keeping control

Strategy & Organizations

Keeping Control: Family Businesses’ Winning Strategy in Commercializing Innovations

The ubiquitous nature of family businesses

From mom-and-pop shops you find across the street to global giants like LVMH – the Arnaults, EXOR – the Agnellis, and Walmart – the Waltons, family businesses are everywhere. As business enterprises, they value wealth creation through innovation, growth, profit, and related business practices. At the same time, however, they pursue family-centered values, such as maintaining control over the business and key strategic resources as well as preserving their legacy for future generations that nonfamily businesses care less about. Given the pervasiveness of family businesses, the implications of their strategic choices along these two lines are relevant not only for companies themselves but also for economies more broadly.

Family businesses’ peculiarity in strategy choices

Studies have shown that family businesses indeed consider these family-centered values in their business decisions seriously and pursue strategies that differ from nonfamily businesses. For example, family firms are characterized by their lower tendency to internationalize, engage in mergers and acquisitions, diversify into different industries, and divest their businesses. While this tells us that family values influence key strategic choices in the company, it says little regarding whether this peculiarity imposes a tradeoff on economic returns, and how they navigate this process.

Does nurturing family centered values impose potential tradeoffs on economic returns?

To answer this question, we examine whether family businesses differ from nonfamily businesses in exploiting their patented inventions and how they handle these two values, economic returns, and the desire to have a tight grip over their inventions. We used a rich survey response from a sample of inventors who applied for patents in the European Patent Office between 2003 and 2005, along with comprehensive patent and firm characteristics from secondary sources. Our analysis is based on 471 companies and 2759 patents.
A patent grants inventors the exclusive right to make, use, or sell their invention, whether it is a new gadget or a novel method. This exclusive right is conferred by government authorities in exchange for a detailed disclosure of the invention in a patent application, making it available to the public.
Companies can capitalize on their patented inventions both internally and externally. Internally, they may integrate the invention into new products or processes, while externally, they can generate revenue by licensing or selling their patents to others. The choice between internal commercialization and licensing (selling) has significant implications for a firm’s control over its technology.
Licensing patents can yield financial returns with minimal additional investment post-patenting. However, it entails relinquishing control over the technological assets, a matter of great concern for family firms. By licensing, they depend on the success of another party and trust that the licensee will effectively generate revenue and adhere to the licensing agreement without compromising the licensor’s competitive position.

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In contrast, internal commercialization allows firms retain control over their innovations, managing the financial returns based on their capabilities in production, marketing, and distribution and enhance their competitiveness in the technology domain. However, this reliance on internal capabilities may limit their ability to exploit their technology compared to nonfamily businesses, which often leverage both internal commercialization and licensing. This presents a tradeoff between retaining technology in-house and maximizing the exploitation of patents.
In our study, after accounting for other key factors that may influence the likelihood of licensing or internal commercialization of patents, such as the quality of the patent in both technological and commercial terms, its relation to the firm’s patent portfolios, firms’ access to downstream resources that can facilitate internal commercialization, the level of competition in the technology domain, the technology class of the patent, and the country where the patenting company is located, we observed some intriguing differences between family and nonfamily businesses in their preferences for licensing and internal commercialization.

Our main findings

Family businesses are approximately 3.5% less likely to license their patents compared to non-family businesses. This discrepancy is quite significant, constituting about 29% of all licensing activities observed in our sample. Conversely, they are approximately 6.3% more likely to utilize their patents internally within their own companies compared to non-family businesses, which accounts for approximately 9% of the total internal commercialization observed in our sample. Family firms excel in leveraging their in-house capabilities to exploit their patents internally, surpassing nonfamily firms in this regard.
Despite these differences in their preferences for a particular method of commercial exploitation, the overall percentages of patents used through licensing and internal commercialization are similar between family and nonfamily businesses. This finding provides two important insights: Firstly, family businesses indeed value maintaining control over their technology. Secondly, they are capable of offsetting their lower likelihood of licensing by a higher likelihood of internal commercialization of their patents, thereby effectively avoiding tradeoffs.

The case of Equifinality than tradeoff at the company level

The findings indicate the existence of equifinality in the efficiency of patent commercialization by family and nonfamily businesses pursuing different strategies. By prioritizing internal over external commercialization, family businesses demonstrate a sophisticated balance between their economic ambitions and their non-economic goals of control and legacy preservation.
Family firm’s closely-knit governance structure and management style is the key enabler to avoid tradeoffs as they juggle these two values: control and economic returns. Specifically, we observe that unlike nonfamily firms, family firms exhibit greater flexibility in shifting their focus from licensing to internal commercialization by actively seek and seize internal commercial opportunities and proactively investing resources to develop and commercialize even serendipitous inventions internally. This demonstrates their strategic agility and commitment to leveraging in-house commercialization opportunities as the shy away from licensing their patents. The ability of family firms to integrate their economic and non-economic values into a cohesive strategy challenges the prevailing notion that these aspects are mutually exclusive. It illustrates that family firms can successfully navigate the complexities of innovation and commercialization, aligning their strategic decisions with both family values and economic goals.
Potential negative welfare effect at the macro level: While this is the case at the company level, this choice significantly influences the development of technology markets. As a technology market matures, it benefits both innovators and the public by facilitating access to various technologies, enabling idea exchange among companies, and fostering the integration of diverse knowledge to accelerate innovation, technology transfer, and specialization.
However, when family-owned businesses opt to keep their technology proprietary rather than licensing (selling) it, it impedes the expansion of the technology market. This restricted access to patents limits opportunities for other entities to utilize or acquire them. Consequently, the lack of sharing stifles the specialization of companies in generating novel ideas and transforming them into marketable products, particularly in regions where family-owned businesses dominate in the innovation domain.
In summary, the strategic management of patents within family businesses embody governance arrangements and managerial practices that enable them to strike a balance between maintaining control over their key strategic resources without giving up on their economic gains. This nuanced approach to innovation management while seems optimal at the company level, it has a significant implication for the development of technology markets and the broader innovation ecosystem.