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: sorayah@ums.edu.my

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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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