**INNOVATION AND PERFORMANCE OF SMALL AND MEDIUM
ENTERPRISES (SMES) MANUFACTURING SECTOR IN
MALAYSIA
Othman bin Aman
Prof. Dr. Abu Bakar Mohd Yusof
Amir Aris
Institute of Technology Management and Entrepreneurship
Universiti Teknikal Malaysia Melaka (UTeM)
Mukhiffun Mukapit
Department of Human Resource Management
Faculty of Management & Muamalah
Selangor International University College (KUIS)
Abstract
Although the literature suggests innovation stimulate performance in organizations,
limited study have investigated the relationship between innovation and performance in
organization, particularly in small and medium-sized enterprises (SMEs) manufacturing
sector. This study attempt to address an innovation and performance of 160 small and
medium enterprises in manufacturing sector in Malaysia. The finding of the empirical
research indicates significant relationships between an innovations activity and
performance of SMEs.
Introduction
More than ever before business organizations need innovation to compete successfully in
the dynamic and chaotic world of global influence and competition. In fact, to survive in
the current competitive global business environment, companies need a regular stream of
innovation to succeed. Business organization need innovation to create new product and
service as well as to maintain their competitive advantages. Business which try to stand
will not survive (Hellriegel et. Al 2001: Lewis et. Al 2001: Drucker, 1985; Kanter, 1983;
and Porter, 1980).
In view of the importance of innovation, management theorist and practitioners alike
have emphasized on the need for organizations to become more innovative regardless of
their size. As a matter of fact, many of the management theorist and practitioners
believed that innovation not only plays crucial role in determining the success of the
organizations, but also helps to maintain their competitiveness (Caird, 1994;
Johannessen, Oslen, and Lumpkin, 2001, Darroch and McNaughton, 2002)
Even though innovation is crucial to success of firm, this issue has received minimal
attention in the small business research literature, particularly in the Malaysian context.
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The review of small business research reveals prior studies on innovation in small and
medium enterprises are still very limited in focus and scope (Sayles, 1974). Furthermore,
previous studies have mainly emphasized on reporting and describing issues such as: type
and characteristics of innovative small firms, relative strength and weaknesses of small
firms in innovation, role of innovator in product innovation in small firms, and
innovation evaluation programs (Khan and Manopchetwattana, 1989; Upton Seaman and
Sexton, 199; Caird, 1994, 1998). Few studies, however, have attempted to examine
organizational factors that influence innovation in SMEs ( Johannessan, Oslen, and
Lumpkin 2001)
Given the importance of innovation to SMEs, more research is obviously needed in this
area. One particularly important research area would be to examine the effect innovation
and performance in small business. According to Covin and Slevin (1989), high
performing firm typically related to increase hostility by creating internal administrative
structure which allowed them effectively and efficiently to manage any necessary
strategic repositioning. The classification of firms into high and lowing performing
subgroup was accomplish through the use of a modified version of Gupta and
Govindarajans’ (1984) performance scale (Covin and Covin, 1990). The performance
criteria were used such as new product success, sales level. Sales growth rate, cash flow,
return on investment (RO), gross profit margin, net profit from operation, profit to sales
ration, and ability to fund business growth from profits. This paper reports an empirical
study that examined the effect between an innovation activity and performance of SMEs
in the Malaysian Manufacturing Sector.
Objectives of the Study
The objectives of this study are:
1. To identify the innovation activities toward successful SMEs development in
manufacturing Sector.
2. To study the relationship between innovation and performance SMEs in
manufacturing sector.
3. To determine the criteria needed for successful SMEs development in
manufacturing sector.
Literature Review
Innovations for SMEs are new ideas in the business of producing, distributing and
consuming product or service (Beiji, 2000). The common definition of ‘innovation is ‘the
process to undertake a change in one or more of many aspects of production, distribution
and consumption of economic goods, (Beije, 2000, p 22). Schumpeter (1961) has made a
classification of innovation that is more practical, consisting of: (1) new product; (2) new
process; (3) ways to penetrate new market; (4) new supply sources or distribution
methods; and (5) industry. It contains all basic categories of ways in which the
entrepreneur can earn money bay undertaking new activities. In addition to that, there are
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innovations in other areas beyond these five categories, such as use of new management
practices and organization structure, developing and retaining skilled personnel,
organization culture, securing financial resources, managing interface with government
and other external agencies (Mehta & Joshi, 2002).
Drucker (1985) discusses innovation in relation to entrepreneurs. Innovation is a specific
tool of entrepreneurs, the means by which they exploit change as an opportunity for
different business or different service. Entrepreneurs need to search purposefully for
sources of innovations, the change and their symptoms that indicate opportunities for
successful innovation. They need to know and to apply the principles of successful
innovation (Drucker, 1995).
Innovation is the act that endows resources with a new capacity to create wealth
(Drucker, 1985). Innovation creates resources and also changes the value and satisfaction
obtained from the resources by the consumer Drucker (1985) discussed this in the case of
Japan wherein the country became the big economic power bay adopting creative
imitation, importing the low cost technology and adopting it instead of undergoing
increased R&D and new product development.
In the study by Johannessen et.al (2001), these researches reffered to innovation as
newness and used six different types of innovation activity to measure innovation as
newness. Drawn from prior research, Johannessen et.al (2001) developed the following
six areas of innovation activity : new products, new services, new methods of production,
opening new markets, new source of supply, and new ways of organizing.
Research Methodolgy
Procedure and sample
The sample for this study consisted of small and medium-sized enterprises (SMEs) in the
manufacturing sector in Malaysia. In this study, a small and medium-sized enterprise
(SMEs) is defined as a manufacturing firm with an annual turnover more than RM10
million and as one which is actively managed by its owner/s. Based on this definition,
3,914 SMEs Southern region in Malaysia (Selangor, Wilayah Persekutuan, Negeri
Sembilan, Melaka, and Johore Bahru) were identified from the listing obtained from the
Small and Medium Industries Development Corporation (SMIDEC).
The Managing Director, Chief Executive Officers, and Senior Manager of selected firms
were contacted by telephone and informed of their selection as part of the present study.
Through the telephone conversation a follow-up letter, the participation of the respondent
was requested and confirm. By using a structured questionnaire, the data were collected
through personal interviews with the respondents. Out of the total number of 1,500
respondents selected, 160 confirmed their participant and completed the questionnaire.
This out resulted in an overall response rate of 11%
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Survey Questionnaire
The structured questionnaire used in this study contained 36 questions as a mean in three
sections. The first and second sections of the questionnaire which consisted of 16 items
were used obtain the general information concerning the background of the respondents
(6 items) and the firms characteristics (10 items).
The remaining 20 questions in sections three of the questionnaire were designed to
capture the respondent assessments of their firm’s innovation activity. Among the sample
items in section there were: innovation activities, importance innovation, and best way
promote innovation and the criteria used to measure the success of innovation.
Finally, the items used in section four of the questionnaire to measure the innovation
activity of the firms included; improved products, improved service, new products, new
service, open new market, new sources of supply, new methods of production and new
ways of organizing.
The 20 items (in section 3) which were adapted from the earlier works on innovation
served as a basis for querying an innovation activity and performance reported by each of
the respondent. The respondents were asked to rate each item on a five-point scale as
follow: ranging from (1) strongly disagrees to (5) strongly agree. The questionnaire was
tested prior to the interviews held with the respondents. The coefficient alpha scores of
the measure ranged from 0.75 to 0.83.
The result
Characteristic of the Respondents
Table 1 below display the personal characteristic of the 160 respondent that participated
in the survey. Out of 160 respondents, 90 were Chinese, and 70 Malays, Hundred twenty
six of respondent were males and the remaining thirty four were females. The age of the
respondents ranged from 30 to 60 years old. In terms of experience, the information
gathered from the study indicated that the respondents had been five and 24 years of
work experience. As far as their education is concerned, 19 had their school certificates,
sixty five had diploma, sixty five obtained a bachelor’s degree and eleven earned a
master’s degree.
Characteristic of the Sample Firms
The following Table 2 summarizes the characteristics of 160 firms that participated in the
study. Out of the 160 firms, 10 firms served the international markets, 25 mainly focus on
the national market, another 100 emphasized on the regional market and the remaining
twenty five locally.
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As shown in Table 2, 46 were private limited companies and five were partnership
companies. The 160 firms had been in operations between ten and 27 years. The number
of products produced by the firms ranged from three products to 80 products. Their sales
volume for the years 2006 ranged from 10 million ringgit to 25 million ringgit. The paidup capital for the 160 firms ranged from 25,000 ringgit to 3 million. In terms of
employment, the 160 firms employed between 40 and 250 employees.
Table 1 : Characteristic of Respondents
Frequency
Race:
Malays
Chinese
Indian
others
Sex:
Male
Female
Age:
Marital Status:
Married
Remarried
Never married
Industry Experience:
Highest Certificate or Degree:
School Certificate
Diploma
Bachelor’s Degree
Master Degree
Percent
70
90
44.0
56.0
-
-
126
34
79.0
21.0
Range
30-60
130
5
25
81.0
3.0
16.0
5-24
19
65
65
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Table 2 : Characteristic of Sample Firms
Frequency
Breadth of Operation;
International
10
National
25
Regional
100
Local
25
Firm Age:
Legal Form:
Private limited
10
Public limited
150
Others
No. of Products:
Volume of sales:
12.0
40.0
40.0
8.0
percent
Range
6.0
15.0
63.0
16.0
10 - 27
6.0
94.0
3 - 80
10 mil – 25
mil
5
Initial Paid – up capital
No. employees:
25,000 – 3.0
mil
40 - 250
Innovation Activity
This study also attempt to investigate the level of innovation activity in the 160 firms. To
determine their innovativeness, a five point scale was used to measure the eight areas of
innovative activity. The respondents were asked to indicate the level of innovation they
have achieved in the eight areas.
The following Table 3, provides the mean and standard deviation scores for the eight
areas of innovative activity as reported by the 1600 respondents. As indicated in Table 4,
the high positive mean score suggest that most of the 160 firms had achieved high level
of innovation activity as measured in terms of improved products (4.0), improved service
(3.96), to be followed by new products (3.65), new service (3.65), ways of organizing
(3.62), new market (3.60), new method of production (3.44), and new source of supply
(3.40).
Table 3: Mean and Standard Deviation Scores of Innovation Activity
Innovation Activity
Mean
Std. deviation
Improved products
4.00
.989
Improved services
3.96
.771
New products
3.65
1.158
New services
3.65
1.158
New methods of production
3.44
1.382
Open new markets
3.60
1.106
New sources of supply
3.40
1.125
New ways of organizing
3.62
1.084
Success of innovation activities
The responses to the five-point strongly agree / strongly disagree question on the
innovation activities gathered from the 160 respondents are condensed in the following
Table 4.
Table 4: Mean and Standard deviation Scores of success of innovation activities
Success of innovation activities
Mean
Std. Deviation
Profitability
2.48
1.052
Market share
2.40
.893
Quality of product
2.17
.996
Reduce costs
2.15
.967
Customer satisfaction
2.10
.881
Employee satisfaction
2.40
.939
Employee participation
2.65
1.021
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Relationship Between performance and Innovation Activity
The following Table 5 and Table 6 presents the results of the correlations between the 7
performance and innovation activity of the 160 firms that participated in the study. As
presented in Table 5 below, the results showed significant positive relationships between
the 7 performances (Profitability, market share, quality of product, reduces costs,
customer satisfaction, employee satisfaction and employee participation). However, the
results of the correlations between the performance, and new products were found to be
not significant.
Table 5: Correlation Between performance and Innovation Activity
New
Improved
Improved New
Performance (N=160)
product
services
products Services
Profitability
.102
.316 (*)
.085
.372 (**)
Market share
.169
.470 (**)
.015
.449 (**)
Quality of product
.315(*)
.323(* )
.040
.326 (*)
Reduce costs
.238
.420 (**)
.010
.294(*)
Customer satisfaction
.328(*)
.275
.0109
.314(*)
Employee satisfaction
.333(*)
.065
.025
.217
Employee participation
.163
.181
.054
.315(*)
* Correlation is significant at the 0.05 level (2 –tailed)
** Correlation is significant at the 0.01 level (2-tailed)
The result in Table 6 show that the correlations between the performance and innovation
activity of the 160 firms that participated , the results showed significant positive
relationships between 7 measured in term of new method of production, open new
markets, and new ways of organizing. Except for new source of supply results of the
correlations were not significant.
Table 6: Correlation Between Performance and Innovation Activity
New
Open new New
Human
Resources
Practices methods of Markets
sources
(N=50)
production
of
supply
Profitability
.342(*)
.291(*)
.272
Market share
.355(**)
.204
.138
Quality of product
.242
.074
.060
Reduce costs
.332(*)
.203
.211
Customer satisfaction
.234
.197
.107
Employee satisfaction
.136
.051
.010
Employee participation
.024
.099
.014
* Correlation is significant at the 0.05 level ( 2 –tailed)
** Correlation is significant at the 0.01 level (2-tailed)
New ways
of
organizing
.100
.349(*)
.158
.028
.025
.065
.084
Discussion and Conclusion
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The purpose of this empirical study was to examine the effect human resources practices
and the innovation activity of small and medium-sized enterprise (SMEs) in Malaysian
manufacturing sector.
The correlation analysis of data gathered from 160 SMEs Manufacturing sector in
Malaysia indicate some statistically significant relationships between innovation activity
and performance of the firms in the study. The results of the study add support to
previous studies that suggested relationship existed between innovation activity and
performance business organizations. This finding is consistent with the earlier
observations made by Johannessen et.al (2001), and Drucker (1995).
On the basis of the results of the study, several findings can be summarized. First, the
empirical information resulted from this study suggest that the innovation activity and
performance in SMEs, particularly in term of improved services and new services.
Second, in term of performance, the results of the study suggest that the 160 firms in the
study followed the pattern of innovative firms as highlighted in the literature. Third, at
the general level, the findings of the study indicate that the 160 firms that participated in
the study focused on performance that fostered innovation.
These findings offer the following managerial implication for SMEs in Malaysia. The
findings of this study suggest relationships existed between an innovation activity and
performance in SMEs. The positive relationships between an innovation activity and
performance suggest that these variables are important for SMEs striving to become
competitive. Hence, in order to ensure that their firms would continue to become
innovative, owner and managers of SMEs need to be concerned with can help stimulate
their innovativeness.
Finally, this research empirically demonstrates that these exist positive relationship
between innovation activity and performance of SMEs. Given the findings of the present
study, approaches to enhance a innovation activities appear to be worthwhile. If small
and medium-sized enterprises are to be more innovative, their owner and mangers need to
intensify their training and development efforts to further improve their performance.
This greater commitment and efforts may present SMEs with additional opportunity to
enhance not only their level of innovativeness, but also their competitiveness.
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