Entrepreneurial Orientation, Risk Taking, and

Performance in Family Firms

Lucia Naldi, Mattias Nordqvist, Karin Sjberg, Johan Wiklund

This article focuses on risk taking as one important dimension of entrepreneurial orientation and its impact in family rms. Drawing on a sample of Swedish SMEs, we nd
that risk taking is a distinct dimension of entrepreneurial orientation in family rms
and that it is positively associated with proactiveness and innovation. We also nd that
even if family rms do take risks while engaged in entrepreneurial activities, they take
risk to a lesser extent than nonfamily rms. Moreover, and most importantly for our
understanding of entrepreneurial orientation in family rms, we nd that risk taking in
family rms is negatively related to performance. Both theoretical and practical implications of our ndings are provided.

Introduction
The relationship between entrepreneurship and
risk taking has long puzzled researchers. Research
at the individual level has found little empirical
evidence to support the idea that entrepreneurs
take considerable risks. For example, on average,
entrepreneurs do not take greater risks than
managers (Brockhaus, 1980), and terms such as
risk avoiders (Miner, 1990) or risk optimizers
(McClelland, 1961) have been suggested for entrepreneurs. One important reason for these inconclusive results is likely to be that the rm-level
governance structure in which entrepreneurial
behavior takes place inuences managers risk
choices (Wiseman & Gomez-Meija, 1998). More
precisely, a problem with current literature on
entrepreneurship and risk taking is that not
enough attention has been paid to the role of the
organizational context in which this risk taking
takes place. Firms differ in terms of their organizational and governance structures and risk
taking may be higher in some organizational contexts than in others, as agency theorists argue

(Eisenhardt, 1989; Fama & Jensen, 1983; Wiseman

& Gomez-Meija, 1998; Zajac & Westphal, 1994).
Corporate entrepreneurship literature also
indicates that organizational context plays a role
in risk taking. A growing stream in this research
examines the concept of entrepreneurial orientation (EO) (Covin & Slevin, 1986, 1989; Lumpkin &
Dess, 1996; Lyon, Lumpkin, & Dess, 2000; Miller,
1983). EO is a construct that addresses the
mindset of rms engaged in the pursuit of venture
creation and provides a useful framework for
research into entrepreneurial activity. Many scholars have used EO to describe a fairly consistent set
of related activities or processes (e.g., Wiklund &
Shepherd, 2003). Such processes incorporate a
wide variety of activities, including a rms
strategic decision-making styles and business
practices, where EO reects the organizational
processes, methods and styles that rms use to act
entrepreneurially (Lumpkin & Dess, 1996, p. 139).
This research has found positive associations
among risk taking and other aspects of entrepreneurial behavior (e.g., Rauch, Wiklund, Freese, &
Lumpkin, 2004). For instance, in organizational

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33

Naldi, Nordqvist, Sjberg, Wiklund

contexts characterized by innovation and proactiveness, risk taking appears to be substantial.

Companies generating new products based on
technological innovations typically take risks, as
the demand for the new product is unknown.
This research on EO has contributed to our
understanding of some of the relationships
between entrepreneurship and risk taking; that
is, it has shown that innovative and proactive
strategies are generally associated with risk
taking. However, much more can be learned
about how different organizational contexts moderate the strength of EO dimensions such as risk
taking (Lumpkin & Dess, 1996; Lyon et al., 2000).
Agency theory stresses that the extent of involvement in risky activities is likely to be inuenced
by the ownership and governance of the rm
(Fama, 1980; Fama & Jensen, 1983; Jensen &
Meckling, 1976). Scholars of EO and agency
theory share an interest in how risk taking affects
performance (e.g., Wiklund & Shepherd, 2003;
Wiseman & Catanach, 1997). A meta-analysis of
the relationship between EO and performance
showed that across studies, the two constructs
were positively correlated (Rauch et al., 2004).
However, the analysis also showed that risk
taking had a signicantly smaller correlation
with performance than other aspects of EO. Similarly, in their review of the relationship between
risk taking and performance, Wiseman and Catanach (1997) found that arguments and results of
positive as well as negative associations between
risk taking and performance existed in the literature. In their empirical analyses, they found that
risk taking had positive effects on performance in
certain contexts, while the effect was negative in
other contexts (Wiseman & Catanach, 1997). Just
as the relationship between entrepreneurship and
risk taking may be context specic, we argue that
the relationship between risk taking and performance is better understood by taking into
account the organizational context, and especially
the relationship between and nature of ownership, governance, and management.
We believe that family rms constitute a relevant organizational context in which to examine
this concept. As we will argue, family rms are

likely to handle risk differently than other types of

rms, partly because management and ownership
are not separated (Fama & Jensen, 1983; Daily &
Dollinger, 1992) and partly because of the family
nature of ownership and management (Carney,
2005; Schulze, Lubatkin & Dino, 2003; Schulze,
Lubatkin, Dino, & Buchholtz, 2001; Zahra, 2005).
Research on entrepreneurship in family rms,
including entrepreneurial orientation and the role
of risk taking, is increasing but still scarce (Habbershon & Pistrui, 2002; Zahra, 2005; Zahra,
Hayton, & Salvato, 2004). Therefore, by combining
insights from the literature on entrepreneurial
orientation, family rms, and agency theory, the
purpose of this article is twofold. First, we set out
to investigate whether risk taking is an important
aspect of EO in family rms. Second, we examine
the relationship between risk taking and performance in family rms. Exploratory and conrmatory factor analysis are used to investigate the
former; multiple regression analysis to investigate
the latter. The present study makes two important
contributions. First, we extend our knowledge of
EO in general and risk taking in particular with
regard to its applicability in one distinct organizational context. Second, we shed light on the
inuence that the risk-taking dimension of entrepreneurial orientation has on performance in
family rms, thereby advancing our knowledge of
corporate entrepreneurship in this common type
of rm. In the following section we present theory
and hypotheses. Thereafter, the research method
is discussed, followed by the analysis and results.
We then discuss the results, offer implications,
and address the most important limitations of
our research, before ending with our major
conclusions.

Theory and Hypotheses

Defining the Family Firm
Family rms can be viewed as a contextual
hybrida unique combination of two sets of
rules, values, and expectations: the familys and
the businesss (Flemons & Cole, 1992; Gersick,
Davis, McCollom, Hampton, & Lansberg, 1997;

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Entrepreneurial Orientation, Risk Taking, and Performance in Family Firms

Tagiuri & Davis, 1982). Family rms share certain

characteristics that render them unique in terms
of patterns of ownership, governance, and succession (Chua, Chrisman, & Sharma, 1999; Steier,
2003). For instance, owner-families share the
desire for ownership control and the continuity of
family involvement in the rm. To fully appreciate
these special characteristics, it is crucial to focus
on family rms where the family is likely to have
considerable impact on entrepreneurial activities.
We therefore dene family rms as rms where
one family group controls the company through a
clear majority of the ordinary voting shares, the
family is represented on the management team,
and the leading representative of the family perceives the business to be a family rm (Westhead
& Cowling, 1999).

Risk Taking and Entrepreneurial

Orientation
Scholars disagree regarding to what extent family
rms constitute an organizational context that
supports or constrains an entrepreneurial orientation (Habbershon & Pistrui, 2002; Zahra, 2005).
Family rms are often characterized as conservative (Aronoff & Ward, 1997; Kets de Vries, 1993;
Sharma, Chrisman, & Chua, 1997), resistant to
change and introverted (Hall, Melin, & Nordqvist,
2001), contradicting what would be considered
entrepreneurial. The risk of losing family wealth
created over a long period of time (Sharma et al.,
1997) may also inhibit family rms from engaging
in entrepreneurial activities. At the same time,
family rms have been viewed as examples of
entrepreneurial rms (Litz, 1995). There are
several arguments supporting the view that family
rms can preserve their entrepreneurial capacity
and continue to engage in risky projects and ventures (Aldrich & Cliff, 2003; Rogoff & Heck, 2003;
Zahra et al., 2004). Recent empirical research has
shown that entrepreneurial activity is a common
characteristic of many family rms (e.g., Hall
et al., 2001; Steier, 2003; Zahra, 2005; Zahra et al.,
2004). Indeed, in todays rapidly changing and
highly uncertain markets, entrepreneurial rms
must be willing to take risks: without risk-taking,

however, the prospects for business growth wane

(Ward, 1997, p. 323).
One reason for these diverging views might be
related to unclear denitions in family business
research of entrepreneurial behavior. Miller
(1983, p. 771) denes an entrepreneurial rm as
one that engages in product market innovation,
undertakes somewhat risky ventures, and is rst
to come up with proactive innovations, beating
competitors to the punch. As mentioned above,
entrepreneurial orientation (EO) is a concept
that has been coined to refer to this type of strategic orientation. Millers (1983) original operationalization contained three dimensions:
innovativeness, proactiveness, and risk taking.
EO mirrors Stevenson and Jarillos (1990)
concept of entrepreneurial management as it
reects the organizational processes, methods
and styles that rms use to act entrepreneurially (Lumpkin & Dess, 1996, p. 139). Conceptual
arguments have suggested that the dimensions of
EO should be viewed as separate but related constructs, rather than as one unifying characteristic
(Lumpkin & Dess, 1996; Lyon et al., 2000). That is,
rms can vary in degree of innovativeness, proactiveness, and risk taking so that they are not
equally entrepreneurial across all dimensions.
However, the dimensions are suggested to be
positively correlated (Lumpkin & Dess, 1996),
which has been validated empirically (Rauch
et al., 2004).
Given the lack of agreement on the extent to
which family rms are entrepreneurial and the
ambiguity as to whether risk taking is an important element of entrepreneurship in family rms,
it is important to explore the dimensionality of the
EO construct among family rms. On the basis of
previous research on EO, we anticipate that risk
taking forms an independent dimension of EO in
family rms and that it is positively associated
with the other dimensions of the construct. Thus:
Hypothesis 1a. Risk taking forms an important and
independent dimension of EO in family rms.
Hypothesis 1b. Risk taking is positively associated
with the other dimensions of EO in family rms.
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Naldi, Nordqvist, Sjberg, Wiklund

Risk Taking in Family and

Nonfamily Firms
Whether family rms take risks to the same extent
as nonfamily rms is controversial. Zahra (2005)
found some support that family ownership and
involvement promote risk taking in general, while
long CEO-founder tenures lead to the opposite.Yet,
in the academic literature and popular press,family
rms are associated with weak risk bearing
attributes that harm longevity and efciency. In
addition,it has been argued that family rms suffer
from strategic inertia and become risk averse
(Meyer & Zucker, 1989) and that an especially high
concentration of ownership may lead to riskavoiding strategic choices (Chandler, 1990).
Agency theorists propose that a rms risk
taking is inuenced by its ownership and governance structure (Fama, 1980; Fama & Jensen, 1983;
Jensen & Meckling, 1976). In Fama and Jensens
(1983) view, family rms tend to bear fewer risks
and choose lower levels of investments than do
more widely held rms. Agency theory also proposes that equity ownership inuences managers
risk-taking propensity (Eisenhardt, 1989; Zajac
& Westphal, 1994), suggesting that managers
become risk averse as their ownership in the rm
increases (Beatty & Zajac, 1994; Denis, Denis, &
Sarin, 1997). On this basis, there are reasons to
believe that risk avoidance is stronger in family
rms than in nonfamily rms. First, in family
rms, the management tends to have most of its
wealth invested in the rm and so bears the full
nancial burden of failed investments (Gedajlovic, Lubatkin, & Schulze, 2004). Consequently,
necessary but risky strategic decisions, such as
international expansion, the launch of a new
product, or committing resources to R&D, are
postponed due to concerns about the safety of the
family wealth (Schulze, Lubatkin, & Dino, 2002).
Second, there is more at stake in family rms than
the familys current wealth. As opposed to other
types of rms, managers risk taking in family
rms is done with the awareness that the accumulated family wealth might be at stake and that they
thereby jeopardize the nancial and social wellbeing of future generations (James, 1999; Schulze

et al., 2002). In addition, the family name and, with

it, the family reputation, often built up over several
generations, might be compromised (Bartholomeusz & Tanewski, 2006). This situation is not the
same in other types of rms, where the connection
to a wider family and to previous and future generations is less clear. In light of this, we expect that:
Hypothesis 2. Family rms take less risk than nonfamily rms.

Risk Taking and Performance in

Family Firms
We have argued that family rms take risks but to
a lesser extent than do nonfamily rms.We believe
that it is also important to study the outcome of
this behavior. Perhaps the most recurrent theme
among those interested in EO concerns the positive implications that entrepreneurial processes
have on rm growth and performance (Lumpkin
& Dess, 1996; Wiklund, 1998; Zahra, Jennings, &
Kuratko, 1999). EO is regarded as inevitable for
rms that want to prosper in competitive business
environments. Empirically, the positive impact of
EO on rm performance and growth has been
supported by several studies and in a metaanalysis. Rauch et al. (2004) found that the
risk-taking dimension is positively related to performance, even if signicantly smaller than other
aspects of EO. This led them to suggest that the
link between risk taking and performance is less
obvious than the one between proactiveness or
innovation and performance (Rauch et al., 2004).
Lumpkin and Dess (1996, p. 163) suggest that the
positive implications of the EO dimensions on
rm performance are context specic and may
vary independently of each other in a given organizational context.
The relationship between risk taking and performance, in particular, appears to vary with
context. As argued above, we can expect from
agency theory (Fama, 1980; Fama & Jensen, 1983;
Jensen & Meckling, 1976) that there are specic
features of risk taking in family rms. In family
rms, the overlap between ownership and management means that owners and managers are the

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Entrepreneurial Orientation, Risk Taking, and Performance in Family Firms

same individuals or represent the same ownerfamily. Traditionally, this lack of separation from
ownership and management has led researchers
to suggest that agency costs are low in family rms
(Fama & Jensen, 1983) because of a lesser need of
formal monitoring and control systems (Daily &
Dollinger, 1992; Geeraerts, 1984; Randy & Goel,
2003). Agency theorists prediction about the lack
of formal information and control systems has
been supported by scholars observing that family
rms are less likely to have active boards with
external board members (Brunninge & Nordqvist,
2004; Schulze et al., 2001) and strategic planning
processes (Ward, 1988). Moreover, Carney (2005)
argues that the personalism and the overlap of
ownership and management in family rms mean
that organizational authority is incorporated in
one person or family. Hence, family rms where
ownership and management is held within a
denable family operate under less pressure from
external constituents, such as minority shareholders, market analysts, and institutional monitors,
that demand accountability, disclosure, and transparency (Carney, 2005) than, for instance, publicly
traded rms or other rms with external owners
or managers. This, in turn, renders family rms
more vulnerable to self-control problems. Indeed,
family managers have the authority and legitimacy to pursue what they perceive as being the
best option (Gedajlovic et al., 2004).
As argued above, entrepreneurial activities in
family rms do involve taking risks, but to a lesser
extent than in nonfamily rms. If family rms
generally are characterized by less internal and
external formal monitoring, risk taking in family
rms is likely to mean that these rms make decisions that are less based on closely calculated
risks; less grounded in a systematic, unbiased way;
and with less incorporation of outsiders perspectives and opinions (Schulze et al., 2001, 2003). The
lack of more formal monitoring and control
systems and practices for systematic collection
and analysis of information can result in family
rms investing in projects without thoroughly
considering the pros and cons in terms of risk.
This logic suggests that managers in family rms
have less control and understanding of the risk

that they are taking. Moreover, they have less pressure to analyze and motivate different alternatives
for both internal and external stakeholders. In
other words, family rms have greater latitude to
allocate resources on the basis of animal spirits or
gut feel and to pursue opportunities that can only
be rationalized by particularistic or intuitive criteria (Carney, 2005. p. 23). Thus, we expect that:
Hypothesis 3. Risk taking is negatively related to
performance in family rms.

Method
Research Design and Sample
To provide a baseline for comparing the risk
taking of family rms with that of nonfamily rms
as stated in Hypothesis 2, we selected a sample
that includes nonfamily rms as well as family
rms. A stratied sample of Swedish small and
medium-sized (SMEs) rms was surveyed and the
respondents were later broken down into two subsamples, that is, family and nonfamily rms. Sampling criteria for the whole sample were (1) four
industrial sectors based on ISIC codes (manufacturing, professional services, wholesale/retail, and
other services); (2) employment size, divided into
two groups (1049, 50249); and (3) corporate
governance (independent rms and members of
business groups). The sampling population contained 2,455 rms obtained from Statistics
Sweden (the Bureau of Census). We collected data
using telephone and mail surveys targeting the
CEOs of the SMEs.
In 1997, we collected data for the independent
and control variables. Data for the dependent
variable were obtained in 2000. We initially contacted the rms by telephone, resulting in 2,034
responses (82.9%). All rms interviewed received
a mail survey, generating 1,278 responses after two
reminders, for a response rate of 52.1% of the
original sample. In 2000, rms responding to
the 1997 survey were contacted again for a telephone interview for the dependent variable. T test
checks for response bias revealed no signicant
difference concerning age, size, and ownership.
This applied also to the family and nonfamily
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Naldi, Nordqvist, Sjberg, Wiklund

business subsamples. The nal sample contained

889 rms, with full information on 696 rms (28%
of original sample; 54% of 1997 survey respondents). To test our hypotheses, we singled out the
family rms. Following Westhead and Cowling
(1999), two criteria were combined to identify
family rms. The respondent had to answer yes to
two questions: (1) Are ownership and management control of the company dominated by one
family? and (2) Do you consider your business to
be a family business? Our total sample consequently broke down into 265 family and 431 nonfamily rms, with answers from family rm CEOs
and nonfamily CEOs. The family rm sample is
used to test Hypotheses 1a, 1b, and 3, whereas both
subsamples are used for testing Hypothesis 2.

included in the 1997 survey. The scale for measuring past performance was identical to the one
measuring the dependent variable. The scale
for measuring environmental heterogeneity was
adapted from Miller and Friesen (1982). We used
three of the four original items (a = 0.85). To
measure industry sectors, we dummy coded rm
industry by SIC classication into manufacturing,
professional services, retailers, and other services.
Respondents were asked to state the year the rm
was founded, which was used to calculate rm age.
Independence was measured by dummy coding
whether the rm reported being independently
owned or belonging to a company group. To
measure size (small or medium-sized), we dummy
coded whether the rm reported having more or
less than 50 employees.

Variables and Measures

The measures we used in the study are shown
in the Appendix. All scales are adopted from previous literature. Below we discuss the dependent,
independent, and control variables.
Performance was measured by asking respondents in 2000 to compare the performance of their
rm with the performance exhibited by their two
main competitors in terms of prot, sales growth,
cash ow, and growth of net worth. These item
were summed into an index (a = 0.82) and the
scale has been validated in previous research
(Wiklund & Shepherd, 2003).
Entrepreneurial orientation (EO) was measured
using the original nine-item scale developed by
Covin and Slevin (1986, 1989), which has dominated research on EO (Rauch et al., 2004). The
scale was included in the 1997 survey. More information regarding the factors and indices are presented in the analyses section.

Control Variables
The multiple regression analyses also controlled
for rms past performance, environmental heterogeneity, industry sector, rm age, independence, and size. These are variables that have been
included in previous research on the relationship
between EO and performance. All variables were

Analysis and Results

Exploratory and conrmatory factor analyses
were used to test Hypostheses 1a and 1b. Principal
component analysis with varimax rotation was
used for the exploratory analysis. One item pertaining to innovativeness (Item a in the Appendix), and one item pertaining to proactiveness
(Item f in the Appendix) turned out to be problematic, leading to unclear factor structure. Once
these items were dropped and the remaining
seven items were reanalyzed, three clean factors
with loadings above 0.69 and cross-loadings
below 0.30 appeared. It is important to note that
all three items were retained for risk takingthe
central variable in our study. The total variance
accounted for by the factors was 71.2% for family
rms (72.9% for nonfamily rms). When summed
to indices, the alpha values of the three variables
were 0.62 (0.72 for nonfamily rms) for risk
taking, 0.83 (0.76 for nonfamily rms) for innovativeness, and 0.67 (0.67 for nonfamily rms) for
proactiveness.
We kept these seven items for conrmatory
factor analysis (Figure 1) and compared t indices
of this factor structure with those of two alternative factor structures suggested in the literature
(Kreiser, Marino, & Weaver, 2002; Yoo, 2001).
According to standard t indices (e.g., Hair,

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Entrepreneurial Orientation, Risk Taking, and Performance in Family Firms

INNOVATIVENESS

.85

NEW PRODUCTS

.84

RADICAL PRODUCT CHANGES

.72 e1
.71

e2

.30
INITIATE CHANGE

.60
PROACTIVENESS

.37

FIRST TO INTRODUCE

.86

.42

HIGH RISK PROJECTS

.55
.66

FEARLESS AND POWERFUL

.59

FEARLESS, AGRESSIVE

RISK-TAKING

.35

e3

.73

e4

.30

e5

.44
.35

e6
e7

Fit Indices for the EO Modelsa

Family

Chi-

RMS

Square

EA

17.257

0.045

GFI

AGFI

CFI

IFI

NFI

PGFI

PNFI

AIC

0.986

0.965

0.986

0.987

0.972

0.387

0.509

54.72

firms
a

RAMSEA = root mean square error of approximation; GFI = goodness-of-fit index; AGFI =

adjusted goodness-of-fit index; CFI = comparative fit index; IFI = incremental fit index; NFI =
normed fit index; PGFI = parsimony goodness of fit; PNFI = parsimony normed fit index; AIC =
Akaike information criterion.
Figure 1 Confirmatory Factor Analyses and Fit Indices in Family Firms (Where e1e7 Represent the Error Terms).

Anderson, Tatham, & Black, 1998), the analyses

showed good t for our model, superior to those
of the alternative models. The correlation between
risk taking and the two other dimensions of EO
is positive and statistically signicant for family
rms (0.37 and 0.42; p < 0.001). Based on these
analyses, we conclude that risk taking forms one
distinct and independent dimension of EO and
that it is positively associated with the other
dimensions of EO (innovativeness, proactiveness)
in family rms. Thus, Hypotheses 1a and 1b both
receive support from our analyses.
Means comparison and Students t test were
used for testing Hypothesis 2 concerning the
extent of risk taking in family and nonfamily

rms. We found that family rms take statistically

signicantly less risk than do nonfamily rms
(mean difference = 0.15 on a seven-point scale;
t = 2.04, p < 0.05), supporting Hypothesis 2. The
next step was to investigate what impact risk
taking in family rms has on their performance.
Hierarchical multiple regression analysis was
used for testing Hypotheses 3. The hypothesis
anticipates a negative relation between risk taking
and performance in family rms. Multicollinearity was not a problem in our data according to
correlation and variance ination factor analysis.
The base model shows that past performance is a
strong predictor of performance and that being
independent of a company group has a negative
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Naldi, Nordqvist, Sjberg, Wiklund

Table 1 Results From Multiple Regression Predicting Performance for Family Firms
Context

Variable

Control Variables

Full Model

Family

Past performance
Heterogeneity
Manufacturing
Professional services
Retailing
Age
Independent
Small or large
Innovativeness
Proactiveness
Risk taking
R2
R2 Adj.
DR2

0.461***
0.011
-0.057
-0.016
0.067
-0.029
-0.130*
0.002

0.455***
0.008
-0.070
-0.030
0.058
-0.036
-0.134*
-0.017
0.103
0.048
-0.193**
0.290***
0.260***
0.037***

0.253***
0.230***
0.253***

= p < 0.1; * = p < 0.05; ** = p < 0.01; *** = p < 0.001.

Note: Standardized regression coefficients are displayed in the table. N = 265.

inuence on performance. Adding the three

dimensions of EO, displayed in the right column of
Table 1, signicantly increases explained variance.
A statistically signicant negative impact can be
noted for risk taking. This result supports
Hypothesis 3. Stated differently: our ndings
suggest that risk taking in family rms is negatively related to perceived performance.

Discussion
There is reason to believe that the relationship
between risk taking, entrepreneurship, and performance may depend on organizational context.
In this article, we have analyzed family rms.
Family rms represent a relatively distinct category in terms of ownership and governance. To
examine these issues, we relied on the entrepreneurial orientation construct and focused on the
risk-taking dimension of this construct. The key
ndings of this study are now discussed.

Risk Taking and Entrepreneurial

Orientation
Consistent with our hypotheses, we found that
risk taking was a distinct dimension of entrepreneurial orientation and that it was positively

associated with proactiveness and innovation.

This nding means that the EO construct seems to
have great generality across organizational types.
Kreiser et al. (2002) found that the EO construct
was valid across different national contexts. Similarly, our ndings suggest that the construct is also
valid and relevant in the important organizational
context of family rms. Hence, this nding adds
to the growing body of research that teases out
ne-grained aspects of the EO construct (e.g.,
Lumpkin & Dess, 1996; Rauch et al., 2004), adding
further to its validity and usefulness in research
practice.
The results also suggest that in family rms the
processes and practices related to entrepreneurial
activities involve an element of risk taking. Furthermore, risk taking is not an isolated phenomenon. Processes and practices related to risk
taking are correlated with innovative and proactive behaviors. This is an important result. In
recent years rms, and not excluding family rms,
have needed to be innovative and acquire new
skills to act proactively and strengthen their competitive position (Habbershon & Pistrui, 2002).

Level of Risk Taking in Family Firms

We also hypothesized, and found, that even if
family rms do take risks as part of their entre-

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Entrepreneurial Orientation, Risk Taking, and Performance in Family Firms

preneurial activities, they do it to a lesser extent

than do nonfamily rms. These results are some
explanation of previous ambiguous ndings
regarding the role of risk taking in entrepreneurship and family rms (Zahra, 2005). Risk taking
may be higher in some type of rms than in
others, supporting the argument that organizational and governance contexts need to be taken
into account in order to gain a deeper understanding of the relationship between risk taking and
entrepreneurship in established rms (Lumpkin &
Dess, 1996; Lyon et al., 2000). Singling out family
rms appears to be relevant in order to understand some of the context specicity of these
relationships.
Using a different conceptualization of both
family rms and risk taking, Zahra (2005) found
some support that family ownership and involvement promote risk taking. Our study shows that
risk taking is an important dimension of entrepreneurial behavior in family rms but that
family rms tend to take less risk than do nonfamily rms. This gives empirical support to the
notion that family rms tend to be more conservative and risk averse in their strategy making
(Carney, 2005; Chandler, 1990; Meyer & Zucker,
1989; Schulze et al., 2002). One explanation for this
behavior can be that managers propensity to take
risk is related to their equity ownership (Eisenhardt, 1989; Zajac & Westphal, 1994) and is consistent with predictions based on agency theory.
When managers ownership in the rm is high,
they tend to be more risk averse, as Beatty and
Zajac (1994) and Denis et al. (1997) have argued.
Moreover, in family rms, the risk of losing accumulated family wealth and jeopardizing the nancial and social well-being of future generations is
likely to further accentuate this tendency (James,
1999; Schulze et al., 2002).

Risk Taking and Performance

Next we tested the link between risk taking and
performance. Earlier research has found that the
risk-taking dimension is positively related to performance, even if signicantly smaller than other
aspects of EO (Rauch et al., 2004). In this study,

taking into account the organizational and governance context, we found some interesting results.
Agency theory and previous empirical and conceptual research on family rms led us to hypothesize a negative relationship in family rms. This
was supported by our data and is an interesting
nding that advances our understanding of entrepreneurial orientation and risk taking in family
rms. First, it is in conict with previous research
that addresses the link between EO and performance, without taking into account the specic
organizational and governance context of family
rms. Research has not before addressed the link
between EO and performance in samples of family
rms only and disentangled the aspects of risk
taking, innovation, and proactiveness empirically.
Our result suggests that family rms take on
risks, but with negative implications for their performance. In line with our argumentation above,
one explanation, albeit tentative, for this nding
can be the following: family rms with the same
individuals or individuals from the same family
dominating both ownership and management of
the rm and who perceive the rm to be a family
rm expect the rm to stay within the family over
generations (James, 1999) and let key business
decisions be inuenced by the family (Chua et al.,
1999). This type of rm is often characterized by
little use of formal control systems (Daily & Dollinger, 1992; Geeraerts, 1984; Randy & Goel, 2003),
few outside board members (Cowling, 2003;
Schulze et al., 2001), and weak pressure from
external monitors demanding accountability and
transparency (Carney, 2005). At least partly as a
result of this, it is plausible to argue that these
rms make decisions, invest in projects, and
pursue new venture in a more informal, intuitive,
and less calculated way. Put differently, risk taking
in family rms might not be rmly grounded in
systematic and formal procedures and not have
enough inclusion of outsiders perspectives and
opinions (Schulze et al., 2001, 2003). Therefore,
risk taking in entrepreneurial activities in family
rms might be less understood and possible outcomes more difcult to predict.
If this explanation is correct, it seems to support
recent arguments for family rms to install formal
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Naldi, Nordqvist, Sjberg, Wiklund

control and monitoring systems, such as active

boards, nancial controls, and strategic planning,
in order to improve performance, despite higher
agency costs and risk of losing exibility (Schulze
et al., 2001, 2003). Better control, evaluation, and
external monitoring can support a more calculated risk taking that is guided toward projects
that are better evaluated and scrutinized and,
thus, whose outcome is better understood. However, this implies an important act of balancing,
since the informality, exibility, and entrepreneurial orientation that characterize risk taking in
family rms can be harmed by increased formalization. Some authors even argue that the intuition and exibility with which many family
rms pursue opportunities may be the source of
a unique competitive advantage compared to
nonfamily rms (e.g., Carney, 2005; Miller &
LeBreton-Miller 2005).
This seems to reveal an interesting paradox of
risk taking in family rms: increased formalization and external monitoring may lead to a risktaking behavior that leads to better outcomes in
terms of nancial performance, but at the same
time, this formalization and external monitoring
may stie the entrepreneurial activities that give
rise to these opportunities and risky projects to
begin with. Unfortunately, our data do not allow
us a more detailed test of this possible explanation
for risk taking in family rms leading to negative
performance. We encourage future research to
look further into this.

Limitations
This article has several limitations that should be
kept in mind. An increasing number of scholars
have argued that family rms do not constitute a
homogenous population of rms (Salvato, 2002;
Sharma, 2004). Rather, family rms differ on a
range of dimensions (Klein, Astrachan, &
Smyrnios, 2005) and it is possible that different
types of family rms show different patterns in
terms of entrepreneurial orientation and risk
taking. Our data consisted of Swedish SMEs and
inference to other countries should be made with
caution. National culture and tradition may inu-

ence risk taking and entrepreneurial orientation,

which has implications for the generalizability of
our ndings.
Moreover, we relied on a single respondent,
the CEO, from each rm. Responses from more
individuals within the rms would have given a
more complete picture of the rms situation and
behavior. Finally, we used self-assessment and perceived measures for entrepreneurial orientation
and performance. Even though this is an often
practice method in this eld of research (Lyon
et al., 2000), our data could be biased and reect
wishful thinking rather than a factual state.
However, the longitudinal nature of our data
makes this problem less pronounced.

Implications for Managerial Practice

Our ndings point to the danger of giving general
advice on the benets of EO without considering
context-specic issues. Family rms distinguish
themselves as an organizational context in important ways. Often, family rms are characterized by
dominant ownership and the presence of family
members at different levels of the rms operations, but also in regard to goals for and attitudes
toward business activities. Advice with regard to
entrepreneurial processes must take this into
account. For instance, family rms are an organizational context in which entrepreneurship can
ourish in the form of new products, ventures,
and process ideas. However, our research suggests
that it is important to secure systems and routines
for careful evaluation of risky investments in
order to better understand the possible amount
and outcome of the risk that is taken without hampering the creative and entrepreneurial milieu of
the organization.

Implications for Theory and

Future Research
This article argues and nds empirical support for
the notion that risk taking and its relationship
with performance is context specic. Among our
family rms, there was a negative relationship
between risk taking and future performance. This

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Entrepreneurial Orientation, Risk Taking, and Performance in Family Firms

is an important nding and contribution to both

corporate entrepreneurship and family rm literature. In addition to rejecting or supporting
theories and models, research needs to establish
the boundary conditions of theories. Entrepreneurial orientation (EO) is an established construct that has attracted substantial research.
Generally, this research nds support for positive
relationships between all dimensions of EO
(including risk taking) and performance. Our
ndings suggest that such statements may need to
be qualied. In some contexts, the relationship
may actually be the opposite. This suggests that
future EO research would benet from paying
closer attention to organizational context. Further,
many EO studies use a one-dimensional summated construct rather than a multidimensional
one. Our ndings suggest that EO may better be
viewed as a multidimensional measure where the
impact of the dimensions may vary across different organizational contexts.
Also our contributions to family business
research open up possibilities for future research.
We did not distinguish between different types of
family rms. Family rms constitute a heterogeneous group and, therefore, future research
investigating the link between risk taking and performance in family rms will benet from a more
ne-grained distinction between different types
of family rms. For example, the role of risk taking
and its relationship with performance may differ
depending on whether the rm is a rst-, second-,
or third-generation family rm. More research is
also clearly needed to investigate more directly the
role of formal control and external monitoring
systems for the performance implications of risk
taking in family rms. One way of doing this is to
investigate what impact active boards with nonfa-

mily members and the use of formal strategic

planning practices have on the relationship
between risk taking and performance. Such
research should, however, also consider the important act of balancing noted above: too much
formal control, planning, and monitoring may
inhibit the overall entrepreneurial orientation of
the family rm.

Conclusions
Research on corporate entrepreneurship and
entrepreneurial orientation will advance by
paying greater attention to the role of organizational context for different dimensions of entrepreneurship. In this article, we have focused on
risk taking as one important dimension of entrepreneurial orientation and its impact in family
rms. We conclude that risk taking is a distinct
dimension of entrepreneurial orientation and that
it is positively associated with proactiveness and
innovation. This is a contribution to the literature
on entrepreneurial orientation and risk taking
since it shows that the EO construct seems to
have great generality across organizational types.
Further, we conclude that even if family rms do
take risks while they are engaged in entrepreneurial activities, they take risk to a lesser extent than
do nonfamily rms. Moreover, and most importantly for our understanding of corporate entrepreneurship in family rms, we conclude that risk
taking in family rms is negatively related to performance. This is a contribution to the literature
on family rms, which so far has not paid enough
attention to the specics of corporate entrepreneurship in this very important type of rm
worldwide.

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Naldi, Nordqvist, Sjberg, Wiklund

Appendix: Measurements
Performance (adapted from Wiklund & Shepherd, 2003)
I will now mention four measures of outcome. For each of them I want to know if you think that your
outcome during the past 3 years has been better, worse or equal to that of other companies in your
industry (5-point scale ranging from much worse to much better).
Net prot (i.e., sales minus operational costs)
Growth of the companys value
Cash ow
Development of sales
Heterogeneity (adapted from Miller & Friesen, 1982)
Are there great differences amongst the products/services you offer, with regard to (seven-point scale
ranging from Approximately the same for all products to Considerable difference between
products)
Buying behavior of the customers
Nature of the competition
Market uctuations and uncertainty
Innovativeness (adapted from Covin & Slevin, 1989)
Generally our company prefers
to . . .
a. Strongly emphasize the
marketing of the companys
present products.*

1234567

Strongly emphasize R&D.

How many new kinds of products

or services has your company
introduced over the past 5 years?
b. A lot of new products/services.

1234567

No new products/services.

c. The changes of the companys

products/services have been
radical.

1234567

There has been small changes of

the present products/services.

Proactivness (adapted from Covin & Slevin, 1989)

Our companys relation toward
competitors:
d. Normally we react upon
initiatives taken by our
competitors.

1234567

Normally we initiate changes

upon which our competitors react.

e. Our company is seldom the

rst one to introduce new
products or services,
administrative systems, methods
of production, etc.

1234567

Our company is very often the

rst company to introduce new
products/services, administrative
systems, methods of production
etc.

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Entrepreneurial Orientation, Risk Taking, and Performance in Family Firms

f. Normally our company tries to avoid

overt competition, but rather takes on a
live-and-let-live-position.*

1234567

Normally our company takes on a very

competitive oriented
beat-the-competitor-position.

Risk Taking (adapted from Covin & Slevin, 1989)

Generally our company has . . .
g. A strong tendency toward projects
with low risk (with normal and secure
yield).

1234567

A strong tendency toward getting

involved in high risk projects (with a
chance for high yield).

Generally we believe that . . .

h. The business environment of the
company is such that fearless and
powerful measures are needed to
obtain the companys objectives.

1234567

The business environment of the

company is such that it is better to
explore it carefully and gradually in
order to achieve the companys
objectives.

When we are facing insecure

decision-making situations . . .
i. We normally take up a fearless,
aggressive position, in order to
maximize the chance of being able to
exploit possible opportunities.

1234567

We normally take up a cautious

wait-and-see position in order to
minimize the hazard of making costly
erroneous decisions.

* Items dropped in the analysis.

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Lucia Naldi is a Ph.D candidate and Lecturer at

Jnkping International Business School, PO Box
1026, SE-551 11, Jnkping, Sweden; fax: +46-36-16
10 69; lucia.naldi@ihh.hj.se.
Mattias Nordqvist is Research Fellow and
Co-Director, Center for Family Enterprise
and Ownership (CeFEO) at Jnkping International Business School, and Research Associate and
Visiting Scholar at the Arthur M. Blank Center for
Entrepreneurship, Babson Park, MA, USA; PO Box
1026, SE-551 11, Jnkping, Sweden; fax: +46-36-16
10 69; mattias.nordqvist@ihh.hj.se.
Karin Sjberg (now Hellerstedt) is a Ph.D candidate and Lecturer at Jnkping International Business School; PO Box 1026, SE-551 11, Jnkping,
Sweden; fax: +46-36-16 10 69; karin.hellerstedt@
ihh.hj.se.
Johan Wiklund is a Professor at Jnkping International Business School; PO Box 1026, SE-551 11,
Jnkping, Sweden; fax: +46-36-16 10 69;
johan.wiklund@ihh.hj.se.
The authors thank the FBR editor and two anonymous reviewers for their helpful comments, which
improved the article. An earlier version of this
article was presented at the Babson Kauffman
Entrepreneurship Research Conference, June
2005, at Babson College, Babson Park, MA, USA.
The authors are listed in alphabetical order and
contributed equally to the article.
47

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