1
The inverted u-shaped relationship between entrepreneurial orientation and
SMEs performance in Egypt
Mohamed Ali Taha Shohaieb
Professor of Management, Faculty of Commerce, Cairo University
Hoda Alaa Helmy
Assistant lecturer, Faculty of Commerce, Cairo University
Abstract
Recent research suggest that the relationship between entrepreneurial orientation (EO)
and firm performance has a more complex effect than the previously stated. Accordingly, we
shed new light on this view through examining the non-linear effect of each EO individual
dimension (innovativeness, risk-taking and proactiveness) on firm performance in the context
of developing economy, Egypt "collectivist economy". Using survey data from 140 SMEs in
food industry sector, the results show that innovativeness and proactiveness have an inverted
U-shaped on firm performance, while the effect of risk-taking over performance is positive
and increasing overtime. The finding also drive managers not to pursue high levels of
innovativeness as well as applying proactive strategies with caution because of their
detrimental effect over firm performance after reaching the moderate level. Whereas, firms
should be encouraged to adopt risk-taking strategies, due to the dramatic positive effect of
rich business opportunities linked to risky strategies over business performance.
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Introduction
Several meta-analysis studies highlight the positive relationship between EO and firm
performance (Linton & Kask, 2017; Rauch, Wiklund, Lumpkin, & Frese, 2009; Saeed,
Yousafzai, & Engelen, 2014). Most of EO studies point out a direct linear effect of EO on
firm performance (Núñez-Pomar, Prado-Gascó, Añó Sanz, Crespo Hervás, & Calabuig
Moreno, 2016; William J Wales, Patel, Vinit, & Kreiser, 2013). However, oversimplifying of
the relationship between EO and firm performance could be considered an emerging issue
that can be questioned (Anderson & Eshima, 2013). Patel, Kohtamaki, Vinit, & Wincent,
(2015) highlight that increased variability in performance due to EO, hold that possessing
high levels of EO might lead to both wins and losses situation. Thus, this views challenge the
linearity of EO over firm performance as suggested by Wiklund & Shepherd (2005).
Firm's EO efforts are the internal firm capabilities that may improve the performance
of entrepreneurial firms in changing the environment (Lee, Lee, & Pennings, 2001). As
originally proposed by Miller (1983), entrepreneurial orientation (EO) is defined as the firm
strategic orientation that includes innovativeness, risk taking and proactiveness (Covin &
Slevin, 1989; Covin & Wales, 2011). Innovativeness refers to the “firm’s effort to find new
opportunities and novel solutions” (Dess & Lumpkin, 2005, p.150). Risk-taking is about
commitment of large resources to exploit opportunities or engaging in business activities with
unceratin outcome (Hean, Thi, & Ping, 2007). Proactiveness is a “forward-looking
perspective”, and it is the firm's ability to catch new opportunities (Dess & Lumpkin, 2005).
The EO literature has called for further research on the effect of individual EO
dimensions on firm performance (George, 2005), where each individual dimension might
hold variable effect with related outcome (Luu & Viet, 2018). Accordingly, there is a need to
identify and understand contingencies affecting the EO-firm performance (Engelen, Gupta,
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Strenger, & Brettel, 2015). Thus, a number of variables have been discussed in literature for
affecting and moderating the relationship between EO and firm performance: the role of
leader, characteristics of management teams, national culture, networks, strategic processes
(Covin, Green, & Slevin, 2006; Engelen, Flatten, Thalmann, & Brettel, 2014).
Rauch et al. (2009) call for future research to test the EO-performance relationship in
different culture contexts to understand whether this positive relationship between EO and
performance will be replicated or not. Miller (2011) underlines that EO tend to embrace other
discilpine as a way of connecting EO to theory, one attempt is to connect EO to Insitutional
theory. Accordingly, next section will explain institutional theory, its roots, history and its
link to EO. Previously, strategic management researcher treats institutions as background in
their own studies (Peng & Heath, 1996). On the other hand, it is proven that institutions
determine how firms struggle to formulate and implement strategies (Peng et al., 2009).
Bruton & Ahlstrom (2003, p.234) note that according to institution-based view, actions of
individuals are shaped by different environmental institutions, hence, it is important to
understand how different institutions affect EO and firm performance.
In this paper, the effect of national culture “part of informal institutions” is addressed.
Hofstede (1991, p.25) defines culture as: “collective programming of the mind which
distinguishes the members of one group or category to people from those of another”.
Cultural difference may be due to differences in regional, national, ethnic and organizational
levels as cited by (Tan, 2002). Informal institutions are viewed as unwritten rules that are
followed and that shape their behaviour in a systematic way (Estrin & Prevezer, 2011).
Culture can shape and direct behaviour, where what is considered appropriate and acceptable
at one place may be rejected in another place due to differences in culture (Altinay & Wang,
2011). The same is recognized in the difference between developed and developing
economies, where what is taken for granted in developed economies may be altered and
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changed when dealing with emerging economies (Bruton, Ahlstrom, & Obloj, 2008). Tan
(2002) and Bruton et al. (2010) highlight that influences and effects of culture over
organizations are mostly recognizable at the national level, accordingly, national culture
plays a major role in explaining the difference between countries. Differences in national
culture differences have an impact on shaping entrepreneurial beliefs: when the environment
is very supportive with a well-developed financial and legal system encourage would
encourage some EO dimensions and traits that are totally different from the less-developed
institutions (Tan, 2002). Hayton et al. (2002) realize that national culture that encourages
autonomy, need for achievement as well as self-efficacy, leads to high rate of start-up. This is
similar to the conclusion of Mueller & Thomas (2001) where the presence of supportive
culture may lead to high entrepreneurship rate, where the culture leads to the development of
the mind and character of entrepreneur. Bruton et al. (2008) conclude that entrepreneur tend
to act differently due to differences in culture and surrounding institutional environment.
The main objective of this paper is to study the effects of the individual dimensions of
EO on firm performance as being moderated by national culture, in the context of developing,
collectivist economies "Egypt". Compared to developed economies, developing, collectivist
economies offer a context with several unique characteristics. First, emerging economies
pose challenges over businesses to develop strategies to fit within the context in which they
operate (Xu & Meyer, 2013). Meyer & Peng (2016) highlight that the nature of rapidly
changing environment of emerging economies lead to an important contribution to business
research. Emerging economies compared to developed ones have “less sophisticated
institutional frameworks” with poorly enforced property rights as well as weak developed
capital markets (Estrin & Prevezer, 2011). Emerging economies environment are
characterized by diversity and instability, accordingly, this environment shapes phenomenon
under investigation (Meyer & Peng, 2016). Emerging economies are characterized by low-
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income and high growth potential which make them attractive to international business
research. They are characterized by more trends toward marketization, privatization and
intense regulations (Hoskisson, Eden, Lau, & Wright, 2000). However, literature fails to
provide an answer to the proposed question: ‘How do organizations play the new game when
the new rules are not completely known?’ (Peng, 2003, p. 283). Research on emerging
economies provide some insights and answers to this unresolved question (Meyer & Peng,
2005). Hence, institutional contexts of emerging economies attract the attention of scholars to
consider the effect of institutional environment that may constrain or enable the businesses
(Peng, 2003; Tatiana & Dacin, 2008).
Slevin & Terjesen (2011) highlight that from a contextual perspective, a large part of
EO research conducted on developed countries is ignoring the rest of the world’s countries,
although, according to Boston Consulting Group conducted in 2011, there are many rapidly
developing economies such as Egypt are left with limited academic research. However, Kiss
et al. (2012) and Wales, Gupta, & Mousa (2011) conclude that the least studied regions are
the middle-east and Africa, while the focus was on China, Russia, Poland and Taiwan.
Martens, Lacerda, Belfort, & Freitas (2016) highlight that future agenda on EO call for
studies that focus on emerging/ developing economies to understand differences in
entrepreneurial processes in different context. However, this future research confirm what
was suggested by Boso, Story, & Cadogan (2013) that EO models need to be explored more
in emerging contexts. All these data, figures and information reflect rationale behind
selecting Egypt to represent developing economy.
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Accordingly, The purpose of this paper is to investigate the non-linear relationship
between individual EO dimensions 'innovativeness, risk-taking and proactiveness' and SMEs
performance in Egypt in the developing, collectivist economy "Egypt". This study makes
several contributions to the literature. First, it is among the first studies to examine the non-
linear coplex relationship between individual dimension of EO and SMEs performance in the
context of a developing, collectivist economy. The findings of this study are important for
checking and changing the expectations about EO dimensions in the extant literature. In this
paper, we demonstrate that emerging/ developing economy with different cultural
envrionments, expectations about the effect of EO dimensions is not appropriate. This
research also offers implications for managers in developing economies for the appropriate
level of innovativeness, risk-taking and proactiveness that should be possessed by SMEs.
Theoretical background and hypotheses development
Several studies highlight the effect of EO in discovering in entrepreneurial
opportunities and achieving superior competitive advantage which will lead to high positive
performance (Li et al., 2009; Semrau et al., 2016). However, the meta-analysis of Rauch et al.
(2009) reveals that there is a variation in the relationship between EO and firm performance,
where some studies reported high positive correlation, while others find negative correlation
or even no correlation. Tang et al. (2008) propose whether too much EO will always lead to
positive performance and conclude that the relationship between EO and performance is
curvilinear. However, this finding contradicts with the finding of Wiklund (1999) where the
EO-performance relationship is positive and also increases over time so that investing more
in EO is worthy for the firm. Since the EO-performance relationship is context specific as
highlighted by Lumpkin & Dess (1996), the variation in the results of the effect of EO on
firm performance may be due to differences in institutions. However, recently, research
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highlights the notion of non-linearity or diminishing performance due to increase in EO in
certain context (J. Tang et al., 2008; Z. Tang & Tang, 2012; William J Wales et al., 2013).
To be able to understand the effect of national culture on the EO-SMEs performance
relationship, we employ three dimensions of Hofstede's work in 2001: uncertainty avoidance,
power distance and in group collectivism. Differences in national culture dimensions lead to
differences in the practices of firms, accordingly, differences in dimensions affect the
effectiveness of EO implementation (Engelen et al., 2014). Uncertainty avoidance refers to
the ability of people to deal with ambiguous, uncertain and unknown situations, power
distance refers to the degree to which individuals accept that power is unequally distributed,
finally, collectivism refers to the degree to which collective actions and collective distribution
of resources are appreciated (Hofstede, 2011). According to Hofstede dimensions, Egypt
scores low (25) in individualism which means that Egypt is a collectivist society favouring
working in teams, groups as well as building ties and connections with others. Also, Egypt
scores high on uncertainty avoidance (80) which means that Egyptians avoid situations with
high uncertainty and ambiguity. This score is similar to one in the 2010 GEM report, where
Egypt is considered risk-averse with 25.5% of the adult indicate that fear of failure may stop
them from starting their own business. Regarding the power distance, Egypt scores high (70)
as Egyptians understand and respect the hierarchal order where not all individuals in societies
are equal. Table (1) summarizes the index of Egypt in Hofstede’s dimensions of national
culture. The next part will explain the effect of individual EO dimenions on SMEs
performance taking into consideration the effect of national culture.
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Table 1:National Cultural dimensions of Egypt
Individualism Power
distance
Uncertainty
Avoidance
Egypt 38 80 68
Source: (Hofstede, 1980)
The relationship between innovativeness and SMEs performance
Innovativeness reflects the firm's ability to support new ideas and engage in
experimentation (Lumpkin & Dess, 2001). Hughes & Morgan (2007) report that
innovativeness can enhance the firm’s creative thinking which in turn will result in entering
new arenas. Lumpkin & Dess (1996) suggest that innovativeness does not mean only
explorative innovation but also an exploitative innovation, where the later means improving
efficieiency or reducing cost in order to be better than competitors. Innovativeness improves
the effecicency of market information that will enable firms to pursue exisitng opportunities
whether through developing a new product or modifying the existing one (Hurley & Hult,
1998). However, sometimes investing in innovation may cause problems including wasting
money as expenditures on R&D with no result and development of competitive climate that
may stimulate competitors to develop similar product and service (Dess & Lumpkin, 2005).
The introduction of new and innovative products can improve the firm's ability to
adapt to changing market conditions and environment, which is the case in Egypt 'developing
economies' (Hult, 2004). Cultural scores for Egypt belongs to high collectivism, and
uncertainty avoidance (Hofstede, 2011). Collectivism encourages mutual cooperation,
cordination and achievement of innovative behavior (Choi & Wu, 2009). Accordingly, SMEs
employing innovative efforts will be more likely to improve the overall performance in
collectivist economies (Luu & Viet, 2018). However, Tiessen (1997) reveals that collectivist
societies might hinder the firm's ability to develop new and breakthrough innovations.
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Collectivist countries are characterized by working in groups which may affect the adoption
of new techniques and innovations to minimize conflicts and problems within the group
(Brewer & Venaik, 2011). The conflicts between group members can lead to anxiety and
stress which may affect the performance of the group and firm (Engelen et al., 2014).
Furthermore, prior research also shows that cultures of high individualism (the opposite
situation of Egypt) are considered as supporters of entrepreneurship and innovation (Mueller
& Thomas, 2001; Shane, 1993). Egypt also scores high in uncertainty avoidance according to
Hofstede' index, which means that Egypt prefers structured situations to avoid uncrtainty and
ambiguity (Saeed et al., 2014). As innovativeness associated with introducing new ideas
involves some degree of risk, techniques and products, being characterized by high degree of
uncertainty avoidance entail less adoption of innovation within the firm (Van Everdingen &
Waarts, 2003). As adopting high degree of innovation may lead to reduction in performance,
therefore, we hypothesize the following hypotheses:
Hypothesis 1: Innovativeness has an inverted U-shaped association with firm
performance
The relationship between risk-taking and SMEs performance
Lumpkin & Dess (2001) refer to risk-taking as taking actions that have uncertain
outcomes. Therfore, risk-taking is considred an important dimension of EO in order to enable
firms to exploit different opportunities in the marketplace (Lumpkin & Dess, 1996). Dess &
Lumpkin (2005) argue that risk taking is not “gambling”, even though risk by nature involves
high degree of risk and uncertainty. It is a must for firms to grow to go through what is
uncertain. Although risk taking is one of the major characterestics of entrepreneurship,
empirical results show little support for the positive effect of risk taking on the performance,
and on the countrary, it may hinder the performance (Hughes & Morgan, 2007). Kollman &
Stockmann (2014) realize an inverted U-shaped relationship between risk taking and
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performance, however, this negative relationship may be due to firms investing their
resources in exploring opportunities rather than working on tradional business practices.
Egypt is characterized by high uncertainty avoidance reflecting the need to avoid risky,
uncertain situations and accordingly, accepting low level of risk-taking (Hofstede, 2011).
Managers in individualistics socieites tend to favor risky decisions as they are independent
and they may accept higher level of risks to improve themselves compared to managers in
collectivist societies (Kreiser, Marino, Dickson, & Weaver, 2010). However, Egypt is
characterized by a risk-averse culture, which impose large burden over firms to invest in
risky projects and decisions (Hattab, 2010). Luu & Viet (2018) highlight that in risk-averse
society, firms are rewarded with above average return to overcome and reduce the reluctance
of firms to invest in risky projects. Accordingly, the more risk-taking activities adopted by
the firm are, the more its firm performance will increase and this effect gets stronger with
higher level of risk-taking. Accordingly, we hypothsize that:
Hypothesis 2: Risk-taking has a positive association with firm performance that
increases with the increase in risk-taking.
The relationship between proactiveness and SMEs performance
Proactiveness is defined as “opportunity-seeking” behaviour characterized by
providing new products to the market before competitors (Soininen, Puumalainen, Sjogren, &
Pasi, 2012). Proactiveness can be viewed as the willingness to be superior than competitors
through proactive and aggressive strategies such as introducing products before competitors
and responding to future demand (Hean et al., 2007). Hughes & Morgan (2007) state that
responsiveness to customer’s needs as well as sensing market signals are the two main
advantages of proactiveness. However, Kollman & Stockmann (2014) report that
proactiveness is not only about first mover advantages but it requires a protection for this
first-mover as well as increasing customer loyalty through improving the efficiency and cost
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advantage. Morgan & Strong (2003, p.167) noted that: “proactiveness has been associated
with competitive superiority due to the ‘step- ahead’ tactics pursued and market leadership
characteristics exhibited by firms with this strategic behaviour.” Proactiveness is about
shaping and directing competition to the advantage of the firm.
Proactiveness is to be a leader rather than a follower, that is why proactiveness is
effective in creating competitive advantage because competitors always have to make
changes to cope with proactive firm (Dess & Lumpkin, 2005). However, research suggests
that uncertainty -avoidance societies may discourage firms from acting aggressively or even
over competing with other firms (Choi & Wu, 2009). The degree of uncertainty acceptance
level affects the level of interaction with the external environment which may increase the
ability of the firm to be the first mover in the market (Covin & Slevin, 1989). Accordingly, it
is suggested that there is a negative relationship between uncertainty avoidance and
proactiveness (Kreiser et al., 2010). Researchs on the relationship between individualism and
proactive behaviour reveals that firms in individualistic society may have limited access to
resources (Tiessen, 1997). Indeed, the access to scarce resources in Egypt is contingent upon
the control played by the government where there is a lack of disclosure of information as
well as misuse of resources (Farid, 2007). Accordingly, costs and uncertainty associated with
proactiveness may reduce benefits of being proactive and first mover in the market.
Therefore, we hypothesis that:
Hypothesis 3: Proactiveness has an inverted U-shaped association with firm
performance
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H1
H2
H3
Figure 1: Proposed research model
Data and methods
Measures
All items used in this research were adopted from existing tested measures with a
seven point likert scales with anchors; '1' indicates not at all; and '7' indicates to an extreme
extent. Table (2) represent constructs, measurement items and related reliability within the
used scale. EO is divided into three dimensions: innovativeness, risk-taking, proactiveness
(e.g. Covin and Slevin, 1989). Five items are used to measure the innovativeness while risk-
taking, proactiveness are measured by three items each (Boso et al., 2013). Firm
performance is measured through a mix between subjective and objective measures.
Respondents were asked to assess their own firm performance with regard to customer
satisfaction, market effectiveness and financial performance following Vorhies and Morgan
(2005), where each variable is measured using four items each (Engelen et al., 2015).
National culture is measured using indices as reflected in table (1), where some previous
studies depend on indices reflecting Hofstede’s dimensions of Culture (Hofstede, 1984). “The
Innovativeness
Risk-taking
Proactiveness
Firm Performance
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use of these measures is appropriate for four reasons: the measures were based on data from
53 countries representing both industrialized and developing nations; the measures were
derived using factor analysis; the measures represent separate discernible constructs; and
researchers have supported the validity of these measures through their correlation with the
indices of other researchers” (Marino et al., 2002).
Table 2: Constructs, measurement items and reliability tests
Construct Variables Method used to construct the
variables
Cronbach
alpha
Source
Entrepreneurial
Orientation EO
Innovativeness
– Our company is known as an
innovator among businesses in our
industry.
– We promote new, innovative
product/services in our company.
– Our company provides
leadership in developing new
products/services.
– Our company is constantly
experimenting with new
products/services.
– We have built a reputation for
being the best in our industry to
develop new methods and
technologies.
0.91 Boso et al.
(2013)
Risk Taking – Top managers of our company, in
general, tend to invest in high-risk
projects.
– This company shows a great deal
of tolerance for high risk projects.
– Our business strategy is
characterized by a strong tendency
to take risks.
0.93
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Proactivness – We seek to exploit anticipated
changes in our target market ahead
of our rivals.
– We seize initiatives whenever
possible in our target market
operations.
– We act opportunistically to shape
the business environment in which
we operate.
0.91
Firm
Performance
Customer
satisfaction
Market
Effectiveness
Financial
Performance
Please evaluate the performance of
your firm over the last three years
compared to your major
competitors in terms of:
- Increasing Customer Satisfaction
- Delivering value to your
customers
- Delivering what your customers
want
- Retaining valued customers
- Market share growth
- Growth in sales revenue
- Acquiring new customers
- Increasing sales to existing
customers.
- Profitability
- Return on investment (ROI)
- Return on sales (ROS)
- Reaching financial goals
Overall 0.88 (Engelen et al.,
2015)
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Research population, sample and data collection procedures
According to the Ministry of Finance report in 2005, there is no unified definition of
micro, small and medium enterprises being adopted in Egypt. The “Small Enterprise
Development Law” on May 29, 200- approved by the Egyptian parliament 4 - sets a
definition for micro (referred to as very small enterprises) and small enterprises in Egypt to
include any company with no more than 50 employees. According to the industrial
development authority, manufacturing firm SMEs are firms with less than 100 employees.
The research population was determined to include all food industry SMEs in Cairo,
Giza as well as 10th
of Ramadan and 6th
of October cities, where those areas represent the
main industrial areas within Egypt as shown in table (3). No research frame is available for
SMEs in Egypt due to the availability of different sources for SMEs categorization.
Accordingly, this research follows a non-probability sampling design, where the choice of the
subjects or firms to be included in the sample will follow judgmental sampling where it is
important to select and depend on special judging to exclude elementary businesses that will
not add any value for their impact of strategic orientation. Although, the judgemental
sampling affects the generalizability of the finding “not generalizable to the entire
population”, it is the most appropriate type of sampling to obtain information required from
people who only have needed facts and information (Cavana, Delahaye, & Sekaran, 2000).
The sampling unit involves owner and manager of SMEs as they represent the main
source of knowledge and information (Semrau et al., 2016), as well as they have clear and
full understanding of main business operations which may increase the accuracy of answers
(Hean et al., 2007). The data collection yielded responses from 140 SMEs in food industry
out of 170 questionnaires sent, yielding approximately 82% as a response rate.
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To control the common method bias, the study applied several procedural remedies:
respondents were assured a high level of confidentiality during data collection where no
implications for right or wrong answers; measurement items were constructed carefully to
avoid any item ambiguity or complexity; finally, data were collected from owners and
managers of SMEs (more than one respondent) within the same firm (Luu & Viet,
2018).Accordingly, common method bias is not likely to be a serious concern in our study.
Table (3) SMEs population by locations in Egypt
Cairo Giza 10th of
Ramadan
6th October Total
Food and
beverage
59 43 38 52 192
source: Industrial development authority 2016-2017
The questionnaire was developed in English in accordance with measures and data
required to test developed hypotheses and then translated into Arabic language. The
questionnaire was translated into Arabic first, then translated back to English to make sure
that all items and questions have the same meaning. Data was collected through a self-
administered questionnaire; a well-developed questionnaire provides accurate and useable
data that will support data analysis and results. The layout is a very important step in
designing the questionnaire, to guarantee that is attractive and not boring for respondent
(Gilham, 2000). The layout of the questionnaire is organized as follows: a) The questionnaire
starts with a brief introduction (cover page) that explains the aim of the research and the
importance of the respondent’s answers to the research to attract attention and ensure the
confidentiality of their answers. b) There is a logical order applied to avoid confusion, such
that sensitive or personal questions are kept at the end of the questionnaire. c) Questions are
organized in a table format with spaces for answers. d) Questions use simple, direct and
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familiar words. Questions are clear, brief and precise. Reverse-worded items are employed in
the questionnaire to reduce carelessness of the respondent and to reduce extreme respondent
bias (Woods, 2006).Two questions were reversed: one item in innovativeness ‘one dimension
of EO’ and another one in firm performance.
In line with the literature, different variables have been tested and recognized for control
variables (Boso et al., 2013; Kreiser et al., 2010; Kreiser and Davis, 2010; Semrau et al.,
2016; Tang and Tang, 2012; Wang and Altinay, 2012; Wiklund, 1999; Wiklund and
Shepherd, 2003). Three control variables are taken into consideration in this study. The first
control variable was firm size, where previous research has shown a relationship between
firm size and the ability of the firm to act strategically (Boso et al., 2013; Kollman &
Stockmann, 2014). The firm size was measured as the total number of employees within the
firm. Finally, the age, education and gender of the respondent were controlled, where
previous studies show direct relationship between the age of the respondent and the attitude
of decision maker within the firm (Kreiser et al., 2010) and the education represents the
amount of intellectual capital within the firm itself (Lechner & Gudmundsson, 2014).
Although, limited number of studies study the effect of gender , but it is proven that women
are more risk-averse than men (Lechner & Gudmundsson, 2014). Also, within SMEs context
women tend to have high EO compared to men (Runyan, Huddleston, & Swinney, 2006).
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Empirical results
Reliability and validity of measures
Table 4 shows composite reliability (CRs) and average variance extracted (AVE) to assess
the reliability and validity of scale measures used. The table shows good result for AVE
scores improving the validity of measures used, as all constructs are with AVE scores greater
than 0.50 (Garson, 2016). The composite reliability exceeded the acceptable range of 0.70,
reflecting acceptable reliability (Hair, Hult, Ringle, & Sarstedt, 2014).
Table 4: Reliability and validity test of measures
Composite reliability* AVE**
Innovativeness 0.745 0.548
Risk-taking 0.783 0.615
Proactiveness 0.851 0.610
SMEs performance 0.920 0.613
* sig at Composite Reliability > 0.7
** sig at AVE>0.50
Results
This study in order to test the developed hypotheses, an OLS-based hierarchical regression is
used. The hierarchal regression is used by entering the independent variables into the
equation by order, one set at a time to assess the prediction of the dependent variable after
controlling the previous variables (Pallant, 2011). In running the hierarchal regression, we
start by entering independent 1: innovativeness , then independent 2: risk-taking and finally
independent 3: proactiveness; we got in results three model whereas each model introduce
new independent variable. Results of Hierarchal regression are summarized in table 5, 6 and
7. According to table 5, the model is evaluated by checking R square; after the variables in
block 1 (innovativeness) have been entered, the overall model explains 11. Model 2, there is
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an increase in R square to 14.5 which means that by adding the second independent variable
risk-taking this account for 3.2% extra in R square (14.5-11.3). In model 3, where all
independent variables were added to the equation, the R square value increases to 23.4%
from 14.5% with a 8.9% changes in R square value.
Table 5: Model Summaryd
Model R R
Square Adjusted R
Square Std. Error of the
Estimate
Change Statistics
R Square Change
F Change df1 df2
Sig. F Change
1 .340a .113 .109 24.54728 .113 .532 1 137 .000
2 .358b .145 .143 25.54246 .032 3.441 1 136 .066
3 .396c .234 .160 27.54161 .089 1.432 1 135 .034
a. Predictors: (Constant), innovall
b. Predictors: (Constant), innovall, riskall
c. Predictors: (Constant), innovall, riskall, proaall
d. Dependent Variable: SMEsperfall
In table 6, the results show that the final model improves the ability to predict the outcome
variables. Where in model 1, the F-ratio is 12.532 with a p value (0.000), throughout model 2
and 3, both F-ration and p value are significantly as well with F-ratio equal to 21.991 and
35.809 respectively.
Table 6: ANOVAa
Model Sum of Squares df Mean Square F Sig.
1 Regression 823.159 1 411.159 12.532 .000b
Residual 13741.033 137 32.300
Total 138364.192 138
2 Regression 6874.172 2 1721.586 21.991 .000c
Residual 4023.020 136 17.294
Total 10897.172 138
3 Regression 1689.592 3 1623.531 35.809 .000d
Residual 7839.600 135 18.293
Total 9529.192 138
a. Dependent Variable: SMEsperfall
b. Predictors: (Constant), innovall
c. Predictors: (Constant), innovall, riskall
d. Predictors: (Constant), innovall, riskall, proaall
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Both innovativeness and proactiveness have a negative inverted U-shaped associations with
firm performance, where innovativeness-firm performance Beta= -0.17, t value= -2.08;
proactiveness- firm performance Beta= -0.10, t value= -2.70; accordingly, hypotheses 1 and 3
are supported. To examine the positive relationship between risk-yaking and firm
performance, results of hierarchal regression shows that risk-taking-firm performance is
positive and significant with Beta= 0.13, t value= 2.45, supporting hypotheses 2. For multi-
collinearity test, all values of VIFs are below 10 (ranging from 1.056 to 1.095), and tolerance
values are greater than 0.2 as shown below in table 7.
Table 7: Coefficient (main result of Hierarchal regression)
Model
Unstandardized
Coefficients
Standardized
Coefficients
T** Sig.***
Collinearity Statistics
B
Std.
Error Beta* Tolerance**** VIF*****
1 (Constant) 26.346 13.398 15.934 .000
innovall -6.053 3.073 -.062 1.990 .015 1.000 1.000
2 (Constant) 5.991 .439 13.659 .000
innovall -8.032 4.073 -.037 -.433 .011 .975 1.026
riskall 6.089 3.048 .159 1.855 .002 .975 1.026
3 (Constant) 43.319 21.517 12.231 .000
innovall -22.017 11.074 -.017 -2.081 .041 .947 1.056
riskall 6.076 3.049 .136 2.453 .012 .928 1.078
proaall -4.070 2.035 -.106 2.704 .023 .914 1.095
* The standardized b value (Beta) identify the sign of the relationship.
** T-value sig at > 1.96
*** P less than 0.05
**** greater than 0.20
***** less than 10
21
Conclusion
Analysis and discussion of results
The current study adds to the literature review by measuring how innovativeness,
risk-taking and proactiveness (the three dimensions of EO) have differential nonlinear effects
over firm performance by applying on SMEs in Egypt. Findings show that both
innovativeness and proactiveness improve firm performance to an extent, then their effects
tend to decline beyond certain point. In line with the existing literature, proactiveness and
innovativeness lead to positive impact over firm performance (Cho & Pucik, 2005; Gupta &
Wales, 2017; William J Wales et al., 2013). However, after a certain point investing too much
in both dimensions especially in the context of collectivist culture like the case in Egypt, too
much focus on innovativeness will impose obligations and constraints over firm which in turn
will reduce performance (Tiessen, 1997). For proactiveness, the limited availability of
resources due to government regulations and weak institutions in Egypt, will hinder the
ability of firms to be aggressive and leader in the market (Sheng, Zhou, & Julie Juan Li,
2011).
However, our study provide an extension to the existing literature by proving the diminishing
and declining effect of both innovativeness and proactiveness by moving from moderate to
high levels.
Although, previous studies report a negative relationship between risk-taking and firm
performance (Hughes & Morgan, 2007; Kreiser, Marino, Kuratko, & Weaver, 2013; J. Tang
et al., 2008). Egypt is characterized by high uncertainty avoidance, which means that a risk-
averse behaviour (Venaik & Brewer, 2010). However, as risk-averse would be compensated
with an above average return for investing in risky ideas and projects. Thus, risk-taking
activities lead to positive performance that increase over time, which contradict some
22
previous studies as the incremental increase in SMEs performance is larger at high levels of
risk-taking rather than at its low level.
Theoretical and managerial implications
The current study extend the literature of EO as mentioned in discussion section by
investigating the individual effect of EO dimensions on SMEs performance in developing,
collectivist economy "Egypt". The results shows that both innovativeness and proactivness by
moving from the moderate to high levels will lead to detrimental effect over SMEs
performance. On the other hand, risk taking leads to an incremental increase in SMEs
performance by moving to its high levels from its low level.
From the results of the effect of individual EO dimension on SMEs performance, a
number of managerial implications have been suggested. First, managers should understand
that innovativeness is an important dimension in EO, however, too much focus on
innovativeness will lead to decrease in firm performance. Second, managers in developing
economy should be caution when investing in proactive strategies, as too much investment in
proactive strategies will lead to decline in performance. Finally, in developing economies,
managers are encouraged to invest more in risky projects and strategies as opportunities
offered within these economies will lead to a dramatic increase in firm performance by
moving from low to high levels of risk.
Limitations and future research
The current research includes only three dimensions of EO (innovativeness, proactivness and
risk-taking) only, thus future research that include the other two dimensions of EO
(competitive aggressiveness and autonomy) to understand the effect of all dimensions of EO
on performance. The second limitation is the inclusion of some indicators to measure SMEs
performance (a mix of dimensions: customer satisfaction, market effectiveness and financial
performance), while previous literature shows other different dimensions used to measure
23
firm performance. The current research is based on data collected from food industry, where
only 140 questionnaires were collected due to time, money constraints. Thus, future research
should incorporate different industries to understand whether the degree of technology (high
tech VS low tech industries) have an impact over the EO-performance relationship.
24
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