Moderating role of CEO compensation in lean innovation strategies of Chinese listed family firms
| DOI | https://doi.org/10.1108/CG-03-2019-0092 |
| Pages | 887-902 |
| Date | 15 June 2020 |
| Published date | 15 June 2020 |
| Author | Muhammad Zulfiqar,Khalid Hussain,Muhammad Usman Yousaf,Nadeem Sohail,Sadeen Ghafoor |
| Subject Matter | Corporate governance,Strategy |
Moderating role of CEO compensation in
lean innovation strategies of Chinese
listed family firms
Muhammad Zulfiqar, Khalid Hussain, Muhammad Usman Yousaf, Nadeem Sohail and
Sadeen Ghafoor
Abstract
Purpose –The purpose of this paper is to examine the impact of Chinese listed family firms on lean
innovation strategies.Additionally, the authors also examinedthe moderating role of CEO compensation
on the familyownership and lean innovation strategiesrelationship.
Design/methodology/approach –Data is obtained from CSMAR databaseabout Chinese family firms
listed at Shenzhen Stock Exchangeand Shanghai Stock Exchange. Panel data comprising of firm year
observationsfrom 2007 to 2016 is analyzed using STATA.
Findings –Family firms are proactive towardsresearch and development investment (innovation input)
as well as towards patent applications (innovation output). Moreover, family firms show propensity
towards patent applications and towards converting their R&D investment into granted patent
applications. CEO compensation negatively moderates the nexus between family firms and lean
innovationwhich seriously needs to be addressedto reduce agency costs.
Research limitations/implications –The study has focused on Chinese market only. The study is
useful for policy makers to address the serious concerns identified in the conclusion section, i.e.
effectiveness of CEO compensationin addressing the lean innovation strategies in emerging economy
like thatof China.
Originality/value –Given the usually considered conservative approach of family firms towards
innovation, this is the first study which has tested the moderating role of CEO compensation on family
firms and lean innovationrelationship in an emerging economy. This study is uniquebecause it provides
a detailed analysisof lean innovation process by splitting the processinto different stages. The negative
moderatingimpact of CEO compensation raises new concernsto resolve agency conflicts.
Keywords Family firms, Lean innovation, Patent application, Research and development investment,
CEO compensation, Resource-based view, Agency theory
Paper type Research paper
1. Introduction
Competition in global business environment encourages firms to be more competitive to
survive. Sustainability is considered as a successful driver of innovation (Szekely and
Strebel, 2013), whereas innovation is regarded as the valuable source of competitive
advantage (De Massis et al.,2016). In this regard, the role of family firms is very crucial
because according to Chirico et al. (2018), innovation strategies of family firms are related
to cost-benefit analysis. Literature related to family firms has been producing novel findings
(Carney et al.,2018). According to Chrisman and Patel (2012), it was previously believed
that family firms behavior toward innovation investment was riskaversive. Morck and Yeung
(2003) also stated that older family firms show more risk aversion behavior toward
innovation investment decisions. Contrary to above findings, recent literature has provided
evidence that family firms are more efficient in transforming their innovation inputs into
Muhammad Zulfiqar is
based at the School of
Accounting, Dongbei
University of Finance and
Economics, Dalian, China.
Khalid Hussain is based at
Government College
University, Faisalabad,
Pakistan.
Muhammad Usman Yousaf
is based at Lyallpur
Business School,
Government College
University, Faisalabad,
Pakistan. Nadeem Sohail is
based at University
Community College,
Government College
University, Faisalabad,
Pakistan. Sadeen Ghafoor
is based at School of
Accounting, Dongbei
University of Finance and
Economics, Dalian, China.
Received 13 March 2019
Revised 12 October 2019
19 March 2020
4 May 2020
Accepted 14 May 2020
DOI 10.1108/CG-03-2019-0092 VOL. 20 NO. 5 2020,pp. 887-902, ©Emerald Publishing Limited, ISSN 1472-0701 jCORPORATE GOVERNANCE jPAGE 887
outputs as compared to the non-family firms (Carney et al.,2018;Xiang et al., 2019). This
differing results from theextent literature is the first motivation for the researchersto conduct
this study. Additionally, we used lean innovation concept in this study that splits the entire
innovation process into R&D investment, patent applications, propensity to patent and
conversion rate of R&D investment. Previously the concept of lean innovation has been
used by Carney et al. (2018) only. “Doing more (innovation output) with less (innovation
input)” is termed as lean innovation (Carney et al., 2018). Many scholars (Carney et al.,
2018;Die
´guez-Soto et al., 2016;Duran et al.,2016;Matzler et al.,2015;Xiang et al., 2019)
have concluded that family firms are getting more innovation output by investing few
innovation inputs which showsthat family firms are following lean innovation strategies.
In the past, protection of intellectual property was not strongly protected in China because
the government was not providing full benefits to the businessmen seeking for patent
protection for their innovations. This was a source of demotivation for many innovation
seekers. However, the trend has changed overthe passage of time. Therefore, researchers
believe that lean innovation will now become an imperative competitive strategy for
businesses operating in China. This study is mainly based on the resource-based view
(RBV) which states that lesser resources can generate more returns and innovation plays a
vital role in generating competitive advantage which can be further protected through
patent rights. Moreover, the study is also based on stewardship theory which provides an
insight about the resource allocationdecisions taken by family firms.
This study has provided several contributions to existing family firms and innovation
literature. First, this study has provided insight about impact of family/non-family firms
towards lean innovation process and results differ from the previous studies on similar kind
of relationship such as study conducted by Carney et al. (2018). Second, CEO
compensation is considered one of the important variable in the corporate governance
which is used to overcome the agency problems (Teti et al., 2017). Therefore, CEO
compensation has been introduced in the model as a moderatorwhich has not been tested
earlier in the context of an emerging economy. Third, the combination of two theories
related to family firms, i.e. agency theory and resource-based view is used to evaluate the
underlying research problem which provided detailed insights about the significance of
statistical results. Moreover, the results are useful for firms’ management to take strategic
decision regarding the CEO compensation as well as the resource allocation for lean
innovation process.
2. Theoretical background, literature review and hypothesis development
In highly competitive markets with an ever-shortening product life cycles and lesser
customer loyalties, companies are required to be more innovative in their operations and
delivering versatility of products they offer (D’Aveni et al.,2010;Garud et al.,2013). The
family firms in contrast to their non-family counter parts are viewed more conservative
toward long-term innovation projects given the lengthy payback periods associated with the
R&D investments. This postulate is correct up to some extent that family firms are less
inclined toward investing in the R&D projects on the voluminous basis; however, the
tendency of family firms to convert weaknesses into opportunities lies in their strong
monitoring. The relationship between resources and output at the managerial and
organizational level can be explained with the help of the resource-based view, agency
theory and stewardship theory. The resource-based view (RBV) is a model which is usedto
evaluate financial performance differentials among firms (Kraiczy, 2013). Barney (1991)
developed this framework on the basis of two assumptions. First, in terms of resources all
firms in an industry are heterogeneous and second, the resources are immovable and
inimitable across the firms. Therefore, it can be said that RBV is a model which considers
the firm’s resources as a key source of firm performance as well as competitive advantage.
Kraiczy (2013) stated that all resources have not the potential to be used as key resources
PAGE 888 jCORPORATE GOVERNANCE jVOL. 20 NO. 5 2020
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