The relationship between leadership behaviour, entrepreneurial orientation and organisational performance in Malaysian small and medium enterprises.

Abstract

Malaysia is heading towards having developed country status by 2020. To realise this national agenda, the country needs to further strengthen its economic development, growth and well-being. One of the important sources for economic growth is the development of small and medium enterprises (SMEs). SMEs are acknowledged as a source of employment, economic dynamism, competition and innovation. But their contributions to the country’s economy are still comparatively low compared with the contributions of SMEs in many developed and developing countries. This indicates an opportunity for further growth and development and a call for a robust study to further explore how the contributions of SMEs can be improved. Research has shown that leadership and an entrepreneurial orientation are important for organisational success. But the literature has indicated that leadership research in small businesses, especially SMEs in Malaysia, is still lacking. Also, research in the area of entrepreneurial orientation in Malaysia is still in its infant stage. Thus, this thesis concentrates on the organisational performance of SMEs in Malaysia from the perspective of the leadership behaviour of SME leaders and their entrepreneurial orientation. To accomplish this, this thesis begins by reviewing the literature in the areas of leadership, entrepreneurship and organisational performance. To represent leadership behaviour, transformational and transactional leadership have been chosen, as these types of leadership behaviour are considered the most recent paradigms of leadership. Innovativeness, proactiveness and risk taking have been chosen to reflect entrepreneurial orientation. Growth and profitability are used as measures for organisational performance. To test hypotheses, data were collected from 395 Malaysian-owned SMEs operating in the manufacturing and service industries. Exploratory factor analysis, confirmatory factor analysis and structural equation modelling (SEM) using path analysis were used to test three models and verify all hypotheses on the direct and indirect effects of leadership behaviour and entrepreneurial orientation on organisational performance. Nine interviews were also conducted to provide quantitative findings and to further elucidate the results of this study. This study demonstrates that leadership behaviour has a direct impact on organisational performance, with transformational leadership having the stronger impact of the two types of leadership behaviour investigated. The attributes of inspirational motivation and contingent reward were found to be the most favourable aspects of transformational and transactional leadership respectively, as perceived by the respondents in this study. Also, entrepreneurial orientation was found to have a direct impact on organisational performance and was a good mediator between transformational leadership and organisational performance. These findings suggest that besides practising transformational leadership, leaders need to focus on developing their organisation’s entrepreneurial orientation. Transformational leadership qualities exert a strong effect on entrepreneurial orientation and enhance organisational performance. This study acknowledges leadership and entrepreneurial orientation as important resources and capabilities in an organisation because the integration of these two elements can offer success for SMEs.

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