International Journal of Logistics Research and

Applications
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Innovation and productivity: insights from

Malaysia's logistics industry

Wai Peng Wong, Keng Lin Soh & Mark Goh

To cite this article: Wai Peng Wong, Keng Lin Soh & Mark Goh (2015): Innovation and
productivity: insights from Malaysia's logistics industry, International Journal of Logistics
Research and Applications, DOI: 10.1080/13675567.2015.1077942

To link to this article: http://dx.doi.org/10.1080/13675567.2015.1077942

Published online: 11 Sep 2015.

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 International Journal of Logistics: Research and Applications, 2015
http://dx.doi.org/10.1080/13675567.2015.1077942

Innovation and productivity: insights from Malaysia’s

logistics industry
Wai Peng Wonga∗ , Keng Lin Soha and Mark Gohb
a School of Management, Universiti Sains Malaysia, Penang, Malaysia; b School of Business IT and
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Logistics, and Platform Technologies Research Institute, RMIT University, Melbourne, VIC, Australia

(Received 9 May 2014; accepted 27 July 2015)

Efficient logistics is critical to a country’s trade competitiveness. This paper uses the Data Envelopment
Analysis Malmquist Index that includes an innovation component comprising three dimensions (input,
process, and output), to assess the impact of innovation by third-party logistics (3PL). We treat the panel
data of asset-based 3PL in Malaysia from 2007 to 2012. Three findings hold. First, innovation is not
always accompanied by productivity gains. Second, innovation is still lacking in the logistics industry
in Malaysia. Third, 3PL need to invest more in technology and stay financially healthy to accelerate the
diffusion of innovation under a more competitive cost structure. This paper has two contributions. First,
we offer an enhanced methodology for total factor productivity by including an innovation component
and apply it for the first time to the logistics industry. Second, we augment the performance measurement
literature specific to the logistics industry and our research suggests that the antecedents of productivity in
logistics companies are investment and financial strength. These productivity–innovation findings provide
insights into Malaysia’s logistics industry and may be helpful for economies similar to Malaysia.

Keywords: logistics; innovation; productivity; data envelopment analysis (DEA); Malmquist

1. Introduction

The amount spent on logistics-related activities form a substantial portion of a country’s gross
domestic product (GDP) (World Bank 2012). The logistics spend to GDP is important for for-
eign direct investments as this points to the robustness of a country’s logistics and supply chain
system. As such, the logistics cost per GDP proxies logistics efficiency and hence indicates a
country’s trade competitiveness. Further, third-party logistics (3PL) is an important lever affect-
ing a firm’s productivity (Bouton et al. 2010). In a highly competitive and dynamic landscape,
the ability of a 3PL to innovate to cope with an uncertain business environment is critical for
enhanced firm performance (Silvia et al. 2013).
Noting the increasing importance of the logistics sector in Malaysia, the Malaysian Logistics
Council (MLC) was formed in 2007 to exercise the overall coordination of strategies, policies,
and regulations for the logistics sector, and to cope with the demand on logistics spurred by
the opening of Malaysia’s Economic Corridors (e.g. Northern Corridor Economic Region, East
Coast Economic Region, and the Iskandar Region). As noted in December 2013 (Kang 2013),
the MLC revealed that logistics spend in Malaysia is 13% in relation to the GDP, higher than
the 7–9% reported for developed economies. Further, the logistics industry in Malaysia has

*Corresponding author. Email: wongwp@usm.my

© 2015 Taylor & Francis

 2 W.P. Wong et al.

been de-regulated through the Competition Act 2010 and is expected to drive firm efficiency.
Therefore, this research is timely to detect any shifts in firm efficiency to more productive levels.
While there is interest in measuring the efficiency of the 3PL, the literature appears focused
only on productivity change. So far, studies on the relationship between innovation and logistics
performance are scant (Wuttke et al. 2013). Examining the role of innovation within the 3PL
is only a recent focus of research in developed countries (Cheng et al. 2013). Prior research
has chosen to examine innovation through a qualitative or empirical lens (Scott 2009) rather
than linking innovation to logistics operations efficiency or productivity (Wu 2006). Following
Miguéis et al. (2012), we apply the non-parametric Data Envelopment Analysis (DEA) to mea-
sure total factor productivity (TFP) and innovation. Our sampling frame comprises 3PL from
Malaysia, a developing country, where such studies are scarce.
This paper has two contributions. First, we offer an enhanced method for TFP (i.e. we include
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an innovation component) and apply it for the first time to the logistics industry. In so doing, we
directly assess the impact of the innovation delivered by a 3PL on firm performance. Second,
we augment the performance measurement literature specific to the logistics industry, where
our research suggests that the antecedents of productivity in the 3PL of a developing country
are investment (e.g. in technology and human capital) and financial health. The findings of this
study can help economies similar to Malaysia to prepare their logistics sector for better sectorial
performance and productivity gains through innovation.
The rest of the paper is organised as follows. Section 2 contains the literature on logistics per-
formance and the measurement tools. Section 3 discusses the research design. Section 4 presents
the findings. Section 5 discusses the managerial insights and implications of the findings while
Section 6 concludes with some suggestions for future research.

2. Theoretical background

There is much recent literature on the performance of 3PL. Of particular interest is the research on
the technical efficiency and productivity of 3PL, which mainly uses four methodologies: para-
metric stochastic frontier (Pels, Nijkamp, and Rietveld 2003), non-parametric frontier (Meade
and Sarkis 2002), semi-parametric stochastic frontier (Korpela, Lehmusvaara, and Nisonen
2007), and index numbers (Eraqi, Khader, and Mustafa 2009). A brief word about these four
techniques is helpful here. Parametric frontiers require strong assumptions on the underlying
production technology while the methodologies based on the non-parametric techniques and
index numbers require no specification of the functional form.
While these tools measure logistics performance, they do not provide firms with an innovation
view on productivity performance, and what could undermine sustainable development. As 3PL
are directly engaged in the provision of services, how they cope in a competitive business envi-
ronment through innovation is thus fundamental to productivity and performance (Scott 2009).
For instance, it would be useful to know how radio-frequency identification (RFID) innovation
has upped productivity for the smaller 3PL, less the financial commitment to the technology.
A search of the literature reveals a dearth of empirical work on both innovation and productiv-
ity performance. In what follows, we analyse the 3PL in Malaysia using a DEA-based approach,
to allow us to decompose the productivity index into three components: efficiency change
(EC), scale effect change, and technical change. We then insert various aspects of innovation
into a typical production function, thus identifying the components of a change in productiv-
ity as a variation in innovation, efficiency, and scale. Such insights can have implications for
management-seeking strategies to improve performance.
With our focus on Malaysia’s logistics industry, we note the recent liberalisation initiatives in
Malaysia. These initiatives have impacted both the logistics industry as well as the services
 International Journal of Logistics: Research and Applications 3

sector. The liberalisation of services and logistics, especially Malaysia’s commitment to the
Association of South-East Asia Nations (ASEAN) framework agreement on services, World
Trade Organisation, and free trade agreements require the review of policy and regulations to
deflect competition. Industry practices such as ‘just-in-time’ and ‘point-to-point’ delivery that
demand accurate and timely delivery as well as the integration of the various transport modes
to provide a seamless connection have altered the logistics landscape. These changes and the
Competititon Act 2010 could influence and spur innovation for greater productivity within the
industry. Malaysia as an ASEAN member is also urged to encourage the progressive liberalisa-
tion of the logistics sector, to enable them to respond better to the opportunities available within
ASEAN and foster competitiveness (Banomyong, Cook, and Kent 2008).

3. Research design
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We now present the data and variables used in the study, followed by a discussion on the method
for assessing productivity change and innovation.

3.1. Data and variables

3.1.1. Inputs and outputs

Cui, Su, and Hertz (2012), in providing a detailed treatment of the definitions of a 3PL, conclude
that the 3PL concept is blurred by the overlap of definitions and meanings. This echoes that of
Vasiliauskas and Jakubauskas (2007) who describe a 3PL as a broader term that is frequently
used to cover businesses in freight forwarding or contract logistics. Similarly, a 3PL is described
as a bundle of transport, warehousing, and related logistics and information technology services
(Pasadilla and Findlay 2014). As such, we use 3PL interchangeably with the freight forwarders
to describe the service offerings or logistics activities (Sgouridis 2003). For uniformity in com-
parison, we measure the productivity of the 3PL using financial variables (Zhou et al. 2008),
which every 3PL would have and report.
Next, the sampled list of the 3PL was obtained from the Malaysia Logistics Directory
2011/2012 and only the asset-based 3PL are chosen. This listing was adopted as it is the most
comprehensive and updated, and it is endorsed by the Ministry of Transport Malaysia and the
Federation of Malaysian Freight Forwarders. The financial data set was obtained from WORLD-
SCOPE (Thomson Datastream Database). The inputs used are total asset, operating expenses,
current liabilities (CLs); the output is operating income. The input, total asset, includes facilities
and equipment (e.g. warehouses, terminals, trucks, planes, trailers, containers, and computers);
operating expenses include personnel cost, variable costs such as fuel, vehicle parts, tires, licens-
ing fees (including software), utilities, taxes, insurance premiums, and document processing fees.
CLs are a major source of financing the current assets in a firm. A lower CL standing reflects
better financial health.
As for the output, the overall firm performance of a 3PL can be measured by the operating
income which best reflects the operational efficiency or productivity of a 3PL. We denote oper-
ating income as the amount of profit realised from a 3PL’s operations; this excludes operating
expense (such as the cost of goods sold) and depreciation. Operating income is used to compute
the operating margin to measure a 3PL’s operating efficiency. Thus, operating income is useful
for comparing the quality of a 3PL’s earnings (Zhou et al. 2008).
Innovation as a process involves diffusion and adoption (Abernathy and Clark 1985) and cre-
ates a complex systemic process at that (Koberg, Detienne, and Heppard 2003). Thus, our paper
positions innovation as a multi-faceted and complex systemic concept with building blocks
 4 W.P. Wong et al.

dynamically linked to produce organisational performance (Rao and Weintraub 2013), which
is based on Carayannis and Provance’s (2008) composite innovation index and is denoted by
the three ‘moments’ of a firm’s innovativeness: inputs moment, process moment, and output
moment. Given the complex, iterative, and systemic process, this paper offers an objective way
of representing these moments in financial terms. This approach of using financial terms is rein-
forced by Zhou et al. (2008) who note that weak 3PL in China would face a bleak future unless
operational efficiency is improved through financial management.
This study uses financial numbers which are representative of the cumulative effect of all
factors in a firm. The savings and efficiencies, and likewise the wastages or inefficiencies, are
captured in the balance sheet and the profit and loss statements. While the non-financial factors
contribute to a firm’s financial health, they usually manifest as team work, motivation, corporate
citizenship, and leadership. The impact of these non-financial factors would have ‘seeped’ into
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and been captured in the financial numbers. Therefore, the financials would have incorporated all
the systemic processes and effects. Further, the financial terms are also parsimonious in nature
as advocated by Sekaran and Bougie (2010).

3.1.2. Innovation

The literature introduces various types of innovation: ‘degree of newness’ innovation (Garcia and
Calantone 2002), technological innovation (Dalton, Barnes, and Zaleznik 1968; Green, Gavin,
and Aiman-Smith 1995), administrative innovation (Elenkov, Judge, and Wright 2005; Teece
1980; Daft 1978), product and process innovation (Damanpour 1987; Salavou and Lioukas 2003)
with Veryzer (1998) presenting product innovation as a two-dimensional approach, process inno-
vation (Reichstein and Salter 2006), incremental innovation and radical innovation (Baker and
Sinkula 2007; Bröring and Herzog 2008; Green, Gavin, and Aiman-Smith 1995; Hurmelinna-
Laukkanen, Sainio, and Jauhiainen 2008; Kim, Kumar, and Kumar 2012; Koberg, Detienne, and
Heppard 2003; Salavou and Lioukas 2003), break-through innovation (Sandberg 2007), disrup-
tive innovation (Lynn, Reddy, and Aram 1996; McDermott and O’Connor 2002; Veryzer 1998;
Walsh and Linton 2000), pioneering innovation (Ali 1994), and marketing innovation (Halpern
2010; Johne 1999; Li 2000).
It is therefore no surprise that Chapman, Soosay, and Kandampully (2003) describe innovation
as a myriad of ideas. Garcia and Calatone (2002) provide 15 categories, ranging from product
superiority to product complexity. Furthermore, they consider innovation and innovativeness as
distinctly different. The OECD (2005) has categorised innovation into four areas namely prod-
uct innovation, process innovation, organisational innovation, and marketing innovation. This
abundance of innovation definitions has led Garcia and Calantone (2002) to conclude that ‘there
is a lack of consistency in operationalizing innovation resulting in the interchangeable use of
innovation and innovativeness constructs to define innovation types and therefore filled with
incongruent categorizations leading to an identification crisis’.
The domain of logistics is not spared either. The definitions of logistics innovations have no
common and consistent meaning across a firm. Logistics innovation can encompass technologi-
cal development, services, and service product innovations (Oke 2008). Research on innovation
has also led research such as Rao and Weintraub (2013) down the path of innovation culture
studies. Their study portrays innovative culture as resting on six dynamically linked building
blocks comprising resources, processes, values, behaviour, climate, and success. With resources
leading the list and with Chapman, Soosay, and Kandampully (2003) claiming that innovation in
logistics services can be achieved by deploying a firm’s resources to induce innovation, it is clear
that the theoretical underpinings are predicated on the Resource-based View and the Resource
Dependence Theory. These resources are formed as a result of inputs and investments within the
firm. This concurs with Carayannis and Provance (2008)’s ‘multi-layered influence’.
 International Journal of Logistics: Research and Applications 5

Given the complex, iterative, and systemic process, our paper offers an objective way of
representing these three moments in financial terms. We therefore offer the following three
moments of innovation specifics: inputs moment with cost and expenditure; process (interme-
diate) moment with investment; and finally output moment with operating income. The proxies
for the three innovation moments are as follows: Inputs with operating expenses and CLs would
also include the expenditure in R&D, commitment of human capital to training on innovation,
and top management’s attention to innovation. Investment would include intellectual, human,
and technological capital (Carayannis and Provance 2008), and output performance is operating
income (Zhou et al. 2008). In deploying DEA, the loss of discriminative power happens when
the number of variables exceeds the number of Decision Making Units (DMUs). This curse of
dimensionality can be avoided by reducing the number of variables for example from 5 inputs to
2 inputs, and from 3 outputs to 1 output (referred to as factors) with minimal loss of information
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using the method of Daraio and Simar (2007). Given the homogeneity of the sample of asset-
based 3PL and the reliance on the Resource-based View, the derived conceptual framework is
therefore theoretically sound.

3.2. Method for assessing productivity change and innovation

The Malmquist Index (MI) is the standard approach for productivity measurement within the
non-parametric literature. First introduced by Caves, Christensen, and Diewert (1982) and later
enhanced by Färe et al. (1994), MI measures the productivity change from period t to t + 1 as
shown by Equation (1)
 t t+1 t+1 (1/2)
E (X , Y ) Et+1 (X t+1 , Y t+1 )
M t+1
= · . (1)
Et (X t , Y t ) Et+1 (X t , Y t )
With MI > 1, there is productivity growth, or else productivity declines. MI requires the
estimation of single-period efficiency scores assuming constant returns to scale, Et (Xt , Yt )
and Et + 1 (Xt + 1 , Yt + 1 ), and mixed-period efficiency scores, Et (Xt + 1 , Yt+1 ) and Et+1 (Xt , Yt ),
using DEA. Et (Xt , Yt ) is a factor used to scale the inputs, holding the output constant, in order to
make a DMU in period t efficient in relation to the technology in the same period, while Et+1 (Xt ,
Yt ) is the factor used to adjust the inputs, so as to make a DMU in period t efficient in relation to
the reference technology in period t + 1. A similar interpretation applies to Et+1 (Xt+1 , Yt+1 ) and
Et (Xt+1 , Yt+1 ). The single period efficiency estimates are always less than or equal to one. The
mixed-period efficiency value may be less or greater than unity as the input–output combination
observed in one period may not be part of the feasible set in another period. Färe, Grosskopf, and
Roos (1998) provide more details on the theoretical development and applications of MI.
A production function can include various aspects of innovation. This can be done by iden-
tifying the components of a change in productivity as a variation in innovation, efficiency, and
scale. As such, we decompose the productivity index into three components, that is, EC, scale
effect change, and innovation change. Such insights help managers seeking strategies to improve
productivity. Appendix A contains the formulation of MI with the inclusion of an innnovation
component.

4. Findings

4.1. TFP growth

We examine productivity change using MI to determine the change in firm performance over
time. Table 1 presents the MI from 2007 to 2012 while Table 2 reports the number of 3PL which
 6 W.P. Wong et al.

Table 1. Summary statistics, 2007–2012.

Variables Min Max Mean Standard deviation

Total assets 13,583 13,752,743 865,922.6 2,478,420

Operating expenses 2000 3,957,633 259,758.8 751,508.8
Current liabilities 966 3,294,227 145,097.1 475,882
Investment 0 1,175,503 37,296.9 140,192.4
Operating income 126 760,511 59,956.32 121,584.7

Table 2. Distribution of MI and sub

indexes for EC and TC.

2007–2012
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Index MI EC TC

<1 43 52 58
=1 13 26 13
>1 30 30 24

Figure 1. Productivity growth.

improved, declined, or maintained productivity levels in the same period. Thirteen 3PL were
located on the production possibility set where the frontier shifted to higher productive levels.
Most 3PL experienced a decline in their efficiency level and hence less productivity.
The distribution of MI is approximately symmetric but also includes a few 3PL whose level
of productivity improvement is very high. The distribution of the EC and technological change
(TC) are also approximately symmetric, but the spread of EC is larger than the spread of TC
(comprising scale and innovation effect changes).

4.2. Sensitivity analysis on TFP growth

As DEA is a non-parametric technique and does not provide any statistical means of validating
the results, a sensitivity test using window analysis (Cooper, Seiford, and Tone 2006) was under-
taken. Window analysis allows for an assessment of the stability of relative efficiency scores over
time by using a moving average analogue where a firm in each period is treated as if it were a
different firm. We consider a window length of 2 years and 4 windows, whereby each 3PL’s TFP
growth is evaluated 8 times and the process continues as each 3PL is shifted two time periods.
Figure 1 shows the mean TFP growth using window analysis. Table A1 shows the results for the
TFP growth of each 3PL over the eight evaluations.
 International Journal of Logistics: Research and Applications 7

Table 3. 3PL that innovated in the period 2007–2012.

Period Companies Innovation

2007–2008 –
2008–2009 DMU9 1.14459
DMU13 1.01932
DMU16 1.05074
DMU17 1.01976
DMU19 1.00733
2009–2010 –
2010–2011 –
2011–2012 DMU1 1.01964
DMU7 1.10881
DMU13 1.2133
DMU17 1.0459
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Though the mean TFP growth of almost all the 3PL generally shows a decreasing trend, four
3PL exhibited stability in the productivity measures. The evidence of stability in industry TFP
growth when the sample was regrouped lends credibility to the implications drawn from the DEA
results. The results from window analysis also suggest that the overall productivity of Malaysia’s
logistics industry from 2007 to 2012 has declined.
It is noteworthy that some 3PL are innovating for productivity sake, that is, pushing the pro-
duction frontier towards more productive areas, as shown in Table 3. The number of innovator
3PL from 2007 to 2012 and their mean innovation scores are, respectively, as follows: (0, 0),
(5, 1.0483), (0, 0), (0, 0), and (4, 1.097). It is also observed that a 3PL could not repeat the
innovative performance within the same period, that is, between 2007 and 2012. This suggests a
period of consolidating the innovation (e.g. further refinements to innovation) to ensure that the
captured productivity is retained and diffused throughout the firm.
Next, we explore if 3PL with the most productivity improvement between consecutive years
in each period were innovators. Between 2007 and 2012, of the 30 highest MI 3PL, only seven
3PL are innovators. Despite significantly improving its productivity, a 3PL may not bring inno-
vation to the industry, as it may be located well inside the production possibility set far from
the frontier. The 3PL previously considered as the most productive in consecutive years is also
not necessarily an innovator in all periods. Similarly, these 3PL could have stayed focused on
improving their processes resulting from the most recent productive innovation. It could also be
that the innovation efforts are futile and risk productivity improvement since innovation risk is
a known fact (Chapman, Soosay, and Kandampully 2003). The 3PL who are productively inno-
vative would have attained the twin capabilities of innovation and productivity. These results
indicate intense and cautious competition among 3PL in a highly competitive logistics sector,
with each searching for innovation and sustaining productivity.

4.3. Factors affecting innovation

On the specification of the innovation index using a single variable to express the overall
innovation of the 3PL, we performed a Tobit regression between the contextual variables and
innovation. The results (Table A2) suggest that CLs and Investment influence firm performance.
A decrease in CLs and an increase in investment through equity will reduce the cost of funds.
These will improve firm performance. Integrating the findings, 3PL should further invest and
remain financially healthy to accelerate the diffusion of innovation under a more competitive
cost structure.
 8 W.P. Wong et al.

In sum, while some 3PL have shown productivity improvement during the period of analysis,
overall productivity has declined from 2007 to 2012. Further, not all 3PL with large productivity
improvements are necessarily innovators. Innovation is still lacking in the industry as the number
of 3PL with TC > 1 throughout 2007–2012 is much less than those with MI > 1 and EC > 1 in
the same period. Given that, Tobit regression analysis found innovation to be related to financial
health and investment. This suggests that innovation needs to be further boosted in the logis-
tics industry. The industry needs to increase the investment in technology such as RFID, and
human capital development while government and regulatory bodies could implement policies
(e.g. financing programmes) to help the 3PL.

4.4. Productivity–innovation linkage

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Due to the lack of statistical significance between innovation and productivity, our results suggest
that innovation does not always bring forth productive performance. This finding is supported
by the mixed results found in Hall (2011) and Hall, Lotti, and Mairesse (2009), Cassiman,
Golovko, and Martínez-Ros (2010), Castellani and Zanfei (2007), and Benavente (2006). Chap-
man, Soosay, and Kandampully (2003) suggest that resources such as technology, knowledge,
and relationship networks could be harnessed to produce innovation. This would suggest that
some of the asset-based 3PL could have (i) underutilised their assets, or (ii) simply borrowed too
much with interest payable chipping away earnings, or (iii) a combination of the factors which
has undermined their innovation efforts.

5. Managerial insights and implications

Logistics has a critical role in the servicing industry to ensure the effective distribution and
smooth flow of goods (Khalid 2008). Competition has become more intense among the 3PL
(Khalid 2008). For a 3PL to remain relevant in the chain, innovation is a strategic imperative
(Glave, Joerss, and Saxon 2014). This paper has revealed the innovation level among the 3PL by
first highlighting that high performers on productivity are not necessarily innovators and, second,
innovation is still lacking among the 3PL in Malaysia.
The literature suggests that productivity and innovation are two different pillars of customer
loyalty and the ability to retain customer loyalty is crucial to the competitiveness of the firm.
Wallenburg (2009) highlights that productivity and innovation are effective in different market
settings. In a setting where outsourced services are simple with relatively short contracting peri-
ods, cost improvement and productivity are thus the main drivers of customer loyalty. When the
setting is more complex with longer contracting periods, innovation is the driver for proactive
performance improvement driving customer loyalty with cost improvement playing only a subor-
dinate role. Proactive improvement is required given the constantly changing customer demands
with the customers acutely aware of external market changes (Woodruff and Flint 2003). This
proactive improvement approach would imply not only fulfilling current customer needs but also
to anticipate changes and develop them (Flint et al. 2005). To decide on the choice of productiv-
ity or innovation, this depends on the market particularly in the context of a developing country
such as Malaysia. In Malaysia, greater use of 3PL services has increased the number of 3PL,
leading to a more competitive environment (Langley and Capgemini 2010). In addition, against
an uncertain customer base, Stone, Woodcock, and Wilson (1996) claim that maintaining existing
customers and extending business with them would be significantly less expensive than acquiring
new ones. This is attested by Li and Green (2010) who claim that it costs five times more to get
 International Journal of Logistics: Research and Applications 9

new customers than to hold on to old ones. Reichheld and Sasser (1990), and Lee and Cunning-
ham (2001) also highlight that a 5% decrease in customer attrition will lead to a 25–85% increase
in profit. Besides, Reichheld and Schefter (2000) highlight that a 5% increase in customer loyalty
would lead to a 30% increase in profits, clearly pointing to innovation to differentiate as a means
to retaining customer loyalty. Chong (2014) finds innovation to be a significantly stronger factor
than efficiency (productivity) to achieve profitability. These findings are consistent with Porter
(1998) who advocates innovation as the preferred route to competitiveness.
The question on why top productivity performers are not necessarily innovators requires a
more fine-grained understanding of innovation in logistics. Wagner (2008) argues that injecting
inputs (e.g. investment) for innovation activities is insufficient to warrant innovative performance
and managers should also focus on the level of innovation generation (i.e. the ‘soft aspect’ of
managing innovation) and the innovation results.
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Investment and financial health affect innovation. This reflects the current situation in the
Malaysian 3PL where 3PL are investing more into technologies such as RFID, transport man-
agement software, supply chain planning software, warehouse management systems, biological
monitoring technologies, and electronic documentation (Glave, Joerss, and Saxon 2014). How-
ever, the 3PL should be prudent with their investments and not jeopardise their financial health.
In cases where the 3PLs’ CLs exceed their assets injection, evidence shows reducing the CL to
yield a more competitive cost structure is a wise step to take.
The recent Logistics Performance Index by the World Bank ranked Malaysia 25th worldwide,
below the OECD economies. In 2012, the same index indicated that the top logistics country
performers are stagnant in their logistics efficiency improvement effort, attributing it to a shift
of government priorities away from logistics reform. Since logistics activities occur along the
supply chain, any adverse systemic occurrence along the chain affects logistics efficiency. The
adverse systemic effects could emanate from the less-than-efficient infrastructure such as cus-
toms and border management thereby restraining efficiency improvements (Arvis et al. 2014).
Given that the targets for the logistics industry in the Third Malaysia Industrial Plan (MITI
2008) are to achieve an overall growth of 8.6% during the planning period and a contribution to
12.1% of GDP by 2020 (MIDA 2008), it is imperative for the 3PL to increase innovation (Glave,
Joerss, and Saxon 2014) to provide new supply chain solutions to their customers, for exam-
ple, e-services (Lynagh et al. 2001), electronic markets (Gudmundsson and Walczuch 1999), and
partnerships with technology providers (Bade, Mueller, and Youd 1999).
The importance of innovation for higher productivity needs to be fully understood. In the
local context, Malaysia 3PL provide a broad spectrum of innovative solutions involving trans-
portation, freight, and customs brokerage services. These solutions are synchronised to give
customers a significant advantage by leveraging on the 3PLs’ competitive strengths. Through
a combination of services provided by the 3PL, the customers will be able to shorten their
supply chain, have better visibility of their products, and provide a higher level of service to
their final customers (Min et al. 2005). To cater to the growing needs of specialised logistics
capabilities in the global market, for example, in healthcare logistics and chemical logistics,
an innovator among the Malaysian 3PL provides distribution, tank storage, and value added ser-
vices on gas, oil products, and chemicals from the petroleum and chemical terminals in the region
(Bloomberg Businessweek 2015). In the food industry, Malaysia is a global halal hub through
its advancements in innovative solutions for halal supply chain logistics (Malaysia as a Global
Halal Hub 2008). Another Malaysian 3PL innovator provides innovative solutions for the halal
supply chain ensuring that the movement of goods and services starting from farm to consumer
are safe from contamination and cross-contamination with non-halal materials or products (The
Halal Journal 2006). These 3PL lead the way in providing innovative and niche logistics solu-
tions resulting from their company investments. These innovative solutions could be emulated by
other 3PL.
 10 W.P. Wong et al.

Another concern is the one-off performance by the seven innovating 3PL within the stud-
ied period (2007–2012). This should be examined closely as the failure to sustain perfor-
mance is indeed wasteful. These non-repeat performance of the asset-based 3PL could be
attributed to a technology slack, insufficient knowledge, and poor relationship networks, and
the challenge of asset management under global economic uncertainty (Chapman, Soosay, and
Kandampully 2003).
A plausible explanation for the non-repeat performance is due to the high capital investment
needed for logistics infrastructure by the asset-based 3PL which not many 3PL can undertake
(Cullinane and Wang 2007). Such lumpy investments as coined by Nilsen et al. (2009) can
engender factor adjustments in capital expenditure and operating cost, and thus affect labour
productivity of the 3PL. Logically, 3PL would prefer to see the fruits of their investments before
investing further in other innovations. These 3PL could ill afford further risks compounded by
Downloaded by [University of Otago] at 15:52 21 September 2015

the cost of capital in an increasingly uncertain economy which induces a decline in investment
spending (Gilchrist, Sim, and Zakrajsek 2014).

6. Conclusion

This paper has applied a modified MI based on the DEA method allowing the incorporation of
an innovation aspect on productivity measurement of asset-based 3PL in Malaysia from 2007 to
2012 to identify the best 3PL performers, using financial data from a secondary database. Our
research shows that the productivity decline in the logistics industry could be due to insufficient
technological improvement and the lack of innovation. Our findings also indicate that innovation
is not always accompanied by productivity gains and innovation is still lacking in the logistics
industry in Malaysia. The MLC set up in 2007 is the vehicle meant to develop the logistics
industry in Malaysia but it instead went into hiatus from 2010 to 2012. This may influence
the productivity effort of the logistics sector. Nonetheless, while the Malaysian 3PL have shown
some growth and maturity, they must significantly invest more resources in innovation so that the
next wave of productive innovation for better efficiency is sooner rather than later. The findings
would be useful to developing economies proximal to Malaysia’s Logistics Performance Index
ranking, for example, Thailand, Indonesia, India, and Vietnam.
A limitation in our study is the deliberate sampling frame of only asset-based 3PL. General-
ising this result to the entire sector should thus be treated with caution. Future research could
include a deeper analysis of the 3PL such as determining their economies of scope and scale in
relation to their efficiency and effectiveness in the use of resources.

Disclosure statement
No potential conflict of interest was reported by the authors.

Funding
The authors are grateful to the Malaysian Ministry of Higher Education for the financial support of this work under
the Exploratory Research Grant Scheme (ERGS) 203/PMGT/6730127 and the Short Term Grant 304/PMGT/6313072.
The authors gratefully acknowledge the ERGS Grant (No: 6730127) and USM-Short Term Grant (No: 6313072) for
supporting this project.

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Appendix 1. Innovation in MI model

I of Equation (1) can be decomposed as the product of EC and TC (frontier shift), as shown in Equation (A1),
 t t+1 t+1 (1/2)
Et+1 (X t+1 , Y t+1 ) E (X , Y ) Et (X t , Y t )
M t+1 = × ·
Et (X t , Y t ) Et+1 (X t+1 , Y t+1 ) Et+1 (X t , Y t ) (A1)
= EC × TC
The first ratio on the LHS of Equation (A1) measures the EC between periods t and t + 1. TC (or a shift in the frontier)
is measured by the second ratio, i.e. the square root of the terms inside the brackets. TC can be further decomposed into
innovative EC (index for innovation) and scale EC. Thus, TC can be written as:
 
Et (X t , Y t ) Et (X t+1 , Y t+1 )
TC = × (A2)
E (X , Y )
t+1 t t Et+1 (X t+1 , Y t+1 )
The first LHS term of Equation (A2) measures scale efficiency (i.e. magnitude of TC) along a ray using data from
period t and the second term captures the change in innovativeness (increase or decrease). If the magnitude is unity
 14 W.P. Wong et al.

Table A1. Results of 3PLs’ TFP growth (%) using window analysis.

Window 1 Window 2 Window 3 Window 4

Companies 2007–2009 2008–2010 2009–2011 2010–2012 Mean

DMU1 0.532 0.785 0.896 0.814 0.757

DMU2 0.583 0.650 0.852 0.540 0.656
DMU3 0.960 0.896 0.804 0.972 0.908
DMU4 0.689 0.754 0.784 0.493 0.680
DMU5 0.985 0.996 0.940 0.816 0.934
DMU6 0.530 0.630 0.482 0.265 0.477
DMU7 0.241 0.129 0.081 0.099 0.137
DMU8 0.140 0.143 0.125 0.164 0.143
DMU9 1.000 0.965 0.969 0.877 0.953
DMU10 0.998 0.970 1.000 1.000 0.992
DMU11 0.644 0.650 0.659 0.634 0.647
DMU12 0.685 0.661 0.475 0.392 0.554
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DMU13 0.838 0.554 0.398 0.416 0.552

DMU14 0.888 0.834 0.771 0.896 0.847
DMU15 0.441 0.461 0.496 0.528 0.482
DMU16 0.371 0.404 0.406 0.409 0.398
DMU17 0.485 0.503 0.473 0.480 0.485
DMU18 0.325 0.248 0.241 0.161 0.244
DMU19 0.138 0.161 0.152 0.136 0.146

Note: Due to the constraints in Window DEA, DMUs with missing values are omitted.

Table A2. Results of Tobit regression.

Variable Coefficient Std. error z-Statistic Prob.

Constant 0.025441 0.043766 0.581289 0.5610

Total asset 3.54E–09 4.22E–08 0.083744 0.9333
Operating expenses − 2.48E–08 1.59E–08 − 1.558770 0.1191
CLs − 3.81E–07 1.27E–07 − 2.999695 0.0027
General Administration 9.20E–08 1.16E–07 0.792947 0.4278
Investment 1.04E–06 9.07E–08 11.45426 0.0000
OUTPUT 1.02E–07 5.47E–07 0.187235 0.8515

(scale efficiency = 1), then the innovative score equals the TC component. With magnitude > 1, it indicates an increase
in scale ( > 1) and if magnitude is < 1, it indicates a decrease in scale, which is the manner in which the DMU adjusts its
direction of production. Here, the examination of the relationship between these efficiency indices would reveal whether
innovation is catching up or making gains in productivity.
In sum, MI can be decomposed as the product of changes in efficiency, scale, and innovation. It is assumed that
the distance functions are multiplicatively separable in both attributes and inputs/outputs. Thus, MI can be expressed
as:
 
Et+1 (X t+1 , Y t+1 ) Et (X t , Y t ) Et (X t+1 , Y t+1 )
M t+1
= × ×
Et (X t , Y t ) Et+1 (X t , Y t ) Et+1 (X t+1 , Y t+1 ) (A3)
= EC × Seff × Innoveff

In (A.3), EC, Seff (Scale EC), and Innoveff (Innovative EC) measure the efficiency, scale and innovation effect
changes, respectively, from periods t to t + 1. For MI and each of its components, a value greater than one indi-
cates an improvement, while a value less than one denotes a decrease; a value equal to one means no change. For
the third term (the numerator, i.e. Et (Xt +1 , Yt +1 )), it can be used as an innovative score where it simply means it is
a factor to adjust the inputs so as to make the DMU in period t + 1 efficient in relation to the reference technology
in period t. The denominator Et +1 (Xt +1 , Yt +1 ) must equal 1 so that we know 3PL have innovated so as to sit on the
frontier.