the interactions between entrepreneurial orientation, degree of internationalization, and national ... studies consider their simultaneous effects on value creation.
Nature Or Nurture? Testing The Direct And Interaction Effects Of Entrepreneurial Orientation, National Culture, And Growth Strategy On Value Creation? u J. B. Arbaugh, University of Wisconsin Oshkosh, Oshkosh, WI, USA Larry W. Cox, University of Wisconsin Madison, Madison, WI, USA S. Michael Camp, Ohio State University, Columbus, OH, USA
A b s t r ac t This paper tests conceptual frameworks of international entrepreneurship, focusing on the choice of acquisitive growth strategies, firm internationalization, entrepreneurial orientation, and national culture on wealth creation in high-growth ventures. While many of the cultural, entrepreneurial and growth factors have been examined independently, few studies consider their simultaneous effects on value creation. Using a sample of 1045 firms from 17 countries, we found that the interactions between entrepreneurial orientation, degree of internationalization, and national culture predicted changes in firm value rather than the direct effects these variables. Our findings suggest that wealth creation may not be a question of “nature or nurture” but rather “nature and nurture.”
Introduction The area of “international entrepreneurship” has received renewed scholarly attention with the development of strong conceptual models (e.g., Sapienza et al., 2005; McDougall et al., 1994; Zahra & George, 2002). These models consider the impact of organizational and environmental characteristics of entrepreneurial firms on the patterns of internationalization, wealth creation, survival, and growth. Much of international entrepreneurship research has focused on the “born global” model, which suggests that entrepreneurial firms are seeking international expansion from their inception rather than waiting until they have exhausted opportunities in domestic markets. While this stream of research has produced interesting findings, the generalizability of research from this framework has been somewhat limited because for the most part it has focused on single-country samples. Particularly relevant factors drawing attention in this research domain are national culture, entrepreneurial orientation, degree of internationalization, and choice of growth strategies. While some research on the influence of national culture on innovation was conducted in the early 1990s, research that specifically examines its relationship to entrepreneurial firm performance is somewhat limited. Similarly, whereas the construct of entrepreneurial orientation and its relationship to firm performance has received substantial research attention, the nexus of entrepreneurial disposition within the context of internationalization and wealth creation has not been effectively examined. Finally, when examining firm growth entrepreneurship researchers have begun to make distinctions between organic growth and growth achieved via mergers and/or acquisitions. While
many of the cultural, entrepreneurial and growth factors have been examined independently, few studies consider their simultaneous effects on value creation. Because these variables have tended to receive isolated attention in previous research, we are unable to assess the extent to which a firm’s entrepreneurial orientation is subject to cultural influences or how it in turn influences the firm’s strategic behavior. Also, like studies of the “born global” framework, studies of these constructs for entrepreneurial firms have been limited because they also have tended to be based on single-country samples. This paper examines these issues by investigating firm behaviors and national culture influences on wealth creation using a multi-national sample of entrepreneurial firms. This study makes three important contributions to the literature. First, we consider the extent to which firm behaviors influence a firm’s ability to create wealth, focusing specifically on firm tendencies toward entrepreneurial behavior, internationalization, and acquisitive behavior. Second, we examine the impact of national culture variables on internationalization. We use Hofstede’s (1980) framework to explain if specific national cultural characteristics augment or impede internationalization processes and its interaction with acquisitive growth strategies. By doing so, we can explain if certain cultural characteristics are more conducive to wealth creation. Finally, we study the extent to which the previously mentioned characteristics moderate the relationship to wealth creation, thereby allowing us to determine whether particular behaviors may be more conducive in some cultural contexts than others.
L i t e r at u r e R e v i e w
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Hypotheses
Entrepreneurial Orientation and Wealth Creation Entrepreneurial orientation (EO) has been an area of increased research attention in recent years. EO measures a firm’s propensity toward innovation, aggressive or proactive competitive action, and risk taking (Miller & Friesen, 1982; Miller, 1983; Covin & Slevin, 1986). Miller (1983) noted originally that “An entrepreneurial firm is one that engages in product-market innovation, undertakes somewhat risky ventures, and is first to come up with ‘proactive’ innovations, beating competitors to the punch” (p. 771). Subsequent work by Covin and Slevin (1988; 1989; 1990; 1991) conceptually and empirically grounded the construct as a primary characteristic of firmlevel entrepreneurial behavior. The construct has been refined further through the work of G.T. Lumpkin, Gregory Dess and colleagues (Dess et al., 1997; Lumpkin & Dess, 1996; 1997; Lyon et al., 2000). Lumpkin and Dess (1996) call for explicit examination of how entrepreneurship orientation and its component dimensions influences firm performance. EO has been shown to be a good predictor of the outcomes of entrepreneurial behavior (Covin & Slevin, 1990; Merz et al., 1994). However, some researchers have raised concerns about a direct relationship between EO and firm performance (Dess et al., 1997; Lyon et al., 2000) suggesting that the relationship may be moderated by characteristics such as the nature of the environment or certain organizational factors (Dess et al, 1997; Lumpkin & Dess, 1996; Wicklund & Shepherd, 2003; Zahra & Covin, 1995). In light of the call for more focused research, scholars have found support for a direct relationship between EO and firm performance, particularly using samples of non-U.S. firms (Wicklund, 1999; Yoo, 2001). One of the issues in interpreting these findings is how firm performance is measured. Empirical studies have focused on the impact of EO on overall firm outcomes, such as return on equity/assets/sales (Miller & Bromiley, 1990; Zahra & Covin, 1995), growth of the firm (Matsuno, Mentzer & Özsomer, 2002; Wiklund, 1999; Zahra & Covin, 1995),
and innovation (Atuahene-Gima & Ko, 2001; Matsuno et al., 2002). While important, no study has examined the direct impact of these factors on wealth creation. Rowe (2001) suggested that leadership in entrepreneurial firms enhances wealth creation. Strategic leadership is comprised on many of the traditional EO qualities supporting strong performance expectations (Rowe, 2001). Ireland et al. (2001) suggested that EO measured the extent to which a firm was engaged in the entrepreneurial behaviors through which firm wealth is created. In addition, Lyon et al. (2000) noted that EO is fundamental to a firm’s attempt to exploit profitable wealth-creating opportunities. To date, there have been no empirical studies directly linking EO and its components to firm wealth. Therefore, this study extends the current research in two ways. First, the focus on the performance impact of EO is specifically on wealth creation. Second, the relationship between EO and firm wealth is considered in an international context. H1: Entrepreneurial orientation will have a direct and significantly positive impact on firm wealth creation. Internationalization and Wealth Creation Internationalization presents significant challenges to entrepreneurial firms. In addition to overcoming the “liability of foreignness” (Zaheer, 1995), international expansion often requires firms to make investments in their financial, managerial, and network capacity so that they can broaden the range of entrepreneurial opportunities they can pursue without jeopardizing the firm’s future (Cox et al., 2003; Ireland et al., 2003). An emerging debate in international entrepreneurship research focuses on whether entrepreneurial firms pursue internationalization after they reach a level of stability and maturity (Johanson & Vahlne, 2003) or are “born global”; that is, pursuing international markets from their inception (Oviatt & McDougall, 1994). Regardless of the mode of internationalization, one reason that firms seek international markets in search of higher returns. Also, in addition to the opportunity for higher returns, internationalization may attract increased outside investment, thereby at least partially diminishing the firm’s resource concerns (Tihanyi et al., 2003; Zacharakis, 1997). Finally, internationalization research suggests that SMEs that internationalize may have additional management skills that domestic firms tend to lack, thereby indicating that they may be generally better managed (Reuber & Fischer, 2002, Shrader et al., 2000) and therefore more likely to attract greater returns. Therefore, we contend that, H2: Internationalization will be associated with wealth creation in entrepreneurial firms. Acquisitive Growth Strategies and Wealth Creation While the strategy literature extensively discusses the role of acquisitive behavior as a vehicle for firm growth (Ahuja & Katila, 2001; Hitt et al., 1990) it has rarely been discussed as a potential growth strategy in the entrepreneurship literature. This omission is due in part to how entrepreneurship scholars have conceptualized growth. Longitudinal research on high-growth firms by Davidsson and Delmar (1997) suggests that firm age and size may influence the growth strategy/ performance relationship. They found that younger and smaller growth-oriented firms tended to primarily pursue organic growth, whereas older and larger firms tended to pursue it through acquisitions. It has also been contended that if a primary objective of entrepreneurship is wealth creation (Ireland et al., 2001) then the use and creation of resources focuses attention on organic growth through the expansion of the firm’s current activities (Davidsson & Wiklund, 2000).
However, there is increasing evidence that acquisitive behavior also could be a viable growth strategy for entrepreneurial firms. First, the use of alliances as a vehicle for firm growth is becoming increasingly commonplace (Barringer & Harrison, 2000), and successful alliances could lead to acquisitions (Reuer, 2001). Second, acquisitions could be a relatively efficient means of developing firm and/or country-specific knowledge and networks (Barringer & Greening, 1998; Hitt et al., 1990). Hoskisson and Busenitz (2002) recommend acquisitions as an entry strategy when the firm’s learning distance between their present and desired capabilities needed to pursue opportunities is extreme, particularly when those capabilities desired are dissimilar from their current capabilities. By acquiring the human and physical resources of another firm, there may be opportunities to recombine the knowledge base in ways that add value to the firm such as entry into new markets or enhanced internal efficiencies (Brush et al., 2001). Also, the acquisition of firms who already have an international presence creates “instant” presence in international markets. Therefore, acquisition as a growth strategy may be a means of buying infrastructure into international markets and may help entrepreneurial firms acquire managerial talent and resource networks (Florin et al., 2003). These capability-building aspects of acquisitive behavior suggest the following hypothesis with regards to entrepreneurial firm internationalization: H3: Acquisition as a growth strategy will be positively related to wealth creation. National Culture Dimensions and Wealth Creation Power distance has been described as the extent to which people in a society accept differences in power and status between its members (Geletkanycz, 1997; Hofstede, 2001; Mitchell et al., 2000). Cultures with high power distance tend to be more hierarchical and centralized in their decision-making; whereas cultures with relatively low power distance tend to be more egalitarian and democratic. High power distance has been associated with entrepreneurs and entrepreneurial cognition (McGrath, MacMillan, & Scheinberg, 1992; Mitchell et al., 2000), and may be associated with entrepreneurial activity, but it is also associated with lower levels of innovation (Shane, 1993). This is due in part to the tendency for people with low power to seek the approval of those in authority before pursuing innovative activities (Shane et al., 1995). However, in high-power distance societies resource access may be more readily available to those with power and can “look after their own”. These networks of relational, political, and financial capital would be readily available for investment and available to support wealth creation efforts. Therefore, we suggest the following hypothesis: H4: High power distance will be positively related to wealth creation. Uncertainty avoidance describes the extent to which a culture tolerates and adapts to uncertainty through the domains of technology, law, and religion (Hofstede, 2001). Uncertainty avoidance tends to discourage risk-taking and encourage modifying innovations to meet traditional organizational norms (McGrath, MacMillan, & Scheinberg, 1992; Shane et al., 1995), thereby reducing a culture’s tendency toward entrepreneurial behavior. Since recent research has argued that wealth creation is a by-product of entrepreneurial behavior (Hitt, Ireland, Camp, & Sexton, 2001), we present the following hypothesis: H5: Uncertainty avoidance will be negatively related to wealth creation. Since some studies have shown a negative relationship between uncertainty avoidance and individualism in developed countries (Hofstede, 2001), we expect a negative relationship between
individualism and wealth creation in entrepreneurial firms. As a cultural dimension, individualism reflects the extent to which individual ties are relatively loose and people tend to be responsible only for themselves and their immediate families. This is contrasted with collectivism, which reflects societies where people are born into cohesive in-groups of which they will be a member for life (Hofstede, 2001). Research suggests that this dimension is much less subject to external influence than either power distance or uncertainty avoidance (McGrath, MacMillan, Yang, & Tsai, 1992). The lack of malleability of this dimension suggests that the relatively high emphasis on individual achievement may limit entrepreneurial firms in individualistic cultures because their management teams have neither the social networks, the patience to cultivate these long term relationships, or the resources to develop indigenous operations into other cultures (Brush et al., 2001; Geletkanycz, 1997; Hambrick & Crozier, 1985). Thus: H6: Individualism will be negatively related to wealth creation. While cast in gender-oriented terms, Hofstede’s (1980) masculinity-femininity dimension actually measures characteristics such as the extent to which a culture values work goals such as advancement, responsibility, and earnings relative to personal relationships, helping others, and the physical environment. Initial research in national culture and entrepreneurship suggest that entrepreneurs tend to be more masculine than non-entrepreneurs (McGrath, MacMillan, & Scheinberg, 1992), and the masculinity dimension’s orientation toward earnings and achievement suggest an affinity toward wealth creation. Therefore, we suggest that: H7: Masculinity will be positively associated with wealth creation. Developed after Hofstede’s (1980) original work on dimensions of national culture, long-term orientation reflects the extent to which a culture values persistence and perseverance, thrift, and a focus on future events (Hofstede & Bond, 1988). These characteristics suggest that management teams of entrepreneurial firms located in high long-term orientation cultures are more likely to have the patience to both develop the financial and relational capital to pursue international expansion (Busenitz & Lau, 1996), the willingness to make organizational changes to pursue expansion (Geletkanycz, 1997) and to come to the realization that they at some point they will likely need to pursue expansion if they wish to see their firm continue to grow (Johanson & Vahlne, 1977). Therefore, we hypothesize that: H8: Long-term orientation will be positively related to wealth creation. Firm Behavior, Cultural Interactions and Wealth Creation Recent research suggests that both entrepreneurial orientation and firm internationalization may have moderating rather than direct effects on firm performance (Lumpkin & Dess, 1996; McDougall & Oviatt, 1996; Richard et al., 2004; Rueber & Fischer, 2002; Werner, 2002; Wiklund & Sheppard, 2005). While these studies have focused on their interactions with other firm characteristics, a moderating relationship between these variables certainly is a reasonable assumption. An orientation toward innovation, proactivity, and risk taking encourages the development of firmbased capabilities that could be used to identify new opportunities that require expansion into international markets (Dess & Lumpkin, 2005; Knight & Cavusgill, 2004; Wiklund & Sheppard, 2003). Therefore, we suggest that:
H9: Entrepreneurial orientation will positively moderate the relationship between firm internationalization and wealth creation. We also contend that the relationship between entrepreneurial orientation and wealth creation will be particularly strong in masculine cultures. This is because the focus on goal accomplishment and financial earnings in these cultures help to create a rewards system that encourages characteristics associated with entrepreneurial orientation such as risk taking and proactiveness. Thus: H10: Masculinity will positively moderate the relationship between entrepreneurial orientation and wealth creation; entrepreneurial orientation will be positively associated with wealth creation in highly masculine cultures. Conversely, some cultural characteristics will negatively affect the relationship between firm characteristics and wealth creation. While high power distance has been associated with entrepreneurs and entrepreneurial cognition (McGrath, MacMillan, & Scheinberg, 1992; Mitchell et al., 2000), research on power distance suggests that it may inhibit firm internationalization. First, as research showing that high power distance countries have significantly low participation rates in international surveys (Harzing, 1997) suggests, cultures with high power distance may discourage engagement in international activities. Second, while high power distance may be associated with entrepreneurial activity, it is also associated with lower levels of innovation (Shane, 1993). This is due in part to the tendency for people with low power to seek the approval of those in authority before pursuing innovative activities (Shane et al., 1995). Since an international expansion likely would reduce the power of authorities over the entrepreneurial firms in high power distance cultures, permission to expand likely would not be given. Therefore, we suggest the following hypothesis: H11: Power distance will negatively moderate the relationship between firm internationalization and wealth creation; internationalization will be negatively associated with wealth creation in high-power distance cultures.
Methods Sample and Data Collection Large sample datasets for entrepreneurship studies are difficult to build or access because new ventures or privately held firms are not required to release financial information to regulatory bodies. To help address this difficulty, the Ewing Marion Kauffman Foundation devoted substantial resources toward developing large sample databases that include financial data for entrepreneurial firms (Cox & Camp, 2001; Reynolds et al., 2000). The Kauffman Foundation, Ernst & Young LLP, and the Entrepreneur Of The Year® Institute administered the International Survey of Entrepreneurs during the summer of 1999. They then sent the completed English language questionnaire to native speaking Ernst & Young managers located around the world for translation into eight other languages (Czech, Danish, Dutch, French, German, Italian, Spanish, and Swedish). The translated versions were edited and (in some cases) re-translated by professional linguists in the United States. Any disputes over wording were resolved after consultation between the authors and the two sets of translators, ensuring that business terminology was reflected accurately and in culturally appropriate ways in the survey. The survey was then printed in nine languages and distributed to Entrepreneur Of The Year® country managers in sixteen countries (Belgium, Canada, Czech Republic, Denmark, France, Germany, India, Ireland, Italy, The Netherlands, New Zealand, South
Africa, Spain, Sweden, Switzerland, and the United Kingdom). In the US, surveys were mailed directly to the finalists by the Kauffman Foundation. Each country participating in the 2000 Entrepreneur Of The Year® awards program was allowed to administer the International Survey of Entrepreneurs to its respective finalists. In some cases, finalists were asked to complete the questionnaire at the time of their face-to-face interview (a standard feature of the selection process worldwide). In most cases, however, this meant that the questionnaire was delivered to finalists and then returned anonymously via mail to the country manager or the Kauffman Foundation. While this procedure did not allow the authors to track responses in any country other than the US, this data collection method was necessary to obtain the cooperation of Ernst & Young’s country managers and is believed to have produced a higher response rate than would have been possible otherwise. Ernst & Young’s Entrepreneur Of The Year® finalists are founders and/or CEOs of some of the most innovative and admired companies in the world. Having risen to the top of a highly competitive field of nominees through a rigorous and independent selection process, they and their companies are “entrepreneurial,” and represent the “best of the best” in terms of growth, profitability, and job creation. While each country is given some latitude regarding the specific procedures it follows and the criteria it utilizes in selecting its respective Entrepreneurs Of The Year®, all nominees are screened carefully and all financial statements are audited for veracity. Personal characteristics and situations are factored into the judging process, but firm performance is critical to being named “Entrepreneur Of The Year.” A total of 1,045 Entrepreneur Of The Year® finalists responded to this survey. Approximately 4,000 surveys were distributed for this study, indicating a response rate of approximately 26 percent. However, because of the way in which the data were collected, it is impossible to determine the exact country-specific response rate for countries other than the US. 1,200 surveys were mailed to Entrepreneur Of The Year® finalists in the US and 361 useable responses were received by the authors (30.1%). Statistical comparisons to non-respondents with regard to firm size and age did not reveal any significant differences. As a result, response bias does not seem to be an issue with this sample. Measures We measured wealth creation as the change in a firm’s net worth over a three year period. We measured entrepreneurial orientation using Covin and Slevin’s (1989) nine-item instrument (alpha=.65). Since some international business researchers have expressed that a multi-dimensional measure of internationalization captures a firm’s international orientation more completely than the single item foreign sales/total sales ratio (George et al., 2005; Rueber & Fischer, 1997; Sullivan, 1994), we used three items to develop our measure of firm internationalization: the foreign sales/total sales ratio, the firm’s percentage of total capital placed outside their headquarters country, and the firm’s percentage of employees permanently located outside their headquarters country (e.g., Tallman & Li, 1996). The reliability alpha was .74. National culture for each country represented in the sample was measured using Hofstede’s (2001) indices of national culture for uncertainty avoidance, power distance, individualism, and long-term orientation. In order to account for conditions at the beginning of the study period, firm age was included in the analysis. Following Davidsson and Wiklund’s (2000) prescription to control for conditions at the beginning of a study period, we used the firm’s number of employees in 1997 as a measure of
the firm’s size. We used a dummy variable to control for whether a firm was publicly held (publicly held = 1). Outside Investment was measured by the percentage of shares of the firm held by entities other than the founder/CEO, his/her family, senior managers, and other employees. Finally, we controlled for effects related to country location by creating a dummy variable that compared North American firms with the rest of the sample (North American firm=1).
R e s u lt s Tables 1 and 2 capture the descriptive statistics and the regression analyses of the variables in the study. We will use the results of these regressions to test our hypotheses. Hypothesis 1, which suggested a positive relationship between entrepreneurial orientation and wealth creation, receives no support in any of the regression models. Conversely, we found a positive relationship between internationalization and wealth creation (Hypothesis 2) in the full effects model (b=.60, p
