TRUST AND GOODWILL AS DRIVERS OF SMALL ENTERPRISE SUCCESS: EVIDENCE FROM KENYAN SERVICE SECTOR INTELLECTUAL CAPITAL PERSPECTIVE

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1 TRUST AND GOODWILL AS DRIVERS OF SMALL ENTERPRISE SUCCESS: EVIDENCE FROM KENYAN SERVICE SECTOR INTELLECTUAL CAPITAL PERSPECTIVE Dr. Roe J S Boit, Emma Serem, Biwott Geoffrey and Thoma Taru Department of Management Science, School of Buine and Economic, Moi Univerity ABSTRACT: Entrepreneurial trut and goodwill play an important role in the ucce of Small and Micro enterprie. Wick and Berman (2004) emphaized the important idea that trut i a cotly governance mechanim, to be deployed only when neceary. They ugget that the greater the degree of interdependence between the partie to the exchange, the greater will be the need for trut. According to Yuuf (1995) the mot critical factor contributing to buine ucce conit of good management kill, acce to financing, peronal qualitie, and atifactory government upport. Goodwill cannot be felt if it i an intangible aet which can be earned through a name or reputation of the organization (Claeen et al., 2000). Mot entrepreneurial effective group and organization are thoe with the highet level of trut and norm. Goodwill from variou take holder like family, friend and other people contribute to entrepreneurial ucce. The main objective of the tudy wa to examine Trut and goodwill a driver of mall enterprie ucce. The tudy utilized exploratory urvey deign. Specific objective were: To ae the influence of trut on enterprie ucce and to examine the relationhip of good will on enterprie ucce. Small and Micro buine owner in the ervice indutry were divided uing imple random technique to obtain a ample ize of 240 SME in the ervice ector drawn from a target population of 600 regitered SME in the ervice ector, Eldoret Town, Uain Gihu County. The tudy wa guided by Relational Theory of Social Network. The tudy employed both qualitative and quantitative method of data collection. Data wa orted coded and analyzed uing inferential tatitic namely, Pearon product moment correlation, Chi-Square method and Analyi of variance (ANOVA) and multiple regreion. The tudy found out that, there wa a trong poitive relationhip between trut [r=.907], and good will [r=.833] on entrepreneurial ucce. Thi indicated that an increae in trut and goodwil will lead to greator entrepreneurial ucce.the tudy finding will contribute great to the academic debate. KEYWORDS: Buine Networking, Micro buine, Service Indutry, Small Buine, Trut and goodwill INTRODUCTION Trut in Small and Micro enterprie increae relationhip invetment, communication and performance and reduce cot and opportunitic behavior (Selne & Salli, 2003). In the abence of trut, conflict between collaborating firm may prevent future invetment or even lead to the withdrawal of exiting invetment (Inkpen &Beamih, 1997). Mutual trut function a a afeguarding and controlling mechanim that promote information haring and reduce 28

2 collaborating firm incentive and propenity to engage in opportunitic behavior (Lane et al., 1998). The individual boundary panner at a ingle firm etablihe relationhip with both individual and group of individual belonging to the partner organization. Hence, if the origin of the relationhip i alway an individual, the counterpart may vary. Thi inight i very ueful in avoiding the cro-level fallacy (Rueau, 1985). The effect of goodwill i highly concentrated on ownerhip tructure, family controlled firm and government controlled firm. Goodwill i omething that cannot be bought but ha to be earned; there i no way to earn it overnight. It will take coniderable time and effort to develop goodwill in for a buine. Some of the factor lited aid in developing goodwill in buine. (Claeen et al., 2000).therefore the objective of thi tudy are twofold: in achieving it ucce: i. To ae the influence of trut on enterprie ucce. ii. To examine the relationhip of good will on enterprie ucce. LITERATURE REVIEW Concept of Entrepreneurial Succe The dependent variable of thi tudy i entrepreneurial ucce a meaured in term of growth in the ale turn over, profit, firm reputation number of employee and volume in ale indicated by level of earning the buine unit get annually. Succe i defined a the having different form, urvival, profit and return in invetment, number of employee, happine and reputation (Foley & Green, 1989). In the pat two decade the rate of growth of network acro all ector ha been dramatic (Doyle, 2000). Trut and entrepreneurial ucce Trut i defined a the expectation that an actor can be relied on to fulfill obligation, will behave in a predictable manner, and will act and negotiate fairly when the poibility for opportunim i preent (Zaheer& Harri,2006). Trut ha been examined in a variety of ocial cience context and defined in a number of different way (Miztal, 1996). A dictionary definition of trut i a firm belief in the reliability, truth or trength of a peron: a confident expectation and a reliance on the truth of a tatement without examination.wick and Berman (2004) emphaized the important idea that trut i a cotly governance mechanim, to be deployed only when neceary. They ugget that the greater the degree of interdependence between the partie to the exchange, the greater will be the need for trut. Importantly, the author point to the notion that, the extent of trut in inter-organizational relationhip i a choice made by firm. They go on to ugget that trut in thee relationhip i upported by intitutional, ocio-cultural, and indutry norm, and thee 'trut upport mechanim' moderate the relationhip between the choice firm make about how much to invet in trut and performance outcome. According to Cohen and Pruek (2001) there are many benefit in term of profit and ale turnover with organization with high level of reputation and trut.in accordance with thi approach, trut among partner ha a ignificant impact on the repective firm performance by reducing tranaction cot and conflict. Infact, other benefit, uch a increaed ale and a greater return on invetment, may alo be identified a direct outcome of trut (Zaheer and Harri, 2006). Trut hould be enhanced by network member in repone to three main 29

3 contraint which dicourage mall firm from etablihing long-term collaboration agreement: (a) the rik of opportunim among the entrepreneur, (b) low commitment from counterpart and (c) the culture of the actor joining an alliance. In the network context between uptream and downtream, a cloe relation between cutomer and upplier can decreae uncertainty and thu generate better inventory control and lower inventory cot (Chung et al., 2000). Goodwill and entrepreneurial ucce Enterprie goodwill i the value of earning or cah flow directly attributable to attribute of the enterprie that reult in earning from conumer that return becaue of the enterprie relationhip. According to International Gloary of Buine Valuation, goodwill i that intangible aet ariing a a reult of name, reputation, cutomer loyalty, location, product, and imilar factor not eparately identified. According to Yuuf (1995) the mot critical factor contributing to buine ucce conit of good management kill, acce to financing, peronal qualitie, and atifactory government upport. Goodwill cannot be felt it i an intangible aet which can be earned through a name or reputation of the organization (Claeen et al., 2000). METHODOLOGY The tudy wa carried out in North Rift Region, Uain-Gihu County, and Eldoret town. Exploratory reearch deign wa ued and which lead the reearcher to gaining great depth of undertanding into how entrepreneur through exploitation of trut and goodwill drive the ucce of mall and micro buinee in Eldoret town. Simple random ampling technique wa utilized to contitute a ample ize of 240 uing Yamane (1967) formulae where 1200 regitered SME buine owner of mall and micro enterprie in Eldoret Town of which 600 were ued a a target population tructured and untructured quetionnaire and interview chedule wa ued in the tudy and Crobahch Alpha for ucce of SME reported cale reliability of trut and goodwill repectively howing reliability of the reearch intrument a hown in table 3.1. The tudy ued inferential tatitic uch a multiple regreion and analyi of Variance (ANOVA) to etablih the relationhip between buine owner network reource ue in relation to the enterprie ucce. Table 3.1 Crobahch Alpha reliability tet Variable No. of item Cronbach alpha Trut Goodwill RESULTS Entrepreneurial ucce Relationhip between trut and Entrepreneurial Succe The Spearman rank-correlation wa ued to determine whether there i a ignificant relationhip between two variable. The influence between independent variable (trut) and dependent 30

4 variable (entrepreneurial Succe) invetigated uing Spearman rank-correlation coefficient. A hown in table 4.1. Table 4.1: Relationhip between Social Trut and Entrepreneurial Succe Spearm an' rho Profit to ale ratio revenue growth Firm reputati on Employ ee Expen e Trut Profit to ale ratio revenue.668 ** growt h.613 **.720 ** **.631 **.655 * **.321 **.404 * * * Firm reputatio n Employ ee.544 ** **.328 **.296 * * Expen e.340 **.448 ** * * Trut **. i ignificant at the 0.01 level (2-. b. Litwie N = 194 Source: Reearcher Survey Data, 2014 The Spearman rank-correlation wa ued to etablih the influence of trut and overall enterprie ucce. There wa a poitive relationhip between the ocial trut and enterprie ucce [r=.907, n=174, p<.05], (Table 4.14), indicating a poitive correlation between ocial trut and enterprie ucce. The more the ocial trut among entrepreneur the higher enterprie ucce. 31

5 Table 4.2: Overall Influence of Trut on Enterprie Succe Variable Spearman' rho Succe Network Succe Trut.907 ** **. i ignificant at the 0.01 level (2-. b. Litwie N = 194 Source: Reearcher Survey Data, 2014 Table 4.3 Entrepreneurial Goodwill Good will Diagree Neutral Agree Mea Freq % Freq % Freq % n Group interaction have contributed to buine ucce. My profit coincide with my level of interaction. My buine performance i in line with my future expectation Std. Dev I have had other ocial interaction ince I tarted my buine. Source: Reearcher Survey Data 2014 From the tudy the mean of goodwill tatement wa all above 4.9, with the highet being 5.5 on group interaction having contributed to buine ucce. The Spearman rank-correlation wa ued to determine whether there i a ignificant influence between two variable. The relationhip between independent variable (goodwill) and dependent variable (entrepreneurial Succe) were invetigated uing Spearman rank-correlation coefficient. Table 4.4: Goodwill and Entrepreneurial Succe Spearman' Rho Profit to ale ratio Profit to ale ratio revenue growth Firm reputati on Employ ee Expen e Goo dwill 32

6 revenue growth Firm reputatio n Employ ee Expene Goodwil l International Journal of Small Buine and Entrepreneurhip Reearch.668 ** **.720 ** **.631 **.655 ** **.321 **.404 **.544 ** **.328 **.296 **.340 **.448 ** * ** **. i ignificant at the 0.01 level (2-. *. i ignificant at the 0.05 level (2-. c. Litwie N = 194 Source: Reearcher Survey Data, 2014 The finding of the influence of Goodwill on enterprie ucce how that there wa a poitive relationhip between the goodwill and enterprie ucce [r=.833, n=174, p<.05], (Table 4.17), indicating a poitive correlation between goodwill and enterprie ucce. The more the entrepreneur goodwill i in the buine the higher the mall enterprie ucce. Table 4.5 Overall Influence of Goodwill on Enterprie Succe Variable Spearman' rho Succe Network Succe Goodwill.833 ** **. i ignificant at the 0.01 level (2-. b. Litwie N =

7 Source: Reearcher Survey Data, 2014 The finding agree with Haman and Jubb, (2008) that the U.S., U.K., Autralia and the European countrie provide evidence that manager have the tendency to recognize goodwill impairment lo while they were experiencing a decline in profitability. Table 4.6 Entrepreneurial trut and goodwill on Entrepreneurial Succe Indicator Varia ble Trut Good will Spearm an' rho Correla tion Coeffic ient Correla tion Coeffic ient Prof it to ale rati o * Sale reve nue Sal e gro wth ** Firm reput ation Empl oyee Expe ne Tru t ** ** **. i ignificant at the 0.01 level (2-. *. i ignificant at the 0.05 level (2-. c. Litwie N = 194 Source: Reearcher Survey Data, 2014 Goo d Will Table 4.7 regreion analyi Model Un Standardized T Sig. Co linearity tandardized Statitic B Std. Error Beta (β) Tolerance VIF 1 (Contant) Trut Goodwill Networking Tie a. Dependent Variable: Succe Source: Reearcher Survey Data, 2014 To tet whether there wa Co linearity; tet were carried out uing tolerance and Variance Inflation Factor (VIF) tatitic Table For thi model, VIF value are all below 10 and 34

8 tolerance tatitic are all well above 0.2 and we can conclude that there i no Co linearity within our data (Bowerman & O Connell, 1990). The finding howed that trut, goodwill and networking had a poitive relationhip with enterprie ucce. Trut among partner ha a ignificant impact on the repective firm' performance by reducing tranaction cot and conflict. In fact, other benefit, uch a increaed ale and a greater return on invetment, may alo be identified a direct outcome of trut (Luo, 2002 and Harri, 2005). Trut hould be enhanced by network member in repone to three main contraint which dicourage mall firm from etablihing long-term collaboration agreement: (a) the rik of opportunim among the entrepreneur, (b) low commitment from counterpart and (c) the culture of the actor joining an alliance. A anticipated, trut challenge the above-mentioned contraint by laying the foundation for a common ground, where entrepreneur can uccefully meet their expectation (Zaheer and Harri, 2006). IMPLICATIONS AND PRACTICAL CONTRIBUTION In term of practical contribution the finding of thi tudy can be ued by Small and Micro buine owner on the utilization of mall firm trut and goodwill for the improvement and the ucce of Small and Micro enterprie. The tudy finding hall improve their buine kill in order to achieve the deired ucce. (Fukuyama, 1995) argued the mot entrepreneurial effective group and organization are thoe with the highet level of trut and norm. Goodwill from variou take holder like family, friend and other people contribute to entrepreneurial ucce. entrepreneurial ucce have been done in developed economie, little ha been done in a developing economy uch a Kenya and more o in ervice indutry in Eldoret Municipality.The finding hall alo ait upcoming cholar to further expand the pie of trut and goodwill a an aet of enterprie ucce and build other theoretical and model development in order to contribute to other area of academic debate. RECOMMENDATIONS FOR FURTHER RESEARCH Reearcher hould invetigate the awarene of the network' contribution to the Small and Micro enterprie and entrepreneur in general. Future reearch hould invetigate whether awarene of network contribution lead to the ucce of enterprie. REFERENCES Bowman, U. N. (2006). Tranferring the management in the family Owned buine. Waco Texa: Baylor Univerity Cohen, D., & Pruak, L. (2001). In good company: How ocial capital make organization work. Boton, MA: Harvard Buine School Pre. Doyle, G.M. (2000) Making Network Work: A Review of Network in Ireland and Abroad with Particular Reference to Training and Human Reource Development, Dublin: Skillnet Ltd. 35

9 Foley, P, & Green, H. (1989). Small Buine Succe. London, England: Paul Chapman Publihing. Haman, J. & Jubb, C. (2008). Earning Management around a change of goodwill rule. Working Paper. Inkpen, A. and Beamih, P. W. (1997). Knowledge, bargaining power, and the intability of international joint venture, Academy of Management Review, Lane, Philip, R. &Tornell, Aaron, (1998). Voracity and Growth, CEPR Dicuion Paper 2001, C.E.P.R. dicuion Paper. Luo, Y. (2002). Contract, cooperation, and performance in international joint venture. Strategic Management Journal, 23(10), Miztal, B. (1996). Trut. Cambridge: Policy Pre Sorenon, et al. (2003) Social network and indutrial geography, Journal of Evolutionary Economic 13(5): Yamane, T., (1967). Statitic: An introductory Analyi (2 nd Edition). New York: Harper and Row Yuuf, A. (1995). Critical Succe Factor for Small Buine: Perception of South Pacific Entrepreneur. Journal of Small Buine Management, 33(2): Zaheer, A., & Harri, J. (2006). Inter-organizational trut. In O. Shenkar& J. Reuer (Ed.), Handbook of trategic alliance (pp ). Thouand Oak, CA: Sage 36