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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 ori-
entation 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 impli-
cations of our ndings are provided.

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


& Gomez-Meija, 1998; Zajac & Westphal, 1994).
The relationship between entrepreneurship and Corporate entrepreneurship literature also
risk taking has long puzzled researchers. Research indicates that organizational context plays a role
at the individual level has found little empirical in risk taking. A growing stream in this research
evidence to support the idea that entrepreneurs examines the concept of entrepreneurial orienta-
take considerable risks. For example, on average, tion (EO) (Covin & Slevin, 1986, 1989; Lumpkin &
entrepreneurs do not take greater risks than Dess, 1996; Lyon, Lumpkin, & Dess, 2000; Miller,
managers (Brockhaus, 1980), and terms such as 1983). EO is a construct that addresses the
risk avoiders (Miner, 1990) or risk optimizers mindset of rms engaged in the pursuit of venture
(McClelland, 1961) have been suggested for entre- creation and provides a useful framework for
preneurs. One important reason for these incon- research into entrepreneurial activity. Many schol-
clusive results is likely to be that the rm-level ars have used EO to describe a fairly consistent set
governance structure in which entrepreneurial of related activities or processes (e.g., Wiklund &
behavior takes place inuences managers risk Shepherd, 2003). Such processes incorporate a
choices (Wiseman & Gomez-Meija, 1998). More wide variety of activities, including a rms
precisely, a problem with current literature on strategic decision-making styles and business
entrepreneurship and risk taking is that not practices, where EO reects the organizational
enough attention has been paid to the role of the processes, methods and styles that rms use to act
organizational context in which this risk taking entrepreneurially (Lumpkin & Dess, 1996, p. 139).
takes place. Firms differ in terms of their organi- This research has found positive associations
zational and governance structures and risk among risk taking and other aspects of entrepre-
taking may be higher in some organizational con- neurial behavior (e.g., Rauch, Wiklund, Freese, &
texts than in others, as agency theorists argue Lumpkin, 2004). For instance, in organizational

FAMILY BUSINESS REVIEW, vol. XX, no. 1, March 2007 Family Firm Institute, Inc. 33
Naldi, Nordqvist, Sjberg, Wiklund

contexts characterized by innovation and proac- likely to handle risk differently than other types of
tiveness, risk taking appears to be substantial. rms, partly because management and ownership
Companies generating new products based on are not separated (Fama & Jensen, 1983; Daily &
technological innovations typically take risks, as Dollinger, 1992) and partly because of the family
the demand for the new product is unknown. nature of ownership and management (Carney,
This research on EO has contributed to our 2005; Schulze, Lubatkin & Dino, 2003; Schulze,
understanding of some of the relationships Lubatkin, Dino, & Buchholtz, 2001; Zahra, 2005).
between entrepreneurship and risk taking; that Research on entrepreneurship in family rms,
is, it has shown that innovative and proactive including entrepreneurial orientation and the role
strategies are generally associated with risk of risk taking, is increasing but still scarce (Hab-
taking. However, much more can be learned bershon & Pistrui, 2002; Zahra, 2005; Zahra,
about how different organizational contexts mod- Hayton, & Salvato, 2004). Therefore, by combining
erate the strength of EO dimensions such as risk insights from the literature on entrepreneurial
taking (Lumpkin & Dess, 1996; Lyon et al., 2000). orientation, family rms, and agency theory, the
Agency theory stresses that the extent of involve- purpose of this article is twofold. First, we set out
ment in risky activities is likely to be inuenced to investigate whether risk taking is an important
by the ownership and governance of the rm aspect of EO in family rms. Second, we examine
(Fama, 1980; Fama & Jensen, 1983; Jensen & the relationship between risk taking and perfor-
Meckling, 1976). Scholars of EO and agency mance in family rms. Exploratory and conrma-
theory share an interest in how risk taking affects tory factor analysis are used to investigate the
performance (e.g., Wiklund & Shepherd, 2003; former; multiple regression analysis to investigate
Wiseman & Catanach, 1997). A meta-analysis of the latter. The present study makes two important
the relationship between EO and performance contributions. First, we extend our knowledge of
showed that across studies, the two constructs EO in general and risk taking in particular with
were positively correlated (Rauch et al., 2004). regard to its applicability in one distinct organi-
However, the analysis also showed that risk zational context. Second, we shed light on the
taking had a signicantly smaller correlation inuence that the risk-taking dimension of entre-
with performance than other aspects of EO. Simi- preneurial orientation has on performance in
larly, in their review of the relationship between family rms, thereby advancing our knowledge of
risk taking and performance, Wiseman and Cata- corporate entrepreneurship in this common type
nach (1997) found that arguments and results of of rm. In the following section we present theory
positive as well as negative associations between and hypotheses. Thereafter, the research method
risk taking and performance existed in the litera- is discussed, followed by the analysis and results.
ture. In their empirical analyses, they found that We then discuss the results, offer implications,
risk taking had positive effects on performance in and address the most important limitations of
certain contexts, while the effect was negative in our research, before ending with our major
other contexts (Wiseman & Catanach, 1997). Just conclusions.
as the relationship between entrepreneurship and
risk taking may be context specic, we argue that
the relationship between risk taking and perfor- Theory and Hypotheses
mance is better understood by taking into
Defining the Family Firm
account the organizational context, and especially
the relationship between and nature of owner- Family rms can be viewed as a contextual
ship, governance, and management. hybrida unique combination of two sets of
We believe that family rms constitute a rel- rules, values, and expectations: the familys and
evant organizational context in which to examine the businesss (Flemons & Cole, 1992; Gersick,
this concept. As we will argue, family rms are 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 however, the prospects for business growth wane
characteristics that render them unique in terms (Ward, 1997, p. 323).
of patterns of ownership, governance, and succes- One reason for these diverging views might be
sion (Chua, Chrisman, & Sharma, 1999; Steier, related to unclear denitions in family business
2003). For instance, owner-families share the research of entrepreneurial behavior. Miller
desire for ownership control and the continuity of (1983, p. 771) denes an entrepreneurial rm as
family involvement in the rm. To fully appreciate one that engages in product market innovation,
these special characteristics, it is crucial to focus undertakes somewhat risky ventures, and is rst
on family rms where the family is likely to have to come up with proactive innovations, beating
considerable impact on entrepreneurial activities. competitors to the punch. As mentioned above,
We therefore dene family rms as rms where entrepreneurial orientation (EO) is a concept
one family group controls the company through a that has been coined to refer to this type of stra-
clear majority of the ordinary voting shares, the tegic orientation. Millers (1983) original opera-
family is represented on the management team, tionalization contained three dimensions:
and the leading representative of the family per- innovativeness, proactiveness, and risk taking.
ceives the business to be a family rm (Westhead EO mirrors Stevenson and Jarillos (1990)
& Cowling, 1999). concept of entrepreneurial management as it
reects the organizational processes, methods
and styles that rms use to act entrepreneur-
Risk Taking and Entrepreneurial
ially (Lumpkin & Dess, 1996, p. 139). Conceptual
Orientation
arguments have suggested that the dimensions of
Scholars disagree regarding to what extent family EO should be viewed as separate but related con-
rms constitute an organizational context that structs, rather than as one unifying characteristic
supports or constrains an entrepreneurial orien- (Lumpkin & Dess, 1996; Lyon et al., 2000). That is,
tation (Habbershon & Pistrui, 2002; Zahra, 2005). rms can vary in degree of innovativeness, pro-
Family rms are often characterized as conserva- activeness, and risk taking so that they are not
tive (Aronoff & Ward, 1997; Kets de Vries, 1993; equally entrepreneurial across all dimensions.
Sharma, Chrisman, & Chua, 1997), resistant to However, the dimensions are suggested to be
change and introverted (Hall, Melin, & Nordqvist, positively correlated (Lumpkin & Dess, 1996),
2001), contradicting what would be considered which has been validated empirically (Rauch
entrepreneurial. The risk of losing family wealth et al., 2004).
created over a long period of time (Sharma et al., Given the lack of agreement on the extent to
1997) may also inhibit family rms from engaging which family rms are entrepreneurial and the
in entrepreneurial activities. At the same time, ambiguity as to whether risk taking is an impor-
family rms have been viewed as examples of tant element of entrepreneurship in family rms,
entrepreneurial rms (Litz, 1995). There are it is important to explore the dimensionality of the
several arguments supporting the view that family EO construct among family rms. On the basis of
rms can preserve their entrepreneurial capacity previous research on EO, we anticipate that risk
and continue to engage in risky projects and ven- taking forms an independent dimension of EO in
tures (Aldrich & Cliff, 2003; Rogoff & Heck, 2003; family rms and that it is positively associated
Zahra et al., 2004). Recent empirical research has with the other dimensions of the construct. Thus:
shown that entrepreneurial activity is a common
characteristic of many family rms (e.g., Hall Hypothesis 1a. Risk taking forms an important and
et al., 2001; Steier, 2003; Zahra, 2005; Zahra et al., independent dimension of EO in family rms.
2004). Indeed, in todays rapidly changing and
highly uncertain markets, entrepreneurial rms Hypothesis 1b. Risk taking is positively associated
must be willing to take risks: without risk-taking, with the other dimensions of EO in family rms.

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Naldi, Nordqvist, Sjberg, Wiklund

Risk Taking in Family and et al., 2002). In addition, the family name and, with
Nonfamily Firms it, the family reputation, often built up over several
generations, might be compromised (Bartholom-
Whether family rms take risks to the same extent eusz & Tanewski, 2006). This situation is not the
as nonfamily rms is controversial. Zahra (2005) same in other types of rms, where the connection
found some support that family ownership and to a wider family and to previous and future gen-
involvement promote risk taking in general, while erations is less clear. In light of this, we expect that:
long CEO-founder tenures lead to the opposite.Yet,
in the academic literature and popular press,family Hypothesis 2. Family rms take less risk than non-
rms are associated with weak risk bearing family rms.
attributes that harm longevity and efciency. In
addition,it has been argued that family rms suffer
Risk Taking and Performance in
from strategic inertia and become risk averse
Family Firms
(Meyer & Zucker, 1989) and that an especially high
concentration of ownership may lead to risk- We have argued that family rms take risks but to
avoiding strategic choices (Chandler, 1990). a lesser extent than do nonfamily rms.We believe
Agency theorists propose that a rms risk that it is also important to study the outcome of
taking is inuenced by its ownership and gover- this behavior. Perhaps the most recurrent theme
nance structure (Fama, 1980; Fama & Jensen, 1983; among those interested in EO concerns the posi-
Jensen & Meckling, 1976). In Fama and Jensens tive implications that entrepreneurial processes
(1983) view, family rms tend to bear fewer risks have on rm growth and performance (Lumpkin
and choose lower levels of investments than do & Dess, 1996; Wiklund, 1998; Zahra, Jennings, &
more widely held rms. Agency theory also pro- Kuratko, 1999). EO is regarded as inevitable for
poses that equity ownership inuences managers rms that want to prosper in competitive business
risk-taking propensity (Eisenhardt, 1989; Zajac environments. Empirically, the positive impact of
& Westphal, 1994), suggesting that managers EO on rm performance and growth has been
become risk averse as their ownership in the rm supported by several studies and in a meta-
increases (Beatty & Zajac, 1994; Denis, Denis, & analysis. Rauch et al. (2004) found that the
Sarin, 1997). On this basis, there are reasons to risk-taking dimension is positively related to per-
believe that risk avoidance is stronger in family formance, even if signicantly smaller than other
rms than in nonfamily rms. First, in family aspects of EO. This led them to suggest that the
rms, the management tends to have most of its link between risk taking and performance is less
wealth invested in the rm and so bears the full obvious than the one between proactiveness or
nancial burden of failed investments (Geda- innovation and performance (Rauch et al., 2004).
jlovic, Lubatkin, & Schulze, 2004). Consequently, Lumpkin and Dess (1996, p. 163) suggest that the
necessary but risky strategic decisions, such as positive implications of the EO dimensions on
international expansion, the launch of a new rm performance are context specic and may
product, or committing resources to R&D, are vary independently of each other in a given orga-
postponed due to concerns about the safety of the nizational context.
family wealth (Schulze, Lubatkin, & Dino, 2002). The relationship between risk taking and per-
Second, there is more at stake in family rms than formance, in particular, appears to vary with
the familys current wealth. As opposed to other context. As argued above, we can expect from
types of rms, managers risk taking in family agency theory (Fama, 1980; Fama & Jensen, 1983;
rms is done with the awareness that the accumu- Jensen & Meckling, 1976) that there are specic
lated family wealth might be at stake and that they features of risk taking in family rms. In family
thereby jeopardize the nancial and social well- rms, the overlap between ownership and man-
being of future generations (James, 1999; Schulze agement 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 owner- that they are taking. Moreover, they have less pres-
family. Traditionally, this lack of separation from sure to analyze and motivate different alternatives
ownership and management has led researchers for both internal and external stakeholders. In
to suggest that agency costs are low in family rms other words, family rms have greater latitude to
(Fama & Jensen, 1983) because of a lesser need of allocate resources on the basis of animal spirits or
formal monitoring and control systems (Daily & gut feel and to pursue opportunities that can only
Dollinger, 1992; Geeraerts, 1984; Randy & Goel, be rationalized by particularistic or intuitive cri-
2003). Agency theorists prediction about the lack teria (Carney, 2005. p. 23). Thus, we expect that:
of formal information and control systems has
Hypothesis 3. Risk taking is negatively related to
been supported by scholars observing that family
performance in family rms.
rms are less likely to have active boards with
external board members (Brunninge & Nordqvist,
2004; Schulze et al., 2001) and strategic planning Method
processes (Ward, 1988). Moreover, Carney (2005)
Research Design and Sample
argues that the personalism and the overlap of
ownership and management in family rms mean To provide a baseline for comparing the risk
that organizational authority is incorporated in taking of family rms with that of nonfamily rms
one person or family. Hence, family rms where as stated in Hypothesis 2, we selected a sample
ownership and management is held within a that includes nonfamily rms as well as family
denable family operate under less pressure from rms. A stratied sample of Swedish small and
external constituents, such as minority sharehold- medium-sized (SMEs) rms was surveyed and the
ers, market analysts, and institutional monitors, respondents were later broken down into two sub-
that demand accountability, disclosure, and trans- samples, that is, family and nonfamily rms. Sam-
parency (Carney, 2005) than, for instance, publicly pling criteria for the whole sample were (1) four
traded rms or other rms with external owners industrial sectors based on ISIC codes (manufac-
or managers. This, in turn, renders family rms turing, professional services, wholesale/retail, and
more vulnerable to self-control problems. Indeed, other services); (2) employment size, divided into
family managers have the authority and legiti- two groups (1049, 50249); and (3) corporate
macy to pursue what they perceive as being the governance (independent rms and members of
best option (Gedajlovic et al., 2004). business groups). The sampling population con-
As argued above, entrepreneurial activities in tained 2,455 rms obtained from Statistics
family rms do involve taking risks, but to a lesser Sweden (the Bureau of Census). We collected data
extent than in nonfamily rms. If family rms using telephone and mail surveys targeting the
generally are characterized by less internal and CEOs of the SMEs.
external formal monitoring, risk taking in family In 1997, we collected data for the independent
rms is likely to mean that these rms make deci- and control variables. Data for the dependent
sions that are less based on closely calculated variable were obtained in 2000. We initially con-
risks; less grounded in a systematic, unbiased way; tacted the rms by telephone, resulting in 2,034
and with less incorporation of outsiders perspec- responses (82.9%). All rms interviewed received
tives and opinions (Schulze et al., 2001, 2003). The a mail survey, generating 1,278 responses after two
lack of more formal monitoring and control reminders, for a response rate of 52.1% of the
systems and practices for systematic collection original sample. In 2000, rms responding to
and analysis of information can result in family the 1997 survey were contacted again for a tele-
rms investing in projects without thoroughly phone interview for the dependent variable. T test
considering the pros and cons in terms of risk. checks for response bias revealed no signicant
This logic suggests that managers in family rms difference concerning age, size, and ownership.
have less control and understanding of the risk This applied also to the family and nonfamily

37
Naldi, Nordqvist, Sjberg, Wiklund

business subsamples. The nal sample contained included in the 1997 survey. The scale for measur-
889 rms, with full information on 696 rms (28% ing past performance was identical to the one
of original sample; 54% of 1997 survey respon- measuring the dependent variable. The scale
dents). To test our hypotheses, we singled out the for measuring environmental heterogeneity was
family rms. Following Westhead and Cowling adapted from Miller and Friesen (1982). We used
(1999), two criteria were combined to identify three of the four original items (a = 0.85). To
family rms. The respondent had to answer yes to measure industry sectors, we dummy coded rm
two questions: (1) Are ownership and manage- industry by SIC classication into manufacturing,
ment control of the company dominated by one professional services, retailers, and other services.
family? and (2) Do you consider your business to Respondents were asked to state the year the rm
be a family business? Our total sample conse- was founded, which was used to calculate rm age.
quently broke down into 265 family and 431 non- Independence was measured by dummy coding
family rms, with answers from family rm CEOs whether the rm reported being independently
and nonfamily CEOs. The family rm sample is owned or belonging to a company group. To
used to test Hypotheses 1a, 1b, and 3, whereas both measure size (small or medium-sized), we dummy
subsamples are used for testing Hypothesis 2. coded whether the rm reported having more or
less than 50 employees.
Variables and Measures
Analysis and Results
The measures we used in the study are shown
in the Appendix. All scales are adopted from pre- Exploratory and conrmatory factor analyses
vious literature. Below we discuss the dependent, were used to test Hypostheses 1a and 1b. Principal
independent, and control variables. component analysis with varimax rotation was
Performance was measured by asking respon- used for the exploratory analysis. One item per-
dents in 2000 to compare the performance of their taining to innovativeness (Item a in the Appen-
rm with the performance exhibited by their two dix), and one item pertaining to proactiveness
main competitors in terms of prot, sales growth, (Item f in the Appendix) turned out to be prob-
cash ow, and growth of net worth. These item lematic, leading to unclear factor structure. Once
were summed into an index (a = 0.82) and the these items were dropped and the remaining
scale has been validated in previous research seven items were reanalyzed, three clean factors
(Wiklund & Shepherd, 2003). with loadings above 0.69 and cross-loadings
Entrepreneurial orientation (EO) was measured below 0.30 appeared. It is important to note that
using the original nine-item scale developed by all three items were retained for risk takingthe
Covin and Slevin (1986, 1989), which has domi- central variable in our study. The total variance
nated research on EO (Rauch et al., 2004). The accounted for by the factors was 71.2% for family
scale was included in the 1997 survey. More infor- rms (72.9% for nonfamily rms). When summed
mation regarding the factors and indices are pre- to indices, the alpha values of the three variables
sented in the analyses section. were 0.62 (0.72 for nonfamily rms) for risk
taking, 0.83 (0.76 for nonfamily rms) for innova-
tiveness, and 0.67 (0.67 for nonfamily rms) for
Control Variables
proactiveness.
The multiple regression analyses also controlled We kept these seven items for conrmatory
for rms past performance, environmental het- factor analysis (Figure 1) and compared t indices
erogeneity, industry sector, rm age, indepen- of this factor structure with those of two alterna-
dence, and size. These are variables that have been tive factor structures suggested in the literature
included in previous research on the relationship (Kreiser, Marino, & Weaver, 2002; Yoo, 2001).
between EO and performance. All variables were According to standard t indices (e.g., Hair,

38
Entrepreneurial Orientation, Risk Taking, and Performance in Family Firms

.72 e1
.85 NEW PRODUCTS
INNOVATIVENESS
.84 .71
RADICAL PRODUCT CHANGES e2
.30
.35
INITIATE CHANGE e3
.60
PROACTIVENESS .73
.37 .86
FIRST TO INTRODUCE e4

.30
.42 HIGH RISK PROJECTS e5
.55
.44
.66 FEARLESS AND POWERFUL e6
RISK-TAKING
.35
.59 FEARLESS, AGRESSIVE e7

Fit Indices for the EO Modelsa


Chi- RMS GFI AGFI CFI IFI NFI PGFI PNFI AIC
Square EA
Family 17.257 0.045 0.986 0.965 0.986 0.987 0.972 0.387 0.509 54.72
firms 8

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 rms. We found that family rms take statistically
showed good t for our model, superior to those signicantly less risk than do nonfamily rms
of the alternative models. The correlation between (mean difference = 0.15 on a seven-point scale;
risk taking and the two other dimensions of EO t = 2.04, p < 0.05), supporting Hypothesis 2. The
is positive and statistically signicant for family next step was to investigate what impact risk
rms (0.37 and 0.42; p < 0.001). Based on these taking in family rms has on their performance.
analyses, we conclude that risk taking forms one Hierarchical multiple regression analysis was
distinct and independent dimension of EO and used for testing Hypotheses 3. The hypothesis
that it is positively associated with the other anticipates a negative relation between risk taking
dimensions of EO (innovativeness, proactiveness) and performance in family rms. Multicollinear-
in family rms. Thus, Hypotheses 1a and 1b both ity was not a problem in our data according to
receive support from our analyses. correlation and variance ination factor analysis.
Means comparison and Students t test were The base model shows that past performance is a
used for testing Hypothesis 2 concerning the strong predictor of performance and that being
extent of risk taking in family and nonfamily 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 0.461*** 0.455***
Heterogeneity 0.011 0.008
Manufacturing -0.057 -0.070
Professional services -0.016 -0.030
Retailing 0.067 0.058
Age -0.029 -0.036
Independent -0.130* -0.134*
Small or large 0.002 -0.017
Innovativeness 0.103
Proactiveness 0.048
Risk taking -0.193**
R2 0.253*** 0.290***
R2 Adj. 0.230*** 0.260***
DR2 0.253*** 0.037***
= 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 associated with proactiveness and innovation.
dimensions of EO, displayed in the right column of This nding means that the EO construct seems to
Table 1, signicantly increases explained variance. have great generality across organizational types.
A statistically signicant negative impact can be Kreiser et al. (2002) found that the EO construct
noted for risk taking. This result supports was valid across different national contexts. Simi-
Hypothesis 3. Stated differently: our ndings larly, our ndings suggest that the construct is also
suggest that risk taking in family rms is nega- valid and relevant in the important organizational
tively related to perceived performance. 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.,
Discussion Lumpkin & Dess, 1996; Rauch et al., 2004), adding
There is reason to believe that the relationship further to its validity and usefulness in research
between risk taking, entrepreneurship, and per- practice.
formance may depend on organizational context. The results also suggest that in family rms the
In this article, we have analyzed family rms. processes and practices related to entrepreneurial
Family rms represent a relatively distinct cat- activities involve an element of risk taking. Fur-
egory in terms of ownership and governance. To thermore, risk taking is not an isolated phenom-
examine these issues, we relied on the entrepre- enon. Processes and practices related to risk
neurial orientation construct and focused on the taking are correlated with innovative and proac-
risk-taking dimension of this construct. The key tive behaviors. This is an important result. In
ndings of this study are now discussed. recent years rms, and not excluding family rms,
have needed to be innovative and acquire new
skills to act proactively and strengthen their com-
Risk Taking and Entrepreneurial petitive position (Habbershon & Pistrui, 2002).
Orientation
Level of Risk Taking in Family Firms
Consistent with our hypotheses, we found that
risk taking was a distinct dimension of entrepre- We also hypothesized, and found, that even if
neurial orientation and that it was positively family rms do take risks as part of their entre-

40
Entrepreneurial Orientation, Risk Taking, and Performance in Family Firms

preneurial activities, they do it to a lesser extent taking into account the organizational and gover-
than do nonfamily rms. These results are some nance context, we found some interesting results.
explanation of previous ambiguous ndings Agency theory and previous empirical and con-
regarding the role of risk taking in entrepreneur- ceptual research on family rms led us to hypoth-
ship and family rms (Zahra, 2005). Risk taking esize a negative relationship in family rms. This
may be higher in some type of rms than in was supported by our data and is an interesting
others, supporting the argument that organiza- nding that advances our understanding of entre-
tional and governance contexts need to be taken preneurial orientation and risk taking in family
into account in order to gain a deeper understand- rms. First, it is in conict with previous research
ing of the relationship between risk taking and that addresses the link between EO and perfor-
entrepreneurship in established rms (Lumpkin & mance, without taking into account the specic
Dess, 1996; Lyon et al., 2000). Singling out family organizational and governance context of family
rms appears to be relevant in order to under- rms. Research has not before addressed the link
stand some of the context specicity of these between EO and performance in samples of family
relationships. rms only and disentangled the aspects of risk
Using a different conceptualization of both taking, innovation, and proactiveness empirically.
family rms and risk taking, Zahra (2005) found Our result suggests that family rms take on
some support that family ownership and involve- risks, but with negative implications for their per-
ment promote risk taking. Our study shows that formance. In line with our argumentation above,
risk taking is an important dimension of entre- one explanation, albeit tentative, for this nding
preneurial behavior in family rms but that can be the following: family rms with the same
family rms tend to take less risk than do nonfa- individuals or individuals from the same family
mily rms. This gives empirical support to the dominating both ownership and management of
notion that family rms tend to be more conser- the rm and who perceive the rm to be a family
vative and risk averse in their strategy making rm expect the rm to stay within the family over
(Carney, 2005; Chandler, 1990; Meyer & Zucker, generations (James, 1999) and let key business
1989; Schulze et al., 2002). One explanation for this decisions be inuenced by the family (Chua et al.,
behavior can be that managers propensity to take 1999). This type of rm is often characterized by
risk is related to their equity ownership (Eisen- little use of formal control systems (Daily & Doll-
hardt, 1989; Zajac & Westphal, 1994) and is consis- inger, 1992; Geeraerts, 1984; Randy & Goel, 2003),
tent with predictions based on agency theory. few outside board members (Cowling, 2003;
When managers ownership in the rm is high, Schulze et al., 2001), and weak pressure from
they tend to be more risk averse, as Beatty and external monitors demanding accountability and
Zajac (1994) and Denis et al. (1997) have argued. transparency (Carney, 2005). At least partly as a
Moreover, in family rms, the risk of losing accu- result of this, it is plausible to argue that these
mulated family wealth and jeopardizing the nan- rms make decisions, invest in projects, and
cial and social well-being of future generations is pursue new venture in a more informal, intuitive,
likely to further accentuate this tendency (James, and less calculated way. Put differently, risk taking
1999; Schulze et al., 2002). in family rms might not be rmly grounded in
systematic and formal procedures and not have
enough inclusion of outsiders perspectives and
Risk Taking and Performance
opinions (Schulze et al., 2001, 2003). Therefore,
Next we tested the link between risk taking and risk taking in entrepreneurial activities in family
performance. Earlier research has found that the rms might be less understood and possible out-
risk-taking dimension is positively related to per- comes more difcult to predict.
formance, even if signicantly smaller than other If this explanation is correct, it seems to support
aspects of EO (Rauch et al., 2004). In this study, recent arguments for family rms to install formal

41
Naldi, Nordqvist, Sjberg, Wiklund

control and monitoring systems, such as active ence risk taking and entrepreneurial orientation,
boards, nancial controls, and strategic planning, which has implications for the generalizability of
in order to improve performance, despite higher our ndings.
agency costs and risk of losing exibility (Schulze Moreover, we relied on a single respondent,
et al., 2001, 2003). Better control, evaluation, and the CEO, from each rm. Responses from more
external monitoring can support a more calcu- individuals within the rms would have given a
lated risk taking that is guided toward projects more complete picture of the rms situation and
that are better evaluated and scrutinized and, behavior. Finally, we used self-assessment and per-
thus, whose outcome is better understood. How- ceived measures for entrepreneurial orientation
ever, this implies an important act of balancing, and performance. Even though this is an often
since the informality, exibility, and entreprene- practice method in this eld of research (Lyon
urial orientation that characterize risk taking in et al., 2000), our data could be biased and reect
family rms can be harmed by increased formal- wishful thinking rather than a factual state.
ization. Some authors even argue that the intu- However, the longitudinal nature of our data
ition and exibility with which many family makes this problem less pronounced.
rms pursue opportunities may be the source of
a unique competitive advantage compared to
Implications for Managerial Practice
nonfamily rms (e.g., Carney, 2005; Miller &
LeBreton-Miller 2005). Our ndings point to the danger of giving general
This seems to reveal an interesting paradox of advice on the benets of EO without considering
risk taking in family rms: increased formaliza- context-specic issues. Family rms distinguish
tion and external monitoring may lead to a risk- themselves as an organizational context in impor-
taking behavior that leads to better outcomes in tant ways. Often, family rms are characterized by
terms of nancial performance, but at the same dominant ownership and the presence of family
time, this formalization and external monitoring members at different levels of the rms opera-
may stie the entrepreneurial activities that give tions, but also in regard to goals for and attitudes
rise to these opportunities and risky projects to toward business activities. Advice with regard to
begin with. Unfortunately, our data do not allow entrepreneurial processes must take this into
us a more detailed test of this possible explanation account. For instance, family rms are an organi-
for risk taking in family rms leading to negative zational context in which entrepreneurship can
performance. We encourage future research to ourish in the form of new products, ventures,
look further into this. and process ideas. However, our research suggests
that it is important to secure systems and routines
for careful evaluation of risky investments in
Limitations
order to better understand the possible amount
This article has several limitations that should be and outcome of the risk that is taken without ham-
kept in mind. An increasing number of scholars pering the creative and entrepreneurial milieu of
have argued that family rms do not constitute a the organization.
homogenous population of rms (Salvato, 2002;
Sharma, 2004). Rather, family rms differ on a
Implications for Theory and
range of dimensions (Klein, Astrachan, &
Future Research
Smyrnios, 2005) and it is possible that different
types of family rms show different patterns in This article argues and nds empirical support for
terms of entrepreneurial orientation and risk the notion that risk taking and its relationship
taking. Our data consisted of Swedish SMEs and with performance is context specic. Among our
inference to other countries should be made with family rms, there was a negative relationship
caution. National culture and tradition may inu- between risk taking and future performance. This

42
Entrepreneurial Orientation, Risk Taking, and Performance in Family Firms

is an important nding and contribution to both mily members and the use of formal strategic
corporate entrepreneurship and family rm lit- planning practices have on the relationship
erature. In addition to rejecting or supporting between risk taking and performance. Such
theories and models, research needs to establish research should, however, also consider the impor-
the boundary conditions of theories. Entrepre- tant act of balancing noted above: too much
neurial orientation (EO) is an established con- formal control, planning, and monitoring may
struct that has attracted substantial research. inhibit the overall entrepreneurial orientation of
Generally, this research nds support for positive the family rm.
relationships between all dimensions of EO
(including risk taking) and performance. Our
ndings suggest that such statements may need to
Conclusions
be qualied. In some contexts, the relationship
may actually be the opposite. This suggests that Research on corporate entrepreneurship and
future EO research would benet from paying entrepreneurial orientation will advance by
closer attention to organizational context. Further, paying greater attention to the role of organiza-
many EO studies use a one-dimensional sum- tional context for different dimensions of entre-
mated construct rather than a multidimensional preneurship. In this article, we have focused on
one. Our ndings suggest that EO may better be risk taking as one important dimension of entre-
viewed as a multidimensional measure where the preneurial orientation and its impact in family
impact of the dimensions may vary across differ- rms. We conclude that risk taking is a distinct
ent organizational contexts. dimension of entrepreneurial orientation and that
Also our contributions to family business it is positively associated with proactiveness and
research open up possibilities for future research. innovation. This is a contribution to the literature
We did not distinguish between different types of on entrepreneurial orientation and risk taking
family rms. Family rms constitute a heteroge- since it shows that the EO construct seems to
neous group and, therefore, future research have great generality across organizational types.
investigating the link between risk taking and per- Further, we conclude that even if family rms do
formance in family rms will benet from a more take risks while they are engaged in entrepreneur-
ne-grained distinction between different types ial activities, they take risk to a lesser extent than
of family rms. For example, the role of risk taking do nonfamily rms. Moreover, and most impor-
and its relationship with performance may differ tantly for our understanding of corporate entre-
depending on whether the rm is a rst-, second-, preneurship in family rms, we conclude that risk
or third-generation family rm. More research is taking in family rms is negatively related to per-
also clearly needed to investigate more directly the formance. This is a contribution to the literature
role of formal control and external monitoring on family rms, which so far has not paid enough
systems for the performance implications of risk attention to the specics of corporate entrepre-
taking in family rms. One way of doing this is to neurship in this very important type of rm
investigate what impact active boards with nonfa- worldwide.

43
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 1234567 Strongly emphasize R&D.
to . . .
a. Strongly emphasize the
marketing of the companys
present products.*
How many new kinds of products 1234567 No new products/services.
or services has your company
introduced over the past 5 years?
b. A lot of new products/services.
c. The changes of the companys 1234567 There has been small changes of
products/services have been the present products/services.
radical.
Proactivness (adapted from Covin & Slevin, 1989)
Our companys relation toward 1234567 Normally we initiate changes
competitors: upon which our competitors react.
d. Normally we react upon
initiatives taken by our
competitors.
e. Our company is seldom the 1234567 Our company is very often the
rst one to introduce new rst company to introduce new
products or services, products/services, administrative
administrative systems, methods systems, methods of production
of production, etc. etc.

44
Entrepreneurial Orientation, Risk Taking, and Performance in Family Firms

f. Normally our company tries to avoid 1234567 Normally our company takes on a very
overt competition, but rather takes on a competitive oriented
live-and-let-live-position.* beat-the-competitor-position.
Risk Taking (adapted from Covin & Slevin, 1989)
Generally our company has . . . 1234567 A strong tendency toward getting
g. A strong tendency toward projects involved in high risk projects (with a
with low risk (with normal and secure chance for high yield).
yield).
Generally we believe that . . . 1234567 The business environment of the
h. The business environment of the company is such that it is better to
company is such that fearless and explore it carefully and gradually in
powerful measures are needed to order to achieve the companys
obtain the companys objectives. objectives.
When we are facing insecure 1234567 We normally take up a cautious
decision-making situations . . . wait-and-see position in order to
i. We normally take up a fearless, minimize the hazard of making costly
aggressive position, in order to erroneous decisions.
maximize the chance of being able to
exploit possible opportunities.
* Items dropped in the analysis.

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Review, 10(4), 323337. 10 69; mattias.nordqvist@ihh.hj.se.
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Entrepreneurship: Theory and Practice, 23(1), 3156. ness School; PO Box 1026, SE-551 11, Jnkping,
Wiklund, J. (1998). Small rm growth and performance: Sweden; fax: +46-36-16 10 69; karin.hellerstedt@
Entrepreneurship and beyond. Doctoral dissertation. ihh.hj.se.
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Johan Wiklund is a Professor at Jnkping Inter-
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formance of small and medium-sized businesses. johan.wiklund@ihh.hj.se.
Strategic Management Journal, 24(13), 13071314. The authors thank the FBR editor and two anony-
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nal disaggregation of operational risk under chang- improved the article. An earlier version of this
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article was presented at the Babson Kauffman
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40, 799830. Entrepreneurship Research Conference, June
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ioral agency model of managerial risk taking. The authors are listed in alphabetical order and
Academy of Management Review, 23(1), 133153. contributed equally to the article.

47