A Study on Factors Affecting the Performance of …

1 International Journal of Academic research in Business and Social Sciences April 2012, Vol. 2, No. 4 ISSN: 2222-6990 224 A Study on Factors Affecting the Performance of SMEs in Malaysia M. Krishna Moorthy, Annie Tan, Caroline Choo, Chang Sue Wei, Jonathan Tan Yong Ping, and Tan Kah Leong Department of Commerce and Accountancy, UniversitiTunku Abdul Rahman, Perak Campus, Kampar, Malaysia Abstract In Malaysia, despite SMEs have a significant contribution to the economy, they have not been given adequate attention as the various researchers have been biased towards larger and listed enterprises in Malaysia. So, this Study aims to investigate the Factors Affecting the Performance of SMEs in the manufacturing sector in Malaysia. The Contingency Theory developed by Fiedler (1964) was used to support this research .

2 Based on the data collected from 300 SMEs in the Malaysian manufacturing sector, the results showed that there is a significant negative relationship between ineffective entrepreneurship as well as inappropriate human resource management (HRM) and the Performance of SMEs. On the other hand, the results also proved that there is a significant positive relationship between the use of marketing information as well as the application of information technology and the Performance of SMEs. In short, this Study found out that the use of marketing information can influence the Performance of SMEs at the highest. Keywords: SMEs, Performance of SMEs, Contingency theory and Performance of SMEs. 1. research Overview Small and Medium Enterprise Corporation Malaysia (SME Corp. Malaysia) classified Small and Medium Enterprises (SMEs) based on the yearly sales turnover or quantity of full-time workers.

3 On the other hand, the Performance of small businesses is defined as their capability to lead to the creation of employment and wealth by business start-up, survival and sustainability (Sandberg, Vinberg, & Pan, 2002). In line with the SME annual report 2010/2011, SMEs represented approximately of the entire business formations in Malaysia in 2010. Performance of SMEs is crucial as they will transform Malaysia into a high-income and knowledge-based economy through their contribution to the national GDP. Despite their important contribution to exports, employment and economic growth, the total number of SMEs has decreased from 17,157 firms in 2010 to 16,893 firms in 2011 according to the SME information provided by the Department of Statistics of Malaysia.

4 In addition, even though there is successful historical evidence regarding the development of SMEs in Malaysia, the development of the SMEs in East Malaysia such as Sabah is slower compared to Peninsula Malaysia. A search of the literature on SMEs in Malaysia reveals that there is a gap in the Study International Journal of Academic research in Business and Social Sciences April 2012, Vol. 2, No. 4 ISSN: 2222-6990 225 which examines the Factors Affecting Performance of SMEs in Malaysia. A Study was conducted by Zindiye (2008) on the SMEs in the manufacturing industry of Harare in Zimbabwe. However, this may not be directly generalized to the SMEs in Malaysia as the structure of industry, culture and norms in Malaysia may be different from that in other countries. Thus, similar studies should be extended to other industries and other regions to help generalize the findings.

5 2. Literature Review Contingency theory has been widely used in researches on measuring the Performance and effectiveness of an organization and it claims that there is no optimum method to systematize a firm and the organization structure of the company (Fiedler, 1964). In other words, contingency theory argues that the most appropriate structure for an organization is the one that best fits a given operating contingency, such as technology (Woodward, 1965; Perrow, 1970) or environment (Burns & Stalker, 1961; Lawrence &Lorsch, 1967). As every company faces its own set of internal and external constraints as well as special environmental incidents that effect in distinctive levels of environmental uncertainties, there is no one optimal organization design for every company because every company has different organizational culture and different perspective towards risk.

6 Effective Entrepreneurship According to Talaiaand Mascherpa (2011), the entrepreneurial team demographics such as level of education and size of Entrepreneurial Team have a positive relationship in the determination of Performance of SMEs. Fairoz, Hirobuni, and Tanaka (2010) found that there were positive correlations among proactiveness and EO with business Performance . H1: There is a negative relationship between ineffective entrepreneurship and Performance of SMEs in the manufacturing industry in Malaysia. Appropriate Human Resource Management A research by Adnan, Abdullah and Ahmad (2011) indicated that HRM practices did have some effects on Malaysian firm bottom line Performance . Islam and Siengthai (2010) found that most of the core processes of HRM, namely, recruitment and selection, Performance appraisal, training and development, as well as compensations have a momentous and positive impact on firm Performance .

7 H2: There is a negative relationship between inappropriate human resource management (HRM) and Performance of SMEs in the manufacturing industry in Malaysia. Use of Marketing Information A research has been conducted by Cacciolatti, Fearne, and McNeil (2011) indicated that SMEs that make good use of structured marketing information presented a higher probability of growth. The research of Mahmoud (2011) concluded that the higher the level of market orientation, the greater the level of Performance in Ghanaian SMEs. The Study of Keh, Nguyen, and Ng (2007) showed that there was a positive relationship between information utilization and the firm Performance . International Journal of Academic research in Business and Social Sciences April 2012, Vol. 2, No.

8 4 ISSN: 2222-6990 226 H3: There is a positive relationship between the use of marketing information and Performance of SMEs in the manufacturing industry in Malaysia. Application of Information Technology Apulu and Latham (2011) found that the competitiveness of SMEs will be increased through adopting Information and Communication Technology. Subrahmanya, Mathirajan, and Krishnaswamy (2010) summed up that those SMEs which have technological innovation have a higher growth compared to the SMEs which are not creative in the sales turnover, investment and job. H4: There is a positive relationship between application of information technology (IT) and Performance of SMEs in the manufacturing industry in Malaysia. Figure 1: The Framework of Relationship between IV and DV Adapted from:Indarti&Langenberg (2004) and Erdil&Ayse (2010).

9 3. Methodology Descriptive Study was carried out to ascertain the implication of each independent factor towards the Performance of SMEs in Malaysia. A total of 300 sets of questionnaires were forwarded via email to the randomly selected SMEs in manufacturing industry all over Malaysia. Performance of SMEs Appropriate Human Resource Management (HRM) Use of Marketing Information Application of Information Technology (IT) Effective Entrepreneurship Independent Variables Dependent Variable International Journal of Academic research in Business and Social Sciences April 2012, Vol. 2, No. 4 ISSN: 2222-6990 227 The questionnaire consisted of 36 questions. All of the questions will be in likert scale of 1 until 5 with 1 as strongly disagree and 5 as strongly agree. According to the Malaysian SMEinfo, there are 16,884 firms, which are categorized into different business sectors.

10 This research narrowed down the focus on Manufacturing (include Agro Based) and Manufacturing Related Services sectors, which comprise of 7443 SMEs and 44% of all business sectors. Among the 300 sets of questionnaires that were distributed randomly to the SMEs in the manufacturing industry, there was a successful return of 219 sets. Nevertheless, only 209 sets were usable due to 10 sets of incomplete questionnaires. Hence, a of respond rate was successfully achieved. A pilot test involving 25 respondents was performed in order to evaluate the reliability of dependent and independent variables. Based on Table 1, the result indicated that all of the variables were acceptable as the Cronbach's Alpha was more than (Nunally, 1978). Table 1: Reliability Test Variables Construct Cronbach's Alpha Number of Items Dependent Variable Performance of SMEs 8 Independent Variable 1 Effective Entrepreneurship 5 Independent Variable 2 Appropriate Human Resource Management (HRM) 5 Independent Variable 3 Use of marketing information 5 Independent Variable 4 Application of Information Technology 5 Source: Developed for the research Data was analyzed and interpreted by using Statistical Package for Social Science (SPSS) computer software program.