FACTORS AFFECTING BUSINESS SUCCESS AMONG SMES:

EMPIRICAL EVIDENCES FROM INDONESIA1

Nurul Indarti
Small and Medium Enterprises Development Center (SMEDC),
Gadjah Mada University, Yogyakarta, Indonesia
E-mail: nurulindarti@ugm.ac.id

Marja Langenberg
Langenberg Advies bv, Den Haag,The Netherlands
CICAT, Delft University of Technology, The Netherlands
E-mail: info@langenbergadvies.nl

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 Factors affecting business success among SMEs:
Empirical evidences from Indonesia

Abstract
In Indonesia, despite the fact that some SMEs have been declining or stagnant, some
others have been successful and growing. What factors affect business success among SMEs?
The recent study aims to answer this main question. Based on survey to 100 SMEs, the study
discloses that marketing, technology and capital access affect the business success in a
positive way significantly, while legality does it in a negative direction. Altogether,
independent variables explain 38.6% of the total variances. These findings suggest that to be
successful SMEs, the owners of the SMEs should pay more attention to improve marketing
strategy, to advance technology, and to get capital access. Other interested parties with
development of SMEs such as government agencies, universities, and business service
development (BDS) should also be prepared for giving assistances in those fields. Why does
legality have a negative effect on business success? The speculative explanation may be
complicated bureaucracy and legal aspect that takes too many resources of the SMEs to deal
with. Simplification of bureaucracy and deregulation of legal aspects are also recommended
to foster the development of the SMEs in Indonesian context.

Keywords: SME, business success, success factor, Indonesia.

1. Introduction
Small- and medium-sized enterprises (SMEs) have long been believed to be important
in supporting economics development within a country (e.g. Akhtar; CDASED, 1999;
Mazzarol, Volery, Doss, & Thein, 1999). One of the important roles of SMEs in this context
includes poverty alleviation through job creation. For instance, in the Netherlands, SMEs
account 98.8% of all private sector companies, contribute 31.6% to Gross Domestic Product
(GDP), and employ 55% of total workforce (EIM Business & Policy Research, 1999). In
Italy, SMEs contribute to USD35 million in exports and absorb 2.2 million of national labors
(Patrianila, 2003). Thai SMEs are increasingly seen as creator of new jobs (Swierczek & Ha,
2003) and Vietnamese SMEs employ 64% of industrial workforce. According to Indonesian
statistics, in 2003, the number of Indonesian SMEs was 42.4 millions and they contribute to
56.7% of GDP, account 19,4% of total export, and employ 79 millions of work force (BPS &
KUKM, 2003). Therefore, in ensuring the economic growth of a country, more attention
should be paid into SMEs development.
Increasing business competition, in particular against large and modern competitors,
put SMEs in a vulnerable position. In Indonesia, most SMEs operate along traditional lines in
production and marketing. It has been argued that the main problem for SMEs in developing
countries is not their small size but their isolation, which hinders access to markets, as well as
to information, finance and institutional support (Mead & Liedholm, 1998; Swierczek & Ha,
2003). Lack of capital, lack of skills, and problems in business development are of problems
faced by Indonesian SMEs (Kementerian KUKM & BPS, 2004). This is also the case for
Vietnamese SMEs. Internal limitation, including capital shortage, old equipment and
outdated technology have hindered the development of SMEs (Swierczek & Ha, 2003). In
Indonesia, despite the fact that some SMEs have been declined or stagnant, some others have
been growing and successful. What factors affect business success among SMEs? The recent
study aims to answer this main question.
The rest of the paper is organized into six sections. The theoretical framework is
presented in section two, followed by description of study methodology in section three. The
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results of survey are expounded in section four and the followed by the discussion in
subsequent section. The general conclusions and policy recommendations bring the paper to
an end.

2. Theoretical Framework
Storey (1994) identified key components to be important in analyzing the growth of
SMEs: the characteristics of the entrepreneurs; the characteristics of the SMEs; and the type
of strategy associated with growth. Instead of the last component, we explore contextual
elements of SME development. The theoretical framework is developed in line with these
adjusted three components as depicted in Figure 1. Justification for each variable included in
the model is explained in subsequent section.

Characteristics of entrepreneur
- Age
- Gender
- Work experience
- Education

Characteristics of SME
- Origin of enterprise Business success
- Length time in operation
- Size of enterprise
- Capital source

Contextual variables
- Marketing
- Technology
- Information access
- Entrepreneurial readiness
- Social network
- Legality
- Capital access
- Government support
- Business plan

Figure 1. Research model

2.1 Characteristics of the entrepreneur

Several previous studies found that demographic characteristics, such age and gender,
and individual background, such as education and former work experience, had an impact on
entrepreneurial intention and endeavour (e.g. Kolvereid, 1996; Mazzarol et al., 1999).

Age. Reynolds et al. (2000) found that individuals aged 25-44 years were the most
entrepreneurially active. Finding from another study in India by Sinha (1996) disclosed that
successful entrepreneur were relatively younger in age. In their study on Internet café
entrepreneurs in Indonesia, Kristiansen, Furuholt, & Wahid (2003) found a significant
correlation between age of the entrepreneur and business success. The older (>25 years old)
entrepreneurs were more successful than the younger ones.
Gender. Mazzarol et al. (1999) found that female were generally less likely to be
founders of new business than male. Similarly, Kolvereid (1996) found that males had
significantly higher entrepreneurial intentions than females.

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 Work experience. Kolvereid (1996) found that individuals with prior entrepreneurial
experience had significantly higher entrepreneurial intentions than those without such
experience. Conversely, Mazzarol, et al. (1999) found that respondents with previous
government employment experience were less likely to be successful founders of small-
businesses. But, they did not investigate the relationship between previous employment
experience in private companies and entrepreneurial intentions.
Education. A research by Charney and Libecap (2000) found that entrepreneurship
education produces self-sufficient enterprising individuals. Furthermore, they found that
entrepreneurship education increases the formation of new ventures, the likelihood of self-
employment, the likelihood of developing new products, and the likelihood of self-employed
graduates owning a high-technology business. Also, the study revealed that entrepreneurship
education of employee increases the sales growth rates of emerging firms and graduates’
assets. Similarly, Sinha (1996) who analysed the educational background of the entrepreneur
revealed that 72% of the successful entrepreneurs who had a minimum of technical
qualification, whereas most (67%) of the unsuccessful entrepreneurs did not have any
technical background. She summed up that entrepreneurs with business and technical
educational background are in a better position to appreciate and analyse hard reality and deal
with it intuitively, which seems to play a critical role in entrepreneurial effectiveness.

2.2 Characteristics of the SMEs

Origin of enterprise. According to Smallbone, Leig, and North (1995), in small firms,
where ownership and management were typically combined in one or more individuals,
future goals for the business might be determined as much by personal lifestyle and family
factors as by commercial considerations. Further, they concluded that one characteristic
which did distinguish the best performing firms from other firms in the study was their
commitment to growth. Also, they found another characteristic that did distinguish high
growth firms from others was their propensity to acquire other businesses.
Length time in operation. Length time in operation may be associated learning curve.
Old players most probably have learned much from their experiences than have done by new
comers. Kristiansen, Furuholt, & Wahid (2003) found that length time in operation was
significantly linked to business success.
Size of enterprise. Size of enterprise reflects how large an enterprise in employment
terms. McMahon (2001) found that enterprise size significantly linked to better business
performance. Larger enterprises were found to have a higher level of success.
Capital source. In a study in Australia, McMahon (2001) discovered that greater
dependence upon external finance associated with better business growth. In a more recent
study, in Indonesia, Kristiansen, Furuholt, & Wahid (2003) found that financial flexibility
was significantly correlated to business success. The SMEs that took advantage of family and
third-party investment experienced higher level of success.

2.3 Contextual variables

Marketing. In Indonesia, most SMEs operate along traditional lines in marketing.
Stiffer competition in the market should be responded proactively by SMEs by doing market
development. Access to market was of problems faced by SMEs (Mead & Liedholm, 1998;
Swierczek & Ha, 2003). Market development is, therefore, crucial for preserving high growth
in the business. Smallbone, Leig, and North (1995) in their study in UK found that the vast
majority of the high growth SMEs had identified and responded to new market opportunities.
New market opportunities included findings new products or services to offer existing
customers and obtaining new customers for existing product or services. In a slightly
different term, market stability (i.e. high proportion of regular customers) was found to be

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significant in determining business success (Kristiansen et al., 2003). Furthermore, market
orientation defined as organization culture creates the necessary behaviour for the creation of
superior value to customers was found to be significantly correlated with company
performance (Verhees & Meulenberg, 2004). More specifically, they pointed out market
orientation is helpful in selection of an attractive product assortment when the SMEs operate
in markets with relatively homogenous product.
Technology. Rapid changes in technology should be responded by the SMEs to find
alternative ways to sustain their competitive advantage by deploying new process and new
growth methods. Technology may play an important role in this respect. In this context,
technology has a close relationship with improvement of production process. Previous study
has revealed that lack of equipment and outdated technology are among hindrances of SME
development (Swierczek & Ha, 2003). In their study in US, Gundry, Kickul, Welsch, and
Posig (2003) disclosed that technological change innovations had significant relationship
with market growth. A study in Ireland unearthed that technological posture, automation, and
process innovation were significantly linked to satisfaction on return on investment (ROI)
(Gibbons & O'Connor, 2003).
Information access. Availability of business information is similarly important for the
intention to initiate a new enterprise. Singh and Krishna (1994), in their studies of
entrepreneurship in India, pointed out that eagerness in information seeking is one of the
major entrepreneurial characteristics. Information seeking refers to the frequency of contact
that an individual makes with various sources of information. The result of this activity is
most often dependent on information accessibility, either through individual efforts and
human capital or as a part of a social capital and networking. Access to new information is
indispensable for the initiation, survival and growth of firms (Duh, 2003; Kristiansen, 2002;
Mead & Liedholm, 1998; Swierczek & Ha, 2003). Business information of special relevance
for the perception of ability to succeed and thereby for entrepreneurial intention is related to
markets and sources of inputs, technological solutions, design, and government rules and
regulations. The availability of new information is found to be dependent on personal
characteristics such as the level of education, infrastructure qualities such as media coverage
and telecommunication systems, and on social capital such as networks (Kristiansen, 2003b).
Entrepreneurial readiness. Entrepreneurial readiness in this study refers to self-
efficacy. The term self-efficacy, derived from Bandura’s (1977) social learning theory, refers
to a person’s belief in his or her capability to perform a given task. According to Ryan
(1970), self-perception plays an important role in the development of intention. Intentions
and their underlying attitudes are perception-based, which should mean that they are learned
and can be continuously influenced, and not fixed by personality traits formed in early
childhood. Accordingly, they will vary across historical and cultural contexts. Cromie (2000)
stated that self-efficacy affects a person’s beliefs regarding whether or not certain goals may
be attained. The attitude provides the foundation for human motivation (Pajares, 2002) and
personal accomplishment: unless people believe that their actions can produce the outcomes
they desire, they have little incentive to act or to persevere in the face of adversities (Pajares,
2002). Bandura (1977, p. 2) pointed to the fact that ‘people’s level of motivation, affective
status and actions are based more on what they believe than on what is objectively true’. An
individual’s perception of self-efficacy has a strong influence on how he or she will act and
how the available knowledge and skills will be utilized. Consequently, people behave
according to beliefs about their capabilities rather than on real facts based on their
competence and capabilities. In their study among Norwegian and Indonesian students,
Kriatinsen and Indarti (2004) found a significant correlation between self-efficacy and
entrepreneurial intention. In their study of Internet café entrepreneurs in Indonesia,

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Kristiansen, Furuholt, and Wahid (2003) also found that entrepreneurial readiness was linked
significantly to business success.
Social network. Social networks have an impact on the likelihood of successful
entrepreneurial endeavour. The study of entrepreneurship has increasingly reflected the
general agreement that entrepreneurs and new companies must engage in networks to survive
(Huggins, 2000). Networks represent a means for entrepreneurs to reduce risks and
transaction costs and also to improve access to business ideas, knowledge and capital
(Aldrich & Zimmer, 1986). A social network consists of a series of formal and informal ties
between the central actor and other actors in a circle of acquaintances and represents channels
through which entrepreneurs get access to the necessary resources for business start-up,
growth and success (Kristiansen, 2003). In his study in Tanzania among small-scale garment
and carpentry industries, Kristiansen (2003a) found that social network has significant
relationship with business adaptability.
Legality. Not many studies have been conducted to examine direct relationship between
legal aspect readiness and business success. Legal aspect in developing countries in Indonesia
is probably of hindrances of success among SMEs. In many cases, dealing with legal aspects
has forced the SMEs to allocate significant amount of financial resources due to bribery
practices. Legal aspect is often also used in selection operating decision in order to ensure
future business success (Mazzarol & Choo, 2003). Unsuitable legislation is also found of
obstacles faced by Slovenian SMEs (Duh, 2003).
Capital access. Access to capital is obviously one of the typical obstacles to the start-up
of new businesses, not least in developing economies with weak credit and venture capital
institutions. Several empirical studies have concluded that the lack of access to capital and
credit schemes and the constraints of financial systems are regarded by potential
entrepreneurs as main hindrances to business innovation and success in developing
economies (Marsden, 1992; Meier & Pilgrim, 1994; Steel, 1994). Potential sources of capital
may be personal savings, extended family networks, community saving and credit systems, or
financial institutions and banks. Robinson (1993) found that informal sources of credit,
though with high interest rates, constitute very substantial contributions to business start-ups
in developing countries, where the capital to labour ratio is normally low and small amounts
of capital may be sufficient for a business start-up. In developed economies with efficient
financial infrastructure, access to capital may represent similar restrictions to individuals’
perception of entrepreneurial options because of the high entry barrier ensuing from high
capital to labour ratios in most industries. As aforementioned, lack of capital is of problems
faced by Indonesian SMEs (Kementerian KUKM & BPS, 2004). A more recent study among
Vietnamese SMEs revealed that of internal limitations that hinder SMEs to succeed is capital
shortage (Swierczek & Ha, 2003). Hence, capital flexibility as abovementioned is of factors
determining business success (Kristiansen, Furuholt & Wahid, 2003).
Government support. Many governments in the world (e.g. Chaston, 1992; Mulhern,
1996; Patrianila, 2003) have been paying a more attention to SME development in order to
strengthen national economy. Indonesian government, through Ministry for Cooperative and
Small- and Medium-sized Enterprises have launched many programs (e.g. giving financial
assistance) dedicated to SME development (Kementerian KUKM, 2003). The programs were
proven to be significant in Indonesian SMEs development (Kementerian KUKM & BPS,
2004). In short, government support is of necessary condition to foster SMEs development.
Government regulations are identified by Reynolds, Day, and Lancaster (2001) to be one of
the top problems faced UK SMEs. In addition to lack of financial support as abovementioned,
lack of institutional support was of hindrances of SME development (Mead & Liedholm,
1998; Swierczek & Ha, 2003).

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 Business plan. Insufficient awareness of the need for a business plan was identified as
one problem at the start-up phase among SMEs (Chaston, 1992). In this context, business
plan can also be regarded as development orientation. McMahon (2001) revealed that greater
development orientation significantly linked to better business growth. In line with this,
Smallbone, Leig, & North (1995) pointed out that one characteristics that distinguished the
best performing enterprises from other was their commitment to change. Therefore, we
believed that well-planned business activities as manifested in a business plan will yield a
better business performance.

3. Research Methods
3.1 Research instrument
This study can be regarded as explanatory study since the focus is on identification of
success factors of Indonesian SMEs. The questionnaire was the main instrument of the study,
though some in-depth interviews were also conducted to grasp the dynamic of entrepreneurial
process among SMEs2. Inputs from one-day seminar attended by 25 entrepreneurs were used
as a basis for developing the questionnaire.
The questionnaire consisted of three parts. The first part comprised demographic
information of the respondents and a set of items to measure business success. Five-point
Likert scale anchored by strongly disagree and strongly agree were applied to measure the
perceived success that comprised four items: “I am satisfied with the growth of net-income
of the business”, “I am satisfied with the time needed to reach break event point (payback
period)”, “I consider my business successful”, and “I consider my business growing”.
In the second part, the respondents were asked to score the importance of nine factors
considered to partake in determining business success using 5-point Likert scale anchored by
very unimportant to very important. The factors were marketing, technology, information
access, capital access, social network, legality, business plan, entrepreneurial readiness, and
government support.
The respondents were asked to rank statement on contextual condition related to each
success factor faced by the respondents in the third part. This part consisted of 31 items
which were intended to measure factors of business success.

3.2 Sample and data collection

The number of respondents was 100 owners of the SMEs. According to Indonesian
Statistics, an enterprise with less than 100 employees is considered as SME. Purposive
sampling procedure was used to select the respondents from SME database comprised 250
SMEs in Yogyakarta, Indonesia, compiled by Small and Medium Enterprises Development
Center (SMEDC), Gadjah Mada University. Yogyakarta is a good sample of Indonesia as the
people come from all corners of Indonesia to get either better education or living. Yogyakarta
is typically one of Indonesian big cities where we can only find a few large enterprises
therein. Most economic activities are run by SMEs.
In filling in the questionnaire, personal interviews were deployed. In case such an
interview was impossible practically, “drop and collect” procedure then was chosen. This
procedure was selected to get a high response rate. In case of some values were missing, we
re-asked the respondents by telephone to supply the missing ones. Not surprisingly, the
response rate was 100% and all returned questionnaires were usable for analyses. In addition
to quantitative data collected using the questionnaire, 20 semi structured interviews were
conducted3. At average, each interview lasted for two hours.
At average, the number of full-time workers of each SME was 17 ranged from 1 to 70,
while the number of part-time workers was 19 varied from 1 to 150. However, a large
percentage (>70%) of the SMEs employed less than 20 full-time workers which could be

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categorized as small enterprises according to Indonesian Statistics. Table 1 comprises the
background of the entrepreneur and the enterprises.
As can be seen in Table 1, most entrepreneurs (71%) were male. As regards their
education, the vast majority of the respondents (75%) had senior high or university
educations. A large percentage (63%) of the entrepreneurs had no former work experience
prior to running the business which was mostly (85%) established by themselves. Obviously,
personal savings (56%) and family investment (23) were the dominant source of capital. Most
SMEs (54%) were running in crafts and arts industry.

Table 1. Background information

Variable %
Gender
- Female 29
- Male 71
Education of the entrepreneur
- Elementary 12
- Junior high 12
- Senior high 38
- University 37
Previous experience
- Yes 37
- Never 63
Origin of SMEs
- Established 85
- Inherited 12
- Other 3
Source of capital
- Personal savings 56
- Joint venture with colleagues/friends 3
- Family investment 23
- Third party investment 2
- Bank 3
- Other 12
Industry sector
- Crafts and arts 54
- Agribusiness 6
- Food processing 12
- Service 15
- Trading 3
- Other 10

3.3 Data analysis methods

In addition to descriptive statistics, we employed correlation and regression analyses.
Before applying regression analysis, the validity and reliability of the research instrument
were examined using factor analyses and values of Cronbach’s alpha. More specifically, in
correlation analyses, t-test and ANOVA were used as appropriate. Correlation analyses were
used to examine relationship between characteristic of the entrepreneurs and SMEs and
business success, while regression analysis was employed to look at relationship between
contextual variables and business success. Post hoc test using LSD (least significant
differences) method was also applied when ANOVA revealed significant differences among
groups compared.

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4. Results
4.1 Validity and reliability of the instrument
Factor analysis applied to items used to measure business success revealed one
variable. Value of Cronbach’s’ alpha of the items was 0.81. Hence, we could conclude that
the items were valid and reliable measurement for business success.
Using exploratory factor analysis, 31 items in the questionnaire were trapped into 10
variables. Each variable consisted at least two items except one; X1 (see Appendix). Hence,
we ignored it in further analysis since it has been represented by the items in marketing
variable. The result of exploratory factor analysis after deleting M1 is presented in Table 2.
Table 3 depicts values of Cronbach’s alpha of the instrument. With exception on social
network, the values of Cronbach’s alpha were greater than 0.6 – or even 0.5 for exploratory
study – which was considered as acceptable ones (Nunally, 1978). Taken together, we
concluded that the research instrument used in the study was valid and reliable.

Table 2. Factor loadings

Item INFO TECH MARK BPLA EREA LEGA GOVS CAPI SOCN
X14 0.82 0.20 0.15 -0.11 0.14 0.06 -0.04 0.14 -0.03
X16 0.67 0.06 -0.12 0.19 0.01 0.27 0.07 0.08 0.17
X15 0.66 0.39 0.18 0.06 -0.10 0.03 0.11 -0.10 -0.08
X12 0.65 -0.01 0.52 0.27 0.02 0.01 0.10 0.03 -0.08
X11 0.63 0.11 0.08 -0.06 0.30 -0.13 0.32 0.34 0.07
X8 0.50 0.43 0.00 0.30 0.14 0.09 -0.01 0.25 -0.27
X13 0.50 0.03 0.25 -0.25 0.28 -0.17 0.29 0.42 0.14
X6 0.20 0.85 0.13 0.05 0.13 0.11 0.15 0.06 0.16
X5 0.10 0.80 0.12 0.03 0.22 0.11 0.02 0.23 0.11
X7 0.37 0.60 -0.03 0.17 0.05 0.08 0.00 0.19 -0.37
X2 0.02 0.13 0.76 0.00 0.04 -0.01 -0.04 -0.04 -0.27
X18 0.26 0.18 0.74 0.03 -0.03 -0.07 0.07 -0.15 0.34
X28 0.09 0.34 0.53 0.23 0.43 0.00 0.01 -0.18 -0.08
X17 0.44 -0.07 0.51 0.11 0.03 0.05 -0.02 0.24 0.28
X3 0.01 -0.18 0.50 0.37 -0.02 0.17 0.08 0.35 -0.19
X23 0.05 0.15 0.10 0.80 0.18 0.09 -0.02 0.00 -0.07
X24 0.19 0.18 -0.05 0.77 0.17 -0.02 0.06 0.13 0.10
X4 -0.06 -0.09 0.17 0.75 0.09 0.05 0.13 0.02 0.20
X26 0.03 0.06 -0.04 0.21 0.80 -0.01 0.12 0.08 0.12
X25 0.18 0.13 -0.09 0.11 0.78 -0.07 0.02 0.05 0.00
X27 -0.02 0.12 0.28 0.10 0.77 0.23 -0.10 0.11 -0.06
X21 0.05 0.02 0.16 0.03 -0.08 0.87 0.15 0.07 0.11
X22 0.01 0.17 -0.12 0.14 0.11 0.80 0.11 -0.04 0.01
X30 0.34 0.10 -0.04 -0.10 0.07 0.67 0.48 0.01 -0.13
X29 0.02 0.07 0.07 0.06 -0.01 0.15 0.89 0.06 0.15
X31 0.17 0.04 -0.04 0.16 0.06 0.26 0.86 0.00 -0.08
X10 0.22 0.23 0.07 0.10 -0.03 -0.01 0.04 0.79 0.05
X9 0.08 0.12 -0.18 0.08 0.22 0.05 -0.01 0.70 0.21
X19 0.05 0.29 0.09 0.03 -0.02 -0.08 0.08 0.23 0.72
X20 -0.01 -0.16 -0.22 0.18 0.12 0.19 -0.01 0.07 0.69
% variance
23.62 9.08 8.46 7.67 6.55 5.21 4.88 3.98 3.65
explained
Notes:
- INFO: Information access, TECH: Technology, MARK: Marketing, BPLA: Business plan,
EREA: Entrepreneurial readiness, LEGA: Legality, GOVS: Government support, CAPI: Capital access,
SOCN: Social network.
- Extraction method: Principal Component Analysis; Rotation method: Varimax with Kaiser Normalization.

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Table 3. Reliability test
No Variable No of items Cronbach’s alpha
1 Information access 6 0.83
2 Technology 3 0.82
3 Marketing 5 0.70
4 Business plan 3 0.78
5 Entrepreneurial readiness 3 0.77
6 Legality 3 0.81
7 Government support 2 0.85
8 Capital access 3 0.66
9 Social network 2 0.46

4.2 Data analysis

Table 4 summarizes mean ratings that indicated perceived importance of variables
related to business. Capital access (mean=4.56), marketing (4.55), and information access
(4.53) were considered to be most important factors in running the business, while social
network (4.02) was perceived to be less important in business operation.

Table 4. Mean ratings

No Variable Mean Standard deviation
1 Capital access 4.56 0.78
2 Marketing 4.55 0.82
3 Information access 4.53 0.69
4 Entrepreneurial readiness 4.43 0.81
5 Government support 4.33 0.90
6 Legality 4.07 0.96
7 Business plan 4.07 1.01
8 Technology 4.07 1.05
9 Social network 4.02 1.04

Regression analysis then was employed to examine the relationship between nine
independent variables (see Table 2) and business success. Values of independent variables
were calculated by multiplying the perceived importance of each variable (as depicted in
Table 4) and the value of the independent variables obtained by averaging the values of items
comprise the variable. The results of regression analysis are summarized in Table 5.

Table 5. Regression results

Variable Beta
Information access 0.107
Technology 0.182*
Marketing 0.370***
Business plan -0.127
Entrepreneurial readiness 0.069
Legality -0.277**
Government support 0.036
Capital access 0.302***
Social network -0.020
Model summary
Adjusted R2 = 32.5%
F = 6.29***
Notes: *p<0.1, **p<0.05, ***p<0.01,

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 As can be seen in Table 5, technology, capital access, and marketing affected business
success significantly in positive directions, while legality did it in a negative direction.
Altogether, the variable independents explained 32.5% of the total variance.

4.3 Demographic data analysis

4.3.1 Characteristics of the entrepreneurs
Age. Treating age both in interval and ordinal level of measurement (using several cut
points), no significant relationship between age and business success was found.
Gender. We found no differences in terms of business success between female and
male entrepreneurs.
Previous experiences. Previous employment of the entrepreneurs had no significant
correlation with business success. Neither, previous experiences and similar sectors/industry
had no significant effect on determining business success.
Education. Surprisingly entrepreneur with university education was significantly
(p<0.05) less successful than those with elementary and senior high school.

4.3.2 Characteristics of the SMEs

Origin of enterprise. Origin of enterprises, either established or inherited, did not
distinguish them in terms of business success.
Length time in operation. Start-up time or length time in operation did not significantly
link to business success.
Size of enterprise. Size of enterprises in terms of number of employees was not
associated with business success.
Source of capital. As depicted in Table 1 above, the vast majority of the SMEs took
advantage of personal savings (56%) and family investment (23%) as their capital sources.
Only 3% of the SMEs utilized bank loan. Because of limited number of respondents using
capital source other than personal saving and family investment, we grouped them into one.
We found that entrepreneur who took advantage of family investment was significantly
(p<0.05) more successful than those with other sources of capital.

5. Discussion
In this section, we focus discussion on answering research question mentioned in the
outset. Table 6 summarized findings of the study.

Table 6. Summary of findings

Individual background Characteristics of SME Contextual variables
- Age (o) - Origin of enterprise (o) - Marketing (+)
- Gender (o) - Length time in operation (o) - Technology (+)
- Work experience (o) - Size of enterprise (o) - Information access (o)
- Education (x) - Capital source (x) - Entrepreneurial readiness (o)
- Social network (o)
- Legality (-)
- Capital access (+)
- Government support (o)
- Business plan (o)
Notes:
- All listed variables are examined as regards their relationship with business success.
- (o) No significant association/correlation; (x) Significant association; (+) Significant positive correlation; (-)
Significant negative correlation

Education of the entrepreneurs was found to have significant relationship with business
success. As aforementioned, those with university education experienced a lower level of
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success than those with elementary and senior high school. A further analyses revealed that
those with elementary and senior high school educations have been being in the business
(respectively 16.5 and 15.3 years) longer than those with university education and junior high
school educations (respectively 13.0 and 11.3 years). Another possible explanation was that
their educational background did not give applicable skills for running the business. Self-
learning was considered by most entrepreneurs (76%) as source of skills. Among those with
university education, 73% considered themselves as self-learners and only 16% felt that
formal education gave them skills to run the business. Other individual backgrounds, namely
age, gender, and previous employment, had no significant associations with business success.
The entrepreneur who took advantage of family investment enjoyed a higher level of
success than those with other sources of capital. We had to note here that most SMEs might
also be considered as family enterprises, as defined by Duh (2003, p. 118), since “the owner
or family members of the owner manage the enterprise and in which exists the wish that the
enterprise remains in the ownership and in the management of the family in the future”. This
claim was substantiated by the fact that 97% of the SMEs was either established or inherited.
Personal saving and family investment were dominant (79%) source of capital among the
SMEs. As the enterprises were considered as the primary source of family income and
investment was on personal risk, high commitments should be devoted in running the
business. As the result, they harvested a better success.
Regression analysis unearthed that capital access, marketing, and technology were
determinants of business success, while legality was burden of business success. The former
findings were not surprisingly, since lacks of these three have been identified as problems of
Indonesian SMEs. Absences of the problems, then, would give the SMEs more ammunition
to struggle with stiffer competition and grow.
The latter finding is interesting and needs explanation. Most probably, complicated
bureaucracy and legal aspect that take too many resources of the SMEs to deal with are of the
explanations. Simplification of bureaucracy and deregulation of legal aspects are then
recommended to foster the development of the SMEs in Indonesian contexts.
Interested parties to SMEs development in Indonesia, such as universities, non-
government organizations, and business development services, should address these
determinants and impediments of business success in giving assistances to SMEs.
Altogether, variable independents explained 32.5% of the total variance. Though the
explanation power was not unusual in cross-sectional model, this also implied that other
factors needed to be identified to get a more complete picture of determinants and
impediments of business success among Indonesian SMEs. The results, then, would be
beneficial to develop Indonesian SMEs.

6. Conclusions
The results from a survey conducted to identify success factors of Indonesian SMEs
have been presented in this paper. Reliability and validity analyses have proved that the
research instrument was a fairly reliable and valid measure. However, items to measure social
network should be improved to increase the reliability.
The analyses revealed that education and source of capital were related significantly to
business success. However, these two seemed to need moderating variables since more
operational explanations were needed to link these two with business success.
The regression analyses unearthed that capital access, marketing, and technology were
determinants of business success, while legality was burden of business success. These
findings should be well-considered in developing programs to develop SMEs. Slightly low
explanation power of the model (32.5%) suggested that other variables should be identified to
get a more explanation of business success among Indonesian SMEs.

12
Notes
1. This study is rooted in the institutional collaboration between Delft University of Technology (The
Netherlands), Rheinisch-Westfalische Technische Hochschule of Aachen (Germany), and Gadjah Mada
University (Indonesia) through Asia-Link Program funded by European Commission.
2. The authors would like to thank Wilko van Oosten, Erik Soonieus, and Ee Fitri Herwanti for their
assistances in data collection.
3. SMEDC as Business Development Service at the Gadjah Mada University – one of the biggest universities
in Indonesia – was established to promote development of Indonesian SMEs by giving, e.g., expert
consultation, relevant training and technical assistances.

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Appendix: Questionnaire
Measurement of perceived success
Please indicate your opinion regarding following statements (1. Strongly disagree … 5. Strongly agree)
S1 I am satisfied with the growth of net-income of the business
S2 I am satisfied with the time needed to reach break event point (payback period)
S3 I consider my business successful
S4 I consider my business growing
Contextual variables
Please indicate your opinion regarding the importance of each factor to you running business (1. Very unimportant… 5.
Very important)
E1 Marketing (e.g. distribution channel, potential market)
E2 Technology (e.g. production machinery, supportin equipments, computer)
E3 Capital access (e.g. capital availability to start and expand the business, alternative sources of capital)
E4 Information access (e.g. market information, information of source of raw material, information on new design)
E5 Social network (e.g. business association, business partners, helpful colleagues/consumers)
E6 Legality (e.g. business permit, taxes)
E7 Business plan (e.g. business feasibility study, expansion plan, plan product/service development)
E8 Entrepreneurial readiness (e.g. managerial skills, decision making skills, communication skills)
E9 Government support (e.g. easiness to get business permit, funding scheme from government, favourable policies)
Based on your experiences in running the business so far and the actual condition of the business, please indicate your
opinion regarding each statement (1. Strongly disagree… 5. Strongly agree)
X1 Distribution channel of my products is already in place
X2 Market potential of my products is promising
X3 Searching for new market for my products is not so difficult
X4 Marketing of my products is well-planned
X5 Existing technology suffices to support all production processes
X6 Existing technology supports innovation
X7 Existing technology is easily maintainable
X8 New technology to support innovativeness in the business is attainable
X9 Existing capital is sufficient to maintain and expand the business
X10 If needed, it is easy to get additional capital
X11 I have accessible alternatives of capital sources if needed
X12 I have access to information on market/consumer of my products
X13 I have access to information on capital sources
X14 I have access to information on technologies to support my business
X15 I have access to information on raw material sources
X16 I have access to information on government regulations that are relevant to my business
X17 I have reliable business network to run the business
X18 I have many helpful colleagues/friends who support the business
X19 I have professional affiliation/business association that supports the business
X20 I have religious association that support my business
X21 I have all permits to run my business
X22 I fulfil all my duties as a businessman to government (e.g. paying taxes)
X23 I have a good business plan
X24 All policies taken in my business are well-planned
X25 I have good leadership skills
X26 I have reliable managerial skills
X27 I have decision making skills
X28 I have good communication skills
X29 Government support to my business is satisfactory
X30 I got business permit and other permits easily and quickly
X31 During running the business, I have no problems when having contact with government

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