Financial Efficiency of SMEs in the Northern Corridor Economic Region: A DEA Analysis

Abstract

Abstract: Given the important role of SMEs as an endogenous growth factor in the local economy, ensuring strong and competitive development for this segment of industry has become a key concern in making the Northern Corridor Economic Region (NCER) a success. “This paper gauges the operating efficiency of SMES in NCER in channelling financial resources (0 revenue and profit. Data Envelopment Analysis (DEA) was used to analyse 1047 SMEs in Kedah, Penang and Perak forthe financial year 2007. DEA shows that only 20 SMEs scored 100 per cent efficiency, and they are mostly from Kedah and Perak. Most of them belong to Wholesale and Retail Trade and Restaurant and Hotels, followed by Financing Insurance, Real Estate, Investment and Business Services, and Manufacturing. ‘This sectoral represcatation for the efficient SMES is consistent with the distribution of ‘SMEs inthe NCER population. From our DEA analyses, we conclude three findings: first financial efficiency is not related 0 company size; second, oversize in capital (inputs) is ‘more critcal than profit (output) generation in determining relative efficiency third, the distribution of financial efficiency is not balanced across the three sates in NCER. The first and third points are consistent with the Korean case reported in Yang (2006).