Manuscript Type Empirical Research Question/Issue This study examines the direct effect of family ownership on innovation in emerging markets by using data from Indian family‐controlled publicly listed firms as its sample. In particular, we study (1) the direct effects of family ownership on innovation and (2) the influences of business group affiliation on these family firms. Research Findings/Insights Using an unbalanced panel of 395 Bombay Stock Exchange (BSE) listed Indian firms during the years 2001 and 2008, we found that the impact of family ownership on innovation productivity is positive (after controlling for possible endogeneity). We further emphasized the business group affiliation of family firms and distinguished between the innovation activities of group‐affiliated and stand‐alone family firms. We found that affiliating with top 50 business groups increases the innovation activities of these family firms. Theoretical/Academic Implications Theoretically, we complement agency theory by incorporating both the institutional perspective and the external resourcing perspective to provide a more robust framework for examining the impact of family ownership on innovation in emerging markets. Methodologically, we adopted a more rigorous econometrics method by providing a panel analysis that used a system GMM estimator and addressed the endogeneity issue thoroughly, which represented a significant improvement over the shortcomings of the methodologies found in the existing literature. Practitioner/Policy Implications Our findings suggest that the Indian government should provide support for affiliating family firms with business groups while improving policies on information disclosures; it should also establish a proper corporate governance mechanism for private and public family business. The findings further suggest that a corporate governance code should encourage family firms to have an independent professional CEO.