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Business Location and Success: The Case of Internet Café Business in Indonesia

Article  in  Gadjah Mada International Journal of Business · June 2004

DOI: 10.22146/gamaijb.5543

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Business Location and Success:

The Case of Internet Café Business in Indonesia1

Gadjah Mada International Journal of Business

Vol. 6, No. 2, p: 171-192, May 2004.

by

Nurul Indarti
Department of Management, Faculty of Economics,
Gadjah Mada University, Yogyakarta, Indonesia
[email protected]

1
This paper is a part of a larger project on Internet café diffusion in Indonesia, funded by Norwegian Ministry of
Foreign Affairs through a collaboration scheme between Agder University College, Norway and Gadjah Mada
University, Indonesia. Author thanks two anonymous reviewers for their insightful comments.
 -2-

Abstract
This research aims to examine the relationship between business location decision and
business success. The case is Internet café business in Indonesia. This research is addressed
to answer these main questions: (1) what factors underlie location decision for an Internet
café business?; and (2) does location decision determine success of Internet café business? A
field research is conducted to answer these questions.

Factor analysis applied to 17 location factors reveals five underlying dimensions of business
location decision. They are centrality, business environment, business venue, cost, and
labour. Based on responses from 93 Internet cafés in three locations (i.e. Yogyakarta,
Surabaya, and Lombok), I find that favourable location of business is positively related to
business success. More specifically, a regression analysis unveils that availability of utilities,
proximity to schools/universities and security affect business success in a positive direction,
while proximity to highways, being in commercial centre do in a negative direction. The
independent variables explain 23% of total variance.

Keywords: business location, business success, location factor, Internet café, Indonesia.
 -3-

1. Introduction
Location selection is one of the business decisions that have to be made carefully. Past
research has shown that business location have had relationship with business’ success (e.g.
Alli et al., 1991). In this context, measurement of business success can vary, but it is most
likely related to both subjective and objective data on multiple aspects of performance such as
sales growth, market share and profitability (Dawes, 1999).

The vast of business location decision studies have focused on the manufacturing sectors,
high technology industries, and large companies (e.g. Greenhut, 1956; Wendt, 1972;
Schmenner, 1982; Galbraith and De Noble, 1988; Hayter, 1997; Karakaya and Canel, 1998).
Several, but not many studies on business location decision for service business have been
conducted (e.g. Schmenner, 1994). Previous empirical works have mainly attempted to
investigate factors behind business location decisions.

The Internet café business in Indonesia is rapidly growing. Hitherto, there were around 1500
Internet cafés in whole country (Basuni et al., 2001). Initial interviews with several users of
Internet cafés revealed that location was one of their considerations in selecting their favourite
Internet café. This preliminary finding attracted me to investigate the relationship between
location decision and business’ success. The aim of this study is to participate to the debate,
especially about location decision in service industries. The main objective is to examine what
factors that influence location decisions; relation between those factors and business success;
and other critical success factors in the Internet Cafés business.

This study is addressed to answer the following main questions:

a. What factors underlie location decision for an Internet café business?
b. Does location decision determine success of Internet café business?

2. Setting
The development of the Internet café business (in Indonesian, known as warnet in short for
warung Internet) in Indonesia is an interesting phenomenon. There is no fixed statistics on the
number of Internet cafés in Indonesia reported. According to Basuni et al., (2001), it was
about 1500 Internet cafés in the whole country in 2001. In 2002, Purbo (2002) stated that
there were over 2000 Internet cafés in Indonesia. A list of Internet cafés collected from
several sources on the Internet and field observations in three cities supports this number.
Figure 1 depicts map of Internet cafés in Indonesia graphically. The vast majority of Internet
cafés is found in the big cities, such as Jakarta, Bandung, Yogyakarta, Surabaya and
Semarang.

<<Insert Figure 1 Here>>

3. Theoretical Framework
Past research on location decision is mostly based on three main schools of thought,
neoclassical, behavioural, and institutional (enterprise) theory. The neoclassical framework
has largely focused on the manufacturing sectors and has found that location was largely
driven by the transportation cost of their factor production (e.g. Schmenner, 1982). The
behavioural location theory interprets the location as a decision making (and learning)
process. According to Dicken (1971), the location decision can be defined as a part of the
objective environment which represents the total sum of information in the economy, either
globally or regionally, with which the firm receives and send information flows and signals of
one kind and another. The institutional (enterprise) theory interprets location as an exercise in
 -4-

bargaining (Krumme, 1969). In more detail, location decision can be viewed as a part of
investment decisions that have strategic purposes, i.e. they are made to meet the basic
motivation of corporate strategy (such as growth, profits and security) by gaining access to
new markets or sources of supply in a way that makes sense to individual corporation (Hayter,
1997, p. 170)

Recent studies of location decision have sought quantitative indicators of the decision’s
success by linking location selection decisions to enhanced business success. Although the
business’s success does not depend solely upon the location of business, but the latter
influences the former. Some scholars state that business location had relationship with
business’ success (Alli et al., 1991; Chan et al., 1995; Ghosh et al., 1995).

Relating to business success, in this context, measurement of business success can vary, but it
is most likely related to both subjective and objective data on multiple aspects of performance
such as sales growth, market share and profitability (Dawes, 1999). Laitinen (2002) proposes
two ways of measuring business performance: financial and non-financial performance.
Financial measurement is traditionally used in measuring the performance of a company
which relates to the profitability of the company (return on investment) (Laitinen, 2002). Non-
financial measurements can focus on quality, inventory levels, productivity, flexibility,
deliverability and employees. Beside those, Dawes (1999) uses other terms for explaining
financial and non-financial measurement called subjective and objective measurement.
Subjective measurement can be defined as perceived success of the owner’s firm while
objective one will be an actual percentage figure of sales growth or profitability.

In this study, Internet café business can be considered as services business – simply because it
offers services to its consumer – as well as retail business – because it sell directly its service
to its consumer. A service business is not only retail business, and a retail business is not
necessarily a service business.

3.1 Location Decision in Service Business

It is generally argued that the characteristic of service business and manufacturing obviously
differs. The main differences is regarding to time of production and consumption
considerations. Services businesses traditionally have been thought to be locationally
connected to markets, while the manufacturing firms (primary and/or secondary sectors) –
such as such as agriculture and other direct uses of natural resources or manufacturing – are
confined by supply considerations. Since one of the characteristics of service is that service
could not be stored, at least in the conventional sense, so they must be provided where they
are consumed (Hanink, 1997).

The service sectors can be divided into two major sectors: tertiary and quaternary (Hanink,
1997). The tertiary sector consists of those activities such as transport, government, wholesale
and retail trade and the general business and personal services, while the quaternary sectors
which are sometimes called the information sector because providing and managing
information, consists of those activities such as banking, insurance, and management service.
Another important distinction between services is defined not by what they provide, but by
their market. They are consumer services and producer services. Whether the service issues
from the tertiary or the quaternary sector, services sold to households are called consumer
services. Those services sold or otherwise provided to business are called producer services.
 -5-

As mentioned in the previous section, the service business establishments in the tertiary sector
are almost always found in proximity to their market, due to the fact that most service cannot
be stored. Likewise, market accessibility is important for the service business establishment in
the quaternary sector that is characterized by frequency of purchases. Because their
production and consumption take place simultaneously, the best location for service business
(i.e. retail business) or other consumer service providers are in places with a high market
density (Hanink, 1997). Other factors such as traffic flows, population densities and local
quality of life are also important in selecting location for a new firm.

Schmenner (1994) introduces an approach to study the service business location. His study
approaches the location decision as an intuitively appealing two-step procedure, which first
chooses a general area for the service operation, and only then a particular site. For each step
in the decision, influences can be described as being “musts” or “wants”. The decision maker
is assumed to look first to “musts” and to satisfying them, and then to move on to consider
otherwise desirable features, termed “wants. for the location.

His study shows that labour issues, infrastructure and quality of life tended to be more
important for those firms located at more distance from the city centre. Proximity to
customers is valued by firms with several distinct characteristics: high employment, more
hours open per week, high capital/labour ratios, sites having always been in this vicinity,
strong local business ties, high value placed on particular sites. Many of these characteristics
apply also to the proximity to competitors influence. Low costs or rents appeal most to large
service firms and to those that draw on a wide market area for their sales. In addition, they
find that hospitals, education and social services, personal and business services (e.g. direct
mail, cleaning, graphic arts, and temporary employment agencies) and utilities are relatively
immune to many of the general area influences.

On the location of particular sites, their findings show that the importance of adequate parking
is relatively greater for those service operations whose sales are largely local in origin, are
open longer hours than other services, and relocate at some distance from downtown. Also,
the attractiveness of the building and high customer traffic area sites is most important for
those services that have greater interaction with the customer. Those industries that are most
affected by high customer traffic, adequate parking area, and similar influences are the more
retail-oriented services: retailing, restaurants, banking and auto sales-services.

3.2 Location Decision in Retail Business

From distribution channels point of view, I consider an Internet café as a retailer, as stated
earlier. Levy and Weitz (1998, p. 7) define “retailer as a business that sells products and
services to consumers for their personal or family use”. A retailer is the final business, after
wholesaler, in a distribution channel that links manufacturers with consumers. In this view,
Internet Service Providers (ISP) can be considered as wholesalers that sell Internet bandwidth
to the Internet cafés and sometimes directly to consumers.

Furthermore, Levy and Weitz (1998) state that selecting retail location is one of the retailing
strategies, because of some reasons. First, location is typically the important consideration in
customer’s store choice. Second, location decision can be used to develop a sustainable
competitive advantage. In fact, retail location is not restricted to only new retailers. Mazze
(1972) mentions that population shifts, new modes of transportation, changing consumer life
styles and competitive conditions are often considered as factors that make retailers to re-
 -6-

evaluate their locations. He also states that location is one of the factors that determine
success of a retail store.

According to Levy and Weitz (1998), there are three general factors affecting the
attractiveness of market in retail business: demographics, business climate and competition.
Demographic factors relate to some conditions, such as population density, education, income
and family size (Mazze, 1972; Levy and Weitz, 1998). Demographic factors considered in
retail business location are dependent on the target market of a particular retailer. For
example, an Internet café with student as its target market often choose their location near to
university, school or student dormitory. Business climate is mainly considered to ensure
strong retail environment in the future. This factor may include market’s employment trends
to guarantee availability of labour and availability of necessary utilities. For instance, an
Internet café relies on service from an ISP to provide access to the Internet, hence, the
availability of such service in the future should also be guaranteed. The level of competition
in an area also affects demand for a retailer’s products or services. For example, if two
convenient Internet cafés are too close together, their market will shrink since they offer the
same services.

In more detail, Mazze (1972) and Levy and Weitz (1998) mention several factors that should
be taken into account in selecting retail location: such as term of occupancy, retail grouping or
being in a centre, accessibility, and legal consideration. The term of occupancy relates to the
cost of renting/building and utilities, since most retailers prefer to lease a building for their
store rather than to be the owner of that. Hence, once a particular location is chosen, retailers
still face a multitude of decision, either will lease or buy. In fact, most of the best locations
such as in shopping malls are only available by leasing (Levy and Weitz, 1998).

Retail grouping refers to a group of retailers that have the same target market (Mazze, 1972).
It is important for a store located in retail grouping or a centre of business activities. The
theory of cumulative attraction as formulated by Nelson (1958) suggested that retailers indeed
benefit from agglomeration. It means that a cluster of similar and complementary retailing
activities will generally have greater drawing power than isolated stores that engage in the
same retailing activities (Levy and Weitz, 1998). For instance, shoe stores, clothing stores,
cosmetic and perfume shops seem to do better if they are close to one another. Likewise,
stationary shops, photocopying, computer rental and Internet café seems to get more benefit if
they are close to another.

Referring to Levy and Weitz (1998), the accessibility of a retail location is defined as the ease
with which a customer may get into and out of the store, and it can be analysed into a macro
analysis and a micro analysis. The macro analysis concentrates on the road pattern or the
position of retailers relatively to highway (Mazze, 1972) or freeway so that customers can
travel easily to the store. The micro analysis focuses on issues in the immediate vicinity of the
store such as visibility, vehicular traffic, availability of parking area, congestion,
transportation facilities, and ingress/regress (Levy and Weitz, 1998).

Legal consideration is also important factors in considering location of a store. Legal issues
that affect the location decision of a store include environmental issues, zoning, building
codes and signs and licensing requirement (Levy and Weitz, 1998). For example, retailers
must consider laws regarding how land is used when choosing a certain location for their
stores.
 -7-

4. Methodology
4.1 Operational Measurement
Instead in fact that some specific hypotheses can be drawn, I choose to treat this research as
exploratory in nature. The reason is due to lack of theoretical backdrop that specifically
relates to Internet café business. Location factors in this business sector are not well-
understood. Research questions answered are stated in the outset of this paper.

It is believed that business location decision has effect on business success. The more
favourable the location of a business, the higher possibility the business is to succeed.
Despite that there are many location factors, 17 location factors that are relevant to be taken
into account in making location decision of Internet café business are selected (see Table 1).
The research model is depicted in Figure 2.

<<Insert Table 1 Here>>

<<Insert Figure 2 Here>>

The dependent variable of this study is perceived success measured by five items. The items
are perception on utilization of computer, growth of net income, payback period, and two
items on general assessment on success.

4.2 Research Instrument

A questionnaire was developed as the main research instrument. The questionnaire was based
on theories on location decision and several preliminary unstructured interviews with owners
of Internet café and users. The preliminary interviews were conducted in the beginning of
August 2002.

In addition to demographical questions, the questionnaire consisted of questions on location

decision, market structure, business development, key success factors and obstacles. The
questionnaire was in Indonesian language. Normally it took around 20 minutes to fill in the
questionnaire.

Background questions incorporated those on individual characteristics such as gender,

education and work experience and business-related items such as year of establishment,
number of computer, operating hours, initial investment, and total investment.

Items on perceived success were measured by 5-point Likert scales anchored by “strongly
disagree” and “strongly agree. while those on location decision were measured by 5-point
Likert scales anchored by “very unimportant” and “very important”. Questions on location
decision consisted of 17 items which each of them represented one dimension of location
believed to be relevant on deciding business location in the Internet café business context.
Dimensions of location, for instance, were availability of labour, availability of utilities (e.g.
water, electricity, and phone), availability of high quality Internet Service Provider (ISP),
proximity to customers, proximity to schools/universities.

To test the questionnaire, a pilot investigation was done in the middle of December 2002.
Based on feedbacks from some respondents, the questionnaire was refined. Some questions
were elicited since the respondents considered that they were difficult to answer or they did
not want to release such information asked.
 -8-

4.3 Data Collection Procedure

Respondents of this study were the owners of Internet café. The study took place in three
regions: Yogyakarta, Surabaya, and Lombok. Yogyakarta was selected because it is a typical
university city, where large proportions of the population are active students at the 100
institutions of higher learning within the small province. Surabaya in East Java was included
because of its dominant role as an industrial city in Indonesia with a high number of modern
manufacturing and service industries. The island of Lombok in the province of Nusa
Tenggara Barat (NTB) was selected mostly because of the dominating tourist industry in the
area. I use the term Lombok to refer to Mataram, Senggigi, and Gili Terawangan Island. The
three study areas are economically relatively well developed and centrally located within the
wider Indonesian context. The Lombok site, however, differs from the urban, Javanese study
areas in some ways, as we shall see. First and foremost, Lombok is characterised by a more
rural society and less advanced infrastructure development. There are around 120 Internet
cafés in Yogyakarta, 100 in Surabaya, and 30 in Lombok.

A clustered-proportional sampling was used to select respondents. The area of Yogyakarta

city was divided into five geographical clusters based on main lines of demarcation. A north-
south distinction was made using the railway as divider. The northern area was divided into
three clusters, and the southern into two based on the main road partitions. I distributed 66
questionnaires randomly to around 50% of the total population in each cluster. I got 44
responses and 43 were usable. A similar procedure was deployed in Surabaya, dividing the
town into four geographical clusters partitioned by main highways. I distributed 50
questionnaires and got 41 responses, 39 valid. The island of Lombok was divided differently:
one educational cluster that is in the vicinity of educational institutions in the capital town,
one shopping-mall cluster, and lastly a tourism area cluster. The number of Internet cafés in
these three clusters is around 30. I distributed the questionnaires to 50% of total population in
each cluster, got 11 responses, all of them valid. At an average, response rate was 73%.

Data from the questionnaires have been complemented by five in-depth interviews with
Internet café owners and twenty user interviews in Yogyakarta and in Lombok. The
qualitative information has helped interpreting some of the quantitative data.

4.4 Data Analysis Methods

Score of each independent variable is calculated by averaging from score from each item in
respective variables. Reverse scoring is deployed for unfavourable item. Because all questions
in the questionnaire are closed-ended ones, a statistical software package, SPSS, is
appropriate to be used in data analysis.

To examine reliability (internal consistency), Cronbach’s alpha is used. Confirmatory factor

analysis is used to examine validity of the instrument. In addition to descriptive analysis (i.e.
central tendency), correlation and regression analyses are deployed to check interdependency
among two variables and the effect of several independent variables on dependent variable
respectively.

5. Research Results
5.1 Reliability and Validity of the Instrument
Reliability and validity test is applied to items to measure subjective success. Cronbach’s
alpha value is used to examine the reliability (internal consistency) of the instrument
(Frankfort-Nachmias and Nachmias, 2000). The value of Cronbach’s alpha is 0.89. According
 -9-

to Nunally (1978) suggested that values up to 0.60 and even 0.50 can be considered
acceptable.

Principal factor analysis is used to determine the validity of data. Principal component
analysis (Frankfort-Nachmias and Nachmias, 2000) discloses that only one factor is being
extracted with factor loadings vary from 0.73 to 0.88. Without exception, component loading
of all items are greater than the minimum acceptable value, 0.3. Hence, the instrument is said
to be valid.

5.2 Demographic Characteristics

The vast majority (89.2%) of Internet café’s owners are male. Most owners of Internet café
have university education (87.2%), while only 1.1% of them who have either elementary or
junior high school education.

The age of the owners varies from 22 to 59 years old, with an average on 32 years. Most of
them fall into the age group 26-30 years. Two third (66.3%) of the owners have previous
work experience. Out of those with work experience, 40.7% have IT-related experience and
only 11.1% have worked in the public sector. More than half of the owners are Javanese
(57%) and 14% are Chinese.

5.3 Location Factors ad Business Success

Using mean rating, the five most important location factors considered by the respondent at
starting up are (a) availability of high quality ISP, (b) proximity to customers, (c) security, (d)
availability of utilities, and (e) availability of business venue. At present day, the five most
important location factors are somewhat different from those at start up. These factors are (a)
security, (b) proximity to customers, (c) availability of high quality ISP, (d) availability of
utilities, and (e) price of high quality ISP. The following quotations from in-depth interviews
support the findings

“I prefer to open it here or at Seturan [a location in the proximity of a university].

But first, Jogja Media Net [an ISP that offers a high quality Internet connection]
should be available in that location”.

“[The location] is very favourable. [It is] close to campuses. There are many
boarding houses in the surrounding of campuses. Students are our target market.”

“Access speed is very important. And then [it is followed by] comfort and quality
services. Access speed means quality of infrastructure, in this regard ISP.”

A regression model is used to determine which location factors that have direct effect on
business success. Values of independent variables are based on the values of the location
factors at start up, while the dependent variable is subjective measurement of success.

Prior to regression analysis, a correlation analysis is conducted to ensure that independent

variables do not correlate among other (i.e. no multicollinearity problem). Result of the
correlation analysis is depicted in Table 2. Multicollinearity is said to exist if there is strong
correlation between independent variables or if coefficient of correlation is greater than 0.7
(Gujarati, 1995). As can be seen, no coefficients of correlation that is greater than 0.7, and
hence I can conclude that there is no multicollinearity problem.
 -10-

<<Insert Table 2 Here>>

I find that the independent variables altogether significantly (F17, 73 =2.60, p<0.01) explain the
perceived success as summarized in Table 3. As can be seen, availability of utilities,
proximity to schools/universities, and local security affect success in a positive direction,
while proximity to highways, and being in commercial centre do in negative directions.

<<Insert Table 3 Here>>

In this regard, availability of utilities (e.g. electricity, water) is considered to be significant by

the Internet café’s owners in determining their business success. It is obvious, no Internet café
without these necessary requirements. Moreover, comfortable place as mentioned before
needs more utilities to provide. Quite often, the comfortable place is a necessary condition to
attract more customers and keep the existing customers. This demand makes the Internet cafés
consider availability of utilities to be more important at present day compared to that at start
up.

Likewise, position of the Internet café close to schools/universities has direct and significant
positive effect on business success. The possible explanation is that location in the
neighbourhood of schools/universities will enable the Internet cafés to get more potential
customers since the largest percentage (58.9%) of their market is student.

Security is also found to be linked to business success significantly. As rate of criminality

increases, this factor becomes more importance to attract customers. The higher number of
potential customers that can be attracted by the Internet cafés, the higher their possibility to
get success.

On the contrary, I find that proximity to highways has a direct and negative effect on business
success. Proximity to highways in one hand is related to visibility and attractiveness; but in
another hand it has its inherent disadvantage because of noise. Since I find that each Internet
café has already had its regular customers, then the visibility becomes less important and
hence have no positive influence on business success.

Another interesting finding is that being in commercial centre is negatively associated with
business success. The fact that most people visit the shopping centre for other activities than
Internet browsing may explain this. In case they will use the Internet, they will go to the
Internet café on purpose. This finding suggests that the Internet café located in commercial
centre tend to be less successful than those not located in commercial centre. Total variance
explained by all independent variables is only 23% (adjusted-R2).

5.4 Underlying Dimensions of Business Location Decision

Factor analysis with principal component analysis and varimax-rotation is used to determine
underlying dimensions of location decision. That factor analysis is applied to values of
importance of location factors at present day provided by respondents and reveals five factors
(dimensions) as shown in Table 4.

<<Insert Table 4 Here>>

The first factor consists of six factors; availability of high quality ISP, price of high quality
ISP, availability of utilities, proximity to customers, security, and proximity to highways. I
 -11-

name this as “centrality” factor. This factor accounts 32% of the variance. Being in the centre
of activities is an important factor in selecting business location. Location in the proximity to
customers and the proximity highway means that it is close to high customer traffic. In
addition, generally in a place where many activities cluster need a high security. Not
surprisingly, this factor falls into this dimension. Giving the customer as well as the owner
freedom from fear about criminality is very important. The attractiveness of the Internet cafe
is difficult to maintain without the existence of security. In addition, availability and price of
high quality ISP play a central role in the Internet café business. Summarily, all these six
factors play a central role in succeeding the Internet café business.

The second factor that is termed as “business environment” factor has five components;
proximity to business services, proximity to residential housing, proximity to hotels/
recreation places, being in commercial centre, and proximity to competitors. This factor
accounts 14.05% of the variance. A good business within inappropriate business environment
is not guaranteed to survive. In this regards, the existence of a good business environment is
important. Location in the proximity to business services, proximity to residential housing,
proximity to hotels/recreation places, being in commercial centre, and proximity to
competitors is beneficial to present a good and healthy business climate. The first four
components again are related to possibility to increase potential customers because of the
attractiveness of the location. The last factor is very important to stimulate the Internet café to
always be innovative in order to win the market. This, then, will produce a tough
entrepreneur.

The third factor is named as “business venue” factor and incorporates three components,
namely availability of business venue, availability of adequate parking area and owner/
personal preference. This factor explains 8.28% of the variance. The first two components are
directly related to a necessary building in which the Internet cafés operate and attractiveness
of the venue. The last component may be related to locality. These components, then,
altogether ease to get a representative and attractive business venue.

Next, the fourth factor is labelled as “cost” factor and has two components (i.e. rental price of
business venue and proximity to schools/universities). This factor explains 6.89% of the
variance. These factors cannot solely be corresponded to operating cost, but also to
profitability. Quite often, rental price of business venue in a certain location, such as in the
proximity to schools/universities, is somewhat high, but this will be compensated by revenue
the Internet cafés will get. The last factor is availability of labour that is named as “labour”
factor and accounts 5.96% of the variance.

<<Insert Figure 3 Here>>

In order to examine which factor that is most important, five factors are compared based on
their importance as shown in Figure 3. The centrality factor appears as the most important one
with mean rating of 4.56, and is followed the business venue factor (4.34), the cost factor
(4.25), the labour factor (3.96), and the business environment factor (3.4) factors respectively.

6. Discussion of the Results

Two main research questions were posed at the beginning of this thesis (1) what factors
underlie location decision for an Internet café business?; and (2) does location decision
determine success of Internet café business? These questions are addressed below in light of
the result of the data analyses.
 -12-

Underlying factors of location decision for an Internet café business

The recent study finds that there are some underlying dimensions examined in the Internet
cafés location decision. The five underlying factors are identified (i.e. centrality, business
venue, cost, labour, and business environment) through factor analysis are clearly the
important dimension considered by the Internet cafés’ owner when evaluating the location for
business. From a regional-planning perspective, it means that regions (cities or town)
attempting to attract new Internet cafés into their area need to consider the factors that are
important to Internet cafés planning to relocate or open up new Internet cafés. It is equally
important to prevent the existing Internet cafés from leaving their present locations to more
attractive ones.

These five factors seem also to affect the agglomeration of the Internet café business.
Attractiveness of a certain location makes business with similar target market to cluster.
Spread of Internet cafés in Yogyakarta and Surabaya (not only those in the research sample)
as depicted by Figure 4 supports this claim.In this analysis, I exclude Internet cafés in
Lombok because as mentioned above, term Lombok refers to Mataram, Senggigi, and Gili
Terawangan Island and this make it incomparable to those on Yogyakarta and Surabaya.

As can be seen in Figure 4(a), most Internet cafés are concentrated in clusters 2 and 3. This
spatial pattern of location seems to be like this because in those clusters several big
universities, such as Gadjah Mada University (with more than 40.000 students), Islamic
University of Indonesia (with more than 20.000 students), Yogyakarta State University,
Sanata Dharma University, and National Development University are located. Among these
93 Internet cafés in the sample, 80 of them (86%) target students as their customer. Though
several universities are also found in the rest of the three clusters but they are not the big ones.
This seems also to be the case in Surabaya. Most Internet cafés are located in clusters 2 and 3
(see Figure 4(b)) where several big universities (e.g. ITS, Petra University, Surabaya
University, Untag, and Unitomo) exist. This finding substantiates previous theories on
geographical concentration or agglomeration and theory of accumulative attractiveness (e.g.
Nelson, 1958; Porter, 1998a; 1998b).According to Porter (1998a, p. 88), this will give “a
social glue that binds clusters together and facilitates access to important resources and
information.”

<<Insert Figure 4 Here>>

Impact of business location on success

Location of the Internet cafés is found to be having a direct and significant effect on business
success. This finding supports previous finding stating that business location had relationship
with business’ success (Alli et al., 1991; Chan et al., 1995; Ghosh et al., 1995). The specific
location factors that are important differ from business sector to business sector. In the context
of Internet café business, I find that availability of utilities, proximity to schools/universities
and security are positively and significantly linked to business success, while proximity to
highways and being in commercial centre have a negative influence on business success.
Internet cafés entrepreneur who want to ensure the success of the business should pay more
attention to availability of utilities, proximity to schools/universities and security when
selecting business location. On the contrary, they should avoid from establishing Internet
cafés in commercial centre and near to highways.

The independent variables altogether explain 23% of total variance. This finding tells us that
there are other factors that explain business success in addition to location factors. Including
 -13-

other relevant factors such as individual background (e.g. education and entrepreneurial
readiness) and business related factor (e.g. type of Internet connection, market, and number of
computers) into the model may increase the explained variance.

Furthermore, examining critical success factors as regards their effects on business success
may give a better understanding of factors behind the success. In addition to geographical
location, access speed, comfort of place, quality of services, and rental price are believed to
have determining influences on the Internet café business success. It is equally important to
consider possible barriers that hinder the Internet cafés to succeed. In addition to unfavourable
location, these factors include high fixed expenses, unfavourable ISP, high competition, and
limited market. Fostering the critical success factors and dampening the possible barriers
down will ensure the success of the Internet café business. Some of the factors/barriers are the
owner’s responsibility and some are other business’s and government’s tasks.

7. Limitations and Further Research

This research is not without its limitations. First, limited number of sample on only three
locations (e.g. Yogyakarta, Surabaya, and Lombok) may lead us to a somewhat biased
conclusion, since I find that the importance of location factors varies from a location to
location. However, the findings may be extrapolated to other locations. But, including Internet
cafés in other locations into samples perhaps will give us a fuller picture of relationship
between location factors and Internet café business success.

Second, this study only includes 17 location factors based on findings of several previous
researches. However, including other factors especially those are related to specific market
area and business context may give different results.

Third, I want to re-emphasize here that as an exploratory research, this research addressed the
research questions broadly. A more specific research may be carried out to examine many
speculative explanations throughout the study.

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 -16-

About the Author

Nurul Indarti is a lecturer at Department of Management, Faculty of Economics, Gadjah

Mada University. She earned her first degree in Management, from Gadjah Mada University
(1998); Sivilokonom (equivalent to Master of Business Administration with specialisation in
Project Management and Entrepreneurship) from School of Management, Agder University
College, Norway (2002); Candidata Mercatoria (equivalent to Master of Science in Strategy
and Management), from Norwegian School of Economics and Business Administration,
Norway (2003). Currently, she is vice deputy of research and database management at Small
and Medium Enterprises Development Center (SMEDC), Gadjah Mada University.
 -17-

Figure 1. Map of Internet cafés in Indonesia

Figure 2. Research model

Location factors
- Availability of labour
- Availability of utilities
- Availability of adequate parking area
- Availability of business venue
- Availability of high quality ISP
- Proximity to customers
- Proximity to schools/universities
- Proximity to hotels/recreational places Perceived success
- Proximity to residential housing
- Proximity to business services
- Proximity to competitors
- Proximity to highways
- Being in commercial centre
- Rental cost of business venue
- Price of high quality ISP
- Owner/personal preference
- Local security stability
 -18-

Figure 3. Importance of five location decision factors compared

Mean values of importance 5

0
Centrality Business Business Cost Labour
environment venue

Figure 4. Spread of Internet cafés in (a) Yogyakarta and (b) Surabaya.

(a) (b)
 -19-

Table 1. Factors considered in location decisions

Factors Studies
Availability of labor Fulton (1971); Blair and Premus (1987); Gailbraith
and De Noble (1988); Schmenner (1994); Mudambi
(1995); Laulajainen and Stafford (1995); Hayter
(1997)
Proximity to customers Schmenner (1994); Laulajainen and Stafford (1995);
Alberto (2000)
Proximity to schools/universities Haines (1970); Gailbraith and De Noble (1988);
Karakaya and Canel (1998); O’Mara (1999)
Proximity to business services Mazze (1972); Gailbraith and De Noble (1988);
Schmenner (1994)
Proximity to residential housing Gailbraith and De Noble (1988); Schmenner (1994)
Proximity to hotels/recreation places Gailbraith and De Noble (1988)
Proximity to highway Schmenner (1994); Hanink (1997)
Being in commercial center Schiller (2001)
Proximity to competitors Schmenner (1994)
Security Laulajainen and Stafford (1995); Mudambi (1995)
Availability of utilities Fulton (1971); Schmenner (1982)
Availability of adequate parking area Schmenner (1994); Hanink (1997)
Owner/personal preference Haines (1970); Gailbraith and De Noble (1988)
Availability of business venue Haines (1970); Karakaya and Canel (1998)
Rental price of business venue Haines (1970); Galbraith and De Noble (1988);
Schmenner (1994)
Availability of high quality ISP and Developed in this study
price of ISP
 -20-

Table 2. Correlation matrix of independent variables at start up

Variable 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17
1 Availability of labour 1.00
2 Availability of utilities 0.40c 1.00
3 Availability of adequate parking area 0.17 0.37 c 1.00
4 Availability of business venue 0.15 0.36 c 0.54 c 1.00
5 Availability of high quality ISP 0.19 a 0.40 c 0.26 b 0.43 c 1.00
6 Proximity to customers 0.06 0.31 c 0.14 0.31 c 0.28 c 1.00
7 Proximity to schools/universities 0.03 0.08 0.41 c 0.38 c 0.24 b 0.37 c 1.00
8 Proximity to hotels/recreation places 0.11 0.19 a 0.01 0.05 0.21 b 0.31 c -0.02 1.00
9 Proximity to residential housing 0.09 0.26 b 0.15 0.22 b 0.15 0.22 b 0.21 b 0.47 c 1.00
10 Proximity to business services 0.15 0.27 c 0.17 0.23 b 0.28 c 0.28 c 0.11 0.62 c 0.59 c 1.00
11 Proximity to competitors -0.04 0.09 0.24 b 0.17 0.01 0.19 a 0.17 0.22 b 0.37 c 0.31 c 1.00
12 Proximity to highway 0.21 b 0.47 c 0.36 c 0.34 c 0.16 0.28 c 0.27 c 0.16 0.30 c 0.35 c 0.19 a 1.00
13 Being in commercial center 0.03 0.10 0.15 0.20 a 0.03 0.06 0.18 0.33 c 0.26 b 0.34 c 0.19 a 0.12 1.00
14 Rental price of business venue 0.06 0.08 0.38 c 0.26 b 0.18 a 0.17 0.38 c 0.04 0.13 0.12 0.19 a 0.12 0.15 1.00
15 Price of high quality ISP 0.19 a 0.31 c 0.23 b 0.25 b 0.46 c 0.41 c 0.16 0.07 0.10 0.19 a 0.31 c 0.26 c 0.03 0.32 c 1.00
16 Owner/personal preference 0.10 0.21 b 0.21 b 0.30 c 0.30 c 0.43 c 0.26 b 0.13 0.19 a 0.25 b 0.19 a 0.36 c 0.12 0.17 0.41 c 1.00
17 Security 0.37 c 0.38 c 0.30 c 0.42 c 0.49 c 0.51 c 0.36 c 0.23 b 0.22 b 0.32 c 0.18 a 0.46 c 0.10 0.24 b 0.52 c 0.50 c 1.00
Notes: a p<0.1, b p<0.05, c p<0.01
 -21-

Table 3. Regression coefficients

Variable Beta t
Availability of labour -0.04 -0.35
Availability of utilities 0.24 1.83*
Availability of adequate parking area 0.12 0.97
Availability of business venue 0.05 0.37
Availability of high quality ISP 0.12 0.93
Proximity to customers -0.20 -1.53
Proximity to schools/universities 0.31 2.50**
Proximity to hotels/recreational places 0.22 1.65
Proximity to residential housing 0.02 0.14
Proximity to business services -0.22 -1.56
Proximity to competitors 0.09 0.79
Proximity to highways -0.37 -2.96***
Being in commercial centre -0.18 -1.72*
Rental price of business venue -0.12 -1.09
Price of high quality ISP -0.09 -0.70
Owner/personal preference 0.19 1.64
Security 0.29 1.99*
Model summary:
F17, 73 = 2.60 p < 0.01 R2 = 0.38 Adj-R2 = 0.23
Notes: * p<0.10, ** p <0.05, *** p<0.01
 -22-

Table 4. Varimax-rotated principal component loadings

Factor 1 Factor 2 Factor 3 Factor 4 Factor 5
Centrality Business Business Cost Labour
environment venue
Availability of high quality ISP 0.82 0.02 0.12 0.17 0.07
Price of high quality ISP 0.72 0.06 0.02 0.44 0.17
Availability of utilities 0.66 0.12 0.39 -0.01 0.28
Proximity to customers 0.59 0.14 0.49 0.03 -0.17
Security 0.54 0.06 0.52 0.21 0.21
Proximity to highways 0.47 0.25 0.12 0.33 -0.09
Proximity to business services 0.31 0.85 -0.08 0.04 -0.05
Proximity to residential housing 0.06 0.83 0.13 0.14 -0.26
Proximity to hotels/recreation places 0.29 0.75 -0.08 -0.07 0.07
Being in commercial centre -0.10 0.69 0.26 0.15 0.11
Proximity to competitors -0.25 0.44 0.10 0.15 0.24
Availability of business venue 0.18 0.08 0.83 0.08 0.02
Availability of adequate parking area 0.07 -0.07 0.79 0.38 -0.01
Owner/personal preference 0.17 0.16 0.55 0.04 0.31
Rental price of business venue 0.22 0.07 0.12 0.80 0.20
Proximity to schools/universities 0.24 0.22 0.33 0.76 -0.16
Availability of labour 0.16 -0.03 0.12 0.05 0.87
Percentage of variance explained 32.00 14.05 8.28 6.89 5.96

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