The Relationships Among Leadership Styles, Entrepreneurial Orientation, and Business Performance

The Relationships Among Leadership Styles,
Entrepreneurial Orientation,
and Business Performance
Chung-Wen Yang
This study aims to contribute to the knowledge of leadership styles
and entrepreneurial orientation at small and medium enterprises as
well as their effects on business performance. This study examines how
leadership style can affect the development and implementation of en-
trepreneurial orientation in small and medium enterprises in Taiwan.
It is also designed to examine the effects of leadership styles and en-
trepreneurial orientation on business performance. Significant conclu-
sions from this study are that different leadership styles may affect
business performance; that transformational leadership is significantly
more correlated to the business performance than is transactional lead-
ership and passive-avoidant leadership; that entrepreneurial orienta-
tion is positively related to performance; and that transformational
leadership with higher entrepreneurial orientation can contribute to
higher business performance.
Key Words: leadership styles, entrepreneurial orientation,
business performance
jel Classification: m10
Introduction
An effective leader influences followers in a desired manner to achieve
desired goals. Different leadership styles may affect organizational ef-
fectiveness or performance (Nahavandi 2002); Entrepreneurs have be-
come the heroes of economic development and contemporary enter-
prises (Sathe 2003). Entrepreneurial orientation is a commonly used
measure in the literature (Morris and Kuratko 2002). This concept is the
presence of organizational-level entrepreneurship (Wiklund and Shep-
herd 2005).
Some researchers have tried to combine the two concepts into en-
trepreneurial leadership to explore both leadership and entrepreneur-
ship behavior (Gupta et al. 2004; Tarabishy et al. 2005). They have tried
Dr Chung-Wen Yang is an Assistant Professor at the Department
of Business Administration, Cheng Shiu University, Taiwan.
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258 Chung-Wen Yang
to combine entrepreneurship with leadership into a new form of lead-
ership called entrepreneurial leadership. This new leadership model has
been used to show both entrepreneurship and leadership behavior (Tara-
bishy et al. 2005). In the dynamic, complex, and uncertain competitive
environment, a type of entrepreneurial leader who is distinct from the
behavioral form of leaders is needed (Cohen 2004).
This study was designed to examine how leadership styles can affect
the development and implementation of entrepreneurial orientation in
Small and medium enterprises (smes) in Taiwan. smes exert a strong
influence on the economies of Taiwan. It also examines the effects of en-
trepreneurial orientation and leadership styles on business performance.
The findings could contribute new knowledge in the fields of leadership
and entrepreneurship, especially entrepreneurial leadership
Literture Review and Hypothesis Development
leadership styles and business performance
Leadership style is the ‘relatively consistent pattern of behavior that char-
acterizes a leader’ (DuBrin 2001, 121). Today’s organizations need ef-
fective leaders who understand the complexities of the rapidly chang-
ing global environment. Different leadership styles may affect organiza-
tional effectiveness or performance (Nahavandi 2002). This study focuses
on three different leadership styles: transformational leadership, trans-
actional leadership, and passive-avoidant leadership measured through
the Multifactor Leadership Questionnaire (mlq; Bass and Avolio 1995).
The concepts of transformational and transactional leadership have been
considerable interest in the leadership literature over the past several
years (Avolio and Bass 2004).
Transformational and transactional leadership are not viewed as op-
posing leadership styles. Leaders can be both transformational and trans-
actional (Lowe et al. 1996). In general, transformational leadership is
more effective than transactional leadership (Gardner and Stough 2002).
Some researchers have found data supporting the conclusion that trans-
formational leadership is superior to transactional leadership (Bass et al.
2003; Dvir et al. 2002). Transformational leadership is more strongly cor-
related than transactional leadership with higher productivity and per-
formance (Lowe et al. 1996), higher level of organizational culture (Block
2003), and higher level of emotional intelligence (Gardner and Stough
2002). Therefore, the researcher hypothesizes:
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The Relationships Among Leadership Styles . . . 259
h1 Can the top-level managers’ leadership styles (transformational lead-
ership, transactional leadership, and passive-avoidant leadership)
predict higher business performance?
entrepreneurial orientation and business
performance
Entrepreneurial orientation is a commonly used measure in entreprene-
urship literature. Entrepreneurial orientation is the presence of organiz-
ational-level entrepreneurship (Wiklund and Shepherd 2005). Several
researchers have agreed that entrepreneurial orientation could be ex-
plained by innovation, proactiveness, and risk taking (Wiklund 1999).
A large proportion of entrepreneurship studies assume entrepreneurial
orientation to be a unitary concept (Covin and Slevin 1989; Dess et al.
1997; Wiklund 1999). The notion of a single factor entrepreneurial orien-
tation concept also has been examined in some studies. Because the three
dimensions of entrepreneurial orientation can vary independently of one
another (Krauss et al. 2005; Kreiser et al. 2002; Lumpkin and Dess 1996;
Lyon et al. 2000; Venkatraman 1989), this study included a comparison of
the dimensions of entrepreneurial orientation and total entrepreneurial
orientation with other variables.
The assumption of entrepreneurial orientation is that entrepreneurial
businesses differ from other types of businesses. Successful corporate
entrepreneurship must have an entrepreneurial orientation (Covin and
Slevin 1989; Wiklund 1999; Wiklund and Shepherd 2003). This study
compared three dimensions of the entrepreneurial orientation and the
total entrepreneurial orientation with business performance. Hence, the
researcher hypothesizes:
h2 Can the entrepreneurial orientation (innovation, proactiveness, and
risk-taking) of smes in Taiwan predict the business performance?
leadership styles and entrepreneurial orientation
The study tried to combine these two concepts: leadership and en-
trepreneurship. The aim was to examine how leadership can affect
the development and implementation of entrepreneurial orientation in
smes in Taiwan. Entrepreneurial leadership is an effective and needed
leadership style (Cohen 2004; Fernald, Solomon, and Tarabishy 2005;
Tarabishy et al. 2005). Entrepreneurial leadership was coined by those
who realized that a change in leadership style was necessary. Entreprene-
urial leaders play a critical role in the success of new business ven-
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260 Chung-Wen Yang
tures. Wah (2004) suggested that future leadership research use more
quantitative approaches to survey Chinese entrepreneurial leaders. En-
trepreneurial leadership is understandable because of the uncharted and
unprecedented territory that lies ahead for businesses in today’s dy-
namic markets (Tarabishy et al. 2005). Thornberry (2006) stated that
‘entrepreneurial leadership is more like transformational leadership than
it is like transactional leadership, yet it differs in some fundamental ways’
(p. 24). The study also examines the effects of entrepreneurial orienta-
tion and leadership styles on business performance. Given this view the
researcher hypothesizes:
h3 Can the top-level managers’ leadership styles (transformational lead-
ership, transactional leadership, and passive-avoidant leadership)
and entrepreneurial orientation of smes (innovation, proactiveness,
and risk-taking) predict higher business performance?
Methodology
research design
This study used a quantitative research method to examine the relation-
ship among leadership styles, the entrepreneurial orientation, and busi-
ness performance of smes in Taiwan; a sample of top-level managers
from smes in Taiwan was used. smes represent a major part of most
modern economies. According to the White Paper on Small and Medium
Enterprises in Taiwan (Ministry of Economic Affairs 2006), smes ac-
count for 97.8% of all businesses in Taiwan. This study focused on smes
to control for organizational size. The population for the study was based
on the cd-rom version of the 2006 Directories of Corporations (China
Credit Information Service 2006). The ccis is the leading business in-
formation agency in Taiwan, and its 2006 directories provide basic back-
ground information for 20,302 enterprises in Taiwan. Surveys were ad-
dressed to top-level managers, who were identified as the ceos, owners,
founders, managers, presidents, or heads of smes. Top-level managers
were targeted because they are the most informed about the business’
overall operational activities.
instrumentation
Three survey instruments were used. The first was the Multifactor Lead-
ership Questionnaire (mlq), which was used to measure top-level man-
agers’ leadership style (transformational, transactional, and passive-
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The Relationships Among Leadership Styles . . . 261
avoidant). The mlq is one of the most widely used instruments to mea-
sure transformational and transactional leadership behaviors (Avolio
and Bass 2004). The mlq Leader 5x short form consists of 45 items that
measure aspects of transformational leadership (attributed charisma,
idealized influence, inspirational motivation, individualized stimulation,
and intellectual consideration), transactional leadership (contingent re-
ward and management-by-exception: active), and passive-avoidant lead-
ership (management-by-exception: passive and laisser-faire leadership)
on a 5-point scale.
The second assessment tool was the Entrepreneurial Orientation
Questionnaire (eoq), the most widely utilized instrument for measur-
ing entrepreneurial orientation. It was developed by Covin and Slevin
(1989), based on the earlier study of Khandwalla (1976/1977) and Miller
and Friesen (1982). The eoq, which contains nine items and uses a 7-
point scale, measures three dimensions of entrepreneurial orientation
(innovation, proactiveness, and risk-taking). It is used to assess three
components of entrepreneurial orientation, with three items measuring
innovation, three items measuring proactiveness, and three items mea-
suring risk-taking.
The third assessment tool was a business performance scale devel-
oped by the researcher according to the suggestions of previous stud-
ies. Business performance is a multidimensional construct (Wiklund and
Shepherd 2005). Previous studies have often used self-reports to gather
business performance data, and these results have proven to be reliable
(Knight 2000). Wiklund (1999) suggested that performance measures
should include both growth and financial performance. Furthermore,
public information is unreliable because most smes are privately held
and have no legal obligation to disclose information. Respondents may
be reluctant to provide actual financial data (Tse et al. 2004). Hence, this
study used subjective, self-reported measures of business performance
including growth and financial performance. The business performance
scale was developed by the research according to suggestions of previ-
ous studies. The scale contains eight items and uses a 7-point Likert-
type scale. Four indicators of growth were utilized: sales growth, employ-
ment growth, sales growth compared to competitors, and market share
growth compared to competitors. The three financial performance indi-
cators were gross profit, return on assets (roa), and return on invest-
ment (roi). In addition, the researcher used an indicator of ‘overall per-
formance/success’ to business performance (Lumpkin and Dess 1996).
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262 Chung-Wen Yang
sampling
A sample should be large enough to provide a credible result. Gay and
Airasian (2003) said that, when the population size is about 5,000 or
more, a sample size of 400 should be adequate (p. 113). Furthermore,
because the similar studies in Taiwan reported a low response rate for
mailed surveys, the researcher randomly selected 3,000 top-level man-
agers of smes in Taiwan through the 2006 Directories of Corporations
(cd version; China Credit Information Service 2006). Questionnaires
were delivered to 3,000 top-level managers via post service. Of these, 449
questionnaires were returned, but 26 surveys were not usable because
they were incomplete.
The 423 usable surveys were examined for accuracy of data entry,
non-response bias, missing values, reliability, and validity. None of the
nine variables – transformational leadership, transactional leadership,
passive-avoidant leadership, outcomes of leadership, innovation, proac-
tiveness, risk-taking, total entrepreneurial orientation, and total business
performance – violated the assumption of normality. Finally, 17 surveys
were deleted due to outliers, so 406 surveys without missing data re-
mained for analysis.
Data Analysis
The Statistical Package for the Social Sciences (spss 13.0) computer pro-
gram for Windows was used to conduct the statistical analysis of all data
in this study. The Cronbach’ alpha coefficients of the mlq ranged from
.79 to .90. The Cronbach’ alpha coefficients of the eoq ranged from .78 to
.84; the overall Cronbach’ alpha coefficient of the eoq was .87. The Cron-
bach’ alpha coefficient of the business performance was .91. All the co-
efficients were greater than .70, exceeding the recommended minimum
level of .7 (Nunnally 1978). This ensured that these three scales had a
very satisfactory degree of reliability. The results concerning evidence of
reliability were consistent with previous studies involving two of the in-
struments used in this study: the Multifactor Leadership Questionnaire
(mlq; Bass and Avolio 1995) and the Entrepreneurial Orientation Ques-
tionnaire (eoq; Covin and Slevin 1989). The business performance scale
also showed high reliability and inter-item correlations.
leadership styles and business performance
A Pearson product-moment correlation coefficient was used to exam-
ine the relationship between the leadership styles and the business per-
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The Relationships Among Leadership Styles . . . 263
table 1 Intercorrelations for leadership styles and business performance (N = 418)
Measure
TF
TA
PA
Business Performance
.25***
.13**
–.10*
notes TF = transformational leadership, TA = transactional leadership, PA = passive-
avoidant leadership; * p < .05, ** p < .01. *** p < .001.
formance of smes in Taiwan. Transformational leadership was signif-
icantly positively correlated with total business performance (r = .25,
p < .001). There was a small, positive correlation between transforma-
tional leadership and business performance. Transactional leadership
was significantly positively correlated with total business performance
(r = .13, p = .009). There was a small, positive correlation with total busi-
ness performance (r = .13, p = .009). There was also a small, positive
correlation between transactional leadership and business performance.
Passive-avoidant leadership was significantly negatively correlated with
business performance (r = -.10, p = .036). There was a small, negative cor-
relation between passive-avoidant leadership and business performance.
As shown in table 1, transformational leadership had a stronger relation-
ship with business performance than did transactional leadership, both
with small and positive correlations. Passive-avoidant leadership had a
very small, negative correlation.
leadership styles to business performance
A standard multiple regression was performed with business perfor-
mance as the dependent variable, and scores on the mlq (transforma-
tional leadership, transactional leadership, and passive-avoidant leader-
ship) as independent variables. An analysis for evaluation of assump-
tions was performed to reduce the number of outliers and improve the
normality, linearity, and homoscedasticity of residuals. With the use of p
< .001 criterion for Mahalanobis distance, no multivariate outliers were
found in the sample (N = 406). No cases had missing data and no sup-
pressor variables were found. A residual analysis was conducted to check
assumptions. To check the scatterplot of the standardized residuals and
the normal probability plot, assumptions about residuals were met.
Table 2 shows the correlations between the variables, unstandardized
regression coefficients (B), and the standardized regression coefficients
(β). This regression model was significantly different from zero, F (3,402)
= 9.85 and p < .001. The regression coefficient of transformational lead-
ership was different from zero, and 95% confidence limits were .28 to .79.
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264 Chung-Wen Yang
table 2 Regression analysis summary for the top-level managers’ leadership styles
predicting business performance
Variable
B
SEB
β
Transformational leadership
.53
.13
.26***
Transactional leadership
–.06
.13
–.03
Passive-avoidant leadership
–.14
.08
–.09
notes R2 = .07, adjusted R2 = .06 (N = 406, p < .001), *** p < .001.
Only one independent variable contributed significantly to prediction of
business performance, transformational leadership: p < .001, sr2 = .04.
Altogether, 6% (adjusted R2) of the variability in business perfor-
mance was predicted by mlq scores on these three independent vari-
ables. Transactional leadership and passive-avoidant leadership were not
good predictors of the business performance. The transformational lead-
ership of top-level managers contributed the most to the business perfor-
mance of smes.
leadership styles to business performance:
discriminant function analysis
The researcher divided business performance into two categories by its
mean (M = 4.32): higher business performance and lower business per-
formance. A direct discriminant function analysis was performed using
three mlq variables (transformational leadership, transactional leader-
ship, and passive-avoidant leadership) as predictors of membership in
the two groups (higher business performance and lower business perfor-
mance). No cases were identified as multivariate outliers with p < .001.
An analysis for evaluation of assumptions of linearity, normality, multi-
collinearity, and homogeneity of variance-covariance matrices did not
violate multivariate analysis.
A discriminant function analysis indicated a strong association be-
tween groups and predictors, χ2 (3) = 14.91 and p = .002. Table 3 presents
the correlation of predictor variables with discriminant functions, which
suggested that the good predictors for distinguishing between higher
business performance and lower business performance were transforma-
tional leadership and transactional leadership.
smes with higher business performance had higher scores on trans-
formational leadership (M = 3.10, SD = .45) than on transactional lead-
ership (M = 2.72, SD = .49) or passive-avoidant leadership (M = 1.33, SD
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The Relationships Among Leadership Styles . . . 265
table 3 Correlation of predictor variables from the mlq with discriminant functions
(function structure matrix) and standardized discriminant function
coefficients
Predictor variable
Correlation with
Standardized discriminant
discriminant functions
function coefficients
Function 1
Function 1
Transformational
.96
1.10
Transactional
.46
–.23
Passive-avoidant
–.27
–.20
table 4 Means and standard deviations of predictor variables from the mlq
as a function of business performance (N = 406)
Predictor variable
Lower business perf.
Higher business perf.
M
SD
M
SD
Transformational Leadership
2.91
.51
3.10
.45
Transactional Leadership
2.63
.52
2.72
.49
Passive-avoidant Leadership
1.40
.63
1.33
.62
= .62). smes with lower business performance also had higher scores on
transformational leadership (M = 2.91, SD = .51) than on transactional
leadership (M = 2.63, SD = .52) or passive-avoidant leadership (M = 1.40,
SD = .63). Table 4 presents the results.
Higher business performance differs from lower business performance
on transformational leadership, F (1,404) = 14.01 and p < .001. The group
of higher business performance did not differ from the group of lower
business performance on transactional leadership, F (1,404) = 3.24 and p
= .07, or passive-avoidant leadership, F (1,404) = 1.14 and p = .29. Among
the three different leadership styles, transformational leadership (Wilks’
λ = .96) was the best predictor of higher business performance. Table 5
presents the predictor variables.
table 5 Predictor variables from the mlq in stepwise discriminant function analysis
Predictor variable
Wilks’ λ
Equivalent F (1,404)
Transformational leadership
.96
14.01***
Transactional leadership
.99
3.24
Passive-avoidant leadership
.99
1.14
notes * p < .05, *** p < .001.
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266 Chung-Wen Yang
table 6 Classification analysis for business performance
Actual group membership
Predicted group membership
Lower bus. perf.
Higher bus. perf.
N
n
%
n
%
Lower Business Performance
200
105
52.5
95
47.5
Higher Business Performance
206
88
42.7
118
57.3
notes Overall percentage of correctly classified cases (54.9%).
table 7 Intercorrelations for dimensions of entrepreneurial orientation and measure
of business performance (N = 406)
Measure
Innovation Proactiveness Risk-taking
Total eo
Business Performance
.32***
.33***
.26***
.37***
notes eo = Entrepreneurial orientation, *** p < .001.
Table 6 shows the classification analysis for the business performance;
54.9% of cases were classified correctly. The group with higher business
performance was more likely to be correctly classified (57.3% correct clas-
sifications) than the group with lower business performance (52.5% cor-
rect classifications).
entrepreneurial orientation and business
performance
A Pearson product-moment correlation coefficient was calculated to ex-
amine the relationship between entrepreneurial orientation and business
performance of smes in Taiwan. Table 7 shows the intercorrelations for
dimensions of entrepreneurial orientation and business performance.
Innovation was significantly positively correlated with business per-
formance (r = .32, p < .001). There was a medium, positive correlation
between innovation and the business performance. Proactiveness was
significantly positively correlated with business performance (r = .33, p
< .001). There was a medium, positive correlation between proactiveness
and business performance. Risk-taking was significantly positively cor-
related with business performance (r = .26, p < .001). There was a small,
positive correlation between risk-taking and business performance. Total
entrepreneurial orientation was significantly positively correlated with
business performance (r = .37, p < .001). There was a medium, positive
correlation between total entrepreneurial orientation and business per-
formance.
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