Volume 30, Number 1, January 2015

The Relationship between Product Diversity and the Performance of Credit Unions and
Badan Usaha Kredit Pedesaan in Yogyakarta Special Province
Stephanus Eri Kusuma & Wihana Kirana Jaya

Customers' Perceptions of Service Quality Dimensions in the Indonesian Banking Industry:

An Empirical Study
Ananda Sabil Hussein & Raditha Hapsari

Competency, Entrepreneur Characteristic and Business Performance:

Study of the Pempek Business in Palembang
Fransiska Soejono, Anastasia Sri Mendari, Micheline Rinamurti

Analysis of Market Timing toward Leverage of Non-Financial Companies in Indonesia

Vera Pipin Wulandari & Kusdhianto Setiawan

Factors Influencing the Success of Performance Measurement:

Evidence from Local Government
Herlina Primarisanti & Rusdi Akbar

Infant Health Production Function: Role of Prenatal Care

Heni Wahyuni

Book Review:
Investment Analysis and Management
(An Indonesian Adaptation)
Hajanirina Andrianantenaina
 Eddy Junarsin, Ph.D.
Fuad Rakhman, Ph.D.
Akhmad Akbar Susamto, Ph.D.
Prof. Wihana Kirana Jaya, Ph.D.
B. Raksaka Mahi, Ph.D.
Prof. Djoko Susanto, Ph.D.
Prof. Sukmawati Sukamulja, Ph.D.
Sekar Mayang Sari, Ph.D.
Deden Dinar Iskandar, Ph.D.
Prof. John Malcolm Dowling, Ph.D.
Prof. Mohamat Sabri Hassan, Ph.D.
Prof. Stein Kristiansen, Ph.D.
Prof. Pacha Malyadri, Ph.D.
Prof. Jae Il Kim, Ph.D.
Daniel Suryadarma, Ph.D.
Arianto Patunru, Ph.D.
Isaac Marcelin, Ph.D.
Prof. Shenghui Tong, Ph.D.
Prof. Thomas Cleff, Ph.D.
Arif Daryanto, Ph.D.
Bayu Sutikno, Ph.D.
Prof. Mudrajad Kuncoro, Ph.D.
Prof. Lincolin Arsyad, Ph.D.
Prof. Jogiyanto Mustakini, Ph.D.
Muhammad Edhie Purnawan, Ph.D.
Prof. Indra Wijaya Kusuma, Ph.D.
Prof. Eduardus Tandelilin, Ph.D.
Didi Achjari, Ph.D.
Ertambang Nahartyo, Ph.D.
Hargo Utomo, Ph.D.
Mamduh M. Hanafi, Ph.D.
Kusdhianto Setiawan, Ph.D.
Prof. Tri Widodo, Ph.D.
Nurul Indarti, Ph.D.
Prof. Indra Bastian, Ph.D.
Jessica Dunn, Ph.D.
Universitas Gadjah Mada
Universitas Gadjah Mada
Universitas Gadjah Mada
Universitas Gadjah Mada
Universitas Indonesia
Sekolah Tinggi Ilmu Ekonomi YKPN
Universitas Atma Jaya Yogyakarta
Universitas Trisakti
Universitas Diponegoro
University of Hawaii at Manoa, U.S.
Universiti Kebangsaaan Malaysia, Malaysia
University of Agder, Norway
Osmania University, India
Seoul National University, Korea
Australian National University, Australia
Australian National University, Australia
University of Maryland Eastern Shore, U.S.
Central University of Finance and Economics, China
Pforzheim University, Germany
Institut Pertanian Bogor
Universitas Gadjah Mada
Universitas Gadjah Mada
Universitas Gadjah Mada
Universitas Gadjah Mada
Universitas Gadjah Mada
Universitas Gadjah Mada
Universitas Gadjah Mada
Universitas Gadjah Mada
Universitas Gadjah Mada
Universitas Gadjah Mada
Universitas Gadjah Mada
Universitas Gadjah Mada
Universitas Gadjah Mada
Universitas Gadjah Mada
Universitas Gadjah Mada
Murray State University, U.S.
 ISSN 2085-8272

CONTENTS

The Relationship between Product Diversity and the Performance of Credit Unions and Badan
Usaha Kredit Pedesaan in Yogyakarta Special Province
Stephanus Eri Kusuma & Wihana Kirana Jaya ......................................................................... 1 – 16

Customers’ Perceptions of Service Quality Dimensions in the Indonesian Banking Industry:

An Empirical Study
Ananda Sabil Hussein & Raditha Hapsari ................................................................................. 17 – 29

Competency, Entrepreneur Characteristic and Business Performance:

Study of the Pempek Business in Palembang
Fransiska Soejono, Anastasia Sri Mendari, Micheline Rinamurti ............................................ 30 – 41

Analysis of Market Timing toward Leverage of Non-Financial Companies in Indonesia

Vera Pipin Wulandari & Kusdhianto Setiawan .......................................................................... 42 – 55

Factors Influencing the Success of Performance Measurement:

Evidence from Local Government
Herlina Primarisanti & Rusdi Akbar .......................................................................................... 56 – 71

Infant Health Production Function: Role of Prenatal Care

Heni Wahyuni............................................................................................................................... 72 – 89

Book Review:
Investment Analysis and Management
(An Indonesian Adaptation)
Hajanirina Andrianantenaina ..................................................................................................... 90 – 92

About the Authors ....................................................................................................................... 93 – 95

Index ............................................................................................................................................. 96 – 96

Previous Abstracts of Journal of Indonesian Economy and Business Volume 29, Number 3,
2014 .............................................................................................................................................. 97 – 99
Journal of Indonesian Economy and Business
Volume 30, Number 1, 2015, 1 – 16

THE RELATIONSHIP BETWEEN PRODUCT DIVERSITY AND THE

PERFORMANCE OF CREDIT UNIONS AND BADAN USAHA KREDIT
PEDESAAN IN YOGYAKARTA SPECIAL PROVINCE

Stephanus Eri Kusuma

Universitas Gadjah Mada
(stephanuserikusuma@gmail.com)

Wihana Kirana Jaya

Universitas Gadjah Mada
(wihana@ugm.ac.id)

ABSTRACT

This study analyzes the relationship between product diversity and the performance of
microfinance institutions (MFIs), especially Credit Unions (CUs) and Badan Usaha Kredit
Pedesaan (BUKPs) in Yogyakarta. It employs a binary logistic regression method in its analysis
and utilizes annual pooled cross section data from 16 CUs and 34 BUKPs in Yogyakarta from
2011. The result indicated that there was a direct negative relationship between the levels of
saving–loan product diversity and the scale of outreach and also between the levels of saving–
loan product diversity and depth of outreach. It also suggested an indirect negative relationship
between the levels of saving–loan product diversity and staff productivity and also between the
levels of saving–loan product diversity and self-sufficiency.
Keywords: product diversity, performance, microfinance institutions, CUs, BUKPs

INTRODUCTION product diversity, diversification and the per-

A shift of the paradigm and practice in the
microfinance field in the last 10 years is the
change in MFIs focus, from providing only a
single product to offering combined microfin-
1
ance products (Rossel-Cambier, 2008). Despite
its increasingly widespread practice, the issue of
combined microfinancing has received relatively
little attention. The Rossel-Cambier’s study
stated that specific research questions such as
whether combining credit and insurance services
improved or weakened the organisational per-
formance of micro-finance schemes remains
underexplored.
Some previous empirical studies which
2 Yogyakarta was chosen as the region for this
focused on explaining the relationship between
1 create a largermicrofinancing network (see
Initially, MFIs only provided business loan service.
Nowadays, they also provide loans and savings for many
purposes, insurance, transfer, leasing and non-financial
services.
2
Esho, et al. (2005), Goddard, et al. (2008), Barry and
Tacneng (2009), Rossel-Cambier (2010a, 2010b, 2011)
and also Lensink, et al. (2011).
formance of MFIs indicated that there was still
no consensus regarding the relationship between
product diversity and the performance of MFIs.
Despite our best efforts to find empirical studies
related to this study, the authors could not find a
study focused on the product diversity issue in
the context of Indonesian MFIs. To fill this gap,
the authors performed a study which focused on
analyzing the relationship between product
diversity and the performance of MFIs operating
in Indonesia, especially in the context of Credit
Unions (CUs) and the Badan Usaha Kredit Pede-
saan (BUKPs) in Yogyakarta Special Province.
research because it is one of the regions in Indo-
nesia with very dynamic microenterprises, which
Pradiptyo, et al., 2013). Thus, it can be predicted
that the microfinance sector in Yogyakarta is
very open to development and needs more dis-
cussion. In addition, December 2010 to Decem-
2 Journal of Indonesian Economy and Business
Table 1. Some performance indicators of CU and BUKP in Yogyakarta Special Province, 2011
Indicators
Number of units
Value of savings (in billion Rp.)
Value of loans outstanding (in billion Rp.)
Total assets (in billion Rp.)
Savings per units (in million Rp.)
Loans outstanding per unit (in million Rp.)
Total assets per unit (in million Rp.)
Source: Primary data from Income and Financial Management Department of Yogyakarta Special Province and Regional
Credit Union Coordinating Agency of Yogyakarta Special Province (Puskopdit Bekatigade and Puskopdit Jatra
Miguna), processed by the authors.
ber 2011 was used in this research as the data
period because it is the most up-to-date overall
annual data that can be provided by the MFIs
sampled at the time of data gathering (Septem-
ber–December 2012).
The purpose of this research was to identify
whether or not the relationship between product
diversity and performance exists in the operation
of the CUs and BUKPs in Yogyakarta Special
Province. The CUs and BUKPs were chosen as
the MFIs to be sampled with respect to certain
considerations. First, the CUs and BUKPs were
the two most sustainable examples of non-bank
MFIs amongst the group of financial coopera-
tives and village credit institutions (ProFi, 2006;
Rahayani, 2009). Second, empirical studies
which focused on credit unions and village credit
institutions (including BUKPs) were still limited
(Kusumajati, 2012). Third, the probability of
accessing reliable and actual data from the CUs
and BUKPs was relatively higher than from the
other non-bank MFIs because most of the CUs
and BUKPs have a structured and relatively up-
to-date performance documentation system.
Fourth, the individual CUs and BUKPs tend to
have relatively similar main operational activi-
ties, operational scales and effectiveness levels
of the institutional system. This gives a logical
reasoning for integrating the unit data from the
3
two different MFIs.
3
In regards to the operational activities of CUs and BUKPs,
both MFIs have the same mission to serve people who are
underserved or unserved by the existing financial institu-
tions. In addition, both MFIs also place the provision of
savings and credit services as their major activities.
Regarding their scales of operation, the data showed that
January
CU BUKP
44 75
69.94 84.21
69.43 100.56
97.77 135.01
1.59 1.12
1.58 1.34
2.22 1.80
The following section reviews the frame-
work to understand the relationship between the
product diversity and performance of the MFIs.
The next section describes the methodology of
this research. After that we explain the data and
analysis of this study. The final section is the
conclusion and recommendations.
Relationship between the Product Diversity
and Performance of MFIs
Rossel-Cambier (2010b) stated that the pro-
vision of combined microfinancing, by defini-
tion, offered clients the possibility of a larger
choice of financial services than that offered by
mono-product MFIs. Offering more services
means that more needs are addressed and hence
more socially excluded people will make use of
these services. According to Frankiewicz &
Churchil (2011), conceptually, product diversity
and diversification can bring both positive and
negative effects to an MFIs performance. The
positive effects arise from the increase in client
satisfaction and loyalty that will be translated
into the increase in word of mouth promotion by
clients and loans-savings clients transactions
quality. In addition, the more varied products
provided by the MFIs enable them to diversify
the average value of savings, credit and assets of the CUs
and BUKPs in Yogyakarta Special Province is not very
different (see table 1). Moreover, although the ownership
and organization structure of these two MFIs are
different, they have their own advantages regarding their
institutional structured elements (e.g. formal and informal
rules, monitoring and enforcement mechanisms) so that
the effectiveness of their institutional systems are
relatively similar.
2015 Kusuma & Jaya 3

their sources and use of funding, and hence in-
crease the effectiveness of their MFIs risk man-
agement. Those effects jointly generate an
increase in the outreach and financial perfor-
mance of MFIs. Meanwhile, the negative
impacts arise from the financial and reputation
loss risks, staff performance decreases because
of over capacity, product canibalization or
exclusion of the poor because of the inappro-
priate design that potentially exists when a new
product is launched.
Rossel-Cambier (2010a), according to some
studies, stated that combined microfinancing
will support the achievement of economies of
scope, the effectiveness of loan delivery and the
decrease of transaction costs. It can also facili-
tate joint-client registration, the access to infor-
mation about clients (for example through more
direct contact from a more frequent transaction
or saving transaction record) and access to a
wider market. However, the Rossel-Cambier’s
study stated that the provision of combined
microfinancing may increase the complexity of
the operation of MFIs when excess transactions
happen. In addition, a study by Lensink et al.
(2011) stated that the provision of multiple
products by MFIs, which combined financial and
non financial services (named microfinance
plus), was expected to: 1) solve multidimen-
sional problems of poverty and be a tool to reach
the poorest, 2) improve the human capital and
loyalty of MFIs customers, 3) reduce the default
risk hence the sustainability of MFIs and 4)
build the comparative advantage of MFIs. But,
microfinance plus can produce some unexpected
impacts, such as: 1) higher operational costs, 2)
an administrative burden, 3) poor quality or
irrelevant services, 4) complex reporting and 5)
low monitoring quality. The conceptual frame-
work described above is illustrated in Figure 1
below.
Some empirical studies analyzed the rela-
tionship between the diversity and performance
of MFIs. Even so, there was no consensus
regarding such a relationship. The study by Esho
et al. (2005) indicated that an increase of the fee-
based activity of CUs in Australia increased the
financial risk and decreased the profitability of
the observed CUs. The study by Goddard et al.
(2008) found that the increase of fee-based
activity in the operation of CUs in the United
States was negatively related to the achievement
of a risk-adjusted ROA of sampled CUs. The
study by Barry & Tacneng (2009) found that
MFIs which focused on loan delivery had a
higher level of depth of outreach but a lower

Provision of more varied MFIs products

Positive effects Negative effects

Fulfilment of client needs (inc. the poor)
Increase of client satisfaction and loyalty
Increase in saving-loan transaction quality
Increase in word of mouth marketing
Increase in information about clients
Diversification of sources and uses of funds
Diversification of risks
Economies of scope advantages
Increase in complexity & staff responsibility
Increase in monitoring problem
Decrease in productivity & service quality
Product canibalization
Unmatched additional product(s) that exclude the
poor
Financial and reputation loss risk in the
introduction of additional product(s)

Change of MFIs outreach and financial performance

Source: Rossel-Cambier (2010a, 2010b), Lensink et al. (2011), Frankiewicz & Churchil (2011), synthesized and
figured by the authors.
Figure 1. Relationship between the product diversity and performance of MFIs
4 Journal of Indonesian Economy and Business January

scale of outreach, financial performance and
portfolio quality in comparison with MFIs that
were not only focused on loan delivery. Barry &
Tacneng’s study also indicated that MFIs that
provide non loan-saving products, especially for
education and health services, tended to have a
higher scale of outreach, productivity and port-
folio quality but this accompanied a lower self-
sufficiency in comparison with the MFIs that did
not provide education and health services. The
study of Rossel-Cambier (2010a) found that the
provision of combined microfinance was posi-
tively related to the efficiency and productivity
of MFIs, while the study by Rossel-Cambier
(2010b) found that combined microfinance was
positively related to the scale of outreach, but
negatively related to the depth of outreach, of
MFIs in Latin America and the Carribean. A
case study conducted by Rossel-Cambier (2011)
in Credit Union City of Bridgetown Barbados
found that the introduction of new products
restricted the access of poor clients as the
attributes (procedures and costs) needed to
access the new products did not match poor
clients capacities. The study of Lensink, et al.
(2011) which involved 290 rated MFIs in 61
countries indicated that MFIs which jointly pro-
vide financial and non financial services, named
microfinance plus, tended to have a higher level
of depth of outreach but a lower portfolio qual-
ity. In addition, the provision of social services
in the microfinance plus scheme tended to have
negative effects on the financial performance of
the sampled MFIs.
METHODOLOGY
Referring to Barry & Tacneng (2009), the
authors built a model to test the relationship
between the product diversity and performance
of MFIs. The authors accomodated some addi-
tional variables that could potentially influence
the performance of the MFIs which were
recommended by Arsyad (2005), Okumu (2007)
and Nyamsogoro (2010). In general, the perfor-
mance model used in this study can be written
as:
= + + + ⋯+ +
where is the dependent variable that
represents MFI performance; , , ..., are
the independent variables that represent some
factors potentially influencing the MFIs’
performance; , , ..., are the estimated
parameters for the independent variables
used in the regression model, and is the
error term. Specifically, the model can be
written as:

= + + + + + +
+ + + … (Model 1)

= + + + + + +
+ + + … (Model 2)

= + + + + + +
+ + + + … (Model 3)

= + + + + + +
+ + + + … (Model 4)

= + + + + + +
+ + + + ... (Model 5)
2015 Kusuma & Jaya
Performance variables: 1) Scale of outreach
(dummy of MFI active clients or DKLIEN); 2)
depth of outreach (dummy of MFI loans dis-
bursed per client or DRAPINJ) in which the big-
ger the value of loans disbursed per client means
a lower depth of outreach as the MFI then is fo-
cused on relatively bigger scale (wealthier) loan
clients; 3) staff productivity (dummy of loans
disbursed per staff or DPROD), 4) operational
efficiency (dummy of operational cost per aver-
age asset based on periods or DRBO), 5) self-
sufficiency (dummy of operational self-suffi-
ciency or DOSS).
Product diversity variables: 1) The level of
loans–savings product diversity (the number of
loans–savings product types or SIMPIN); 2) the
level of non loans–savings product diversity (the
number of non loans–savings product types or
NONSIMPIN)
Control variables: 1) Size of the MFIs (assets
or ASET); 2) duration of MFI’s operation (age
of MFI or USIA); 3) proportion of loans out-
standing (loans to assets ratio or SHRPINJ); 4)
proportion of savings (savings to assets ratio or
SHRSIMP); 5) operational area of MFI service
unit (dummy of location—urban or village— or
DWIL(1)).
This study employed a binary logistic regres-
sion method, a model regression in which the
dependent variable is a dichotomous variable.
Following Goldberger, as cited in Maddala
(1983), who suggested that the use of binomial
or binary choice models could overcome the
inefficient parameter estimation with ordinary
least squares when the datasets were not nor-
mally distributed, as in the case of the datasets
available for this study. The binary regression
method uses a discrete dependent variable and
assumes that individuals are faced with a choice
between two alternatives and that their choice
depends on their characteristics. As all perfor-
mance indicators in our datasets were continous
variables, we converted them into dichotomous
variables by dividing the value of each perfor-
mance indicator (for example: the number of
clients) into two: the one with a value above the
average value of population or relatively high
was coded as ‘1’, and the one with a value below
5
or exactly same as the average value of popula-
tion or relatively low was coded as ‘0’.
There are some limitations that should be
considered related to the models used in this
study. First, the models used in this study may
have suffered from an endogeinity problem.
Regarding the endogeinity issue in an econome-
tric model, according to Wooldridge (2012), an
econometric model suffers from endogeinity
problems if at least one of the “explanatory
variables” is endogenous or jointly determined
with the dependent variable (In other words, the
assumption of a zero covariance is violated).
This problem may arise as a consequence of the
exclusion of explanatory variable(s) from the
models, called omitted variable(s). In our model
formation, we excluded a variable, named insti-
tutions. Institutions are a set of formal and
informal rules and also its enforcement mechan-
ism that determines individual and organiza-
tional behavior (Burky & Perry, 1998). In the
context of the MFIs operation, it is actualized in:
1) government or MFIs’ regulations (formal
rules) and 2) social conventions, culture, social
norms, and ethics (informal rules) which are
involved in the MFIs operations (Kusumajati,
2012). Based on our observations of the sampled
MFIs used in our study, institutions were re-
flected in the formal rules (governor’s decrees,
various government documents, supervisor guid-
ance, written organizational policy and conven-
tion, various kinds of standard operating proce-
dures, planning documents), informal rules
(organizational culture and ethics, client culture),
enforcement mechanisms (reporting and moni-
toring procedures/techniques, incentives and
sanction mechanisms) adopted by each sampled
MFI.
Some prominent Indonesian empirical mi-
crofinance studies that focused on the effects of
institutions on MFIs’ performance in Indonesia
confirmed that institutions significantly influ-
4
ence MFIs’ performance. Even so, it was diffi-
4
A study by Martowijoyo (2001) found that implemen-
tation of the Indonesian Rural Credit Banks System
(Bank Prkreditan Rakyat System) influenced the
performance of the Rural Finance Institutions that were
supposed to be Rural Credit Banks. A study by Arsyad
(2005) found that formal rules, informal rules, the
6 Journal of Indonesian Economy and Business
cult for us to find any quantitave proxy that was
considered appropiate to represent the institu-
tions variable. Initially, we considered the type
of MFIs to be used in this study as the proxy of
institutions. Unfortunately, our field observa-
tions found that the institutional features of each
MFI did not provide clear−cut evidence. In this
case, similar types of MFIs (for example within
CUs) did not always have the same features of
institutions and achieve institutional perfor-
mance, while the different types of sampled
MFIs (for example between CUs and BUKPs)
did not always have different features of institu-
tions or achieve institutional performance. Thus,
we cannot hypothesize that the type of MFIs
reflect the type of institutions. Finally, as we
could not find an alternative proxy for institu-
tions, we dropped the institutions variable from
our quantitave models. Furthermore, our field
observations recognized that institutions tended
to be correlated with an MFI’s size, age, opera-
tional area, loan proportion, and saving propor-
tion. Specifically, the relatively large, old,
urban–based MFIs in our sample tended to have
better formal institutions and enforcement, while
the smaller, younger, and rural–based MFIs
tended to have poorer formal institutions and
enforcement. In addition the rural–based MFIs
we sampled tended to have better informal rules
and enforcement in comparison to the urban–
based ones. This evidence means that a correla-
tion does exist between the institutions variable
(which was omitted from the models used in this
study) and some explanatory variables (MFI
size, age, and operational area). Thus, it poten-
tially leads to endogeinity problems as the
explanatory variables correlated with the omitted
variable.
The second limitation of this study was the
exclusion of macroeconomic variables in the
models used. It was because there was no clear
operation areas of the sampled MFIs. In this
case, some sampled MFIs operated in villages or
interaction between formal and informal rules, and also
the enforcement of formal and informal rules influenced
Village Credit Institutions in Bali. A study by Kusumajati
(2012) confirmed that formal rules and informal rules
significantly affected the performance of Credit Unions
in Indonesia.
January
at the sub-district level where macroeconomic
data was not available. Morever, some sampled
MFIs operated in some dispersed sub-districts
with different macroeconomic characteristics. In
short, it would need an abundance of resources
to provide convenient macroeconomic data for
each MFI’s operational area. The third limitation
was the use of logistic probability models. This
study utilized a binary logistic model. This
model predicts less strongly the direct quantita-
tive effect of independent variables in affecting
performance as its dependent variables are
binary choices.
DATA AND ANALYSIS
This research used quantitative and qualita-
tive data for the analysis. The quantitive data
were cross section data sourced from the annual
operational performance statistical reports of
each sampled MFI (CU and BUKP), while the
qualitative one was gathered from a direct inter-
view with each CU respondent (CU Manager
and Head of the Office of each BUKPs), and the
Manager of the Coordinating Body of the CUs
and BUKPs in Yogyakarta Special Province.
This research employed 16 CU units (from a
total of 36 units) and 34 BUKP units (from the
total of 75 units) in Yogyakarta Special Prov-
ince. This research utilized a multi-stage sam-
pling process as explained in Figure 2.
Later, table 2 explains the basic descrip-
tive statistics of the variables used in this
study.
Regarding the five models proposed for the
analysis, the results of the Omnibus test,
Hosmer–Lomeshow test, classification table &
Cox-Snell R2 and Nagelkerke R2, there was
sufficient statistical evidence to conclude that all
five models were acceptable to explain the
relationship between the product diversity and
performance of the sampled MFIs (see table 3).
From the statistical results, we found that the
five models tended to pass all of the tolerance
criteria or could be judged as ‘fit’ models.
2015 Kusuma & Jaya 7

STEP 1: Identifying total CUs & BUKPs operating

Data in Yogyakarta Special Province 36 units of CU
Inventory (based on the database of the 75 units of BUKP
Coordinating Body of CU and BUKP)

STEP 2: Minimum N = 5 X 9 = 45
Defining the total number of
Defining (We used 50 unit sample)
MFIs used in analysis based on Bartlet et al.
Sampled MFIs (2001), minimum of 5 times the independent CU=(36/111)*50=16 units
Quota variables, & proportionality rule BUKP=(75/111)*50=34 units

STEP 3:
Defining sampled Defining the sampled CUs and BUKP 16 CUs and 34 BUKPs with
CUs & BUKPs based on their scale the highest sum value of
(scale of its main product, savings & loan) savings and loan

Note: The total number of 36 CUs in the sampling process was the number of CU recommended by the Credit
Union Coordinating Body of Yogyakarta. According to the monitoring staff of the body, among the 44 CUs in
its database, there are 6 CUs which are in dispute (for 2 or 3 periods they have not reported their performance
or are operationally inactive) and 2 CUs located outside Yogyakarta province. Thus, these 8 CUs were not
recommended for this research. After consideration, this study excluded these 8 CUs from the CU sample basis.
Sources: Figured by the authors
Figure 2. Sampling process

Table 2. Descriptive statistics of variables used in this study

Minimum Maximum Standard
Indicator N Average
value value deviation
KLIEN (people) 50 156.00 2205.00 601.80 369.27
RAPINJ (million Rp.) 50 1.03 17.68 5.44 2.76
PROD (million Rp./staff) 50 114.94 1553.60 566.17 315.98
RBO (%) 50 2.97 18.62 9.79 3.08
OSS (%) 50 94.19 222.90 136.20 23.32
SIMPIN (product type) 50 3.00 13.00 5.28 2.38
NONSIMPIN (product type) 50 0.00 5.00 1.66 1.47
ASET (billion Rp.) 50 1.54 11.71 3.25 1.90
USIA (years) 50 2.00 31.00 17.26 6.53
SHRPINJ (%) 50 43.95 92.88 71.97 12.20
SHRSIMP (%) 50 12.27 95.52 63.43 16.18
DWIL (urban-1 / rural-0) 50 0.00 1.00 0.56 0.50
Sources: Primary data from sample units of CU and BUKP, processed by the authors

Table 3. The result of logistic regression

Model (Dependent Variable)
Independent
Variable Model 1 Model 2 Model 3 Model 4 Model 5
(DKLIEN) (DRAPINJ) (DPROD) (DRBO) (DOSS)

SIMPIN -1.075* -2.224** -0.544 -3.648 -0.353

(0.091) (0.033) (0.132) (0.111) (0.230)
NONSIMPIN 0.353 0.489 0.480 0.622 0.607
(0.589) (0.476) (0.390) (0.488) (0.194)
ASET 3.578*** 3.393* -0.900 -4.720* -1.469**
(0.009) (0.007) (0.150) (0.067) (0.010)
USIA 0.106 0.201 0.109 -0.358 0.089
(0.408) (0.277) (0.417) (0.274) (0.408)
8 Journal of Indonesian Economy and Business January

Table 3. The result of logistic regression (continued)

Model (Dependent Variable)

Independent Variable Model 1 Model 2 Model 3 Model 4 Model 5
(DKLIEN) (DRAPINJ) (DPROD) (DRBO) (DOSS)
SHRPINJ 0.115 0.084 0.092 0.174 -0.077*
(0.162) (0.224) (0.164) (0.173) (0.091)
SHRSIMP -0.001 0.020 0.124* 0.410* -0.038
(0.962) (0.697) (0.034) (0.053) (0.225)
1.033 1.071 -2.583** -6.153* -1.676*
DWIL(1)
(0.333) (0.329) (0.013) (0.093) (0.062)
-0.014*** 0.007** -0.001 0.006*
KLIEN
(0.004) (0.016) (0.886) (0.017)
-1.283* 0.334 0.824 0.341*
RAPINJ
(0.010) (0.133) (0.161) (0.083)
-10.994 -5.014 -17.079 -6.130 7.034
C
(0.165) (0.577) (0.056) (0.631) (0.218)
Observation 50 50 50 50 50
31.473*** 32.692*** 28.598*** 46.297*** 22.766***
X2 Omnibus (0.000) (0.000) (0.001) (0.000) (0.007)
X2 Hosmer & Lemeshow 4.422 9.550 14.096 2.062 10.031
(H-L) (0.817) (0.298) (0.079)* (0,979) (0.263)
Classification Table (%) 82 92 86 84 76
Cox & Snell R2 0.467 0,480 0.436 0.604 0.366
Nagelkerke R2 0.631 0,658 0.586 0.806 0.490
Note:
1) *, **, *** means that the null hypothesis is rejected at the significance error (α) of 10%, 5%, and 1%. This study allows a
significance error up to 10% to minimize the risk of rejecting the true alternative hypothesis because this study is a social
research involving peoples’ behavior and institution effects that potentially limit the sensitivity of proxies used in the
quantitative analysis.
2) Omnibus value, H-L value, and classification table value indicate the fitness of the model, while Cox & Snell R2 and
Nagalgerke R2 indicate the relationship intensity between overall independent variables and the dependent variable. This
study set the tolerance value at 5% for the first two test, 70% for the third test, and 30% (moderate) for the fourth fitness
model test.
3) Number in brackets is the p-value.
Sources: Primary data from sample units of CU and BUKP, processed by the authors

The following part of this section analyzes
the relationship between the product diversity
and the performance of the sampled MFIs. This
study classified the analysis into two parts, one
related to product diversity in terms of loans-
savings (in which loans and savings are the main
products of the sampled CUs and BUKPs) and
the other related to the product diversity in terms
of non loans-savings products. Figure 3 below
summarizes the relationship between the
variables used in the analysis in this study.
Regarding the relationship between saving–
loan product diversity and performance, the re-
sult of the regression indicated a significant
direct relationship between the level of saving–
loan product diversity and outreach performance
indicators, both of scale and depth of outreach.
Statistical analysis indicated that additional types
of saving–loan products provided by the sam-
pled MFIs decreased the probability of the MFIs
achieving a higher-level number of loan clients
(higher−level scale of outreach) and increased
the probability of the sampled MFIs achieving a
lower-level average loan size (a higher-level
depth of outreach). This was indicated by the
negative coefficient and p-value of SIMPIN that
was lower than 10% in model 1 and model 2.
2015 Kusuma & Jaya 9

However, the relationship between saving–loan
product diversity and other performance aspects
such as staff productivity, operational efficiency
and operating self-sufficiency was not statisti-
cally significant, as indicated by the p-value of
SIMPIN which was higher than 10 % in models
3, 4 and 5 (see table 4). Furthermore, the regres-
sion results do not find any statistically signifi-
cant relationship between the level of non
saving–loan product diversity and all five
performance indicators used in this study (see
table 4).
The direct negative relationship between the
level of saving–loan product diversity and scale
of outreach (the number of loan clients) predicts
that the MFIs with more varied saving–loan
product types tend to have a smaller probability
of reaching a higher number of loan clients.
Probably, this happened because the MFIs with
more diversed saving–loan products were chal-
lenged by having more complex operations (e.g.
product administration, infrastructure provision,
promotion and reporting). This reduced the
resources, especially time and effort, that could
be allocated by the MFI’s staff to find and
process potential clients. Thus, the more diversi-
fied the product was, the MFIs tended to have a
lower number of clients.

Self-Sufficiency

Operational
(-) (+) Staff Productivity
Efficiency (+)

Depth of (-) Scale of

Outreach Outreach

(-) (-) (+) (+) (-) (-) (+) (-) (+) (+) (-) (-)

Area Savings Loans

CharacteristicM Assets Product Diversity
Proportion Proportion
FI Location

Sources: Figured by the authors

Figure 3. The relationship between variables in the models

based on the results of logistic regression analysis

Table 4. The result of logistic regression (product diversification variables)

Model (Dependent Variable)

Independent
Variable Model 1 Model 2 Model 3 Model 4 Model 5
(DKLIEN) (DRAPINJ) (DPROD) (DRBO) (DOSS)
-1.075* -2.224** -0.544 -3.648 -0.353
SIMPIN (0.091) (0.033) (0.132) (0.111) (0.230)
0.353 0.489 0.480 0.622 0.607
NONSIMPIN
(0.589) (0.476) (0.390) (0.488) (0.194)
Note: *, **, *** means that the null hypothesis is rejected at the significance error (α) of 10%, 5%, and 1%.
Sources: Primary data from sample units of CU and BUKP, processed by the authors
10 Journal of Indonesian Economy and Business January

Table 5. The result of logistic regression (product diversity and outreach variables)
Model (Dependent Variable)
Independent
Variable Model 1 Model 2 Model 3 Model 4 Model 5
(DKLIEN) (DRAPINJ) (DPROD) (DRBO) (DOSS)
-1.075* -2.224** -0.544 -3.648 -0.353
SIMPIN (0.091) (0.033) (0.132) (0.111) (0.230)
0.353 0.489 0.480 0.622 0.607
NONSIMPIN (0.589) (0.476) (0.390) (0.488) (0.194)
(0.333) (0.329) (0.013) (0.093) (0.062)
-0.014*** 0.007** -0.001 0.006*
KLIEN (0.004) (0.016) (0.886) (0.017)
-1.283* 0.334 0.824 0.341*
RAPINJ
(0.010) (0.133) (0.161) (0.083)
Note: *, **, *** means that the null hypothesis is rejected at the significance error (α) of 10%, 5%, and 1%.
Sources: Primary data from sample units of CU and BUKP, processed by the authors

Meanwhile, the direct negative relationship
between the level of saving–loan product diver-
sity and average loans disbursed per client
means that MFIs with more varied saving–loan
products had a higher probability of servicing
more clients with relatively small size loans. In
other words, MFIs with more diverse saving–
loan products had a higher probability of being
more focused on clients with relatively small
size loans (which is often correlated with less
wealthy clients) and/or attract more clients
looking for small size loans who would deal
5
with the MFIs.
The result of the regression also suggested
the existence of an indirect negative relationship
between the level of saving–loan product diver-
sity and two financial performance indicators,
especially staff productivity and operational self-
sufficiency. Regarding the indirect negative
relationship between the level of saving–loan
product diversity and staff productivity (the
value of loans disbursed per staff), the relation-
ship was mediated by the scale of outreach (the
number of loan clients). Related to the result, in
5
Average loan size or average outstanding loan per client
can be used as the proxy of depth of outreach (see
Ledgerwood, 1999:225; Martowijoyo, 2001:128,159;
Weiss & Montgomerry, 2005:43; UNCDF, 2006:2). The
wealthier clients are not interested in smaller loans
(UNCDF, 2006). In addition, the wealthier clients tend to
have a greater probability of accessing larger loans as
they have greater assets and the capacity to provide
conventional collateral in comparison with less wealthy
clients.
the previous discussion, the analysis predicted
the existence of a negative relationship between
the level of saving–loan product diversity and
the number of clients. In addition, the regression
results also indicated a positive relationship
between the number of clients and staff produc-
tivity. According to the statistical result, there is
a positive coefficient of KLIEN and a p-value
lower than 5% in model 3 (see table 5). It means
that the decrease of the number of clients tended
to decrease the probability of the sampled MFIs
achieving a higher level of staff productivity in
generating loans. The result meant that a higher
level of saving–loan product diversity tended to
be followed by a decrease in the probability of
achieving a higher number of clients and, in the
longer term, the probability of achieving a
higher-level of staff productivity to generate
loans.
Regarding the indirect negative relationship
between the level of saving–loan product diver-
sity and self-sufficiency (operational self-suffi-
ciency), this relationship was mediated by the
scale of outreach (the number of loan clients)
and the depth of outreach (indicated by the value
of loans disbursed per client). The previous dis-
cussion explained the existence of a negative
relationship between the level of saving–loan
product diversity and the number of loan clients
and also the value of loans disbursed per client.
In addition, the regression analysis also indicated
a statistically significant and positive relation-
2015 Kusuma & Jaya 11

ship between the number of clients as well as the
average loans disbursed and operational self-
sufficiency, indicated by a positive coefficient of
KLIEN and a p-value lower than 5% in Model 5
(see table 5). It means that the negative relation-
ship between the level of saving–loan product
diversity and the number of loan clients and the
value of loans disbursed per client, in the longer
term, tends to lead to a lower probability of the
MFIs achieving self-sufficiency.
The result of the logistic regression also in-
dicated a direct relationship between some con-
trol variables (especially assets, proportion of
loans outstanding, proportion of savings, the
operational area of MFI unit) and some indica-
tors of performance.
Assets, as the proxy of MFI size, tend to
have a direct relationship with almost all of the
performance indicators, especially a positive
relationship with the scale of outreach and oper-
ational efficiency and a negative relationship
with the depth of outreach and operational self-
sufficiency. It indicates that, although the bigger
sized MFIs tend to have a higher probabilty of
being efficient and reach more clients than the
smaller sized MFIs, they have a higher probabil-
ity of focusing on wealthier clients (lower depth
of outreach) and achieve lower-levels of self-
sufficiency because of their inability to minimize
production costs. This was indicated by each
ASET coefficient value sign and their p-value
being lower than 10 5 (see Table 6, especially
ASET in model 1, 2, 4,and 5).
Loans proportion, as the proxy of the re-
sources allocation to the most important produc-
tive investment of the MFIs, tended to have a
direct negative relationship with operational self-
sufficiency (as indicated by a negative coeffi-
cient and a 9.1% p-value of SHRPINJ in model
5). It means that the increase of loans proportion
tends to increase the probability of the sampled
MFIs achieving a lower self-sufficiency. This
evidence indicates that, practically, too much
investment in loan assets is not always good for
the sampled MFIs because it is probably posi-
tively correlated with the problem of over ca-
pacity, potential default, and higher operational
costs. Thus, it seems a necessity for the sampled
MFIs to consider a moderate loan investment in
their operations.
Savings proportion had a positive relation-
ship with the probability of the sampled MFIs
achieving staff productivity and a negative rela-
tionship with the probability of the sampled
MFIs achieving higher-levels of operational effi-
ciency. The statistical analysis showed that an
increased saving proportion tended to increase
the probability of the sampled MFIs achieving a
higher staff productivity to generate loans (indi-
cated by a positive coefficient of SHRSIMP in
model 3 and a p-value lower than 5%). The rea-
sons behind this evidence are probably: 1)

Table 6. The result of logistic regression (other independent variables)

Model (Dependent Variable)

Independent
Variable Model 1 Model 2 Model 3 Model 4 Model 5
(DKLIEN) (DRAPINJ) (DPROD) (DRBO) (DOSS)
3.578*** 3.393* -0.900 -4.720* -1.469**
ASET (0.009) (0.007) (0.150) (0.067) (0.010)
0.106 0.201 0.109 -0.358 0.089
USIA (0.408) (0.277) (0.417) (0.274) (0.408)
0.115 0.084 0.092 0.174 -0.077*
SHRPINJ (0.162) (0.224) (0.164) (0.173) (0.091)
-0.001 0.020 0.124* 0.410* -0.038
SHRSIMP (0.962) (0.697) (0.034) (0.053) (0.225)
1.033 1.071 -2.583** -6.153* -1.676*
DWIL(1) (0.333) (0.329) (0.013) (0.093) (0.062)
Sources: Primary data from sample units of CU and BUKP, processed by the authors
12 Journal of Indonesian Economy and Business
savings products may facilitate the MFIs to
access the information about loan applicants
(including their character), 2) savings products
may provide collateral substitution for loan
applicants who do not have enough conventional
collateral (land certificates or vehicle ownership
documents), and 3) savings products tend to
increase the source of money to be lent by the
MFIs. However, in the case of the sampled
MFIs, the results of the regression showed a
positive coefficient of SHRSIMP in model 4 and
a p-value lower than 10%. It meant that an
increase in the savings proportion tended to
decrease the probability of the sampled MFIs
achieving lower operational costs (higher
efficiency). There is a tendency that a higher
proportion of savings tends to increase the cost
of operating which is translated into a decrease
in efficiency (see table 6 above).
The result of the regression also confirmed
that the MFIs located in urban areas had a higher
probability of accessing lower operational costs
and of being more efficient than the ones located
in rural areas. This was reflected by the negative
coefficient (-6.153) and significant p-value
(9,3%) of variable DWIL in model 4 (see Table
6). Even so, the MFIs located in urban areas tend
to have a lower probability of achieving a
higher-level of staff productivity in generating
loans and a higher-level of sufficiency than the
ones located in rural areas. This was reflected by
the negative coefficient (-2.583 and -1.676) and
significant p-value (1,3% and 6,2%) of variable
DWIL in model 3 and model 5 (see Table 6). It
seems that MFIs in urban areas tend to meet
higher levels of competition which reduces their
productivity and ability to generate higher prof-
its in comparison with MFIs located in rural
areas. It translates into the lower self-sufficiency
achieved by urban MFIs.
CONCLUSION AND RECOMMENDATION
The purpose of the research was to identify
whether the relationship between productivity
and performance existed in the operation of the
CUs and BUKPs in Yogyakarta Special Prov-
ince. The analysis confirmed a significant direct
relationship between the levels of saving–loan
January
product diversity and outreach performance
indicators, both for scale and depth of outreach.
However, that was not the case for the other
performance aspects such as staff productivity,
operational efficiency and operating self-suffi-
ciency. In addition, the analysis also indicated
indirect negative relationships between the levels
of saving–loan product diversity and staff prod-
uctivity to generate loans and self-sufficiency.
However, the analysis does not confirm a sig-
nificant relationship between the level of non
saving–loan product diversity and all five per-
formance indicators.
Based on the analysis, we recommend a di-
versification strategy which can be applied in the
operations of the sampled MFIs. For the MFIs
that focus on building a good financial perfor-
mance and reaching large number of clients,
according to the model and analysis of this stu-
dies, it is suggested that they do not have too
many saving–loan products if trying to increase
their performance. Meanwhile, for the MFIs that
focus on serving the low income and low-scale
transaction clients,and have some degree of to-
lerance in achieving a superior financial perfor-
mance, providing more varied saving–loan
products would be a good strategy to increase
their performance. In addition, this study had
some limitiations. It is recommended that these
limitations should be considered in any further
related research. The limitations include: 1) the
limited number of types and their operational
areas, 2) the absence of dynamic analysis, 3) the
use of imperfect indicators as this study only
used a single indicator for each variable used in
the model, 4) the absence of performance indi-
cators based on clients and 5) the measurement
of the level of product diversity that did not con-
sider the transaction volume of each product. In
addition, it would benefit further related research
if it would accomodate a quantitative endogein-
ity analysis and include the institutions variable
in the model(s) used.
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2015 Kusuma & Jaya 15

APPENDIX
The General Description of Sampled MFIs Products

The CUs and BUKPs observed in this study provide savings, loans and non saving-loan products.
From our observations, generally we found that most of the CUs had a greater variety of products in
comparison with the BUKPs. The process of product development between the CUs and BUKPs also
differs. The products offered by each CU were determined by the management and board of directors
(Pengurus) based on the approval of the annual members’ meeting (Rapat Anggota Tahunan).
Meanwhile, the products offered by each BUKP were determined by the Provincial Government
through a Governor’s decree. However, some BUKPs developed additional products which were not
covered by the decree. Another difference between the CUs and BUKPs was the clients who could
access the products. A CU only serves its members, while BUKPs serve anybody who wants to do
business with them. In the next part, we will give a general description of their products.
The savings products provided by CUs can be grouped into five categories, which are: 1) demand
deposits (Simpanan Bunga Harian), in which clients can save or withdraw their money anytime, 2)
time deposits (Simpanan Sukarela Berjangka), in which clients can withdraw their money according to
a maturity period, generally 1−12 months, 3) education savings (Simpanan Pendidikan) in which
clients can withdraw their money according to their schooling period (for example: after the savers
reach higher levels of education, or a certain educational level) and the maturity period ranges from
1−5 years, 4) pension savings (Simpanan hari Tua/Masa Depan), in which the savers can withdraw
6
their money after reaching a certain age (generally about 50 years old) , 5) capitalization savings
(Simpanan kapitalisasi) which are provided to clients who want to build their assets, even if they do
not have money to save (in this case the CU lends money to the member, at ‘x’ % loan interest rate,
then the member must save all the loaned money in capitalization savings with a more than ‘x’ %
interest rate) and 6) savings schemes that are not included in the five schemes above, such as land and
building investment savings, special religion day savings and community savings. The saving interest
rates offered by each sampled CU varied. They ranged between 2−10% for the demand deposits,
4−15% for the time deposits, 4−11.6% for educational savings and 8−14% percent for pension
savings. Meanwhile, savings products provided by BUKP were limited to demand deposits (Simassa)
which gave 4−6% interest rate and time deposits (deposito) which had a 8−12% interest rate. But,
some BUKPs provided other saving schemes, such as rotating association savings (tabungan arisan),
educational savings and childrens’ savings schemes.
Regarding the loan products, the sampled CUs provided a wide array of loans. These can be
classified into 5 main categories: 1) business loans, a loan to finance productive purposes, 2)
consumption loans, a loan to finance consumption products purchases, such as vehicles, electronic
equipment, houses and buildings (and their material or equipment), education and daily consumption
product purchases, 3) capitalization loans, a loan to build the member’s own assets, in which the
borrower receives a loan from the CU and all of it is saved in a CU savings product, especially
capitalization savings, 4) emergency loans, a loan to finance an urgent need (such as land / house /
vehicle brokerage capital, marriage funding or medical treatment) and which will be paid back in a
relatively short-term period and 5) other loans that are not included in the 4 loan classifications above
(such as a partnership loan, a loan given to another financial institution to finance their business, or
community loans, a loan given to a grassroots community to finance their business. The loan interest

6
Some CUs established schemes where savers must save a certain amount of money every month until they reach the age at
which they can withdraw their money.
16 Journal of Indonesian Economy and Business January

rate provided by the sampled CU varied, ranging from 10.8 to 48% annually. Business and
consumption loans were offered by most of the sampled CUs with the rate being between 15 to 24%
annually. Meanwhile, emergency loans tended to be the most expensive loans from a CU (excepting
emergency loans for medical treatment) with interest rates being above 24% annually. Education loans
and capitalization loans tended to be the cheaper loans with interest rates below 15%. Regarding the
loan products of the BUKPs, most of the sampled BUKPs offered the same products. They were
common loans, a loan given for both productive or consumption purposes, and incidental loans, a loan
to fund any emergency needs. BUKPs charged interest rates of 18−30% anually for common loans and
30−36% anually for incidental loans.
For the non saving–loan products, almost all of the sampled CUs provided loan protection
schemes for their members, some kind of solidarity fund (for example: solidarity funds for the death or
sickness of members) and educational schemes. The CUs’ loan protection is facilitated by Dana
Perlindungan Masyarakat (Daperma). This is an institution which provides facilitation to members
who die when they still have a loan to repay to a CU. This institution writes off the member’s
outstanding loan and gives a grant (santunan) to the member’s family/surviving relatives. The
members need not pay an insurance fee as this is paid by their CU. Regarding the solidarity fund, it
can be provided either by Daperma or the CU internally. The solidarity fund provided by Daperma is a
solidarity fund for members who die, while the CUs provide various ones, depending on each CU’s
policy and capacity. The loan protection and solidarity funds in the sampled CUs had a double role.
Firstly, they gave protection to members and their families in case they were unable to repay their
loans because of the death or sickness of the member. Secondly, they also reduce the credit risk
burden of the CUs as the loan insurance scheme by Daperma covered any outstanding unpaid loans of
dead members. In addition, the solidarity fund scheme is a real way for the CUs to show attention to
the members difficult conditions. This builds up the members loyalty and stimulates the members not
to try to cheat in their transactions with their CUs. Regarding the education facilities, there are two
types of educational programme provided by the sampled CUs. The first one is a basic educational
programme. It covers basic financial education, household management and a motivational
programme. The second one is an advanced educational programme. It covers some form of business
training given to members according to their business field. Educational activities in the sampled CUs
were facilitated through seminars, workshops or visits to the community villages in the CU’s
operational area. Educational activities by the CU will help CU members to recognize and understand
the spirit and operational activities of the CU so they can have positive feelings in their transactions
with the CU. They can also help the members to manage their money and businesses more cleverly.
For the non savings–loan BUKP products, we found that some BUKPs provided a loan protection
facility to their clients. However, this differed from the loan protection facility offered by the CUs, in
that the BUKP clients must pay the insurance fee. Some BUKPs also provide a payment center to pay
telephone, electricity and water service bills. In addition, we did not find any structured educational
activities provided by the BUKPs, excepting visits to and advice for their non-discipline loan clients.
Journal of Indonesian Economy and Business
Volume 30, Number 1, 2015, 17 – 29

CUSTOMERS’ PERCEPTIONS OF SERVICE QUALITY DIMENSIONS IN

THE INDONESIAN BANKING INDUSTRY: AN EMPIRICAL STUDY

Ananda Sabil Hussein

Faculty of Economics and Business
Universitas Brawijaya Malang
(sabil@ub.ac.id)

Raditha Hapsari
Faculty of Agribusiness and Commerce
Lincoln University Canterbury, New Zealand
(raditha.hapsari@lincolnuni.ac.nz)

ABSTRACT

This study aims to investigate the dimensions of hierarchical service quality in the area of
the banking sector as well as to determine its relationships with other constructs, namely corpo-
rate image and customer loyalty. One hundred and eleven respondents participated in this
study. Partial Least Squares were employed to analyse the data. The inner and outer model
evaluations showed that the proposed model was robust. This study found that the interaction
quality, outcome quality and physical quality were the dimensions of service quality which were
formed in the hierarchical model. In addition, this study indicated that service quality was a
robust determinant of corporate image and customer loyalty in the banking sector. Similar to
service quality, corporate image was also found to be an essential predictor of customer loyalty
as well as the mediator between service quality and customer loyalty. To enhance the under-
standing of service quality in the banking sector, further studies might add additional constructs
such as brand engagement, perceived value, and customer experience.
Keywords: service quality, image, loyalty, bank

INTRODUCTION customer loyalty would provide great benefits to

As one of the competitive business service
sectors in Indonesia, the banking industry creates
tight market competition. As of now, around 120
commercial banks – both state-owned and pri-
vate, operate in Indonesia (Bank Indonesia,
2011). This situation creates competition among
the banks to obtain funds from third parties and
therefore challenges the banking sector to main-
tain their customers’ loyalty.
Theoretically, maintaining customer loyalty
is essential for any business sector, including the
banking industry. Gremler and Brown (1996)
argued that customer loyalty was the degree to
which a customer exhibits repurchasing behavior
from a service provider, possesses a positive
attitudinal disposition toward the provider, and
considers using only this provider when a need
for this service emerges. Based on this notion,
an institution, such as in minimizing the cost of
it attracting new customers, more efficient oper-
ational costs, lowering the psychological and
social costs, and making loyal customers defend
the institution and even to attract others to it, and
recommend the institution to them.
Service quality has been recognized as an
important factor in maintaining loyal customers.
Pollack (2009) mentioned that service quality
had a positive effect in creating loyalty. It means
a business organization offering a high quality
service will likely have more loyal customers.
While service quality has been understood to
be an important factor in the service industry
including in banking services, there is still a
debate among scholars about its dimensions
(Brady and Cronin Jr, 2001). To date, the
SERVQUAL framework proposed by
18 Journal of Indonesian Economy and Business
Parasuraman et al. (1988) is widely used by
scholars to analyze service quality. However,
there are some criticisms addressed at the
SERVQUAL framework (Cronin and Taylor,
1994; Shu, 2010).
Apart from its role in creating customer
loyalty, scholars also claim that service quality
has an essential role in creating a positive corpo-
rate image. Alfin et al. (2013) suggested that
service quality had a positive effect on corporate
image, which implied that a higher service qual-
ity, as perceived by customers, resulted in a
greater positive image of the corporation. Simi-
lar to Alfin et al.’s (2013) study, Cham and
Easvaralingam (2012) explained that corporate
image is significantly influenced by service
quality.
As an important element in the marketing
field, corporate image is recognized to have an
important role in creating loyalty. Scholars sug-
gest that corporate image has a significant effect
on customer loyalty (Cheng and Rashid, 2013;
Saleem and Raja, 2014). The more positive the
image of the company is, as perceived by its
customers, the more loyalty will be shown by the
customers to the company. Although some stu-
dies confirm the significant effect of image on
loyalty, scholars such Hart and Rosenberger
IIaboveI (2004) found that corporate image only
had a marginally significant influence on cus-
tomer loyalty. For that reason, there is still a
need to examine this relationship in a different
field.
Based on the research issues stated, we were
led to the following two research objectives of
this study:
1. To examine the hierarchical service quality
dimensions as perceived by banking service
customers.
2. To test the relationships among several essen-
tial marketing constructs, namely service
quality, corporate image, and customer
loyalty.
This study provided some contributions by
confirming the two research objectives above.
Firstly, differing from the previous studies, this
study developed and tested a comprehensive
January
hierarchical model that provided a complete and
integrated analysis of the dimensions underlying
customers’ perceptions of service quality, and
also analyzed the relationships that exist among
several important higher order marketing con-
structs in the banking industry. Secondly, this
study provided empirical support for the use of a
hierarchical model to conceptualize and measure
customers’ perceptions of service quality in the
banking industry. Thirdly, the results of this
study will benefit marketers and practitioners
who are already operating in or preparing to en-
ter the banking industry market, as the findings
may assist these organizations in developing and
implementing successful business strategies.
LITERATURE REVIEW AND
HYPOTHESES
1. Service Quality
Service is any act or performance that one
can offer to another that is essentially intangible
and does not result in the ownership of anything
(Kotler and Amstrong, 2006). In the area of ser-
vice marketing studies, Parasuraman et al.(1985)
stated that service quality was an elusive con-
struct. Furthermore, Rust and Oliver (1994)
contended that service quality was a subjective
manner. Hence, Brady and Cronin (2001)
claimed that the construct of service quality was
difficult to grasp.
Today the SERVQUAL scale is the instru-
ment which is most widely used by scholars to
measure service quality (Amin and Isa, 2008;
Barroso et al., 2010; Huang, 2010; Yang et al.,
2006). This scale was developed by Parasuraman
et al. (1988) based on the disconfirmation para-
digm. According to Parasuraman et al., (1988)
there were five dimensions of service quality
namely (1) Tangibility – the physical facilities,
equipment, and appearance of personnel, (2)
Reliability - the ability to perform the promised
service dependably and accurately, (3) Respon-
siveness – the willingness to help customers and
provide prompt service, (4) Assurance – the
knowledge and courtesy of employees and their
ability to inspire trust and confidence, and (5)
2015 Hussein & Hapsari
Empathy – the caring individualized attention
that the firm provides to its customers.
Although SERVQUAL has been used
extensively to measure service quality, several
criticisms are addressed at this instrument
(Babakus and Boller, 1992; Carman, 1990).
Fernie et.al.(2003) contend that two criticisms
can be directed at the SERVQUAL framework.
Firstly, SERVQUAL generalises the relationship
between customers and service providers;
secondly, it disregards the crucial relationship
between customers and service providers. Other
scholars such as Babakus and Boller (1992) and
Carman (1990) argued that SERVQUAL was
being applied inappropriately to measure service
quality because: 1) the dimensions of the
SERVQUAL measures may not apply in all ser-
vice settings, 2) items in some dimensions reveal
that those are not distinct during scale purifica-
tions, 3) SERVQUAL focuses on the compari-
son between expectations and perceptions of
actual service delivery and 4) SERVQUAL can-
not adequately cover the complexity of custom-
ers’ perceptions.
While there is no agreement about the con-
ceptualization of service quality, scholars agree
that service quality is multidimensional (Brady
and Cronin, 2001; Dabholkar et al., 1995;
Parasuraman et al., 1988). To overcome the
inadequate measurements of SERVQUAL,
Brady and Cronin (2001) proposed the hierar-
chical service quality framework. This frame-
work stated that the overall perception of service
quality was affected by three dimensions,
namely the interaction quality, physical quality,
and outcome quality.
This study employs a hierarchical service
quality framework that has been used by other
studies to measure service quality. A study by
Wu (2009) of the hotel industry in Taiwan found
that the hierarchical service quality framework
was a robust framework to measure service
quality in the Taiwanese hotel industry. This
study revealed that service quality was formed in
a hierarchical model consisting of the interaction
quality, outcome quality, and physical quality
that were taken separately as primary dimen-
sions. Similar to this study, Mohi (2012) found
19
that a hierarchical service quality framework was
a robust framework to measure the service qual-
ity of Malaysia’s restaurants. In the telecomun-
cations industry, Clemes et al. (2014) found that
hierarchical service quality can be used to meas-
ure the quality of services provided. Further-
more, this study declared that interaction quality
is the dimension which had the most dominant
effect in determining the service quality.
Based on these contentions, these following
hypotheses were proposed:
H1a : interaction quality has a significant effect
on the overall perception of service
quality
H1b : physical quality has a significant effect on
the overall perception of service quality
H1c : outcome quality has a significant effect on
the overall perception of service quality
2. Corporate Image
Image is one way the public perceives a
company or its products (Kotler and Keller,
2006) Corporate image is the perception that
different audiences have of an organization and
results from the audiences’ interpretation of the
cues presented by an organization. Corporate
image in service marketing literature was identi-
fied as an important factor in the overall evalua-
tion of the service and the company quite early
on. Grönroos (1984) stated that brand image was
largely affected by the overall assessment of the
services received by the customers. Baker et al.
(1994) explained that service quality was the
determinant of image. In accordance with Baker
(1994), Clemes et al. (2009) found that service
quality significantly influenced brand image.
Nguyen and LeBlanc (1998) indicated that the
overall image of an organization, including its
brand, was influenced by the perception of its
customers about the quality of services offered.
Andreassen and Lindestad (1998) identified
that customer satisfaction, loyalty, and reputa-
tion (including corporate image) were important
indicators of the market orientation in the public
sector, which influenced government perfor-
mance. Reputation (corporate image) was found
to be the strongest driver of loyalty. Moreover,
20 Journal of Indonesian Economy and Business
they claimed that the customers’ voice was
believed to be important in this respect.
According to this study, as a service company
develops closer relations with its customers by
offering services of a high quality and by stimu-
lating its customers’ voice, a strong correlation
between image and loyalty will emerge. The
study of Clemes et al. (2013) in the telecom-
munications industry found that corporate image
was an important predictor of customer loyalty.
Hence, the following hypotheses were pro-
posed:
H2 : corporate image is significantly affected by
service quality
H3 : corporate image has a significant effect on
customer loyalty
3. Customer Loyalty
Loyalty is a consumer’s voluntary decision
to continue patronizing a specific service from
the same firm over an extended period of time
(Lovelock and Wirtz, 2011).Oliver (1997)
claimed that customer loyalty was a deeply held
commitment to rebury or re-patronize a preferred
product or service consistently in the future, the-
reby causing repetitive same-brand or same
brand-set purchasing, despite situational influ-
ences and marketing efforts having the potential
to cause switching behavior.
According to Mardalis (2005), there were six
reasons why an institution needed to get its cus-
tomers’ loyalty. First, loyal customers gave great
benefits to the institution. Second, the cost of
getting new customers was more expensive than
that of keeping and maintaining existing cus-
tomers. Third, the customers who already
believed in the institution would also believe in
other things it offered. Fourth, the operational
costs of an institution were more efficient if it
had many loyal customers. Fifth, the institution
may deduct the psychological and social costs,
because long time customers had many positive
experiences with the institution. Sixth, loyal
customers would defend the institution, and even
attract and recommend it to other people.
Customers receive several benefits from
being a loyal customer. These benefits can
January
include a feeling of optimal satisfaction, a
knowledge of what to expect from the service
provider, trust in the provider, friendship with
employees, time savings from not having to
search for a provider, and various types of spe-
cial treatment (Gremler and Brown, 1996).
Customers are the driving force for profita-
ble growth and therefore customer loyalty can
lead to profitability (Hayes, 2008). Loyal
customers are less likely to switch to other com-
petitors and they even make more purchases than
non-loyal customers. Therefore, loyal customers
are considered to be the most important assets of
a company.
Some studies have shown that service quality
has an important role in creating loyalty
(Ostrowski et al., 1993; Wong and Sohal, 2003).
In this case, customers tend to be more loyal to a
company when they perceive a high service
quality. Furthermore, scholars also suggest that
service quality has an indirect effect on loyalty
through the corporate image (Shu, 2010).
The proposed hypotheses are:
H4 : customer loyalty is significantly affected by
service quality
H5 : corporate image mediates the relationship
between service quality and customer
loyalty
Based on the review of the literature, the
conceptual framework proposed in this study is
as shown below.
Interaction Corporate
Quality Image
Physical Service Customer
Quality Quality Loyalty
Outcome
Quality
Figure 1. Conceptual Framework
2015 Hussein & Hapsari 21

RESEARCH METHOD in this study. The measures used in this study

1. Sample were adapted from several studies measuring
hierarchical service quality and its effects, espe-
The respondents of this study were the cus- cially on corporate image and customer loyalty.
tomers of a national banking company in Indo-
The questionnaire which examined the inte-
nesia. One hundred and fifty questionnaires were
raction quality, physical quality, and outcome
distributed. A total of 111 respondents returned
quality was adapted from Brady and Cronin Jr
the questionnaires giving a 74 percent response
(2001) and Parasuraman, et al.(1988). The inte-
rate. These respondents were recruited using a
raction quality was measured by 6 items, in-
convenience sampling method.
cluding: bank employees are quick at eliminat-
The following demographic profile emerged ing potential errors. The physical quality was
from the sample: 75 percent of the respondents measured by 3 items, for example: bank offices
were aged between 26 and 45 years old, 60 per- are visually appealing. The outcome quality was
cent had a tertiary education, 51% were male, measured by 4 items, such as: I feel safe in my
and 47% had an income between Rp1,000,000 - transactions with the Bank. The questions to
Rp. 3,000,000. Table 1 presents the demographic measure the corporate image were adapted from
profile of the respondents in this study. Kotler and Amstrong (2009) – like: the bank had
high integrity in providing services demanded by
Table 1. Demographic Profile of Respondents
customers; further, the questions for customer
Varia- Percen- loyalty were adapted from Jones and Taylor
Category
ble tage (2007), for instance: do (you the customer) make
Gender Male 51.3 regular repeat purchases?.
Female 48.7
Apart from the questions about the respon-
15-25 17.2 dents’ demographics, which were measured by
26-35 45
36-45 30.1
categorical scales, all the other constructs were
Age measured using a five-point Likert’s scale rang-
46-55 5
>55 1 ing from ‘strongly disagree (1)’ to ‘strongly
=< Senior high school 30.63 agree (5)’.
Diploma 3 9
Edu- Bachelor/ undergraduate 43.2
cation
3. Data Analysis
Master/Doctoral Degree 13.5
Others 3.6 This study used Partial Least Squares (PLS)
≤ Rp 1,000,000 14.7 to analyze the data. There are several reasons for
Rp 1,000,000 - Rp 2,000,000 23.3 selecting PLS as the analysis technique. First,
Income Rp 2,000,001 - Rp 3,000,000 24 PLS is distribution-free, which does not require
Rp 3,000,001 - Rp 4,000,000 18.7 or exclude any distributional form for the meas-
>Rp 4,000,000 19.3 ured variables (Wold, 1982). Hence, this tech-
nique is suitable for analyzing data from non-
2. Questionnaire normal distributions (Falk and Miller, 1992).
Aibinu and Al-Lawati (2010) suggested that
A self-administered questionnaire survey of
measuring individuals’ perceptions using Likert
a national bank’s customers was conducted in
scales was likely to yield non-normally distri-
Malang to collect empirical data for this study.
buted responses. Bontis et al. (2007) proposed
The questionnaire was designed based on the
that the use of bootstrapping was the reason why
review of the related literature. The question-
PLS works well with non-normal data. For that
naire consisted of two parts. The first part
reason, since this study relies on Likert scales to
collected information about the demographic
measure individuals’ behavioral intentions and
characteristics of the respondents; and the
its antecedents, PLS is a suitable technique.
second part measured the variables investigated
22 Journal of Indonesian Economy and Business
Another reason for using PLS was based on
Abdi’s suggestion (2007) stating that the aim of
PLS was to predict the effects of a set of inde-
pendent variables on a set of dependent
variables. He explained that PLS was a multiva-
riate technique to compare multiple response
variables and multiple explanatory variables.
Though it is similar to Principal Components
Analysis (PCA), PLS is believed to be a better
option than multiple linear regression and PCA
regression techniques since it presents more
vigorous model parameters that do not change
with new calibration samples from the popula-
tion (Falk and Miller, 1992; Geladi and
Kowalski, 1986).
RESULTS
Following PLS’s rule of thumb, the evalua-
tion of the outer and inner models were per-
formed to ensure that the proposed model was
robust. For this study, the outer model was
evaluated by using some tests, namely the
convergent validity, discriminant validity, and
reliability. The inner model was evaluated by
using the score of coefficient determinant and
goodness of fit. The following section discusses
the evaluation of the outer and inner models.
1. The Evaluation of the Outer Model
The assessment of the outer model was
accomplished in three steps: examinations of the
convergent validity, discriminant validity, and
reliability. The investigation of these problems
was essential since these problems had the
potential to affect the outcome of the statistical
test.
The first assessment was the convergent
validity. In this study, the evaluation of conver-
gent validity was determined by the score of the
factor loadings and Average Variance Extracted
(AVE). The score of the factor loadings for this
study varied between 0.610 and 0.910 which
were above the recommended threshold of 0.50
as proposed by Fornell and Larcker (1981). As
the loading score was greater than 0.50, the
score indicates that all measurement indicators
have sufficient convergent validity, meaning that
each indicator has a high level of connection
January
with its corresponding variable. In this study, the
score of AVE ranged from 0.610 to 0.795.
Fornell and Larcker (1981) suggested that a
score of 0.50 for AVE indicated an acceptable
level of validity for the measures. Therefore, all
constructs used in this study can be used to
explain the measurement variance. Table 2
summarizes the result of the convergent validity.
The last outer model evaluation was uni-
dimensionality. The composite reliability score
for each construct ranged from 0.824 to 0.953,
which were beyond the cut-off value (0.70)
(Nunnally, 1978). Based on these uni-dimensio-
nality tests, all constructs used in this study have
an acceptable degree of consistency and thus are
considered reliable. Table 3 summarizes the
score of composite reliability and AVE.
The discriminant validity was assessed using
an approach proposed by Chin (2010). This ap-
proach suggested that none of the items should
load more highly on another construct than they
do on the construct they intend to measure. In
other words, the value of the factor loading
should be higher than the cross loading. For this
study, the value of the factor loading for each
construct was higher than the cross loading.
Therefore, it can be said that there is no discri-
minant validity. See Appendix 1 for the cross
loading calculation.
2. The Evaluation of the Inner Model
After determining the robustness of the
measures, the next phase was to provide confir-
mation that supports the theoretical model as
demonstrated by the structural model (Chin,
2010). The structural model was evaluated
through the score of the coefficient of determi-
nation ( ) and the Goodness of Fit Index
(GoF).
Similar to the OLS regression, the value of
in PLS represents the amount of variance
explained by the model (Chin, 2010). Falk and
Miller (1992) suggested that the variance ex-
plained for endogenous variables should exceed
0.10. The value of in this study ranged from
0.547 to 0.943. Table 4 shows the for each
endogenous construct.
2015 Hussein & Hapsari 23

Table 2. Convergent Validity

Factor Factor
Code Questions AVE Code Questions AVE
Loadings Loadings
The Bank had high inte-
Bank offices are grity in providing
PQ1 0.816 CI_1 0.919
visually appealing services demanded by
customers.
Bank employees are
The Bank showed good
suitably dressed and
PQ3 0.776 0.610 CI_2 innovation in providing 0.857
neat, considering the
the services
work they perform
The employees of bank
Easy to find the ATMs are very friendly in pro-
PQ4 0.749 CI_3 0.884
and office of this bank viding service especially 0.795
during the transaction.
The employees of bank
The Bank performs a know the information
OQ1 service exactly as 0.867 CI_4 needed by customers in 0.897
promised relation to services of-
fered.
Information provided by
Bank Bukopin Malang
bank employees was
OQ2 0.876 0.770 CI_5 branch has a good repu- 0.899
clear and
tation
understandable.
I feel safe in my trans- Make regular repeat
OQ3 0.898 CL_1 0.674
actions with the Bank. purchase
The Bank considers my Not switch to another
OQ4 0.868 CL_2 0.749
wishes and needs. bank

The Bank performs its Purchases across product

IQ1 0.776 CL_3 0.825
services without errors and service lines
Bank employees
Positive word-of- mouth
IQ2 quickly respond to my 0.87 CL_4 0.849
about the bank
requests.
Bank employees are Recommend the bank to
IQ3 0.844 CL_5 0.648 0.867
always willing to help. other consumers
I considers the bank is
Bank employees are
0.709 my only choice when
IQ4 quick to eliminate 0.858 CL_6 0.846
purchasing this type of
potential errors
service
Bank employees are
IQ5 0.871
trustworthy
Bank employees know
to advise me what
IQ6 would be the most 0.829
appropriate service for
my specific needs.
24 Journal of Indonesian Economy and Business January

Table 3. Composite Reliability and AVE hypothesis 1a, 1b, and 1c were confirmed.
Among these dimensions, interaction quality
Composite reliability AVE
was considered as the most important dimension,
CI 0.951 0.795 as the results found that interaction quality had
CL 0.916 0.648 the most significant effect in the formation of
IQ 0.935 0.709 service quality.
OQ 0.93 0.77 The second research objective was to eva-
PQ 0.824 0.61 luate the relationships among service quality,
SQ 0.953 0.615 corporate image, and customer loyalty. The
result of the hypotheses testing showed that ser-
vice quality had a significant positive effect on

Table 4. The Values corporate image (t = 22.167; β = 0.818). It
R Square
means hypothesis 2 is supported; further, it
implies that the higher the quality of service, as
CI 0.669
perceived by a bank’s customers, will result in a
CL 0.547 more positive image of the bank.
IQ 0.943 This study indicated that corporate image
OQ 0.917 had a positive effect on customer loyalty (t =
PQ 0.644 3.431; β = 0.435); thus, hypothesis 3 is sup-
ported. This significant relationship means the
more positive the image is of a corporation, as
To ensure the robustness of the inner model, perceived by its customers, the more loyal the
this study also evaluated the Goodness of Fit customers will be to the corporation. This study
(GoF) index. Since PLS is a variance based also found that customer loyalty was signifi-
SEM, it does not have a formal GoF. Therefore, cantly affected by service quality (t = 2.555; β =
the calculation of GoF refers to Tenenhaus et 0.339); hence, it supports hypothesis 4. This
al’s. (2004) suggestion. Derived from Tenenhaus relationship indicates that customers will be
et al. (2004), Daryanto et al. (2009) proposed more loyal to the bank when they perceive high
that the baselines for GoF were small = 0.1, quality in the offered services.
medium = 0.25 and large = 0.36. The calculation
of GoF yielded a score of 0.716. Since the GoF Table 5. Hypotheses Testing
index of the model tested in this study exceeded
Path T
0.36, the model proposed in this study is robust. Hypothesis Path
Coefficient Statistics
See Appendix 2 for the calculation of the GoF H1a SQ -> IQ 0.970 179.226**
The outcomes of the inner model evaluation H1b SQ -> OQ 0.957 128.510**
indicated that the model tested for this study is H1c SQ -> PQ 0.802 26.886**
robust. Therefore, hypotheses testing can pro- H2 SQ -> CI 0.818 22.167**
ceed. H3 CI -> CL 0.435 3.431**
H4 SQ -> CL 0.339 2.555*
3. Hypotheses Testing H5 SQ->CI->CL 3.335**
The first research objective was to assess the *significant at p <0.01
dimensions of service quality perceived by the
Hypothesis 5 proposed that there was an
bank’s customers. The outcomes of the second-
indirect effect of service quality on customer
order confirmatory factor analysis showed that
loyalty through corporate image. The result of
interaction quality (t = 179.226; β = 0.970), out-
the indirect effect examination showed that the
come quality (t = 128.510; β = 0.957), and
value of the t-statistics was 2.773 (p<0.01),
physical quality (t = 26.886; β = 0.802) were the
which means that hypothesis 5 is supported.
dimensions of the service quality. Therefore,
2015 Husssein & Hap
psari 25

Figure 2. Structural
S Equ
uation Model

DISCUS
SSION
This study deteermined the dimensionss of
service quality
q in thee Indonesian banking serrvice
and evaaluated the relationships
r s among serrvice
quality, corporate immage, and cuustomer loyalty.
This study proposedd that the intteraction quaality,
outcomee quality, annd physical quality are the
dimensioons of servicce quality.
This study foundd that these three
t dimenssions
– interacction qualityy, physical quality,
q and out-
come quuality – were the dimennsions of serrvice
quality in
i the bankinng service. This
T finding sup-
ports preevious studiees which emmployed a hieerar-
chical model
m of service qualiity (Brady and
Cronin Jr
J 2001; and Dagger et all., 2007)
Empployees are an a essential capital assett for
service companies, especially in the bankking
sector. Employees
E arre important since they assist
a
the comppany to delivver the produuct to custommers.
Employeees, as thee service providers,
p n
need
appropriiate skills suuch as interrpersonal skkills,
a problem solving skills to
professioonal skills, and
ensure thhe operationnal success ofo the organniza-
tion.
Bitner (19922) contendedd that the surrrounding
phyysical environnment, in w which the pro ocess of a
serv
vice encountter takes plaace, played an a impor-
tantt role in influencing customers’ overall
percceptions of service
s qualiity. Research
hers state
thatt a physicall or “built” environmen nt affects
custtomer servicce evaluationns, as the quality
q of
the physical envvironment iss an importaant aspect
of the
t service assessment
a bby customerss (Baker,
19887; Bitner, 19992; Gustafssson et al., 20006; Rust
& Oliver,
O 19944; Wakefieldd & Blodgettt, 1996).
Thee importancee of the physsical quality proposed
in this
t hierarchhical model iis similar to
o tangible
aspects of thhe SERVQU UAL propo osed by
Parasuraman et al. (1985). H However, thee concept
of physical
p quaality has a bbroader mean ning than
justt its tangible aspect (Lai et al., 2007). Reflect-
ing on this finnding, the baanking secto or should
prov vide a good physical envvironment in n order to
support the proccess of servicce delivery.
Outcome quuality or techhnical quality
y is what
custtomers receeive after tthe service delivery
process and buuyer-seller innteractions are
a com-
pletted (Gronrooos, 1984). Fuurthermore, similar
s to
26 Journal of Indonesian Economy and Business
Gronroos (1984), Czepiel et al. (1985) explained
that the outcome quality referred to the technical
outcome as the "actual" service, and posits that it
is a determinant in assessing the quality of a ser-
vice encounter. In determining the outcome
quality in the banking service, several dimen-
sions should be considered. Since customers are
involved in the service production, the waiting
time is one of the important dimensions in
determining service quality. Parasuraman et al.
(1985) contended that customers identified the
service promptness as an integral part of service
quality. Similar to SERVQUAL’s proposition
that the reliability of service would influence the
perceived service quality, in a hierarchical
model, the reliability aspect is also considered as
an essential aspect in defining outcome quality
(Shu, 2010).
As proposed in this study, service quality has
a positive significant effect on corporate image.
This finding supports the study of Alfin et al.
(2013) and Huei and Easvaralingam (2011) as
they found that service quality had a positive
influence on corporate image. These findings
prove that a higher service quality results in a
better image for the company. On the other
hand, a lower quality of service causes a poorer
image of the company.
Corporate image is the perception that dif-
ferent audiences have of an organization and
results from the audiences’ interpretation of the
cues presented by an organization. For example,
if the employees are willing to help customers
and provide a prompt service, then the customers
will think that the company has high integrity in
serving and delivering the customers’ needs and
in providing their services.
As an important construct in the marketing
field, corporate image is found to have a signifi-
cant role in influencing customer loyalty. This
study finds that the more positive the image is,
as perceived by customers, then this results in
greater loyalty by the customers to the bank.
This finding is similar to several previous studies
which also revealed the significant effect of cor-
porate image on customer loyalty (Shu, 2010).
Since there is an essential effect of image on
loyalty, banking companies should be able to
January
create positive corporate images. This is plausi-
ble since the banking sector is a business sector
which needs to gain the trust of its customers.
Customers would feel more secure having trans-
actions with a bank if the bank has a positive
image in running its business.
The other important finding of this study is
the indirect effect of service quality on customer
loyalty. While several studies indicate a direct
relationship of service quality on customer
loyalty, this study shows that the corporate
image mediates this relationship. In brief, this
study finds that, as a central construct in the
service marketing field, service quality influ-
ences customer bank loyalty both directly and
indirectly through the corporate image. Hence,
service providers should show some concern to
the quality of their offered services.
CONCLUSIONS, LIMITATIONS, AND
RECOMMENDATIONS
This current study found that a banking
company needs to pay attention to its interaction
quality, physical quality, and outcome quality in
order to provide an excellent service quality for
its customers. In the Indonesian banking sector,
providing a high quality service is proven to be a
way to enhance corporate image and customer
loyalty.
While this study makes a contribution to the
body of service marketing literature, it has sev-
eral limitations that need to be acknowledged.
The first is about the sampling method used by
this study. Since this study takes convenience
sampling as its sampling technique, the findings
of this study may not be widely generalized. The
second limitation is related to the self-adminis-
tered questionnaire used in the data collection
process. The lack of researcher control in such a
situation may lead to misinterpretation by the
participants, which could create validity prob-
lems. Moreover, the self-administered method
may also present limitations since participants
may sometimes give expected answers (social
response bias) or patterned responses to the
questions. The last limitation is about the factors
influencing customer loyalty. In predicting cus-
tomer loyalty, this study just focused on service
2015 Hussein & Hapsari
quality and corporate image. Theoretically, there
are several other factors that have been identified
as affecting loyalty; therefore, further studies
may include other factors to predict customer
loyalty when arranging a more comprehensive
study.
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Journal of Indonesian Economy and Business
Volume 30, Number 1, 2015, 30 – 41

COMPETENCY, ENTREPRENEUR CHARACTERISTIC AND BUSINESS

PERFORMANCE: STUDY OF THE PEMPEK BUSINESS
IN PALEMBANG

Fransiska Soejono
Economics Department, School of Economics Musi
(fransoe_77@yahoo.com)

Anastasia Sri Mendari

Economics Department, School of Economics Musi
(puket1stie@yahoo.com)

Micheline Rinamurti
Economics Department, School of Economics Musi
(rina_angel2008@yahoo.com)

ABSTRACT

The purpose of this study was to examine empirically the effects of entrepreneurial compe-
tencies and characteristics on business performance. Previous studies found that competencies
and entrepreneurial characteristics significantly influenced business performance. A quantita-
tive method was used and 122 respondents were involved as the sample in this study, who were
pempek business owners in Palembang, South Sumatra. The results indicated an effect from
entrepreneurial competencies on business performance. It was also found that the entrepre-
neurs’ characteristics (owners’ ages) significantly affected the businesses’ performance. This
implication requires some sort of course or program for the entrepreneurs to improve their
competence to direct the owners to gain better business performance. The growing age of the
business owners requires equal insights to ensure age does not stop the owners from improving
their business’ performance.
Keywords: competency, characteristics, performance, age, entrepreneur

INTRODUCTION longan, Semarang, Gresik, Jember, Malang,

The development of the pempek business
should be increasingly ensured in Palembang,
South Sumatra, considering that Palembang is
known internationally. Some international events
held recently in Palembang included the S.E.A.
games in 2011 and the third Islamic Solidarity
Games in 2013. These occasions promoted
Palembang’s well known tourism spots and also
its unique food. Recently, the pempek business
has not only been growing regionally but also
nationally, with the spread of Pempek Wongkito
19 in Bekasi, West Java (92 outlets with annual
sales ranging from fifteen to sixty million
dollars), Pempek 8 Ulu Cik Ning (25 outlets
spread across Java, Riau and Lombok), and
Pempek Tjek Entis (36 outlets in Jakarta, Peka-
Purwokerto, Sidoarjo, Tasikmalaya, Mojokerto,
Denpasar and Ambon) (Yohana et al., 2013).
Pempek businesses could be provided the oppor-
tunity to develop globally through international
events which may be held in Palembang. Nila
(2012) concluded the statement of the Mayor of
Palembang, Mr. Eddy Santana Putra, who com-
mented on the remarkable pempek sales which
had reached one trillion rupiah annually. It is
evident that the real economy sector is growing
rapidly in Palembang. The development of pem-
pek businesses is closely related to the increase
in economic activities in Palembang. The pem-
pek business is a popular culinary business com-
pared to other culinary businesses. This kind of
food is not only recognized by local people as
their traditional food but also as a staple, primary
2015 Soejono et al.
meal. Furthermore, it is present in both formal
and informal occasions.
The pempek business is one of the local
entrepreneurial lines which plays a role in pro-
moting the success of the entrepreneurial move-
ment in Indonesia. Therefore, the effort to
improve pempek’s business performance is very
important. Pempek businesses have unique cha-
racteristics, they are frequently found in the mid-
dle of thriving local markets because this busi-
ness is growing around formal and informal
institutions. Currently, there has not been any
formal institution which could organize and
unite the pempek entrepreneurs. Moreover they
encounter complex problems, such as the availa-
bility of their primary raw material, raw material
prices, and competition from informal institu-
tions. Pempek enterpreneurs (as they are
involved in economic transition) are required to
have high capabilities in human resources and
financial capital. The success of this business
cannot be separated from the internal factor,
namely the owner’s capability. Internal factors
are described as being competent and having
entrepreneurial characteristics. Competence is a
vital concept for organizational growth and suc-
cess. Owners with high entrepreneurial compe-
tence will be able to face intense competition
and the current situation of globalization, while
the entrepreneurial characteristics are the sup-
porting factors for a successful venture. It is in
line with the results of previous research which
determined that the entrepreneurial characteris-
tics were the supporting factors to establish busi-
ness performance optimization (Adegbite et al.,
2006; Islam et al., 2011; Sarwoko et al., 2013).
Research by Ahmad et al. (2010) and
Sarwoko et al. (2013) showed the important role
of entrepreneurial competence in business per-
formance. Entrepreneurial competence improves
the capability, competitiveness, and performance
of the firm (Sancez, 2011). Another previous
study by Xiang (2009) described that entrepre-
neurial competence was different from mana-
gerial competence. Business owners tend to have
a higher entrepreneurial competence than their
managers. Furthermore pempek owners mostly
consider themselves as a manager, but as a busi-
31
ness owner and manager, they must have entre-
preneurial competencies. The research problem
was formulated based on the owners’ views.
They implied that their businesses were success-
ful enough to cover their daily needs. Limited
owners’ capabilities are considered to be one of
the obstacles to developing the businesses to
their maximum potential.
Previously, research into competency and
entrepreneurial characteristics had been per-
formed on different backgrounds of economic
and social-cultural conditions in such places as
the Ukraine, Malaysia, Nigeria, Hong Kong, and
Norway. However, it has rarely been explored in
Indonesia. A similar study was conducted in
Malang, East Java by Sarwoko et al. (2013).
Other studies (Adegbite et al., 2006; Ahmad et
al., 2010; Islam et al., 2011; and Akande, 2012)
had investigated the competency or performance
characteristics, and their effects on busi-
nesses/organizations, separately, while Sarwoko
et al. (2013) reviewed both variables at great
depth. This became our main reference to con-
tinue the investigation into the competencies and
characteristics, and their effects on business per-
formance in a different situation, namely the
pempek businesses in Palembang, South Suma-
tra. The purpose of this study was to examine the
effect of entrepreneurs’ competencies on busi-
ness performance, and the effect of the entrepre-
neurial characteristics (gender, owner’s age,
business age, funder/ line ownership, business
size/number of employees, educational back-
ground) on business performance.
THEORY
A. Definition and Role of Entrepreneurship
An entrepreneur is a person who creates a
new business and is prepared to take the risks
and uncertainty inherent in this, in order to
achieve profits and growth by identifying sig-
nificant opportunities and combining resources
so these necessary resources can be capitalized
(Zimmerer and Norman, 2008). Entrepreneur-
ship is the process of creating something new
and of a certain value by using the required time
and effort, financial risk, physical and social
32 Journal of Indonesian Economy and Business
risks, to receive monetary rewards and personal
satisfaction and independence (Hisrich et al.,
2008). The role of entrepreneurship in economic
development includes more than just an increase
in output and income per capita; it also includes
the initiative and determination to make changes
in the structure of business and society (Hisrich
et al., 2008). Government, as one of the media-
tors to commercialize the results of the combina-
tion between social and technological needs.
Corporate entrepreneurship is a business entre-
preneurship which might merge the gap between
science and market. While independent entrepre-
neurship creates new organization to bridge the
gap between science and the market (Hisrich et
al., 2008).
B. Competency of Entrepreneurship
Entrepreneurship competence is defined as
the entrepreneur’s ability to face critical situa-
tions effectively by considering environmental
constraints and establishing relationships and
internal resources (Iandoli, 2007: 17 in Solesvic,
2012). In the online business dictionary, compe-
tence is defined as "A cluster of related abilities,
commitments, knowledge, and skills that enable
a person (or an organization) to act effectively
in a job or situation." Competence indicates the
availability of knowledge and skills that enable a
person to make decisions in various situations.
Competence may occur at any stage of life or
career. Competencies can be acquired through
formal education, and also through life, career
and experiences.
The roles and tasks of entrepreneurs and
managers are identical in some aspects, such as
organisational abilities, and personal managing.
Entrepreneurial competencies are generally
found to be higher than those of business own-
ers/managers (Xiang, 2009). Entrepreneurs, who
have better incentives to succeed, do not only
work longer hours, but also harder (Bitler et al.,
2005).
According to Baumol (1968) in Grieco
(2007), managers are people who implement
efficiencies in a continuous process, including
controlling, scheduling, and decision making
related to prices as well as to marketing pro-
January
cesses. Managers practice things routinely while
entrepreneurs focus on the development and
implementation of new ideas. An entrepreneur is
more than just an innovator. Despite any bad
situation, the entrepreneur will work harder than
a manager. Sadler-Smith et al. (2003) found that
an “entrepreneurial style but not managerial
behavior” positively influenced the possibilities
for a high growth type company.
In a study of managerial competence, com-
petence is assessed as the actual observed beha-
vior in the workplace and it is usually defined by
personal characteristics such as the nature,
knowledge, expertise and personality of the indi-
vidual manager. According to Bird (1995) in
Xiang (2009), as well as managerial competence,
entrepreneurial competence could be defined by
characteristics such as general and specific
knowledge, motives, traits, self-images, social
roles, and skills that result in the birth of specu-
lation, and its survival and/or growth. Compe-
tence can only be shown by attitudes and
actions, and it is also related to the dynamic cha-
racteristics of the competitive environment.
Competence can be changed and studied. Entre-
preneurial competence characteristics indicate
that competition can be controlled. Entrepre-
neurial competence with respect to the number
of attributes required to achieve success entre-
preneurs and entrepreneurship resistance (Dixon
et al., 2005).
C. Theory of Entrepreneurship
According to Simpeh (2011), there are six
theories of entrepreneurship.
First, the Economic Entrepreneurship theory.
This theory has a deep connection with classical
economic theory, neoclassical, and Austrian
Market Process (AMP). This theory explores the
economic factors that increase entrepreneurial
behavior. Classical theory suggests three factors
of production, namely land, capital and labor.
Neoclassical models offer growing criticism
against the classical models, and indicate that
economic phenomena can be reduced to pure
changes, reflecting an optimal ratio, and occur-
ring within an economic system that is basically
not used. The economic system consists of par-
2015 Soejono et al.
ticipants’ changes, the changes in events, and the
impact on other market participants’ changes.
There is some criticism of the neoclassical,
alleging that (a) the aggregate demand ignores
the uniqueness of entrepreneurial activity at the
individual level, (b) whether the use or change in
value reflects the future value of the outcomes of
innovation, (c) a rational allocation of resources
does not capture the complexity of the market-
based system, (d) performance is based on inno-
vation, and efficiency does not include non-
uniform output; knowledge tools/destination and
perfect knowledge/semi-perfect which does not
describe the uncertainty. Perfect competition
does not include innovation and entrepreneurial
activity, (e) it allows the imitation of all inputs
and outputs in a market system, (f) of entrepre-
neurial activity is destructive demands of a mar-
ket system. The Austrian Market Process (AMP)
is a new movement of the neoclassical. AMP is
focused on human activities in the context of the
knowledge economy. An important function of a
company is to create something new that is pro-
duced from a process that is run as a market
economy a boost. AMP rejects the assumption
that the state repeatedly, always leads to the
same outcome in an economic system. However,
AMP is considered entrepreneurial incentives do
not always use the knowledge (probably never
seen before, or never seen again later), to
increase the value. AMP is based on three main
concepts, namely (a) the market arbitrage oppor-
tunities that provide views for market partici-
pants of the opportunities or the passage of
certain suboptimal activity, (b) attention to the
profit-making opportunities, (c) conceptualiza-
tions that differ between entrepreneurial owner-
ship. Entrepreneurship does not require the
ownership of resources, but an additional idea of
the context of uncertainty and risk. This concep-
tualization suggests that every opportunity is
unique and therefore previous activities cannot
be used to reliably predict the outcome. Critics
of the AMP claim: (a) the system is not purely
competitive market, but it can improve colla-
boration antagonist, (b) the monopoly of
resources can interfere with competition and
entrepreneurship, (c) fraud/fraud and tax/control
33
systems also contribute to the activities of the
market, (d) private companies and governments
are different, but both can become entrepre-
neurial, (e) entrepreneurship can occur in a non-
social situation in the market without competi-
tion.
Second, the Entrepreneurship Psychological
theory. This theory emphasizes the personal cha-
racteristics that determine entrepreneurship. Per-
sonality traits, the need for achievement, and the
locus of control are reviewed in this theory and
empirical evidence suggests three new charac-
teristics are associated with entrepreneurial
tendencies - risk-taking, innovativeness, and a
tolerance for ambiguity.
Third, the Entrepreneurship Sociological
theory. This theory emphasizes the social con-
text, ie. the level of analysis of the general com-
munity. There are four social contexts, namely
(a) the social network, (b) the context of the
stages of a person's life path which is to analyze
the situation and characteristics of an individu-
al's life who decides to become an entrepreneur,
(c) identification of ethnicity, (d) population
ecology.
Fourth, the Entrepreneurship Anthropologi-
cal theory. This theory studies the origin, devel-
opment, customs/habits, and beliefs of a commu-
nity. In other words, studying the culture of a
person in a community. According to this theory,
if a person wants to be successful he/she must
initially pay attention to his/her social and cul-
tural factors.
Fifth, the Opportunity-Based Entrepreneur-
ship theory. It uses the approach of opportuni-
ties, that is change is not caused by an entrepre-
neur, but he/she will exploit the opportunities
which will create change. An entrepreneur has
the possibility to change the direction of crea-
tion.
Sixth, the Resource-Based Entrepreneurship
theory. This theory argues that access to re-
sources by owners is a more important predictor.
The emphasis is on the importance of the theory
of financial factors (financial capital/liquidity
theory), social (social capital/social network
34 Journal of Indonesian Economy and Business
theory), and human resources (human capital
entrepreneurship theory).
D. Previous Research
Man (2001) linked the entrepreneurial
characteristics of the performance of small and
medium enterprises in the context of the service
sector in Hong Kong. Identification of entrepre-
neurial competencies with qualitative analysis
was performed on 19 samples of business own-
ers/managers using successful interview strate-
gies. The quantitative analysis was conducted by
distributing questionnaires via email which were
answered by 153 business owners/ managers of
small and medium businesses. Tests were then
carried out using multiple regression analysis.
The results showed that competence in entrepre-
neurship did affect the performance of the small
and medium businesses in the services sector in
Hong Kong.
Baum and Edwin (2004) investigated the
relationship between entrepreneurial traits and
skills (passion, persistence, and new resource
skills) and specific situational motivation (com-
municated vision, self-efficacy, and goals) with
the growth of the next business. The data were
derived from 299 entrepreneurs and 106 chief
executive officers in a single industry, which
was studied for a 6 year period. Testing involved
using a Structural Equation Modeling, which
showed goals, self-efficacy, and communicated
vision directly influenced the subsequent growth
of businesses, and these factors influences were
mediated by passion, persistence, and new re-
source skills. Furthermore, acquired and commu-
nicated vision, and self-efficacy all related to the
goals, and persistence was associated with new
resource skills.
Dixon et al. (2005) aimed to identify
entrepreneurial competence in managers at 10
training academies operated by the Training
Agency of Jamaica. 10 managers and 10 deputy
managers were selected as the sample. 53 items
on a questionnaire identified competencies in the
first phase of data collection, while the second
and third questionnaires had 66 items related to
competence. 20 questionnaires were distributed,
and 15 returned (response rate of 75%). The
January
manager of the Jamaica Training Academy
believed that 39 of the 66 entrepreneur compe-
tencies in the survey list were very important for
instructors to successfully pass on to the students
to help perform their function. The manager also
looked at the performance of the instructors,
who met more than half of the identified require-
ments for entrepreneurial competence.
Ahmad (2007) examined the relationship
between entrepreneurial competencies and busi-
ness success in the context of small and medium
enterprises in Australia and Malaysia. This was
conducted in 2 parts, the first was a qualitative
method based on individual interviews with 10
entrepreneurs from Australia and 10 from
Malaysia who ran small and medium enterprises
in the manufacturing and service sectors. The
purpose of the first part of the study was to
obtain behavior data that reflected competencies
that were relevant to the business environment.
Analysis of this interview data identified 12
competencies that comprised of strategy, com-
mitment, conceptual, opportunities, organizing
and directing, relationships, learning, personal,
technical, social responsibility, and familiarity.
The second part of the study was an analysis of
the causal link between entrepreneurial compe-
tencies and business success in small and
medium enterprises in Australia and Malaysia.
The results revealed that entrepreneurial compe-
tence was a strong predictor for business success
in Australia and Malaysia. It was also noted that
the environmentally-friendly and stable business
conditions had influential effects on business
success in Australia, while in Malaysia only the
stable business environment had any influence.
Ahmad et al. (2010) evaluated the effect of
entrepreneurial competencies and the moderat-
ing influence of the business environment on
business success in small and medium sized
enterprises in Malaysia. He sampled 212 busi-
ness owners in Malaysia, and his hypotheses
were tested using a Structural Equation Model
(SEM). The results showed that competence of
entrepreneurship was a strong predictor for the
success of small and medium business enter-
prises in Malaysia. Other findings showed that
the relationship of entrepreneurial competencies
2015 Soejono et al.
and business success grew stronger in a hostile
and dynamic environment than in a benign and
stable environment.
Jane et al. (2011) examined the interaction
between the ages and education of women entre-
preneurs with the business dynamics of small
and medium enterprises in Kenya. The survey
was conducted using a cross sectional explora-
tion. The research sample comprised of 128
women entrepreneurs in small and medium
enterprises. Results of the interaction with a
UNIANOVA analysis showed that there was a
significant interaction between age and educa-
tion and their influence on the locus of planning.
Age and education also had a significant impact
on the profitability (Return on Assets) of the
businesses. The implication was the need for
early education programs and special courses for
women entrepreneurs to raise their levels of edu-
cation.
Sancez’s research (2011) studied the effects
of entrepreneurial competence in small compa-
nies in Spain, by building causal models using
data of entrepreneurship. The research model
was constructed to not only study the influence
of entrepreneurial competence on firms’ perfor-
mance, but also to look at the competitive envi-
ronment, and organizational capabilities, and
describe the direct and indirect influences. Data
was collected using a questionnaire, distributed
to 700 potential respondents either by phone or
email. 460 questionnaires were returned (65 per-
cent response rate). The questionnaire consisted
of 53 items using a Likert scale of seven points
(1 = strongly disagree, and 7 = strongly agree).
Testing was conducted using Structural Equation
Models, while the parameters of the goodness of
fit were RMSEA, NFI, CFI, and normed chi
square. The results of this research demonstrated
entrepreneurial competence affects the perfor-
mance of companies.
Sarwoko et al. (2013) examined the effects of
entrepreneurial characteristics and competencies
on business performance in small and medium
enterprises in Malang, East Java. 147 business
owners were selected as respondents by using a
survey instrument. Data were analyzed by using
Structural Equation Modeling. Results of this
35
study indicated a significant effect on the charac-
teristics of entrepreneurial business performance.
Entrepreneurial competence mediated the rela-
tionship between entrepreneurial characteristics
and business performance. This means that bet-
ter entrepreneurial characteristics will lead to an
increase in the business owner’s competence,
which in turn affects the performance of the
business.
E. Hypothesis Development
The success of the organization/business will
be determined by the skill and ability (compe-
tence) not only of the owners/ managers but also
the employees. Entrepreneurial competency such
as the ability to convey the business’ vision and
goals has an influence on business growth
(Baum and Edwin, 2004). The role of the
decision maker should be focused on the devel-
opment of entrepreneurial competence (Ahmad
et al., 2010). Entrepreneurial competence played
an important role in the organization's capabili-
ties and the scope of the competition, and also
directly affected the performance of the com-
pany (Sancez, 2011). Entrepreneurial competen-
cies could be a positive influence in new product
development for the medium and long term, but
negatively for the company's short-term profit
(Lumpkin and Dess, 1996 in Sancez, 2011).
Therefore, the first hypothesis raised was:
H1: entrepreneurial competencies positively
affect business performance.
According Sarwoko et al. (2013) only the busi-
ness owners who had strong entrepreneurial
characteristics may have an impact on business
performance. Adegbite et al. (2006) found that
entrepreneurial characteristics such as the
amount of experience the owner had, and the
length of time the business had been operating
contributed positively to the company’s perfor-
mance. Adegbite et al. (2006) also stated that not
all characteristics contribute positively, some
had a negative contribution to business perfor-
mance. Therefore, the second hypotheses raised
were:
H2a: gender impacts the business performance.
36 Journal of Indonesian Economy and Business
H2b: the age of the business owner influences
the business performance.
H2c: the age of the business influences the
business performance.
H2d: ownership impacts the business perfor-
mance.
H2e: the number of employees impacts the
business performance.
H2f: education affects the business performance.
METHODOLOGY
The intended respondents of this study were
the pempek business owners in Palembang. They
were selected through convenience and a snow
ball sampling technique. Primary data were col-
lected by using an interview technique with the
questionnaire as a guide. The data were surveyed
only from pempek businesses in Palembang,
South Sumatra. This was an empirical study
which was based on data and factual reports.
Considering its explanation level, it may be said
that this research is also categorized as a causal-
ity study, due to the examination of the influence
of competency and entrepeneurial characteristics
on business’ performance.
The variables of this study were measured by
using a 5 point Likert scale (1 = strongly disag-
ree to 5 = strongly agree), and business perfor-
mance was used as the dependent variable meas-
ured by three statements: (1) the increased
growth in sales, (2) the increased profit, and (3)
the increased assets. Independent variables used
were competency entrepreneurship. Entrepre-
neurship competence indicators (entrepreneurial
competence) used here were taken from the
work of Man (2001) and Ahmad et al. (2010) and
consisted of: strategy competency (C_1), the
development of a vision, strategy, future plans,
the setting of goals and standards, and ideas
offered. Commitment competency (C_2), the
display of a strong motivation to compete,
driven by the achievement of future results, and
the capacity to make an impact, plus motion and
dedication. Conceptual competency (C_3), the
demonstration of cognitive ability, the ability to
make decisions, the ability to measure risks, ana-
lytical thinking, innovation, creativity, show
January
grounds, and with a capacity to reduce the risk.
Opportunity competency (C_4), the ability to
recognize and seize opportunities and the ability
to identify customers’ needs. Relationship com-
petency (C_5), possessing and using good inter-
personal communication skills, and the ability to
influence others and give support. Organisa-
tional competency (C_6)the ability to direct,
lead, delegate, motivate, plan and schedule
work, to develop programs, and prepare budgets.
Personal competency (C_7) the ability to recog-
nize shortcomings, to keep in high spirits, to
respond to constructive criticism, prioritize work
and manage time, managing personal career
development, self-motivate to function at opti-
mum performance levels, to identify strengths
and weaknesses and to adapt to opportunities
and threat. Learning competency (C_8) the abil-
ity to learn as much as possible in one’s own
field, to learn in a variety of ways, to proactively
learn, to stay up to date/current in one’s own
field, to apply learned skills and knowledge in
practice. Ethical competency (C_9) the ability to
admit mistakes and tell the truth, to be honest
and transparent in business dealings, to be com-
mitted to offering goods/services at a price that
is fair, to be responsible, and always take into
account any actions taken. Familism competency
(C_10) to cooperate and help others in the busi-
ness (especially close colleagues), to identify
and seek help from trustworthy employees, get
support and input/suggestions from family and
peers, share knowledge and resources with
others (especially close colleagues).
The characteristics of entrepreneurship
which acted as the other independent variables
were gender, the age of the owner, the age of the
business, whether the owner was the founder of
or successor to the business, the business’s size
measured by the number of employees, and the
educational background of the owner.
Stages in the data analysis techniques in-
cluded the presentation of the number of data
samples obtained, the profile of the respondents,
the descriptive statistics, and the data’s validity
and reliability. Final data analysis were done to
meet the criteria of BLUE (Best Linnier
Unbiased Estimation), which is the classical
2015 Soejono et al.
assumption test. The purpose of the study was
investigated by the use of ANCOVA models in
the hypotheses testing. These were used since
metric variables (competence) and non-metric
variables/categorical variables (gender, age of
owner, age of business, ownership, number of
employees, and education) for the independent
variable were found out. Specifically, the model
was described as follows: Performance = α +
Competency + gender + age of owner + age of
business + number of employees + ownership +
education + ε. The research model in figure 1
illustrates the relationship among the proposed
variables.
Description: α = regression intercept, is the
mean of the performance for all the independent
variables which were used. Competency = conti-
nuous variables (metrics) and was a variable that
included the overall (total) strategic competence,
commitment, conceptual, opportunity, relation-
ship, organisational, personal, learning, ethical,
and familism. Gender = variable category (non-
metric) was given the value of 1 for men and 2
for women. The age of the owner = variable
category (non-metric) was allocated the value of
1 for those aged 0-30 years old, 2 for those aged
between 31-50 years old and 3 for those aged
above 50. The age of the business = variable
category (non-metric) had the value of 1 for
businesses aged 0-2 years, 2 for those between
3-10 years, and 3 for those above 10 years.
Ownership = variable category (non-metric) had
the value of 1 for the founders, and 2 for non-
founders. The number of employees = variable
category (non-metric) was given the value of 1
for 0-5 people employed, 2 for 6-10 people and
3 for over 10 people. Education = variable
category (non-metric) had a value of 1 for not S1
and 2 for S1.
Kompetensi Kewirausahaan Business
Performance (BP)
Figure1. Research Model
37
Questionnaires were distributed through enu-
merators numbering 135. 133 questionnaires
were returned, of which 122 were completed and
suitable to be used for hypotheses testing. Both
pempek owners and business managers were
involved as respondents. Data were distributed
to various business places around Palembang,
including: Kenten, Sekip, Sudirman Street,
Dempo Street, K.H Burlian Street, and the Sebe-
rang Ulu area. 70 percent of the respondents
were female, and 30 percent male. 66 percent
were between the ages of 31-50 years old, of the
remainder 8 percent were under 30 years old,
and 26 percent were aged over 50. Most respon-
dents (49 percent) had been in business between
3-10 years, of the remainder, 25 percent had
started their business less than 3 years ago and
the other 26 percent had business experience of
more than 10 years. 93 percent of the respon-
dents were the direct owner and manager of the
pempek business, 7 percent of them were the
successor to a business that had been founded by
a family member. 88 percent of the respondents
had less than 5 employees. (They did not specifi-
cally recruit permanent employees, but the term
refers to members of the family, a child, the
wife, her husband or others), 6 percent of them
had 6-10 employees, and the other 6 percent had
more than 10 employees. For their educational
bacground, 89 percent of the respondents did not
complete S1 (high school, secondary and ele-
mentary school), and the remaining 11 percent
were educated to the S1 level. Based on the
minimum value of the variable performance, all
the pempek businesses experienced growth in
both their sales and their profits and assets.
Gender
Karakteristik Wirausaha
Usia Pemilik
Usia Usaha
Kepemilikan
Jumlah Karyawan
Pendidikan
38 Journal of Indonesian Economy and Business
Reliability measurements were performed
with a one shot or one-time measurement that
used a statistical test Cronbach Alpha. Both con-
structs of competency and performance met
Cronbach’s Alpha value of more than 70 per-
cent, meaning they were reliable. Test the valid-
ity of the statements made on which is an indica-
tor of Competency and Performance (Business
Performance). There were 48 questions used to
measure competence and 3 questions to measure
performance (business performance). A validity
test was done by using a bivariate correlation
between each point score declaration (indicator)
with a total score for the variables/constructs.
Each indicator of the competence variables (C_1
to C_48) had a significant correlation to the total
score of the construct (competence). So it can be
concluded that each indicator competency state-
ment was valid. The performance of each indica-
tor variable (P_1 up to P_3) had a significant
correlation to the total score of the construct
(performance). So it can be concluded that each
statement Performance indicator was also valid.
Tolerance values for each variable indepen-
dent were at value ≥ 0.1, while the VIF value
was close to 1. This meant that multicollinearity
did not happen between the independent va-
riables in the regression model. There was no
autocorrelation in the model seen from the resi-
dual lag (Lag_res1) which gave a probability of
significance above 5 percent . Autocorrelation
used the Lagrange Multiplier test (LM test) or
the Breusch-Godfrey test. A Glejser test was
conducted which showed no detectable heteroke-
dastisitas because the significant value of each
independent variable was above 5 percent . The
value of the Kolmogorov-Smirnov test was
significant at 1.364 and 0.048, which indicated
that the data were normally distributed residuals
at the 1 percent level.
The test results showed that entrepreneurial
competency affected business performance (per-
formance) in the pempek business in Palembang.
An F test value of 56.714 with a significant
probability of less than 1 percent was 0.000.
This meant that the first hypothesis was sup-
ported (Table 1).
January
Entrepreneurial characteristics in this case
were the age of the pempek business owners, the
F test value for this of 2.406 with a significance
level of below 10 percent was 0.096. Therefore,
it could be said that age affected the perfor-
mance of the owners. While other entrepre-
neurial characteristics such as gender, the age of
the business, the ownership, the number of
employees, and the educational level of each
significant had a probability above 10%. The
second hypothesis was supported only on the
one entrepreneurial characteristic, the owners
age (Table 1).
Table 1. Hypothesis Test
Variabel Nilai F P-value
Competency 56,714 0,000
Gender 0,790 0,377
Age of Owner 2,406 0,096
Age of Business 0,660 0,519
Ownership 1,074 0,303
Number of employees 0,537 0,587
Education 0,923 0,339
Based on Table 2, a pairwise comparison
provided more detailed data on the variables of
gender, the age of the owner, the age of the busi-
ness, the ownership, the number of employees,
and education. In the gender variable values, a
mean difference of -0.030 meant pempek busi-
nesses owned or managed by men had a lower
performance than that of the pempek business
enterprises that were owned or managed by
women, which scored 0,030. However, the mean
difference had a significance probability value of
more than 10 percent, at 0.938, which meant that
the performance of the pempek businesses
owned or managed by men were no different
from the pempek businesses owned or managed
by women.
For the age of owner variable, we found that
the performance of business owners aged 30 or
less scored more than 0,100, which was more
than the owners aged 31-50 years, but it did not
show significant differences (see significance
probability of 1.00 of greater than 10 percent).
The performance of business owners aged less
than 30 years was more than 1,294 over the
2015 Soejono et al.
Table 2. Pairwise Comparison
Variabel
Gender:
Male – Female
Age of Owner:
a. 0-30 years – 31-50 years
b. 0-30 years – above 50 years
c. 31-50 years – above 50 years
Age of Business:
a. 0-2 years – 3-10 years
b. 0-2 years – above 10 years
c. 3-10 years – above 10 years
Ownership:
Not Founders – Founder
Number of Employees:
a. 0-5 people – 6-10 people
b. 0-5 people – above 10 people
c. 6-10 people – above 10 people
Eduaction:
Not to S1 – S1
owners over the age of 50 years, and the differ-
ence was significant (significance probability
was less than 10 percent ie 0,089). While the
performance of business owners aged between
31-50 years was more than 1,194 over the own-
ers over the age of 50 years and the difference
was significant.
For the age of the business variable, we
found that business performance was greatest
when the business was still between 3 to 10
years old. With new businesses (2 years or less)
and when over 10 years old, the performance of
the business dropped off to be lower than that of
the 3 to 10 year old businesses. However the
significance probability of greater than 10 per-
cent for this age of business variable showed no
significant difference in performance.
For the ownership variable, it appeared that
businesses not managed by the founder do not
differ significantly from the businesses managed
by the founder in their performance. Business
performance as managed by the founder of the
business scored 0,022 compared to business
enterprises run by the founder. The variable for
number of employees that the business em-
ployed showed little significant difference in
performance value between pempek businesses
that had the varying numbers of employees. For
the education variable we found that the business
39
Mean Difference P-value
-0,030 0,938
0,100 1,000
1,294 0,089
1,194 0,019
-0,403 1,000
0,271 1,000
0,674 0,435
0,022 0,967
-0,902 0,346
0,522 1,000
1,424 0,201
-0,711 0,132
performance did not differ significantly between
the pempek business owners with S1 or without.
Entrepreneurial competence was defined as
the competence strategy, commitment compe-
tence, conceptual competency, relationship com-
petency, organisational competence, personal
competence, learning competence, ethical com-
petence, and competence familism needed to
have a positive and significant impact on the
business performance of the pempek business in
Palembang, South Sumatra. The higher the com-
petency that a business owner possessed, the
greater the improvements would be in his/her
business’s performance. These results were con-
sistent with the findings of Ahmad (2007) for
businesses in Australia and Malaysia, Ahmad et
al. (2010) for businesses in Malaysia, Sancez
(2011) for self-employment in Spain, and
Sarwoko et al. (2013) for small and medium
enterprises in Malang, East Java.
The entrepreneurial characteristic that most
affected the performance of the pempek busi-
nesses in Palembang, South Sumatra was the
owners age. Pempek business owners aged 50
and under had a business performance which
was better than that of the owners of over 50
years of age. This was consistent with the results
of research by Jane et al. (2011), namely that the
age of the owner had a significant impact on the
40 Journal of Indonesian Economy and Business
profitability of the business. Other entrepre-
neurial characteristics, namely gender, the age of
the business, the ownership, the number of em-
ployees, and education had no significant effect.
These results contrast with the results of the
research and explanation by Jane et al. (2011)
and Sarwoko et al. (2013) who both stated that
both the individual characteristics (gender,
owner/non-owner, and education) and organiza-
tional characteristics (age of business, and num-
ber of employees) had a significant effect on the
performance of the business.
CONCLUSION
The results of the hypothesis test of the 122
respondents concluded that there was a signifi-
cant impact of entrepreneurial competency on
the business performance of the pempek busi-
ness in Palembang. It was also found that the
owner’s age significantly impacted on the busi-
ness performance. In additional, the investiga-
tion implied that the entrepreneurial characteris-
tics (gender, business period, founder/successor,
business size/number of employees and educa-
tional background) did not impact on the busi-
ness performance of the pempek business. The
implication of this study is the requirement for
courses or educational programs for the owners
to improve their competence, to allow them to
gain better business performance. The pempek
business owner is positioned as a producer as
well as a marketer. Each of them should possess
entrepreneurial competency to enable their sales
growth, profit enhancement, and asset growth.
The characteristics of the business owners, in
particular their age, also played a role in improv-
ing their business performance. The growing age
of the business owners also requires equal in-
sight enhancement to ensure this does not stop
the owners from improving their business
performance.
It was also clear that the sampling technique
used in this study probably did not represent the
whole data from the expected sample. Conveni-
ence sampling methods were used due to the
respondent’s affordability and limited area
coverage. Future studies are suggested to use an
expanded and broadened sample, and to imple-
January
ment the multiple regression models with a va-
riable interval scale for entrepreneurial charac-
teristics for gaining better results. Testing and
research analysis might also be carried out by
using the entrepreneurial characteristics variable
in the form of the category/ non-metric.
ACKNOWLEDGMENT
The writers wish to acknowledge DIKTI for
financial support during the research.
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Journal of Indonesian Economy and Business
Volume 30, Number 1, 2015, 42 – 55

ANALYSIS OF MARKET TIMING TOWARD LEVERAGE OF

NON-FINANCIAL COMPANIES IN INDONESIA

Vera Pipin Wulandari

Faculty of Economics and Business
Universitas Gadjah Mada
(verapipinwulandari@gmail.com)

Kusdhianto Setiawan
Faculty of Economics and Business,
Universitas Gadjah Mada
(s.kusdhianto@ugm.ac.id)

ABSTRACT

This study aimed to examine the effect of market timing on leverage on non-financial compa-
nies in Indonesia. Market timing was tested on the hot and cold market conditions. Hot and cold
markets are determined by the monthly market to book ratio. A hot (cold) market occurs when
the average market to book ratio of a particular month is above (below) the value of the moving
average of the monthly market to book ratio. This study also aimed to test whether non-financial
companies in Indonesia persistently applied leverage policies. This study used two research
models. The first model was a panel data with a sample size of 77 non-financial companies
listed on the Indonesian Stock Exchange from 2002-2013.The second model was a cross section
data with a sample size of 157 non-financial companies that conducted their IPO in Indonesia
from 2003-2013. The dependent variable in both the research models was leveraget (levt). The
independent variables were markett and leveraget-1 (levt–1). The control variables were profitabi-
lityt-1 (proft-1); and sizet-1. The results of this study indicated that market timing affected the leve-
rage of non-financial companies listed on the Indonesian Stock Exchange. However, market
timing did not affect the leverage of non-financial companies that had their IPO in Indonesia.
The non-financial companies in Indonesia were not persistently applying a leverage policy. The
capital structure of non-financial companies in Indonesia changed because of the influence of
variable profitability and size (which supports the pecking order and trade off theory).
Keywords: market timing theory, leverage, hot and cold market, market to book ratio

INTRODUCTION There are several theories regarding the capi-

The goal of financial decision making is to
maximize the shareholders’ wealth. Such finan-
cial decisions include (1) the investment deci-
sion; (2) financing decision; and (3) dividend
policy.
The most important funding decision is the
value of the company's capital structure. The
optimal capital structure by Brealey, et al (2011)
would be a capital structure that could minimize
the overall costs of capital or the average costs
of capital in order to maximize its value.
tal structure, which are the trade off theory,
pecking order theory and market timing theory.
Baker and Wurgler (2002) explained that equity
market timing was an important aspect of corpo-
rate financing policy. The market timing theory
says that companies tend to issue their shares
when their market value is high and are likely to
buy back the stock, or issue the debt, when the
market value is low, in order to obtain funds at a
cheaper cost of capital.
Barker and Wurgler (2002) explained that
market timing negatively affected the level of
2015 Wulandari & Setiawan
leverage. That effect is permanent and had per-
sistence in the capital structure for at least a ten
year period. In the long run, the changes in capi-
tal structure are influenced by the opportunity to
issue or buy back shares. This means that
changes in the capital structure in the long term
are influenced by the perceptions of managers in
taking advantage of the issuance and repurchase
of equity. So, the accumulation of capital struc-
ture is the result of a decision to utilize, by trad-
ing in the market, the value of the shares when
they are overvalued or undervalued.
However, the research of Hovakimian (2006)
explained that the effect of market timing on
capital structures was temporary. That effect was
negative and significant to the leverage only in
the first year after the IPO. Hovakimian (2006)
treated convertible debt as debt. But, Baker and
Wurgler (2002) treated convertible debt as equi-
ty. This would reduce the leverage ratio.
Alti (2006) examined the effect of market
timing on capital structures by using other va-
riables, which happened to be the same as those
used by Baker and Wurgler (2002). The differ-
ence was that Alti (2006) used a hot and/or cold
market as a proxy of market timing. The re-
search result showed that the hot market had a
very strong negative effect on leverage, but the
negative effect was quickly turned around. In the
second year after the IPO, that effect was already
lost. Overall, the results of this study showed
that market timing was an important factor in
financing activities in the short term, but the ef-
fects of market timing were limited in the long
term.
One of the practices of market timing is uti-
lizing the company's stock mispricing in the
market, to obtain funds at relatively low capital
costs. Mispricing is a condition in which the
price of a stock, instead of being at its fair, rea-
listic value is actually overvalued or undervalued
on the market. The implication is that (1) if the
stock is overvalued compared to its assessed fair
value, the company will tend to issue new
shares; and (2) if the stock is undervalued, the
company would issue the debt and buy back its
shares.
43
The consistent utilization of share mispricing
can only occur in an inefficient market. In such
inefficient markets, managers can choose the
right time to issue shares, in other words when
the price is above the fair value. Quoted from
Saad and Siagian (2011), “The behavior of in-
vestors as if rational and arbitration mechanisms
that not perfect will lead mispricing and cause
markets to be inefficient”. Empirical evidence
has shown that the Indonesian capital market is
in an inefficient condition (Kim and Shamsud-
din, 2008; Hoque, et al, 2007). It gave signs that
investors in Indonesia’s capital market behaved
as if they were rational. Therefore, it can be con-
cluded that the theory of capital structure equity
market timing by Baker and Wurgler (2002)
should be applied to markets which are not effi-
cient.
Quoted from Muhsinin (2011) “The research
that has been conducted into the condition of the
capital markets in Indonesia showed that the ma-
jority of shares had a low autocorrelation coeffi-
cient which was not significantly different from
zero” (Husnan, 1990 and Esti, 1995). However,
the Indonesian capital market cannot be said to
be efficient because there were shares that had
different autocorrelation coefficients to zero. The
test was a weak form of efficiency testing. In
testing the weak forms of efficiency, the capital
market should be efficient if the changes in stock
prices followed a random walk pattern. There-
fore, investors cannot earn abnormal returns by
using trading rules which were based on the in-
formation of a stock’s previous price (Husnan,
2005). The change in the share’s price in the past
is expressed as a percentage. To determine the
relationship between the past share price with
the future share price, an autocorrelation coeffi-
cient is used. If the coefficient is found to be
equal to zero then the capital market is efficient.
This is because the pattern of changes in the
share prices follows a random walk pattern.
The inefficient capital market condition
raised the presumption that companies in Indo-
nesia used the market timing theory to determine
corporate funding. Therefore, the researchers
wanted to examine the effect of market timing
when tested on the hot and cold market condi-
44 Journal of Indonesian Economy and Business
tions on the capital structure of non-financial
companies in Indonesia in the two models. The
first model examined the effect of market condi-
tions (hot and cold markets) on the capital struc-
ture of non-financial companies listed on the
Indonesian Stock Exchange (IDX) from 2002 to
2013. The second model examined the effect of
market conditions (hot and cold markets) on the
non-financial corporate capital structure which
conducted an IPO in Indonesia from 2003 to
2013. The researchers used data from 2002 to
2013 as the period of study in order to reduce
any bias in the result. The researchers also used
non-financial companies as the sample because
non-financial companies have different charac-
teristics to financial companies. The financial
companies tend to carry larger levels of debt
than the non-financial companies for the same
equivalent level of risk (Jensen and Meckling,
1976).
Hot and cold market values were determined
based on the monthly market to book ratio. Hot
(cold) market was the monthly average market to
book ratio that was above (below) the monthly
moving average market to book ratio. Market
conditions were used as independent variables to
test their effects on changes in the level of leve-
rage used by the company.
The researchers focused on the market to
book ratio to capture any market timing and its
impact on the capital structure. There is one ver-
sion of market timing where economic agents
have motives that can be perceived as mispric-
ing, which causes irrational mispricing of stocks
from time to time. Based on this, a manager act-
ing in the interest of his existing shareholders
will take advantage of market timing in order to
obtain funds at a lower capital cost by issuing
shares which are overvalued at the time. The
market to book ratio can be used to see if the
value of the equity was overvalued or underva-
lued. Thus, the market to book ratio indicates the
motivation for the market timing for the funding
policy (Baker and Wurgler, 2002).
In this study, the researchers tried to investi-
gate the persistence of non-financial corporate
leverage policy in Indonesia. If such a policy of
leverage by non-financial companies listed on
January
the stock exchange was persistent, then the value
of the leverage ratio in year t-1 would be equal
or nearly equal to the value of leverage in year t
(at any market condition in year t-1 and t).
Therefore, there were three objectives of the
research. The first objective was to determine
whether market conditions (hot and cold mar-
kets) affected the leverage of non-financial com-
panies listed on the Indonesian Stock Exchange
and of non-financial companies that held their
IPO in Indonesia. The second objective was to
determine whether non-financial companies
listed on the Indonesian Stock Exchange and the
non-financial companies who held their IPO in
Indonesia persistently applied a leverage policy.
The third objective was to determine whether the
pecking order and trade off theory had any effect
on the leverage of non-financial companies
listed on the Indonesian Stock Exchange and
non-financial companies that issued their IPO in
Indonesia.
THEORIES AND HYPOTHESES
1. Theory of Equity Market Timing
The equity market timing theory (Baker and
Wurgler, 2002) states that firms will tend to is-
sue equity (decrease leverage) when they have a
high market value and will buy back the equity
or issue the debt when they have a low market
value.
There exists two versions of market timing
(Baker and Wurgler, 2002) based on two eco-
nomic motive agents. The first version is that the
economic agent has perceived a mispricing motif
that is irrational. That causes mispricing in the
share price of the companies from time to time.
Therefore, managers that act in the interests of
the shareholders will take advantage of this mar-
ket timing in order to obtain funds at a lower
capital cost by issuing shares when the price is
overvalued. This applies to companies prior to
and after their Initial Public Offering (IPO).
In the present study, the researchers tested
the market timing for the hot and cold market
conditions. Hot and cold markets are defined on
the basis of the monthly market to book ratio.
The hot (cold) market is a condition which is
2015 Wulandari & Setiawan
found when the average market to book ratio for
a certain month is above (below) the moving
average market to book ratio of that same month.
The theory of market timing, as explained above,
will be tested on hot and cold market conditions.
H1 : market condition (hot market and cold mar-
ket) negatively affect the leverage changes
in non-financial companies listed on the In-
donesian Stock Exchange.
H5 : market conditions (hot market and cold
market) negatively affect the leverage
changes in non-financial companies that did
their IPO in Indonesia.
2. Persistence of Leverage Policy
Leverage policy persistency is applied if the
value of the leverage at t-1 is equal or nearly
equal to the value of the leverage at t, despite
market conditions at the time t-1 being the same
or different to the market conditions at the time
t. In the first model, if the leverage policy of
non-financial listed companies on the stock ex-
change is persistent, the value of the leverage
ratio in year t-1 will be equal or nearly equal to
the value of the leverage in year t (any market
conditions in year t-1 and t). In the second mod-
el, if the leverage policy of the non-financial
corporations that held their IPOs in Indonesia is
persistent, the value of the leverage ratio in year
t-1 (the year prior to the IPO) will be equal or
nearly equal to the value of leverage in year t
(the year after an IPO) for any market conditions
in the years before and after the IPO. The hypo-
theses of persistence of leverage policy are for-
mulated below:
H2: non-financial companies listed on the Indo-
nesian Stock Exchange persistently apply a
leverage policy.
H6: non-financial companies that had their IPO
in Indonesia persistently apply a leverage
policy.
The leverage policy of non-financial compa-
nies in Indonesia is persistent, if:
1) The control variable Levt-1 has tvalue> ttable;
pvalue <α (0.05).
2) The coefficient Levt-1 is equal to or close to ±
1. Where tvalue for Levt-1 variable is
45
coefficient lev t −1 − 1
t value =
standard error
β2 −1
= (1)
standard error
3. Pecking Order Theory
The profitability of a company is an impor-
tant factor in determining its capital structure. If
it has large retained earnings, the company will
tend to use these retained earnings as working
capital. This is because of the cost of informa-
tion asymmetry. Issuance of debt has a cost
asymmetry higher than that of the use of retained
earnings in the fulfillment of its financing needs
(Hanafi, 2008). Based on the theory of the peck-
ing order as explained above, the following hy-
potheses were formulated:
H3: profitabilityt-1 affects leveraget in non-finan-
cial companies listed on the Indonesian
Stock Exchange.
H7: profitabilityt-1 affects leveraget in non-finan-
cial companies that held their IPO in Indo-
nesia.
4. Trade Off Theory
The trade off theory states that the use of
debt in financing capital structures will increase
the value of the company up to a certain opti-
mum point. However, the use of debt after ex-
ceeding that optimum point will decrease the
value of the company. This is because the bene-
fits gained from the use of debt are no longer
proportional to the increase in expenses related
to the financial distress and agency conflict. The
larger companies tend to have greater credibility.
The larger companies can reduce their agency
costs because they have clear control over the
disipline of their managers in fulfilling their ob-
ligations to the lenders or shareholders. Posed
benefits of decreased costs of this agency to
make the size of the larger companies will in-
crease the company's issuance of new debt
(Brealey, et al, 2011). Based on the theory of
trade off as explained above, the hypotheses are
formulated:
46 Journal of Indonesian Economy and Business
H4: sizet-1 affects leveraget in non-financial com-
panies listed on the Indonesian Stock Ex-
change.
H8: sizet-1 affects leveraget in non-financial com-
panies that had an IPO in Indonesia.
RESEARCH METHODOLOGY
1. Types and Sources of Data
The data used in this study was secondary
data. The secondary data comprised of the an-
nual basic financial statements issued by the
companies to the public. These were obtained
from the Indonesian Stock Exchange; OSIRIS;
and the Indonesian Capital Market Directory.
2. Population and Sample
The populations in this research comprised
of non-financial companies listed on the Indo-
nesian Stock Exchange between 2002-2013 (the
first model) and non-financial companies that
held their IPOs in Indonesia between 2003-2013
(the second model). The researchers used a pur-
posive sampling technique to obtain a represent-
ative sample in accordance with the criteria, as
set by the author. This purposive sampling me-
thod is a method of sampling research by match-
ing certain criteria with the needs of the research
(Sekaran, 2010). The author included specific
considerations (judgment sampling) in order to
provide the desired information. The criteria that
were set by the author to determine the sample
of the companies in the first research model
were:
1) The non-financial companies that were listed
on the Indonesian Stock Exchange during the
period from 2002-2013.
2) These companies did not stop their operations
and delist during the research period.
3) The companies provided annual financial
reports periodically to the Indonesian Stock
Exchange during the research period.
4) The companies had a complete data set that
could be used in the research.
5) Based on the criteria above, the researcher
found 77 samples for the first model.
January
The criteria that were set by the researcher to
determine the sample of the companies in the
second research model were:
1) The non-financial companies that held their
Initial Public Offering (IPO) on the Indone-
sian Stock Exchange between 2003-2013.
2) The companies did not stop their operations
and delist during the research period.
3) The companies provided annual financial
reports periodically to the Indonesian Stock
Exchange during the research period.
4) The companies had a complete data set that
could be used in the research.
Based on the criteria above, the researcher
obtained 157 samples for the first model.
1. Models Analysis
a. The First Model
Levi,t = β0 + β1 (market)t + β2 (Levt-1)i,t +
β3 (Proft-1)i,t + β4 (Sizet-1)i,t + ɛi,t (1)
where:
Levi,t = leverage on firm i in year t
(market)t = market conditions in year t,
described by a dummy variable, which is the
number one (1) if the market condition in
year t is more than 50 percent of the monthly
average market to book ratio in year t above
the monthly moving average market to book
ratio in year t. Zero (0) if the market
condition in year t is more than 50 percent of
the monthly average market to book ratio in
year t below the monthly moving average
market to book ratio in year t.
(levt-1)i,t = leveraget-1 firm i in year t
(Proft-1)i,t = profitabilityt-1 firm i in year t
(Sizet-1)i,t = sizet-1 firm i in year t
b. The Second Model
(Levt)i = β0 + β1 (Markett)i + β2 (Levt-1)i +
β3 (Proft-1)i + β4 (Sizet-1)i + ɛi (2)
where:
(Levt)i, = leverage after the IPO shares in
firm i
2015 Wulandari & Setiawan
(Markett) i = the current market conditions to
go public or do an IPO of shares in firm i, is
described by a dummy variable, which is the
number one (1) if the company i goes public
during hot months of the market and the
number zero (0) if firm i goes public during
cold months of the market
(Levt-1)i = leverage before the IPO shares
(pre-IPO) in firm i
(Proft-1)i = profitability before the IPO shares
(pre-IPO) in firm i
(Sizet-1)i = the size of the company before the
IPO shares (pre-IPO).
2. Measuring Research Variables
a. Dependent Variables
Baker and Wurgler (2002) and Alti (2006)
defined the level of leverage as the ratio of
the book value of debt to the total assets as
follows.
Lev = Debts / Assets (2)
Debts represent the total debt that consists of
long-term debt and short-term debt. Assets
are the total asset of the company based on
the book value.
b. Independent Variables
- Market
Market timing will be tested in hot market
and cold market conditions. Hot and cold
markets are defined on the basis of the
monthly market to book ratio. A hot market
is a market in a condition where the average
market to book ratio during a certain month
is above the moving average market to book
ratio of that month. A cold market is when
the average market to book ratio is below
the moving average market to book ratio
during a certain month.
In the first model, this variable was de-
scribed by a dummy variable, which was
the number one (1) if the market condition
in year t was more than 50 percent of the
monthly average market to book ratio in
year t above the monthly moving average
market to book ratio in year t. Zero (0) if
47
the market condition in year t was more
than 50 percent of the monthly average
market to book ratio in year t below the
monthly moving average market to book ra-
tio in year t.
In the second model, this variable was de-
scribed by a dummy variable, which was
the number one (1) if company i went pub-
lic during the hot months of the market and
the number zero (0) if firm i went public
during the cold months of the market.
- Leveraget-1 (Levt-1)
Leveraget-1 was calculated by dividing the
total debtt-1 to total assetst-1.
Formulated as follows:
(Levt-1) = (Debtt-1) / (Assetst-1) (3)
Levt-1 variable was used to test the persis-
tency of the leverage policy.
c. Variable Control
- Profitabilityt-1
According to Titman and Wessels (1988)
profitability is defined as the operating in-
come divided by the total assets.
(Proft-1) = (OIt-1) / (Assetst-1) (4)
Proft-1 was used to test the pecking order
theory
- Sizet-1
According to Baker and Wurgler (2002) and
Alti (2006) size is defined as the logarithm
of net sales (net sales).
(Sizet-1) = (logarithm net salest-1)
= (log net salest-1) (5)
In this study, the inflation rate of net sales
has been adjusted using the GDP deflator
with a base year of 2000. Size was used to
test the trade off theory.
3. Determination of the Conditions of Hot
and Cold Markets
The steps for the determination of the condi-
tions of hot and cold market were as follows.
48 Journ
nal of Indon
nesian Econo
omy and Bussiness January

- Firstlly, by seekinng the averaage value off the
montthly market to book ratio of non-finanncial
comppanies listedd on the Inndonesian Stock
Exchhange from 2002-20133 (first sam mple
modeel of 77 comppanies).
- Seconndly, by seeking
s the value of the
montthly moving average marrket to book ratio
r cann be seen in detail in thhe appendix,, and are
(withh a size windoow of twelvee months).
thann 50 percentt of the valuee of monthly y average
marrket to book ratio in yearr t was below w the val-
ue of the monnthly movingg average market m to
boook ratio in yeear t. Therefoore, the mark
ket condi-
tion
ns of non-fiinancial com mpanies in Indonesia
I
eachh year durinng the studyy period (2003-2013)
summmarized in thet table 1.

- Thirddly, by deterrmining the monthly maarket Based on Table

T 1, we can see the market
condiitions duringg the period from
f 2003-2013. con
nditions durinng our studyy period froom 2003-
Hot months
m occuurred in the market
m whenn the 201
13. The cold markets occcurred in 200 03, 2005,
averaage market too book ratio of a month was 06, 2008, 20111, 2012, annd 2013, and hot mar-
200
abovee the movingg average market
m book ratio
r ketss occurred inn 2004, 2007, 2009, and 2010.
2
of a month andd cold montths were iff the In the seconnd model, thhe independeent varia-
averaage market too book ratio of a month was ble was the currrent market cconditions to
o go pub-
beloww the movinng average market
m valuue to lic or hold an IPO of shares in firm i (m markett)i,
book ratio of a month. whiich was also described bby a dummy variable.
Num mber one (11) if the com mpany i wen nt public
RESULTS AND DIISCUSSION
N wheen the markeet condition wwas a hot market and
the number zero (0) if firmm i went pub blic when
1. Anallysis of Hot and
a Cold Markets
M
the market wass a cold marrket. The tab ble below
Figuure 1 below shows the conditions
c off hot shows the num mber of non-financial co ompanies
and coldd market (moonthly) duringg the study. thatt went publiic or did an IPO during g hot and
In thhe first model, the indeppendent variiable coldd market connditions.
was the market conddition in yearr t (markett),, de- Based on Table
T 2, wee can see, th
hat there
scribed by
b a dummyy variable. Nuumber one (1) if werre 74 non-finnancial comppanies that held
h their
it was more
m than 50
5 percent of o the valuee of IPOO during a hot
h market coondition (fro om 2003-
monthlyy average maarket to bookk ratio in yeear t 20113), and 83 non-financiial companiees which
t monthly moving average
above thhe value of the did their IPO while
w in a coold market condition
c
market tot book ratioo in year t. Zero
Z (0) if more
m (fro
om 2003-2013).

Figure 1.. Tthe conditioons of hot and

d cold market (monthly)
2015 Wulandari & Setiawan 49

Table 1. Market Condition during Study Period

Years Market Conditions

2003 Cold
2004 Hot
2005 Cold
2006 Cold
2007 Hot
2008 Cold
2009 Hot
2010 Hot
2011 Cold
2012 Cold
2013 Cold

Table 2. Number of Non-Financial Companies that did an IPO during Hot and Cold Mar-
ket Conditions
Number of Non-Financial Company that did an IPO during Hot and
Years Cold Market Conditions
Hot Market Cold Market
2003 1 2
2004 5 2
2005 0 4
2006 3 6
2007 18 0
2008 0 15
2009 9 2
2010 14 7
2011 9 15
2012 3 17
2013 12 13
Total 74 83

2. Analysis of The Research Results
The data from this research were processed
using Eview 7.0. and Tables 3 and 4 show the
results.
So, the equation of the first model (1) is :
Levi,t = 0,2243 - 0,0139 (market)t +
0,6929 (Levt-1)i,t -0,333 (Proft-1)i,t –
0,0023 (Sizet-1)i,t + ɛ i,t
So, the equation of the second model (2) is :
(Levt)i = -0,4739 – 0,0078 (markett)i+
0,4659 (Levt-1)i – 0,3193 (Proft-1)i +
0,0592 (Sizet-1)i + ɛt (7)
Based on the research results above, we can
determine the significance of the hypothesis test-
ing in Table 5.
(6)
50 Journal of Indonesian Economy and Business January

Table 3. The Results of the First Model (1)

Variable Coefficient Std. Error t-Statistic Prob.
Market -0,0139 0,0048 -2,895 0,0039
Leveraget-1 0,6929 0,0242 28,676 0,0000
Profitabilityt-1 -0,333 0,0559 -5,9611 0,0000
Sizet-1 -0,0023 0,008 -0,2932 0,7694
C 0,2243 0,091 2,4638 0,0140
R-squared 0,9059

Table 4. The Results of the Second Model (2)

Variable Coefficient Std. Error t-Statistic Prob.
Market -0,0078 0,0259 -0,3009 0,7639
Leveraget-1 0,4659 0,09 5,1721 0,0000
Profitabilityt-1 -0,3193 0,144 -2,2171 0,0281
Sizet-1 0,0592 0,0236 2,5052 0,0133
C -0,4739 0,2344 -2,0224 0,0449
R-squared 0,4029
Source of the data in Tables 3 and 4: Indonesian Stock Exchange; OSIRIS; and the Indonesian Capital Market Directory
2002-2013 (the primary data were processed by using Eviews 7.0 in 2014).

Table 5. Research Results: The Effect of the Independent Variable on the Dependent Variable
Var. Dependent The First Model The Second Model

Var. Leveraget on non-financial companies Leveraget on non-financial companies

Independent listed on the Stock Exchange that held IPOs in Indonesia

Significant (-) Not Significant

Market Conditions (hot t statistic = -2,895 > t table = -2,015 and ρ t statistic = -0,3009 < t table = -2,015 and ρ
and cold market) value market = 0,0039 < α = 5% (H1 is value market = 0,7639 > α = 5% (H5 is
supported). not supported).
Not Significant Not Significant
t statistic = 28,676 > t table = 2,015 and ρ t statistic = 5,1721 > t table = 2,015 and ρ
Persistence of Leverage value levt-1 = 0,00 < α = 5%. But the value levt-1 = 0,0 < α = 5%. But the
Policy coefficient of levt-1 is not equal or close coefficient of levt-1 is not equal or close
to 1 (H2 is not supported). to 1 (H6 is not supported).
Significant (-) Significant (-)
t statistic = -5,9612 > t table = -2,015 and ρ t statistic = -2,2171 > t table = -2,015 and ρ
Proft-1 value proft-1 = 0,0000 < α = 5% (H3 is value proft-1 = 0,0281 < α = 5% (H7 is
supported). supported).
Not Significant Significant (+)
t statistic = -0,2932 < t table = -2,015 and ρ t statistic = 2,5052 > t table = 2,015 and ρ
Sizet-1
value sizet-1 = 0,7694 > α = 5% (H4 is not value market = 0,0133 < α = 5% (H8 is
supported). supported).
Description:
t in first model means in year t
t in second model means the year after the IPO
2015 Wulandari & Setiawan
Economic agents have perceived mispricing
motives as being irrational. It causes mispricing
(share prices overvalued or undervalued) in
shares of the companies from time to time. This
is because the capital market in Indonesia is in-
efficient. Economic agents can earn abnormal
returns by using irrelevant information. Non-
financial corporate managers take advantage of
mispricing in Indonesian markets to determine
their funding structure. This can be seen in Table
3 above, the market conditions (hot and cold
markets) have affected the leverage of the non-
financial companies that were listed on the Indo-
nesian Stock Exchange (H1 is supported). The
companies publishing the equity looked for
whether the market was in a hot or cold condi-
tion (market timing occurred in Indonesia, espe-
cially in the non-financial companies that were
listed on the Indonesian Stock Exchange). Finan-
cial managers utilized the mispricing of the stock
to establish their optimal capital structure policy.
The non-financial companies that were listed on
the Indonesian Stock Exchange did not persis-
tently apply a leverage policy (H2 is not sup-
ported). Profitabilityt-1 had significant effects on
leveraget on non-financial companies listed on
the stock exchange (H3 is supported). The rela-
tionship between profitabilityt-1 and leveraget
was negative. The companies that had great
profitability tended to use internal sources of
funding rather than external sources (such as
debt) because the costs of information asymme-
try on internal funding were lower than the costs
of information asymmetry for external funding
(this supports the pecking order theory). Sizet-1
had no effect on the leveraget of non-financial
companies that were listed on the Indonesian
Stock Exchange (H4 is not supported). The size
of the non-financial companies that were listed
on the Indonesian Stock Exchange did not affect
the leverage ratio in the following year. There-
fore, the capital structure of the non-financial
companies listed on the Indonesian Stock Ex-
change was influenced by market timing and
profitabilityt-1.
Based on the regression result of the first
model, R-squared (R2) was 0,9059, which means
the leveraget of the non-financial companies that
were listed on the Indonesian Stock Exchange
could be explained by the model at 90,59 percent
51
and the remainder of it could be explained by
other variables outside of the model, at 9,41 per-
cent.
Market conditions (hot and cold markets)
had no effect on the leverage of the non-financial
companies that did their IPOs in Indonesia (H5 is
not supported). Finance managers at the non-
financial companies in Indonesia did not pay
attention to the IPO market conditions (market
timing did not occur in Indonesia, particularly in
non-financial companies that did IPOs in Indo-
nesia). The non-financial companies that did
IPOs in Indonesia did not persistently apply le-
verage policies (H6 is not supported). Corporate
leverage policy changes were not affected by
market conditions, but were influenced by the
size and profitability of the company before the
IPO. Profitabilityt-1 had a significant effect on
leveraget for the non-financial companies that
did IPOs in Indonesia (H7 is supported). The re-
lationship between the two variables was nega-
tive. If the profitability of the company before an
IPO was high, the leverage of the company after
the IPO fell, because the manager chose an in-
ternal funding source for the profitability of the
company, because that had a lower information
asymmetry cost than issuing debt. If the profita-
bility of the company before an IPO was low,
the leverage of the company after its IPO would
rise because internal capital resources were not
sufficient to meet the financing needs of the
company (which supports the pecking order
theory).
Sizet-1 had a significant effect on leveraget on
the non-financial companies that did IPOs in
Indonesia (H8 is supported). The relationship
between the two variables was positive. The
large companies tended to have greater credibil-
ity and had clear control over their managers in
fulfilling their obligations to the lenders or
shareholders thus reducing agency costs. The
benefit from the reduction of agency costs means
the large size of the companies can increase their
company’s new debt issue. If the size of the non-
financial companies in Indonesia prior to their
IPO was large, then the leverage of the non-
financial companies in Indonesia after their IPO
would also be large. If the size of the non-finan-
cial companies in Indonesia prior to their IPO
was small, then the leverage of such companies
52 Journal of Indonesian Economy and Business
in Indonesia after the IPO would be small (sup-
ports the trade-off theory).
Based the on regression result of the second
model, R-squared (R2) was 0,4029. It means the
leveraget of the non-financial companies that
were listed on the Indonesian Stock Exchange
could be explained by the model at 40,29 percent
and the remainder of it could be explained by
other variables outside of the model at 59,71 per-
cent.
CONCLUSION
Based on the analysis of the results of the
first model, it could be concluded that the market
conditions (hot and cold markets) affected the
leverage of the non-financial companies that
were listed on the Indonesian Stock Exchange.
However, based on the analysis of the result of
the second model, it could be concluded that
market conditions (hot and cold markets) did not
affect the leverage of the non-financial compa-
nies that did their IPOs in Indonesia. This means
that the non-financial firms in Indonesia issuing
equity considered the market conditions (a hot or
cold market). Yet, the non-financial firms in In-
donesia which issued equity did not consider the
market conditions (hot or cold market) when
issuing equity the first time (IPO). In addition,
the capital structure of the companies in Indone-
sia changed due to the influence of the variable
size and profitability of the company.
The non-financial companies that were listed
on the Indonesian Stock Exchange and the non-
financial companies that did IPOs in Indonesia
did not apply persistent leverage policies. This
means that the leverage of the non-financial
companies in Indonesia in year t-1 and the leve-
rage of the non-financial companies before their
IPO were not equal with the leverage of the non-
financial companies in Indonesia in year t and
the leverage of the non-financial companies after
their IPO. This could mean a change in the capi-
tal structure policy of the non-financial compa-
nies in Indonesia. The changes in capital struc-
ture policies were not only caused by the market
conditions (hot and cold markets) when issuing
equity, but also caused by the variable profitabil-
ity and size of the companies.
January
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2015 Wulandari & Setiawan 53

APPENDIX

Market Condition during the Study Period

Moving Average Market
Moving Average MTB (Monthly) Market Condition
Months MTB Condition
(Monthly)
(Monthly) (Size Window = 12 Month) In Year t
Jan-03 2.4304 10.7148 Cold Market
Feb-03 2.4139 9.6141 Cold Market
Mar-03 2.0747 8.6561 Cold Market
Apr-03 2.7967 7.4895 Cold Market
May-03 3.4622 6.5574 Cold Market
Jun-03 3.4651 5.7197 Cold Market
Cold Market
Jul-03 3.4442 5.0608 Cold Market
Aug-03 3.5304 4.4977 Cold Market
Sep-03 3.6518 4.1259 Cold Market
Oct-03 3.6277 3.8452 Cold Market
Nov-03 3.5477 3.4676 Hot Market
Dec-03 3.7167 3.1801 Hot Market
Jan-04 9.3961 3.7606 Hot Market
Feb-04 7.4313 4.1787 Hot Market
Mar-04 7.1296 4.6000 Hot Market
Apr-04 6.4078 4.9009 Hot Market
May-04 6.2123 5.1301 Hot Market
Jun-04 6.7850 5.4067 Hot Market
Hot Market
Jul-04 7.4790 5.7430 Hot Market
Aug-04 6.6477 6.0027 Hot Market
Sep-04 5.3168 6.1415 Cold Market
Oct-04 6.0294 6.3416 Cold Market
Nov-04 6.0993 6.5542 Cold Market
Dec-04 6.0784 6.7511 Cold Market
Jan-05 1.2148 6.0693 Cold Market
Feb-05 1.2870 5.5573 Cold Market
Mar-05 1.2960 5.0711 Cold Market
Apr-05 1.2419 4.6406 Cold Market
May-05 1.2060 4.2234 Cold Market
Jun-05 1.2188 3.7596 Cold Market
Cold Market
Jul-05 1.2435 3.2400 Cold Market
Aug-05 1.0808 2.7761 Cold Market
Sep-05 1.1540 2.4292 Cold Market
Oct-05 1.1000 2.0184 Cold Market
Nov-05 1.1220 1.6036 Cold Market
Dec-05 1.0875 1.1877 Cold Market
Jan-06 0.8463 1.1570 Cold Market
Feb-06 0.8316 1.1190 Cold Market
Mar-06 0.9003 1.0861 Cold Market
Apr-06 0.9528 1.0620 Cold Market
May-06 0.8912 1.0357 Cold Market
Cold Market
Jun-06 0.8593 1.0058 Cold Market
Jul-06 0.8891 0.9762 Cold Market
Aug-06 0.9171 0.9626 Cold Market
Sep-06 0.9427 0.9450 Cold Market
Oct-06 0.9613 0.9334 Hot Market
54 Journal of Indonesian Economy and Business January

Nov-06 1.0289 0.9257 Hot Market

Dec-06 1.1255 0.9288 Hot Market
Jan-07 1.3170 0.9681 Hot Market
Feb-07 1.3703 1.0130 Hot Market
Mar-07 1.4372 1.0577 Hot Market
Apr-07 1.8260 1.1305 Hot Market
May-07 2.0882 1.2302 Hot Market
Jun-07 2.4987 1.3668 Hot Market
Hot Market
Jul-07 3.7438 1.6047 Hot Market
Aug-07 2.7196 1.7549 Hot Market
Sep-07 3.6867 1.9836 Hot Market
Oct-07 3.6173 2.2049 Hot Market
Nov-07 4.2837 2.4762 Hot Market
Dec-07 4.2376 2.7355 Hot Market
Jan-08 0.7718 2.6901 Cold Market
Feb-08 0.9099 2.6517 Cold Market
Mar-08 1.2097 2.6327 Cold Market
Apr-08 1.0349 2.5668 Cold Market
May-08 1.3341 2.5040 Cold Market
Jun-08 1.6938 2.4369 Cold Market
Cold Market
Jul-08 1.7345 2.2695 Cold Market
Aug-08 1.5998 2.1761 Cold Market
Sep-08 1.3996 1.9855 Cold Market
Oct-08 1.2363 1.7871 Cold Market
Nov-08 1.3082 1.5392 Cold Market
Dec-08 1.1968 1.2858 Cold Market
Jan-09 1.2207 1.3232 Cold Market
Feb-09 1.2034 1.3476 Cold Market
Mar-09 1.2202 1.3485 Cold Market
Apr-09 1.2868 1.3695 Cold Market
May-09 1.5100 1.3842 Hot Market
Jun-09 1.7150 1.3859 Hot Market
Hot Market
Jul-09 1.9645 1.4051 Hot Market
Aug-09 2.3279 1.4658 Hot Market
Sep-09 2.1738 1.5303 Hot Market
Oct-09 2.1912 1.6099 Hot Market
Nov-09 2.0186 1.6691 Hot Market
Dec-09 2.2656 1.7581 Hot Market
Jan-10 2.3133 1.8492 Hot Market
Feb-10 2.3344 1.9435 Hot Market
Mar-10 2.0919 2.0161 Hot Market
Apr-10 2.1837 2.0908 Hot Market
May-10 1.8405 2.1184 Cold Market
Jun-10 2.0349 2.1450 Cold Market
Hot Market
Jul-10 2.0673 2.1536 Cold Market
Aug-10 1.9119 2.1189 Cold Market
Sep-10 2.4910 2.1454 Hot Market
Oct-10 2.4769 2.1692 Hot Market
Nov-10 2.6040 2.2180 Hot Market
Dec-10 2.8376 2.2656 Hot Market
Jan-11 1.9200 2.2328 Cold Market
Feb-11 2.0090 2.2057 Cold Market Cold Market
Mar-11 2.0592 2.2030 Cold Market
2015 Wulandari & Setiawan 55

Apr-11 2.1628 2.2013 Cold Market

May-11 2.1974 2.2310 Cold Market
Jun-11 2.0844 2.2351 Cold Market
Jul-11 2.2716 2.2521 Hot Market
Aug-11 2.0666 2.2650 Cold Market
Sep-11 1.9306 2.2183 Cold Market
Oct-11 2.0324 2.1813 Cold Market
Nov-11 2.0815 2.1377 Cold Market
Dec-11 2.1102 2.0771 Hot Market
Jan-12 2.4427 2.1207 Hot Market
Feb-12 2.4995 2.1616 Hot Market
Mar-12 2.6349 2.2095 Hot Market
Apr-12 2.3156 2.2223 Hot Market
May-12 2.1148 2.2154 Cold Market
Jun-12 2.0536 2.2128 Cold Market
Cold Market
Jul-12 2.0812 2.1970 Cold Market
Aug-12 2.0177 2.1929 Cold Market
Sep-12 2.1589 2.2119 Cold Market
Oct-12 2.1690 2.2233 Cold Market
Nov-12 2.1922 2.2325 Cold Market
Dec-12 2.1410 2.2351 Cold Market
Jan-13 2.0915 2.2058 Cold Market
Feb-13 2.2422 2.1844 Hot Market
Mar-13 2.4173 2.1663 Hot Market
Apr-13 2.2649 2.1620 Hot Market
May-13 2.2966 2.1772 Hot Market
Jun-13 2.2396 2.1927 Hot Market
Cold Market
Jul-13 2.1160 2.1956 Cold Market
Aug-13 1.9830 2.1927 Cold Market
Sep-13 2.0402 2.1828 Cold Market
Oct-13 2.0761 2.1751 Cold Market
Nov-13 2.2444 2.1794 Hot Market
Dec-13 2.1665 2.1815 Cold Market
Journal of Indonesian Economy and Business
Volume 30, Number 1, 2015, 56 – 71

FACTORS INFLUENCING THE SUCCESS OF PERFORMANCE

MEASUREMENT: EVIDENCE FROM LOCAL GOVERNMENT

Herlina Primarisanti
Faculty of Economics and Business, Universitas Gadjah Mada
(herlinaprimarisanti@yahoo.co.id)

Rusdi Akbar
Faculty of Economics and Business, Universitas Gadjah Mada
(rusydi.akbar@gmail.com)

ABSTRACT

There were only a few government institutions in Indonesia capable of preparing good
accountability reports. Based on the survey conducted in the Special District of Yogyakarta, the
study aimed to empirically examine the influencing factors in the development of the measure-
ment system of performance, performance accountability and the use of performance informa-
tion. Additionally, it also tried to interpret and to explain empirical evidence in the perspective
of the institutional theory. The institutional theory was used to find out the extent to which the
development of the measurement system of the performance, the performance accountability
and the use of the performance information was influenced because of the presence of coercive,
mimetic and normative isomorphism phenomena. The study used mixed methods that combined
quantitative and qualitative study approaches simultaneously and a sequential explanatory
strategy. It used Partial Least Square (PLS) analysis to test the hypotheses. It gave evidence
that training, incentives and authority in decision making had significant impacts on the
development of the measurement of the performance, the performance accountability and the
use of the performance information. It contributed to the understanding of the influencing
factors of the development of the measurement system of the performance, the performance
accountability and the use of the performance information in order to improve the measurement
system of the performance of government institutions.
Keywords: performance measurement system, performance accountability, the used of
performance information and mixed methods.

INTRODUCTION performance measurements. They reported more

Starting with the Presidential Instruction No.
7 of 1999 and completed by Regulation No. 29
of 2010 of the Minister for State Apparatus
Utilization and Bureaucracy Reformation on the
Guidelines for Framing the Determination of
Performance and Reporting on the Accountabil-
ity of Government Agencies which required that
government institutions must prepare and
present their Laporan Akuntabilitas Kinerja
Instansi Pemerintah (LAKIP). However, there
were in fact only a few government institutions
that were able to prepare good accountability
reports. The reports in general did not inform of
the success of the institutions using proper
about the activities they had organized and did
not focus on the performance of the improve-
ments which they had made (Effendy, 2006).
The issuance of the Regulation of the Minis-
ter for State Apparatus Utilization and Bureau-
cracy Reformation Number 29 of 2010 was
indicative of the seriousness of the government
in improving the performance of the government
organizations in developing performance-based
management of the government organizations in
Indonesia. Therefore, the author was motivated
to conduct a study of the measurement of the
performance of government organizations,
which was still relevant because the measure-
2015 Primarisanti & Akbar
ment of the performance of the government
organizations must continuously be improved
(Yowi, 2011). Additionally, there were still
problems in the implementation of the existing
performance measurement system, in addition to
the frequent use of the implementation of the
performance measurement system if it was prop-
erly implemented, the opportunity to improve
the quality of the development of the perfor-
mance measurement system in the future, and
there have not been any studies to uncover the
condition of the implementation of the perfor-
mance measurement system in the government
institutions of the Republic of Indonesia
(Nurkhamid, 2008).
The results of the studies by (Julnes and
Holzer, 2001; Cavalluzzo and Ittner, 2003;
Sihaholo and Halim, 2005; Putra, 2006;
Nurkhamid, 2008; Fachruzzaman and Norman,
2010; Yowi, 2011; Astuti and Adiwibowo, 2011;
Akbar et al, 2012; Wijaya and Akbar, 2012)
suggested that the problems in the performance
measurement system occurred at the develop-
ment and the implementation steps. The study
used the conceptual model developed by Julnes
and Holzer (2001) and Cavalluzzo and Ittner
(2003) to identify the influencing factors in the
development of the measurement system of per-
formance, performance accountability, and the
use of performance information using the insti-
tutional theory to explain isomorphism pheno-
mena in local governments. Also, it used mixed
methods to test the hypotheses with a Partial
Least Square (PLS) analysis. Therefore, the
questions of the study were as follows: what
were the problems in determining performance
measurement, training, top management com-
mitment, innovation, incentive, the limitations of
the information system and the authority in deci-
sion making that influenced the development of
the measurement system of performance, perfor-
mance accountability, and the use of perfor-
mance information? Was there an isomorphism
in the development of the measurement system
of performance, performance accountability and
the use of performance information?
The study aimed at empirically examining
the influencing factors on the development of the
57
measurement system of performance, perfor-
mance accountability and the use of performance
information. Additionally, it interpreted and
explained empirical evidence in the perspective
of institutional theory. The institutional theory
was used to find out the extent to which the
development of the measurement system of the
performance, the performance accountability and
the use of the performance information was
influenced by the presence of coercive, mimetic
and normative isomorphism phenomena.
It was expected that the study would contri-
bute to the literature on the influencing factors of
the measurement system of the performance, the
performance accountability and the use of per-
formance information, especially by government
institutions. It was also expected that the results
of the study could contribute inputs to the gov-
ernment institutions of Indonesia, especially the
government of the Special District of Yogya-
karta, that the influencing factors would be
recommended to be included in the improvement
and the development of the measurement system
of the performance, to make it into a better and
more effective one, to support decision making
and to improve government performance.
THEORETICAL BASIS AND
HYPOTHESES DEVELOPMENT
Institutional Theory
The institutional theory is a social theory
which is focused on developing sociological
insights into institutions, the way they interact
and their effect on people (Scott, 1987). The in-
stitutional theory digs deeper into social struc-
tures (Scott, 2004). It has been widely used to
explain phenomena and give complex and rich
insights into public sector organizational envi-
ronments (Van Helden, 1995 in Wijaya and
Akbar, 2012).
According to Scott (1995) there were three
institutional pillars, viz. regulative, normative
and cognitive ones. Gudono (2012) suggested
that not all experts agreed with Scott’s institu-
tional pillar. The relationship of each of the pil-
lars, the sequence and the complementary capa-
bility of each of them also deserves attention.
58 Journal of Indonesian Economy and Business
Additionally, there is a concept which it is
necessary to explain, relating to the existing
mechanism in the three pillars, which is the iso-
morphism concept (i.e., the process into the
same form; iso means the same and morp means
form).
DiMaggio and Powell (1983) defined iso-
morphism as a “constraining process” that forces
a unit in a population to have the same form or
characteristics as other units facing the same
environmental condition. The isomorphism is
classified into two, viz. competitive and institu-
tional ones. The competitive isomorphism is the
most relevant to open competition, while the
institutional isomorphism fits the situation in
which no free competition exists. It is because
organizations not only compete for resources or
consumers, but also for institutional or political
legitimacy. Public organizations are more likely
to gain their legitimacy and be isomorphic with
other public organizations (DiMaggio and
Powell, 1983). The institutional isomorphism is
a useful concept for the organizations in which
political and ceremonial culture is deeply rooted
in organizational life, especially the public orga-
nizations in Indonesia (Abubakar, 2012).
DiMaggio and Powell (1983) identified three
isomorphism mechanisms, which are coercive,
mimetic and normative isomorphism mechan-
isms.
The Difficulties in Determining Performance
Measurement
The difficulties in determining performance
measurement might result in incomplete or unin-
formative performance measurements which are
required by the Government Performance and
Result Acts (GPRA) (GAO, 1997). Therefore,
the difficulties in determining the performance
measurement led to the limitations in the use of
performance measurements for the purpose of
decision making and accountability (Astuti and
Adiwibowo, 2011). According to DiMaggio and
Powell (1983) when organizations began to
experience environmental uncertainty, such as
the difficulties in determining performance mea-
surement, they were more likely to mimic other
organizations. Consequently, they reflected
January
mimetic isomorphism in government institu-
tions. Based on several theories and the argu-
ments above, the following hypotheses were
formulated:
H1a: The difficulty in determining performance
measurement has a negative impact on the
development of the performance measure-
ment systems.
H1b: The difficulty in determining performance
measurement has a negative impact on per-
formance accountability.
H1c: The difficulty in determining performance
measurement has a negative impact on the
use of the performance information.
Training
Training in making, implementing and using
management accounting innovation enables or-
ganizations to clarify the correlation between
new practices and organizational objectives
(Shields, 1995; Cavalluzzo and Ittner, 2003; and
Nurkhamid, 2008). This condition will result in a
mechanism for government employees to under-
stand, to accept and to feel comfortable with in-
novation, and to alleviate depressed feelings or
confusion among the employees resulting from
the implementation process. Therefore, it was
necessary for the organizational personnel to
prepare a strategic plan and performance report,
(Renstra and Lakip), to determine program tar-
gets, to develop performance indicators for the
program, to use program performance informa-
tion in decision making, to relate the perfor-
mance of a policy/program/activity to the
achievement of the organizational objectives
(Cavalluzzo and Ittner, 2003), including the
training to design and to implement the perfor-
mance indicators (Tucker and Willoughby,
2002).
Organizational personnel who had a tech-
nical understanding and capability related to the
implementation of the performance measure-
ment system, would be able to successfully im-
plement the performance measurement system
(The Urban Institute, 2002). The technical capa-
bility was required to analyze data, to present
performance reports in a form that was easy to
2015 Primarisanti & Akbar
understand, and to prepare particular reports in
accordance with stakeholders’ characteristics
(Nurkhamid, 2008).
The training for the organizational personnel
also improved the communication among divi-
sions and departments about public services, per-
formance, and performance measurement. The
number of personnel who are able to understand
the performance measurement process both
quantitatively and qualitatively has an impact on
the materialization of performance accountabil-
ity (Artley, 2001) and the use of the performance
information (The Urban Institute, 2002 in
Nurkhamid, 2008). The training emerged from
organization professionals so that it reflected the
normative isomorphism in government institu-
tions. Based on the several theories and argu-
ments above, the following hypotheses were
formulated:
H2a: Training has a positive impact on the de-
velopment of performance measurement
systems.
H2b: Training has a positive impact on perfor-
mance accountability.
H2c: Training has a positive impact on the use
of performance information.
Top Management Commitment
Management is a part of all organizations,
and it means that the management commitment
represents the emotional attachment of individu-
als in the management of an organization to be
involved in the effort to complete its missions,
the values and the objectives of the organiza-
tions. In other words, the management commit-
ment is a more concrete form of loyalty, to see
the extent to which the management pays careful
attention to, contributes ideas to, and is respon-
sible for, the efforts to meet the objectives of the
organizations. Organizations with strong top
management commitments from their leaders
and followers are more likely to easily meet their
objectives, and have better performance, as
compared to the ones without any top manage-
ment commitment (Astuti and Adiwibowo,
2011). Thus, a strong top management commit-
ment is required by an organization to improve
59
its performance accountability (Artley, 2001)
and to better use the resulting performance
information (The Urban Institute, 2002). Top
management commitment emerges from indi-
vidual professionalism that is reflected in the
normative isomorphism of government institu-
tions. Based on the theories and arguments
above, the following hypotheses were formu-
lated:
H3a: Top management commitment has a posi-
tive impact on the development of perfor-
mance measurement systems.
H3b: Top management commitment has a posi-
tive impact on performance accountability.
H3c: Top management commitment has a posi-
tive impact on the use of performance
information.
Innovation
Attitude, as an innovation measurer,
represents a pattern of basic assumptions that are
found, created or developed by certain groups
for the purpose of organizational learning to
solve problems resulting from external adapta-
tion or internal integration that have been good
enough, and hence it is necessary to teach new
members the correct method to understand, to
think of and to feel the various problems
(Schein, 1992 in Julnes and Holzer, 2001). Of
course, the performance measurement results in
organizational change. The change will be per-
ceived in different ways by individuals in the
organization and it will cause organizational
culture changes (Sihaholo and Halim, 2005).
Innovation emerges from individual professio-
nalism which reflects the normative isomor-
phism in government institutions. Based on the
theories and arguments above, the following hy-
potheses were formulated:
H4a: Innovation has a positive impact on the
development of performance measurement
systems.
H4b: Innovation has a positive impact on perfor-
mance accountability.
H4c: Innovation has a positive impact on the use
of performance information.
60 Journal of Indonesian Economy and Business
Incentive
Kloot (1999) indicated that good perfor-
mance indicators for both organizational units
and individuals may be used on a reward and
punishment basis. Verbeeten (2008) suggested
that incentive had a positive and significant im-
pact on performance. Indudewi and Nafasita
(2012) suggested that essentially individuals had
an interest in improving their prosperity, that
incentives represented a fundamental factor in
improving and controlling their performance. It
emerged from organizational policies for good
individual performers in organizations, and it
reflected the normative isomorphism in govern-
ment institutions. Based on these theories and
arguments above, the following hypotheses were
formulated:
H5a: Incentive has a positive impact on the de-
velopment of performance measurement
systems.
H5b: Incentive has a positive impact on perfor-
mance accountability.
H5c: Incentive has a positive impact on the use
of performance information.
Information System Limitation
Some results of prior studies into the per-
formance of the public sector also indicated that
the problems in information systems posed the
main obstacles to gaining success in the imple-
mentation of a performance measurement sys-
tem. Cavalluzo and Ittner (2003) and Nurkhamid
(2008) confirmed that the problems in the infor-
mation system related to the limitations of the
information system’s capability to provide relia-
ble, valid and timely data at an effective cost.
Previous research findings by Cravcuk and
Schank (1996) indicated that government insti-
tutions often faced serious problems in measur-
ing performance because of the problems in the
information system, such as the difference in the
definition of data, technology, ease of access,
and the amount of collected data. According to
DiMaggio and Powell (1983), when organiza-
tions experienced environmental uncertainty
such as information system limitations, they
were more likely to mimic other organizations.
January
Therefore it reflected mimetic isomorphism in
the government institutions. Artley (2001) and
The Urban Institute (2002) suggested that the
availability of the report of the performance in-
formation would improve performance accoun-
tability and the use of performance information
in decision making. Based on the various theo-
ries and arguments above, the following hypo-
theses were formulated:
H6a: Information system limitations have a
negative impact on the development of
performance measurement systems.
H6b: Information system limitations have a
negative impact on performance accounta-
bility.
H6c: Information system limitations have a
negative impact on the use of performance
information.
Decision Making Authority
According to Astuti and Adiwibowo (2011),
it is possible for an organization to delegate the
authority for decision making from superiors to
subordinates. The delegation of the authority for
decision making helps the management make
decisions more quickly, and improves creativity
and the effort to make changes. Additionally, it
also improves the accountability among person-
nel of public sector organizations. Each of the
subordinates is given the authority for decision
making and they have to be responsible for the
decisions they make to meet the predetermined
goals.
The involvement of program staff in the
development of a performance measurement
system is one of the factors influencing the use
of performance information in an organization
(The Urban Institute, 2002), while the authority
for decision making is also a factor that influ-
ences the materialization of performance
accountability (Artley, 2001). Managers believe
that the implementation of the measurement
system will support their decision making activ-
ities, and hence they are more motivated to
implement and to use the performance mea-
surement. On the contrary, managers who are
lacking in authority do not have any reason to
2015 Primarisanti & Akbar
accept the system (Nurkhamid, 2008). The deci-
sion making authority emerges from individual
professionalism that is reflected in the normative
isomorphism of government institutions. Based
on the theories and arguments above, the
following hypotheses were formulated:
H7a: Decision making authority has a positive
impact on the development of performance
measurement systems.
H7b: Decision making authority has a positive
impact on performance accountability.
H7c: Decision making authority has a positive
impact on the use of performance infor-
mation.
RESEARCH METHOD
Data Collection Technique
The data in the study were primary data col-
lected using the mixed method. The mixed
method combined qualitative and quantitative
approaches (e.g., using the perspective of qualit-
ative and quantitative, data collection, analysis
and inferential techniques) to obtain the compre-
hensiveness and depth of understanding, and the
confirming evidence (Johnson et al, 2007). The
strategy of the mixed method was applied by
using an explanatory sequential approach. The
explanatory sequential approach was the strategy
of the mixed method that offered quantitative
data analysis using questionnaires for the first
stage, and then proposed qualitative data analy-
sis using interviews in the second stage, which
referred to the initial results of the quantitative
stage (Creswell, 2010). The objective of all of
the strategies was to use the qualitative results to
explain the initial quantitative results (Creswell
and Plano Clark, 2011). Therefore, the first data
collection method of the study was a survey
using a questionnaire that was given directly to
the chosen respondents, followed up with face-
to-face interviews with the respondents.
Samples and Population
The population of the study was the Gov-
ernment of the Special Region of Yogyakarta,
the Government of Sleman District, the Gov-
61
ernment of Bantul District, the Government of
Gunung Kidul District, the Government of
Kulonprogo District, and the Government of
Yogyakarta City. The sampling method was a
purposive sampling. The criterion of the sam-
pling was a government employee with a mini-
mum position of echelon four, with at least a
year of formal work in agencies/bodies/offices,
who considered that their working period had
provided them with the opportunity to be
involved in and responsible for the process of
strategic planning and performance reporting
and hence believed that they understood the situ-
ation and the condition of their organization and
environment (Sihaholo and Halim, 2005; Putra,
2006; Nurkhamid, 2008; Astuti and Adiwibowo,
2011; Wijaya and Akbar, 2012).
Variable Operational Definitions and Varia-
ble Measurement
a) Independent Variables
Difficulties in Determining Performance
Measurement. The variable uncovered the prob-
lem level in defining and interpreting perfor-
mance measurement in an organization. This
variable was measured using an instrument
based on the research questions by Cavalluzzo
and Ittner (2003) and as also used by Putra
(2006), Nurkhamid (2008), Yowi (2011), and
Akbar (2012).
Training. The variable uncovered the train-
ing level given by an organization to its person-
nel, related to the implementation of perfor-
mance measurement. This variable was meas-
ured using an instrument based on the research
questions of Cavalluzzo and Ittner (2003) which
were also used by Putra (2006), Nurkhamid
(2008) and Yowi (2011).
Top Management Commitment. The variable
measured the commitment level of the leaders to
achieve results through performance measure-
ment. This variable was measured using an
instrument based on the research questions of
Cavalluzzo and Ittner (2003) and also used by
Putra (2006), Nurkhamid (2008), Yowi (2011),
and Akbar (2012).
62 Journal of Indonesian Economy and Business
Innovation. The variable showed the attitude
of leaders and their staff towards change (i.e.,
innovation). This variable was measured using
an instrument based on the research questions of
Julnes and Holzer (2001) and also used by
Sihaholo and Halim (2005) and Nurkhamid
(2008).
Incentive. This was the policy made by an
organization as a response to innovation as risk
taking activities, measured on the basis of the
respondents’ responses to the presence of
rewards/incentives in an organization, for the
effort to improve organizational performance
and the risk taking, in an organization in the
form of innovative ideas to improve organiza-
tional performance. This variable was measured
using an instrument based on the research ques-
tions of Julnes and Holzer (2001) and also used
by Sihaholo and Halim (2005) and Nurkhamid
(2008).
Information System Limitations. The variable
uncovered the limitations of the information
system capabilities of an organization to provide
valid, reliable and timely data. This variable was
measured using an instrument based on the
research questions of Cavalluzzo and Ittner
(2003) and was also used by Putra (2006),
Nurkhamid (2008), Yowi (2011).
Decision Making Authority. The variable
uncovered the authority level in decision making
based on performance information, which was
delegated by the organization to its personnel to
support the achievement of the organization’s
strategic objectives. This variable was measured
using questions based on the research instru-
ments of Putra (2006) and Yowi (2011).
b) Dependent Variables
The Development of the Performance Mea-
surement System. The variable indicated the
effort of an organization to develop a perfor-
mance measurement system as reflected in the
determination and the establishment of, various
types of performance measurements that were
result-oriented, for various policies/programs/
activities it organized. This variable was meas-
ured using an instrument based on the research
questions of Cavalluzzo and Ittner (2003) which
January
had also been used by Putra (2006), Nurkhamid
(2008), Yowi (2011).
Performance Accountability. The variable
measured the extent to which the leaders were
responsible for achieving the results of the poli-
cies/programs/activities organized by their or-
ganization. This variable was measured using an
instrument based on the research questions of
Cavalluzzo and Ittner (2003) and also used by
Putra (2006), Nurkhamid (2008), Yowi (2011)
and Akbar (2012).
The Use of Performance Information. The
variable indicated the various kinds of use of
performance information to support the decision
making in an organization. This variable was
measured using an instrument based on the re-
search questions of Cavalluzzo and Ittner (2003)
and was also used by Putra (2006), Nurkhamid
(2008), Yowi (2011) and Akbar (2012).
The variables in the study were measured by
a Likert Scale from 1 (highly disagree) to 5
(highly agree), except for the training variable,
which was measured using yes (1) or no (0)
questions.
Data Analysis Method
Quantitative Approach
The quantitative approach of the study used
a Partial Least Square (PLS) analysis to test the
hypotheses. The PLS analysis was a multivariate
statistic technique that compared multiple de-
pendent variables to multiple independent
variables. The PLS was one of the variant-based
Structural Equation Modeling (SEM) statistical
methods that were able to simultaneously test the
measurement model and the structural model
(Hartono, 2011). It was a quality predicting tool
used to develop theories (Hartono and Abdillah,
2009). Therefore, the PLS fitted the study
because it combined complex models, and used
a relatively small number of samples to antic-
ipate the low response rate of the samples in the
targeted local governments. The study used
SmartPLS (Version 2.0M3) developed by
Ringle, Wende and Will that was downloaded
from http://www.smartpls.de.
2015 Primarisanti & Akbar
Qualitative Approach
The qualitative data analysis in the study was
made using a thematic analysis. The thematic
analysis was a qualitative analysis method to
identify, analyze, and to report patterns (themes)
found in the data (Braun and Clarke, 2006). Sub-
sequently, more detailed analysis was made
using a coding process. The sorted data resulting
from the interviews were related to the themes or
the problems of the study. And then, the inter-
view results were interpreted in the description
of the results (Creswell and Plano Clark, 2011).
RESULTS
Quantitative Approach
a. Pilot Study
The respondents of the pilot study were 30
individuals consisting of 15 local government
employees who were studying in the master’s
degree program in Development Economics at
Universitas Gadjah Mada Yogyakarta and 15
local government employees who were studying
in the science master’s degree program of
Universitas Gadjah Mada majoring in Develop-
ment Economics. The analysis of the results of
the pilot study was made using the software of
SmartPLS ver. 2.0M3.
The results of the pilot study showed that all
of the constructs had passed the validity test (i.e.,
AVE and communality value ≥ 0.5) and the
reliability test (i.e., Cronbach’s alpha and com-
posite reliability ≥ 0.7). The results of the pilot
study showed that the loading factor value was
>0.6 and based on the cross-loading table it
could be concluded that considering each of the
indicators of a latent variable, (i.e. constructs)
the highest value was found in the targeted con-
struct, as compared to the value in other con-
structs. This indicated that the questions in the
study were valid and reliable for real study.
b. Quantitative Data Collection
Quantitative data was collected by distribut-
ing questionnaires to 288 respondents in the
Special Region of Yogyakarta. There were 247
questionnaires returned, but not all of them
could be analyzed because some of the question-
63
naires were incomplete. Thus, the resulting
number of questionnaires eligible for analysis
was 214, as illustrated in the respondent profile
summarized in Table 1 below.
c. Demography Analysis
Demographic analysis might provide an ad-
ditional explanation of the study results. The
correlation between the demographic variables
and the development of the performance mea-
surement system, the performance accountability
and the use of performance information was
summarized in Table 2. The demographic analy-
sis was made using ANOVA and the results
showed that the variables of age, the working
period and present position in the performance
accountability had significant value, thus indi-
cating that age, the working period and present
position had a significant impact on local gov-
ernment performance.
d. Data Range
Based on the results of the data processing of
the 214 respondents, 57 items were considered
to be valid in the theoretical range between
minimum 2 and maximum 65. All of the res-
ponses of the respondents involved in the actual
range were in their theoretical range, which was
minimum 2 and maximum 65, so that it might be
said that in general the responses of the respon-
dents were in their theoretical range.
e. Non-response Bias
The non-response bias was the bias caused
by the respondents returning with belated res-
ponses (Hartono, 2011a). The author of the study
divided the possibility of the non-response bias
into two, which were the non-response bias
based on the time of the Mann-Whitney U-test,
and the location bias tested using the Kruskal-
Wallis H-test. The statistical instrument to test
the non-response bias was SPSS version 18.
The results of the Mann-Whitney U-test
were obtained on the basis of the differences in
the time taken to return the questionnaire. They
showed that there were not any significant dif-
ferences between the respondents returning the
questionnaires in the first collection stage, and
those returning the questionnaires in the second
64 Journal of Indonesian Economy and Business
collection stage, at the statistical significance
above 0.05. The results of the Kruskal-Wallis H-
test showed that there were not any differences
in the responses of the respondents in the 6 sam-
ple areas of the study at the statistical signific-
ance above 0.05.
Table 2. The Summary of the Correlation of
Demographic Variables with the
Development of Performance Measu-
rement System, the Performance
Accountability and the Use of Per-
formance Information
Demographic Sig
Variables DPMS PA UPI
Age 0.241 0.020 0.971
Education 0.880 0.178 0.900
Length of service 0.694 0.000 0.512
Gender 0.201 0.382 0.139
Current Position 0.222 0.035 0.821
Source: Output SPSS, 2013
f. Quantitative Data Analysis and Hypotheses
Test
The results of the evaluation of the mea-
surement model (path analysis) using a PLS al-
gorithm iteration showed that all of the construct
indicators passed the convergent validity tests,
which was AVE and communality, with the
value above 0.5 (see Table 3). The discriminant
validity test was the cross loading factors indi-
cating that each of the indicators in a construct
of the measurement model had met the discrimi-
nant validity requirement, because each of the
indicators in a construct differed from those in
the other construct and grouped in the construct
with the score of > 0.6. Table 3 also showed that
all of the constructs met Cronbach’s Alpha and
Composite Reliability > 0.6.
The evaluation of the structural model in
Table 3 gave the R2 value for the PA construct of
97.07 percent, the R2 value for the DPMS
construct of 19.67 percent, and the R2 value for
the UPI construct of 54.55 percent. Hypotheses
tests were carried out by comparing T-table and
T-statistic values resulting from a bootstrapping
process. If the T-statistics value was higher than
the T-table value, the hypothesis was confirmed
and vice versa. At the confidence level of 95
January
percent (alpha 5 percent), the T-table value for
hypotheses of a tail was ≥ 1,64 (Hair et al.,
2006, Hartono, 2009).
Twenty one hypotheses were tested and 16
hypotheses were statistically confirmed because
their T-statistics values were higher than their T-
table. The 16 hypotheses were H1c (DDPM→
UPI: γ3= -0.170141, t= 3, 897843); H2a (T→
DPMS: γ4= -0.120234, t= 1.661271); H2b
(T→PA: γ5= 0.034536, t= 2.635693); H2c
(T→UPI: γ6= -0.179524, t= 3.514174); H3b
(TMC→PA: γ8= 1.263029, t= 5.180138); H3c
(TMC→UPI: γ9= -1.665029, t= 7.043097); H4a
(IV→DPMS: γ10= 0.767806, t= 1.901311); H4c
(IV→UPI: γ12= 1.821218, t= 9.893432); H5a
(IC→DPMS: γ13= -0.341692, t= 2.441043);
H5b (IC→PA: γ14= -0.447488, t= 4.224462);
H5c (IC→UPI: γ15= -0.405046, t= 3.321745);
H6b (ISL→PA: γ17= 0.021724, t= 2.249855);
H6c (ISL→UPI: γ18= -0.359847, t= 7.509086);
H7a (DMA→DPMS: γ19= 0.311418, t=
7.141906); H7b (DMA→PA: γ20= -0.045981,
t= 2.869588); H7c (DMA→UPI: γ21= 0.382927,
t= 8.728015).
Five hypotheses were not confirmed statisti-
cally because their T-statistics values were lower
than their T-table values. The five hypotheses
were H1a (DDPM→DPMS: γ1= -0.066871, t=
0.71322); H1b (DDPM→PA: γ2= -0.003955, t=
0.395555); H3a (TMC→DPMS: γ7= -0.35438,
t= 0.709163); H4b (IV→PA: γ11= 0.161743, t=
0.89006); H6a (ISL→DPMS: 0.028519, t=
0.375982).
Qualitative Approach
a. Qualitative Data Collection
It was clearly observed in Figure 1 that there
were 5 outlier respondents, but as they were not
available for interview, the study used non-out-
lier respondents to catch the existing isomor-
phism phenomena. The respondents also filled in
the availability for interview form enclosed in
with the questionnaire for the survey, and they
confirmed their availability for interview when
the author contacted them. The respondents were
also selected on the basis of the areas in the
study to represent the population.
2015 Primarisanti & Akbar 65

Table 3. Iteration Algorithm

Validity Test Reliability Test
Composite Cronbach’s R Square
AVE Communality
Reliability Alpha
PA 0.952909 0.952909 0.987787 0.983264 0.97074
IV 0.95546 0.95546 0.988472 0.984226
IC 0.96499 0.96499 0.982183 0.963834
TMC 0.678302 0.678302 0.926361 0.907793
DDPM 0.617249 0.617248 0.86371 0.786615
ISL 0.903397 0.903397 0.986803 0.984673
DMA 0.723928 0.723928 0.939959 0.922686
T 0.683029 0.683028 0.914165 0.882016
DPMS 0.822667 0.822667 0.958661 0.946184 0.196738
UPI 0.64668 0.64668 0.95948 0.954237 0.545525
Source: Output SmartPLS ver 2.0 M3, 2013

Figure 1. The Scatter Plot of Respondents Data Processing

According to Creswell (2010), interviews
might be organized either as face-to-face, or
over the telephone or in a focus group, and via
an internet interview using email or any other
online programs. The interviews in this study
were organized as face-to-face with 5 respon-
dents and an email interview with one respon-
dent from SKPD Gunung Kidul. The interviews
took about 15-20 minutes. The author recorded
the interviews using an audio recorder, having
first asked the respondents for permission to
record each interview.
b. Qualitative Data Analysis
Based on the interviews with the selected
respondents, it was concluded that the difficul-
ties in determining performance measurement
did not have any significant impact on the de-
66 Journal of Indonesian Economy and Business
velopment of performance measurement systems
and performance accountability, but did have a
significant impact on the use of performance
information in the SKPD of the Special Region
of Yogyakarta. The employees of the local gov-
ernment of the Special Region of Yogyakarta did
not face any problems in determining perfor-
mance measurement because there has been a
LAKIP form available to them, in particular
containing technical guidelines (Juknis) and
referred to the RPJMD (Rencana Pembangunan
Jangka Menengah Daerah), the local medium
term development plan. It was confirmed by the
following respondent’s statement:
“There is not any problem in determining
indicators and some of our indicators are in
accordance with minimal service standards
(Standar Pelayanan Minimal) and there are
also particular technical guidelines. And
then, we scrutinize the existing operational
definition and there is not any problem in the
implementation and we find out whether the
targets are met or not.”
(Head of the Data and Information Section of
Bantul District Health Office)
Though the SKPDs in the Special Region of
Yogyakarta did not have any problem in deter-
mining the performance measurements, they
faced problems in the use of performance infor-
mation. This was confirmed by the following
respondent’s statement:
“There is not any problem in determining
performance measurements because the
performance measurements in preparing the
LAKIP had been standardized in the existing
LAKIP form. The problem is that the LAKIP
form has not reflected the real performance
and indicates only the financial perfor-
mance. However, the LAKI preparation
contains the target achievements that are
evaluated with various indicators and the
results of programs/activities.”
(Head of the Subsection of the Public Works
Office of Gunung Kidul District)
Based on the results of the content analysis
of the interview transcript with the respondents,
it could be concluded that the mimetic isomor-
January
phism phenomena took place in the SKPDs of
the Special Region of Yogyakarta.
Based on the interviews with the respon-
dents, it was evident that training had a positive
impact on the development of the performance
measurement system, the performance accounta-
bility and the use of performance information in
the SKPDs of the Special Region of Yogyakarta.
It helped the employees of the local government
of the Special Region of Yogyakarta to prepare
the strategic plan, determine performance objec-
tives for a program/activity/project, develop
various performance indicators for a program/
activity/project, use performance information in
the decision making process and relate the
achievement of the performance of a program/
activity/project to the existing organizational
objectives. It was confirmed by the following
respondent’s statement:
“There has been training. In general, all of
the friends of the program, those from the
inspectorate invite us, also those from the
agency for regional development
(BAPPEDA) sometimes invite us. We are
invited by some participants to get involved
in an activity/training so that we will be able
to prepare the LAKIP in accordance with the
particular program.”
(Head of the Metal Industry Department of
Disperindagkop of the Special Region of
Yogyakarta)
Based on the results of the content analysis
of the interview transcripts with the respondents
it could be concluded that the normative isomor-
phism phenomena took place in the SKPDs of
the Special Region of Yogyakarta.
Based on the interviews, the top manage-
ment’s commitment did not have any significant
impact on the development of the performance
measurement system, but it had a significant im-
pact on the performance accountability and the
use of performance information in the SKPDs in
the Special Regional of Yogyakarta. The em-
ployees of the local government of the Special
District of Yogyakarta had the commitment to
prepare the LAKIP, but there were some ob-
2015 Primarisanti & Akbar
stacles, such as the availability of accurate data.
What follows was a respondent’s statement:
“The commitment is high enough. It is ma-
nifested in the seriousness to prepare as
good a LAKIP as possible, so that the LAKIP
can reflect the description of the real
SKPD’s performance. The difficulties are
found more in technical matters such as the
need for accurate and face data.”
(Head of the Public Works Office of Gunung
Kidul District)
Though there were obstacles in accomplish-
ing the commitment, the employees of the local
government of the Special Region of Yogyakarta
prepared the LAKIP because it might be used for
the evaluation of the performance of the SKPDs.
The following was a respondent’s statement:
“The LAKIP enables us to reflect on our
performance especially in a year. I think it is
important to evaluate our performance for a
year to improve the programs and the activ-
ities we organize.”
(Head of the Sub-section of Planning and
Evaluation of Diskanertrans of Kulonprogo
District)
Based on the content analysis of the inter-
view transcripts with the respondents, it could be
concluded that the normative isomorphism took
place in the SKPDs of the Special Region of
Yogyakarta.
Based on the interviews with the selected
respondents, it was evident that innovation had a
positive impact on the development of the per-
formance measurement system and the use of
performance information. However, it did not
have any significant impact on the performance
accountability of the SKPDs in the Special Re-
gion of Yogyakarta. The employees of the local
government of the Special Region of Yogyakarta
always innovated to improve their organizational
performance. This was confirmed by the fol-
lowing respondent’s statement:
“We always coordinate, but we present data
that is sometimes incomplete and its para-
meters are not optimal. And finally, we inno-
vate something to reflect the performance on
67
the budget. So, it does not indicate that the
budget is not 100% absorbed and the per-
formance was not 100% physically. Because
saving also represents a part of perfor-
mance, the budget of 100 million and 99
million are absorbed and the physical result
is 100% means that it is an achievement, but
sometimes people have different ways to see
something.”
(Head of the Metal Industry Department of
Disperindagkop of the Special Region of
Yogyakarta)
Based on the content analysis of the inter-
view transcript with the respondent, it was con-
cluded that the normative isomorphism pheno-
mena took place in the SKPDs of the Special
Region of Yogyakarta.
Based on the interviews with the selected
respondents, it was evident that incentives had a
positive impact on the development of the per-
formance measurement system, performance
accountability and the use of performance
information in the SKPDs of the Special Region
of Yogyakarta. The presence of an incentive
would improve the performance of the em-
ployees of the local government of the Special
Region of Yogyakarta. It was confirmed by the
following respondent’s statement:
“We refer to an incentive pattern, meaning
that an employee gets a salary plus honora-
rium. As long as it is referred to as an activ-
ity, it is rewarded with a honorarium. The
preparation of the LAKIP is also rewarded
with a honorarium. So, it is expected that the
incentive will improve their performance.”
(Head of the Planning and Evaluation Sub-
section of the Agency of Regional Develop-
ment (BAPPEDA) of Yogyakarta City)
Based on the results of the content analysis
of the interview transcript with the respondents,
it could be concluded that the normative isomor-
phism phenomena took place in the SKPDs of
the Special Region of Yogyakarta.
Based on the interviews with the selected
respondents, the information system limitation
was not in evidence as having a negative impact
on the development of the performance mea-
68 Journal of Indonesian Economy and Business
surement system. However, it was evident that
the information system limitation had a negative
impact on the performance accountability and
the use of performance information in the
SKPDs of the Special Region of Yogyakarta.
The information system limitation might be
caused by inaccurate data, a lack of trust or the
lack of timeliness. However, in practice the in-
formation system limitation of the SKPDs did
not cause the tendency of the SKPDs to mimic
other SKPDs. They overcame the information
system limitation by sending confirmation to the
data source and compiling the data in the inter-
nal SKPDs, though in practice there were still
many limitations. This was confirmed by the
following respondent’s statement:
“When we compile the data, for example the
data of economic growth/inflation and the
calculation is conducted by BPS (Badan
Pusat Statistik) and when their calculation is
not logical we ask the data source to validate
the data again and occasionally with minor
changes.”
(Head of the Economic Department of
BAPPEDA of Sleman District)
The presence of the information system
limitation had a significant impact on the per-
formance accountability and the use of the
performance information in the SKPDs. There-
fore, it was necessary to use the data as the basis
for the decision making process, and the lack of
the complete, reliable and timely performance
data could reduce the accountability of the em-
ployees of the local government to the parties
concerned.
“The data on our database has not been op-
timal. The internal data exists, but the exter-
nal one related to the performance of each of
the areas has not been completed. For ex-
ample, the data of industry is incomplete. We
have 81,000 IKM and it is incomplete. What
is the name? There are names, but incom-
plete. So, then we present only limited infor-
mation such as the description of a company.
The valid data is in the district/city and it is
slowly updated. So, the recapitulation of the
data in the district/city is not complete and
January
the use of the data is also not optimal.”
(Head of the Metal Industry Department of
Disperindagkop of the Special Region of
Yogyakarta)
Based on the content analysis of the inter-
view transcripts with the selected respondents, it
could be concluded that the mimetic isomor-
phism phenomena took place in the SKPDs of
the Special Region of Yogyakarta.
Based on the interviews with the selected
respondents, the decision making authority was
proven to have a positive impact on the devel-
opment of the performance measurement sys-
tem, the performance accountability and the use
of performance information in the SKPDs of the
Special Region of Yogyakarta. The decision
making authority represented the authority of a
leader to make decisions. The employees of the
local government of the Special Region of
Yogyakarta had the authority in their respective
areas, as regulated in the existing rules. The
rules indicated the presence of external pres-
sures, which was consistent with the following
respondent’s statement:
“First, it is indeed necessary for us to begin
with a reference and the presence of the
rules requiring us to prepare the LAKIP. I
am in the planning department and we serve
there as facilitators. Various materials come
from the technical department and what we
do is to prepare and to coordinate with the
departments from which we collect the mate-
rials.”
(Head of the Planning and Evaluation Sub-
section of Disnakertrans of Kulon Progo
District)
When someone was given the authority to
make decisions, or the right to make decisions,
he or she was more likely to use the performance
information in making the decision and it would
increase his or her performance accountability. It
was consistent with the following respondent’s
statement:
“The authority for preparing the LAKIP is
with the LAKIP preparation team. As part of
the team, each of the members has the right
to give inputs and considerations in analyz-
2015 Primarisanti & Akbar
ing the performance of the SKPDs. The
LAKIP is a performance report and hence
the materials to prepare the report are dis-
cussed, especially the data of the conditions
of performance achievement, including
physical realization, financial/budgetary
realization, and the achievement of targeted
income, the achievement of the SKPDs’
strategic plan targets that have been broken
down into annual targets (RKT), and other
targets whose indicators and values have
been determined. So, the team authority is
limited to the presentation of the data of the
performance and to the analysis of the data
as compared to the targets and to the con-
clusions of the condition of the SKPDs’ per-
formance. The bottom line is that the LAKIP
preparation team only compares the targets
and the realization of them and then draws
conclusions as to whether their performance
was as expected.”
(Head of the Planning Sub-section of the
Public Works Office of Gunung Kidul dis-
trict)
Based on the results of the content analysis
of the interview transcript of the selected res-
pondents, it could be concluded that the coercive
isomorphism phenomena took place in the
SKPDs of the Special Region of Yogyakarta.
CONCLUSION, IMPLICATION AND
LIMITATION
Conclusion
The study used two (2) study approaches,
which were the quantitative and qualitative ones.
Based on the results of the analysis with the
quantitative approach, it was concluded that the
study managed to prove that training, incentives
and authority had positive impacts on the devel-
opment of performance measurement systems,
performance accountability and the use of per-
formance information; difficulties in determin-
ing performance measurement had a positive
impact on the use of performance information;
top management commitment had a positive im-
pact on performance accountability and the use
of performance information; innovation had a
69
positive impact on the development of perfor-
mance measurement systems and the use of per-
formance information; and information system
limitations had a negative impact on perfor-
mance accountability and the use of performance
information.
The results of the qualitative analysis of the
study indicated that training, top management
commitment, innovation and incentives had a
significant impact on the development of the
performance measurement system, performance
accountability and the use of performance
information. They also corroborated the results
of qualitative data processing and indicated that
the actions taken by the SKPDs in the local gov-
ernment of the Special Region of Yogyakarta
were motivated by normative isomorphism
power. The results of the study showed that the
authority to make decisions had a significant
impact on the development of the performance
measurement system, performance accountabil-
ity and the use of performance information.
They also corroborated the results of the quantit-
ative data processing and indicated that the
actions taken by the SKPDs in the local govern-
ment of the Special Region of Yogyakarta were
motivated by coercive isomorphism power.
Implication
The results of the study could contribute to
the efforts by the employees of the local gov-
ernment of the Special Region of Yogyakarta to
consider technical factors, including information
system limitations and difficulties in determining
performance measurements; organizational fac-
tors, including top managements’ commitment,
decision making authority, training and organi-
zational culture factors, including innovation and
incentives and demographic factors, including
age, working period and present position in the
context of isomorphism if they had to success-
fully implement effective performance measure-
ments.
Research Limitation and Recommendation
for Future Research
The study had some limitations that could in-
fluence its results. Firstly, it was limited only to
70 Journal of Indonesian Economy and Business
technical factors, including information system
limitations and the difficulties in determining
performance measurements; organizational fac-
tors, including top managements’ commitment,
the decision making authority, training, and
organizational culture, including innovation and
incentives. Future studies might include other
factors that influenced the performance mea-
surement system such as rational factors, which
were resources, objective orientation and exter-
nal stipulations (Julnes and Holzer, 2001).
Secondly, the difficulties in determining perfor-
mance and the information system limitations in
the study could not catch the phenomena of the
presence of the actions taken because of mimetic
motivation. Future studies might use other fac-
tors that could catch the isomorphism pheno-
mena that influenced the performance measure-
ment system. Thirdly, it was only conducted in
the Special Region of Yogyakarta, so that it
could not be generalized for the performance
measurement practices in the whole of Indone-
sia. Future studies might broaden their objectives
and included other local government institutions
to improve the generalizability of their conclu-
sions. Fourthly, it is highly recommended that
future studies are reminded to use a mixed
method because it would give a deeper under-
standing, and be able to test the results of the
study with different approaches and to catch any
isomorphism phenomena.
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Journal of Indonesian Economy and Business
Volume 30, Number 1, 2015, 72 – 89

INFANT HEALTH PRODUCTION FUNCTION:

ROLE OF PRENATAL CARE

Heni Wahyuni
Faculty of Economics and Business, Universitas Gadjah Mada
(hwahyuni@ugm.ac.id)

ABSTRACT

This article reviews the economic concept of the health production function regarding the
determinants of infant health and the results of previous empirical studies on the role of
prenatal care in infant health production. The review will include a brief explanation about the
health production function, followed by how the concept applies to infant health, explaining the
derivation of the infant health production function, and finally the previous empirical studies on
the role of prenatal care in infant health production. Grossman’s model on the demand for
health and the framework of the infant health production function of Rosenzweig and Schultz
explain that the following important factors will influence infant health and the demand for
maternal medical care: age, wage/income, education, and knowledge. Furthermore, given that
an infant inherits its health capital stock from its mother, there may be biological factors (e.g., a
specific health endowment) that may be keys to determining infant health. In terms of the role of
prenatal care, the review summaries that there is strong evidence that prenatal care does affect
infant health. However, it is difficult to isolate the causal effect between the two without con-
trolling for endogeneity, such as via a natural experiment. It is possible that there are unob-
served heterogeneous factors of mothers that can affect prenatal care and infant health. Many
studies have attempted to estimate the infant health production function, taking into account
these selection biases. The merits and critiques of existing methods have also been discussed in
the previously mentioned studies, which have mostly been conducted in relation to developed
countries and have very rarely been conducted for the developing countries’ context. The find-
ings of this review state that studies into this topic should consider many important aspects,
such as selectivity bias, the determinants of infant health as stated in theory and previous
empirical studies, and the need to use an appropriate measurement of adequate prenatal care,
especially for the case of developing countries.
Keywords: health production function, infant health production function, Grossman model,
prenatal care

INTRODUCTION There are a growing number of empirical

This paper reviews the economic concept of
the health production function regarding the
determinants of infant health and the results of
previous empirical studies on the role of prenatal
care in infant health production. A brief review
of the health production function will be in-
cluded in the first section, followed by how the
concept applies to infant health, explaining the
derivation of the infant health production func-
tion, and finally the previous empirical studies
on the role of prenatal care in infant health
production.
studies that estimate the determinants of infant
health (Conway & Kennedy, 2004; Grossman &
Joyce, 1990; Joyce, 1994, 1999; Kaestner et.al,
1996;; Lien & Evans, 2005; Reichman et al.,
2009; Rosenzweig & Schultz, 1983; Steer, 2000;
Warner, 2003). These studies are based on the
framework of the infant health production func-
tion of Rosenzweig and Schultz (Rosenzweig &
Schultz, 1982; Rosenzweig & Schultz, 1983),
derived from the household or family production
function. The prenatal care discussion explains
the role of prenatal care that enters into the in-
fant health production function from previous
2015 Wahyuni 73

empirical studies. The relative merits and criti- Health, however, differs from other forms of
ques of the factor will be considered and will be human capital, since an individual will demand
discussed as a base for further empirical studies. it for two reasons: the first relates to a consump-
tion commodity and, the second, to an invest-
THE HEALTH PRODUCTION FUNCTION ment commodity. As a consumption commodity,
health enters the utility function directly as
According to the classical demand theory of
‘healthy days’, which are a source of utility (and
consumer behaviour, each consumer has a utility
‘sick days’ are a source of disutility). As an in-
function that allows him/her to choose the com-
vestment commodity, health will affect an indi-
binations of consumption goods and services
vidual’s stock of health capital. The increase in
that can be purchased in the market. The con-
the stock of health capital will increase the indi-
sumer is assumed to be able to select the combi-
vidual’s healthy time that can be spent in market
nations that maximize his/her utility, subject to
and non-market activities. In other words, the
income and other resource constraints. This
increase in the stock of health capital will
theory, therefore, explains the demand for goods
increase the number of healthy days available
and services, in general, by the consumer. When
each year if, for example, time were measured in
buying medical care, however, it is not the ser-
years, and it will decrease the number of sick
vices, per se, that consumers demand; rather,
days each year (therefore, Grossman assumed
they want better health (Grossman, 1972).
that sick time, which is time lost from market
Therefore, health is one of the choices in the
and non-market activities due to illness or injury,
utility function and medical care is an input to
is inversely related to the stock of health capital).
produce that choice. This distinction, between
The stock of health capital, ultimately, will
the demand for health and medical care, is the
determine the length of time that an individual
focus of Grossman’s model for health.
remains healthy.
Grossman used the human capital theory as
In the Grossman model of health capital,
an approach to explain the demand for health
health is one choice in the utility function of an
and medical care. The conceptual framework of
individual, a function of the total consumption of
human capital was introduced by Becker
health “services” (Grossman conceptualized the
(Becker, 1965). Human capital includes quali-
flow from the health stock as a type of service)
ties, such as knowledge and skills, that will in-
and the consumption of other commodities. In
fluence productivity in the market and household
this model, it is assumed that a person has inhe-
sectors. Human capital can be increased by
rited an initial stock of health capital. This capi-
investing, for example, in education. Becker’s
tal depreciates over time, and the rate of depreci-
model demonstrated that an increase in human
ation varies, depending on the age of the
capital will increase productivity in the market
individual within his/her life cycle. The stock of
and household sectors and, thus, the knowledge
health capital can be increased by an individual
that a person has will determine his/her market
by investment. The inputs to produce this invest-
and household sector productivities. Following
ment includes his/her own time and healthy
Becker’s model, Grossman suggested health as
behaviours (e.g., accessing medical care, main-
one form of human capital (Grossman, 1972).
taining a healthy diet, and exercise) and limiting
Likewise, a person’s stock of health capital will
unhealthy behaviour (e.g., smoking, illicit drug
determine the total amount of time (healthy
use and alcohol, and the quality of housing).
days) that can be spent in market and non-
Individuals also use market goods and their own
market activities.1
time inputs to produce other commodities that
may enter their utility function. Other factors,
1
Market activities are activities that produce earnings/ such as the level of education, can influence the
income and non-market activities include household
sector and other activities; for example, recreation (an
individual needs time and transportation services to individual uses books and educational services to add to
create a recreational visit), additional knowledge (an knowledge and/or skills).
74 Journal of Indonesian Economy and Business
efficiency in the production of other commo-
dities.
From the individual’s point of view, the
inputs to production are scarce resources subject
to budget constraints (expenditure on these
inputs must not exceed the budget/income con-
straint). The total amount of time available must
be exhausted by all possible uses, which could
be time spent working, time lost due to illness or
injury, time as an input to the investment in
health capital, and time as an input to produce
other commodities, including household goods.
Individuals try to maximize their utility, subject
to their scarce resources and budget constraints.
This produces the optimal quantity of investment
in health capital and the optimal quantity of
other commodities.
Grossman explained that the optimal stock of
health capital, as an investment commodity, was
determined by the equilibrium between the mar-
ginal monetary rate of return on investment in
health (i.e., benefits of investment) and the user
costs of health capital in terms of the price of
investment. The marginal monetary rate of
return on investment is defined as the value of
the marginal product of health capital, divided
by the marginal cost of the investment in health.
The value of the marginal product of health capi-
tal is the wage rate, multiplied by the marginal
product of health capital. The marginal product
of health capital is the increase in the number of
healthy days, caused by a one-unit increase in
the stock of health capital. The net-user costs of
health capital include the interest rate, the depre-
ciation rate of health capital, and the capital gain.
The user costs of health capital can be termed as
the ‘opportunity costs’ of health capital. The
interest rate measures the interest payment the
individual foregoes, if he/she wants to increase
his/her health capital stock by one unit rather
than the stock of some other asset in a given
period.
Some important factors, however, can alter
the optimal stock of health. The first factor is
age. It is assumed that the rate of depreciation
increases with age – at least after some point in
an individual’s life cycle. As an individual
becomes older, his/her physical strength and
January
memory capacity will deteriorate. The increasing
depreciation rate will reduce the individual’s
stock of health capital, which can then be offset
by increasing his/her investment in health.
Therefore, the demand for medical care – as one
of the investment inputs into health – will
increase with age, as long as the price elasticity
of the demand for health capital is less than one.
In other words, there is a negative relationship
between health capital and medical care. The
model predicts that unhealthy (old) people will
make a larger investment and, therefore, will
make use of more medical care than healthy
(young) people.
The wage rate is another factor that can
influence the optimal stock of health capital. As
explained by Grossman, the stock of health capi-
tal will produce healthy days that the individual
can use for working and earning an income. The
amount of income the individual can earn is
determined by his/her wage rate, multiplied by
the number of healthy days he/she has available
for working. The wage rate measures the value
of healthy time, as it is the rate at which he/she
can turn this healthy time into income. If there is
an increase in the wage rate, the monetary value
of the marginal product of health capital will
increase, since the value of the marginal product
of health capital is equal to the marginal product
of health, multiplied by the wage rate. In other
words, the higher the individual’s wage, the
higher the value to that individual, ceteris pari-
bus, of an increase in healthy time. However, an
investment in health capital requires time, and
the cost of time has, also, to increase as the wage
rate increases. Time is not the only input into an
investment in health capital, there are other
inputs required for an investment in health capi-
tal; for example, medical care fees. Thus, the
cost of the investment will increase, but by a
lower amount than the increase in the return on
the investment. With no change in the user costs
of health capital, the optimal health capital stock
will rise, as the wage rate rises.
To examine the impact of education on the
optimal stock of health capital, Grossman
assumed that the investment in health required
inputs: medical care, an individual’s own time,
2015 Wahyuni
and education. Grossman assumed that the
investment in health was homogeneous to the
degree of one of two inputs, i.e. medical care
and the individual’s own time.2 It follows that a
change in an investment in health, caused by a
change in education (the marginal product of
education) is the sum of the changes in the mar-
ginal products of medical care and own time,
with respect to the change in education.3 The
marginal product of medical care is the increase
in the number of healthy days, caused by a one-
unit increase in medical care; and the marginal
product of an individual’s own time is the
increase in the number of healthy days, caused
by a one-unit increase in his/her own-time use. If
education increases productivity (the marginal
product of education is positive), an increase in
education will increase the marginal products of
both medical care and the individual’s own time.
As the marginal products of both inputs increase,
the quantity of the inputs required to produce a
given amount of investment is reduced. This
means that the more educated people are, the
more efficient they will be in using their own
time and medical care as inputs to invest in their
own health. If there is no price change in inputs
into this investment, the reduction in their quan-
tity will reduce the marginal cost of investment
in health. This reduction in producing health
capital will increase the marginal monetary rate
of return on health investments. Given that the
value of the marginal product of health capital is
held constant (e.g., assuming that the wage rate
is constant), the increase in the marginal mone-
tary rate of return on the investment will
increase the optimal stock of health capital. This
increase, gained through more efficient produc-
tion, will motivate better educated individuals
and result in reducing medical care consumption.
2
I = f(M,TH,E) … (1)
where I is an investment in health; M is medical care; TH
is the individual’s own time; E is education.
I is homogeneous of degree one in M and TH. It means I
= M.MPM + TH.MPTH. ….(2)
MPM is the marginal product of medical care and MPTH is
the marginal product of own time.
3
Differentiate equation (2) with respect to E (holding M
and TH are constant) result in:
∂I ∂( MPM ) ∂( MPTH )
= M+ TH
∂E ∂E ∂E
75
Education, of course, is a determinant of other
socioeconomic factors, such as wage/income or
occupation, where wage/income grows as edu-
cation increases. Therefore, the impact of educa-
tion on health could reflect, in part, an impact on
various socioeconomic characteristics
(Grossman, 1999).
The Grossman model is an important ap-
proach to understanding how individuals make
decisions about their health. It defines the con-
cept of the health production function and
explains why individuals invest in health-pro-
moting activities. It concludes that the individual
is able to use, and invest in, his/her health capi-
tal, as well as earn a return from it. What
Grossman does not explain, however, is from
where the initial stock of capital originates;
rather, it is only assumed; nor does the model
address the determinants of an infant’s inherited
health stock.
INFANT HEALTH PRODUCTION FUNC-
TION
Individuals will inherit different levels of a
starting (or initial) stock of health capital. The
initial stock in an infant, in turn, will influence
the length and health of its life. A new infant,
however, cannot make its own health-investment
decisions with the initial stock it inherits. This
section will apply the concept of consumer be-
haviour and the health production function to
explain the relationship between a mother’s
investment in her own health and that of her
infant.
As per the Grossman approach, a woman
will value her health capital for its investment
aspect and for the ‘consumption’ of good health.
When a woman is pregnant, her own state of
health undergoes changes; therefore, she may
need to increase the investment in her own
health capital. It can be expected that she will
have an increased demand for medical care (and,
possibly, for other inputs into her health produc-
tion), thus benefiting from this consumption and
the value from the investment. Furthermore,
during pregnancy, any investment in a woman’s
own health is, in parallel, an investment in her
infant’s health – infant health is a joint product.
76 Journal of Indonesian Economy and Business
The consumption value from the health of her
baby enters her utility function, since she will be
happier if her baby is in good health. Therefore,
we can expect a higher investment in her health
production than would be explained by her
health capital, alone.
As per the Grossman model, a woman will
invest in her health capital to the extent where
the marginal monetary rate of return on invest-
ment (i.e., benefits of investment) equals the
user-costs of health capital. The investment in
the infant’s health will require inputs, such as
medical care and the mother’s own time and
healthy behaviour.4 From a mother’s point of
view, those inputs are scarce, and she also has a
limited budget. Therefore, to maximize her util-
ity, she will have to determine the optimum
investment in her infant’s health within those
constraints.
The return on investment in health capital is
higher for women who have children than for
those who do not because, for a woman with a
baby, there is a return with regard to her own
number of healthy days and in the healthy days
for her infant (since the infant inherits its health
capital from its mother), compared to a woman
with no baby. The higher the return due to the
additional number of a baby’s healthy days, the
fewer the days a mother will need to care for a
sick infant. She can then benefit from this addi-
tional time for her market and non-market activ-
ities (she does however, faces budget con-
straints). This investment can provide the neces-
sary initial health capital stock for the infant as a
return, which will ultimately contribute to its
own life, but the mother will not be able to bene-
fit from it. The inability to benefit from the
investment may be a deterrent for mothers to
invest in infant health. Government policy-
making should be able to correct this, if it is par-
ticularly concerned about maternal and infant
health in Indonesia.
Grossman’s concept of the health production
function (1972) has been applied to the devel-
4
Grossman focused on medical care and time as direct
inputs and education as an indirect input. The change in
indirect input changes the efficiency of the production
process.
January
opment of a framework for the production of
infant health (Corman & Grossman, 1985;
Corman et al., 1987; Grossman & Joyce, 1990;
Joyce, 1994; Reichman et al., 2009; Rosenzweig
& Schultz, 1982; Rosenzweig & Schultz, 1983).
The framework, based on the Rosenzweig and
Schultz studies (1982; 1983), specified a model
of infant health production function in the con-
text of the family or household production. It
was assumed that the health of the infant, H, is
one of the ‘goods’ in the family utility function.
Other goods included consumer goods which
affect infant health, Y (e.g., parental smoking,
the number of children in the family), and
health-neutral consumer goods, X, which had no
effect on infant health. The health of the infant
depended on the level of consumer goods (Y)
and other family inputs (Z) that were purchased
as inputs of infant health, such as medical care.
Thus, the family utility function is
U=U(X, Y, H) (1)
The relationship between infant health and
the inputs that influence it is explained by an
infant health production function,
H=F(Y, Z, µ), FY, FZ, Fµ ≠ 0 (2)
where µ relates to unobserved biological or
endowment factors, such as genetic or environ-
mental conditions, unaffected by parental beha-
viour, but known to the parents.
The family has budget constraints,
I=XPX + YPY + ZPY (3)
where PX, PY, and PZ are the prices of goods X,
Y, and Z.
The family attempts to maximize utility
function (1), subject to (2) and (3). This maximi-
zation yields three demand equations of three
types of goods (X, Y, and Z) and the optimal
infant health outcome (H). Each demand equa-
tion is a function of prices, income, and unob-
served endowment factors.
Following the Grossman model, the optimal
stock of infant’s health capital can be changed
by certain factors. The first relates to the age of
the mother, a choice variable that refers to the
2015 Wahyuni
time in her life cycle, when she chooses to have
a child (Rosenzweig & Schultz, 1983). In terms
of an infant’s health production, the time when a
mother decides to have a child can be treated as
a behavioural factor. Biologically, the risks
involved in pregnancy and birth are higher for
very young, as well as for older women. The
teenage years or very mature ages can be repre-
sentative of unhealthy points in a mother’s life
cycle. At an older age, the Grossman model
indicated that the rate of depreciation in a
woman’s health capital was higher (compared to
an optimal reproductive age) and, therefore, the
optimal stock of her health capital was lower
than at the optimal reproductive age. By being
pregnant at a younger age (than during the
optimal reproductive age), a woman did not have
a sufficient stock of health capital. Therefore,
bearing children at a very old age or too young
an age would contribute to women being less
efficient investors in infant health. Since the
baby would have inherited its stock of health
capital from its mother, a change in the optimal
health capital of the mother would, ultimately,
influence that of the infant. The reduction in
health capital can be offset by the mother, by
making larger investments in infant health,
driving her to consume more medical care than
mothers who have babies at the optimal repro-
ductive age.
Another factor that may change the optimal
stock of an infant’s health capital is the mother’s
wage rate: the higher the wage, the higher the
increase in the value of her healthy time. This
follows the Grossman model’s prediction that
was explained in the previous section, whereby
an increase in wage leads to an increase in health
capital investment, contributing to an increase in
infant health. While the consumption value of
infant health will not change, the higher the
income a mother earns, the more she will invest
in consumption, including infant health. An
increase in income will also enable her to afford
a better quality and quantity of health production
inputs, such as medical care.
A mother’s education is yet another factor
which could change the optimal stock of an
infant’s health capital. Therefore, equation (2)
77
can be rewritten to include education (Grossman
& Joyce, 1990; Joyce, 1994; Rosenzweig &
Schultz, 1982),
H=F’(Y, Z, µ; e), (4)
where e is education and F’ye, F’ze>0.
Then the optimization process of (1), subject
to (3) and (4), yields the demand equations of
three types of inputs goods (X, Y, and Z) that are
functions of educational attainment, in addition
to prices and income.
Conceptually, there are three potential
mechanisms by which education can influence
infant health. The first improves the efficiency in
producing infant health (Grossman, 1972, 1999).
Productive efficiency exists where the more
educated mothers will either produce a larger
amount of output (in this case, health), for given
amounts of inputs, or will use inputs more effi-
ciently (i.e., use less inputs) to produce a given
quantity of investment in infant health. This will
decrease the cost of the investment and increase
infant health. It reflects the effect that schooling
can have on infant health production, through
the alteration of an input of the infant health
production function (Rosenzweig & Schultz,
1982; Rosenzweig & Schultz, 1983). The second
mechanism relates to the return to education,
which can be quantified by an increase in wage
or income. Educated women earn more, and they
are able to afford more for medical care services
(Currie & Moretti, 2003). If the cost of medical
care remains unchanged, the investment in infant
health will increase and, thus, result in an
increase in infant health capital. The third
process relates to education and health informa-
tion. Education can improve knowledge and the
ability to acquire and process information, espe-
cially with regard to healthy behaviour during
pregnancy. For example, highly educated people
understand the importance of medical care and
what constitutes a healthy lifestyle (e.g., appro-
priate diet, exercise, the harmful effects of
tobacco and drugs, etc.). Education, therefore,
may increase healthy behaviour in women5 and,
5
Grossman focused on medical care as the market ‘good’
in the investment function. He also acknowledged,
however, that there were generally other inputs, such as
78 Journal of Indonesian Economy and Business
increase their use of medical care services
(Currie & Moretti, 2003). By understanding the
importance of medical care and a healthy life-
style, women may well be motivated to change
their behaviour toward infant health.
PRENATAL CARE UTILIZATION
Prenatal care utilization is believed to be an
important factor in ensuring that women have
healthy pregnancies and babies. Through pre-
natal care, mothers can receive (i) early detection
of an at-risk pregnancy or any potential compli-
cations and diseases; (ii) diagnosis and treatment
for medical conditions that occur before and
during pregnancy; (iii) vitamin, minerals, and
other supplements for pregnancy; and (iv) advice
and information related to improving nutrition
during pregnancy, healthy behaviour, preventing
potential difficulties, and advice regarding deli-
very (Berg, 1995). Care in early pregnancy and
intense prenatal care may protect mothers from
adverse birth outcomes. Adequate prenatal care
visits can encourage healthy behaviour, prevent
deterioration in the health of the mother and the
foetus, and monitor for possible risks. During
prenatal visits, mothers may be diagnosed with
diseases and abnormalities that may be detri-
mental to the pregnancies and the pregnancy
outcomes. Providing effective services and
proper treatment will, therefore, contribute to
preventing ill health, reduce risks, and increase
the likelihood of a healthy baby.
Economists and health researchers, alike,
have long been interested in the analysis of the
effects of prenatal care on infant health. Most
studies have been conducted in industrialized
countries, where prenatal care has been shown to
positively have an impact on birth outcomes
(Grossman & Joyce, 1990; Guilkey et al., 1989;
Habibov & Fan, 2011; Jewell & Triunfo, 2006;
Liu, 1998; Reichman et al., 2009; Reichman &
Florio, 1996; Rosenzweig & Schultz, 1983;
Rous et al.,, 2004). There are three important
issues that will be reviewed in this section
regarding this evidence. The first is the associa-
housing, diet, exercise, recreation, cigarette smoking, and
alcohol consumption that influenced an individual’s level
of health.
January
tion of adequate prenatal care on infant health,
which is important to ensure that mothers have a
healthy pregnancy and a healthy baby; however,
there is still no generally agreed measure for the
adequacy. The second issue will be a review of
the determinants of prenatal care utilization,
particularly on the barriers (commonly relating
to policy decision-making in developing econo-
mies) that affect access to these services. The
third and last issue is the fact that it is extremely
difficult to observe the causal effects of prenatal
care and infant health, despite the various mea-
surements of prenatal care that have been used.
This is because there may be unobserved exoge-
nous factors that correlate with both prenatal
care and outcomes, which may be known to indi-
vidual mothers but are unknown to researchers.
This problem is often referred to as ‘selectivity’
problems, which can impact the effectiveness of
prenatal care on infant health.
The Impact of Adequate Prenatal Care Visits
on Infant Health
Adequate care depends on both the timing
and the number of visits. With regard to the
effectiveness of such services, it is difficult to
have a single measurement of a prenatal visit
that will capture the effectiveness of the visit on
birth outcomes. To estimate the adequacy of
care, many studies use prenatal care delay (in
months or weeks) or whether the mother has had
prenatal care during the first trimester of preg-
nancy (Li & Poirier, 2003b; Liu, 1998;
Reichman et al., 2009). Others use the number
of visits (sometimes with the squared root of the
number of visits included in the model) (Joyce,
1994; Rous et al., 2004) as the measurement of
prenatal care. Regardless of which indicator is
applied, the findings have generally indicated
that the earlier the visits start or the higher the
number of visits there are, the better the birth
outcome. In other words, the longer the delay in
the utilization of prenatal care, the more possi-
bility of an adverse birth outcome. Rosenzweig
and Schultz (1983) considered the number of
months of elapsed pregnancy before the mother
visited a medical professional. They found that a
5-month increase in the sample mean delay in
2015 Wahyuni
seeking prenatal care services reduced the birth-
weight by 260 grams. Liu (1998) showed that for
every month a mother delayed initiating care the
birthweight reduced, on average, by 160 grams.
Current studies for developed countries
reflect the following. Rous et al., 2004) found
that one additional visit will increase birthweight
by 14.44 grams, and Reichman et al. (2009),
who used first-trimester prenatal care as another
measurement, discovered that the baby’s birth-
weight increased by about 50 grams in self-
reported input (the authors also used actual
input, which is the combination between self-
reporting and information from medical records,
and found an insignificant result). Those studies
controlled the estimation for common demo-
graphic and socioeconomic factors, as well as
the behaviour of the mothers during pregnancy.
However, there have been only a few studies that
have been conducted in developing countries.
Generally, the results were similar, as were the
measurements used, for developed countries. For
example, Guilkey et al. (1989) used the number
of visits and data from Metropolitan Cebu, the
Philippines, and found that this factor had a sig-
nificant influence on birthweight in relation to
private health providers in urban areas. Jewell
and Triunfo (2006), for the case of Uruguay,
used the month of initiation of prenatal care and
found consistency in the result with other stu-
dies.
Some studies used the Kessner index, which
combines the timing of the visit, the number of
visits, and the length of pregnancy in order to
provide a measure of prenatal care visits as ade-
quate, intermediate, or inadequate. For the Kess-
ner index, adequacy is defined as prenatal care
beginning in the first trimester, with nine visits
for a normal length pregnancy; intermediacy is
defined as prenatal care beginning in the second
trimester; and inadequacy is defined as prenatal
care starting in the third trimester or not at all
(Kotelchuck, 1994). An example of a study,
which used this index, is Joyce (1994). He
divided the prenatal care that women received
into three categories: inadequate, intermediate,
and adequate. He found that the impact of pre-
natal care on birthweight was higher for mothers
79
who moved from inadequate to intermediate
than from intermediate to adequate care.
Another widely used measurement of the
adequacy of care in developed countries is the
two-factor Adequacy of Prenatal Care Utiliza-
tion (APNCU) index. This index includes infor-
mation about the timing for the initiation of
prenatal care and the number of visits after initi-
ation (Kotelchuck, 1994). Adequate care, based
on this index, is defined as care having begun by
the fourth month and 80-109 percent of recom-
mended visits received. The recommended num-
ber of visits is based on the American College of
Obstetricians and Gynecologists’ (ACOG) rec-
ommendation, which is 14 visits during a nor-
mal-length pregnancy (40 weeks).
There are a number of critiques regarding the
various measures for the adequacy of prenatal
care. The first relates to the initiation of the first
trimester visit or the month of initiation of the
visit, which provide no data on the visits after
the first trimester one. The second relates to the
fact that in countries where prenatal care cover-
age is low, measures such as the Kessner and the
two-factor APNCU index could be too high a
standard, proving unrealistic and, therefore,
irrelevant when they are unable to be met. For
instance, using data from the 2007 IDHS,
approximately 95 percent of women visited a
prenatal care service at least once; however, only
66 percent went four times during pregnancy
(Badan Pusat Statistik Republik Indonesia
(Statistics Indonesia) & Macro International,
2008). Therefore, both indices may be inappro-
priate in this case. The impact of any public
health programme relating to prenatal care ser-
vices − and, ultimately, birth outcome improve-
ment − requires an appropriate measurement.
Inappropriate standards may potentially unde-
restimate the impact of care on the infant health
production function.
When considering the appropriate measure-
ment for countries with low prenatal care cover-
age and low prenatal care utilization, a minimum
frequency of visits can be taken into account to
ensure a healthy pregnancy and to detect any
complications. The WHO recommends a mini-
mum of four visits during pregnancy (World
80 Journal of Indonesian Economy and Business
Health Organization, 2005, p. 43). Specifically,
these should represent one in the first trimester
(by 16 weeks), one in the second trimester (at
24-28 weeks), and two in the third trimester (at
32 weeks and at 36-38 weeks) of pregnancy
(Berg, 1995). In the context of developing coun-
tries, this standard may be more appropriate than
the other standards mentioned, whose frequency
make them impracticable.
Despite the positive results of prenatal care
in terms of infant health, as well as the benefits
that have been identified for mothers, utilization
of this care remains low in developing countries,
including Indonesia. The following section will
discuss the possible barriers and an analysis in
search of an answer.
Barriers to Prenatal Care Utilization
In general, prenatal care use can be explain-
ed within two key frameworks: demand-side and
supply-side factors (McNamee et al., 2009).
Demand-side factors include cost (socioeco-
nomic, such as income and education), women’s
autonomy in decision-making in the household,
geography (distance between health providers
and residence), demographics (age, marital sta-
tus, and parity), and quality of care (anticipated
and experienced satisfaction with the process of
care and the final health outcomes). Supply-side
factors include the level of accessibility of the
services and the availability of qualified health
providers. The following sub-section will ex-
plain some of the key elements for prenatal care
utilization. Some factors already have been
discussed, to some extent, in the section relating
to determinants as indirect factors that influence
infant health through the alteration of prenatal
care utilization. I will discuss the determinants
that focus on the barriers of utilization, caused
by these factors. The discussion will attempt to
identify how they constrain access to prenatal
services, and it will include socioeconomic, geo-
graphic, and supply-side components.
Socioeconomic Factors and the Decision-
Making Power of Women in the Household
Inequality in the use of maternal health care
and delivery services, associated with socioeco-
January
nomic inequality, exists across countries (Celik
& Hotchkiss, 2000; Gwatkin et al., 2007;
Sepehri et al., 2008). Gwatkin et al. (2007)
noted that prenatal care use increased steadily
with rising economic power. The wealthiest 20
percent of the population used prenatal care at
one and a half to two times the rate of the poor-
est 20 percent. The difference was even larger
for visits to professional providers, with the
wealthiest double to those of the needy. In Indo-
nesia, visits by a higher-income person to a
medically trained person in 2002/03 were 1.3
times higher than for a low-income person, and
for iron supplementation during pregnancy, the
ratio between the richest and the poorest was 1.4
(Gwatkin et al., 2007). The gaps were worse for
deliveries attended by a medically trained per-
son, with an almost three times difference
between the two.
Many of the studies suggested that the
socioeconomic status of women was one of the
most important factors contributing to the use of
prenatal care services (Celik & Hotchkiss, 2000;
McNamee et al., 2009; Nguyen et al., 2012;
Sepehri et al., 2008). The indicators used vary
from study to study, with a large number of them
including the relationship between income or
wealth of mothers and the use of prenatal care in
terms of developing countries, providing con-
flicting results. An analysis (using the National
Family Health Survey carried out in Southern
India during 1992-93 and a standard-of-living
index as a measurement of household wealth)
found that the impact of the standard of living
was significant in only one state (Navaneetham
& Dharmalingam, 2002). Celik and Hotchkiss
(2000) used the 1993 Turkish Demographic and
Health Survey and established that household
wealth would affect prenatal care use from a
trained provider, depending on the measure of
household wealth. They found that only two
indicators (owning a car and having a flush
toilet) were significant. On the other hand, there
have been studies undertaken that have found
significant results for a broader range of meas-
ures. For instance, Gage (2007) examined the
factors in rural Mali, using data from the 2001
Demographic and Health Survey, where 9,340 of
2015 Wahyuni
12,849 women aged 15-49 years resided in rural
areas. She also employed a household infra-
structure index as an indicator of wealth. The
index was derived from the infrastructure that
belonged to a household, such as the source of
drinking water and type of toilet. She found that
household wealth did have a strong relationship
with prenatal care use in the first trimester visit,
and with four or more visits. Habibov (2011)
used the Azerbaijan Demographic and Health
Survey and found that mothers from the richest
and richer households (derived from the house-
hold wealth index) made more visits. Finally,
Muchabaiwa et al. (2012) examined the case for
Zimbabwe, using the 2005/06 Zimbabwe Demo-
graphic Health Survey and the household wealth
index. He discovered that the middle, richer, and
richest households were more likely to use these
services than the poorest.
There is one possible rationale to explain
why the studies in these particular developing
countries were found to be inconsistent in terms
of the relationship between wealth and prenatal
care. Most applied a household wealth index (a
husband’s income or household assets) as an
indicator of the wealth of the mother. This may
not be a true representative indicator to estab-
lishing the wealth or socioeconomic status of a
woman in a household, since access to house-
hold assets is often difficult for women who do
not have the bargaining power to make decisions
with regard to using the assets for health care,
which could prove to be an important factor.
This also applies to money-spending decisions,
sex, freedom of mobility, family domination,
and decisions related to children’s health. For
example, in Indonesia, a woman who has a share
of the household assets or has control over eco-
nomic resources, has more control over her own
reproductive health decisions and the use of pre-
natal care and delivery services, compared to
those who do not (Beegle et al., 2001). It does
appear, therefore, that involving mothers in the
household decision-making related to the access
to internal and external resources is an important
factor in the improvement of reproductive health
and the utilization of maternal health care ser-
vices.
81
In addition to the wealth indicators of
women, empirical studies reported that educa-
tion impacts on their use of prenatal and post-
natal care services (Beegle et al., 2001; Celik &
Hotchkiss, 2000; Currie & Moretti, 2003;
Guilkey et al., 1989; Reichman & Florio, 1996;
Rosenzweig & Schultz, 1983). Economic litera-
ture, in general, suggests that the more educated
the mothers are, the more knowledge of health
and healthy behaviour they have, including their
ability to process information. This implies that
there are barriers that prevent the use of prenatal
care in developing countries due to the low edu-
cational levels of women.
Overall, the socioeconomic status of mothers
is crucial to the utilization of prenatal care. It is
associated with wealth and education, factors
that will influence policy decision-making in
many developing countries. Inconsistent results
that relate to wealth, however, may relate to the
measure of wealth that the studies used or to the
fact that the impact of wealth or income relates
to education.
Geographical Constraint
Extensive research has demonstrated that the
area where the mother resides can essentially
influence her utilization of prenatal care (Celik
& Hotchkiss, 2000; Gage, 2007; Gage &
Calixte, 2006; Habibov, 2011; Kyei et al., 2012;
Navaneetham & Dharmalingam, 2002; Sepehri
et al., 2008). This reflects the differences
between urban and rural areas in the availability
and accessibility of health care facilities. Women
living in urban areas usually have better access
than those in rural or remote locations. For urban
women, there is an increase in the awareness of,
and exposure to, a wide variety of quality health
providers (Celik & Hotchkiss, 2000; Sepehri et
al., 2008) while, for those in rural and remote
areas, access to modern health care is usually
limited and is affected by distance and the lack
of transportation. For example, in rural Zambia,
for each increase of 10 kilometres, the odds of
receiving quality prenatal care (defined as hav-
ing more than four visits, with more than eight
specific interventions) decreased by 25 percent
(Kyei et al., 2012). Gage and Calaxite (2006)
82 Journal of Indonesian Economy and Business
noted that the lack of service availability and
poor road conditions reduced the frequency and
timeliness of receiving such care in Haiti. Gage
(2007) also found that in rural Mali, not only did
transportation barriers affect facility use per the
recommended frequency, but the lack of facili-
ties prevented the first trimester visit. A com-
parison study of mothers in rural and urban areas
of southern India came to similar conclusions
(Navaneetham & Dharmalingam, 2002), as did
research relating to Azerbaijan (Habibov, 2011).
Financial Assistance
Out-of-pocket expenses often lead to inade-
quate prenatal care visits for poor women. In
response, many programmes provide financial
assistance in the form of insurance, vouchers, or
subsidies to improve the use of services and
promote infant health. Targeted programmes,
such as Medicaid in the United States, are very
common in developed countries and provide free
services for low-income families, with the goal
of improving infant health by increasing the
quantity and quality of services for women
(Kaestner, 1999). Similar programmes are in-
creasingly being implemented in developing
countries, such as Bangladesh, Indonesia, Nepal,
and Turkey (Bhatia & Gorter, 2007; Celik &
Hotchkiss, 2000; Johar, 2009; Nguyen et al.,
2012).
Despite the growing data relating to the
impact of financial assistance and related pro-
grammes, the evidence shows mixed results. For
example, the study by Kaestner (1999) on U.S.
Medicaid found that there was no significant
association between insurance status and birth-
weight; i.e., no significant difference in birth-
weight for the uninsured, for Medicaid recipients
and for women with private insurance (after
controlling for other factors, such as socioeco-
nomic and demographic characteristics, maternal
health conditions, the previous number of still-
births or miscarriages, race, and ethnicity).
Kaestner found that women under Medicaid
made less prenatal care visits and were less
likely to have adequate care (as defined by the
Kotelchuck (Kotelchuck, 1994) index) than
those with private insurance. He argued that this
January
was mainly due to the uninsured and Medicaid
recipients beginning care later than the privately
insured, although the difference was very small.
Furthermore, findings relating to Medicaid and
the quality of prenatal care suggest that there is
no evidence that Medicaid recipients received
less quality care than the privately insured.
Conflicting results come from Joyce’s
examination (Joyce, 1999) of the impact of the
Prenatal Care Assistance Programme (PCAP) in
New York, which was a part of the Medicaid
programme. They showed that PCAP was asso-
ciated with a 20-percent increase in the likelih-
ood of enrolment into the Women, Infants and
Children programme, 35 grams increase in mean
birthweight, and a 1.3 percentage point decrease
in the rate of low birthweight. A New Jersey
Health Start programme analysis showed that
black women, covered by Medicaid, gave birth
to infants with a higher weight and, therefore,
lowered newborn hospitalization costs
(Reichman & Florio, 1996).
The experience in developing countries also
shows mixed results. A voucher programme in
Bangladesh significantly increased the use of
maternal health care services (Nguyen et al.,
2012) through incentives for poor mothers to use
antenatal, delivery, and postnatal services. Eligi-
ble women were granted access to the services
for free. Participating health care providers also
benefited from the programme. Results from the
evaluation of the programme found that, com-
pared to women in a control group (no voucher
programme), the treatment group had a 46.4 per-
centage point higher probability of using a quali-
fied provider and a 13.6 percentage point higher
probability of delivery in a health care institu-
tion. The effect of this demand-side financing
through a health care card, however, has been
more limited in Indonesia (Johar, 2009), for
which the author provides some explanations.
First, the demand for public health care services
is inelastic; i.e., given a change in price, there is
little shift in the quantity of demand. Second, the
variation in the level and lack of actual informa-
tion about the programme’s scope and objectives
may have contributed to the programme’s neg-
ligible impact on health care service use. Last,
2015 Wahyuni
where there is an inadequate health care system
and public health facilities are limited, an
increase in demand cannot be accommodated.
This leads to the selection of self-medication by
the target community, in lieu of seeking public
health care, causing underutilization of any such
support programme. It is important, therefore, to
improve the health system in tandem with any
demand-side programme.
Out-of-pocket expenditure is one of the
major barriers to accessing adequate prenatal
care by poor mothers. Many programmes have
responded by providing financial assistance in
the form of either insurance, vouchers, or subsi-
dies, especially in relation to poor families, to
improve the use of prenatal care services and
infant health.
Selectivity Problems of Prenatal Care:
Unobserved Heterogeneity
Although there is consistent evidence of the
relationship between prenatal care and infant
health, the interpretation of causality must be
treated with caution. This is because there are a
range of possible unobserved factors that may
influence prenatal care, as well as infant health.
The population may differ with respect to health
endowments and some of the differences would
be known to the individuals but not to the
researchers. For instance, many pregnant women
have information about their health endowment
from prior pregnancies (e.g., pregnancy compli-
cations, adverse birth outcomes), which may
influence their use of prenatal care and, likewise,
their birth outcomes. Women with poor health
endowments may utilize more prenatal care ser-
vices, while those with a positive health endow-
ment may seek less care. In this case, the effects
of prenatal care may be underestimated. Alter-
natively, women in better health may invest in
more prenatal care, which could result in an
overestimation of the effect of prenatal care. For
example, pregnant women with good health
endowments may exhibit more beneficial health
behaviour. These women may initiate prenatal
care early or make more visits, may take suffi-
cient nutritious food, vitamin supplements,
engage in proper exercise, and avoid unhealthy
behaviour, compared to other groups.
83
If indicators of health endowment are unob-
served, it may bias the estimated impact of
prenatal care on infant health. Depending on the
direction of the relationship between health
endowment and health-seeking behaviour, the
effectiveness of prenatal care may be overesti-
mated or underestimated when the relationship
between prenatal care and infant health is esti-
mated using a direct correlation method. This
will make it extremely difficult to estimate the
independent effect of prenatal care on birth out-
comes and to isolate the causal relationship
between the two in non-experimental data. This
problem is referred to in economic literature as
an endogeneity of prenatal care. Ignoring this
endogeneity in the estimation of infant health
production may lead to an incorrect inference
about the value of prenatal care utilization, and
could mislead policymakers into believing that
adequate or even additional prenatal care will
not improve birth outcomes. They will consider
the other inputs in the infant health production
function – more amenable to policymaking –
rather than encourage the use of prenatal care.
Previous economic studies have used various
tests and econometric methods to address the
bias due to endogeneity in prenatal care. The
most common method is the Two-Stage Least
Squares (2SLS) or instrumental variables that
counteract the Ordinary Least Squares (OLS)
method. Beginning with Rosenzweig and
Schultz’s (1983) research, they found that there
was no appreciable effect on prenatal care,
according to the OLS method, while the effect
using 2SLS was significant and almost forty
times the OLS point estimate, when using the
price of milk, a husband’s income, and parental
education as instruments for identification. The
authors also suggested that the OLS result unde-
restimated the prenatal care impact on birth-
weight because mothers who knew that their
pregnancies could be problematic may have
addressed their anticipation of adverse birth out-
comes by seeking prenatal care early. Current
studies tend to follow this work, using the 2SLS
method with different instruments, such as
marital status (Jewell & Triunfo, 2006).
84 Journal of Indonesian Economy and Business January

Table 1. Summary of Empirical Studies on Infant Health and Prenatal Care

Issues Measurement Reference Findings

1. Adequate Prenatal Care Delay (in
Prenatal Care months or week)
Measurement
Have prenatal care in first
trimester of pregnancy
Number of visits
Number of months of
elapsed pregnancy before
the mother visited a
medical professional
Li & Poirier, 2003b; The earlier the visits start, the
Liu, 1998; Reichman et better the birth outcomes
al., 2009
Li & Poirier, 2003b; Have prenatal care in the first
Liu, 1998; Reichman et trimester of pregnancy, have better
al., 2009 birth outcomes
Joyce, 1994; Rous, Higher the number of visits, the
Jewell, & Brown, 2004; better the birth outcomes
Guilkey et al., 1989
Rosenzweig & Schultz, A 5-month increase in the sample
1983 mean delay in seeking prenatal care
services reduced birthweight by
260 grams.

Months a mother delayed Liu, 1998 For every month a mother delayed
initiating care initiating care, the birthweight
reduced, on average, by 160 grams.
Kessner Index Joyce, 1994; Kotelchuk, The impact of prenatal care on
(prenatal care beginning in 1994 birthweight is higher for mothers
the first trimester, with nine who move from inadequate to
visits for normal length of intermediate than from
pregnancy; intermediate is intermediate to adequate care.
defined as prenatal care
beginning in the second
trimester; and inadequacy is
defined as prenatal care
starting in the third trimester
or not at all) and Adequacy
of Prenatal Care
Utilization (APNCU) index
WHO Standard (one visit WHO, 2005; Berg, Proposed for use in the developing
in first trimester, one in the 1995 countries.
second, and twice in the
third trimester)

2. Determinants Socioeconomic factors and Celik & Hotchkiss, - Prenatal care use increases
of Prenatal the decision-making power 2000; Gwatkin et al., steadily with rising economic
Care Service of women in the household 2007; Sepehri et al., power.
Utilization 2008; Celik & - Household wealth will affect
(Barriers to Hotchkiss, 2000; prenatal care use from a trained
access) McNamee et al., 2009; provider.
Nguyen et al., 2012; - Household wealth does have a
Sepehri et al., 2008 strong relationship with prenatal
care use in the first trimester visit
and with four or more visits.
- Mothers from the richest and
richer households made more
visits.
- A woman with greater freedom
of mobility and freedom from
family domination has a higher
number of prenatal care visits.
2015 Wahyuni 85

Geographical constraint Celik & Hotchkiss, - Women living in urban areas

2000; Gage, 2007; usually have better access than
Gage & Calixte, 2006; those in rural or remote
Habibov, 2011; Kyei et locations.
al., 2012; Navaneetham - The lack of service availability
& Dharmalingam, and poor road conditions reduced
2002; Sepehri et al., the frequency and timeliness of
2008 receiving prenatal care.
- The lack of facilities prevented
the first trimester visit of prenatal
care.
Financial Assistance Kaestner, 1999; Bhatia - Mothers with financial
& Gorter, 2007; Celik assistance use higher prenatal
& Hotchkiss, 2000; care services.
Johar, 2009; Nguyen et
al., 2012; Joyce, 1999.

3. Causal effect Endogeneity of prenatal Rosenweigz and - Rosenweigz and Schultz (1983)
of prenatal care Schultz, 1983; Jewell & suggested that OLS result
care and Triunfo, 2006; underestimates prenatal care
infant health Grossman & Joyce, impact on birthweight.
1990 - Jewell & Triunfo (2006) found
that using 2SLS, prenatal care
was a statististically significant
influence in birth outcomes, but
they did not conduct endogeneity
test.
- Grossman & Joyce (1990) found
that the endogeneity problem
only existed in relation to black
mothers.

Source: Primary Data, processed (2015)

There are some criticisms to be made about
the 2SLS method. The first is the problem of
identifying valid instruments for prenatal care.
Two requirements are necessary for an instru-
ment to be valid (Wooldridge, 2009): (i) it must
be uncorrelated with unobserved factors in the
infant health production function. In other
words, it should not have a partial effect on
infant health (referred to as instrument exogene-
ity); and (ii) it must be related to the endogene-
ous variable; i.e., prenatal care (referred to as
instrument relevance, relevant in explaining
variation). The usual variables used in the pre-
vious studies may not have fulfilled those
requirements. For example, education, income,
or marital status as instruments may be corre-
lated with prenatal care. However, these varia-
bles may have only a partial effect on a baby’s
health. As discussed previously, education can
affect infant health directly, explained as a prod-
uctivity shifter in the production process. The
same applies to income. Marital status is also a
choice variable (as discussed previously). If
these instruments partially correlate to infant
health or weakly correlate to prenatal care, then
the estimators that have appeared as a result of
the 2SLS method could prove to be worse than
those using the OLS method (Wooldridge,
2009).
The second critique is that the 2SLS estima-
tor is less efficient than the OLS one, such that
the standard errors of 2SLS estimators are
usually larger than the OLS (Wooldridge, 2009).
Therefore, it is important to have carried out an
endogeneity test of prenatal care to show
whether the 2SLS method is applicable. Some of
the previous studies lacked this process (Jewell
& Triunfo, 2006).
Grossman and Joyce (1990) estimated the
impact of prenatal care on birthweight, using a
86 Journal of Indonesian Economy and Business
cohort of pregnant women in New York City in
1984 and taking into account the bias from
endogeneity of prenatal care and pregnancy res-
olution. They found that there was a strong
pregnancy-resolution bias for blacks, but not for
whites. For blacks, the results suggested that the
unobserved factors that caused birth probability
were correlated with unobserved factors that
decreased the delay in the initiation of prenatal
care visits and increased birthweight, after con-
trolling for education, the age of the mother,
marital status, parity, availability of clinics, and
abortion-related indicators. Their results also
suggested that the endogenity problem of pre-
natal care was only evident for black mothers,
after controlling for the same factors, plus
unhealthy behaviour and the gender of the child.
The authors argued that the mean shadow price
of contraception and the variation of price were
greater for blacks than for whites. Therefore,
black women were more likely to abort than
white women. For this reason, the selectivity
bias was only found in relation to black mothers.
CONCLUSION
In conclusion, using Grossman’s model on
the demand for health (Grossman, 1972, 1999)
and the framework of the infant health produc-
tion function of Rosenzweig and Schultz (1982;
Rosenzweig & Schultz, 1983), the following
important factors will influence infant health and
the demand for maternal medical care, as de-
scribed in the previous paragraphs: age,
wage/income, education, and knowledge. Fur-
thermore, given that an infant inherits its health
capital stock from its mother, there may be bio-
logical factors (e.g., a specific health endow-
ment) that may be key to determining infant
health (Grossman & Joyce, 1990; Joyce, 1994;
Rosenzweig & Schultz, 1982; Rosenzweig &
Schultz, 1983). In this research, the empirical
analysis was based on the framework of the
infant health production function. The equation
below summarizes the production of infant
health by the mother that is derived from the
concept of the infant health production function
framework,
January
H=h(Am, Ym, Im, Em, Bm, µ) (5)
where Am is the age of the mother, Ym relates to
medical care, Im is income, wealth or wage, Em is
the education of the mother, Bm is maternal
healthy/risky behaviour, and µ is the mother’s
specific health endowment. Age, income/wealth,
and education are commonly known as socioe-
conomic and demographic factors.
In terms of the role of prenatal care, there is
strong evidence that prenatal care does affect
infant health. However, it is difficult to isolate
the causal effect between the two without con-
trolling for endogeneity, such as via a natural
experiment. It is possible that there are unob-
served heterogeneous factors of mothers that can
affect prenatal care and infant health. Many stu-
dies have attempted to estimate the infant health
production function, taking into account these
selection biases. The merits and critiques of ex-
isting methods have also been discussed in the
previously mentioned studies, which have
mostly been conducted in relation to developed
countries and have very rarely been conducted
for the developing countries’ context. Therefore,
there is a need to observe the role of prenatal
care on infant health production using a compre-
hensive approach for the case of developing
countries.
It implies that studies on this topic should
consider many important aspects, such as selec-
tivity bias, the determinants of infant health that
were stated in theory and in previous empirical
studies and the need to use an appropriate mea-
surement of adequate prenatal care, especially
for the case of developing countries.
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Wooldridge, J. M., 4th eds., 2009. Introductory
econometrics: a modern approach. Mason,
Ohio: South-Western Cengage Learning.
World Health Organization, 2005. The World
Health report 2005: make every mother and
child count. Geneva: World Health Organi-
zation.
Journal of Indonesian Economy and Business
Volume 30, Number 1, 2015, 90 – 92
Book Review:
INVESTMENT ANALYSIS AND MANAGEMENT
An Indonesian Adaptation
Hajanirina Andrianantenaina
University of Antananarivo, Madagascar
(hajasan7@gmail.com)
“Just say no!” Investing is necessary how-
ever, and one’s choices and decisions are more
important. Harmful choices and bad decisions
might be sourced from a lack of fundamental
investment concepts and practices by which
educated people (even university professors) or
public officials (members of the Indonesian par-
liament) might be tempted to invest in scams and
fraudulent offers ending in deception. Lured by
the offer of higher rates of return on investments,
they only lead to regret, and psychological,
moral and physical torture, as evidenced in the
case of some investors in Indonesia. Daily,
whoever the person is, destined to invest in any
form. From the very beginning, students are
helped by this book to understand some prin-
ciples and concepts of investment through
investigations into investment disciplines written
by investment managers.
This adapted-for-Indonesia version entitled:
“Investment Analysis and Management, An
Indonesian Adaptation” is based mainly on
Charles P. Jones’s work, and is similar to his
previous volumes, including among others,
“Investments Principles and Concepts”. Charles
P. Jones is a lecturer at the Department of Busi-
ness Management, North Carolina State Univer-
sity whose main teaching interests are invest-
ments, managerial finance, risk management and
money and capital markets. Co-authored by
Indonesian lecturers Sidharta Utama, Budi Fren-
sidy, Irwan Adi Ekaputra and Rachman Untung
Budiman from the University of Indonesia,
Faculty of Economics and Business, who have
among their other interests investment as an item
for research and teaching.
Basically, this book serves to provide an
introduction to investments. Offering funda-
mental investment concepts and practice, it aims
to elaborate a framework for beginners to man-
age their portfolio. It attempts to describe invest-
ment as one whole discipline; however, it then
scrutinizes separate particular elements of
investments in the capital markets. Its main goal
is to unveil the confusion in international invest-
ments by illustrating foreign cases. Hence, this
work offers both Indonesian and foreign evi-
dence to explain the standard concepts.
INVESTMENT AND THE INDONESIAN
CASE
Throughout the seven parts, it deals with
investments as the “commitment of funds” made
by an individual or institution to one or more
assets, held over some future period of time that
needs management of these funds (wealth). The
discipline is then the study of the investment
process. Thus, that definition is applied univer-
sally, regardless of the geographical and political
area. Investment is for the future but decided at
the present moment, it could end suddenly, or
remain for a life time to guarantee our old age.
Risk is one major component after return, and
both need a trade-off. Investors should not forget
ethical behaviour, which plays on the investment
process integrity. In Indonesia, at least twenties
of financial assets could be invested in the form
of direct and indirect investments. This book
exhibits these Indonesian tradable assets in well
classified groups, which consist of non marketa-
ble securities (saving and certificates of deposit),
money markets (SBI: Sertifikat Bank Indonesia,
negotiable certificates of deposit, commercial
papers, Eurodollars, repurchase agreements,
banker’s acceptances), capital markets [(1) fixed
income, composed of bonds: from the govern-
2015 Andrianantenaina
ment known as SUN: Surat Utang Negara, gov-
ernment retail or ORI: Obligasi Ritel Indonesia,
and corporate bonds, (2) equities composed of
preferred and common stocks], the derivatives
markets (options and future contracts for certain
commodities). As far as indirect investment
assets are concerned, as reported on page 25 in
the book, these are the investment companies for
unit trust investments for the open end, and
money market mutual funds, stocks, bonds and
income funds for the close end, and exchanged-
traded funds.
For educational purposes, this book is a
breakthrough for institutions and universities
intending to go global without losing the Indone-
sian evidence. This work becomes a turning
point in international collaboration among aca-
demics and universities to adjust, improve and
develop Indonesian educational levels and stan-
dards. The book is practical as its technical terms
can be understood in the Indonesian concept,
local data were explored using the Indonesian
Stock Exchange (IDX), instead of the NYSE or
NASDAQ (page 125). It motivates Indonesian
students to be proud of their systems and the
mechanisms for investment, even though they
differ from those in the US, the Indonesian sys-
tems for financial assets and markets are explor-
able. This might be recommended reading mate-
rial since not only theories are elaborated, but
rubrics for checking ones understanding, and
problems and summaries to practice terminate
each chapter.
A NEED FOR A MORE COMPLETE,
ADAPTIVE AND UPDATED VERSION
It is evidently a pedagogical oriented book,
but it lacks practical guidance for investors,
while intending to guide investing in Indonesia,
and mostly it does not offer any suggestion for
the solution to the thinking behind “just say no!”
Yet, this book is devoted to investment, it pro-
vides explanations on risks, but does not offer
solutions to the “other risks” that might really be
faced in Indonesia which academics and practi-
tioners, regardless of education, social class, or
political party must take into account. The book
only deals with the common standard risks:
91
interest rate risk, market risk, inflation risk,
business risk, financial risk, liquidity risk,
exchange rate risk and provides only a snapshot
of country risk (page 143). Among the above
mentioned securities, no distinctive practical
explanation has been made as to how an investor
may approach an investment choice to avoid the
detrimental effects of the offer provided.
It seems the US cases (eg. page 409-412,
Coca-Cola), references, figures, illustrations and
text still dominate this book while referring to
the Charles P Jones “Investment Principles and
Concepts” work. Indonesian references are
mostly, “Indonesian style” and evidence is still
lacking for this adapted version.
The title might have the words “fundamen-
tal” or “basic principle” added. There are discus-
sions about some theories that this book does not
consider. For instance Markowitz’s approach
(Markowitz, 1952) in chapters 7-8 on pages 175
- 228, discussions on short sales, additional costs
(brokerage fees, leverage costs, taxes and poli-
cies) are not explained in these passages (Pogue,
1970). Similar to the CAPM model; Sharpe
(1964), this theory has its own limitations, as it
only considers the market risk as the main factor
for estimating returns, Fama and French (2004).
In terms of market efficiency (Fama, 1970), the
Indonesian market is not well developed for the
current situation. No analysis on behavioural
finance related to the Indonesian investors’ atti-
tudes is provided. Are they risk takers? Do they
share the same position of selling too soon the
winning stocks, or holding on to for too long to
the losing ones? Shefrin and Statman (1985) and
Garvey and Murphy (2004).
This initiation is expected to revive Indone-
sian literature and provide material to develop
educational backgrounds related to the multi
dimensional context (Indonesia - US and the
world). This book serves students in Indonesia
(local and international students), by helping
them to understand the local mechanisms for
investment. Students, lecturers and investors are
recommended to read this book, to get fresh
ideas into the world of investment analysis and
management. However, a new updated and more
adaptive version is needed.
92 Journal of Indonesian Economy and Business
REFERENCE
Fama, E.F., and French, K.R., 2004. The Capital
Asset Pricing Model: Theory and Evidence.
Journal of Economic Perspectives, 18(3),
pp.25-46.
Fama, E.F., 1970. Efficient Capital Markets: A
Review on Theory and Empirical Works.
The Journal of Finance, 25(2), pp.383-417.
Garvey, R. and Murphy, A., 2004. Are Profes-
sional Traders too Slow to Realize their
Losses? Financial Analysts Journal, 60(4),
pp.35-43.
Jones, C.P., 2010. Investments Principles and
Concepts. 11th ed. International Student
Version. Asia: John Wiley & Sons, Inc.
Jones, C.P., Utama, S., Frensidy, B., Budiman,
R.U., 2009. Investment Analysis and Man-
January
agement (An Indonesian Adaptation). 10th
ed. Indonesia: Penerbit Salemba Empat.
Pogue, G. A., 1970. An Extension of the Mar-
kowitz Portfolio Selection Model to Include
Variable Transactions' Costs, Short Sales,
Leverage Policies and Taxes. The Journal of
Finance, 25(5), pp.1005-1027.
Sharpe, W.F., 1964. Capital Asset Prices: A
Theory of Market Equilibrium Under Con-
ditions of Risks. The Journal of Finance,
19(3), pp.425-442.
Shefrin, H., and Statman, M., 1985. The Dispo-
sition to Sell Winners too Early and Ride
Losers too Long: Theory And Evidence.
The Journal of Finance, 40(3), pp.777-790.
2015 About the Authors
ABOUT THE AUTHORS
Ananda Sabil Hussein is a lecturer and re-
searcher at the Department of Management,
Faculty of Economics and Business,
Universitas Brawijaya Malang. He earned
his Doctoral major in Marketing at the
Faculty of Agribusiness and Commerce,
Lincoln University, Canterbury, New
Zealand and his Master of Strategic Mar-
keting from the Faculty of Commerce,
University of Wollongong, Australia. His
bachelors degree was gained in the area of
management at Universitas Brawijaya. His
research areas cover strategic marketing,
social marketing, tourism management and
consumer behavior. During his career as an
academic he has published some articles in
reputable journals such as GAMA Interna-
tional Journal of Business, the Journal of
Human Resources in Hospitality and Tour-
ism and the European Journal of Tourism,
Hospitality and Recreation. He has served in
some managerial positions at the Universi-
tas Brawijaya. Currently he is the head of
the international program at the Department
of Management, FEB-UB. Apart from his
role as an academic, he also serves society
by providing consultations in business and
management particularly in the area of hotel
management.
Anastasia Sri Mendari is a lecturer at the
Departement of Management, Faculty of
Business and Accounting, Universitas
Katolik Musi Charitas Palembang. Her re-
search interests are mainly in the areas of
entrepreneurship , personal finance, finan-
cial behavior, and financial literacy.
Fransiska Soejono has been a lecturer at the
Departement of Management, Faculty of
Business and Accounting, Universitas
Katolik Musi Charitas Palembang since
93
2002. She earned her Bachelor’s Degree in
Management from STIE Malangkucecwara
Malang, and her Master of Science Degree
from Universitas Gadjah Mada Yogyakarta.
Her research interests are mainly in the
areas of entrepreneurship, and the financial
management of state owned companies.
Hajanirina Andrianantenaina is a Doctoral
student at the Faculty of Economics and
Business, Gadjah Mada University, Yogya-
karta. He was a lecturer’s assistant in
teaching at Atma Jaya University Yogya-
karta, UAJY and is a research assistant for a
lecturer at Gadjah Mada University. His
research interests encompass finance, man-
agement, and financial economics. He grad-
uated from Atma Jaya University Yogya-
karta, UAJY obtaining his Masters of Man-
agement M.M. degree from the Faculty of
Economics. He earned his Bachelor of
Science degree from the Faculty of Law,
Economics, Management and Sociology
(Faculté DEGS - Faculté de Droit, d'Eco-
nomie, de Gestion et de Sociologie -
Département Gestion) and his Bachelor of
Arts degree from the Faculty of Letters and
Humanities (FLSH - Faculté des Lettres et
Sciences Humaines - Département d'Etudes
Anglophones), both from the University of
Antananarivo, Madagascar.
Heni Wahyuni is a lecturer and researcher at the
Faculty of Economics and Business,
Universitas Gadjah Mada (FEB UGM). She
earned her Bachelors Degree in Economics
and Development Studies from UGM, her
master’s degree from the Australian Na-
tional University, and a Ph.D. in Economics
from the University of Technology, Sydney,
Australia. Her interest is in health econom-
ics and development economics. Currently,
94 Journal of Indonesian Economy and Business
she is a researcher in Research and Training
in Economics and Business (P2EB), Centre
of Economics Studies and Public Policy
(PSEKP), and a collaborate researcher with
the Faculty of Medicine, UGM She also
publishes some articles in journals and is
active in international conferences on health
economics.
Herlina Primarisanti is a civil servant at
Kementerian Agraria dan Tata Ruang/Badan
Pertanahan Nasional. She graduated from
the Faculty Economics and Business,
Universitas Gadjah Mada with a master’s
degree. She is interested and involved in
research related to public sector accounting.
Kusdhianto Setiawan, is a lecturer in the
Departement of Management, Faculty of
Economics and Business, Universitas
Gadjah Mada. He earned his bachelor’s
degree from UGM, his master’s degree from
Agder University College, Norway, and his
P.hD at the Hiroshima University of Eco-
nomics, Japan. He has had several articles
published in journals, mainly on finance
related topics, such as The Household Con-
sumption Smoothing Through Equity
Investment in the United States and Japan:
an Empirical Examination of the Consump-
tion-Capital Asset Pricing Model (C-
CAPM). International Journal of Econom-
ics and Business Research (IJEBR)
http://www.inderscience.com/info/inarticle.
php?artid=57955, Vol.7, No.1, p.72-103;
Global Stock Markets Landscape: An
Application of Minimum Spanning Tree
Technique. International Journal of Opera-
tional Research (IJOR). Publisher: Inders-
cience (UK) , Vol.20, No.1, p.41-67; Stock
Market Integration: Are Risk Premiums of
International Assets Equal?. Gadjah Mada
International Journal of Business, Vol.16,
No.1, p.39-53; Public Firm's Background on
the Performance-Governance Relation: Evi-
dence from Indonesia. Journal of Indone-
sian Economy and Business, Vol.28, No.3,
p.399-390; etc.
January
Raditha Hapsari is a doctoral candidate and a
teaching assistant at the Faculty of Agribu-
siness and Commerce, Lincoln University,
Canterbury, New Zealand. She holds a
bachelors degree and a masters degree from
Universitas Brawijaya, majoring in financial
management and human resource manage-
ment, respectively. Currently she is pur-
suing her PhD in Marketing, and her thesis
is focused on the services marketing area.
She has co-authored several articles, pub-
lished in quality-assured journals and has
given presentations at several International
conferences.
Rusdi Akbar is a lecturer at the Faculty of Eco-
nomics and Business, Universitas Gadjah
Mada. He earned his Bachelors Degree in
Accounting from the Faculty of Economics
and Business, Universitas Gadjah Mada and
a Masters Degree in Accounting from the
University of Kentucky, United States and
his Ph.D from Curtin University. He is in-
terested and involved in research related to
Accounting.
Stephanus Eri Kusuma earned his bachelor’s
and master’s degrees from Universitas
Gadjah Mada. He is an independent
researcher, his focus and interest being in
economics and development studies. He has
worked with some research institutions in
Universitas Gadjah Mada (UGM) and
Universitas Sanata Dharma (USD), includ-
ing the Research and Training in Economics
& Business program, Faculty of Economics
and Business, UGM, the Center for Eco-
nomics & Public Policy Study, UGM, and
the Center for Environmental Studies, USD.
He has been involved in research and coun-
selling projects related to microfinance and
SMEs, cooperatives, REDD+ benefit shar-
ing, and industrial analysis. His most recent
international publication was On The In-
quiry of the Most Optimal Networking for
BPD Regional Champion (BRC) to Support
Financial Inclusion, 2013 (co-authored with
Pradiptyo, et al.). He also published a book
entitled Ekonomika Industri: Pendekatan
2015 About the Authors
struktur, analisis dan kinerja, 2014 (co-
authored with Lincolin Arsyad).
Vera Pipin Wulandari. Bachelor’s Degree in
Financial Management from UGM in 2014.
She has been worked in the Ministry of
Finance, Republic of Indonesia’s Directo-
rate General for the Treasury since February
2015.
Wihana Kirana Jaya is a lecturer at the
Department of Economics, Faculty of Busi-
ness and Economics, Universitas Gadjah
Mada (UGM). Currently he serves as the
Dean, Faculty of Business and Economics
UGM. He earned his bachelor’s degree from
UGM, master’s degree from the University
of Birmingham, England, and his doctoral
degree from Monash University, Australia.
His research interests are in regional eco-
nomics, monetary economics, and institu-
tional economics. He has published some
.
95
books/chapters and several papers/articles,
mainly on regional autonomy & finance,
decentralisation, and institutional issues.
These include Fiscal Decentralisation and
Institutions, 2012; Institutional Change and
Business Perceptions at the Regional Level
in Indonesia, 2011; The Role of the State in
the case of Indonesia Local Tax Reform,
2007; Brief Reflection on Indonesia Decen-
tralisation: Flip-Flop Pattern?, 2006; Dys-
functional Institutions in the case of Indone-
sia Regional Government Budget Process,
2005; New Institutional Economics of The
State: An Alternative Approach to Regional
Autonomy in Indonesia, 2004; Institution
Matters in Regional Autonomy Transition,
2003; Regional Autonomy in Indonesia,
2002; The Latest Crisis of Regional Auton-
omy in Historical Perspective, 2001; Fiscal
Decentralisation and Its Impacts on Local
Government Revenue, 2000.
96 Journal of Indonesian Economy and Business January

INDEX

age, 30, 31, 35, 36, 37, 38, 39, 40 health production function, 72, 75, 76, 86
characteristics, 30, 31, 32, 33, 35, 36, 38, 40 infant health production function, 72, 76, 77, 79,
83, 85, 86
competency, 30, 31, 35, 36, 37, 38, 39, 40
prenatal care, 72, 78, 79, 80, 81, 82, 83, 84, 85,
entrepreneur, 30, 31, 32, 33, 34
86, 87, 88, 89
performance, 30, 31, 33, 34, 35, 36, 37, 38, 39,
product diversity, 1, 2, 4, 5, 6, 8, 9, 10, 12
40
microfinance institutions, 1, 12, 13, 14
hot and cold market, 42, 43, 44, 47, 48, 50
performance, 1, 2, 3, 4, 5, 6, 7, 8, 10, 11, 12, 13,
leverage, 42, 43, 44, 45, 46, 47, 51, 52
14
market timing theory, 42, 43, 44
image, 17, 18, 19, 20, 21, 24, 25, 26, 27, 28, 29
market to book ratio, 42, 44, 46, 47, 48
loyalty, 17, 18, 19, 20, 21, 24, 25, 26, 27, 28, 29
performance accountability, 56, 57, 58, 59, 60,
service quality, 17, 18, 19, 20, 21, 24, 25, 26, 27,
61, 63, 66, 67, 68, 69
28, 29
performance measurement system, 56, 57, 58,
bank, 17, 21, 23, 24, 26
60, 62, 63, 66, 67, 68, 69, 70
BUKPs, 1, 2, 6, 8, 12, 15, 16
the used of performance information and mixed
methods, 56, 57, 71 CUs, 1, 2, 3, 6, 7, 8, 12, 15, 16
Grossman model, 72, 73, 75, 76, 77
2015 Previous Abstracts 97

PREVIOUS ABSTRACTS
JOURNAL OF INDONESIAN ECONOMY AND BUSINESS
VOLUME 29, NUMBER 3, 2014

INTERNET SEARCH TRAFFIC AND ITS INFLUENCE ON

LIQUIDITY AND RETURNS OF INDONESIA STOCKS:
AN EMPIRICAL STUDY
Berto Usman & Eduardus Tandelilin

ABSTRACT
The development of advanced information technology has become a standard in the process of improving
corporate value. This is seen through the high level of investors’ awareness of the brand and information that
company holds (Da, Engleberg, and Gao, 2011; Bank, Larch, and George, 2011; Joseph, Wintoki, and Zhang,
2011). Among the information providers, internet plays an important role not only in accessing information, but
also as a medium that can be applied to publish a wide range of financial reports or news to attract investors.
This study aims to examine the effect of investors’ attention towards returns, liquidity and volatility of stock
returns. The results indicate that investors’ attention which is represented by Google Insight contributes
positively and significantly to the explanation of returns, liquidity, and volatility of stock returns in Indonesian
manufacturing firms. Also, the phenomenon of information technology usage can be one of the considerations
for investors in order to discover what types of company’s criterion that is appropriate to be included in their
investment portfolio.
Keywords: investors’ attention, returns, liquidity, volatility of stock returns

MONETARY AND FISCAL POLICY ANALYSIS:

WHICH IS MORE EFFECTIVE?
Muhamad Yunanto & Henny Medyawati

ABSTRACT
Fiscal policy is an adjustment in the income and expenditure of government as stipulated in the state budget
in order to achieve better economic stability and pace of development. The main objective of this study was to
measure and analyze Fiscal and Monetary Policy of the Gross Domestic Product (GDP). Fiscal Policy
Multiplier (FPM) and Monetary Policy Multiplier (MPM) are used to answer the debate where more effective
between fiscal policy and monetary policy. Short-term models derived through error correction model (ECM),
which also forms the derivative equation. A system of simultaneous equations two stage least squares (TSLS), is
used to describe the sensitivity analysis (response) of shocks to the policy change of important macroeconomic
indicators. The results showed that during the study period, Indonesia's monetary policy more effective than
fiscal policy.
Keywords: monetary policy, fiscal policy, Mundell-Flemming Model

THE EFFECT OF GCG IMPLEMENTATION AND RISK PROFILE ON FINANCIAL

PERFORMANCE AT GO-PUBLIC NATIONAL
COMMERCIAL BANKS
Sri Haryati & Emanuel Kristijadi

ABSTRACT
The research tests the effect of the risk profile and the application of corporate governance on financial
performance at go-public national commercial bank. The data were taken from their financial statement and
98 Journal of Indonesian Economy and Business January

GCG assessment published during 2008-2010, analyzed using SEM with generalized structured component
analysis (GSCA). It shows that risk profile has no significant and positive effect on the financial performance.
Among the four risk profiles, liquidity risk has the best discriminate validity. However, GCG has significant and
positive effect on the financial performance, and only financial and non financial transparency has the best
convergent validity. Bank's five financial performance indicators have good validity. Beside, ROA, NIM and
CAR have good validity in which ROA has the highest loading estimate.
Keywords: good corporate governance, risk profile, profitability, capital

STUDENT PERCEPTION ON BUSINESS ETHICS

Eko Suwardi, Arika Artiningsih & M. Ridwan Novmawan

ABSTRACT
Many research conducted on the behavior of business persons and their perception on business ethics.
However, rarely similar study deals with the perception of students on business ethics. Indeed, students are our
future generation who are going to have substantial role in Indonesian business and economy. Therefore this
study focuses on students as a proxy for future business players in this country (Trawick and Draden, 1980). We
compare among groups of students based on their maturity, formal business ethic education, gender and specific
professional backgrounds. The results of analysis show that in general students have good perception on
business ethics. Further, there is a significant different perception on business ethics among students with
different academic maturity, professional background. Student with business background are less ethical
compare to those are with non-business background. This may consistent with previous evidence found that
ethical principles need to be introduced more to business students. In contrast, there is no different perception
on business ethics among student with different gender groups and formal business ethics course. This could be
business ethics formal education takes time to be internalized by participants or student with no formal business
ethics course also learn business ethics from other sources.
Keywords: students, perceptions, business ethics

WILLIAMSON MODEL:
AN APPLICATION OF INSTITUTIONAL TRANSFORMATION
IN THE INDONESIAN DGT
Wihana Kirana Jaya, Anggi Rahajeng, & Indra Bastian

ABSTRACT
A reform of tax administration in Indonesia has been carried out in several stages from 1983 to 2009.
However, the changes are limited to the tax system of the DGT, it being the tax governing body in Indonesia,
which has still has not managed to meet the tax revenue target (reflected through a tax ratio). A lack of
authority caused the DGT (DGT) to face some difficulties in reaching the target and demonstrating the
expected performance. The goal of this paper is to stress the needs of institutional transformation in DGT. By
using the Williamson Model, this study focuses on evaluating the DGT institutionally and creating an alternative
institutional transformation of the DGT. The international and domestic results of ascertaining best practices
conclude that the DGT needs to change gradually, not with a ‘big bang’, and by providing the more flexible
authority by remaining in the structure of Traditional Department or Single Directorate in the Ministry of
Finance (SDMOF) which would lead to an organization structure which is semi-autonomous or a Unified Semi-
autonomous Body (USB) that covers all the systems of taxation such as service, assurance, law enforcement and
supporting roles.
Keywords: tax governing body, Indonesian DGT (DGT), institutional transformation, williamson model
2015 Previous Abstracts 99

TEACHING OF BEHAVIORAL AND EXPERIMENTAL ECONOMICS AND

THE PROSPECTS FOR TEACHING IT IN DEVELOPING COUNTRIES:
A SURVEY
Muhammad Ryan Sanjaya

ABSTRACT
The rising trend of behavioral and experimental economics is observed through a survey of the top 100
academic institutions in economics and econometrics. The survey found that this subject is relatively popular
with around 44% of academic institutions offering this course to undergraduate students. Another survey on
publication interest found a surge since 2002 that was experienced by this subject along with only a few other
subjects such as labor economics and business economics. Lastly, four short experiments on undergraduate
students were conducted in Indonesia to explain economics, and this activity seems to support the student-
centered learning that has since became the focus of the Directorate General of Higher Education in Indonesia.
Keywords: behavioral and experimental economics, economics teaching, developing countries
 JOURNAL OF INDONESIAN ECONOMY AND BUSINESS (JIEB)
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technical purpose, use percent in text; for
technical purpose, uses % symbol.
Keywords, four keywords must be provided at
the end of the abstract such that they would
be easier to locate in the index.
ABSTRACT
An abstract, with 100-300 words length, should
be presented on a separate page im-
mediately preceding the text of the manu-
script. An abstract should be relatively non-
mathematical, and provides the details
about the paper’s purposes, research
methods and findings as well as its
contributions. Neither the author’s name nor
his/her affiliation should appear on the
abstract page.
TABLES AND FIGURES
Authors should pay attention to the following
format and style:
1. When submitted for review, all tables and
figures (graphs) should be written on
separate pages at the end of manuscript.
Each table or figure should be numerically
numbered and fully titled, which refer to the
contents of the table or figure.
2. References for each graph should be men-
tioned in manuscript without any exception.
3. Graphs should be easily interpreted without
referring to the text.
4. Lines that refer to sources and notes should
be included in the text.
Equations, equations should be numerically
numbered in parentheses with align-right
margin.
DOCUMENTATION
Manuscripts should be cited in a “author-year
system.” Authors should mention the pages of
the referred manuscripts.
 In text, manuscripts should be cited with this
way: last/family name and year in a parenthe-
sis; example: (Andoyo, 1991), for two authors
(Andoyo & Hutabarat, 1992), more than two
authors (Andoyo et al., 1993), two manu-
scripts or more by one author (Andoyo, 1991,
1993).
 To avoid ambiguity, do not use “P”,”pp”, or
“page” before the page number but use colon:
for example: (Andoyo, 1991: 121).
 If there are more than one reference written
by the same author and in a same issue, use
suffix a, b, and so forth after year in a citation;
example: (Andoyo, 1991a) or (Andoyo,
1991a; Hutabarat 1992b).
 If an author’s name is mentioned in a text, it
is unnecessary to be mentioned again in refer-
ence, example: “Andoyo (1991: 121) said ..."
 A quotation that refers to institutional work
should use acronym or abbreviation; example:
(Komite SAK-IAI, PSAK28, 1997).
REFERENCES
Each manuscript should include references
which contain referred texts. Each entry
should contain all required data. Use the
following format:
1. To assure the validity of the references, make
sure that the references provide adequate
information (e.g., volume, number, page,
publisher, city, URL address and accessed
date)
2. For any non-English articles, please write
down the translation of the article in brackets
[ ] after the original article’s title. Note that
the original article should be written in italic.
3. Arrange references alphabetically according
to last/family name of the first author or
institution.
4. Use initial name for author's first name.
5. Issue year should be placed after author’s
name
6. Manuscript’s title should not be shortened
7. If there are two or more manuscripts by the
same author referred in the article, arrange
chronologically according to the year of issue.
Two or more manuscripts by the same author
should be distinguished with a letter (a, b, c,
etc.) immediately preceding date.
Examples of entries are as follows:
For Periodical Issues:
Blum, T. C., D. L. Field, and J. S. Goodman,
1994. “Organization-Level Determinant of
Women in Management”. The Academy of
Management Journal, 37 (4), 467-498.
Palmer, R. J., T. Schimidt, and J. Jordan-
Wagner, 1996. “Corporate Procurement
Cards; The Reengineered Future for Non-
Inventory Purchasing and Payables”. Jour-
nal of Cost Management, 10 (3), 19 – 32.
For Books/Monographs:
Fabozzi, F., and I. Pollack, eds., 1987. The
Handbook of Fixed Income Securities. 2nd
ed. Homewood, IL: Dow Jones-Irwin.
Kahneman, D., P, Slovic, and A. Tversky, eds.,
1992. Judgment Under Uncertainty: Heu-
ristic and Biases. Cambridge, United King-
dom: Cambridge University Press.
For articles in collective works:
Brunner, K. and A. H. Meltzer, 1990. “Money
Supply” in: B. M. Friedman dan F. H. Hahn,
Handbook of Monetary Economics, 1, 357 –
396. Amsterdam: North-Holland.
(For magazines, non-published papers,
dissertations/theses, seminar papers, etc.,
follow the aforementioned guidelines).
Sukarman, W., 2003. “Liberalisasi: Ekonomi-
Politik Perbankan Masa Orde Baru
[Liberalization: Banking Political Economy
during the New Order Era]”, Unpublished
Dissertation, Post-Graduate Programme.
Yogyakarta: UGM.
For internet source(s) with author’s name
Chain, P., 1997. “Same or Different?: A Com-
parison of the Beliefs Australian and Chinese
University Students Hold about Learning’s
Proceedings of AARE Conference”,
Swinburne University. Available at:
http://www.
swin.edu.au/aare/97pap/CHAN97058.html
For internet source(s) without author’s name
Please write the organization's/company’s name,
as shown below:
StatSoft, Inc., 1997. Electronic Statistic Text-
book, Tulsa OK., StatSoft Online. Available
at: http://www.statsoft.com/textbook/
stathome.html, accessed on May 27th, 2000.
Footnote, Footnote cannot be used as a
reference. It should be used only for broad
information that may distract reading
continuity if included in a text. Footnote
should be typed single-spaced and
numerically numbered with an Arabic
superscript numeric, and should be placed at
the end of the text.