A Multivariate Framework for MSME Financial Performance: Financial and Strategic Determinants in Developing Island Economies
Abstract
This study aims to identify the financial and strategic determinants affecting the financial performance of Micro, Small, and Medium Enterprises (MSMEs) in developing island economies. It specifically explores the roles of financial inclusion and internal capabilities such as financial literacy, financial culture, innovation, and strategic orientation. A quantitative approach using Structural Equation Modeling - Partial Least Squares (SEM-PLS) was adopted. Data were collected from 210 MSMEs operating in the Nias Islands, Indonesia. The model examines relationships among latent constructs, including financial literacy, inclusion, innovation, strategic orientation, financial culture, access to finance, and financial performance. The study is limited to a geographically specific setting (Nias Islands) and uses a cross-sectional design. Caution is advised in generalizing the results beyond similar contexts. Future research should consider longitudinal and qualitative methods to explore causal depth. This study contributes to theory by extending the Resource-Based View (RBV) to include contextual factors such as culture and geography. The proposed multivariate framework offers a replicable model for analyzing MSME financial performance in financial and infrastructurally constrained environments. The findings reveal that access to finance significantly mediates the relationship between internal capabilities (financial literacy, innovation, and strategic orientation) and MSME financial performance. Meanwhile, financial inclusion and financial culture influence performance only through access to finance. Innovation and strategic orientation also have direct effects on performance. The multivariate model demonstrates strong explanatory power, with R² = 0.73 for financial performance.
References
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[40] Widodo, T., Musthofa, A., & Riyadi, S. (2020). Strategic planning and MSME sustainability: A study from Central Java. International Journal of Economics and Business Research, 20(4): 411-426. DOI:10.1504/IJEBR.2020.110262
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[45] OECD. (2022). Financing SMEs and Entrepreneurs 2022: An OECD Scoreboard. OECD Publishing. DOI:10.1787/29cfead4-en
[2] Ali, M., & Park, K. (2020). Structural equation modeling in SME research: A review and recommendations. Journal of Small Business Management, 58(2): 314-337. DOI: 10.1080/00472778.2020.1739621
[3] Anwar, M., Khan, S. Z., & Shah, S. Z. A. (2022). Resource-based view and SME innovation performance: The mediating role of innovation capabilities. Technological Forecasting and Social Change, 174, 121248. DOI: 10.1016/j.techfore.2021.121248
[4] Barney, J. B. (1991). Firm resources and sustained competitive advantage. Journal of Management, 17(1): 99-120. DOI: 10.1177/014920639101700108
[5] Beck, T., & Demirgüç-Kunt, A. (2022). Financial inclusion and firm access to credit: New cross-country evidence. World Bank Economic Review, 36(2): 456-476. DOI: 10.1093/wber/lhab008
[6] Beck, T., & Demirgüç-Kunt, A. (2022). Financial inclusion and firm access to credit: New cross-country evidence. World Bank Economic Review, 36(2): 456–476. DOI: 10.1093/wber/lhab008
[7] Darmawan, A., Wibowo, A., & Yuniarti, R. (2023). Cultural values and financial behavior: Implications for MSME financing decisions in Indonesia. Journal of Entrepreneurship in Emerging Economies, 15(1): 75-94. DOI: 10.1108/JEEE-05-2022-0120
[8] Darmawan, A., Wibowo, A., & Yuniarti, R. (2023). Cultural values and financial behavior: Implications for MSME financing decisions in Indonesia. Journal of Entrepreneurship in Emerging Economies, 15(1): 75–94. DOI: 10.1108/JEEE-05-2022-0120
[9] Dsouza, A., Trivedi, R., & Agrawal, R. (2023). Financial literacy and performance of small enterprises: Evidence from Indian SMEs. International Journal of Emerging Markets, 18(2): 302-322. DOI:10.1108/IJOEM-04-2022-0512
[10] Dsouza, A., Trivedi, R., & Agrawal, R. (2023). Financial literacy and performance of small enterprises: Evidence from Indian SMEs. International Journal of Emerging Markets, 18(2): 302–322. DOI:10.1108/IJOEM-04-2022-0512
[11] Ferrer, R. C., Ballesteros, F. C., & Caday, N. B. (2020). Financial literacy and SMEs: A meta-analysis. Asia-Pacific Journal of Innovation and Entrepreneurship, 14(2): 216-232. DOI: 10.1108/APJIE-06-2020-0052
[12] Ferrer, R. C., Ballesteros, F. C., & Caday, N. B. (2020). Financial literacy and SMEs: A meta-analysis. Asia-Pacific Journal of Innovation and Entrepreneurship, 14(2): 216–232. DOI: 10.1108/APJIE-06-2020-0052
[13] Hair, J. F., Hult, G. T. M., Ringle, C., & Sarstedt, M. (2021). A primer on partial least squares structural equation modeling (PLS-SEM) (3rd ed.). SAGE Publications.
[14] Herath, H. M. A., Gunawardena, C. G., & Weerasinghe, I. M. (2022). Access to finance and SMEs' performance: Mediating role of innovation capability. Journal of Small Business and Enterprise Development, 29(7): 1035-1053. DOI: 10.1108/JSBED-06-2021-0225
[15] Herath, H. M. A., Gunawardena, C. G., & Weerasinghe, I. M. (2022). Access to finance and SMEs' performance: Mediating role of innovation capability. Journal of Small Business and Enterprise Development, 29(7): 1035–1053. DOI: 10.1108/JSBED-06-2021-0225
[16] Ismail, S., Abidin, Z. Z., & Rosli, M. M. (2022). Financial literacy and entrepreneurial performance: The mediating role of financial behavior. Management Research Review, 45(4). DOI: 10.1108/MRR-08-2020-0495
[17] Ismail, S., Abidin, Z. Z., & Rosli, M. M. (2022). Financial literacy and entrepreneurial performance: The mediating role of financial behavior. Management Research Review, 45(4). DOI: 10.1108/MRR-08-2020-0495
[18] Jatmiko, B., Widodo, W., & Raharjo, K. (2023). Financial management behavior among MSMEs: A PLS-SEM approach. Journal of Asian Business and Economic Studies, 30(1). DOI: 10.1108/JABES-04-2022-0072
[19] Khan, A., Anwar, M., & Khan, N. U. (2022). Strategic orientation and firm performance: Evidence from developing economies. Journal of Strategy and Management, 15(1). DOI: 10.1108/JSMA-09-2021-0217
[20] Lusardi, A., & Mitchell, O. S. (2014). The economic importance of financial literacy: Theory and evidence. Journal of Economic Literature, 52(1): 5-44. DOI: 10.1257/jel.52.1.5
[21] Muller, P., Rammer, C., & Truby, J. (2020). Innovation and SME financing: Empirical insights from Europe. Small Business Economics, 54: 503-521. DOI: 10.1007/s11187-018-0070-2
[22] Muller, P., Rammer, C., & Truby, J. (2020). Innovation and SME financing: Empirical insights from Europe. Small Business Economics, 54: 503–521. DOI: 10.1007/s11187-018-0070-2
[23] Nguyen, N. P., & Luu, T. M. N. (2021). Financial access, firm innovation, and performance: Evidence from Southeast Asia. Journal of Innovation & Knowledge, 6(4): 234-246. DOI: 10.1016/j.jik.2021.03.002
[24] Nguyen, T., Pham, T. Q., & Nguyen, D. D. (2020). Strategic orientation, innovation capability, and firm performance: Evidence from SMEs. Entrepreneurship Research Journal, 10(4). DOI: 10.1515/erj-2019-0226
[25] Podsakoff, P. M., MacKenzie, S. B., & Podsakoff, N. P. (2003). Common method biases in behavioral research: A critical review. Journal of Applied Psychology, 88(5): 879-903. DOI: 10.1037/0021-9010.88.5.879
[26] Puspitawati, H., Nugroho, R., & Sulistyowati, A. (2021). Financial management practices among microenterprises: A comparative study. International Journal of Business and Society, 22(3): 1145-1163. DOI: 10.33736/ijbs.3833.2021
[27] Raimo, N., Ricciardelli, A., Vitolla, F., & Marrone, A. (2021). Financial literacy and firm performance: Evidence from Italian SMEs. Journal of Small Business Management, 59(3): 317-342. DOI:10.1080/00472778.2020.1783718
[28] Rakhmani, I., & Darmawan, D. (2021). Financial exclusion in remote Indonesia: Structural insights and community responses. Asian Journal of Comparative Politics, 6(2) 202-220. DOI:10.1177/2057891120961233
[29] Ringle, C. M., Wende, S., & Becker, J. M. (2020). SmartPLS 4 Manual. SmartPLS GmbH.
[30] Saptariani, L., Harjanti, N. S., & Widjaja, D. C. (2023). Strategic orientation and MSME performance: An empirical test using SEM-PLS. International Journal of Business Excellence, 29(2): 215-232. DOI:10.1504/IJBEX.2023.10042789
[31] Saptariani, L., Harjanti, N. S., & Widjaja, D. C. (2023). Strategic orientation and MSME performance: An empirical test using SEM-PLS. International Journal of Business Excellence, 29(2): 215–232. DOI:10.1504/IJBEX.2023.10042789
[32] Sari, R. F., Dhewanto, W., & Lantu, D. C. (2021). Innovation and MSMEs' performance during crisis: A resilience perspective. Journal of Entrepreneurship and Innovation in Emerging Economies, 7(2): 230-249. DOI: 10.1177/23939575211004488
[33] Setyawati, R., & Rahayu, N. (2023). Strategic orientation and financial behavior of MSMEs in island regions. International Journal of Entrepreneurship and Small Business, 49(3). DOI: 10.1504/IJESB.2023.129996
[34] Suryani, T., & Purwana, D. (2022). Financial behavior and culture: Study on Indonesian MSMEs. Journal of Behavioral and Experimental Finance, 35, 100739. DOI: 10.1016/j.jbef.2022.100739
[35] Susanto, A., Indrawati, & Wahyudi, S. (2022). Role of access to finance as a mediating variable in SME financial behavior. Journal of Finance and Banking, 26(4): 823-838. DOI: 10.26905/jkdp.v26i4.7899
[36] Tambunan, T. T. H. (2020). Financial inclusion in Indonesia: Policies and practices. International Journal of Social Economics, 47(2): 257-271. DOI: 10.1108/IJSE-09-2019-0583
[37] Teece, D. J. (2018). Business models and dynamic capabilities. Long Range Planning, 51(1): 40-49. DOI:10.1016/j.lrp.2017.06.007
[38] Wales, W. J., Gupta, V. K., & Mousa, F. T. (2020). Empirical research on entrepreneurial orientation: An overview and future directions. International Small Business Journal, 38(6): 507-528. DOI:10.1177/0266242619886634
[39] Wibowo, A., & Sugiharto, T. (2021). The impact of financial culture on SME credit behavior in Indonesia. Cogent Business & Management, 8(1): 1970870. DOI: 10.1080/23311975.2021.1970870
[40] Widodo, T., Musthofa, A., & Riyadi, S. (2020). Strategic planning and MSME sustainability: A study from Central Java. International Journal of Economics and Business Research, 20(4): 411-426. DOI:10.1504/IJEBR.2020.110262
[41] Widyastuti, D., & Pamungkas, I. D. (2020). Institutional voids and MSME financing in Indonesia: A study of policy mismatch. Asian Economic Journal, 34(1): 33-53. DOI: 10.1111/asej.12185
[42] Wijaya, I. M. A., & Mulyana, A. (2021). Barriers to financial access among rural MSMEs in Indonesia. Journal of Asian Business and Economic Studies, 28(3): 263-280. DOI: 10.1108/JABES-09-2020-0113
[43] Yusoff, S., Ahmad, S., & Hassan, F. (2020). Understanding cultural factors in SME financial behavior. International Journal of Islamic and Middle Eastern Finance and Management, 13(2): 263–280. DOI:10.1108/IMEFM-02-2019-0092
[44] Zulkarnain, M., & Priyono, A. (2022). Local innovation and MSME adaptation in Indonesia’s remote regions. Journal of Development and Business Research, 14(1): 45–63. DOI: 10.1007/s11698-022-00215-z
[45] OECD. (2022). Financing SMEs and Entrepreneurs 2022: An OECD Scoreboard. OECD Publishing. DOI:10.1787/29cfead4-en
Published
2025-09-30
How to Cite
BATE'E, Maria Magdalena et al.
A Multivariate Framework for MSME Financial Performance: Financial and Strategic Determinants in Developing Island Economies.
Theoretical and Practical Research in Economic Fields, [S.l.], v. 16, n. 3, p. 742 - 756, sep. 2025.
ISSN 2068-7710.
Available at: <https://journals.aserspublishing.eu/tpref/article/view/9114>. Date accessed: 08 oct. 2025.
doi: https://doi.org/10.14505/tpref.v16.3(35).15.
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