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Product
The effects of entrepreneurs’ innovation
moral awareness and ethical
behavior on product innovation of
new ventures 421

Evidence from China Received 16 October 2017

Revised 21 March 2018
13 September 2018
Yiyuan Mai and Wenge Zhang Accepted 10 November 2018
School of Management, Huazhong University of Science and Technology,
Wuhan, China, and
Lihua Wang
College of Business, San Francisco State University,
San Francisco, California, USA

Abstract
Purpose – The purpose of this paper is to apply the social cognitive theory and social learning theory to
examine the different mechanisms through which entrepreneurs’ moral awareness and ethical behavior affect
the product innovation of new ventures.
Design/methodology/approach – The authors collected survey data from 150 founders and 389
founding team members of new ventures in China in 2015. The final sample contained 113 questionnaires
from entrepreneurs and 246 questionnaires from their founding team members. Regression analyses were
used to test direct effects, and Preacher and Hayes’ (2004) formal mediation test approach with bootstrapping
method was used to evaluate the mediation effects.
Findings – The findings indicate that the ethical levels of entrepreneurs can affect the product
innovation of a new venture through two paths: entrepreneurs with low levels of moral awareness tend
to be more individually creative, which facilitates product innovation, and entrepreneurs with high
levels of ethical behavior can make founding teams more creative, which also promotes product
innovation.
Practical implications – The findings of this study suggest that entrepreneurs are not negatively
affected by their low moral awareness as long as they exhibit high ethical behavior with founding team
members. But such low moral awareness has to be genuine. The best way to promote product innovation in
the long run is to create an organizational culture of ethical behavior rather than to ignore moral issues in
decision-making.
Originality/value – This study challenges the assumption that moral awareness and ethical behavior are
always consistent. It takes an initial step to resolve the contradiction in the current literature regarding the
relationship between the ethical levels of entrepreneurs and product innovation in the context of founders and
founding teams in new ventures.
Keywords Product innovation, Entrepreneurs, Ethical leadership, Creativity, Moral awareness
Paper type Research paper

Chinese Management Studies

Vol. 13 No. 2, 2019
This research is funded by Chinese National Science Foundation Grant (project # 71672064). An pp. 421-446
earlier version of this paper was presented at the Academy of Management Meeting, Atlanta, GA, © Emerald Publishing Limited
1750-614X
August 4-8, 2017. DOI 10.1108/CMS-10-2017-0302
CMS Introduction
13,2 Entrepreneurs regularly face ethical dilemmas and need to choose between pursuing
personal gains and following moral principles (Morris, 2016). Their choices may not only
impact their firms’ stakeholders but also affect firm behavior and performance (Berrone
et al., 2007). Past studies have found that the ethical level of an entrepreneur may affect a
firm’s behavior such as corporate social responsibility (Scherer and Palazzo, 2011), social
422 entrepreneurship (Santos, 2012), and the adoption of sustainable practices (Berrone et al.,
2013). In addition, a high ethical level of an entrepreneur may also positively affect a firm’s
outcomes such as profit, employee commitment, job satisfaction, and trust from major
stakeholders including employees, investors, and customers (Bedi et al., 2016; Ferrell et al.,
2013).
Product innovation capability is one of the significant indicators of firm performance in
today’s dynamic global environment (Davis et al., 1999). While ethics is increasingly
important and visible in decision-making processes associated with product innovation, few
studies have investigated the mechanisms through which the ethical levels of entrepreneurs
affect product innovation (Brusoni and Vaccaro, 2017; Fisscher et al., 2005; Miles et al., 2004;
Ward, 2015). Some scholars suggest a negative association between the ethical levels of
entrepreneurs and product innovation and argue that low levels of ethics are strongly
associated with generating creative ideas that facilitate product innovation (Brenkert, 2009;
Morris, 2016). Others, however, suggest that entrepreneurs who make ethical decisions can
ensure better organizational outcomes including employee creativity and ensuing product
innovation (Baucus et al., 2008; Ferrell et al., 2013; Tu and Lu, 2013).
One possible reason for these contradictory claims is that the ethical level of an
entrepreneur may be a multidimensional concept, but the prior literature typically treats it
as a one-dimensional concept. The entrepreneurship literature has mostly focused on
entrepreneurs’ ethical decision-making and behavior but has paid less attention to moral
awareness (Bryant, 2009; Wurthmann, 2017). By focusing on entrepreneurs’ ethical
behavior, past studies implicitly assume that the moral awareness of entrepreneurs is
consistent with their ethical behavior (Bryant, 2009; Jordan, 2009). An entrepreneur’s moral
awareness is defined as his or her ethical level as an individual who is aware of the moral
values embedded in everyday decisions, whereas an entrepreneur’s ethical (leadership)
behavior reflects his or her ethical level perceived by the founding team members based on
the entrepreneur’s leadership behavior. The concept of entrepreneurs’ ethical behavior in
this study is similar to the concept of ethical leadership in the literature (Brown et al., 2005).
Moral awareness and ethical behavior can be inconsistent in two ways. First, an
entrepreneur’s moral awareness and ethical behavior may be inconsistent because of the
cognitive process known as moral disengagement (Detert et al., 2008; Moore et al., 2012).
Moral disengagement, when it operates, deactivates the self-regulatory processes that
normally deter individuals from actions that violate their moral standards (Bandura, 1991;
Moore et al., 2012). The contingent factors that cause this inconsistency include both
individual (e.g. knowledge, values, attitudes and intentions) and situational factors (e.g.
organizational culture, job characteristics, the possible consequences of unethical decision-
making) (Kalshoven et al., 2016). Thus, entrepreneurs may be morally aware that they are
breaking rules but still choose to act unethically, especially when acting morally may cause
significant financial loss (Baron et al., 2015). For example, Mark Zuckerberg might be aware
of the user privacy issue in the early days of Facebook, but addressing this issue may
suggest that Facebook could not profit from extensive user data they collected, which might
result in significant financial loss.
 Another situation that entrepreneurs’ moral awareness and ethical behavior can be Product
inconsistent is when entrepreneurs lack ethical awareness but are perceived to have high innovation
levels of ethical behavior because they strive to establish an ethical culture by encouraging
founding teams and employees to make ethical decisions. In this case, founding team
members can help entrepreneurs to become aware of the ethical issues and make ethical
decisions (Hernandez and Sitkin, 2012).
Because moral awareness and ethical behavior of an entrepreneur can be inconsistent, it
is essential to study the effects of ethical levels of entrepreneurs on product innovation by
423
specifying different mechanisms through which moral awareness and ethical behavior
affect product innovation. Thus, this study examines whether and how moral awareness
and ethical behavior of an entrepreneur differentially affect product innovation in the
context of new ventures. We suggest that the product innovation capability of a new venture
depends on the creativity of both the founding entrepreneur and the founding team. We
hypothesize that the ethical levels of entrepreneurs can affect the product innovation of a
new venture through two paths: Entrepreneurs with low levels of moral awareness tend to
be more individually creative, which facilitates product innovation, and entrepreneurs with
high levels of ethical behavior can make founding teams more creative, which also promotes
product innovation.
We choose new ventures of six years old or younger as our research context for two main
reasons. First, new ventures typically have limited financial resources and experience constant
changes. These pressures suggest that the ethical dilemmas involving entrepreneurs’ own
values, organizational cultures, employee well-being, customer satisfaction and external
accountability are especially salient in relation to those of established companies (Payne and
Joyner, 2006). Second, entrepreneurs in new ventures are not subject to the close internal and
external scrutiny that constrains unethical behavior in well-established firms (Kish-Gephart
et al., 2010). Thus, moral disengagement is more likely to occur in new ventures than in large
firms.

Theory and hypotheses

Moral awareness and individual creativity
According to the social cognitive theory, moral awareness requires an individual’s selective
attention to, encoding of and recall of moral-related stimuli (Simon, 1945). When an
individual is confronted with a situation involving moral issues, the neural system
automatically searches for schemas that match the stimuli. If the pattern matches a schema
related to a moral issue, this information is then transmitted to consciousness, and the
individual may consciously take into consideration the ethical issue in the situation when
making decisions (Reynolds, 2006).
Existing literature on the antecedents of moral awareness has suggested moral
awareness can be affected by the characteristics of moral issues, the way issues are
presented, and individual differences. First, issues with greater magnitude of consequence,
temporal immediacy, proximity, concentration of consequences and greater levels of social
consensus are more salient and vivid and thus are more likely to create moral awareness
(Jordan, 2009; Reynolds, 2006). Second, the way issues are presented to an individual can
also affect his or her moral awareness (Butterfield et al., 2000). Third, individual differences
in ethical predisposition, the perceived importance of ethics in business, personal moral
philosophy, gender, education, experience, and religiosity can all affect an individual’s moral
awareness regarding certain issues (Reynolds, 2006; Singhapakdi et al., 1999; Wurthmann,
2017).
CMS While several studies have addressed the antecedents of moral awareness, little research
13,2 has examined how moral awareness may affect individual creativity. Social cognitive theory
argues that schemas do not always benefit individuals (von Hippel et al., 1993). Possessing
dominant schemas for a particular situation may make one more likely to pay attention to
the information that confirms the existing schema and to discount or even ignore other
important information. This may cause distortion and discrimination in information
424 processing when an individual faces a situation. Thus, schemas may create directional
guidance, constraints and bounded-scope thinking, all of which are typical mental barriers
to creativity. Eliminating these barriers can increase the scope of ideas during the creative
process (Csikszentmihalyi, 1996).
Entrepreneurs with low levels of moral awareness possess fewer moral-related schemas.
They are less likely to be aware of moral issues even where these moral issues exist.
Therefore, they are more likely to be unconventional, to think outside of the box and to
ignore or violate assumptions and social expectations (Brenkert, 2009). They are more likely
to engage in divergent thinking, which requires rule breaking within a domain to establish
an association between previously unassociated cognitive elements (Gino and Wiltermuth,
2014). Such unusual associations can lead to novel and creative ideas (Amabile et al., 1996).
Indeed, entrepreneurship research considers rule breaking synonymous with innovation
and creativity (Zhang and Arvey, 2009). For example, Gino and Wiltermuth (2014) found
that dishonesty – an unethical behavior – could lead to individual creativity because
dishonest individuals have a heightened feeling of being unconstrained by rules.
Entrepreneurs with low levels of moral awareness are also more likely to take risks
(Baucus et al., 2008; Morris, 2016; Zhang and Arvey, 2009), and risk-taking is integral to
individual creativity (Abbey and Dickson, 1983). The creation of new ideas and behaviors is
risky and highly uncertain and the action-outcome link is often tortuous and spreads over
time (Sethia, 1989; Csikszentmihalyi and Wolfe, 2014). New ideas and behaviors are risky
also because they disturb the status quo and upset power balances (Albrecht and Hall, 1991).
The obstacles that Uber, the ride-sharing company, faces when expanding its services in
various parts of the world, especially from taxi service companies, provide a good
illustration of the risks that Uber founders face as a result of their creative use of resources
to disrupt the status quo.
On the contrary, if an entrepreneur has a high level of moral awareness, he or she is more
likely to be aware of the ethical issues in a given situation and to think about problems from
an ethical perspective. This consideration of ethics may lead the entrepreneur to think
within the boundary of widely accepted conventions and norms and to be more conservative
when thinking about the problem, which may lead to a lower level of individual creativity.
Because entrepreneurs with low levels of moral awareness are more likely to be rule
breaking and risk-taking, which are necessary traits for individual creativity, the following
hypothesis is proposed:

H1. Entrepreneurs’ moral awareness is negatively related to their individual creativity.

Individual creativity and product innovation

Creativity is typically considered a precursor to innovation, with innovation being the
successful implementation of a creative idea (Amabile, 1988). Creativity motivates the
generation of new ideas and provides “raw materials” for innovation (Amabile, 1988;
Amabile et al., 1996). Creative individuals are associated with creative cognitive styles and
open-minded personality traits, which greatly enhance their innovation intention (Marcati
et al., 2008). Ajzen (1991) posited that the intention to engage in a behavior (e.g. innovation
intention) can be the best predictor of such a behavior (e.g. the actual innovation behavior). Product
Creative entrepreneurs tend to proactively contend with the changing external environment innovation
through innovation. By embracing new things, gathering a wide variety of information, and
developing various resources for innovation preparation, entrepreneurs with high levels of
individual creativity can enhance the innovation capacity of new ventures.
Moreover, entrepreneurs powerfully influence organizational culture and development,
especially in the early period following the launch of a new venture (Gartner et al., 1994).
425
Highly creative entrepreneurs can inspire founding team members and build more creative
and innovative organizational cultures, thus playing a vital role in fostering innovation
(Marcati et al., 2008). For example, a study of new ventures in the USA found that
entrepreneurs’ creativity was significantly related to the radicalness of innovations
observed in their ventures (Baron and Tang, 2011). This leads us to the second hypothesis of
this study:

H2. Entrepreneurs’ individual creativity is positively related to the product innovation

of their new ventures.

Moral awareness, individual creativity and product innovation

If entrepreneurs’ low moral awareness is associated with their individual creativity (H1),
and if this creativity encourages product innovation in their new ventures (H2), we predict
that moral awareness has a negative relationship with product innovation, partially because
moral awareness is negatively associated with individual creativity. Consequently:

H3. A negative relationship exists between entrepreneurs’ moral awareness and product
innovation in their ventures, partially because moral awareness is negatively
associated with individual creativity.

Ethical behavior and founding team creativity

Research on ethical (leadership) behavior has found that a leader’s ethical behavior can
positively affect employee outcomes such as organizational citizenship behaviors (Piccolo
et al., 2010), job satisfaction and helping behavior (Avey et al., 2012; Yang, 2014), affective
organizational commitment (Demirtas and Akdogan, 2015), employees’ ability to resolve
conflicts (Babalola et al., 2016), whistleblowing intention (Wen and Chen, 2016), job
motivation, and task performance (Ng and Feldman, 2015). A leader’s ethical behavior may
also relieve employees’ perception of work stress (Zhou et al., 2015) and reduce employees’
unethical and counterproductive behavior (Mayer et al., 2010; Schaubroeck et al., 2012). In
addition, a leader’s ethical behavior can be a necessary condition for the beneficial effect of
corporate social responsibility on firm reputation and performance (Zhu et al., 2014).
Most studies on the effect of ethical leadership take place in the setting of supervisor-
subordinate relationships within well-established organizations (Feng et al., 2016;
Kalshoven et al., 2016). Little existing research focuses on how entrepreneurs’ ethical
behavior may affect founding team outcomes in new ventures. While we acknowledge the
importance of leaders’ ethical behavior at all levels of the organizational hierarchy in all
organizations, we think that the effect of ethical leadership is much more profound in new
ventures at the top of the organizational hierarchy. This is because new ventures do not
have well-established cultures, and the ways founders shape organizational cultures
through their behaviors are crucial for new ventures’ development (Kelly et al., 2000).
CMS Therefore, it is important to study how a founder’s ethical behavior may affect the founding
13,2 team’s creativity in new ventures.
The social learning theory suggests that individuals learn appropriate behavior from the
behaviors of credible and attractive role models (Bandura, 1977). As role models of ethical
behavior, ethical leaders can signal to founding team members that good behavior is
expected, encouraged, and valued. Ethical leaders can also exhibit ethical behavior through
426 communicating about ethics and values, and establishing a reward system that encourages
ethical behavior (Brown et al., 2005; Piccolo et al., 2010; Treviño et al., 2014).
Entrepreneurs’ ethical behavior may affect founding teams’ creativity through several
mechanisms. First, entrepreneurs’ ethical behavior can enhance individual founding
members’ creativity and innovative work behavior through stimulating their intrinsic
motivation and increasing psychological empowerment and autonomy (Feng et al., 2016; Tu
and Lu, 2013). Autonomy is a way for ethical leaders to convey trust to founding members
(Morris, 2016), and the resulting trusting relationship can stimulate the creativity of the
founding team by allowing team members to freely generate different ideas and voices with
no concern about the leaders’ disapproval (Chen and Hou, 2016).
Second, entrepreneurs’ ethical behavior can promote group learning behavior, defined as
“the extent to which [group] members seek opportunities to develop new skills and
knowledge, welcome challenging assignments, are willing to take risks on new ideas, and
work on tasks that require considerable skill and knowledge” (London et al., 2005, p. 114). In
today’s dynamic business environment, continuous learning is essential for creativity.
Entrepreneurs’ ethical behavior can promote founding teams’ learning behavior through the
development of productive group learning norms and behaviors and the establishment of
formal procedures to disseminate knowledge within the group (Walumbwa et al., 2017).
In addition, a leader’s ethical behavior can also facilitate an ethical climate that fosters
team creativity. Research on team processes has suggested that team creativity is a function
of the interaction patterns among team members (Jehn and Shah, 1997). Ethical climates
may enhance team members’ perceptions that they are treated fairly and can interact with
psychological and psychosocial trust and safety (Walumbwa et al., 2017; Xu et al., 2016), so
that they will be more willing to collaborate, share knowledge, and communicate ideas and
information (Shalley and Gilson, 2004), for enhanced team creativity.
To apply this reasoning to the context of new ventures, we can reasonably predict that as
entrepreneurs model ethical behavior in founding teams, and as they dedicate more time and
resources to developing ethical norms, procedures and ethical climates, team members will
show increased learning behaviors, stronger organizational identity, and enhanced
intragroup psychological and psychosocial trust and safety. They will be more likely to
interact frequently and to share knowledge, which ultimately fosters founding teams’
creativity:

H4. Entrepreneurs’ ethical behavior is positively related to founding teams’ creativity.

Founding teams’ creativity and product innovation

All stages of product development require creativity, from the generation of new product
ideas to their commercialization (Pitta et al., 2008). All organizational members directly or
indirectly contribute to product innovation, but founding teams are especially crucial for
product innovation in new ventures (Shalley and Gilson, 2004). New ventures need to
generate valuable ideas for new products that will appeal to some identifiable markets, and
they need to figure out how to bring their projects to fruition (Ward, 2004). Founding team
members must use their creativity to recognize potential hidden opportunities by assuming
the perspective of prospective customers and linking these opportunities to firm Product
performance (Ward, 2004). Additionally, founding teams need to creatively deploy relevant innovation
resources at each stage of new ventures’ development (Timmons, 1999). The identification of
innovation opportunities and the use of relevant resources for bringing ideas to
commercialization rely highly on the founding team’s creativity (Ardichvili et al., 2003;
Chen, 2007):

H5. Founding teams’ creativity is positively related to product innovation. 427

Ethical behavior, team creativity and product innovation

In summary, we predicted that entrepreneurs’ ethical behavior could make founding teams
more creative (H4), which could then cause new ventures to be more innovative in
generating products (H5), leading to our final hypothesis:

H6. Founding teams’ creativity mediates the relationship between entrepreneurs’ ethical
behavior and product innovation.
Figure 1 illustrates our basic conceptual model and hypotheses.

Method
Sample and data
A sample of 150 new ventures located in six Chinese provinces and municipalities was
compiled using the authors’ personal connections and a firm that provides survey
services. Consistent with the current literature, new ventures are defined as firms that
are six years old or younger (Zahra et al., 2000). The sample firms are widely
distributed in areas that are both frequently and less actively involved in
entrepreneurial activities. They operate in economically developed regions (Beijing,
Shandong, Guangdong and Fujian) and underdeveloped regions (Hubei and Jiangxi).
Their main industries include manufacturing, information services, wholesale and
retail services, and real estate.
In 2015, 150 questionnaires to founders and 389 questionnaires to the founding team
members of new ventures were mailed out. To increase the valid response rate, research
assistants called each company, explained the study’s objectives and questionnaire
contents, and confirmed names and job titles before mailing the questionnaires. The
respondents were asked to include at least two key founding team members who actively
participated in major decision-making processes. One hundred thirteen questionnaires
from entrepreneurs (75.33 per cent response rate) and 246 from founding team members
(63.24 per cent response rate) were retained after questionnaires with excessive missing
data were removed and questionnaires by the respondents who were not main decision-
makers were eliminated.
The questionnaire for the entrepreneurs asked about their personal characteristics, their
moral awareness, their individual creativity, the firm’s product innovativeness, and the

–
Entrepreneur’s moral awareness Entrepreneur’s individual creativity
+ Figure 1.
The conceptual
Product innovation
model and
+
Entrepreneur’s ethical behavior Founding team’s creativity + hypotheses
CMS founding team’s creativity. The questionnaire for the founding team members asked about
13,2 their individual characteristics and the entrepreneurs’ ethical behavior.
Table I lists the entrepreneurs’, founding team members’, and firms’ charaftcteristics.
A total of 86.7 per cent of the 113 entrepreneurs were men; 69.9 per cent were 40 years old
or younger; and 64.6 per cent had a bachelor’s degree or higher. Of the 246 founding team
members, 68.7 per cent were men; 76 per cent were 40 years old or younger; and 64.6 per
428 cent had a bachelor’s degree or higher. For firm characteristics, one-third of the firms
were 1-2 years old, 54.9 per cent were 3-4 years old, and 11.5 per cent were 5-6 years old. A
total of 35.4 per cent of firms were from Northern China, 19.5 per cent were from Central
China, and the rest were from Southern China. About half of the firms had 50 or fewer
employees.

Category Frequency (%)

Characteristics of the entrepreneurs (N = 113)

Gender Man 98 86.70
Woman 15 13.30
Age 20-30 32 28.32
31-40 47 41.59
41-50 34 30.09
Education Middle school 1 0.90
High school 8 7.10
Associate degree 31 27.40
Bachelor’s degree 67 59.30
Master’s degree or above 6 5.30
Characteristics of the founding team members (N = 246)
Gender Man 169 68.70
Woman 77 31.30
Age 20-30 62 25.20
31-40 125 50.82
41-50 59 23.98
Education High school 1 0.40
Associate degree 86 35.00
Bachelor’s degree 142 57.70
Master’s degree or above 17 6.90
P osition Chief Financial Officer 84 34.10
Chief Technology Officer 74 30.10
Marketing Director 20 8.10
Operation Director 51 20.70
Human Resources Director 17 6.90
Characteristics of the new venture (N = 113)
Firm age 1-2 years 38 33.63
3-4 years 62 54.87
5-6 years 13 11.50
Region North 40 35.40
Center 22 19.47
South 51 45.13
Number of employees 10 or below 13 11.50
Table I. 11-50 46 40.71
Characteristics of the 51-100 23 20.35
sample 101 or above 31 27.44
Measures Product
Following Brislin’s (1986) translation/back-translation procedure, a Chinese version of all innovation
measures based on original scales published in English was created. Whenever possible,
established scales with well-documented reliability and validity were used. The
respondents indicated measurements on a five-point Likert scale from 1 = strongly
disagree to 5 = strongly agree. The Appendix lists measurement items for the main
variables.
429
Dependent variable
Product innovation. Five items (a = 0.72) from Zhang and Li (2010) were used to measure
product innovation. Entrepreneurs rated their ventures’ success relative to their major
competitors in terms of:
 frequently introducing new products;
 being the first to introduce new products;
 quickly launching new products;
 developing new products with superior quality; and
 penetrating markets using new products.

This scale highlights the two key components used to assess the performance of new
products: quality and speed (Brown and Eisenhardt, 1995).

Independent variables
Entrepreneurs’ moral awareness. Entrepreneurs read a short vignette adapted from
Reynolds (2006) (see Appendix). The scenario described an incident in which a
representative of a medical clinic called to inquire about a delayed order. Although the
shipping clerk said the order had been shipped two days ago, the manager discovered that
the order had actually been shipped that morning. The respondents indicated their
agreement with three statements:
(1) This situation has very important ethical aspects.
(2) This situation clearly involves no ethical issues.
(3) If the company had an ethics resource committee, I would definitely report this
situation.

Cronbach’s a for this three-item scale was 0.93.

Entrepreneurs’ ethical behavior. A ten-item scale (a = 0.85) Brown et al. (2005) developed
was used to measure founding team members’ perceptions of entrepreneurs’ ethical
behavior. Sample items included:
 The founder sets examples of the correct ways in which to treat others.
 The founder discusses business ethics or values with team members.
 We are treated equitably and fairly.

Mediating variables
Entrepreneur’s individual creativity. A measurement scale of creativity used extensively in
creativity research (Shalley and Perry-Smith, 2001) and modified by Perry-Smith (2006) was
used. Entrepreneurs rated the extent to which their work involved:
CMS  new ideas and approaches to customer problems;
13,2  new applications for current technology;
 risk-taking;
 radical new ideas, and
 novel long-term vision or applications.
430 Cronbach’s a for this scale was 0.97.
Founding teams’ creativity. Anderson and West’s (1998) approach of focusing on new
idea generation was adopted to assess the founding team’s creativity. Sample items are as
follows: The founding team members I lead often devise new ideas associated with the job
and always solve problems by proposing new and creative ideas. Cronbach’s a for this scale
was 0.88.
The scores of founding team members were aggregated to measure entrepreneurs’
ethical behavior. Within-group agreement was assessed before the aggregation by using the
median inter-rater agreement coefficient Rwg (James et al., 1984) and intra-class correlation
coefficients (ICC1 and ICC2) (Bliese and Halverson, 1998). The median inter-rater agreement
coefficient (Rwg) for the variable of ethical behavior was 0.90, indicating a high inter-rater
agreement. The value of ICC1 was 0.13, above the widely accepted cutoff value of 0.12. The
test statistics (F-ratios) associated with the values of ICC1 were statistically significant. The
value of ICC2 was 0.94, above the conventional threshold level of 0.70.

Control variables
Six control variables plus ten industry dummies were used for H1 to H3 regarding the
relationship among entrepreneurs’ moral awareness, individual creativity, and product
innovation (Baron and Tang, 2011). At the individual level, gender and human capital
variables such as years of education and age are often considered to affect entrepreneurial
behavior (Hamilton, 2000). Gender is coded as 1 if an entrepreneur is a man and 0 otherwise.
Education levels were transformed into years of schooling using Xie and Hannum’s (1996)
coding scheme. The variable “education” takes a value of 0 if an entrepreneur is illiterate, 5
for elementary school graduates, 8 for middle school graduates, 11 for high school or
vocational school graduates, 13 for associate degree holders, 15 for bachelor’s degree
holders, and 18 for master’s degree holders or above. Age was measured with three
categories: The value is 1 for 20 to 30 years old, 2 for 31 to 40 years old, and 3 for 41 to 50
years old. No entrepreneurs were younger than 20 or older than 50 in our sample.
At the firm level, firm age, firm size, firm performance, and industry sector may influence
innovation (Ucbasaran et al., 2009). Firm age was measured by the number of years the firm
had existed. Firm size was measured by the number of employees in the firm. Firm
performance was measured by sales revenues (Baron and Tang, 2011). Ten dummy
variables for industry sectors were added (public administration; retail and wholesale
services; information services; hospitality; manufacturing; real estate; construction; farming,
fishing, and forestry; transportation; science and technology; “other” is the default category).
For simplicity, the results for the industry dummies are not reported.
For H4-H6 on the relationship among entrepreneurs’ ethical behavior, founding teams’
creativity, and product innovation, founding team size and group diversity in age, gender
and education were controlled. Firm age, firm size, firm performance and industry sectors
were also used as control variables. Team size was included as a control variable because
larger teams may have more resources and skills to facilitate team creativity and product
innovation. It is measured as the number of founding members in a venture. As
demographic diversity also influences team creativity, team diversity in age, gender, and Product
education were also included as control variables (Kunze and Leicht-Deobald, 2014; Pearsall innovation
et al., 2008; Ries et al., 2013). Diversity in age and in education were measured with the index
coefficient of variation for age/education, calculated by dividing the standard deviations of
age/education in a team by their respective expected values (Allison, P1978). Diversity in
gender was measured with the Teachman index calculated as D = Pi  [ln(Pi)], where i
represents the category “man” and Pi is the proportion of the members belonging to the i
category (Teachman, 1980).
431

Analyses
Common method variance. Harman’s one-factor test was adopted in SPSS 24.0 to check for
possible common method variance (Podsakoff et al., 2003). All self-reported variables were
entered into an exploratory factor analysis with principal axis factoring and a varimax
rotation. Three factors emerged with eigenvalues greater than 1 and explained 60.84 per
cent of the variance. Specifically, the largest factor explained 26.36 per cent of the total
variance, far less than the threshold of 40 per cent. No single factor accounted for the
majority of covariance among measures. Therefore, no common method variance was
detected.
Reliability and validity. We used factor analysis in SPSS and AMOS 24.0 to assess the
constructs’ reliability and validity. Reliability is assessed by Cronbach’s alphas. Table II
shows that Cronbach’s alphas of all major variables are in the range of 0.72 to 0.97, above
the recommended level of 0.7 (Nunnally and Bernstein, 1994).
To test the constructs’ validity, we calculated the Kaiser–Meyer–Olkin (KMO) measures
of sampling adequacy to determine if the data were suitable for factor analysis (Cerny and
Kaiser, 1977). High KMO values (> 0.7) indicate low partial correlation for each pair of
variables and thus the data are suitable for factor analysis. Table II shows that KMO values
of all constructs are above 0.7, suggesting that the data were suitable for factor analysis.
Next, exploratory factor analyses for entrepreneurs’ moral awareness, ethical behavior,
individual creativity, and founding team creativity were conducted. As Table II shows,
factor loadings for all constructs are larger than 0.6 (range from 0.61 to 0.93); CR values are
all higher than 0.7 (ranging from 0.80 to 0.97); AVE values range from 0.51 to 0.75 (>0.5).
Overall, all measures exhibited adequate convergent validity (Hair et al., 2006).
To statistically check whether an entrepreneur’s ethical level is indeed a two-dimensional
construct, a confirmatory factor analysis (CFA) for an entrepreneur’s ethical level was
conducted. A one-dimensional (i.e. treating an entrepreneur’s ethical level as a one-
dimensional construct) and a two-dimensional model (i.e. treating an entrepreneur’s ethical
level as a two-dimensional construct including moral awareness and ethical behavior) were
constructed and examined to determine which better fit the data. As Table III shows, the

Construct Cronbach’s a KMO AVE CR Loading

Product innovation 0.72 0.79 0.51 0.84 0.64-0.75

Entrepreneurs’ moral awareness 0.93 0.70 0.75 0.94 0.82-0.93
Entrepreneurs’ ethical behavior 0.85 0.95 0.73 0.97 0.84-0.91
Entrepreneur’s individual creativity 0.97 0.76 0.51 0.80 0.61-84
Founding teams’ creativity 0.88 0.90 0.51 0.88 0.71-80 Table II.
Reliability and
Notes: Recommended threshold value: Cronbach’s a  0.7; KMO  0.7; AVE  0.5; CR  0.7 validity of variables
CMS two-dimensional model was a better fit (CFI = 0.97, NFI = 0.93, IFI = 0.97, RMSEA = 0.08,
13,2 x 2/df = 1.77) than the one-dimensional model was (CFI = 0.89, NFI = 0.86, IFI = 0.89,
RMSEA = 0.16, x 2/df = 3.76), suggesting that the two-dimensional model better reflects the
construct of entrepreneurs’ ethical levels (Schumacker and Lomax, 2016). CFA also suggests
that independent variables and mediating variables are single-dimension constructs.
Model specification. Preacher and Hayes’ (2004) formal mediation test approach with
432 bootstrapping method was used to evaluate the mediation effect. Accordingly, Preacher and
Hayes’ (2008) procedures in SPSS were used to test our hypotheses. Figure 2 illustrates the
hypothesized relationships among independent variables (moral awareness/ethical
behavior), mediators (entrepreneur’s individual creativity/group creativity of the founding
team), and dependent variable (product innovation).
Based on Preacher and Hayes’ (2008) suggested approach, a series of regression models
were used to test our hypotheses. First, regression models were used to test H1 and H4, i.e.
the relationship between moral awareness and an entrepreneur’s individual creativity (H1)
and the relationship between an entrepreneur’s ethical behavior and the founding team’s
creativity (H4) (See “a” path in Figure 2). Second, regression models were used to evaluate
H2 and H5, in which product innovation is the dependent variable and an entrepreneur’s
individual creativity (H2) and the creativity of the founding team (H5) are the independent

Variables Measure model x2/df RMSEA NFI CFI IFI

Entrepreneur’s ethical level Null model 22.16

One-dimensional model 3.76 0.16 0.86 0.89 0.89
Two-dimensional model 1.77 0.08 0.93 0.97 0.97
Entrepreneur’s moral awareness Null model 127.67
Single-dimensional model 1.07 0.03 0.99 0.99 0.99
Entrepreneur’s ethical behavior Null model 26.09
Single-dimensional model 1.66 0.08 0.95 0.98 0.98
Table III. Entrepreneur’s individual creativity Null model 17.69
Single-dimensional model 1.35 0.06 0.92 0.99 0.99
Overall fit index of Founding team’s creativity Null model 15.79
the confirmatory Single-dimensional model 1.03 0.01 0.96 0.99 0.99
factor analysis for
major variables Notes: Recommended threshold value: x2/df < 2; RMSEA < 0.1; NFI > 0.9; CFI > 0.9; IFI > 0.9

Entrepreneur’s
individual creativity
a b
c'
Entrepreneur’s moral Product
awareness c
innovation

c'
Entrepreneur’s ethical Product
c
behavior entrepreneurs innovation

Figure 2. a Founding team’s b

Model specification creativity
variables (See “b” paths in Figure 2). Third, the regression models for independent variables’ Product
total effect on the dependent variable, without accounting for the mediating effects, were run innovation
to evaluate H3 and H6 (See “c” paths in Figure 2). Finally, the independent variables’ direct
effects on the dependent variable were evaluated while controlling for the mediating effects
(See “c’” path in Figure 2).
When a, b, and c are all significant, the mediation effect exists. If c’ is not significant, then
the independent variable’s effect is said to be “fully” mediated by the mediator. If c’ is
significant and c’ < c, then the independent variable’s effect is said to be “partially” 433
mediated. The bootstrap method was used to estimate the standard errors of parameter
estimates and the bias-corrected confidence intervals of the indirect effects (MacKinnon
et al., 2002; Preacher and Hayes, 2004). The mediated effect is significant if the 95 per cent
confidence interval does not contain zero (Preacher and Hayes, 2004). Following Preacher
and Hayes (2004), five thousand bootstrap samples were used to derive estimates of the
indirect effect.

Results
Table IV presents descriptive statistics and a correlation matrix for major variables.
Entrepreneurs averaged 36.4 years of age and 14 years of education. The ventures averaged
3.5 years. The founding team size had a mean value of 3.2. Table IV shows that
entrepreneurs’ moral awareness was negatively correlated with their ethical behavior.
Moreover, entrepreneurs’ individual creativity and founding teams’ group creativity were
positively correlated with product innovation, consistent with Bharadwaj and Menon’s
(2000) findings.
Table V shows the regression models used to test H1 to H3; that is, entrepreneurs’ moral
awareness has a negative relationship with product innovation, partially because
entrepreneurs’ moral awareness is negatively associated with entrepreneurs’ individual
creativity, and individual creativity is positively associated with product innovation.
Table VI shows the results of regression models used to test H4 to H6; that is, founding
teams’ creativity mediated the relationship between entrepreneurs’ ethical behavior and
product innovation.
Model 1 in Table V includes only control variables. It shows that entrepreneurs’
educational level is positively related to their individual creativity ( b = 0.277; p < 0.05).
Model 2 adds entrepreneurs’ moral awareness into the equation to test H1, which predicts
that entrepreneurs’ moral awareness is negatively related to their individual creativity. The
coefficient for entrepreneurs’ moral awareness is negative and significant at the 0.001 level
( b = 0.402; p < 0.001), supporting H1. Model 3 contains control variables using product
innovation as the dependent variable. Model 4 tests the link between entrepreneurs’ moral
awareness and product innovation, and it shows that entrepreneurs’ moral awareness has a
negative relationship with product innovation ( b = 0.442; p < 0.001). Model 5 includes
entrepreneurs’ moral awareness and individual creativity in the regression equation. It
shows that entrepreneurs’ individual creativity is positively related to product innovation
( b = 0.597; p < 0.001), supporting H2. H3 predicted that entrepreneurs’ moral awareness is
negatively related to product innovation, partially due to the negative association between
entrepreneurs’ moral awareness and individual creativity. Based on Model 4, entrepreneurs’
moral awareness is negatively associated with product innovation ( b = 0.442; p < 0.001).
When entrepreneurs’ individual creativity was controlled for in Model 5, however,
entrepreneurs’ moral awareness had a weaker effect ( b = 0.202; p < 0.05). We used
bootstrapping analysis to examine the significance of this effect (MacKinnon et al., 2002). A
significant indirect effect occurred for entrepreneurs’ moral awareness on product
 13,2

434
CMS

variables
Table IV.

among major
and correlations
Descriptive statistics
Variables Mean SD Minimum Maximum 1 2 3 4 5 6

1 Product innovation 3.32 0.80 1.80 5.00

2 Entrepreneur’s moral awareness 2.60 0.42 1.67 3.33 0.45
3 Entrepreneur’s ethical behavior 3.24 0.84 1.29 4.86 0.54 0.50
4 Entrepreneur’s individual creativity 3.24 0.80 1.40 5.00 0.72 0.42 0.60
5 Founding team’s creativity 3.04 0.86 1.57 4.86 0.60 0.46 0.63 0.71
6 Entrepreneur’s age 36.40 7.02 25.00 50.00 0.01 0.01 0.03 0.13 0.08
7 Entrepreneur’s gender 0.87 0.34 0.00 1.00 0.01 0.10 0.10 0.01 0.02 0.05
8 Entrepreneur’s education 14.27 1.62 8.00 18.00 0.22 0.01 0.20 0.20 0.06 0.32
9 Founding team’s size 3.17 0.74 2.00 6.00 0.04 0.02 0.01 0.05 0.05 0.12
10 Founding team’s age diversity 0.06 0.05 0.00 0.27 0.15 0.05 0.13 0.06 0.08 0.13
11 Founding team’s education diversity 0.04 0.05 0.00 0.23 0.07 0.01 0.07 0.05 0.11 0.26
12 Founding team’s gender diversity 0.23 0.32 0.00 0.69 0.01 0.03 0.01 0.02 0.08 0.04
13 Firm age 3.53 1.66 1.00 8.00 0.01 0.07 0.11 0.13 0.19 0.34
14 Firm size 86.66 97.96 4.00 480.00 0.08 0.13 0.16 0.17 0.31 0.12
15 Firm performance 16.68 24.19 0.03 160.00 0.01 0.02 0.18 0.17 0.20 0.01

Notes: N = 113,  p < 0.1,  p < 0.05,  p < 0.01,  p < 0.001 (continued)
Variables 7 8 9 10 11 12 13 14

1 Product innovation
2 Entrepreneur’s moral awareness
3 Entrepreneur’s ethical behavior
4 Entrepreneur’s individual creativity
5 Founding team’s creativity
6 Entrepreneur’s age
7 Entrepreneur’s gender
8 Entrepreneur’s education 0.00
9 Founding team’s size 0.02 0.05
10 Founding team’s age diversity 0.05 0.02 0.43
11 Founding team’s education diversity 0.06 0.08 0.28 0.40
12 Founding team’s gender diversity 0.02 0.01 0.15 0.07 0.06
13 Firm age 0.22 0.10 0.03 0.12 0.02 0.01
14 Firm size 0.01 0.16 0.01 0.14 0.01 0.01 0.29
15 Firm performance 0.06 0.14 0.06 0.11 0.10 0.06 0.08 0.37

Table IV.
innovation

435
Product
CMS innovation via individual creativity with a 95 per cent bootstrap confidence interval from
13,2 0.36 to 0.15, excluding zero (Preacher and Hayes, 2004). H3 was supported.
Table VI presents the results for H4-H6; that is, founding teams’ creativity mediated the
effect of entrepreneurs’ ethical behavior on product innovation. Model 1 contains only
control variables. Firm size is positively related to founding teams’ creativity ( b = 0.280;
p < 0.05). Model 2 shows that entrepreneurs’ ethical behavior is positively related to
436 founding teams’ creativity ( b = 0.553; p < 0.001), supporting H4. Model 3 contains only
control variables when product innovation is the dependent variable. Model 4 suggests that
the direct relationship between entrepreneurs’ ethical behavior is positively related to
product innovation ( b = 0.515; p < 0.001). Model 5 adds entrepreneurs’ ethical behavior and

Entrepreneurs’ individual creativity Product innovation

Variables Model 1 Model 2 Model 3 Model 4 Model 5

Control variables
Entrepreneur’s age 0.147 (0.104) 0.144 (0.094) 0.007 (0.106) 0.004 (0.095) 0.082 (0.077)
Entrepreneur’s gender 0.002 (0.095) 0.043 (0.087) 0.006 (0.096) 0.044 (0.087) 0.018 (0.070)
Entrepreneur’s education 0.277 (0.098) 0.266 (0.089) 0.264  (0.100)

0.252  (0.089) 0.093 (0.075)
Table V. Firm age 0.132 (0.103) 0.133 (0.094) 0.071 (0.106) 0.073 (0.094) 0.007 (0.077)
Firm size 0.003 (0.106) 0.050 (0.098) 0.007 (0.109) 0.051 (0.098) 0.021 (0.079)
Regression results
Firm performance 0.123 (0.099) 0.169    (0.091) 0.035 (0.101) 0.016 (0.091) 0.085 (0.075)
for the relationship Industry dummies (included) (included) (included) (included) (included)
among
entrepreneur’s moral Independent/mediating variables
Entrepreneur’s moral awareness 0.402   (0.087) 0.442   (0.088) 0.202 (0.078)
awareness,
Entrepreneur’s individual creativity 0.597   (0.083)
Entrepreneur’s R2 0.260 0.394 0.230 0.392 0.607
individual creativity, Adjusted R2 0.146 0.293 0.111 0.290 0.537
and product
innovation Notes: N = 113,  p < 0.1,  p < 0.05,  p < 0.01,  p < 0.001

Founding Team’s Creativity Product Innovation

Variables Model 1 Model 2 Model 3 Model 4 Model 5

Control variables
Team size 0.096 (0.101) 0.105 (0.081) 0.028 (0.111) 0.036 (0.095) 0.012 (0.089)
Age diversity 0.013 (0.108) 0.067 (0.087) 0.087 (0.118) 0.037 (0.102) 0.068 (0.095)
Educational diversity 0.102 (0.095) 0.155 (0.076) 0.053 (0.104) 0.003 (0.090) 0.074 (0.085)
Gender diversity 0.053 (0.094) 0.091 (0.075) 0.041 (0.103) 0.006 (0.089) 0.047 (0.083)
Firm age 0.122 (0.091) 0.088 (0.073) 0.024 (0.100) 0.008 (0.086) 0.048 (0.081)
Firm size 0.280  (0.104) 0.214 (0.083) 0.043 (0.114) 0.019 (0.099) 0.117 (0.095)
Firm performance 0.079 (0.097) 0.000 (0.078) 0.007 (0.107) 0.066 (0.093) 0.066 (0.086)
Table VI. Industry dummies (included) (included) (included) (included) (included)
Regression results
for the relationship Independent/mediating variables
Entrepreneur’s ethical behavior 0.553   (0.073) 0.515   (0.088) 0.262 (0.103)
among
Founding team’s creativity 0.458   (0.113)
entrepreneur’s ethical R2 0.322 0.571 0.184 0.400 0.490
behavior, Founding Adjusted R2 0.209 0.494 0.048 0.292 0.392
team’s creativity and
product innovation Notes: N = 113, †p < 0.10,  p < 0.05,  p < 0.01,  p < 0.001
founding teams’ creativity into the equation. Founding teams’ creativity is positively related Product
to product innovation ( b = 0.458; p < 0.001), supporting H5. In H6, it was predicted that innovation
founding teams’ creativity mediates the relationship between entrepreneurs’ ethical
behavior and product innovation. Model 5 suggests that the direct relationships are
significant between entrepreneurs’ ethical behavior and product innovation, but they have a
weaker effect when the intermediate variable of founding teams’ creativity is added ( b =
0.262; p < 0.05). The bootstrap analysis suggested that the effect of entrepreneurs’ ethical
behavior on product innovation via founding teams’ creativity was significant with a 95 per 437
cent bootstrap confidence interval from 0.05 to 0.23, which excluded zero (Preacher and
Hayes, 2004), supporting H6.

Additional analyses
This paper challenges the assumption that moral awareness and ethical behavior are always
consistent. We suggest that it is common for entrepreneurs to have low levels of moral
awareness but high levels of ethical behavior (moral inconsistency resulting from low levels
of moral awareness) or to have high levels of moral awareness but low levels of ethical
behavior (moral inconsistency resulting from a lack of self-regulation). To empirically
investigate how these two types of moral inconsistency affected our results, we subtracted
entrepreneur’s moral awareness from entrepreneur’s ethical behavior. The result was
positive in 89 cases, 0 in six cases, and negative in 18 cases. This result suggests that the
majority of moral inconsistency between moral awareness and ethical behavior results from
a low level of moral awareness and a higher level of ethical behavior. Only 18 out of 113
entrepreneurs had higher levels of moral awareness than ethical behavior, reflecting a weak
self-regulation capability when facing an ethical situation.
To empirically test the effect of these two types of moral discrepancy between moral
awareness and ethical behavior, a dummy variable was included to indicate whether the
firm belonged to a group where the levels of entrepreneurs’ ethical behavior were larger than
their levels of moral awareness. After we included this indicator variable in all models, all
hypotheses were supported. The only difference was that an entrepreneur’s individual
creativity fully mediates the relationship between an entrepreneur’s ethical awareness and
product innovation. In addition, the founding team’s creativity fully mediates the
relationship between an entrepreneur’s ethical behavior and product innovation.

Discussion
Although ethics plays an increasingly important role in product innovation, little research
has directly examined the question of how an entrepreneur’s ethical level may affect a firm’s
product innovation (Brusoni and Vaccaro, 2017). This study explores this question in the
context of new ventures. We suggest that an over-emphasis on ethical behavior without
considering moral awareness in the current literature leads to an inadequate understanding
and contradictory findings of the relationship between an entrepreneur’s ethical level and
product innovation. We propose that an entrepreneur’s ethical level is a two-dimension
construct including moral awareness and ethical behavior and that moral awareness and
ethical behavior can be inconsistent. An entrepreneur can has a low level of moral
awareness but still exhibit a high level of ethical (leadership) behavior. An entrepreneur may
also have a high level of moral awareness but choose to behave unethically due to the lack of
self-regulation when facing ethical dilemmas. Because moral awareness and ethical
behavior affect product innovation in different ways, it is important to study the effects of
moral awareness and ethical behavior separately to unpack the effect of an entrepreneur’s
ethical level on product innovation.
CMS Consistent with the hypotheses, the findings indicate that an entrepreneur’s moral
13,2 awareness and ethical behavior affect product innovation differently. While moral
awareness affects product innovation through an entrepreneur’s individual creativity,
ethical behavior affects product innovation through a founding team’s creativity. In general,
an entrepreneur’s moral awareness is negatively associated with product innovation while
an entrepreneur’s ethical behavior is positively related to product innovation.
438 This study contributes to the literature on moral awareness and ethical leadership. The
current literature on moral awareness is scarce (Miller et al., 2014) and mostly focuses on its
antecedents (Wurthmann, 2017). This study provides empirical evidence on how the moral
awareness of entrepreneurs may matter in product innovation of new ventures. In addition,
many studies on ethical leadership were conducted in the setting of lower level supervisor-
subordinate relationships within organizations (Walumbwa et al., 2017; Li et al., 2017). This
study provides more empirical evidence on how entrepreneurs’ ethical behavior may affect
the creativity of the founding teams in new ventures.
This study also provides further evidence for the social cognitive theory, that not all
schemas benefit individuals (von Hippel et al., 1993). Schemas related to the moral
dimensions of a situation (i.e. moral awareness) may constrain an individual’s creativity,
which negatively affects product innovation.
The findings of this study have some practical implications for entrepreneurs who wish
to promote product innovation in new ventures. This study suggests that moral
inconsistency is common for new ventures. One reason of this inconsistency is that an
entrepreneur is truly naïve about moral issues (i.e. don’t have existing schemas for moral-
related issues) but strives to establish a culture of ethical behavior in the firm and among
founding members by dedicating more time and resources to develop ethical norms,
procedures, and ethical climates. In this situation, it is reasonable to predict that
entrepreneurs’ moral awareness levels will increase over time as entrepreneurs continue to
face moral dilemmas, learn how to identify moral issues, and revise their moral norms
(Campbell, 2017). As a result, the gap between moral awareness and ethical behavior can
decrease over time. Product innovation is more likely to result from entrepreneurs’ high
levels of ethical behavior rather than lack of moral awareness in the long run.
Another reason for moral inconsistency might result from the lack of self-regulation
(high levels of moral awareness and low levels of ethical behavior), i.e. entrepreneurs feel
strong pressure to do things that compromise their own values to survive at the initial
stages of new ventures’ development (Fisscher et al., 2005). The lack of self-regulation may
lead to unethical decision-making, tamper founding members’ creativity, negatively affect a
firm’s reputation and legitimacy, and ultimately negatively affect firm performance.
Therefore, moral disengagement of entrepreneurs cannot be a long-term sustainable
strategy for product innovation (Vohs and Baumeister, 2016).
This study has a few limitations that suggest opportunities for future research. First, it
considers individual creativity in entrepreneurs and group creativity in founding teams as
the only mediating variables affecting product innovation. However, good ideas resulting
from individual and team creativity need to be translated into product innovation, which
depends on a firm’s other resources and capabilities (Amabile et al., 1996). Future studies
can consider such factors when studying the antecedents of product innovation (Hsu and
Fan, 2010).
Second, this paper does not distinguish between incremental and radical innovations,
although entrepreneurs’ moral awareness and ethical behavior may affect both types of
innovations differently. Consequently, future research should measure them separately.
 Third, entrepreneurs with low moral awareness may ignore ethical factors during start- Product
up stages when business success and survival are most important (Fisscher et al., 2005). innovation
However, entrepreneurs may develop higher moral awareness over time when their
reputations become at risk (Longenecker et al., 2006). Future research can investigate how
the dynamics of moral awareness and ethical behavior may change over time.
Fourth, this study is only exploratory. The study’s limited resources made it prudent to
hire a consulting firm and to use personal connections to generate the study’s sample.
Although the sample covered developed and underdeveloped regions and represented
439
different industries, the sample was not strictly representative of new ventures in China. In
addition, unique economic system and under-developed business policies and regulations
may also influence ethical level of Chinese entrepreneurs (Lu, 2009). Future studies should
collect data more systematically in China and/or other regions in the world to test the
study’s ideas.
Finally, this study shares a common concern over existing research on ethical leadership
that the data is collected from a self-reported survey method. (Brown and Treviño, 2014;
Chen and Hou, 2016). Collecting data from both the entrepreneur and the multiple founding
team members in one firm may alleviate this problem. Future studies can enhance our
understanding of ethical leadership by collecting alternative types of data, such as personal
interviews and objective secondary data.

Conclusion
This study challenges the common assumption in the literature of ethical leadership that
moral awareness and ethical behavior are always consistent. It departs from the existing
studies focusing on ethical behavior of leaders and examined separately the different
mechanisms through which an entrepreneur’s moral awareness and ethical behavior may
affect product innovation in a sample of 113 new Chinese ventures. The results show that
product innovation is enhanced when entrepreneurs have low moral awareness, which is
associated with a high level of individual creativity. Product innovation is also enhanced
when entrepreneurs behave highly ethically, which makes founding teams more creative.

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Appendix. Measurement of major variables Product
All measurements were estimated on a five-point Likert scale from 1 = strongly disagree to 5 = innovation
strongly agree.
Product innovation (a = 0.72)
Zhang and Li (2010)
Entrepreneurs rated the relative success of their ventures in terms of:
 Frequently introducing new products. 445
 Being the first to introduce new products.
 Launching new products rapidly.
 Developing new products of superior quality.
 Penetrating markets with new products.

Entrepreneurs’ moral awareness (a = 0.93)

Reynolds (2006).
Vignette: You are the general manager of a company. One of your most important customers,
a medical clinic, called yesterday. It had ordered a product 10 days ago. Products are normally
delivered within 7-10 days, but it had not arrived. Quickly, you traced the order to the shipping
office. The shipping clerk said, “I shipped it two days ago!” As you left the shipping office, you
glanced at her desk and saw her shipping receipts. You could clearly see that the order had been
shipped this morning. You called the clinic back to let it know the product was on its way. When
you talked to the clinic, you learned that the delay of the product had not affected its patients in any
way.
Entrepreneurs read the scenario and indicated their agreement/disagreement with three
statements:
(1) This situation comprises very important ethical aspects.
(2) This matter clearly involves no ethical issues.
(3) If the company has an ethics resource committee, I would definitely report this
situation.
Entrepreneurs’ ethical behavior (a = 0.85)
Brown et al. (2005).
Team members rated their founder according to the following standards:
 Listens to founding team members.
 Disciplines founding team members who violate ethical standards.
 Conducts personal life ethically.
 Has the best interests of founding team members in mind.
 Makes fair and balanced decisions.
 Can be trusted.
 Discusses business ethics or values with founding team members.
 Sets an example for how to conduct business ethically.
 Defines success not only by results but also by how they are attained.
 When making decisions, asks “What is the right action?”.

Entrepreneurs’ individual creativity (a = 0.97)

Perry-Smith (2006).
Entrepreneurs rated whether their ventures had:
CMS  New ideas and approaches to customer problems.
13,2  New applications for existing technology.
 Risk-taking.
 Radical new ideas.
 Novel long-term vision or applications.

Founding teams’ creativity (a = 0.88)

446
Anderson and West (1998).
Entrepreneurs rated whether founding team members did the following:
 Often devise new ideas associated with the job.
 Always solve problems by proposing new and creative ideas.
 Consider problems from different perspectives.
 Expand knowledge or skills in the job category.
 Develop new products and services frequently.
 Incorporate different information and knowledge creatively.
 Suggest unique new methods to solve problems.
 Use new methods for accomplishing tasks.

Corresponding author
Lihua Wang can be contacted at: lihua@sfsu.edu

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