Innovation Outcomes: Spin-off Processes in Family Firms (Management Project)

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ABSTRACT

The purpose of this thesis was to analyse the relationship between being an employee of a family firm and transition to self-employment. It was ascertained empirically whether being employees of family firms have a positive influence on the phenomenon of spin-offs in Sweden.

Using a data set of individuals as well as firms for the whole of Sweden, the thesis applied a logistic regression model to analyse the influence of family firms on spin-off processes. Specifically I examined how employees of firms as at 2007 transitioned to self-employment in 2008. I also examined the characteristics of employees who spin-off and the choice of industry of operation of spin-offs.

Disagreements between owners of family firms and employees about the strategic focus of the business arise as a result of the long-term horizon of family firms, coupled with agency issues as well as organisational culture that encourages the direct involvement of owners of family firms in the routines. Employees who discover innovative and risky ideas are likely to exploit them outside the company due to the reluctance of the family firm to implement them, due to its long-term orientation.

The thesis established a nexus between family firms and spin-off processes. The results suggest that being an employee of a family firm has a positive and significant influence on the decision to transition to self employment. The results also indicate that employees in relatively higher occupational categories are less likely to spin-off as compared to employees in relatively lower occupational classifications. In terms of the choice of industries of operation, it is found that spin-offs are less likely to be established in the same industry as their parent firms. Increasingly, spinoffs are carving their own images in their respective new industries. Last but not least, contrary to evidence that employees of smaller firms are more likely to spin-off, our results show otherwise.

THEORETICAL BACKGROUND AND HYPOTHESES

Figure 2.1: Theoretical and Analytical Framework

Figure 2.1: Theoretical and Analytical Framework.

Following the theoretical background, an analytical model is proposed upon which the analysis in this thesis is anchored. The core elements in the analytical model include: Organisational culture; social capital; resource base view; agency issues; professionalization of family firms and succession as seen in figure 2.1. The subsequent parts of the section show how these core elements bring about disagreement about the strategic choices of family firms, and how that encourages employees to transition to self-employment.

METHODOLOGY

Collection of Data

The individual level data set used in this study is from Statistics Sweden, which is the state institution in charge of collecting and managing national statistical data. This is a comprehensive data in which all firms or establishments in Sweden are captured in different data sets. The location of firms as well as individual employees is captured.

Apart from the individual data of all persons in Sweden, the total number of employees in the country, industrial classification according to the European Community, and the International Labour Organisation (ILO) employment classifications are also covered in this database. The demographic data of individuals such as gender, wage income, education, professional status, civil status, place of residence and birth are all available. Also available are balance sheet information of firms such as remuneration, turnover value added and sales. The data also identify MNEs.

RESULTS

From the data set for 2008 that contains data of all individuals in Sweden, all self-employed people are identified by their professional codes. I traced them back to the 2007 data set to identify those who in 2007 were employees or owners of firms. This is done using their professional codes. This leaves me with a total of 4741782 observations. I also identified all self employed people in 2008.

Those that worked as employees of other firms in 2007 and became self-employed in 2008 are classified as spin-offs (Also explained in section 3.2.2). This is then merged with the balance sheet data to include firm level variables such as net turnover and value added. Value added is used to further determine value added per employee. The ownership data set is also merge with the main data set to determine the MNE status of firms.

ANALYSIS

Family Firms as Seedbeds for Spin-offs

The thesis set out to measure the effect of family run firms on spin-off processes in Sweden. This particular aspect of the study represents the novelty of this thesis. Our main hypothesis is that employees who work in family firms are more likely to spin-off. The evidence suggests that employees of family firms are more likely to go into self-employment by way of establishing or owning firms as compared to employees of non-family firms.

Furthermore the average marginal effect suggests that employees of family firms are 0.87% more likely to spin-off as compared to employees of non-family firms as captured in table 4.3. This is positively significant and shows the level of influence of familiness on spin-off process among employees of firms in Sweden.

CONCLUSION

New firms remain the lifeblood of many economies, including Sweden. Apart from introducing new innovations they also serve as source employment for the increasing workforce, especially graduates (Fritsch, 2011). Some employees would usually work as employees for incumbent firms for a considerable period time before choosing self-employment. (Klepper, et al, 2010). By this they get educated about the process and also get exposed to networks (Gompers et al, 2005).

Even though many have investigated the kinds of firms such as MNEs, large firms and Venture capital supported firms just to mention a few from which these employees exit to establish their own firms (Boschma and Wending, 2007; Eriksson and Kuhn, 2006; Klepper, 2009), this thesis focused primarily on family firms due to their overwhelming representation and contribution to the Swedish economy (Bjuggren et al, 2007).

Using the Swedish individual data of employees and firms, this thesis analysed how being an employee of a family firm accounts for the transition to self-employment in Sweden. Specifically, I analysed how employees of family firms as at 2007 switch to self-employment in the year 2008. This thesis set out to test the following hypotheses: 1) Employees of family firms are more likely to choose self-employment 2) Employees of family firms at higher-level management are more likely to become self-employed. 3) Spinoffs of family firms are established in the same industry as their parent firms and 4) Non-family employees are more likely to spin-off when there is an inter generational succession in a family firm. Due to data availability I was unable to measure succession, thus the fourth hypothesis has not been tested.

Source: BTH
Authors: Abdul-Basit Issah

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