Political embeddedness, socioemotional wealth, and R&D investment in family firms: Evidence from China as a transition economy

Abstract

The behavioral agency model predicts that family firms underinvest in R&D to preserve socioemotional wealth. In transition economies, family firms suffer from institution voids, so political embeddedness helps them do business. In a mixed gamble analysis of publicly listed firms in China, we find that politically embedded family firms are more likely to invest in R&D than those that are not politically embedded. However, this effect is weaker when the firms are in more-competitive industries or regions with higher speed of pro-market reforms. Hence, in regions with higher pro-market reforms speed or in more-competitive industries of China, family firms should be aware that potential financial and SEW gains derived from R&D investment are less dependent on the government and that political embeddedness does not always confer advantages. Family firms need to be strategic in response to institutional changes when implementing nonmarket strategies.