www.ccsenet.org/ibr International Business Research Vol. 3, No. 4; October 2010 ISSN 1913-9004 E-ISSN 1913-9012 28 Information System and Firms’ Performance: The Case of Malaysian Small Medium Enterprises Saira Kharuddin (Corresponding author) Dept. of Accounting and Finance, Faculty of Economics and Management, Universiti Putra Malaysia 43400 UPM Serdang, Selangor Darul Ehsan Tel: 60-3-8946-7630 E-mail: saira@econ.upm.edu.my Zariyawati Mohd Ashhari Dept. of Accounting and Finance, Faculty of Economics and Management, Universiti Putra Malaysia 43400 UPM Serdang, Selangor Darul Ehsan Tel: 60-3-8946-7630 E-mail: zariyawati@gmail.com Annuar Md Nassir Dept. of Accounting and Finance, Faculty of Economics and Management, Universiti Putra Malaysia 43400 UPM Serdang, Selangor Darul Ehsan Tel: 60-3-8946-7630 E-mail: annuar@econ.upm.edu.my Abstract Information systems are widely use by many corporations to automate existing operations and to improve business activities efficiency. Prior researches have shown that information system adoption did increased firms’ performances and operations efficiency. In Malaysia, Small and Medium Enterprises (SMEs) has been targeted as a mechanism in generating domestic-led investment to stimulate economic development, particularly after the economic crisis that hit the country in 1997. Thus, it is crucial for SMEs to adopt information system to enhance their business operations capability and efficiency. Nevertheless, SMEs limited resources to implement information systems have been one of the critical barriers that hindered the adoption of information systems. Malaysian government has allocated special grants and various initiatives to assist Malaysian SMEs to adopt information system software. Therefore, this study is to investigate the impact of accounting information system on firm performance of Malaysian SMEs. Panel data was used to analyse firm’s performance. Results revealed that SMEs adopting accounting information system show significant improvement in performance compared to non-adopters. Keywords: Accounting systems, SMEs, Firm performance, Random effect 1. Introduction The growth of computer technology in 1950s had initiated increasing development in information storing and processing (Rashid, Hossain, & Patrick, 2001). Computer technologies increase the use of information due to its capabilities of analysing massive amount of data and in producing accurate and timely reports. These unique features of computer capabilities have lead to the introduction of various information systems such accounting information system (AIS), manufacturing resource planning system (MRP) and human resource system (HRM). Information system technology has definitely changed the way businesses are being operated (Elliot, 1992). Firms that are responsive to these changes are perceived to be able to gain competitive advantage (Porter, 1980; Fisher and Kenny,2000). Computer revolutions have greatly affected many organisation processes and procedures, in particular the accounting process (Ismail, Abdullah, & Tayib, 2003). In the early 1960s, many organizations have started utilizing Inventory Control Packages (ICP) technology to integrate and automate their inventory control system (Rashid, Hossain, & Patrick, 2001). This system has contributed to increases in business productions and transactions as now firms are able to produce more products due to the more systematic order schedule plan offered by the system. Thus, this enhances business activities. More businesses and transactions implied that there will be more accounting data needed to be recorded and updated. Prior traditional accounting method of manually inputting and recording daily transactions has becoming inefficient. Errors such as wrong data entry, inefficient tasks performance and massive utilization of paper products have create many problems to business