ENTREPRENEURIAL ORIENTATION AND MARKET DYNAMISM: EFFECT OF KNOWLEDGE ABSORPTIVE CAPACITY
García-Villaverde, P.M. ()
Rodrigo-Alarcón, J. ()
Ruiz-Ortega, M.J. ()
Parra-Requena, G. ()
Department: Business Administration
University: Castilla-La Mancha
Subject area: Emprendimiento y dinámica empresarial
Abstract: The aim of this work is to analyse the antecedents of the firm’s entrepreneurial orientation, completing an important gap in the literature on the empirical analysis of its main determinants (Wales, Gupta and Mousa, 2013), highlighting the interest in analysing the role of the environment dynamism (Simsek, Heavey and Veiga, 2010). The innovative behaviour, as an element of this entrepreneurial orientation, is an essential factor for regional development (Cornett, 2009). Firms develop a greater entrepreneurial orientation if they want to be able to exploit changes in customer demands and capture new market niches (Lumpkin and Dess, 2001), with the aim of improving their performance. In this sense, regional development is derived from the ability or capacity of local firms to obtain and generate incomes (Cornett, 2009). However, facing a high market dynamism, changes in the market diminish strategic certainty and the difficulty of accurately planning future forecasts increases (Sheth and Parvatiyar, 1992), which can jeopardize the firms’ performance and particularly those small firms without sufficient resources to manage it. Specifically, we analysed the Spanish agri-food industry, which is distributed throughout the national territory and which represents 8.38% of the GPD. It combines the maturity, the tradition, the predominance of small firms and territorial embeddedness. In this sense, the entrepreneurial orientation in this sector is important for achieving a higher performance and for employment growth in the region (Madsen, 2007). On the other hand, the literature establishes that the influence of environmental conditions on the strategic orientation will be affected by its resources and capacities (Teece, Pisano and Shuen, 1997), analysing how the capacity to absorb knowledge influences the relationship between both variables. Due to the specific characteristics of the firms in the sector analysed, they must establish relations with other agents in order to obtain the necessary knowledge to develop innovations ahead of competitors. The development of this capacity reinforces, complements and focuses the basic knowledge possessed (Lane, Koka and Pathak, 2006). The results obtained using the PLS-SEM methodology on a sample of 292 firms show that market dynamism has a concave curvilinear relationship with entrepreneurial orientation. The main contribution of this work is to demonstrate how the effect of the knowledge absorptive capacity changes the influence of market dynamism on the firm’s entrepreneurial orientation. Therefore, we demonstrate how the resources and capabilities possessed by a firm can enhance or limit the entrepreneurial behaviour derived from the dynamism of the market perceived in the environment and thereby improve the development of the regions where firms are established by increasing results and employment. Likewise, the results will allow us to propose various policies that could stimulate the development of this entrepreneurial behaviour, business profit and the development of the region.
Keywords: Entrepreneurial orientation; market dynamism; absorptive capacity; moderating effect; agri-food industry.
JEL codes: L26; D83; M1; L66
- INTRODUCTION.
EO has been consolidated as a key element in the entrepreneurship literature (Covin and Lumpkin, 2011). EO is found in the implementation process of business initiatives and corporate culture (Dess and Lumpkin, 2005) being a key factor in generating differentiation, developing better solutions ahead of competitors, enhancing adaptation to environmental changes and market trends and weakening the ability of rivals to compete and respond to the firm's actions in the future (Hughes and Morgan, 2007). Research on entrepreneurial orientation (EO) has grown over the last few years with the publication of numerous empirical studies (Covin and Lumpkin, 2011; George, 2011; Miller, 2011; Kollmann and Stöckmann, 2012; De Clercq, Dimov and Thongpapanl, 2013; among others) and several meta-analyses (Rauch, Wiklund, Lumpkin and Frese, 2009; Rosenbusch, Rauch and Bausch, 2013). However, most of these studies have analysed the relationship between EO and firm performance. Rauch et al. (2009) verified that the correlation between EO and firm performance is robust in different cultural and geographical contexts, demanding new ideas and proposals on research about EO, deriving the regional development from the ability or capacity of local firms to obtain and generate greater incomes (Cornett, 2009).
Previous literature has highlighted the scarcity and need of new studies that empirically analyse the main determinants of EO, in order to understand its origin and development (Covin and Lumpkin, 2011; Wales, Gupta and Mousa, 2013) and specifically, the mechanisms that stimulate entrepreneurial behaviour in SMEs, paying special attention to the factors that can improve the ability of firms to innovate and generate local ventures that boost the region’s economy (Cornett, 2009). Entrepreneurial behaviour generate new jobs, intensifies competition in the region and increases productivity through changes, in short, increases the level of economic growth (Acs, 2006). However, there are few theoretical or empirical studies that have analysed the factors and conditions that generate and develop entrepreneurial behaviour in regional contexts. Thus, the current theory calls for new studies that analyse how the connection between internal and external factors determines the firm’s EO.
Currently, a key external factor to understand the firms’ strategic orientation is the dynamism of the environment with they face, which generates both opportunities and threats that determine the implementation of their strategy (Milliken 1987). However, the influence of these changes in the environment has on the strategic orientation will depend on the capabilities available in the firm (Teece, Pisano and Shuen, 1997). This shows the need to jointly analyse market dynamism as an external factor and the availability of internal capabilities to properly understand the EO process. Otherwise, the results would not be conclusive and would not progress in covering the gap detected in the literature. Among the different capacities of the firm, we consider that the ability to detect, assimilate and use external knowledge is an essential factor to deal adequately with the multiple changes that arise in the environment (Zhang and Wu, 2013). For this reason, in this paper, we propose to delve into EO antecedents, analysing the way in which the market dynamism and the firm’s absorptive capability interact to explain this strategic orientation, trying to fill this gap in the literature.
From the population-ecology view, environmental conditions are the main factor that determines a firm’s behaviour and performance (Hannan and Freeman, 1977) and acknowledges the important role of a firm’s resources and capabilities. We rely here on the population-ecology perspective, which indicates that firms tend to develop rapidly when their key capabilities are needed to survive and grow in the environmental conditions in which they operate (Brittain and Freeman, 1980). From this approach, we try to overcome the gap in the literature on the interaction of external and internal antecedents of the EO, as it is suggested by Kyrgidou and Spyropoulou (2013). Thus, we propose that it is the adequacy of firm’s specific capabilities to face and take advantage of a dynamic environment that will encourage the firm to develop an EO.
In the one hand, previous literature has identified several external factors that may affect the firm’s EO –hostility, munificence, heterogeneity, dynamism, life cycle of the industry, complexity- (Covin and Slevin, 1991; Morris and Kuratko, 2002; Aloulou and Fayolle, 2005; Wales et al., 2013; among others). Different studies have highlighted the interest in studying the relationship between environmental dynamism and EO, which has been addressed in a few studies (Lumpkin and Dess, 2001; Simsek, Heavey and Veiga, 2010). This is because inevitably, the strategic behaviour of a firm will be determined by the changes which it faces. Thus, Lumpkin and Dess (2001) emphasize the importance of dynamism because the changes produced in the environment –technological, marketing and competitive- generate difficulties in predicting the context to which the firm must face, but also new opportunities arising from EO. However, criticism has been directed at the integration of technological and market dynamism both in its measurement and conceptualization (Jaworski and Kohli, 1993), because technological and market changes do not necessarily occur simultaneously and can generate different effects (Rosenbuch et al., 2013). In this sense, it is important to analyse the effect of market dynamism, which refers to the rate of change in the preferences of products, in demand or the emergence of new customer segments (Jaworski and Kohli, 1983).
On the other hand, in recent decades it has been established the theoretical basis attributing to the resources and capabilities an essential support for the development and success of the firm’s entrepreneurial orientation (Lumpkin and Dess, 1996). As we highlight above, a key internal capability in order to predict and face with changes is the knowledge absorptive capacity. Thus, in order to recognize changes in the environment and take advantage of existing opportunities, firms must have the ability to acquire information, assimilate and exploit the knowledge developed (Jantunen, 2005). In this paper, we analyse the moderating role of the knowledge absorptive capacity, defined as the “the ability of a firm to recognise the value of new external information, assimilate it and apply it to commercial ends” (Cohen and Levinthal, 1990: 128). The development of this capacity reinforces, complements and focuses the knowledge base owned by the firm (Lane, Koka and Pathak, 2006), promoting the development of entrepreneurial orientation.
Following this approach, the main aim of this paper is to study how the absorptive capacity influences the relationship between market dynamism and firm’s EO. More specifically, we analyse the existence of a non-linear relationship between market dynamism and EO, deepening in the moderating role of knowledge absorptive capacity. Several studies suggest that the effect of high levels of market dynamism can generate a decrease in strategic certainty, increasing the difficulty to accurately plan future forecasts, mainly in local regional contexts where resources are insufficient to cope with changes in the environment. Therefore, the main contribution of our study is to demonstrate how the resources and capabilities possessed by small and medium firms on the agri-food industry can promote or prevent an entrepreneurial behaviour derived from the market dynamism perceived in the environment. Thus, dynamic contexts are more suitable to detect and pursue opportunities if the firm has the right capabilities, enabling it to obtain the appropriate knowledge and boosting its entrepreneurial orientation.
This paper is structured as follows. First, we explain the theory and derived hypotheses. Then, we describe the methodology used, followed by the results obtained. Finally, we present the discussion, conclusions and implications for theory and practice.
- THEORY AND HIPOTHESES.
- Entrepreneurial orientation: toward the antecedents.
The concept of EO is a widely accepted instrument for capturing a firm’s tendency toward entrepreneurship (Rauch et al., 2009). EO refers to the strategic process by which firms identify opportunities and implement entrepreneurial actions (Dess and Lumpkin, 2005), incorporating aspects such as planning, analysis, decision-making and a firm’s values and goals. Therefore, EO not only refers to the process of starting a new business or launching a new product, but also involves a continuous behaviour based on identifying and generating new opportunities to gain a sustainable competitive advantage over time (Wiklund and Shepherd, 2005).
From the works of Miller (1983) and Covin and Slevin (1989) three key aspects are highlighted that can define a firm’s EO –innovativeness, proactiveness and risk-taking- these factors making up the dimensions further explored in the literature of EO. Innovativeness is defined as the propensity or willingness of a firm to participate in supporting new ideas, creativity and experimentation of new products/services and developing creative technological leadership and R&D processes, which results in new products, services or technological processes (Lumpkin and Dess, 1996). Proactivity refers to a future perspective where firms try to develop new products or improvements on them, anticipating changes and opportunities that arise in the environment, promote changes in current tactics and detect future market trends (Hughes and Morgan, 2007). Finally, risk-taking is associated with the willingness of the firm to engage a higher level of resources in projects where the error cost can be very high or the results are uncertain (Wiklund and Shepherd, 2005). Without some degree of these factors, firms tend to avoid the development of new innovations and react conservatively to environmental changes (Hughes and Morgan, 2007).
Previous studies have shown unequivocally that EO leads firms to a better performance (Covin and Slevin, 1991; Lumpkin and Dess, 1996; Wiklund, 1999; Hughes and Morgan, 2007; Rauch et al., 2009). Thus, if more actors develop an entrepreneurial behaviour, it can lead to increased dynamism and economic growth (Uhlaner and Thurik, 2007). Therefore, entrepreneurship, innovation and economic growth are linked through the recognition and exploitation of opportunities in economic and social arenas. Thus, several authors have argued that entrepreneurial culture may affect aspects of economic performance or economic growth in general. Then, a society characterized by an entrepreneurial culture may lead to higher levels of entrepreneurship (Suddle et al. 2006), subsequently triggering a process of economic dynamism, resulting in economic growth (Carree and Thurik 2003).
However, in the literature there is a gap on the antecedents of a firm’s EO (Wiklund and Shepherd, 2003) that demands further studies to understand what factors are most important to develop an EO (Wales et al., 2013). Thus, there are few works that study the relationship between different types of variables in analysing a firm’s EO (De Clercq et al., 2013; Ruiz-Ortega et al., 2013). Those works that incorporate EO as a dependent variable focus on the direct effects of several environment characteristics or internal factors of firms (Covin and Slevin, 1991; Zahra, 1991; Sciascia et al., 2006). It is necessary, therefore, to examine how other variables less studied jointly, can modify the effect of environmental characteristics –market dynamism- on a firm’s EO.
2.2. Market dynamism and entrepreneurial orientation
Evolutionary Economy regards competition as a dynamic process in which firms try to adapt their strategies to market conditions and, at the same time, by means of their strategic decisions, to develop actions that allow them to influence environmental conditions (Nelson and Winter, 1982). Several studies have stated the influence of environmental conditions on the firms’ entrepreneurial orientation (Ruiz-Ortega et al., 2013). We agree with Milliken (1987), in that differing environmental conditions can spawn different threats and opportunities in the implementation of the strategy. Thus, behind the conceptualization of undifferentiated environmental dynamism there may be hidden important knowledge about the specific effects of each of the concepts that it traditionally has encompassed (Atuahene-Gima, Li and De Luca, 2006).
Market dynamism refers to the rate of change in the consumers’ preferences, the demand or the emergence of new segments of customers in the industry (Jaworski and Kohli, 1983). In environments with high market dynamism firms need faster changes in their products or services to stay competitive in the market (Cui, Griffith, Cavusgil and Dabic, 2006). These changes produce a decrease in the strategic certainty and pose more problems for accurately planning future forecasts (Sheth and Parvatiyar, 1992).
Several studies have shown that the environment affects firm’s EO and the firm’s performance (Covin and Slevin, 1991). Thus, market dynamism is a basic determinant of firm’s EO (Miller, 1983; Sciascia et al., 2006, Simsek et al., 2010; Ruiz-Ortega et al., 2013), in order to be more efficient and effective in the discovery and exploitation of emerging opportunities (Rauch et al., 2009). In this sense, the changing demands of customers require companies to focus on their creativity to continuously modify their products and services (Cui et al., 2006), in order to reduce uncertainty and maintain their competitiveness (Pérez-Luño, Wiklund and Cabrera, 2011). Thus, given a high market dynamism, firms will develop a greater EO to be able to exploit changes in customer demand and capture new niches in the market (Lumpkin and Dess, 2001). This entrepreneurial trend is particularly important to meet the changing needs of customers (Tsai and Yang, 2013). Moreover, market dynamism may lead companies to try to shape customer behaviours and needs rather than wait for customer initiative. In this way, if the company internally develops new ideas to offer new products or services that meet the latent needs of customers, they can form and increase their market demand in a dynamic environment (Pérez-Luño et al., 2011).
The previous arguments indicate a positive influence of market dynamism in EO. However, several studies suggest that this positive effect may decline with high levels of market dynamism, because in such situations the EO can be an excessively risky behaviour (Ritala, 2012). From this approach, an excessive dynamic marketcan generate a decrease in strategic certainty, increasing the difficulty to accurately plan future forecasts. Therefore, when time and speed are critical, the development of a solution to a new market need or preference may be too risky (Ritala, 2012). Then, firms can give up developing an EO and engaging with the demands and preferences of their current customers (Atuahene-Gima et al., 2006).
As we can check, the market dynamism can create both incentives as disincentives to develop an EO. Thus, the excessive dynamism of market generates high levels of risk and reduces the entrepreneurial behaviour. Conversely, very low levels of market dynamism do not create incentives to companies to be creative and develop new products. We expect that when the market dynamism is low or moderate, its positive effect on EO predominates over the negative effect, since the incentives predominate over the perceived risk. However, for high levels of market dynamism, when a certain threshold is exceeded, there begin to dominate their negative effects on the EO that are turning the relationship in decreasing.
In summary, we propose that a certain level of market dynamism promotes the EO. However, is decreased when the market dynamism comes to be too high. Therefore, we predict a curvilinear relationship -inverted U-shape- of the market dynamism and the EO, where an intermediate level of dynamism will be the optimum level to develop an EO.