Corporate Governance,Corporate Entrepreneurship and Firm Performance: Evidence from the Rwandese Manufacturing Industry

Abstract

This study aims to determine effects of corporate governance on corporate entrepreneurship of Rwandese manufacturing firms, and to evaluate effects of corporate governance on performance of Rwandese manufacturing firms. We used two complementary methodological approaches: one which links corporate governance to corporate entrepreneurship; another which uses an augmented Cobb–Douglass production function to associate corporate governance with the firm performance. This study resulted in four main outcomes: first, the background—education and experience—and motivation of top managers contribute significantly to both corporate entrepreneurship and corporate performance; second, the sole proprietorship organisational form harms significantly the firms’ entrepreneurial activities and impacts negatively their financial performance; third, electricity and raw materials expenses are positively and significantly related to financial performance of manufacturing firms; and fourth, even if informal competition has no effect on entrepreneurial activity of manufacturing firms, it harms their financial performance.

Keywords

Corporate governance corporate entrepreneurship firm performance

Introduction

The Rwandese manufacturing industry is still small and less diversified. It contributes, on average, around 15 per cent of the GDP. According to the Rwanda Industrial Policy document (MINICOM, 2011), in order to reach the Rwanda Vision 2020 targets, it requires the share of manufacturing industry to increase to 26 per cent of the GDP. In order to achieve this goal, many factors are determinants, particularly the corporate governance and the corporate entrepreneurship.

Corporate governance refers to alternative means of coordinating relations between owners and managers of the firm, and corporate entrepreneurship can be related to behaviour in the pursuit of entrepreneurial opportunities by existing firms (Rigolini, 2007). Corporate members promote and realise corporate entrepreneurship. Consequently, stakeholders in the firm are responsible for the creation of new business, and strategic renewal of the organisations within the company’s corporate governance. Thus, corporate governance and corporate entrepreneurship are not conflicting; they complement each other, and their conjunction contributes to the firms’ financial solidity, survival and growth.

In developing countries, studies have recently explored the relationship between corporate governance and corporate entrepreneurship on the one hand, and between corporate governance and firm performance on the other (Albu & Mateescu, 2015; Atmaja, Tanewski, & Skully, 2009; Mokokwu, Barreria, & Urban, 2013). Almost all these studies concluded that the corporate governance is the key element of the firm’s entrepreneurial activities and thus of its performance. However, to the best of our knowledge, no similar studies have been conducted in Rwanda. Consequently, we consider that this study has the merit of filling this gap in empirical literature.

The aim of this article is first, determining the effects of corporate governance on corporate entrepreneurship of Rwandese manufacturing firms and second, evaluating the effects of corporate governance on performance of Rwandese manufacturing firms. To address these two objectives, we first used variables of business environment and corporate governance and evaluated their effects on corporate entrepreneurship and then considered the evaluation of the effects of business environment and corporate governance on firm’s performance through an augmented Cobb–Douglass production function.

We used data from the enterprise survey conducted by the World Bank in Rwanda between June 2011 and February 2012. During this period, data from 241 establishments were collected using a stratified random sampling (The World Bank and IFC, 2012). Through interviews at the firm level in the manufacturing and services sectors, the survey collected information about the constraints to private sector growth and about the business environment indicators that are comparable across countries.

Our analysis resulted in four main findings: first, background and motivation of top managers contributed significantly to both corporate entrepreneurship and corporate performance; second, the sole proprietorship is the organisational form which harms more firms’ entrepreneurial activities and financial performance; third, electricity and raw materials expenses are significantly related to the financial performance of Rwandese manufacturing firms; and fourth, informal competition has no effect on entrepreneurial activities of manufacturing firms, but it harms their financial performance.

Table 1.

Full-time Employees in 2010 and Variation from 2008 to 2010 According to the Legal Status

	Employees in 2010					Variation from 2008 to 2010
Legal Status	Observations	Average	Min.	Max.	Total	Observations	Average	Min.	Max.	Total
Shareholding with stock market	1	1,000	1,000	1,000	1,000	1	0	0	0	0
Shareholding without stock market	24	79	7	550	1,891	21	−2	−100	13	−44
Sole proprietorship	28	32	2	381	904	28	4	−14	51	99
Partnership	19	57	2	700	1,077	18	4	−17	50	67
Limited partnership	9	130	6	540	1,166	8	15	−2	63	117
Total³ 3 When comparing number of full employees in 2010 and change in number of full employees from 2008 to 2010, number of observations is different because some of companies were created after 2008, and consequently they did not report the change in their workforce.	81				6,038	76				239

Source: Authors’ calculations from RWA_2011_ES_v01_M_WB.

Literature Review

The corporate entrepreneurship refers to entrepreneurial activities, the pursuit of entrepreneurial opportunities by existing firms and the development of innovation (Hung & Mondejar, 2005; Rigolini, 2007). The corporate entrepreneurship explains the survival and the growth of firms. All corporate employees are actors of the corporate entrepreneurship, but its main source is from the supreme power of the firm, that is, from the governance and the management of the firm. According to Rigolini (2007), the strategy literature identifies three types of corporate entrepreneurship (i.e., creation of new business, strategic renewal of organisations and change in ‘rules of competition’) and links them to four factors: strategic leaders, good organisational form (corporate governance variables), good business environment and firm’s performance.

Corporate governance is about ensuring that the business is run well, and investors receive their fair returns (Magdi & Nadereh, 2002). Theoretical foundations of the corporate governance are the agency theory and the transaction cost theory. Both theories explain the relationship between shareholders and the management of the firm. They suggest that different systems of ownership are represented by different dominant ‘principal–agent’ problems (Atmaja et al., 2009). Dispersed ownership raises the ‘owner–manager’ problem while concentrated ownership leads to the problem between main shareholder and minor investors.

Consequently, the corporate governance is the key element of the firm entrepreneurial activities and thus of its performance. Honoré, Munari, and van Pottelsberghe de la Potterie (2010) noticed four components of the corporate governance which are the board of directors, the audit and internal controls, the shareholders rights and the executive remuneration. Together, these elements of corporate governance aim at lowering information asymmetries between shareholders and managers, and let corporate executive likely to feel constrained to pursue initiatives in the interest of shareholders. Definitively, firm’s performance depends on its entrepreneurial activities and on its governance enforcement.

The empirical literature on the relationship between corporate governance and corporate entrepreneurship, and between corporate governance and firm performance is not conclusive (Kumar, 2004; Pintea & Fulop, 2015). About this relationship, Hung and Mondejar (2005) studied the association between corporate governance and entrepreneurial innovation in a major Asian metropolitan city. Their analysis resulted in mixed outcomes. Duality of CEO/board chairman and shareholders who are board directors influence positively the risk-taking preference and the development of new initiatives. However, their effect on acceptance of changes is negative. Also, they found that the origin of board of directors (from the executive management or not) has no significant effects on innovative activities of the firm.

This conclusion is comparable to findings of an empirical study by Tan and Tan (2004) about the impact of corporate governance on value creation in entrepreneurial firms in Singapore. These authors concluded that effects of corporate governance on entrepreneurial activities of small and medium enterprises (SMEs) depend on governance practices of the firm as a whole, which go beyond the board level.

The impact of corporate governance on SMEs entrepreneurship was also analysed by Hanazaki and Liu (2007) using data from Indonesia, Korea, Malaysia, Philippines and Thailand. They concluded that corporate investment in these five East Asian countries is determined by profitability, cash-flow and credit risk. Thus, literature agrees that there are no corporate governance mechanism influencing entrepreneurial activities of these Asian SMEs (Hanazaki & Liu, 2007; Hung & Mondejar, 2005; Tan & Tan, 2004).

However, according to the study of Hanazaki and Liu (2007), family-controlled firms face more severe internal financing constraints than non-family-controlled firms, and they are limited on the financial market by their low financial sustainability. Furthermore, within listed firms, family-controlled firms’ conditions restraint their investments and risk-taking preferences. Consequently, financial constraints might limit their interest to long-term strategic actions.

Thus, while some corporate governance mechanisms (i.e., board independence and institutional ownership) are associated with corporate entrepreneurship for most companies listed on stock markets (refer Albu & Mateescu, 2015; Mokokwu et al., 2013), SMEs companies in developing countries face many other constraints, particularly financial limitations, political instability and market uncertainty (Okeahalam, 2004). In addition, most of these companies are family-controlled and face agency problems which raise conflicts between minority and large shareholders (Atmaja, 2008). This governance issue impacts negatively on entrepreneurial activities of firms as seen earlier (Atmaja et al., 2009).

The relationship between corporate governance and firm’s performance has been explored in developing countries (Pintea & Fulop, 2015). Unfortunately, these studies are also not conclusive. For instance, when exploring the effect of ownership structure on the firm’s performance, Kumar (2004) found that the foreign shareholding pattern did not influence significantly the firm’s performance in India. This result contrasted with other studies which found that foreign ownership lead to higher performance of firms in India (Manna, Sahu, & Gupta, 2016).

Brown and Caylor (2009) studied the relationship between corporate governance variables and firm operating performance in USA, using a composite measure of corporate governance (governance index), and found that better-governed firms are relatively more profitable, more valuable and pay out more cash to their shareholders. They showed that good governance, as measured using executive and director compensation, is most highly associated with good performance. However, they found that good governance as measured using charter/bylaws is most highly associated with bad performance.

In Vietnam, Vo, and Nguyen (2014) analysed the effects of corporate governance on performance of listed firms. Their findings indicate that mechanisms of corporate governance such as the presence of board female members, the duality of CEO/board chair, the working experience of board members, and the compensation of board members have positive effects on the performance of firms. However, board size has a negative effect on the performance of firms.

In Pakistan, Cheema, and Din (2013) studied the effects of board size, family controlled firms, and CEO duality on financial performance in the cement industry. As performance indicators, they considered accounting variables which are return on equity, return on assets, earnings per share, debt to equity and current ratio. They observed a relationship between corporate governance mechanism and firm performance. Following their results, only governance mechanism relating to ‘family-controlled firms impacts positively and significantly on firm performance. Duality CEO/board chair impacts negatively and significantly on firm performance. Furthermore, even if the board size influences negatively the firm performance, its impact is not significant.

Badriyah, Sari, and Basri (2015) conducted a similar study on non-financial companies listed in Indonesian Stock Exchange. Using data from companies’ annual reports, they tested the relationship between corporate governance, firm characteristics and firm performance by Partial Least Square (PLS) technique. Their results show that corporate governance and firm characteristics affect positively the existence of risk management committee; and the existence of risk management committee affects positively the firm performance. Also, they concluded that existence of risk management committee acts as a mediating variable between firm characteristics and firm performance. Otherwise, the risk management committee in this case is a key variable of the corporate governance. Thus, the effect of corporate governance and firms characteristics on firm performance is indirect through the risk management committee.

More interest on risk management rose after experiencing financial crises over the world; and the corporate governance became the main issues of investors and analysts. Akdogan and Boyacioglu (2014) conducted a study in Turkish companies listed on the Istanbul Stock Exchange in order to verify if good corporate governance system minimises the misconduct risks of the authority to decide on economic activities of the company. Thus, they tested the relationship between application level of corporate governance principles and performances of the companies. As a result of the study, it has been revealed that a significant and positive relationship exists between the companies’ level of corporate governance principles and return on asset and return on equity.

Previous conclusion is supported by a similar study of Yilmaz and Buyuklu (2016), which investigated the influence of corporate governance variables such as board size, share of independent board members and foreign investors on financial performance (return on assets) of firms traded in Turkey’s stock exchange. The study concluded that corporate governance variables influence firms’ performance: shares of independent board members have negative influences while foreign ownership has a positive influence on firms’ financial performance.

Comparable results were found by Kyereboah-Coleman (2007) in African countries. He analysed the impact of corporate governance on performance of listed companies from Ghana, South Africa, Nigeria and Kenya. Results indicate that large and independent boards enhance firm value and that combining the positions of CEO and board chair has a negative impact on corporate performance. Also, the size of audit committees and the frequency of their meetings have positive influence on market based performance measures, and institutional shareholding enhances market valuation of firms. However, this differs slightly from results of Lekaram (2014) on Kenyan listed manufacturing firms. The author found that the board size is negatively related to firm’s financial performance measured in accounting ratios.

The common characteristic of previous studies is the population of interest, which is restricted mainly to listed companies. However, majority of African manufacturing firms are not listed. Our study tries to fill this gap by analysing the relationship between corporate governance enforcement, corporate entrepreneurship and financial performance of SMEs not listed on the stock market.

Methodology

Models

In this study we refer to two complementary approaches. The first framework concerns the relationship between corporate governance and corporate entrepreneurship, while the second is about the relationship between the corporate governance and the firm’s performance.

Relationship between Corporate Governance and Corporate Entrepreneurship

We refer to Albu and Mateescu’s (2015) framework. These authors used a framework derived from the agency and signalling theory. They used three corporate governance variables: board size, board independence and presence of institutional investors. For the authors, these three variables represented control variables which impact the corporate entrepreneurship. They operationalise the corporate entrepreneurship through two variables: growth (of revenue, of employees or of profits) and research and development activities.

Thus, the basic model to estimate is as follows:

C E_{i} = f (C G_{i})

(1)

where CEi represents the corporate entrepreneurship indicators and CGi the corporate governance measurements. In our modelling, corporate entrepreneurship measurements consider three types of corporate entrepreneurial activities as mentioned earlier (Hung & Mondejar, 2005). However, in this study and referring to Albu and Mateescu (2015), we take into account overall entrepreneurial activities and represent them by a single indicator, that is, the company growth in size (in sales revenue and in full-time employees).

Thus, empirical models to estimate are as follows:

E m p l G r_{i} = a_{o} + a_{1} o r g f o r m_{i} + a_{2} B u s e n v i r_{i} + a_{3} L e a d e r b a c k g r_{i} + a_{4} p e r f o r m_{i} + ε_{i}

(2)

S a l e s r e v G r_{i} = β_{o} + β_{1} o r g f o r m + β_{2} B u s e n v i r_{i} + β_{3} L e a d e r b a c k g r_{i} + β_{4} p e r f o r m_{i} + m_{i}

(3)

where EmplGri, SalesrevGri, Orgformi, Busenviri, CEOLeaderbackgri, performi ɛi and mi are change in full-time employees, change in sales revenue, organisational form, CEO background, financial performance and the error term, respectively. Parameters βi and ai to be estimated measure the effects of each corporate component on corporate entrepreneurship. In order to conform our modelling to the database, variables have been adapted as follows:

orgform_i is the legal status of firms and contains: shareholding without shares traded on the stock market, sole proprietorship, partnership and limited partnership. These different legal forms represent different forms of corporate governance (see law no. 07/2009 of 27/04/2009 relating to companies in Rwanda). They are in dummy form with the value 1 if the organisational form of the company is as indicated and 0 if not. These different organisational forms represent different ownership concentration. We expect that, more is the ownership concentration, more is its positive influence on the entrepreneurship activity of the firm.

Busenvir_i, the business environment is represented by the ‘informal competition’, with value 1 if this competition exists and 0 if not. We expect that ‘informal competition’ positively influences entrepreneurship activities of firms (in order to adapt products on the changing market).

CEOLeaderbackgr_i, the executive top management background is represented by the CEO working experience and education level. We considered this variable because they influence skills and remunerations of firms’ top managers. Consequently, manager’s motivation helps them to be good strategic leaders. Thus, we expect that as the background of the top manager is high, the entrepreneurship of the company is improved.

perform_i, the performance of firms is represented by the economic value added. The economic value added is calculated by deducting operating expenses from sales revenue and adding depreciations. We preferred this indicator to other financial performance measurements¹

In the literature, four indicators are used to measure the financial performance: Tobin’s q, return on assets (ROA), return on equity (ROE) and economic added value (Pintea & Fulop, 2015)

, because it evaluates the whole performance of all inputs. Usually, the firm performance improves its entrepreneurship activity (Hanazaki & Liu, 2007).

Other variables’ indicators (i.e., sales revenue and full-time employees) are captured as usual.

Equations (2) and (3) are estimated separately using the Ordinary Least Squares (OLS) method. However, in each equation, variables are introduced hierarchically in order to evaluate the robustness of models.

Relationship between Corporate Governance and Firm Performance

To estimate the relationship between corporate governance and firm performance, we used the augmented Cobb–Douglass production function. This approach is similar to that used by Vo and Nguyen (2014) and Kalezić (2012) because it is based on a microeconomic theoretical foundation. Consequently, the model to be estimated is as follows:

I n A V_{i} = φ_{o i} + φ_{1 i} I n K_{i} + φ_{2 i} I n L_{i} + φ_{3 i} \sum I N C G_{i} + φ 4_{i} \sum D_{i} + V_{i}

(4)

where AV represents the economic performance, K is the capital input, L is the labour input, CG represents different variables of the corporate governance mechanisms used in this study; D represents variables of corporate governance in dummy form and v the term error. Parameters φ represent coefficients to be estimated. Subscripts i represent the firm unit. All variables are in log form, except those in dummy form.

To conform to the availability of data, variables of Equation (4) were adapted as follows:

AV_i is the economic added value as announced earlier.

K_i, the capital is represented by annual electricity cost and raw materials cost. These two elements are proxies of capital variable because they are proportional to the fixed equipments of the company. They are considered separately in order to investigate separate role of each type of capital.

L_i, the labour is represented by the number of full-time employees in 2010.

CG_i, the corporate governance variable is represented by the background of the top manager as a proxy of CEO strategic leadership (manager experience and education level).

D_i, corporate governance variable in binary form, is represented by the legal status of the firm, which is the proxy of the ownership (see earlier) and by the informal competition, variable of the business environment as defined earlier.

Equation (4) was estimated by the OLS method, and augmented variables were introduced hierarchically in order to assess progressively the robustness of the model.

Data Used

The data used in this article was obtained from the enterprise survey conducted in Rwanda by the World Bank between June 2011 and February 2012. Data from 241 establishments were collected using a stratified random sampling. Topics of the survey include particularly firm characteristics, gender participation, access to finance, annual sales, costs of inputs and labour, workforce composition, bribery, licensing, infrastructure, trade, crime, competition, capacity utilisation, land and permits, taxation, informality, business–government relations, innovation and technology and performance measures. This survey focused on service and manufacturing firms operating in Kigali and Butare (now Huye). However, in this study we considered only manufacturing firms, which counted for 81 establishments in the sample.

Empirical Findings

Before we discuss empirical results from estimation of Equations (2)–(4), we present descriptive statistics. These statistics concern some characteristics of manufacturing firms analysed, that is, the legal form, number of full-time employees, age of the firm and ownership structure.

Manufacturing Firms’ Characteristics: Legal Form, Workforce, Age and Ownership Structure

The sample contains five legal forms of firms: shareholding with shares traded on the stock market, shareholding without shares traded on the stock market, sole proprietorship, partnership and limited partnership.

According to results presented in Table 1, the sample we studied contained a total of 6,038 employees in 2010, of which 239 were added from 2008. Limited partnership firms contributed mainly to the variation of employees’ number. However, individually, the largest legal form is shareholding companies listed on the stock market, even if the sample contains only one company. This legal form is not analysed in this study because of insufficient observations. The second organisational form in terms of employees is the limited partnership, with an average of 130 employees in 2010. The last company’s legal form in terms of employees is the sole proprietorship. It concerns firms which are mainly family-controlled companies, even if some are of the government ownership. However, with 28 firms, the sole proprietorship form represents the highest number of companies in the sample.

In terms of corporate governance, sole proprietorship companies operate mainly in duality CEO/Board chairman. According to the agency theory, this can mitigate or exacerbate agency problems. Agency problems arise when the relationship between board chairman and CEO is not facilitated and information asymmetries are high in the management of the company. However, we observe that this organisational form contributed enough in the variation of the workforce because it was the second contributor. This could suggest that it served to reduce agency problems.

In contrast, we can observe that from 2008 to 2010 companies in shareholding not listed on the stock market reduced the number of full employees, despite their second rank in terms of number of full employees in the sample. In comparison with the sole proprietorship form, we can assume that the former legal form complicates and exacerbates agency problems.

About age of companies, we can observe that in average Rwandese manufacturing companies are relatively young (between 10 and 17 years). Only the shareholding company listed on the stock market is above 50 years old (see Table 2). Partnership and shareholdings not listed have above 15 years, while the limited partnership is the last with 10 years. This attests that in Rwanda, survival of firms is lower and that the legal organisational form is important for their sustainability. Also, this predicts that in the Rwandese manufacturing industry, probably the corporate entrepreneurship is still weak.

Table 2.

Age of Firms According to Their Legal Status

Legal Status	Observations	Average	Min	Max
Shareholding with stock market	1	52	52	52
Shareholding without stock market	24	16	2	40
Sole proprietorship	27	12	3	41
Partnership	19	17	2	49
Limited partnership	9	10	3	28
Total	80

Source: Authors’ calculations from RWA_2011_ES_v01_M_WB.

Considering extreme values, we observe heterogeneity among the highest age of firms. The smallest age lies between 2 and 3 years while the highest age lies between 28 and 52 years. As seen earlier, limited partnership form counts the lower highest age, whereas partnership form has the highest aged firm (after the unique shareholding company listed on the stock market). Further, ages of sole proprietorship firms seem to be more dispersed, assuming that companies in this legal form are less sustainable.

If we consider the ownership structure, majority of shares belong to private domestic owners. For four legal forms out of five, the percentage of shares is above 50 per cent of private domestic ownership. Only the limited partnership is dominated by the private foreign ownership (51 per cent). This attests that in the Rwandese manufacturing industry, the foreign direct investment is still low, particularly in the sole proprietorship and shareholding firms listed or not. Probably, foreign shares are much more invested in partnership companies rather than in other legal forms.

Also, counting for age of firms, we can observe that majority of foreign investments are in the youngest legal form (see Tables 2 and 3). Thus, more effort is still needed to attract foreign direct investments in the manufacturing sector.

After description of firms’ characteristics, in the next paragraphs, we present results about the relationship between corporate governance and corporate entrepreneurship and between corporate governance and firm performance.

Table 3.

Ownership Structure in the Manufacturing Industry

Legal Status	% of Private Dominant Owners				% of Private Foreigners
Legal Status	Observations	Average	Min.	Max.	Observations	Average	Min.	Max.
Shareholding with stock market	1	100	100	100	1	0	0	0
Shareholding without stock market	24	82	0	100	24	18	0	100
Sole proprietorship	28	85	0	100	28	11	0	100
Partnership	19	76	0	100	19	24	0	100
Limited partnership	9	49	0	100	9	51	0	100
Total	81				81

Source: Authors’ calculations from RWA_2011_ES_v01_M_WB.

Effects of Corporate Governance on Corporate Entrepreneurship

In order to evaluate impacts of corporate governance on corporate entrepreneurship, we have estimated Equations (2) and (3) as described in the methodological section. Empirical results are summarised in Table 4.

Table 4.

Effects of Corporate Governance Mechanisms on Corporate Entrepreneurship

Dependent Variables	Change in Workforce		Change in Sales Revenue (log form⁴ 4 In order to overcome the problem of big coefficients, the variable ‘change in sales revenue’ is in log form. )
Dependent Variables	Coefficient	p-Values	Coefficient	p-Values	Coefficient	p-Values
Shareholding not listed	−8.964742	0.022	−1.192655	0.034	−0.954257	0.070
Sole proprietorship	−2.979111	0.200	−1.312172	0.001	−1.226147	0.001
Partnership	−2.579747	0.185	−0.581776	0.113	−0.456034	0.170
Added value	5.40E-09	0.074	—	—	—	—
Informal competition	1.716437	0.730	—	—	0.807921	0.248
Manager experience	1.179775	0.001	—	—	0.073347	0.073
Manager education	2.005909	0.295	—	—	0.486421	0.135
Constant	−14.55082	0.208	21.14576	0.000	17.05185	0.000
Observations	33		30		29
R ²	0.6743		0.3635		0.6152
Probability > F	0.0001		0.0075		0.0009

Source: Authors’ computations from RWA_2011_ES_v01_M_WB.

We can observe that shareholding companies not listed contribute significantly and negatively to the corporate entrepreneurship for all entrepreneurship variables considered (workforce and sales revenue). The sole proprietorship form lowers entrepreneurial activity when we consider sales revenue. The negative contribution of the first legal organisational form shows that it facilitates exacerbation of agency problems. Particularly, the negative contribution of the sole proprietorship conforms to the literature which states that in developing countries family-controlled firms (mainly in sole proprietorship) face important financial constraints (Hanazaki & Liu, 2007) and are therefore not able to invest in strategic activities. Here, the problem is less from the governance mechanisms; it is rather from their difficulty to finance access.

Another element of corporate governance considered is the background of the top manager. This variable is the proxy of strategic leadership. We can observe that the coefficient has a predicted positive sign. Also, for one variable (experience) of the management background, coefficients are statistically significant. This might attest that when top managers are experienced, they are also well remunerated and motivated, and this helps them to participate effectively in entrepreneurial activity of the company.

Other factors of corporate entrepreneurship considered are the business environment and the firm financial performance. About the business environment, we considered if the firm faces the informal competition or not, while the financial performance is represented by the economic added value. Coefficients of these two variables are positive as predicted. However, only the added value has a significant coefficient even if the coefficient itself is too low.

These two results can be interpreted as that the competition is not enough to boost entrepreneurial innovations in the manufacturing industry, and that the financial performance is still low and does not help enough to boost innovations and risk-taking behaviours of managers. This complements our interpretation of the negative contribution of companies in sole proprietorship, which are mainly family-controlled and face big financial constraints.

Effects of Corporate Governance on Financial Performance

In order to investigate the relationship between corporate governance and firm performance, we refer to Table 5 which summarises results from estimates of Equation (4). We recall that it is an augmented Cobb–Douglass production function, where control variables represent the corporate governance and the business environment.

About impacts of variables representing the traditional Cobb–Douglass production function, we can observe that only variables representing capital are statistically significant. They are expenses on electricity and raw materials. This attests that investments in public infrastructures, mainly in power energy, are essential for the entrepreneurship development in Rwandese manufacturing industry. Electricity permits to use effectively and efficiently plant’s equipments. Also, the availability of raw materials is important for the entrepreneurship development of manufacturing firms, of which majority are agro processing (NISR, 2016).

When considering effects of variables representing the corporate governance, only the education level of top managers contributes positively to financial performance of manufacturing firms. Managers who have enough skills improve the financial management, and thus, the financial performance of their companies. The coefficient of manager’s experience is positive but not significant. When linking this section to the previous one, we can suggest that top managers who are well educated and experienced, are also well motivated and have a good leadership. Consequently, they contribute positively to corporate entrepreneurship and firm financial performance.

Table 5.

Effects of Corporate Governance on Firm Performance

	Coefficient	p-Values
Dependent variable: log added value
Log number of full-time employees	0.0054716	0.633
Log electricity expenses	0.0148564	0.022
Log raw materials expenses	0.0164065	0.011
Shareholding without shares on stock market	−0.0027146	0.842
Sole proprietorship	−0.0222667	0.014
Partnership	−0.0044129	0.548
Informal competition	−0.0441074	0.039
Log manager experience	0.0193101	0.135
Log manager education	0.0442033	0.051
Constant	2.371966	0.000
Observations	35
R ²	0.8510
Probability > F	0.0000

Source: Authors’ computations from RWA_2011_ES_v01_M_WB.

About the organisational form of the company, the sole proprietorship is related significantly but negatively to the firm financial performance. As seen earlier, this negative relationship confirms the negative contribution of firms in sole proprietorship on entrepreneurial initiatives because they have important financial constraints.

We can also observe that the expected sign of the business environment coefficient and its significance are as predicted. Firms which face informal competition have also a low financial performance. Thus, even if the informal competition has no effects on corporate entrepreneurship of manufacturing firms, it reduces significantly their financial performance. We can interpret this result as the superior competitiveness of informal firms in comparison with formal companies in the manufacturing industry.

Further, change in size (full employees) of Rwandese manufacturing firms has no effect on their financial performance because the coefficient is small and not significant. Otherwise, positive variation of employees observed earlier, and considered as consequence of entrepreneurship development, does not influence the financial performance. However, as seen earlier, the financial performance influences positively the corporate entrepreneurship even if slightly. There is not a two ways relationship between financial performance and corporate entrepreneurship; entrepreneurial activities are not enough to impact financial performance even if the reverse is true. Change in number of full time employees is not motivated by firms’ financial performance. This surprising result can be interpreted as short term view of this analysis which is limited to cross-sectional data.

Conclusions

The dual aims of this article were of determining the effects of corporate governance on corporate entrepreneurship and on firm performance. To address these two objectives, we employed two complementary methodological approaches. The first approach was to deal with estimate of business environment variables and corporate governance variables on corporate entrepreneurship, represented here by the change in the firm’s size. The second approach used the augmented Cobb–Douglass production function in order to estimate the effects of business environment and of corporate governance on the corporate performance.

This study resulted in four main outcomes: (a) the background of top managers (experience and education level) contributes significantly to both corporate entrepreneurship and corporate performance; (b) the sole proprietorship organisational form and non-listed shareholding companies are negatively related to entrepreneurial activities. In addition, companies in sole proprietorship face in average a poor financial performance; (c) electricity and raw materials expenses contribute significantly and positively to financial performance of Rwandese manufacturing firms; and (d) informal competition has no effect on entrepreneurial activities of manufacturing firms, however, it harms their financial performance.

The first result of this study conforms to the literature (Brown & Caylor, 2009; Vo & Nguyen, 2014) which states that skills and motivation of top managers render them good strategic leaders and permits them to be creative and proactive and to improve firms’ financial performance. The second result is also similar to the theory and to previous empirical findings: listed shareholding companies favour agency problems and weaken entrepreneurial initiatives (Atmaja et al., 2009) while managerial duality, CEO/Board Chair,²

Most of firms in sole proprietorship are managed in duality CEO/board chair.

negatively impacts the financial performance of firms (Cheema & Din, 2013). Further, this result enriches the literature because it extends this finding to non-listed shareholding firms.

The last two findings confirm and give insights to claims of manufacturing firms’ proprietors. They argue that the major drawback of their activity is the shortage of electricity and of raw materials (NISR, 2016). Also, sometimes they claim against the informal competition which can sap their business. However, for this last argument, our analysis shows that the informal competition is neutral vis-à-vis their corporate entrepreneurship even if it can lower their financial performance.

According to empirical findings above and in order to boost entrepreneurial activities of manufacturing firms, we recommend focusing more on the experience and motivation of top managers. However, in order to improve the financial performance of firms, it is better to improve education and skills of top managers (CEO and Boards members). Also, we suggest helping manufacturing firms in sole proprietorship to access finance, the key element for their internal entrepreneurship development. Firms in sole proprietorship are small and young (see Tables 1 and 2). However, they constitute a big proportion of the Rwandese manufacturing industry and contribute enough to job creation (see Table 1). Consequently, improvement of their entrepreneurial activity will impact positively and significantly on the whole manufacturing industry.

Further, we advise availing electricity and raw materials in order to improve the manufacturing entrepreneurial activity and financial performance. As noted earlier, majority of Rwandese manufacturing firms are agro processing which face the shortage of inputs because of seasonality. Also, according to MINICOM (2010), among other challenges faced by SMEs in Rwanda, transport and energy are the biggest challenges to manufacturing firms in the country. Thus, availability of raw materials is possible through improvement of farming technology, road infrastructure and transformation and storing technology. However, the latter is only possible if enough and cheaper electricity is available.

However, this study has used cross-section data collected 6 year ago. Consequently, we think that resulted findings give a short-term view and might be a bit different from the current reality. Thus, we suggest extending the analysis using the newly collected panel data, mixing quantitative and qualitative approaches in order to bring closer to the real world.

Declaration of Conflicting Interests

The author(s) declared no potential conflicts of interest with respect to the research, authorship and/or publication of this article.

Funding

The author(s) received no financial support for the research, authorship and/or publication of this article.

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