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Deakin Research Online This is the published version: Roxas, Hernan 'Banjo', Lindsay, Val, Ashill, Nicholas and Victorio, Antong 2008, Institutional analysis of strategic choice of micro, small, and medium enterprises : development of a conceptual framework, Singapore management review, vol. 30, no. 2, pp. 47-72. Available from Deakin Research Online: http://hdl.handle.net/10536/DRO/DU:30042419 Reproduced with the kind permissions of the copyright owner. Copyright : 2008, Singapore Institute of Management

Institutional Analysis of Strategic Choice ofMicro, Small, and Medium Enterprises:

Development of a Conceptual Framework

Hernan "Banjo" G RoxasVal Lindsay

Nicholas AshillSchool of Marketing and International BusinessVictoria University of Wellington, New Zealand

Antong VictorioSchool of Government

Victoria University of Wellington

AbstractThis paper presents a conceptual framework showing formal and infor-mal institutions and their relationship with the strategic choice of micro,small, and medium enterprises (MSMEs) in a developing country setting.It emphasises how institutions at sub-national level (such as a region orcity) influence the strategic orientations of MSMEs as many developingcountries in Asia are undergoing decentralisation whereby sub-nationalgovernment authorities are given more political, economic, fiscal, andadministrative powers. Furthermore, it sheds more insights on the envi-ronmental (institutional) determinism-organisational (strategic) choicenexus. It offers propositions, questions as well as issues worth pursuingin empirical investigations in the future.

IntroductionIf the micro, small, and medium enterprise (MSME) sector is an en-

gine of economic growth, then the local institutional framework is thesteering wheel. This is the underlying theme of this study. Its main thesisis that formal and informal institutions emanating from the economic,political, and socio-cultural environments at a sub-national level such asa region or city significantly influence the strategic directions of MSMEsoperating in that locality. In many developing countries characterised bygovernment deregulation and decentralisation, national institutions domatter but sub-national institutions matter even more.

However, the liability of smallness is known to be inherent amongthese MSMEs (Lall, 2000). This liability explains that despite their po-tential to contribute to economic growth, MSMEs are unable to competewell due to exogenous and endogenous constraints (Harvie and Lee, 2002;

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SINGAPORE MANAGEMENT REVIEW, VOLUME 30 NO 2

Kirby and Watson, 2003; Brown, Earle and Lup, 2005; Fogel, Hawk,Morck and Yeung, 2006). Institutional analysis has been used in a varietyof ways to diagnose and offer remedies to the functional, performance,and competitiveness issues associated with MSMEs (Basu 1998; Busenitz,Gomez and Spencer, 2000; Carlsson, 2002; Carney and Gedajlovic, 2002).One stream of institutional theory that is replete with controversy is thenew institutional theory of Douglas North whose original work on thesubject focuses on institutional explanations of economic development(North 1990, 2005).

The current debate on North's work centres on how to operationaliseformal and informal institutions (Glaeser, La Porta, Silanes and Shlcifer,2004; Helmke and Levitsky, 2004; Gambarotto and Solari, 2005; Vatn,2005; Demirbas, 2006; Fergusson, 2006). Furthermore, as typical insti-tutional analysis has been repeatedly applied in country-wide settings, agrowing interest is on understanding the institutional framework at thesub-national levels such as a state, region or city (Busenitz et al, 2000;Brouthers, 2002; Meyer and Nguyen, 2005). The argument is that whilenational institutions do matter, it is important to recognise that there aremay be institutional disparities between and amongst sub-national geo-economic and political areas within the same national boundary espe-cially in countries with diverse multicultural identifications situated indispersed geographic locations (Meyer and Nguyen, 2005).

Another issue concerns the use of institutional analysis to describenational entrepreneurial (that is, SME) development. Typical studies tendto examine the institutional factors to explain national or regional aggre-gate measures of economic and/or entrepreneurial productivity (North,1990; Ahmadi, 2003; Glaeser et al, 2004; Tabellini, 2005; Welter andSmallbone, 2005). While this could be helpful in macro economic analy-sis, most helpful for the MSME sector is to understand how specificinstitutional forms directly influence firm-level variables such as the func-tional activities and performance of firms.

This study hopes to contribute more insights if not remedies to theissues and research gaps identified above. Specifically, it attempts topresent the development of a conceptual framework illustrating the insti-tutional environment that is argued to shape the strategic choice ofMSMEs. It discusses the following issues: (a) formal and informal insti-tutions under the new institutional theory; (b) decentralisation; (c) therole of MSME in economic development; (d) strategic choice; and (e)link between institutions and strategic posture of MSMEs.

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DEVELOPMENT OF A CONCEPTUAL FRAMEWORK

Review of LiteratureNew Institutional Theory

The seminal work of Douglas North in the field of new institutionaleconomics (North, 1992) has inspired numerous studies on the institu-tional theory. North (1992) broadly defines institutions as the "rules ofthe game" or humanly devised structures that provide incentives and con-straints to economic players. It suggests that these economic players areembedded in an extemai environment characterised by high degree ofuncertainty and transaction costs (Baum and Oliver 1992; HoUingsworth,2002). The presence of economic uncertainty makes it costly for MSMEsto transact. Institutions are formed to reduce this uncertainty by settingthe "rules ofthe game" in the form of formal rules, informal norms, andtheir enforcement characteristics (North, 1992, 2005).

Likewise, the same rules of the game provide the constraints andincentives that encourage the economic players, say MSMEs, to switchfrom unproductive to productive activity, and ultimately improve the gen-eral economic well-being of a society (North, 1990). The extant litera-ture has shown that institutions take the form of rules (Ostrom, 2005),collective action (Parto, 2005), and structures (North, 1992).

North's new institutional theory explains that there are two types ofinstitutions: formal and informal. Formal institutions refer to written laws,policies, regulations, political and economic rules, and contracts (North,1990).

On the other hand, informal institutions are referred to by North(1990) as codes of conduct, norms of behaviour, and social conventionsthat generally emanate from a society's culture. Informal rules are con-sidered unwritten rules that are created, communicated, and enforcedoutside officially sanctioned channels (Helmke and Levitsky, 2004). Theirenforcement takes place by way of sanctions such as expulsion from thecommunity, ostracism by friends and neighbours, or loss of reputation(Pejovich, 1999).

While there is a plethora of studies that have examined the role offormal institutions (Clingermayer and Feiock, 2001; Carlsson, 2002;Carney and Gedajlovic, 2002; Veciana, Aponte and Urbano, 2002; Co,2004), studies that attempt to operationalise North's informal institutionsare very scarce and divergent in their approaches. The very scarce em-pirical studies on informal institutions looked at socio-cultural factorssuch as kinship, community networks, religion, norms, and values asmanifestations of informal institutions having varying degrees of influ-ence on human or organisational behaviour (Hill, 1995; Pejovich, 1999;Veciana et al, 2002; Nkya, 2003; Tabellini, 2005; Fogel et al, 2006). In-

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deed there is an abundance of conceptual discussions on informal insti-tutions coupled with a drought of empirical studies to operationalise thesame (Helmke and Levitsky, 2004). One explanation for this could bethat North's seminal work did not specifically come up with operationaldefinitions of formal and informal institutions to guide empirical investi-gations.

Decentralisation of GovernanceA focus on institutional environment at the city level is justified by

the wave of decentralisation taking place in a number of developing coun-tries, including Cambodia, Indonesia, the Philippines, Pakistan, India,Bhutan, and Thailand. Decentralisation in these countries is characterisedby national govemments assigning state powers, responsibilities and re-sources to sub-national authorities (Wescott and Porter, 2002). This is aprocess of restructuring or reorganisation of political, fiscal, and admin-istrative authority whereby the authority and capabilities of govemmentunits at sub-national levels are substantially increased (Work, 2001).However, studies on the implementation of decentralisation reveal thatresults were lacklustre due to the underdeveloped institutional capacityat sub-national levels (Work, 2001; Wescott and Porter, 2002).

Micro, Small, and Medium Enterprises (MSMEs)The role of MSMEs in economic development cannot be

overemphasised. Comprising over 98 per cent of total enterprises in theAsia-Pacific region (APEC, 2002), MSMEs have assumed a leading rolein economic development of many countries (Benney, 2000; Lee andPeterson, 2000; OECD, 2005). For instance, in the Philippines, 99.6 percent ofthe total 810,362 business establishments as of 2003 are micro(91.75 per cent), small (7.5 per cent), and medium (0.35 per cent) firmsgenerating 67.9 per cent ofthe country's total employment (DTI, 2005).

However, the liability of smallness that is inherent amongst theseMSMEs explains that despite their potential to contribute to economicgrowth, they arc unable to compete well due to exogenous and endog-enous constraints (Lall, 2000; Kirby and Watson, 2003). Previous stud-ies have shown that the institutional (that is, political, social andeconomic) framework significantly affects the chances of success ofMSMEs (Amin and Thrift, 1995; Nkya, 2003; Aidis, 2005).

Strategic Choice of MSMEsNo business organisation would survive in the long mn in the ab-

sence of a strategy (Thomson, 2001). Hence, the exercise of strategic50


choice is a fundamental managerial and organisational function in everyMSME. Strategic choice refers to the determination of courses of strate-gic action an organisation should take (Child, 1997). Strategic choice, inthis context is considered as an organisational variable although it is nor-mally exercised by the top management of organisations. The choice isstrategic as it involves matters of critical importance to an organisationas a whole. Child (1997) argues that strategic choice enables anorganisation to relate to its external environment, set standards of operat-ing performance, and determine the design of the organisation. In thiscontext, environmental conditions shape the strategic choice (such assituational analysis and choice of goals and strategy) of organisations.Strategic choices consequently influence the organisation's scale of op-eration, technology, structure, hunian resources, and ultimately theorganisation's operating effectiveness.

Conceptual Framework DevelopmentThe foregoing discussion on the theoretical domains of institutional

theory, MSME sector development, and strategic choice serves as a men-tal map guiding the development of the framework linking institutionsand strategic choice of MSMEs. Figure 1 presents the conceptual frame-work. The formal and informal institutions constitute the institutionalmatrix (North, 1990) which shapes MSMEs' strategic choice that isoperationalised as strategic posture or the top management's risk takingbehaviour with regard to investment decisions and strategic actions inthe face of uncertainty, the extensiveness and frequency of product inno-vations and the related tendency toward technological leadership, andthe pioneering nature of the firm as evident in the firm's propensity tocompete with industry rivals aggressively and proactively (Covin andSlevin, 1990; Covin, Slevin and Schultz, 1994; Gibbons and O'Connor,2005).

Formal institutions constitute the "concrete" (Boland, 1992) or "hard"institutional environment of the firm (Hodgson, 1993) while the infor-mal institutions constitute the "consensus" or "soft" institutional envi-ronment. Together, they determine the level of institutional thicknesswhich shape the productive and strategic directions of MSMEs (Aminand Thrift, 1995; Raco, 1999).

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Figure 1: The Conceptual Framwork

Formal Institutions

Rule of Law

Property Rights Protection

Government Policies

Regulatory Quality

Government Assistance

Informal Institutions

Performance Orientation

Future Orientation

Assertiveness

Collectivism

Power Distance

Humane Orientation

Uncertainty Avoidance

Strategic Posture

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Link between Institutions and Strategic PostureThe relationships between institutions and strategic choice as mani-

fested by strategic posture, remains a point which needs further clarifica-tion (Pfeffer and Salancik, 1978; Clark, Varadarajan and Pride, 1994;Child, 1997; Beckert, 1999). The strategic choice perspective of the growthof the firm builds on the assumption that the firm operates in a marketeconomy in which it is relatively free to pursue its own strategic choices(Peng and Heath, 1996).

The work of Oliver (1991) provides the argument that firms are notpassive entities floating in an ocean of institutions. Institutional theorycan accommodate interest-seeking, active organisational behaviour whenorganisations' responses to institutional pressures and expectations arenot assumed to be invariably passive and conforming across all institu-tional conditions (Oliver, 1991). By combining institutional and resourcedependency theories, Oliver (1991) was able to identify a typology ofstrategic responses to deal with institutional pressures under the conver-gent assumptions that: (a) organisational choice is constrained by exter-nal pressures coming from a collective and interconnected environment;(b) organisations seek legitimacy, stability and predictability to survive;and (c) organisations are able to protect their interests through respon-siveness to external demands and expectations. The ability of anorganisation to adapt to changing environmental circumstances is thekey to organisational survival and the effectiveness of the adaptive re-sponse is dependent on aligning the response to the environmental cir-cumstances faced by the organisation (Strandholm, Kumar andSubramanian, 2004).

Likewise, the theory of opportunity exploitation (Shane, 2003), theoryof organisational adaptation (Hrebiniak and Joyce, 1985), and the con-cept of environmental management (Zeithaml and Zeithaml, 1984) allpoint to the same argument that environmental structures (that is, institu-tions) are not necessarily antagonistic to strategic choice, rather they bothform its precondition and inform its content (Whittington, 1988). More-over, the subjective perceptions (mental models) of organisational keyplayers about their external environment—correct or incorrect—deter-mine the choices they make which are the ultimate sources of action(North, 2005).

Formal InstitutionsFormal institutions refer to the legal and political factors manifested

by the rule of law, regulations, government policies and assistance pro-grams designed to support the business activities of MSMEs (Busenitz et

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al, 2000). These formal institutions are articulated in written forms, ad-ministered by a central authority, and violations of these "rules" entaillegal sanctions (Redmond, 2005). Identification of these formal institu-tions is mainly based on the seminal work of Kaufmann et al (1999) ongovernance and institutional quality which inspired more studies on therole of formal institutions in economic development (Fogel et al, 2006).

Rule of LawRule of law refers to the supremacy of law whereby decisions are

made by the application of known principles or laws without the inter-vention of discretion in their application (Kahn, 2006). A society with astrong rule of law is defined as one having sound political institutions, astrong court system, and provisions for orderly succession of power aswell as citizens who are willing to accept the established institutions andto make and implement laws and adjudicates disputes (Oxley and Yeung,2001). Rule of law enhances transactional trust among contracting par-ties knowing that their rights and interests are well protected by law sup-ported by an efficient legal and judicial system (Vandenberg, 1999; Fogelet al, 2006). It promotes transparency and stability regarding boundariesofacceptable behaviour (Scully, 1988; Oxley and Yeung, 2001). Increasedtransactional trust therefore allows MSMEs to be more aggressive in seek-ing for opportunities, building alliances, bearing risks, raising capital andentering markets (Fogel et al, 2006). Hence, proposition number one statesthat rule of law is positively associated with entrepreneurial strategicposture.

Property Rights ProtectionPossession of significant assets cannot be efficiently used to increase

output and promote economic growth if such assets lack the legal statusof property. Protection of property rights include the protection and en-forcement of right to use, exclude others from using, modify, obtain in-come from, and sell assets (Reed, 2001; Landau, 2003). Property rightsidentify and protect the set of tangible and intangible resources that canbe transferred in the market place and provides necessary incentives toowners to risk improvement to resources by ensuring that they will ben-efit from the improvement and that others will not deprive them of thebenefit (Reed, 2001).

Consequently, protection of property rights allows the creation ofsecurity for capital borrowing and investment as well as provides incen-tives to put private property into productive use (Reed, 2001; Heitger,2004; Rodrik, Subramanian and Trebbi, 2004). These incentives increase

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the confidence of MSMEs to innovate and become economically activewithout the fear of being cheated out of the fruits of their efforts (Heitger,2004). Other advantages include the promotion of investment in know-ledge creation and business innovation by establishing exclusive rightsto use and sell newly developed technologies, goods and services(Maskus, 2000). Consequently it promotes widespread dissemination ofnew knowledge by encouraging rights holders to put their inventions andideas in the market (Maskus, 2000). As information is viewed as aresource, it will open up opportunities for further research and develop-ment by the rights holder and other firms. Based on the foregoing arguments,proposition number two states that protection of property rights is posi-tively associated with entrepreneurial strategic posture.

Government PoliciesThe development and maintenance of a policy framework condu-

cive for private enterprise in general and for MSME development in par-ticular cannot be over emphasised. In this context, government policiesrefer to the enacted and implemented laws, ordinances, regulations anyother forms of legislations and/or government decisions especially thosethat affect the business sector (Fogel, 2001). The relevance of govern-ment policies is well supported by the argument of Rodrik (2006) thatstrategic government intervention may often be required to get out of thelow-level traps and elicit private investment brought about by coordina-tion failures and capital market imperfections. Government policies maybe viewed as conduits through which MSMES can engage in businessactivities consistent with external rules and regulations, hence, reducingthe level of uncertainty (for example, fear from government interven-tion).

Likewise, government policies open up opportunities for MSMESsuch as resource acquisition, mobilisation, alliance/network formation(for example, subcontracting), establishment of industry clusters, andmarket development or expansion (for example, export) (Lester, 1992;Skuras, Dimara and Vakrou, 2000; Jackson, 2002; Audretsch, 2004; Tan,2004; Tambunan, 2005). Therefore, proposition number three states thatgovernment policies perceived as conducive for MSME are positivelyassociated with entrepreneurial strategic posture.

Regulatory QualityRegulatory quality refers to the degree to which compliance of the

existing laws, rules, and other government regulatory procedures doesnot impose unreasonable burden on MSMEs (Gnyawali and Fogel, 1994;

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Geiger and Hoffman, 1998; Fogel and Zapalska, 2001). Burdensome gov-emment regulations may affect SMEs through: the increased prices toabsorb the cost of regulatory compliance; pressure of cost inequities assmall companies feel the brunt of regulatory burdens more than largefirms; competitive restrictions that may significantly discourage smallfirms; managerial restrictions resulting from SMEs sacrificing manage-rial time to comply with govemment regulations; and mental burden aris-ing from postponed projects, wasted time, managerial failure due to lackof time and energy (Gnyawali and Fogel, 1994; Kuratko, Homsby andNaffziger, 1999; Hellman, Jones, Kaufmann and Schankerman, 2000;Kuratko and Hodgetts, 2004). Therefore, proposition number four statesthat better regulatory quality is positively associated with entrepreneur-ial strategic posture.

Government AssistanceGovernment assistance has been noted as a key component in small

business or MSME development (Hill, 1995; Jackson, 1999; Helmsing,2000; Henriquez, Verheul, van der Knaap and Bischoff, 2001). In thisstudy, govemment assistance is expressed as the extent to which thegovemment extends various forms of assistance or incentives supportiveofthe MSME sector (Busenitz et al, 2000). Jackson (1999) argues thatgovemments have a significant role to play in nurturing the small busi-ness sector by being involved in the provision of non-traditional func-tions such as coordinating and monitoring economic agents, marketdevelopment, financing, supporting producers, enabling community self-provision, supporting customers through provision of information, anddirect provision of services not undertaken by the market (Jackson, 1999).Skuras et al (2004) concluded that the range of business assistance pro-grams significantly shape the tendency of SMEs to pursue either sur-vival-oriented or more aggressive-type of strategies. Proposition numberfive states govemment assistance is positively associated with entrepre-neurial strategic posture.

Informal InstitutionsInformal institutions refer to the cultural factors shared by members

of a society in a that serve as constraints and/or standards and the viola-tion of which entails social rather than legal penalties (North, 1990;Olsson, 1999; Redmond, 2005). This operational definition stems fromthe characterisation of informal institutions by North (1990) as codes ofconduct, norms of behaviour, unwritten mles, conventions, and gener-ally accepted way of thinking that come from socially transmitted infor-

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mation and are part of the heritage that we call culture (North, 1990;1991; 2005). These norms, ethics, customs, taboos, and ideologies formthe unofficial rules of a society, learned through socialisation and arelargely the inherited view of the world from older generations (Olsson,1999; Redmond, 2005).

Whilst there are a number of studies discussing the theoretical andconceptual bases of informal institutions (Pejovich, 1999; Aidis, 2005;Davis, 2006), only a handful of empirical studies attempted to measurespecific constructs categorically classified as informal institutions (Pengand Heath, 1996; Nkya, 2003; Peng, 2004; Robson, 2004; Tabellini, 2005).The very scarce empirical studies on informal institutions look at socio-cultural factors such as kinship, community networks, religion, norms,and values and their varying degrees of influence on human ororganisational behaviour (Hill, 1995; Pejovich, 1999; Nkya, 2003;Tabellini, 2005). Obviously, there is a plethora of studies examining cul-ture using the popular framework of Hofstede (1980) whereby culturaldimensions such as collectivism and uncertainty avoidance were shownto be related to entrepreneurship in various respects (Robson, 2004). Evenso, informal institutions are oftentimes treated ex post facto or as resid-uals after exhaustively discussing formal institutional mechanisms. Thisis anathema to North's (1990) original concept of informal institutionsfor which he argues that informal constraints should not be treated asmere appendages of formal rules.

This study adopts the Global Leadership and OrganisationalBehaviour Effectiveness (GLOBE) cultural framework developed byHouse et al (2004) for a number of reasons. The study of Parboteeah et al(2005) claims that the GLOBE cultural study is the most up-to-date na-tional culture study providing helpful updates to the cultural dimensionsidentified by Hofstede (1980) whose work has been criticised for manyof its conceptual and methodological issues. As such, using the GLOBEframework tends to avoid Hofstede's problematic issues and incorpo-rates other cultural dimensions not included in Hofstede's work and thatof other cultural schemes (Parboteeah, Bronson and CuUen, 2005).

The GLOBE cultural framework measures culture using the DirectValues Inference method whereby cultural characteristics are inferred fromthe aggregated values of respondents in a survey (Lenartowicz and Roth,1999). One of the strengths of the framework is its predictive validitywhereby cultural dimensions are studied not just in the context of thegeneral society but also in the context of leadership and organisationalbehaviour (House et al, 2004). The following are the major componentsof the GLOBE cultural framework which are considered in this study as

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manifestation of a society's informal institutions.

Performance OrientationPerformance orientation reflects the extent to which a community

values results, assertiveness, competition, and materialism, and encour-ages and rewards innovation, high standards, and performance improve-ment (Javidan, 2004). Performance orientation shows strong resemblanceto McClelland's Need for Achievement as well as the Protestant ethics ofindividual responsibility, hard work, knowledge and challenge (Javidan,2004). It is considered as an important dimension of a community'sculture as the underlying practices and values have an impact on the waythe community defines success in adaptation to extemai challenges(Javidan, 2004). It promotes the values of seeking betterment, settinghigh standards of performance, ambitious expectations and a thirst forleaming (Javidan, 2004).

According to Javidan (2004), societies with high level of perfor-mance orientation tend to display strong level of competitiveness,self-confidence, and ambition. Likewise, he further argues that in thesesocieties, time is considered non-renewable and subject to high deple-tion thereby promoting a strong sense of urgency in meeting challengesand making decisions. Hence, proposition number six explains that higherlevel of performance orientation is positively associated with entrepre-neurial strategic posture.

Future OrientationFuture orientation is used in this study to mean the tendency to con-

scientiously think and plan for the future and consider the long-termconsequences of one's actions in the present (Ashkanasy et al, 2004;Corral-Verdugo and Pinheiro, 2006). Cultures with high future orienta-tion display strong capability and willingness to imagine future contin-gencies, formulate future goals states, and seek to achieve goals anddevelop strategies for meeting their future aspirations (Ashkanasy et al,2004). People in a future oriented culture are likely to be good in estab-lishing and achieving goals and in planning strategies for meetinglong-term obligations (Corral-Verdugo and Pinheiro, 2006). Propositionnumber seven is expressed as higher levels of future orientation are posi-tively associated with entrepreneurial strategic posture.

AssertivenessAssertiveness refiects the beliefs as to whether people are encour-

aged to be assertive, aggressive, and tough or non-assertive, non-aggres-58


sive, and tender in social relationships (Den Hartog, 2004; Parboteeah etal, 2005). Assertiveness behaviour includes making it clear to others whatone wants, refusing what one doesn't want and generally expressing one'sintentions in clear and unambiguous terms (Parboteeah et al, 2005).Assertiveness also entails willingness to confront opposing views and toexpress one's ideas and feelings in social encounters (Niikura, 1999). Itis reported that assertive societies tend to be competitive, value successand to think of others as necessarily opportunistic (Den Hartog, 2004).Assertive societies tend to look at nature as something to be controlledand manipulated, take a pragmatic stance towards reality, and have abelief in human perfectibility (Den Hartog, 2004).

A highly aggressive culture places high value on achievement, inde-pendence, heroism, monetary rewards, and decisiveness (McGrath et al,1992; Gleason et al, 2000; Su, 2006). The relationship betweenassertiveness and MSME strategic posture may be explained in terms ofthe dimensions of strategy-making. It is argued that assertiveness is aninherent dimension of strategy-making which concerns the levels of risk-taking and reactiveness or proactiveness of decisions (Miller, 1987;Koberg et al, 1993). Since entrepreneurial firms are viewed as risk-tak-ers and act on rather than react to their environment, then an assertiveculture is likely to support entrepreneurial strategic posture as strategy-making and implementation are considered as an exercise of assertiveness(Miller, 1987; Koberg et al, 1993). Hence, proposition number eight statesthat high level of assertiveness is positively associated with entrepre-neurial strategic posture.

CollectivismCollectivism involves the subordination of personal interests to the

goals of the larger work, an emphasis on sharing, cooperation, interper-sonal connectedness, group harmony and solidarity, and joint responsi-bility, concern for group welfare, and hostility toward out-group members(Hosfstede, 1980; 1983; Morris et al, 1993; Gelfand et al, 2004; Parboteeahet al, 2005; Yilmaz et al, 2005; Su, 2006). The opposite construct is indi-vidualism which refers to self-orientation, an emphasis on self-sufficiencyand control, the pursuit of individual goals that may or may not be con-sistent with in-group goals, a willingness to confront members of the in-group to which they belong, and a culture where people derive pridefrom their own accomplishments (Morris et al, 1993; Yan and Hunt, 2005).Personal freedom is valued and individual decision-making is encour-aged in societies with high individualism culture (Gong, Li and Stump,2007).

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Studies have shown that cultures that are low in collectivism (thatis, high in individualism) tend to support entrepreneurial strategic pos-ture. McGrath et al (1992) argue that entrepreneurs must have high indi-vidualism score since under individualist culture, individual initiative,

I achievement, right to privacy as well as formation of one's own opinionI are highly valued. This is consistent with the findings of Parboteeah et al

(2005) and Yan and Hunt (2005). Therefore, proposition number ninestates that high level of collectivism is negatively associated with entre-preneurial strategic posture.

Power DistancePower distance reflects the extent to which a community accepts and

endorses authority, power differences, and status privileges (Carl et al,2004). High degree of power distance leads to a less participative stancein decision-making, greater reliance on rules and procedures, and higherlevels of subordinate submissiveness (Yilmaz et al, 2005). Likewise, pres-ervation of current status tend to be highly noticeable in societies withhigh power distance (Hosfstede, 1980).

Shane (1992) explains that high power distance is anathema to in-novation because it promotes hierarchical social structure and inequality,inhibits informal communication between people in different hierarchi-cal levels, encourages centralisation of power, endorses elaborate con-trol systems especially in organisations, and upholds unwillingness toaccept change in the distribution of power. All these, according to Shane(1992), inhibit innovation such that: dispersed power structures createcoalitions that support innovation; frequent informal communication aswell as decentralisation permit free flowing of ideas which facilitatesknowledge acquisition and diffusion; control systems based on trust ratherthan rigid rules and procedures encourage active participation and cre-ative thinking amongst employees; and social mobility increases occu-pational mobility, technical change and innovation.

Innovation tend to be significantly lower in countries with high powerdistance (Yaveroglu and Donthu, 2002). Cultures that exhibit large powerdistance will be less innovative because people in such cultures are en-couraged to respect authority, follow directions and avoid standing outthrough original thinking (Gong et al, 2007). People may take less initia-tive to consider and discuss the introduction of new products and tech-nologies and will generally wait for signals from authority figures oropinion leaders (Gong et al, 2007). Therefore, proposition number 10advances that high level of power distance is negatively associated withentrepreneurial strategic posture.

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Humane OrientationHumane orietitation characterises those societies where people's

behaviours are guided by values of altruism, benevolence, kindness, love,and generosity (Kabasakal and Bodur, 2004). The need for belongingnessand affiliation rather than self-fulftlment, pleasure, material possessionand power are likely to be the dominant bases (Kabasakal and Bodur,2004). Societies that have high humane orientation tend to place greaterimportance of others (that is, family, friends, or community), have highneed for belonging and affiliation, values obedience and promotes closemonitoring of children by children rather than promoting independence(Kabasakal and Bodur, 2004).

The GLOBE study reveals that a humane oriented culture tends tocontradict the elements of an entrepreneurial strategic posture: risk-tak-ing, proactiveness, and innovation. Greater emphasis on affiliation ratherthan achievement, less emphasis on self-fulfilment, material possessionand power, less emphasis on independence, strong tendency towards col-lectivism, and lesser value placed on assertiveness: all these do not fitnor support the conceptual scope of entrepreneurial strategic posture. Toachieve something is an underlying purpose of entrepreneurial risk-tak-ing. Likewise, independence is an essential element of innovation andproactiveness based on the assumption that one can only be innovativeand proactive if they are willing to take a firm stand on what they thinkand feel (independent) and pursue ideas contrary to popular beliefs. Henceproposition number 11 states that high level of humane orientation isnegatively associated with entrepreneurial strategic posture.

Uncertainty AvoidanceUncertainty avoidance refers to the extent to which ambiguous situa-

tions are threatening to individuals, to which rules and order are pre-ferred and to which uncertainty is tolerated in society (Gleason et al,2000; De Luque and Javidan, 2004). In short, uncertainty avoidance re-flects the level of tolerance for ambiguity within a given culture(Parboteeah et al, 2005).

Low uncertainty avoidance implies greater willingness to take risks(Hosfstede, 1980). Likewise low uncertainty avoidance comes with itvalues for risk-taking, strong motivations for individual achievement andmore optimism—a very good climate for entrepreneurs to thrive (McGrathet al, 1992; Gong et al, 2007).

The intention to become an entrepreneur and start up a business ischaracterised as a risky behaviour compared to establishing an employ-ment career with predictable and steady fiow of income.

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The fear of failure (usually operationalised by one's risk aversion) isa critical issue for entrepreneurs due to the little separation between busi-ness and personal risk in an entrepreneurial venture (Watson andRobinson, 2003). In this case, entrepreneurship can be characterised asrequiring fair tolerance of ambiguity, locus of control that is more inter-nal than extemai as well as willingness to take risks that are relativelywell calculated (Pitt and Kannemeyer, 2000). Uncertainty avoidance turnsout to be anathema to innovation as the latter tends to introduce unantici-pated changes and cause uncertainty which in tum leads to resistance toinnovation (De Luque and Javidan, 2004; Emmban and de Jong, 2006).

Hofstede (1980) noted that in hi uncertainty avoidance societies,there is greater fear of failure, lower willingness to take risks, lower levelsof ambition, and lower tolerance for ambiguity. These values tend to con-tradict the entrepreneurial values of proactiveness, innovation, and risk-taking. Hence proposition number 12 states that high level of uncertaintyavoidance is negatively associated with entrepreneurial strategic posture.

Strategic PostureAs previously discussed, the exercise of strategic choice by MSMEs

is operationalised by the concept called strategic posture. Strategic pos-ture implies that a firm can be categorised along a continuum rangingfrom less entrepreneurial to more entrepreneurial (Covin, 1991). Strate-gic posture, whilst exercised by the owner of an MSME, or top manage-ment of a firm, is considered an organisational variable as organisationsare refiections ofthe values and cognitive bases of powerful actors (Car-penter and Fredrickson, 2001).

Strategic posture, hinges on three fundamental constructs:innovativeness, proactiveness, and risk-taking. Innovativeness refiects atendency to support new ideas, novelty, experimentation, and creativeprocesses, thereby departing from established practices and technologies(Lumpkin and Dess, 1996). Proactiveness refers to a posture of antici-pating and acting on future wants and needs in the marketplace, therebycreating a first-mover advantage vis-a-vis competitors (Lumpkin and Dess,1996). Risk-taking is associated with a willingness to commit largeamounts of resources to projects where the cost of failure may be high(Miller and Friesen, 1982). It also implies committing resources to projectswhere the outcomes are unknown. It largely refiects the organisation'swillingness to break away from the tried-and-tested and venture into theunknown (Wiklund and Shepherd, 2003).

Covin et al (1994) argue that firms with conservative or less entre-preneurial strategic posture are risk averse, non-innovative and reactive

62


firms whilst those with more entrepreneurial strategic posture are risktaking, innovative, and proactive. These three components comprise abasic, uni-dimensional strategic orientation (Covin et al, 1994; Gibbonsand O'Connor, 2005; Naldi et al, 2007). Essentially, strategic posturereflects the firm's strategic orientation, that is, the firm's overall com-petitive orientation (Covin and Slevin, 1989).

The importance of studying strategic posture rests on previous re-search that generated the following results among others: (a) strategicposture is the organisation's response or adaptation to the vagaries of theexternal environment (that is, hostility, turbulence, complexity, etc) (Lukas1999; Strandholm et al, 2004); (b) strategic posture is the exploitation ofthe firms' resources to generate competitive advantage (Ordaz et al, 2003);(c) strategic posture shapes the level of innovation within the firm (Salavouet al, 2004; O'Regan and Ghobadian, 2005); and (d) strategic postureshapes the performance outcome of firms (Ramaswamy et al, 1994;Rajagopalan, 1996; Pelham, 1999; Durand and Coeurderoy, 2001; Nobleet al, 2002; Morgan and Strong, 2003; Aragon-Sanchez et al, 2005).

Conclusion and Implications for Further ResearchInstitutions matter to MSMEs because they provide the structure,

set constraints and offer incentives that could support or inhibit the pro-active, risk-taking and innovative activities of these firms. Theminimisation of transaction costs as well as level of uncertainty throughformal institutions play a major role in supporting the entrepreneurialgrowth of MSMEs. The socio-cultural support provided by the equallyimportant infomial institutions complete the institutional landscapethrough which productive entrepreneurial activities could take place. Theconceptual framework developed in this study offers a new way of look-ing at the relationship between the institutional environment and the stra-tegic choices of MSMEs. However, this study offers numerous questionsand issues worth pursuing in future studies.

Of major concern is the measurement of formal and informal insti-tutions. It must be noted that there are many ways to measure a firm'sexternal environment (Lenz and Engledow, 1986). If informal institu-tions are intangible, will the cognitive model of environment (Weick,1988) provide an adequate framework for measurement? Should objec-tive measures be used to determine the quality of formal institutions?Furthermore, many developing countries are undergoing deregulation anddecentralisation of governance systems making sub-national (for example,regional or city) governments politically and economically more respon-sible and accountable. It would be interesting to know how the proposi-

63


tions would work in such institutionally-heterogeneous localities.Finally, the ultimate objective of business operation is to realise a

pre-determined goal or set of goals which may range from intrinsic tofinancial values. The challenge therefore is to establish if an institutionalenvironment conducive for entrepreneurial strategic posture would re-sult to better and sustainable MSME performance.

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