ENTREPRENEURIAL ORIENTATION AND ORGANIZATIONAL

LEARNING ON SMES’ INNOVATION

Karen Yuan Wang*, Antoine Hermens, Kai-Ping Huang and John Chelliah
Management Discipline Group, University of Technology, Sydney, Australia
* (corresponding author) karen.yuan.wang@uts.edu.au

Abstract

Entrepreneurial orientation (EO) is a driver of firms’ innovation. The phenomenon of EO as a

prerequisite for innovation has become a central focus of corporate entrepreneurship literature.
Despite an abundance of research suggesting that innovation capability contributes to SMEs’
performance, little is known how dimensions of EO specifically influence SMEs’ innovation.
Furthermore, although prior research has examined various factors that influence the EO–
innovation relationship, few studies have address views how organizational learning influences
the EO-innovation relationship in the SMEs context. Based on the literature review, our study
attempts to fill this gap by postulating that entrepreneurial innovativeness, proactiveness and
risk-taking are related to SMEs’ innovation and that organizational learning positively moderates
the EO–innovation relationships.

Keywords: Entrepreneurial orientation, organizational learning, innovation, SMEs

Introduction Unlike large companies, the relatively smaller

size of SME’s allows them to react to market
Due to the vital role which SMEs play in changes expeditiously through innovative
economies and technological development, initiatives. SMEs have the potential to be able
issues of SMEs’ innovation are increasingly to facilitate innovative activities with proper
explored in the SME literature (Mueller et al., strategies (Prajogo & McDermott 2014; Tang
2013). The dimensions of entrepreneurial & Hull, 2012). To survive in today’s competi-
orientation include innovativeness, risktaking tive business environment, enterprises need to
and proactiveness behaviors. These key initiate new products and services; and sus-
elements represent a directional approach for tain their competitiveness through innovation
a firm’s inclination to connect entrepreneurial (Kreiser et al., 2010). Constrained by limited
actions with its growth. SMEs generally face firm resources, SMEs’ growth depends on
with the significant resource constraint. their ability to adopt right strategies for

The International Journal of Organizational Innovation Vol 7 Num 4 April 2015 71

innovation (Mbizi et al., 2013; Mazzarol et al., Literature Review and Development of
2014). Despite an abundance of research Proposition
suggesting that innovation contributes to
SMEs’ performance, little is known regarding Entrepreneurial Innovativeness and SMEs’
the extent to which salient dimensions of EO Innovation
may influence SMEs’ innovation outcomes.
With respect to entrepreneurial orien-
Entrepreneurship is best studied tation, innovativeness is defined as the
through the understanding of its key elements capabilities and intention to initiate new
such as originality, proactiveness and daring products and services. Mbizi et al. (2013)
attitudes. Organizational learning strengthens define innovativeness of firms and individual
the impact of the entrepreneurial orientation employees as their capability to harness
on firms’ positive forces of growth, especially creativity and to execute that creativity in the
on SMEs innovation. Strategic management face of challenges during the course of
of SMEs through organizational learning can improving processes, procedures and products.
lead to improved and mobilized intellectual As outlined in the definition, innovativeness
resources for effective innovation. is crucial for a firm for upgrading or radical
changes on existing products and services.
Prior research suggests that organi- For some researchers, upgrading and innovat-
zational learning influences firms’ innovation iveness are different aspects of business
performance (Alegre & Chiva, 2013). development. For example, Kaplinsky and
Innovation can be seen as the result of an Morris (2003) consider innovation as the
organizational learning process which directs process through which a firm ensures that the
firms toward effectiveness, efficiency or product and processes in use are subjected to
breakthrough outcomes. Organizational continuous improvement. Upgrading can also
learning is a dynamic process which enables be equated as innovation only when it is
firms to adapt quickly to the environment present in a relevant context. Giuliani et al.
with advanced technologies and knowledge (2003) alternatively describe upgrading as a
reflecting marketing changes. This process function of innovativeness that is used to
includes the application of new knowledge increase value to the firm or brand, often
and skills with innovative approaches. How- achieved by entering new markets, sectors
ever, few studies have expressly examined and niches and generating new
how organizational learning influences the product/service functions.
EO-innovation relationship in the SMEs
context. This study attempts to fill these Our study argues that decision to go for
research gaps by postulating that entrepren- innovation is often based on entrepreneurial
eurial innovativeness, entrepreneurial innovativeness of SMEs, although these firms
proactiveness and entrepreneurial risk-taking often calculate factors that bring about the
are positively related SMEs’ innovation. variation in products, services and processes.
Organizational learning, in turn, positively Four different directions those are available to
moderates EO–innovation relationship. This firms to follow for innovativeness, including
paper proceeds by first elaborating theoretical process, product, chain or functional upgrad-
arguments and developing hypotheses. We ing (Kaplinsky & Morris, 2003). Humphrey
then proceed with a discussion of the and Schmitz (2003) argue that these cate-
implication and conclusion. gories are important contributions to the
international debate over on innovativeness

The International Journal of Organizational Innovation Vol 7 Num 4 April 2015 72

and have gained recognition in the inter- entrepreneurial orientation is driven by a
national sphere rapidly. Researchers have thrust to innovate at each and every step of
believed that technological innovation is the work. It has positive effect on not only the
equivalent to up-gradation within a firm. In market performance but also on the brand’s
this context, Habaradas (2008), for example, long term reputation helping firms to retain
suggests that technological innovativeness in customers after the initial product break-
a firm consists of many steps, such as techno- through. Out of this discussion the following
logical, scientific and commercial steps. proposition emerges:
SMEs with high entrepreneurial innovative-
ness will invest with organizational and Proposition 1: Entrepreneurial Innova-
financial resources in each of these steps tiveness is positively related to SMEs’
leading the firm to being innovative. The Innovation.
most important activities involved in these
steps are critical for actual delivery on Entrepreneurial Risk-taking and SMEs’
research and development, training of staff, Innovation
setting up of tooling, sales and marketing
which eventually contribute to innovation in Entrepreneurial risk taking is another
SMEs. key dimension of entrepreneurial orientation
which is embedded on SMEs’ operational
Innovation can be described as creative activities substantially. Risk taking is a com-
application of traits held suitable in action to bination of bold intension and activities that a
business development (Lyons et al., 2007). It firm takes to improve its business returns and
would therefore be safe to say that innova effectively increase the growth. These oper-
tiveness is the process of generating original ations include venturing into unknown
concepts by using methodologies that are markets, investments in ventures that have
generally used to place creative ideas in uncertain outcomes and borrowing large
action. Roberts (1999) proves a direct correl- quantities from the market (Baker & Sinkula,
ation between innovation and profitability 2009). Risk taking can be defined as manage-
(Lyons et al., 2007). It has been demonstrated ment’s willingness to obligate significant
that the early and fast introduction of inno- resources to seek out opportunities that have
vation in the enterprise brings in highest both a chance of failure and the opportunity
possible market returns since the firm for success (Eggers et al., 2013; Nasution et
becomes the first one to introduce a product al, 2011; Ireland et al, 2006).
or good into the market (Hitt et al., 2001).
Generally firms in the market which
Innovation is important for SMEs to are built on EO are often classified or char-
earn monopoly profit, although it is for a acterized by their risk taking potential or
short term duration and is valid only till a strategies. These would include taking on
competitor arrives in the scene. Competitive large debts or making large commitments of
advantage is a direct outcome of innovation resources towards projects that secure high
between competitor brands and hence, market returns by making the most of oppor-
innovativeness is close to being the lifeline of tunities in the marketplace. In short, risk
a firm’s strategy and therefore, an integral taking is a measure of the firm’s ability to
part of entrepreneurial orientation (Hamel, venture into the unknown and break away
2000). SMEs with high entrepreneurial from the conventional path. Hughes & Mor-
innovativeness can hit the jackpot if their gan (2007) suggest that EO encompasses the

The International Journal of Organizational Innovation Vol 7 Num 4 April 2015 73

undertaking of risks necessary to secure of innovation, competitive advantage and
sustainable growth in the ongoing competitive first-mover benefits in the marketplace
markets. McGrath (2001) elaborates this view (Eggers et al., 2013; Ireland et al, 2006). A
through his study and argues that following forward looking approach and a positive
conventional paths leads to high mean per- mindset can help the firm use existing
formance while risk taking has variable techniques or adopt advanced knowledge to
outcomes for businesses and have potential overcome impending change in the market
for long term profitability. Dess et al. (2011) place.
and Tang et al. (2014) note that entrepren-
eurial risk taking has a positive influence on However, a firm has maximum chances
organization and business growth. Risk taking of enjoying first mover benefits. However for
and innovation are relatable aspects of EO as a firm to maximize its chance of enjoying
they have a positive impact on the growth of a first mover benefit, it needs to combine pro-
business by virtue of improved brand aware- activeness with innovativeness and come up
ness in the market and introduction of with a novel solution that is brand new to the
competition in the processes. Crucial factors market place and therefore, accepted as a
in innovation that receive a boost through risk breakthrough. Entrepreneurial orientation
taking are product and services innovation rests on the capability of a firm to use its
which according to Hoonsopon and Ruenrom existing resources to introduce new products
(2012) have a positive impact on the com- or services in the marketplace or redefine its
petitive advantage of SMEs. SMEs with high investments and develop processes and pro-
entrepreneurial risk-taking can create oppor- ducts that are completely new to the market-
tunities to contribute to innovative outcomes place. Proactiveness has the capacity to not
and provide benefits to their customers as just project the firm into the future market but
well as enhance their cost advantage over also shape the environment in the market and
competitors by offering new services and give new edge to existing competitive capa-
products at low costs in suitable markets bilities. Capitalizing in emerging markets is
(Zhou et al., 2005; Hoonsopon & Ruenrom, the main requisite of the spirit of proactive-
2012). The following proposition then ness (Tang & Hull, 2012). Proactiveness is
emerges: expected to be significant in securing superior
firm performance (Baker & Sinkula, 2009). It
Proposition 2: Entrepreneurial Risk- is easier for them to target premium markets
taking is positively related to SMEs’ and extract first entrant advantages like
Innovation. skimming the market much ahead of their
competitors (Tang & Hull, 2012; Lumpkin &
Entrepreneurial Proactiveness and SMEs’ Dess, 2001).
Innovation
Conventionally, innovations are classi-
The level of entrepreneurial proacti- fied as radical or incremental, depending
veness in a firm often decides the extent to upon the degree of novelty in their applica-
which it will survive in a changing market, tions (Nieto et al., 2013). Studies on inno-
especially for SMEs which have limited vation management and the amount of pro-
resources and R&D capability to sustainably activeness show that firms which succeed in
compete with large companies. Proactiveness balancing their existing expertise to create
is often defined as opportunity seeking and improved incremental innovations by using
exploitation of resources that can be a source proactiveness are more prone to experiencing

The International Journal of Organizational Innovation Vol 7 Num 4 April 2015 74

market success, while they are required to gorised by closeness to novel or existing
simultaneously develop new technologies to technologies, functions and product features;
bring about major breakthroughs (Chang et al., customers, market segments and the market
2011). Needless to say that in order to fulfil routes (Chang & Hughes, 2012). Enhancing
this requisite, a firm must be able to balance product and service innovations therefore
internal dilemmas between innovation path- must be focused upon original and emerging
ways against challenges related to demands of customer needs in new, creative or rising mar-
contradictory nature on the firm by the kets through the use of novel technologies,
external market environment that creates features and functions which are significantly
external pressure on the firm (Jansen et al., separate from existing processes and products.
2006). A firm therefore is able to learn the art Likewise, incremental innovations of both
of striking the balance between radical and products and services meet current market
incremental innovative actions to accomplish needs and those of customers with enhance-
superior sustainable performances. A firm that ments in modern technologies.
is unable to strike this balance will end up
becoming mediocre and uncompetitive in the Innovations completely rely on using
market (Chang et al., 2011). an inventive and proactive approach that is
considered through prototyping, tests, re-
Entrepreneurial proactiveness can be a search and discovery. SMEs with high
drive for innovativeness since SMEs with this entrepreneurial proactiveness tend to proact-
orientation tend to start innovation protocols ively bring in a change in the way of opera-
to meet the emerging customers or market ting to entry into unknown markets and intro-
needs (Nieto et al., 2013). The approach utili- duce new services and products by applying
zes original designs, new markets creation, new technologies and information in order to
and new channels of distribution which are improve the total performance of the firm
developed through due diligence and proacti- (Nieto et al., 2013). As a result, such SMEs
veness. Alternatively, incremental innovations are potentially able to generate more inno-
can be derived by exploiting current capabil- vation for the market than those lacking
ities alongside seeking continuous up- proactiveness. Based on the foregoing, we
gradations as a result of incremental inno- thus hypothesize:
vation that generate consistent and positive
returns (Nieto et al., 2013). The firms expand Proposition 3: Entrepreneurial Pro-
on skills and the knowledge which exists activeness is positively related to
currently. They also enhance the recognised SMEs’ Innovation.
designs and expand on the existing products
and associated services, which increase the Organizational Learning and SMEs’
efficiency of existing distribution channels Innovation
(Chang & Hughes, 2012). Hence, it is only
natural that incremental innovations build on Prior studies suggest that organiza-
existing knowledge and organization learning tional learning is an integrated combination of
frameworks and bring into focus existing a number of organizational activities includ-
skills, structures and processes (Jansen et al., ing knowledge acquisition and information
2006). sharing that consciously influence firms’
innovation performance (Sakiet al., 2013).
It is important to note here that product Firms’ innovation relies on a steady stream of
and service innovations are normally cate- organizational learning in the firm that is

The International Journal of Organizational Innovation Vol 7 Num 4 April 2015 75

inspired by entrepreneurial orientation. more focus on expansion and enhancement of
Organizational learning allows the firm to services in these firms. From SMEs’ per-
make strategic moves by facilitating inno- spective, internationalization is an entre-
vative activities and creation (Sakiet al., preneurial activity and entering new geo-
2013). Organizational learning and entrepren- graphic markets on a large scale is to be
eurial orientation have a close relationship regarded as equivalent to adopting new
because organizational learning sits at the practices, up-gradations and implementing
roots of firms’ innovation and entrepreneurial organizational learning (Johnson Jr. et al.,
ventures. Organizational learning has a posi- 2013). Prior research suggests that SMEs
tive impact on innovation by preventing differ from larger enterprises because of
repetition of existing protocols (Renko et al., differences in their leadership styles, internal
2009 Avolonitis & Salavou, 2007). It is thus operations, organizational structures, existing
important to note that future profit streams in assets, and environmental reaction (Mbizi et
entrepreneurial firms from existing operations al., 2013). SMEs often understand and try to
are uncertain and therefore businesses need to emphasize innovation to achieve high growth
use organizational learning to maintain a with exciting variances in a given period of
search for new opportunities because of the time. However, failure rate can be high in the
ever shortening life cycle of products in innovation phase due to high uncertainty, risk
today’s fiercely competitive environments taking and chaotic factors if organizational
(Hamel, 2000). Empirical studies undertaken learning is not integrated in the process
in this regard support the view that organi- (Mueller et al., 2013). Appropriate organiza-
zational learning has a positive impact on tional learning cultivates essential firm
entrepreneurial firms and performance (Zahra, capabilities for innovation (Chiva et al., 2013)
2012; Eggers et al., 2013). and it increases SMEs’ ability to sense new
opportunities in products and services of
Organizational learning also has a innovation (Maes & Sels, 2013).
positive impact on the quality of performance
(Tang & Hull, 2012). The intensification of Oke et al. (2007) suggest that SMEs
pioneering entrepreneurship is a significant are more engaged in creating product and
purpose for any new enterprise. This in- service innovations based upon important
creases its receptiveness to a global and lessons derived from organizational learning
varying market settings. Today’s firms cannot and previous innovation drives (Saki et al.,
survive fast change and novelty which they 2013). As is well known, innovations are
are compelled to experience if they fail to aimed at the creation and commercialization
uphold entrepreneur’s skill (Eggers et al., of improved products and services, in a way
2013). SMEs invariably lack the competence, so as to meet demands of current customers
market control and resources of other big and markets (Mueller et al., 2013). Such
firms. To a great extent, their success depends innovations have successful outcomes which
on their innovative behavior and the ability to are known to customers and firm builders and
formulate competitive strategies, implement therefore have a low risk capability.
them and respond to the market challenges
posed by the changes (Mbizi et al., 2013). Organizational learning is known to
travel on a trajectory. Organizational strat-
Organizational learning form SMEs is egists build upon previous experience, core
pretty direct and impactful requisition since competencies, organizational learning, with
there may be less focus on innovation and effective linkages to the market and field

The International Journal of Organizational Innovation Vol 7 Num 4 April 2015 76

knowledge (Kollmann & Stöckmann, 2014). study contributes to the literature of SME
There is no doubt that in SMEs’ operating strategy management with analysis of the
today, economies of scale and scope increase strategic effect of entrepreneurial orientation
the firm’s profit margins greatly, and directly on firm innovation. SMEs’ strategic develop-
affect operational efficiency and profitability. ment of entrepreneurial orientation can effect-
SMEs are known to hold the gift of exper- ively increase their innovation capabilities.
ience over new entrepreneurs and as they We address the unexplored issues in the liter-
apply their knowledge and new ways of ature vis-a-vis the three dimensions of the
learning in order produce extensions from entrepreneurial orientation essential for SMEs
present product lines. SMEs must keep in in terms of innovation.
mind that effectiveness of innovation might
be influenced by organizational learning Entrepreneurial risk-taking orientation is
curve. In addition, innovations are presumed applied to explore opportunities associated
to enhance the life cycle of the SME’s with innovation for the business expansion.
offerings as too many resources are not SMEs’ initiative for testing and introducing
required and profit gains are observed within the innovative products or service to new
a very short duration of time (Mueller et al., markets requires a critical step of strategic
2013). Out of this discussion the following risk-taking. The dynamic strategy based on
proposition emerges: the entrepreneurial proactiveness is a signif-
icant drive of SME innovation. With entre-
Proposition 4: Organizational learning preneurial innovativeness embedded in the
positively moderates the relationship entrepreneurial process, SMEs’ focus will be
between Entrepreneurial Innova- on entrepreneurial course of action for actual
tiveness and SMEs’ Innovation. innovation. Although the entrepreneurial
orientation is common to all ventures, SMEs
Proposition 5: Organizational learning adopting the approaches by linking three
positively moderates the relationship aspects of EO with innovation are able to
between Entrepreneurial Proactive- create unique opportunities for their survival
ness and SMEs’ Innovation. and growth. The extent to which entrepren-
eurs and SMEs utilize innovation determines
Proposition 6: Organizational learning the extent to which they will succeed or even
positively moderates the relationship fail.
between Entrepreneurial Risk-taking
and SMEs’ Innovation. Our study also contributes to the litera-
ture of SME innovation by exploring the
Figure 1 illustrates the expected moderating effect of organizational learning
relationships that form the basis of the in the relationships between innovation and
propositions and reviews the extant literature entrepreneurial orientation of SMEs, which is
on the construct in relation to the conceptual rarely addressed by previous studies. The
framework. SMEs intending to embrace innovation and
raise their productivity and survival odds
Discussion must be able to be ahead of the changing
markets by learning advanced technologies
Entrepreneurial orientation acts as the
and knowledge, combining and utilizing both
fundamental poise of a firm which many
external and internal resources. SMEs should
SMEs have actually been able to adopt. Our
be open to new information, advanced

The International Journal of Organizational Innovation Vol 7 Num 4 April 2015 77

technologies and knowledge in order to be survival and growth critically depend on their
able to indulge in innovation and sustain their effective organizational learning to overcome
competitive advantage in the market. Their their limited resources for innovation.

Figure 1. The proposed framework for Entrepreneurial Orientation and SMEs’ Innovation

Organizational learning plays a propel- economic behavior. The entrepreneurial

ling role in an organization forward to strategy conducted by entrepreneurship is a
achieve SMEs’ goals of creativity and combination of internal and external factors
innovation. As one may say survival of the that are influencing the business at a certain
fittest applies even in case of entrepreneurial point of time. External factors that affect
orientation and SME innovation, which is companies and influence their individual
particularly applicable in a competitive entrepreneurship strategies include compet-
market. Product differentiation and market ition, technological turbulence and demand
penetration are two key elements of compet- uncertainty. Due to these changing external
itive advantage. Constant learning for inno- factors, firms must constantly react to the
vation is the only way-out. Organizational dynamic challenges emanating from the
learning allows SMEs to identify the new markets, build competitive advantages and
trend of customer demands and take a new sustain their business for the future through
perspective to business development and the organizational learning, and rely on new
process of innovative entrepreneurship. To patterns experienced in the business devel-
add to this mix, the role of SMEs in inno- opment of SME entrepreneurship.
vation and economic development has grown.

Conclusion

Entrepreneurial orientation is a process

that results in destruction of old business
practices and leads to the establishment of
new, innovative, risk-taking patterns of
business development that secures a firm’s

The International Journal of Organizational Innovation Vol 7 Num 4 April 2015 78

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65-75, in which there are errors in Figure 1, occurring in the publication process of the journal.
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