Board Characteristics, Firm Characteristics, Technological Innovation and Manufacturing Firm Performance: Conceptual
Paper
Hussain, S.1*, Hashim, F.1, Jamaludin, M. F.2
1 1Graduate School of Business, Universiti Sains Malaysia, 11800 Penang, Malaysia
2Accounting Faculty, Universiti Technologi MARA, 08400 Merbok, Kedah, Malaysia
*Corresponding Author: [email protected] Accepted: 10 January 2023 | Published: 31 March 2023
DOI:https://doi.org/10.55057/ijaref.2023.5.1.12
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Abstract: This paper aims to study a potential interrelationship between board characteristics, firm characteristics, technological innovation, and firm performance in the manufacturing sector. The paper is a conceptual paper. It offers a brief review of the literature regarding on these four variables. This study intends to employ a quantitative research approach in determining the determinants of firm performance. Several methods including online and offline material from article journals, books and industrial reports are used to collect and analyzed the literature. This study is grounded on RBV theory. The theoretical argument and literature findings indicate that viewing the firm performance from the perspective of internal sources by incorporating the three determinants, which include board characteristics, firm characteristics, and technological innovation, has the potential to improve manufacturing firm performance. This study reveals that there have been very limited studies have combined the three internal determinants of firm performance such as board characteristics, firm characteristics, and technological innovation on firm performance. As a result of focusing on internal firm resources, the framework will provide a greater emphasis on strategic sources that the firm owns and can fully utilize in order to improve the Malaysian manufacturing firm performance. Therefore, this warrants more investigation, and future studies are needed to further analyze the proposed framework.
Keywords: Board Characteristics, Firm Characteristics, Technological Innovation, Firm Performance and Manufacturing
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1. Introduction
It is undeniable that the manufacturing firm performance has been the economic driver of many national economies because of the number of people it employs and the wealth it generates.
Malaysia is no exception to this, where manufacturing has been the key pillar of economic success for many years. In 2020, the manufacturing sector with 22.9 percent share of Gross Domestic Product (GDP) (Bank Negara Malaysia, 2021), and it raises from 8.6 percent in 1960 (Malaysia Ministry of Finance, 2020).
However, as reported by Malaysia Ministry of Finance (2020), there are persistent potential threat to manufacturing firms and it raises concerns about their performance. Manufacturing firms are confronted with several dilemmas, including declining trend in value-added share performance, and negative growth in some industries within the manufacturing sector such as
crude oil and natural gas (2005; 14% to 2015; 8.7%), electronic components and boards (2005;
3.1% to 2015; 2.5%), and computer, peripherals, office equipment and machinery (2005; 4.6%
to 2015; 0.5%). This critical issue has garnered less attention from researchers and practitioners in the past.
The above issues need to be addressed immediately to prevent it from getting worse. There are some manufacturing firms have had to close their business operations because due to firm performance issues. Having the above in mind, the investigation on the determinants of firm performance becomes crucial and important in explaining firms' success. The main motivation to study in this field arises since the manufacturing sector is recognized as a key component of growth and prosperity in any economy. Investors also consider the firm's performance to be one of the most important factors in their decision-making process (Vieira et al., 2019).
In order to achieve the objective, three dimensions of firm’s performance determinants are proposed in this study. The first dimension of determinants embodies firm characteristic determinant that capture the firm characteristic within firms operate. In this dimension, firm age, leverage and liquidity of the firm is included as explanatory variables. The benefit of having this variable is that many scholars, such as Egbunike and Okerekeoti (2018) and Palaniappan (2017), have discovered that firm characteristics appear to play a critical role in determining the overall performance of the manufacturing firm.
The second dimension of determinant refers to board variables. Since, the overall state of the board can also influence a firm’s performance, three board characteristics are chosen by using measurement of board size, board gender diversity and board independence. The board of directors has the ability to shape the firm's direction and culture. A manufacturing firm requires an effective board that does not sit in a comfortable chair and does not remain static. Therefore, board characteristics are critical in serving as a determinant of firm performance.
The final dimension of determinant refers to technological innovation. R&D intensity is chosen to be the proxy for technological innovation. Technological innovation is not a choice but a requirement for an organization to adapt to a changing market environment, consumer demands, and achieve superior firm performance.
In several ways, this study expands on previous empirical studies. First, it will incorporate three distinct dimensions of internal firm resources into a single model, each of them has the potential to influence firm performance. They are firm-level determinants, board-level determinants, and technological innovation. These three determinants are desired as a package to improve manufacturing firm performance because they can be aligned. With increasing competition in the manufacturing business, the complexities of the manufacturing firm allow the firm to benefit more from additional board size. Technological innovation can also be resisted, including corporate internal boycotts as occurred with the legendary American photographic film, Kodak Company (Ho & Chen, 2018). In this case, the board must support innovation culture in firm. From the perspective of firm characteristics, the ability level of liquid assets to finance its activities and investment when external finance is unavailable is crucial to ensuring the firm performance is sustained. All determinants are proposed to be included in a single model for manufacturing firm performance to continue to grow.
Furthermore, this study has been significant in contributing literature knowledge in the area of innovation management and organizational study. There is abundance evidence on innovation activities in develop economy, on contrary, despite the continuous efforts by developing
economies in protecting manufacturing sector, literature on technological innovation and determinant factor towards firm performance of developing economies is still lacking.
Therefore, by combination of these three determinants into one model has the potential to improve the basic theoretical framework while also offering a more comprehensive picture.
This study also has a potential to contribute to the existing literature by providing comparable data from a developing economy, Malaysia.
Second, this framework model represents an improvement over previous studies that focused solely on firm-specific determinants, such as, Nunes and Serrasqueiro (2015), both factor;
industry and firm (Hee et al., 2019), national and firm factors (Egbunike & Okerekeoti, 2018) and the combination factor of national, industry and firm level (Pervan et al., 2019), but very limited to covers simultaneously incorporated internal sources including firm, board and technological innovation. As a result, the model will deliver a more precise depiction of the performance of a Malaysian manufacturing firm by placing more emphasis on the firm's internal resources. It is notable that there are 13 industries in manufacturing sector proposed by MITI (2021). Differences industries have different technological and learning regimes shaping specific patterns of firm performance. Therefore, to get a clear understanding on the research scope, industry types has been chosen as control variable.
Finally, the findings of this study will provide some insight for the board of directors. The board of director or the managers may better understand the interrelationship between firm characteristic factor, the board characteristics as well technological innovation on firm performance in manufacturing sector in Malaysia
2. Literature Review
Literature review covers the literature in the field of firm performance and its determinants, including the board characteristics, firm characteristics, technological innovation, the details of the theoretical framework as well as the utilization of RBV as the underpinning theory that serves as the theoretical framework's foundation. The proposition developments are also presented in this section.
2.1 Firm Performance
The past scholars have paid close attention to the topic of firm performance (Jia & Bradbury, 2020; Tejerina-Gaite & Fernández-Temprano, 2020). It has been of the main concern to business players in all types of businesses due to its implications on organizational health, competitive advantage (Yang et al., 2017), and ultimate survival (Lo & Liao, 2021). A well- performing firm can generate a higher and long-term profits (Taouab & Issor, 2019), allowing the firm to grow and progress. As a result, managing and measuring firm performance is relevant, as they are always looking for effective and efficient results.
Firm performance is crucial because it enables firms to keep comparing their actions to those of their competitors, as well as how firms perform and grow over time (Rahim & Zainuddin, 2019). It indicates shareholder's satisfaction, management's success, investor attraction and the firm's long-term viability (Zhang et al., 2019). However, Alarussi and Alhaderi (2018) claimed that majority of firms have realized the importance of firm performance but they may lack sufficient knowledge of how to improve it and the factors influencing it. This is especially noticeable during a crisis. Some businesses attempt to retain their financial status by implementing risky measures.
Nevertheless, due to limited experience and high risks, these types of actions generally worsen their financial situation. In this changing environment, which characterizes the global economy today, firms are confronted with intense competitive pressure to operate more effectively, faster, and at a lower cost. The challenges posed by their environments have become more difficult in recent years, and they must be able to adapt better in order to keep up with these challenges (Taouab & Issor, 2019). In the context of a manufacturing firm, knowing the determinant of their firm will encourage the board to stay focused and always be prepared to deal with various potential risk faced by the firms such as high competition, technological disruption and changing trends in customers’ requirements.
Based on the past empirical paper, the determinants of firm performance can be divided into two categories. Vieira et al. (2019) categorized them into two groups; internal and external determinant. Egbunike and Okerekeoti (2018) divided them in the same number but in different theme, micro, and macroeconomic factor. However, the interesting point is, it has the same characteristic whether internal or micro. It focuses on internal firm factors that are under management's control including firm (Nanda & Panda, 2018) and board characteristic (Duppati et al., 2020) as well as technological innovation (Paula & Silva Rocha, 2020). The external determinant, also known as macroeconomic are referred to the factors that are not under the control of management and exist outside the firm such as industry (Elango & Dhandapani, 2020) and national characteristics (Pervan et al., 2019). This current study proposes to cover the internal firm resources.
According to Yang et al. (2017), if the board utilized combined firm internal resources, those resources may contribute more to the firm. The focus on internal resources is expected to assist manufacturing firms achieve synergistic value and provide unique opportunities (Black &
Boal, 1994; Yang et al., 2017). Therefore, this study proposed that there is limited empirical evidence to support this argument. To address this gap in the existing body of knowledge, it is necessary for the future researcher, to give an attention on how the combination of internal resources affects the manufacturing firm performance.
However, another group of the previous researchers such as Vieira et al. (2019) proposed manufacturing firms should focus on external factors such as industry and country characteristics in order to improve firm performance. Their justification is the firm should always in line with external needs to make sure it relevant in the market. Such a view is not wrong, but many researchers including Ngu and Amran (2020) and Palaniappan (2017) suggest to the board of directors should focus on its internal firm resources in developing the firm's strengths and subsequently achieve good performance. The point of views from the groups that support these internal sources also have their own justifications, which all future researchers should consider.
The justification is that internal firm resources are under the board's control. It can always be strengthened to achieve better results. In comparison to external resources that are not under the board's control. This view is in line with RBV, internal firm resources can provide a competitive advantage to the firm because they are unique, difficult to imitate by the competitors, rare, and have the ability to further drive the firm performance towards better achievement as has been proven by the previous findings. Table 1 has shown the themes variables has been using by scholars for study determinant of firm performance. The following section discusses how these three variable namely firm characteristics, board characteristics and technological innovation has potential effect to manufacturing firm performance.
Table 1: Variables of determinants of firm performance in manufacturing sector Author / Country Determinant of firm performance
External Factor Internal factor National Industry Firm
(1) Board
(2) Technological
Innovation (3) 1,2,3
Pervan et al. (2019) – Croatian ✓ ✓ ✓ X
Ngu and Amran (2020) - Malaysia ✓ X
Younas and Rehman (2020) - Pakistan ✓ X
Fernández et al. (2018) - Spain ✓ ✓ X
Egbunike and Okerekeoti (2018) - Nigeria
✓ ✓ X
Chen and Ibhagui (2019) - America ✓ X
Nanda and Panda (2018) - India ✓ ✓ X
Qureshi et al. (2020) - Norway ✓ ✓ X
Rahim and Zainuddin (2019) - Malaysia ✓ X
Duppati et al. (2020) – Singapore &
India
✓ X
Palaniappan (2017) - India ✓ ✓ X
He et al. (2020) - Australia ✓ X
Vieira et al. (2019) - Portugal ✓ ✓ ✓ X
Elango and Dhandapani (2020) - India ✓ ✓ X
2.1.1 Firm Characteristics
Several determinants of firm performance have been identified in previous literatures, including industry structure (Pervan et al., 2019), the firm characteristic (Doan, 2020), the national level (Nanda & Panda, 2018), the board level (Ngu & Amran, 2020), and technological innovation (Paula & Silva Rocha, 2020). Many studies shows that the firm characteristic effects are the most widely used variable proposed by researchers (Pervan et al., 2019; Fernández et al., 2018).
In Nigeria, Charles et al. (2018) found that the interrelationship between firm characteristics and financial performance among manufacturing firms in Nigeria were significant. In India, Nanda and Panda (2018) claimed that the firm-specific variables and macroeconomic indicators play a significant role in explaining the profitability of Indian manufacturing firms.
In Croatian, Pervan et al. (2019) examined the influence of three types of profitability determinants; industry-specific, macroeconomic and firm characteristics, and claimed that those factors have significant influence on a firm’s profitability. In Spanish, Fernández et al.
(2018) examined the relative importance of the firm and industry effects in explaining the firm performance. This study separated the firm into three size categories, and it has a significant result. In Korea, Bae (2019) has found that the firm characteristic have positive moderating effects towards firm performance in Korean manufacturing firms. In Norway, Qureshi et al.
(2020) investigated on the sources of variations in firm profitability in Norwegian businesses and their findings revealed that firm characteristics explain majority of the variation in profitability.
In South East Asia perspective, the evidence by Sudiyatno et al. (2020) (Indonesia) showed that firm characteristics had a positive effect on firm profitability. In Malaysia context, Rahim (2017) found that there is a significant correlation between the firm characteristics such as firm size and debt ratio with the rate of sustainable growth. As a result, the role of firm characteristics must be considered and prioritised in companies in order to achieve firm performance.
2.1.2 Board Characteristics
As a matter of fact, firms do not have any artificial intelligence or their own brain to make decisions about their wellbeing or for long-term achievements. For this purpose, organizations are governed and run by the people for which mostly corporate board is responsible to make decisions of the firms (Bhagat & Bolton, 2008). In the corporate governance literature, the ability of a board of directors to perform its duties is related to certain characteristics. Amin and Nor (2019) has stated that the future of a firm is determined by the characteristics of the leader. Therefore, the board characteristics are crucial in serving as a determinant of firm performance because empirical findings show that it has a relationship with performance.
Many previous scholars have proven that board characteristics have an impact on firm performance. Palaniappan (2017) investigated the effect of board characteristics on the financial performance among 275 Indian manufacturing firms. The findings suggested that the board level characteristics such as meeting frequency and board independence moderate the relationship between return on assets and return on equity. Ngu and Amran (2020) claimed their findings on the top 100 Malaysian Public listed companies in 2016 were supportive of the RBV, as the board diversity is more likely to represent diverse stakeholders and achieve higher financial returns. However, Jakpar et al. (2019) reported that their findings show negative relationship between board characteristics and firm performance and none of the relationship is significant relationship with firm’s performance. The data was gathered from the 30 listed firms on the Bursa Malaysia within the period 2011 to 2015.
In India, Shaw et al. (2016), using data from 651 Indian firms for the year 2006 – 2012, has found that the board characteristic enhanced firm performance. Besides that, Duppati et al.
(2020) claimed that the findings from Indian and Singapore companies demonstrated a positive and significant relationship between board characteristics and firm performance when the sample is split into five quantiles for the firms in these two countries. In developed country such as Australia, He et al. (2020) confirmed with their findings support the view that both firms’ resources and internal processes that enable boards to mobilize those resources to resolve complex tasks are critical for a firm’s long-term success; For United States and United Kingdom, Brahma et al. (2020) and Charles et al. (2018) has found that a positive and significant relationship between board characteristics and firm performance. However, Martínez-Caro et al. (2020) reported that some of the board characteristics such as board compensation, CEO duality and, board size are positively associated with the firm performance, but the board compensation has a negative associated. Therefore, board characteristics should be considered as an important agenda item for achieving superior performance.
2.2 Technological Innovation
Technological innovation is crucial for manufacturing firms to achieve sustainable competitive advantage, given that manufacturing sectors are technologically intensive (Zhang et al. 2014).
Similarly, innovation strategies can lead firms to become more innovative, increased their productivity and it will also be helpful in boosting the competitive advantage (Abbasi et al., 2019). Moreover, by implementing the new innovative ideas and technology, a firm can reduce its processing cost (Younas & Rehman, 2020). Moreover, the core aim of an organization is to earn profit and to maximize wealth, however, the accomplishment of this objective is only possible when revenue of the firm is greater than their cost. Hence, the fundamental vision driving manufacturing firms' active in employing technological innovation is to improve firm performance in terms of revenue, growth, value, and competitiveness by reducing the cost.
Therefore, the cost efficiency leads the organizations to enjoy high profit and stability.
Active participation in technological innovation activities can boost the competitiveness and prosperity of manufacturing firms (Xin et al., 2019). However, in recent years, manufacturing firms from many countries including Malaysia have faced slowing growth due to rising raw material costs, more sophisticated demand from consumers, and more complex value chains (Malaysia Ministry of Finance, 2020). Technological innovation is viewed as a tool that Malaysian manufacturing firms can use to address these challenges (Rahim & Zainuddin, 2019). As a result, it can be stated that the lack of technological innovation in the manufacturing firm will have a significant impact on the company's success. It determines their chances of survival in the market.
2.3 Underlying theory – RBV theory
The basic assumption made in RBV is that resources are distributed heterogeneously across firms and that resources which are productive cannot be transferred across firms without cost.
Due to this immobility, the firms find it difficult to replicate competitors' resources and strategies. Therefore, in today's rapidly changing globalized world, firms that respond quickly to changes in the competitive market, are more likely to gain and sustain competitive advantage.
From the RBV perspective, the firm characteristic, the board attributes, and technological innovation are a potentially valuable resources for the firm and its management to improve the firm performance. Following to this viewpoint, firms’ internal resources such as technological innovation including R&D expenditure; firm characteristics including firm age, leverage and liquidity; and board characteristic including the board size, board independence and board gender diversity may influence the firm performance. There are several previous studies that have used RBV to investigate the relationship between those determinant factors and firm performance separately, such as Zhu et al. (2019), Pervan et al. (2019), Elango and Dhandapani (2020). This paper also considers RBV as the appropriate theory for the hypothesis development.
The board of directors is a potentially valuable resource for the firm and its management. A board of directors could meet these required attributes and so be considered a strategic resource when governance choices affect the creation of economic rents. In particular, where boards can provide a firm access to scarce, valuable and non-replicable resources, they can become a valuable resource, especially when compared to a board that focuses mainly on monitoring and minimizing agency costs (Huse, 2007). Thus, the capabilities of a board of directors may be a valuable resource that cannot be easily duplicated or substituted and providing the firm with a distinct competitive advantage. For technological innovation, Shaker et al. (2005) examined the effects of several technological resources on new ventures domestic and international growth and found out the firm's technological resources can generate a competitive advantage that improves its sales growth. Zhang et al. (2019) claims that technological innovation enables firms to create a wide range of new products and services, which are critical for high performance and profits.
Pervan et al. (2019) also discovered that a firm can effectively build a competitive advantage by using internal resources such as firm characteristics, which can be reflected in the return on investment. Bhayani (2010) examined factors influencing profitability for cement firms from 2001 to 2008. He concluded that liquidity and firm age are important determinants of profitability in the Indian cement industry. Some studies have argued that firms have higher returns when they borrow more funds, but there is a negative influence on long-term debt (Abor, 2005). Egbunike and Okerekeoti (2018) found that the relationship between firm
characteristics including firm size, leverage and liquidity were significant to firm performance.
Thus, the RBV view suggests that firm and the board characteristic as well as technological innovation drive performance outcome.
2.4 Theoretical Framework and Hypotheses Development 2.4.1 Theoretical Framework
Based on literature review, this study proposed the following conceptual framework (see Figure 1). The examination of determinant factors is relevant and significant in explaining firm’s performance. It is shaped according to a firm’s internal resources and underpinning by RBV theory, and directly affects competitive advantage, which determines firm performance. In order to accomplish the aim, past literature have revealed that the selected determinants have direct influence on firm performance including firm and board characteristic as well as technological innovation. The combination of these three determinants may improve the basic theoretical conceptual framework and providing a more comprehensive view.
Figure 1: Proposed Conceptual Framework of the Study
2.4.1 Firm Age and Firm Performance
RBV's idea claims that a firm age has a significant effect on firm performance. Older firms perform better than younger firms because they are more experienced and are not vulnerable to new liabilities (Sumaira & Amjad, 2013). New firms are more likely to have lower profits than established firms because they have less industry experience, are still developing their business positions, and typically have a higher cost structure. Older firms may be reaching the end of their product life cycle. This argument also support by Ujunwa (2012). This suggests that the complexity of a firm grows with its age.
Pervan et al. (2019) claims that a substantial amount of theoretical and empirical work in various scientific fields such as finance, economics, and strategic management, has been devoted to understanding and exploring the question of whether older firms are more profitable than smaller ones. The main justifications for why the firm's age may have a positive impact on performance are its business reputation, easier access to financing and the firm's experience.
However, This result contradicts to Charles et al. (2018), older firms often attempt to codify decision-making procedures, which causes them to become very bureaucratic and reduces their organizational flexibility and the ability to make quick changes. These rules and procedures
Firm Performance Firm Characteristic
• Firm Age
• Leverage
• Liquidity
Board Characteristic
• Board Size
• Board Independence
• Board Gender Diversity
Technological Innovation
H1 – H3
H4 – H6
H7
Control Variable:
• Industry types
can be significant impediments to organizational change and innovation, both of which are critical in a competitive business environment. Based to the argument above, the findings of previous literatures are inconsistent. However, this study revealed that numerous recent findings, such as Pervan et al. (2019), show a significant link between firm age and firm performance. Thus, this study issued the following proposition:
P1. Firm age has a positive significant impact on firm performance
2.4.2 Leverage and Firm Performance
The corporate climate has changed in recent years and, in order to be effectively completed, firms need to make optimal use of their resources (Galbreath & Galvin, 2008). This is in line with the RBV hypothesis, a firm proposed to establish competitive advantages by improving their internal financial resources. Financial resources are generally measured by leverage ratios that allow the firm to increase its project funding by borrowing from debt providers (Charles et al., 2018). A number of studies have documented a positive relationship between leverage and firm performance, such as Egbunike and Okerekeoti (2018) and Rahim (2017). A current findings by Qureshi et al. (2020) employing data from listed companies in Scandinavia from 2002 to 2015 suggests that leverage was among the most significant determinants of profit variability in the Norwegian listed companies.
However, according to Pais and Gama (2015), the analyzed on a sample of Portuguese SMEs and showed a negative association between leverage and profitability. These findings are compatible with those of Alarussi and Alhaderi (2018) and Nanda and Panda (2018), who examined the influence of debt on the economic performance of firms and concluded that the level of debt had a negative and significant impact on firm performance, measured with ROA, ROE and Tobin's Q.
As the previous findings on this topic are not clear, the literature has found that many papers such as Egbunike and Okerekeoti (2018) and Rahim (2017) reported that leverage has a positive impact on firm performance, therefore the second proposition is proposed as follows:
P2. The financial leverage has a positive significant impact on firm performance.
2.4.3 Liquidity and Firm Performance
In fact, liquidity has been identified as a predictor of firm performance (Vieira et al., 2019).
Liquidity ratios are commonly used to determine a firm’s financial resource availability.
Available financial resources enable strategic flexibility, which can improve firm performance (Short et al., 2007). As a result of the RBV approach, firms with optimal levels of liquidity report better firm performance (Omondi & Muturi, 2013). When external finance is unavailable, the firm can finance its activities and investments with liquid assets. Higher liquidity can assist a firm in dealing with unexpected situations and meeting its obligations during times of low earnings. Therefore, a successful business relies on liquidity.
Safdar et al. (2016) investigate the relationship between liquidity and profitability in Pakistan, and the evidence shows that liquidity has a positive impact on both the ROA and the ROE, implying that managers can increase the firm's profitability and the value of its shareholders by investing effectively and efficiently in liquid assets. Mohd Zaid et al. (2014) investigated the factors influencing profitability for Malaysian construction firms. They discovered a significant and positive relationship between liquidity and size towards profitability. Nanda and Panda (2018) also concluded that liquidity improves firm performance in Indian
manufacturing firms. In Nigeria, liquidity is beneficial and has a significant impact on ROA (Egbunike & Okerekeoti., 2018). In accordance with the previous literature, this paper formulates the third proposition as follows:
P3. Liquidity has a positive significant impact on firm performance.
2.4.4 Board Size and Firm Performance
The size of a firm's board of directors is related to its ability to obtain critical resources such as budget enhancements and external funding (Ngu & Amran, 2020). Several studies support the notion that the firm’s resources, including board size, are critical to the firm's long-term success (He et al., 2020). Each board member may bring a unique set of skills, intellectual knowledge, and a variety of industry experience. This will be beneficial for the decision-making process and a valuable resource for the firm to improve performance (Consuelo et al., 2019). According to Vieira et al. (2019), the board of directors assists in monitoring management activity and protecting the interests of shareholders.
Jackling and Johl (2009) also remarked that the achievement of financial returns was positively influenced by board size. Jakpar et al. (2019) and He et al. (2020) support the existence of a positive relationship between board size and the firms’ performance. Consuelo et al. (2019) investigates how the size of the board affects firm performance in a sample of 10,314 firm-year observations from six geographic zones including Africa, Asia, Europe, Latin America, North America, and Oceania. According to the findings, it is positively related to firm performance.
Khidmat et al. (2020) suggest that the board size has a positive effect on ROA. Given the following empirical results, this paper formulates the fourth proposition as follows:
P4: Board size has a positive significant impact on corporate performance.
2.4.5 Board Independence and Firm Performance
The board of directors, particularly outside directors, can be viewed as a collection of strategic resources to be used within the firm, as they can advise and counsel the CEO and management in areas where in-firm knowledge is limited or lacking. As a result, RBV recognizes that outside directors, in their capacity as an independent board, can provide a valuable source of competitive advantage through their professional and personal qualifications. There are two reasons why independent boards are important for achieving firm performance. First, they can better monitor the manager’s actions and maximize shareholders’ wealth (Ngu & Amran, 2020). Second, an independent board would be more transparent and disseminate information, ultimately improving the firm’s liquidity (Fuzi et al., 2016).
From the result by Fuzi et al., (2016), the independent board’s view would assist the firms in improving their corporate performance. Consuelo et al. (2019) investigated how board independence affects firm performance among 10314 firm-year observations belonging to 34 countries that have been grouped into six geographic zones: Africa, Asia, Europe, Latin America, North America, and Oceania. The findings show that board independence is positively associated with firm performance. In India, Palaniappan, (2017) uses a multiple regression model to analyze data from 275 manufacturing firms in India from 2011 to 2015.
The findings show that board independence moderates the relationship between return on equity and return on assets by enhancing these measures among corporate governance mechanisms. In China, Liu et al. (2015) asserted that independent directors have an overall positive effect on firm operating performance. However, the effect is stronger for Tobin-Q than for ROA. This study claimed that independent directors play an important role in constraining
insider self-dealing and improving investment efficiency as internal sources of competitive advantage for the firm. He et al. (2020) also discovered strong evidence to suggest that board independence is critical for a firm’s long-term success. Fuzi et al. (2016) claimed that a higher proportion of independent board members will result in more efficient management performance. In Hong Kong firms, studies on board committee independence and firm performance in the family firm showed no association. However, there is a positive relationship between board independence and firm performance in nonfamily firms (Leung et al., 2014).
Based on this literature, this paper develops the fifth proposition as follows:
P5. Board Independence has a positive significant impact on firm performance.
2.4.6 Board Gender Diversity and Firm Performance
Empirical evidence from both developed and emerging markets reveals a positive relationship between board gender diversity and firm performance (He et al., 2020; Khan & Abdul Subhan, 2019). From a theory perspective, RBV claimed that gender diversity on boards has become a critical resource for the firm to gain competitive advantage and higher firm performance (Barney, 2001; Khidmat et al., 2020). For example, He et al. (2020) discovered that more gender diversity enables the board to mobilize resources such as long-serving member directors with sufficient time and knowledge. As a result, boards are capable of making decisions and resolving tasks that are critical for a firm’s long-term success.
In psychological and management behavior studies have been long accepted that women behave differently from men (Bacha & Azouzi, 2019; Byrnes et al., 1999). Women and men have different attitudes, which could affect how well they perform as a board of directors. Men and women may be able to bring a different perspective to the table when formulating investment strategies for the firm (Taylor & Wozniak, 2018). Compared to their male counterparts, female directors are more likely than men directors to take active roles on boards by demonstrating participative leadership and collaborative skills (Green & Homroy, 2017).
Empirical studies also show that female directors are more willing to question, and debate issues, and generally hold their firms to higher ethical standards (Arena et al., 2015). Consistent with this view, the literature shows that female directors contribute to the board in a good way by decreasing board conflict (Nielsen & Huse, 2010) and improving firm performance (Terjesen et al., 2015).
Based on the past literature, many scholars have investigated the relationship between gender diversity and firm performance. The result prove that the firm performance was influenced by board gender diversity including the research from Singapore and India (Duppati et al., 2020), United Kingdom (Brahma et al., 2020), Malaysia (Ngu & Amran, 2020), Pakistan (Khan &
Abdul Subhan, 2019), Middle East and North African countries (Sarhan et al., 2019), China (Khidmat et al., 2020), America (O’Hagan, 2017) and Australian (He et al., 2020). The same conclusions are provided by them is the result was positive and significant. The findings support the RBV view that the gender diversity is a valuable resource for firm performance.
Thus, based on the above argument, this study proposed the sixth proposition:
P6: Board Gender diversity has a positive significant impact on firm performance.
2.4.7 Technological Innovation and Firm Performance
Several research suggests that technological innovation has a significant impact on firm performance (Xin et al., 2019). It has received support from many researchers throughout the world. Bockova and Zizlavsky (2016), showed that more investment by companies in
innovation tends to yield better financial performance in Czech manufacturing industry. In Malaysia and Vietnam, technological innovation capabilities has a significant impact on competitive advantage and firm performance in the Automotive Industry as reported by Rahim and Zainuddin (2019) as well as in agriculture sector (Ho et al., 2018). Lee et al. (2019) also proposed that organizational innovation directly and positively impacts the performance of South Korea low-tech firms.
Within a competitive market, these firms became industry leaders (Chae et al., 2018), and the innovation outcomes enhanced the interest of the company regarded as a market leader within innovative product (Davcik et al., 2020) in the minds of consumers. This contributes greatly to current customer loyalty and the acquisition of new customers (Azubuike, 2013). Company that effectively brings technological innovations to the marketplace is also extremely market- oriented (Lin et al., 2020). Compared to non-technological innovation, technological innovation has a more significant influence on firm performance and success (Ryu & Lee, 2015). Alternatively, it can conclude that many literatures including Teece (1986) until recent scholars such as Xin et al. (2019) claimed that if companies are unable to gain competitive advantages from its innovation, then the rivals will benefit it.
With regards to the empirical findings in the literature discussed above, a significant relationship between a firm's performance and technological innovation was found. Thus, this paper proposes the following proposition:
P7: Technological innovation has a positive significant impact on firm performance 3. Method
This study intends to employ a quantitative research approach in determining the determinants of firm performance. The unit of analysis of this study is the publicly listed firms in Bursa Malaysia and focuses on the manufacturing sector. This sample will be represented by 259 firms, consisting of 13 industries in the Malaysian manufacturing sector. The potential sample will cover the financial year 2015 until 2019. This paper chooses the firm's annual audited financial report as the primary source, which will be downloaded from Bursa Malaysia's website. The quantitative data produced will be analyzed using descriptive statistics such as percentage distribution, mean, and frequency count. The relationship between the independent and dependent variables will be explained through multiple regression. Several methods including online and offline material from article journals, books, and industrial reports are used to collect and analyze the literature. The total manufacturing firms based on the industry are shown in Table 2.
Table 2: The Total of Manufacturing Firms Based on Industry
Industry Total firm Percentage (%)
Chemical and Petrochemical 27 10
Automotive 11 4
Wood Based 18 7
Textile Apparel and Footwear 15 6
Rubber 5 2
Electrical and Electronics 33 13
Machinery and Equipment 45 17
Aerospace 6 2
Iron Steel 35 14
Cement, Ceramic, Glass, and Industrialised Building System (IBS) 29 11
Food 26 10
Medical Devices 5 2
Pharmaceutical 4 2
Total number of manufacturing firms 259 100
Source: Bursa Malaysia (2021)
4. Conclusion
Based on the relevant literature and the synthesis of RBV theory, this study proposed a framework model that incorporated three types of firms’ performance determinants including firm characteristic, board characteristic and technological innovation. The investigation on the determinants of firm performance become relevant and significant in explaining firms’
business success. The idea to focus on internal resources matter for the development of all types of firms including manufacturing and inline to RBV perspective. They can provide a competitive advantage to the firm as they are unique, difficult to imitate by the competitors, rare, and have the ability to further drive the firm performance towards better achievement as has been proven by the previous findings.
Nevertheless, since this paper is conceptual, no data are collected to allow generalization to other nations. Furthermore, the structure of this analysis is based on previous literature.
Generalization is therefore not appropriate. The same study is promoted in other countries and various angles to internal resources in firm may apply. Indirectly, policies that may be formulated by future policymakers will get a more comprehensive picture related to manufacturing sector performance not only at the firm level but also at the characteristic level of board of directors and technological innovation perspective. Therefore, a theoretical model is suggested for further research of these relations and opportunities for quantitative research are proposed.
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