Roots, reasons, and resources: Situated optimism and firm growth insubsistence economies☆
Matthew S. Wood ⁎, Steven W. Bradley, Kendall ArtzDepartment of Management and Entrepreneurship, Hankamer School of Business, Baylor University, One Bear Place, Waco, TX 76798, United States
☆ Acknowledgments: An earlier version of this paperCollege Entrepreneurship Research Conference, Lyon Fraacknowledge conference participant feedback in the devthankChris Blocker and TimHolcomb for their developmeof the paper.⁎ Corresponding author. Tel.: +1 254 710 6640.
Do entrepreneurs have optimism in subsistence economies, and if so, how does it influence entrepreneurialoutcomes? We investigate this question by taking the situated view of optimism. We reason that variationsin optimism are a function of the type of opportunity pursued and the diversity of opportunity informationentrepreneurs receive and that optimism plays an intervening role between these antecedents and businessgrowth. We also hypothesize that this mediating relationship is conditioned on the reason for business formation(i.e., opportunity/necessity) and the level ofmicrocredit loans.We test ourmodel using survey data collected frommore than 1000 entrepreneurs in Kenya, Burundi, and Indonesia. Ourfindings support the idea that optimism is animportant determinant of business growth, but it is conditioned and altered by other salient factors.
Entrepreneurship is an important driver of economic prosperity andin developing countries researchers have documented the growing classof entrepreneurs who have launched “subsistence businesses” focusedon achieving a reasonable standard of living (Nakata & Viswanathan,2013). These businesses participate almost exclusively in local econo-mies but are increasingly seen as a potential source of jobs and econom-ic growth. As Toledo-López, Díaz-Pichardo, Jiménez-Castañeda, andSánchez-Medina (2012, p. 1658) point out, subsistence businesses inemerging economies “not only offer a standard of living and incomeopportunities for many families, but also provide employment to theirpeers at the base of the pyramid.”
The idea of people in developing nations using entrepreneurshipto pull themselves and their peers out of poverty is inspiring. However,entrepreneurs in subsistence economies face significant challenges. InKenya, for example, business owners report general government suspi-cion of small business and often face complicated forms and long delaysin obtaining licenses (Chu, Benzing, &McGee, 2007). Add to this the ex-pense of corruption and bribery (Kiggunda, 2002), competitive pressure
was presented at the Babsonnce, June, 2013. We gratefullyelopment of the paper. We alsont comments on earlier versions
ots, reasons, and resources: S0.1016/j.jbusres.2014.04.008
from non-indigenous residents (Fafchamps, 2004) and the fact thatbusinesses in developing countries are notorious for inefficient opera-tions (Elkan, 1988) and it becomes clear that there is substantial com-plexity surrounding growing a business in a developing nation. Giventhis difficulty, it makes one wonder what it is that allows someone topursue growing a business in a subsistence economy. The answer tothis query may rest—at least in part—on optimism.
The idea that optimism plays a role in business growth in subsis-tence economies is derived from research documenting that peopleneed a positive mindset to overcome adverse circumstances foundin poverty contexts. Hope, for example, engenders the energy neededfor experimentation and creativity as the poor develop solutions usinglimited resources (Blocker et al., 2012; Rosa, Geiger-Oneto, & Barrios,2012). This suggests that positive psychological variables influence be-havior in poverty contexts. As such, we reason that situated optimism –
positive outcome expectancies within the context of specific circum-stances (Armor & Taylor, 1998) – is one variable that warrants carefulconsideration. Prior research has revealed that optimism is a mecha-nism that allows people to overcome challenges and uncertainty(Ucbasaran, Westhead, Wright, & Flores, 2010) and that in povertycontexts positive psychological variables engender people to takeaction in difficult circumstances (Snyder, 1994). Because entrepreneur-ship requires action (McMullen & Shepherd, 2006), the implication isthat optimism—if present—would benefit entrepreneurs in subsistenceeconomies by providing them the drive and energy to pursue entre-preneurial initiatives like business growth. Hence, we advance thefollowing question: Do entrepreneurs in subsistence economies haveoptimism, and if so, how does it facilitate entrepreneurial outcomes,such as business growth?
ituated optimismand firm growth in subsistence economies, Journal of
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To address this question, we draw from situated optimism thenotion that people “tend to obey the constraints of reality and as a con-sequence becomemore or less realistic” (Armor & Taylor, 1998, p. 315).Because subsistence economies have unique situational constraints,we theorize that entrepreneurs experience variations in optimism asa function of the type of business opportunity they pursue and thediversity of opportunity-related information they receive. These varia-tions in optimism influence the degree to which entrepreneurs growtheir businesses, but this relationship is contingent upon their reasonfor pursuing entrepreneurship (e.g., necessity or opportunity) and theresources available (e.g., microcredit loans). We test our model usingsurvey data collected from entrepreneurs in the subsistence economiesof Kenya, Burundi, and Indonesia.
Our findings advance the literature by exploring the influence ofoptimism in a poverty context where fatalism and resignation areoften the norm. This stands in sharp contrast to extant research thathas been conducted almost entirely in developed economies whereachievement ideology (e.g., American dream) prevails. Thus, our inves-tigation helps test the bounds of extant empirical knowledge on therelationship between optimism and business growth. The net effect isnew insights that illuminate the contextual and contingent nature ofoptimism in entrepreneurship.
2. Theory and hypotheses
Entrepreneurship can be a way out of poverty in developing coun-tries, but enterprising individuals face a number of environmentalcomplexities and constraints. One possibility for overcoming thesechallenges is using positive cognitive states to cope with adversecircumstances (Feldman & Gross, 2001). While there are a number ofpositive cognitive states, one that has received considerable attentionis optimism. The optimism literature consists of two distinct conceptualstreams. The first stream conceptualizes optimism as “dispositional” —an aspect of one's personality that has an enduring characteristic(Schulman, Keith, & Seligman, 1993). The second stream viewsoptimism as a social cognition (Mitchell, Randolph-Seng, & Mitchell,2011) that is “situated” within a particular context (Peterson, 2000).In this study, optimism is identified as an “attitude associated with anexpectation about the social or material future” (Tiger, 1979, p. 18)and thus is tied to specific circumstances and goals that are personallybeneficial and achievable (Armor & Taylor, 1998). This suggests thatoptimism can vary based on circumstances and goals, but within thoseparameters, it is relatively stable over time (Peterson, 2000).
Because goals and circumstances in subsistence economies areunique (e.g., escape poverty), we adopt the situated view of optimism.Our approach takes into consideration that in practice, optimism maybe some combination of dispositional and situational. However, theseperspectives are distinct in cognitive science and empirical researchshows that dispositional and situational optimism predict differentoutcomes (Segerstrom, Taylor, Kemeny, & Fahey, 1998). As such, we
SituatedOptimism
Imitative or Innovative Business
Opportunity
Diversity of Opportunity Information
Roots
Fig. 1. Situated optimism and firm gr
Please cite this article as:Wood,M.S., et al., Roots, reasons, and resources: SBusiness Research (2014), http://dx.doi.org/10.1016/j.jbusres.2014.04.008
adopt the situational perspective and explore optimism as it relates tothe perceived resources and skills entrepreneurs possess within subsis-tence economies. This culminates in our roots, reasons, and outcomes(model illustrated in Fig. 1).
2.1. Situated optimism and firm growth
Firm growth is an important entrepreneurial outcome becausegrowth increases employment and economic development. The deci-sion to pursue firm growth rests on a complex set of factors. This isespecially true in subsistence economies where entrepreneurs arefaced with significant environmental complexities requiring the desireand energy to overcome structural and social barriers in pursuit offirm growth. Prior research has documented that one avenue to perse-vering in such challenging circumstances is to rely on optimistic expec-tations that positive outcomes can be achieved (Wrosch & Scheier,2003). Developing optimistic expectancies takes into account cir-cumstantial constraints stimulating self-regulatory behavior neededto achieve favorable outcomes (Armor & Taylor, 1998). This suggeststhat in developing countries, situated optimismmay be a coping andadapting mechanism that engenders entrepreneurs to pursue businessgrowth.
Because resources are a key situational constraint in substance econ-omies (Cull & Xu, 2005), we further specify the definition of situatedoptimism articulated above by conceptualizing situated optimism inour study as an optimism related to perceived resources and skills thatentrepreneurs possess. If we consider this specific type of optimismwith research documenting optimistic people as more willing to takerisk (Bernardo & Welch, 2001) and when they own a business aremore likely to hire employees (Dunkelberg &Wade, 2009), the implica-tion is that entrepreneurs who are optimistic about their resources andskills will bemore likely to pursue business growth. This line of thinkingsuggests that situated optimism is a benefit for entrepreneurs in subsis-tence economies, where perceived lack of resources and knowledge canlimit beliefs about capabilities and the horizon of possibilities for thefuture (Chakravarti, 2006). Concretely, we reason that situated opti-mism is a mechanism by which enterprising individuals overcome theconstraints of their environment. This suggests:
Hypothesis 1. In subsistence economies, entrepreneurs with greatersituated optimism (e.g., optimism about the resources and skills theypossess) will be associated with higher levels of firm growth.
2.2. Roots of situated optimism
In our model situated optimism is a function of the entrepreneur'sperceptions that he or she holds the resources and skills needed toachieve goals. Tying this to business growth requires considering theachievability of outcomes in light of the entrepreneur's optimism.
Employment Growth
Microcredit Loan Size
Opportunity vs. Necessity Motivation
Resources
Reasons
owth in developing economies.
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Prior research suggests that these considerations are influenced by atleast two key criteria: the type of opportunity pursued and the diversityof knowledge he or she acquires about the opportunity prior to marketentry.
2.2.1. Opportunity typeGrowing a business requires introducing something newor different
to themarket. However, as Kogut and Zander (1992) note, the degree ofnewness can range from imitative to innovative. The innovativeness ofopportunities hinges on things like the entrepreneur's creativity andknowledge (McMullen & Shepherd, 2006; Ward, 2004). Since theseelements are often in short supply in poverty contexts, imitative oppor-tunities (e.g., small dry-goods shops) proliferate. The poor often liveclose to subsistence level with the consequences of failure more severethan for entrepreneurs with reserves for learning through trial anderror. As such, many entrepreneurs in developing countries pursuebusiness concepts that are well proven but offer less growth potential,but some do pursue comparatively innovative business concepts andenjoy higher business revenue as a result (Bradley, Artz, & Hulett,2012; Bradley, McMullen, et al., 2012).
The implication for ourmodel is that the type of opportunities entre-preneurs pursue influence their perceptions of resources and skills theypossess relative to competitors. Extant research suggests that the pur-suit of innovative opportunities, for example, requires resourcefulnessby introducing changes in product offerings or improving production(McMullen, 2011). Hence as entrepreneurs pursue innovative opportu-nities they are more likely to acquire resources and skills that are notheld by those who pursue more ubiquitous imitative opportunities.This suggests that those pursuing innovative business opportunitieswill experience greater situated optimism because of perceptions thatthey possess with comparatively greater resources and skills. Add tothis the fact that innovative opportunities are more uncertain but holdgreater economic potential (Schumpeter, 1934) and because the goalin developing countries is typically to escapepoverty, it is the innovativeopportunities that provide the greatest expectancy for achieving thisgoal. All of this logic suggests that situated optimism is expected to behigher among entrepreneurs pursuing innovative rather than imitativeopportunities. Stated formally:
Hypothesis 2. In subsistence economies, entrepreneurs who pursuemore innovative business opportunities will have greater situated opti-mism (e.g., optimism about the resources and skills they possess).
2.2.2. Diversity of opportunity informationAnother important component in an entrepreneur's situated opti-
mism regarding specific outcome goals is confirmatory evidence(Armor & Taylor, 1998; Schlenker, 1980). As entrepreneurs receivenew information it shapes their views about the resources and skillsthey have and how those might result in desired outcomes. As such, itis important to consider where entrepreneurs find opportunity relatedinformation. Cornelissen and Clarke suggest that information is distrib-uted in “the social context of speaking and interactions with othersaffecting the construction of meaning about a new venture” (2010:542). In developed countries, information is plentiful with numeroussources that can be consulted to build confidence in the opportunity(e.g., industry reports, universities, entrepreneur networks). The generalview is that more diverse information networks lead to greater innova-tion and business success (Ruef, 2002). The environment in subsistenceeconomies may alter this relationship in several ways. First, informationinfrastructure is far less organized and opportunity-related informationis less plentiful and more widely dispersed making it harder to gatherand evaluate. Second, weaker institutions create lower levels of trustand a greater reliance on strong ties with family and friends (Stam,Arzlanian, & Elfring, 2014).
These considerations are important because accurately discerningthe attractiveness of opportunity pursuit is not just a function of the
Please cite this article as:Wood,M.S., et al., Roots, reasons, and resources: SBusiness Research (2014), http://dx.doi.org/10.1016/j.jbusres.2014.04.008
amount of information considered, but also the diversity of that infor-mation (Wood, McKinley, & Engstrom, 2013). By considering diverseinformation sources, the entrepreneur gains a clearer picture of thebusiness opportunity. For our theory, this suggests that the broaderthe search for opportunity information, the more likely he or she findsinformation that either confirms or disconfirms initial beliefs regardinghis or her set of resources and skills and, by extension, the achievabilityof pursuing business growth. This confirmation/disconfirmation be-comes a cognitive issue because counterfactual evidence negativelyinfluences optimism (Sanna, 1996). In subsistence economies, entre-preneurs who focus on their own experiences or a limited set of familysources for opportunity information will be less like to receive dis-confirmatory evidence. Information from a broader set of contacts pro-vides knowledge about market barriers and competitors of which theymay not have been aware. This suggests that as the information netbroadens, it is more likely that the entrepreneur discovers that theresources and skills he or she possesses are comparatively insufficientand the achievability of business growth seems doubtful. When thishappens, situated optimism diminishes. Therefore, we propose:
Hypothesis 3. In subsistence economies, the more diverse theentrepreneur's sources of business opportunity information, the lessthe entrepreneur's situated optimism (e.g., optimism about the re-sources and skills they possess).
2.3. Mediating role of situated optimism
Previous research has established that innovative business opportu-nities and the diversity of opportunity information are related to a rangeof entrepreneurial outcomes (cf. Bradley, Artz, et al., 2012; Bradley,McMullen, et al., 2012). This suggests direct relationships between theroots of optimism and firm growth, with situated optimism playing anintervening role between these variables and firm growth. In terms ofopportunity type, innovative opportunities have greater potential thanmimetic opportunities (Schumpeter, 1934), so it stands to reason thatthere should be a positive relationship between the type of opportunitypursued and the amount of firm growth realized. If situated optimism isalso considered, we expect it to play a mediating role. Entrepreneurspursuing more innovative opportunities believe they hold importantresources and skills and thereby experience greater optimism, withthat optimism acting as a mechanism by which entrepreneurs convertinnovative opportunities into firm growth. Prior research documentsthat pursuing innovation leads to resource and capability developmentin developing countries (e.g., Figueiredo, 2010). Thus we reason thatthose who pursue innovative opportunities will accumulate resourcesand skills that engender an optimistic outlook that facilitates the pursuitof business growth.
Similarly, research suggests a relationship between the diversityof information and business growth (Laursen & Salter, 2006). As such,we have hypothesized above that as one consults a more diverserange of information sources, it becomes more likely that he or shewill uncover negative information regarding the challenges of businessgrowth. Themore realistic picture of opportunities derived fromdiverseinformationmay deflate perceptions about the resources and skills nec-essary for success in away that constrains growth aspirations. Optimismthen, is adjusted to the information received by the entrepreneur(Hmieleski & Baron, 2009). In that way, situational optimism is a reflec-tion of the assessment of the information and conditions surroundingthe business in terms of resources and skills needed to achieve businessgrowth. In both cases (i.e., type of opportunity and the diversity of infor-mation), the logic outlined above suggests that situated optimism is anintervening variable. Stated formally:
Hypothesis 4a. In subsistence economies, an entrepreneur's situatedoptimism partially mediates the relationship between opportunitytype and firm growth.
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Hypothesis 4b. In subsistence economies, an entrepreneur's situatedoptimismwill mediate the relationship between the diversity of oppor-tunity information and firm growth
2.4. Conditional indirect effects
We now conceptualize that the mediated effect hypothesizedabove may be augmented in the presence of variables specific tothe subsistence-economy context. These are “moderated mediation”effects, which Preacher, Rucker, and Hayes (2007, p. 186) call conditionalindirect effects, defined as “themagnitude of an indirect effect at a partic-ular value of a moderator(s).”We follow prior work adopting the condi-tional indirect effects approach (cf. SimsekSimsek, Veiga, & Lubatkin,2007 ) conceptualizing that the entrepreneur's source of motivationand the size of microcredit loans will moderate the mediation effect ofsituated optimism.
2.4.1. Reasons for entrepreneurshipThe reason someone pursues entrepreneurship rather than wage
labor is important because it suggests motivation. Typically, scholarsconsider this a choice of opportunity cost such that the decision to pursueentrepreneurship occurs when the potential benefits outweigh otherincome opportunities (cf. Schjoedt & Shaver, 2007). In some cases, thechoice is forced with wage-earning opportunities scarce making entre-preneurship a necessity-based rather than an opportunity-based deci-sion. When the decision is opportunity motivated, one becomes anentrepreneur because a set of circumstance exists (i.e., an opportunity)for which the anticipated profits from introducing a new product or ser-vice are significant andworth pursuing. Differences between opportunityand necessity motivation are notable for our model because they influ-ence entrepreneurs' judgments and actions (e.g., Wood et al., 2013).
Specifically, when entrepreneurial reasons are based on necessity,individuals seek income-generating opportunities that can meet theirimmediate needs to escape an uncomfortable situation. As a result,there is little time for search, pre-planning, and evaluation resultingin pursuits that have low profit potential (Cromie & Hayes, 1991).Even if one believes that he or she holds unique resources and skills(e.g., high situated optimism), necessity-based reasoning is likely toframe immediacy that directs choices to a limited set of opportunitiesthat have lower growth. In contrast, when reasoning is based on opportu-nity, one's evaluation of what can be done with the resources and skillspossessed is much broader. Entrepreneurs operating under these condi-tions are less constrained andaremore likely to have conducted extensivesearch and pre-planning (Helfat & Lieberman, 2002). For these individ-uals, situated optimism is more likely to link diversity of informationand innovative business ideas to firm growth. In that way, opportunity-based reasoning and situated optimismwork in concert together. Oppor-tunity reasoning is an assessment of the opportunity relative to other op-tions available, while situated optimism is an assessment of the likelihoodthat the chosen option will result in a positive return. If the reason forentrepreneurship is opportunity based, but the entrepreneur has lowersituated optimism (e.g., perceives a lack of resources and skills), it is lesslikely that he or she would pursue the envisioned market offering to thelevel that the firm would grow through hiring of employees to producemore of that good or service. This suggests:
Hypothesis 5. In subsistence economies, the reason for entrepreneur-ship (i.e., opportunity/necessity) will moderate the indirect effect of(a) innovation and (b) information diversity on growth through situatedoptimism. Specifically, situated optimismwill mediate the indirect effectwhen motivation is based on opportunity but not necessity.
2.4.2. Microcredit loan sizeAccess to financing and credit is a critical component of business
growth (Beck & Demirguc-Kunt, 2006). This is particularly true for the
Please cite this article as:Wood,M.S., et al., Roots, reasons, and resources: SBusiness Research (2014), http://dx.doi.org/10.1016/j.jbusres.2014.04.008
poor, who have few assets and little access to traditional bankingservices. Microcredit has provided access and much has been writtenabout the importance of microcredit financing with both positiveand negative aspects noted (cf. Banerjee, Duflo, Glennerster, & Kinnan,2010). What has not received much attention, however, is howmicrocredit influences the cognitions and behaviors of entrepreneurs.This is intriguing when viewed through the lens of optimism as priorresearch has shown that entrepreneurs' optimism regarding the futuredevelopment of their firm and their hiring needs co-vary with theirreliance on debt (Landier & Thesmar, 2009). This suggests that in thecontext of subsistence economies, where microcredit is prevalent, thesize of the microcredit loan will influence the relationship betweensituated optimism and employment growth. Specifically, Armor andTaylor (1998) posit that the achievability of outcome expectanciesbecome more salient when predictions are public and verifiable.Microcredit loans are determined by both the credit officer and themicrocredit group which makes entrepreneurs' predictions public andverifiable. Further, larger loans enable optimism regarding an innova-tive idea and collected information to result in firm growth. In contrast,if optimism is higher regarding an innovative idea and collected infor-mation but loan availability is lower, it limits the means for growthregardless of the positive cognitive state. This suggests:
Hypothesis 6. In subsistence economies, resources (i.e., microcreditloan size) will moderate the indirect effect of (a) innovation and (b) in-formation diversity on growth through situated optimism. Specifically,situated optimism will mediate the indirect effect when loan size ishigher than average but not when loan size is smaller than average.
3. Method
3.1. Sample and data collection
We surveyed a cross-national sample of entrepreneurs in Kenya(2009, 2010, and 2011), Burundi (2010), and Indonesia (2010). Datawere collected by university faculty and trained students. Trainingwas provided for the field workers collecting data as well as careful in-structions for respondents. Surveys were collected via well-establishedmicrocredit agencies in each country. Credit officers visit specific clientgroups everyweek to oversee loan repayments and resolve group issuesand the groups chosen were those that met on the days researchersvisited. Group member businesses were diverse, representing the spec-trumof industries typically seen inmicrofinance. All those in attendancevoluntarily completed the survey as a part of the microcredit programmeeting reducing concerns about non-response, and because membersof each groupparticipated, our sample is representative of all the groupssolicited. The Kenyan surveys were conducted within urban centerswhere clients are conversant in English. Indonesia and Burundi surveyswere also conducted near urban centers and were translated and back-translated by a research team conversant in both languages. A pilot testwas conducted to ensure that the questions were understood and thetime required was reasonable.
Four fieldworkers accompanied each credit officer to the meetingsand administered the survey. The credit officers and fieldworkersmade an appeal to the loan recipients to participate in the survey, anda small monetary reward was given to respondents. The fieldworkersmonitored the survey-completion process, answered questions andmade clarifications. In total, we collected surveys from 822 entrepre-neurs in Kenya, 124 in Burundi, and 162 in Indonesia. The samplesacross country had similar distributions of business type, income levelsand age. We followed published research that combines multi-countrydata (e.g., Begley, Tan, & Schoch, 2005; Kreiser, Marino, & Weaver,2002), and after eliminating incomplete responses, our sample totaled1066 entrepreneurs. The Kenya sample is larger than Burundi andIndonesia (due to researchers' prior connections with microcredit
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agencies in Kenya) as often found in multi-country studies (e.g., Dakhli& De Clercq, 2004). As discussed below, we control for country and wealso use analytical techniques that account for differences in samplesize.
3.2. Variables and measures
3.2.1. Dependent variableThe outcome measure was employment growth. Employment
growth is an important indicator of development because it informswhether the business is pursuing scalable activity that creates neededjobs for others (West, Bamford, & Marsden, 2008). Respondents wereasked, “Compared to last year, has your number of employees increased,decreased, or stayed the same?” We drew this measure from twocomprehensive national representative surveys of entrepreneurship —
the U.S. Federal Reserve Board's 2003 Survey of Small Business Finances(SSBF) (Mach&Wolken, 2006) and theUK Small Business Survey (SBS).In developing economies, change in employment is considered a con-servative indicator (Parker, 1995) and is a frequently usedmeasure “be-cause it is most easily and accurately remembered by entrepreneurs”(Mead& Liedholm, 1998, p. 66). Hence, change in employment is an ap-propriatemeasure in developing economieswhere financial statementsare either not available or are unreliable.
3.2.2. CovariatesFollowing prior research, we utilized an indirect measure of situated
optimism. Specifically, we followed Ucbasaran et al. (2010), whomeasured optimism using future expectations and augmented their ap-proach to account for the resource constraints in subsistence economies.Specifically, wemeasured situational optimism as a construct related tobeliefs about skills and resources and the achievability of outcomesthose skills and resources engender. We used a five-point scale rangingfrom “a lot more” to “a lot less” regarding the statements, “The level ofskills I have relative to competitors in this business” and confidence in“The level of resources I have compared to my competitors in this busi-ness” (α = .66). Necessity versus opportunity-based entrepreneurshipwas measured on a seven-point scale using two questions containedin the Panel Study on Entrepreneurial Dynamics (e.g., “I have given upother job opportunities to start this business”) (α= 0.67). Lower valuesare associatedwithnecessity-based entrepreneurship andhigher valuesare associatedwith opportunity-basedmotives. Loan sizewasmeasuredusing current loan outstanding in USD. Imitative vs. innovative opportu-nity was measured with a four-item scale developed by Bradley,McMullen, et al. (2012) with reliabilities similar to prior research(α = 0.77). Diversity of opportunity information was calculated usingthe number of people from groupings of family members or friends,lending groups, customers, and suppliers who have provided informa-tion for the business and was computed using Shannon and Weaver's(1963) information entropy formula.
Someof ourmeasures showed internal consistencies lower than rec-ommended standards (e.g.,α= .70).We tested sensitivity of estimatesto measurement reliability by comparing results if these constructs hadreliabilities fixed at α = 0.70 (see Section 4.3 for robustness checks).Models with reliability constructs fixed at 0.70 showed the same direc-tion and significance as well as similar estimates, indicating that mea-surement error was not a significant factor.
3.2.3. Control variablesWe included control variables previously associated with growth.
Specifically, we included SIC industry dummy variables for: agriculture,manufacturing, wholesale, retail, hotel/restaurant, transportation/communication, rental, education/health, andother services. Competitiveintensitywas the respondent's report of the number of firms in the samebusiness in his or her area. Business age was included along with gender,education, family business background, and prior industry experience.
Please cite this article as:Wood,M.S., et al., Roots, reasons, and resources: SBusiness Research (2014), http://dx.doi.org/10.1016/j.jbusres.2014.04.008
Finally, we controlled for business expertisemeasured as business trainingrelative to competitors.
3.3. Analyses
We used a generalized structural equation model (Stata 13 gsemcommand) to analyze our data. This allows ordered logit specificationfor our categorical dependent variable, it provides a means for testingsimultaneous paths, and it also provides output for testing moderatedmediation effects with bootstrapping (Preacher & Hayes, 2004). Priorto testing our models, we assessed the fit of our measurement modelvia confirmatory factor analysis (Anderson & Gerbing, 1988). All itemssignificantly loaded on their respective latent construct (p b .001, zvalues greater than 7.0). The proposed model versus chi-squared testshowed a strong fit (χ2 = 28.3, p b .001, 8 df, n = 1137) comparedto the baseline model (χ2 = 731.12, p b .001, 15 df, n = 1137). Thefit indexes (CFI= 0.97, RMSEA= .047, TLI= 0.95) suggest appropriatefit for latent construct measures. Next, we tested for common methodvariance (Podsakoff, MacKenzie, Lee, & Podsakoff, 2003). A likelihoodratio difference test of the CFA model and the model with the commonmethod variable did not show a significant improvement in fit (p N .10),suggesting that common method bias was not a serious concern.
We also checked formeasurement invariancedue to potential differ-ences in response across countries (Vandenberg & Lance, 2000). Wedid find variance by country on some measures and we address this inthreeways.We included country dummyvariables that capture unmea-sured differences by country (Kennedy, 2003). We included robuststandard errors clustered by country which account for systematicerror (Pepper, 2002). Finally, we report bootstrap results with resam-pling in the tests for indirect effects (Table 3) and this adjusts for differ-ences in sample size between countries through random draws of theresiduals (Kennedy, 2003). Taken together, these techniques accountfor influence by country differences including unequal sample sizes.
Our analysis followed the approach recommended by Preacher andHayes (2004) for moderated mediation using simultaneous pathmodels, but we also included additional step models related to Baronand Kenny's (1986) mediation approach. In terms of the moderatedmediation hypotheses, when a significant interaction effect was real-ized, bootstrapped regression analyses were conducted at the meanand +/−1 SD of the moderator.
4. Results
Table 1 presents the variable means, standard deviations, andpairwise correlation. An inspection of the correlations (and subse-quent checks of VIFs) indicates that multicollinearity is not a salientconsideration.
4.1. Tests of mediation
Table 2 presents the models for the hypotheses. RegardingHypothesis 1, we examined the direct effect of situated optimism onemployment growth, controlling for other factors in Model 2.2. Resultssupport Hypothesis 1 (ß = 0.307, p b .001) and indicate that as theentrepreneur's situated optimism increases, thefirmexperiences higherlevels of employment growth. Hypothesis 2 asserted that entrepreneurswho pursuemore innovative business opportunities experience greatersituated optimism. Model 2.1 supports this prediction as there is a pos-itive and significant relationship between innovative opportunities andsituated optimism (β= .041, p b .001). Hypothesis 3 argued that therewould be a negative relationship between the diversity of opportunityinformation and situated optimism. Model 2.1 reveals a negative andmarginally significant relationship between the diversity of opportunityinformation and situated optimism (β = − .274, p b .10). This findingprovides some evidence for Hypotheses 3, suggesting that situated
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optimism is reduced as entrepreneurs consider more diverse sources ofopportunity information.
Next, we investigated Hypotheses 4a and 4b, which argued thatsituated optimism mediates the relationships between innovative op-portunities, the diversity of opportunity information, and employmentgrowth. We followed Baron and Kenny's (1986) steps for establishingmediation. Step 1 requires a relationship between the antecedentand dependent variable. Model 2.3 indicates that there is a significantrelationship between innovative opportunities and firm growth (β =.059, p b .001), but there is not a significant relationship between thediversity of opportunity information and employment growth (β =.009, p N .05). This means that we can proceed to the second step withthe innovative opportunities variable (H4a), but not for the diversityof information variable and thus H4b is not supported. ForHypothesis 4a, the second step involves establishing a direct relation-ship between the antecedent andmediator variable.Model 2.1 indicatesthat there is a significant relationship between innovative opportunitiesand situated optimism (β = .041, p b .001). The third step requiresthat the mediator influence the dependent variable when the effectof the antecedent is controlled for and this was established whenHypothesis 1 was supported. The final step is to establish that the effectof the antecedent on the dependent variable is reduced in the presenceof the mediator variable (β = .055, p b .001), as shown in Model 2.4.The two-tailed Sobel test was significant (Z = 2.5, p b .05) providingsupport for Hypothesis 4a.
4.2. Tests of moderated mediation
Models 2.5 and 2.6 explore Hypotheses 5 and 6whileModel 2.7 testsfull effects. For the relationship between situated optimism and reasonfor entrepreneurship, Model 2.5 reveals a significant and positive inter-action (β= .173; p b .001), indicating that growth is more likely whenmotivation is opportunity-based rather than necessity-based. We alsofound evidence that greater loan size positively influences the optimismand growth relationship (Model 2.6), where the coefficientwas positive(β = .132; p b .001). Therefore, we examined the conditional indirecteffect of innovation and the diversity of information on employmentgrowth through situated optimism at three values of moderators(Table 3). The results for innovation show that the indirect effect of
Table 1Means, standard deviations and correlations of key variables.
Variable Mean S.D. 1
1. Employment growth 0.78 0.742. Age 37.0 10.4 −0.193. Education 9.76 3.86 0.214. Gender (F = 1) 0.68 0.47 −0.085. Family business background 0.46 0.50 0.016. Prior industry experience 0.51 0.50 0.007. Business Age 7.77 6.99 −0.128. Competitive intensity 5.91 6.30 0.009. Kenya dummy 0.74 0.44 0.1110. Burundi dummy 0.12 0.33 0.1411. Imitative vs. innovative opp. 19.99 4.69 0.1312. Network diversity 0.31 0.43 −0.0513. Situated optimism 3.32 0.77 0.1114 Opportunity motivated 5.27 1.50 0.1315. Loan size (USD) 677 779 0.08
N = 1066. Pairwise correlations reported.Correlations above .06 are significant at p b .05.
Please cite this article as:Wood,M.S., et al., Roots, reasons, and resources: SBusiness Research (2014), http://dx.doi.org/10.1016/j.jbusres.2014.04.008
optimism increases as the reason for business start-up moves fromnecessity-based to opportunity-based entrepreneurship (β = .0026,p = .623 at −1 SD; β = .011, p = .044 at M; β = .019, p = .030at +1 SD). These results are illustrated in Fig. 2a where the indirecteffect through situated optimism is plotted across a range (+/−1 SD)of values from low opportunity cost (necessity-based) to high opportu-nity cost (opportunity-based) with 95% confidence bands. The horizon-tal line denotes zero indirect effects. The indirect effect of innovationon growth via situated optimism is significant (region of significance)just above the mean where the confidence band does not containzero. These results provide support for Hypothesis 5a. Returning toTable 3, the moderating effects of reason for start-up on the indirectdiversity of information growth relationship are not significant, soHypothesis 5b is not supported. However, the indirect effect of opti-mism increases as loan size increases (β = .0013, p = .833 at −1 SD;β = .0084, p = .120 at M; β = .0155, p = .047 at +1 SD). Fig. 2b, re-veals that the indirect effect of innovation on growth through situatedoptimism becomes significant when loan size is approximately 700USD (+0.5 SD) above the mean, supporting Hypothesis 6a. Finally,Table 3 which shows the moderating effects of loan size on the indirectdiversity of information growth relationship (Hypothesis 6b) is not sup-ported (p N .05).
4.3. Robustness checks and alternative models
One limitation of cross-sectional data is the potential for specifica-tion of alternative models. In particular, the relationship between firmgrowth and situated optimism could be recursive. We ran themediatedmodel with growth leading to optimism and optimism leading togrowth with error terms allowed to co-vary. Neither growth nor opti-mism was significant on the other and the error terms did not indicateestimation issues. Next, we examined growth as a mediator leading tooptimism. The variance explained for optimism was slightly lowerwith growth as the dependent variable. Finally, we re-examined ourfull model with bootstrapped standard errors and got essentially thesame results. While we cannot establish causality, these additionalchecks provide greater confidence in the hypothesized model andresults.
Case reported n = 1066. Unstandardized coefficients reported along with robust clustered standard errors in parentheses.Industry dummies included but not shown. Other services (ISIC 2 digit 93) was the omitted category; Indonesia was the excluded country category.
a Mean-centered variables.⁎ p b .05.⁎⁎ p b .01.⁎⁎⁎ p b .001.⁎⁎⁎⁎ p b .10.
Case reported n = 1066. Unstandardized estimates reported along with standard errors in parentheses. Bootstrap sample size = 500; CI = confidence interval; LL = lower limit;UL = upper limit.
8 M.S. Wood et al. / Journal of Business Research xxx (2014) xxx–xxx
5. Discussion
We document that entrepreneurs in subsistence economies doexhibit optimism that can lead to business growth, but that opti-mism is situated within the roots, reasons, and resources availablefor business development. Specifically, we find that more innovativebusiness opportunities lead to higher levels of situated optimism,
-0.01000
-0.00500
0.00000
0.00500
0.01000
0.01500
0.02000
0.02500
0.03000
0.03500
0.04000
3.77
Con
diti
onal
Ind
rect
Eff
ect
- In
nova
tion
Necessity-based vs. Op
a
b
Fig. 2. a: Moderating effect of necessity/opportunity-based motivation (Mean +/− 1 SD) on tband. b. Moderating effect of loan size (Mean +/− 1 SD) on the innovation–firm growth relat
Please cite this article as:Wood,M.S., et al., Roots, reasons, and resources: SBusiness Research (2014), http://dx.doi.org/10.1016/j.jbusres.2014.04.008
while considering diverse sources of business opportunity informa-tion results in lower levels. In turn, higher levels of situated optimismare associated with higher employment growth. However, only whenresources, such as higher loan availability and/or opportunity-based motivation, are present does situated optimism mediate therelationship between more innovative business opportunities andfirm growth.
5.27 6.77
portunity-based Entrepreneurship
Region of significance
he innovation–firm growth relationship through situated optimism with 95%-confidenceionship through situated optimism with 95%-confidence band.
ituated optimismand firm growth in subsistence economies, Journal of
9M.S. Wood et al. / Journal of Business Research xxx (2014) xxx–xxx
5.1. Implications and future research
An important implication of our findings is that we documentoptimism as a benefit for entrepreneurs in subsistence economies.Specifically, we argued that situated optimism provides entrepre-neurs with a mechanism to overcome the challenges of growing abusiness in a subsistence economy and Model 2.4, for example, re-veals that a unit increase in optimism is associated with a 28% higherodds of employment gains (odds ratio = exp [0.249] = 1.28). This isa substantial positive effect that has not been previously documentedand stands in contrast to previous research in developed economiesthat has found a negative relationship between optimism and businessgrowth (e.g., Hmieleski & Baron, 2009). While there are several differ-ences between our study and this strand of optimism research, ourfind-ings suggest boundary conditions for the idea that optimism is a sourceof unrealistic bias, at least in subsistence economies where a “positivepsychology” (Seligman & Csikszentmihalyi, 2000) facilitates businessgrowth.
A second implication is that we reflect a more nuanced view ofoptimism that helps explain how andwhen optimism influences entre-preneurship. For example, Model 2.5 reveals that a unit increase towardopportunity-based motives that interacted with a unit increase in opti-mism raises the likelihood of employment growth by 46% (odds ratio=exp [0.173+ .206 ∗ 1]= 1.46). Resources available showed similar pos-itive effects (Model 2.6) as a unit increase toward opportunity motivesthat interactedwith an increase in loan size (1SD or 780 USD) increasesthe likelihood of employment growth by 40% (odds ratio=exp [0.206+.132 ∗ 1SD] = 1.40). We note that the direct effect of loan size onemployment growth was not significant, but becomes important in thepresence of an opportunity motive. Further, findings reported inTable 3 indicate that innovative business ideas and optimistic framingsin conjunction with loan size increased the likelihood of growth. Takentogether, the implication is that microcredit loans may be insufficientto stimulate business growth. Thus, it appears that the roots and reasonsfor entrepreneurship should be considered in the microcredit loanscreening process.
Finally, our study provides early evidence for emerging research ex-amining socially situated cognition in firm development (Cornelissen &Clarke, 2010;Wood,McKlevie &Haynie, 2014).While our research doesnot fully account for where situated optimism comes from, we do findthat one source is comparatively large microcredit loans. We reasonthat this is because it positively influences entrepreneurs' perceptionsof the resources and skills they hold. In that way, access to larger loansis a driver of situated optimism and this facilitates business growthand this parallels findings in other developing countries such as China,where entrepreneurs leading small firms are more likely to reinvestprofits toward growth when there is access to credit (Cull & Xu,2005). This suggests that microcredit agencies may want to pay moreattention to effects of loan size as opposed to simply the number ofloans provided.
5.2. Limitations
The data in this research is cross-sectional and limits inferences ofcausality. We used analytic techniques to reduce the odds of capturingreverse causality and we also conducted analyses to detect indicationsof reverse casualty. The superior fit of our model over the recursive in-dicates that the pattern of causation outlined in ourmodel is defensible.However, more evidence based on longitudinal data is required beforethe validity of the model can be fully known. Additionally, some mayhave concerns over the internal consistency estimates for some of ourmeasures. But as Cole, Walter, and Bruch (2008) note, “coefficientalpha is a conservative estimate of reliability (Cortina, 1993)” and weran our path models with adjustments made for low reliability coeffi-cients and results indicated that internal consistency estimates did notmeaningfully influence our findings.
Please cite this article as:Wood,M.S., et al., Roots, reasons, and resources: SBusiness Research (2014), http://dx.doi.org/10.1016/j.jbusres.2014.04.008
6. Conclusion
In the development context studied here, we find optimism as abenefit and an influential cognitive mechanism linked to firm growth.However, situated optimism is not a panacea and there are many activ-ities that flow from optimism that ultimately prove pointless—“thepsychological equivalent of junk food” (Peterson, 2000, p. 49). This sug-gests that a line of research that investigates the specific activities thatunderlie the situated optimism and business growth relationship wedocument in this study is needed.
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