Effect of Entrepreneurial Orientation on Firm Performance and Failure: A Longitudinal Analysis

Abstract

This thesis aimed to examine the longitudinal effects of entrepreneurial orientation (EO) and each of its dimensions, innovativeness, proactiveness, and risk taking, on firm performance, among surviving and failed firms, as well as on the risk of firm failure. By utilising the theoretical framework of organisational learning theory and prospect theory, this thesis advances knowledge on EO by challenging the dominating EO-as-Advantage perspective.

This research adopted a quantitative methodology by objectively measuring EO at the firm-level and examining its effects along a longitudinal timeframe from the pre-crisis (fiscal year 2000) to the post-crisis period (fiscal year 2014). The thesis utilised secondary data from Compustat and CRSP databases to collect financial and market information on a sample of US large firms in the high-technology industry. The sample consisted of a total of 742 firms with 5,011 observations. Study 1 used fixed effect panel regression to examine the effect of EO and its dimensions on short-term and long-term measures of firm performance over time in the sample of surviving firms versus the sample of failed firms. Study 2 of this thesis examined the effect of EO and each of its dimensions on the risk of firm failure. The analysis of the data for Study 2 was done by the Cox proportional Hazard regression.

EO was shown to have an inverse U-shaped effect on performance among surviving firms and a negative effect on performance among failed firms. It was revealed that innovativeness had a significant positive effect on long-term performance; whereas proactiveness and risk taking had a significant negative effect on long-term performance. It was also shown that EO as well as its dimensions increased risk of failure over time. Such results provide evidence for the EO-as-Experimentation perspective and align with our predictions on EO from organisational learning theory and prospect theory.