Review about Entrepreneurship and Risk Finance Essay

The aim of this chapter is to develop the knowledge and understanding on the subject matter as well as providing the theoretical background for the study. Therefore, it was essential that a desk review be made on previous studies focusing on the topic of the risk taking propensity among entrepreneurs. The literature review included some relevant studies that were done in the past particularly those related to the issue of this study. In addition, studies related to the general issues of entrepreneurship were also reviewed to shed additional insight on the subject matter. The chapter starts with the discussion on the concept of entrepreneurship with special reference to the entrepreneurial process and how entrepreneurs play their role in the process. It is then followed by discussion on the micro and small business sector in Malaysia in terms of the working definition and its importance to the national economy. Next, the definition of risk and its variants are discussed in greater detail. The chapter ends with the discussion of the literature related to risk taking propensity. Entrepreneurship is a process universally connected with the founding of business ventures, acquiring or expanding an existing business. Entrepreneurs have been considered as bearers for risks and uncertainties in making business choices (Knight, 1921), and make innovations for new goods, new methods of production, new markets, and new types of industrial organization (Schumpeter, 1934). Hull, Bosley, and Udell (1980) concurred that entrepreneurs assumed risks with the intention to expand the businesses. Meanwhile, Brockhaus (1980) recognized an entrepreneur as a manager or owner of a business who is not employed elsewhere. However, Cooper and Dundleberg (1987) defined entrepreneur as a person who either own or manage a business. While McClelland (1961) described an entrepreneur as a business manager who has the responsibility as a decision maker and takes responsibility for the decision made. From the above definitions, it can be concluded that an entrepreneur is the owner or manager of an MSME, in which he or she may not be a founder but has a responsibility to make decision and take the risk and responsibility for the decision made. Entrepreneurship endeavours involve gathering of productive resources in an attempt to begin a business enterprise with the expectation of providing a reasonable income to the entrepreneur or small business operator. These resources include manpower, equipment and tools, money, time and basic raw materials which may entail some risks in procuring them. For example, the risk of not getting basic raw materials as needed to produce the product or damage to the equipment and tools means losses to the entrepreneur. These resources, along with their associated risk, should be recognized and managed to minimize losses and to increase profits. Hereditary risk exists in all the processes starting from the ideation, conceptualization, enterprise creation, commercialization and ending with the growth of the enterprise. The entrepreneurial process remains the same and the roles and nature of the entrepreneur are universal, regardless of industries. A­A­A­ Moreover, all businesses in the world face risk regardless of its size, thus they have to identify, assess, manage and monitor the organization's business opportunities and risks. The current business disappointments are usually caused by entrepreneur's misjudgements, mismanagement of risk and changes in corporate governance requirements. There are also increasing stakeholder expectations for entrepreneurs to effectively manage all risks exist within an organization.

2.3 Micro, Small and Medium Enterprises (MSMEs)

Micro, small and medium enterprises (MSMEs) are and will continue to be the backbone of Malaysian economic growth. Undoubtedly, MSMEs contributes greatly to the economic strength in Malaysia. With the New Economic Policy introduced by government in 1971, Malaysian MSMEs were given the important task of hoisting new breed of Bumiputra entrepreneurs who would eventually grow into large business community in accordance with the social restructuring objectives of the policy. The policy has been able to create MSMEs whereby 30% of the businesses are owned by bumiputras. As of Mac 2005, a total of 518,996 MSMEs were registered in Malaysia (Census of Establishments and Enterprises, 2005, Department of Statistics Malaysia). Most of the MSMEs were found in the service sector, accounting for 86.5%. They contributed 27.3 percent of total manufacturing output, 25.8 percent to value-added production, owned 27.6 percent of fixed assets and employed 38.9 percent of the country workforce (SMIDEC, 2002). There were 192,527 establishments in the services sector and 186,728 (96.7%) of these are made up of MSMEs in Malaysia. Yusoff (2004) noted higher consumer spending and a record level of tourist arrival caused the services sector to grow by 6.8% in 2004. Strong expansion in all sub-sectors with transport and communication emanated the growth in the lead at 8.4% followed by wholesale and retail trade, hotels and restaurants (7.1%) and finance, insurance, real estate and business services (6.5%). MSMEs had become one of the main drivers of economic growth as the industries contribute 32% to Malaysia's gross domestic product (GDP), account for 56% of total employment and 19% of total exports of the nation in 2007 (SME Annual Report, 2007). The definition of micro, small and medium-sized enterprises is classified within the context of the country in which they operate, as typically, the concept varies according to country (Gunasekaran, Forker and Kobu, 2000). In the past, there was no common definition of micro, small and medium enterprises (MSMEs) in Malaysia. Many agencies defined MSMEs differently according to their own criteria based on annual sales turnover, number of employees or shareholder. The criteria should include paid-up capital, shareholders' funds, sales turnover, and number of employees or a combination of these. In Malaysia, National Small and Medium Enterprise Development Council (NSDC), (2005), defined micro, small and medium enterprises as firms employing 150 full-time employees with sales turnover less than RM 25 million. This definition covers the manufacturing sector including agro-based, services, primary agriculture and ICT. Bank Negara Malaysia defined MSMEs as enterprises with shareholders funds of less than RM10 million. Meanwhile, the Small and Medium Industries Development Corporation (SMECorp) defined MSMEs as enterprises based on the annual sales turnover not exceeding RM25 million and number of full-time employees not exceeding 150. The criteria used in defining MSMEs are based on annual sales turnover and number of the MSMEs as postulated in Table 2.1 below.

Table 2.1: Definitions of MSMEs in Malaysia

Category

Micro-enterprise

Small enterprise

Medium enterprise

Manufacturing (including agro-based) and MRS

No. of full-time employees: Less than 5 Annual Sales Turnover: Less than RM250,000 No. of full-time employees: Between 5 and 50 Annual Sales Turnover: Between RM250,000 and less than RM10 million No. of full-time employees: Between 51 and 150 Annual Sales Turnover: Between RM10 million and RM25 million.

Services, primary agriculture and information and communication Technology (ICT)

No. of full-time employees: Less than 5 Annual Sales Turnover: Less than RM200,000 No. of full-time employees: Between 5 and 19 Annual Sales Turnover: Between RM200,000 and less than RM1 million No. of full-time employees: Between 20 and 50 Annual Sales Turnover: Between RM1 million and RM5 million Sources: National Small and Medium Enterprise Development Council (NSDC), (2005)

2.4 Risk

Risk become popular in the economics field in the 1920s and started to be the main focus in the academic discipline. Thus, the definition of risk has been extended within the area of decision making by various field of literature in management, environmental, insurance and psychology. Risk and its elements' definition is complicated and multifaceted as it is viewed and considered differently depending upon the taxonomy that an individual utilizes it. Generally, risk refers to uncertainty concerning the occurrence of a loss (Redja 2005). Yates and Stone (1992) defined risk as the degree of uncertainty and potential loss which may follow from a given behaviour. Risk is also defined by Greene (1962) as the "uncertainty as to the occurrence of an economic loss" and, "measurable uncertainty" (Knight, 1921) or "objectified uncertainty regarding the occurrence of an undesirable event" (Willett, 1951). Apart from the dissimilarities in defining risk, two common themes are about uncertainty and loss. According to Crowe & Horn, (1957), the term probability may have the connotation of likelihood to specific persons as compared to probability to others. This feeling of unpredictability of the actual results of a method contrary the possible expected outcomes introduces objectives suspicion about the outcome in given circumstances (Williams & Heins, 1964). Once the event occurred, the differences can be measured in the actual versus expected outcome of an action but differs from the incidence of an unwelcome contingency (Althearn, 1962). Consequently, there is variability in the connotative definitions of risk between persons, society and ethos despite several general academic accords concerning the fundamental of risk. In addition to the facets of uncertainty and loss, there is the constituent of the future time component in the likelihood, predictive, possibility of risk. The multitude of descriptions of risk is due to the lack of agreement by scholars and the nature of risk itself. The word of uncertainty may be unique to a particular actor if the word of uncertainty refers to the component of risk and uncertainty as a state of mind of the individual processing the risk. Besides uncertainty, risk involves loss, or something that is undesirable. Loss may be more than financial or economic. Crowe and Horn (1957) defined loss as an involuntary reduction in the capacity of an entity to satisfy its wants. Therefore, it looks that scholars have disagreements in separating an individual's awareness, perception and attitude from the general concept of risk.

Entrepreneurial Risk

An entrepreneur is a risk taker and is prone to assume business risks. Any error in making business decision is a probable source of threat or opportunity in assuring the success of the business. The distinctiveness of entrepreneur businesses, rivalries and tight economic situations has obligated the entrepreneurs' capability on predicting the business risks. Busenitz (1999) noted the basis of risk is that the dominant theme running throughout the entrepreneurship literature is risk and how entrepreneurs are predisposed towards risky alternatives or how the should manage risk" (p. 325). However, this statement contradicts with McCarthy's (2000) statement on the risk that the risk construct dominates the literature on entrepreneurship and the ability to bear risk has been identified as the primary challenge facing entrepreneurs" (p.563). Furthermore, Klein (1977) had summarized that the capacity to take risk as being an inherent attribute of the entrepreneurial venture as stated that if an entrepreneur is to profit from an unexploited potential, he must also inevitably deal with a greater degree of uncertainty. Business risks occur due to uncertainty about the future and the effect of current judgements.Therefore, business choices need to consist of an assessment of their outcomes and the possibility that the outcome may differ from expectation. Entrepreneurs confront the problem that the sum of tolerable risk is based on likelihood of unconstructive outcomes and reward is often comparative to the amount of risk taken. Bird (1989) differentiates risks to five types which four of them are clearly pertinent to any potential entrepreneurs such as economic risk, risk in social relations, risks in career development, psychological and health risk. The general concept of "risk" has been broken into several dimensions by several authors (see for example, Assael, 1981; MacCrimmon and Wehrung, 1986; Minkowick, 1964; Mowen, 1987; and Robertson, Zielinski and Ward, 1984). These include financial risk, physical risk, social risk, professional risk, performance risk, opportunity cost risk and time risk. Meanwhile, Carroll, Siridhara and Finchman (1986) used the Atkinson's model (consumer model of risk perception) which resulted in a six dimensions to define risk among entrepreneurs as the decision to become an entrepreneur involves consumer risk. The dimensions included in the model are financial risk, social risk, psychological risk, performance risk, safety risk and convenience risk. However, Harrington and Niehaus, (2004) noted that in business several types of risks are present and can be applied to entrepreneur business decision making such as price risks, credit risks and pure risks. Price risks include market risks associated to the victory of the business plan, demand for the product, and issues of cost and price which include output price and input price risks. Romano et al, (2001) includes price risk to business-related financial risks involving credit, cash flow, foreign currency and working capital. Every business risks are not monetary, yet, a good deal of risk is inherent in companies and operations itself. It can be concluded that many of these risks resulted from pressures related to company growth, company culture and information management. Other type of business risks is credit risk. Credit risk is a chance and magnitude of financial loss involved in the spending of money. To quote Harrington and Niehaus, (2004), on the credit risk of the business risk: "The risk that a firm's customers and the parties to which it has lent money will delay or fail to make promised payments is known as credit risk. Most firms face some credit risk for account receivables. The exposure to credit risk is particularly large for financial institutions, such as commercial banks, that routinely make loans that are subject to risk of default by the borrower. When firms borrow money, they in turn expose lenders to credit risk (i.e., the risk that the firm will default on its promised payments). As a consequence, borrowing exposes the firm's owners to the risk that the firm will be unable to pay its debt and thus be forced into bankruptcy, and the firm generally will have to pay more to borrow money as credit risk increases" (p.5). Raghavan, (2005) noted that Probability Default (PD) and Loss Given Default (LGD) were used to measure credit risk and default percentage is quite high in SME sectors as compared to the large corporate or entity. Finally, pure risk is another type of business risks. These risks affect business due to reduction in value of business assets such as wreck or demolition of construction, equipment, inventory, business records, or other property; recovery and replacement costs after fires, flooding, typhoon or other disaster; and loss of income during recovery. Pure risks also involve company losses due to shipping damages or losses occurring because of crimes such as misappropriation or robbery. Entrepreneurs face a range of pure risks that must be controlled and managed lest they endanger the future of the firms. This pure risk also includes legal liability for damages for harm to customers, suppliers, shareholders and also injury to employees resulting from accidents, harm product, professional malpractice, inappropriate business practices and mistakes or omission. Another type of pure risk is the risk which associated with paying benefits to injured workers under workers' compensation laws including the risk of legal liability for injuries or other harms to employees that are not governed by workers' compensation laws. Finally, the risk that the businesses agreed to make payments under employee benefits plans due to death, illness and disability to employees (Harrington and Niehaus, 2004). The figure below shows the major types of business risk.

Figure 1: The Major Types of Business Risk

Source: Harrington and Niehaus, 2004 Liles, (1974) recommended that new venture entrepreneurs, involved financial status, career opportunities and psychosocial health. The new venture also will face strain and loss of family and social relations. The private monetary risk that the entrepreneur perpetrates from a failed business can affect the major losses to the entrepreneurs, resulting in a lower standard of living. Liles (1974) also suggested that the potential entrepreneur is well counselled to analyze carefully the risks associated with his specific business proposal and then make a decision to undertake them because the financial and emotional consequences of failure could be devastating. Liles then concluded that the decision depends to a great extent upon the potential entrepreneur's perception of the risk involved. Raghvan, (2005), specify the risks to SME sectors include the following: 1. Constitution of business entity involves the constitution to be risky due to lack of professionalism and overdependence on one or two key person in deciding the important part in running the business. The decisions made will affect the success or failure in establishment and advancement of the business. 2. Leverage on financial structure occurs when the business entity limits the funds mobilisation efforts that a small and medium business enterprise can raise capital and borrow. 3 Tough competition and inadequate margin resulted from competition with bigger business, whereby a small and medium business enterprise face the pressure on the margin as they have to absorb according to bigger enterprise price as they cannot raise their price. 4. Low collection in account receivable gives effects to the strain on the liquidity position of the SME sector and may be the result of bank restricted their exposure to the sector. 5. Incapacity to go for technology advancement to help the sector optimized their available resources in the best way is because of little financial resources and poor ability for leveraging the financial structure. 6. High employee turnover in the small and medium business enterprise because of limited of growth prospects includes the possible loss of manpower and additional costs in the form of training and knowledge update that will results the operation continuity and lowering the productivity. 7. Micro finance which provided credits to small enterprise as to improve the standard of living will covered them under social entrepreneurial activities. Doubtfully, the risk of the lenders will be spreading under the sector. The approach of micro enterprise finance is through repayment incentive structure, streamlined administration and market based pricing adopting profit which leads to great transform in a cumulative causation triggered by credit to MSMEs. 8. Collateral Security exists when dealing with lenders and borrower particularly to banks. Banks would not on detailed investigation and analysis of borrower's business as they already have the protection which will reflect of credit-worthiness to lenders. 9. Bank lending to MSMEs is considered as the primary source of external finance to support the sector's growth in the country. Business owners have knowledge on the prospects of venture and risk facing their business than lenders that will set in the information asymmetry. The existence of information asymmetry makes the lenders respond by increasing lending margins to levels in excess of that which the inherent risks would require. Besides, banks also curtail the extent of lending and resort to what is known as Credit Rationing, notwithstanding the fact that MSMEs would be willing to pay a fair Risk Adjusted Cost of Capital.

2.6 Risk Taking Propensity

The study of decision making behaviour categorizes the risk into three elements: risk perception, risk propensity and preparedness to take risk (Brindley, 2005). Brockhaus (1980) defined risk propensity: "The perceived probability of receiving the rewards associated with success of a proposed situation, which is required by an individual before he will subject himself to consequence associated with failure, the alternative situation providing less reward as well as less severe consequences than the proposed situation." (p. 513) Risk taking can also be defined as one of the three dimensions of entrepreneurial orientation of a company and refers to the readiness of the organization to consign significant resources to opportunities that might be uncertain (Junehed and Davidsson 1998). Sitkin and Weingart (1995) defined risk perception as a subjective interpretation of expected loss which affected by individual's view of the uncertainty of the decision and the consequence of the decision. Meanwhile, risk propensity is usually defined as an individual's general tendency toward either taking or avoiding risk within a particular kind of decision context (Sitkin and Pablo, 1992). Risk propensity is a common tendency to accept or avert risks (Sitkin and Weigart, 1995). Summary of past trend of the selected research in risk propensity have produced mixed conclusions is tabulated in Table 2.1 (p. 23). Some studies have indicated no significant differences in risk taking propensities among entrepreneurs. Risk propensity and risk perception influence risk taking. Risky decisions will be made when the situations are of high risk propensity and low risk perception. Therefore, risk-taking initiatives should be more necessary in order to achieve good results in hostile markets. In other words, business owners or managers who dare to take more risks take actions that are more suitable and perform better. Abby and Slater (1989) noted that an organization which has an international vision, favorable perception and attitudes towards international business, is willing to take risk and has the capacity to engage positively in international business activities is likely to lead the company to business success. In order to minimize risks, entrepreneurs are required to identify which variables influence their business performance. If they have a higher risk-taking propensity, they positively affect the business performance. Begley (1995) defined risk-taking propensity as the willingness to take moderate risks. This means that when entrepreneurs are faced with different situations, they would probably show different risk propensities. At the same time, different entrepreneurs faced with the same situation may present different risk propensities. Entrepreneurs are willing to accept the uncertainty. They are distinctively able to start and orchestrate events that have risk consequences (Mitton. 1989). Some entrepreneurial studies conducted propose that successful entrepreneurs are moderate risk-takers (Bridge, O'Neil, Cromie, 1998). Douglas and Shepherd (2002) found that those with a greater risk acceptance had stronger levels of entrepreneurial intention. McClelland (1961) found that individuals would have moderate propensities to take risk if they have high achievement needs. However, Liles (1974) argued that entrepreneurs frequently have to adopt uncertainty with respect to financial well-being, psychic well-being, career security and family relations. Group's risk propensity could be influenced by various variables. Among them was characteristic of the group as suggested by Sitkin and Pablo (1992) that outcomes associated with prior risky decisions can influence risk propensity with more positive outcomes leading to greater risk propensity. Prediction by people that groups with higher levels of collective efficacy (Gibson, McKeon and Ostrom, 2000) could have greater risk propensity because they feel more capable of handling problems that arise. Similarly, groups with more ambitious goals or groups that compete closely with other groups may have greater risk propensity because risk taking is necessary for their success. The environment was another variable that may also play a role in the risk propensity of groups. For example, the group may have greater risk propensity if risk is valued in a group's social environment (Stine-Cheyne, 2002). According to Moreland & Levine, (1992), a group may have a greater risk propensity because it has less fear of failure if the group expects outsiders to provide help when it is needed. When the consequences of failure are smaller, a group may be more willing to take more risks. This relationship may be moderated, however, by the availability and value of outside help.

Table 2.1: Selected Empirical Research of Risk Taking Propensity and Entrepreneurs

Researcher(s)

Sample

Place

Instrument(s)

Results

Brockhaus and Nord (1979)

New founders (N=31), newly promoted managers (N=31), and newly hired managers (N=31)

United States

Choice Dilemmas Questionnaire (CDQ)

No significant differences in risk taking propensity of the three groups.

Brockhaus (1980a)

New founders (N=31), newly promoted managers (N=31), and newly hired managers (N=31)

United States

CDQ

No significant differences in risk taking propensity of the three groups.

Sexton and Bowman (1983)

Entrepreneurship majors (N=61) and non business majors (N= 113)

United States

Jackson Personality Inventory

(JPI)

Personality Research Form E

(PRF-E)

CDQ

Entrepreneurship majors higher in risk taking

Sexton and Bowman (1984)

Entrepreneurship majors (N=45) , business majors (N=75) and non business majors (N= 98)

United States

JPI

PRF-E

Entrepreneurship majors higher in risk taking

Schwer and Yucelt (1984)

Owners and small business managers (N=71)

CDQ

No differences in personal risk; other risks mitigated by age and education

Masters & Meier (1988)

Male and Female owners/owner-managers and managers (N=50)

United States

CDQ

No significant differences in risk taking propensity neither between owners and managers nor between males and females owners.

Table 2.1: Selected Empirical Research of Risk Taking Propensity and Entrepreneurs

(Continued)

Researcher(s)

Sample

Instrument(s)

Results

MacCrimmon and Wehrung (1990) Business owners and Executives Canada CDQ -The greater success was related to greater risk taking. -Education was also found to be related to risk taking. -Age, seniority, number of dependents was inversely related to risk taking. Carland, J.W., III, Carland, J.W., Carland, J.A & Pearce, J.W. (1995) Entrepreneurs (N=114), Small Business Owners (N=347) and Managers (N=387) South Eastern United States JPI - Older respondents explained a lower of risk taking propensity than the younger. - Respondents with higher level of education had higher propensities for risk taking, - Female exhibited a lower level of risk taking propensity compared to male. Begley (1995), Business executive (N=239) New England JPI failed to identify whether the level of entrepreneurial risk taking was low, moderate, or high. Koiranen, Hyrsky and Tuunanen (1997) Entrepreneurs, Small business owners and managers (N=1000) India, Turkey and United States JPI -Americans were more inclined to assume risks. -Finnish entrepreneurs, small business owners and managers were more risk averse than Americans. -Americans males have a higher scores than Finnish males -No significant difference between female US entrepreneurs, small business owners and managers and their Finnish female counterparts

Table 2.1: Selected Empirical Research of Risk Taking Propensity and Entrepreneurs

(Continued)

Researcher(s)

Sample

Place

Instrument(s)

Results

Stewart, Watson, Carland and Carland (1998), Students (N=206) United States and Rusia JPI and CDQ - CDQ failed to measure the construct of risk taking in the investigation. - JPI was more successful; however, it has components which may not be well matched for measuring entrepreneurial risk taking. Hyrsky and Tuunanen (1999) Entrepreneurs, Small business owners and managers (N=1000) Finland and United States Carland Entrepreneurship index (CEI) American had greater risk taking propensity. Forlani and Mullins (2000) CEO of the firms (N=540) United States Risk Style Scale Differences in risk propensities among entrepreneurs on their new venture choices. Petrakis (2005), Small Businessmen of SMEs (N=120) Greek 13 risk measures by author. Risk propensity affects the way entrepreneurs decide to finance their venture and also affects the first performance principal component which includes the risk undertaken and the profit rate. Leko-Simic and Horvat (2006), Croatian exporters (N=300) Croatia 5 point Likert scale There is significant difference between 'risk taking' and 'non-risk taking' but do not have a very high risk-taking propensity when doing business internationally. Shivani, Mukherjee and Sharan (2006) Small Entrepreneurs (N=200) India Risk Attitudes Inventory designed by Gene Calvert (1993) -A substantial proportion of respondents have low level of risk taking propensity. -No differences between male and female respondents.

Table 2.1: Selected Empirical Research of Risk Taking Propensity and Entrepreneurs

(Continued)

Researcher(s)

Sample

Place

Instrument(s)

Results

Ozturk and Hancer (2006) Middle level hotel managers (N=106) Turkey Zalaskiewicz (2001) risk scale There was no significant relationship between the risk items and corporate entrepreneurship. Walker, Geddes and Webster (2006) Small business owners (N=1600) Western Australia Measures by author -Some gender differences with women being more emotionally risk averse than their male counterparts. -Younger people, irrespective of gender were more emotionally and financially risk averse compared to older people. - There were differences between gender and age cohorts in regard to initial business start-up motivation. Nieuwenhuizen and Groenewald (2006), Owners of SMEs (N=50) South Africa Neethling Brain Instrument (NBI) -The majority of the identified successful, established entrepreneurs did have a strong tendency towards creativity and propensity for calculated risk taking. Naldi, Nordqvist, Sjoberg, Wiklund, (2007) CEOs of the SMEs firms (N=2455) Sweden Entrepreneurial Orientation. -Risk taking is a distinct dimension of entrepreneurial orientation in family firms and that is positively associated with proactive ness and innovation. -Family firms do take risks while engaged in entrepreneurial activities; they take risk to a lesser extent than non-family firms. -Risk taking in family firms is negatively related to performance. G. Thamizharasi and N. Panchanatham (2010) Small and medium enterprise (N=120) India Not mentioned Risk taking propensity is very much influenced by age, income, marital status and type of ownership. Brockhaus and Nord (1979) found no significant differences in risk taking propensity among three sample groups that they studied. The sample group consists of 31 entrepreneurs who had initiated a new venture within the past three months, 31 managers who had been transferred to another organization and 31 managers who had been promoted in their organizations during the same period of time. Risk taking was measured using the Kogan-Wallach Choice Dilemma Questionnaires (CDQ). In another study, Brockhaus (1980) defined propensity for risk-taking as the perceived probability of receiving the rewards associated with success before the potential entrepreneur actually subjects himself/herself to the consequences associated with failures. Brockhaus examined the risk taking propensity among entrepreneurs using CDQ by Wallach & Kogan (1959, 1961). The study tested three categories of individuals: business owner who has started their business for three months prior to the study, managers who had changed positions in their companies within three months prior to the study and managers who had changed employers within three months prior to the study. The researcher's rationale using entrepreneurs close to the starting point of business enterprise would involve those that would finally fail, thereby eliminating bias from investigating only successful entrepreneurs. However, the study found no differences between the respondent's scores and the normative Kogan-Wallach data which means that the distribution of risk taking propensities of entrepreneurs and managers were the same that they are moderate risk takers. A series of researches by Sexton and Bowman (1983, 1984, and 1985) concluded that higher propensity for risk taking was a characteristic which differentiate entrepreneurs from managers. The studies used instruments that researchers developed themselves by modifying test instruments based on Jackson Personality Inventory (JPI) which included measurement of those traits which had previously been found to be significant higher in risk taking among entrepreneurship majors than business administration majors and non-business majors. A study by Ray (1986) had discovered a higher propensity for risk taking among entrepreneurs, particularly when confronted with business risk. Meanwhile, (Schwer and Yucelt, (1984) found that risk taking is moderated by business experience, age, education and type of business. A similar survey conducted by Masters and Meier (1988) examined a group of managers or small business owners who had attended management development workshops using Kogan and Wallach's Choice Dilemma Questionnaires (CDQ). The study also compared the mean scores of all respondents to the CDQ norms, the scores for male and female to each other, and the scores for small business owners for managers. The study found no significant differences in risk taking propensity among male and female entrepreneurs and concluded that the women's involvement and women's entry into business had bridged the gap between the difference in male and female scores on the CDQ. MacCrimmon and Wehrung (1990) studied the risk taking propensity among executives in Canada and United States. The results showed that the degree of success among business owners and executives was related to the degree of risk taking propensity. Education was also found to be related to risk taking showing that business owners and executives who are less educated were less willing to take risk. However, the study found that age, seniority, number of dependents was inversely related to risk taking. The results concluded that those business owners and managers were not willing to take risks in business were not likely to succeed. Meanwhile a study by Carland, Carland and Carland (1995) investigated the risk taking propensity using the Risk Taking scale of the Jackson Personality Inventory (JPI) by Jackson (1976). There were 848 respondents consisting of 114 entrepreneurs, 347 small business owners and 387 managers which were located in 20 states in the South-eastern United States using convenience sampling method. The study revealed that the owners displayed a higher level of risk taking compared to the managers. The study also looked at the differences among entrepreneurs, small business owners and managers which showed that among the three groups, entrepreneurs had the highest risk taking propensity, followed by small business owners and managers. Another part of the study was to examine the demographic differences of risk taking propensity such as gender, age and education. The findings indicated that older respondents exhibited a lower of risk taking propensity than the young ones. Respondents with higher level of education had higher propensities for risk taking and finally, female exhibited a lower level of risk taking propensity as compared to male. So, via the JPI, the research resulted in differentiation on demographic, as well as among entrepreneurs, small business owners and managers. Other study by Begley (1995), who conducted the research on 239 New England business executive found that risk taking propensity was the only trait on which founders and non-founders differed but failed to identify whether the level of entrepreneurial risk taking was low, moderate or high. Koiranen, Hyrsky and Tunnanen (1997) conducted a study to find out whether there was any difference on risk taking propensity between American and Finnish entrepreneurs, small business owners and managers. The study revealed that U.S entrepreneurs, small business owners and managers were more inclined to risk taking than their Finnish counterparts. The samples for this study were 1000 U.S entrepreneurs, small business owners and managers and 1000 Finnish entrepreneurs, small business owners and managers. The instrument used to measure risk taking propensity was the JPI. The result showed there were no significant difference between female US entrepreneurs, small business owners and managers and their Finnish female counterparts. Stewart, Watson, Carland and Carland (1998), examined the risk taking propensity of students using JPI and CDQ for the purpose of measurement comparison and validity assessment. The study used two samples of 138 students and 68 students from two universities using convenience sampling method to examine the differences in JPI and CDQ. The study found that the CDQ failed to measure the construct of risk taking in the investigation. Even though JPI was more successful, however, it has components which may not be well matched for measuring entrepreneurial risk taking. The researchers suggested entrepreneurship researchers should be more careful when trying to measure business risk taking propensity, and must not rely too heavily on a generic substitute. Hyrsky and Tuunanen (1999) measured the varying degrees of innovativeness and risk-taking propensity by Finnish and U.S entrepreneurs and small business owners found that the Americans (N=456) had greater risk-taking propensity than the Finns (N=434) who tended to be more conservative and risk-averse. The study used the Risk Taking scale of the Jackson Personality Inventory (JPI) by Jackson (1976) to measure the risk-taking propensities which includes 320 True-False statements consisting of 16 scales, each comprising 20 statements, and the scores of each scale ranging from 0 to 20. In elements of risk, risk perceptions and entrepreneurs' propensities to take risk influence choices among potentially risky entrepreneurial venture survey by Forlani and Mullins (2000), respondents were CEO of the 540 firms listed in INC, Fortune and Business Week magazines of the fastest growing public companies in the United States. The respondents were contacted by fax to request their participation in the study and 210 agreed to participate in the study. The instruments were then mailed and asked to return via U.S mail to ensure confidentiality. The study found an effect of differences in risk propensities among entrepreneurs on their new venture choices. Das and Teng (2001) proposed a temporal framework of strategic risk behaviour in which the two temporalities were integrated with risk propensity and perceived decision context. The study also suggested individual risk propensity can manifest itself with different saliencies in decisions involving different time horizons. The result showed a fairly clear divide - the short-range side was dominated by situational factors (perceived decision context), while the longer-range side was influenced more by the dispositional risk propensity. Balabanis and Katiskea (2003) noted that risk taking propensity directly influenced by company size because larger companies have a greater pool of resources that gives more space to take risks and spread them among different products and markets. In addition, larger companies are unable to tolerate losses from unsuccessful entrepreneurial efforts. Therefore, level of risk taking propensity among larger companies was expected to be higher as compared with smaller companies. Petrakis (2005) investigated the risk propensity among 120 businessmen of MSMEs who own capital smaller than 10,000,000 Euros (EU definitions of MSMEs). The study found that risk propensity affected the way entrepreneurs decide to finance their venture and also affected the first performance principal component which includes the risk undertaken and the profit rate. Leko-Simic and Horvat (2006) analyzed company's age, size and types of business as determinants of risk taking propensity on 300 Croatian exporters. They were randomly drawn from Croatian Chamber of Commerce database as 10% of active exporters. The samples were clustered into 'risk-taking and 'non-risk taking' segments. The two clusters were analyzed with statistical inferential analysis against different aspects such as objective and subjective of export performance. The study found that there was significant difference between 'risk taking' and 'non-risk taking' but they did not have a very high risk-taking propensity when doing business internationally. Past studies by Shivani, Mukherjee and Sharan (2006) had used Risk Attitudes Inventory designed by Gene Calvert (1993) to measure risk taking propensity. The maximum score was 15 which showed the higher the total score the more the risk taking propensity. The scores from 0-5 were categorized as having low risk taking propensity, scores from 6-10 as having moderate risk taking propensity and 11-15 as high risk taking propensity. The study found that a substantial proportion of respondents had low level of risk taking propensity. However, the study found no differences between male and female respondents. Ozturk and Hancer (2006) analysed the relationship between middle level hotel managers' risk taking propensity and corporate entrepreneurship. To analyse the relationship, 106 middle level hotel managers in Didim, Turkey were surveyed for their risk taking propensity. In addition, corporate entrepreneurship scale was also used to identify if the hotels have corporate entrepreneurship activities. The study showed that there was no significant relationship between the risk items and corporate entrepreneurship. Walker, Geddes and Webster (2006), studied the risk taking propensities among women business owners and how age affects such activities. The questionnaires were distributed to 1600 small business owners in regional and metropolitan Western Australian and the response rate was 30% (486 questionnaires returned). The study found that there were some gender differences with women being more emotionally risk averse than their male counterparts. With regard to age, younger people, irrespective of gender, were more emotionally and financially risk averse compared to older people. There were also differences between gender and age cohorts in regard to initial business start-up motivation. The study concluded that self-employment might be a viable alternative to mainstream employment for women in general; it may not be the best alternative for all younger women, given that many of them still have to balance between work and family. Nieuwenhuizen and Groenewald (2006) investigated methods or instruments that determine an individual's creativity and risk propensity identified that Schein's Career Anchor Instruments and the Neethling Brain Instrument (NBI) as two appropriate instruments to determine creativity and evaluate risk propensity. The results proved that the majority of the identified successful, established entrepreneurs did have a strong tendency towards creativity and propensity for calculated risk taking. Naldi, Nordqvist, Sjoberg and Wiklund (2007) focused on risk taking as one important dimension of entrepreneurial orientation and its impact on family firms. The respondents were the CEOs of the 2455 MSMEs firms obtained from Statistics Sweden (the Bureau of Census) using stratified sampling method. The data was collected using telephone and mail surveys. The study found that risk taking is a distinct dimension of entrepreneurial orientation in family firms and that is positively associated with proactiveness and innovation. Another finding from this study was, even if family firms do take risks while engaged in entrepreneurial activities, they take risk to a lesser extent than non-family firms. Finally, the study also found that risk taking in family firms is negatively related to performance. Tamizharasi and Panchanatham (2010) studied the demographic factors of the small and medium enterprise attitudes in Cuddalore district of Tamilnadu, India. They stated that entrepreneurial attitudes can make the entrepreneurs stronger and more successful in their business. They also found that age and ownership were related significantly to risk taking. The study concluded that entrepreneurial attitudes increased with the increase of the age, income, change in marital status and type of ownership.

Summary

This chapter presents a review of previous researchers on the risk taking propensity of entrepreneurs. In summary, this chapter has attempted to organize the previous research findings to develop an understanding with regards to the topic under investigation. It summarizes the empirical evidence of those in order to address the main issues for the focus of this study. From the literature, the discussion on entrepreneurs risk taking propensity centred on the two variables that influence the risk taking propensity - demographic and business characteristics. The influence of these predictor's variables on entrepreneurs' risk taking propensity has also been reviewed briefly. From the discussion, it can be summarize that demographic and business characteristics are the most important components of risk taking propensity. Studies on demographic characteristics revealed that certain variables are more likely to have positive influence and contribute to development of entrepreneurs' risk taking propensity. For example, age has been shown to have significantly positive relation with risk taking propensity. Marital status also seems to be related positively with risk taking propensity. Meanwhile, gender has been found to show inconsistent results. Business ownership and owners' business experience have also indicated positive relationship with risk taking propensity. For this study, the researcher selected only these four demographic characteristics due to limited time and resources available for this research. Furthermore, demographic characteristics only form a subset of the numerous independent variable to be examined in this present study. Selection of a few appropriate demographic variables is therefore essential. Another pressing need for research appears to be investigating on how business characteristics of entrepreneurs will relate to their risk taking propensity. It seems that business characteristics measured by size, length of business, type of business, amount of start-up financing, sources of start-up financing, location and number of employees has produced supportive evidence for such relationship. Therefore, for the present study, business characteristics were utilized where business characteristics were measured by size, length of business, type of business, amount of start-up financing, sources of start-up financing, location and number of employees. Finally, considering the lack of empirical research for MSMEs' risk taking propensity in Malaysia, especially in the two east coast states, and further research to address these issues is apparently warranted. In the next chapter, will gives insight into research design employed to interrogate the research problem with specific reference to sampling, data collection methods and the statistical techniques utilised.

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