An Empirical Investigation of the Production Function of the Family Firm (1998)

The causal effects of various firm ownership structures on such performance measures as economic growth, production efficiency, and shareholder value are not well-developed in the field of economics, or any field for that matter. While Demsetz (1983) has argued that no single firm ownership structure is optimal for all situations, Fama (1980) contends that ownership of the firm may be irrelevant from a nexus of contracts perspective. However, little theoretical or empirical progress has been made to resolve this issue, despite attempts by those such as Williamson (1981) to bring the topic to the forefront of discourse. One ownership construct that is beginning to receive empirical attention is the family-owned firm. However, according to a review of the literature by Wortman (1994) and an empirical study by Riordan and Riordan (1993), there is a paucity of theoretical models or even a generally accepted definition of family business. Empirical progress in the study of family ownership suffers from the difficulty of gathering data from firms that are primarily closely held. Consequently, most studies focus on survey and database results restricted to a particular geographic region (Daily and Dollinger 1993; Kirchhoff and Kirchhoff 1987) or nationally focusing on a particular industry or trade group (Daily and Thompson try or trade group (Daily and Thompson 1994). This article examines the impact of the family business type of ownership structure on the production frontiers of the firms studied. The analysis proceeds first from the microeconomic perspective on the unique attributes of the small business objective function, leading next to a cross-section production function to assess the differential macroeconomic impact of family-versus nonfamilyowned small firms. An extensive database of small privately held companies in Western New York (primarily the Buffalo and Niagara Falls SMSA) was developed to carry out empirical analysis. Statistical regression analysis from a production function perspective generates conclusions on the potential for additional economic growth in Western New York or in any region with a similar profile of family business activity. From a more global perspective, the policy implications of these results are discussed for government agencies (the U.S. Small Business Administration and local industrial development agencies) whose mandate is to promote economic growth and development in the various regions and in the United States as a whole. Sampling Methodology The database for this project was developed with the assistance of the Canisius College Center for Entrepreneurship, supported by a grant from the U.S. Small Business Administration. Companies and data were drawn from various sources, primarily local chambers of commerce, Microcosm (published by Dun & Bradstreet Information Services), and confidential company lists provided by professional sponsors to the Center. The database contains over 2,000 small privately held companies in Western New York. A survey on family business was distributed to the entire database. Information was requested on number of employees, industry sector (manufacturing, distribution, or service), sales category, and age of the firm. Microcosm also provides a sales figure in dollars, a SIC code, and some employee data for the subset of firms in our database that are also listed in that source. Numerous crosschecks substantiated the reliability of most survey responses. Of the 600 or so survey responses, 506 were usable based on sufficient completeness, for a yield rate of about 25 percent. The two questions shown in Table 1 were intended to break out family versus non-family firms. Our intention was to permit companies to classify themselves as family or non-family firms using Question One: Do you consider yourself a family business? so long as the reliability of self-selection was confirmed by the control in Question Two. …