GLOBAL PERSPECTIVES

Factors Contributing to the Growth ofSmall Manufacturing Firms: Data from,Australia

The small business sector i.s a vitalcontributor to the overall performance ofthe Australian economy. Small busi-nesses account for approximately 97 per-cent of all private sector businesses, and51 percent of private sector employment(Australian Bureau of Statistics 1996).Neveiiheiess, the folklore is that mostsmall businesses discontinue within afew years of their start up. Of those busi-nesses that continue, there is consider-able variability in the rate of growth.Therefore, it is Important to identify thecauses of failures and discontinuations aswell as the factors contributing to thesuccess or growth of small enterprises.Moreover, these causes of failure andfactors of success may vary from countryto country, depending on economic,geographical, and cultural differences.As such, empirical investigation intothese aspects of small business in differ-ent countries is needed because the find-ings of such research are useful to eco-nomic development planners as well asto individual entrepreneurs in the coun-tries concerned.

The purpose of this article is to exam-ine a set of firm- and industry-specificvariables that may have an impact on thegrowth of small firms. This study isbased on an examination of a sample ofsmall manufacturing firms operating inthe Illawarra region of New South Walesin Australia. Because the study is ex-ploratory, it does not attempt to identifyany a priori entrepreneurial and man-agerial abilities or other specific charac-teristics associated with the successfuloperation of firms.

Review of the LiteratureThe previous research on factors con-

tributing to the success or growth ofsmall firms has focused primarily on theentrepreneurial, managerial, or otherpersonality attributes of owner-man-agers. Few have examined firm- orindustry-specific factors, which Tan andTay (1994) claim are more significantthan personality attributes in explainingthe variance of growth in small business.Another limitation of previous studies isthat they are based on small business ingeneral; those focusing on manufactur-ing firms are sparse. Moreover, some ofthese studies seem to be supported byanecdotal rather than by systematicempirical evidence. The brief reviewprovided in this section is confined tosome of the empirical studies reported inthe literature.

One of the studies that focused on theimpact of owner-manager personality at-tributes on the success of small busi-nesses in general is by Ibrahim andGoodwin (1986). Based on a survey of144 small firms in the retail, wholesale,service, and manufacturing sectors in afew metropolitan areas of the UnitedStates and Canada, they asserted that en-trepreneurial behavior and managerialskills of owner-managers are key successfactors in small business. Similar findingswere reported by Huck and McEwen(1991) from a survey of 54 Jamaican en-trepreneurs involved in manufacturingand service businesses. More specifical-ly, these researchers identified entrepre-neurs' competencies in management,planning and budgeting, and marketingas most crucial for the successful opera-

88 JOURNAL OF SMALL BUSINESS MANAGEMENT

lion of a small busine.ss. Personality at-tributes of owner-managers were furtherexamined by Duchesneau and Gartner(1990) in an extensive field study of 26small merchandising firms in eight met-ropolitan centers in the southeast, cen-tral, and southwest Pacific regions of the[ inited States. According to their find-ings, successful entrepreneurs weremore likely to have been rai.sed by entre-preneurial parents, and had broaderbusiness and prior startup experience.Such entrepreneurs also worked longhours, had a personal investment in thefirm, and were good communicators.

Another study that examined personal-ity attribLites of' owner-managers is byGhosh. Teo, and U)w (1993). On theIjasis of a questionnaire survey of 101small and medium-sized enterprises inthe manufacturing, financial, and mer-chandising sectors of Singapore, theyreported that ability to satisfy customers,finding a market niche, good service, agood management team, and good net-working were the chief success factors. Ina similar study based on 192 small manu-facturing firms in Saskatchewan, Canada,Chaganti and Chaganti (1983) observedthat innovativeness, know-how, creativi-ty, and managerial competence (particu-larly in the management of cash flow)were important for .success in small busi-ness. Similarly, a study of 58 female smallbusine.ss owners in three eastern metro-politan areas in the United States indicat-ed that education, prior experience, andability to delegate are needed by femaleentrepreneurs for success in business(Cuba, Decenzo, and Anish 1983).

A few studies have focused theirempirical investigations on both internaland external factors that impact smallbusiness success. One such study is byDavicLsson (1991). This study surveyed432 small manufacturing firms in Swedenand found that industrial, managerial,and entrepreneurial experiences ofowner-managers, as well as favorablegeographic location and membership inparticular indu.stry groups, positivelycontributes to the growth of small busi-ness. Focused on similar factors, a study

conducted by Tan and Tay (1994) wasbased on a questionnaire survey of 161small manufacturing and commercialenterprises in Singapore. This studyfound .several factors to be positively andsignificantly related to small businesssuccess: financial suppoit by the govern-ment; the entrepreneur's prior experi-ence; a quality product and/or service;good customer service; and being largeramong small-scale firms. Another firm-specific factor examined by the abovetwo studies and by a study on smallmanufacturing firms in India (̂ Little 1987)is the age of firms. All three studiesreported that the age of firms was nega-tively correlated with their growth, indi-cating that older firms grew less rapidlythan younger ones.

Another study, based on 220 smallfirms operated in several types of busi-nesses in the island nations of the SouthPacific (Yusuf 1995). found that goodmanagement, access to financing, per-sonal qualities of the entrepreneur, andsatisfactoiy government suppoit wereperceived by the responding owner-managers as the most critical succe.ss fac-tors in their businesses. Further, in astudy based on extensive personal inter-views of owner-managers in 22 smallmanufacturing firms in nortliwest Wis-consin. Steiner and Solem (1988) foundthat managerial experience and priorexperience in a similar or the same typeof business as well as the adoption ofnew manufacturing technologies, theavailability of resources to adopt newtechnology, and the development of acompetitive advantage were stronglyrelated to success. A study based on asurvey of 55 small manufacturing firmsin the Kobe region of Japan (Wijewar-dena and Cooray 1995) revealed thatfirms with more skilled labor as well asrelatively bigger firms in the small-scalesector achieved better performance insales growth. Their results also indicatedthat the sales growth of small-scale firmswas, to some extent, industry-specific.Furthermore, the results of another partof the same survey revealed that goodcustomer relations, high quality of prod-

APRIL 1999 89

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90 JOURNAL OF SMAU BUSINESS MANAGEMENT

ucts, efficiency of management, and theowner's knowledge and experiencewere perceived to be highly correlatedwith small firm .success (Wijewardenaand Cooray 1996).

SampleThe sample for this study consisted of

500 firms which were randomly selectedfrom the Register of Manufacturing In-dustry of the Iliawarra Regional Informa-tion Service (IRIS 1992). The criterionused for selecting the sample firms wasthat they belonged to the category ofsmall manufacturing enterprises, whichare defined by the Australian Bureau ofStatistics as manufacturing organizationsemploying fewer than 100 people (ABS1996).

A questionnaire was mailed to theowner/manager of each firm. A reply-paid envelope was included. A total of142 firms responded to the question-naire, giving a response rate of 28.4 per-cent. Given the nature of small firms andthe low response usually associated withmost mail .surveys, this response rate wasconsidered reasonably adequate. Six ofthe responses received were not u.seabledue to incomplete data. Tlie rest of theresponses, representing 136 firms, wereused in the study. A profile of these firmsis displayed in Table 1.

Nearly 78 percent of the firms in thesample employed fewer than 20 personsand only alx)ut 7 percent had between50 and 100 employees. The majority offirms (639 percent) operated as propri-etary limited liability companies whilemost of the others were sole prctprietor-ships and partnerships. Nearly 58 per-cent of firms were 20 years of age orbelow, and only about 22 percent wereover 30 years. Basically, almost all firmsfaced a considerable degree of competi-tion in the product market, witli nearly74 percent facing extensive competition.Almost 85 percent of the firms sold theirproducts only in the domestic market.Even the firms participating in exporttrade had a very low percentage ofexports in relation to their domestic.sales. The sample firms fell Into eight in-du.stry categories by their Internationa]Standard Industry Cla.ssification (ISIC).The annual sales growth of firms interms of industry groups ranged from 4.7to 23.8 percent during the 1990-1994period. About 18 percent of the finns fellinto the two industry groups which hadachieved substantial sales growth: Group1, consisting of manufacturers of textiles,wearing apparel, leather products, expe-rienced a 23.8 percent sales growtli; andGroup 2, consisting of manufacturers of

Table 2Regression Results from Equation 1

Estimated Coefficient -Statistic

Constant

Log of AGE (firm's age)

Log of SZ (size)

Log of SZ2 (size squared)

Log of SW (use of skilled workers)

MC (market competition)

EO (export orientation)

R^= 0.14

F- statistic = 2.06

10.90

-5.29

12.73

-2.41

0.58

-0.88

0.15

.93-3.16"1.90*

-1.81*

0.30-0.51

1.06

< .05£ .01

APRIL 1999

Table 3Regression Results from Equation 2

Estimated Coefficient -StatisticCon.stant

Log of AGE (firm's age)

Log of SZ (size)

Log of SZ2 (size squared)

Log of SW (use of skilled workers)

MC (market competition)

EO (export orientation)

R2= 0.14

F- statistic = 2.06

10.16

-5.27

12.47

-2.39

0.15

1.27

-3.18*'

1.91'

-1.85'

1.15

' p < .{)=>

*' p< .01

basic metal products, had a 21 percentgrowth in sales.

Analysis TechniqueBecause of the difficulty- of obtaining

realistic information on profits earned,financial performance was mea.sured bysales growth. This is in conformity withthe studies by Steiner and Solem (1988),Cuba. Decenzo, and Anish (1983), Khanand Rocha (1982), and the US SmallBusiness Administration (1980) whichhave used sales growth as a key indica-tor of small business success and overallperformance. It is hypothesized thatgrowth is significantly irifluenced by theloliowing set of variables: firm size, ageof firms, employment of skilled workers,market competition, export orientation,and type of industry. To examine thepossible relationships of these variablesto growth, we employed the followingmultiple regression model;GR = f (SZ, AGE, SW, MC, EO, INIDUS-

TRY)The variables (with expected sign inparenthesis) are listed below:GR = Growth (represented by annual

growth of sales)AGE = Age of firm (+ or -)SZ = Size of firm, defined as the total

number of employees (+)

SW = Skilled workers, calculated as theratio of skilled workers to totalemployees (+)

MC = Market competition, ranked from1 (no competition) to 5 (severecompetition) (- or +)

EO = Export orientation of firm, mea-sured as the ratio of exports tototal sales (+)

INDUSTRY = a set of 0-1 variables rep-resenting industry membershi pby ISIC classification.

The AGE variable is included in themodel becau.se very young firms whichsiii-\ive would tend to grow rapidly dueto innovative ideas and dynamic man-agement together with the fact that theyare less likely to attract the attention ofmajor industry players. On the otherhand, older firms may be better placedto achieve stronger growth becau.se oftheir greater expertise and experience.Thus, the expected coefficient of theAGE variable can be either positive ornegative. It is also possible that largerfirms grow faster than .smaller ones dueto their ability to employ more skillfulmanagers and workers and to acquiremore efficient productitm facilities(Sandesara 1966). Accordingly, theexpected coefficient of the SZ (firm size)variable is positive. Similarly, since

92 JOURNAL OF SMALL BUSINESS MANAGEMENT

skilled workers can Ix' as.sumed to con-tribute significantly to growth of a Firm(Wijewardena and Cooray 1995), the co-efficient of the SW (skilled workers) islikely to be positive. Firms facing lesscompetiticm in the market may havehigher .sales volumes, contributing tofaster growth. On the other hand, thegreater the competition the more effi-cient and dynamic a firm may be. A firmfacing no or little competition may restt)n its laurels. Therefore, the coefficientof the MC (market competition) variableniay be either negative or positive. Also,firms which are active in export trademay be relatively more capable of in-creasing their sales, leading to a positivecoefficient for the EO (expcjrt orienta-tion) variable. In addition t<} the abovevariables, the growth of certain firmsmay be partly iittributable to the specificnature of the industry in which theyoperate. In order to capture such indu.s-try-specific features, dummy variableswere used to represent the eight productgroups to which the sample firmslielong.

ResultsThe mode! specified in the previous

section was estimated using tirdinaryleast scjuares. The dummy variables rep-resenting the industry groups were sta-tistically insignificant and were droppedfrom the model. In the estimation ofresults, the three variables of AGE, SZ,and SW were used both in linear and logforms. The log form produced a better titthan that of the linear form, and the Finaltesults in respect to these three variablesare reported in both tables in this form.The results produced by the model afteromitting dummy variables are reportedas Equation 1 in Table 2, In Equation 1the coefficients of skilled workers (SW)and market competition (MC) are notsignificant. The model was re-estimatedafter omitting the.se two variables; re.sultsare presented as Equation 2 in Table 3. Itis clear from this table that after the dele-tion of SW and MC, the .stati.stical signifi-cance of the overall regression hasimproved. This variable deletion is statis-

tically acceptable in terms of the stan-dard test for variable deletion.

The coefficient of AGE is significantat the 1 percent level with a negativesign. This suggests that older firms havepoor perfonnance compared to youngerones, A possible reasori for this may bethai the management of younger firms inthe small-scale sector is more dynamicand innovative. This finding is compati-ble with the results reported by threeother studies of small enterprises inIndia, Sweden, and Singapore (Little1987; Davidsson 1991; Tan and Tay1994). Tlie coefficient of SZ (size) is sig-nificant at the 3 percent level with a pos-itive sign, indicating that relatively biggerfirms in the small-scale sector demon-strate higher sales growth. This findingconfirms results in the Singapore andJapanese studies cited in the review ofliterature (Tan and Tay 1994;Wijewardena and Cooray 1995). How-ever, when the SZ variable is squared locapture any further effect of firm size ongrowth performance, it also produces astatistically significant coelFicient, butwith a negative sign. Interestingly, thecoefficient of SZ- is smaller than that ofSZ. We conclude from this that althoughthe larger firms in the small-scale sectorperform better, the importance of thesize factor in groviih performance dimin-ishes with increased firm size. Thisaspect was not examined in the Singa-pore and Japanese studies cited above.In the case of EO (export orientation),the /-ratio is statistically insignificant,though the sign is as expected, and the/-ratio is greater than one. We interpretttiis as weak statistical support for thehypothesis that greater export orienta-tion leads to better growth performance.In contrast, the same measure examinedin the Japanese study (Wijewardena andCooray 1995) proditced a negative coef-ficient significant at the 10 percent levelHowever, it is important to note that cir-cumstances facecl by firms in Japan aredifferent from those in Australia; the neg-ative coefficient of EO is consistent withthe experience of Japanese industryunder the massive yen appreciation

APRIL 1999 93

(endaka) since 1985. Under this situationin Japan, .selling in the domestic markethas been more profitable than exporting,particularly for small manufacturers whoare less capable of adjusting to the ex-change rate pressures through costingand pricing strategies (Athukorala andMenon 1993.)

ConclusionsIt is important to mention two major

limitations of this study before any con-clusions may be drawn. The small sam-ple size does not permit generalizationof the findings to all firms in the small in-dustry sector. Similarly, tlie firms studied,although representative of .small industryin the lUavv'arra region, may not be rep-resentative of small industry throughoutAustralia. Despite these limitations, the.study provides .some insight into somefirm-specific factors affecting growth insmall manufacturing firms in Au.stralia.

The results of the study suggest thatolder firms, in general, have poorgrowth performance compared toyounger ones. Tlie results also suggestthat relatively larger finns in the small in-dustry sector perform better, but the im-portance of the size factor in growth per-formance diminishes with the increase offirm size. However, there is less statisti-cal support from the results of this studyfor the hypothesis that greater export ori-entation leads to better growth perfor-mance in small industry.

ReferencesAthukorala, P., andJ, Menon (1993). 'Ex-

change Rate Changes and ExportPricing Behavior in Japan," PacificEconomic Papers. No. 222 (August),Canberra, Australia: Australian-JapanResearch Centre. Australian NationalUniversity, 1-35.

Australian Bureau of Statistics (1996).Small Business in Australia 1995.Canberra, Australia: The AustralianGovernment Publishing Service.

Chaganti, R., and R. Chagami (1983). "AProfile of Profitable and Not SoProfitable Small Business," fournal ofSmall Business Management 21(3),45-50.

Cuba, R., D. Decenzo, and A. Anish,(1983). "Management Practices of Suc-cessful Female Business Owners,"American fournal of Small Business8(2), 40-46",

David.sson P. (1991). "Continued Entre-preneurship: Ability, Need and Op-portunity as Determinants of SmallFirm Growth," fournal of BusinessVenturing 6, 405-29.

Duchesneau, D, A., and W. B. Gartner(1990). "A Profile of New Venture Suc-cess and Failure in an Emerging In-dustry," fournal of Business Venturing5, 297-312.

Ghosh, B.C., S. K. Teo, and A. M, Low(1993). "Factors Contributing to theSuccess of Local SMEs: An Insightfrom Singapore," Journal of SmallBusiness and Entrepreneurship 10(April-June), 33-46.

Huck, John F, and T. McEwen (1991).'Competencies Needed for SmallBusiness Success: Perceptions ofJamaican Entrepreneurs," Journal ofSmall Business Management 29(4),90-93.

Ibrahim, A.B,, andJ, R, Goodwin (1986)."Perceived Causes of Success in SmallBusiness." American fournal of SmallBusiness 11(2), 41-50.

Illawarra Regional Inf(jrmation Service(1992). Register of ManufacturingIndustry. Wollongong, Australia.

Khan. R., and J. Rocha (1982). "RecurringManagerial Problems in Small Busi-ness," American fournal of SmallBusiness 7il), 50-58.

Little. I. M. D. (1987). "Small Manu-facturing Enterprises in DevelopingCountries," 7}.7e World Bank EconomicReview 2 (January), 203-235.

Sandesara. J. C. (1966). "Scale and Tech-nology in Indian Industry." OxfordBulletin of Economics 28(3), 181-198.

Steiner, Michael P., and Olaf Solem(1988). "Factors for Success in SmallManufacturing Firms," fournal ofSmall Business Management 26(1),51-56.

Tan. William, and S, T. Richard Tay(1994). 'Factors Contributing to theGrowth of SMEs: The Singapore

94 JOURNAL OF SMALL BLJSINESS MANAGEMENT

Case," Proceedings to the Fifth ENDECWorld Conference on Entre-preneurship. Singapore: NTIJ-Entre-preneurship Development Center,150-161.

U.S. Small Business AdministrationC1980). The State of Small Business: AReport of the President. Washington,D.C.: U.S. Government PrintingOffice.

Wijewardena, Hema, and Shiran Cooray(1995). "Determinant of Growth inSmall Japanese Manufactn.iring Firms:Survey Evidence from KoVm," fournalof Small Business Management 33(4),87-92.

(1996). 'Factors Contributing to the-Growth of Small Manufacturing Eirms:

Perceptions of Japanese Owner-Man-agers," fournal of Enterprising Culture4 (December), 351-361.

Yusuf, Attahir (1995). "Critical SuccessFactors for Small Business: Per-ceptions of South Pacific Entre-preneurs," Journal of Small BusinessManagement 33(1), 68-73.

Hema WijewardenaUniversity of WollongongWoUongong, Australia

Garry E. TibbitsUniversity of Western SydneyCampbelltown, Australia

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