NEXUS BETWEEN INFORMAL NETWORKS AND RISK-TAKING: IMPLICATIONS FOR IMPROVING THE PERFORMANCE OF SMALL AND MEDIUM ENTERPRISES (SMES) IN NIGERIA.

Author:Lawal, Fatai Alani
Position:Report - Abstract
 
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INTRODUCTION

SMEs perform crucial role and are adjudged to be one of the major driving forces in the socio-economic development of both developed and developing modern economies (Turyakira & Mbidde, 2015). It has being a long-standing believe in entrepreneurial, managerial and economics literature that membership of a network is beneficial to entrepreneurial firms (including SMEs), assisting small firms in the acquisition of information and advice (Birley, 1985). Today's market conditions are also compelling businesses to adapt to changes in order to survive, grow and be competitive. Such changes include interpersonal and inter- business cooperation and networks, which provide room for innovation and competition in a dynamic environment.

In the pursuit of innovation, venturing efforts and strategic renewal as component of SMEs growth strategies, SME managers may trail the risk-taking path by forming decisions and taking actions in the circumstance of uncertainty as well as effecting substantial resource commitments without being privy to the consequences of their decisions/behaviors (Schott & Jesen, 2016). In developed and transition economies, Wang & Poutziouris (2010) noted that risk taking, as a firm-level strategic orientation, constitutes a potential source of competitive advantage with positive and long-term effect on growth and financial performance of SMEs. According to Lin & Lin (2016) networking can sustain performance of SMEs through a number of avenues including the reduction in the cost of transactions, supplying resources in a more flexible manner and at reduced cost, facilitating the flow of knowledge and technological improvements (Vanhaverbeke et al., 2009).

A number of research approaches have provided insight into networks and networking dimensions of entrepreneurs and the small firm as well as entrepreneurial orientations. The diversity of research approaches include risk taking and performance of firms on Nigeria Stock Exchange (Olaniyan et al., 2016), risk taking in agro-processing SMEs (Wambugu et al., 2015), entrepreneurial orientation and network ties (Gunawan, Jacob & Duysters, 2013) and entrepreneurial orientation and performance with social networking moderating (Kiprotick et al., 2015). These studies examined the influence of risk taking propensity on performance on one hand and informal networks on the other hand in isolated contextual situation without considering the institutional framework that take cognizance of the informal structures and risk-taking propensity. Our paper contributes to the literature on SMEs and entrepreneurial orientation by integrating studies that stress the significance of entrepreneurs' networks (particularly informal networks) and those that emphasize the importance of risk-taking dimension of entrepreneurial orientation, under the theoretical canopy of the resource based view. To the best of our knowledge, this is the first work that examines the role of risk-taking and informal networks in relation to the performance of SMEs in developing settings like Nigeria. Thus, objectives of the study are as follows: (1) to examine the effects of risk-taking on SMEs performance; (2) to investigate the influence of informal networks on SMEs performance.

LITERATURE REVIEW

Theoretical Literature

Jack (2010) considers network research in entrepreneurship from the standpoint of Resource-Based Theory. This examines how a number of tangible and intangible resources (derivable from business and social relations of entrepreneurs) foster new venture formation and growth. Within this perspective, successive growth and survival of new business is achieved through utilizing both internal resources as well building external contacts (Lechner & Dowling, 2003). The large bundle of resources that networks produce can increase the ability of the firm to generate new blends of knowledge, thereby boosting its competitive advantage (Wernerfelt, 1984).

Networks afford SMEs access to external resources and enable the creation and exploitation of social capital which in itself is considered as a source of competitive advantage (Barney, 1991). Intangible capabilities and resources connected with social capital, business model design and innovation are valuable to SME performance (Peteraf & Barney, 2003). Thus they attributed performance differences between competing firms to differences in their resources endowment. The intangible resources and the business processes that exploit them are less imitable and provide the basis for more competitive advantage (Ray et al., 2004).

Conceptualizing Risk Taking Propensity

Risk taking propensity refers to the predisposition of an individual to exhibit risk avoidance or risk acceptance when confronted with risky situations. Historically, entrepreneurship is linked with risk taking and entrepreneurs are portrayed as having a high penchant to take risk than others (Littunen, 2000). The concept of risk-taking has been long associated with entrepreneurship as evidenced in the definition of entrepreneurship which focuses on the willingness by entrepreneurs to be involved in calculated business risks (Leko-Simic & Horvat, 2006). These authors argue further that risk taking propensity, though a reasonably stable characteristic can be altered through experience.

Kiprotich et al. (2015) conceptualize risk taking propensity as an individual characteristic with a predisposition to take or avoid risks. Panzano & Billings (2005) asserted that the existence of positive relationship between risk propensity and risky decision-making by individuals is anticipated to translate to organizations through top management teams. Risk propensity (or affinity for risk taking) incorporates an inclination to allocate considerable resources to opportunities with a moderate chance of costly failure and an eagerness to dissociate from pessimistic disposition (Wiklund & Shepherd, 2005). Risk-taking propensity could in essence be effectively conceptualized as an individuals' orientation toward taking chances in any decision-making circumstance.

According to Dess & Lumpkin (2005), the aspect of risk taking in entrepreneurial orientation involves calculated and manageable risks so as to actualize benefits, rather than taking hazardous risks which have adverse effect on firm performance. Risk taking is reliant upon risk perception and risk propensity. Risk perception is considered to be the perceived degree of risk inherent in a certain situation. The higher the risk propensity, the lower the concern over risk or risk taking (Olaniran, Namusonge & Muturi, 2016). The individual risk aversion tendency is decisive in determining entrepreneurial success. Tolerance for a fair degree of risk is more internal than external and the willingness to assume some element of risk is an important variable that determines success of small business owners.

In seizing advantage of opportunities in the marketplace, risk-taking involves firms' inclination to assume courageous acts such assigning a tangible amount of resources to ventures with doubtful outcomes, venturing into unfamiliar markets, as well as the proclivity to borrow heavily with the anticipation of reaping high returns (Dess, Lumpkin & Eisner, 2007; Entebang, Harrison & Ernest, 2010). Consequently, managers and organizations are confronted with three types of risk, vis-a-vis: (i) business risk-taking involving venturing into the unknown without being sure about the probability of success, (ii) financial risk-taking, a situation when a company needs to borrow heavily or commit a large portion of its resources in order to grow and (iii) personal risk-taking, encompassing the risks that an executive assumes in taking a stand in favor of a strategic course of action. Wendestam (2008) viewed the total risk management in business from three perspectives: (1) the strategic perspective that lay emphasis on risks from the strategic goals of the business which includes risks associated with new innovations and launching a new product in a new market, (2) the tactical risk management that focuses on the tactical decisions of the venture and takes ownership for handling risks connected with the yearly planning and (3) the operational risk management which concerns the day-in-day-out operations of the business.

From market perspective, Olaniran et al. (2016) identified three types of risks, namely:

  1. Market or social risk: the risk which matures when a market decline thereby squashing the performance of investments even when the quality of the investments remain the same.

  2. Monetary risk-associated with the resultant effect of inflation. In this scenario, inflation reduces the purchasing power of money, thus causing firms to consume more money in the production and distribution of products and services and consequently affecting the profit level...

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