THE RELATIONSHIP OF INTELLECTUAL CAPITAL, KNOWLEDGE SHARING AND INNOVATION ON ORGANIZATIONAL PERFORMANCE OF MALAYSIAS SMALL AND MEDIUM ENTERPRISES

ROHANA NGAH

FACULTY OF BUSINESS AND ACCOUNTANCY UNIVERSITI MALAYA 2011

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ABSTRACT
The knowledge-based economy has taken over the traditional economy due to the explosive era of knowledge.. Knowledge resources are a new venture to capitalize competition in the knowledge-based economy. It raises the importance of knowledge. Intellectual capital can be traced through knowledge development, which is either knowledge management or innovation. Exploiting intellectual capital as a competitive advantage has been proven in large organizations but exploring intellectual capital in SMEs is still in its infancy. Knowledge resources are said to be in abundance in SMEs systems. Maximizing on their intellectual capital such as human capital, close-networking, close and efficient communication system, SMEs should capitalize upon these opportunities as their competitive advantage. Pursuing the stream of importance of knowledge and capital, this study attempts to establish an integrated framework for intellectual capital. There are very few intellectual capital studies on Small and Medium Enterprises (SMEs); this study investigates intellectual capital with a process perspective and its relationship to organizational performance. As previous studies were inclined to investigate the impact of individual components of intellectual capital on organizational performance, this study focuses on examining the effects of intellectual capital as one construct on organizational performance. It considers the mediation effects of knowledge sharing and innovation with organizational performance. Three hundred and thirty-six usable questionnaires were collected through the mail survey method. Respondents were owners, managers and executives of SMEs of the manufacturing and services sectors. Structural Equation Modelling was utilized to estimate the conceptual model; the unidimensionality, discriminant validity, convergent validity, and reliability were also established.
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The findings show positive significant indirect relationship between intellectual capital and organizational performance whereas knowledge sharing and innovation serve as mediators to the relationship. Knowledge sharing and innovation served as an important link as mediator for intellectual capital for better organizational performance of the organization. Therefore, in order for the SMEs to have a better performance, they should integrate knowledge sharing and innovation in their daily operation. Knowledge sharing is important for the organization to be innovative. Knowledge sharing presents as process mechanism between the intellectual capital, innovation and organizational performance. The integrated model was presented, which may lead to future research in this area.

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ABSTRAK
Ekonomi berasaskan ilmu telah menggantikan ekonomi tradisi berikutan era ledakan ilmu. Sumber ilmu adalah satu usaha baru untuk menguasai persaingan dalam ekonomi berasaskan ilmu. Ia menekankan kepentingan ilmu. Modal intelek boleh disusuri melalui pembangunan ilmu, samada pengurusan ilmu atau inovasi. Mengeksploitasikan modal intelek sebagai kelebihan persaingan telah terbukti dalam organisasi yang besar namun kajian modal intelek dalam Perusahan Kecil dan Sederhana (PKS) masih cetek. Sumber ilmu dikatakan berlimpahan dalam sistem PKS. Memaksimakan modal intelek mereka seperti modal insan, rangkaian yang rapat, sistem komunikasi yang pendek dan efisien, PKS harus memanafaatkan peluang-peluang ini sebagai kelebihan persaingan mereka. Menyusuri laluan pentingnya ilmu dan modal, kajian ini berhasrat untuk membina rangkakerja integrasi bagi modal intelek. Terdapat beberapa kajian modal intellek ke atas PKS; kajian ini mengkaji modal intelek dari perspektif proses dan hubungannya ke atas prestasi organisasi. Oleh kerana kajian terdahulu lebih kepada menyelidiki kesan komponen modal intelek secara berasingan ke atas prestasi organisasi, kajian ini tertumpu kepada mengkaji kesan modal intelek sebagai satu konstruk ke atas prestasi organisasi. Ia mengambilkira kesan perantaraan perkongsian ilmu dan inovasi ke atas prestasi organisasi. Tiga ratus tiga puluh enam borang kajiselidik yang boleh digunakan diperolehi melalui kaedah tinjauan mel. Responden adalah tuanpunya, pengurus dan eksekutif PKS dari sektor pembuatan dan perkhidmatan. Model Persamaan Struktural (SEM) telah digunakan untuk menganggarkan model konseptual; unidimensional, kesahihah diskriminan, kesahihah konvergen dan kebolehpercayaan juga telah dibina.

Hasil penemuan menunjukkan hubungan positif yang signifikan antara modal intelek dan prestasi organisasi di mana perkongsian ilmu dan inovasi bertindak sebagai perantara dalam hubungan ini. Perkongsian ilmu dan inovasi berfungsi sebagai perantara yang penting kepada model intelek bagi prestasi organisasi yang lebih baik. Oleh itu, PKS harus mengintegrasikan perkongsian ilmu dan inovasi dalam operasi harian mereka bagi mencapai prestasi organisasi yang lebih baik. Perkongsian ilmu penting bagi organisasi untuk lebih berinovatif. Perkongsian ilmu wujud sebagai mekanisma proses antara modal intelek, inovasi dan prestasi organisasi. Model integrasi telah di bina yang boleh dijadikan kajian di masa hadapan dalam bidang ini.

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ACKNOWLEDGEMENTS First and foremost, I would like to express my deepest gratitude, love and thanks to Almighty God, Most Gracious, Most Merciful for giving me the strength, patience, knowledge and good health without which it will be impossible for me to complete this thesis. I would like to thank and express my gratitude to my supervisor, Associate Prof. Dr.Abdul Razak Ibrahim whose advice, guidance and motivation have been extremely invaluable to me, throughout this journey and my academic career. I am thankful to my parents, Haji Ngah Bin Mamat and Hajjah Hasmah Binti Hassan for their continuous love and prayers. To my brothers and sisters, nieces and nephews, thank you for your prayers and words of encouragement. I would like to express my greatest appreciation and gratitude to my loving and caring husband, Taufiq Tai Gak Whee, who shares the ride with me side by side in highs and lows during this journey. Thank you for your love, support, encouragement, motivation, sacrifices and everything in helping me to complete my study. My beautiful children; Azril, Azraie, Dina, Adhwa and Adibah; give me such a joy of being a proud parent and they make me want to be a better person than who I am day by day. Their understandings, prayers, patience and sacrifices make me feel blessed, grateful and guilty at the same time. They are very independent and bright that allowed me to dedicate more time in this study. Finally, I also wish to extend my appreciation to Prof Charles Egbu (UK), Dr Sandra Cohen (Greece), Prof Deborah Bandalos (USA), Dr Shahid (USA), Prof Khairuddin (UUM,Malaysia), Prof Jenny Darroch (NZ), my best friend, Zana, my colleagues and friends (especially my PhD friends Albaity, Ali Jaballa, Liza, and others) who gave me advice, motivation, encouragement and support in making my dream a reality. My sincere and heartfelt thanks go to all of you beautiful people.

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Abstract Abstrak Acknowlegements Table of Content List of Figure List of Table List of Chart

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CHAPTER ONE INTRODUCTION 1.1 1.2 1.3 1.4 1.5 1.6 1.7 1.8 1.9 Background of Study Problem Statement Aim of study Research Objectives Research Questions Significance of the Study Theoretical Contributions Practical Contributions Definition of variables 1.9.1 Intellectual capital 1.9.2 Knowledge sharing 1.9.3 Innovation 1.9.4 Organizational Performance 1.10 Summary 1.11 Organization of the thesis 1 5 12 14 14 15 16 17 19 19 19 21 21 22 22

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CHAPTER 2 LITERATURE REVIEW 2.1 2.2 2.3 2.4 Introduction Resource-Based Theory 2.2.1 Resource-Based Theory to framework Organizational Resources Intellectual Capital 2.4.1 Human Capital 2.4.2 Structural Capital 2.4.3 Relational Capital 2.4.4 Intellectual capital Studies 2.5 The Mediating Variables 2.5.1 Knowledge 2.5.2 2.6 Knowledge Sharing 2.5.3 Innovation Organizational Performance 2.6.1 The Relationship between Intellectual Capital and Organizational Performance 2.6.2 The Relationship between Intellectual Capital and Knowledge Sharing 2.6.3 The Relationship between Knowledge Sharing and Organizational Performance 2.6.4 The Relationship between Innovation and Organizational Performance 2.6.5 The Relationship between Intellectual Capital, Knowledge Sharing and Organizational Performance 2.6.6 Intellectual Capital, Innovation and Organizational Performance 2.6.7 Intellectual Capital, Knowledge Sharing, Innovation and Organizational Performance 2.7 2.8 2.9 The Relationship between Intellectual Capital and Innovation The Relationship between Knowledge sharing and Innovation Gaps in the study 26 26 28 32 35 54 56 57 60 67 69 71 99 122 126 127 129 131 133 134 135 138 146 153 155
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2.10 Summary

CHAPTER 3 ANALYSIS OF SMALL AND MEDIUM ENTERPRISES 3.1 3.2 3.3 3.4 Introduction Definition of Small and Medium Enterprises in Malaysia Small and Medium Enterprises Output to GDP Geographical Location of SMEs 157 158 161 163 164 165 168 170 172 178

3.5 Small and Medium Sectors 3.5.1 Manufacturing industry 3.5.2 Services industry 3.5.3 Agriculture 3.6 3.7 Challenges of SMEs Summary

CHAPTER FOUR RESEARCH DESIGN AND METHODOLOGY 4.1 4.2 4.3 4.4 Introduction Philosophy of Research Conceptual Framework Research Design 4.4.1 Sampling Design 4.4.2 Population 4.5 Hypotheses Development 4.5.1 The Relationship between Intellectual capital and Organizational Performance 4.5.2 The Relationship between Intellectual Capital and Knowledge Sharing 4.5.3 The Relationship between Knowledge Sharing and Organizational Performance 4.5.4 The Relationship between Intellectual Capital and Innovation 4.5.5 The Relationship between Innovation and Organizational Performance 4.5.6 Intellectual Capital, Knowledge Sharing and Organizational Performance 179 180 181 183 184 186 186 188 189 190 190 191 191
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4.5.7 The Relationship between Intellectual Capital, Innovation and Organizational Performance 4.5.8 The Relationship between Intellectual Capital, Knowledge Sharing, Innovation and Organizational Performance 4.6 4.7 Data Collection Procedure 4.6.1 The Questionnaire Method of Survey 4.7.1 Survey Questionnaire Validation 4.7.2 Instrument Translation Process 4.7.3 Pilot Test 4.8 4.9 Reliability Test Data Analysis Plan

192 193 194 194 195 197 198 199 200 201 203 206 207

4.10 Common Method Variance/ Common Method Bias 4.11 Assumptions 4.11 Summary CHAPTER FIVE DATA ANALYSIS 5.1 5.2 Introduction Data Collection 5.2.1 The Response Rate 5.2.2 Non Response Bias 5.2.3 Normality Test 5.2.4 Demographic Profiles 5.3 5.4 Univariate Analysis 5.3.1 Test of Collinearity and Multivariate Analysis- Structural Equation Modelling 5.4.1 Measurement Model 5.4.2 The mediating role of knowledge sharing and innovation 5.4.3 Analysis of Structural Model and Testing Hypotheses 5.6 5.7 Summary of Hypotheses Findings Summary

208 208 208 209 210 211 214 214 214 215 234 242 249 254
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CHAPTER SIX DISCUSSION AND FINDINGS 6.1 6.2 6.3 Introduction Review of Data Analysis Results Readdressing the Research Questions 6.3.1 The Relationship between Intellectual Capital and Organizational Performance 6.3.2 The Relationship between Intellectual Capital, Knowledge Sharing and Organizational Performance 6.3.3 The Relationship between Intellectual Capital, Innovation and Organizational Performance 6.3.4 The Relationship between Intellectual Capital, Knowledge Sharing, Innovation and Organizational Performance 6.4 Summary 255 255 256

256 258 263 265 270

CHAPTER SEVEN CONCLUSION AND RECOMMENDATIONS 7.1 7.2 7.3 7.4 7.5 Introduction Limitations and Suggestions for Future Research Theoretical Contributions/ Implications Recommendations Summary 272 273 276 281 285

APPENDICES Appendix 1 Taxonomy of Intellectual Capital, Knowledge Sharing, Innovation Studies Appendix 2 Taxonomy of Knowledge Sharing Studies Appendix 3 Taxonomy of Innovations Appendix 4 List of Small and Medium Enterprises Definition Appendix 5 Dimensions of Measurements Appendix 6 Cover Letter Appendix 7 Questionnaire Appendix 8 Graph of P-Plot Appendix 9 Results of Structural Equation Modeling Appendix 10 Correlation of Final Items REFERENCES
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LIST OF FIGURES
Figure 1.1 2.1 2.2 2.3 2.4 2.5 2.5 2.6 2.7 2.8 2.9 2.10(a) 2.10(b) 2.11 2.12 2.13 2.14 2.15 2.16 2.17 2.18 2.19 2.20 2.21 2.22 2.23 2.24 2.25 2.26 2.27 2.28 2.29 2.30 2.31 2.32 2.33 2.34 Title Flow of Chapters Resource-Based Value model Basic Resources The Haanes and Lowendahl Model The Lowendahl Model Conceptual roots of Intellectual Capital Skandia Knowledge Management frameworks Components of Intellectual Capital The Danish Confederation of Trade Unions Model Jaworski & Kohli Model Intellectual capital dimensions The intellectual capital studies (Chen et al.,2004) The intellectual capital studies (Bontis, 2000) Knowledge management enablers Kaplan and Norton (1992) Gamble and Blackwell Model Demarests Knowledge Management Model Knowledge Cycle Model Boisot Model Knowledge and Trust Model Integrative framework on knowledge-sharing-performanc relationship Knowledge Work Model Husted Model of Motivation for Knowledge Sharing Factors that influence knowledge sharing between individuals in the organization Knowledge Sharing Model Knowledge Sharing Process Innovation Model Sources of Ideas Circle of innovation Innovation Typology Innovation Level Innovation Process Innovation Management System Knowledge Content Components and knowledge outcomes Knowledge sharing Model Integrative framework on knowledge-sharing-performance relationship Hurley and Hult Innovation Model Page 25 30 33 34 35 37 40 42 43 58 60 61 61 63 64 73 74 76 77 86 91 92 93 95 96 98 100 102 106 108 109 113 116 119 128 130 132
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Figure 2.35 2.36 2.37 2.38 2.39 2.40 2.41 2.42 2.43 2.44 2.45 2.46 3.1 3.2 3.3 4.1 4.2 4.3 4.4 5.1(a) 5.1(b) 5.1(c) 5.1(d) 5.2 5.3 5.4 5.5 5.6 (a) 5.6 (b) 5.6 (c) 5.6 (d) 5.6 (e) 5.6 (f) 5.6 (g) 5.7 5.8 5.9

Title Intellectual capital Model Keskins Market orientation Model Hult Market Orientation Model Hult and Hurley Market orientation Model Martin and Terblances Innovation Model Afuahs Innovation Model Intellectual Capital and Culture Intellectual capital and Innovation Model Knowledge Innovation Model Knowledge sharing infrastructure model Social aspects of innovation process Model Collaboration and Interaction Innovation Model Map of Malaysia Development Programmes for SMEs Creating Enabling Environment for SME Development in Malaysia Conceptual Framework Research Framework The Research Process Flow Chart The Hypotheses as Depicted in the Research Framework Measurement Model for Intellectual Capital Measurement Model for Innovation Measurement Model for Knowledge Sharing Measurement Model for Organizational Performance Widamans Three Comparison Models: A simplified Example using Innovation Models for Discriminant Validity Test (Simplified Example of Intellectual Capital and Knowledge Sharing Constructs) Illustrative Example of Testing Predictive Validity Illustration of Mediating Effect Direct Effect Relationship Direct and Indirect Effect Relationships Direct Effect Relationship Direct Effect Relationship Direct Effect Relationship Direct Effect Relationship Simplified Models for Testing the Mediation Effect of Knowledge Sharing and Innovation Model Result of structural model Simplified Models for sequential Chi-square difference Tests The Final Structural Model

Page 135 136 137 138 141 142 143 146 149 150 152 153 164 174 177 182 182 183 187 218 218 219 219 224 226 228 235 237 238 238 239 239 240 240 242 246 248

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LIST OF TABLES
Table 1.1 2.1 2.2 2.3 2.4 2.5 2.6 2.7 2.8 2.9 2.10 2.11 2.12 2.13 2.14 2.15 2.16 2.17 2.18 2.19 2.20 2.21 2.22 2.23 2.24 3.1a 3.1b 3.2 3.3 3.4 3.5 3.6 3.7 3.8 3.9 3.10 4.1 Title Summary of intellectual capital studies Types of knowledge resources Taxonomy of Components of Intellectual Capital Taxonomy of Intellectual Capital Dimensions Benefits of Intellectual Capital Definition of Intellectual capital (IC) Human capital dimensions Measurement of intellectual capital Intellectual Capital Valuation Intellectual Capital Research Summary of Data, Information and Knowledge Advantages of Knowledge Sharing Types of knowledge transfer/knowledge sharing Knowledge Sharing Measurement Summary of Internal and External knowledge Summary of knowledge sharing dimensions Types of Innovation Innovation Categories The difference between Creativity and Innovation Summary of literature review about variables influencing innovative efforts of SMEs Determinants of innovation The measurement of organizational performance Measurement of intellectual capital towards organizational Performance Knowledge Infrastructure Impact of innovation on organizational performance Definition of SME based on Annual Sales Turnover Definition of SME based on Number of Full-Time Employees Definition of SME based on category Output and Value Added of SMEs by Sector(2003) Total output by SMEs (Manufacturing) Distribution of SMEs in services (sub-sector) Total Factor Productivity and Contribution (1999-2008) by SMEs (Services) Services Productivity Distribution of SMEs in agriculture (sub-sector) Production value resulting from initiatives by MADA Innovation Performance and Innovation Enablers Rankings: Malaysia vs. Selected Countries, 2007-2011 Source of Measurements Page 20 38 45 46 47 48 55 64 65 66 69 72 83 88 89 104 110 111 117 121 124 125 129 133 159 159 160 162 165 168 169 169 170 171 172 176 195
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Table 4.2 4.3 5.1 5.2 5.3 5.4 5.5 5.6 5.7 5.8 5.9 5.10 5.11 5.12 5.13 5.14 5.15 5.16 5.17 6.1

Title Reliability Test Results for the Pilot Study Data Analysis Techniques Correlations among independent variables Demographic Profiles (Organization) Demographic Profiles (Individual) Multicollinearity Test Results Summary of Items Dropped in Confirmatory Factor Analysis Fit Results for Measurement Models after Instrument Validation Summary of Other Results of the Measurement Models Convergent Validity Tests (Bentler-Bonett Coefficient ) Convergent and Discriminant Validity Tests (Widamans Three Models Test) Assessment of Discriminant Validity (Constrained and the Unconstrained models) Test of Discriminant Validity Results of Predictive Validity Test Result of Construct Validity Assessment Direct Relationships between Study Variables Fits for Models Used In Testing the Mediating Effects of Knowledge Sharing and Innovation Sequential Chi-square difference Tests Summary of Hypotheses Summary of Discussion

Page 201 202 212 213 214 216 218 220 224 225 226 227 228 232 236

241 244 249 270

LIST OF CHARTS
Chart 3.1 3.2 3.3 3.4 Title SMEs proportion Contribution of SMEs to Economy Distribution of SMEs (Manufacturing) Productivity of SME in the Manufacturing Sector Page 161 162 166 167

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LIST OF ACRONYMS AND SYMBOLS

AVE CC CFI GFI HC IC IMP3 INV KM KS LV MI MO OP P PC PD RBT RBV RC RMSEA SC SEM SME SMIDEC SPSS TLI R Average Variance Extracted Customer Capital Comparative Fit Index Good Fit Index Human Capital Intellectual Capital Third Malaysian Industrial Master Plan Innovation Knowledge Management Knowledge Sharing latemt variable Modification Index Market Orientation Organizational Performance p-value Process Innovation Product Innovation Resource-Based Theory Resource-Based View Relational Capital Root Mean Square of Approximation Structural Capital Structural Equation Modelling Small and Medium Enterprises Small and Medium Enterprises Corporation Statistical Package for the Social Science Tucker Lewis Index Bentler-Bonnett Coefficient R-Squared, proportion of variance Alpha Change in Chi-Square Chi-Square Lambda, Regression Weight

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DEDICATIONS

To my parents, To my husband, To my beloved children

Verily, with every difficulty there is relief Therefore, when thou art free (from thine immediate task), still labour hard, And to thy Lord turn (all) thy attention

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CHAPTER ONE INTRODUCTION

1.1 Background of Study
The global conomy is moving from physical labour to a knowledge based economy (KBE). Knowledge provides long-term competitive advantages to countries as well as organizations. The Asia Top-3, namely, South Korea, Japan and Hong kong (UNDP, 2007) have proven that a knowledge-based economy allows the countries to remain competitive even in uncertain situations. In todays context, knowledge is vital for most organizations and, therefore, they must make a significant effort to change. The first step to changing from a traditional company into a knowledge company is to be aware of the knowledge of the organization, known as intellectual capital (IC) (Montequin et al. 2006). Recently, the concept of intellectual capital has been identified as a key resource and driver of organizational performance and value creation (Marr et al., 2004). Most IC researchers (Stewart, 1997; Bontis, 2001; Van Buren, 1999) and Barneys resource-based view (1991, 1997, and 2002) agree that IC is a critical resource for a firm. Organizations perform well and create value when they implement strategies that respond to market opportunities by exploiting their internal resources and capabilities (Penrose, 1959; Andrews, 1971 as cited by Marr et al., 2004). In knowledge-based economy, (KBE), organizations must be knowledge oriented and rely on knowledge to create competitive advantage (Quah, 2008). As productive capabilities become more dependent on knowledge assets, and knowledge itself is being created and exchanged at an increasingly rapid rate, organizations have to
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restructure themselves to exploit it to get better market leverage. Knowledge management initiatives are aimed at enhancing organizational performance through the identification, capture, validation, and transfer of knowledge. Although the basic concepts and principles of knowledge management are similar for small and large organizations, there is a difference in the value placed on systematic knowledge management practices like formalized environmental scanning and computer based knowledge sharing systems (Lim and Klobas, 2000). Choi and Lee (2003) stress that information and knowledge management should consider both human and system factors to develop individual knowledge into a collective organizational resource. The knowledge and information in the organization have to be managed, and that intellectual capital is the most appropriate theoretical lens to use (Roos, et al., 1998). The intellectual capital includes all the processes and the assets of knowledge such as human capital, which comprises employees capabilities, skills and commitment; structural capital, which comprises organizational efficiencies and knowledge management; and relational capital, which comprises customers, suppliers and other parties relationships to the organizations. In short, intellectual capital can be located in its people, its structures and its customers (Wiig, 1997). The intellectual capital is the answer to a very practical and widespread need to manage the whole company. While knowledge is part of intellectual capital, intellectual capital is much more than knowledge (Roos, et al., 1998). Intellectual capital is also known as the organizational resources of an organization (Egbu et al., 2000) Small and medium-sized enterprises (SMEs) have a reputation as boosters of employment, economic growth and economic dynamics (Keizer et al., 2002). The role of SMEs in economic development has been a growing concern of economic researchers,
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policy makers and numerous international agencies for many years (Ratanapornsiri, 2003). According to the 2007 Malaysian Central Bank Governors keynote address, the SME sector has long been hailed as a key driver of the national economy; it contributes 32% to the national GDP (Low, 2007). Ninety-nine out of 100 Malaysian businesses are SMEs and almost 5.6 million Malaysians work in the SME sector (Low, 2007). SMEs face difficult challenges compared to large enterprises when it comes to the global business and trade landscape. One of the challenges affecting SMEs ability to be competitive, efficient, and resilient is limited capacity for technology management and knowledge acquisition; therefore, SMEs will need to acquire critical knowledge and skills in order to remain competitive (SME Annual Report, 2007). According to Quah (2008), even though knowledge management is relevant to SMEs, the implementation might take some time. Knowledge management in Malaysia remains at a very infant stage with very few Malaysian companies and industries having initiated any knowledge management programme (Tat and Hase, 2006, Quah, 2008, Ngah et al., 2008). As SMEs are small and easy to manage, the application of knowledge management and innovation should be much easier. Knowledge sharing is the best answer for knowledge management in SMEs, as the lack of knowledge sharing systems, means that the knowledge related to the organizations core competencies is held as tacit knowledge in the mind of key employees (Keskin, 2006; Lim and Klobas, 2000). SMEs seem to be appropriate units to behave like network nodes because of their lean structure, adaptability to market evolution, active involvement of versatile human resources, ability to establish subcontracting relations and good technological level of their products (Mezgar et al. 2000). Knowledge is more than just improving organizational performance. In the era of
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globalization, the rich information flows from many sources and channels without any limitation, consequently, an organizations capability to manage knowledge effectively becomes a prerequisite for success and innovativeness (Widen-Wulff and Suomi, 2007). Over the years, because of globalization and global corporations, Asia has risen as an important location for innovation offshoring (Ernst, 2006). In addition, Asian governments and firms are playing an increasingly active role as promoters and new sources of innovation. Although China and India are at the forefront, South Korea, Taiwan, Singapore and Malaysia are equally well developed. Studies have evidenced that small companies seem to have a shorter development cycle and a higher proximity to the market (Birchall et al., 1996 as quoted in Ussman et al., 1997) which allow SMEs to be fast and flexible (Zanjani et al. 2009). This is one of SMEs capability that to realize innovation (Keizer et al., 2002).

Most of the researches done on knowledge management, particularly knowledge sharing (Huysman et al., 2002) and innovation are on large organizations as they are seen more structured and financially strong. According to Ghobadian and Gallear (1997), SMEs are more likely to be people oriented than system oriented. For this, SMEs need to weigh up their basic lack of people resources against their increased flexibility and responses. Previous researches have found out that SMEs are eager to adapt and adopt knowledge sharing practices, (Mc Adam and Mc Creedy, 1993) and interested in innovation (Motwani et al., 1999). Therefore, in assisting SMEs to be successful, there should be a model to suit SMEs based on their scarce resources, skills, expertise, practices, culture and environment.

1.2

Problem Statement
As previous studies have revealed, intellectual capital (IC) components are

intertwined, and they act as integral knowledge assets in an organization. However, even though a few authors mentioned that IC components are closely related, most intellectual capital studies concentrate on identifying the impact of its components as a separate entity rather than regarding it as a bundle of resources. It has to be measured as one rather than separately as is generally the case. As some authors regard intellectual capital as static knowledge, the model of intellectual capital with a process link should be considered. In particular, human capital, structural capital and relational capital are heavily involved in the knowledge conversion, i.e. tacit knowledge, explicit knowledge and their transformation from one to the other (Hsu, 2006), which is also a knowledge sharing process. While there is no clear division between knowledge sharing and intellectual capital, there is an intuitive link between them. Numerous researchers have investigated knowledge components and the knowledge management (KM) process, especially knowledge creation, innovation and success achievement in organizations, however, none has been identified to include knowledge sharing and innovation components in an integrated research framework of intellectual capital. Few researchers have identified the role of knowledge management in improving intellectual capital. Besides, innovation is also regarded as another capital in intellectual capital studies (Chen et al. 2004). However, recently, more researchers are treating innovation as an outcome, as innovation will prevail when there is a generation of ideas that is heavily dependent on knowledge. This study presents a framework that integrates the input-process-output model of intellectual capital.
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Ultimately, an organization should target to achieve better organizational performance. Therefore, this study presents a model with process and content perspectives instead of just the IC effects that have been focused upon in the earlier IC initiatives. Although intellectual capital maybe a source of competitive advantage, generally, most organizations do not understand its nature and value (Collis, 1996). Facing intense globalized competition, there is a widespread recognition that intellectual capital is a critical force that drives economic growth (Huang and Liu, 2005). Nowadays, companies are competing on creativity and innovation, which are dependent on the information and knowledge captured, acquired, utilized, stored and accumulated. Hashim (2007) identifies the business characteristics of successful SMEs as sufficient capital, economies of scale, flexibility in costing, pricing latitude, ability to meet typical operating profit margin of the industry, costs variability at various production levels, ability to achieve greater efficiency, use of marketing in generating additional sales and the ability to be innovative. Basically, entrepreneurs have the ability to recognize a business opportunity, which is fundamental to the entrepreneurial process as well as growing a business (Hisrich and Peters, 2008). This business opportunity results from the knowledge and experience of the individual entrepreneurs. Knowledge is a combination of experience and education, and relevant experience could be work related or a variety of personal experience (Hisrich and Peters, 2008). Today, companies have two basic kinds of expenditure for a long run investment: capital equipment, and research and development. Knowledge is said to be the main source of competitive advantage for companies, therefore, more and more companies are investing in knowledge and information, making them knowledge-intensive companies (Stewart,
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2000). The best part is that knowledge and information can be detached from the physical movement of goods and services. While knowledge management and intellectual capital were developed around large organizations that were mainly related to the financial sector, nowadays, efforts are addressed to transfer these concepts to SMEs (Montequin et al. 2006). Operating within a KBE, knowledge drives profit for the organizations for capital gain and sustaining competitive advantage (Wickramansinghe, 2005). Knowledge management is a competitive advantage for an organization but for SMEs, knowledge management only covers knowledge creation and knowledge acquisition and it stops there (Wong and Radcliffe, 2000). The intellectual capital (comprising employees, their knowledge of products and services, and their creativity and innovation abilities) is a crucial source of knowledge assets (Wickramansinghe, 2005) for organizations. Furthermore, compounded by an informal and oral culture of communication within SMEs, the tacit nature of knowledge will give rise to the knowledge retention problem, therefore, sharing needs to be adopted immediately (Thorpe et al., 2005). Entrepreneurs that are able to act on business opportunities would be in a strategic position to develop innovation new products/services. Entrepreneurs shift resources from areas of low productivity and low yield to areas of higher productivity and higher yield (Drucker, 1986). The strength of SMEs lies in motivation, good network, tacit knowledge in unique skills, shorter informal communication, less bureaucracy, greater proximity to market and internally closely related, which is important for innovation (Nooteboom, 1993). This gives SMEs flexibility in innovation, especially its close proximity to market information and customer information. The great diversity of
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SMEs generates a variety of innovative ventures (Nooteboom, 1993). Most literature reviews highlight the SMEs lack of tangible resources, physical and financial capital, but the challenges for these SMEs is being able to demonstrate the intangible resources embedded in the organization such as entrepreneurial capital, which is an extension of human capital (Erikson, 2002). Furthermore, the new economy is built on information technology and the sharing of knowledge and innovation (Wickramansinghe, 2005). The fact that most of the knowledge shared by SMEs is explicit suggests that some management of the sharing process is in the hands of the SMEs (Levy et al., 2003). Many researchers suggest that using the findings of innovation studies in advanced countries to explain innovative behaviour in less developed countries is likely to be inappropriate. SMEs differ from large organizations in their stages of development because they are successful, associated with a clear focus and strong values like independence, flexibility, entrepreneurship and innovation as well as their close contact with customers and suppliers through personal forms of control and a longterm view of business relations. However, they suffer from an informal structure, insufficient resources, erratic decision making and poor administrative and accounting procedures (Heildenberg, 2006 as cited in Montequin et al. 2006). Therefore, this new finding will help SMEs to adapt to a KBE, thereby capitalizing their internal resources in maximizing their performance via innovation and knowledge sharing. Quoted by Kaplan and Norton (2004, p. 4 as in Chen at. 2005) some countries such as Venezuela and Saudi Arabia have high natural resource endowments but have made poor investments in their people and systems. As a consequence, they produce far less output per person and experience much slower growth rates, than countries like
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Singapore and Taiwan that have few natural resources but invest heavily in human and information capital and effective internal systems. Considering the current context, where markets are becoming more competitive, forcing companies to be consistently innovating, management of intellectual capital seems to be the most valuable assets, as the main driver of innovation. Intellectual capital in SMEs appears more complex because normally it is difficult to introduce and to manage intangible assets, which, combined with the scarcity of resources, undermine competitiveness. Practitioners, managers and policy makers that are oriented to the promotion of the endogenous growth of SMEs, are taking consideration the importance of developing intellectual capital in order to foster the entrepreneurial performance of SMEs which are intended as the most innovative entrepreneurial units. Davidson and Griffin (2003) pointed out small businesses have contributed many innovative ideas and technological breakthroughs to the society. In order to maintain and develop further their innovative skills SMEs need to develop their understanding of knowledge management (KM), as a key business driver rather than as a resource-intensive additional initiative (Zanjani et al., 2008). However, despite this pressing need, it is widely accepted that small companies even the most knowledgeintensive ones are characterized by a lack of uptake of KM initiatives (Nunes et al., 2006). Perhaps due to the reason that KM systems are expensive to purchase, use and maintain. However, it is recognised that the peculiarities of SMEs mean that they do KM differently from large companies (eg McAdam and Reid, 2001; Desouza and Awazu, 2006; Basly, 2007; Supyuenyong et al, 2009 as cited in Staplehurst and Ragsdell , 2010) because of their characteristics. .
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Some important characteristics of SMEs include: The company is characterized by the entrepreneur who very often also is the owner of the company. The entrepreneur normally is the general manager, thus he acts on his own risk. The entrepreneur has a network of personal contacts to customers, suppliers and the relevant public sector. So the contact is close and rather informal. The company usually acts very local. The products offered can be very individual to the customers needs. The form of organization is rather informal and flat. The company can react quickly to changes in the environment. The company is not dominated or ruled by another company, e.g. part of big business concern.

The market share is normally small. The products are little diversified.

SMEs make substantial contributions to national economies and are estimated to account for 80 percent of global economic growth ( Pavic et al, 2007). SMEs are a vital part of any national economies because Zanjani et al. 2009): 1. They are a source of innovation in new products, services, processes and work practices 2. They are specialist suppliers of parts, components and subassemblies for large companies 3. They are fast and flexible and close to their customers 4. They can perform an import substitution role
10

5. They can be a more human environment; on human scale. Many researchers agree that for SMEs, developing channels for effective knowledge sharing is crucial. With SMEs under constant pressure to keep costs low, the opportunities for cost savings from knowledge sharing and pooling resources cannot be overlooked. One area in which SMEs can clearly benefit from knowledge sharing is good practice. SMEs have advantages about flexibility, reaction time and innovation capacity that make them central actors in the new economy (Raymond and Croteau, 2006 as cited in Ibrahim et al. 2010). Against this background, it is important to propose an alternative approach to suit SMEs in utilizing and capitalizing their internal and external knowledge as well as be competitive in knowledge-based economy. This approach is unique as SMEs strengths and weakness have been taken into consideration. Mosey et al (2002) found that low innovative SMEs which they called low growth incremental improvers made poor use of knowledge and information of their customers and market information compared to innovative high growth SMEs. Apparently, SMEs should know on how to capitalize external knowledge (customer and market) by sharing the knowledge internally lead to rapid innovative decision making. This study will focus on SMEs in the manufacturing and service sector as they are considered as being highly tacit knowledge intensive in nature (Lowendahl, 2000). This study will identify other implications where intellectual capital is being increasingly recognized as the major driver of corporate and national growth (Chen et al., 2005). In short, being in dynamic environments, SMEs is a choice to explore the role of intellectual capital, knowledge sharing and innovation based on these justifications:

11

1.

SMEs maybe small in size, but they are large in numbers in most economies firm populations (Maes et al., 2005)

2. Most of research and theory building on intellectual capital and knowledge sharing in particularly largely ignored SMEs as a research population (Zahra et al. 2006). This is surprising given that SMEs need unique, dynamic capabilities to survive and be able to exploit their innovative position (Sapienza et al., 2006). 3. Combining SMEs urgent need for intellectual capital and knowledge sharing with their more transparent nature (Cohen and Kaimnekis, 2007), makes them an ideal research population to advance current knowledge of how intellectual capital and knowledge sharing can be developed, improved and enhanced.

1.3

Aim of study

A number of IC studies have conceptually established different dimensions of intellectual capital. Most IC studies examined intellectual capital components independently (Bontis, 1998, 2000; Chen et al., 2000; Cohen and Kaimenakis, 2007) rather than examining the effect of intellectual capital as a bundle of effects. Most of either KM or IC research utilized interpretive case studies (Massey et al., 2002, Davenport et al., 1997, 1998, 2000), or positivist quality research, (e.g. classification or frameworks establishment; (Teece, 1998; Bontis, 2002a and 2002b, Pike et al., 2002). However, there are almost no empirical studies examining the relationship between IC and knowledge sharing, innovation and the links between knowledge sharing, innovation and organizational performance into one
12

model. Even though this model is similar to Lee and Choi (2003) model using inputprocess-output, however their model is complicated (Papoutsakis, 2006). In this study, knowledge sharing is included as knowledge sharing is regarded as key for growth for SMEs. Many SMEs may therefore see knowledge sharing as a low cost solution that could increase innovation and customer satisfaction, while improving the retention of expertise and strengthening a sense of community (Love et al. 2005, p.16 as cited in Staplehurst and Ragsdell, 2010). Futhermore, knowledge sharing culture is already well-developed in SMEs (Davison and Ou, 2007). Therefore, this study is to develop an alternative model for SMEs to set their strategies in competing in knowledge-based economy. In addition, this model also to explicate the framework of how organizational performance can be improved through intellectual capital, knowledge sharing and innovation. It is important to align and choose knowledge management activities with targeted intellectual capital results. To further strengthen the model, innovation is included as an intermediate outcome as SMEs is regarded as source of innovation (Zanjani et al., 2009). As well as from the practioners point of view, interconnecting variables may provide a clue as to how firms enhance their strengths to improve their performance (Liau and Chung, 2001).

By having this alternative approach, SMEs would be able to understand, re-examine and re-organized its intellectual capital and its practices towards being more innovative and competitive.

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1.4

Research Objectives
o To investigate the relationship between intellectual capital and organizational performance in SMEs o To investigate the mediating effects of knowledge sharing on intellectual capital and organizational performance. o To investigate the mediating effects of innovation on intellectual capital and organizational performance o To identify the mediating effect of knowledge sharing and innovation on intellectual capital and organizational performance.

1.5

Research Questions
RQ1: What is the impact of SMEs intellectual capital on organizational performance? RQ2: Does knowledge sharing mediate the relationship of intellectual capital and organizational performance? RQ3: Does innovation mediate the relationship of intellectual capital and organizational performance? RQ4: Do knowledge sharing and innovation mediate the relationship between intellectual capital and organizational performance?

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1.6

Significance of the Study

This study focuses on intellectual capital as a bundle of assets. Intellectual capital is

also known as an organizational knowledge that needs to be regulated in order to make sure that the knowledge in the organization is not only valuable but can be turned into profit, either in the form of innovation or organizational performance. Most of the researches pertaining to intellectual capital look at knowledge management relationship rather than focusing on intellectual capital itself the internal resources. It is important to focus on the internal resources of the organization in assessing its capabilities to be competitive. The recent work by Bontis et al. (2000) suggests the existence of a significant positive relationship between intellectual capital and organizational performance in large organizations that have a proper system and structure compared to small and medium enterprises. However, as SMEs are rich in knowledge, it is important to carry out a study of intellectual capital in SMEs to identify the strengths of their internal resources. However, SMEs are known for lacking knowledge management practices even though they have strong communication links and social networks in the organization. It is said that knowledge sharing, especially tacit knowledge, is highly and actively interacted in SMEs. As more and more researchers are interested in exploring this tacit knowledge sharing, which is very valuable and difficult to codify, SMEs could benefit from this advantage compared to bigger organizations. One of the elements of intellectual capital is innovation capital, which is seldom highlighted. In fact, knowledge is closely related to innovation, which is an outcome of knowledge management. When knowledge is wisely utilized and capitalized, innovation will be produced. Innovation is found to be very active in small-scale business. It is one of
15

the Governments objectives to promote innovation among Malaysian entrepreneurs. Furthermore, it is included in Malaysias Third Industrial Master Plan (IMP3) for Manufacturing. This study will develop a framework of intellectual capital, knowledge sharing, innovation and organizational performance, which will assist SMEs fit into a knowledgebased economy (Wickramansinghe, 2005). This new comprehensive model of intellectual capital for SMEs is a new approach for SMEs to further develop and excel in their business performance. In this study, Structural Equation Modelling (SEM) using AMOS 16 is utilized. This will provide new insights to IC researchers in testing their data using SEM Amos. In addition, most previous research concerning IC focused on the impact of IC elements on performance. This research will put the elements of IC together and test them as second order latent variables against other variables.

1.7

Theoretical Contributions
Most of the intellectual capital studies focussed on the individual effect of

intellectual capital construct on organizational performance; this study will investigate the effect of intellectual capital as one construct. Meanwhile, in KM studies, knowledge creation, which is regarded as the source of competitive advantage and innovation for longterm survival, has received tremendous attention. However, some authors agreed that the SECI model is a knowledge sharing process rather than a knowledge creation process and that, therefore, knowledge sharing should be given more attention in order for it to create knowledge. Knowledge creation is the outcome of knowledge sharing ( Nonaka and Konno, 1998). Furthermore, most intellectual capital studies focused on large organizations rather
16

than SMEs. The lack of intellectual capital studies on SMEs could be due to the lack of a formal structure and systems. The relationship of intellectual capital and organizational performance is known to be positive (Bontis, 1998, Cohen and Kaimenakis, 2007, Wang and Chang, 2005). Intellectual capital is static and is a bundle of knowledge that needs another mechanism to influence organizational performance (Stewart, 2006). Knowledge sharing exists significantly in informal face-to-face social interaction settings, which suit SMEs. Even though knowledge sharing is still in its infancy level for both large and small organizations (Pathirage and Amaratunga, 2007), it is the most effective technique used in the sharing of knowledge in SMEs and, according to Egbu (2005), knowledge in SMEs is tacit in nature. Furthermore, SMEs need to be motivated in knowledge sharing arrangements to recognize that knowledge has value and that the value added is derived from the knowledge exchange (Egbu, 2005). In addition, innovation is a key survival tool for SMEs to survive in business. Innovation is resource dependent, and much research has been done on SME innovation. This study will contribute to the existing theory by integrating intellectual capital, knowledge sharing and innovation on organizational performance, which is yet to be explored.

1.8

Practical Contributions
The study focuses on the inner resources of SMEs, which should be regarded as

their competitive advantage. In so doing, SMEs are capable of emerging as key players in the industry rather than dwelling on their incapacity, especially regarding physical and financial capital (Man et al. 2002). However, tacit knowledge sharing is prevalent in small
17

organizations rather than large organizations, which prevent the smooth flow of knowledge. Tacit knowledge sharing is ubiquitous, informal and without bureaucracy. The combination of tacit and explicit knowledge would make knowledge sharing more effective and valuable. Knowledge sharing has not been extensively explored, especially from an SME perspective. Even though innovation has been proven to exist within SMEs it was researched from the perspective of market orientation, customer orientation and entrepreneurial orientation but not intellectual capital. Intellectual capital, which provides structure, system, strategy and culture, is an antecedent of innovation (Afuah, 2003). Therefore, this study looks at SMEs intellectual capital and innovation, which influence organizational performance. The integration of intellectual capital, knowledge sharing and innovation on organizational performance has not been explored to date. This framework can be applied in the SMEs scenario for their long-term competitive advantage. This framework can also assist SMEs in finding ways to improve their internal resources, capitalizing their strengths and capturing opportunities. The results of this study will provide insights into what needs to be done to increase an organizations level of intellectual capital, what business consequences are expected from increasing the level of intellectual capital, and how knowledge sharing and innovation influence the relationship between intellectual capital and organizational performance.

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1.9

Definition of variables

1.9.1 Intellectual capital Stewart (2000) defined intellectual capital as intellectual material knowledge, information, intellectual property, experience that can be put to use to create wealth. It is collective brainpower. Edvinson (1997) defined intellectual capital as the possession of knowledge, applied experience, organizational technology, customer relationships and professional skills that provide Skandia with a competitive edge in the market. Roos and Roos (1997) define intellectual capital as the sum of the hidden assets of the company not fully captured on the balance sheet and, thus, it includes both what is in the heads of organizational members and what is left in the company when they leave. Bontis (1998) defines intellectual capital as the pursuit of the effective use of knowledge (the finished product) as opposed to information (the raw material). Intellectual capital consists of three types of capital human capital, structural capital and customer capital which are defined differently by different authors as shown in Table 1.1. 1.9.2 Knowledge sharing Tacit knowledge is a tremendous resource for all activities, especially for innovation (Leonard and Sensiper, 1998). Tacit knowledge is what is embedded in the mind (Choi and Lee, 2003), can be expressed through ability applications and is transferred in the form of learning by doing and learning by watching. Knowledge sharing is basically the act of making knowledge available to others within the organization (Ipe, 2003). Knowledge sharing can also be explained as a set of behaviours that involve the exchange of information or assistance to others and is separate from information sharing (Connelly and
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Kelloway, 2003). Knowledge sharing enables managers to keep individual learning flowing throughout the company and integrate it for practical applications.

Table 1.1 Summary of intellectual capital

Authors Bontis, Nick (1998) Human Capital Tacit knowledge, sheer intelligence of member Network of node Generic inheritance Education Experience Attitude of life and business (Hudson, 1993) Structural Capital Systems Procedures structures Relational Capital Customer capital: Marketing channel Customer r/ship Government Suppliers Industry associations

Brooking, Anne (1996)

Skills, abilities and expertise, problem-solving abilities and leadership style

All the technologies processes and methodologies that enable a company to function

Brands, customers, customer loyalty and distribution channels

Roos , Goran (1997)

Competence, attitude and intellectual agility

All organizational innovation, processes, intellectual property and cultural assets

Relationship includes internal and external stakeholders

Stewart , Thomas (1997)

Employees are an organizations most important asset Employees capabilities, skills, knowledge, technical expertise, etc.

Knowledge embedded in information technology

Market information used to capture and retain customers

Cohen and Kaimenakis (2007)

organizational capital: databases, charts, manuals

Knowledge embedded in customers, suppliers, government and relatedindustries

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1.9.3 Innovation Peter Drucker (1986) refers to innovation as the purposeful and organized search for changes and the systematic analysis of the opportunities such changes might offer for economic or social innovation. He also highlighted that innovation is the means by which the entrepreneur either creates new wealth-producing resources or endows existing resources with enhanced potential for creating wealth. Based on Nonaka and Takeuchi (1995), to explain innovation, we need a new theory of organizational knowledge creation....The cornerstone of our epistemology is the distinction between tacit and explicit knowledge...the key to knowledge creation lies in the mobilization and conversion of tacit knowledge. Innovation is also defined as the adoption of an idea or behavior, whether a system, policy, program, device, process, product or service, that is new to the adopting organization (Damanpour, 1991). Innovation is the process of creating a commercial product from an invention (Hitt et al., 2005). 1.9.4 Organizational Performance

The goal of improving organizational performance is to ensure that the organization resources and system designs processes well and systematically improve its performance to incur higher productivity and better financial outcome. Measuring organizational performance is comparing the expected results to actual results, investigating deviations from plans, assessing individual performance and examining the progress being made towards meeting the targeted objectives (Hashim, 2007).

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1.10 Summary
This chapter highlights the direction of the study. It started with an introduction of intellectual capital and its importance. Next, the problem statement was elaborated upon to address the issues of an intellectual capital model as well as the importance of knowledge sharing and innovation. The significance of the study from the practical and theoretical perspectives was discussed. The aim of the study as well as the research questions and research objectives were presented. Finally, the definition of variables was provided. The next chapter will discuss the literature review concerning the variables in this study.

1.11 Organization of the thesis

The thesis will be presented in seven chapters, including Chapter One, the introduction chapter. Figure 1.1 shows the flow of the chapters.

Chapter One: INTRODUCTION This chapter starts with the background of intellectual capital and its challenges. The researcher defines the terminology and describes the problem statement in the field of intellectual capital, knowledge sharing, innovation and organizational performance. Research questions and research objectives are presented in this chapter as well as the definition of each variable.

Chapter Two: LITERATURE REVIEW Chapter Two provides a deeper understanding of the literature concerning intellectual capital, knowledge sharing, innovation and organizational performance. The chapter also
22

discusses the theoretical foundation, the resource-based view. It then introduces the independent variable Intellectual Capital and provides a definition and outlines the importance of intellectual capital in this study. This is followed by the mediating variables, knowledge sharing and innovation. The dependent variable, organizational performance is elaborated upon. The concepts derived from this section are discussed at length.

Chapter Three: INDUSTRY ANALYSIS: SMALL AND MEDIUM ENTERPRISES IN MALAYSIA This chapter describes the Malaysian small and medium enterprises and further elaborates upon the manufacturing and services industries. The importance and contribution of SMEs are discussed at length.

Chapter Four: RESEARCH DESIGN AND METHODOLOGY This chapter describes the research objectives and questions posed in the study. A research model is developed along with the hypotheses that are guided by the research questions. The chapter elaborates in detail the research design, methodology and sampling used in this study.

Chapter Five: DATA ANALYSIS AND FINDINGS This chapter synthesizes the data produced from the survey in which the preliminary model is developed. The data analysis process is done thoroughly using SPSS and SEM, including univariate and multivariate analysis. The proposed model is presented. The findings of the hypotheses testing are presented.
23

Chapter Six: DISCUSSION AND FINDINGS This chapter discusses the findings of the survey, literature review as well as the findings from the fieldwork. The findings of the hypotheses are discussed. The Research Questions will be addressed to serve the aim of the study.

Chapter Seven: CONCLUSIONS AND RECOMMENDATIONS This chapter concludes the findings from the previous chapters. Limitations and future research are discussed. The implications are highlighted and the recommendations for practitioners and academics are included. Finally, the chapter summarizes the research contribution.

24

Introduction Chapter 1

Literature Review Chapter 2

Small and Medium Enterprises in Malaysia Chapter 3

Research Design and Methodology Chapter 4

Data Analysis Chapter 5

Discussion and Findings Chapter 6

Conclusion and Recommendations Chapter 7 Figure 1.1 Illustration of the overview of the organization of the thesis.

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CHAPTER 2 LITERATURE REVIEW

2.1

Introduction

The purpose of this chapter is to provide an overview of the literature in the area of intellectual capital and organizational performance of SMEs in Malaysia. The literature survey gives a schematic view of matters discussed in the thesis. The review is divided into three components. The first component will discuss the theory adopted for the thesis and the relevancy to the framework. The second component will discuss the intellectual capital, organizational performance and mediating variables knowledge sharing and innovation in detail. Third component is proposing a new theoretical framework. Models and past literature will be highlighted to show the existing relationships.

2.2

Resource-Based Theory

Resource-based value is an efficiency-based explanation of performance differences and a firm-level analytical tool (Peteraf and Barney, 2003). The resource-based view posits that competitive advantage can only be sustained if the capabilities creating the advantage are supported by resources that are not easily duplicated by competitors. In short, the firms resources must have barriers to imitation (Rumelt, 1984). Barney (1991) developed his resource-based argument using two alternative assumptions that firms may be
26

heterogeneous with respect to strategic resources and that those resources are not perfectly mobile. His definition of a firms resources include "all assets, capabilities, organizational processes, firm attributes, information, knowledge, etc. controlled by a firm that enable a firm to conceive of and implement strategies that improve its efficiency and effectiveness." These resources can be classified as physical and capital resources, human capital resources, and organizational capital resources. Barney (1991) asserts that to be a potential source of sustained competitive advantage, a resource must have four attributes: it must be valuable, rare, imperfectly, imitable, and not substitutable.

A resource must be valuable, and be able to exploit opportunities or neutralize threats. When a resource is valuable, it allows a firm to conceive and implement strategies to improve efficiency and effectiveness. If a resource is not valuable, it is not a resource.

A resource must be rare among current and potential competitors. If everyone has the resource, then no one can gain advantage from it. Valuable but common resources can help ensure survival but not competitive advantage.

A resource must also be imperfectly imitable. Valuable and rare resources are only sources of sustained competitive advantage if other firms cannot obtain them. A resource can be imperfectly imitable for three reasons. First, the ability to obtain the resource depends on unique historical conditions. Second, the link between the resource and the sustained competitive advantage is causally ambiguous. Third, the resource is socially complex.

27

A resource must not be substitutable. In other words, there must be no strategically equivalent valuable resources that are either rare or imitable. Strategically equivalent resources may be similar to another firm's resources (e.g. the top management team) or very different (e.g. substituting a charismatic leader for a systematic company-wide planning system).

Resources are the basic building blocks to a firms functioning and performance. A firms resources are simply the inputs into the production process, such as machinery, financial capital and skilled employees (Hisrich and Peters, 2008) and define resources as the inputs into the production process. Organization is studied in terms of how their resources can predict their performance in a dynamic, competitive environment (Holsapple and Joshi, 2001). 2.2.1 Resource-Based Theory to framework The resource-based perspective argues that sustained competitive advantage is generated by the unique bundle of resources at the core of the firm (Conner and Prahalad, 1996; Barney, 1991). In other words, the resource-based view describes how business owners build their business from the resources and capabilities that they currently possess or can acquire (Dollinger, 1999). The term resources was conceived broadly as anything that can be thought of as a strength or weakness of the firm (Wernerfelt, 1984, p. 172). The theory addresses the central issue of how superior performance can be attained relative to other firms in the same market and posits that superior performance results from acquiring and exploiting the unique resources of the firm.

28

Implicitly the resource-based perspective is the centrality of the ventures capabilities in explaining the firms performance. Resources have been found to be important antecedents to products and ultimately to performance (Wernerfelt, 1984). According to resource-based theorists, firms can achieve a sustainable competitive advantage from such resources as strategic planning (Michalisin et al. 1997; Powell, 1992), management skills (Castanis and Helft, 1991), tacit knowledge (Polanyi, 1692,1966), and capital employment of skilled personnel (Wernerfelt, 1984) among others. Resource based theorists (e.g. Barney, 1991; Grant, 1991; and Peteraf, 1993) contend that the assets and resources owned by companies may explain the differences in performance. Resources may be tangible or intangible and are harnessed into strengths and weaknesses by companies and in doing so lead to competitive advantage. The resource-based theory continues to be refined and empirically tested (Bharadwaj, 2000; Hadjimanolis, 2000; Medcof, 2000). The resource-based view for the firm suggests that the firms internal characteristics, especially the cultural patterns of learning and human capital assets accumulation have a significant impact on the firms capability to introduce new products and compete within disparate markets (Tvorik and McGivern, 1997). As emphasized by many authors, firms must have resources that are valuable, rare and difficult to imitate, in order for them to survive in the long term compared to their competitors. Knowledge, especially tacit knowledge is one of the strengths that the organization has that is more difficult to transfer or copy (Nooteboom, 1993). Hisrich and Peters (2008), in Figure 2.1, further highlight that in order for a firm to create unique resources, which are rare, valuable and non-imitatable, it has to exploit its internal knowledge. Internal knowledge that is possessed by employees, if well utilized, would lead
29

to creativity and innovation. Barney (1991) suggests that firms should implement strategies that exploit their internal strengths through responding to environmental opportunities while neutralizing external threats and avoiding internal weaknesses. Therefore, in order for an SME to exploit the market it has to have entrepreneurial strategy, which has three key stages (Hisrich and Peters, 2008): 1. The generation of a new entry opportunity. 2. The exploitation of a new entry opportunity. 3. A feedback loop from the culmination of a new generation and exploitation back to Stage 1.

Entry strategy Knowledge Resource bundle Other resources Assessment of new entry opportunity Organization Firm Performance

Risk reduction strategy

Stage 1: New entry generation

Stage 2: New entry exploitation

Source: Hisrich and Peters (2008)

Figure 2.1 Resource-Based Value model

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Grant (1996) extends the resource-based theory into the knowledge-based view concerning knowledge as a resource of the firm. Knowledge that is residing within the individual and organizations that put their knowledge into applications lead to the capability of an organization to utilize this resource and turn it into profit. He argued that while the resource-based theory perceives the firms as a unique bundle of idiosyncratic resources and capabilities where the primary task of management is to maximize value through the optimal development of existing resources and capabilities, the knowledgebased view highlights the importance of processing the resources into products and services. The knowledge-based view puts weight on the importance of the coordination, organizational capability, organizational structure and the boundaries of the firms. The main issue is that resources must be channelled and processed through the right means to transform it into profit. Otherwise, the resources and capability will remain static in the organization. Looking at the resource-based theory from the entrepreneurship perspective, it can be divided into two, namely, entrepreneurial recognition, which is defined as the recognition of opportunities, and opportunity seeking behaviour, which is a resource as well as the process of combining and organizing resources (Alvarez and Busenitz, 2001). Kirzner (1979) argues that knowledge experts do not fully recognize the value of their knowledge or how to convert it into profit or else the expert would be an entrepreneur. Although the entrepreneur may not have the specific knowledge of the expert it is the entrepreneurs who recognize the value and the opportunity of expert knowledge (Kirzner, 1997). Entrepreneurs develop inventions and innovations around why and how they see and create new opportunities (Alvarez and Busenitz, 2001). Danneels (2002) suggests that product
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innovation is the core organizational process in which the various resources and competences of the firm are brought together. In addition, product innovation can serve as a vehicle for the renewal of firm competences/resources. As entrepreneurs expand their knowledge base and absorptive capacity, it creates their competitive advantage. However, the resource-based theory does not consider all the resources possessed by a company but only focuses on the critical (or strategic) resources, especially those that are the basis of the companys sustainable competitive advantage. Based on the empirical research of fourteen case studies of SMEs, Rangone (1999) has listed SMEs sustainable competitive advantage based on three capabilities: Innovation capabilities: a companys ability to develop new products and processes, and achieve superior technological and/or management performance (e.g. development cost, time-to-market, etc.) Production capability: the ability to produce and deliver products to customers, while ensuring competitive priorities, such as quality, flexibility, lead time, cost, dependability. Market management capability: the companys ability to market and sell its product efficiently and effectively. Based on this model, SMEs either consciously or unconsciously put their strategic focus on one or more of the basic capabilities.

2.3

Organizational Resources
A few authors agreed that organizations are able to perform better if they are able to

exploit their internal resources and capabilities (Penrose, 1959 as cited by Marr et al. 2004).
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Therefore, entrepreneurs need to understand what are the key resources and drivers of performance and value in their organizations. The concept of performance drivers suggests a causal relationship between resources and organization value creation. Penrose further argues that it is never resources themselves that create value, but the services that the resources can render (Marr et al, 2004, pg 312). Barney (1991) and Miller and Shan Sie (1996) suggested that resources could be grouped into property-based resources and knowledge-based resources. Figure 2.2 shows these two basic categories of resources.

Resources

Physical-based resources

Knowledge-based resources

Plant

Raw Materials

Technologies

Human

Organizational structure/System

Cash

Equipment

Location

Distribution outlets (tangible and legally controlled by firm

Source: Miller and Shan Sie (1996), Barney (1991)

Figure 2.2 Basic Resources

Knowledge-based resources are often intangible and cannot be imitated by competitors, as they are subtle and hard to understand, involve talents that are elusive, and
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the connection with the result is difficult to discern (Lippman and Rummelt, 1982). Grant (1991) added to these financial, technological and reputational resources. Resource allocation is a recurrent theme in the strategy literature. It focuses on the firms efficient use of organizational resources. An efficient resource allocation process, therefore, provides the firm investment opportunities to create competitive barriers (Porter, 1980) or to execute acquisitions and divestitures that reduce transaction costs (Williamson, 1975). An organizations resources exist as a bundle of assets that are interdependent according to the resource-based theory. Company resources are divided into two, namely, tangible and intangible resources (Haanes and Lowendahl, 1997) as shown in Figure 2.3.

Resources

Tangible

Intangible

Competence Information Based Skills Capabilities Aptitudes

Relational Reputation Loyalty Relationships

Sources: Haanes and Lowendahl (1997)

Figure 2.3 The Haanes and Lowendahl Model Intangible resources are the intellectual capital of the company, which is further divided into competence and relational resources. Competence is the ability to perform a given task. It exists at two levels individual (knowledge, skills, aptitude or capabilities)
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and organizational (information-based like databases, technology and procedures). Relational resources refer to the reputation of the company, client loyalty and the relationships it has with customers (Tan et al. 2008). Lowendalh (1997) further divides the competence and relational categories into two subgroups, individual and collective, depending on whether the resource is employee or organizational as shown in Figure 2.4. This is to distinguish between people dependent and organizational dependent. The organizational resources are divided into people, organization and the structure of the organization, which forms a combination of resources for an organization.

Resources

Tangible

Intangible

Competence Individual Knowledge Capabilities Skills-Aptitude Collective Database Capabilities Skills-Culture Individual Reputation Loyalty Relationship

Relational Collective Reputation Loyalty Relationship

Source: Lowendahl (1997)

Figure 2.4 The Lowendahl Model

2.4

Intellectual Capital
Intellectual capital was first discovered in the banking and accounting areas where

accountants were concerned that the market value of an organization was more than what
35

appeared on the financial reports. Skandia Bank started the inquiry concerning the intangible assets that existed in the form of non-financial assets such as employees skills, talents and capabilities, and internal and external structures. There are two approaches to the research on intellectual capital. First, is to measure the intellectual capital assets in the organization, which concerns discovering hidden assets in its people, structure and external relationships by proposing a number of different methods of measurement and reporting of intellectual capital (Liebowtisz and Suen, 2000). This approach is also known as the stock approach, which is concerned with calculating the dollar value of the intangible assets (Guthrie and Ricerri, 2002). The other approach is how to capitalize intellectual capital to enhance the organizational performance. This approach is known as the flow approach, which views intellectual capital as being concerned with identifying the knowledge resources that drive value creation rather than assigning a specific dollar value to the resources (Boedker et al., 2005). Roos et al. (1998) show that the theoretical roots of intellectual capital can be traced to two different streams of thought, namely, the strategic stream and the measurement stream as shown in Figure 2.5

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Learning Organization

Knowledge Development

Conversation Management

Innovation

Strategy Knowledge Leverage

Knowledge Management

Core Competencies

Intellectual capital
Invisible Assets

Human Resource Accounting

Balanced

Measurement Scorecards
Financial

Source: Roos et al. (1998)

Figure 2.5: Conceptual roots of Intellectual Capital

While the first one studied the creation and use of knowledge, the second one focused on the need to develop a new information system, measuring non-financial data alongside the traditional financial data. In reality, knowledge development and knowledge leverage are enmeshed. A widespread application of knowledge is a goal in itself and a means to develop new knowledge (Roos et al. 1998). Internal resources are dependent on the organization and are divided into structure, human resources and technology (Maranto-Vargas and Rangel, 2007). The competitive

37

advantage of an organization is viewed from the uniqueness of its resource mix and the inability of competitors to replicate the mix (Holsapple and Joshi, 1998). Spender (2006) views an organization as a dynamic, knowledge-based activity system, maintaining that it is an organizations knowledge and ability to generate knowledge that forms competitive advantage. A few authors have identified the type of knowledge resourcesthat can be found in an organization, as shown in Table 2.1.

Table 2.1 Type of knowledge resources

Type of knowledge resources identified in KM frameworks Authors Leonard-Barton (1995) 1. 2. 1. 2. 3. 4. 1. 2. 3. Knowledge resources Employee knowledge Knowledge embedded in physical systems Human capital Organizational capital Customer capital External structures Internal structures Employee competencies

Petrash (1996)

Sveiby (1997)

Source: Holsapple and Johsi (2001)

The term knowledge resources has been used interchangeably with the term intellectual capital, as argued by Fincham and Roslender (2003, p.3) the imperative to manage knowledge coincides with that of managing intellectual capital. Knowledge is one of the organizational resources that often become embedded, not only in documents or repositories but also in organizational routines, processes, practices and norms (Steinheider and Al-Hawamdeh, 2004). Furthermore, knowledge management activities have been
38

defined as tactics and initiatives taken by the organization to identify, enact, develop and dispose of its knowledge resources (Boedker et al., 2005). Intellectual capital is created through the combination and exchange of knowledge. The combination and exchange of knowledge can result in innovation incremental and radical and through this combination and exchange, knowledge sharing takes place. In order for knowledge sharing to take place, opportunity, deployment, motivation and combination capability must exist. These factors are summed up by Cohen and Levinthal (1990) as absorptive capacity, which depends on the existence of related prior knowledge. Intellectual capital is hard to identify and harder still to deploy effectively but once a firms find it and exploits it, it will win (Stewart, 2000). Stewart (1997) defines intellectual capital as the intellectual material knowledge, information, intellectual property, experience that can be put to use to create wealth. Edvinson (1997) defines intellectual capital as the possession of knowledge, applied experience, organizational technology, customer relationships and professional skills that provides Skandia with a competitive edge in the market. Roos and Roos (1997) define intellectual capital as the sum of the hidden assets of the company not fully captured on the balanced sheet and, thus, it includes both what is in the heads of organizational members and what is left in the company when they leave. Bontis (1998) defines intellectual capital as the pursuit of the effective use of knowledge (the finished product) as opposed to information (the raw material). From the strategic perspective, intellectual capital (IC) is used to create and enhance the organizational value, and success requires IC and the ability to manage this scarce resource by the company (Chen et al, 2004).

39

The above definition can be concluded as (Cohen and Kaimenakis, 2007): 1. Intellectual capital consists of intangible resources that contain knowledge that can be used by the firm to accomplish its goals. 2. The combination of these intangible creates value for the firm. 3. Firms do not own or control all these resources. 4. The intangible resources will not bring positive results to firms without effective management. 5. Along with effective management, these resources can provide the firm with a sustainable competitive advantage. Edvinsson and Malone (1997) developed an intellectual capital (IC) framework, which is also known as the Skandia Knowledge Management approach, as shown in Figure 2.5.

Market value

Equity

Intellectual capital Human Capital Structural capital

Customer capital Customer base Customer relationship

Source: Mc Elroy, 2002

Organizational capital Innovation capital Process capital

Customer potential

Figure 2.5(a) Skandia Knowledge Management framework

40

Stewart (1997) suggests that intellectual capital is knowledge management since organization is a knowledge-based activity system (Holsapple and Joshi (2001). But Awad and Ghaziri (2004) stress that knowledge management is not intellectual capital, as defined clearly by Wiig (1997): Intellectual capital focuses on building and governing intellectual assets from strategic and enterprise governance perspectives. Knowledge management has tactical and operational perspectives in facilitating and managing knowledge. Wiig (1997) also points out that intellectual capital cannot be pursued in isolation as they keep knowledge flow vibrant to secure the competitive advantage in the long term. Intellectual capital can be located in its people, its structures and its customers. The model in Figure 2.6 indicates that intellectual capital is divided into three parts: human capital, structural capital and customer/relational capital. Stewart (1997) explains that human capital is the accumulated capabilities of the individuals responsible for providing customer solutions. Structural capital refers to the capabilities of the organization to meet market requirements and customer capital refers to the extent and intensity of the organizations relationships with customers. The three types of capital are interrelated each positively or negatively affecting the other.

41

Intellectual Capital

Human Capital

Structural Capital

Relational Capital

Source: Stewart (1997).

Figure 2.6 Components of Intellectual Capital

The Danish Confederation of Trade Unions (1997) also clarify the understanding of intellectual capital by classifying intellectual capital into three components the people (human capital), the system (structural capital) and the market (customer or relational capital) as shown in Figure 2.7. The People element represents employee and managers competence, both individually and collectively. It suggests that this element depends on peoples motivation, their culture, education and training and development. The System is the knowledge in the company that is independent of people. It includes patents, methods, technology and the organization of the company. The Market consists of the relationship between the organization and the outsiders including suppliers, partners, distributors and customers. The Market is also the source of money, labour and knowledge that the company lacks.

42

The People Motivation Culture Education and Training Development

The System Patents Methods Technology Organization

The Market Suppliers Partners Customers Labor

Source: DCTU (1997).

Figure 2.7 The Danish Confederation of Trade Unions Model

Human capital refers to the value of knowledge, skills and experiences held by individual employees in a firm; structural capital is the embodiment, empowerment and supportive infrastructure of human capital (Edvinsson and Malone, 1997), which includes all the things that support human capital in a firm but that are left behind when employees go home at the end of the day (McElroy, 2002). The goal of this intellectual capital model is to achieve a multiplicative effect in order to enhance rapid knowledge sharing and develop new business applications, which can be facilitated by the right company culture, leadership and infrastructure (Skandia, 1996a). According to de Castro et al. (2004) intellectual capital, especially relational capital is very much into social networking where the relationship with external parties, such as customers, suppliers, and the government, play a crucial and very significant role to the organization.
43

However, Mc Elroy (2003) commented that intellectual capital itself does not emphasize the value of the relationships between people in firms and between firms and other firms. Trust, reciprocity, shared values, networking and norms are all under social capital, which adds value to the firm by speeding the transfer of information and development of new knowledge (Mc Elroy, 2002). Furthermore, intellectual property is mostly about patents, trademarks and copyrights. Table 2.2 shows the components of intellectual capital as highlighted by various authors. As mentioned by Huang and Hsueh (2007) numerous IC indicators have been identified (Guthrie et al. 1999; Miller et al. 1999) as research teams promulgated different theories of IC and evaluated organizations against them (p. 388).

44

Table 2.2 Taxonomy of Components of Intellectual Capital

Author Components of Intellectual Capital

Skandia (1994)

Brooking (1996)

1. Human capital 2. Structural capital a.Customer capital b.Organizational capital 1. Market assets (customer capital) 2. Human centred assets (human capital) 3. Intellectual property assets (structural capital) 4. Infrastructure assets (social capital) 1. Human Capital 2. Structural Capital 3. Relational Capital

St Onge (1996) Edvinsson and Malone (1997) Stewart (1997) Roos et al (1998) Bontis (2002)

Van Buren (1999)

Sveiby (2000)

1. 2. 3. 4. 1. 2. 3. 1. 2. 3. 4.

Human Capital Innovation Capital Process Capital Customer Capital External structure Internal structure Employees Human capital Structural capital Customer capital Innovation capital

Pollard (2000)

ODonnell and OReagan (2000)

Cohen and Prusak (2001) Davies and Magowan (2002) Wang and Chang (2005)

Nillson and Lindskog (2008)

Zerenler et al. (2008)

1. People 2. Internal Structure 3. External Structure 1. Human capital 2. Structural capital 3. Customer capital 4. Social capital 1. Human Capital 2. Innovation Capital 3. Process Capital 4. Customer Capital 1. Human Capital 2. Structural Capital 3. Relational Capital 4. Financial Capital 1. Employee capital 2. Structural capital 3. Relational capital

Compiled by researcher 45

Few researchers have produced their own version of the Intellectual Capital of human capital, structural capital and relational capital. Table 2.3 shows the taxonomy of intellectual capital by various authors. Details are shown in Appendix 2. Table 2.3 Taxonomy of Intellectual Capital Dimensions
Authors Bontis, (1998) Nick Human Capital Tacit knowledge Sheer intelligence of member Network of node Generic inheritance Education Experience Attitude of life and business (Hudson, 1993) Skills, abilities and expertise, problem-solving abilities and leadership style Competence, attitude intellectual agility and Structural Capital Systems Procedures Structures Relational Capital Customer capital: Marketing channel Customer r/ship Government Suppliers Industry associations

Anne Brooking (1996)

All the technologies processes and methodologies that enable a company to function All organizational innovation, processes, intellectual property and cultural assets Knowledge embedded information technology in

Brands, customers, customer loyalty and distribution channels Relationships internal and stakeholders include external

Goran Roos(1997)

Thomas Stewart (1997)

Employees are organizations important asset

an most

Market information used to capture and retain customers

Cohen and Kaimenakis (2007)

Employees capabilities, skills, knowledge, technical expertise, etc.

Organizational capital: databases, charts, manuals

Knowledge embedded in customers, suppliers, government and relatedindustries

Source: compiled by researcher

Recent frameworks have emphasized three characteristics of intellectual capital (Pena, 2002). First, the increasing importance of intellectual capital management requires a shift in the way the corporate managers or top management run their organizations. As knowledge has become a critical resource that firms must master in todays competitive landscape, and

46

in order to manage knowledge, the organization needs information from its non-financial indicators to measure intangible assets. Second, intellectual capital must respect and comprehend each firms idiosyncrasies. It must be tailored to meet the specific information needs of a particular organization to improve its own strategic decision making. Third, the framework has to be understood from a dynamic perspective. The interaction among different intellectual capital elements experiences a permanent change as firms evolve over time. However, the benefits of intellectual capital have been proven empirically. Table 2.4 illustrate the benefits of intellectual capital to an organization. Table 2.4 The benefit of Intellectual Capital
Authors Bontis (1997) Bontis et al. (2000) Zhen et al. (1999) Civi (2000) Carneiro (2000) Anell and Wilson (2002) Hurwitz et al. (2002), Lev and Feng (2001) Chen et al (2005)
Source: Tan et al. (2008)

Benefits of Intellectual capital Business performance

Product improvement Competitive Strategy Competitiveness and innovation Competitive advantage Driver of stock return Future financial indicators

47

Table 2.5 Definition of Intellectual capital (IC)

Skandia (1994) IC is the aggregate sum of intangible values which comprises of: i. Human capital knowledge skills and capability ii. Structural capital everything that remains when the employees go home: databases, software, manuals, trademarks, organization structures, etc. Customer capital is the relationship built up with the customers, and is a significant part of the structural capital Intellectual capital Human Capital Structural Capital Customer Capital Innovation Capital Intellectual Property Brooking (1996) IC components are : i. Market assets ii. Human centered assets iii. Intellectual property iv. Infrastructure asset Intangible assets
Organizational Capital

Process Capital

Human Centered Assets

Intellectual Assets IP

Market Assets

Infrastructure Asset

Bontis (1996) IC includes three sub-domains i. Human capital ii. Structural capital iii. Custosmer capital
Human Intellectual Capital Structural Customer

With two supporting drivers i. Trust ii. Culture

Trust

Culture

48

Table 2.5 (continued)

Roos et al. (1997)

IC includes: i. Thinking assets human capital ii. Non-thinking assets structural capital

iIntellectual capital

Thinking assetstructural capital

Non-thinking assetstructural capital

Sveiby (1997)

IC consists of three invincible assets: i. Employee competence ii. Internal structure iii. External structure

Internal Structure

Individual Competence

External Structure

Stewart (1997) IC as intellectual material which consists of: i. Knowledge ii. Information iii. Intellectual property iv. Experience That can be put to create wealth Knowledge

Intellectual capital

Information

Intellectual property

Experience

49

Table 2.5 (continued)

Danish Trade Union (1997) IC includes: i. People ii. System iii. Market

People

Market

System

Haanes and Lowendahl (1997) IC is intangible resources of: i. Competencies various abilities to perform and are reflected at individual and organization level ii. Relationship reflected in the reputation of the company customer loyalty Both of these exist in an individual and collective fashion.

Resources

Tangible

Intangible

Competence Information based Skills Capabilities Aptitudes

Relational Reputation Loyalty Relations

Edvinsson and Malone (1997) IC consists of: i. Human capital what people can do individually and collectively ii. System components- knowledge in firms which is independent of people includes patents, contacts and databases iii. Market components relationship between organization and outsiders Values Human Capital Market Component

System

50

Table 2.5 (continued)

Saint-Onge (1997) i. Human capital capabilities of individual to provide solutions to customers Relational capital the depth, width, attachment and profitability of franchise Structural capital the capabilities of organization and to meet market requirements

Values
Human Capital Structural capital Relational capital

ii.

iii.

Sullivan (1998) IC is knowledge that can be converted into profits: IC comprises three elements: i. Human capital ii. Intellectual assets iii. Structural assets
Complementary Business Assets

Human Capital

Intellectual Asset IP
Manufacturing, Distribution, Sales

Structural Capital

Andriessen and Tissen (2000) Five categories of intangible assets: i. Skills and tacit knowledge (STK) ii. Collective values and norms (CVN) iii. Technology and explicit knowledge (TEC) iv. Primary management processes (PMP) Assets and Endowments (AandE)

A and E

STK CVN PMP TEC

51

Guthrie and Petty (2000) Values 1. 2. 3. Internal: Organization (structural) capital External: customer (relational) capital Employee competence: human capital
Organization Capital

Customer Capital

Human Capital

Mayo (2000)

Most of common forms of IC: i. Customer (external) capitalcustomers relationship, loyalty, satisfaction and image. ii. Organizational (internal structure) capital systems, patents, knowhow,database, knowledge, culture. iii. Human capital individual competence and experience, judgement, leadership and motivation

Values
Customer Capital

Organization Capital

Human Capital

Allee (2000)

Expanded view of IC: i. Business relationship alliances and business relationship with customers, partners, suppliers, investors and government (BR) ii. Internal structures systems, work processes that leverage competitiveness including IT, communication and technologies (IS) iii. Human competencies (HC) iv. Social citizenships (SC) v. Environmental health (EH) vi. Corporate identity (CI)

Identity, Vision and Values EH SC BR HC IS

52

Table 2.5 (continued)

McElroy (2002) Modifies Edvinssons IC model: i. Human capital ii. Structural capital iii. Social innovation capital
Social capital

Intellectual Capital Social Capital Inter social capital Human Capital Intra social capital Structural Capital Process Capital Innovation Capital IP Other IA

Hussi (2004)

1. 2. 3.

Human Capital Internal Structures External Structures

Human

Internal Structures

Value

External Structures

Cohen and Kaimenakis (2007)

IC is divided into 3 factors: a. Hard intellectual assets (HC and CC) b. Soft intellectual assets (HC and SC) c. Functional intellectual assets (SC)

Soft

Hard

Functional

Source: Mazlan Ismail (2005, researcher (2010) 53

Despite the growing acknowledgement of the strategic significance of intellectual capital, there is limited understanding of how organizations manage, measure and report their knowledge resources (Guthrie, 2001 as cited by Boedker et al. 2005). There are many definitions of intellectual capital in the relevant literature by various authors in various areas such as accounting and business. The intellectual capital concept is expanding to others areas such as construction, marketing, education etc. Most of the definitions of intellectual capital dedicated to human capital, structural capital and relational capital as three main components of intellectual capital even though some of the definitions used different terms. Table 2.5 summarizes the definitions of intellectual capital.

The following section will discuss the elements of intellectual capital in detail.

2.4.1 Human Capital The employees in the organization make up the human capital of the organization. Employees are the most important resources in the organization. Known as human capital, employees skills, commitment, capabilities, talents and knowledge are an organizations intangible assets that can be turned into its competitive advantage. The human capital of one organization to another organization is difference that makes it difficult to imitate, difficult to copy, rare and non-replaceable. Knowledge must be managed effectively in people and organizations to ensure that wealth-creating capacity can be maintained (Bohn, 1994 as cited in Martinez-Torres, 2006). Human capital is important because it is a source of innovation and strategic renewal (Cohen and Kaimenakis, 2007). A study carried out by Chen et al. (2004) found that other than through innovation capital and customer capital,
54

human capital has no direct relation to performance. However, human capital is a very important resource of the organization. Human capital represents the individual tacit knowledge embedded in the mind of the employees. It can be defined as a combination of employees competence, attitude and creativity (Chen et al. 2004). According to Mayo (2001), human capital can be divided into three dimensions: capability and potential, motivation and commitment and innovation and learning. Table 2.6 shows the dimension of human capital.

Table 2.6 Human capital dimensions

Educational level, professional skills, experience, attitudes, personal networks, values and the ability of current employees to evolve within the organization. Whether employees align their own interests with those of the firms The degree to which employees are open to change

Capability and potential

Motivation and commitment Innovation and learning

Source: Mayo (2001)

Human capital is different from structural capital in managing knowledge (Stewart, 2000). Human capital is the source of innovation, as people contribute their creativity, while sharing and transporting knowledge require structural intellectual assets and structural capital is more towards strategy and purpose. According to Man and Lau (2002), the emphasis on the human factor is supported by the findings of Stoner (1987) that the key distinctive competence of small firms is the experience, knowledge and the skills of the owners and workers. For SMEs, the entrepreneur and the inventor are pure human capital (Hisrich and Peters, 2008). An SME is more than the owner itself, it is about the people
55

who make things go and earn profit for the organization. The most important is human capital, which is about what people can do, individually and collectively (Brennan and Connell, 2000).

2.4.2 Structural Capital Intellectual capital by itself is of little value without the leveraging effect of the firm's supporting structural capital resource. The structural capital comprises systems, structure, corporate culture, the organizational process efficiency, databases, information and production technology (Cohen and Kaimenakis, 2007). Structural capital is the embodiment, empowerment, and supportive infrastructure of human capital (Bontis, 1998). It provides the environment that encourages individuals to invest their human capital to create and leverage knowledge. The structural capital encompasses all forms of knowledge including human capital, which is supported by employees such as organizational routines, strategies, process handbooks, databases and many more (Boisot, 2002, Walsh and Ungson, 1991, Pablos, 2007). It also encompasses the organizational capacity, including the physical systems used to transmit and store intellectual material (Edvinsson and Malone, 1997). This component of intellectual capital is the firms infrastructure, which is developed to commercialize their intellectual capital (Edvinsson and Sullivan, 1996). Unlike human capital, structural capital can be formally captured and embedded (Tan et al., 2008). Structural capital provides a platform for people to be creative (Stewart, 2000). While firms do not own human capital (Cohen and Kaimenakis, 2007), structural capital belongs to the organization. It can be reproduced and shared. A good structural capital will provide a good environment for rapid knowledge sharing, collective knowledge growth, shortened lead
56

times and more productive people (Stewart, 2000). The system in the structural capital is the knowledge of the company, which is independent of people (Brennan and Connell, 2000). In fact, Stewart (2000) also refers to structural capital as knowledge management in which the knowledge of an organization is flowing.

2.4.3 Relational Capital Relational capital embraces all the relations the firm has established with its stakeholder groups such as customers, suppliers, the community, and the government (Bontis, 1998, Allee, 2000). Most references refer to the third part of intellectual capital as customer capital as those authors are relating it to the market orientation and customer orientation. However, for the purpose of this study, relational capital will be adopted. Many nations are improving economically in todays knowledge-based economy by promoting and supporting SMEs with the necessary infrastructure (Cowey as in Wickramansingher and Sharma, 2005). Stewart (2000) points out that the relationship with these external stakeholders is to turn it into money. The information from the market is turned into market orientation while the information concerning the customer is referred to as customer orientation. Customer capital is closely related to market orientation (Cohen and Kaimenakis, 2007). Market orientation is a set of behaviours and processes (Kohli and Jaworski, 1990) or an aspect of culture (Narver and Slater, 1990) to create superior customer value. Market orientation is also the implementation of the marketing concept via market intelligence generation,

57

intelligence, dissemination and responsiveness (implementing a marketing strategy) (Kohli and Jaworski, 1990). Figure 2.8 shows the model developed by Jaworski and Kohli (1993).

Top Management Market Orientation

Intelligence generation Intelligence dissemination responsiveness

Employees

Interdepartmental dynamics

Environment

Organizational systems

Business Performance

Source: Jaworski and Kohli (1993)

Figure 2.8 Jaworski and Kohli Model Han and Kim(1998) emphasize that market orientation is to coordinate the customers needs by obtaining and using the customers information, competitors capabilities and provision of other significant market agents and authorities (Keskin, 2006; Deshpande and Webster, 1989). This integrated effort on the part of the employees and across departments in an organization gives high or superior performance to an organization (Kohli and Jaworski, 1990). Customer orientation is defined as an integral component of the general underlying organizational culture and, thus, attention to information about customers needs should be considered along with the basic set of values and beliefs that are likely to reinforce, such as customer focus, and permeate the firm (Appiah-Adu and Singh, 1998). They emphasized, that in SMEs, customer orientation is a
58

vital determinant of success because of the advantage of close proximity to their customers which Deshpande and Webster (1993) found a positive relationship between customer orientation and organizational performance. Specifically, relational capital fosters a knowledge-producing behaviour providing a source of ideas for change and improvement by market information processing and marketing strategies (Keskin, 2006). However, this knowledge has little benefit if not appreciated and implemented to enhance firm innovation. Contemporary classical schemes have divided intellectual capital into the categories of external (customer-related) capital, internal (structural) capital and human capital (e.g. Sveiby, 2001, 2002; Roos et al. 1998; Stewart, 1997; Edvinsson and Malone, 1997; Petty and Guthrie, 2000). In conclusion, it appears that most of the definitions of intellectual capital listed above include human capital, structural capital and relational/customer capital.

The three IC components (human capital, structural capital and relational capital) are closely intertwined and interdependent (Subramaniam and Youndt, 2005; Youndt, et al., 2004). IC provides the best possible value to organizations through the combination, utilization, interaction, alignment and balancing of the three types of intellectual capital as well as through managing the knowledge flow between the three components (Quink, 2008). Therefore, for this study, IC will be regardes as one construct. This concept is supported by Eren and Kocapinar (2009), Huang and Wu (2009) and Firer and Stainbank (2003) in treating IC as one construct.

59

2.4.4 Intellectual capital Studies

Montequin et al. (2006) in their study listed the important elements of Intellectual Capital for SMEs, as shown in Figure 2.9.

Intellectual capital

Human capital

Structural capital

Relational capital

Peoples competence Competence improvement Staff stability Improvement of capacity of persons and groups

IT Product technology Process and business philosophy Organization structure Intellectual property

Customer base Customer loyalty Market proximity Sales effectiveness Suppliers Interrelations with other actors

Source: Montequin et al. (2006)

Figure 2.9 Intellectual capital dimensions

Intellectual capital is a multifaceted construct with several dimensions that are not developed in isolation as they show strong ties (Cohen and Kaimenakis, 2007; Jin Chen, 2004; Wang and Chang, 2005; Bontis, 2000). Cohen and Kaimenakis (2007) found that only human capital and organizational capital and human capital and customer capital directly interrelate in SMEs in the service industry. Bontis et al. (2000) and Chen et al. (2004) found that human capital does not have a direct relation to performance but through other capitals (Figure 2.10(a)).

60

Innovation capital

Human capital

Customer capital

Performance

Process capital

Source: Chen et al. (2004)

Figure 2.10(a) The intellectual capital studies

Human capital

Customer capital

Structural capital

Performance

Source: Bontis (2000)

Figure 2.10(b) The intellectual capital studies

Bontis (2000) as in Figure 2.10 (b), also found that non-service industries in Malaysia have a better capability for transforming individual employee knowledge into non-human knowledge. In short, much of the intellectual capital in non-service industries is absorbed in the large capital outlays (i.e. machinery and equipment) found in construction and other manufacturing intensive industries whereby human capital has no direct impact
61

on performance but has an impact on other capitals, which, in turn, affect performance. This is supported by Stewart (2006) who suggests that structural capital is indeed a knowledge-based activity system that helps boost performance. However, most intellectual capital studies have been conducted to investigate how the different types of intellectual assets that exist in the context of firms, interact with each other and the way these assets affect performance (Bontis, 1998; Bontis et al., 2000, Chen et al., 2004, 2005; Wang and Chang, 2005, Cohen and Kaimenakis, 2007). From the perspective of the flow approach of intellectual capital, knowledge resources are flowing through its people, structure and relationship to create value. The flow process needs a mechanism to represent the basic operations of knowledge. In this study, knowledge sharing and innovation are identified as knowledge processes for intellectual capital that affects organizational performance. This relationship can be found in the inputprocess-output model by Hackerman and Moris (1978). The input-process-output is extended further by Lee and Choi (2003) as shown in Figure 2.11. Lee and Choi (2003) further demonstrate this model by applying seven enablers, which they called knowledge enablers, to interconnect the knowledge management factors. The human interaction is limited to t-shaped skills rather than the social interactions among the people.

62

Culture 1.Collaboration 2.Trust 3.Learning Structure 1. Centralization 2. Formalization People T-Shaped skills

Knowledge Creation

Knowledge management intermediate outcome

Organizational performance

Socialization Externalization Combination Internalization

Organizational creativity

Organizational performance

Information Technology - IT supports

Source: Lee and Choi (2003)

Figure 2.11 Knowledge management enablers As IC was first discovered in the financial areas, most of the measurement of IC is contributed by the accounting fraternity. Sveiby (2000) suggests that measuring approaches for intangibles fall into four categories, namely: direct intellectual capital methods, market capitalization methods, return-on-assets (ROA) methods and scorecard methods (SCM), which are regarded as a Dollar Valuation of IC. Details are shown in Table 2.7.

63

Table 2.7 Measurement of intellectual capital

Methods Direct intellectual capital (DIC) Estimation Dollar value of intangible assets through its various components. Calculates difference between a companys market capitalization and the book value of shareholders equity Average pre-tax earnings of a company for a period of time divided by the average of tangible assets of the company Various components of IC are identified and indicators and indices are generated and reported in scorecards or in a graph

Market capitalization (MCM)

Return-on-assets (ROA)

Scorecard (SCM)

Source: Sveiby (2000)

In addition to the Dollar Valuation of IC, researchers are also interested in using measures that are more accurate and faster than purely financial measures. Kaplan and Norton (1992) as cited in Tan et al., 2008, pioneered a model called the Balanced Scorecard, which measures organizational performance across four linked perspectives: financial, customer, internal business processes and learning and growth, as shown in Figure 2.12.

Financial Perspective

Customer Perspective

Vision and Strategy

Internal Business Process Perspectives

Learning andGrowth Perspective

Source: Kaplan and Norton (1992) as cited in Tan et al (2008)

Figure 2.12 Kaplan and Norton (1992)

64

Several methodologies for measuring IC have been developed. These measuring techniques are still evolving. As the definition of IC is not well established, and neither are the standards for measuring and reporting, IC is still in its infancy, confused and unstructured (Bornermann et al. 1999). Therefore, there is plenty of scope for improvement and further development of measuring and reporting IC as either a dollar or non-dollar valuation. The taxonomy of IC valuation over the years is further shown in Table 2.8.

Table 2.8 Intellectual Capital Valuation

Dollar Valuation Methods Balanced Scorecards Market Assets Human-centred Assets Intellectual property assets Infrastructure assets Author(s) Kaplan and Norton (1997) Brooking (1996) Non-Dollar Valuation Methods Economic Value Added (EVA) Market-to-book value Market Value = Book value + IC Author(s) Bontis et al. (1999) Dzinkowski, 2000 Lev and Fang, 2001 Guthrie, 2001 Seetharaman et al., 2002

Skandia IC (112 metrics) Financial Customer Human Process Renewal and development IC indexes

Edvinsson and Malone (1997)

Tobins q

Luthy (1998)

Roos et al. (1997)

Invincible balance sheet Internal structure External structure Individual competence Market Value IC=HC+Innov Capital + Process Capital+RC
Source: Tan et al. (2008).

Sveiby (1997)

Value Added Intellectual Coefficient (VAIC) Human resource costing and accounting

Pulic (1998, 2000)

Johanson (1998)

and

Grojer

Joia (2000)

Accounting for future (AFTF)

the

Nash (1998)

65

Table 2.9 shows the summary of intellectual capital research by various researchers across the sectors and countries. A detailed taxonomy on intellectual capital studies is presented in Appendix 2. Table 2.9 Intellectual Capital Research
Major Area Research Defining and measuring constructs Author Edvinsson and Malone (1997) Skandia (1994) Stewart (1997) Sveiby (2000) Bontis (1998), Bontis et al. (2000), Torres (2006) Cohen and Kaimenakis (2007) Tsai and Ghoshal (1998)

Business value of intellectual capital

Impact of intellectual capital on organization performance Intellectual capital and relationship management Human capital and organizational performance

Agndal and Nilsson (2006) Seleim, Ashour and Bontis (2006), Bontis and Fitz-enz (2002) Boedker et al (2005) Cabrita and Vaz (2006), Cleary (2009), de Castro and Saenz (2008), Hong et al. (2008), Huang and Hsueh (2007), Marr et al. (2004), Menor et al. (2007), Tovstiga and Tulugurova (2007), Wang and Chang (2005) Chen et al. (2006), Marr et al. (2004), Wu et al. (2008) Li and Zhu (2009) Bontis (1998) Bontis et al. (2000) Bontis and Fitz-enz (2002) Pablos (2002) Wang and Chang (2005) Cabrita and Vaz (2006)

Benefits of intellectual capital Intellectual capital and organizational performance

Intellectual capital and innovation

Intellectual capital and knowledge sharing Interactions among the dimensions of intellectual capital and business performance

Source: compiled by researcher

66

2.5

The Mediating Variables

According to Pablos (2004), intellectual capital represents the stock of knowledge

that exists in an organization at a particular point in time. Therefore, there must be a mediating mechanism that can process this stock of knowledge to generate products and profit. A few authors of intellectual capital have explored the mediating effects on the relationship between intellectual capital and performance. Wu et al. (2007) explored the mediating effect of dynamic capabilities on the relationship of intellectual capital and innovation performance. Lin and Chen (2008) investigated the effect of shared knowledge on the relationship of internal and external integration on innovation capability and product competitive advantage in Taiwan. Hsu and Fang (2009) investigated the mediating effect of organizational learning capability on the relationship of intellectual capital and new product development performance.

Intellectual capital and knowledge management cannot be pursued in isolation. They must interweave with other management considerations to make a sound, balanced and competitive enterprise (Wiig, 1997). Furthermore, from the practitioners point of view, interconnecting variables may provide a clue as to how firms can enhance their strengths to improve their performance (Liao and Chuang, 2006). This combined system must be treated as a dynamic process.

It is important to align and choose knowledge management activities with the intellectual capital result that has been targeted. From the strategic perspective, IC can be used to create knowledge that enhances a firms value (Tan et al., 2008). The key role of
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knowledge as a source of competitive advantage is to produce IC in an efficient way (Marti, 2001 as cited by Tan et al. 2008). But knowledge cannot be created by computers, books, or direct explicit knowledge transfer (Roos et al. 1998). According to Nonaka (1995), an organizations knowledge is created through the interaction of tacit and explicit knowledge. Nonaka and Takeuchi (1995) emphasize that the tacit personal knowledge possessed by individuals is most important for an enterprise to act intelligently. However, tacit knowledge must be transferred to explicit shared knowledge to be of general and lasting value. The interaction between tacit and explicit knowledge, when properly stimulated, can make a companys knowledge base grow exponentially. This is because knowledge is one of the few assets that grow most when shared (Tan et al. 2008). It is the key to enhance competitiveness (Nonaka, 1995). Carneiro (2000) examines knowledge management and its influence on innovation and competitiveness. IC is always referred to as a stock and knowledge management is often referred to as a flow (Bontis et al. 2002). The point is, when there is no knowledge sharing, there is no knowledge creation (Roos et al. 1998). Knowledge creation leads to innovation. A few authors have highlighted that innovation is to be measured prior to measuring organizational performance to ensure a proper outcome for organizations. Therefore, in this process mechanism, in order to add value to IC, knowledge sharing and innovation will be included as mediating variables in the framework. As knowledge is flowing continuously in the organization, being shared among the employees and flowing vertically and horizontally, when knowledge is developed, innovation will prevail.
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2.5.1 Knowledge Knowledge is defined as information combined with knowledge, context, interpretation and reflection (Davenport, De Long and Beers, 1998). Data, information and knowledge are not interchangeable concepts (Alavi and Leidner, 2001; Davenport and Prusak, 2000; Grover and Davenport, 2001). It is important for the organizations to differentiate the distinction of these three concepts in order to reap the benefits of knowledge (McCampbell et al., 1999). Data is a set of discrete, objective facts of events; it does not contain inherent information. Information is a message meant to change the way in which a receiver perceives something. Information is data that contains meaning. Knowledge is broader, richer and deeper than data and knowledge (Davenport and Prusak, 2000). Table 2.10 presents a summary of these three concepts.

Table 2.10 Summary of Data, Information and Knowledge

Data Simple observations of the state of the world Easily structured Easily captured on machines Often quantifiable Easily transferable Information Data is endowed with relevance and purpose Requires a unit of analysis Needs consensus on meaning Human mediation necessary Knowledge Value-added information from the human mind including reflection, synthesis, context Hard to structure Difficult to capture on machine Often tacit Hard to transfer

Example of data: Real-time stock prices

Example of Information: Analysts report on a stockuptrend or downtrend

Example of Knowledge: Fund managers decision to buy or sell stock

Source: Davenport (1997)

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Knowledge lies in human minds and only exists if there is a human mind to do the knowing (Widen-Wulff and Suomi, 2007). There are three dimensions of knowledge: width, depth and tacitness (Nooteboom, 1993). Knowledge can be created by intentional and resource-consuming efforts (Du et al., 2007). The neglect of knowledge based on people and ideas has undoubtedly reduced the corporate market places capability for true innovation and sustainable competitiveness (Gamble and Blackwell, 2001). Knowledge is classified into two types by Polanyi (1966, p.135-146) tacit and explicit. Explicit knowledge is the type of knowledge that can be easily documented and shaped (Choi and Lee, 2003). It can be created, written down, transferred and followed among the organizational units verbally or through computer programs, patents, diagrams and information technologies (Keskin, 2005; Choi and Lee, 2003). Tacit knowledge is what is embedded in the mind (Choi and Lee, 2003), it can be expressed through ability applications and transferred in the form of learning by doing and learning by watching. Based on Polanyi (1966), all knowledge has tacit dimensions. It can be completely tacit, semiconscious or unconscious knowledge held in peoples heads and bodies (Leonard and Sensiper, 1998). Tacit knowledge can be classified into two dimensions: technical and cognitive (Pathirage and Amaratunga, 2007). Technical encompasses information and expertise in relation to know-how while cognitive consists of mental models, beliefs and values. Tacit knowing is embodied in physical skills and resides in the bodys muscles, nerves and reflexes and is learned through practice. Tacit knowledge is also embodied in cognitive skills (Leonard and Sensiper, 1998). While explicit is ready to be explored, it is difficult to extract tacit knowledge without the consent of the knowledge owner. Tacit knowledge and explicit knowledge complete each other and
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they are important components of knowledge management approaches in organizations (Beijerse, 1999). Keskin (2005) found that tacit knowledge, explicit knowledge and performance are closely related, especially when the external environment is hostile. The great virtue of tacit knowledge is that it is automatic, requiring little or no time or thought (Stewart, 2000). He emphasizes that tacit knowledge tends to be local as well as stubborn because it not found in manuals, books, databases or files. It is oral. It is created and shared around a water cooler or during a coffee break. Tacit knowledge spreads when people meet and tell stories. As tacit knowledge remains hidden, unspoken and tacit, this knowledge can be either knowledge embodied in people and social networks or knowledge embedded in the processes and products that people create (Horvath, 2007). 2.5.2 Knowledge Sharing Knowledge sharing can be defined as the activities of how to help communities of people work together, facilitating the exchange of their knowledge, enhancing organizational learning capacity and increasing their ability to achieve individual and organizational goals (Dyer and Nobeoka, 2000). Knowledge sharing can also be explained as a set of behaviours that involve the exchange of information or assistance to others and is separate from information sharing (Connelly and Kelloway, 2003). Knowledge does not flow automatically through organizations. Indeed, peoples time and energy is limited and they will choose to do what will give them the best return given their scarce resources (Davenport and Prusak, 1998). Knowledge sharing is basically the act of making knowledge available to others within the organization (Ipe, 2003). Knowledge sharing in organizations is of great interest to the researcher and practitioner alike (Alony et al., 2007).

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There are many reasons about why people share their knowledge. Table 2.11 shows the advantages of knowledge sharing.

Table 2.11 Advantages of Knowledge Sharing

Advantage Reduces uncertainty Authors Gulati and Gargiulo (1999) Tywoniak (2007) Nonaka (1994)

Transform individual learning into organizational learning Preventing the reinventing of the wheel Create shared understanding Problem solving Decision Making Improves organizational performance Promoting competitive advantage Organizational learning Innovation Survival
Source: compiled by researcher

Bender and Fish (2000) Nickerson and Zenger (2004) Cross and Sproull (2004) Harlow (2008) Lesser and Storck (2001) Argote and Ingram (2000) Argote (1999) Powell, Koput, and Smith-Doerr, (1996) Baum and Ingram (1998)

Knowledge sharing is critical to a firms success and often forms a key component of knowledge management programmes (Davenport and Prusak, 1998; Riege, 2005). Much of the literature focuses on the tacit knowledge held by individuals rather than collective tacit knowledge. As tacit knowledge is valuable depending on the content of the knowledge, sharing ones knowledge with another could increase or add value to the knowledge itself (Leonard and Sensiper, 1998). In an organization, tacit knowledge takes
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one of two forms: 1. Knowledge embodied in people and social networks, 2. Knowledge embedded in the processes and products that people create (Hedlunds et al., 20003). Effective knowledge management (KM) requires a symbiosis between explicit and tacit knowledge in line with the technology and human resource processes (Choi and Lee, 2003). In a commercial environment, knowledge must be put into work in three primary areas; customer needs, concern processes and body of knowledge (Gamble and Blackwell, 2000). If a business idea is to be successful, it has to deliver the value and profit as shown in Figure 2.13.

Generating

Capturing

Storing/Sharing

Applying

Realizing Value

Explicit knowledge
Structured data Unstructured data

Cost Savings Customer Service Productivity Innovation Intellectual PRODUCT DEVELOPMENT and MARKETING STRATEGIC BUSINESS DECISIONS Capital

Value Net Environment Knowledge management system

CUSTOMER SALES and SERVICE

Transforming

Retention Speed Employee Skills retention Organizational Learning

Tacit knowledge

People Experiences Insights Collaborative innovation

Source: Gamble and Blackwell (2000)

Figure 2.13 Gamble and Blackwell Model

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Every member of the organization must understand how his or her work contributes to fulfilling customer needs and how the products and services of the enterprise provide customer value. Then members of the organization must understand how his or her work relates to the work of others. The last part of the process is the flow of knowledge that, to varying degrees, every person must understand something about the subject matter with which members of the organization deal. This requires a deeper knowledge of the relationships and meanings within both the enterprise and the outside world.

Knowledge must continuously circle and flow in the organization. As long as there is a stock of knowledge, during any period of time, there is a flow of knowledge (Stewart, 2000). McAdam and McCreedy (2000) commented that these two models of Gamble and Brickwell and Demarest, are too mechanistic and are not representative of knowledge flow in a real organization. They claimed that Demarests knowledge management model (Figure 2.14) is more comprehensive, which views knowledge as being intrinsically linked within the social and learning processes within the organization.

Knowledge construction

Knowledge Embodiment

Knowledge Dissemination

Use

Source: Mc Adam and Mc Creedy (2000)

Figure 2.14 Demarests Knowledge Management Model

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The model emphasizes the construction of knowledge within the organization, which is not limited to scientific input but is seen as including social construction knowledge. The model assumes that constructed knowledge is then embodied within the organization, not just through explicit programmes but through the process of social interchange. Then the process of dissemination of espoused knowledge throughout the organization and its environment. Lastly, knowledge is seen as being of economic use concerning the organizational outputs. The dark arrows show the primary flow direction while the light arrows show the more recursive flows. All these knowledge management models have shown the process of knowledge in an organization. One significant issue is that knowledge flows continuously in the organization. This flow of knowledge needs to be supported by a process of knowledge sharing to ensure that the process of knowledge management is fully utilized. Making knowledge available to others and capturing new knowledge as well, has been described by Nonaka (1991) as the spiral of knowledge. In Figure 2.15, Nonaka and Takeuchi (1999) examine the concept in terms of a knowledge spiral encompassing four basic patterns of interaction between tacit and explicit knowledge: socialization, externalization, combination and internalization.

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Tacit
From Tacit to Tacit produces:

to

Explicit
From Tacit to Explicit produces: Externalization Examples: dialogue with team, answer questions, models, metaphors, stories

Tacit

Examples: team collaboration

Socialization meetings and

discussions,

to
From Explicit to Tacit produces: Internalization Examples: learn from a report, read from many sources and create new knowledge combining existing tacit knowledge with knowledge gained from others.

Explicit

From Explicit to Explicit produces: Combination Examples: share a report or document, training, shared database of information.

Source: adapted from Marwick, A.D. (2001). Knowledge Management Technology, IBM Systems Journal. Nonaka and Takeuchi, 1999

Figure 2.15 Knowledge Cycle Model McAdam and McCreedy (1999) identify this model as the knowledge category model. The model assumes that tacit knowledge can be transferred through a process of socialization into tacit knowledge in others and that tacit knowledge can become explicit knowledge through a process of externalization. This explicit knowledge can be transferred into the tacit knowledge of others through a process of internalization and that explicit knowledge can be transferred to explicit knowledge in others through a process of combination. These movements of knowledge along the tacit-explicit spiral are essentially events of knowledge sharing (Roos et al., 1998).

In fact, Boisots Model (1987), in Figure 2.16, discusses the same things except Boisot considers knowledge as either codified or uncodified. When knowledge is diffused it refers to knowledge that is ready to be shared and undiffused refers to knowledge thatis not ready
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to be shared. However, Leonard and Sensiper (1998) point out that knowledge does not necessarily need to be explicit in utilizing it. Knowledge can remain tacit but collective tacit knowledge leads to creativity and innovation (Leonard and Sensiper, 1998).

Undiffused

Diffused

Codified

Property Knowledge

Public Knowledge

Uncodified

Personal Knowledge

Common Sense

Source: Mc Adam and Mc Creedy (2000)

Figure 2.16 Boisot Model

Nonakas conceptualization of socialization, externalization and combination is of particular importance in explaining the process of knowledge sharing (Wah et al., 2005). Even though the SECI model is mostly known for knowledge creation the process is more towards knowledge sharing. The creation of organizational knowledge requires the sharing and dissemination of personal experiences (Gold et al., 2001). According to Roos et al. (1998), explicit to explicit knowledge transfer can only involve data; to have knowledge, data must be interpreted by the human mind. Knowledge that resides in groups, teams or communities is a key source of underleveraged know-how in most organizations. Communities of practice (CoP) are the nexus for sharing and transferring the valuable tacit knowledge possessed by individuals and groups (Kogut and Zander, 1992; Lesser and Storck, 2001), and they provide firms with a
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vital source of organizational learning and incremental innovation as community members improve their practice through the continuous creation of knowledge (Wenger, 1998). This transfer of tacit knowledge is not to simply codify it but rather to share. In a smaller setting where CoP exists, the interaction is primarily in informal face-to-face discussions (Lave and Wenger, 1991). More commonly, people are unaware or are unable to articulate their tacit knowledge but storytelling during breaks and on the job helps individuals to interpret knowledge and events (Schenkel and Teigland, 2008). Tacit knowledge cannot be captured but can only be demonstrated through expressible knowledge and acts, tacit knowledge can be shared (McAdam et al. (2007). Bontis et al. (1998) and Saint Onge (1996) regard tacit knowledge as the primary source of intellectual capital but Roos et al. (1998) believe that tacit and explicit knowledge should be balanced. There are two schools of thought regarding externalization and codification of tacit knowledge. One view espouses that tacit knowledge must be made explicit for sharing and the other regards tacit knowledge as always being tacit (McAdam et al., 2007; Nonaka and Konno, 1998). However, Polanyi (1966) suggests that as long the possessor of tacit knowledge knows a way to express the knowledge, she or he should be able to share it. Tacit knowledge sharing cannot be taught, trained or educated (Brockmann and Anthony, 1998), it can only be learned and facilitated. Various authors commented that tacit knowledge sharing is very difficult due to perception, language, time, value and distance (Haldin-Herrgard, 2000; Nonaka and Konno, 1998; Bennet and Gabriel, 1999; Leonard and Sensiper, 1998). However, different methods like apprenticeship, direct interaction, and networking that include face-to-face social interaction are more suitable for supporting the diffusion of tacit knowledge (Haldin78

Herrgard, 2000). It can also be communicated by converting into words, models or numbers that anyone can understand (Desouza, 2003). The more tacit knowledge is shared, the harder is the imitation (Leonard and Sensiper, 1998). All these processes involve joint social interaction with two or more actors whereby tacit knowledge that resides in the individuals mind is articulated and becomes explicit (Wah et al., 2005). The application and transfer of knowledge in knowledge sharing activities will also help to promote knowledge creation because of the improvement in the firms absorptive capacity (Cohen and Levinthal, 1990). Therefore, people in the organization must be encouraged to communicate either orally or through written means (Roos et al., 1998). Knowledge sharing is also perceived to be the most essential process for knowledge management (Bock and Kim, 2002). Knowledge sharing is different from knowledge transfer even though it is often used interchangeably (Renzl, 2008). Knowledge transfer is defined as has adopted a source and recipient generic model while knowledge sharing emphasizes the collective character of knowledge emerging from interaction and dialogue among individuals. Knowledge sharing is a reciprocal process of knowledge exchange and examines factors that help explain why individuals are willing to engage in this process and why it is a fragile process (Renzl, 2008). Knowledge sharing is critical to a firms success and often forms a key component of knowledge management programmes (Davenport and Prusak, 1998; Riege, 2005). Sharing knowledge is power (Liebowitz and Chen, 2001). The goal of knowledge sharing is exploring a new knowledge and exploiting existing knowledge. There are reasons why knowledge sharing is important for the survival of almost all businesses (Gurteen, 1999), which are:
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Knowledge is an intangible product, which can easily slip through without being noticed.

Continuous innovation is an application of new knowledge, which is the only sustainable competitive advantage.

An organization might lose their knowledge when staff leave the organization. Expertise learnt and applied should be leveraged throughout the organization. Change could make the knowledge base erode sooner than anticipated.

Every employee in the organization has knowledge embedded in their mind as tacit knowledge, which is very difficult to be extracted directly (Ipe, 2003). As more and more companies realize that knowledge sharing gives them a competitive edge by leading to accelerated learning and innovation, knowledge management becomes increasingly important to the organization (Ipe, 2003). Reid (2003 as in Lin, 2006) stated that knowledge sharing creates opportunities to maximize an organizations ability to meet those needs and generate solutions and efficiencies that provide a business with a competitive advantage. Knowledge sharing enables managers to keep the individual learning flowing throughout the company and integrate it for practical applications. Christensen (2007) stressed that knowledge sharing is a process that is intended to exploit existing knowledge, especially in SMEs. He further elaborated that knowledge sharing is also a process of bridging organizational interdependencies. Not much of the literature or companies include knowledge sharing as part of their key components as knowledge sharing is considered difficult to measure (Christensen, 2007). However, the bottom line is that knowledge sharing is critical to a firms success (Davenport and Prusak, 1998).
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Nevertheless, the major problem with knowledge sharing is to convince, coerce, direct or otherwise get people within an organization to share their information (Gupta et al., 2000). For an organization, knowledge sharing is capturing, organizing, reusing and transferring experience-based knowledge that resides within the organization and making that knowledge available to others in the business. An interesting characteristic of knowledge is that its value grows when shared (Bhirud et al., 2005). Studies in knowledge creation and knowledge sharing (Lee and Cole, 2003; Nelson and Winter, 1982, Nerkar 2003) show that knowledge creation is a path-dependent evolutionary process that involves the spread of recombining knowledge over time and that the innovation process can be effectively organized as an evolutionary process of knowledge sharing. Exploration of new knowledge has a more innovative focus than the exploitation of knowledge and the perspective is grounded and exposed in the literature that has a primary focus on innovation (Christensen, 2005). Exploiting existing knowledge is more concerned with how to mobilize organizational best practices, thereby enabling a more efficient application of both individual and organizational knowledge (Christensen, 2005). Knowledge sharing is one of the most important processes of knowledge management, which gradually evolves and improves the production system and its constituent elements. Therefore, knowledge sharing is closely related to the long-term performance and the competitiveness of a firm (Du et al., 2007). However, sharing knowledge is not that easy. When knowledge is regarded as power, an individual will be reluctant to share their knowledge (Kinsey, 2007), especially the tacit knowledge, when they perceive that there are few rewards or when sharing is not recognized by the organization (Wah et al. (2005). It is very important for the organization
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to provide a conducive organizational environment to encourage knowledge sharing where knowledge sharing represents a key enabler of improved business performance. 2.5.2.1 Dimensions of knowledge sharing The terms transfer and share are interrelated (Awad and Ghaziri, 2003). Knowledge transfer is a mechanistic term, which provides knowledge for someone else and the term share is an exchange of knowledge between individuals, between or within teams, or between individuals and knowledge bases, repositories and so forth. Knowledge sharing recognizes the personal nature of peoples knowledge gained from experience (Awad and Ghaziri, 2003). While some authors interchange the terms knowledge sharing and knowledge transfer, Ipe (2003) stressed the difference between knowledge sharing and knowledge transfer even though it is not really visible. Knowledge transfer describes the movement of knowledge between larger entities within organizations such as between departments or divisions and between organizations themselves (Chakravathy et al. 1999; Lam, 1997). In contrast, knowledge sharing provides a link between individuals and the organization by moving knowledge that resides within individuals to the organizational level where it is converted into economic and competitive value for the organization (Hendriks 1999). This leads to the dissemination of innovative ideas and is considered critical to creativity and subsequent innovation in organizations (Armbrecht, Chapas, Chappelow and Farris, 2001), while between individuals it is a process that contributes to both individual and organizational learning (Andrews and Delahaye, 2000, Nidumolu, Subramani and Aldrich, 2001). In addition, Davenport and Prusak (1998) warn that the lack of knowledge sharing has proven to be a major barrier to the effective management of
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knowledge in organizations. Dixon (2000) and Spender (1996) as cited in Riege (2005) showed five types of knowledge sharing or knowledge transfer, as shown in Table 2.12.

Table 2.12 Types of knowledge transfer/knowledge sharing

Serial transfer Tacit and explicit team knowledge is shared within the team to a different setting at a later time The replication of explicit team knowledge in other teams undertaking similar tasks The replication of tacit team knowledge in other teams doing similar tasks Either tacit or explicit form, needs to complete a strategic task that occurs infrequently in organizations Team requires and seeks explicit expertise from others in the organization to accomplish a task

Near transfer

Far transfer

Organizational know-how

Expert transfer

Source: Dixon (2000)

However, Ford and Chan (2003) in explaining the four processes that characterize knowledge management, defined knowledge transfer as knowledge sharing. Meanwhile, Liebowitz and Chen (2001) emphasized the usage of Knowledge Management Assessment Tool (KMAT) the index summarized the successful knowledge-sharing criteria, which are: Leadership Culture Technology Measurement Knowledge management process

The American Productivity and Quality Center (APQC) report grouped its findings into six key areas that influence peoples willingness to share knowledge:
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The relationship between knowledge sharing and business strategy The role of human networks The role of leaders and managers The fit with overall culture The relationship between knowledge sharing and daily work The institutionalizing of learning disciplines

Wah et al. (2005) believe that an individual will only become involved in knowledge sharing if the following conditions exist: 1. Opportunities to do so 2. Communication modality 3. Expectation of the benefits of members accrue 4. Expectation of the cost of not sharing knowledge 5. Context compatibility for those who shared 6. Motivation is a crucial precondition for knowledge sharing 7. Personal compatibility and liking 8. Opportunism (associated with transaction cost analysis)

According to Riege (2005), knowledge sharing goals and strategies are only mentioned in business strategies because of the difficulties in measuring the effectiveness of knowledge sharing and because management are unable to identify the barriers. There are three important elements of knowledge sharing, namely, individual, structure and technology. These will help an organization encourage knowledge sharing in the organization. The success of knowledge sharing in organizations is not solely dependent on
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technological means but is also related to the behavioural factors the individual and the culture of the organization (Warsham, 2001; Calantone and Cavusgil, 2002; Herzum, 2002; Liao 2003 as in Borges et al. 2007). Ford and Chan (2003) also listed organizational culture elements as being key to the knowledge sharing process. These include: o Trust o Common cultures o Vocabularies o Frames of reference o Meeting times and places o Broad ideas of productive work o Status o Rewards that do not go to the knowledge owners o Absorptive capacity in recipients o The belief that knowledge is not the prerogative of particular groups o Absence of the not-invented-here syndrome o Tolerance for mistakes or need for help (Davenport and Prusak 1998)

Based on Abrams et al. (2003), as highlighted in Lin (2006), trust is the central characteristic of a relationship that promotes effective knowledge sharing and it determines the nature of the interactions and peoples expectation. According to Steward (1998) in Laycock (2005), trust can be created in an organization through competence, communities and networks through shared commitment and compensation (tangible and intangible). In
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Figure 2.17, Lin (2006) stated that organizational support is positively associated with organizational perceptions of innovation characteristics and interpersonal trust, which, in turn, are positively related to the organizational intention to facilitate knowledge sharing. Interpersonal trust is a key foundation for effective collaboration (Whitener et al. 1998) and is a salient factor in determining the effectiveness of knowledge sharing activities (William, 2001; Chowdhurry, 2005). According to Kelloway and Barling (2006), the best way to manage knowledge workers is to build trust.

Organizational perceptions of innovation characteristics Perceived relative advantage Perceived compatibility Organizational support Intention to facilitate knowledge sharing

Interpersonal trust

Source: Lin 2006

Figure 2.17 Knowledge and Trust Model Since tacit knowledge is difficult to codify, the key to knowledge-sharing is matching the type of knowledge with the right transfer method and will depend on three factors (Liebowitz and Chen, 2001; Dixon, 2000 (in Riege 2005)): Whether the task is routine or non-routine Whether the knowledge is related is tacit or explicit
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Any similarity between the originator and the receiver of the information

There are other factors that affect knowledge sharing. First, the organizational factors and interpersonal factors should be considered (Du et al., 2003). Trust and conflict are inherent issues of any organizational arrangement and are central for knowledge sharing (Du et al., 2003). In addition, group values, attitudes, norms and organizational climate should also be considered (Du et al. 2003). Most knowledge sharing studies have concentrated on the behaviour theory and motivation, which is believed to influence an individuals knowledge sharing intentions. This shows how much knowledge sharing is related to organizational performance. Du et al. (2003) emphasize that knowledge sharing activities should be measured quantitatively and be linked to performance whereas most knowledge sharing studies concerned qualitative measures. The cost of knowledge management either IT or human resources is costly (Choi and Lee, 2003; Du et al., 2005). Therefore, most of small and medium-sized firms cannot afford to have or adopt knowledge management systems (Mc Adam and Mc Creedy, 1999). However, the knowledge sharing cost is bearable for SMEs (Du et al., 2003). Du et al. (2003) developed measures for knowledge sharing from the perspective of accounting and operation as shown in Table 2.13.

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Table 2.13 Knowledge Sharing Measurement

Variables 1. The expenditure on inter-units and interorganizational training To facilitate knowledge transfer among different persons and different units in the firm, absorb knowledge from other firms and speed knowledge adoption. New knowledge of doing job is accumulated and shared increasingly, resulting in improved or innovative ways of doing the job and leading to better organizational performance. The intentional activities for communicating and transferring conceptual and operational knowledge, experiences and skills in a company can accelerate the process of knowledge sharing (Ingram and Simons, 2002). Importing workers from outside and implementing job rotation will stimulate the blend of different knowledge at different levels. Knowledge sharing occurs automatically in job rotation (Ortega, 2001) within an organization and workers mobility. RandD has been used to illuminate knowledge transfer. The process of RandD not only creates knowledge but also implies communication among different workers and units,which facilitates knowledge sharing and transfer.

2.

The expenditure on collaborative trials and experiments of non-RandD departments

3.

The expenditure on intentional activities for communication and transferring knowledge

4.

The frequency of importing workers

5.

The frequency of job rotation

6.

The expenditure on collaborative RandD

Source: Du et al. (2003).

Table 2.14, by Ipe (2003), summarizes the ideas of other authors on motivation factors that influence knowledge sharing between individuals, which can be divided into internal and external factors.

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Table 2.14 Summary of Internal and External knowledge

Internal Knowledge as Power o If an individual perceives that power comes from the knowledge they possess, it is likely to lead to knowledge hoarding instead of knowledge sharing (Davenport 1997, Gupta and Govindarajan 2000). o Politics of information (Blackler, Crump and McDonald 1998) when knowledge is perceived as a source of power in an organization. o Blackler because knowledge is always situated within a particular context, it is natural that culture and power dynamics within the context affect the way knowledge is perceived and used. Reciprocity (mutual give-and-take) o Can facilitate KS if individuals see that valueadded to them depends on the extent to which they share their own knowledge with others (Hendriks 1999, Weiss 1999). o Empirical evidence for the relationship between reciprocity and knowledge sharing indicates that receiving knowledge from others stimulates a reciprocal flow of knowledge in the direction of the sender both horizontally and vertically in organizations (Shulz 2001). o Trust is further emphasized by Andrews and Delahaye (2000), Roberts (2000), Read (1962), and Zand (1972). o The power and status involved in exchanges influence, to some extent, whether and how knowledge is shared (Krone, Jablin and Putnam 1987, OReilly 1978. External Relationship with recipient o Relationship is based on: Trust Power and status of recipient o Ghosal and Bartlett (1994), trust is one of four primary dimensions in an organization that influences the actions of individuals. o Huemer, van Krogh and Roos (1998) trust is more important as trust facilitates learning and the decision to exchange knowledge under certain conditions is based on trust. o Kramer 1999 trust is a critical factor that influences the way knowledge is shared within these communities.

o Huber (1982) Low status and power individuals direct info to those with more power and status High power and status individuals direct info to peers, not to lower status and power. o Reciprocity is also thought to be a motivator of knowledge sharing in CoP where KS results in Rewards for sharing enhancing participants expertise and providing o This is supported by Gupta and Govindarajan opportunities for recognition (Bartol and 2000, Quinn et al. 1996. Tissen, Andriessen and Srivastava 2002 Orr 1990). Deprez 1998, McDermott and Odell 2001. Negative aspect of reciprocity: o Bartol and Srivastava (2002) proposed different Fear of exploitation types of KS and reward Mechanisms of KS Suggested that the first 3 should be given monetary rewards while informal is to be given intangible incentives such as enhancing the expertise and recognition of individuals. Individual contribution to databases Formal interactions with and between teams Knowledge sharing across work units Knowledge sharing through informal interactions
Source: Ipe (2003) 89

Jacobs and Roodt (2007) compiled a literature overview concerning the knowledge sharing questionnaire in which they found a lack of relationship or culture of knowledge sharing behaviour as shown in Table 2.15. Table 2.15 Summary of knowledge sharing dimensions
Selected conditions, methods, outcomes and importance Trust (questions 12,19,22) Author(s)

Bartol and Srivasta (2002), Husted and Michailova (2002), Yang and Wan (2004) incentive systems Bartol and Srivasta (2002), Chua (2003), Husted and Michailova (2002), Mc Dermott and ODell (2001), Yang and Wan (2004) Chua (2003) Mc Dermott and ODell (2001) Husted and Michailova (2002

Reward, recognition (questions 1,2)

and

The likelihood of others doing likewise(reciprocity) question 13,20,23) Support from and to managers (question 4,14) No fear that career development is in danger if admit mistakes and failures (questions 5,18,21) Supportive organizational culture (question 15)

Gupta et al. (2000), Haldin-Herrgard(2000), Husted and Michailove (2002), Mc Dermott and ODell (2001)

Informal gathering and social events (question 7,8) Yang and Wan (2004) Training, workshops (question 3,6) seminars conferences Gupta et al. (2000), Husted and Michailove (2002), Yang and Wan (2004) Bartol and Srivasta (2002),

Performance appraisal, merit pay, promotions (question 17) Improve business (question 9) performance and success

Gupta et al. (2000)

To stay competitive and become innovative (question 10,11)

Chua (2003), Gupta et al. (2000), Haldin-Herrgard(2000), Husted and Michailove (2002)
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Source: Jacobs and Roodt (2007)

While knowledge sharing literature has conceptually emphasized the importance of motivating people to share their knowledge empirically, the role of employee motivation for knowledge sharing reports mixed results (Husted et al., 2005). In fact, Bock and Kim (2002) found that motivational factors were negatively correlated to knowledge sharing. 2.5.2.2 Models of knowledge sharing Du et al. (2007) emphasize that environmental and organizational factors are important factors in the relationship of knowledge sharing and performance as shown in Figure 2.18.
Environmental factors Social characteristics Economic characteristics Industry characteristics

Knowledge sharing

Performance

Organizational factors Size Structure Strategy Firm resources Culture Top management team characteristics
Source: Du et al. (2007)

Figure 2.18 Integrative framework on knowledge-sharing-performance relationship

Employees are likely to engage in knowledge work to the extent that they have the ability, motivation and opportunity to do so (Kelloway and Barling, 2006). In addition,
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organizational characteristics such as transformational leadership, trust, job design, social interaction and organizational culture are identified as potential predictors of ability, motivation and opportunity, as shown in Figure 2.19. In this framework, leadership, job design, social interaction and culture (organizational expectations and reward structure) are identified as potential predictors of ability and motivation.

Leadership

ABILITY Skills/Knowledge Role Breadth Self Efficacy Knowledge work Finding knowledge Creating knowledge Packaging knowledge Applying knowledge

Job Design

Social Interaction Organizatio nal culture Expectation Reward

Source: Kelloway and Barling, 2006

MOTIVATION Trust in organization Commitment to the organization Opportunity

Figure 2.19 Knowledge Work Model

Another important element in knowledge sharing is network, which encourages people to work less formally, therefore, relationships rely more on cooperation and collaboration (Laycock, 2005). As shown in the case of Buckman Laboratories, it is human networks, not IT networks that are fundamental for effective knowledge sharing. Knowledge sharing is notably a people thing, not a technology thing (Laycock, 2005).
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Husted et al. (2005) studied knowledge sharing from the perspective of extrinsic and intrinsic motives. They also investigated the role of motivational factors that influence knowledge sharing behaviours. These two motives are investigated separately, as shown in Figure 2.20.

Managerial Invention

Individual motivation for knowledge sharing

Managerial Invention

Source: Husted et al. (2005).

Figure 2.20 Husted Model of Motivation for Knowledge Sharing

To facilitate knowledge sharing, incentives, in terms of rewards, regardless of tangible and intangible should be given. People are motivated to engage in knowledge sharing if they receive something in return for the knowledge they share (Christensen, 2005). However, Bock and Kim (2002) found that expected rewards are not significantly related to the attitude towards knowledge sharing. Nevertheless, expected association and contribution are significantly related to attitude towards knowledge sharing. Intrinsic rewards actually exist and the challenge of fostering and improving knowledge sharing is to become better at supporting situations yielding intrinsic rewards such as the social rewards while extrinsic rewards are governed through the control and authority, as emphasized by Blau (1964) as cited in Christensen (2005).

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Marshall (2000),

as in Lim and Klobas (2000), suggested offering financial

incentives to employees to share their knowledge and further suggest that dedicated staff needed to manage the system and ensure that it contains only up to date knowledge. Knowledge is not to be given for free the sharing of knowledge is to be balanced by returning some type of reward such as money, bonus, organizational efficacy, promotion, social acceptance and informal acknowledgments (Ipe, 2003). Intrinsic rewards which is a favour that makes us grateful would definitely be stimulating, providing comfort (absence of pressure from others), behavioural confirmation by self, behavioural confirmation by others, status, and allowing the improvement of non-tangible resources (such as skills and competencies) without a reduction in any of the other functions.

In Figure 2.21, Ipe (2003) identifies various factors that influence knowledge sharing between individuals in an organization.

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Internal factors: Power Reciprocity External factors: Relationship with recipient Rewards for sharing

Tacit and explicit knowledge Value of knowledge

Nature of knowledge Knowledge sharing Motivation to share Opportunities to share Purposive learning channels Relational learning channels

Culture of work environment

Source: Ipe (2003)

Figure 2.21 Factors that influence knowledge sharing between individuals in the organization

Ipe (2003) then extended the model in Figure 2.21 whereby, nature of knowledge, motivation to share and opportunities to share are embedded within the culture of the work environment. This model supports a statement by Stenmark (2001) that people are not likely to share knowledge without strong personal motivation. Widen-Wulff and Suomi (2003, 2007) develop their knowledge sharing models based on knowledge sharing companies in their research on insurance companies in Finland. Figure 2.22 shows the knowledge sharing model. The model is supported by hard information resources, core competencies, soft information resources and behaviour as the internal

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information environment, which are the key elements in the knowledge sharing model, while the external environment is seen as an outcome of knowledge sharing outputs.

Business Success

Knowledge sharing

Learning organizationmetaphor

Intellectual capital

Knowledge sharing in process

Communication as core competencies

Organizational slack

Human capital

ICT infrastructure

Sources: Widen-Wulff and Suomi (2003)

Figure 2.22 Knowledge Sharing Model

Figure 2.23 shows the knowledge sharing process as suggested by (Widen-Wulff and Suomi, 2007). The model is further enhanced by separating between the internal and external environment. The basic foundation of knowledge sharing is organizational slack, human capital and technology (ICT). Organizational slack is defined, as time is important because it gives the employees an opportunity to share knowledge with others while human capital will ensure different kinds or types of knowledge to circulate in the organization. The ICT
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infrastructure or technology will help the speed of information. All these basic resources are needed if knowledge sharing is a goal (Widen-Wulff and Suomi, 2003). The next step of this model is communication. Communication is an important channel to transfer knowledge. Language and communication is considered to be highly important for the creation of trust in an interpersonal relationship, which is essential for further knowledge sharing (Yap and Chai, 2005). The next step is to add soft information resources, which include learning organizational metaphors, intellectual capital and knowledge sharing in process. Learning is a basic business practice. Intellectual capital is the knowledge and knowing capability of a social collectively such as an organization, intellectual community or professional practice (Nahapiet and Ghosal, 1998). At this level, knowledge from hard and soft information resources is well blended to create the knowledge sharing capabilities. According to Widen-Wulff and Suomi (2007), when knowledge sharing capabilities is combined with organizational resources, it is called internal information environment or information culture.

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External Environment

Business Success

Business outcome

Step 4 Internal Information Environment

Behavior

Knowledge sharing

Step 3 Soft information Culture Resources

Learning organization metaphor Intellectual capital Knowledge sharing in process

Step 2 Core Competence

Communication

Step 1

Hard Information Resources

Organizational slack

Human capital

ICT infrastructure

Source: Widen-Wulff and Suomi, 2007

Figure 2.23 Knowledge Sharing Process

The informal knowledge sharing network has gained recognition in knowledge management research. Organizations acknowledge that the majority of individual knowledge transfer does not follow formal structures or processes but depends a lot on the interpersonal relationships between people developed through informal interactions
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(Nirmala and Vemuri, 2009). Based on their research in applying knowledge management, particularly knowledge sharing, four aspects must be adhered to; knowledge capturing, mentoring, rewards and recognition, competency development and communities of practice. However, the human resource practices in many SMEs are often not conducive to the creation and exchange of knowledge (Gray, 2006). Therefore, many authors agreed that SMEs are not ready for knowledge management even though they are known for their only strength open communication knowledge sharing. The study of knowledge sharing is presented in Appendix 2.

2.5.3 Innovation Peter Drucker (1985) refers to innovation as the purposeful and organized search for changes and the systematic analysis of the opportunities such changes might offer for economic or social innovation. He also highlighted that innovation is the means by which the entrepreneur either creates new wealth-producing resources or endows existing resources with enhanced potential for creating wealth. Based on Nonaka and Takeuchi (1995), to explain innovation, we need a new theory of organizational knowledge creation....The cornerstone of our epistemology is the distinction between tacit and explicit knowledge...the key to knowledge creation lies in the mobilization and conversion of tacit knowledge. Innovation is also defined as the adoption of an idea or behavior, whether a system, policy, program, device, process, product or service, that is new to the adopting organization (Damanpour, 1991). Innovation is the process of creating a commercial product from an invention (Hitt et al, 2005). Innovation is creating or improving upon a new or existing product and selling it on the market. Innovation is making products visible
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to the eyes of customers while fulfilling their needs. Innovation can deliver four types of benefits besides cash: knowledge, brand, ecosystem and culture (Andrew and Sirkin of Anonymous, 2007). However, the most important reason for innovation in an organization is to make profit (Afuah, 2003). Firms make profits by offering products or services at a lower cost than their competitors or by offering differentiated products at premium prices that more than compensate for the extra cost of differentiation (Afuah, 2003), as shown in Figure 2.24.
Nature of innovation Incremental, radical architectural Complexity, tacitness Life cycle phrase

Environment Competitive Macro Internal Strategy Structure System people

Competences Ability to design engines, integrate, different functions, build logistics, market ideas, manufacture

Knowledge

Profit Form innovation that leads to low cost or differentiate d products

Nature of innovation Incremental, radical architectural Complexity, tacitness Life cycle phrase

Asset Size, patents, copyrights, location, skilled scientist, reputation, sponsor, licenses

Source: Afuah (2003)

Figure 2.24 Innovation Model

A firm will get involved in innovation by the impact of its environment and internal environment. Internally, a firm should be supported by its strategy, structure, system and people. Competences and assets are the function of technological and market knowledge as
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innovation is the use of new technological and market knowledge to offer to a new product or service that customers will want (Afuah, 2003). In addition, an organization needs to get new ideas from various sources to support their organizational creativity: 1. Consumers the feedback and complaints from consumers will trigger ideas to fulfil the needs and want of the customers. 2. Existing products and services existing products and services will give new ideas to entrepreneurs to further improve and upgrade their products and services from time to time. 3. Distribution channels members of distribution channels are also excellent sources of market information because of their familiarity with the needs of the market. 4. Government government regulation and support can be a source of new product ideas that push entrepreneurs to be innovative and creative (Hisrich and Peters. 2008). These sources of ideas are frequently used by entrepreneurs. Figure 2.25 shows the flows of ideas by Afuah (2003).

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New product
Low cost Improved attributes New attributes

Competences And assets

New technological knowledge

New market knowledge

Source: Afuah (2003)

Figure 2.25 Sources of Ideas

Damanpour et al. (2007) describe innovation type as administrative and technical innovation. Administrative innovations are defined as those that occur in the administrative component and affect the social system of an organization; while technical innovations are defined as those that occur in the operating component and affect the technical system of an organization. This could be the adoption of a new idea pertaining to a new product or a new service, or the introduction of new elements in an organizations production process or service operations. Innovation can be broadly interpreted through three major forms of innovation, which were identified by the Australian Bureau of Statistics (Hine and Ryan, 1999): 1. Product (major or radical and incremental).

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2. Process, known as both technological innovation and non-technological. Technological comprises new products and processes and significant technological changes of products and processes. 3. Non-technological innovation refers to changes that occur within an organization that are not directly attributable to products/services and production methods. Bloch (2007), however, states that the word technological should be removed from product and process innovation as these innovations still require significant movements in functions or uses, especially for the less R & D intensive firms. Table 2.16 illustrates the different types of innovation (Trott, 2005). Table 2.16 Types of Innovation
Type of Innovation Product innovation Process innovation Organizational innovation Example The development of new or improved product The development of a new manufacturing process A new venture division, introduction of new accounting procedure TQM systems Quality circles, Just-in-time (JIT) New financing arrangements Internet-based financial services

Management innovation Production innovation Commercial/Marketing innovation Service innovation

Source: Trot (2005)

Although not all firms should be innovative in the same manner, several scholars have suggested that innovation needs to be directed at new products, or services, new organizational structures or administrative systems, new process technologies or new
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programmes pertaining to organizational members, as these typically occur simultaneously (Garcia and Calantone, 2002; Trott, 1998). Product innovation is defined as the introduction of a good or service that is new or significantly improved with respect to its characteristics or intended uses (Trott, 1998). Product innovation occurs when a new or improved product is introduced to the market while process innovation is an adoption of new ways of making products or services (Maravekalis et al., 2006). Therefore, there is a strong correlation between product and process innovation. This includes significant improvements in technical specifications, components and materials, incorporated software, user friendliness or other functional characteristics (Maravekalis et al., 2006; Bloch, 2005). The innovation process has been identified for radical, incremental, really new, discontinuous and imitative innovations, as well as for architectural, modular, improving, and evolutionary innovation (Garcia and Calantone, 2002) that are also known as innovation categories. Meyer (1984) delineated three categories of innovations based on two dimensions: the type of technology employed; and its effects on the established consumption pattern as shown in Table 2.17. Table 2.17 Innovation Categories
Low Technology Or Distinctive Innovation Breakthrough Innovation Incremental Innovation High Distinctive Innovation High

Approach

Low

Consumption Pattern
Source: Meyer (1994)

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Incremental innovations refer to improvement over the existing processes and procedures, which do not require new technologies or changes in customer behaviour; incremental innovations can easily be defined as products that provide new features, benefits, or improvements to the existing technology in the existing market. Incremental innovation is important on two main counts: 1. As a competitive weapon in a technologically mature market. 2. As streamlined procedures based on existing technology that can help alert a business in good time to threats and opportunities associated with the shift to a new technological plateau. For many firms, incremental innovations are the lifeblood of the organization. Distinctive innovation refers to improvements over the present processes and procedures, which require new technologies or involve a certain degree of behavioural change, and breakthrough innovation includes improvements based on new technologies or approaches that require substantial adjustments in both the delivery systems and customer behaviour. The dynamic nature of most markets makes it almost impossible to find a firm that does not engage in innovation, either continuously or periodic (Hurley and Hult, 1998). The radical innovation is also known as disruptive innovation while incremental innovation is known as sustaining innovation. Radical innovation has been defined as innovations that embody a new technology that results in a new market infrastructure (Colarelli, 1998; Ettlie and Rubenstein, 1987). Often, radical innovations do not address a recognized demand but instead create a demand previously unrecognized by the consumer. This new demand cultivates new industries with

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new competitors, firms, distribution channels and new marketing activities (Garcia and Calantone, 2002). Different factors influence the organizational environment in the innovation process. Developing a reputation for innovation helps propagate a virtual circle that reinforces the companys abilities (Trott, 2005). Figure 2.26 illustrate the innovation circle.

High morale And Retention of Creative people

The organizations Reputation for innovation

Motivates people Within the organization And reduces frustration

Attraction of Creative people

Willingness Within The organization To accept new ideas Development Of innovative products

Organizational Encouragement Of creativity And innovation

Source: Trott, 2005

Figure 2.26 Circle of innovation This circle can be viewed as a specific example of Michael Porters (1985) notion of competitive advantage. Porter argued that those companies who are able to achieve competitive advantage above the performance in an industry sector are able to reinvest this additional profit into the activities that created that advantage in the first place, thus creating a virtual circle of improvement, or so called competitive advantage (Trott, 2005).

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2.5.3.1 The Difference between Innovation and Innovativeness

There are many interpretations of innovation that have resulted in the interchangeable use of the constructs innovation and innovativeness to define innovation types (Gracia and Calantone, 2002). However, this could be due to the different perspectives of the research on innovation by scholars that have been addressed to different issues and different communities such as engineering, marketing, product management and R&D (Garcia and Calantone, 2002). Innovation, as defined by Organisation for Economic Co-operation and Development (OECD) , is an iterative process initiated by the perception of a new market and/or new service opportunity for the technology-based invention, which leads to development, production and marketing tasks striving for the commercial success of the invention (Garcia and Calantone, 2002). This iterative process implies varying degrees of innovativeness and, thus, necessitates a typology to describe different types of innovations, which results in a variety of different innovations typically called radical innovations for products at the early stages of diffusion and adoption and incremental innovations at the advanced stages of the product life cycle. Innovativeness is most frequently used as a measure of the degree of newness of an innovation (Garcia and Calantone, 2002). New product is very subjective; new to the world, new to the adopting unit, new to industry, new to the market, and new to the consumer. From a macro perspective, innovativeness the paradigm shift in the science and technology and/or market structure in an industry. From a micro perspective, innovativeness is the capacity of a new innovation to influence the firms existing marketing resources, technological resources, skills, knowledge capabilities or strategy. A new innovation in a developing
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country might be considered obsolete in a developed country (Darroch, 2003). Garcia and Calantone (2002) proposed an operationalization of innovativeness based on the typology discussed above. Figure 2.27 illustrates the innovation typology.

Newness to the customer

Product innovativeness Newness to industry Newness to firm

technology newness market know-how technology know-how

Market newness

Source: Garcia and Calantone (2002)

Figure 2.27 Innovation Typology

Product innovativeness does not equate to firm innovativeness. Firm or organizational innovativeness has been defined as the propensity for a firm to innovate or develop new products. Innovativeness of a product that a firm markets or adopts is not a measure of organizational innovativeness. Many firms have taken an innovation strategy of imitating and improving upon existing products or technologies, which have been described by Miles and Snow (1994) as analyzer strategies. Radical innovations are innovations that cause marketing and technological discontinuities on both a macro and micro level. Incremental innovations only occur at a micro level and
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cause either a marketing or technological discontinuity but not both. Really new innovations cover the combinations in between these two extremes.

According to Hisrich and Peters (2008), innovation can be of varying degrees of uniqueness. Figure 2.28 illustrates the different degrees of innovation.

Breakthrough innovation

Uniqueness

Technological innovation

Ordinary Innovation

Number of Events
Source: Hisrich and Peters. 2008

Figure 2.28 Innovation Level With little uniqueness, innovation is labelled as ordinary innovation. Technological innovations are when the new products are produced with significant technological advancement. Breakthrough innovation is when new products are produced with some technological change. The breakthrough innovation often establishes the platform for future innovations in a certain area while technological innovations are very meaningful as they offer
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advancement and improvement in the product/market area. Ordinary technological is the extension of technological innovation in improving products or services for market use. The market has a stronger effect on innovation that is market pulled rather than technology, which is technology pushed (Hisrich and Peters., 2008).

Hisrich and Peters (2008) summarizes these innovations as shown in Table 2.17. Table 2.17 Types of innovation
Type of innovation Breakthrough innovation Uniqueness Extremely unique Number of events New product with some technological change. Few products. Example: computer, aeroplane Technological innovation Moderately unique New product with significant technological advancement. Occurs frequently compared to breakthrough Example: short-message signal (SMS), GPRS of hand phone Ordinary innovation Less unique New product with little technological change. Occurs most frequently Example: gloves, stationery
Source: Hisrich and Peters (2008)

However, according to Drucker (1986), innovations do not necessarily have to be technical. Some innovations might be the improvements of certain aspects of products or services to meet the needs and wants of customers, which is referred to as social innovation. An example of this innovation is insurance and health policy.

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2.5.3.2 Creativity and Innovation Creativity is about coming up with ideas, however, it is innovation that takes these ideas and turns them into action. Therefore, creativity is the food of innovation. Gurteen (1998) has listed the differences between creativity and innovation as shown in Table 2.18.

Table 2.18 The difference between Creativity and Innovation.

Creativity Process of generating ideas Innovation Process of shifting, refining and critically implementing the ideas Convergent thinking Putting them into action

Divergent thinking Generation ideas

Source: Gurteen (1998)

According to Davenport and Prusak (2000), ideas are free. Ideas to innovate can come from various sources as mentioned by Drucker (1986): 1. The unexpected sources sources of innovation might be derived from unexpected success, unexpected failure or unexpected events which trigger ideas and creativity in firms. 2. The incongruity the uneasiness of customers in dealing with their daily lives could give firms ideas to create something new for the customers. For example: paying bills on the Internet. 3. Process need opportunity is the source of innovation. Ideas could be derived from the market information.

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4. Changes in industry or market changes that caught everyone unaware the effect of globalization that has an impact on the industry. 5. Demographic changes population change is one of the innovation sources in meeting consumers needs. 6. Changes in perception, mood and meaning trend and lifestyle are among the sources of innovation under this source of innovation. 7. New knowledge, scientific and non-scientific knowledge-based innovation is the superstar of entrepreneurship. Innovation that is based on this source is unique as the competitors could have a hard time to imitate the innovation. 2.5.3.3 Innovation Process Innovation does not exist without going through a process. The model as shown in Figure 2.29 explains how innovation can be nurtured and developed in an organization (Trott, 2005). The process is important in ensuring that an organization is capable of nurturing and producing innovativeness.

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Scientific and Technological developments inevitably lead to knowledge inputs

Firms develop knowledge, Processes and products

Creative individual

Companies operating Functions and activities

Companys architecture and external linkages

Societal changes and Market needs lead to demands and opportunities

Source: Trott (2005)

Figure 2.29 Innovation Process Scientific and technological development may help an individual acquire the necessary knowledge that will lead him/her to be creative. A firm will then develop its knowledge, processes and product in line with its functions and activities. Once the firms architecture and external linkages are in line with societal changes and market needs it will lead to demand and opportunities. These three parts are overlapping and need each other in developing an innovation. The source of innovation lies in people individual employees willingness, ability and interest in contributing to the companys well being (Horibe, 2007). Hitt et al. (2005) emphasized that innovation should be the main pillar of entrepreneurship regardless of whether it is radical or incremental. Entrepreneurship and innovation are important for young and old and for large and small companies, for service companies as
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well as manufacturing companies and high-technology ventures (Thomke, 2003). Globalization has left most companies in an uncertain environment, thus, it is difficult to predict the future. Therefore, companies have to develop strategies to overcome this uncertainty. Capitalizing on their capabilities while acquiring resources allows companies to take the necessary action to react and adapt to the dynamic environment and be proactive. Companies have to be entrepreneurial and innovative (Hitt et al., 2005). Innovations are critical to a companys efforts to differentiate their goods and services from competitors in ways that create additional or new value for customers (Katilla and Ahuja, 2002). Innovation is always regarded as being a part of the strategic competitiveness of an organization that allows it to be competitive. Companies operating in diverse industries are using innovation as a competitive strategy. 2.5.3.4 Innovation Models Terviovski (2001) adopted the Continuous Improvement and Innovation Management (CIAM) framework to measure SMEs innovation and performance for 115 manufacturing SMEs in Australia. CIAM utilizes 57 variables, which are loaded into five constructs, namely:

1. innovation system and structure 2. continuous improvement and innovation management strategy 3. customer and supplier relationships 4. organizational culture 5. firms technological compatibilities
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Firm performance is measured by: 1. new product 2. product configuration 3. product innovation 4. improved work methods 5. reduction in waste of resources 6. increased market opportunities 7. increased quality 8. increased delivery-in-full-on-time

In a study by Terziovski (2001), organizational culture and technological compatibilities are not closely related to SME performance or the other variables. However, regression analysis on individual items showed that core technologies and organizational objectives are the key drivers of new ideas and information as part of the continuous improvement and innovation management system (Terviosvki, 2001). Terviosvki, however, did not explore knowledge in-depth but just generalized knowledge as ideas and information. Figure 2.30 shows the innovation management system that leads to performance.

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Innovation system and structure

Continuous improvement and innovation management strategy Technological compatibilities Organizational culture

Performance

Customer/supplier relationships
Source: Terziovski, (2005)

Figure 2.30 Innovation Management System Subramaniam and Nilakanta (1996) pointed out that when innovativeness is measured in multidimensional constructs, it shows a significant different effect on the outcomes. They highlighted that in measuring innovation in multidimensional measures, the following must follow suit: 1. Any valid measure of innovativeness must be based on adoptions of several innovations. 2. In addition to the number of innovations adopted, the time of adoption of each innovation must also be considered. 3. The consistency of adoption patterns over time must also be measured (either late or early). Keizer et al. (2002) classified variables that can be considered as possible predictors of innovation efforts of SMEs as external variables and internal variables. External variables
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refer to the opportunities an SME can seize from its environment. Internal variables refer to the characteristics and policies of SMEs. The variables found in the review are summarized in Table 2.18.

Table 2.19 Summary of literature review about variables influencing innovative efforts of SMEs
External Variables Internal Variables

Collaboration with other firms: Collaboration with suppliers to overcome size constraints with suppliers leads to low formalized relations that could be difficult to achieve over long distance (Lipparini and Sobrero, 1994) Close working relationship with suppliers and customers in co-design and co-makeship (Birchall et al. 1996; Davenport and Bibby, 1999; Keeble et al. 1999; Docter and Stokman, 1988) Customers are the main source of improved technology for SMEs in the USA (Le Blanc et al., 1997) Strategic alliances as an integral part of the firms development plan (Forrest, 1990; Cooke and Wills, 1999) Linkages with knowledge centres: Contributions by professional consultants, university researchers and technology centres (Le Blanc et al., 1997; Hoffman et al., 1998; Oerlemans et al., 1998) Contributions by innovation centres and Chamber of Commerce (Oerlemans et al., 1998) Utilizing financial resources or support regulations: Availability of RandD funding (Le Blanc et al., 1997; Birchall et al., 1996; Hoffman et al., 1998) Government financial aid (Dutch Ministry of Economic Affairs, 1993)
Source: Keizer et al (2002)

Strategy: Explicit strategies to increase and stimulate internal creativity and risk taking behaviour (Birchall et al., 1996; Carrier, 1994). Sound day-to-day and strategic management practices (Anonymous, 1999) Strategies to implement state-of-the-art production technology and automation (Aronson, 1998; AbdulNour et al., 1999) Structure: Application of project management structures (Larson et al., 1991, Meer et al., 1996) Technology policy: Planning for future (Docter and Stokman, 1988) Number of technology policy instruments used by the firms (Oerlemans et al., 1998) Level of education: Level of education of founder/manager and employees (Docter and Stokman, 1988) Presence of qualified engineers (Le Blanc et al, 1997; Hoffman et al., 1998) Investments in RandD: Percentage of sales volume invested in RandD (Birchall et al., 1997) Geographical location: Rural or urban location (Hoffman et al., 1998)

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Soderquist et al., 1997 (as cited in Terziovski, 2001), investigated continuous improvement and innovation practices in French SMEs, which was the extension of Birchall et al. (1996). This study presented a macro-level comparison of factors affecting managing of innovation in SMEs in the UK, France and Portugal. The top nine sources of innovation were found to be: 1. The introduction of new products and/or services 2. Continuous improvement of work processes 3. Radical change, e.g. through Business Process Reengineering 4. Increased focus in marketing/sales efforts 5. Reduction in indirect staff numbers 6. Improvement on staff competence 7. Improved quality of products and services 8. Improving the quality of management 9. Efforts to improve supplier performance.

Shapira et al. (2006) proposed the knowledge content components and knowledge outcomes framework for knowledge economy measurement as shown in Figure 2.31. In knowledge components there are two main variables, namely, knowledge enablers (stock) and knowledge processes (flow or actions). A knowledge enabler is regarded as the input stock variable while knowledge processes generate knowledge and make use of knowledge. There is a two-way flow between enablers and processes, which is interdependent. Knowledge outcomes are the target of knowledge efforts, which result in innovation and

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then economic performance. The economic performance is influenced by external factors such as business climate, demand conditions and market and industry structure.

KNOWLEDGE COMPONENTS

KNOWLEDGE OUTCOMES

Knowledge enablers (stocks) E1: Human capabilities E2: Knowledge Leadership E3: Technology/Infrastructure E4: Environment

Innovation (O1) New or improved product New or improved process Improved organizations i

Knowledge processes (flow or action) K1: Knowledge Generation K2: Knowledge Acquisition K3: Knowledge Sharing K4: Knowledge Utilization

Economic Performance (O2) Improved productivity Enhanced profits

External factors Source: Shapira et al. (2006). Business climate Demand conditions Market and industry structure

Figure 2.31 Knowledge Content Components and knowledge outcomes

However, most of the studies done on SMEs do not rigorously test the strength of the relationship between SME practice and performance (Terziovski, 2001). Therefore, there is a need to further test the SME practices of other variables and performance in searching for a stable framework that is practical for SMEs.
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2.5.3.5 Determinants of Innovation Few authors have done empirical studies on innovation and proposed various determinants of innovation. The determinants are management support for an innovative culture (MS), customer/market focus (CF), communication/networking internal and external (CN), Human resources strategies that emphasize innovation (HR), teams and teamwork (TM), Knowledge management, development and out-sourcing (KN),

Leadership (LS), Creative development (CD), Strategic posture (SP), Flexible structures(FS), Continuous Improvement (CI). It was found that the most important determinant of innovation was managemet support for innovation for an innovative culture which is the responsibility of top management to nurture and cultivate the innovative environment in the organization (Read, 2000). Table 2.20 shows the determinants of innovation by several authors Appendix 3 presents the taxonomy of innovation by previous authors.

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Table 2.20 Determinants of innovation

Authors Atuahene-Gima (1996) Balbontin et al. (1999) Yamin et al. (1999) Spivey et al. (1997) Tang (1999) Sirilli and Evangelista (1998) Nobel and Birkinshaw (1998) Ozsomer et al. (1997) Soderquist et al. (1997) Cho (1996) Zhuang et al. (1999) Kusunoki (1997) Hurley and Hult (1998) Keogh (1999) Muffatto and Panizzolo (1996) Subramanian and Nilakanta (1996) Shaw (1998) Birchall et al. (1996) McGourty et al. (1996) Zien and Buckler (1997) Total
Source: Read (2000)

MS X X

CF X X

CN

HR X

TM X

KN

LS

CD

SP

FS

CI

TE

X X

X X

X X X X

X X X X X X X

X X X

X X X

X X X X 9 X 8 X

X X X X 7 5 X 4

X X

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2.6

Organizational Performance
Organizational performance comprises the actual output or results of an organization

as measured against its intended outputs (or goals and objectives) (Ali, 2006). According to Tvorik and McGiven (1997), organizational performance is always focused on two areas: economic perspective and organizational perspective. The measurement of firm performance can include financial measures (Subramaniam and Nilakanta, 1996), as well as tangible and intellectual capital (Sveiby, 2001). Measuring organizational performance compares the expected results with the actual results, investigating deviations from plans, assessing individual performance and examining the progress being made towards meeting the targeted objectives (Hashim, 2007). A single measure may fully explicate all aspects of the performance (Snow and Hrebiniak, 1980 as cited in Liao and Chuang, 2006). It is best to show the perpetual measures of firm performance that correlate strongly to more traditional objective measures including sales growth, net income growth and return on investment (Talon et al. 2000). While the economic perspective emphasizes the firms performance position, the organizational perspective builds on the behavioural and sociological paradigms of the firm. The external environment conditions and industry structure are largely assumed to shape the firms performance. However, recently, other streams of research emphasize a resource-based bundle of capabilities perspective on organizational performance has evolved to characterize the firms evolution and strategic growth alternatives (Dierickx and Cool, 1989; Dosi, 1988 as cited by Tvorik and McGivern, 1997). From their study, they inferred that the firm is a repository of skills and capabilities exhibiting aligned resources and leadership styles that mobilize the firm through the creation of a shared vision. These synergistic and symbiotic relationships
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provide the firm with the essential strategic leverage to pursue innovation with the expectation of increasing competitive advantage. The resulting innovation enables the generation of new skill sets that evolve from the combination of the firms synergism of past accomplishments and the existing knowledge base.

However, there is no single measure to measure performance (Ali, 2006), especially in small and medium enterprises. Xia et al. (2007) in their study on SMEs in Singapore propose that variance in organizational performance is explained by six dimensions of firm resources, which are: 1. Technological resources 2. Owner/top managers managerial skills and capability 3. Employees skills 4. Employees professional/technical knowledge 5. Firms internal relationships 6. Firms external relationship.

Measuring organizational performance in SMEs is different than large organization, SMEs are characterized by their smaller firm size and consequent limited abilities (Taticchi et al., 2008). Furthermore, SME owners and managers are usually well aware of the local market and the client demands and, hence, the relation with the clients and the after-sales services are often more intensive compared to large organizations (Taticchi et al. 2008). This is generally complemented by less bureaucracy (Vinten, 1999) and shorter internal lines of communication (Winch and McDonald, 1999), which guarantee a greater speed in
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the problem resolution and decision making. Small businesses should strive for simplicity and keep their performance measurement system focused and simple (Ali, 2003). Taticchi et al. (2008) argue that there is not a specific measurement of performance that suits SMEs and suggest that an integration of measurements of performance be applied to SMEs. However, such an application is still very new to SMEs. Several authors have summed up the measurements of organizational performance on different items as shown in Table 2.21.

Table 2.21 The measurement of organizational performance

Construct

Measurement

Intellectual Capital

Financial(Wang and Chang, 2005; Bontis et al., 2000 ) Innovation (Cohen and Kaimenakis, 2005; Wang and Chang, 2005; Mertins et al., 2001; Stewart, 1997) New product/services (Mertins et al., 2001;Deshpande et al., 1993; Gold et al., 2001; Nahapiet and Ghosal, 1998; Motwani et al., 2005) Improving innovation (Husted et al., 2005) Financial (Liao and Chuang, 2006, Lee and Choi, 2003)

Innovation

Knowledge Sharing
Source: Ali (2003)

The method of measuring organizational performance in knowledge management can be categorized into four groups: financial measures, intellectual capital, tangible and intangible benefits and balanced scorecards. Most authors recognize the significance of intellectual capital as a resource underpinning organizational performance (Marr et al.2004). Stewart (2000) listed the measurement of intellectual capital towards organizational performance: human capital, structural capital and customer capital in Table 2.22.
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Table 2.22 Measurement of intellectual capital towards organizational performance

Capital 1. Human capital 2. 3. 4. 1. 2. 3. 1. 2. 3.
Source: Stewart (2000)

Measurements Innovation number of new products/services produced Employee attitudes Tenure, turnover, experience, learning Skills, talents, training Valuing stocks of knowledge Working capital turns Databases at estimated replacement cost Customer satisfaction Measuring alliances between employees and customers Loyalty/retention rate

Structural capital

Customer capital

The existing approaches to the measurement of intellectual capital can be classified according to a double criterion: either organizational level only versus components identified, or non-monetary valuation versus monetary valuation (Montequin et al. 2006). According to Boedker et al. (2005), intellectual capital is best measured or predicted by non-financial indicators rather than financial as it focuses on future financial performance. For SMEs, innovation can be measured by counting the number of products and process innovations introduced in the past two years (Yap et al., 2005). As this study looks at the outcome of knowledge sharing and innovation, the specific measure developed and validated by Deshpande et al. (1993), Lee and Choi (2005) and Capon et al. (1992) will be adopted. Organizational performance can be measured using sales, sales growth and profitability (return on sales) similar to Hendreckson and Psarouthakis (1992). They cite return on sales as an effective basis for evaluating small firms (Calatone et al., 2002), Lee and Choi (2003), Bontis (1998) and Gold et al. (2001).
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Venkatraman and Ramanujam (1986) identify organizational performance as a broad construct, which includes operational performance (market share), financial performance (ROA, ROI) and other firm performance indicators and suggest that whenever possible, measures of both financial performance and operational performance should be used as indicators of firm performance. By measuring the organizational performance and the capabilities or resources of the organization, an organization will be able to assess their position and goals.

2.6.1 The Relationship between Intellectual Capital and Organizational Performance Intellectual capital is the firms most important asset that is embedded in the organization. It is also termed as an organizational resource and represents the strength and ability of the firm to compete with its competitors. The impact of intellectual capital on organizational performance can provide another competitive advantage for the firm. The intellectual capital refers to the summation of all the knowledge and capabilities of every employee, and which brings about performance and creates wealth for the enterprise (Huang and Hsueh, 2007). There are different definitions and classifications of intellectual capital due to different research backgrounds. For this study, intellectual capital is divided into human capital, structural capital and relational capital in accordance with the definitions of Bontis et al. (2000), Hubert (1996) and Edvinsson and Sulivan (1996). Most of the studies of intellectual capital test the intellectual capital independently against performance (Bontis et al., 2000; Wang and Chang, 2005, Huang and Hsueh, 2007; Bramhandkar et al. 2007; Huang et al. 2007; Liao and Chuang, 2006). Human capital has
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an indirect relationship to performance while structural capital and relational capital have a direct impact on performance. Different industries have a different emphasis on the intellectual capital dimension. Human capital can be more important in an industry requiring expertise built up over time. Structural capital can be vital in industries that demand an extensive IT infrastructure or strong corporate culture. Relational capital can be more essential in an industry requiring close supplier contact, close customer contact or strong brands, or that require substantial regulatory compliance. According to Bramhandkar et al. (2007), regardless of how financial performance is measured, better intellectual capital management is associated with better returns.

2.6.2 The Relationship between Intellectual Capital and Knowledge Sharing Knowledge is important in intellectual capital that needs to produce higher-valued assets. Intellectual capital is tacit and tacit knowledge cannot be sold no matter how much someone is willing to pay (Stewart, 2000; pp.74). People develop and use tacit knowledge before they formalize or codify it. However, Awad and Ghaziri (2004) stress that knowledge management is not intellectual capital, as clearly defined by Wiig (1997): Intellectual capital focuses on building and governing intellectual assets from a strategic or enterprise governance perspective. Knowledge management has a tactical or operational perspective in facilitating and managing knowledge.

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Widen-Wuff and Suomi (2003) found that intellectual capital needs a process mechanism, which is knowledge sharing, to have an impact on business performance, as in the research in Finland (Figure 2.32).
Business Success

Knowledge sharing

Learning organizationmetaphor

Intellectual capital

Knowledge sharing in process

Communication as core competencies

Organizational slack

Human capital

ICT infrastructure

Source: Widen-Wuff and Suomi (2003)

Figure 2.32 Knowledge sharing Model Ruta and Macchitella (2008) highlight that the three dimensions of intellectual capital human capital, social capital and organizational capital can influence the motivation of individuals to share their knowledge with other members within the organization. Koenig (1998) stresses that in order for knowledge to be circulated evenly in the organization, it must be supported by social capital, which comprises culture, trust, knowledge behaviour, human capital and the structural capital of the processes, resources, technology and metric.

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2.6.3 The Relationship between Knowledge Sharing and Organizational Performance Knowledge sharing is the behaviour of disseminating and assimilating ones acquired knowledge with other members within ones organization (Zheng and Bao, 2006). Knowledge, especially tacit knowledge is valuable compared to explicit knowledge. Tacit knowledge can be either knowledge embodied or knowledge embedded (Horvath, 2007). Embodied knowledge resides in peoples minds while knowledge embedded is shown in products, processes or documents. The value of tacit knowledge is only known through its outcomes innovation and organizational performance (Cavusgil et al., 2003). It is argued that the most effective means to transfer valuable tacit knowledge is actually not to codify it, but rather to transfer it through an implicit mode (Schenkel and Teigland, 2008). In SMEs the knowledge management model, which is based upon knowledge sharing through constant and open communication (often the SMEs strength) the making explicit of often buried or tacit knowledge held by all employees (Gray, 2006). In Figure 2.23, Gold et al. (2001) emphasize that knowledge infrastructures such as technology, structure and culture, along with knowledge acquisition, conversion, application and protection, are essential organizational capabilities for higher organizational performance. They believe that these key infrastructures enable the maximization of social capital. Table 2.23 Knowledge Infrastructure

Infrastructure Structural infrastructure Cultural dimensions Technological dimensions

Source: Gold et al. (2005)

Context Norms, trust Shared context Technology-enabled ties

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Technology dimensions are part of effective knowledge management and include business intelligence, collaboration, distributed learning, knowledge discovery, knowledge mapping, opportunity generation as well as security (Gold et al., 2005), while structure is important to optimize the knowledge sharing process within the firm. The most significant hurdle of knowledge management or knowledge sharing in particular is organizational culture. Shaping the culture is central to a firms ability to manage its knowledge. Husted et al. (2005) reveal that extrinsic motivators, such as reward (monetary incentives), are related to knowledge exploitation while intrinsic motivators such as self-fulfilling tasks are related to knowledge exploration. Pathirage and Amirutanga (2007) highlighted studies by Grant (1996), Zander and Kogut (1995) that suggest that tacit knowledge can be integrated externally through relational networks that span organizational boundaries that are paramount for superior performance. The relationship is shown by Du et al. (2007) in Figure 2.33.
Environmental factors Social characteristics Economics characteristics Industry characteristics Knowledge sharing Performance

Organizational factors Size Structure Strategy Firm resources Culture Top management team characteristics
Source: Du et al. (2007)

Figure 2.33 Integrative framework on knowledge-sharing-performance relationship

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Knowledge sharing is divided into two forms: donating knowledge (communicating to others what ones personal intellectual capital is) and collecting knowledge (consulting colleagues in order to get them to share their intellectual capital) (Weggeman, 2000; Van de Hoof and Van Weenen, 2004). These two processes evolve together in the knowledge sharing procedure and are always followed by controversy and interaction, and dialectically collective enquiry among colleagues, especially for tacit knowledge (Fernie et al.,2003).

2.6.4 The Relationship between Innovation and Organizational Performance The innovation type has a significant impact on business performance, especially incremental innovation (Oke et al., 2004). Deshpande et al. (1993) found that innovativeness is an important determinant of organizational performance even after the culture has been controlled. Previous studies on innovation and organizational relationship indicated mixed results, some positive, some negative and some showed no relationship at all (Capon et al. 1990, Atuahene-Gima, 2001). Figure 2.34 shows the relationship between organizational characteristics that influence organizational outcomes.

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Organizational Characteristics Structural and Process Characteristics Size and resources Age Differentiation Formalization Loose coupling Hierarchy Market intelligence Planning

Organizational Outcomes

Capacity to innovate

Market focus Characteristics Cultural Learning and development Status differentials Participative decision making Support and collaboration Power sharing Communication Tolerance for conflict and risk

Competitive advantage and performance Innovativeness

Feedback and Reinforcement

Source: Hurley and Hult (1998)

Figure 2.34 Hurley and Hult Innovation Model The relationship between innovation and organizational performance has been found by many researchers (Hurley and Hult, 1998; Kohli and Jaworski, 1993; Keskin, 2006; Atuahene-Gima, 2001; Damanpour; 1991, 1996). Damanpour et al. (2007) argued that the association between innovation and firm performance depends on the performance measurement and the characteristics of a given organization. Furthermore, different types or different combinations of innovation may also result in divergent organizational performance (Lee and Chen, 2007). Innovation has demonstrated a strong and influential relationship with SMEs performance (Wolff and Pett, 2006; Montequin, 2006).

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Danneels (2002) emphasized that product innovation should be utilized in investigating the impact on organizational performance. This is further supported by Montequin et al. (2006) in studying innovation in SMEs. Lin and Chen (2007) found that 53.5% of SMEs of in the manufacturing and service industries in Taiwan engaged in a combination of radical and incremental innovation. Innovativeness is an important direct driver of performance (Hult et al. 2004). Table 2.24 shows the impact of innovation on organizational performance.

Table 2.24 Impact of innovation on organizational performance

Author(s) Authene-Gima (1996) Performance Measurement Respondents rated the degree of innovation success on a 12-point scale in terms of market share; sales, growth and profit objectives; cost-efficiency, etc. 27 items based on four dimensions; marketing effectiveness, asset management, operation efficiency and financial performance. Effective measures (revenue generation focus) such as market share and sales. Conclusion The potency factors affecting innovation performance differ between service and manufacturing firms. Innovative companies are more profitable,although highly innovative companies may not necessarily outperform innovators. The results show that innovativeness does improve organizational performance.

Yamin et al. (1999)

Subramaniam and Nilakanta (1996)

2.6.5 The Relationship between Intellectual Capital, Knowledge Sharing and Organizational Performance Knowledge management as perceived from the intellectual capital approach is primarily geared towards building up structural capital (Huysman and Witt, 2002). Structural capital ensures that human capital and social capital flourishes (Huysman and Witt, 2002). Yang (2007) found that knowledge sharing facilitates the collective individual
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knowledge, thus, leading to organizational effectiveness. Saint-Onge (1996) suggests that tacit knowledge exists in each segment of intellectual capital: Human capital: this is in the mindsets of individuals. Structural capital: the collective mindsets of employer and employees that shape the culture of the organization. Customer capital: this is in the mindsets of the employees and customers, which shape their perceptions of the value provided by any given product or service.

2.6.6 Intellectual Capital, Innovation and Organizational Performance There is a significant relationship between market orientation, customer orientation and even entrepreneurial orientation and organizational performance. (Hurley and Hult, 1998; Kohli and Jaworski, 1993; Keskin, 2006; Atuahene-Gima, 2001; Damanpour; 1991,1996; Wolff and Pett, 2006; Montequin, 2006, Appiah-Adu and Singh, 1998). In addition, Garcia and Calatone (2002) suggest that single construct product innovation for technological-based projects can be utilized as a mediating or moderating variable or even to split innovation into product type categories. Bontis et al. (2000) and Chen et al. (2004) show the relationship of structural capital and organizational performance, which indirectly shows the innovation capital relationship to organizational performance as in Figure 2.35.

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Human capital

Customer capital

Structural capital

Performance

Source: Bontis (2000)

Figure 2.35 Intellectual capital Model There is a positive relationship between market orientation and customer orientation on performance in small firms (Verhees and Meulenberg, 2004); Montequin, 2006). However, most researchers focused on the effect of market orientation, entrepreneurial orientation, customer orientation and even human capital separately on organizational performance (Hurley and Hult, 1998; Kohli and Jaworski, 1993; Keskin, 2006; Atuahene-Gima, 2001; Damanpour; 1991, 1996; Wolff and Pett, 2006; Montequin, 2006). Appiah-Adu and Singh (1998) found that customer orientation through innovation has a positive impact on organizational performance. Entrepreneurial orientation positively affects innovation and, thus, leads to higher performance of the SME (Avlonitis and Salavou, 2007), which is in line with other researchers.

2.6.7 Intellectual Capital, Knowledge Sharing, Innovation and Organizational Performance Keskin (2006) suggests that market orientation, which is a part of the customer capital of intellectual capital, has an indirect effect on the firms performance in SMEs
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whereby the firms innovativeness has a positive impact on firm performance. In addition, innovativeness is influenced separately by market orientation and learning organization for higher organizational performance. Figure 2.36 shows the model.

Mkt intelligence Mkt Strategy Impr. Mkt strgy

Market orientation

Innovativeness
Commitment Shared vision Open-minded Knowledge sharing

Performance

Learning organization

Source: Keskin (2006)

Figure 2.36 Keskins Market orientation Model Based on his research, Keskin (2006) suggested that tacit knowledge sharing should be incorporated into the framework, as in SMEs tacit knowledge sharing is the foundation of an SMEs innovativeness. In addition, tacit knowledge sharing frequently takes place in SMEs (Pathirage and Amaratunga, 2007). Horvath (2007) suggests that tacit knowledge is the source of innovation and is often found in the tacit knowledge of people in the organization. Hult et al. (2004) found a direct relationship of market orientation,

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entrepreneurial orientation and innovativeness but not learning organization towards business or organizational performance, as in Figure 2.37.

Market Orientation

Learning Organization

Business performance

Innovativeness

Entrepreneurial orientation

Source: Hult et al. (2004)

Figure 2.37 Hult Market Orientation Model Hult et al. (2004) found that innovativeness mediates the relationship between market orientation and organizational performance and between entrepreneurial orientation and organizational performance, especially learning organization, which needs constructs like innovativeness to affect organizational performance. Innovativeness supported by market orientation, learning organization and entrepreneurial orientation is likely to be more effective, thus, generating competitive advantages for organizations (Hult et al. 2004). The model is shown in Figure 2.38. The knowledge management process capability (KMPC) enhances the firms performance through innovation (Liao and Chuang, 2006).

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Market orientation

Learning organization

Innovativeness

Organizational Performance

Entrepreneurial orientation

Source: Hult et al (2004)

Source: Hult, Hurley et al. 2003

Figure 2.38 Hult and Hurley Market orientation Model

2.7

The Relationship between Intellectual Capital and Innovation

Human capitals output is innovation, which is the structural capitals efficiency

(Stewart, 2000). An innovative organization requires an organizational culture that constantly guides organizational members to strive for innovation and a climate that is conducive to creativity (Ahmed, 1998). Yap et al. (2005) state that culture is important for the organization to produce greater innovation and that the leadership culture and attitude commonly manifested in the strategic priorities of the firm may influence the level of innovation (Yap et al. 2002). McAdam and McClelland (2002) found that there is a strong correlation between the culture of continuous improvement and innovation in SMEs. Innovation, creativity, motivation and learning are processes that need support from many
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levels in the organization (Widen-Wulff and Suomi, 2007), especially from the management. Motwani et al. (1999) found that the structure of the organization is important to innovation as it supports innovation in SMEs for both the product and process of innovation. Scheins (1985) model depicts the levels of organizational culture, namely, artefacts, values and basic assumptions and their interaction. Hatch (1993), in Martins and Terblance (2003), criticized Scheins model for not including the patterns of interaction between people, roles, technology and the external environment, which represent a complex environment that influences the behaviour in organizations. As innovation provides the competitive edge for organizations, Martins and Terblance (2003) stress that the organizational culture model must have the basic elements of organizational culture (shared values, beliefs and the behaviour expected of members of an organization) that influence creativity and innovation in two ways: o Through socialization processes in organizations, individuals learn what behaviour is acceptable and how activities should function. o The basic values, assumptions and beliefs become enacted in established forms of behaviour and activities and are reflected as structures, policy, practices, management practices and procedures. Martins and Terblanche (2003) proposed that certain elements are important in organizational culture to support creativity and innovation in the long term. The elements are: Strategy an innovation strategy is a strategy that promotes the development and implementation of new products and services (Robbins, 1996).

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Structure organizational culture has an influence on the organizational structure and operational systems in an organization (Armstrong 1995).

Support mechanism the literature study revealed that rewards and recognition and the availability of resources, namely, time, information, technology and creative people, are mechanisms that constitute this role.

Behaviour that is rewarded reflects the values of an organization. Intrinsic rewards like increased autonomy and improved opportunities for personal and professional growth may support the innovation process (Shatow 1996, Amabile and Gryskiewicz 1987). Management should be sensitive to which method of reward and recognition will inspire personnel in their specific organization to be more creative and innovative (Tushman and OReilly 1997). However, innovative companies rely heavily on intrinsic rewards compared to less innovative companies that rely on extrinsic rewards (Avlonitis and Salavou, 2007).

Information technology as a support mechanism is an important resource for successful innovation (Shattow, 1996).

Behaviour that encourages innovation, i.e. values and norms that encourage innovation manifest themselves in a specific behavioural form that promotes or inhibit creativity and innovation.

Communication. An organizational culture that supports open and transparent communication based on trust will have a positive influence on promoting creativity and innovation (Barrret 1997, Robbins 1996). o Communication is human nature; knowledge sharing is human nurture (Lim and Klobas, 2006).
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In Figure 2.39, Martins and Terblanche (2003) proposed a new organizational model that supports creativity and innovation.
DIMENSIONS MEASURED TO DESCRIBE ORGANIZATIONAL CULTURE Strategic vision and mission Customer focus (external environment) Means to achieve objectives Management processes Employee needs and objectives Interpersonal relationships Leadership

DETERMINANTS OF ORGANIZATIONAL CULTURE THAT INFLUENCE CREATIVITY AND INNOVATION

STRATEGY STRUCTURE SUPPORT MECHANISM Reward and recognition Availabilityres ources: Time Information Technology Creative people BEHAVIOR THAT ENCOURAGES INNOVATION Mistake handling Idea generating Continuous learning culture Risk taking Competitiveness Support for change Conflict handling COMMUNICATION Open communication

Vision and mission purposefulness

Flexibility Freedom: Autonomy Empowerment Decision making Cooperative teams and group interaction

CREATIVITY AND INNOVATION

Source: Martins and Terblanche (2003)

Figure 2.39 Martin and Terblances Innovation Model

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This model is further supported by Afuah (2003) as he links strategy, structure, system, people and culture with dominant managerial logic (leadership), local environment (culture) and type of innovation in recognizing the potential of an innovation. Figure 2.40 shows Afuahs Innovation Model.

System, structure, system, people and culture

Dominant managerial logic

Recognize the potential of an innovation Information collection and processing

Local environment

Type of innovation
Source: Afuah (2003).

Figure 2.40 Afuahs Innovation Model

Figure 2.35 shows the model derived from the Model of the Canadian Imperial Bank by Herbert Saint-Onge (1996), and which stresses two dimensions of knowledge, explicit and tacit (Sanchez-Canizares et al. 2007). A firms ability to recognize the potential of an innovation rests on the way it collects and processes information and is a function of the four factors as shown in the model in Figure 2.41.

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Intellectual Capital Structural Capital Human Capital Leadership Culture and values

Source: Sanchez-Canizares et al. 2007

Figure 2.41 Intellectual capital and culture

Innovation models and innovation structures take different shapes in different cultures (Pohlmann, 2005). Leadership is important in an innovation culture (Ahmed, 1998). It is the task of organizational leaders to provide the culture and climate that nurtures and acknowledges innovation at every level (Ahmed, 1998). This is particularly important for SMEs as owners should lead and encourage, and nurture the innovation culture of SMEs (Avlonitis and Salavou, 2007). According to Edwards, surprisingly few studies examine the embeddedness of innovation in SMEs (Oakey 1993, Shaw 1998, Panniccia 1998, Freel 2000, Jensen and Greeve 2002), which shows that SMEs are capable of engaging in innovation and developing their competitive edge. The ability to innovate is increasingly viewed as the single most important factor in developing and sustaining
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competitive advantage (Tidd et al., 2001). Davenport and Bibby (1999) state that small to medium-sized enterprises (SMEs) increasingly need to develop their innovation capabilities beyond their technical innovation. Globalization has encouraged innovation to be a prerequisite for SMEs to operate in the more competitive global markets (Gunasekaran et al., 1996). Although there are a number of studies on continuous improvement in SMEs (Gunasekaran et al., 1996; Bessant and Caffyn, 1997; Bessant and Francis, 1999) there is a relative paucity of in-depth studies on innovation implementation in SMEs (McAdam, 2000). Furthermore, according to Caputo et al. (2002) the relationship of SMEs and innovation is not an easy one, as SMEs have a number of unique features such as scarce resources, low market influence and informal communication, which differentiates them from large firms (Hadjimanolis, 2000). The innovation process traditionally involves huge financial resources and is quite risky (Caputo et al., 2002). Moreover, innovation, which allows diversification strategies, may be better pursued by large organizations rather than SMEs. Traditionally, SMEs demonstrated poor ability in innovating products and processes (Caputo et al. 2002). Most innovation studies focus on large organizations, and the findings may not be transferable to SMEs (Humphreys et al., 2005). However, several European Union studies have shown that SMEs appear to be innovative (Caputo et al., 2002). Motwani et al. (1999) explored the management of innovation in French SMEs and found that both the way of managing and the structure that supports innovation are important to innovation in both products and processes (Abbot et al, 2006). Oke et al. (2004) found that SMEs focus more on product innovations than service and/or processes, and that the majority of SMEs focus predominantly on incremental innovations. SMEs vary in their interest and approach to innovation because of differences in their sources of capital
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(Susman et al., 2006; Hadjimanolis, 2000). The type of innovation that SMEs pursue also depends on whether their industry is emerging (where radical innovation is more likely) or is mature (where incremental innovation is more likely) (Nooteboom, 1994). The innovation in products, processes or services of varying types and degree can be appropriate for different SMEs in different industry sectors or product life cycle stages (Susman, et al.2006), and product innovation is more important for small firms (Damanpour, 1996). Avermaete et al. (2003) found that there is a significant relationship between product innovation and process innovation in small companies (Schmidt, 1990). SMEs have at some point undertaken some form of incremental innovative initiatives, often supported by local authority grants (Humphreys et al, 2005). Therefore, there is a need for SMEs to increasingly innovate to survive and compete in global and niche markets, especially as many SMEs focus on projects and product development aspects of innovation (Humphreys et al, 2005). Therefore, there is a need for studies on how innovation is implemented within the constraints and characteristics of SMEs (Humphreys et al. 2005). Most innovation studies relate to large organizations yet large organizations are frightened of innovation as it is linked to risk (Ahmed, 1998). Yap et al. (2003) found that the interpersonal skills of employees in SMEs are an important advantage of SMEs in innovation. Culture is a primary determinant of innovation (Ahmed, 1998). The extensive discussion of culture and innovation in SMEs should be supported by other factors such as infrastructure and leadership whereas culture should be a central nucleus. In the intellectual capital model, culture is the central nucleus of the model. Furthermore, Han and Kim (1998) found that innovation improves the relationship of market orientation and performance. Jaworski and Kohli (1993) found a positive
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empirical result of the mediating effect of innovation on the relationship between intellectual capital and organizational performance as shown in Figure 2.42.

Customer orientation

Technological innovation Organizational Performance

Competitor orientation

Administrative innovation

Interfunctional coordination

Source: Jawoski and Kohli (1993)

Figure 2.42 Intellectual capital and Innovation Model Deshpande and Webster (1993) found a causal relationship between market orientation, innovation and performance. Innovation is observed separately from intellectual capital. This is because with intellectual capital, innovation is being observed as innovation capacity and results of the innovations obtained by means of commercial rights, intellectual property, managerial secrets, etc.

2.8

The Relationship between Knowledge sharing and Innovation

An individuals tacit knowledge does not contribute much to an organization

(Leonard and Sensiper, 1998). However, if this tacit knowledge is shared and combined to
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become collective tacit knowledge, then it will lead to creativity and innovation (Leonard and Sensiper, 1998). The concept of tacit knowledge is very important in the context of innovation and its diffusion (Nooteboom, 1993). The process of innovation depends heavily on knowledge (Nonaka and Takeuchi, 1995). Nonaka (1998) further explained that tacit knowledge consists partly of technical skills the kind of informal, hard to capture in the terms of know-how. Nooteboom (1993) refers to this tacit knowledge, know-how, of the small business as craftsmanship. Innovation is a distinction drawn in communication (Pohlmann, 2005), which is the root of knowledge sharing. Liao and Chuang (2006) found that knowledge sharing has a significant relationship with innovation. Knowledge sharing promotes the innovation development relative to competitors and creates innovation of novelty. Innovation is the use of new technology and market knowledge to offer new products or services that the customers want (Afuah, 2003). Darroch and McNaughton (2002) state that many studies reported aspects of KM as antecedents of innovation but none explicitly examined this relationship. However, Nooteboom (1994) stresses that the concept of tacit knowledge is important in the context of innovation. Therefore, it is important to activate knowledge sharing activity in order to transfer and share tacit knowledge in the organization. Birchall et al. (1999) cite seven sources of innovation among which are process needs, changes in industry or market structure and new knowledge. Innovation is a social process that requires people who are good at different roles to collaborate and work in units performing different functions to integrate their unique expertise through working together (Tang, 1999). Innovative organizations rely on multiple sources for ideas. Knowledge and skills form the basis of competence to innovate (Tang, 1999). Cavuslgil et al. (2003) state that innovation which depends on knowledge
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where firms that create and use knowledge rapidly and effectively are able to innovate faster and more successfully than those that do not. Based on the research of a few successful organizations, he determined that tacit knowledge transfer boosts innovation, as tacit knowledge is more difficult to transfer and deploy across borders than explicit knowledge and is harder for competitors to replicate or imitate. Darroch and McNaughton (2002) suggested that knowledge sharing can be viewed as an organizational innovation that has the potential to generate new ideas and develop new business opportunities through socialization and that the learning process of knowledge. Interaction between individuals is essential in the innovation process (Gold et al., 2001). Darroch (1995) suggested that implementing various knowledge management initiatives, including knowledge sharing, to identify and exploit organizational knowledge is important to organizational innovation and organizational performance. Knowledge sharing has been identified as a positive force in creating innovative organizations (Yang, 2005). Knowledge sharing can also be viewed as an organizational innovation that has the potential to generate new ideas and develop new business opportunities through socialization and the learning process of knowledge workers (Lin, 2006). Innovative firms develop new products through creating and sharing knowledge (Koskinen, 2005). In addition, generative innovative ideas rely on the knowledge of existing artefacts and practices (Ward et al. 1999). Knowledge sharing has been identified as a positive force in creating innovative organizations, especially when there is a more positive social interaction culture (Connelly and Kelloway, 2003; Yang, 2007). The process of innovation depends heavily on knowledge (Gloet and Terziovski, 2004), therefore, knowledge sharing is important in innovation in SMEs. Innovation requires competencies
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in both idea generation and idea implementation (Yap et al, 2005). Calantone et al. (2002) found that intra-organizational knowledge sharing in which elements of organizational learning influence a firms innovativeness lead to higher firm performance. Innovation requires competencies in both idea generation and idea implementation (Yap et al. 2005). Looking into the relationship of knowledge and innovation, Goh (2006) proposed an integrated management framework for managing knowledge and innovation called Knowledge Innovation, in relation to perspectives on knowledge-centred principles, knowledge sharing infrastructures and knowledge based initiatives (Figure 2.43).

Knowledge innovation

Human capital

Structural capital

Intellectual capital

Knowledge centered principles

Knowledge sharing infrastructure

Knowledge based initiatives

Source: Goh (2006)

Figure 2.43 Knowledge Innovation Model

By developing this framework, in terms of perspectives on knowledge centred principles, knowledge sharing infrastructures and knowledge based initiatives; the objective is to focus on how organizations could better fulfil their roles in these strategic areas. The
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role of information technology in the knowledge sharing process, even though very dependent on resource constraints, is important, especially to promote a flow of innovations. Today, a basic technology infrastructure is affordable by SMEs and is definitely a necessity in knowledge sharing processes, especially the use of the intranet. Figure 2.44 shows the knowledge-sharing infrastructure.

Knowledge sharing infrastructures (based on technology) Knowledge-sharing infrastructures

The Internet

The intranet

Uses widely-supported communication standard protocol Offers world-wide access Avail end-user software Employs a high-speed, broad-band digital network based on optical fibers. Provides means of publishing information

Source: Goh (2006)

Figure 2.44 Knowledge sharing infrastructure model

Because end-users are familiar with browser interfaces, information can be shared across different local area networks and computer platforms and published information is instantly available over the entire network (Goh, 2006).
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Successful organizations are those that are able to start a virtual cycle between applying knowledge to and learning from work, especially innovation-related projects (Nonaka and Takeuchi, 1995). Using the SECI model in creating and sharing knowledge (Nonaka and Takeuchi, 1995), it is information and, more importantly, the exchange of information or knowledge sharing that first spark and later sustains the innovation efforts (Tang, 1999). The interaction between employees is aligned to the strategic objectives of the organization and the actual content of the knowledge shared will be very much influenced by the nature of the business of the organization (Bhirud et al. 2005). Hence, knowledge sharing is an important ingredient of innovation. Yap et al. (2005) stresses that a firm needs to forge its network efficiently, especially in sharing common knowledge to foster innovativeness in the firm. In addition, communication and common language is important to create trust in an interpersonal relationship (Yap et al. (2005).Trust is one of the important elements in knowledge sharing that exist in the social network. This social network can be further explored in terms of knowledge and innovation as well. In Figure 2.45, Taatile et al. (2006) proposed a model of the social aspects of the innovation process of economic innovation, emphasizing the social structure and social innovation networks, which are: Period prior to the idea Idea development Implementation culminating in economic success Period after economic success

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Innovation process

Period prior to innovation

Period prior

Idea Idea development

Implementation until economic success

Period after economic success

Individual based competence attributes

Structural competence attributes that contain the social aspects of innovation process

Resource based competence attributes

Culture environment

Source: Taatile et al. (2006)

Figure 2.45 Social aspects of innovation process Model

In addition, Koenig (1998) suggests that knowledge management enhances knowledge sharing and collaboration (Figure 2.46). The result of which would be innovation in areas of high interaction and individual knowledge, competency in areas of low interaction and individual knowledge, responsiveness in areas of high interaction and group knowledge and productivity in areas of low interaction and group knowledge.

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Knowledge

High Interactivity

Innovation

Responsiveness

Low Interactivity ompetency

C Productivity

Individual
Source: Koenig (1998)

Group

Figure 2.46 Collaboration and Interaction Innovation Model

The ability of SMEs to innovate and improve continuously is related to the employees skills and knowledge (Nonaka, 1991). However, Chan et al. (2006) argue that although SMEs strive for innovative ideas in products and services, the organizational members find it difficult to transform or verbalize what they know into comprehensible formats to be shared among team members.

2.9

Gaps in the study

Based on the literature review discussed earlier, there is a great demand for a new

framework for intellectual capital that suits SME in Malaysia. This need can be seen from the taxonomy presented in Appendix 1, Appendix 2 and 3.

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Conceptually, intellectual capital needs to be integrated with knowledge sharing and innovation as discussed by Montequin et al. (2006). However, most empirical studies, investigate these variables separately. Intellectual capital has not been explored extensively, especially in SMEs. The gaps are summarized below: 1. Intellectual capital is explored extensively in large organizations but not in SMEs. 2. Intellectual capital needs another mechanism to ensure the flow of knowledge within the organization. 3. SMEs are known to be poor in practicing a complete knowledge management due to cost and expertise. However, SMEs commonly practice knowledge sharing through informal interactions. 4. Knowledge in SMEs is tacit by its nature and this tacit knowledge is almost impossible to make explicit. However, tacit knowledge can be transferred through knowledge sharing. 5. Innovation is prevalent in small firms. Innovation is resource-dependent. Therefore, intellectual capital should be treated as an antecedent of innovation. 6. Creativity is derived from tacit knowledge, the link between tacit knowledge sharing and innovation must be explored, particularly in an SME setting. 7. A comprehensive or complete framework of intellectual capital (internal resources and external resources) to achieve higher organizational performance via knowledge sharing and innovation has never been developed.
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Based on the gaps discussed above, the need for a new framework to suit SMEs should be developed.

2.10 Summary
This chapter reviewed the literature concerning the variables of the framework proposed. There is a considerable amount of literature in the field, which begins with the definition of organizational performance, intellectual capital, knowledge sharing and innovation. However, there has been little theoretical or empirical literature review of intellectual capital in entrepreneurship, particularly in small and medium enterprises. As knowledge has become the main capital in a knowledge-based economy, the development of intellectual capital for small and medium enterprises is important in helping the entity be competitive. The next step is to place intellectual capital in the context of small and medium enterprises. This context is important because small and medium enterprises have not been adequately explored in terms of their organizational resources, especially concerning knowledge management. It is very challenging to incorporate intellectual capital, knowledge management, particularly knowledge sharing and innovation in this scenario. By studying intellectual capital and implementing it in small and medium enterprises, and comparing it in the literature, it is hope to produce a suitable model of intellectual capital for small and medium enterprises.

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Frameworks were explored to give the researcher a comprehensive view and appreciation of intellectual capital. The researcher then identified the gaps in the literature in order to highlight the importance of further research in this field. In Chapter Three, intellectual capital is outlined in the context of Malaysian Small and Medium enterprises. This will provide the basic/foundation of the study for the researcher to explore in more depth the literature and empirical evidence in Malaysia.

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CHAPTER 3 ANALYSIS OF SMALL AND MEDIUM ENTERPRISES

3.1 Introduction
In the economy, SMEs have been the backbone of economic growth in driving development. Economic growth in developed countries such as Japan, Korea, Taiwan and many others, has been significantly generated by the activities of SMEs. The percentage contribution of SMEs to GDP/total value added range from 50% in Korea, 55.3% in Japan, 57% in Germany, 60% in China to 47.3% attained by Malaysia (Mohd Aris, 2006). S<Es are important traders and service providers to primary industries (Sarah et al. 2009). SMEs also offer employment opportunities, initiate improvement, accelerate competition and support big companies (Hashim and Wafa, 2000). The globalization process has brought opportunities and challenges for SMEs in Malaysia. The Malaysian government has given priority to SMEs and put in place a policy and institutional framework that addresses their developmental needs. Strategies during the Ninth Malaysian Plan (2006-2011) emphasized the development of SMEs in the manufacturing sector and, in particular, the development of a competitive Bumiputra Commercial and Industrial Community (BCIC). Funding to address critical issues in promoting and developing SMEs has been made available through various agencies Malaysia External Trade Development Corporation (MATRADE), Malaysia Technology Development (MTDC), Small and Medium Industries Development Corporation (SMIDEC) and Standards and Industrial Research Institute of Malaysia (SIRIM) Berhad. The development of a competitive and resilient small and medium enterprise sector is a key component of the Governments
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economic growth strategy. As the SME sector comprises 99.2% of total establishments and employs more than 5.6 million workers, promoting entrepreneurship and SMEs is an important thrust to support the Governments aim of achieving balanced economic development and a higher standard of living for all levels of society (SME Annual Report, 2006). The government policies, especially on tariffs, give SMEs the opportunity to enter into new markets for their new products and greater access to technology, capital, labour and intermediate inputs (SME Annual Report, 2006).

3.2

Definition of Small and Medium Enterprises in Malaysia

SMEs in Malaysia account for 99.2% or 548,267 of total establishments in Malaysia

(SME Annual Report, 2008). The findings also reveal that 87% of SMEs were in the service sector, followed by 7.2% in the manufacturing sector and 6.2% in the agriculture sector. Collectively, three-quarters of these three sectors compared to the gross domestic product (GDP) was estimated to be more than three-quarters of the total GDP in 2003 (Aris, 2006). Malaysian SMEs can be grouped into three categories: Micro, Small or Medium (SME Annual Report, 2006). These groupings are decided based on either: The number of people a business employs or On the total sales or revenue generated by a business in a year. Table 3.1(a) and Table 3.1(b) show the definition of SMEs in Malaysia.

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Table 3.1(a) Definition of SME based on Annual Sales Turnover

Size Manufacturing (including agrobased) and Manufacturing-related services Less than RM250,000 Between RM250,000 and less than RM10 million Primary Agriculture Services Sector (including ICT)

Micro

Less than RM200,000

Less than RM200,000

Small

Between RM200,000 and less than RM1 million Between RM1 million and RM5 million

Between RM200,000 and less than RM1 million Between RM1 million and RM5 million

Medium

Between RM10 million and RM25 million

Source: SME Annual Report 2006

: Table 3.1(b) Definition of SME based on Number of Full-Time Employees

Size

Manufacturing (including agrobased) and Manufacturing-related services Less than 5 employees

Primary Agriculture

Services Sector (including ICT)

Micro

Less than 5 employees Between 5 and 19 employees.

Less than 5 employees Between 5 and 19 employees.

Small

Between 5 to 50 employees.

Medium

Between 51 to 150 employees.

Between 20 and 50 employees.

Between 20 and 50 employees.

Source: SME Annual Report 2006

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Ndubisi and Salleh (2006) summarize the definition of Malaysian SMEs into two broad categories manufacturing and services as shown in Table 3.2.

Table 3.2 Definition of SME based on category

Category

Micro Enterprise

Small Enterprise

Medium Enterprise

Manufacturing, Manufacturing-related services and agro-based industries

Sales turnover of less than RM250,000 or full time employees less than 5

Sales turnover between RM250,000 and RM10 million or full time employees between 5 to 50.

Sales turnover between RM10 million and RM25 million or full time employees between 51 and 150.

Services, Primary Agriculture and Information and Communication Technology (ICT)

Source: (Ndubisi, 2006)

Sales turnover of less than RM200,000 or full time employees fewer than 5

Sales turnover between RM200,000 and RM1 million or full time employees between 5 and 19.

Sales turnover between RM1 million and 5 million or full time employees between 20 and 50.

The business sector of Malaysian SME comprises manufacturing (including agrobased), manufacturing related services, mining and quarrying, services (including ICT), construction, agriculture and others with 16,184 establishments throughout Malaysia. The proportion of this sector is shown in Chart 3.1

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Others Agriculture Manufacturing (inc agro)

Construction

Services including ICT Mining and Quarrying

Source: UNDP (2004)

Manufacturing (related services)

Chart 3.1 SMEs Proportion

3.3

Small and Medium Enterprises Output to GDP

The SMEs of manufacturing, services and agriculture sectors as well as ICT has

contributed to the economy in terms of output, value-added, employment and exports (Third Industrial Master Plan, 2006). The Malaysian economy registered a growth of 4.6% in 2008, amidst the international financial turmoil and deterioration in the global economic environment. The significant role of Malaysias SMEs is demonstrated by their contribution to output and value added, RM 405 billion and RM154 billion respectively in 2003. Services sector contributed 57 percent and 55 percent value added of the services sector. Table 3.3 show the output and value added by sector.
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Table 3.3 Ouput and Value Added of SMEs by Sector

Output (RM billion) Sector Manufacturing Services Agriculture Total Total 549.1 361.7 20.6 931.4 SMEs 191.6 204.9 8.7 405.2 % 34.9 56.7 42.1 43.5 Total 128.1 187.6 9.1 324.7 Value added (RM billion) SMEs 47.5 102.7 3.6 153.7 % 37.1 54.7 39.7 47.3

Source: Department of Statistic, Census of Establishment and Enterprises 2005

SMEs not only stimulate entrepreneurship but also provide a broad economic base. In 2005, SMEs contributed 32 percent to the GDP, 56.4 percent to employment and 19 percent to exports. Chart 3.2 shows the SMEs contribution to the economy of Malaysia.

Export; 19% GDP; 32%

Employment 52%

Chart 3.2 Contribution of SMEs to the Economy

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In the year 2003, Small and Medium Enterprises (SMEs) contributed RM405 million output and RM154 million value-added to the GDP. Table 3.4 shows the breakdown of the contribution by sector. SMEs accounted for 43.5 percent of total output and 47.3 percent of value added. The service sector contributed the largest share of 56.7 percent and 54.7, respectively, while manufacturing 34.9 percent on output and 37.1 on value added.

3.4

Geographical Location of SMEs

SMEs are mainly concentrated in the Central Region (Kuala Lumpur and Selangor)

accounting for 37.1 percent, 10.4 percent SMEs are in Johor and Perak with 7.3%. The other states accounted for less than 44.1 percent. A vast number of manufacturing SMEs are located in West Coast of Malaysia where is the industrialized location which equipped with ports services (Saleh and Ndubisi, 2006). Manufacturing of textiles and apparel and wood based industries with 17.5 percent are based in Johor followed by Selangor (16.7 percent), Perak (9.4 percent) and Pulau Pinang (8.7 percent). Johor led of the country due to the accessibility of cheap labour and logging activities (Siti Sarah et al, 2009). While general businesses or services of SMEs are scattered all over Malaysia, agriculture is mainly concentrated in Kedah (north region of Malaysia) of 27.4 percent concentration and followed by east coast states with 2.6 percent (Mohd Aris, 2006). Figure 3.1 show the map of Malaysia.

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Figure 3.1 Map of Malaysia

3.5 Small and Medium Sectors

Small and medium sectors are divided into few sectors based on its concerntration of niche market of. According to Khairuddin (2000), SMEs in Malaysia can be caterogized into three main components; manufacturing, general business or services and agriculture. The general business or services sector includes construction, wholesale and retailing, transport and storage, business services and activities and prodiving services such as hotel and restaurant. The main activities of manufacturing sector consist of processing and production
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of raw materials. Meanwhile, agriculture sector includes rubber, oil palm, paddy, coconuts, fruits and vegetables. From the components, the manufacturing sector is the most important components of SMEs in Malaysia as it is the main pillar of Malaysian economy. 3.5.1 Manufacturing industry As the Malaysian economy has been adapting to create new enabling environments for continuous economic growth and equitable development, the manufacturing sector has continued to move up the value chain, shifting to higher value-added skills and knowledge intensive manufacturing (SME Annual Report 2006). Table 3.4 shows the total output by SMEs in the manufacturing sector. Based on the SME Annual Report 2006, SMEs in the manufacturing sector continued to perform well in 2006 with a growth rate of 7.4% in value added to RM17.8 billion. SMEs in the manufacturing sector accounted for 96.6% (37,866) of the total establishments. SMEs contributed 34.9 percent of the output in manufacturing. SMEs accounted for 96.5% (39,436) of all enterprises in the manufacturing sector.

Table 3.4 Total output by SMEs (Manufacturing)

Percentage share of manufacturing sector (%) 2007 2008 30.74 30.9

Value Level* 2007 Total output 94,356 2008 100,299

Growth (%) 2008 6.30

Value Added

19,251

20,507

26.33

26.5

6.52

Employment

413,397

420,917

31.62

31.8

1.82

*Value levels for Total Output And Value Added are in RM million Source: SME Annual Report 2008

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Based on the size in terms of output distribution, the food and beverages sub-sector contributed the largest contribution among subsetor, accounting for 32%, followed by chemistry and chemistry products 16%, rubber and rubber products 10%, non-metal products 7%, ready made metal products 6%, and basic metal 4%, furniture 4%, and others 21% (SME Annual Report, 2007). The distribution of SMEs output in the manufacturing sector is shown in Chart 3.3

Others; 21% Food&Beverages; 32%

Furniture; 4% Ready Metal Product; 4% Basic Metal; 6%

Non-Metal Products; 7% Rubber/Rubber Products; 10%

Chemistry; 16%

.Source: SME Annual Report 2007 Chart 3.3 Distribution of SMEs Output (Manufacturing)

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Interestingly, in 2003, most of the SMEs were in the textile and apparel and resource-based industries, which accounted for 23.2% (Third Industrial Master Plan (IMP3), 2006). The productivity of SMEs in the manufacturing sector was increased by 4.6% because of the increased value-added employee. The growth was driven by export-oriented industries (8.5%), petroleum products (5.6%), electronics and electrical (EandE), products (5.4%), wood and wood products (4.8%) and food and beverages (4.7%). These sub-sectors recorded productivity growth of the above average SME productivity in the manufacturing sector (SME Annual Report, 2008). Chart 3.4 shows the productivity of SMEs in the manufacturing sector.

Chart 3.4 Productivity of SMEs in the Manufacturing Sector

60 50 40 30

7 6 5 4 3

20 10 0 Level Growth 2003 37 5.9 2004 39.4 6.4 2005 42 6.5 2006 44.2 5.2 2007 46.5 5.3 2008 48.1 4.6

2 1 0

Source: SME Annual Report 2008 167

3.5.2 Services industry SMEs account for 99.4% (449,004) of the total establishments in the services sector. More than half of the SMEs (55.3%) were concentrated in the wholesale and retail subsector, 14.5 percent in restaurants and hotels, and 6.2 percent in transport and communications. The other sub-sectors of professionals, health, education, real estate activities, business/management consultancy made up the remaining 24.0 percent (SME Annual Report, 2008). Table 3.5 shows the distribution of SMEs in services by sub-sector in 2003. Table 3.5 Distribution of SMEs in services by sub-sector
SME Sub-sector Total Wholesale and retail Restaurants Transport and Communication Financial Intermediaries Professional Services Real estate activities Business and management consultancy services Health Education Hotel Computer services Telecommunications Selected services Total Number of Establishments 451,516 249,178 63067 28231 19291 11245 8847 8404 7838 7738 2494 1182 88 43913 Number 449,004 248221 63013 27980 19108 11120 8779 8352 7759 7618 2275 1095 58 43626 Share (%) 100.0 55.3 14.0 6.2 4.3 2.5 2.0 1.9 1.7 1.7 0.5 0.2 neg. 9.7

ource: Industrial Master Plan Three (IMP), Consensus of Establishment and Enterprises, 2005 (preliminary data), Department of Statistic 168

The total output generated by SMEs is 56.7% of total output in the services sector. As the manufacturing sector is moving up the value chain, the services sector also gained increasing prominence with its share of GDP, rising from 47% in 1990 to almost 52% in 2006. Table 3.6 shows the productivity trend in the services sector. The productivity in the services sector is estimated to have expanded by 3.3%. The productivity trends will have an impact on SMEs as the majority of SMEs are in the services sector (87%). The services sector achieved a Total Factor Productivity (TFP) growth of 1-2% through the utilization of capital and labour and contributed 20.6% to output growth. Table 3.6 Total Factor Productivity and Contribution (1999-2008) by SMEs (Services)

Services Sub-sector

TFP Growth (%)

Contribution to Output Growth TFP (%) Capital (%) 40.81 32.32 40.16 35.74 44.62 Labour (%) 38.63 33.89 36.54 30.41 34.68

Services Trade Finance Utilities Transport

Source: SME Annual Report 2008

1.33 2.12 1.87 1.63 1.36

20.56 33.79 23.30 33.86 20.70

Overall productivity in the services sector is estimated to have expanded by 3.3%. The growth was lead by productivity gains in the transport, trade and finance subsectors. Productivity in the transport and trade subsectors was supported by upgrading and

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maintenance of infrastructure, increased investment as well as higher domestic demand and tourism activities. Table 3.7 show details of services productivity. Table 3.7 Services Productivity
Output Services Transport Finance Utilities Trade Other Services Productivity Services Transport Finance Utilities Trade Other Services Total Factor Productivity Growth Services Transport Finance Utilities Trade Other Services
Source: Malaysian Productivity Corporation (MPC)

Share of GDP (%) 46.3 7.4 15.7 2.9 14.8 5.5 Level (RM) 56,139 70,607 124,262 162,606 40,027 26,895

2008 Growth in value added (%) 6.6 6.7 5.6 2.2 9.4 4.9 Growth (%) 3.3 4.5 4.2 4.0 4.3 1.9 1999-2008 1.3 1.4 1.9 1.6 2.1 1.0

3.5.3 Agriculture The agriculture sector constitutes 6.2 percent of the total business establishments and provides 12.1 percent of the total employment in the country. In 2008, agriculture exports expanded strongly by 30 percent to RM68.1 billion (SME Annual Report, 2008). Malaysias agriculture sector is predominantly made up of the palm oil and rubber subsectors, which cater for the export market. SMEs in the agriculture sector comprise smallholders in these plantation crops as well as farmers who are mainly in food-related

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activities such as vegetable farming, livestock breeding, fisheries and aquaculture. Table 3.8 show the sub-sector of SMEs in agriculture.

Table 3.8 Distribution of SMEs in agriculture by sub-sector

SME Sub-sector Total Number of Establishments 32,397 21,333 6,701 2,249 1,571 283 230 Number 32,126 21,146 6,669 2,208 1,558 258 227 Share (%) 100.0 65.8 20.9 6.9 4.8 0.8 0.7

Total Planting, market plantation and horticulture Fisheries Poultry farming Agricultural and animal husbandry Forestry, logging and other related services Mixed-agriculture- agricultural and animal husbandry Hunting, trapping and game propagation including related services

30

30

0.1

Source: Industrial Master Plan Three (IMP), Consensus of Establishment and Enterprises, 2005 (preliminary data), Department of Statistic

The Ministry of Agriculture and Agro-Based Industry (MOA), through its agency the Muda Agricultural Development Authority (MADA), has intensified its efforts to make the agriculture sector more vibrant. From their efforts through advisory services and guidance, modernization of infrastructure and equipment, product development and diversification and branding, promotion and marketing for the domestic and overseas market, MADA had produced 73 new entrepreneurs in four main sub-sectors, namely,
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agriculture crops, livestock, fishery and agricraft. Table 3.9 shows the production value of these initiatives by MADA to promote agriculture sector. Table 3.9 Production value resulting from initiatives by MADA
Production value (RM) Sub Sector Crops Livestock Fishery Agricraft Total 2006 823,781 64,191 128,381 53,492 1,069,845 2007 4,069,334 204,450 659,642 50,742 4,974,168 2008 5,519,395 421,578 855,224 44,600 6,810,797 Total 10,402,510 690,219 1,643,247 148,834 12,884,810

Source: Ministry of Agriculture and Agro-Based Industry (MOA), SME Annual Report 2008

Appendix 4 presents details of SMEs categorization.

3.6

Challenges of SMEs
Gaining international business opportunities and access to the global market are by far

the most critical barriers identified. Limitation of time, competency and financial resources available are often the reasons for SMEs to identify and pursue new market opportunities. According to the SMIDPs 2001-2005, SMEs in Malaysia are facing many new challenges, domestically as well as globally. These challenges include (Salleh and Ndubisi, 2006): 1. Intensified global competition. 2. Competition from other producers (for example China and India). 3. Limited capability to meet the challenges of market liberation and globalization. 4. Limited capacity for technology management and knowledge acquisition. 5. Low productivity and quality output.
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6. A shortage of skills for the new business environment. 7. Limited access to finance and capital, and the infancy of venture funds in initial or mezzanine financing. 8. The high cost of infrastructure. 9. A general lack of knowledge and information.

Lack of knowledge on the best way to enter or to make the greatest use of commercial engagements in the market is another known barrier. SMEs may decide not to take up certain opportunities, or they may take an approach, which ends up being unsuccessful. The ability to reach out to the right customer is a problem for any business seeking to enter an unfamiliar market. Reaching out to produce the right product or service to the right customer at the right time can be a challenging issue to SMEs, especially to the new players in the market. This situation occurs because of the nature of the market. Competition is increased when SMEs are competing against the major players in the market. Failing to reinvest the profit gained today, poor management in people and time, retaining the old methods culture, little adaptation of latest technology, lack of long term foresight or lack of innovation in the product and services provided are the key barriers to the success of SMEs. These should be overcome to create a competitive and secure environment for the SMEs to conduct their business transactions more actively. In developing SMEs in the knowledge-based (K-based) industries, the Government had implemented 25 programmes in 2008, amounting to RM913.2 million to reach 184,808 SMEs mainly in skills upgrading in the areas including biotechnology, nanothechonlogy, photonics, ICT, renewable energy, aerospace, and advanced materials (SME Annual report
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2008). In 2009, the government had embarked numerous programmes to overcome shortterm challenges for SMEs as a result of the global economics and financial crisis as well as for long-term challenges. Figure 3.2 shows development programmes for SMEs in 2009.

2009 174 progammes RM 3.04 million 17 programmes RM11.9 million

Strengthening Enabling Infrastructure

Building Capacity and Capability

Enhancing Access to Financing

26 Programmes RM150.8 million

129 Programmes RM542.5 million

19 Programmes RM2.354million

Key Development Programmes

3 Programmes RM1.2 billion

7 Programmes RM0.1billion

7 programmes RM1.5million

Stimulus Packages and Other Related Measures

Figure 3.2 Development programmes for SMEs in 2009

Source: SME Annual Report 2008

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In promoting higher productivity, the Malaysian government set a plan called the Third Industrial Master Plan 2006-2020 (IMP3), which set a target for the manufacturing sector to grow at 5.6 percent annually and contribute 28.5 percent to the Gross Domestic Product (GDP) in year 2020 with a total investment of RM412.2 billion (RM27.5 billion annually).

The IMP3 has set five strategic thrusts to ensure that SMEs in the manufacturing and services sectors contribute significantly to the economy. The thrusts are: 1. Enhancing the competitiveness of SMEs; 2. Capitalizing on outward investment opportunities; 3. Driving the growth of SMEs through technology, knowledge and innovation; 4. Instituting a more cohesive policy and supportive regulatory and institutional framework; and 5. Enhancing the growth and contribution of SMEs in the services sector.

Based on the Organization Economic Co-Operation Development survey in 2008, Malaysia ranked 33rd in expected innovation performance compared to 134 countries. It ranked in 30th position in terms of expected innovation performance, 45th of expexted direct input and 31st for expected aggregate input. This showed that Malaysia has a great potential to be more innovative and competitive and follow suits of other Asian countries such as Taiwan, Korea and Singapore. Table 3.10 shows the rankings of the selected countries.

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Table 3.10 Innovation Performance and Innovation Enableers Rankings: Malaysia vs. Selected Countries, 2007-2011
Country Japan Switzerland United States Sweden Finland Germany Denmark Taiwan Republic of Korea Norway Singapore United Kingdom IP 1 2 3 4 7 5 9 6 17 18 14 16 IE 12 1 1 1 1 7 1 13 17 19 13 13 DI 25 4 5 9 10 13 3 21 35 19 2 8 AI 14 2 3 4 5 9 1 16 17 20 11 13 Country (continued) Ireland Italy Australian Hong Kong MALAYSIA Thailand India China Phillipines Indonesia Pakistan Vietnam IP 20 19 21 23 33 59 56 54 62 73 78 79 IE 19 27 7 21 30 65 49 37 58 77 73 73 DI 1 37 7 6 45 57 52 53 50 64 75 54 AI 19 29 7 21 31 64 50 37 58 74 77 70

Source: OECD, Patent Database (2008) Note: IP: Expected Innovation Performance; IE: Expected Innovation Environment; DI: Expected Direct Input; AI: Expected Aggregate Innovation

The government of Malaysia is committed to promote and develop SMEs. A master plan has been developed and several ministries, departments and units have been appointed to help and create development environment for SMEs. Figure 3.3 shows the plan.

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Monitoring and Coordination of SME Development Programmes by SME Development Council Secretariat: Central Bank

Technology Acquisition and Development Malaysia Technology Development Corporation (MTDC) Multimedia Development Corporation Ministry of Science, Technology and Environment SMIDEC

Capacity Development for SMEs with Emphasis on Productivity and Quality Building, Improvement to Production and Business Processes, Export Readiness and Awareness on Opportunities in Overseas Markets SMIDEC MATRADE MARA Ministry of Entrepreneur and Co-operative Development Ministry of Agriculture Construction Industry Development Board Special Window of Assistance for Women SMIDEC MATRADE MTDC Business Advisory Support SME Bank SMIDEC MATRADE Ministry of Entrepreneur and Cooperative Development Ministry of Science, Technology and Environment Ministry of Youth and Sports

Trade Facilitation and Market Development Ministry of International Trade and Industry (MITI) MATRADE Farmers Association Marketing Authority (FAMA) Feedback Mechanism Trade and Industry Associations Chambers of Commerce SME Association Ministries/Agencies
Source: United Nation Development Programme 2004

Enabling Environment For SMEs Development

Financial Support Development Financial Institutions Credit Guarantee Corporation Commercial Banks Venture capital companies Various Ministries and Government Agencies

Figure 3.3 Creating Enabling Environment for SME Development in Malaysia

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3.7

Summary
This chapter discusses SMEs in Malaysia in detail. The definition of SMEs was

elaborated upon as different countries have different definitions to suit their respective environments. There are three sectors of SMEs in Malaysia. The discussion of every sector was discussed. Challenges faced by SMEs were also highlighted. The government is taking its role seriously in assisting SMEs to cope with globalization. Technology and innovation are the drivers of the growth and competitiveness of SMEs in the knowledge era. Full support from the government will help SMEs in Malaysia to be competitive and resilient in achieving sustainable economic growth and be competitive in the global market. The next chapter will discuss the methodology, research design and sampling used in this study.

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CHAPTER FOUR RESEARCH DESIGN AND METHODOLOGY

4.1 Introduction
The main purpose of this study is to examine the intellectual capital, knowledge sharing and innovation in small and medium enterprises in Malaysia. In designing this research, it is important that certain choices of procedures and methods are made to enhance the validity of the study results (Bickman and Rog, 1998). This is mainly achieved through mounting the most rigorous designs in data collection from objective sources and designing studies that have universal generalizability. The chapter will begin with the philosophy of the research and a discussion about the approach of this study. This is followed by a discussion on the conceptual framework, highlighting the independent variable, dependent variable and mediating variables. Subsequently, hypotheses development will be elaborated upon in testing the relationship of the variables. There are eight hypotheses in this study. The research design will describe the method used for this study and the flow of research is shown in a flow chart. Next the data collection method, which utilizes questionnaires, will be discussed. The survey validation method, translation, pre-test, pilot test and reliability test will be explained. The data analysis plan is to navigate the data analysis process, which uses Amos version 16 for Structural Equation Modelling. This chapter will attempt to highlight the methodological framework adopted in this study in assisting the researcher in fulfilling the research objectives and research questions of this study.

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4.2

Philosophy of Research
Creswell (2000), as cited by Nemani (2009), states that the design of any research

study begins with the selection of a topic and a research methodology. There are three orientations to research: post-positivist research (quantitative), interpretive research (qualitative) and critical research (critical theory). The objective of this study is to develop an alternative path or process in the existing framework that will enhance the outcome. This study also attempts to predict and explain by discovering the necessary and sufficient conditions for the framework model. The framework was developed through identifying the gaps in the existing frameworks through a review of the literature. The literature review identified the sources and extracts in an attempt to define the problem statement and develop preliminary theories (Sekaran, 2003). Research questions and hypotheses have been developed to navigate the research process. A quantitative approach will be used to gain insight into the research problem.

As this study attempts to understand human problems by applying the right technique, assumed knowledge is more like an object that can be readily stored, retrieved at will and shared, therefore, the researcher opted to use a positivist approach. Positivism is an epistemological perspective and philosophy of science, which holds that the only authentic knowledge is that which is based on actual sense experience (Bryman, 1988). Positivism is based on the epistemology that objective reality exists versus interpretivism, which is based on the subjective lens of the researchers perspective and experience. However, according to William (2008), neither the positivistic view nor the interpretative

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are adequate in covering all forms of knowledge and information as they are dependent on the framework of the research.

4.3

Conceptual Framework
As discussed in Chapter Two in the literature review, this study explores the

relationship of intellectual capital and organizational performance as discussed by previous researchers. In addition, this study will explore further by integrating knowledge sharing and innovation into the framework and making it an integrative framework. The framework for this study is the outcome from the relationship deduced from the review of the literature. The literature review of intellectual capital based on the works of Bontis (1998), Bontis et al., (2000), Chen et al. (2004), Lee and Choi (2001) and Cohen and Kaimenakis (2007) contributed to this conceptual framework. Previously, the intellectual capital framework would have the intellectual capital as an independent variable and organizational performance as its dependent variable. Intellectual capital consists of human capital, structural capital and relational capital. For this study, the framework has been further extended with the inclusion of knowledge sharing and innovation as mediating variables. It was developed by integrating several direct relationships among study variables to come up with the deduced framework. Intellectual capital consists of human capital, structural capital and relational capital. Knowledge sharing is made of trust, social network, and communication. Innovation comprises product innovation and process innovation. Organizational performance is measured by financial indicators. Figure 4.1 illustrates the conceptual framework.

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Intellectual capital

Knowledge sharing Innovation

Organizational performance

Figure 4.1 Conceptual Framework

The framework also proposes a direct link between intellectual capital (IC) and knowledge sharing (KS), and intellectual capital (IC) and innovation (INV). Alternatively, knowledge sharing (KS) has a direct link to Innovation (INV). The relationships shown in the framework, suggest that knowledge sharing (KS) and innovation (INV) play a role in the intervention between intellectual capital (IC) and organizational performance (OP). Figure 4.2 presents the study framework. The literature review was used to identify the measurement items, as shown in Table 4.1, and details are shown in Appendix 5.

KS

IC

OP

INV
Figure 4.2 Research Framework
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4.4

Research Design
This study will be conducted according to the steps outlined in Figure 4.3, which

presents the research process flow chart for this research.

Research Intent Preliminary Literature Review Theory Exploration Theoretical Framework Model Building

Literature Review Research Problem Definition Definition Objectives Hypotheses

Selection of Basic Research Method Survey (questionnaire) Sampling (Survey) Questionnaire Development Pilot Study Refinement of Questionnaire Data Collection Data Collection (Field Work) Editing/Coding of Data Quantitative (Survey) Analysis SEM Descriptive Analysis Interpretation of Results and Findings Drawing Conclusion /Report Writing

Research Design

Data Analysis

Conclusion and Recommendations Final Thesis Report

Figure 4.3 The Research Process Flow Chart

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The steps include: literature review, research design, data collection, data analysis and drawing up the conclusions and report writing. In the following paragraph and in subsequent sub-sections, discussion of the research design, data collection and data analysis processes are covered. Data or information (primary data) will be obtained by using the survey method, namely, a questionnaire survey. This method, as described by Zikmund (2003), is a method for gathering a primary database on communication with a representative sample of subjects of study. It is a research technique in which information is gathered from a sample by way of a questionnaire or interview. Conversely, Fowler (2001) identifies factors that influence the quality of data from a survey; the size and representativeness of the sample from which the data is collected; the techniques used for collecting the data; the quality of the interviewing; if the interviewers are used; and the extent to which questions are good measures. This entails researchers to consider all sources of error when making survey design decisions. Margione (1998) points out those four major types of errors can be encountered in a survey; sample selection bias, non-response error, item non-response errors and response error. Margione again stresses the importance of designing quality in all stages of a survey, referring to the aspect of optimizing efforts across all areas as total survey design , as confirmed by other methodologists including Groves (1989) and Biemer et al. (1991). 4.4.1 Sampling Design Respondents of this survey are owners and managers of the SMEs. The choice to use the single respondent approach is based on the criteria for SMEs (Avlonitis and Salavou, 2007). The choice to use the single respondent approach is based on both the size
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of the firms as well as the respondents familiarity with the research topic and the information sought. Especially, in the case of SMEs the view of a single respondent may, in fact, reflect those of the firm (Lyon et al., 2000). Furthermore, consistent with previous research within entrepreneurial organizations, surveys were addressed to either the owner of general manager of each SME (Lumpkin and Dess, 1996; Miller, 1983). In the studies of young and/or small businesses, it is often rely on the response of a single key player to represent the views of the whole firm (Brush and Vanderwerf, 1992; Chandler and Hanks, 1993). The use of single respondents can increase the possibility of common method variance problem which can artificially amplify relationships (Campbell and Friske, 1993 as cited in Lyon et al. 2000). There are advantages to use only a single informant such as the high likelihood that the most knowledgeable individual in the organization would provide the information, in small firms, the views of the respondent may, in fact, reflect those of the firm. Beside, the use of a single respondent also helps to increase the participation of more firms since only one individual in the organization is impacted. Previous researchers found strong evidence of convergent and discriminant validity between self-reported business volume and sales growth through factor and alpa factor. Thus, research using single-respondent self-reports can be an appropriate and necessary means of operationalizing key constructs when carefully performed (Chandler and Hanks, 1993). Furthermore, the geographically confined nature of the sample as well as the reliance on select Asian markets also limit the extent to which any conclusions may be generalized beyond the range represented by the sample (Jogaratnam and Tse, 2006). The list of SMEs provided by the Small and Medium Development Corporation (SMIDEC) makes up the target sample. The target survey was identified using random
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sampling. According to Sekaran (2003), a sample size of 384 is enough for a population of 1 million. In order to meet the representativeness criteria of a good sample collection, the questionnaires for the study were posted to 1,000 selected SMEs in the manufacturing and services sectors. The first 1,000 SMEs were selected from the list of SMIDEC. They were asked to complete the questionnaire or pass it to the managers in their organizations. Most of the entrepreneurs took part themselves as they are well-versed in the practices of their organizations and are interested in gaining knowledge in improving their system, structure and strategies. Due to the exploratory nature of this study, a cross-sectional approach was undertaken to measure firms responses regarding this study, whereby the questionnaire was distributed throughout Malaysia. 4.4.2 Population The population frame for this study is the list of SMEs from the Small and Medium Enterprises Corporation (SMIDEC) Malaysia. Specifically, the respondents are SMEs in the manufacturing and service manufacturing sector that are considered to be involved in innovation and knowledge sharing. SMIDEC is a government-established agency to assist in the growth process of SMEs in Malaysia. Based on suggestion by Sekaran (2003), questionnaires were posted to 1,000 selected SMEs in the manufacturing and services sectors.

4.5 Hypotheses Development

The framework presented in the preceding section shows how the links for variables are hypothesized. It is noted that each variable, intellectual capital (IC), knowledge sharing
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(KS) and innovation (INV) have hypothesized impacts on organizational performance (OP). Using propositions from the literature review, the hypotheses were developed and Figure 4.4 presents the hypothesized relationships and how the hypotheses feature in the proposed framework. Through the framework, knowledge sharing (KS) and innovation (INV) was posited to mediate the relationship between intellectual capital (IC) and organizational performance (OP). H6

KS
H2 H1 H3 H8 H4 H5

IC

OP

INV
H7

Key: IC Intellectual Capital; KS Knowledge Sharing; INV Innovation; OP Organizational Performance.

Figure 4.4 The Hypotheses as Depicted in the Research Framework The study examines the influence of intellectual capital on knowledge sharing and innovation and whether more leads to higher innovation and organizational performance. The proposed hypotheses are: H1: H2: H3: Intellectual capital has a positive impact on organizational performance Intellectual capital has a positive impact on knowledge sharing Knowledge sharing has a positive impact on organizational performance
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H4: H5: H6:

Intellectual capital has a positive impact on innovation Innovation has a positive impact on organizational performance Knowledge sharing positively mediates the relationship between intellectual capital and organizational performance Innovation positively mediates the relationship between intellectual capital and organizational performance Knowledge sharing and innovation positively mediates the relationship between intellectual capital and organizational performance

H7:

H8:

4.5.1 The Relationship between Intellectual capital and Organizational Performance Firm growth depends on the firms successful and creative combination of its internal knowledge and other resources acquired beyond its boundary (Mu et al. 2008). According to Bramhandkar et al. (2007), regardless of how financial performance is measured, better intellectual capital management is associated with better returns. Intellectual capital comprises human capital, structural capital and relational capital and is regarded as organizational resources or assets. The organization, which is made up from the various talents and skills of its employees, structure, system and good networking of customers and suppliers is unique compared to its competitors. Therefore, an organization should capitalize and utilize its resources to the maximum to have higher organizational performance. H1: Intellectual capital has a positive impact on organizational performance

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4.5.2 The Relationship between Intellectual Capital and Knowledge Sharing Employees are the main element in the knowledge sharing activity. When people get together and are involved in knowledge-based discussion, they will share their personal knowledge with their colleagues. The knowledge regardless of its nature, tacit, explicit, formal or informal must be circulated in order for the knowledge to be beneficial to the organization. This knowledge flow will increase the value of the existing knowledge as expanded knowledge becomes valuable and meaningful. The structural capital is not only a mechanism to take advantage of the information and knowledge but also a mechanism to capture, store, retrieve and communicate the knowledge and information (Koenig, 1984). The knowledge, either tacit or explicit, which is acquired and gathered through the interaction with customers, suppliers or any outside party, will help the organization to generate, acquire and restore its knowledge asset. Tacit knowledge is the key element of knowledge sharing, and the knower must be willing to share the knowledge. Factors such as motivation of the sender and recipient (Huber, 2001), reward and benefit of sharing (Gupta and Govindarajan, 2000, Kaiser and Miles, 2001, Dyer and Nobeoka, 2000), technical ease of sharing (Decarolis and Deeds, 1999), the utilization of shared knowledge (Cohen and Levinthal, 1990), and the characteristics of the knowledge (Gupta and Govindarajan, 2000) are, among others, important to facilitate the movement of knowledge within and between organizations. H2: Intellectual capital has a positive impact on knowledge sharing

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4.5.3 The Relationship between Knowledge Sharing and Organizational Performance Knowledge sharing is crucial as it links individual learning with organizational learning (Kim, 1993). As suggested by the resource-based theory of the firm (e.g.Wernerfelt, 1984) and the knowledge-based theory of the firm (e.g.Nonaka, 1994, Grant, 1996, Kogut and Zander, 1992) tacit knowledge can be a source of competitiveadvantage for the firm. The value of a companys information asset no longer lies in the ability to store and retrieve information but in dynamic matching of the information to specific processes and unknown situations (Chen et al. 2008). Therefore, knowledge is an asset that should be managed well to be more valuable and more meaningful. Based on the Resource-Based View (RBV), the firms for which information is a valuable resource will utilize knowledge sharing to enhance organizational knowledge (Lin, 2007). Thus, increased knowledge sharing has led to greater back-office efficiency, greater customer intimacy, improved strategic planning, flexible adaptation to market changes, improved decision making, and other organizational benefits, which is organizational performance. H3: Knowledge sharing has a positive impact on organizational performance

4.5.4 The Relationship between Intellectual Capital and Innovation Leadership and ideas are part of human capital. Innovation depends on peoples knowledge while the process of innovation takes place in structural capital (Johnson, 2002). Structural capital that provides the platform and processing venue for ideas and creativity is an important element for encouraging innovation. Ideas and knowledge gathered from the relationship of customers, suppliers and authorities formed relational capital. These ideas

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and knowledge will help an organization in producing a process or product innovation that is marketable and meets the customers needs. H4: Intellectual capital has a positive impact on innovation

4.5.5 The Relationship between Innovation and Organizational Performance Innovation has a positive relationship to organizational performance regardless of industries (Deshpande et al. 1993; Hurley and Hult, 1998; Kohli andJaworski, 1993; Keskin, 2006; Atuahene-Gima, 2001; Damanpour; 1991, 1996) and this is also found in the SMEs performance (Wolff andPett, 2006; Montequin, 2006). As innovations that meet the needs of the customers will give an organization an advantage in the market and, thus, enable them to make a profit. H5: Innovation has a positive impact on organizational performance

4.5.6 Intellectual Capital, Knowledge Sharing and Organizational Performance At every minute, knowledge is circulating in the organization from the employees to top management, from customers to employees, employees to employees and so on. Consciously or unconsciously, knowledge is being shared, transferred and circulated within and outside the organization in every transaction and activity. This continues to occur as long as people are interacting and communicating. The collective individual knowledge gathered through knowledge sharing activity will lead to organizational effectiveness (Huysman and Witt, 2002). The knowledge of employees (human capital), collective mindsets, culture and systems (structural capital) and value perceptions by its customers
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and suppliers (relational capital) must be integrated through a knowledge sharing process so that every employee can combine their knowledge, expertise and skills to enhance the organizational performance. H6: Knowledge sharing positively mediates the relationship between intellectual capital and organizational performance

4.5.7 The Relationship between Intellectual Capital, Innovation and Organizational Performance There is a significant relationship between market orientation, customer orientation and even entrepreneurial orientation and organizational performance (Hurley and Hult, 1998; Kohli and Jaworski, 1993; Keskin, 2006; Atuahene-Gima, 2001; Damanpour; 1991, 1996; Wolff and Pett, 2006; Montequin, 2006, Appiah-Adu and Singh, 1998). In addition, Garcia and Calantone (2002) suggest that a single construct product innovation for technological-based projects can be utilized as a mediating or moderating variable or even to split innovation into product type categories. Bontis et al.s (2000) study of intellectual capital shows the relationship of structural capital and organizational performance, which suggests an indirect relationship of innovation capital to organizational performance. Most researchers found a positive effect for innovation as a mediating factor in the relationship of intellectual capital and organizational performance (Hurley and Hult, 1998; Kohli and Jaworski, 1993; Keskin, 2006; Atuahene-Gima, 2001; Damanpour; 1991,1996; Wolff and Pett, 2006; Montequin, 2006). Innovation needs an antecedent in order to have an impact on organizational performance. Knowledge, creativity, ideas, culture, structure, strategy and systems must be incorporated to support innovation in the organization.
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Innovation, even an incremental innovation, has an impact on organizational performance (Afuah, 2003). H7: Innovation positively mediates the relationship between intellectual capital and organizational performance

4.5.8 The Relationship between Intellectual Capital, Knowledge Sharing, Innovation and Organizational Performance Knowledge-based resources involve both static and dynamic features. Intellectual capital being static should be in the same model with dynamic processes. Without dynamic processes, the intellectual capital is merely a static stock of assets (Hussi, 2004). Knowledge only leads to superior performance if the industry characteristics enable the knowledgeable company to derive the profits from the new ideas (Bierly and Daly, 2002). The interaction of intellectual capital with knowledge sharing and innovation will improve the quality of knowledge in the organizations, thus, enhancing its performance. As innovative activities usually take place in smaller groups, Tsai (2001) suggested that smaller groups could produce more innovations and enjoy better performance if they occupy central network positions that provide opportunities for shared learning and knowledge sharing. Knowledge sharing implies that organizationally relevant information, knowledge and expertise are spread and exchanged among individual members of an organization (Moorman and Miner, 1988, Bartol and Srivastava, 2002). Innovation requires tacit and explicit knowledge in order to create something new (Yang, 2005). H8: Knowledge sharing and innovation positively mediates the relationship between intellectual capital and organizational performance.
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4.6

Data Collection Procedure

The objective of the data collection procedure is to ensure that an efficient and

accurate data collection process is conducted. This section discusses the process of data collection for this study. The data collection method for this study used a written survey questionnaire. The method of survey will be elaborated upon. The survey questionnaires were validated following a pilot test and reliability test. Details of the procedure are discussed below. 4.6.1 The Questionnaire In gathering information pertaining to the current study, a questionnaire was used as the main instrument for data collection. Questionnaires were developed to collect data about the research models constructs. The questionnaire consists of five sections. The first section covers intellectual capital (IC); second section is on knowledge sharing (KS); third section is on innovation (INV) and the fourth section is on organizational performance (OP). The fifth section is on the demographic profile. The demographic profile is divided into two sections, namely, organization profile and individual profile. Table 4.1 shows the measurement of items for the variables that were adopted from various authors. Firms were asked to provide information on their demographic organizational profile (type of business, employment, annual sales turnover) and individual profile (education background, working experience and area of expertise). In the variables sections (intellectual capital, knowledge sharing, innovation and organizational performance), all questions are closed-ended questions. Intellectual capital is divided into three sections, namely, human capital (HC) 12 items, structural capital (SC) 18 items and relational capital (RC) 11 items; a total of 33 items for IC. For knowledge
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sharing (KS), there are 18 items, innovation (INV) 11 items and organizational performance (OP) 5 items. Items statements in the variables sections are measured as subjective estimates using a seven-point Likert scale (with 1 = strongly disagree and 7 = strongly agree). The full set of these measurement items and questions are found in Appendix 7, which presents the survey questionnaire (final version).

Table 4.1 Source of Measurements

Variable Intellectual capital Source of Measurement Items Bontis et al. (1998), Chen et al. (2005), Cohen andKaimenakis (2007), Narver and Slater (1990), Deshpande et al. (1993) Haldin-Herrgard (2000), Bock and Kim (2002), Ipe (2003), Husted et al. (2005), Chieh-Peng Lin (2007), Calatone et al. (2002), Liebowitz (1999), Choi and Lee (2002) Appiah-Aduand Singh (1998), GhosalandBartlet (1989),Han et al. (1998),Hurley and Hult (1998), Calatone et al. (2002), Atuahene-Gima (1995) Calatone et al (2002),Lee and Choi (2003),Bontis (1998), Gold et al. (2001)

Knowledge sharing

Innovation

Organizational Performance

Compiled by researcher

4.7

Method of Survey
The mail survey was used to reach a relatively large sample of SMEs scattered

throughout Malaysia. A large geographical area can be covered quickly and cheaply by this method. It is also timely, as many questionnaires are being answered in parallel. Evidence suggests that a mail survey, compared to other methods, is relatively cheap, much information can be obtained very quickly without the problems of interviewer bias and the
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variability inherent in face-to-face techniques; respondent anonymity is assured; and sensitive information can be easily gathered in this way, where specific data is requested and records and other sources can be sought for verification (Forsgren, 1989). This method was chosen, as it is an efficient and accurate method of polling the opinions of the sample population and is an effective means of collecting quantitative data (May, 2002). Moreover, this type of survey offers the maximum potential to produce results that are generalizeable and precise in terms of the population (Firestone, 1997). Most researchers in relation to SMEs adopt a mail survey approach despite the difficulties associated with low response rates (Newby et al. 2003). It is important to minimize the errors that are associated with the mail survey method of data collection (Mangione, 1998). The errors include sampling selection bias, non-response error, item non-response error and response error. The discussion on handling sample selection bias is discussed in the sampling sub-section. For the non-response error or biased nature of the responding sample, the study targets to achieve a high response rate by employing various techniques: reminders, as suggested by Cooper and Schindler (2003), telephone pre-notification (Sclegelmilch and Diamantopoulos, 1991), coloured paper (LaGarce and Kuhn, 1995), using double-sided rather than single-sided or short rather than long questionnaires (Jobber, 1989). In addition, the university logo has been found to increase response rates (Greer and Lohtia, 1994). Assurance of anonymity has generally proven successful in acquiring higher response rates (Kanso, 2000, Tyagi, 1989). By providing clear instructions, the failure of respondents to answer individual questions or item non-response error can be reduced. The questionnaire was made to look attractive, not crowded and the questions were not too long. Many of the total design method (TDM)
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recommendations suggested by Dillman (1990) were adopted. The questionnaire was designed in an easy to read booklet format with a total of 11 pages. A detailed structured questionnaire was administered at the enterprise level. A selfaddressed envelope with postage was sent together with the questionnaire and cover letter. The cover letter was sent with the questionnaire addressed to the identified owner (respondents) of the organizations to be studied. The letter contained the objective of the survey, the purpose of the study and its importance, how the results were to be used, the researchers contact number and how to deliver the completed questionnaire. In improving the response rate and to reduce the non-response bias,the assurance of confidentiality was included in the letter. In this study, to maximize the return rate, three subsequent reminders over the telephone and the mail lists which were provided by SMIDEC after the initial surveys were mailed. Telephone inquiries were conducted three weeks later as a last resort for those SMEs that had not responded. A follow up letter was sent after the expiry of the set dateline. Additional phone calls were made wherever the need arose. Appendix 6 presents the cover letter.

4.7.1 Survey Questionnaire Validation The validity of the survey instrument is observed in its content and face validity (the assessment of the correspondence of the variables to be included in a scale and its conceptual definition) and the reliability (the extent to which measures are free from error and thereby able to produce consistent results) pertaining to its items. A comprehensive literature review and interviews with practitioners and academicians, as part of the survey instrument development procedure, enhances the content and face validity of the survey
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instrument (Li et al., 1998). Measures of the focal constructs in this paper were developed from the existing literature. In this research, the items used in the data collection instrument were generated based on previous intellectual capital, knowledge sharing and innovation literature review. The questionnaire was originally prepared in English. Before conducting the pre-test and pilot test, the questionnaire was checked for face and content validity by two foreign academicians and four local academicians who are familiar with the constructs and variables that were provided with the survey. They were either the heads of departments or lecturers who are active in the research of knowledge management, intellectual capital and entrepreneurship. They were chosen because of their knowledge and experience in similar areas. Ambiguities and sources of confusion in the questionnaire were highlighted and improved following the comments and suggestion of academicians. 4.7.2 Instrument Translation Process In a multi-lingual society like Malaysia, translating the questionnaire into different languages has become a standard procedure (Ng, 2006). In addition, offering a choice of questionnaire language is one method of capturing the respondents attention and response (Harzing, 2006; Bond and Yang, 1982). Therefore, in the questionnaire booklet, the question was posted in two language versions, English and Bahasa Melayu, as this will provide a better understanding, especially for native respondents. Respondents have a choice to answer in either Bahasa Melayu or in English. In order to ensure that the Bahasa Melayu version correctly reflects the meaning and nuances of the original instrument, the researcher asked two of the qualified translators from Institut Terjemahan Negara (National Translation Institute) to provide the appropriate translation of
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the items in the original version of the questionnaire. Both of the translators were Malays. Both of them are certified and qualified translators who have extensive experience in translation and interpretation. Each translator took a week on the translation. After a week, the translation was evaluated and they shared very close translations for the majority of the items. Some items were re-worded to be understood in the Bahasa Melayu context. In addition, to make sure that the items in the Bahasa Melayu translation have a similar meaning with the original items, back translation was conducted through an academician from the Department of English Language in the Faculty of Language, Universiti Teknologi MARA. Words or expressions were compared and revised until consensus was attained.

4.7.3 Pilot Test To verify the validity and reliability of the instrument after the translation process and before conducting the actual study, a pilot study was conducted to check its clarity, validity and reliability. This procedure is necessary before performing the real data collection to ensure that the respondents understood the instructions and the questions asked. The instrument was piloted by administering it to thirty entrepreneurs who were attending an entrepreneurship course in the National Productivity Center (NPC), Petaling Jaya to check the wording and understanding of information in the questionnaire as suggested by Xia et al. (2007). All the samples chosen for the pilot test were from the same population in the actual survey (Malhotra and Birks, 1999). The main issues are the scrutiny and a thorough checking of the appropriateness and the language of the research constructs for the small and medium enterprises (SMEs) in Malaysia. To be valid, a
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questionnaire must be understandable and easily completed by the population concerned. As no missing data was found, the questionnaire was deemed to be highly acceptable (Aron and Aron, 2002).

4.8

Reliability Test
The reliability of an instrument refers to its ability to produce consistent and stable

measurements. Kumar (1996) explains that reliability can be seen from two sides: reliability (the extent of accuracy) and unreliability (the extent of inaccuracy). The most common reliability coefficient is the Cronbachs alpha, which estimates internal consistency by determining how all the items on a test relate to all other items and to the total test internal coherence of data. The reliability is expressed as a coefficient between 0 and 1.00. The higher the coefficient the more reliable the test. The result of the pilot study showed that the Cronbachs alpha reliability coefficient for the intellectual capital was in the range of 0.609 to 0.685, knowledge sharing 0.829, innovation 0.877 and the alpha for the dependent variable, knowledge performance, is 0.907 indicating that this instrument is a reliable measure. A measure should have a Cronbachs alpha of at least 0.6 or 0.7 and preferably closer to 0.9 to be considered useful (Aron and Aron, 2002; Sekaran, 2003).The reliability test was done twice, initially when the pilot study was done and subsequently after the data was completely collected. Table 4.2 lists detailed scores of the Cronbachs coefficient alpha.

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Table 4.2 Reliability Test Results for the Pilot Study

Variables Reliability Cronbachs lpha Human Capital (HC) Structural Capital (SC) Relational Capital (RC) Knowledge Sharing (KS) Innovation (INV) Organizational Performance (OP) 0.685 0.609 0.675 0.829 0.877 0.907

Intellectual Capital (IC)

4.9

Data Analysis Plan

To ensure the testability of the study, systematic data analysis was stringently

followed throughout the process of data analysis. Various data analysis techniques and procedures to be used in the research for both stages of field research data are listed in Table 4.3 and discussed in the following sub-sections. In this study, the Amos 16.0 software package was used to perform the structural equation modelling (SEM) to investigate the inter-relationships between constructs of the hypothesized model. The SEM is a statistical technique that allows the assessment of the direct and indirect effects of each variable on the other variables (Maruyama, 1998). Univariate, bivariate and multivariate techniques are used to analyze the data involving descriptive statistics, assumptions for data analysis (i.e. normality, linearity) and quantitative data analysis using Structural Equation Modelling (SEM).

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Table 4.3 Data Analysis Techniques

Research Stage Survey (Quantitative)

Technique Descriptive Statistics Check on Assumptions: Test for non-response bias Normality test Test of Collinearity and Linearity Confirmatory Factor Analysis o Assessment of Measurement Models Construct Validity Assessment Unidimensionality, Reliability; Convergent Validity; Discriminant Validity; Nomological/Predictive Validity o Assessment of the Structural Model Testing Hypotheses

First of all, using descriptive statistics, the collected data was summarized, simplified, and organized. Descriptive statistics provide background information for sample characteristics. Background information includes the profiles of the respondents and organizations (gender, role, educational level, number of employees, annual sales turnover, duration of business, business terms). Frequency distributions and percentages provided an overview of the collected data. These were displayed in the form of graphs and tables. Explaining the results of the reliability, normality, and the questionnaire validity follow. Next, bivariate testing was conducted to test the collinearity and linearity. The issue of multicollinearity (the degree to which the independent variables effects can be predicted or

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accounted for by the other variables in the analysis) was checked using the variance inflating factor (VIF) and tolerance. Lastly, multivariate testing was used to test the hypotheses on the causal effect relationship. A two-step process is widely used in Structural Equation Modelling (SEM). The first step involves the analysis of the measurement model and the second step tests the structural relationships among the latent constructs. A measurement model relates the items to the latent construct while the structural model relates latent constructs to another. The former provides factor loadings and reliability measures from items to latent constructs. The latter illustrates the path coefficients for significant effects on the relationships between constructs. The overall model in SEM was examined using multiple fit indices. Furthermore, the t-values and the R were also examined for the model fit as well as the other indexes (Hair et al., 2006). Having established an adequate measurement mode, the next step of the two-step procedure involved testing the hypotheses of the study through fitting the structural models for the relations among the latent variables (Bollen, 1989, Kline, 1998, Loehlin, 1998).

4.10

Common Method Variance/ Common Method Bias

As this study adopted self-reported measures, it is exposed to common method variance. Common Method Variance (CMV) is defined as variance that attributable to the measurement method rather than to the constructs the measures represents (Podsakoff et al. 2003). CMV creates a false internal consistency, which are apparent correlation among variables generated by their common resources (Chang et al., 2010). This is especially prevailing when self-reported questionnaires are used to collect data at the same time from
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the same participants. Entrepreneurship researchers frequently use the self-reported perceptions of business ownenrs and managers because they are typically quite knowledgeable regarding company strategies and business circumstances (Hambrik, 1981). However, Conway and Lance (2010), self-reports are clearly appropriate for the job performance especially when self-reports can predict organization growth and work context variables (Shalley et al. 2009; Judge et al. 2000) when employees are best suited to selfreport creativity because they are the ones who are aware of the subtle things they do in their jobs that make them creative. The magnitude of common methods bias is likely to be a function of the differences among methods and the concreteness of constructs (Doty and Glick, 1998). Meade et al. (2007) agreed that common method variance and common method bias exist in organizational research but the magnitude of common method bias is likely to be small to medium which do not have the serious consequences of the analysis and negligible

(Crampton and Wagner, 1994; Spector (2006). In fact, according to Doty and Glick (1998), the effect of common method bias in organizational research is small as 0.05 or less. However, the specific details of the research methodology are clearly relevant in determining the likelihood and degree of common method bias. Among the common attributes to CMV are the use of a common rater, the manner in which items are presented to respondents, the context in which questionnaire are placed and the contextual influences used in to measure the constructs (Chang et al., 2010). Podskoff et al. (2003) suggest four remedies to avoid or correct CMV. 1. Using different sources of information for some of the key measures. For example, different sources for dependent and independent variables;
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2. Mix the order of questions with different type of scales; 3. Use a complicated specifications of regression models to reduce CMV 4. Use several statistical remedies to detect and control the possibility of CMV. While remedies 1 and 2 are ex-ante approaches implemented in the research design stage, remedies 3 and 4 are ex-post approaches implemented after the research has been conducted. For this study, researcher has taken carefully steps in avoiding CMV by adopting remedy 1,2,3 and 4 which is ex-ante approach and ex-post approach.

The sources to measure the construct as shown in Table 4.1 are from different sources and to avoid CMV, researcher adapted measures from few different authors. Another ex-ante research strategy is the way questionnaire is designed and administered (remedy 2). For this study, respondents were assured of anonymity and confidentiality of the study. In the questionnaire, respondents would answer questions on behavioural

activities (for IC, KS and INV) but in the dependent variable section, it is more towards perception. Moreover, more fact-based questionnaires items are less likely to be associated with CMV (Chang et al., 2010). Although the dependent variable (organizational performance) was self-reported, it was still gathered at a later point in time the predictor variables in order to minimize rating bias (Podsakoff et al. 2003; Luthans et al. 2008). In the questionnaire, respondents would answer questions on behavioural activities (for IC, KS and INV) but in the dependent variable section, it is more towards perception. In addition, researcher developed different scales for demographic section to make it look different than other sections.
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There is also empirical evidence arguing for the reliability and validity of selfreported, single respondent data (Lyon et al. 2000; Kumar, et al. 1993). Researcher used statistical tests in attempting to avoid and reduce CMV. One way to rule out the substantial method effects is to demonstrate construct validity of the measures used (Meade et al., 2007) which can be done through; (1) appropriate reliability evidence; (2) Factor structure; (3) Establishment of a nomological network including relationship with theoretically relevant variable; (4) Mean difference between relevant groups; (5) convergent and discriminant validity and other evidences depending on situation (Messick, 1989; as cited in Conway and Lance, 2010)

4.11 Assumptions

In research of this nature, it is important to outline the main assumptions, as ideal situations for such studies do not exist except in controlled environments. The need for clearly pointing out the assumptions receives support from other authors. The assumptions form a basis in the course of conducting this research for the purpose of realizing the research objectives. The nature of the current business environment is strong and dynamic and has been influenced by globalization. Because of this, it is assumed that all firms are experiencing the effects of these trends in the course of conducting their operations. Taking into consideration of Malaysia size, therefore it is assume that small and medium enterprises in Malaysia are exposed to the same challenges and risks.

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In line with the above mentioned assumption, it is assumed that all firms implement knowledge sharing and innovation practices (some knowingly and some unknowingly); and are at differing levels of manufacturing levels.

4.11 Summary
This chapter focuses on the methodology used to test the research questions and hypotheses. The philosophy of research as well as the research plan to navigate this study was described. It also described the sampling design of the research. The questionnaire development and the pilot test done to ensure the validity of the research measurement were also explained. Data collection was accomplished through the use of a survey questionnaire. The main techniques to be used in analyzing the data is Structural Equation Modelling as described at the end of the chapter. The next chapter discusses the way the data was collected and analyzed.

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CHAPTER FIVE DATA ANALYSIS

5.1 Introduction
This section presents the data analysis for the survey in accordance with the analysis techniques presented in the previous chapter. As discussed in Chapter Four, which describes the research design, an eleven-page questionnaire was used to measure the theoretical constructs of intellectual capital (IC), knowledge sharing (KS), innovation (INV) and organizational performance (OP). After the content and face validity of the questionnaire was established, the questionnaire was sent to the respondent firms. The following section discusses the analysis of the data collected.

5.2

Data Collection

5.2.1 The Response Rate A questionnaire was sent to the CEO/managing director, owners or manager of the firms. A stamped return envelope was included with the questionnaire. A total of 257 responses were received after the first mailing. A follow-up mailing to non-respondents was done about six weeks after the first mailing. Another 79 responses were received, giving a total of 336 respondents (a response rate of 33.6 per cent). This response rate is similar to other surveys in Malaysia, which tend to obtain a response of between 15-25 per cent (Sarachek and Aziz, 1983; Rozhan, 1998; Nordin and Arawati, 1993, p. 60; Hazman, 1998; Kanapathy and Jabnoun, 1998). This response rate is also considered satisfactory
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since accessing the CEO/managing director of SMEs is usually difficult. In surveys, response rates commonly range between five and thirty per cent, depending on the efforts made (Diekmann, 2005; Meffert, 2000 as in Durst, 2008). In the following sections, the results from the survey conducted using this questionnaire are presented. All analysis (excluding structural equation modelling, SEM) was performed using SPSS version 16. Amos version 16 was used to analyze the proposed research framework through SEM. 5.2.2 Non Response Bias In this research, the non-response bias was addressed by splitting the respondents into two groups representing the early and the late wave of returned surveys, as suggested by Lambert and Harrington (1990), and put in use by authors including Kraus et al. (2007); Chen and Paulraj (2004). The early wave was 257 respondents and the late wave was made up of 79 respondents. The t-test performed on the study items yielded results that indicated no significant difference (at = 0.05) between the two groups of responses. The sample and population means were compared for any significant difference. The t-test performed on these two values yielded no statistically significant difference (at = 0.05) on the sample means. In the t-test analysis, as no difference was found between the group mean differences at the 5% level for any of the variables in the study it may be concluded that non-response bias is not a particular influence in this research (Sakarmesas, Katsikeas and Schlegelmilch, 2002, as cited in Ramayah et al. (2009).

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5.2.3 Normality Test This study tests for the symmetric nature and peakedness/flatness for the data set using the shape descriptors, skewness and kurtosis, respectively. The skewness values for measurement items ranges from 0.902 to +0.302, are well within the recommended range of-1 to +1 (Hair et al., 2006). Kurtosis ranges from -0.146 to +1.036 are well within the recommended limit from -2.0 to +2.0 (Coakes and Steed, 2003). To uphold the validity and reliability of analysis, the normal probability plot is examined. Hair et al. (2006) also suggested using P-P plots to check the linear relationship of variables. Appendix 8 indicates a histogram of a normal P-P plot of regression standardized residual. The normal plot of regression standardized residuals for the dependent variable indicates a relatively normal distribution. Although convenience sampling belongs to non-probability sampling, the normal distribution indicates that the analysis method for probability sampling can be carried out for this study. Table 5.1 shows the correlations among the independent variables in excluding the multicollinearity assumptions. Table 5.1 Correlations among independent variables
IC IC KS INV 1 0.636 0.639 1 0.617 1 KS INV

The presence of high correlations, generally above 0.9, is the first sign of collinearity (Hair et al., 2006). Examining the correlations among independent variables, the intercorrelations were found to be generally well below the recommended correlation
210

coefficient value of r = 0.9 (Table 5.4). A visual inspection of the correlation matrix between the measurement items was performed and the results show that all coefficients are positive and that most of the values are above 0.3 (medium to large strength) and significant at 0.05. 5.2.4 Demographic Profiles The respondent Table 5.2 shows the respondents organization profile. Respondents profiles are based on the type of industry, number of employees, annual sales turnover, type of ownership and length of business. Most respondents are from the manufacturing industry, which is the biggest industry player in Malaysia SMEs, with 40.4% of SMEs in partnership and 34.8% have been operating more than ten years. Based on the number of employees and annual turnover, 45.2% and 51.8% of respondents are in small enterprises, respectively.

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Table 5.2 Demographics Profiles ( Organization)

Profile Type of Industry Manufacturing Services No of employees Small (Between 5 to 19 employees) Medium (Between 20 to 150 employees) Annual Turnover Small (between RM200,000 and less than RM1 million) Medium (between RM1 million and RM5 million) Type of Ownership Sole-proprietor Family-owned Partnership Others Length of Business Less than 2 years 2 4 years 5 8 years 8- 10 years More than 10 years Frequency 213 123 141 195 197 128 53 57 136 90 24 71 87 37 117 % 63.3 36.7 45.2 54.8 51.8 48.2 15.8 17.0 40.4 25.8 7.2 21.1 25.9 11.0 34.8

Table 5.3 shows the demographic profile based on the individual, which are based on the current position, education level, previous working experience, years of working experience and area of expertise. Most of the respondents are owners (25.3%) followed by executives (23.2%) and managers (22.3%). Most of them are degree holders (42.3%) who have previous working experience (76.8%) and 41.7% have more than 5 years of working experience in business (17.3%).

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Table 5.3 Respondents Individual Profile Profile

Current position Owner Co-Owner Partner Manager Executive Director Education level SPM/STPM Certificate Diploma Degree Master Professional Qualification Years of previous working experience No working experience With working experience Years of working experience Less than 1 year 1-2 years 2-5 years More than 5 years Area of experience Business Finance Accounting Engineering Science IT Engineering Operation Architecture/Design Construction Logistic Others

Frequency
85 42 39 75 78 16 57 14 76 142 26 14 78 178 41 32 31 131 58 15 16 19 4 6 15 6 2 1 3 1

%
25.3 12.9 11.6 22.3 23.2 4.8 17 4.2 22.6 42.3 7.7 4.2 23.2 76.8 12.2 9.5 9.2 41.7 17.3 4.5 4.8 5.7 1.2 1.8 4.5 1.8 0.6 0.3 0.9 71.4

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5.3

Univariate Analysis

5.3.1 Test of Collinearity and Linearity Multicollinearity is checked using the variance inflation factor (VIF) and tolerance level (Pallant, 2005). Kleinbaum (2007) suggests that if the value of VIF of any variable exceeds 10, that variable is said to be highly collinear and will pose a problem for multivariate analysis. The calculated values for the two indicators are presented in Table 5.4. The results show that the problem of multicollinearity does not exist as the VIF values are less than 10 and the tolerance level values are above 0.1, but < 1.0. Table 5.4 Multicollinearity Test Results
Variables tested Variance Inflation Factor 1.771 2.608 2.416 Tolerance Condition Index Remarks

IC and KS IC and INV KS and INV

0.565 0.414 0.225

11.447 .649 11.590

No Problem No Problem No Problem

Note: The condition index cut off point is 30 whereby any values below 30 indicate no problem of multicollinearity.

5.4

Multivariate Analysis- Structural Equation Modelling

The Structural Equation Modelling approach will help to validate the research

model. It was chosen because of its ability to test causal relationships between constructs with multiple measurement items (Joreskog and Sorbon, 1996). It involves a two-stage model-building process, namely, a measurement model and an analysis of the structural model.

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5.4.1 Measurement Model The measurement model was first examined for instrument validation (Lin, 2007) and for the purpose of searching for model specification (Hair et al., 2006). The

measurement model with all four constructs was assessed using confirmatory factor analysis. Confirmatory Factor Analysis (CFA) is employed in evaluating the construct validity, which includes unidimensionality, reliability, convergent validity, discriminant validity and nomological and predictive validity of the constructs. Due to the large number of items involved, it is necessary to employ an approach that requires variables to be evaluated individually using different measurement models (Moorman, 1995, AthuaeneGima and Evangelista, 2000, Chen and Paulraaj, 2004). It is also good practice to assess the fit of each construct and its items individually to determine whether there are any items that are particularly weak (Hooper et al. 2007). Modifications can be made locally, which can substantially improve the results of the model. The modification index (MI 4); standard residuals (< 4.0); squared multiple correlations (SMC 0.3); path estimates ( 0.5) and Heywood cases are adhered to in the process of validating the items. Items that had a loading of less than 0.55 were not significant at the 0.01 level and/or cross-loadings of more than 0.35 were discarded as an indication of a very high level of error. Table 5.5 details the results of item validation. In the process, 4 items were dropped from human capital, 5 items from structural capital, 4 items from relational capital, 5 items from knowledge sharing, 4 items from innovation and 1 item from organizational performance, all the items totalling 23 were first order constructs and dropped from further analysis as they could not survive the model diagnostic procedure. However, the researcher

215

considered both the statistical criteria and the theoretical issues before removing any items. The following sub-section presents the four measurement models from the above process. Table 5.5 Summary of Items Dropped in Confirmatory Factor Analysis
Variables Original Number of Items HC 10 items Final (CFA) Number of Items 6 Number of Items Dropped in CFA 4 Description of Items Dropped in CFA

Intellectual Capital

SC

12 items

RC

11 items

Knowledge Sharing

14 items

HC2: Our employees always come up with new ideas HC3: All employees are given an opportunity to be creative HC5: Our employees are willing to take responsibilities HC8: In our company, employees are free to voice their views SC1: In our company, information is always available SC2: Everybody shares their knowledge in this company SC7: Our company encourages creative ideas by employees SC10:Our companys operation is efficient SC12:Knowledge is recognized as an outcome for the company and sharing is promoted RC1: Our company is aware of customer complaints RC4: Our companys survival depends on a small number of customers RC6: Our companys customers are satisfied with the services provided RC10: We are competing primarily based on product or service differentiation KS2: Informal dialogues and meetings are used for knowledge sharing in our company KS3: Knowledge is acquired by one-to-one mentoring KS11: I share my knowledge with someone that I trust KS12: Our employees are generally trustworthy KS14:Our company values employees with creative ideas INV2: Our product offers unique, innovative features to customers INV4: We produce high quality products INV5: We offer new products/services from time to time INV8: We often reposition existing products/services OP2: In the past 3 years, we have improved our product/service innovation
216

Innovation

11 items

Organizational Performance

5 items

Table 5.6 shows the result of fit for each measurement. The final measurement models for two second-order latent variables and two first-order variables in this study are presented in Figure 5.1. The Normed ranges from 2.079 to 2.793 (all below the recommended threshold of 3.0; (Hair et al. 2006)). RMSEA values (from 0.057 0.077) are below the recommended cut-of-points of 0.08 (Hair et al.2006). The values of GFI (from 0.948 0.988), CFI (from 0.072 0.996) and TLI (from 0.961 0.991) are all above the recommended threshold of 0.90 (Hair et al. 2006). The intellectual capital (IC) is made up of three constructs, namely, human capital (HC), structural capital (SC) and relational capital (RC), which is a second-order latent variable. Innovation is also another secondorder latent variable of process innovation and product innovation while knowledge sharing and organizational performance are first-order variables. These results show that the models under consideration exhibit good fits. Figures 5.1 (a), (b), (c) and (d) show the measurement model for the study variables. The results from these models show that based on modification indices and standardized error, a few items were deleted to get the data to fit the model. Generally, removal of problematic items and re-specifications may result in a better fit of a model (Bollen, 1989). Although there are a number of items were dropped, there are justifications for dropping the items. Firstly, the scales were integrated from various researchers and considered exploratory in nature. Therefore, in this study, dropping items were considered legitimate reasons in order to seek parsimony and fitness (Klein et al. 2006). Most of the studies particularly exploratory studies need to delete certain items originally included in scale to improve their fitness, validity and reliability (Nyambegera et al., 2001). Another possible justification for dropping the items was that the integrated items had never been used in Malaysia sample before (Hasliza and Norbani, 2009).
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Table 5.6 Fit Results for Measurement Models after Instrument Validation
Construct Number of Items Dropped 4 5 4 5 4 1 Fits 104.758 /df 2.555

Df 41

RMSEA 0.068

GFI 0.947

CFI 0.978

TLI 0.971

IC

HC SC RC KS INV OP

27.785 25.889 10.393

13 12 5

2.137 2.157 2.079

0.058 0.059 0.057

0.978 0.980 0.988

0.992 0.989 0.996

0.987 0.980 0.991

Figure 5.1(a) Measurement Model for Intellectual Capital

Hc

HC

IC

SC

RC

Figure 5.1(b) Measurement Model for Innovation

Inv 1

PD

INV
PC
Inv

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Figure 5.1(c) Measurement Model for Knowledge Sharing

Ks 2 Ks 1

KS

Ks 3

Figure 5.1(d) Measurement Model for Organizational Performance

OP 1

OP

Key: IC Intellectual Capital; HC Human Capital; SC Structural Capital; RC Relational Capital; KS Knowledge Sharing; INV Innovation; OP Organizational Performance

In addition, Table 5.7 presents the summary of the measurement model showing the values for the standard regression weights ranging from 0.512 to 0.908, all were above the 0.5 lower level limit recommended by Hair et al. (2006, Tabarnick and Fidell, 2007). The tvalues (critical ratios) range from 13.013 to 25.902, all greater than 2 and significant with p = 0.000 (Hair et al. 2006). The construct reliability, ranges from 0.81 to 0.94, higher than the recommended value of 0.7 by Hair et al. (2006) and Byrne (2001). The variance extracted is from 0.55 to 0.74. The lower side of the variance extracted is just above the threshold of 0.5 recommended by Hair et al. (2006).

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Table 5.7 Summary of Other Results of the Measurement Models Variable/Construct Range of Regression Weight for 1st Order Latent Variable IC 0.572 0.876 HC 0.572 0.813 SC 0.789 0.876 RC 0.666 0.774 KS 0.525 0.868 INV 0.656 - 0.915 PD-INV 0.709 0.867 PC-INV 0.656 0.915 OP 0.731 0.880 Range of Critical Ratios (t-values) for Regression Weights 10.661 17.479 10.661- 16.205 12.064 17.479 12.535 15.242 9.866 17.588 11.279 12.459 11.279 14.875 11.279 12.459 18.751 23.390 Construct Reliability (CR) 0.78 0.85 0.85 0.84 0.83 0.81 0.88 0.82 0.92 Variance Extracted (VE) 0.56 0.53 0.58 0.56 0.62 0.64 0.67 0.61 0.72

5.4.1.1 Confirmation of Second Order Latent Variables in this study The relevance of the study variable being considered as second order factors emanates from the fact that each construct reflects several first order factors. This is verified by the reviewed literature, which was used to identify the study constructs, enumerate the relationships that exist between the first order LVs and their corresponding second order LVs. As suggested by Chin (1998) other tests such as examination of strengths of the paths connecting the second order LVs to the first order LVs need to be performed. The requirement is to have a large percentage of these paths having the parameter estimate greater than 0.70 as well as adequate model fits. Also, the variables were subjected to nomological network with other study LVs. In this study both tests were performed. The strength of the paths connecting the first and second order of LVs is in the range from 0.572 to 0.876 (Appendix 9).

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Considering the nomological networking with other LVs in the study, it shows that the strength of the relationships between first order LVs and their corresponding second order LVs are strong as evidenced in the nomological validity test in section 5.4.1.7. Furthermore, Widaman (1985) used three models (see section 5.4.1.5) for the purpose of determining whether a study construct is suitable as a first order LV or as second order LV for IC in this analysis. This is also in-line with the suggestion of Hunt and Morgan (1995), and Uncles (2000), where relational capital (on market orientation) was operationalized as a second-order construct. Basically the test looks into the fits of model 1 and model 2. Model 1 loads study items to the final construct as a first order one while model 2 loads items to their corresponding first order LVs, which are then loaded to their corresponding second order LVs (refer to Figure 5.9). The difference in the Chi-square values between model 1 and model 2 is calculated (with the degree of freedom df=df1 df2). If the change in Chisquare is significant, it shows that the LVs are suitable to be used as second order LVs. The results show that all three constructs are suitable as second order LVs in this study.

5.4.1.2 Construct Validity Assessment Construct validity involves the assessment of the degree to which a measure (items in a scale) correctly measures the abstracts or theoretical constructs (OLeary-Kelly and Vokurka, 1998; Garver and Mentzer, 1999; Chen and Paulraj, 2004; Hair et al. 2006). The procedure for performing the assessment of construct validity is performed in the following

221

sequence: unidimensionality, reliability, convergent validity, discriminant validity, and nomological and predictive validity. The researcher chose to use multiple techniques for validity assessment of all constructs, to uphold the rigor of the research, and have rigorously tested measurement items, as recommended in the instrument measurement development procedures. 5.4.1.3 Unidimensionality The procedures for assessing unidimensionality require an assessment to determine whether the items are significantly associated with an underlying construct. It has to meet two conditions that an empirical indicator must be significantly associated with the underlying latent variable and that it can be associated with one and only one latent variable (Anderson and Gerbing, 1982; Phillip and Bagozzi, 1986; OLeary-Kelly and Vokurka, 1998). When the items of a scale estimate one factor then the scale is unidimensional. The scale has to be unidimensional in order to have reliability and construct validity (Gerbing and Anderson, 1988). A multidimensional construct thataids content validity is acceptable as long as the scales are unidimensional (Bharati and Chaudhury, 2004). In this study, the results of CFA, all the regression weights (0.512 to 0.908; with significant t-values) are also 0.5, the threshold as recommended by Hair et al. (2006). A good fit of measurement model, as measured by the goodness of fit index (GFI) also indicates that all items load significantly on one underlying latent variable. A GFI of 0.90 or higher for the model indicates that there is no evidence of lack of unidimensionality. The full results on this assessment are provided in Table 5.13. The results suggest that all the scales are unidimensional.
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5.4.1.4 Reliability Reliability is the internal consistency of a dimension. Hair et al. (2006) define reliability as an assessment of the degree of consistency between multiple measurements of a variable (Hair et al. 2006, p. 137). It is also the degree of dependability, consistency or stability of a scale (Gefen et al., 2000). The reliability is assessed in terms of Cronbachs Alpha value coefficient (18). A scale is considered reliable if the alpha coefficient is greater than 0.70 (Hair et al., 2006; Pallant, 2005; Zickmund, 2003, Garver and Mentzer, 1999; Kline, 1998). In this study the results of the CFA Alpha ranges are from 0.78 to 0.92. The construct reliability values calculated from the CFA results indicate that the scale is reliable, as all the Alpha values are above the recommended threshold of 0.7. The details of these and other results are shown in Table 5.13. 5.4.1.5 Convergent Validity Convergent validity is the extent to which different approaches to the measurement of the construct yield the same result. Convergent validity is checked using the BentlerBonett Coefficient (), which was introduced by Bentler and Bonett (1980). The BentlerBonett Coefficient () is the ratio of the difference between the chi-square value of the null measurement model and the chi-square value of the specified measurement model to the chi-square value of the null model (Li et al., 1998) and the for 0.9, it is a demonstration of strong convergent validity (Segar and Grover, 1993, 1998). The results (range: 0.91 0.93) demonstrate strong convergent validity (1) as shown in Table 5.8. In this study, convergent validity is also assessed based on the standardized regression. All the Rs of the observed variables were greater than 0.50, indicating a reasonably good convergent validity
223

of the model (Chinda and Mohamed, 2008). In addition, all the path coefficients are positive and statistically positive at p < 0.05, therefore, their significance to the model is augmented. The Widamans three comparison models are also used to study the convergent validity. There are significant Chi-square differences between model 0 and model 1 (result ranges from 1270.219 df 6 to 3642.620, df 20) as seen in Figure 5.2 and Table 5.9. All assessment of the results demonstrates strong convergent validity in the study. Details are in Table 5.13.

Table 5.8 Convergent Validity Tests (Bentler-Bonett Coefficient )

Model/Coefficient Model 0 ( 0) Specified Model (s) Coefficient () = (0- s)/ 0 INNOVATION 1417.783 132.143 0.91 INTELLECTUAL CAPITAL 4240.773 313.487 0.93

Model 0
in1 In 2 In 3

Model 1
in1

Model 2
in1

In 2 In 3

In 2

pd
Inv

Inv

In 3

pc
pc1 pc1 pc1

Figure 5.2 Widamans Three Comparison Models: A simplified Example Using Innovation
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Table 5.9 Convergent and Discriminant Validity Tests (Widamans Three Models Test)
INNOVATION Model 0 0 df0 Model 1 1 df1 Model 2 2 df2 Model 0 1 0 - 1 df0 df1 Model 1 2 1 - 2 df1- df2 1417.783 21 147.564 15 15.421 11 1270.219 6 132.143 1 INTELLECTUAL CAPITAL 4240.773 190 598.153 170 284.666 167 3642.620 20 313.487 3

5.4.1.6 Discriminant Validity The goal of discriminant analysis is to predict group membership from a set of predictors (Tabarnick and Fidell, 2007). Three approaches to discriminant validity

assessment are Widamans three model test, comparison of fits in pairs of the constrained, and the unconstrained models; and the comparison of variance explained, and squared correlation, among two variables. Table 5.10 shows the Widamansthree model test on discriminant analysis. Figure 5.3 demonstrates the models of constrained and unconstrained and Table 5.10 shows the comparison of constrained and unconstrained models. The comparison of constrained and unconstrained models yields results in Chi-square difference ranging from 13.804 to 24.657 (df = 1), all being significant.

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Table 5.11 shows the test of discriminate validity by comparing the average variance extracted and the square of correlations. All respective average variance extracted are larger than the squared correlation between the corresponding constructs, which demonstrates the strong support of discriminant criterion. The details of these results are in Table 5.13.

=1
IC INV VS IC INV V

HC

SC

RC

Prc

Prd

HC

SC

RC

Prc

Prd

C Constrained Pair Model Unconstrained Pair Model

Figure 5.3 Models for Discriminant Validity Test (Simplified Example of Intellectual Capital and Innovation Constructs) Table 5.10 Assessment of Discriminant Validity (Constrained and the Unconstrained models)
Description Model Fit Indices Unconstrained TLI CFI 0.938 0.944 0.921 0.948 0.939 0.964 0.941 0.929 0.954 0.949 0.970 0.956 Constrained TLI CFI 0.936 0.941 0.919 0.946 0.933 0.958 0.936 0.926 0.951 0.943 0.966 0.951 Model statistic Unconstrained (df) 798.073 (399) 751.832 (318) 497.196 (248) 321.314 (114) 172.792 (74) 151.945 (41) Constrained (df) 814.035 (400) 768.455 (319) 511.390 (249) 345.971 (115) 189.866 (75) 165.749 (42) at 1 Df

IC with KS IC with INV IC with OP KS with INV KS with OP INV with OP

15.962 (1)* 16.623 (1) * 14.194 (1) * 24.657 (1) * 17.074 (1) * 13.804 (1) *

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Table 5.11 Test of Discriminant Validity

1. 2. 3. 4.

Intellectual Capital Knowledge Sharing Innovation Organizational Performance

1 0.56* 0.40 0.38 0.40

0.63* 0.34 0.35 0.64* 0.42 0.72*

Notes:*Diagonal elements are the average variance extracted for each of the four constructs. Off-diagonal elements are the squared correlations between constructs. For discriminant validity, diagonal elements should be larger than off-diagonal; All of the correlations are significant at the p<0.001 level

5.4.1.8 Nomological validity and predictive validity Defining a construct and operationalizing it does not suffice in the determination of its conceptual meaning. It is important to examine the relationships of the construct with its antecedent and consequences (Bagozzi et al., 1991). This is a test of nomological validity, which is achievable through correlating constructs to other constructs that they should predict (Garver and Menzter, 1999). When the constructs are correlated, the correlations between the two constructs should be substantial in magnitude and statistically significant. Bivariate correlation among the measurement items is presented in Appendix 10. The results indicate the existence of significant and positive relationships of large magnitude (r 0.5) between each second order variable and the corresponding first order variable as well as between each first order variable and its corresponding measurement items. Moreover, the results indicate the existence of a significant and positive relationship of large magnitude among intellectual capital, knowledge sharing and innovation.
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Regarding individual relationships, there is an indication of significant positive relationships among variables but of varying strengths. For example, in looking at the relationship in the link IC KS, there is a significant and positive relationship of large INV, there is a significant and OP is

magnitude. Similarly, in the relationship in the link IC

positive relationship of large magnitude. The relationship in the link of IC

significant and of large magnitude. The relationship with items for the first order variables of IC shows strong strengths that are significant and positive. In addition, the relationships of all first order variables of KS and INV and their corresponding items reveal the existence of significant and positive relationships having strong strengths. Therefore, these results reveal that all correlation values between second order latent variable are of substantial magnitude and in the appropriate direction. Also higher values are observed between the first order latent variables and their corresponding items. This provides evidence of nomological validity in this set of constructs. Figure 5.4 illustrates the testing of the individual relationships between the exogenous and the endogenous constructs. Table 5.12 presents the results of predictive validity between the exogenous and endogenous constructs. All relationships show a positive impact () ranging from 0.735 to 0.993, and t-value ranging from 9.425 to 15.476, all at p = 0.00. These results support the predictive validity criterion.

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IC

INV

HC

SC

RC

Prc

Prd

Figure 5.4 Illustrative Example of Testing Predictive Validity

Table 5.12 Results of Predictive Validity Test

Relationship IC IC IC KS KS INV - value KS INV OP OP INV OP 0.766 0.735 0.780 0.741 0.969 0.993 t- value 15.476 13.086 12.170 10.951 11.542 9.425 p-value *** *** *** *** *** ***

The structural model is used to assess the nomological validity (Min and Mentzer, 2004) as well as predictive validity (Garver and Mentzer, 1999). In this approach, the estimation of the structural model involves a procedure for empirical estimation of the strengths of each relationship between exogenous (intellectual capital (IC)) and the endogenous (knowledge sharing (KS) and innovation (INV) and organizational performance (OP)) variables as depicted in the theory. The structural model is analyzed, based on the modified measurement models using the maximum likelihood estimation (MLE) method.

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The results of the fits provided by the path IC

KS/INV

OP in the structural

model (Figure 5.9) are quite reasonable if one considers the complexity of the model, the limitation of response rate and the number of observed items (Min and Mentzer, 2004). The normed is 1625.465, CFI is 0.910 and the TLI is 0.904 while the RMSEA is 0.060. The normed meets the threshold requirement of less than 3, while the CFI and TLI values are above the 0.9 threshold value. The RMSEA fulfils the requirement of the respective thresholds (less than 0.08) according to Hair et al., (2006). As the theory suggests, there are positive paths IC OP; KS OP; INV OP as evidenced by the respective

significant critical ratios and standardized regression weights. At this point, it is concluded that positive impacts of IC on OP, on KS as well as on INV exist, supporting the nomological validity (as well as predictive validity) of the measurement scales. The results for the nomological and predictive validity tests are included in Table 5.13.

5.4.1.9 Testing Common Method Variance/ Common Method Bias

For this study, few statistical tools have used to avoid and reduce CMV/CMB. From the findings, it showed that there is no CMV or CMB exist in this study as shown in results such as: 1. Correlation values are between 057 0.72 indicated that the variables are not highly correlated therefore the variables are distinctive and exclusive (Table 5.11). 2. Discriminant Validity is to predict group membership from a set of predictors. The findings showed that construct are unique (Table 5.10 and Table 5.11)

230

3. Unidimensionality test. In this study, the results of CFA, all the regression weights (0.512 to 0.908; with significant t-values) are also 0.5, the threshold as recommended by Hair et al. (2006) as shown in Table 5.13. A good fit of measurement model, as measured by the goodness of fit index (GFI) also indicates that all items load significantly on one underlying latent variable. Table 5.16 has shown that model 5 which integrated independent variable, mediating variables and dependent variable is the best model with the lowest chi-square and lowest RMSEA indicated the model fit. Beside, the nomological network tests had shown the theoretical relationships of the variables as suggested by Meade et al. 2007). In addition, Table 5.10 of discriminant validity test has proven statistically that each variable differ. 4. The reliability and validity tests (Table 5.13) have shown that the items used in the study are reliable and valid.

Conway and Lance (2010) argue that structural equation model is theoretically sound to reduce common method bias and has not been tested empirically. However, in this study has shown that structural equation model empirically can reduce the bias as done by William and Anderson (1994). From these findings, it shown that every construct is unique and distinctive. .

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Table 5.13 Result of Construct Validity Assessment

Validity Aspect/Test 1. Unidimensionality CFA : Regression Weight : Critical Ratio : Multiple Fits Criteria 2. Reliability Cronbachs Alpha CFA : Construct Reliability : Proportion of observed variable variance in 0.7 ( also 0.5 0r 0.6) CR 0.7 R 0.3 0.911-0.958 0.78-0.85 0.327 0.795 0.943 0.83 0.431 0.750 0.816 0.940 0.82-0.88 0.404 - 0.838 0.920 0.92 0.539 - 0.777 All accepted All accepted All accepted 0.5 t 1.96 at = 0.05 GFI 0.9; RMSEA 0.080 0.666 0.843 10.661-17.479 0.924;0.046 0.656-866 13.213-19.204 0.960;0.0623 0.656-0.915 11.279-14.875 0.987;0.035 0.731-0.880 18.751-23.390 0.989;0.069 Requirement Construct IC Remarks KS INV OP All accepted All accepted All accepted All accepted

3.

Convergent Validity t 2.0 VE 0.5 CR 0.7 0.90 : Bentler-Bonnet Coefficient : Widamans three comparison Models Significant change in between model 0 and model 1 (Table 2) 10.661-17.479 0.53-0.58 0.78-0.85 0.93 13.213-19.204 0.62 0.83 11.279-14.875 0.61-0.67 0.82-0.88 0.91 18.751-23.390 0.72 0.92 All accepted All accepted All accepted All accepted

CFA : Critical Ratio : Variance Extracted : Construct Reliability

3642.620 at 20 df

1270.219at 6 at 7 df

All accepted

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Table 5.13 Result of Construct Validity Assessment (continued)

Validity Aspect/Test 4. Discriminant Validity CFA: Widamans three comparison Models : Pair-wise comparison of models

Requirement

Construct IC

Remarks KS INV OP

Significant change in between model 1 and model 2 Significant change in between constrained model ( =1) and unconstrained model ( =0) Variance Extracted be greater than squared correlation

313.487at 3 df

132.143at 1 df

All accepted

The change of ranges from 4.006 to 28.84 at 1 df. All values are significant at < 0.05. Details of the results are in Table 3

All accepted

5.

: Variance Extracted compared to squared correlation between two variables Nomological Validity CFA: Correlations in the measurement theory

All accepted

Should make sense

A visual inspection of the correlation of matrix (Table 4) shows all the correlations are in the correct direction as posited in theory

All accepted

Predictive Validity Correlating constructs to other constructs they are supposed to predict Test relationship between exogenous and endogenous variables Significant links in the Structural Model Correlations be substantial in magnitude and significant A significant positive impact should exist Regression weights, , be significant and acceptable. Critical ratios, t (2.0)

Table 3 Correlations values are greater than 0.3, in the correct directions; higher between 1st order variables and their corresponding 2md order. Positive significant impact exist for the links of : IC KS; IC OP; IC INV; KS OP; INV All accepted

All accepted OP, KS INV All accepted

Positive and significant values of Regression

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5.4.2 The mediating role of knowledge sharing and innovation

A variable is said to be a mediator, if it accounts for the relation between the predictor and the criterion variables (Hair et al., 2006; Baron and Kenny, 1986). The authors designate the requirement that all variables (predictor, criterion and mediator) be significantly correlated. To demonstrate the mediating effects, the following conditions must exist as suggested by Baron and Kenny (1986): 1. The independent variable (IC) must be significantly related to the mediating variable (KS) 2. The independent variable (IC) must be significantly related to the dependent variable (OP). 3. When the effect of the mediating variable (KS) is added in the relationship between the independent variable (IC) and the dependent variable (OP), the path coefficient must be significantly decreased. 4. The relationship between the mediating variable (KS) and the dependent variable (OP) must be significant.

Figure 5.5 illustrates the mediating effects in the direct relationship. If the direct relationship of IC and OP is reduced and remains significant after the KS is included in the model, then partial mediation is supported. If the direct relationship is reduced to a point where it is no longer statistically different from zero after the KS is included, then full mediation is supported. The important indicators include the regression weights (significant) and the model fit as indicated by the change in the statistics ().
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Mediator variable

KS
Independent variable Dependent variable

IC
IC-Intellectual capital; KS- Knowledge Sharing; OP- Organizational Performance

OP

Figure 5.5 Illustration of Mediating Effect If there is a significant improvement in the fit of the model (as indicated by ) because of the addition of the direct relationship, then mediation is not supported. If the two models exhibit similar fits, then mediation is supported. This approach to the analysis of the mediation effect is similar to that proposed by Kelloway (1995). Several authors have applied the procedure including Prajogo and Sohail (2006). This study performs tests on the mediation role of KS and INV on the relationship between IC and OP. The literature shows that there have been studies that obtained results confirming the direct relationship between the study variables as identified in Table 5.14. To accomplish the tests, the study assumes variations of the links in the baseline model, which represent the fully mediated model (Model 1 in Figure 5.8). Basically the model is constructed following the existence of the direct relationships between IC and KS, KS and OP, IC and INV, INV and OP. Model 2 in Figure 5.8 presents an additional direct link in the fully mediated model, i.e. the direct link between IC and OP. This may be interpreted as a representation that assumes the existence of a partially mediated model on the relationship between IC and OP. Similarly, the addition of the direct link between IC and
235

OP on the fully mediated model may be interpreted as representing a partial mediation effect of INV on the relationship between IC and OP.

Table 5.14 Direct Relationships between Study Variables

Relationship/Link Author(s)/Study Remarks

IC

OP

Nahapiet and Ghosal (1998); Bontis (2000, 1998); Deshpande et al. (1993); Gold et al. (2001); LeeandChoi (2003); Montequin et al. (2006); Wang and Chang (2005); Cohen and Kaimenakis (2007); Yaosheng et al. (2005) Widen-Wuff andSuomi (2003);Darroch (2005); Nahapiet and Ghosal (1998) ;Gold et al. (2001) ; Lee andChoi (2003) Gopalakrishnan (2000); Subramaniam and Nilakanta (1996); Lee and Choi (2003); Lee and Sukoco (2007); Scozzi and Garavelli (2005) Du et al (2007);Hoffman et al. (2005); Saint-Onge (2003); Darroch and Naughton (2001); Alony and Whymark 2006; Alavi and Leidner (2001); Gold et al. (2001) Oke et al. (2004); Liao and Chuang (2006); Lin and Chen (2007); Terziovski (2001); Deshpande et al. (1993); Lee and Choi (2003); Calatone et al. (2002) Alwis and Hartmann(2008); Harlow (2008); Leonard and Sensiper (1998); Du et al (2007); Hoffman et al. (2005) Darroch and Naughton (2001)

A significant, direct positive relationship prevails

IC

KS

A significant, direct positive relationship prevails

IC

INV

A significant, direct positive relationship prevails

KS

OP

A significant, direct positive relationship prevails

INV

OP

A significant, direct positive relationship prevails

KS

INV

A significant, direct positive relationship prevails

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In line with the discussion on constructing the mediation test shown earlier, the models in Figure 5.8 (Models 1, 2, 3, 4, 5, and 6) were compared to the non mediated model (Model 0) in terms of the parameters for the direct links IC OP. This test was carried

out to test and compare the fits (Chi-square differences) between the baseline model (Model 1) and each of the other models (Models 2, 3, 4, 5 and 6). A significant difference in the Chi-square () between Model 1 and any of these models means that the mediation effect is present. To ascertain whether the mediation is full or partial, the corresponding parameters for the direct link IC OP were compared with those obtained in the nonOP in the test model (Model

mediated model (Model 0). If the parameter in the link of IC

2,3,4,5, 6) is significant, but less than the one in the non-mediated model, it implies that partial mediation is supported; but if the parameter is non-significant or equivalent to zero, then full mediation is supported. In this study, the existence of significant correlation is confirmed, Appendix 10. The fits for Models 1,2,3,4 and 5 are as shown in Table 5.15 while the regression weights for each path are as shown in Figure 5.6. All significant paths are significant at p < 0.05.

Model 0
= 0.780

IC Figure 5.6 (a) Direct Effect Relationship

OP

237

This model will be used as the basic model to compare to other models in comparison of the difference of Chi-square. The results of the non-mediated model are observed to have significant regression weights of 0.780 for the link of IC Model 0. OP as in

Model 1

=0.69

KS

=0.51

IC
=0.76

OP INV
=0.58

Figure 5.6 (b) Direct and Indirect Effect Relationships Model 1 is used as the baseline model for the test.

Model 2

=0.72

KS
=0.56

=0.44

IC
=0.64

OP INV

Figure 5.6 (c) Direct Effect Relationship

238

Results for Model 2 show that path IC

OP has been reduced slightly to 0.59. The

change in fit ( = 10.1) is greater than 3.84 (tables of critical value), being a significant change in the fit, thus, demonstrating a partial mediation effect.

Model 3

=0.69

KS
=0.37(ns)

IC
=0.64

OP INV
=0.67

Figure 5.6 (d) Direct Effect Relationship In model 3, the result indicates that the path IC OP is not significant ( = 0.37,

t= 2.322, p = 0.020), less than value of 0.780 from Model 0. The change in fit ( = 1.229) is less than 3.84 (tables of critical value), being a non-significant change in the fit, thus, demonstrating a full mediation effect.

Model 4

=0.69

KS
= 0.20(ns)

=0.49

IC
=0.76

OP
=0.58

INV

Figure 5.6 (e) Direct Effect Relationship

239

The result of the test on Model 4 indicates that the path IC

OP is not significant

( = 0.20, t= 0.0.056, p = 0.956). The change in fit ( = 0.003) is less than 3.84 (tables), being a non-significant change in the fit, thus, demonstrating full mediation effect. Model 5

=0.67

KS
=0.78

IC

=0.28(ns) =0.66

OP INV

Figure 5.6 (f) Direct and Indirect Relationship The results of the test on Model 5 show that the path of IC OP is not significant

with a regression weight of 0.28 ( t = 20.024, p = 0.043). The change in fit ( = 16.7) is greater than 3.84 (tables of critical values), being a significant change in the fit, thus, demonstrating a partial mediation effect.

KS
=0.67 =0.78 = 0.15(ns) =-0.29 =0.62 = 0.32

IC

OP

INV

Figure 5.6 (g) Simplified Models for Testing the Mediation Effect of Knowledge Sharing and Innovation Model
240

The result of the test on Model 6 shows that the path IC

OP is not significant with a

regression weight of 0.15 (t = 0.644, p = 0.520). The change in fit ( = 17.8) is greater than 3.84 (tables of critical value), being a significant change in the fit, thus, demonstrating a partial mediation effect. These results when combined with the results of the regression weights indicate the existence of some support on the mediation role of KS and INV. However, KS mediates partially and INV mediates fully in Model 2 and Model 3. This makes Model 6 the best model of combination of partial and full mediation effects. Table 5.5 show the mediating effects.

Table 5.15 Fits for Models Used in Testing the Mediating Effects of Knowledge Sharing and Innovation
Model 1 2 3 4 5 6 1643.221 1653.319 1644.450 1643.218 1626.489 1625.465 df 733 733 733 732 733 731 CFI 0.909 0.908 0.909 0.909 0.910 0.910 TLI 0.903 0.902 0.903 0.903 0.905 0.904 RMSEA 0.061 0.061 0.061 0.061 0.060 0.060 10.1* 1.229 0.003 16.7* 17.8* Remarks Full mediation Model Partial Mediation Supported Full mediation Supported Full mediation Supported Partial Mediation Supported Partial Mediation Supported Mediator KS Innovation KS and Innovation KS and Innovation KS and Innovation

After demonstrating the roles of KS and INV in the model as mediating variables, the following steps analyze the structural model and test the hypotheses. This was performed as presented in the following section.

241

5.4.3 Analysis of Structural Model and Testing Hypotheses The first step in model estimation was to examine the goodness-of-fit of the hypothesized model of Figure 5.7. The observed normed was 2.22 (/df = 1625.465/731). The CFI is 0.910, TLI = 0.904 and RMSEA = 0.060. The results of the goodness-of-fit indices exhibited a strong acceptance level of overall model fit and, therefore, provided support to the overall validity of the structural model.

KS
=0.67 = 0.32 = 0.15(ns) =0.78

IC
=0.29

OP
=0.62

INV

Figure 5.7 Result of structural model

The structural model is analyzed based on the modified measurement models using the maximum likelihood estimation (MLE) method. Some authors do this by comparing the model to alternative models as outlined in Anderson and Gerbing (1988) and applied by others e.g. Li et al. 1998. The procedure involves comparing the proposed model to alternative models by conducting sequential Chi-square differences by calculating the differences between the Chi-square statistic values for the proposed model and each alternate model. The degree of freedom for the Chi-square difference equals the difference in the degrees of freedom of the pair of models being compared. This study proposes the
242

models presented in Figure 5.8, where Model 6 is the initially proposed model and Models 1,2, 3, 4 and 5 are the alternative models to be analyzed. The regression weights for each path are seen in each corresponding figure. Table 5.16 presents the results of the fit and the calculated Chi-square difference. Even though the result showed that Model 2 is the best model in term of change of chisquare, significant increase in the Chi-square value compared to the proposed model. Similarly, Models 1, 3 and 4 also show significant increases in the Chi-square values compared to the initially proposed model (Model 6). However, the study is proposing Model 5 as alternative model to basic model Model 6. The comparison of Model 5 and Model 6 produces an insignificant change in the Chi-square value leading to the conclusion that Model 5 is the most suitable among the proposed alternative models. Model 5 in Figure 5.8 is presented again in Figure 5.9 with the corresponding details. The open arrows stand for the error variance terms (unstandardized) corresponding to the measured items represented by number boxes (1, 2 or 3) for each of the twenty first order latent variables linked to either of the three second order latent variables. The regression weights for each relationship (significant at p > 0.05) with the corresponding critical ratio (t-value) in brackets are shown in the figure. The correlation coefficient for intellectual capital and organizational performance is 0.28 (t = 1.934, p = 0.53).

243

Table 5.16 Sequential Chi-square difference Tests

Model 1 2 3 4 5 6 1644.450 1653.319 1643.221 1643.218 1626.489 1625.465 df 733 733 733 732 733 731 CFI 0.909 0.908 0.909 0.909 0.910 0.910 TLI 0.903 0.902 0.903 0.903 0.905 0.904 RMSEA 0.061 0.061 0.061 0.061 0.060 0.060 18.985 27.854 17.756 17.753 1.024

Other results are presented in Appendix 9 depicting the regression weight of each link in the model being significant (as seen from the significant t-values which are all greater than 3, p 0.05) for all the links.)

Model 1

=0.69

KS

=0.51

IC
=0.76 =0.58

OP INV

= 1644.450, df = 733, CFI = 0.909, TLI = 0.903, RMSEA = 0.061

244

Model 2

=0.72

KS
=0.56

=0.44

IC
=0.64

OP

INV

= 1653.319, df = 733, CFI = 0.908, TLI = 0.902, RMSEA = 0.061

Model 3

=0.69

KS
=0.37(ns)

IC
=0.64

OP INV
=0.67

= 1643.221, df = 733, CFI = 0.909, TLI = 0.903, RMSEA = 0.061

Model 4 KS
= -.20(ns) =0.76

=0.69

=0.49

IC

OP
=0.58

INV

= 1643.218, df = 732, CFI = 0.909, TLI = 0.903, RMSEA = 0.061

245

Model 5

KS
=0.67 =0.78

IC

0.28(ns)

OP INV

=0.66

= 1626.489, df = 733, CFI = 0.910, TLI = 0.905, RMSEA = 0.060

Model 6 KS
=0.67 = 0.32 = 0.15(ns) =0.78

IC
=0.29

OP
=0.62

INV
= 1625.465, df = 731, CFI = 0.910, TLI = 0.904, RMSEA = 0.060

Figure 5.8 Simplified Models for sequential Chi-square difference Tests

The effects of each indicator (item), as represented by the regression weights in Appendix 9, have a direct relationship with the second order variables in the sense that they are caused by these second order variables. Increased activities related to any of the indicators are a reflection of an increase in the level of the first order variable and, consequently, the second order variable.
246

The results of the fits provided by the paths IC

KS

INV

OP are quite reasonable, if

one considers the complexity of the model, limitation and number of observed items (Min and Mentzer, 2004). The Normed was 2.219, CFI was 0.910, TLI was 0.905 while RMSEA was 0.060. The Normed meets the threshold requirement of less than 3 while the CFI and TLI values are above the 0.9 threshold. The RMSEA fulfils the requirement of the respective thresholds (less than 0.08 and 0.07, respectively). All threshold points are according to Hair et al. (2006). Considering the large number of observed items, the values of GFI (0.805) and AGFI (0.782) are within what Min and Mentzer (2004) term as reasonable fits in terms of overall model fit indices.

247

.
1 1 1 1 1 1 1 1 1 1

1 1 1 1 1 1

HC R=0.89 KS 0.84 (14.925) R=0.96 SC IC 0.96(17.496*) 1 0.67 (13.357*) 0.78(4.413*) 0.15(0.520) OP 0.29 (0.833) R=0.80 1 INV 0.66(2.8741*) 0.85(0.9328*) 0.32(3.583) R=0.51
1 1

1 1 1 1 1 1 1

1 1 1 1 1 1 1

PD RC
1 1 1 1

PC

= 1625.465, , df = 731 CFI= 0.910, TLI= 0.904, RMSEA= 0.060

Figure 5.9 The Final Structural Model Weights and path coefficients are shown above with their corresponding t critical value in bracket. The lines indicate significant paths, the dotted lines indicate insignificant paths and the gray lines indicate new paths
248

5.6

Summary of Hypotheses Findings

The causal relationship between four constructs Intellectual capital (IC),

Knowledge Sharing (KS), Innovation (INV) and Organizational Performance (OP) were examined. Eight hypotheses were formed based on previous studies and frameworks, and they were tested with the collected data using Structural Equation Modelling of AMOS. The summary of the eight hypotheses is shown in Table 5.17. Testing of the hypotheses is to show the evidence of support that a theoretically specified model fits the sample data. Table 5.17 Summary of Hypotheses
Hypotheses H1:Intellectual capital has a positive relationship on organizational performance H2:Intellectual capital has a positive relationship on knowledge sharing H3:Knowledge sharing has a positive impact on organizational performance H4: Intellectual capital has a positive relationship on innovation H5: Innovation has a positive relationship on organizational performance H6: Knowledge sharing positively mediates the relationship between intellectual capital and organizational performance H7: Innovation positively mediates the relationship between the intellectual capital and organizational performance H8: Knowledge sharing and innovation positively mediates the relationship between intellectual capital and organizational performance Details There is a positive relationship between Intellectual capital and organizational performance. There is a positive relationship between intellectual capital and knowledge sharing. There is a positive relationship between knowledge sharing and organizational performance There is a positive relationship between intellectual capital and innovation. There is a positive relationship between innovation and organizational performance Result Supported

Supported Supported

Supported

Supported

A positive relationship between intellectual capital and organizational performance is mediated by knowledge sharing

Not Supported

A positive relationship between intellectual capital and organizational performance is mediated by innovation

Supported

A positive relationship between intellectual capital and organizational performance is mediated by knowledge sharing and innovation

Supported

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H1: Intellectual capital has a positive impact on organizational performance The statistical significance of IC and OP representing H1 confirms that intellectual capital has a positive relationship with organizational performance, with a path coefficient of 0.78, t-value 12.170 and significant at p < 0.05. A total of 66.7% of organizational performance is explained by intellectual capital. This finding is supported by previous studies on the positive relationship between intellectual capital and organizational performance (Wang and Chang, 2005, Yang, 2008, Yaosheng et al., 2005) where intellectual capital is identified as a key resource and driver of organizational performance (Itami and Roehl, 1991; Teece, 1998, Mayo, 2000, Li, 2007; Hong et al. 2008))

H2: Intellectual capital has a positive impact on knowledge sharing The standardized coefficient of the effect of intellectual capital on knowledge sharing provides support for hypothesis H2. This indicates that intellectual capital has a positive impact on knowledge sharing with a path coefficient of 0.766, t-value 15.476 and significant at p < 0.05. Intellectual capital has 88% variance explained by knowledge sharing. This finding is similar to the previous studies of Lee and Choi (2003), Yang (2005), Cheng et al., (2008). Li and Zhu (2009) also found that intellectual capital has a strong positive relationship to knowledge sharing.

H3: Knowledge sharing has a positive impact on organizational performance The significant standardized coefficient of the direct link of knowledge sharing and organizational performance supports hypothesis H3, showing that KS has a direct positive influence on organizational performance with a path coefficient of 0.741, t-value 10.951
250

and significant at p < 0.05. Knowledge sharing has 69.7% variance explained by organizational performance. This finding is similar to previous studies done by Yang (2005), Cheng et al., (2008), Du et al., (2007), and Hoffman et al., (2005). This is similar to the findings of Yang (2007) and Hsu (2008) on the organizational knowledge sharing to organizational performance in Taiwan

H4: Intellectual capital has a positive impact on innovation The standardized coefficient of the effect of intellectual capital on innovation provides support to hypothesis H4 with a path coefficient of 0.735, t-value 13.086 and significant at p < 0.05. This finding is similar to previous studies done by Yang (2005), Cheng et al., (2008), Du et al., (2007), and Hoffman et al., (2005). This shows that intellectual capital positively impacts innovation. The result of correlation analysis supports the indication that intellectual capital and its measures are significantly related to innovation and its measures.

H5: Innovation has a positive impact on organizational performance Similarly, the significant standardized coefficient of the direct link between INV and OP, supporting hypotheses H5, shows that INV has a positive impact on OP. This result is further demonstrated by the findings of the correlation analysis that suggest that INV is significantly and positively related to OP measures. This indicates that INV as an intermediate predictor for a firm to achieve satisfactory performance.

251

H6: Knowledge sharing positively mediates the relationship between intellectual capital and organizational performance Knowledge sharing does not mediate the relationship between intellectual capital and organizational performance with path coefficient of 0.36 (t = 0.784) .Even though the impact is positive however the effect is not significant and weak. This finding is contrasted with other findings such as Liao and Chuang (2006) found that knowledge sharing

mediates the relationship of intellectual capital and organizational performance (Hoffman et al, 2005; Gloet and Terziovski, 2004; Wah et al. 2005, Steinheider and Al-Hawamdeh, 2004). However, this result is supported by Kim (2008), Garud and Nayyar (1994)

H7: Innovation positively mediates the relationship between intellectual capital and organizational performance The results include a substantial change in the chi-square after entering the innovation variable ( = 17.758, df= 1, p<0.01) as the mediating variable between IC and OP, it fully mediates the relationship. This is in line with the study done by Hult et al. (2004). As reflected by the R, in this model 80 percent of variance in innovation ( = 0.64, t=13.822) is explained by intellectual capital and the 51.1 percent of variance in organizational performance ( = 0.56, t=10.522) is explained by innovation. This implies that while innovation is an important direct driver of performance, it also appears to be a necessary mediator of the link between IC and OP. This finding is similar to Wang and Chang (2000), Hsu and Fang (2009) and Chen et al. (2001) who observed the mediating effect of innovation on organizational performance and intellectual capital. Lin and Chen (2007) found R = 0.411 for innovation of SMEs in Taiwan.
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H8: Knowledge sharing and innovation positively mediates the relationship between intellectual capital and organizational performance

Knowledge sharing and innovation partially mediates the relationship between intellectual capital and organizational performance, with51% variance explained in organizational performance by knowledge sharing and innovation. Intellectual capital has a path coefficient of 0.67 to knowledge sharing, which contributes 89% variance explained by knowledge sharing. It also shows a strong path coefficient between knowledge sharing and innovation at 0.78 with 85% variance explained by innovation. Knowledge sharing has a strong link to product innovation with79% of variance explained by knowledge sharing. The process innovation has 42% of variance explained by knowledge sharing with a significant positive link. This result is consistent with the research that shows the relationship of knowledge sharing and innovation (Koenig, 1998; Steinheider and Hawandeh, 2004). This finding indicates that firms will achieve a higher level of innovation when organizational members have more social interaction such as trust, communication and share more frequently and effectively (Huang and Li, 2009). This is supported by Abbot et al. (2006), Cavusgil et al. (2003), Saenz, Aramburu and Rivera (2009).

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5.7

Summary
This chapter presented the research findings. The descriptive analysis was carried

out to check the response bias, test of normality and test of collinearity and linearity. The data was seen to be normally distributed. A structural equation modelling approach was applied to the data using the AMOS version 16.0 software packages. Through CFA, the constructs were tested for validity and proven to possess validity in all tested aspects. Eight hypotheses were tested with a positive result. The test of mediation of knowledge sharing and innovation are possible using structural equation modelling. The tests showed that knowledge sharing and innovation partially mediate the relationship of intellectual capital and organizational performance. In the next chapter, the discussions derived from the researchs findings are discussed. The chapter provides answers to the research questions presented in the beginning of the study as well as the concluding remarks for this study.

254

CHAPTER SIX DISCUSSION AND FINDINGS

6.1 Introduction
This section looks over the results of the data analysis covered in Chapter Five of this study report. The findings and implications for the industry will be discussed

thoroughly as well as the impact on practitioners. Research questions will be answered and explanations will be provided.

6.2

Review of Data Analysis Results

The presentation of the key findings of this research covers the findings from the

various stages of the research. The findings provide a description of how the study firm manages its organizational resources and what makes it survive in the challenging and demanding business environment. The importance of these findings lies in the identified actual practices, actual intellectual capital measures and their influences on the performance of Small and Medium Enterprises (SMEs). It is important to note that the discussion in this chapter is based on the results from the small and medium enterprises that are operating in manufacturing and services: 56 percent comprise small-sized firms while another 44 percent represent medium-sized firms. It has been perceived that intellectual capital, knowledge sharing and innovation are very different between small and mediumsized firms. However, the difference of means between small and medium firms is not that much being 5.52 and 5.07, respectively. Therefore, it is reasonable to generalize the findings to fit the industry.

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6.3

Readdressing the Research Questions

The presentation in this section provides answers to the research questions that were

raised by the researcher in the initial stage of this study. The four research questions were posed to guide the study process. This section revisits the questions and furnishes answers with elaborations according to the findings of the research. The four research questions are: RQ1: What is the impact of SMEs intellectual capital on organizational performance? RQ2: Does knowledge sharing mediate the relationship of intellectual capital and organizational performance? RQ3: Does innovation mediate the relationship of intellectual capital and organizational performance? RQ4: Does knowledge sharing and innovation mediate the relationship of intellectual capital and organizational performance? 6.3.1 The Relationship between Intellectual Capital and Organizational Performance RQ1: What is the impact of SMEs intellectual capital on organizational performance? The first question, what is the impact of SMEs intellectual capital on organizational performance (RQ1) can be answered by the survey findings. The intellectual capital has a direct positive impact on organizational performance. This finding implies that the knowledge from employees, from the systems, structure and from customers and the market can help increase the performance of the organization. It shows that the collective knowledge of the organizations, from its employees, its operation and its customer base,
256

does have an impact on the performance of the organization. It means that intellectual capital is more important to an organization that has a higher organizational performance. This indicates that by utilizing intellectual capital, it will drive better organizational performance. Often, intellectual capital is also referred to as organizational resources or assets that determine the survival of the organization as highlighted by Wang and Chang, (2005), Yang, (2008), Yaosheng et al., (2005), where intellectual capital is identified as a key resource and driver of organizational performance (Itami and Roehl, 1991; Teece, 1998, Mayo, 2000, Li, 2007; Hong et al. 2008). The intellectual capital of SMEs can help them to improve their organizational performance if the knowledge is directed and controlled accordingly. This study looks at intellectual capital as a bundle of organizational resources. The concept of intellectual capital has three dimensions that are highly interrelated and difficult to segregate in practice (Goshal and Nahapiet, 1998), therefore, it is more practical to see the impact of intellectual capital on organizational performance as one dimension. Shiu (2006) and Chan (2009a, 2009b) empirically tested intellectual capital as one dimension towards organizational performance by utilizing VAIC (Value-Added Intellectual Capital) methodology and found that intellectual capital has a strong impact on the organizational performance of the companies on the Hang Seng Index in Hong Kong. Intellectual capital plays a vital role in facilitating knowledge flow in the organization (Mu et al., 2008). As human capital and structural capital are heavily loaded with knowledge (Hsu, 2008), especially tacit knowledge from its people and its operation, intellectual capital is a way to manage the organization to create wealth. An organization that knows how to capitalize its knowledge by utilizing the knowledge of its employees including their experience and education,
257

knowledge from its system and operation in cutting down cost but increasing efficiency, and utilizing its customers and market information to its advantage, will be able to create more value and stay ahead of its competitors. Therefore, the management should recognize that intellectual capital is a vital facilitator to enhance organizational performance.

6.3.2 The Relationship between Intellectual Capital, Knowledge Sharing and Organizational Performance RQ2: Does knowledge sharing mediate the relationship of intellectual capital and organizational performance? The finding from the data analysis shows that intellectual capital has an influence on knowledge sharing. The result indicates that organization has a high level of intellectual capital and can help in disseminating the knowledge among the employees. The result also indicates that when collective knowledge is shared, it will enhance the organizational performance. However, knowledge sharing does not influence the impact of intellectual capital on organizational performance. The knowledge transformation and conversion takes place mostly in human capital, and structural capital is the heart of knowledge sharing (Hsu, 2008). It takes place in either a positive manner or vice-versa. Lee and Choi (2003) in their study found that organizational resources have an impact on knowledge sharing, as did the studies done by Yang (2005) and Cheng et al., 2008). Li and Zhu (2009) also found that intellectual capital has a strong positive relationship to knowledge sharing (Hsu, 2008). Ravn (2004) state that knowledge is must not be stored in databases but organizational members must take intelligent actions, to bring out the dynamics nature of knowledge in pursuit of their goals which is through knowledge sharing. However, Kim
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(2007) highlighted that in Asia context, knowledge sharing is taken place at individual level which resulted the improved performance on individual but not towards the organizational performance. This statement is further strengthen by Loebbecke et al. (2003), that SMEs provide an interesting setting as they are knowledge generators, but is poor at knowledge exploitation. Futhermore, full knowledge sharing is enabled by intention of full knowledge sharing; partial KS is enabled by the uniqueness of the knowledge (Ford & Staples, 2010). To deploy knowledge sharing is not an easy task. Knowledge sharing in SMEs is unsuccessful even though supported by ICT (Mason et al. 2008) due to lack of understanding in socio-technical and conventional channels (face-to-face). A mixture of the channels is necessary for SMEs. Many SME owner-managers, however, are not familiar with the conceptual basis and potential benefits of KM models, the latest KM software tools and so forth. In order to encourage to be willing to share ideas, information and knowledge for collective intelligence for the organization, it requires visionary leadership, a high organisational care culture (Von Krogh 1998 as cited in Menkoff et al. 2004) where efficient and suitable communication and infrastructure exist. One possible explanation could be that only certain SMEs benefit from internal knowledge sharing, namely those that rely heavily on cumulative knowledge or operate in more dynamic environments or under other specific conditions (Garud and Nayyar, 1994 as cited in Zhou and Uhlaner, 2004). The weak support found for the mediating role of knowledge sharing in SMEs organizational performance could be due to few reasons such as the size of SMEs that is too small or the diversity of their internal expertise too limited to benefit from such sharing. Or perhaps there are contingencies for which such sharing is less effective with respect to

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innovation. The environment is also important for to encourage knowledge sharing. Culture and encouragement from top management would promote productive knowledge sharing. Study in Thailand has shown that the company was successful in creating a sharing attitude and atmosphere by building relationships and adjusting the sharing and learning approaches to fit in with the nature of the target groups. Lacking of a proper and planned knowledge sharing activities could dampen the productive knowledge sharing. In order for owners/managers to ensure that a quality knowledge sharing session is taking place, they have to take an initiative by guiding the people into producing good ideas during the session. One possible explanation could be that only certain SMEs benefit from internal knowledge sharing, namely those that rely heavily on cumulative knowledge or operate in more dynamic environments or under other specific conditions (Garud and Nayyar, 1994). Knowlege sharing is still vital to organizational performance. The bundle of knowledge that exists in the organization can further help improve the performance of the organization if it is a process through knowledge sharing, which increases the value of knowledge and makes it more efficient. Mechanisms need to be in place to assist the sharing of information and ideas between individuals and they need to possess the skills whereby they learn about and from each other (Cornell and Voola, 2007). Agndal and Nilsson (2007) also point out that knowledge sharing is a way for intellectual capital to be generated in order for intellectual capital to remain effective. While Plessis et al. (2006) found that intellectual capital through knowledge sharing provides entrepreneurs with important skills such as negotiation, leadership, communication, problem solving, assessment and critical thinking. Ruta and Macchitella (2008) support the finding on the relationship of intellectual capital and knowledge sharing, as efficient intellectual capital not only influences the motivation of the
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individual to share knowledge within the organization but also encourage employees to contribute in terms of the quality and quantity of the knowledge to other members in the organization. These findings reveal that organizations that consider knowledge sharing to be a superior, compatible and uncomplicated means of achieving organizational objectives, will be able to use their intellectual capital for higher organizational performance. This also strengthens the previous studies (Lin and Lee, 2005; Pablos, 2005; Hussi, 2004; Li and Zhu, 2009) in which knowledge sharing involves social and human interaction that enhances the value of knowledge held by intellectual capital and, thus, boosts the organizational performance. Widen-Wulff and Suomi (2003) state that intellectual capital is the foundation or antecedent to knowledge sharing and, therefore it can leads to a better business performance. Organizations should not only manage knowledge itself, but also the knowledge worker, organizational structure and customers continuously to obtain and sustain higher organizational performance (Lee, 2004). The ability of the company to interact with its employees as well as relevant partners will influence the profitability of the entire capital and, hence, improved the economic performance of the company (Jakobsen, 2003). Husted and Michailova (2002) argue that there is no standard wisdom of how to develop knowledge sharing activities as some of the knowledge sharing activities in large organizations failed and turned hostile. Knowledge sharing hostility takes place when individuals are against the knowledge sharing activities and refuse to share their knowledge. In promoting and encouraging knowledge sharing, managers have to set a good

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example by sharing their own knowledge, share relevant success and positive stories and create a high degree of transparency. Therefore, knowledge sharing should be encouraged extensively in the organization to assist employees to share the quality and quantity of their knowledge. Knowledge that is embedded in the intellectual capital will be able to grow through knowledge sharing and, thus, knowledge creation could be created. It is obvious that organizations that utilize knowledge sharing will be able to increase the value of their intellectual capital in achieving higher organizational performance. This is supported by Xia et al. (2007) in their SMEs study in Singapore that employees skills, professional and technical knowledge with firms internal and external relationship are the significant predictors in organizational performance. Knowledge sharing has a strong positive impact on organizational performance as determined by Yang (2005), Cheng et al., (2008), Du et al., (2007), Hoffman et al., (2005), Keskin (2005). Choi and Lee (2002) stress that the process of knowledge sharing must be in the streamline of the interplay between human-orientation and technology information. In this study, intellectual capital and knowledge sharing were determined to be very strongly related. Organizations that foster intellectual capital and knowledge sharing lead to effective firm performance (Wang and Lan, 2008). Owners striving to better improve their organizational performance will be well served by organizational knowledge sharing by focusing their intellectual capital. Ruta and Macchitella (2008) found that the willingness to share knowledge depends on the structural or social capital on the quantity of knowledge shared but the quality of knowledge shared depends on human capital. Wicket and Herschell (2001) point out that in
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SMEs, the flat organization structure (Rita and Macchitella, 2008) and closeness to its customers are the SMEs strengths. A small or medium-sized company that can successfully leverage its knowledge about current and potential customers can ultimately beat competitors through this sustainable advantage. In addition, in small or medium-sized companies, personal relationships have traditionally been a major contributor to success.

6.3.3 The Relationship between Intellectual Capital, Innovation and Organizational Performance

RQ3: Does innovation mediate the relationship of intellectual capital and organizational performance? The findings show that intellectual capital has a positive relationship with innovation. This indicates that organizations with a high level of intellectual capital are significantly better in their innovation than organizations with low intellectual capital. The findings suggest that innovation involves to a broad extent the collective knowledge of human capital, structural capital and relational capital that enables the implementation of new ideas, processes, solving-problem means, products, services or business model (Lin and Chen, 2008). The ability of a firm to innovate and improve continuously has been proven to be related to the employees skills and knowledge (Nonaka, 1991; Nonaka and Kenney, 1991). The results correspond with the findings of Calatone et al. (2202) that a firm has a better innovative capability to further enhance its innovation when its unique competence is more distinctive. This unique competence of an organization can be regarded as its organizational intellectual capital.
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The other findings show that innovation has a positive relationship to organizational performance. The results also endorse the positive relationship between innovation and organizational performance, which is similar to the previous studies by Norbani and Saat (2008) on the innovation impact on organizational performance in Malaysian SMEs as well as Hilmi (2008), and is similar to previous studies (Gopalkrishan, 2000; Daneels, 2002; Lee and Sukoco, 2007). This is also supported by Hadjimanolis (2000) in his study on small manufacturing industries in Cyprus, when he investigated the impact of the characteristics of organizational members, characteristics of firm and environmental factors to innovation and organizational performance, which showed a positive strong impact of independent variables to the dependent variable while considering the mediating effect of innovation (King, 1990; Wolfe, 1994; Avlonitis et al., 1994). Yamin et al. (1997) found that innovation is the antecedent of organizational performance in the Australian manufacturing industry. Hobday (1996) found in his study on Malaysian SMEs innovation that innovation is central to an organizations success. This finding is consistent with a study done by Wolff and Pett (2006), which found that process innovation and product innovation are SMEs strategic orientation to innovation. This is further supported by Hollestein (1996), Pratalli (2003), Susman et al. (2006).

The results also indicate that organizations that have a high level of intellectual capital are likely to generate new ideas and develop new business opportunities, thus, facilitating innovation activities (Darroch and McNaughton, 2002) significantly better in their organizational performance than those with a low level of intellectual capital. These

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results suggest that when knowledge is combined, especially knowledge from customers and market, it would help illuminate the product and features should be developed. When innovation is considered in the relationship between intellectual capital and organizational performance, it improves the organizational performance. The result corresponds with the findings of Calatone et al. (2002) and Chen et al. (2006). This proves that innovation is an important link between intellectual capital and organizational performance. The mediating effect of innovation is further supported by Han et al. (1998) who empirically tested and substantiated innovations mediating role in the market-orientationcorporate performance relationship (Agarwal et al. 2003; Yli-Renko et al. 2003). By financial measures, organizational performance of SMEs is positively affected by the propensity for innovative activities, efficient organizational structure and use of external indicators for improving entrepreneurial performance (Jo0 and Mrio, 2008), which is similar to the findings of this study.

6.3.4 The Relationship between Intellectual Capital, Knowledge Sharing, Innovation and Organizational Performance

RQ4: Do knowledge sharing and innovation mediate the relationship of intellectual capital and organizational performance? The final question concerning whether knowledge sharing and innovation mediate the intellectual capital and organizational performance (RQ4) has been answered with the strong positive result of the mediating effects of knowledge sharing and innovation on the
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relationship between intellectual capital and organizational performance. The results indicate that when knowledge is shared, organizations have a high level of innovation. Organizations involved in a high level of knowledge sharing are better in their innovation as collective knowledge from employees, system, structure, customers and market enables the generation of new ideas for products and a reduction in the cost of process innovation. The results indicate that organizations with a high level of intellectual capital need to be involved in knowledge sharing in generating innovation to enhance organizational performance. However, the results indicate that when knowledge sharing is considered, intellectual capital does not have an impact on innovation. The significant effect of intellectual capital on knowledge sharing and innovation suggests that knowledge sharing and innovation are important constructs. The strong connection of intellectual capital and knowledge sharing is consistent with Wiig (1997), Ruta et al. (2008), and Doctor and Ramachandran (2008). The strong effect of knowledge sharing on innovation is consistent with the study done by Mei and Nie (2007) that highlights the importance of a firms knowledge interaction. This shows that knowledge sharing is a key issue in order to enhance the innovation capability of organizations (Saenz et al., 2009; Lee and Choi, 2006), which, in turn, enhances the organizational performance (Lee and Sukoco, 2007). A study done by Huang and Li (2008) reveals that knowledge sharing is coupled with mutual trust and that communication helps organizations to be innovative (Gilbert and Cordey-Hayes, 1996). This empirical result suggests that organizations with a high degree of knowledge sharing among its employees can produce more innovation.

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Chen and Huang (2007) found that knowledge sharing is the mediating link between human resource strategic planning and innovation relationship, which supports this studys finding on the effect of knowledge sharing on intellectual capital and innovation relationship. The findings show that together knowledge sharing and innovation are the mediating mechanisms through which intellectual capital benefits organizational performance. This finding supports other findings on how managing knowledge as a strategic resource is one of the foundational weapons that enables a firm to sustain distinctive competencies and competitive advantages (Nonaka and Takeuchi, 1995; Grant, 1996; Spender, 1996; Sarin and McDermott, 2003, Argote et al., 2003). Brachos et al. (2007) found that intellectual capital is crucial for fostering knowledge sharing and innovation. This contribution is important since the need for developing an organizational context where knowledge sharing and innovation flourish is constantly put forth in the business press while the empirical and research based evidence for its importance has been scarce. The analysis further reveals that knowledge sharing and innovation fully mediates the relationship between intellectual capital and organizational performance, which is the contribution to intellectual capital theory as well as innovation theory and its relation to knowledge. This findings mirrors that of previous studies by Liao and Chuang (2006) who explored the integration of knowledge resources, knowledge management process capability, innovation and firm performance as well as by Lee and Choi (2007) on the knowledge management enablers, knowledge management process, innovation and organizational performance. Chang and Ahn (2005) stress that the basic building blocks of the performance-oriented knowledge management approach are knowledge, process, product and performance.
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Chen et al (2006) found in their survey that 56 percent of SMEs in the United Kingdom believe that they are effective or effective in leveraging knowledge from other organizations to improve their business performance; however, findings in this study suggest that SMEs should leverage their internal knowledge for better outcomes. Leveraging knowledge should focus on every aspect of SMEs, not just knowledge from customers and competitors alone. Knowledge sharing leads to the innovation outcomes as well as organizational performance as supported by Tsai (2001), Harlow (2008) and Smith et al. (2005). Organizations that maximize knowledge sharing opportunities and innovation capabilities are demonstrated in this study. This shows that knowledge sharing can improve other capabilities of the organizations which is consistent with the results of other studies (Zahra et al., 2000, Szulanski and Jensen, 2006), which will improve the overall operational efficiency and effectiveness of the organization. Intellectual capital can improve knowledge sharing, which in turn greatly enhances innovation and ultimately organizational performance (Mu et al., 2008). The knowledge sharing that takes place through day-to-day management processes appears to be the most relevant, whereas in the case of small and medium enterprises, people focused knowledge sharing is the most important (Saenz et al. 2009). Dynamic teamwork, more often than not, arises from a small team whereby every member has the opportunity to contribute and share. Size is important in innovation. Today, bigger organizations opt for smaller teams to generate new knowledge and ideas. SMEs are always regarded as the best platform for innovation because of their small size and closeness to the main knowledge and idea contributors its customers. This integrative process from
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intellectual capital to knowledge sharing and innovation leads to higher performance in the organization as shown in this finding. Market orientation is important for SMEs; however, most SMEs are dependent on government agencies in manoeuvring their market orientation. Therefore, SMEs should start paying attention to what is happening in the market they are operating in while strengthening their relationship with their customers. In addition, the findings show the positive impact of knowledge sharing on innovation, which has been supported by the findings that show that knowledge sharing is an important antecedent to innovation. Even though knowledge sharing sounds easy, in reality, it is difficult to get people to share their knowledge as people consider that knowledge is power. Sharing knowledge during social gathering is simple but sharing knowledge for the sake of the organizations performance is a challenge. Innovation is a resource-intensive business where managers must continuously build and exploit unique resources and capability, especially from their people (Yap et al., 2005). Innovation is a product of creative ideas. Knowledge sharing is idea generation and idea implementation that requires innovation. Japan has long shown to the world how much their knowledge sharing practices have helped them be more competitive and innovative. This study also shows that knowledge sharing acts as a mediator between intellectual capital, innovation and organizational performance. These findings suggest that organizational performance does not occur in a vacuum but is determined by a certain set of strategic choices made by the owners. The next section shows the summary of the findings of this study.

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6.4

Summary

Table 6.1 shows the summary of the research questions as discussed earlier.

Table 6.1 Summary of Discussion

Research Question RQ1: What is the impact of SMEs intellectual capital on organizational performance?

Objective To investigate the relationship between intellectual capital and organizational performance in SMEs To find out the impact of knowledge sharing on the relationship between intellectual capital and organizational performance. To find out the impact of innovation on the relationship between intellectual capital and organizational performance. To investigate the mediating effects of knowledge sharing and innovation on intellectual capital and organizational performance.

Data Analysis Intellectual capital in SMEs influences organizational performance.

RQ2: Does knowledge sharing mediate the relationship between intellectual capital and organizational performance?

Knowledge sharing has a weak impact on the relationship between intellectual capital and organizational performance.

RQ3: Does innovation mediate the relationship between intellectual capital and organizational performance? RQ4: Does knowledge sharing and innovation mediate the relationship between intellectual capital and organizational performance?

Innovation has a strong impact on the relationship between intellectual capital and organizational performance. Intellectual capital has an impact on organizational performance through knowledge sharing and innovation. The best path for better performance is starting with intellectual capital through knowledge sharing and innovation. Knowledge sharing and innovation partially mediate the relationship between intellectual capital and organizational performance.

Source: compiled by researcher.

The presentation in this section provides answers to the research questions posed by the researcher in the initial stage of the study. Four research questions were posed by the
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researcher. The questions have been used to guide the study process. This section revisits the questions and furnishes answers with elaborations according to the findings of the research. This chapter presented the research discussions. The intellectual capital has a strong positive impact on organizational performance. Knowledge sharing is an important link between intellectual capital and organizational performance, which helps to enhance the performance. Innovation has also proven to be an important link in the relationship between intellectual capital and organizational performance. The intellectual capital through knowledge sharing and innovation gives a better performance of SMEs. Knowledge sharing also has a strong positive impact on innovation. Together, knowledge sharing and innovation are the important links for intellectual capital to enhance the organizational performance. In the next chapter, the conclusions and recommendations are presented.

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CHAPTER SEVEN CONCLUSION AND RECOMMENDATIONS

7.1 Introduction
This study has met its research aims in gaining an understanding of the role of intellectual capital, knowledge sharing and innovation in SMEs. This chapter presents the conclusion based on the results derived from the entire process of conducting this study. The limitations and areas for future research in the subject are also presented. Recommendations to practitioners and academicians of the studied practices are offered. This study examined the intellectual capital framework of SMEs in Malaysia. An integrated framework has been developed with the inclusion of knowledge sharing and innovation as a link between intellectual capital and organizational performance. Most SMEs are unaware of the advantage of their intellectual capital and seek support, especially in terms of financial support from the government to improve their performance. This study has shown that SMEs intellectual capital together with its knowledge sharing practices and innovation can help SMEs to be independent without being heavily reliant on the government. The practical implications of this study have point the fact that SMEs are a KM player but might not be in an effective way. Most researchers and authors (Levy et al. 2003, Lim and Aspinwall, 2006) stress that SMEs are not ready to embrace knowledge management as they are lacking in terms of finance, knowledge, expertise and human capital. However, this study has shown that knowledge sharing is actively practiced in SMEs; therefore, it will give SMEs an
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opportunity to be further involved in knowledge management. Knowledge sharing is essential for the success of product development and business processes. Recognizing the importance of intellectual capital may give practitioners further insights into how they can improve their intellectual capital. Again, motivating its human capital through knowledge sharing could encourage creativity and ideas. This study has attempted to increase the understanding and awareness of intellectual capital, knowledge sharing and innovation for owners and managers who are seeking to improve their organizational performance. Therefore, the results of this study can serve as a useful source of information for in-house training material on intellectual capital, knowledge sharing and innovation.

7.2

Limitations and Suggestions for Future Research

This study is not without limitations. These limitations can be addressed in future

research work that may focus on studying the relationships among variables used in this study as well as in related areas of research. The first limitation is the geographical factor. Most of the respondents are from the Central region of Malaysia where industrial operations are centralized. It was not possible to extend the survey to Sabah and Sarawak due to the limitation of time and logistics. This study perceives that the manufacturing sector of SMEs have a similar background, resources and environment, however, in reality, issues such as geographical factors could influence the operating system of the firm. Firms that operate in the industrial states such as Selangor, Kuala Lumpur and Johor might face tough competition that motivates them to be more innovative and to produce different types of innovation compared to firms that operate in smaller states like Terengganu, Perlis, etc. Therefore, future research should be
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conducted throughout Malaysia to gain a better understanding and to observe the different practices. Secondly, the data presented in this study is cross-sectional. These influencing factors were measured at a static point rather than as they were developing, thus, losing the richness of time explanation. It is important to focus on long-term effects, especially on knowledge sharing behaviour and innovation practices. Future research can gather longitudinal data to examine the causality and interrelationships between variables that are important to intellectual capital, knowledge sharing and innovation. Thirdly, the data was collected in a single country (Malaysia). Potential culture limitations should be noted, especially the cultural differences among the firms or employees that influence the perceptions of sharing knowledge and innovation practices. The research model should be tested further using samples from other countries to generalize or modify the concepts. In addition, cultural differences influence employee perceptions regarding knowledge sharing and further testing would provide a more robust test of the hypotheses. Fourthly, this study was done by empirically investigating Malaysian SMEs. As large organizations have more resources and are better structured, the research model should also be tested using samples from large organizations in Malaysia for a comparison with SMEs. In addition, a survey can be conducted to compare the manufacturing and services industries between SMEs and large organizations. Lastly, having single-informant per firm is another limitation. Future research may also focus more explicitly on micro-foundations of routines, for example, by obtaining selfreports of knowledge sharing practices from individual members of each organization.
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Although obtaining multiple respondents data per organization is challenging, it would allow for a more rigorous testing of micro-foundation to intellectual capital, knowledge sharing and innovation perspectives. Furthermore, the background of the owners or managers could be another important factor in influencing the firm to practice knowledge sharing and become actively involved in innovation activities. Therefore, the entrepreneurial orientation should be given serious consideration in future studies. Future research also needs to highlight the government incentives and assistance by investigating the impact of this assistance on SMEs performance. Even though most researchers of SMEs suggested using product and process innovation, it would be better to expand the dimensions of innovation. In this case, researchers would be able to identify the types of innovation being practiced in SMEs, for example, organizational innovation, management innovation, incremental innovation, radical innovation. In Thailand, the government and universities have collaborated to carry out a survey to quantify the types of innovation in SMEs and large organizations. This exercise is not only to gather data and information for the policy makers but also to educate entrepreneurs on innovation. It is important to carry out similar research in Malaysia in recognizing, identifying and classifying types and activities of innovation. Researcher would also like to suggest for future research to look from the perspective reciprocity, power, influence and leadership in SMEs in influencing the structure of intellectual capital as well as the motivation of employees towards knowledge sharing and innovation.

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It is suggested that the complete components of knowledge management are to be included in the framework to observe the knowledge management practices in SMEs rather than concentrating only on certain parts of knowledge management such as knowledge sharing.

7.3

Theoretical Contributions/ Implications

Theoretically, a framework is proposed for empirical studies to link intellectual

capital and processes with organizational performance. This study is probably the first to establish an integrative view of intellectual capital. This framework may be used as a stepping stone for further empirical research. This study contributes to the overall understanding of the intellectual capital and the importance of human capital, structural capital and relational capital and how it affects organizational performance through knowledge sharing and innovation. Previously, the effect of intellectual capital on organizational performance has been thoroughly explored. However, instead of investigating the effect of intellectual capital from the view of three intellectual capital elements namely, human capital, structural capital and relational capital, this study regarded these capitals as one construct. These organizational resources are considered as one packaged as stated by Stewart (2001). From the theoretical perspective, this study has expanded the current intellectual capital framework by adding two mediating variables. This study has achieve what has been proposed by Skandia (1996a) that the intellectual capital model is to achieve a multiplicative effect in order to enhance rapid knowledge sharing and develop new business applications which can be facilitated by the right culture, infrastructure and leadership. SMEs will be more effective if they intentionally manage knowledge. Effective knowledge sharing process should improve performance. The
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important findings of this study imply that intellectual capital is an important indirect factor to organizational performance through knowledge sharing and innovation. In addition, intellectual capital can play a critical role in forming an effective platform for knowledge sharing. Another finding revealed that knowledge sharing is the mediator of innovation and organizational performance in SMEs. Also in this study, knowledge sharing was found to be an important link between intellectual capital, innovation and organizational performance. The findings also confirmed previous findings on the mediation role of innovation between intellectual capital and organizational performance (Yli-Renko et al, 2001; Lee and Sukoco, 2007, Lee and Choi, 2006). In this study, innovation proved to be important link between knowledge sharing and organizational performance. However, the effect of intellectual capital on organizational performance cannot be conveyed through knowledge sharing. This could be explained that in Malaysia, knowledge sharing exist but have not been practice to the maximum speed, It would take some take time for organization to fully utilize knowledge sharing for the organizational benefits which can be translated into organizational performance. It is considered as a catalyst to promote better performance. Without this catalyst it would weaken the outcome of the organization. Nevertheless, the main purpose of this study is to investigate the link between intellectual capital and organizational performance and the inclusion of knowledge sharing and innovation. The findings show that in order for intellectual capital to have a strong effect on organizational performance, it has to utilize knowledge sharing activities which in turn, lead to innovation. Knowledge sharing alone does not help SMEs intellectual capital to have a better effect on organizational performance. Previous researches have shown that knowledge sharing would be strong agent on organizational performance if the organization
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is relying heavily on knowledge or it is operating in dynamic environment or under pressure to be competitive. This can be observed in SMEs of Korea, Japan and Taiwan. One of knowledge management dimensions is knowledge sharing via interpersonal interaction. From this model, it is proposed that SMEs should start with knowledge sharing initiatives before fully committed to knowledge management practices. Knowledge sharing is the heart of knowledge management. This model has also highlighted that innovation require more than individual knowledge tacit knowledge. In creating innovation, knowledge has to be collective which is a product of knowledge sharing. Through knowledge sharing activities, more ideas could prevail for innovation to take place. This study has shown that knowledge sharing is vital to SMEs to be innovative. This model has highlighted that knowledge must be shared or flow in the organization through knowledge sharing activities as a process mechanism to encourage innovation. Utilizing knowledge sharing alone, does not contribute towards organizational performance in Malaysian SMEs. SMEs should promote and encourage the knowledge sharing activities in the organizations. This can be done through informal brainstorming sessions with an objective to create innovation. A collective knowledge sharing would help organization to gather all the good ideas towards innovation thus improve organizational performance. However, SMEs have to take extra role in promoting knowledge sharing. Among others are the support from top management, provide a conducive environment and nurture the culture of sharing knowledge. SMEs have to create informal atmosphere to encourage

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knowledge sharing to take place and build awareness on the importance of productivity which can be produced during knowledge sharing. The main idea is to observe the practices among SMEs in identifying their organizational resources. The organizational resources are well established in every organization and the issue is whether the internal factors (human capital and structural capital) compliment the external factor (relationship to outsiders) in tapping the business opportunities. This framework offers other insights for SMEs to re-value their strengths and weakness and utilize their routine activity of knowledge sharing for productivity, which is innovation. SMEs have many advantages, being small in terms of size allows SMEs to forge a strong bond among employees, develop a close relationship with customers, create opportunities to share knowledge with every employee and flexibility in any environment or situation. Through this framework, SMEs will be able to re-set their strategies, especially in innovation to excel in competition. This study is the first study on the intellectual capital of Malaysian SMEs. Rather than total reliance on government assistance and incentives, SMEs should find their own path of progress by relying on their strategies based on their capabilities and resources to enable them to access new markets increase their revenue and expand their customer base. SMEs should consistently invest in R&D and innovation in order to increase their competitiveness. By embarking on knowledge, they should be better able to understand the needs and wants of the marketplace. This study offers an insight into how SMEs can capitalize on their knowledge, which is embedded in their organizational structure, relationships and people, through its common practice knowledge sharing to be innovative. However, SMEs should pay serious attention to ensure that these knowledge sharing practices become a platform that promotes a culture that encourages knowledge
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sharing rather than allowing these knowledge sharing practices to become another platform for less important social networking. Owners or managers should lead the practice of encouraging employees to share their tacit and explicit knowledge freely and make it accessible to all organizational members. Innovation is crucial and a must-have for any organization in order to stay sustainable and profitable in the long run. In this regard, SMEs should establish a knowledge culture. Rewards and incentives need to be put in place to motivate knowledge workers to share their knowledge and, thus, encourage creativity and innovation. Knowledge about the importance of intellectual capital in encouraging knowledge sharing and innovation could help owners or managers of SMEs in motivating their employees to be more active and productive. Providing a more conducive environment that will further encourage the activity of productive knowledge sharing sessions and create a strong network among members to create, generate, acquire and utilize knowledge and turn it into creativity and innovations for SMEs to make more profits. It is very important for SMEs owners and managers to revisit their routine knowledge sharing activities and they must be willing to break away from practices that worked well in the traditional economy and embrace the changes of the knowledge-based economy. This study has practical implications. First, the relationships among intellectual capital, knowledge sharing, innovation and organizational performance may provide a guide as to how companies should achieve competitive advantage by using intellectual capital to develop knowledge sharing and innovation, Second, SMEs are advised of the important intellectual capital (human capital, structural capital and relational capital) that lead to the success of knowledge sharing and innovation. Third, the level of intellectual
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capital offers a checklist for SMEs to evaluate themselves according to the degree to which they implement the practices necessary to develop knowledge sharing and innovation. Understanding the impact of intellectual capital, knowledge sharing and innovation on organizational performance would assist owners or managers of SMEs in identifying their strategies in future development. And for SMEs to understand that knowledge sharing is crucial for success of companies operating in turbulent and uncertain environments.

7.4

Recommendations
The researcher would also like to suggest that SMEs should start auditing their

intellectual capital in recognizing their strengths and weaknesses so that they are able to identify their capabilities before they become involved in innovation. This will give their entrepreneurship direction and allow them to compete in the right market at the right time. SMEs should also start hiring qualified people to help them achieving their goals through knowledge sharing and innovation. Tacit knowledge from these qualified and knowledgeable people are considered as future investment for SMEs to be competitive in Knowledge-Based-Economy (KBE). The knowledge sharing network of SMEs should be extended beyond their organization and stakeholders. Policy makers, universities, centres of development, academics and scientists should work together with SMEs in helping them in acquiring, developing, utilizing knowledge inside and outside the organizations and, thus, transforming this knowledge into innovation. This connection allows for technological innovation and organizational innovation (Mitra, 2000). As proposed by Cavusgil et al. (2003), developing a close relationship with other firms plays an important role in
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obtaining tacit knowledge from outside firms that provides opportunities to assess other firms in-depth operation processes. In addition, in order for SMEs to be ready for knowledge management, time is needed to develop it through the deployment of various organizational resources such as management vision, team spirit, or external support from the government including funding and professional advice to devise a systematic knowledge management strategy.

Although, knowledge sharing is more effective in face-to-face interaction, the role of information technology (IT) is crucial in helping knowledge to be shared rapidly and for it to be accessible to as many people as possible. IT makes it easier to collect, store and distribute information. As SMEs are easy to manage because of its flatter structure and closer relationships among its member, it is easier to promote knowledge sharing. First of all, SMEs should nurture and cultivate the culture of knowledge sharing as well as culture of innovation which should cultivate corporate values and spirits which encourage employees to share knowledge and innovate. The top management should play a role model to encourage knowledge sharing culture in the organizations. This can be done through involvement of every member of the organization even novices and newcomers especially when they believe that their knowledge is respected, valued and used to inform decisions. Besides, organizations should align rewards and recognition to support those who behaviours are an example to others. These knowledge sharers should be moved around in the organization in encouraging others to follow suits.

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In promoting and encouraging innovation, SMEs also should establish flexible, competitive environments to nurture employees creativity. Innovation culture helps the employees in SMEs own the sense of innovation and get use to regarding innovation as their behavior norms. It is important for Malaysian SMEs to cultivate innovation corporate culture in order to develop their sustained innovation capabilities. In addition, effective incentive mechanism should be established to motivate employees innovate. The compensation system should connect the employees innovation actions with their incomes and ensure them get physical and mettle reward from their innovations. An effective motivation mechanism can mobilize employees creative potential to use and develop innovations. Since the capacity of employees especially their innovative capabilities determine the enterprises sustained innovation competence, SMEs should establish effective training system. The established effective training system is to develop their employees creativity, expand the workers skills and enables their staffs to be innovative and productive. If Governments want to stimulate SMEs to become and remain innovative, they should encourage these companies to implement an innovation directed policy. According to Keizer et al. (2002), without such a policy SMEs seem unable to successfully digest stimulating measures and subsidy schemes. It is recommended that the relevant authorities extend scalable initiatives that meet the new demands of SMEs: Maximizing the use of scarce consulting resources available to help SMEs Providing tools to SMEs Leveraging experience across the community

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A learning network should be developed for innovative SMEs. This will allow them to strengthen their core competencies, monitor their international business environment and build learning organizations as strategic priorities. In addition, SMEs should take advantage of external resources to enhance their sustained innovation capabilities. For example, SMEs may establish good relationship with universities and research institutes since it is an effective way to enhance SMEs technology innovative abilities. In the meantime, favorable relations with government and bank help SMEs raise more funds to invest in corporate innovation. The opportunities to develop core competencies through cooperation with other types of partners, including universities, consultancy companies and international SME networks for knowledge sharing should be seriously addressed in broadening the strategic horizons of innovative Malaysian SMEs. Observing and documenting how innovation takes place in SMEs is another way to identify the type of innovation of SMEs. In addition, it is important to understand how SMEs develop their creativity and innovation; therefore, third parties such as universities and consultants could further assist in imparting and sharing knowledge to improve the current practices. Because of the high cost of research and development and the long time lag to successful innovation and commercialisation, only a collaborative effort between Malaysian SMEs, large corporations and Malaysian public institutions will yield fruitful outputs. This study has provides alternative approaches for SMEs to motivate their employees towards knowledge sharing and innovation activities. The leadership of SMEs would help employees to be able to contribute more in reciprocity to the organizational performance.
284

Despite the many researches on intellectual capital, there is very little research focusing on the scope of SMEs. Researchers interested in pursuing an even stronger understanding of intellectual capital in SMEs may want to investigate different industries, use other methods, or discuss different issues It will be beneficial to the practitioners to have a framework that guides them on how to capitalize their intellectual capital and to start knowledge sharing practices and become involved in the innovation process from scratch. Local SMEs need to be proactive to seek to establish smart partnerships and strategic alliances and fully utilize their internal activities to maximize their outcomes.

7.5

Summary
This chapter concludes the findings and discussions of this study. The chapter

highlights the purpose of the study in the Introduction. Limitations and Suggestions for future research were also identified to pave the way for future research in the area of intellectual capital. Implications concerning the practical and theoretical aspects were also discussed and elaborated upon. Finally, recommendations were offered to further enhance the research of the constructs that have been discussed and also for SMEs.

285

APPENDICES

286

APPENDIX 1
Taxonomy of Intellectual Capital, Knowledge Sharing , Innovation and Organization Performance The Gap
Authors Intellectual capital Knowledge Sharing Performance: Profit and sales per employee Organizational effectiveness- non financial Innovation performance Innovation Performance financial Performance financial Manufacturers Manufacturing/s ervice University Service University Service SME < 50 employees Service and nonservice Malaysia Canada Spain US Singapore UK US Greek Organizational Outcome Industry Country Methodology

Abbot et al (2006) Argote and Ingram (2000) Bontis, Nick (1998) Bontis, Nick (1998) Carbello-Medina et al (2006) Cavusgil et al (2003) Chay Yue Wah et al (2005 Chen et al (2006) Chowdhury (2005) Cohen and Kaimenakis (2007) Damanpour et al. (1989) Gloet and Terziovski (2004) Goh (2005) Gold et al, 2001

Construction

SME

UK

Case study (1) Case study Survey -107 Survey MBA students Interview 125 firms Survey -182 Survey - 262 Survey /Interview 12 interview Survey 127 firms

SME in (< 20 employees)

library

US

Survey - 88

Manufacturing

Australia/New Zealand

Survey - 70 Case study

Hoffman et al (2005) Hsu and Fang (2008)

Organizational effectiveness- non financial

Consulting firms

US

Survey - 323

Case study Integrated circuit design industry Large firms Taiwan Interview Questionnaire 123
287

Huang et al (2007) Kalling (2007) Liao and Chuang (2006) Liebowitz and Suen (2000) Montequin et al (2006) Saenz, Aramburu and Rivera (2009) Smith (2005) Wang and Chang, (2005) Yang (2007) Yli-Renko et al (2001) Huang and Hsueh (2007)

Performance: profit Organizational effectiveness- financial

Accounting firms ManufacturingLarge org

SME

Malaysia Sweden Taiwan

Survey Case study Questionnaire survey 118

IT

SME

Spain

Case study

Performance - financial Effectiveness non financial New product development Business Performance Financial Operating performance indexes Business Performance

IT Service IT Engineering Consulting Firms Hotel SME

Taiwan Taiwan UK Taiwan

Case study Survey - database Survey - 499 Survey-225 firms Survey 101 managers

Wang and Chang (2005) Bramhandkar et al. (2007). Hult et al (2004)

(MO) (Mv)

Business Performance

Information technology industry Pharmaceutical Industry Marketing

Taiwan Tobins Q Survey 181 managers

Business Performance

139 companies on SIC Large Firms >100mil

USA

USA

288

APPENDIX 2 TAXONOMY- KNOWLEDGE SHARING (MEDIATOR)

Authors Keskin, Halit, 2005

Variables . Explicit knowledge strategy 2. Tacit knowledge strategy 3.Performance 4. Environmental hostility

Constructs Explicit orientation Tacit orientation Performance Competition (Q included)

Industry

Focus SME in Turki

Method Survey

Byounggu Choi and Heeseok Lee (2003)

Shu-en Mei and Ming Nie (2007)

Tacit knowledge Explicit knowledge KM styles: 1. system oriented 2. dynamic 3. passive 4. human-oriented corporate performance Knowledge sharing Determinants of knowledge sharing Innovation

Dynamic emphasize on KM Human oriented communication/trust/interpersonal skill Passive little interest in KM System-oriented codifying/reusing knowledge Knowledge sharing with customers Knowledge sharing with suppliers Knowledge characteristics Absorptive capacity Innovation process (technological exploration and intro of new products) and product innovation (increase efficiency thru incremental process innovation) Structural dimensions Relational dimensions Agency dimensions KS: cost of hoarding Cost of sharing Benefit sharing Organizational culture Organizational citizenship behavior

Listed Companies Middle mgr

Survey

Measurements Explicit orientation 4 items (Choi and Lee 2003) Tacit orientation- 3 items (Choi and Lee 2003) Firm performance- 6 items (Choi and Lee 2003) Environmental turbulenceDeshpande 1993 Intensity mkt competitionAtuahene-Gima (1995) Tacit and explicit is based on LR Performance (non-financial measure) Deshpandee et al (1993) and Drew (1997)

Findings Explicit (codying, stroing, transdering and exploiting internal knowledge, faster response to customer, lower cost of knowledge transaction is more for performance compared to sharing personal knowledge, communication, trust, training Dynamic style result in higher performance

Survey

Chay Yue Wah et al (2005)

Social capital/IC Organizational factors Knowledge sharing( DV)

university Online survey Educational institution

Survey

Everd Jabobs and Gert Roodt ( 2007)

Knowledge sharing Turnover intention

Nurse

Survey

Knowledge sharing on social capital (Nahapiet and Ghoshal, 1998) Knowledge sharing orientation (Liebowitz ,1999) Organizational concern (Rioux and Penner, 2001) Knowledge sharing construct self-developed

Reward and recognition, open-mindedness and cost concern of knowledge hoarding/sharing are strongest predictors of KS

289

Organizational commitment Job satisfaction

Gold et al, 2001

Knowledge infrastructure (Structure, technology, culture) Knowledge capabilities (SECI)

Structure norms/incentive systems/ modular/flexibility Technology- ties Culture trust, shared context, openness, vision Acquisition innovation, benchmarking, collaboration Conversion integration (rules/directives/ routine/decisionmaking) Application storage, sharing, contributing Protection- incentive, rules

Large organization VP/Snr mgr

Survey

Organizational culture survey (OCS -97 items) Turnover intention (14 items (Roodt, 2004b) Organizational Commitment Questionnaire (Roodt 1997) Organizational citizenship behavior ( Van Dyne and LePine 1998) Job satisfaction Minnesota Satisfaction questionnaire (Weiss et al 1967). Self-developed questionnaire (Questionnaire attached)

From perspective of social capital knowledge can be created and disseminate through network of r/ship and norms

Husted et al 2005

Widen-Wulff, G. and Suomi, R. (2003)

Knowledge related performance: 1. exploration (improving decision-making process, speed of innovation and developing new business areas) 2. exploitation (improving labor productivity, improving customer satisfaction and reducing costs) Intrinsic and extrinsic motive 1. hard information resources (time, human capital, ICT) 2. core compentence (communication) 3. soft information culture resources (learning organization metaphor, intellectual capital, knowledge sharing process) Behavior (knowledge sharing)

Online Survey

insurance companies

Interview

MANDI (Managing the dynamic interfaces between knowledge and culture) questionnaire -27 items : 1. knowledge sharing vs org culture 2. objectives of knowledge sharing 3. reasons for knowledge sharing 4. strategies for knowledge sharing relationship of KS and organizational performance Research paper

290

Yang, Jen-te (2007) Bock, G.W. and Kim Y. (2002) Beijerse, uit R.P (2000)

IV: Knowledge sharing Organizational Learning DV: Organizational effectiveness Social exchange theory Self-efficacy Theory of reasoned action Knowledge Management Structure- horizontal/vertical Strategy- vision Systems- rules/regulations Culture- value/norms Inter-organizational knowledge transfer

Taiwan

Hotel

Survey - 499

Yang (2004) Sveiby and Simon (2002)

ks is related positively to organizational effectiveness

Survey

Quantitative Questionnaire

Self-reported

SME

Survey

From 79 items, 20 items is for knowledge sharing

Chen et al (2006)

Knowledge transfer need Tacit knowledge transfer and innovation capability Knowledge transfer and organizational performance

UK

Cavusgil et al (2003)
Argote and Ingram (2000)

SME service US

Survey survey

Chase (1979)

The importance of external knowledge for SMEs Tacit knowledge transfer is very important to increase innovation among firms Knowledge sharing is significant related to performacne

291

APPENDIX 3 TAXANOMY OF INNOVATION STUDIES (MEDIATOR)

Author AtuaheneGima (1996) Balbontin et al (1999) Birchall et al. (1996) Purpose Compares innovation performance in manufacturing and services Compares NPD success factors in American and British firms Comparison of technological innovation in SMEs in UK, France and Portugal Shows how Samsung organised for innovation Examines the effect of organisational culture on innovation To understand the importance of information and knowledge in innovation Looks at effect of problemsolving approaches on radical NPD Presents a behavioural model of innovation Studies innovation and NPD in the Italian motorcycle industry Focus 600 Australian service and manufacturing firms 49 UK and 38 US high technology companies 233 SMEs: UK 68, France 77, Portugal 88 Samsung Corporation, Korea 9648 employees of a large US govt RandD unit 20 SMEs in Scotland Innov Type NPD/NSD Method QS Main Point Innovation factors and perception are different btwn the two Common critical success factors are: participative leadership, mgmt support and good information flow Innovation variables are interdependent and an integrative and broad approach is needed Suggests a Clustered Web organizational structure for innovation An innovative culture facilitates adaptation and innovativeness Firms must develop HR and nurture knowledge to be innovative Tech.-based firms should not approach radical innovation in a technology-based way Culture modification through management practices can encourage innovativeness Partnerships played a key role in the firms studied

NPD

OI

S, Q

Cho (1996)

OI

Hurley and Hult (1998) Keogh (1999) Kusunoki (1997) McGourty et al. (1996) Muffatto and Panizzolo (1996) Nobel and Birkinshaw (1998)

OI

Q/S

OI

Compares Matsushita and Ricoh 14 US best-ofbest companies 8 firms (Italian and Japanese in Italy

NPD

OI

NPD

Q/S

Examines global innovation in multinational organisations

15 Swedish Multinational RandD units

OI

Q, I

Provides a number of implications for MNC managements

292

Ozsomer et al. (1997) Shaw (1998)

Investigates factors of organisational and environmental innov Examines NPD in the UK medical industry Technological innovation comparisons of manufacturing and service firms Examines innovation management in French SMEs Development of fractal Paradigm Studies relationship between innovation and org. characteristics and perform Validation of inventory of organisational innovativeness Examines relationships between innovation and performance Studies managers understanding of innovation issues

Sirilli and Evangelista (1998) Soderquist et al. (1997) Spivey et al. (1997) Subramanian and Nilakanta (1996) Tang (1999)

142 Fortune 500 manufacturing firms 11 UK medical equipment manufacturers 6005 Italian service firms 84 French SMEs A top org. in US Dept. of Defence 143 bank managers

NPD Q/S

Strategic posture is the most important factor in increasing innov. C Internal and external knowledge management and networking is needed for success Show more similarities than differences

OI, NPD NSD/ PI OI NPD

SDA/ S Q C

Key innov. factors are a customer focus and cont. improvement Macro view of innovation can be seen in fractal perspective Innovativeness does improve organizational performance

OI

Q/S

871 members of OI Q/S The inventory could be useful in a professional assessing a firms innovation engineering soc. Yamin et al. 237 Australian OI SDA Highly innovative companies are more (1999) manufacturing profitable companies Zhuang et al. 199 practicing OI Q, I Many managers have not been able to (1999) managers of various create an innovative culture orgs. Zien and Searches for common 12 US, NPD/ I Each firm needs unique innovative Buckler principles of innovative European and OI structures but 7 universal principles are (1997) organizations Japanese given Companies Gloet and 70 large NPD/PI Quantit HRM is very important in measuring and Terziovski (2004) manufacturing ative predicting the relationship between KM companies in practices and innovation performance Australia and New Zealand NPD = new product development, NSD = new service development, OI = organizational innovation, PI =process innovation. ** Q = questionnaire, S = survey, SDA = secondary data analysis, C = case study, I = interviews
293

APPENDIX 4

LIST OF SECTORS LISTED UNDER SMES DEFINITION

i. Primary Agriculture:
Agriculture, Hunting and Related Service Activities Forestry, Logging and Related Service Activities Fishing, Operation of Fish Hatcheries and Fish Farms; Service Activities Incidental to Fishing

ii. Manufacturing (including Agro-Based):

Manufacture of food products and beverages Manufacture of tobacco products Manufacture of textiles Manufacture of wearing apparel; Dressing and dyeing of fur Tanning and dressing of leather; Manufacture of luggage, handbags, saddlery, harness and footwear Manufacture of wood and products of wood and cork, except furniture; Manufacture of articles of straw and plaiting materials Manufacture of paper and paper products Publishing, printing and reproduction of recorded media Manufacture of coke, refined petroleum products and nuclear fuel Manufacture of chemicals and chemical products Manufacture of rubber and plastic products Manufacture of other non-metallic mineral products Manufacture of basic metals Manufacture of fabricated metal products, except machinery and equipment Manufacture of machinery and equipment Manufacture of office, accounting and computing machinery Manufacture of electrical machinery and apparatus Manufacture of radio, television and communication equipment and apparatus Manufacture of medical, precision and optical instruments, watches and clocks Manufacture of motor vehicles, trailers and semi-trailers Manufacture of other transport equipment Manufacture of furniture; Manufacturing Recycling

iii. Manufacturing Related Services :

Research and experimental development services on physical sciences Research and experimental development services on chemistry and biology Research and experimental development services on engineering and technology Research and experimental development services on agricultural sciences Research and experimental development services on medical sciences and pharmacy Research and experimental development services on other natural sciences Factory bus services Freight transport by road Transport via pipelines Freight transportation by sea-going and coastal water vessels Inland water freight transport services Other scheduled air transport (e.g. helicopter services) Other non-scheduled air transport
294

 Stevedoring services Storage and warehousing services Activities of freight forwarding / forwarding agencies Activities of other transport agencies Packaging services on a fee or contract basis Advertising Market research and public opinion polling General management consultancy services Public relations consultancy services Other business consultancy and management consultancy services n Printed news supply services Other news agency services Other publishing Rental of office machinery and equipment (including computers) Rental of furniture Industrial waste collection and disposal services Recycling of tin Recycling of other metal waste and scrap Recycling of textile fiber Recycling of rubber Recycling of non-metal waste and scrap Engineering consultancy services Casting of iron and steel Casting of non-ferrous metal Forging, pressing, stamping and roll-forming metal; powder metallurgy Treatment and coating of metals, general mechanical engineering on a fee or contract basis Manufacture of other fabricated metal products Manufacture of machine tools Technical testing and analysis

iv. Services:
Electricity, Gas and Water Supply Wholesale and Retail Trade; Repair of Motor Vehicles, Motorcycles and Personal and Household Goods Hotels and Restaurants Transport, Storage and Communications Financial Intermediation Real Estate, Renting and Business Activities Education Health and Social Work Other Community, Social and Personal Service Activities

295

APPENDIX 5 MEASUREMENT OF THE DIMENSIONS

SECOND ORDER First order latent variable Measurement HC1 Every employee in this company has his/her own talent/skill HC2Our employees always come up with new ideas HC3 All employees are given an opportunity to be creative HC4 We have a good level of cooperation among employees INTELLECTUAL CAPITAL (IC) HUMAN CAPITAL (HC) HC5Our employees are willing to take responsibilities HC6 Our employees are willing to work overtime HC7 We share company vision and have clear goals HC8 In our company, employees are free to voice their views HC9 Individuals in this company learn from one another HC10 I can depend on my employees if I need assistance Literature Review Bontis et al (1998)

Bontis et al (1998)

Cohen and Kaimenakis (2007)

Bontis et al (1998) Cohen and Kaimenakis (2007)

Bontis (1998)

Bontis (1998)

Bontis (1998)

Bontis (1998)

Cohen and Kaimenakis (2007)

SC1.In our company, information Bontis (1998) is always available SC2.Everybody shares their knowledge in this company STRUCTURAL CAPITAL (SC) SC3.Our organizational culture supports diffusion of knowledge across our company Bontis (1998) Bontis (1998)

SC4.Successful practices used in the past are Lee and Choi (2002) recorded to be used in future INTELLECTUAL CAPITAL (IC) SC5.Our companys procedures support innovation Bontis (1998)
296

SC6.I am familiar with the companys perspectives and business directions SC7.Our company encourages creative ideas by employees SC8 In our company, employees take part in decision-making STRUCTURAL CAPITAL (SC) SC9 .Our company has set a product quality level SC10 Our companys operation is efficient SC11 We have a good management style SC12 Knowledge is recognized as an outcome for the company and sharing is promoted RC1 Our company is aware of customer complaints RC2.Our companys customers is one of our sources of expertise and know-how RC3.We always get feedback from our customers RELATIONAL CAPITAL (RC) RC4 Our companys survival depends on a small number of customers RC5 Our customers are a reliable source of information

Cohen and Kaimenakis (2007)

Cohen and Kaimenakis (2007)

Bontis (1998) Lee and Choi (2002)

Lee and Choi (2002)

Cohen and Kaimenakis (2007)

Lee and Choi (2002)

Deshpande et al (1993)

Cohen and Kaimmenakis (2007)

Cohen and Kaimmenakis(2007)

Cohen and Kaimmenakis(2007)

RC6 Our companys customers are satisfied Bontis (1998) with the services provided RC7 The knowledge that our company acquires from the customers is diffused across our company RC8 We share competitors information among our employees Bontis (1998)

Bontis (1998)

297

RC9 Our products/services are based on market and customer information

Bontis (1998)

RC10 We are competing primarily based on Appiah-Adu and Singh (1998) product or service differentiation RC11 We always try to create customer value in our products or services Appiah-Adu and Singh (1998)

MEDIATOR

FIRST ORDER KNOWLEDGE SHARING (KS)

First order latent variable

Measurement
face-to-face to exchange ideas and knowledge

Literature Review

and Lee (2002) KS 1.In the company, we alwaysChoi meet

Choi and Lee (2002) KS 2.Informal dialogues and meetings are used for knowledge sharing in our company Choi and Lee (2002) KS 3.Knowledge is acquired by one-toone mentoring et al (2002) KS 4.We improve task efficiencyCalatone by sharing information and knowledge

KS5 We use technology (such asDarroch (2005)

internet, emails) to share knowledge Chieh-Peng Lin (2007) KS 6.I share my job experience with my co-workers Choi and Lee (2002) KS 7 Our company stresses searching and sharing new values and thoughts

KS 8 We frequently use
brainstorming in our company

Darroch (2005)

KS 9 In our company,
knowledge sharing is used to speed innovation

Husted et al (2005)

298

Husted et al (2005) KS 10 The knowledge that I possess is valuable Haldin-Herrgard (2000) KS 11 I share my knowledge with someone that I trust Haldin-Herrgard (2000) KS 12 Our employees are generally trustworthy

KS 13 Our company
environment is easy for people to talk to each other

Haldin -Herrgard (2000)

Haldin-Herrgard (2000) KS 14 Our company values employees with creative ideas

SECOND ORDER INNOVATION (INV)

First order latent variable

Measurement
needs

Literature Review

PRODUCT INNOVATION (PD)

Atuahene-Gima (1995) INV1.Our product covers customer

INV2.Our product offers unique,Atuahene-Gima (1995)

innovative features to customers Atuahene-Gima (1995) products/services to our existing ranges

INV3.We often add new

Atuahene-Gima (1995) INV4.We produce high quality products Ghosal and Bartlet (1989) INV5 We offer new products/services from time to time Ghosal and Bartlet (1989) INV6 We place emphasis on new product developments Ghosal INV7 We constantly improve and refineand Bartlet (1989) existing products Ghosal and Bartlet (1989) INV8 We often reposition existing products/services Han of et al (1998) INV9 We always look for new ways PROCESS Hurley and Hult (1998) doing things INNOVATION

(PC)
299

INV10 We often change our

production process in order to reduce costs

Han et al (1998) Hurley and Hult (1998)

INV11 We frequently
introduce new methods in our production process

Han et al (1998) Hurley and Hult (1998)

SECOND ORDER

First order latent variable

Measurement

Literature Review

In the past 3 years,

Dalam tempoh 3 tahun yang lalu, . OP1 our companys revenue growth have been improved Gold et al (2001)

ORGANIZATIONAL PERFORMANCE (OP)

OP2 we have improved our

product/service innovation

Gold et al (2001)

et al (2001) OP3 We have been consistentlyGold making profit Gold et al (2001) OP4 We have been growing fast

OP5 We have made more salesGold et al (2001)

300

APPENDIX 6 COVER LETTER

Date: Rohana Ngah Faculty of Business and Accountancy Universiti Malaya 50603 Kuala Lumpur Tel: 03-26173024 Fax: 03-26173008 Dear Sir/Madam A SURVEY ON INTELLECTUAL CAPITAL, KNOWLEDGE SHARING, AND INNOVATION OF SMALL AND MEDIUM ENTERPRISES (SMEs) IN MALAYSIA

This survey is regarding the intellectual capital, knowledge sharing and innovation of SMEs in Malaysia. The survey is designed to study your experience as an entrepreneur and your views on knowledge sharing and innovation in your firm. Your cooperation is important to highlight your practice as findings in this survey will be useful in providing suggestions to the relevant parties. You will be asked questions concerning your current business practices. The questionnaire should not take more than twenty (20) minutes to complete. Your survey responses will be strictly confidential and remain anonymous. Data from this research will be only in aggregate form. Enclosed is the self-addressed. Kindly placed the completed questionnaire into the enveloped and mail to the above address. Your responses are very important. Thank you very much for your time and support..

Regards, Rohana Ngah Faculty of Business and Accountancy Tel: 03-26173024 Fax: 03-26173008 hana_ngah@perdana.um.edu.my
301

APPENDIX 7

KAJIAN MODAL INTELEKTUAL, PERKONGSIAN ILMU DAN INOVASI DI PERUSAHAAN KECIL DAN SEDERHANA (SME) DI MALAYSIA

Tuan/Puan, Kajiselidik ini adalah berkaitan dengan modal intelektual, perkongsian ilmu dan inovasi SME di Malaysia. Soalselidik ini disesuaikan untuk mengkaji pengalaman anda sebagai usahawan dan pandangan anda mengenai perkongsian ilmu dan inovasi di syarikat anda. Kerjasama anda sangat penting untuk memperlihatkan amalan anda kerana hasil kajian ini berguna sebagai cadangan kepada pihak berkenaan. Anda akan ditanya soalan mengenai amalan perniagaan anda sekarang. Soalselidik ini mengambil masa tidak lebih daripada dua puluh minit (20) untuk dilengkapkan. Jawapan anda adalah sulit dan dirahsiakan. Data daripada kajian ini hanya dikeluarkan dalam bentuk agregat.. Jawapan anda sangat penting. Terimakasih atas sokongan dan masa anda

Rohana Ngah Fakulti Perniagaan dan Perakaunan Universiti Malaya 50603 Kuala Lumpur Tel: 03-26173024 Fax: 03-26173008
hana_ngah@perdana.um.edu.my hana.ngah@gmail.com

302

strongly disagree Code

strongly agree

(1)
sangat tidak bersetuju

(2)

(3)

(4)

(5)

(6)

(7)
sangat bersetuju

HC1

Every employee in this company has his/her own talent/skill

Setiap pekerja di syarikat ini memiliki bakat/skil tersendiri

HC 2

Our employees always come up with new ideas

Pekerja kami sentiasa memberi idea baru

HC 3

All employees are given an opportunity to be creative

Semua pekerja diberi peluang untuk berkreatif

HC 4

We have a employees

good

level

of

cooperation

among

Kami mempunyai hubungan kerjasama yang baik dengan pekerja

HC 5

Our employees are willing to take responsibilities

Pekerja kami sedia bertanggungjawab

HC 6

Our employees are willing to work overtime

Pekerja kami sanggup kerja lebih masa

HC 7

We share company vision and have clear goals

Kami berkongsi visi syarikat dan mempunyai sasaran yang jelas

HC 8

In our company, employees are free to voice their views

Di syarikat kami, pekerja bebas memberi pandangan mereka

HC 9

Individuals in this company learn from one another

Individu di syarikat ini belajar antara satu sama lain

HC 10

I can depend on my employees if I need assistance

Saya boleh bergantung kepada pekerja saya jika saya memerlukan bantuan

SC1.

In our company, information is always available

Di syarikat kami, maklumat sentiasa ada

SC2.

Everybody shares their knowledge in this company

Semua orang berkongsi ilmu di syarikat ini

SC4.

Our organizational culture supports diffusion of knowledge across our company

Budaya syarikat menyokong sebaran ilmu dalam syarikat ini

SC4.

Successful practices used in the past are recorded to be used in future

Kejayaan lalu direkod untuk kegunaan masa hadapan

SC5.

Our companys procedures support innovation

Prosedur syarikat kami menyokong inovasi
303

SC6.

I am familiar with the companys perspectives and business directions

Saya biasa dengan pespektif dan arahtuju syarikat

SC7.

Our company encourages creative ideas by employees

Syarikat mengalakkan idea kreativiti oleh pekerja

SC8

In our company, employees take part in decisionmaking

Di syarikat, pekerja turut serta dalam pembuatan keputusan

SC9.

Our company has set a product quality level

Syarikat kami menetapkan tahap kualiti produk

SC10

Our companys operation is efficient

Operasi syarikat cekap

SC11

We have a good management style

Kami mempunyai gaya pengurusan yang baik

SC12

Knowledge is recognized as an outcome for the company and sharing is promoted

Ilmu dikenalpasti sebagai hasil syarikat dan perkongsian digalakkan

Rc1

Our company is aware of customer complaints

Syarikat kami peka dengan aduan pelanggan

RC2.

Our companys customers is one of our sources of expertise and know-how

Pelanggan kami adalah salah satu sumber kepakaran dan skil teknikal syarikat kami

RC3.

We always get feedback from our customers

Kami sering mendapat maklumbalas dari pelanggan kami

RC4

Our companys survival depends on a small number of customers

Masa hadapan syarikat bergantung pada sebilangan kecil pelanggan

RC5

Our customers are a reliable source of information

Pelanggan kami adalah sumber maklumat yang boleh dipercayai

R6

Our companys customers are satisfied with the services provided

Pelanggan kami berpuashati dengan servis yang diberikan

RC7

The knowledge that our company acquires from the customers is diffused across our company
Ilmu yang diperolehi daripada pelanggan disebarkan dalam syarikat

RC8

We share employees

competitors

information

among

our

Kami berkongsi maklumat pesaing dengan pekerja

RC9

Our products/services are based on market and customer information

Produk/servis kami berdasarkan maklumat pasaran dan pelanggan

RC10

We are competing primarily based on product or service

304

differentiation
Kami bersaing pada asas perbezaan produk/servis
RC11

We always try to create customer value in our products or services

Kami sentiasa menghasilkan produk/servis kami nilai pelanggan dalam

TK 1.

In the company, we always meet face-to-face to exchange ideas and knowledge

Di syarikat, kami sering berjumpa bersemuka untuk bertukar pendapat dan ilmu

TK 2.

Informal dialogues and meetings are used for knowledge sharing in our company
Dialog dan perjumpaan tidak rasmi digunakan untuk perkongsian ilmu dalam syarikat

TK 3.

Knowledge is acquired by one-to-one mentoring

Ilmu diperolehi melalui mentor

TK 4.

We improve task efficiency by sharing information and knowledge

Kami meningkatkan kecekapan tugas dengan berkongsi maklumat dan ilmu

TK5

We use technology (such as internet, emails) to share knowledge

Kami mengunakan teknologi (seperti internet/emel) untuk berkongsi ilmu

TK 6.

I share my job experience with my co-workers

Saya berkongsi pengalaman kerja dengan pekerja lain

TK 7

Our company stresses searching and sharing new values and thoughts
Syarikat kami menekankan pencarian dan perkongsian nilai dan pemikiran Baru

TK 8

We frequently use brainstorming in our company

Kami sering menggunakan percambahan minda dalam syarikat kami

TK 9

TK 10

In our company, knowledge sharing is used to speed innovation Di syarikat, perkongsian ilmu digunakan untuk memacu inovasi The knowledge that I possess is valuable
Ilmu yang saya miliki berguna

TK 11

I share my knowledge with someone that I trust

Saya berkongsi ilmu dengan orang yang saya percayai

TK 12

Our employees are generally trustworthy

Secara am, pekerja kami boleh dipercayai

TK 13

Our company environment is easy for people to talk to each other

Persekitaran syarikat memudahkan pekerja berbual antara satu sama lain

TK 14

Our company values employees with creative ideas

Syarikat menghargai pekerja yang memberi idea kreatif

305

Section 3: Innovation This section describes activities relating to innovation either by creating new product/services or improving existing products/ services or process. (Bahagian ini merujuk kepada aktiviti berkaitan inovasi dengan mencipta produk baru atau mempertingkatkan produk atau proses sedia ada)
strongly disagree Code strongly agree

(1)
sangat tidak bersetuju

(2)

(3)

(4)

(5)

(6)

(7)
sangat bersetuju

INV1.

Our product covers customer needs

Produk kami memenuhi keperluan pelanggan

INV2.

Our product offers unique, innovative features to customers

Produk kami menawarkan ciri-ciri unik, inovatif kepada pelanggan

INV3.

We often add new products/services to our existing ranges

Kami sering menambah produk/servis baru dalam senarai produk kami The rating from 1 = strongly disagree to 7 = strongly agree (Kadar dari 1 = sangat tidak bersetuju kepada 7 = sangat bersetuju)
strongly disagree strongly agree

Code

(1)
sangat tidak bersetuju

(2)

(3)

(4)

(5)

(6)

(7)
sangat bersetuju

INV4.

We produce high quality products

Kami menghasilkan produk berkualiti tinggi

INV5

We offer new products/services from time to time

Kami menawarkan produk/servis baru dari masa kesemasa

INV6

We place emphasis on new product developments

Kami menekankan pembangunan produk baru

INV7

We constantly improve and refine existing products

Kami sering memperbaiki dan memperbaharui produk sedia ada

INV8

We often reposition existing products/services

Kami sering mengubahsuai produk/servis sedia ada sebelum ini

INV9

We always look for new ways of doing things

Syarikat kami mencari cara baru dalam pengurusan

iNV 10

We often change our production process in order to reduce costs

Kami sering menukar proses pengeluaran kami untuk mengurangkan kos

INV 11

We frequently introduce new methods in our production process

Kami sering memperkenalkan kaedah baru dalam proses pengeluaran kami
306

Section 4: Business Performance

Code

In the past 3 years,

Dalam tempoh 3 tahun yang lalu, . our companys revenue growth have been improved
kadar pendapatan syarikat kami meningkat

strongly disagree

strongly agree

(1)
sangat tidak bersetuju

(2)

(3)

(4)

(5)

(6)

(7)
sangat bersetuju

OP1

OP2

we have improved our product/service innovation

kami telah mempertingkatkan inovasi produk/servis kami

OP3

We have been consistently making profit

Kami berterusan mendapat keuntungan

OP4

We have been growing fast

Kami membangun dengan pesat

OP5

We have made more sales syarikat kami mencatat lebih banyak jualan

307

( Bagi Bahasa Malaysia, sila rujuk muka surat seterusnya) Please tick at the appropriate box/column or write in your answers where appropriate Section A: The Company
1. This company is: Sole-proprietor Family-owned Partnership Others. Please specify__________________________ 2. Length of time in which company has been in business less than 2 year 2 4 years 5 - 8 years 8 10 years More than 10 years 4. Your companys annual sales turnover

Demographic Profile

3. Number of full-time employees less than 5 6 - 10 10 - 20 more than 20

RM 200,001 RM300,000 RM300,001 RM500,000 RM500,001 RM1 million RM1.1 million RM 3 million more than RM3 million

5. Company status 100% Bumiputra 100% Non-Bumiputra Joint venture with foreign business Joint venture with local business Others. Please specify _______________ 6. Which is the following terms best term describes your firm business: Please tick only one box Construction Food products and beverages Fabricated Metal Products Furniture Other Transport Equipments Chemical and Chemical Products Textiles, Apparels and Leather Rubber and Plastic products Wholesale and retail trade Transportation - Automotive and repair Wood and Wood Products Machinery and Equipments Information and Communication Technology (ICT) Transport and storage Paper and Printing Manufacturing Related Services Plantation and Plantation products Manufacturing Related Services Pharmaceutical Products Others. Please Specify: ______________________

308

Section B: The Respondent 7.Your gender Male Female 8. Your race Malay Chinese

Indian Others

9. Your current position in this company Owner Co-Owner Partner Manager Executive Others. Please specify__________

10. Duration of your current position less than 2 years 2 4 years 5 7 years 8 10 years More than 10 years

11. Your highest education level (Also, please state your area of study) SPM/STPM Certificate (___________________) Diploma (___________________) Degree (___________________) Master (___________________) Professional qualifications (___________________) Others. Please specify _______________________

12. Do you have any past working experience: Yes Please indicate the number of years of working : ______ years Also kindly indicate Area of experience _____________________________ ____ (i.e engineering, marketing etc)

No

309

13. In the last 3 years, we ___________________ (You may thick more than one box)

14. In the last 3 years, we ____________ (You may tick more than one box) have attended seminar/training program organized by g participated in government agencies programmes got RandD support from government agencies got technical assistance/advic govenment agencies from

Purchased new machinery Developed new products/services Improved existing products/services Developed a new process Upgraded existing machine Improved existing process Had no development/improvement of our products/services/processes but carry on routine process

got a financial support from government agencies got management/marketing adv ce/assistance did not attend/participate in any government programmes have attended seminar/training programmes organized by private firms

310

Demografik
Sila tanda pada kotak/ruang yang sesuai atau tulis jawapan anda di mana berkaitan

Seksyen A : Syarikat
1. Tempoh Perniagaan kurang daripada 2 tahun 2 4 tahun 5 - 8 tahun 8 10 tahun Lebih daripada 10 tahun 3. Bilangan pekerja sepenuh masa kurang daripada 5 6 - 10 10 - 20 lebih daripada 20 2. Syarikat ini: Hak milik perseorangan Milik keluarga Perkongsian Lain-lain. Sila nyatakan____________________________

4. Keuntungan jualan tahunan syarikat

kurang daripada RM200,000 RM 200,001 RM300,000 RM300,001 RM500,000 RM500,001 RM1 juta RM1.1 juta RM3 juta lebih daripada RM3 juta

5. Status Syarikat 100% Bumiputra 100% Bukan-Bumiputra Usahasama dengan syarikat asing Usahasama dengan syarikat tempatan Lain-lain. Sila nyatakan _______________

6. Terma yang terbaik mengambarkan perniagaan anda: Sila tanda satu kotak sahaja Pembinaan Produk makanan dan minuman Produk Logam Pasang Siap Perabot Peralatan Pengangkutan Lain Bahan Kimia dan Produk Bahan Kima Tekstil dan Pakaian Getah dan Produk Plastik Pemborong dan peruncit dagangan Automotif dan pembaikan Kayu dan Produk Kayu Jentera dan Peralatan ICT Pengangkutan dan Penyimpanan Produk Farmaseutikal Perkhidmatan Pembaikan Perladangan and Produk Perladangan Kertas dan Percetakan Pembuatan Berkaitan Servis Others. Please Specify: ______________________

311

Seksyen: Responden
7. Jantina Anda Lelaki Perempuan 9. Jawatan Anda Sekarang Pemilik Pemilik Bersama Rakan Kongsi Pengurus Eksekutif Lain-lain. Sila nyatakan_______________________ 8. Keturunan Anda Melayu Cina India Lain-lain

10. Tempoh anda memegang Jawatan ini kurang daripada 2 tahun 2 4 tahun 5 7 tahun 8 10 tahun Lebih daripada 10 tahun

11. Tahap pendidikan tertinggi anda Sila nyatakan bidang pengkhususan anda SPM/STPM Sijil Diploma ( _______________) Ijazah ( _______________) Sarjana ( _______________) Kelayakan Profesional ( _______________) Lain-lain. Sila nyatakan _____________

12. Adakah anda mempunyai pengalaman kerja terdahulu? Ya Sila nyatakan bilangan tempoh bekerja: ______ tahun Juga, sila nyatakan Bidang pengalaman _________________________________ (i.e kejuruteraan, pemasaran etc)

Tidak

13. Dalam 3 tahun yang lepas, kami telah ____________ (Anda boleh menanda lebih daripada satu)

14. Dalam 3 tahun yang lepas, syarikat kami ________ (Anda boleh menanda lebih daripada satu) Menghadiri seminar/program latihan anjuran age Mengambil bahagian dalam program agensi kerajaan Mendapat bantuan RandD daripada agensi kerajaan Mendapat bantuan/nasihat teknikal daripada agensi kerajaan Mendapat bantuan kewangan da ipada agensi kerajaan Mendapat nasihat/bantu n pengurusan/pemasaran Tidak menghadiri/mengambil bahagian dalam mana-mana program anjuran kerajaan Menghadiri seminar/latihan anjuran pihak swasta
312

Membeli mesin/peralatan baru Menghasilkan produk/servis baru Mempertingkatkan produk/servis sedia ada Menghasilkan proses baru Menambahbaik mesin/peralatan sedia ada Memperbaiki proses sedia ada Tiada sebarang pembangunan/pembaikan produk/servis/process kami tetapi meneruskan proses rutin

Appendix 8 Histogram P-P Plot of regression standardized residual

313

314

APPENDIX 9
FINAL ESTIMATES FOR THE STRUCTURAL MODEL
Path Standardized Reg Weight () KS 0.676 0.735 0.780 0.741 0.924 0.993 0.843 Fixed at 1.00 0.911 Standard Error (S.E) 0.050 0.056 0.064 0.068 0.084 0.105 0.056 0.060 Critical Ratio (t-value) 13.401 13.086 12.170 10.951 8.694 9.425 15.032 15.180 p-value

IC IC IC KS KS INV HC SC RC

INV
OP OP INV OP IC IC IC

*** *** *** *** *** *** *** ***

The Magnitude, Directions, and Statistic Significance of the Estimated Parameters between Latent Variables and Their Indicators
Latent Indicator Standardized Reg Weight () 0.572 0.780 0.780 0.813 0.808 0.701 0.861 0.857 0.823 0.876 0.817 0.789 0.843 0.774 0.760 0.715 0.791 0.666 0.759 0.773 0.770 Standard Error (S.E) 0.064 0.057 0.068 0.063 0.063 0.064 0.059 0.058 0.075 0.060 0.059 0.063 0.065 0.064 0.073 0.066 0.060 0.066 Critical Ratio (t-value) 10.661 15.521 13.096 16.205 13.828 16.392 17.479 15.462 12.064 15.462 14.495 14.727 13.668 15.242 12.535 14.557 15.044 16.417 p-value

Human Capital (HC)

HC1 HC4 HC7 HC8 HC11

*** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** ***
315

HC12
Structural Capital (SC) SC4 SC5 SC7 SC8 SC10 SC12 SC14 RC2 RC3 RC5 RC7 RC8 RC9 RC11 KS2

Relational Capital (RC)

Knowledge Sharing

KS6 KS8 KS9 KS10 KS13 KS14 KS19 KS20 Innovation (INV) INV1 INV3 INV6 INV7 INV9 INV10 INV11 OP1 OP3 OP4 OP5

0.833 0.724 0.745 0.866 0.853 0.656 0.667 0.788 0.709 0.821 0.867 0.861 0.656 0.759 0.915 0.816 0.817 0.880 0.879

0.057 0.057 0.056 0.057 0.057 0.054 0.057 0.058

16.905 18.464 15.678 19.675 19.204 13.213 18.913 19.007

*** *** *** *** *** *** ***

0.093 0.100 0.098 0.053 0.068

14.245 14.875 14.757 11.279 12.459

*** *** *** *** ***

Organizational Performance (OP)

0.057 0.053 0.050 0.047

17.828 20.292 23.218 23.390

*** *** *** ***

316

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