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Part I Entrepreneurship

Chapter 1 The Determinants of Technological Innovation Adoption in Malaysian SMEs

Abstract This study used the partial least squares (PLS) and structural equation modeling (SEM) tool to explore the factors to determine the adoption of technological innovation (TI) in the manufacture sector in Malaysian SMEs' businesses. Statistical results confirm that the adoption of technology is positively associated with its size. It also examines on the best predictor pertaining to the TI adoption. The results, besides indicating the suitability of the PLS in statically analysis, have also contributed to a better understanding of technological innovation adoption in Malaysian SMEs' business perspectives, and the findings are useful for policy makers and practitioners to enhance their application given the diversified advance to the small business.

Keywords Technological innovation • Information technology • Diffusion • Small and medium enterprises • Firm size

1.1 Introduction

How does size matter in the adoption of technological innovation (TI)? Adoption of TI has become a critical issue for several reasons. Firstly, while there is a large study that examines the adoption of TI, most studies either ignore firm size or focus exclusively on medium and large firms. That study which is available would suggest that firm size influences positively in innovation (R&D project) financing possibilities because of internal funds availability and stability for larger firms, and R&D is more productive in larger firms [1]. Baumol [2] and Shefer and Frenkel [3] in their study on technology expenditure found that the firm propensity investment in technology is positively associated with its size. Furthermore, the study on the adoption of TI which is available would suggest that small business differs in many key ways from larger firms, namely (according to Arias-Aranda [4]), small firms (1) have simple and highly centralized structures, (2) experience severe financial onstraints on growth, (3) lack trained personnel resources, and (4) take a shortrange management perspective imposed by a volatile competitive environment [2].

Apart from that, many small businesses refuse to apply specific mechanisms to improve their TI even though they can apply for public subsidies because they do not have enough human resource to allocate to the administrative process [3]. These differences may mean that organizational theories and practices on firm adopting and impact of TI which have been developed from research on large businesses may not be applicable to those who operate in the small business sector [4]. Hence, in recent year, we have encountered that a large number of small firms engage with innovation activities. Therefore, this study will thoroughly investigate the degree of association between firm size and the rate of TI adoption.

Secondly, small businesses generally have fewer resources available to devote to TI, they have very little control over forces that are external to the organization, they generally do not have their own separate TI department, and they generally have less formalized planning and control procedures for the adoption and use of TI. Small-business entrepreneurs are thus often placed in the circumstances of knowing that TI can support their business in some way, but they lack the expertise and resources to know how it can be effectively applied. Nevertheless, the study by [5] found that small business and nonhierarchical firms are taking advantage of some of the more sophisticated mechanisms to implement major TI compared to larger and hierarchical firms that have not moved as far away as expected from the simpler implementation mechanisms. Moreover, larger firms increase bureaucracy control, which hinders innovation activity [4].

Finally, in many countries, small businesses comprise over 95 % of the proportion of private business and approximately half of the private workforce, with information technology (IT) being used in majority of these businesses. Small and medium enterprises (SMEs) formed a vital component of the Malaysian economy. In order to sustain their important role, SMEs need to be equipped with new strategy directions and strategic resources such as new skills, knowledge, technology, as well as the continued support from the government. Governments of countries around the world, whether developed or developing, give priority to the development and growth of small and medium enterprises (SMEs) because of their economic importance and potentials. Hence, the study in this area has become critical because of the increasing economic importance of this sector to the economy. Therefore, it is important to carry out the study on the adoption of TI in the small businesses in Malaysia.

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