Innovation in Family Firms: The Role of Absorptive Capacity and Knowledge Collaboration

ABSTRACT While prior research suggests that family ownership can significantly facilitate sales and innovation, empirical findings often overlook the nuanced differences in innovation inputs between family and non‐family firms. We address this gap by examining the extent to which family firms are able to use absorptive capacity by creating knowledge internally and collaborating with external partners to enhance their innovation. Utilizing micro‐level data from 9266 of the most innovative UK firms from 2006 to 2016, we employ a multi‐level analysis to examine how different knowledge inputs—such as internal investments in knowledge and external collaborations at the regional and international levels—influence innovation outputs in family and non‐family firms. Our findings contribute to the innovation and family business literature by providing a clearer understanding of the innovation dynamics within family firms compared to their non‐family counterparts. Additionally, we offer managerial insights and outline policy implications that could foster knowledge transfer in family firms. These recommendations take into account that regional and international knowledge collaboration serves as a boundary condition for family firms to outperform their non‐family counterparts.