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Exploring corporate entrepreneurship in privatized firms
Journal of World Business 45 (2010) 2–8
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Journal of World Business journal homepage: www.elsevier.com/locate/jwb
Exploring corporate entrepreneurship in privatized firms Ana M. Romero-Martı´nez a,*, Zulima Ferna´ndez-Rodrı´guez b,1, Elena Va´zquez-Inchausti a,2 a b
Complutense University of Madrid, Departamento de Organizacio´n de Empresas, Campus de Somosaguas, 28223 Madrid, Spain Carlos III University of Madrid, Seccio´n de Organizacio´n de Empresas, C/Madrid 126, 28903 Getafe, Madrid, Spain
A R T I C L E I N F O
A B S T R A C T
Keywords: Corporate entrepreneurship Innovation Competition Privatization
This paper reports an analysis of whether state-owned enterprises (SOEs) increase their levels of corporate entrepreneurship after privatization. The study uses agency theory to discuss why SOEs display little entrepreneurial behavior and how privatization may alter this situation by changing firms’ systems of controls and incentives. The study also uses a sample of Spanish firms for its empirical research. Data on these firms were available for three years before and after privatization. The findings show that corporate entrepreneurship increases after privatization when firms are in highly competitive industries, either because competition was greater after privatization or because the firm was already in a highly competitive industry. In summary, corporate entrepreneurship in privatized firms seems to be favored by two factors, a change of ownership and competition. ß 2009 Elsevier Inc. All rights reserved.
1. Introduction Privatization of state-owned enterprises (SOEs) has become common throughout the world in recent years. The spread of this phenomenon has been driven in large part by the desire to improve firm performance and stimulate corporate entrepreneurship—a fundamental competitive tool for creating value (Baumol, 2002; Hitt, Ireland, Camp, & Sexton, 2002). Privatization brings changes of ownership and corporate governance, both of which have been shown to affect entrepreneurial behavior (Zahra, 1996; Zahra, Neubaum, & Huse, 2000). Anecdotal evidence from Spain also indicates that privatization boosts corporate entrepreneurship. For example, after privatization Telefo´nica practically doubled its spending on R&D, while also increasing the number of patents it registered by 50 percent. The old state-owned shipyards also more than doubled their product, and process and organizational innovations after they were put into private hands. Additionally, privatized firms like Iberia, Repsol and Telefo´nica led the internationalization of Spanish firms in Latin America in the 1990s. The typical agency relation of state-owned enterprises (SOEs) has some specific features that presumably limit innovative and proactive behavior. First, several types of agents (e.g., government ministers, civil servants and legislators) exist between the principal
* Corresponding author. Tel.: +34 91 3942376; fax: +34 91 3942371. E-mail addresses: [email protected] (A.M. Romero-Martı´nez), [email protected] (Z. Ferna´ndez-Rodrı´guez), [email protected] (E. Va´zquez-Inchausti). 1 Tel.: +34 91 6249656; fax: +34 91 6249758. 2 Tel.: +34 91 3942506; fax: +34 91 3942371. 1090-9516/$ – see front matter ß 2009 Elsevier Inc. All rights reserved. doi:10.1016/j.jwb.2009.04.008
(the state) and the firm (Aharoni, 1981). Second, the public purpose of SOEs leads them to pursue goals that are not directly linked to creating value (e.g., maintaining employment and providing subsidized goods and services). Lastly, their incentive systems and administrative controls favor routine behavior over risk taking. These factors militate against entrepreneurial behavior and make it probable that privatization will increase corporate entrepreneurship. Privatization brings new owners and the simplification of the agency relation between them and management. These changes are likely to push the firm’s objectives towards creating value. This will necessitate more innovative and proactive behavior, which will in turn boost the level of corporate entrepreneurship. In addition, privatization often opens up markets to competition, which should also raise the level of corporate entrepreneurship (De Castro & Uhlenbruck, 2003). Despite the many studies that exist on privatization and corporate entrepreneurship, the relationship between the two has still not been researched. This paper attempts to fill this gap in the literature by analyzing if the level of corporate entrepreneurship changes after privatization. The analysis includes the two main dimensions of privatization: transfer of ownership and opening of the markets. At a theoretical level, the paper examines the main post-privatization strategic and organizational changes linked to corporate entrepreneurship. At an empirical level, the paper compares the degree of corporate entrepreneurship of privatized firms before and after the change of ownership. The study is based on a sample of 38 Spanish non-financial firms privatized between 1985 and 2000 (about 40 percent of the total of firms privatized during this period). The paper is organized as follows. The next section introduces the study’s theoretical frame and hypotheses. The method and the
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empirical study are then presented and the results are summarized. The paper finishes with a discussion of the results and conclusions, along with some practical implications. 2. Privatization and corporate entrepreneurship 2.1. Change of ownership and corporate entrepreneurship Entrepreneurship involves the discovery and exploitation of opportunities. According to Schumpter, this means introducing new products and processes, designing new organizational structures, and winning new markets. In existing firms, entrepreneurship is not limited to introducing and exploiting product and process innovations and creating new businesses. Entrepreneurship also requires periodic revisions to structure and strategy, which may lead to divesting some businesses or re-defining domains (Covin & Miles, 1999). Corporate entrepreneurship, then, includes innovation, business creation (Lumpkin & Dess, 1996), and strategic renewal (Guth & Ginsberg, 1990). Agency theory points to corporate governance as one of the organizational factors most likely to affect the level of firms’ corporate entrepreneurship. Empirical research has reported positive relationships between corporate entrepreneurship and long-term institutional ownership, executive stock ownership, and board composition (Zahra, 1996; Zahra et al., 2000). Little research, however, has been in press on how the privatization of SOEs may affect entrepreneurial activities. The one exception is Antoncic and Hisrich (2003) who analyze the relationship between the percentage of public capital sold and corporate entrepreneurship in a former communist country. The findings of this study demonstrate that a higher share of private ownership can be particularly beneficial for growth and profitability by enhancing impacts of corporate entrepreneurship activities. Agency problems in SOEs have specific characteristics. The usual tools for controlling management in the private sector are not applicable to SOEs. Corporate market control does not exist. The managerial labor market does not work either, as the criteria for promotion in SOEs are political. Lastly, SOEs are protected from bankruptcy (Pryke, 1971), which disarms the controlling role of the product markets. Creating value, therefore, is not the primary objective of these firms (Lioukas, Bourantas, & Papadakis, 1993). The agency relation of SOEs affects their structures and strategies. Specifically, it discourages innovation and change, and ultimately corporate entrepreneurship too. The diffuse nature of SOEs’ objectives (Aharoni, 1981) and the strict administrative controls that exist promote bureaucratic structures and a reactive style of decision making (Pugh, Hickson, Hinings, & Turner, 1969). Managers are more concerned with sticking to plans and controls than with introducing innovations that respond to the market (Obloj & Thomas, 1998). Furthermore, re-defining the competitive focus becomes more vulnerable to pressure from stakeholders, employees, customers and suppliers who will not easily accept any re-structuring that reduces their privileges. When SOEs are sold, private owners replace the state and introduce the standard private-sector control mechanisms. Privatization also results in a re-definition and sharpening of the firm’s objectives by the new owners (Megginson, Nash, & Van Randenborgh, 1994). This manifests itself in managerial incentive and control systems aimed at creating value. These dynamics are likely to modify the behavior of the firm, enabling it to reach higher levels of competitiveness, innovation and change. On this basis, then, Hypothesis 1 postulates: After privatization, firms increase their level of corporate entrepreneurship.
3
2.2. Change of ownership, competition and corporate entrepreneurship Empirical research finds positive relationships between competition and corporate entrepreneurship (Miller & Friesen, 1982; Zahra, 1993). In a non-competitive market, the firm does not need to adapt to its demands; without competition there is no pressure on the firm to become more entrepreneurial. Competitive environments, on the other hand, demand high levels of innovation and flexibility (Baumol, 2002) and promote corporate entrepreneurship (Miller, 1983). Changes in the structure of the market create as many new opportunities as threats, which may favor more entrepreneurial behavior (Guth & Ginsberg, 1990). Many privatizations do not only involve the sale of public capital, but also include measures to increase competition. These measures may contribute to improving performance as much as or more than the change of ownership (Vickers & Yarrow, 1988). Early empirical studies reveal a positive relationship between competition and an increase in the sales of privatized firms (Megginson et al., 1994; Ramaswamy, 2001). In summary, then, the transfer of ownership from the public sector to the private does not ensure that privatized firms will be more entrepreneurial and innovative; competition may also be necessary for this to occur (Ramamurti, 2000; Uhlenbruck & De Castro, 1998). Hypothesis 2, therefore, postulates: After privatization, firms in more highly competitive industries increase their level of corporate entrepreneurship to a greater extent than firms in less competitive environments. 3. Method 3.1. Population and sample The target population of this study is 103 non-financial firms privatized by the Spanish government from 1985 to 2000, of which only 13 were by initial public offering (IPO). The study includes SOEs privatized through holding companies or functional ministries during the socialist (PSOE) and conservative (PP) administrations, irrespective of the mechanisms used. The two mechanisms were: (a) public offering (PO) and its variants (initial public offering (IPO) or public offering of the shares of quoted companies); (b) direct sale or competitive tendering. Firms from the Rumasa group (expropriated in 1983) are not included as their experience in the public sector was only incidental, nor are firms privatized from 2001 onwards as this study requires a minimum of three years after privatization to assess the changes. The study determines the date of privatization by equating it with the time the state loses control of the firm. This criterion is defined as when the state possesses less than 50 percent of the firm’s capital and is no longer able to make top management appointments. The latter is an important consideration. In some Spanish SOEs, the state had the power to name CEOs despite possessing less than 50 percent of their capital. The sample includes firms that have been partially privatized (the state continues to be a minority shareholder) and others that have been totally privatized (the state retains no stake in the capital). In both cases, however, the state has lost its capacity to control the firms. A questionnaire (see Appendix A) was designed to collect the information. It was mailed to the CEOs of the privatized firms. Respondents were asked to rate the firm three years before privatization and three years after for all of the items on the questionnaire. The researchers supervised this process by telephone calls and visits to the firms. The field work was performed from April to September 2003. The final sample contains 38 questionnaires—an effective response rate of 37 percent. Of the 38 firms that returned the
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questionnaire, 27 percent had 250 or fewer employees, 19 percent had between 250 and 1000, and the remaining 54 percent more than 1000. Service firms made up 58 percent of the sample and manufacturing firms the remaining 42 percent. Sixty-six percent of the firms that answered were privatized from 1997 on, when the Partido Popular (the conservative Popular Party) was in office. This is not surprising as more recently privatized firms found it easier to answer the questionnaire. During this surge in privatization activity, the Spanish government agreed its Strategic Privatization Plan at the cabinet meeting of June 28, 1996. Most of the firms underwent privatization by direct sale. High percentages (24 percent) of the responding firms’ privatizations, however, were IPOs. In Spain, IPOs make up only 10 percent of all privatizations. This is because the majority of responding firms’ privatizations took place after 1997, when IPOs became more common. Lastly, on the issue of institutional dependency, the completed questionnaires accurately reflect the preponderance of firms from the Ministry of Industry and Energy in the Spanish privatization process. Logistic regressions were performed to test the representativeness of the sample against the population. The independent variables used were: method of privatization; date of privatization (in three periods: 1985–1991, 1992–1996 and 1997–2000); and institutional dependency of the privatized firm. No significant differences regarding method and institutional dependency between the sample and the population were observed. These variables, therefore, do not bias results by influencing the probability of a firm appearing in the sample. Date of privatization, however, revealed significant differences between the sample and the population—the sample over-represents firms privatized from 1997 onwards. 3.2. Measures The study adopts Zahra’s method of measuring corporate entrepreneurship and competition, using a five-point Likert scale where 1 = strongly disagree and 5 = strongly agree. Six dimensions based on Zahra et al. (2000) and Zahra (1996) measure corporate entrepreneurship: product innovation (5 items), process innovation (4 items), organizational innovation (4 items), national venturing (5 items), international venturing (3 items) and strategic renewal (4 items). This method was chosen because it includes the main aspects of corporate entrepreneurship and uses measures that were validated by Zahra and his colleagues. Each dimension was calculated as the mean of its constituent items. This calculation was repeated with the data from the two periods under study (pre-privatization and post-privatization). The Cronbach Alpha coefficients (see Appendix A) are higher than 0.75 for each dimension—both before and after privatization. To gauge competition the study uses Zahra and Neubaum’s (1998) measure of competitive hostility (4 items). Once again, the value of
each dimension (calculated as the mean of its constituent items) was computed before and after privatization. The Cronbach Alpha coefficients are around 0.80. 3.3. Statistical treatment of data After calculating the corporate entrepreneurship and competition measures for the periods before and after privatization, the study tested the hypotheses using non-parametric techniques because: (a) the size of the sample is small; and (b) the Kolmogorov–Smirnof test and histogram analysis yielded nonnormal results for the variables. To test Hypothesis 1 (after privatization, firms will increase their level of corporate entrepreneurship), the study conducted Wilcoxon’s sign-rank test. The test checks whether the mean difference in variable values between the before and after privatization samples is zero. Moreover, the test classifies the differences between these variables into three categories: negative differences, positive differences and ties. To test Hypothesis 2 (after privatization, firms in more highly competitive industries will increase their level of corporate entrepreneurship to a greater extent than firms in lesser competitive industries), the study used a dichotomous measure to segment the sample according to the industry’s competitive characteristics: 0 representing that respondents rated sector competition hostility as equal to or less than 2.5; and 1 representing a sector competition hostility rating of higher than 2.5. Thus, 0 equals low competition and 1 high competition. The study then segmented the sample into two sub-samples: Sub-sample 1: Firms in industries where competition was low before privatization, but significantly higher after privatization. Sub-sample 2: Firms in industries where competition did not change after privatization. The study divided this sub-sample 2 into two groups: low competition before and after privatization (sub-sample 2a); and high competition before and after privatization (sub-sample 2b). After segmenting the sample, the study conducted Wilcoxon’s sign-rank test. 4. Results Tables 1 and 2 present the statistics and Spearman correlation (the non-parametric version of Pearson correlations) matrices of the variables for corporate entrepreneurship before and after privatization. Although the correlation coefficient values are significant, in absolute terms most of the cases have low values. The highest value is in the correlation between product and process innovations, which is not surprising given that in many cases product innovations lead to process innovations.
Table 1 Descriptive statistics and non-parametric correlations before privatization. Variables
N
Minimum
Maximum
Mean
S.D.
1
2
3
4
5
6
1. 2. 3. 4. 5. 6.
38 38 38 38 38 38
1.00 1.75 1.00 1.00 1.00 1.00
4.00 4.00 3.50 3.40 4.00 4.75
2.31 2.74 2.13 1.88 2.27 2.39
0.91 0.64 0.79 0.68 0.96 0.87
1.00 0.72*** 0.35* 0.60*** 0.52** 0.49**
1.00 0.41** 0.30 0.35* 0.24
1.00 0.42** 0.32* 0.33*
1.00 0.57*** 0.68***
1.00 0.48**
1.00
y
Product innovation Process innovation Organizational innovation National venturing International venturing Strategic renewal
p < .10. * p < .05. ** p < .01. *** p < .001.
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Table 2 Descriptive statistics and non-parametric correlations after privatization. Variables
N
Minimum
Maximum
Mean
S.D.
1
2
3
4
5
6
1. 2. 3. 4. 5. 6.
38 38 38 38 38 38
1.00 1.50 1.00 1.00 1.00 1.75
4.80 4.25 5.00 4.80 5.00 5.00
2.99 3.10 3.11 2.99 3.54 3.59
1.04 0.80 0.93 0.95 1.07 0.89
1.00 0.76*** 0.49** 0.45** 0.34* 0.39*
1.00 0.51** 0.32* 0.46** 0.46**
1.00 0.36* 0.30y 0.49**
1.0 0.60*** 0.66***
1.00 0.61***
1.00
Product innovation Process innovation Organizational innovation National venturing International venturing Strategic renewal y
p < .10. * p < .05. ** p < .01. *** p < .001. Table 3 Changes in entrepreneurship. Variables
Product innovation Process innovation Organizational innovation National venturing International venturing Strategic renewal
N
Mean before
38 38 38 38 38 38
2.31 2.74 2.13 1.88 2.27 2.39
Mean after
2.99 3.10 3.11 2.99 3.54 3.59
Change in mean
Z
Sign tests
***
0.68 0.37 0.98 1.10 1.27 1.20
3.85 2.75** 4.37*** 4.85*** 4.74*** 4.70***
Dif. +
Dif.
Ties
26 21 27 31 29 30
3 4 3 1 2 2
9 13 8 6 7 6
(68%) (55%) (71%) (82%) (76%) (79%)
(8%) (11%) (8%) (3%) (5%) (5%)
(24%) (34%) (21%) (16%) (18%) (16%)
y p < .10. *p < .05. ** p < .01. *** p < .001.
4.1. Changes in corporate entrepreneurship Table 3 presents the results of the dimensions for corporate entrepreneurship. As expected, significant differences exist in all dimensions. Innovation and corporate venturing, as well as strategic renewal, increase significantly after privatization. These
findings support Hypothesis 1 that after privatization, firms increase their level of corporate entrepreneurship. The results of Wilcoxon’s sign-rank test confirm that after privatization over 50 percent of the firms in the sample became more innovation-driven, introducing more product and process innovations and spending more on R&D. Moreover, these firms changed
Table 4 Changes in entrepreneurship after sample segmentation according to competition. Variables
N
Mean before
Mean after
Change in mean
Z
Dif. +
Dif.
Product innovation 1 Product innovation 2 Product innovation 2a Product innovation 2b
12 25 6 19
2.35 2.26 2.17 2.30
3.19 2.88 2.23 3.08
0.84 0.62 0.07 0.79
2.16* 3.10** 1.00 2.99**
9 16 1 15
(75%) (64%) (17%) (79%)
1 2 0 2
2 7 5 2
Process innovation 1 Process innovation 2 Process innovation 2a Process innovation 2b
12 25 6 19
2.82 2.65 2.58 2.67
3.26 3.07 2.63 3.21
0.45 0.42 0.04 0.54
1.84y 2.66** 1.00 2.56**
8 13 1 12
(67%) (52%) (17%) (63%)
1 2 0 2
3 10 5 5
Organizational innovation 1 Organizational innovation 2 Organizational innovation 2a Organizational innovation 2b
12 25 6 19
2.13 2.18 2.50 2.08
3.60 2.84 2.79 2.86
1.48 0.66 0.29 0.78
2.99** 3.06** 1.60 2.80**
11 15 3 12
(92%) (60%) (50%) (63%)
1 2 0 2
0 8 3 5
National venturing 1 National venturing 2 National venturing 2a National venturing 2b
12 25 6 19
1.79 1.94 1.83 1.97
3.07 2.92 2.57 3.03
1.27 0.98 0.73 1.06
2.91** 3.83*** 1.60 3.53***
11 19 3 16
(92%) (76%) (50%) (84%)
1 0 0 0
0 6 3 3
International venturing 1 International venturing 2 International venturing 2a International venturing 2b
12 25 6 19
2.19 2.29 1.95 2.40
3.69 3.48 2.56 3.77
1.50 1.19 0.61 1.37
2.99** 3.60*** 1.48 3.18***
11 17 4 13
(92%) (68%) (67%) (68%)
1 1 0 1
0 7 2 5
Strategic renewal 1 Strategic renewal 2 Strategic renewal 2a Strategic renewal 2b
12 25 6 19
2.06 2.57 2.42 2.62
3.98 3.44 3.08 3.55
1.92 0.87 0.67 0.93
3.06*** 3.43*** 1.60 3.08**
12 17 3 14
(100%) (68%) (50%) (74%)
0 2 0 2
0 6 3 3
y
p < .10. p < .05. p < .01. *** p < .001. *
**
Sign tests Ties
6
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their organizational structures, human resources programs, and management systems to stimulate innovation. The strategic changes are even more marked. Over 70 percent of the firms undertake corporate venturing at national and international level, and over 75 percent take steps to redefine their activities at a corporate and competitive level. Therefore, firms show more entrepreneurial, innovative and proactive behavior after privatization, which brings with it important strategic and organizational changes. 4.2. Sample segmentation according to competition To analyze the effect of competition on the corporate entrepreneurship of privatized firms the sample was segmented according to the level of sector competition hostility. The resulting distribution of firms is as follows: - 32 percent of the firms belong to sub-sample 1 (where competition was low before privatization, but significantly higher after privatization) and; - 68 percent of the firms belong to sub-sample 2 (where competition did not change after privatization): 16 percent operate in low competition industries before and after privatization (sub-sample 2a), while 52 percent are in high-competition industries before and after privatization (sub-sample 2b). The study excluded one case where the level of competition dropped significantly after privatization. Table 4 shows that after segmenting the sample, the significant differences remain the same for all corporate entrepreneurship dimensions. In addition, the percentage of firms following the expected behavior – increasing their level of entrepreneurship (positive differences) – is over 50 percent for all cases. In general terms, these results show that after privatization entrepreneurship is higher. Firms become more innovation-driven, develop more new businesses and are more likely to undertake re-structuring activities. This is the case whether the level of competition changes (sub-sample 1) or remains the same (sub-sample 2). This finding supports the belief that changes in competition do not influence the differences in the entrepreneurial behavior of firms after privatization. This result does, however, give grounds for some caution. First, an analysis of the results of Wilcoxon’s sign-rank test shows that in all cases the percentage of firms that behave as expected (positive differences) is higher for firms in sub-sample1 than for those in sub-sample 2. Second, significant differences in sub-sample 2 only exist in the highcompetition industries (sub-sample 2b). In addition, the results of Wilcoxon’s sign-rank test show that the percentage of firms behaving as expected (positive differences) is also higher in subsample 2b. Therefore, corporate entrepreneurship only increases in firms operating in high-competition industries—either because privatization created greater competition, or because competition was already high before privatization. This conclusion supports Hypothesis 2: after privatization, firms in more highly competitive industries will increase their level of corporate entrepreneurship (more innovation, corporate venturing and strategic renewal). The higher the degree of price competition (together with quality, service and innovative competitive actions), the higher is the percentage of more entrepreneurial firms. 5. Discussion and conclusions Privatization has become a highly important instrument of economic policy over the last decades (Uhlenbruck & De Castro, 1998). It creates externalities for the economic system and improves business performance in privatized firms (Cuervo &
Villalonga, 2000). One reason for this is that privatization can introduce the incentives and means to increase the level of corporate entrepreneurship. This paper confirms that after the sale of public capital firms improve their entrepreneurial activity. Privatized firms innovate and change their management structures and systems. In place of the bureaucratic and slow-moving organizational structures typical of SOEs, privatized firms use more flexible and adaptable structures. Their corporate strategies also undergo marked changes as they enter new businesses and abandon unprofitable ones. The levels of diversification and internationalization of SOEs are very low because of the external controls they are encumbered with. After privatization, the number of businesses in which they are involved, along with the degree of internationalization of their activities, increases. Likewise, freed from the pressure of stakeholders – particularly trade unions – they are able to eliminate business lines more easily. In short, three years after privatization firms are more entrepreneurial than they were three years before their sale. Segmenting the sample according to competition, however, puts a different slant on the results. Segmentation reveals that significant increases in corporate entrepreneurship only occur in firms operating in industries that became more competitive after privatization or those were already highly competitive before privatization. In other words, SOEs operating in low competition industries before and after privatization do not significantly increase their levels of corporate entrepreneurship. This result is in line with Vickers and Yarrow (1988), who conclude that private ownership is superior to public in competitive markets, but not in non-competitive markets. Ros’s (1999) study of the relationship between the privatization of telecommunications firms and efficiency gains also notes the advantages of combining the sale of public capital with competition. Lastly, our finding supports other research that reveals a positive relationship between competition and corporate entrepreneurship (Zahra, 1993). 5.1. Managerial relevance These results indicate that simply bringing in new owners to impose entrepreneurial behavior on firms is not sufficient; the product markets are also important. Market conditions must put pressure on the new owners for innovative and proactive activities to develop. When this is not the case, insufficient incentives exist for new owners to be proactive. Thomas’s (1996) finding that the capital market more highly values firms in industries where competition is great (because it forces them to be more innovative) supports this conclusion. In the same way, the fact that privatization needs competitive market structures to succeed helps to explain why its results are not so positive in less developed countries where institutional failures jeopardize its hoped-for benefits (Smith & Trebilcock, 2001). Despite this, however, other factors may be affecting our results. A rise in the overall level of entrepreneurial activity in the Spanish economy could also explain the increase in corporate entrepreneurship. To control for this effect, the study examined the trend in innovative activity in Spain from 1985 to 2000 and found no empirical evidence of a significant increase (Morcillo, 2002). Organizational variables – like size and age – may also have an effect on corporate entrepreneurship. Younger and smaller firms, for example, might be expected to be more entrepreneurial. This can be discounted in this study, however, as our sample is composed of large and mature firms. This paper also has managerial implications. Privatized firms need managers with entrepreneurial skills to adapt to the new competitive environment. Managers that are more proactive,
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Lastly, because innovation and proactive behavior seem to be subject to cultural differences, it is interesting to extend research on it to non-Anglo-Saxon countries, which have not been much analyzed. Our work using Zahra’s (1996) methodology with a sample of European firms (in this case Spanish) is a first step in this direction. Future work should continue this line of research. In summary, the paper’s lesson is clear: A change of ownership is not enough to produce entrepreneurial behavior. Privatized firms that remain beyond the control of the market are unlikely to be innovative and risk taking, or to ever fully develop their competitiveness. Competition, therefore, is a key factor in the process of innovation, the development of new businesses, and the strategic renewal of former state firms.
innovative and willing to take risks will be better placed to handle the process of change caused by privatization. In addition, after privatization managers are under less stakeholder pressure, which makes it easier for them to set the firm on the road to creating value. This research is not free from limitations. First, the study includes data on 38 of the 103 firms privatized during the period of study, around 40 percent of the total. The sample also overrepresents firms privatized since 1997. Second, the study’s only source of information was the firms’ CEOs. Future studies should contrast this information with objective data. Similarly, delving into the relationship between the changes in behavior observed and firm performance would be interesting.
Appendix A. Measures Entrepreneurship: Respondents were asked to assess the following statements before and after privatization. A five-point Likert-type scale was used for this purpose (1: strongly disagree, 2: disagree, 3: undecided, 4: agree and 5: strongly agree). Before privatization
After privatization +
4 4 4 4 4
5 5 5 5 5
1 1 1 1 1
2 2 2 2 2
Product innovation a. Being the first company in your industry to introduce new products to the market. b. Creating radically new products for sale in new markets. c. Creating radically new products for sale in the company’s existing markets. d. Commercializing new products. e. Investing heavily in cutting-edge product-oriented R&D.
+
a = 0.89 3 3 3 3 3
a = 0.90
1 1 1 1 1
2 2 2 2 2
1 1
2 2
3 3
4 4
5 5
1 1
2 2
1 1
2 2
3 3
4 4
5 5
1 1
2 2
1 1 1 1
2 2 2 2
4 4 4 4
5 5 5 5
1 1 1 1
2 2 2 2
1 1 1 1 1
2 2 2 2 2
4 4 4 4 4
5 5 5 5 5
1 1 1 1 1
2 2 2 2 2
International venturing a. Entering new foreign markets. b. Expanding your international operations. c. Supporting and financing start-up business activities dedicated to international operations.
1 1 1
2 2 2
4 4 4
5 5 5
1 1 1
2 2 2
Strategic renewal a. Divesting several unprofitable business units. b. Changing its competitive approach (strategy) for each business unit. c. Initiating several programs to improve the productivity of business units. d. Reorganizing operations to ensure increased coordination and communication among business units.
1 1 1 1
2 2 2 2
4 4 4 4
5 5 5 5
1 1 1 1
2 2 2 2
a = 0.82
Process innovation a. Investing heavily in cutting-edge process technology-oriented R&D. b. Being the first company in the industry to develop and introduce radically new technologies. c. Pioneering the creation of new process technologies. d. Copying other companies’ process technologies (reversed). Organizational innovation a. Being the first in the industry to develop innovative management systems. b. Being the first in the industry to introduce new business concepts and practices. c. Changing the organizational structure in significant ways to promote innovation. d. Introducing innovative human resource programs to spur creativity and innovation.
3 3 3 3 3
4 4
5 5
3 3
4 4
5 5
4 4 4 4
5 5 5 5
4 4 4 4 4
5 5 5 5 5
4 4 4
5 5 5
4 4 4 4
5 5 5 5
3 3 3 3
3 3 3 3 3
a = 0.84
a = 0.82 3 3 3 3
3 3
a = 0.80
a = 0.88 3 3 3
5 5 5 5 5
a = 0.90
a = 0.83
National venturing a. Entering new national markets. b. Promoting new national business creation. c. Diversifying into new industries in Spain. d. Supporting and financing new national venture and start-up activities e. Acquiring companies in very different industries.
4 4 4 4 4
a = 0.84
a = 0.91 3 3 3 3
3 3 3 3 3
3 3 3
a = 0.80 3 3 3 3
Sector competition hostility: Respondents were asked to assess the following statements regarding the level of sector competition where the company developed its core activity. Before privatization
After privatization +
+
a = 0.80 a. Competition based on quality is fierce. b. Competition based on price is fierce. c. Competition based on service is fierce. d. Competition based on product newness is fierce.
1 1 1 1
2 2 2 2
3 3 3 3
a = 0.81 4 4 4 4
5 5 5 5
1 1 1 1
2 2 2 2
3 3 3 3
4 4 4 4
5 5 5 5
8
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References Aharoni, Y. (1981). Managerial discretion in state owned enterprises. In R. Vernon & Y. Aharoni (Eds.), Research in state-owned enterprise in western economies (pp. 184– 193). London: Croom Helm. Antoncic, B., & Hisrich, R. D. (2003). Privatization, corporate entrepreneurship and performance: Testing a normative model. Journal of Developmental Entrepreneurship, 8(3): 197–218. Baumol, W. J. (2002). The free-market innovation machine: Analyzing the growth miracle of capitalis. Princeton: Princeton University Press. Covin, J. G., & Miles, M. P. (1999). Corporate entrepreneurship and the pursuit of competitive advantage. Entrepreneurship: Theory and Practice, 23(3): 47–63. Cuervo, A., & Villalonga, B. (2000). Explaining the variance in the performance effects of privatization. Academy of Management Review, 25(3): 581–590. De Castro, J. O., & Uhlenbruck, K. (2003). The transformation into entrepreneurial firms. Examining the context of privatization. Management Research, 1(2): 171–184. Guth, W. D., & Ginsberg, A. (1990). Guest editor’s introduction: Corporate entrepreneurship. Strategic Management Journal, 11: 5–16. Hitt, M., Ireland, R. D., Camp, S. M., & Sexton, D. L. (2002). Strategic entrepreneurship: Integrating entrepreneurial and strategic management perspectives. In M. Hitt, R. D. Ireland, S. M. Camp, & D. L. Sexton (Eds.), Research in strategic entrepreneurship: Creating a new mindset (pp. 1–16). Oxford: Blackwell Publishing. Lioukas, S., Bourantas, D., & Papadakis, V. (1993). Managerial autonomy of state-owned enterprises: Determining factors. Organization Science, 4(4): 645–666. Lumpkin, G. T., & Dess, G. G. (1996). Clarifying the entrepreneurial orientation construct and linking it to performance. Academy of Management Review, 21(1): 135–172. Megginson, W. L., Nash, R. C., & Van Randenborgh, M. (1994). The financial and operating performance of newly privatized firms: An international empirical analysis. The Journal of Finance, 49(2): 403–452. Miller, D. (1983). The correlates of entrepreneurship in three types of firms. Management Science, 29: 770–791. Miller, D., & Friesen, P. H. (1982). Innovation in conservative and entrepreneurial firms: To models of strategic momentum. Strategic Management Journal, 3: 1–25. Morcillo, P. (2002). Capacidad tecnolo´gica de Espan˜a II. Evolucio´n y ana´lisis comparativo de los gastos en I + D en Espan˜a. Revista Madri+d, 8 www.madridmasd.org/ revista.
Obloj, K., & Thomas, H. (1998). Transforming former state-owned companies into market competitors in Poland: The ABB experience. European Management Journal, 16(4): 390–399. Pryke, R. (1971). Public enterprise in practice. London: MacGibbon & Kee. Pugh, D., Hickson, D. J., Hinings, C. R., & Turner, C. (1969). The context of organization structures. Administrative Science Quarterly, 14(1): 91–114. Ramamurti, R. (2000). A multilevel model of privatization in emerging economies. Academy of Management Review, 25(3): 525–550. Ramaswamy, K. (2001). Organizational ownership, competitive intensity, and firm performance: An empirical study of the Indian manufacturing sector. Strategic Management Journal, 22(10): 989–998. Ros, A. (1999). Does ownership or competition matter? The effects of telecommunications reform on network expansion and efficiency. Journal of Regulatory Economics, 15: 65–92. Smith, D. A. C., & Trebilcock, M. J. (2001). State-owned enterprises in less developed countries: Privatization and alternative reform strategies. European Journal of Law and Economics, 12(3): 217–252. Thomas, L. G. (1996). The two faces of competition: Dynamic resourcefulness and the hypercompetitive shift. Organization Science, 7: 221–242. Uhlenbruck, N., & De Castro, J. (1998). Privatization from the acquirer’s perspective: A mergers and acquisitions based framework. Journal of Management Studies, 35(5): 619–640. Vickers, J., & Yarrow, G. (1988). Privatization and economic analysis. Cambridge, MA: The MIT Press. Zahra, S. A. (1993). New product innovation in established companies: Associations with industry and strategy variables. Entrepreneurship Theory and Practice, 18(2): 47–69. Zahra, S. A. (1996). Governance, ownership, and corporate entrepreneurship: The moderating impact of industry technological opportunities. Academy of Management Journal, 39(6): 1713–1735. Zahra, S. A., & Neubaum, D. O. (1998). Environmental adversity and the entrepreneurial activities of new ventures. Journal of Developmental Entrepreneurship, 3(2): 123– 140. Zahra, S. A., Neubaum, D. O., & Huse, M. (2000). Entrepreneurship in medium-size companies: Exploring the effects of ownership and governance systems. Journal of Management, 26(5): 947–976.
Contents lists available at ScienceDirect
Journal of World Business journal homepage: www.elsevier.com/locate/jwb
Exploring corporate entrepreneurship in privatized firms Ana M. Romero-Martı´nez a,*, Zulima Ferna´ndez-Rodrı´guez b,1, Elena Va´zquez-Inchausti a,2 a b
Complutense University of Madrid, Departamento de Organizacio´n de Empresas, Campus de Somosaguas, 28223 Madrid, Spain Carlos III University of Madrid, Seccio´n de Organizacio´n de Empresas, C/Madrid 126, 28903 Getafe, Madrid, Spain
A R T I C L E I N F O
A B S T R A C T
Keywords: Corporate entrepreneurship Innovation Competition Privatization
This paper reports an analysis of whether state-owned enterprises (SOEs) increase their levels of corporate entrepreneurship after privatization. The study uses agency theory to discuss why SOEs display little entrepreneurial behavior and how privatization may alter this situation by changing firms’ systems of controls and incentives. The study also uses a sample of Spanish firms for its empirical research. Data on these firms were available for three years before and after privatization. The findings show that corporate entrepreneurship increases after privatization when firms are in highly competitive industries, either because competition was greater after privatization or because the firm was already in a highly competitive industry. In summary, corporate entrepreneurship in privatized firms seems to be favored by two factors, a change of ownership and competition. ß 2009 Elsevier Inc. All rights reserved.
1. Introduction Privatization of state-owned enterprises (SOEs) has become common throughout the world in recent years. The spread of this phenomenon has been driven in large part by the desire to improve firm performance and stimulate corporate entrepreneurship—a fundamental competitive tool for creating value (Baumol, 2002; Hitt, Ireland, Camp, & Sexton, 2002). Privatization brings changes of ownership and corporate governance, both of which have been shown to affect entrepreneurial behavior (Zahra, 1996; Zahra, Neubaum, & Huse, 2000). Anecdotal evidence from Spain also indicates that privatization boosts corporate entrepreneurship. For example, after privatization Telefo´nica practically doubled its spending on R&D, while also increasing the number of patents it registered by 50 percent. The old state-owned shipyards also more than doubled their product, and process and organizational innovations after they were put into private hands. Additionally, privatized firms like Iberia, Repsol and Telefo´nica led the internationalization of Spanish firms in Latin America in the 1990s. The typical agency relation of state-owned enterprises (SOEs) has some specific features that presumably limit innovative and proactive behavior. First, several types of agents (e.g., government ministers, civil servants and legislators) exist between the principal
* Corresponding author. Tel.: +34 91 3942376; fax: +34 91 3942371. E-mail addresses: [email protected] (A.M. Romero-Martı´nez), [email protected] (Z. Ferna´ndez-Rodrı´guez), [email protected] (E. Va´zquez-Inchausti). 1 Tel.: +34 91 6249656; fax: +34 91 6249758. 2 Tel.: +34 91 3942506; fax: +34 91 3942371. 1090-9516/$ – see front matter ß 2009 Elsevier Inc. All rights reserved. doi:10.1016/j.jwb.2009.04.008
(the state) and the firm (Aharoni, 1981). Second, the public purpose of SOEs leads them to pursue goals that are not directly linked to creating value (e.g., maintaining employment and providing subsidized goods and services). Lastly, their incentive systems and administrative controls favor routine behavior over risk taking. These factors militate against entrepreneurial behavior and make it probable that privatization will increase corporate entrepreneurship. Privatization brings new owners and the simplification of the agency relation between them and management. These changes are likely to push the firm’s objectives towards creating value. This will necessitate more innovative and proactive behavior, which will in turn boost the level of corporate entrepreneurship. In addition, privatization often opens up markets to competition, which should also raise the level of corporate entrepreneurship (De Castro & Uhlenbruck, 2003). Despite the many studies that exist on privatization and corporate entrepreneurship, the relationship between the two has still not been researched. This paper attempts to fill this gap in the literature by analyzing if the level of corporate entrepreneurship changes after privatization. The analysis includes the two main dimensions of privatization: transfer of ownership and opening of the markets. At a theoretical level, the paper examines the main post-privatization strategic and organizational changes linked to corporate entrepreneurship. At an empirical level, the paper compares the degree of corporate entrepreneurship of privatized firms before and after the change of ownership. The study is based on a sample of 38 Spanish non-financial firms privatized between 1985 and 2000 (about 40 percent of the total of firms privatized during this period). The paper is organized as follows. The next section introduces the study’s theoretical frame and hypotheses. The method and the
A.M. Romero-Martı´nez et al. / Journal of World Business 45 (2010) 2–8
empirical study are then presented and the results are summarized. The paper finishes with a discussion of the results and conclusions, along with some practical implications. 2. Privatization and corporate entrepreneurship 2.1. Change of ownership and corporate entrepreneurship Entrepreneurship involves the discovery and exploitation of opportunities. According to Schumpter, this means introducing new products and processes, designing new organizational structures, and winning new markets. In existing firms, entrepreneurship is not limited to introducing and exploiting product and process innovations and creating new businesses. Entrepreneurship also requires periodic revisions to structure and strategy, which may lead to divesting some businesses or re-defining domains (Covin & Miles, 1999). Corporate entrepreneurship, then, includes innovation, business creation (Lumpkin & Dess, 1996), and strategic renewal (Guth & Ginsberg, 1990). Agency theory points to corporate governance as one of the organizational factors most likely to affect the level of firms’ corporate entrepreneurship. Empirical research has reported positive relationships between corporate entrepreneurship and long-term institutional ownership, executive stock ownership, and board composition (Zahra, 1996; Zahra et al., 2000). Little research, however, has been in press on how the privatization of SOEs may affect entrepreneurial activities. The one exception is Antoncic and Hisrich (2003) who analyze the relationship between the percentage of public capital sold and corporate entrepreneurship in a former communist country. The findings of this study demonstrate that a higher share of private ownership can be particularly beneficial for growth and profitability by enhancing impacts of corporate entrepreneurship activities. Agency problems in SOEs have specific characteristics. The usual tools for controlling management in the private sector are not applicable to SOEs. Corporate market control does not exist. The managerial labor market does not work either, as the criteria for promotion in SOEs are political. Lastly, SOEs are protected from bankruptcy (Pryke, 1971), which disarms the controlling role of the product markets. Creating value, therefore, is not the primary objective of these firms (Lioukas, Bourantas, & Papadakis, 1993). The agency relation of SOEs affects their structures and strategies. Specifically, it discourages innovation and change, and ultimately corporate entrepreneurship too. The diffuse nature of SOEs’ objectives (Aharoni, 1981) and the strict administrative controls that exist promote bureaucratic structures and a reactive style of decision making (Pugh, Hickson, Hinings, & Turner, 1969). Managers are more concerned with sticking to plans and controls than with introducing innovations that respond to the market (Obloj & Thomas, 1998). Furthermore, re-defining the competitive focus becomes more vulnerable to pressure from stakeholders, employees, customers and suppliers who will not easily accept any re-structuring that reduces their privileges. When SOEs are sold, private owners replace the state and introduce the standard private-sector control mechanisms. Privatization also results in a re-definition and sharpening of the firm’s objectives by the new owners (Megginson, Nash, & Van Randenborgh, 1994). This manifests itself in managerial incentive and control systems aimed at creating value. These dynamics are likely to modify the behavior of the firm, enabling it to reach higher levels of competitiveness, innovation and change. On this basis, then, Hypothesis 1 postulates: After privatization, firms increase their level of corporate entrepreneurship.
3
2.2. Change of ownership, competition and corporate entrepreneurship Empirical research finds positive relationships between competition and corporate entrepreneurship (Miller & Friesen, 1982; Zahra, 1993). In a non-competitive market, the firm does not need to adapt to its demands; without competition there is no pressure on the firm to become more entrepreneurial. Competitive environments, on the other hand, demand high levels of innovation and flexibility (Baumol, 2002) and promote corporate entrepreneurship (Miller, 1983). Changes in the structure of the market create as many new opportunities as threats, which may favor more entrepreneurial behavior (Guth & Ginsberg, 1990). Many privatizations do not only involve the sale of public capital, but also include measures to increase competition. These measures may contribute to improving performance as much as or more than the change of ownership (Vickers & Yarrow, 1988). Early empirical studies reveal a positive relationship between competition and an increase in the sales of privatized firms (Megginson et al., 1994; Ramaswamy, 2001). In summary, then, the transfer of ownership from the public sector to the private does not ensure that privatized firms will be more entrepreneurial and innovative; competition may also be necessary for this to occur (Ramamurti, 2000; Uhlenbruck & De Castro, 1998). Hypothesis 2, therefore, postulates: After privatization, firms in more highly competitive industries increase their level of corporate entrepreneurship to a greater extent than firms in less competitive environments. 3. Method 3.1. Population and sample The target population of this study is 103 non-financial firms privatized by the Spanish government from 1985 to 2000, of which only 13 were by initial public offering (IPO). The study includes SOEs privatized through holding companies or functional ministries during the socialist (PSOE) and conservative (PP) administrations, irrespective of the mechanisms used. The two mechanisms were: (a) public offering (PO) and its variants (initial public offering (IPO) or public offering of the shares of quoted companies); (b) direct sale or competitive tendering. Firms from the Rumasa group (expropriated in 1983) are not included as their experience in the public sector was only incidental, nor are firms privatized from 2001 onwards as this study requires a minimum of three years after privatization to assess the changes. The study determines the date of privatization by equating it with the time the state loses control of the firm. This criterion is defined as when the state possesses less than 50 percent of the firm’s capital and is no longer able to make top management appointments. The latter is an important consideration. In some Spanish SOEs, the state had the power to name CEOs despite possessing less than 50 percent of their capital. The sample includes firms that have been partially privatized (the state continues to be a minority shareholder) and others that have been totally privatized (the state retains no stake in the capital). In both cases, however, the state has lost its capacity to control the firms. A questionnaire (see Appendix A) was designed to collect the information. It was mailed to the CEOs of the privatized firms. Respondents were asked to rate the firm three years before privatization and three years after for all of the items on the questionnaire. The researchers supervised this process by telephone calls and visits to the firms. The field work was performed from April to September 2003. The final sample contains 38 questionnaires—an effective response rate of 37 percent. Of the 38 firms that returned the
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4
questionnaire, 27 percent had 250 or fewer employees, 19 percent had between 250 and 1000, and the remaining 54 percent more than 1000. Service firms made up 58 percent of the sample and manufacturing firms the remaining 42 percent. Sixty-six percent of the firms that answered were privatized from 1997 on, when the Partido Popular (the conservative Popular Party) was in office. This is not surprising as more recently privatized firms found it easier to answer the questionnaire. During this surge in privatization activity, the Spanish government agreed its Strategic Privatization Plan at the cabinet meeting of June 28, 1996. Most of the firms underwent privatization by direct sale. High percentages (24 percent) of the responding firms’ privatizations, however, were IPOs. In Spain, IPOs make up only 10 percent of all privatizations. This is because the majority of responding firms’ privatizations took place after 1997, when IPOs became more common. Lastly, on the issue of institutional dependency, the completed questionnaires accurately reflect the preponderance of firms from the Ministry of Industry and Energy in the Spanish privatization process. Logistic regressions were performed to test the representativeness of the sample against the population. The independent variables used were: method of privatization; date of privatization (in three periods: 1985–1991, 1992–1996 and 1997–2000); and institutional dependency of the privatized firm. No significant differences regarding method and institutional dependency between the sample and the population were observed. These variables, therefore, do not bias results by influencing the probability of a firm appearing in the sample. Date of privatization, however, revealed significant differences between the sample and the population—the sample over-represents firms privatized from 1997 onwards. 3.2. Measures The study adopts Zahra’s method of measuring corporate entrepreneurship and competition, using a five-point Likert scale where 1 = strongly disagree and 5 = strongly agree. Six dimensions based on Zahra et al. (2000) and Zahra (1996) measure corporate entrepreneurship: product innovation (5 items), process innovation (4 items), organizational innovation (4 items), national venturing (5 items), international venturing (3 items) and strategic renewal (4 items). This method was chosen because it includes the main aspects of corporate entrepreneurship and uses measures that were validated by Zahra and his colleagues. Each dimension was calculated as the mean of its constituent items. This calculation was repeated with the data from the two periods under study (pre-privatization and post-privatization). The Cronbach Alpha coefficients (see Appendix A) are higher than 0.75 for each dimension—both before and after privatization. To gauge competition the study uses Zahra and Neubaum’s (1998) measure of competitive hostility (4 items). Once again, the value of
each dimension (calculated as the mean of its constituent items) was computed before and after privatization. The Cronbach Alpha coefficients are around 0.80. 3.3. Statistical treatment of data After calculating the corporate entrepreneurship and competition measures for the periods before and after privatization, the study tested the hypotheses using non-parametric techniques because: (a) the size of the sample is small; and (b) the Kolmogorov–Smirnof test and histogram analysis yielded nonnormal results for the variables. To test Hypothesis 1 (after privatization, firms will increase their level of corporate entrepreneurship), the study conducted Wilcoxon’s sign-rank test. The test checks whether the mean difference in variable values between the before and after privatization samples is zero. Moreover, the test classifies the differences between these variables into three categories: negative differences, positive differences and ties. To test Hypothesis 2 (after privatization, firms in more highly competitive industries will increase their level of corporate entrepreneurship to a greater extent than firms in lesser competitive industries), the study used a dichotomous measure to segment the sample according to the industry’s competitive characteristics: 0 representing that respondents rated sector competition hostility as equal to or less than 2.5; and 1 representing a sector competition hostility rating of higher than 2.5. Thus, 0 equals low competition and 1 high competition. The study then segmented the sample into two sub-samples: Sub-sample 1: Firms in industries where competition was low before privatization, but significantly higher after privatization. Sub-sample 2: Firms in industries where competition did not change after privatization. The study divided this sub-sample 2 into two groups: low competition before and after privatization (sub-sample 2a); and high competition before and after privatization (sub-sample 2b). After segmenting the sample, the study conducted Wilcoxon’s sign-rank test. 4. Results Tables 1 and 2 present the statistics and Spearman correlation (the non-parametric version of Pearson correlations) matrices of the variables for corporate entrepreneurship before and after privatization. Although the correlation coefficient values are significant, in absolute terms most of the cases have low values. The highest value is in the correlation between product and process innovations, which is not surprising given that in many cases product innovations lead to process innovations.
Table 1 Descriptive statistics and non-parametric correlations before privatization. Variables
N
Minimum
Maximum
Mean
S.D.
1
2
3
4
5
6
1. 2. 3. 4. 5. 6.
38 38 38 38 38 38
1.00 1.75 1.00 1.00 1.00 1.00
4.00 4.00 3.50 3.40 4.00 4.75
2.31 2.74 2.13 1.88 2.27 2.39
0.91 0.64 0.79 0.68 0.96 0.87
1.00 0.72*** 0.35* 0.60*** 0.52** 0.49**
1.00 0.41** 0.30 0.35* 0.24
1.00 0.42** 0.32* 0.33*
1.00 0.57*** 0.68***
1.00 0.48**
1.00
y
Product innovation Process innovation Organizational innovation National venturing International venturing Strategic renewal
p < .10. * p < .05. ** p < .01. *** p < .001.
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5
Table 2 Descriptive statistics and non-parametric correlations after privatization. Variables
N
Minimum
Maximum
Mean
S.D.
1
2
3
4
5
6
1. 2. 3. 4. 5. 6.
38 38 38 38 38 38
1.00 1.50 1.00 1.00 1.00 1.75
4.80 4.25 5.00 4.80 5.00 5.00
2.99 3.10 3.11 2.99 3.54 3.59
1.04 0.80 0.93 0.95 1.07 0.89
1.00 0.76*** 0.49** 0.45** 0.34* 0.39*
1.00 0.51** 0.32* 0.46** 0.46**
1.00 0.36* 0.30y 0.49**
1.0 0.60*** 0.66***
1.00 0.61***
1.00
Product innovation Process innovation Organizational innovation National venturing International venturing Strategic renewal y
p < .10. * p < .05. ** p < .01. *** p < .001. Table 3 Changes in entrepreneurship. Variables
Product innovation Process innovation Organizational innovation National venturing International venturing Strategic renewal
N
Mean before
38 38 38 38 38 38
2.31 2.74 2.13 1.88 2.27 2.39
Mean after
2.99 3.10 3.11 2.99 3.54 3.59
Change in mean
Z
Sign tests
***
0.68 0.37 0.98 1.10 1.27 1.20
3.85 2.75** 4.37*** 4.85*** 4.74*** 4.70***
Dif. +
Dif.
Ties
26 21 27 31 29 30
3 4 3 1 2 2
9 13 8 6 7 6
(68%) (55%) (71%) (82%) (76%) (79%)
(8%) (11%) (8%) (3%) (5%) (5%)
(24%) (34%) (21%) (16%) (18%) (16%)
y p < .10. *p < .05. ** p < .01. *** p < .001.
4.1. Changes in corporate entrepreneurship Table 3 presents the results of the dimensions for corporate entrepreneurship. As expected, significant differences exist in all dimensions. Innovation and corporate venturing, as well as strategic renewal, increase significantly after privatization. These
findings support Hypothesis 1 that after privatization, firms increase their level of corporate entrepreneurship. The results of Wilcoxon’s sign-rank test confirm that after privatization over 50 percent of the firms in the sample became more innovation-driven, introducing more product and process innovations and spending more on R&D. Moreover, these firms changed
Table 4 Changes in entrepreneurship after sample segmentation according to competition. Variables
N
Mean before
Mean after
Change in mean
Z
Dif. +
Dif.
Product innovation 1 Product innovation 2 Product innovation 2a Product innovation 2b
12 25 6 19
2.35 2.26 2.17 2.30
3.19 2.88 2.23 3.08
0.84 0.62 0.07 0.79
2.16* 3.10** 1.00 2.99**
9 16 1 15
(75%) (64%) (17%) (79%)
1 2 0 2
2 7 5 2
Process innovation 1 Process innovation 2 Process innovation 2a Process innovation 2b
12 25 6 19
2.82 2.65 2.58 2.67
3.26 3.07 2.63 3.21
0.45 0.42 0.04 0.54
1.84y 2.66** 1.00 2.56**
8 13 1 12
(67%) (52%) (17%) (63%)
1 2 0 2
3 10 5 5
Organizational innovation 1 Organizational innovation 2 Organizational innovation 2a Organizational innovation 2b
12 25 6 19
2.13 2.18 2.50 2.08
3.60 2.84 2.79 2.86
1.48 0.66 0.29 0.78
2.99** 3.06** 1.60 2.80**
11 15 3 12
(92%) (60%) (50%) (63%)
1 2 0 2
0 8 3 5
National venturing 1 National venturing 2 National venturing 2a National venturing 2b
12 25 6 19
1.79 1.94 1.83 1.97
3.07 2.92 2.57 3.03
1.27 0.98 0.73 1.06
2.91** 3.83*** 1.60 3.53***
11 19 3 16
(92%) (76%) (50%) (84%)
1 0 0 0
0 6 3 3
International venturing 1 International venturing 2 International venturing 2a International venturing 2b
12 25 6 19
2.19 2.29 1.95 2.40
3.69 3.48 2.56 3.77
1.50 1.19 0.61 1.37
2.99** 3.60*** 1.48 3.18***
11 17 4 13
(92%) (68%) (67%) (68%)
1 1 0 1
0 7 2 5
Strategic renewal 1 Strategic renewal 2 Strategic renewal 2a Strategic renewal 2b
12 25 6 19
2.06 2.57 2.42 2.62
3.98 3.44 3.08 3.55
1.92 0.87 0.67 0.93
3.06*** 3.43*** 1.60 3.08**
12 17 3 14
(100%) (68%) (50%) (74%)
0 2 0 2
0 6 3 3
y
p < .10. p < .05. p < .01. *** p < .001. *
**
Sign tests Ties
6
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their organizational structures, human resources programs, and management systems to stimulate innovation. The strategic changes are even more marked. Over 70 percent of the firms undertake corporate venturing at national and international level, and over 75 percent take steps to redefine their activities at a corporate and competitive level. Therefore, firms show more entrepreneurial, innovative and proactive behavior after privatization, which brings with it important strategic and organizational changes. 4.2. Sample segmentation according to competition To analyze the effect of competition on the corporate entrepreneurship of privatized firms the sample was segmented according to the level of sector competition hostility. The resulting distribution of firms is as follows: - 32 percent of the firms belong to sub-sample 1 (where competition was low before privatization, but significantly higher after privatization) and; - 68 percent of the firms belong to sub-sample 2 (where competition did not change after privatization): 16 percent operate in low competition industries before and after privatization (sub-sample 2a), while 52 percent are in high-competition industries before and after privatization (sub-sample 2b). The study excluded one case where the level of competition dropped significantly after privatization. Table 4 shows that after segmenting the sample, the significant differences remain the same for all corporate entrepreneurship dimensions. In addition, the percentage of firms following the expected behavior – increasing their level of entrepreneurship (positive differences) – is over 50 percent for all cases. In general terms, these results show that after privatization entrepreneurship is higher. Firms become more innovation-driven, develop more new businesses and are more likely to undertake re-structuring activities. This is the case whether the level of competition changes (sub-sample 1) or remains the same (sub-sample 2). This finding supports the belief that changes in competition do not influence the differences in the entrepreneurial behavior of firms after privatization. This result does, however, give grounds for some caution. First, an analysis of the results of Wilcoxon’s sign-rank test shows that in all cases the percentage of firms that behave as expected (positive differences) is higher for firms in sub-sample1 than for those in sub-sample 2. Second, significant differences in sub-sample 2 only exist in the highcompetition industries (sub-sample 2b). In addition, the results of Wilcoxon’s sign-rank test show that the percentage of firms behaving as expected (positive differences) is also higher in subsample 2b. Therefore, corporate entrepreneurship only increases in firms operating in high-competition industries—either because privatization created greater competition, or because competition was already high before privatization. This conclusion supports Hypothesis 2: after privatization, firms in more highly competitive industries will increase their level of corporate entrepreneurship (more innovation, corporate venturing and strategic renewal). The higher the degree of price competition (together with quality, service and innovative competitive actions), the higher is the percentage of more entrepreneurial firms. 5. Discussion and conclusions Privatization has become a highly important instrument of economic policy over the last decades (Uhlenbruck & De Castro, 1998). It creates externalities for the economic system and improves business performance in privatized firms (Cuervo &
Villalonga, 2000). One reason for this is that privatization can introduce the incentives and means to increase the level of corporate entrepreneurship. This paper confirms that after the sale of public capital firms improve their entrepreneurial activity. Privatized firms innovate and change their management structures and systems. In place of the bureaucratic and slow-moving organizational structures typical of SOEs, privatized firms use more flexible and adaptable structures. Their corporate strategies also undergo marked changes as they enter new businesses and abandon unprofitable ones. The levels of diversification and internationalization of SOEs are very low because of the external controls they are encumbered with. After privatization, the number of businesses in which they are involved, along with the degree of internationalization of their activities, increases. Likewise, freed from the pressure of stakeholders – particularly trade unions – they are able to eliminate business lines more easily. In short, three years after privatization firms are more entrepreneurial than they were three years before their sale. Segmenting the sample according to competition, however, puts a different slant on the results. Segmentation reveals that significant increases in corporate entrepreneurship only occur in firms operating in industries that became more competitive after privatization or those were already highly competitive before privatization. In other words, SOEs operating in low competition industries before and after privatization do not significantly increase their levels of corporate entrepreneurship. This result is in line with Vickers and Yarrow (1988), who conclude that private ownership is superior to public in competitive markets, but not in non-competitive markets. Ros’s (1999) study of the relationship between the privatization of telecommunications firms and efficiency gains also notes the advantages of combining the sale of public capital with competition. Lastly, our finding supports other research that reveals a positive relationship between competition and corporate entrepreneurship (Zahra, 1993). 5.1. Managerial relevance These results indicate that simply bringing in new owners to impose entrepreneurial behavior on firms is not sufficient; the product markets are also important. Market conditions must put pressure on the new owners for innovative and proactive activities to develop. When this is not the case, insufficient incentives exist for new owners to be proactive. Thomas’s (1996) finding that the capital market more highly values firms in industries where competition is great (because it forces them to be more innovative) supports this conclusion. In the same way, the fact that privatization needs competitive market structures to succeed helps to explain why its results are not so positive in less developed countries where institutional failures jeopardize its hoped-for benefits (Smith & Trebilcock, 2001). Despite this, however, other factors may be affecting our results. A rise in the overall level of entrepreneurial activity in the Spanish economy could also explain the increase in corporate entrepreneurship. To control for this effect, the study examined the trend in innovative activity in Spain from 1985 to 2000 and found no empirical evidence of a significant increase (Morcillo, 2002). Organizational variables – like size and age – may also have an effect on corporate entrepreneurship. Younger and smaller firms, for example, might be expected to be more entrepreneurial. This can be discounted in this study, however, as our sample is composed of large and mature firms. This paper also has managerial implications. Privatized firms need managers with entrepreneurial skills to adapt to the new competitive environment. Managers that are more proactive,
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Lastly, because innovation and proactive behavior seem to be subject to cultural differences, it is interesting to extend research on it to non-Anglo-Saxon countries, which have not been much analyzed. Our work using Zahra’s (1996) methodology with a sample of European firms (in this case Spanish) is a first step in this direction. Future work should continue this line of research. In summary, the paper’s lesson is clear: A change of ownership is not enough to produce entrepreneurial behavior. Privatized firms that remain beyond the control of the market are unlikely to be innovative and risk taking, or to ever fully develop their competitiveness. Competition, therefore, is a key factor in the process of innovation, the development of new businesses, and the strategic renewal of former state firms.
innovative and willing to take risks will be better placed to handle the process of change caused by privatization. In addition, after privatization managers are under less stakeholder pressure, which makes it easier for them to set the firm on the road to creating value. This research is not free from limitations. First, the study includes data on 38 of the 103 firms privatized during the period of study, around 40 percent of the total. The sample also overrepresents firms privatized since 1997. Second, the study’s only source of information was the firms’ CEOs. Future studies should contrast this information with objective data. Similarly, delving into the relationship between the changes in behavior observed and firm performance would be interesting.
Appendix A. Measures Entrepreneurship: Respondents were asked to assess the following statements before and after privatization. A five-point Likert-type scale was used for this purpose (1: strongly disagree, 2: disagree, 3: undecided, 4: agree and 5: strongly agree). Before privatization
After privatization +
4 4 4 4 4
5 5 5 5 5
1 1 1 1 1
2 2 2 2 2
Product innovation a. Being the first company in your industry to introduce new products to the market. b. Creating radically new products for sale in new markets. c. Creating radically new products for sale in the company’s existing markets. d. Commercializing new products. e. Investing heavily in cutting-edge product-oriented R&D.
+
a = 0.89 3 3 3 3 3
a = 0.90
1 1 1 1 1
2 2 2 2 2
1 1
2 2
3 3
4 4
5 5
1 1
2 2
1 1
2 2
3 3
4 4
5 5
1 1
2 2
1 1 1 1
2 2 2 2
4 4 4 4
5 5 5 5
1 1 1 1
2 2 2 2
1 1 1 1 1
2 2 2 2 2
4 4 4 4 4
5 5 5 5 5
1 1 1 1 1
2 2 2 2 2
International venturing a. Entering new foreign markets. b. Expanding your international operations. c. Supporting and financing start-up business activities dedicated to international operations.
1 1 1
2 2 2
4 4 4
5 5 5
1 1 1
2 2 2
Strategic renewal a. Divesting several unprofitable business units. b. Changing its competitive approach (strategy) for each business unit. c. Initiating several programs to improve the productivity of business units. d. Reorganizing operations to ensure increased coordination and communication among business units.
1 1 1 1
2 2 2 2
4 4 4 4
5 5 5 5
1 1 1 1
2 2 2 2
a = 0.82
Process innovation a. Investing heavily in cutting-edge process technology-oriented R&D. b. Being the first company in the industry to develop and introduce radically new technologies. c. Pioneering the creation of new process technologies. d. Copying other companies’ process technologies (reversed). Organizational innovation a. Being the first in the industry to develop innovative management systems. b. Being the first in the industry to introduce new business concepts and practices. c. Changing the organizational structure in significant ways to promote innovation. d. Introducing innovative human resource programs to spur creativity and innovation.
3 3 3 3 3
4 4
5 5
3 3
4 4
5 5
4 4 4 4
5 5 5 5
4 4 4 4 4
5 5 5 5 5
4 4 4
5 5 5
4 4 4 4
5 5 5 5
3 3 3 3
3 3 3 3 3
a = 0.84
a = 0.82 3 3 3 3
3 3
a = 0.80
a = 0.88 3 3 3
5 5 5 5 5
a = 0.90
a = 0.83
National venturing a. Entering new national markets. b. Promoting new national business creation. c. Diversifying into new industries in Spain. d. Supporting and financing new national venture and start-up activities e. Acquiring companies in very different industries.
4 4 4 4 4
a = 0.84
a = 0.91 3 3 3 3
3 3 3 3 3
3 3 3
a = 0.80 3 3 3 3
Sector competition hostility: Respondents were asked to assess the following statements regarding the level of sector competition where the company developed its core activity. Before privatization
After privatization +
+
a = 0.80 a. Competition based on quality is fierce. b. Competition based on price is fierce. c. Competition based on service is fierce. d. Competition based on product newness is fierce.
1 1 1 1
2 2 2 2
3 3 3 3
a = 0.81 4 4 4 4
5 5 5 5
1 1 1 1
2 2 2 2
3 3 3 3
4 4 4 4
5 5 5 5
8
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