Understanding Entrepreneurship: The Relation between Entrepreneurial

Orientation (Opportunity, Knowledge and Risk Taking), Innovation and

Firm Performance

Abstract
Entrepreneurship is regarded as a modern area of examination, study into which is gaining
the interest of an increasing amount of researchers. Moreover, entrepreneurship includes acts
of managerial formation, regeneration or innovation taking place inside or outside a firm. On
the other hand, entrepreneurship orientation is observed as an essential aspect of optimistic
results at organizational performance.
The purpose of this research paper is to understand the relation between entrepreneurial
orientation and firm performance. Moreover, this research paper considered innovation
performance as the most important elements, and examined the connection between EO,
innovation and firm performance.
This research paper reviewed various literatures theories and models proposed by different
authors in order to gain understanding on the importance of entrepreneurship and associated
aspects with regards to innovation. This research has utilized primary and secondary data
sources. The primary analysis of the data set was derived from structural equations
modelling. Structural equations models were produced in various educational standards in
order to validate the theory. At last, conclusion was made to support the findings.

Table of Contents
1.

2.

Introduction.........................................................................................................................1
1.1.

Problem Statement.......................................................................................................1

1.2.

Aims and Objectives....................................................................................................2

1.3.

Significance of the Study.............................................................................................2

Literature Review...............................................................................................................3
2.1.

Entrepreneurial Orientation (EO)................................................................................3

2.2.

Organizational Learning Capability............................................................................3

2.3.

Opportunity Recognition.............................................................................................4

2.4.

Innovation Performance..............................................................................................4

2.5.

Knowledge Management.............................................................................................5

3.

Research Hypotheses..........................................................................................................5

4.

Research Methodology.......................................................................................................6
4.1.

Data Collection............................................................................................................6

4.2. Measurements..................................................................................................................7
4.3.
5.

Data Analysis...............................................................................................................8

Results.................................................................................................................................8
5.1. Structural Equations Model.............................................................................................8
5.2. Correlations.....................................................................................................................9

6.

Conclusion........................................................................................................................10

References................................................................................................................................11
Appendix..................................................................................................................................15

1. Introduction
Promoting entrepreneurship is an efficient manner of producing employment, raising
efficiency and decreasing paucity (OECD, 2005). Moreover, entrepreneurship is regarded as a
modern area of examination, study into which is gaining the interest of an increasing amount
of researchers (Ireland, Reutzel and Webb, 2005). Sharma and Chrisman (1999) purported
that entrepreneurship includes acts of managerial formation, regeneration or innovation
taking place inside or outside a firm. On the other hand, Entrepreneurial Orientation (EO) is
regarded as the methods, activities and managerial functions that cause entrepreneurship
(Lumpkin and Dess, 1996; Richard, Barnett, Dwyer and Chadwick, 2004). This theory is
same as Covin and Slevins (1989) entrepreneurial strategic posture which is categorized by
numerous and broad innovation, insistent competitive orientation and a well-built risk-taking
tendency by organization.
According to Ireland and Webb (2007), entrepreneurship is broadly observed as an essential
aspect of optimistic results at organizational level. Moreover, entrepreneurial activities are
apparent in product, practice and organizational innovations (Ireland and Webb, 2007;
Schumpeter, 1934). Schuler (1986) stated that entrepreneurship is the method of innovating
and asserts that what differentiates entrepreneurial from non-entrepreneurial organizations is
the amount of innovation. Therefore, this research paper considered innovation performance
as the most important elements, and examined the connection between EO, innovation and
firm performance.
1.1.

Problem Statement

Several researches consider that entrepreneurial orientation has a constructive effect on the
performance of an organization (Zahra and Covin, 1995; Lumpkin and Dess, 1996; Wiklund,
1999), this govern connection does not appear to be practically certain (Slater and Narver,
2000). This is for the reason that the performance of a form relies basically upon several
elements both internal and external to the firm (Thoumrungroje and Tansuhaj, 2005), or that
the advantages of EO frequently take a longer time to come to completion (Zahra and Covin,
1995; Madsen, 2007). Therefore, in order to examine the EO-firm performance association,
reliant elements, that are more directly responsive to EO must be taken into consideration.

1.2.

Aims and Objectives

The aim of this research paper is to understand the relation between entrepreneurial
orientation and firm performance.
More specifically, the objectives are:

To analyze entrepreneurial orientation

To examine elements of entrepreneurial orientation
To examine the relation between entrepreneurial orientation and firm performance
To consider the impact of entrepreneurial orientation performance of an organization
To evaluate the relation between entrepreneurial orientation (opportunity, knowledge
and risk taking), innovation and firm performance

1.3.

Significance of the Study

Lumpkin and Dess (1996), any relationship between EO and performance seems to be
context specific, i.e. internal or external factors influence how an EO will be configured to
achieve high performance. However, despite previous research on these factors, these authors
call for further studies to clarify the role of contingency approaches in explaining the EO
firm performance relationship. Research should focus on identifying the underlying processes
that determine the contribution of EO to performance (Zahra et al., 1999). Dess et al (2003)
highlight the importance of corporate entrepreneurship in promoting organizational learning.
They affirm that entrepreneurship creates new knowledge, and that organizational learning
mediates this relationship. Furthermore, Wang (2008) has recently introduced the mediating
role of learning orientation into the EO-firm performance relationship. In our research, we
analyze the role of organizational learning capability in explaining the relationship between
EO and innovation performance.
The concept of organizational learning has attracted a great deal of attention in recent years in
both academic and business circles (Bapuji and Crossan, 2004; Easterby-Smith et al., 2000),
mainly due to the increasingly dynamic and complex economic environment. In spite of its
complexity, reflected in the numerous perspectives proposed, organizational learning might
be defined as the process through which organizations change or modify their mental models,
rules, processes or knowledge, to sustain or improve their performance. Organizational
learning capability (OLC) has therefore been considered a key indicator of an organizations
effectiveness and potential to innovate and grow (Jerez-Gmez et al., 2005).

2. Literature Review
2.1.

Entrepreneurial Orientation (EO)

Entrepreneurship is considered as an approach to management that aspires to emphasize

innovation, suppleness and openness determined by the observation of opportunity, while
offering more refined and competent management (Guth and Ginsberg, 1990; Naman and
Slevin, 1993; Jogaratnam et al. 1999). Entrepreneurial Orientation (EO) is regarded as the
methods, actions, beliefs and managerial operations that guide firms to entrepreneurship
(Lumpkin and Dess, 1996). Covin and Slevin (1989) purported that EO is considered as a
strategic attitude to symbolize regular and essential innovation, tough competitive course or
proactiveness and a tough risk-taking tendency.
Innovativeness is an affinity of an organization to undertake and encourage fresh ideas,
originality, testing, and inventive methods that cause new products, services or technological
methods, and the recreation of original, extraordinary or new resolutions to several issues and
requirements (Covin and Slevin, 1989; Lumpkin and Dess, 1996; Morris and Jones, 1999).
On the other hand, Lumpkin and Dess (1996) purported that though innovations can differ in
their amount of significance, innovativeness signifies a fundamental readiness to vary from
current technologies or actions and undertaking away from the present practice. Thus,
fundamental innovations are closely associated with entrepreneurship.
Risk taking is considered as an enthusiasm to perform important resources to opportunities
that have a sensible possibility of breakdown (Covin and Slevin, 1989; Lumpkin and Dess,
1996; Morris and Jones, 1999). On the other hands, Lumpkin and Dess (1996) stated that
organizations with an EO are regularly characterized by risk-taking attitude, for example
acquiring bigger liabilities or making bigger obligations commitments, for the sake of
obtaining higher profits by confiscating prospects in the industry.
2.2.

Organizational Learning Capability

Organizational Learning Capability (OLC) is described as the managerial and professional

features or aspects that helps the organizational learning practice or facilitate a firm to gain
knowledge (Dibella et al., 1996; Goh and Richards, 1997; Hult and Ferrell, 1997).
Chiva and Alegre (2009) purported that there are five vital following aspects of
organizational learning:
3

1)
2)
3)
4)
5)

Dialogue
Experimentation
Interaction with the external environment
Participative decision making.
Risk taking

Dialogue is described as a continued combined examination into the methods, suppositions,

and convictions that comprise daily understanding (Isaacs, 1993).
Experimentation is described as the amount to which latest ideas and propositions are
handled considerately (Tannembaum, 1997).
Interaction with the external environment is described as the extent of associations with the
external situation (Bapuji and Crossan, 2004).
Participative decision making is described as the degree of control workforce has in the
decision-making procedure (Cotton et al, 1988).
Risk taking is described as the patience of vagueness, ambiguity and mistakes (Sitkin, 1996).
2.3.

Opportunity Recognition

The idea of entrepreneurs identifying opportunities has caused a threefold classification

(Sarasvathy et al., 2003; Miller, 2007):
a) Opportunity recognition is considered as relating recognized products with present
requirements in order to utilize a formerly identified opportunity
b) Opportunity discovery begins with a recognized supply and progresses with seeking
an unidentified requirement
c) With opportunity creation, neither the supply nor the requirement is present before
entrepreneurial operations and the entrepreneur contributes in producing both
simultaneously (Sarasvathy et al. 2003; miller, 2007)
2.4.

Innovation Performance

Innovation includes thriving utilizations of new facts (Myers and Marquis, 1969). It
consequently needs conformity with two situations: originality and utilization. Generally, the
significance of originality is established since the innovation procedure initiates a discovery,
or a new production or organizational practice.

Innovation outcomes comprise product and process innovations; these two types of
innovation outcomes are very much related with each other and form an extremely compound
method that usually contains all organizational operations (Utterback and Abernathy, 1975).
A product is considered as a good or service given to consumers, and a process is the
manner the good or service is created and offered (Barras, 1986). Thus, product innovation is
described as the product or service launched in order to fulfil the requirements of the industry
or customer on the other hand, process innovation is described as a new aspect established
into production processes (Damanpour and Gopalakrishnan, 2001).
2.5.

Knowledge Management

According to Corso et al (2002), knowledge management is of rising attention to researchers

of firms and management due to its believed function in shaping innovation potential of an
organization.
Knowledge management has been examined by various regulations from diverse measures
(Lopez et al, 2004). Barney (1991) purported that an organization requires maintaining and
controlling knowledge in the form of recognized measures, rights, training models or
organization schedules to continue its competitive advantage and to survive in the industry.
3. Research Hypotheses
According to the theory of entrepreneurial orientation, organizational learning capabilities
and innovation performance, the following conceptual model is proposed (Figure 3.1). The
debate of the proposed model is that the influence of EO on innovation performance is
governed by OLC. Moreover, innovation performance has an optimistic impact on firm
performance. Therefore, hypotheses were developed about (1) the association between EO
and firm performance; (2) the association between EO and OLC and (3) the connection
between OLC and innovation performance of a firm

Figure 3.1: Conceptual Model

Therefore, the research has following hypotheses:

Hypothesis 1: EO is completely connected to innovation performance of a firm.
Hypothesis 2: Innovation performance is completely associated with the firm
performance.
Hypothesis 3: Innovation performance plays an important role in mediating the
relationship between EO and performance of a firm.
Hypothesis 4: Entrepreneurial orientation is completely associated with organizational
learning capability.
Hypothesis 5: There is an optimistic connection between organizational learning
capability and innovation performance of a firm.
4. Research Methodology
4.1.

Data Collection

This research has utilized primary and secondary data. The primary data was collected with
the help of quantitative technique through a questionnaire. On the other hand, the secondary
data was collected from the previous literatures and researches.
A key informant technique in relation to the previous researches was employed to collect data
for the research (Kumar et al, 1993). The questionnaire was distributed to managers of
6

several global firms. Moreover, the categories of the managers of the firms were classified
into three categories, for example, questions regarding the firm performance were distributed
to the General Managers, questions regarding innovation performance were distributed to
Product Development Managers, and on the other hand questions regarding OLC were
distributed to Human Resource Managers. The firms were randomly selected from the online
global corporate database.
The questionnaire was distributed to 200 firms globally through emails that were obtained
from the HR list of the companies. Out of these, only 182 completed questionnaires were
received, therefore making the total sample size of the study to 182.
4.2. Measurements
a) Entrepreneurial Orientation
Entrepreneurial Orientation was evaluated through the extensively used nine-item, 7-point
scale produced by Covin and Slevin (1989).
b) Organizational Learning Capability
Regarding the OLC, the measurement tool produced by Chiva & Alegre (2009) was utilized.
In this study we apply the same measurement scale in the same industry at the firm level, this
time through interviews with a key respondent: the Human Resource Manager.
c) Innovation performance
The research considered product innovation performance as an important element with three
varied dimensions in relation to the literature, e.g. product, process and innovation.
d) Firm performance
In order to evaluate the firm performance, general managers of the firms were asked to give
rating to the performance of their firms since last 3 years. The research has utilized
Venkatramans (1989) business performance scale to evaluate the ratings. The managers were
asked to rate their firms growth and productivity on a scale from 1 to 7, with 1 signifying the
lowest scoring and 7 signifying the highest scoring.

4.3.

Data Analysis

The primary analysis of the data set was derived from structural equations modelling.
Structural equations models were produced in various educational standards in order to
validate the theory. Therefore, this method encompassed producing measurement models to
specific underlying elements and then forming associations or connections or structural
equations among these elements.
5.

Results

5.1. Structural Equations Model

The figure below (Figure 5.1) represents the results derived from the structural equations
analysis. Moreover, the chi-square statistic for the model is essential, but other applicable fit
indices propose a fine overall fit (Seibert et al., 2001; Tippins and Sohi, 2003).

Figure 5.1: Structural Equations Model

OLC, IP, and FP are aspects of second order. Moreover, EO and Size are aspects of firstorder. On behalf of shortness, only the weights on the hypotheses courses are represented.
However, parameters not represented here and are all consistent, significant at p < 0.001, and
more than 0.4.
Hypothesis1 and Hypothesis 2 are tested and proven. EO has an important and optimistic
effect on innovation performance of a firm, and there is an optimistic, well-built and
considerable effect of innovation performance on the performance of a firm.
5.2. Correlations

Table 5.1: Factor Correlations, Means, Standard Deviations and Alpha Reliabilities
N = 182; alpha reliabilities are represented in brackets.
** Correlation is significant at the 0.01 level.
The interceding impact of innovation performance on the connection between EO and the
performance of firm is recognized because of the three following circumstances (Tippins and
Sohi, 2003).
1) There is an optimistic connection between EO and innovation performance.
2) There is an optimistic connection between innovation performance and the
performance of firm.
3) The impact of EO on the performance of firm is little and non-significant.

These situations offer inducing confirmation for the interceding impact of innovation
performance on the connection between EO and the performance of firm and thus proved
Hypothesis 3.
The structural equations model represented a reasonable impact of EO on OLC and a
significant effect of OLC on innovation performance of a firm. Moreover, these associations
are optimistic and considerable. Thus, these proved hypotheses 4 and 5.
6.

Conclusion

Nowadays, entrepreneurship has gained a significant amount of attention. Though EO is

frequently believed to have an optimistic effect on the performance of the firm, this express
association does not appear to be practically certain and absolute. In the present research,
innovation performance was included in the EO-firm performance connection, based on the
significance of innovation for entrepreneurship. Innovation performance is regarded as a
three dimensional factor: product, process and innovation.
The results of the study proposed that EO develops innovation performance, which
consecutively develops firm performance. On the other hand, innovation performance plays
an important role in mediating the relationship between EO and performance of a firm.
This research has suggested that though managers identify the significance of
entrepreneurship and EO, their propositions on the rest of the firm are frequently overlooked
in the course of its accomplishment. Therefore, it is recommended to execute an
organizational learning approach when organization has selected to follow an EO. Moreover,
the research emphasizes the significance of determining its impacts on firms by examining
their innovation performance. Hence, innovation is very essential for firms nowadays, as it
signifies the spirit of their competitive advantage.

10

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Appendix
Questionnaire
Innovation Performance Measurement Scale
Please specify your firms performance in relation to your competitors since last 3 years
according to the following statements (items):

14

15