The Impact of Owners' Social Capital on the Financial Performance of Dutch SMEs

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The research is aimed at examining the impact of the owners’ social capital (SC) on the financial performance of their small and medium Dutch enterprises (SMEs). Therefore, Financial Performance can be considered as a dependent variable. Specifically, the discussion is provided in consideration to how two categories of SC, external (bridging) and internal (bonding), and their effect of on a firm’s financial performance are related. Therefore, the discussion will explain why internal SC is considered more significant to the firm’s performance while external SC is not deliberated as a significant category of SC. The second discussion is provided considering why U-shapes are not confirmed. Therefore, the relationship between the Dutch SME’s owners’ SC, as internal SC, external SC and the financial performance of the Dutch SMEs has been explored thoroughly in this discussion.

5.1 The significance of internal SC

In case of internal SC, Putnam (2000) defined internal SC as homogenous networks or groups of individuals, which tend to be inward looking and have clear boundary distinctions between internal and external networks. Therefore, internal SC results in closed systems in which the resources, knowledge, and information of the participating members are well utilized for the benefit of the firm. In addition, Hillman and Dalziel (2003) stated that high internal SC is associated with high trust levels along with commitment, reciprocity, and loyalty of the members of the internal network. Internal SC occurs where people can work together towards common activities, trust, associability and shared vision. Therefore, both trust and shared vision or goals provide the momentum for the firm to take collective action in a focused and effective manner. A sharing of goals and vision increases the chances that the firm can simultaneously achieve the desired objectives of its members as well as group goals (Leana and Van Buren, 2009). The research takes the view that owners come together to start the company. It is not possible to establish a profitable and viable business without spending time, effort and money together. Thus, enabling them to bonding them together and such internal SC positively impacts firm economic performance. Nevertheless, Miller's work also observes that a affirmative impact on the company performance is contingent on group dynamics or bonding and thus internal SC. If the relationship between owners is acrimonious and less cohesive, the financial performance of the firm will decline irrespective of the number of owners, their range and scope of experience and the amount of time they spend with each other

Moreover, the principle underlying the links between trust and collective action leading to the fulfillment of the objective of the firm is ‘generalized reciprocity’ according to which people help each other in the long term irrespective of whether they will be rewarded or not (Adler and Kwon, 2002). Collins and Clark (2003) extended this view by pointing out that generalized reciprocity transforms an individual from a self-centered agent to one that is committed to the common good of the firm. Brief and Motowidlo (2006) found that a belief in generalized reciprocity transform trusts into collective action.

Furthermore, Finkelstein and Moone (2003) stated that Board of Directors is a fundamental organization body whose effective execution of responsibilities can be enhanced when there is trust and teamwork. There is insufficiency of variable set of skills and knowledge required for the fulfillment of the firm advisory and governance when only a single director is involved. But as a group, they can pool together their various professional skills and resources to effectively execute their duties towards attainment of the company goals.

Therefore, internal SC develops ‘Intra Board Connectedness’ which facilitates the ability of the board members to work as a team and positively impact firm performance. The internal ties create trust and enhance connectivity between directors who in turn enables the transfer of information and professional skills. Thus, the firm’s prosperity is reflected in the cohesiveness of the board and the firm’s other employee’s. The connectedness amongst the members of a group facilitates the sharing of goals, values, vision amongst them, fosters mutual expectations, leading to those actions and behavior that promotes collective action or at least an assurance to execute combined action (Offstein et al., 2005).

According to He and Huang (2011), senior management groups, execute the vital function of decision making on various strategic issues related to a firm, and such choices have significant implications for the financial performance of a company. Such complex processes as decision making and problem-solving require more high levels of co-operation than in other groups, so that multiple perspectives, information, and approaches can be applied cohesively and effectively.

It was confirmed from the research findings that trust plays an essential role in the firm's internal SC. Finkelstein and Mooney (2003) indicated that internal SC has the effect of sharing of norms, faith as well as of resource and assets within the firm that catalyzes the mobilization of external SC within the organization. Therefore, internal SC is a reflection of the closeness of the group, thus ensuring that external resources brought in by the owners of the corporate are appropriately utilized for the benefit of the firm.

5.2 Disadvantages of External SC

According to Kim (2005) definition of external SC, it was established that external SC is a bridge of connection between top management officials with the external environment and the resources that they can potentially leverage from the external environment that can become a basis of economic advantage for the corporate. The external connection provides the company with timely and fast access to vital resources thus positively impacting on the firm’s financial outcomes. Strategic information about potential opportunities and the resources to exploit them, provide a firm with sustainable competitive advantages that are hard for the competition to replicate. However, it was confirmed that regardless of the benefits the company enjoys from external SC, incurred costs connected to it can result in adverse financial performance. Harris and Shimizu (2004) suggested that excess networking often consumes the player’s attention and time thus diverting their focus on the company objectives. The view was confirmed by Shimizu (2004) who suggested that too much emphasis on networking decreases active involvement in the daily company operations.

Moreover, in the case of administrators, serving on the boards of too many corporations can bring about ‘over-boarding' characterized by a pressed time requirement by the boards. Secondly, the manager may either find it difficult to continuously attend corporate conferences or fail to adequately prepare for any subsequent meeting organized the board of directors. It seriously compromises the selection-making capacity of the actors/personnel involved, threatening the fine of their contributions and the company performance as properly (Ocasio, 2009). Furthermore, Kwon and Adler (2014) factor out that mere access to external SC does not necessarily imply that a company is benefited. Such external ties would no longer be effectively mobilized and implemented to achieve a better decision-making and implementation procedures within the company. Obhukhova and Lan (2013) determined that the literature on SC frequently assumes that firms will definitely take advantage of their outside ties and contacts, even as this doesn't show up in fact and therefore it's far vital to differentiate between outside SC possibilities which are applied or mobilized and those that handiest have capacity for the firm.

According to Adler and Kwon (2002) too much social capital can have an adverse effect on the firm. The research of Goerzen and Beamish (2005) indicates that external SC could have a negative effect on firm overall performance at the same time as that of Kor and Sundarmurthy (2009) indicated a curvilinear relationship (first an growth in overall performance followed with the aid of a decrease) between external SC and firm performance. Due to the inconclusive links between outside SC and company overall performance, He and Huang (2011) said that for you to understand how SC impacts firm performance, it's far vital to examine relationships and networks within the firm itself which is termed as inner SC or bonding. Carter and Lorsch (2004) said that the relationships among pinnacle management and subsidiary actors inside the firm play a crucial role in choice making. Johnson et al., (2006) identified that the ability of the top administration to process externally acquired resources and knowledge depends on the degree of contentedness inside the firm and consists of cohesiveness teamwork, cooperation, and trust. Therefore, to observe the entire SC of a company and its effect on the company's financial achievement, one has to look at each the internal and outside SC regarding the firm's owner.

5.3 U-Shape Relationship

It could be concluded that the external SC of the owners of the company has a reversed U-shape relationship with firm overall performance and that the internal SC moderates this courting. When the internal social capital of the proprietors is excessive, the level of improvement within the overall financial performance of the company is stronger. But, there's still no conclusive proof of this phenomenon as most valid hypothesis 1 could only be validated partially. The reversed U-shape relationship can be used by firms to predict the financial loss. Firm owners can also use this formula to implement positive changes to both internal and external SC to gain economic prosperity. However, the reversed U-shape hypothesis cannot be validated because Internal Social Capital2 is not significant for a B-value of -.165. For external social capital, it can be concluded that the B-values of Network Mobilization and Network Mobilization B-value could indeed explain the reversed U-shape relation as drawn in hypothesis 2.

5.4 The Control Variables

Apart from the independent and dependent variables discussed above, five other control variables were incorporated in the mediation linear regression analyses. The paragraph deliberates the control variables which exhibited momentous influence on the socal capital and financial performance. Namely, the characteristics of the organization, size, age, sector of operation, and the number of owners. Uhlaner et al., (2007) and Berent-Braun & Uhlaner, (2010) confirms that company age, and company size are often investigated in performance researches. Company age, and company size indicate the number of employees in a particular corporation thus providing a natural logarithm used in depicting a more linear distribution of a sample. According to Zellweger and Astrachan (2008), age of the company is a significant control variable when considering owner social capital. The proprietors may develop more attachments towards the company over a period of time and hence become more willing to participate in the company network mobilization. Age of the company is measured by identifying its operational years, that is, difference between commencement year and the data collection period (2017). The meta-analysis study conducted by Capon, Farley, and Hoenig (1990) found that the variables, company size and company age, do indeed influence firm financial performance and are thus necessary to conduct this research.

6.0 Conclusion

The final chapter avails the specific response to the research sub-questions and the central study question. To respond to the questions, the report has tackled in various steps. The possible structure in the second Chapter provided relevant theory concerning the significant relationships and dimensions between the concepts. The design of the research, measurement items and samples were identified in Chapter 3. The hypotheses concepts were verified in Chapter 4 on their normality, reliability, and validity. Furthermore, mediation analyses and regression were implemented to assess the hypotheses. In the preceding chapter, the fifth Chapter, the test results were discussed and interpreted. Chapter 6 comprises of five sections. First, the responses to the research sub-questions. Second, answers to the central research question. The third is the presentation of the study limitations while the fourth is the suggestion of various practical recommendations. Lastly, the chapter concludes by providing multiple future studies recommendations.

6.1 Answers to Sub-Questions

The relationship between the Dutch SME’s owners’ SC, as internal social capital and external social capital and the financial performance of the Dutch SMEs, has not been explored thoroughly in the literature. The main objective of this research was to bridge this gap. This research proceeds from the premise that just like the members of the Board, the owners of the firm are critical stakeholders whose social capital significantly impacts the financial performance of the firm. It is particularly important for small and medium-sized enterprises (SMEs) in which there is a single or limited number of owners who are directly involved in the day to day operations of the firm. The broad conclusion emerging from the findings is that both internal and external social capital is as important for the owners of the firm as it is for the Board members of the firm. External social capital provides the owners of the secure access to external sources of knowledge and resources while internal social capital leverages such knowledge and resources effectively in ways that benefit the firm. Hence it can be concluded internal SC/bonding is related to the firms' financial performance.

6.2 Answer to Central Research Question

The external social capital was considered to be a measure of the owner's ability to network with external agents, find out new business opportunities for the company and promoting the company. These measures were found to provide the company with access to knowledge and resources both of which can be exploited to expand and improve the business of the firm. External networks act as a bridge to firms as they are a means of targeting new resources and markets. Moreover, external social capital enables the firm to enhance their influence, control, and power. Hypothesis 2 indicated a reversed U-shaped link between external SC and the firm’s economic performance could not be validated because it was not found significant for the provided B-values.

Internal SC was considered to be an eventually combined measure of quality relationships and shared vision amongst company owners. The internal SC enhanced intra-owner connectedness, trust, facilitate information exchanges, transfer of knowledge, active cohesiveness and teamwork all of which was found to positively impact the aptitude of the company stakeholders and owners to work together for a common purpose and improve the financial performance of the company. However, hypothesis 1 indicated a significant bond between internal SC and the firm financial performance could only be partially validated and is therefore not accepted. The research could only give and explanation for the first part of the previously indicated reverse U-shape.

It is proven that internal social capital can have a positive relationship towards firm financial performance. Therefore, its argued that a high internal SC level increases the company dissemination advantages conveyed by the external SC and impact a positive multiplier on the firm’s economic performance. It has been confirmed that high internal SC yields a high cohesion levels amongst the board members thus facilitating effective coordination between them. Hence, reducing the adverse outcome of overloading brought about by excessive external social capital. It may be concluded that the firm owner external SC has a reversed U-shape relationship with firm performance and that the internal SC moderates this relationship. Therefore, when the owners’ internal SC is high, the level of improvement in the financial performance of the firm is enhanced. However, there is still no conclusive evidence of this phenomenon as the only hypothesis 1 could only be validated partially.

These findings contribute not only to the literature on social capital but also more specifically to the research on SME's in Holland. The results of this research provide insights into the theory of social identity and on research related to internal social capital. The reversed U-shape relationship can be used by firms to predict the financial loss. Firm owners can also use this formula to implement positive changes to both internal and external SC to gain economic prosperity. It has critical managerial implications for owners of small-scale businesses in Holland who will need to learn to improve interpersonal relationships among themselves to leverage the benefits of interpersonal relationships.

6.3 Limitations

The first limitation of this research was the limited data set. With hindsight, the researcher now knows that to test the reversed U-shape hypotheses. A much larger data set would be required to indeed confirm the link between SC and the company financial performance.

The research is quantitative hence it does not provide detailed insights into relationships between owners of the firm which will enable a better understanding of internal social capital. It is also recommended to do a qualitative study that will enable a more detailed study of relationships occurring between owners of the firm and between owners and other stakeholders like employees, vendor partners, suppliers.

Hypothesis 1 could not be validated. Therefore a new study should be done by external SC and firm financial performance.

The value of the adjusted R2 in the regression model is quite low. It may be caused by the lack of some variables that can potentially impact the financial performance of the firm that this research has not yet considered.

6.4 Theoretical Recommendations

For significant improvement of the value R2, future research can consider some additional internal factors related to employees, design, innovation production. Also, factors associated with the external environment, more specifically those related to the country (such as factors explicitly operating in Holland), local factors or institutional factors to improve the ‘goodness of fit' of the regression models.

Whether owner social capital has a significant impact on the firm’s financial performance or shareholder capital has a more significant impact on the firm’s financial performance proposals on the future scope of research.

Future research can also focus on the level of depth of linkages between owners and between owners and external networks. It is based on the premise that there can be only strong or weak linkages. In strong linkages, the owners interact with each other and with external systems frequently, and this has a substantial impact on firm performance. Weak ties on the other hands refer to the indirect linkages owners have with each other and with external entities. Future research can distinguish social capital from owners into strong and weak linkages and examine their impact on firm performance.

6.5 Practical Recommendations

The study explicitly considers small and medium firms. More research needs to be conducted into the owner's social capital of large, family-owned firms.

Furthermore, research is conducted using data from surviving firms but overlooks information related to the failed firm. Examining survivor bias is also notable as the social capital of failed entrepreneurs can highlight how social capital can also increase the likelihood of closure/failure of businesses and the mechanisms involved in such failure.

In this research, social capital has been conceptualized at the level of the individual owners, but performance has been considered at the firm level. Future research is required to analyze how social capital translates into the financial performance of the firm. Lastly, future research can also focus on how social capital influences the motivations, goals, decision-making capabilities of entrepreneurs and how external networks combine to impact the performance of the firm.

January 19, 2024

Business Economics

Subject area:

Company Leadership

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