Productivity Performance of

Malaysian Government
Linked Companies (GLCs)
in Plantation Sector

by
Rosmi Abdullah
e-mail : rosmi@npc.org.my

Abstract
The increase in productivity performance
and economies of scale are very important
to the industry. Productivity performance
explains how effective and efficient the
company is, in managing the inputs such as
labour and capital to produce the output.
The increasing performance reflects the
success of the business of the company in
competing with others. The first part of
these studies measure productivity
performance of the Government Linked
Companies in plantations sector. The
productivity measurement indicators have
been used because they explain the
efficiency and effectiveness of the company
in managing resources. To stay competitive
and efficient in the industries, productivity
ratio for the employee and capital should
be higher compared with other companies.
The two most important productivity
measurements are labour productivity and
capital productivity. Labour productivity
measures the effectiveness and efficiencies
of the labour in producing the product. A
higher labour productivity indicates that the
labours are efficient and a lower ratio is
due to the inefficiency in managing the
labour productivity. Capital productivity
measures the efficiencies of the capital
utilisation- A higher ratio reflects the
effectiveness of the utilisation of the capital.
The findings of this study explained the
productivity performance of the selected
companies. The trend of the productivity
performances for these 3 companies is very different and the productivity measurement
ratios vary from each other. The labour productivity for GLCsl is higher compared with
GLCs2 and GLCs3. This implies that GLCsl is most efficient in managing its labour
input. The ratio for capital productivity for the GLCs 1 is higher than GLCs2 and GLCs3.
This indicates that the capital for GLCs2 and GLCs3 are under-utilised compared to the
GLCsl. Comparison between these 3 companies shows that company GLCsl is the
most efficient in labour and capita! productivity. Companies GLCs2 and GLCs3 have to
benchmark the best practices of company GLCsl and implement them to improve the
efficiency in labour and capital productivities. The second part of the analysis finding
explains the economic theory of return to scale. The production function approach model
explained that 3 selected companies are operating at constant and decreasing return to
scale. The GLCsl is operating at constant return to scale. The GLCs2 and GLCs3 are
operating at decreasing return to scale. The findings proved that productivity
measurement is very important in measuring the performance and economies of scale
for companies because it explains how effective and efficient the labour and capital
are. Eventhough from the financial report the company may record profit but the
production function mode! approach may show that the company does not operate at
an increasing economies of scale. The company should operate at an increasing
economies of scale to maintain and succeed in the business. Productivity improvement
refers to the change sought, noted and implemented in an operation to produce a
positive change in the performance of the company. The company has to implement
continuous productivity improvement programme for the labour and capital to improve,
sustain and be competitive in the industries and the market.

Keywords: Competitiveness, Efficiency, Productivity, Performance

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

The role of productivity in a firm's performance is fundamentally important to the

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

The overall performance of Malaysian productivity has been measured and

compared with other countries. Productivity level can be used as an indicator to
measure the competitiveness performance of Malaysian industries. The study by the
National Productivity Corporation (NPC) produced in Productivity Annual Report 2005,
shows that the productivity level of Malaysia was lower than USA, Japan, Ireland,
Hong Kong, France, Finland, Singapore, UK, Germany, Canada, Australia, Taiwan and
Korea. Conversely, the Malaysian productivity level is higher when compared to
Thailand, Philippines, China, Indonesia and India. The comparison was based on the
relative productivity for year 2005. Among the Asian countries, Hong Kong, Singapore
and Taiwan's productivity were between 3.2 to 5-4 times that of Malaysia. Malaysia's
o
productivity was higher than Thailand, Philippines, China, Indonesia and India. From
the report by NPC, Malaysian industries were far behind our neighbouring country
Singapore, which had productivity level of 4.7 compared to 1.0 for Malaysia. There are
still a lot of rooms for improvement for the Malaysian industries through the
implementation of productivity improvement programme, such as Total Management
Quality System.
-——^w
Relative Productivity and Growth

Selected Countries twity

(constant Productivity Growth (%);:
i'ei;\n USS)
^"^^^^^
USA 77.346 6.9 1.8
Japan 77,061 6.8 1.9
Ireland 62,936 5.6 1.0
Hong Kong 60,299 5.3 5.0
France 57,677 5.1 1.4

Finland 55,698 4.9 0.1

Singapore 52,426 4.7 1.9

UK 51,882 4.6 0.9

 Germany 50,789 4.5 0.9
Canada 49,308 4.4 1.6
Australia 45,545 4.0 -1.0

Taiwan 35,856 3.2 2.7

Korea 27,909 2-5 2.6
Malaysia 11,300 1.0 3.0
Thailand 4,305 0.4 3.0
Philippines 2.807 0.2 -0.8
China 2,272 0.2 7.1

Indonesia 1,952 0.2 4.4

India 1,242 0.1 6.6

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

Malaysian industries must be more competitive to sustain and compete in

globalisation. There are many factors involved in managing quality and performance of
a company. The two most important factors are the performance measures of labour

o and capital in producing outputs. The result indicates that Malaysian industries should
improve more on their productivity level to compete with the other countries.
Additionally, to improve the macro productivity level, Malaysian Government should
emphasise at the micro productivity level. This could be done by increasing the
productivity in each company in Malaysia. This study measures the performance of
productivity indicator in Malaysian Government Linked Companies (GLCs) to analyse
and evaluate how competitive this sector is.

in Industries Economies by Scherer (1996); Tirole (1988), it is found that frequently

mentioned performance criteria include efficiency, product variety, innovativeness and
macro-economic stability. Related dimensions of competitive conduct include pricing
behaviour, R&D, advertising and product design. Market structure, finally, encompasses
elements such as concentration, product differentiation, market entry barriers, and
vertical integration. Structure, conduct and performance are all characteristics of markets.
They include product and process technology, employees' skills, unionisation and location
of raw resources. Basic conditions on the demand side influenced effective demand.
They include consumers' buying methods, availability of substitutes, price elasticity,
and cyclical and seasonal patterns in buying. This input can be divided into two main
production factors, labour and capital, which are to produce output. These two factors
measure efficiencies and effectiveness of the company by using productivity measurement.
This can be analysed by productivity performance each year, comparing between the
years to see how the factors are influencing the inputs and outputs of the companies.

In terms of the structure, it is important to see whether the selected companies

are influenced by the rules or regulations. The study will also determine whether the
conclusion by Scherer & Boss (1990), that public policies, finally, can both influence
market structure (e.g. via market entry regulations or anti-trust policies) and market
conduct (e.g. via subsidies and advertising rules). This study analysed the rules and
regulations in Malaysia with regards to the GLCs and how the rules and regulations
benefit these companies in competing with private companies.

Malaysian GLCs
The study analysed the productivity performance measurement in 3 selected
GLCs. In general, a GLC is a corporate entity that may be private or public (listed on a
stock exchange) where the government owns a stake using a holding company. There
are two other main definitions of GLCs, depending on the proportion of the corporate
entity the government owns. One definition purports that a company is classified as a
GLC if the government owns an effective controlling interest of more than 50%, while
the second definition suggests that any corporate entity that has the government as a
shareholder is a GLC.

The GLCs aim to realise their own organisational objectives such as making a
profit, producing quality products and excellent services, and becoming the largest
organisations. At the same time, GLCs organisations are expected, by the government mnm
themselves and the society, to contribute to important and collectively defined public
interest and objectives such as maintaining or lowering the price, providing diverse and
objective information related to their products and services, and creating jobs. Since
the privatisation, GLCs policy makers have been engaged by the question of whether
and how these organisations are effective, efficient and able to satisfy the public
interest objectives.

In Malaysia, GLCs are defined as companies that have a primary commercial

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

GLICs are defined as Government Linked Investment Companies that allocate

some or all of their funds for GLC investments. Defined by influence of the Government
in appointing/approving Board members and senior management, and having these
individuals reporting directly to the Government, as well as in providing funds for
operations and/or guaranteeing capital (and some income) placed by unit holders.
 This definition currently includes seven GLICs, namely Employees Provident Fund
(EPF}, Khazanah National Bhd (Khazanah), Kumpulan Wang Arnanah Pencen (KWAP),
Lembaga Tabung Angkatan Tentera (LTAT), Lembaga Tabung Haji (LTH), Menteri
Kewangan Diperbadankan (MKD) and Permodalan Nasional Berhad (PNB).

The Structure of Malaysian GLCs

The GLCs are managed by the Putrajaya Committee on GLC High-Performarice
which comprises the Minister of Finance II, a representative from PMO, and heads of
Khazanah, Permodalan Nasional Berhad (PNB), Employee Provident Fund (EPF),
Lembaga Tabung Haji (LTH) and Lembaga Tabung Angkatan Tentera (LTAT). Others are
invited as necessary. Khazanah is the Secretary to the Putrajaya Committee on GLC
High-Performance. The structure of the Putrajaya Committee (PCG) and Joint Working
Team (JWT) is shown in Figure 1. The PCG and Joint Working Team UWT} are to
ensure that the GLCs succeed in their business and at the same time also have to
respond to the objective stated by the Government for each of the GLCs. From the
structure below, we can see that these companies report to the Second Finance
Minister regarding their operations, management, merger and other activities related
with the business.
0
Structure of the PCG
Figure 1

Second Finance Minister

PMO Representatives
GLICCEOs/MDs :.;^

GLC Roundtable

Joint Working Team (JWT)

Secretariat: Lead Consultant:

?Khazanah Representatives: McKinsey & Company

• EPF Consultant for

• PNB Special Initiatives:
• LTH Boston Consulting Group
• LTAT and Ethos Consulting

Source: Putrajaya Committee

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

• Clear implementation with applicability, responsibility and timeline for GLCs

and GLICs;
• Task and equip PCG to implement and monitor;
• Establish a programme management approach to implementation; and
• PCG and eventually PMU within the Prime Minister's Office act as a channel
to ensure compliance.

GLCs are government business entities which are privatised. However, the
Government is still holding some percentage of the share to maintain the control of
the companies' managements and operations. The Government has to maintain the
control of these companies because some of these companies are involved in services
and products which are related to social responsibility to the public and to ensure that
the objectives set by the Government are implemented. The GLCs have to submit
reports and get approval from the Government when they decide to increase the price
of electricity, price of the services and others, for example. This is very important
because an increase in the price of the services and products will affect the Malaysian
economy. An increase in the price of electricity or petrol will increase other prices
such as production cost, transportation and others. Table 2 shows the percentage of
shares controlled by the Government in Malaysian GLCs.
 List of Government Linked Companies

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

Employees Provident Fund (GLICs)

Commerce Asset-Holding 20.0 %

CIMB 14.2%

Malaysia Building Society 63-0 %

Malaysia Resources Corporations 30.0 %

Lembaga Tabling Haji (GLICs)

BIMB Holdings 30.0 %

Syarikat Takaful Malaysia 22.2 %

Lembaga Tabling Angkatan Tentera (GLICs)

Affin Holdings 47.4 %

Boustead Holdings 70.0 %
Boustead Properties 39.2 %

PSC Industries 23.1 %

UAC 27.3 %
Johan Ceramics 60.0 %
Petroliam Nasional {GLICs)

Bintulu Port Holdings 33.0 %

KLCC Property Holdings 51.0%

MISC 62.0 %

Petronas Dagangan 70.0 %

Petronas Gas 61.0%

Minister of Finance Incorporated

Bursa Malaysia 20.0 %

Pos Malaysia & Services Holdings 33-3 %

Khazanah Malaysia

Commerce Asset-Holding 26.0 %

CIMB 1 8.7 %

D'nonce Technology 20.0 %

Faber Group 41 .0 %

Malaysia Airport 73.0 %

MAS 69.0 %

Park May 25.0 %

Proton Holdings 38.0 %

Plus Expressway 67.0 %
Tenaga Nasional 37.0 %
 Telekom Malaysia (TM) 35.0 %

VADS 24.5 %
Time Engineering 45.0 %
Time dotcom 50.3 %
Uda Holdings 50.0 %

UEM World 63.0 %

Cement Industries of Malaysia 34.0 %

Opus International Group PLC 39.1 %

Pharmaniaga 34.7 %

UEM Builders 32.8 %

Permodalan Nasional & Funds

BIMB Holdings 30.0 %

Central Industrial Corporation 39-0 %

Chemical Company of Malaysia 64.0 %
Formosa Prosonoc Industries 26.0 %

Golden Hope Plantation 57.0 %

Mentakab Rubber 34.2 %

Negara Properties 35.3 %

Island & Peninsular 60.0 %

Kumpulan Guthrie 74.0 %

Guthrie Ropel 42.9 %

Highlands & Lowlands 40.7 %

Malayan Banking 51 .0 %
Malaysian Industrial Development Finance 37.0 %

MNI Holdings 75.0 %

MNRB Holdings 60. D %

NCB Holdings 56.0 %

Sime Darby 45.0 %

Sime Engineering Services 31.5%

Tractors Malaysia Holdings 32.4 %

Sime UEP Properties 51 .0 %

UMW Holdings 60.0 %

Ya Horng Electronic (Malaysia) 30.0 %

Source: UBS Investment Research

The GLCs are split into 2 groups. The first is the G20 companies, defined by the
Putrajaya Committee for GLCs (PCG) and are all public listed companies. The second
group consists of the remaining 30 GLCs which are publicly listed but do not come
under the direct purview of the PCG. The G20 companies are Telekom Malaysia (TM),
Tenaga Nasional Berhad (TNB), MAS, BCHB, UEM, Proton, Pos Malaysia, MAHB all
under Khazanah, Maybank, Sime Darby, Golden Hope, Guthrie, UMW and CCM under
PNB, Affin Holdings and Boustead under LTAT, MRCB and MBSB under EPF, and BIMB
and TH Plantations under LTH. This study measures and analyses the performance and
structure in the productivity level, which from the findings we are able to define the
performance of the companies' operational efficiency, competitiveness and performance
comparison between the companies.

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

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

Problem Statement
There are several issues with regards to the development of existing GLCs. Firstly
is to improve their performance in terms of operations and financial indicators, such as
Return on Investment (ROI), as their key performance index and to sustain
competitiveness. The study by CIMB on GLCs Issues and Prospects, year 2004,
showed that GLCs underperformed the broader Malaysian market on all key financial
indicators, except for the size of their companies.

Another issue is how GLCs could play a leading role, not only in generating future
wealth for the nation but also in developing Malaysia as a modern nation. Their social
obligations have also brought great benefits to a wider community, through carrying
out a government objective. According to Khazanah Nasional Bhd, GLCs represent a
significant part of the corporate market where they contribute 54% to the KL Composite
Index, employ 5% of the total workforce and provide major services to the community.
GLCs do, indeed, play a critical and influential role in shaping the standard of living. It
is not difficult to imagine the impact that GLCs have on our lives, from the electricity,
water and energy we depend on, to the food we consume, the waste we produce, the
cars and roads we use, the healthcare we need and the human capital development
for the nation. In today's competitive environment, there is a fundamental shift in
expectations where there is now unrelenting pressure on GLCs to deliver greater
shareholder value and market relevance. The Malaysian society is depending on the
GLCs companies and they must be transparent and high performance-based, and allow
equal opportunity and respect for diversity and integrity.

There are also issues in consumer welfare and efficiency gains. Privatisation is
supposed to enhance enterprise efficiency. There are two relevant aspects of efficiency
related to GLCs that should be considered, namely productive and allocative
efficiencies. Productive efficiency is attained when a firm's output is produced at
minimum resource cost. Allocative efficiency is achieved when the consumer's
marginal valuation of the product equals the marginal cost of production, assuming no
externalities. However, this does not imply allocative efficiency in terms of satisfying
consumer preferences for quality services. To achieve both productive and allocative
efficiencies, privatised enterprises such as GLCs generally need to be exposed to
greater competition, liberalisation, marketisation, and deregulation, notwithstanding
scale economies and other 'extenuating' circumstances.

In Malaysia, many GLCs remain as monopolies. In contrast to privatisation, which

is then expected to be accompanied by the relaxation or abolition of monopolistic
practices, including statutory monopoly powers, such as those usually conferred on
and enjoyed by public utilities. Privatised entities are thus expected to face competitive
markets or environments. Competition may encourage more efficient behaviour
among private as well as public entities or companies, in order to achieve both
productive and allocative efficiencies, unless increasing returns to scale are attainable.

The important issues in Malaysian GLCs are whether these companies have achieved
their objectives, profit, efficiencies and also social responsibilities with all support
given by the Government. The GLCs should be more competitive and efficient
considering many incentives given to them in business opportunity. The performance
ratio should be higher because they have much advantage against their competitor.
However, there are many statements and complains on the efficiencies of the GLCs
due to services which are not up the expectations, as required by the consumers. In
many cases, GLCs would increase their prices when financial problem arises or the
profit margin becomes too small to gain more profit. They are often tagged as neglecting
their social responsibilities to the public. There are also cases that the GLCs companies'
financial statement showed that they were running the business inefficiently and were
facing financial problem. This is a reflection of the performance of GLCs, which even
though they have all the benefits given, but are not able to perform well. Thus, they
should perform better given the advantage in business opportunity against their
competitor. This is the reason why we need to examine the performance of the GLCs
in terms of productivity because such measure can reflect the strengths and the
weaknesses of the companies compared to the financial report. The productivity
measurement is appropriate to a particular company to improve the management
system and the company's strategic intentions which will have been formed to suit
the competitive environment in which it operates and the kind of business that it is.
The productivity indicators will help the companies in organising their strategies
towards the mission, vision and objective.

Objectives of the Study

The general objective of the research project is to attempt and study the
productivity performance and economies of scale. This study will analyse the
productivity performance and economies of scale using the productivity indicators of
the companies for a period of 6 years based on financial year reports. The result will
identify whether these companies succeeded in achieving the mission, vision, objective
and government's goal in privatisation. It is generally believed that GLCs have
significant presence in the national economy due in part that many of them are market
leaders in their respective sectors.

The main objectives of the study are:

i. To better understand the trend reflected by labour productivity and capital
productivity towards the performance of selected GLCs, and
ii. To study the performance of the selected GLCs by using a production function
model approach to determine the economic theory of return to scale.

An analysis on production function approach model can reveal which company

operates at increasing, constant or decreasing to scale. The study will identify the
most significant factor affecting the success of the GLCs because the productivity
indicators indicate the efficiency and effectiveness of managing resources and capital,
reflected by the trend and performance of the companies over the period of the study.
This will lead to the understanding of organisational control process, whereby an
organisation ensures that it is pursuing strategies and actions which will enable it to
achieve its goals. Productivity performance measurements will help management with
far more useful information on how to run a company more effectively and efficiently.
Management can determine with considerable certainty which direction the company
is going and, if all goes well, continue with the good work. Or, if the productivity
performance measurements indicate that there are difficulties on the horizon,
management can work towards the success of the company. And if the finding shows
that the company operates at decreasing return to scale, this could help the company
to plan how to improve the efficiency and effectiveness of their labour and capital.
Significance of the Study
The study is significant to analyse the performance and structure of Malaysian
GLCs. The study by D'Souza and Megginson (1999), found that there is a whole line of
study on privatisation and empirical results which consistently show that privatisation
induces output, efficiency, and profitability improvement. From the perspective of this
traditional wisdom, the study examines the performance of the group of government-
run enterprises in Malaysia. Malaysian Government sets up a group of GLCs in key
industries to provide propelling forces to the country's economy. As such, GLCs play a
strategic and important role in the economic development. This research is to study
the issues in Malaysia, whether these GLCs are generally well-run, efficient and
profitable. Productivity indicators are used in this study to analyse the performance
and structure of the management and operations. The productivity measurement
indicators were calculated by using the financial report. The findings represent the
information on how efficient and effective the company is in using the input to produce
the maximum output. Some analysts even said that it is time for the Malaysian
Government to give up control of the GLCs to allow more competition into the market,
which would improve their performance. But given the fact that Malaysia is an opened
economy, the GLCs may have been competing with foreign companies all along. Such
competitions may well compel them to be more efficient than typical government
enterprises would be. In any case, Malaysian GLCs provide an interesting case to
address the simple but fundamental question, "Are government-owned companies
necessarily inefficient?" We can see in the case of several GLCs which always
increase their prices on products and services offered to gain more profit even though
there are monopolistic company. The labour productivity will reflect how efficient the
management is, in managing human resources to produce the output. Capital
productivity will explain how the capital will be utilised in producing a certain amount
of output. The production function approach model should explain why these
companies have to increase the price to gain more profit if they operate at an increasing
return to scale.

Limitation of the Study

The results depend on the accuracy of the annual financial reports produced by
each company. The annual report was gathered from each selected company. The data
for this research were extracted and computed from certain values in the annual
financial reports. The reliability and validity of the data were based on how true are the
companies in reporting all the transactions and activities. The findings explain the
efficiency and effectiveness of the labour and capital in producing the product and
services. The reliability and validity of the data produce the accuracy and precision of
the findings on the performance of the companies.
Literature Review
Background
The concept of productivity has existed for a long time, and the idea has many
different applications. Jury (1992) in his study found that the customers buy utility, and
productivity associates outputs with inputs. Productivity, at the organisation level, may
be considered a measure of how well the company satisfies the customers' utility.
Therefore, productivity measurement shows how well a company is doing. This does
not, however, tell anything about why the company is performing the way it is. This
discussion addresses the meanings that refer to work and economics. One basic way
of defining productivity is "output divided by input" (O/l}. If Company X uses 100 units
of input to produce 100 units of output, their productivity ratio is 1. To interpret this
formula in economic terms, one can substitute ringgit for the input and output units,
i.e., RM100 of output divided by RM100 of input produces the same productivity ratio
of 1. Using money as a measure of value makes it possible to compare dissimilar
inputs and outputs.

Productivity change is the measure of productivity in this research which refers to

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

Productivity, defined by O/l, requires that the units of input be measured in some
manner. The early applications of productivity measurement addressed simple,
repetitive jobs of short duration. Several measurement techniques were developed for
this purpose, including the labour productivity, capital productivity and others. Such
techniques were designed to measure performance of the companies and to identify
the strengths and weaknesses of the company's strategies in competitiveness. This
measure can also help the company to increase efficiencies, reduce loss and improve
the quality of workforce and services. A business converts economic resources into
something else. It may do well or poorly. Drucker {1974} believed that at this level,
productivity is the balance between all production factors that will give the greatest
return, for the least effort and productivity at the organisational level is considered
separately from productivity at lower levels. The performance measurements used in
this research are labour productivity and capital productivity to identify the efficiency
and effectiveness of the human resources and capital in producing the products.
Productivity Measurements
Productivity indicator as a measurement for efficiencies has been used in many
companies. The labour and capital productivities are being used to determine how
productive is the labour in producing one unit output and the capital productivity are
used to measure how effective is the utilisation of the capital in producing one output.
Rittenhouse (1992) believed that it is very important to discover why productivity must
first be examined at lower levels such as the work group, which are best suited for
using productivity measures as an indication of change. Sardana (1987) in his study
found that the concept of productivity is often vaguely defined and poorly understood,
although it is a widely discussed topic. Different meanings, definitions, interpretations
and concepts have emerged, as experts working in various areas of operations have
looked at it from their own perspectives. However a different view is only that the
terms 'performance' and 'productivity' are used concerning with the productivity level.
People who claim to be discussing productivity are actually looking at the more general
issue of performance. Productivity is a fairly specific concept while performance
includes many more attributes. Drucker, also in his study found that knowledge worker
is the area that offers the greatest opportunities to increase productivity. This is in line
with what our Prime Minister said, that it is important to increase the human capital
resources because human capital is the asset of the companies that can create wealth
to the organisations.

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

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

While productivity has been studied for decades and knowledge work has always
existed, it is only recently that researchers have tried to measure knowledge workers'
productivity. The concept of productivity has existed for a long time, and the idea has
many different applications. This discussion addresses the meanings that refer to work
and economics. Today the varieties of productivity measurement have been used but
the most common are labour productivity and capital productivity.
 The only way we can understand and compare the performance of one company
against another is measuring its performance. Conventionally, the focus has been on
internal, historic, financial, numeric and short-term information. Many aspects of an
organisation's operation are intangible and difficult to pin down, yet these are increasingly
seen to be the areas where companies can gain competitive edge. Professor R.S. Kaplan
of Harvard Business School in The Evolution of Management Accounting states: "if
senior managers place too much emphasis on managing by the financial numbers, the
organisation's long term viability becomes threatened." That is, to provide corporate
decision makers with solely financial indicators is to give them an incomplete set of
management tools. Recently, more rigorous approaches to assess non-financial results
have emerged. Measurements of this type, especially those that are future-oriented,
are key components of the performance management revolution that is changing the
way companies do business worldwide. This study uses the non-financial indicators to
measure performance by using the productivity indicators to look inside the selected
companies; the problem of inefficiency, unutilised input, cost of management and others.
The analysis will provide a solution to improve productivity and quality in work place.

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

Moore (1978) have explained the more important productivity measurement

because they can be separated into two factors: performance and financial. Performance
productivity is based on the number of outputs produced. For example, if Company A
produces 100 units in one week and 120 the next, its performance productivity has
increased by 20 percent. By contrast, financial productivity focuses on the value of the
output. If Company A had produced 100 units in both weeks, but raised the price from
$1.00 per unit to $1.20 per unit in the second week, its financial productivity would
have increased by 20 percent with no increase in output.

The productivity measurement now becomes an important tool in measuring the

performance of a company, as the productivity indicators reflect the companies'
efficiency and effectiveness in using the input to produce output, whether it is in
maximum capacity or under utilised.

Measurement Techniques
Many measurement techniques and packages are available. Mundel (1989)
presented a computer software package that evaluates productivity. Direct adjustments
for quality by the package are excluded, but quality indicators may be implicit because
the package considers only good output. The programme does not consider raw materials,
because the end product is knowledge. In this and other computer programmes,
simple 0/1 algorithms are used to calculate productivity. The programmes facilitate the
calculation of productivity at the organisation level. Mundel presented eight levels of
work units, starting from the lowest-motion-up to the highest-results achieved
because of outputs.

Sassone (1991) presented a technique that is relatively simple to implement. He

classified work by the lowest level of employee who could reasonably do it. Work is
then recorded for each participant by the type he or she is doing. This record is then
analysed and compiled in a matrix format that shows the amount of effort expended
by each type of employee, and whether the employees are working at, above, or below
their level. This information can indicate the mix of workers that is needed in a work
group. It can be used to explore the consequences of common assumptions, such as
whether cutting support staff will actually reduce costs.

Sink (1985) presented several techniques of evaluating productivity. His three

main methodologies are Multi-Factor Productivity Measurement Model (MFPMM),
Normative Productivity Measurement Methodology (NPMM), and Multi-Criteria
Performance/Productivity Measurement Technique (MCP/PMT). MFPMM is a
computerised methodology for measuring productivity, based strictly on O/l. NPMM
uses structured group processes to formulate appropriate productivity measures for
white-collar or knowledge workers. It uses the group technique to establish consensus
about what the productivity measures are and how they should be measured. MCP/PMT
is designed to allow the user to evaluate the various productivity measures and decide
which is the most important. It also allows the user to aggregate dissimilar productivity
measures.

In Malaysia, NPC has produced computer software package, named COMPASS or

Company Manual Productivity Assessment to measure the performance of the
productivity indicator. The COMPASS software analyses the financial accounting data
and produces the indicators related to productivity improvement measurement. The
indicator will be analysed to show the trend and performance of the company and the
improvement will be recommended to increase efficiency, effectiveness, productivity
and quality. To encourage the usage of COMPASS software packages among Malaysian
industries, the Ministry of International Trade and Industry have established the
Productivity Award. The Award is given to the companies with the highest productivity
performance. COMPASS is a standardised model developed by NPC, which allows
company to conduct "self assessment" and makes the business analysis more result
oriented. Participation in the Productivity Award allows third party assessment of the
effectiveness of the company's productivity improvement initiatives and its comparative
advantage. It is essential for companies to measure productivity and implement
productivity improvement programmes to increase their performance and enhance
competitiveness. This is also to encourage Malaysian industries to measure their
performance using the productivity measurement to improve their competitiveness
level, efficiencies and effectiveness. This study analyses the importance of the
productivity measurement indicators, which are labour productivity and capital
productivity and to prove the significance of using these indicators in measuring the
economies of scale in producing the output.

Methodology
Research Design
The research design used for this study is the secondary data from financial
annual reports, which make use of the inferential statistics to determine the values of
the performance and economies of scale for the 3 selected GLCs. The study gathers
the information and data from financial statements between years, from 2000 to 2006.
From the financial reports, the study then calculates the labour productivity and capital
productivity to identify the performance of the companies. Second part of the
methodology analyses the data, using Cobb-Douglas production functions to run the
test and to find the values of the variables to determine whether the company is
operating within the economic return to scale.

Study Area
The study focuses on the 3 selected companies from the G20 companies. The
companies selected were from the same industries. This is because the comparison
from the same industries will provide more information and accurate performance
measurement. The results produced identify which company is more efficient and
effective in managing its human resources and capital, based on the measurement of
labour productivity and capital productivity. The value of the ratio explains the
performance of the companies from year 2000 to 2006. The model will then explain
the relationships between the variables and the result will show whether the
company's operation is efficient in producing output based on the economic concept
of return to scale.

Source of Data
The sources of the data for this research are mostly from the secondary data. The
secondary data were obtained from the 3 selected companies itself. Most of the data
and information are from the annual report. The other information such as number of
employment and others, which were not included in the financial report were gathered
and obtained from the web site of the companies.
The Production Function Approach Model
The methodology of this research is to measure performance of GLCs using
accounting data. If GLCs are generally well run, efficient and profitable, then the
performance of the GLCs, no matter how it is measured, should be comparable to the
performance of non-government, private companies. Furthermore, if the privatisation
objectives of GLCs are unrelated to resource allocation, greater efficiency, or reduction
of the fiscal burden, their performance would not be greatly increased or improved
after privatisation. For this reason, this study will measure the performance based on
the productivity indicator. Essentially, we analyse the performance using the productivity
indicator for the recent period of 6 years, based on the financial reports. Then from the
labour productivity and capital productivity, the research will further discuss on the
production economic model, while focusing on the micro economy. Then the variables
will explain the efficiency of the production based on the economics of return to scale.

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

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

The model used in this research will be able to analyse the relationship, correlation
and effectiveness between revenue and two productivity measurements, and these
two factors contribute more significantly to the profit and efficiency of a company.
The model will also explain the production function based on the return of scale theory.
 The first step of this research is to compute the labour productivity and capital
productivity of each selected company, using the financial reports. From the measurement
indicator, we analyse the structural and performance of the companies. From the
productivity data calculated, we run the data using SPSS software to identify the
correlation and relationship between the two productivity measurements and the revenue.
This will explain the performance and growth of the industries over the years, from
2000 to 2006. The model used in this study is based on the Cobb-Douglas production
function because it is clear that the relationship between the output and the two
inputs is nonlinear.

The production function in this study is expressed as:

Where Ff = output/revenue
X2 = labour productivity
Xj = capital productivity
u = stochastic disturbance term
e = base of natural

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

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

Where j60 = Inj8,

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

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

1. The (partial) elasticity of output with respect to the labour productivity that
is, it measures the percentage change in output,
2. The (partial) elasticity of output with respect to the capital productivity,
holding the labour input constant, and
3. The sum ( ) gives information on returns to scale,
that is the response of output to a proportionate change in input. If the sum is 1, then
there is return to scale, that is doubling the inputs will double the outputs and so on.
If the sum is less than 1, there is decreasing return to scale; it means doubling the
inputs will lessen the outputs by twice. If the sum is greater than 1, there are increasing
returns to scale; it happens when double the inputs is more than double the outputs.

Before proceeding further, note that whenever we have a log-linear regression

model involving any number of variables, the coefficient of each of the X variables
measures the (partial) elasticity of the dependent variable Y with respect to that
variable. Thus, if we have a k-variable log-linear model:
 In Y, = In/o + j02 In X* + j83 In X3i +........ +jff* In X* + u,

Each of the (partial) regression coefficients,^through^ , is the (partial) elasticity of Y

with respect to the variable X2 through Xt.

Assume that model (2) satisfies the assumptions of the classical linear regression
model. After calculating the labour productivity and capital productivity, we will run the
data using the SPSS program to get the value of the variablesj8 lr j8 2 andj0 3 . The result
explains the relationship between the independent and dependent variables regarding
the return to scale economic theory.

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

Results and Discussion

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

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

Labour productivity is computed by dividing total output by the number of the

employees. Due to changes and fluctuation in the flow of the labour, we will use the
average number of employees for the period of time being measured. The reason that
labour productivity is used is because labour is the most important input factor, being
more readily measured of all the input factors. The key to productivity of the
organisations lies in the way products and services are produced and delivered. Labour
productivity will explain how effective and efficient their human resources are and how
the organisations can manage their human resources.
 Capital productivity is a measure used in determining the value generated per unit
capital employed. Capital productivity indicates the degree of utilisation of fixed assets
and their efficiency with which assets are utilised. It is defined as revenue generated
per ringgit of fixed assets. High ratio indicates better performance of enterprise.

The Production Function Approach Model is used to determine the relationship

between labour and capital productivities, and the revenue. The finding explains how
efficient resources are used in producing the output with regards to economies of scale
theory. The information needed can be obtained using SPSS program to get the value
of the Beta and return to scale. Findings explain the return to scale economic theory
for the 3 selected GLCs. In the study, correlation of determination R2 is examined to
measure the goodness-of-fit in this Production Function Approach Model. The F-value
examines the sufficiency of information for the prediction of dependent variable that at
least one variable contributes significant information for the prediction of revenue.

Result of Unit Root Test

To ensure that there is a long term relationship among the variables in production
function approach model, Augmented Dickey-Fuller and Phillips Pheron tested the

o stationary data on the variables revenue, labour productivity and capital productivity.
The test is conducted for each company.

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

Level ADF PP
Variable Constant Constant Constant Constant
No trend Trend No trend Trend

Lnrevenue 5.250547 19.1027 Q.6849 -2.7239

Lnlabprod -0.07Q981 -2.580727 0.313096 -2.201378

Lncapprod 5.89999 4.4305 1 .649342 -1.250231

1st difference ^^^^^^^^^^^^Hi
Variable Constant Constant Constant Constant
No trend Trend No trend Trend
Lnrevenue 15.22807 -3.1177 * -17.1022***

Lnlabprod -2.132992 -1.326083 1 .659457

Lncapprod 3.537039 -2.113564 -10.3518***

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

Unit Root Test for Company GLCs2

Level ADF PP
Variable Constant Constant Constant Constant
No trend Trend No trend Trend
Lnrevenue -0.433182 -2.742251 0.271120 -4.809872

Lnlabprod -3.623501 -9.314789* -0.489388 -1-817388

Lncapprod -2.826488 -50.77674* -0.910947 -1.470332

1st difference ^^^^^^^^^^^^H
Variable Constant Constant Constant Constant
No trend Trend No trend Trend
Lnrevenue -2.702027 -4.129902* -7.917392**

Lnlabprod -7.294841* -2.516184 -5.911542**

Lncapprod -41.09709*** 2.300747 -3.673089

Notes: Lnrevenue = Ln revenue; Lnlabprod = Ln labour productivity; Lncapprod = Ln capital productivity.

The null hypothesis is that the series are non-stationary and the rejection of null hypothesis for ADF and PP
test is based on the MacKinnon's 119911 critical value.

" Significant at 1% level

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

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

Unit Root Test for Company GLCs3

Level ADF PP
Variable Constant Constant Constant Constant
No trend Trend No trend Trend

Lnrevenue -8.60132* -5.661365 -2.735627 -2.440830

Lnlabprod -7.906291* -2.479446 -8.943698* -16.88829*

Lncapprod -1.723994 -7.857781 - 1.701624 -1.661016
 1st difference ADF PP
Variable Constant Constant Constant Constant
No trend Trend No trend Trend

Lnrevenue -3.611111 -1.108200 0.708338

Lnlabprod -1.733847 -14.76463* -11.77362*

Lncapprod -5.342101*" -2.757883 -6.586986**

A/ofes: Lnrevenue = Ln revenue; Lnlabprod = Ln labour productivity; Lncapprod = Ln capital productivity.

The null hypothesis is that the series are non-stationary and the rejection of null hypothesis for ADF and PP
test is based on the MacKinnon's (1991/ critical value.

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

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

Productivity Performance for the 3 Selected GLCs

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

Productivity Performance of GLCsI

The productivity measurement indicator for this company was calculated from the
annual reports, year 2000 - 2006. Table 6 shows the result calculated for labour and
capital productivities for company GLCs!.

Productivity Measurement of Company GLCsI

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

2000 365.35 9.56
2001 408.74 10.44
2002 456.83 11.33

2003 499.12 12.97

2004 610.67 14.03
2005 748.34 18.02
2006 789.12 19-61
 The table shows that the performance or growth of labour and capital productivities
increased over the years. The labour productivity increased from RM365,350 in the year
2000 to RM789,120 in year 2006. The capital productivity increased twice from year
2000 to year 2006, from RM9,560 to RM19.610. This indicates that the workers have
improved the efficiency, knowledge and skill in producing the products. The utilisation of
fixed asset has also increased for company GLCsI.

Productivity Performance - GLCsI

Figure 2

Productivity (RM'OOO)

900

2000 2001 2002 2003 2004 2005 2006 Year

Labour Productivity GLCsJ Capital Productivity GLCsI

Figure 2 shows that the labour productivity performance is on an increasing trend.

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

Productivity Performance of GLCs2

The productivity indicators for company GLCs2 show that it is lower than company
GLCsI. This indicates that there is room for improvement in labour and capital
productivities in the company. The performance of the labour productivity from year
2000 to 2006 indicates an increasing trend but it is lower than company GLCs!. Table
7 shows that labour productivity has decreased from year 2000 to year 2001, from
RM88,520 to RM66,970. It then increased to RM98.520 in 2002 and increased more in
2003 and 2004. It decreased slightly in 2005, and in 2006 it increased to RM147.100.
 Year Labour Productivity (RM'OOO} Capital Productivity {RM'OOO)
2000 88.52 0-78
2001 66.97 0.57
2002 98.52 0.78
2003 146.85 1.07
2004 141.59 1.05
2005 131.86 0.86
2006 147.10 0.97

Productivity Performance - GLCs2

Figure 3

Productivity (RM'OOO)

160
140

100

o
2000 2001 2002 2003 2004 2005 2006 Year

,_ Labour Productivity GLCs2 —«— Capital Productivity GLCs2

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

Productivity Performance of GLCs2

The labour productivity of company GLCsS is the lowest, compared with the two
other companies. From the annual report, the number of employees was increasing
but the increase in the total output was not significant enough to affect the labour
productivity. This result shows a lower labour productivity for GLCsS, and is not
efficient or effective compared to the other two GLCs. The other reason is that the
workers were not well managed or the allocation of resources was not maximised. The
ratio of capital productivity in the GLCsS is also the lowest. Table 8 shows that the
labour productivity for company GLCs3 has decreased from year 2000, from RM87.810
to RM36,060 in year 2001 - This is because the employees had increased by triple, from
year 2000 to 2003, and also due to higher investment in capital but the revenue
collected only increased by double. Capital productivity for this company was
stagnated and the company has to study why it happens and not only measure their
performance based on financial indicators. Table 8 shows that the capital productivity
decreased from RM500.00 in year 2000 to RM400.00 in year 2006. The reasons are
because the fixed assets were under capitalised and utilised. The utilisation of the
fixed assets in this company needs to be improved to ensure a higher output.

Productivity Measurement of Company GLCs3

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

2000 87.81 0.50
2001 36.06 0.39
2002 51.62 0.56
2003 50.44 0.52
2004 43.60 0.45
2005 38.73 0.40
2006 45.10

Figure 4 shows the negative trends of performance of labour productivities for

0.40

o
company GLCsS. Even though the company recorded profit for every year but the
utilisation of the capital and labour productivities were not maximised. Compared to
GLCs! and GLCs2, the productivity ratio for GLCsS was the lowest. Being in the same
industrial sector with the other two companies, GLCsS needs to benchmark the two
other companies on how to improve the productivity ratio.

Productivity Performance - GLCsS

Figure 4

Productivity (RM'OOO)
100
90

X
X

2000 2001 2002 2003 2004 2005 2006 Year

m— Labour Productivity GLCsS —*— Capital Productivity GLCs3

 Comparison of Labour Productivities
Comparison between productivity ratios of the 3 selected GLCs is very important
to understand why certain companies have higher labour productivity and capital
productivity ratios than the others. The higher ratios indicate that the company is very
effective and efficient in managing human and capital resources. In these three
companies, the values of productivity ratio are varied from each other.

Comparison of Labour Productivities

Table 9
Year Labour Productivity Labour Productivity Labour Productivity
GLCsI (RM'OOO) GLCs2 (RM'OOO) GLCs3 (RM'OOO)
2000 365.35 88.52 87.81
2001 408.74 66.97 36.06
2002 456.83 98.52 51.62
2003 499.12 146.85 50.44
2004 610.67 141.59 43.60
2005 748.34 131.86 38.73

o
2006 789.12 147.10 45.10

Table 9 shows the comparison in labour productivity for these 3 GLCs, with GLCs!
having the highest labour productivity compared with the two other GLCs. There is a
very significant difference in the productivity ratio. This means that the performance of
GLCsI is much better than GLCs2 and GLCsS. Their workers are very effective and
efficient in producing the outputs. One unit worker in company GLCsI can produce
RM789,120 compared with GLCs2 which only produced RM147,100 and RM45JOO for
GLCs3 in year 2006. GLCs2 and GLCsS need to benchmark the systems implemented for
managing employees in GLCsI and adapt such programmes to improve their labour
productivity. The low ratio indicates that the workers are not maximised or not fully
capitalised, or wastage of time and maybe because of inadequate salary. The higher
ratio indicates the management efficiency in managing their workers, work altitude of
the employees is good and their workers are knowledgeable and skilful. Figure 5 shows
the comparison of the labour productivity for these 3 selected GLCs.
 Labour Productivity Comparison
Figure 5

Labour Productivity (RM'OOO)

900

800

700

600

500
400
300
200

100
D

2000 2001 2002 2003 2004 2005 2006 Year

Labour Productivity GLCsI Labour Productivity GLCs2 Labour Productivity GLCs3

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

productivity. This can be explained as GLCs! has a good managing system compared
with the two other companies. GLCs2 also shows an increasing trend but its value of
labour productivity ratio is far below that of GLCsI. The lowest in labour productivity
ratio is GLCsS. The selected 3 GLCs companies are from the same plantation sector
but have a very large range in the values of labour productivity. The labour productivity
ratio is very important because from the ratio we can understand the problem of the
companies and whether their workers are effective or efficient at all.

Comparison of Capital Productivities

The comparison between the capital productivity for these three companies also
showed a significant difference in their capital utilisation. GLCsI has utilised its fixed
assets very well in producing output, compared with the two others. GLCs2 and
GLCsS have problems in managing their fixed assets because the productivity ratio is
low compared to GLCsI. GLCs! indicates the efficiencies of assets utilisation
compared to companies GLCs2 and GLCs3. GLCs2 and GLCsS should increase the
utilisation of their fixed assets. Table 10 shows that in year 2006, GLCsI was very
successful in handling capital productivity, which is 19 times higher than GLCs2 and
GLCsS. This can be explained as GLCs! has utilised the optimum of the fixed assets in
production than GLCs2 and GLCsS.
 Comparison of Capital Productivities

Year Capital Productivity Capital Productivity Capital Productivity

GLCsI (RM'OOO) GLCs2 (RM'OOO) GLCsS (RM'OOO)
2000 9.56 0.78 0.50
2001 10.44 0.57 0.39
2002 11.33 0.78 0.56
2003 12.97 1.07 0.52
2004 14.03 1.05 0.45
2005 18.02 0.86 0.40
2006 19.61 0.97 0.40

Figure 6 shows the trend of comparison in the capital productivity. It shows a

significant difference in the value of capital productivity. The difference can be used to
explain how good company GLCsI is in managing its capital compared with the others.
The low ratio for the 2 other companies reflect the poor assets utilisation. The two
other companies have to find a better way to improve the capital productivity by
increasing the utilisation of their fixed assets.

Capital Productivity Comparison

Capital Productivity {RM'OOO)

0
2000 2001 2002 2003 2004 2005 2006 Year

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

The graph shows the performance of capital productivity for the 3 selected GLCs,
from year 2000 to year 2006. The capital for GLCsI has increased from RM9,560 in
year 2000 to RM19,610 in year 2006, but for GLCs2 and GLCs3 the performance of
capital productivity is very low compared to GLCsI. This indicates that the fixed assets
are under utilised for GLCs2 and GLCsS. Capital productivity for GLCs2 and GLC3 can
be improved by maximising the utilisation of their fixed assets.
Results of the Production Function Approach Model
The time series data for each selected company were run using the SPSS programme
to analyse the relationship between the variables and to determine the economies of
scale. The results explain the most significant factor affecting the revenue for these 3
selected GLCs. The model used is the Production Function Approach Model.

Results of the Data Analysis of GLCs!

The data for company GLCs! were regressed after the values of labour and capital
productivities were transformed to In. The output of SPSS for company GLCsI is shown
in the table below. The output explains the effectiveness and efficiency of the company.
It also explains which variables have significantly contributed to the dependent variables.

Model Summary : Coefficient of Determination of GLCsI

R Square Adjusted Std. Error oft

R Square the Estimate

,999a

a. Predictors : (Constant), Lnlcapprod, Lnlabprod

.999 .998 .01235
o
The Model Summary table shows the coefficient of determination. It measures
the degree of predictive accuracy of the regression model in explaining the variations
in the dependent variable. The model explains that 99.9 percent of the variation in
revenue was contributed by labour and capital productivities. That means other
variable have contributed very little to the revenue of GLCsI. The ANOVA (Analysis of
Variance) table contains the sum of square, degree of freedom, mean square, F test
and the level of significance of the regression and the residual. The purpose of this
table is to prove whether the summary table is correct or not. The ANOVA table
contains information needed to test the overall significance of the regression model.
The purpose of the test is to compare the means of three or more independent groups
and the variables compared are normally distributed.

ANOVA: ANOVA for GLCsI

Table 12
Model HHHpf *** Mean F Sia.
("•Bflftre Square

1 Regression .420 2 .210 1375.833 .0003

Residual .001 4 .000

Total .420 6

a. Predictors : (Constant). Lnlcapprod, Lnlabprod

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

Coefficients : Coefficients of GLCsI

Table 13
Unstandardised Standardised
Coefficients Coefficients

Std. Error

(Constant) 13.285 .446 29.785 .000

Lnlabprod .185 .128 .206 1.436 .224
Lnlcapprod .777 .140 .795 5-541 .005

a. Dependent Variable : Lnrevenue

The coefficients table contains information needed to evaluate the significance of

individual independent variables and for comparing the relative importance of each

o other. The Sig. value corresponding to each variable is to determine whether that
variable is significantly related to the dependent variable or not. The table coefficient
shows for GLCsI, the capital productivity is significant in contributing to the revenue
because the P value (0.005) < 0.05. The labour productivity is not significant in
contributing to the revenue because P value (0.224) > 0.05.

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

= 13.285+ 0.206 In j0L + 0.777 In J32

ThejS, value of 0.206 indicates that if a labour productivity increased by 1 percent,

then the revenue should increase by approximately 0.206. Thej6 2 value indicates that
when capital productivity assets increased by 1 percent, the revenue will increase by
0.795 percent. Based on the beta value, the capital productivity is more significant and
important compared to labour productivity in contributing to the revenue of company
GLCsI.

The parameter for economies of scale for company GLCs! is obtained by adding
these two dependent variables (economies of scale _/J, + JS2 = 1.001)- 1.001 was
obtained, which gives the value of constant return to scale. As is evident, over the
period of this study, the revenue for company GLCs! was characterised by constant
return to scale.
Results of the Data Analysis GLCs2
The data for company GLCs2 were run through the SPSS. The output from SPSS
is shown in the table below. The outputs have been studied to identify the significance
of the independent variables towards the dependent variables.

Model Summary : Coefficient of Determination of GLCs2

Model R R Square Adjusted Sld. Error of

R Square the Estimate

1 .9569 .913 .896 .12467

2 .991 C .983 .975 .06159

a. Predictors : {Constant). Lnlabprod

b. Predictors : (Constant), Lnlcapprod, Lnlabprod

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

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

Model Sum of df Mean F Sig.

Square Square

1 Regression .819 1 .819 52.669 .D01a

Residual .078 5 .016

Total .896 6

2 Regression .881 2 .441 116.141 .000b

Residual .015 4 .004

Total .896 6

a. Predictors : (Constant), Lnlabprod

b. Predictors : {Constant!, Lnlcapprod, Lnlabprod
c. Dependent Variable : Lnrevenue

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

1 (Constant) 8-990 .787 11.424 .ODD

Lnlabprod 1.206 .166 .956 7.257 .001

2 (Constant) 2.977 1-531 1.945 .124

Lnlabprod 2-416 .309 1.915 7.815 .001

Lncapprod -1.707 .420 -.995 -4.060 .015

a. Dependent Variable : Lnrevenue

The coefficients table contains information needed to evaluate the significance of

individual independent variables and for comparing the relative importance of each
other. The Sig. value corresponding to each variable is to determine whether that
variable is significantly related to the dependent variable or not. The table coefficient
shows for GLCs2, the labour productivity is significant in contributing to the revenue

o because the P value (0.001) < 0.05. The capital productivity is also significant in
contributing to the revenue because P value (0.015) < 0.05.

The production function equation model for company GLCs2 is:

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

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

Results of the Data Analysis GLCs3

The data for company GLCsS were processed using the SPSS programme. The
output of SPSS is shown in the table below. The output is studied to identify the
significance of independent variables towards the dependent variables. Table 17
suggests that the model explains 89.6 percent of the variation in revenue. That means
other variables not included in the model are also related to the revenue. The coefficient
of determination R2 explains 89.6 percent revenue was explained by labour and capital
productivity factors.
 Model Summary : Coefficient of Determination of GLCsS

R Square Adjusted Std. Error of

R Square the Estimate
896a .803 .704 .12624

a. Predictors : (Constant), Lnlcapprod, Lnlabprod

ANOVA : ANOVA for GLCsS

Model Sum of df Mean F Sig.

Square Square

1 Regression .259 2 .130 8.132 .039a

Residual .064 4 .016

Total .323 6

b. Predictors : (Constant), Ln/capprod, Lnlabprod

c. Dependent Variable : Lnrevenue

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

Coefficients : Coefficients of GLCsS

Table 19
Unstandardised Standardised
Coefficients Coefficients

Std. Error

1 (Constant] 18-992 1.107 17.150 .000

Lnlabprod -.779 .221 -.979 -3.523 .024

Lncapprod 1.640 .445 1.025 3.687 .021

a. Dependent Variable : Lnrevenue

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

The equation for production function model for company GLCsS is:

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

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

Conclusion and Recommendation

Summary
The findings of this research show that the performance of the labour and capital
productivity factors of the companies is significantly different from each other. The
labour productivity for GLCsI is higher than GLCs2 and GLCsS even though they are in
the same plantation sector The differences are indicated by the efficiencies of the
labour in producing the output. The capital productivity for these 3 companies also
shows a different performance in the utilisation of their fixed assets. Company GLCsI
has a higher performance in capital productivity compared with the two others. Company
GLCsS has a fluctuating performance in capital productivity. This indicates that the

o capital is not utilised and not effective in producing the output for GLCs2 and GLCsS.
The performance from 2000 to 2006 reflects the productivity growth for each company.
The higher labour productivity indicates the effectiveness and efficiencies of their workers
in producing the output. The capital productivity explains how the fixed assets are
utilised. The highest ratio implies that the capital is utilised to the maximum compared to
the lower ratio result, which indicates capital is not efficient and under utilised.

The production function approach model explains the economies of scale for each
company. The company GLCsI is operating at constant return to scale, meanwhile
GLCs2 and GLCsS are operating under decreasing return of scale. The study shows
that the three GLCs are not efficient in managing labour and capital productivities.
Eventhough all the 3 companies selected are making profit over the period of study,
their performance can still be improved further by increasing labour and capital
productivities. The companies have to strategise the management and development of
human capital, with the aim of increasing their knowledge and skills through trainings.
Capital can be improved further by increasing the utilisation of fixed assets.

The company should emphasise the study on economies of scale to increase the
efficiency and effectiveness in production of the products. The study shows only GLCsI
is operating at a constant return to scale The two other companies are operating at
decreasing return to scale This means that the company has not maximised the labour
productivity and capital productivity. The company has a lot of room to improve their
labour and capital productivities. The company should have a continuous productivity
improvement plan to increase the efficiency and competitiveness m the market.
Conclusion
With increasing recognition that productivity growth is the key to sustain the
economic expansion, measuring productivity is becoming important to economists and
policy makers. The accurate measurement of productivity performance plays an
important role in providing the information economists need to put forth better policy
recommendations and for policy makers to make the right decisions. Micro
productivity is parallel with the scope covered by the term "microeconomics." It refers
to the productivity of the organisational unit and size, such as a business, division, or
department. The findings of the study show the productivity measurement can identify
the effectiveness in capital and labour compared to using the financial indicators.

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

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

Recommendation
The productivity movement has a scientific basis in the statistical control of
manufacturing processes, that is, quality control. Since the late 1980s, it has been
increasingly applied to the business-level management of an organisation. The objective
in the original approach was to manage the production process so that it achieved and
maintained a consistent, desired level of quality. The Malaysian Government gives
recognition to the company which measures productivity. The Productivity Award was
presented to companies with a higher ratio in productivity measurement indicator. The
principles and values emphasised in this category are productivity measurement,
management by facts, continuous improvement, and long-term goals of the organisation.

Organisations that have succeeded in improving productivity growth have typically

used approaches in productivity and quality improvement programmes, such as Total
Quality Management (TQM), Just In Time, Total Preventive Maintenance, Quality Control
Circle, Kaizen, 5S and others. The performance or productivity growth seeks continuous
improvement in processes, products, and services of an organisation. The company
should require a shared mindset (culture) that emphasises customer satisfaction,
shared leadership and getting it right the first time. Another perspective indicates that
to increase efficiency and performance the company should have philosophies that are
related to customer focus, continuous improvement and employee participation. To
sustain and maintain competitiveness, the organisations have to measure their
performance or productivity growth since these reflect how competitive the companies
are. The productivity performance emphasises the understanding of variation, the
importance of measurement, the role of the customer and the involvement of
employees at all levels of an organisation in pursuit of such an improvement.

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