The Moderating Effect of Country
Entrepreneurship on Innovation and the
Performance of Firms
Berk Soylu (S3190536)
Supervisor: P.J. (Paulo) Marques Morgado
Co- Assessor: J. Hans van Polen
MSc. International Business and Management
ABSTRACT
TABLE OF CONTENTS
1.INTRODUCTION 4
2.LITERATURE REVIEW 7
2.1 Manufacturers of Computer, Electronics and Optical Products Industry 7
2.2 Entrepreneurship 7
2.2.1 Drivers of Entrepreneurship. 8
2.2.2 General Factors of Entrepreneurship. 8
2.2.3 Individual Factors of Entrepreneurship. 9
2.2.4 Effect of Institutions on Entrepreneurship. 10
2.2.5 Effect of Culture on Entrepreneurship. 11
2.2.6 Measurement of Entrepreneurship. 11
2.2.7 Entrepreneurship in Firms. 12
2.2.8 Entrepreneurial Employee Activity. 12
2.3 Relationships Between Entrepreneurship and Innovation 13
2.4 Innovation 13
2.4.1 What Is Innovation? 13
2.4.2 How Can Firms Become Innovative? 14
2.4.3 Firm Size in Innovation. 15
2.4.4 Effect of Firm Age in Innovation. 16
2.4.5 Effect of Research and Development on Innovation. 16
2.4.6 Effect of Patents on Innovation. 17
2.4.7 Innovation and Performance. 18
2.5 Conceptual Model 20
3. METHODOLOGY 21
3.1 Data Collection 21
3.1.1 The Industry. 21
3.1.2 Dependent Variable. 21
3.1.3 Independent Variable. innovation. 22
3.1.4 Moderator Variable. 22
3.1.5 Control Variables. 23
4. DATA 23
5. ANALYSIS 25
7. DISCUSSION AND CONCLUSIONS 30 7.1 Limitations and Recommendations for Future Research 33
1.INTRODUCTION
Computers and other kinds of electronical products are parts of our lives due to the digital age that we are living in. Hence, firms introduce new and technological products every day. This creates a very high competition among the firms that manufacture computers, electronic devices and optical products (European Commission, 2009). The largest companies in this industry are Apple, Sony, Toshiba, Dell, HP, Fujitsu and Intel. Sony, for instance, has changed the way people listen to music by introducing the Walkman. Apple, on the other hand, has changed the concept of mobile phones by introducing the Iphone. When Sony first introduced the Walkman in 1979, the product had a big success. The firm produced 30000 Walkman’s in the first batch of production; and sold all of the 30000 products in the first three months. Even though its competitors have introduced similar products in the following ten years, Sony still had a %50 of the market share in the U.S market in 1989 (Sanderson&Uzumeri,1992).
The case of Apple is similar to Sony. The first IPhone offered a technology which was far ahead from its competitors at the time. Hence, it was considered as an innovative success in the phone market. After its introduction, Apple sold three million phones in the U.S market only in the year 2007. The success of the product is still continuing (Johnson, Li, Phan, Singer &Trinh, 2012; Xing& Detert, 2010). According to a research by Kantar Worldpanel, the new IPhone 7 had a %40 share of the market at the end of year 2016 (2016).
Hence, a considerable part of the success of the Sony and Apple is related to their ability to come up with the right innovative product, at the right time. It is well established that, innovative products and innovative processes play an important role for a firm to gain a competitive advantage over its rivals (Schumpeter, 1934). The competitive advantage arising from innovation leads to better performance, higher profits and faster firm growth ( compared to non-innovative firms ). Hence, firms need to invest in innovation and try to sustain innovative practices in order to remain competitive (Bessant& Tidd, 2015).
The upper management and the organizational structure of a firm are extremely important to be innovative. According to Bosch’s CEO, Franz Fehrenbach, the innovative performance of Bosch is satisfactory because the top executives have an innovative mindset. As far as the organizational structure is concerned, flat organizational structures increase the communication between the management and the employees. The increase communication in turn, results in more innovative firms (Berger, Dutta, Raffel, & Samuels, 2009; Tantau, Chinie & Carlea, 2015).
Other key elements that influence innovation are entrepreneurship and entrepreneurial philosophy that a company possesses (Bessant& Tidd, 2015; Shaw et al., O’Loughlin, & McFadzean, 2005). Entrepreneurship is a relatively new ( yet, very important ) concept in the literature which has a direct effect on the economic development of a country (Cooney, 2012). Top management has an important role in the implementation of entrepreneurial behavior in a firm (Berger et al., 2009; Kazama et al., 2002). Characteristics of a firm (such as size, strategy, industry and culture) influence the entrepreneurial behavior of a firm as well (Baum et al., 2001).
Instead of focusing on the individual characteristics that affect entrepreneurship, there are studies which generalize the entrepreneurial attitudes and behaviors of nationalities. For example, Global Entrepreneurship Monitor (GEM) measures the differences in the level of entrepreneurial activity between different economies (Amaros & Bosma, 2013).
Institutions influence entrepreneurship via the socially shared beliefs and values (Hayton, George & Zahra, 2002). According to the New Institutional Economics (NIE), institutions are the rules of the game. Institutions lead to formal and informal constraints that shape the political, economical and social interactions in a country (North, 1991). Since entrepreneurship involves interaction, institutions of a country promote (or, limit) entrepreneurship and entrepreneurial activities in that country (Zahra, Korri & Yu, 2005).
There are many studies which have performed extensive investigations on the relationship between entrepreneurship, innovation and firm performance. For example, Bessant & Tidd (2015), Shepherd & Katz (2004) and Tantau et al. (2015) have investigated the relationship between entrepreneurship and innovation. Shaw et al. (2015) have investigated entrepreneurial activities within a firm. Lumpkin & Dess (1996) and Bessant & Tidd (2015) have investigated the relationship between innovation and firm performance. Finally, Berger et al. (2009) and Kazama et al. (2002) have investigated the contributions of the top management on innovation levels. However, there are no studies which investigate the contribution of the employees on innovation and the performance of the firm arising from their entrepreneurial nature. Furthermore, none of the articles that has been reviewed consider the effect of different entrepreneurial levels of countries on innovation and performance.
The outline of the thesis is as follows. In Chapter 2, the literature about entrepreneurship, innovation and performance is reviewed and then the hypotheses of the thesis are presented. Chapter 3 is related to the methods used in this thesis and the data collection methods that are utilized. Chapter 4 explains the steps of the analysis, whereas the results are presented in Chapter 5. Finally, the discussions and conclusions are presented in Chapter 6.
2.LITERATURE REVIEW
2.1 Manufacturers of Computer, Electronics and Optical Products Industry
According to Orbis, there are 466,629 active firms operating in this industry including Apple, Toshiba, Sony, HP and Intel. The firms in this type of an industry produce innovative products such as computers, printers, monitors, keyboards, mice, joysticks, projectors and communications equipment (Eurostat, 2016). By nature, these products have short life cycles and because of that, this industry is extremely dynamic. Hence, competition and R&D intensity is very high in this industry, leading to a suitable environment for innovation (European Commission, 2009). According to the data derived from Orbis, only the R&D expenditure of the aforementioned 5 firms in year 2015 adds up to 28 billion dollars.
2.2 Entrepreneurship
Entrepreneurship is a new and important topic, which is growing rapidly in organizational sciences (Crook, Shook, Madden, & Morris, 2010). It is important because entrepreneurial activities create value by creating new economic activities, or, by expanding current ones. Clearly, creation of new activities and expansion of current economic activities create new job opportunities. This, in turn, intensifies competition among firms, alleviate poverty and contribute to the economic development of countries. Recently, policy makers have also realized the importance of entrepreneurship, leading them to promote entrepreneurship in their countries (Ahmad & Hoffman, 2007; Amoros & Bosma, 2013).
2.2.1 Drivers of Entrepreneurship. There are two main drivers of entrepreneurship. The
first one is called necessity motivated/driven entrepreneurship (NME), which is observed more in underdeveloped countries with low levels of GDP. Since there are less work options in those countries, individuals are forced into starting their own businesses (Amoros & Bosma, 2013; McMullen, Bagby & Palich, 2008). NME leads to imitation of existing ventures, which results in lower profit margins.
In developed economies with a high GDP, on the other hand, opportunity motivated entrepreneurship (OME) occurs more frequently. In developed countries, there are more employment options. Hence, individuals voluntarily decide to start their own businesses after perceiving a business opportunity. In other words, individuals indulge in OME since they are “pulled into” entrepreneurship. As a result, compared to the NME, OME leads to higher job growth rates, higher number of innovations and higher exports by exploiting new markets (McMullen et al., 2008; Reynolds, Bygrave, Autio, Cox, & Hay, 2002).
2.2.2 General Factors of Entrepreneurship. Firstly, in order for entrepreneurship to
2.2.3 Individual Factors of Entrepreneurship. Personality traits and cognitive properties
of individuals play an important role on whether that person is an entrepreneur, or, not. Hence, one asks herself/himself the question “are there any personality traits and skills that make individuals better entrepreneurs? “. The answer is “yes”. Some individuals with certain personality traits find entrepreneurship more attractive than others. In general, entrepreneurs are creative and risk taker individuals who possess critical thinking and problem solving skills (Cooney, 2012). Furthermore, individuals with high openness to experience (which is one of the Big Five personality traits) are more suitable for being an entrepreneur. This is because they tend to be more creative, innovative, nontraditional and imaginative (Zhao & Seibert, 2006). In addition to that, people with greater self-efficacy, optimism, need for achievement and more internal locus of control are more likely to engage in entrepreneurial activities (Chen, Greene, & Crick, 1998; Cooper, Woo, & Dunkelberg, 1988; Shane &Venkateraman,2000). Besides, people with a future-oriented perspective are less likely to reflect on the past events. A future oriented perspective makes individuals better entrepreneurs, because it leads to less counterfactual thinking and it increases the possibility of discovering opportunities (Baron, 1999).
Researchers have shown that most entrepreneurs that start their own company have worked for other organizations prior to the foundation of their own company (Burton, Sørensen, & Dobrev, 2016). Researchers have also shown that men are more likely to be entrepreneurs when compared to women. Lastly, marital status and characteristics of family background determine whether an individual is likely to become an entrepreneur (Burton et al., 2016).
2.2.4 Effect of Institutions on Entrepreneurship. Personality traits and cognitive
properties are not the only factors that influence entrepreneurial behaviors since they deal with entrepreneurship in an individual level. Entrepreneurship can also be monitored in the community level. Entrepreneurs constantly interact with the social environment that they are nested in and this environment may allow (or, limit) the entrepreneurial behaviors of individuals in a country (Zahra, Korri & Yu, 2005). In other words, culture can influence entrepreneurial activities via the socially shared beliefs and values (Hayton et al.,2002).
Different institutional environments can lead to different entrepreneurial activities in different countries. According to Douglas North, institutions are formal and informal constraints that shape political, economic and social interaction in a country (1991). Institutions ensure that individuals get enough compensation arising from their entrepreneurial activity. In case of an institutional inefficiency, uncertainty in the environment increases, which, in turn, results in an increase in the cost associated with entrepreneurial activity. As a result, individuals feel discouraged and entrepreneurial activities decrease (McMullen et al., 2008).
As the generosity of a social security system increases, the opportunity cost of entrepreneurship also increases. Hence, a generous social security system decreases the level of entrepreneurship in a country. In countries with a generous social security system, firms established from entrepreneurial activities tend to have less inclination towards introducing new products and services (Hessels, Gelderen & Thurik, 2008).
Regulatory business cost of countries has also an impact in entrepreneurial activity. By nature, in order to start a business, entrepreneurs require access to capital; whereas, most entrepreneurs have liquidity constraints. In OME, high regulatory business costs act as a barrier, and thus, reduce entrepreneurial activities (Ho & Wong, 2007).
associated with the OME activity. The same study has also revealed that business freedom and corruption levels in a country are not associated with entrepreneurial levels. Another study has shown that high levels of corruption and weak property rights limit the growth aspirations of young entrepreneurial firms(Estrin, Korosteleva &Mickiewicz, 2013).
2.2.5 Effect of Culture on Entrepreneurship. Besides the institutions, the cultural
elements also influence entrepreneurial activities (Thomas & Mueller,2000). For example, in U.S, educated people frequently leave their jobs in order to become entrepreneurs. In Japan, on the other hand, educated people rarely leave their current jobs to become entrepreneurs (Ohe, Honjo, Olivia, MacMillan, 1991). This behavior can be explained with different cultural values that Japan and U.S have.
Culture is the set of shared values, beliefs and expected behaviors in a country. Culture determines the degree of a society to make the entrepreneurial behaviors desirable (Hayton, et al., 2002; Hofstede, 1980). Geert Hofstede has classified cultural dimensions into six groups, namely, individualism, power distance, masculinity, uncertainty avoidance, long term orientation and indulgence (Shane, 1995). In the past, researchers used to hypothesize that entrepreneurial activity is associated with high levels of individualism, low levels of uncertainty avoidance and low levels of power-distance (Hayton et al., 2002). However, the relationship between culture and entrepreneurship is much more complex than that. Recent researches have revealed that the previous hypothesis is only true for countries with high economic development (Hayton & Cacciotti, 2013). Pinillos and Reyes have found that individualism is positively related to entrepreneurship activity in rich countries; whereas, it is negatively related in poor countries (2011).
2.2.6 Measurement of Entrepreneurship. In addition to the individual level,
total population and it differentiates between entrepreneurial activities of different countries. …. It also analyzes the inclination of citizens of a country towards participating in entrepreneurial activities (Amoros & Bosma, 2013).
2.2.7 Entrepreneurship in Firms. Contrary to the popular belief, entrepreneurship is not
associated with new organizations only. It can also occur in existing organizations and in big firms (Shane &Venkateraman,2000). Entrepreneurial activity inside an organization is called corporate entrepreneurship (CE), or intrapreneurship. CE makes sure that employees act entrepreneurially in the firm; and this improves the general performance of the firm (Ahmad & Hoffman, 2007; Shepherd & Katz, 2004). The level of entrepreneurship in a company depends on the managers, on the characteristics of the company (size, culture, structure), on the industry and on the country that the company operates in (Bessant & Tidd, 2015; Shepherd & Katz, 2004).
In order to promote entrepreneurial activities in a firm, a motivating environment should be provided by supporting innovative ideas and achievements. Furthermore, organizations should stimulate creativity, should give employees enough freedom to manage their own activity and should promote taking risks rather than avoiding them (Tantau et al., 2015). Reward systems and incentives motivate employees to act in an entrepreneurial manner as well (Goodale, Kuratko, Hornsby, & Covin, 2011).
2.2.8 Entrepreneurial Employee Activity. Measuring entrepreneurship in firms is only
2.3 Relationships Between Entrepreneurship and Innovation
As stated before, entrepreneurship creates new job opportunities and promotes the economic development of a country. Entrepreneurship and corporate entrepreneurship drive innovation and cause innovative activities which promote economic development and job creation (Ahmad & Hoffman, 2007; Bessant & Tidd, 2015; Cooney, 2012; Shepherd & Katz, 2004; Tantau et al., 2015). In this part of the literature review, innovation will be explained in detail.
2.4 Innovation
2.4.1 What Is Innovation? Innovation adds value and novelty to organizations by
developing a new product, service, system, or plan (Shaw, O’Loughlin, & McFadzean, 2005). With the help of innovation, more products and services are delivered to people in an efficient manner (Schilling,2013). There are three dimensions that are commonly used to categorize innovations. These dimensions are product versus process innovation, radical versus incremental innovation and, finally, architectural versus component innovation.
The first dimension distinguishes between product and process innovation. Product innovation is associated with services or goods. For instance, development of a new hybrid car is an example of product innovation (Schilling,2013). Process innovation, on the other hand, is a change in the manufacturing methods and equipments to produce a certain product .
The second dimension distinguishes between incremental and radical innovation. Incremental innovation improves or, reconfigures an existing technology or process ( rather than creating new products and processes ). In contrast, radical innovation creates something from scratch and offers exceptionally different products or processes compared to the existing ones (Mangundjaya, 2011; Schilling,2013).
Innovation arises from individuals, firms, universities, government laboratories, and incubators. From the individual's perspective, personality traits and creative thinking abilities of individuals are influential in innovative practices. Individuals who can think creatively perceive problems in unconventional ways, come up with ideas that are worth pursuing and convince others that their ideas are worthwhile (Schilling,2013). In terms of personality traits, it has been assessed that emotional stability, openness to experience and extraversion have positive relationships with innovation and creativity (Patterson& Zibaras, 2017). It has also been assessed that individuals with high self-efficacy and tolerance for ambiguity; and individuals who are willing to overcome obstacles tend to be more creative and innovative (Sternberg& Lubart, 1998).
As mentioned before, innovation may also originate from a firm. Majority of the money that is invested for innovation is invested by industrial companies. Due to globalization of the markets, firms are obliged to capture value from innovation by recognizing opportunities and by implementing good ideas. Innovation helps maintaining competitive advantage and ensures that a firm survives, since firms that do not innovate face the risk of being overtaken by others. Having novel products, offering a non-imitable product with high complexity and having an early mover advantage by innovation result in competitive advantages for a company (Bessant & Tidd, 2015; Schilling, 2013).
2.4.2 How Can Firms Become Innovative? A climate that increases creativity of
employees results in emergence of newer and more novel ideas, and thus, leads to innovations (Bessant & Tidd, 2015). Firms can create a strong climate for innovation by showing that they are valuing innovation and by rewarding innovative behaviors. The policy of a firm should encourage their employees to take risks and should make sure that they go beyond status quo (Shaw et al., 2005; Tantau et al., 2015).
In firms with a flat and open organizational structure, management employee communication increases. This, in turn, allows the employees to share their ideas, which increases the likelihood of innovation (Steiber &Alänge, 2013; Tantau et al., 2015). Google company is a typical example for a good organizational structure. As far as the innovative activities are concerned, Google is trying to behave as a small company by maintaining a flat structure and by avoiding unnecessary bureaucracy. The organizational structure of the Google company encourages employees to spend %20 of their time on their own projects. This strategy has been extremely helpful in the invention stages of the Google Mail and the Google News (Steiber &Alänge, 2013; Schilling, 2013).
2.4.3 Firm Size in Innovation. According to the European Commission, small firms
typically have between 10 and 49 employees, medium sized firms have between 50 and 250 employees and large firms have more than 250 employees (2010).
According to Joseph Schumpeter, large firms would be better innovators because they have more financial resources to finance the R&D projects (1961). Furthermore, large firms can invest more money in big or risky innovation projects compared to smaller firms. However, when the number of employees increase, firms tend to be less inclined to change because of the bureaucratic inertia that they have (Schilling, 2013). According to Robin Dunbar, when the number of employees exceed 150, group effectiveness drops because of the involvement of extra rules and procedures (Daft,2010). Besides, managerial control loses its effect, which results in inefficient R&D projects (Schmalensee & Willig,1989). Finally, in large companies, monitoring and motivating the employees is more difficult and because of that, the inclination of the employees towards innovation reduces (Rotemberg & Saloner, 1994).
2.4.4 Effect of Firm Age in Innovation. The age of a firm can also influence the
innovative practice of a firm. In terms of flexibility, established firms have difficulties in adapting to changing environments, while young firms adapt quickly because of their flexibility (Thornhill & Amit, 2003). Besides, young firms have more freedom to behave more entrepreneurially than established firms, which results in more pioneering innovations (Lumpkin&Dees, 1996; Rosenbusch et al., 2010). Hence, as the age of a firm increases, the firm faces more difficulties in performing innovation. The findings of Rosenbusch et al. have proved this point, since they have found a negative moderation effect between innovation and firm performance (2010).
2.4.5 Effect of Research and Development on Innovation. Clearly, it is not possible to
talk about innovation without research and development (R&D) activities. R&D is one of the most important source of innovation. The OECD countries spend approximately $1500 billion, every year, on R&D. R&D is important, because R&D leads to new inventions and new inventions lead to new products and processes (Ahmad & Hoffman, 2007; Bessant & Tidd, 2015). Roberts, for instance, has shown that R&D intensity has a positive correlation with sales
growth and profitability (Roberts, 2001).
R&D may be divided into two categories, namely, basic and applied research. Basic research is performed in order to increase a better understanding of a field (without having any commercial goals). Applied research, on the other hand, has commercial objectives towards a specific need (Schilling, 2013).
intensity. The R&D intensity, which is calculated by dividing R&D expenditures to sales, is used to capture the extent of innovation opportunities in firms (Makri & Scandura, 2010).
2.4.6 Effect of Patents on Innovation. As discussed before, innovation results in a
competitive advantage over the rivals of the firm. However, innovation requires investments to be made and it includes a high risk of failure. Hence, in order to eliminate the risk of being imitated by their competitors who do not take any risks, firms use intellectual property protection in the form of patents, trademarks, copyrights, and trade secret laws (Schilling, 2013).
Patents, which protect inventions from imitation, have been considered to be a driver of innovation. Wealthy countries offer more awards to inventors by having better patent protection systems with longer protection periods (Lerner, 2002). As the duration of the patent protection increases, inventors feel more encouraged to innovate (Mosser, 2016). Furthermore, each country has its own patent protection laws which implies that a patent granted in one country does not ensure protection in other countries (Schilling, 2013).
2.4.7 Innovation and Performance. Researchers have determined that both innovation
and entrepreneurship contribute positively to the performance of a firm. Most of these researches indicate that innovation is one of the most important factors associated with the success of a firm. New products that are based upon inventions bring more customers. This increases the sales of the firm, resulting in increased market shares and increased profits. As a result, innovative firms show stronger growth, have better efficiencies, have higher market shares and have higher profitabilities. (Bessant & Tidd, 2015; Gunday, Ulusoy, Kilic & Alpkan, 2011; Lumpkin & Dess, 1996;).
There are some studies, however, which have obtained contradictory results. Some researchers have found no correlation between innovation and performance; and some researchers have found a negative effect (Gunday et al., 2011). The negative effect can be explained with the time lag between innovative activities and financial performance. This is because the impact of innovation is observed, firstly, in the non-financial measures of performance which leads to better financial performance later on (Gunday et al., 2011). Hence, in order to be able to observe any positive effect (of the innovative activities on financial performance), a certain amount of time should pass (Zahra & Sidharta, 1993).
Other researchers who investigated the relation between innovation and performance have concluded that the relationship between them is context dependent. They have found that the age of the company, the culture in which the company operates and the type of innovation affect the relationship in different ways (Rosenbusch et al., 2010).
There are several ways to monitor the performance of a firm after the innovation. Performance, being a multidimensional concept, consists of financial and non-financial measures. Non-financial measures include satisfaction and success ratings. The financial measures, on the other hand, include sales and market share growth, return on investment(ROI), return on assets(ROA), return on sales(ROS) and growth in the number of employees and profits
The literature review that has been performed implies that entrepreneurship drives innovation. The review has also revealed that innovation increases the chances of firm survival and contributes to the performance of a firm in a positive manner. In the light of these findings, this thesis proposes that firms operating in more entrepreneurial countries will benefit more from innovation; and as a result, will have better performances. In other words, entrepreneurship acts as a moderator between innovation and firm performance.
To test the causality between innovation and performance, the following two hypotheses have been proposed.
Hypothesis 1a: R&D expenditure of a firm produces higher ROA. Hypothesis 1b: R&D expenditure of a firm produces higher Net Profit.
In order to test the moderation effect of entrepreneurship, the following hypothesis have been proposed.
Hypothesis 2a: R&D expenditure of a firm produces higher ROA when the country Entrepreneurial Employee Activity is high.
Hypothesis 2b: R&D expenditure of a firm produces higher ROA when the Total early stage Entrepreneurial Activity is high.
Hypothesis 3a: R&D expenditure of a firm produces higher Net Profit when the country Entrepreneurial Employee Activity is high.
2.5 Conceptual Model The conceptual model has been developed to illustrate the relationships between the variables. According to the model, innovation is the independent variable which causes the dependent variable, which is the firm performance. Country entrepreneurial employee activity acts as a moderator which moderates the relationship between innovation and firm performance positively. The conceptual model is illustrated graphically in Figure 1.
3. METHODOLOGY
This study takes positivism philosophy and generates hypothesis for testing it. Furthermore, in terms of research approach, this study takes a deductive approach. By having deductive approach, this study finds theories, applies it to a specific phenomenon and uses data to approve or disapprove them. As research design, this study has quantitative research design because the derived data will be numerical. As research strategy, this thesis takes experiment research strategy since it will test the moderation effect of an independent variable on other variables. Finally, the time horizon of this research is cross sectional since data will be collected for only one particular year. (Saunders, Lewis, & Thornhill, 2007).
3.1 Data Collection
3.1.1 The Industry. In order to perform the statistical analysis, computer, electronic and optical product manufacturers have been selected. To eliminate different effects of industries on the hypothesis testing, only single industry has been selected. In the Orbis database, “manufactures of computer, electronic and optical products” has been added to the general search criteria.
3.1.2 Dependent Variable. Firm performance is the dependent variable in the conceptual
3.1.3 Independent Variable. According to the conceptual model, the independent variable is innovation. In this research, the R&D expenditures of firms have been selected as a measure since other studies have also used the same measure. However, as mentioned before, in order to observe the effect of innovation on the financial performance of a firm, a certain amount of time should pass (Zahra & Sidharta, 1993). Since both two measures associated with the dependent variable are financial, to have a valid statistical test, it has been decided to take 3 years of difference between the R&D expenses and the financial performance measures. Hence, in the Orbis Database, R&D expenditures of firms in the year 2012 have been added to the search strategy.
3.1.4 Moderator Variable. To observe the moderating effect of entrepreneurship on
innovation and firm performance, entrepreneurial scores of each country are required. Since this thesis focuses on innovation and performance at the firm level (rather than at the country level), the measure of entrepreneurship should also consider firms. Considering this criterion, entrepreneurial employee activity scores from the GEM database have been selected to be the measure of the moderator variable. It should be noted that none of the articles that have been discussed in the literature review has used this measure of the GEM database. It should also be noted that EEA scores of some countries fluctuate extensively each year, which leads to question the validity of the EEA scores.
3.1.5 Control Variables. As discussed in the literature review part, the age and the size of
a firm affect the innovation levels of a company. In order to eliminate the effect of age and size of a firm on the results of the experiment, the age of the firm and the size of the firm have been taken to be the control variables. Hence, in Orbis, incorporation date of the companies and the number of employees working in the firms in year 2012 have been added to the search criteria.
4. DATA
From the search criteria, a total of 2071 firms have been found working in this industry. Firstly, countries having less than 40 companies have been eliminated from the list in order to have statistically significant results. Secondly, firms with zero R&D expenses have also been removed from the list. Finally, in order to determine the age of each company, the year in which the company is incorporated has been subtracted from the year 2012.
After the eliminations, 1402 companies from 5 different countries have been left (see Table 1). It wasn’t surprising that 4 of the 5 countries are from Asia, whereas, there are no countries from Europe. This is because Asian countries have shifted from production activities to R&D activities in the recent years. Furthermore, R&D activities have shifted from Europe to Asia which explains why there are no European countries in the list (European Commission, 2009).
Table 1. Companies Considered in this Study
Country China Japan South Korea Taiwan USA
Number of Firms 222 227 57 592 304
Table 2. SPSS Outputs.
Variables N Mean SD Skewness S. E of
Skewness Kurtosis S.E of Kurtosis 1.Net Profit 1402 10661422 18353523 30,644 0,065 1046,913 0,131 2.ROA 1402 3,460 6,293 -2,754 0,065 11,553 0,131
In the same SPSS outputs, in accordance with the Shapiro Wilk test statistics, null hypothesis for measures have been rejected since they had p-values equal to 0. This have also indicated that the measures ROA and Net Profit were not normally distributed (Razali &Wah, 2011).
In order to eliminate the skewness and kurtosis and transform the distributions to normal, the outliers of each country have been eliminated from the list. To do that, the outlier labeling rule has been performed by taking k value as 2.2 (Hoaglin& Iglewicz, 1987). To reduce the skewness and kurtosis further, histograms of ROA and Net profit have been checked and additional firms have been removed from the list. After these steps, skewness of the ROA has dropped to -0,062; and skewness of the Net Profit has dropped to 0,655. The final skewness and kurtosis values obtained are given in Table 3.
Table 3. Final Skewness and Kurtosis Values.
After elimination of data, one obtains the final number of firms in each country, and the associated EEA and TEA scores (see Table 4).
Table 4. Number of Firms, EEA Scores and TEA Scores for Different Countries.
Country China Japan South Korea Taiwan USA
Number of Firms 134 123 42 280 121
TEA 12.83 3.99 6.64 7.54 12.84
EEA 0.6 1.10 2.07 5.8 6.71
5. ANALYSIS
Before testing the hypotheses, correlation tests have been performed. Correlations of both initial and final datasets have been determined, yielding the data shown in Tables 5 and 6, respectively.
Table 5. Correlations for the Initial Data set with N= 1402.
Variables Mean SD 1 2 3 4 5
1 R&D Expense
73783712,5 4,233E8 1 0,457** 0,059* 0,130** 0,590**
2 Net Profit 1,12E8 1,533E9 0,457** 1 0,081** 0,025 0,236**
Table 6. Correlations for the Final Data set with N= 700. Variabl es Mean SD 1 2 3 4 5 6 7 1 R&D Expens e 15993517 ,5 355522 81 1 0,167 ** -0,078 * 0,120 ** 0,407 ** 0,73 0,75* 2 Net Profit 10661422 ,2 183535 23 0,167 ** 1 0,564 ** 0,113 ** 0,231 ** 0,88* -0,163 ** 3 ROA 3,46004 6,92275 0,078 * 0,564 ** 1 -0,51 -0,45 -0,32 -0,31 4 Firm Age 24,2 18,693 0,120 ** 0,113 ** -0,51 1 0,149 ** -0,421 ** -0,155 ** 5 #of Employe es 2012,1 4106,90 0,407 ** 0,231 ** -0,45 0,149 ** 1 -0,43 -0,49 6 TEA 8,79 3,30 0,73 0,88* -0,32 -0,421 ** -0,43 1 0,126 ** 7 EEA 3,91 2,54 0,75* -0,163 * -0,31 -0,155 ** -0,49 0,126 ** 1 ** p <.01 * p <.005
The correlation tests indicate that the R&D expenses of a firm is significantly correlated with the net profits of a company. However, after the data elimination, the correlation has dropped from 0,457 to 0,167 in the final data set (p < .01). The correlation test also indicates a significant negative relationship between the R&D expenses and the ROA (r= -.078 p < .005). Furthermore, a significant positive relationship exists between the measures EEA and TEA (r= .126 p < .01). Although these two measures measure different attributes of entrepreneurship, a positive correlation was indeed expected since both measures reflect, by using different means, how entrepreneurial a country is.
When the firms are investigated for the number of employees, it is observed that the majority of the firms are large firms which employ more than 250 employees (78.8%). Medium and small size firms, on the other hand, constitute 19.1 % and 2.1 % of the totality of the firms. After checking the correlations from the SPSS, a significant positive relationship between the number of employees of a firm and the R&D expenditure has been found (r = .407, p < .01).
When the ages of the companies are considered, 55.14 percent of the firms in the list are younger than 20 years old. After the correlation test, a significant positive relationship between the age of the firm and the R&D expenditure has been found (r = .120, p < .01). The aforementioned correlation results prove that, without having these measures as control variables, they might have affected the results of the analysis in a different way.
For Hypotheses 1a and 1b, a simple linear regression has been performed by taking the age of the firm and the number of employees as the control variables. For Hypothesis 1a, ROA has been selected as the dependent variable; and for Hypothesis 1b, Net Profit has been selected as the dependent variable. After the first two hypotheses, the analysis has proceeded with other hypotheses by performing moderation tests. Prior to tests, the independent variable, i.e., the R&D Expenditure, and the moderator variables, i.e., TEA and EEA, have been standardized by using SPSS. Then, by multiplying the standardized moderation variables with the standardized independent variable separately, two interaction terms have been calculated. Finally, from the regression section of the SPSS, the Linear Regression command has been selected and the control variables have been assigned to block 1.
For Hypothesis 2a, ROA has been assigned to the dependent variable section of the SPSS interface. Later on, the standardized variables EEA and R&D have been added to block 2, and the interaction term between EEA and R&D has been assigned to block 3. In order to test Hypothesis 2b, EEA variable in Hypothesis 2a has been replaced with TEA.
6.RESULTS
For Hypotheses 1a (Model 1A) and 1b (Model 1B), the regression test has been performed, the results of which are given in Table 7. For Hypothesis 1a, which used ROA as the dependent variable, the test has found results with no significance. This means that the analysis has failed to reject the null hypothesis. For Hypothesis 1b, a significant and positive relationship between R&D expenditure and Net Profit has been found with p < 0.005. The results indicate that R&D expenditure explains for 6,5 percent the outcomes in Net Profit. Furthermore, a $1 increase in the R&D expenditure leads to an increase, in the net profits of a company, by $0,042. Therefore, Hypothesis 1b has been accepted.
Table 7. Results of the Regression Test.
Table 8. Results of the Moderation Test.
For Hypotheses 3a (Model 3A) and 3b (Model 3B), which have used Net Profit as the dependent variable, a moderation test has been performed by using linear regression. The results are shown in Table 9. For Hypothesis 3a with EEA being the moderator, the analysis has given an insignificant result. Hence, for Hypothesis 3a, the analysis has failed to reject the null hypothesis.
Table 9. Results of the Moderation Test.
7. DISCUSSION AND CONCLUSIONS
Entrepreneurship is an important phenomenon, which triggers innovation. Innovation, on the other hand, is an important factor for the survival of a firm since it affects the performance in a positive manner. Hence, this study proposes that entrepreneurship influences the relationship between innovation and the performance of a firm in a positive manner. In order to prove this hypothesis, the influence of TEA and EEA levels of a country on the relationship between R&D expenditure, ROA and Net Profit has been investigated.
aforementioned causal relationship between the R&D expenditure and the Net Profit can be interpreted in two different ways.
Firstly, the analysis that has been performed indicates that as the size of the firm grows, the net profits and the financial resources of the company increase (r= .2031, p < .01). Hence, by having more financial resources at hand, a large firm may allocate a larger budget for the R&D department, leading to more R&D expenditure. In line with this view, Rosen (1991) has determined that large firms invest more in R&D (compared to smaller firms). Also, the correlation analysis that has been conducted reveals that R&D expenditure is positively correlated with the size of a firm (r=0.407, p < .01). Secondly, Rauch et al. (2010) have determined that firms with more resources at hand feel encouraged to pursue new opportunities.
Therefore, firms with higher financial resources may have higher R&D budgets since they can afford it. The higher budgets, in turn, result in more innovations leading to more sales and eventually more net profits.
A significant, but low, correlation (7.8 percent) has been found between the R&D expenditure and ROA. Since ROA and the Net Profit are similar, the previous comments that have been made regarding the relationship between the R&D expenditure and the Net Profit are valid for the relationship between the R&D expenditure and the ROA.
While testing hypotheses 1a, 2a, 2b and 3a, insignificant test results have been encountered. Hence, it is difficult to comment on these hypotheses.
As discussed before, TEA is the percentage of population of a country who are entrepreneurs and new business owners. Perceived Opportunities Rate of countries, on the other hand is also obtained from the GEM database. It is defined to be the percentage of the adult population who anticipates a good opportunity to start a firm in their area (GEM, 2017).
It has been observed that TEA levels are directly proportional with the Perceived Opportunity Rates among the countries. Among the countries in this study, USA has the highest TEA rate in year 2012. USA, also has the highest level of Perceived Opportunity Rate with %43 in the same year (GEM, 2017). So, among 43 percent of the population of USA, 12 percent have their own business or entrepreneurs.
Clearly, when an individual perceives an opportunity or has an innovative product or new idea, he/she decides to start their own firm. And to do that, he/she leaves their current position. Once people start dropping their current jobs to start new businesses, firms may start to have difficulties in finding employees who have innovative potentials. So, because of the high Perceived Opportunity Rate and high TEA rates in USA, American firms may struggle the most to recruit employees with innovative capabilities. This argument explains, at least partially, the unexpected finding of why entrepreneurship in countries moderate the relationship between innovation and performance negatively.
7.1 Limitations and Recommendations for Future Research
This study has several limitations. The first limitation is regarding the measurement of the dependent variable. This study measures innovation via the R&D expenditures which reflects, solely, the desire of a firm to support innovation. In other words, the R&D expenditures do not fully reflect the innovation success of a company (Gumusluoglu & Ilsev, 2009). Instead of the R&D expenditures, one could utilize the number of innovative products introduced to the market as Bianchi et al. did (2016). Alternatively, the percentage of sales arising from innovative products could be used as a measure (Cassiman and Veugelers 2003). In order to conduct a research which uses the aforementioned measure, conducting a survey with a small number of firms would be better than focusing on archival data. However, due to the time constraints of this thesis, the R&D expenditures have been selected as a measure of innovation. Hence, only archival data have been used.
The second limitation is related to the dependent variable, which is the performance of a firm. While measuring performance, ROA and Net Profit, which only consider the financial aspects of performance, have been used. It should be noted that the performance of a firm could be reflected much better by adding a non- financial measure. As suggested by Rauch et al., self-reports can be used as a non-financial measure (Rauch et al. 2010).
Finally, the data about the companies have been collected via the Orbis database, which reports the country of origin of a company (rather than the location of the production facility). Since most of the firms in the dataset are large, it is possible that the R&D facilities of these firms are located in a different country (than its country of origin). This, indeed, decreases the credibility of the dataset which, in turn, may have affected the validity of the results of this research.
In order to remedy the aforementioned country of origin problem, one could consider only small and medium-sized firms. Furthermore, it should be noted that innovation can be better observed in small firms. In a small firm, the organizational structure is flat and there is less bureaucracy. This creates a suitable environment for innovation (Steiber &Alänge, 2013; Tantau et al., 2015). Hence, by focusing on small firms, the moderating effect of entrepreneurship, on the relationship between innovation and performance, can be observed in a much better manner.
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