as a driver of innovation highlights the need for clear support through economic and tax incentives to drive innovation in FFs so they can grow, internationalize and be sustainable in the medium term, which will further strengthen their role as a key element in the Spanish economy.

About the report

Information provided by 2,045 companies from the industrial sector that participate in the Survey of Entrepreneurial Strategies (EEE), carried out by the SEPI Foundation, has been analyzed. The study period starts in 2006 and ends in 2017, the last full fiscal year of the EEE when the report was begun.

More info on the report: here