Acquisition of resources, formal organization and entrepreneurial orientation of new ventures
The Authors
Niu Fang, Business School, Nankai University, Tianjin, People's Republic of China
Zhang Yuli, Business School, Nankai University, Tianjin, People's Republic of China
Xue Hongzhi, Business School, Nankai University, Tianjin, People's Republic of China
Acknowledgements
This paper was sponsored by the National Natural Science Foundation of China (No. 70732004). Comments and suggestions from reviewers have been very helpful. The authors thank the China Association of SMEs and SMEs research center of Nankai University for providing the data, and also thank Mrs. Jun Wang for her translation work.
Abstract
Purpose – The purpose of this paper is to assess the impact of the acquisition of resources and formal organization on entrepreneurial orientation (EO) of new ventures.
Design/methodology/approach – The research was conducted using an original data set of 199 new ventures in China. The data were analyzed through regressing models.
Findings – It was found that new ventures experiencing difficulty in acquiring resources have higher levels of EO; formal organization is associated with the proactiveness dimension of EO significantly and positively.
Research limitations/implications – First, the measures of EO were mainly used to study established firms. The measures of EO may need to be modified to take into account new ventures' uniqueness. Second, this study focused on new ventures operating in a specific geographical region, China.
Practical implications – New ventures should build their formal management systems so that they can integrate as organic organizations to engage in entrepreneurial activities. New ventures lack regulations and their development mainly depends on entrepreneurs. The formal regulations can help new ventures better use and integrate the power of the whole organization systems to identify and explore external opportunities.
Originality/value – Research on EO has focused on established firms while the EO of new ventures is seldom studied. These findings indicate the uniqueness of new ventures and contribute to a better understanding of their behaviors.
Article Type:
Research paper
Keyword(s):
Entrepreneurialism; Business formation; Resource management; Organizational structures; Innovation; China.
Journal:
Journal of Chinese Entrepreneurship
Volume:
1
Number:
1
Year:
2009
pp:
40-52
Copyright ©
Emerald Group Publishing Limited
ISSN:
1756-1396
Introduction
Both new ventures and established firms often carry out entrepreneurial activities in pursuit of external opportunities to expand their business (Lumpkin and Dess, 1996). Entrepreneurial activities can help enterprises achieve good performance, while generating employment opportunities and creating wealth for the society.
Scholars have studied entrepreneurial activities from various perspectives. These studies develop the constructs of entrepreneurial activities, examine their impact on organizational performance, and identify the factors affecting entrepreneurial activities. Lumpkin and Dess (1996) provided constructs of entrepreneurial activities and linked them to performance. Zahra and Covin's (1995) research found that in the competitive environment, the enterprises stressing entrepreneurial activities could get good performance. Whereas this stream of research focused on entrepreneurial activities of established firms, those of new ventures are still lacking discussion.
New ventures are not a small version of established firms, their characteristics and behaviors have obvious uniqueness (Carroll, 1983; Freeman et al., 1983). Compared with established firms, new ventures lack legitimacy, find it hard to acquire resources, and face the “liability of newness.” These characteristics may make the entrepreneurial activities of new ventures different from the mature, established firms. Therefore, exploring the entrepreneurial orientation (EO) of new ventures will help identify the uniqueness of new ventures' entrepreneurial activities.
Meanwhile, studying the entrepreneurial activities of new ventures can help integrate the knowledge in entrepreneurship research. There are “accumulative fragments” in the entrepreneurship research (Harrison and Leitch, 1996). Entrepreneurship research focuses on two areas: individual entrepreneurship and corporate entrepreneurship, which are separate from each other. The former emphasizes the entrepreneur's characteristics and behaviors, while the latter analyzes the characteristics and behaviors of enterprises. New ventures as the result of individual entrepreneurship undertake the characteristics of individual. Their decision makings and behaviors are largely extensions of those of the founders (Mullins, 1996). New ventures also have some characteristics of established firms. New ventures build the organizational borders, establish certain regulations, and their organizational management are increasingly standardized. So the study of the entrepreneurial activities of new ventures can link the two fields of researches, and find the relationships/distinctions in entrepreneurial activities between new ventures and established firms.
This paper focuses on the entrepreneurial activities of new ventures, mainly investigates the effects of acquisition of resources and formal organization on the EO. This paper first analyzes the distinction between new ventures and established firms; and then proposes related hypotheses. Finally, hypotheses are tested and the results are discussed.
Entrepreneurial orientation
An EO refers to the processes, practices, and decision-making activities that lead to new entry (Lumpkin and Dess, 1996). EO is a concept different from entrepreneurship. Entrepreneurship refers to the creation of a new organization or new business, stresses the content, and answers the question of “what business should we enter?” EO focuses on the process and describes what we do in the process. Meanwhile, there are mutual ties between the two concepts – both entrepreneurship and EO include activities like innovation, searching for the opportunity and effectively utilizing resources.
Any enterprise is in the continuum between conservation and EO (Barringer and Bluedorn, 1999). The enterprises with strong EO appear to be innovative and willing to support new products (services), new technologies and new ideas. Miller (1983) thought the entrepreneurial enterprises had 3D named innovation, risk taking and proactiveness. Later scholars, based on the study of Miller (1983), provided more dimensions of EO. Lumpkin and Dess (1996) proposed that EO have five dimensions, including innovativeness, risk taking, proactiveness, autonomy and competitive aggressiveness (Table I).
EO results in high-organizational performance, by identifying external opportunities and developing new products and services. The changes in the environment provide opportunities for the enterprises. The factors, such as technological, social or market changes, are the main sources of entrepreneurial opportunities (Eckhardt and Shane, 2003). After studying 63 TVEs, Luo (1999) found the environmental dynamism was significant correlated with EO. Yusuf (2002) also found that uncertainty was significantly associated with EO.
Enterprises are different in identifying and using external opportunities, and also show significant differences in EO. Some scholars discussed the relationship between the organizational characteristics and the EO. The related organizational factors include organizational size, organizational structure, strategy, strategic decision-making process, enterprise resources and organizational culture (Guth and Ginsberg, 1990; Morris et al., 1994; Yusuf, 2002).
Characteristics of new ventures
New ventures, as the initial form of organizations, are the result and extension of individual entrepreneurship. With their growth, new ventures establish their regulations and gradually become established firms over time (Figure 1).
In the period of individual entrepreneurship, entrepreneurs connect with other business-related persons (for example, family members, and friends) mainly through social networks. Social networks provide resources, information and emotional supports for entrepreneurs. When the individual entrepreneurial activities develop to a certain stage, the entrepreneurs create new ventures by recruiting staff, purchasing equipments, and registering trademarks. New ventures are separated from environment and become independent systems identified and recognized by customers, suppliers, and governments. The establishment of new ventures proves the ability of entrepreneurs.
In new ventures, the economic relationships begin replacing the social relationships in the individual entrepreneurship period. New ventures are in continuous trial-and-error. By adjusting, the behavior patterns, regulations and corporate cultures take shape gradually. So the enterprises begin to integrate as a whole, and become relatively stable systems.
Although followed by established firms, new ventures are not the small version of established firms. New ventures have some attributes and characteristics of individual entrepreneurs. The transformation of new ventures to established firms is not a simple growth of organizations' attributes, but the process of re-establishing and composing organizations' attributes. Compared with established firms, new ventures have significant differences in resources, formal organization, decision-making modes and organizational goals, etc. (Table II).
New ventures are short of resources and still in the stage of acquiring resources (Stinchcombe, 1965). Established firms have accumulated a certain amount of human and physical resources during their long-term development. Meanwhile, because established firms have been known and understood by the external environment, they have built some channels to acquire resources. Owing to the lack of the legitimacy, new ventures find it difficult to acquire resources. In the channels of acquiring resources, new ventures still rely on the social networks established in the period of individual entrepreneurship. For example, the entrepreneur's family network can provide free staff and funds provided by relatives and friends are still important for new ventures. The study by Brüderl and Presisendörfer (1998) found that new ventures often overcome deficiency of resources by exploring the resources of their social networks.
New ventures are building their formal organization systems. New ventures emerge in the network constituted by various actors (such as customers, staff and suppliers), and the relationships between actors are changing (Larson and Starr, 1993). Compared with the established firms, new ventures are more dependent on the individual behaviors of entrepreneurs to regulate and shape the behaviors and development of enterprises. With the growth of new ventures, by means of constant trial and error, and learning, new ventures begin to set the business-related properties and fix organizational behavior patterns.
The behaviors and decision makings of new ventures are different from those of established firms. New ventures are more inclined to take risks and innovate than established firms. New ventures have some characteristics of entrepreneurs, their decisions and actions largely depend on the entrepreneurs (Mullins, 1996). Entrepreneurs have the traits of innovation and risk taking, which result in innovation and risk taking of new ventures.
Fast growth is the main objective of new ventures. Compared with established firms, new ventures have not yet become known by customers and community, and their survival faces challenges. For example, 24 percent of new ventures fail in their first two years after their establishment, and in six years, 63 percent of new ventures fail (Timmons, 1999). The rate of failure of new ventures is greater than that of established firms (Hannan and Freeman, 1984; Singh et al., 1986). To avoid failing, new ventures adopt fast growth as an important means by which to cope with the pressure of competition. If there is no growth, their survival will be seriously threatened (Buederal et al., 1992).
Hypothesis
By being different from established firms in decision-making patterns and organizational goals, entrepreneurial activities of new ventures may be unique and the factors affecting the EO may be different. Thus, the effect of acquisition of resources and formal organization on EO in new ventures may be different from established firms.
Acquisition of resource and entrepreneurial orientation
The behaviors of established firms have the characteristics of risk aversion and rational decision making. Entrepreneurial activities often involve high risks and uncertainties. Established firms usually determine their entrepreneurial activity based on available resources. The easier established firms can acquire resources, the stronger their EO.
Compared with established firms, the behaviors of new ventures have obvious uniqueness. The new ventures are the extension of individual entrepreneurs. Individual entrepreneurs do not identify and explore the opportunities based on their available resources (Davidsson and Honig, 2003). Therefore, the entrepreneurial activities of new ventures do not depend on acquisition of resources, but rely more on external opportunities. Meanwhile, new ventures are in the stage of acquiring resources. In order to achieve fast growth, new ventures' entrepreneurial activities can be used as a means to acquire resources. New ventures can provide new products or services by means of entrepreneurial activities, to gain the understanding of customers or community, leverage their legitimacy, and then acquire external resources on this basis. Therefore, the new ventures finding it more difficult to acquire resources are more inclined to undertake entrepreneurial activities:
H1. The new ventures with poorer acquisition of resources have higher level of EO.
Formal organization and entrepreneurial orientation
Established firms have stable organizational structures, standardized systems and their organizational regulations have been fixed. The strict management systems and the hierarchical structures of established firms often lead to inertia, bureaucracy, and poor information sharing, which impede innovation and entrepreneurial activity. Therefore, for established enterprises, formal organization is not conducive to the identification of entrepreneurial opportunities.
The impact of formal organization on entrepreneurial activities of new ventures is distinct from established firms. From system perspectives, new ventures are at the stage of building system structures. By being different from established firms, the organizational inertia and bureaucracy are not the key issues the new ventures need to overcome. Business management is the important issue for new ventures to address (Drucker, 2002). How to build an effective system to manage the enterprise is important for new ventures. Formal regulations can effectively shape the behavior patterns of staff, thus uniting them into an organic system. Formal organization can help enterprises better use and integrate the power of the whole organization systems to identify and explore the external opportunities for entrepreneurial activities:
H2. Formal organization can improve the EO of new ventures.
Research method and data collection
Measure scales
Scholars have developed dimensions of EO. The most commonly used dimensions are innovation, risk taking and proactiveness. Covin and Slevin (1989) proposed the measure scales of the 3D, comprising a total of nine items. Referring to Covin and Slevin (1989) and Li (2006), we develop the measures, as listed in Table III.
Resources include human resources, funds, equipments, and so on. The funds are the basis for new ventures to gain other resources. Manpower, equipment and other resources are dependent on the size of their funds. To some degree, the acquisition of funds determines the acquisition of other resources. So we mainly measure the acquisition of funds.
The items measuring formal organization include: the organization is an informal system; internal information could not be exchanged smoothly; the organizations have no strategies or long-term plans; the organizations lack regulations (Table IV).
Sample and description
Different studies use different criteria to distinguish new ventures and established firms. New ventures are often defined in term of ages. Some studies attribute enterprises set up less than eight years previously into new ventures (Biggadike, 1979; McDougall et al., 1994) while global entrepreneurship monitor (GEM) attribute the enterprises set up within the last three-and-a-half years into new ventures. This paper defines the enterprises set up five years ago or less as new ventures.
The data come from a survey of China's SMEs conducted by China Association of SMEs and SMEs Research Center of Nankai University in December 2007. There are 199 enterprises which have relatively complete data and are taken as the sample of this study.
The enterprises are small sized: only 21.61 percent of enterprises' sizes exceed 50 million Yuan; the employees are less than 100 in 54.27 percent of enterprises and only 10.56 percent of enterprises have more than 500 employees. In total, 78.89 percent of enterprises are owned privately. The enterprises established within last three years account for 85.38 percent of the total enterprises. As for sectors, the majority of the enterprises belong to the manufacturing sector, accounting for 56.78 percent of the total enterprises, and other sectors include wholesale, retail, construction, education, chemicals, telecommunications, finance, insurance, and so on.
Hypothesis testing and discussion
Validity and reliability
In the exploratory factor analysis (EFA) of EO dimensions, the loadings of the item Y
5 on two factors are both greater than 0.4. After removing item Y
5, EFA get two factors: proactiveness and innovation dimensions
The EFA of formal organization and acquisition of resources comprises two factors: acquisition of resources and formal organization. The loading of every item is greater than 0.7, the validity of measures is qualified.
Cronbach's α was used to test the reliability of the scales (Table V). All α of variables are greater than 0.65, which shows measures have good reliability.
Hypothesis testing
To avoid other factors' influence on the study, we choose the age, ownership, size and types of enterprises as control variables. State-owned enterprises and collective enterprises are Coded 1, private enterprise are Coded 2, and foreign investment ( joint ventures or wholly-owned) are Coded 3. Types of enterprises are divided into non-technology-intensive and technology-intensive. The technology-intensive ones are Coded 1 while non-technology-intensive ones are Coded 0.The sizes of enterprises are measured by their total assets in 2006.
We use hierarchical regression analysis to investigate, respectively, the relationships between the acquisition of resource, formal organization and EO. The results of regression are listed in Table VI.
Discussion
The regression coefficients between acquisition of resources and EO dimensions are −0.151 and −0.152, and are significant at the p<0.1 level. The empirical results show that acquisition of resource has a negative correlation with EO, that is, new ventures finding it more difficult to acquire resources have a stronger EO. H1 has been supported.
H1 reflects that new ventures' activities have uniqueness. Established firms usually make decisions based on the available resources. As for the new ventures, their decision-making patterns are extensions of individual entrepreneurs, having a strong spirit of risk taking and innovation. New ventures' entrepreneurial activities are not constrained by the available resources. This conclusion is consistent with Mullins' (1996) point of view.
The correlation coefficient between formal organization and innovation dimension is 0.061, which is not significant; the correlation coefficient between formal organization and proactiveness dimension is 0.239, significant at the p<0.05 level.
For established firms, in order to carry out effective innovation and entrepreneurship, they need to overcome the organizational rigidity and inertia. New ventures are still in the process of building their management systems. Formal organization can help new ventures integrate as organic systems and thus take action before their competitors.
The regression coefficient between formal organization and innovation is not significant, which shows that the influence of the formal organization on the innovation dimension is uncertain. The reasons for this uncertainty may include: formal organization is conducive to integrating an organization's abilities to innovate; but formal organization may also limit the flexibility, the key capability for quickly responding to external opportunities. Therefore, the effect of the new ventures' formal organization on innovation is not significant.
Conclusions
Different from other studies, this paper is mainly based on the uniqueness of new ventures to examine the relationships between the acquisition of resources, formal organization and EO. The empirical study finds that the relationships between acquisition of resources, formal organization and EO of new ventures are significantly different from those of established firms. For new ventures, the difficulty of acquiring resources has not prevented their entrepreneurial activities. On the contrary, new ventures, which find it more difficult to acquire resources, have stronger EO. At the same time, formal organization could promote proactiveness in the competition.
In this paper, the study reveals the uniqueness of new ventures' entrepreneurial activities. The research enriches the understanding and knowledge of new ventures' activities and decision-making modes. In practice, the study implies a “dilemma” for new ventures. New ventures need to integrate the entire enterprise as a whole by formal organization to take entrepreneurial activities. However, formal organization may also limit the organizational flexibility, which impedes quick response to the environment. Therefore, for new ventures, how to balance formal organization and organizational flexibility is the problem they need to solve, especially in a highly uncertain environment.
Limitations
This research has limitations that should be overcome in future research. First, our measures of EO come from previous measures and previously were mainly used to study the EO of established firms. For new ventures, their measures of EO may differ from those of established firms. So the mature measures used for studying established firms might need to be modified. Second, our study focused on new ventures operating in a specific geographical region, China. As such, results might not apply to organizations doing business in different economic conditions. Future research could replicate our study in other countries. However, gathering data is not an easy task. The researchers should be aware of the difficulties beforehand and find a suitable means to overcome these difficulties.
Future directions
Although, this paper finds some distinctions between new ventures and established firms, more systematic studies of new ventures' entrepreneurial activities are needed. Some interesting issues include:
- How do new ventures acquire and integrate resources for entrepreneurial activities? New ventures' entrepreneurial activities are not bound by the acquisition of resources. For new ventures, how to acquire the resources to support their entrepreneurial activities? Compared with the established firms, new ventures lack legitimacy. Therefore, the ways new ventures adopt to acquire resources may be different from established firms. Exploring how new ventures acquire resources could further clarify the uniqueness of new ventures, and provide some guidance for them to overcome the lack of resources.
- How do the entrepreneurial activities of new ventures evolve with their growth? In the growth of new ventures, organizational management and characteristics are all changing. To understand the evolution of new ventures' entrepreneurial activities, further studies are needed to apply a dynamic perspective and collect longitudinal data of new ventures.
- What is the relationship between the legitimacy and entrepreneurial activities of new ventures? New ventures lack legitimacy, so their growth is also a continuous process of seeking legitimacy. The empirical studies of Tornikoski and Newbert (2007) show that entrepreneur's initiatives benefit new ventures in acquiring legitimacy. Entrepreneurial activity, as new ventures' actively respond to the changes of environment, can provide new products and services. Therefore, EO may be favorable for new ventures to obtain legitimacy. However, the relationship between legitimacy and entrepreneurial activities still lacks researches, especially empirical study based on large samples.
Figure 1Change of entrepreneurship's agents
Table IDimensions of EO
Table IINew ventures' characteristics
Table IIIMeasures of EO dimensions
Table IVMeasures of acquisition of resource and formal organization
Table VTest of validity and reliability
Table VIRegression model
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Further Reading
Bird, B. (1992), "The operation of intentions in time: the emergence of the new venture", Entrepreneurship: Theory and Practice, Vol. 17 No.1, pp.11-20.
About the authors
Niu Fang is an Assistant Professor in the School of Business at Nankai University of China. He received his PhD from Peking University in China in 2007. His research focuses on entrepreneurship, organizational learning and social networks. Niu Fang is the corresponding author and can be contacted at: niufang1999@sina.com
Zhang Yuli is a Professor in the School of Business at Nankai University of China. He received his PhD from the same university. His current research interests include new venturing, entrepreneurship and strategic management. He is the author of many articles in scholarly journals, practitioner magazines, and books. His work has been funded by several grants from Government and Ministry of Education of China.
Xue Hongzhi is an Assistant Professor in the School of Business at Nankai University of China. He received his PhD from the same university in 2007. His research interests include knowledge management, corporate entrepreneurship, and innovation management.