HALL AND WOODHOUSE has been brewing beer amid the Georgian splendour of Blandford St Mary, in Dorset, since 1777. The company’s founder, Charles Hall, made his fortune during the Napoleonic wars selling ale to the troops bivouacked in nearby Weymouth, ready to repel the French. Today the seventh generation runs the firm and the extended family still owns almost all the shares. It is a venerable example of the dominant form of business structure in modern Britain, where over two-thirds of companies are family owned.

Hall and Woodhouse looks like everything the chancellor of the exchequer, Philip Hammond, would like a company to be. It trades heavily on its heritage, yet remains innovative. With a turnover of £100m ($135m) a year it has just spent £20m on a new factory to produce more of its Badger beer. “We experiment,” says the managing director, Anthony Woodhouse. Last summer the firm added a range of ice-creams for dogs, including Carrot Crunch and Old Sock flavours, to the desserts on sale in its pubs, and ended up selling more ice-cream to canines than to human customers.

Britain is almost as sentimental about families as it is about pets, which means that family businesses sometimes escape the scrutiny that other bits of the economy are subject to. But the evidence suggests that they tend to underperform when compared with companies with more diverse ownership and management. Indeed, as Mr Hammond searches for ways to improve Britain’s weak productivity growth, he could do worse than take a look at family businesses. Britain is not unusual in having such a preponderance of them (some countries in Europe and Latin America have an even larger share), but it seems to have unusually poor performers.

A survey of the manufacturing industry by the Office for National Statistics showed that family-owned and -run companies are about 19% less productive than others. Family-owned companies that have non-family management do better, but still lag the rest (see chart). Whereas 18% of small and medium-sized firms export, only a tenth of small and medium family firms do, although they tend to be smaller.

One reason for their lower productivity is that family firms value stability, and the chance to hand on the business to the next generation, over innovation. Mike Wright, a professor of entrepreneurship at Imperial College London, says that research and development budgets in family firms are lower than in others, and that family companies are more risk-averse. More than three-quarters of private R&D investment in Britain is carried out by just 400 businesses. Family firms typically focus more on improving existing products than on inventing new ones. One survey found that 86% had never filed a patent. Britain’s small and medium-sized companies are less likely than their European competitors to introduce new products and processes, the government pointed out in its recent “industrial strategy” paper. Poor management is another feature of family firms. Britain emerges badly from the World Management Survey in this respect: only 37% of managers in its family-owned, family-run companies have degrees, whereas 48% do in companies with a diverse shareownership. In Germany, 49% of managers in family-run and family-owned firms have degrees, rising to 70% in companies with a wider ownership. Take Nisbets, a Bristol-based catering-equipment company which sells to schools, hotels and restaurants. Founded in 1983, in one sense it is a very successful business. It has an annual turnover of £400m, employs about 2,000 people and has offices in continental Europe and Australia. Looking back, however, Andrew Nisbet, the founder, concedes that the company was “initially slow and not terribly successful” at expanding abroad. “Management mistakes let us down,” he says. Mr Nisbet set up the company straight out of school, from one of his father’s business interests. “In the early days we weren’t up to the challenge,” he admits. In Europe management is “more structured and professional”, Mr Nisbet believes. The contrast may, in part, account for the success of the Mittelstand. Two-thirds of Germany’s economic powerhouse is family owned, but its firms are better run and more ambitious than their British counterparts. Mittelstand companies account for 23% of EU exports that go beyond the EU, far ahead of the 10% made up by small and medium British firms.

Tweaks to financing rules could help British family companies do better. Many finance their activities strictly through cashflow, rarely taking on debt. This helps them to survive during the bad times, but limits their ability to expand during booms. They are often loth to take on outside investment because it would dilute the family’s ownership. Premium listings on the London Stock Exchange allow only one class of share, meaning that families cannot retain special voting shares, for instance, as they can on some other exchanges. Some families that have successfully floated their firms argue that it is better to have a smaller share of a larger pie. Most, however, keep it in the family.