Why does entrepreneurial orientation affect company performance?

Abstract

AbstractResearch summaryTo better understand why entrepreneurial orientation (EO) is positively associated with company performance, we propose and test a reconceptualization of how the components of EO (risk‐taking, innovativeness, proactiveness) combine in driving performance. Drawing on financial economics theory, our conceptualization highlights that all three components positively contribute to performance, but in different ways. Risk‐taking has a direct positive relationship with performance, which can be understood through the risk–return tradeoff that is central in financial economics theory. The relationship between risk‐taking and performance is conditional on the level of innovativeness and thus innovativeness contributes to performance through its effect on the type of risk‐taking. Proactiveness contributes to performance through its positive effect on the level of risk‐taking.Managerial summaryThis study analyzes three key drivers of company performance: risk‐taking, innovativeness, and proactiveness. We show that constructive risk‐taking is the central driver of company performance, mirroring the principle of risk and return in financial investment settings. Risk‐ taking that is associated with innovation has a particularly strong positive relationship with performance, consistent with innovation being a driver of growth and profitability. More proactive firms tend to take on more risk and thus also perform better than less proactive firms.