CHAPTER 1

INTRODUCTION
BACKGROUND OF STUDY
Productivity is defined as a ratio of output to a volume measure of input use. (OECD
2011). Productivity was measured as the Total Factor Productivity (TFP) obtained from fixed
and random effects models. TFP is the weighted average capacity of all input. (Owyong 2000).
TFP is defined as the portion of output not explained by the amount of inputs used in production
as the value represents how the efficient and intensely the input are utilized in production.
(Murat Seker, Federica Saliola 2018).

TFP is relates to productivity counted by a ratio of output produced and index of

composited inputs. Productivity is analyses using longitudinal micro-level data in various
aspects have been widely employed in both develop and developing countries as the
productivity growth at the micro-level has been considered a key factor to yield economic
growth at the macro level in the long run.

Structural reforms have positive effects on productivity as there is a consensus that

reforms are important to boost and sustain long-term growth. Reforms matter for
macroeconomic performances (Bordon, Shirono, & Ebeke, 2016; Christiansen, Schindler, &
Tressel, 2013; Bouis Causa, Demmou, Duval & Zdezienicka, 2012; Bourles, Cette, Lopez,
Mairesse, & Nicoletti, 2010) and promote growth (Prati, Onorato, & Papaeorgiou, 2013) by
increasing aggregate productivity (Nicoletti & Scarpetta, 2003) and raising employment
(Bordon et al., 2016)

This study discovered relationship between Efficiency (Inventory Turnover, Account

Receivable Turnover and Fixed Asset Turnover), Leverage (Debt Equity Ratio) and
Profitability (Return on Equity and Return on Asset) towards productivity of firms in financial
distress. Productivity is a combination between the efficiency and effectiveness of firms that
shows whether the firm is in favourable or unfavourable position. Productivity of firm also can
be determined by generating and predicting level of firm’s growth.

Inventory Turnover (ITO) Account Receivable Turnover (ARTO), Fixed Asset

Turnover (FATO), Debt Equity Ratio (DER), Return on Equity (ROE) and Return on Asset
(ROA) is the formula that has been used as the indicator of efficiency, leverage and profitability
ratios to measure the productivity and performance of company. It is favourable for the firm
when the ratios is higher which is can affect the firm’s decision through their investment and
firm’s growth.

This study will shows the impact of efficiency (ITO and FATO) and profitability (ROE
and ROA) of firms in financial distress. This study can determine how the firm face the
financial distress by using the determinants of firm’s productivity. There are different ways
and techniques used by different researcher as it is depends on the aspects of the business that
carried out in the studies. The main objective of this research is to examine the determinants of
firm’s productivity in financial distress and discover the evidences from firms in financial
distress. Thus, the financial distress firms in Malaysia are been selected as a sample and
determinants of productivity will be determined.
PROBLEM STATEMENT
Financial distress is can be defined as the shortage in cash on the assets side of balance
sheet, or as huge unpaid amount of debt in liabilities. Both circumstances lead to the same
result of financial distress which is mean that cash flow is not sufficient to cover the current
obligations. In order to measure firm’s productivity in financial distress which is by means of
firm’s growth or performance of firm in financial constraints, a better firms will generate
higher profits (higher liquidity and higher turnover) and reduce their debt (lower leverage) by
paying off the obligations.

The problem of the study sets out to address is that there are many methods of measuring
productivity. The methods is been used widely through various sector and industries. The
availability of micro-data has not much modify the existing methods used for measuring
productivity. If the interest is only to produce productivity, it is best not to take a dogmatic
stance on methodology but rather to explore the sensitivity of productivity measures to
variations in methodology (Bartelsman and Doms, 2000). (Chamber et al., 1996) develop the
difference-based Luenberger Productivity Indicator (LPI) with the directional distance function
to accommodate a potential measuring problem of ratio based Malmquist Productivity Index
(MPI) which is fails to model the distance function with both input contraction and output
expansion.

This study novel and original given the fact that there are only a few researches has
been done on firms classified as financially distressed in Malaysia. The gap between previous
studies were focusing more on manufacturing sector and banking sector and in addition, there
are only a few research on the productivity of firms in financial distress (Geeta Krishnasamy,
2004) and (Ahmad Khaliq,2014). Thus, there are less information and explanation related to
the productivity of firms. Therefore, it is important to obtain further evidence that related to
determinants of productivity. In this research will using data collection from Data Stream
information to generated through STATA which is different from previous research.

The analysis of prior research on this topic leads to the discovery of two major issues.
First, size

Leverage

methods
Importance of Research

The understanding of this topic is very important for at least two reason. Firstly, productivity
is viewed at the most important long run driver of economic growth in both economic theory
and empirical research. (Sai Ding, Alessandra Guariglia, Richard Harris 2015).

Secondly, productivity is important that traces technological changes, technical and

organizational efficiencies and real cost savings. Higher productivity allows firms to produce
higher output for the same level of input, earn higher revenues and ultimately generate strong
overall economic growth.

In conclusion, this study uncover some factors that may influence the firm’s productivity. In
addition, it is also contributing to the knowledge and understanding to the firms and other
decision makers in deciding that can cause on firm’s productivity in financial distress.

Research Gaps

This research is mainly concentrated on the determinants of firm’s productivity and the
variables that effects or influence towards financial distress firms in Malaysia. Although there
are a few of research done on determinant of firm’s productivity globally, there is still little
number of research done on determinants of firm’s productivity in Malaysia. The findings of
previous research are highlight a few of variables that give impact to the firm’s productivity.
There are market size, firm age, financial access, employment levels, structural reforms.

Research Objectives

This research is a studies about how the firm or company manage their productivity in financial
constraints or more known as financial distress situation in Malaysia. Sometimes, the firm may
facing difficult in their business and very attentive to survive in their area of expertise.
Moreover the firm will somehow try to do something in production which is their intention,
want to protect their employees from run away or keep the employees morale stay high. In
addition, the firm’s growth are the main criteria that the firm need to achieve.

Productivity is used to measure performance of firms. Productivity is combination of efficiency

of firm, profitability of firm and leverage level of firm. This research will focusing on
determinants of firms productivity in financial distress in Malaysia.This study involving a few
of independent variables such as Efficiency (Inventory Turnover, Account Receivable
Turnover and Fixed Asset Turnover), Leverage (Debt Equity Ratio) and Profitability (Return
on Equity and Return on Asset).