Innovation as a Corporate Entrepreneurial Outcome in Newly Established Firms a Human Resource-Based

Innovation as a Corporate Entrepreneurial Outcome in Newly Established Firms a Human Resource-Based

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Unformatted text preview: Innovation as a Corporate Entrepreneurial Outcome in Newly Established Firms: a Human Resource-Based View Johan Maes Katholieke Universiteit Leuven Department of Applied Economics Naamsestraat 69 3000 Leuven Tel. +32 16 32 68 68 Fax +32 16 32 67 32 [email protected] Luc Sels Katholieke Universiteit Leuven Department of Applied Economics Naamsestraat 69 3000 Leuven Tel. +32 16 32 68 72 Fax +32 16 32 67 32 [email protected] Sophie De Winne Katholieke Universiteit Leuven Department of Applied Economics Naamsestraat 69 3000 Leuven Tel. +32 16 32 68 94 Fax +32 16 32 67 32 [email protected] Innovation as a Corporate Entrepreneurial Outcome in Newly Established Firms: a Human Resource-Based View Johan Maes Luc Sels Sophie De Winne ABSTRACT The study presented here explores innovation as a corporate entrepreneurial outcome in recently established small firms. More precisely, we explore the role of upper echelon and employee human capital and human resources management as determinants of innovation. Our approach builds on a ‘human resource’-based view, stressing the importance of (1) entrepreneur/entrepreneurial team (‘upper echelon’) human resources and (2) employee human resources and their management in determining the innovation performance of start-ups. As innovation is one of the three possible outcomes of corporate entrepreneurship (innovation, venturing and renewal), we take a corporate entrepreneurship research approach in examining innovation in start-ups. The analyses are based on a sample of 294 start-ups covering a wide range of economic activities, having 1 to 49 employees and being in their second year of life in 2003. The results indicate that both types of human capital do matter in the context of start-up innovation. First of all, employee human capital and HRM have a strong positive effect on innovation. Second, while we could not trace direct effects of entrepreneur/entrepreneurial team human capital on innovation, indirect effects (via HRM or employee human capital) of for instance education level and business advice are indisputably present. All things considered, the study teaches us that valuing human capital in start-ups can contribute to a considerable extent to preserving their innovation performance, thus stimulating their chances of building a viable business model and safeguarding future growth and further development. Key words: innovation, resource-based view, start-up, upper echelon, human capital 1 Innovation as a Corporate Entrepreneurial Outcome in Newly Established Firms: a Human Resource-Based View 1. INTRODUCTION In the process of economic growth and development entrepreneurship is considered to be a vital component. Entrepreneurship has long been seen as a synonym for establishing new small firms as a suitable vehicle for entrepreneurial endeavor (Rothwell & Zegveld, 1982). Through their entry, start-ups form a major source of competitive restructuring within industries. With little or no exception, entrepreneurs establishing a new firm are strongly convinced that their enterprise has something unique to offer to the economy, such as a new product, a new management model or a new technology, safeguarding the survival of their newly established company (Hsueh & Tu, 2004). However, newly established firms or start-ups can contribute to the process of economic development in a second way (Baldwin & Gellatly, 2003). If the young firm is to survive and/or flourish, it must develop itself from the inception and start-up phase on in a persistent way (Flamholtz, 1986; Gray, 2002). Following, start-ups – as existing companies - can contribute to the industrial transition via the growth that occurs as these firms develop and expand the scope of their activities (Baldwin & Gellatly, 2003). In other words, start-ups can benefit from trying to preserve their entrepreneurial posture throughout the subsequent development phases. Corporate entrepreneurship in general and innovation in particular are often brought forward in this context as a desired tool to suit the action to the word (Baldwin & Gellatly, 2003; Drucker, 1985; Hsueh & Tu, 2004). After all, it is seen as an instrument for keeping up the entrepreneurial spirit by means of business development, revenue growth, and pioneering the development of new products, services and processes (Kuratko et al., 1990; Lumpkin & Dess, 1996; Miles & Covin, 2002; Zahra, 1991; Zahra & Covin, 1995; Zahra et al., 1999b). This suggests that corporate entrepreneurship is not something that pertains only to larger, mature companies, but that it is equally desirable for start-ups (Borch et al., 1999; Carrier, 1996; Gray, 2002; Messeghem, 2003). Corporate entrepreneurship thus points to the efforts made by all existing companies - large as well as small, mature as well as newly formed - of retaining or regaining their entrepreneurial spirit throughout the different stages of their development in view of stimulating business development, innovation and so forth. Notwithstanding this recognition on a theoretical level, most empirical research on corporate entrepreneurship seems to have been concentrating on larger corporations, leading to an empirical research gap. 2 This article aims at starting to bridge this gap and investigates to which extent start-ups can safeguard their entrepreneurial flair, thus securing the sustained progression from the start-up phase, enhancing their chances of survival and stimulating their growth prospects. As mentioned earlier, innovation is considered to be excellent for this purpose as it embodies the entrepreneurial spirit and stimulates the growth, development and performance capabilities of new firms (Baldwin & Gellatly, 2003; Drucker, 1985; Hsueh & Tu, 2004). More precisely, in this article we explore the role of upper echelon and employee human capital and their management as determinants of innovation, studied through a corporate entrepreneurship lens. Building on the resourcebased view of the firm, we expect that both types of human capital (upper echelon and employee) as well as the way in which employee human resources are managed stimulate innovation in newly established firms. The analyses are based on a sample of 294 start-ups covering a wide range of economic activities, having 1 to 49 employees and being in their second year of life in 2003. As mentioned, our approach builds on a ‘human resource’-based view, stressing the importance of (1) entrepreneur/entrepreneurial team (‘upper echelon’) human capital and (2) employee human resources and their management in determining the innovation performance of start-ups. The focus on human resources and the way in which these are managed results from the growing awareness that a firm’s ability to develop new products, services or processes is inextricably linked to its human resource pool and to the way in which it organizes its human capital (Laursen, 2002). Firms that are endowed with superior human resources and with policies managing these resources in a proficient way should be more able to adapt to environmental contingencies, to find new ways to increase customer benefits and to innovate (Coleman, 1988; Florin et al., 2003; Youndt et al., 1996; Lengnick-Hall, 1992). In spite of the above, the combination of corporate entrepreneurship (including innovation) and human resources and their management has been overlooked up to a considerable degree in past research (Heneman et al., 2000; Katz et al., 2000; Laursen, 2002; Laursen & Foss, 2003; Michie & Sheehan, 1999). This paper is intended as a contribution to this somewhat underdeveloped research stream. The further outline of this paper is as follows. First, in the literature review section we discuss the importance of innovation as a corporate entrepreneurial outcome for newly established firms and we briefly explore the construct of corporate entrepreneurship. Following, we develop our research model and formulate the corresponding research hypotheses. Thereafter, we elaborate on the methodology and present the empirical findings. And finally, we discuss the results. In what follows, the terms ‘human resources’ and ‘human capital’ will be used interchangeably. 3 2. LITERATURE REVIEW 2.1. Start-ups and Innovation Whenever new firms are established – whether they are large or small – the entrepreneurs responsible for their inception invariably believe that they have found a niche (new technology, new product or service, new market, new management model and so forth), allowing their enterprises to survive (Hsueh & Tu, 2004). As such, one can postulate that the very first development phase in a company’s life cycle - the startup phase - generally is perceived as entrepreneurial in some (major or minor) extent (Gray, 2002). However, sustained progression is needed from that phase on if the firm is to prosper and/or survive (Flamholtz, 1986; Gray, 2002). Put differently, newly established firms can take advantage of being inclined towards actively preserving their entrepreneurial posture throughout the post start-up phases of their development, of keeping the entrepreneurial spirit sharply vivid. Corporate entrepreneurship in general and innovation in particular are often considered as a most suitable tool for this purpose, as innovation embodies the entrepreneurial spirit and stimulates the growth, development and performance capabilities of new firms (Baldwin & Gellatly, 2003; Drucker, 1985; Hsueh & Tu, 2004). Considering the fluidity of a venture in its early stages (Bouwen & Steyaert, 1990) corporate entrepreneurship and innovation efforts can have a large impact on the start-up’s survival and future performance. By adopting an innovative posture after their creation, start-ups and other small firms may develop the capacity to maintain their entrepreneurial behavior (Messeghem, 2003). Furthermore, if newly established firms succeed in doing so, the expected impact of innovation on firm performance is far more pronounced compared to their larger and more mature counterparts. After all, new enterprises are less burdened with tradition, show greater willingness to innovate and accept the ability to adopt innovation more readily (Hsueh & Tu, 2004). Based on the view expressed above, the study presented here explores innovation as a corporate entrepreneurial outcome in recently established small firms. Despite its importance for start-ups, innovation has far less frequently been studied in small startups compared to larger and/or more mature companies. Moreover, a large part of those previous empirical innovation studies that have focused on start-ups exclusively considered the high-tech or new technology-based end of the start-up spectrum (e.g. Eisenhardt & Schoonhoven, 1990; Himmelberg & Petersen, 1994; Lynskey, 2004). In contrast, the newly established firms studied in this article cover the whole for-profit side of the economy, including industrial enterprises as well as commercial and service firms. As innovation is one of the three possible outcomes of corporate entrepreneurship (besides venturing and renewal (Zahra, 1995)) one can take a corporate entrepreneurship research approach in examining innovation in start-ups. 4 2.2. Corporate Entrepreneurship: What’s in a Name? A prerequisite for developing a research model on the link between human resources and the innovation outcome dimension of corporate entrepreneurship is clarifying how corporate entrepreneurship is conceptualized. Corporate entrepreneurship is generally considered to be ill defined (Stopford & Baden-Fuller, 1994). There is no consensus on what it means for firms to be entrepreneurial and researchers are often talking about different phenomena, although using the same label (Covin & Miles, 1999; Maes, 2004). This gives rise to a misfit between the labeled phenomenon and its actual operationalization. As such, the knowledge on corporate entrepreneurship remains limited and fragmented (Miles & Covin, 2002). Entrepreneurship and - its hierarchical sub-construct - corporate entrepreneurship can be seen as broad labels under which a hodgepodge of research is housed (Shane & Venkataraman, 2000). This fragmentation of the research field tends to be self-reinforcing since it brings researchers to speak after one another, rather than to one another. Before developing a research model it is therefore imperative to (1) make clear which main research approach or view is being taken and (2) explain how corporate entrepreneurship is approached within the view withheld. In what follows, both topics are dealt with consecutively. 2.2.1. Entrepreneurship research approaches. Two research approaches dominate the entrepreneurship field: the trait approach and the behavioral approach. In the trait approach researchers try to identify traits and characteristics of individuals in order to differentiate entrepreneurs from nonentrepreneurs. The entrepreneur’s traits are seen as the key to explain the entrepreneurship phenomenon (Gartner, 1989). The primary level of analysis is therefore the individual. Specific entrepreneurial traits often mentioned in literature are the locus of control, the need for achievement, risk taking, the personal value system and age (Begley & Boyd, 1987; Gartner, 1989). Despite the attention this approach has received in research and literature, the trait approach still seems to be unable to capture the entrepreneurship phenomenon to the full extent. The flaws in this approach are well documented by Gartner (1989). The shortcomings of the trait approach have lead entrepreneurship researchers to a second approach. In this so-called behavioral approach entrepreneurship is seen as the process of creating entrepreneurial achievements, such as new organizations (Gartner, 1989) or surplus value (Jones & Butler, 1992). This approach takes the entrepreneurial object being created (‘the project’) as the primary level of analysis. The objective is not to find out ‘who is the entrepreneur’, but to gain understanding as to why and how the entrepreneurial achievement has come into existence. The behavioral view stresses the contextual nature of the creating process. The entrepreneurial project is therefore seen as an outcome of a complex process with many influences (Gartner, 1989; Maes, 2004). The role of the individual boils down to a series of actions or behavior undertaken to enable the creation of the project. Personal characteristics are considered ancillary to the behavior. 5 Although the definitional ambiguity surrounding the entrepreneurship construct has still not been resolved, studying entrepreneurship from a behavioral point of view is likely to increase the chances of researchers speaking to one another. Therefore, we will take the behavioral approach. However, the behavioral approach also increases the complexity of the entrepreneurship phenomenon compared to the trait approach. After all, within the behavioral view, entrepreneurship is generally accepted as a multidimensional construct, as the nexus of several dimensions or process components that can be distinguished, but not separated from each other. A condition that must be fulfilled in order to obtain a good definition of entrepreneurship (or of its hierarchical sub-construct corporate entrepreneurship) is that researchers in the field must share this definition so as to promote the accumulation of knowledge (Bruyat & Julien, 2001). Maes (2004) has demonstrated that this condition – even within the behavioral approach – is not fulfilled and that even within the behavioral approach, reaching agreement on a definition of (corporate) entrepreneurship remains problematic. As a result, we are bound to clarify in a next paragraph how we approach corporate entrepreneurship within the behavioral view before we can develop our specific research model on human resources and innovation. 2.2.2. The corporate entrepreneurship nexus. As we recall, within a behavioral framework entrepreneurship is generally accepted as a multidimensional construct, as a nexus of multiple components. The study of entrepreneurship then requires taking into account the various process components. However, there seems to be no agreement as to the number of components involved. As explained by Maes (2004), entrepreneurship can be seen as a nexus of three core components: the creator, the creating process and new value creation. These three components (that can be distinguished but not separated from each other) form the true nexus or core of entrepreneurship considered from a behavioral point of view. This nexus is the actual object or construct studied in the field of entrepreneurship (Bruyat & Julien, 2001). Since corporate entrepreneurship is a hierarchical sub-construct of entrepreneurship (Sharma & Chrisman, 1999) this three-component nexus is equally applicable to corporate entrepreneurship. Corporate entrepreneurship aims at creating new value for the firm (component 1). New value (the outcome component of the nexus) can be created by developing new products, services or processes (innovation), by setting up new activities and moving into new markets (venturing) and by renewing the business concept (strategic renewal) (Antoncic & Hisrich, 2001; Lumpkin & Dess, 2001; Zahra & Covin, 1995). As such, new value creation is seen as the sum of a company’s innovation, venturing and renewal efforts (Zahra, 1995). A creating process (component 2) precedes this new value creation. The creating process can be defined as the process through which the company pursues entrepreneurial opportunities. It entails several steps, such as the discovery and recognition of business opportunities, information search and the acquisition and accumulation of resources (Shane & Venkataraman, 2000; Ucbasaran et al., 2001). Finally, an organization as such or an individual or a group of individuals (the creator; 6 component 3) drives the creating process. The corporate entrepreneurship nexus forms the basis of our research model that will be developed in the following section. 3. RESEARCH MODEL AND HYPOTHESES The research model depicted in Figure 1 aims at exploring innovation as a particular type of newly created value from a human resource-based view. The research model builds on the corporate entrepreneurship nexus discussed on a general level in the previous section. As such, we will now elaborate on how we have operationalized the nexus in view of the focus of this article, leading to the model presented in Figure 1. NEXUS CREATOR E n t r e p r e n e u r /t e a m h u m a n c a p it a l C R E A T IN G P R O C E S S N E W V A L U E C R E A T IO N H u m a n reso u rce m anagem ent in n o v a t io n bo ard E m p lo y e e h u m a n c a p it a l E x t e r n a l a d v ic e Figure 1. Theoretical model. 3.1. New Value Creation As we recall, corporate entrepreneurship aims at creating new value for the organization. It is seen as a process that goes on inside an existing firm and that may lead to new business ventures, the development of new products, services or processes (innovation) and the renewal of strategies and competitive postures. In this article, we will focus on the innovation dimension of corporate entrepreneurship since our research population consists of small newly established firms (in their second year of existence). Innovation performance (defined here as improving products, services, production processes and/or supporting processes and as developing new products or services) 7 could prove to be a solid indicator of the degree in which these newly formed firms are able to develop themselves and display a viable business model, thus increasing their chances of surviving the turbulent first years of their existence. After all, innovation embodies the entrepreneurial spirit and sti...
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