Productivity Performance ofMalaysian GovernmentLinked Companies (GLCs)in Plantation Sector

byRosmi Abdullahe-mail : rosmi@npc.org.my

AbstractThe increase in productivity performanceand economies of scale are very importantto the industry. Productivity performanceexplains how effective and efficient thecompany is, in managing the inputs such aslabour and capital to produce the output.The increasing performance reflects thesuccess of the business of the company incompeting with others. The first part ofthese studies measure productivityperformance of the Government LinkedCompanies in plantations sector. Theproductivity measurement indicators havebeen used because they explain theefficiency and effectiveness of the companyin managing resources. To stay competitiveand efficient in the industries, productivityratio for the employee and capital shouldbe higher compared with other companies.The two most important productivitymeasurements are labour productivity andcapital productivity. Labour productivitymeasures the effectiveness and efficienciesof the labour in producing the product. Ahigher labour productivity indicates that thelabours are efficient and a lower ratio isdue to the inefficiency in managing thelabour productivity. Capital productivitymeasures the efficiencies of the capitalutilisation- A higher ratio reflects theeffectiveness of the utilisation of the capital.The findings of this study explained theproductivity performance of the selectedcompanies. The trend of the productivity

performances for these 3 companies is very different and the productivity measurementratios vary from each other. The labour productivity for GLCsl is higher compared withGLCs2 and GLCs3. This implies that GLCsl is most efficient in managing its labourinput. The ratio for capital productivity for the GLCs 1 is higher than GLCs2 and GLCs3.This indicates that the capital for GLCs2 and GLCs3 are under-utilised compared to theGLCsl. Comparison between these 3 companies shows that company GLCsl is themost efficient in labour and capita! productivity. Companies GLCs2 and GLCs3 have tobenchmark the best practices of company GLCsl and implement them to improve theefficiency in labour and capital productivities. The second part of the analysis findingexplains the economic theory of return to scale. The production function approach modelexplained that 3 selected companies are operating at constant and decreasing return toscale. The GLCsl is operating at constant return to scale. The GLCs2 and GLCs3 areoperating at decreasing return to scale. The findings proved that productivitymeasurement is very important in measuring the performance and economies of scalefor companies because it explains how effective and efficient the labour and capitalare. Eventhough from the financial report the company may record profit but theproduction function mode! approach may show that the company does not operate atan increasing economies of scale. The company should operate at an increasingeconomies of scale to maintain and succeed in the business. Productivity improvementrefers to the change sought, noted and implemented in an operation to produce apositive change in the performance of the company. The company has to implementcontinuous productivity improvement programme for the labour and capital to improve,sustain and be competitive in the industries and the market.

Keywords: Competitiveness, Efficiency, Productivity, Performance

IntroductionCompetitiveness of Malaysian Industries

Competitiveness and efficiencies are very important factors for industries tocompete and sustain in this era of globalisation. The efficiency and effectiveness inmanagement, production and marketing will contribute to the competitiveness andincrease in profit. This research identifies the need to understand productivityperformance and economies of scale for the plantation sector. The study will focus onthe same type of industries sector under the Malaysian Government Linked Companies.The productivity performance of the industries is very crucial to understand, identifyand analyse the factors affecting and to understand the companies' internal problem,trend and competitiveness, and to sustain in the market.

The role of productivity in a firm's performance is fundamentally important to theeconomy. Many companies have been using productivity performance measurementto evaluate their performance and competitiveness. Productivity indicators of the

industries will be compared at the national productivity level. Benchmarking within theindustries of the same sector is also conducted to ascertain the level of competitiveness,in terms of labour productivity and capital productivity. Productivity measurement is anindicator of how well companies are in managing their production, material, humancapital and quality of their products. Peter Drucker (1974) had put it in a more generalway, "Without productivity objectives, a business does not have direction. Withoutproductivity measurement, it does not have control"- This statement proves thatmeasurement of productivity indicator is very important to strategise how thecompanies should manage their production, human resources, raw material, capitaland end products. Productivity indicator would be able to measure the trend,effectiveness and efficiencies in the utilisation of inputs in producing outputs.

The overall performance of Malaysian productivity has been measured andcompared with other countries. Productivity level can be used as an indicator tomeasure the competitiveness performance of Malaysian industries. The study by theNational Productivity Corporation (NPC) produced in Productivity Annual Report 2005,shows that the productivity level of Malaysia was lower than USA, Japan, Ireland,Hong Kong, France, Finland, Singapore, UK, Germany, Canada, Australia, Taiwan andKorea. Conversely, the Malaysian productivity level is higher when compared toThailand, Philippines, China, Indonesia and India. The comparison was based on therelative productivity for year 2005. Among the Asian countries, Hong Kong, Singaporeand Taiwan's productivity were between 3.2 to 5-4 times that of Malaysia. Malaysia'sproductivity was higher than Thailand, Philippines, China, Indonesia and India. Fromthe report by NPC, Malaysian industries were far behind our neighbouring countrySingapore, which had productivity level of 4.7 compared to 1.0 for Malaysia. There arestill a lot of rooms for improvement for the Malaysian industries through theimplementation of productivity improvement programme, such as Total ManagementQuality System.

-——^wRelative Productivity and Growth

Selected Countries twity(constant Productivity

i'ei;\n USS)Growth (%);:

USA

JapanIreland

Hong Kong

France

Finland

Singapore

UK

" ^^^^77.346

77,061

62,936

60,299

57,677

55,698

52,426

51,882

6.9

6.8

5.6

5.3

5.1

4.9

4.7

4.6

1.8

1.9

1.0

5.0

1.4

0.1

1.9

0.9

o

GermanyCanada

Australia

Taiwan

Korea

Malaysia

Thailand

Philippines

China

Indonesia

India

50,789

49,308

45,545

35,856

27,909

11,300

4,305

2.807

2,272

1,952

1,242

4.5

4.4

4.0

3.2

2-5

1.0

0.4

0.2

0.2

0.2

0.1

0.9

1.6

-1.0

2.7

2.6

3.0

3.0

-0.8

7.1

4.4

6.6

Computed from: Economic Report, Ministry of Finance, Malaysia, various Issues: OECD Economic Outlook,December 2005, Vol. 78 National Accounts of OECD Countries, Detailed Tables 1992-2003 Country Data,Source: National Productivity Corporation

oMalaysian industries must be more competitive to sustain and compete in

globalisation. There are many factors involved in managing quality and performance ofa company. The two most important factors are the performance measures of labourand capital in producing outputs. The result indicates that Malaysian industries shouldimprove more on their productivity level to compete with the other countries.Additionally, to improve the macro productivity level, Malaysian Government shouldemphasise at the micro productivity level. This could be done by increasing theproductivity in each company in Malaysia. This study measures the performance ofproductivity indicator in Malaysian Government Linked Companies (GLCs) to analyseand evaluate how competitive this sector is.

in Industries Economies by Scherer (1996); Tirole (1988), it is found that frequentlymentioned performance criteria include efficiency, product variety, innovativeness andmacro-economic stability. Related dimensions of competitive conduct include pricingbehaviour, R&D, advertising and product design. Market structure, finally, encompasseselements such as concentration, product differentiation, market entry barriers, andvertical integration. Structure, conduct and performance are all characteristics of markets.They include product and process technology, employees' skills, unionisation and locationof raw resources. Basic conditions on the demand side influenced effective demand.They include consumers' buying methods, availability of substitutes, price elasticity,and cyclical and seasonal patterns in buying. This input can be divided into two mainproduction factors, labour and capital, which are to produce output. These two factorsmeasure efficiencies and effectiveness of the company by using productivity measurement.This can be analysed by productivity performance each year, comparing between theyears to see how the factors are influencing the inputs and outputs of the companies.

In terms of the structure, it is important to see whether the selected companiesare influenced by the rules or regulations. The study will also determine whether the

conclusion by Scherer & Boss (1990), that public policies, finally, can both influencemarket structure (e.g. via market entry regulations or anti-trust policies) and marketconduct (e.g. via subsidies and advertising rules). This study analysed the rules andregulations in Malaysia with regards to the GLCs and how the rules and regulationsbenefit these companies in competing with private companies.

Malaysian GLCsThe study analysed the productivity performance measurement in 3 selected

GLCs. In general, a GLC is a corporate entity that may be private or public (listed on astock exchange) where the government owns a stake using a holding company. Thereare two other main definitions of GLCs, depending on the proportion of the corporateentity the government owns. One definition purports that a company is classified as aGLC if the government owns an effective controlling interest of more than 50%, whilethe second definition suggests that any corporate entity that has the government as ashareholder is a GLC.

The GLCs aim to realise their own organisational objectives such as making aprofit, producing quality products and excellent services, and becoming the largestorganisations. At the same time, GLCs organisations are expected, by the government mnmthemselves and the society, to contribute to important and collectively defined publicinterest and objectives such as maintaining or lowering the price, providing diverse andobjective information related to their products and services, and creating jobs. Sincethe privatisation, GLCs policy makers have been engaged by the question of whetherand how these organisations are effective, efficient and able to satisfy the publicinterest objectives.

In Malaysia, GLCs are defined as companies that have a primary commercialobjective and in which the Malaysian Government has a direct controlling stake.Controlling stake refers to the Government's ability (not just percentage ownership) toappoint Board members, senior management, and/or make major decisions (e.g.contract awards, strategy, restructuring and financing, acquisitions and divestmentsetc) for the GLCs, either directly or through Government Linked Investment Companies(GLICs). This includes GLCs where the Government of Malaysia controls directlythrough Khazanah, Ministry of Finance Inc. (MOF), KWAP and BNM or where GLCsand/or other Federal Government linked agencies collectively have a controlling stake.

GLICs are defined as Government Linked Investment Companies that allocatesome or all of their funds for GLC investments. Defined by influence of the Governmentin appointing/approving Board members and senior management, and having theseindividuals reporting directly to the Government, as well as in providing funds foroperations and/or guaranteeing capital (and some income) placed by unit holders.

This definition currently includes seven GLICs, namely Employees Provident Fund(EPF}, Khazanah National Bhd (Khazanah), Kumpulan Wang Arnanah Pencen (KWAP),Lembaga Tabung Angkatan Tentera (LTAT), Lembaga Tabung Haji (LTH), MenteriKewangan Diperbadankan (MKD) and Permodalan Nasional Berhad (PNB).

0

The Structure of Malaysian GLCsThe GLCs are managed by the Putrajaya Committee on GLC High-Performarice

which comprises the Minister of Finance II, a representative from PMO, and heads ofKhazanah, Permodalan Nasional Berhad (PNB), Employee Provident Fund (EPF),Lembaga Tabung Haji (LTH) and Lembaga Tabung Angkatan Tentera (LTAT). Others areinvited as necessary. Khazanah is the Secretary to the Putrajaya Committee on GLCHigh-Performance. The structure of the Putrajaya Committee (PCG) and Joint WorkingTeam (JWT) is shown in Figure 1. The PCG and Joint Working Team UWT} are toensure that the GLCs succeed in their business and at the same time also have torespond to the objective stated by the Government for each of the GLCs. From thestructure below, we can see that these companies report to the Second FinanceMinister regarding their operations, management, merger and other activities relatedwith the business.

Figure 1 Structure of the PCG

Second Finance MinisterPMO RepresentativesGLICCEOs/MDs :.;^

GLC Roundtable

Joint Working Team (JWT)

Secretariat:?Khazanah Representatives:

• EPF• PNB• LTH• LTAT

Lead Consultant:McKinsey & Company

Consultant forSpecial Initiatives:Boston Consulting Groupand Ethos Consulting

Source: Putrajaya Committee

The PCG is chaired by the Minister of Finance II, who reports directly to the PrimeMinister. Membership of the PCG consists of the heads of Permodalan Nasional Bhd(PNB), Khazanah Nasional Bhd (KNB), Lembaga Tabung Angkatan Tentera (LTAT),Employees Provident Fund (EPF), Lembaga Tabung Haji (LTH) and representativesfrom MOF and the Prime Minister's Office. Khazanah acts as the Secretariat to PCG,chairs and drives the PCG Joint Working Team (JWT) which consists of representativesfrom all GLICs. Lead consultant to the PCG is McKinsey & Company, while otherconsultants such as the Boston Consulting Group and Ethos Consulting contribute tospecific initiatives in the programme. A Transformation Management Office (TMO) hasbeen set up at the secretariat level to ensure the success of the programme at thedesign and roll-out phases for 2005 and 2006, with quarterly reports to the PCG, andthen onwards directly to the Prime Minister through a Program Monitoring Unit (PMU).The CEO of the GLICs will be tasked to monitor and ensure that the implementation attheir GLCs are on track, while the Chairman and CEO of the respective GLCs will beaccountable for programme's results at their own companies. PCG, through TMO, isundertaking a programme management approach with the following 4 guidelines andaction points:

• Clear implementation with applicability, responsibility and timeline for GLCsand GLICs;

• Task and equip PCG to implement and monitor;• Establish a programme management approach to implementation; and

• PCG and eventually PMU within the Prime Minister's Office act as a channelto ensure compliance.

GLCs are government business entities which are privatised. However, theGovernment is still holding some percentage of the share to maintain the control ofthe companies' managements and operations. The Government has to maintain thecontrol of these companies because some of these companies are involved in servicesand products which are related to social responsibility to the public and to ensure thatthe objectives set by the Government are implemented. The GLCs have to submitreports and get approval from the Government when they decide to increase the priceof electricity, price of the services and others, for example. This is very importantbecause an increase in the price of the services and products will affect the Malaysianeconomy. An increase in the price of electricity or petrol will increase other pricessuch as production cost, transportation and others. Table 2 shows the percentage ofshares controlled by the Government in Malaysian GLCs.

List of Government Linked Companies

JHBBHBMHl ^ e a ^ ^ ^ ^ ^ BBBBB^ ^ ^ ^ ^ ^ M^M!BaCBroiiniiT5nn!iMfflcimME^ B^^^^^^^^Stmmm -^-K^"--- ^ ^ ^ ^ ^ BgBgg^gmgligg lllg^gg^ ^

Employees Provident Fund (GLICs)

Commerce Asset-Holding

CIMB

Malaysia Building Society

Malaysia Resources Corporations

Lembaga Tabling Haji (GLICs)

BIMB Holdings

Syarikat Takaful Malaysia

Lembaga Tabling Angkatan Tentera (GLICs)

Affin Holdings

Boustead Holdings

Boustead Properties

PSC Industries

UAC

Johan Ceramics

Petroliam Nasional {GLICs)

Bintulu Port Holdings

KLCC Property Holdings

MISC

Petronas Dagangan

Petronas Gas

Minister of Finance Incorporated

Bursa Malaysia

Pos Malaysia & Services Holdings

Khazanah Malaysia

Commerce Asset-Holding

CIMB

D'nonce Technology

Faber Group

Malaysia Airport

MAS

Park May

Proton Holdings

Plus Expressway

Tenaga Nasional

20.0 %

14.2%

63-0 %

30.0 %

30.0 %

22.2 %

47.4 %

70.0 %

39.2 %

23.1 %

27.3 %

60.0 %

33.0 %

51.0%

62.0 %

70.0 %

61.0%

20.0 %

33-3 %

26.0 %

1 8.7 %

20.0 %

41 .0 %

73.0 %

69.0 %

25.0 %

38.0 %

67.0 %

37.0 %

Telekom Malaysia (TM)

VADS

Time Engineering

Time dotcom

Uda Holdings

UEM World

Cement Industries of Malaysia

Opus International Group PLC

Pharmaniaga

UEM Builders

Permodalan Nasional & Funds

BIMB Holdings

Central Industrial Corporation

Chemical Company of Malaysia

Formosa Prosonoc Industries

Golden Hope Plantation

Mentakab Rubber

Negara Properties

Island & Peninsular

Kumpulan Guthrie

Guthrie Ropel

Highlands & Lowlands

Malayan Banking

Malaysian Industrial Development Finance

MNI Holdings

MNRB Holdings

NCB Holdings

Sime Darby

Sime Engineering Services

Tractors Malaysia Holdings

Sime UEP Properties

UMW Holdings

Ya Horng Electronic (Malaysia)

35.0 %

24.5 %

45.0 %

50.3 %

50.0 %

63.0 %

34.0 %

39.1 %

34.7 %

32.8 %

30.0 %

39-0 %

64.0 %

26.0 %

57.0 %

34.2 %

35.3 %

60.0 %

74.0 %

42.9 %

40.7 %

51 .0 %

37.0 %

75.0 %

60. D %

56.0 %

45.0 %

31.5%

32.4 %

51 .0 %

60.0 %

30.0 %

Source: UBS Investment Research

The GLCs are split into 2 groups. The first is the G20 companies, defined by thePutrajaya Committee for GLCs (PCG) and are all public listed companies. The secondgroup consists of the remaining 30 GLCs which are publicly listed but do not comeunder the direct purview of the PCG. The G20 companies are Telekom Malaysia (TM),

Tenaga Nasional Berhad (TNB), MAS, BCHB, UEM, Proton, Pos Malaysia, MAHB allunder Khazanah, Maybank, Sime Darby, Golden Hope, Guthrie, UMW and CCM underPNB, Affin Holdings and Boustead under LTAT, MRCB and MBSB under EPF, and BIMBand TH Plantations under LTH. This study measures and analyses the performance andstructure in the productivity level, which from the findings we are able to define theperformance of the companies' operational efficiency, competitiveness and performancecomparison between the companies.

This research focuses on 3 selected GLCs companies in the same sector to studytheir performance and structure over the period of 7 years. The study will show thegrowth of these companies, their performance and structure to survive and compete inglobalisation.

The study of a firm has been a long-time concern of the economics and so-calledmicroeconomic theory of the firm which occupies much of the economists' thoughtsand attention, and shares a relative number of decision-making processes in a real worldfirm. All these are subjects which have been at the centre of research in economictheories. The key issue for the development of microeconomics in the next century iswhether they can be expressed and developed in ways which give them relevance tobusiness policy. This requires changes in the attitudes of both businessmen andeconomists. Microeconomics has potentially the same role in management issues thatmacroeconomics currently has for political issues. The growth in microeconomicssector will contribute to the growth of Malaysian economy. This is why the researchon structure and performance of Malaysian GLCs is very important to the developmentof Malaysia because of their significant influences on the macroeconomic level.

Problem StatementThere are several issues with regards to the development of existing GLCs. Firstly

is to improve their performance in terms of operations and financial indicators, such asReturn on Investment (ROI), as their key performance index and to sustaincompetitiveness. The study by CIMB on GLCs Issues and Prospects, year 2004,showed that GLCs underperformed the broader Malaysian market on all key financialindicators, except for the size of their companies.

Another issue is how GLCs could play a leading role, not only in generating futurewealth for the nation but also in developing Malaysia as a modern nation. Their socialobligations have also brought great benefits to a wider community, through carryingout a government objective. According to Khazanah Nasional Bhd, GLCs represent asignificant part of the corporate market where they contribute 54% to the KL CompositeIndex, employ 5% of the total workforce and provide major services to the community.GLCs do, indeed, play a critical and influential role in shaping the standard of living. Itis not difficult to imagine the impact that GLCs have on our lives, from the electricity,

water and energy we depend on, to the food we consume, the waste we produce, thecars and roads we use, the healthcare we need and the human capital developmentfor the nation. In today's competitive environment, there is a fundamental shift inexpectations where there is now unrelenting pressure on GLCs to deliver greatershareholder value and market relevance. The Malaysian society is depending on theGLCs companies and they must be transparent and high performance-based, and allowequal opportunity and respect for diversity and integrity.

There are also issues in consumer welfare and efficiency gains. Privatisation issupposed to enhance enterprise efficiency. There are two relevant aspects of efficiencyrelated to GLCs that should be considered, namely productive and allocativeefficiencies. Productive efficiency is attained when a firm's output is produced atminimum resource cost. Allocative efficiency is achieved when the consumer'smarginal valuation of the product equals the marginal cost of production, assuming noexternalities. However, this does not imply allocative efficiency in terms of satisfyingconsumer preferences for quality services. To achieve both productive and allocativeefficiencies, privatised enterprises such as GLCs generally need to be exposed togreater competition, liberalisation, marketisation, and deregulation, notwithstandingscale economies and other 'extenuating' circumstances.

In Malaysia, many GLCs remain as monopolies. In contrast to privatisation, whichis then expected to be accompanied by the relaxation or abolition of monopolisticpractices, including statutory monopoly powers, such as those usually conferred onand enjoyed by public utilities. Privatised entities are thus expected to face competitivemarkets or environments. Competition may encourage more efficient behaviouramong private as well as public entities or companies, in order to achieve bothproductive and allocative efficiencies, unless increasing returns to scale are attainable.

The important issues in Malaysian GLCs are whether these companies have achievedtheir objectives, profit, efficiencies and also social responsibilities with all supportgiven by the Government. The GLCs should be more competitive and efficientconsidering many incentives given to them in business opportunity. The performanceratio should be higher because they have much advantage against their competitor.However, there are many statements and complains on the efficiencies of the GLCsdue to services which are not up the expectations, as required by the consumers. Inmany cases, GLCs would increase their prices when financial problem arises or theprofit margin becomes too small to gain more profit. They are often tagged as neglectingtheir social responsibilities to the public. There are also cases that the GLCs companies'financial statement showed that they were running the business inefficiently and werefacing financial problem. This is a reflection of the performance of GLCs, which eventhough they have all the benefits given, but are not able to perform well. Thus, theyshould perform better given the advantage in business opportunity against theircompetitor. This is the reason why we need to examine the performance of the GLCs

in terms of productivity because such measure can reflect the strengths and theweaknesses of the companies compared to the financial report. The productivitymeasurement is appropriate to a particular company to improve the managementsystem and the company's strategic intentions which will have been formed to suitthe competitive environment in which it operates and the kind of business that it is.The productivity indicators will help the companies in organising their strategiestowards the mission, vision and objective.

Objectives of the StudyThe general objective of the research project is to attempt and study the

productivity performance and economies of scale. This study will analyse theproductivity performance and economies of scale using the productivity indicators ofthe companies for a period of 6 years based on financial year reports. The result willidentify whether these companies succeeded in achieving the mission, vision, objectiveand government's goal in privatisation. It is generally believed that GLCs havesignificant presence in the national economy due in part that many of them are marketleaders in their respective sectors.

The main objectives of the study are:

i. To better understand the trend reflected by labour productivity and capitalproductivity towards the performance of selected GLCs, and

ii. To study the performance of the selected GLCs by using a production functionmodel approach to determine the economic theory of return to scale.

An analysis on production function approach model can reveal which companyoperates at increasing, constant or decreasing to scale. The study will identify themost significant factor affecting the success of the GLCs because the productivityindicators indicate the efficiency and effectiveness of managing resources and capital,reflected by the trend and performance of the companies over the period of the study.This will lead to the understanding of organisational control process, whereby anorganisation ensures that it is pursuing strategies and actions which will enable it toachieve its goals. Productivity performance measurements will help management withfar more useful information on how to run a company more effectively and efficiently.Management can determine with considerable certainty which direction the companyis going and, if all goes well, continue with the good work. Or, if the productivityperformance measurements indicate that there are difficulties on the horizon,management can work towards the success of the company. And if the finding showsthat the company operates at decreasing return to scale, this could help the companyto plan how to improve the efficiency and effectiveness of their labour and capital.

Significance of the Study

The study is significant to analyse the performance and structure of MalaysianGLCs. The study by D'Souza and Megginson (1999), found that there is a whole line ofstudy on privatisation and empirical results which consistently show that privatisationinduces output, efficiency, and profitability improvement. From the perspective of thistraditional wisdom, the study examines the performance of the group of government-run enterprises in Malaysia. Malaysian Government sets up a group of GLCs in keyindustries to provide propelling forces to the country's economy. As such, GLCs play astrategic and important role in the economic development. This research is to studythe issues in Malaysia, whether these GLCs are generally well-run, efficient andprofitable. Productivity indicators are used in this study to analyse the performanceand structure of the management and operations. The productivity measurementindicators were calculated by using the financial report. The findings represent theinformation on how efficient and effective the company is in using the input to producethe maximum output. Some analysts even said that it is time for the MalaysianGovernment to give up control of the GLCs to allow more competition into the market,which would improve their performance. But given the fact that Malaysia is an openedeconomy, the GLCs may have been competing with foreign companies all along. Suchcompetitions may well compel them to be more efficient than typical governmententerprises would be. In any case, Malaysian GLCs provide an interesting case toaddress the simple but fundamental question, "Are government-owned companiesnecessarily inefficient?" We can see in the case of several GLCs which alwaysincrease their prices on products and services offered to gain more profit even thoughthere are monopolistic company. The labour productivity will reflect how efficient themanagement is, in managing human resources to produce the output. Capitalproductivity will explain how the capital will be utilised in producing a certain amountof output. The production function approach model should explain why thesecompanies have to increase the price to gain more profit if they operate at an increasingreturn to scale.

Limitation of the StudyThe results depend on the accuracy of the annual financial reports produced by

each company. The annual report was gathered from each selected company. The datafor this research were extracted and computed from certain values in the annualfinancial reports. The reliability and validity of the data were based on how true are thecompanies in reporting all the transactions and activities. The findings explain theefficiency and effectiveness of the labour and capital in producing the product andservices. The reliability and validity of the data produce the accuracy and precision ofthe findings on the performance of the companies.

Literature ReviewBackground

The concept of productivity has existed for a long time, and the idea has manydifferent applications. Jury (1992) in his study found that the customers buy utility, andproductivity associates outputs with inputs. Productivity, at the organisation level, maybe considered a measure of how well the company satisfies the customers' utility.Therefore, productivity measurement shows how well a company is doing. This doesnot, however, tell anything about why the company is performing the way it is. Thisdiscussion addresses the meanings that refer to work and economics. One basic wayof defining productivity is "output divided by input" (O/l}. If Company X uses 100 unitsof input to produce 100 units of output, their productivity ratio is 1. To interpret thisformula in economic terms, one can substitute ringgit for the input and output units,i.e., RM100 of output divided by RM100 of input produces the same productivity ratioof 1. Using money as a measure of value makes it possible to compare dissimilarinputs and outputs.

Productivity change is the measure of productivity in this research which refers tothe change in the productivity ratio over time. If in the above example the ratio ofoutputs to inputs was measured at a later date and was found to be RM 200/RM100,the new ratio would be 2. The change in productivity would be (2-1 )/1 or 100 percent.A problem with this formula is that if Company X achieved this improvement inproductivity and responded by cutting the price of its output in half, the measuredproductivity change would be zero even though there was a real improvement.

Productivity, defined by O/l, requires that the units of input be measured in somemanner. The early applications of productivity measurement addressed simple,repetitive jobs of short duration. Several measurement techniques were developed forthis purpose, including the labour productivity, capital productivity and others. Suchtechniques were designed to measure performance of the companies and to identifythe strengths and weaknesses of the company's strategies in competitiveness. Thismeasure can also help the company to increase efficiencies, reduce loss and improvethe quality of workforce and services. A business converts economic resources intosomething else. It may do well or poorly. Drucker {1974} believed that at this level,productivity is the balance between all production factors that will give the greatestreturn, for the least effort and productivity at the organisational level is consideredseparately from productivity at lower levels. The performance measurements used inthis research are labour productivity and capital productivity to identify the efficiencyand effectiveness of the human resources and capital in producing the products.

Productivity MeasurementsProductivity indicator as a measurement for efficiencies has been used in many

companies. The labour and capital productivities are being used to determine howproductive is the labour in producing one unit output and the capital productivity areused to measure how effective is the utilisation of the capital in producing one output.Rittenhouse (1992) believed that it is very important to discover why productivity mustfirst be examined at lower levels such as the work group, which are best suited forusing productivity measures as an indication of change. Sardana (1987) in his studyfound that the concept of productivity is often vaguely defined and poorly understood,although it is a widely discussed topic. Different meanings, definitions, interpretationsand concepts have emerged, as experts working in various areas of operations havelooked at it from their own perspectives. However a different view is only that theterms 'performance' and 'productivity' are used concerning with the productivity level.People who claim to be discussing productivity are actually looking at the more generalissue of performance. Productivity is a fairly specific concept while performanceincludes many more attributes. Drucker, also in his study found that knowledge workeris the area that offers the greatest opportunities to increase productivity. This is in linewith what our Prime Minister said, that it is important to increase the human capitalresources because human capital is the asset of the companies that can create wealthto the organisations.

Sink (1985) categorised three basic ways to collect data about a given phenomenonor organisational system: inquiry, observation, and collecting system data ordocumentation. This data gathering is the essential part of measurement. It is theprocess by which productivity benchmarks are established. In the simplest form, theoutputs are evaluated against the inputs, but even at this simple level, terminologymay be a problem. Some writers included non quantitative indicators such as quality intheir definition of "output," but others confined the discussion of productivity to Output/Input. The definition affects the type and amount of data gathered.

The literature suggests that organisations select the most appropriate measurementtechnique based on implementation costs. Inaccuracies in productivity measurementare acceptable if the level of inaccuracy remains constant over time. The measures aremost important for tracking trends, not quantifying empirical data. The trend ofproductivity indicators will reflect the performance of the company and can explain whythe situation occurred.

While productivity has been studied for decades and knowledge work has alwaysexisted, it is only recently that researchers have tried to measure knowledge workers'productivity. The concept of productivity has existed for a long time, and the idea hasmany different applications. This discussion addresses the meanings that refer to workand economics. Today the varieties of productivity measurement have been used butthe most common are labour productivity and capital productivity.

The only way we can understand and compare the performance of one companyagainst another is measuring its performance. Conventionally, the focus has been oninternal, historic, financial, numeric and short-term information. Many aspects of anorganisation's operation are intangible and difficult to pin down, yet these are increasinglyseen to be the areas where companies can gain competitive edge. Professor R.S. Kaplanof Harvard Business School in The Evolution of Management Accounting states: "ifsenior managers place too much emphasis on managing by the financial numbers, theorganisation's long term viability becomes threatened." That is, to provide corporatedecision makers with solely financial indicators is to give them an incomplete set ofmanagement tools. Recently, more rigorous approaches to assess non-financial resultshave emerged. Measurements of this type, especially those that are future-oriented,are key components of the performance management revolution that is changing theway companies do business worldwide. This study uses the non-financial indicators tomeasure performance by using the productivity indicators to look inside the selectedcompanies; the problem of inefficiency, unutilised input, cost of management and others.The analysis will provide a solution to improve productivity and quality in work place.

Sardana and Vrat (1987) said those who measure productivity should have threeobjectives: (1) to identify potential improvements; (2) to decide how to reallocateresources; and, (3) to determine how well previously established goals have been met.They also use a broad definition of productivity that tells the observer how the measuredorganisation is doing, as a whole.

Moore (1978) have explained the more important productivity measurementbecause they can be separated into two factors: performance and financial. Performanceproductivity is based on the number of outputs produced. For example, if Company Aproduces 100 units in one week and 120 the next, its performance productivity hasincreased by 20 percent. By contrast, financial productivity focuses on the value of theoutput. If Company A had produced 100 units in both weeks, but raised the price from$1.00 per unit to $1.20 per unit in the second week, its financial productivity wouldhave increased by 20 percent with no increase in output.

The productivity measurement now becomes an important tool in measuring theperformance of a company, as the productivity indicators reflect the companies'efficiency and effectiveness in using the input to produce output, whether it is inmaximum capacity or under utilised.

Measurement TechniquesMany measurement techniques and packages are available. Mundel (1989)

presented a computer software package that evaluates productivity. Direct adjustmentsfor quality by the package are excluded, but quality indicators may be implicit becausethe package considers only good output. The programme does not consider raw materials,

because the end product is knowledge. In this and other computer programmes,simple 0/1 algorithms are used to calculate productivity. The programmes facilitate thecalculation of productivity at the organisation level. Mundel presented eight levels ofwork units, starting from the lowest-motion-up to the highest-results achievedbecause of outputs.

Sassone (1991) presented a technique that is relatively simple to implement. Heclassified work by the lowest level of employee who could reasonably do it. Work isthen recorded for each participant by the type he or she is doing. This record is thenanalysed and compiled in a matrix format that shows the amount of effort expendedby each type of employee, and whether the employees are working at, above, or belowtheir level. This information can indicate the mix of workers that is needed in a workgroup. It can be used to explore the consequences of common assumptions, such aswhether cutting support staff will actually reduce costs.

Sink (1985) presented several techniques of evaluating productivity. His threemain methodologies are Multi-Factor Productivity Measurement Model (MFPMM),Normative Productivity Measurement Methodology (NPMM), and Multi-CriteriaPerformance/Productivity Measurement Technique (MCP/PMT). MFPMM is acomputerised methodology for measuring productivity, based strictly on O/l. NPMMuses structured group processes to formulate appropriate productivity measures forwhite-collar or knowledge workers. It uses the group technique to establish consensusabout what the productivity measures are and how they should be measured. MCP/PMTis designed to allow the user to evaluate the various productivity measures and decidewhich is the most important. It also allows the user to aggregate dissimilar productivitymeasures.

In Malaysia, NPC has produced computer software package, named COMPASS orCompany Manual Productivity Assessment to measure the performance of theproductivity indicator. The COMPASS software analyses the financial accounting dataand produces the indicators related to productivity improvement measurement. Theindicator will be analysed to show the trend and performance of the company and theimprovement will be recommended to increase efficiency, effectiveness, productivityand quality. To encourage the usage of COMPASS software packages among Malaysianindustries, the Ministry of International Trade and Industry have established theProductivity Award. The Award is given to the companies with the highest productivityperformance. COMPASS is a standardised model developed by NPC, which allowscompany to conduct "self assessment" and makes the business analysis more resultoriented. Participation in the Productivity Award allows third party assessment of theeffectiveness of the company's productivity improvement initiatives and its comparativeadvantage. It is essential for companies to measure productivity and implementproductivity improvement programmes to increase their performance and enhancecompetitiveness. This is also to encourage Malaysian industries to measure their

performance using the productivity measurement to improve their competitivenesslevel, efficiencies and effectiveness. This study analyses the importance of theproductivity measurement indicators, which are labour productivity and capitalproductivity and to prove the significance of using these indicators in measuring theeconomies of scale in producing the output.

MethodologyResearch Design

The research design used for this study is the secondary data from financialannual reports, which make use of the inferential statistics to determine the values ofthe performance and economies of scale for the 3 selected GLCs. The study gathersthe information and data from financial statements between years, from 2000 to 2006.From the financial reports, the study then calculates the labour productivity and capitalproductivity to identify the performance of the companies. Second part of themethodology analyses the data, using Cobb-Douglas production functions to run thetest and to find the values of the variables to determine whether the company isoperating within the economic return to scale.

Study AreaThe study focuses on the 3 selected companies from the G20 companies. The

companies selected were from the same industries. This is because the comparisonfrom the same industries will provide more information and accurate performancemeasurement. The results produced identify which company is more efficient andeffective in managing its human resources and capital, based on the measurement oflabour productivity and capital productivity. The value of the ratio explains theperformance of the companies from year 2000 to 2006. The model will then explainthe relationships between the variables and the result will show whether thecompany's operation is efficient in producing output based on the economic conceptof return to scale.

Source of Data

The sources of the data for this research are mostly from the secondary data. Thesecondary data were obtained from the 3 selected companies itself. Most of the dataand information are from the annual report. The other information such as number ofemployment and others, which were not included in the financial report were gatheredand obtained from the web site of the companies.

The Production Function Approach ModelThe methodology of this research is to measure performance of GLCs using

accounting data. If GLCs are generally well run, efficient and profitable, then theperformance of the GLCs, no matter how it is measured, should be comparable to theperformance of non-government, private companies. Furthermore, if the privatisationobjectives of GLCs are unrelated to resource allocation, greater efficiency, or reductionof the fiscal burden, their performance would not be greatly increased or improvedafter privatisation. For this reason, this study will measure the performance based onthe productivity indicator. Essentially, we analyse the performance using the productivityindicator for the recent period of 6 years, based on the financial reports. Then from thelabour productivity and capital productivity, the research will further discuss on theproduction economic model, while focusing on the micro economy. Then the variableswill explain the efficiency of the production based on the economics of return to scale.

The performance of the GLCs will be analysed and examined using productivityindicators measurement. The organisation needs to assess its productivity levelsbecause it is very important to achieve international competitiveness level, with thecoming of AFTA and WTO. This is because productivity improvement is imperative tothe successful achievement of developing the nation. Productivity measurement inthis study will be measured by two main indicators: labour productivity and capitalproductivity.

Labour productivity is the most important input factor, and more readily measuredof all input factors. Labour productivity is measured by total output per employee. Thisreflects the amount of wealth created by the company, relative to the number ofemployees. A high ratio indicates the favourable effect of labour factor in the wealthcreation process. A low ratio means unfavourable working procedures such as wastagesof time and materials. Capital productivity is a measure used in determining the valuegenerated per unit capital. The high ratio indicates capitals are managed efficiently,good asset utilisation and stock control. The observed changes in firm performancemay be due to many factors such as efficiency, competitiveness, economy and others.The research will focus on listed companies for the consideration of reliable and publiclyavailable financial and accounting data. The sample hence includes the 3 selected GLCs.The accounting data of the sample firms, obtained from their historical prospectuses,will be used in calculating the productivity performance of the companies.

The model used in this research will be able to analyse the relationship, correlationand effectiveness between revenue and two productivity measurements, and thesetwo factors contribute more significantly to the profit and efficiency of a company.The model will also explain the production function based on the return of scale theory.

The first step of this research is to compute the labour productivity and capitalproductivity of each selected company, using the financial reports. From the measurementindicator, we analyse the structural and performance of the companies. From theproductivity data calculated, we run the data using SPSS software to identify thecorrelation and relationship between the two productivity measurements and the revenue.This will explain the performance and growth of the industries over the years, from2000 to 2006. The model used in this study is based on the Cobb-Douglas productionfunction because it is clear that the relationship between the output and the twoinputs is nonlinear.

The production function in this study is expressed as:Where Ff = output/revenue

X2 = labour productivityXj = capital productivityu = stochastic disturbance terme = base of natural

From equation 1, it is clear that the relationship between the output and the twoinputs is nonlinear. However, if we log-transform the mode we obtain:

In K, = Infi, + j02 In X2i + fi3 In X*

Where j60 = Inj8,The model is linear in the parameters j80, j#2 and^3 therefore is a linear regression model.

From the model above, we are able to analyse the variables to understand thesignificance of the labour productivity and capital productivity contribution to the revenueof the company. This can be explained by:

1. The (partial) elasticity of output with respect to the labour productivity thatis, it measures the percentage change in output,

2. The (partial) elasticity of output with respect to the capital productivity,holding the labour input constant, and

3. The sum ( ) gives information on returns to scale,

that is the response of output to a proportionate change in input. If the sum is 1, thenthere is return to scale, that is doubling the inputs will double the outputs and so on.If the sum is less than 1, there is decreasing return to scale; it means doubling theinputs will lessen the outputs by twice. If the sum is greater than 1, there are increasingreturns to scale; it happens when double the inputs is more than double the outputs.

Before proceeding further, note that whenever we have a log-linear regressionmodel involving any number of variables, the coefficient of each of the X variablesmeasures the (partial) elasticity of the dependent variable Y with respect to thatvariable. Thus, if we have a k-variable log-linear model:

In Y, = In/o + j02 In X* + j83 In X3i +........ +jff* In X* + u,

Each of the (partial) regression coefficients,^through^ , is the (partial) elasticity of Ywith respect to the variable X2 through Xt.

Assume that model (2) satisfies the assumptions of the classical linear regressionmodel. After calculating the labour productivity and capital productivity, we will run thedata using the SPSS program to get the value of the variablesj8lrj82 andj03. The resultexplains the relationship between the independent and dependent variables regardingthe return to scale economic theory.

The model is also used to determine the relationship between the revenue of thecompanies and the labour and capital productivities. The correlation coefficient ofdeterminations (R square) is a summary that tells how well the sample regression linefits the data or to measure the goodness of fit.

Results and DiscussionBackground of the Data Analysis

The time series data for this research were gathered from the financial reports ofthe three selected GLCs over year 2000 to 2006. The data are used to calculate thetwo productivity measurement indicators. The productivity measurements are veryuseful in managing the organisation or the unit of organisations. Productivity can bemeasured by the output to one input only or the ratio of output to more than one input.When more than one factor are involved, this productivity measurement is called multi-factor or sometimes known as the total factor productivity measurement, especially bythe economists when input factors of labour and capital are involved.

This study focuses on the labour productivity and capital productivity, and thusexplains the effectiveness of utilisation of all input resources, which is suitable forassessing the performance of an organisation. Output is goods produced by theorganisations and can be measured by the value of productions. Input refers to thefactors of productions, namely labour, materials, energy, capital and other resourceswhich are utilised in producing outputs.

Labour productivity is computed by dividing total output by the number of theemployees. Due to changes and fluctuation in the flow of the labour, we will use theaverage number of employees for the period of time being measured. The reason thatlabour productivity is used is because labour is the most important input factor, beingmore readily measured of all the input factors. The key to productivity of theorganisations lies in the way products and services are produced and delivered. Labourproductivity will explain how effective and efficient their human resources are and howthe organisations can manage their human resources.

o

Capital productivity is a measure used in determining the value generated per unitcapital employed. Capital productivity indicates the degree of utilisation of fixed assetsand their efficiency with which assets are utilised. It is defined as revenue generatedper ringgit of fixed assets. High ratio indicates better performance of enterprise.

The Production Function Approach Model is used to determine the relationshipbetween labour and capital productivities, and the revenue. The finding explains howefficient resources are used in producing the output with regards to economies of scaletheory. The information needed can be obtained using SPSS program to get the valueof the Beta and return to scale. Findings explain the return to scale economic theoryfor the 3 selected GLCs. In the study, correlation of determination R2 is examined tomeasure the goodness-of-fit in this Production Function Approach Model. The F-valueexamines the sufficiency of information for the prediction of dependent variable that atleast one variable contributes significant information for the prediction of revenue.

Result of Unit Root TestTo ensure that there is a long term relationship among the variables in production

function approach model, Augmented Dickey-Fuller and Phillips Pheron tested thestationary data on the variables revenue, labour productivity and capital productivity.The test is conducted for each company.

The results for company GI_Cs1 are shown in Table 3. Table 3 reports the statisticfor unit root using ADF and PP for each series in time series. This shows the undeniableexistence of unit root in labour productivity (Inlabprod) at a significant statistical level,except for the existence of unit root in revenue (Inrevenue) and capital productivity(Incapprod}. This means that Inrevenue and Incapprod are stationary at level. The datashown are stationary and can be used for further analysis.

LevelVariable

Lnrevenue

Lnlabprod

Lncapprod

ConstantNo trend

5.250547

-0.07Q981

5.89999

ADF PP

ConstantTrend

19.1027

-2.580727

4.4305

1st difference ^^^^^^^^^^^^HiVariable

Lnrevenue

Lnlabprod

Lncapprod

ConstantNo trend

ConstantTrend

15.22807

-2.132992

3.537039

ConstantNo trend

Q.6849

0.313096

1 .649342

ConstantTrend

-2.7239

-2.201378

-1.250231

ConstantNo trend

-3.1177 *

-1.326083

-2.113564

ConstantTrend

-17.1022***

1 .659457

-10.3518***

The result for company GLCs2, tested using Augmented Dickey-Fuller and PhillipsPheron, is shown in Table 4. The report shows the Augmented Dickey-Fuller andPhillips Pheron test at a significant statistical level except the existence of unit root inrevenue (Inrevenue), labour productivity (Inlabprod) and capital productivity (Incapprod).This means that Inrevenue, Inlabprod and Incapprod are stationary at level. The data forthe three variables are stationary and can be used for further analysis.

Unit Root Test for Company GLCs2

Level ADFVariable

Lnrevenue

Lnlabprod

Lncapprod

ConstantNo trend-0.433182

-3.623501

-2.826488

PPConstantTrend-2.742251

-9.314789*

-50.77674*

1st difference ^^^^^^^^^^^^HVariable

Lnrevenue

Lnlabprod

Lncapprod

ConstantNo trend

ConstantTrend

-2.702027

-7.294841*

-41.09709***

ConstantNo trend0.271120

-0.489388

-0.910947

ConstantTrend-4.809872

-1-817388

-1.470332

ConstantNo trend

-4.129902*

-2.516184

2.300747

ConstantTrend

-7.917392**

-5.911542**

-3.673089

Notes: Lnrevenue = Ln revenue; Lnlabprod = Ln labour productivity; Lncapprod = Ln capital productivity.The null hypothesis is that the series are non-stationary and the rejection of null hypothesis for ADF and PPtest is based on the MacKinnon's 119911 critical value.

" Significant at 1% level' * Significant at 5% level*** Significant at 10% level, indicates the rejection of null hypothesis of non-stationary at 10%, 5% and 1%

level respectively.

Table 5 shows the result of the Augmented Dickey-Fuller and Phillips Pheron testfor company GLCsS. The report shows the Augmented Dickey-Fuller and Phillips Pherontest at a significant statistical level except existence of unit root in revenue (Inrevenue),labour productivity (Inlabprod) and capital productivity (Incapprod). This means thatInrevenue, Inlabprod and Incapprod are stationary at level. The data for the threevariables are stationary and can be used for further analysis.

Unit Root Test for Company GLCs3

Level

Variable

Lnrevenue

Lnlabprod

Lncapprod

ConstantNo trend

-8.60132*

-7.906291*

-1.723994

ADF PP

ConstantTrend

-5.661365

-2.479446

-7.857781 -

ConstantNo trend

-2.735627

-8.943698*

1.701624

ConstantTrend

-2.440830

-16.88829*

-1.661016

1st difference ADF PP

Variable

Lnrevenue

Lnlabprod

Lncapprod

Constant ConstantNo trend Trend

-3.611111

-1.733847

-5.342101*"

ConstantNo trend

-1.108200

-14.76463*

-2.757883

ConstantTrend

0.708338

-11.77362*

-6.586986**

A/ofes: Lnrevenue = Ln revenue; Lnlabprod = Ln labour productivity; Lncapprod = Ln capital productivity.The null hypothesis is that the series are non-stationary and the rejection of null hypothesis for ADF and PPtest is based on the MacKinnon's (1991/ critical value.

* Significant at 1 % level'' Significant at 5% level*** Significant at 10% level. Indicates the rejection of null hypothesis of non-stationary at 10%, 5% and 1 %

level respectively.

The results from the Augmented Dickey-Fuller and Phillips Pheron test or stationarydata for the 3 selected companies are stationary at level, as shown in Table 3, 4 and 5.The data are significant to be used for further tests.

Productivity Performance for the 3 Selected GLCs

The productivity performances were calculated from the company's annual financialreports. The indicators used for this study is labour productivity and capital productivity,based on each company's six years annual financial reports. The productivity ratioresults from the calculation were analysed and the information regarding these twoindicators was studied to see the productivity performance of each GLCs.

Productivity Performance of GLCsIThe productivity measurement indicator for this company was calculated from the

annual reports, year 2000 - 2006. Table 6 shows the result calculated for labour andcapital productivities for company GLCs!.

Productivity Measurement of Company GLCsI

Year Labour Productivity (RM'OQO) Capital Productivity (RM'OOO)

2000

2001

2002

2003

2004

2005

2006

365.35

408.74

456.83

499.12

610.67

748.34

789.12

9.56

10.44

11.33

12.97

14.03

18.02

19-61

The table shows that the performance or growth of labour and capital productivitiesincreased over the years. The labour productivity increased from RM365,350 in the year2000 to RM789,120 in year 2006. The capital productivity increased twice from year2000 to year 2006, from RM9,560 to RM19.610. This indicates that the workers haveimproved the efficiency, knowledge and skill in producing the products. The utilisation offixed asset has also increased for company GLCsI.

Figure 2 Productivity Performance - GLCsI

Productivity (RM'OOO)

900

2000 2001 2002 2003 2004 2005 2006 Year

Labour Productivity GLCsJ Capital Productivity GLCsI

Figure 2 shows that the labour productivity performance is on an increasing trend.This implies that efficiencies of the human labour have improved; in the skill,knowledge and quality aspects such as to reduce the reject rate, defects and cost ofproduction. The performance of capital productivity also shows an increasing trend.This indicates that machineries and plant equipment are efficiently utilised in producingoutputs for company GLCs!.

Productivity Performance of GLCs2

The productivity indicators for company GLCs2 show that it is lower than companyGLCsI. This indicates that there is room for improvement in labour and capitalproductivities in the company. The performance of the labour productivity from year2000 to 2006 indicates an increasing trend but it is lower than company GLCs!. Table7 shows that labour productivity has decreased from year 2000 to year 2001, fromRM88,520 to RM66,970. It then increased to RM98.520 in 2002 and increased more in2003 and 2004. It decreased slightly in 2005, and in 2006 it increased to RM147.100.

Year Labour Productivity (RM'OOO} Capital Productivity {RM'OOO)

2000

2001

2002

2003

2004

2005

2006

88.52

66.97

98.52

146.85

141.59

131.86

147.10

0-78

0.57

0.78

1.07

1.05

0.86

0.97

o

Figure 3 Productivity Performance - GLCs2

Productivity (RM'OOO)

160140

100

2000 2001 2002 2003 2004 2005 2006 Year

,_ Labour Productivity GLCs2 —«— Capital Productivity GLCs2

The labour productivity fluctuation may also be affected by the economic factorssuch as price, economy depressions and also turnover of the workers. The labour inputfactors affect the productivity performance if labour is not skilful, knowledgeable andefficient in producing the output. The capital productivity shows a very low ratiocompared to GLCsI, due to under-utilisation of machineries. This situation can beimproved by implementing work study to reduce breakdown time, implement goodoperating procedures and maintain good conditions of the factory.

Productivity Performance of GLCs2The labour productivity of company GLCsS is the lowest, compared with the two

other companies. From the annual report, the number of employees was increasingbut the increase in the total output was not significant enough to affect the labourproductivity. This result shows a lower labour productivity for GLCsS, and is notefficient or effective compared to the other two GLCs. The other reason is that theworkers were not well managed or the allocation of resources was not maximised. Theratio of capital productivity in the GLCsS is also the lowest. Table 8 shows that the

labour productivity for company GLCs3 has decreased from year 2000, from RM87.810to RM36,060 in year 2001 - This is because the employees had increased by triple, fromyear 2000 to 2003, and also due to higher investment in capital but the revenuecollected only increased by double. Capital productivity for this company wasstagnated and the company has to study why it happens and not only measure theirperformance based on financial indicators. Table 8 shows that the capital productivitydecreased from RM500.00 in year 2000 to RM400.00 in year 2006. The reasons arebecause the fixed assets were under capitalised and utilised. The utilisation of thefixed assets in this company needs to be improved to ensure a higher output.

Productivity Measurement of Company GLCs3

Year Labour Productivity (RM'OOO) Capital Productivity (RM'OOO)2000

2001

2002

2003

2004

2005

2006

87.81

36.06

51.62

50.44

43.60

38.73

45.10

0.50

0.39

0.56

0.52

0.45

0.40

0.40

Figure 4 shows the negative trends of performance of labour productivities forcompany GLCsS. Even though the company recorded profit for every year but theutilisation of the capital and labour productivities were not maximised. Compared toGLCs! and GLCs2, the productivity ratio for GLCsS was the lowest. Being in the sameindustrial sector with the other two companies, GLCsS needs to benchmark the twoother companies on how to improve the productivity ratio.

Figure 4Productivity Performance - GLCsS

Productivity (RM'OOO)

10090

XX

2000 2001 2002 2003 2004 2005 2006 Year

m— Labour Productivity GLCsS —*— Capital Productivity GLCs3

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Comparison of Labour ProductivitiesComparison between productivity ratios of the 3 selected GLCs is very important

to understand why certain companies have higher labour productivity and capital

productivity ratios than the others. The higher ratios indicate that the company is very

effective and efficient in managing human and capital resources. In these three

companies, the values of productivity ratio are varied from each other.

Table 9 Comparison of Labour Productivities

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Year Labour Productivity Labour Productivity Labour ProductivityGLCsI (RM'OOO) GLCs2 (RM'OOO) GLCs3 (RM'OOO)

2000

2001

2002

2003

2004

2005

2006

365.35

408.74

456.83

499.12

610.67

748.34

789.12

88.52

66.97

98.52

146.85

141.59

131.86

147.10

87.81

36.06

51.62

50.44

43.60

38.73

45.10

Table 9 shows the comparison in labour productivity for these 3 GLCs, with GLCs!

having the highest labour productivity compared with the two other GLCs. There is a

very significant difference in the productivity ratio. This means that the performance of

GLCsI is much better than GLCs2 and GLCsS. Their workers are very effective and

efficient in producing the outputs. One unit worker in company GLCsI can produce

RM789,120 compared with GLCs2 which only produced RM147,100 and RM45JOO for

GLCs3 in year 2006. GLCs2 and GLCsS need to benchmark the systems implemented for

managing employees in GLCsI and adapt such programmes to improve their labour

productivity. The low ratio indicates that the workers are not maximised or not fully

capitalised, or wastage of time and maybe because of inadequate salary. The higher

ratio indicates the management efficiency in managing their workers, work altitude of

the employees is good and their workers are knowledgeable and skilful. Figure 5 shows

the comparison of the labour productivity for these 3 selected GLCs.

Figure 5Labour Productivity Comparison

Labour Productivity (RM'OOO)

900

800

700

600

500

400

300

200

100

D

2000 2001

Labour Productivity GLCsI

2002 2003 2004

Labour Productivity GLCs2

2005 2006 Year

Labour Productivity GLCs3

Figure 5 shows that the GLCsI has an increasing performance in labour

productivity. This can be explained as GLCs! has a good managing system compared

with the two other companies. GLCs2 also shows an increasing trend but its value of

labour productivity ratio is far below that of GLCsI. The lowest in labour productivity

ratio is GLCsS. The selected 3 GLCs companies are from the same plantation sector

but have a very large range in the values of labour productivity. The labour productivity

ratio is very important because from the ratio we can understand the problem of the

companies and whether their workers are effective or efficient at all.

Comparison of Capital ProductivitiesThe comparison between the capital productivity for these three companies also

showed a significant difference in their capital utilisation. GLCsI has utilised its fixed

assets very well in producing output, compared with the two others. GLCs2 and

GLCsS have problems in managing their fixed assets because the productivity ratio islow compared to GLCsI. GLCs! indicates the efficiencies of assets utilisation

compared to companies GLCs2 and GLCs3. GLCs2 and GLCsS should increase the

utilisation of their fixed assets. Table 10 shows that in year 2006, GLCsI was very

successful in handling capital productivity, which is 19 times higher than GLCs2 and

GLCsS. This can be explained as GLCs! has utilised the optimum of the fixed assets inproduction than GLCs2 and GLCsS.

Comparison of Capital Productivities

Year Capital Productivity Capital Productivity Capital ProductivityGLCsI (RM'OOO) GLCs2 (RM'OOO) GLCsS (RM'OOO)

2000

2001

2002

2003

2004

2005

2006

9.56

10.44

11.33

12.97

14.03

18.02

19.61

0.78

0.57

0.78

1.07

1.05

0.86

0.97

0.50

0.39

0.56

0.52

0.45

0.40

0.40

Figure 6 shows the trend of comparison in the capital productivity. It shows asignificant difference in the value of capital productivity. The difference can be used toexplain how good company GLCsI is in managing its capital compared with the others.The low ratio for the 2 other companies reflect the poor assets utilisation. The twoother companies have to find a better way to improve the capital productivity byincreasing the utilisation of their fixed assets.

Capital Productivity Comparison

Capital Productivity {RM'OOO)

0

2000 2001 2002 2003 2004 2005 2006 Year

Capital Productivity GLCsl —*— Capital Productivity GLCs2 —*— Capital Productivity GLCsS

The graph shows the performance of capital productivity for the 3 selected GLCs,from year 2000 to year 2006. The capital for GLCsI has increased from RM9,560 inyear 2000 to RM19,610 in year 2006, but for GLCs2 and GLCs3 the performance ofcapital productivity is very low compared to GLCsI. This indicates that the fixed assetsare under utilised for GLCs2 and GLCsS. Capital productivity for GLCs2 and GLC3 canbe improved by maximising the utilisation of their fixed assets.

Results of the Production Function Approach ModelThe time series data for each selected company were run using the SPSS programme

to analyse the relationship between the variables and to determine the economies ofscale. The results explain the most significant factor affecting the revenue for these 3selected GLCs. The model used is the Production Function Approach Model.

Results of the Data Analysis of GLCs!The data for company GLCs! were regressed after the values of labour and capital

productivities were transformed to In. The output of SPSS for company GLCsI is shownin the table below. The output explains the effectiveness and efficiency of the company.It also explains which variables have significantly contributed to the dependent variables.

Model Summary : Coefficient of Determination of GLCsI

R Square AdjustedR Square

Std. Error oftthe Estimate

,999a .999 .998 .01235

a. Predictors : (Constant), Lnlcapprod, Lnlabprod

The Model Summary table shows the coefficient of determination. It measuresthe degree of predictive accuracy of the regression model in explaining the variationsin the dependent variable. The model explains that 99.9 percent of the variation inrevenue was contributed by labour and capital productivities. That means othervariable have contributed very little to the revenue of GLCsI. The ANOVA (Analysis ofVariance) table contains the sum of square, degree of freedom, mean square, F testand the level of significance of the regression and the residual. The purpose of thistable is to prove whether the summary table is correct or not. The ANOVA tablecontains information needed to test the overall significance of the regression model.The purpose of the test is to compare the means of three or more independent groupsand the variables compared are normally distributed.

ANOVA: ANOVA for GLCsITable 12

Model HHHpf *** Mean F Sia.("•Bflftre Square

1 Regression

Residual

Total

.420

.001

.420

2

4

6

.210

.000

1375.833 .0003

o

a. Predictors : (Constant). Lnlcapprod, Lnlabprodb. Dependent Variable : Lnrevenue

o

The above ANOVA table contains information to test the significance of theregression model. Since the Sig (or Prob) value (0.000) < 0.05, the model is significantand can explain or predict the revenue. Based on F-statistic, F = 1375-833 and P value(0.000) < 0.05 show that the model is significant, and conclude that labour productivityand capital productivity have affected the revenue of GLCsI.

Table 13 Coefficients : Coefficients of GLCsI

UnstandardisedCoefficients

StandardisedCoefficients

Std. Error

(Constant)

Lnlabprod

Lnlcapprod

13.285

.185

.777

.446

.128

.140

.206

.795

29.785

1.436

5-541

.000

.224

.005

a. Dependent Variable : Lnrevenue

The coefficients table contains information needed to evaluate the significance ofindividual independent variables and for comparing the relative importance of eachother. The Sig. value corresponding to each variable is to determine whether thatvariable is significantly related to the dependent variable or not. The table coefficientshows for GLCsI, the capital productivity is significant in contributing to the revenuebecause the P value (0.005) < 0.05. The labour productivity is not significant incontributing to the revenue because P value (0.224) > 0.05.

The equation for the production function model for company GLCsI is:

= 13.285+ 0.206 In j0L + 0.777 In J32

ThejS, value of 0.206 indicates that if a labour productivity increased by 1 percent,then the revenue should increase by approximately 0.206. Thej62 value indicates thatwhen capital productivity assets increased by 1 percent, the revenue will increase by0.795 percent. Based on the beta value, the capital productivity is more significant andimportant compared to labour productivity in contributing to the revenue of companyGLCsI.

The parameter for economies of scale for company GLCs! is obtained by addingthese two dependent variables (economies of scale _/J, + JS2 = 1.001)- 1.001 wasobtained, which gives the value of constant return to scale. As is evident, over theperiod of this study, the revenue for company GLCs! was characterised by constantreturn to scale.

Results of the Data Analysis GLCs2

The data for company GLCs2 were run through the SPSS. The output from SPSSis shown in the table below. The outputs have been studied to identify the significanceof the independent variables towards the dependent variables.

Model Summary : Coefficient of Determination of GLCs2

Model R R Square Adjusted Sld. Error ofR Square the Estimate

12

.9569

.991C

.913

.983

.896

.975

.12467

.06159

a. Predictors : {Constant). Lnlabprodb. Predictors : (Constant), Lnlcapprod, Lnlabprod

Table 14 explains the coefficient of determinant R2 for GLCs2. This table showsthat the two dependent variables, labour productivity and capital productivity,contributed 98.3 percent in generating revenue in the company, while the remainingpercent is not explained by R2. The unexplained value of 1.7 percent may be becauseof the materials and services bought from contractors hired by the company.

Table 15ANOVA: A N O V A f o r G L C s 2

Model Sum of df Mean F Sig.Square Square

1 Regression

Residual

Total

2 Regression

Residual

Total

.819

.078

.896

.881

.015

.896

1

5

6

2

4

6

.819

.016

.441

.004

52.669

116.141

.D01a

.000b

a. Predictors : (Constant), Lnlabprodb. Predictors : {Constant!, Lnlcapprod, Lnlabprodc. Dependent Variable : Lnrevenue

The ANOVA table contains information to test the significance of the regressionmodel. Since the Sig (or Prob) value < 0.05, the model is significant and can explain orpredict the revenue. Based on F-statistic, F = 11.141 and P value (0.000) < 0.05 showthat the model is significant, and conclude that labour productivity and capitalproductivity have contributed to the revenue of company GLCs2.

Coefficients : Coefficients of GLCs2

1 (Constant)

Lnlabprod

8-990

1.206

.787

.166 .956

11.424

7.257

.ODD

.001

2 (Constant)

Lnlabprod

Lncapprod

2.977

2-416

-1.707

1-531

.309

.420

1.915

-.995

1.945

7.815

-4.060

.124

.001

.015

a. Dependent Variable : Lnrevenue

o

The coefficients table contains information needed to evaluate the significance ofindividual independent variables and for comparing the relative importance of eachother. The Sig. value corresponding to each variable is to determine whether thatvariable is significantly related to the dependent variable or not. The table coefficientshows for GLCs2, the labour productivity is significant in contributing to the revenuebecause the P value (0.001) < 0.05. The capital productivity is also significant incontributing to the revenue because P value (0.015) < 0.05.

The production function equation model for company GLCs2 is:

Y = 2.977 + 1.91 5 In j9, + -0.995 In

The value of fi^ explains that the revenue in GLCs2 increases by 1.915 percent iflabour productivity is increased by 1 percent. The value of _/J2 explains that if thecompany increases 1 percent in capital, the revenue will decrease by 0.995 percent.Adding the two inputs' elasticity, we obtained 0.920, for the return to scale parameter.As is evident, over the period of this study, GLCs2's revenue was characterised bydecreasing return to scale.

Results of the Data Analysis GLCs3

The data for company GLCsS were processed using the SPSS programme. Theoutput of SPSS is shown in the table below. The output is studied to identify thesignificance of independent variables towards the dependent variables. Table 17suggests that the model explains 89.6 percent of the variation in revenue. That meansother variables not included in the model are also related to the revenue. The coefficientof determination R2 explains 89.6 percent revenue was explained by labour and capitalproductivity factors.

Model Summary : Coefficient of Determination of GLCsS

896a

R Square

.803

AdjustedR Square

.704

Std. Error ofthe Estimate

.12624

a. Predictors : (Constant), Lnlcapprod, Lnlabprod

ANOVA : ANOVA for GLCsS

Model Sum of df Mean F Sig.Square Square

1 Regression

Residual

Total

.259

.064

.323

2

4

6

.130

.016

8.132 .039a

b. Predictors : (Constant), Ln/capprod, Lnlabprodc. Dependent Variable : Lnrevenue

The table ANOVA shows the significant effect of the dependent variables towardsindependent variables. Based on F-statistic, F = 8.132 and P value (0.039) < 0.05 showthat the model is significant, and conclude that labour productivity and capitalproductivity have contributed to the revenue of company GLCsS.

Table 19 Coefficients : Coefficients of GLCsS

UnstandardisedCoefficients

StandardisedCoefficients

Std. Error

1 (Constant]

Lnlabprod

Lncapprod

18-992

-.779

1.640

1.107

.221

.445

-.979

1.025

17.150

-3.523

3.687

.000

.024

.021

a. Dependent Variable : Lnrevenue

The table coefficient for GLCsS shows that the labour productivity is significant incontributing to the revenue because the value of P (0.024) < 0.05. The capital productivityis also significant in contributing to the revenue as P (0.021) < 0.05. Both variables willsignificantly affect the dependent variables.

The equation for production function model for company GLCsS is:

Y = 18.992 + (-0.797) In jfi, + 1.025) In j82

o

The value of j&i explains that revenue in GLCsS decreases by 0.797 percent iflabour productivity is increased by 1 percent. The value of j62 explains that if companyGLCsS increases 1 percent in capital, the revenue will increase by 1.025 percent. Addingthe two input elasticity, we obtained - 0.228, for the return to scale parameter As isevident, over the period of this study, the company's revenue was characterised bydecreasing return to scale.

Conclusion and RecommendationSummary

The findings of this research show that the performance of the labour and capitalproductivity factors of the companies is significantly different from each other. Thelabour productivity for GLCsI is higher than GLCs2 and GLCsS even though they are inthe same plantation sector The differences are indicated by the efficiencies of thelabour in producing the output. The capital productivity for these 3 companies alsoshows a different performance in the utilisation of their fixed assets. Company GLCsIhas a higher performance in capital productivity compared with the two others. CompanyGLCsS has a fluctuating performance in capital productivity. This indicates that thecapital is not utilised and not effective in producing the output for GLCs2 and GLCsS.The performance from 2000 to 2006 reflects the productivity growth for each company.The higher labour productivity indicates the effectiveness and efficiencies of their workersin producing the output. The capital productivity explains how the fixed assets areutilised. The highest ratio implies that the capital is utilised to the maximum compared tothe lower ratio result, which indicates capital is not efficient and under utilised.

The production function approach model explains the economies of scale for eachcompany. The company GLCsI is operating at constant return to scale, meanwhileGLCs2 and GLCsS are operating under decreasing return of scale. The study showsthat the three GLCs are not efficient in managing labour and capital productivities.Eventhough all the 3 companies selected are making profit over the period of study,their performance can still be improved further by increasing labour and capitalproductivities. The companies have to strategise the management and development ofhuman capital, with the aim of increasing their knowledge and skills through trainings.Capital can be improved further by increasing the utilisation of fixed assets.

The company should emphasise the study on economies of scale to increase theefficiency and effectiveness in production of the products. The study shows only GLCsIis operating at a constant return to scale The two other companies are operating atdecreasing return to scale This means that the company has not maximised the labourproductivity and capital productivity. The company has a lot of room to improve theirlabour and capital productivities. The company should have a continuous productivityimprovement plan to increase the efficiency and competitiveness m the market.

Conclusion

With increasing recognition that productivity growth is the key to sustain theeconomic expansion, measuring productivity is becoming important to economists andpolicy makers. The accurate measurement of productivity performance plays animportant role in providing the information economists need to put forth better policyrecommendations and for policy makers to make the right decisions. Microproductivity is parallel with the scope covered by the term "microeconomics." It refersto the productivity of the organisational unit and size, such as a business, division, ordepartment. The findings of the study show the productivity measurement can identifythe effectiveness in capital and labour compared to using the financial indicators.

The result shows that the three selected GLCs are still operating under economiesof scale. The economies of scale can be increased further if the company measuretheir labour and capital productivities, because these two indicators are very importantin contributing to the total output of the company. The measurement of labour andcapital productivities will explain many factors related to the production, from theaspects of managing quality and productivity. The measurement will explain theeffectiveness of labour, reject rates, defect rates of the products, utilisation of machines,broke down time, capacity of the machines and handling.

The findings of the research suggested that the company should increase theirlabour and capital productivities to achieve increasing return to scale. The findings canbe used to increase the efficiencies of the economies of scale in production by studyingthe factors that affect labour and capital productivities. GLCs2 and GLCsS can alsobenchmark GLCsI in their best practices to increase their economies of scale. Missions,vision and strategies are powerful drivers towards the success of the company.

Recommendation

The productivity movement has a scientific basis in the statistical control ofmanufacturing processes, that is, quality control. Since the late 1980s, it has beenincreasingly applied to the business-level management of an organisation. The objectivein the original approach was to manage the production process so that it achieved andmaintained a consistent, desired level of quality. The Malaysian Government givesrecognition to the company which measures productivity. The Productivity Award waspresented to companies with a higher ratio in productivity measurement indicator. Theprinciples and values emphasised in this category are productivity measurement,management by facts, continuous improvement, and long-term goals of the organisation.

Organisations that have succeeded in improving productivity growth have typicallyused approaches in productivity and quality improvement programmes, such as TotalQuality Management (TQM), Just In Time, Total Preventive Maintenance, Quality Control

Circle, Kaizen, 5S and others. The performance or productivity growth seeks continuousimprovement in processes, products, and services of an organisation. The companyshould require a shared mindset (culture) that emphasises customer satisfaction,shared leadership and getting it right the first time. Another perspective indicates thatto increase efficiency and performance the company should have philosophies that arerelated to customer focus, continuous improvement and employee participation. Tosustain and maintain competitiveness, the organisations have to measure theirperformance or productivity growth since these reflect how competitive the companiesare. The productivity performance emphasises the understanding of variation, theimportance of measurement, the role of the customer and the involvement ofemployees at all levels of an organisation in pursuit of such an improvement.

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