Does market power drive business model innovation? Evidence from Italian family manufacturing firms

The increasingly dynamic and uncertain environment in which firms operate has strengthened the need to understand how firms react to changing conditions and unpredicted events. Using the information on business model innovation collected through a unique survey on Italian manufacturing companies, we study if and how variations in the firm's competitive position in the product market, proxied by the corporate markup, prompt proactive or reactive changes in the firms' business model. Drawing upon the performance feedback approach, we find that markup variations foster business model innovation, and that the degree of family involvement shapes this influence. In particular, family firms turn out to be significantly more proactive (they react proactively to both negative and positive performance feedback) than family firms with lower family involvement and non-family firms. Interestingly, positive performance feedback encourages family firms to invest and strengthen those areas of the business model that are often considered weak in this type of company. In recent years, firms have been faced with unprecedented challenges, prompted, for instance, by increasing competition end globalization, but also by particularly adverse and unpredicted events, including the well-known COVID-19 pandemic. This strengthened the importance of understanding how companies react to unexpected changes. To tackle this issue, in this study, we assess whether firms reduce or increase the extent of innovation in their business models as a response to both positive and negative variations in their market power (proxied by their price-cost margin, or markup). Using a sample of Italian manufacturing companies and unique survey data, we show that markup variations foster business model innovation, but that this link significantly changes with the degree of family involvement. In particular, family firms stand out for their proactive response to both increases and decreases in their market power, and seem to view the improvement in their competitive position in the product market as an incentive to strengthen those areas of the business model that are often considered weak in this type of company. Hence, our study portraits a favourable account of (virtuous) family businesses which should prompt policymakers to provide adequate support to these companies.