Economic Modelling 27 (2010) 395403

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Economic Modelling
j o u r n a l h o m e p a g e : w w w. e l s ev i e r. c o m / l o c a t e / e c m o d

The inuence of Flexible Manufacturing Technology adoption on productivity of

Malaysian manufacturing industry
D.A.R. Dolage a, Abu Bakar Sade b, Elsadig Musa Ahmed c,
a
b
c

International Graduate School of Business, University of South Australia, Adelaide, Australia

Faculty of Management, Multimedia University, Cyberjaya, Malaysia
Faculty of Business and Law, Multimedia University, 75450 Melaka, Malaysia

a r t i c l e

i n f o

Article history:
Accepted 9 October 2009
Keywords:
Flexible Manufacturing Technology
Total factor productivity growth
Mass customisation

a b s t r a c t
This paper investigates the inuence of the adoption of Flexible Manufacturing Technology (FMT) on the Total
factor Productivity Growth (TFPG) of Malaysia Manufacturing Industry. The Principal Component Analysis has
been adopted to extract the most appropriate underlying dimensions of FMT to use in place of the eight FMT
variables owing to the potential multicollinearity. The study has been conducted within FMT intensively
adopted 16 three-digit industries that encompass 50 ve-digit industries covering the years 20002005. The
results obtained from the two situations, one, including the industry xed effects dummy variables and the
other without these, are contrasted. It is established that the model that included the industry xed effect
dummy variables has a greater explanatory power. The two principal components that account for the greater
variation in FMT show positive and moderately signicant relationship with TFPG. The study provides
sufcient evidence to conclude that FMT has a direct and moderately signicant relationship with TFPG.
2009 Elsevier B.V. All rights reserved.

1. Introduction
The average gross domestic product (GDP) growth of Malaysia
(5.5%) during 20002007 is lower than that (7.0) during 19902000.
Malaysian Manufacturing sector GDP (13.0%) during 20002007 is
much lower than the same (4.8%) for the period 19902000. These
are some of the key indicators to the declining competitiveness of
the Malaysian manufacturing industry over the period 20002007. It
is widely believed that intensive regimes of contemporary manufacturing paradigms such as mass customisation, customerisation and
instant customerisation can pave the way for a competitive manufacturing industry. The studies show that mass customisation is the core
manufacturing paradigm. The studies also showed that the crucial
determinant of the successful implementation of mass customisation is the abundant use of Flexible manufacturing Technology (FMT)
(Wind and Rangaswamy, 2001; Da Silveria and Fogliatto, 2005).
Moreover, Malaysian Industrial Development Authority (MIDA)
(MIDA, 2007) has recognised a number of promoted activities and
products (for the development and production) for high technology
establishments which makes them entitled to pioneer status or investment tax allowance under the promotion of Investment Act
1986. This includes FMT products such as, Computer process control
Corresponding author. Tel.: +60 126330517, +60 62523807; fax: + 60 62318869.
E-mail addresses: A.Dolage@liverpool.ac.uk (D.A.R. Dolage), absade@mmu.edu.my,
adsade@yahoo.com (A.B. Sade), elsadigmusa@yahoo.com, asadiq29@hotmail.com
(E.M. Ahmed).
0264-9993/$ see front matter 2009 Elsevier B.V. All rights reserved.
doi:10.1016/j.econmod.2009.10.005

systems/equipment, Process instrumentation, and Robotic equipment

and Computer numerical control machine tools. The Ninth Malaysia
Plan which is compiled by the Economic Planning Unit of the Prime
Minister's Ofce presents the rst ve-year blueprint of the National
Mission, outlining the policies and key programmes aimed at fullling
the Mission's Thrusts and objectives for the period 20062010. This
aims to achieve changes in the structure and improved performance
of the economy with every economic sector achieving higher value
added and total factor productivity. The Thrust 1 of the Plan is aimed
at making the economy more centred on human capital, particularly
with increasing competition from globalisation and progressive
market liberalisation. This states that,
Application of high technology and production of higher value
added products will be given emphasis. Measures will be undertaken
to migrate the electrical and electronics (E&E) industry towards hightechnology and higher value added activities.
The empirical studies on FMT are clustered in the following
areas; types of exibility, types of FMT, procedure bias on investment
appraisal of FMT, operational problems, market structure and competitiveness. Nonetheless, it is observed that the inuence of FMT
adoption on the competitiveness of the Malaysian manufacturing
industry has not been adequately explored. Studies have revealed that
due to the potential operational problems of FMT implementation,
potential benets of FMT might not be derived (Sharma, 2002; Gale
et al., 2002; Roller and Tombak, 1993). Moreover, Slagmulder and

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D.A.R. Dolage et al. / Economic Modelling 27 (2010) 395403

Bruggeman (1992) and Fine and Freund (1990) showed that due
to procedure bias on investment appraisal of FMT, investments in
FMT do not take place smoothly or effectively. Hence, additional
studies need to be carried out to measure the extent to which FMT
contributes to the productivity in the manufacturing industry.
Evidently, only a few studies have examined the impact of specic
technologies on the industry level productivity using less aggregated
data. Berndt and Morrison (1995) examined the impact of high-tech
investments on multifactor productivity (MFP) and three protability
measures. While the study found only limited evidence of a positive
relationship between protability and the share of high-tech capital
in the total physical capital stock, it established that they were negatively correlated with MFP. Amato and Amato (2000) have investigated the impact of high-tech investments on MFP and Price Cost
margin. This study established that there was a positive impact from
high-tech investments regardless of whether or not the specication
includes industry effects dummy variables to account for the differences in technological opportunity among industries.
According to Henricsson and Ericsson (2005), Wysokinska (2004)
and Porter (1990), productivity is the only relevant measure of competitiveness. Zhi et al. (2003) showed that there were three productivity concepts currently adopted to measure the productivity in
the manufacturing industry. Chau (1993) and Oulton and O' Mahony
(1994) emphasised on the unresolved academic debate over whether MFP and Total Factor Productivity Growth (TFP) are the same.
On account of this, the present study adopts a widely recognised
productivity measure, growth of TFP (TFPG). A number of studies have
been conducted in the manufacturing industry of Malaysia that adopted
TFPG to measure productivity at industry level. Menon (1998) studied
TFPG of foreign and domestic rms in the Malaysian manufacturing
industry. Tham (1997, 1995), Choong and Tham (1995) and Fatimah
and Mohd (2004) adopted TFPG to examine the inuence of trade
policies and industry characteristics on the productivity growth of the
Malaysian manufacturing industry. Abdullah and Hussein (1993)
adopted TFPG to examine the productivity growth of the Malaysian
resource based industries. These studies indicate that TFPG has been
used in Malaysia to measure productivity growth in the manufacturing industry. Moreover, Elsadig (Elsadig, 2006a, 2006b, 2006c, 2007,
2008a, 2008b), estimate TFPG contribution to Malaysia's manufacturing
in relation to input driven, positive and negative externalities, such as
the impact of information and communications technology, human
capital, foreign direct investment, carbon dioxide emissions and Biochemical Oxygen demand emissions.
The purpose of this paper is to examine the inuence of FMT
adoption on TFPG in selected manufacturing industries of Malaysia.
This adds to the previous literature by focusing more narrowly on the
inuence of adoption of FMT on productivity. This study developed
inclusion criteria and selected FMT intensively adopted 16 MSIC
three-digit industries and 50 MSIC ve-digit industries included
within them. All secondary data required for the study came from the
Annual Surveys of Manufacturing Industries (ASMI) during 2000
2005 and Economic census data maintained by the Department of
Statistics Malaysia (DOS). Another novelty in this study is that prior
similar studies have been carried out at the four-digit level whereas
the present study is carried out at ve-digit level. The present study
contributes to the previous studies by considering less aggregated
data and also by considering TFPG in place of MFP.
This study also considers a higher number of specic FMT variables
such as, Computer Numerical Control machine tools, Numerical Controlled Machine Tools (NC), Robotics (ROB), Programmable Logic
Controllers (PLC), Automated Inspections (INS), Automated Storage
and Retrieval Systems (ASR), Computer Aided Design (CAD) and Local
Area Networks (LAN). In order to overcome multicollinearity among
FMT variables, the study extracts three underlying dimensions of FMT
by adopting Principal Component Analysis. They are namely; process
control technologies, production and quality control technologies

and the general control technology. The study adopts a questionnaire

survey to compute the degree of adoption of FMT among the selected
50 ve-digit industries. The present study considers eight types of
FMT instead of ve specic technologies, evidently the maximum
number considered in a prior study. The study covers only six years
from 2000 to 2005 due to the limitation of data availability. The fact is
that the DOS follows the MSIC 2000 in classifying industries for the
collection and publication of data. The Annual Survey of Manufacturing Industries (ASMI) reports from 2000 onwards have been prepared
according to this classication and up to 1999 according to the older
version of the MSIC. The older classication system is so different that
more than 30% of the MSIC ve digit industries (classied according to
MSIC 2000) considered in this study is neither listed nor coded or
described differently in ASMI reports published up to 1999 which
were based on older classication system. Hence, the earliest year
that was considered for this study is 2000. Since ASMI 2006 which
publishes data for the reference year 2005 was released in early
June 2008, the latest year considered is 2005. This has been done by
Amato and Amato (2000) too in their study on impact of high-tech
investments in protably and productivity have considered only
ve years. Since the data for six year have been reviewed the total
number of resultant observations (cases) available for this study
was 300 (6 50 = 300).
2. Methodology
The basic research hypothesis of the study is: a high degree of FMT
adoption enhances TFPG of the manufacturing industry of Malaysia.
TFP is measuring the relationship between output and its total inputs
(a weighted sum of all inputs), by this means giving the residual
output changes not accounted by total factor input changes. Being a
residual, changes in TFP are not inuenced by changes in the various
factors which affect technological progress such as the quality of
factors of production, exibility of resource use, capacity utilisation,
quality of management, economies of scale, and the like (Rao and
Preston, 1984).
In addition, it has been documented in empirical work on
economic growth by Solow (1956, 1957), that after accounting for
physical and human capital accumulation, something else accounts
for the bulk of output growth in most countries. Both physical and
human capital accumulations are certainly critical for economic
growth. The process becomes more complicated with the role of
knowledge in the economic growth process. Knowledge obviously
accounts for a part of the growth that is not accounted for by the other
factors of production; namely capital and labour. In growth theory,
the Solow residual is an unexplained residual of labour and capital and
it is attributable to the growth of TFP. The notion of TFP is interpreted
as an index of all those factors other than labour and capital not
explicitly accounted for but which contribute to the generation of
output. TFP refers to the additional output generated through enhancements in the efciency accounted for by such things as
advancement in human capital, skills and expertise, acquisition of
efcient management techniques and know-how, improvements in
an organisation, gains from specialisation, introduction of new technology, innovation or upgrading of present technology and enhancement in Information and Communication Technology (ICT), (Elsadig,
2006a,b,c, 2007, 2008a,b).
2.1. Estimation of TFPG
There are two stages in the methodology. The rst stage is to
estimate TFPG for all the industries considered in the sample. The
second is to identify the explanatory variables of TFPG. The TFPG
approach to measuring productivity is widely used in the manufacturing industry (Sharma, 2002; Bloch and Tang, 1999; Leung, 1997;
Yean, 1997). Jorgenson et al. (1987), based on the pioneering works of

D.A.R. Dolage et al. / Economic Modelling 27 (2010) 395403

Solow (1957) and Denison (1967) developed an approach to compute

TFPG. This measure is based on the Translog (Transcendental
Logarithmic) production function which is a generalisation of the
CobbDouglas production function. According to Zhi et al. (2003),
this is based on the premise that for each industry, there exists
a transcendental logarithmic (translog) production function giving
output as a function of intermediate input, capital input, labour input
and time.
In this approach, TFPG of each industry is computed as the
difference between the rate of growth of output and the average
weighted growth of intermediate input, capital input and labour
input. The average productivity growth term VT represents the
Translog index of TFP growth i.e. ln (TFP). This study adopts the
same equation adopted by Zhi et al. (2003) to compute VT which is
given below:
VT = ln ZT ln ZT1VX ln XT ln XT1

VK lnKT lnKT1VL lnLT lnLT1

Where
VX = 1 =2 VX T + VX T1
VK = 1 =2 VK T + VK T1
VL = 1 =2 VL T + VL T1
VX = pX X = qZ; VK = pK K = qZ; VL = pL L = qZ
In the above equations, VX, VK and VL represent the respective
shares of inputs of intermediate, capital and labour, averaged over
time T and T 1. While q, pX, pK and pL denote the prices of the
output and inputs of intermediate, capital and labour respectively,
Z represents the output.
Since lnTFP = VT


TFPT
= VT
ln
TFPT1
TFPT
1
= ln VT
TFPT1
But; TFPG =

TFPTTFPT1
TFPT1

Hence; TFPG =

TFPT
1
1 = ln VT 1
TFPT1

2.2. Review of factors affecting TFPG in the manufacturing industry

Growth Rate of Output (GRO): it is logical to anticipate that output
growth can lead to higher TFPG because it allows economies of scale
to be exploited. As output grows, capacity utilisation is bound to
increase leading to a fall in average cost. A positive link between
output growth and TFPG, known as Verdoorn's Law named after P. J.
Verdoorn, was postulated during the interwar period (Sharma et al.,
2000). Goldar & Kumari (2003), Zhi et al. (2003), Sharma et al. (2000),
Amato & Amato (2000) and Leung (1997) considered GRO as an
explanatory variable of TFPG. Hence, a positive link is expected
between TFPG and GRO, ceteris paribus.
Change in Capital Intensity (CCAPIN): it is rational to expect
that capital-intensive industries offer more scope for technological
progress and learning by doing and thereby inuencing the factor
productivity. The studies of Goldar & Kumari (2003), Sharma et al.
(2000), Leung (1997), Yean (1997) and McGuckin and Streitwieser
(1996) revealed that CAPIN was an explanatory variable of TFPG.
Amato & Amato (2000) have taken CAPIN as a control variable in
their investigation into MFP of high-tech investments. However,
the efciency of capital intensity is more likely to depend on the

397

availability of efcient infrastructure. Sharma et al. (2000) and Leung

(1997) in their studies assumed a negative relationship between
CAPIN and TFPG. A signicant variability could be observed among the
researchers in their approach to quantifying CAPIN. Sharma et al.
(2000) dened it as Fixed Capital divided by Total Employment.
Goldar & Kumari (2003) used the ratio of Investment to Capital. Leung
(1997), McGuckin and Streitwieser (1996) and Mahadevan (2002)
used the capital labour ratio, measured as the capital per employee.
Amato & Amato (2000) dened capital intensity as the value of shipment divided by capital stock. The present study adopts value of assets
divided by total number of employees as the capital intensity. The
CCAPIN was (measured as the change of capital intensity between
two consecutive years) considered in place of its absolute value
since TFPG was a variance associated with two consecutive years.
A positive link is expected between TFPG and CCAPIN, ceteris paribus.
Export Growth (EXPGROW): export growth can lead to higher
productivity due to a number of reasons namely; opportunity for greater
capacity utilisation particularly in industries in which the minimum
efcient size of plant is large relative to the domestic market, greater
horizontal specialisation as each rm concentrates on a narrow range of
products, and increasing familiarity and absorption of new technologies
(Sharma et al., 2000). Moreover, with foreign exchange earned from
export growth, rms would have better access to imported inputs
and new technology the effects of which can evidently enhance factor
productivity. Sharma et al. (2000), Leung (1997) and Yean (1997)
considered export intensity or growth as an explanatory variable of
TFPG. Since the dependent variable, TFPG is associated with a growth; it
is preferable to use EXPGROW as the explanatory variable. This was
measured as the increase in exports in two consecutive years divided by
the exports of the previous year. A positive link is expected between
TFPG and EXPGROW, ceteris paribus.
Change in Firm Size (CFSIZE): this variable is a crude proxy for
scale of entry barrier. Theoretically, the minimum efcient plant size
is a better proxy but could not be included due to the non availability
of data. Higher productivity gains can be expected in the presence
of oligopolistic competition. Therefore, researchers include average
plant size or rm size in TFPG models to take account of such effects: (Chandrasiri, 2003; Amato & Amato, 2000; McGuckin and
Streitwieser, 1996). In the present study, FSIZE was measured as the
average rm size of the eight largest rms in each industry. A positive
link is expected between TFPG and CFSIZE, ceteris paribus.
Change in Industry Concentration (CCR4): oligopoly theory explains that the higher the level of concentration, the more likely it is
that the dominant rms will be able to collude, tacitly or expressly, to
rise prices above the long run average costs (Shiraz, 1973). Therefore,
it is reasonable to include this variable in TFPG model as it can affect
the productivity in a given industry. Industry concentration is widely
expressed in terms of four-rm concentration ratio (CR4) i.e. sales of
the four largest rms divided by the total sales in an industry. Amato
and Amato (2000) have incorporated CR4 in its MFP model. In the
present study, CR4 was measured as the percentage of industry sales
contributed by the four largest rms in each MSIC ve-digit industry
for each year. A positive link is expected between TFPG and CCR4,
ceteris paribus.
The eight types of FMT considered in this study are given below:
Computer Numerical Control Machine Tools (CNC): measured as
the percentage of rms in each MSIC ve-digit industry using
microprocessor based numerical control technologies referred to
as computer numerical control machine tools.
Numerical Controlled Machine Tools (NC): measured as the percentage of rms in each MSIC ve-digit industry using numerical
controlled machine tools.
Robotics (ROB) measured as the percentage of rms in each MSIC
ve-digit industry using robotics.

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D.A.R. Dolage et al. / Economic Modelling 27 (2010) 395403

Programmable Logic Controllers (PLC): measured as the percentage of rms in each MSIC ve-digit industry using programmable
logic controllers.
Automated Inspections (INS): measured as the percentage of rms
in each MSIC ve-digit industry using automated sensor-based
inspection, either during the production process or nal product.
Automated Storage and Retrieval Systems (ASR): measured as the
percentage of rms in each MSIC ve-digit industry using automated storage and retrieval systems.
Computer Aided Design (CAD): measured as the percentage of
rms in each MSIC ve-digit industry using computer aided design
to control manufacturing machinery.
Local Area Networks (LAN): measured as the percentage of rms
in each MSIC ve-digit industry using local area networks.
A positive link is expected between TFPG and any type of FMT
variable, ceteris paribus.
Industry Fixed Effects Dummy Variables (INDj): The study involved
50 ve-digit industries included in 16 three-digit industries. It is
logical to assume that industry characteristics among these 16
three-digit industries can be diverse and need to be captured by a
variable. Therefore, 16 dummy variables (INDj) were incorporated
into the TFPG model to capture the industry xed effects. However,
most contemporary researchers have not considered industry xed
effects in the TFPG model. While Mahadevan (2002) and Amato &
Amato (2000) have incorporated industry xed effect dummy
variables, Goldar & Kumari (2003), Tham (1997), Leung (1997) and
Sharma et al. (2000) in their similar studies, have not made any
reference to industry xed effects, let alone considering them in
their models. A positive link is expected between TFPG and INDj,
ceteris paribus.
The model representing the relationship among TFPG, explanatory
variables and FMT variables can be specied as given below:
TFPG = 0 + 1 GRO + 2 CCAPIN + 3 EXPGROW + 4 CFSIZE
+ 5 CCR4 + 6 CNC + 7 NC + 8 ROB + 9 PLC + 10 INS
+ 11 ASR + 12 CAD + 13 LAN + 13 + j INDj +

The core hypothesis tested in this research study is: a high degree
of Flexible Manufacturing Technology adoption enhances Total Factor
Productivity Growth of the manufacturing industry of Malaysia.
3. Data and estimation and inclusion criteria
According to the Malaysian Standard Industrial Classication 2000
there are 53 three-digit industries. In order to obtain a rational
outcome, the study needs to be conducted only within industries in
which FMT is intensively adopted. On account of this, inclusion
criteria were formulated in an effort to select FMT intensively adopted
MSIC three-digit industries for the sample, which is shown below:
Industries with high capital/labour ratio
Industries in which product variation is a marketing strategy
Industries in which products are susceptible to demand uctuation
Using the above criteria a sample of 16 MSIC three-digit industries
which together comprise 50 ve-digit industries was selected.
3.1. Primary data
The data that indicate the degree of adoption of FMT is not
published by any organisation in Malaysia. Hence, a questionnaire
survey was conducted to gather information necessary to compute

the percentage of establishments adopting each specic type of FMT

in a given year, within a given MSIC ve-digit industry. The questionnaires were sent to all the establishments, listed under the 50
MSIC ve-digit industries that appeared in the directory of Federation
of Malaysian Manufacturers.
3.2. Secondary data
In order to compute TFPG, industry-wise data is required for
output, intermediate input, capital input and labour input. The closest
indicators for these values were obtained from Table 3 of the ASMI
published for the years 2000 through 2005 by the DOS of Malaysia.
The variables GRO and CCAPIN were computed using the data
obtained from Table 3. EXPGROW, CCR4 and CFSIZE were computed
using the data obtained from the Economic Censes conducted by the
DOS Malaysia.
4. Empirical results
In view of the fact that only FMT intensively used industries were
included in the sample, naturally some similarity in the sequence
and characteristics of the production processes could be expected
even amongst different ve-digit industries. Hence, there could be a
tendency for a similarity in the technology adopted amongst these
industries. Due to the similarities in technologies, a high prevalence of
multicollinearity among the eight types of FMT could be anticipated.
In this study, bivariate Pearson product-moment correlation analysis
has been conducted using SPSS to test for multicollinearity amongst
FMT. The output that reveals potential multicollinearity among
FMT variables is displayed in Table 1. According to Coakes et al.
(2008) and Field (2005), when a considerable number of correlations
are exceeding 0.3, the matrix is suitable for Principal Component
Analysis (PCA).
PCA was performed using SPSS in order to obtain underlying
dimensions (Principal Components) of FMT as a remedy for multicollinearity. As per both standard methods of (i.e. screen test and
Eigen values greater than one) extracting the optimal number of
components, three Principal Components (PCs) were extracted that
account for 67% of the variation in the FMT. According to Table 2, the
loadings of variables onto the three PCs obtained from both types of
rotations (Orthogonal and Oblique) are quite similar. Hence, due to
simplicity, PCs obtained from orthogonal rotation was used in the rest
of the analysis.
Once the most appropriate type of rotation and the resultant PCs
were decided, the variables loading onto each of these PCs were
examined as the next step. An examination of the component loadings
depicted in Table 2 indicates that Local Area Networks, Computer
Aided Design, Programmable Logic Controllers and Computer Numerical Control Machine Tools load onto PC1; Automated Storage
and Retrieval Systems, Automated Inspections and Robotics load onto
PC2 while only Numerical Controlled Machine Tools load onto PC3.
Usually, it is difcult to give clear cut themes or names to PCs that only
relate to or encompass particular variables that are loading onto it.
Hence, only the best possible names have been assigned to the PCs
extracted from this analysis. The technologies Local Area Networks,
Computer Aided Design, Programmable Logic Controllers and Computer Numerical Control Machine Tools are used in the manufacturing
set up as process control technologies. Since these load onto PC1, so
can be named as process control technologies. The technologies,
Automated Storage and Retrieval Systems, Automated Inspections
and Robotics load onto PC2, so can be named as production and
quality control technologies. PC3 has only one variable i.e. Numerical
Controlled Machine Tools, loading onto it so can be called the general
control technology.
As the next step, the eight FMT variables were substituted with the
three PCs namely, PC1, PC2 and PC3. Therefore, the TFPG model was

D.A.R. Dolage et al. / Economic Modelling 27 (2010) 395403

399

Table 1
Correlations among FMT.

CNC

NC
ROB
PLC
INS
ASR
CAD
LAN
a
b

Pearson correlation
Sig. (2-tailed)
N
Pearson correlation
Sig. (2-tailed)
Pearson correlation
Sig. (2-tailed)
Pearson correlation
Sig. (2-tailed)
Pearson correlation
Sig. (2-tailed)
Pearson correlation
Sig. (2-tailed)
Pearson correlation
Sig. (2-tailed)
Pearson correlation
Sig. (2-tailed)

CNC

NC

ROB

PLC

INS

ASR

CAD

LAN

1.000

.160a
.005
300
1.000

.351a
.000
300
.012
.836
1.000

.634a
.000
300
.164a
.005
.368a
.000
1.000

.307a
.000
300
.177a
.002
.250a
.000
.302a
.000
1.000

.237a
.000
300
.126b
.030
.427a
.000
.257a
.000
.564a
.000
1.000

.248a
.000
300
.141b
.014
.391a
.000
.394a
.000
.115b
.046
.308a
.000
1.000

.322a
.000
300
.171a
.003
.236a
.000
.380a
.000
.186a
.001
.129b
.025
.609a
.000
1.000

300
.160a
.005
.351a
.000
.634a
.000
.307a
.000
.237a
.000
.248a
.000
.322a
.000

.012
.836
.164a
.005
.177a
.002
.126b
.030
.141b
.014
.171a
.003

.368a
.000
.250a
.000
.427a
.000
.391a
.000
.236a
.000

.302a
.000
.257a
.000
.394a
.000
.380a
.000

.564a
.000
.115b
.046
.186a
.001

.308a
.000
.129b
.025

.609a
.000

Correlation is signicant at the 0.01 level (2-tailed).

Correlation is signicant at the 0.05 level (2-tailed).

reformulated as follows (the changes in PCs are considered here to be

consistent with TFPG which too is measured as a change):
TFPG = 0 + 1 GRO + 2 CCAPIN + 3 EXPGROW
+ 4 CFSIZE + 5 CCR4 + 6 CPC1 + 7 CPC2 + 8 CPC3
+ 8+ j INDj +

4.1. Multiple regression analysis of TFPG

As described, the model contains a set of 16 industry xed dummy
variables (INDj) to account for the differences of technological
opportunity among industries. Although it is theoretically desirable
to include INDj, the consequent impact of adding these 16 extra
variables needs to be examined by comparing and contrasting the
results obtained without considering the INDj in the model. A separate
regression was performed for this scenario and the tables of Model
Summary, ANOVA and Coefcients were obtained. In order to
facilitate easy comparison of the results, the tables of output obtained
from regression analysis for the two situations, one with the INDj
included and the other without the INDj have been combined into one.
The tables of ANOVA and Coefcients contained in the SPSS output for
these situations have been reproduced in Tables 3 and 4 respectively.
According to Table 4, Adjusted R square is considerably high
(0.518). This indicates that the explanatory variables together explain
51.8% of the variance in TFPG. However, the explanatory power of the
model has decreased marginally when the INDj has been excluded;
Adjusted R square (0.50) has decreased.

According to ANOVA, the F statistics for both situations of

including and excluding INDj in the models are 14.089 and 36.339
respectively. They both are larger than the critical value (1.53) of the F
distribution, obtained from the F distribution calculator for = 0.05
level of signicance when degrees of freedom are 23 and 257.
One of the assumptions of regression analysis is that the residual
terms should be uncorrelated for any two observations. Since the
study involved time dependent variables, the lack of autocorrelation
has to be tested. This can be tested with DurbinWatson Test which
tests for serial correlations between errors. According to Field (2005),
the test statistic can vary between 0 and 4 with a value of 2 meaning
that the residuals are uncorrelated. Table 4 depicts DurbinWatson
test statistics of 2.118 and 2.086 respectively when industry xed
effect variable (INDj) is included and excluded. Since these are very
close to 2, it can be concluded that the error term does not show any
appreciable autocorrelation.
The statistical test for the existence of a linear relationship
between dependent variable and the independent variables is:
H0

1 = 2 = 3 = .. k = 0

H1

Not all the i (i = 1,2,24) are zero

As the F statistic is in the rejection region, H0 was rejected and H1

was accepted. Since p < 0.000, it can be concluded that there is strong
evidence of TFPG having a linear regression relationship with any of
the explanatory variables in the model with a probability of less than
0.1% of making an error in this conclusion.

Table 2
Comparison of components obtained from two types of rotations.
Component One
Orthogonal

LAN
CAD
PLC
CNC
ASR
INS
ROB
NC

.816
.816
.666
.555

.477

Component Two
Oblique

Orthogonal

Pattern

Structure

.861
.841
.640
.517

.811
.801
.722
.621

.412

.542

.845
.816
.526

Component Three
Oblique

Orthogonal

Pattern

Structure

.858
.844
.460

.445
.467
.851
.826
.573
.883

Oblique
Pattern

Structure

.871

.883

400

D.A.R. Dolage et al. / Economic Modelling 27 (2010) 395403

Table 3
ANOVA.
Sum of squares

Regression
Residual
Total

df

Mean square

Sig.(p-value)

INDj
inc

INDj
exc

INDj
inc

INDj
exc

INDj
inc

INDj
exc

INDj
inc

INDj
exc

INDj
inc

INDj
exc

45.333
36.127
81.68

42.198
39.482
81.680

23
257
280

8
272
280

1.981
0.141

5.275
0.145

14.089

36.339

0.00

0.00

Dependent variable: TFPG, inc included, exc excluded.

4.2. Industry xed effects dummy variables (INDj) included

According to Table 4, the variables namely, GRO (0.000) and
EXPGROW (0.000) are very highly signicant at p < 0.001. This
implies that the chances of making an error by assuming that these
correlate with TFPG are less than 0.1%. Also both these variables are
positively correlated. CCAPIN (0.009) and CCR4 (0.010) are highly
signicant at 0.001 < p < 0.01. CFSIZE (0.10) is moderately signicant
at 0.05 < p < 0.1. While CCR4 shows a positive relationship, CCAPIN
and CFSIZE show a negative relationship with TFPG. Since the main
focus of this model is to test the signicance of the correlation of FMT
with TFPG, an examination of the correlation of the three PCs with
TFPG becomes necessary. CPC1 (0.034) at 0.01 < p < 0.05 shows a
signicant and positive correlation with TFPG whereas CPC2 (0.114)
at 0.10 < p < 0.15 shows a marginally signicant and positive relationship with TFPG. However, CPC3 (0.473) shows highly insignicant
and negative relationship with TFPG.
Table 3 shows the results of the estimating equation obtained
using the method of Ordinary Least Squares. The numerical values of
coefcients of the independent variables can be used to substitute the
respective values in Eq. (3); the level of signicance of each variable is
shown in parentheses.
TFPG = 0:091 +

0:017 EXPGROW
0:002CCAPIN
0:420GRO
+

0:000
0:009
0:000

0:099 CPC1
0:684 CCR4
0:0002 CFSIZE
+
+
0:034
0:010
0:104

0:031 CPC3
0:099 CPC2
+ 8 + j INDj
+
0:473
0:114

Table 4
Coefcients.
Variable

(Constant)
Growth Rate of Output
(GRO)
Change in Capital Intensity
(CCAPIN)
Export Growth (EXPGROW)
Change in Firm Size (CFSIZE)
Change in Industry
Concentration (CCR4)
Change in Principal
Component One (CPC1)
Change in Principal
Component Two (CPC2)
Change in Principal
Component Three (CPC3)
Adjusted R square
Std. error of the estimate
DurbinWatson
Dependent variable: TFPG.

INDj included

INDj excluded

Sig. (p-value)

Sig. (p-value)

.091
.420

.118
.000

.067
.450

.015
.000

0.002

.009

0.002

.009

.017
0.0002
.684

.000
.104
.010

.019
0.0002
.770

.000
.113
.007

.099

.034

.098

.036

.099

.114

.116

.058

.031

.473

.031

.465

0.518
0.375
2.118

0.502
0.381
2.086

A positive and signicant relationship between total factor productivity growth and output growth can be observed, thereby conrming that Verdoon's Law holds for the industry sample tested in
this study. The output growth which is measured as the sales growth
over a year is a highly important variable. The equation indicates
that a unit change in output growth causes an incremental change
of 0.42 in the total factor productivity growth, ceteris paribus.
The change in capital intensity too has a positive relationship
with total factor productivity growth. The equation indicates that a
unit change in change in capital intensity causes an incremental
change of 0.002 in the total factor productivity growth, ceteris paribus.
The growth of exports yielded the expected positive sign. The
equation indicates that a unit change in export growth causes an
incremental change of 0.017 in the total factor productivity growth,
ceteris paribus.
The variable change in rm size has a very marginal impact on
the total factor productivity growth. The equation indicates that a unit
change in change in rm size causes an incremental change of 0.0002
in the total factor productivity growth, ceteris paribus.
In the case of the change in concentration ratio, an increase of
the ratio appears to exert a pro-competitive effect on total factor
productivity growth. The equation indicates that a unit change in
concentration ratio causes an incremental change of 0.684 in the total
factor productivity growth, ceteris paribus.
The variable CPC1 (the change in principal component one) shows
a reasonably high positive correlation with total factor productivity
growth. This principal component represents the cluster of technologies namely, Local Area Networks, Computer Aided Design, Programmable Logic Controllers and Computer Numerical Control
Machine Tools. These technologies are used in the manufacturing
set-up as process control technologies. The corollary is that a unit
change in investments in process control technologies causes an incremental change of 0.099 in the total factor productivity growth,
ceteris paribus.
The variable CPC2 (the change in principal component two) shows
a reasonably high degree of positive correlation with total factor
productivity growth. This principal component represents the cluster
of technologies namely, Automated Storage and Retrieval Systems,
Automated Inspections and Robotics. These technologies are used in
the manufacturing set-up as production and quality control technologies. The corollary is that a unit change in investments process
control technologies causes an incremental change of 0.099 in the
total factor productivity growth, ceteris paribus.
Although the variable CPC3 (the change in principal component
three) shows a negative correlation with total factor productivity
growth, it can be excluded from the computation as the relationship is
very highly insignicant.
4.3. INDj excluded
According to the output of the model that excluded the INDj, the
signicance of explanatory variables, GRO, EXPGRO, CCAPIN, CCR4
CFSIZE, CPC1, CPC2 and CPC3 are, 0.000, 0.000, 0.009, 0.007, 0.113,
0.036, 0.050, and 0.465 respectively. The only signicant deviant

D.A.R. Dolage et al. / Economic Modelling 27 (2010) 395403

observation is CPC2 which was marginally signicant in the former

TFPG model is signicant in this model. Hence, it is inferred that the
reliability of TFPG model which included INDj variable is higher,
though of course marginally.
The variables, CPC1 and CPC2 that denote the changes of the rst
two PCs (PC1 and PC2) represent two important themes (dimensions), namely process control technologies and production and
quality control technologies that together account for 53% of the
variance, which is signicant. CPC3 that denotes change in PC3
which gives the dimension of general control technology is very
highly insignicant and it only accounts for 13% of the variance in
FMT. According to both TFPG models, the null hypotheses that CPC1
and CPC2 have no partial correlation with TFPG (i.e. 6 = 0, and
7 = 0) can be rejected. Therefore, the alternative hypotheses can be
accepted which means that FMT has a signicant correlation with
TFPG which is positive (since in both models 6 and 7 are positive).
This leads to the acceptance of the research Hypothesis: A high
degree of FMT adoption enhances TFPG of the manufacturing industry of Malaysia.
Since outliers may exert greater inuence on the least squares
estimates of the regression parameters than do other observations,
the robustness of the model and sensitivity of the model to the
outliers were tested as explained in Appendix A. Further, it was
revealed that the potential for any particular three-digit industry
having a signicant impact on the output of the model is marginal
(see Appendix B).
5. Conclusions and policy implications
The objective of this paper was to evaluate the inuence of the
degree of adoption of Flexible Manufacturing Technology on the
productivity of the manufacturing industry of Malaysia. The types of
Flexible Manufacturing Technology considered are namely, Computer
Numerical Control Machine Tools, Numerical Controlled Machine
Tools, Robotics, Programmable Logic Controllers, Automated Inspections, Automated Storage and Retrieval Systems, Computer Aided
Design and Local Area Networks. The presence of multicollinearity
among the eight types of Flexible Manufacturing Technology
necessitated the use of three PCs to substitute the individual Flexible
Manufacturing Technology variables. The Flexible Manufacturing
Technology variables load onto PCs as follows: Local Area Networks,
Computer Aided Design, Programmable Logic Controllers and Computer Numerical Control Machine Tools load onto PC1; Automated
Storage and Retrieval Systems, Automated Inspections and Robotics
load onto PC2 and Numerical Controlled Machine Tools only loads
onto PC3. The three Principal Components (PCs) were labelled so that
they best describe their respective constituents; PC1-process control
technologies, PC2-production and quality control technologies and
the PC3-general control technology.
In this study, two separate models for total factor productivity
growth were solved for two situations: one included the Industry Fixed
Effects Dummy Variables and the other excluded it. One of the important
contributions of the present study is that it reveals, regarding the models
specied to study the impacts of Flexible Manufacturing Technology,
that by including an industry xed dummy variable to account for
the differences in technological opportunity among different industries,
the credibility of the models can be increased at least marginally.
The most signicant nding of the study is that the change in
PC1 shows a signicant and positive correlation with total factor
productivity growth whereas the change in PC2 shows a marginally
signicant and positive relationship with total factor productivity
growth. This indicates that the increase in process control technologies
and production and quality control technologies have direct inuences on total factor productivity growth of the Flexible Manufacturing Technology intensively adopted sub sector of the manufacturing
industry. In contrast, the change in PC3 shows a highly insignicant

401

and negative relationship with total factor productivity growth. Since

both PC1 and PC2 together account for (53%) greater variation and PC3
account for (12%) relatively smaller variation among the eight Flexible
Manufacturing Technology, it can be concluded that a high degree of
Flexible Manufacturing Technology adoption enhances total factor
productivity growth of the Manufacturing Industry of Malaysia.
This is in harmony with the a priori expectations regarding Flexible
Manufacturing Technology but contrary to the ndings of the studies
by Brendt and Morrsison (1995) and Amato and Amato (2000). However, these studies are different from the present study due to
reasons such as differences in technologies considered, non consideration of Industry Fixed Effects Dummy Variables, differences in
countries considered and the differences in the explanatory variables
considered.
In this regard, the manufacturing sector has been the engine of
economic growth since structural transformation took place in the
Malaysian economy in 1987. The sustainability of higher economic
growth continued to be driven by productivity through the enhancement of TFP. In this regard, TFP development strategies emphasised
on the quality of the workforce, raw material, capital structure and
technical progress. However, the instability of TFP contribution to
manufacturing sector industries in terms of average annual growth
rates are dependent on the inputs used in the production which were
reported to be insufcient and of low quality. The starting point for
policy recommendations is to offer policies that can help to overcome
the following main problems of the manufacturing sector, especially
the efciency and productivity being input-driven rather than TFP
productivity-driven.
Meanwhile, for any industry to develop there must be a regular
and consistent supply of raw materials. One of the main problems
faced by the Malaysia's manufacturing sector industries is in the
supply of raw materials. The manufacturing sector is dependent on
imported raw materials, which form the largest component of cost in
the Malaysian manufacturing sector. This can have serious adverse
impact on the Malaysian Balance of Payments as shown in the Annual
Report of Bank Negara (19912005) which reported that imported
raw materials constituted 20% of the raw materials utilised by
resource-based industries while non-resource-based industries as
much as 60% of the required raw materials. In particular, leading
industries in the manufacturing sector such as electronics and
electrical machinery can have imported raw materials content as
high as 70% of the total cost. For food manufacturing industries, the
sources of supply of raw materials are 70% dependent on imported
raw materials. The supply of raw material is not consistent and of low
quality in most manufacturing sector industries in general and food
manufacturing industries in particular. Besides, shortage of skilled
labour also causes a serious constraint on capital utilisation. Skilled
labour is required to operate the new technologies embodied in new
plants and equipment so that available capital stock may be utilised
efciently. Hence, skills training and the deepening of skills are of
vital importance for the full utilisation of capital. Improvement of the
quality of the local raw materials will help to improve the nal
product and enable it to compete in the international markets;
and also help to reduce the dependency of the manufacturing sector industries on imported raw materials. These, if attained, could
help the industries to become efcient, dynamic, and internationally
competitive.
Moreover, one of the major problems of Malaysia's manufacturing sector is that the sector is highly dependent on foreign direct
investment FDI. The local small and medium scale industries have
nancial problems compared with the large-scale industries. Getting
capital at the right time will save the production of these SMI's.
Overcoming the nancial problems of industries will improve the
productivity of the sector.
In addition, low technology has been identied as a major constraint facing the local small-scale industries (SMI's). The ndings of

402

D.A.R. Dolage et al. / Economic Modelling 27 (2010) 395403

ogy investments such as FMT to customer values (Sade et al., 2009) for
example, is becoming more crucial as manufacturing concept of
productivity moves toward the concept of customerisation. Further, it
can be safely admitted that the accuracy of ndings can be increased
by considering investments in FMT rather than the degree of adoption
of FMT. Hence, it is proposed that future studies need be undertaken
in collaboration with the industry monitoring institutes of the state
sector that makes establishments obligatory to divulge investments
made in FMT to evaluate the impact of investments in FMT on total
factor productivity growth.

this study are in line with the above-mentioned statement reecting

the relationship between the technological inputs and the scale of
production of SMI's. Low technologies are adopted in the manufacturing processes, and manual handling of materials is applied, with
low quality control. The rst step for improving the productivity
growth and efciency of the manufacturing industries will be to
modernise the technology used by small-scale industries to improve
the quality of the manufacturing products, and change their production methods. This must be started right from the cultivation of
agricultural raw material in order to reduce the harvesting loss, and
also to get good raw material quality.
The local large-scale industries, on the other hand, are dependent
largely on imported technology. For a more sustainable development
of the large-scale industries, this imported technology should be kept
to a minimum in the short run, while in the long run efforts are made
to produce all the technological inputs locally. This can be achieved by
adopting the experience of industrial countries and by capitalising on
the benets of global information and communications technology
and research done in this area through collaboration with the developed countries and their companies.
Furthermore, the level of skilled labour employed would reect on
the level of technology adopted. Therefore, before any improvement
on technological and material inputs, there is a need to reduce the
number of unskilled labour that dominated the manufacturing sector,
and increase the volume of skilled labour in the sector. Concomitant
with technology enhancement and as industries become more capital
intensive, the critical shortage of skilled manpower will continue for
some time. A programme could be designed to upgrade labour
standards and use high technology in production methods, through
institutions involved in the area of technology skills training for local
workers.
Finally, since a direct relationship between the total factor productivity growth and the degree of investment in exible manufacturing technology has been established, the policy makers can focus
more on the promotion of investments in exible manufacturing
technology in formulating incentive schemes for the manufacturing
industry. The threat of global competition and the changing demand
of customers are forcing the Malaysian manufacturing industry to reevaluate their existing operational and technological capability. The
study recommends that managers make the manufacturing processes
more efcient by adopting a high degree of exible manufacturing
technology despite their widely discussed operational problems and
the unfavourable economic appraisals.
FMT allows manufacturers to cope with the ever increasing
changing demand of digitally connected 21st century customers.
These new kind of customers are in a way becoming closer to the
production oor and they expect more customization on the products
they are buying. For example, companies such as Dell and BMW offer
modular customization to their customers who order through their
websites. Perhaps by incorporating these kind of customer values into
the equation will help to shed some lights and arrive to a favorable
economic appraisal for FMT investment in manufacturing.
In its customary call for future research, the authors recommend
studies that investigate the relationship of investments in FMT rather
than the degree of adoption of FMT have with the total factor
productivity growth of the manufacturing industry. Relating technol-

Appendix A
In order to evaluate the inuence of extreme observations
Mahalanobis distance and Cooks distance (which indicate the impact
of outliers) were obtained from the SPSS output. Mahalanobis distance
measures the inuence of a case by examining the distance of cases
from the means(s) of the predictor variables(s). The critical value of
Chi-square, at = 0.001 level of signicance is 51.179 which was
taken as the critical value for the Mahalanobis distance; using this
value, 12 multivariate outlying cases were identied. Since the values
greater than this are problematic and cause for concern they were
scrutinised carefully. Further, although they are extreme observations
it is not unexpected in a situation where the sample is large (300 cases)
and there are a large number of independent variables. Therefore, the
outliers were retained in the data set without exclusion.
One statistic that does consider the effect of a single case on the
model as a whole is Cook's distance. Cook's distance is a measure of
the overall inuence of a case on the model and it is suggested that
values greater than one, may be cause for concern. Only in two cases
this critical value was exceeded. Although the exclusion of the extreme cases in both diagnostic tests brought about some changes in
the coefcients, they were not signicant. Hence, it can be concluded
that extreme observations are not cause for concern in the model.
Appendix B
It is important to check whether any particular three-digit industry
can inuence the output of the model in a signicant manner. The two
three-digit industries namely 292 (manufacture of special purpose
machinery) and 321 (manufacture of electronic valves and tubes and
other electronic equipment) are different from the others. The 292
three-digit industry contains seven ve-digit industries encompassing a total of 712 establishments. These two features make it stand out
from rest of the three-digit industries. The 321 three-digit industry is a
sector which adopts FMT quite intensively. The regression model was
solved twice excluding three-digit industries 292 and 321 separately
on each attempt, one industry at a time. Table 5 displays the Adjusted
R square and coefcients (B) and signicance of the three CPCs for
each attempt along with the values obtained for the two occasions
when all the industries were included and then excluded.
According to the table, the exclusion of the three-digit industries
292 and 321, separately has changed Adjusted R square only marginally. Further, the signicance levels of CPC1 have changed only
minutely when the three-digit industries 292 and 321 are excluded
from the model, separately. A similar situation is observed with CPC2

Table 5
Comparison of outputs.
Number of industry

Adjusted
R square

CPC1

CPC2

CPC3

Sig.

Sig.

Sig.

All 16 industries included

All 16 industries excluded
Only industry 292 excluded
Only industry 321 excluded

0.518
0.502
0.563
0.521

0.099
0.098
0.083
0.109

0.034
0.036
0.034
0.032

0.099
0.116
0.125
0.114

0.114
0.058
0.087
0.092

0.031
0.031
0.000
0.054

0.473
0.465
0.995
0.290

D.A.R. Dolage et al. / Economic Modelling 27 (2010) 395403

when the same comparison is made. The reason for the situation is
that although the excluded industries are signicantly different from
the others, the difference is not sufcient enough to make an impact
on the output that results from the analysis of model because there
are 15 other industries at any given attempt. This provides further
evidence to the robustness of the regression model used in the study.
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