The Impact of Entrepreneurial Orientation on Entry Mode
Choices: A Survey Study of Manufacturing SMEs in East China
University of Groningen Faculty of Economics and Business
Jiajia Zhao Student Number: s2314789 Supervisor: Dr. Igor Kalinic Referent: Dr. Gjalt de Jong Email: j.zhao.10@student.rug.nl
The Impact of Entrepreneurial Orientation on Entry Mode Choices: A Survey Study of Manufacturing SMEs in East China
Abstract
China’s accession to the WTO provides opportunities for local enterprises to go global and
internationalize. Meanwhile, more and more foreign enterprises enter into the Chinese market, which brings strong pressure for local enterprises. Under this background,
"internationalization" becomes the inevitable choice for Chinese local enterprises, especially those small and medium-sized enterprises (SMEs). This study tests the effects of
entrepreneurial orientation (EO) on entry mode (EM) choices in the context of SMEs in East China. I develop hypotheses to test how entrepreneurial orientation is associated with entry mode choices of SMEs from East China. I choose three dimensions of entrepreneurial orientation: innovativeness, risk-taking, proactiveness as independent variables. Then, an empirical investigation has been conducted by emailing questionnaires to managers of 1,000 manufacturing SMEs. There are 217 valid and eligible questionnaires at the end. Statistical results based on binary regression analysis indicate a significant and positive effect of entrepreneurial orientation on firms’ entry mode choices. Furthermore, the analysis also indicates that cultural distance between China and the overseas export market plays a moderating role in the EO-EM relationship. In the end, I present both theoretical and
managerial contributions. I also provide some suggestions and directions for future research.
Key words: small and medium-sized enterprises (SMEs), entrepreneurial orientation, entry
Contents
CHAPTER 1 INTRODUCTION ... 4
CHAPTER 2 LITERATURE REVIEW ... 9
Entrepreneurial Orientation... 10 Innovativeness ... 11 Risk-taking ... 12 Proactiveness ... 13 Entry Modes ... 14 SMEs EO - EM Relationship ... 17 Cultural Distance ... 18 CHAPTER 3 METHODOLOGY... 22
Data and Sample... 22
Measures ... 25 Independent variable... 25 Dependent variable ... 26 Moderator... 27 Control variables ... 28 Analysis ... 29 CHAPTER 4 RESULTS ... 33
CHAPTER 5 DISCUSSION, LIMITATION AND CONCLUSION... 37
Discussion ... 37
Conclusion ... 41
Reference ... 42
Appendix A Table 1 ... 50
Appendix B Table 2 ... 51
Appendix C Table 3 ... 52
CHAPTER 1 INTRODUCTION
Economic globalization and China’s accession to WTO provide both opportunities and
challenges for Chinese enterprises. These enterprises can gain fairer and more reasonable treatments. And more and more enterprises enjoy preferential policies to go global. At the same time, they face with fierce competition from both domestic and global markets. There are a large number of multinationals enter into Chinese market especially after China joined into WTO. Under such background, it is significant for Chinese regional enterprises, especially those small and medium-sized enterprises, to begin to go global, internationalize, and explore the international markets.
Within the past two decades, Chinese SMEs have achieved rapid and smooth growth.
According to a report made by China Daily (2012), SMEs in China are made up 97 percent of 12.5 million licensed companies by the end of 2011. The market-oriented economic reforms initiated by Deng Xiaoping promote the development of Chinese SMEs, especially their significant role in Chinese economic development. There are also various promotional policies issued by the government to support the development of SMEs, such as the SMEs promotion law promulgated in June 2002, which symbolized that the development of SMEs has ushered in a new era (Jia Chen, 2006). This promotional law aims to remove institutional barriers, to promote scientific and technological innovations and upgrading, and to enhance the overall quality and competitiveness of SMEs etc. (Jia Chen, 2006). In 2006, the
policy and regulation for SMEs, to sustain the SME reforms, and to strengthen SME training etc. (Liu Xiangfeng, 2008). Under the help of these promotional laws and policies, SMEs play a significant role in China's rapid economic growth, business revenue and employment generation. Kropp, Lindsay and Shoham (2006) also claim that SMEs are important economic growth, innovation, competitiveness and poverty alleviation. Therefore, SMEs form the backbone of the Chinese economy. They are dynamic, innovative and efficient, and their small and medium size allows for flexibility and quicker decision making (Kropp, Lindsay and Shoham, 2006).
Previous researches, such as Dess et al. (1997), and Knight’s (2000) researches, indicated that under globalization, SMEs with a higher degree of entrepreneurial orientation (EO) are more likely to perform better than those who are a lack of entrepreneurial orientation. Knight (2000) also suggests that SMEs, with their relatively limited resources and capabilities, have to possess the entrepreneurial spirit to survive or even to outperform their competitors in global markets. SMEs with a high degree of entrepreneurial orientation are more likely to obtain competitiveness and competitive advantages. Therefore, they use these strengths to sustain companies’ growth, sustainability and stability. Buckley and Ghauri (1999) also claim that
firms internationalize on the basis of the competitive advantages they possess to cover additional overseas operational costs and to seek higher profits.
management, or other resources into a foreign country”. Agarwal & Ramaswami (1992) and
Lu (2002) treat entry mode choice as a very complex and difficult but crucial issue during international entrepreneurship decision-making process. Chang & Rosenzweig (2001) also argue that entry mode choice issue is not a simple question about how to reduce all kinds of costs related to international activities, but more importantly, this issue is to design an effective organizational structure and utilize the complementary organizational resources and competence to achieve the competitive advantage.
In this research, I divide entry modes into three categories, market, hybrid, and hierarchy, based on different levels of control power, resource commitment, risk, and flexibility (Angie M, Paliwoda & Stanley, 1997; Woodcock, Beamish & Makino, 1994; Kumar & Velavan, 1997; Herrmann & Datta, 2002). Anderson & Gatignon (1986) also suggest that, in many situations, international entry modes choice issues are to trade off between control power and resource commitment under risk and uncertainty.
attempt to answer the research question: how entrepreneurial orientation is associated with entry mode choices of manufacturing SMEs in East China, and what kind of role does the cultural distance play to the relation between entrepreneurial orientation and entry mode. I explore the impacts of entrepreneurial orientation on entry mode choices by using
innovativeness, risk taking, and proactiveness as antecedents. In this study, positive relationships between entrepreneurial orientation and entry mode are hypothesized.
Furthermore, I also assume that the cultural distance may moderate the EO-EM relationship.
and explore the global markets. Finally, because of the cluster effect, SMEs in East China can improve technological innovation more easily.
In this research, we used the questionnaire to collect data. We delivered questionnaires to the managers of 1,000 randomly selected companies through the Internet. We got 245 responses with 217 valid and useable responses at the end. To test these hypotheses, I conduct the binary regression based on data from these valid and eligible questionnaires. The analysis shows that firms processing a higher degree of entrepreneurial orientation tend to choose hierarchy and hybrid modes to internationalize, and firms lacking strong entrepreneurial spirit are more likely to choose market mode to go global. Furthermore, results also indicate that the cultural distance between home and foreign export markets moderates this relationship, strengthening the value of using hierarchy and hybrid modes when firms process a high degree of EO or of using market mode to lower the risk when firms lack such spirit.
The remaining sections of this research are organized as follows: First, the relevant literature review on entrepreneurial orientation, including innovativeness, risk taking, and proactiveness, and on entry modes is presented in Chapter 2. Second, Chapter 3 describes the research
CHAPTER 2 LITERATURE REVIEW
Many prior entry mode strategies researches based on transaction cost theory have made a great contribution to this issue. Transaction cost theory has been widely used to study entry mode selection for large multinational enterprises (MNEs). According to Brouthers and Nakos’ (2004) study, transaction cost theory can be applied to SMEs mode choice. Coviello
& McAuley (1999) suggest that firms’ managerial style, ownership, and independence can differentiate SMEs from large multinational enterprises (MNEs). Moreover, their limited resources may lead them to very different international strategic choices in comparison to larger firms (Zacharakis, 1997; Erramilli & D’Souza, 1993). Many researchers also argue that the asset specificity, external uncertainty and other cost related factors will directly influence the decision-making of entry mode for firms entering unfamiliar foreign market (Anderson & Gatignon, 1986; Klein et al., 1990; Shervani et al., 2007).
Entrepreneurial Orientation
According to Lumpkin and Dess (2001), entrepreneurial orientation is defined as “the
organizational processes, methods, styles, practices, and decision-making activities employed by firms that lead to new entry”. It includes a willingness to innovate and take risks, proactive
relative marketplace opportunities. Entrepreneurial orientation is also referred to a firm's strategic orientation. It can capture specific entrepreneurial aspects of decision-making styles, practices, and methods (Wiklund and Shepherd, 2005). Zahra and Garvis (2000) argue that globalization requires SMEs to take self-directed actions, to be more innovative, proactive, and risk-taking to take advantage of opportunities to explore the global market.
As Owoseni & Adeyeye (2012) presents, some researchers argue that entrepreneurial orientation refers to a set of personal psychological traits, values, attributes and attitudes (Owoseni & Adeyeye, 2012) strongly associated with a motivation to engage in
entrepreneurial activities (McClelland, 1962; Dunkelberg & Cooper, 1982; Hornaday & Aboud 1971; Timmons, 1978). Deeks (1976) argues that the individual manager can have a strong and direct impact on the entrepreneurial potential, behavior, and effectiveness of firms. While other authors believe that entrepreneurial orientation is a firm-level construct (e.g., Covin & Slevin, 1991) that can be closely linked to strategic management and the strategic decision making process (Birkinshaw, 1997; Lumpkin & Dess, 1996; Kantar, 1982; Burgleman, 1983; Nman & Selvin, 1993; Owoseni & Adeyeye, 2012). Particular organizational strategies, structures, systems, and cultures can affect and manage this
mode. Within this research, I link these two levels. It is entrepreneurs’ attributes, attitudes, and behavior that decide their firms’ performance --- internationalize to explore the international market.
As indicated by Covin & Slevin (1991), an entrepreneurial posture is reflected in three types of organizational-level behaviors: top management risk taking with regard to investment decisions and strategic actions in the face of uncertainty; the extent and frequency of product innovation and related tendency towards technological leadership; and the pioneering nature of the firm as evident in the firm’s propensity to aggressively and proactively compete with
industry rivals. As proposed by Miller (1983), EO comprises three dimensions: innovativeness, risk-taking, and proactiveness.
Innovativeness
Lumpkin & Dess (1996) define innovativeness as the firm’s ability and willingness to support
creativity, new ideas and experimentation to produce new products/services. According to Lyon, Lumpkin, and Dess (2000), innovativeness refers to attempts to embrace innovative ideas, creativity, experimentation, novelty, and technological leadership in technologies, products, services, and processes within the respective environments. Firms take advantage of innovation in new products, services, technologies, and business process to compete with their competitors. Innovativeness is one aspect to show a firm’s competitive advantage. It is firm’s capability and competence to provide new and innovative products, services, processes,
new products, processes, and services (Ussahawanitchakit P., 2007; Lee, Lee, and Pennings, 2001). Firms are eager to implement the ability of innovativeness to internationalize and explore the international market. Thus, the innovativeness dimension of entrepreneurial orientation may affect the firms’ entry mode choice to some extent.
Risk-taking
Therefore, when facing the entry mode choice, firms with high risk-taking characteristics tend to make decision riskily and boldly.
Proactiveness
operation and effectively managing processes. Kropp and Zolin (2005) believe that firms are proactive in seeking out an appealing niche and creating the necessary resources to facilitate new entry.
Entry Modes
Data et al. (2002) believe that foreign market entry choice is one of the most important strategic decisions in the internationalization process. Foreign market entry mode has been defined by Root (1987) as “an institutional arrangement that makes possible the entry of a
company’s products, technology, human skills, management, or other resources into a foreign country”. Entry mode is a strategy when companies enter into a strange market. It can directly
and significantly influence firms’ performance after entering into overseas markets.
As suggested by Kumar and Subramaniam (1997), there is a natural hierarchy among the various modes of entry according to different degrees of resource commitment in unfamiliar markets. Chu & Anderson (1992) also treat entry modes as a continuum of increasing levels of control power, risk exposure, resource commitment, and profit potential from hierarchy perspective. There are different aspects among different international entry modes, including control power, resource commitment, and risk (Angie M, Paliwoda & Stanley, 1997;
that the levels of risk will often predict the levels of control by the firms entering foreign markets. Higher control modes imply larger risk at the expense of profits, resource
commitment, while the lower control modes are related to reduced resource commitment and risk. Thus, in countless situations, international entry mode choice issues are to trade off between control power and resource commitment usually under risk and uncertainty (Anderson& Gatignon, 1986). Furthermore, the degree of flexibility is also unique among different entry modes. When the transcontinental market is risky, firms tend to choose a flexible entry mode to lower the risk and cost. If firms want to fully control their remote operation, the flexibility tends to be low. When firms decide to start their international investments, they can access to foreign markets in a range of ways, depending on the degree of control exercised over the foreign assets necessary for the distribution of their products (Campa, J.M. & Guillen, M.F., 1999).
Within this research, I divide entry modes into three categories, market, hybrid, and hierarchy, based on different levels of control power, resource commitment, risk, and flexibility. As is showed in Table 1, market mode links to low control power, resource commitment and risk, and high flexibility; hybrid mode is related to the middle degree of these four aspects;
Table 1：Comparisons among Different Entry Modes
Entry Modes Control Power
Resource
Commitment Risk
Flexibilit y
Market (e.g. export) Low Low Low High
Hybrid (e.g. licensing, franchising and JV etc.)
Middle Middle Middle Middle
Hierarchy (e.g. M&A, green
field) High High High Low
Sources: Woodcock, Beamish & Makino (1994); Kumar & Velavan (1997); Herrmann & Datta (2002).
SMEs EO - EM Relationship
Miller (1983) argued that these three components of EO comprised a unidimensional basic strategic orientation. A number of researchers emphasize that greater entrepreneurial orientation (EO) significantly contributes to firms’ success. Entrepreneurial orientation may
influence entrepreneurs’ decision-making process when firms decide to internationalize.
Based on the initial discussion, innovativeness may have a positive influence on entry mode choice. Ussahawanitchakit (2007) holds that firms with the stronger degree of innovativeness effectively perceive greater organizational operations and get superior merits. Firms with utmost capability of innovativeness tend to choose more risky entry mode to internationalize, like hierarchy mode. Additionally, they want to keep sharp control on their innovative
services. During this process, more resource commitments are involved, along with elevated risk, when firms are highly proactive. SMEs with a higher level of proactiveness are more likely to pose a high level of control of the external market. Thus, they tend to choose a more hierarchical entry mode to explore an unfamiliar market. Above all, the degree of
entrepreneurial orientation may influence firms’ entry mode choice. Therefore, I hypothesize:
Hypothesis 1: SMEs with a high degree of entrepreneurial orientation are more likely to choose a hierarchy or hybrid mode to internationalize. SMEs with a low degree of entrepreneurial orientation are more likely to choose a market mode to internationalize.
Cultural Distance
Evans & Mavondo (2000) define culture as shared values and meanings of the members of a society. It affects both behavior of customers in a market and the execution and
the degree to which the members of a culture are threatened by uncertain, unknown, or unstructured situations (Hofstede, 1991). Individualism and its counterpart collectivism are defined as a relative preference for the loose individual in contrast to the robust and cohesive in-groups (Hofstede, 1991). Finally, masculinity and its opposite femininity show the societal gender roles of males and females (Hofstede, 1991). Rian & Arjen (2006) give some
examples of both masculine values and feminine values: for masculine values, such as achievement, competitiveness, high earnings, ambition, and assertiveness; while for feminine values, such as nurturing, minding the quality of life, not showing off, helping others, and putting relationships with people before money.
indeed found that low control modes, such as market mode, were often selected in situations characterized by high cultural distance. As indicated by Anderson & Gatignon (1986) and Anderson & Gatignon (1988), cultural distance increases both transaction costs and the cost of internalization. Anne-Wil Harzing (2003) also argues that market transaction cost increase due to the uncertainty involved in a distant market. This uncertainty may increase the
difficulty to monitor the resident agents. Internalization costs increase due to constraints and difficult to collaborate with foreign partners (Anne-Wil Harzing, 2003). Thus, under the pressure of higher costs, there will be less control of overseas operations when the culture is distant.
competing with local enterprises. As Laszlo, David and Craig (2005) indicate, although control is one of the most critical aspects to be considered, entry mode choices in relationship to cultural distance can also be explained by a risk-reduction rationale of MNE managers. Therefore, hierarchical way can lower the risk by extending control for firms internationalize in culture distant markets. Second, firms with a high degree of EO may cooperate with local partners when the cultural differences are obvious. These partners may provide complete and updated information about the local market. This kind of collaboration may help firms to internationalize immediately and smoothly. Thus, as cultural distance increases, firms with a high degree EO will benefit from using hierarchy and hybrid entry modes. Finally, for a firm with a low degree of EO, market mode might be an effective way to internationalize in unfamiliar overseas export markets. Firms can obtain higher flexibility during the internationalizing process. Gatignon and Anderson (1988) also argue that, if the cultural distance is higher, MNEs may prefer to choose entry modes with greater flexibility, such as exporting, which results in less control and risk. In addition, market mode requires less resource commitment, which generates low risk. Other studies have found that greater cultural distance is associated with entry modes based on lower percentages of resource commitment if firms process a minimal degree of entrepreneurial orientation (Barkema Shenkar, & Vermeulen, 1997; Barkema & Vermeulen, 1998).
Hypothesis 2: The cultural distance between home and target country will moderate the relation between entrepreneurial orientation and entry mode choice, such that the probability of firms with a higher degree of entrepreneurial orientation selecting hierarchy and hybrid modes as cultural differences increase and the probability of firms with a lower degree of entrepreneurial orientation selecting market mode increases as cultural differences increase.
CHAPTER 3 METHODOLOGY
Data and Sample
To test these hypotheses, we used data from ORBIS database. We conducted the firm-level research in East China, including Jiangxi Province, Anhui Province, Jiangsu Province, Fujian Province, Shandong Province, Zhejiang Province and Shanghai City. These provinces or cities are located in eastern coastal areas of China, and most of these provinces are located along the principal shipping routes. According to Murray, Gao, Kotabe, & Zhou (2007), these places are most critical manufacturing locations for firms with both local and foreign
investments. During the first-hand data collection process, we focus on traditional
foreign companies’ cooperation, we concentrated the firms’ national legal form on 16
categories, which included individual in corporation, individual partnership, joint stock company, joint cooperative venture (HK, Macao or Taiwan), limited liability company, limited company, one-person company, other limited liability company, private company, private incorporated company, private limited liability company, private partnership, sole proprietorship, state owned and collective company, state owned association, and state owned company. These companies’ headquarters are all located in China. Under the criteria of this research sample, there are 11,143 eligible enterprises in East China, which accounts for more than 69% (11,143 of 16,133) of the whole manufacturing SMEs in China. SMEs in East China can represent the development of the whole to some extent. We randomly collect first-hand data--- names of 1,000 sample SMEs (almost 10% of SMEs in East China) with three categories connect information---from ORBIS database. Thus, the survey database offered us the opportunities to control the industry to traditional manufacturing (ORIBS Database: NACE Rev 2. 10-17 & 19- 32), as well as to provide paths for the second-hand data collection.
After collecting the first-hand data, a questionnaire was delivered to these sample companies’ e-mail addresses through Qualtrics Survey Software. The second-hand data were collected in the period from the end of March to the beginning of June 2013. Although there are
asked our Chinese teachers and friends to help the translation so that the questionnaire was clear and captured the desired information. These questionnaires were deemed to send to the firm's founder or a member of the firm's top management team. There are 27 questions within this questionnaire. Respondents were asked to provide basic information of their companies (e.g., main export products, the number of employees worldwide etc.), information of firm’s most important export market (e.g., the export sales to total sales of last year, the export structure of this most important market etc.), as well as information about firms’ characteristic when deal with uncertainty, competition etc. For some firms, when there were no responses a week later, we sent our questionnaire again to their regular email addresses. In order to enhance the completeness and accuracy of the data collected, we also conducted a telephone interview for other firms. In the questionnaire mailing of the study, 21 of e-mail addresses are invalid. Deducting the undeliverable mailings from the original 1,000 mailed, the valid mailing was 979 surveys, from which 245 responses were received. When surveys completed and returned, only 217 were eligible and usable. The effective response rate was
approximately 21.7%. Based on Aaker, Kumar and Day (2001), the response rate for a mail survey can be less than 20%, when there is no an appropriate follow-up procedure. Therefore, the response rate for this study is considered acceptable. The response rate was the highest in Zhejiang Province (51 observations, 23.5 percent) followed by Jiangsu Province (43
Measures
Independent variable
This research treats the EO continuum (innovativeness, risk-taking and proactiveness) as the independent variable, the entry mode choice (market, hybrid and hierarchy) variable as the dependent variable. And the cultural distance is the moderator for theory building and data analysis purposes.
I adopted a 9-item (7-point) measure of entrepreneurial orientation proposed by Covin and Slevin (1989), Khandwalla (1976/1977), and Miller and Friesen (1982). Concretely, this 7-point Likert type scale (1 = totally disagree; 7 = totally agree) has three aspects. For each aspect represents each dimension of entrepreneurial orientation. The values for these 9 items were summed and averaged to create the EO construct. Higher average score on this construct indicates a higher degree of EO.
assessed by the willingness to initiate actions to which competitors then respond, preference to introduce new products and services, and adoption to a very competitive
“beat-the-competitors” posture.Three scale items are built to measure the degree to which
firms identify opportunities and compete with competitors. (Table 1 in Appendix A shows these nine items.)
Dependent variable
Regarding the measurement of entry modes, managers of SMEs were asked about the companies’ export structure. To construct an entry mode index, managers were asked to
specify the entry mode that they used in the most important export market. Due to different levels of risk, control power, resource commitment, and flexibility, there are three types of entry modes: market mode, hybrid mode, and hierarchy mode. There are six options to choose for this question (as showed in Appendix B Table 2). These possible response options are arranged hierarchically according to the level of risk, control power, and resource
commitment. In Klein and Roth’s (1990) study, hierarchical channels were assigned a value of 1. In this research, there are only 10 responses that choose hierarchy mode. Most responses are hybrid mode and market mode. Thus, both hierarchy and hybrid modes were assigned a value of 1 and included four types: “we have a wholly owned sales subsidiary” “we serve it from the host country, using company personnel” “we are involved in a joint venture with another company to handle sales in this market” “we use commission agents” (Covin and
our product and contacts with buyers directly” (Covin and Slevin, 1989, Khandwalla,
1976/1977, and Miller and Friesen, 1982). Since the entry mode variable is a binary variable, we used binary regression analysis to test Hypotheses 1 and 2.
Moderator
Despite the fact that there are some criticisms of Hofstede’s framework, it is still valid and reliable. Thus, based on Hofstede’s four cultural dimensions, namely: power distance,
individualism - collectivism, uncertainty avoidance, and masculinity – femininity, the cultural distance between China and export markets is calculated by using Kogut and Singh’s (1989) formula:
CDj=∑{(Iij-Iic) 2
/Vi}/4
Where
Iij is the index for the ith cultural dimension and jth country,
Vi is the variance of the index of the ith dimension,
c indicates the China, and
CDj is cultural difference of the jth country from the China.
including China). The moderating variable was calculated by centering the values of the entrepreneurial orientation and the cultural distance scores and then multiplying the entrepreneurial orientation value by the cultural distance measure.
Control variables
four-item (7-point scale) singular statement about the most important export market.
Company performance was measured with a single item 7-point scale (1 = very high, 7 = very low) for the evaluation of firm’s overall performance in the last year.
Analysis
manufacture of computer, electronic and optical products (NACE Rev 2. 26, 12.4%), and manufacture of rubber and plastic products (NACE Rev 2. 22, 10.1%).
Table 2 Sample Description % Entry Mode Hierarchy Mode 4.6 Hybrid Mode 47 Market Mode 48.4 Exporting Experience
Less than 5 years 18
5 to 15 years 71.4
More than 15 years 10.6
International Experience
Less than 5 years 17.1
5 to 15 years 70.9
More than 15 years 12
Firm Size
Less than 249 people (including 249) 79.7
More than 250 people (including 250) 20.3
Research & Development
Less than 5% 1.4
5% to 20% 96.3
Over 20% 2.3
Company Performance of Past Year
Worse than breakeven 4.6
Breakeven 17.1
Better than breakeven 78.3
Industry classification
Manufacture of fabricated metal products, except machinery and equipment 21.2
Manufacture of machinery and equipment nec 15.2
Manufacture of computer, electronic and optical products 12.4
Manufacture of rubber and plastic products 10.1
Manufacture of electrical equipment 8.8
Manufacture of textiles 7.8
Manufacture of other non-metallic mineral products 5.1
Manufacture of wood and products of wood etc. 3.2
Manufacture of chemicals and chemical products 3.2
Before testing these hypotheses, the means, standard deviations and correlations of these variables are provided in Table 3. This table indicated that company performance is positively correlated with exporting experience, international experience, research & development, and external uncertainty. Further, this table shows that entrepreneurial orientation is positively and statistically correlated with firm size (pearson correlation = 0.343, p < .01) and research & development (pearson correlation = 0.591, p < .01). Firms with a higher level of
entrepreneurial orientation tend to spend more on research and development to provide innovative products and services to compete with local enterprises. While the relation between entrepreneurial orientation and external uncertainty is negative and statistical (pearson correlation = -0.403, p < .01). When facing with high risk and high external
Table 3
Means, Standard Deviations, and Correlations
Construct M SD 1 2 3 4 5 6 7 8
1. Exporting Experience 9.740 4.873 1
2. International Experience 10.170 5.117 0.983** 1
3. Firm Size 243.240 191.928 0.117 0.122 1
4. Research & Development 0.099 0.043 0.075 0.113 0.236** 1
CHAPTER 4 RESULTS
We performed the usual tests to obtain reliable estimates to prepare the data for the regression analysis (Hair et al., 2006). These P-P Plot and Q-Q Plot tests yielded satisfactory results: non--normality is not an issue. These data are normally distributed.
A binary model was presented in Table 4 to explore these hypotheses concerning entry mode. Model 1 is the base model and was significant (p < .01). Control variables explain about 42% of the variance in the dependent variable. Firm size (ß = -0.002, p < .05) and research & development (ß = -21.142, p < .01) are significantly related to the use of hierarchy and hybrid modes, while external uncertainty (ß = 0.962, p < .01) is significantly related to the use of market mode.
Model 3 explores the interaction between entrepreneurial orientation and cultural distance. Model 3 was significant (p < .01); the increase in explanatory power over the Model 2 was also significant (p < .01). Model 3 explained about 63.2% of the variance in our dependent variable, entry mode. The relation between entrepreneurial orientation (ß = -0.537, n.s.) and entry mode is not significant when adding the moderator, cultural distance. Cultural distance (ß = 1.292, p < .05) has a strongly significant and positive effect on entry mode. Interaction variable EO * CD (ß = -0.500, p < .05) was significant; firms, with a high degree of EO, tended to choose hierarchy and hybrid modes to internationalize in cultural distant market, while firms, with a low degree of EO, tended to choose market mode to explore cultural close market, providing support for Hypothesis 2.
Table 4
Logistic Regression of Entry Mode
Model 1 Model 2 Model 3
Control Variables
Exporting Experience 0.225 (0.197) 0.274 (0.225) 0.332 (0.233) International Experience -0.235 (0.187) -0.336 (0.216) -0.383 (0.224)
Firm Size -0.002* (0.001) 0.000 (0.001) 0.000 (0.001)
Research & Development -21.142** (5.226) 1.092 (6.185) 1.307 (6.279) External Uncertainty 0.962** (0.217) 0.650* (0.255) 0.693** (0.262) Company Performance -0.372 (0.197) -0.188 (0.219) -0.215 (0.226) Independent Variable
Entrepreneurial Orientation (EO) -1.762** (0.295) -0.537 (0.563) Moderator Cultural Distance (CD) 1.292* (0.634) Interaction EO*CD -0.500* (0.217) Constant 1.288 (1.390) 4.143* (1.640) 0.843 (2.277) χ2 82.000** 134.195** 139.456** χ2
change from Model 1 52.195**
χ2
change from Model 2 5.261**
Nagelkerke R2 0.420 0.615 0.632
Note: N = 217. *p < .05. **p < .01.
development (ß = -3.253, p < .01) and external uncertainty (ß = 0.166, p < .01) on entry mode, in Panel 1 are the same as in Table 4. Panel 2 reports significant and statistical correlation between entrepreneurial orientation (ß = -0.282, p < .01) and entry mode. The results to test hypothesis 1 are the same in Table 4. Panel 3 reports non-significant correlation between the interaction EO*CD (ß = -0.043, n.s.) and entry mode. The results to test hypothesis 2 are not same in Table 4. The difference may be due to biases of the questionnaire survey.
Table 5
Robustness Tests for Entrepreneurial Orientation and Entry Mode
Panel 1 Panel 2 Panel 3
Control Variables
Exporting Experience 0.031 (0.034) 0.025 (0.029) 0.029 (0.029) International Experience -0.032 (0.032) -0.034 (0.027) -0.037 (0.027)
Firm Size 0.000 (0.000) 5.771E-5 (0.000) 7.821E-5 (0.000)
Research & Development -3.253** (0.732) 0.226 (0.736) 0.294 (0.735) External Uncertainty 0.166** (0.034) 0.072* (0.031) 0.073* (0.031) Company Performance -0.067* (0.034) -0.037 (0.029) -0.040 (0.029) Independent Variable
CHAPTER 5 DISCUSSION, LIMITATION AND CONCLUSION
Discussion
SMEs now play a significant role in global activities. Yet there is not so much manufacturing SMEs’ entry mode choice researched in the context of China. Furthermore, a few studies have examined the effect of the level of entrepreneurial orientation on firms’ entry mode choice. In
this study, I addressed both of these issues. Besides, I also invited cultural distance as a moderator. Scott (1995) suggests that foreign markets provide a business context separate from the home context. And firms operate in overseas markets may create greater value (He, Brouthers, & Filatotchev, 2013). Thus, a fitting entry mode can be directly related to firms’ performance in unknown foreign markets.
As approved by Brouthers and Nakos’s (2004) study, the transaction cost model of
Based on 217 eligible responses, I found that firms, with a high degree of EO, are more likely to own more control to reduce the risk and cost generating from external uncertainty.
Hierarchy or hybrid mode might be SMEs’ optimal choice to internationalize, especially to cultural distant market. This entrepreneurial spirit helps firms to innovatively produce new products and services, take risk to operate in foreign markets, and proactively compete with local competitors. While firms, with a low degree of EO, tended to choose market mode to explore foreign market. These companies lower the transaction cost by decreasing the resource commitment to a global market. Thus, firms possessing different levels of entrepreneurial spirit make different entry mode choice. From Table 4, I also found that external uncertainty was significantly related to entry mode in all models (p < .01, p < .05, p < .01 respectively), which means that external uncertainty plays an important role in
international business decision-making process.
risk-avoidance, which is one noticeable characteristic of Chinese people. They tend to take safe and conservative measures to explore unfamiliar foreign markets. Finally, flexibility of hybrid and market modes is relatively high than flexibility of hierarchy mode. To some rather small firms with less than 100 workers, market mode might be a better choice to avoid risk.
For theoretical contribution, I explored the relationship between entrepreneurial orientation and entry mode in the context of manufacturing SMEs in East China. Additionally, I also tested the moderating effect of cultural distance on this EO-EM relationship. Further, transaction cost theory was used to explain these results. This study also indicated that an entrepreneurial orientation is an antecedent of an international entry mode in SMEs. For empirical contribution, taking into account cultural distance, aligning the degree of entrepreneurial orientation has significant implication of entry mode choice. Thus, our
research is beneficial to managerial understanding of making a decision to enter into a foreign market from the transaction cost perspective.
Limitation
Thus, future research may wish to use more effective and reliable method to collect eligible data. Tenth, the ultimate limitation is about sample selection. I only concentrated on firms who are survived. It is time-consuming and difficult to contact with those disappeared firms.
Conclusion
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Appendix A
Table 1
Entrepreneurial Orientation Scale.
Innovativeness
1. With regard to the activities of my firm, we generally: Favor the marketing of tried and tested products or services. VS. Favor Research and Development, technological leadership innovations.
2. How many new lines of products/services has your firm marketed in the past 5 years? No new lines of products or services. VS. Very many new lines of products or services. 3. How many new lines of products/services has your firm marketed in the past 5 years? Changes in product or service lines have usually been of a minor nature. VS. Changes in products or service lines have usually been quite dramatic.
Risk-taking
1. With regard to the activities of my firm, we generally: Favor low risk projects (with normal and certain rates of return). VS. Favor high risk projects (with high chances of very high return).
2. In general, we believe that owing to the nature of the external environments it is best to achieve the firm’s objectives via: Cautious and incremental behavior. VS. Bold and wide-ranging acts.
3. When confronted in the marketplace with decision making situations involving uncertainty, my firm typically adopts a: Cautious. ‘Wait and see’ posture in order to minimize the
probability of making costly decisions. VS. Bold, aggressive posture to maximize the probability of exploiting potential opportunities.
Proactiveness
In dealing with its competitors in the marketplace, my firm:
1. Typically responds to actions which competitors initiate. VS. Typically initiates actions to which competitors then respond.
2. Is very seldom the first firm to introduce new products/services, administrative and/or operating technologies. VS. Is very often the first firm to introduce new products/services, administrative and/or operating technologies.
3. Typically seeks to avoid competitive clashes preferring a ‘live-and-let-live’ posture. VS. Typically adopts a very competitive ‘beat-the-competitors’ posture.
Appendix B
Table 2
Entry Modes Scale.
Your company’s exports to this market are structured as: (Please circle only 1 type) Hierarchy Mode
1. We have a wholly owned sales subsidiary.
2. We serve it directly from the USA, using company personnel.
Hybrid Mode
3. We are involved in a joint venture with another company to handle sales in this market. 4. We use commission agents.
Market Mode
5. We sell to a merchant distributor who takes title to our product and contacts buyers directly.
6. Other (please specify).
Appendix C
Table 3 Hofstede’s Cultural Value Scores for 23 Countries
Country Power Distance Uncertainty Avoidance Individualism Masculinity Australia (AUL) 36 51 90 61 Brazil (BRA) 69 76 38 49 Canada (CAN) 39 48 80 52 China （CHI） 80 30 20 66 France (FRA) 68 86 71 43 Germany (FRG) 35 65 67 66 Great Britain (GBR) 35 35 89 66 India (IND) 77 40 48 56 Indonesia (IDO) 78 48 14 46 Italy (ITA) 50 75 76 70 Japan (JPN) 54 92 46 95
South Korea (KOR) 60 85 18 39
Malaysia (MAL) 104 36 26 50
Netherlands (NET) 38 53 80 14
Pakistan (PAK) 55 70 14 50
Russia (RUS) 90 70 42 37
Singapore (SIN) 74 8 20 48
South Africa (SAF) 49 49 65 63
Spain (SPA) 57 86 51 42 Thailand (THA) 64 64 20 34 Turkey (TUR) 66 85 37 45 United States (USA) 40 46 91 62 Vietnam （VIE） 70 30 20 40 Sources:
Hofstede, Geert (1980) Culture's consequences: International differences in work-related values. California: Sage Publications.
