The Effect of Centralization and Formalization on Entrepreneurship in Export Firms

Abstract

The growing liberalization of economies and the creation of free trade zones are resulting in the radical transformation of the global business environment. Export firms in particular must face turbulent operating environments characterized by changing technologies and fragmented markets that represent both problems and opportunities. Such contingencies demand an adaptable, responsive, and entrepreneurially-oriented business organization. Entrepreneurship can be defined as the process of creating value by bringing together a unique package of resources to exploit an opportunity. As a process, it is applicable to organizations of differing sizes and types. The process can be divided into specific stages, including: the identification of opportunities; the development of new business concepts; the evaluation and acquisition of the necessary set of resources; the implementation of the concept; and finally, the exploitation and harvesting of the resultant business venture (Morris, Avila, and Allen 1993; Rosenberg and Servo 1990; Stevenson, Roberts, and Grousbeck 1989). The human resource is increasingly being seen as the ultimate source of corporate adaptability and competitive power. It has replaced property and capital as the premier source of power and profit (Itami 1987; Phillips 1993), but must be organized effectively if it is to achieve a best-fit arrangement with external circumstances (Galbraith 1977). Two key aspects of organization design concern the levels of centralization and formalization that need to be built into the organizational system. The constructs of centralization, formalization, and entrepreneurship would intuitively appear to be related. It is difficult to imagine a firm that is either highly centralized or completely lacking in formalization as being entrepreneurial. However, to investigate the relationships among these constructs, a number of factors need to be present. First, a macro theory that relates the variables needs to be specified. Second, the literature pertaining to each construct needs to be reviewed, and last, the micro relationships need to be specified. Such is the intent of this article. Contingency theory offers a theoretical justification for the relationships among these constructs. The contingency approach (Galbraith 1977; Ruekert, Walker, and Roering 1985; Zeithaml, Varadarajan, and Zeithaml 1988) holds that there are no universal principles that apply to all organizations and that not all available approaches are equally effective. Contingency theory argues that for an organization to survive and perform in a given context, it must exhibit congruence between its internal elements and its external environment (Galbraith 1977). Burrell and Morgan (1979) argue that there are two major types of congruence. They first postulate that the effectiveness of the organization depends on the congruence between elements of the organizational subsystem and the demands of the environment (macro congruence); and they further postulate that effectiveness requires that the subsystem elements be congruent with one another (micro congruence). These two aspects of congruence are reflected in the assumptions that the constructs of centralization, formalization, and entrepreneurship would intuitively appear to be related. However, congruence is a necessary but not sufficient condition for contingency. It is possible to speak of a contingency theory only if, in addition to congruence, the fundamental laws of relationship are specified before discussion of multiple system states (Fry and Smith 1987). The purpose of this research is to determine the degree to which centralization and formalization are factors in explaining entrepreneurial behavior in export firms. A model is developed and hypotheses are proposed regarding relationships between each of these constructs and entrepreneurial behavior. In addition, the relationship between the amount of a manager's experience and entrepreneurial behavior is also considered. …

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