The mediating effects of entrepreneurial orientation on the relationship between leadership styles and performance of SMEs in Malaysia

The purpose of this study is to investigate the relationship between leadership styles, entrepreneurial orientation and business performance of SMEs in Malaysia. A total of 391 owner/managers participated in this research. The owner/managers were sent a package of questionnaires which comprised the Multifactor Leadership Questionnaire MLQ 5X (Bass & Avolio, 1995, 2000, 2004), the Entrepreneurial Orientation Questionnaire EOQ (Covin & Slevin, 1991), the Business Performance BP (Dess & Robinson, 1984; Allen & Helms, 2002; Choi & Lee, 2003; O'Regan, Ghobadian & Sims, 2005) questionnaire and the demographic questionnaire. Out of 391 questionnaires answered only 371 questionnaires were usable for this research. The collected data were analyzed using the SPSS version 16. Descriptive statistics, correlation and regression analysis were used to analyze the data. This study found that there were significant positive relationships between i) transformational leadership and business performance, ii) transactional leadership and business performance, iii) transformational leadership and entrepreneurial orientation, iv) transactional leadership and entrepreneurial orientation, and v) entrepreneurial orientation and business performance. This study also found that passive-avoidant leadership was negatively correlated with either business performance or entrepreneurial orientation. Although entrepreneurial orientation was supposed to be fully mediating the relationship between leadership styles and business performance, the results showed that the mediating effect was only partial. The findings can be generalized as follows: (i) the study found that transformational and transactional leadership styles were the dominant form of leaderships displayed by the owner/managers of the SMEs and (ii) the direct effect relationships between leadership styles and business performance were more significant than the effect of using the entrepreneurial orientation as a mediator. The findings demonstrated that SMEs owner/managers need to upgrade their leadership skills and improved the company's entrepreneurial orientation in order for them to survive the competitive market environment. The owner/managers must be willing to be more innovative, pro-active and able to take higher risk. In ensuring that SMEs will continue to contribute to the national economy, the government is urged to develop higher level training programs that will help the owner/managers to upgrade their leadership skills. This study also provides an opportunity to expand the research on other industries such as manufacturing, constructions, agricultures and telecommunications. Future researchers perhaps may want to investigate the effect of leadership styles and entrepreneurial orientation on Malaysian SMEs going abroad, as international expansion offers a potential way for these firms to increase growth and improve performance