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The influence of effectuation and causation processes

on firm performance in the Tanzanian hospitality

sector

Master Thesis | Capita Selecta

Author

Aron Nap

Degree

MSc Entrepreneurship (Joint degree UvA & VU)

Student number

UvA 11417005 | VU 264008

Thesis Supervisor

Prof. Dr. E. (Enno) Masurel

Academic year

2016-2017

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Master Thesis | Aron Nap 3

Statement of Originality

This document is written by Aron Nap who declares to take full responsibility for the contents of this document.

I declare that the text and the work presented in this document is original and that no sources other than those mentioned in the text and its references have been used in creating it.

The Faculty of Economics and Business is responsible solely for the supervision of completion of the work, not for the contents.

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Master Thesis | Aron Nap 4

Acknowledgements

My appreciation goes out to all the respondents that took time to participate in this study, providing me with valuable information. Therefore, I would like to thank all the business owners who participated in our research.

Next, I would like to express my deep appreciation to all the experts who participated: Ellen Van der Wel – Former researcher in Tanzania, Mr. Msavilla – Manager micro credits SMEs at NMB Bank, Mr. Richards – Manager micro credits SMEs at NMB Bank, Dieter Beyens – Director at Red ‘n White, Peter Lyimma – Account manager Red ‘n White, Jonesta Ibunga – Account manager Red ‘n White, Mr. Gies – First Secretary Economic and Trade Policy, Martha Enock – Serial entrepreneur in the hospitality sector, and last but definitely not least, Erica Verwey – Manager Triniti Guesthouse. Thank you so much for all your time, guidance, effort and support.

Furthermore, I would like to thank my supervisor, Prof. Dr. E. Masurel for giving me the opportunity to conduct research in Tanzania. It was a wonderful, educative and an eye-opening adventure. Moreover, I would like to thank my girlfriend, Sabine Koers, for her patient and support. Additionally, I would like to thank Kim Shaw for his help and critical feedback.

Finally, I would like to thank my fellow research partner, Martijn Graff, for making this research project in Tanzania unforgettable and for being a great research partner.

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Master Thesis | Aron Nap 5

Abstract

The purpose of this research is to reveal the effect of causation and effectuation processes on firm performance of small and medium hospitality enterprises in Tanzania. Many researchers have considered goal-driven behavior as ‘causation processes’, which are at on one end of the continuum that has ‘effectuation processes’ at the other hand. To summarize, causation rests on a logic of prediction, effectuation on the logic of control. According to researchers is the growth of small businesses in developing countries important for economic development. Moreover, in many sub-Saharan Africa countries, the development of hospitality industries is an important source of economic diversification. However, research on decision-making orientations of small business owners in developing countries and the influence on firm performance is still missing. Therefore, this research strives to contribute to the development of effectuation research. More specific, this research will broaden our knowledge regarding the influence of effectuation and causation processes on firm performance of small and medium sized hospitality enterprises in Tanzania.

In this research, the firm performance of small and medium hospitality related enterprises is measured by three constructs: financial firm performance, non-financial firm performance and development of personal wealth. In order to investigate the impact of entrepreneurial orientation on firm performance, several semi-structured interviews were conducted with experts in the field, in order to get profound knowledge about the specific research area. Next, 91 entrepreneurs of small and medium hospitality enterprises in Tanzania were questioned, 66 questionnaires were conducted in Dar es Salaam, and 25 questionnaires were conducted in Arusha. The results of this research revealed that entrepreneurs of small and medium hospitality enterprises in Tanzania are rather more effectuation-oriented than causation-oriented. Nevertheless, entrepreneurs who employ causation principles tend to exhibit higher financial firm performance as well as increase in personal wealth.

Keywords: Firm performance, causation, effectuation, SME, small and medium enterprises, Tanzania,

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Master Thesis | Aron Nap 6

Index

1. Introduction ... 8 1.1 Cause ... 8 1.2 Research question ... 10 1.3 Relevance ... 10 1.3.1 Scientific relevance ... 10 1.3.2 Practical relevance... 11 2. Theoretical Framework ... 12

2.1 Causation and Effectuation ... 12

2.1.1 Causation ... 12

2.1.2 Effectuation ... 13

2.1.3 Linkage of causation and effectuation concepts to empirical measures ... 16

2.1.4 Effectuation and venture performance ... 17

2.1.5 Business planning (causation) and firm performance of small firms ... 17

2.2 Small and Medium Enterprises (SMEs) ... 19

2.2.1Defining SMEs ... 19

2.2.2 Indicators of business environment of SMEs ... 20

2.2.3 Characteristics of SMEs ... 20

2.2.4 Entrepreneurship in the Informal Economy ... 20

2.3 Measurement of firm performance ... 21

2.3.1 Financial and Non-Financial measurements ... 21

2.3.2 Dimensions of performance ... 22

2.3.3 Performance measures in non-Western Context ... 23

3. Hypotheses ... 25

4. Fieldwork ... 28

4.1 Context of the study ... 28

4.2 Fieldwork ... 29

4.2.1 Research design ... 29

4.2.2 Data collection and respondents... 29

5. Results ... 32

6. Hypotheses testing ... 37

6.1 Quality of the research ... 37

Internal validity ... 37

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Master Thesis | Aron Nap 7

External validity ... 40

Reliability ... 40

6.2 Data processing ... 40

6.3 Effectuation and Causation orientation [H1] ... 41

6.4 The effect of entrepreneurial orientation on firm performance [H2] ... 43

6.4.1 Effect of entrepreneurial orientation on non-financial firm performance [H2a] ... 44

6.4.2 Effect of entrepreneurial orientation on financial firm performance [H2b] ... 47

6.4.3 Effect of entrepreneurial orientation on personal wealth development [H2c] ... 49

6.5 Summary of results ... 51

6. Discussion ... 52

6.1 Discussion of the results ... 52

8. Conclusion ... 54

8.1 Recommendations for future research ... 54

8.2 Limitations of the research ... 55

References ... 56

Appendices ... 58

Appendix I – Survey ... 58

Appendix 2 - Topic list semi-structured expert interviews ... 62

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Master Thesis | Aron Nap 8

1. Introduction

1.1 Cause

Entrepreneurs are recognized as the driving force of economic development (Schumpeter, 1934). Large numbers of entrepreneurial actions are carried out in developing economies (Eijdenberg, 2016), and involves activities that do not fall inside the formal institutional boundaries (Webb, Bruton, Tihanyi, & Ireland, 2013). The informal economy significantly adds to the gross domestic product (GDP) in developing economies, however it is most important for sub-Saharan Africa (Schneider, 2002; International Labour Organization, 2002, as cited in Eijdenberg, 2016). In many sub-Saharan African countries, the development of hospitality industries is an important source of economic diversification. (Sharma & Upneja, 2005). As a result, scholars and practitioners are gaining more interest in researching the hotel and restaurant businesses in these nations (Sharma & Upneja, 2005). To elaborate, the contribution of tourism activities in Tanzania is 5.5 to 8 percent of the national gross domestic product (GDP) (MIGA, 2002, as cited in Sharma & Upneja, 2005). Moreover, research revealed that restaurants and small hotels are contributing for more than 70 percent in this sector, are an important source of entrepreneurial activities, and provide opportunities to conquer unemployment in these nations (Sharma, 2004 as cited in Sharma & Upneja, 2005).

Whereas the government of Tanzania has stimulated foreign direct investments (FDI), policies that support small businesses are still lacking. As a result, small hotels and restaurant owners may facing hurdles that are affecting firm performance (Sharma & Upneja, 2005). In order to guide management decision and policy formulation, it is important to increase our understanding regarding firm level dynamics (Sharma & Upneja, 2005). Moreover, it is suggested that performances of

hospitality ventures are strongly influenced by the markets in which they operate; the objectives and characteristics of the entrepreneur; and their management methods (Cragg and King, 1998).

Furthermore, studies on small hotels and restaurant’s performance mainly focused on ventures in developed nations, the study on this topic in developing nations is still in its nascent stages.

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Master Thesis | Aron Nap 9 Additionally, Sharma and Upneja (2005) stressed that research on firm performance in Tanzania needs an increased regional coverage in order to investigate factors that might influence the performance of small hotels and restaurants.

Despite the importance of conducting research on developing economies, it has only been investigated in a few notable studies (Eijdenberg, 2016). Since entrepreneurship is considered as a means to fight poverty since ‘it impacts economic performance at the individual, firm and societal

levels, affecting the development of personal wealth, firm profitability, and economic growth’, it is

worth studying (Wennekers et al., 2002, p.27, as cited in Eijdenberg, 2016).

As mentioned before, the growth of small businesses in developing countries is important for the economic development (Brenner and Schminke, 2015, as cited in Eijdenberg, 2016. Several factors are affecting the growth of small businesses (Brenner and Schminke, 2015, as cited in Eijdenberg), for instance the decision-making orientations of small business owners (Eijdenberg, 2016). However, research on decision-making orientations of small business owners in developing countries and the influence on firm performance is still missing. Based on rational decision-making models, many researchers have considered goal-driven behavior as ‘causation processes’, which are at on one end of the continuum that has ‘effectuation processes’ on the other hand (Perry et al,2011; Bird, 1989; Sarasvathy, 2011).

To contribute to the development of effectuation research, it is needed to empirically research the consequences of effectuation in different contexts (Cai, Guo, Fei, & Liu, 2016). Previous research on effectuation has solely focused on mature market economies. However, new

enterprises in developing economies are facing higher environmental uncertainties, given that the institutional and market environments are continually evolving and rapidly changing (Dixon, Meyer, and Day 2010; Peng 2003; Tan 2001; Webb et al. 2013). Regarding the effectuation theory, it is expected that variance of firm performance is greater when effectuation processes are used under high levels of uncertainty (Chandler et al, 2011; Read, Song, and Smit 2009; Wiltbank et al, 2006, as cited in Cai et al., 2016). For that reason, effectuation processes might be more appropriate in order

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Master Thesis | Aron Nap 10 to increase the probability of obtaining higher performance in developing economies (Cai, Guo, Fei, & Liu, 2016). Nonetheless, previous empirical research did not focus in this regard (Cai et al., 2016). Consequently, the purpose of this research is to examine the influence mechanism of effectuation on new venture performance in a developing economy like Tanzania. Moreover, Eijdenberg (2010) revealed that research on more and different samples on effectuation in developing economies would enrich the generalizability of his findings. In addition, Van der Wel (2015) suggested that it would be interesting to investigate business performances of SMEs in other industries than the clothing sector in Dar es Salaam, Tanzania.

1.2 Research question

The main question this research tries to answer is:

To what extent do effectuation and causation processes have an effect on firm performance of hospitality enterprises in Tanzania?

In order to answer this question, the following sub-questions are formulated:

1. What are the differences between effectuation and causation processes? 2. What are the characteristics of SMEs?

3. What performance measurements are appropriate for measuring SME performance in Tanzania?

1.3 Relevance

1.3.1 Scientific relevance

For academic purposes, this research may shed light on effectuation and causation processes and their influence on firm performance. “The theory of effectuation as an emerging

entrepreneurship theory has drawn increasing attention from scholars and moved toward an

intermediate state of development” (Fisher 2012; Perry, Chandler, and Markova 2012; Reymen et al. 2015; Sarasvathy et al. 2014 as cited in (Cai, Guo, Fei, & Liu, 2016).

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Master Thesis | Aron Nap 11 1.3.2 Practical relevance

By answering the research question, this study will broaden our knowledge regarding the influence of effectuation and causation processes on firm performance in a specific context, namely, SMEs in Dar es Salaam. Those insights may be of great value for potential entrepreneurs or investors.

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2. Theoretical Framework

The introduction in the previous sector described the cause and objectives of this research. Also, the research question and sub-questions were stated. This chapter will elaborate on the most important key concepts and theory about these key concepts by means of scientific literature, which will form the theoretical framework of this research.

2.1 Causation and Effectuation

Since the interest of studying entrepreneurship has intensified, the number of new theoretical perspectives has evolved to clarify the logic and actions that are related to

entrepreneurial behavior (Fisher, 2012). These new approaches are contrasting with more traditional models of entrepreneurial behavior, which have been broadly referred to as the “emerging

theoretical perspectives” for research in entrepreneurship (Fisher, 2012).To specify, traditional approaches draw to a great extent on economic thinking in order to describe how individuals or firms take entrepreneurial action by exploring areas where the demand for products or services surpass supply to discover opportunities for entrepreneurial activities and evaluate if the opportunity is lucrative (Fisher, 2012). After this process, the entrepreneur takes action by collecting resources to establish a business that will exploit the identified opportunity.

2.1.1 Causation

Causation is compatible with planned strategy approaches (Handoff, 1988; Brews and Hunt, 1999; Minzberg, 1978 as cited in Chandler, 2011). In addition, causation models require planning and analysis, which assume that the distribution of outcomes is a collection predictable calculation (Sarasvathy, 2001). Moreover, research conducted by Fiet (2002); Herron & Sapienza (1992) revealed that entrepreneurs who followed a causation process in order to create a new venture, clearly defined the objectives they want to have accomplished up front and systematically searched for entrepreneurial opportunities within existing industries that met those objectives. Additionally, entrepreneurs tend to exploit their pre-existing resources and knowledge by engaging in planning

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Master Thesis | Aron Nap 13 activities and analysis (Chandler, 2011). Thus, from the start of the venture, the business is

envisioned and all activities are directed to reach the pre-envisioned state.

In causational processes, entrepreneurs make rational decisions based on all possible information related to his decision and an estimated predicted advantage for each option (Viale, 1992, as cited in Chandler, 2011). The majority of existing literature on entrepreneurship has theoretical bases in the causation approach. To elaborate, Fiet (2002) stated that the detection of opportunities is the result of a rational search process in which alternative options are analyzed and identified. The option with the highest predicted return from rational search processes is selected and implemented. The role of the entrepreneur when using causational processes is to examine the environment and existing projects in the marketplace, by using a sequential screening process, and select the project with the highest predicted return (Casson and Wadeson, 2007, as cited in Chandler, 2011). Another example of institutional conformity to causational approaches is the popularity of business plans in both entrepreneurship pedagogy and practice. To relate, many books and articles on entrepreneurship are constructed around business planning models (e.g. Allen, 2003; Kuratko and Hodgetts, 2004; Scarborough and Zimmerer, 2003; Timmons and Spinelli, 2004, as cited in Chandler, 2011). Moreover, the construction of business plans, with its step-by-step rational process, is the main deliverable in a large number of entrepreneurial programs in universities (Chandler, 2011). However, the potency of business plans has been mixed (Honig and Karlsson, 2004; Liao and Gartner, 2006, as cited in Chandler, 2011).

2.1.2 Effectuation

In contrast, (Sarasvathy, 2001) argued in her ground-breaking article, that a clarification of creation of artifacts such as firms/organizations and markets requires the notion of effectuation. To specify, the definition of the processes of causation and effectuation according to Sarasvathy (2001)

“Causation processes take a particular effect as given and focus on selecting between means to create that effect. Effectuation processes take a set of means as given and focus on selection between possible effects that can be created with that set of means” (p. 245). To summarize, causation rests

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Master Thesis | Aron Nap 14 on a logic of prediction, effectuation on the logic of control (Sarasvathy, 2001). Moreover, (Perry, Chandler, & Markova, 2012) stated that effectuation represents a paradigmatic shift in the way researchers understand entrepreneurship.

Sarasvathy (2001) embodied four principles that are central in the theory of effectuation.

1. Affordable loss rather than expected returns: Whereas causation models place emphasis on selecting optimal strategies in order to maximize potential returns, effectuation focuses on how much loss is affordable, and on experimenting with several strategies with the given limited means. Moreover, effectuation emphasis on options that leverage more options in the future instead of those that enlarge returns in the present situation.

2. Strategic alliances rather that competitive analyses: Causation models emphasize detailed competitive analyses, for instance the Porter model in strategy (Porter, 1980). In contrast, effectuation stresses pre-commitments from stakeholders and strategic alliances as mean to decrease and/or eliminate uncertainty and to build entry hurdles.

3. Exploitation of contingencies rather than exploiting of pre-existing knowledge: Causation models emphasize on leveraging pre-existing knowledge, for instance expertise in a relatively new technology, in order to build competitive advantage. However, effectuation models are preferred for exploiting contingencies that emerge unexpectedly over time.

4. Controlling an unpredictable future rather than predicting an uncertain one: Causation models emphasize the foreseeable aspects of a future which is uncertain. According to Sarasvathy (2001), the logic of causation is: “To the extent that we can predict the future, we

can control it “(p.252). In contrast, the logic of effectuation, according to Sarasvathy (2001),

is: “To the extent that we can control the future, we do not need to predict it” (p.252). In addition, this logic is significantly useful in fields where human interference is the main factor that shapes the future.

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Master Thesis | Aron Nap 15 Figure 1 Entrepreneurship Theories (Fisher, 2012, p.1022)

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Master Thesis | Aron Nap 16 2.1.3 Linkage of causation and effectuation concepts to empirical measures

Chandler (2011) conducted interviews in order to link theoretical concepts, constructed by Sarasvathy (2001), of effectuation and causation to empirical measures. They revealed that causation is a uni-dimensional construct, but effectuation is a multidimensional formative construct. Moreover, one dimension of effectuation (pre-commitments) is shared with causation and provides a

theoretical rationale for why that is the case. (Chandler, 2011) stated that causation and effectuation have been proposed as alternative new venture creation processes used by entrepreneurs. The study conducted by Chandler (2011) provided practitioners and researchers important tools for measuring the constructs causation and effectuation. Moreover, the study proved that these measures can be reliably used and are generally consistent with (Sarasvathy, 2001).

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Master Thesis | Aron Nap 17 Figure 3 Results from Study Two - causation and effectuation items and loadings (Chandler, 2011, p.382)

2.1.4 Effectuation and venture performance

(Read, Song, & Smit, 2009) conducted research in order to measure the relationship between effectual principles and new venture performance, and yields two useful practical results. First, the study revealed a precise measurement of effectuation, by refining the operationalization of effectuation. Second, clear constructs which need future study of effectuation are provided.

2.1.5 Business planning (causation) and firm performance of small firms

Researchers on entrepreneurship are engaged in an intense debate about the effectiveness of business planning. Some researchers argued that planning is beneficial, however, contextual factors such as newness of the firm and the cultural environment of the firm significantly impact the relationship between business planning and firm performance (Brinkmann, Gricknik, & Kapsa, 2010). On the one hand, researchers are arguing that business planning is crucial for the development and survival of both established and new firms. On the other hand, researchers are sceptical about business planning and focusing on learning, strategic flexibility, and controlling resources, especially when entrepreneurs are dealing with high degrees of uncertainty.

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Master Thesis | Aron Nap 18 business planning in new firms is growing as well (Delmar and Shane, 2003).

Two contrasting schools of thought have emerged that provide a theoretical bases for consequence of business planning on firm performance: the learning school and the planning school (Wiltbank et al, 2006; Brews and Hunt, 1999, as cited in Brinkmann et al., 2010). Planning scholars state that the advantages of business planning increases, especially in dynamic and unstable external

environments, since business planning reduces uncertainty, facilitates faster decision-making, introduces controls for personal bias or subjectivity, and develops new forms of actuation (Goll and Rasheed, 1997; Dean and Sharfman, 1996; Miller and Friesen, 1977, Priem et al., 1995; Delmar and Shane, 2003, as cited in Brinkmann et al., 2010). Contrasting, the opposing learning school advocates that an adaptive and incremental strategy development is more appropriate (Brews and Hunt, 1999, as cited in Brinkmann et al., 2010). More specific, particularly in unpredictable and uncertain

conditions, emergent and adaptive strategies enable entrepreneurs to rapidly capture arising

opportunities (Mosakowski, 1997, Mintzberg and Waters, 1985, as cited in Brinkmann et al., 2010). However, little is known about how business planning will affect firm performance in specific

cultural contexts and market environments.

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Master Thesis | Aron Nap 19

2.2 Small and Medium Enterprises (SMEs)

2.2.1Defining SMEs

The Small and Medium-sized Enterprise (SME) sector performs a significant role worldwide (Kira & He, 2012), since the SME sector contributes to economic and social development, generation of income, innovation, creation of jobs, as well as a catalyst for urban and rural area’s growth

(Hallberg, 2000; OECD, 2004; Williams, 2006; Fatoki & Asah, 2011), and has been identified by several Third World governments (Liedholm & Mead, 2013). Moreover, there is a growing recognition of the role that SMEs play in sustained global and regional economic recovery (Ayyagari, Beck, & Demirguc-Kunt, 2007).

However, the definition of an SME on the foundation of specific criteria is not uniform across the globe (Ayyagari, Beck, & Demirguc-Kunt, 2007). In Some of the most common criteria are the total net assets, the number of employees, sales, and investment level. But the most frequently used criteria for defining SME is the number of employees. Despite the variation in defining the lower and upper limit of employment in an SME, the most used cut-off point is 250 employees in a large number of sources (Ayyagari, Beck, & Demirguc-Kunt, 2007).

In determining SMEs, both qualitative and quantitative approaches can be used. Regarding the quantitative characteristics of SMEs, it is most useful to look at the definition of SMEs that is used by the European Union (EU). The main focus of the SMEs’ definition is in the number of employed people per SME: less than 250. Moreover, a firm is classified as an SME when it meets either the balance sheet limit (not more than €43 million) or the turnover limit (not more than €50 million). Besides the quantitative approach to determine SMEs, it is also possible to use a qualitative approach. The main difference between these approaches is that SMEs are not treated as being equivalent to large firms (Welsh and White, 1981, p18, as cited in Masurel 2017).

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Master Thesis | Aron Nap 20 2.2.2 Indicators of business environment of SMEs

Theory of the business environment of SME is rather ambiguous about the correlation between the size of the SME sector and the business environment in manufacturing (Ayyagari, Beck, & Demirguc-Kunt, 2007). On the one hand is argued that SME have an easy entry and exit, sound contract enforcement, effective rights of property registration and access to finance can foster a thriving and vibrant SME sector. On the other hand, costly entry and exit, rigid labour regulations and restricted access to external finance can also foster a large SME sector, however, consisting of many small enterprises that do not have incentives to grow (Ayyagari, Beck, & Demirguc-Kunt, 2007).

2.2.3 Characteristics of SMEs

A study by Liedholm and Mead (2013) revealed that SMEs have a large potential to

contribute in various ways to develop economies in developing countries. The five most significant contributions of SMEs to economic development are the following. First, it contributes to household income and welfare, by providing income maintenance for people with few options and

employment. Second, it contributes to empowerment of the individual and improves self-confidence. Third, it contributes to social development, democracy, and a stable political environment. Fourth, it contributes to developing new opportunities for the poor, women and people in rural and/or

isolated locations. Finally, it contributes to demographic changes through reduction in birth rates and rural-urban migration.

2.2.4 Entrepreneurship in the Informal Economy

According to (Webb, Bruton, Tihanyi, & Ireland, 2013), the informal economy is defined as: ‘economic activities that occur outside of formal institutional boundaries (i.e. illegal) yet fall within informal institutional boundaries (i.e. legitimate) for large segments of society’(p.600). Some examples of activities in the informal economy are those who refuse labor or environmental regulations; those undertaken by undocumented workers; and often street vending (Eijdenberg, 2016). Activities in the informal industry differ from one economy to another. To specify, informal activities in developed economies are different in nature from those in developing economies

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Master Thesis | Aron Nap 21 (Eijdenberg, 2016). Moreover, the proportion of informal entrepreneurial activity increases when the level of economic development of a country decreases (Webb, Bruton, Tihanyi, & Ireland, 2013). Concerning the least developed countries (LDCs), we can conclude that the informal economy is large (Eijdenberg, 2016). Furthermore, informal entrepreneurial activities are becoming increasingly important for the development of the economy in LDCs (Naudé, 2011, as cited in Eijdenberg, 2016).

2.3 Measurement of firm performance

According to Foreman-Peck et al. (2006), two SME performance measures are most

indicative to measure firm performance, namely, profitability and growth. Many other indicators of firm performance, such as the level of productivity, are solely intermediate variables which influence one or both of the two main variables in ways that will differ from firm to firm (Foreman-Peck, Makepeace, & Morgan, 2006). The first variable, profitability, is an important one since profitability of a firm is mandatory in order to survive in the long run in a competitive environment. To measure profit performance, according to Foreman-Peck et al. (2006), the ratio of profit to turnover must be employed. The second performance measure for SMEs is growth. Since many SMEs are not willing to share sensitive information about their performance, researchers are often measuring with

subjective growth measure of performance. However, general optimism bias will merely affect the scaling of growth measure; a ‘medium growth’ response may, in fact, correspond to a ‘low growth’ performance (Foreman-Peck, Makepeace, & Morgan, 2006).

2.3.1 Financial and Non-Financial measurements

The focus on performance measurement and management has significant increased over the past decades (Taticchi, Tonelli, & Cagnazzo, 2010). Moreover, performance measurement is

necessary in order to monitor and understand firm performances for companies competing in continuously changing environments (Sharma et al, 2005, as cited in Taticchi et al., 2010). Companies could measure its performance using non-financial (customer satisfaction, delivery time, waiting time, and employees’ turnover) and financial measures (profit before tax, and turnover) (Chong,

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Master Thesis | Aron Nap 22 2008). In addition, there has been a focus shift in the way companies measure performance; from a financial perspective to a non-financial perspective (Taticchi, Tonelli, & Cagnazzo, 2010). In addition, Said, Hassab Elnaby & Wier (2003 as cited in (DeNisi & Smith, 2014) stated that the environment outside of academia is changing, and suggested non-financial performance measures that can

improve firm performance under specific conditions. Furthermore, Elkington (1994 as cited in (DeNisi & Smith, 2014) proposed a ‘triple-bottom-line’ approach, which takes into account environmental quality, social justice, and economic prosperity on top of financial performance measures. Moreover, owners-managers of modern SMEs recognized the limitations of relying merely on either the non-financial or non-financial measures. Therefore, many owners-managers have adopted a hybrid approach of measuring firm performance, using both non-financial and financial measurements (Chong, 2008).

2.3.2 Dimensions of performance

A study by (Hudson, Smart, & Bourne, 2001) revealed that six dimensions of firm performance exist. Those six dimensions can be seen to cover all aspects of business, they are intended to encourage the holistic consideration of these areas when developing measures to support company strategy.

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Master Thesis | Aron Nap 23 2.3.3 Performance measures in non-Western Context

Performance measures which are regularly used in Western economies, for instance profit, sales, and the number of employees (Davidsson, 1989; Wiklund and Shepherd, 2005), are often not suitable for non-Western economies (Eijdenberg, 2016). Regarding performance in developing or informal economies, measurement instruments used in Western economies, often have less relevance. In contrast to performance measures in Western economies, performance can be deduced from the increase of personal wealth, for instance schooling, transport, good health, housing, and physical assets (Pouw and Elbers, 2012, as cited in Eijdenberg, 2016). Moreover, consumer durables can be used as performance measures: for instance, having a flush toilet and piped water, a television, electricity for lighting (Booysen et al., 2008, Filmer and Pritchett, 2001; Sahn and Stifel, 2000, as cited in Eijdenberg, 2016). Additionally, many research on growth in developing economies focused on employment, since the number of employees can easily be provided by the small business owners (Bisten and Gebreeyesus, 2007, as cited in Eijdenberg, 2016). In scientific literature, the use of social performance indicators to measure business

performance is still nascent (Edmondson & McManus, 2007). As a consequence, little measurement instruments have been developed to measure performance with social metrics (Van der Wel, 2015). FINCA, a global NGO, developed the FCAT measurement tool (Bernt, Nasser & Stein, 2007, as cited in Van der Wel, 2015), which measures changes on six social metrics: food security, housing, health care, empowerment, household, and social capital (TRASI, n.d., as cited in Van der Wel, 2015). These social metrics are the most commonly used metrics in scientific research (Rooyen et al, 2010; Afrane, 2002), and ING (2014, as cited in Van der Wel, 2015).

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Master Thesis | Aron Nap 24 Figure 6 - Items to measure performance (Eijdenberg, 2016, p.48)

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Master Thesis | Aron Nap 25

3. Hypotheses

The hypotheses which are stated in this chapter, are based on the theoretical framework. The measurement instrument which is built in order to find an answer on the hypotheses, is presented in Table 1.

Most of the Western literature on entrepreneurial orientation and their relationship with firm performance is based on the Austrian economist’s explanation (Kirzner,1973; Schumpeter (1934, as cited in Eijdenberg, 2016). However with regard to the many individuals who are working as small business owners in the formal and informal economies in the Least Developed Countries, such as Tanzania, the Western approach of the process of transforming resources and opportunities into value-added products or services might differ from the reality of such economies (Eijdenberg, 2016). More specific, particularly in unpredictable and uncertain conditions, emergent and adaptive

strategies enable entrepreneurs to rapidly capture arising opportunities (Mosakowski, 1997, Mintzberg and Waters, 1985, as cited in Brinkmann et al., 2010). Therefore, concerning

entrepreneurial orientation of small and medium business owners in Tanzania, we hypothesize that:

Hypothesis 1 (H1): Small business owners in the food and beverage related sector in Tanzania are more effectuation-oriented than causation-oriented.

Hypothesis 2 (H2): Small business owners in the food and beverage related sector in Tanzania who employ effectuation rather than causation exhibit a higher firm performance.

Recent studies have revealed that owner-managers should adopt a hybrid approach of measuring firm performance by using both non-financial and financial measurements (Chong, 2008). Since this research is conducted in a non-Western Context, measurement instruments used in Western economies, often have less relevance (Eijdenberg, 2016). In contrast to performance

measures in Western economies, performance can be deduced from the increase of personal wealth, for instance schooling, transport, good health, housing and physical assets (Pouw and Elbers, 2012,

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Master Thesis | Aron Nap 26 as cited in Eijdenberg, 2016). Therefore, the following hypotheses were formulated in order to test the main hypotheses;

H2a: Small business owners in the food and beverage related sector in Tanzania who employ effectuation rather than causation exhibit higher non-financial measures of firm performance.

In order to examine the non-financial firm performance of small business owners, the owners are questioned about how the number of people working in their business has developed over the last year. Moreover, the owners are questioned about how the number of people that are financially dependent on the success of their business has developed over the last year.

H2b: Small business owners in the food and beverage related sector in Tanzania who employ effectuation rather than causation exhibit higher financial measures of firm performance.

In order to examine the financial firm performance of small business owners, the owners are questioned about the growth of sales, customers, inventory purchases, and profit of their business over the last year.

H2c: Small business owners in the food and beverage related sector in Tanzania who employ effectuation rather than causation exhibit an increase in personal wealth.

In order to examine the development of personal wealth of small and medium business owners, the owners are questioned about the development of their household situation, health care and

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Master Thesis | Aron Nap 27 In order to answer the hypotheses, a quantitative questionnaire was developed. All the items were used from validated scales from previous literature. The table below presents all the items of the final questionnaire, the constructs, and variables. The final questionnaire is presented in Appendix 1.

Construct Variable Question Source

Socio-demographics 1.Business license (Yes/No) 2. Gender (Male/Female) Standard items 3. Age (Number, scale)

4. Highest completed education (No education; primary school; junior secondary school; senior secondary school; University Bachelor’s degree; university; Master’s degree; Other) 5. Founding year of business (year) 6. Type of business

(Hotel/Bar/Restaurant/Other)

Business

performance Non-financial performance 7. The number of people working in the business one year ago and now (please fill in an absolute number)?

8. The number of people financially dependent on the success of your business (please fill in an absolute number)?

Van der Wel (2015); Bernt, Nasser & Stein, 2007, p.17; ING p. 57

Financial

performance 9.Compared to one year ago, how have the following business performance change? (5-point Likert scale, strongly decreased, somewhat decreased, neutral, somewhat increased, strongly increased).

Van der Wel (2015); Bernt, Nasser & Stein, 2007, p.17; ING p. 57

Personal wealth

development 10.Compared to one year ago, how have the following assets changed? (5-point Likert scale, strongly disagree, disagree, undecided, agree, and strongly agree).

Van der Wel (2015); Bernt, Nasser & Stein, 2007, p.17; ING p. 57

11. Compared to one year ago, how has the access to health care changed? (5-point Likert scale, strongly disagree, disagree, undecided, agree, and strongly disagree).

Van der Wel (2015); Bernt, Nasser & Stein, 2007, p.17; ING p. 57

12. Compared to one year ago, how has the education situation of your children changed? (5-point Likert scale, strongly disagree, disagree, undecided, agree, and strongly disagree).

Van der Wel (2015); ING p. 67; Adjei et al., 2009; Lacalle Calderon et al., 2008 Decision-making orientation Entrepreneurial

orientation Question 13 to 20. (Multiple-choice questions, an option for effectuation principle, an option for causation principle, and an option for both principles are applicable.

Eijdenberg (2016)

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Master Thesis | Aron Nap 28

4. Fieldwork

The methodology section will discuss the method used in this research. Various options regarding the methodology are considered and those choices will be explained. All the steps that are taken in order to acquire the data are outlined within this section.

4.1 Context of the study

The context of this study is Tanzania, an East African, Least Developed Country (LDC). The country shares borders with Kenya and Uganda in the North, Congo-Kinshasa, Rwanda and Burundi in the West, Mozambique, Malawi and Zambia in the South. Moreover, Tanzania had approximately 52,47 million inhabitants in 2015, a GDP of $45,63 billion in 2015, and a GDP per capita of $865,- in 2015, which is reflecting a low income level (Worldbank, 2017). Its GDP is less than averages for Sub-Saharan Africa and East Africa. Despite the economy of Tanzania is growing dramatically by 5% to 7%, it did not contribute to significant improvements of life for the majority of inhabitants of Tanzania (Country Survey: Tanzania, 2017). Moreover, Tanzania is ranked 164th out of the 185 countries listed according to (Worldbank, 2017). The official languages in Tanzania are Swahili and English.

The services sector is the largest contributor to Tanzania’s GDP, the service sector counts for 41% of the GDP (Council, 2017), and includes education, health, public services, retail and other social services. The construction and industry include mining, energy and water supply. As a result of increased gold production and favorable world prices, mining and quarrying grew by 8% in 2015, up from 5,2% in 2014 (Council, 2017). Moreover, Tanzania’s main export commodities are gold, coffee, cashew nuts, some manufactured goods and cotton (Council, 2017). The top five export markets in 2015 were: Kenya, India, South Africa, China and Oman (Council, 2017).

Tanzania became one of the East African countries after the period of socialism in the 1980s, and made progress in terms of government liberalization policies and international trade. However, Tanzania’s economy is still heavily dependent on agriculture, which accounts for considerable parts of its GDP (over 25%). The banking sector reforms from the last decade have helped the rise of the

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Master Thesis | Aron Nap 29 private sector and investments ( Central Intelligence Agency, 2015). Currently, a significant amount (1.7 million businesses) of operating businesses in Tanzania are micro and small-sized enterprises (MSEs) and employ over three million people ( Central Intelligence Agency, 2015). According to the Worldbank (2004, p. 33, as cited in Eijdenberg, 2016) ‘hundreds of millions of poor people in

developing countries make their living as micro-entrepreneurs: as farmers, street vendors and home workers, and in a range of other occupations, a large share of them women’. Moreover, Kiggundu (2002, p. 248, as cited in Eijdenberg, 2016) explained that ‘MSEs are often one-person operations, poorly managed, sometimes temporary, generally less productive, usually based on marginal capital value, and mainly informal’. In contrast to MSEs, ‘small and medium-sized enterprises (SMEs) are generally larger, better organized, and formalized businesses’. Moreover, according to the United Nations (2014), the informal economy in the Least Developed Countries is large. To specify, Webb et al. (2013, p.600) define the informal economy as ‘economic activities that occur outside of formal institutional boundaries (i.e. illegal) yet fall within informal institutional boundaries (i.e. legitimate)’. However, this study will only focusses on formal small and medium enterprises in the hospitality sector. Only business owners with a business license were questioned.

4.2 Fieldwork

4.2.1 Research design

The research design has two parts: a qualitative pre-study based on expert interviews, and a quantitative main study based on questionnaires. The main reasons of the qualitative pre-study were to obtain an overview of the subject in the context of Tanzania and to shape the questionnaire in the main study according to the local context. The purpose of the quantitative main study is to acquire data for testing the hypotheses.

4.2.2 Data collection and respondents

This study examines the influence of effectuation and causation processes on firm performance of food and beverage related small and medium-sized enterprises in Tanzania. Therefore, small and medium business owners in food and beverage related enterprises in

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Master Thesis | Aron Nap 30 Tanzania were investigated. The fieldwork was conducted in Dar es Salaam and Arusha, two major cities in Tanzania. In order to gain profound knowledge and insights needed to conduct research in a foreign country, experts in the field were interviewed. The interviews with experts were conducted in the first one and half week of May 2017, the questionnaires were conducted in the remainder of May 2017.

4.2.2.1 Data collection and respondents expert interviews

In order to obtain an overview about the subject in Tanzania and to validate the survey, several experts were approached to participate in this study. The majority of the experts were approached via contacts of the researchers’ network. Since the specific experts were approached on purpose by their characteristics and knowledge, a non-probability sampling is used (Ritchie, 2003). Eight interviews were conducted amongst expert in the field. A summary of the most important implications for the study, provided by experts, are presented in Table 2.

Person Profession Implication for the study

Prof. Dr. E. (Enno) Masurel Professor at Vrije Universiteit

Amsterdam Validated the survey.

Ms. E. Van der Wel Former researcher in Tanzania Provided the researchers with a general overview of Tanzania. Mr. D.J. Msavilla Manager micro credits SMEs at

NMB Bank Provided the researchers with a profound understanding about microcredits.

Mr. D. Richards Manager micro credits SMEs at

NMB Bank Validated the survey. Adjusted a few questions about measuring firm performance.

Ms. E. Verwey Owner of Triniti Hotel & Bar Explained the hospitality industry in Dar es Salaam, Tanzania. Ms. J. Broughton Manager Women Microfinance

Initiative (WMI) Explained the entrepreneurial environment for women in Tanzania.

Mr. E. Gies First Secretary Economic and Trade

Policy, Dutch Embassy in Tanzania Provided the researchers with specific insights about SMEs in Tanzania. Moreover, explained the political situation in Tanzania. Adjusted the questionnaire in order to make the questions appropriate to conduct research in a specific context.

Mr. D. Beyens Director at Red ‘n White, major

wholesaler in Tanzania Provided the researchers with specific insights into the food and beverage related small and medium enterprises in Tanzania. Table 2 Summary of findings expert interviews

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Master Thesis | Aron Nap 31 4.2.2.2 Data collection and respondents survey

In order to assemble respondents for the surveys, small and medium sized business owners were approached in their hospitality business in Tanzania. 66 questionnaires were conducted in Dar es Salaam, and 25 questionnaires in Arusha. To specify, Dar es Salaam is the largest city in Tanzania as well as a regionally important economic center. Moreover, Dar es Salaam is the leading arrival and departure point for most tourists who visit tourism areas in Tanzania. Arusha is a major international diplomatic hub and is close to several national parks. To come to the conclusion, both cities are important hubs and host most of the tourists that are coming to Tanzania. To assume, both cities are relatively comparable and will not bias the results found in this study.

Not all the business owners were willing to participate in the investigation, however the majority of business owners participated. The non-response rate was approximately 5%. Since respondents were selected on purpose, by their characteristics and business segment, the type of sampling was a non-probability sampling (Ritchie, 2003). The principle characteristic of the respondents for this research was food and beverage related enterprises in Tanzania. Moreover, the questionnaire could only be conducted in enterprises were the business owner or manager was physically present. Furthermore, only official registered businesses, with a business license, were investigated. In total 91 business owners and managers of food and beverage related enterprises were surveyed.

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Master Thesis | Aron Nap 32

5. Results

This chapter will present the results derived from the data, in order to find answers to the research question. The results will be presented per question as presented in questionnaire. First of all, all the participants official registered their business, this data is derived from question 1 of the questionnaire. When looking at the general characteristics of the participants, 73.6% [67] of the participants is male, and only 26.4% [24] is female (question 2). The majority of the respondents were between 36 years and 45 years, as can be seen in Table 2 (question 3).

Moreover, when examining the highest level of education successfully completed by the participants (question 4), 13.2% [12] of the respondents completed primary school, 24.2% [22] junior secondary school, 14.3% [13] senior secondary school, 27.5% [25] University bachelor’s degree, and 6.6% [6] completed a master’s degree.

When looking into the founding year of businesses (question 5), the mean founding year of business was 2005. In addition, 5.5 [5] of the businesses were founded before 1992, 16.5% [15] between 1992 and 1997, 8.8% [8] between 1998 and 2002, 13.2% [12] 2003 and 2007, 29.7% [27] between 2008 and 2012, and 26.4% [24] between 2013 and 2017.

When looking into the type of businesses the respondents are owning or managing (question 6), 7.7% [7] of the businesses is classified as a bar, 8.8% [8] as a hotel, 46.2% [42] as a restaurant, and 37.4% [34] as a retail business.

The average number of employees working in the business (question 7) is 12.84 in year 0 (the year before research took place), and 13.55 in year 1 (at the moment of researching). Two outliers, 300 employees and 145 employees, are removed from the sample, since those outliers biased the sample.

The average number of people that are financially dependent on the success of the business (question 8) is 11.67 in year 0 (the year before the research took place), and 11.68 in year 1 (at the moment of researching).

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Master Thesis | Aron Nap 33 last year-, are derived from a 5-point Likert scale. A score of ‘1’ refers to strongly decreased, ‘2’ refers to somewhat decreased, ‘3’ refers to neutral, ‘4’ refers to somewhat increased, and ‘5’ refers to strongly increased. First of all, the mean score for sales development over the last year is 2.00. Secondly, the mean score for profit growth is 2.01. Thirdly, the mean score for customers growth is 2.08. Fourth, the mean score for inventory purchases growth is 2.74. Fifth, the mean score for performance in contrast with the competition is 3.51. Finally, the mean score for the current economic situation is 1.57.

Descriptive Statistics

N Minimum Maximum Mean Std. Deviation Sales growth 91 1.00 5.00 2.00 1.15 Profit growth 91 1.00 5.00 2.01 1.16 Customers growth 91 1.00 5.00 2.00 1.17 Inventory purchases growth 91 .00 5.00 2.73 1.13 Performance growth in

contrast with competition 91 .00 5.00 3.50 .98 Current economic situation 91 1.00 5.00 1.57 1.07 Valid N (listwise) 91

Table 3 Business performances

The results of question 10, -how the household situation has changed over the last year-, are derived from a 5-point Likert scale. A score of ‘1’refers to strongly disagree, ‘2’ refers to disagree, ‘3’ refers to undecided, ‘4’ refers to agree, and ‘5’ refers to strongly agree. The results of question 10 are presented in the table below. First of all, the mean score of the overall quality of the household is 3.01. Secondly, the mean score for the quality of the water sources is 3.04. Thirdly, the mean score for the quality of electricity is 3.06. Fourth, the mean score for the quality of the toilet facility is 3.02. The results of question 11, -how the access to health care has changed-, is derived from a 5-point Likert scale. A score of ‘1’refers to strongly disagree, ‘2’ refers to disagree, ‘3’ refers to undecided, ‘4’ refers to agree, and ‘5’ refers to strongly agree. First of all, the mean score to the question if the respondent has paid for health care earlier than last year is 3.04. Secondly, the mean score for better insurance for health care is 2.967.

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Master Thesis | Aron Nap 34

The results of question 12, -how the situation of children’s education has changed-, is derived from a 5-point Likert scale. A score of ‘1’refers to strongly disagree, ‘2’ refers to disagree, ‘3’ refers to undecided, ‘4’ refers to agree, and ‘5’ refers to strongly agree. The results of question 12 are

presented in the table below. First of all, the mean score for the payment of children’s education is 2.769. Secondly, the mean score for improvement of children’s education is 2.747.

The results of question 13 until 20 are derived from multiple-choice questions. A score of ‘1’ refers to the option which is applicable for effectuation principles, a score of ‘2’ refers to the option which refers to causation principles, and a score of ‘1.5’ refers to both options. The following tables presented the results for each question.

The results of question 13 showed that 62 respondents selected the option which reflects effectuation, 29 respondents selected the option which reflects causation.

The results of question 14 showed that 30 respondents selected the option which reflects effectuation, 58 respondents selected the option which reflects causation, and 3 respondents selected the options which reflects both principles.

The results of question 15 showed that 40 respondents selected the option which reflects effectuation, 49 respondents selected the option which reflects causation, and 2 respondents selected the options which reflects both principles.

The results of question 16 showed that 50 respondents selected the option which reflects effectuation, 39 respondents selected the option which reflects causation, and 2 respondents selected the options which reflects both principles.

The results of question 17 showed that 42 respondents selected the option which reflects effectuation, 48 respondents selected the option which reflects causation, and 1 respondents selected the options which reflects both principles.

The results of question 18 showed that 48 respondents selected the option which reflects effectuation, 43 respondents selected the option which reflects causation.

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Master Thesis | Aron Nap 35 The results of question 19 showed that 54 respondents selected the option which reflects effectuation, 37 respondents selected the option which reflects causation.

The results of question 20 showed that 66 respondents selected the option which reflects effectuation, 24 respondents selected the option which reflects causation.

Frequency Percent Valid Percent

Cumulative Percent Valid Effectuation 62 68.1 68.1 68.1

Causation 29 31.9 31.9 100.0 Total 91 100.0 100.0

Table 4 – Question 13 - Means versus goals (resources vs business targets)

Frequency Percent Valid Percent

Cumulative Percent Valid Both 3 3.3 3.3 3.3 Effectuation 30 33.0 33.0 36.3 Causation 58 63.7 63.7 100.0 Total 91 100.0 100.0

Table 5 -Question 14 - Means versus goals (no clear goal vs clear goal)

Frequency Percent Valid Percent

Cumulative Percent Valid Both 2 2.2 2.2 2.2 Effectuation 40 44.0 44.0 46.2 Causation 49 53.8 53.8 100.0 Total 91 100.0 100.0

Table 6 - Question 15 - Affordable loss versus expected returns (risk vs benefits)

Frequency Percent Valid Percent

Cumulative Percent Valid Both 2 2.2 2.2 2.2 Effectuation 50 54.9 54.9 57.1 Causation 39 42.9 42.9 100.0 Total 91 100.0 100.0

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Master Thesis | Aron Nap 36

Frequency Percent Valid Percent

Cumulative Percent Valid Both 1 1.1 1.1 1.1 Effectuation 42 46.2 46.2 47.3 Causation 48 52.7 52.7 100.0 Total 91 100.0 100.0

Table 8 - Question 17 - Affordable loss versus expected returns (keeping risks low vs analysis)

Frequency Percent Valid Percent

Cumulative Percent Valid Effectuation 48 52.7 52.7 52.7

Causation 43 47.3 47.3 100.0 Total 91 100.0 100.0

Table 9 - Question 18 -Partnerships versus market analysis (partnerships vs competitor analysis)

Frequency Percent Valid Percent

Cumulative Percent Valid Effectuation 54 59.3 59.3 59.3

Causation 37 40.7 40.7 100.0 Total 91 100.0 100.0

Table 10 - Question 19 - Preferences for acknowledging versus overcoming the unexpected market findings (did influence vs did not influence)

Frequency Percent Valid Percent

Cumulative Percent Valid Effectuation 66 72.5 72.5 72.5

Causation 25 27.5 27.5 100.0 Total 91 100.0 100.0

Table 11 -Question 20 - Preferences for acknowledging versus overcoming the unexpected market findings (small steps or business plan at beginning)

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Master Thesis | Aron Nap 37

6. Hypotheses testing

6.1 Quality of the research

To evaluate the quality of this study three quality measures; reliability, internal validity, and construct validity are used. These quality measures are based on previous studies (Eijdenberg, 2016 & Van der Wel, 2015). On the one hand, reliability is used to measure whether the significant findings are more than a single snapshot in time and if they are inherently repeatable. On the other hand, validity is used to measure whether the research instrument measures what the instrument supposed to measure. To evaluate whether the study is valid, both external and internal validity should be taken into account.

Internal validity

The internal validity evaluates whether there is a significant relationship between concepts and if the instrument really measures what it should measure. Considering the internal validity of this study, a couple of factors are taken into account. First of all, all the questions in the questionnaire are based on existing instruments that already proved itself successful in the past. To measure whether an entrepreneurs is rather causation or effectuation oriented, items of Eijdenberg (2016) and Van der Wel (2015) are used. Both researchers did research amongst entrepreneurs in East-Africa. Furthermore, the questionnaire is checked by several experts in the field of entrepreneurship in Tanzania. Mr. Donaltus, manager of the NMB bank checked the questionnaire on relevance for this study. Moreover, Prof. Masurel evaluated the questionnaire several times in order to increase the internal validity. On top of that, all the question are based on scientific literature of the theoretical framework and expert interviews. In order to secure the internal validity, it is important for respondents that their input is processed anonymously and confidently. Moreover, the researchers highlighted that the results are only used for scientific purposes. Tanzanian people are rather reserved and are highly appreciating their privacy, since the current government is investigating Tanzanian entrepreneurs increasingly. To increase the chance that respondents are telling the truth, the purpose of this study was explained clearly and upfront the interview.

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Master Thesis | Aron Nap 38 Construct validity

In order to measure whether questions can be grouped into specific constructs, construct validity is used. To examine the internal consistency of the questions per construct, the Cronbach Alpha of the subgroups is measured, to assess the value of Cronbach Alpha.

First of all, there are eight questions which determines whether an entrepreneur is an

effectuation or causation oriented entrepreneur, namely, 1] my business was specified on the basis of given resources (α = 0.722), 2] I have a clear goal in mind for the future of my business (α = 0.748), 3] I mainly considered the potential benefits of the business (α = 0.749), 4] I focused on keeping risks and costs low (α = 0.686), 5] in order to reduce risk, I started partnerships (α = 0.703), 6] I tried to reduce risks of my business through internal or external partnerships and agreements (α = 0.692), 7] new market findings influenced the business goals (α = 0.742) and 8] the business planning was carried out in small steps during the business implementation (α = 0.733). Grouping those eight questions into one construct, the Cronbach Alpha of the construct is 0.749, since 0.749 is greater than 0.700, the construct validity is perceived good.

Secondly, there are five questions considering the financial firm performance of the entrepreneurs, namely, 1] how did the sales of your business develop? (α = 0.728), 2] how did the profit of your business develop? (α = 0.734), 3] how did the number of customers in your business change? (α = 0.738), 4] how did the number of investments in your business develop? (α = 0.856), and 5] how did your business perform when you compare it to your competitors(α=0.885)?.

Grouping those five questions into one construct, the Cronbach Alpha of the construct is 0.832, since 0.832 is greater than 0.700, the construct validity is perceived good.

Thirdly, there are eight questions considering the development of the personal wealth of the entrepreneur. Four questions concerning the development of the entrepreneur’s household

situation, namely; 1] has the overall quality of your house improved over the last year? (α = 0.838), 2] has the access to water sources in your house improved over the last year? (α = 0.831), 3] has the access to electricity in your house improved over the last year? (α = 0.831), 4] has your toilet facility

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Master Thesis | Aron Nap 39 improved over the last year? (α = 0.831). Moreover, two questions concern about the entrepreneur’s ability to pay for health care, namely; 1] this year I paid earlier for my health care than last year (α = 0.842), 2] I have improved my health care insurance comparing to one year ago (α = 0.835).

Additionally two questions regarding the entrepreneur’s ability to pay for children’s education, namely; 1] this year, I have paid my children’s school fees earlier than last year (α = 0.862), 2} this year, I have sent my children to better education (α = 0.864).

Grouping those eight questions into one construct, the Cronbach Alpha of the construct is 0.859 since 0.859 is greater than 0.700, the construct validity is perceived good.

Item-Total Statistics Scale Mean if Item Deleted Scale Variance if Item Deleted Corrected Item-Total Correlation Squared Multiple Correlation Cronbach's Alpha if Item Deleted household - overall quality 20.648 14.319 .637 .762 .838 household - water sources 20.615 14.262 .732 .896 .831 household - electricity 20.604 14.264 .720 .926 .831 household - toilet facility 20.637 14.278 .726 .959 .831

health care 20.615 14.106 .603 .718 .842

health care insurance 20.692 14.104 .665 .726 .835 education children 20.890 13.677 .486 .954 .862 better education children 20.912 13.637 .479 .954 .864

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Master Thesis | Aron Nap 40 External validity

Taking into account the external validity of this study, external validity is present when results of this study are generalizable beyond this research. This research only examined the impact of effectuation and causation processes on firm performance in food and beverage related

enterprises in Tanzania. Since this study took place in a specific context, we have to be cautious to generalize the results to other situations and populations. For that reason, the results of this study might be applicable for other small and medium businesses, however we have to be careful with the interpretations.

Reliability

Considering the reliability of this study, several factors are taking into account. First of all, the interpretation and skills of the interviewer and the level of knowledge and understanding of the respondents are important factors that should be taken into account to increase the reliability of the study. Most entrepreneurs who are interviewed were able to speak and understand English at an adequate level. When the researchers did conduct research in a more rural area with only Swahili speaking respondents, the researchers were accompanied by Swahili and English speaking translators, a decent translation of the questionnaire is optimal insured. Secondly, the interpreter was briefed before the research about the intentions of the questions, the interpretation of the 5-point Likert scale and the introduction that should be provided to the respondents. This results in less biased data since the researchers looked after the interpreter during every questionnaire during the entire study. Moreover, the researchers could answer questions continuously to the respondent, and vice versa, when in doubt.

6.2 Data processing

After the researchers conducted the research, the data of the 91 questionnaires were inserted into SPSS, in order to describe the data. No missing values were detected since the researchers supervised the respondents during filling in the questionnaires.

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Master Thesis | Aron Nap 41

6.3 Effectuation and Causation orientation [H1]

The hypothesis about whether entrepreneurs of small and medium food and beverage related enterprises in Tanzania were more oriented by effectuation than causation was formulated as follows:

H1: Small and medium business owners in food and beverage related enterprises in Tanzania are more effectuation-oriented than causation-oriented.

To investigate whether an entrepreneur is more effectuation than causation oriented, the scores of the individual questions are combined for each entrepreneur. Each question can be

answered with either an answer that relates to the effectuation approach and will get a score of 1 or with an answer that relates to the causation approach and will get a score of 2. In case the

entrepreneur finds both answers applicable, a score of 1.5 is given. According to the statistics provided by SPSS, the mean score of the sample is 1.43. Moreover, after combining the eight individual scores per respondent, we can divide the sample into three groups, namely; effectuation, causation, or both effectuation and causation oriented. A score of <1.5 refers to effectuation, a score of exactly 1.5 refers to both principles, and a score of >1.5 refers to causation. The table below presents the distribution of entrepreneurial orientation.

Entrepreneurial orientation Number of respondents

Effectuation 46

Causation 38

Both principles 7

Total 91

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Master Thesis | Aron Nap 42 The next table presents the distribution of the three groups found.

Effectuation Causation Both principles

Gender 33 Male

13 Female 29 Male 9 Female 5 Male 2 Female

City 12 Arusha

34 Dar es Salaam 12 Arusha 26 Dar es Salaam 1 Arusha 6 Dar es Salaam Type of

business 2 Bar 4 Hotel 20 Restaurant 20 Retail 4 Bar 4 Hotel 20 Restaurant 10 Retail 1 Bar 2 Restaurant 4 Retail Business size (average number of employees) Y0: 13.50 Employees

Y1: 13.15 Employees Y0: 26.66 Employees Y1: 23.63 Employees Y0: 5.86 Employees Y1: 6.00 Employees

Education High school - University(4.48) High – school University (4.26) Junior – High school (3.71)

Average age 47 years 45 years 42 years

Country of

birth 37 Tanzania 9 Foreign 31 Tanzania 7 Foreign 6 Tanzania 1 Foreign Table 13 Distribution of the sample

Owners of small and medium sized food and beverage related enterprises in Tanzania tend to be more effectuation orientated than causation orientated, according to the results provided. The difference between the groups are not remarkably large, however those results showed that entrepreneurs in the food and beverage related sector are more effectuation orientated than causation orientated. Therefore, hypothesis H1 is accepted.

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Master Thesis | Aron Nap 43

6.4 The effect of entrepreneurial orientation on firm performance [H2]

The hypothesis about whether entrepreneurs of small and medium food and beverage related enterprises in Tanzania who employ effectuation rather than causation exhibit a higher firm performance was formulated as follows:

H2a: Small business owners in the hospitality sector in Tanzania who employ effectuation rather than causation exhibit a higher firm performance.

In order to test this hypothesis, three sub-hypotheses were formulated and are stated in the next chapters.

H2a: Small business owners in the hospitality sector in Tanzania who employ effectuation rather than causation exhibit higher non-financial measures of firm performance.

H2b: Small business owners in the hospitality sector in Tanzania who employ effectuation rather than causation exhibit higher financial measures of firm performance.

H2c: Small business owners in the hospitality sector in Tanzania who employ effectuation rather than causation exhibit an increase in personal wealth.

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