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JOURNAL OF GLOBAL BUSINESS AND ECONOMICS

Editor in Chief
Zaini Jamaludin
MEMBER OF REVIEWER
*************************************************************************************
Prof. Dr. Mohand-Said Oukil Assoc. Prof. Dr. S. Saraswathi
King Fahd University of Petroleum and Minerals School of Management Studies, CBIT, India
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Ain-Shams University, Cairo, Egypt Computer College of Dubai
Prof. Dr. Sami Ahmed Al-Smadi Assoc. Prof. Dr. Hossein Ali Momeni
Yarmouk University, Jordan Islamic Azad University, Iran
Prof. Dr. Rosalan bin Ali Dr. Ahmad Fauzi Idris

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Universiti Malaysia Sabah Universiti Sains Malaysia
Assoc. Prof. Dr. Mohd Salehuddin Mohd Zahari Dr. Nasina Mat Desa
Universiti Teknologi MARA Universiti Sains Malaysia
Assoc. Prof. Dr. Zafir Khan Mohammad Makhbul Dr. Abdussalam Ismail Onagun
Universiti Kebangsaan Malaysia Islamic Financial Services Board (IFSB)
Assoc. Prof. Dr. Ibrahim bin Ali Dr. Joyce Nga Koe Hwee
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Universiti Sains Malaysia Universiti Sains Malaysia
Dr. Zarina Md Nor Dr. Nek Kamal Yeop Yunus

Universiti Sains Malaysia Universiti Perguruan Sultan Idris
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Universiti Perguruan Sultan Idris Universiti Malaysia Terengganu
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Universiti Utara Malaysia New Zealand Defence Force
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Kingston Engineering College
ii
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iii
July 2013. VOLUME 7. NUMBER 1
CONTENTS
No. Title Page
1. THE COST EFFICIENCY EFFECT ACHIEVEMENT OF THE GROSS PROFIT 1

PRODUCTION COMPANY - Evi Octavia and Eva Mariyani
2. FACTORS AFFECTING THE FINANCIAL PERFORMANCE OF NON-OIL INDUSTRIAL 9

COMPANIES LISTED ON LIBYAN STOCK MARKET (LSM) - Khalifa Mohamed
Khalifa and Zurina Shafii
3. HOW TO ENGAGE THE NEW AGE EMPLOYEES: A LOOK FROM THE PERSPECTIVE 26
OF BUSINESS AND ECONOMICS STUDENTS THROUGH JOB SELECTION
PREFERENCES - Guven Ordun and Aysegul Karaeminogullari
4. LTV COMPLIANCE: HOW DOES IT EFFECT GOOD CORPORATE GOVERNANCE OF 39

SHARIA BANKING INSTITUTION? (A CASE STUDY OF INDONESIAS ISLAMIC
BANK) - Rida Prihatni, Dedi Purwana, ES., Diena Noviarini, M.Yasser Arafat,
Marsellisa Nindito and Yunika Murdayanti
5. EMERGENCY RESPONSE PLAN (ERP) IN A MANUFACTURING COMPANY: A 45

CORPORATE AWARENESS - Nor Azimah Chew Abdullah and Khairol Hisham Bin
Khairuddin
6. THE ROLE OF GOVERNMENT AND PRIVATE SECTOR ON ECONOMIC 59

DEVELOPMENT IN ASEAN 5 - Ferry Prasetyia
7. IMPACT OF DOUBLE SQUEEZE PHENOMENON ON EAST JAVA SMALL MEDIUM 68

INDUSTRIES (SMI) SUSTAINABILITY AFTER ASEAN CHINA FREE TRADE
AGREEMENT (ACFTA) IMPLEMENTATION - Farah Wulandari Pangestuti, Ermita
Yusida and Anorti Ika Wijaya
8. BUDGET DECENTRALIZATION AND ECONOMIC DEVELOPMENT INEQUALITY 85

AMONG REGIONS IN EAST JAVA - Dwi Budi Santosa
9. INFLUENCE OF LOCAL TAX AND LOCAL RETRIBUTION TOWARD THE LOCAL 104
FINANCIAL INDEPENDENCE (Research on the Local Government of the Bandung
City) - Diana Sari and Destria Vidiantini
10. REVIEW OF ANALYSIS SOURCES AND THE USING OF CASH 114

AT PT PINDAD (PERSERO) - Debbie Christine and Rina Rismawati
11. ANALYSIS OF RETURN ON ASSETS AND EARNINGS PER SHARE ON THE STOCK 119
MARKET IN THE BANKING COMPANIES IN BURSA EFEK INDONESIA (INDONESIA
SECURITIES EXCHANGE) - Silviana and Rocky
iv
JULY 2013. VOLUME 7. NUMBER 1
1
THE COST EFFICIENCY EFFECT ACHIEVEMENT OF

THE GROSS PROFIT PRODUCTION COMPANY
Evi Octavia
Faculty Economic and Business
Padjajaran University
evi.octavia@widyatama.ac.id
Eva Mariyani
Faculty Economic
Widyatama University
Abstract
The purpose of this research is to determine how much the efficiency influence of the production
costs to the achievement of gross profit within PT PINDAD (Limited) Industrial Machinery and
Services Division of the period from 2006 to 2010. This study dilator background by a phenomenon
where PT PINDAD (Limited), in the use of production cost inefficiencies still exist. The efficiency of the
production costs associated with the accuracy of a way to run something, in this case the production
process, with no wasted time, effort and cost of production in accordance with the plans that have
been made.The research method is descriptive method verification. The sample in this study is a
report on the budget and the realization of cost production and gross profit PT PINDAD (Limited)
Industrial Machinery and Services Division on period 2006 to 2010. The results indicate that the
efficiency cost of production has a positive influence on the achievement of the company's gross
profit on PT PINDAD (Limited) on period 2006 to 2010.
Keywords: Efficiency Production Costs, Gross Profit Achievement

------------------------------------------------------------------------------------------------------------------------
1. Introduction
The cost efficiency is meant that the use of the real costs could be reduced in such a way
that the actual cost may be lower than previously budgeted. With the realization of cost efficiencies,
expected the company to earn profit optimally. One of the costs that must be pressed in order to
create cost efficiency is the cost of production, because production costs are enormous that incurred
by the company during the production process. Production cost is a cost related to the processing of
raw materials into finished goods. Production costs here are classified into three groups, namely the
cost of materials, direct labor costs, and factory overhead costs.
As happened in the PT PINDAD (Limited) as one of the large-scale manufacturing company in
Indonesia, PT PINDAD (Limited) should always strive to improve quality in order to grow and
compete in the increasingly competitive competition. According to data obtained, there are
inefficiencies in the use of production costs. This can be seen in the table below:
2
Table 1.1: Production Cost Efficiency Level PT PINDAD (Limited) Period 2006 2010
Production Cost Production

Period Efficiency Cost
Budget Realization
(%)
2006 25.981.023.120 23.883.870.192 8,07
2007 28.791.718.899 25.318.347.058 12,06
2008 34.324.287.226 55.034.180.490 (60,34)
2009 112.818.452.092 86.050.756.328 23,73
2010 103.210.051.888 66.893.809.414 35,19
Source: RKAP PT PINDAD (Limited) 2006 to 2010 (reprocessed)
Based on this phenomenon, the purpose of this study was to determine how much influence
the efficiency of the production costs to the achievement of gross profit within PT PINDAD (Limited)
Industrial Machinery and Services Division on the period of 2006 to 2010.
2. Theory and Hypotheses

2.1 Production cost
The meaning for the cost of production by Mulyadi (2009:14) are: Costs incurred to process
raw materials into finished products ready for sale Another meaning conveyed by Soemarso
(2004:271): Production costs are the fees that charged in the production process during the period
Based on the definition above, it can be concluded that the production costs are those costs
that occur in conjunction with the processing of raw materials into a finished product. According to J.
Ravianto Putra (1988:130) that: "The efficiency of the production cost shows how much of the
resources used to produce a set of results".
While Henry Simamora (2000:301) stated that production cost efficiency is the ratio
between actual production costs with production costs budgeted based on standard costs or other
expenses that may be used as a comparison. From the explanation above, it can be concluded that
the reference to the efficiency of the production cost is the appropriateness of the way in running
something, in this case the production process with no waste of time, effort, and money so the cost
is really going to fit with have planned.
2.2 Gross Profit

According Prastowo (2002:171) Gross profit is defined as follows "Gross profit (gross profit)
is the difference between the cost of goods sold and sales Gross profit or gross profit is often
referred to as gross margin."Another notion of gross profit (gross profit) proposed by Soemarso
(2004:234) that: "Gross profit or gross profit is net sales less cost of goods sold." It can be said that
the gross profit is sales minus the costs of production (raw material costs, direct labor costs, and
factory overhead costs) of goods that have been sold or cost of sales.
2.3 The Achieving Cost Effect Toward the Efficiency Production Gross Profit
Selection of the gross profit to be associated with the efficiency of production costs made as
a result of sales gross profit (the selling price multiplied by volume of sales) minus the cost of goods
sold. That is the cost of production will establish the cost of production which is one of the elements
3
taken into account in determining the cost of goods sold and sales that will further reduce gross
profit is obtained.
By knowing the difference arising then it means there is a deviation. Because experience
shows that the budget is not always the same with the realization. Furthermore, if the deviation is
large enough, the management should be examined as soon as possible in order to undertake
corrective action as necessary. If these costs are to be controlled then there is the cost efficiency of
production.
As to achieve optimal profit target, the management company can take steps include:
(Munawir, 2002:184)
I. Lowering the production costs or operating costs as low as possible to maintain the level of
selling prices and sales volume there.
II. Set prices in such a manner in accordance with the desired profit.
III. Increasing the sales volume as possible.
Based on these opinions, one way to achieve the optimal profit is to reduce production
costs. Lowering the production costs means efficient use of production costs. The more efficient use
of the production cost of goods sold will be smaller. The lower the cost of goods sold, the profit will
be higher achievement.
2.4 Framework
Based on the above framework, the images flow framework as a basis to propose the
hypothesis in this study are as follows
Production Cost Achievement of

Efficiency Gross Profit
Figure 2.1: Picture of Achieving Cost Efficiency of Production and Gross Profit Framework
2.5 Hypothesis
Based on the framework above, the hypothesis in this study are:
"Production Cost Efficiency influential in achieving the company's gross profit"
3. Research Methodology
The research method used descriptive method verification. The sample in this study is a
report on the budget and the realization of cost of production and gross profit PT PINDAD (Limited)
Industrial Machinery and Services Division on 2006 to 2010.
3.1 Hypothesis Testing

Determination hypothesis as follows:
Ho : = 0, There are no positive effect between production cost efficiency with achieving gross profit
Ha : 0, there is a positive effect of the cost-efficiency of production with the achievement of the
company's gross profit.
4
4. Analysis
To determine the production cost efficiencies to prior calculation of the percentage
difference between the production cost budget realizations, then divided by budget cost of
production and multiplied by 100%.
Production Cost Efficiency = Production Budget - Actual Cost of Production x 100%

Production Budget
The development level of production cost efficiency within PT PINDAD (Limited) can be seen
in the following table:
Table 4.1: Production Cost Efficiency Level PT PINDAD (Limited) Period 2006 2010
(in Rupiah)
Production Cost Production
Period Efficiency Cost
Budget Realization
(%)
Year 2006 25.981.023.120 23.883.870.192 8,07
Year 2007 28.791.718.899 25.318.347.058 12,06
Year 2008 34.324.287.226 55.034.180.490 (60,34)
Year 2009 112.818.452.092 86.050.756.328 23,73
Year 2010 103.210.051.888 66.893.809.414 35,19
Average 3,74
Source: the Report of RKAP PT PINDAD (Limited) for the period 2006 to 2010
(reprocessed)
Based on the achievement of gross profit analysis above, it can be concluded that the
achievement of gross profit on PT PINDAD (Limited) had fluctuating low, except in the year 2008 has
decreased sharply. Achievement of low volatile earnings due to measurability sales will be
conducted so that the budget set out in the profit prediction did not experience too much deviation.
Decrease in production cost efficiency also was followed by a decrease in the gross profit
achievement in 2008.
Having regard to the development of table production cost efficiency and the achievement
of gross profit, it is made graphic comparison of the development of production cost efficiency and
the achievement of gross profit at PT PINDAD (Limited) the period 2006 to 2010 as Figure 4.1 below:
5
Biaya Produksi
Pencapaian laba
40,00%
20,00%
0,00%
2006 2007 2008 2009 2010
-20,00%
-40,00%
-60,00%
-80,00%
Figure 4.1: Comparison Chart Production Cost Efficiency Developments and Achievements
PT PINDAD Gross Profit (Limited) Period 2006-2010
Based on Picture 4.1 above, it clear that any trend changes in the cost efficiency of
production is always followed by a trend change in the achievement of gross profit. This suggests a
link between the costs of production to the achievement of gross profit. Example in 2008 which
decreased production cost efficiency achieved 60.34% coupled with a reduction in the achievement
of gross profit 51.66%.
4.2 The Effect of Achieving Efficiency Cost Production Gross Profit

Pearson Correlation Analysis (Product Moment Correlation Analysis)
To determine the effect of production cost efficiencies to the achievement of gross profit,
the author will use the Pearson correlation analysis or often referred to as Product Moment
Correlation Analysis. On the basis of Tables 4.1 and 4.2 the calculation of the correlation coefficient
table is as follows:
Table 4.3: Helper table for Calculating Coefficient of Correlation Efficiency Production Cost
(X) and Achieving Gross Profit (Y)
n X Y X2 Y2 XY
1 0,0807 0,2982 0,0065 0,0889 0,0241
2 0,1206 0,2948 0,0146 0,0869 0,0356
3 (0,6034) (0,5166) 0,3640 0,2669 0,3117
4 0,2373 0,2475 0,0563 0,0613 0,0587
5 0,3519 0,2935 0,1238 0,0861 0,1033
Number 0,1871 0,6172 0,5652 0,5901 0,5333
6
From Table 4.3 above, the obtained values as follows:

n =5
X = 0,1871
Y = 0,6172
X2 = 0,5652
Y2 = 0,5901
XY = 0,5333
To determine the strength of the relationship between the efficiency of the production cost
as the variable X with the achievement of gross profit as a variable Y,
Table 4.4: SPSS Output Correlation Coefficient Correlations

Production cost Efficiency Achievement
Profit
Production cost Efficiency Pearson correlation 1 ,953*
Sig.(2 tailed) . ,012
N 5 5
Profit Pearson correlation ,953* 1
Sig. (2 tailed) ,012 .
N 5 5
*. Correlation is significant at the level 0.05 level (2- tailed)
Based on the calculation of correlation coefficients above, the obtained r = 0.953 (positive).
According Sugiyono, if the value of the coefficient is between 0.80 to 1.000 mean values shows that
the efficiency of the production costs and the achievement of gross profit has a very strong
relationship. Based on this, it can be concluded that the efficiency cost of production has a very
strong influence and direction to the achievement of gross profit, which if the cost of production
increases, the achievement of gross profit will also increase and vice versa.
4.2.1 Regression analysis

Regression analysis is used to determine the change on the dependent variable (Y) or the
predicted value of the dependent variable based on the value of the independent variable (X) is
known.
Table 4.5: Output Regresi SPSS - Coefficients

Unstandardized Standardized
Coefficients Coefficients
Model B Std. Error Beta t Sig.
1 (Constant) ,089 ,057 1,576 ,213
Cost production Effciency ,914 ,168 ,953 5,425 ,012
a. Dependend Variable : Achievement of profit
7
From the calculation above, the known value of a = 0.09 and b = 0.914 the obtained
equation Y and X as follows: Y = 0.09 + 0.914 X. The equation shows that the relationship between
production cost efficiency and the achievement of gross profit at PT PINDAD (Limited) has a
significant relationship. It can be seen also from the signification (0,012) <0.05. It shows the
regression equation above can be used to predict the achievement of gross profit. This means that
any increase in production cost efficiencies will be followed by an increase in gross profit
achievement. Thus it is known that for every increase of production cost efficiency of the unit, or Rp
1.00 it will improve its gross profit amounted to 0.914 times the unit.
4.2.2 Analysis of Coefficient of Determination

Analysis of the determination coefficient is used to determine the influence level of the
efficiency of the production costs (variable X) to the achievement of gross profit (variable Y).
Table 4.6:Output coefficient Determination of SPSS

Model Summary b
Adjusted Std. Error of

Model R R Square R Square the Estimate
1 ,953a ,907 ,877 ,1258759
a. Predictors: (Constant), Efisiensi Biaya Produksi
b. Dependent Variable: Pencapaian Laba
The calculations show that the magnitude of the effect of production cost efficiencies to the
achievement of gross profit of 90.7%. In other words it can be said that the efficiency of production
costs will affect the achievement of 90.7% of gross profit at PT PINDAD (Limited), while the
remaining 9.3% is influenced by other factors not addressed in this study.
4.2.3 Hypothesis Testing

Based on the previous hypothesis needs to be proven whether the hypothesis can be
accepted, through test the following hypothesis:
r n2
t=
2
1 (r )
0,953 5 2
t=
2
1 (0,953)
1,65
t=
0,30
t = 5,43
These results can also be seen in Table 4.5 earlier in which test t = 5.43 with sig. (0.012).
Thus, the t-test criterion is TTable of the significant level = 0.05, df = n-2 = 3, obtained TTable = 3.182.
8
The results of the statistical test t (t count) were then compared with the critical price of TTable with
the decision-making criteria as follows:
1. If-TTable <Tcount <TTable, then Ho is accepted and Ha rejected, meaning that there is no positive
effect between production cost efficiencies to the achievement of the company's gross
profit.
2. If-Tcount - TTable or Tcount TTable, then Ho is rejected and Ha accepted, meaning that there is a
positive influence on the efficiency of the production costs to the achievement of the
company's gross profit.
If seen from the calculation results obtained that Tcount > TTable (5.427> 3.182), based on the
test criteria then Ho is rejected and Ha accepted, or can be seen from the SPSS output sig. (0.012)
<0.05 () showed that Ho is not acceptable. This means there is a significant effect between
production cost efficiencies to the achievement of gross profit at PT PINDAD (Limited).
5. Conclusion
Based on calculations and testing hypotheses, it can be concluded that the positive effect of
production cost efficiencies to the achievement of gross profit. That is, the higher the efficiency of
the production cost, the higher the gross profit achieved by the company, and vice versa. So as to
achieve the optimal gross profit required the use of cost efficient production. As for the influence of
90.7%. While the remaining 9.3% is influenced by other factors not addressed in this study.
References
Amin Wijaya Tunggal. 1997. Basic Fundamentals of Budgeting. Jakarta: Rineka Cipta
Carter, William K, and Usry, Milton F. 2004. Cost Accounting. Thirteen Edition. Jakarta: Salemba
Empat.
Dwi Prastowo and Rifka Julianty. 2002. Analysis of Financial Statement : Concept and Applications.
Second Edition. Yogyakarta: UPP AMP YKPN
Firdaus A. Dunia. 1999. Cost Accounting. Jakarta: LPFE UI.
Harjanto. 2003. Cost Accounting : Cost of Production. First edition. Yogyakarta: BPFE
Hendriksen, Eldon S. 2000. Accounting Theory. Jakarta: Salemba Empat
Henry Simamora. 2000. Management Accounting. Jakarta: Salemba Empat.
J. Ravianto Putra. 1988. Fundamentals of Productivity. Jakarta: Karunika Universitas Terbuka.
Moh. Nazir. 2003. Research Method. Jakarta: Ghalia Indonesia.
Mulyadi. 2009. Cost Accounting. Fifth Edition. Yogyakarta: UPP STIM YKPN.
Munawir. 2002. Analysis of Financial Statement. Yogyakarta: Liberty.
Soemarso. 2004. Introduction of Accounting. Jakarta: Salemba Empat.
Sofjan Assauri. 2004. Production and Operations Management. Jakarta: Economic Faculty Indonesia
University
Sofyan Syafri. 2002. Accounting Theory. Jakarta: PT. Raja Grafindo Persada.
Sugiyono. 2004. Research Method. Bandung: CV Alfabeta.
Suharsimi Arikunto. 2002. Research Procedure : A Practice Approach. Fifth Edition. Jakarta: Rneka
Cipta.
Supriyono and Mulyadi. 1996. Management Accounting. Yogyakarta: STIE YKPN.
9
FACTORS AFFECTING THE FINANCIAL PERFORMANCE OF NON-OIL

INDUSTRIAL COMPANIES LISTED ON LIBYAN STOCK MARKET (LSM)
Khalifa Mohamed Khalifa
Zurina Shafii
Faculty of Economics and Muamalat
Universiti Sains Islam Malaysia (USIM)
kalifa64@yahoo.com
Abstract
This study aims to assess the financial performance in the areas of liquidity, operational activity,
debt, of the non-oil industries companies listed on the Libyan stock market (LSM) for the years from
1999 to 2008. Many previous studies examined the subject of financial performance in the various
economic sectors, such as industrial, service, commercial, banking, and tourism from developed and
developing countries. Researchers have studied in these subjects on evaluating the financial
performance such as Medhat Tarawneh, 2006, Liargovas and Skandalis, 2008, Amalendu Bhunia
(2010), Almajali, et al, 2012, and many more. The sample of this study consists of eight companies
which were selected based on the criterion of size of the capital. This study is based on the secondary
data obtained from the balance sheets and profit and loss accounts. This study used the financial
ratio analysis to measure the level of liquidity and operational activity, leverage and profitability,
while the statistical method used to identify the variables that affect on financial performance. The
model of this study consists of seven variables; including the dependent variable is financial
performance measured by the Return on Assets (ROA) and six independent variables namely current
ratio (CR), quick ratio (QR), net working capital (NWC), inventory turnover ratio (ITR), account
receivable turnover ratio (ARTR) and debt to equity ratio (DER).The data collected was analyzed using
a number of basic statistical techniques such as descriptive statistics, correlation test (Pearsons
correlation) and regression analysis (Multiple Regression Analysis). The findings indicated that
current ratio (CR), quick ratio (QR) and account receivable turnover ratio (ARTR) are negatively
related with return on assets (ROA). On the other hand, net working capitals (NWC), inventory
turnover ratio (ITR), are positively related with return on assets (ROA). The result also shows there is
no relationship between debt to equity ratio (DER) and return on assets (ROA) of the companies.
Keywords: manufacturing industry, financial performance, financial ratio analysis

-----------------------------------------------------------------------------------------------------------------------
1. Introduction
The industry sector is one of the most important contemporary economic industries because of
their role and high impact in the development of the economy at the local and global level., depend
on it most of the national economies of industrialized advanced countries, and the industrial sector
plays, significant role cannot be ignored in the process of economic development in any state and
became this sector occupies an increasing importance in the development plans in developing
countries which seeks to break the cycle of industrial underdevelopment have in order to achieve
economic development, miscellaneous contribute to increased of national income. Libya, one of the
developing countries which focused on the non-oil industries sector through an ambitious industrial
development plans prepared for this sector in order to be an important source of national income
and contribute to the progress of the national economy and increase the rate of growth and
diversify the production, reduce the dependence on oil to a level necessary for financing the
10
transformation plan, reduce imports, increase the non-oil exports and expand the economic
infrastructure.
Libya spent 4500 million Libyan dinars (LD) approximately 6 billion (U.S.D), for the
development of the industries sector 17% of the total expenses of the development plans during the
period from 1970 to 1990 (Mohamed Mabruk Buzied, p.58, 199). But the oil sector still contributes
approximately 95% of export earnings, 75% of the government receipts and 30-40% of the gross
domestic product (Khaled R. M. Elbedi, et al, p .71, 2010). The Libyan economy still suffers of a
disturbance in its foreign sector, because of the in elastic it of its exports as a result of the
domination of the crude oil on almost all exports, since it represents about 96.4%, while other
exports represented only 3.6% in 2007 (Central Bank of Libya from 2007 to 2008) based on the
foregoing, the researcher wondering, why the industrial sector is still unable to be main resource
and an active contributor to the Libyan economy. Accordingly, the researcher believes that there is a
problem may be related to weak of financial performance in the areas of liquidity performance,
operational activity performance and leverage performance. This study will attempt to evaluate and
measure the impact of financial factors related to areas of liquidity, operational activity and leverage
on the financial performance. In order to study this case the researcher chose the non-oil industrial
companies , listed in the main branch (B) on Libyan stock market as a sample for this study the
main reason for this choice because these companies are the largest non oil industrial companies in
Libya.
The main objective of this selection is to study and measure the strength and the weakness
of the financial performance and the factors affecting this performance of these companies, as well
as discover the extent of the application of these companies to the principles of financial
management, which aims mainly to develop financial performance in various economic units,
through the use of financial analysis methods, especially the method of financial ratio analysis.
Measuring performance is very important because it builds on the results, make different decisions
in economic units. According to (Benjalux Sakunasingha. 2006) performance measures are the life
blood of economic units, since without them no decisions can be made. Financial performance
Measure is one of the important performance measures for economic units. Financial performance
measures are used as the indicators to evaluate the success of economic units in achieving stated
strategies, objectives and critical success factors (Katja Lahtinen, p. 11, 2009).
The main objective of financial performance measuring is to determine the operating and
financial characteristics and the efficiency and performance of economic unity management, as
reflected in the financial records and reports (Amalendu Bhunia, p. 429, 2010). Financial ratio
analysis method is an important measure to financial performance analysis in the economic units.
Ratio analysis method is the most commonly used financial tool to evaluate the current and past
performance in the economic unit and to assess its sustainability (Dick W. Feenstra, et al, p. 7, 2000).
Its the important analytical tools of finance, which provides managers with executives important
insights regarding overhead cost structure, ability to raise capital, adequacy of working capital and
contingency reserves, and efficient use of assets through the evaluation of a set of financial ratios,
observations of trends in those ratios, and comparisons to average values for other companies in the
industry, also this method it can be a productive starting point for assessing financial strengths and
weaknesses, creditworthiness, and other attributes of a firm based on past performance (Joy S.
Rabo, p. 91, 2008). Ratio analysis helps to determine the performance of liquidity, profitability and
solvency position of economic units and it provides all assistance to the management to fix
responsibilities (P. Periasamy, p. 234, 2005).
11
2. Problem Statement
The problem of this study , may be related to weak of financial performance in the areas of liquidity
performance, operational activity performance and leverage performance, this weakness is
confirmed from the financial statements, published by the financial departments of non-oil industrial
companies listed on Libyan stock market (LSM) during the study period, namely the balance sheet
and income statement. These financial statements show that there are large fluctuations in the
profitability of these companies. This variation of profits among these companies suggests that firm-
specific factors play crucial role in influencing industrial companies` profitability. It is therefore
essential to identify what are these factors and how they help industrial companies to take actions
that will increase their profitability and investors to forecast the profitability of industrial companies
listed on Libyan stock market (LSM).
3. Objectives of the study

The main objective of this study is to identify the factors affecting in financial performance of
industrial companies listed on the Libyan Stock Market during the period of the proposed study. To
achieve the main objective the study will covers the following specific objectives:
I. To measure the relationship between the variables of liquidity performance (CR, QR, and
NWC) and return on assets (ROA) in the non-oil industrial companies listed on Libyan stock
market during the period of study.
II. 2-To measure the relationship between the variables of operational activity performance
(ITR, ARTR,) and return on assets (ROA), in the non-oil industrial companies listed on Libyan
stock market during the period of study.
III. 3-To measure the relationship between variable of leverage performance (DER) and return
on assets (ROA), in the non-oil industrial companies listed on Libyan stock market during the
period of study.
4. Literature Review
Many previous studies in various developed and developing countries were examined the
subject of financial performance in the various views, different environments, and also from
different economic sectors, are as follows:
Study (Medhat Tarawneh, 2006). The main objective of this study to compare the financial
performance between five commercial banks in the Sultanate of Oman, during period from 1999 to
2003, the researcher used method of simple regressions in order to determine the impact of
independent variables on dependent variables in the research sample, the researcher used the
return on assets and the interest income as proxies (dependent variables), while used the bank size,
asset management, and operational efficiency as independent variables. The study found there is
positive strong effect of the operational efficiency, asset management and bank size on financial
performance (ROA).The study concluded that the bank with higher assets, deposits, credits, does or
shareholder equity, does not always mean that has better profitability.
Study (Liargovas and Skandalis, 2008). The main aim of this study is to identify the factors
affecting the financial performance of Greece, industrial firms during the period from 1997to 2004,
this study used the return on sales (ROS), return on assets (ROA) and return on equity (ROE) as
proxies (dependent variables), while used the factors of leverage, liquidity, capitalization,
investment, size, age, location, export and management efficiency as independent variables. The
study findings showed that leverage, liquidity, size and index management competence index,
significantly affect on financial performance of Jordanian insurance companies listed at Amman
12
stock exchange. the results of this study showed that leverage, export , location, size and
management efficiency significantly affect on financial performance of Greece industrial firms, these
results implies that profitable in Greece industrial firms are large, young, exporting firms with a
competitive management team , which have an optimal debt-equity ratio and use their liquidity to
finance their investments.
Study (Almajali, et al, 2012). The purposes of this study is to examined and identify the factors
affecting the financial performance of Jordanian insurance companies listed at Amman stock
exchange during the period from 2002 to 2007, the researcher used the return on assets (ROA) as
proxies (dependent variable), while used the factors of leverage, liquidity, age, size and management
competence index as independent variables. The study findings showed that leverage, liquidity, size
and index management competence index, significantly affect on financial performance of Jordanian
insurance companies listed at Amman stock exchange.
The study of Amalendu Bhunia (2010) stated in his study that the financial performance of Indian
pharmaceutical Industry, this study has been undertaken for the period of twelve years from 1997 to
2009, the researcher used the return on investment (ROI) as proxy (dependent variable), while used
the current ratio (CR), liquid ratio (LR), debt to equity ratio (DER) , interest coverage ratio (ICR) ,
inventory turnover ratio (ITR) , debtors turnover ratio (DTR) , net profit to total asset ratio (NPTAR),
return on investment ratio (ROIR), debt to total asset ratio (DTAR) , debt to net worth ratio (DNWR),
net worth to total asset ratio (NWTAR) and total liabilities to net worth ratio (TLTWR) as
independent variables. The results of this study showed that there is statistically significant
relationship between most of study variables with return on investment
5. Methodology
5.1 Population and Sample of the study
The study population consisted of all non-oil industrial companies listed on Libyan stock
market (LSM) during the period (1999-2008) which consists eight of non-oil industrial companies, the
researcher took all of them as a study sample. Table 5.1 shows the sample of study.
Table 5.1: Sample of the study
S. No. Name company

1 Ahlia Cement Company(ACC)
2 Al- Enmaa Company For Pipe manufacturing (AECPM)
3 Libyan Company Of Tobacco (LCT)
4 The National Company For Mills & Fodder (TNCMF)
5 Al- Enma Company For Cables (AECC)
6 Al-Enma Company For Pipeline (AECP)
7 Al- Enma Company For Engineering Industries (AECEI)
Al- Enmaa Company Extracation And Refining Vegetable Oil
8
(AECERVO)
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5.2 Data Collection Methods
The present study mainly based on secondary data. Secondary data means is the data that have
been already collected by and readily available from other sources (Management Study Guide:
2012). The data for this study was collected from the financial statements, published by the financial
departments of non-oil industrial companies listed on Libyan stock market (LSM) during the study
period, namely the balance sheet and income statement. Moreover, the researcher used other
resources such as books texts and Journals. In order to collect the scientific content of the
theoretical framework of the study and to explain the basic concepts of the study, also this data use
to study, measuring and identified on a numerical scale. Quantitative data can be analyzed using
statistical methods, and results can be displayed using tables, histograms and figures. The researcher
will followed quantitative method in this study because the collected data will be in the form of
numerical digits and researcher will use statistical tools for data analysis. In this study the researcher
will use SPSS software version 17.0 to explain the relationship between liquidity variables,
operational activity variables, leverage variables and financial performance.
5.3 Explanatory Variables

5.3.1 Dependent variable
The financial performance is the dependent variable and will be measured by the return on
assets (ROA). The reason for choosing this variable is that the return on assets (ROA) ) it measures
the effectiveness of the economic unity in using its assets to generate profit especially
manufacturing, the higher this ratio, the better the economic unity of the as it indicates the
management's efficiency in using its assets to generate profit (Mahdi Salehi and Kumars Biglar, p. 98,
2009), and also it represents the ratio of how much a firm has earned on its asset base, and the
return on assets ( ROA ) .Will also be used in this study as dependent variable because accordingly
the net profit in relation to the selected companies asset base is a good way to measure the extent
of returns on investments made in the companies , return on assets ( ROA) has been used as
dependent variable by, Liargovas, p, and Skandalis, k, (2008) , Hifza Malik ( 2011) , Ahsen Saghir et
al ( 2011) Sayeda Tahmina Quayyum (2011), Amal Yassin Almajali , et al ( 2012 ) . The ROA will be
calculated as follows:
Return on Assets = Net profit/Total Assets
5.3.2 Independent Variables
This study will use six independent variables include: the liquidity performance variables namely
current ratio (CR), quick ratio (QR) and net working capital (NWC), operational activity variables are,
inventory turnover ratio (ITR) and account receivable turnover ratio (ARTR), leverage variable is debt
to equity ratio (DER), which will be measured in order to determine the effect on the dependent
variable (financial performance), these variables are:
5.3.2.1 Current Ratio (CR)

The reason for choosing this variable is that the current ratio (CR ) because it refer to a
relationship between current assets and current liabilities, the major objective of this ratio to
measure the ability of the firm to meet its short term liability, from current assets, which can be
converted into cash in the short term. It is mainly used to show the economic unit ability to pay back
its short-term liabilities (debt and payables), with its short-term assets (cash, inventory, receivables)
(Michael Havser & Romuaid Bert, p. 53, 2006). Current ratio ( CR) has been used as independent
variable with (ROA) by, Mehmet Sen And Eda Oruc ( 2009), Nor and Noriza, (2010), Hassan Mobeen
14
Alam, et al, (2011), Farzaneh Nassirzadeh, et al ( 2012), Melita Charitou, et al, (2012), Faisal Shakoor,
(et al. 2012). The current ratio (CR) will be calculated by using the following formula:
Current ratio = Current Assets / Current Liabilities

5.3.2.2 Quick Ratio (QR)
The researcher has choose this ratio as a variable for the liquidity performance, because it a
more rigorous and penetration test of the liquidity position of the economic unit as compared to
the current ratio of the firm (Niranjan Mandal and Mahavidyalaya, p. 27 , 2010) .This ratio also
reflects the fact that inventory might not be easily and quickly converted into cash, and furthermore,
that a economic unit would probably not be able to sell all of its inventory for an amount equal to its
carrying value, especially if it were required to sell the inventory quickly (Thomas R. Robinson. et al,
p.286, 2009). Quick ratio (QR) has been used as independent variable with (ROA) by, Nassirzadeh
(2011), Sayeda Tahmina Quayyum (2011). Will be computed by using the following formula:
Quick ratio = Current Assets-(Inventory+ Prepayments) / Current liabilities

5.3.2.3 Net Working Capital (NWC)
The main reason has chosen this ratio as a variable for the liquidity performance. Because it one
of important financial elements to evaluate financial performance in the economic units, because it
directly affects on liquidity and profitability (Abdul Raheman and Mohamed Nasr, p. 278, 2007) also
is a useful indicator in the field of financial management, because it reflects the efficiency of
economic unity in the use of available cash in order to meet current liabilities (I. Pirvutoiu & Agatha
Popescu, p. 1, 2007). Net working capital (NWC) has been used as independent variable whit (ROA)
by, John and Varsakelis,( 2008), Mehmet SEN and Eda ORUC, (2009). Will be computed by using the
following formula:
Net working capital = Current Assets - Current liabilities
5.3.2.4 Inventory Turnover Ratio (ITR)
The reason for choosing this ratio as a variable for the operational activity performance, because
it is the critical performance to assess the effectiveness of inventory management in economic unity
because it measures the number of times, which was converted inventory to sales during the year
(C. Madhusudhana and K. Prahlada, p. 43, 2009). The higher of this ratio is better because it refers to
the ability of economic unity on the sale of its inventory quickly and reduces the chances of obsolete
inventory, and to use available resources efficiently and effectively (Noor Asma Jamaludin, et al, p.
116, 2009). Has used this ratio as an independent variable with the (ROA) by, John Ananiadis and
Nikos C. Varsakelis, 2008, Shaskia G. Soekhoe, 2012, Chandrapala and Wickremasinghe, 2012, Faisal
Shakoor, et al , 2012 . It is calculated by dividing cost of net sales by the inventory, according to the
following equation:
Inventory Turnover Ratio = Net sales /Average inventory
5.3.2.5 Account Receivable Turnover Ratio (ARTR)

Study has chosen this ratio as a variable for the operational activity performance, because it
measures the speed of movement of inventory from the point of purchase of raw materials to the
point of sale of commodities ready for sale. This ratio indicates that there is a relationship between
incomes from sales to the amounts receivable within one year; it indicates how rapidly an economic
unity receives payments for goods and services sold and reflect its capability of securing payments (A
15
lgimantas Misiunas, p. 39, 2010) The high value of this ratio indicates the effectiveness of the credit
policy in the economic unity (Krishna Sahay. et al 1984). This ratio has used as an independent
variable with the (ROA) by, Olufemi and Ajilore, 2009, Hasan Agan Karaduman, et al, 2010, Ahsen
Saghir, et al, 2011, Shaskia G. Soekhoe, 2012, Faisal Shakoor, et al, 2012. Calculated this ratio by
dividing net sales by the account receivables .according to the following equation:
Account receivable turnover rate = Net sales / Account receivable
5.3.2.6 Debt to Equity Ratio (DER)

Researcher has chosen this ratio as a variable for the leverage performance, because it reflects
the relationship between capital contributed by owners, and that contributed by creditors
(Christopher G. Gattis, 2009). It also compares the relative size of debt to resources invested by the
owners (Krishna Sahay, et al 1984). This ratio to determine the extent of which depends upon
economic unit on funds borrowed to finance its operations (Krishna Sashay, et al, 1984). The lower
this ratio its the better of economic unit, because it indicates that the total equity exceeding long-
term debt (Noor Asma Jamaludin. et al, p. 121, 2009). This ratio has used as an independent variable
with the (ROA) by Khalaf Taani, et al , 2011, Iorpev, and Kwanum,2012, Faisal Shakoor, et al, 2012.
This ratio calculated by according to the following equation:
Debt- to- equity ratio = Total liabilities / Total equity

5.4 Model of the Study
In order to achieve the aims of this study the researcher used the multiple linear regression
analysis to identify the relationship between the financial performance of non-oil industrial sector
companies listed on Libya stock market and liquidity ratios, operational activity ratios and leverage
ratio. Data will be analyzed with one dependent variable (financial performance) will be used to
measure by return on assets (ROA) and six independent variables (current ratio (CR) , quick ratio
(QR), net working capital (NWC) , inventory turnover ratio (ITR), account receivable turnover
ratio(ARTR) and debt to equity ratio(DER) is constant and e is error term . Following is the
regression equation:
Y = + b1X1 + b2X2 +.. + b n X nit + e
Where: Y. Dependent Variable, : Constant Coefficient.bn: Regression Coefficient, Xn: Independent
Variable, e: Error Value.
In this study, CR, QR, ITR, NWC, ARTR and DER, will be taken as the explanatory variables and ROA
will be used as the dependent variable. The regression model will be as follow:
ROA = + b1CR + b2QR + b3 ITR + b4 NWC + b5 ARTR + b6 DER + e
16
Independent Variables
Liquidity Variables Dependent Variable
CR, QR, NWC
Operational Activity Variables

ITR, ARTR, Financial Performance Return on assets
Leverage Variable
DER
Figure 5.2: Conceptual framework of the study
5.5 Hypotheses of the Study

Based on the problem statement, objectives of the study and the review of the related literature; for
this study are several key hypotheses derived from a set of sub-hypotheses to reach the desired
objective of the study as follows:
I. There is a significant positive relationship between current ratio (CR) and return on assets
(ROA).
II. There is a significant relationship between quick ratio (QR) and return on assets (ROA)
III. There is a significant relationship between net working capital (NWC) and return on assets
(ROA).
IV. There is a significant relationship between inventory turnover ratio (ITR) and return on
assets (ROA).
V. There is a significant relationship between account receivables turnover ratio (ARTR) and
return on assets (ROA).
VI. There is a significant relationship between debt to equity ratio (DER) and return on assets
(ROA).
6. Data Analysis and Results

6.1 Raw Data
After the raw data collection stage, manually entered into an excel spreadsheet, and then
uploaded into SPSS software for statistical analysis. In order to screen the data, for missing data and
outliers, before the actual process of statistical analysis of the variables, in order to examine and
approve the quality of data or not. Outliers are the points that lie far from the true regression line,
and the presence of outliers in the data of variables that can distort estimates of regression
coefficients. In order to get rid of the problem of the existence of outliers in the data there are
several methods are (natural Log, Square Root, Square and Inverse) According to (Zulkarnain
17
Muhamad Sori and Hasbullah Abd Jalil, p 11. 2009) there are several approaches to data
transformation methods supported in the literature, such as natural Log, Square Root, Square and
Inverse. When evaluating the data of this study, it is found there is the problem of outliers in the
most of variables data of this study, and was treatment this problem through two approaches are
natural Log and Square Root. Under the natural log transformation, it is found that only one variable
were normal namely inventory turnover ratio (ITR). While Under the square root transformation,
there are five variables are current ratio (CR), quick ratio (QR), net working capital (NWC), account
receivable turnover ratio (ARTR), and debt to equity ratio (DER).
6.2 Descriptive Statistics

Descriptive studies produced the mean, minimum, maximum and standard deviation for each
variable of non-oil industrial companies listed on Libyan stock market (LSM) during 1999-2008.
Based 4.1 the mean value of return on assets (ROA) is 2.79 and the value of standard deviation is
0.097. The mean value of current ratio (CR) is 1.67 and the value of standard deviation is 0.393. The
mean value of quick ratio (QR) is 1.24 with the standard deviation is 0. 278. The mean value of net
working capital (NCW) is 0.86 with the standard deviation is 0.027. The mean value of inventory
turnover ratio (ITR) is - 0.023 while the value of standard deviation is 0.469. The mean value of
account receivable turnover ratio (ARTR) is 1.63 and the value of standard deviation is 0.839. The
mean value of debt to equity ratio is 6.590 there are big differences between values of debt to
equity ratio because of standard deviation is high at 1.820. Table 6.1 shows that the values of
standard deviation ranges from 0.027 to 1.820, revealing that there is not much of variation, and this
also implies that the model of multiple regression analysis will be lead into significant results
indicating the strength of data.
Table 6.1: Data descriptive statistics results for all variables (1999-2008)
Variables N Minimum Maximum Mean Std. Dev.
Return on assets (ROA) 80 2.59 3.00 2.79 0.097
Current ratio (CR) 80 1 2.90 1.67 .393
Quick ratio (QR) 80 0.70 2 1.24 .278
Net working capital ( NWC) 80 0.82 0.93 0.86 .027
Inventory turnover ratio (ITR ) 80 -1.00 0.91 -0.023 .469
Account receivable turnover ratio (ARTR) 80 0.32 3.16 1.63 .839
Debt to equity ratio (DER) 80 2.45 10.82 6.590 1.820
6.3 Correlation Test

Correlation test shows that return on assets (ROA) is significant with current ratio (CR), net
working capital (NWC) and debt to equity ratio (DER). Table 6.2 shows that there is significant strong
negative correlation between current ratio (CR) and return on assets (ROA) with a significant value
of 0.008, while there is positive and insignificant relationship between quick ratio (QR) and return on
assets (ROA). Result shows that there is significant strong positive correlation between net working
capital (NWC) and return on assets (ROA) with a significant value of 0.000. There is an insignificant
18
and positive correlation between inventory turnover ratio (ITR) and return on assets (ROA). There is
an insignificant and negative correlation between account receivable turnover ratio (ARTR) and
return on assets (ROA). Debt to equity ratio (DER) and return on assets (ROA) shows positive but
significant correlation with each other.
Table 6.2: Pearsons correlation coefficient

Variables Pearson Correlation Significant
**
CR -0.294- 0.008
QR 0.085 0.456
NWC .847** 0.000
ITR 0.114 0.315
ARTR -0.049 0.664
*
DER .265 0.018
6.4 Regression Analysis

In order to test multiple linear regression models, the researcher must assess the study data
collected through three assumption tests; these tests include normality test, multicollinearity test
and autocorrelation test.
6.4.1 Normality Test

The examination of the normal distribution of the data of the study is one of the fundamental
requirements for linear regression analysis between the study variables. Normality tests are used to
determine whether a data set is well-modeled by a normal distribution or not, or to compute how
likely an underlying random variable is to be normally distributed (Gujarati, 2009). In SPSS software,
the distribution of normality can assess by skewness and kurtosis statistics , that values of Skewness
(SK) and Kurtosis (KU) should be within the range from -1 to +1(Jyh-Tay Su and Lim Veron Nardy, p.
983. 2012) also can assess the distribution of normality by looking at the spread of the data in the
graph that are expressed by dots. If when the point spread around the diagonal line and follow the
direction of the diagonal line in the Normal Probability Plot graph (Gujarati, p. 175, 1999). The result
of the normality test can be seen from the Table 6.3, this Table shows that the Skewness values for
all variables in this study, it's ranging from -0.112 to 0.374, while values of Kurtosis for all the
variables, it's ranging from -1.047 to -0.151, based on these results we can say the skewness and
kurtosis scores of the current data in this study indicate an approximately normal distribution. Figure
6.1, it shows that the data are scattered around the diagonal line of the shows that the normal
probability plot; it seems that the normality assumption might be satisfied for these data.
19
Table 6.3: Normality tests for all variables
Variables Skewness Kurtosis
ROA -0.112 -0.302
CR 0.607 0.471
QR 0.374 -0.151
NWC -0.083 -0.528
ITR -0.112 -0.604
ARTR 0.168 -1.000
DER 0.000 -0.632
Figure 6.1: Normal Q-Q Plot of Studentized Residual

20
6.4.2 Multicollinearity Test
According to (Gujarati, 2003, p. 374) one of the assumptions of linear regression model is that
there is no multicollinearity among the explanatory variables. Multicollinearity can be controlled by
tolerance values and values of variance inflation factor (VIF), high value of multicollinearity can
result in both regression coefficients being inaccurately estimated, and difficulties in separating the
influence of the individual variables on the dependent variables. Any variables with a tolerance value
below 0.10 or with a value above 10.0 of variance inflation factor (VIF) would have a correlation of
more than 0.90 with other variables, indicative of the multicollinearity problem (Hair et al. 1998).
Table 6.4 shows that multicollinearity does not exist among all independent variables because the
tolerance values for all independent variables in this study is more than 0.10 it's ranging from 0.443
to 0.936, while values of Variance Inflation Factor- VIF for all the independent variables is less than
the limited valued 10.0 it's ranging from 1.069 to 2.256.
Table 6.4: Results of multicollinearity test for dependent variables

Variables Tolerance variance inflation factor (VIF)
CR 0.569 1.757
QR 0.443 2.256
NWC 0.773 1.294
ITR 0.603 1.657
ARTR 0.677 1.478
DER 0.936 1.069
6.4.3 Autocorrelation Test

According to (Rafika and Muhamad, p. 149. 2012) autocorrelation test objective to test the linear
regression model there is have a correlation between the error in period t with bullies error in
period t-1 (previous period). Durbin-Watson (DW) is use to test the independent variables of errors
(autocorrelation), for a level of significance of 0.05 (Nagib, et al, p. 13). (Nagib, et al, p. 13.2012)
quoted (Field, 2009). For result accuracy, the Durbin-Watson d value greater than 3 or less than 1 is
definitely reason for concern. Table 6.5 shows that the Durbin-Watson statistic in this data was 2.42
and they do not be greater than 3 or less than 1 or 2, it means that there was no autocorrelation
between independent variables and return on assets (ROA), this result indicating lack of
autocorrelation error in model of this study.
Table 6.5: Results of autocorrelation test
Model R Standard Error of the Durbin-Watson (DW)

Estimate
1 .923 .03901 2.428
21
6.4.4 Heteroscedasticity Test
According to (Gujarati, 2003, p. 387) Heteroscedasticity test an important assumption of linear
regression model is that the disturbances appearing in the population regression function are
homoscedasticity; that is, they all have the same variance. Heteroscedasticity test aims to test
whether the regression has difference variance from the residue between observations (Djoko, et al,
p. 240, 2009). If this assumption is not satisfied, there is heteroscedasticity. (Paskah, p. 39. 2007). If
the variance of the residuals of the observations to other observations fixed, then called
Homoskedastisitas, If the variance of the residuals of the observations to other observations
different or changing, then called Heteroskedastisity, a good regression model, is a model of free
Heteroskedastisity, to detect and presence or absence Heteroskedastisity through looking at the
scatter plot graph (Rafika and Muhamad, p. 149. 2012). The result can show from the below figure
6.2 there is no heteroscedasticity, becouse there is no clear pattern of the spread in the below
graph.
Figure: 6.2: scatter plot
6.4.5 Multiple Regression Analysis

After screening missing values, assess and treatments outliers had been deleted and data satisfy
the normal distribution without any problem of non response bias, the data was fully screened and
clean, After assess the study data, through several important tests namely as normality test,
multicollinearity test, autocorrelation test and heteroscedasticity test, we can say that the data was
ready and could be used to run a multiple regression analysis. Table no (4.6) shows the result of
multiple regression analysis. Results show that the variables of current ratio (CR), quick ratio (QR),
account receivable turnover ratio (ARTR), and debt ratio (DR) are negatively related with return on
assets (ROA). While the variables of net working capital (NWC), inventory turnover ratio (ITR), are
positively related with return on assets (ROA). R-square shows that only 85.1% of variations in
dependant variable return on assets (ROA) are explained by the variations in the six independent
variables. The adjusted R square is slightly below the R-square with the value of 83.9%. F-statistics
shows the validity of model as its value 69.542 is well above its sig value of 0.000. On the other hand,
the regression coefficients of these variables are as follows: Regression coefficient of current ratio at
22
-0.062 indicates that when the current ratio (CR) increases by 1 per cent with the assumption that
other variables remain constant, then the return on assets (ROA) will decrease by 6.2 per cent.
Regression coefficient of quick ratio (QR) at -0.057 indicates that when the quick ratio increases by
1percent with the assumption that other variables remain constant then the return on assets (ROA)
will decrease by 5.7 per cent. Regression coefficient of account receivable turnover ratio (ARTR) at -
0.018 indicates that when account receivable turnover ratio increases by 1percent with the
assumption that other variables remain constant then the return on assets (ROA) will decrease by
1.8 per cent. Net working capital (NWC) and inventory turnover ratio (ITR) is positively related with
return on assets (ROA). On the other hand, the regression coefficients of these variables are as
follows: Regression coefficient of net working capital (NWC) at 3.141 indicates that when net
working capital (NWC) increases by 1percent with the assumption that other variables remain
constant then the return on assets (ROA) will increase by 314.1 per cent .Regression coefficient of
inventory turnover ratio (ITR) at 0.034 indicates that when inventory turnover ratio increases by
1percent with the assumption that other variables remain constant then the return on assets (ROA)
will increase by 3.4 per cent .Regression coefficient of debt to equity ratio (DER) at 0.004 indicates
that when debt to equity ratio increases by 1percent with the assumption that other variables
remain constant then the return on assets ( ROA) will increase by 0.4 per cent but it is not
significantly. Based on calculated coefficients, which are described in the Table 6.6 the linear
multiple regression model identified for the variables studied is as follows:
ROA = 0.245-0.062CR - 0.057QR+3.141 NWC+ 0.034 ITR - 0.018 ARTR + 0.004 DER.
Table 6.6: Results of multiple regression analysis
Variables Beta T-Value Sig
(Constant) 0.245 1.592 0.116
CR -0.062 -4.200 0.000
QR -0.057 -2.393 0.019
NWC 3.141 17.172 0.000
ITR 0.034 2.783 0.007
ARTR -0.018 -2.758 0.007
DER 0.004 1.482 0.143
R-Squared 0.851
Adjusted R-Squared 0.839
F-Statistics 69.542
Sig (P-Value) 0.000
7. CONCLUSION
Based on the findings of this study, the following conclusions are derived regarding the financial
performance of non- oil industrial sector companies listed on Libyan stock market. The main
objective of this study, to assess the financial performance level, and to identify the factors affecting
this performance of non-oil industrial sector companies listed on Libyan stock market, for the period
of 1999-2008. The findings of this study will contribute towards a better understanding of financial
performance in non-oil industrial sector companies listed on Libyan stock market. On the basis of
findings of the study, it can be conclude that there are significant relations between liquidity
variables and operational activity variables with return on assets as findings suggested that, working
23
capital components and financial performance (ROA) in selected companies disclose both positive
and negative association. The study reveals that five variables out of six variables selected for the
study, three variables are current ratio (CR), quick ratio (QR) and account receivable (ARTR))
illustrate negative significant relations with return on assets (ROA), while tow variables namely, net
working capital (NWC) and inventory turnover ratio (ITR)) whilst, debt to equity ratio (DER) is
positively insignificant with return on assets (ROA).
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26
HOW TO ENGAGE THE NEW AGE EMPLOYEES: A LOOK FROM THE
PERSPECTIVE OF BUSINESS AND ECONOMICS STUDENTS THROUGH JOB
SELECTION PREFERENCES
Guven Ordun
School of Business Administration
Istanbul University
gordun@istanbul.edu.tr
Aysegul Karaeminogullari
School of Business Administration
Istanbul University
aysegulkeo@gmail.com
ABSTRACT
The profile of workforce is changing, with an increase in Generation Y. Differences of this new
generation in terms of their value systems, preferences about the suitable methods for task
accomplishment, goals and desires, communication styles do create a potential for dysfunctional
conflict in the workplace. Thus, it is critical to clarify the characteristics and define the profile of
Generation Y employees in order to create the work environment that prevents the efficiency-
threatening conflicts, coordinate the adaptation of this new profile to guarantee the harmony in the
workplace, and strengthens the young workforce to succeed and advance in their careers. Stemming
from the deficiency about the knowledge on Generation Y employees, the purpose of this study is to
examine the expectations of the new blood labor about their work related issues. A sample of 904
undergraduate diploma students majoring in business administration and economics from 30
faculties of 21 universities in Istanbul - Turkey was asked for input and results of the study showed
several significant results. The most important finding is the significant differences between the levels
of importance and tolerance ratings related to the job attributes. Results indicate that the students
representing Generation Y, are not altogether flexible about their priorities on job attributes. The
findings reveal that members of Generation Y can be accepted as highly consistent in their tendency
to state less tolerance for the factors that they attach importance to. Therefore this study provides
insight into the Generation Y members subsequent career intentions and job preferences. Results
present a comparison of several job attributes from a perspective of importance levels and tolerance
levels attached to each factor. The findings have the potential to be helpful in understanding the
Generation Y employees and their job preferences.
Field of Research: Workplace expectancies, career intentions, business administration students,

economics students, generation Y employees.
-----------------------------------------------------------------------------------------------------------------------------
1. Introduction
The multigenerational workforce potentially presents many inconveniences for businesses
as well as hidden opportunities. Prevention of the dysfunctional conflicts; creating an efficiency-
increasing work atmosphere; ensuring the harmony in the workplace while providing the flexibility,
adaptation and motivation in the workplace for all employees of diverse generations exemplify some
of the major challenges that may stem from managing a multigenerational workforce. Leveraging
the power of generational differences for competitive advantage is possible only if the myths and
the realities about the different generations are discriminated consciously.
27
The profile of workforce is changing, with an increase in Generation Y. Characteristic
discrepancies of this new generation have recently become an issue of increasing concern for
managers, human resources experts and for job and career consultants. However much of the
literature grows in the popular press or in the trade magazines. Moreover the literature on
Generation Y mainly comes from United States, Australia or Canada. Considering the high population
and huge potential of Generation Y to transform the realities of the workplace, more empirical
research, taking especially the less studied countries youngsters into the focus, is needed.
This study is an attempt to reach a clearer understanding of the job related expectations,
impressions and motives of Generation Y members in Turkey, where the median age of the complete
population is 29,2. The orientation of the research is located on providing information about the job
selection preferences of the near future new joiners of the workforce.
2. Work Related Attributes Associated with Generation Y

Even though there doesnt exist a universally accepted consensus, Generation Y is generally
used to define the group of individuals born between as early as 1976 (Wallace, 2001) and as late as
2000s (Singer, 2011). This generational group, also sometimes referred to as `the Millenials, Digital
Natives, Net Generation, i-Kids, Echo Boomers, Nexters, Generation Next, Internet Generation or the
Gen Why` (Nikirk, 2009; Altimier, 2006; Tulgan & Martin, 2001), are characterized to differ to a great
extent from the members of the other generations in terms of their work habits and job
expectations.
The older members of Generation Y have just recently begun to enter the workforce. The
existence and contributions of Generation Y in the workplace are particularly important for some of
their exceptional attributes, relative to all the previous generations. They have an extreme
familiarity with technology which leads to a higher versatility in problem solving. They are
considered to be a better educated, pertinacious, more creative, tolerant to diversity, and a more
cooperative group compared to their formers (Cowell & Kupritz, 2007). Generation Y is pointed out
to be a cohort which is selective in the decision of the work they will engage in. They are told to have
the tendency to seek for meaning in their work. They are generally portrayed as an idealistic
generation with high social sensitivity. (Andersson, 2007). Majority of Generation Y members are
expected to switch from one career to another (Patterson, 2010).
All the characteristics attributed to Generation Y may seem to be too generalized and even
stereotypical. Though, the historians and sociologists do not deny the concept of generations and do
accept the similarities of perspectives and reactions within the same generation. Karl Mannheim
(1923), in his theory of generations, suggests that the generation phenomenon is far more than an
issue of groups coming with regular intervals but rather a group of people who are connected with
fundamental and influential historical events (Wolff, 1993). Related to this context of connectedness
through similar experiences individuals have during their formative years (Kunreuther, Kim &
Rodriguez, 2009), the members of the same generation end up in a unity in terms of their beliefs,
attitudes and values, expectations, motives, desires and goals (Patterson, 2010).
Still, universal and particular experiences may lead to different characteristics among the same
generation across different nations and cultures. For valid generalizations and for better
interpretation of the spirit of the age (zeitgeist as introduced by Herder, 1769), empirical
investigations are essential.
28
3. Theoretical Background of Job Preferences
With the realization of the competitive power of the human capital, the recruitment and
retaining practices became a top priority management concern. The increased reliance on the
contributions of employees for higher organizational performance, in other words the so called
talent war, has accelerated dramatically beginning in the 1980s (Michaels, Handfield-Jones,
Axelrod, 2001). As a result of such a radical shift in the mindsets, the job and organizational
characteristics that are likely to attract and engage valuable employees, has arisen as a popular area
of research.
Several of these studies have focused on the preferences of actual and potential applicants
(Gatewood & Gowan & Lautenschlager, 1993; Browne, 1997; Jennings & Werbel & Power, 2003;
Iacovou & Shirland & Thompson, 2004; Larkin & LaPort & Pines, 2007; DelVecchio & Jarvis & Klink &
Dineen, 2007; Kim & Hallab & Lee, 2009) whereas some have focused on the actual employees
perspectives (Hart, 2006; Rich & Lepine & Crawford, 2010). Others have investigated recruiting and
retaining as a dynamic process (Caldwell & OReilly, 1985; Turban & Eyring & Campion, 1993;
Ganzach & Pazy & Ohayun & Brainin, 2002; Weber & Mahringer, 2008) of the interaction between
two sides, the company and the applicants (Rynes & Bretz & Gerhart, 1991; Adkins & Russell &
Werbel, 1994; Boswell & Roehling & LePine & Moynihan, 2003; Ng & Burke, 2005).
This long stream of research has its roots in a wide range of theories out of which Job Choice
Theory (Behling, Labovitz, & Gainer, 1968; Pounder & Merrill, 2001; Young et al., 1989) provides
the most comprehensive contextual framework appropriate for this current inquiry. The Job Choice
Theory, originally proposed by Behling, Labovitz, and Gainer (1968), primarily relies upon and
integrates three discrete theories of job choice: objective theory, subjective theory, and critical-
contact theory (Pounder & Merrill, 2001). The emphasis in objective theory is on economic factors
which are mainly objective and measurable. Subjective theory, on the other hand, suggests that
candidates ground their job decisions on their psycho-social needs. Finally the critical-contact theory
maintains that the candidates predominantly base their decisions neither on objective nor subjective
criteria due to their limited amount of needed information or due to the lack of experience. Instead
they depend upon some other indicators such as the observations about the recruiter, the
smoothness of the recruiting process or the impression about the physical facilities. (Liu, 2005).
Among these three sub-approaches of the Job Choice Theory, the objective and subjective
explanations of the job choices best suits the structure of this current research design. Since the aim
of the current paper is to investigate the potential workforce, composed of Generation Y members,
in terms of their job related expectations, impressions and motives, authors prefer following a
person-organization fit approach rather than explicating the recruitment function in detail. With a
concern of examining job and organization factors that are most likely to fulfill the expectations,
correspond the attitudes and satisfy the needs of the potential Generation Y employees, this paper
is framed around the objective and subjective theories of job choices.
4. Theoretical Framework
Based on the objective of this study that is to examine the factors that affect the job
selection of Generation Y members, the following research design is developed (Figure 1). The
theoretical framework is embodied dependent on the Job Choice Theory (Behling, Labovitz, &
Gainer, 1968; Pounder & Merrill, 2001; Young et al., 1989). In brief, this study intends to
investigate the characteristics of the tolerance zone between the desired and the minimum
acceptable levels of Generation Y members for the importance of job selection preferences.
29
Work Expectations of Generation Y
Job Preferences of Generation Y Impressions of Generation Y
Motives of Generation Y
Figure 1: Theoretical framework of the study
Although employees and potential employees realize their impression and motive
preferences, they also recognize that these desires are not always possible. Thus, they hold another,
lower level expectation for the threshold of acceptable impressions and motives. Employees and
potential employees assess job opportunities based on two distinct standards: what they desire and
what they assume as acceptable. This leads to our first hypothesis:
H1: A zone of tolerance exists between the desired and the minimum acceptable level of job
preferences.
The zone of tolerance may vary in terms of different aspects. Employees and potential
employees are expected to declare high levels of expectations closer to the maximum point of the
scale used. On the other hand, the minimum acceptable levels of preferences are not expected to be
close to the minimum point of the scale used. The most desired impressions and motives for
potential employees are expected to have narrower tolerance zones. Furthermore, the most desired
ones are expected to be least tolerated. These conclusions can be summarized by means of the
following hypotheses:
H2: The desired level for impressions and motives takes a value close to 5 (the maximum point of the
scale used).
H3: The tolerance level for impressions and motives takes a value close to 3 (the mid-point of the
scale used) rather than 1 (the minumum point of the scale used).
H4: The width of the tolerance zone and the level of tolerance fluctuate in the opposite direction
with the strength of desire for a certain category of impression or motive.
5. Methodology
5.1 Sample and data collection method
The target population of this study was students whose common characteristic is being a
member of Generation Y and majoring in the field of business administration or economics in
Istanbul. The distribution of the sample according to the universities and grades is presented in
Table 1.
30
Grade
1. Year 2. Year 3. Year 4. Year Total
Boazii University 5 11 3 11 30
Aydn University 12 12 2 4 30
Baheehir University 3 13 10 4 30
Bilgi University 0 0 3 27 30
Dou University 5 13 10 2 30
Fatih University 12 10 6 2 30
Hali University 11 17 23 9 60
stanbul University Economics 2 12 10 6 30
stanbul University Business Administration 21 14 16 9 60
stanbul Teknik University 0 0 10 20 30
stanbul Ticaret University 7 8 15 0 30
Ko University 15 14 1 0 30
stanbul Kltr University 30 9 16 7 62
Maltepe University 3 3 15 9 30
Marmara University 27 17 8 8 60
Yldz Teknik University 10 19 22 9 60
Yeditepe University 22 19 10 9 60
Galatasaray University 17 9 2 2 30
Baheehir University 39 27 14 10 90
stanbul Arel University 27 34 0 1 62
Sabanc University 14 4 7 5 30
Total 282 265 203 154 904
Table 1: The distribution of the sample according to the universities and the grades
In order to reach a satisfying number of sample units out of the defined population, a
combination of judgmental and snowball sampling are used. Teams composed of at most 5 students
taking Organizational Behavior course at Istanbul University School of Business Administration were
assigned to a certain university as part of their term project and was asked to randomly hand out the
research questionnaire to at least 30 students of the related faculty of business administration or
faculty of economics.
Data collection process kept on for four months in total, during the 2009-2010 spring
semester. Being a member of Generation Y and studying business administration or economics in a
university in Istanbul, were the two main selection criteria in the determination of sample units. As a
result of such a sampling methodology, a sample of 904 undergraduate diploma students majoring
in business administration and economics in 30 discrete faculties of 21 universities in Istanbul -
Turkey was recruited to provide input for the research.
5.2 Measurement Instruments

The data appropriate for the research questions of the study was collected via a
questionnaire designed as a combination of four distinct sections. The first section was devoted to
31
measure the strength of attitudes of students towards certain characteristics relevant to their future
jobs. The second section was measuring the strength of attitudes of students towards the lack of
certain characteristics they may suffer in their future jobs. The third section included demographic
questions and finally the fourth section was intended to capture the relative importance of certain
characteristics of students future jobs.
The first and second sections which are focused on attitudes towards the existence and non-
existence of certain characteristics in a work setting are adapted to Turkish by integrating Job
Descriptive Index (Locke, 1976) and Job Diagnostic Survey (Hackman & Oldham, 1976). A five-point
Likert scale is used to let participants indicate their strength of attitudes and to calculate the
motivating potential score for each job characteristic. In the first section labels of the Likert scale
ranges between very important to very unimportant whereas in the second section labels
ranging from definitely do not accept to definitely accept are chosen as standard response
options.
The demographic questions are designed by the researchers. The question list included
questions which are beneficial to have a clearer understanding of the sample and to control whether
the sample units are matching the requirements of our sample framework.
The fourth section is again developed by the researchers based on an extensive review of
relevant literature. In this section, a list of job-related attributes is presented in three separate titles:
the job characteristics, the organizational characteristics, the individual characteristics. Respondents
were asked to put each group of characteristic in order separately, considering to what extent each
characteristic plays a role in their desire to work in an organization.
6. Findings & Discussion

The empirical research, involving instruments and methodologies of management,
supported most of the hypothesis proposed in this paper, strengthening the base of application in
motivational issues. The research results are provided in the following sections.
6.1 Reliability analysis

Cronbachs alpha coefficient value for the 21 items included in the attitudes measurement
tool is found to be 0.844. The higher the coefficient value, the item inter-correlations converge to
unity (Zeller & Carmines, 1980). A value of 0.844 can be considered high enough compared to the
widely-accepted cut-off point (0.70 for a set of items is generally accepted to indicate the reliability
of a scale or a subscale) of Cronbach alpha coefficient value in social sciences (Vaus, 2004).
6.2 Validity analysis

In order to reveal and test the underlying structure of the attitude scale, as an initial starting
point, exploratory factor analysis was employed. Within the first pass of the factor analysis, the
Kaiser-Meyer-Olkin measure of sampling adequacy and Bartletts test of sphericity tests were
examined to test the appropriateness of data for conducting factor analyses (Burns & Burns, 2008).
Kaiser-Meyer-Olkin value of the measurement tool was calculated to be 0.914 while Bartletts Test
of sphericity was found to be 7464.025, with significance lower than 0.000. Both statistical data,
KMO being greater than 0.5 and Bartletts test having a probability less than 0.05 (Burns & Burns,
2008), were satisfactory, supporting the use of factor analysis.
In the next step, the authors employed principal component analysis and varimax rotations
in order to reveal the factor structure of the 30 items in the measurement tool. 21 items had factor
32
loadings greater than 0.40 and were retained in the scale. 9 items were excluded due to factor
loadings below .40 and high cross loadings (Netemeyer, Bearden & Sharma, 2003). Five factors were
identified via the exploratory factor analysis in the attitudes towards the existence and non-
existence of certain characteristics in a work setting scales which composed of the remaining 21
items. The results are presented in Table 2. Reliabilities for each of the factors were 0.71, 0.77, 0.70,
0.58 and 0.70 respectively.
Even though some of the items were dropped from the scales, the resulting factor structure
was in line with the original factor structure, even if not perfectly matching. The items which were
adapted from the Job Descriptive Index items and the ones borrowed from the Job Diagnostic Survey
did not unite under any of the factors. The items derived from the Job Descriptive Index composed
three of the five factors whereas the items borrowed from the Job Diagnostic Survey formed two
discrete factors.
Component
characteristics
characteristics
characteristics
organizational
basic motives
work climate
higher-order
motives
job
Opportunity to demonstrate a variety of skills and aptitudes ,739
Autonomy, authorization to decide on the structure of the job ,674
Chance to actualize the knowledge gained through education ,642
High potential for gaining expertise and experience ,621
Having the power to do complete tasks instead of a minor parts ,615
Being asked for opinions in related decision making processes ,542
Opportunities of feedback on task accomplishment ,534
Company being a longstanding and powerful institution ,755
Large company size with high number of employees ,749
Company being advantageous and superior compared to competitors ,739
Product and services of the company being well known ,719
Work setting being comfortable and ergonomic ,715
Work climate and colleagues being harmonious ,708
Manager being tolerant and benevolent ,703
Manager having positive attitudes and behaviors ,663
Position being high status and high ,777
Prestigious level of salary ,775
Adequate promotion possibilities ,634
High health benefits and job safety ,826
Satisfactory level of social benefits ,724
Job security and contract for services ,667
Table 2: Exploratory factor analysis results
With a deeper examination of the items, the factors are named job characteristics,
organizational characteristics, work climate characteristics, higher-order motives, and basic
33
motives, respectively for the ease of interpretation. The first three factors are representing the
impressions of students whereas the latter two are covering the issues about the motives of the
students.
6.3 Results
Among the participants of the research study, the distribution of gender was slightly higher
for males with a total of 470 male respondents (52 %). On the other hand, there were 434 female
respondents which composed the 32.3 % of the total respondents. All participants were born before
1976, in parallel with the cut-off point for being a member of Generation Y.
The research results which provide a list of the most attractive sectors, the most attractive
organizational departments and the most attractive companies in Generation Y students of business
administration and economics, are presented in Table 3.
Sectors Organizational Departments Companies

1. Banking (14.27 %) Marketing (16.3 %) Dou Group (2.4 %)
2. Finance & Stock Exchange (5.42 %) Finance (9.7 %) Sabanc Group (2.3 %)
3. Food Industry (5 %) Human Resource Management (7.1 %) lker Group (2 %)
Table 3: Top 3 of sectors, organizational departments and companies for Generation Y students
Table 4 summarizes the expectations of Generation Y students about a broad range of
attributes of their future jobs. The table presents a comprehensive list of job-related attributes
together with the percentage of the participants who indicated each attribute as the most important
factor in their job choice decisions. The attributes are examined in three different sections: the job
characteristics, the organizational characteristics, and the individual characteristics.
Organizational Individual
Job Characteristics % % %
Characteristics Characteristics
Salary 77,9 Organizational power 72.0 Fit with personality 71.3
Status 68,1 Company size 70.7 Fit with aptitudes 70.3
Match individuals
Promotion 62,6 Companys market share 64.2 66.2
educational background
Job security 56,7 Organizational vision 61.2 Match personal interests 63.3
Consideration,
56,7 Reputation of the company 60.2 Match personal goals 58.3
appreciation
Social benefits 51,8 Corporate image 56.4 Match personal values 52.2
Match personal
Job importance 49,1 Reputation of the products 52.9 51.5
experiences
Management of the Match individuals
Work schedule 46,7 50.2 47.1
company motives and needs
Employee health and job
44,2 News on the company 36.7 Match personal beliefs 42.8
safety
Match familys
Work autonomy 38,3 Ads of the company 32.5 29.5
expectations
Table 4: Expectations of Generation Y students about job-related attributes

34
As mentioned before when measurement instruments were being introduced, each of these
three sections was put in order separately by each respondent. Results reveal that salary was
selected to be the top priority by 77,9 % of all participants. The most important attribute among the
organizational characteristics was the power of company, being mentioned as number one by 72 %
of all the sample units. When the participants were asked to determine the individual characteristic
which affects their desire to work in an organization most, 71.3 % of the participants mentioned that
personality and how well it fits the job was the most important individual factor in their job choice
decisions.
When the strength of attitudes of students towards the existence and non-existence of
certain characteristics in a work setting are examined deeper, the results revealed two different
aspects to be considered: the impressions and the motives of the Generation Y students. When the
impressions of students towards the job characteristics, organizational characteristics, and work
climate characteristics are explicated, the work climate characteristics appear to be the most
important factor for Generation Y students. Organizational climate characteristics are again, the
ones which are declared to be the least tolerated characteristic in the case of their non-existence.
The results of the analysis of impressions and motives of students about the existence and non-
existence of certain characteristics in a work setting are presented in Table 5.
Std. Error
Impressions and Motives Mean Std. Deviation
Mean
Job Characteristics (JC) 4.0624 .54884 .01825
Impressions
Tolerance for JC 3.3438 .73433 .02442

Organizational Characteristics (OC) 3.5772 .81713 .02718
Tolerance for OC 2.8593 .93798 .03120
Work Climate Characteristics (WCC) 4.1327 .60367 .02008
Tolerance for WCC 3.6020 .80658 .02683
Higher Order Motives (HOM) 4.3051 .55027 .01830
Motives
Tolerance for HOM 3.5056 .80856 .02689

Basic Motives (BM) 4.1913 .65533 .02180
Tolerance for BM 3.6076 .80770 .02686
Table 5: Impressions and motives of Generation Y students about the existence and non-existence of
certain characteristics in a work setting
analysis results
The findings in Table 5 support H2 and H3. The arithmetic mean of the desire for all five of
the measurement variables is not lower than the middle point of measurement scale, which is 3.
Furthermore the tolerance levels never drop below 2, supporting the proposal that the minimum
acceptable levels of preferences would not be close to the minimum point (1 in this case) of the
scale used.
Table 6 shows an analysis of the comparison between attitudes towards the existence and
non-existence of certain characteristics in a work setting. According to the t-test results, for each of
the 5 factors representing the attitudes of Generation Y students towards certain characteristics in a
work setting, the differences between desire and tolerance levels for the same factors are
statistically significant.
35
Paired Differences
Sig.
Std. Std. Error t df
Mean (2-tailed)
Deviation Mean
JC and Tolerance for JC .71854 .76871 .02557 28.104 903 .000
OC and Tolerance for OC .71783 .91821 .03054 23.505 903 .000
WCC and Tolerance for WCC .53079 .79271 .02637 20.132 903 .000
HOM and Tolerance for
.79949 .87427 .02908 27.495 903 .000
HOM
BM and Tolerance for BM .58369 .86857 .02889 20.205 903 .000
Table 6: t-test results for comparison between attitudes towards the existence and non-existence of certain
characteristics in a work setting
analysis results
Depending on the t-test results it can be concluded that desire and tolerance for certain
characteristics in a work setting are two distinct standards used by Generation Y potential
employees for assessing job opportunities. The fluctuation of the level of tolerance exhibits
somewhat contradictory results. The related hypothesis is supported for motives whereas it is not
supported for impressions. Results revealed that the relative importance attributed to work climate
characteristics, job characteristics and organizational characteristics is exactly in the same direction
with the relative tolerance attributed to these factors. That is the most desired impression factor
(work climate characteristics) is found to be the one which is most tolerated in the case of its non-
existence. On the other hand, the least desired impression factor (organizational characteristics) is
found to be the impression factor which is least tolerated in the case of its non-existence. This
parallelism is just the opposite for motive factors for Generation Y members. The most desired
motive factor, which is higher order motives, is found to be least tolerated, as expected.
The width of the tolerance zone is found to be maximum for job characteristics and
minimum for work climate characteristics. This result does not support the hypothesis which
proposes that the tolerance zone will become narrower as the strength of desire increase. On the
other hand, the tolerance zone is widest for the most desired motive factor (higher order motives)
whereas it is narrowest for the least desired motive factor (basic motives).
The results point out that, Generation Y members almost equalize their tolerance levels
regardless of the impression factors that they are evaluating. When they rate the motive factors,
they tolerate the higher order motives more than the basic motives. This finding contradicts with the
motivation literature which proposes that basic motives are more indispensable compared to the
higher order motives. Generation Y members provide a potential employee profile which have a
greater desire and weaker tolerance for higher order motives, contrasting with the conventional
employee profile.
7. Conclusion and Future Recommendation

The most important finding highlighted in this study is the significant differences between
the levels of importance and tolerance ratings related to the job attributes. Results indicate that the
students representing Generation Y, are not altogether flexible about their priorities on
characteristics in a work setting. Desire and tolerance for certain factors in the work setting appear
to be two distinct standards which have an influence on the assessment of job opportunities by
36
Generation Y potential employees. Levels of tolerance and the width of the tolerance zone also
expose different interpretations, providing different aspects to the issue of engaging new age
employees to jobs. The findings reveal that members of Generation Y can be accepted as highly
consistent in their tendency to state less tolerance for the motive factors that they attach
importance to.
In general, this study provides insight into the Generation Y members subsequent career
intentions and job preferences. Results present a comparison of several job attributes from a
perspective of importance levels and tolerance levels attached to each factor. The findings have the
potential to be helpful in understanding the Generation Y employees and their job preferences.
Results provide human resource managers and other concerned authorities with information on
how to deal with the person-organization fit, motivation, engagement, and adaptation issues of
Generation Y employees who have just begun their careers and most of whom are about to enter
the work life.
For a better understanding of generational issues in the workplace, comparative studies are
needed. Cross-cultural and cross-generational studies may provide fruitful results critical for an
organization to improve the ability of effectively and efficiently handling generational problems in
the work setting. Such studies may be critical to managers and human resources experts to indicate
generational differences in an understanding of the most effective recruitment and retaining
practices. Moreover, systematic and periodic surveys would be helpful in analyzing the shifts across
generations through time series. Due to rapidly changing, diverse preferences of todays workforce,
there is an increasing need for the examination of true differences in the evaluations of employees.
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39
LTV COMPLIANCE:
HOW DOES IT EFFECT GOOD CORPORATE GOVERNANCE OF SHARIA BANKING
INSTITUTION? (A CASE STUDY OF INDONESIAS ISLAMIC BANK)
Rida Prihatni
Dedi Purwana, ES.
Diena Noviarini
M.Yasser Arafat
Marsellisa Nindito
Yunika Murdayanti
Faculty of Economic, UNJ
diena_1601@yahoo.com
Abstract
Loan To Value (LTV) ratio compliance over sharia banking in Indonesia was applied in order to
increase the riil sector loan of which covers commercial and industrial consumers rather than the
consumtive loans. The LTV policy has emerged over the need to anticipating the overheating of
domestic economy caused by the overall situation of global economy and the booming of Islamic
bankings growth recently. The competition coming out of the booming of sharia bankings growth to
gain customers and offering loans and the fact that Non Performing Loan of consumer credit
segment in the automotive and house lendings has been increasing were the condition that need to
be resolve adequately. Such condition may have been resolved by the LTV ratio as it is the way to
apply Good Corporate Governance of sharia bankings in channeling its consumer loans to customers.
Keywords: Loan To Value Ratio, Global Economy, Good Corporate Governance, Non
Performing Loan
-----------------------------------------------------------------------------------------------------------------------
1. INTRODUCTION
1.1. The Research Background

Indonesian domestic economy had been experiencing tremendous economical crisis in the
year of 2008. Back then, many banks had collapsed due to the global economy crisis and Indonesian
Bank as the regulator had been in a very difficult position to made bail outs at huge amount of
domestic bank loans. The loans were disbursed to consumer loans from housing and vehicle loans
and many banks had liquidity problems to paid back customers withdrawals because the loans that
were given were uncollectible. The situation that coming out of the Europe crisis from year 2010
until now more likely have a fewer impacts on Indonesian domestic economy, nevertheless the
domestic economy have been overheating because banks were trying to chanelling as many loans as
they have in order to get the income out of the interest spreads. As been stated by the Indonesian
Bank Deputy Governor, Halim Alamsyah (The Jakarta Post, 2012) Indonesian Bank need to regulate
this credits chanelling by setting out the Loan to Value (LTV) for commercial banks as nearly as 70%
value and the automotive loans at the maximum of 75%. The LTV would become effectively for the
commercial banks in June 2012 while for the Sharia Banks, further stated by Halim, not all sharia
bankings products could be imposed by the same level of down payment limit that became
effectively for the conventional banks. The chairman of ASBISINDO, Achmad K Permana
40
(Kompas.com, 2012), said that the LTV rules for the sharia bankings would still be in the process of
completting around October-November 2012.
The imposing of LTV rules for Sharia Bankings would faced such dilemmas because of only
Sharia Bankings customers whom are able to afford the payment installment that might get the
loans and this would decelerate the Sharia Banking units lending growth down to 70%, said Yuslam
Fauzi, the President of Sharia Mandiri Bank (The Jakarta Post, 2012). Yuslam further imposed that it
would take the improving of internal risk management of Sharia Bankings in Indonesia.
Eventhough out of national bankings as the whole, Nelson Tampubolon, former Indonesian
Bank International Director (Kompas.com, 2012), Sharia Bankings have more endurance from
conventional banks and some advantanges because they have the concepts of underlying
(guarantee) and mutual profit and loss sharings between the banks and their customers.
Nevertheless, the LTV imposing to Sharia Bankings may result in the decelerating of its market
shares (Kompas.com, 2012) therefor it would take strong wills from the stakeholders, whether its
the government, the Ministry of Finance, the Ministry of Religion and the Sharia Bankings to uphold
the LTV and find the best solutions to increase the growth of Sharia Bankings market shares.
1.2. Problem Formulation

We have describe that loan to value compliance on sharia banking influenced the good
corporate governance on Indonesias Islamic bank therefor the problem that could be formulated
were as follows:
1. Were the loan to value ratios have ever been implemented in Sharia Banking in
Indonesia?
2. How deep the compliance of LTV would effect the good corporate governance of
Indonesias Islamic Bank?
3. Does the central authority as in this research Bank of Indonesia regulate and monitor
the implementation of LTV?
1.3. The Objectives of The Research:

The purpose of this research have been pointed out as follows:
1. To find how long the LTV have ever been implemented on Indonesia Islamic Bank
2. To find the depth of LTV compliance over Sharia Banking
3. To find the rules that have been set up to maintain the implementation of LTV by Bank
of Indonesia
2. Theoretical Background
2.1. Loan To Value Ratio

Loan to value ratio is the underlying ratio against the credit ratio that have been set up by the
Bank of Indonesia to regulates all commercial banks in Indonesia (Achmad K.Permana, 2012).
According to Didik Purwanto (Kompas.com, 2012), the regulation of LTV have been setting out the
minimum of 30% down payment for the housing and vehicle loans chanelling for all conventional
banks. Meanwhile for the sharia bankings the ratio would still be around 15-20% and it didnt cover
for all the sharia products. The regulation of LTV was effectively run in June 15, 2012 (Rivki Maulana,
2012) while for the Sharia Banking it would still be in the process of completion around October-
November 2012 and some major Sharia Bankings have stated their commitment to comply this new
regulation. However, for the BPRS as in this research are the samples, of which have smaller capital
41
from major Sharia Bankings, this new regulation might have taken impact in decreasing their loans
chanelling because they have customers with mid lower income and not all their customers have the
ability to provide up to 30% capital as down payment for the approval of their loans.
2.2. Good Corporate Governance

Good Corporate Governance is the set of regulation that organize the relation of all parties in
one company or organization in connection with their rights and obligations (Agoes Ardana, 2009 in
Ammar, 2012). Due to the description, it regulates and maintain the functions of all parties that
involved in the organization to make sure that the main purpose or goal of the organization could be
accomplished. Furthermore, Ammar (2012) said that the achievement of the main purpose of the
organization would need certain mechanisms from the authorities to make sure that the minority
parties have gained their rights also and the mechanisms were devided into two type, the internal
and external mechanism. The internal mechanism covers from the internal structure of organization
from the main board of directors and commisioners while the external mechanism works from the
outside parties of the organization.
2.3. The Effect of Loan to Value Ratio on Good Corporate Governance of Sharia Banking
Institution
The implementation of LTV on Sharia Banking institutions complying the good corporate
governance as the mechanism (Ammar,2012) because in the chanelling of the loans not all potential
customers would gain their consumtive loans. Though as the institution that targetting the mid
lower income community, its products cover multi level income of community as the
implementation of fairness, Sharia Banking institutions need to take precautions in disbursing the
loans to the customers and this is the implementation of accountability. Furthermore, the
transparancy of both customers and Sharia banking institutions as the financing institution has
emerged in while in the process of the credit proposal. The management as the internal parties of
Sharia Banking institutions need to report the financing activities to the external parties as their
investors and Bank of Indonesia as the regulator have the responsibility to control and manage the
whole system of good corporate governance regulations.
3. RESEARCH METHODOLOGY
3.1. The Types of Research

This research have taken the qualitative method of research of which have interviewed and
observed some of the BPRS. The samples that were observed stated that they have the housing and
vehicle loans financing for their customers and that their location which are in the tip point of big
city indicates that their main customers are the mid lower income community.
3.2. The Research Location

This research have taken the location of Jakarta, Depok, Sentul and Bekasi area and have
interviewed and observed the location of BPRS customers domiciles. The locations have been
observed for nearly up almost one month and the economical activities that run in the location
suggested that BPRS still have many potential customers as their market shares.
42
3.3. The Research Instruments
We have used a list of questions to be fulfilled by the informants or answered verbally through
direct or indirect interviews. However, some informants require their identity remain anonymously
due the secrecy of company.
3.4. The Research Data Sampels

We have determined that the best sample of this research is BPRS that actively open and
situated in the Jakarta, Depok, Sentul and Bekasi area.
3.5. The Determination of Informants

The informants that were interviewed were the staff and employee of BPRS that have the
knowledge of the credit type in their company and aware of the LTV ratio that have been set out by
the Bank of Indonesia.
3.7. The Analysis of Data

We have interviewed the informants and analyze the datas that we have collected through
the observation and therefor we can draw the conclusion that become the result of this research.
4. Finding & Discussion
4.1. The effect of loan to value ratio on good corporate governance

We find that Loan to value ratio have significant impact on the good corporate governance
implementation because in chanelling the consumtive loans, the Sharia Banking institution in this
research are BPRS, have to imply precautions to disburse money to their customers. The
disbursement of the loans would have to follow the LTV ratio of which 30% down payment out of
total loans.
4.2. The application of good corporate governance on sharia banking institution

The good corporate governance have determined the organization of Sharia Banking because
it pointed out the fairness of which the same treatment for all customers and potential customers,
the transparancy and accountability of its products and the responsibility of the Sharia Banking
management to uphold the Bank of Indonesia regulations.
5.1. Conclusion
Based on the thorough analyses above, it was acknowledged that the LTV ratios have been
implemented in Sharia Banking institutions, however, the conclusion that covered that not all
product of the consumtive loans were the subject to this research due the short time between the
date of LTV implementation with the time of the research.
5.2. Future Recommendation

This research would only be admitted in BPRS as Indonesia Islamic Bank that situated in
Jakarta, Depok, Sentul and Bekasi area but we suggested that for further and better research the
location may have been larger and the time of the research have been longer than this one.
Source: http://ib.eramuslim.com/misc/daftar-bprs-seluruh-indonesia-htm
Source: http://ib.eramuslim.com/misc/daftar-bprs-seluruh-indonesia-htm
43
QUESTIONAIRES
Honorable,
Sir/Madam of Informants
List of Questions:
1. What do you know about LTV ratio?
2. In matter of credit chanelling to your customer, was it already upholding the sharia
principles?
3. In matter of credit chanelling to your customer, was it already upholding justice principles?
4. In matter of credit chanelling to your customer, was it already upholding transparancy
principles?
5. In matter of credit chanelling to your customer, was it already upholding responsibilities
principles?
6. What is the minimum of vehicles credit down payment?
7. What is the minimum of housing credit down payment?
8. Was there ever been monitoring from the Bank of Indonesia?
9. Was your company have the facilities to generate financial report?
10. Was there ever been a rising/decreasing in credit chanelling during the LTV implementation?
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44
Rafika Rahmawati, M. Nadratuzzaman Hosen, (2012). Efficiency of Fund Management of Sharia
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http://www.eurojournals.com/JMIB.htm
45
EMERGENCY RESPONSE PLAN (ERP) IN A MANUFACTURING COMPANY: A

CORPORATE AWARENESS
Nor Azimah Chew Abdullah

School of Business Management,
College of Business,
Universiti Utara Malaysia,
06010 Sintok, Kedah
norazimah@uum.edu.my
Khairol Hisham Khairuddin

Kementerian Dalam Negeri
Malaysia
ABSTRACT
The aim of this study is to determine the significance of corporate awareness in initiating an effective
Emergency Response Plan (ERP) at a manufacturing company in Senawang, Negeri Sembilan. Five
independent variables were used to justify its relationship with corporate awareness: roles and
responsibilities, chain of command, control of plant, training and liaison with emergency services. A
total number of 210 employees were chosen as respondents for the study but only 145 employees
responded to the survey. The Pearson correlation analysis was used to determine if there was a
significant relationship between corporate awareness and all the independent variables. The findings
showed positive relationship between corporate awareness and all the independent variables (roles
and responsibilities, chain of command, control of plant, training and liaison with emergency
services). Multiple regressions showed that only chain of command, control of plant and liaisons with
emergency services were significant predictors of corporate awareness. It is also suggested that the
study would have more significant results with more organization engage in this survey.
Keywords: corporate awareness, roles and responsibilities, chain of command, control of plant,
training and liaison
-----------------------------------------------------------------------------------------------------------------------
1. Introduction
Many industries, facilities, and government departments in Malaysia still do not give serious
emphasis in the development of an efficient Emergency Response Plan (ERP) at its workplace. They
highly expect and rely too much on the local fire department, police, and emergency services to
respond to the emergency. This understanding is partly correct, but in a growing country like
Malaysia, the number of request to respond to the emergency cases has increased. Therefore, there
is a need for every entity to have an ERP for their premises so that not only it can assist those
agencies in responding to the emergencies or disaster, but most importantly in helping to prevent
and minimize the impact of the emergency on the safety and health of its employees and its
surrounding community. For a business entity, safety and health is part of the business. Failing to
prepare and respond to emergency will give a very negative impact to its production and businesses.
46
In the industrial sector, managing emergency is an obligation of the corporate. The purpose for
corporate awareness in initiating an effective emergency response plan within its premises is to
ensure that all its employees are safe from all form of hazards at its workplace. It is also to preserve
the company facilities and equipment and to protect the community from the impact of emergency
that rises from the act of their operation (Stringfield, 2000). In view to protect workers and the
surrounding communities from the effect of a major industrial accident, the Malaysian government
has approved a bill in Occupational Safety and Health Act (Act 514) 1994, so that all entities have to
plan and develop an ERP for their workplace. In the United States, ERP is not only a legal
requirement imposed by the federal and state authorities, but also a requirement by the insurance
company (Stringfield, 2000).
The aim of this study is to determine the significance of corporate awareness in initiating an
effective Emergency Response Plan (ERP) at a manufacturing company in Senawang, Negeri
Sembilan.
Corporate Awareness
Corporate awareness is about corporate responsibility in how the corporate inculcates

knowledge and interest to ensure employees safety by nurturing and developing an effective ERP
(Hiles, 2011). Hartel et al. (1991) discovered that poor situational consciousness was the underlying
source that causes 200 aircraft accidents. Endley (1995) further supported this finding by indicating
that people who are not alert of situational factors was slower to discover problems and may need
more time to solve the problem. It was also found in Hsu et al. (2010) study that commitment
displayed by corporate is a significant factor that contributes to safety supervision and practices in
an organization. A similar result was also supported by other safety studies like Dedobbeleer and
Beland (1991); Flin et al. (2000) and Zohar and Luria (2005) that identified significant positive impact
on safety performance through management involvement and commitment in safety management
processes.
Roles and Responsibilities
In emergency response, the understanding of each individual and organization responsibility

is important in the making of an effective ERP. The main focus of identifying responsibilities is what
they should do and whom to report during an emergency. All level of employees must be trained
and given brief on each individual roles and responsibility in response to any emergency or disaster
before, during and after an emergency. Emphasis on how to establish communication, managing
resources and assets, managing security and safety, and managing utilities are some areas that need
attention in defining roles and responsibilities (Joint Commission Resources, 2008). Thus,
organization needs to outline roles and responsibility in emergency response through planning. This
is further support by Kramer et al. (2009), who stated that for an ERP to work effectively, the roles
and responsibilities must be assigned to individuals. These people must then be trained in order for
them to know and understand their responsibilities.
Chain of Command
One of the elements of ERP is to have a chain of command. Chain of command refers to the
incident management of the organization which has got an orderly line of authority within the ranks
47
(FEMA, n. d.). In the event of an emergency or disaster, the chain of command can minimize the
confusion among employees and visitors within the plant by taking charge of the situation and
making decisive decision in controlling and managing the situation (Gustin, 2010). The chain of
command in an organization must be clear and every individuals who is elected should understand
well of their position and responsibilities. The chain of command must be flexible to response to
multiple emergencies such as fire, chemical spillage or utility breakdown (Barth et al., 2002). A study
by Smith (2010) on respondents that experienced hurricane Katrina in 2005 has identified the failure
of the chain of command in providing clear directives and making decision in the management of the
disaster. The respondents have requested for an improvement of the state disaster chain of
command.
Control of plant
The most important element in the controlling of plant during emergency is having an
evacuation plan in place. According to Gustin (2010), evacuation plan must be written and
communicated for two reasons. Firstly, the plan will provide the occupants of the building specific
information on procedure of an orderly evacuation in the event of emergency or disaster to a safe
area. Secondly, the evacuation plan is essential in meeting the requirement of the law in OSH. To
achieve an effective response to an evacuation plan, employee needs training. This also includes
commander to control the evacuation, the standard procedure, a clear communication system and
identifying the escape routes. It is also crucial for the emergency response management committee
to work and consult with the fire department, police and other officials to develop the appropriate
protocol and procedure for the evacuation plan. Employees must be updated with the evacuation
plan and emergency drills must be carried out (Rutherford Silvers, 2004).
Training
Training will enhance the state of readiness of all personnel involved in the emergency
response process. By conducting training such as periodic simulation exercise like table-top, full scale
mock exercise or fire drills will enable the management to identify the insufficiency of the
emergency response management system and the response procedure (Ramabrahman et al, 1996).
A study on emergency preparedness in North Dakota public school district indicated that 36% of the
responding school superintendents who took part in the ND LEAD Centre emergency response
training has attained a good competency in emergency response while those who had not attended
the training was unfortunate and performed poorly (Swiontek, 2009). This was supported by another
study of Chen (2009) on cities that performed emergency training and exercise for its employees,
where she found that those cities to be more prepared than those cities that conduct lesser training
and exercises. This shows that the corporate people are more prepared on emergency situation or
disaster by focusing on emergency response training and exercises among its employees.
Liaison with emergency services and local communities
Communities depend on the fire service and other external emergency services organization
for an effective, efficient and safety response to an emergency or disaster. Organizations that have
an ERP need to incorporating the services of the fire department, and the emergency services such
as medical, police, Red Crescent, Public Works Department, SMART Team, etc. These external
services are required not only for suppressing fire which is the common form of emergency, but also
providing assistance in a more challenging operation such as specialized and technical rescue,
emergency medical services, hazardous materials response, terrorism, road, sea and air accident and
48
to the extent of forest fire, air pollution and earthquake. It is the quick and early response of these
services in any incidents that play a key role in deciding the final outcome of the incident (Fleming,
2010).
Different types of emergency require different form of emergency services to deal with the
emergencies in ensuring the safety and health of the people. However there are cases where in
some emergency and disaster incidents, there are inadequate emergency services supports. This is
because the number of emergency services is limited by the geographical factor, time and space,
management system, communication system, training and logistic support.
Nik Hisamuddin et al. (2007) study on the emergency medical services (EMS) provider in
Malaysia was concerned about the lack of integration between agencies such as the ambulance
services, police and the fire departments during an emergency situation. The case is the same for the
EMS in Zimbabwe where Thomson (2005) has raised the issues of long emergency response time,
long patient transport distance, very high patient workload and poor resources. In a fire incident
occurred at a discotheque in Gothenburg 1998, the tragedy that claimed 63 lives and injured 213
was a chaos due to lack of hospital space and inadequate emergency services support (Cassuto &
Tarnow, 2003).
Based on above literature, the following research framework was proposed.
Independent Variable Dependent Variable

Roles and responsibilities
Chain of command
Corporate Awareness in
Controlling of plant Emergency Response
during emergency Planning
Training
Liaison with emergency

services and local
community
Figure 1. Research framework
Based on the framework, the following hypotheses were developed:

Hypothesis 1
H1 : There is a relationship between roles and responsibilities for emergency response and
corporate awareness in emergency response planning.
Hypothesis 2
H1 : There is a relationship between chain of command to deal with emergency situation and
49
Hypothesis 3
H1 : There is a relationship between provision for controlling of plant during emergency and
Hypothesis 4
H1 : There is a relationship between training and corporate awareness in emergency response
planning.
Hypothesis 5
H1 : There is a relationship between liaison with emergency services and local community and
Hypothesis 6
H1 : The independent variables (role and responsibilities, chain of command, control of plant,
training, liaison with emergency services and local community) will influence corporate awareness in
emergency response planning.
3. Methodology
This research was conducted at a manufacturing company which is located at Senawang

Industrial Park, Negeri Sembilan. A total number of 210 employees were chosen as respondents
using simple random sampling but only 145 employees responded to the questionnaire. A pilot test
of 51 respondents was conducted prior to the main study. The data was collected from respondents
of various departments, who answered the questionnaires on the spot. With the aid of personnel
from the Safety and Health Unit, the questionnaires were then collected for analysis.
Data was gathered through questionnaires. It consist of two sections Section A and Section B.
Section A represents respondents information on gender, age, ethnic, education level, job position
and year of services. Questions relating to experience in training and emergency are also in this
section. Section B represents the main instrument that relates to the independent variables in this
study (role and responsibilities, chain of command, control of plant, training, liaison with emergency
services and local community) and dependent variable (corporate awareness). The instrument was
taken from Health and Safety Executive (n.d.).
Data was analyzed using SPSS version 19.0. Data analysis techniques like correlation and
multiple regressions were used to measure the data. A significance level of 0.05 is used to analyze
the data.
4. Findings
Relationship between independent variables and dependent variable
Five hypotheses were developing to measure the relationship between independent variables (role
and responsibilities, chain of command, control of plant, training, liaison with emergency services
and local community) and dependent variable (corporate awareness). These hypotheses were
tested using correlation analysis.
50
Table 1: Correlation analysis of independent variables and corporate awareness
Roles and Chain of Control of Training Liaison with
responsibilities command plant emergency
services
Corporate 0.380 ** 0.689 ** 0.597 ** 0.633 ** 0.668 **
awareness (p = .000) (p = .000) (p = .000) (p = .000) (p = .000)
** Correlation is significant at the 0.01 level (2-tailed).
Table 1 shows that there was a positive relationship between roles and responsibilities and
corporate awareness with r = 0.380 and p = 0.000; p < 0.05. Thus, hypothesis 1 was accepted. As a
conclusion, it was found that there was a relationship between role and responsibilities and
corporate awareness.
As for hypothesis 2, Table 1 shows that there was a positive relationship between chain of
command and corporate awareness with r = 0.689 and p = 0.000; p < 0.05. Thus, hypothesis 2 was
accepted. As a conclusion, it was found that there was a relationship between chain of command
and corporate awareness.
Table 1 shows that there was a positive relationship between control of plant and corporate
awareness with r = 0.597 and p = 0.000; p < 0.05. Thus, hypothesis 3 was accepted. As a conclusion,
it was found that there was a relationship between control of plant and corporate awareness.
As for hypothesis 4 in Table 1, the result shows that there was a positive relationship between
training and corporate awareness with r = 0.633 and p = 0.000; p < 0.05. Thus, hypothesis 4 was
accepted. As a conclusion, it was found that there was a relationship between training and
corporate awareness.
Table 1 also shows that there was a positive relationship between liaison and emergency
services with corporate awareness with r = 0.668 and p = 0.000; p < 0.05. Thus, hypothesis 5 was
accepted. As a conclusion, it was found that there was a relationship between liaisons with
emergency services and local community and corporate awareness.
Influence of independent variables towards dependent variable
Multiple regression analysis was used to test hypothesis six. Table 2 shows that the regression
results revealed the R square value of 0.622. The five independent variables together explain 62.2%
of the variance in corporate awareness where the F-value = 45.749 at p < 0.000. The magnitude of
standard coefficients (Beta), shows that chain of command (0.427) is the best predictor on corporate
awareness, followed by liaison (0.381), and control of plant (0.203). Further, of the three dimensions
(IVs), only chain of command, liaison with emergency services and control of plant were significant
predictors of corporate awareness. Thus, alternative hypothesis was accepted for chain of
command, liaison and control of plant.
51
Table 2: Multiple Regression Analysis Result

(Constant) .907 .259 3.505 .001
ROLE -.042 .067 -.040 -.632 .529
CHAIN .400 .070 .427 5.674 .000
CONTROL .211 .083 .203 2.555 .012
TRAINING -.041 .077 -.051 -.530 .597
LIASON .243 .047 .381 5.215 .000
Note:
a. Predictors: (Constant), LIASON, ROLE, CHAIN, CONTROL, TRAINING
r2 = 0.622; p = 0.000; F = 45.749
5. Discussion and Conclusion
The result of analysis identified that there is a positive relationship between roles and
responsibilities and corporate awareness. It has found that the element of roles and responsibilities
is important in ensuring the effectiveness of an ERP as profound by Czerwinski (2009), Kramer (2009)
and Mcking (2008). This study has found that this manufacturing company needs to transform the
roles and responsibilities of the emergency responders in preparing for emergency response since
the positive relationship is at a moderate positive sign. It shows that the level of understanding of
roles and responsibilities in ERP is still lacking among emergency responders and employees. To
improve the situation, management must give attention to achieving functional standard and
developing a legal tool to enforce roles and responsibilities performance (Mcking 2008).
The result of analysis shows that there is a significant relationship between chain of command
and corporate awareness. This shows that the chain of command has a major contribution to an
effective ERP as shown by an above average positive relationship. This requirement is supported by
White et al. (2010) and Sene (2008) who stated that many organizations has established their chain
of command through the concept of ICS. A study by Smith (2010) proved that effective chain of
command is vital in disaster management. The experienced from hurricane Katrina proved the chain
of command had failed due to failure of the state authority to make a comprehensive assessment of
the disaster.
The result of analysis has shown a significant positive relationship between controlling of plant
during emergency with corporate awareness in emergency response planning. This study proves that
evacuation plan is important to an organization, where this was supported by a study from Rice
(2010) in the state of Florida where he identified those who refuse to leave their houses when hit by
hurricane are those who have not experience major hurricane which shows that these people have
poor understanding the value of evacuation plan.
It was again reveal that the result shows there is a relationship between training and corporate
awareness. The study has similarities with a study by Bavelacqua & Stilp (2009) which established
that there is a requirement that all emergency responders and operational staff to be given
adequate timely training. In a study by Swiontek (2009), school superintendents that took part in the
ND LEAD Centre emergency response training are found to be more competent. This was further
52
supported by Chen (2009), who found that city which performed emergency training for its
employees was found to be more prepared for disaster.
From the analysis, it was found that both variables have a significant relationship showing the
acceptance of the alternate hypothesis (H1). The finding was supported by several studies like the
one raise by Nik Hisamuddin et al. (2007) that was concern about the importance of integration
between emergency services in providing aid during emergency response to medical needs. In a
study by Thomson (2005), he stressed the need for improvement by EMS because the long
emergency response time has hampered the effort to provide effective aid to patient or victims of
major accident.
This study was to identify the significant relationship of corporate awareness in ERP
implemented at this manufacturing company. The result of analysis has found positive relationship
between corporate awareness and all the independent variables. Anyhow, the result also shows that
the current ERP is still lacking and need improvement. Therefore, it is appropriate that remedial
action for continuous improvement be taken by the company. The company also needs to develop a
positive safety culture among its employees so that the effort taken by management who had given
their commitment will achieve its objective. The company will also need to give consideration for
organizational change in view of the changing risk and threat. It is also suggested that the study
could have more significant results with more organizations engage in this survey.
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54
THE ROLE OF GOVERNMENT AND PRIVATE SECTOR ON ECONOMIC DEVELOPMENT IN

ASEAN 5
Ferry Prasetyia
Faculty of Economic and Business, University of Brawijaya Indonesia
Email: ferry.p@ub.ac.id or ferryfeub@yahoo.com
Abstract
This research aims to analyse the of goverment and private sector on economic development in
ASEAN 5 countries in short and long run periods. This research is applying quantitative research
method by using Vector Error Correction Model (VECM). The result of this research states that private
sector (investment and consumption) in long run was more dominant than the government
expenditure during the economic growth in ASEAN 5. If the the private expenditure has influence to
the ASEAN 5 countries, the government expenditure only influenced in Indonesia. While for
government investment, the significant influence happened to Indonesia, Singapore, and Thailand.
Then, in the short run, economic growth in ASEAN 5 is more dominated by the consumption of
variable government than the other three variables. While the government investment expenditure
only influences in Malaysia, the Government consumption influences to the growth of economic in
ASEAN 5 countries exclude Indonesia. On the other hand, the private expenditure (consumption and
investment) only influences significantly to Singapore and Thailand.
Keywords: Government Expenditure, private expenditure, Economic Growth, and ASEAN 5

--------------------------------------------------------------------------------------------------------------------------
1. INTRODUCTION
The economic growth is an important factor for developing a country. The growth of economic
shows the growth of the country ability to produce goods and services (Gross Domestic Product/
GDP). A high economic growth is needed to reduce poverty and unemployment rate, and improving
income to rise quality of life. Instead of economic growth issue, regionalism economic is also another
issue to improve regional economic growth. These regionalism is a regional dependable believe and
create economic strength area. Countries geographic similarity factor in ASEAN 5 that is dominated
by developing countries and the identical growth number resulting influence to fiscal decision which
is followed by each government in ASEAN 5.
Picture 1. The Job Comparison between Government Expenditure and Private Expenditure to GDP and Economic Growth
among ASEAN 5 Countries in 2010
(Source: CIA World Factbook and IMF (economic watch and indexmundi), processed
55
The data in ASEAN 5 shows that the proportion in private xependiture to GDP is higher than the
government expenditure proportion especially in Fillipina and Indonesia. This situation may means
that private sector has dominant rule to push the economic growth in ASEAN 5. But, the data in
Fillipina and Indonesia showed that government and private expenditure are not enough effective to
push the economic growth. This is shown from all government and private expendiure that is higher
that GDP total which is acquired by both countries.
A research done by Ventelou and Bry (2005) shows that public expenditure has potential to
change the macroeconomic growth by using Data Envelopment Analysis (DEA). Also, Ghali (2003) in
Tunisia shows that the government expenditure has important rule in shaping the conomic eficiency,
resulting economic growth acceleration. The relationship between the government expenditure and
the economic growth is infuenced by some factors such as size of the government (Hseih and Lai:
1994) and components from the government expenditre themselves (Barro: 1990). Kweka and
Morissey (2000) in Tanzania also shows that the investment expenditure and government
consumption infuences the economic growth significantly. While private investment expenditure is
not significant since there is too long lag.
Ghali (1997) undertake research in Saudi Arabia and Sinha (1998) in Malaysia opposes the fiscal
decision theory which is pioneered by Keynes. The result of the research in both countries shows
that govrenment expenditure does not have impacts to economic growth. Moreover, Sodiq (2007)
also shows that applying General Least Square method, investment that is done by private does not
influence the regional economic in indonesia. Base on things stated above, the goal need to be
achieved in this research is to know how the relationship of government and private expenditures to
the economic growth in ASEAN 5 in long and short run.
2. METHOD
This research using secunder data that the source from the government and other connected
institutes publications. This researc is done in 5 ASEAN countries include Filipina, Indonesia,
Malaysia, Singapore, and Thailand in 1981-2010.
The variables which are used in this research are:

1. The economic growth (EG), is the improvement of goods and service production (output) in
a country that is seen from the growth number of GDP;
2. The government consumption expenditure (GCE), is non investment government
expenditure upon government spend burden to pay good and service purchasing routinely
and used up;
3. Government investment expenditure (GCAE), is the government investment expenditure
upon government spend burden that is used to shape capital good. This expenditure is
usually used to build public infrastructure;
4. Private consumption expenditure (PCE), is an expenditure that is done by people (non
government) for purchasing daily needs such as goods (food and non food) and services;
5. Private investment expenditure (PMT), is expenditure that is done by people for investment
not consumption such as providing new capital goods inside the country or import include
used capital goods from other countries.
By using time series data, the analysis technique which is used to know the long run and short
run relationship between government expenditure and economic growth in ASEAN 5 is Vector Error
Correction Model (VECM). The steps to use VECM analysis are:
56
3.1 Stationarity Test

The VECM analysis assumption is all data variables must be stationaire, with residual that is
characterize white noise and free from correlation (Ajija, et. Al: 2011). The non stationaire
data creates estimation result that is false or does not have artistic value. The stationarity
test that applys Augmented Dickey-Fuller (ADF) shows if the ADFstatistic number > MacKinnon
critical value, results stationaired data. If it is not stationaired, so it needs defferentiation by
reducing those data with the previous period data.
3.2 Deciding Lag Lenght

Deciding optimum lag is needed to know how long the period is neede by a variable to respon
other variable (Ajija, et. Al.: 2011). Too few lag results inaccurate actual error estimation which
make hard to estimate correctly error standart and . If there are too many lags, it reduces the
ability to refuse H0 since the too many additional parameter will reduce the degree of freedom.
Criteria that are used to know the optimal lag numbers are:
a. Akaike Information Criterion (AIC)

-2 + 2 (k + T )
b. Schwarz Information Criterion (SIC)
-2 +k
c. Haman-Quinn Information Criterion (HQ)
-2 + 2k log
Where:
1 = Log likehood function value which is equal with
- is sum of squared residual
T = Observation amount
k = Estimated parameter
from those criteria, we choose optimal lag which has final prediction error correction or having
the smallest amount in AIC, SC, and HQ among other proposed lag.
3.3 Cointegration Test

Cointegration test by using Johanssen method can be analyze through VAR model with P orde
that is shown through equation:
yt = A1yt-1 + .........+ Apyt-p + B t + t

where:
yt = Vector-k in non-stationaire variables
t = Vector-d in deterministric variables
t = Inovation vector
Then, these equation can be formulated again into:
Where:
57
Matric coefisien has T < k reduce rank that has k x T matrics and with T rank, like =
and yt is I(0). T variable is cointegration variable, while column shows cointegration
vectors. variable is adjustment parameter in VECM so that Johanssen method can be used to
estimate matric from unrestricted VAR and see the residue result from rank whether
accepted or not.
3.4 VECM Estimation

According to Ajija et. al (2011: 191), there are two ways which can be used to observe dynamic
characteristics of VECM which can be seen through response of each endogenous variable upon
shock in those variables as well as other endogenous variables which is through Impulse Response
Function and Variance Decomposition.
If time series data on the VAR model shows that there is co integration connection, therefore
VECM model can be used to detect short run characteristics of variable upon the long run value.
VECM estimation model for time series data Xt vector (p x 1) which is co integrated on each
component can be written in an equation:
Which are:
i = matrix coefficient (p x p); j=1, ...., k
= vector (p x 1) which cover every determinant component in the system
, = matrix (p x r); 0 < r < p and r is the number of linear combination o Xt element which only
affected by shock transistor
Xt-1 = error correction term, is the reverser weight mean on the co integration vector on the t-
1st data
= matrix of coefficient error correction
3.5 Impulse Response Function (IRF)

IRF describes expectation of k-periode to the front of error prediction of a variable as an effect
of innovation or shock from other variables. Therefore, the duration of shock variable effect upon
other variable until the effect is gone or back to the balancing point which is can be seen in Ajija et.
al (2011: 168).
Which are:
ij (i) = effect from structural shock
ij (0) = impact multipliers
ij (i) = cumulative multipliers
ij (i) pada saat n = long run multipliers
3.6 Forecast Error Variance Decomposition (FEVD)

Variance Decomposition is equipment in the VAR model which will separate the variation of a
number of variables which are estimated into shock components, with the assumption of variables
in those shock components is not correlated to each other. Variance Decomposition gives
information about the proportion from mobilization of the shock effect from the variables upon the
shock on other variables in the present or in the future.
58
4. RESULTS
The result test for VECM estimation in this research can fulfill various actions which are
explained before. The result of VECM test shows significance if the t-measure score of the
estimation result is larger from t-table. VECM test for variable data in ASEAN 5 shows the various
results in each country.
From the VECM test result below, we can be conclude that, in the long run, every private
expenditure variable whether it is consumption or infestation give significant influence upon
economic growth in all countries of ASEAN 5. The expenditure of the government shows various
results to the long run economic growth at every country of ASEAN 5. Besides in Indonesia,
government consumption expenditure gives significant influence to economic growth in four other
ASEAN countries. While in the case of government infestation expenditure, the effect only shows
significance to the long run economic growth in Indonesia, Singapore ad Thailand.
As for the short run, government infestation expenditure variable in the short run period only
has significant effect to economic growth in Malaysia. On the other hand, government consumption
expenditure shows significant influence to the short run economic growth at four ASEAN countries
except Indonesia. Private expenditure variable whether as infestation or consumption has equal
effect which only affect short run economic growth at Singapore and Thailand only.
59
Long Run Short Run t-tabel

Country
EG(-1) GCAE(-1) GCE(-1) PCE(-1) PMT(-1) EG(-1) GCAE(-1) GCE(-1) PCE(-1) PMT(-1)
- -0.000736 -0.006279 0.000639 0.002009 -0.239430 -54.36632 211.2132 640.2676 292.6982 1.70814
Filipina**) (-0.53779) (-6.31694) (3.26184) (6.28938) (-0.69727) (-1.27380) (2.58585) (1.60283) (1.41107)
T S S S T T S T T
- -0.000242 0.000134 5.55E-06 -7.20E-05 -1.267068 355.4439 476.7190 1714.225 665.9611 1.70562
Indonesia**) (-4.24184) (1.26564) (5.17082) (-2.65144) (-2.14276) (0.85294) (1.20487) (0.54797) (0.41902)
S T S S S T T T T
- -0.002050 0.057834 -0.019123 0.006055 0.011684 -23.95326 -24.24868 -44.34223 2.867850 1.70329
Malaysia*) (-0.72955) (6.09745) (-6.40175) (4.91666) (0.26741) (-2.92188) (-1.90074) (-0.80957) (0.04918)
T S S S T S S T T
- -0.001508 0.002323 -0.000635 0.000386 -0.163566 11.16879 376.0890 952.4462 923.2467 1.70562
Singapura*) (-2.92623) (5.68804) (-4.09871) (2.60852) (-0.28644) (0.07543) (5.12573) (2.75018) (1.88120)
S S S S T T S S S
- 0.010192 -0.011003 0.001558 -0.001090 -0.288171 46.05443 -83.49327 -558.7021 -492.2897 1.70814
Thailand**) (6.81913) (-5.39257) (3.56773) (-3.01444) (-3.51646) (1.68717) (-2.75103) (-4.54702) (-4.09579)
S S S S S T S S S
Table 1. Resume of Result Test VECM at ASEAN 5
Explanation:
nd
**) = every variable in those countries was changed to the 2 form difference T = not significant
Example: for Philippine, become DDFI_EG(-1) S = significant
*) = every variable in those country was changed to the form 1st difference ( ) = shows t-measure
Example: for Malaysia, become DMA_EG(-1)
60
From the analysis of IRF result can be conclude that:
I. Besides Indonesia, response which is given by economic growth variable upon shock/change
from government expenditure variable is not significantly different. The change of government
consumption variable in Indonesia is given response negatively but fluctuated by economic
growth, whereas on the government infestation expenditure variable, the response given is on
the opposite. If the response in Malaysia, Singapura and Thailand is fluctuated, but in the
government expenditure in Philippine is given negative response by the economic growth
variable. Fluctuations in Malaysia and Thailand are different from Singapore because the
fluctuation range on the balance line.
II. The change on the people consumption expenditure variable is given response by economic
growth variable in Indonesia, Malaysia and Thailand in fluctuation way, but range under the
balance line. If in the Philippine the shock of the people consumption expenditure variable is
given response negatively, the same thing is given response positively in Singapore.
III. The response in Malaysia is on the opposite with Philippine where the shock of people
infestation expenditure variable is given response negatively by economic growth. On the same
case in other three countries, the response given by economic growth variable is much
fluctuated. If the fluctuation mobilization in Singapore and Thailand is under the balance line,
the case in Indonesia is on the contrary.
Next, from the Variance Decomposition result, we can conclude that:
I. Economic growth gives great contribution to the economic growth itself in Indonesia, Malaysia
and Singapore up to 67%.
II. On the Indonesian and Thailand case, the contribution from government infestation expenditure
is fewer than to the economic growth. The opposite condition occurs on the infestation
expenditure which is done by private which gives greater contribution to the economic growth.
Government and private expenditure in Thailand has greater influence to the economic growth
(> 13%) than in Indonesia.
III. Contribution trend from the government and private expenditure in Singapore and Philippine
shows contrast result with the case in Indonesia and Thailand where the government infestation
expenditure has greater influence to the economic growth than the government consumption
expenditure. If at the Singapore the difference contribution between the consumption and
infestation expenditure is in the small distance, in the case of Philippine, the difference of
contribution is very big (> 18%).
5. DISCUSSION
Based on the objective, the discussion related to the influence between independent variable
upon the dependent variable is divided into two periods, which are long run and short run.
5.1 Long Run

In the long term, private infestation expenditure gives far greater influence to the economic growth
in ASEAN 5 compare to government infestation expenditure. That effect for Philippine, Malaysia and
Singapore is positive while for Indonesia and Thailand is negative. From the side of government income,
61
Indonesia and Thailand are at the highest position as countries with the highest national income in
ASEAN 5 ( > US $ 22,424,000,000.00). This is because of the government infestation expenditure in those
countries which try to build infrastructure (transportation and communication, roads, bridge) so they
will be able to increase the privates roles in the economic growth. As occur in Singapore and Malaysia,
private sector is reputed as activator in the economics so that the government must create the climate
supporting condition to infest and start to reduce their roles in economics. Malaysia is trying to increase
the private infestation through the simplifying procedure of Foreign Direct Investment (FDI) also
preparing the sufficient electricity supply.
From the estimation VECM, it shows that government infestation expenditure only has effect in
Indonesia, Singapura dan Thailand. It is because:
1. Most of the government infestation fund in those three countries is used to donate various
infrastructure and service in economics. Ideally, the effect of that expenditure upon the
economic growth cannot be seen in the short run because sometimes the finance cannot be
finished in the one year budget.
2. The change of this variable is given response by economic growth in those three countries in
fluctuation way but shows the mobilization to the positive side. Besides, the proportion of
government infestation expenditure upon national budget and GDP in Indonesia, Singapore and
Thailand in the last six years is on the lowest position in ASEAN 5.
3. Special for Singapore which is the only developed country in ASEAN 5, fiscal wisdom which is
taken by the government is directed to reach the long run economic growth compare to the
clyclical adjustment or income distribution.
On the case in Malaysia, although the national budget for the government infestation needs for the last
thirty years is always above 15% and greater than other countries in ASEAN 5, this variable does not
give effect for the long run because:
1. The Malaysian government wisdom which wants to reduce their roles in the government, also
concentrate to produce the human resource who are competent and skillful through the
supporting to the educational sector.
2. The proportion from the government infestation expenditure upon GDP in Malaysia has the
most stable fluctuation with the highest growth range compare to the other four countries (ADB
data, edited).
3. Statistically, the change of this variable is given response by economic growth in Malaysia
negatively or shows the decreasing trend.
While in the Philippine, the response which is given by the economic growth variable tends to shows
the decreasing trend. Government infestation fund which is still low (+ 15% from the total of national
budget/year), it turns out that most of it is used to build various infrastructure of bridge and the
formation of capital thing (the building of the build). Besides, the building which still has the capital
intensive affect the influence of this variable upon the economic growth still needs the long term to feel
the effect.
In the consumption sector, private expenditure also has significant effect to the economic growth in
all ASEAN 5 countries. This shows that this variable has strong effect in protecting the economic growth
in the ASEAN 5 countries in the future. The proportion from people consumption expenditure to the
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GDP in Malaysia and Singapore during the three decades is at the lowest level in ASEAN 5. This thing
probably be the cause of why this variable has the connection which both negative to the economic
growth in the related country. In the government sector, the consumption expenditure only not
significant to the economic growth in Indonesia because:
1. Indonesian government has building priorities which are too many so that the existing fund is
not maximally used. Besides, as a country which does the fiscal decentralization, the balancing
fund to the local government reach up to 1/3 from the total national budget. Around 2/3 from
the balancing fund is precisely allocated for the public allocation fund payment which is used to
pay the employees expense all of the local government officers. But, this thing is not followed
up with the existence of the infrastructure building and economical sector especially in the east
side of Indonesia so that only few areas which can feel the economic growth effect.
2. The proportion of the government consumption expenditure upon the GDP in Indonesia is at the
lowest level among the ASEAN 5 countries. From 1987 until 2010, that proportion in Indonesia
never more than 10% (ADB data, edited).
3. National budget for the government consumption in Indonesia tends to be the most fluctuated
in ASEAN 5. In the global economical crisis era in 1997-1998 although in 2008-2009, the
proportion o the government consumption expenditure upon the national budget in Indonesia
shows the greatest change which reach +15%. Government consumption expenditure is very
affected by the number of the income of the country. Indonesia become the only one country in
ASEAN 5 with the larger growth of national minus income for last 30 years, where in the crisis
era in 1997-1998 experienced the highest national decreasing income up to 59,86%.
5.2 Short Run

In the short run, government consumption expenditure more dominates its function to support the
economic growth in ASEAN 5 compare to its private expenditure. This variable has significant influence
to the economic growth in Philippine, Malaysia, Singapore and Thailand. Consumption expenditure in
the four countries mostly allocated to the social security activity also supporting activity in education
and health sector.
In the private sector, whether the consumption expenditure and people infestation has significant
effect to the economic growth in Singapore and Thailand only. ADB data shows that:
1. People consumption expenditure proportion upon GDP in the two countries for the last 30 years
shows decreasing trend. Even though for the same case in Malaysia also shows the decreasing
trend, the decrease is far smaller than the people consumption proportion decrease in
Singapore and Thailand.
2. The proportion of infestation expenditure to the GDP is never below 20%. Overall, the
proportion in both countries is at the highest level compare to the other three ASEAN 5
countries.
Besides, the proportion of workers number compare to the population in the two countries place
the highest position in ASEAN 5 with the number always more than 45% during last 30 years. The
infestation and consumption expenditure of the citizen is very influenced by their income level so that,
more labors in the country, more consumption and/or infestation expenditure which they do.
63
Test result which is not significant of the research variable according to Ghali (1997) in Saudi Arabia,
Sinha (1998) in Malaysia and Sodiq (2007) in Indonesia, research in Saudi Arabia which is recognize as a
country with the largest estimation deficit is not found the consistent result that the change of the
government expenditure has influence to the real output growth. Besides, by using General Least Square
methods, infestation which is done by the private does not affect regional economic growth. Various
cases that occur in developing countries are usually caused by the lowness of the public service, less law
security and the various government wisdoms which are not pro-business yet show the infestation
climate which is not conducive. The possible suggestions are:
1. It needs to do the rechecking of the national budget wisdom with the observation and the
implementation in every country. Government infestation expenditure for the projects
implementation which has labor intensive characteristics will certainly be more effective than
projects which have intensive capital characteristics to support the economic growth.
2. Indonesia must consider to reduce size of government and limit their role in economics because
it is not effective to increase the economic growth. It is because there are still many
enlargement areas in Indonesia whether in the province or region/city which is not supported by
the local economic sufficient analysis ability to develop local finance. This phenomenon cause
the increase of balance fund which must be prepared by central government to pay every
operational payment of operational offices in the new areas.
In the private consumption sector, test result of short run in Philippine, Indonesia and Malaysia
shows the insignificant result which can indicate that the people tend to buy hi-tech gadgets (they are
usually imported), it may be the cause of this insignificant variable to the economic growth in those
three countries. The economic in those three countries is not in the hi-tech level yet and still dominated
by natural sources sector. This thing is contrast to the consumption theory by Keynes in his book entitle
General Theory which is published in 1936. According to Mankiw (2007: 447), Keynes explained that in
the short run consumption which is done by the people is very affected by their income.
On the other hand, in the case which shows the significant correlation along with the result gotten
by Kweka and Morrissey (2000) in Tanzania, Landau (1983), Gregorio (2002) in South America, Deravajan
et. al (1996) and Bose et. al (2007). Although they have the same significant influence, but the research
result of Bose et.al (2007) shows positive correlation and reversal with other two researches. Kweka and
Morrisseys research (2000) and Deravajan et. al (1996) shows that:
1. The increase of government expenditure which positive affect negative to economic growth.
Especially Malaysia, this research result contrast to the research which is ever done by Sinha
(1998) in that country which is used variation of research variable in log.
2. Besides, government consumption expenditure has tight connectivity for the economic growth
because it has big influence to the income and consumption of the people. Most of the
countries with low income (developing countries), government consumption expenditure
become more beneficial for the economic than the infestation expenditure.
3. Citizen consumption expenditure affects positively and significantly to the economic growth
along with government consumption expenditure. Government consumption expenditure,
especially about salary will increase the people consumption expenditure. This thing must be
followed up by keeping the goods supply or service which is produced in order to avoid over
demand. Excessive consumption expenditure without followed by infestation will weaken the
related government economic because of no new job vacancy by the high inflation.
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Bose et.al (2007) also shows there is a positive relationship to support the neo-classic people growth
theory where the investation is needed in improving economic growth and in contrast with the research
done by Kweka dan Morrissey (2000). According to Kweka and Morrissey (2000), public investment still
can not push the economic growth since there is nothing and for example there is complementarity
between public investment expenditure and people investment expenditure, so the impact of the
people investment to the economic growth is still limited, then tend to be negative. The country income
is still relatively low which creates the consumption expenditure is more profitable for the economic
growth. The significant government consumption variable test result but has negative impact in Filipina
and Thailand for long run, better the estimation proportion that is used for the government
consumption expenditure is in line with the time must be reduced to shift to the expenditure that
characterize as investment.
The expenditure that characterizes as investment tend better to be the basis to support a country
economic growth continously since it is able to push the creation of vacancies which can reduce
unemployment and poverty. This process exactly impossible to be done in short time since investment
expenditure need enough long time for the economic to feel the impact. Because of a very imited
budget (budget constraint) from the national budget especially in Filipina, can be done by transferring
fund from other expenditure post to be added in government investment expenditure. Beside that,
public service partnership method can be an alternative in facing limited government fund to provide
public needs. In line with these result, Sinha (1990) suggest that the structure difference from the
government expenditure can contribute more effectively to economic growth.
In private sector, the investment expenditure improvement shows better people wealth level. The
modern countries expenditure such as Singapura is relatively small that 4 other countries and inversely
proportional to people investment expenditure. People with high income tend to spend more money for
investment. This becomes separated challenge for government bureaucrat to optimize the investment
improvement through the creation of condusive investment climate. Something that can be done is by
simplifying the capital investment procedure (the permission, providing good supporting infrastructure
for investment such as: electricity, water, transportation, and communication, also the availability of
educated, competitive, and trained labor.
6. CONCLUSION AND SUGGESTION
6.1 Conclusion
Based on the result of the test, the conclusion can be derived that in long run period, private
expenditure plays more rule to influence the economic growth in ASEAN 5. While in short run
period, the government consumption variable dominates more to influence the economic growth in
ASEAN 5 than other variables. The explanations of each country are as follows:
1. Filipina
In short run, the only consumption expenditure variable that influence the economic
growth. While in long run, instead of government investment expenditure, all existence
variables influence significantly to the economic growth.
The government investment fund is still small and is dominated by building
infrastructure and creating capital goods so that the impacts to the economic growth
65
can not be felt in very short time. On the government consumption side, mostly are
alocated for social. Also, by the economic concentration that still bases on natural
resources, with Indonesia and Malaysia, the people in Filipina tend to consume high-
technology goods
2. Indonesia
All research variables do not infuence the short run economic growth, while in long run
all variables influence the conomic growth instead of government consumption
expenditure.
The fgovernment investment expenditre is mosty used for building infrastructure so that
the impacts to the economic growth can be seen in long run only. The infrastructure
building program is more likely soid capital.
The government building priority that too much and not focus in formulating fund
makes the government has not able to use it maximally. Besides, one third of the whole
national budget is used to transfer to regionsas the fiscal decentralization practice.
These fund is mostly used for paying the government officer purchase. This has not
been balanced by building some infrastructure especially in regions in east Indonesia
which means the economic growth has still not spreaded optimally.
3. Malaysia
In short run, all government expenditure variables influence more isgnificant than private
expenditure to the economic growth. While in long run, the situation is same in what
happened in Filipina that is beside government investment expenditure, all research
variables influence the economic growth.
The government expenditure is alocated to produce reliable human resource through
education that still can not give continual effect for the improvement of peoples income fast
so that the private expenditure will not be so significant in short run.
For the last years, the Malaysia government is trying to reduce the government role in
economy sector. The private sector is beleived to be the engine of Malaysia economic so that
Malaysia has tried to simplified the investment procedure to support the private role
including to provide the supproting equipments.
4. Singapura dan Thailand
In both countries, all research variables has significant influence to the long run economic
growth, while in short run the only government investment expenditure variable that does
not influence the economic growth. Also, the government investment fund is mostly
dominated by the building economic sector and infrastructure so that the impact to the
economic growth is seen in long run period. The investment that still in the form of capital
solid creates insignificant private expenditure in short run since some programs that still do
not adsorb labors in high amount.
Both countries economic are more supported by private sector so that the government
investment expenditure does not give significant impact to short run economic growth. The
government programs are mostly allocated to social or people and creating supproting
condition for private investment climate to develop.
6.2 Suggestions
Based on the conclusion above, the suggestions are as follows:
66
1. It is important to do re-investigation to the purchasing composition in National budget so that
each country gets correct and effective investment expenditure and consumption formula. The
government investment expenditure in ASEAN 5 supposes to be directed to the intensive labor
program (riil sector) to trigger the economic growth. Of course this must be followed by fund
management and thight supervising so that all kinds of building programs will be precisely
achieve the goal.
2. The very limit national budget estimation for public service investment, especially in Filipina, can
be tricked by doing public private partnership. In some other countries, if it is needed to add the
investment expenditure number, it is possible to do fund transfer from other expenditure posts
to be added to the desired government expenditure.
3. In Indonesia, the government can reduce the existed size of government. The glow of regional
expanding in Indonesia whether it is in provice level or city/regency level without being
supported by regional fiscal independent to pay the governement operational practice so that
the fund transfer that must be provided by the central government is very high. Beside that, the
building priority in this country must be more limited since remembering the scope of the
government decision that exists is still to broad and general.
4. The governement consumption expenditure improvement will push the people consumption
improvement. Filipina, Indonesia, and Malaysia must anticipate this by keeping the peoples
purchasing power. The protected goods and service production supply will not create over
demand and provide price stability. The excessive consumption expenditure without being
follwoed by investment will weak the country economic since there is not enough new vacancies
as the result of high inflation effect. In long run, the consumption must be reduced since the
consumption growth is suceptible enough to support the economy. The people consumption
pattern that easily change creates shock in economy if there is consumption change.
5. Indonesia, Malaysia, and Filipina needs to reduce the government role in economic sector to
optimize the private role. The investment improvement through creating condusive investment
climate is absolutely needed by simplifying capital investment procedure, providing enough
investment supporting infrastructures (electricity, water, transportation, and communication)
also the availability of educated, competitive, and trained labors.
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IMPACT OF DOUBLE SQUEEZE PHENOMENON ON EAST JAVA SMALL MEDIUM
INDUSTRIES (SMI) SUSTAINABILITY AFTER ASEAN CHINA FREE TRADE
AGREEMENT (ACFTA) IMPLEMENTATION
Farah Wulandari Pangestuti
Ermita Yusida
Anorti Ika Wijaya
Faculty of Economics and Business
Brawijaya University
farah.wulandari@ub.ac.id
yusi_chic@yahoo.co.id
ano_capry@yahoo.com
Abstract
The role of Small Medium Industries (SMI) in Indonesian economy has long been recognized through its
role in alleviating poverty and decreasing unemployment rate. However, Chinas products have been
becoming thread for SMIs sustainability through ACFTA scheme. This paper aims at identifying industries
in East Java, having the most sensitivity upon huge influx of cheap products imported from China, and
analyzing its implications to SMIs existence. The methodology we use are in-depth interview with some
of the respondents, combined with 3 Stage Least Square model used to determine the most
uncompetitive variant products produced by East Java SMI. The results show that SMI are facing a
double squeeze phenomenon worsening their competitiveness. Furthermore two most sensitive and
uncompetitive SMIs variant products are: (i) handicraft industries, and (ii) metal and electronic
industries. On the contrary SMI engage in clothing industries, and chemical and building material
industries are the most competitive ones. Hence SMI with natural resources input base still has their
attractiveness after the implementation of ACFTA.
Field of Research: International Trade, Small Medium Industries, Double Squeeze Phenomenon.
---------------------------------------------------------------------------------------------------------------------
1. Introduction
Small Medium Industries (SMI)s role on economic development in Indonesia are very important,
both their role on employment absorption and economic growth. Based on national statistic data,
during the last 5 years, number of employment absorption by SMIs are more than 60% from total
number of national workforce and contribute to more than 50% of GDP. This indicates that SMIs are
able to boost economic growth and reduce the level of poverty, so that SMI is a basic foundation of
national welfare.
However, with all the excellences, problems are still undergone by SMIs in this country. Mainly, the
modernization era causes SMI must be able to compete to stay survive in expanding its business. Not
only competition between SMIs, competition also occurs between SMI and big industries which have
larger economies of scale. Furthermore, after ASEAN-China Free Trade (ACFTA) agreement has been
signed, SMI should be keener in improving the quality of its products. This is happen because a lot of
69
countries are competing in marketing their goods and services to all over the world without any barriers,
so that their domestic products must be able to compete with imported products in their domestic
market.
So far, there has not been any define theory regarding the advantage and disadvantage of free
trade. According to the Classical theory of trade, the advantages of international trade are gains of
trade. As stated by Salvator (1997), gains of trade which could be occur were (i) consumption gains of
trade, which was availability of goods that could be consumed by the citizens on a country with cheaper
price, compared to when there was no trade with another country; (ii) Production gains of trade, which
was production by a country that produced a product specialty for its product with relatively more
efficient workforce compared to produce another product; and (iii) GDP gains of trade, that was an
increase in GDP regarding the increase in domestic output and consumption of a countrys citizens.
Nevertheless, gains of trade above were different in every country; depended on how big the term
of trade gained from the trade interactions. In this theory, Classical economist assumed that the market
structure was perfectly competitive. Meanwhile on the development and empirical condition, market
did not run according to Classical assumption. Perfectly competitive market is hard to find today, only
the approaching one exists. A new theory describes this Classical assumption came from Economic
Institutional Theory. The New Economic Institutional Theory stated that free trade not always gave
positive impact to a country. This happened because of asymmetric information on the market, and
market did not run according to perfectly competitive condition (North, 1990). Cost of transportation
and information neglected on the Classical Theory, prove to affect the economic transactions (Yeager,
1999). Information inequality cause free trade not always gave positive impacts. The advantageous sides
of free trade were they who had more information, as well as price (Yustika, 2008).
The existence of the brokerage and rent seeking had disrupted the market (Olson, 2001). The
brokerage who tent to have more information, often manipulate the price of goods, lead to market
distortion where price received by consumers was not really reflects the actual market price. Surely, a
lot of moral hazard in economic activity causes profit to be enjoyed by one party alone. As well as free
trade which only profitable to those who had more information than the other. With the shift of
economic order towards free trade, it could be said that SMIs face a double squeeze situation, which
was situation that come from internal factor namely productivity gap, efficiency and innovation, also
from external factor, namely pressure (Tambunan and Ubaidillah, 2008).
Based on the description above, the purpose of this study was to examine the impact of ACFTA
implementation towards sustainability of SMIs in East Java. Further, after the impact was known, the
rate of SMIs product sensitivity would be analyzed to see which industries are affected by ACFTA.
Regionalism creates market
Based on the theories of comparative advantages classical economists had promoted, every country
having different endowment factors increase their wealth by trading. International trade was becoming
a crucial factor through its sharing to sustain countries income. Krugman, et al (2012) said that the
70
growth of international trade had been more than doubled recently. This process was accelerated by the
formation of Regional Trade Area (RTA).
There were several reasons why regional cooperation occurs, however we could classify at least two
of them: policy-induced integration and market-driven integration (Cihelkova, et al, 2007 in Stuchlikova,
2008). Policy-induced integration (called regionalism) involves formal economic cooperation
arrangements to liberalize or facilitate trade on a regional basis. The Free Trade Agreement (FTA) was
the most frequent institutional form of these regional arrangements. On the other hand, market-driven
integration (called regionalization) was spurred by regional growth dynamics, the emergence of
international production networks and related flows of foreign direct investments. The forms of
cooperation among countries depend on many internal and external factors and conditions on the
specific geographical, historical, cultural and political circumstances in the region, on the current
economic policy directions both at the national and global levels, etc.
Moreover, this extension of market as a result of RTA formation created new opportunity to achieve
economies of scale. Production efficiency occurred when firms spread over their costs to more number
of products. Thus, firms could sell the products in a lower price that at the end of the day could booster
their competitiveness.
This positive impact of RTA formation was not always the case. There were two concepts related to
trade creation and trade diversion that at the same time could happen in a country facing this sort of
tariff liberalization. Trade creation occurred when the lowering of tariffs allows partner country imports
to replace high-cost domestic production. Trade diversion, on the other hand, occurred when the
removal of tariffs caused trade to be diverted from a third country to the partner country despite the
fact that, the countries treated equally, the third country would be the low cost source of imports. Thus,
it depended on the degree of those two effects relatively happening in the country (Clausing, 2001).
Consumer choice among goods in relation with Characteristic of SMIs products
Theoretically, consumer behaved rationally by maximizing their utility with a certain budget
constraint. Individual indifference curve reflected how consumers chose the products they wanted to
consume in a certain rate of satisfaction. Consumers would choose any combination that was best for
them in terms of quantity. The higher the location of indifference curve from the origin, the more goods
consumers could get, the better off the consumer would be.
Indifference curve theory showed that there would be two effects influencing consumers welfare if
the price changes: substitution effect and income effect. In brief, consumers would be better if the price
of the goods or substitutable goods went down. Substitution effect revealed that consumers would tent
to move to goods that was cheaper, and would buy more on it.
Furthermore, Monroe (1973) stated from his research that pricing was an important decision due to
its effects on buyers price perception. Consumer price perceptions were interlinked with consumers
purchase intentions. Price reflected consumers willingness to pay. In relation with domestic SMIs
products which were in general had low competitiveness in terms of price, meaning that SMIs could not
produce their products efficiently and sold it in higher prices. In addition, SMIs products had many
71
substitution goods (substitutable. Instantly, this fact would affect the consumers preferences which
tent to easily moved or shift their consumptions from one good to the others.
Market imperfection and Role of middleman
New institutional economics explained the Classical assumption regarding perfectly competitive
market (Yustika, 2008). Many research also examined concerning imperfect market in international
market, both by means of pricing to market approach, which tracks pricing decisions by exporters across
markets as bilateral exchange rates change (Krugman, 1987; Knetter, 1989) and New Empirical Industrial
Organization (NEIO) methods (Genesove and Mullin, 1998). The pricing to market approach had the
advantage of not requiring data on quantity adjustments associated with the price changes. However, it
revealed little about the extent of market power and type of game played by firms. Another drawback
was that in general it failed to distinguish price discrimination from other phenomena such as product
differentiation. On the other hand, NEIO methods focused on structural models of supply and demand
and on measuring mark-ups over marginal cost.
Furthermore, this imperfect market causes the existence of middleman (brokerages) in the trade.
This was caused by asymmetric information in the market, led to the emergence of transaction cost that
ought to be taken into account. Mainly in developing countries, middlemen were thought to earn
excessive profits (Chau, Hideaki, Ravi :2009). Middlemen, trading entrepreneurs who link the
backwaters of developing countries to emerging markets nationally and especially globally, seem to be
universally reviled despite the economic service they provide. Without their capital and specialized
knowledge, high prices in growing markets might be outside the reach of the small holder in the rural
area, or of the home-based artisan in the urban slum.
Middlemen made excessive profits because of their market power, which was at the root of much of
the concern. Thus, for example, McMillan, Welch and Rodrik (2004) study the case of cashews in
Mozambique, and report that cashew growers only receive 40 to 50 percent of the border price, even
after border taxes are allowed for. They go on to note:
it is clear that the marketing channels for raw cashew nuts remain imperfectly competitive.
Farmers' incomes are depressed not only by transport and marketing costs, but also by the market
power exercised by the traders." (p 120)
Middleman caused transaction cost rose because information was costly and held asymmetrically
by the parties to exchange. As a result, although the players developed institutions to structure human
interaction, however, it resulted in some degree of imperfection of the markets. In addition, the
incentive consequences of institutions provided mixed signals to the participants, thus, even in those
cases where the institutional framework was more conducive to capturing the gains from trade than an
earlier institutional framework, there would be incentives to cheat, free ride, and so forth that would
contribute to market imperfections (North,1992).
Finally, Institutions were the rules of the game in a society; more formally, they were the humanly
devised constraints that shape human interaction. In consequence they structured incentives in
exchange, whether political, social, or economic. Because Western neoclassical economic theory failed
to take account of institutions, it was of little help in analyzing the underlying sources of economic
72
performance. It was no exaggeration to say that although neoclassical theory focused on the operation
of efficient markets.
Figure 1. Theoretical Framework
Source: author ilustration, 2012
Figure 1. showed that trade competition occurred between domestic and foreign products,
especially in the implementation of ACFTA. Supply products in the domestic and overseas markets
would affect the price and quantity, that when there was an excess supply, the market tent to be more
competitive which caused the price drops. This price suppression also caused pressure on the quantity
of production. Both of these conditions would result in continuing decline of total revenue, with the
assumption of constant total cost in the short term. Finally the domestic and foreign pressures would
reduce profit.
The hypothesis of this study could be stated as follows:
1. ACFTA had a positive impact on quantity
2. ACFTA had a negative impact on price
73
4. Methodology
There would be two methods used in this study, (i) Three Stage Least Square (3 SLS), and (ii)
sensitivity analysis. First, 3 SLS is used to analyze the impact of ACFTA towards SMIs sustainability in
East Java, looked from the product quantities and price. Model specification consisted of two
simultaneous equations below
Equation 1. Price Equation
I (1)
Where:
P = Price of domestic products
Q = Product quantity of SMIs in East Java
impV = Import value from China
expV = Export value to China
dxQ = dummy variable of quantity
d = absolute dummy variable, (1 = after ACFTA, 0 = before ACFTA)
= Error
Equation 2. Quantity Equation

I (2)
Where:
Q = Product quantity of SMIs in East Java
Vimp = Volume of import from China
Veksp = Volume of export to China
L = Workers of SMIs in East Java
I = Investment value of SMIs in East Java
d = absolute dummy variable, (1 = after ACFTA, 0 = before ACFTA
u = error
Price and quantity equations above, solved simultaneously because basically quantity and price has a
strong relationship.
Second, sensitivity analysis used to analyze types of SMI which affected and unaffected by
implementation of ACFTA. Sensitivity analysis used standard deviation to see the movement of price and
quantity, before and after the implementation of 0% tariff of ACFTA.
According to the methods mentioned above, accordingly the data used in this study was secondary
data of all SMIs in East Java in 2009 and 2010; consisted of investment value, number of workers,
production quantity, products selling, and types of products. Also, data regarding number of export and
import of East Java to and from China, both in volume and value. This data was collected from
department of industry and commerce in East Java. All of those data would be executed using 3 SLS and
simple statistic test of sensitivity analysis.
74
Operational Definition of Variables
Variables used in this study consisted of three main variables, namely dependent variable,
independent variable, and dummy variable:
1. Dependent Variable
Consisted of:
a. Price (P), production value divided by number of production of SMIs in East Java
b. Quantity (Y), number of production of SMIs in East Java on every type of SMI.
2. Independent Variable
Consisted of:
a. Sales (X1), average sales revenue of SMIs in East Java both from domestic and international
market
b. Investment value (X2), the average of the initial capital in establishment of SMIs in East Java
c. Number of workers (X3) the average number of workers yang who works on SMIs in East Java
3. Dummy Variable of ACFTA
Dummy variable was used to describe the different impact of SMIs before the implementation of
ACFTA (0) and after the implementation of ACFTA (1). Implementation of 0% ACFTA has started from
January, 1 2010.
Economic downturn that hit Indonesia in the second quarter of 1997 showed how tough the
phenomenon of the Small Medium Industries, particularly in East Java, in dealing with such difficult
conditions. However, SMI is currently not strong enough in dealing with global competition as a logical
consequence given after the enactment of the ACFTA. Fear of competition between SMI products with
imported products from China based on the fact that the competitiveness of the SMI product is still very
low, especially in terms of price.
Table 1. Indonesian Competitiveness Rank
Country 2006-2007 2007-2008 2008-2009 2009-2010

Indonesia 50 54 55 54
Malaysia 26 21 21 21
Vietnam 77 68 69 69
Thailand 35 28 34 36
China 54 34 30 29
Filipina 71 71 70 87
Singapura 5 7 5 3
Source: World Economic Forum, 2009
Table 1. indicates that ranking of domestic product competitiveness was very poor when compared
to Chinese products that were 54 and 29 respectively in the year of 2009-2010. Indonesia lost even
further compared to its counterparts in ASEAN region, with Singapore in the 3rd position, Malaysia in the
21st, and Thailand in the 36th. Indonesian products only win over products from Vietnam and Philippines.
75
Furthermore, in addition to competing with cheaper Chinese import products, SMIs products also
had to compete with products produced by domestic big industries. Theoretically, big industries
experienced economies of scale in producing goods so that they could sell products in more competitive
prices. In fact, this double squeeze phenomenon could threaten the existence of SMI. Considering the
role of SMI was very important in absorbing labor in East Java, the government should make policies to
help SMI improve their product competitiveness.
Figure 2. Characteristics of Domestic Big Industries and SMI in 2010
Source: Department of industry and commerce in East Java, modified, 2011
The significance of SMI in East Java economy could be shown in the bar chart above. SMI had
considerable business units absorbing a relatively huge number of labor compared to big industries. Big
industries tent to attract more investments than SMI. However in terms of employment, the SMI was
superior when compared to big industries. This suggests that big industries tent to be capital intensive,
while SMI tent to be labor intensive.
5.1 Statistical Result
The results of Three Stage Least Square on Table 2 below, showed the impact of the ASEAN-China
Free Trade Agreement on the sustainability of SMIs in East Java which measured by the quantity
(production) and the price of goods.
76
Table 2. Three-stage least square regression
Three-stage least squares regression
Equation Obs Parms RMSE R-sq chi2 P
Q 61 5 1.863235 0.7292 185.47 0

P 61 5 2.399204 -0.0242 10.46 0.0632
| Coef. Std.Err. z P>|z| [95% Conf. Interval]

Q |
Vimp | 0.1133735 0.0998327 1.14 0.256 -0.082295 0.309042
Vexp | -0.1035238 0.0395871 -2.62 0.009 -0.1811131 -0.0259345
L | 0.8613893 0.1893964 4.55 0 0.4901792 1.232599
I | 0.443416 0.0967894 4.58 0 0.2537123 0.6331196
dummy | -1.302489 0.4826462 -2.7 0.007 -2.248458 -0.3565193
_cons | -1.178459 1.975739 -0.6 0.551 -5.050836 2.693919
P |
Q | 0.3239819 0.1243722 2.6 0.009 0.0802169 0.5677469
impV | -0.1556973 0.1413797 -1.1 0.271 -0.4327963 0.1214018
expV | 0.0861621 0.0521832 1.65 0.099 -0.0161151 0.1884393
dxQ | -0.2864235 0.1581908 -1.81 0.07 -0.5964716 0.0236247
dummy | 5.466074 2.66815 2.05 0.04 0.2365956 10.69555
_cons | 5.034761 2.626601 1.92 0.055 -0.113283 10.18281
Endogenous variables: Q P
Exogenous variables: Vimp Vexp L I dummy impV expV dxQ
Table 2 showed that there were two main equations in the model: production quantity equation
(Q), and SMIs price of goods equation (P). Those two equations were simultaneous equation. In more
detail the two equations could be written in the following equation
a.
b.
In this research, independent variable had a significant effect towards dependent variable if P>|z|
10%, and vice versa, independent variable had insignificant effect if P>|z| 10%. Based on the
estimation results presented on Table 2, variables which had a significant effect towards production
quantity were export volume, labor, investment, and dummy variable of ACFTA. Meanwhile, variables
which had a significant effect towards price were production capacity, export value, dummy times
quantity (dxQ), and dummy variable of ACFTA. As a whole, the model used in this research was a proper
model because the value of chi-square probability was low.
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5.2 Results and Discussions
Domestic SMIs trade quantity was an endogenous variable in 3SLS model used in this research.
Based on the results presented above, it could be concluded that ACFTA gave a negative impact on
domestic SMIs trade quantity. This conclusion also took into account the assumption that all SMI did
not involve in direct export because only less than 10% SMI in East Java involved in direct export
(DISPERINDAG Data).
A Mathematical model from 3SLS estimation results could be written as model (1) below
Q = -1.18 + 0.11Vimp 0.10Vexp + 0.86L + 0.44I -1.30dummy .. (1)
Where:
Q : Domestic Quantity
Vimp : Volume of import
Vexp : Volume of export
L : Labor
I : Investment value
Dummy : Variable shows before and after implementation of ACFTA (before ACFTA = 0 ; after
ACFTA = 1)
From model (1) above, all the variables were significant at 10% alpha, except for volume of import
which significant at 25% alpha. Based on the chi-square, the variables used in this model were also
significant. We could say that the model could be used in analyzing the impact of ACFTA implementation
on domestic quantity.
Model (1) above also indicated that the trade quantity of SMI would decrease following the
implementation of ACFTA. This phenomenon occurred because the dummy variable had a negative
significant effect, meaning that there was a downward sloping curve reflected from the respective
model. Moreover, the volume of export also gave a negative impact on trade quantity. It meant that an
increase in 1 unit of volume of export would cause a decrease in 0.10 unit of domestic quantity. This
could happen due to enormous number of imports, causing domestic demand mostly supplied by
imported products.
Furthermore, volume of imports, which had a positive relationship with quantity, showed a high
error term. It meant that import products pressure caused a decline in SMIs quantity in East Java
although the market demand was increasing. Surely, with all price were equal assumptions; brokerage
was the one who gained in such a condition because they tent to import relatively cheaper products.
This brokerage would get more margins.
On the other hand, labor and investment value had a positive relationship with domestic quantity.
An increase in 1 unit of labor would be followed by an increase in 0,86 units of quantity, and an increase
in 1 unit of investment value would cause an increase in 0.44 units of quantity. These findings in line
with the theory of production with a production function consist of labor and capital. Those two
variables were the main determinant in a production process.
78
It could be conclude that the implementations of ACFTA caused a decline in domestic quantity.
Meaning that SMIs products in East Java had not been able to compete with imported products. SMI
had not been able to gain the opportunity in a high market demand. The implementation of ACFTA did
not give an advantage both to the producers and consumers, only brokerage who gained the advantage
of ACFTA implementation. Furthermore, ACFTA really affected the domestic price. Three SLS estimation
results showed the dummy variable significantly affected the domestic price. It could be explained using
model (2) below:
P = 5.03 + 0.32Q 0.15impV + 0.09expV 0.29dxQ + 5.47dummy.. (2)
Where:
P = Price of domestic goods
impV = Import value
expV = Export value
dxQ = dummy variable of quantity
According to the chi-square, model (2) above was significant with the level of confidence 99.04%.
All the exogenous variables were significant in 10% alpha except for import value variable. This model
was robust to analyze the impact of ACFTA towards domestic price.
As in model (2), ACFTA gave quite big impact towards domestic price. It meant that when ACFTA
was implemented, the price of domestic products increase rapidly. Thus, with the same value of export
and dxQ, ACFTA would still cause prices to increase. In a short run, ACFTA was good to be implemented.
This indicated that when free tariff was implemented, market demand increased and caused the price of
goods tent to increase.
The increase in price started from ACFTA implementation caused domestic market to export their
products. Products availability in the market becomes scarce. This situation encouraged the brokerage
to import cheaper products. But these cheaper products did not drop down the price of domestic
products because as we could see on model (2), import value variable do not significantly affect price.
From this fact, we could indicate that ACFTA exactly played by the brokerage.
Moreover, price was affected positively by export value. It meant that every 1 unit of increase in
export value would be followed by 0.09 increase of price. So it was true that SMI tent to export their
products directly or by using big industries as an intermediation. This was happened because imported
products already fulfilled domestic demand and domestic products could not compete with it in terms
of price.
Thus, in the short run ACFTA cause domestic price higher, where the price was played by the
brokerages. In doing the exports, SMI tent to use an intermediary service, both using the brokerage or
big industries. It could be conclude that although there was a free trade with 0 tariffs, SMI was still
unable to penetrate the international market independently.
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5.3 The Impact of ACFTA on SMIs Sustainability
The impact o ACFTA on SMI in East Java were increasing in domestic price and decreasing in SMIs
quantity of products. These were shown by 3SLS estimation results where dummy variable positively
and significantly affect the price, but negatively and significantly affect the quantity of products. This
condition indicated that ACFTA implementation gave negative impact on SMIs sustainability in East
Java. ACFTA gave an easier access to Chinese market player into Indonesian market, causing SMIs
quantity to drop down. Details were shown on Figure 3 below
Figure 3: The Framework of ACFTA Trading Process
Source : Author illustration, 2012
Figure 3 showed additional economic agent who could enter the market freely after implementation
of ACFTA, namely brokerage. Figure 3 also showed a new trade order commonly used by SMI, where
usually the target of SMIs market was intermediate demand, not final demand. So, the brokerage in this
trading process was the core. Brokerage was an intermediary from producers to consumers thus the one
who had the perfect information was the brokerage, not producers, nor consumers.
Logically, free trade would decrease the price and increase the quantity of goods. This was in line
with The Classical Theory, which the market structure was perfectly competitive market. When this
condition really happens, it would cause both additional consumer surplus and producer surplus. Details
were illustrated on Figure 4 and Figure 5 below
80
Figure 4 : Supply Curve of Positive Trade
S0
S1
Consumer surplus
P0
P1
Producer Surplus
Q0 Q1
Source: Author Illustration, 2012
Figure 5 : Supply Curve after Implementation of ACFTA
S1
Consumer Surplus
S0
P0
P1
Producer Surplus
Q1 Q0
Figure 4 showed that according to The Classical Theory, free trade could cause decreasing in price
(P) and increasing in quantity (Q). Where decreasing from P0 to P1 and addition from Q0 to Q1 boost
the surplus consumer and producer. So, according to Figure 4, free trade was advantageous both from
consumer side and producer side.
Figure 5 showed that this research gave a different result. According to Figure 5, the implementation
of ACFTA caused a rise in price from P0 to P1 and decrease in quantity from Q0 to Q1. This imply in
decreasing of consumer surplus. As for producer surplus, as long as the increase in price was larger than
the decrease in quantity, producers still had their surplus. On the other hand, if the increase in price
were smaller than the decrease in quantity, the producer surplus would also decrease.
81
In fact, producer surplus did not received by SMI in East Java, due to the existence of brokerage in
the market control. Thus, the implementation of ACFTA tent to disadvantage the consumers and SMI.
The failure of price to fall down in free trade ACFTA also could be caused by price market rigidity, where
the price in the market was difficult to fall, as well as wage rigidity. In the short run, demand in this case
was assumed to be fix, because demand was related to consumer behavior and consumer behavior tend
to unchanged in a short period of time.
The difference between theory and result of this research was also caused by the classical
assumption, which state that perfectly competitive and perfect information owned by both producer
and consumer. But in reality, perfectly competitive market did not exist. Furthermore, institutional
economics recently state that transaction cost also could affect the market.
The implementation of ACFTA was advantageous to the brokerage instead, because they could
manipulate the price. When the demand increased which would be followed by the increase in price as
well, the brokerage could use this opportunity to import products which usually cheaper. If the market
had not sufficient and the import products could not fulfill it, the brokerage would take the rest of the
products from SMI. This was why SMI quantity tent to decrease due to abundant amount of import
products in domestic market.
This negative impact of the implementation of ACFTA could be caused by 2 things, which were (i)
The Brokerages game and (ii) A high disparity of price. First, the brokerage as the owner of information
was easy to manipulate the price. The brokerage could supply goods easily and cheaply after the
implementation of ACFTA because as already acknowledged by a lot of countries, China was able to
produce goods from the finest quality to the lowest one. SMI, which tent to sell their products by
intermediaries, did not know the information in the market. SMI tent to receive information from the
intermediary, thus it could be said that asymmetric information existed on SMI. The high market
demand should be supplied by SMI, but the existence of brokerage causes the productivity of SMI
diminished. It meant that SMI only produce goods based on the brokerages demand.
The second was high disparity of price between SMI and importer. This condition often used by the
brokerage, especially after the implementation of ACFTA. The brokerages preferred to import products
because with ACFTA there would be no tariff barrier that would be levied products from China tent to be
cheaper than products made by SMI in East Java. It meant, SMI in East Java had no be able to produce
efficiently. Inefficiency could be caused by output of productions, which outnumbered from Chinese
firms. Of course, according to theory, more output produced meant more efficient a firm was, as long as
the firm had not reached its maximum point of production. This highly disparity was used by the
brokerage to gain a large amount of margin. Thus, it could be concluded that ACFTA was more
advantageous to the brokerage, compared to the producer.
5.4 Characteristics of SMI which products was Affected and Not Affected by ACFTA
ACFTA free trade gives different impact to different type of SMI in East Java. Different type of SMI
also had different degree of sensitivity in facing the ACFTA. This was reasonable due to a lot of
commodities could be found in East Java. Industries, which very sensitive to ACFTA, were industries
which underwent an increasing price and decreasing quantity on the same time in 2010.
82
Based on the movement of price and quantity on 2009-2010, not all of SMI in East Java experienced
a negative impact of ACFTA. It meant that when ACFTA was implemented, there were SMIs experiencing
a rise in price and decrease in quantity. On the other hand, there were also SMIs that could compete in
ACFTA and gain profits from it. There were also industries insensitive to ACFTA. In detail, the degree of
sensitivity of SMI could be seen on Figure 6 below:
Figure 6 : Mapping of SMIs Sensitivity among SMIs variant products towards the
Implementation of ACFTA
Figure 6 showed sensitivity mapping of SMI towards impact of ACFTA, that consist of four quadrants.
These quadrants showed SMI affected by ACFTA. The number on each quadrant showed different
degree of sensitivity of SMI towards the implementation of ACFTA. With this mapping, we could find
industries which experience impact after ACFTA and what kind of industries with the most sensitivity
after the implementation of ACFTA.
Quadrant I, consisted of SMIs that mostly affected by ACFTA. It was conditions when ACFTA was
implemented (0n 2010), they experienced a rise in price and fall in quantity. The most sensitive
industries were SMIs in handicraft, and metal and electronics. These two types of SMI were the most
sensitive industries because in 2010, the price of these respective industries rose very high and
experienced a decrease rapidly in quantity at the same time. This indicates that industries, which had a
high level of sensitivity, were industries which using the brokerage service mostly to sell their products.
Meaning that these SMIs did not fulfill the final demand but intermediate demand. Thus, SMIs in
Quadrant I were industries which were susceptive and concerned towards the implementation of
ACFTA. Thus, there might be a big effort to keep the sustainability of these industries.
Quadrant II consisted of industries, which were ready in facing the free market. During 2010, these
SMIs experience a rose in price as well as quantity. This indicated that these industries demand were
high. Moreover, these industries could compete with imported products especially from China. It could
be conclude that we did not need to worry about these industries because market demand was
increasing and not too many imported products entering the market. Although these industries also use
the brokerage service, the demand was still high so these industries still could advance more.
83
Quadrant III consisted of industries which unaffected by ACFTA. SMIs in this category were SMIs in
chemical and building materials and SMIs in clothing. The quantity of these industries rose and the price
decreased in 2010. This phenomenon happened because these industries did not rely on the brokerage
and what makes them unaffected was the price of domestic and imported products tent to be equal.
Thus, although there was a brokerage on the trading process, it was not concerned if the imported
products enter the domestic market.
Meanwhile, there was not any industry on Quadrant IV, where this quadrant describes a very poor
situation. In this quadrant, both price and quantity experience a decline. If we could see from four
quadrants above, industries which experienced the most impact from implementation of ACFTA were
industries in Quadrant I where these industries had a similar characteristics, which were very much
depend on the brokerage, also have a high level of disparity between domestic products and imported
products.
6. Conclusion and Recommendation
According to Three Stage Least Square (3SLS) estimation result, the implementation of zero tariff
ACFTA on 2010 had contributed significantly towards Small and Medium Industries (SMIs) sustainability
in East Java, which this free trade caused price tent to rise and sales volume (quantity) tent to decrease.
This phenomena showed that products came from China had overruned the domestic market, notably
after the implementation of ACFTA. Whereas, local products made by SMIs in East Java had not had a
high competitiveness yet. The main problem why SMIs could not gain from free trade was because the
existence of the brokerage (middleman) who often manipulate the market price, so that asymmetric
information in the market was very high. Furthermore, according to sensitivity analysis, it could be
concluded that the most sensitive SMIs affected by the implementation of ACFTA were SMIs in
handicraft sector, and SMIs in metal and electronic sector.
Based on the conclusion stated above, few strategies that could be conducted to actualize the gain
of trade for SMIs in East Java in a free market were:
1. Reconsideration regarding ACFTA trade policy, especially concerning import mechanism because
import was not always profitable to all party.
2. Maximizing the role of cooperative in supporting the SMIs, mainly to ease input accessibility and
sales accessibility. Thus, the asymmetric information could be minimized.
3. Lowering the cost for national product standardization certification (SNI) in order to increase the
number of SMIs that standardized their product, so that the competitiveness could be higher and
also protect the consumers from risk.
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BUDGET DECENTRALIZATION AND ECONOMIC DEVELOPMENT INEQUALITY
AMONG REGIONS IN EAST JAVA
Dwi Budi Santosa

Faculty of Economics and Business
Brawijaya University
dwibudisantosa@gmail.com
ABSTRACT
The main purpose of fiscal decentralization in Indonesia is to narrow economic development inequality
among regions. However, implementation of budget decentralization in East Java has not been able to
significantly reduce regional inequality. The main objective of this study is to identify the key components
that reduce the success of decentralization in order to diminish the degree of inequality among regions in
East Java. Stochastic Frontier Analysis (SFA) is used as the estimation method of measuring the level of
efficiency of public spending, ie for education, health and infrastructure. Each region is classified into
three groups, namely: areas with high, medium and low efficiency. The third group of the area analyzed
further by using the approach of the Public Financial Management (PFM), including nine principal
components. The results showed that during 2006 to 2011, all districts/cities in East Java has
experienced decreasing efficiency level. It is caused by the three components of the PFM, namely: (i) the
level of compliance on the basis of rules over budget execution, (ii) unappropriate indicators in arranging
budget, and (iii) unclear relationship of planning documents and budget allocation composition.
Recommendation that can be proposed are: (i) strengthening public participation in governance budget,
(ii) providing the development needs indicators, such as Human Development Index (HDI) and the
Farmers Exchange, (iii) arranging planning documents which properly reflect the region's economic
development issues, and (iv) considering to construct multi-year budget.
Field of Research: Public Finance, Decentralization, Stochastic Frontier Analysis, Inequality

-------------------------------------------------------------------------------------------------------------------------------
1. Introduction
Basically, there were three important governments roles in economic development (Musgrave and
Peggy, 1989), namely (i) providing public goods, (ii) income redistribution, and (iii) economic
stabilization. In Suharto Era, Indonesia was in centralistic regime, where central government through its
public spending, perceived less responsive in providing public goods (World Bank, 2003). Since 2001,
decentralization was expected to be able to fix weakness in public spending happened in centralistic era.
There were two reasons why decentralization of budget was hoped to be more responsive toward
citizens preference. First, Regional Budget (Income and Spending Budget Plan) must be approved by
DPRD (Regional House of Representatives) to be appointed as Regional budget. Second, during the
disposition of the budget, it was required to formalized local consultation process), namely Musrenbang
(Public consultation on development planning). With the two mechanism mentioned before,
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government spending allocation was expected to be truly reflected peoples preferences regarding
public goods needed.
However, the implementation of fiscal decentralization in Indonesia until recently perceived less
responsive towards citizens need. World Bank (2008) explained there were two phenomenons
worrisome during the implementation of decentralization in Indonesia, namely: (i) public spending
alocation from regional government in Indonesia tent to be similar, (ii) public spending corruption in
local level was larger in decentralization era than in centralization era. First phenomenon indicated that
budget decentralization in Indonesia faced a budgeting planning problem. Necessarily, budget alocation
reflected regional development problem, where development priority faced by each region was
different. Thus, budget allocation pattern between each region should be different. Moreover, the
second decentralization phenomenon reflected the effectiveness and efficiency problem in providing
public goods. Corruption indicated an aberration of public budget usage both administratively and
spending marked up, and finally resulted in unachieved output target that had been planned or
achieved, but sacrificing more costly in the process.
Regional inequality in Indonesia was a primary issue in economic development, both in

centralization and decentralization era. East Java was one of the provinces in Indonesia with the highest
regional inequality, compared to other provinces in Java. Figure 1a illustrated regional inequality in four
provinces in Java which tent to increase in decentralization era. East Java was the highest among 4 (four)
provinces. Mean while, figure 1b showed concentrated economic development in East Java in 5 (five)
regions, which were: Surabaya, Sidoarjo, Gresik, Kediri, and Malang. Economic development
concentration rate in the respective regions tent to increase until hit 60% from East Javas GDRP.
Figure 1. Regional Development Disparities and Concentrations in East Java
Source: Calculated from BPS, 1985, 1990, 2000, 2005, 2010, 2012
On the other hand, local governments role through regional budget in decentralization era tent to
increase. Figure 2 indicated the ratio of regional budget and Regional Gross Domestic Product in 38
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districts in East Java were constantly increasing. Thus, fiscal decentralization in East Java could be said
insignificantly affect the improvement of the rate of regional development inequality.
Figure 2. Contribution Regional Budget to Regional Gross Domestic Product in East Java, 2006-
2011
Source: Calculated from BPS, 2000, 2005, 2010, 2012
Based on the facts mentioned above, the main purpose of this study was to identify the key
component reducing significant success of decentralization dealing with disparity regional
development in East Java. Therefore, there were three problems need to be answered in this research,
namely:
1) Was there any improvement in technical efficiency of public budgets during
decentralization?
2) Does fiscal decentralization lead to an increase in the provision of public goods?
3) Does fiscal decentralization could improve regional income inequality in East Java?
2.Theoretical Framework
Generally, decentralization was a transfer of authority and responsibility policy of the central
governments functions on the provision of public goods to the lower level or to the private sector.
Rondinelli (2001) suggested that decentralization could be divided into three main classifications,
namely:
1) Political decentralization, which aimed to give greater authority to the citizens and elected
representatives in public decision-making;
2) Administrative decentralization, which aimed to redistribute power, responsibility, and

financial resources for providing public services among different levels of government, and
3) Economic or market decentralization, which aimed to delegate governments responsibility

for the provision of public goods to the private sector.
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The three caractheristics of decentralization above, basically had the same purpose, which was
accelerating the achievement of regional economic development. The purpose of decentralization could
be realized if decentralization implementation tent to lead to two situations, which were (i) the creation
of fiscal equalization both vertically, i.e. between the central and local governments, and horizontally,
i.e. between local governments (Jun Ma, 1999; Martinez-Vazquez dan Boex, 2001); and (ii) the increased
efficiency of procurement of public goods (Oates, 1993; Barankay, and Lockwood, 2007).
Generally, fiscal capacity between local governments was different, thus financial transfer
mechanism from central government designed to create fiscal equalization become one of the keys to
the success of decentralization (Ma, 1999). The basic principle of fiscal transfer was narrowing fiscal gap,
which was the difference between the fiscal capacities owned by local government with its fiscal needs.
With the narrow fiscal gap, transfer funds expected to balance the capacity of each region in providing
for public goods.
In addition to the fiscal equalization, the success of fiscal decentralization in economic development
also determined by capability of each region in managing its public spending, both regarding budget
efficiency and budget effectiveness. Based on the theory of fiscal federalism, greatest opportunity of
budget efficiency and effectiveness could be realized by implementing decentralization rather than
centralization (Shin, 2001). The argument was, local government had better information regarding local
citizens need on public goods , both in quantity and quality. Thus, local government could provide
public goods according to the desired specifications of its citizens. It meant the increase in efficiency and
effectiveness of the budget could be achieved by avoiding the public procurement of goods that were
not needed by local communities.
Moreover, the increase in institutional efficiency and effectiveness had greater opportunity to occur
in decentralization era than centralization era (Shin, 2011). Generally, provision of public goods needed
a complex and great organizational structure when it was provided by central government. Therefore,
local government would be able to minimize cost in providing public goods , by means of: (i) the
simplification of the executing structural organization, and (ii) a reduction of bureaucratic inaction (red
type).
Nevertheless, decentralization implementation resulted varies in few countries. There were few
studies revealed the success of decentralization in improving citizens welfare. Hsu (2004) and Ding
(2007) supported hypothesis that decentralization impacts in acceleration of regional growth in China.
Meanwhile, Stansel (2004) found same conclusion in metropolitan area in USA. Thus, study by Barankay
and Lockwood (2007) supported the success of decentralization using the fact that enhancement of
government spending efficiency in providing education service in Switzerland. On the contrary, there
were also studies revealed the failure of decentralization. For example Akin, Hutchinson, dan Strumpf,
(2005), found that decentralization gave negative impact on health care provision in Uganda. Thus,
Thornton (2006) found the failure of decentralization in accelerating economic growth in OECD
countries.
Since the results of decentralization were various, focus on the study regarding factors that
influence the success or failure of decentralization had been growing rapidly. Shin (2001) suggested to
focus on four conditions caused the failure of decentralization in provision of public goods. First, the
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problem characteristics of public goods needed in general (collective action problem), which, in essence,
almost all the region need. Thus, cooperation was needed between local governments in providing
public goods. This provision of public goods should be done centralistic in order to minimize the cost of
negotiation and coordination. Second, the existence of externality effect or spillover benefits, namely
the emergence of cost or benefit that could not be taken into account in the component of cost or
benefit in the program of provision of public goods. If decentralization was implemented in this kind of
condition, the provision of public goods in one region would become excess or shortage. For example,
road construction across several administrative region, require a government, which had a higher
authority. Otherwise, region that did not get any benefits from it, surely wont care with the cost of
construction and maintenance. Third, the existence of economies of scale, namely lower cost in
providing public goods, when the quantity was enhanced. Provision of power plants, for example, was
very inefficient if every region construct it in a small scale. Therefore, provision of public goods, which
had characteristic of economies of scale would be more efficient if it was provided centralistic. The last
was regional capacity constraint, both because of (i) institutional capacity constraint, i.e. the weakness
of organization, infrastructure, and rules, and (ii) capacity of apparatus employee constraint. These
conditions cause the failure of the implementation of decentralization in boosting the regional
development.
Basically, the success of fiscal decentralization in developing regional economy was determined by
efficient and effective public financial management (PFM). Shah (2007) stated that there were nine
aspect of PFM1) that should be done in order to reach an effective and efficient PFM performance. The
efficiency of public spending consist of three types (Kurnia, 2006), namely: (i) production efficiency was
the cost required to produce a given output, (ii) allocation efficiency associated with spending
compositions appropriate with citizens need priority, (iii) fiscal efficiency regarding source of
optimization regional revenue. Meanwhile, budget effectiveness referred to achievement of
development target planned in the financing capability constraint.
Briefly, Figure 3 illustrated theoretical framework used in this study, consisted of four stage analysis,
namely (i) decentralization was expected to reduce the regional fiscal gap, meaning that the delegation
of authority to increase the fiscal autonomy; (ii) increase in regional fiscal autonomy resulted in
increased spending capability which means a change in the allocation of public spending; (iii) changes in
the allocation of public spending priorities reflected a change in the provision of public goods needs
were more in line with public preferences; and in the end (iv) with the compatibility between the
priority of provision of public goods needs with people's preferences, performance target development,
namely regional income inequality, was expected to be achieved efficiently and effective.
1
) Nine aspects of the PFM are: (i) regulatory framework, (ii) planning and budgeting, (iii) cash management, (iv) procurement of goods or
services, (v) accounting and reporting; (vi) internal controls; (vii ) public debt and investment, (viii) asset management and (ix) audit and
external supervision.
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Figure 3. Theoretical Framework
Source: Mardiasmo (2002), modified
Based on the theoretical framework above, allocation efficiency occurred when public
spending allocation differ between region, as long as public preference on public goods
differred between regions. Production efficiency occurred when the cost of provision of
public goods spent to produce certain output. Meanwhile, budget efficiency occurred when
output produced gives impact to development performance targeted on the plan. Next, PFM
implementation was used to identify factors which affect the failure and success of
decentralization, namely achieved and unachieved allocation efficiency, production
efficiency, and budget effectivity.
3. Methodology
3.1. Measurement of Budget Decentralization
Basically, decentralization was the transfer of authority from central to local government. The
research on how big the impact of decentralization of regional economic development, usually used
three methods of measurement. First, decentralization analysis which overlooked the degree of
decentralization usually divided the time horizon into two, namely before and after the implementation
of decentralization. This measurement, in principle, compared the economic development performance
indicator before and after decentralization. For example, Akin, Hutchinson, and Strumpf, (2010) used
this approach was used to analyze decentralization impact on healthcare. Meanwhile, Hiskey and
Seligson (2003) observed decentralization impact on economic growth in Bolivia. Basically, these two
researches use decentralization as a dummy variable, score 1 during the years of the implementation of
decentralization, and 0 during non-decentralization period.
Second, measurement of the degree of decentralization was based on the ability of the region in
exploring regional or local income. In principle, measuring how much regional ability in optimizing its
potency, thus the degree of fiscal dependency decreasing. Decentralization measurement based on
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income aspect was used to observe the impact of decentralization on economic growth in China (Ding,
2007). The measurement method was based on the reality that in decentralization era the ability of the
region in exploring its income increasing (Ma, 1997; Zhang & Zou, 1998; Lin & Liu, 2000).
Third, measurement of the degree of decentralization was based on the ability of the region in
covering all the expenses, both administratively and operational expense. In principle, measuring how
much regional dependency on transfer payment from central government used to finance all the
regional governments activities. Decentralization in Switzerland, for example, used ratio of total needs
of education expense to total of central governments grant (Barankay & Lockwood, 2007).
Decentralization measurement in this study was based on regional budget (APBD) structure applied
in Indonesia, which had three types of measurement. First, ratio of autonomous local revenue
[Pendapatan Asli Daerah: PAD) to transfer (DP) or in mathematical term: . Thus, region with high
ratio indicated that decentralization degree was also high, because it had low dependency on central
government.
Second, administrative expenditure (Belanja Tidak Langsung: BTL) ratio to transfer (dana
perimbangan: DP) or in mathematical term: . The largest component of BTL was local apparatus
spending, thus BTL reflected administration cost or service. Thus, a region with high ratio meant
decentralization degree was also high. Third, ratio of development spending (Belanja Langsung: BL) to
DP or . The largest component of BL was capital expenditure, thus BL reflected the expenditure of
provision of public goods. Thus, region with high ratio of BL to DP, meant decentralization degree was
also high.
The three ratios above had strong relationship both positively and negatively2. If the increase of PAD
to DP caused increase in BL and BTL ratio to DP, then this was indicated the improvement of regional
ability in covering its expenditure needs with its own income. It meant, financial dependency to central
government was lower, or decentralization degree tent to increase. The opposite interpretation used for
negative relationship between ratio of PAD to DP, with ratio of BTL and BL to DP.
3.2. Analytical Method
Based on the purpose of this research, analytical method used consisted of two approaches. First,
SFA was used to estimate the degree of public spending efficiency, namely Infrastructure, education,
and healthcare. Basically, SFA uses production or cost function approach by calculating the ratio of input
and output (Kumbhakar and Lovell, 2003). Cost or production function estimation had an error, which
divided into two parts, namely: (i) statistical error and (ii) inefficiency. Efficiency estimation result was
used as exogenous variable in path analysis. SFA model in this study consisted of three equations which
was not a simultaneous equation, namely:
....................................... (1)
2
) Basically, spending (B) must be equal to revenue (P)n namely balance budget. Here, spending consists of two main components: BL and
BTL; meanwhile, income also consists of two main components, namely: PAD and transfer (DP). So, balace budget means B=P, and could
be explained mathematically in detail as follow: ; atau .
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.................................. (2)
................................... (3)
Where,
Edu : Spending allocation for education
Health : Spending allocation for health
Infra : Spending allocation for infrastructure
X : Educational output, in the form of number of school, number of student, number of
teacher, either primary school, junior high school, or senior high school
Z : Health output, in form of the number of medic and paramedic personnel, number of
hospital, number of community healthcare
X : Infrastructure output, in form of access to clean water, irrigation, electricity, and good
road proportion
: error
v : statistical distribution error
u : inefficiency
Second, Path Analysis was used to estimate decentralizations role on income disparity. The purpose
of Path Analysis was to simplify the analysis by identify relationship pattern between simultaneous
variables. Figure 4 illustrated model specification used to estimate the impact of decentralization to the
level of regional income disparity.
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Figure 4. Path Analysis Model
Keterangan
R_PAD_DP : Autonomus Local Revenue Ratio to transfer
R_BL_DP : Expenses For Providing Public Goods Ratio to transfer
R_BTL_DP : Development or Administrative Expenses Ratio to transfer
Infra : Allocation of Infrastructure Spending
Health : Allocation of Health Spending
Edu : Allocation of Education Spending
Eff_Infra : Budget Infrastructure Efficiency
Eff_Health : Budget Health Efficiency
Eff_Edu : Budget Education Efficiency
Inc_Cap_D : Disparity of Regional Income percapita
Source: developed from theoritical framework
Third, Focus Group Discussion (FGD) was used as approach to evaluate local PFM performance. The
main purpose of PFM analysis was to identify problems or main hindrance in effective and efficient
budget governance. PFM analysis was focused in 5 (five) main aspects: (i) local regulation, (ii) planning
and budgeting, (iii) cash management, (iv) procurement, and (v) accounting and reporting. At any given
aspect of assessment was based on the balance score card analysis.
3.3. Data and Variable
Based on the analytical method mentioned above, data used in this study was secondary data in
the form of regional budget in each East Java districts, particularly education spending, health spending,
and infrastructure spending also output from respective sector. Moreover, data regarding income per
capita from each districts in East Java also used in this study. All the data in this study were spanning
from 2005-2010. All the data were taken from Indonesia Statistical Bureau and government secretariat
94
institution, and would be examined using Path Analysis and SFA. Briefly, Table 1 described the types of
data and definition of variables used in this research.
Table 1. Data and Definition Variables

No Variable Difinition
Autonomous local revenue sourced from tax, Sharing tax income and
1 PAD
other income
2 DP Sharing tax income, general allocation fund and specific allocation fund
Expenditure to provide public services: i.e. goods expenditure, and
3 BL
capital expenditure
4 BTL Apparatus expenditure (routine)
5 Income per capita Deviation of district income per capita and regional income per capita
Allocation for Education
6 Education expenditure divided by total expenditure
Spending (Edu)
Allocation for health
7 Health spending divided by total expenditure
Spending
Allocation for
8 infrastructure Spending Infrastructure spending divided by total expenditure
(Edu)
9 Number of school number of primary school, junior high school, senior high school
10 Number of student total students in primary school, junior high school, senior high school
number of teachers from primary school, junior high school, senior high
11 Number of teacher
school in each districts/cities in East Java
Number of local
12 number of community healthcare
community healthcare
13 Number of doctor number of doctor
14 Number of paramedics number of paramedics (nurses, pharmacist)
15 Access to clean water amount of clean water ratio to number of citizen
16 Irrigation Technical irrigation ratio to hectare fields
17 Electricity Electricity consumption per capita
Through-traffic in good
18 Length of road in good condition divided by total length of roads
condition ratio
4. Finding and Discussion
This chapter consisted of three parts, namely: (i) statistical result, focusing on statistical
interpretation from data estimation, (ii) decentralization and budget efficiency, focusing on the impact
of decentralization towards budget efficiency, both technical efficiency and allocation efficiency, and (iii)
decentralization and effectiveness, focusing on the impact of decentralization towards budget
effectiveness.
4.1. Statistical Result
In statistical result, there were three points of discussions. First, during decentralization in 2006-
2011, fiscal ability in all local government In East Java tent to increase. Figure 4 described that on
average, ratio of PAD to DP increased. This indicated that this ratio could be used as a measurement
approach of decentralization level between regions.
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Figure 4. Average Ratio Outonomus Local Revenue (PAD) to Transfers (DP) in Budget
Decentralization, East Java, 2006-2011
Source: Calculated from BPKAD East Java.
Second, estimation result of public spending efficiency, briefly, showed tendency to decrease. Score
of SFA closed or equal to one means public spending was very efficient and it meant the other way if the
score was more than one or deviate too far from one. Estimation result of public spending efficiency
consists of three sectors, namely (i) education, (ii) healthcare, and (iii) infrastructure.
Figure 5. Efficiency Score of Education Expenditure in East Java, 2006-2010
Source: SFA Result

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Related to estimation result of education spending efficiency in East Java, Figure 5 explain that from
38 districts/cities in East Java, only 7 districts had increasing efficiency score of education expenditure,
on the other hand, there were 17 districts with decreasing efficiency score of education expenditure.
And for the rest of the districts, the efficiency score of education expenditure keep unchanged.
Therefore, it could be said that most of the local government in East Java still had not been successful in
improving spending efficiency in attempt to improve provision of education service in each region. There
was a strong presumption, unsuccessfulness most of the local government was caused by the rule of
20% minimum allocation for education expenditure. Thus, there was a tendency to allocate more than
20% although the need of education service was not as higher as stated by the rule.
Figure 6. Efficiency Score of Health Expenditure in East Java, 2006-2010
Source: SFA Result
Related to estimation result of health expenditure efficiency in East Java, Figure 6 showed seven
local governments which be able to improve their health expenditure efficiency, on the contrary there
were six local governments that had decreasing efficiency. Thus, there were 25 regions with the
efficiency score of health expenditure keep unchanged. Different from education expenditure, only few
regions had decreasing efficiency. This was indicated that most of local governments in East Java had
been able to maintain the efficiency score of health expenditure in the last five years; in fact few regions
were able to increase the efficiency.
Figure 7 explained the progress of the infrastructure expenditure management efficiency in East
Java. Seven local governments were able to improve their infrastructure expenditure efficiency, and 18
regions could keep their efficiency level. On the other hand, the rest, which were 13 regions, underwent
a decreasing efficiency level.
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Figure 7. Efficiency Score of Infrastructure Expenditure in East Java, 2006-2010
Source: SFA Result
Third, discussion regarding path analysis result divided in two stages:
Model fit result based on goodness of fit criteria implied that statistically, empirical data regarding
decentralization impact to regional inequality in East Java appropriate with the model analysis
developed based on theory. Table 2 showed that every test of the model fit criteria had qualified as a
valid model to be used as hypothesis test.
Table 2. Model Fit Summary

Goodness of fit )
Cut-off Value * Result Meaning
index
Nilai 2 diharapkan kecil dan tidak signifikan 2 = 97.535 dengan
square (2) Valid
pada probability level lebih dari 5% probability level=0.98
CMIN/DF 2.00 0.487 Valid
GFI 0.90 0.973 Valid
AGFI 0.90 0.933 Valid
TLI 0.95 1.002 Valid
CFI 0.95 1.000 Valid

RMSEA 0,08 0.000 Valid
*) Rule thumb (Ferdinand, 2002)
The impact of decentralization estimation result toward regional income disparity in East Java based
on path analysis result. Estimation result showed five insignificant equations. Accepted error term in this
analysis was five percent or less. Table 3 showed that each change in regions ability both in BL and BTL
insignificantly affected health expenditure allocation. This indicated that health allocation different in
each region. On the other hand, every change in regions ability in spending significantly and positively
affected education and infrastructure expenditure, except it negatively affects two types of spending,
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namely: (i) BTL on infrastructure expenditure allocation, and (ii) BL on education expenditure allocation.
Table 2 also suggested that public expenditure efficiency did not have any effect in disparity of regional
income per capita, except for budget infrastructure efficiency. Furthermore, public expenditure
allocation positively affected the disparity of regional income per capita, except for infrastructure
expenditure allocation.
Table 3. Result of Path Analysis

No. Equations Est. S.E. C.R. P
1 Ratio BL to DP <--- Ratio PAD to DP 0.896 0.162 5.545 ***
2 Ratio BTL to DP <--- Ratio PAD to DP 4.452 0.641 6.946 ***
3 Alocation of Infrastructure Spending <--- Ratio BL to DP 0.123 0.027 4.601 ***
4 Alocation of Infrastructure Spending <--- Ratio BTL to DP -0.019 0.006 -2.999 0.003
5 Alocation of Education Spending <--- Ratio BL to DP -0.424 0.046 -9.241 ***
6 Alocation of Education Spending <--- Ratio BTL to DP 0.034 0.011 3.15 0.002
7 Alocation of Health Spending <--- Ratio BL to DP 0.003 0.023 0.121 0.904
8 Alocation of Health Spending <--- Ratio BTL to DP 0.004 0.005 0.779 0.436
9 Disparity of Regional Income percapita <--- Budget Health Efficiency -0.002 0.005 -0.461 0.645
10 Disparity of Regional Income percapita <--- Budget infrastructure Efficiency 0.244 0.106 2.314 0.021
11 Disparity of Regional Income percapita <--- Budget Education Efficiency -0.002 0.012 -0.196 0.845
12 Disparity of Regional Income percapita <--- Allocation of Education Spending 4.776 2.28 2.095 0.036
13 Disparity of Regional Income percapita <--- Allocation of Infrastructure Spending 0.421 4.793 0.088 0.930
14 Disparity of Regional Income percapita <--- Allocation of Health Spending 16.287 5.933 2.745 0.006
Source: Path analysis Result
Figure 8. Result of PFM Analysis Base on Balance Scorecard Approach
Source: Calculate from FGD Result
Fourth, in general, there was high inequality of PFM capacity between districts in East Java. In this
case, score used was 1 (very good) until 10 (very poor). Thus, the highest total score indicated the
poorest PFM performance. Figure 8 described that total score of high PFM happened in Planning and
Budgeting section. This indicated that most of the regions were facing difficulty in making scale of
priority and budgeting in planning and budgeting process. Another difficulty was measuring staff
performance, where indicators used to measure staff performance still less clearly measurable. This
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could be seen from many complaints and unfair implementation of punishment and incentive, or
provide a less positive stimulus on work motivation. Furthermore, there was also high inequality
between the best in PFM performances total score, which was Blitar, and the poorest, which was Kediri
City. Here, PFM performance in Blitar about 2 times better than in Kediri. PFM performance inequality
indicated different governance budget capacity.
4.2. Budget Decentralization and Efficiency
During the implementation of fiscal decentralization in East Java, fiscal capacity of PAD tent to
increase. If this increase was caused by aggressive policy from local government to discover tax and non-
tax potency, instead of efforts to increase the efficiency of the income management; increase in local
fiscal capacity would be a contra-productive policy towards regional development. However, in case of
East Java, the possibility of contra-productive policy did not seem to be important, because the fact was
the increase in fiscal capacity also led to an increase in regions ability to cover its governments
operational needs and to improve the provision of public goods. In fact, the tendency of increasing fiscal
capacity led to an increase in BL3) larger than increase in BTL, where this kind of spending more
dominated by civil servants wage. Thus, it could be said that the implementation of fiscal
decentralization in East Java was potentially advantageous to regional development. It depend on
budget management ability to increase public spending efficiency and effectiveness. To facilitate
systematic discussion, the focus of discussion in this sub-chapter was about the efficiency of budget
management; meanwhile discussion of the budget effectiveness would be presented in the next sub-
chapter.
Path analysis result stated that decentralization led to an increase in proportion of infrastructure
expenditure allocation, and on the contrary a decrease in proportion of education expenditure
allocation. On the other hand, proportion of health expenditure allocation was not affected by the
increase in local expenditure ability. Thus, except for proportion of health allocation, public spending
between regions in East Java had undergone a shift with the same pattern. Even though,
decentralization could be said insignificantly affected spending allocation efficiency, using three
arguments. First, the pattern of infrastructure and education expenditure allocation in each region tent
to be similar; which supposed to be different in decentralization era; because the priority of public
goods needs was different in each region. This indicated that regional government had weak capacity in
three aspects, namely (i) poor financial management capability to precisely identify the priority needs of
public goods, (ii) lack of preparation of the planning process that involved the participation of local
communities, and (iii) lack of infrastructure owned by local government in collecting information about
the needs of society regarding public goods.
Second, changes in spending allocation did not change the portion of administrative expenditure
and education significantly, which still in the range of more than 60% of the total expenditure. Figure 9
showed two percent decrease in the portion of administrative expenditure and 4% for education
expenditure. Thus, the provision of another public goods did not increase substantially, because the
allocation of health expenditure increased by only one percent and two percent for infrastructure.
3
) Most of the direct spending is capital expenditure directly connected to improvement of provision of public goods and service both in
quantity and quality.
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Third, SFA result showed that around 45% from 38 local governments in East Java undergone a
decreasing technical efficiency of education expenditure. On the other hand, Figure 9 implied that
proportion of education expenditure was the highest after administrative expenditure. This indicated
inefficiency in education expenditure, because the allocation of education expenditure could be
reduced, if the technical efficiency of education expenditure could be increased.
Figure 9. Budget Allocation on Average in East Java, 2006-2010
Source: Regional Budget Reports in 38 District and Province East Java.
Briefly, the implementation of decentralization in East Java still not gave real benefits to improve
budget efficiency, both allocation efficiency and technical efficiency of public spending. Those were
caused by the poor performance of PFM in (i) Planning and Budgeting, and (ii) Cash Management.
Specifically, there were three reasons why Planning and Budgeting failed to improve public spending
efficiency, when decentralization was implemented, namely:
(i) failed to identify the problem regarding public goods needed by almost all of local
governments in East Java (collective action problem),
(ii) failed to identify the existence of externality effect or spillover benefits,
(iii) failed to identify public goods which had economic of scale characteristic.
4.3. Budget Decentralization and Effectiveness
Path analysis result implied that an increase in public spending allocation did not give benefits in
improving disparity of regional income per capita. This indicated weak level of effectiveness of public
spending that occurred at the level of local government in East Java. On the other hand, PFM analysis
result showed that the weakest fields were: (i) Planning and Budgeting, (ii) Cash Management, and (iii)
Accounting and Reporting. These three weaknesses were suspected to cause a low level of effectiveness
in public spending.
101
In addition, there was a possibility of lack of efficiency of public spending allocation also contributed
to the low level of effectiveness of public spending. The amount of education expenditure, for example,
had a potential to reduce the level of effectiveness, if not accompanied by a transparent evaluation and
proper planning, such as the determination of development indicators to be achieved. Weak local
capacity of both the limited capacity of local institutions and apparatus provide a significant contribution
to the low effectiveness in public spending. Shin (2001) stated that the implementation of
decentralization was not give advantage to regional development when the local capacity was limited.
This condition seemed likely to happen in East Java, thus decentralization was less effective in improving
regional development inequality.
5.1 Conclusion
According to explanation above, there were four main conclusions as follow:
a. Fiscal capacity could be used as indicator of the implementation of decentralization in

each region. Where, region with the highest fiscal capacity could be categorized as a
region with a high decentralization level.
b. The implementation of decentralization in East Java still not providing real benefits to
improving the efficiency of public spending. This was due to the poor performance of
PFM, particularly in: (i) planning and budgeting, and (ii) cash management.
c. Decentralization through increased public expenditure did not provide benefit to the
improvement of inter-regional per capita income inequality. It meant that the
implementation of decentralization did not significantly improve the effectiveness of
public spending. It was likely due to the limited capacity of institutions and apparatus.
d. There were three reasons why decentralization failed in improving public expenditure
efficiency and effectiveness, namely:
i. Failed to identify the problem regarding public goods needed by almost all of local
governments in East Java (collective action problem),
ii. Failed to identify the existence of externality effect or spillover benefits,
iii. Failed to identify public goods which had economic of scale characteristic
5.2 Future Recommendation
Based on the conclusion above, there were few critical points in local government expenditure that
the impact of development became less optimal. It caused by 2 major problems namely:
1. Allocation efficiency of public sector expenditure remained low. Efficiency of public

expenditure allocation could be increased through some improvements, namely:
a. Improving the implementation of MUSRENBANG thus it would truly reflect the
preferences of public goods needed in the region.
102
b. Improving local government financial management competency, particularly in
identifying indicators of development thus the allocation of expenditure actually
beneficial to society.
c. Required the preparation of multi-year programs (forward estimate) in order to
achieve the efficiency and effectiveness in the budget management.
2. Effectiveness of public spending in East Java still needed to be improved. Improving
effectiveness of public spending could be done with:
a. Maintaining the planning consistency from MUSRENBANG stages to budget
planning on SKPD level
b. Additional BL was needed in terms of infrastructure expenditure in order to reach
high economies of scale for the provision of infrastructure. This could be done at
the provincial level, instead of handed it over to the local districts.
c. In general, education spending districts in East Java indicated a reduction or shift
budget allocations for BL. It was possible to improve the effectiveness of
education expenditure, but still need to look more closely on the needs of public
goods which were needed, such as infrastructure. Thus, the reduction in the
budget of the education sector should be diverted to infrastructure spending.
Model analysis in this study still had limitations. Efficiency estimation using SFA did not consider the
quality aspect of public goods. Thus, the development of estimation models that took into account the
difference in the efficiency of service quality between regions into future research agenda.
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Applications. Part One: Theory and Concepts. Fiscal Policy Training Program 2001. Fiscal
Decentralization Course. July 23 August 3, 2001. World Bank Institute and Georgia State
University. Andrew Young School of Policy Studies. Atlanta. Georgia.
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Applications. Part Two: Simulating the Allocation of Transfers. Fiscal Policy Training Program
2001. Fiscal Decentralization Course. July 23 August 3, 2001. World Bank Institute and Georgia
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International Studies Program. Working Paper #01-1 January 2001. Andre Young School of Policy
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of Public Economics, 67, pp. 221240.
104
INFLUENCE OF LOCAL TAX AND LOCAL RETRIBUTION TOWARD THE LOCAL
FINANCIAL INDEPENDENCE
(Research on the Local Government of the Bandung City)
Diana Sari
Destria Vidiantini
Bandung Indonesia
diana_sari570@yahoo.com
ABSTRACT
Local autonomy causes the authority of the central government in several areas delegated to local
authorities. Purpose of the transfer of power, among others, is to create a better government
organization (good governance) that is characterized by the increase of local independence. The
implementation of local autonomy requires local government to have greater financial independence.
The higher the financial independence, the better quality public services provided by the region. The
purpose of this study was to determine how much influence of local tax and local retribution on local
financial independence of Bandung government administration. The research methodology used in this
study is a descriptive analysis method, while to obtain data by conducting field research supported by
the research literature The results showed that the local tax and local retribution influenced by 30.50%
of the local financial independence, while the remaining 69.50% is the influence of factors other than
local tax and local retribution.
Keywords: Local Tax, Local Retribution, Local Financial Independence

------------------------------------------------------------------------------------------------------------------
1. Introduction
Implementation of Regional Autonomy imposed since January 1, 2001 with the enactment of Law
No. 32 of 2004 as a replacement of Law No. 22 Year 1999 on Local Government gives greater authority
and responsibility to the regions proportionately. Local governments have the authority to regulate and
manage the interests of the public at its own initiative based on the aspirations of the people. This policy
provides a challenge for local governments to manage owned resources efficiently and effectively in
accordance with the capabilities capacity of each region.
Through regional autonomy, authority of central government in several areas delegated to local
authorities. Transfer of power is of course not without purpose. Purpose of transfer of power is to
create an organization of better governance (good governance) that is characterized by the increase of
regional autonomy. Regional autonomy is also applied for the achievement of public welfare and to
enhance the competitiveness of the region itself.
In order to implement regional autonomy, each area must have factors such as humans, have good
executors, finances should be pretty good, the equipment must be adequate and well, and have good
105
organization and management. By looking at it, one of the factors that play an important role is the
financial factor.
Discussing the financial problems of a region after the implementation regional autonomy, could
not be separated from the sources problem of Local Owned Revenue (PAD), as one of the criteria are
region able to finance its development and local government with funding sources that are owned, one
of which is the Local Owned Revenue (PAD).
According to Law No. 33 of 2004 on Financial Balance between Central and Local Government, the
sources of Local Owned Revenue consist of:
1. Local Taxes Revenue
2. Local Retribution Revenue
3. SOE (BUMN) share of profit revenue and other investments
4. Other legitimate Local Owned Revenue
In the era of regional autonomy, one of the sources of PAD that is the most reliable to support the
implementation of development and government administration that would not rule out other sources
are Local Tax and Local Retribution.
Local Owned Revenue (PAD) should be better managed so that each can increase independence in
financial matters. According to Abdul Halim (2008) financial performance of the region can be seen from
the degree of local independence, which is a measure of how much the reception comes from the
region can meet the needs of the region indicated by the size ratio of PAD compared to total revenues.
The higher the ratio of local financial independence means that the level of local dependence on
external assistance is getting lower and vice versa.
The implementation of regional autonomy and fiscal decentralization requires local government to
have greater financial independence. The higher the financial independence, then the region will be able
to provide a higher quality of public services and the development of long-term investments (Mahmudi,
2007). Regional autonomy has been effectively implemented since 2001, but still shows the condition of
local financial independence that has not been good. Growth in expenditure needs in the region in
various sectors every year encourages the Local Government to compete in exploring PAD sources
among which are Local Tax and Local Retribution. However, the increase of local tax revenues and local
retributions cannot pursue growth regional shopping needs.
Table 1 show that the level of financial independence in Bandung City from 2001 to 2010 was below
25%. In 2006 to 2009 the Bandung City financial independence continues to decline. In 2005 the level of
financial independence of Bandung reaching 20.09%, in 2006 decreased to 18.16%, in 2007 17.04%, in
2008 15.58%, and in 2009 suffered a drastic decline in the 14.99 %, but in 2010 shows an increased
financial independence city, although still below 20%, i.e. 18.11%. This is an interesting phenomenon for
the author to undertake the study entitled "Influence of Local Tax and Local Retribution toward Local
Financial Independence (Research on the Local Government of the Bandung City).
106
Table 1: Total of Local Tax, Local Retribution and Financial Independence Year 2001-2010
Year Local Tax Local Retribution % Financial
Independence
2001 73.583.061.471,10 35.484.409.612,00 15,86
2002 103.153.173.907,92 48.760.223.699,50 21,58
2003 114.983.791.861,00 55.029.885.021,10 22,15
2004 133.554.985.454,00 61.634.485.823,75 19,92
2005 143.107.822.781,00 66.280.333.390,00 20,09
2006 164.781.409.646,00 76.015.059.933,00 18,16
2007 190.496.238.611,00 76.099.329.030,00 17,04
2008 214.433.400.986,00 72.857.118.264,30 15,58
2009 250.338.673.104,00 68.912.741.347,00 14,99
2010 301.781.987.749,00 86.471.546.547,00 18,11
Source: Budget Realization Report Bandung City; Year 2001-2010
2.1 Local Owned Revenue
Under Law No. 33 of 2004 Chapter 1 verse 18 explains that "Local Owned Revenue is revenue
derived from regional sources in its own territory to be collected by local regulations in accordance with
the legislation in force." Abdul Halim (2008:96) argues that, "Local Owned Revenue represents all local
revenues derived from the local economy sources."
2.2 Local Tax
A local tax is the most reliable revenue sources and can increase Local Owned Revenue
(PAD). Local tax provided the largest contribution to the acceptance of Local Owned Revenue
(PAD). Local tax contribution to total local revenues is also continued to increase. Definition of
local tax according to Law No. 28 Year 2009 is as follows: "Local Tax, hereinafter referred to tax,
is mandatory contribution to the regions that are owed by the individual or entity that is
enforceable under the Act, to not get rewarded directly and used for regional needs for the
maximum prosperity of the people."
2.3 Local Retribution
Mahmudin (2010:25) states that local retribution is the second contributor of source of revenue for
PAD after local tax. Even for some region, local retributions are higher than local tax. According to Law
No. 28 Year 2009 on Local Taxes and Local Retribution, Local Retribution is as follows: Local Retribution,
hereinafter referred to as the retribution, is collection of local payment for certain services or special
permits provided and / or administered by the local government for the benefit of individuals and
entities."
Types of local retribution consist of:
1) The Public Service Retribution is retribution on services provided or granted by the local
government for the purpose and benefit of the public interest and can be enjoyed by private
107
persons or entities.
2) Business Services Retribution is retribution on services provided by local governments by adhere
to commercial principles because basically may also be provided by the private sector.
3) Specific Licensing Retribution is retribution for certain activities in the context of the Local
Government granting permission to an individual or entity that is intended for development,
regulatory, judicial, and monitoring of activities, space utilization, and the use of natural
resources, goods, infrastructure, advice or certain facilities in order to protect the public interest
and protecting the environment.
2.4 Local Financial Independence

As stated in Law No. 32 of 2004, financial independence means that local governments can do
their own financing and financial accountability, implement their own, in the context of the principle
of decentralization. Definition of local financial independence proposed by Halim (2008:232) as follows:
"local financial independence is the ability of local government to finance the government's own
activities, development, and service to the people who have paid taxes and retribution as a source of
revenue needed by the region."
Local financial independence is shown by the size of the local owned revenue than the revenue
derived from other sources such as central government grants or loans. To determine the level of local
financial independence can be formulated as follows:
This independence ratio describes the level of local dependence on external resources.
Independence ratio also indicates the level of community participation in local development. That is, the
higher the independence ratio, the higher the community participation in paying taxes and retributions.
Table 2: Ratio Local Financial Independence
PAD/TPD (%) Local Financial Independence
< 10,00 Very Poor
10,01 20,00 Poor
20,01 30,00 Adequate
30,01 40,00 Modest
40,01 40,00 Good
> 50.01 Very Good
3. Research Methodology
Objects in this study are local tax and local retribution, as well as local financial independence. The
research method used in this research is descriptive analytical method. The population in this study is
the Bandung City Government Financial Statements. The data to be sampled in this study is the Bandung
City Financial Report for Fiscal Year 2001-2010. The analysis method used is multiple regression analysis
method.
108
4. Research Result
The data obtained in this study for local tax, local retribution, and the level of local financial
independence Bandung City from year 2001 to 2010 is as follows:
Table 3: Local Tax Revenue of Bandung City

Year Budget Realization Achievement
2001 Rp 66.450.000.000 Rp 73.563.061.471 110.7%
2002 Rp 98.100.000.000 Rp 103.153.173.908 105.2%
2003 Rp 117.000.000.000 Rp 114.983.791.861 98.3%
2004 Rp 126.072.000.000 Rp 133.554.985.454 105.9%
2005 Rp 137.050.000.000 Rp 143.107.822.781 104.4%
2006 Rp 154.728.981.000 Rp 164.781.409.646 106.5%
2007 Rp 186.625.927.926 Rp 190.496.238.611 102.1%
2008 Rp 213.160.908.731 Rp 214.433.400.986 100.6%
2009 Rp 255.506.475.774 Rp 250.338.673.104 98.0%
2010 Rp 291.800.000.000 Rp 301.781.987.749 103.4%
Average 103.5%
Visually, Bandung City local tax revenues development over the period year 2001-2010 can be seen
in the following graph:
Realization of local tax revenues Bandung area continued to increase from year to year, but when
viewed from the achievement, Bandung local tax revenues tend to fluctuate widely. On the average
local tax revenue achievement Bandung during the period of year 2001-2010 amounted to 103.5%
annually, in 2003 and even though the 2009 Bandung local tax revenues do not reach the target.
109
Table 4: Local Retribution Revenue of Bandung City
Year Budget Realization Achievement
2001 Rp 40.446.550.000 Rp 35.484.409.612 87.7%
2002 Rp 54.572.820.000 Rp 48.760.223.700 89.3%
2003 Rp 59.301.371.455 Rp 55.029.885.021 92.8%
2004 Rp 63.014.010.650 Rp 61.634.485.824 97.8%
2005 Rp 63.643.298.000 Rp 66.280.333.390 104.1%
2006 Rp 74.527.551.000 Rp 76.015.059.933 102.0%
2007 Rp 83.601.909.313 Rp 79.099.329.030 94.6%
2008 Rp 91.691.795.275 Rp 72.857.118.264 79.5%
2009 Rp 81.758.868.505 Rp 68.912.741.347 84.3%
2010 Rp 91.810.119.947 Rp 86.471.546.547 94.2%
Average 92.6%
Visually, Bandung City local retribution revenues development over the period year 2001-2010 can
be seen in the following graph:
Bandung City local retribution acceptance continued to increase from year 2001 to 2007, but in year
2008 and 2009 local retribution of Bandung City decreased. In terms of achievement, Bandung City local
retribution increased from year 2001 to 2005 before it finally fell in year 2006 until 2008. On average,
Bandung City local retribution during the period of year 2001-2010 amounted to 92.60% annually, which
means that the retribution budget of Bandung City barely achieved every year.
110
Table 5: Local Financial Independence in Bandung City
Year Total PAD Total Revenue Financial
Independence
2001 Rp 123.984.485.749 Rp 781.262.482.404 15.87%
2002 Rp 182.064.238.544 Rp 843.811.909.467 21.58%
2003 Rp 213.029.461.862 Rp 961.568.767.563 22.15%
2004 Rp 222.909.941.953 Rp 1.118.761.646.229 19.92%
2005 Rp 225.596.438.613 Rp 1.123.097.156.370 20.09%
2006 Rp 253.882.919.543 Rp 1.397.711.614.416 18.16%
2007 Rp 287.249.534.045 Rp 1.685.638.878.893 17.04%
2008 Rp 314.627.155.412 Rp 2.018.841.349.189 15.58%
2009 Rp 360.152.627.690 Rp 2.402.466.979.725 14.99%
2010 Rp 441.863.068.294 Rp 2.440.160.360.714 18.11%
Average 18.35%
Visually, local financial independence development in Bandung City can be seen in the following
graph:
Bandung City total local owned revenue continues to increase from year to year during the period
year 2001-2010. However, Bandung City local financial independence tends to be unstable over the
period year 2001-2010. When compared to total revenues, Bandung City local financial independence
on average only amounted to 18.35% annually. This means that the local owned revenue only fulfills
18.35% of the total government and development financial needs in Bandung City.
Having elaborated overview of research variable data, then to examine the influence of local tax and
local retribution on local financial independence, multiple regression analysis is used. Data from local tax
revenue, local retribution and local financial independence, compiled data pairs three variables used for
the calculation of regression analysis as described in Table 6.
111
Table 6: Pair of Data
Financial
Year Local Tax* Local Retribution*
Independence
2001 73,563 35,484 15,870
2002 103,153 48,760 21,576
2003 114,984 55,030 22,154
2004 133,555 61,634 19,925
2005 143,108 66,280 20,087
2006 164,781 76,015 18,164
2007 190,496 79,099 17,041
2008 214,433 72,857 15,585
2009 250,339 68,913 14,991
2010 301,782 86,472 18,108
*in million rupiah
The results of data processing using software SPSS.18 obtained the following output:
Table 7: Linear Regression Results

Unstandardize Standardized
d Coefficients
Model t Sig.
BCoefficients
Std. Error Beta
1 (Constant) 17.877 3.935 4.543 .003
X1 -.034 .021 -.955 -1.590 .156
X2 .096 .099 .580 .966 .366
a. Dependent Variable: Y
From Table 7 formed linear regression equation as follows:
Y = 17,877 - 0,034 X1 + 0,096 X2

Where:
Y = local financial independence
X1 = local tax revenue
X2 = local retribution
A constant of 17.877% indicates the average value of Bandung city local financial independence if
local tax revenues and local retributions equal to zero. Local tax revenues have coefficient marked
negative of 0.034%, which means that any increase in local tax revenue realization by 1 billion rupiahs is
predicted to lower the local financial independence by 0.034%, assuming local retribution realization
unchanged.
112
This is in line with the theory that have been suggested by Halim namely the higher the
independence ratio, the higher the community participation in paying local tax. From the data obtained
the high number of local tax are not accompanied by the rising ratio of local financial independence.
Increase in the amount of local tax generated only increase local owned revenue but not accompanied
by decrease in the number of funds transfers from the central government in which the amounts are
much larger than the local owned revenue itself.
Local retribution coefficient is positive by 0.096%, which means that any increase in the realization
of local retribution amounting to 1 billion rupiahs is predicted to increase the local financial
independence by 0.096% assuming the realization of local tax revenues unchanged. The results in Table
8 above shows that the multiple correlation coefficient value (R) amounting 0.552 indicating that the
local tax and local retribution simultaneously had a strong relationship with local financial
independence. Value of determination coefficient (R Square) of 0.305 indicates that the local tax and
local retribution simultaneously influenced by 30.50% of the local financial independence, while the
remaining 69.50% which is the influence of factors other than local tax and local retribution.
Table 8: Determination Coefficient

Adjusted Std. Error of Durbin-
Model R R Square R Square the Est im at e Wat son
1 .552a .305 .106 2.38438 1.274
a. Predictors: (Constant ), X2, X1 b. Dependent Variable: Y
Related to the phenomenon that occurred in Bandung City where the level of independence
continued to decline from year 2006 to 2009. This happens because the level of dependence of Bandung
City government to central government funding is still high. When seen from the data obtained local
owned revenue (PAD) Bandung City has continued to rise from year 2001 to 2010. But it cannot increase
the local financial independence of Bandung City because of the amount of transfers of funds from the
central government is far greater than the PAD generated by government of Bandung City.
PAD as an indicator of financial independence has not yet set as a reliable decentralization finance
source for several reasons, among others: the relatively low base of taxes / local retribution,
administration collection in areas not yet adequate and planning and supervision capacity is still low.
Local financial independence can be enhanced through the ability or performance of institutions in the
region to increase local revenues.
5. Conclusion
Local tax and local retribution of Bandung City government has increased from year to year, but it
cannot increase the local financial independence of Bandung City because of the amount of transfers of
funds from the central government is far greater than the obtained local owned revenue (PAD)
generated by government of Bandung City. Local tax and local retribution simultaneously had a strong
relationship with local financial independence. Local tax and local retributions influenced by 30.50% of
the local financial independence, while the remaining 69.50% is the influence of factors other than local
tax and local retribution.
113
Acknowledgement
This paper entitled Influence of Local Tax and Local Retribution Toward The Local Financial
Independence has been presented at 4th ICBER.
References
Dwirandra. (2008) Efektivitas dan Kemandirian Keuangan Daerah Otonom Kabupaten/Kota di

Provinsi Bali. Jurnal Akuntansi dan Bisnis.
Halim, Abdul. ( 2008) Bunga Rampai Manajemen Keuangan Daerah edisi revisi. Yogyakarta : UPP
AMP YKPN.
Haryanto, Joko Tri. ( 2003) Potret PAD dan Relevansinya Terhadap Kemandirian Daerah.
Mahmudi. (2007) Analisi Laporan Keuangan Pemerintah Daerah. Yogyakarta : UPP STIM YKPN
Mahmudin. (2010) Managemen Keuangan Daerah. Yogyakarta : Erlangga.
Nazir, Moh. (2003) Metode Penelitian. Ghalia Indonesia: Jakarta.
Undang-undang Nomor 28 Tahun 2009 Tentang Pajak Daerah dan Retribusi Daerah.
Undang-undang Nomor 32 Tahun 2004 Tentang Pemerintah Daerah.
Undang-undang Nomor 33 Tahun 2004 Tentang Perimbangan Keuangan antara Pemerintah
Pusat dan Daerah.
114
REVIEW OF ANALYSIS SOURCES AND THE USING OF CASH
AT PT PINDAD (PERSERO)
Debbie Christine
Rina Rismawati
Indonesia
debbie.christine@widyatama.ac.id
debbie.dr75@yahoo.com
ABSTRACT
Financial report is one of the media in delivering information that can be used by the parties concerned
as an ingredient in the decision making consideration. The role of the financial statements are very
important in measuring the development of the company to accomplish the progressing of the company.
One report shows changes to the financial position is to report the sources and uses of cash. Reports
indicate the sources and uses of cash for a change in the cash value of the accounting period and give
reasons for those changes and show the cash value of any cash sources and uses. In the preparation of
this research, the authors do practical working at PT Pindad (Persero). The work of this practice is poured
by the authors in the research entitled Review of Analysis Sources and the Use of Cash at PT Pindad
(Persero). From the result of this data research, it is known that in 2010 the amount of cash resources at
PT Pindad (Persero) has increased. This is because in 2010 the company experienced an increase in
operating income compared to the year 2009 that would result in increased amount of cash resources.
Keywords: sources and the use of cash

------------------------------------------------------------------------------------------------------------------------------------------
1. INTRODUCTION
Cash plays an important role in running the activities of the company, because it is a cash working
capital element of the highest liquidity. Therefore setting the amount of cash is a major issue for
financial managers in managing the company's activities. That number is an indicator that shows
whether from operations can generate enough cash flow to run their business back. Financial report
serves as a conduit of information for those who need it. The role of the financial statements is critical in
measuring the development of PT Pindad (Persero) which includes the development and smooth
running of their business. Statement of cash flows reflects cash receipts and disbursements in PT Pindad
(Persero) with respect to the resources that aims to generate income.
2. LITERATURES
According to Munawir (2007:5) understanding financial statements is two of the list compiled by the end
of the accounting period for a company. The second list is a list of the balance sheet or financial position
of the list and the list of income or the income list. At the time lately has become a habit for the trusts to
register a third profit is the surplus list or lists that do not share profits or retained earnings.
115
Meanwhile, according to Donald E. Kieso (2007:6) financial reporting purposes is the objective of
financial statements is to provide useful information for investment and credit decisions, information
that is useful in assessing future cash flows, and information about enterprise resources, claims to those
resources, and changes in it.
Qualitative characteristics of financial statements in accordance with Indonesian Institute of

Accountants (2009:5) is as follows:
1. Can be understood
Quality of information in the financial statements is around simplicity to be understood by the user
immediately. For this purpose, users are assumed to have adequate knowledge of business and
economic activity, accounting and a willingness to study the information with reasonable diligence.
2. Relevant
To be useful, information must be relevant to meet the needs of users in the decision making process.
Have relevant information that may affect the quality of economic decisions users by helping them
evaluate past events, present, or future, confirm or correct, the results of the user evaluation of the
past.
3. Reliability
To be useful, information must also be reliable. Have quality information reliably if free from misleading
understanding, and reliable material errors users as sincere or honest representation of who ought to be
served or that are reasonably expected to be presented. According to Donald E. Kieso (2007:380) Cash is
the most liquid assets, a medium of exchange and a standard of measurement and the basis of
accounting for all of its posts. Meanwhile, according to Dwi Prastowo and Rifka Julianty (2008:34) states
that Cash is a highly liquid investments, short-term and are readily convertible to cash with a certain
amount without facing a significant risk of changes in value.
Analysis of the sources and uses of cash is defined as the difference between total current assets and
current liabilities, then the amount of working capital will rise or fall simply because the transactions
that affect both the current account and non-current accounts at once. Analysis of the sources and uses
of cash can provide information that allows the users to evaluate the changes in net assets, financial
structure and the ability to affect the amount of cash flows in order to adapt to changing circumstances
and opportunities. Cash flow information is useful in assessing the ability of the enterprise to generate
cash and enable users to assess and compare the present value of future cash flows. According to
Munawir (2007:157) the objective analysis of sources and uses of cash are to obtain information on the
causes of surplus (deficit) of cash during a certain period, so it can be used as a basis for decision making
on cash.
116
3. RESEARCH METHOD
The method used in the writing of this research is descriptive method that searches fact the correct
interpretation. The purpose of the descriptive method is to solve, analyze and clarify data have been
obtained and presented in a form that can provide a clear picture of the object under study.
4. ANALYSIS
Table 1: PINDAD PT (Persero)

Sources and Uses of Cash Report
December 31, 2010 and 2009
Sources of Cash Rp % Use of Cash Rp %
Net trade receivables 204 125 920 38.10 Cash and cash equivalents 4598697 0.86
Other receivables 785 400 0.15 Advance 13,565,955 2.53
Stock 42,035,986 7.85 Prepaid expenses 4608520 0.86
Prepaid taxes 26,443,649 4.94 Preformance implementation of tangible fixed assets 632 635 0.12
Revenues are still accepted 4638207 0.87 KSO assets PINDAD Dahana 356 850 0.07
Tangible fixed assets 593 161 0.11 Intangible fixed assets in the implementation 1143908 0.21
Intangible fixed assets 299 207 0.06 Unmoving inventory 220 496 0.04
Trade payables 112 645 415 21.03 Other receivables Non-current 250 124 0.05
Bank debt 8006464 1.49 Bail 35 233 0.01
Tax debt 23,219,604 4.33 Suspended load 312 565 0.06
Other payables 1500528 0.28 Restricted funds 53,559,503 10
Accrued Expenses 13,868,569 2.59 Rent received in advance 577 983 0.11
Advance sales 60,023,054 11.20 Deferred tax liabilities 2420379 0.45
Employee benefit obligations 1784857 0.33 Restricted funds 53,559,503 10
Profit / loss from restructuring 25,889,082 4.83 General reserve 628 873 0.12
Brackish earnings 9886208 1.85
unappropriated
Number of Sources of Cash 535 745 311 100 Number of Uses of Cash 136 471 224 25.47
Increase in Cash Resources 399 274 087 74.53
535 745 311 100 535 745 311 100
Source: PT Pindad (Persero)
Cash resources on PT Pindad (Persero), among others sourced from:

1. Net receivables increased
2. Inventories increased due to unsold inventory
3. Bank debt increased because the company has obtained working capital loans from banks
4. Employee benefit liabilities increased due to the hiring of new employees by the company.
The use of cash occurred in PT Pindad (Persero) is as follows:

1. Cash and cash equivalents decreased due to the payment of operating expenses, purchase of fixed
assets and pay current liabilities and long term
2. Advances for purchases declined due to contract with other companies in the installation and
maintenance services of machinery
3. Prepaid expenses decreased due to vehicle insurance payments
4. Unmoving inventories decreased due to the use of material contained supplies in warehouses that
can not be used and reused in 2010
117
In the exercise of sources and uses of cash can serve as guidelines that provide direction as well as
the tasks that must be accomplished to control and evaluate the activities of the company in the future.
For that it needs a control on the implementation of the report on the sources and uses of cash Pindad
PT (Persero). Implementation report on the sources and uses of cash Pindad Persero) is as follows:
1. Divisions and other units to prepare financial statements for transactions that occur in the
environment division and each business unit
2. Each division and business unit financial statements are required to report to headquarters
3. Headquarters to prepare financial statements for transactions that occurred in the central office
4. Headquarters preparing the combined financial statements for the transaction based on the financial
statements of all entities in accounting
5. Headquarters to prepare consolidated financial statements consolidate the financial statements of
subsidiaries and joint
6. After preparing the consolidated financial statements of the company prepared a report on the
sources and uses of cash.
5. CONCLUSIONS AND RECOMMENDATIONS
5.1 Conclusions
Based on observations and discussions that have been the author pointed out in the previous
chapter, it can be concluded as follows:
1. Preparation of the sources and uses of cash in PT Pindad (Persero) has been going well. It can be seen
from the steps in the preparation of the sources and uses of cash
2. From the analysis conducted to report the sources and uses of cash pad PT Pindad (Persero) that the
source of cash in 2010 increased compared to 2009 due to the increase of operating income
3. The process of implementation reports on the sources and uses of cash Pindad PT (Persero) for the
implementation is done by the central office, each division and other units just reported its financial
statement presentation headquarters.
5.2 Suggestions
Based on the research and anlisis above, the author tries to give input which is expected to be useful
for Pindad PT (Persero) as follows:
1. Each division or other business unit is often not timely in presenting its financial statements, and
therefore should each division or unit other transactions made in duplicate evidence of cash and
cash-out for the right time in the presentation of financial statements
2. To generate greater revenue than in previous years should the company increase sales by expanding
the market share of one of them in the general population
3. In preparing the financial statements should each division and other units in the timely reporting on
the financial statements that the central office headquarters can be the right time in preparing the
consolidated or combined financial statements.
118
Note:
This paper has been presented in 3rd International Conference on Management 2013, Penang, Malaysia,
10 & 11 Jun.
REFERENCES
Dwi Prastowo dan Rifka Julianty, 2008, Analisis Laporan Keuangan, Edisi Kedua, Yogyakarta: UPP STIM
YKPN.
Fess, Warren Reeve, 2007, Pengantar Akuntansi, Edisi Kesepuluh, Jakarta: Erlangga.
Harahap, Sofyan, S., 2004, Analisis Kritis Laporan Keuangan, Jakarta: Raja Grafindo Persada.
Ikatan Akuntan Indonesia, 2009, Standar Akuntansi Keuangan, Jakarta: Salemba Empat.
Kieso, Donald E., and Jerry J. Weygandt, Intermediate Accounting, Edisi Keduabelas, Jakarta: Erlangga.
Munawir S., 2007, Analisis Laporan Keuangan, Edisi Keempat, Yogyakarta: Liberty.
119
ANALYSIS OF RETURN ON ASSETS AND EARNINGS PER SHARE ON THE STOCK
MARKET IN THE BANKING COMPANIES IN BURSA EFEK INDONESIA (INDONESIA
SECURITIES EXCHANGE)
Silviana and Rocky
Faculty Economic
Silviana_unbara@yahoo.co.id
Silviana.msi@widyatama.ac.id
ABSTRACT
Investors need accurate information to make an investment in the capital market, so that investors do
not get stuck in adverse conditions. Investment in the stock exchange is a type of investment with a
relatively high risk, despite relatively promising big profits. This study aimed to examine the effect of
Return on Assets ratio (ROA) and Earning Per Share (EPS) of stock price at the banks.This research is an
empirical study, in which the data used in this study are secondary data. The study population was all
banks listed on the Stock Exchange in the period 2006 to 2010, which amounted to 31 banks. The
samples used in this study were 16 banks with sampling techniques using purposive sampling. Classical
assumption in the study included classic assumption. Data had been analyzed using multiple linear
regression analysis, the F test, t test, and the coefficient of determination test. Analysis of data by using
multiple linear regression method. Analysis Results of ROA on the banks showed that negative and not
significant. Results of the analysis showed that the EPS on banks significant positive effect. Results of
multiple linear regression analysis obtained ROA variable not significantly affect stock price. EPS
variables significantly influence stock price. Adjusted R square value of 0.558 means Return On Asset
(ROA), and the Earning Per Share (EPS) give a contribution of 55.8%, the stock price, while the remaining
44.2% can be explained by other variables outside the model.
Keywords: Stock Price, Return on Assets, Earning Per Share.

----------------------------------------------------------------------------------------------------------------------------------------
1. Introduction
Banking companies are extremely required in modern economic climate as mediator between the
society with excessive funding and the society who need financial help. Data obtained from Indonesia
Investor Daily on December 2010 had revealed that stock prices of PT Bank Rakyat Indonesia Tbk (BBRI)
had decreased by 5,7%, PT Bank Mandiri Tbk (BMRI) decreased by 4,4%, PT Bank BNI Tbk (BBNI)
decreased by 6%, and PT Bank BCA Tbk (BBCA) decreased by 2,3%. There are two factors that happen to
be the reasons of these lower stock prices. First, portfolio switching has occurred to the companies with
commodity base of coconut palm oil (CPO) and coal because these companies assessed to be potential
along with increase in worlds commodity price. Second, banks stock price has been adjudicated too
expensive.
Statement given by Bloomberg showed that national banks average Price to Book Value (PBV) is 3,5
times, while regional banks is between 1,28 times until 2,8 times. Meanwhile, if being assessed from
Price Earning Ratio (PER), national banks classified as upper class are in the level of 15-26 times, while
120
regional banks about 11-23 times. It means, if being judged from PBVs perspective, national banks
stock prices indeed give expression to be quite high, so does from PERs.
Even after their stock prices went on lower rate, national banks still possessed ability to produce
fantastic profits during 2010. By 2010 third quarter, BRI produced Rp 6,66 trillions net profit, Mandiri Rp
6,39 trillions, BCA Rp 6,11 trillions, BNI Rp 2,95 trillions, and Bank Niaga Rp 1,79 trillions. National banks
average net profits had grown more than 40% and had been predicted to be continued until next year. If
calculated from range January-December 2010, those stocks still score high returns. BBRI for example,
recorded return by 41,8%, BMRI by 38,3%, BBNI by 102,0%, BNGA by 192,3%, and BBCA by 32%.
Research about financial ratios benefits had been done previously and had given different
conclusions, for example research by Hartono dan Parulian (2009) showed both ROA and NPM ratio give
no effect towards stock prices movement. Research by Handoko (2008) showed EPS has significant
influence towards stock price, while other variable doesnt influenced. Research done by Widi (2010)
disclosed ROA ratios significant yet negative effect, while EPS ratio giving significant and positive effect.
The phenomena above has given conclusion that the one who has huge influence to attracts
investors is the company itself, which should possess ability to improve and repair its performance so
investors interested to invest through capital market. Assessment towards companys ability to
produces profit is important to investors, because companys profit rate could influences its issued stock
price. Companys high profit rate shall increase its ROA and EPS so the stock price would increase as
well. This research performed with the aim of examining Return On Assets (ROA) and Earning Per Share
(EPS) effects toward banking companies which have their names listed at Indonesias Stock Exchange.
2. Return On Assets (ROA)

ROA defined as companys financial ratio which related to companys ability to gain profit
(profitability) at certain rate of revenue, asset, and capital (Hanafi dan Abdul, 2007). Greater ROAs bank
would cause greater and higher banks position from asset purposes perspective (Dendawijaya, 2008).
Formula to calculate ROA is shown below:
Return On Assets = net profit x 100%

total asset
Bank Indonesia demands minimum ROA is 1.22%.
3. Earning Per Share (EPS)
EPS is ratio of income after tax divided issued common stocks, so knowing EPS could get us
information to estimate how much we are going to earn as capital investors. EPS reflect future income
or capital gain or loss. (Harahap, 2010)
121
Formula used to calculate EPS:
Earning Per Share = net profit preferred stock dividend
Issued Common stocks
4. Stock Price
Rusdin (2006) said, there are two kinds of stock price, when opened for sale for the first time at IPO
(initial public offering) and at secondary market (exchange floor).
Return on Assets
Stock Price
Earning per Share
Figure 1: Theoretical framework of the study
6. Methodology
6.1 Research Object

Object of this research are Return On Assets, Earning Per Share and stock price of the banking
companies which listed at Indonesia Stock Exchange, using secondary data acquired from financial
statements from 2006 until 2010.
6.2 Sample and data collection method

Population observed in this research is banking companies which have their names on Indonesia
Stock Exchange list amounted to 31 emittens, but only 16 would be observed as samples. Technique
used for collecting samples is purposive sampling while research method is associative method
(Sugiyono 2009). Hypothesis examined using multiple regression analysis.
122
7.1 Descriptive statistics
Result from calculation of average Return On Asset on 2006-2010:
Table 6.1: Result from Calculation of Return On Asset for Each Bank on 2006-2010
Average ROA
2006 2007 2008 2009 2010
1,52 1,57 -1,75 1,73 2,03
According to the table above, can be explained that average Return On Asset for banks recorded at
Indonesia Stock Exchange list during 2006-2010 periods happen in fluctuate way.
Result from Calculation of Average EPS for Each Bank on 2006-2010:
Tabel 6.2: Result from Calculation of Average EPS for Each Bank on 2006-2010
average EPS
2006 2007 2008 2009 2010
84,25 172,08 91,02 119,24 179,41
From the table above, information gained that earning per share (EPS) value for banks listed at
Indonesia Stock Exchange during 2006-2010 periods is fluctuating every year.
Result from Calculation of Average Stock Price for Each Bank on 2006-2010:
Table 6.3: Result from Calculation of Average Stock Price for Each Bank on 2006-2010
Average Stock Price
2006 2007 2008 2009 2010
1672,49 1843,31 1278,26 2082,68 2521,79
According to the table shown above, could be seen that changes in average stock price for banks
listed at Indonesia Stock Exchange during 2006-2010 periods are fluctuated.
7.2 Analysis
By using SPSS, multiple linear regression analysis had resulted as shown below:
123
Table 7.1:Multiple Linear Regression Equation
Coefficientsa
1 (Constant) 799,343 197,539 4,047 ,000
ROA (x1) -6,765 28,625 -,019 -,236 ,814
EPS (x2) 8,415 ,900 ,753 9,347 ,000
a. Dependent Variable: Stock Price (Y)
So the multiple linear regression quotation could be made as:

= 799,343 -6,765X1 + 8,415X2
7.3 Result from Hypothesis Examination of ROA Stock Price
T-calculated value for ROA variable is -0,236. With 5% achieved t-table value as 1,991. Because t-
calculated value < t-table value (-0,236 < 1,991) so H0 accepted, means that partially ROA doesnt give
significant influence toward stock price at Indonesia Stock Exchange.
7.4 Result from Hypothesis Examination of EPS Stock Price
T-calculated value for EPS variable has resulted as 9,347. With 5% achieved t-table value as 1,991.
Because t-calculated value > t-table value (9,347 > 1,991) so H0 refused, means that partially EPS gives
significant influence toward stock price at Indonesia Stock Exchange.
7.5 Partial Influence Produced by Each Independent Variable

Coefficientsa
Standardized
Coefficients Correlations
Model Beta Zero-order
1 ROA (x1) -,019 ,236
EPS (x2) ,753 ,747
a. Dependent Variable: Stock Price (Y)
According to the table above, calculation could be done to acquiring partial influence from each
independent variable as explained below:
ROA Influence (X1) = -0,019 x 0,236 = -0,004 or -0,45%

EPS Influence (X2) = 0,753 x 0,747 = 0,562 or 56,2%
Based on the calculation above, could be understand that variable which gives biggest influence
contribution is EPS variable (X2) as 56,2% while ROA variable (X1) only has -0,45% influence contribution.
124
7.6 Research Finding
The study findings that the factors most influence on stock price is earning per share. This research
finding according with research result has taken by Handoko (2008), the research showed EPS has
significant influence towards stock price, while other variable doesnt influenced. According with
Research done by Widi (2010) that disclosed ROA ratios significant yet negative effect, while EPS ratio
giving significant and positive effect.
7.7 Theoretical Implication

Research finding has consistently affirmed that earnings per share is able to explain the stock price.
The research finding according with theory thet EPS is ratio of income after tax divided issued common
stocks, so knowing EPS could get us information to estimate how much we are going to earn as capital
investors. EPS reflect future income or capital gain or loss. (Harahap, 2010)
8. Conclusion
Based on result from analysis and discussion which had performed, writers have taken conclusions:
1. Partially, Return On Asset (ROA) doesnt have significant influence toward stock price of banking
companies which go public at Indonesia Stock Exchange, since influence contribution only given by -
0,45%.
2. Partially, Earning Per Share (EPS) gives significant influence toward stock price of banking
companies which go public at Indonesia Stock Exchange, with influence contribution given by
56,2%.
9. Recomendation
Based on research finding, that the factor most influence on stock price is earning per share. So the
investors suggested to be more careful in observing the development of the company's performance,
in order to obtain the expected return
Note:
This paper has been presented in 3rd International Conference on Management 2013, Penang, Malaysia,
10 & 11 Jun.
References
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Dendawijaya, Lukman. 2008. Manajemen Perbankan, First Copy, Publisher: Ghalia Indonesia, Jakarta.
Elton, Edwin J and Martin J Gruber. 2003. Modern Portfolio Theory and Investment Analysis. New York.
Handoko, Wahyu. 2008. Pengaruh EVA, ROE, ROA Dan EPS Terhadap Perubahan Harga Saham. Studi
Empiris Pada Perusahaan Kategori LQ45 di BEI.
Harahap, Sofyan Syafri. 2010. Analisis Kritis atas Laporan Keuangan. Jakarta: PT Raja Grafindo
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Finance and Accounting 2(2) 51 66.
Hartono, Jogiyanto. 2008. Teori Portofolio dan Analisis Investasi. Fifth Edition. Yogyakarta: BPFE.
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Husnan, Suad. 2008. Manajemen Keuangan: Teori dan Penerapan (Keputusan Jangka Panjang).
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Ikatan Akuntan Indonesia, 2007. Standar Akuntansi Keuangan. Jakarta: Salemba Empat.
Ikatan Akuntan Indonesia, 2009, Pernyataan Standar Akuntansi Keuangan, Jakarta: Salemba
Empat.
Indriana, Novi. 2009. Effect Of DER, BOPO, ROA And EPS In Share Price Of Indonesia Stock
Exchange (IDX) On Foreign Exchange Bank.
Indriantoro, Nur dan Bambang Supomo. 2006. Penelitian Bisnis untuk Akuntansi dan Manajemen.
Yogyakarta: BPFE.
Irawati, Susan. 2006. Manajemen Keuangan. First Copy. Bandung: Pustaka.
Keown, J Arthur and John D Martin et al. 2008. Manajemen Keuangan. Jakarta: PT. Indeks.
Kusumastuti, A dan Neneng Rina. 2008. Pengaruh Earning Per Share Terhadap Harga Saham. Studi
Empiris Pada Perusahaan Manufaktur yang Terdaftar di BEI. Jurnal Akuntansi FE Unsil, Vol. 3,
No. 2.
Rusdin. 2006. Pasar Modal, First Copy, Bandung, Alfabeta.
Sasongko, Mustopo Ali. 2008. Analisa Penilaian Saham. Jurnal Akuntansi.
Sjadzali, Munawir. 2007. Analisa Laporan Keuangan. Fourth Edition. Yogyakarta: Liberty.
Sugiyono. 2009. Metode Penelitian Administrasi. Bandung: Alfabeta.
Suhartono dan Qudsi. 2009. Dasar-Dasar Teori Portofolio dan Analisis Sekuritas. Sekolah Tinggi Ilmu
Manajemen YKPN. Yogyakarta.
Sunariyah. 2010. Pengantar Pengetahuan Pasar Modal. Sixth Edition. Yogyakarta: UPP STIM YKPN.
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Tandelilin, Eduardus. 2009. Analisis Investasi dan Manajemen Portofolio. Yogyakarta : BPFE.
Widi, Janu. 2010. Analisis Pengaruh Profitabilitas Terhadap Harga Saham Pada Lembaga
Keuangan. Studi Empiris Pada Perusahaan yang Go Public di BEI Tahun 2004-2007.
Wild, John J, K.R Subramanyam dan Robert F Hasley. 2004. Financial Statement Analysis. Eighth
Edition. McGraw-Hill Education.
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JOURNAL OF GLOBAL BUSINESS AND ECONOMICS

Prof. Dr. Rosalan bin Ali Dr. Ahmad Fauzi Idris

Assoc. Prof. Dr. Norazah Mohd Suki Dr. Haslindar Ibrahim

Dr. Daisy Kee Mui Hung Dr. Zulnaidi Yaacob

Dr. Zarina Md Nor Dr. Nek Kamal Yeop Yunus

Dr. Abdul Raheem Mohamad Yusof Dr. Azlina Abd. Aziz

Dr. Nor Shaipah Abdul Wahab Dr. Lily Wisker

Dr. Shanthi.Vijaya Keerthi

ABSTARCTING AND INDEXING SERVICES

1. THE COST EFFICIENCY EFFECT ACHIEVEMENT OF THE GROSS PROFIT 1

2. FACTORS AFFECTING THE FINANCIAL PERFORMANCE OF NON-OIL INDUSTRIAL 9

4. LTV COMPLIANCE: HOW DOES IT EFFECT GOOD CORPORATE GOVERNANCE OF 39

5. EMERGENCY RESPONSE PLAN (ERP) IN A MANUFACTURING COMPANY: A 45

6. THE ROLE OF GOVERNMENT AND PRIVATE SECTOR ON ECONOMIC 59

7. IMPACT OF DOUBLE SQUEEZE PHENOMENON ON EAST JAVA SMALL MEDIUM 68

8. BUDGET DECENTRALIZATION AND ECONOMIC DEVELOPMENT INEQUALITY 85

10. REVIEW OF ANALYSIS SOURCES AND THE USING OF CASH 114

THE COST EFFICIENCY EFFECT ACHIEVEMENT OF

Keywords: Efficiency Production Costs, Gross Profit Achievement

Production Cost Production

2. Theory and Hypotheses

2.2 Gross Profit

III. Increasing the sales volume as possible.

Production Cost Achievement of

3.1 Hypothesis Testing

Production Cost Efficiency = Production Budget - Actual Cost of Production x 100%

in the following table:

4.2 The Effect of Achieving Efficiency Cost Production Gross Profit

From Table 4.3 above, the obtained values as follows:

Table 4.4: SPSS Output Correlation Coefficient Correlations

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

4.2.1 Regression analysis

Table 4.5: Output Regresi SPSS - Coefficients

4.2.2 Analysis of Coefficient of Determination

Table 4.6:Output coefficient Determination of SPSS

Adjusted Std. Error of

4.2.3 Hypothesis Testing

FACTORS AFFECTING THE FINANCIAL PERFORMANCE OF NON-OIL

Keywords: manufacturing industry, financial performance, financial ratio analysis

3. Objectives of the study

Table 5.1: Sample of the study

S. No. Name company

5.3 Explanatory Variables

5.3.2.1 Current Ratio (CR)

Current ratio = Current Assets / Current Liabilities

Quick ratio = Current Assets-(Inventory+ Prepayments) / Current liabilities

5.3.2.5 Account Receivable Turnover Ratio (ARTR)

Account receivable turnover rate = Net sales / Account receivable

5.3.2.6 Debt to Equity Ratio (DER)

Debt- to- equity ratio = Total liabilities / Total equity

Operational Activity Variables

Figure 5.2: Conceptual framework of the study

5.5 Hypotheses of the Study

6. Data Analysis and Results

6.2 Descriptive Statistics

6.3 Correlation Test

Table 6.2: Pearsons correlation coefficient

6.4 Regression Analysis