Can deep local roots help family firms grow faster?

Family businesses are often seen as stable, tradition-bound, and somewhat reluctant to chase aggressive growth. But is that perception accurate—or outdated? A growing body of research suggests that family firms, especially those embedded in their local communities, may in fact hold powerful advantages when it comes to long-term business expansion.

This article explores a vital but underappreciated concept in family business studies: local embeddedness. It refers to the extent to which a business is integrated into the social, cultural, and economic fabric of its surrounding community. Drawing on detailed data from Swedish firms between 2004 and 2013, this research uncovers how local embeddedness affects the growth trajectories of family versus nonfamily firms—and how rural versus urban settings further influence these dynamics.

As policymakers and practitioners search for sustainable strategies for economic development, particularly in rural and less industrialized areas, the lessons from this study are more relevant than ever.

What We Studied

To explore the impact of local embeddedness on business growth, the researchers constructed a unique dataset of 15,658 matched Swedish firms, evenly split between family and nonfamily ownership. These firms were observed over a 10-year period, providing a rare longitudinal perspective on firm growth dynamics.

The key variables analyzed were:

• Family firm status (defined by ownership and management by multiple family members),
• Local embeddedness (measured by the average number of years the owners have lived in the same municipality),
• Rural vs. urban location (based on municipality classifications),
• Sales growth (as a proxy for business expansion).

To ensure statistical rigor, the study employed coarsened exact matching (CEM) to balance the sample and used a two-stage residual inclusion (2SRI) model to control for endogeneity—a common challenge in observational data. Robustness checks included alternative measures (e.g., employee growth), continuous family involvement indices, and various definitions of embeddedness.

The study tested three key hypotheses:

1. That family firms grow more slowly than nonfamily firms.
2. That local embeddedness enhances growth more in family firms than in nonfamily firms.
3. That this effect is stronger in rural areas than in urban settings.

Key Insights

1. Family Firms Aren’t as Risk-Averse as We Thought

Contrary to longstanding assumptions, family firms in this study did not grow more slowly than nonfamily firms. In fact, when accounting for local embeddedness and other factors, family firms often outpaced nonfamily firms in terms of relative sales growth. This challenges the stereotype of family businesses as overly conservative or reluctant to expand. Instead, it suggests that growth may be part of a long-term continuity strategy, motivated by nonfinancial goals such as legacy, local reputation, and generational sustainability.

2. The Power of Being Local

Family firms benefit disproportionately from being embedded in their local communities. As local embeddedness increases, the growth of family firms accelerates significantly more than that of nonfamily firms. Why? Because family businesses tend to build long-lasting, trust-based relationships with local stakeholders—suppliers, customers, employees, even municipal authorities. These relationships provide access to critical resources: tacit knowledge, loyal clients, skilled labor, and informal credit arrangements. Local embeddedness also enhances legitimacy and commitment in the eyes of the community.

3. Rural Contexts Amplify the Effect

The benefits of local embeddedness are especially pronounced in rural areas, where access to external resources is more limited. In these settings, local social capital becomes a vital substitute for the agglomeration advantages typically found in urban areas. Family firms, with their strong regional ties and long-term presence, are better equipped to thrive under such constraints. The study shows that family firms in rural municipalities with high local embeddedness had the highest rates of sales growth across the entire sample.

4. Nonfamily Firms Struggle to Reap the Same Benefits

Interestingly, nonfamily firms do not experience the same growth boost from local embeddedness. This may be due to more transactional relationships with the local community or a lack of deep-rooted commitment. While these firms may operate in the same environment, their strategic orientation and organizational culture make them less able—or less inclined—to capitalize on community-based resources.

Takeaways

Build Local Roots, Don’t Just Operate Locally

For family business owners, the takeaway is clear: actively cultivate local relationships. Attend community events, join local associations, invest in community projects, and maintain visibility. The longer and deeper your presence, the more likely it is that your firm can convert social capital into business growth.

In Rural Areas, Embeddedness is a Competitive Edge

Rather than seeing rurality as a disadvantage, family firms in non-urban settings should leverage their closeness to the community. Embeddedness acts as a buffer against resource scarcity and opens doors to alternative sources of knowledge, labor, and capital.

Local Loyalty Isn’t Just Sentimental—It’s Strategic

Many family firms feel an emotional obligation to their home region. This study shows that such loyalty can have concrete business payoffs. Prioritizing local employment, supporting regional suppliers, and sponsoring community initiatives are more than acts of goodwill—they can drive long-term business success.

Organizational Culture Shapes Embeddedness

Embeddedness isn’t just about location—it’s about behavior. Family firms often emphasize stewardship, long-term orientation, and community responsibility. These values help them nurture meaningful local ties, which, in turn, drive business outcomes. Nonfamily firms seeking to emulate this advantage may need to adopt similar cultural attributes.

Impact

This study contributes to both family business theory and regional economic policy. It challenges the notion that family involvement necessarily limits firm growth and instead shows how contextual factors like local embeddedness and geography can shape firm performance. For policymakers, the findings support the case for promoting local economic ecosystems that value social capital and family ownership structures.

The study also offers a fresh perspective on rural development. Rather than relying solely on urban-centric growth models, policymakers and advisors should recognize the potential of locally embedded family businesses to drive inclusive, place-based economic development.

Recommendations

For Family Business Owners:

• Stay rooted: Avoid relocation unless absolutely necessary—your presence is part of your capital.
• Invest in visibility: Sponsor local initiatives or events that strengthen your public image and build goodwill.
• Mentor locally: Engage with schools and community centers to create a pipeline of future talent and trust.

For Policymakers:

• Support locally embedded firms: Provide incentives or technical assistance tailored to family firms in rural areas.
• Strengthen local networks: Encourage the formation of local business clusters and cooperative networks.
• Preserve rural infrastructure: Ensure digital connectivity, transport, and services so that embedded firms can scale effectively.

For Researchers:

• Explore cross-cultural comparisons: Would the same dynamics play out in other national contexts?
• Examine industry-specific effects: Do manufacturing family firms benefit more from local embeddedness than service-based ones?
• Consider generational factors: How does the passing of local social capital from one generation to the next influence embeddedness and growth?

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