Research Article: 2019 Vol: 23 Issue: 4
Siti Resmi, Sekolah Tinggi Ilmu Manajemen YKPN
Reza Widhar Pahlevi, Universitas Islam Indonesia
Fran Sayekti, Universitas Teknologi Yogyakarta
This purpose of this study is to test and analyze the effect of financial and taxation literacy on sustainable competitive advantage through business growth. This study uses the source of primary data through questionnaire that is distributed to Creative MSMEs actors in Daerah Istimewa Yogyakarta (DIY). The respondent of this study is 269 Creative MSMEs actors with the population from all Creative MSMEs in DIY. The data analysis uses Structural Equation Modeling (SEM) with AMOS technique. The result of this study proves that financial and taxation literacy has an effect on business growth and competitive advantage. Business growth can mediate the effect of financial and taxation literacy toward the competitive advantage of Creative MSMEs in DIY.
Financial Literacy, Taxation, Business Growth, Competitive Advantage, Creative MSMEs.
The dynamics of MSMEs have provided significant contribution toward the economy in Indonesia. In Daerah Istimewa Yogyakarta (DIY), the MSMEs have provided economical contribution for 95% (http://jogja.tribunnews.com, accessed on Juli 21, 2018). Increasingly competitive market condition and limited natural resources make MSMEs require new breakthroughs by relying on creative and innovative human resources as basic capital in facing free market competition. DIY is rich in traditional culture and diverse characters of its people, so that the creative industry has a big potential to be developed. Creative MSMEs have very high resilience, tenacity, and innovation which make them become very competitive to penetrate global market (Fitriati, 2014). Creative MSMEs often experience delay in its development because there are many conventional problems that have not been resolved completely, such as HR capacity, financing, marketing, and others related to business management that makes it difficult for them to compete with large companies (Abor & Quartey, 2010). Strategic efforts are needed to improve the performance and sustainability of MSMEs. Some literatures prove that the capability of a company in recognizing and accessing financial resources will have an impact on the company’s growth rate (Cole & Fernando, 2008; Bruhn & Zia, 2013). Several studies showpositive finding about the importance of MSMEs in financial and taxation literacy. MSMEs that have good understanding of finance and taxation will generate business growth (Clark, 2014; Xu Zia, 2012; Dunska & Kravinskis, 2016; Bayrakdaroğlua & Şanb, 2014) and competitive advantage (Bayrakdaroğlua & Şanb, 2014; Demirbag, et. al., 2013; Nunoo & Andoh, 2012). Financial literacy is very important for MSMEs, so financial training is required. Managers with higher level of financial literacy show bigger participation in financial market (Beck et al., 2005; Agyei, 2018; Nunoo & Andoh, 2012). Ponorîcă & Al-Saedi (2015) in their study found that the understanding of taxation literacy is closely related to the growth of the company.
On the other hand, there are several studies that are contradictive to those results and show that MSMEs experience many difficulties to improve business growth, especially the one that covers tax costs. Not all taxpayers, including MSMEs, can comply with tax regulation and the right implementation of tax reporting procedure due to lack of understanding of tax regulations (Simanjuntak & Mukhlis (2012). Other findings from Beck et al. (2005); Agney (2018) explained that financial literacy is the main resource of the organization which has not utilized enough although it can improve MSMEs performance through sustainable competitive advantage. Low level of financial literacy can reduce the ability to accumulate and manage assets, and also to ensure a promising financial future (Mottola, 2013; Atkinson & Messy, 2012; Agarwalla, et al., 2015). Potrich, et al. (2015) found that women generally have lower levels of financial literacy compared to men. The study conducted by Demirbag (2013) and Ponorîcă &Al-Saedi (2015) explained that it is difficult for MSMEs to comply with tax due to bad tax morale. This research is also used to fill research gap by testing and analyzing the effects of financial and taxation literacy on sustainable competitive advantage through business growth.
Financial Literacy and Business Growth
Some theoretical and research studies explain that maximum understanding of financial literacy tends to increase business growth of the MSMEs. Muraga (2015) in his research used the variable of debt management, budgeting, bank service, and accounting or recording as financial literacy found that all variables of financial literacy have positive relationship with business performance. Aribawa (2016) found that financial literacy has an effect on performance and business sustainability of Creative MSMEs. It is also added by Lusimbo (2016) that managers with low financial literacy recorded lower, even zero business growth. The finding from Bayrakdaroğlua & Şanb (2014) explained that MSMEs in developing countries, especially Turkey, show an improvement of financial literacy level of manager with financial training. Nunoo & Andoh (2012) found that better financial literacy can provide benefit for MSMEs in increasing demand for financial services, more savings, better risk management, increased intermediation, and accelerating financial development. Drexler et al. (2010) stated that simple training and practical rules can result in improvements that are economically meaningful for MSMEs. Training that is in accordance with basic financial needs is more appropriate and efficient for economic development and business growth of the MSMEs.
Taxation Literacy and Business Growth
Simanjuntak & Mukhlis (2012) explained that not all taxpayers, including MSMEs, can understand the rules or the right implementation of tax reporting procedure due to lack of understanding of tax regulations. Most MSMEs feel that the taxation system is unfair since MSMEs have to pay the same amount as large companies, so the government needs to simplify or create taxation system that is suitable for MSMEs (Ponorîcă & Al-Saedi, 2015). The high level of tax compliance affects the ease of MSMEs taxpayers to become government partners, so that it will not only increase sales (business growth), but also increase costs which will hinder business growth. Tax costs are one of the considerations in determining the type of financing, because when the taxation literacy is good, the company’s growth will also increase.
Business Growth and Competitive Advantage
Cantele & Zardini (2018) found that competitive advantage is affected by business growth. The result of the study from Bashor & Chamdan (2017) stated that manager’s performance, entrepreneurial orientation factor, business growth, and creativity have direct effect on competitive advantage, while manager’s performance positively affects competitive advantage. Aryana, et al. (2017) found that competitive advantage is also able to mediate information system performance and customer intimacy toward marketing performance. Sucuahi (2013) proved that the significant role of MSMEs can be shadowed and maintained through a good and appropriate financial management from the managers/owners themselves. A good financial foundation of entrepreneurs is the barometer of significant company success and growth. Agney (2018) added that financial literacy and cultural values of MSMEs owner are the main sources of the organization that have not been used maximally, while it is actually able to improve MSMEs performance (growth) through sustainable competitive advantage. According to resource-based view, there are many resources owned by a company that can improve its competitive advantage (Das & Teng, 2000). Conner & Prahalad (1996) stated that the level of maintaining competitive advantage by a company depends on their abilities to maintain the heterogeneity of their source of knowledge.
H1: There is an effect of financial and taxation literacy on sustanainable competitive advantage through business growth.
This study uses primary data with questionnaire to strengthen the result of this study. The population of this research is all Creative MSMEs actors in DIY. Creative MSMEs in DIY are chosen because Yogyakarta is a region that is rich in traditional culture and diverse character of its inhabitants, so it encourages the development of the potential of Creative MSMEs. The sampling technique is done using purposive sampling. The method is conducted by taking samples from Creative MSMEs that take part in entrepreneurship training organized by the Office of Cooperative and MSMEs in each district/city in DIY, namely Sleman Regency, Kulonprogo Regency, Gunungkidul Regency, Bantul Regency, and Yogyakarta City. The training by the office is carried out in April 2019.
This study uses primary data by distributing questionnaire to Creative MSMEs in DIY. It is done by taking 20% of the total number of Creative MSMEs in every districts/city. DIY has four districts, namely Sleman Regency, Kulonprogo Regency, Gunungkidul Regency, Bantul Regency, and one city namely Yogyakarta City. The total number of questionnaires collected is 487, but there are only 269 questionnaires that are filled in completely and in accordance with the guidelines. Therefore, the reasonable sample of respondents in this study is 269 Creative MSMEs actors in DIY. The statistic technique that is used to analyze the data is Structural Equation Modeling-AMOS.
Validity and Reliability Test
The validity and reliability test result based on the measurement can be seen on Table 1 below.
| Table 1 Validity and Reliability Test Result | |||||
| Variable | Indicator | Pearson Correlation |
Significance | Conclusion | Cronbach's Alpha |
| Financial Literacy | Item 1 | 0.573 | 0.000 | Valid | 0.838 |
| Item 2 | 0.509 | 0.000 | Valid | ||
| Item 3 | 0.501 | 0.000 | Valid | ||
| Item 4 | 0.648 | 0.000 | Valid | ||
| Item 5 | 0.642 | 0.000 | Valid | ||
| Item 6 | 0.734 | 0.000 | Valid | ||
| Item 7 | 0.753 | 0.000 | Valid | ||
| Item 8 | 0.733 | 0.000 | Valid | ||
| Item 9 | 0.655 | 0.000 | Valid | ||
| Item 10 | 0.649 | 0.000 | Valid | ||
| Taxation Literacy | Item 1 | 0.511 | 0.000 | Valid | 0.894 |
| Item 2 | 0.547 | 0.000 | Valid | ||
| Item 3 | 0.486 | 0.000 | Valid | ||
| Item 4 | 0.552 | 0.000 | Valid | ||
| Item 5 | 0.314 | 0.000 | Valid | ||
| Item 6 | 0.637 | 0.000 | Valid | ||
| Item 7 | 0.395 | 0.000 | Valid | ||
| Item 8 | 0.598 | 0.000 | Valid | ||
| Item 9 | 0.426 | 0.000 | Valid | ||
| Business Growth | Item 1 | 0.702 | 0.000 | Valid | 0.926 |
| Item 2 | 0.788 | 0.000 | Valid | ||
| Item 3 | 0.831 | 0.000 | Valid | ||
| Item 4 | 0.802 | 0.000 | Valid | ||
| Item 5 | 0.788 | 0.000 | Valid | ||
| Item 6 | 0.798 | 0.000 | Valid | ||
| Item 7 | 0.840 | 0.000 | Valid | ||
| Item 8 | 0.601 | 0.000 | Valid | ||
| Item 9 | 0.821 | 0.000 | Valid | ||
| Item 10 | 0.790 | 0.000 | Valid | ||
| Competitive Advantage | Item 1 | 0.311 | 0.000 | Valid | 0.835 |
| Item 2 | 0.756 | 0.000 | Valid | ||
| Item 3 | 0.803 | 0.000 | Valid | ||
| Item 4 | 0.804 | 0.000 | Valid | ||
| Item 5 | 0.813 | 0.000 | Valid | ||
| Item 6 | 0.821 | 0.000 | Valid | ||
| Item 7 | 0.776 | 0.000 | Valid | ||
| Item 8 | 0.741 | 0.000 | Valid | ||
| Item 9 | 0.663 | 0.000 | Valid | ||
| Item 10 | 0.558 | 0.000 | Valid | ||
| *Significance level is at 5%. | |||||
Based on Table 1, it can be explained that the value calculated from all questionnaire items of the research variables namely financial literacy, taxation literacy, business growth, and competitive advantage show probability value (sig) < 0.05. Therefore, it can be concluded that all questionnaire items from the research variables are valid. The Cronbach’s Alpha value is obtained from all results of research variables that show greater value than 0.6 m which means that it is reliable. The result of descriptive statistics of each variable can be seen on Table 2.
| Table 2 Descriptive Statistic Test Result | |||
| NO | VARIABLE | MEAN | CATEGORY |
| 1 | Financial Literacy | 4.22 | Very Good |
| 2 | Taxation Literacy | 3.93 | Good |
| 3 | Business Growth | 4.25 | Very Good |
| 4 | Competitive Advantage | 4.19 | Good |
Table 2 explains that the variable of taxation literacy and competitive advantage have scores in the range of 3.41 to 4.20. This explains that the good understanding of taxation literacy and competitive advantage of Creative MSMEs in Yogyakarta. As for the understanding of financial literacy and business growth, the Creative MSMEs in Yogyakarta perceive good understanding. Furthermore, the model that has been presented in the form of path diagram is stated in structural equations and equation that stated the specification of measurement model. The model testing in the Structural Equation Modeling is carried out with two tests; the fit model test and causality significance test through the regression coefficient test. The fit model test is done with various criteria, namely Chi-square/degree of freedom (CMIN/DF), Adjusted Goodness-Of-Fit Index (AGFI), Goodness-Of-Fit Index (GFI), Comperative Fit Index (CFI), Tucker Lewis Index (TLI), and Root Mean Square Error Approximation (RMSEA).
The result of the fit model test (Table 3) shows that all criteria of the goodness of fit can be accepted although there is a marginal value in AGFI. This marginal value is because the value of GFI and AGFI is on the value range of 0.8-0.9 which means that the model is average. This also describes that almost all of the guidelines in the model have meet the recommended value. Thus, the final model that is developed is fit with the data. Overall, the model can be accepted, and the next step is to analyze the estimate parameter.
| Table 3 The Result Of Fit Model Test | |||
| Criteria | Cut of Value | Result | Information |
| Chi-Square Probability CMIN/DF GFI AGFI TLI CFI RMSEA |
37.65 ≥ 0.05 ≤ 2.00 ≥ 0.90 ≥ 0.90 ≥ 0.95 ≥ 0.95 ≤ 0.08 |
202.677 0.082 1.152 0.891 0.856 0.984 0.986 0.032 |
Good Good Good Average Average Good Good Good |
Based on Table 4, the result of this study shows that the variables of financial and taxation literacy do not have direct effect on competitive advantage variable, but the through business growth variable. This also proves that the hypothesis that is proposed is accepted.
| Table 4 Hypothesis Test Result | |||||
| Standardized direct effect | C.R. | p-value | Test Result | ||
| Equation-1: ZY1 = γ 1.1X1+ γ 1.2X2+ε1 | |||||
| Financial Literacy | Business Growth | 0.617 | 12.737 | 0.000 | Significant |
| Taxation Literacy | Business Growth | 0.150 | 3.106 | 0.002 | Significant |
| Equation-2 : ZY2 = γ 2.1Y1+γ2.2X1+γ2.3X2+ε2 | |||||
| Financial Literacy | Competitive Advantage | 0.252 | 3.571 | 0.000 | Significant |
| Taxation Literacy | Competitive Advantage | 0.037 | 3.651 | 0.015 | Significant |
| Business Growth | Competitive Advantage | 0.337 | 4.802 | 0.000 | Significant |
Table 5 provides concise information about the coefficient price (effect) of the total effect of financial literacy and taxation literacy variables on competitive advantage through business growth variable.
| Table 5 The Total Effect Between Independent Variable on Dependent Variable | |
| Effect Direction | Total Effect |
| X1→ Y1→ Y2 | 0.460 |
| X2→ Y1→ Y2 | 0.088 |
The total effect, direct effect, and indirect effect between Financial Literacy (X1), Taxation Literacy (X2), Business Growth (Y1), and Competitive Advantage (Y2) is presented in Table 6.
| Table 6 Total Effect, Direct Effect, and Indirect Effect Between Exogenous and Endogenous Variable | ||||
| Direct Effect | Indirect Effect | Total Effect | ||
| Business Growth (Y1) | Competitive Advantage (Y2) | Competitive Advantage (Y2) | Competitive Advantage (Y2) | |
| Financial Literacy (X1) | 0.617 | 0.252 | 0.204 | 0.460 |
| Taxation Literacy (X2) | 0.150 | 0.037 | 0.045 | 0.088 |
| Business Growth (Y1) | - | 0.337 | - | 0.337 |
Micro, Small, and Medium Entreprises in DIY is able to provide 95% economic contribution. Increasingly competitive market and limited natural resources make harder condition for the MSMEs, so they are required to make new breakthroughs to create creative and innovative product. DIY is rich in traditional culture and diverse character of its inhabitants, so that creative industry has great potential to be developed. Creative MSMEs often experience delays in their development due to various conventional problems that have not been resolved completely. Strategic efforts are required to improve the performance and sustainability of the Creative MSMEs, such as increasing financial and taxation literacy to increase business growth towards sustainable competitive advantage. The result of this study proves previous research findings that financial literacy and taxation literacy do not have direct effect on competitive advantage variable, but through the business growth variable.
MSMEs will have competitive advantage when they have good literacy in financial and taxation (Muraga, 2015; Aribawa, 2016). However, if MSMEs are reluctant to learn and add knowledge about financial and taxation, it could have significant impact on their business growth (Lusimbo, 2016). The government and universities, especially in developing countries, also need to provide support for MSMEs through various ways, such as training and mentoring (Potrich, et al., 2015). It is because it will give more encouragement to manage the business seriously, can provide satisfying service to stakeholders, and able to manage company risk (Nunoo &Andoh, 2012). It is emphasized that by giving training that is in accordance with the needs of the MSMEs, it will be able to improve economic development and business growth of the MSMEs (Agney, 2018).
Based on the analysis in result and discussion, it can be concluded that both financial literacy and taxation literacy have an effect on business growth and competitive advantage. Business growth can mediate the effect of financial literacy and taxation literacy on competitive advantage of Creative MSMEs in DIY. If business actors in the MSME sectors (Creative MSMEs in this study) have the adequate ability of financial and taxation literacy, the financial and business decision that is determined will be directed to better development from time to time, will improve the company ability to survive in the midst of crisis, and make the business has long-term sustainability. MSMEs have unique characteristics to face the changes of business environment and stakeholders. This business sector tends to work together than compete in the relationship between its business actors. Knowledge sharing to MSMEs should be done not only from the government, academician, or bigger business, but also between the MSMEs themselves, because it can be the main factor of MSMEs success in developing in global market era. It is very important to understand that intra-MSME cooperation is necessary to achieve complementary capabilities.
Research team would like to express gratitude to the Directorate of Research and Community Service, Directorate General of Research and Development at the Ministry of Research, Technology, and Higher Educatin in providing financial assistance during the research output process in the Basic Research Grant 2019/2020 scheme.