When Can Families Fill Voids? Firms’ Reliance on Formal and Informal Institutions in R&D Decisions

Abstract

Firms are more prone to allocate their resources to research and development (R&D) when they are confident about their ability to appropriate the value created through these activities. In this regard, policymakers introduce formal intellectual property rights (IPR) institutions to create an innovation-friendly environment. Less formalized shared values and norms are however likely to affect the extent to which organizations depend on the strength of formal institutions in determining their R&D strategy. Embracing an institution-based perspective on firm-level strategic decision-making, we examine whether the degree to which a firm relies on strong formal IPR institutions in R&D decisions depends on the configuration of informal institutions in its environment, including family and societal culture. We test our hypotheses on a representative sample of privately-held European manufacturing firms and find that the family institution can play an “institutional void filling” role through involvement in ownership and management. This is particularly the case when the firm is embedded in a collectivist culture coherent with the family’s values and norms imbued in the business. Our study offers contributions to the institution-based view, innovation, and family business literatures.