An exploratory examination of the factors influencing Indonesian SME\u27s sustainability practices in the textile and chemical industries

All firms have an impact on the environment in which they operate, for example in the exploration and processing of environmental resources to make a profit. Manufacturing firms, in particular have the potential to pollute the environment with dangerous liquid and solid wastes. Small and medium sized enterprises (SMEs) make a significant contribution to the global economy in both developing and developed countries. Individually, SMEs appear to have little environmental impact, but accumulatively, they have a considerable impact, not only economically but also environmentally. However, managing environment impact is not usually core business for SMEs. SMEs often suffer from a lack of internal resources and capabilities. For example they can have limited access to credit given their high risk, limited warranty, and lack of managerial experience or track record in managing aspects such as financial, production, and sales data. In terms of environmental issues, SMEs often attract little attention from the media, although government does support environmental management initiatives. Consequently, SME owner managers can be indifferent to, or unable to implement, sustainability practices. Thus, natural resources become objects of exploitation or over exploitation. Although there are many differences in sustainability definitions, all definitions have at their heart the same objective, that is, how today‘s firms‘ needs are fulfilled such that they do not harm the future. This is evident in definition of sustainability in the business field as ―one that creates profits for its shareholders while protecting the environment and improving the lives of those with whom it interacts‖ (Savitz & Weber, 2006, p.x). Thus, the concept of sustainability is not one which is solely orientated to economic aspects or profit, but also to social and natural aspects, in terms of the triple bottom line (TBL) in undertaking business. Indonesian SMEs in the manufacturing industry are a source of significant employment; however, they suffer a range of issues. The Asian Development Bank (2005) reported that industrial waste and pollution in Indonesia is out of control, while regulation and enforcement by government is completely inadequate. Studies have shown Indonesia‘s chemical based manufacturers contribute to air pollution, contamination of water sources, and depletion of groundwater through improper and illegal disposal of solid and hazardous waste. The focus of this thesis is SMEs sustainability: perceived benefits, drivers for and barriers to sustainability. As such this is a study of the natural, social, and economic dimensions that make up the concept of sustainability in relation to Indonesian SMEs. The literature identifies a range of natural, social and economic factors influencing sustainability and these were collated into a model. Eight case studies of SMEs in the Central Java chemical and textile industries were undertaken to refine the measures in the model of sustainability. The overall sustainability of the case study firms was also assessed while hypotheses were constructed as to the relationships between constructs and firms sustainability practices based on firm types and size, as well as industry. A survey of 215 chemical and textile SMEs was then undertaken to test the refined model and develop a final model. The model was developed using confirmatory factor analysis (CFA) or a measurement model, which included some second order factors for dependent latent variables, and then followed by a structural model which combined each final measurement model. The final model was found to have a high fit (.971 CFI,/df, .041 RMSEA, and .081 RMR) with efficiency as a critical factor influencing sustainability practices. Overall the study found that sustainability practices were not first priority for these SMEs although they were more inclined towards the present interests in the Sustainable Value framework developed by Hart and Milstein (2003). Indonesian SMEs emphasised resource consumption and civil society issues. In terms of the level of sustainability this group of SMEs were found to have moved ‗beyond the level of legal compliance‘ in terms of their sustainability practices. While Hubbard‘s (2009) Sustainability Balanced Scorecard stresses a balance between the economic as well as the natural and social dimensions of sustainability, this balance was not evident for these Indonesian SMEs. The SME owner managers were also more concerned with the social dimension of sustainability and this was at odds with their perception of the government‘s concern being with the natural dimension of sustainability. However moral mandate was evident as a driver for the natural and social dimensions of sustainability as has been found in other studies of SMEs in developed countries such as New Zealand and the Netherland