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UAE Family Firms’ Entrepreneurship and Innovation Essay


Abstract

The contemporary business environment presents new challenges to the firms. For this reason, entrepreneurship has become an essential component of business strategy in every business segment. The following paper presents evidence that the UAE family-owned firms are rarely innovative and reluctant to take risks but are predisposed towards the adoption of entrepreneurial orientation practices. Such a situation is favorable to the incorporation of a change from the acknowledgment of the benefits of entrepreneurial orientation to their incorporation into everyday business practices in order to boost business performance. The incorporation of entrepreneurial orientation can be achieved through several approaches, including greater involvement of family business owners in the innovation processes of their firms, empowerment of workers through family culture, and the creation of trusted resource networks used to support innovation. With the suggested changes in place, it is possible to expect improvements in performance as well as the emergence of reliable evaluation practices.

Introduction

The contemporary business environment is a dynamic field that constantly changes in order to stay relevant. Numerous technological, scientific, and social advancements opened up various opportunities both for the customers and for the owners. However, the changes also created significant challenges and raised the quality and performance bars for the players. Thus, entrepreneurship has become even more significant and is now required for successful firm performance regardless of the scope and business segment. Naturally, a better understanding of the factors that contribute to entrepreneurial success is expected to improve the efficiency of their usage and, by extension, the performance of the organizations which utilize it. The aim of the following paper is to explore the current views on entrepreneurial orientation in the academic literature, discuss the advantages and shortcomings of viewing it as a multidimensional construct, and determine the applicability and value of the suggested approach to the family business in the UAE.

Entrepreneurial Orientation as a Multidimensional Construct

The current academic consensus holds that entrepreneurial orientation (EO) has an overall positive influence on the organizational performance and, by extension, on the revenues generated by the company (Wang & Yen, 2012). However, the approaches to defining the EO, identifying its dimensions, and measuring it varies depending on the business segment, the scope of the research, and a host of other factors. Despite this, two general directions can be outlined as dominant in the approach of the researchers. The majority of the sources treat entrepreneurial orientation either as a single factor or as an aggregate of several factors represented by a single measurement. According to Wang and Yen (2012), the rationale behind such an approach is the relative interconnectedness between the most common dimensions of EO. As a result, the findings are expected to be similar enough to allow for ignoring the differences.

The second approach, suggested by some researchers, treats EO as a multidimensional construct, rather than the unidimensional one. The main reason for considering such an approach is the differences between the measurements of different dimensions found by some studies, and, by extension, a differentiated impact on the performance outcomes (Wang & Yen, 2012). It should also be acknowledged that disaggregation of the results provides the opportunity for improvement in at least two directions. First, the comparison of results allows to estimate the weight of each of the dimension and, eventually, offers more precise data on the causes of the company’s changes in performance. Second, the inclusion of meaningful and relevant factors adds to the theoretical understanding of the issue and is thus beneficial for the development of innovative approaches to the enhancements of organizational performance. From a practical perspective, it also provides effective tools for developing and implementing models of business operations.

Definitions and Criteria

From the information above it becomes clear that the multidimensional construct is a more promising approach from both the theoretical and the practical perspectives. Therefore, it is necessary to isolate the dimensions that are to be studied and formulate their definitions and criteria for inclusion. Wang and Yen (2012) suggest innovativeness, proactiveness, and risk-taking as three principal dimensions. Based on the review of the literature, they suggest the definitions and criteria for each dimension. For instance, innovativeness is defined as the company’s ability to find new opportunities and develop solutions that are either novel or uncommon for the segment. Such an approach may contribute to the optimization of the existing processes or result in the introduction of a new product or service (Wang & Yen, 2012). Such measurement can also be used to understand the company’s readiness to engage in and support the innovative activities from the external sources as well as encourage and promote it on the internal level. As can be seen from the description, innovativeness has a significant capacity for generating competitive advantage on the strategic management level, for which reason it is frequently emphasized in the firms’ strategic priorities.

Proactiveness is described as the trend of actively engaging in operations not necessarily related to the present directions pursued by the organization (Wang & Yen, 2012). The examples of proactive approach include the introduction of new products and services and termination of declining or potentially undesirable processes, among others. The necessary components of proactiveness include sensitivity to the environment and the ability to respond to the actions of and conditions created by the competing entities. Besides, both the readiness and willingness to face the challenges can be considered an important determinant of a proactive entrepreneurial orientation. While proactiveness requires investment for successful proliferation, it usually yields superior results in comparison to more financially reserved strategies.

The factor of investment connects proactiveness to the third dimension, risk-taking. This dimension is described as the willingness to engage in unfamiliar or unproven activities in an attempt to obtain a greater reward (Wang & Yen, 2012). The most common type of risk associated with the business domain involves undertaking a potentially lucrative opportunity without the possibility of definitively estimating the result. Such activity is normally accompanied by certain standard risk mitigation measures and therefore requires the allocation of a larger amount of resources. Therefore, it is reasonable to include the resource commitment as an essential part of risk-taking.

Finally, organizational performance is a diverse concept that is defined by the metrics used for its assessment. The most common approach used for assessing performance differentiates between financial and non-financial measurements of performance (Wang & Yen, 2012). A financial assessment is done based on the self-reported data offered by the business entity or using the secondary information obtained from the market analysis. This aspect of assessment is valuable due to its high degree of cross-compatibility since it allows performing a comparison with the competitors and is reliable enough to generate robust results.

The non-financial measures include such metrics as customer satisfaction and global success ratings and are traditionally expected to show a weaker relationship to entrepreneurial orientation than the financial counterpart (Wang & Yen, 2012). However, it should be pointed out that the non-financial measurements have low consistency in scholarly literature. The researchers present evidence of this phenomenon by citing several studies that establish a strong positive relationship between the non-financial performance and EO and contrasting their findings to the results from other studies that find little to no relationship between them (Wang & Yen, 2012). Finally, there is limited evidence that companies with uneven distribution of entrepreneurial dimensions can achieve significant results, which is consistent with the initial suggestion that different dimensions of entrepreneurial orientation may have varying impacts on the performance of the organization.

Methodology and Findings

The study in question was performed by administering a survey to a range of small and medium Taiwanese enterprises (5 to 500 employees) located in China. The responses were made by the top management of the firms (founders and presidents) and investigated the potential impact of common method variance (Wang & Yen, 2012). The survey measured innovativeness, proactiveness, and risk-taking through several questions based on the definitions detailed above and the organizational performance based on the evaluation by the participants. All responses were formed using a five-point Likert-type scale.

The authors formulated three research hypotheses correlating to each of the identified dimensions. The hypotheses are “Innovativeness is positively associated with firm performance,” “Proactiveness is positively associated with firm performance,” and “Risk-taking is positively associated with the firm performance” (Wang & Yen, 2012, p. 1038).

The obtained data were processed using multiple regression techniques. The regression results show a strong relationship between innovativeness and performance and risk-taking and performance. The relationship between proactiveness and performance was weaker compared to the former but still statistically significant. Therefore, the results confirmed all the hypotheses formulated by the authors.

The paper contains several implications based on the described findings. First, the authors suggest the actualization of all three dimensions by the firms’ management and their incorporation into the business practices to maximize performance (Wang & Yen, 2012). While no detailed suggestions are provided in the article on the method of their incorporation aside from matching with the external environment, it is possible to assert that these include an internal promotion, staff engagement and training, and adjustments in resource allocation. In addition, the authors describe several areas relevant to the setting of Taiwanese businesses in China. For instance, innovation is considered a viable approach to boosting the revenues by minimizing the expenses associated with product lifecycle extension and developing new markets in other countries (Wang & Yen, 2012). Besides, innovation is considered a source of sustainable development and excellence, which is crucial for the firms that aim at surviving in the highly competitive Chinese market.

Finally, the aggressive competition from the local players can be extremely challenging to deal with since significant gain in performance may result in a backlash in the form of social and legal aftermath triggered by the false allegations of unfair play. Specifically, the accusation of tax evasion will have a detrimental effect on the firm’s performance regardless of the presence of unfair practice due to the related hassle (Wang & Yen, 2012). The authors openly acknowledge the narrow focus of the results’ applications but speculate on their relevance for several other developing countries in which the businesses operate under similar conditions. It is also important to note that the described results are based on the self-reports by the company officials who are prone to common method variance despite the taken precautions. Therefore, the authors suggest self-administration of such tests to obtain a snapshot evaluation of the company’s potential for entrepreneurial orientation. Finally, they emphasize the need to replicate the research in different economic settings to corroborate the results and establish a link between the Taiwanese economy and those of other developing countries to confirm the generalisability of the data.

Applicability to Family Businesses in the UAE

Despite the focus of the research on the specific setting and its apparent relevance to the firms operating in an unfamiliar and/or highly competitive environment, the reviewed findings have potential applicability to family businesses. Such applicability is especially relevant for the UAE setting, where the concentration of the family businesses is traditionally high. By some estimates, up to 90 percent of the region’s businesses are family-oriented (EY Research, 2014). Understandably, such density has significant economic influence, as it is estimated to generate up to 80% of the region’s GDP and employ more than 70% of the nationals (EY Research, 2014). In fact, some of the largest family businesses in the MENA region are from the UA, including Majid Al Futtaim Group and Etihad Airways PJSC (EY Research, 2014). Considering the information above, it is possible to describe the family business segment as an essential part of the UAE economy. Therefore, to ensure both the resilience and profitability of the national economy, it is important to maintain the required level of business performance. Thus, we need to explore the possibility of integrating the approaches suggested by the authors into the UAE family businesses and determine the expected effect based on the findings from the relevant studies.

The UAE Setting

Despite the wide recognition of the importance of EO for business performance, there is a notable scarcity of studies that directly tackle the issue in the UAE setting. The only notable exception is innovation, an EO dimension that is significantly more popular and, as a result, more thoroughly researched than risk-taking and proactiveness. On the whole, the UAE business domain is considered relatively innovative (Al-Ansari, Pervan, & Xu, 2013). However, it should be noted that the overwhelming majority of studies do not differentiate between family and non-family businesses and aggregates the data from all involved companies. Therefore, despite the domination of family businesses in the area, the findings are only marginally applicable to the topic of family businesses. Besides, it is important to acknowledge the limitations of the approach chosen by the scholars who reach such conclusions. For instance, Al-Ansari et al. (2013) assert that the respondents who provided data for the study had different perceptions of the innovative characteristics of the firms and innovation as a concept.

Under such conditions, it is not impossible to assume that the participants chose the practices which were already present in their organization and decided upon their applicability for reporting, which constitutes significant bias in the research. Also, the main source of ideas for starting a business was external. Such a situation is common for the early stage of development of entrepreneurial activities and, by extension, is characterized by the low rate of innovation (Al-Ansari et al., 2013). Overall, the study identified the agreement among the respondents that innovation is beneficial for organizational performance, profitability, and generating competitive advantage. (Al-Ansari et al., 2013). The discussed results indicate a high level of awareness of the benefits of innovative entrepreneurial orientation dimensions accompanied by insufficient knowledge of its theoretical principles and lack of readiness to actively pursuing innovation as a part of company strategy. Such a setting is considered favorable for introducing a shift from hypothetical acknowledgment to education and gradual integration into practice.

A more rigorous approach was demonstrated in the study by Santos, Mancha, and Kaszowska (2014). The authors establish several characteristics of innovative companies in the UAE. The analysis showed insignificant differences in size and owners’ demographics between innovative and non-innovative companies and a significant reliance on export for both the manufacturing and service businesses (Santos et al., 2014). This result indicates the uniformity of the innovative businesses’ characteristics and, by extension, suggests the applicability of the findings on the universal scale. Notably, the study also contains information on the proportion of innovative companies in the UAE, which is 27 percent for both the manufacturing and service firms (Santos et al., 2014). This number is noticeably lower than the estimates made by Al-Ansari et al. (2013), most probably due to the presence of a set of well-defined criteria that minimize the possibility of bias. Overall, the findings confirm the initial assertion of the scarcity of the actual EO practices and favorability of the current setting for the introduction of innovation.

Entrepreneurial Orientation in Family Businesses

A family business is a distinct subtype that possesses several unique characteristics. Interestingly, the net effect of all characteristics is unclear, with some of them presenting significant challenges while others are thought of as creating the advantages to stakeholders. For instance, Hayton, Chandler, and DeTienne (2011) suggest several factors that provide opportunities for creating competitive advantage pertinent to family businesses, such as longer time frame of investment, reduced agency costs, greater flexibility in organizational structures, greater cost-efficiency of transactions, and, most notably, the inclusion of certain unique intangible assets related to family values.

On the other hand, some characteristic features of family-owned companies can be considered a limiting factor. For instance, Casillas, Moreno, and Barbero (2010) point to the fact that the success of the family business depends on the sustainability of the original entrepreneurial orientation throughout the generations. In other words, regardless of the initial success of the firm, the long-term performance and growth depends on the effective synergy of actions of two disparate systems (family and business) and can be maintained only under the condition that the subsequent generations can successfully adopt and build upon the vision proposed by the founders. Due to the intangible nature of some of the said factors and the diversity of definitions used by different authors, it is currently impossible to calculate their aggregated effect since it would be difficult to determine their relative weight.

Another widespread concern with the family business is the lack of flexibility. There is a widespread belief that family-owned companies are more reluctant to embrace innovation and resort to high-risk behaviors than non-family business entities (Duran, Kammerlander, Van Essen, & Zellweger, 2016). While some evidence in the academic literature supports this assertion, the issue is currently not well-represented in the studies to arrive at meaningful conclusions. Thus, in order to understand both the possibility and viability of applying the multidimensional approach to the family business sector in the UAE, it is first necessary to review the existing evidence generated by the researchers.

The study by Hayton et al. (2011) focused on the differences between family and non-family firms in the opportunity identification process. According to the authors, opportunity identification is an important starting point in the entrepreneurial decision-making process and depends largely on the combination of the entrepreneurs’ experiences. Since the latter will differ for employees of family-oriented businesses, the identification process is expected to lead to a different set of results. Besides, while the authors do not utilize any of the dimensions of the entrepreneurial orientation for their research, their definition of opportunity identification visibly aligns with certain aspects of each of the said dimensions.

Specifically, Hayton et al. (2011) assign several characteristics to the opportunity identification process, describing it as possibly spontaneous and creative, and assert that a well-timed opportunity identification may result in the engagement in high-risk, high-reward business activity. The creative component can be associated with innovativeness since creativity is required for establishing new approaches to existing issues or developing unique products or services. Besides, one of the four hypotheses formulated by the researchers deals with the innovativeness of the recognized opportunities, which confirms the initial assertion. Next, high-risk, high-reward practices can be considered evidence of the willingness of the company to take risks and invest in highly lucrative opportunities. The proactiveness is the least represented dimension of the EO in the study, not being apparent in any of the conducted measurements, although there may be an indirect connection between the spontaneous character of the decisions and the readiness to engage in new activities.

Of the four hypotheses formulated by the researchers, only one was not supported by the findings (H2). However, only the first and third hypotheses are relevant to the entrepreneurial orientation dimensions identified by Wang and Yen (2012). Both of these hypotheses were supported. Specifically, the analysis revealed that family-owned companies are far less likely to describe opportunity identification as spontaneous and creative, supporting the first hypothesis, and recognize fewer opportunities within the firms that can be considered innovative, which confirms the third hypothesis. It should be acknowledged that while the differences between the family and non-family businesses were statistically significant in both cases, the measurement of innovativeness has relatively poor reliability and is, therefore, to be used with caution (Hayton et al., 2011).

Overall, the findings are consistent with the popular perception of family businesses as less innovative and more risk-averse than their non-family counterpart. Such a result implies the potential underperformance caused by the insufficiency of EO dimension representation. While the study was performed among Western companies, it is reasonable to assume that most of the results are applicable to the UAE setting due to the similarity of the family business characteristics. Most prominently, entrepreneurs in the family business are socially embedded in the family matters that restrain the freedom of the decision-making process and, as a result, inhibit innovation. As this effect is expected to be more prominent in the settings with a higher reliance on traditional values, it is possible that the identified disparity will be even more prominent among the UAE firms.

Due to the fact that family businesses are known to possess a range of unique characteristics, it is necessary to determine their relevance to entrepreneurial orientation facilitation. One of the most evident factors is trans-generational sustainability. As was detailed above, the long-term efficiency of entrepreneurial orientation in the family business is dependent on the success of communicating the initial EO to the subsequent generations. A study by Casillas et al. (2010) assessed several external and internal factors pertinent to the family business EO to determine their impact on performance. The results indicated a stronger positive relationship between entrepreneurial orientation and growth in companies that were in the second or subsequent generations than in businesses in the first generation or at the founding phase (Casillas et al., 2010).

As a possible explanation for such effect, the authors suggest that the founding generation becomes gradually less entrepreneurial throughout the lifespan of their firm, while for the subsequent generations growth becomes the objective of higher priority (Casillas et al., 2010). However, regardless of the validity of this suggestion, the findings indicate the presence of additional growth possibilities for family businesses that exist on the market for more than one generation. Another important finding made by Casillas et al. (2010) deals with external conditions that impact the efficiency of the EO dimensions. Specifically, the dynamism of the environment increases the influence of proactiveness on firms’ performance whereas environmental hostility as a similar effect on the relationship between risk-taking and performance.

In other words, firms that operate in a highly dynamic environment can benefit more from acting proactively and engaging in uncharacteristic activities while the ones that operate under hostile conditions need to prioritize risk-taking to maximize growth (Casillas et al., 2010). Both results are relevant for increasing the understanding of the mechanisms behind EO as a multidimensional construct. However, the influence of the dynamic environment is of particular importance as the UAE is considered among the most dynamic economies in the world. This information illustrates the potential area of entrepreneurial orientation adjustments for the companies that approach it from the multidimensional perspective.

It is important to acknowledge that while the low level of innovation is an established fact, some researchers suggest that its detrimental effect on firms’ performance is relatively low for family-owned businesses. For instance, Duran et al. (2016) point to the fact that family businesses proliferate despite the lack of innovation and surpass their more innovative competitors. The possible explanation for this, according to the authors, is the high level of control over operations, the presence of non-financial goals, and the concentration of wealth, which allows a higher rate of innovation input to output (Duran et al., 2016). In other words, family firms are able to invest less in innovation and still achieve relatively high performance without getting high scores in the EO assessment process. Therefore, it would be necessary to develop assessment means that would account for this factor and produce more reliable measurements.

Conclusion

The review of the scholarly literature can be summarized as follows: the family-owned business is currently predominant in the UAE in terms of volume, revenue, and impact on the economy. The overall assessment of the firms in the region suggests a high degree of awareness about the benefits of EO dimensions for the business performance but low level of commitment to the practical implementation of EO into company strategies. In other words, the UAE firms are rarely innovative or willing to take risks but are predisposed towards the adoption of such practices.

While no disaggregated information is available for family and non-family businesses, these findings are largely applicable to the former. This assertion is confirmed by findings from other countries that characterize family businesses as risk-averse, lacking in innovation, and limited in proactiveness. The reasons for such a situation include the presence of unique intangible assets such as family values and a longer time frame of investments. Such a setting is favorable to the introduction of a shift from the hypothetical acknowledgment of the benefits of EO towards their incorporation into everyday business practices in order to boost organizational performance. The introduction of entrepreneurial orientation can be achieved through greater involvement of firms’ owners in the innovation processes of their companies, employee empowerment through trust-based family culture, and the creation of trusted source networks used for innovation facilitation.

However, it should be acknowledged that according to some researchers at least some dimensions of EO produce results that are inconsistent with the common models as they do not include several important metrics such as wealth concentration and non-financial goals. Therefore, it would be necessary to develop evaluation tools that would account for the greater rate of innovation input to output conversion characteristic for family businesses. With the suggested adjustments in place, it is reasonable to expect improvements in performance accompanied by reliable evaluation practices.

References

Al-Ansari, Y., Pervan, S., & Xu, J. (2013). Innovation and business performance of SMEs: The case of Dubai. Education, Business and Society: Contemporary Middle Eastern Issues, 6(3), 162-180.

Casillas, J. C., Moreno, A. M., & Barbero, J. L. (2010). A configurational approach of the relationship between entrepreneurial orientation and growth of family firms. Family Business Review, 23(1), 27-44.

Duran, P., Kammerlander, N., Van Essen, M., & Zellweger, T. (2016). Doing more with less: Innovation input and output in family firms. Academy of Management Journal, 59(4), 1224-1264.

EY Research. (2014). Family business in the Middle East: Facts and figures. Web.

Hayton, J., Chandler, G. N., & DeTienne, D. R. (2011). Entrepreneurial opportunity identification and new firm development processes: A comparison of family and non-family new ventures. International Journal of Entrepreneurship and Innovation Management, 13(1), 12-31.

Santos, J. L., Mancha, T., & Kaszowska, J. A. (2014). Service innovation in the Middle East: An analysis for Egypt, Turkey, Iran, Jordan and United Arab Emirates. In SERMED 2014 Conference Papers (pp. 511-522). Madrid, Spain: Instituto Universitario de Análisis Económico y Social.

Wang, H. K., & Yen, Y. F. (2012). An empirical exploration of corporate entrepreneurial orientation and performance in Taiwanese SMEs: A perspective of multidimensional construct. Total Quality Management & Business Excellence, 23(9-10), 1035-1044.

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