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Nybakk, E. 2012. Learning orientation, innovativeness and financial performance in traditional manufacturing firms: a higher-order structural equation model. International Journal of Innovation Management 16(5): 28 pp.

Learning orientation, innovativeness and financial performance in traditional manufacturing firms: a higherorder structural equation model

Erlend Nybakk Norwegian Forest and Landscape Institute, Pb 115, NO-1431 AAs, Norway. Tel: +4764949099. E-mail: [email protected]

Abstract This study examines the relationships among learning orientation, firm innovativeness and financial performance in the context of the Norwegian wood industry. A questionnaire-based survey was sent to the CEOs of firms in the wood industry in Norway (241 usable replies, response rate of 49 percent). Learning orientation and firm innovativeness were conceptualised and analysed as latent second-order constructs using structural equation modelling. The findings show that learning orientation has a positive effect on firm innovativeness in the traditional manufacturing industry. In addition, learning orientation was found to positively affect financial performance via the full mediating effect of firm innovativeness. Furthermore, firm innovativeness was also found to have an independent positive effect on financial performance. No direct effect of learning orientation on financial performance was found. According to the data, firm age also does not appear to affect the relationship between learning orientation and firm innovativeness. Keywords Learning orientation, learning commitment, shared vision, open-mindedness, intraorganisational knowledge sharing, innovation, innovativeness, traditional manufacturing firms, wood industry.

Electronic version of an article published as [International Journal of innovation management, Volume 16, Issue 5, 2012, 28pp] [DOI No: 10.1142/S1363919612003873] ©[copyright World Scientific Publishing Company] [http://www.worldscinet.com/ijim/]

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Nybakk, E. 2012. Learning orientation, innovativeness and financial performance in traditional manufacturing firms: a higher-order structural equation model. International Journal of Innovation Management 16(5): 28 pp.

1 Introduction Over the past several decades, scholars have increasingly focused on innovation as a key factor in the creation of firms’ sustainable competitive advantages. Many researchers have found evidence for a relationship between innovativeness and performance (Damanpour et al., 1989; Hurley and Hult, 1998; Narver and Slater, 1990; Sinkula et al., 1997). Researchers have frequently mentioned learning orientation as one of the antecedents of innovativeness (Calantone et al., 2002; Slater, 1995; Wang, 2008). In addition, learning orientation is important for a firm’s competitive advantage (Sinkula et al., 1997), and the literature has generally focused on the effects of learning orientation on financial performance (Wang, 2008). Recently, however, the focus has widened to include innovativeness as a mediating factor (Akgün et al., 2007; AragónCorrea et al., 2007; Keskin, 2006; Rhee et al., 2009). Other researchers have found that learning orientation affects performance and that innovativeness is a mediating factor that also directly affects performance (Calantone et al., 2002; García-Morales et al., 2007). Lloréns Montes et al. (2005) found that organisational learning influences the administrative and technical innovation gap as well as performance, but they also discovered that organisational learning has a direct effect on performance. In summary, the literature is inconsistent in terms of whether innovativeness plays a partial or full mediating role in the relationship between learning orientation and firm performance. This study examines the relationships among learning orientation, firm innovativeness and financial performance in the context of traditional manufacturing firms. The moderating effect of firm age was also tested. In the present study, learning orientation is defined as a firm’s degree of commitment to learning, shared vision, open-mindedness and intra-organisational knowledge sharing. Firm innovativeness is defined as the degree to which a firm creates and/or adopts new products, manufacturing processes and business systems. Financial performance is defined as a firm’s key measure of financial success over time, such as return on sales and overall competitiveness. The majority of studies on the relationships among learning orientation, firm innovativeness and financial performance have ignored the direct effect of learning orientation on financial performance (see e.g., Hult et al., 2004; Rhee et al., 2009). Additionally, many studies have 2

Nybakk, E. 2012. Learning orientation, innovativeness and financial performance in traditional manufacturing firms: a higher-order structural equation model. International Journal of Innovation Management 16(5): 28 pp.

failed to test the significance level of the indirect effect, which is necessary to determine the total effect of learning orientation on financial performance. Furthermore, this approach does not clarify whether innovativeness has a partial or full mediating effect. This study seeks to fill this gap with a higher-order structural equation model and bootstrapping to determine whether the mediating effect of learning orientation is non-significant, partial or full (in addition to determining the total effect). Despite the large body of literature examining the relationship between learning orientation and firm innovativeness, scholars have yet to thoroughly investigate many areas and industries. Many studies have addressed specific contexts, such as companies in the USA with sales over $100 million (Hult et al., 2004), technology-intensive and innovation-oriented South Korean smalland medium-sized enterprises (SMEs) (Rhee et al., 2009), SMEs in Turkey (Keskin, 2006) and the hotel industry in Indonesia (Nasution et al., 2010). In another related study, Calantone (2002) examined technology companies in the USA that were large enough to have their own R&D programs. The results of these empirical studies may not be applicable to the traditional European manufacturing industry, which has received less scrutiny in this context (Becheikh et al., 2006). In addition, many of the studies mentioned above are cross-sectional; they examine a specific point in time and may be limited by survivorship bias. In other words, they are biased upwards and run the risk of overstating the impact of learning orientation on firm innovativeness and financial performance because the impact of learning orientation may be lower among firms that have gone out of business. Thus, researchers should conduct studies on this issue in a more homogeneous context. Additionally, as Calantone et al. (2002) emphasised, cross-national studies are important. Accordingly, this study investigates the relationships among learning orientation, firm innovativeness and financial performance in the context of the Norwegian wood industry, which is a relatively homogeneous and traditional industry (Sande, 2008). A large part of the literature on learning orientation and firm innovativeness does not account for important dimensions of firm innovativeness. The shallow operationalisation of firm innovativeness that is frequently used does not account for dimensions such as products, processes, markets and organisation innovativeness. For example, a company may be innovative at improving processes to reduce costs but not innovative at introducing new products to new

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Nybakk, E. 2012. Learning orientation, innovativeness and financial performance in traditional manufacturing firms: a higher-order structural equation model. International Journal of Innovation Management 16(5): 28 pp.

markets. If the aim is to build new knowledge in a new field, a basic operationalisation of firm innovativeness can be advantageous. However, these results must be validated by a more in-depth operationalisation of the term based on a long history of innovation research. Furthermore, prior researchers have emphasised that a universal and reliable scale for measuring innovativeness does not yet exist in the literature (e.g., Deshpande and Farley (2004). A clear definition of innovativeness and the creation of a reliable, robust and valid scale to measure innovativeness are necessary to build new knowledge in the field through survey-based studies. This study seeks to fill this gap by utilising a broad definition of firm innovativeness and a second-order construct evaluated via three first-order indicators: product, process and business system innovativeness. In summary, this study investigated whether and to what degree learning orientation affects financial performance both directly and through the mediation of firm innovativeness. A higherorder structural equation model and bootstrapping were used to determine whether the mediating effect of learning orientation is non-significant, partial or full. Additionally, the moderating effects of firm age on the direct relationships between learning orientation and firm innovativeness and between learning orientation and financial performance were investigated. The hypotheses presented in this paper were developed based on the questions mentioned above. The remainder of the paper presents information on the theoretical background for the research, followed by the method, analyses, results, discussion, implications and limitations of the study.

2 Theoretical background and hypotheses

2.1 Innovativeness and learning orientation Although there are various definitions of innovation and innovativeness in the literature (Garcia and Calantone, 2002), this study defines firm innovativeness as the propensity of firms to create and/or adopt new products, manufacturing processes and business systems. Thus, the focus is on products, processes and business systems that are new to a firm but not necessarily new to the market. Accordingly, firm innovativeness includes both adoption and more radical innovations. Product innovation includes the development of new products, improvements to existing products and the adoption of products and is widely recognised as an important factor for manufacturing 4

Nybakk, E. 2012. Learning orientation, innovativeness and financial performance in traditional manufacturing firms: a higher-order structural equation model. International Journal of Innovation Management 16(5): 28 pp.

firms (Cooper, 1999; Cormican and O'Sullivan, 2004; March-Chordà et al., 2002; Wheelwright and Clark, 1992). Product innovativeness is frequently defined as a product’s level of newness in relation to the firm and the market (Song and Montoya-Weiss, 1998). One of the relevant processes involves the production process. Process innovativeness is defined as the action that leads to process innovation and as the process itself (i.e., the technologies and improvements used in production) that constitutes the innovation (Tatikonda and MontoyaWeiss, 2001). The process must be new, improved or newly adopted to be innovative. Business system innovativeness can apply to every aspect of the firm that is necessary to manage, structure, operate and administer the business and its internal and external environments. Innovation in business systems includes organisational innovations (defined as the creation or adoption of ideas or behaviours new to the organisation) and the use of new managerial and working concepts and practices (Damanpour, 1987, 1996; Damanpour and Evan, 1984). Wang (2008) conceptualises learning orientation as those firm values that influence a firm’s approach to acquiring information. They emphasise the importance of planned processes in allowing firm learning to lead to the achievement of common organisational goals. Other scholars take a strict approach and claim that for meaningful learning to occur, learning must result in a behavioural change (Fiol and Lyles, 1985; Garvin, 1993). In contrast, Hurley and Hult (1998), Huber (1991) and Slater and Narver (1995) argue that the new knowledge a company acquires will create the potential for the firm’s values to influence its behaviour. Thus, they do not require an actual change in behaviour. In this study, a learning organisation is defined as an organisation with a learning orientation. Following Calantone (2002), this study defines a firm with a learning orientation as a firm that creates and uses knowledge to obtain a competitive advantage, especially if the process involves strategic planning and is executed across the whole organisation. Furthermore, in accordance with Calantone et al. (2002), the term learning orientation is defined as a firm’s commitment to learning, shared vision, open-mindedness and intra-organisational knowledge sharing. A learning orientation helps a firm to acquire, disseminate and share information (Wang, 2008). Tidd (1997) argued that organisations focused on learning can achieve a better understanding of the

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Nybakk, E. 2012. Learning orientation, innovativeness and financial performance in traditional manufacturing firms: a higher-order structural equation model. International Journal of Innovation Management 16(5): 28 pp.

organisational factors that affect the acquisition of new knowledge related to technology and the market.

2.2 Frameworks and hypotheses In this study, learning orientation is a higher-order construct comprising the following variables: commitment to learning, shared vision, open-mindedness and intra-organisational knowledge sharing. Firm innovativeness is a higher-order construct consisting of the following variables: product innovation, process innovation and business system innovation. Financial performance is a first-order construct. The conceptualised model hypothesises that learning orientation will have a positive effect on financial performance both directly and through the mediation of firm innovativeness. Firm age is expected to act as a moderating factor that enhances the effect of learning orientation on firm innovativeness and the effect of learning orientation on financial performance.

Figure 1 Theoretical framework of the study showing the study’s six hypotheses Dotted line = hypothesised indirect positive effect Solid line = hypothesised direct positive effect.

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Nybakk, E. 2012. Learning orientation, innovativeness and financial performance in traditional manufacturing firms: a higher-order structural equation model. International Journal of Innovation Management 16(5): 28 pp.

2.2.1 Direct effect of learning orientation on financial performance (H1) Learning orientation is thought to be important for the development of competitive advantage and the improvement of financial performance over time (Fiol and Lyles, 1985; Garvin, 1993; Kropp et al., 2006; Sinkula, 1994; Slater, 1995). Calantone et al. (2002) found a direct link between learning orientation and financial performance, and Senge (1990) claimed that for learning to positively affect performance, a firm has to engage strategically in the field of learning. A firm’s learning orientation will help the firm to use information from its customers to improve its products and services, increase its sales and maintain a larger customer base. The learning orientation can also increase the firm’s knowledge base and enable it to utilise its resources more effectively. For example, in traditional manufacturing firms, knowledge about raw materials and technical knowledge about machinery can be critical to performance. A firm’s ability to acquire and apply this knowledge to its operations is a cornerstone of its learning orientation (Garvin, 1993). A larger knowledge base achieved through continuous learning processes will also render the firm a more attractive collaborator to its competitors, suppliers and customers. For example, a sawmill and wood supplier is attractive if it has a high degree of fundamental knowledge about how to use wood. Furthermore, for a firm to improve its performance over time, the firm must learn to understand and satisfy its customers’ demands (Day, 1994; Narver and Slater, 1990). Additionally, a firm with a learning orientation will typically monitor its competitors’ behaviours in the market (Gatignon and Xuereb, 1997) to understand and learn from their strengths and weaknesses (Calantone et al., 2002; Lant and Montgomery, 1987). Firms with a learning orientation can achieve higher levels of strategic capability (GarcíaMorales et al., 2007), which allows them to build long-lasting competitive advantages (Sinkula et al., 1997). Such firms tend to be more perceptive and better at coping with significant environmental changes (Day, 1994). However, the learning orientation must be implemented properly. For example, Garcia-Morales et al. (2007) emphasised that although the knowledge shared among employees can result in a learning orientation (and thus in a higher financial performance), errors can occur during the knowledge-sharing process, with negative

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Nybakk, E. 2012. Learning orientation, innovativeness and financial performance in traditional manufacturing firms: a higher-order structural equation model. International Journal of Innovation Management 16(5): 28 pp.

consequences for a firm’s overall profits. Regardless of the potential errors and time lags, this line of reasoning supports the following hypothesis:

H1: A higher level of learning orientation will have a direct positive effect on a firm’s financial performance.

2.2.2 The indirect effect of learning orientation on financial performance via firm innovativeness (H4) Learning orientation is thought to be an important antecedent of firm innovativeness or innovation capacity (Alegre and Chiva, 2008; Calantone et al., 2002; Damanpour, 1991; Liao et al., 2008). Scholars have argued that both learning orientation and market orientation are important antecedents of firm innovativeness (Hurley and Hult, 1998; Lin et al., 2008; Rhee et al., 2010; Sinkula, 1994; Slater, 1995). Several researchers have viewed learning orientation as a mediator in the relationship between market orientation and firm innovativeness (e.g. Lin et al., 2008). Others have emphasised the importance of employee creativity to innovation and competitive advantage (Amabile, 1988, 1996; Hirst et al., 2009). Akgün et al. (2007) found that a firm’s emotional capacity has a positive effect on its learning capability and product innovation. They argued that a firm’s emotional capability helps it to focus its employees on new product development and firm innovativeness. Clearly, most empirical research on the relationship between learning orientation and firm innovativeness is conducted on large firms (Keskin, 2006), which have more of the resources needed for innovation and can take on a larger degree of risk because they can diversify their risk by linking it to various activities throughout the firms (McDade et al., 2002). However, others have argued that small firms exhibit relatively more innovation per employee (Acs and Audretsch, 1990). Smaller firms have other advantages, such as a less extensive bureaucracy (Thompson, 1969), and can access resources by collaborating with other actors (Ahuja, 2000). Furthermore, one line of empirical studies has shown the importance of learning orientation to firm innovativeness among SMEs (e.g. Chaston et al., 2001; Keskin, 2006).

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Nybakk, E. 2012. Learning orientation, innovativeness and financial performance in traditional manufacturing firms: a higher-order structural equation model. International Journal of Innovation Management 16(5): 28 pp.

The literature has also thoroughly debated the relationship between firm innovativeness and financial performance. Countless studies have been performed in different fields to investigate the relationships between firm innovativeness and financial performance (e.g. Calantone et al., 2002; Deshpandé and Farley, 2004; Kohli and Jaworski, 1990; Narver and Slater, 1990; Rhee et al., 2010) and between innovation and financial performance (e.g. Damanpour et al., 1989; García-Morales et al., 2007; Hurley and Hult, 1998). Akgün et al. (2007) found a positive relationship between product innovativeness and financial performance. West and Farr (1989) emphasise that although innovations are expected to create benefits, the benefits will vary and might not accrue at all. Uncertainty is inherent to innovation, which involves risk, and a positive outcome is not guaranteed. Some researchers have shown that innovation does not necessarily lead to improved financial performance (Cooper, 2001). However, the majority of researchers claim that innovation and firm innovativeness are the key components of firm success (Hult et al., 2004) and that the innovations that allow a firm to achieve a competitive advantage will contribute to its financial performance (Damanpour, 1991). Based on the literature examining the effect of learning orientation on firm innovativeness and the effect of firm innovativeness on financial performance, one can logically assume that learning orientation will have an indirect positive impact on financial performance via firm innovativeness. Understanding how firms’ learning orientations indirectly affect financial performance via firm innovativeness is complex. However, this conclusion is supported by the findings of empirical studies. Garcia-Morales et al. (2007) studied farming, manufacturing, construction and service firms in Spain and found that learning orientation both directly and indirectly affects the financial performances of large firms and SMEs through innovation. A continuous learning process that creates new knowledge and builds and maintains a knowledge base is also a cornerstone of innovation activity (García-Morales et al., 2007). Both the knowledge base itself and the process of knowledge creation are important to innovation. Cohen and Levinthal (1990) have argued that a firm’s ability to recognise the value of new external knowledge and to adapt and apply this knowledge to the business is critical to the firm’s innovation capabilities. Because highly learning-oriented firms tend to make better use of the information available to them, they are more likely to be innovative. If knowledge circulates and

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Nybakk, E. 2012. Learning orientation, innovativeness and financial performance in traditional manufacturing firms: a higher-order structural equation model. International Journal of Innovation Management 16(5): 28 pp.

creates firm innovativeness, a firm’s capacity to innovate may be enhanced and thus improve its financial performance. This idea yields the following hypotheses:

H2: A higher level of learning orientation in firms leads to greater firm innovativeness. H3: Greater firm innovativeness leads to better financial performance. H4: Learning orientation will positively influence financial performance in an indirect manner via firm innovativeness.

2.2.3 Age as a moderating effect (H5 and H6) The age of an organisation is thought to moderate the effect of learning orientation (Calantone et al., 2002; Sinkula, 1994). The ideas and information needed for innovation are often found outside of the organisation (Jenssen and Nybakk, 2009), and information is gathered through many different channels, including customers, suppliers and distributors. It takes time to build strong relationships with customers and suppliers. Hence, older organisations have an advantage over younger ones because the former have had more time to build the relationships that allow them to obtain market information more efficiently. Therefore, Sinkula (1994) claims that older firms have better access to information than younger firms. Older organisations also have had more time to build efficient systems to gather and share information (Lukas et al., 1996). Moreover, older organisations have accumulated more knowledge in selecting and employing information. If the above statements hold, then the firm innovativeness and financial performance of an organisation with a high level of learning orientation will improve as it grows older (Calantone et al., 2002). This reasoning supports the following hypotheses:

H5: The older the organisation is, the stronger the relationship between learning orientation and firm innovativeness.

H6: The older the organisation is, the stronger the relationship between learning orientation and financial performance.

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Nybakk, E. 2012. Learning orientation, innovativeness and financial performance in traditional manufacturing firms: a higher-order structural equation model. International Journal of Innovation Management 16(5): 28 pp.

3 Methods 3.1 Empirical setting – the wood industry This paper addresses the relationship between learning orientation, firm innovativeness and financial performance within the Norwegian wood industry. Specifically, the study includes sawmills, planning mills, laminated wood factories, furnishing and wood-product producers, producers of paper, cellulose and wood pulp, and fibreboard firms. There were several reasons why we selected this context. In doing so, we sought to validate previous findings by studying a traditional manufacturing industry with well-established traditions, and the wood industry meets these requirements (Sande, 2008). According to Jakobsen et al. (2001), the Norwegian wood industry has exhibited a low growth rate relative to that of other industries. The sector’s economic growth has been steadily sinking and its profitability has been lower than that of other sectors. Through analyses of the business environment in the forest and timber trades, Jakobsen et al. (2001) identified four main problems: 1) isolation, which hinders the transfer of knowledge and stimuli; 2) low levels of competence at utilising market opportunities and research, and the results of commercial development; 3) little direct contact with international markets; and 4) weak pressure on innovation. Most firms in the industry are also in a mature phase of their lifecycle (Sande, 2008). By choosing a traditional, homogeneous industry in Norway, one have ensured a certain isolation of the study and minimal variation in unknown variables (Sande, 2008). However, it was also important to ensure adequate variation in the variable. The Norwegian wood industry fulfils both demands because it typically uses the same raw materials and has the same end market (the building products market) (Sande, 2008). At the same time, it is an industry that is comprised of a variety of firms that produce many different products from simple components to complicated products such as furniture and stairs.

3.2 Study design and questionnaire development This study was conducted using mail surveys in conjunction with theories regarding causal connections. Higher-level constructs are represented by empirically observed variables. The

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Nybakk, E. 2012. Learning orientation, innovativeness and financial performance in traditional manufacturing firms: a higher-order structural equation model. International Journal of Innovation Management 16(5): 28 pp.

models consist of several hypotheses (those previously mentioned). The hypotheses were tested using structural equation modelling in the statistical tool EQS. A questionnaire was developed that included three different parts: learning orientation, firm innovativeness and financial performance. Questions were also included that asked about job title, average annual sales in the business for the previous three years, the date when the firm was established, the number of employees in the company’s production division and which products they produced. Although all of the questions were from previous studies, the questionnaire was tested by several researchers. Furthermore, the questionnaire was thoroughly scrutinised by a vice-president from a firm in a corresponding industry. Because all of the questions were derived from earlier studies, a full pilot study was not conducted.

3.3 Measurement All latent variables were tested and measured using multiple items based on previous studies (as recommended in’ Churchill Jr., 1979). Firm innovativeness was measured as a second-order construct via three first-order indicators: product innovation, process innovation and business system innovation. The firm innovativeness scale was based on previous studies (i.e., Avlonitis, 1994; Deshpandé et al., 1993; Knowles et al., 2008; Wang and Ahmed, 2004) as shown in Appendix 1. A seven-point Likert scale was used to measure the first-order indicators, which ranged from 1 (strongly disagree) to 7 (strongly agree). Learning orientation was measured as a second-order construct and was measured through four first-order indicators based on work by Calantone et al. (2002) and several earlier studies (Galer and Van der Heijden, 1992; Hult and Ferrell, 1997; Sinkula et al., 1997). The four following under-dimensions were commitment to learning, shared vision, open-mindedness and intraorganisational knowledge sharing. Each of the dimensions was measured using three items. The three items with higher standard loadings based on Calantone et al.’s (2002) study were selected (see Appendix 2). A seven-point Likert scale was used to measure the first-order indicators; the scale ranged from 1 (strongly disagree) to 7 (strongly agree).

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Nybakk, E. 2012. Learning orientation, innovativeness and financial performance in traditional manufacturing firms: a higher-order structural equation model. International Journal of Innovation Management 16(5): 28 pp.

Financial performance was measured using four items based on Dess and Robinson (1984). These items were return on sales, sales growth rates, after-tax returns on assets and overall competitiveness (see Appendix 3). The items were measured using a self-rated subjective scale, with the respondents asked to rank their firm’s level of facility as compared with that of their competitors in the industry. The lowest and highest quintiles were 1 and 5 respectively.

3.4 Sampling, data collection and non-response bias Although this is a relatively large industry in the Norwegian context, there are a limited number of firms in the industry. Through the relevant special interest organisations, we obtained contact information for approximately 80 to 90% of the total population of firms. The data collection process was accomplished with the help of an electronic web survey. Because there was no access to the membership lists for the furniture industry (including via e-mail), two different collection methods were used. Both collection methods were modified versions of the data collection design suggested by Dilman (2000). CEOs in single-manufacturing wood-product facilities were used as key informants because they are well positioned to evaluate different aspects of their respective firms (Baer and Frese, 2003; García-Morales et al., 2007). A letter was sent out to the CEOs of the furniture industry (about 100 firms) requesting that they participate in the study. There were 36 answers received. Four hundred twenty one e-mails, each with a link to the web study, were sent out to the CEOs in the remaining sample. After the e-mail study was complete (in approximately four weeks), a list was made of those who had not replied to either the postal or the e-mail inquiries. Each of the firms on this list was sent a new questionnaire with a return envelope. In total, there were 255 replies to 492 requests (the total made to the correct addresses). The total response rate was therefore 52%. Of the replies received, 241 were usable. The others were discarded because the firm had less than two employees, because it was a cooperative, because the main office had responded instead of the production plant or division, or because the form was not completely filled out. This procedure lowered the response rate to 49%.

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Nybakk, E. 2012. Learning orientation, innovativeness and financial performance in traditional manufacturing firms: a higher-order structural equation model. International Journal of Innovation Management 16(5): 28 pp.

Despite a relatively high response rate, non-response bias was analysed using a t-test in which the early and late respondents were compared (Armstrong and Overton, 1977). The firms were compared with respect to age, size, learning orientation, firm innovativeness and financial performance, and non-significant differences were identified (P>0.05). No non-response bias was found (Armstrong and Overton, 1977).

4 Analyses and results 4.1.1 The measurement Model The measurement model consisted of two second-order constructs (learning orientation and firm innovativeness) and one first-order construct (financial performance). Firm innovativeness consisted of three first-order factors (process, product and business systems), whereas learning orientation consisted of four first-order factors (commitment to learning, shared vision, openmindedness and intra-organisational knowledge sharing). Each of the constructs was measured using three to five items (Tables A1, A2 and A3 in the appendix). After testing (i.e., after Lagrange & Wald tests and a reliability analysis had been conducted), two of the indicators for product innovativeness were deleted because of poor metrics. Consistent with the literature, it was considered acceptable for two error terms (“return on sales” and “return on assets”) for financial performance to be correlated (Hansen et al., 2006). Closeness among the items may result in repeatable errors (Gerbing and Anderson, 1984).

First-order factors The revised measurement model with the loading coefficients and error variance for all manifest indicators was tested. The t-values for the factor loadings varied from 10.0 to 17.5 (p < 0.01), indicating the convergent validity of the indicators (Anderson and Gerbing, 1988). Furthermore, reliability and variance extracted were appropriate, especially given the rather conservative nature of the test for the latter (Hatcher, 1994). Robust estimators were used to adjust for deviations from analysis assumptions. The measurement model showed acceptable fit (* SatorraDentler χ2 (SB χ2) = 853, df = 396, p < 0.01, * Comparative Fit Index (CFI) = 0.92, *Incremental

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Nybakk, E. 2012. Learning orientation, innovativeness and financial performance in traditional manufacturing firms: a higher-order structural equation model. International Journal of Innovation Management 16(5): 28 pp.

Fit Index (IFI) = 0.92, * Non-normed Fit Index (NNFI) = 0.92, SBX2/df = 2.2, Standardised Root Mean Residual (SRMR) = 0.064, * Root Mean Square Error of Approximation (RMSEA) = 0.057 [0.050, 0.064], Bollen's Rho=0.96) with 88% of the residuals in the -0.1 to +0.1 range. The construct correlations for the first-order factors are shown in Table 1.

Table 1. Construct correlations Second-Order

First-Order F1 F2 F3 F1 Financial performance 1 Firm F2 Product innovativeness .33 1 Innovativeness F3 Process innovativeness .47 .76 1 F4 Business System .35 .65 .67 innovativeness Learning F5 Commitment to learning .21 .43 .42 Orientation F6 Shared vision .24 .33 .30 F7 Open-mindedness .28 .46 .49 F8 Intra-organisational .11 .35 .33 knowledge sharing Note: all significant at P