Mei Peng Low (Ed.

)
5MFs in MaIaysia
SusIaihabiliIy ih busihesses
Small ahd Medium EhIerprises (SMEs) are khowh Io makihg sighi!icahI
cohIribuIioh Io Ihe ecohomies o! boIh developed ahd developihg haIiohs
ih Ierms o! employmehI geheraIioh ahd developmehI impacIs. Overall,
SMEs are khowh Io cohsIiIuIe more Ihah 90% o! busihess worldwide ahd
accouhI !or beIweeh 50% ahd 60% o! employmehI ahd more Ihah hal! o!
gross domesIic producI. 1he similar cohIribuIioh by SMEs is observed ih
Malaysia as well. DaIa compiled by Ihe DeparImehI o! SIaIisIics, Malaysia
showed IhaI Gross DomesIic ProducI (GDP) growIh o! SMEs ih Malaysia
had ouIpaced Ihe overall GDP growIh sihce 2004, whereby SME growIh
was almosI similar Io Ihe overall ecohomy.However, oh Ihe road Io success,
SMEs ehcouhIer mahy predicamehIs. 1his book discusses SMEs ih Malaysia
parIicularly oh Ihe aspecI o! busihess susIaihabiliIy which looks ihIo various
aspecIs, such as !ihahcial issues, cosI o! operaIihg, resources, ih!ormaIioh
Iechhology as well as corporaIe social respohsibiliIy. 1his book aims Io
provide some ihsighIs Io SMEs busihess owhers ahd mahagers oh issues Io
look up !or ih order Io sIay compeIiIive ih Ihis agile ecohomy.
Mei Peng Low
Mei Pehg has beeh a lecIurer wiIh UhiversiIi 1uhku Abdul Rahmah ih
FaculIy o! AccouhIahcy ahd AdmihisIraIioh !or more Ihah Ieh (10) years.
8esides o! lecIurihg various MahagemehI ahd Ecohomics sub|ecIs, she also
ihvolves ih humerous research pro|ecIs.
978-3-659-52051-8
S
M
E
s

i
n

M
a
l
a
y
s
i
a
L
o
w

(
E
d
.
)
Mei Peng Low (Ed.)
SMEs in MaIaysia
Mei Peng Low (Ed.)
SMEs in MaIaysia
SustainabiIity in businesses
LAP LAMBERT Academic PubIishing
LAP LAMBERT Academic PubIishing
Impressum / ImprinI
8ibliogra!ische lh!ormaIioh der DeuIscheh NaIiohalbiblioIhek: Die DeuIsche
NaIiohalbiblioIhek verzeichheI diese PublikaIioh ih der DeuIscheh NaIiohalbibliogra!ie,
deIaillierIe bibliogra!ische DaIeh sihd im lhIerheI ber hIIp://dhb.d-hb.de abru!bar.
Alle ih diesem 8uch gehahhIeh Markeh uhd ProdukIhameh uhIerliegeh warehzeicheh-,
markeh- oder paIehIrechIlichem SchuIz bzw. sihd Warehzeicheh oder eihgeIragehe
Warehzeicheh der |eweiligeh lhhaber. Die Wiedergabe voh Markeh, ProdukIhameh,
Cebrauchshameh, Hahdelshameh, Warehbezeichhuhgeh u.s.w. ih diesem Werk berechIigI
auch ohhe besohdere Kehhzeichhuhg hichI zu der Ahhahme, dass solche Nameh im Sihhe
der Warehzeicheh- uhd MarkehschuIzgeseIzgebuhg als !rei zu beIrachIeh wareh uhd
daher voh |edermahh behuIzI werdeh dr!Ieh.
8ibliographic ih!ormaIioh published by Ihe DeuIsche NaIiohalbiblioIhek: 1he DeuIsche
NaIiohalbiblioIhek lisIs Ihis publicaIioh ih Ihe DeuIsche NaIiohalbibliogra!ie, deIailed
bibliographic daIa are available ih Ihe lhIerheI aI hIIp://dhb.d-hb.de.
Ahy brahd hames ahd producI hames mehIiohed ih Ihis book are sub|ecI Io Irademark,
brahd or paIehI proIecIioh ahd are Irademarks or regisIered Irademarks o! Iheir respecIive
holders. 1he use o! brahd hames, producI hames, commoh hames, Irade hames, producI
descripIiohs eIc. eveh wiIhouI a parIicular markihg ih Ihis works is ih ho way Io be
cohsIrued Io meah IhaI such hames may be regarded as uhresIricIed ih respecI o!
Irademark ahd brahd proIecIioh legislaIioh ahd could Ihus be used by ahyohe.
Coverbild / Cover image: www.ihgimage.com
Verlag / Publisher:
LAP LAM8ER1 Academic Publishihg
isI eih lmprihI der / is a Irademark o!
OmhiScripIum CmbH & Co. KC
Heihrich-8ckihg-SIr. 6-8, 66121 Saarbrckeh, DeuIschlahd / Cermahy
Email: ih!o@lap-publishihg.com
HersIelluhg: siehe leIzIe SeiIe /
PrihIed aI: see lasI page
I5N: 978-3-659-52051-8
CopyrighI 2014 OmhiScripIum CmbH & Co. KC
Alle RechIe vorbehalIeh. / All righIs reserved. Saarbrckeh 2014
Preface
Small and Medium Enterprises (SMEs) has known to making significant
contribution to the economies of both developed and developing nations in terms
of employment generation and development impacts. Overall, SMEs are known to
constitute more than 90% of business worldwide and account for between 50% and
60% of employment and more than half of gross domestic product. The similar
contribution by SMEs is observed in Malaysia as well. However, on the road to
success, SMEs encounter many predicaments. This book discusses SMEs in
Malaysia particularly on the aspect of business sustainability which looks into
various aspects, such as financial issues, cost of operating, resources, information
technology as well as corporate social responsibility. This book aims to provide
some insights to SMEs business owners and managers on issues to look up for in
order to stay competitive in this agile economy.
i
Acknowledgement
We are grateful to many people who helped us in the compilation of this book. We
would like to express our appreciation to the following experts helped us to review
and edit the contents the chapters :
Hen Kai Wah, Universiti Tunku Abdul Rahman
Jayamalathi a/p Jayabalan, Universiti Tunku Abdul Rahman
Junainah binti Mohd Som, Universiti Tunku Abdul Rahman
Komathi a/p Munusamy, Universiti Tunku Abdul Rahman
K Shamini a/p T Kandasamy, Universiti Tunku Abdul Rahman
Low Mei Peng, Universiti Tunku Abdul Rahman
Saraswathy a/p Thurairaj, Universiti Tunku Abdul Rahman
Dr Thillaisundaram a/l Arumugam, Universiti Tunku Abdul Rahman
ii
Table of Content
Preface i
Acknowledgement ii
Chapter 1 : Contemporary Issues and Challenges to Financial 1
Management of Malaysia Small-Medium Enterprises
(SMEs)
Tee Peck Ling & Dr. Aik Nai Chiek
Chapter 2 : Operations Management as a Weapon to Organization`s 11
Success: Design for Sustainability
Chung Chay Yoke
Chapter 3 : Small and Medium Enterprises: Electronic Customer 29
Relationship Management (E-CRM); Advantages and Challenges
Farida Bhanu bt Mohamed Yousoof, Kang Chye Mei,
KomathiMunusamy, SaraswathyThurairaj
Chapter 4 : Small and Medium Enterprises (SMEs), Corporate Social 58
Responsibility, and Disclosure
Kasmah Tajuddin & Nor Haliza Binti Che Hussain
iii
Chapter 5 : An Overview of Minimum wage policy implementation in 80
SMEs in response to high income nation for sustainable
economy
Chung Chay Yoke, Jayamalathi a/p Jayabalan, K Shamini a/p
Kandasamy, Lee Kwee Fah, Low Mei Peng, Pok Wei Fong,
Ung Leng Yen, Yeong Wai Mum
Chapter 6 : The Accelerating Electricity Cost 103
Chung Chay Yoke, Jayamalathi a/p Jayabalan, K Shamini a/p
Kandasamy, Lee Kwee Fah, Low Mei Peng, Pok Wei Fong,
Ung Leng Yen, Yeong Wai Mum
Chapter 7 : Sustainability of Water Sources in Malaysia: A case of Klang 126
Valley and Putrajaya
Chung Chay Yoke, Jayamalathi a/p Jayabalan, K Shamini a/p
Kandasamy, Lee Kwee Fah, Low Mei Peng, Pok Wei Fong,
Ung Leng Yen, Yeong Wai Mum
Chapter 8 : Born Global Firm, A New Emerging Enterprise 153
Dr. Falahat Nejad Mahani Mohammad
iv
1
Chapter 1
Contemporary Issues and Challenges to Financial Management of Malaysia
Small-Medium Enterprises (SMEs)
Tee Peck Ling & Dr. Aik Nai Chiek
Any type of business organisation, ranging from small-medium enterprises
(SMEs) to multinational corporations (MNCs), needs financial management.
Financial management refers to the duties of finance managers to identify possible
strategies and course oI actions to maximise the Iirm`s net present value, allocate
the Iirm`s scarce resources among competing opportunities, implement and
monitor the chosen strategy and course of actions to ensure the overall
organisation`s objectives are being achieved. There are five major areas of
financial management decisions, namely:
(i) Financing decision: concern about from which sources funds can be raised
and how to minimise the Iirm`s cost oI capital. Literally, a firm that has
lower cost of capital than its competitors will have more lucrative
opportunities in new investment projects to undertake.
(ii) Investment decision: involve forecasting of cash flows to be generated from
all proposed investment projects and apply various capital budgeting
techniques to appraise each of the proposed investment projects.
(iii) Dividend decision: out of the earnings generated from business operations,
how much should be retained as internal funds to finance new investments
and how much to be distributed as cash dividends to ordinary shareholders.
(iv) Working capital decision: to determine what is the optimal amount of
investment in working capital to balance the risk-return trade-off. A positive
2
net working capital strategy (current assets exceed current liabilities) reduces
a Iirm`s liquidity risk but also lowers potential return. On the contrary, a
negative net working capital strategy (current assets less than current
liabilities) raises a Iirm`s potential return but with the expense of higher
liquidity risk.
(v) Financial risk management decision: concern with applying various
hedging techniques to reduce currency risk exposure arising Irom a Iirm`s
involvement in international transactions (such as exporting, importing,
foreign direct investment) and intensified competition from foreign rivals.
Besides currency risk, a firm might also apply other hedging methods to
mitigate other types of risk such as interest rate risk and commodity price
risk.
In this era of globalisation, changes in business environment are fast
emerging and becoming more unpredictable. All these changes without doubt bring
opportunities and threats to almost all business organisations. In this chapter, we
will discuss some of the recent developments and emerging issues that might affect
Malaysian SMEs and recommend how the finance managers of SMEs maneuver to
benefit from those opportunities and overcome those threats.
Goods and Services Tax (GST)
As part of the Malaysian government tax reform, goods and services tax
(GST) is scheduled to replace the current sales tax and services tax structure (SST)
effective April 1, 2015. All businesses with annual sales volume of RM500,000
and above are liable to be registered for GST, while businesses with annual sales
volume of less than RM500,000 are not liable but could voluntarily register for
GST. GST is a consumption tax based on value-added concept. It is expected that
3
the imposition of GST will enhance the efficiency and effectiveness of the
government in collecting a more stable source of tax income. Nevertheless, the
imposition of GST could also bring about some negative impacts to businesses and
consumers.
First, imposition of GST is likely to affect cash flow position of SMEs. GST
is imposed on all goods and services (including imported goods and services) at
every production and distribution stage of supply chain as opposed to single stage
approach of taxation under the existing SST. Although the burden of the GST is
ultimately borne by end consumers and businesses can also claim tax credit on
their purchase costs (an input tax), businesses are accounted to pay for GST earlier
than the existing SST. Under GST, all goods and services are accounted for GST at
the earliest between three events: (i) the time the taxable goods or services are
made, (ii) the time the invoice is issued and (iii) the time the payment is received.
Obviously, event (i) prevails most of the time. In contrast, services tax under
existing SST is only accounted for when payment is received, or twelve months
following the invoice due date in the event of non-payment. Earlier cash outflow to
pay GST will therefore violate the basic principle of cash management speed up
the timing of cash inflow and delay the timing of cash outflow, and might cause
some SMEs to fall into cash deficit position. Some SMEs might have to raise
emergency short-term financing at relatively high cost to overcome the liquidity
problem. Although it can be argued that SMEs can try to improve cash position by
shortening cash conversion cycle (CCC) when managing their working capital,
such efforts are easier to be said than done. CCC is computed by summing up
average inventory holding period (AIHP) and average collection period (ACP), and
then minusing average payment period (APP). CCC can be improved by
shortening the first two and lengthening the latter. In practice, it might not be easy
for SMEs to shorten ACP. Unlike large corporations, SMEs might not have the
4
bargaining power to impose stricter credit terms on customers and apply high
pressured collection techniques on overdue accounts receivable. Although cash
discounts could be offered to customers to encourage prompt payment and shorten
the ACP, the discounts per se would actually reduce cash inflow to the firm.
Similarly, SMEs might be less able to delay the payments to their suppliers due to
lack of bargaining power. Failure to pay suppliers on time could result in
withholding of future supplies or end of business relationship. Larger corporations,
especially multinationals, could source their supplies from various suppliers across
the globe and hence increase their bargaining power.
Secondly, GST will increase production or purchasing cost of SMEs that
import services from overseas. GST system treats imported services as if they are
made by the recipients (importing SMEs) instead of the overseas providers (known
as reverse charge concept). Under the existing SST system, imported services are
not taxable. Moreover, wider range of services (domestically provided or
imported) will fall under the net of GST compared to SST. This is because GST is
based on negative concept where all goods and services are chargeable to tax
unless specifically exempted, whereas the existing sales tax is based on positive
concept where only services prescribed are chargeable to tax. This potential
increase in production or purchasing cost could cause SMEs even more unable to
compete with larger corporations due to lack of economies of scale in their
operations. Therefore, instead of charging lower price for their products and
services, SMEs have to find other methods for their competitive survival, such as
product differentiation strategy, niche market segment strategy etc.
Thirdly, besides the possible rise of production and purchasing cost, SMEs
will also suffer from rising compliance cost. Businesses will have to hire
accountants and tax consultants for the tax computation to be submitted to
Lembaga Hasil Dalam Negeri (Inland Revenue Board of Malaysia), keeping
5
necessary taxation records to prepare financial reports, and advising on necessary
amendments to be incorporated into accounting and tax software and information
systems.
Next, the GST rate of 6% announced during the presentation of the 2014
Budget by Prime Minister Najib Razak on October 25, 2013, was unexpectedly
higher than the 4% that economists and market analysts generally reckoned.
Coupled with the continuous reduction in subsidies on petroleum and controlled
goods such as sugar and flour, the implementation of GST could lead to price hike
for many goods and services. Surge in inflation could put more burden on the low
and middle income families. In addition, the entire workforce cannot escape from
paying GST because they will spend money on goods and services regardless of
whether their income is high or low. In contrast, under the progressive personal
income tax system, individuals with taxable income of RM17,500 or below in
effect do not need to pay any tax because they are eligible to claim RM400 tax
rebate for taxable income less than RM35,000 (tax payment include RM175 for
first RM10,000 taxable income and 3 percent on subsequent RM7,500 taxable
income). Albeit the potential reduction of personal income tax rates by 1% to 3%,
financial burdens and constraints on individuals will ultimately result in lower
demand for goods and services sold by businesses. Again, SMEs could be lack on
scale and financial strength compared to larger corporations to survive through the
tough economic and business conditions.
Upgrading of China-Malaysia Bilateral Relationships
Arising from the meeting between China President Xi Jinping and Malaysia
Prime Minister Najib Razak on October 4, 2013, the two nations have agreed to
upgrade their bilateral economic relationship to a comprehensive strategic
6
partnership. With that, Malaysia has become the pioneer country among ASEAN
nations to establish such cooperation status with China.
First, the building of Qinzhou Industrial Park in China and Kuantan
Industrial Park in Malaysia is expected to increase cross-border investments by the
businesses in each other`s country. This could be good opportunity for Malaysian
SMEs to expand their businesses operations into China. With 1.3 billion population
in China compared to a mere 29 million population in Malaysia, SMEs could
potentially achieve tremendous growth in their sales revenue even if their market
segments in Malaysia are already saturated. Besides that, Malaysian SMEs could
seek for more production efficiency with cheaper labour and raw material costs in
China, which could in turn help to achieve lower per unit cost for their products
and eventually compete in the international arena with low pricing strategy.
For SMEs in sectors where technology and expertise are still lagging behind
the China counterparts, it is encouraging that more Malaysian SMEs joint venture
with China businesses. China joint venture partners have in-depth understanding of
the local business environment in China and wider business networks in China that
could help to expand sales, and also enable better access to its local capital markets
which could help to raise funds at lower costs of capital. Moreover, joint venture is
also a good tactic to overcome country risk if the China host government were to
impose unfair barriers such as higher tax rates, employment requirement, sales and
advertising restrictions, stringent environmental requirement, remittance
restriction, limited access to local capital markets such as stringent listing
requirement, red-tape procedure on applications to set up or expand operation etc.
Joint venture with China businesses and obtaining loans from local banks in China
will increase Malaysian SMEs bargaining power against the Chinese government
because their local firms and banks would have been interlocked in the business
arrangements.
7
Secondly, bilateral trade volume between China and Malaysia is expected to
exceed the hallmark US$160 billion (equivalent to about RM500 billion) by year
2017. With increasing trade volume, international trade transactions between the
two nations are encouraged to be denominated in the local currency (either Chinese
renminbi or Malaysian ringgit), which could help to make their respective
currencies a major currency in the world economy and appreciate against other
foreign currencies in the long run. A closer China-Malaysia bilateral trade
relationship and the strengthening of Malaysian ringgit against other foreign
currencies in the FOREX market could lead to reduction of the cost of imported
goods and services for Malaysian SMEs. This could be crucial especially to those
SMEs whose demand for their products and services are highly elastic. Such SMEs
find it relatively difficult to pass on the effect on exchange rate changes on their
input cost as higher price charged on the end consumers because consumers can
easily switch to other competitors or substitute products. This phenomenon is
known as low degree of exchange rate pass-through. Moreover, lower and middle
income groups have become more price-sensitive due to rising living costs, slow
growth rate in income and the proposed minimum wage legislation yet to be in
effect.
For export-oriented Malaysian exporters, they should grab this golden
opportunity to expand their export sales to China. Armed with a huge population in
China, there is now a possibility for Malaysian SMEs to enlarge their operating
capacity to enjoy the benefit from economies of scale in production. China market
could be the initial stepping stone for Malaysian SMEs before they penetrate into
other foreign markets with a lower cost and lower price strategy.
Thirdly, the meeting also highlighted that the two nations will enhance their
cooperation in sectors such as information and communication, remote satellite
sensing, biological technology, education, tourism, military and finance. For SMEs
8
which are directly involved in these sectors or indirectly involved through any
form of vertical supply chain integration, they should look for appropriate business
partners from China to share the technology, human resource expertise, innovative
ideas and new business models to develop and cultivate their own competitive
advantage that could help them to compete not just with large enterprises in
Malaysia but also multinational enterprises from any part of the world. Perhaps
SMEs owned by Chinese ethnic in Malaysia will have an upper hand to secure
business partnership with China firms. With better understanding of Chinese
culture and linguistic ability to speak multiple Chinese dialects, it is easier for
these SMEs to establish trust and good relationship (known as guan xi`) with
China business partners.
This historic economic integration could also bring more exchange rate
exposure to Malaysian SMEs which engage in exporting, joint ventures, foreign
direct investments or sourcing funds in China. Finance managers of SMEs should
start to learn how to measure transaction, operating and translation exposure due to
unpredictable changes in exchange rates, and how to manage these exposures with
various hedging techniques. Techniques such as forward market hedge, money
market hedge, currency futures hedge and currency options hedge could be
adopted to reduce transaction and translation exposure. To reduce operating
exposure, SMEs should restructure their operations by shifting the sources of costs
and revenues to other locations in order to match exchange rate sensitive cash
inflows and cash outflows in a particular currency.
Minimum Wage
SMEs also need to ensure successful development of their human capital,
particularly in the hiring of cheaper foreign labour. It has becoming more
challenging for some SMEs as they have been restructured their operations to
9
adapt themselves for the inception of the minimum wage for foreign workers,
which comes into effect on Jan 1, 2014. In accordance with the Minimum Wage
Ordinance (MWO), SMEs are not allowed to make any deductions on levies,
accommodation and other allowances from the salaries of their foreign workers
following the new rulings. The minimum wage for private-sector in Malaysia has
been set within the range of RM800 to RM900 per month. Considering payroll is
one of the major fixed costs to businesses, mandating a minimum wage may have a
material adverse effect to the cash flow and hence future hiring of SMEs. In
theory, this should be simple. The law of demand raises the incentive for
employers to find ways to use less labour now and discourage SMEs from hiring
more low-skilled workers. It is also expected that the workers will receive less on-
the-job training. The rationale is quite simple where if the workers are poor
performers, raising the minimum wage will make no difference in their
performance but it will erode the cash flow of SMEs and put some of the smaller
SMEs in a quandary. In effect, SMEs can respond by cutting back on benefits or
hours or training. Some studies found that firms tend to respond to minimum wage
not by reducing employment or cut down its benefits but by raising prices.
1
If the
SMEs are reluctant to settle for fewer profits and laying people off (because they
are already running the minimum number of workers needed to satisfy demand),
they may simply pass along their extra costs to customers. The impact of higher
price to offset the hike in operating costs depends upon the elasticity of the demand
curve Ior a Iirm`s products and services. In general, SMEs inherit less competitive
advantage and that should make them less likely to sustain their business when
there is a likely reduction in demand due to rising prices. Other possibility is that
SMEs may cut wages for other higher-paid workers. Recently, Hirsch, Kaufman
and Zelenska (2011) found that 50 percent of the employers in their survey would
1
See Lemos (2008) for major survey of the minimum wage effects on prices.
10
delay increment or limit bonuses for more experienced employees. If that actually
happens, then the SMEs are mitigating their cash flow burden at the expense of
better-paid workers. Schmitt (2013) posited that this could boost gross domestic
product (GDP) in the short run if these workers are more likely to spend the cash.
To ease the cash flow squeeze, SMEs can react by becoming more efficient
through rearrangement of their production processes (to substitute capital for low-
skill labour) and also innovation of new technologies.
2
The Government could
assist the SMEs by introducing soft financing loans for them to automate their
operations or to upgrade their present machinery to help improve productivity. To
ensure that SMEs contribute 40 percent to GDP by 2020 from the current 32.4
percent, the Government proposes an allocation of RM120 million in the Budget
2014 for an integrated package to provide financing for mechanisation and
automation as well as upgrading capacity of SMEs. SMEs can leverage on various
assistance and incentives provided in the Budget 2014 to cope with escalating
operating costs. In addition, the minimum-wage workers might cognitively to work
more efficient and productive when they are waged more. Croucher and Rizov
(2012) examined labour productivity in low-paying sectors of the British economy
and found that productivity was positively affected by the introduction of national
minimum wage (NMW). At the operation level, firms might save cost from a
minimum wage due to less employee turnover now (as retention loyalty index has
risen) which is beneficial to employers believing lower turnover could ease the
costs of higher wages. However, empirical evidence on whether this happens is
inconclusive. SME Corporation Malaysia (SME Corp) has continuously advised
SMEs to embrace new technologies and innovation to increase their
2
See Hirsch, Kaufman & Zelenska (2011) for some evidence on the minimum wage channels of adjustment.
However, SMEs in certain industry need to pay particular concern about the actual jobs that involved their minimum
wage labour before substituting capital for labour. For example, automation change for retail and hospitality SMEs
would be quite impractical.
11
competitiveness not just in Malaysia, but across the globe. Nevertheless,
innovation and technology seem to be something foreign to most of the SMEs in
Malaysia. As we move along with the SME Masterplan (2012-2020) that was
introduced to strengthen the role of SME through six high impact programmes
(HIPs), Malaysian SMEs must recognise innovation and technology as long-term
investments rather than expenses.
References
Croucher, R., & Rizov, M. (2012). The impact of the national minimum wage on
labour productivity in Britain. E-Journal of International and Comparative Labour
Studies, 1(3-4), 263-289.
Hirsch, B.T., Kaufman, B.E., & Zelenska, T. (2011). Minimum wage channels of
adjustment. IZA Discussion Papers 6132, Institute for the Study of Labor (IZA).
Lemos, S. (2008). A survey of the effects of the minimum wage on prices. Journal
of Economic Surveys, 22(1), 187-212.
Schmitt, J. (2013). Why does the minimum wage have no discernible effect on
employment? Center for Economic and Policy Research (CEPR).
12
Chapter 2 :
Operations Management as a Weapon to Organisation`s Success: Design for
Sustainability
Chung Chay Yoke
Overview
Business organizations compete through some combination of their
marketing and operations functions. Marketing influences competitiveness in
several ways, including identifying consumer wants and needs, pricing, advertising
and promotion. Operations has a major influence on competitiveness through
product and service design, cost, location, quality, response time, flexibility,
inventory and supply chain management and service. Many of them are
interrelated (Stevenson & Sum, 2010).
Operations management (OM) is the set of activities that creates value in the
form of goods and services by transforming inputs into outputs. Proper
management (planning, organizing, leading and controlling) in operations can add-
value and create competitive advantage to an organization through wider the profit
margin between the price and cost of production. The key to successful competing
is to determine what customers want and then directing efforts toward meeting or
exceeding customer expectation. There are two basic issues to address, what do the
customers want and what is the best way (how) to satisfy those wants?
In this article, the writer will starts with the trend evolution of operation
management, address some oI the ideas how to meets today`s customer wants in
terms of product quality and services, price and response without much burden to
the societies and environment through sustainability.
13
Evolution in Operations Management
The early concept (1776 -1980) of managing operations (bottom line
production or service customer) of a company was cost focus. Organization used
labor specialization, standard parts, process analysis, motion and time studies, and
mass- production to achieve organization goals. From 1980 1995, organization
realized that only focus on cost alone is not sufficient, hence, they starts focusing
on quality improvement. Total Quality Management (TQM), Just-In-
Time (JIT), and time-based competition provided both tools and elements of
the management systems which needed to integrate into company strategy.
Business process reengineering (BPR) was immense benefits to nonmanufacturing
processes by applying the time-based and waste-minimization efforts that similar
to TQM and JIT philosophy that had applied into manufacturing.
Since 1995 (1995 2015), Mass customization era, as companies developed
their core competencies and included them in their business processes, the tools
and concepts of TQM and JIT were applied into new product development and
managing their supply chains, and they typically involved multiple organizations.
Its incorporated JIT between supplier and production units, then move to
optimizes logistic between producers and distributors, then to customer
relationship management (CRM), and finally to global fulfillment.
As the new economic order unfolded, people recognized that profits and
profitability were not the only elements in determining the long-term success of a
company, other new legitimacy concerns are captured in the measure including the
future of people (internal and external to companies) and the future of the planet,
Earth. Hence, operations management today is on the pressure of movement
towards triple bottom line reporting (3BL) concerning the relationship of profit,
14
people, and the planet (3Ps). The resulting challenges include integrating
environmental, health, and safety concerns with green-product design, lean and
green operations, and closed-loop supply chains.
Green Consumption in Malaysia
The consumers` spending pattern has been growing over the past decades.
The fact is, the more things they purchase, it contributes more negative impact to
the environment. The use of goods creates toxic waste which becomes the
pollution to the land and environment.
In fact, Malaysia is one of the earliest countries in the world that have taken
serious concern about the environmental effects. Malaysia government has
established Environment Quality Act in 1974, formed Ministry of Energy, Green
Technology and Water; and enacted the National Policy right in Forum 2010
(Malaysia Green Forum 2010). Another holistic approach, AFFIRM (Awareness,
Faculty, Finance, Infrastructure, Research, development and commercialization
and Marketing) has designed to obtain the commitment from all stakeholders in
committing towards the environmental protection in Malaysia.
Although, Malaysia people now-a-days are more aware of the environmental
issues, but many are less readiness to pay more for eco-friendly products. This is
the challenge that marketers are facing today, how to reduce overall cost, yet to be
eco-friendly? This paper is providing some practical view for organization /
marketers to consider how to create an eco-friendly and value effective product,
become a social responsibility organization that contribute to environment
sustainability while making profit.
15
Sustainability in OM
In Operations Management, sustainability means ecological stability,
operating a production system in a way that supports conservation and renewal of
resources. It must help companies to become agile, adaptive, and aligned in
balancing the people and the planet with profits. Operations manager might define
sustainable OM as the set of skills and concepts that allow a company to structure
and manage its business processes to obtain competitive returns on its capital
assets without sacrificing the legitimate needs of internal and external stakeholders
and with due regard for the impact of its operations on people and the environment.
The evolution towards sustainable OM is clear in three areas that integrate
the 3Ps of sustainable OM.
Techniques for Sustainability in OM
Below are some of the useful ideas for sustainability in operations (Kleindofer,
Singhal & Luk N. Van Wassenhove, 2005).
Design for green product
Design for green process
Lean and green OM
Remanufacturing and closed-loop supply chains

Design for Green Product
Operations manager needs to consider the entire life cycle of the product
including the design stage, production stage and the destruction stage (Heizer &
Render, 2011).
16
The following six guidelines may help the operations manager to achieve ethical
and create environmentally-friendly design product:-
Make Products Recyclable
Starting from the product design stage, use materials that can be recyclable
when the life cycle of that product ended. Such as aluminum can, cardboard boxes,
metal, most plastic, paper and glasses. Minimize the different types of materials
used and, if possible, move to single materials product to ease for dismantle.
Moving to biodegradable packaging for home composting can minimize the
impact of packaging at the end of its life. In some cases, as with tires, the
manufacturer should responsible for 100 percent disposal.

Use Recycled Materials
Product can be designed to use recycle materials such as recycled plastics
for soap pads, pails, park benches and dustbin. Old clothing can be used to make
seat upholstery for car. This application not only reduced the usage of new raw
material, but had save lots of water, electricity and reduce millions pounds of
carbon dioxide emitted into the environment.
Use Less Harmful Ingredients / materials
Organization should use less hazardous raw materials such as metal-free
utensils, mercury free batteries, unleaded petrol and biodegradable paint. Example
such as printing industry has replaced environmentally dangerous inks with soy-
based inks that reduce air, water pollution and human health as well.
MacBook Air laptop, although less rapturously received as compared with iPod, is
the first Apple product to take Green issues fully into account. Its screen is
17
mercury-and arsenic-free, the circuit boards contain no toxic PVC and BFRs, and it
is very energy efficient as well ('Sustainable design, 2008).
Use Lighter Components
The auto and truck industries continue to expand the use of aluminum and
plastic components to reduce weight. There are positive relationships between
weight and fuel efficiency, means that the lighter the truck, the consumption of the
fuel will be lesser.
Use Less Energy
Auto, truck and airframe industries are designing to improve mileage, new
generation of refrigerators, air-conditional and light bulb that require substantially
less electricity consumption. Energy generated from fossils fuels (gas, coal and oil)
will be reduced if the consumption reduced, it may sustain for longer duration and
proportion to our next generation.

Use Less Material
Organizations are fight to drive down material use in plant and in the
packaging. Use less water, reduce waste through poka-yoke system, packing larger
size pack instead of small and convenience pack to reduce the use of packaging
materials. Hotel eliminated bars of soap and bottles of shampoo by installing pump
dispensers in the bathroom, saving the needs of millions plastic containers a year.
Building contractor use dimensional planning to reduce the amount of
building materials needed and cut construction costs. For example, design rooms
on 4-foot multiples to conform to standard-sized wallboard, ceiling and plywood
sheets.
18
Today`s Practical Types of Product Design
i. Modular Design
Manufacturers are now moderating the old practice of uneconomically
replace or repair most products` individual parts by developing new designs that
avoid environmentally hazardous components and make it economically possible
to save components that have high reuse value. Modular designs increasingly
facilitate remanufacturing. By developing compatibility in modular product design
that is analogous to analyzing compatibility of product designs for recyclability
and reuse (Di Marco, Eubanks & Ishii, 1994).
Modular design and easy disassembly also facilitates disposal. Computers,
televisions, and PDAs ever sold decades ago are no longer in use and await
disposal. These devises all contain substantial amounts of toxic materials and are
thus prohibited from most landfills. With easy disassembly, it is economical to
remove parts that contain toxic materials and making the rest of the product
acceptable in landfills.
Modular designs are practical in service industries as well. It often used in
education, insurance, financial institutions and fast-food restaurants. Modular
designs offer flexibility to production and marketing because it adds flexibility to
the ways customers can be satisfied. The customization provided by modularity
allows customers to mix and match to their own taste. McDonald`s and Burger
King use relatively few modules (cheese, lettuce, buns, sources, pickles, meat
patties, French fries, etc.) to make a variety of meals (Heizer at al. 2011).
19
ii. Robust and Simplification Product Design
A product designed that can be produced to requirements even with
unfavorable conditions. Small variation in production or assembly (internal)
process or external factors (eg. weather, customer carelessness) will not adversely
affects the quality and functionality of the product called robust design.
Simplification design will further reduced problems of complication processes,
functionality and use. By integrating these two ideas in the product design, the
final product is expecting to be more long lasting and eventually will reduce the
repairs, return and disposal. All the related resources such as replaced materials,
electricity, rework and redo will be reduced as well. This will contribute to the
sustainability of resources (Heizer et al. 2011) and cost savings.

iii. Design for Concentration
If a product contains water, for example cleaning products, paints, coatings
or drinks, and it can be concentrated, so that the consumer can mix it with water at
his/her own destination. This means manufacturer can create a smaller (and
cheaper) packaging, will lead to lower transportation and storage costs, and
sometimes a longer lifespan of the product due to concentrated.
"Persil recently looked at the sustainability oI its products and its 'eco-
design solution was to move the Small and Mighty liquid detergent to two times
more concentrated product. The benefits of this was that it now only takes half ()
of the water to make it, half of the packaging volume in which to put it and half of
the number of lorry to deliver it (Donato, 2013).
iv. Design for Transport Efficiency
Company should design the packaging that more products can fit onto one
pallet, can interlock or stack in a different way to allow more products to stack
20
together. Do consider shelf-ready packaging to eliminate the need for secondary
and transit packaging. This will not only save transportation cost, it will reduce the
space needed for storage and shelf space for displaying. Direct or indirectly the
provide cost saving to an organisation.
v. Design for Longevity
Historically, some companies have been accused of planned obsolescence,
deliberately designing a product with a limited useful life, so that it will become
obsolete or nonfunctional after a certain period to ensure consumers re-purchase
products.
Most designers are, however, now moving away from inbuilt obsolescence
and looking at whether the product can be designed to last longer, for example a
kitchen knife with two blades, so that, once the user cannot re-sharpen the first
blade satisfactorily, the blade can be swapped and the blunt one sent back to the
manufacturer to be professionally sharpened. Another example is that of a washing
re-programmable machine, so that when a new washing powder is released that
allows consumers to wash at a lower temperature, a new program can be uploaded
that sets the temperature to the new level (Donato, 2013). These will cause some
resources (raw materials and energy) savings.
In the future, the real challenge for designers will not be to create a new
products or services, but to rethink products and services completely so that the
cycle of obsolescence is broken. For instance, iPod, TV, video, cars are upgradable
rather than replaceable. Process and service design will have to slowly supplant
product design to less priority ('Sustainable design, 2008).
21
vi. Design for Green Building`
According to ('Low-energy building, 2013), Construction developer should
designed an energy conservation building` or houses that consume less electricity
such as using light colors for roofing and wall finish materials, install high R-
value wall and ceiling insulation, and use minimal glass on east and west with sun
exposure. Natural lighting strategies can be very useful for energy saving.
Designed more windows and ensure adequate solar excess and ventilation, but
minimize excessive sun light trespass from outside through proper shade
selection, hence will reduce the head ingress into the building. If lighting can be
controlled electronically through light sensors and other devices such as timer
control are helpful in reduction of electricity usage.
Contractors are responsible to plant more plants and trees at the surrounding
of the buildings or houses to improve the air (overall sustainability) of the
surrounding. This will expected reduced the usage of air-condition especially,
which consume large amount of electricity.
Designs for Green Process
Managers may find it helpful to think in terms of four Rs as they address
sustainability in the process design (Kleindofer et al. 2005) as below:-
i. Resources used by the production process driven down the water
and energy usage, reduce weight as cutting delivery cost.
ii. Recycling of the production materials and product components
reduces waste treated cost.
iii. Regulations that apply pollution prevention, handling hazardous
material and reducing the carbon footprint.
22
iv. Reputation oI the Iirm may be aIIected iI not meet the society`s
expectation.
As known, all product will move through all the four stages of the product
life cycle, process (and equipment) selection will change according to the life cycle
stage, it will starts with process focused (produce in high variety but low volume in
the introduction stage), used repetitive focused process (modular based, flexible
equipments used) at growth stage of life cycle, used product focused process
(produce in high volume but low variety, rigid equipment used) during the maturity
stage, and should phase out capacity to develop new product during decline stage
(Heizer et. al 2011).
Modern technology allows operations managers to enlarge the scope of their
processes. It is important attribute to look for in new equipment and process
selection are flexible equipments. Flexibility is the ability to respond with little
penalty in time, cost, or customer value. This may mean modular, movable,
sophisticated electronic equipments (CAD, CAM & Virtual Reality Technology)
which increasingly provide the rapid changes in the mass customization era to
meet customer demand.
Lean and Green OM
Concerning new management systems to promote employee health and
safety excellence and sustainable industrial practices, including the lean production
or the process of discovering and eliminating waste that originally focused on time,
quality defects, and excess inventory, but is now being used effectively to ferret
23
out in environmental wastes (Rothenberg, Pil & Maxwell, 2001; King & Lennox,
2001).
To achieve sustainable OM, companies must integrate employee health and
safety metrics with key business processes, measure results, and obtain the
commitment of top management. They may use life-cycle analysis, gated DfX
screens (where design for X (DfX) includes such factors as environment, safety,
disassembly, and recycling), and eco-logistics to promote sustainable products and
supply chains.
ISO 14000 began development in 1991, after the successful deployment of
ISO 9000 standards. It is in belief that, if ISO 9000 can be a significant aid to
discovering process defects and fixing them. By extension, this same logic of
process excellence appears to apply the impacts on employee health and safety and
their associated Environmental Management System, and industrial practice as
well. It is a matter of time only.
Remanufacturing and Closed-loop Supply Chains
Companies are increasingly expected, or legally required, to take
responsibility for the entire lives of their products, including proper recycling and
disposal. As the costs of handling product returns increased, it may offset the small
profit margins, and short product life cycles may increase the costs of
obsolescence.
Remanufacturing is an industrial process where used products are restored
(remanufactured) to useful life. The reverse supply chain begins when the
customer returns the product and ends when the company has recovered the
24
maximum value. Products that being returned can include repairs products, end-of-
life returns, end-of-use, packaging returns and convenience returns in the
distribution phase (Kleindofer et al. 2005). The collected returned products may be
used / unused products, the timing and quality are usually unknown. The sellers
must put time-sensitive products back on the shelves quickly. Their small margins
force companies to pay attention to the returns process.
Returned products which may still be in perfect working condition, by
reusing modules or components will be remanufactured and may start a second life
with another customer. End of-life products typically land in the waste stream. It
may recover value by recycling materials or recover energy through incineration.
Companies must proactively pursue value from return streams and
coordinate forward and reverse flows, and deal with increased uncertainty as to
timing, quantity, and quality of returns and poorly developed secondary markets.
Other Operation Management Strategy in Sustainability
Design flexible layout
In our increasingly short-life-cycle, mass-customized world, layout designs
need to be view as dynamic. Operations managers must design flexibility into
layouts. This means considering small, movable, and flexible equipment including
movable store displays, office desks, modular partitions and prefabricated racks.
This not only will lead to quick and easy changes in product models and in
production rates with minimum cost time spent, it will reduces the waste of
materials such as wall being dismantle, fixed cabinet and furniture being broken
25
down. This practice should be applied to all industries, offices, warehouse and
even the household for productivity as well as sustainability (Heizer et al. 2011).
A work cell layout is an example of flexible layout are laterally organize and
process the complete operation, where work is organized by outcomes. Group
technology are using by small group of technical and human resources closely
located and dedicated to process a family of similar parts, products, information
deliverables or services. Cells are responsible for the start-to-finish processing and
are designed to meet an expected volume of work sufficient to justify allocations.
Cell offer more flexibility in that they typically can produce a range of services or
products within a family, and cell workers are normally multi skills and can
perform a broader range of task as compared with other layout design such as
assembly line and job shop (Hyer & Brown, 2003). This hybrid types of layout are
not only able to combine both of the advantages of efficiency and improve the
variety in products, its also cater for flexibility future change of scope and scale
when product move along the product life cycle.
Conclusions and Recommendations
Terms like eco-design, design for sustainability, carbon foot printing and
life-cycle thinking all sound very technical and complex when first looking at the
sustainability of a product, service or process. However, all these terms have
roughly the same meaning and use similar approaches to identifying potential
improvements in the design oI 'greener products, packaging and services. In
simple terms, they all suggest that the entire life-cycle of the product should be
considered when looking at improving any product and this will usually include
the added benefit of identifying where costs are highest and where easy financial
26
savings can be made. After all sustainable design must also be about financial
performance as well as social and environmental benefits
Sustainable operations management will help companies to become agile,
adaptive, and aligned in balancing the people and the planet with profits. The
integration of management systems for safety and environmental objectives with
ISO 9000, ISO 14000, and other process management systems indicates the
growing recognition of all three Ps (product, people & profit) in promoting
sustainable operations. The people` part should be more emphasize in the Iuture
research.
The roadmap to success for sustainable building not only includes the design of
operations, should also include the following:-
Build facilities that are able to sustain the performance for energy, water,
waste and supply-chain.
Build sustainable team to help in implementing sustainability initiatives, it
requires participation from individuals and departments throughout an
organization, from senior leadership to front-line workers. Like any
organization-wide effort, successful sustainability programs require skilled,
accountable staff; adequate resources to meet organizational goals; and a
clear understanding of roles and responsibilities across the organization.
Often, decentralized responsibility will makes successful implementation of
institutional goals.
Leadership supports play an importance role to support creation of a green
team` to ensure that issues regarding sustainability are addressed and
initiatives are implemented. Walk the talk. Make recycling a top priority in
27
leadership offices. Insist on double-sided copied and printed reports. Use a
reusable mug, fox, spoons, chopsticks and encourage others to do the same
and potentially will be emulated by the staff.
Publicize the organization's actions and progress on a regular basis. This
requires dedicated resources to enable information gathering and
communication, and encourage the organization to seek recognition in the
community through regular public affairs communications as well as
sustainability awards and recognition programs.
Reference
Di Marco, P., C. F. Eubanks, K. Ishii. (1994). Compatibility analysis of product
design for recyclability and reuse. Proceedings of the 1994 ASME Computers
in Engineering conference, Minneapolis, Minnesota.
Donato, J., Eco design Specialist, AEA. Date Retrieved March 8, 2013, from
http://www.bpf.co.uk/Sustainable_Manufacturing/Design/Designing_Sustaina
bility.aspx
Heizer, J., and Render, B. (2011). Operations management, (10th ed.) Upper
Saddle River, NJ: Prentice Hall.
Hyer, N. L. and Brown, K. A. (Fall, 2003). Work cells with staying power:
Lessons for process complete operations. California Management Review
46(1).
King, A. A., M. J. Lenox. (2001). Lean and green? An empirical examination of
the relationship between lean production and environmental performance.
Production and Operations Management 10(3) 244256.
29
Chapter 3
Small and Medium Enterprises: Electronic Customer Relationship
Management (E-CRM); Advantages and Challenges
Farida Bhanu bt Mohamed Yousoof, Kang Chye Mei
KomathiMunusamy,
SaraswathyThurairaj
Introduction
In order to understand the term Small and Medium Enterprises (SMEs), it
requires the understanding oI yearly sales turnover, developments oI country`s
economy and industrial development. Majority of scholars have generally defined
SMEs based on their yearly sales turnover or by counting the total number of full
time employees. A new definition of SMEs is effective from Jan 1, 2014 (Prime
Minister Datuk Seri Najib Abdul Razak, 2013).SMEs defined as firms with annual
sales not exceeding RM20 million (less than RM5 million at present) or not more
than 75 workers (less than 50 currently).At large, SMEs are regarded as an
important sector that significantly contributes to the development oI the country`s
economy. In Malaysia, SMEs has vital role in the development of the Malaysian
Economy. SMIDEC (2002) states that for about 93.8% of manufacturing
companies in Malaysia comprises of SMEs. It is in fact been recognized that SMEs
are so important that they have been labeled as the backbone` oI industrial
development (Saleh & Ndubisi, 2006).
SMEs started in 1970 by becoming the sub-contractors to large multinational
cooperation (MNCs). They began to grow by forming strong linkages with the
MNCs and today, contribute considerably to the country`s economy. The
contribution of SMEs can be seen in terms of export, employment as well as
30
economic growth, In fact, the focus of SMEs is so diverse and they can be seen
almost in all sectors like, textile and apparel, food and beverages, metal and wood
products. Malaysian Government has recognized the importance of SMEs thus it
has drawn and implemented various policies and strategies. For instance, the Third
Industrial Master Plan (IMO3) 2006-2020 was developed to enhance the growth of
the manufacturing sectors.
Despite all the endless efforts by the government to sustain the performance
of SMEs, it was reported that the total number of SMEs has decreased by 1.5% in
2011. Knowing that the performance of SMEs are so crucial to the development of
the country`s economy, thus eIIorts were taken not only by the SMEs themselves,
but all the government at large, to continuously enhance the sustainability and
growth of these SMEs. All these efforts were taken into consideration to restore the
performance of the SMEs so that it directly contributes to the growth of the
country`s GDP. With regard to these eIIorts, SMEs has greatly emerged with E-
Business and E-Commerce.
Various organizations have been formed to overlook the activities of SMEs
in Malaysia. The organizations that are actively involved in the development of
SMEs are:
(i) NSDC (National SME Development Council Act as the highest policy
making body. Their role include formulating strategies for SME development
across all economic sectors, coordinating the tasks of related Ministers &
Agencies, encourage partnership with the private sectors, as well as to ensure
effective implementation of the overall SMEs development in Malaysia. Later,
SME Corp was tasked to assume the role as policy maker for SMEs in Malaysia
31
(ii) SME Corp. They act as a central coordinating agency to develop the SME
sectors in Malaysia. In such situation, SME Corp acts as a single point of
references in the formulation of policies and strategies for the SME sector. They
also play an important role in developing programs and providing the necessary
assistance like infrastructure facilities, financial assistance, advisory service,
market access and other support programs for SMEs to achieve its development
needs. The ultimate aim is to develop capable and elastic Malaysian SMEs to be
competitive in the global market.
(iii) PIKOM (The Association of the Computers and Multimedia Industry of
Malaysia) PIKOM plays a significant role in enhancing ICT on SMEs in Malaysia.
Programs were conducted to educate SMES on ICT and e-commerce that will
eventually help them to compete on a global scale. The ultimate aim of PIKOM is
to guide the business to use ICT to improve their operations and efficiency towards
business growth and competitiveness.
Overview of E-Commerce and E-Business
What are Electronic commerce (EC or e-commerce) and Electronic business
(E-business)? E-commercedescribes the process, services, services of buying,
selling, transferring, serving or exchanging products, or information via computer
networks, including the Internet. On the other hand, E-business refers to a broader
definition of e-commerce, not just the buying and selling of goods and services, but
also servicing customers, collaborating with business partners, conducting e-
learning, and conducting electronic transactions within an organization.
E-Commerce can be business-to-business (B2B) or business-to-consumer
(B2C), but is currently
32
heavily dominated by B2B in terms of revenue split. B2B e-Commerce can be
open to all interested parties, including commodity exchange, or limited to specific
qualified participants, such as private electronic markets. B2C e-Commerce, on the
other hand, is conducted by establishments, such as Amazon.com.
The emergence of Internet technology, particularly the World Wide Web, as
an electronic medium of commerce has brought tremendous changes in how
companies compete. Companies that do not take advantage of the Internet
technology is viewed as not delivering value added services to their customers,
thus are at a competitive disadvantage. From a marketing perspective the Internet
is not just another marketing tool, but a tool that can reach far to help companies
understand customers better, to provide personalized services and to retain
customers. Hence, the Internet technology is imperative in managing customer
relationship for businesses. In other words, in order to provide value added
services to customers SMEs have also used Internet technology.
IT Usage in SMEs
The business environment is transferring from product-centric to customer-
centric and most SMEs in Malaysia realize that ICT is critical to the productivity
and performance of their companies. Nevertheless many Malaysian family-based
SMEs are still operating their business in the conventional way. On the other hand,
SMEs which have invested in ICT systems fail to implement and maintain these
systems successfully.
33
Table 1: Level of ICT Adoption at SMEs In Malaysia
No Variables No. of
Respondents %
Cumulative
%
1. Develop formal ICT training plan
Yes 47 26.11 26.11
No 133 73.89 100.0
2. Develop business web site
Yes 17 9.44 9.44
No 163 90.56 100.0
3. E-mail usage for business purposes
Yes 143 79.44 79.44
No 37 10.56 100.0
4. E-business practices
Yes 38 21.11 21.11
This result show that internet usage amongst SMEs in Malaysia was still low
in level and SMEs rarely use internet for business function were common. Small
businesses often have difficulty in obtaining financial resource. Internet may
consider too expensive to many SMEs because of their lack of financial resources
(Poon and Swatman, 1999). The findings also suggest that ICT were not well-
established.
From the Table 1, it showed that e-commerce practices were not common or
popular amongst SMEs. Significant portion of these companies used e-mail
services as a communication channels. E-mail has been the most effective
34
communication channel amongst the SMEs. This reflects that many SMEs still
maintain the manual and traditional way of doing business.
According to a research (Hashim, J, 2007) done to examine the extent of
information communication technology (ICT) skills, use and adoption among 383
owners of small and medium enterprises (SMEs) in Malaysia, the findings show
that the level of ICT skills possessed by SME owners in Malaysia is poor, the use
of ICT is low due to the reason that they find that the ICT adoption is difficult.
This study was conducted to examine the ICT skills (such as basic skills, e-mail
skill, CD-ROM skill, Internet skill, ICT skill) of SME owners in Malaysia. The
results, as shown in below table shows that the owners` skills are quite poor, with
the mean of 1.9103 (below average) has used the Internet and e-mail at their
workplace.
Table 2
N Minimum Maximum Mean Standard
Deviation
Internet Use 383 1.00 4.36 1.665 0.939
CD-ROM
Use
383 1.00 5.00 1.858 1.133
Email Use 383 1.00 5.00 2.208 1.424
ICT Use 383 1.00 4.65 1.910 1.083
Note: 1 = never; 2 = seldom; 3 = not sure; 4 = often; 5 = always (adopted from
Hashim, J, 2007)
35
A number of barriers leading to the lack of IT adoption have been identified
which includes shortage of resources (expertise and financial), lack of skills and
knowledge (Moghavvemi, S., Salleh, N. A. M., Zhao, W., & Hakimian, F., 2011).
CRM adoption in SMEs
In today`s business environment, competition among businesses to attract
customers is very furious and not easy in view of increased customers expectation
and market pressure.This causes the companies to switch to relationship
marketing. In view of that Customer Relationship Marketing (CRM) has emerged,
promising to significantly improve the implementation of relationship marketing
principles. Relationship marketing principles are rarely been applied in SMEs.
World Bank identified SMEs in terms of manpower between 5 to 49 people. The
attention of software vendors has moved recently to SMEs, offering them a wide
range of CRM systems which were formerly adopted by large firms only. SMEs
are considered as major economic players and a potential source of national,
regional and local economic growth. SMEs differ from large enterprises mainly in
their limited financial abilities affecting their information-seeking practices, and
they do not normally have the same burden of large legacy systems to integrate
their CRM. Thus, the adoption of CRM in SMEs cannot be a miniaturized version
of larger organizations. Like in large organizations, CRM provides SMEs with
opportunities that are still largely unexploited. However, without a better
understanding of the complex issues involved, the drive to implement CRM will
not successfully contribute to SMEs' competitiveness.
In order to survive in the global markets, many SMEs have instigated CRM,
so that they can compete effectively. CRM technology applications can improve
business intelligence and have better decision making. Besides it can also
36
enhanced customer relations by providing good quality of services and products.
Therefore, there is a surge in the CRM solution. CRM technology applications able
to link front office (e.g. sales, marketing and customer service) and back office
(e.g. financial, operations, logistics and human resources) functions with the
company`s customer 'touch points. A company`s touch points can include the
Internet, e-mail, sales, direct mail, telemarketing operations, call centres,
advertising, fax pagers, stores and kiosks.
In addition, CRM as a customer-oriented business approach is considered as
one of the powerful capabilities in organizations which help to transform
themselves to a customer-centric environment. Companies which concentrate on
their customer`s needs and wants are in a better situation to achieve long term
success than those who do not. In view of that, many firms have invested or are
planning to invest large amounts of money to implement relationship principles
using strategic and technology-based CRM applications to win the battle in the
increasingly competitive environment.
In order to produce a CRM, cross functional information technology uses
information technology to create a crossfunctional enterprise systems that
integrates and automates many of the customerserving processes in sales,
marketing, and customer services that interact with a company`s customer.CRM
systems also create an IT framework of web-enabled software and database that
integrates these processes with the rest oI a company`s business operations.
There are two primary components of CRM which are operational CRM and
analytical CRM. Operational CRM supports traditional transactional processing for
day to day front office operations or systems that deal directly with the customers.
37
Analytical CRM supports back-office operations and strategic analysis and
includes all systems that do not deal directly with the customers.
Contact and Account Management
CRM software aids sales, marketing, and service professionals capture and
track relevant data about every past and planned contact with prospects and
customers. InIormation is captured Irom all customers` touch points, such as
telephones, fax, e-mails, the companies` web sites, retail stores,kiosks and personal
contacts. CRM systems store the data in a common customer database that
integrates all customer accounts` inIormation and makes it available throughout the
company via Internet, intranet, or other network links for sales, marketing, service
and other CRM applications.
Sales
A CRM system provides sales representatives with the software tools and
company data sources they need to support and manage their sales activities and
optimize cross-selling and upselling. Cross-selling is an approach in which a
customer of one product or service, for example retail loan, might also be
interested in purchasing a related product or service, for instance investment
product. Up-selling refers to the process of finding ways to sell a new or existing
customer a better product than they are currently seeking. Examples include sales
prospects and product information, product configuration, and sales quote
generation capabilities. CRM also provides real-time access to a single common
view of the customer, enabling sales representatives to check on all aspects of a
customer`s status and history beIore scheduling their sales calls. For example, a
CRM system would alert bank sales representatives to call customers who make
large deposits to sell them premier credit or investment services.
38
Marketing and Fulfillment
CRM systems help marketing professionals accomplish direct marketing
campaigns by automating such tasks as qualifying leads for targeted marketing and
scheduling and tracking direct marketing mailings. Then the CRM software helps
marketing professionals capture and manage prospect and customer response data
in the CRM database and analyze the customer and business value oI a companys
direct marketing campaigns . CRM also assists in the fulfillment of prospect and
customer responses and requests by quickly scheduling sales contacts and
providing appropriate information about products and services to them, while
capturing relevant information for the CRM database.
Customer Service and Support
A CRM system provides service representatives with software tools and real
time access to the common customer database shared by sales and marketing
professionals. CRM helps customer service managers create, assign, and manage
requests for service by customers. Call center software routes calls to customer
support agents on the basis of their skills and authority to handle specific kinds of
service requests. Help desk software provides relevant service data and suggestion
for resolving problems for customer service representatives who assist customers
to easily access personalized support information at the company web site, while
giving them an option to receive further assistance online or by phone from
customer service personnel.
Retention and Loyalty Programs
CRM systems try to help a company identify, reward and market to its most
loyal and profitable customers. CRM analytical software includes data mining
tools and other analytical marketing software, and CRM databases may consist of a
39
customer data warehouse and CRM data marts. These tools are used to identify
proIitable and loyal customers as well as to direct and evaluate a company`s
targeted marketing and relationship marketing programs.
Model 1: CRM Development Stages Model - Stefanou and Sarmaniotis (2003)
Non IT-assisted
CRM
-Customer
Surveys
-Manual recording
systems
-Non- IT assisted
processing
IT-assisted CRM
-Call Centers
Fax-mall
-Spreadsheets-
Databases
-Statistical
packages
-Internet presence
IT-
automated
CRM
-ERPI
-EDI
-E-Commerce
-Operational
CRM
I- CRM
--ERPII
-Analytical
CRM/SCM
-DSS
Defensive
Relationship
Marketing
Customer Satisfaction-
Complaint
Management
Customer
Accounts-Orders
Management
Customer
Personalization
Management
I
T
L
e
v
e
l
CRM
40
Electronic Customer Relationship Management System (E-CRM)
With the rapid growth of Internet technology, CRM functions can be
delivered in a more effective manner. Internet technologies have provided an
exceptional opportunity for improving relationship building with strong
interactivity and personaliseability. Lee Kelly (et al., 2003) refers customer
relations which are delivered over the Internet using technologies such as web sites
and email, data capture, ware housing and mining as E-CRM. Therefore, a web
based CRM software (E-CRM) is introduced in the organizations and it is
becoming an important issue for marketing strategies and their subsequent
implementation. E-CRM encompasses all the processes needed to acquire, build
and maintain customer relationship through e-business operations. Fundamentally
E-CRM concerns on attracting and keeping economically valuable customers and
repelling and eliminating economically invaluable ones. Enabling technologies
such as Internet is an important tool in identifying the customer behaviors and
attitudes in relation to company`s product.
Furthermore E-CRM offers features and functionalities considered essential
for an optimum customer experience such as customer support, ease of use and
visibility of the customer support throughout the site including customer support
by phone and e-mail, personalization, self service customer service tools(FAQs,
interactive maps and business locators). The software will pull all relevant product,
sales data and customer information from one or multiple sources in the
organization. This information is available via the web, e-mail and/or mobile
access. In addition it also helps to create customer profiles and customized
products. E-CRM adds 'intelligence to the customer proIiles and can help deploy
customized products.
41
SMEs are not implementing E-CRM aggressively as big companies as
described in the literature but more in a modest Internet based technologies to
enhance their customer relationship and establishing competitive advantage.
Research conducted by Ng Kim Soon, et al., 2012 revealed that customers of
SMEs in Malaysia found perceived ease of use of E-CRM is very good. E-CRM
able to provide the needed information for decision making. In addition, the
security and privacy issues pertaining to E-CRM also found to be good.
E-CRM Theory and Concepts
The resource-based view theory (RBV) prescribes that the firms resources
are the main driver of firm performance resources, a subset of which enables them
to achieve competitive advantage, and a further subset which leads to superior
long-term performance .Empirical studies of firm performance using the RBV have
found differences not only between firms in the same industry , but also within the
narrower confines of groups within industries . This suggests that the effects of
individual, firm-specific resources on performance can be significant. Resources
that are valuable and rare and whose benefits can be appropriated by the owning
(or controlling) firm provide it with a temporary competitive advantage. That
advantage can be sustained over longer time periods to the extent that the firm is
able to protect against resource imitation, transfer, or substitution.
Information system researchers have highlighted the potential of the RBV
and related theories to provide explanations as to how and why firms can derive
strategic value from IT investments. Proponents of the RBV suggest that the
competitive advantage of the firm reside in organizational resources, capabilities,
and competences that are valuable, rare, inimitable, and non-substitutable. IS
researchers quick to point out that IT system are duplicable and can be purchased
42
easily by competitors. Therefore, business value of IT in making an organization
different from its competitors is not achievable by just increasing IT spending.
Researchers have identified tangible and intangible resources (e.g., human and
business resources) that work together to create organizational capabilities.
Capabilities measure the Iirm`s ability to combine a number oI resources
efficiently to attain a certain objective (Coltman, 2007; Duta, Narasimhan, &
Rajiv, 2005). Studies on IT business value argue that RBV theory can be used to
explain how investment in IT can be transformed into firm performance.E-CRM
combine with human, technical and business related activities which is valuable
and costly to imitate.
Although RBV has widely been used in IT related researchers, it has some
limitations. The RBV assumes that resources are always applied in the right way
and for their best uses. It says little about how this is done. Bharadwaj (2000)
refers to the application of process-orientated models by researchers in examining
the effects of IT on intermediate business process. Mooney et al.,(1996), by
proposing a process-orientated model, state that 'in order to evaluate IT business
value the key business processes within each core business area must be identified
and the linkages and contributions of IT to those processes should be defined. The
application of process-orientated approach along with RBV in the context of E-
CRM is relevant because CRM success is highly dependent on a process
management orientation, by focusing on CRM processes, managers can ensure the
effective deployment of organizational resources toward the creation of desired
outcomes.
Dynamic Capabilities (DC) refers to the ability of a firm to achieve new
forms of competitive advantage by renewing technological, organizational and
managerial resources to achieve congruence with the changing business
environment (Teece et al. 1997, Esenhardt & Martin 2000). E-CRM exemplifies
43
the characteristics of dynamic capabilities as they engage routines, prior and
emergent knowledge, analytical processes and simple rule to turn IT into customer
value.
Challenges of E-CRM in SMEs:
Customer`s Trust on E-CRM
At the beginning stage of the e-commerce, nobody will ever think of buying
a shirt, jewelry and not to mention groceries online. From time to time we can
actually see the products that can be sold online are actually growing in terms of
types of goods. Now, we can even buy a shirt, car, book, song, grocery, house or
nearly anything online. But of course certain goods are still facing limitations.
Examples of such products are antique, jewelry and others are still not able to sell
successIully online. The main reason Ior this to happen is due to buyers who can`t
see or touch or check on the products themselves especially if the product where
their originality is doubted. Furthermore, the seller is not from the well known
company such as Nike, Adidas, Dell, Acer and others. The buyers are worried of
the product that they bought might be fraud and there is no way they can claim
back their money if the product that they bought is from an anonymous.
E-CRM is also an evolvement from CRM. Basically everything that we are
doing has been migrated to Internet nowadays. Rather than keeping our customers`
profile on paper format, we are storing them in the database. The purpose is to
understand our customers better and it will be easier to analyse the data in the
database format for example to whether they are prospects or old customers. The
issue is how to make the customers to trust and provide us with relevant
information about them. Indirectly, trust between buyers and sellers are hard to
establish iI the company requesting Ior the customers` proIile is a small company
44
and not very well known. The ability to create intimacy with the customer is
limited and building trust can be difficult (Kennedy, 2006). In the absence of such
trust it is harder and tougher to get customers to share the data which is essential to
create effective CRM strategies.
Companies that are willing to implement E-CRM shall see the need to
manage the profile of the customers more efficiently. Exposure or selling of
customers` proIile in return Ior the payment to other third party should not be
engaged. Salmen and Muir (2003) promote the value of creating further contact
possibilities between customers, in this case banking customers, within the context
of virtual communities in which customer experiences or discussion can be
exchanged. If the companies involve are selling products, participants in the virtual
communities can actually discuss on the usage of the product and any comment on
the product in order to bring out the benefit of using the product to the next level.
Online Channel`s Performance
With the usage of Internet technology, customers are asked to key in their
data directly into the database. Customers will face difficulty especially if the
customers are not tech-savvy. They are afraid if wrong information are keyed in
and they don`t know how to modiIy it aIter clicking on the save button. When
managing an on-line channel companies are faced with the fact that greater choice
creates fickleness among customers and with the competition only one click away
there are no second chances to recover mistakes in these remote channels
(Fairhurst, 2001). The purpose of using the e-CRM should be only targeting those
customers who are more keen to online and also the younger generations. Old
generations should still stick to the old way of collecting their profile where forms
are given for them to fill up or there is staff to help them keyin the information.
45
The on-line channel must not be allowed to cannibalise other valuable customer
contact points and should attract and retain only those customers best served
through this contact point. In other scenarios traditional contact points may remain
the most appropriate (Butler, 2000).
With the full application of CRM using Internet or phone based, clear
instruction shall be given to avoid customers feeling isolated and confused
especially if the e-CRM system is not user friendly at all. Examples of how to key
in the data should be provided and next step instruction should be clear enough to
give clear instruction to users. The implementation of automated call centre should
be prepared and ready all the time to support the users to avoid customers feeling
Irustrated when they can`t get any assistance when they needed it the most. Web-
based interface design should be able to cater groups with physical limitation and
also groups with computer illiterate and literate. The design of an e-CRM user
interface (input and output) is critical to the operational success of the application.
Statistical data on rapid changes in IT
We can`t deny that InIormation and Communication Technologies (ICT)
aIIect people`s everyday lives in many ways, either it be at work or at home. Since
last decade, Information and Communication Technology (ICT) has become
widely available to the public in terms of the accessibility and cost. According to
the statistic sourced from the Internet Eurostat, in year 2007, there were about 55%
of households had access to Internet. This number had increased to 73% in year
2011 (http://epp.eurostat.). The trend on the usage of the Internet will surely be
increasing in the coming years. Whereas in Malaysia context, Malaysia has pooled
in lots of money to the information and communication technology in order to
switch to the digital world. Malaysia`s government has announced 8
th
and 9
th
46
Malaysia Plan for year 2001 to 2005 in order to raise globalize economy, enhance
competitiveness, develop knowledge base economy and provide IT infrastructure
for digital economy. Under this plan, government has built vital ICT infrastructure
for public sector as well as in private sector in order to increase the usage of
computerization, exploring internet capabilities and IT infrastructure in many
governmental agencies and lastly is to set up an emergency response centre to
handle the issue on internet security. As a result of 8
th
Malaysia plan launching,
there was annual growth rate of 4.7% in ICT investment spending from all
economic sectors (Khan, M. J.,et al., 2009). With the introduction of 9
th
Malaysia
plan from year 2006 to 2010, Malaysia will be able to facilitate wider adoption and
usage of ICT in every aspect of life such as in business, education, health and
service sector. As a result, according to IDC survey, income from ecommerce in
Malaysia has grown to US$22.3 billion in 2007. On the other side, according to
statistical department, there were 23.4% of internet subscribers been recordedin
year 2007 of the whole population.
Integration with Traditional System
Companies cannot fully depend on the Web to support the users. This new
channel of e-CRM still needs support from the traditional front and back office
systems to make it function successfully. Companies setting up such new channel
must make every possible effort to integrate them tightly with existing business
processes and/or channels first. As interest has intensified in doing business on the
Internet many companies have treated this CRM strategy as a separate project.
Such an approach makes for an inconsistent and unsatisfactory customer
experience which will not make any business successful (Bradshaw & Brash,
2001). Bradshaw & Brash (2001) in their research of UK firms found that
organizations addressed different customer facing processes (sales, marketing,
47
services) and channels (call centre and Web) as separate projects, giving little
chance of supporting the different customer with consistency support. Companies
were managing individual transactions and interactions when they should have
been managing relationships.
Data integration and IT architecture challenges with the existing data and
system in the company also exist for organizations adopting E-CRM technologies
(Kennedy, 2006). From a technology perspective an E-CRM system represents
isolated software and stands tall by its own and a need to integrate it with the
existing system is needed. No single software application is able to fill the gap, nor
is it likely to be filled internally is available. To implement E-CRM, companies
will need a variety of hardware/software applications and tools (Anon, 2001). This
suggests significant resource and cost implications, which companies must
incorporate into their overall strategic planning.
Integrating data itself from multiple sources such as both on-line and off-line
channels, is a critical issue in facilitating successful and valuable E-CRM analytics
(Nemati et al., 2003) but will represent a challenge to any companies. Nemati et al.
(2003) suggest that although on-line, off-line and external data integration has its
complexities and challenges, the value added to this process will be significant
proofed.
The IT function is important in the business development within an
organization and creates a good impression to the customers if the companies are
up-to-date with their technology usage. However, mismatched perceptions and
expectations between the Marketing and IT functions can often impact and delay
E-CRM strategies. Marketing users often focus on the front end of applications and
assess the functionality of the E-CRM system with limited understanding of data
and Web integration issues, while the IT function tends to assess its technical
quality rather than the front end applications. An additional concern is that E-CRM
48
projects driven by a functional head, such as Marketing or IT, rarely produce an
enterprise view of customers and modeling applications to a single functional view
can often lead to failure. Proper requirements gathering from the users is needed by
the system analyst from the IT department to make sure the perspective of the
users are properly studied.
Ability to secure funds for business expansion
SMEs find it difficult in getting secured finance to expend their business
activities such as capacity expansion and production development. These are
critical elements as it enhances their capability to produce and design new product
to meet the expending product market. However, banks have become stringent in
approving loans and the entire credit processes have been much tougher ever since
the financial crises. In this situation, SME face major problem in securing funds to
overcome the way to setting up business, expansion as well as staying in business.
Ability to attract and retain human resources
The ability to maintain the e-CRM application once installed or goes live is
another issue that arises as one of the challenges. Chen and Yi (2005) mentioned
that most of the companies had no in-house technical expertise and would face
challenges if their applications malfunctioned. The companies will have difficulty
seeking help from to troubleshoot the problem. This continues in the ability to
modify the application if it is off-the-shelf application. Even if they have the
expertise at the moment to support the e-CRM application, but this will not last
long as the expertise will be leaving the companies one day and no other staff can
be there to support the current application that is in use. If the companies using the
proprietary application, these companies might also be facing difficulty in how far
they could modify the proprietary application to suit their needs. Besides, it was
49
deemed that SMEs are not an attractive organization to work with. This is because;
it has been perceived that they may not be able to pay above market rate, lack of
attractive annual bonuses and continuous staff development. Even though, much
efforts have been taken to break this perception, where it has been seen that a
number of SMEs have been offering comparable employment remunerations,
however, candidates prefer to work for larger organization. In such situation,
SMEs find it hard to attract and retain professionals and skill works within their
organization thus, causing lack of manpower supply.
Arguing on the importance of HRD, it is known that HRD are essential to
any organization. This is because, HRD help to increases workforce competence,
skills and work quality. Thus, it is an essential tool for long term survival for
organization. However, SMEs in most situation fail to provide such trainings as the
HRD cost is significantly high and lack of managerial support. Thus, it finds hard
to retain employees who seek for high career development and opportunities.
Ability to acquire or develop new technology
Although it is known that SMEs significantly play a vital role in the
development of Malaysian economy, yet it faces huge challenges in terms of
acquiring new technologies. In such situation, their ability to be more innovative is
distracted due to their inability to adopt and use the latest tool. Innovation is
critical to organization as it is the back bone for industrial development and
competitiveness, yet SME face a huge challenge on this part compared to large
organizations. The lack of innovation can be partly blamed to their inability to
adapt and use the technologies, and lack of investment on R&D due to limited
monetary. Infact in a survey conducted by MITI showed a very few business
50
operated by SMEs have been fully automated. This hinders their resilience to
achieve competitiveness.
High level of international competition due to globalization
One new challenge face by these SMEs is to operate in a global
environment. In this situation, SMEs are pressured to continuously involve in
R&D and product development to keep up with the high level of competitions.
However, not all but majority of SMEs find it tough to compete in global
environment. Although they know that their long term survival relay highly on
ability to compete in global environment, yet due to certain reason they seem to be
lacking in global competitiveness. SMEs are seems not being able to offer
products or services at low cost by taking advantage of low cost strategy as their
operational cost is high. Meanwhile, competing in global environment needs high
involvement in product development due to many reasons. Some of the obvious
reasons are the change in consumer demographical characteristics, increase in
competitors and change in technologies, causing the product life cycle of product
to become shorter. However, SMEs still not able to cope with such demand due to
limited resources.
Scalability
The scalability issue has not been looked into in most of the software
development. Scalability is about creating an application that will be able to meet
the increasing number of users in the future. Most of the current e-CRM systems
that are available in the market do not look into this issue properly.
Mobility
51
The development of mobile CRM was not considered at inception by most
of the companies. Integrating mobile CRM in the future could be a problem where
such features had not been designed into the E-CRM application and there is no in-
house expertise.
Chen and Yi (2005) mentioned that some of the challenges faced by the
companies could be resistance to change by the staff. In order to implement the E-
CRM successfully, not only the customer should accept it but the staff working
internally must be able to accept the new system. Other challenges could be some
of the companies might find that E-CRM system does not suit their nature of
business, lack of reliable resources to get the correct information, suppliers and
customers are not geared in e-commerce and the last reason could be difficulty in
seeing direct ROI.
Enabling SMEs through E-Commerce
The Government has aided SMEs in this regard, with introduction of the
SME Business Stimulus
Package in December 2009, allowing the first 100 SMEs to register for entry-level
websites for free, while the rest pay RM200 each. The package is the result of a
partnership between the Ministry of International Trade and Industry, Google and
two local universities, the Multimedia University and Universiti Tunku Abdul
Rahman. Its aim is to connect Malaysian SMEs to millions of Internet users at
home and abroad. The package offers free hosting on Blogger.com and five static
HTML pages, including the homepage, a products/services gallery, a business
location page with map, an 'About Us page, and a 'Contact Us page with Iorm.
The package makes it easy for Malaysian SMEs to create a simple website and use
it as a sales channel in conjunction with a free trial of Google AdWords
52
In January 2010, the Malaysian Government, through SME Corp, further
took steps to e-enable Malaysian SMEs, through signed a Memorandum of
Understanding with eBay and PayPal entitled, 'Empowering Businesses Online
with eBay and PayPal. The initiative aims to help Malaysian SMEs leverage on
the global business opportunities that e-Commerce brings, through equipping
SMEs with knowledge needed to market their products internationally and gain a
competitive advantage. The initiative would provide educational courses for SMEs
in Malaysia in the form of workshops or phone consultation programmes that are
conducted by certified eBay Education Specialists in Malaysia. To encourage
SMEs to start selling on eBay, there will be a waiver of insertion fees for the first
100 eBay listings and selected features, as well as up to 25% discount on fees for
the first 100 payments received via PayPal
CRM2 or Cloud Computing Adoption Programme is a program by
Multimedia Development Corporation SdnBhd (MDEC). Second Customer
Relationship Solution is even more affordable for Malaysian SMEs with MSC
Malaysia Cloud Computing Enablement Initiative. SMEs have been provided with
financial incentive for the purchase of this software in order to provide a better
service.
Conclusion
In conclusion, many Malaysian SMEs are still operating in a conventional
way and e-mail has been the most effective communication channel amongst
SMEs. Web-based CRM (E-CRM) is becoming popular however SMEs has not yet
implementing E-CRM aggressively as big companies. The future of E-CRM seems
to be very bright with encouragement from government. The future of E-CRM can
53
remain bright if there is sufficient consumer trust and confidence in the underlying
systems. Therefore government and SMEs need to work together to ensure specific
standards are set, which will assist the electronic traders to meet their
responsibilities more systematically. The Malaysian government needs to provide a
baseline for international consumer protection to ensure effectiveness of industry
self-regulation and thus strengthen consumer confidence. Government can further
encourage SMEs by providing leadership roles and continue to improve broadband
and high speed broadband. Tax breaking and subsidies, provision of specialized
training, technology transfer and providing more affordable and secure hosting
solution will further encourage more SMEs to adopt and implement E-CRM
successfully.
References
|1| Abbas Keramati, HamedMehrabi, NavidMojir (2010), A processoriented
perspective on relationship management and organizational performance : An
empirical investigation, Industrial Marketing Management 39
|2|Anon (2001), A short guide to ebusiness; getting close to customers:
leapIrogging with eCRM`, Enterprise Ireland access via http://www.enterprise-
ireland.com/ebusiness.
|3| Bharadwaj A, 'A Resource Based Perspective on IT Capability and Firm
PerIormance, AnEmprical Investigation, MIS Quarterly 24(1), pp; 169-196.
|4|Bradshaw, D. and C. Brash (2001), Managing customer relationships in the e-
business world: how to personalize computer relationships for increased
proIitability`, International Journal oI Retail and Distribution Management, vol. 29,
no.12, pp. 520-529.
54
|5| Butler, S. (2000), Changing the game: CRM in the e-World`, Journal oI
Business Stragety, March/April, vol. 21, no. 2, pp. 13-15.
|6| ChaIIey, D.et al., 'Internet Marketing, Prentice-Hall, London, 2003.
|7| Chen, T. F. and Yi C. L. (2005), The Critical Success Factors and Integrated
Model forImplementing E-business in Taiwan`s SMEs`, Proceedings of the Fifth
International Conference on Electronic Business, Hong Kong, December 5-9, pp.
279-289.
|8|Coltman, T. and Dolnicar, S., 'eCRM (2004) success and the value oI
managerial discreation, ANZMAC (CD), ConIeranceProceedingds oI the
Australian and New Zealand Marketing Academy.
[9]David , A., &Fitzgerald.G. (2006). Information Systems
Development,Methodologies, Techniques & Tools (4
th
Edition) Mac Graw Hill
|10| Fairhurst, P. (2001), e-CRM`, Journal oI Database Marketing, vol. 8, no. 2,
pp. 137-42.
|11| HandeKimiloglu and HulyaZarali, 'What signiIies success in e-CRM,
Marketing Intelligence and Planning, vol 27(2), 2009.
|12| Hasan, H and Tibbits, H.R, 'Strategic management oI electronic commerce:
an adaptation oI the balance scorecard, Internet Research: Electronic Networking
Applications and Policy, vol 10(5), 2000, pp. 439-50.
|13|. Hashim, J, (2007), 'InIormation Communication Technology (ICT) Adoption
Among SME Owners in Malaysia, International Journal oI Business and
Information Vol 2 (2), December 2007.
[14] Huber,Piercy&Mackeown. (2007). Information Systems, Creating Business
Value , John Wiley &Sons,Inc
|15| Jeong Yang Ahn, Serk Ki Kim and Kyung Soo Han, 'On the Design Concepts
Ior CRM System, Industrial Management & Data System vol 103(5), 2003.
55
|16|Kennedy, A. (2006), Electronic Customer Relationship Management
(eCRM):Opportunities and Challenges in a Digital World`, Irish Marketing
Review, Special Issue, Vol. 18 Issue 1 and 2, pp. 58-69.
[17] Khan, M. , Dominic, P. D. D., & Khan, A. (2009). The Impact of ICT and
Driving Factors of Internet Users Buving Behavior in Malavsia.2009
International Conference on Machine Learning and Computing IPCSIT vol. 3
(2011).IACSIT Press, Singapore.
|18| Kotler, P, (1991) 'Marketing Management: Analysis, Planning,
Implementation, and Control, Prentice-Hall, Englewood Cliffs, NJ,
[19] Lee-Kelley, L.Gilbert, D, and Mannicom, R, (2003)'How e-CRM can
enhance customer loyalty, Marketing Intelligence,& Planning, vol 21(4), pp.239-
48
[20] (Moghavvemi, S., Salleh, N. A. M., Zhao, W., & Hakimian, F. (2011). An
Empirical Study of IT Innovation Adoption Among Small and Medium Sized
Enterprises in Klang Valley, Malaysia. Journal of Communications of Global
Information Technology (COGIT), 3, 78-86 ) [21] Namati, H.R., C.D. Barko and
A. Moosa (2003), E-CRM analytics: the role oI data integration`, Journal oI
Electronic Commerce in Organisations, July-Oct., vol. 1, no. 3, pp. 73-90.
|22| Ngai, E.W.T, 'Customer relationship management research (1992-2002): an
academic literature review and classiIication, Marketing Intelligence & Planning,
vol 23(6), 2005, pp. 582-605.
|23| Ng Kim Soon, MohdFaizulZulkiIli, June 2012,'The Impact oI Electronic
Customer Relationship Management (e-CRM) on the business performance in
Small Company, Journal oI Engineering & Technology.
|24| Payne Adrian, Frow, Pennie, 'Developing a segmented service strategy:
Improving Measurement in Relationship marketing, Journal oI Marketing
management, vol 15(8), 1999, pp797-818.
56
[25] Post & Anderson. (2006).Management Information Systems, Solving
Business Problems with Information Technology(4
th
Edition) Mac Graw Hill
[26] Prime Minister Datuk Seri Najib Abdul Razak (12 July 2013) The Sunday
Daily Newspaper.
[27] Romano, N.C., &Fjermedestas, J., (2003)'Electronic commerce customer
relationship management: A research agenda, InIormation Technology and
Management, vol. 2/3, 233-258.
[28] Saleh A,S&Ndubisi, N, O (2006), An Evaluation of SME Development in
Malaysia, International Review of Business Research Paper, 2(1), 1-14
|29| Salmen, S.M. and A. Muir (2003), Electronic customer care: the innovative
path to e-loyalty`, Journal oI Financial Services Marketing, vol. 8, no. 2, pp. 133-
44.
[30] Shan L.Pan and Jae-Nam Lee, (2003) 'Using eCRM for Unified View of the
Customer, Journal oI Communications oI the ACM, vol 46(4), 2003.
[31] SMIDEC 2002. 'SMI Development Plan (20012005), PercetakanNasional
Malaysia Berhad, Kuala Lumpur
|32| SteIanou C., Sarmaniotis,C., StaIyla A., (2003) 'CRM and customer centric-
knowledge management: an empirical research, Business Process Management
Journal vol 9(5), pp.617-634.
|33| Tae HyungRoh, Cheol Kyung Ahn and Ingoo Han, (2005) 'The priority Iactor
model for customer relationship management system success, Expert Systems
with Application, vol28(4), pp.641-654.
[34] Teece DJ, Pisano G, Shuen A, 1997, Dynamic Capabilities and Strategic
Management, Strategic Management Journal 18(7): 509-533.
|35| Kathleen M. Eisenhardt, JeIIrey A. Martin, (2000) 'Dynamic Capabilities:
What are They, Strategic Management Journal Vol(21), pp 1105-1121.
[36] Third Industrial Master Plan 2006-2020. Kuala Lumpur : MITI. 2007.
57
[37]Yan Liu, ChangFeng Zhou and Ying Wu Chen, (2006) 'Determinants oI E-
CRM in influencing Customer SatisIaction, Vol. 4099, Springer Berlin /
Heidelberg.
58
Chapter 4 :
Small and Medium Enterprises, Corporate Social Responsibility, and
Disclosure
Kasmah Tajuddin & Nor Haliza Binti Che Hussain
Definition of Corporate Social Responsibility
Corporate social responsibility (CSR) simply means how companies act or
operate responsibly so as not to harm anybody or anything in the ways that they do
or carry out their businesses. A responsible company can be defined as one which
actively manages the economic, social, and environmental impacts of its activities,
in line with a clear-cut set of values, in order to reap benefits for its own business
as well as for the stakeholders it affects and the communities within which it
operates.
The concept of social responsibility had been widely discussed as early as in
the 1950s by academics, businessmen and politicians (Mintzberg, 1983); its
resurgence attributed to by the separation of powers between the ultimate owners
of corporations, who are the shareholders, and the powers vested to the managers
of the corporations.
According to Dahlsrud (2006), there are many available definitions of CSR
and they are consistently referring to five dimensions. Although they apply
different phrases, the definitions are predominantly congruent.
59
Table 1: Dimensions of CSR
Dimensions Refers to Examples phrases
The natural
environment
The environmental
dimension
a cleaner environment`,
environmental stewardship`,
environmental concerns in
business operations`
The social
dimension
Socio-economic or
financial aspects,
including describing
CSR in terms of a
business operation
contribute to a better society`,
integrate social concerns in their
business operations`, consider the
full scope of their impact on
communities`
The economic
dimension
The relationship between
business and society
contribute to economic
development`, preserving the
proIitability`, business
operations`
The stakeholder
dimension
Stakeholders or
stakeholder groups
interaction with their
stakeholders`, how organisations
interact with their employees,
suppliers, customers and
communities`, treating the
stakeholders oI the Iirm`
The voluntariness
dimension
Actions not prescribed by
law
based on ethical values`, beyond
legal obligations`
Source: Dahlsrud, A. (2006). How Corporate Social Responsibility is Defined: an
Analysis of 37 Definitions. Corporate Social Responsibility and Environmental
Management Corp. Soc. Responsible. Environ. Mgmt. 15, 113 (2008)
60
Figure 1: Carroll`s CSR Pyramid
Dr. Archie B. Carroll, a business management author and professor defined
social responsibility as the responsibility of businesses; encompassing the
economic, legal, ethical, and discretionary expectations that society has of
organisations at a given point in time. He identified four areas that make up a
corporate social responsibility pyramid: legal, economic, ethical and philanthropic.
This pyramid has become widely used and is meant to explain the main areas that a
business's duties to its stakeholders fall under.
Bursa Malaysia on the other hand, in their CSR Framework 2006 defined
corporate social responsibility as an, ..open and transparent business practices
that is based on ethical values and respect for the community, employees, the
environment, shareholders and other stakeholders. It is designed to deliver
sustainable value to society at large.
62
CP-Community Participation; EP-Employee Involvement; PC-Partnerships
with the Community; DC-Dialogue with the Community; ASD-Alleviation of
Social Disadvantage; CRM-marketing; Sp-Sponsorship of
Community/Cultural/Sporting activities; Ph-Philanthropic donations Source: Najib
Tun Abdul Razak. (2004). CSR:creating greater competitive advantage - the role of
CSR in achieving Vision 2020. Paper presented at the Corporate Social
Responsibility Conference. 21-22 June: Kuala Lumpur.
The Responsibility of CSR and Firm Size
Is it a fact or a myth that CSR is only meant for large companies? Charles
Dickens once said that irrespective of the size of your business, the colour of your
skin and the faith of your religion, "no one is useless who lightens the burdens of
another". The act of kindness that comes from the heart can change the lives of
others. CSR activities of companies such as donations and philanthropies which
sometimes also involved their employees could be seen as acts of kindness wherein
the desired end result would be to relief the burdens of the recipients who make up
the society.
The norm is any company whose activities have an impact on others whether
economic, social or environmental should be made socially responsible. There
might be an association between company size and the level of social involvement.
For example, heavy manufacturing industries operate on a huge scale; therefore
these companies will be more closely monitored because of its environmental
impact on society. They are perceived to be more harmful to natural habitats
(Smith and Alcom, 1991) than other companies. The same applies to the oil and
gas industry. The companies in these industries are considered to be performing
sensitive activities and as a result they are more likely to be deeply involved in
63
CSR. Does this mean that smaller companies in less sensitive industries have lower
levels of social involvement? A study by Joyner, Payne and Raiborn (2002) among
retailing and financial services companies shows that there is no apparent impact
of size with CSR. In fact smaller companies seemed to better understand CSR than
larger companies triggered by other factors such as ethical values by avoiding
irresponsible behaviour (Thompson and Smith, 1991).
The myth that CSR is only for the rich-ards and that smaller and micro
companies who are not having a healthy balance sheet, need not contribute to the
betterment of the society is not acceptable anymore. There should be some form of
giving back to society in whatever form be it education for youth, funding
assistance for the underprivileged, maintaining orphanages, giving out scholarships
or planting trees to help reduce carbon foot print. In the words of Datuk Hafsah
Hashim, the chief executive officer of Small and Medium Enterprises Corporation
Malaysia (SME Corp Malaysia), ' if we are not poor enough to receive, then we
should be rich enough to give.
The Malaysian Small and Medium Enterprises (SMEs) and CSR
The National SME Development Council has developed a Master Plan
2012-2020 where it states that SMEs are to be developed by innovation and to be
driven by productivity. As the Chairman of National SME Development Council,
Dato` Seri Najib Tun Abdul Razak said,
'Unless we introduce a game changer`, we will be caught in a middle-income trap
and no longer as competitive on cost...
64
'. the Government would adopt a differentiated approach to accelerate the
growth oI SMEs and to provide the impetus Ior growth led by the private sector.
' . an innovation-led economy demands a new breed of SMEs that can help
foster market and technology-driven innovation to create more high-skilled jobs in
all economic sectors. Prime Minister of Malaysia.
At the launch of the Malaysian Institute of Management (MIM) Konrad
Adenauer (KAS) CEO Dialogue 2012 Driving Development with Effective
Green Growth Policies: Maximising Green Opportunities for Organisations, the
political secretary to Minister of Energy, Green Technology and Water, said that
companies including SMEs should be thinking of giving back to society even when
they are busy building or developing their businesses and organisations and it is
not just about organising charitable activities and programmes or doling out
donations in cash or in kind but also looking internally or in-house, on what kind
of CSR activities that they can do. To him, CSR covers a wide range of issues
including business ethics, corporate governance and socially responsible investing
(SRI) to environmental sustainability and community investment; it is a method of
management that considers an integrated set oI indicators that charts the Iirm`s
impact and reciprocal effects on socio-economic sphere, human rights, good
governance and environment.
Meanwhile, Malaysian Institute of Management chief executive officer Dr.
Nazily Mohd Noor attributed the situation of less involvement of SMEs in CSR to
the lack of awareness and promotion on the significance of CSR activities among
SMEs in the country. Realising the undesirable situation, he said the institute
would hold more dialogues with SMEs. 'Big corporations are there and aware oI
65
these activities. Now we try to encourage SMEs to take part in CSR, he said,
adding that CSR programmes were not only confined to charitable activities.
Contemporary scenario of CSR
In the wake of corporations now under intense pressure to perform
Iinancially as well as conIorm to society`s expectations and demands, they cannot
anymore ignore their corporate social involvement, as they know that their
operations can fundamentally affect the lives of the community. Moreover, the
future and sustainability of businesses largely depend on the acceptance of the
communities in which it operates.
Therefore, corporate social responsibility (CSR) programmes are becoming
increasingly popular elements of corporate marketing strategies. Companies are
under growing pressure to embrace social responsibility, in part due to emerging
public standards for social performance (e.g. the United Nations Global Compact),
and another due to the proliferation of independent evaluations and rankings that
make social perIormance more transparent (e.g. Fortune`s Most Admired
Companies). The Enron and WorldCom scandal had also become the catalyst for
government intervention to curb future abuse and misuse of power.
Benefits of CSR
Companies that adopt CSR generate a positive corporate image (Smith and
Stodghill, 1994), and enhance product evaluation via an overall evaluation of the
firm (Brown and Dacin, 1997). With an enhanced brand image and a positive
reputation among consumers; they are able to attract more accomplished
employees and business partners. Apart from being able to attract and retain high
66
quality employees, they also showed a higher degree of loyalty (Turban and
Greening, 1997;Fombrun and Shanley, 1990).
CSR also acts as a buffer against, and may help a company recover from a
market crisis. Socially responsible companies also have less risk of negative rare
events. Companies that adopt the CSR principles are more transparent and have
less risk of bribery and corruption. In addition, they run less risk of having to
recall defective product lines and pay heavy fines for excessive polluting. They
also have less risk of negative social events, which could damage their reputation
and costs millions in information and advertising campaigns or litigation.
While other researchers remain skeptical on the relationship between CSR
and company performance, there are however researches that have shown that
there is indeed a relationship between CSR and company performance where they
are positively related to better financial performance; Nicolau, 2008) and
(Aragon-Correa et al., 2008; Bird et al., 2007; Peloza and John 2006; Orlitzky et
al.,2003; Judge and Douglas,1998; Preston and O`Bannon, 1997; Russo and Fouts,
1997; Waddock and Grave, 1997; Hart and Ahuja, 1996; Klassen and McLaughlin,
1996; Pava and Krusz, 1996; Grave and Waddock,1994; Sturdivant and Ginter,
1977; Heinze, 1976; Bragdon and Marlin, 1972, as cited by K.H. Kang et al.
(2010). The relationship is statistically significant, supporting, therefore, the view
that socially responsible corporate performance can be associated with a series of
bottom-line benefits.
In his research in 2006, Cochius concluded that there are four motivations
among Dutch SMEs to engage in CSR, namely the political, the instrumental, the
integrative and the ethical motivation. He also concluded that the most important
67
CSR stakeholders are the employees, the environment, the suppliers, the
consumers and the community. The external benefits of CSR are related to its
effect on corporate reputation. Firms with good social reputation may improve
relations with external factors such as customers, investors, competitors, bankers
and suppliers.
Company reputation, employee and customer engagement were the earliest
forms of motivations for companies to adopt CSR. However in more recent
developments companies now embark on CSR to reap the benefits of CSR through
innovation, cost saving and brand differentiation. For example, in recognising that
water shortages are already affecting many parts of the world, where by 2025, 1.8
billion people will be living in countries or regions with absolute water scarcity
and two-thirds in water-stressed condition, Unilever Malaysia works across their
value chain from raw material sourcing to the design of their products to reduce
water usage in their manufacturing processes. They are also working with the
Water Footprint Network since 2009, to measure their agricultural water impact
since their raw materials come from water-intensive crops such as tomatoes and
sugar cane.
Some of their products have also been designed as such that, they are to be
used with less water like their hand foam and fabric conditioner. By doing this
Unilever has positioned itself as one of the leading brands that promote CSR.
Consumers who are now highly aware of the importance of environmental
sustainability would definitely choose a product that does something good to the
environment.
68
CSR disclosure and profitability
An association between profitability and SRD has been demonstrated in a
number of empirical studies (Smith, Yahya and Aminuddin, 2007; Janggu, Joseph
and Madi, 2007 Hackston and Milne, 1996;). Several studies have suggested that
there might be a link between profitability and disclosure. A study by smith et al.
(2007) examines the extent to which the environmental disclosure in annual reports
and suggests that there is no significant relationship between disclosure and
profitability. The findings of Janggu et al. (2007) suggested that social
responsibility disclosure is positively associated with profitability.
Companies that socially responsible will bring the company competitive
advantages. Firm performance can be argued to be dependent on upon the know-
how of its employees and managers which are considered as valuable resources of
the company. Haniffa and Cooke (2005) found that profitability is significantly
related to corporate social disclosure. Janggu et al. (2007) found that profitability is
significantly related to corporate social responsibility and implied that profitable
companies tend to disclose more social issues as compared to less profitable ones.
In addition, profitable companies have more financial resources to invest in
reporting social responsibility information.
Main Theories Behind Disclosure
There are various motivations driving companies to externally report
inIormation about the organisation`s social and environmental perIormance
(Deegan, 2002). One of the motivations is the desire to legitimise certain aspects of
an organisation`s operations.
69
Legitimacy Theory
Based on legitimacy theory, companies disclose organisation social responsibility
information to present a socially responsible image so that they can legitimise their
behaviours to their stakeholder groups (Branco and Rodrigues, 2006a). Legitimacy
theory is reIers to the idea that a 'social contract exists between society and
business. Legitimacy theory can be defined as:
.society is considered to allow companies to exist and have rights, and
expecting the companies to fulfil its expectations about how their operations
should be conducted. A breach of contract exists and a legitimacy gap may
develop iI society`s expectations are not IulIilled. (Branco and Rodrigues,
2006, p236)
In term of legitimacy theory, companies in some industries are socially more
visible and more exposed to the public scrutiny (Branco and Rodrigues, 2006a).
The companies are therefore considered to feel greater political and social pressure
to provide and disclose information in certain areas of social responsibility. They
are expected to act in a more socially desirable manner.
Haniffa and Cooke (2005) adopted legitimacy theory as the premise of their
theoretical framework to understand the factors that may cause variability in
corporate social disclosure and to what extent the variables may influence
organisational actions in responding to various stakeholder groups. The study by
O`Donovan (2002) supports legitimacy theory and provides insight into
management disclosure behaviour based on scenarios that have different impacts.
70
Stakeholder Theory
Stakeholder theory is closely related to legitimacy theory. Stakeholder theory
offers a new way to organise thinking about organisational responsibilities. The
stakeholder theory is used as a basis to analyse those groups to whom the firm
should be responsible (Moir, 2001). Stakeholder theory suggests that the needs of
shareholders cannot be met without satisfying to some degree the needs of other
stakeholders, therefore turned attention to considerations beyond direct profit
maximisation (Jamali, 2008).
Sachs et al. (2006) investigated corporate social responsibility by a mobile
communications provider in Switzerland and analysed whether the implementation
were consistent with responsibilities derived from the stakeholder view framework.
Stakeholder theory has been applied to Iacilitate one`s understanding oI how
corporate entities behave, particularly in adapting to the rapidly changing business
environment where social and environmental issues are becoming increasingly
important (e.g. Eljido-Ten, 2007).
Resource-based Theory
Branco and Rodrigues (2006b) discussed how resource-based theory can influence
Iinancial Iirm`s perIormance (proIitability) and what were the reasons behind such
relationship was. They conclude that one of the reasons was firms engage in
corporate social responsibility (CSR) because companies believe that being seen as
socially responsible will bring the companies a competitive advantage (Branco and
Rodrigues, 2008). Thus, allowing them to achieve better economic results. They
expect by having a good relation with their stakeholders will increased financial
returns by developing valuable intangible assets. Resource-based theory are
considered as useful starting points in the analysis of CSR because they emphasize
71
the importance of intangible resources and capabilities and consider them to be the
most importance sources of firm success.
From resource-based perspectives, CSR is seen as providing internal and external
benefits, or both. When companies invest in socially responsible activities may
have internal benefits by helping a firm to develop new resources and capabilities
that are related to know-how and corporate culture. Branco and Rodrigues (2006b)
stated that these resources, which are acquired internally, would then lead to more
efficient use of resources. Companies can generate sustainable competitive
advantages by effectively controlling and manipulating their resources and
capabilities which are valuable, rare, cannot be imitated and no substitute. Human
resource activities can assist in creating a competitive advantage by developing a
skilled workIorce that eIIectively carries out the Iirm`s business strategy and thus
leading to improved financial performance.
Medium of Disclosure
The public awareness and interest in environmental and social issues have
resulted in more social disclosures from companies in the last two decades (Gray et
al., 1995). Social disclosures are deemed to be an important communication tool or
channel towards ensuring greater corporate transparency and enable a better
engagement with multiple stakeholders. It is therefore crucial that companies
choose the right medium in order to communicate with the public. The chosen
media should be able to incorporate all the information with exceptional speed and
accuracy. With globalisation and liberalisation the internet would have been
deemed to be the most effective medium. However, there are other forms of
medium which companies can adopt as their mode of engagement with the public.
72
The annual report as a medium of disclosure
According to Smith et al. (2007), annual report is a statutory report which is
produced regularly, easily available, and widely recognised as the principal means
for corporate communication. Mirfazli (2008) defines annual reports as:
At the top every analyst`s list (oI Iinancial reports used by analysts) is the
annual report to shareholders. It is the major reporting document and every
other financial report is in some respect subsidiary or supplementary to it.
(p.398)
Many studies use corporate annual reports as the only source for gathering
data on social responsibility disclosure. There are good reasons to focus on annual
reports to disclose social responsibility. Firstly, the annual report is the main
corporate communication tool, which is represent a company and widely used
(Branco and Rodriguez, 2006). Annual report is regarded as an important
document for corporate social disclosure due to its high credibility in
communicating information to stakeholders and its widespread distribution
(Unerman, 2000).
Although annual report is an important source of data about a company, its
use as the source for gathering data of the social responsibility disclosure can be
criticised for the way it ignores other forms of communication (Roberts, 1991).
O`Donovan (2002) indicated that the level oI sophistication oI non-investors
stakeholders is such that an annual report is less likely to be read and that the
proliferation of specialized environmental reports may be a response to this issue.
73
The internet as a medium of disclosure
Zeghal and Ahmad (1990) also indicated that the choice of a medium for
information disclosure is dependent on the target public for whom the message is
intended. Branco and Rodriques (2008) compared the Internet (corporate web
pages) and annual reports as medium of social responsibility disclosures. They
concluded that the disclosure medium is relying on the target public that
companies wish to deliver the message.
Studies analysing the Internet as a tool for communicating with various
stakeholders and disclosure medium for social responsibility information have
been growing in number (e.g. Branco and Rodrigues, 2008; Wanderly et al., 2008).
There are many benefits of using the Internet as communication channel compared
to traditional media (such as newspapers, magazines, billboards, television and
radio) because of the possibility of disseminating more information less
expensively and in timely fashion. The Internet also allows companies to provide
information targeted to different stakeholders and to obtain feedback from them as
the Internet is interactive in nature. The Internet also allows the companies to
publicised detailed and up-to-date information (Wanderly et al., 2008).
Some studies compare social responsibility information disclosure through
Internet with disclosure in annual reports (Branco and Rodrigues,2008; Branco and
Rodrigues, 2006a). Branco and Rodrigues (2006a) examined social responsibility
disclosure in annual reports and on the web sites of Portuguese banks and suggest
that Portuguese banks seem to attribute greater importance to annual reports as
disclosure media than to the Internet.
74
Other mediums of disclosure
Some studies try to consider other disclosure medium in addition to annual
reports such as corporate websites, corporate brochures and advertising. One of the
first studies to consider other disclosure medium for social responsibility
disclosure was Zeghal and Ahmad (1990). They analysed advertisements and
company brochures used by banks and petroleum companies; and compared the
amount and focus of reporting in the annual reports, brochures and advertising.
They concluded that advertisements are not a major means of disclosing social
information, while brochures appear to be a widely used means of disclosing social
information (Zaghel and Ahmad, 1990).
Conclusion
The growing public awareness on the role of corporations in society and the
accusations of corporations as the cause of social problems have prompted
companies to address these anxieties through acts of responsibilities whether
economically, legally, ethically or philanthropically as depicted by Carroll. Such
acts should not be the burden of multinationals alone but also the smaller
companies.
As has been seen in some researches, CSR is beneficial to companies in not
only in improving their Iinancial perIormance but also able to win public`s trust
towards their businesses. To do this the companies need to engage with the public
to disclose such acts of social responsibilities and choose the right medium towards
ensuring better transparency and engagement with the multiple stakeholders.
75
References
Branco, M. C., & Rodrigues, L. L. (2008). Factors Influencing Social
Responsibility Disclosure by Portuguese Companies. Journal of Business
Ethics, 83, 685-701.
Branco, M.C. & Rodrigues, L. L. (2006a). Communication of corporate social
responsibility by Portuguese banks: A legitimacy theory
perspective.Corporate Communications: An International Journal, 11(3).
Branco, M.C. & Rodrigues, L.L. (2006b). Corporate Social Responsibility and
Resource-Based Perspectives. Journal of Business Ethics, 69, 111132
Branco, M.C. & Rodrigues, L.L. (2006b). Corporate Social Responsibility and
Resource-Based Perspectives. Journal of Business Ethics, 69, 111132
Brown, T. J., & Dacin, P. A. (1997). The company and the product: Corporate
associations and consumer product responses. Journal of Marketing, 61(1),
6884.
Bursa Malaysia Corporate Social Responsibility Framework (2006).
Conchius, T. (2006). Corporate social responsibility in Dutch SME: motivations
and CSR stakeholder. Final thesis, Maastricht University, Netherlands.
Retrieved from http://www.basisboekmvo.nl/images/mvo-scriptie/
4%20Timo%20Cochius.pdf
Dahlsrud, A. (2008). Corporate Social Responsibility and Environmental
Management Corp. Soc. Responsib. Environ. Mgmt. 15, 113 (2008). Wiley
InterScience
76
Deegan, C. (2002). Introduction: the legitimizing effect of social and
environmental disclosures a theoretical foundation. Accounting, auditing
and Accountability Journal, 15 (3), 282-311.
Fombrun, C, Shanley, M. (1990). What`s in a name?` Reputation building and
corporate strategy. Academy of Management Journal 33, 233258.
Elijido-Ten, E. (2007). Applying stakeholder theory to analyze corporate
environmental performance: Evidence from Australian listed companies.
Asian Review of Accounting, 15 (2), 164-184.
Gray, R., Kouhy, R., & Lavers, S. (1995). Corporate social and environmental
reporting: A review of the literature and a longitudinal study of UK
disclosure. Accounting, Auditing and Accountability Journal, 8(2), 47-77.
Hackston, D. & Milne, M. J.(1996). Some determinants of social and
environmental disclosures in New Zealand companies. Accounting, Auditing
& Accountability Journal, 9 (1), 77-108.
Haniffa, R.M. & Cooke, T.E., (2002). Culture, corporate governance and
disclosure in Malaysian corporations. Abacus 38 (3), 317349.
Jamali, D. (2008).A Stakeholder Approach to Corporate Social Responsibility: A
Fresh Perspective into Theory and Practice. Journal of Business Ethics, 82,
213231
Janggu, T., Joseph, C. & Madi, N. (2007). The Current State of Corporate Social
Responsibility among Industrial Companies in Malaysia. Social
Responsibility Journal, 3 (3).
77
Joyner B.E, Payne. D, Raibom C.E (2002). Building Values, Business Ethics and
Corporate Social Responsibility into the Developing Organisation. Journal Of
Developmental Entrepreneurship. Vol 7, Pg 113 131
K.H. Kang et al. (2010). Impacts of positive and negative corporate social
responsibility activities on company performance in the hospitality industry.
International Journal of Hospitality Management 7282
Mintzberg, H. (1983). The case for corporate social responsibility. Journal of
Business Strategy (pre-1986); Fall 1983; 4, 000002; ABI/INFORM Global pg.
3.
Mirfazli, E. (2008). Evaluate corporate social responsibility disclosure at Annual
Report Companies in multifarious group of industry members of Jakarta
Stock Exchange (JSX), Indonesia. Social Responsibility Journal, 4 (3), 388-
406.
Moir, L. (2001). What do we mean by corporate social responsibility? Corporate
Governance, 1 (2), 16-22
Najib Tun Abdul Razak. (2004). CSR: creating greater competitive advantage - the
role of CSR in achieving Vision 2020. Paper presented at the Corporate
Social Responsibility Conference. 21-22 June: Kuala Lumpur.
O`Donovan, G. (2002). Environmental disclosures in the annual report: Extending
the applicability and predictive power of legitimacy theory. Accounting,
Auditing and Accountability Journal, 15 (3), 344371.
78
Peloza, John. (2006). Using Corporate Social Responsibility as Insurance for
Financial Performance. California Management Review, 48(2): 52-72.
Roberts, C. B. (1991). Environmental Disclosure: A Note on Reporting Practices in
Mainland Europe. Accounting, Auditing & Accountability Journal, 4 (3), 62-
71.
Sachs, S., Maurer, M., Ruhli, E., & Hoffman, R. (2006). Corporate social
responsibility Irom a 'stakeholder view perspective: CSR implementation
by a Swiss mobile telecommunication provider. Corporate governance, 6
(4), 506-515.
Smith M.S, Alcom D.S (1991). Cause Marketing: A New Direction in the
Marketing of Corporate Responsibility. Journal of Services Marketing. Vol 6,
No 4, Pg 21-37
Smith, G., Stodghill, R.(1994). Are good causes good marketing? Business Week
3363, 6466.
Smith, M., Yahya, K. & Amiruddin, A. M. (2007). Environmental disclosure and
performance reporting in Malaysia. Asian Review of Accounting, 15 (2),
185-199
Thompson. J.K. and Smith, L. (1991) Social responsibility and small business:
suggestions Ior research`, Journal oI Small Business Management 29(1) pp.
30-44.
79
Turban, D. B., Greening, D. W. (1997). Corporate social performance and
organisational attractiveness to prospective employees. Academy of
Management Journal 40(3), 658672.
Unerman, J. (2000). Methodological Issues: Reflections on quantification in
corporate social reporting content analysis. Accounting, Auditing &
Accountability Journal, 13 (5), 667-680.Wanderley, L. S. O., Lucian, R.,
Farache, F. & Sousa Filho, J.M. (2008). CSR Information Disclosure on the
Web: A Context-Based Approach Analysing the Influence of Country of
Origin and Industry Sector. Journal of Business Ethics, 82,369378.
Zeghal, D., & Ahmed, S. A. (1990). Comparison of social Responsibility
Information Disclosure Media Used by Canadian Firms. Accounting,
Auditing and Accountability Journal, 3(1), 38-53.
80
Chapter 5 :
An Overview of Minimum wage policy implementation in SMEs in response
to high income nation for sustainable economy
Chung Chay Yoke
Jayamalathi a/p Jayabalan
K Shamini a/p Kandasamy
Lee Kwee Fah
Low Mei Peng
Pok Wei Fong
Ung Leng Yen
Yeong Wai Mum
Introduction
Malaysia has achieved significant economic and social progress in the past
several decades. As the world economy is changing, and Malaysia is moving
toward a new economic model in order to become a high-income nation for
sustainable economy. In response, the Economic Transformation Programme
(ETP) which represents a marked change in approach to build on the Tenth
Malaysia Plan minimum wage policy is recommended by the National Wage
Consultative Council (NWCC). The government has set a minimum wage of
RM900/month for Peninsular Malaysia and RM800/month for Sabah, Sarawak and
Labuan. The aim of the minimum wage should be to allow low income workers to
maintain a decent standard of living without unduly limiting the flexibility of
employers to allow Malaysia to remain competitive at the global level. In setting
the minimum wage, the government took into account social and economic
considerations: cost of living, productivity, competitiveness and employment. In
81
Malaysia, almost 33.8% of about 1.3m private sector workers still earned less than
RM700/month in 2009, well below the RM800/month that is considered the
poverty line (CIMB ECONOMIC UPDATE May 2, 2012).
The objectives of minimum wages by government are as followed:
1. to ensure basic needs of employees and their families are met.
2. to provide sufficient social protection to employees.
3. to encourage industry to move up the value chain by investing in higher
technology and increase labour productivity
4. to reduce nation`s dependence on unskilled Ioreign labour.
Efficiency Wage Theory and its debates
The Government`s move on implementation oI minimum wage leads us to
revisit the Efficiency Wages theory. Generally, Efficiency Wage theory is used to
explain downward wage rigidity at the microeconomic level (Weiss, 1991) and
thus involuntary unemployment as well as labour market segmentation (Bulow &
Summers, 1986) and wage differentials across firms or industries (Krueger &
Summers, 1988). The essence of the theory states that wages do not only determine
employment but also aIIect employees` productive behavior or quality. Therefore,
under certain conditions, it is optimal for employers to set compensation above the
market clearing level in order to recruit, retain or motivate employees. The theory
started in 1914, whereby Henry Ford, being the builder of most popular car,
decided to pay all qualified employees a minimum of $5 a day for an eight hour
day, with the market going rate of average $2.30 for a nine hour day. This was a
very large salary increase for most employees at that point of time. However, from
the viewpoint of Ford company, this increase in pay was far from negligible as it
was represented about halI oI the company`s proIits at the time. The main reason
82
for the substantial increase in profits was the huge reduction in turnover rate and
layoff rate. Adding on, employees were more motivated and promoted good work
which leads to high productivity.
Although, there is a vast number of empirical studies of efficiency wages,
there are many who view the evidence as unpersuasive and inconclusive (Manning
& Thomas, 1997; Autor, 2003). This is mainly due to numerous problems that
render the empirical testing of efficiency wage. As such, the debate for minimum
wage is still on going, with mix results.
Views on MinimumWage
The supporters of minimum wage believe that if the minimum wage is set at
the right level, it helps the poorest workers meet their basic needs, reduces poverty
in the short run. Since the poorest have high marginal propensity to spend,
eventually the raise on wage will be re-channeled to the economy. The employers
will avoid employing less-skilled workers and causing unemployment on the other
hand. In spite of the possible pool of unemployment, the pain will not last long. In
the long run, the unskilled workers will invest in education and training in order to
avoid unemployment. As such, productivity will increase. At the same time,
businesses are forced to be more innovative and become more efficient.
However, these deem to be too ideal to be true by the opponents of the
policy. The neoclassical economists believe any intervention will lead to
inefficiencies. Large companies can sustain the increase in labour cost, but not the
small and medium enterprise. The SMEs are forced to lay off workers as a control
of their tight budget, and they have limited ability to invest in technology. Some of
the incompetent firms have no choice but to shut down. Alternatively, the SMEs
will choose to pass on the marginal labour cost to consumers, and cause inflation.
The unemployment of the unskilled or less skilled workers worsen the income gap,
83
as the basic needs cannot be met, needless to mention about education and social
mobilization.
Since SMEs are the lifeblood of most economies, some have succeeded
because SMEs form a fundamental part of the economy. It comprises over 98% of
total establishments and contributing to over 65% of employment as well as over
50% of the gross domestic product. SMEs have the potential to contribute
substantially to the economy and can provide a strong foundation for the growth of
new industries as well as strengthening existing ones, for Malaysia's future
development. On average, they represent over 90% of enterprises and account for
50-60% of employment at a national level (Luetkenhorst, 2004)). It is clear that
SMEs stand as a major economic force, upon which large numbers of people in
developing countries depend for their livelihoods. SMEs have always been faced
with a wide range of competitive market conditions which threaten their survival.
Further they are under heavy pressure of performance both with restricted
manpower and low levels of profits.
Below are statistics extracted from the Department of Statistic, Malaysia
showing the contribution of SMEs in Malaysia GDP:
Table 1: SME contribution to economy (%)
Current Status
Forecast for 2020
(based on the SME Masterplan)
GDP 31.9% 41%
Employment 59% 62%
Exports 19% 25%
Source: SME Corp. Malaysia & Department of Statistics, Malaysia
84
Table 2: Contribution of SME to GDP by Key Economic Activity (Constant 2000
Prices)
Source: SME Annual Report 2010 / 11 & Department of Statistics, Malaysia
Source: SME Annual Report 2010 / 11 & Department of Statistics, Malaysia
Year 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Agriculture 2.4 2.5 2.4 2.4 2.4 2.4 2.4 2.2 2.3 2.4 2.3
Mining &
Quarrying
0.05 0.05 0.05 0.05 0.05 0.04 0.04 0.04 0.04 0.04 0.04
Construction 0.8 0.9 0.9 0.9 0.8 0.8 0.8 0.8 0.8 0.9 0.9
Manufacturing 9.2 8.5 8.3 8.7 9.0 9.0 9.2 9.2 8.8 8.4 8.7
Services 17.1 17.4 17.3 16.9 16.9 17.3 17.6 18.7 19.4 20.2 20.2
Less: Undistributed
FISIM
0.9 0.9 0.8 0.8 0.8 0.7 0.8 0.7 0.7 0.7 0.7
Plus: Import Duties 0.1 0.1 0.1 0.1 0.2 0.2 0.1 0.2 0.2 0.3 0.4
Total Value Added 28.8 28.5 28.3 28.1 28.6 29.0 29.4 30.4 30.9 31.5 31.9
85
Source: SME Annual Report 2010 / 11 & Department of Statistics, Malaysia
Lower income workers are the ones affected by the introduction of minimum
wages. Obviously this move will be welcomed by these workers whose current
earnings fall below the limit imposed. Studies have shown that this has a negative
effect on other workers who are already at or above the minimum wage level as
they still receive the same compensation while their younger and more
inexperienced colleagues get higher wages which, effectively closes the income
gap between the two groups of workers. This might be perceived as inequity by the
older, more experienced and skillful workers (Stickles 1999).The dissatisfaction
may be great enough to compel the more productive workers to seek employment
offering higher wages elsewhere. If this occurs on a massive scale, the firm will be
left with an unbalanced work force comprising mostly of the least productive
workers. This will have a detrimental eIIect on the company`s perIormance which
may lead to business failure.
Thus, it is imperative to look into the impact of minimum wage on both the
employers` and employees` perspectives.
86
Impact of Minimum Wage from the Employers` Perspectives
Reduce number of labours employed through technologies automation
Alpert (1986) (cited in Wimmer, 2000), study discusses how restaurants
decreased their reliance on low-skilled labour. He notes that productivity
improvements at restaurants have emphasized on procedures limiting both
employee training and on-premises food preparation. This consistent with
Kreuger`s (1991) Iound that product uniIormity across outlets has led Iranchisors
to adopt relatively capital-intensive production processes and decrease reliance on
labour inputs in fast-food through job simplification, franchised restaurants will
help to ensure quality uniformity and may reduce monitoring cost.
Dumas (1997) reported that firm in merchandise stores including warehouse,
clubs had introduced technologies to automate many functions including the point
of sale and other activities related to inventory such as centralized distribution
operations, allowed firms to move away from more labour-intensive practices of
the past. This supported by Ragnitz and Thum (2007), since the labour costs
increase the employers burden, they can be expected to implement cost-avoidance
measures, at least in the medium and long term such as substitution labour by
capital in the security services, replaced labour by electronic monitoring systems,
information terminals could be used instead of service counters, means some low-
wage earners would lose their jobs.
Substitution of capital for labour effect
II labour is an important input in the production process (i.e. labour`s share
in total costs is large) even a small increase in pay will cause a substantial hike in
the marginal cost of production. By increasing the cost of labour, capital becomes
relatively less expensive and firms will begin to seek opportunities to invest in
labour saving capital. It is a vital step towards modernization and in the
87
transformation to a developed country.Result in the training of workers to use such
technology and therefore the acquiring of higher level skills, there appears to have
been a substitution of capital for labour in a substantial minority of firms.
The effect is strongest in manufacturing where production is potentially
more capital intensive than in the service sector where production is inherently
more labour intensive and, therefore, the opportunities for using machinery and
equipment to replace workers are more restricted. That is, the minimum wage
increase should induce firms to layoff the higher priced labour that receives the
minimum wage increase, and into using more of other inputs including capital and
even higher priced labour that does not receive the minimum wage increase. In the
short-run such substitution may be difficult, but in the long run it can occur in
subtle fashions especially as firms alter their technology and processes of
production. This might occur through the introduction of new technology,
particularly investment in information and communication technologies, which is
shown to have brought about considerable improvements in output growth in the
United States and elsewhere in recent decades (Forth, Mason and O`Mahony,
2002). Here, the direction of changes in labour productivity and unit labour costs
would mirror those resulting from capital deepening.
Foreign Direct Income (FDI)
In China, the minimum wage can bring impact to the FDI. Companies that
give minimum wage has a global market that makes its product competitive. The
FDI will be high due to this factor. Companies which pay minimum wage will
attract quality labour force, this will then make productivity high. The wage levels
may have competition to attract qualifies work force. This will be better for the
companies in terms of the productivity (Ge, 2006). In Ireland, raising the wages to
88
minimum wage did not show any problems because when the policy of minimum
wage was introduced, the wage growth was during that period was taking place
(Nolan, 2002).
Labour Costs
In Indonesia, implementation of minimum wage has separated the skilled
labour and unskilled labour. Companies with skilled labour who are paid
minimum wage will be competitive and marketed globally (Isabelle Mjean,
2010). Minimum wage for professionals will ensure that skilled labour will be
employed hence productivity will be increased.
The increase to minimum wage brings about impact to the cost of
construction in Iowa, according to Fisher and Sheenan (1985), it increased the cost
of construction to about 3.5% which had an impact towards its profit. The
reduction in profit translates to decrease in tax to the Government. In this context
the Government decreases the social security payments, diminished unemployment
insurance premiums, reduce higher rates for workers compensation and
uncompensated health-care costs incurred by hospitals (Belman and Voos, 1995).
Because of minimum wages, the benefits were taken away. This benefits cut
would also affect their family welfare.
There were companies in New Jersey, which started to pay the minimum
wage, but this was compensated by reducing the material and equipment costs in
order to have the same profits. In this, the quality of the product was compromised
in order to pay the minimum wage. In New Jersey, the less money spent on
benefits and healthcare with the workers not paying taxes and at the same time
workers are spending little of their money in the state, this will lead to economic
decline (Greenberg, 2005).
89
If minimum wages are implemented, in order for the company to maintain
its profits, there is a possibility that the workforce will be reduced and their
working hours be increased. Workers are designated with certain hours extra or
forced to increase their productivity to make up for the minimum wage.
Companies do this as their cost of production is being affected and may not be
competitive if the selling prices of their products are to be raised. The company
may not want their profits to be reduced(Stewart & Swaffield, 2007).
The minimum wage will ensure the livelihood of workers but in companies
where the competitiveness of a product is pricing, many companies would see it as
beneficial to mechanise their production rather than have the labour costs to be at
an increasing level. This would be beneficial if the labour cost is a material
amount in the cost of production.
In China, if the companies are not employing at minimum wage, the work
force might not complain given the fact that there is a surplus of workforce in the
market that are willing to takeover their jobs. This is because of the workers
livelihood would be taken (Chan, 2001). Potential change in employment
landscape in terms of more people being employed on contractual basis (as
opposed to permanent basis) as companies sought to manage costs according to the
business cycles. Negative impact in terms of employment and investment if
companies decide to cut the number of workers to extract more productivity
(output or sales per worker) as labour costs increase due to minimum wage, or if
companies simply decide to relocate to other countries where labour costs are still
relatively cheap, especially the export-based industries.
90
Substitution of low skilled teenagers with high skilled workers
According to Department of Labour (DOL) (cited in Wimmer, 2000) reports
that nearly half (49 percent) of all minimum wage workers work in retail-trade
industry, with over half (60 percent) in sales and service occupations. As one
would expect, the majority of minimum wage jobs are in industries and
occupations that relatively labour intensive where gains in labour productivity may
be difficult to achieve. Minimum wage increases affect employment depends on
few factors such as labour intensity, the amount of increase in minimum wage and
the ability of firms to adjust production processes.
Substitution of labour may be not be suitable in certain industries and
occupations, if service being provided is essentially the labour input itself and the
labour productivity essentially capped (maid services at the hotel or cashiers) and
the production process are rigid, firm must either absorb the cost increases or pass
them to their customers, means price increased in their product. Both of these
Iactors will decrease the Iirm`s proIitability. Alternatively, the Iirms are likely to
attempt to hire more highly skilled labourers (if available) to increased labour
productivity to offset the effects of a minimum wage increase. This is supported by
Neumark and Wascher (1992, 1995), low-skilled teenagers whose being dropout
from school are more likely substitute by higher skilled teens workers and they
have little chance of receiving an increase in wages.
However, the early study by The University of Maine, (1999), increases in
the minimum wage during 1996-1997 showed no systematic loss of employment
among the low-wage earners affected the increases. It estimated effects generally
economically small and statistically insignificant and proven that raising the
earnings of low-wage workers without lowering their employment opportunities in
US.
91
A number of studies focusing fast-food industry in 1990-91 by Card and
Krueger, based on survey in few states including Texas, California, Pennsylvania
and New Jersey and in Jackson, Mississippi and Greensboro, N.C. found no
systematic or significant loss of employment. In some cases, employment actually
rose. This also is supported by recent Fiscal Policy Institute (FPI) study of state
minimum wages found no evidence of negative employment effects on small
business (cited in Kai Filion 2009).
Based on a study done on the U.S. retail sector, the minimum wage
implementation would lead to either no impact on employment or some have
shown strong employment effects (Addison, Blackburn and Cotti, 2009). However,
Sabia (2006) shows that increases in the minimum wage does decrease
employment for low-skilled and entry-level workers.
In China the minimum wage had result in increase of unemployment rate. In
certain parts of China minimum wage does not have an adverse effect on the
employment. In the eastern region minimum wage had a negative eeffect on
unemployment whereas it had a positive effect in the western region.(Ni, Wang, &
Yao, 2011). Unemployment rates can cause a national concern for the country.
Turnover rate
Ragnitz and Thum (2007) mentioned that if the higher cost increased being
pass to consumer, consumer demand might fell in reaction to the increased of
prices, employment would be also decrease. How strong is the decrease in demand
would be in individual industries depends on the existing substitution possibilities
(for example, via imports or do-it-yourself).
Card and Kreuger (cited in Wimmer 2000) reported that turnover at fast-food
restaurants and many minimum wage jobs is relatively high compared to the rest of
92
the economy. However, the workers in such jobs receive very little training. Thus,
the cost of turnover are not likely high in these industries.
Increase use of contingent workers
Warhurst, Lloyd and Dutton (2008) found that employers UK Hotel industry
tend to demand for flexibility by utilizing contingent contracts workers that create
working hours and financial insecurity for workers. Employed contingent workers
not only allowed the employers to reduce to working hours per worker, it is able to
save cost of fringe benefits for permanent workers.
Offsetting cost increase by using other means
According to Miller (2009), his previous research in 2008 found that, in the
absence of a strong trade union presence at the factory level, workers can often
struggle to receive even the minimum wage due to a lack of minimum fall-back
guarantees, misclassification of work, delayed payments, and false apprenticeship
schemes (fair Wear Foundation, 2006, page 44). Cases are also reported of
employers offsetting increases against food and accommodation charges for
migrant workers.
Some of the countries in Europe such as France, Slovakia, Slovenia and
Spain, are given reduction oI employers` social security contributions by their
Government if they employed disabled people to offsetting the cost due to wage
increased (Cited in Funk and Lesch, 2006). There is evidence of illegal collusion
between some employers and workers such that both gain at the expense of the
state government. The employers understate the hours and pay of work which
compliance with new minimum wage. This permits the worker to get a larger
93
amount of tax credit and the employer to pay a correspondingly lower hourly
wage, which lowers the company VAT and income tax burden. This may have the
unintended favourable site-effect of higher employment eg. In Indian and
Bangladeshi restaurants or Indian clothing manufacturers (Metcalf 2008).
According to ACCI (Australian Chamber of Commerce & Industry) Report
(April 2011), the minimum wage policy has impacted the Australian`s Iirm where
by the employers are offering less hours to staff, increased the costs of
products/services to customers, and there is a decrease in cash flow and overall
level oI proIitability. It also had a direct negative eIIect on employers` hiring
intentions and the owners are required to put in more hours for their business.
Moving production to cheaper labour cost country
According to Hookway, Barta, and Mattioli, (2012). Glabal companies in
Garment, footwear and electronic manufacture industries have moved around the
developing world as they faced higher labour prices in China over the past few
year. Example, U.S menswear retailer Jos. A. Banks Clothiers Inc have moved
some of their production from China to Asia such as Indonesia, Sri Lanka,
Malaysia, including Central America and countries such as Haiti and Jordan as the
price oI labour and goods increased. Women`s specialty retailer New York & Co.
Inc. shifting production out of China in 2009 and 2010 to Vietnam as wage rose.
Another issue is, China`s moves, in part, have helped spur other such
changes in the region. Indonesian workers in some areas have secured minimum-
wage increases of more than 20%, Thailand pushed salary up about 40% in many
parts of the country. Labour advocates in Cambodia, Sri Lanka and Bangladesh
also are calling for higher wages.
94
Services quality effects
A minimum wage increase may also cause firms to reduce service quality
because provision of service quality such as prompt service, clean premises, or
long hours of operation, are relatively labour intensive. As discussed by Wimmer
(1996), rigid controls and quality standards imposed on franchisees make it
difficult to adjust their mix of capital and labour, which results in employment
being closely related to sales.
Impacts on Training
The Low Pay Commission (1998, cited by Heyes, J. and Gray, A. 2003) has
sees that the NMW as a potential means for a firm to stimulating training activity
as a efforts to justify the higher price charged on customer through the quality
improvements in product or services provided. These coincided with increases in
the amount and /or quality of training offered to employees. However, the
evidence presented by Heyes, J and Gray, A. are unable to prove the development
rates will stimulate employers` training eIIorts and assist in the creation of a more
highly skilled workforce in small firms.
According to Lechthaler and Snower (2008), there is an influence of
minimum wage implementation oI Iirm`s incentive to train their employees. They
were dividing the workers into low-skilled and higher-skilled. They argued that
minimum wages create a 'low-skill trap whereby the companies may lack the
incentives to train those low-skilled workers as they fail to raise their productivity;
where else, workers with higher-skills will be provided with more training.
Additionally, companies will also get fewer workers since they will be giving more
training to those workers. However, another study done by Norris, Williams and
Adam-Smith (2003) do not find that the UK hospitality industry found any impact
95
on training given to its workers when the national minimum wage was introduced.
Similarly, Acemoglu and Pischke (2001) also found no evidence that minimum
wage will reduce training given.
Impact of Minimum Wage from the Employees` Perspective
The minimum wage policy has far reaching consequences from an employee
perspective. A review oI the literature indicates issues` concerning unemployment
and motivation (Falk et al 2006) .The conventional wisdom that the
implementation of minimum wage would lead to higher unemployment rates is
supported by numerous studies (Gramlich1976; Mincer 1976; Brown, Gilroy, and
Kohen 1982; Harrison and Leamer 1995).
It has also been shown that there is an impact of minimum wages on
unemployment duration (Pedace and Rohn 2011) whereby there is shorter
unemployment duration for older males and those with at least a high school
diploma, but longer unemployment spells for male high school dropouts and
females who are older and in lower-skilled occupations. There is an absence of
studies on minimum wage and worker motivation from the employee perspective.
Studies on minimum wages have typically taken the view of the employer and at
the macroeconomic level. Since employees are the ones directly affected by
minimum wages, it is important to find out their perceptions of the various possible
factors impacting them and how these perceptions influence their motivation level
and decision to remain or leave the company.
Thus, further study should attempt to measure employee perceptions on
minimum wage. The findings will help employers to develop effective measures to
increase motivation and productivity among the employees, and to manage the
96
disgruntled, more experienced employees, preventing/ reducing the turnover of
productive workers.
Current Predicament and Challenges Ahead
In view of the impacts encountered by the employers and employees, the
implementation of minimum wage would not be an easy task. According to
Minister of Human Resources, Datuk Seri Dr. S. Subramanian, they acknowledged
that the full implementation of minimum wage policy would be challenging. He
highlighted that the government would look into the possible support and
assistance to ease the predicaments faced by industries. For instances, there are
companies that made losses consecutively for two to three years. Some 4,200
employers have appealed to the government to delay the implementation of the
minimum wage policy as the implementation of minimum wage will certainly
affect their revenue negatively. Last year, 2012, National Labour Advisory Council
decided to allow 600 companies to postpone the implementation of minimum wage
policy to enable these companies to restructure and return to profitability. The
grace period granted was three to six months. (The Edge, Jan 16, 2013).
Conclusion
The introduction of minimum wage comes with two folds as it shed lights to
the lower income group however it also negatively aIIect the SME`s in various
aspects and in turn will affect the national economy. It is also consistent with the
past research, whereby it highlights that offering employee an optimal wage has
positive eIIects on employees` productivity (Shapiro & Stiglitz, 1984).
Meanwhile, there are research evidence that minimum wage may seen as 'weak
in support of efficiency wages due to unusual features of a specific labour market
97
(Autor, 2003).Thus, the Government should wrestle between the costs and benefits
for various parties. The implementation shall be carried out with carefully
scrutinize measures to capitalize it benefits and minimize its negative
consequences. The Government should monitor the process of implementing the
minimum wage for any adverse effect in the national, employers and employees
perspective. The monitoring process should also be carried out by a tripartite party
for effective implementation. The government also hopes that association such as
Malaysian Employer`s Federation (MEF) which is a one oI the major stakeholder
oI the country`s economy, could be more progressive, proactive and assist the
government in implementing a well thought out sustainable and enforceable human
resource policy towards transforming our country into a high income sustainable
economy. In view that recognition has grown around the world that basic
guarantees of worker rights and income security are important for sustainable
economic growth, thereIore it is in anyone`s interest that this implementation will
eventually help us to achieve our goal as a high income nation come 2020.

ACCI Report (April 2011). Minimum wage decisions: Impacts on business.
Australian Chamber of Commerce & Industry
Acemoglu, D., &Pischke, J-S. (2001). Minimum wages and on-the-job training.
Addison, J. T., Blackburn, M. L., &Cotti, C. D. (2009). Do minimum wages raise
employment? Evidence from the U.S. retail-trade sector.Labour Economics, 16,
397-408.
98
Alatas,V. and Cameron, L.A. (2008). The impact of minimum wages on
employment in a low-income country: A quasi-natural experiment in Indonesia.
Industrial and Labor Relations Review, 61(2), 201-223.
Alpert, W, T., (1986). 'The Minimum Wage in the Restaurants Industrv`, New
York: Praeger Publishers.
Autor, D. (2003) 'Efficiency Wage, Neoclassical and Non-Neoclassical
Evidence., Unpublished manuscript, Department oI Economics, MIT, Cambridge,
MA.
Bulow, J. & Summers, L (1986) 'A Theory oI Dual Labor Markets with
Applications to Industrial Policy, Discrimination, and Keynesian Unemployment.,
Journal of Labor Economics, 4, 376-414.
Brown, Charles, Curtis Gilroy, and Andrew Kohen. 1982.'The Effect of the
Minimum Wage on Employment and Unemployment. Journal of Economic
Literature, Vol. 20, No. 2 (June), pp. 487528.
Card, David, and Alan Krueger. 1994. 'Minimum Wages and Employment: A
Case Study of the Fast-Food Industry in New Jersey and Pennsylvania. American
Economic Review, Vol. 84, No. 4 (September), pp. 77293.
Dickens, Richard, Stephen Machin, and Alan Manning.1999. 'The EIIects oI
Minimum Wages on Employment: Theory and Evidence Irom Britain. Journal of
Labor Economics, Vol. 17, No. 1(January), pp. 122.
99
Dumas, Mark W. (1997, July). 'Productivity trends in two retail trade industries,
1987-95, Monthly Labor Review, 120, 35-39.
Falk.A., Fehr, E.andZehnder, C. (2006).Fairness perceptions and reservation wages
the behavioral effects of minimum wage laws. The Quarterly Journal of
Economics, November 2006, 1347-1381.
Forth J, Mason G and O`Mahony M (2002) 'Industrial perIormance, ICT
investments and workIorce skills: literature and statistical review, National
Institute of Economic and Social Research, mimeo.
Funk, L. &Lesch, H. (2006).'Minimum wage regulations in selected European
countries.Intereconomics. March / April, 78-82.
Gramlich, Edward M. 1976. 'The Impact oI Minimum Wages on Other Wages,
Employment, and Family Incomes. In Arthur M. Okun and George L. Perry,
eds.,Brookings Papers on Economic Activity, Vol. 2, No. 76, pp.40951.
Washington, D.C.: Brookings Institution.
Harrison, Ann E., and Edward Leamer. 1997. 'Labor Markets in Developing
Countries: An Agenda for Research. Journal of Labor Economics, Vol. 15, No.
3,pt. 2 (July), pp. S1S19.
Heys, J., & Gray, A. (2003). The implications of the National Minimum Wage for
training in small firms. Human Resource Management Journal, 13(2), 76-86.
100
Hookway, J., Barta, P &Mattioli, D. (2012). 'Minimum wages change asia`s low-
cost reputation. The Wall Street Journal.
Kai Fillion. (2009).'Minimum wage issue guide.Economic Policy Institute.
Kreuger, Alan B. (1991, February).'Ownership, agency and wages: An
examination of franchising in the fast-Iood industry, Quarterly Journal of
Economics, 106, 75-101.
Krueger, A. & Summers, L (1988) 'EIIiciency Wages and Interindustry Wage
Structure., Econometrica, 56, 259-63.
Lechthaler, W., & Snower, D. J. (2008). Minimum wages and training.
LabourEconomics, 15, 1223-1237.
Manning, A. & Thomas, J. (1997) 'A Simple Test oI the Shirking Model.,
Working paper no. 374, Centre of Economic Performance, LSE, London.
MetcalI, D. (2008, May 16). 'Why has the British national minimum wage had
little or no impact on employment?`. Journal of Industrial Relations. 489-512
Miller, D. (2009) 'Wage determination in outsourced multi-buyer apparel supply
chains, International Journal of Labour Reseach, 1 (2), 183-199.
Mincer, Jacob. 1976. 'Unemployment Effects of Minimum Wages. Journal of
Political Economy, Vol. 84, No.4, pt. 2 (August), pp. S87S104.
101
Neumark, D., & William, W. (1995). 'Minimum wage eIIects on employment and
school enrollment. Journal of Business & Economic Statistics, April, 13(2).
Neumark, D., & William, W. (1992, October). 'Employment eIIects oI minimum
and subminimum wages: Panel Data on State Minimum Wage Laws. Industrial
and Labor Relations Review, 46, 55-81.
Norris, G., Williams, S., & Adam-Smith, D. (2003).The implications of the
national minimum wage for training practices and skill utilization in the United
Kingdom hospitality industry. Journal of Vocational Education and Training, 55
(3), 351-368.
Pedace, R. & Rohn, S.(2011). The Impact of Minimum Wages on Unemployment
Duration: Estimating the Effects Using the Displaced Worker Survey. Industrial
Relations, 50 (1), 57-75,(January 2011).
Ragnitz, J., & Thum, Marcel. (2007). 'The Empirical Relavance of Minimum
Wages for the Low-wage sector in Germanv.`CESifo Forum.
Sabia, J. J. (2006). The effect of minimum wage increases on retail and small
business employment. Employment Policies Institute
Shapiro, C. & Stiglitz, J. (1984) 'Equilibrium Unemployment As a Worker
Discipline Device. American Economic Review, 74, 433-44.
Stickles, D. (1999). The minimum wage hike and it`s ripple eIIect. Business West,
September 1999, 5.
102
Warhust, C., Lloyd, C., & Dutton, E., (2008). 'The national minimum wage, low
pay and the UK hotel industry : The case oI room attendants. Sociology, 42: 1228.
Weiss, A. (1991) Efficiency Wages Models of Unemployment, Layoffs and Wage
Dispersion, Princeton, New Jersey: Princeton University Press.
Wimmer, Bradley S. (1996, Winter). 'Minimum wage increases and employment
in franchised fast-food restaurants. Journal of Labor Research, 17, 211-14.
Wimmer, Bradley S. (2000). 'The minimum wage and productivity diIIerentials,
Journal of Labor Research,21 (4), 649.
103
Chapter 6 :
The Accelerating Electricity Cost
Chung Chay Yoke
Jayamalathi a/p Jayabalan
K Shamini a/p Kandasamy
Lee Kwee Fah
Low Mei Peng
Pok Wei Fong
Ung Leng Yen
Yeong Wai Mum
Background
Over the last decade, the economy grew at an average rate of 4.9 % p.a.
Malaysia is a net energy exporter, with 13.7 percent of export earnings in 2009
derived from crude oil, liquefied natural gas (LNG) and petroleum products.
During the period from 2000 2008, energy consumption per capita increased at an
average rate of 3.14 % p.a. Energy is the foundation that supports and spurs the
eco- socioeconomic development of a country as Energy, Green technology and
Water Minister Datuk Seri Peter Chin puts it. In 2008, final use of commercial
energy was 44.9 Mtoe, comprising of 54.5 % petroleum products, 23.9 % natural
gas, 17.8 % electricity and 3.8 % coal and coke. The transport sector consumed
36.5 %, industrial sector at 42.6 % and the residential & commercial sector at 13.8
%. Final energy demand is projected to grow at 3.4 % p.a. reaching 92.9 Mtoe in
2030, more than twice the 2008 level. Electricity consumption per capita now is
about 3,412 kWh per year, significantly higher than most developing countries, but
still below the average in developed countries. This is projected to more than
104
double, in order to reach 7,571 kWh/person in 2030. Hence, energy is a key driver
of the Malaysian economy.
In 2008, Malaysia total primary energy supply stood at 75.5 Mtoe, which are
contributed by crude oil and petroleum products (38.2 %), natural gas (43.4 %),
coal and coke (15.3 %), and hydro (3.1 %). Malaysia is currently importing about
20 million tonnes of coal annually, mostly from Indonesia, Australia and South
Africa. Malaysia also imports about 110 mmscfd of natural gas from Indonesia and
290 mmsfd from the Malaysia-Thailand Joint Development Area via cross-border
pipelines to meet the domestic demand for gas. In 2009, the total installed
generation capacity of the three main utilities and IPPs was recorded at 24,006
MW, comprising of 21,817 MW in the Peninsula and 2,189 MW in East Malaysia.
In view of the heavy usage and dependency on energy in the economy,
securing a sustainable energy future for Malaysia is vital. Increasingly, there are
more recent policies have focused on reducing dependency on petroleum products
and environmental considerations while ensuring supply at affordable costs. In
addition, close monitoring and updating of energy demand projection would be a
key prerequisite for developing an active and responsive energy policy.
Forecasting, scenario-building and planning must be regular and permanent
activities within the Malaysian institutional framework. Over the last two decades,
Malaysia`s electricity supply industry structure has evolved Irom a monopolistic,
vertically-integrated industry managed by government utilities, to an industry
comprising government-owned utilities as well as private sector players. Today,
there are three main utilities in the country, namely Tenaga Nasional Berhad
(TNB), Sabah Electricity Sdn. Bhd. (SESB) and Sarawak Electricity Supply
105
Corporation (SESCO).There are now 24 IPPs in operation in Malaysia, 17 of
which are in the Peninsula.
Overview of the Increased Demand
Currently, Malaysia is employing energy mix which remains heavily on
Iossils Iuels that contribute to more than 90 oI the industry`s generation fuel mix.
According to TNB`s latest report the industry`s generation mix Ior the Iinancial
year August 31,2011 and 2010 are as follows:
Year Gas Coal Oil Hydro Distillate
2010 54.2% 40.2% 0.3% 5.1% 0.2%
2011 45.1% 44.0% 2.5% 5.8% 0
The growing dependence on coal assumes that Malaysia`s energy sector is
going towards coal given that there is abundant supply of coal compared to oil.
Meanwhile, gas sold to the energy sector was heavily subsidized. As a result, there
is substantial increase in the electricity tariff for the companies. The increase of
electricity tariII would add on to the production cost and decrease in companies`
profitability. This impact has becomes a main concern to small businesses, namely
the SMEs.
On the other note, it is observed that fuel availability to the energy sector has
been challenged by tightness in gas supply in recent years. This is mainly
attributable to the prevailing price distortion as the result of price subsidies. Gas
prices sold to energy sector have been kept low for many years as part of a subsidy
programme to ensure affordable electricity prices to the end users. At present, gas
sold to the energy sector is fixed at RM13.7 per million metric British thermal
units (mmbtu). Even though the market price of gas has increased to around RM49
106
per mmbtu presently, the price has not been revised since the last revision in June
2011. As such, it is not feasible for oil companies to sell at significantly lower
prices to the country`s energy sector when they could sell their gas at a higher price
elsewhere. There has been a pressure in the country and it is unsustainable to
maintain low prices of electricity with high cost of power generation.
SMEs and Electricity Hikes
The small medium-sized enterprises (SME) industry has been getting a lot of
attention given the fact that it is considered the backbone of the Malaysian
economy. SMEs currently represent 97.3% of total business establishments in the
country which was a marginal drop from previously 99.2%. In SMEs census report
shows that a total of 645,136 SMEs were operating their business in 2011. Out of
that 90% of the establishment were in the service industry, 5.9% in the
manufacturing sector , 3% in the construction sector and the remaining 1% in
agriculture and 0.1% in mining and quarrying. Overall 77% or the majority were
micro-sized establishments followed by 20% small-sized and 3% medium-sized
establishments.
As of 1
st
January 2014, TNB has increased the overall electricity rates for
consumers and commercial customers have increased. The industrial customers
will have to increase an average increase of 16.85%. The move to increase the
rates was to reduce reliance on government subsidies to industries.( Source : The
Star, 3 December 2014)
The impact on increase electricity prices could give a large impact to the
SMEs as their cost of production could be increasing. The government needs to
strike a balance between the conflicting demand of economic pressure from rising
commodity prices and the need to rationalize subsidies to restore fiscal balance and
socio-political interests to ensure affordable electricity tariffs to users.
107
While Malaysia`s electricity supply challenges in the 1990s have since been
overcome by the opening up of the industry to allow private sector participation in
electricity generation, the nation`s power industry continues to Iace challenges as
the country enters its next phase of growth towards high-income economy. Rising
energy demand in the country driven by its robust economic activities only serves
to exacerbate the challenges already faced by the energy sector. The country
cannot afford to keep its energy sector status quo. Reform initiatives are essential
to keep up with the changing times and to deal with the global challenges so as to
ensure the power sector`s supply chain remains healthy enough to support the
country`s economic growth. At present the peak demand Ior electricity in
Peninsular Malaysia stands at 15,826MW, as recorded on June 20,2012. By
2020,the peak electricity demand will likely exceed 20,000MW based on an
expected growth rate of 3.5% or 550MW to 600MW per year.
Monitoring of the energy consumption and developments in energy
efficiency is necessary in order to check and apply desired policies. Energy is the
most important sector for automation and modernization. Automation and
modernization is increasing rapidly day by day in the industrial sectors. In
Malaysia, electricity generation is mostly fossil-based, in particular natural gas and
oil. To ensure the security of energy supply, the Four-fuel Diversification
Strategy2 was introduced in 1981 as an extension of the 1979 National Energy
Policy. Subsequently, the Five-fuel Diversification Strategy3 was introduced in
1999 and will continue until 2020. The rationale for this policy initiative was to
reduce Malaysia`s over dependency on oil in overall energy consumption. This
policy in the electricity sector aimed for a gradual change in fuel use from 74.9%
gas, 9.7% coal, 10.4% hydro, and 5% petroleum in the year 2000 to 40% gas, 30%
hydro, 29% coal, and only 1% petroleum by the year 2020.
108
Accordingly, the main sources of commercial energy supply in 2000 were
natural gas (45.4%) and crude oil (45.5%). These sources remain as the major ones
in 2007. However, the share of coal and coke increased from 5.6% to 14% in these
years and only 2.4% came from the non-fossil source of hydropower in 2007. In
terms of demand in 2000, 40.6% was for transportation, 38.4% for industrial
purposes and 13.0% for residential use. By 2007, energy demand for industrial
purposes had exceeded that for transportation, with demand in all sectors showing
an increase. With the introduction of the Fifth Fuel Policy, renewable energy (RE)
is also recognized as a feasible option.
Nevertheless, gas is still a major primary energy input for the electricity
sector constituting 68%, with 63.8% of the installed generating plants firing on gas.
Coal is fast gaining significance in the generation fuel mix from 11.1% in 2002 to
the present 31.1%. Coal as a primary fuel will gain more significance with the
commissioning of the Tanjung Bin and Jimah power plants by the IPP within this
9th Malaysia Plan period. Hydro contributed 13.8% for 2006 and oil acting as just
standby and back-up fuel.
Tenaga Nasional Berhad (TNB) has announced recently that its cost of
producing electricity has gone up and therefore it has no choice but to increase its
rates to the consumers.
109
Source The Star,Friday June 3,2011.
From the table above, there would be a 8.3% increase in electricity rates
which was effective in June 2011. The gas tariff for electricity and industrial
sectors will rise by RM3/MMBtu every six months starting from June 1 to Dec
2015. After that the price will be based on market rates. The announcement was
made at a joint press conference by Minister in the Prime Minister's
Department Tan Sri Nor Mohamed Yakcop and Minister of Energy, Green
Technology and Water Datuk Seri Peter Chin Fah Kui. They said the 7.12% hike
was due to the increase in natural gas price to the power sector. (Source The Star,
30 May 2011)
The ultimate aim of the government is to totally remove subsidy on natural
gas. The following table depicts estimated changes of electricity cost due the
removal of subsidy on natural gas.
110
Table : Estimated changes of electricity cost due the removal of subsidy on natural
gas
2010 2011
Lowest
market
price
(Jan
2006-
Oct
2012)
Highest
market
price
(Jan
2006-
Oct
2012)
Market price (RM/mmBTU) 30-40 40-50 20 60
Gas Tariff for power producer (RM/mmBTU) 10.7 13.7 20 60
Electricity generation cost (cent/kwh)
3
14 17.92 26.16 78.5
4
Electricity tariff (cent/kwh) for:
Industrial 37.85 41.01 49.16 101.5
Commercial 28.56 30.94 40.16 92.5
Price index for industrial 92.29 100.00 119.87 247.50
Price index for commercial 92.31 100.00 129.80 298.97
Gross profit margin (cent/kwh) for:
Industrial 23.85 23.09 23 23
Commercial 14.56 13.02 14 14
The italicized figures are estimated based on data from 2010 to 2011.
3
Suruhanjaya Tenaga, 'Industri pembekalan elektrik di Malaysia. Maklumat prestasi and statistic, 2010.
4
The Star, June 3,2011
111
At present, the electricity tariff is RM0.137 per kwh. If the subsidy is removed and
power producer have to purchase natural gas at market price, the lowest market
price is around RM20/mmBTU and the highest market is around RM60/mmBTU,
from January 2006 to October 2012
5
. Using extrapolation method, the electricity
tariff for industrial use is estimated to increase by about 19.87% to 147.50%, from
current price of RM0.4101 to RM 1.015. The tariff for commercial use is
estimated to increase by 29.80% to 198.97%, from current price of RM 0.3094 to
RM0.925
Further, the change in production cost is estimated as follows based on the
generated price indexes. Six business entities are interviewed to obtain the
information about their production cost and electricity cost.
112
Table: The impact of increase in electricity cost on total production cost
Nature of
business
Electrici
ty cost
per
month(
RM)
Total
produc
tion
cost per
month
(RM)
Total
product
ion cost
per
month
(RM) if
the
market
price of
gas is
RM
20/mm
BTU
Total
product
ion cost
per
month
(RM) if
the
market
price of
gas is
RM
60/mm
BTU
Increas
es in
total
cost if
the
market
price of
gas is
RM
20/mm
BTU
Increas
es in
total
cost if
the
market
price of
gas is
RM
60/mm
BTU
Metal
manafacturing 1,000 35,000 35,199 36,475 0.57% 4.21%
Glass
manufacturing 850,000
25,000,
000
25,168,8
95
26,253,7
50 0.68% 5.01%
Laundry 800 23,000 23,159 24,180 0.69% 5.13%
Tiles
Manufacturing 30,000 300,000 305,961 344,250 1.99% 14.75%
Boiler
Manufacturing 8,500 650,000 651,689 662,538 0.26% 1.93%
Food can
manufacturing 100,000
1,000,0
00
1,019,87
0
1,147,50
0 1.99% 14.75%
113
Hence, the impact of increase in electricity cost is predicted to be very
significant to businesses especially SMEs. The production cost increases between
0.57 to 2.00 percentage points when the natural gas market price is
RM20/mmBTU. The production cost increases between 1.93 to 14.75 percentage
points when the natural gas market price is RM60/mmBTU.
As oI 1 January, with the tariII rates increasing, the SME`s not only will see
the cost of production high but the competitiveness among the SME`s also will be
price sensitive as the majority of customers might resort to cheaper products
depending on their take home income. The increase will not only have a direct
impact but also an indirect impact to consumers. The SMEs must look into the
possibility to find alternative ways to reduce their costs.
According Michael Kang, the vice president of SMI Association of
Malaysia, typical SMEs net profit margin is only 3% to 5%. In conclusion, the six
business entities barely survive when natural gas costs RM20/mmBTU and only
one out of six will survive when natural gas cost RM60/mmBTU.

Statistics on Energy Demand and Supply
Graph 1: Final energy consumption in selected ASEAN countries
Source: Market Potential in Energy Efficiency in Southeast Asia (2011)
114
With reference to Graph 1, it is expected that the SEA region will experience
exponential growth in terms of its energy consumption due to energy demand,
energy related investment, and spending (IEA Energy World Outlook, 2009). This
growth is particularly attributed to countries such as Vietnam, Thailand, and
Indonesia which is expected to have rapid industrial growth. It could conclude that
the entire region is expecting tremendous increase in energy consumption.
Energy Demand by Sector in Malaysia
Table 1: Final Commercial Energy Demand by Sector, Malaysia (2000 2010)
Source Energy Consumption (Petajoules) Average Annual Growth
Rate (%)
2000 (%) 2005 (%) 2010 (%) 2000
2005
(8MP)
2006 -2010
(9MP)
Industrial
1
477.6
(38.4%)
630.7
(38.6%)
859.9
(38.8%)
5.7 6.4
Transport 505.5
(40.6%)
661.3
(40.5%)
911.7
(41.1%)
5.5 6.6
Residential
&
Commercial
162.0
(13.0%)
213.0
(13.1%)
284.9
(12.8%)
5.6 6.0
Non-
Energy
2
94.2
(7.6%)
118.7
(7.3%)
144.7
(6.5%)
4.7 4.0
Agriculture
& Forestry
4.4 (0.4%) 8.0 (0.5%) 16.7
(0.8%)
12.9 15.9
Total 1,243.7 1,631.7 2,217.9 5.6 6.3
115
Source: Ninth Malaysia Plan
1
Includes manufacturing, mining and construction.
2
Includes natural gas, bitumen, asphalt, lubricants, industrial feedstock, and
grease.
Based on Table 1, it shows that from the year 2000 2005, the total energy
consumption by the five sectors namely industrial, transport, residential &
commercial, non-energy and agriculture and forestry has increased by 5.6% p.a. It
is forecasted that there will be a further increase for the period between 2006 -2010
under the 9
th
Malaysian Plan.
Graph 2: Final Energy Demand by Sectors, 2000 - 2020
Source: Malaysia Second National Communication to the UNFCCC
The Ministry of Natural Resources and Environment Malaysia, from graph 2
has projected that between 2000 until 2020, the energy consumption will grow
annually at a rate of 4.8 percent following the business-as-usual (BAU) projection.
This projection is derived by using the five sectors with industrial sectors expected
to grow at 5.0 percent, transport at 4.7 percent, commercial and residential at 5.6
116
percent, non-energy at 4.5 percent and agriculture at 5.1 percent per annum
respectively.
Energy Demand by Type in APEC
Graph 3: Primary Energy Demand by Type
Source: APERC Analysis (2006), APEC Energy Demand and Supply Outlook
According to the report by APEC (2006), coal will have the fastest growth
rate at 9.7 percent per annum, followed by natural gas and oil at 2.9 percent and
2.7 percent respectively. However, the share of oil will decline from 47 percent to
38 percent by the year 2030 in line with the government`s eIIorts to move away its
reliance from oil to other types of energy supply.
117
Graph 4: Electricity Generation Mix
Source: APERC Analysis (2006), APEC Energy Demand and Supply Outlook
As per the projection by the same report, the growth in the usage of
electricity is strongly influenced by strong demand from the industrial sector. From
Graph 4, the forecast has projected that Malaysia will replace natural gas by coal in
generating fuel mix. The contribution of coal will be expected to increase from 6
percent in 2002 to 50 percent in the year 2030. Additionally, it shows that
Malaysia will be very reliant on coal and natural gas as it contributes 95 percent in
the generation of electricity in 2030. Thus, the increase in the cost of natural gas
will naturally hurt the industrial sector since they are one of the main users as
shown in Graph 2.
119
production plants during off-peak hours. Small scale industries were not willing to
run production plants during off-peak hours because of labour costs.

Inflationary Phenomena Due to Electricity Hikes
The Star dated 31 May 2011, by reported Sharidan M. Ali, pointed that
companies will pass on to consumers the higher cost of business stemming from
the rise in electricity tariffs and gas prices. Companies would try to absorb the hike
as much as it could but cautioned that it could also reflect an increase in its selling
price if the hike adversely affected its margins.
As a result oI the gas price increase, TNB`s gas bill will increase by about
RM1.5bil per year. Due to the gas price increase, TNB will have to increase the
electricity tariII to cover Ior the additional cost, TNB president and CEO Datuk
Seri Che Khalib Mohd Nor said at a briefing 30 May 2011.
According to Lee Heng Guie, CIMB Investment Bank Bhd economic
research head, the impact on individual households would not be evident since
consumers who used less than 300kWh would not experience the tariff increase.
However, there is the knock-on effects which have to worry because it's not just
electricity tariffs that are being raised, it's also the gas price. He added on that there
was still the cascading effect on the economy that would have to be taken into
account. And the worst-case scenario is for inflation to average 3.5% to 4%.
'Electricity is only a small component oI the consumer price index. What is oI
more concern is that companies facing higher cost and margin pressure may pass
through the cost to consumers, he said.
Adding on this, even though electricity may be a small component of the
consumer price index, it will still impact the poor. The increase in the electricity
will dig deeper to the poor`s pockets and it goes without saying that everything
120
else will be affected including food prices and other goods. Hence, inflationary
phenomena would be observed as a result of electricity hikes.
Additional Costs for Business
According to World Bank Enterprise Surveys, the indirect costs, i.e., costs
related to inIrastructure and services account Ior a relatively high share oI Iirms`
costs. As such, when the price of electricity has increase, it certainly, increases the
costs of doing businesses.

Decrease in Foreign Direct Investment
As the cost of doing business has increased, the FDI would also be
negatively affected. Malaysia attracted an inflow of US$11.97 billion last year, an
increase of 31.5 per cent from 2010. Malaysia emerged as the fifth most popular
destination for foreign direct investments (FDIs) in Asia last year with inflows of
US$11.97 billion (RM37.83 billion), an increase of 31.5 per cent from 2010.
According to a report released by United Nations Conference on Trade and
Development (UNCTAD), it showed that the manufacturing sector continued to be
the largest contributor to FDI inflows at 44 per cent, followed by the services
sector (35 per cent), mining and quarrying (20.1 per cent) and agriculture, forestry
and fishing (0.3 per cent). Statistics also show that these are the sectors which rely
heavily on electricity. The current electricity hikes will certainly lead to higher cost
of doing business and hence making foreign investment unattractive.
"If I am an investor, Malaysia to me is a place of strength, the country to
come to. It is an excellent place to be," said UNCTAD investment and enterprises
division chief, Professor Hafiz Mirz. However, as a result of the increase in
121
electricity tariff, investors would be hesitate to invest in Malaysia as the
profitability of their business will be significantly affected.
Recommendations
Evidence shows that Malaysia is an energy dependent country. Thus, the
energy policies should aim to increase electricity generation by sustaining the
current electricity supply and at the same time exploring the possibilities for
renewable electricity generation. Policy makers ought to ensure that the growth of
electricity supply rate is greater than the growth of consumption to boost the
economic growth.
Too much dependence on the oil and gas industry for energy may pay big
dividends in the short and medium term, but, over the long-term, the future of
fossils fuels becomes increasingly precarious with each passing mega hurricane,
flash flood or record drought. Sooner or later, the climate will force the
government to slash carbon emissions, and that will mean demand for fossil fuels
will plummet. At the same time, society should be encouraged to practice efficient
usage of electricity, reduce wastage and consumption.
Below are some of the feasible main sources of renewable energy which has been
recognized by our government:-
1. In a sunny country like Malaysia, solar power is the obvious renewable energy
of choice. The price of the solar panels has decreased by 60 percent in the past
two years, making this energy source increasingly cost-effective compared to
fossil fuels such as oil and gas.
122
2. In states such as Sarawak, home to many huge rivers, the potential for
hydroelectric power is enormous and could provide an abundance of clean,
affordable power for the state in decades to come. Dams, which required large
areas to be flooded, remain controversial, however, and can meet with stiff local
resistance, particularly if communities have to be relocated.
3. Biomass, as a renewable energy source, is biological material from living, or
recently living organisms. As an energy source, biomass can either be used
directly, or converted into other energy products such as biofuel.
In the first sense, biomass is plant matter used to generate electricity with steam
turbines and gasifiers or produce heat, usually by direct combustion. Examples
include forest residues (such as dead trees, branches and tree stumps), yard
clippings, wood chips and even municipal solid waste. In the second sense,
biomass includes plant or animal matter that can be converted into fibers or
other industrial chemicals, including biofuels. Industrial biomass can be grown
from numerous types of plants, including miscanthus, switchgrass, hemp, corn,
poplar, willow, sorghum, sugarcane, bamboo, and a variety of tree species,
ranging from eucalyptus to oil palm (palm oil).
4. Nuclear may not be feasible for the small country with low population such as
Malaysia.
But the implementation part has to be strengthened and improved, government
should do the below:
A. Proper planning and environmental impact assessment dam building
123
Holding public discussions during initial stages of dam building with
local residents can help dispel worries and resistance.
The local people must be able to see that their lives will improve with
any new project that affects their lives.
Ensuring the provision of safeguards for human communities, flora
and fauna.
The plan should include initiatives to improve the local area, provide
opportunities for local people and therefore get the buy-in of
neighbouring residents.
Government transparency and accountability can go a long way to
ensure the success of the project.
B. Provide incentive for companies producing renewable energy products or
engaged in promoting activities. These can be in the forms of:
Tax rebate developer who build smart` house or building.
Work together with local bank by offering lower interest rate
(scheme) in loan borrowing.
Subsidy for R & D activities.
Provide recognition or reward for those companies who
successfully produced renewable energy products.
Act as consultant to give support and training to company who
needed help.
124
C. Encourage society to buy or invest in energy saving products through
discount, rebates or media communication not only change their mindset but
try to create green environment` culture into the society.
Install solar panel for home/company for electricity generation.
install LED lights, buy refrigerator, washing machine, air-
condition & others technology which consume lesser electricity.
Discount (or tax incentive) for fuel efficiency car which emit lesser
or no harmful gases.
D. The Fit-in-tariff (FIT) should not be impose and pay by the final user, the
electricity agenerators should bear the cost of production and think of
innovative ways to improve their efficiency, productivity and operations
through certain technology, management and control system.
E. Malaysia should have few electric generator` or supplier in the market,
each of them are independent, compete each other for the price and service,
consumer are free to select the service provider that can provide high
satisfaction for them. But Government should set certain rules or policies to
protect consumer.
All in all, there is a necessary to ensure transparency and efficiency in
procuring future power generation capacity. To have transparency in electricity
pricing and enable consumers to better understand the elements of the electricity
that they have consumed. Economic growth based largely on industrialization,
125
combined with population growth and urbanization, has created an expanding
demand for energy. In response, the development of the energy sector has
emphasized the establishment of a secure, reliable and cost effective energy
supply. The need now is to ensure efficient utilization of energy resources,
diversification of sources and minimization of wastage. The industrial sector is
expected to implement measures for improvements in plant, equipment and
processes as well as the end uses. Promotion of the use of high efficiency motors
includes initiatives to develop local expertise in the manufacture of energy efficient
equipment and machinery. Energy efficiency measures are to be intensified in the
industrial, transport and commercial sectors, and in government buildings. Energy
efficiency programmes that will focus on energy saving features in the industrial
and commercial sectors as well as residential in the domestic sectors should be
introduced. Energy efficiency in buildings promotes the optimal use of energy for
heating, cooling and lighting. This is achieved by several strategies that optimize
and regulate energy use in the building envelope. Measures include: structural
elements such as windows with glazing to prevent heat gain, and controls for
regulating energy use.
126
Chapter 7 :
Sustainability of Water Sources in Malaysia: A case of Klang Valley
and Putrajaya
Chung Chay Yoke, Jayamalathi a/p Jayabalan, K Shamini a/p
Kandasamy, Lee Kwee Fah, Low Mei Peng, Pok Wei Fong,
Ung Leng Yen, Yeong Wai Mum
Brief Overview of SME in Malaysia
The small and medium enterprises (SMEs) in Malaysia have been fast in
gaining a foothold in the business environment. The government seems to be
putting more emphasis in SMEs given their contribution to the country`s gross
domestic product (GDP). They are currently contributing about 32.5% to the
country`s GDP (Department oI Statistics, Malaysia, 2011). By the year 2020, the
Malaysian government has targeted for the SMEs to contribute up to 41% of the
country`s GDP.
From the total SME establishments of 645,136 (Table 1), around 32.64% are
centred in Selangor and Wilayah Persekutuan Kuala Lumpur (including WP
Putrajaya). Furthermore, SMEs make up approximately 97.3% of all businesses
throughout Malaysia (Table 2). From here, we can say that any cost hike will
definitely affect majority of the businesses and the chain effect will be tremendous
given the huge percentage being covered by the SMEs.
127
Table 1: Total Establishments and SMEs in Malaysia
Source: SME Corp, SME Census 2011
Table 2: Total of SMEs Distribution by Sector in Different States of Malaysia
Source: SME Corp, SME Census 2011
128
Possible Water Crisis
The Energy, Green Technology and Water Ministry has again warned of an
imminent water crisis in the Klang Valley. This comes as on June 30,
consumption exceeded the production capacity of Selangor's 34 treatment plants by
some 50 million liters. The ministry said in a statement that a total of 4,420
million liters per day (MLD) were consumed that day when the maximum all the
plants could produce was 4,371 MLD. The ministry noted that with such a trend, it
would be a matter of time before water disruptions would occur in Selangor, Kuala
Lumpur and Putrajaya. The average demand for water in all three areas was about
4,369 MLD for the period between June 25 and July 1, precariously close to the
maximum production capacity. To deal with the potential shortage, the ministry
said all treatment plant operators, including Puncak Niaga Sdn Bhd, Konsortium
ABASS Sdn Bhd and Syarikat Pengeluar Air Sungai Selangor Sdn Bhd
(SPLASH), have been ordered to operate at maximum capacity.
Earlier this year, Syarikat Bekalan Air Selangor Sdn Bhd (SYABAS) had issued a
warning that the Klang Valley will face a water crisis unless the authorities
implement three projects by 2014.The projects are the Sungai Langat 2 water
treatment plant, the Pahang-Selangor raw water tunnel and the Salak Tinggi dam
projects, which have not taken off so far because of differences between the federal
and state governments, particularly over land acquisition and water price.
According to Syabas, these three projects must be expedited to meet the rising
demand for water supply in Selangor, Kuala Lumpur and Putrajaya, which is
growing by 3.5 per cent yearly. At the moment, the production capacity of the
existing water treatment plants in the Klang Valley is not sufficient to meet the
rising consumer demands, as it has already reached the maximum level and cannot
be further enhanced. Syabas has estimated that the water demand will increase to
4,354 million liters per day (mld) by the end of this year, while the production
129
capacity of the existing water treatment plants is 4,326 mld. Syabas has been
appointed by the state and federal governments to upgrade and enhance the water
supply system and services in the state of Selangor through the concept of
privatization. It has been granted a concession by the federal government and the
Selangor state government to manage, operate, and distribute clean, good quality
water for 30 years starting from Jan 1, 2005.
The Selangor Government and Lembaga Urus Air Selangor (LUAS),
meanwhile, have refuted statements made by Syabas, saying that there was enough
treated water supply in the state. LUAS director Md Khairi Selamat said the dams
that supplied water to households in Petaling, Kuala Lumpur, Hulu Langat and
Sepang were still overflowing. As of 2nd July 2012 all the dams in Selangor were
90-100% full. Who's creating the water crisis? The big question is the water
treatment plant working at their full capacity? Can their operations be audited?
Water levels in Selangor dams have been on the rise, a sign that there is ample raw
water for consumers in the state, Mentri Besar Tan Sri Abdul Khalid Ibrahim said.
He said there was enough water in the Sungai Selangor dam which contributes to
60% of the water supply in the Klang Valley through three water treatment plans,
namely Sungai Selangor Phase 1 (SSP1), Sungai Selangor Phase 2 (SSP2) and
Bukit Badong (SSP3).He also stressed that there is an increase of 55.43% or
127.49 million cubic meters of raw water in Sungai Selangor dam which supplies
raw water to the treatment plants (Bernama, 21 October 2012).
Demand for Potable Water
Generally for water resource planning it is prudent to adopt a more
conservative approach when projecting the water demand. The term demand is the
quantity of water which has to be put into a supply and distribution system to
130
satisfy the requirement of household use, commerce, institutional services, industry
recreation and tourism, meet losses that occur through leakage and satisfy other
unaccounted for water components. Referring to Review of The National Water
Recourses Study (2000-2005) and Formulation of National Resources Policy
(NWRS) for relevant data to examine if there is potential shortage of raw water
and treated potable water.
Table 3 Actual Potable Water Projection and Consumption in Selangor, 2000-2010
Demand(Mld) 2000 2005 2006 2007 2008 2009 2010
NWRS
2000
Low 2,758 3,664 3,845 4,026 4,208 4,389 4,570
Planning 3,039 4,265 4,510 4,755 5,000 5,245 5,490
High 3,274 4,556 4,812 5,068 5,324 5,581 5,837
Actual WTP 2,858 3,728 3,775 3,814 3,889 3,926 -
Groundwater - 3 21 51 37 34 -
River Abstraction(2) - 10 67 68 57 41 -
Actual Total 2,858 3,741 3,863 3,933 3,983 4,001 -
Source: 1. From Malaysia Water Industry Guide 2. From Lembaga Urus Air
Selangor (LUAS)
Based on these historical data in Table 3, the total actual consumptions are lower
than the low projection of the NWRS 2000 and after year 2006 is taking a flatter
gradient.
The NWRS 2000 projected demand for the period 2000-2009 is compared to the
actual water production extracted from Malaysia Water Industry Guide and
collected from Lembaga Urus Air Selangor (LUAS) are summarized below. The
actual potable water in Selangor comes from three sources as follows:
1. Potable Water Distribution System
2. Ground Water and
3. Direct abstraction from river
131
The potable water supply system operated by the water operators constitutes
the overwhelming portion of potable water supply. Since the 1998 water crisis,
several parties especially industrial water users have started exploiting ground
water for their uses. In addition, there are also licensed abstractions from river
sources which are under the control of LUAS.
Table 4 Projected Water Demands by Sectors, 1995-2050
Yea
r
Water requirement (mld)
Population Domesti Industria Commercia Institutiona Losse Total
199 4,026,835 1,007 350 123 96 349 1,92
199 4,643,079 1,253 410 177 158 422 2,42
200 5,461,915 1,556 607 242 184 450 3,03
201 7,728,374 2,287 1,330 551 534 787 5,49
202 9,485,708 3,013 2,097 741 741 937 7,52
203 10,100,42 3,244 2,368 838 835 1,022 8,30
204 10,396,60 3,335 2,518 909 909 942 8,61
205 10,774,35 3,452 2,564 942 942 892 8,79
Source: Review of National Water Resource Study (2000-2050) and Formulation
of National Water Resources Policy
Based on the last two columns of Table 4, the total water requirement
includes about 10 to 18% losses, mainly due to leakage. The wasted water
increases the need for more treated water in the coming years. Thus, further actions
should be taken to minimize the losses.
1. Non-Revenue Water
The water supply industry has another method to compute losses. Non-revenue
water is defined as the difference between produced water and metered (billed)
water. According to Buletin Ingineur, published by Malaysia Board of Engineer in
June-August 2004, non-revenue water in 2003 is classified as follows:
132
Table 5 Components of Non-Revenue Water in 2003
Pipe burst and leaks 20%
Pilferage of water 12%
Meter under-registration 8%
Other losses such as reservoir
overflow, fire-fighting, scouring
4%
Total 44%
Source: Buletin Ingineur (June-August 2004)
Table 6 Historical Data on Selangor`s Non-Revenue Water, 2005-2009
Year NRW (%)
2005 38.4
2006 36.6
2007 34.7
2008 33.9
2009 32.5
Source: Review of the National Water Resources study (2000-2050) and
formulation of national water resources policy.
From Table 6, the statewide average NRW for the year 2009 for the state of
Selangor is 33%. This is way above the recommendation from the World Bank
where NRW should be 'less than 25.
In comparison with other countries, the World Bank database on water
utility performance, IBNET includes data from more than 900 utilities in 44
developing countries gives an average figure for NRW levels around 35%
(Kingdom, Liemberger, and Marin, December 2006). Moreover a report by the
Asian Development Bank (ADB) mentions a study performed by the South East
Asian Water Utilities Network (SEAWUN) analyzing levels of 47 water utilities
133
across Indonesia, Malaysia, Thailand, the Philippines and Vietnam, which
concluded that the levels of NRW average 30% of the water produced with wide
variation among individual utilities ranging from 4 percent to 65 percent (ibid).
Table 7 Summary of Non-Revenue Water in Percentage
District Actual Adopted
2008 2009 2010 2015 2020 2030 2040 2050
Gombak 33.1 34.43 34.2 31.7 29.2 26.2 24.2 23.2
Klang 33.29 31.24 31.1 28.6 27.1 24.1 23.1 22.1
Kuala Langat 40.64 36.41 36.3 32.8 30.3 26.3 24.3 23.3
Kuala Selangor 36.69 37.54 37.4 33.9 31.4 27.4 24.4 23.4
Petaling 33.29 31.24 31.1 28.6 27.1 24.1 23.1 22.1
Sabak Bernam 39.25 32.75 32.6 30.1 27.6 24.6 23.6 22.6
Sepang 24.43 24.88 24.8 24.3 23.8 22.8 21.8 20.8
Ulu Langat 26.89 28.24 28 26.5 25 23 22 21
Ulu Selangor 39.46 36.86 36.7 33.2 30.7 26.7 23.7 22.7
Average Non-
R
34.12 32.62 32.47 29.97 28.02 25.02 23.36 22.36
Source: Review of National Water Resource Study (2000-2050) and Formulation
of National Water Resources Policy
Table 7 shows that the average non-revenue water is as high as 34%, and is
planned to reduce to 23% in 2050. Despite the planned reduction, it is still
extremely high as comparing to current rate, 5% in Singapore and 7% in Germany.
The water supplier should identify the causes of relatively high wastage in our
water treatment system.
The authors suggest that laid-back management, poor maintenance and
inefficient regulations being the main reasons. According to SPAN, although there
were NRW reduction programs carried out in the country, they have become
ineffective in the long run. This was because if programs achieve an initial
134
reduction in NRW levels, they often increase again over the years to the same or
even higher levels than before the program due to poor follow through actions.
However, the implementation of a holistic reduction strategy carried out in three
states namely Negeri Sembilan, Melaka and Johor where they have migrated to the
licensing regime has seen success.
Besides, there are proposal for alternatives solutions. Water demand
management (WDM) identified in the Ranhill Consulting Report stated that it is
becoming important to manage and conserve limited water resources in advanced
countries like the United States, United Kingdom, Australia and South Africa.
WDM can help in changing the level and timing of water usage to bring about
material improvement. Water Conservation (WC) involves the minimization of
loss of water whereas the Integrated Resource Management (IRM) involves in the
demand and operation of water institutions by evaluating a variety of supply and
demand management for the best way of providing water.
Supply of Potable Water
This section discusses the water source and water treatment development
works that are required to meet potable water demand of the State up to year 2050.
There are four major river basins in the State of Selangor, namely Sg Langat, Sg
Klang, Sg Selangor and Sg Bernam. Selangor State, Federal Territory of Kuala
Lumpur and Putrajaya are currently obtaining water from Sg Langat and Sg
Selangor. Although Sg Klang is a large basin, it has not been exploited
significantly due to the poor quality of the water condition which was affected by
the intensive development of the city. Hence, treated water is being transferred to
the nearer region at Sg Klang.
135
The main sources of raw water in Selangor and Federal Territory of Kuala
Lumpur and Putrajaya come from direct abstraction from natural or regulated
rivers and direct supply from storage dams. In 2009, 99% of raw water requirement
are met by surface water resources and there is only 1% supplied by groundwater.
The existing potable water supply systems derive their raw water source mainly
from the four major rivers as above, except Sg Bernam. The details and storage
capacity for each dam are summarized as in table 8:
Table 8 Storage Capacity of Existing Dams - Selangor
Dam Type Capacity (million cubic
1 Subang Embankment 3.50
2 Klang Gates Concrete 32.00
3 Langat Embankment 37.48
4 Batu Embankment 33.60
5 Semenyih Embankment 62.60
6 Tinggi Embankment 122.50
7 Selangor Rockfill 235.00
Total 526.68
Source: Review of National Water Resource Study (2000-2050) and Formulation
of National Water Resources Policy
Generally, all the major dam sites near to the urban centers in Klang Valley
have been developed except the Bernam dam site, which is further away in the
north and shared with the State of Perak, is the only large storage dam site
available.
The existing water supply system in Selangor and Federal Territory of Kuala
Lumpur and Putrajaya is currently served by 33 treatment plants. Table 9
summarizes the existing water treatment plants in operation in Selangor including
their designed capacity, average daily production and distribution rates (based on
136
2009 record from Syabas). The capacity utilization rate is then calculated to
identify which plant is especially underutilized.
Table 9 Capacities and Productions of 33 Water Treatment Plants
Water
Treatment
Plant (WTP)
Designed
Capacity
(mld)
Current
Average
Productio
n
(mld)
Overload/
Distributabl
e
Capacity
(mld)
Utilization
Rate (%)
Under
Utilize
d (%)
1 BRH 40.60 30.41 40.60 74.90 25.10
2 Batang Kali 20.30 9.42 20.30 46.40 53.60
3 Sg Dusun 1.30 0.93 1.30 71.54 28.46
4 Sg Selisek 1.30 1.84 1.30 141.54 (41.54)
5 Sg Tinggi 1.30 1.12 1.30 86.15 13.85
6 Kalumpang 6.70 4.76 6.70 71.04 28.96
7 Kuala Kubu Bharu 6.70 4.23 6.70 63.13 36.87
8 Sg Buaya 0.90 0.25 0.90 27.78 72.22
9 Rantau Panjang 31.50 35.95 31.50 114.13 (14.13)
10 Sg Batu 113.70 76.80 113.70 67.55 32.45
11 Sg Rankap 9.00 9.04 9.00 100.44 (0.44)
12 Gombak 22.50 23.26 22.50 103.38 (3.38)
13 Kepong 2.30 1.13 2.30 49.13 50.87
14 Sg Rumput 4.50 0.14 4.50 3.11 96.89
15 Air Keroh 0.50 0.00 0.50 0.00 100.00
16 North Hummock 22.50 9.59 22.50 42.62 57.38
17 Sg Langat (see note1) 386.00 450.61 454.00 99.25 0.75
18 Bukit Nanas 145.00 136.08 145.00 93.85 6.15
19 Cheras Miles 11 27.00 23.51 27.00 87.07 12.93
20 Bukit Tampoi 31.50 32.70 31.50 103.81 (3.81)
21 Ampang Intake 18.00 17.84 18.00 99.11 0.89
22 Salak Tinggi 10.80 1.48 10.80 13.70 86.30
23 Sg Serai 0.90 1.12 0.90 124.44 (24.44)
24 Sg Lolo 0.40 0.81 0.40 202.50 (102.50
25 Sg Pangsoon 1.80 3.99 1.80 221.67 (121.67
26 Sg Semenyih (see note 2) 546.00 596.01 636.00 93.71 6.29
27 Sg Selangor (F1) 950.00 720.06 760.00 94.74 5.26
28 Sg Selangor (F3) Sg 250.00 130.59 130.00 100.45 (0.45)
29 Sg Selangor (F3) Badong 800.00 671.89 800.00 83.99 16.01
30 Sg Sireh 27.00 20.77 27.00 76.93 23.07
31 Sg Selangor (F2) - P1 & 950.00 959.33 950.00 100.98 (0.98)
32 Lolo Baru 1.04 1.79 3.00 59.67 40.33
33 Wangsa Maju 45.00 45.80 45.00 101.78 (1.78)
Total 4,476.04 4,045.26 4,326.00
137
Source adapted: Review of National Water Resource Study (2000-2050) and Formulation of
National Water Resources Policy
Note: 1) Sg Langat's original capacity was 386 mld but has been estimated to yield
454 mld.
2) Sg Semenyih original capacity was 546 mld but has been estimated to produce
636 mld with present upgrading works.
One-third (11 plants) of the water treatment plants (WTPs) are operating above
their designed capacity. Thus, the remaining 66.67% (22 plants) are operating
below their capacity. Although the total designed capacity of all existing water
treatment plants is 4476 mld, the distributable capacity is much lower as shown in
the above due to the following reasons:
1. The Sg Selangor Phase 1 water treatment plant is not able to produce up to
its designed capacity of 950 mld under low river flow conditions. It can
produce only 760 mld due to under capacity of the raw water pumping
system giving an operation deficit of 190 mld.
2. There is about 120 mld of excess capacity from the Rasa Water Treatment
Plant under the Sg Selangor Phase 3 scheme that is not accessible to the
demand centers in the Klang Valley.
Presently, most of the distribution systems in the Selangor State have been
interconnected and hence there is no clear-cut division of the potable water supply
zone. However, it can be broadly divided into the following regions:
1. The northern Selangor region supplied from Selangor and Tinggi dams.
2. The Klang Valley area which is partly supplied from Batu and Klang Gates
dams and partly from the northern region.
138
3. The southern Selangor region supplied from Langat and Semenyih dams.
Due to such arrangement, when some dams are running low in terms of the water
level, those areas that are under the coverage of the WTPs and dams could be
affected. Although there is some interconnectivity, there are still some problems
with the current arrangement:
1. There is low water demand in some local distribution area of certain WTPs.
2. Water could not be channeled to some areas as there is no network of
pipelines since there are still some areas that are not interlinked due to the
distance between the areas and WTPs.
3. The task force led by Selangor state secretary, Datuk Khusrin Munawi and
staffed with water experts and Selangor Economic Planning Unit (UPEN)
officers also uncovered something revealing. Selangor`s 34 treatment plants
are jointly capable of treating up to 4,807 million liters of water per day
(MLD). But, Syabas is only capable of distributing up to 4,411 MLD. So
even if the treatment plants fulfilled their full potential in their water
treatment capacity, Syabas still can`t distribute all oI it (Gan, 2012). Thus,
they are not producing at full capacity due to Syabas limitation in water
distribution.
139
Do We Have Enough Water Until 2050?
Table 10 Projection of Water Shortage, 2010-2050
2010 2020 2030 2040 2050
Raw water (1% capacity of existing water
dams)
5,26
7
5,26
7
5,26
7
5,26
7
5,26
7
Raw water from river 480 480 480 480 480
Total supply of raw water 5,74
7
5,74
7
5,74
7
5,74
7
5,74
7
Water treatment plant capacity 4,47
6
4,47
6
4,47
6
4,47
6
4,47
6
Actual treated water production 4,04
5
4,04
5
4,04
5
4,04
5
4,04
5
Actual water demand without losses 4,03 4,89 5,37 5,97 6,47
Water demand (assume 5 % losses) 4,23 5,14 5,64 6,27 6,80
Water demand (assume 8 % losses) 4,36 5,28 5,80 6,45 6,99
Shortage of raw water 1,38 459 -54 -706 -
Shortage of water treatment capacity (assume 116 -812 - - -
Table 10 illustrates the projection for possible water shortage until 2050.
The demand for water is projected based on the projected increase in population in
Selangor. It is reasonable to assume Malaysia is able to control water losses to 8%
in the long run because the current losses are 5% for Singapore and 7% for
Germany. Hence the projection of water shortage will be based on projected actual
demand plus 8% losses.
Not all water from the dams can be extracted for treatment. Taken into
consideration rainIall and sustainability oI the river`s upstream and downstream,
140
with the projection of extraction of about 1% capacity of all six existing dams, the
amount of raw water is projected to be 5,267 mld. Currently the other smaller
water treatment plants are extracting 480 mld from rivers. Thus, the total water
supply will be 5,747 mld of raw water. If there is no increase in raw water sources,
Selangor state will be facing shortage of raw water by 2030. The shortage will
amount to 1,248 mld by 2050.
The current capacity of existing water treatment plants is 4,476, which are
underutilized by about 9%. If we do not expand the capacity of water treatment
plants, there will be shortage from 2020 onwards, 812 mld by 2020 and 2,519 mld
by 2050.
In conclusion, the Government needs to increase the capacity of raw water
reservoir and treatment plants in the long run. The proposed Langat 2 water
treatment plant is justifiable by the shortage of potable water in near future.
However, is Langat 2 the best of all alternatives?
Cost and Benefit Analysis of Alternatives to Meet Water Demand
The Malaysian government and the Selangor state government have no mutual
consensus on the available alternatives. Thus, not much information is available.
The following is the summary of the given facts about the two alternatives, namely
Langat 2 that includes two phases of water treatment plants and Pahang-
Selangor raw water transfer project
Bukit Jelutong water treatment plant that are using membrane technology
Langat 2 Membrane Technology
Time A few years to built
Phase 1: 2015
Phase 2: 2030
6 months to upgrade a plant
(based on proposal for Bukit
Jelutong water treatment plant
141
(WTP))
Cost (RM) Building plan in 2
phases:
Phase 1 RM3.9 bil
(WTP and tunnel)*
Phase 2 - budget
allocated (figure not
given)*
Total cost of entire
project including
tunnel and treatment
plant RM6 bil. #
Other cost:
Pahang water cost 10
sen/m3
* Source: Review of
the National Water
Resources Study
(2000-2050) and
Formulation of
National Water
Resources Policy
# Source: The Star
Online, Sep 11, 2012
Even the project cost
figures are different
from one report to
another. It is all very
confusing.
RM50 80 mil per plant (to
upgrade)
RM800 mil (to upgrade 10
treatment plants)
Source: Malaysian Insider, Oct 30,
2012
Capacity to produce
treated water (mil
litres daily)
Phase 1 : 1130 mld
Phase 2 : 760 mld
Total : 1,890 mld
50 100 mil (for Bkt Jelutong
WTP
Estimate: 10 WTP x 75 mil = 750
mld
Increase in price of
water
Syabas water tariff
allows up to 75%
price increase
Selangor government maximum
12% price increase
142
More information is collected from similar project and research report to justify the
feasibility of the two options.
Langat 2 Membrane Technology
Requirement on raw
water quality
Unable to process raw
water that is polluted by
chemical, pathogenic
microorganisms, high in
salinity, agricultural
activities, domestic
wastewater discharges
and livestock effluents.
This is a critical issue if
there is natural disaster
that seriously affect the
quality of raw water
Able to process polluted
water.
Required space Need more space for
coagulation, flocculation,
dissolved air flotation,
sedimentation, and rapid
sand filtration.
Occupy up to 40% less
space than conventional
coagulation processes.
This translates to major
saving in infrastructure
costs
New water reservoir Because the relatively
high demand on raw
water quality, it requires
new water dam or
No new water reservoir is
required in near future.
Selangor is highly
populated and
143
pipeline to transfer raw
water from remote area.
industrialized prone to
pollution, but it this
efficient even in small
scale, and can extract
water from nearby rivers,
even when rivers are
slightly polluted.
Use of chemicals More chemicals are used
during treatment, for
example Aluminium
sulphate was used as a
coagulant and chlorine is
used for disinfection.
Natural organic matters in
raw water react with
chlorine to form
disinfection by-products
(DBPs), which is
potentially
carcinogenic or mutagenic
to animals in laboratory
test.
Use chemicals to clean
filters, no chemical are
directly added into water.
Required manpower Relatively higher as
compared to a treatment
plant that uses membrane
technology
Less manpower required
due to compact design
and high level of
automation
144
Sludge and waste water
management
Produce solid waste ,
generally disposed as
landfill
Produce liquid
concentrate that is larger
in volume, can be
disposed in
environmentally safe
ways.
Quality of treated water Produce acceptable
drinking water
Superior finished water
quality.
No alteration in the PH of
treated water, thus no
remineralisation required
Capital Cost The system is well
developed and the cost
achieved its optimal level.
No tendency to become
cheaper in the future
Increasing number of
membrane systems for
potable water are already
perceptible and tendency
of cheaper membrane
production and system
cost will continue
Cost comparison based on
Yang, Yuan and Weng
(2010) study of a pilot
plant in Kinmen, Taiwan
Conventional water
treatment followed by
O3/BAC (i.e.
ozonation/biological
activated carbon) incurred
a capital cost of US$7.7
Conventional water
treatment followed by
O3/BAC (i.e.
ozonation/biological
activated carbon), and in
addition using UF-NF
145
mil for 20 mld capacity,
converted to RM1.34
billion for plant with
capacity of 1130 mld.
Annual operating costs:
US$1.73mil for 20 mld,
converted to RM304 mil
for 1130 mld.
membrane technology
incurred a capital cost
US$15.8 million for a 20
mld capacity. This can be
converted to RM2.8
billion for a plant with
capacity of 1130 mld.
Annual operating costs:
US$5.3mil for 20 mld,
converted to RM933 mil
for 1130 mld.
Operating cost USD$0.35/1000 liter
(Yang et al, 2010)
USD$0.97/1000 liter.
(Yang et al, 2010). The
quality of raw in this
study is poor (high in
natural organic matter),
thus the cost is higher.
In another study based on
treatment of karstic spring
water, the operating cost
is 5% lower than
conventional method if
there is no
micropollutants in the raw
water. (Pianta et. al.,2000)
Future prospects Membrane system is more
146
practical in the long run,
due to the raw water
quality tend to be poorer
in future due to
deforestation, industrial
waste water and sewerage
water.
The full supply cost of a water treatment plant comprise of both Capital
Charges, and Operations & Maintenance (O&M) Cost. Using cost estimates based
on the Taiwan pilot plant, the calculated full supply cost of a conventional WTP is
much lower than a conventional plus membrane technology WTP. Capital charges
are about 51% lower, and O&M costs per annum are 67% lower for a conventional
WTP. However, the conventional plus membrane technology produces water
quality which is far superior to conventional treatment alone and may be necessary
over the long term to get potable water safe for human consumption.
Thus, if the Langat 2 WTP is a conventional plant then the Federal
Government`s budgeted construction costs oI RM3.9bil is close to 3 times the cost
of the authors estimated cost of RM1.34bil. The estimated cost to construct a
conventional plus membrane technology WTP is RM2.8bil which is 28% lower
than the Iederal government`s budget. (Comment: this estimate excludes the
tunneling cost from Pahang to Selangor, the connecting pipelines, and the
construction of the Sg Kelau dam. It is thought to be the balance of the total project
cost of RM6bil, amounting to RM2.1bil). Other cost that should be taken into
consideration is the 10sen/m3 for drawn raw water to be paid to the Pahang
government.
147
According to the Malaysian Nature Society (MNS) Selangor Branch 2009
report, by implementing a Water Demand Management Plan and other water
conservation measures, Selangor can be self-sufficient in water. This would be so
for the foreseeable future even without the Selangor-Pahang Raw Water Transfer
Project. In this case, the capital cost of Langat 2 WTP is estimated to be RM2.8
billion for a conventional plus membrane technology water treatment process. The
other relevant costs will be the annual operations and maintenance costs which are
rather high at RM933 mil.
Based on the analysis, the Selangor government`s proposal to upgrade the 10
WTPs is the feasible option over the short term. O&M costs should be monitored
for the actual costs incurred. For the long term, Langat 2 WTP has to be
constructed but the water transfer from Pahang may not be necessary depending on
the effectiveness of water management measures.
Recommendations
a. Minimized Water Usage
All business firms should be educated via various mediums on the importance of
water conservation. The commercial sector should make the effort to learn the
criticality of having water in their daily consumption. They should be made aware
that clean water may also have the issue of shortages in the future if no appropriate
actions are put in place now.
b. Rainwater Harvesting System
This system is conducive to Malaysia given that there is plenty of rainfall
throughout the year. The system to collect rainwater from roofs of homes has long
148
been used in developed countries as both a supplement to the main water supply as
well as a main water source in rural areas and arid land. To encourage the use of
this system, the local council should make it a requirement that all future planning
permission applications to include this system. They could also provide rebates on
assessment fees when a home is fitted with a rainwater harvesting system. For
example, in Queensland, Australia, a rebate of up to A$1,500 was given for the
purchase and installation of home rainwater system. In Britain, homeowners who
planned to do up their driveways or porches need to seek planning permission form
their local council iI they`re not going to use permeable surIaces which soak up
rainwater to avoid rainwater running into the streets. Similarly in Germany,
property owners have to pay rain taxes calculated based on impermeable surface
area on their property, which generates rainwater run-off to the local storm sewer.
Even though the government has not given any incentives for the companies to
implement this, however, the business owners may want to have their own
filtration system installed. By having the said system installed, in their premises,
they can reuse the recycle water for miscellaneous purposes such as flushing of
toilets or general cleaning for water conservation and reduction in water
consumption.
c. Deforestation and Land Clearing
First, deforestation and land clearing cause waterway sedimentation, reducing the
water flow available for potable water treatment. Second, these activities increase
the treatment cost. A survey of 27 water suppliers was conducted in 2002 by the
Trust for Public Land and the American Water Works Association. They found
that for every 10% increase in forest cover in the source watershed, treatment and
chemical costs decreased by approximately 20%, up to about 60% forest cover.
149
The Malaysian government should limit the deforestation around the water
catchment areas and strictly enforce regulation on illegal logging. Furthermore, the
business sectors need to be aware that improper planning during their expansion of
land clearing will lead to the same issue. Thus, they should know and properly plan
for any future development as part oI their company`s social responsibility eIIorts
and contribution for a better future.

d. Monitor for Irregularities of Water Billing
Companies currently in operation should monitor their own water costs incurred in
the day-to-day running of their businesses. This monitoring is to find out the
percentage of costs incurred for water usage in their monthly consumption and to
check on any irregularities involved which are not in-tandem with their normal
production. Then, they can locate if there are any water leakages due to faulty
piping or any inefficiency of the production processes.
e. Effective and Efficient Management of WTPs
Marked improvements in the management of WTPs would increase the potable
water output and reduce NRW. It is suggested that the authorities concerned set
aside their differences and work towards the best solution in a transparent manner.
Other countries with much better and proven water management systems could
serve as a guide to the relevant authorities.
150
Reference List
Bernama (October 21, 2012). Dont confuse public over water levels of dams-
Abdul Khalid. Retrieved on February 18, 2013, from
http://malaysianwater.blogspot.com/2012/10/bernamadont-confuse-public-
over-water.html
Buletin Ingenieur (June-August 2004). Water engineering. Retrieved on February
19, 2013, from
http://www.bem.org.my/v3/body/pdf/einforeach/2004/BEM%20Jun04-
Aug04%20(Water%20Engineering).pdf
Department of Statistics, Malaysia (2011). Press release: Media conference census
report on SMEs 2011. Retrieved on February 21, 2013, from
http://www.statistics.gov.my/portal/images/stories/files/LatestReleases/BE/B
I/BE2011_SMEsBI.pdf
Gan, P. L. (August 20, 2012) Solving Selangors water woes. Retrieved on
February 18, 2013, from http://www.thenutgraph.com/solving-
selangor%E2%80%99s-water-woes/.
Kingdom, B., Liemberger, R., and Marin, P. (December 2006). The challenge of
reducing non-revenue water (NRW) in developing countries. Retrieved on
February 21, 2013, from
http://siteresources.worldbank.org/INTWSS/Resources/WSS8fin4.pdf.
151
Malaysian Insider (October 30, 2012). Putrafava snubs Selangors water plans, insists
Langat 2 best option. Retrieved on February19, 2013, from
http://www.themalaysianinsider.com/malaysia/article/putrajaya-snubs-
selangors-water-plans-insists-langat-2-best-option
Malaysia Nature Society Selangor Branch (2009). The need for water demand
management for Selangor.
Pianta, R., Boller, M., Urfer, D., Chappaz, A., & Gmnder, A. (2000). Costs of
conventional vs. membrane treatment for karstic spring
water. Desalination,131(1), p. 245-255.
Raman, P. (2012). Harvest rainwater, reduce run-off, Streets Your News.
Retrieved on February 21, 2013, from www.nst.com.my/ .
Review of the National Water Resources study (2000-2050) and formulation of
national water resources policy. (August 2011). Final Report, 14
SME Corp (n.d.). About Us. Retrieved on February 17, 2013, from
www.smecorp.gov.my/
Suruhanjaya Perkhidmatan Air Negara (SPAN) (Mac 7, 2011). Keratan Media -
Masalah berkaitan air tidak berhasil. Retrieved on February 17, 2013, from
http://www.span.gov.my/index.php?option=com_content&view=article&id=
275%3Amedia-statement-the-problem-of-non-revenue-water-
&catid=167%3Aarchive&lang=bahasa
152
The Star Online (Sept 11, 2012). PAAB issues tender for Langat 2. Retrieved on
February 17, 2013, from
http://www.thestar.com.my/story.aspx?file=%2f2012%2f9%2f11%2fbusines
s%2f20120911084747&sec=
Wong, A. (5 July 2012). SMEs to account for 41% of GDP by 2020. The Edge
Malaysia. Retrieved on February 17, 2013, from
http://www.theedgemalaysia.com/business-news/216479-smes-to-account-
for-41-of-gdp-by-2020.html
Yang, J. S., Yuan, D. X., & Weng, T. P. (2010). Pilot study of drinking water
treatment with GAC,O
3
/BAC and membrane processes in Kinmen Island,
Taiwan. Desalination, 263(1), p. 271-278.
153
Chapter 8 : Born Global firms
A New Emerging Enterprise
Falahat Nejad Mahani Mohammad
Introduction
Traditional theories on internationalization highlighted that firms initially
establish a strong base in the domestic markets and slowly expand to foreign
markets which follows the incremental stages of internationalization. Usually only
when domestic business is successful and has generated consistent cash flow, firms
are confident to enter foreign markets, one country at a time which are
geographically close to their home country. This incremental process is suggested
by Johanson and Vahlne (1977) for SMEs to accumulate sufficient knowledge and
resources to minimize the risk on venturing to foreign markets.
However, new studies that were conducted in relation to SMEs export
behavior have challenged many previous findings in the traditional
internationalization literature (Oviatt & McDougall, 1994; McKinsey & Co.,
1993). It has been seen nowadays that these SME firms do not follow through the
incremental stages of internationalization. Researches has shown that these SMEs
start their international activities right from the establishment of the firm, enter
distant markets which is not geographically closed to their own home country and
enter not only one but multiple countries. The logic reasoning behind the
appearance of these firms can be due to the advance in technology, new
development in transportation, international financing opportunities, less trade
barriers and more cooperative countries mutual trade agreements. These new breed
of SMEs have been labeled many names, such as International New Ventures
(Oviatt & McDougall,1994), Global Startups (Autio, Sapienza, & Almeida, 2000)
154
and Born Globals (McKinsey & Co., 1993; Knight & Cavusgil, 1996; Madsen &
Servais, 1997). Born Global is synonymous with the terms 'International New
Ventures and 'Global Startups.
The Born Global` concept was coined in a survey Ior The Australian
Manufacturing Council by the McKinsey Consultants. McKinsey & Co. (1993)
were the first to identify a group of Australian manufacturers who were exporting
just two years after establishment. Born Global firm has been defined in the
literature as 'Business organization that Irom inception, seek to derive signiIicant
competitive advantages from the use of resources and the sale of outputs in
multiple countries (Knight & Cavusgil, 2004; Autio et al., 2000; Oviatt &
McDougall, 1994).
According to Cavusgil and Knight (2009), Born Globals is characterized as
highly active in international markets from its inception, lack of tangible and
financial resources, having strong entrepreneurial orientation toward international
markets, often implementing differentiating strategy, offering superior products
quality, leveraging information technologies and advance communication and
mainly expand internationally via exporting.
These firms have been found in all major trading countries (OECD, 1997)
and across high-tech and low-tech industry sectors (Knight & Cavusgil, 2004;
Madsen & Servais, 1997; Rennie, 1993). Born Globals tend to be formed by
entrepreneurs with strong orientation toward international market (Knight &
Cavusgil, 2009). Knight and Cavusgil (2009) highlighted the Born Global firms
as entrepreneurial firms that see the world as their market place and often
involving international marketing skills.
The concept of Born Global studies emerged and was mostly conducted by
researchers in developed countries and advanced economy (Loane, 2006; Freeman,
Edwards & Schroder, 2006; Moen, 2002) and this has sparked the interest to better
155
comprehend Born Globals SMEs in developing countries and newly industrialized
country in particular Malaysia.
Empirical evidence of Born Global
Born Global, as an emerging phenomenon in recent decade, has attracted the
attention of numerous researchers in this field of study. Key factors that triggers
Born Global firms internationalize from early inception by various scholars are
discussed below.
Entrepreneur orientation
McDougall, Shane and Oviatt (1994) defined entrepreneur as an individual
who is more alert to opportunities than others, someone that is more capable of
taking advantage of his superior informational capabilities to create competitive
advantages before others become aware of such opportunities. As such, Born
Globals are generally viewed as being entrepreneurial in nature (Oviatt &
McDougall, 1994).
A review of the literature on international entrepreneurship concluded that
entrepreneur orientation (EO) is conceptualized as a combination of the
dimensions of innovativeness, pro- activeness and risk-taking (Jantunen et al.,
2005; Zhou, 2007; Knight, 2000; McDougall & Oviatt, 2000; Madsen & Servais,
1997; Covin & Slevin, 1986). Miller (1983) and Covin and Slevin (1986) argued
that the dimensions of EO should co-vary, for instance a firm should score equally
on all dimensions; if they score highly on one dimension, they will naturally score
highly on the others.
EO has been identified as potential drivers of international performance
(Knight & Cavusgil, 2004). In light of this scarcity of resources, an entrepreneurial
orientation has frequently been seen as an important source of competitive
advantage (Johansen & Knight, 2010). Since SMEs have fewer available resources
156
than resource-rich MNEs, they rely on EO to create competitive advantages
(Wiklund & Shepherd, 2005; Knight & Cavusgil, 2004). Similarly, the critical role
oI the Iirms` entrepreneurial orientation has been highlighted as the common
denominator of Born Global firms (Cavusgil & Knight, 2009; Andersson &
Wictor, 2003; Oviatt & McDougall, 1994; Knight & Cavusgil, 1996; Rennie,
1993).
Born Global firms obtain knowledge and capabilities in order to be able to
differentiate from others (Hartsfield et al, 2008). These firms maintain
relationships with foreign markets and keep updating its knowledge in order to
continually peruse the foreign market. In other words, the importance of
international orientation has been embedded within the culture of these firm
(Hartsfield et al., 2008).
McDougal and Oviatt (2000) defined international entrepreneurship as a
combination of innovativeness, pro-activeness and risk taking behavior that crosses
national borders and is intended to create value for organizations. International EO
means that firms step out to the foreign market due to its unique entrepreneurial
competencies (McDougall et al., 1994; Autio et al., 2000). According to Hartsfield
et al. (2008), this orientation reflects the ability of firms to be innovative and
proactive and to be active in seeking new markets and opportunities. These firms
usually seek new markets and opportunities in complex markets that have
uncertainty and risk (McDougall et al., 1994).
In the context of Brazil, Dib, da Rocha, and da Silva (2010) examined the
network and entrepreneur variables of firms that follow an early and accelerated
internationalization process in comparison with traditional approach to
internationalization. They have used structured questionnaires in studying software
157
development companies in a high-tech industry. Their results showed that
innovativeness and customer orientation as well as technical knowledge of
entrepreneurs offer significant differences between Born Global firms and firms
that followed the traditional internationalization path.
Hartsfield, Johansen and Knight (2008) investigated on Born Global firms in
the United States that expand rapidly into foreign markets from or near inception
despite limited human, financial and tangible resources. Their results from the
survey-based study across industry from Born Global firms shows that strong
international entrepreneurial orientation, strong differentiation strategy and strong
marketing capabilities are associated with superior international performance in
Born Global firms.
Di Gregorio, Musteen, and Thomas (2008) conducted empirical case studies
from United States and Czech Republic and highlighted the role of entrepreneurs
in Born Global and presented the framework for Born Global firms. They argued
that a majority of Born Global firms emerge due to the entrepreneur opportunities
seeking behavior in regards to the resources and markets across the border.
In China, Zhou (2007) argued that Born Globals are focused more on foreign
market knowledge that is derived from innovativeness, proactiveness and risk
taking dimensions in pursuit of entrepreneurial opportunities overseas, which
makes them different from incremental exporters. His objective was to examine the
relationship between innovativeness, proactiveness, risk taking and foreign market
knowledge with performance of early internationalization. He found that
proactiveness is the most influential entrepreneur behavior in accumulating foreign
market knowledge followed by innovativeness and risk taking in comparison to
traditional firms.
158
Weerawardena, Mort, Liesch, and Knight, (2007) by drawing from dynamic
capability view presented a conceptual model of Born Global firm
internationalization. They have argued that a set of dynamic capabilities that are
built and nurtured by entrepreneur oriented founders / managers assist firms to
develop knowledge intensive products which lead to early internationalization of
firms. They argued that the issue of why some Born Globals were able to
internationalize from inception while others concentrated on domestic market
highly depends on entrepreneur behavior characteristics. They have specified
networking capability among the most critical capabilities in Born Global
internationalization that leads to international performance. They highlighted the
entrepreneur characteristics as antecedents to those capabilities which lead to
development of leading edge products that facilitate internationalization. The
authors believed that internationalization of firms are more effective if firms
acquire knowledge from multiple sources which leads to enhanced international
performance (Weerawardena et al., 2007).
Mort and Weerawardena (2006) examined how networks function in
Australian Born Global firms. They researched on Born Global behavioral
characteristics and how network capabilities leads to international market
performance. Six case studies from low-tech and high-tech industries were adopted
to examine the generative mechanisms and processes of networking capabilities.
Results showed the critical role of internationally entrepreneurial
founder/owner/managers more specifically innovativeness, proactiveness and risk
taking dimensions of entrepreneur in building networking capability. They
concluded that dynamic networking capability plays a key role in the early and
rapid internationalization of Born Global firms and it minimizes the risks
associated with international market entry decisions.
159
Knight and Cavusgil (2004) have found during interviewing Born Global
firms in the United States that the majority of managers highlighted the importance
of entrepreneurial and innovative mindset when approaching the international
market. Their findings reveal that international entrepreneurial orientation as the
key for developing productive organizational routines in Born Globals. Born
Globals have unique entrepreneurial characteristics and when those characteristics
integrate with other resources and skills, they create capability for the firm to take
advantage of opportunity in foreign markets and achieve international performance
(Knight & Cavusgil, 2004).
Andersson and Wictor (2003) have investigated why some Swedish firms
are global shortly after their inception. They have done empirical case studies from
four Born Global firms located in Sweden. They have highlighted the value of
Network theory and the role of personal networks of entrepreneurs as being the key
for strategy implementation in Born Global success. The authors highlighted that
Born Globals are exposed to the same opportunities that non Born Global may face
but the only difference is the entrepreneurial behavior of Born Globals towards
taking advantage of opportunities.
Networking capabilities
The critical role of knowledge in Born Global internationalization has been
highlighted in literature (Zahra et al., 2000; Oviatt & McDougall, 2005).
Networking provides an in- depth understanding and intensive knowledge of
foreign market (like demand, design, prices, delivery schedules, channels etc.) for
small businesses like Born Global firms. Apart from that, network provides access
160
to foreign markets, access to information about foreign trade fairs, and training
opportunities, and access to supplier credit.
It is crucial for firms to have the capability of networking, which in turn the firm
can gain resources from the environment through alliance creation and social
embeddedness to overcome its constraints (Zhang, Tansuhaj & McCullough 2009).
Networking is one the major strategies perused by entrepreneurial firms in order to
access resources and cope with environmental uncertainty (Alvarez & Barney,
2001).
The importance of networks becomes apparent when the resource constraints
and limitations that many Born Globals face are taken into consideration (Chetty &
Stangal, 2009). In the context of New Zealand, Chetty and Stangal (2009) study
reveals on how network relationships are used in the internationalization and
innovation of SMEs in software industry. They have developed the matrix
consisting of four groups namely, incremental internationalization, incremental
innovation, innovation networks and internationalization networks. They
conducted an in-depth qualitative study of ten software firms that fall into the four
mentioned distinct groups, depending on the type of internationalization and the
type of innovation and the group`s respective types oI network relationships. Firms
with limited network relationships have incremental internationalization and
innovation but those with diverse network relationships have radical
internationalization and innovation. They have concluded that network
relationships are inIluential in shaping the Iirm`s Iuture as well as maintaining
sustainability for the firm.
Gabrielsson and Pelkonen (2008) examined leading Swedish and Finnish
Internet consultancies operating in the digital media service field and investigated
resources, networking and international business strategies. It focuses on Born
Global international firms that internationalized rapidly but were able to survive it.
161
Results showed that both the international new venture research and the
Scandinavian internationalization model appear to be valid. Besides that, first
mover advantage is not a guarantee for success and networking is essential for
rapid internationalization of Born Global.
Laanti, Gabrielsson and Gabrielsson (2007) discussed the globalization of
business-to-business Born Global firms based in Finland with a focus on wireless
technology industry. Born Global firms make use of networking to overcome
inherent weaknesses such as the Iirm`s size and lack of resources to gain entrance
to global markets. Network relations drives Born Global firms to access to
complementary social, technical and commercial resources in R&D, technology,
production, marketing and distribution areas that would take individual companies
years to accumulate on their own (Laanti, et al, 2007).
Freeman Edwards and Schroder (2006) described how Australian Born
Global firms achieve rapid growth internationally in early inception and overcame
constraints. They have identified the constraints that smaller Born Global firms
faced as lack of economies of scale, lack of resources and aversion to risk taking.
They found that commitment of senior management, range of alliances and
collaborative partnerships, using unique technology provides completive advantage
that leads to rapid growth internationally (Freeman et al., 2006).
Loane and Bell, (2006) have done cross-national study investigating the networks
of internationalizing entrepreneurial firms in Australia, Canada, Ireland and New
Zealand among all firms and service sectors. They state that a high proportion of
firms actively use existing networks to develop their knowledge of international
markets and improve their international competitiveness. They found that the
importance of networks in the internationalization of entrepreneurial firms is
widely accepted and there is growing evidence that many rapid internationalizes
have to build new networks.
162
Mort and Weerawardena (2006) examined how networks function in
Australian Born Global firms and researched Born Global behavioral
characteristics and how network capabilities leads to International Market
Performance. Six case studies from low-tech and high-tech industries were adopted
to examine the generative mechanisms and processes of networking capabilities.
Results showed that dynamic networking capability characterizes international
entrepreneurship in the Born Global firm and plays a central role in rapid
internationalization, in developing knowledge intensive products and in
international market performance.
Jantunen, Puumalainen, Saarenketo and Kylheiko (2005) explore the effect
oI entrepreneurial orientation and Iirm`s reconIiguring capabilities on international
performance among 217 Finnish manufacturing and service organizations. They
have collect the data from food, forestry, furniture, chemicals, metals, electronics,
information and communication (ICT) and services. their results indicate that
Iirm`s entrepreneurial orientation and its reconIiguring capabilities have a positive
and significant effect on performance.
Moen et al. (2004) studied on the entry forms and market selection of five
small Norwegian computer software firms. Their finding reveals that limited
correlation between the Iirm`s international experience and Ioreign market entry.
Firms choose markets based on the choices available through network relationship.
In the context of Tanzania, Rutashobya & Jaensson (2004) suggested that the
network on internationalization provides an interesting opportunity in
understanding entry into foreign market by resource constrain small Born Global
firm. Network provides an in depth understanding of foreign market information
such as demand, design, prices, delivery schedules, channels and others for small
businesses like the Born Global firms. Their study explores use of a wide range of
network, including horizontal and social network in small firm internationalization.
163
The result of their study indicates four typologies of network as networks
with friends, customers and close family ties, networks with independent
distributors in foreign markets, networks with cluster members, local and foreign
association like chamber of commerce, and networks with local producers. Apart
from that, network provides access to foreign markets, access to information about
foreign trade fairs, and training opportunities, and access to supplier credit.
Establishing network enables competitiveness in the foreign market (Rutashobya &
Jaensson, 2004).
Chetty (2003) highlighted that networks enable firms to overcome the
constraints of limited financial and human resources and lack of knowledge of the
new markets. Business networks also enable firms to proceed faster with their
international growth instead of gradual stage process. They stated that to cope with
explosive growth, firms need to develop the capabilities to collaborate with other
firms in order to identify potential international partners and to achieve benefits
from subsequent collaborations. A network partner can be both an important
facilitator and an inhibitor. Networks open up new opportunities, technology,
market knowledge and information.
Ritter and Gemunden (2003) have done research on German SMEs to realize
the role of networks and Born Global success. Their finding reveals that Network
competence has a strong positive influence on the extent of technological
collaboration between organization and the Iirm`s product and innovation process
success. This is because through network competence, firms are able to involve
others in their technological development process. They have identified four
antecedents which have positive significant impact on network competence which
are (1) access to resources, (2) network orientation of human resource
management, (3) integration of communication structure, and (4) openness of
corporate culture.
164
Chetty and Blankenburg-Holm (2000) highlighted the role of networks and
Born Global success in New Zealand by providing insights into the dynamic
capability view of how firms use business networks when they internationalize.
They have done research on four small to medium size manufacturing firms using
structured interview. Their finding reveals how the four firms in four different
ways internationalized by using networking as a bridge to internationalization
Marketing competencies
In order to be successful in foreign market, Born Globals must reduce their
direct competition with large and well established firms (Knight & Cavusgil,
2005). According to HartsIield et al. (2008), 'one way that born global can reduce
the direct competition is to oIIer the unique or niche product or services. These
firms strive to pursue marketing techniques to differentiate their products and
services (Porter, 1980). According to knight and cavusgil, (2004) differentiation
strategy tends to be function of marketing competencies.
Knight, Madsen & Servais (2004) conducted exploratory case studies and
used survey-based study for further validation of results on exemplar US and
Denmark Born Global firms across industries. Their findings reveal that marketing
competencies appear to be crucial to Born Global international performance.
Marketing competencies implies skillful handling of product adaptation and the
marketing planning process, control of marketing activities, prowess in
differentiating the product (knowledge development, R&D, innovativeness, and a
general emphasis on the product), as well as being highly effective in pricing,
advertising and distribution. The ability of firms to gather this information, manage
it and use it to implement marketing competencies was found key to the
international success of these Born Global firms.
165
McDougall et al. (2003) examined American Born Globals using sample of
214 IPO new ventures to differentiate the characteristics of Born Globals and firms
that focus on domestic market. They came to the conclusion that Born Globals are
characterized by having aggressive growth objective and by being first to enter
markets. They argue that Born Globals can be distinguished from firms that focus
on domestic market based on their entrepreneurial team experience, the global
integration of the industry, and emphasis more on strategic weapons such as
innovative differentiation, quality of service and marketing compared to traditional
firms. However, the international experience is not supported widely in Born
Global literature due to the aggressive nature of Born Globals towards expansion.
The more experience top management have, the more they will rely on proven
routines which lead to risk aversion and are less aggressive in acquiring new
knowledge towards new market development (Knight et al., 2004). Autio,
Sapienza & Almeida, (2000) stated that new knowledge that leads to new routines
tends to conIlict with management`s embedded mental models.
SMEs Exporters in Malaysia
Malaysia is located in Southeast Asia and is one of the developing countries
that assist Small and Medium enterprises (SMEs) to be aggressively involved in
exports. Malaysia generally has a combination of competitive advantages such as
multilingual workforce, first class physical infrastructure and political stability.
The proIile oI Malaysia`s export has been changed Irom a leading exporter oI
commodities in early 1960s to the exporter of wide range of high value added
products. This transformation is primarily supported by the New Economic Model
and 10
th
Malaysian Plan which SMEs are potentially the key contributors to the
success of these initiatives. SMEs sectors that are exporting Malaysian products
166
are the manufacturing, service and agriculture sectors with 57.6 %, 40.6 % and
1.8% respectively. According to the Bank Negara of Malaysia (see table 1.1), as of
2006, the total number of business establishments in Malaysia is 523,132 firms.
Out of this total, 518,996 firms are SMEs which represent 99.2 % of the total
business establishments in Malaysia. However, out of the total SMEs established
(518,996) only 4,257 SMEs in Malaysia, which is less than 1 % (more specifically
0.8 %) of total SMEs establishment, are actively exporting their goods and services
(Bank Negara Malaysia, 2006). Contribution oI SMEs` exports to overall export
value is 16.6 % (Bank Negara Malaysia, 2006). This statistics shows that MNEs in
Malaysia which constitutes only about 0.8 % of total business establishments
contribute 84.4 % of total export value in the country. Being a newly industrialized
country, Malaysia highly rely on Multinational Enterprises (MNEs) to export and
internationalize.

Table 1.1 : General Information on SMEs
Sector
Total
establishments
SMEs
establishments
Percentage
of SMEs
Structure
of SMEs
exporters
SMEs
export
value /
Percentage
Total
Value
of
Export
/ (bil)
Total
Value of
SMEs
Export
/(bil)
Manufacturing 39,219 37,866
96.6 %
57.6 % 85.7 % n.a.
RM
32.57
Service 451,516 449,004
99.4 %
40.6 % 13.9 % n.a.
RM
5.280
Agriculture 32,397 32,126
92.6 %
1.8 % 0.4 % n.a.
RM
0.150
Total 523,132 518,996
99.2 %
100% 100%
RM
229
RM 38
Source : SME performance annual report 2005 (Bank Negara Malaysia 2006).
167
Therefore, this chapter intends to address factors contributing early
internationalization of SMEs exporters in Malaysia. More specifically, the present
study attempts to contribute to the understanding of how SMEs exporters achieve
superior performance in early inception.
Contribution to early internationalization
Entrepreneur Orientation and early internationalization
Entrepreneur orientation consist of firms that implemented progressive and
innovative production process, undertook projects that are associated with risks,
actively observe and adopt the best practices in their sector. It actively observes
new practices developed in other sectors and exploit them in their own business
that is advantageous for the firm. The entrepreneur orientation behaviors of these
firms leads to recognize technological changes and have the flexibility to take on
sudden change in business opportunities due to less bureaucratic red tape within
the firm.
In uncertain decision making situations, it leads to bold (brave/daring)
actions to make sure that all possibilities are exploited and allocate the needed
resources continuously to new promising areas. All of these aspects are not only
important, but crucial to Malaysian SMEs to go for early internationalization and
achieve superior performance in the foreign marketplace.
Networking Capability and early internationalization
The performance of Malaysian Born Global firms are highly influenced by
the Iirm`s ability to overcome its limitations and constraints through the
identification and exploitation of the relationship with local bodies / government
agencies, key informants and international members. Besides that the relationship
168
with a) local bodies and government agencies (MATRADE, SME Corp, Chamber
of Commerce, Financial Institution such as EXIM Bank and SME Bank), b) key
informants ( Bankers, individuals who sit on the board of directors of other
companies, key members in trade associations and key member in government
policy committee) and c) international members (key customers in international
markets) are important in overcoming the constraints of firms to go for early
internationalization.
Marketing Competencies and early internationalization
To achieve superior export performance, it is necessary to adopt a marketing
driven approach in regards to any activities in foreign market. It has been shown
that product design, pricing and advertising is more important and have a higher
priority in achieving early internationalization. A firm that has the ability to gather
market information, manage it and utilise it to implement marketing competencies
is able to be succeed in foreign market and this is crucial for early
internationalization of Born Globals.
Conclusion and Practical implications
Due to the impact of globalization, the entrepreneurs, business owners and
top managers must concentrate on internal resources and capabilities of their firms
and intensify its network circles to boost its competencies. Furthermore to this,
ability to build relationship with government agencies, customers in foreign
market, key informants are considered as the drivers of early internationalization.
Therefore, it is recommended that Malaysian manufacturing and service sectors
should consider the development of network with government agencies specially
MATRADE and key foreign customers to gain proper knowledge in regards to the
foreign market which they would like to enter. This information and knowledge
can provide them proper strategy to implement pricing, distribution, promotion and
169
advertisement better than their competitors which gives them competitiveness in
foreign market and in turn gain superior performance.
Malaysian firms are advised to consistently monitor and evaluate their
marketing activities. After careful planning on the marketing activities, it is
important to monitor the customers` reaction towards it. Besides that, Iirms must
have the ability to segment and target specific market. Firms may be able to supply
to any country in the world, however, firms has to prioritize which industry
segment and market the firm can provide its product and service. From there, the
firm can fully utilize its resources to close the sale knowing that these prospective
customers can be future clienteles in the future.
Effective pricing and distribution should also be seriously considered by
firms who want to internationalize. Cheaper pricing does not automatically mean
more customers. Effective pricing is a better strategy where the product and service
is taken into account when planning the appropriate pricing. Also, firms can plan
on having 1-2 diIIerent price lists in accordance to the customer`s geographical
location. If the customer is in the Asian countries, then the pricing should be lower
because China is geographically nearer to Asian countries. If the customer is
located in the Middle East which is more concerned on quality than price, then the
pricing can be slightly higher. However, the ocean freight costs, local custom
charges in Malaysia, cargo insurance as well as the export country`s import duties
and custom taxes are needed to be taken into account prior to providing the price
list. When all considerations are taken into account, a more effective pricing can be
achieved.
Contribution to the policy makers in Malaysia is to further encourage small
firms to venture to foreign markets. The Malaysian government can promote the
industries that Born Globals are actively exporting in global markets. Therefore, it
170
is suggested that there should be more proactive ways to stimulate the rapid
internationalization of Malaysian firms to be Born Globals. Policy makers should
develop a more tailored export programmes and financial assistance schemes based
on the unique requirements of Born Globals. This is crucial since Born Globals are
in various industries and each has its own unique characteristics and challenges.
Since Born Globals are resource-poor, financial assistance will not only encourage
firms to go overseas, but it can also encourage for firms to take further risks in
going to foreign markets.
Currently, Born Globals are not able to apply for working capital, industrial
hire purchase or bank guarantees because banks such as EXIM bank and SME
bank (which both banks specializes in providing financial facilities for export
purposes and for SME firms) have rigid and strict rules in applying and require
extensive documentations such as auditing reports and tax forms for a minimum of
3 years. In this study, 80 firms internationalized in the first 2 years of inception and
30 firms internationalized between 2 to 3 years. For Born Globals that
internationalized within 3 years are automatically not eligible to apply for such
financial facilities with the banks, even with their consistent sales of products and
services to the foreign market. There is always a possibility that the firms may not
fully declare their pure revenue to reduce the tax payments, and because of low net
profit declared in the auditing reports, it may lead to a possible rejection of
financial facilities application from the banks. Policy makers need to have a certain
level of leniency and set unique guidelines that the banks can follow in the
approval of Born Global firms. These firms can provide the management accounts
and bank statements where the respective banks can determine in a case-by-case
basis whether these firms are sincerely eligible for the financial facilities in
accordance to their monthly turnover, assessment of the products and services in
terms of innovation and the background of the owner/higher management. The
171
approval of the financial facilities can initially be a minimal amount, and as
months progressed with the commitment of the Born Globals repaying its debt to
the banks, it solidifies the trust and builds a positive relationship between them. In
return, the amount of the financial facilities can be increased accordingly.
In regards to the marketing and promotion, currently MATRADE has grants for
going overseas. However, these grants are only available in the website and to the
firms who are current members of MATRADE who are informed time to time on
the latest updates. There are many small firms that did not register as MATRADE
members and are not able to access the current information available. MATRADE
can further promote its export promotions through Suruhanjaya Syarikat Malaysia
(SSM). SSM is the official government body that registers companies in Malaysia.
When new companies are incorporated, SSM can provide a brief overview on the
export assistance of local bodies/governmental agencies that is provided to small
firms. A one page flyer can be printed on the available assistance and further
details can be searched through MATRADE's official website.
Besides that, policy makers are advised to interview a few decision makers
(founder/manager) from various industries to look at ways of improving the export
promotion incentives, efficient government bureaucracy and other related
paperwork. As mentioned earlier, Born Globals may not have the necessary
documentations normally needed, but other documentations such as proof of sales
in a monthly basis to different countries, export documentations (such as customs
export documentations, certificate of origin from chamber of commerce and
shipping liner`s invoices), oIIicial letters stated that the Iirms have acquired
distributors in the foreign market to promote and distribute the products and
services there are some proof that Born Globals are aggressive in penetrating the
foreign markets. Further export promotions and expedited paperwork can
172
encourage current Born Globals and new firms to further explore the export market
in the fastest and most efficient manner.
Lastly, there is also a challenge that foreign government which want to protect
their own local markets by imposing certain restrictions on import permits and
incentives to foreign exporters. Malaysian government agencies can take a
proactive approach to have closer trade collaboration with other foreign
governments for import permit arrangements, focusing on initially regional
collaboration.
REFERENCES
Alvarez, S.A, Barney, J.B (2001). How entrepreneurial firms can benefit from
alliances with large partners. Academic of Management Executive,
15(1),139-148
Andersson, S. & Wictor, I. (2003). Innovative internationalization in new firms:
Born Globals the Swedish case. Journal of International Entrepreneurship,
1 (3), 249276.
Autio, E., Sapienza, H. J., & Almeida, J. G. (2000). Effects of age and entry,
knowledge intensity, and imitability on international growth. Academy of
Management Journal, 43 (5), 902 - 906.
Bank Negara Malaysia. (2006). SME Annual Report 2005: Optimizing Strategic
Values, National SME Development Council. Kuala Lumpur, Malaysia.
Chetty, S. K. (2003). Explosive international growth and problems of success
amongst small to medium-sized firms, International Small Business Journal,
21(1), 5-27.
Chetty, S. K., & Blankenburg Holm, D. (2000). The role of business networks in
the internationalisation of manufacturing firms: a longitudinal case study,
Advances in International Marketing, 205 222.
173
Chetty, S. K., & Stangl, L. M. (2009) Internationalization and Innovation in a
Network Relationship Context. European Journal of Marketing,44 (11/12),
1725-1743.
Di Gregorio, D., Musteen, M., & Thomas, D. (2008). International new ventures:
The cross border nexus of individuals and opportunities. Journal of World
Business, 43(2), 186196.
Dib, L. A., da Rocha, A., & da Silva, J. S. (2010). The internationalization process
of Brazilian software firms and the Born Global phenomenon:Examining
firm, network and entrepreneur variables. Journal of International
Entrepreneurship, 8, 233-253.
Freeman, S., Edwards, R., & Schroder, B. (2006). How smaller Born-Global firms
use networks and alliances to overcome constraints to rapid
internationalization. Journal of International Marketing, 14 (3), 33-63.
Gabrielsson, M. & Pelkonen, T. (2008). Born internationals:Market expansion and
business operation mode strategies in the digital media field. Journal of
International Entrepreneurship, 6, 49-71.
Hartsfield, S., Johansen, D., & Knight, G. (2008). Entrepreneurial Orientation,
Strategy, and Marketing Capabilities in the Performance of Born Global
Firms, International Business: Research, Teaching and Practice, 2(1): 12-
38.
Jantunen, A., Puumalainen, K., Saarenketo S & Kylheiko, K. (2005)
Entrepreneurial Orientation, Dynamic Capabilities and International
Performance. Journal of International Entrepreneurship, 3(3), 223-243.
Johanson, J., & Vahlne, J.-E. (1977). The internationalisation process of the firm: a
model of knowledge development and increasing foreign market
commitments. Journal of International Business Studies, 8 (1), 23-32.
174
Knight, G. A, Madsen, T. K. & Servais, P. (2004). An inquiry into born-global
firms in Europe and the USA. International Marketing Review, 21 (6), 645
665
Knight, G. A., & Cavusgil, S. T. (1996). The Born Global firm: A challenge to
traditional internationalization theory. Advances in International Marketing,
8, 11-26.
Knight, G. A., & Cavusgil, S. T. (2004). Innovation, Organizational Capabilities,
and the Born-Global Firm. Journal of International Business studies, 35 (2),
124-141.
Knight, G. A., & Cavusgil, S. T. (2005). A taxonomy of Born-Global firms.
Management International Review, 45(3), 1535.
Knight, G. A., & Cavusgil, S. T. (2009). Born Global Firms A new International
enterprise. International Business Collection, Business expert press, USA.
Laanti, R., Gabrielsson, M., & Gabrielsson, P. (2007). The globalization strategies
of business-to-business Born Global firms in the technology industry.
Industrial Marketing Management, 36, 1104-1117.
Loane, S. & Bell, J. (2006). Rapid internationalization among entrepreneurial firms
in Australia, Canada, Ireland and New Zealand: an extension to the network
approach. International Marketing Review, 23(5), 467-85.
Madsen, T. K., & Servais, P. (1997). The Internationalization of Born Globals: an
Evolutionary Process? International Business Review, 6 (6), 561-583.
McDougall, P., Oviatt, B., & Shrader, R. (2003). A comparison of international
and domestic new ventures, Journal of International Entrepreneurship, 1, 59-
82.
McDougall, P., Shane, S., & Oviatt, B. (1994). Explaining the formation of
international new ventures: the limits of theories from international business
research. Journal of Business Venturing, 9(6), 469487.
175
McKinsey & Co. (1993). Emerging exporters: Australia`s high value-added
manufacturing exporters. Melbourne: McKinsey & Co., Australian
Manufacturing Council.
Moen, O. (2002). The Born Globals: A new generation of small European
exporters. International Marketing Review, 19(2), 156175.
Moen, O., Gaulen, M & Endresen, I. (2004). Internationalization of small
computer software firms and market selection, European Journal of
Marketing, 38 (9/10), 1236-1251.
Mort S. G., & Weerawardena, J. (2006). Networking capability and international
entrepreneurship: How networks function in Australian born global
firms.International Marketing Review,23(5),549-572.
Oviatt, B. M., & McDougall, P. P. (2005). Defining International Entrepreneurship
and Modeling the Speed of Internationalization, Entrepreneurship Theory &
Practice 29, 537-553.
Oviatt, B.M., & McDougall, P.P. (1994). Toward a theory of international new
ventures. Journalof International Business Studies, 25(1), 45-64.
Porter, M.E. (1980), 'Competitive Strategy: Techniques Ior Analyzing Industries
and Competitors, New York:The Free Press.
Rennie, M. W. (1993). Global competitiveness: Born Global. McKinsey Quarterly,
4, 45-52.
Ritter T. & Gemunden, H. G. (2003). Network competence: its impact on
innovation success and its antecedents. Journal of Business Research, 56 (9),
745-55.
Weerawardena, J., Mort, G., Liesch, P., & Knight, G. (2007). Conceptualizing
accelerated internationalization in the born global firm: A dynamic
capabilities perspective. Journal of World Business, 42(3), 294303.
176
Zahra, S. A., Ireland, R. D., & Hitt, M. A. (2000). International expansion by new
venture firms: International diversity, mode of market entry, technological
learning and performance. Academy of Management Journal, 43(5), 925-
950.
Zhang, M., Tansuhaj, P., McCullough, J. (2009). International entrepreneurial
capability: The measurement and a comparison between Born Global firms
and traditional exporters in China. Journal Of Entrepreneurship, 7, 292-322.
Zhou, L. (2007). The effects of entrepreneurial proclivity and foreign market
knowledge on early internationalization. Journal of World Business, 42(3),
281293.

Buy your books fast and straightforward online - at one of worlds
fastest growing online book stores! Environmentally sound due to
Print-on-Demand technologies.
Buy your books online at
www.get-morebooks.com
Kaufen Sie Ihre Bcher schnell und unkompliziert online auf einer
der am schnellsten wachsenden Buchhandelsplattformen weltweit!
Dank Print-On-Demand umwelt- und ressourcenschonend produzi-
ert.
Bcher schneller online kaufen
www.morebooks.de
VDM Verlagsservicegesellschaft mbH
Heinrich-Bcking-Str. 6-8 Telefon: +49 681 3720 174 info@vdm-vsg.de
D - 66121 Saarbrcken Telefax: +49 681 3720 1749 www.vdm-vsg.de