Linking Social Capital, Business Environment, Product Innovation,

and Sustainable Competitive Advantage: Empirical Evidence from

Farmers in Karo Regency, North Sumatra, Indonesia

Maretta Ginting

, Hasan Basri Tarmizi

, Endang Sulistya Rini

, Yeni Absah

Department of Management, Universitas Sumatera Utara, Jl. Prof. T.M Hanafiah, SH, Kampus USU, Medan, Indonesia

Department of Regional Planning Universitas Sumatera Utara, Jl. Prof. T.M Hanafiah, SH, Kampus USU, Medan,

Indonesia

Keywords: Social Capital, Business Environment, Product Innovation, Sustainable Competitive Advantage, Horticultural

Product. Resource-based Theory.

Abstract: Competitiveness of Indonesian agricultural commodity products requires more attention from stakeholders.

The problems faced by farmers and traders of horticulture products are still low competitiveness. Horticultural

products have been unable to compete with agricultural products from ASEAN countries such as Thailand

and Malaysia. In a competitive marketplace, social approaches and social attributes and sustainability levels

of competitive advantages are, among others, explained through the RBT-resource-based theory of the firm's

approach. The purpose of this study is to investigate the effect of several constructs such as social capital,

business environment, product innovation towards sustainable competitive advantage. The present study used

a quantitative approach based on structural equation modeling (SEM) analysis. The number of samples was

500 farmers from Karo Regency, North Sumatra, Indonesia. The empirical evidence indicates that social

capital has an insignificant effect on product innovation. The business environment has a significant effect on

product innovation. Social capital has an insignificant effect on sustainable competitive advantage. The

business environment has a significant effect on sustainable competitive advantage. The product innovation

has a significant effect on sustainable competitive advantage. The business environment has a significant

effect on the sustainable competitive advantage of horticultural products through product innovation. Social

capital has an insignificant effect on the sustainable competitive advantage of horticultural products through

product innovation. The ability to adopt technology should be in line with the ability to respond to the

movement of market behavior. Therefore, the role of farmers is expected to be more proactive in observing

the direction of changes in the horticultural product market behavior. Export market access is required and

standardize product according to market demand. Therefore, learning is needed to empower farmers to

achieve a target market that has broad coverage.

1 INTRODUCTION

Competitiveness of Indonesian agricultural

commodity products requires more attention from

stakeholders. Facts indicate an effort to improve the

competitiveness of Indonesian agricultural products

which has been underestimated in the mind and

creativity aspects which are the primary capital to

increase competitive advantage. (Haryono, 2013). It

is possible that Karo district has the highest

agricultural potential of all provinces in Indonesia.

The majority of people work as professional farmers.

Working as a farmer has a purpose other than

fulfilling daily living needs, the results of their

farming commodities have been marketed to other

areas.

In the highlands of Karo's land has the beauty of

mountain nature with the coolness of the air and it has

a characteristic of fruit and vegetable area. Among the

area's horticultural products there are some products

that most contribute to farmers in Karo District. The

results of the horticulture products are 324,200 tons

of orange, 92,551 tons of cabbage, 42,089 tons of

carrots, 7,000 tons of coffee, and 4,829 tons of

passion fruit. (With Data Statistic, 2017).

The problems faced by farmers and traders of

horticulture products are still low competitiveness.

Horticultural products have not been able to compete

Ginting, M., Tarmizi, H., Rini, E. and Absah, Y.

Linking Social Capital, Business Environment, Product Innovation, and Sustainable Competitive Advantage: Empirical Evidence from Farmers in Karo Regency, North Sumatra, Indonesia.

DOI: 10.5220/0009200301370150

In Proceedings of the 2nd Economics and Business International Conference (EBIC 2019) - Economics and Business in Industrial Revolution 4.0, pages 137-150

ISBN: 978-989-758-498-5

137

with agricultural products from ASEAN countries

such as Thailand and Malaysia.Zimmere and

Scarborough (2005) believe that in order to win the

competition, it is necessary to build a sustainable

competitive advantage for all product outcomes.

Sustainable competitiveness is interpreted as a value

that the company can create for consumers. This

sustainable competitive advantage is also seen from

the suitability and accuracy of providing products in

the market and responds to consumer complaints such

as product quality, consumer needs, new market share

and continuous product innovation (Aditya, 2004).

Syahyuti (2008) believes that social capital is

proven to grow and accumulate over time and

significantly affect the performance of the

agricultural commodities trading system. Suriatna

and Ardianti (2013) in their paperwork state that there

is a link between social capital and product

innovation and all indicators of the two variables are

interconnected. Other scholars such as Muin (2013)

have investigated business capabilities, social capital

and its implications for the performance of SMEs in

the industrial sector in South Sulawesi. The empirical

results indicate that social capital has a positive and

significant effect on the performance of small

microenterprises in South Sulawesi. Furthermore,

Rapih (2015) recognizes social capital variables have

a positive and significant effect on SMEs'

performance where performance measurement is seen

by profit growth, customer growth, sales volume

growth, and asset growth. Wambugu et al. (2009)

found empirical evidence of social capital has a

positive influence on the performance of small

organizations, including marketing performance.

The success of an industry depends on industrial

relations with its environment (Porter, 1981). Amit

and Schoemaker (1993) also believe the organization

should be able to adapt to the environment because of

rapidly changing environmental and technological

advances to achieve competitive advantage. Luo,

Yadong (1999) mentions the impact of the dynamics

of a competitive environment has influenced

innovative, courageous risk-taking, and corporate

activity. In the ever-changing environment, Slater &

Narver (1997) recognizes the determination by

creativity and innovation to enable it to capture

customer satisfaction over competitors (Dicky,

2002). Furthermore, some research results (such as

Sinkoviccs, 2004; Nurbarokah, 2009) report

environmental adaptability dimensions that affect

competitive advantages. As with Mc Carthy &

Perreault (1996), their research confirms the factors

that determine the competitive advantage, among

others, the rate of change, the number of products, the

speed to enter the market. Other scholars, such as

Meutia (2013), highlight the ability to adapt to

changing business environment and competitive

advantage. Furthermore, the innovation and

technology adopted by the company more appropriate

have become a factor to achieve competitive

advantage.The recent research from Daiya Isogawa et

al., (2012) emphasizes that product innovation has a

significant effect on the marketing performance of a

company. Companies with new product innovations

tend to achieve high sales of new products, and are

less likely to suffer from cannibalizing effects.

Sugiyarti (2015) agreed that product innovation had a

significant effect on competitive advantage.

Companies that implement product innovation

systems tend to increase theSMEs’s competitive

advantage. Scholars such as Droge and Vickey (1994)

recognize product innovation is a source of

competitive advantage. Companies capable of

designing their products in line with customer's desire

tend to survive in the midst of tight competition, as

their products are still in demand for customers.

Luke and Ferrel (2000) recognize that marketing

and innovation are seen as a driver of economic

growth and a primary component of competitive

advantage. Nelly et al. (2001) believe product

innovation demonstrates the development and

recognition of new or improved products that are

successful in marketing. Drucker 1954, Berthon et al.

1999 acknowledged that product innovation is a

potential thing to create a mindset that ultimately

satisfies customer satisfaction. Dourgerty (1996)

notes product innovation is a relevant way for

companies to grow and tends to adapt to markets,

technology, and competition.

2 LITERATURE REVIEW

2.1 Social Capital

The social capital concept was reintroduced by

Putnam (1993) when researching in Italy in 1985. The

concept of social capital has been widely discussed in

social sciences over the last year (Field, 2010). One

of the resources that might provide a competitive

advantage is the resources developed through social

approaches known as social capital (Coleman, 1988).

In a competitive marketplace, social approaches and

social attributes and sustainability levels of

competitive advantages are, among others, explained

through the RBT-resource-based theory of the firm's

approach as seen in various studies undertaken by

academics, among others; (Amit & Schoemaker:

EBIC 2019 - Economics and Business International Conference 2019

138

1993; Barney: 1991, Bharadwaj, Varadarajan, &

Fahy: 1993; Conner: 1991; Oliver, 1997).Cohen and

Prusak (2001) have defined the social capital as a

stock and an active relationship between society.

Meanwhile, Ancok (2013) emphasizes social capital

as embedded traits on individuals involved in social

interaction.

2.2 Business Environment

Knowledge of competitive environments can

encourage creativity, and the reason is

environmental knowledge analyzing highlighted

opportunities and weaknesses that should be

calculated (Menon et al., 1999; Mudiantono &

Khamidah, 2005). Competition intensity (Birchall et

al., 1996) environmental competition (Kim et al.,

1993) and Hadjimanolis, 2000), is a measure of

market innovation. Environmental changes related to

uncertainty and dynamics (Damanpour, 1996; and

Hadjimanolis, 2000).

According to Amit et al. (1993) innovation is an

interactive process, seen from the network of

economic relationships in its business environment

including changes in its resources. The business

environment has a strong influence on corporate

organizations, especially when the business world is

unlimited by a borderless world, (Hunger, Wheelen:

2007, Brooks: 1997). Companies that have

successfully adapted to the level of adaptability and

high flexibility with the surrounding business

environment, show good performance over

companies that do not succeed in aligning the low

level of flexibility strategy (Beal: 2000, Elenkov:

1997).

A company that lays down to survive and exits to

become a winner in a competitive business should

create a company-oriented policy pattern to achieve

a competitive advantage in the future (Barlett,

Ghoshal: 1999).

2.3 Product Innovation

Kotler (2007) defines product innovation as a

combination of various processes that interact with

each other. Nasution (2005) recognizes product

innovation as a new product or service introduced into

the market. Product innovations are categorized as

new products for the world, new product lines,

additions to existing product lines, revisions of

existing products, re-determination and cost reduction

(Nasution, 2005).Hadjimanolis (2000) suggests that

leadership capabilities, company capabilities, and

environmental factors are more influential on product

innovations that will be undertaken by the

company.Indriani and Prasetyowati (2008) in his

research show that innovation along with leadership

capabilities, company capabilities and engagement

have a positive and significant effect on product

innovation that ultimately affects corporate

performance. Companies that focus on innovation in

services are more capable of success in product

marketing that ultimately contributes to improved

performance (Eisingerich, Rubera, and Seifert, 2009).

According to a survey byTaghizadeh and Rahman

(2013), there is some information available about the

impact of innovation on the success of the company,

especially in the manufacturing sector. Research on

the impact of innovation on company performance has

been studied by scholars such as Cetindamar &

Ulusoy, 2008; Gunday et al., 2011; Lin et al., 2010).

2.4 Sustainable Competitive Advantage

In a company, there are two sources of competitive

advantage that are: superior skills and superior

resources as stated by Day and Wensley (1998).

Barney (1991) reveals that there are four things that

can be applied to produce sustainable competitive

advantage are value, rareness, inability to be imitated,

and imperfect substitution.O'Shannassy (2008)

outlines resources with four (four) valuable, rare,

implicit attributes, no strategic resources that are

strategically equivalent to a company; and strategy

resources help the company achieve and sustain a

Sustainable Competitive Advantage. RBV's theory

states that sustainable competitive advantages rely on

highly valuable, rare, imperfect and non-substitutable

(VRIN) organizational resources (VRIN) in

organizational settings with policies and procedures

for exploiting Barney resources, 1991; Barney &

Clark, 2007; Knott, 2003; Kraaijenbrink, Spender, &

Groen, 2010). Based on the resource-based view, the

organization can define the strategies it will perform

following organizational capabilities. (Purnomo,

2013).

Based on prior works and grounded

theoretically. The authors proposed the hypotheses

developed as follows:

H1: Social capital has a positive and significant effect

on the innovation of horticulture products.

H2: Business environment has a positive and

significant effect on innovation of horticulture

products.

H3: Social capital has a positive and significant effect

on the competitive advantage of horticulture

products.

H4: Business environment has a positive and

Linking Social Capital, Business Environment, Product Innovation, and Sustainable Competitive Advantage: Empirical Evidence from

Farmers in Karo Regency, North Sumatra, Indonesia

139

significant effect on the competitive advantage

of horticulture products.

H5: Product innovation has a positive and significant

effect on the sustainable competitive advantage

of horticulture products.

H6: Social capital has a positive and significant effect

on sustainable competitive advantage

through the innovation of horticulture products.

H7: Business environment has a positive and

significant effect on sustainable competitive

advantage through the innovation of horticulture

products.

3 METHOD

The present study uses a quantitative approach based

on structural equation modeling (SEM) analysis with

some exogenous variables and endogenous variables.

SEM is part of the multivariate dependent statistic;

SEM allows analysis of several dependent and

independent variables directly (Hair et al., 1995).

Ghozali (2008) notes that PLS is a powerful analysis

method since it is not based on many assumptions.

This research was conducted in Karo Regency, North

Sumatra, Indonesia. Data on the source research from

primary data and secondary data.Data also does not

have to have normal multivariate distributions

(indicator with category scale, ordinal, interval until

ratio can be used on the same model) the sample

should not be large. Software used in this research is

WarpPLS. Mahfud and Ratmono (2013: 7) stated that

SEM-PLS allows work efficiently with small sample

sizes and complex models. Also, the assumption of

data distribution in SEM-PLS relative is more flexible

than CB-SEM.

4 RESULTS AND DISCUSSION

4.1 Results

4.1.1 Direct Effect

The direct effects between the variables have been

shown on the path coefficients in the structural model.

The value of path coefficients among variables is

presented in the table below.

Table 1. Direct Effect

Original

Sample

(O)

T Statistics

(|O/STDEV)

Values

Business Env -

> Product Inov

0,918 8,113 0,000

Business Env -

> SuComp

Adv

0,525 2,599 0,010

Product Inov -

> SuComp

Adv

0,377 2,774 0,006

Social Capital

-> Product

Inov

0,074 0,779 0,437

Social Capital

->SuComp

Adv

0,050 0,418 0,676

4.1.2 Indirect Effect

Indirect effects are the number of influences through

variable intermediaries. The indirect-effect of

business environment on sustainable competitive

advantage through product innovation is equal

to0.918 x 0.377= 0.346.

The summarize of indirect effects, direct effect and

total effect will present in Table 3 below.

Table 2. Indirect Effect

Original

Sample

(O)

Statistics

(

O/STDEV

)

Values

Business Env -

> Product Inov

-> SuComp

Adv

0,346 2,682 0,008

Social Capital -

> Product Inov

-> SuComp

Adv

0,028 0,873 0,383

4.1.3 Total Effect

Total effect generated from the analysis of the

structural model in the study is the sum of direct

effects and indirect effect. The total effect result

(business environment on sustainable competitive

advantage through product innovation)is equal to

0.525 + 0.346 = 0.871

EBIC 2019 - Economics and Business International Conference 2019

140

Table 3. Summary of Research Variable Effects

Direct

Effect

Indirect

Effect

Total

Effect

Business Env ->

Product Inov

0,918

Business Env ->

SuComp Adv

0,525 0,346 0.871

Product Inov ->

SuComp Adv

0,377

Social Capital -

>Product Inov

0,074

Social Capital ->

SuCom

Adv

0,050 0,028 0,078

4.1.4 Hypotheses Testing

Table 4. Results of Hypotheses Test

Original

Sample

(O)

T Statistics

(|O/STDEV|)

Values

Conclusion

Business Env -

> Product Inov

0,918 8,113 0,000

Accepted

Business Env -

> SuComp Adv

0,871 3,870 0,000

Accepted

Product Inov -

> SuComp Adv

0,377 2,774 0,006

Accepted

Social Capital -

> Product Inov

0,074 0,779 0,437

Rejected

Social Capital -

> SuComp Adv

0,078 0,542 0,588

Rejected

Business Env -

>Product Inov

-> SuComp

Adv

0,346 2,682 0,008

Accepted

Social Capital -

> Product Inov

-> SuComp

Adv

0,028 0,873 0,383

Rejected

4.2 Discussion

4.2.1 The Effect of Social Capital on the

Sustainable Competitive Advantage of

Horticultural Products

The empirical findings show that t-statistics value is

lower than the t-table value. The t-statistics value is

0.779, and the t-table value is 1.96. (0.779 < 1.96)

and sig value (0.437 >0.05). The results indicate that

social capital has an insignificant effect on product

innovation. Contrary to the empirical findings by

Suriatna and Ardianti (2013) which have stated that

there is a link between social capital and product

innovation. Hence, the authors concludedthat the

hypothesis proposed is rejected.

4.2.2 The Effect of Business Environment on

the Innovation of Horticultural

Products

The empirical evidenceindicates that t-statistics value

is higher than the t-table value. The t-statistics value is

8.113, and the t-table value is 1.96. (8.113 > 1.96) and

sig value (0.000 <0.05). The results indicate that the

business environment has a significant effect on

product innovation. Therefore, the authors concluded

that the hypothesis proposed is accepted.The

empirical findings are consistent with the research

results by (2000), which found a positive influence on

the business environment on innovation, a faster

environmental change has demanded companies to

adapt quickly with continuous improvements through

innovations. The competition environment affects the

number and type of competitors that entrepreneurs

face. Knowledge of competitive environments can

encourage creativity, as knowledge of the competing

environment controlled by entrepreneurs makes them

aware of the opportunities that can be highlighted and

the weaknesses that are calculated (Menon et al.,

1999). The study also recognizes previous research

results such as Birchall et al., (1996), Kim et. al,

(1993); and Hadjimanolis, (2000) have found positive

influences between the business environment and

innovation, including product innovation, competition

intensity, and environmental competition, and are a

measure of the market for innovation.

4.2.3 The Effect of Social Capital on the

Sustainable Competitive Advantage of

Horticultural Products

The empirical findings show that t-statistics value is

lower than the t-table value. The t-statistics value is

0.542, and the t-table value is 1.96. (0.542< 1.96) and

sig value (0.588>0.05). The results indicate that

social capital has an insignificant effect on

sustainable competitive advantage. Therefore, the

authors concluded that the hypothesis proposed is

rejected.Contrary to the empirical findings by

Pastoriza (2009) and Khamimah and Suyati (2015)

find that there is a social capital effect that consists

of networking, trust and commitment to the

competitive advantage of Small and Medium

Enterprises.If the network, trust and commitment to

a Small Medium Enterprises increase, there will be

an increase in the competitive advantage of the Small

Medium Enterprises. Social capital is a source of

sustainable competitive advantage of a company that

can describe the quality of relationships in a business

and measures inter-member relationships.

Linking Social Capital, Business Environment, Product Innovation, and Sustainable Competitive Advantage: Empirical Evidence from

Farmers in Karo Regency, North Sumatra, Indonesia

141

4.2.4 The Effect of Business Environment on

the Sustainable Competitive

Advantage of Horticultural Products

The empirical evidenceindicates that t-statistics value

is higher than the t-table value. The t-statistics value

is 3.870, and the t-table value is 1.96. (3.870> 1.96)

and sig value (0.000 <0.05). The results indicate that

the business environment has a significant effect on

sustainable competitive advantage. Therefore, the

authors concluded that the hypothesis proposed is

accepted.This research findings support previous

research such as work by Beal, (2000); Sinkovics,

(2004), Nurbokah, (2009) where they highlight the

relevance of corporate environmental adaptability

and sustainable competitive advantage. These

findings also recognize the results of work from

Meutia (2013) which have found that there is

significant influence between adaptability to

changing business environment and competitive

advantage. Ability to adapt and rapid external

environment changes is a factor to enhance

competitive advantage.

4.2.5 The Effect of Product Innovation on

the Sustainable Competitive

Advantage of Horticultural Products

The empirical evidenceindicates that t-statistics value

is higher than the t-table value. The t-statistics value

is 2,774, and the t-table value is 1.96. (2,774> 1.96)

and sig value (0.006<0.05). The results indicate that

product innovationhas a significant effect on

sustainable competitive advantage. Therefore, the

authors concluded that the hypothesis proposed is

accepted. The research findings are in line with the

findings of Sugiyarti (2015) which states that product

innovation has a significant effect on competitive

advantage. Companies that implement the product

innovation system will increase the competitive

advantage of Small Medium Enterprises in rapidly

changing environmental conditions. The

paperworked by Slater and Narver (1997) believes

that competitive advantage is determined by

creativity and innovation that can satisfy customers'

expectations rather than competitors. Droge and

Vickey (1994) found that product innovation was

used as one of the sources of competitive advantage.

Companies that are able to design their products

according to customer's desire to survive in the

middle of competition because their products will

remain attractive to customers.

4.2.6 The Effect of Business Environment on

the Sustainable Competitive

Advantage of Horticultural Products

through Product Innovation

The empirical evidenceindicate that t-statistics value

is higher than the t-table value. The t-statistics value

is 2.682, and the t-table value is 1.96. (2.68 2> 1.96)

and sig value (0.008 <0.05). The results indicate that

the business environment has a significant effect on

the sustainable competitive advantage of horticultural

products through product innovation. Therefore, the

authors concluded that the hypothesis proposed is

accepted.

4.2.7 The Effect of Social Capital on the

Sustainable Competitive Advantage of

Horticultural Products through

Product Innovation

The empirical findings show that t-statistics value is

lower than the t-table value. The t-statistics value is

0.873, and the t-table value is 1.96. (0.873 < 1.96) and

sig value (0.383 >0.05). The results indicate that

social capital has an insignificant effect on the

sustainable competitive advantage of horticultural

products through product innovation. Hence, the

authors concluded that the hypothesis proposed is

rejected.

5 CONCLUSIONS &

SUGGESTIONS

The empirical pieces of evidence indicate that social

capital has an insignificant effect on product

innovation. The business environment has a

significant effect on product innovation. Social

capital has an insignificant effect on sustainable

competitive advantage.The business environment

has a significant effect on sustainable competitive

advantage. The product innovation has a significant

effect on sustainable competitive advantage. The

business environment has a significant effect on the

sustainable competitive advantage of horticultural

products through product innovation. Socialcapital

has an insignificant effect on the sustainable

competitive advantage of horticultural products

through product innovation. The ability to adopt

technology should be in line with the ability to

respond to the movement of market behavior.

Therefore, the role of farmers is expected to be more

proactive in observing the direction of changes in the

horticultural product market behavior. Export

EBIC 2019 - Economics and Business International Conference 2019

142

market access is required and standardize product

according to market demand. Therefore, learning is

needed to empower farmers to achieve a target

market that has broad coverage.

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