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FAMILY INVOLVEMENT AND FIRM PERFORMANCE: A FAMILY
EMBEDDEDNESS PERSPECTIVE
Cristina Cruz Rachida Justo Julio De Castro
IE Business School Working Paper GE8-107-I 22-01-2008
Abstract
This paper uses f amily embeddedness (Cliff and Aldrich, 2003) and Work
Family Interface (WFI) (Jennings and McDougald, 2007) to analyze the effect
of gender and income on the relationship between family employment and firm
performance in the context of micro and small family enterprises. Our results
indicate that family employment contributed to increase sales but was
negatively related to f irm’s profitability. Moreover, the results indicate that
when the business is t he main source of ho usehold income the fa mily
employee’s positive impact on performance is reduced, and that the positive
relationship between family employment and firm performance is stronger in
woman run firms.
IE Business School
Research Department
Serrano 105
28006 - Madrid
Tel. 915689652
Julio.castro@ie.edu
IE Business School
Research Department
Serrano 105
28006 - Madrid
Tel. 915689654
Rachida.justo@ie.edu
IE Business School
Research Department
Pinar 7, Bajo
28006 - Madrid
Tel. 917452415
Cristina.cruz @ie.edu
IE Business School Working Paper GE8-107-I 22-01-2008
One of the most important decisions that an entrepreneur makes concerns whether or
not to employ family members. Such a decision can have a tremendous impact on the
entrepreneur, the business, and the family. While a few studies have examined family
employment (Daily and Dollinger 1992; Kirchhoff and Kirchhoff 1987; Heck and
Walker 1993), there is little theoretical discussion and empirical analysis in the fields of
entrepreneurship and family business as to how the decision to hire relatives impacts
firm performance. The neglect of the study of this relationship is rather surprising
particularly in light of empirical findings that demonstrate the importance of family
employment all over the world (Aldrich & Langton, 1998; Heck & Trent´s, 1999).
One might argue that employing family members can lead to advantages for the firm,
since the existence of kin relationships are generally reputed to temper the self-interest
and foster commitment of those inside the family business (Chrisman, Chua, and Litz
2004; Davis 1983; Gersick, Davis, Hampton, and Lansberg 1997; Taguiri and Davis
1996; Habberson and Astrachan 1997). However, recent studies also show that kinship
ties may increase adverse selection and it may reduce both the possibility to attract the
best non-family managers (Schulze, Lubatkin, Dino, and Buchholtz 2001), and “the
CEO’s ability to effectively monitor and discipline family agents” (Schulze, Lubatkin,
and Dino 2003).
A significant problem with existing research is that it has considered family
employment either as positive or negative for firm performance regardless of the
situational context in which this relationship takes place. As evidenced by the prior
paragraph, theory and research point out to both positive and negative aspects of family
employment. The net impact of family employment on performance should depend on
the magnitude of the benefits of employing family members compared to their costs. In
turn, the magnitude of these costs and benefits will be contingent on the particular
context in which they are measured. Thus the key question should be under which
conditions is the employment of family members in ventures conducive to higher firm
performance?
A recent stream of research, the family embeddedness perspective on entrepreneurship,
proposed by Cliff and Aldrich (2003) and extended by Jennings and McDougald (2007)
in their Work Family Interface (WFI) framework, calls for research into the interface of
family and work as an important situational factor that can affect entrepreneurial
decision making and outcomes. The interface between family and work is maximized
when the owner decides to employ relatives in the firm. However, the consequences of
this decision for firm performance have never been examined from a family
embeddedness perspective.
This paper aims to build on this literature by analyzing the impact of family
involvement on several indicators of firm performance. This effect will be tested in the
case of microfirms, where we consider that the WFI should be particularly salient since
the business and the family are so closely interrelated as to justify the use of the term
“family economic unit” (Baines & Wheelock, 2000).
Two determinants of WFI, identified by Jennings and McDougald (2007), will be used
in this study: First, and with respect to how individual differences affect owner’s ability
to cope with work family conflict, we argue that the influence of family involvement on
firm performance differs according to owner’s gender. Second, and turning to family-
domain determinants, we contend that when the venture is the primary source of income
IE Business School Working Paper GE8-107-I 22-01-2008
2
for the owner’s household coping mechanisms are more difficult to implement. This
would provide more stress to the work family nexus and would have implications for
firm performance.
Our work makes a number of important contributions to the current literature. First, we
test and extend the family embeddedness perspective, providing empirical evidence to
the influence of a particular aspect of work family interface on firm performance, that
is, family involvement. This effect is tested in a particular context, microfirms and
under two contingencies: gender and household income. In doing so we also contribute
to the family firm literature by adopting contingency approach to the effect of family
involvement on firm performance. As Chrisman et al.’s (Chrisman, Chua, and Litz
2003) suggest: “from a research perspective it is not sufficient to show whether or not
family firms outperform their nonfamily counterparts. The contingencies and
configurations wherein family provides a useful organizing context need to be
identified, explained, and proven” (p. 238).
Family Employment and Performance in Micro and Small Companies
Researchers that examine the relationship between work and family have argued that
family and business, commonly treated as separate entities, should be examined
together, given that they are “inextricably intertwined” (Aldrich and Cliff, 2003).
Research from the family embededness perspective (Aldrich and Zimmer, 1986;
Aldrich, 1999; Cliff and Aldrich, 2003; Jennings and McDougald, 2007), contends that
family firm relations have impact on the firm, and that in order to understand the
characteristics of new and small businesses, it is important to understand the impact of
the family.
Aldrich and Cliff (2003 have argued that family embededdness impacts the process of
new venture creation and ultimately new venture performance, because of the family’s
assistance with the resource mobilization process (p.574). While Aldrich and Cliff’s
arguments concentrate on the context of new ventures, the same arguments can be
applied to small and micro enterprises, where the inability to attract talented workers
from the labor market makes family members a critical human resource for the firm’s
survival (Chrisman et al., 2003; Schultze et al., 2001). The lower wages and lower
opportunities for career advancement that characterizes these firms reduce the size,
character and quality of the labor pool that serves them (Schulze et al. 2001). Their
inability to offer prospective employees the same terms of employment than in larger
firms implies that they are less able to attract talented workers. This reduced
competition and the associated market inefficiencies derived from private ownership
make it more costly for micro and small firms to guard against adverse selection when
recruiting from outside the firms. Moreover, family employment can result in
performance benefits for the micro firm by adding to the firm’s base of financial,
physical, and social ties (Aldrich and Waldinger, 1990; Steier and Greenwood, 2000;
Brush et al, 2001).
Aldrich and Cliff also highlight the impact of family norms attitudes and values held by
entrepreneurial family members on the firm’s strategies, processes and structures
(p.590). When family members working for the firm exhibit shared norms and values,
the impact on firm performance should be positive as it brings consistency and unity of
purpose (Kets de Vries 1993; Westhead et al. 2001).
IE Business School Working Paper GE8-107-I 22-01-2008
3
This unity of purpose derived from contracts that involves family ties should be
particularly salient in the context of micro and small firms. In this context, the firm’s
social dynamics are still highly organic, with all employees reporting directly to the
founder/business manager. The family employee’s social status is closely tied to his or
her employer, and an enduring attachment means that self-concept and self-esteem are
likely enhanced through long-term identification with the firm (Kets de Vries 1993;
Westhead et al. 2001).
At the same time, the informal nature of familial relations in micro and small firms is
likely to develop kin networks based on strong social ties and a common history
between the manager and its subordinates (Sirmon and Hitt 2003). The presence of
these family networks result in shared values and sentiments of fulfilling family
obligations (Athanassiou, Crittenden, Kelly, and Marquez 2002). Moreover, the
existence of networks based on direct blood ties tempers self-interest, fosters loyalty
and commitment and results in the development of high trust between those involved in
running the business (Taguiri and Davis 1996; Gersick et al. 1997; Davis 1983;
Habberson and Astrachan 1997). In the context of micro and small firms, both trust and
family control can become an effective monitoring system that will provide managers
with disincentives to trade off stockholders welfare for their own without the need to
incur in costly monitoring systems (Fama and Jensen 1983; Lansberg 1983; Ward
1987)
All the above arguments imply that in the specific context of micro and small firms, the
positive effects of employing family members outweigh the costs. Thus we hypothesize
the following:
H1: Family involvement is positively related to firm performance in micro and
small firms
Women as managers and family employment: Effects on Firm Performance:
Even though we argue a positive relation between family employment and firm
performance, as stated in the intro, prior evidence has been inconsistent on the
family/performance relationship. Based on the family-embeddedness perspective, we
argue that theses inconsistencies can be explained by analyzing the specific effect of
WFI determinants. In particular, Jennings and McDougald (2007) have argued that the
influence of work and family and its effects on the firm does not affect male and female
business owners in the same manner.
The authors contend that this is due to differences in the gendered work family interface
experience of entrepreneurs and in particular to differences in terms of work schedule
and autonomy, household time demands, and family responsibility levels. Females have
indeed less work schedule autonomy and flexibility, more household time demands, and
a higher family responsibility level. Furthermore they contend that male and female
entrepreneurs tend to prioritize work and family responsibilities differently, with male
entrepreneurs being able to more easily accommodate work demands and exhibiting less
family role intensity in terms of time and attention. According to their arguments,
women entrepreneurs are less likely to scale back their psychological and behavioral
commitment to family roles.
We believe that given those arguments, family employment in the firm should benefit
more female headed firms than male headed firms. There are several reasons why that
should be the case: First, bringing other family members into the venture can provide a
IE Business School Working Paper GE8-107-I 22-01-2008
4
coping mechanism for the family work divide. Now the family is also in the firm.
Having another family member in the firm, should also increase work flexibility as
another member of the family is in the firm to take over responsibilities when the head
is attending to family concerns. Further, having another family member in the firm can
provide the family more evidence of the amount of commitment necessary to run the
firm and alleviate family pressures on the manager. Thus the presence of a family
member in the firm should help female manager’s better accommodate work and family
demands. Therefore, the benefits of family employment should result in relative better
results for female than to male headed firms.
The second reason deals with Aldrich and Cliff´s arguments that family systems can
affect firm objective performance by providing consistency and unity of purpose in the
implementation of founding strategies, processes and structure (Aldrich and Cliff,
2003). If that is the case, then in female owned firms, those benefits should be stronger.
Women play a prominent role in developing family identity. Since women’s lives are
organized around their family’s needs (Gillis-Donovan and Moynihan-Bradt 1990), they
will strive to make family members feel that they belong, making family employee’s
desire to identify with the business (Edlund 1992; Salagnicoff 1990). In the words of
Poza and Messer’s (2001) they adopt the role of “stewards of the family legacy […]
instilling a sense of purpose, responsibility, and community which yields a spirit of
cooperation and unconditional support,” (Poza and Messer 2001). Such attitudes
would insure that both the concerns of the business and the concerns of family members
are addressed, making it easier for everyone to feel a part of the group’s purpose and to
be committed to the family and to the business. Thus in this case the benefits of family
employment should be stronger.
Lastly, women’s restricted access to capital markets and financial resources makes it
especially difficult for them to take on costs associated with hiring and training
employees (Carter and Allen 1997). These difficulties might also be increased by
women’s embeddedness in social networks that are narro9wer and less diverse that
those of men’s (Buttner and Moore 1997), which puts them in a disadvantage for having
access to an appropriate pool for recruitment. Based on these arguments we hypothesize
that in the particular context of micro and small firms, the ability to generate collective
team identification between family employees would be enhanced when there is a
women managing the firm. Thus:
H2: The positive effect of family involvement on micro and small firm
performance would be higher for women led business.
Household Sources of Income and the Family Employment/Firm Performance
Relationship
Jennings and McDougald discuss the need for coping strategies to help alleviate work
family conflict, in particular the need to accommodate work vs family demands. In the
case of microfirms employing family members, and as stated previously, conflicts
between family and work might occur at the workplace as the two spheres overlap. This
conflict might happen when the family’s main income comes from the business. In this
case, the family will face the often contradictory objective of preserving their socio-
emotional wealth (Gomez-Mejia et al 2007) derived from being employed at the firm
and that of fostering the business’s financial profitability.
IE Business School Working Paper GE8-107-I 22-01-2008
5
The literature on family business is replete with anecdotes that attest to the importance
of the non-economic utilities derived from contract that involves family ties. These
include for instance the satisfaction of deep social/emotional needs for belonging
(Kepner 1983), the satisfaction to contribute to the family business perpetuation
(Handler 1990) or the fulfillment of identification needs (Gomez-Mejia, Haynes,
Nuñez-Nickel, Jacobson, and Moyano-Fuentes 2007). In addition, family members
employed in the firm might also face higher exit barriers because their human capital is
likely to be more firm-specific (Gomez-Mejia, Nuñez-Nickel, and Gutierrez 2001;
Haynes, Gomez-Mejia, Jacobson, Nuñez-Nickel, and Moyano 2004). Lastly, exiting the
firm implies not only losing a secure job, but also reduced status (Casson 1999). This
effect, although present in all type of firms, is likely to become more salient in micro
and small firms, because the existence of alternative employment opportunities is
lowered as a result of reduced dimension and lack of competitiveness.
To the extent that the family employee recognize these benefits and costs as high, he or
she would pursue to protect the family social capital derived from the employment
contract as a primary goal. The problem is that this goal could conflict with more
traditional financial goals of the organization. For instance, a higher emphasis on
performance targets imply strategies directed toward generating revenues and profits,
while preserving socioemotional wealth implies a policy towards supporting and
developing family members (Gersick et al., 1997; Davis and Harberston, 2001). The
conflict between these two different set of goals is likely to be greater when the owner
household’s primary source of income comes from the firm. Under these circumstances,
pressure to solve family financial concerns reduces the flexibility needed to implement
WFI coping mechanism.
Thus, even though we content that employing family members affect positively micro
and small firm performance (as per Hypothesis 1), this effect would be reduced when
the owner household´s primary income is derived from the firm, as the conflict of goals
between protecting family social capital versus pursuing performance target is enhanced
in this case. Formally stated:
H3: The positive effect of family involvement on micro and small firm
performance is lower when the owner’s household primary income
comes from the firm.
As per Hypothesis 3, we stated that in the context of micro firm, the employment of
family members implies the conflict between two set of goals, the preservation of
family social capital and financial performance, that are based on different, and often
incompatible, values and drivers. Consequently, the firm’s success under these
conditions will be contingent on the owner’s ability to integrate both objectives in an
efficient way. In this sense, we contend that women business owner have an advantage
over their male colleagues in facing in a productive manner this kind of situation.
Indeed, women’s traditional role of caretakers of family concerns and nurtures (Gilligan
1982; Belenky, Clinchy, Goldberger, and Tarule 1986) gives them a greater ability to
establish coping strategies that deal with the work-family interface (Hollander and
Bukowitz 1990). Morevoer, Ruderman et al (2002) demonstrated that multiple role
commitment can improve women managerial skills. Men, traditionally educated in a
logic that considers these two domains as incompatible would have more difficulties in
balancing both sets of conflicting goals (Levinson 1986). The above-mentioned
IE Business School Working Paper GE8-107-I 22-01-2008
6
tendency of men business owners to focus on professional goals and neglect emotional
ones in the workplace might find itself heightened under the pressure of economic
necessity which, in turn, would reinforce family employee’s perception of conflict and
discomfort with work environment.
Additionally, in the context of microentreprises operating in developing countries,
women might be especially well-equipped to deal with the simultaneous goals of family
preservations and economic welfare (Blumberg 1998). As stated by Espinal and
Gusmuack (Espinal and Grasmuck 1997): “ Policy makers concerned with increasing
resources to the poor have sometimes noted the importance of directing economic
outlays (either as transfers or wage-earning opportunities) to female rather than male
heads of households, since there is some evidence that women are more “efficient”
utilizers of resources to improve the well-being of their children”. In fact, mounting
evidence in this sense have fostered the multiplication of initiatives directed mainly
towards women micro-entrepreneurs such as the Grameen bank (Pitt and Khandker,
1998).
Based on these arguments and evidence, we expect that women’s greater ability to cope
with family-work conflict would reduce the negative impact of family employee’s
continuance commitment on micro firm performance. As a result of this we
hypothesized the following:
H4: The negative effect of having owner’s household primary income coming
from the firm on firm performance would be reduced for women led
micro and small firms.
SAMPLE AND METHODOLOGY
Data for our study is drawn from a national survey on micro and small enterprises
conducted through personal interviews in Dominican Republic, and conducted by an
independent think tank interested in issues of micro-enterprise development. The
survey, based on personal interviews, tracked firms from March 1998 through March
2000 and requested a broad array of information related to business characteristics,
owners’ demographics, as well as the evolution of business sales during these years.
For the study, the country was divided in representative areas, and from a
selection of these areas, census of all exiting firms were undertaken every year. For the
following years, interviews were done of all interviewed the previous year that still
existed. The data used for this study represent urban areas and are categorized into
three geographic units: Santo Domingo (the capital), other major cities, and the rest of
the country.
Because of the high exit rate of the micro and small business population, only 875 firms
were included for this study out of the 1450 registered firms initially interviewed in
1998. Out of these firms, we ended up with a sample of 537 firms because of missing
data and coding errors. Although this means that our study is not based on a total
coverage of the population, it should not affect the generalizability of our results to
similar contexts. Indeed, the contribution of our paper lies in understanding how
situational factors affect the relationship between family involvement and business
performance, rather than estimating population parameters.
IE Business School Working Paper GE8-107-I 22-01-2008
7
Variables
Dependent variables:
Following the entrepreneurship literature, data on firm performance were based on the
most frequently used operationalizations: sale’s growth and profitability (Brush and
Vanderwerf 1992), which were asked for in the survey. Although not ideal, several
studies have found evidence that supports the reliability of founder-reported
performance measures (Anna, Chandler, Jansen, and Mero 2000). In particular, we
measure sales’ growth as an ordinal variable comprised of 10 categories that measures
the percentage of increase in sales between 1998 and 2000. As previously mentioned,
growth is a variable commonly used in the literature on small business and performance
(Wiklund 1998). Moreover, it has been demonstrated that firm’s size (measured in
terms of sales) is the single greatest predictor of income among small capitalists
(Aldrich and Weiss 1981). In order to assess firm profitability, our study used two
complementary measures: profits and ROA. The first, a continuous variable expressed
in logarithms, was computed as the average of the monthly profits declared by the
owners during the three consecutives years of the survey. As such, our data presents the
advantage of avoiding biases due to exceptional results achieved in a specific year.
Following Watson and Robinson’s (Watson and Robinson 2003) recommendations
regarding the importance of assessing firm profits in relation to the risk taken by the
business owner, we used the Return on Assets as a second measure of profitability. This
variable, also continuous, was computed as the ratio of profits on assets.
Independent variables:
Family involvement: this indicator was captured as a dichotomous variable with 1
indicating the presence of family members among employees and 0 otherwise.
Gender: Gender was measured with a dichotomous variable, taking the value 1 for
female and 0 for male business owners.
Income: In order to capture the importance of the business in the overall economic
survival of the family, the owner was asked about the origin of the household’s main
regular income. The resulting variable took the value of 1 when the answer was the
firm, and 0 in the other cases.
Control Variables:
In the explanation of firm performance, and following existing research, we controlled
for several owners and business characteristics:
Owner age: this continuous variable measured in years, was included since older
business owners have been generally associated with more successful firms (Cooper,
Dunkelberg, and Woo 1988).
Owner education: the same applies for this variable, which was measured as a
dichotomous variable with 0= no university education, 1= at least some university
education.
IE Business School Working Paper GE8-107-I 22-01-2008
8
Prior entrepreneurial experience: this dummy variable (1= yes, 0= no) also encloses
information regarding the owner’s human capital and is considered as having a positive
influence on the firm’s outcome (Brüderl, Preisendorfer, and Ziegler 1992).
Firm age: continuous variable measured in months and in logarithms.
Firm size: continuous variable measured in number of employees.
Homebased business (HBB): this dichotomous variable indicates whether the business
was operated from home or not (dichotomous variables). Stanger (Stanger 2000)
suggested that the flexibility offered by HBB may be gained at the expense of reduced
sales. In fact, the difficulty in separating work and personal life (Good and Levy 1992)
might significantly reduce the number of hours dedicated to the business by owner,
which should influence negatively economic success. Moreover, this variable was
introduced in order to control for the greater reliance of women on this kind of venture
(Mirchandani 1999), and especially in contexts such as the Dominican Republic
(Espinal and Grasmuck 1997).
Industry: following previous literature (Gimeno, Folta, Cooper, and Woo 1997) industry
was classified in five dummy variables in order to capture the influence of the industry
environment on firm performance. These categories were Manufacture and
Construction
1
, Retail and wholesale trade, Restaurants and hotels, Skilled services
(business and professional services; finance, insurance, real stat) and Personal services.
Firm geographic location: due to the difficulties in collecting comprehensive
information about the competitive environment of an organization in survey, and as a
complement to the information offered by the industry, we took into account the
regional location of the business (Brüderl et al. 1992) by differentiating between those
located in main urban areas from those outside them. Competition is indeed much
heavier in the capital and main cities than in other urban areas. The result is a
dichotomous variable that takes the value of 1 for main urban areas and 0 for the rest.
RESULTS
Table 1 shows business characteristics of the firms analyzed in this study as well as the
demographic and personal characteristics of their owners. Consistent with studies on
microentreprises (Chell and Baines 1998) and, in particular, those located in Dominican
Republic (Espinal and Grasmuck 1997), firms in our study are managed in general by
adults in their forties and with low formal education. The economic importance of the
microentreprise sector is confirmed by the fact that, despite their small size (almost 3
employees on average) they provide the owner and his family with his main source of
living in more than 60% of the cases. In terms of industry affiliation, these firms
concentrate mainly in the wholesale and retail sector, followed by the manufacturing
industry, and remain underrepresented in other sectors of higher value added, such as
skilled services.
___________________________
Insert Table 1 about here
____________________________
1
Since our sample is composed of micro and small businesses, only 2 cases pertaining to the construction
industry were identified, and included into the category of manufacture.
IE Business School Working Paper GE8-107-I 22-01-2008
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Table 2 shows the bivariate correlations between the main variables of the study.
Means and standard deviations are also presented. In general, intercorrelations are
consistent with our expectations. Correlation coefficients are overall significant, but the
magnitude of these correlations are modest with the highest being 0, 50. Hence no
problem of multicollinearity has been detected.
___________________________
Insert Table 2 about here
____________________________
Hypotheses were tested using hierarchical regression analysis. As customary,
control variables were entered first, followed by main effects. Multiplicative terms were
added later to examine the hypothesized interactions. Results are showed in Table 3,
with measures of firm growth, profits and ROA as the dependent variables.
___________________________
Insert Table 3 about here
____________________________
Model 1 is the base model that includes only control variables. This model shows that
overall, the control variables have a opposite effect on growth and profits on the one
hand and on ROA on the other hand. This result points out to the importance of
differentiating between indicators of growth and income and those of economic
efficiency. Of all the controls, the size of the business and whether it is operated from
home are the two indicators that affect all indicators of performance. However, while
business size is positively related to firm growth and profits, it seems to affect
negatively indicators of financial efficiency such as the ROA. Similarly, businesses that
are homebased grow less and generate lower profits than those operated outside home
but seem instead to make a more efficient use of their assets, with a positive effect on
ROA. While having no apparent effect on growth, industry is related to profits and
ROA through its manufacturing and skilled services sectors, which influence negatively
the former and positively the latter. In other words, microentreprises operating in these
sectors might generate lower profits but make a more efficient use of their assets.
Consistent with previous research, (Bates, 2002; Cliff Langton and Aldrich, 2005).
Our results show the existence of performance differential female and male headed
firms. Finally, and regarding demographic characteristics, owner’s age influences
positively ROA although surprisingly, these same indicators are affected negatively by
university education.
Model 2 introduces the effect of family involvement. As expected, this variable had a
significant impact on the three indicators of performance firm performance, bringing
about the largest increment in R
2
with respect to the base model in the case of sale’s
growth and ROA. However, this result provides only partial support for hypothesis 1 as
the effect is positive for firm growth (and profits) but it is of opposite sign when it
comes to the ROA. This suggests that overall, family employee’s contribution to the
business is not cost effective, and the relative increase in profit it might generate is
offset by an increase in the corresponding needs in terms of resources.
Models 3 and 4 include respectively the interaction of gender and income with family
involvement. In support of our expectations, women seem to know better than men how
IE Business School Working Paper GE8-107-I 22-01-2008
10
to make the most of family implication the business. Scatterplot nº1 offers additional
support to hypothesis 2, showing that while women-owned businesses owned with no
family employees underperform male-owned ones, the involvement of family
employees incurs in gains in sales that are much more considerable for the former than
for the latter (see graph 1). In the same vain, the drop in ROA produced by family
involvement is smoothed when this participation is managed by a women. Instead, it is
much steeper when the owner is a male, resulting in a ROA indicator that is inferior to
that of women (see graph 2). These results are significant for both indicators of firm
performance, although the R
2
change is far more significant for growth and profits than
it is for ROA.
___________________________
Insert Graph 1 and Graph 2
about here
____________________________
The negative significant coefficient for the interaction term between income and
family involvement gives support for hypothesis 3. As predicted, the motive that
induces a family member to work in the family firm is a factor that makes a difference
in terms of the impact of his involvement on firm performance. Results indicate that the
dependence on the business as the main source of household income offsets family
employee’s positive impact on the firm’s economic indicators (see graphs 3 and 4). This
situation is clearer when we assess business outcomes in terms of growth and profits
than using the ROA. Indeed, while the R
2
change brought about the interaction is
significant for the formers, this is not the case for the latter.
___________________________
Insert Graph 3 and Graph 4
about here
___________________________
Finally, and contrary to our expectations, results lent no support to hypothesis 4. Indeed,
the inclusion of the three-way interaction between family involvement, income and
gender, had no significant impact on any indicator of performance.
DISCUSSION
This study uses a family embeddedness perspective and heeds Jennings and
MacDougald´s (2007) recommendation of extending the WFI model by testing the
direct impact of work family conflict on business performance (page 19). Our results
indicate that in the context of micro and small enterprises, the presence of employment
contracts involving family ties contribute to increase sales. Family employment,
however, does not increase profitability. In fact, the results show the opposite: the
presence of family members is negatively related to firm’s profitability as measured by
ROA.
These findings might help to explain contradictory previous findings regarding the net
effect of family employment, since they indicate the importance of distinguishing
between growth and profitability measures to capture firm performance. These results
suggests that the owner’s intention to provide family members not only with secure
employment, but also with perquisites and privileges that they would not otherwise
IE Business School Working Paper GE8-107-I 22-01-2008
11
received (Ward 1987), while helping increase firm sales, is going to negatively affect
firm’s profitability. This is to say, the owner’s intention to divert resources to pursue
non economic goals diminishes firm profitability, even in the absence of agency cost
because managers conform to these issues. The benefits obtained from increasing
affective commitment with employment of family members do not offset the costs
associated with the inefficient use of firm resources when examining firm profitability,
but they do with respect to increases in sales.
Furthermore, these costs are likely to be greater for micro firm since agency costs
traditionally associated with privately held and owner managed firms (i.e adverse
selection problems associated with the inefficiencies of the labour markets or hold up
problems derived from owner’s opportunism) could be also more severe.
Thus, our results are in line with Meyer and Zucker’s assertion that micro and small
family firms live in a state of “permanent failure,” which they define as “a condition
characterized by sustained low performance and high persistence” (Meyer and Zucker
1989)(p. 68). Perhaps family firms may be able to do this because they have access to
what some refer to as “patient capital” or “survivability capital” (Sirmon and Hitt 2003)
that other firms may be unable to access. Given this argument it would be important to
explore the persistence of underperforming firm in the context of family and micro
enterprises. Research (Gimeno et al. 1997) has examined why underperforming firms
stay in markets. It is possible that for the reasons argued previously, family and micro
enterprises are more likely to persist while underperforming than other enterprises.
The data also support the notion that the “business dualism” (Kepner 1983) that
characterizes firms that involves employment contract with family ties ultimately
influences the decision making process in family firms and distinguish it from that of
non-family firms. In particular, our results confirm that the benefits of family
employment are reduced when the owner’s household primary income comes from the
firm. In this situation, the conflict of goals between protecting socioemotional
endowment and targeting performance goals is enhanced. Wealth concentration in a
single business, deep emotional attachment to that business, and limited employment
opportunities outside that business means that organizational failure would be seen as
truly catastrophic. This is likely to place the firm manager and his employees under a
great deal of stress. Our results confirm that whatever the contingencies, family
involvement in the business for negative reasons (such as an economic necessity or lack
of alternatives) has an adverse impact on performance.
Data also support the notion that the woman family managers may understand better
than their male counterparts how to manage family employee’s commitment and use it
to the firm´s advantage. As Frishkoff and Brown (1993) state: “ She may convince
others that considerate caring relationships in family business contribute to effective
management”” (p. 69). This advantage implies that when the firm is lead by a woman,
family involvement’s positive impact on growth and profits is higher and its negative
influence on ROA is relatively tempered. This point is critical for understanding the
importance of fostering women’s implication in decision-making of their family
businesses, and not just as a sidekick (Folker, 2003). As Aronoff (Aronoff 1998),
suggested, of the megatrends in family business is the expansion of women’s roles from
the widow, supportive wife, and “chief emotional officer” to a wider range of roles
including sibling ownership and ownership teams.
A caveat of course is that ours is but one study that examines the family performance
relationship from a family embededness perspective. Further research is needed to
IE Business School Working Paper GE8-107-I 22-01-2008
12
confirm these results and to examine which other contingencies inform the family-
performance relationship. In the context of micro enterprises we contend that those
effects should be magnified. It would be interesting to examine the persistence
of effects in contexts such as large family enterprises, and to see whether those effects
persist. As the firm grows and the division of labor deepens, its structure becomes more
formalized and professionalized (Blau 1970; Blau and Scott 1962; Hellman and Puri
2002). Roles become more defined, coordination becomes more formal, and controls are
instituted to facilitate organizational activities. At the same time, adverse selection
problems and hold up issues diminish. What would be the net effect of family
involvement on performance in these companies? Given the predominance of family
employment all over the world, more research efforts should be devoted to investigate
these issues.
Our study also has limitations of data and method. For example, we relied on self-
report data to assess firm performance. Objective performance measures would have
been desirable, but because the family firms in our sample were not publicly traded that
data was not available. However, our performance measure has often been employed in
the literature (Dess and Robinson 1984).
In conclusion, our study contributes to the current literature by expanding the family
embeddedness perspective by exploring the extent to which family involvement in the
business makes a difference on firm performance, both in terms of sales and in terms of
profitability, for established firms. Also important, we provide empirical evidence of
Jennings and McDougald´s (2007) work family interface on firm performance
framework , and in particular provide evidence of the role that gender, and family
primary sources of income play in the family employment, firm performance
relationship.
IE Business School Working Paper GE8-107-I 22-01-2008
13
Table 1: Descriptives for Business and Owner
Variable Descriptive (mean or
percentage)
Owner age (years) 42,7
Owner’s university education (%)
- Yes
- No
15,5
84.5
Gender (%)
- Male
- Female
51,8
48,2
Previous entrepreneurial experience (%)
- Yes
- No
25,4
74,6
Business is main income (%)
- Yes
- No
60,2
39.8
Business age
4,2
Business size (average number of employees) 2,45
Family involvement (%)
- Yes
- No
43,4
56,6
Homebased business (%)
- Yes
- No
58,5
41,5
Industry (%)
- Manufacture
- Wholesale and retail
- Hotels and restaurants
- Skilled services
- Personal services
25,5
50,3
6
5,4
12,8
Business located in main cities (%)
- Yes
- No
67,1
32,9
N
573
IE Business School Working Paper GE8-107-I 22-01-2008
14
Table 2: Descriptives and Bivariate correlations
N = 537
+ p ≤ .10 ; * p ≤ .05 ; ** p≤ .01
Mean
S.
D.
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17
1
Business Age
4,2 0,9 1
2
Business size
2,4 2,4 ,09* 1
3 Business
location
0,7 0,5 ,02 ,12** 1
4 Homebased
business
0,6 0,5 -,14** -,27** -,15** 1
5 Industry_
Manufactu
0,3 0,4 ,04 ,02 -,01 ,15** 1
6 Ind_ hotel and
rest.
0,1 0,2 -,04 ,08 -,01 -,09* -,14** 1
7 Ind_ skilled
services
0,1 0,2 ,03 ,01 ,00 ,05 -,14** -,06 1
8 Ind_ persona
service
0,1 0,3 ,01 ,01 ,13** -,09* -,22** -,09* -,09* 1
9
Owner’s age
42,7 13 ,23** -,05 -,07 ,07 ,00 ,03 ,01 -,21** 1
10 Owner’s univer.
edu.
0,2 0,4 ,03 ,34** ,22** -,26** -,04 -,04 ,05 ,19** -,16** 1
11 Prior entr.
experience
0,2 0,4 ,04 ,02 ,01 -,03 -,07 -,01 -,05 -,08* ,05 -,08 1
12 Family
involvement
0,4 0,5 ,05 ,19** -,02 -,12** -,06 ,10* -,13** -,09* ,01 ,03 ,01 1
13
Gender
0,5 0,5 -,11* -,19** -,08 ,33** ,10* ,01 ,04 ,16** ,01 -,09* -,06 -,17** 1
14
Main income
0,6 0,5 ,22** ,21** ,12** -,22** -,01 -,01 -,07 -,05 -,01 ,17** ,02 ,14** -,37** 1
15
Sale’s growth
3,2 1,5 ,01 ,15** ,08 -,15** ,04 -,038 -,03 ,01 -,07 ,12** ,05 ,36** -,08 ,10* 1
16
Profits (log)
8,2 1,5 ,22** ,41** ,32** -,45** -,09* ,029 -,05 ,04 -,19** ,36** ,06 ,24** -,48** ,50** ,23** 1
17
ROA (Log)
5,6 2,4 -,01 -,17** -,08 ,26** ,13** -,034 ,12** -,08 ,13** -,19** -,01 -,18** ,09* -,06 -,13** -,14** 1
IE Business School Working Paper GE8-107-I 22-01-2008
15
Table 3: Hypothesized effects
Dependent variable: Sale’s growth Dependent variable: Profits (log) Dependent variable: ROA (log)
Model 1 2 3
2
4
2
5
2
1 2 3 4 5 1 2 3 4 5
Business age (log) -,013 -,027 -,021 -,029 -,027 ,190** ,185** ,167** ,127** ,122*** -,017 -,013 -,013 -,018 -,017
Business size ,106* ,042 ,050 ,040 ,059 ,236** ,211** ,184** ,172** ,161** -
,090*
-,067 -,066 -,069 -,068
Business location ,034 ,046 ,044 ,049 ,055 ,212** ,216** ,201** ,196** ,193** -,019 -,024 -,027 -,022 -,023
Homebased business -,116* -,094* -,095* -,089* -,095* -
,272**
-,263** -
,176**
-
,218**
-,165** ,183*
*
,175** ,185*
*
,181*
*
,184*
*
Industry_manufacture ,047 ,083+ ,103* ,091* ,112* -,087* -,073* -,025 -,053+ -,026 ,128*
*
,116** ,130*
*
,122*
*
,127*
*
Industry_hotel and
restaur.
-,048 -,063 -,068+ -,058 -,067+ -,018 -,024 -,004 -,001 ,014 ,007 ,013 ,014 ,018 ,015
Industry_skilled
services
-,001 ,047 ,067 ,055 ,068+ -,085* -,066* -,039 -,057+ -,015 ,130*
*
,116** ,124*
*
,122*
*
,127*
*
Industry_personal
services
-,016 ,031 ,022 ,032 ,018 -,107* -,088* -,019* -,030 -,021 ,022 ,006 ,010 ,009 ,006
Owner’s age -,045 -,043 -,055 -,046 -,056 -
,189**
-,188** -
,181**
-
,179**
-,174** ,107* ,107* ,104* ,106* ,100*
Owner’s university
educat.
,061 ,063 ,058 ,056 ,048 ,149** ,150** ,149** ,134** ,135** -
,110*
-,110* -
,112*
-
,117*
-
,117*
Prior entrepren. ,050 ,056 ,060 ,065 ,062 ,045 ,047 ,046 ,063* ,058* ,003 ,001 ,002 ,008 -
2
Changes in R2 are with respect to Model 2
IE Business School Working Paper GE8-107-I 22-01-2008
16
experience ,226+
Family involvement ,356** ,184** ,461** ,278* ,140** ,045 ,268** ,191* -,132** -
,211*
*
-,042 ,006
Gender -
,158**
-,196* -
,370**
-,276** -
,106+
-,157
Main income
,093+ -,020 ,422** ,300** ,093+ -,017
Family involvem. x
Gender
,290** ,191+ ,110* ,035 ,128* ,201+
Family inv. x Main
income
-,158* -,116 -
,225**
-,164+ -
,135+
,018
Main income x
Gender
,066 ,054 ,101
Family involvement x
Main income x
Gender
,102 -,014 -,122
Adjusted R squared ,034 ,152 ,184 ,156 ,186 ,412 ,430 ,511 ,535 ,569 ,114 ,129 ,133 ,132 ,131
R squared Change .054** .116** .035** ,007+ ,042** ,425** ,018** ,081** ,104** ,141** ,133*
*
,016** ,008+ ,006 ,012
F 2,724*
*
8,927*
*
9,592*
*
8,008*
*
7,740*
*
34,943
**
34,406*
*
40,662
**
44,670 39,963*
*
7,072
**
7,386** 6,687
**
6,596
**
5,334
**
N = 537. Standardized regression coefficients are shown in the table ; + p ≤ .10 ; * p ≤ .05 ; ** p≤ .01 ;
IE Business School Working Paper GE8-107-I 22-01-2008
Graph 1: T he moderating effect of gender on the relationship between family
involvement and firm growth
Graph 2: T he moderating effect of gender on the relationship between family
involvement and firm growth
IE Business School Working Paper GE8-107-I 22-01-2008
18
Graph 3: T he moderating effect of income on the relationship between family
involvement and firm growth
Graph 4: T he moderating effect of income on the relationship between family
involvement and ROA
IE Business School Working Paper GE8-107-I 22-01-2008
19
IE Business School Working Paper GE8-107-I 22-01-2008
20
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NOTAS
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