1

The inverted u-shaped relationship between entrepreneurial orientation and

SMEs performance in Egypt

Mohamed Ali Taha Shohaieb

Professor of Management, Faculty of Commerce, Cairo University

Hoda Alaa Helmy

Assistant lecturer, Faculty of Commerce, Cairo University

Abstract

Recent research suggest that the relationship between entrepreneurial orientation (EO)

and firm performance has a more complex effect than the previously stated. Accordingly, we

shed new light on this view through examining the non-linear effect of each EO individual

dimension (innovativeness, risk-taking and proactiveness) on firm performance in the context

of developing economy, Egypt "collectivist economy". Using survey data from 140 SMEs in

food industry sector, the results show that innovativeness and proactiveness have an inverted

U-shaped on firm performance, while the effect of risk-taking over performance is positive

and increasing overtime. The finding also drive managers not to pursue high levels of

innovativeness as well as applying proactive strategies with caution because of their

detrimental effect over firm performance after reaching the moderate level. Whereas, firms

should be encouraged to adopt risk-taking strategies, due to the dramatic positive effect of

rich business opportunities linked to risky strategies over business performance.

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Introduction

Several meta-analysis studies highlight the positive relationship between EO and firm

performance (Linton & Kask, 2017; Rauch, Wiklund, Lumpkin, & Frese, 2009; Saeed,

Yousafzai, & Engelen, 2014). Most of EO studies point out a direct linear effect of EO on

firm performance (Núñez-Pomar, Prado-Gascó, Añó Sanz, Crespo Hervás, & Calabuig

Moreno, 2016; William J Wales, Patel, Vinit, & Kreiser, 2013). However, oversimplifying of

the relationship between EO and firm performance could be considered an emerging issue

that can be questioned (Anderson & Eshima, 2013). Patel, Kohtamaki, Vinit, & Wincent,

(2015) highlight that increased variability in performance due to EO, hold that possessing

high levels of EO might lead to both wins and losses situation. Thus, this views challenge the

linearity of EO over firm performance as suggested by Wiklund & Shepherd (2005).

Firm's EO efforts are the internal firm capabilities that may improve the performance

of entrepreneurial firms in changing the environment (Lee, Lee, & Pennings, 2001). As

originally proposed by Miller (1983), entrepreneurial orientation (EO) is defined as the firm

strategic orientation that includes innovativeness, risk taking and proactiveness (Covin &

Slevin, 1989; Covin & Wales, 2011). Innovativeness refers to the “firm’s effort to find new

opportunities and novel solutions” (Dess & Lumpkin, 2005, p.150). Risk-taking is about

commitment of large resources to exploit opportunities or engaging in business activities with

unceratin outcome (Hean, Thi, & Ping, 2007). Proactiveness is a “forward-looking

perspective”, and it is the firm's ability to catch new opportunities (Dess & Lumpkin, 2005).

The EO literature has called for further research on the effect of individual EO

dimensions on firm performance (George, 2005), where each individual dimension might

hold variable effect with related outcome (Luu & Viet, 2018). Accordingly, there is a need to

identify and understand contingencies affecting the EO-firm performance (Engelen, Gupta,

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Strenger, & Brettel, 2015). Thus, a number of variables have been discussed in literature for

affecting and moderating the relationship between EO and firm performance: the role of

leader, characteristics of management teams, national culture, networks, strategic processes

(Covin, Green, & Slevin, 2006; Engelen, Flatten, Thalmann, & Brettel, 2014).

Rauch et al. (2009) call for future research to test the EO-performance relationship in

different culture contexts to understand whether this positive relationship between EO and

performance will be replicated or not. Miller (2011) underlines that EO tend to embrace other

discilpine as a way of connecting EO to theory, one attempt is to connect EO to Insitutional

theory. Accordingly, next section will explain institutional theory, its roots, history and its

link to EO. Previously, strategic management researcher treats institutions as background in

their own studies (Peng & Heath, 1996). On the other hand, it is proven that institutions

determine how firms struggle to formulate and implement strategies (Peng et al., 2009).

Bruton & Ahlstrom (2003, p.234) note that according to institution-based view, actions of

individuals are shaped by different environmental institutions, hence, it is important to

understand how different institutions affect EO and firm performance.

In this paper, the effect of national culture “part of informal institutions” is addressed.

Hofstede (1991, p.25) defines culture as: “collective programming of the mind which

distinguishes the members of one group or category to people from those of another”.

Cultural difference may be due to differences in regional, national, ethnic and organizational

levels as cited by (Tan, 2002). Informal institutions are viewed as unwritten rules that are

followed and that shape their behaviour in a systematic way (Estrin & Prevezer, 2011).

Culture can shape and direct behaviour, where what is considered appropriate and acceptable

at one place may be rejected in another place due to differences in culture (Altinay & Wang,

2011). The same is recognized in the difference between developed and developing

economies, where what is taken for granted in developed economies may be altered and

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changed when dealing with emerging economies (Bruton, Ahlstrom, & Obloj, 2008). Tan

(2002) and Bruton et al. (2010) highlight that influences and effects of culture over

organizations are mostly recognizable at the national level, accordingly, national culture

plays a major role in explaining the difference between countries. Differences in national

culture differences have an impact on shaping entrepreneurial beliefs: when the environment

is very supportive with a well-developed financial and legal system encourage would

encourage some EO dimensions and traits that are totally different from the less-developed

institutions (Tan, 2002). Hayton et al. (2002) realize that national culture that encourages

autonomy, need for achievement as well as self-efficacy, leads to high rate of start-up. This is

similar to the conclusion of Mueller & Thomas (2001) where the presence of supportive

culture may lead to high entrepreneurship rate, where the culture leads to the development of

the mind and character of entrepreneur. Bruton et al. (2008) conclude that entrepreneur tend

to act differently due to differences in culture and surrounding institutional environment.

The main objective of this paper is to study the effects of the individual dimensions of

EO on firm performance as being moderated by national culture, in the context of developing,

collectivist economies "Egypt". Compared to developed economies, developing, collectivist

economies offer a context with several unique characteristics. First, emerging economies

pose challenges over businesses to develop strategies to fit within the context in which they

operate (Xu & Meyer, 2013). Meyer & Peng (2016) highlight that the nature of rapidly

changing environment of emerging economies lead to an important contribution to business

research. Emerging economies compared to developed ones have “less sophisticated

institutional frameworks” with poorly enforced property rights as well as weak developed

capital markets (Estrin & Prevezer, 2011). Emerging economies environment are

characterized by diversity and instability, accordingly, this environment shapes phenomenon

under investigation (Meyer & Peng, 2016). Emerging economies are characterized by low-

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income and high growth potential which make them attractive to international business

research. They are characterized by more trends toward marketization, privatization and

intense regulations (Hoskisson, Eden, Lau, & Wright, 2000). However, literature fails to

provide an answer to the proposed question: ‘How do organizations play the new game when

the new rules are not completely known?’ (Peng, 2003, p. 283). Research on emerging

economies provide some insights and answers to this unresolved question (Meyer & Peng,

2005). Hence, institutional contexts of emerging economies attract the attention of scholars to

consider the effect of institutional environment that may constrain or enable the businesses

(Peng, 2003; Tatiana & Dacin, 2008).

Slevin & Terjesen (2011) highlight that from a contextual perspective, a large part of

EO research conducted on developed countries is ignoring the rest of the world’s countries,

although, according to Boston Consulting Group conducted in 2011, there are many rapidly

developing economies such as Egypt are left with limited academic research. However, Kiss

et al. (2012) and Wales, Gupta, & Mousa (2011) conclude that the least studied regions are

the middle-east and Africa, while the focus was on China, Russia, Poland and Taiwan.

Martens, Lacerda, Belfort, & Freitas (2016) highlight that future agenda on EO call for

studies that focus on emerging/ developing economies to understand differences in

entrepreneurial processes in different context. However, this future research confirm what

was suggested by Boso, Story, & Cadogan (2013) that EO models need to be explored more

in emerging contexts. All these data, figures and information reflect rationale behind

selecting Egypt to represent developing economy.

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Accordingly, The purpose of this paper is to investigate the non-linear relationship

between individual EO dimensions 'innovativeness, risk-taking and proactiveness' and SMEs

performance in Egypt in the developing, collectivist economy "Egypt". This study makes

several contributions to the literature. First, it is among the first studies to examine the non-

linear coplex relationship between individual dimension of EO and SMEs performance in the

context of a developing, collectivist economy. The findings of this study are important for

checking and changing the expectations about EO dimensions in the extant literature. In this

paper, we demonstrate that emerging/ developing economy with different cultural

envrionments, expectations about the effect of EO dimensions is not appropriate. This

research also offers implications for managers in developing economies for the appropriate

level of innovativeness, risk-taking and proactiveness that should be possessed by SMEs.

Theoretical background and hypotheses development

Several studies highlight the effect of EO in discovering in entrepreneurial

opportunities and achieving superior competitive advantage which will lead to high positive

performance (Li et al., 2009; Semrau et al., 2016). However, the meta-analysis of Rauch et al.

(2009) reveals that there is a variation in the relationship between EO and firm performance,

where some studies reported high positive correlation, while others find negative correlation

or even no correlation. Tang et al. (2008) propose whether too much EO will always lead to

positive performance and conclude that the relationship between EO and performance is

curvilinear. However, this finding contradicts with the finding of Wiklund (1999) where the

EO-performance relationship is positive and also increases over time so that investing more

in EO is worthy for the firm. Since the EO-performance relationship is context specific as

highlighted by Lumpkin & Dess (1996), the variation in the results of the effect of EO on

firm performance may be due to differences in institutions. However, recently, research

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highlights the notion of non-linearity or diminishing performance due to increase in EO in

certain context (J. Tang et al., 2008; Z. Tang & Tang, 2012; William J Wales et al., 2013).

To be able to understand the effect of national culture on the EO-SMEs performance

relationship, we employ three dimensions of Hofstede's work in 2001: uncertainty avoidance,

power distance and in group collectivism. Differences in national culture dimensions lead to

differences in the practices of firms, accordingly, differences in dimensions affect the

effectiveness of EO implementation (Engelen et al., 2014). Uncertainty avoidance refers to

the ability of people to deal with ambiguous, uncertain and unknown situations, power

distance refers to the degree to which individuals accept that power is unequally distributed,

finally, collectivism refers to the degree to which collective actions and collective distribution

of resources are appreciated (Hofstede, 2011). According to Hofstede dimensions, Egypt

scores low (25) in individualism which means that Egypt is a collectivist society favouring

working in teams, groups as well as building ties and connections with others. Also, Egypt

scores high on uncertainty avoidance (80) which means that Egyptians avoid situations with

high uncertainty and ambiguity. This score is similar to one in the 2010 GEM report, where

Egypt is considered risk-averse with 25.5% of the adult indicate that fear of failure may stop

them from starting their own business. Regarding the power distance, Egypt scores high (70)

as Egyptians understand and respect the hierarchal order where not all individuals in societies

are equal. Table (1) summarizes the index of Egypt in Hofstede’s dimensions of national

culture. The next part will explain the effect of individual EO dimenions on SMEs

performance taking into consideration the effect of national culture.

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Table 1:National Cultural dimensions of Egypt

Individualism Power

distance

Uncertainty

Avoidance

Egypt 38 80 68

Source: (Hofstede, 1980)

The relationship between innovativeness and SMEs performance

Innovativeness reflects the firm's ability to support new ideas and engage in

experimentation (Lumpkin & Dess, 2001). Hughes & Morgan (2007) report that

innovativeness can enhance the firm’s creative thinking which in turn will result in entering

new arenas. Lumpkin & Dess (1996) suggest that innovativeness does not mean only

explorative innovation but also an exploitative innovation, where the later means improving

efficieiency or reducing cost in order to be better than competitors. Innovativeness improves

the effecicency of market information that will enable firms to pursue exisitng opportunities

whether through developing a new product or modifying the existing one (Hurley & Hult,

1998). However, sometimes investing in innovation may cause problems including wasting

money as expenditures on R&D with no result and development of competitive climate that

may stimulate competitors to develop similar product and service (Dess & Lumpkin, 2005).

The introduction of new and innovative products can improve the firm's ability to

adapt to changing market conditions and environment, which is the case in Egypt 'developing

economies' (Hult, 2004). Cultural scores for Egypt belongs to high collectivism, and

uncertainty avoidance (Hofstede, 2011). Collectivism encourages mutual cooperation,

cordination and achievement of innovative behavior (Choi & Wu, 2009). Accordingly, SMEs

employing innovative efforts will be more likely to improve the overall performance in

collectivist economies (Luu & Viet, 2018). However, Tiessen (1997) reveals that collectivist

societies might hinder the firm's ability to develop new and breakthrough innovations.

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Collectivist countries are characterized by working in groups which may affect the adoption

of new techniques and innovations to minimize conflicts and problems within the group

(Brewer & Venaik, 2011). The conflicts between group members can lead to anxiety and

stress which may affect the performance of the group and firm (Engelen et al., 2014).

Furthermore, prior research also shows that cultures of high individualism (the opposite

situation of Egypt) are considered as supporters of entrepreneurship and innovation (Mueller

& Thomas, 2001; Shane, 1993). Egypt also scores high in uncertainty avoidance according to

Hofstede' index, which means that Egypt prefers structured situations to avoid uncrtainty and

ambiguity (Saeed et al., 2014). As innovativeness associated with introducing new ideas

involves some degree of risk, techniques and products, being characterized by high degree of

uncertainty avoidance entail less adoption of innovation within the firm (Van Everdingen &

Waarts, 2003). As adopting high degree of innovation may lead to reduction in performance,

therefore, we hypothesize the following hypotheses:

Hypothesis 1: Innovativeness has an inverted U-shaped association with firm

performance

The relationship between risk-taking and SMEs performance

Lumpkin & Dess (2001) refer to risk-taking as taking actions that have uncertain

outcomes. Therfore, risk-taking is considred an important dimension of EO in order to enable

firms to exploit different opportunities in the marketplace (Lumpkin & Dess, 1996). Dess &

Lumpkin (2005) argue that risk taking is not “gambling”, even though risk by nature involves

high degree of risk and uncertainty. It is a must for firms to grow to go through what is

uncertain. Although risk taking is one of the major characterestics of entrepreneurship,

empirical results show little support for the positive effect of risk taking on the performance,

and on the countrary, it may hinder the performance (Hughes & Morgan, 2007). Kollman &

Stockmann (2014) realize an inverted U-shaped relationship between risk taking and

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performance, however, this negative relationship may be due to firms investing their

resources in exploring opportunities rather than working on tradional business practices.

Egypt is characterized by high uncertainty avoidance reflecting the need to avoid risky,

uncertain situations and accordingly, accepting low level of risk-taking (Hofstede, 2011).

Managers in individualistics socieites tend to favor risky decisions as they are independent

and they may accept higher level of risks to improve themselves compared to managers in

collectivist societies (Kreiser, Marino, Dickson, & Weaver, 2010). However, Egypt is

characterized by a risk-averse culture, which impose large burden over firms to invest in

risky projects and decisions (Hattab, 2010). Luu & Viet (2018) highlight that in risk-averse

society, firms are rewarded with above average return to overcome and reduce the reluctance

of firms to invest in risky projects. Accordingly, the more risk-taking activities adopted by

the firm are, the more its firm performance will increase and this effect gets stronger with

higher level of risk-taking. Accordingly, we hypothsize that:

Hypothesis 2: Risk-taking has a positive association with firm performance that

increases with the increase in risk-taking.

The relationship between proactiveness and SMEs performance

Proactiveness is defined as “opportunity-seeking” behaviour characterized by

providing new products to the market before competitors (Soininen, Puumalainen, Sjogren, &

Pasi, 2012). Proactiveness can be viewed as the willingness to be superior than competitors

through proactive and aggressive strategies such as introducing products before competitors

and responding to future demand (Hean et al., 2007). Hughes & Morgan (2007) state that

responsiveness to customer’s needs as well as sensing market signals are the two main

advantages of proactiveness. However, Kollman & Stockmann (2014) report that

proactiveness is not only about first mover advantages but it requires a protection for this

first-mover as well as increasing customer loyalty through improving the efficiency and cost

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advantage. Morgan & Strong (2003, p.167) noted that: “proactiveness has been associated

with competitive superiority due to the ‘step- ahead’ tactics pursued and market leadership

characteristics exhibited by firms with this strategic behaviour.” Proactiveness is about

shaping and directing competition to the advantage of the firm.

Proactiveness is to be a leader rather than a follower, that is why proactiveness is

effective in creating competitive advantage because competitors always have to make

changes to cope with proactive firm (Dess & Lumpkin, 2005). However, research suggests

that uncertainty -avoidance societies may discourage firms from acting aggressively or even

over competing with other firms (Choi & Wu, 2009). The degree of uncertainty acceptance

level affects the level of interaction with the external environment which may increase the

ability of the firm to be the first mover in the market (Covin & Slevin, 1989). Accordingly, it

is suggested that there is a negative relationship between uncertainty avoidance and

proactiveness (Kreiser et al., 2010). Researchs on the relationship between individualism and

proactive behaviour reveals that firms in individualistic society may have limited access to

resources (Tiessen, 1997). Indeed, the access to scarce resources in Egypt is contingent upon

the control played by the government where there is a lack of disclosure of information as

well as misuse of resources (Farid, 2007). Accordingly, costs and uncertainty associated with

proactiveness may reduce benefits of being proactive and first mover in the market.

Therefore, we hypothesis that:

Hypothesis 3: Proactiveness has an inverted U-shaped association with firm

performance

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H1

H2

H3

Figure 1: Proposed research model

Data and methods

Measures

All items used in this research were adopted from existing tested measures with a

seven point likert scales with anchors; '1' indicates not at all; and '7' indicates to an extreme

extent. Table (2) represent constructs, measurement items and related reliability within the

used scale. EO is divided into three dimensions: innovativeness, risk-taking, proactiveness

(e.g. Covin and Slevin, 1989). Five items are used to measure the innovativeness while risk-

taking, proactiveness are measured by three items each (Boso et al., 2013). Firm

performance is measured through a mix between subjective and objective measures.

Respondents were asked to assess their own firm performance with regard to customer

satisfaction, market effectiveness and financial performance following Vorhies and Morgan

(2005), where each variable is measured using four items each (Engelen et al., 2015).

National culture is measured using indices as reflected in table (1), where some previous

studies depend on indices reflecting Hofstede’s dimensions of Culture (Hofstede, 1984). “The

Innovativeness

Risk-taking

Proactiveness

Firm Performance

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use of these measures is appropriate for four reasons: the measures were based on data from

53 countries representing both industrialized and developing nations; the measures were

derived using factor analysis; the measures represent separate discernible constructs; and

researchers have supported the validity of these measures through their correlation with the

indices of other researchers” (Marino et al., 2002).

Table 2: Constructs, measurement items and reliability tests

Construct Variables Method used to construct the

variables

Cronbach

alpha

Source

Entrepreneurial

Orientation EO

Innovativeness

– Our company is known as an

innovator among businesses in our

industry.

– We promote new, innovative

product/services in our company.

– Our company provides

leadership in developing new

products/services.

– Our company is constantly

experimenting with new

products/services.

– We have built a reputation for

being the best in our industry to

develop new methods and

technologies.

0.91 Boso et al.

(2013)

Risk Taking – Top managers of our company, in

general, tend to invest in high-risk

projects.

– This company shows a great deal

of tolerance for high risk projects.

– Our business strategy is

characterized by a strong tendency

to take risks.

0.93

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Proactivness – We seek to exploit anticipated

changes in our target market ahead

of our rivals.

– We seize initiatives whenever

possible in our target market

operations.

– We act opportunistically to shape

the business environment in which

we operate.

0.91

Firm

Performance

Customer

satisfaction

Market

Effectiveness

Financial

Performance

Please evaluate the performance of

your firm over the last three years

compared to your major

competitors in terms of:

- Increasing Customer Satisfaction

- Delivering value to your

customers

- Delivering what your customers

want

- Retaining valued customers

- Market share growth

- Growth in sales revenue

- Acquiring new customers

- Increasing sales to existing

customers.

- Profitability

- Return on investment (ROI)

- Return on sales (ROS)

- Reaching financial goals

Overall 0.88 (Engelen et al.,

2015)

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Research population, sample and data collection procedures

According to the Ministry of Finance report in 2005, there is no unified definition of

micro, small and medium enterprises being adopted in Egypt. The “Small Enterprise

Development Law” on May 29, 200- approved by the Egyptian parliament 4 - sets a

definition for micro (referred to as very small enterprises) and small enterprises in Egypt to

include any company with no more than 50 employees. According to the industrial

development authority, manufacturing firm SMEs are firms with less than 100 employees.

The research population was determined to include all food industry SMEs in Cairo,

Giza as well as 10th

of Ramadan and 6th

of October cities, where those areas represent the

main industrial areas within Egypt as shown in table (3). No research frame is available for

SMEs in Egypt due to the availability of different sources for SMEs categorization.

Accordingly, this research follows a non-probability sampling design, where the choice of the

subjects or firms to be included in the sample will follow judgmental sampling where it is

important to select and depend on special judging to exclude elementary businesses that will

not add any value for their impact of strategic orientation. Although, the judgemental

sampling affects the generalizability of the finding “not generalizable to the entire

population”, it is the most appropriate type of sampling to obtain information required from

people who only have needed facts and information (Cavana, Delahaye, & Sekaran, 2000).

The sampling unit involves owner and manager of SMEs as they represent the main

source of knowledge and information (Semrau et al., 2016), as well as they have clear and

full understanding of main business operations which may increase the accuracy of answers

(Hean et al., 2007). The data collection yielded responses from 140 SMEs in food industry

out of 170 questionnaires sent, yielding approximately 82% as a response rate.

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To control the common method bias, the study applied several procedural remedies:

respondents were assured a high level of confidentiality during data collection where no

implications for right or wrong answers; measurement items were constructed carefully to

avoid any item ambiguity or complexity; finally, data were collected from owners and

managers of SMEs (more than one respondent) within the same firm (Luu & Viet,

2018).Accordingly, common method bias is not likely to be a serious concern in our study.

Table (3) SMEs population by locations in Egypt

Cairo Giza 10th of

Ramadan

6th October Total

Food and

beverage

59 43 38 52 192

source: Industrial development authority 2016-2017

The questionnaire was developed in English in accordance with measures and data

required to test developed hypotheses and then translated into Arabic language. The

questionnaire was translated into Arabic first, then translated back to English to make sure

that all items and questions have the same meaning. Data was collected through a self-

administered questionnaire; a well-developed questionnaire provides accurate and useable

data that will support data analysis and results. The layout is a very important step in

designing the questionnaire, to guarantee that is attractive and not boring for respondent

(Gilham, 2000). The layout of the questionnaire is organized as follows: a) The questionnaire

starts with a brief introduction (cover page) that explains the aim of the research and the

importance of the respondent’s answers to the research to attract attention and ensure the

confidentiality of their answers. b) There is a logical order applied to avoid confusion, such

that sensitive or personal questions are kept at the end of the questionnaire. c) Questions are

organized in a table format with spaces for answers. d) Questions use simple, direct and

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familiar words. Questions are clear, brief and precise. Reverse-worded items are employed in

the questionnaire to reduce carelessness of the respondent and to reduce extreme respondent

bias (Woods, 2006).Two questions were reversed: one item in innovativeness ‘one dimension

of EO’ and another one in firm performance.

In line with the literature, different variables have been tested and recognized for control

variables (Boso et al., 2013; Kreiser et al., 2010; Kreiser and Davis, 2010; Semrau et al.,

2016; Tang and Tang, 2012; Wang and Altinay, 2012; Wiklund, 1999; Wiklund and

Shepherd, 2003). Three control variables are taken into consideration in this study. The first

control variable was firm size, where previous research has shown a relationship between

firm size and the ability of the firm to act strategically (Boso et al., 2013; Kollman &

Stockmann, 2014). The firm size was measured as the total number of employees within the

firm. Finally, the age, education and gender of the respondent were controlled, where

previous studies show direct relationship between the age of the respondent and the attitude

of decision maker within the firm (Kreiser et al., 2010) and the education represents the

amount of intellectual capital within the firm itself (Lechner & Gudmundsson, 2014).

Although, limited number of studies study the effect of gender , but it is proven that women

are more risk-averse than men (Lechner & Gudmundsson, 2014). Also, within SMEs context

women tend to have high EO compared to men (Runyan, Huddleston, & Swinney, 2006).

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Empirical results

Reliability and validity of measures

Table 4 shows composite reliability (CRs) and average variance extracted (AVE) to assess

the reliability and validity of scale measures used. The table shows good result for AVE

scores improving the validity of measures used, as all constructs are with AVE scores greater

than 0.50 (Garson, 2016). The composite reliability exceeded the acceptable range of 0.70,

reflecting acceptable reliability (Hair, Hult, Ringle, & Sarstedt, 2014).

Table 4: Reliability and validity test of measures

Composite reliability* AVE**

Innovativeness 0.745 0.548

Risk-taking 0.783 0.615

Proactiveness 0.851 0.610

SMEs performance 0.920 0.613

* sig at Composite Reliability > 0.7

** sig at AVE>0.50

Results

This study in order to test the developed hypotheses, an OLS-based hierarchical regression is

used. The hierarchal regression is used by entering the independent variables into the

equation by order, one set at a time to assess the prediction of the dependent variable after

controlling the previous variables (Pallant, 2011). In running the hierarchal regression, we

start by entering independent 1: innovativeness , then independent 2: risk-taking and finally

independent 3: proactiveness; we got in results three model whereas each model introduce

new independent variable. Results of Hierarchal regression are summarized in table 5, 6 and

7. According to table 5, the model is evaluated by checking R square; after the variables in

block 1 (innovativeness) have been entered, the overall model explains 11. Model 2, there is

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an increase in R square to 14.5 which means that by adding the second independent variable

risk-taking this account for 3.2% extra in R square (14.5-11.3). In model 3, where all

independent variables were added to the equation, the R square value increases to 23.4%

from 14.5% with a 8.9% changes in R square value.

Table 5: Model Summaryd

Model R R

Square Adjusted R

Square Std. Error of the

Estimate

Change Statistics

R Square Change

F Change df1 df2

Sig. F Change

1 .340a .113 .109 24.54728 .113 .532 1 137 .000

2 .358b .145 .143 25.54246 .032 3.441 1 136 .066

3 .396c .234 .160 27.54161 .089 1.432 1 135 .034

a. Predictors: (Constant), innovall

b. Predictors: (Constant), innovall, riskall

c. Predictors: (Constant), innovall, riskall, proaall

d. Dependent Variable: SMEsperfall

In table 6, the results show that the final model improves the ability to predict the outcome

variables. Where in model 1, the F-ratio is 12.532 with a p value (0.000), throughout model 2

and 3, both F-ration and p value are significantly as well with F-ratio equal to 21.991 and

35.809 respectively.

Table 6: ANOVAa

Model Sum of Squares df Mean Square F Sig.

1 Regression 823.159 1 411.159 12.532 .000b

Residual 13741.033 137 32.300

Total 138364.192 138

2 Regression 6874.172 2 1721.586 21.991 .000c

Residual 4023.020 136 17.294

Total 10897.172 138

3 Regression 1689.592 3 1623.531 35.809 .000d

Residual 7839.600 135 18.293

Total 9529.192 138

a. Dependent Variable: SMEsperfall

b. Predictors: (Constant), innovall

c. Predictors: (Constant), innovall, riskall

d. Predictors: (Constant), innovall, riskall, proaall

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Both innovativeness and proactiveness have a negative inverted U-shaped associations with

firm performance, where innovativeness-firm performance Beta= -0.17, t value= -2.08;

proactiveness- firm performance Beta= -0.10, t value= -2.70; accordingly, hypotheses 1 and 3

are supported. To examine the positive relationship between risk-yaking and firm

performance, results of hierarchal regression shows that risk-taking-firm performance is

positive and significant with Beta= 0.13, t value= 2.45, supporting hypotheses 2. For multi-

collinearity test, all values of VIFs are below 10 (ranging from 1.056 to 1.095), and tolerance

values are greater than 0.2 as shown below in table 7.

Table 7: Coefficient (main result of Hierarchal regression)

Model

Unstandardized

Coefficients

Standardized

Coefficients

T** Sig.***

Collinearity Statistics

B

Std.

Error Beta* Tolerance**** VIF*****

1 (Constant) 26.346 13.398 15.934 .000

innovall -6.053 3.073 -.062 1.990 .015 1.000 1.000

2 (Constant) 5.991 .439 13.659 .000

innovall -8.032 4.073 -.037 -.433 .011 .975 1.026

riskall 6.089 3.048 .159 1.855 .002 .975 1.026

3 (Constant) 43.319 21.517 12.231 .000

innovall -22.017 11.074 -.017 -2.081 .041 .947 1.056

riskall 6.076 3.049 .136 2.453 .012 .928 1.078

proaall -4.070 2.035 -.106 2.704 .023 .914 1.095

* The standardized b value (Beta) identify the sign of the relationship.

** T-value sig at > 1.96

*** P less than 0.05

**** greater than 0.20

***** less than 10

21

Conclusion

Analysis and discussion of results

The current study adds to the literature review by measuring how innovativeness,

risk-taking and proactiveness (the three dimensions of EO) have differential nonlinear effects

over firm performance by applying on SMEs in Egypt. Findings show that both

innovativeness and proactiveness improve firm performance to an extent, then their effects

tend to decline beyond certain point. In line with the existing literature, proactiveness and

innovativeness lead to positive impact over firm performance (Cho & Pucik, 2005; Gupta &

Wales, 2017; William J Wales et al., 2013). However, after a certain point investing too much

in both dimensions especially in the context of collectivist culture like the case in Egypt, too

much focus on innovativeness will impose obligations and constraints over firm which in turn

will reduce performance (Tiessen, 1997). For proactiveness, the limited availability of

resources due to government regulations and weak institutions in Egypt, will hinder the

ability of firms to be aggressive and leader in the market (Sheng, Zhou, & Julie Juan Li,

2011).

However, our study provide an extension to the existing literature by proving the diminishing

and declining effect of both innovativeness and proactiveness by moving from moderate to

high levels.

Although, previous studies report a negative relationship between risk-taking and firm

performance (Hughes & Morgan, 2007; Kreiser, Marino, Kuratko, & Weaver, 2013; J. Tang

et al., 2008). Egypt is characterized by high uncertainty avoidance, which means that a risk-

averse behaviour (Venaik & Brewer, 2010). However, as risk-averse would be compensated

with an above average return for investing in risky ideas and projects. Thus, risk-taking

activities lead to positive performance that increase over time, which contradict some

22

previous studies as the incremental increase in SMEs performance is larger at high levels of

risk-taking rather than at its low level.

Theoretical and managerial implications

The current study extend the literature of EO as mentioned in discussion section by

investigating the individual effect of EO dimensions on SMEs performance in developing,

collectivist economy "Egypt". The results shows that both innovativeness and proactivness by

moving from the moderate to high levels will lead to detrimental effect over SMEs

performance. On the other hand, risk taking leads to an incremental increase in SMEs

performance by moving to its high levels from its low level.

From the results of the effect of individual EO dimension on SMEs performance, a

number of managerial implications have been suggested. First, managers should understand

that innovativeness is an important dimension in EO, however, too much focus on

innovativeness will lead to decrease in firm performance. Second, managers in developing

economy should be caution when investing in proactive strategies, as too much investment in

proactive strategies will lead to decline in performance. Finally, in developing economies,

managers are encouraged to invest more in risky projects and strategies as opportunities

offered within these economies will lead to a dramatic increase in firm performance by

moving from low to high levels of risk.

Limitations and future research

The current research includes only three dimensions of EO (innovativeness, proactivness and

risk-taking) only, thus future research that include the other two dimensions of EO

(competitive aggressiveness and autonomy) to understand the effect of all dimensions of EO

on performance. The second limitation is the inclusion of some indicators to measure SMEs

performance (a mix of dimensions: customer satisfaction, market effectiveness and financial

performance), while previous literature shows other different dimensions used to measure

23

firm performance. The current research is based on data collected from food industry, where

only 140 questionnaires were collected due to time, money constraints. Thus, future research

should incorporate different industries to understand whether the degree of technology (high

tech VS low tech industries) have an impact over the EO-performance relationship.

24

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