By virtue of their historical connections with a given place, family frms are in a position to adhere to and infuence 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 frm" (Pallares-Barbera et al., 2004, 648). This is deemed to explain performance divergences among family and non-family frms 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 frms 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 frms are found to shape the competitiveness of the region itself. By aggregating the collective actions of family frms, current empirical evidence shows how the regional innovation output is related to the density of family frms present in that region (Berlemann & Jahn, 2016; Block & Spiegel, 2013).

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

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

# **Empirical design**

### *Data and variables*

In order to empirically analyze how the ownership of a frm—where we distinguish between family and non-family frms—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 frm, 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 frms over time. By combining information about the individual and the frm, 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 frm. The second measure entails the geographical distance between the stakeholder and the local frm—that is, *distance to frm*—measured in kilometers. To capture local embeddedness from a wider perspective, both place tenure and the distance to the frm were calculated for each frm stakeholder. We used several stakeholders engaged in a frm through management, ownership, and at the organizational level, who are important for the frm'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 frm.

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

In the empirical estimations, we control for the basic frm and municipal features that infuence the local embeddedness of individuals: frm age, frm size in terms of number of employees, fnancial development in terms of turnover and total assets, whether the frm is part of a multi-establishment frm, 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 frms (Table 7.1).

The descriptive statistics for local embeddedness separated into family and non-family frms show a coherent picture where the former are more locally embedded compared to the latter. Family frms have a higher level of place tenure—i.e., all the different stakeholders have lived in the same municipality as the local frm for a longer time—compared to their non-family counterparts. In some cases, there are signifcant differences. For example, the average years a chairperson in a family frm has lived in the same municipality is 12.6 compared to 10.5 for the chairperson in non-family frms. In relation to the distance to the local frms, we observe the same pattern where stakeholders in family frms have on average a shorter distance to their frm compared to stakeholders in non-family frms. Based on the embedded measures used in this chapter, we fnd that family frms are more locally embedded than non-family frms in terms of their stakeholders. The relationship between local embeddedness and frm 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 frms among stakeholder, regardless of ownership structure, as indicated by the large standard deviations.

In relation to frm-specifc characteristics, family frms are on average older and larger compared to non-family counterparts. That the frms 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 frm. Older frms that have not changed location thus enable a person to live longer in the same location as the frm and for the person to be engaged in the frm for a longer period of time compared to a younger frm.

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

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

### 148 *Stefano Amato et al.*

#### *Empirical model and results*

The descriptive statistics show that stakeholders in family frms are on average more locally embedded. In addition, they show that family frms are on average older, which, in fact, could enable the stakeholders of the frm to be more rooted to the territory, as measured through place tenure. Thus, there seem to be factors associated with family frms 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 frms are more embedded, controlling for frm and location specifc 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 frm for all six stakeholders; there are 12 variables in total. *Family firmit* is a dummy variable that is "1" for family frms and "0" otherwise. *X* ˜ is a vector that captures the control variables at the frm and municipal level. ˜1 and ˜ are the parameters to be estimated. *Year* captures the fxed effects for the different years (2006 to 2014) and *Industry* controls for the 2-digit industry codes of the frm. *uit* is the between-entity error and ˜*it* is the within-entity error. Standard errors are clustered at the frm 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 fxed 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/ frm fxed effects. In this case, the family structure—that is, being a family frm—is normally something that does not change over time, and by using a fxed effects estimation, only the frms that change ownership structure would be captured in the estimations. Because we are interested in the differences between family and non-family frms, it is more appropriate to use the random-effect model. There are also disadvantages to choosing the random effects model over the fxed 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 fxed 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 frms infuences the local embeddedness of different stakeholders. Table 7.2 gives the results for the place tenure while Table 7.3 presents the fndings in relation to local embeddedness, defned as distance to local frms. 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 fndings: random effects model by using place tenure as dependent variable

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

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

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

We can confrm the previous fndings from the descriptive statistics where most stakeholders in family frms overall had greater local embeddedness compared to stakeholders in non-family frms. The results hold also when controlling for frm-specifc characteristics where the age of the frm might be particularly important as a control variable. All stakeholders have a greater level of local embeddedness if part of a family frm, in terms of place tenure, except the owner of the frm. This is an interesting and also rather surprising fnding as the owner of family frms is often a person that belongs to the family. The results indicate that the owners of family frms are less locally embedded in terms of place tenure compared to those of non-family frms. One reason for this could be generational shift in family frms 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 frm and the local embeddedness of the stakeholders can be derived from several different factors. One aspect is the historical roots of family frms 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 frms 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 frm (Pallares-Barbera et al., 2004). Another factor that builds the local embeddedness among stakeholders in family frms is if the frm is founded and run in the same location where the frm founder was born (Pallares-Barbera et al., 2004).

Comparing the different stakeholders, the magnitude of the coeffcient 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 frms have a much stronger local connection compared to other types of frms.

It is interesting to observe the negative association between family frms and the owner as this indicates that the owners in family frms have lived a relatively shorter time period in the same municipality as the frm, compared to owners of non-family frms. Based on the previous theoretical section, one would assume a positive association. As the owners in family-frms are, according to our defnition, 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 frm is located in and are, in many cases, part of the team that owns the frm.

The results in Table 7.2 also highlight the possibility of reverse causality. It might also be that family frms are less able, compared to non-family counterparts, to attract stakeholders from outside their own municipality. Family frms 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 frms to grow and develop and to get new insights from external stakeholders. Thus, local embeddedness and being a family frm will, in this case, act as lock-in effect.

In the next table, the results for local embeddedness defned as distance to the local frm 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 fnd a signifcant relationship between being part of a family frm and local embeddedness in three out of the six measures. For employees that are not managers in the frm and for the chairperson of the frm, being part of a family frm increases their local embeddedness. The negative association between the family frm dummy translates into a shorter distance between the stakeholder and the frm, and hence a greater local embeddedness. On the other hand, for the owner of the frm, we once again fnd that being part of a family frm decreases the local embeddedness of the individual.

When analyzing the control variables, we observe that older frms increase the level of local embeddedness for each of the stakeholders. This is an expected fnding as the age of the frm also affect how long a stakeholder can be locally embedded in terms of place tenure. The relationship between the size of the frm, in terms of employees, and local embeddedness is less clear and is only positively and signifcantly related to local embeddedness in a few estimations. The fnancial size of the frm, 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 frms are able to attract stakeholders external to the local community. More successful frms 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 frm, and hence lower the local embeddedness of the different stakeholders. Being part of a multiestablishment frm increases the local embeddedness of the stakeholders as employees have not only more options to change positions within the frms but also across establishments and through this fnd 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 frms and territories, or "family frm-territory nexus," using an outward perspective, has only recently begun to attract interest in the feld of family business studies. Family frms, like other types of frms, 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 infuence the local *milieu* in which they dwell. In particular, the frm'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 frms' 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 frms are more locally embedded than non-family counterparts.

By relying on a large dataset of Finnish frms, we explore the association between the family nature of the frm and local embeddedness, as expressed in place tenure and the spatial distance, of six different categories of infuential stakeholders of the frm. Our results reveal that stakeholders tend to reside for a longer period of time in the same place as local family frms, which, hence, rely greatly on more persistent and geographically proximate stakeholders. Thus, family frms are more locally embedded where the chairperson of the family frm tends to be a relevant link with their home-territory. Additionally, our fndings show a negative association between family frms' status and spatial distance, with some categories of stakeholders unveiling the higher responsiveness of family frms 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 frms, 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 frm and the social life of the family take place, the interaction between family frms and territory is steadily emerging as a piece missing in the comprehension of family frms' distinctiveness (Basco, 2015; Stough et al., 2015). For family frms, 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 frms would account for the existence of sets of physical, social-institutional, and historical attributes that mesh with the attributes of both family and frm. On the other hand, for regional studies, the recognition of family frms enables investigations in the role of space as an independent production factor and generator of distinctive static and dynamic advantages for the frms located inside.

Finally, our book chapter has relevant public policy implications. First, as the study shows a substantial reliance of family frms on particular stakeholders, any "dis-embedding" event de-anchoring the frm 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 frms. Second, since our results reveal that family frms 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 frms 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 frst attempts to analyze in a systematic and detailed way whether and to what extent family frms 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 refected in higher productivity (i.e., static advantages) and innovation capabilities (i.e., dynamic advantages) of family frms. The embeddedness of family frms may result in a unique network position at the local level, potentially infuencing the acquisition and exploitation of a spatially bounded fow 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 frms 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 frms, 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) defned 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 frms and corporate responsibility in peripheral regions**

*Martin Graffenberger and Franziska Görmar*

## **Introduction**

Research on family frms has traditionally focused on the analytical distinction between them and non-family frms, implying, amongst others, differences in terms of demographic, structural, and behavioural dimensions (Basco, 2015). While family frms, like any economic agent, pursue pecuniary goals, non-fnancial goals are important aspects of their strategic agendas (Aparicio, Basco, Iturralde, & Maseda, 2017). Specifcally, 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 frms' business practices to mediate economic and non-economic goals.

The aforementioned attributes help explain why family frms exhibit high degrees of local embeddedness (Baù, Block, Cruz, & Naldi, 2017; Stough et al., 2015). Embeddedness creates linkages between frms 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 frms, accounting for 58% of private employment and 52% of aggregate turnover, and that many of them are of considerable size (Stiftung Familienunternehmen, 2019), family frms 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 frms 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, frms that are market leaders in specifc product segments, are regarded a suitable example to study corporate responsibility as they typically possess suffcient 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 frms 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 frms 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 specifcations such as frm size and (changes in) the nature of frm ownership as well as the location and size of the towns where they dwell. Furthermore, the selected case frms refect 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 fnd 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 frm 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 frm 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 frms, regardless of their ownership nature and structures, are engaged in corporate giving and corporate volunteering activities.

However, our fndings indicate that ownership structures may affect both scope and intensity of community engagement. Family frms 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 frms' decision-makers grew up and still live locally, socio-emotional place attachment emerges as a distinct driver of frm engagement. Consequently, our study allows the further differentiation of previous fndings on the interrelations between frm engagement and ownership structures (e.g., Bürcher, 2017; Lengauer & Tödtling, 2010). We observe that while family involvement seems to affect the tendency of a frm to engage in corporate support activities (long-term orientation), sponsoring and volunteering activities are common in any frm regardless of its ownership structure.

# **Theoretical framework**

# *Family frms 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 refects the frm-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 specifc 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 frm'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 frms' intentions to pursue non-fnancial 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 frms 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 frms are well embedded locally and beneft 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 frm'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 frm's relation to economic actors, as well as administrative and societal stakeholders, fuctuates (Zellweger et al., 2019).

### *Corporate local and regional responsibility*

The "active involvement of frms in shaping the contexts and networks a frm 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 frms 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 frms 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 fnancial 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 fre brigades and social activities or days with schools and educational institutions. Furthermore, frms 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 frm'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 frms. Additionally, it has been highlighted that corporate responsibility can be seen as a specifc instrument to shape socio-spatial contexts and to maintain favourable local and regional living and business conditions – which might be particularly relevant for frms located in peripheral regions (Bird & Wennberg, 2014; Bürcher, 2017) but also result in elevated expectations regarding the engagement of (internationally successful family) frms. While frm engagement can support processes of local and regional development, associated activities are, due to their voluntary nature, highly volatile, dependent on frm 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 frms in peripheral regions (Bird & Wennberg, 2014) and especially their wider societal implications (Zellweger et al., 2019). Hence, this study specifcally focusses on how frms 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 frms' 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: frms as actors in small-town development**

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

We investigate three case studies of Hidden Champion frms 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 frm 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 feld visits in 2018. Interview material was complemented with data gathered through desk research (from municipal documents, company websites, media etc.).

All three frms 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 briefy portray the companies and give a short insight into their respective local contexts.

**EJOT** and **BSW** frms 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 signifcance to local frms, in regards to their needs for qualifed 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 diffcult fnancial 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 signifcance. Currently, Bad Berleburg builds on a diversifed industrial base characterised by medium-sized and family-owned companies – including the Hidden Champions **EJOT**  and **Berleburger Schaumstoffwerke (BSW)**.

### *Family frms and corporate responsibility* 163

Both frms 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 signifcantly 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 frms have expanded in recent years, partly by reusing former buildings of the healthcare industries and industrial brownfelds. Both companies have their headquarter buildings in central locations, refecting economic relevance and importance for the urban landscape.

In social and cultural terms, Bad Berleburg is not only the headquarters of the frms 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 frms 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 frms understand themselves as rooted in and interwoven with the region where they fnd 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 frms' 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 frm'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 diffcult 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 frms, such as the Hidden Champion **Holmer Maschinenbau GmbH,** expanding their operations.

Due to these recent dynamics, the fnancial 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 infuenced 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 frm. Both sides emphasise that the size of the town may also have a facilitating infuence 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 fre 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 frm and community actors in Schierling. Although there are many well-functioning communication channels, formal and informal, between the municipality and the frm, 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 identifed in each of the selected cases, albeit with different levels of engagement.

All three companies provide fnancial 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 frm 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 beneft.

(Interview EJOT, August 8, 2018)

*Table 8.1* Selected CLRR activities of case frms

In addition to fnancial and material support, all companies grant leaves of absence for employees to participate in fre 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 frms, 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.<sup>2</sup> 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 offce, etc.) are bundled and rooms for further associations and initiatives are available. The total investment is about €2.5 million, of which 70% was fnanced by federal and state funds. Through the donation of €200,000 each by BSW and EJOT, the municipality was able to co-fnance 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 specifc needs of such a place. This corporate engagement is

*Figure 8.1* Roofng 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 specifc and frm-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 frms.

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 frm'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 frms 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 frms contribute signifcantly 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 frms are generally willing to provide substantial (monetary and non-monetary) resources for community purposes. We fnd evidence of the most common activities related to CLRR, such as cultural, social, and educational matters. Therefore, we validate activities identifed in previous studies as central dimensions of frm engagement, which are widely accepted and appreciated activity felds by local/regional initiatives as well as policy-makers (Lengauer & Tödtling, 2010; Vilain, 2010). However, we fnd that frm 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 frms and non-family frms, the study allows for refections on the specifc role of family ownership for CLRR activities and to expand previous research fndings (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 frms, municipalities, and civil society actors, as they constitute determining factors for wider development dynamics of both frms and small towns. Since the spatial focus of engagement is mainly on the immediate frm environments, diverse CLRR activities related to corporate giving and corporate volunteering have particularly pronounced implications for small-town development. CLRR activities, especially in the felds 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 fnd that the ownership nature of the frm (family or non-family) seems not to affect the types of engagements related to corporate giving and corporate volunteering – i.e., all frms 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 frms' specifc 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 frms. 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 specifc socio-emotional motivations are less pronounced for managers in non-family frms, especially if decision-makers do not live locally or if a high fuctuation 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 frm'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 affliation with an international private equity fund. During this period, both frm 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 defning new trustful ties with the municipality and other local actors. Unlike Holmer, BSW and EJOT refect a high degree of continuity as both frms are third-generation family frms. 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 frms, which seems to point to a specifc 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 frms 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 frms 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 frms restrain their efforts.

# **Contributions**

This chapter offers useful perspectives for policy-makers in the context of small-town development. As frms' and municipalities' goals substantially overlap, opportunities for cooperative action emerge. In this context, the identifcation of joint goals between frms, municipalities, and civil society actors is an essential driver of successful cooperation and steering development processes. Corporate engagement provides a specifc 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 specifc challenges, compared to larger agglomerations. To mobilise these potentials and to tap new/additional resources (fnancial, time, ideas, etc.) municipalities need to fnd ways to channel the obviously existing willingness of frms to engage in local and regional matters. The identifcation 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 frms based on common goals, envisaged outcomes, agreed responsibilities and resources, and clear time frames.

Thereby, frms can be actively and strategically involved in local development processes, to create mutually accepted outcomes. As we observe in our research, family frms are comprehensively engaged in local development processes. Besides strategically organising the corporate support activities of family frms, a central challenge for municipal actors can be seen in the activation of non-family frms 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 frms. When it comes to building such distributed structures, our study highlights that small towns might operate as particularly effective environments: the number of potential frms to be targeted is limited, decision-makers within frms 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 frms' strategic effects on regional development**

Evidence from Kenya

*William Murithi and Kassa Woldesenbet Beta*

# **Introduction**

Academic interest in family frms and regional development has grown recently in Western context (Acquaah, 2016; Basco, 2018). Despite the well-recognised contributions of family frms 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 frms in developing and emerging economies remains under studied (Kolk & Rivera-Santos, 2018). For instance, the African continent remains largely unexplored in spite of family frms' prevalence at the national and regional levels (Khavul, Bruton, & Wood, 2009). There are three main reasons why the phenomenon of family frms in Africa has attracted less academic attention. First, policy-makers and governments are not well aware of family frms' contribution to economic and social development. Second, there is a lack of offcial 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 fnancial commitment for academic research on family frms is inadequate.

We believe that Africa provides a unique context for investigating the signifcance of family frms 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 frms in the context of Kenya. Drawing on a quantitative analysis of 307 frms operating in Kenya, our study fnds 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 frms differ in their levels of contributions to regional development in developing economies, such as Kenya, and in sub-Saharan Africa. More specifcally, we fnd that entrepreneurial orientation and bridging social capital had positive and signifcant effects on managers' self-perception on frm 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 frms differ in the extent to which they self-perceived their contribution to regional development.

# **Family frms in Kenya**

Family frms 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 frms account for 60–80% of all employment in Kenya (National Baseline Survey, 1999; Waweru, 2014). According to a PricewaterhouseCoopers report on private frms, 95% of Kenyan family frms that predicted growth were confdent of achieving it, with 32% aiming for aggressive growth over a fveyear period and another 56% expecting steady growth (2014, 6). Contrary to family frms in Western economies, family frms in Kenya (and sub-Saharan Africa in general) face unique ownership, management, governance, and succession structures. Family frms 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 frms have members from the extended family and communities that infuence 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 frms 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 infuence 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 defned as the actions taken by frms or their toplevel managers that are intended to infuence the market environment in which they compete (Kuratko, 2012). The strategic behavioural differences between family and non-family frms can be understood by investigating the infuence of controlling family on business decisions, strategy making, and performance (Abdellatif, Amann, & Jaussaud, 2010). Family and nonfamily frms differ in their strategic behaviours because family involvement alters their goals (Basco, 2017). Family frms, 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 frm from one generation to another.

The differences in strategic behaviours between family and non-family frms are likely to determine their outcomes and, therefore, the way both types of frms contribute to regional development. In general, the strategic behaviour of frms 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 frms' strategic entrepreneurial behaviours, such as wealth creation and advantage-seeking actions (Hitt, Ireland, Sirmon, & Trahms, 2011). We conceptualised strategic behaviours of the frm 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 frms differ in these three dimensions of strategic behaviour and how such differences, if they exist, affect frms' 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 frms are the major contributors to economic development (Hitt et al., 2011). This is because family frms are able to orchestrate resources that lead to individual-, frm-, and regional-level outcomes (Hitt et al., 2011). In addition, the literature on corporate entrepreneurship has highlighted the differences between family and non-family frms 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 frms score low on the fve dimensions of corporate entrepreneurship (Zellweger, Muhlebach, & Sieger, 2010). Short et al. (2009) also found that although family frms 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 frms.

However, as most of these studies focused on either the individual (ownermanager) or frm-level analysis, they underestimated the infuence of the family stakeholders' entrepreneurial orientation on family frms (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 frms to generate transgenerational value. In addition, Basco and Pérez Rodríguez (2009) also called for a holistic view of the family frm by integrating the family and business systems. These authors recommend that researchers should focus on four important aspects of the family frm—strategy, human resources, governance, and succession—in order to understand how family infuences the frm's strategic decision-making.

Indeed, the current conceptualisation of entrepreneurial orientation at the frm level is limited in its explanatory power to show the frm's infuence at regional level. We know more about the effects of entrepreneurial orientation on frm performance, such as the growth and proftability (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 signifcance because entrepreneurial orientations could be shaped by contexts (Welter, 2011; Basco, 2018). Such limitations led to calls for further exploration of frm 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 frm-level entrepreneurship within developing economies and frm performance (Cai, Liu, Deng, & Cao, 2014). We argue that the frm level of entrepreneurship will affect regional development, through performance and social engagement. Our frst hypothesis is as follows:

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

### *Firm strategic decision-making process*

The basic strategic management processes between family and non-family frms 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 frms (Lee, 2006). In family frms, family members are the main stakeholders likely to infuence the strategic management process in comparison to non-family frms, where different shareholders infuence the decision-making process and where they follow the proft maximisation goal. Furthermore, family stakeholders play an important role in strategic renewal, entrepreneurship, frm growth, innovation, and performance of family frms (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 frm in order to remain autonomous. Families always seek autonomy for control purposes over ownership and management, even in the context of poor fnancial performance (Gómez-Mejía et al., 2007). In doing so, a controlling family coalition pursues family-centred fnancial and non-fnancial 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 infuence on frm 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 specifc process tend to be more innovative and effcient. Sharing information with other team members encourages a collective responsibility that allows members to participate in the development of organisational strategies. Therefore, stronger frm performance is likely to be associated with a participative process and frm 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 frms than in non-family frms.*

# *Firm bridging social capital*

Family frms 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 signifcant 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 frms in emerging economies has shown that top-level managers develop strong social capital with managers from other frms, communities, and political leaders, which increases their community involvement (Acquaah, 2012; Mani & Durand, 2019). Family frms represent both the family as an institution and the business as an organisational form when engaged in entrepreneurial activities. Family infuence 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 frms 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 infuence the economic development in sub-Saharan Africa because of their ability to navigate institutional boundaries. Hence, family frms in Africa can manage underdeveloped and dysfunctional formal institutions by using informal institutions such as social relationships and networks (Acquaah, 2012). As family frms 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 frms. 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 frms 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 frm" (p. 523). To access external resources, family frms 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 frms than in non-family frms.*

# **Methodology**

To explore the differences and potential strategic behaviours that may explain the extent to which family and non-family frms 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 frms.

### *Measures*

The dependent variable is the contribution that the frm makes to regional development outcomes. We defne 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 frm contribution to regional development as "direct effects of individual frms to employment, aggregate output (goods and services), and productivity growth as refected 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 frms' contribution to regional development.

The independent variables are at the frm level and focus on the dimensions of strategic behaviours: frm entrepreneurial orientation, participation in strategic decision-making processes, and bridging social capital relationships. Entrepreneurial orientation is measured using fve dimensions: innovativeness, proactiveness, risk-taking, competitive aggressiveness, and autonomy (Casillas & Moreno, 2010). The participative strategic decision-making processes were measured using fve 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 frm age and frm—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 fve 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 frm as family or non-family with the following two criteria. First, the respondent's self-identifcation as either a family or non-family frm (Westhead & Cowling, 1998). Second, the level of family involvement (Chua, Chrisman, & Sharma, 1999). In the later classifcation, fve variables were used to collect the responses based on the frm ownership, management, and governance, involvement of transgenerational family members and intrafamily succession. Of the 307 frms included in the sample, 40.4% (*n* = 124) self-identifed as family frms, whilst 59.6% (*n* = 183) self-identifed as non-family frms. Consequently, frms 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 frms drawn from Strathmore Enterprise Development Centre, which contained frms 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 coeffcient. 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 frms are older (more than 25 years old) while non-family frms are younger (less than 5 years old on average). In terms of size, as measured by the number of employees, the majority of the frms in both categories are medium- to large-sized frms. Most family and nonfamily frms operate in national and regional markets.

Inferential statistical analysis was conducted using exploratory factor analysis and confrmatory factor analysis (Hair et al., 2006). The frst 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 identifed with their communalities, Cronbach Alpha, composite reliability, and AVE coeffcients. To assess the measurement model, we used the goodness of ft indices (Table 9.2) as specifc 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 specifed and then alternative formulations of the underlying theory are identifed (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 frms in their contribution to regional development, based on self-perception. In relation to entrepreneurial orientation, family frms reported a higher and signifcant contribution to regional development (*β* = 0.278, *p* = 0.002) compared to non-family frms, which reported a positive but not signifcant effect on regional development (*β* = 0.109, *p* = 0.287). However, participative decision-making within family frms had a statistically negative effect on regional development compared to non-family frms (*β* = −0.107, *p* = 0.201), hence indicating differences between both types of frms. In terms of the bridging social capital effect, non-family frms make a statistically signifcant contribution (*β* = 0.291, *p* < 0.01) to regional development when compared to family frms (*β* = 0.138, *p* = 0.097).

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

*Table 9.1* 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 frms in terms of their contribution to regional development can be explained by their strategic behaviours. Even though both types of frms show that their entrepreneurial orientation is positively related to regional development, family frms reported a signifcant positive effect compared to non-family frms. Thus, this study's fndings, while consistent with the previous fndings that suggest that family frms are less entrepreneurial than non-family frms (Gómez-Mejía et al., 2007) at the frm level, show that family frms' entrepreneurial orientation effects on regional development is positive and signifcant. The longterm orientation of family frms 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 frms may prefer to forgo short-term performance (fnancial gains) in order to maintain their ownership control over the frm and this consideration may create sustained value for regional development.

Our research goes beyond establishing that family frms have differentiated contribution to regional development outcomes; it also shows the underlying factors that contribute to the observed differences. Our study is the frst 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 frms and its effect on regional development. It provides an interesting insight into the greater effect family frms' entrepreneurial orientations have on regional development in comparison to non-family frms in Kenya.

Our fndings can be explained by the level of family involvement. The interaction of the family, business, and context may enhance family frms' contribution to regional dimensions, compared to non-family ones. Even though this study shows a positive and sustained effect of family frm 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 confict within a family such as diffculties 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 frms' behaviours have a signifcant negative effect on regional development compared to non-family frms. Therefore, these fndings 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 confguration and innovative activities for organisational performance and its effect on regional development. Second, a consultative strategy-making process, typical in family frms in developing economies, culminates with the founders' blessings in such a way that it promotes family-centred economic and non-economic goals.

The fndings show that bridging social capital has a direct, strong, and positive effect on regional development outcomes. However, its effect on non-family frms was more pronounced than on family frms. Family frms' utilisation of network social capital for navigating institutional voids and strengthening their social bonds may not necessarily equate with non-family frms' proactiveness in drawing strategic resources aimed at frm performance with a potential impact on regional development. Hence, this study speculates that family frms' bridging social capital may have long-run effect in comparison to short-term effects on regional development. Another potential explanation for the above fndings 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 frms 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 frms) 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 frms 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 frm 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 frms by family members and communities may limit their ability to accumulate resources aimed at frm growth and, hence, restrict their contribution to regional development. Such an analysis suggests that the pathways in which the family frms contribute to regional development are complex and intertwined.

### **Contributions**

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

Theoretically, we can highlight three main implications. First, the conceptualisation of family frms in the African context. The way in which family frms are defned in the Western context is less likely to capture the essence of African family frms because these families extend beyond the nuclear family and include kinships and extended family relationships. Hence, the way in which the family frms are conceptualised in the African context can have several implications for management, governance, succession, and strategic choice literature. Second, African family frms 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 frms navigate the duality of institutions and institutional voids, how they respond to or cope with volatile changes in the institutional environments, and how family frms perceive their contribution to regional development. Third, our fndings show that family and non-family frms 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 signifcant contributions family frms make to regional economic and social development, policy-makers should pay attention to how family and non-family frms 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 frms and regional entrepreneurship**

The European evidence

*Riccardo Cappelli, Marco Cucculelli and Valentina Peruzzi*

### **Introduction**

Family frms 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 frms, and on the role played by some family-specifc attributes in explaining the former's proftability and productivity (Anderson & Reeb, 2003; Sraer & Thesmar, 2007), fnancing 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 frm 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 specifc exogenous industry characteristics, like the industry structure and the density of family-owned frms.

The aim of this chapter is two-fold. First, it aims at analyzing whether family frm 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 infuence 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 frst, 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 signifcant 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 infuence the incentives behind individual decisions and, in turn, local entrepreneurial activity (Villalonga & Amit, 2010). A large presence of family frms 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 frms 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 frm.

Finally, as for the third research area, recent evidence on the impact of family ownership on innovation helps to explain why the infuence 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 frms – typically large-sized frms – 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 signifcant factor in shaping the relationship between industry characteristics – including company ownership – and the process of new frm 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 frm size (regional industry scale) and the share of family owned frms (regional family frm density) – matter for regional frm 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 frm birth rate and the average frm size in the manufacturing sector) for European countries. Second, the BvD-Amadeus dataset, which provides frm level information (e.g., ownership information) about a large sample of European frms. By merging the two, we ended up with a fnal sample of 121 regions, located in 13 European countries: Bulgaria, Czech Republic, Estonia, Hungary, Romania, Poland and Slovakia (classifed as Eastern European); Denmark, Spain, Finland, France, Italy and Portugal (classifed as Western European).

To summarize our fndings, estimation results indicate that the average frm size and the share of family frms in the regional industry are negatively and positively associated, respectively, with higher regional frm birth rate. This means that entrepreneurship reacts positively to a more pervasive presence of family frms 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 signifcantly driven only by the average frm 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 frm creation depends on industry characteristics such as the level of capital intensity, the average minimum effcient 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 effcient size, all of which are negatively related to frm entry. Therefore, a key fnding 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 frms and startups (Santarelli & Vivarelli, 2007), one strand of research has focused on the role of frm 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 frm size and industry scale (Beesley & Hamilton, 1984), have built on the idea that the opportunity cost of starting a frm 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 frms and then promote their entrepreneurial behavior. First, employees with personality traits that are conducive to entrepreneurship self-select into small frms 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 frm might be stimulated by direct interactions with an entrepreneurial role model, which is more likely to occur in very small frms than in large enterprises. Through such interactions, young workers learn about the process of starting and running a frm, 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 frm density is positively and signifcantly associated with new frm 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 frms and closing frms 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 frms fosters entrepreneurial initiatives. Similarly, Reynolds (1994), who looked at 382 labor market areas in the United States, shows that the impact of small frms on the annual birth rate of independent businesses is positive and statistically signifcant, but tends to vary for different economic sectors and the type of labor market area.

The aforementioned fndings have been confrmed by more recent studies. By analyzing labor market areas in the United States, Armington and Acs (2002) found that new frm creation is substantially explained by regional differences in income growth, population, industry intensity and frm 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 frms 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 frms behind the entrepreneurial activity. We believe that a key distinction here might be between family and non-family frms, because the former exhibits a stronger social network within their region and are themselves more likely to be infuenced 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 felds by examining the impact of the family environment on entrepreneurial activities and processes. This literature considers the family frm 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 frms' culture is an important strategic resource that gives these frms 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 frms. 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 frms.

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 frms, the values that are transmitted to family members are specifc knowledge, skills, abilities, attitudes and motivations on how to run a business. Because of their involvement in the frm'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 frms is also extended to non-family employees and managers. Through close and frequent interactions with the family frm's founder, young workers learn about the process of starting and running a frm, 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 frms in explaining regional outcomes (Stough et al., 2015). Considering the regional density of family frms, we provide an empirical evidence to shed light on the importance of family frms 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 frm size at the industry level, is negatively associated with the birth rate of frms at the regional level, whereas the density of family frms has a positive impact. Hence, we formulate our hypotheses as follows:

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

However, as far as the infuence of the industrial structure is concerned, we expect that the relationship between average frm 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 frms (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 frms 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 frm size may affect entrepreneurial activity in European areas differently according to their stage of industrial development. Large foreign frms that are mainly responsible for the increase of the average frm 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 frm size and frm 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 frm 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 frms in 2009. Combining the two databases, we obtain a fnal 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.<sup>2</sup>

### *Dependent variable*

We measure annual regional entrepreneurship in terms of frm birth intensity in the industry sector (NACE Rev. 2, B-E) (*Regional frm birth rate*), calculated as the ratio between the sectoral regional number of frm births 3 for each year of the reference period 2011–2016 and the sectoral regional number of existing frms in the same year. Due to data constraints, the number of observations on the annual regional frm 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 frm 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 frms (*Regional frm birth rate*) – average values for the period 2011–2016.

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that regions with the lowest levels (less than 6%) of frm birth rate are located mainly in Italy, Finland and Spain, while regions with the highest levels of frm 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 frm size (*Regional frm 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 frms in the same sector in 2009. Map 10.2 shows the distribution of the average frm size in the 121 regions with available data. Regions with the largest frm sizes (higher than 20 employees) are located mainly in Slovakia and Romania, while those with the smallest frm sizes (less than ten employees) are located mainly in the Czech Republic, Portugal and in the southern regions of Italy, France and Spain.

# *Family frm density*

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

 *Map 10.2* Regional average size of manufacturing frms (*Regional average frm size*) in 2009.

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

as provided by Bureau van Dijk–Amadeus. First, to distinguish family frms from non-family frms we use the ownership equity share. We consider a frm as a family frm 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 frm density (*Regional family business density*) is the ratio between the regional number of family frms in the manufacturing sector and the regional total number of frms in the manufacturing sector.

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

### *Econometric specifcation*

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

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affect frm *Regional frm birth rate* and that could be correlated with *Regional frm 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 specifc events. As results, *Regional frm 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 coeffcients, 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 coeffcient 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 frm birth rate.

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

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

*Table 10.1* Descriptive statistics and correlation matrix

*Table 10.2* Determinants of regional frm 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 frm 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 frm average size* decreases and becomes not signifcant. This means that the relationship between *Regional frm 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 infuence of the variable *Regional frm average size* different between the two groups of regions. We turn back to this issue below.

In all models, we fnd a signifcant and positive effect of family frms (*Family business*). A two-standard deviation increase in *Regional family business density* (i.e., an increase of 0.38 in the share of family frms) produces an average increase of 1.1% in regional frm birth rate (see Model 3). These results support Hypothesis 1b and suggest that a high density of family frms is conducive to entrepreneurial attitudes and cultures. With regard to the other control variables, we fnd a negative and signifcant 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 frm entry rate. Moreover, country dummies are almost always statistically signifcant: the frm 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 frm average size*  reduces regional frm 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 coeffcient for *Regional frm average size* is negative for Western European regions (Model 5) and positive for Eastern European regions (Model 6). Interestingly, the results show that the coeffcient for *Regional family business density* is positive for Western regions (Model 5), but it is not statistically signifcant for Eastern regions (Model 6). We believe that this evidence, i.e., the scarce or null infuence of family business density on entrepreneurship in Eastern European regions, is due to the signifcant dependence of local industrial sectors on non-local actors, i.e., multinational or other foreign frms. 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 confrm the main evidence of the paper.

# **Conclusion**

In this chapter we investigated the impact of industry scale and family frm density on new entrepreneurial initiatives at the regional level in Europe. By drawing information on 121 regions located in 13 European countries from the Eurostat regional database and the BvD-Amadeus database, we found that the regional industry scale (i.e., the average frm size at the industry level) and the regional density of family frms positively affect regional entrepreneurship (i.e., the regional frm birth rate). However, when the level of industrial development is taken into account – and European regions are classifed either as Eastern or Western – these results only hold for Western European regions, whereas in Eastern European regions the industry scale variable has a positive (instead of negative) infuence on entrepreneurship and the contribution of family frm density almost disappears.

The main contribution of this chapter is to explore behavioral differences between family and non-family frms in a regional context. Existing literature highlights the importance of family ownership in explaining frms' economic and innovative behaviors, but partially neglects the role played by family frms within the geographical context. Family frms can beneft from a strong social network and they are more embedded in the industrial setting of the region than non-family frms. This book chapter provides an

# 206 *Riccardo Cappelli et al.*

empirical evidence to shed light on the impact of family frms on entrepreneurship as a regional outcome.