1
FACTORS AFFECTING THE FIRM PERFORMANCE AMONG SMALL AND
MEDIUM SIZED ENTERPRISES (SMES): A CONCEPTUAL PAPER
Sorayah Nasipa1
, Ramraini Ali Hassanb, Nurulain Najihah Muda
c
a b c
Entrepreneurship Research and Development Centre (ERDEC),
Universiti Malaysia Sabah, Malaysia
ABSTRACT
The purpose of this paper is to examine the factors affecting the firm performance among
SMEs owners in food services sector in East Malaysia, Sabah. A conceptual framework was
developed to highlight the relationship between the factors and firm performance. This due to
many challenges faced by SMEs in order to survive in business and yet the resources is
scarce.
Keywords: Financial capital, human capital, social capital, technology and operation
_____________________
1 Corresponding author Email: [email protected]
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1.0 INTRODUCTION
Small and Medium Sized Enterprises (SMEs) has been noted played a major roles to
economy growth of many countries (Omar, Arokiasamy and Ismail 2009; Ayyagari, Beck
and Kunt, 2007; Audretsch, 2002; Beck, Kunt and Levine, 2005; Storey, 1994). In Malaysia
perspectives, the numbers of SMEs is growing has reported by (Shankar, Pandian, Sulaiman
and Munusamy, 2010) and SMEs also expected to contribute around 50 per cent of the Gross
Domestic Product (GDP) in the year 2020 (Hashim, 2000). Moreover, SMEs act in order to
serve the community through job creation, accelerating competition among business players,
introducing innovation and acting as a supply chain to the Multinational Companies in
Malaysia (Hashim and Wafa, 2002).
Table 1: Malaysia: Definition of Small and Medium Enterprises
By Annual Sales Turnover (AST) and Full-time Employees (FTE)
Sectors Micro enterprises Small enterprises Medium
enterprises
Manufacturing,
manufacturing-related
services, and agro-
based industries.
AST less than
RM250,000; or FTE
less than 5.
AST from
RM250,000 but less
than RM10 million;
or FTE between 5
and 50.
AST between RM10
million and RM25
million; or FTE
between 51 and 150.
Services, primary
agriculture, and
information &
communication
technology (ICT).
AST less than
RM200,000; or FTE
less than 5.
AST from
RM200,000 but less
than RM1 million;
or FTE between 5
and 19.
AST between RM1
million RM5
million; or FTE
between 20 and 50.
Source: SME Corporation Malaysia 2013.
Table 2: Malaysia: SME Profiles
Sector Total
Establishment
(a)
Total SMEs
(a)
Percentages
(%) of SMEs
over Total
Establishment
(b)/(a)*100
Total
Employment
by SMEs
Overall Total 662,939 645,136 97.3 3,669,259
Services 591,883 580,985 98.1 2,610,373
Manufacturing 39,669 37,861 95.4 698,713
Agriculture 8,829 6,708 76.0 78,777
Construction 22,140 19,283 87.1 275,631
Mining &
Quarrying
418 299 71.5 5,765
Source: SME Corporation Malaysia 2013
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Based on Table 2 above, 98.1 per cent of SMEs in Malaysia are in the service sector,
followed by 94.5 per cent in manufacturing, 87.1 per cent in construction and 76.0 per cent in
the argiculture sector. Meanwhile, the Service sector alone contributes around 2,610,373
employment opportunities as compared to other sectors. Below on table 3 stated the lists of
agencies that assist and support the SMEs activities in Malaysia.
Table 3: Agencies to support SMEs activities in Malaysia
Agencies Year
establish
Functions
MARA (Majlis Amanah
Rakyat or the Council of
Trust for the Indigenous
Peoples)
1966 Education, training, provisions of technical and
financial assistance, establishment of new
industrial enterprises and management of
enterprises in the initial stages with a view to
the ultimate transfer of their ownership to the
bumiputera themselves.
PERNAS (Perbadanan
Nasional Berhad, The
National Corporation)
1969 To promote Malay participation in insurance,
construction, trading, properties, engineering,
and securities.
UDA (Urban
Development Authority)
1971 Commercial and property development for
Malays.
PUNB ( Perbadanan
Usahawan Nasional
Berhad)
1991 To increase participation of bumiputera
entrepreneurs in industry sector by equipped
them with knowledge and experience to ensure
more competitive in the market.
TEKUN (Tabung
Ekonomi Kumpulan
Usaha Niaga)
1994 To provide the micro loan and support for
business among bumiputera.
SMIDEC (Small &
Medium Industries
Development
Corporation), currently
known as SME
Corporation (SME Corp).
1996 To promote the development of Small and
Medium Industries (SMIs) in the
manufacturing sector through the provision of
advisory services, fiscal and financial
assistance, infrastructure facilities, market
access and other support programmes.
MECD, Ministry of
Entrepreneur and Co-
operative Development
2004 To provide an environment that is conducive
for the development of genuine entrepreneurs
who are innovative and progressive; possessing
the quality, resilience and competitiveness in
all sectors; and to inculcate an entrepreneurial
and co-operative culture amongst Malaysian
citizens.
INSKEN (Institut
Keusahawanan Negara)
2005 To implement entrepreneurship training and
guidance programmes to improve and
strengthen the knowledge and expertise of the
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existing and future entrepreneurs (bumiputera).
TERAJU 2011 To assist the bumiputera Economic
Transformation Road Map.
Research questions
This research addresses the following research questions:
i. What is the demographic profile of bumiputera owners of SMEs in food service sector
along the West Coast of Sabah?
ii. What are the challenges faced by bumiputera owners of SMEs in food sector from the
perspective of financial, human, social, technology and operation in determining
performance along the West Coast of Sabah.
2.0 FACTORS AFFECTING THE FIRM PERFORMANCE IN MALAYSIA SMES
Many factors influence the firm performance which can be found in the study done by
Cooper and Gascon (1992). Therefore, several factors are considered by the researchers in
order to measure the firm performance among SMEs owners as:
2.1 Financial capital
Financial capital is defined as the purchasing power or medium that represents saved-up
financial wealth, usually in the form of currency, which is used by firms or individual
entrepreneurs to invest in start-up in order to purchase physical capital (Curtiss, 2012). She
pointed out that, physical capital include machinery equipment, stalls or office equipment and
buildings that are repeatedly used over several production cycles. Moreover she explains that,
financial capital is accumulated to produce goods or to provide services mainly with the
intent of receiving income or achieving capital gains. Therefore, there are two important
forms of financial capital includes debt and equity (Van Praag, 2003).
Financial constraint is a most major challenge to SMEs growth around the world. According
to Thurik (2007) noted that, SMEs face many complexity which depending on a single
product, hard to get fund sources, lack in term economics of scale and insufficient budget
control system. Moreover, Alam et.al (2011), a study conducted of food manufacturing in
Klang Valley, Malaysia highlighted financial barriers such as high collateral requirements,
bank charges, bank bureaucracy, banks ignoring loan proposal, time consuming loan
disbursement, costly preparation of a business plan and refusal of bank finance are the major
obstruction to growth of the firm.
Kasseeah and Ragoobur (2011) conducted a study 398 of SMEs in Mauritius to find a link
between finance, firm size and growth of the firm. They further argued, government give
strong support to the SMEs development in Mauritius, but yet firm still tend to report having
a problem in access to finance. Therefore, they concluded that, firm performance depending
on assessing to finance and finance also slow up the performance of the firms. Therefore, we
propose this hypothesis:
Hypothesis 1: The financial capital is positively affects a firm’s performance in service
sector.
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2.2 Human Capital
Human capital is defined as the range of valuable skills and knowledge a person has
accumulated over time (Burt, 1992). This theory on human capital was originally developed
by Becker 1964 in his seminal work. Moreover, he argues that an increasing in cognitive
abilities which he or she be able to perform a better job was associated with an individual
investment in human capital such as education, skills and experiences. According to Florin
and Schultze (2000) revealed the human capital into two categorised as general and specific
human capital. For instances, general human capital include education and working
experience. While, specific human capital refers to skills in industry or firm, business training
and managerial experience. Much study has revealed two components of human capital such
as general and specific human capital of entrepreneur’s profile (Bosma et al., 2004; Bruderl et
al., 1992; Gimeno et al., 1997; Wiklund and Shepherd, 2003). Additionally, human capital
such as intellectual resources and industry specific experiences aid for an entrepreneur to face
hurdle in business ownership (Coleman, 2007).
Human capital can be divided into two categorises such general human capital and specific.
General human capital attributes such as level of education and working experiences in any
industries. Meanwhile, specific human capital included the business training and managerial
experience. Much studies result revealed that, human capital such education, experience,
knowledge and skills associated with small firm success (Florin, Lubatkin, & Schulze, 2003;
Rauch & Frese, 2000). Also a number of studies supported that, firm survival and success
influenced by the human capital attributes (Bates, 1985, 1990; Bosma et.al. 2004; Brüderl,
Coleman, 2007; Preisendörfer, & Ziegler, 1992).
Davidsson and Honig (2003) found that the association between human capital and firm
performance consists of education and persistence. According to Cooper, Gimeno-Gascon,
and Woo, 1994, (1994) defined education as a combination of knowledge, skills, discipline,
motivation and self-confidence. Moreover, different types of human capital study reflect the
different stages of decision making styles of SMEs founder toward firm performance
(Davidsson and Honig, 2003). Kangasharju and Pekkala (2002) conducted a study in Finnish
firms found that during economic recessions and economic booms, those entrepreneurs who
had a higher education contributed to higher firm growth. Furthermore, they argued that
highly educated entrepreneurs had a lower probability of exiting the business during
difficulty of economic crisis (Kangasharju and Pekkala, 2002). This result also supported by
Pena (2002) revealed that, firm growth was associated with entrepreneurs who had a college
degrees which studied were conducted in Spanish firms. Nonetheless, less likely to fail in the
business war is entrepreneurs’ who had a college education as compared those who did not.
Therefore, education attribute of human capital had a significant effect on both firm survival
and growth (Cooper et.al, 1994). Nonetheless, in United States, success seems to be
associated with better education (Burns, 2008).
Next, second attribute of human capital in this study refers to working experience. According
to Parker (2006) explained that, through experience, an individual become more productive
and (Davidsson and Honig, 2003) allowed them to adapt to new situation. Consequently,
point highlighted by Bate (1990) and Gimeno et.al. (1997), an individual ability to start a new
business is associated with work experiences. Furthermore, a study of 1000 firms in
Netherlands result revealed that, small firm performance in terms of survival, profitability
and growth are associated with prior experience in an industry (Bosma, et.al, 2004).
Moreover, Batjargal (2005) reveals that industry experience among Russian entrepreneurs
have positively impacted on firm revenue growth. Nonetheless, as the “individuals with more
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human capital than other people have (such as experience and formal education) will achieve
what they intend to (Becker, 1964 as cited in Chen, Su & Wu, 2012 p.1313). A study among
198 manufacturing SMEs in UK by Jayawarna, Macpherson and Wilson (2007) has found the
formal training is significantly associated with performance rather than informal training. In
addition, Yahya, Othman and Shamsuri (2012) revealed, training is positively related with
performance where the study was conducted among 138 SMEs in Malaysia. Therefore, we
propose this hypothesis:
Hypothesis 2: The human capital is positively affects a firm’s performance in service sector.
2.3 Social Capital
Social capital is defined as “the aggregate of the actual or potential resources which are
linked to possession of a durable network of more or less institutionalised relationships of
mutual acquaintances or recognition” (Bourdieu, 1986, p. 248). He argued in his seminal
work that, network and social obligation are included in social capital. Moreover, Putnam
(1993) pointed out that, trust, norm and network are associated with social capital and these
feature led to mutual benefit. Further argued by Nahapiet and Ghoshal (1998), social capital
also led to increases the efficiency of action and aids cooperative behaviour. In general,
network divided into informal or personal contact networking and formal network or inter-
organisional contact. As refers to informal network or personal contact networking (PCN),
this occured among family members, friends and social contacts from local community.
Meanwhile, formal network or inter-organisational contact started to build during growth
stages of the business which link with many parties such as lawyer, supplier, banker,
accountants, governement agencies and others to obtain needed business information.
Davidsson and Honig (2003) pointed out that, through social structures, networks and
memberships, an entrepreneur’s or actor be able take benefits on it.
Coleman (1988, p. 96) defined social capital as “a set of resources inherent in family relations
and in community social organizations that are useful for the cognitive or social development
of a child or young person”. Putnam (1995) defines social capital as the features of social
organizations, such as networks, norms, and social trust, all of which facilitate coordination
and cooperation for mutual benefit. Much previous research referred social capital with
network (Brass, 1995; Burt, 1992). According to Nahapiet & Ghoshal (1998) explained that,
exchange information among members were associated with competitive advantage of the
firm.
Lerner, Brush and Hisrich, (1997) found that, Israel women entrepreneurs perform better in
term of profitability which association with a single network, but shown opposite
unfavourable relationship with multiple networks towards revenues and number of
employees.
A study of SMEs in South Africa by Fatoki (2011) revealed that, social capital has positively
relationship with firm performance. This study demonstrated among 122 entrepreneurs who
involved in four sectors such as manufacturing, retail, wholesale and service. An addition,
this study also found out the positive relationship between human and financial capital with
firm performance. Therefore, we propose this hypothesis:
Hypothesis 3: The social capital is positively affects a firm’s performance in service sector.
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2.4 Technology
Technology in this study refers to “a transformation of key business processes by using an
Internet technology (IT)”(Meckel et al, 2004). According to Hamill (1997) argued that,
internet connected the business to other business or network to network and also the one with
the ultimate business potential. For example, in 1995, Amazon.com and e-Bay were both
created the most significant booms in trade history (Philipson, 2005). Moreover, small firms
adopt this technology, carry the potential to gain leverage in competing in international
markets (Bennett, 1997). Thus in Malaysia perpective, the important of technology adoption
among Small and Medium sized Enterprises (SMEs) is significant to the Malaysia economics
development (Abdullah, 2002).
However, according to Ein Dor and Segey (1978), argued that small firm face many barriers
to IT adoption and are less likely to adopt IT as compared to larger organisation. This due to
many contraints on financial resources, a lack of in-house IT expertise and short-range
management perspective (Welsh & White, 1981; Blackburn & Athayde, 2000; Ndubisi &
Jantan, 2003). In addition, Ssewanyana & Busler (2007) revealed that, 143 firms in Uganda
do appreciate of Information and Communication Technology (ICT) was associated with firm
performance, but the many barriers such as high costs of hardware, software, Internet and
ICT professionals among others are an hindrance to their progress.
Thus study in Malaysia, Hashim (2007) surveyed has been conducted 383 SME owners in
Malaysia revealed that, the level of ICT skills is poor and the SME owners seldom use
internet at their workplace. Other study among 85 manufacturing companies in Sarawak East
Malaysia shows that information technology is positively related with firms’ performance
(Lo, Mohamad & La, 2009). Therefore, we propose this hypothesis:
Hypothesis 4: The technology is positively affects a firm’s performance in service sector.
2.5 Operation
Operation is defined as the management of systems and processes that are involved in the
manufacturing of products and also relates with good quality, competitively priced and
provide excellent customer services (Stevenson, 2002). Moreover, operation associated with
the consistency between business capabilities and policies and business competitive
advantages (Adam and Swamidass, 1989). Strategy guided the organization to move to the
right path by consistency in decisions making in achieving the vision (Russell & Taylor,
2003). Stock, Gries and Kasarda (1998, p.40) refers strategy as a business strategy on how a
business unit will achieve and maintain a competitive advantage within its industry. Hence,
operations strategy also called as a manufacturing strategy (Johnston, 1994; Skinner, 1969).
Reid and Sanders (2002) pointed out that, the role operation strategy is related to the action
taken by the organization in order to utilize its resources. In addition, operation strategy is
relates with how strategic decisions are made in an organisational setting (Ho, 1996). For
instance, the operation strategy is involving four dimensions such as low cost, quality,
flexibility and delivery performance (Stonebraker and Leong, 1994 in Badri, Davis & Davis,
2000; Heizer & Render, 2009).
First dimension of operational strategy is low cost. Cost refers to the sum of all discounted
costs to the firm involved in developing, producing, delivering, servicing, and disposing of
the product (Badri et al., 2000, p.159). Secondly, quality is defined as, a quest for excellence,
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creating the right attitudes and controls to make prevention possible by increased efficiency
and effectiveness (Prasad, Jha & Prakash, 2015).Third, flexibility stated by Gerwin (1986, p.
39) as, “flexibility is the ability to respond effectively to changing circumstances.” Other
definition of flexibility is the ability to respond with little penalty in time, effort, cost and
performance to the ever-changing and increasing customers’ needs (Sethi & Sethi, 1990;
Upton, 1994). Verdu and Gomez-Gras (2009), argued that the flexibility can affect the cost
and speed of company operations’ response, as well as triggers changes that are generally
reversible or short-term in nature. The last dimension is delivery. Delivery involve two points
which emphasis on meet delivery schedule as delivery dependability and react quickly to
customer orders to delivery fast or delivery speed (Spring & Boaden, 1997).
Perçin and Ustasüleyman (2006) shown that cost and quality positively affect a firm’s
business performance which involve 200 firms in Turkey. Anwar, Subroto, Alhabsji and
Djumahir (2014) revealed that, the operations strategy has directly enhanced implementation
of competitive strategy and business performance in 153 small scale business of coconut oil.
Schroeder, Goldstein and Rungtusanatham (2011) found that the operations strategy
significantly affects competitive strategy in order to increase firm’s performance. A study
conducted by Butt (2009), revealed that the cost, quality, flexibility, and delivery is
associated with the firm financial performance. Therefore, we propose this hypothesis:
Hypothesis 5: The operation (low cost, low cost, quality, flexibility and delivery) is positively
affects a firm’s performance in service sector.
2.6 Firm Performance
Firm performance indicators can be measured by financial and non-financial. In traditionally
term of an accounting, firm performance was includes sales growth, market share and
profitability. Chong (2008) revealed that, the owners-managers in SMEs combining the
financial and non-financial measures to evaluate performance against the predetermined goals
and time. Many studies regarded performance referred to firm growth (Davidsson et al. 2002;
Kolvereid 1992; Rodriquez et al. 2003) and also consists of sales growth, the growth of the
company’s assets and profit growth (Lee and Tsang, 2001). Nevertheless, non financial
indicator can be measured by the number of the employees (Wren and Storey, 2002). To
summarise the discussion above, a conceptual framework about the factors affecting the firm
performance can be illustrate in Figure 1.
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Figure 1. A Conceptual Framework about the factors affecting the firm performance
3. CONCLUSION
In summary, financial capital, human capital, social capital, technology and operation are
important to the sustainability of the SMEs. Each variable had a direct effect on firm
performance among SMEs. The conceptual framework put forward in this paper clarifies the
importance of each variable that must be taken into consideration in order to get the entire
prospect on SMEs performance.
Financial capital
Operation
Technology
Human capital
Social capital Firm performance
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Measuring the impact