The Moderating Effect of Environment on the Relationship Between Self-Efficacy And Entrepreneurial Orientation Among Malay SMEs in Manufacturing Industry
By
Rohani Mohda
Faculty of Business Management,
Universiti Teknologi MARA,
Malaysia
(60-0132069766, ),
Khulida Kirana Yahyab
College of Business,
Universiti Utara Malaysia,
Malaysia
(60-0134889190, ),
Badrul Hisham Kamaruddinc
Faculty of Business Management,
Universiti Teknologi MARA,
Malaysia
(60-0192198346, )
a Corresponding author
June 27-28, 2012
Cambridge, UK 2
The Moderating Effect of Environment on the Relationship Between Self-Efficacy And Entrepreneurial Orientation Among Malay SMEs in Manufacturing Industry
ABSTRACT
This study examined the effect of environment on the relationship between internal drive of Malay owner managers and their entrepreneurial orientation. The sample comprised of 162 Malay-owned small scale enterprises in the manufacturing industry, located the whole of Malaysia. We adopted the instruments of past studies and improved construct validity and reliability of these instruments by using Rasch Measurement Model. The moderated multiple regression analysis was employed to test the moderation effect of hostility. The findings indicated that the relationship between self efficacy and entrepreneurial orientation was not moderated by the environment. In other words, self efficacy was found to affect entrepreneurial orientation regardless of how good or bad the environment was perceived by the owner managers. This shows the important role of self-efficacy in making owner managers to be entrepreneurial or less. This explains why the Malay SMEs do not improve by as much as the incentives given to them by the government. Hence, the government needs to formulate strategies that could improve the self-efficacy of Malay owner managers. Only then would they have confidence with their entrepreneurial abilities to sustain good performance in the long run.
Key words: Environment, Self-efficacy, Entrepreneurial Orientations, Malay SMEs
Acknowledgement
We are greatly indebted to the Training Division of the Public Service Department of Malaysia, KPT for providing us the financial support throughout this study.
June 27-28, 2012
Cambridge, UK 2
INTRODUCTION
Research on whether entrepreneurs are more entrepreneurial than non-entrepreneurs are enormous. But research on what drives them to be entrepreneurial is not many. Rauch and Frese (2007) believe that entrepreneurs are driven by certain motivational forces before any behavior is chosen. However, this behavior is chosen based on certain circumstances (Bandura, 1989). For instance, entrepreneurs who have high internal motivation are found to show entrepreneurial behavior only under favorable environment. In fact, there are two conflicting views regarding the influence of environment on self-efficacy level which inturn affect business or entrepreneurial orientation. For instance, in the work of Shane et al. (2003), Green et al. (2008), Rauch and Frese (2007), they found that these owner managers whose motivation were high, became more entrepreneurial only in supportive environment. On the other hand, Bandura (1989) found that people with high self efficacy become more entrepreneurial when environment is hostile or less supportive. For this reason, based on the latter, this study was conducted to see if Bandura’s (1989) theory of self efficacy was true. Besides, there were other issues that stimulated the conduct of this study. This explained next.
First, although there are numerous Malaysian studies on examining the motivation to start business (Mansor & Che Mat., 2010; Mansor, 2005; S. Ali et al., 2004; M. Dali et al., 2009), studies on owner managers’ motivational drive to sustain business are limited. Past studies on motivational drives mainly emphasized on achievement motivation (McClelland, 1961, Shane et al, 2003). Unfortunately, self-efficacy, important motivational variable to explain behavior, has not been emphasized, particularly in Malaysia setting.
Second, the debate as to whether personological characteristics of SMEs (the dancer) are more important than the process of entrepreneurship (the dance) or vise-versa, would never end if these two were not integrated and investigated in a single study. Nevertheless, the findings of more recent studies (Chattopadhyay & Ghosh, 2008; Kumar, 2007; Baron, 2004; Gatner, 1988) suggest that it is critical to combine both approaches (personalogical characteristics and business environment) in order to understand entrepreneurial orientation and success. Hence, the need to incorporate business environment into the study of SMEs and entrepreneurship is important.
Third, although the literature suggests that business environment can moderate the relationship between entrepreneurial orientation and performance (Covin & Slevin, 1987; Zahra, 1996; Dess et al. 1997; Green, Covin and Slevin, 2008; Awang et al., 2010), very few studies (Chen et al., 1998; Andreas et al., 1999) have actually investigated the moderating effect of business environment in explaining the relationship between internal motivation and entrepreneurial orientation. Hence, empirical studies in this area are lacking. Moreover, many psychologists argue that the interaction between individual motivation and situational condition predicts behavior better than any one of them in isolation (Bandura, 1989). As reported by Rauch and Frese (2007), most research studies ignore potential mediating process and situational contingencies. Thus, this study is expected to fill this gap.
LITERATURE REVIEW
Self-efficacy
Self-efficacy (SE) is defined as an individual’s belief (or confidence) about his or her abilities to mobilize motivation, cognitive resources, and courses of action needed to successfully execute a specific task within a given context (Bandura, 1997; Stajkovic and Luthans, 1998). Other concepts similar to self-efficacy found by Mitchell and Daniels (2003) which have been used by other research scholars include personal agency belief, personal efficacy, capacity belief, and perceived competence.
Self-efficacy was seen as task-specific self-confidence by Shane et. al (2003). It was claimed by them to be a robust predictor of an individual’s performance in a task s/he is confident with. It was also believed to be an important variable that explains why people of equal ability perform differently. For example, an individual with high self-efficacy for a given task will exert more effort for a greater length of time, persist through set backs, set and accept higher goals, and develop better plans and strategies for the task.
A person with high self-efficacy is also believed to regard a negative feedback in a positive manner and use that feedback to improve his or her performance. These motivational attributes are described by Shane et. al. (2003) as important to the entrepreneurial process. This is because they believe that business situations are often ambiguous, so effort, persistence, and planning are important.
In fact, self-efficacy is a useful concept for explaining human behavior. According to Chen et al. (2004), self-efficacy plays an influential role in determining an individual's choice, level of effort, and perseverance. Simply stated, individuals with high self-efficacy for a certain task are more likely to pursue and then persist in that task compared to those who have low self-efficacy (Bandura, 1997).
According to Bandura (1994), people with strong sense of self-efficacy would: 1) view challenging problems as tasks to be mastered; 2) have deep interest in the activities that they participate; 3) form a strong sense of commitment in the activities; and 4) recover quickly from setbacks and disappointment. However, people with weak self-efficacy would: 1) avoid challenging tasks; 2) believe that difficult tasks and situations are beyond their capabilities; 3) focus on personal failings and negative outcomes; and 4) quickly lose confidence in personal abilities.
The above scenario gave an interpretation that self-efficacy plays significant role in entrepreneurial orientations. Entrepreneurs with strong self-efficacy would be stronger, showed strong behavior in difficult situation or weak environment. This scenario also signaled the moderation role of environment on the relationship between self-efficacy and entrepreneurial orientations.
Entrepreneurial orientation
Lumpkin and Dess (1996) refer to entrepreneurial orientation (EO) as process, practices, decision making activities that lead to new entry. They defined EO as a firm’s strategic orientation portraying entrepreneurial decision-making styles, methods and practices. Similarly, Burgelman (1983) described it to be closely linked to strategic management and strategic decision making process.
Factors influencing entrepreneurial orientation
As in Kotey and Meredith (1997), the three basic factors that influence strategic orientations of an organization that were identified by Thompson and Strickland (1993) were management, environmental variables and firm’s internal sources. The degree to which management and environmental variables influence entrepreneurial orientation has been debated by a number of research scholars. As stated by Montanari (1978) that the greater the influence of environmental variables the less will be the impact of management on entrepreneurial orientation. In dynamic and changing environments, SME owner managers are said to have the greatest influence on entrepreneurial orientation.
On the other hand, Porter (1991) argued that management would always have some influence on strategic orientations regardless of the impact of the environment. Porter explained that over time, managers can create and sustain competitive advantage by continuous innovation, improvement, and upgrading of resources. This seems to support Bandura’s self-efficacy theory in that an individual whose self efficacy is high would show stronger behavior in weak environment. The environment, which acts as a major influence on entrepreneurs have been widely discussed in the literature. The most recent evidence is the study of Morris and Schendihutte (2005) who found that entrepreneurs are more entrepreneurial in a supportive environment. However, this contradicted the theory of self efficacy.
Entrepreneurial orientation dimensions
Entrepreneurial orientation (EO) has been operationalised in a number of ways in the entrepreneurship literature. Drawing on a review of existing studies, Wiklund (1998:224), for example, provides some of the dimensions of entrepreneurial orientation, as follows:
“… points to a number of actions that can be regarded as entrepreneurial, i.e. the development of new products and markets, proactive behavior, risk-taking, the start-up of new organizations and the growth of an existing organization.”
On another perspective, scale development research on the EO construct (Lumpkin, 1996) revealed a set of five distinct dimensions:
1) Autonomy – the independent action of an individual or a team who generates an idea or vision and carrying it through to completion.
2) Innovativeness – a firm’s tendency to engage in and support new ideas, novelty, experimentation and creative process as these might result in the generation of new products, services, or technological processes.
3) Risk taking – incurring heavy debt or making large resource commitments as a result of seizing opportunities in the market place in the interest of high returns.
4) Proactiveness – taking initiatives by anticipating and pursuing new opportunities and by participating in emerging markets.
5) Competitive aggressiveness – a firm’s natural tendency to directly and intensely challenge its competitors to achieve entry or improve its current positioning to outperform industry rivals in the marketplace.
This study has excluded competitive aggressiveness from the five dimensions of entrepreneurial orientations identified by Lumpkin and Dess. Instead, this study employed only 4 dimensions of entrepreneurial orientations, namely autonomy; proactiveness; innovativeness; and risk taking. This is because proactiveness was believed to explain competitiveness (Covin & Slevin, 1989; Weaver et al., 2001; Okhomina, 2010).
As reported by Weaver et al. (2001), those dimensions have been adapted by numerous research scholars in the last 15 years like Zahra, 1998; Covin and Slevin, 1989; Dess, Lumpkin and Covin, 1997; Dickson and Weaver, 1997; and Crant, 2000. They are linked not only to personal values, but to other variables as well like strategy formation; marketing orientation; strategic alliance formation; environment; performance etc..
The measure of EO most commonly employed in studies by those mentioned scholars was developed by Covin and Slevin (1989). This scale which consists of three dimensions – innovation, proactiveness and risk taking, has been adopted by numerous studies (e.g., Dickson and Weaver, 1997; Naman and Slevin, 1993; Steensma, Marino, Weaver, and Dickson, 2000). Later, Lumpkin and Dess (1996) added two other dimensions, namely competitive aggressiveness, and autonomy.
With regards to the relationships among the dimensions, Miller (1983) and Covin and Slevin (1989) suggested EO as a unidimensional construct. These scholars insisted that the three dimensions be combined into a single scale. On the other hand, Lumpkin and Dess (1996), Lumpkin and Erdorgan (2004) and Kreiser et al. (2002) claimed that the dimensions of EO can vary independently of one another. This argument is based on the point that each dimension represents a different and independent aspect which might have responded to performance differently. Moreover, these scholars argued that some SMEs may be cautious and risk averse under one circumstance and risk taking in another. The works of Lumpkin and Dess (1997) and (1998), and Lumpkin and Erdogan (2004) provide theoretical support and empirical evidence that the dimensions of EO may vary independently. This study adopted Covin and Slevin’s (1989) view, but adopted Lumpkin and Dess’s (1996) construct which is widely accepted and simple that owner managers find it easier to respond or answer.
Business environment
Business environment is defined by George and Jones (2002) as the forces affecting the supply of resources surrounding an organization. Athey (1982) described it as the aggregate uncontrollable factors that have an influence on the effectiveness of a system. Studying the impact of business environment on SMEs is not easy and it takes a long period before an analysis can to be conducted unless if the environment is measured according to the perception of owner managers of SMEs (Green, Covin, Slevin, 2008). Subsequently, Green, Covin and Slevin (2008) operationally defined business environment as the environmental forces within which a firm carries out its primary business operation as perceived by a business owner or manager to be either munificent/hostility and dynamism. Munificent environment is described as low hostility environment.
In relation to the above, this study was conducted in order to understand the effect of environment on entrepreneurial orientation. Naffziger et al. (1994) claimed that since an entrepreneur creates a firm to exist and competes in a business environment, whether on a local, regional, or national basis, an examination of the relevant environment should be part of the decision-making process. They highlighted several factors in the business environment that may influence one to undertake a new venture: societal attitude towards starting a business, societal attitude towards business in general, the economic climate of the market, and the availability of accessible funds. A combination of these factors was referred to as supportive environment by Okhomina (2010) and munificent environment or benign by Green, Covin and Slevin (2008). These scholars believe that these two environments play a role in developing or nurturing of entrepreneurial behavior and activities.