POLISH JOURNAL OF MANAGEMENT STUDIES 2017

Rochdi D., Khatijah O., Muhammad A.S.A.H. Vol.15 No.1

MEDIATING ROLE OF THE INNOVATION EFFECTIVENESS

ON THE RELATIONSHIP BETWEEN ENTREPRENEURIAL
ORIENTATION AND THE SMEs PERFORMANCE IN ALGERIA
Rochdi D., Khatijah O., Muhammad A.S.A.H.*
Abstract: Entrepreneurial orientation is a crucial element for a firms success. Nonetheless,
most of the findings from previous studies provide the results of testing the direct effect of
entrepreneurial orientation on firm performance. Various factors have been used to
determine the relationship between entrepreneurial orientation and firm performance by
past studies. In this study, we contribute to the entrepreneurial orientation and firm
performance literature by proposing a wider perspective with intermediate step: type of
process innovation effectiveness. A quantitative approach and simple random sampling
through self-administered questionnaire was adopted to collect the data from SMEs sector
which consist of the SMEs owners, directors, and the general managers in Algeria. There
were 291 respondents who participated and 258 respondents were usable for further
analysis after the screening process. SPSS - 20 and Smart-PLS 2.0 were utilized to screen
and analyze the data. The results of data analysis showed that the entrepreneurial
orientation does not have significant direct effect on the firm performance. It means that
there is an intervening variable between entrepreneurial orientation and firm performance
namely process innovation effectiveness. Further, this study found that the process
innovation effectiveness mediates the relationship between entrepreneurial orientation and
the firm performance.
Key words: entrepreneurial orientation, firm performance, process innovation
effectiveness, SMEs, Algeria
DOI: 10.17512/pjms.2017.15.1.18
Article history:
Received January 9, 2017; Revised February 30, 2017; Accepted March 10, 2017

Introduction
In the current dynamic and competitive global environment, the small-and-
medium-sized enterprises (SMEs) in different countries play a key role in the
development of economies and have been the driver for economic development
and technological progress (Bruque and Moyano, 2007). The development of the
SMEs sector occupies top priority in developing countries (Davidsson, 2004; Gibb
and Ritchie, 1982). In a developing country like Algeria, the development of SMEs
sector is of great importance as SMEs assist the industry and support their large
counterparts. In this regard, the development of SMEs is the hope for large
industries as every large enterprise has started out, one way or another as an SME.

*
Debili Rochdi University Malaysia Terengganu, Malaysia; Omar Khatijah, Abi Sofian
Abdul Halim Muhammad, Senior Lecturer, University Malaysia Terengganu, Malaysia
Corresponding author: khatijah@umt.edu.my

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Entrepreneurship has long been acknowledged as a main driver behind the

productivity and development of firms (Aloulou and Fayolle, 2005) that results in
considerable advantages for the whole economy (van Praag and Versloot, 2007).
It has been a focus by several researchers and among them, Davidsson et al. (2002)
who stressed on the definition of the term entrepreneurship as various definitions
have been proposed.
With regards to the entrepreneurship concept, one that has come under scrutiny of
scholars is that of entrepreneurial orientation (EO), which refers to organizational-
level entrepreneurial activity (Covin and Slevin, 1991; Kreiser et al., 2002; Covin
and Lumpkin, 2011; Covin and Wales, 2012). Entrepreneurial orientation (EO)
basically describes how a new entry is undertaken and is a reflection of the
operation of the firm and as such, EO measure can be gained through the firm level
entrepreneurship (Stetz et al., 2000; Knight, 1997; Morris and Sexton, 1996).
Innovation refers to the successful use of new ideas (Myers and Marquis, 1969)
and two criteria have to be satisfied; novelty and use. Novelty is required as the
innovation practice actually uses the invention, the scientific discovery or new
production or management method, while utility is required as the inventory has to
be used or it has to be commercially successful. Outcomes from the innovation
include product and process innovations both of these outcomes are interrelated
(Utterback and Abernathy, 1975) and comprise a complex process involving the
entire functions of the company.
Prior findings from studies that examined the direct EO relationship with
performance display only a partial picture of performance (Lumpkin and Dess,
1996; Wiklund and Shepherd, 2005) as studies evidencing such relationship is
affected by firm size, national culture (Rauch et al., 2005) financial resource access
(Wiklund and Shepherd, 2005), network capability (Walter et al., 2005), and
strategic processes (Covin et al., 2006). In related studies Covin and Miles (1999),
Ireland and Webb (2007) and Schumpeter (1934) contended that entrepreneurial
actions directly impact product, process and administrative innovations while other
studies (e.g. Drucker, 1998; Ireland et al., 2005; Schumpeter, 1934) considered
innovation outcomes as antecedents of entrepreneurship - a relationship that needs
more validation and confirmation. To this end, EO maximizes firms proactiveness
and its inclination to take on risks and bring about innovation (Zahra et al., 1999).
In fact, innovation is a significant factor of firm performance that evolves from
a dynamically competitive market place (Newey and Zahra, 2009; Wheelwright
and Clark, 1992).

Research Framework and Hypothesis Development

The EO-performance relationship is among the most important subjects that have
been focused on by researchers. Majority of studies in this area consider firm
performance as a dependent variable and the firms entrepreneurship activities as
the independent variable. There is a strong agreement among researchers
concerning the final outcome of the entrepreneurial activities stem from

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the performance enhancement. According to some researchers, high level of

entrepreneurial orientation activities would be facilitating superior performance
(e.g. Wiklund and Shepherd, 2005; Wiklund, 1999; Pearce and Carland, 1996;
Zahra and Covin, 1995; Zahra, 1991). Based on the literature review that
mentioned before, the framework below was designed.

Process innovation
effectiveness
H2 = (+) H3 = (+)

Entrepreneurial Figure1. TheH1

research framework
= (+) FirmPerformance
orientation (EO)

Figure 1. The research framework

In the past literature, it is common to relate EO to firm performance (e.g. Zahra and
Covin, 1995; Wiklund, 1999; Jogaratnam et al., 1999; Madsen, 2007) but this
relationship may not be discernible (Dess et al., 1999) because empirical studies
demonstrate that the EO benefits may not show up until after the passing of many
years (Zahra and Covin, 1995; Madsen, 2007), and that the performance of the firm
directly hinges on different internal and external organizational conditions and
factors (Thoumrungroje and Tansuhaj, 2005). The modeling of EO-firm
performance relationship entails other dependent variables that are sensitive
towards EO.
Empirical studies have advocated that EO positively impacts firm performance
(Barrett and Weinstein, 1999; Runyan et al., 2006; Fairoz et al., 2010). To this end,
Wiklund (1999) stated that EOs impact upon performance is especially significant
among small firms as smaller sized firms have a tendency to be flexible and
innovative. Similarly, Covin and Slevin (1991) claimed that EO is related to
performance in the context of small firms within a hostile surrounding.
Hypothesis 1: There is a positive and significant relationship of Entrepreneurial
orientation (EO) on Firm performance.
Covin and Miles (1999), Ireland and Webb (2007), and Schumpeter (1934) claimed
that entrepreneurial actions directly impact product, process and administrative
innovations while Drucker (1998), Ireland, Reutzel and Webb (2005) and
Schumpeter (1934) evidenced innovation to be an indicator of entrepreneurship.
These mixed results call for further examination of the relationship. According to
Zahra et al. (1999), EO increases proactiveness and inclination towards risk taking
and innovation within a specific firm. Consequently, EO may be deemed to be
among the innovation performance antecedents (Baker and Sinkula, 2009; Renko
et al., 2009). Moreover, innovation is a significant factor in the performance of the

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firm brought about by the competitive dynamic environment (Newey and Zahra,
2009; Wheelwright and Clark, 1992). The significance of innovation for the
companys long-term outcome is extensively acknowledged in theory and practice.
As a result, innovation performance is deemed to directly impact the performance
of the firm (Baker and Sinkula, 2009; Renko et al., 2009; Wheelwright and Clark,
1992), and an accurate dependent variable of EO as opposed to firm performance
(Ireland et al., 2003).
Based on the prior sections, entrepreneurial orientation can be described as
processes, practices, philosophy, and activities of decision-making that motivates
the firm into taking up proactive innovation (Lumpkin and Dess, 2001; Wiklund
and Shepherd, 2005; Li et al., 2009). The significance of entrepreneurial
orientation to the life and performance of firms has been, time and again, brought
up in literature (Lumpkin and Dess, 2001b; Wiklund and Shepherd, 2005; Covin
and Slevin, 1991; Smart and Conant, 1994; Tambunan, 2007; Hughes and Morgan,
2007). Innovation is invaluable in the performance of the firm owing to the
dynamic competitive environment (Bueno and Ordonez, 2004) and innovation
performance has been reported to have a direct impact on the overall firm
performance (West and Iansiti, 2003; Brockman and Morgan, 2003). In a related
study, Ireland and Webb (2007) stated that entrepreneurial activities directly
impact product and process innovation. In other words, as EO increases, the
autonomy, competitive aggressiveness, proactiveness and willingness of the firm to
take risks and innovate also increase (Zahra et al., 1999; Lumpkin and Dess, 2001).
Innovation and EO are related to each other despite the fact that innovation has
been conceived as an indicator of both entrepreneurship and EO. Nevertheless,
only a few studies have been dedicated to analyze the relationship empirically.
Hypothesis 2: There is a positive and significant relationship of Entrepreneurial
orientation on Process innovation effectiveness.
Hypothesis 3: There is a positive and significant relationship between Process
innovation effectiveness and Firm performance.
Besides that, process innovation effectiveness is treated as a mediator in this study.
Thus, the hypothesis can be proposed as follows:
Hypothesis 4: Process innovation effectiveness mediates the relationship between
Entrepreneurial orientation and Firm performance.

Research Methodology
The population of the study encompasses the total number of SMEs in Algeria
(747, 934). A simple random sampling was used to select the respondents from the
list of MISMEP (2013). There were 500 questionnaires distributed to owners,
directors and managers of the small and medium enterprises (SMEs) located in
Algeria that had been selected randomly from the list of MISMEP (Krejcie and
Morgan, 1970; Hair et al., 2010). The researcher himself and a group of appointed
enumerators conducted the data collection through self-administered structured

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questions. From October 2014 to June 2015, only 291 questionnaires were
obtained. However, among the returned questionnaires, only 258 questionnaires
were usable for the analysis stage. To examine the model of the study, Partial Least
Squares Structural Equation Modeling (PLS-SEM) approach was employed
utilizing the Smart-PLS package 2.0.
The measures of the study were adapted from the past literature. The measurements
of Innovation performance is deemed to be a construct having three various
dimensions. Studies dedicated to the field of innovation have provided an overview
of process innovation effectiveness (Brown and Eisenhardt, 1995; Organization for
Economic Cooperation and Development OECD, 2013). Entrepreneurial
orientation was adapted from Covin and Slevin (1986; 1989) and Smart and Conant
(1994). Firm performance in the present study was specifically adapted from
Narver and Slater (1990) as well as Jaworski and Kohli (1993).

Research Results and Discussion

Table 1 shows the composite reliability values are between 0.677 to 0.935 which
exceed the pre-set value (0.7). Only I= 0.677 is less than 0.7 but still accepted
because AVEb =0.553 (Fornell and Larcker, 1981; Hair et al., 2010).

Table 1.Convergent validity analysis

Constructs Items Alpha R square CRa AVEb
A 0.870 0.693
C 0.858 0.669
Entrepreneurial orientation I 0.891 0.677 0.553
P 0.785 0.549
R 0.888 0.727

Firm performance FP 0.921 0.377 0.935 0.592

PS
Process innov. effectiveness 0.867 0.501 0.895 0.524
a: CR = ( factor loading)2 / {( factor loading)2) + (variance of error)}
b: AVE = (factor loading)2 / ( (factor loading)2 + (variance of error)}

The average variances extracted (AVE) values ranging from 0.524 to 0.727
illustrate a good level of construct validity related to the used measures. The
convergent validity of the remaining model is confirmed from these outcomes.
Particularly, the GoF value of this model was found to be 0.500 which is
considered large when compared to the baseline values suggested by Wetzels et al.,
(2009) (large =0.36, medium =0.25, small =0.1). The results showed that the model
goodness of fit measure based on the average variance explained is large which
indicates an adequate level of global.
As illustrated in Table 2, EO does not have significant effect on the Firm
Performance (=0.056, t= 0.948, p>0.05). Thus, H1 is rejected. Further, the results

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showed that EO has a positive and significant effect on Process innovation

effectiveness (=0.708, t= 18.481, p<0.001). Similarly, Process innovation
effectiveness has a positive and significant effect on the Firm performance
(=0.090, t= 1.287, p<0.001). Based on the results of hypothesis testing, two
hypotheses are accepted: H2 and H3. In addition, as H1 is rejected, thus, we
expect the variable of Process innovation effectiveness mediates in relationship of
EO on the Firm Performance.

Table 2 . The results of the hypothesis testing

Path Std. P
No Hyp T Value Decision
Coefficient Error Value
H1 EO -> FP - 0.056 0.059 - 0.948 0.344 Rejected
H2 EO -> PS 0.708 0.038 18.481 0.000 Accepted
H3 PS -> FP 0.090 0.124 1.287 0.000 Accepted
***:p<0.01;**:p<0.05

Testing the Mediating Role of Process Innovation Effectiveness

in Relationship of EO on the Firm Performance
To test the mediating effect of the Process innovation effectiveness on the
relationship between EO and firm performance, the PLS bootstrapping algorithm
was run to estimate the indirect effect among the variables. As illustrated in Table
3, the chi-square statistic for the model is significant, but other relevant fit indices
suggest a good overall fit (Tippins and Sohi, 2003). The mediating effect of
innovation performance on the relationship between EO and firm performance is
established due to the following conditions (Tippins and Sohi, 2003). First, there is
a positive relationship between EO and Process innovation effectiveness. Second,
there is a positive relationship between Process innovation effectiveness and firm
performance. And third, the direct effect of EO on firm performance is low and not
significant. These conditions provide compelling evidence for the full mediating
effect of Process innovation effectiveness on the relationship between EO and firm
performance and lend substantial support to H4. So, this mediation relationship
represents a significant contribution to our understanding of the positive influence
of EO on firm performance.

Table 3. Mediation analysis results

Path
Std.
Hyp Hyp Coefficient T Value P Value Decision
Error
(a*b)

H4 PS*OE -> FP 0.064 0.005 23.785 0.000 Accepted

Managerial Implication
Since the SMEs are among the most competitive sectors of the world economy
(Alegre and Chiva, 2013), it can be derived from this study that firms should put

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special emphasis on process innovation, as this type of innovation is found to be

important instrument for a firm to achieve sustainable competitive advantage.
Algerian SMEs owners or managers could establish and follow plans to improve
their firm innovation and organizational learning to develop and encourage
entrepreneurial environment in their organizations.

Conclusion
Although entrepreneurial orientation is usually considered to have a positive effect
on firm performance, this relationship requires a broader analysis of the
intermediate steps between entrepreneurial orientation and firm performance. The
results of this study suggest that entrepreneurial orientation enhances innovation
performance, which in turn enhances firm performance and process innovation
effectiveness plays as a mediating variable in relationship of entrepreneurial
orientation on the firm performance.
More importantly, this paper provides a more examination of the effects of
entrepreneurial orientation (EO) on firm performance and offers an explanation to
intraindustry differences in firm performance (Easterby-Smith and Prieto, 2008;
Nelson, 1991). Given that firm performance may vary among SMEs, we attempt to
understand this asymmetry within the context of managerial attitudes (EO),
innovation performance (Process innovation effectiveness). Results suggest that
competitive advantage in the SMEs industry requires firm strategies focusing on
entrepreneurial orientation and innovation. This finding represents a contribution to
the strategic management stream that seeks to explain differences in firm
performance within a particular industry. Furthermore, this study underlines the
importance of measuring the effects of entrepreneurial orientation on firms by
analyzing their innovation performance (Process innovation effectiveness).
Innovation is a key concept for firms today, as it represents.
For the future research, it could be of a great value if some other factors are to be
included to determine the SMEs performance. For example, Process innovation
effectiveness and Project innovation efficiency could be critical factors affecting
the level of performance. In addition, the size and sector of the business could be
an influential factor of the performance since small and medium businesses needs
of innovation are different from those of bigger businesses. The results of this
study are context specific. Although it is theoretically feasible to extend this study
to other contexts, the specific differences between Algerian SMEs and other
emerging economies restrict the generalizability of this studys findings. Therefore,
other useful extension could be applied for this study to be conducted in other
emerging countries.

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MEDIACYJNA ROLA EFEKTYWNOCI INNOWACYJNEJ POMIDZY
ORIENTACJ PRZEDSIBIORCZ I WYDAJNOCI
MP W ALGIERII
Streszczenie: Orientacja przedsibiorcza jest kluczowym elementem sukcesu firmy.
Niemniej jednak, wikszo wnioskw z dotychczasowych bada dostarcza wynikw
dotyczcych testowania bezporedniego wpywu orientacji przedsibiorczej na wydajno
firmy. W badaniach tych w celu okrelenia zalenoci midzy orientacj przedsibiorcz
a wydajnoci firmy wykorzystywano rne czynniki. Niniejsze opracowanie stanowi
przyczynek do literatury na temat orientacji przedsibiorczej i wydajnoci firmy,
proponujc szersz perspektyw z etapem porednim: rodzajem efektywnoci innowacji
w obrbie procesu. W celu zebrania danych z sektora MP, obejmujcych wacicieli,
dyrektorw i dyrektorw naczelnych MP w Algierii, przyjto podejcie ilociowe i proste
losowe pobieranie prbek przy wykorzystaniu samodzielnego kwestionariusza. W badaniu
wzio udzia 291 respondentw, po przegldzie, odpowiedzi 258 respondentw nadaway
si do dalszej analizy. Do przeszukiwania i analizy danych wykorzystane zostay programy
SPSS - 20 i Smart-PLS 2.0. Wyniki analizy danych wykazay, e orientacja przedsibiorcza
nie ma istotnego bezporedniego wpywu na wydajno przedsibiorstwa. Oznacza to, e
pomidzy orientacj przedsibiorcz a wydajnoci firmy istnieje interwencyjna zmienna,
zwana efektywnoci innowacji w obrbie procesu. Ponadto, niniejsze opracowanie
wykazao, e efektywno innowacji w obrbie procesu poredniczy w relacji midzy
orientacj przedsibiorcz a wydajnoci firmy.
Sowa kluczowe: orientacja przedsibiorcza, wydajno firmy, efektywno innowacji
w obrbie procesu, MP w Algierii

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