Background of small and medium enterprises in Malaysia

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This chapter explains briefly the general essence of the current research. It highlights the background of the research and subsequently the underlying problem of the research. The research questions and research objectives are also presented, and the expected contribution both to the body of knowledge is highlighted. Finally, the scope of the study, the operational definition of key terms and variables used in the current research, and organisation of the report is detailed at the end of this chapter.

Background of the Research

Small and Medium Enterprises (SMEs) in Malaysia is defined into two main categories of manufacturing, manufacturing related services and agro-based industries, and the services, primary agriculture and Information and Communications Technology (ICT) (SME Annual Report 2009/10). The first is business with less than 150 full time employees or with annual sales turnover not exceeding RM 25 million, and the latter are enterprises with less than 50 employees or with annual sales turnover not exceeding RM 5 million.

According to National SME Development Council (2010), there has been a change in SME growth trends since 2004. For six years from 2004 until 2009, value added growth of SMEs has consistently outperformed that of the overall economy, averaging at an annual rate of 6.3% compared to 4.5% for the overall GDP growth. This is not viewed as a coincidence, however, an outcome of definitive policy initiatives by the Government, particularly the setting up of the National SME Development Council (NSDC) in 2004 which led to better coordinated efforts among the various Ministries and Agencies in pursuing a common objective. It is also reaffirmed by performance during the recent economic downturn, it must also be noted that Malaysian SMEs are generally more resilient than larger corporations. Due to their size and flexible structures, SMEs are agile and able to adjust to changes in market conditions more efficiently than large enterprises. During economic shocks, SMEs are stabilisers of growth.

The positive results in the last few years are a testimony that the SMEs is heading in the right direction. It is expected that domestic SMEs would fully recover in 2010 and their value added growth is projected to expand by 8.0 to 8.5%. However, we cannot rest on our laurels, as the contribution of SMEs to the economy is still under-represented when compared with more developed economies. Going forward, a differentiated approach has to be taken to accelerate efforts to move SMEs to a higher growth trajectory and to provide the impetus for growth led by the private sector. SMEs would not only be providing the foundation and linkages in the supply chain network, but would also become a crucial driver of growth under the New Economic Model.

However, Ting (2004) highlighted that many challenges are still facing Malaysian SMEs, and the five key challenges are lack of access to finance, human resource constraints, limited or inability to adopt technology, lack of information on potential markets and customers and global competition. Ting (2004) also pointed the high risk that SMEs will be wiped out if they do not increase their competitiveness in the new, rapidly changing world of globalisation.

In a research by Saleh and Ndubisi (2006) to determine the competitiveness issues faced by SMEs in selected 12 Asian countries, the study was based on more than 1,200 decision makers from Asian SMEs during 2004 in several countries (for example, Australia, China, India, Malaysia, among other Asian countries). The respondents were from a different range of industries, for example, automotives, garments and textiles, gifts and housewares, among others. One of the interesting findings of this study was that 73 per cent of the respondents considered Chinese SMEs to be more competitive than the SMEs in their own countries. The survey reported that the Philippines and Indonesian SMEs were ranked as the least competitive, while Malaysian SMEs came in tenth, and were considered competitive by 27 per cent of respondents.

Moving forward, the watershed to Malaysia's long-term policy agenda is the New Economic Model (NEM) that was released in 2010. The NEM is part of a comprehensive framework comprising the four pillars to drive the national transformation programme which entails economic, social and political changes to achieve a developed status nation by 2020. The vision is to transform the economy to become a high income nation with quality growth over the next decade. The three key principles of the Model are high income, inclusiveness and sustainability to ensure that the economic progress is all inclusive and encompassing and at the same time environmentally sustainable. A high income nation would mean higher wages derived not only via capital but more importantly through productivity enhancement by utilising on innovation, high skilled labour, improved coordination, stronger branding and international compliance and usage of Intellectual Property Rights. Policies would be formulated and implemented through public-private partnership. While growth would be essentially private-sector led, the Government would play the facilitator role and enabler of wealth creation that promotes competition and market efficiency.

As of today, the bulk of SMEs are made of micro enterprises that represent a major share of the bottom 40% of income earners in Malaysia. The interest of this group is at the heart of the New Economic Model towards achieving the vision of a more inclusive, sustainable and balanced growth. The Government is committed to continue providing a comprehensive range of assistance to develop and enhance the contribution of micro enterprises to the economy. At the same time, the more established and innovative SMEs will be supported to help realise their full potential and to integrate with the global markets. These would ultimately contribute towards achieving a high income developed nation status by 2020.

Under these circumstances, training and experience in managing a SME, and the role of management accounting information, both have an important part to play with respect to monitoring and control of the activities of SMEs (Nandan, 2010). Nandan (2010) also argued that like large firms, SMEs' also require adequate and also sophisticated management accounting techniques and systems to better manage scarce resources and enhance customer and owner/manager values. In spite of the economic and social importance of SMEs, provision for management accounting information and management accounting research initiatives in SMEs have both been considerably lacking (Marriott and Marriott, 2000; Mitchell and Reid, 2000).

Though SMEs are important segment in the Malaysian economy, Sabah only recorded a total of 24,794 SMEs as of 2010. Sabah took the 10th position in terms of the number of SME companies from the list of the 14 states, considering Sabah's total population of 3.14 million and as the second largest state covering 73,997 sq km, in fact, Sabah can generate a larger number of SMEs (Bernama, 2011).

Thus, it is pertinent for this research to critically examine into the usage of management accounting information (MAI) in SMEs in the light that such understanding may subsequently lead to more well-manage SMEs and hence, stimulate entry and participation into this segment of the economy. Specifically, this study focuses on the extent of MAI in planning, decision making and control amongst SME s in Sabah, and subsequent to that, the relationship between the usage and business performance.

Problem Statement

In the wake of the above issues, this research acknowledged that management accounting information is important to the performance of an organisation. management accounting literature has long found a positive association between the effective design of management accounting information system and organisational performance (e.g. Hoque & James, 2000; Scott & Tiessen, 1999).

Munther Barakat Al-nimer (2009)

There are a limited number of studies focusing on MAPs in developing countries, (Adelegan,

2000; Sulaiman et al, 2004; Ismail, 2007; Triest, Elshahat, 2007; Kattan, et al., 2007 and

Billings, Capie, 2004), in addition, many studies indicated that there is a lack of studies

which examine the MAPs within the financial sector as most of the studies investigate the

MAPs within the industrial or manufacturing sector, furthermore many researchers indicated

to the need for examining management accounting within the financial and services sector,

(Adelegan, 2000; Sulaiman, Ahmad et al., 2004, Wu and Drury, 2007; Davila and Wouters,

2006 ; Billings, Capie, 2004;Garg, et al., 2003 and Gutierrez, et al., 2005).

Research Questions

Based on the problem statements presented above, the study attempts to answer the following research questions:

1. What is the extent of usage of the elements of MAI amongst SMEs in Sabah?

2. What is the relationship between SMEs' extent of MAI usage and business performance?

Research Objectives

Hence, in order to answer the research questions identified by the current research, the following research objectives are determined:

1. To investigate the extent of usage of MAI amongst SMEs in Sabah.

2. To examine if SMEs' extent of

Significance of Study

In Sabah, there has yet to be a research paper that investigated MAI in the SMEs

This study aims to contribute to the body of knowledge in the field of management accounting from both theoretical and practical perspective. The following sub-sections present possible contributions expected from this research.

Theoretical Contribution

The current research attempts to fill in the gap in management accounting literature

Finally, the findings of this research may enlighten on the state of management accounting information usage in SMEs of developing countries, thus, provide a contribution to management accounting usage in general.

Practical Contribution

Consequent to the problem statement presented, the current research attempts to fill the gap in management accounting

Scope of Study

This research focused on the Small and Medium Enterprises (SMEs) throughout Sabah. Population of the study is obtained from the Malaysia SME Business Directory 2009/2010. Meanwhile, the scope in literature review of this study focused extensively on two key areas which are business performance and usage of management accounting information and contingency theory that explains the relationship between business performance and management accounting usage.

Operational Definitions of Key Variables in this Study

Extent of Usage

The 'extent of usage' refers to the level of SMEs use

Business Performance

Management Accounting Information


Decision Making


Small and Medium Enterprises

1.6 Organisation of the Report

The report is organized into five chapters, namely; the Introduction, Literature Review, Research Methodology, Analysis of Findings and Discussion and Conclusion respectively.

Chapter 1, the Introduction, provides the background of the Small and Medium Enterprises (SMEs) in Malaysia. It subsequently derives the Problem Statement, Research Objectives, Scope of Study, Significance of Study, Definitions of Terms and Key Variables in this study and Organisation of Study.

Chapter 2, the Literature Review examines on the business's usage of Management Accounting Information and their performance in the SMEs as previously recorded by academicians and their findings. The dependent and independent variables used in this research were derived from the literature reviews and the relationship between these variables would be further discussed in this Chapter.

Chapter 3, the Research Methodology, outlines the Research Framework, Hypotheses, the Underlying Theory to the Research methods and questionnaires used to conduct the research survey.

Chapter 4, the Results of the Study, analyzes findings from the survey undertaken and finally, the study is concluded with Chapter 5, Discussion and Conclusion.

Chapter 2


2.0 Introduction

This chapter reviews relevant literature on the relationships between usage of Management Accounting information and business performance. The aim of this chapter is

2.1 Conceptualization of Management Accounting Information

Provide a brief history of the empirical research on the subject.

How the variable have been defined previously by other researchers

Pioneering studies and seminal works.

Thrust of prior research on the subject, i.e. which issues have received attention?

Theories explored and viewpoints expressed.

Details about populations and samples.

Research methods typically used.

Previous study by Alattar et. Al. (2008)

Management accounting is …..

Table 2.1: Management Accounting Information Usage and its core elements


Definition and concepts

Core Elements

Main Characteristics


Figure 2.1 shows the model of Management Accounting Information usage

Previous literature focused on the…..

According to ……, there were significant difference in business performance of SMEs that heavily uses MAI and

2.2 Management Accounting Information

- definition

elements- planning




A. Bhimani / Accounting, Organisations and Society 28 (2003) 523-548

Whilst there is evidence to suggest that the perceived

implementation success of a new MAS is

in¬‚uenced by whether its information output is

considered easy to use, accurate and timely,

investigations of organisational culture and control

practices indicate that successful information

Uyar (2010) The importance of cost and management accounting practices has increased more than ever. The reasons for this are the domestic and global competition getting severer by globalization, decreasing profit margins, increasing input prices due the tightening energy sources, economic crises etc. Therefore, companies operating in developing countries have also begun to implement cost and management accounting practices which were first adopted by companies operating in developed countries. Parallel to these developments, research studies which have

been conducted initially in developed countries are followed by the studies conducted in developing countries.

2.3 Usage of Management Accounting Information

why is mai so important

benefits/ advantage

how important (A)

Jalal M. Alattar

Mohamad Military College, Doha, Qatar

Reza Kouhy

Accounting and Finance, Glasgow Caledonian University,

Glasgow, UK, and

John Innes

and Finance, University of Dundee, Dundee, UK

Mitchell and Reid (2000, p. 386) have argued that:

[...] researching management accounting in the smaller ¬rm has not been fashionable but

[...] we can learn a great deal about the fundamentals of management accounting

development from these ¬rms.

Lybaert (1998) found a positive

relationship between the extent of information usage and the performance of small


Andreas I. Nicolaou (2000)

Nicolaou (2000) in citing the work of Prakash and Rappaport (1975)

defined the elements of the firm in five interacting processes: planning process,

decision-making process, implementation through observation process, data structuring process, and performance evaluation process.

Meanwhile, Nicolaou (2000)

The role of accounting information

is to tie those elements in a common


structure. The need to minimize redundancies,

promote increased consistency among data


used in different functional areas within the


enhance data organisation, and promote

a cross-functional view within the organisation


and Eining, 1993), can create coordination requirements

for the sharing of scarce resources


and Fisher, 1990) as well as control


for the centralized monitoring of decisions

and actions (Simons, 1987)

2.3.1 Planning

2.3.2 Decision Making

Accounting information,

in general, has been categorized into two primary

types: (a) decision-influencing information that


mainly used for organisational control and (b) decision-facilitating

information that is mainly used for


coordination (Demski and Feltham,


Kren, 1992).

2.3.3 Control

Randall and Horsman (1998)

suggested that score keeping in small enterprises was performed as a result of the data

processing and reporting in the ¬nancial accounting function of the business. In

contrast to score keeping information, Randall and Horsman (1998) argued that

attention directing and problem solving categories of information were most likely to

be absent in small enterprises.

2.4 Business Performance

What is business?

What is business performance?

Measure of business performance

Monitoring of business performance

Factors influencing business performance

How to improve business performance (B)

Table 2.4: Definition and measurement of business performance according to previous authors


Definition and concepts

Core Elements

Main Characteristics

2.5 Summary

Summarize what has been written about in the chapter.

Chapter 3


3.0 Introduction

This chapter introduces the research framework, research hypotheses, research design, unit of analysis, sampling design, instrument design, data collection and data analysis method used in this study. Research framework outlines the conceptual framework in this study and introduces the independent and dependent variables. The research hypotheses show the list of hypotheses of this study. The research design section points out the method of carrying out this research and also justifies the reason these methods are being used while the unit of analysis section explains the measurement units respectively. Meanwhile, in sampling design, location of study and population, sampling technique and sampling size are discussed. This is then followed by instrument design section which elaborates on the formation of the questionnaire. The data collection method section introduces the methods applied for the survey distribution and recovery while data analysis method section provides a brief explanation on statistical tests to be conducted.

3.1 Research Framework

The Research Framework is the foundation of this research. The Literature Review in Chapter 2 collects the sources of academicians that characterized the usage of MAI which influences business performance.

3.1.1 Theoretical Framework

The theoretical framework consolidates the determinants into a conceptual model which will be tested in order to understand the relationship between MAI usage and its influence on business performance in SME in Sabah.

Figure 3.1: Theoretical Research Framework: Management Accounting Information usage and its relationship on business performance



Management Accounting Information Usage


Decision Making



Figure 3.1 shows the theoretical research framework used in this study. The definition of variables is explained in the subsequent sections.

3.1.2 Dependent Variable

The main purpose of this study is to determine the relationship between Management Accounting Information usage among executives and business owners toward business performance in SMEs in Sabah. Thus, the dependent variable is:

Business Performance which ……………………………. (Author, year)

3.1.3 Independent Variables

The independent variable in this study us the usage of Management Accounting Information, which has three (3) independent variables, namely:

Planning which is …………………………………………………..(Author, year)

Decision Making…………………………………………………..(Author, year)

Control…………………………………………………..(Author, year)

3.1.4 The Underlying Theory- Contingency Theory

Otley (1980), "the contingency approach to management accounting is based on the premise that

there is no universally appropriate accounting system which applies equally to all

organisations in all circumstances. Rather, it is suggested that particular features of an

appropriate accounting system will depend upon the specific circumstances in which an

organisation finds itself".

Andreas I. Nicolaou (2000)

A contingency model is advanced that examines sources of requirements for organisational coordination and

control as they affect the extent of integration in an accounting information system. Requirements that are contingent

on the degree of organisational formalization, information interdependence among functional areas, and dependence

in interorganisational information sharing and electronic data interchange links, are examined. The congruence

or fit of system integration with those requirements is a key concept that influences beliefs about system


Results of the empirical study indicated that, as hypothesized, the fit between the accounting system

design and the contingency factors resulted in a more successful system.

Table 3.1.4 Previous Contingency-based researches


Contextual Variables

Management Accounting System

Khandawalla (1972)


Usage of Control

Gordon & Narayanan (1984)

Perceived Environmental Uncertainty

MAS information characteristics

Chenhall & Morris (1986)

1. Perceived Environmental Uncertainty;

2. Interdependency;

3. Structure

MAS design

Mia & Clarke (1999)

Market competition

Use of MAS information

Nicolaou (2000)

Organisational Coordination and Control Requirements:

1. Internal Organisational Structure;

2. Internal Organisational Context;

3. Interorganisational Context

MAS design

Reid & Smith (2003)

1. Strategy;

2. Technology;

3. Organisational structure;

4. Management style

MAS design and use

Hoque (2004)

1. Strategic Priorities;

2. Environmental uncertainty

Performance Measure

Rozita (2004)

Match between manufacturing strategy and performance management system

Company Performance

Sudarno (2007)

Match between Perceived Environmental and Centralisation

MAS design

Alrawi & Thomas (2007)

This study examined the relationship between the

degree of fit between organisational requirements for

coordination and control with the design of an AIS

and perceptions of effectiveness about the system.

Contingency theory served as the basis for the development

of the hypothesis in the study. The results of

3.2 Research Hypothesis

The model based on research framework (refer to figure 3.1), the model illustrates significant relationship to business performance. The following hypotheses are developed for the purpose of this study.

H1: There is significant relationship between Management Accounting Information usage in planning and business performance of SMEs in Sabah, Malaysia

H2: There is significant relationship between Management Accounting Information usage in decision making and business performance of SMEs in Sabah, Malaysia

H3: There is significant relationship between Management Accounting Information usage in control and business performance of SMEs in Sabah, Malaysia

3.3 Sampling Design

The population of the study was executives, managers and business owners of SMEs business entities in Sabah. It is recognised that the degree of MAI usage would varies due to the different industries the respondents are, as shown in Table 3.5.1. Therefore, the sampling design is targeted to focus on a target group of respondents and establish the most effective methods to conduct this research. Thus, sampling design would address the location of study and population, sampling technique, and sampling size determined.

3.3.1 Location of Study and Population

The study focused mainly on executives and business owners in SMEs in Sabah, Malaysia. Based on the Malaysia SME Business Directory 2009/2010 published in 2010, total SMEs in Sabah were, 346 business entities. The SMEs are then categorised in the industries as follows:

Table 3.3.1 Total SMEs in Sabah According to Industries as of 2009











Beauty and Cosmetics



Building and Constructions









Electrical and Electronics



Food and Beverages









Industrial Equipment






Machinery & Engineering



Management Advisory and Consultancy












Medical and Healthcare






Office Products and Services



Oil and Gas












Retail and Wholesale






Security and Safety



Textile and Apparel











TOTAL SMEs in Sabah


Source: Malaysia SME Business Directory 2009/2010, 2010

The reason the SMEs business entities in Sabah is chosen because SMEs make up to 99.2 percent of business in Malaysia; contributing 32 percent of the country's gross domestic product; 36 percent to employment ; and 19 percent to the country's total exports. With these reasons, it is fair to conclude that SMEs have key role to play in ensuring Malaysia continues to stay resilient in the present trying economic environment.

3.3.2 Sampling Technique

From the total population of 346, probability sampling was used, specifically simple random sampling. Simple random sampling is a form of probability sampling whereby all elements in the population are considered and each element has a known and equal chance of being chosen as the subject (Sekaran and Bougie, 2010).

According to Sekaran and Bougie (2010), the unrestricted probability sampling or simple random sampling has the least bias and has offers the most generalizability of the results, though this sampling process could be troublesome and expensive as an entirely updated listing of the population would not be available.

3.3.3 Sampling Size

In order to derive the sample size for this research, the formula in Figure 3.4.3, by Krejcie and Morgan (1970) from the works of Chua (2006) is adopted.

Figure 3.4.3: Krejcie and Morgan (1970) formula to determine sampling size




required sample size



the population size



population proportion (assumed to 0.50 since this would provide the maximum sample size)



the degree of accuracy expressed as a proportion (0.05)



the table value of chi-square for one degree of freedom at the desired confidence level, which was 3.841 for the 95% confidence level

Source: Chua (2006)

Based on Figure 3.4.3 by Krejcie and Morgan (1970) as derived from the study by Chua (2006), in order to obtain a 95% confidence level for a population of 346 SMEs entities, it is estimated that the sample size has to be at 182 numbers in order to be optimally representative. In order to measure the representatives of the population based on the short time frame given, simple random sampling technique was used as the generalizability of the findings to the whole population was the main objective of the study.

From the surveys conducted via mail and online questionnaire, conducted between the first week of May 2011 to the end of May 2011, xxx complete questionnaires were collected. Detail of the collection period and also response rate was recorded in Appendix xx. The sample size of xxx respondents obtained were significantly representative, that is, approximately xx percent over the 346 population size.

3.4 Instrument Design

The instrument used for this study is quantitative method of data collection. A questionnaire survey is used to collect and gather valuable data for evaluation from questionnaires. The questionnaires were designed via adoption from models of past studies in the same context while slight modifications of the questions were made to suit the research framework of this study.

Questionnaires were distributed both via

then developed online via and the participants for this research were notified through email invitations which are imbedded with the survey website URL. The invitation were sent to the targeted sample group via the email addresses obtained from the Malaysia SME Business Directory in which participants for the research were able to participate in the survey just by clicking on the URL imbedded in the email which directed the participant to the survey website at that contained the research questionnaires.

3.5 Unit of Analysis

The Unit of analysis in this study were individuals within organisation of business enterprises. The study focused on individuals employed as executives and above, or business owners in SMEs. The reason this group of individuals are chosen is because they are frequent users of Management Accounting Information for planning, decision making and control that ultimately influence the business performance.

3.6 Instrument Design

The target of this research is to gather valuable data for evaluation from questionnaires. The questionnaires were designed via adoption from models of past studies in the same context while slight modifications of the questions were made to suit the research framework of this study.

3.6.1 Questionnaire

Questionnaires were adopted and modified to suit the research that measured the existence of Management Accounting Information usage in planning, decision making and control using questions from the work of xxxx (year) found in the works of xxxx (year).

The questionnaires applied scaled questions which used a 6 point Likert scale to allow quantifiable analysis. The reason for not switching it to a 5 point Likert scale is because the 6 point Likert scale is used to have respondents commit to either the positive or negative end of the scale. It is disagreed that respondents should be given a neutral answer choice (xxxx, year).

3.6.2 Control Measures

The most questionable aspect of web-based survey data is whether a representative sample of the target population will have the opportunity to respond and also problems with double entry of data.

In order to ensure that the respondents of the questionnaires fit the intended population of study, the link to the survey was only emailed to list of names given in the Malaysia SME Business Directory.

3.7 Data Collection Method

The data for this study was obtained from the SMEs of various industries in Sabah, Malaysia, the respondents are mostly executive level and above and business owners. A total of 346 questionnaires have been sent out by email to the respective respondents.

3.8 Data Analysis Method

Data collected through the questionnaire were analyzed using the Statistical Package for Social Science (SPSS) software, version 17 for Windows. Following are the tests that were conducted:

1. Descriptive Analysis - Prior to performing in depth analysis of the study, a descriptive analysis of the respondents was performed for better understanding on the profile of the respondents.

2. Frequency Test - To test the goodness and correctness of the data, the mean and standard deviation for all the variables were computed to show the central tendency of the responses.

3. Normality Test - to test the normality of the data of each variable graphically using histogram, boxplot and supported with the variable's skewness and kurtosis.

4. Reliability Test - To determine degree of consistency (homogeneous) in the results of the measuring instrument supplies, the average correlation or covariance of the items were determined for all scaled questions based on the Cronbach‟s Alpha coefficients.

3.9 Summary

Based on the literature reviewed, research framework and hypotheses were derived from the theories and previous research findings. The questionnaire developed was adopted from proven models of previous researchers and modified to suit the research framework in this study. Online surveys is then carried out via e-mails and the feedback from respondents is analyzed with the SPSS software to determine the relationship between Management Accounting Information usage and business performance. The analysis of the findings is discussed in Chapter 4.