Along with identification with the territory, a strong level of local economic integration stands out as a complementary element of the foundation of local embeddedness of family firms. This refers to the extent to which a given firm relies on the local context as a source of labor, materials, and a market for final output and information (Courtney et al., 2008). Family firms depend heavily on the local setting as a source of generic and strategic inputs with local contextual factors and circumstances that, therefore, may strongly influence their behavior, survival, and competitiveness (Backman & Palmberg, 2015). The attributes and historical background of the family appears to be crucial for the intensity—expressed in terms of duration, frequency, and monetary value3—of the firm carrying out its economic transactions locally (Kalantaridis & Bika, 2006). A firm's headquarters corresponds typically with the place the founder was born, where the business venture started, and where the entrepreneurial dynasty is continuously nourished (Pallares-Barbera et al., 2004). This link, which is physical, emotional, and socioeconomic, is rarely severed; rather, it becomes the socio-spatial platform from which new growth paths, mainly through expansion in extra-local/regional markets, begin (Kontinen & Ojala, 2012; Amato, Basco, Backman & Lattanzi, 2020).

By virtue of their historical connections with a given place, family firms are in a position to adhere to and influence the establishment of a set of common habits, routines, established practices, and value of conducts prevailing in the socioeconomic *milieu* (Pallares-Barbera et al., 2004); to develop a common knowledge base and expertise characterizing the local area (De Massis et al., 2016); and to build trust-based and reciprocal relationships with physically proximate local actors (Stough et al., 2015). This, in turn, "facilitates contacts, improves bargaining capacity, and attracts and maintains favorable conditions for the firm" (Pallares-Barbera et al., 2004, 648). This is deemed to explain performance divergences among family and non-family firms in more remote regions, such as rural areas (Backman & Palmberg, 2015; Baù et al., 2018; Greenberg, Farja, & Gimmon, 2018), and local production systems, such as industrial districts (Cucculelli & Storai, 2015) and business clusters (Pucci, Brumana, Minola, & Zanni, 2017), whereby family firms tend typically to exhibit stronger economic integration in the locality (Amato, Basco, Gomez-Anson, Lattanzi, 2020; Courtney et al., 2008). What's more, proximity dimensions become crucial for acquiring tangible and intangible resources and, hence, for competing successfully (Boschma, 2005). Finally, the strong local roots of family firms are found to shape the competitiveness of the region itself. By aggregating the collective actions of family firms, current empirical evidence shows how the regional innovation output is related to the density of family firms present in that region (Berlemann & Jahn, 2016; Block & Spiegel, 2013).

Therefore, given the aforementioned arguments, we posit the following hypothesis:

Hypothesis: *Being a family firm is positively associated with the degree of local embeddedness.*

# **Empirical design**

### *Data and variables*

In order to empirically analyze how the ownership of a firm—where we distinguish between family and non-family firms—relates to its local embeddedness, we used register data from Statistics Finland covering the years from 2006 to 2014. The data has restricted public access as it allows for detailed analysis by providing information about the firm, its employees, CEO, managers, and also the connection to other important stakeholders such as the chairperson and other board members. It is further possible to assess information at the individual level regarding where the different stakeholders live and work. The data are longitudinal, which means that we can track individuals and firms over time. By combining information about the individual and the firm, we built several measures that capture the local embeddedness of the different stakeholders.

First, local embeddedness is measured as *place tenure,* which refers to the number of years an individual has lived in the same municipality as the local firm. The second measure entails the geographical distance between the stakeholder and the local firm—that is, *distance to firm*—measured in kilometers. To capture local embeddedness from a wider perspective, both place tenure and the distance to the firm were calculated for each firm stakeholder. We used several stakeholders engaged in a firm through management, ownership, and at the organizational level, who are important for the firm's development: (i) the CEO, (ii) the owner, (iii) other managers, (iv) non-managers, that is, employees, (v) the chairperson of the board, and (vi) other board members. Thus, we get a composite measure of local embeddedness with 12 indicators in total, each corresponding to different categories of stakeholders for both place tenure and distance to the local firm.

In order to differentiate family firms from non-family firms, we used the Finnish Longitudinal Employer-Employee Data (FLEED) combined with data from the Population Register Centre. For the purpose of differentiating firms' family ties, information on each individual's spouse and matches between children to their parents was utilized. By using this, we identified the parents of the lion's share of the individuals in the working population and also many of the grandparents. The family ties were used to identify family firms. Data accessed through the FLOWN (Finnish Longitudinal Owner-Employer-Employee Data) database further allowed us to assess the ownership structure of each firm where the individual data could be matched to the ownership data, thus enabling us to identify who owns different shares of a firm. Family firms are, in this chapter, defined as firms where the majority of the owners belong to the same family, following (Litz, 1995; Villalonga & Amit, 2006). Families are defined as individuals, who (i) own shares of the firm either directly or indirectly, are (ii) connected by family ties, and (iii) jointly own the highest share of the firm, compared to other individuals. For detailed information about the construction of the variable, please see Peltonen (2018). To distinguish the different firms, a binary variable was used, denoted "1" for family-firms and "0" for non-family firms.

In the empirical estimations, we control for the basic firm and municipal features that influence the local embeddedness of individuals: firm age, firm size in terms of number of employees, financial development in terms of turnover and total assets, whether the firm is part of a multi-establishment firm, and the size of the municipality. The following table presents the descriptive statistics for the variable of interest (local embeddedness), divided into family and non-family firms (Table 7.1).

The descriptive statistics for local embeddedness separated into family and non-family firms show a coherent picture where the former are more locally embedded compared to the latter. Family firms have a higher level of place tenure—i.e., all the different stakeholders have lived in the same municipality as the local firm for a longer time—compared to their non-family counterparts. In some cases, there are significant differences. For example, the average years a chairperson in a family firm has lived in the same municipality is 12.6 compared to 10.5 for the chairperson in non-family firms. In relation to the distance to the local firms, we observe the same pattern where stakeholders in family firms have on average a shorter distance to their firm compared to stakeholders in non-family firms. Based on the embedded measures used in this chapter, we find that family firms are more locally embedded than non-family firms in terms of their stakeholders. The relationship between local embeddedness and firm performance is something that has been discussed in previous studies (Backman & Palmberg, 2015; Baù et al. 2018; Bird & Wennberg, 2014). It should be noted that there is a large variation in both the place tenure and distance to local firms among stakeholder, regardless of ownership structure, as indicated by the large standard deviations.

In relation to firm-specific characteristics, family firms are on average older and larger compared to non-family counterparts. That the firms are older can naturally lead to stakeholders having greater embeddedness in terms of place tenure. This is reasonable since we measured the number of years the individual has lived in the same location as the firm. Older firms that have not changed location thus enable a person to live longer in the same location as the firm and for the person to be engaged in the firm for a longer period of time compared to a younger firm.

*Table 7.1* Summary statistics of the focus variables of local embeddedness in family and non-family firms

Note: \*, \*\*, and \*\*\* indicates significance at 5%, 1% and 0.01%. Errors clustered at the firm level.

### 148 *Stefano Amato et al.*

#### *Empirical model and results*

The descriptive statistics show that stakeholders in family firms are on average more locally embedded. In addition, they show that family firms are on average older, which, in fact, could enable the stakeholders of the firm to be more rooted to the territory, as measured through place tenure. Thus, there seem to be factors associated with family firms that relate to the level of local embeddedness. In the next step, we therefore perform a random effects estimation to capture whether stakeholders in family firms are more embedded, controlling for firm and location specific effects. The estimations performed are described in Equation 1.

$$\text{Loc.}\\_emb\_{l,1} = \alpha + \beta\_l\\\text{Family }\;firm\_{l,1} + \gamma X' + \text{Year}\_l + \text{Industry}\_{l,1} + u\_{l,1} + \text{c}\_{l,1} \tag{1}$$

Here *Loc*. *embit* is the local embeddedness measure for both place tenure and distance to their respective local firm for all six stakeholders; there are 12 variables in total. *Family firmit* is a dummy variable that is "1" for family firms and "0" otherwise. *X*′ is a vector that captures the control variables at the firm and municipal level. β1 and γ are the parameters to be estimated. *Year* captures the fixed effects for the different years (2006 to 2014) and *Industry* controls for the 2-digit industry codes of the firm. *uit* is the between-entity error and ε*it* is the within-entity error. Standard errors are clustered at the firm level.

Having access to panel data allows us to explore the data in more detail compared to using a cross-section or a time-series model. Normally, when using panel data, a fixed or a random effects model is used. An advantage of the random effects model in our case is that it allows us to add timeinvariant variables that would otherwise be captured by the individual/ firm fixed effects. In this case, the family structure—that is, being a family firm—is normally something that does not change over time, and by using a fixed effects estimation, only the firms that change ownership structure would be captured in the estimations. Because we are interested in the differences between family and non-family firms, it is more appropriate to use the random-effect model. There are also disadvantages to choosing the random effects model over the fixed effects one; one such issue is omitted variable bias, as you need to control for the aspects that are time invariant as they are not captured by the fixed effects. We added several control variables to mitigate the problem of omitted variable bias.

The following tables show the results of how the ownership structure of firms influences the local embeddedness of different stakeholders. Table 7.2 gives the results for the place tenure while Table 7.3 presents the findings in relation to local embeddedness, defined as distance to local firms. The number of observations change across the different models due to missing values when measuring local embeddedness for some of the stakeholders.

*Table 7.2* Empirical findings: random effects model by using place tenure as dependent variable

*Table 7.3* Empirical findings: random effects model by using distance to the local firm as the dependent variable

Note: \*, \*\*, and \*\*\* indicates significance at 5%, 1% and 0.01%. Errors clustered at the firm level.

#### 150 *Stefano Amato et al.*

We can confirm the previous findings from the descriptive statistics where most stakeholders in family firms overall had greater local embeddedness compared to stakeholders in non-family firms. The results hold also when controlling for firm-specific characteristics where the age of the firm might be particularly important as a control variable. All stakeholders have a greater level of local embeddedness if part of a family firm, in terms of place tenure, except the owner of the firm. This is an interesting and also rather surprising finding as the owner of family firms is often a person that belongs to the family. The results indicate that the owners of family firms are less locally embedded in terms of place tenure compared to those of non-family firms. One reason for this could be generational shift in family firms where the new owner could have a lower local embeddedness if he/she has lived somewhere else before the ownership shift.

The positive association between being part of a family firm and the local embeddedness of the stakeholders can be derived from several different factors. One aspect is the historical roots of family firms that relate to their probability of operating mainly locally and thus being embedded in the local *milieu* (Amato, 2019; Kalantaridis & Bika, 2006). One example is their strategy in competence development and hiring where a strategy to be more local would lead to more employees, managers, and board members being hired from the local community. The ability of members in family firms to build strong and long-lasting relationships, as noted by Stough et al. (2015), is a key component in being locally embedded. The local embeddedness can in turn shape the competitive advantage of the firm (Pallares-Barbera et al., 2004). Another factor that builds the local embeddedness among stakeholders in family firms is if the firm is founded and run in the same location where the firm founder was born (Pallares-Barbera et al., 2004).

Comparing the different stakeholders, the magnitude of the coefficient for the chairperson stands out, as it is much larger compared to the other values and, in most cases, is triple the size. Thus, it seems that the chairpersons of family firms have a much stronger local connection compared to other types of firms.

It is interesting to observe the negative association between family firms and the owner as this indicates that the owners in family firms have lived a relatively shorter time period in the same municipality as the firm, compared to owners of non-family firms. Based on the previous theoretical section, one would assume a positive association. As the owners in family-firms are, according to our definition, family members, one would assume that they would be more locally embedded. One possible explanation is that families also capture marital links where spouses are considered as family. Spouses have a higher probability of being born and having lived outside the municipality the local firm is located in and are, in many cases, part of the team that owns the firm.

The results in Table 7.2 also highlight the possibility of reverse causality. It might also be that family firms are less able, compared to non-family counterparts, to attract stakeholders from outside their own municipality. Family firms might actively engage in activities to recruit and attract stakeholders from outside but are less successful in this endeavor as they might not be perceived as attractive employers by individuals outside of the family. If this is the case, local embeddedness might act as a hindrance for family firms to grow and develop and to get new insights from external stakeholders. Thus, local embeddedness and being a family firm will, in this case, act as lock-in effect.

In the next table, the results for local embeddedness defined as distance to the local firm are presented.

The same patterns that were found for local embeddedness in terms of place tenure are not mirrored for the distance measure. In this case, we only find a significant relationship between being part of a family firm and local embeddedness in three out of the six measures. For employees that are not managers in the firm and for the chairperson of the firm, being part of a family firm increases their local embeddedness. The negative association between the family firm dummy translates into a shorter distance between the stakeholder and the firm, and hence a greater local embeddedness. On the other hand, for the owner of the firm, we once again find that being part of a family firm decreases the local embeddedness of the individual.

When analyzing the control variables, we observe that older firms increase the level of local embeddedness for each of the stakeholders. This is an expected finding as the age of the firm also affect how long a stakeholder can be locally embedded in terms of place tenure. The relationship between the size of the firm, in terms of employees, and local embeddedness is less clear and is only positively and significantly related to local embeddedness in a few estimations. The financial size of the firm, in terms of turnover and total assets, lowers the local embeddedness of the stakeholders. This can be viewed as supporting evidence for the argument that there is selectivity in how successfully different firms are able to attract stakeholders external to the local community. More successful firms are plausibly more able to attract individuals from different regions as they are seen as an attractive possibility and people will be willing to move to the firm, and hence lower the local embeddedness of the different stakeholders. Being part of a multiestablishment firm increases the local embeddedness of the stakeholders as employees have not only more options to change positions within the firms but also across establishments and through this find new career paths. The size of the municipality seems to be weakly related to the local embeddedness of stakeholders.

# **Conclusion**

Examining the relationships between family firms and territories, or "family firm-territory nexus," using an outward perspective, has only recently begun to attract interest in the field of family business studies. Family firms, like other types of firms, are intrinsically territorial—that is, their operations take place in spatially bounded areas. But, differently from their non-family counterparts, the territory is more intensively local for family-led businesses in such a way that these economic actors, due to physical, emotional, and socioeconomic attachments, are uniquely affected by and able to influence the local *milieu* in which they dwell. In particular, the firm's embeddedness in spatial structures of social relationships—i.e., local embeddedness—has been advocated as the foundation of the micro-territorial perspective of family businesses. While previous studies have shed light on the distinctive conditioning of local embeddedness on family firms' decisions (Dekker & Hasso, 2016) and sources of differential performance as compared to non-family counterparts (Baù et al., 2018), the current literature is somewhat silent on *whether* and *to what extent* family firms are more locally embedded than non-family counterparts.

By relying on a large dataset of Finnish firms, we explore the association between the family nature of the firm and local embeddedness, as expressed in place tenure and the spatial distance, of six different categories of influential stakeholders of the firm. Our results reveal that stakeholders tend to reside for a longer period of time in the same place as local family firms, which, hence, rely greatly on more persistent and geographically proximate stakeholders. Thus, family firms are more locally embedded where the chairperson of the family firm tends to be a relevant link with their home-territory. Additionally, our findings show a negative association between family firms' status and spatial distance, with some categories of stakeholders unveiling the higher responsiveness of family firms to geographic distance in the availability of resources (i.e., labor and directorial skills and capabilities) provided by some stakeholders (i.e., workers and chairperson). These two results, taken together, reveal how family firms, as compared to their non-family counterparts, are more embedded in the local setting.

Our book chapter contributes to the convergence efforts between regional and family business studies. While family business research has traditionally overlooked the regional context in which the economic activity of the firm and the social life of the family take place, the interaction between family firms and territory is steadily emerging as a piece missing in the comprehension of family firms' distinctiveness (Basco, 2015; Stough et al., 2015). For family firms, region arises not only as a socio-spatial platform to which they are functionally and economically bonded, but also as symbolic and emotional constructs inside of which these organizations evolve across generations. Therefore, introducing the "locality" in the study of family firms would account for the existence of sets of physical, social-institutional, and historical attributes that mesh with the attributes of both family and firm. On the other hand, for regional studies, the recognition of family firms enables investigations in the role of space as an independent production factor and generator of distinctive static and dynamic advantages for the firms located inside.

Finally, our book chapter has relevant public policy implications. First, as the study shows a substantial reliance of family firms on particular stakeholders, any "dis-embedding" event de-anchoring the firm from its own territory may potentially undermine the conditions of longevity and growth. This dis-embedding might be a result of the cooling of family ties, due to generational transfers or, even worse, the presence of factors preventing intra-family succession, among others. From this perspective, the introduction of taxation relief in cases of inherited business transferring or tax allowances for the purchase of management consulting services needed for successful succession planning, may be extremely useful for the improvement of the legal and institutional contexts of family firms. Second, since our results reveal that family firms are more susceptible to geographic distance and spatial variation in the availability of essential resources, mainly labor and management skills, any policy-making interventions should be directed at correcting the qualitative and quantitative imbalances in the geographical distribution of the aforementioned resources. In fact, given the importance of family firms as both absolute (that is, in terms of the total number of operating businesses) and relative (that is, in terms of contribution to the GDP and economic well-being), the proper endowment of productive factors at both regional and local levels appears to be crucial for their competitiveness and, ultimately, survival.

While our chapter represents one of the first attempts to analyze in a systematic and detailed way whether and to what extent family firms differ in their local engagement and how anchored they are, future research should further investigate the role of local embeddedness in the exploitation of spatial advantages as reflected in higher productivity (i.e., static advantages) and innovation capabilities (i.e., dynamic advantages) of family firms. The embeddedness of family firms may result in a unique network position at the local level, potentially influencing the acquisition and exploitation of a spatially bounded flow of knowledge and information (i.e., local knowledge spillovers) that, in turn, affect their performance. Additionally, as our study uses administrative borders (i.e., municipalities) as geographical levels of analysis, future studies should investigate local embeddedness in settings such as local production systems (e.g., industrial districts and business clusters) wherein the strong territorial identity and high level of economic integration are deemed to play substantial roles in the behavior and competitiveness of family firms and in the evolution of the locations themselves. Finally, even though local embeddedness has been tested at the micro-level, an interesting future research avenue would be to aggregate the collective actions of family firms, that is, to adopt a macro-level of analysis, in order to test whether attachment to the region in which they are located results in a source of resilience of the region itself when adverse events (e.g., recessionary shocks, natural disasters) occur.

# **Acknowledgment**

We would like to thank Edvard Johansson, Faculty of Social Sciences, Business and Economics, Åbo Akademi University, Finland for his help with the data processing.

### **Notes**

1 In his seminal contribution, North (1991) defined institutions as "humanly devised constraints that structure political, economic and social interaction"

### 154 *Stefano Amato et al.*

(p. 97). They consist of formal rules (constitutions, law, and property rights) and informal constraints (sanctions, traditions, rules of conduct) that, throughout history, "have been devised by human beings to create order and reduce uncertainty in exchange" (p. 97).

# **References**

### 156 *Stefano Amato et al.*

# **8 Family firms and corporate responsibility in peripheral regions**

*Martin Graffenberger and Franziska Görmar*

# **Introduction**

Research on family firms has traditionally focused on the analytical distinction between them and non-family firms, implying, amongst others, differences in terms of demographic, structural, and behavioural dimensions (Basco, 2015). While family firms, like any economic agent, pursue pecuniary goals, non-financial goals are important aspects of their strategic agendas (Aparicio, Basco, Iturralde, & Maseda, 2017). Specifically, long term orientation of strategic decisions (Bird & Wennberg, 2014; Zellweger, Chrisman, Chua, & Steier, 2019), responsibility for employees and communities (Campopiano, De Massis, & Chirico, 2014; Gallo, 2004), and sensibility towards aspects of social status and reputation (Chrisman, Chua, Pearson, & Barnett, 2012) appear as distinct attributes of family firms' business practices to mediate economic and non-economic goals.

The aforementioned attributes help explain why family firms exhibit high degrees of local embeddedness (Baù, Block, Cruz, & Naldi, 2017; Stough et al., 2015). Embeddedness creates linkages between firms and their diverse contexts and, thereby, functions as an essential lever to facilitate and channel regional development dynamics regarding both economic and noneconomic aspects (Pike, Langendijk, & Vale, 2000). Given that around 90% of businesses in Germany are family firms, accounting for 58% of private employment and 52% of aggregate turnover, and that many of them are of considerable size (Stiftung Familienunternehmen, 2019), family firms are a crucial determinant of regional development processes (Basco, 2015). However, there is a lack of research on interpreting and understanding the role they play in local economic and social development (Baù et al., 2017; Lengauer & Tödtling, 2010). Because the nexus between family and regions still requires further research (Basco, 2015; Stough et al., 2015), we aim at offering insights on wider community-related and societal implications by considering regional engagement and philanthropic activities through the lens of corporate local and regional responsibility (CLRR). That is, we attempt to shed new light on the following research question: *How and why do firms take responsibility for their local communities?*

### 158 *Martin Graffenberger and Franziska Görmar*

The empirical material, gathered as part of a wider research project, relates to the so-called "Hidden Champions" located in small towns in peripheral regions in Germany. Hidden Champions, firms that are market leaders in specific product segments, are regarded a suitable example to study corporate responsibility as they typically possess sufficient resources for engagement, tend to exhibit a high degree of local embeddedness, and are mostly family controlled (Vonnahme, Graffenberger, Görmar, & Lang, 2018). There are three main stylised facts that guide our focus on firms located in small towns in peripheral regions. First, small towns are a central part of the German settlement system but face particular development challenges. Second, research has neglected to focus the attention on them (Academy for Spatial Research and Planning, 2019; Bell & Jayne, 2009). Finally, in the German context, successful and innovative firms are frequently located in small towns.

In this chapter, we examine three companies located in two peripheral small towns in Germany – Bad Berleburg in North Rhine-Westphalia (headquarters of two family-owned Hidden Champions) and Schierling in Bavaria (headquarters of one management-led Hidden Champion). We selected the cases based on company specifications such as firm size and (changes in) the nature of firm ownership as well as the location and size of the towns where they dwell. Furthermore, the selected case firms reflect variance regarding their ownership structures, by recognising both long-lasting family ownership and the transition from family to non-family ownership with subsequent integration into an international family holding.

We find that successful and locally embedded companies are generally willing to provide substantial resources for community purposes, in particular regarding local/regional cultural, social, and educational matters. Engagement is coupled with diverse firm interests such as securing human resources by maintaining and increasing the attractiveness of place and region. Hence, these activities can have pronounced effects on small-town development, especially as the spatial focus of engagement is mainly on the immediate firm environment. The actions of locally embedded companies constitute a substantial supplement to the activities and investments of municipal and civil society actors and, thereby, open room to manoeuvre and to shape local and regional structures. All selected firms, regardless of their ownership nature and structures, are engaged in corporate giving and corporate volunteering activities.

However, our findings indicate that ownership structures may affect both scope and intensity of community engagement. Family firms are particularly involved in comprehensive and strategic activities, such as steering group membership of local initiatives or participation in municipal strategy processes. This comprehensive engagement is driven by a sense of obligation and is coupled with efforts to generate returns for the local community – i.e., beyond mere economic returns. Since the firms' decision-makers grew up and still live locally, socio-emotional place attachment emerges as a distinct driver of firm engagement. Consequently, our study allows the further differentiation of previous findings on the interrelations between firm engagement and ownership structures (e.g., Bürcher, 2017; Lengauer & Tödtling, 2010). We observe that while family involvement seems to affect the tendency of a firm to engage in corporate support activities (long-term orientation), sponsoring and volunteering activities are common in any firm regardless of its ownership structure.

# **Theoretical framework**

# *Family firms and embeddedness*

Regional embeddedness is about the involvement of (economic) actors in a geographically bounded social structure (Granovetter, 1973; Hess, 2004) whereby these actors become tied to spatial contexts (Pike et al., 2000). Through embeddedness, these actors shape the economic as well as societal dynamics of places and regions (Hess, 2004). Hence, embeddedness reflects the firm-place nexus and constitutes an integral part of local and regional development beyond its economic dimension (Bürcher, 2017). In economic terms, embeddedness relates not only to transactions with regional suppliers, sub-contractors, and customers; integration in regional networks and intra-regional competition but also access to technology, human resources, and regionally specific knowledge (Clifton, Gärtner, & Rehfeld, 2011; Lengauer & Tödtling, 2010). In social and cultural terms, embeddedness surfaces in linkages to local/regional administrative, intermediate, and civil society stakeholders (Baù et al., 2019; Bird & Wennberg, 2014; Bürcher, 2017) and a firm's integration into regional cultures, manifested in collective values, norms, and symbols (Clifton et al., 2011; Dequech, 2003). Thus, embeddedness facilitates the mobilisation of local resources, trust, and networks. Consequently, embeddedness operates as a determinant for corporate and regional competitiveness (Baù et al., 2019) but also conditions firms' intentions to pursue non-financial goals, such as philanthropy and community engagement activities (Bürcher 2017; Campopiano et al., 2014; Lengauer & Tödtling, 2010).

However, not all economic actors are similarly linked with their local communities. For instance, it has been mentioned that, compared to their non-family counterparts, family firms exhibit profound degrees of local embeddedness (Basco, 2015; Baù et al., 2017; Bird & Wennberg, 2014), especially regarding non-economic and social dimensions (Chrisman et al., 2012; Zellweger et al., 2019). Family reputation (Deephouse & Jaskiewicz, 2013), the fact that decision-makers typically grew up and live locally, shared regional mindsets (Dörhöfer, Minnig, Pekruhl, & Prud'homme van Reine, 2011), and family members being integrated into the community's everyday life (Lang, Görmar, Graffenberger, & Vonnahme, 2019) also play a decisive role in their engagement. Family firms are well embedded locally and benefit from this (Baù et al., 2019), especially in rural regions, where they "have the possibility to form alliances and build close connections with the

### 160 *Martin Graffenberger and Franziska Görmar*

community and are exposed less to the anonymity of urban areas" (Bird & Wennberg, 2014, 425).

It is important to note that embeddedness is not a static manifestation but an inherently dynamic concept (Hess, 2004). In this sense, Pike et al. (2000) highlight the importance of considering spatial processes of *embedding* rather than a state of *embeddedness* as well as counter-processes of *disembedding*. Thus, a firm's level of embeddedness might increase or decrease over time, as the characteristics of their ties to local/regional contexts alter for reasons such as changes in purchasing strategy, management, or ownership structure. In this sense, a firm's relation to economic actors, as well as administrative and societal stakeholders, fluctuates (Zellweger et al., 2019).

### *Corporate local and regional responsibility*

The "active involvement of firms in shaping the contexts and networks a firm is involved in" (Lengauer & Tödtling, 2010, 7) is widely understood as a key element of corporate engagement. It is a distinct form of and mechanism to strengthen socio-spatial embeddedness (Bürcher, 2017). Consequently, and due to their typically pronounced degree of local embeddedness, family firms are particularly receptive to corporate engagement (Campopiano et al., 2014) through their locally embedded decision-takers.

Research on corporate engagement lacks both distinct spatial elements (Lengauer & Tödtling, 2010) and ownership-related considerations (Campopiano et al., 2014). Even though activities under the umbrella of concepts like corporate social responsibility or corporate citizenship often have a (more or less explicit) regional orientation, the concepts themselves are non-spatial. To incorporate spatial considerations, this chapter adopts the notion of CLRR developed by Hohn, Kleine-König, and Schiek (2014). Departing from a holistic understanding, CLRR is about the "development partnership between companies and the region" (Kiese & Schiek, 2016, 10) in which firms engage voluntarily for economic, ecological, social, and cultural matters.

The associated activities in the partnerships related to CLRR can be categorised into three distinct, yet not mutually exclusive, mechanisms: corporate giving, corporate volunteering, and corporate support (Hohn et al., 2014; Vilain, 2010). Corporate giving refers to engagement through occasional or long-term financial and material donations. It emerges, for instance, as sponsoring of cultural and social events, institutions, associations, and sports clubs but also material support for (vocational; music) schools and kindergartens. Secondly, activities along the lines of corporate volunteering involve, for instance, leaves of absence for staff to participate in local fire brigades and social activities or days with schools and educational institutions. Furthermore, firms frequently provide their premises as venues for cultural events, such as concerts or readings. Finally, corporate support refers to strategic, i.e. rather formalised, and long-term engagement in local and regional development processes – e.g., through support of and participation in civic or regional management initiatives, local strategy formation, or the establishment of foundations. CLRR considers engagement primarily in the direct context of a firm's location. Consequently, corresponding activities can contribute directly and indirectly to various dimensions of small-town development – e.g., by securing diverse and high-quality social and cultural landscapes.

Generally speaking, proactivity, strategic (business) orientation, commitment, and resource input tend to increase from giving to support activities (Bürcher, 2017; Kiese & Schiek, 2016). Even if CLRR activities typically exceed immediate business goals, they might be coupled with and partially motivated by business-oriented considerations (Kiese & Schiek, 2016). For instance, local engagement can increase visibility and reputation of firms. Additionally, it has been highlighted that corporate responsibility can be seen as a specific instrument to shape socio-spatial contexts and to maintain favourable local and regional living and business conditions – which might be particularly relevant for firms located in peripheral regions (Bird & Wennberg, 2014; Bürcher, 2017) but also result in elevated expectations regarding the engagement of (internationally successful family) firms. While firm engagement can support processes of local and regional development, associated activities are, due to their voluntary nature, highly volatile, dependent on firm success, and likely to be cut in economic downturns (Gallo 2004; Lengauer & Tödtling, 2010), such as the current COVID-19 crisis.

Research has so far largely neglected the particular effects of family firms in peripheral regions (Bird & Wennberg, 2014) and especially their wider societal implications (Zellweger et al., 2019). Hence, this study specifically focusses on how firms located in peripheral regions engage in processes of (small) town development and, thereby, highlights a particular spatial dimension within the debate on corporate responsibility. With this chapter, we establish a direct link between CLRR and firms' immediate operational contexts, but also adopt its holistic understanding by investigating the linkages between CLRR and cooperative small-town development (Deutscher Städtetag, 2013).

# **Consciousness and strategy: firms as actors in small-town development**

### *Case studies – local contexts and firm embeddedness*

We investigate three case studies of Hidden Champion firms located in small towns in peripheral regions in Germany, namely EJOT and Berleburger Schaumstoffwerke (BSW) located in Bad Berleburg (North Rhine-Westphalia) and Holmer Maschinenbau located in Schierling (Bavaria). The case studies draw on 13 interviews conducted with firm representatives (owners, management), central administrative (mayors, administrative staff), and civil society actors (representatives of local clubs, associations and initiatives, regional management, etc.), as well as local media, during

# 162 *Martin Graffenberger and Franziska Görmar*

multi-day field visits in 2018. Interview material was complemented with data gathered through desk research (from municipal documents, company websites, media etc.).

All three firms are important employers in their towns and contribute, with their economic interrelations and linkages, considerably to local and regional development. Hence, in all cases the economic core activities (through employment, taxes, purchasing power, expansion, etc.) are considered their main pecuniary contribution to local development. In the following section, we briefly portray the companies and give a short insight into their respective local contexts.

**EJOT** and **BSW** firms are both family-owned and in the third generation of family ownership. EJOT, founded in 1922 by the great uncle of today's managing director, currently employs more than 3,000 persons, approximately 1,300 of whom work in Bad Berleburg and its surroundings. The main goods produced by the company are special screws and other connecting elements. BSW was founded in 1954 and employs about 650 persons, of which 470 work in Bad Berleburg. The main product of BSW is foam material utilised for sports mats or running tracks (Box 8.1).

# **BOX 8.1: CONTEXT INFORMATION ON BAD BERLEBURG**

Bad Berleburg, North Rhine-Westphalia

Bad Berleburg faces ongoing demographic challenges that manifest in selective out-migration and population ageing. Both trends are of significance to local firms, in regards to their needs for qualified workforce. Infrastructural access, both road and railway, are deemed highly problematic, resulting in the local "Route 57" lobbying initiative.

In the past, the municipality experienced a difficult financial situation. However, the city council re-oriented its urban planning and development strategy, deliberately involving economic and civil society stakeholders in strategy formation processes and project activities.

In the past, the healthcare sector was highly important for Bad Berleburg but has, due to regulatory changes and economic restructuring, somewhat lost significance. Currently, Bad Berleburg builds on a diversified industrial base characterised by medium-sized and family-owned companies – including the Hidden Champions **EJOT** and **Berleburger Schaumstoffwerke (BSW)**.

### *Family firms and corporate responsibility* 163

Both firms are highly embedded in Bad Berleburg in economic as well as social and cultural terms. Economically, they constitute a great share of local employment and significantly contribute to local tax revenue and purchasing power. Additionally, they strengthen the local economy through subcontracts and the concentration of their economic activities within the region. Committing themselves to Bad Berleburg as their headquarters' location, both firms have expanded in recent years, partly by reusing former buildings of the healthcare industries and industrial brownfields. Both companies have their headquarter buildings in central locations, reflecting economic relevance and importance for the urban landscape.

In social and cultural terms, Bad Berleburg is not only the headquarters of the firms but also residential place of the founding families, who grew up in this region and are engaged privately in various local associations and initiatives. The same applies to their employees, who originate mainly from the surroundings. Both firms show strong loyalty towards their employees and are themselves engaged in multiple ways in the town's societal life. Thus, it can be expected that traditions and regional values are shared by both managers and employees (Dörhöfer et al., 2011), resulting in strong regional ties. Both firms understand themselves as rooted in and interwoven with the region where they find appropriate workforce and human resources to successfully manage their corporate development.

Human resources are a great potential and capital of our company and that certainly ties us to this location. It is certainly not the local infrastructure, which is a real disadvantage.

(Interview BSW, August 8, 2018)

As a consequence, the two firms' leaders are very much motivated "to keep the town and the region attractive for employees" (Interview EJOT, August 08, 2018) and engage in its development.

The Hidden Champion **Holmer** was founded in 1969 and produces sugarbeet harvesters and other agricultural machines. Of the firm's 420 employees, 330 work in Schierling. Holmer has witnessed several changes in the ownership structure. In 2004, the founder Alfons Holmer sold the enterprise to a private equity company, which in turn sold it to a second private equity company in 2006. Since 2013, Holmer has belonged to the French family-owned holding Exel Industries, who are familiar with the agricultural machinery business. Hence, Holmer can be considered a management-led enterprise with a family-owned enterprise in the background (Box 8.2).

Both the municipality and the company management consider the private equity ownership phase marked by uncertainty and turbulence. Since the acquisition of the company by Exel Industries, the relations between the town administration and the company improved considerably, strengthening, once more, the base for communication and trust.

# 164 *Martin Graffenberger and Franziska Görmar*

Ten years in private equity were certainly not favourable for our company, particularly because the identity was missing. […] It was a difficult period. Finally, in 2013 we could indirectly get back into family ownership.

(Interview Holmer, November 6, 2018)

By acquiring a property of 14 hectares in a newly established industrial area, Holmer committed itself to the location of Schierling, which was a long-term and strategic decision by the management.

The development of the new location was a long-term and strategic decision, knowing that we are not able to relocate anywhere else. This is just not possible due to our product and our self-image. Our knowledge carriers are located here and we are deeply rooted. Therefore, we do not want to leave.

(Interview Holmer, November 6, 2018)

# **BOX 8.2: CONTEXT INFORMATION ON SCHIERLING**

Schierling, Bavaria

Schierling has continuously gained population in the past few years. These population dynamics are partly due to its location in the commuting area of Regensburg. Schierling is well connected in terms of infrastructure. Recent infrastructural improvements have also facilitated the development of a commercial industrial site, which attracted a major automotive supplier and led to several local/regional firms, such as the Hidden Champion **Holmer Maschinenbau GmbH,** expanding their operations.

Due to these recent dynamics, the financial situation of Schierling is rather positive. Beginning in 1999, a number of urban development concepts were elaborated and implemented, resulting, for instance, in the establishment of a centrally located service centre containing local supplies, a medical centre, and the public library as well as space for meetings. Currently, a major project of the city council is the development of a new hotel.

Regarding its regional embeddedness, the economic aspects are clearly considered most important. The company is one of the biggest employers in the region and is an important partner in education. This generates purchasing power in the region and has increased tax revenue for the municipality, opening up considerable room for manoeuvring urban development.

As far as possible, Holmer organises its supply chains regionally, thereby strengthening local and regional economic structures. Further, the commitment of Holmer to stay in Schierling has substantially influenced the development of the municipality. A new commercial estate was developed as result of Holmer's expansion plans, a process which was characterised by continuous communication between the city council and the firm. Both sides emphasise that the size of the town may also have a facilitating influence on their mutual communication.

Socially and culturally, the enterprise is apparently less embedded than other companies in Bad Berleburg. While a major share of the employees originate from the region and are active in local associations like the fire brigade, the persons responsible for the management mostly live in Regensburg, a nearby regional centre. This fact might explain the supportive but rather distant and professional relations between firm and community actors in Schierling. Although there are many well-functioning communication channels, formal and informal, between the municipality and the firm, both sides have precise ideas about the competencies and responsibilities of public and private actors in urban development processes, which are rather separated from each other.

# *Corporate responsibility: from club sponsoring to community building(s)*

All Hidden Champions investigated as part of this research exhibit distinct interests in assisting the development of their immediate (headquarters) environments. Consequently, they engage in various, wide-ranging activities, particularly regarding cultural and social initiatives, as well as education, environmental concerns, and sports. Activities along the lines of CLRR and their different mechanisms (corporate giving, volunteering, and support) were identified in each of the selected cases, albeit with different levels of engagement.

All three companies provide financial and material support for a wide range of local initiatives and institutions – e.g., for cultural associations and events, a biodiversity project on wisents, sports clubs (e.g., football, athletics and biathlon), schools/kindergartens, and youth associations. Additionally, BSW and EJOT open their facilities as venues for events such as concerts or literary readings. At Holmer, employees can propose relevant projects and initiatives to the management for funding and even use the facilities and machinery of the firm for their own civic engagement. Generally, it can be observed that, through these corporate giving and volunteering activities, the companies aim at making a conscious contribution to the overall locational attractiveness of their headquarter sites. In this sense, a certain diversity and quality of local social and cultural landscapes are considered relevant locational factors when it comes to binding and attracting workforce (Table 8.1):

We [think about engagement] every time we have the impression that some of our employees may benefit.

(Interview EJOT, August 8, 2018)

*Table 8.1* Selected CLRR activities of case firms

In addition to financial and material support, all companies grant leaves of absence for employees to participate in fire brigades and the Red Cross, for example. Furthermore, they cooperate closely with local/regional schools and vocational training centres, organise internships or open days to present themselves to future members of the workforce, and even enter into formal partnerships with neighbouring schools. A very important aspect in this regard is the high value that they place on training and apprenticeship. EJOT and BSW, for example, are strongly involved in the regional structures for professional education, being part of a regional educational centre (Bildungszentrum Wittgenstein GmbH) as founding and currently managing members.

Regarding strategically oriented corporate support processes, the intensity of engagement differs between the three companies. Both EJOT and BSW have been actively involved in strategic local and regional planning processes such as the municipal mission process ("Leitbildprozess"). However, the managing directors referred to their participation in these processes not as representation of their firms, but as private citizens of Bad Berleburg. Yet, a distinction between these roles seems not always to be clearly drawn, as private and corporate functions might easily overlap in public perception.

I participated but I perceived it as private meeting. It makes a difference whether the minutes of the meetings say "the representative of BSW or Mr. [family name]" said something. […] But in a small town like Bad Berleburg all of that blurs.

(Interview BSW, August 8, 2018)

Besides this local engagement, BSW and EJOT take on responsibilities in regional development processes. For instance, as a member of the steering groups of the LEADER region Wittgenstein, the regional Chamber of Commerce, and economic associations and initiatives lobbying for better regional infrastructure connections.1

One central project in Bad Berleburg in which both local Hidden Champions have been actively engaged is a newly built regional community centre integrating both touristic and social functions.2 The centre constitutes a central, strategic urban development project of Bad Berleburg. At its core, it contains a multifunctional event and meeting place where several central organisations of the town (municipal youth welfare, Wisent world, tourist office, etc.) are bundled and rooms for further associations and initiatives are available. The total investment is about €2.5 million, of which 70% was financed by federal and state funds. Through the donation of €200,000 each by BSW and EJOT, the municipality was able to co-finance its 30% share of total project costs. Additionally, the companies contributed also to the planning process, by sharing their expertise in terms of event management and the likely specific needs of such a place. This corporate engagement is

*Figure 8.1* Roofing ceremony of community centre in Bad Berleburg. Source: Pahl + Weber-Pahl Planungsgesellschaft mbH & Co. KG.

one of the reasons why the community centre is considered a "best practice example of regional engagement" (Prasse, 2018). Yet, there are also specific and firm-related motivations that guide the support. First, BSW and EJOT can use the centre as a venue for their own events – something they had lacked. Second, the centre offers dedicated space for projects and events for adolescents to increase the attractiveness of Bad Berleburg for families, an important target group for both the municipality and local firms.

I was convinced [by the project] rather quickly, because it is good for Bad Berleburg. [We get] a representative building where receptions and other events can be arranged, even bigger ones.

(Interview EJOT, August 8, 2018)

In contrast, Holmer's corporate support activities are less pronounced than those of the companies in Bad Berleburg. Both Schierling's administration and its management underline the strict distinction between municipal and entrepreneurial competencies and tasks. This understanding may be one of the reasons why long-term engagement does not play a big role in Holmer's voluntary activities, with the exception of its participation in the climate council of the municipality and its membership in the local economic association. Holmer's activities manifest in rather low-threshold activities such as project and event sponsoring. Still, the firm's management is interested in current urban development and planning processes and supports them ideationally, but it does not actively engage in strategy formation or project implementation:

There is no strategic cooperation regarding urban development. We do not meet with the city council and jointly develop a long-term plan.

(Interview Holmer, November 06, 2018)

### **Discussion: from corporate engagement to cooperative action**

Using the examples of three Hidden Champions in Germany, the study examines the local effects of successful operating firms located in small towns in peripheral regions. In economic terms, the three selected companies are important local players and are well embedded within their regions. The firms contribute significantly to municipal budgets, offer diverse employment opportunities, and strengthen regional value chains through strategic purchasing.

Going beyond this economic dimension, our results suggest that successful and locally embedded firms are generally willing to provide substantial (monetary and non-monetary) resources for community purposes. We find evidence of the most common activities related to CLRR, such as cultural, social, and educational matters. Therefore, we validate activities identified in previous studies as central dimensions of firm engagement, which are widely accepted and appreciated activity fields by local/regional initiatives as well as policy-makers (Lengauer & Tödtling, 2010; Vilain, 2010). However, we find that firm engagement is driven by a set of diverse motivations that is implicitly and explicitly coupled with their own interests (see Figure 8.2). Aspects such as recruitment/retention of skilled employees and development strategies for young professionals are closely intertwined with challenges of locational attractiveness, which are of particular importance in peripheral regions.

### 170 *Martin Graffenberger and Franziska Görmar*

Considering family firms and non-family firms, the study allows for reflections on the specific role of family ownership for CLRR activities and to expand previous research findings (e.g., Bürcher, 2017; Lengauer & Tödtling, 2010; Vilain, 2010). Firms generally seem to have a high level of awareness that their engagement may operate as a mechanism to maintain and increase social, cultural, and educational infrastructures and, thereby, actively and consciously shape the attractiveness of place and region. Given the particular context of small towns in peripheral regions, such soft factors are highly relevant for firms, municipalities, and civil society actors, as they constitute determining factors for wider development dynamics of both firms and small towns. Since the spatial focus of engagement is mainly on the immediate firm environments, diverse CLRR activities related to corporate giving and corporate volunteering have particularly pronounced implications for small-town development. CLRR activities, especially in the fields of corporate giving and corporate volunteering, constitute substantial supplements to the activities and investments of municipal and civil society actors and, thereby, open room for manoeuvres to shape and strengthen local and regional structures. We find that the ownership nature of the firm (family or non-family) seems not to affect the types of engagements related to corporate giving and corporate volunteering – i.e., all firms use these activities regardless the nature of their ownership.

However, the case studies provide various indications that ownership structures might affect scope and intensity of corporate engagement. Decision-makers of the family-owned Hidden Champions are particularly engaged in terms of comprehensive and strategic corporate support activities. Such comprehensive forms of engagement – e.g., steering group membership in local institutions or participation in municipal strategy processes – can be partly attributed to personal motivations that emerge due to family firms' specific and individual factors as well as socio-emotional dimensions of embeddedness (Bird & Wennberg, 2014; Campopiano et al., 2014). In this sense, engagement is driven by a sincere sense of obligation and responsibility, resulting in efforts to provide positive returns to the local community. Place related and socio-emotional attachment emerges in the motives of family firms. As decision-takers grew up and still live locally, they have more profound motivations to contribute to the development of their hometowns and to build diverse cultural and social landscapes. These specific socio-emotional motivations are less pronounced for managers in non-family firms, especially if decision-makers do not live locally or if a high fluctuation can be observed among them.

Furthermore, our study highlights the importance of adopting a procedural understanding of embeddedness (Hess, 2004; Pike et al., 2000). Events such as ownership changes may affect the degree of embeddedness, the perception of a firm's local and regional responsibility, and, consequently, the intensity of CLRR activities; more generally, it can alter the nature of ties to stakeholders (Zellweger et al., 2019). Such aspects become apparent in Holmer's acquisition by and long-term affiliation with an international private equity fund. During this period, both firm embeddedness and CLRR activities were substantially reduced. However, the acquisition of Holmer by a French family holding in 2013 facilitated the process of gradual (re-)embedding by defining new trustful ties with the municipality and other local actors. Unlike Holmer, BSW and EJOT reflect a high degree of continuity as both firms are third-generation family firms. We interpret continuity as a constantly ongoing embedding process, which facilitates the emergence of shared mindsets and high trust levels (Dörhöfer et al., 2011) that result in institutionalised engagement and joint development of projects and initiatives along the lines of corporate support.

These aspects further illustrate the (potential) role of family involvement in firms, which seems to point to a specific corporate culture, including intentions to build diverse connections with community stakeholders (Campopiano et al., 2014; Zellweger et al., 2019) – even if family involvement relates to the macro holding-level. On the one hand, these results highlight the diverse and distinct local and regional values of maintained-family ownership of medium-sized firms such as Hidden Champions. On the other hand, our results pose the question of how these values can be effectively secured – e.g., as part of (family-external) company succession or (international) merger and acquisition processes.

Despite their generally positive attitude towards corporate engagement, all firms emphasise that the level and intensity depends on their (current) economic success, which highlights the processual nature of corporate engagement itself (Gallo, 2004; Lengauer & Tödtling, 2010). The latter aspect also has an important implication for municipal and civil society actors, who must avoid being dependent on voluntary sponsoring and support related CLRR activities in case firms restrain their efforts.

# **Contributions**

This chapter offers useful perspectives for policy-makers in the context of small-town development. As firms' and municipalities' goals substantially overlap, opportunities for cooperative action emerge. In this context, the identification of joint goals between firms, municipalities, and civil society actors is an essential driver of successful cooperation and steering development processes. Corporate engagement provides a specific development resource to activate and strategically exploit – especially for peripherally located municipalities and small towns where the maintenance of attractive living environments faces complex and specific challenges, compared to larger agglomerations. To mobilise these potentials and to tap new/additional resources (financial, time, ideas, etc.) municipalities need to find ways to channel the obviously existing willingness of firms to engage in local and regional matters. The identification and implementation of concrete joint projects that involve private, public, and civil society actors (like the

# 172 *Martin Graffenberger and Franziska Görmar*

community centre in Bad Berleburg) offer promising mechanisms to strategically engage firms based on common goals, envisaged outcomes, agreed responsibilities and resources, and clear time frames.

Thereby, firms can be actively and strategically involved in local development processes, to create mutually accepted outcomes. As we observe in our research, family firms are comprehensively engaged in local development processes. Besides strategically organising the corporate support activities of family firms, a central challenge for municipal actors can be seen in the activation of non-family firms or subsidiaries of larger companies to also engage in these processes. Their purposive activation could mobilise additional resources and facilitate the emergence of distributed and multi-actor CLRR development structures involving both family and non-family firms. When it comes to building such distributed structures, our study highlights that small towns might operate as particularly effective environments: the number of potential firms to be targeted is limited, decision-makers within firms are usually not anonymous and are accessible, and communicative distances are rather small, i.e., associated issues and activities can be discussed quickly via formal and informal channels.

### **Acknowledgments**

The empirical part of this chapter was conducted as part of the project "Hidden Champions – Stabilisierungs- und Entwicklungsfaktoren von Kleinstädten in peripheren Lagen" [Hidden Champions – stabilisation factors and development drivers of small towns in peripheral locations], funded by the Federal Institute for Research on Building, Urban Affairs and Spatial Development (BBSR). We thank our interviewees for their time and interest in the project; Thilo Lang, Lukas Vonnahme, and Lars Porsche for constructive discussions; and the book editors for helpful feedback on earlier stages of this chapter.

### **Notes**

# **References**

# 174 *Martin Graffenberger and Franziska Görmar*

*innovativer Unternehmen für Kleinstädte in peripherer Lage* [*Hidden Champions and Urban Development: The Economic and Societal Importance of Innovative Companies for Small Towns in a Peripheral Location*]. Bonn: Federal Institute for Research on Building, Urban Affairs and Spatial Development (BBSR).

# **Part IV Evidence around the world**

# **9 Comparing family and nonfamily firms' strategic effects on regional development**

Evidence from Kenya

*William Murithi and Kassa Woldesenbet Beta*

# **Introduction**

Academic interest in family firms and regional development has grown recently in Western context (Acquaah, 2016; Basco, 2018). Despite the well-recognised contributions of family firms to regional economic and social development (Basco, 2015; Memili, Fang, Chrisman, & De Massis, 2015; Stough et al., 2015), the understanding of the nature and the type of contribution made by family firms in developing and emerging economies remains under studied (Kolk & Rivera-Santos, 2018). For instance, the African continent remains largely unexplored in spite of family firms' prevalence at the national and regional levels (Khavul, Bruton, & Wood, 2009). There are three main reasons why the phenomenon of family firms in Africa has attracted less academic attention. First, policy-makers and governments are not well aware of family firms' contribution to economic and social development. Second, there is a lack of official data (e.g., longitudinal and cross-sectional data) to describe, explore, and show the business ownership structures and family involvement and participation in economic activities (Kolk & Rivera-Santos, 2018). Third, the financial commitment for academic research on family firms is inadequate.

We believe that Africa provides a unique context for investigating the significance of family firms in regional economic and social development (Khavul et al., 2009; Stough et al. 2015; Zoogah, Peng, & Woldu, 2015) and poverty alleviation (Bruton, Ketchen Jr, & Ireland, 2013). This chapter attempts to explore the impact of family and non-family firms in the context of Kenya. Drawing on a quantitative analysis of 307 firms operating in Kenya, our study finds that differences in the strategic behaviours (i.e., entrepreneurial behaviours, decision-making strategies, and external social capital) are the underlying mechanisms that may explain how both types of firms differ in their levels of contributions to regional development in developing economies, such as Kenya, and in sub-Saharan Africa. More specifically, we find that entrepreneurial orientation and bridging social capital had positive and significant effects on managers' self-perception on firm contribution to regional development. However, there is a negative effect of participative decision-making process on the self-perception of their regional development contribution. That is, family and non-family firms differ in the extent to which they self-perceived their contribution to regional development.

# **Family firms in Kenya**

Family firms form the backbone of Kenyan economic and social development, with prominent medium and large family-run businesses contributing substantially to GDP, employment opportunities, and wealth creation (PricewaterhouseCoopers, 2014). The actual estimation is that family firms account for 60–80% of all employment in Kenya (National Baseline Survey, 1999; Waweru, 2014). According to a PricewaterhouseCoopers report on private firms, 95% of Kenyan family firms that predicted growth were confident of achieving it, with 32% aiming for aggressive growth over a fiveyear period and another 56% expecting steady growth (2014, 6). Contrary to family firms in Western economies, family firms in Kenya (and sub-Saharan Africa in general) face unique ownership, management, governance, and succession structures. Family firms are shaped by a highly collectivist culture (Hofstede, 2001), diverse social structures (Kamoche, Siebers, Mamman, & Newenham-Kahindi, 2015), and the coexistence of both formal and informal institutions (Murithi, Vershinina, & Rodgers, 2020) that may boost and/or constrain economic activities. Further, as opposed to Western countries where studies refer to the nuclear family as a majority owner, Kenyan family firms have members from the extended family and communities that influence business behaviour and performance (Khavul et al., 2009).

As a developing economy, Kenya's political, economic, and culture patterns differ from other developing Western or Asian economies (Zoogah et al., 2015; Vershinina, Kassa, & Murithi, 2018). The weak political and institutional environments found in Kenya encourage informal economic activities (Khavul et al., 2009; Murithi et al., 2020; Murithi, 2019). Most small and medium firms operate at the intersection of formal and informal institutions (Waweru, 2014; Murithi, 2019). Like other countries in sub-Saharan Africa, Kenya has a unique socio-cultural landscape, deep rooted in traditions and cultural contexts that influence wider management and entrepreneurial practices (Zoogah et al., 2015; Vershinina et al., 2018). In particular, the "harambee spirit" with its various aspects can enable or constrain entrepreneurial behaviours in Kenya (Vershinina et al., 2018). Therefore, the country presents a unique context to explore the differences between family and non-family contributions to regional development.

# **Theoretical framework and hypothesis**

# *Strategic behaviours and regional development*

Strategic behaviours are defined as the actions taken by firms or their toplevel managers that are intended to influence the market environment in which they compete (Kuratko, 2012). The strategic behavioural differences between family and non-family firms can be understood by investigating the influence of controlling family on business decisions, strategy making, and performance (Abdellatif, Amann, & Jaussaud, 2010). Family and nonfamily firms differ in their strategic behaviours because family involvement alters their goals (Basco, 2017). Family firms, like their non-family counterparts, pursue business economic goals but also family-oriented ones, such as employment for family members, support to local communities, and the intention to transfer the family firm from one generation to another.

The differences in strategic behaviours between family and non-family firms are likely to determine their outcomes and, therefore, the way both types of firms contribute to regional development. In general, the strategic behaviour of firms is associated with decision-making and its implementation to achieve desired goals and outcomes. It is in this process that family involvement and control affects the firms' strategic entrepreneurial behaviours, such as wealth creation and advantage-seeking actions (Hitt, Ireland, Sirmon, & Trahms, 2011). We conceptualised strategic behaviours of the firm as the strategic posture involving entrepreneurial orientation (Covin, Green, & Slevin, 2006), participation in strategic decision-making (Eddleston & Kellermanns, 2007; Basco, 2013), and developing and using resources embedded in social networks (Acquaah, 2012; Mani & Durand, 2019). This chapter examines whether family and non-family firms differ in these three dimensions of strategic behaviour and how such differences, if they exist, affect firms' self-perception of their contribution to regional development in context of Kenya.

### *Firm entrepreneurial behaviour*

Strategic entrepreneurship theory, which focuses on the entrepreneurship and strategic management aspects of opportunity recognition and wealth creation, predicts that family firms are the major contributors to economic development (Hitt et al., 2011). This is because family firms are able to orchestrate resources that lead to individual-, firm-, and regional-level outcomes (Hitt et al., 2011). In addition, the literature on corporate entrepreneurship has highlighted the differences between family and non-family firms concerning their entrepreneurial orientation (Casillas & Moreno, 2010). Studies that used a multi-dimensional approach (focusing on the dimension of proactiveness, risk-taking, innovativeness, competitive aggressiveness, and autonomy) found that family firms score low on the five dimensions of corporate entrepreneurship (Zellweger, Muhlebach, & Sieger, 2010). Short et al. (2009) also found that although family firms do exhibit language consistent with all entrepreneurial orientations, their entrepreneurial orientation language in relation to autonomy, proactiveness, and risk-taking is lower than in non-family firms.

However, as most of these studies focused on either the individual (ownermanager) or firm-level analysis, they underestimated the influence of the family stakeholders' entrepreneurial orientation on family firms (Dyer, 2006). Zellweger, Nason, and Nordqvist (2011) thus argued for the consideration of the family as a unit of analysis, as this would help further our understanding of the ability of family firms to generate transgenerational value. In addition, Basco and Pérez Rodríguez (2009) also called for a holistic view of the family firm by integrating the family and business systems. These authors recommend that researchers should focus on four important aspects of the family firm—strategy, human resources, governance, and succession—in order to understand how family influences the firm's strategic decision-making.

Indeed, the current conceptualisation of entrepreneurial orientation at the firm level is limited in its explanatory power to show the firm's influence at regional level. We know more about the effects of entrepreneurial orientation on firm performance, such as the growth and profitability (Gupta & Gupta, 2015), but less on regional levels. Further, evidence from emerging economies (e.g., China) shows that not all the dimensions of entrepreneurial orientation have equal levels of significance because entrepreneurial orientations could be shaped by contexts (Welter, 2011; Basco, 2018). Such limitations led to calls for further exploration of firm level entrepreneurship in developing economies (Kantur, 2016). Businesses operating in developing economies also face increased uncertainty, imperfect competition, and hostile environments, which require the deft use of entrepreneurial orientations. Recent studies have also found a positive link between firm-level entrepreneurship within developing economies and firm performance (Cai, Liu, Deng, & Cao, 2014). We argue that the firm level of entrepreneurship will affect regional development, through performance and social engagement. Our first hypothesis is as follows:

*H1: Firm entrepreneurship orientation effect on regional development outcomes is higher in family firms than in non-family firms.*

### *Firm strategic decision-making process*

The basic strategic management processes between family and non-family firms may look similar (Miller & Le Breton-Miller, 2011). However, there are differences on the goals to be pursued, the process of resource allocation to achieve those goals, and who participates in the decision-making (Chrisman, Chua, & Sharma, 2005; Basco, 2013). The involvement of the family in businesses and the goals they pursue account for differentiated outcomes in both types of firms (Lee, 2006). In family firms, family members are the main stakeholders likely to influence the strategic management process in comparison to non-family firms, where different shareholders influence the decision-making process and where they follow the profit maximisation goal. Furthermore, family stakeholders play an important role in strategic renewal, entrepreneurship, firm growth, innovation, and performance of family firms (Mazzi, 2011). It is a taken-for-granted fact that family (as individuals or as a group) are willing to retain the ownership and control of the firm in order to remain autonomous. Families always seek autonomy for control purposes over ownership and management, even in the context of poor financial performance (Gómez-Mejía et al., 2007). In doing so, a controlling family coalition pursues family-centred financial and non-financial objectives aimed at creating generational wealth (Carney, 2005; Aparicio, Basco, Iturralde, & Maseda, 2017).

According to Covin et al. (2006, 59), "Strategic decisions are made through consensus-seeking versus individualistic or autocratic processes by the formally responsible executive". Prior studies have found that strategic decision-making through teamwork participation, interaction, and regular consultation with employees, as well as free and open exchanges have positive influence on firm performance (Eddleston & Kellermanns, 2007). Drawing from the stewardship theory, Eddleston, Chrisman, Steier, and Chua (2010) found that participative strategic decision-making and the focus on long-term orientation positively enhance the level of entrepreneurship. Firms that encourage information and knowledge sharing about their specific process tend to be more innovative and efficient. Sharing information with other team members encourages a collective responsibility that allows members to participate in the development of organisational strategies. Therefore, stronger firm performance is likely to be associated with a participative process and firm involvement that will promote regional development. Based on the discussion above, our second hypothesis is as follows:

*H2: The effect of participative strategic decision-making on regional development is higher in family firms than in non-family firms.*

# *Firm bridging social capital*

Family firms are an integral part of the community and institutions in Africa. We argue that their embeddedness in community and institutional environments would allow them to make significant contribution to socioeconomic development. Through their engagement in businesses, socially oriented enterprises, and many economy-related activities, business families in sub-Saharan Africa are in a better position to contribute to socioeconomic development. This is because they combine different sociological and cultural qualities to overcome institutional voids prominent in such economic contexts (Murithi et al., 2020). Empirical evidence from family firms in emerging economies has shown that top-level managers develop strong social capital with managers from other firms, communities, and political leaders, which increases their community involvement (Acquaah, 2012; Mani & Durand, 2019). Family firms represent both the family as an institution and the business as an organisational form when engaged in entrepreneurial activities. Family influence in the African, particularly in Kenyan context, goes beyond the nuclear family. "Family" involves the kin relationships and those in industry member associations and government agencies. Hence, such developed social networks provide strategic resources for entrepreneurial and socially oriented activities with positive effects on development (Adusei, 2016). Therefore, family firms would be able to contribute to regional development outcomes in the African context.

Murithi et al. (2020) argue that business families are in a better position to influence the economic development in sub-Saharan Africa because of their ability to navigate institutional boundaries. Hence, family firms in Africa can manage underdeveloped and dysfunctional formal institutions by using informal institutions such as social relationships and networks (Acquaah, 2012). As family firms operate at the intersection of family and community, and formal and informal institutions, there is a greater chance of them contributing to regional development in comparison to non-family firms. It is important to consider the network resources accessible because of a family's social capital. Familial ties and societal relationships help in bringing in important resources for business. McGrath, O'Toole, Marino, and Sutton-Brady (2018) argue that entrepreneurs and family firms must actively pursue related connections, "beyond early social network ties, to gain access to and use a broader pool of resources and capabilities external to the firm" (p. 523). To access external resources, family firms must be willing to collaborate with other economic and social actors (Dyer & Singh, 1998, 672), to have the ability to coordinate competencies and combine knowledge across (organisational) boundaries, and to sustain its innovativeness by creating and managing the overall network architecture over time (Capaldo, 2007, 585). Therefore, we posit the following hypothesis:

*H3: The effect of bridging social capital on regional development outcomes is higher in family firms than in non-family firms.*

# **Methodology**

To explore the differences and potential strategic behaviours that may explain the extent to which family and non-family firms contribute to regional development based on their self-perception, the study deployed an exploratory survey, which is best suited to this kind of study (Hair et al., 2006). Using a structured survey questionnaire, quantitative data was collected from top-level managers of 307 privately held Kenyan firms.

### *Measures*

The dependent variable is the contribution that the firm makes to regional development outcomes. We define regional development as the application of economic processes and resources available to the region that result in sustainable development and desired economic outcomes for the region (Stimson, Stough, & Roberts, 2006). Bishop, Mason, and Robinson (2009) conceptualised firm contribution to regional development as "direct effects of individual firms to employment, aggregate output (goods and services), and productivity growth as reflected in their investments in resources and development capabilities". In this study, we use three regional outcome measures, drawing on the existing literature: contribution to GDP, employment, and wealth creation (Thurik, Wennekers & Uhlaner, 2002). Each item was measured using 7-point Likert scale (7 for the highest degree of agreement and 1 for the lowest). These are subjective measures as perceived by the top-level managers about their firms' contribution to regional development.

The independent variables are at the firm level and focus on the dimensions of strategic behaviours: firm entrepreneurial orientation, participation in strategic decision-making processes, and bridging social capital relationships. Entrepreneurial orientation is measured using five dimensions: innovativeness, proactiveness, risk-taking, competitive aggressiveness, and autonomy (Casillas & Moreno, 2010). The participative strategic decision-making processes were measured using five items drawn from extracted from Eddleston and Kellermanns (2007). Finally, bridging social capital items were drawn from Acquaah (2012). All items were captured using 7-point Likert scale.

We control for firm age and firm—both categorical variables. Firm age was measured with six categories: less than 5 years, 6–9 years, 10–14 years, 15–19 years, 20–24 years, and above 25 years. Firm size was measured using the number of employees in the following categories: micro (1–9), small (10–49), medium (50–249), and large (250 and above). Finally, the geographic distribution of sales was measured using five levels: county, national, regional, African, and global.

### *Data analysis*

To analyse the dataset, we adopted contemporary structural equation modelling techniques (Hair et al., 2006). We classify a firm as family or non-family with the following two criteria. First, the respondent's self-identification as either a family or non-family firm (Westhead & Cowling, 1998). Second, the level of family involvement (Chua, Chrisman, & Sharma, 1999). In the later classification, five variables were used to collect the responses based on the firm ownership, management, and governance, involvement of transgenerational family members and intrafamily succession. Of the 307 firms included in the sample, 40.4% (*n* = 124) self-identified as family firms, whilst 59.6% (*n* = 183) self-identified as non-family firms. Consequently, firms with high family involvement represented 31% (*n* = 96), while those with low family involvement represented 69% (*n* = 211).

Following the recommendation made by Bryman (2016), a pilot study was conducted using a sample of firms drawn from Strathmore Enterprise Development Centre, which contained firms of the similar characteristics as the main sample used. The analysis of the pilot study indicated that the items measure the expected constructs. We also tested for internal reliability with a Cronbach alpha coefficient. All values are above the required minimum of 0.6 (entrepreneurial orientation = 0.88, decision-making strategy = 0.765, bridging social capital = 0.83, and regional development = 0.878).

The analysis of the demographic characteristics of the sample shows that the majority of the family firms are older (more than 25 years old) while non-family firms are younger (less than 5 years old on average). In terms of size, as measured by the number of employees, the majority of the firms in both categories are medium- to large-sized firms. Most family and nonfamily firms operate in national and regional markets.

Inferential statistical analysis was conducted using exploratory factor analysis and confirmatory factor analysis (Hair et al., 2006). The first stage of analysis was done using the former, which relies on estimation of the factors and the contribution of the variables (items) to the factor loadings as a basis for identifying variables for subsequent analysis (Steinmetz, Davidov, & Schmidt, 2011). Table 9.1 shows the four latent constructs identified with their communalities, Cronbach Alpha, composite reliability, and AVE coefficients. To assess the measurement model, we used the goodness of fit indices (Table 9.2) as specific evidence of construct validity (Hair et al., 2006).

After specifying the measurement model, we adopt the competing equivalent model structure. That is, a single model (i.e., set of relationships) is specified and then alternative formulations of the underlying theory are identified (Hair et al., 2006). Firstly, the model (Table 9.3) shows that the three independent variables (entrepreneurial orientation, decision-making process, and bridging social capital) have direct relationships with regional development outcomes. Secondly, all the three independent variables reported some degree of interaction among themselves that would give rise to their own inter-relationships.

Table 9.3 reports the hypothesised relationships on the differences between the family and non-family firms in their contribution to regional development, based on self-perception. In relation to entrepreneurial orientation, family firms reported a higher and significant contribution to regional development (*β* = 0.278, *p* = 0.002) compared to non-family firms, which reported a positive but not significant effect on regional development (*β* = 0.109, *p* = 0.287). However, participative decision-making within family firms had a statistically negative effect on regional development compared to non-family firms (*β* = −0.107, *p* = 0.201), hence indicating differences between both types of firms. In terms of the bridging social capital effect, non-family firms make a statistically significant contribution (*β* = 0.291, *p* < 0.01) to regional development when compared to family firms (*β* = 0.138, *p* = 0.097).

Based on the aforementioned findings, we confirm that entrepreneurial orientation, participative decision-making, and bridging social capital provide a holistic explanation on the differences between family and non-family firms' contribution to regional development.

Indicator loadings and composite reliability of variables and indicators

### 186 *William Murithi and Kassa Woldesenbet Beta*

*Table 9.2* Fit indices, measurement model (1), structural model (2), interaction model (3) and model criteria

Notes: \*\*\**p*-value < 0.01; \*\**p*-value < 0.05; \**p*-value < 0.10.

### **Discussion and conclusion**

The differences between family and non-family firms in terms of their contribution to regional development can be explained by their strategic behaviours. Even though both types of firms show that their entrepreneurial orientation is positively related to regional development, family firms reported a significant positive effect compared to non-family firms. Thus, this study's findings, while consistent with the previous findings that suggest that family firms are less entrepreneurial than non-family firms (Gómez-Mejía et al., 2007) at the firm level, show that family firms' entrepreneurial orientation effects on regional development is positive and significant. The longterm orientation of family firms and concern for socio-emotional wealth (Gómez-Mejía et al., 2007) prompt entrepreneurial decisions aimed at sustainability rather than short-term gains and this is likely to contribute to regional development (Zahra, Hayton, & Salvato, 2004). Hence, family firms may prefer to forgo short-term performance (financial gains) in order to maintain their ownership control over the firm and this consideration may create sustained value for regional development.

Our research goes beyond establishing that family firms have differentiated contribution to regional development outcomes; it also shows the underlying factors that contribute to the observed differences. Our study is the first of its kind in the Kenyan and sub-Saharan African contexts that empirically shows the differences on the level of entrepreneurial orientation by family and non-family firms and its effect on regional development. It provides an interesting insight into the greater effect family firms' entrepreneurial orientations have on regional development in comparison to non-family firms in Kenya.

Our findings can be explained by the level of family involvement. The interaction of the family, business, and context may enhance family firms' contribution to regional dimensions, compared to non-family ones. Even though this study shows a positive and sustained effect of family firm entrepreneurial orientation on regional development, we caution against hasty conclusions, as there may be circumstances where such positive contributions don't exist. These situations may include conflict within a family such as difficulties in succession or lack of strategic renewal upon the exit or death of a founding family member(s).

Regarding participatory and interactive decision-making (Eddleston and Kellermanns, 2007), this study establishes that family firms' behaviours have a significant negative effect on regional development compared to non-family firms. Therefore, these findings contradict recent studies, which argue that the participation of family owners in decision-making would positively enhance regional development (Basco, 2015; Stough et al., 2015). These negative effects on regional development can be explained by two factors. First, the participation of extended family members in the decision-making process slows down proactive strategies aimed at resource configuration and innovative activities for organisational performance and its effect on regional development. Second, a consultative strategy-making process, typical in family firms in developing economies, culminates with the founders' blessings in such a way that it promotes family-centred economic and non-economic goals.

The findings show that bridging social capital has a direct, strong, and positive effect on regional development outcomes. However, its effect on non-family firms was more pronounced than on family firms. Family firms' utilisation of network social capital for navigating institutional voids and strengthening their social bonds may not necessarily equate with non-family firms' proactiveness in drawing strategic resources aimed at firm performance with a potential impact on regional development. Hence, this study speculates that family firms' bridging social capital may have long-run effect in comparison to short-term effects on regional development. Another potential explanation for the above findings may be that the family becomes an institutional investor with a capacity to leverage institutional resources to generate wealth in the long run. Further, their strong embeddedness in community network structures and pro-social objectives might not be captured by the study—the effect of which could amplify their role in local socioeconomic development in the long-term. Instead, family firms might use bridging social capital to cope with institutional voids, as a buffer from uncertain markets, to make up for the lack of professional management, and to preserve family wealth.

### 188 *William Murithi and Kassa Woldesenbet Beta*

According to Murithi et al. (2020), focusing on the family (instead of family firms) in sub-Saharan Africa shows that the family and the business are not competing sub-systems, as argued in some existing studies. Instead, they complement each other and enable businesses to navigate the complex institutional environment. For instance, the involvement of the extended family becomes a major source of capital, expertise, and information, which can be a result of the informal entrepreneurial activities at the family level (Murithi et al., 2020). Evidence from small firms in Kampala and Uganda showed that the larger the entrepreneur's network (i.e., kinship networks), the more resources they could raise. However, this comes at a higher cost (Khayesi, George, & Antonakis, 2014), showing that the effects of social capital on firm performance can be either positive or negative because of the need to maintain family ties and network relationships, which is very costly in an African context. The family patriarch or matriarch is responsible for the maintenance of family members and contribution to community welfare because of the expectations of the collectivist culture. The high-level dependence on family firms by family members and communities may limit their ability to accumulate resources aimed at firm growth and, hence, restrict their contribution to regional development. Such an analysis suggests that the pathways in which the family firms contribute to regional development are complex and intertwined.

## **Contributions**

This chapter presented comparative evidence on family and non-family firms' contributions to regional development in Kenya. The key conclusion is that the family context is a significant moderator between firms' strategic behaviour, firms' self-perception, and its contribution to regional development.

Theoretically, we can highlight three main implications. First, the conceptualisation of family firms in the African context. The way in which family firms are defined in the Western context is less likely to capture the essence of African family firms because these families extend beyond the nuclear family and include kinships and extended family relationships. Hence, the way in which the family firms are conceptualised in the African context can have several implications for management, governance, succession, and strategic choice literature. Second, African family firms operate not only at the intersection of formal and informal institutions but also in environments characterised by institutional voids. Such institutional contexts merit further theoretical and empirical work to understand how family firms navigate the duality of institutions and institutional voids, how they respond to or cope with volatile changes in the institutional environments, and how family firms perceive their contribution to regional development. Third, our findings show that family and non-family firms contribute differently to regional development in the Kenyan context based on their self-perception and that these differences can be explained in reference to their strategic behaviours.

Given the significant contributions family firms make to regional economic and social development, policy-makers should pay attention to how family and non-family firms contribute to regional development. A better understanding of how economic actors behave and react to the environment can help policy-makers tailor their regional and local policy and increase their impact in communities. National, regional, and local public institutions should be aware of the importance of having reliable data to improve the knowledge that we have about our economies. Public decision-making needs information to develop policies and to alleviate regional disparities or inequalities by engaging local actors.

### **References**

### 190 *William Murithi and Kassa Woldesenbet Beta*

# **10 Family firms and regional entrepreneurship**

The European evidence

*Riccardo Cappelli, Marco Cucculelli and Valentina Peruzzi*

### **Introduction**

Family firms are the most predominant form of business organization and account for a large proportion of employment, business turnover and gross domestic product (Bjuggren, Johansson, & Sjögren, 2011). This relevance has led researchers to focus on the behavioral differences between family and non-family firms, and on the role played by some family-specific attributes in explaining the former's profitability and productivity (Anderson & Reeb, 2003; Sraer & Thesmar, 2007), financing and investment decisions (Anderson, Mansi, & Reeb, 2003; Anderson, Duru, & Reeb, 2012) and internationalization and innovation activities (Minetti, Murro, & Paiella, 2015; Pongelli, Caroli, & Cucculelli, 2016).

The literature has mainly focused on micro-oriented research at the firm and family levels, whereas the role played by family ownership and industry attributes at the aggregate level has received less attention (Basco, 2015). This is particularly evident in the case of regional entrepreneurship, as the extant literature has scarcely explored the connections between local entrepreneurial activity and specific exogenous industry characteristics, like the industry structure and the density of family-owned firms.

The aim of this chapter is two-fold. First, it aims at analyzing whether family firm density, together with industry scale, affects entrepreneurship at the regional level. Second, it investigates whether the development stage of the economy plays a role in this relationship. As this last issue is central to our analysis, we explore the different stages of development of European regions to identify the influence of structural industry characteristics on regional entrepreneurship rates across European geographical areas.

The rationale behind this research study is to connect three complementary streams of analysis: the industry scale, the ownership structure of companies and the stage of industrial development of European regions. For the first, previous studies have demonstrated that a high regional concentration of large scale industries – i.e., the industry scale – negatively affects entrepreneurship (Stuetzer et al., 2016), whereas the prevalence of small businesses has been associated with a higher level of entrepreneurship (Reynolds, Storey, & Westhead, 1994; Lee, Florida, & Acs, 2004; Fritsch & Falck, 2007).1 This makes the industry structure a significant external boundary condition in assessing the development of entrepreneurial activity at the regional level.

As for the second line of research, we argue that in addition to the industry scale, the industry composition – in terms of the prevalent type of ownership – also matters for entrepreneurship, as it can influence the incentives behind individual decisions and, in turn, local entrepreneurial activity (Villalonga & Amit, 2010). A large presence of family firms makes the long-term orientation a pervasive feature of incumbent companies, thus supporting risk-taking in the economy, which, in turn, fosters entrepreneurship (Zahra, Hayton, & Salvato, 2004). Similarly, family firms are very well suited to promote interaction between founders and workers, an aspect that makes it easier for the latter to learn how to start and run a firm.

Finally, as for the third research area, recent evidence on the impact of family ownership on innovation helps to explain why the influence of industry factors on entrepreneurship may run differently depending on the stage of regional development (Cucculelli & Peruzzi, 2020). In regions that are in an early stage of industrial development, foreign direct investments may fuel economic growth because of employment opportunities and other spillovers that are poured into the local economy by external large players. Multinational firms – typically large-sized firms – may also generate positive spillovers on host regions in terms of diffusion of technologies and management practices, thereby fostering local entrepreneurship. Moreover, large external companies may also stimulate local entrepreneurship through the sub-contracting of productive tasks from a vertically integrated process to small-sized satellite businesses. All these aspects make the stage of development of the local economic environment a significant factor in shaping the relationship between industry characteristics – including company ownership – and the process of new firm creation (Smallbone & Welter, 2001).

In this context, the chapter aims at checking whether and to what extent selected industry-level variables – i.e., the average firm size (regional industry scale) and the share of family owned firms (regional family firm density) – matter for regional firm birth rate (regional entrepreneurship), and whether this relationship is facilitated or inhibited by the stage of development of the local economic environment. To test these intuitions, we drew information from two main datasets. First, the Eurostat regional database, which provides the main regional economic and demographic variables (e.g., the firm birth rate and the average firm size in the manufacturing sector) for European countries. Second, the BvD-Amadeus dataset, which provides firm level information (e.g., ownership information) about a large sample of European firms. By merging the two, we ended up with a final sample of 121 regions, located in 13 European countries: Bulgaria, Czech Republic, Estonia, Hungary, Romania, Poland and Slovakia (classified as Eastern European); Denmark, Spain, Finland, France, Italy and Portugal (classified as Western European).

To summarize our findings, estimation results indicate that the average firm size and the share of family firms in the regional industry are negatively and positively associated, respectively, with higher regional firm birth rate. This means that entrepreneurship reacts positively to a more pervasive presence of family firms and negatively to the presence of large companies. However, these results only hold in Western European regions, whereas in Eastern Europe, entrepreneurial initiatives are positively and significantly driven only by the average firm size and the density of family ownership does not play a substantial role.

# **Theoretical background**

### *Industry structure and entrepreneurial activity*

Few theoretical and empirical studies have investigated the relationship between industry structure and entrepreneurial activity (e.g., Bauernschuster, Falck, & Heblich, 2010; Wyrwich, 2013; Glaeser, Kerr, & Kerr, 2015; Stuetzer et al., 2016). In this research area, the classical approach to entrepreneurship is the one put forward by the literature on Industrial Organization (IO). According to this perspective, new firm creation depends on industry characteristics such as the level of capital intensity, the average minimum efficient size (MES) and the level of irreversible investment (i.e., the sunk costs in the case of exit or failure). For instance, large-scale industries are typically associated with high levels of capital intensity, large amount of irreversible investments and the existence of large minimum efficient size, all of which are negatively related to firm entry. Therefore, a key finding of this framework is that large-scale industries only provide a limited number of entrepreneurial opportunities (Siegfried & Evans, 1994; Geroski, 1995).

Within the IO approach to new firms and startups (Santarelli & Vivarelli, 2007), one strand of research has focused on the role of firm size in explaining entrepreneurial phenomena (Parker, 2009; Elfenbein, Hamilton, & Zenger, 2010). These studies, which are closely related to IO literature because of the association between average firm size and industry scale (Beesley & Hamilton, 1984), have built on the idea that the opportunity cost of starting a firm is relatively low when working in a small business, due to low wages, reduced job security and limited opportunities for professional advancements.

In this framework, a number of reasons have been suggested that push people into small firms and then promote their entrepreneurial behavior. First, employees with personality traits that are conducive to entrepreneurship self-select into small firms because of the close similarity in the work environment (Stuetzer et al., 2016). Second, entrepreneurial skills that emanate from the ability of people to perform a broad spectrum of diverse tasks and challenges are higher in small enterprises where the division of labor is low and workers are not highly-specialized (Wagner, 2004; Hyytinen & Maliranta, 2008; Bublitz & Noseleit, 2014; Lechmann & Schnabel, 2014). Third, the propensity to start one's own firm might be stimulated by direct interactions with an entrepreneurial role model, which is more likely to occur in very small firms than in large enterprises. Through such interactions, young workers learn about the process of starting and running a firm, thereby improving their entrepreneurial human capital (Minniti, 2005; Fritsch, 2013).

Although large-scale industries affect entrepreneurial activity at the industry level, there is some evidence that they also determine the regional level of entrepreneurship. Davidsson (1995) analyzed regional entrepreneurial activity in Sweden and shows that small firm density is positively and significantly associated with new firm creation because of good supply of entrepreneurial models, relevant work life experience, and access to practical know-how on how to get a business going. Keeble and Walker (1994), who examined the geographic distribution of new firms and closing firms in the United Kingdom for the period 1980–1990, suggest that, in addition to population growth, housing wealth, professional expertise and urbanization, the presence of small firms fosters entrepreneurial initiatives. Similarly, Reynolds (1994), who looked at 382 labor market areas in the United States, shows that the impact of small firms on the annual birth rate of independent businesses is positive and statistically significant, but tends to vary for different economic sectors and the type of labor market area.

The aforementioned findings have been confirmed by more recent studies. By analyzing labor market areas in the United States, Armington and Acs (2002) found that new firm creation is substantially explained by regional differences in income growth, population, industry intensity and firm size. Similar results are shown by Stuetzer et al. (2016), who analyzed the entrepreneurial activity of British regions and found that the ones with high employment shares of large-scale industries in the 19th century have lower entrepreneurship rates and weaker entrepreneurship culture today. All these contributions make regional heterogeneity in the endowment of small and large firms a crucial issue to be investigated, to understand how entrepreneurship develops within a region.

### *Family ownership and regional entrepreneurship*

Most empirical studies on regional entrepreneurship only partially consider the heterogeneous nature of firms behind the entrepreneurial activity. We believe that a key distinction here might be between family and non-family firms, because the former exhibits a stronger social network within their region and are themselves more likely to be influenced by their environment's community (Stough et al., 2015).

Recently, a growing number of studies have started to analyze the intersection between the entrepreneurship and the family business fields by examining the impact of the family environment on entrepreneurial activities and processes. This literature considers the family firm a highly entrepreneurial organizational context, that is dynamic and change-oriented because of the long-term mindset of family owners and managers. Consistently with this view of family ownership, by using data from 536 U.S. manufacturing companies, Zahra et al. (2004) showed that family firms' culture is an important strategic resource that gives these firms a competitive advantage over their rivals by promoting and sustaining entrepreneurial activities. Similarly, Kellermanns and Eddleston (2006), who focused on a sample of 232 family businesses in the northeastern United States, indicated that a willingness to change and technological opportunity recognition are positively related to entrepreneurship in family firms. Finally, Aldrich and Cliff (2003) found that family dynamics is the most important factor in recognizing entrepreneurial opportunities, because of the exclusive access to resources, norms, attitudes and values of family firms.

Berger and Luckmann (1967) argued that the family can be considered the strongest social institution when it comes to passing on values and attitudes to its members. In the context of family firms, the values that are transmitted to family members are specific knowledge, skills, abilities, attitudes and motivations on how to run a business. Because of their involvement in the firm's ownership and management, family members become endowed with a higher tolerance of failure and risk-taking behaviors. However, the transmission of human and entrepreneurial capital in the context of family firms is also extended to non-family employees and managers. Through close and frequent interactions with the family firm's founder, young workers learn about the process of starting and running a firm, thereby becoming more likely to start their own in the future. Consistent with this view, Fairlie and Robb (2007) found that in the United States, children of business owners are substantially more likely than others to become self-employed. Moreover, Alsos, Carter, and Ljunggren (2014) highlighted the importance of the entrepreneurial household in business creation and growth by demonstrating that farm households play an important role in business incubation by providing resources, knowledge and emotional encouragement.

So far, studies on the relationship between family ownership and entrepreneurial activities have been mainly micro-oriented, thus neglecting the role of family firms in explaining regional outcomes (Stough et al., 2015). Considering the regional density of family firms, we provide an empirical evidence to shed light on the importance of family firms for regional entrepreneurship.

#### *Testable hypotheses*

The aim of our chapter is to investigate the role played by industry scale and family ownership prevalence at the regional level in promoting entrepreneurial initiatives in European regions. In line with the aforementioned theoretical and empirical literature, we expect that the industry scale, i.e., the average firm size at the industry level, is negatively associated with the birth rate of firms at the regional level, whereas the density of family firms has a positive impact. Hence, we formulate our hypotheses as follows:

Hypothesis 1: *Average firm size is negatively associated with the firm birth rate at the regional level.* Hypothesis 2: *Family firm density is positively associated with the firm birth rate at the regional level.*

However, as far as the influence of the industrial structure is concerned, we expect that the relationship between average firm size and entrepreneurial activities may be different in European regions at a lower industrial development stage. Chinitz (1961) used this intuition to explain the different level of entrepreneurship between New York and Pittsburgh, which resulted from the dissimilar processes of past economic development of the two cities. The historical concentration of industries characterized by large, massproduction firms (e.g., the steel industry) hindered entrepreneurial activity in Pittsburgh. On the other hand, the development of decentralized industries (e.g., the garment industry) characterized by the presence of small independent firms fostered entrepreneurship in New York. Using this evidence and exploiting the same underlying rationale, a recent paper by Stuetzer et al. (2016) showed that entrepreneurship activity is actually shaped by the industry structure in the UK, where the presence of large-scale industries in a region is associated with a lower rate of entrepreneurial activity in that area.

Borrowing from Stuetzer et al. (2016), we therefore assume that the industry average firm size may affect entrepreneurial activity in European areas differently according to their stage of industrial development. Large foreign firms that are mainly responsible for the increase of the average firm size in Eastern European regions actually play a crucial role in these areas because of the positive externalities – in terms of diffusion of technologies and management practices – on local businesses, which, in turn, can foster local entrepreneurship. Moreover, we may expect that also the outsourcing of production activities to local agents by large foreign and state-owned enterprises may drive new entrepreneurial activities, along a process of division of labor spurred by the re-organization of vertically-integrated plants. Hence, we test the following additional hypothesis:

Hypothesis 3: *The relationship between average firm size and firm birth rate may be reversed in Eastern European regions.*

# **Data, variables and method**

# *Dataset*

To construct regional variables, we rely on two databases. The Eurostat regional database provides the main economic and demographic variables (e.g., the regional firm birth rate and the regional share of employees in the manufacturing sector) for European NUTS2 regions (Eurostat, 2011) for the period 2011–2016. The Bureau van Dijk–Amadeus database provides information on ownership and headquarter location about European companies, which we use to compute the regional share of family firms in 2009. Combining the two databases, we obtain a final sample of 121 regions of 13 European countries, i.e., Bulgaria, Czech Republic, Denmark, Estonia, Spain, Finland, France, Hungary, Italy, Poland, Portugal, Romania and Slovakia.2

# *Dependent variable*

We measure annual regional entrepreneurship in terms of firm birth intensity in the industry sector (NACE Rev. 2, B-E) (*Regional firm birth rate*), calculated as the ratio between the sectoral regional number of firm births 3 for each year of the reference period 2011–2016 and the sectoral regional number of existing firms in the same year. Due to data constraints, the number of observations on the annual regional firm birth rate (expressed in percentages) ranges from 1 (for 18 regions) to 6 (for 56 regions).

Map 10.1 shows the distribution of the average annual firm birth rate over the period 2011–2016 in the 121 regions considered in our analysis. It shows

*Map 10.1* Regional birth rate of industry firms (*Regional firm birth rate*) – average values for the period 2011–2016.

that regions with the lowest levels (less than 6%) of firm birth rate are located mainly in Italy, Finland and Spain, while regions with the highest levels of firm birth rate (higher than 10%) are located mainly in East European countries like Poland, Romania and Slovakia. Overall, a strong country effect emerges, which will have to be accounted for in the empirical analysis.

# *Industry scale*

To measure the scale of the manufacturing sector (NACE Rev.2, 10–33) at the regional level, we use the average firm size (*Regional firm average size*). This variable is computed as the ratio between the regional number of employees in the manufacturing sector in 2009 and the regional number of firms in the same sector in 2009. Map 10.2 shows the distribution of the average firm size in the 121 regions with available data. Regions with the largest firm sizes (higher than 20 employees) are located mainly in Slovakia and Romania, while those with the smallest firm sizes (less than ten employees) are located mainly in the Czech Republic, Portugal and in the southern regions of Italy, France and Spain.

# *Family firm density*

Family firm density at regional level is computed using information on ownership and the headquarters location of firms in the manufacturing sector,

*Map 10.2* Regional average size of manufacturing firms (*Regional average firm size*) in 2009.

*Map 10.3* Regional density of family manufacturing firms (*Regional family business density*) in 2009.

as provided by Bureau van Dijk–Amadeus. First, to distinguish family firms from non-family firms we use the ownership equity share. We consider a firm as a family firm when the largest shareholder (top 1) in 2009 was an individual or a family. Additionally, we use the NUTS 2 code of the company's headquarters location to assign it to a particular region. Regional family firm density (*Regional family business density*) is the ratio between the regional number of family firms in the manufacturing sector and the regional total number of firms in the manufacturing sector.

Map 10.3 shows the distribution of family firm density in the 121 regions with available data. Regions with the highest shares of family firm density (higher than 0.4) are located mainly in Bulgaria, Italy, Poland and Spain, while regions with the lowest shares of family firm density (less than 0.2) are located mainly in Denmark, France, Portugal and Romania.

### *Econometric specification*

We model regional entrepreneurship using the annual firm birth rate in the industry sector (*Regional firm birth rate*). Our two main variables of interest capturing the industry structure of regions are average firm size (*Regional firm average size*) and family firm density (*Regional family business density*) in the manufacturing sector. We controlled for several factors that

### 202 *Riccardo Cappelli et al.*

affect firm *Regional firm birth rate* and that could be correlated with *Regional firm average size* and *Regional family business density.* The GDP per capita in 2009 (*Regional GDPpci* ) is included to control for the overall level of economic development.4 Moreover, the share of employees in the manufacturing sector (*Regional share of manufacture*) controls for the degree of industrialization of regions. Finally, a set of country dummies (*C*) and year dummies (*T*) are included to control, respectively, for all country-level unobserved characteristics and for time specific events. As results, *Regional firm birth rate* is modelled using the following equation:

Equation (1) represents our main model. As we were also interested in exploring different patterns between Eastern and Western European countries due to the stage of industrial development, additional regressions have been run for the sub-sample of 48 regions belonging to East European countries (i.e., Bulgaria, Czech Republic, Estonia, Poland Hungary, Romania and Slovakia) and the sub-sample of 73 regions belonging to West European countries (i.e., Denmark, Finland, France, Italy, Portugal and Spain).

All estimates are performed using OLS pooled regressions with clustered standard errors. To facilitate the comparison of the regression coefficients, continuous independent variables were standardized, dividing them by two times the sample standard deviation, while the dichotomous independent variables are centred around their sample mean (i.e., demeaned) (Gelman, 2008). The adopted linear rescaling changes the coefficient values of the independent variables, but it does not change the associated *t*-statistics and *p*-values.

### **Estimation results**

Table 10.1 shows the descriptive statistics and matrix of correlations of the unstandardized regression variables. Table 10.2 shows the results of the OLS pooled estimates for regional firm birth rate.

In Table 10.2, models in columns 1, 2 and 3 show the baseline specifications with controls only for the country (Italy as reference category) and year fixed effects. Model 4 extends the basic models by adding all other control variables – i.e., *Regional GDP pc* and *Regional Share of manufacture*.

The coefficient of *Regional firm average size* is negative and significant in Models 1, 2 and 3. This means that the presence of large-scale firms negatively affects entrepreneurship. A two-standard deviations increase in *Regional firm average size* (i.e., an increase of 16.94 employees per firm)

*Table 10.1* Descriptive statistics and correlation matrix

*Table 10.2* Determinants of regional firm birth rate: OLS pooled regressions

Notes: Clustered standard errors in parentheses; \*\*\**p* < 0.01, \*\**p* < 0.05, \**p* < 0.1; Year dummies (included in the models) are not reported for the sake of clarity.

produces an average decrease of 1.55% in regional firm birth rate (see Model 3). These results support Hypothesis 1a. However, when we control for *Regional GDP pc* and *Regional share of manufacture* (see Model 4), the negative effect of *Regional firm average size* decreases and becomes not significant. This means that the relationship between *Regional firm average size* and entrepreneurial activity at regional level may be dependent on the level of industrial development of the region. Eastern and Western European regions differ in terms of stage of industrial development and the role of the manufacturing industry as an engine of growth, thus making the influence of the variable *Regional firm average size* different between the two groups of regions. We turn back to this issue below.

In all models, we find a significant and positive effect of family firms (*Family business*). A two-standard deviation increase in *Regional family business density* (i.e., an increase of 0.38 in the share of family firms) produces an average increase of 1.1% in regional firm birth rate (see Model 3). These results support Hypothesis 1b and suggest that a high density of family firms is conducive to entrepreneurial attitudes and cultures. With regard to the other control variables, we find a negative and significant effect of *Regional Share of manufacture* on the entrepreneurial activity. This means that regions with an economic structure characterised by a strong presence of manufacturing industries show lower regional firm entry rate. Moreover, country dummies are almost always statistically significant: the firm entry rate are particularly high for Poland, Romania and Slovakia as compared to Italy, the reference category.

As argued in Hypothesis 1c, we can expect that *Regional firm average size* reduces regional firm entry rate only in Western European regions, while an opposite effect is expected for Eastern Europe. Table 10.3 reports the results of OLS pooled regressions for the sub-sample of Western European regions (Model 5) and the sub-sample of Eastern European regions (Model 6). All regressions in Table 10.3 include the full set of control variables.

In line with Hypothesis 1c, the coefficient for *Regional firm average size* is negative for Western European regions (Model 5) and positive for Eastern European regions (Model 6). Interestingly, the results show that the coefficient for *Regional family business density* is positive for Western regions (Model 5), but it is not statistically significant for Eastern regions (Model 6). We believe that this evidence, i.e., the scarce or null influence of family business density on entrepreneurship in Eastern European regions, is due to the significant dependence of local industrial sectors on non-local actors, i.e., multinational or other foreign firms. However, further research is needed to comprehensively explain this result.

Additional checks have been conducted to validate the robustness of our main results.5 First, we performed tobit regressions to take into account the fact that the dependent variable is left censored. The results are very similar to those discussed above. Secondly, we performed additional regressions using different subsample periods to account for heterogeneous macroeconomic conditions (crisis and recovery periods). Finally, we assessed the

Notes: Clustered standard errors in parentheses; \*\*\**p* < 0.01, \*\**p* < 0.05, \**p* < 0.1; Country dummies and year dummies (included in the models) are not reported for the sake of clarity.

weak causality of the cross-sectional model by using a rolling-reference window for the dependent variable, from the time interval 2011–2016 to the time interval 2014–2016 and 2015–2016. In all cases, estimated results confirm the main evidence of the paper.

# **Conclusion**