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Abstract

  1. Top of page
  2. Abstract
  3. Introduction
  4. Theory and Hypotheses
  5. Method
  6. Results
  7. Discussion
  8. Conclusion
  9. References

Building on prior research, this study provides insights on the complex interaction between individual, organizational, and environmental factors in the field of new venture success. Specifically, we develop and test hypotheses on how venture size, institutional context, and their interaction moderate the effect of entrepreneurs' networking ability on the financial performance of new ventures. Based on a sample of 283 new ventures in Germany and Brazil—two countries that differ significantly in terms of their institutional frameworks—our analyses reveal moderating effects of venture size and the interaction between venture size and institutional environment.


Introduction

  1. Top of page
  2. Abstract
  3. Introduction
  4. Theory and Hypotheses
  5. Method
  6. Results
  7. Discussion
  8. Conclusion
  9. References

Networking ability is an individual-level skill, defined as the ability to develop friendships and build strong, beneficial alliances and coalitions (Ferris et al. 2005). In an intraorganizational context, it has been found to positively influence managerial job performance (Semadar, Robins, and Ferris 2006), income (Ferris et al. 2008; Wolff and Moser 2009), promotions and career, as well as life satisfaction (Todd et al. 2009). Most recently, however, it has also been shown that networking ability is relevant in an entrepreneurial context. Specifically, Batjargal (2010a) found that entrepreneurs' networking skills enable them to attract a greater number of institutional investors. In addition, Semrau and Sigmund (2012) have shown that entrepreneurs with high networking ability realize a higher financial performance, as they are able to build larger exchange networks with stronger exchange relationships. However, the authors also provided initial evidence for the notion that the impact of entrepreneurs' networking ability on new venture performance may be influenced by organizational variables. Specifically, they have shown that the positive relationship between entrepreneurs' networking ability and new venture performance is moderated by venture age.

This study is designed to extend this prior research. Specifically, it addresses the effect of entrepreneurs' networking ability on a new venture's financial performance in different institutional environments. In addition, our study sheds light on the potential moderating role of venture size on the relationship between entrepreneurs' networking ability and new ventures' financial performance, and how this moderating role differs across institutional environments.

Addressing the effects of venture size and institutional context on the relationship between entrepreneurs' networking ability and new venture performance seems fruitful for several reasons. First of all, previous research has pointed to the fact that venture age has a significant moderating effect on the relationship between entrepreneurs' networking ability and the performance of their new ventures (Semrau and Sigmund 2012). Theoretically, this effect is grounded in the fact that younger ventures suffer from the liability of newness, such as a lack of organizational legitimacy (Aldrich and Auster 1986; Stinchcombe 1965) and as a consequence may have to rely on entrepreneurs' networking ability to be successful. Other than suffering from the liability of newness, however, new ventures are also widely recognized to suffer from a liability of smallness, meaning that they lack necessary resources and thus need external support while at the same time are rather unattractive as exchange partners (Aldrich and Auster 1986). In view of these observations, and the fact that the liabilities of newness and smallness have been shown to be conceptually and empirically distinct concepts (Brüderl, Preisendörfer, and Ziegler 1992; Freeman, Carroll, and Hannan 1983), contributing to research on the potential moderating role of venture size, when controlling for venture age, extends our knowledge of how organizational-level concepts and variables affect the relevance of entrepreneurs' characteristics on new venture performance.

Second, researching how differences in the institutional environment affect the relationship between entrepreneurs' networking ability and new venture performance, as well as the interaction between venture size and this relationship, seems fruitful because it answers the calls (1) for better contextualizing entrepreneurship research (Welter 2011) and (2) for shedding light on how a potential interplay of organizational-level and environmental variables influence the relevance of entrepreneurs' individual characteristics for their new ventures' performance (Baron 2007; Korunka et al. 2003; Rauch and Frese 2007).

The paper is organized as follows: in the next section, we present our theoretical reasoning and develop our hypotheses. We then describe our research method and the results of our empirical analysis based on a sample comprising the data of new ventures from Germany, which have previously also been used by Semrau and Sigmund (2012), and additional data from new ventures in Brazil. We then discuss the results of our analysis, which significantly support our hypotheses by providing evidence for (1) a positive effect of entrepreneurs' networking ability on new venture performance in both institutional contexts; (2) a moderating effect of venture size; and (3) a significant three-way interaction between networking ability, venture size, and institutional context. We then conclude with some remarks on the limitations and the contribution of our study.

Theory and Hypotheses

  1. Top of page
  2. Abstract
  3. Introduction
  4. Theory and Hypotheses
  5. Method
  6. Results
  7. Discussion
  8. Conclusion
  9. References

A large body of research indicates that person-related variables may exert a significant influence on entrepreneurial activity and success (Frank, Lueger, and Korunka 2007; Mitchell et al. 2002; Rauch and Frese 2007; Shaver and Scott 1991). Among those variables identified are cognitive factors, such as risk-taking propensity and internal locus of control (Arenius and Minniti 2005; Caliendo, Fossen, and Kritikos 2009; Hansemark 2003; Walter and Walter 2009); variables describing entrepreneurs' backgrounds and experiences, such as previous work and founding experience as well as general human capital (Brüderl, Preisendörfer, and Ziegler 1992; Colombo and Grilli 2005; Davidsson and Honig 2003; Diochon, Menzies, and Gasse 2008); and sociodemographic variables such as age and gender (Brush 1992; Langowitz and Minniti 2007; Minniti 2010). Additionally, recent research provides empirical evidence for a link between entrepreneurs' skills and the success of their ventures. In particular, Baron and Markman (2003) and Baron and Tang (2009) have shown that entrepreneurs' social skills are associated with the financial performance of new ventures, and Batjargal (2010a) as well as Semrau and Sigmund (2012) provide initial evidence for the notion that entrepreneurs may profit from a distinct networking ability.

However, prior research also indicates that the relevance of individual-level factors on the performance of new ventures may be limited to certain conditions. Frank, Lueger, and Korunka (2007), for example, have shown that the relevance of personality traits for the success of entrepreneurs is much stronger in prefounding than in postfounding stages of the entrepreneurial process. Similarly, Baron and Tang (2009) provide evidence for the notion that the industry in which new ventures operate may have an effect on the performance relevance of entrepreneurs' individual skills. Furthermore, it has been shown that the effect of entrepreneurs' networking abilities on the performance of new ventures is moderated by a new ventures' age (Semrau and Sigmund 2012).

In addition to this evidence, prior research has also shown that differences in the institutional context in which individuals are embedded may impact the relevance and use of network ties (Batjargal 2010b; Peng and Luo 2000). For instance, Xin and Pearce (1996) found that network relations may serve as substitutes for formal institutional support in a less developed institutional framework.

Based on these prior insights, we develop a theoretical rationale for how new ventures' size and their institutional context may affect the relationship between entrepreneurs' networking ability and new ventures' financial performance. Before doing so, however, we will briefly describe why we expect entrepreneurs' networking ability to have a positive effect on the financial performance of their new ventures.

Networking Ability and the Financial Performance of New Ventures

Networking ability is the “core dimension” of the political skills concept (Blass et al. 2007, p. 93; Todd et al. 2009, p. 187). It describes one's ability to develop friendships; build strong, beneficial alliances and coalitions; and understand power structures and establish social relations according to one's personal objectives (Blass et al. 2007; Ferris et al. 2005; Hochwarter et al. 2007; Peled 2000; Semadar, Robins, and Ferris 2006). As an important dimension of the political skills concept, networking ability has been empirically found to positively influence managerial job performance (Semadar, Robins, and Ferris 2006), income (Ferris et al. 2008; Wolff and Moser 2009), promotions and career, as well as life satisfaction (Todd et al. 2009).

More recently, research has also shown that networking ability is relevant in an entrepreneurial context. In particular, Batjargal (2010a) observed that entrepreneurs' networking ability helps them to attract a greater number of institutional investors. Complementing this result, Semrau and Sigmund (2012) found that entrepreneurs' networking ability impacts the financial performance of their new ventures because it enables them to establish favorable exchange relationships which in turn facilitate the new venture's financial performance. Specifically, their study revealed that the relationship between entrepreneurs' networking ability and the financial performance of their new ventures is mediated by two characteristics of the new ventures' network: network size and strength of exchange ties.

Theoretically, this result may be explained by the fact that both network characteristics have a positive impact on the resources available through a new venture's network. In fact, larger networks are likely to provide more and a greater variety of resources because they consist of more network partners able to grant resource access (Batjargal 2003). Analogously, stronger network exchange relationships are also expected to be beneficial for new ventures because closer relationships and more frequent interactions motivate exchange partners to grant access to their resources at more favorable terms (Krackhardt 1992; McFadyen and Cannella 2004; Steier and Greenwood 2000) and make resource exchanges more efficient (McFadyen and Cannella 2004; Uzzi 1997).

In view of these arguments and the fact that prior research has shown that entrepreneurs in very different institutional contexts profit from resource exchanges via network relationships (Batjargal 2010b; Lechner, Dowling, and Welpe 2006; Xin and Pearce 1996), we expect that the positive impact of entrepreneurs' networking ability on the financial performance of their new ventures is not limited to a specific national context. Consequently, we propose

  • H1: Entrepreneurs' networking ability is positively related to the financial performance of their new venture, irrespective of the institutional context examined.

The Moderating Impact of New Venture Size

As already indicated by prior research, the impact of networking ability on new venture performance seems to be influenced by certain firm-level conditions. Specifically, it has been shown that the relationship between both variables is stronger for younger than for more mature ventures (Semrau and Sigmund 2012). The reasoning given for this effect is that more recently founded ventures lack a track record of prior performance and exchange relationships and thus have greater difficulties motivating potential network partners to cooperate, so that distinct networking abilities are especially useful for them when trying to establish needed support networks.

However, we do not expect new venture age to be the only firm-level moderator of this relationship. Specifically, we expect the size of a new venture to also have a moderating effect on the relationship between entrepreneurs' networking ability and new venture performance, even when venture age is kept constant. As proposed by many theorists in the field, new ventures suffer not only from a liability of newness but also from a liability of smallness (Aldrich and Auster 1986; Kale and Arditi 1998; Strotmann 2007). Empirically, the size of a new venture is often coupled with its age, but not all organizations are born small or grow at the same rate in the course of their development (Aldrich and Auster 1986). In fact, Freeman, Carroll, and Hannan (1983) as well as Brüderl, Preisendörfer, and Ziegler (1992) have shown that firm size is a factor that turns out to influence venture survival, even when controlling for venture age. The theoretical reasoning behind this result is that not only younger but also smaller firms face severe problems when trying to master the challenges involved in organizational development. First, small firms often have very limited financial and physical resources, a fact that makes them vulnerable to market contractions (Aldrich and Auster 1986; Carayannopoulos 2009). Even if they are able to raise capital via traditional market exchange, they usually have to pay higher interest rates and face more demands for changes that compromise the founders' concept of the organization (Aldrich and Auster 1986; Strotmann 2007). Second, smaller organizations not only suffer from scarcity of financial and physical resources, they usually also lack the managerial knowledge that larger companies possess, as they less likely to attract competent personnel (Aldrich and Auster 1986; Kale and Arditi 1998). As a result, we expect that smaller ventures are more dependent on external support than are their larger counterparts when it comes to getting access to financial capital, other physical assets, and relevant knowledge and information (Carayannopoulos 2009; Strotmann 2007).

In addition, a small firm will most likely have problems motivating potential network partners to cooperate. Again, our reasoning here is twofold: first, small ventures suffer from restricted visibility and organizational reputation, which limits their initial pool of potential partners (Milanov and Fernhaber 2009). Second, because of their lack of resources, they are unable to directly reciprocate within a network-based exchange. Consequently, potential network partners will usually hesitate to invest in an exchange relationship even when they become aware of a new venture.

Based on these facts, we expect smaller ventures' financial performance to be more strongly related to their founders' networking ability than the financial performance of their bigger counterparts for two reasons: (1) smaller ventures will have to rely on greater external support to compensate for larger resource constraints and (2) because of limited organizational visibility and legitimacy, smaller ventures will have to rely more extensively on entrepreneurs' subtle and convincing style that comes with distinct networking abilities in order to develop network exchange relationships. Expecting that entrepreneurs' networking ability will be more important for smaller than for larger ventures, we suggest that the relationship between entrepreneurs' networking ability and their new ventures' financial performance will be negatively moderated by venture size. We thus propose

  • H2: There will be a negative moderating effect of venture size on the relationship between entrepreneurs' networking ability and their new ventures' financial performance.

The Moderating Impact of the Institutional Environment

Besides the size of a new venture, we propose that the institutional environment in which a new venture operates also moderates the impact of entrepreneurs' networking ability on its performance.

Institutions are defined as multifaceted, durable social structures composed of regulative, normative, and cultural-cognitive elements (Scott 2001). Social actors are embedded in environments that vary extensively among these three dimensions (Baumol 1993, 1996, 2005; North 1990, 1994, 2005) that are widely recognized as exerting a strong influence on economic behavior in general (Ralston et al. 2008) and entrepreneurial activity in particular (Aidis, Estrin, and Mickiewicz 2008; Batjargal 2007; Ralston et al. 2008). Acs, Desai, and Klapper (2008), for example, found significant differences in entrepreneurial activity when analyzing data from different institutional environments. Similarly, Tominc and Rebernik (2007) conclude that different intensities of institutional support for entrepreneurial behavior in postsocialist countries have significant effects on the rate of new venture formation and subsequent firm development.

In addition, there is some empirical evidence indicating that institutional differences may also have a significant moderating impact on the relationship between the characteristics of a new venture's network and its performance. Batjargal (2010b), for instance, provides confirming evidence for the notion that the effect of certain network structures on performance is contingent on institutional context differences, and Sheng, Zhou, and Li (2011) found that network ties are more important for firm performance in less developed institutional environments than in more developed ones. Based on these observations, we argue that entrepreneurs' individual networking ability, as an important antecedent of new ventures' network characteristics, will have a much stronger impact on the performance of a new venture in environments with a less developed institutional framework than it will in those environments with more fully developed regulative frameworks.

Highly developed institutional environments are characterized by a stable rule of law, the existence and enforcement of a commercial code, and a functioning court system (Djankov et al. 2005; McMillan and Woodruff 1999). In such an environment, entrepreneurs may rely on contractually safeguarded exchange relationships as a way to easily enforce their rights. In contrast, entrepreneurs operating in less developed institutional environments cannot rely on enforcing contractual rights to a similar extent and may thus be faced with severe risks and opportunistic behavior when engaging in such exchange arrangements (Aidis and Adachi 2007; Aidis, Estrin, and Mickiewicz 2008; Batjargal 2003; Radaev 2002; Sedaitis 1998). As a result, they have to substitute formal institutional support by relying on informal institutions such as trusted exchange partners and mutual safeguarding (Khanna and Palepu 1997; Peng and Luo 2000). Consequently, we expect that being able to rely on trust and reciprocity-based network exchange relationships is much more relevant for entrepreneurs in less developed institutional environments (Sheng, Zhou, and Li 2011; Zhou and Peng 2010) and consequently also expect entrepreneurs' networking ability to be more valuable in these contexts.

Additionally, we expect entrepreneurs from less developed institutional contexts to particularly profit from distinct networking skills, as these skills should help them to develop political ties that are particularly needed in less developed institutional environments. Political ties are informal social connections with government officials in various levels of administration (Sheng, Zhou, and Li 2011). Especially in weaker institutional environments, such relationships are valuable because governments officials and politicians control access to major business opportunities and may provide crucial support in terms of subsidies, favorable regulations, protection against competitors, tax benefits, and so on (Boddewyn and Brewer 1994; Hillman and Hitt 1999; Oliver and Holzinger 2008; Schuler, Rehbein, and Cramer 2002). Supporting this line of reasoning, several previous studies point out that political ties are imperative for survival and growth in environments with less developed institutional settings (Baron 1995; Sheng, Zhou, and Li 2011), and we expect entrepreneurs with more distinct networking abilities to be better able to develop such ties.

Summing up, we expect entrepreneurs in less developed institutional environments to particularly profit from distinct networking abilities, because they should enable them to establish the exchange relationships and political ties that are especially crucial in these contexts. Conversely, we expect the relationship between entrepreneurs' networking ability and their new ventures' financial performance to be weaker in a more developed institutional context. We thus propose

  • H3: The relationship between entrepreneurs' networking ability and their new ventures' financial performance will be weaker in a more developed institutional environment.

The Combined Impact of Venture Size and the Institutional Environment

In addition to the aforementioned moderating effects, we expect that differences in institutional environments will also affect the moderating influence of venture size on the relationship between entrepreneurs' networking ability and the financial performance of their new ventures. Specifically, we suggest the negative moderating effect of venture size on the relationship between networking ability and new ventures' financial performance to be stronger in more developed institutional environments.

As described previously, the rationale for the negative moderating effect of venture size on the relationship between networking ability and new venture performance is that larger ventures (1) do not have to rely as heavily on external resource providers as do their smaller counterparts and (2) are able to rely on their visibility and greater organizational legitimacy when trying to attract potential network partners. As a result, we proposed that the relevance of entrepreneurs' networking ability declines as new ventures grow.

As also described previously, however, we expect entrepreneurs in less developed institutional contexts to particularly profit from distinct networking abilities, because they not only have to establish the resource exchange relationships needed by new ventures in general but also have to develop political ties to government officials and bureaucrats. Assuming that these political ties remain crucial for new ventures in less developed institutional contexts, even when they grow, and also assuming that political ties have to be managed by the entrepreneur himself or herself no matter how large his or her company is, we expect that, in less developed institutional environments, entrepreneurs' networking ability remains crucial for their ventures' financial success as the venture grows.

Confirming the notion that political ties remain important in less developed institutional environments, even when a new venture grows, previous research has found that a large percentage of the value of top-performing firms in Indonesia is derived from political connections (Fisman 2001). Similarly, based on their case-based research, Dieleman and Boddewyn (2012) explain that even Indonesian firms of considerable size are likely to fail if ties to officials, such as politicians and bureaucrats, are severed.

Additionally, there exists considerable evidence for the notion that, even as their ventures grow, entrepreneurs in less developed institutional contexts continuously have to manage their political ties, whereas the management of nonpolitical ties may often be delegated. Kets de Vries and Florent-Treacy (2003), for instance, vividly describe that the politicians and bureaucrats to whom entrepreneurs developed viable network relationships in Russia did not accept another contact person within the company, even as the firm grew and became a major player in the industry. Quite similarly, Dieleman and Boddewyn (2012) observed that deals between companies and governmental officials in Indonesia are always based on personal relationships and personal interaction, even when companies have already grown and obtained a high level of organizational legitimacy.

Summing up, we thus expect that (1) the relevance of political ties for ventures' financial performance is sustained in less developed institutional contexts even when a new venture grows and (2) political ties continuously have to be managed by the entrepreneur himself or herself. Consequently, we expect that entrepreneurs' networking ability, which enables them to effectively develop and manage political ties, will remain significantly more important in less developed institutional contexts, even when a venture grows in size. Conversely, we expect the negative moderating effect of venture size on the relationship between entrepreneurs' networking ability and their new ventures' financial performance to be stronger in more developed institutional contexts. We thus posit

  • H4: The negative moderating effect of venture size on the relationship between entrepreneurs' networking ability and their new ventures' financial performance will be stronger in more developed institutional contexts.

Method

  1. Top of page
  2. Abstract
  3. Introduction
  4. Theory and Hypotheses
  5. Method
  6. Results
  7. Discussion
  8. Conclusion
  9. References

Because our aim was to address the impact of entrepreneurs' networking ability on the performance of new ventures in significantly different institutional environments, we decided to rely on the data of German entrepreneurs previously used by Semrau and Sigmund (2012) and to collect additional data from new ventures in Brazil.

Whereas the institutional context in Germany has to be considered fully developed and reliable, entrepreneurs in the emerging economy of Brazil have to cope with a significantly less developed institutional setting. This perspective is supported by the results of the Worldwide Governance Indicators project (Kaufmann, Kraay, and Mastruzzi 2006). In this project, the quality of the institutional frameworks of 212 countries was characterized by several indicators, such as the perceived quality of contract enforcement, the property rights, the likelihood of crime and violence, and the extent to which public power is seen as being exercised for private gain, including both petty and grand corruption (Kaufmann, Kraay, and Mastruzzi 2006). On all these indicators, Brazil scores significantly lower (ranked between 25th and 50th in terms of percentile ranking) than Germany (above 90th) (Kaufmann, Kraay, and Mastruzzi 2006).

To obtain a parallel sample to the German data set in Brazil, we followed the strategy described by Semrau and Sigmund (2012) and contacted institutions that support entrepreneurial activities and asked them to promote the research project. Because of privacy concerns, most of the people contacted refused to provide the contact information on newly founded ventures but instead offered to invite the founders associated with their institutions to take part in our online survey. As a result, we were able to collect data on 201 entrepreneurs and their new ventures in Brazil. We then combined these data with the data from German entrepreneurs, excluded companies that were not independent, and further restricted the sample with respect to company age. Consistent with other studies in the field, we excluded all firms less than one year old (Hansen 1995; Sorenson, Folker, and Brigham 2008) and companies established more than 10 years ago (Covin, Slevin, and Covin 1990; Lechner, Dowling, and Welpe 2006). We then had to exclude more data sets because of missing values, leaving 283 usable responses in total––158 from German and 125 from Brazilian entrepreneurs.

Measures

Because there were no objective data available to represent the main explanatory and dependent variables in our study, we had to rely on self-reported measures. We are confident that this approach led to results with reasonable validity. First, most of our variables are concrete attributes, which are typically reported more accurately than psychological constructs (Fuchs and Diamantopoulus 2009). Second, previous research in entrepreneurship gives broad support for the reliability and validity of self-reported measures (Brush and Vanderwerf 1992; Lechner, Dowling, and Welpe 2006; Peng and Luo 2000). Third, we took several additional steps (described later) to ensure the quality of our measures.

New Ventures' Financial Performance

Firm performance is a multidimensional construct, and specifically measuring new venture performance presents a significant challenge for scholars (Carton and Hofer 2006; Chandler and Hanks 1993). Following Chandler and Hanks' (1993) recommendations for developing reliable and valid measures to capture new venture performance, two distinct variables—actual revenue and revenue growth—were used in this study. Both of these variables measure values in broad categories to overcome problems that may potentially be caused by respondents' unwillingness to disclose precise financial performance information. To operationalize the two variables, we relied on items that have shown their validity in prior research (see Chandler and Hanks 1998; Honig, Lerner, and Raban 2006; Lee and Tsang 2001).

To get comparable results on revenue in both countries, we used the same categories in Brazil that were used in Germany but converted the answer categories from euro to Brazilian real according to exchange rates in December 2008. Specifically, the entrepreneurs were asked to indicate their revenue in 2008 in nine categories. The nine categories ranged from one (up to €50 thousand) to nine (more than €10 billion) for the German entrepreneurs and from one (up to R$150 thousand) to nine (more than R$30 billion) for the Brazilian entrepreneurs.

Second, we asked our respondents to indicate their cumulative revenue growth rate since 2005 or since the business had been established. Growth rates were grouped in seven brackets ranging from one (less than 5 percent growth) to seven (more than 200 percent growth) and had to be indicated for a three-year period (or compared with their first full year of operation if the new venture was younger than three years). We then divided the cumulative revenue growth rates by three (or company age if the company was younger than three years) to obtain a comparable average annual growth rate. To compensate for skewness, we used the natural log of the category means of both variables in our regression analysis.

Networking Ability

To capture networking ability, three items from the networking ability scale of the Political Skill Inventory (Ferris et al. 2005, 2007) were adapted to an entrepreneurial context and used. Specifically, respondents were asked to indicate on a seven-point scale to what extent the people in their founding team who liaise with external partners (1) had already spent substantial time and effort networking with others; (2) had been good at building relationships with influential people; and (3) had been good at using their connections and network to make things happen even before the new venture was founded. The Cronbach's alpha for the three items in our study was 0.87 and thus equal to the value reported for the networking ability scale in previous studies (Blass et al. 2007; Ferris et al. 2005).

Developmental Status of the Institutional Environment

To account for the differences in the institutional environments, we followed the method used by Batjargal (2008, 2010b) and constructed a dummy variable. This dummy variable took the value of one for the German and zero for the Brazilian context because, as already described in detail, Brazil scores consistently lower than Germany on all relevant indicators for the quality of institutional environment such as contract enforceability, property rights, the likelihood of crime and violence, and the extent to which public power is seen as being exercised for private gain, including both petty and grand corruption (Kaufmann, Kraay, and Mastruzzi 2006).

New Venture Size

We assessed new venture size by asking respondents to indicate the number of founders and current employees in their organization. We then aggregated the two measures. In addition to employing new venture size as a moderator when testing H2, we included it as a control in all other analyses. In doing so, we accounted for the fact that new venture size and financial performance are expected to be closely related (Birley 1987; Boyd, Gove, and Hitt 2005). Thus, we were able to specifically address the potential effect of entrepreneurs' networking ability on new venture financial performance, which may—as theorized previously—be explained by the impact of entrepreneurs' networking abilities on the network characteristics of their new ventures.

Controls

As Rosenkopf and Schilling (2007) demonstrate, network structures may vary substantially across industries that differ in terms of technological dynamism and uncertainty, and we expect entrepreneurs in Germany and Brazil to potentially differ regarding the propensity to found a high-tech venture. Therefore, we included a dummy variable to indicate whether a firm belongs to a high-tech industry. Taking into account that entrepreneurs in Brazil and Germany have been found to differ with respect to industry sector participation (Kelley, Singer, and Herrington 2012) and that industry sector may potentially influence the relationship between entrepreneurs' individual skills and new venture performance, we also included a dummy variable indicating whether the new venture is operating in services or not. Furthermore, we included company age as a control variable for two reasons: First, we wanted to empirically eliminate effects that are grounded in the liability of newness (Freeman, Carroll, and Hannan 1983). Second, venture age typically corresponds to a firm's resource base and legitimacy and thus may influence its revenue potential (Stam and Elfring 2008). To capture company age, we asked our respondents to indicate how many (complete) years the new venture had been operating.

Data and Construct Validity

Based on the data validation efforts made for the German data (Semrau and Sigmund 2012), we took considerable efforts to also ensure the validity of the data from Brazil. To test for response bias, we grouped responses by arrival date and compared early with late respondents with respect to several of our independent and dependent variables using one-way analyses of variance. In addition, we checked for nonresponse bias to the extent that anonymous respondents more closely resembled nonrespondents (BarNir and Smith 2002) by comparing the answers of anonymous respondents in our sample with those who provided us with company names and e-mail addresses.

To check for common method bias, we conducted Harman's one-factor test (Harman 1967). The basic idea of Harman's one-factor test is that if a substantial quantity of common-method variance exists, either one dominant factor will account for most of the covariance among the variables or only one single factor will emerge. To check for this potential threat to the validity of our results, we entered all our variables into a factor analysis and found that five factors with eigenvalues greater than one were extracted. With the first factor explaining just 20 percent of the variance, we concluded that common-method variance is not a severe problem in our study.

Additionally, we compared our data with external sources of information to ensure its validity. For the new ventures in both countries, research assistants searched the Internet for information on those companies that provided their company names and collected all the data relevant to our study, such as firm age and the number of founding team members. The correlations between the self-reported measures and Internet data were all highly significant and ranged from r = 0.96 (p < .00, N = 67) for company age to r = 0.98 (p < .00, N = 60) for the number of founding team members.

Furthermore, all founders who contacted the researchers after participating in the survey were asked to provide the contact details of a person outside their company who is acquainted with the founding team members and whom we could interview to validate some of the answers given. As a result of this strategy, 53 people (33 Brazilians and 20 Germans) were contacted and asked to rate the founding team members' networking ability. The correlations between founders' perceptions about founding team members' networking ability and how founders' network ability was perceived by others ranged from r = 0.78 (p < .00, N = 53) to r = 0.84 (p < .00, N = 53) for the items used.

Whereas the answers provided on new ventures' financial performance in Germany were validated by making use of listings in the commercial register and the information available via databases, we followed Batjargal's (2010b) approach and validated the financial performance information provided by entrepreneurs in Brazil with taxation department officials. To do so, we submitted the revenue information of 20 randomly chosen companies to the taxation department. From these 20 companies, the taxation officials were able to identify 17 and reported that 82 percent of our revenue information fit perfectly with their data. As a result, we are confident that the financial performance data used in our study are of sufficient validity.

Results

  1. Top of page
  2. Abstract
  3. Introduction
  4. Theory and Hypotheses
  5. Method
  6. Results
  7. Discussion
  8. Conclusion
  9. References

Means, standard deviations, and correlations for all variables in our sample are shown in Table 1.

Table 1. Means, Standard Deviations, and Correlations
N = 283MeanS.D.12345678
  1. S.D., standard deviation.

  2. *p < .05.

  3. **p < .01.

1. Revenue407,491.131,395,429.3010.0870.0780.432**−0.0120.153**−0.026−0.071
2. Revenue Growth39.8959.76 10.0770.0010.108−0.158**0.0220.066
3. Networking Ability3.881.61  10.093−0.106−0.0600.0230.065
4. Venture Size7.6115.68   1−0.1000.253**0.070−0.083
5. Institutional Environment (Germany)0.560.50    1−0.047−0.0610.256**
6. Company Age4.092.68     10.061−0.013
7. High-Tech Industry0.590.49      10.161*
8. Service Provider0.740.44       1

We tested our hypotheses using moderated regression analyses, which allow us to compare alternative regression models with and without interaction terms. As recommended by Aiken and West (1991) and Frazier, Tix, and Barron (2004), we mean centered and standardized all our nonbinary independent variables and moderator variables. We then formed the interaction term by multiplying the respective measures.

Computing our regression, we first entered the control variables before testing the isolated effect of networking ability in the second step. In the third and fourth steps, we included the two interaction terms to test our moderation hypotheses. For all of the models, we computed several regression diagnostics and checked the variance inflation factors (VIFs) to exclude multicollinearity. The VIFs for all our variables, including the interaction terms, were significantly below 10, the most commonly used threshold for collinearity (see, i.e., Belsley, Kuh, and Welsch 2005; Hair et al. 2006; Neter et al. 1996). Variance inflation should thus not be an issue in our study.

With respect to our control variables, the regression results depicted in Table 2 underscore the correlation results depicted in Table 1. Specifically, Table 2 reveals a significant, positive relationship between company age and revenue but not between company age and revenue growth. Additionally, a positive relationship between new venture size and our dependent variables becomes obvious. Finally, our results suggest that service providers realize lower levels of revenue than other new ventures.

Table 2. Results of Hierarchical Regression Analyses
N = 283RevenueRevenue Growth
Model 1Model 2Model 3Model 4Model 5Model 6Model 7Model 8Model 9Model 10
  1. p < .10.

  2. * p < .05.

  3. ** p < .01.

Constant11.578**11.60**11.592**11.593**11.613**2.144**2.162**2.164**2.164**2.147**
Service Provider−0.371*−0.427*−0.473**−0.485**−0.482**0.3070.2560.2370.1890.211
High-Tech Industry−0.116−0.118−0.057−0.052−0.0690.0380.0400.0650.0840.078
Company Age0.515**0.537**0.474**0.468**0.481**−0.025−0.005−0.033−0.060−0.070
Institutional Environment (Germany)0.476**0.540**0.642**0.644**0.658**0.2170.2700.3140.3250.330
Venture Size0.509**0.482**0.953**0.962**0.618**0.1800.1560.357*0.402*0.417
Networking Ability 0.251**0.243**0.296*0.252* 0.217*0.212*0.447*0.424*
Networking Ability × Venture Size  −0.566**−0.578**−0.239  −0.241−0.294−0.207
Networking Ability × Institutional Environment   −0.085−0.045   −0.3770.355
Venture Size × Institutional Environment    0.568*    −0.001
Networking Ability × Venture Size × Institutional Environment    −0.559**    −0.147
R20.3210.3470.4130.4140.4310.0210.0350.0440.0540.056
ΔR2 0.0260.0660.0010.017 0.0140.0090.0100.002
Adjusted R20.3090.3330.3980.3970.4100.0030.0140.0200.0260.021

With respect to our hypotheses, our regression results provide confirming evidence for H1, stating that networking ability has a significant positive impact on new venture performance irrespective of the institutional context. First, Table 2 reveals a positive effect of networking ability on revenue in Models 2–5 as well as on revenue growth in Models 7–10. An additional split-sample analysis confirmed that this result is not predominantly driven by the German entrepreneurs. Specifically, the analysis of the Brazilian subsample revealed a significant, positive relationship between entrepreneurs' networking ability and new ventures' revenue (β = 0.207, p < .05), as well as new ventures' revenue growth (β = 0.411, p < .05).

When entering the two-way interaction term to test for the negative moderating effect of new venture size, we also find confirming evidence for H2. In particular, Table 2 reveals a significant negative moderating impact of venture size on the relationship between networking ability and revenue (Model 3, β = −0.566, p < .01) that is also depicted in the interaction diagram in Figure 1.

figure

Figure 1. Moderating Impact of Venture Size

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As shown in Figure 1, entrepreneurs' networking ability and their new ventures' revenue are clearly positively related for smaller ventures but not for larger ones. Underlining this result, Model 4 shows that the negative moderating effect of venture size persists (β = −0.578, p < .01), even when we include the additional interaction term necessary for testing our subsequent hypothesis. Providing further support for our second hypothesis, a marginally significant negative moderating effect of venture size on the relationship between networking ability and revenue growth, which is narrowly missed in Model 8 (β = −0.241, p = .11), becomes evident when we control for the interaction between networking ability and institutional environment (Model 9, β = −0.294, p < .10). To test for the stability of this result, we additionally reestimated our models, employing the number of employees instead of the aggregated number of employees and founders as a measure for new venture size. The results of these additional analyses clearly support our findings.

In contrast, our data do not provide clear support for H3. Even though the interaction term between institutional environment and networking ability meets the threshold for marginal significance in Model 9 (β = −0.377, p < .10), we find no convincing evidence for the notion that the relationship between entrepreneurs' networking ability and a new venture's financial performance is weaker in more developed institutional contexts in general.

In contrast, our three-way interaction analysis provides significant support for H4, which proposed that the negative moderating effect of venture size on the relationship between entrepreneurs' networking ability and their new ventures' financial performance is significantly stronger in more developed institutional contexts. Technically speaking, H4 thus implies a negative three-way interaction among venture size, institutional environment, and entrepreneurs' networking ability, which we find clear evidence for in our data (Model 5, β = −0.559, p < .01).

Discussion

  1. Top of page
  2. Abstract
  3. Introduction
  4. Theory and Hypotheses
  5. Method
  6. Results
  7. Discussion
  8. Conclusion
  9. References

This study aimed at extending previous research on the relationship between entrepreneurs' networking ability and a new venture's financial performance. Our results first of all provide evidence for the notion that entrepreneurs' networking ability is an individual-level skill relevant for the performance of new ventures in different institutional environments. This evidence confirms and extends earlier research showing that certain individual-level characteristics of entrepreneurs, such as self-commitment, self-efficacy, or dynamism, are of relevance for entrepreneurial activity and success in various and diverse settings (Kiss, Danis, and Cavusgil 2012). From a practical point of view, this result implies that irrespective of the quality of the institutional environment surrounding them, entrepreneurs should consider either including people with significant networking abilities into their founding team or seeking assistance and training to improve their own networking abilities when trying to find and successfully operate a newly founded venture.

This insight, however, also offers some avenues for further research. In particular, we have to acknowledge that our data do not reflect whether the networking behavior and strategies that make some entrepreneurs better networkers than others are similar in different institutional contexts. Recent research presented by Batjargal (2010b) points out that some networking strategies, such as brokering between disconnected actors, might be accepted and successful in one context but even punished and unsuccessful in a different institutional environment. Thus, we explicitly want to encourage further research to analyze the behavior and strategies that entrepreneurs who are highly skilled and successful in networking use in different national or institutional contexts.

Confirming our second hypothesis, our results show that the positive impact of networking ability on the financial performance of a new venture is moderated by its size. More specifically, our results suggest that the financial performance of smaller ventures tend to profit significantly more from the distinct networking ability of their entrepreneurs than does the financial performance of larger ventures. Providing evidence for our theoretical reasoning that ventures suffering from a liability of smallness benefit from entrepreneurs' networking ability, this result complements previous findings on the decreasing performance relevance of entrepreneurs' individual-level characteristics in the course of a new venture's development (Frank, Lueger, and Korunka 2007; Semrau and Sigmund 2012). Considering that we control for venture age when testing for the moderating impact of venture size, our results additionally underscore previous research results showing that the effects of the liability of newness and smallness are conceptually and empirically distinct (Brüderl, Preisendörfer, and Ziegler 1992; Freeman, Carroll, and Hannan 1983).

With regard to our third hypothesis, which posits a general moderating effect of the institutional environment, we find no confirming evidence. As such, this finding clearly contradicts existing evidence for the notion that the ability to establish network ties may be more important for new ventures in less developed institutional contexts than in fully developed ones (Danis, De Clercq, and Petricevic 2011; Lee, Lee, and Pennings 2001). At least partially, however, this contradiction may be resolved when also considering the results related to our fourth hypothesis, as well as the differences in the theoretical reasoning underlying both propositions. Specifically, when testing our fourth hypothesis, we found that whereas the impact of entrepreneurs' networking ability on the financial performance of new ventures largely decreases with venture size in a more developed institutional environment, such an effect is not observable in the less developed institutional context. Put differently, this finding suggests that whereas entrepreneurs' networking ability seems to be equally relevant across contexts that differ with respect to the developmental status of their institutions as long as a venture is small, this individual skill is relatively more important in less developed institutional contexts for larger ventures.

From a theoretical point of view, this result may be explained by the fact that irrespective of the institutional context, small ventures' resource exchange is predominantly based on network relationships, whereas when the ventures grow market and contract-based exchanges become more important (Hite and Hesterly 2001; Schutjens and Stam 2003). As a consequence, differences in institutional environments, which have an impact on contract enforceability and reliability, do not play a significant role for the relevance of entrepreneurs' networking ability as long as the venture is small, because entrepreneurs in less as well as in more developed institutional settings have to compensate for a lack of organizational legitimacy by making use of their individual networking skills to develop the exchange relationships needed. Conversely, the question of whether a contract is more or less enforceable in a specific institutional environment seems to become much more relevant as a venture grows. Additionally, and in-line with empirical evidence showing that entrepreneurs in Germany should delegate network management responsibilities in the course of their new ventures' development to be more successful (Maurer and Ebers 2006), a more developed institutional environment seems to enable new ventures that have grown in size to become more and more independent from network relationships that are socially embedded and involve the entrepreneurs themselves. In contrast, our results indicate that even when already grown to a considerable size, new ventures in a context with a less stable rule of law are much more dependent on entrepreneurs' engagement in developing and managing network relationships and connections to political actors.

From a practical point of view, this finding is particularly relevant for entrepreneurs who are thinking about internationalizing businesses that have reached a significant size. For them, our results imply that they have to carefully evaluate whether their personal networking abilities are needed in the international context they want to enter and whether they want to personally engage more intensely in the process of developing contacts to exchange partners and political actors in the new environment when the institutional context is less developed.

Connected to this point, however, we clearly have to admit that our study is based on the data from just two different institutional contexts, which do not allow us to more specifically attribute the observed effects to particular differences in the institutional environment (Castrogiovanni 1991). Consequently, we want to encourage further research to build on and extend our results by analyzing the question of how differences in institutional environments might explain the effects of entrepreneurs' networking ability—or other individual-level skills and attributes—in other institutional contexts and in more detail.

Before concluding, we have to note two other limitations of our study. Specifically, we have to acknowledge that our cross-sectional research design may raise the issue of causality. Even though the networking ability items we used have a timeline that supports the direction of influence proposed in our hypotheses, a clear causal interpretation of our results may remain problematic. In general, one could reverse the interpretation of the pertinent results to some extent and say that the existence of positive financial performance could lead to a self-perception of strong networking ability. However, there are several arguments against this interpretation. First, there are a number of studies with longitudinal designs showing that networking ability clearly predicts work outcomes (Ferris et al. 2005; Hochwarter et al. 2007). In addition, previous research indicates that networking abilities are quite stable over time (Treadway et al. 2007). Moreover, we also have to acknowledge as a limitation of our study that the data collections in Germany and Brazil were not conducted simultaneously, which may potentially have had an impact on our results. However, there was only a very small time lag between the two periods of data collection, which were both conducted in 2009. Additionally, all the items used to capture variables that are not time invariant had a clear timeline. Even though we are not able to completely rule out that the not perfectly synchronized periods of data collection might have had an effect, we are confident that our results are not seriously biased.

Conclusion

  1. Top of page
  2. Abstract
  3. Introduction
  4. Theory and Hypotheses
  5. Method
  6. Results
  7. Discussion
  8. Conclusion
  9. References

The aim of this study was to extend previous research on the relationship between entrepreneurs' networking ability and a new venture's financial performance. In doing so, we shed more light on how venture size, differences in institutional environments, as well as the interplay of both variables affect the relationship between entrepreneurs' networking ability and new ventures' financial performance. The results of our analyses not only show a significant moderating effect of venture size but additionally emphasize that whereas the impact of entrepreneurs' networking ability on the financial performance of new ventures diminishes with venture size in a developed institutional environment, its relevance persists when the venture grows in a less developed institutional context. Revealing this complex interaction between the individual, organizational, and environmental variables, our study makes a significant contribution to the literature, as it answers the calls for better contextualizing entrepreneurship research (Welter 2011) and for shedding more light on how a combination of individual-level, organizational-level, and environmental variables may help to explain new venture performance (Korunka et al. 2003; Rauch and Frese 2007).

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  3. Introduction
  4. Theory and Hypotheses
  5. Method
  6. Results
  7. Discussion
  8. Conclusion
  9. References
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