Why does entrepreneurial orientation affect company performance?

• Published date: 01 December 2020
• Author: Arnis Sauka,Tālis J. Putniņš
• Date: 01 December 2020
• DOI: http://doi.org/10.1002/sej.1325

RESEARCH ARTICLE

Why does entrepreneurial orientation affect

company performance?

T

alis J. Putnin¸š

1,2

| Arnis Sauka

2

1

UTS Business School, University of

Technology Sydney, Sydney, New South

Wales, Australia

2

Stockholm School of Economics in Riga, Riga,

Latvia

Correspondence

T

alis J. Putnin¸š, UTS Business School, PO Box

123 Broadway, Sydney, NSW 2007, Australia.

Email: talis.putnins@uts.edu.au

Abstract

Research summary: To better understand why entrepre-

neurial orientation (EO) is positively associated with company

performance, we propose and test a reconceptualization

of how the components of EO (risk-taking, innovativeness,

proactiveness) combine in driving performance. Drawing

on financial economics theory, our conceptualization highlights

that all three components positively contribute to performance,

but in different ways. Risk-taking has a direct positive relation-

ship with performance, which can be understood through the

risk–return tradeoff that is central in financial economics the-

ory. The relationship between risk-taking and performance is

conditional on the level of innovativeness and thus innovative-

ness contributes to performance through its effect on the type

of risk-taking. Proactiveness contributes to performance

through its positive effect on the level of risk-taking.

Managerial summary: This study analyzes three key drivers

of company performance: risk-taking, innovativeness, and

proactiveness. We show that constructive risk-taking is the

central driver of company performance, mirroring the princi-

ple of risk and return in financial investment settings. Risk-

taking that is associated with innovation has a particularly

strong positive relationship with performance, consistent

with innovation being a driver of growth and profitability.

More proactive firms tend to take on more risk and thus

also perform better than less proactive firms.

KEYWORDS

conceptualization, entrepreneurial orientation, innovativeness,

performance, proactiveness, risk-taking

Received: 5 July 2016 Revised: 5 May 2019 Accepted: 8 May 2019 Published on: 27 August 2019

DOI: 10.1002/sej.1325

© 2019 Strategic Management Society

Strategic Entrepreneurship Journal. 2020;14:711–735. wileyonlinelibrary.com/journal/sej 711

1|INTRODUCTION

Entrepreneurial orientation (EO), which reflects inclinations of key players within a firm to take calculated risks, inno-

vate, and pursue proactive behaviors (e.g., Lumpkin & Dess, 1996; Miller, 1983), is among the most validated and

widely used constructs in the strategic entrepreneurship literature (e.g., Anderson, Kreiser, Kuratko, Hornsby, &

Eshima, 2015; Runyan, Ge, Dong, & Swinney, 2012). Our understanding of EO, its relationship with performance, the

factors that influence this relationship, and what constitutes EO, is rich, yet is constantly evolving. For example, Lin-

ton (2016) notes that in the period up to the end of 2010, 256 scholarly articles refer to EO (Covin & Lumpkin,

2011). Using the same search criteria, in the subsequent few years through to mid-2015, a further 360 new research

articles refer to EO.

The relationship between EO and firm performance has been widely studied (e.g., Gupta & Wales, 2017; Miller,

2011; Rauch, Wiklund, Lumpkin, & Frese, 2009). Many studies find that EO contributes to performance (e.g., Rauch

et al., 2009; Saeed, Yousafzai, & Engelen, 2014). This result has been found in a large number of different national

contexts (Semrau, Ambos, & Kraus, 2016) including countries other than the US and Western Europe, and using dif-

ferent operational definitions of EO and firm performance (Rauch et al., 2009; Wales, Gupta, & Mousa, 2013). There

are, however, studies that do not find a positive relationship between EO and performance, suggesting the EO-

performance relationship may be more complex than a universal linear relationship (e.g., Andersen, 2010; Hughes &

Morgan, 2007).

Despite the substantial research effort directed to EO, there are still important issues about EO and its rela-

tionship with performance that are not well understood. There is a lively debate in the literature about t hec on-

ceptualization of EO—whether it is a unidimensional construct in which the elements of EO ( risk-taking,

innovativeness, and proactiveness) together reflect a strategic orientati on towards entrepreneurship, or whether

it is a multidimensional construct in which each of the dimensions can play a unique role in driving firm perfor-

mance. Studies that adopt the multidimensional view tend to focus on the effects of one or two dimensions of

EO (e.g., Lumpkin & Dess, 1996; Walls & Dyer, 1996), independent effects of various EO dimensions on EO per-

formance (e.g., George & Marino, 2011; Kreiser, Marino, Kuratko, & Weaver, 2013), the unique effect s of the

dimensions in a particular industry (e.g., Hughes & Morgan, 2007), and nonlinearity between each of the dimen-

sions and performance (e.g., Kreiser et al., 2013).

Surprisingly little is known about how the dimensions of EO combine and interact in determining performance.

For example, are risk-taking, innovativeness, and proactiveness simply substitutes such that a lack of one can be

compensated by more of another? Or do they interact in such a way that a particular combination of the three con-

tributes to high performance? Do some dimensions have a direct impact on performance, while others affect perfor-

mance through their effects on the direct drivers?

Our paper aims to address the above questions. We analyze the interrelations between the dimensions of

EO and develop a model of how they interact in determining performance. We identify which dimensions are

direct drivers of performance, and which dimensions are related to performance through mediating and/or

moderating relationships with other dimensions of EO. Thus, our approach is inherently a configurational one,

in the spirit of much of the recent EO literature. However, it differs from the existing literature in that it looks

for a configurational model internally within the dimensions of EO rather than between EO and external fac-

tors. Following the call to return to the conceptual discussion of EO to further advance the field (Covin &

Lumpkin, 2011), we propose and test a reconceptualization of the EO-performance relationship, focusing on

the unique roles and interactions of risk-taking, innovativeness, and proactiveness. Our conceptualization

draws on financial economics theory, in particular how and why risk and uncertainty are related to investment

returns.

We propose that risk-taking has a direct positive relationship with performance, which can be understood

through the risk-return tradeoff that is central in financial economics theory. The basic intuition is that because less

712 PUTNIN¸ŠAND SAUKA