244 Int. J. Logistics Systems and Management, Vol. 24, No.

2, 2016

The effects of legal-political factors and market

competition on supply chain performance:
some findings from firms in a free trade zone

Yudi Fernando*
Graduate School of Business,
Universiti Sains Malaysia,
11800 Penang, Malaysia
Email: yudi@usm.my
*Corresponding author

Agustina Fitrianingrum
Faculty of Economics and Management,
Universitas Internasional Batam,
29442 Batam, Indonesia
Email: agustina@uib.ac.id

Christopher Richardson
Graduate School of Business,
Universiti Sains Malaysia,
11800 Penang, Malaysia
Email: christopher.richardson@usm.my

Abstract: This paper investigates the effects of legal-political factors and

market competition on supply chain performance. The data were collected from
firms in the electrical and electronics (E&E) sector in an Indonesian free trade
zone (FTZ) on the island of Batam. The E&E firms were chosen because of
their significant contribution to Indonesian exports. The sampling of this study
was E&E firms involved in exporting activities. As part of survey research,
hypothesis-testing was undertaken to explain the variance in the legal-political
factors and market competition to predict the two measurements of supply
chain performance of the E&E firms in Batam. Since structural equation
modelling (SEM-PLS) path modelling 2.0 works efficiently with small sample
sizes and complex models, this analytical tool was employed in the study. The
findings reveal that legal-political factors and market competition were
positively significant on supply chain performance-efficiency and supply chain
performance-flexibility. This study suggests that firm success is not necessarily
tied to the size of its investment. Rather, it is the interrelationship amongst the
factors that influences the supply chain.

Keywords: supply chain flexibility; supply chain efficiency; exports; free trade
zone; FTZ; Indonesia.

Copyright 2016 Inderscience Enterprises Ltd.

 The effects of legal-political factors and market competition on supply chain 245

Reference to this paper should be made as follows: Fernando, Y.,

Fitrianingrum, A. and Richardson, C. (2016) The effects of legal-political
factors and market competition on supply chain performance: some findings
from firms in a free trade zone, Int. J. Logistics Systems and Management,
Vol. 24, No. 2, pp.244264.

Biographical notes: Yudi Fernando is a Senior Lecturer in Operations

Management at the Graduate School of Business, Universiti Sains Malaysia
(USM). He received his MBA and PhD degrees from the School of
Management at USM and also received his Bachelors in Business and
Management from UNAND, Indonesia. He is an award-winning scholarly
research competition as the best PhD research in applied art at USM in 2010.
He also worked for several years in the electronics industry. His current
research interests are green operation management, service management,
logistics, and sustainable issues in supply chain management. He has indeed
been honoured to have been selected as one of the council members of The
Society of Logisticians, Malaysia/Pertubuhan Pakar Logistik Malaysia (LogM)
Management Council for 20142016. Internationally, he had appointed as a
member of editorial boards in some of refereed journals, technical committee
member in conferences and invited speaker in various universities.

Agustina Fitrianingrum is a Lecturer of Economics and Management Faculty at

Universitas International Batam. She obtained her Masters degree at Graduate
Business School of Universitas International Batam, and finished her doctoral
degree from Graduate Business School of Universiti Sains Malaysia. Project
management and international business studies in Asia and some emerging
countries become her interest for teaching and focus of research.

Christopher Richardson joined the Graduate School of Business in 2011 after

completing his Doctorate in International Business at Manchester Business
School. His PhD thesis, which was funded by a research grant from the
Economic and Social Research Council (ESRC) in the UK, investigated the
impact of policy-driven industrial clusters on firm internationalisation. His
research interests include firm internationalisation, the role of religion and
culture in business and management, and the impact of industrial clusters on
the international activities of firms. He has published several articles in
prominent international business journals, including Journal of World Business
and International Business Review. In addition to his PhD, he also holds a BA
in Social Sciences and an MSc (with Distinction) in International Business and
Management, both from the University of Manchester.

1 Introduction

With many firms facing a highly volatile and uncertain environment, short product life
cycles, as well as frequent and unpredictable changes in demand, the ability to react
according to environmental changes is increasingly important. The goal of every
profit-based organisation is to make money by meeting enterprise demands with service
level agreements at minimised cost (Andini and Simatupang, 2014). As noted by Gereffi
and Sturgeon (2013), several current issues in international business are related to supply
chain performance (SCP). They argue that leading firms are relying on global suppliers
and intermediaries for an array of processes, specialised inputs and services, and are
246 Y. Fernando et al.

demanding that their most important suppliers have a global presence. To achieve
effective SCP, firms need to be efficient and flexible.
This flexibility, however, is not limited to a manufacturing system, as this would be
insufficient when dealing with the increasingly turbulent economic environment.
Flexibility generates firms ability to respond, in a timely and cost-effective manner, to
changing requirements in terms of volume, mix and delivery time (Tachizawa and
Thomsen, 2007). A study conducted by Aryee and Naim (2008) supports the findings of
Gereffi and Sturgeon (2013), namely that soft collaborative issues rather than hard
technological issues serve as the main drivers to improving SCP. This highlights that the
success of a business is not necessarily tied to the size of its investment, but rather that it
is the interrelationship among the factors that influences the supply chain (SC). In a
globally competitive environment, firms cannot be winners by standing alone. Instead,
they need to work hand-in-hand with suppliers and customers, integrating and
synergising export marketing strategies to support SCP. Through integration and
partnership, firms with high levels of flexibility and cost-effectiveness are believed be
better placed to penetrate new foreign markets quickly (Leonidou, 1995).
Fawcett and Clinton (1996) suggest that an effective SCP measurement should help in
understanding the system and providing information to SC members and outside
stakeholders. In many cases, quantitative performance measures fail to capture the
strategic goals of an organisation (Sezen, 2008). Financial measures, for instance, ignore
the opportunities to understand and improve supply chain management (SCM).
Operational measures, on the other hand, reflect on competencies in terms of cost,
quality, flexibility, speed and reliability, and provide a relatively direct indication of the
efforts of the various SC constructs (Chen and Paulraj, 2004). Lee et al. (2007) use
efficiency and effectiveness as key variables in measuring SCM performance.
Efficiency refers to the ability to provide a service using the least inputs, while
effectiveness concerns the ability to accommodate customers special requests (Fawcett
and Clinton, 1996).
Efficiency of the SC is the result of integration of the performance of all members,
thus implying that managing the overall SC efficiency is a challenging task (Shafiee
et al., 2014). Chen and Paulraj (2004) added time-based performance measures as a
third dimension to measuring SCM. Reflecting on the efficiency variable, SCM
is intended to reduce the number of production cycles (Jayaram et al., 1999) and
shorten manufacturing lead times (Handfield and Pannesi, 1992). Reflecting on the
effectiveness variable, flexibility in terms of responding to demand variability
(Beamon, 1998; Li et al., 2006), and the speed of new product introduction and
development (Vickery et al., 1995) are required. In a recent study, Ryoo and Kim (2015)
found that knowledge exchange has a greater impact on SCP for suppliers than for
buyers. Based on the contingency theory (CT), the theoretical model has been developed
to seek the empirical justification on the effect of legal-political factors and market
competition on SCP. This paper is organised as follows. The following section introduces
Batams free trade zone (FTZ). This is followed by a review of the related literature. We
then describe the methodological approach adopted in the study before presenting our
results. Next, we discuss the findings in light of extant literature, highlighting also the
practical implications of the study. We end the paper with some concluding remarks.
 The effects of legal-political factors and market competition on supply chain 247

2 The Batam FTZ

The island of Batam is located along the busy Malacca Straits, between Malaysia and
Singapore. The Batam islands consist of Batam, Tonton, Nipah, Setokok, Rempang,
Galang, Galang Baru and Janda Berias, all of which are connected by seven bridges
(Bahrum, 2011). One of its key and unique features is its proximity to Singapore (20 km)
and Malaysia (60 km) (Bahrum, 2003). It functions as one of the most important entry
points to the Sumatran Economic Corridor, as one of primary gateways to the Indonesian
market as well as for international trade. It is expected be able to accelerate economic
growth throughout the rest of the country. Due to its strategic location, the Indonesian
government initiated large-scale physical developments from 1970 to 1999, with Batam
being designated an FTZ. An FTZ refers to an economic zone or designated region in a
country that operates under specific rules that offer special investment incentives,
including duty free treatment for imports and for manufacturing plants that re-export their
products (Simple Shipping Solution, 2012).
The island of Batam in Kepulauan Riau Province (Kepri) is the most developed area
in Indonesia, while Kepri itself is considered as a new province of 32 provinces in
Indonesia. Kepri is located just off the coast of Singapore, which is considered to be the
most strategic location for Indonesian exports. The FTZ consists of Batam, Bintan and
Karimun, but Batam is the most developed, especially from the perspective of the
electrical and electronics (E&E) industry. The countrys top contributor of non-oil
exports is the E&E industry at 31.07% (BPS, 2013). Kepri is one of the top four export
contributors in Indonesia, with Batam being the main contributor to export activities
(Figure 1).

Figure 1 Contributors of export in Kepulauan Riau Province (see online version for colours)

Source: Badan Pusat Statistik (2013)

The E&E industry in Batam has been characterised by demand uncertainty in terms of
mix and delivery, and demand volatility in terms of volume and product mix, both of
which are very high. Therefore, forecasting is not very accurate. This condition presents a
challenge for the E&E firms to be more capable in their delivery of the required product
to the market, on time and at a competitive price. Even though Batam is an FTZ, it still
has to follow the regulations for the export and import of raw materials. In certain cases,
the listed raw materials cannot be directly imported to Batam but have to be transferred
via the capital, Jakarta. If raw materials are directly imported from Singapore, shipping to
248 Y. Fernando et al.

Batam takes only one day, but the transhipment from Jakarta prolongs this process by
around two weeks. The regulations for importing the raw materials may lengthen and
increase the cost of the process of transhipment. Therefore, political and regulatory
factors mean that firms have less flexibility or ability to deliver products to meet
customers demands in the required time. Hence, the efficiency and flexibility of a firms
SCP needs to be highlighted from the point of view of the firms strategic management. If
E&E firms in Batam are not concerned with their level of flexibility, in the future they
will not be able to compete with E&E firms from other countries.

3 External determining factors

According to Sousa et al. (2008), external determining factors (EDFs) are uncontrollable
factors from the environment of the host country and the conditions in the destination
country. The two factors examined in this study are the legal and political environment of
the host country and market competition in the destination country. The legal and
political factors (LP) include the quality of the host countrys business (e.g. clarity of
regulations, the implementation of laws and regulations, as the soft infrastructure
provided for business) (Li et al., 2012), while market competition refers to the
intensification of business competition in a similar product market in the destination
country (Cadogan et al., 2006).

3.1 Legal and political factors

Shoham (1998) incorporates economic, socio-cultural and political externals, partly as the
differences between the home and export market in some aspects (i.e. competitive
structure, physical climate, local laws, and marketing infrastructure), next to the image of
the exporting country, and the influence of the local government. OCass and Julian
(2003) argue that as far as the legal and regulatory policies of host country governments
are concerned, frequently when a developing country is involved, the host-country
government may exercise influence over the choice of suppliers and over marketing.
Alternatively, it may impose exchange controls, which can have an important impact on
reinvestment, financing, and repatriation decisions (Beamish et al., 1993). As a result,
laws or pressure from the government can play a significant role in the marketing
performance of the venture by increasing or reducing firm capacity and effectiveness
(Beamish et al., 1993; Cavusgil and Zou, 1994).

3.2 Market competition

Morgan et al. (2004) explain that a firms performance is basically determined by two
fundamental factors, structural analysis and the firms capability. The former determines
the competitive intensity the firm faces, while the latter achieves and sustains positional
advantages through the efficient execution of a planned competitive strategy. Market
competition or competitive intensity is the degree of competition a firm faces in a market
and is directly related to the activities of competing firms (Cavusgil and Zou, 1994;
Porter, 1980). In markets of higher competition, customers have more options to serve
their needs, increasing the difficulty of customer retention (Kohli and Jaworski, 1990).
Lages et al. (2013) state that in foreign markets where competition are less intense, firm
 The effects of legal-political factors and market competition on supply chain 249

has options whether applying the strategy of product adaptation or standardisation.

Firm in a lower competition market can achieve the sales target revenue in the more
convenient ways.
This logic is consistent with that of Aulakh et al. (2000), who noted that in situations
of lower competition, firms can work to present alternatives to increase the value offer to
the final consumer. The first mover argument also supports this logic, whereby first
movers work to define the needs of the market, creating high switching costs, which in
turn create a competitive barrier in the market. OCass and Julian (2003) explain that the
degree of product and promotion adaptation is higher in the competitive foreign market.
Firms should compete with the rivals to have a bigger market share by understanding the
market demand and implementing the strategy of adaptation. Firms capabilities to
implement the adaptation strategy becomes firms competitive advantage and enhance the
export marketing performance (Cavusgil et al., 1993; Douglas and Craig, 1989).

3.3 Supply chain performance

Supply chain practices have been identified as the most important strategies for medium
and large organisations and have become a prerequisite for success in the global market
(Gorane and Kant, 2014). SCP is measured by flexibility and efficiency, relying on
measurement developed by Ibrahim and Ogunyemi (2012). Supply chain (SC)
flexibility is defined as the ability to accommodate customers special requests in terms
of product design, delivery times, volume, and mix. SC efficiency is the ability to
provide a service using the least inputs to produce a firms products. Green et al. (2012)
define SCP as the ability of the SC to
1 deliver quality products and services in precise quantities and times
2 minimise the total cost of the products and services to the ultimate customers of the
SC (Green and Inman, 2005), while in marketing, performance indicators should
relate to both the effectiveness and efficiency of the SC and its actors.
Van der Vorst and Beulens (2000) (in logistics) made a distinction between performance
indicators on three main levels:
1 the SC level (e.g. product availability, quality, responsiveness, delivery reliability
and total SC costs)
2 the organisation level (e.g. inventory level, throughput time, responsiveness, delivery
reliability and total organisational costs)
3 the process level (e.g. responsiveness, time taken, process yield and process costs).
How to measure SCP is still debatable (Chan et al., 2003; Chen and Paulraj, 2004;
Shepherd and Gunter, 2006; Flynn et al., 2010). Some studies use predictor variables that
can help explain why some SCs perform better than others. Gunasekaran et al. (2001)
present a list of key SCP metrics, classified at strategic, tactical and operational levels.
Zelbst et al. (2009) recognise SCP as the ability to satisfy the ultimate customer in terms
of quality and cost. Chan and Qi (2003) propose a process-based approach to mapping
and analysing SCs, and suggest a model for SCP measurement. Lee et al. (2007) found
that a firms internal integration and integration with suppliers and customers have a
positive impact on SCP.
250 Y. Fernando et al.

3.4 Hypothesis development

CT explains the relationship between legal and political situations, market competition,
and export performance. This theory holds that export success depends on the context in
which a firm is operating, and that effectiveness depends on the appropriate matching of
organisational contingency factors to fit a firms context. No single strategy can be
effective in all contexts (Perrow, 1967). Moreover, it suggests that environmental factors
influence the firms strategies and SCP. This theory emphasises the selection method to
choose the best strategic option, which is most suitable, depending on the circumstances.
From the perspective of CT, a firms EP is dependent on the context in which the firm
operates. This study, therefore, uses CT to establish if there is a relationship between EP
and the level of fit between a firms strategic orientation and its context. This
perspective maintains that there is no universal set of strategies, which is optimal for all
businesses or firms, and, therefore, strategies need to be designed with specific
environmental contexts, including industry types (La et al., 2005). The CT has supported
the conceptual framework to explain the relationship of variables (Figure 2).

Figure 2 Conceptual framework

LP1 LP2 LP3 LP4 LP5 EF1 EF2 EF3 EF4 EF5

Legal & SCP-

Political Efficiency

Market SCP-
Competition Flexibility

MC1 MC2 MC3 MC4 Fle1 Fle2 Fle3 Fle4 Fle5

3.4.1 Legal and political factors and SCP

OCass and Julian (2003) emphasise that when a firm expands its market in developing
countries, the host country governments role should be considered as a significant factor
of firm performance. This idea is supported by Beamish et al. (1993) and Cavusgil and
Zou (1994), who suggest that laws or pressures from the host government can increase or
reduce firm capacity and effectiveness. This occurs through the mechanism of supplier
selection and is related to regulation, operations and marketing processes (Osland, 1994).
In part the supply-chain pressures are driven by regulatory developments relating to
specifications for products to be placed on the market (Hitchcock, 2012).
Li et al. (2012) identify three key barriers to trade that a high-quality legal system can
mitigate: asymmetries in information between exporters and importers, geographical and
temporal constraints on the ability of importers to fully inspect goods before payment,
and the liability of foreignness that importers face due to lack of information and access
to local networks. Besides reducing transaction costs facing importers and increasing
their willingness to pay, a reliable, effective and trusted legal system can also reduce
 The effects of legal-political factors and market competition on supply chain 251

exporters domestic production costs and their transaction costs associated with crossing
the border. The legal and political situation can be a problematic issue when conducting
business overseas. Investors prefer conducting business in a country that has high quality
legal and political implementation. The clarity of rule and procedure, and the stability of
the political situation will strengthen the business environment. Therefore, the following
hypotheses are proposed:
Hypothesis 1 There is positive and significant relationship between legal and political
factors and SCP-efficiency.
Hypothesis 2 There is positive and significant relationship between legal and political
factors and SCP-flexibility.

3.4.2 Market competition and SCP

Market competitiveness has also been identified as an important determinant of EP
(Sousa et al., 2008). This appears to be consistent with the view that the structural forces
that determine competitive intensity in a market have a strong impact on firm
performance. OCass and Julian (2003) report that a lack of market competition makes a
positive contribution to the EP of a firm, because firms will enjoy dominating the market.
In contrast, Lages and Montgomery (2004) also found export market competition to be
positively associated with EP. Less competitive markets tend to be associated with less
developed countries (Sriram and Manu, 1995), in which it is more difficult to achieve
export success because of economic instability (Austin, 1990). Another reason for firms
to perform better in more competitive environments could be that firms tend to relax
excessively in markets that are easier to operate in. Market competition persuades firms
to work closely with suppliers and customers. It is difficult to compete in global markets
by standing alone as an individual business entity. Therefore, the following hypotheses
are proposed:
Hypothesis 3 There is a positive relationship between market competition and
SCP-efficiency.
Hypothesis 4 There is a positive relationship between market competition and
SCP-flexibility.

4 Method

The population frame for this study was obtained from the Batam Badan Pusat Statistik
(BPS; Central Agency on Statistics), which reports that of the 104 E&E firms registered,
the total number involved in exporting activities in 2012 was 86 firms. As part of the
sample, the 86 E&E firms in Batam were chosen because they have contributed
significantly to the quantity of exports in Batam and Indonesia. This study utilised SPSS
21.0 for descriptive statistical analysis and structural equation model with smart-PLS 2.0
(PLS-SEM). The unit of analysis was at the firm level, so the respondents were limited,
while the model was complex. The overall complexity of a structural model has little
influence on the sample size requirement for PLS-SEM (Hair et al., 2014). The PLS-SEM
fits well with the small sample size. Chin and Newsted (1999) demonstrate that PLS can
supply suitable estimates with a minimum sample of 20 cases. However, the matter of
252 Y. Fernando et al.

sample size still needs to be acknowledged when applying PLS. Given the small
sampling frame of the study and the probability of a low response rate, purposive
sampling was used in this study. The measurement items for legal and political factors
were adapted from Li et al. (2012). Market competition items, meanwhile, were adapted
from Cadogan et al. (1999, 2006), while SCP measurement items were adapted from
Ibrahim and Ogunyemi (2012). Seven-point Likert scale (1 = strongly disagree to 7 =
strongly agree) was used to indicate the level of agreement for each statement.

5 Results

The authors checked all of the returned questionnaires, which were considered as raw
data material. This was to ensure that the data could be used for further analysis by
checking all items for omissions and their consistency in responding to the questions
(Zikmund et al., 2010). In the data checking, the researchers ensured that a minimum of
75% of total questions were considered for sampling purposes in this area. The next step
involved pre-coding techniques, in which all the items of the questionnaires were coded
with numerical values (Sekaran and Bougie, 2013). The total number of questionnaires
distributed was 86, though 27 firms did not respond to the survey. A follow-up was
conducted by giving a gentle reminder call. Most of the reasons for not being involved in
the survey were about the confidentiality issues, while others said that they had internal
problems and stated clearly they were not willing to join the survey.
The total number of returned questionnaires was 59, but one questionnaire was
incomplete. Therefore, in the next step of data analysis, this questionnaire was discarded
and not included as data for this study, leaving the total returned questionnaires for
analysis at 58. All the firms that participated in the survey have been involved in the
export of E&E products. According to the collected data, 34% of the firms have more
than 500 full-time employees. Regarding the products of E&E firms, they are classified
into six categories: semi-conductors, electronic components, printed circuit board
assembly (PCBA), electrical appliances, industrial electronics and others. Many E&E
firms are producing electronic components as 17% of their production. This means that
there are E&E firms in Batam that are not yet producing fully-assembled consumer
products. If it is only a component of electronics, the technology applied is simple to
modify in terms of technical difficulties or technology complexities.

5.1 Descriptive statistics

Table 1 shows the mean score of each statement in the legal and political factors (LP)
variable, which has five statements. Amongst those five statements, statement LP2 has
the highest mean score at 5.603 while LP4 has the lowest mean score at 5.034. However,
all the mean scores are recorded above four, which means that the respondents agree with
the statements categorised under the LP variable. LP2 has the highest mean score at 5.603
(SD at 1.184). This means that the E&E firms have high expectations of the government
offering more interesting incentive regulations that will increase their motivation to
expand their export market. On 1 January 2015, the Indonesian government and five
other ASEAN countries signed an agreement to become the ASEAN Economic
Community. When the agreement is established, the production tax will be reduced to
 The effects of legal-political factors and market competition on supply chain 253

between 0 and 5%. This means that, with more competitive price regulations, firms will
have a better opportunity to expand their markets.
Table 1 Mean score of each statement in legal and political factors (LP) variable

Std.
Items Indicators N Min Max Mean
deviation
LP1 Firms understandings of export 58 1 7 5.293 1.228
regulations that support EP
LP2 Regulation incentives on exporting 58 1 7 5.603 1.184
motivate firms to expand their market
LP3 Highquality legal institutions in host 58 1 7 5.052 1.033
country lower production costs
LP4 Firms export regulations speed up the 58 1 7 5.034 1.228
process of product delivery
LP5 Infrastructure facilities provided by the 58 1 7 5.414 1.140
government motivate firms to export

LP3 has the lowest mean score at 5.052 (SD at 1.033). The respondents are not confident
that, in the short term, Indonesia can implement high-quality legal institutions. Therefore,
respondents have little hope that production costs can be lowered to support their
competitiveness in the foreign market. LP factors are the quality of the host country from
the perspective of business (clarity of regulations, the implementation of laws and
regulations as soft infrastructure provided for business) (Li et al., 2012).
The mean score of each statement in the market competition (MCO) variable is
presented in Table 2. The MCO variable has four statements, of which statement MCO3
has the highest mean score at 5.534 (SD at 1.379), while MCO4 has the lowest mean
score at 4.931 (SD at 1.296). However, all the mean scores recorded are above four,
which means that the respondents agree with the statements categorised under the MCO
variable. MCO3 has the highest mean score at 5.534, which shows that respondents
recognise high competition in the E&E industry. Competition in the E&E industry is
higher due to the development of technology and the rapid progress of emerging
countries.
Table 2 Mean score of each statement in market competition (MCO) variable

Std.
Items Indicators N Min Max Mean
deviation
MCO1 Competitive intensity in 58 1 7 5.000 1.139
the export market is high
MCO2 Competitors new products are high 58 1 7 5.276 1.399
MCO3 Competition in the E&E 58 1 7 5.534 1.379
industry is high
MCO4 Customers requirements on the 58 1 7 4.931 1.296
product features are high

The more countries achieve the status of emerging countries reflects the incremental
market demand related to technology appliances, such as laptops, gadgets and utilities
required by people to support their performance in their daily work or life. MCO4 has the
lowest mean score at 4.931 (SD at 1.296), which means that customers requirements of
254 Y. Fernando et al.

the product features vary. This requires E&E firms to be more capable of responding to
the market demand. Unfortunately, it is not easy for an E&E firm to meet demands for a
customised product. Only minor adjustments of the product specifications can be
entertained, not specific products that require new product adaptation. MCO is the
intensification of business competition in a similar product market (Cadogan et al., 2006).
Table 3 shows the mean score of each statement in the SC efficiency (EFI) variable.
This tangible variable has five statements, among which statement EFI2 has the highest
mean score at 5.259 (SD at 1.163) while EFI5 has the lowest mean score at 4.897 (SD at
1.495). However, all the mean scores recorded are above four, which means that the
respondents agree with the statements categorised under the EFI variable. A firms
cash-to-cash cycle (EFI2) is considered as the most significant aspect that will improve
its efficiency. The lowest mean score is 4.897 for the firms level of integration (EFI5).
The firms level of integration for E&E firms has been considered less important because
the suppliers of E&E firms do not necessarily have a long contract. The nature of the
relationship between the E&E firms and their suppliers is a long-term relationship
without having a long-term contract. EFI is efficiency in using the resources in a SC
system (Ibrahim and Ogunyemi, 2012).

Table 3 Mean score of each statement in SC efficiency (EFI) variable

Std.
Items Indicators N Min Max Mean
deviation
EFI1 Firms production cycles meet the 58 1 7 5.052 1.033
firms annual target
EF12 Firms cash-to-cash cycle 58 1 7 5.259 1.163
EFI3 Suppliers efficiency to adjust 58 1 7 4.948 1.317
production capacity
EFI4 Firms level of communication and 58 1 7 5.224 1.377
coordination among all functions
EFI5 Firms level of integration 58 1 7 4.897 1.495

Table 4 shows the mean score of each statement in the FLE variable, which has five
statements. Among these five statements, statement FLE3 has the highest mean score at
5.414 (SD at 1.623) while FLE1 has the lowest mean score at 4.707 (SD at 1.271).
However, all the mean scores recorded are above four, which means that the respondents
agree with the statements categorised under the FLE variable. The respondents agree that
the suppliers flexibility to adapt to the E&E firms internal processes (FLE3) can be an
important factor in supporting firms flexibility. However, respondents also recognise
that local suppliers in Batam do not yet possess flexibility in accommodating the
variability of market demands. FLE is effectiveness of a supply chain in responding to
changes in terms of product design, delivery times, volume and mix (Ibrahim and
Ogunyemi, 2012).
 The effects of legal-political factors and market competition on supply chain 255

Table 4 Mean score of each statement in SC flexibility (FLE) variable

Std.
Items Indicators N Min Max Mean
deviation
FLE1 Firms flexibility to adapt the 58 1 7 4.707 1.271
production to accommodate
variability in customer demand
FLE2 Firms capability to influence the 58 1 7 4.983 1.132
suppliers to adapt their processes
FLE3 Suppliers flexibility to 58 1 7 5.414 1.623
adapt their processes
FLE4 Firms adaptation to 58 1 7 4.948 0.981
accommodate market demand
FLE5 Firms satisfaction with 58 1 7 4.828 1.045
the supplier lead times

5.2 Measurement model

Having ensured a theoretically-based model with appropriate specifications, a PLS
analysis can be conducted. The empirical PLS analysis and interpretation of the results
are presented in two steps. In the first step, the quality of the measurement model is
assessed. Only in the case of reliable and valid measures of the latent variables can a
valuable analysis of the structural model and interpretation be undertaken (Henseler et al.,
2009). As PLS makes no distributional assumptions, only non-parametric tests can be
used to evaluate the explanatory model (Chin and Dibbern, 2009). The quality of
reflective measures can be assessed by the individual reliability of the items as well as by
the convergent validity and the discriminant validity of the latent variables (Henseler
et al., 2009). In line with Hair et al. (2014), outer model assessment for reflective
measurements involved examining individual indicator reliabilities, the reliabilities for
each constructs composite of measures (i.e., internal consistency reliability), as well as
the measures convergent and discriminant validities.
When evaluating how well constructs are measured by their indicator variables,
individually or jointly, researchers need to distinguish between reflective and formative
measurement perspectives (e.g. Diamantopoulos et al., 2008). While criteria such as
Cronbachs alpha and composite reliability are commonly applied to evaluate reflective
measures, an internal consistency perspective is inappropriate for assessing formative
ones (e.g. Diamantopoulos and Winklhofer, 2001). The first step in PLS is to assess the
measurement model (outer model). Examining the measurement model is necessary in
order to ensure the reliability and validity of the questionnaire as the survey instrument.
This study employed reflective measurement. Table 5 presents the measurement model
(loadings factor and cross loadings), which shows the loadings for each item in its own
construct. It is recommended to ensure the construct measures are reliable and valid
before attempting to draw conclusions about the relationship between the construct. With
PLS analysis, the reliability of scale items for exploratory research is 0.50 (accepted)
(Hair et al., 2011).
256 Y. Fernando et al.

Table 5 Loadings and cross loadings

EFI FLE LP MCO

SC efficiency (EFI) [CR = 0.843; AVE = 0.521]
Firms production cycles meet firms annual target EFI1 0.778 0.232 0.655 0.338
Firms cash-to-cash cycle EFI2 0.629 0.636 0.663 0.453
Suppliers efficiency to adjust production capacity EFI3 0.813 0.238 0.722 0.269
Firms level of communication and EFI4 0.672 0.121 0.454 0.156
coordination among all functions
Firms level of integration is high EFI5 0.705 0.254 0.558 0.200
SC flexibility (FLE) [CR = 0.867; AVE = 0.571]
Firms flexibility to adapt the production to FLE1 0.525 0.798 0.576 0.436
accommodate variability in customer demand
Firms capability to influence the FLE2 0.193 0.579 0.218 0.814
suppliers to adapt their processes
Suppliers flexibility to adapt their processes FLE3 0.325 0.771 0.457 0.491
Firms adaptation to accommodate market demand FLE4 0.241 0.811 0.559 0.511
Firms satisfaction with supplier lead times FLE5 0.320 0.788 0.519 0.350
Legal and political factors (LP) [CR = 0.857; AVE = 0.546]
Firms understanding of how export LP1 0.649 0.194 0.705 0.354
regulations support the EP
Regulation incentives on exporting LP2 0.442 0.660 0.662 0.370
motivate firm to expand the market
High-quality legal institutions in host LP3 0.766 0.273 0.709 0.252
country lower production costs
Firms export regulations speed up the LP4 0.692 0.343 0.736 0.411
process of product delivery
Infrastructure facilities provided by LP5 0.340 0.623 0.572 0.429
the government motivate firm to export
Market competition (MCO) [CR = 0.813; AVE = 0.525]
Competitive intensity in the export market is high MCO1 0.655 0.313 0.606 0.688
Competitors new products are high MCO2 0.155 0.553 0.194 0.691
Competition in E&E industry is high MCO3 0.188 0.609 0.259 0.837
Customers requirements of product features are high MCO4 0.183 0.626 0.474 0.686
Notes: CR = composite reliability; AVE = average variances extracted;
reliability accepted = composite reliability > 0.70 (Hair et al., 2014);
convergent validity accepted: AVE > 0.50 (Bagozzi and Yi, 1988).
The loading values in bold shows that all of loadings were accepted for measurement
model. To assess the internal consistency reliability, composite reliability was assessed.
The acceptable value for both consistency and reliability that reflected from composite
reliability value according to Hair et al. (2014) must be 0.70 and above. Reliability scores
provide indicators of the degree to which measures are free from random error and yield
consistent results.
All scales show those indicators are robust in terms of their consistency reliability, as
indexed by the composite reliability scores that are well above 0.813, the recommended
 The effects of legal-political factors and market competition on supply chain 257

threshold value (Hair et al., 2014). This indicates that the measurements used in this
study are consistent in measuring the construct. In terms of convergent validity both
indicator reliability and construct reliability were assessed (Vinzi, 2010). To measure the
convergent validity of the reflective measurement an average variances extracted (AVEs)
score was given. Indicator reliability was examined by looking at the construct loadings.
All loadings are significant at the 0.01 level and above the recommended 0.7 parameter
value. Significance tests were conducted using the bootstrap routine with 500 resamples
(Chin, 1998). Within-method convergent validity is evidenced by the large AVE (> 0. 50)
and significant item loadings on their respective constructs. The quality of reflective
measures can be assessed by the individual reliability of the items as well as by the
convergent validity and the discriminant validity of the latent variables (Hair et al., 2014).
AVE includes the variance of its indicators captured by the construct relative to the total
amount of variance, including the variance due to measurement error. An AVE of less
than 0.5 is considered insufficient, as more variance is due to error variance than to
indicator variance (Vinzi, 2010).
Besides considering the indicator and construct reliability, a thorough validation
procedure also requires the evaluation of a measurement (or structural) models
discriminant validity. Discriminant validity is defined as the dissimilarity in a
measurement tools measurement of different constructs. A necessary condition for
discriminant validity is that the shared variance between the latent variable and its
indicators should be larger than the variance shared with other latent variables (Vinzi,
2010). Discriminant validity is the traditional counterpart of convergent validity. To
evaluate to what extent measures of a given construct differ from other indicators of the
latent variables, the AVE-value can be used again. Overall, the average shared variance
of a construct and its indicators should exceed the shared variance with every other
construct of the model.
Table 6 The measurement of discriminant validity

EFI FLE LP MCO

Efficiency (EFI) 0.728
Flexibility (FLE) 0.423 0.739
Legal and political factors (LP) 0. 610 0.613 0.736
Market competition (MCO) 0.403 0. 640 0.530 0.724
Note: Loading pattern follows the Fornell-Larcker Criterion = the squareroot of each
constructs AVE values should be greater than its highest correlation with other
constructs (Hair et al., 2014).
Therefore, the square root of AVE should surpass the correlation coefficient of the
construct with every other construct of the model, which is the case in the outlined
model. Furthermore, as a reflective indicator should load higher on its corresponding
construct than on the other ones, the cross-loadings should be examined. Additionally, all
indicators of the construct in question should have a higher loading than the indicators of
further constructs. The evidence of discriminant validity is provided in Table 6. The
result shows that each construct has a higher loading with the intended indicators and
shares more variance with its block of indicators than with the indicators of the other
constructs, thus establishing discriminate validity among constructs. The existence of
258 Y. Fernando et al.

discriminant validity implies that the relationships between the constructs are
conceptually similar.

5.3 Hypothesis testing

The reflective measurement model in SEM-PLS has computed the score of coefficient
determination (R2). The R2 values shown are efficiency (0.745), and flexibility (0.601)
has a high predictive power (R2 > 0.60). The relationship between LP and MC on SPC
was broken down into two sub-hypotheses. Hypothesis 1: There is positive and
significant relationship between legal and political factors and SCP-efficiency. Table 7
shows that the relationship was found to be statistically supported, because the t-value of
13.814 > 2.33 is significant at a 1% probability of error. Hypothesis 2 examined whether
LP has a positive and significant relationship to SC flexibility. Results from Table 7
shows that the relationship was found to be statistically supported, because the t-value of
1.746 < 1.65 is significant at a 5% probability of error. Hypothesis 3 has been formulated
to examine if there is a positive and significant relationship between MC and SC
efficiency. Result shows that the relationship is statistically supported because the t-value
of 1.694 > 1.65 is significant at a 5% probability of error. Hypothesis 4 examined
whether MC has a positive and significant relationship to SC flexibility. Table 7 shows
the relationship to be statistically supported, because the t-value of 2.704 > 1.65 is
significant at a 1% probability of error.
Table 7 The results of hypothesis testing

Standard errors
Hypotheses Direct effects Beta t-values
(STERR)
H1a LP EFI 0.900 0.065 13.814**
H1b LP FLE 0.316 0.214 1.746*
H2a MCO EFI 0.373 0.115 1.694*
H2b MCO FLE 0.558 0.206 2.704**
Notes: *t-value: 1.65, ** t-value: 2.33

6 Discussion

Two interesting observations can be made from the findings above, with the first
concerning the relationship between the LP and SCP. SCP has been measured by
flexibility and efficiency (Ibrahim and Ogunyemi, 2012) and their relationship to SCP
efficiency was strongly positive and significant. As Gunasekaran et al. (2004) explained,
legal or governmental regulations become the external drivers for firms to implement and
enhance their SC management practices to increase their SCP. Firms engaged in
international trade should be familiar with their home countrys policies, procedures,
laws and regulations, and tariffs. In practice, many firms involved in exporting activities
are also active importers of various materials. In order to be internationally successful, a
firms understanding of complying with home-country regulations has always been
mandatory. This understanding would have a significant impact on their effectiveness and
efficiency in the global SC (Pujawan, 2004).
 The effects of legal-political factors and market competition on supply chain 259

Typically, E&E firms in Batam have a specified person or department in charge of

handling import and export requirements, customs, freight forwarding, port clearances,
and so on. The appointed person is required to provide updates and ensure that the
processes of exporting and importing are clear and in line with existing regulations. This
method is well-suited to reducing the risk of uncertainty regarding legal matters and to
increasing efficiency. However, the direct relationship of LP to FLE was significant.
Technology is developed rapidly, thus forcing firms to make a prediction in demand and
inventory. As Tachizawa and Thomsen (2007) explained, the E&E sector is characterised
by high demand volatility, thus leading to higher inaccuracy of the inventory.
Gunasekaran et al. (2004) explain that inaccuracy of the inventory can reduce profit by
10%. When there is an unexpected short-term supply shortage of a raw material, a
flexible production system will incur high costs due to its inability to reschedule
production or to decrease the production capacity temporarily (Pujawan, 2004). Doherty
and Misrahi (2013) highlight that industry and governments should redesign their policies
to lower logistics costs, something that is particularly important in the current economic
context where the priority for policymakers is to boost economic growth and create jobs.
High logistics costs are akin to a tax on international trade. In this case, legal factors
or regulations might reduce firms flexibility. By considering legal factors as the
predictors, practitioners alike will benefit from the extended model of SCP that has been
tested from firms in FTZs. This model also provides empirical evidence that local and
foreign firms should appoint cross-functional teams to frequently check the local and
global legal requirements. This is a critical part that is sometimes overlooked by firms in
developing countries. Firms should aware of forced or over exploited labour and green
business issues such as gas emission, cleaner production, and other energy concerns in
SCM. These factors are often neglected in Indonesia. However, they are of huge
importance as they affect SCP and can potentially discourage orders from buyers. This
will make the situation worse as foreign investors leave the country.
The second important observation arising from the results above concerns the
relationship between MCO and SCP. The relationship of MCO to efficiency and
flexibility was found to be significant. Fierce competition in the E&E industry forces
firms and the SC firms to work together as collaborators, because success is not measured
by their own transactions. As Gautier (2010) notes, managing the SC in an efficient and
effective way allows the global chain to increase its competitiveness. Global trade has
grown dramatically over the last two decades, with the total value today exceeding
US $20 trillion (Doherty and Misrahi, 2013). This is evidence that firms are no longer
competing as single entities but in chains that compete.
Firms in the FTZ also need to be aware of buyers retention and competitive intensity
around the region. The Vietnamese Government offers better facilities, zero tax
(depending on the size of investment), power subsidies and even land to attract more
investors to build manufacturing plants. Moreover, the low labour cost has always
appealed to potential investors. Other countries like Malaysia offer political stability,
superior infrastructure, and English/multi-tongued, educated labourers. The education
system is also pretty well established to offer the right place for R&D. Thailand,
meanwhile, is the most frequently discussed among investors as a potentially favourable
host country in which to build manufacturing plants.
Indonesian firms in the FTZ should also be aware of the product features
requirements from advance technology and quality-conscious buyers. Target export
countries like Japan require advanced technology, electronic products/circuits/
260 Y. Fernando et al.

chips/components at low cost. Other than cost, European and North American buyers
might be interested to find semiconductor firms that can supply products that are
produced with a strong emphasis on health, ethical and environmental issues in the
production process. Unfortunately for Indonesian firms, E&E firms in China have
everything that buyers request. Future studies should look at the supply chain
responsiveness, which is actually a critical basis on which to compete in the global E&E
industry.

7 Conclusions

SCM is becoming an important source of competitive edge for firms in todays highly
competitive business environment. To achieve better SCP, firms should seek close,
working, and sustained relationships with their suppliers and customers, sharing
information to resolve problems (Spekman et al., 1998; Lee and Fernando, 2015).
Furthermore, Lages and Montgomery (2004) also found that the firms that performed
better in more competitive environments could be the firms that tend to relax excessively
in markets that are easier to operate in. In this study, the E&E firms in Batam have shown
capabilities to maintain their relationships with the suppliers and customers. Thus, these
good relationships help them to manage their SCP. Gautier (2010) states that firms should
build and maintain a relationship of trust with the parent firm because mutual trust is an
essential factor of relationship quality and performance. He further emphasises that trust,
a complex and multidimensional concept, is necessary to increase SCP. Looking more
closely at the E&E firms in Batam, most of them are subsidiary firms that have parent
firms in developed countries, such as Japan, the USA, or Europe. Therefore, firms have
the benefit of learning how to manage their relationships with customers and suppliers
from abroad. E&E firms in Batam also provide best practices to maintain relationships
with the other suppliers in their domestic country of operation.

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