WHO CAN PROMOTE FIRM’S INNOVATION? EVIDENCE FROM THE INTERGENERATIONAL TRANSITION OF FAMILY BUSINESS

Chinese family business is experiencing a pivotal phase of succession. Although innovation can help family firms realise the goal of long-term development, it remains under-investigated whether and how the second generation influence family firms’ innovation. Based on the controversy on the successors’ behaviour, we explore the effect of the second generation on family firms’ innovation, both input and output included. We find that the engagement of the second generation can foster firm innovation, encompassing both the willingness and the high-quality outcomes of innovation. Also, this effect is more pronounced when family firms own greater competitiveness over their peers and exhibit higher level of financialisation. Path analysis indicates that the second generation may lead to reduced agency costs, minimised appropriation of receivables by large shareholders, and increased risk tolerance regarding innovation, thereby fostering a greater willingness to innovate and yield superior innovation outputs. We thus add to the literature on the succession in family firms and derive practical implications for family firms aiming to bring together family succession and innovative practices.