ISSN: 2232-0172

Vol 7 Issue 1, June 2018

pp. 83-103

A Contemporary Business Journal

Internal Factors For New Venture Growth In Malaysian Manufacturing

SMEs: An Empirical Study

M.V. Deepa
Graduate School of Business (GSB), University Sains Malaysia

Gandhinathan Annamalai
Northern Corridor Implementation Authority
© The Author(s) 2016. This article is published with open access by Taylor’s Press.

Abstract: Small and Medium Enterprises (SMEs) play an important role in the economic
growth of nations. Despite the increasing number of SMEs, many firms find it difficult to
survive beyond the first five years. New venture firms face many challenges in today’s
globalized world. The purpose of this research is understood the internal drivers for new
venture growth in Malaysian Manufacturing SMEs. The findings of this empirical study show
that less innovation strategy and market disorientation were negatively influencing the new
venture growth in Malaysian manufacturing SMEs. While companies have no control over
the external factors, by focusing on the internal factors that enhance growth, companies can
work towards surviving, sustaining and enhancing firm performance.

Keywords: New venture growth, internal factors, Manufacturing SMEs

1. INTRODUCTION

In the 21st Century, industrialization plays a key role in the economic growth of
nations. Globalisation and rapid growth of technology have paved way of many
entrepreneurial ventures and start-up companies(Kirkley & Kirkley, 2016). Small
and medium-sized enterprises (SMEs) provide employment opportunities, lead
innovation and propel economic growth (Ipinnaiye, Dineen, & Lenihan, 2017;
Rigtering, Kraus, Eggers, & Jensen, 2014). Ninety-seven percent of business
establishments in Malaysia are small and medium enterprises (SMEs). SMEs are
responsible for nearly 36% of the country’s GDP, 65% of the country’s employment,
and nearly 18% of Malaysia’s exports. As the pillar of Malaysian economy SMEs
will accelerate economic growth and propel Malaysia into a developed high income
nation by 2020 (Dai, Maksimov, Gilbert, & Fernhaber, 2014). The Government’s
goal is for SMEs to contribute to 41% of Malaysia’s GDP and 23% exports by 2020
(Worldbank, 2016).

Correspondence: M.V. Deepa, University Sains Malaysia, Malaysia. Email: deepagandhi05@yahoo.com

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 M.V. Deepa & Gandhinathan Annamalai

Growth of new venture businesses varies from that of larger established

companies. It is of academic interest to understand the factors(internal and external)
behind new venture survival and growth (Gilbert, McDougall, & Audretsch, 2006).
Many companies are unable to sustain themselves over the long term and face
problems and failures in their survival. SMEs across the globe have high failure rate
within the first 60 months of being in operation. In a cross nation study, the SME
failure rate for Australian SMEs was 23%, while more than 60% of Malaysian SMEs
tend to wound up within 5 years of their existence (Ahmad & Seet, 2009). According
to the 2014 annual report published by SSM (2014), the number of companies that
closed down or filed bankruptcy from year 2012 to year 2014 has almost doubled,
which is a very alarming state of affairs. During the fiscal year 2012, 17,092
companies closed down while the figures stood at 30,924 companies that closed
down in 2014 as shown in Error! Reference source not found..

Table 1. Number of companies that have closed down from 2012 to 2014
Year 2014 2013 2012
Companies wound up 1,744 2,581 2,419
Companies struck off
29,180 23,849 14,673
(Section 308)
Source: (SSM, 2014)

It is of high academic interest to understand the reasons for survival and

growth of companies. There is substantial amount of research available on the SME
industry, discussing on success factors and beneficiaries of the SME industry in
general. However, there have not been many research studies on internal drivers for
new venture growth and the reasons for their successes or failures. Hence, it is
critical to understand the internal factors that influence new venture growth for
business sustainability and economic growth(Gilbert et al., 2006). A search of the
literature on SMEs in Malaysia reveals that there is a gap in the study which examines
the factors affecting performance of SMEs in Malaysia (Moorthy et al., 2012). The
manufacturing sector is essential to innovation, technological progress, provide
employment opportunities and is, thus, a key driver of economic growth (Ipinnaiye
et al., 2017). In Malaysia, the manufacturing sector plays a key role in the economic
development of country. Malaysia has been ranked as the world’s top manufacturing
location in new suitability index by Cushman and Wakefield (Wan, 2016). The
current study focuses on the manufacturing SMEs in Malaysia, which is considered
to be a high value sector as well as being knowledge-based sector. Despite
considerable academic attention on small businesses and their contribution to the
economy over the last 30 years, our understanding of the drivers of business growth
remains partial (Westhead & Wright, 2011). While considerable amount of research
has been done on wide range of perspectives on topics related to SMEs and
entrepreneurship, there appears to be little information on the internal factors

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 Internal Factors For New Venture Growth In Malaysian Manufacturing SMEs: An Empirical Study

affecting new venture survival (Larrañeta, Zahra, & Galán González, 2014). The
purpose of the current study is to understand the influence of internal drivers on
new venture growth in Malaysian manufacturing companies.

2. LITERATURE REVIEW

Radzi, Shamsuddin, and Wahab (2017) have highlighted lack of financial capital,
inadequate human resources, pace of technological advancement, difficulty to
penetrate potential markets and competition from across the globe as some of the
main challenges faced by Malaysian SMEs. Aziz, Rahim, and Bukhari (2017) in their
research, emphasised the need to understand measures that paved way for small
businesses to sustain and lead to new venture success. In studying a sample of small
rural entrepreneurs in Malaysia, the external factors are more dominant than the
internal ones in contributing to the business success (Kader, Mohamad, & Ibrahim,
2009). However, the scope of this study will focus on other internal factor prevalent
in literature in related settings, as these are controllable by the firms. While the SMEs
do not have any means to influence the external factors, it is vital for Malaysian
SMEs to understand the internal factors that influence business growth (Moorthy
et al., 2012). New venture SMEs play a major role in economic growth by creating
jobs, triggering innovation and encouraging entrepreneurial skills (Ipinnaiye et al.,
2017). Despite the economic contribution of SMEs and new ventures, the
probability to wind up within first few years of operation is high. We must admit
that young companies are fragile and the failure rate of start-ups remains high over
time (Coad, Frankish, Roberts, & Storey, 2016). Most often than not, new ventures
face difficulties in adopting to market conditions and managing their resources
(Täuscher & Abdelkafi, 2017). When compared with established firms, new
ventures face more uncertainties and their survival becomes questionable in the
absence of growth (Larrañeta et al., 2014). While established businesses focus on
sustaining their growth, new venture businesses primarily focus on survival and
avenues for growth (Glowik & Sadowski, 2014). The new venture growth literature
has primarily discussed why some ventures grow while others fail. However, the
literature has largely disregarded the manner in which the growth has been attained
(Kirkley & Kirkley, 2016). Surviving, registering growth and staying competitive is
a big challenge to both SMEs and established firms (Wang, Thornhill, & De Castro,
2017). The decisions entrepreneurs make in the venture’s early years have profound
long-lasting implications for performance (Yamakawa, Peng, & Deeds, 2015).
Growth can occur in many different aspects of a firm’s operations, such as its cash
flow, net income, customer base, sales, employment, and market share (Umrani,
Johl, & Ibrahim, 2017). Different new venture businesses measure growth in varied

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 M.V. Deepa & Gandhinathan Annamalai

ways. However, most research studies have sales, market share and number of
employees to measure growth in new venture firms (Gilbert et al., 2006).
An increasing number of new venture firms are internationalizing their
business operations early in their life cycles (Fernhaber, 2013). Internationalization
is a major element of a firm’s growth (Dangi, Ismail, Johari, & Noor, 2017). Schulz,
Borghoff, and Kraus (2009) argued that most of the SMEs involved in
internationalization generate their earnings more in global markets rather than in
their home countries. In recent years, attention has begun to shift towards better
understanding of the implications for new venture internationalization on
performance (Love & Roper, 2015). Multiple studies have concluded a positive
relationship between internationalization and performance (Khavul, Pérez-
Nordtvedt, & Wood, 2010). A study by Coeurderoy, Cowling, Licht, and Murray
(2012) found a positive, linear relationship between new venture internationalization
and survival. According to Sleuwaegen and Onkelinx (2014), firms starting to
internationalize early show superior growth rates in international markets. Running
a business without any external capital (financing) shows that the business is in a
good financial condition. External financing may increase the risk of bankruptcy
due to inability to settle the debt within agreed period. Capital is the key element in
both strength and weakness among SMEs. Running the business without any
external capital (loan) reduces the financial risk of the business. Research also
revealed capital insufficiency is the crucial problem among SMEs, which might be
due to the difficulties to obtain external fund. Although the results should be taken
with caution, nevertheless financial management is vital in order to face new
business challenges as well as for the survival of the business in the future (Salikin,
Ab Wahab, & Muhammad, 2014).
Start-ups traditionally rely on insider finance as it is harder to obtain external
finance (Fraser, Bhaumik, & Wright, 2015). Carpenter and Petersen (2002)
examined a large panel containing over 1600 small manufacturing firms and results
indicate that the growth of most small firms is constrained by the availability of
internal finance. Financial capital provides the flexibility needed to support the
firm’s strategic endeavours (Love & Roper, 2015). The growth rate of small firms
depends upon the availability of internal finance. Lack of financial support and
access to internal finance is a major problem to low new firm creation, survival and
growth (Olawale & Garwe, 2010). Studies for smaller firms also suggest that internal
funding was more important for growth in smaller firms than for larger companies
(Brinckmann, Salomo, & Gemuenden, 2011). New venture team attributes have
been identified as critical resources for new venture growth and success (Unger,
Rauch, Frese, & Rosenbusch, 2011). The competencies of entrepreneurial team are
a unique, valuable, and difficult to imitate resource that can provide the basis for
new ventures’ competitive advantages and enables new ventures to discover and
exploit opportunities, plan strategies, and acquire additional resources. The
education, experience, knowledge, and skills of new venture team is likely to

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 Internal Factors For New Venture Growth In Malaysian Manufacturing SMEs: An Empirical Study

positively affect new venture performance (Jin et al., 2016). Prior industry
experience provides new venture teams with knowledge of markets, suppliers, and
industry conditions, and it has been found to have a significant relationship with
new venture success (Rauch & Rijsdijk, 2013). Literatures revealed that competency
are positively related to venture growth (Jin et al., 2017).
An important factor contributing to the success of new ventures is the level
of their innovativeness (Taghizadeh, Rahman, & Ramayah, 2017). Because of the
extreme international competition, demanding and fragmented markets, and fast
changing technologies, innovation has been considered as one of the utmost factors
of new venture firms’ success (Shapiro, Tang, Wang, & Zhang, 2015). Innovation
has been considered as the most critical source of strategic change within the
business environment, which helps firms to sustain in the marketplace. SMEs have
a positive relationship with innovation and firm performance (Sun & Du, 2011).
According to Umrani et al. (2017) new venture enterprises need innovation to
create new markets, to increase product quality, expand product range, reduce
labour costs, improve production processes and materials; reduce environmental
damage and energy consumption; and replace products or services. The positive
role of firm innovativeness on firm performance has been supported by many
theoretical and empirical studies of new product developments, technology
adoption and diffusion, process improvement, and innovation (Keskin, 2006).
Market orientation refers to the organization wide generation, dissemination, and
responsiveness to market intelligence (Martin & Javalgi, 2016). According to
Mokhtar, Yusoff, and Ahmad (2014), market orientation is an important internal
influence and has been shown to have a positive relationship to organizational
performance. In a study of 170 SMEs from various industries in Sabah, Malaysia,
Hassan and Sulaiman (2016) noted that market orientation has a significant
relationship with SMEs success. According to Kader et al. (2009), business
positioning and market orientation is very important internal factor in ensuring
business success among SMEs. Munoz, Welsh, Chan, and Raven (2015) in a study
on factors affecting microenterprise success in Malaysia commented that marketing
orientation would help new ventures predict business performance.

3. CONCEPTUALIZED RESEARCH FRAMEWORK

Based on the literature review, a conceptualized research model is proposed for this
study and is presented in Figure 1. This research model is supported by market
based view and resource based view theory. The independent variables of the study
are business positioning, capital investment, entrepreneurial ability and marketing
knowledge. The dependent variable is new venture growth.

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 M.V. Deepa & Gandhinathan Annamalai

Figure 1. Conceptualized Research Framework

4. HYPOTHESES DEVELOPMENT

According to Mokhtar et al. (2014), market orientation is an important internal

factor and his study has shown to have a positive relationship between market
orientation and firm performance. All businesses require financial resources in order
to grow. Lack of internal funds can be a constraint on business growth (Cassar,
2004). Internationalization is a major element of a firm’s growth (Chelliah, Sulaiman,
& Yusoff, 2010). Innovation is key to organisational growth (Love & Roper, 2015).
According to Rao, Chandy, and Prabhu (2013), innovation strategies of new
ventures influence firm performance. Human capital attributes have been identified
as critical resources for new venture success (Unger et al., 2011). According to Jin
et al. (2017), new venture team competencies positively influences new venture
performance. From the conceptualized research model, the research hypotheses for
this study are formulated. Previous empirical findings pertaining to the relationships
among the study variables are presented to support the proposed hypotheses. The
research hypotheses for the current study are postulated to answer the research
questions of the study as stated in the first chapter. There are five hypotheses that
are to be tested in this study which include five predictor variables (independent
variables).

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 Internal Factors For New Venture Growth In Malaysian Manufacturing SMEs: An Empirical Study

Hypotheses Statement of Hypotheses

Internationalization positively influences new venture growth in
H1
Malaysian manufacturing SMEs
Internal financing constraint negatively influences new venture
H2
growth in Malaysian manufacturing SMEs
New Venture Team Competencies positively influences new
H3
venture growth in Malaysian manufacturing SMEs
Less Innovation Strategy negatively influences new venture growth
H4
in Malaysian manufacturing SMEs
Market disorientation negatively influences new venture growth in
H5
Malaysian manufacturing SMEs

5. RESEARCH METHODOLOGY

The proposed study has adopted a quantitative research approach using the mail
questionnaire survey recommended by Sekaran and Bougie (2010). The primary data
has been gathered and compiled specially for the research at hand. A cross-sectional
approach has been utilised in this study. In this study, the relationships between the
independent and dependent variables have been examined, hence making this study
a correlational investigation. The population of this study consists of manufacturing
SMEs in Malaysia, which have listed in business directories published by SME
Corporation Malaysia and Federation of Malaysian Manufacturers. Any
manufacturing SME registered with SME Corporation Malaysia and who obliged to
participate in the survey formed the sample for this study. For the purpose of this
study, questionnaires were mailed to SMEs in four major locations namely Penang,
Johor Bahru, Selangor and Kuala Lumpur. The minimum sample size required to
apply PLS–SEM is about 50 respondents. As part of data collection, 700
questionnaires were mailed in July & August 2017, to manufacturing SMEs in the
four major locations in Malaysia based on non-probability quota sampling. The
questionnaire was mailed with self-addressed envelope to companies based on the
listing available with SME Corporation Malaysia. The target participants of the
questionnaire were members of the senior management who represented the SME
companies with knowledge about new venture growth. 65 responses were obtained,
which achieves a 9.7% response rate. The data collected for this research were
analyzed using two statistical softwares; IBM Statistical Package for Social Sciences
(SPSS) version 23 and Smart Partial Least Squares (SmartPLS) in Structural
Equation Modelling (SEM) version 3.0. SPSS was used to analyze and summarize

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 M.V. Deepa & Gandhinathan Annamalai

the respondents’ demographic profile whereas SmartPLS was used to examine and
conclude on the hypothesis developed in the earlier chapter based on the theoretical
framework and its variables.

6. SIGNIFICANT FINDINGS AND RESULTS

Close to half of the respondents are SMEs located in Selangor (43.1%), followed by
about one third of the respondent SMEs from Kuala Lumpur (30.8%). About 11
(16.9%) companies responded from Penang. There were a handful of six (9.2%)
SMEs that responded from Johor Bahru. There were 20 SMEs (30.8%) which have
been established for the past 3-4 years. Slightly more than one fourth (27.7%) of the
companies that responded have been around for 5 – 6 years. 15 (23.1%) companies
that responded for the current study have been in existence for 7- 8 years. There
were 12 (18.5%) SMEs that are newbies in the industry with less than two years
presence. About one third (33.8%) of the companies had 76-125 employees, while
18 (27.7%) companies had 26 – 75 employees. One-fourth (24.6%) of the SMEs
who participated in the survey had 126 - 200 employees. Very few respondent
companies accounting to 9% had less than 25 employees who worked for them.
While 30 (46.2%) respondent firms had annual net revenue of RM 5 million to RM
25 million, 13 (20%) respondent firms reported annual net revenue lesser than or
equal to RM 5 million. About 22 (33.8%) companies reported annual net revenue
of more than MYR 25 million. Of the companies that responded, 28 (43.1%) SMEs
that responded were Private Limited Companies. About 12 (18.5%) companies were
partnership firms followed by 11 (16.9%) companies as joint venture; eight (12.3%)
companies had limited liability partnership and six (9.2%) firms held sole
proprietorship. In terms of position held by the representatives of the company, 20
(30.8%) were chief executive officers, 16 (24.6%) respondents were senior vice
presidents, 12 (18.5%) respondents are vice presidents, eight (12.3%) respondents
are Chief executive officers, seven (10.8%) respondents were Managing directors.
The other group with two (3.1%) respondents included chief financial officer and
director one each. About 15 (23.1%) respondents were electrical and electronics
manufacturers, seven (10.8%) respondents each were from Food & Beverage
products and palm oil & products followed by six (9.2%) companies from Rubber
industry. Petrochemical products, textile & apparels and machinery& engineering
sub sectors each had five (7.7%) respondents who participated in the survey. Metal
& metal products; paper, printing & publishing and plastic products had three (4.6%)
respondents each. Wood & wood products and leather subsectors had two (3.1%)
companies who participated in the survey. Footwear and construction related
material subsectors had one (1.5%) respondent each who participated in the survey.

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 Internal Factors For New Venture Growth In Malaysian Manufacturing SMEs: An Empirical Study

The respondents of the current study rated the average scores from 4.36 to
2.82 out of 5.00 for the independent variables and an average of 5.61 out of 7.00
for the dependent variable. However, mean values of all the variables have been
found to be above the midpoint 2.50 and 3.50 for Likert scale 1-5 and 1-7
respectively. Among the variables measured on Likert scale 1-5, market
disorientation has the highest mean score of 4.46 with a standard deviation of 0.429,
which reflects high agreement among the respondents. On the other hand, lack of
internal financing has the lowest mean value of 2.82 with a standard deviation of
0.651, indicates that the respondents have slight differences in their opinions. Since,
the standard deviation is less than one for all independent variables, there is more
personal agreement (with less variation) among the respondents. The dependent
variable, new venture growth (NVG), measured on a 7-point Likert scale has a mean
value of 5.61, well above the average of 3.5 on a 7-point Likert scale. Interestingly,
the study sample reflected new venture growth amongst Malaysian manufacturing
SMEs. The VIF for each latent variable was less than 5, collinearity among the
predictor variables is not an issue in the structural model, and we can go ahead with
further analysis. The analysis was carried out to assess the extent to which data was
subjected to common method bias of the respondents. In the present study, 31
components were extracted for 31 question items of the model variables using
principal component analysis in the first factor run. The 31 extracted had Eigen
value more than one and the total variance explained by the 13 factors (whose Eigen
value is greater than one) was 81.519 percent and is well above the prescribed
specification of 50 percent. Since a single factor did not emerge and the first factor
did not account for most of the variance, this study concludes that the common
method bias was not a major concern. The respondents were able to understand the
questions well and respond without any bias.
This study applies Partial Least squares (PLS) using Smart PLS Version 3.0
and non-parametric bootstrapping (Wetzels, Odekerken-Schröder, & Van Oppen,
2009) with 5000 replications. First to be analysed was convergent validity which
comprises a latent variable, main loadings, and question items, Composite Reliability
(CR) and average variance extracted (AVE). The main loading for each question
item is above the cut-off point of 0.5 in the present study, as the main loading ranges
from 0.949 to 0.648. 10 question items were deleted due to main loading less than
0.708 for any further analysis. The Average Variance Extracted (AVEs) value ranged
from 0.796 to 0.599. All independent variables had Cronbach alpha greater than
0.80 as shown in Table 2, thereby satisfying the rule of thumb recommended by
Hair, Ringle, and Sarstedt (2013). The Cronbach alpha value for DV is slightly less
which could be improved by including more samples.

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Table 2. Measurement Model of VB-SEM (n=65)

Latent Variable Indicator Main AVE Composite Cronbach's
(Question Loading Reliability Alpha
items)
Internal Financing IF1 0.678 0.640 0.898 0.857
Constraint IF2 0.720
IF3 0.832
IF4 0.860
IF5 0.888
Internationalization INT2 0.944 0.796 0.921 0.879
INT3 0.865
INT4 0.866
Less Innovation IS2 0.814 0.644 0.877 0.828
Strategy IS3 0.761
IS7 0.919
IS8 0.699
Marketing MO1 0.785 0.606 0.859 0.790
Disorientation MO2 0.845
MO3 0.807
MO4 0.665
New Venture NVG1 0.648 0.599 0.815 0.667
Growth NVG2 0.772
NVG5 0.884
New Venture Team NVTC4 0.949 0.794 0.885 0.758
Competencies NVTC5 0.829

In discriminant validity assessment, the researcher has to examine the HTMT

ratio for every construct compared to other constructs. The values of the ratio for
the intersection between two or more constructs are shown in Table 3. The result
shows that every value is below 0.90. Nevertheless, the value is seen as valid if it is
below 0.9 (Henseler et al., 2015). Thus, the HTMT ratio criterion is fulfilled. This
present research inferred that discriminant validity is established since all
discriminant validity measurements are satisfied. Overall, the measurement model
demonstrated adequate convergent validity and discriminant validity fulfilling the
construct validity for the measurement model of PLS.

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 Internal Factors For New Venture Growth In Malaysian Manufacturing SMEs: An Empirical Study

Table 3. Discriminant Validity of measurement model-Heterotrait-Monotrait Ratio

(HTMT)
Latent variable IF INT IS MO NVG NVTC
Internal Financing Constraint
Internationalization 0.202
Less Innovation Strategy 0.138 0.156
Marketing disorientation 0.160 0.317 0.545
New Venture Growth 0.280 0.131 0.491 0.509
New Venture Team Competencies 0.346 0.179 0.184 0.168 0.319

The coefficient of determination R2 values of the endogenous variables lies

between 0 and 1 with 0 as complete lack of fit and 1 as perfect fit (Chin, 2010). For
the current study, the independent variables together influence on the dependent
variable (new venture growth) to the extent of R2 = 0.296 as shown in Figure2,
which shows that the PLS model reasonably fits well for the data. The Q2 value
was obtained by using the blindfolding procedure and in the current study, the
predictive relevance Q2 for all endogenous construct (new venture growth) is greater
than zero as shown in Figure 3, which implies the model has predictive relevance
for all endogenous variables.

Figure 2. PLS-Path analysis of R-square values (n=65)

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 M.V. Deepa & Gandhinathan Annamalai

Figure 3. Blindfolding (DV) (Q2=0.082>0)

The results as shown in Figure 4 and Table 4 indicated that there were two
direct effects which were negatively and significantly influencing on new venture
growth (Dependent Variable) and they were less innovative strategies (β=-0.258,
p<0.05) and market disorientation (β=-0.321, p<0.05). Whereas, the other direct
effects of internationalization (β=0.195), internal financing (β= -0.152), and new
venture team competencies (β= 0.000), on new venture growth were not significant
as such, H4 and H5 were supported, whereas H1, H2 and H3 were not supported.

Table 4. Summary of PLS results: Direct effects

Standard
Hypothesis Path β value t Statistic p Value Decision
Error
H1 INT -> NVG 0.195 0.171 1.142 0.253 Not Supported
H2 IF -> NVG -0.152 0.159 0.955 0.340 Not Supported
H3 NVTC -> NVG 0.000 0.169 0.001 0.999 Not Supported
H4 IS -> NVG -0.258 0.124 2.085* 0.037 Supported
H5 MO -> NVG -0.321 0.169 1.894* 0.058 Supported
Note: *p<0.05, t>1.645; SE: Standard Error

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 Internal Factors For New Venture Growth In Malaysian Manufacturing SMEs: An Empirical Study

Figure 4. PLS output for testing population regression coefficients (t-values)

7. DISCUSSIONS

Despite the various measures taken by government agencies and SME Corporation
to ensure the sustenance of SMEs, only 32.31% of the surveyed 65 Malaysian
manufacturing SMEs considered themselves to be have growth in their new venture
business. This clearly brings to light the need for new venture businesses to
understand the internal and external factors that can help companies to survive and
grow. In comparison to large corporations and established firms, new ventures face
multiple challenges to start the business, survive and grow. The establishment of a
new venture is a cumbersome process right from obtaining finance to marketing the
product. Unlike established firms, new venture firms face myriad of obstacles to
finance their ideas. With little or no business achievement to back them up, new
venture SMEs face difficulties in borrowing money to fund projects and build their
credibility with banks or venture capitalists. Firms that are able to sustain themselves
with alternative methods of financing like internal financing are in a better position
to survive and grow. The relatively low number of firms reporting growth could be
because competition among SMEs is very high. While new venture businesses try
to capture the market through new product development, exploring new horizons,

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stiff competition from other SMEs and established firms, makes it all the more
difficult for new venture firms to grow.
Business ventures with creativity and innovation survives the most, others
have limited options to survive and grow in the market place. The increasing labour
costs and lack of modernized technology to keep up with the rapid pace of
development is being a hindrance for new venture growth. Another key factor to
note is the limited resources available to new venture firms. Most often than not
there is a shortage of manpower, funds, technical skills and so forth making it
difficult for new ventures to grow. The findings of the study indicate that market
disorientation negatively and significantly influences new venture growth in
Malaysian manufacturing SMEs. The survey respondents strongly agreed that the
inflexibility to adapt to rapidly changing external conditions lead to market
disorientation with average mean score of 4.48 on a 5-point Likert scale. The lack
of emphasis on studying the market environment was highlighted as the next
important factor that leads to market disorientation with average mean of 4.46 on a
5-point Likert scale. Respondents have scored relatively low with average mean of
4.15 on the question item discussing the time taken by new ventures for new
product launch. Respondents opined that failure to capitalize on first mover
advantage can lead to market disorientation by scoring average mean score of 4.37
on a 5-point Likert scale. New venture firms are not sure of the market and are
unable to predict the market place. The results reflect that new venture SMEs have
limited knowledge compared to established SMEs and MNCs. There is also less
information sharing amongst new ventures. The lack of information diffusion is
creating challenges for new venture growth. Information exchange amongst SMEs
is not prevalent. There is less collaboration among the new venture firms. At times,
new venture firms tend to grab the opportunities of other new venture firms,
thereby subduing the overall growth of new venture firms.
It is worthwhile to mention that less innovation strategy negatively and
significantly influences new venture growth in Malaysian manufacturing SMEs.
New venture businesses require innovation to some extent for new product
development. The respondents surveyed for this study have opined that if routine
work is done exemplarily firms can grow even with little innovation. The results
reflect that innovation is not a hindrance to growth and generally there is an over
emphasis on innovation by market players. The survey respondents felt new creative
ideas do not help customers grow with highest average mean score of 4.54 on a
5-point Likert scale. This was supported by scoring average mean of 4.49 in
favouring that innovative ideas are not quickly implemented by new venture
businesses. The SMEs surveyed have responded that problems arising in new
venture businesses are solved using creative solutions only to a limited extent with
average mean score of 4.45. In new venture businesses, the respondents favoured
that innovation is not viewed as key to organizational survival with average mean
score of 4.22. The survey respondents felt that continuous innovative improvement

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 Internal Factors For New Venture Growth In Malaysian Manufacturing SMEs: An Empirical Study

on daily business activities is not essential for new venture business with average
mean score of 4.20. The respondents favour less the need to be first in market with
new products with average mean score of 4.18 on 5-point Likert scale. The
minimum average score of 3.22 was given for question regarding using creative
methods in daily operations. Probably new ventures focus on running their business
rather than placing emphasis on innovation and creativity.
The survey findings indicate that internationalization did not positively and
significantly influence new venture growth. New venture firms are interested but
are not able to nurture international markets maybe due to funding issues, product
considerations or business positioning strategies. While new venture businesses
have interest in internationalization strategies, they might face funding problems to
grow their business in international markets. In addition, new venture SMEs at times
have to play the supporting role of doing sub contract activities for large MNCs
where opportunities to grow internationally is sparse. The respondents of this
survey highly favoured the use of both personal and business networks at the
international level to grow business with average mean score of 4.09 on 5-point
Likert scale. To some extent respondents agreed that growth target has been
achieved through internationalization with average mean score of 3.75. The survey
respondents also agreed that previous experience of internationalizing business
ventures come in handy with average mean score of 3.55. The SMEs who
participated in this survey favoured less the need to go global from inception with
low average mean score of 3.52. Surprisingly, internal financing constraint had no
positive significant influence on new venture growth in Malaysian manufacturing
SMEs. The results clearly show that SMEs found internal financing to be
insufficient to do business and systems are not supportive for funding new venture
businesses. While internal financing can grow the business at a small level, it is
insufficient to grow beyond a point and SMEs require the support of external
financing. The government agencies and banking system should encourage new
ventures to grow by providing them financial viability. All the questions on internal
financing constraint received low scores. The impact of initial financial resources on
new venture growth had the highest average mean score of 2.49 on a 5-point Likert
scale. The survey respondents have expressed that initial capital constraint hinders
performance with average mean score of 2.48. The SMEs who participated in this
research survey have given very low scores for the difficulties in procuring loans
and difficulty to sustain business without external finance. New venture team
competencies were not found to be positively and significantly influencing new
venture growth. One of the main reasons for this could be that leveraging on
competencies of NVTs is still in a primitive state in Malaysia. SMEs need to create
an environment to groom new venture team competencies. In addition, competency
is a very subjective term and more studies are required to understand the impact of
new venture team competencies on new venture growth. A competency index for
SMEs will be a useful guide. In the current survey conducted, respondents rated the

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 M.V. Deepa & Gandhinathan Annamalai

pivotal role of the new venture team in scanning & selecting opportunities as most
important factor with average mean score of 4.54 on a 5- point Likert scale. The
respondents agreed on the business networking skills of new venture teams to
ensure business survival. The SMEs surveyed for the survey acknowledged that
functional expertise of new venture teams adds value to new venture growth with
average mean score of 4.26. Interestingly, the respondents gave low ratings on prior
industry experience (average mean score of 3.38) and professional experience
(average mean score of 2.62) of new venture teams. There seems to be varied levels
of agreement on these factors by the survey respondents.

8. CONTRIBUTIONS OF THE STUDY

As SMEs increasingly contribute positively to the growth of the Malaysian economy,

it is essential to ensure the success of these new ventures by understanding the
underlying factors that contribute to the new venture growth. There is a lack of
empirical studies on new venture growth in Malaysian manufacturing SMEs. In new
venture firms, there is increased chances of failure. This research initiative attempted
to examine which internal factors influence new venture growth of Malaysian
manufacturing SMEs. Pointing out the internal drivers can provide new ventures
with critical information for improving their businesses by reducing the risk of
failure and increase chances of success. The relevance of the study is to ensure that
entrepreneurs and existing new ventures are aware of the internal factors that could
cause a company to grow. This research has identified the internal factors, which
influence new venture growth. In developing countries, there is high encouragement
for start-up business and it is for the business people to grab the available
opportunities. This study will also provide a guide line for the various stakeholders
and policy makers so that they may develop practices to prevent SME failure in the
country. The opinion expressed by the SMEs can be viewed as future direction for
nurturing new venture projects.

9. LIMITATIONS OF THE STUDY

The study has contributed to the knowledge of influence of internal factors on new
venture growth in Malaysian manufacturing SMEs. However, the study covers
selected places in Malaysia like Selangor, Kuala Lumpur, Penang and Johor Bahru.
More places in Malaysia were not considered due to practical difficulties in data
collection. The number of years of establishment for a firm to qualify as potential
new venture respondent for the study was fixed as eight years based on literature

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 Internal Factors For New Venture Growth In Malaysian Manufacturing SMEs: An Empirical Study

review. However, there is no standard demarcation on how to choose potential

respondents for the study. Choosing younger firms might yield different results. The
researcher encountered many difficulties in collecting primary data owing to the
voluntary participation of the SMEs.

10. SUGGESTIONS FOR FUTURE RESEARCH

The research model of the current study can be applied to other SME sectors in
Malaysia. A comparative study of manufacturing firms and service firms will throw
more light on the differences in the relationship among the identified internal
factors for new venture growth. Similarly, the external factors influencing new
venture growth in Malaysian manufacturing SMEs can be identified and the effect
of external factors on new venture growth can be studied.

11. CONCLUSIONS

SMEs play vital role in the economic growth of many nations. However, many start-
up ventures do not survive beyond the first five years and sustain to succeed. The
current research extends the knowledge of new venture growth in Malaysian
manufacturing SMEs by developing a research model, which provides deeper
insights into the relationship between internal factors, and new venture growth.
This study was conducted amongst Malaysian manufacturing SMEs registered with
SME Corporation and which have been established during or after the fiscal year
2009. To the knowledge of the researcher, this is one of the first descriptions of
internal factors influencing firm growth in Malaysian SME manufacturing sector.
The major theoretical contributions of the present study are identifying the internal
factors that negatively influence new venture growth in the Malaysian
manufacturing SMEs using the Market Based View (MBV) and Resource Based
View (RBV) theory. Overall, the study identifies the contributing factors to improve
new venture growth and concludes that less innovation strategy and market
disorientation negatively influence the new venture growth in Malaysian
manufacturing companies.

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Dr. M.V. Deepa lectures in business management courses for

postgraduate students at various private universities. Her primary
research focus is in the areas of operational service quality with
specific interest in airline service quality. Her research interests also
include turnaround strategies, business performance and New
Venture Growth of Malaysian SMEs.

Gandhinathan Annamalai is an Engineer by profession, currently

attached to Northern Corridor Implementation Authority. His
work focuses primarily on implementing projects liaising with SME
companies. As part of his work, he was intrigued to research further
on how to grow and sustain performance of start-up new venture
companies in the SME segment.

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