Innovation Factors Influencing Performance Of Manufacturing SMEs In Malaysia.

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KAJI SELIDIK

Innovation Factors Influencing Performance

of Manufacturing SMEs in Malaysia

Perhatian:

1. Kaji selidik ini hendaklah dijawab oleh Pemilik Firma, Pengarah Urusan, Pengurus

Kanan atau sesorang yang berpengetahuan mengenai pengurusan dan operasi firma.

2. Sila jawab kaji selidik dengan ikhlas.

3. Segala maklumat yang tuan/puan kemukakan adalah rahsia.

Memulangkan kaji selidik yang diisi:

Sila lengkapkan kaji selidik ini dan kembalikan dengan menggunakan sampul surat

bersetem yang telah disediakan.

Pertanyaan:

Sekiranya Tuan/Puan mempunyai apa-apa pertanyaan mengenai mengisi soal selidik ini sila

hubungi:

Othman Aman (calon PhD), Fakulti Pengurusan Teknologi dan Teknousahawanan,

Universiti Teknikal Malaysia, Melaka (UTeM), Kampus Bandar, Jalan Hang Tuah,

Melaka Tel: 0105223341 e-mail othmanaman@utem.edu.my atau

Dr. Ismi Rajiani (Penyelia), Fakulti Pengurusan Teknologi dan Teknousahawanan,

Universiti Teknikal Malaysia, Melaka (UTeM), Kampus Bandar, Jalan Hang Tuah,

Melaka Tel: 0123656617 e-mail ismi@utem.edu.my

Laporan ringkas kaji selidik:

Sekira Tuan/puan berminat untuk mendapatkan senaskah laporan ringkas kaji selidik, sila

tulis nama firma dan alamat dalam ruangan atau lampirkan kad perniagaan.

Nama:

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INNOVATION FACTORS INFLUENCING PERFORMANCE OF MANUFACTURING SMEs IN MALAYSIA

OTHMAN BIN AMAN

A thesis submitted

in fulfillment of the requirements for the degree of Doctor of Philosophy

Faculty of Technology Management And Technopreneurship

UNIVERSITI TEKNIKAL MALAYSIA MELAKA

2014

Comment [ SS1] : Ini perlu ada?

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DEDICATION

To my wife Kamariah binti Kudus &

my children; Aishah, Abidul Qader, Munirah, Faiez and Samiyah with my love

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ABSTRACT

Innovation is a catalyst for the growth and development a country’s economy. The ever changing and uncertainty of the global economy has demanded Malaysia to emphasis on innovation and creativity as the key factors for a sustainable growth in the world of business. In this respect, the Small and Medium Enterprises (SMEs) which are recognized as the backbone of the nation’s economic growth need to be innovative and creative in order to be sustainable. However, some SMEs in Malaysia do not recognize change and reform as an innovation, and they do not consider innovation as part of their manufacturing activities. Further, despite their significant contributions to the Malaysian economy, the SMEs have not been given adequate attention in comparison to the larger size companies and public-listed enterprises in Malaysia. Hence, this study aims to investigate the innovation factors that influence the performance of Manufacturing SMEs in Malaysia. This study is an exploratory descriptive study that utilizes questionnaire as its main instrument for data collection. It was designed to identify and explore the influence of innovation factors in optimizing the business performance of the SMEs in Malaysia. 180 respondents representing the SMEs manufacturing sector in the Klang Valley and Southern Region Malaysia (Selangor, Wilayah Persekutuan, Negeri Sembilan, Melaka, and Johor Bahru) were involved in this study. The data were analyzed using the Statistical Package for Social Sciences (SPSS) version 16.0. The overall findings showed that all of the factors that contribute to the encouragement of innovation influence the business performance of the SMEs. Therefore, efforts towards imparting innovation should be prioritized in the SMEs in order to enhance their business operation. By doing so, they can be more effective and efficient so that they can contribute significantly towards the development of the national economy.

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ABSTRAK

Inovasi merupakan pemangkin kepada pertumbuhan dan pembangunan ekonomi sesebuah negara. Ekonomi global yang sentiasa berubah dan tidak menentu telah menuntut Malaysia memberi penekanan kepada inovasi dan kreativiti sebagai faktor utama bagi pertumbuhan yang mampan dalam dunia perniagaan. Dalam hal ini, Perusahaan Kecil dan Sederhana (PKS ) yang diiktiraf sebagai tulang belakang kepada keperluan pertumbuhan ekonomi negara perlu menjadi inovatif dan kreatif dalam usaha untuk menjadi mampan. Walau bagaimanapun, sesetengah PKS di Malaysia tidak mengiktiraf perubahan dan pembaharuan sebagai inovasi , dan mereka tidak menganggap inovasi sebagai sebahagian daripada aktiviti-aktiviti perniagaaan pembuatan mereka. Walaupun mereka merupakan penyumbang utama kepada ekonomi Malaysia, PKS tidak diberi perhatian yang mencukupi berbanding dengan syarikat-syarikat bersaiz besar dan syarikat-syarikat awam yang tersenarai di Malaysia. Oleh itu, kajian ini bertujuan mengkaji faktor-faktor inovasi yang mempengaruhi prestasi PKS dalam sektor Pembuatan di Malaysia. Kajian ini merupakan kajian penerokaan deskriptif yang menggunakan soal selidik sebagai instrumen utama bagi pengumpulan data. Ia telah direka untuk mengenal pasti dan meneroka hubungan antara faktor-faktor inovasi dalam mengoptimumkan prestasi perniagaan PKS di Malaysia. 180 responden yang mewakili sektor pembuatan PKS di Lembah Klang dan Wilayah Selatan Malaysia ( Selangor , Wilayah Persekutuan , Negeri Sembilan, Melaka dan Johor Bahru) telah terlibat dalam kajian ini. Data dianalisis dengan menggunakan Pakej Statistik untuk Sains Sosial ( SPSS ) versi 16.0 . Hasil dapatan menunjukkan bahawa terdapat faktor-faktor inovasi yang mempengaruhi prestasi perniagaan PKS. Oleh itu , usaha ke arah inovasi perlu diutamakan dalam PKS bagi meningkatkan operasi perniagaan mereka. Dengan berbuat demikian, mereka boleh menjadi lebih cekap dan memberikan impak berkesan dalam memberi sumbangan besar kepada pembangunan ekonomi negara.

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ACKNOWLEDGEMENT

Praise to Allah the Almighty for His kind forgiveness and love, from those who loved Him. The study is carried out as a partial fulfillment of the requirements for the Degree of Doctor of Philosophy at the Faculty of Technology Management and Technopreneurship, University Technical Malaysia Melaka (UTeM). It is to explore and identify the problems faced by small and medium sized manufacturing sector in the Klang Valley and the Southern Region of Malaysia in carrying out their business with respect to innovation activities and performance as well as to find solutions to the problems.

I would like to express my gratitude to all those who gave me the possibility to complete this thesis. Especially, I owe my loving thanks to my wife Kamariah binti Kudus, my children Aishah, Abidul Qader, Munirah, Faiez, and Samiyah, They have given me the strength to finish what I have started and also not forget to my brother Mohamamad bin Aman, my sister-in-law Norliah binti Kudus and their families for their loving support. Without their encouragement and understanding, it would have been impossible for me to finish this work. I am deeply indebted to my supervisors YBhg. Dato’ Prof. Dr. Abu Bakar bin Mohd Yusof and Dr. Ismi Rajiani who have helped me to complete this thesis and also Dr. Sapiah bt. Sidek as pruf reader. Their wide knowledge and logical way of thinking together with their understanding, encouragement and personal guidance have been of great value for me. Also to my Dean, my colleagues at FPTT and the University Technical Malaysia Melaka. My main aim of pursuing this study is to become a good human being.

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DECLARATION

I hereby declare that the thesis is based on my original work except for quotations and citations that have been duly acknowledged. I also declare it has not been previously or concurrently submitted for any other degree at UTeM or other institutions.

Signature : ……… Name : OTHMAN BIN AMAN Date : 15 January 2014

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APPROVAL

I hereby declare that I have read this thesis and in my opinion this thesis is sufficient in term of scope and quality for the award of Doctor of Philosophy.

Signature ………

Supervisor Name DR. ISMI RAJIANI Date 15 January 2014

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TITLE OF TESIS

Page i DEDICATION ii ABSTRACT ABSTRAK iii iv ACKNOWLEDGEMENTS v DECLARATION APPROVAL

TABLE OF CONTENTS

vi vii viii

LIST OF TABLES xiii

LIST OF FIGURES xv

ABBREVIATION

CHAPTER

I. INTRODUCTION

1.0 Background

1.0.1 Small and Medium Enterprise

1.0.2 SMEs Productivity Performance 1.1 Statement of Research Problem

1.2 Research Question

1.3 Objectives of the Research 1.4 Scope of Study

1.5 Significance of the Study 1.6 The Definition of Terms 1.6.1 Small Medium Enterprise 1.6.1.1 Primary Agriculture

1.6.1.2 Manufacturing (Agro-based & Service) 1.6.1.3 Service (ICT)

xvi 1 3 9 10 14 14 14 15 17 17 17 18 18 viii

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1.6.2 Innovation

1.6.3 Organization Performance 1.6.4 Influence

1.7 Summary

2. LITERATURE REVIEW

2.1 (SMEs) Classification

2.1.1 Type of Measurement of SMEs

2.1.2 Role and Important of SMEs to the region 2.1.3 SMEs in the Manufacturing Sector

2.1.4 Benefits of SMEs to Malaysian Government

2.1.5 Problems faced by SMEs 2.1.6 Determinants of SMEs Success

2.1.7 Government Policies

2.1.8 Ministries and Agencies Involved in the Development of Malaysian SMEs 2.2 SME in Innovation

2.3 Technologies Innovation and Organization Effectiveness 2.3.1 Managerial Influence

2.3.2 Organizational Adoption 2.3.3 Adopter Interdependencies 2.3.4 Knowledge Barrier to Adoption 2.4 The Definition of Innovation

2.4.1 Various Definition of Innovation 2.4.2 Product Innovation

2.4.3 Process Innovation 2.4.4 Marketing Innovation 2.4.5 Organizational Innovation 2.4.6 Innovation and Firm Size 2.4.7 Innovation Strategies 2.4.8 Open Innovation

2.4.9 Innovations Model for Small and Medium Industries 19 22 22 23 24 24 30 32 34 39 43 50 56 61 63 66 68 68 70 71 72 76 82 83 87 87 87 89 90 92 ix

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2.4.10 The Importance of Innovation for SMEs 2.4.11 Innovation Implementation

2.5 Performance of SMEs 2.5.1 Dimension of Organizational Performance

2.5.2 Manufacturing Performance Measure for SMEs 2.6 Innovation Factors Influencing Performance of Manufacturing

Manufacturing SMEs

2.6.1 Innovation importance 2.6.2 Innovation intention

2.6.3 Innovation improvement 2.6.4 Innovation personality

2.7 Theoretical Framework 2.8 Hypothesis

2.9 Summary

3. RESEARCH METHODOLOGY

3.1 Introduction 3.2 Research Design

3.2.1 Research Scope 3.3 Collecting Data 3.3.1 Primary Data 3.3.2 Secondary Data 3.4 Survey Instrument 3.5 Sampling Method 3.6 Pilot Test

3.7 Validity and Reliability 3.8 Research Area

3.9 Population and Sample Plan 3.9.1 Target Population 3.9.2 Population

3.9.3 Probability Random Sampling 3.9.4 Stratified Random Sampling

3.10 Research Instrument

95 99 104 106 108 110 110 111 111 112 112 117 124 125 125 126 126 129 129 129 130 131 131 132 134 137 137 137 139 139 140 x

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3.10.1 Introduction

3.10.2 Survey Questionnaire 3.10.3 Data collection Strategies 3.10.3.1 Questionnaire Design 3.11 Procedures of Data Analysis

3.11.1 Quantitative Data Analysis 3.11.1.1 Factor Analysis 3.12 Summary

4.RESULT OF DATA ANALYSIS

4.1 Introduction

4.2 Description of Sample 4.3 Demographic

4.3.1 Particular of Respondent of SMEs in Malaysia 4.4 Descriptive Statistic Result of Company Profile

4.5 Descriptive Statistic Result of Innovation Activities 4.6 Descriptive Statistic Results of SMEs Development 4.7 The innovation importance and Business Performance 4.8 The innovation intention and Business Performance 4.9 The innovation improvement and Business Performance 4.10 The innovation personality and Business Performance 4.11 Factor Analysis for Innovation Variables

4.11.1 Principal Component Analysis-Total Variance Explained

4.11.2 Principal Component Analysis – Rotated Component Matrix

4.12 Correlation analysis 4.13 Summary

5.RESULT AND DISCUSSION

5.1 Conclusion 5.2 Discussion

5.2.1 Demographic Factors

140 140 142 142 147 147 148 148 150 150 151 151 151 158 159 162 167 169 170 171 171 171 173 177 183 184 184 184 185 xi

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5.2.2 Technology Innovation Factor 5.2.3 Determinants of innovation factors

5.2.4 Innovation Factors 5.2.5 Hypothesis 5.3 Managerial Implication 5.4 Theoretical Implication 5.5 Overall Conclusion 5.6 Recommendations 5.7 Limitation of Study

REFERENCES APPENDICES

188 189 191 192 193 193 194 200 204

206-244 1-9

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LIST OF TABLES

TABLE TITLE PAGE

2.1 Measurements of SMEs, Percentage of Workers and Value Added per SMEs in Selected ASEAN Countries

and Other Region 25

2.2Based on the annual sales turnover27

2.3 Based on Number of Employees 27

2.4 Based On Distribution of SMEs by size 28

2.5 Measurements of SMEs, Percentage of Workers and Value Added per SMEs in Selected ASEAN Countries and Other Region 30

2.6 Distribution manufacturing Sector in Malaysia 32

2.7 Labor and Capital Productivity of SMEs in 2006 34

2.8 Contribution of SMEs in the Manufacturing Sector 36

2.9 Contribution to Output, Growth in Output, Contribution to Value-Added Products and Growth in Value- Added Product by SMEs in Manufacturing Sector 36

2.10 Employment Distribution of SMEs in the Manufacturing Sector 38

2.11 Fixed Assets per Worker by Employment Size Group in Malaysia 40 2.12 Critical dimension of Performance 107

2.13 Dimension of Innovation construct 115

3.1 Reliability of Variables 133

3.2 Distribution of SMEs in State Country 136

3.3 Breakdown of sample according to industry sector 141

3.4 Construct of the Questionnaire 144

3.5 Profile of Respondent 145

3.6 Profile of Business 146

4.1 Respondents’ Background 152

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4.2 Company Profile 153

4.3 Business Location 155

4.4 Type of Industry 156

4.5 Annual Sale Turn Over Business 157

4.6 Descriptive Analysis of Company Profile – Mean and Standard Deviation 158

4.7 Descriptive Analysis of Challenges of Innovation Activities 161

4.8 Descriptive Statistic of Challenges Faced in Implementation of Innovation 162

4.9 Nature of Organization Success 162

4.10 Government Agencies for SMEs well-being 163

4.11 The government (State and Federal) Currently Gives Full Support to SMEs in Getting Suitable Factory Site and Affordable Office Spaces for Their Business 164

4.12 The financial institution currently are very realistic, especially in charging reasonable interest rates, as well as imposing easy loan terms on SMEs 164

4.13 SME will become the core organization to enhance the development of Socio-Economic activity of the country 165

4.14 Relationship between Gender of Respondent and the Importance of Innovationto Them 166

4.15 Relationship between Organisation Year Established and the Important of Innovation to the Organisation 166

4.16 The innovation importance and Business Performance 167

4.17 The innovation intention and Business Performance 169

4.18 The innovation improvement and Business Performance 170

4.19 The innovation personality and Business Performance 171

4.20 Total Variance Explained 172

4.21 Rotated Component Matrix 173

4.22 PCA of Firm Performance 175 4.23 Correlation analysis 179

4.24 Goodness of Fit indices 179 4.25 Structural Model path Coefficient 182

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LIST OF FIGURES

FIGURE TITLE PAGE

2.1 Innovation based on Allan Afuah 81

2.2 Towards a Model of opportunity recognition 93

2.3 Profit chain Model 94

2.4 Creating Value through internal Innovation Process 98

2.5 Conceptual Framework of Innovation model for SMEs Performance 114

2.6 Research Framework and Hypothesis 123

3.1 Research Area of the study 135

4.1 Level of Important of Innovation by respondents 159

4.2 Level of importance of Innovation to the Organization 160

4.3 The result concerning the Hypothesis 181

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ABBREVIATION

ANOVA Analysis of Variance Is a Statistical Model. FIMA Food Industry of Malaysia.

GDP Gross Domestic Product. ICA The industrial Coordination Act.

ICU The Implementation and Coordination Unit. IDCJ Industrial development Cooperation of Japan. IMP Industrial Master Plan.

IT Information Technology.

ITAF The Industrial Technical Assistance Fund. ITC International Trade Commission

ITI Industrial Training Institute.

ITT International telegraphic and Telecommunication. ISO The International Standards Organization. JICA Japanese International Cooperation Agency. JIT Just-In-Time

JPM Jabatan Perdana Menteri (Prime Minister’s Department) JPA Jabatan Perkhidmatan Awam (Public Service Commission) KLIA KL International Airport.

LSIs Large Scale Industries. MARA Majlis Amanah Rakyat.

MARDI Malaysia Agriculture Research and Development Institute. MBA Master of Business Administration.

MBO Management by Objectives.

MDC Multimedia Development Corporation.

MECD Ministry of Entrepreneur and Cooperative Development. MECIB The Malaysian Export Export Credit Insurance Berhad. MEDeC Malaysian Entrepreneurial Development Centre. MESEAM Medium and Small Enterprises Association of Malaysia.

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MIDA Malaysia Industrial Development Authority. MIDF Malaysian Industrial development Finance. MIEL Malaysian Industrial Estate Limited. MIM Malaysia Institute of Management. MIT Mara Institute of Technology. MITB Mara Institute of Technology Berhad. MITI Ministry of International Trade and Industry

Ministry of Internal Trade and Industry.

MITIC Malaysia Industrial Technology Information Centre. MNC Multi National Corporation.

MOSTI Ministry of Science, Technology and Innovation (MOSTI) . MSC Multimedia Super Corridor.

MP1 First Malaya Plan (1960-1965) MP2 Second Malaya Plan )1966-1967) MSI Medium Scale Industry.

NDC National development Council. NDP New Development Policy.

NEDC National Entrepreneur development Council. National Economic Development Council.

NEDRA National Entrepreneur Research Development Association. NEP New Economic Policy.

NGOs Non-Government Organizations. NIC New Industrialized Country. NPC National Productivity Corporation.

OPP1 The first Outline Prospective Plan (1970-1990). OPP2 The Second Outline Prospective Plan (1991-2000). OPP3 The Third Outline Prospective Plan (2001-2010). OPP4 The Fourth Outline Prospective Plan (2011-2020). PDCA Plan, Do, Check, and action.

PIA Promotion Investment Act. POC Price (Costs) of Conformance. PPB Part Per Billion.

PPH Part Per Hundred. PPM Part Per Million.

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PROTON Perusahaan Automobile National (National automobile Enterprise).

PM Productivity Maintenance. Productivity Management. Production Maintenance. Production Management. PNB Permodalan National Berhad. PWTC Putra World trade Centre. R&D Research and Development.

RICOM The registry of Industrial Contracting Manufactures. RIDA Rural Industrial Development Authority.

RM Ringgit Malaysia.

RM1 First Malaysia Plan (1967-1970). RM2 Second Malaysia Plan (1971-1975). RM3 Third Malaysia Plan (1976-1980). RM4 Fourth Malaysia Plan (1981-1985). RM5 Fifth Malaysia Plan (1986-1990). RM6 Sixth Malaysia Plan (1991-1995). RM7 Seventh Malaysia Plan (1996-2000). RM8 Eight Malaysia Plan (2001-2005). RM9 Ninth Malaysia Plan (2006- 2010). RRIM Rubber Research Institute of Malaysia. SAPURA Sapura Holding Sendirian Berhad. SDP Sime Derby Pernas Trading Corporation. SEDC State Economic Development Corporation. SIDO Small Industries Development Organization.

SIRIM Standard and Industrial research Institute of Malaysia. SIRIMEX Standard and Industrial research Institute of Malaysia(SIRIM)

Excellent.

SMEs Small and Medium Enterprises.

SMIDEC Small and Medium Industries Development Corporation. SPC Statistical Process Control.

SPSS Statistical Package for Social Science. SSIs Small scale Industries.

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S&T Science and Technology. TC Total Costs.

TFB Total Factor Productivity. TPM Total Productivity Maintenance.

Total Productivity Management. TQC Total Quality Control.

TR Total revenue. TSIs Tiny Scale Industries.

UNDP United Nations Development Programme. UPM University Pertanian Malaysia.

University Putra Malaysia. USA United States of America. VAT Value Added Tax.

VDP Vendor Development Programme.

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CHAPTER 1

INTRODUCTION

1.01 Background

ACKGROUND OF STUDY

The Small and Medium Enterprises (SMEs) have a significant

presence in the Malaysian manufacturing sector. Around 90 percent of the total establishment in manufacturing sector are the SMEs. These firms account forabout 29 percent and 33 percent of the total output and employment in the manufacturing sector,

respectively. Acknowledging the importance of SMEs into the manufacturing sector, the

Malaysian government has made various some efforts to promote the development of

SMEs in the sector. In the recent Eight Malaysia Plan (2001-2005),an approximatelyabout

42 percent (or RM1.09 billion) of the development allocation for industrial development

has beenwas allocated for the development of SMEs development.

TheThe emphasis of the government’s emphasis has been on developing more resilient

SMEs via the transformation from labor intensive operationoperations to oneto based on

capital, knowledge and technology based operation. This transformation also includes the

improved , including the ability of the SMEs to innovate, design and develop new products

and processes.

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The role of SMEs in the national innovation system and the importance of technological change and innovation in creating opportunities for SMEs are explicitly recognized in the Bologna Charter on SME Policies (which was adopted on 15 June 2000). More specifically, the Bologona Charter calls for governments to consider implementing SME policies that are:

• Improve SMEs’ ability to manage innovation,

• Reduce financial barrier to innovation in SMEs, and

• Improve SMEs’ access to national and global innovation network.

This thesis presents a research agenda to explain the innovation factors that optimize the business performance of Manufacturing Small Medium Enterprises (SMEs) in Malaysia. It was designed to identify and explore the innovation factors usage that in manufacturing SMEs in Malaysia influence the in relation to business performance of manufacturing SMEs in Malaysia. This study was conducted is due to the lacking to facts that SMEs have lack of technical know-how, poor management, poor marketing linkages, and capital to invest in technology automation and innovation among SMEs.. In view of that, SMEs would require a technology development or transfer initiatives to enhance their business operations in orderas to become more effective and efficient. Consequently,As a result of that, the overall performance of the Manufacturing SMEs overall performance can be further improvedwere improved further.

Innovation has been viewedis broadly seen as an essential component of competitiveness, embedded in the organizational structures, processes, product, and

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services of with a firm. Innovations provides firms a strategic orientation to overcome the problems a firmthey encounters while striving to achieve sustainable competitive advantage (Drucker, 1990; Hit et al., 2001; Kuratko et .al., 2005).

Innovativeness is one of the fundamental instruments of growth strategies to enter a

new market, to increase the existing market share and to provide athe company with a

competitive edge. Motivated by the increasing competition in the global market,

companies have started to grabsp the importance of innovation. The changing emphasis to

innovation is also due to the swift changes in technologies which cause a , since swiftly

changing technologies and serve global competition rapidly erosion ofde the value added

of existing products and services. Thus, innovations constitute an indispensable component of the corporate strategies for several reasons such as to apply more productive manufacturing processes, to perform better in the market, and to seek positive reputation in customers’ perception, in which all of these result in gaining and as a result to again sustainable competitive advantage.

One of the primary research areas in the present innovation literature aims to find the out the acknowledged relations between innovation and the firm’s performance. Although there are quite numerous conceptual studies in this field of knowledge, , analytical and empirical studies are found to be limited both in terms of the numbers, and extent and depth of analysis. As stated by Jin et al. (2004), oOnly a few studies have

conducted a close examination of intimately examined the relationship between innovation

and firm performance. as Jin, Z., et.al., (2004) stated.Thus, there is a need for The

empirical studies that focused on the realations between a few dimensions of innovation

and/or a single performance aspect.

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In this study, we aim to explore innovations and their influence on the firm

performance by examining the importance, intention, improvement and personality

innovation, as well as by focusing on various aspects of firm performance such as the innovative performance, production performance, market performance and financial

performance. Therefore, the main contribution of this study is the comprehensive

innovation-performance analysis based on empirical data. Using a structural equation modeling approach, this study, which does not only revealed the positive effects of

innovation factors on firm performance but also yieldsed a path of relation among these

variable.

1.0.1 using structural equation modeling approach.Technology innovation has created organizational change over the last decades and t. Especially in term of technology that has become more and more important in influencing and shaping organizational strategy and success. Hence, adopting technological innovation has become a significant managerial concern by organizations due to its as well as its impact on business performance. In this case, tThe central theme of this study focuses on innovation factors that influence in on the development of manufacturing SMEs in Malaysia.

Small and Medium Enterprise (SMEs) 1.1.1

It has been widely recognizsed that the Small and Medium-sized Enterprises (SMEs) are considered the to be an engines for growth in both the developed and developing countries (Boocock and Shariff, 2005).. The benefits of a vibrant SME sector include: the creation of employment opportunities,; the strengthening of industrial linkages,; the promotion of flexibility and innovation,; and the generation of export revenues ( Coad &and Rao,,2008; , Harvie &and Lee, 2010). There

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PROTON Perusahaan Automobile National (National automobile Enterprise).

PM Productivity Maintenance. Productivity Management. Production Maintenance. Production Management. PNB Permodalan National Berhad. PWTC Putra World trade Centre. R&D Research and Development.

RICOM The registry of Industrial Contracting Manufactures. RIDA Rural Industrial Development Authority.

RM Ringgit Malaysia.

SIRIM Standard and Industrial research Institute of Malaysia. SIRIMEX Standard and Industrial research Institute of Malaysia(SIRIM)

Excellent.

SMEs Small and Medium Enterprises.

SMIDEC Small and Medium Industries Development Corporation. SPC Statistical Process Control.

SPSS Statistical Package for Social Science. SSIs Small scale Industries.

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S&T Science and Technology.

TC Total Costs.

TFB Total Factor Productivity. TPM Total Productivity Maintenance.

Total Productivity Management.

TQC Total Quality Control.

TR Total revenue.

TSIs Tiny Scale Industries.

UNDP United Nations Development Programme. UPM University Pertanian Malaysia.

University Putra Malaysia.

USA United States of America.

VAT Value Added Tax.

VDP Vendor Development Programme.

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CHAPTER 1

INTRODUCTION

1.01 Background

ACKGROUND OF STUDY

The Small and Medium Enterprises (SMEs) have a significant presence in the Malaysian manufacturing sector. Around 90 percent of the total establishment in manufacturing sector are the SMEs. These firms account forabout 29 percent and 33 percent of the total output and employment in the manufacturing sector, respectively. Acknowledging the importance of SMEs into the manufacturing sector, the Malaysian government has made various some efforts to promote the development of SMEs in the sector. In the recent Eight Malaysia Plan (2001-2005),an approximatelyabout

42 percent (or RM1.09 billion) of the development allocation for industrial development

has beenwas allocated for the development of SMEs development.

TheThe emphasis of the government’s emphasis has been on developing more resilient SMEs via the transformation from labor intensive operationoperations to oneto based on

capital, knowledge and technology based operation. This transformation also includes the improved , including the ability of the SMEs to innovate, design and develop new products and processes.

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• Improve SMEs’ ability to manage innovation, • Reduce financial barrier to innovation in SMEs, and

• Improve SMEs’ access to national and global innovation network.

Innovation has been viewedis broadly seen as an essential component of competitiveness, embedded in the organizational structures, processes, product, and

Formatted: Indent: First line: 0.5"

Formatted: Bulleted + Level: 1 + Aligned at: 0.75" + Indent at: 1"

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Innovativeness is one of the fundamental instruments of growth strategies to enter a

new market, to increase the existing market share and to provide athe company with a

competitive edge. Motivated by the increasing competition in the global market, companies have started to grabsp the importance of innovation. The changing emphasis to innovation is also due to the swift changes in technologies which cause a , since swiftly changing technologies and serve global competition rapidly erosion ofde the value added of existing products and services. Thus, innovations constitute an indispensable component of the corporate strategies for several reasons such as to apply more productive manufacturing processes, to perform better in the market, and to seek positive reputation in customers’ perception, in which all of these result in gaining and as a result to again

sustainable competitive advantage.

One of the primary research areas in the present innovation literature aims to find

the out the acknowledged relations between innovation and the firm’s performance. Although there are quite numerous conceptual studies in this field of knowledge, ,

analytical and empirical studies are found to be limited both in terms of the numbers, and

extent and depth of analysis. As stated by Jin et al. (2004), oOnly a few studies have

conducted a close examination of intimately examined the relationship between innovation and firm performance. as Jin, Z., et.al., (2004) stated.Thus, there is a need for The

empirical studies that focused on the realations between a few dimensions of innovation and/or a single performance aspect.

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In this study, we aim to explore innovations and their influence on the firm performance by examining the importance, intention, improvement and personality innovation, as well as by focusing on various aspects of firm performance such as the

innovative performance, production performance, market performance and financial performance. Therefore, the main contribution of this study is the comprehensive innovation-performance analysis based on empirical data. Using a structural equation modeling approach, this study, which does not only revealed the positive effects of innovation factors on firm performance but also yieldsed a path of relation among these variable.

Small and Medium Enterprise (SMEs) 1.1.1

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Innovation Factors Influencing Performance Of Manufacturing SMEs In Malaysia.

KAJI SELIDIK