ENTREPRENEURIAL ORIENTATION AND BUSINESS PERFORMANCE OF SMALL AND MEDIUM SCALE ENTERPRISES OF WESTERN PROVINCE IN SRI LANKA

The economic growth of developing countries can be sustained by the expansion of private sector, as they are the engine of growth. Many scholars have argued that Entrepreneurial Orientation is one of the salient factors which contribute to the performance of SMEs. However, the recent literature provides contradictory findings about the relationship between Entrepreneurial Orientation and performance. Accordingly this study aimed at investigating the level of Entrepreneurial Orientation (EO) of owner(s)/manager(s) of SMEs and the relationship between EO and business performance of manufacturing SMEs in Western province. This study adopted deductive approach and used both descriptive and inferential statistical tools in analyzing the collected data. Findings revealed that the Entrepreneurial Orientation (EO) among owner/managers of manufacturing SMEs in Western province is at high level. Among the dimensions of EO, innovativeness shows high influence on business performance.


Introduction
Today SME sector spread worldwide plays a significant role in the economy (Philip, 2010 andIslam et al., 2011). At present the vibrant SME sector is identified as engine of growth playing a significant role in economic growth, innovation, employment generation and poverty reduction (Stokes, 2003 andPrasad, 2004) intensive nature of the sector, potential to mobilize and divert financial resources in the economy, promote balanced regional development, nurtures entrepreneurial talents and play a complementary role to large industries through sub-contracting and facilitating the linkage between the formal and informal sector (Gamage, 2003). Thus as shown as above, are very important. Some of the entrepreneurial talents are described by Entrepreneurial orientation.
EO has recently been recognized as one of the most important factors for a firm's growth and profitability. Research has shown that high growth correlates with a firm's entrepreneurial orientation. Hence, growth can be associated with innovativeness, pro-activeness and risktaking behavior of the firm, which refers to an entrepreneurial orientation (EO) dimension (Zainol and Ayadurai, 2011).
Entrepreneurial orientation (EO) has been a topic of much debate in management and entrepreneurship literature for years (Zainol and Ayadurai, 2011).The relationship between EO and firm performance has been extensively discussed conceptually and empirically in previous studies and majority were supported a positive relationship (Lumpkin and Dess, 1996;Quince and Whittaker, 2003;Lim, 2008;Fairoz et al., 2010). It implies that the relationship among various dimensions of EO and performance yield mixed results raising a question that does the EO positively or negatively related with firm performance. Further there is a dearth of literature between EO and business performance in developing countries in Asia (Kiriri, 2005;Zainol and Ayadurai 2011). It is also evident that 85 percent of SMEs face significant survival challenges and more than 75 percent fail within five years of startup (Asian SME Summit, 2009). It implies that SMEs to be proactive and innovative to face these challenges successfully and thereby to ensure the long term survival. This study attempted to examine how EO can contribute to the performance of SMEs. By analyzing the relationship between EO, this study provides useful insights to owner/managers of manufacturing SMEs in Western province to be entrepreneurially oriented in their businesses.

Research Objectives
The objectives of the study are mentioned as follows.


To investigate the level of Entrepreneurial Orientation (EO) of owner(s)/manager(s) of SMEs  To identify the relationship between EO and strategic planning and business performance of SMEs

Review of Literature
EO refers to a firm's strategic orientation, acquiring specific entrepreneurial aspects of decision-making styles, practices and methods (Lumpkin and Dess, 1996). They defined EO dimensions as follows.
 Autonomy: the independent action of an individual or a team in bringing forth an idea or a vision and carrying it through to completion  Innovativeness: a firm's tendency to engage in, and support new ideas, novelty, experimentation, and creative process which may result in new products, services, or technological processes.
 Risk Taking: Incurring heavy debt or making large resource commitments by seizing opportunities in the market place in the interest of high returns.
 Pro-activeness: Taking initiatives by anticipating and pursuing new opportunities and by participating in emerging markets.
 Competitive Aggressiveness: A firm's propensity to directly and intensely challenge its competitors to achieve entry or improve position to outperform industry rivals in the marketplace. Fairoz et al., (2010) also focused on entrepreneurial orientation in terms of innovativeness, pro-activeness and risk-taking. In their study entrepreneurial orientation was consisted of same dimensions followed by Koufopoulos in 2010. The above Table 2.6 presents the indicators of EO used by Fairoz et al., (2010). This study found that 52 percent SMEs reported moderate level of EO. Considering the above factors it is clear that both organizational as well as non-organizational factors affect the level of strategic planning in different ways. Accordingly, owner/manager characteristics, firm characteristics and Entrepreneurial Orientation together determine the level of strategic planning in SMEs.

Entrepreneurial Orientation (EO) and Performance
The relationship between EO and firm performance has been extensively discussed conceptually and empirically in previous studies and majority were supported a positive relationship (Lumpkin and Dess, 1996;Quince and Whittaker, 2003;Lim, 2008;Fairoz et al., 2010).
Most of the subsequent studies were adopted all the dimensions or several of them as per the requirement. Quince and Whittaker (2003) investigated the relationship between EO (innovativeness, pro-activeness and risk-taking) and performance of 142 high-tech firms and found that both pro-activeness and innovativeness were weakly positively related to employment growth and innovativeness was positively related to turnover growth. Lim (2008) investigate the relationship between EO and the performance of 137 service businesses. The model consisted of autonomy, innovativeness, risk-taking and competitive aggressiveness and Competitive aggressiveness was identified as the only dimension of EO which has a significant impact on the performance. This means that the higher the EO in terms of competitive aggressiveness, the higher the performance of the organization.
Covin and Slevin (1989) as cited by Lim (2008) suggested that EO is related to performance among small firms in hostile environments. Lim (2008) incorporated four dimensions; autonomy, innovativeness, risk-taking and competitive aggressiveness and confirmed the positive relationship between EO and performance. Consistently Hui Li et al., (2008) reconfirmed Lim's findings employing all five dimensions of EO. Fairoz et al., (2010) also focused on entrepreneurial orientation and business performance of twenty five manufacturing SMEs in Hambantota district in Sri Lanka in terms of innovation, pro-activeness and risktaking. However the findings are contradictory with other studies and showed no significant relationship among innovativeness, pro-activeness, risk-taking and overall EO with sales growth, profit, employment growth and owner/manager satisfaction. In an attempt to investigate the correlation of EO and firm performance of services and manufacturing SMEs in Kuala Lumpur, results suggested that there is a significant positive relationship between EO and firm performance. Further, it showed that innovativeness, pro-activeness and risktaking play a significant role in firm performance (Zainol and Ayadurai, 2011). Islam et al., (2011) recently examined the effect of entrepreneurial characteristics and firm characteristics on SME performance in Bangladesh found that entrepreneurial characteristics are significantly related to business success. Entrepreneurial orientation was one of the entrepreneurial characteristics considered in this study. An important study undertaken by Samarakoon and Jasek (2011), based on the SMEs in Western province of Sri Lanka was aimed to find out the relationship of overall EO and each dimension of EO with the performance of SMEs. This study mainly focused on three dimensions of EO; Innovativeness, pro-activeness and risk-taking. The results found that there is a significant relationship between EO and overall performance. Among the three dimensions, innovativeness has a significant relationship with the overall performance. The performance was measured in terms of Return on Investment (ROI), sales performance and market performance. The analyzed the relationship between overall EO and the each measure of performance. Relationship between overall EO and each measure of performance was investigated. It was found that only significant relationship was found with respect to overall EO and ROI. However the strength of the relationship is not strong.
It is apparent that the relationship among various dimensions of EO and performance yield mixed results raising a question that does the EO positively or negatively related with firm performance. Based on the previous research findings the following hypothesis can be proposed in this study for the empirical testing.
H1: There is a positive relationship between the Entrepreneurial Orientation and the business performance

Figure: Variables
The above mentioned framework suggests EO as the independent variable and Business  Lumpkin and Dess (1996) defined Entrepreneurial Orientation as the firm's strategic orientation, acquiring specific entrepreneurial aspects of decision-making styles, practices and methods. Since the majority of studies have used Innovativeness, Pro-activeness and Risk-taking, this study also focused on these three dimensions. The relevant indicators were adopted from Fairoz et al., (2010) and measured through 5 point scale statements ranging from "strongly agree" to "strongly disagree".
Then the level of EO of owner/managers is categorized as low, medium and high.
Accordingly, if the summated value ranges from 9 to 20, from 21 to 32 and from 33 to 45, are categorized as low level of EO, medium level of EO and high level of EO respectively.

Operationalization of Dependent Variables
Business performance of the firm and it was measured through a combination of financial and non-financial measures including the annual sales growth, annual profits growth, annual employee growth, market share and investment to the business. These performance variables were adopted from Pushpakumari & Watanabe (2009). It was found that most of SMEs in Sri Lanka does not maintain financial reports properly and reluctance to disclose the data even if available (Wijewardena et al., (2004). Therefore the owner/managers were asked to indicate the trend of each of these indicators during last three years as "Highly increased", "Increased", "Moderate", "Decreased" and "Highly decreased" using 5-point scale.

Population, Sample and Sampling Method
Population of the study consists of manufacturing SMEs in Western province of Sri Lanka.

Entrepreneurial Orientation and Business Performance
The relationship between EO and business performance was examined in terms of overall performance and each measure separately. Business performance was measured under five measures namely; annual sales, annual profits, employee growth, market share growth and investment to the business over last three years from 2009 to 2011.  -tailed) .000 N 200 200 ** Correlation is significant at the 0.01 level (2-tailed).

Source: Survey data (2012)
Since the p-value is less than 0.05, the alternative hypothesis is accepted. Accordingly, it can be concluded there is a positive correlation between the EO and business performance. More precisely higher the levels of EO better the business performance of SMEs. Pearson correlation coefficient is 0.404 at 0.01significance level, which indicates a weak relationship between these two variables. That means EO contributes the business performance slowly.
In addition to the overall relationship between EO and business performance, the relationship between each dimension of EO and business performance was investigated by the Table 6.
The results show that a positive relationship between innovativeness, pro-activeness and risktaking and business performance. However, the relationship is moderated with innovativeness, weak with pro-activeness and risk-taking. Further, the relationship between overall EO and each measure of business performance was examined by the following Table 7. According to the above table, there is a positive relationship between overall EO and the each measure of business performance (less than 0.05). Although the relationship is positive, it cannot be found any strong relationship. However, the relationship between EO and employee growth shows .481, which is closer to moderate (0.5) with respect to other measures. The above table presents the correlations between different dimensions of EO and different measures of business performance. Results show that innovations and pro-activeness are significantly related with all performance variables at 0.01 (P=.000<0.05). However, risk taking is significantly related only with profits growth, employee growth and investment to the business. Notably risk taking is negatively related with market share growth. However, it is not significant.
Subsequently multiple regression analysis was carried out to identify which dimension of EO would affect significantly on the business performance significantly. Multiple regression results show that the coefficient of determination (R 2 ) is 0.310 (Adjusted R Square=0.310). It denotes that only 31 percent of variation on business performance is explained by this model with the standardized beta values of 0.491, 0.141 and 0.043.
The significance value shown by the ANOVA table is less than 0.05 (P-value>0.000), which indicated that overall model applied is significantly good enough in predicting the outcome variable of business performance.
With reference to the below Table 9, independent variables are innovativeness, proactiveness and risk-taking. The results show that the p-values of pro-activeness (.061) and risk-taking (.518) are greater than 0.05 except innovativeness (.000). Therefore it can be concluded that only innovativeness has a significant impact on business performance.  identify the performance differences among three groups of EO. Accordingly, the significant performance differences can be found between medium and high groups (p-value=.000) and low and high groups (p-value=.001) in terms of EO.

Discussion and Conclusion
The relationship between the level of Entrepreneurial Orientation (EO) of owner-managers of SMEs and business performance is inconclusive in the recent literature. Therefore this relationship was empirically tested in manufacturing SMEs in Sri Lankan context. The findings of the present study revealed that there is a positive but weak relationship between characteristics that person has a strong desire and courage to drive the business toward the success. However, the findings of Fairoz et al., (2010) are contradictory with other studies and showed no significant relationship among innovativeness, pro-activeness, risk-taking and overall EO with sales growth, profit, employment growth and owner/manager satisfaction.

Limitations and Recommendations for Further Research
The limitations of this study can be discussed as contextual and conceptual. The results of this study must be interpreted in the light of obvious limitations. One limitation is that the research is constrained by the vastness of SME sector and the limited time availability.
Therefore this study was confined to manufacturing SMEs in Western province only. Sample size was another limitation of the study. Nevertheless, the results were also subject to the limitations commonly associated with the questionnaire method.
Conceptual limitations consist of definitions of performance and Entrepreneurial Orientation.
For the purpose of this study EO, it was defined in terms of three dimensions; innovativeness, pro-activeness and risk taking whereas business performance using five measures. Further, there are some factors such as firm size, uncertainty which mediate the EO-performance relationship. Those mediating factors were not considered in this study. In addition to that, there are limitations in relation to the operational definition of SMEs. In this study SME was defined based on only one criteria; no. of employees. Accordingly the following recommendations can be made for future research.

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The present study mainly focused on the relationship between EO and business performance of manufacturing SMEs in Western province of Sri Lanka, which can be recommended to other provinces in Sri Lanka.

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In defining EO autonomy and competitive aggressiveness can be incorporated in addition to above three measures. There may be many measures categorized under financial (Net profit, Return on investments etc.) and non-financial (objectives achievement level, manager/employee/customer satisfaction etc.). Accordingly, another prospect for further research lies in the need to develop more tools to define EO and business performance and validate the relationship which is investigated in this study.

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Obviously the scope of the study was limited to manufacturing SMEs in Western province. However, this study is possible to extend to other industries like retail and trade sectors and examine the differences among them. Similarly the performance differences can be examined among the three districts in the Western province.