ABSTRACT. This paper considers the effect of different firm
leadership on the innovative performance of firms from seven
EU countries. We investigate whether owner-led or manager-
led firms achieve a larger share of their turnover with product
innovations. Economic theory does not propose clear answers
to this question. In the empirical analysis, it turns out that the
manager-led firms are more active innovators: the share of
sales based on new products is larger if firms’ managers do
not hold any of the firms’ capital. Surprisingly, there are no
differences between the seven countries included in the regres-
It is well known that the traditional textbook
model of the owner-led firm is inadequate for large
modern corporations. Nowadays, these are led by
managers, who are paid a fixed salary and addi-
tionally receive a share of the firm’s realized
profits or turnover. However, the fixed portion of
the remuneration is usually much larger than the
profit-related portion (Jensen and Murphy, 1990).
The managers’ incentives may be different from
those of traditional firm owners and therefore it
is questionable whether managerial firms behave
like owner-led firms.
The economic literature intensively discusses
the consequences of managerial leadership of the
modern corporation. One topic is the effect of
leadership on growth and the investment behav-
iour related with this. It is frequently stated that
managers – instead of following profit-maxi-
mizing behavior – tend to invest too much into
capital. The obvious reason for this is to intensify
growth of the firm, thus possibly raising personal
income as well as personal prestige and power.
The purpose of this paper is to point to another
possible difference between managerial and
owner-led firms: The pursuit of innovative
activity. We discuss the arguments against or in
favor of innovative activities of managerial firms
and subsequently we present the results of an
empirical study concerning this topic. We use data
from firms in five sectors concerning seven
European countries. All firms are small or medium
sized with a maximum of 1,000 employees.
Overall, 474 observations can be used.
2. Theoretical considerations
The discussion on managers leads directly to the
well-known principal-agent models (see e.g.
Milgrom and Roberts, 1992). The main question
in these models is how to make the managers act
in the interest of the firms’ capital owners.
Naturally, owners want to maximize their profits.
Managers seek to optimize their monetary and
non-monetary income which is related to profits
but also to firm size or similar characteristics.
Empirical studies show that managerial income is
only weakly related to a firm’s profitability but
Firm Leadership and Innovative
Performance: Evidence from
Seven EU Countries
Small Business Economics 22: 325–332, 2004.
2004 Kluwer Academic Publishers. Printed in the Netherlands.
Final version accepted on 23 May 2002
Centre for European Economic Research
Department of Industrial Economics and
P.O. Box 10 34 43
University of Essen
Department of Economics