Development of SMEs in Malaysia

The Global Enterprise

Introduction

Malaysia is a developing nation with a population of 30 million and currently classified in the upper middle income category. It is situated in the South East Asia Region and is part of the Association of South East Asian Nation; which also comprises of countries such as Brunei, Cambodia, Indonesia, Laos, Myanmar, Philippines, Singapore, as well as Thailand and Vietnam (ASEAN, 2014). Malaysia is a unique country as it is made up of a variety of races such as Malay, Chinese and Indian as well as indigenous races, making it an ethnically heterogeneous nation. This thus sets a very diverse and vibrant cultural backdrop in Malaysia.

Important Benchmark in the Malaysian Economic Policy

In their study of strengthening entrepreneurship in Malaysia, Ariff et al (2000) describes that during the British colonial rule of Malaya (pre-1957), the British implemented the practice of separating economic activity along racial boundaries. Malaya’s main economic drivers at the time were tin mining and production of rubber. In order to streamline operations of the industry, Indian and Chinese migrant workers were imported to work on the rubber plantations and in the tin mines respectively. The Chinese were allowed to run certain businesses; becoming shopkeepers, peddlers and petty traders in the towns. The Malays were mainly concentrated in the agricultural sector and were the only ethnic-group that was allowed into the bureaucracy. However, only members of the royal or upper-class families of the different states of Malaya were usually allowed into the administration, whereas the majority of Malays were limited to the low-income agricultural sector. This resulted in a very multi-layered society, segregated economically and racially with the majority of Malays (Bumiputras) at the bottom rung. To rectify the economic disparity that existed within the country, the representatives of the three major ethnic groups (Malay, Indian and Chinese) agreed that upon independence from colonial rule, the Malays would be given certain “special rights” in the fields of religion, economics and politics. The main reason for this “positive discrimination” was to elevate the status of the economically marginalized Malays, and therefore create a more equitable and balanced society.

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Under the New Economic Policy (NEP) established in 1970, these special rights received more comprehensive enunciation. This was a reaction to the growing discontent about the economic inequalities between the Malays and the other races who were still gaining economic ascendancy. The main objectives of the NEP were “to reduce and eventually eradicate poverty,” and “to accelerate the process of restructuring Malaysian society to correct economic imbalance, so as to reduce and eventually eliminate the identification of race with economic function” (Kuala Lumpur: Government Press, 1972) The NEP emphasised on increasing effective Bumiputra ownership and participation in the corporate sector, improving Bumiputra participation in high-income occupations, as well as narrowing income inequality and eradicating poverty.

Within these larger policies, the subject of constructing a Bumiputra Commercial and Industrial Community (BCIC), which involves fostering Bumiputra entrepreneurs, professionals and creating a Bumiputra middle-class (Economic Planning Unit, 2001) is deeply prevalent. This has become the backbone of Malaysia’s strategy for strengthening national entrepreneurship, and all related policies and strategies have to take this into consideration. However non-Bumiputra entrepreneurs have not been completely neglected.

The State of the Malaysian Economy (2013-2014)

Malaysia has a medium-sized but rapidly growing economy. It is self-sufficient in important natural resources, including gas and oil, and has a conducive environment and climate for the production of various crops (oil palm being one of those). Her especially strategic location provides further advantages for the development of its international trade.

As of 14 August 2014, Malaysia has posted a Gross Domestic product (GDP) of 6.4%, amounting to RM262.8 billion. This is a very encouraging sign for the national economy. This is a slightly marked improvement from the first quarter of 2014 which was 6.2%. In the fourth quarter of 2013, the nation posted a GDP of 5.1% (Department of Statistics, Malaysia, 2014). This can be seen in Chart 1. The construction sector was the main contributor to the GDP at 9.9%, followed by manufacturing (7.3%), agriculture (7.1%), private consumption (6.5%) and petroleum and mining (2.1%) according to The Star (2014)

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An additional point to note; the twin tragic disasters that befell Malaysia especially Malaysia Airlines this year (flights MH370 and MH17 respectively) have not significantly affected Malaysia’s bullish economic performance. However, Malaysia Airlines (MAS) have been experiencing heavy losses in the 2^nd and 3^rd quarters of the year (Malaysia Airlines, 2014)

As an oil and gas exporter, Malaysia has profited from higher world energy prices, although the rising cost of domestic gasoline and diesel fuel, has forced the government to begin to address fiscal shortfalls, through initial reductions in energy and sugar subsidies and the announcement of the 2015 implementation of a 6% goods and services tax. The government is also trying to lessen its reliance on state oil producer PETRONAS. The oil and gas sector supplies about 32% of government revenue in 2013. Bank Negara Malaysia (central bank) maintains healthy foreign exchange reserves, and a well-developed regulatory regime has limited Malaysia’s exposure to riskier financial instruments and the global financial crisis. Nevertheless, Malaysia could be vulnerable to a fall in commodity prices or a general slowdown in global economic activity because exports are a major component of GDP.

In order to attract increased investment, the Prime Minister of Malaysia Dato’ Sri Najib Razak earlier raised possible revisions to the special economic and social preferences accorded to ethnic Malays under the New Economic Policy of 1970, but retreated in 2013 after he encountered significant opposition from Malay nationalists and other assigned interests. In September 2013 Najib launched the new Bumiputra Economic Empowerment Program (BEEP), policies that favor and advance the economic condition of ethnic Malays, further strengthening the economic stature and power of the Bumiputras in the nation.

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Malaysia has a diversified and rapidly expanding manufacturing sector. Malaysia was able to join the world’s leaders in some fields although in many areas of manufacturing, it relies on imported technologies and foreign investments. In the 1990s, it became the world’s third-largest producer of integrated circuits and one of the leading producers of domestic appliances. Agriculture is still an important export earner. Malaysia is the world’s second largest producer of palm oil behind Indonesia, amounting to 39% of the world’s palm oil production (Malaysian Palm Oil Council, 2014).

Malaysia has always been very open to foreign investment (FDI), especially for export-oriented manufactures, with relatively few restrictions and easy return of profits. This has prompted some of the world’s largest corporations, such as Dell and Microsoft of the United States, NEC and Mitsubishi of Japan, and others, to set up production branches in Malaysia.

Small Medium Enterprises (SMEs) in Malaysia

Normah Mohd Aris (2007) says that:

“The Malaysian economy is driven and influenced by many factors. Some of these factors include Small and medium enterprises (commonly referred to as SMEs) have been the backbone of economic growth of an economy in driving industrial development. Due to their sheer numbers, size and nature of operations, the role of SMEs in promoting domestic sources of growth and strengthening the infrastructure for accelerated economic expansion and development in Malaysia has been recognised. The interdependence of SMEs and large enterprises in collaborating with each other has led to the further expansion of SMEs.”

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According to the Malaysian SME Corp website, SMEs are defined by the following features:

• Manufacturing sector, sales turnover not exceeding RM50 million OR full-time employees not exceeding 200 workers
• Services and other sectors, sales turnover not exceeding RM20 million OR full-time employees not exceeding 75 workers

SMEs are further divided into three different categories as shown in Table 1.

SMEs in Malaysia are generally focused in the textile and apparel, food and beverages, metals and metals products and wood and wood products sectors. The majority of manufacturing companies are located in the central parts of Malaysia and around the country’s major industrial regions.

Challenges Faced by SMEs in Malaysia

According to Muhammad et al., (2010) many previous studies conducted by Saleh and Ndubisi (2006); Samad (2007); Abu Bakar et al. (2006); Aris (2006); Harvie (2004); Wang (2003); Wafa et al. (2005); Ritchie & Brindley (2000); Decker et al. (2006) and Foon (2006) various challenges faced SMEs in a globalized environment. The SMEs should mainly concentrate in overcoming the challenges, which include recession, barrier from global sourcing, low productivity, lack of managerial capabilities, and lack of financing, difficulty in accessing management, technology and heavy regulatory burden. In the same way, Teoh and Chong (2008) reasoned that the major hurdles to entrepreneurship development are lack of access to credit, formal business and social networks. Muhammad et al. (2010) identified that the main problems faced by SMEs in Malaysia are the lack of knowledge regarding marketing techniques, branding, customer loyalty and also lack of good contacts with others local and international enterprises.

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How the Government is Helping SMEs in Malaysia

The Malaysian Government’s commitment to and involvement for the development of SMEs has been palpable since the early 1970s. The ‘New Economic Policy’, which mainly aimed to improve people’s welfare and restructure ethnic economic imbalances, was introduced in 1971. The government’s commitment to the development of SMEs is also evident in the second Industrial Master Plan (IMP2), which is then followed by the Third Industrial Master Plan (IMP3) 2006–2020; to coincide with the country’s vision for 2020.The Malaysian Government has implemented various policies and strategies under these plans. (Saleh et al, 2006)

Further understanding the role of SMEs, the government’s commitment towards the development of SMEs was emphasized when the National SME Development Council (NSDC), was established in 2004. This Council embodies the highest-level policy making body to chart the direction and strategies for the development of SMEs. Some of the initiatives announced include the formulation of targeted strategies for the development of SMEs across all sectors; the establishment of a comprehensive National SME database and the expansion of development support programmes and facilities to enhance access to financing and accessibility of markets for export (Bank Negara Malaysia, 2006). The Small and Medium Industries Development Corporation (SMIDEC) was also set up, with the goal of developing capable and resilient Malaysian SMEs to be competitive in the global market.

In 2007, the NSDC decided to appoint a single dedicated agency to formulate overall policies. SMIDEC was chosen to tackle this role and was transformed into the Small and Medium Enterprise Corporation Malaysia (SME Corp. Malaysia). SME Corp. Malaysia is now the central point of reference for information and advisory services for all SMEs in Malaysia. (Small and Medium Enterprise Corporation Malaysia, 2014)

Saleh et al (2006) have also identified other key areas in which the Malaysian government have been helping SMEs. These areas include:

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1. Developing Access to Markets

The Malaysian External Trade Development Corporation (MATRADE) facilitates the participation of SMEs at trade fairs and trade exhibitions by financing their participation costs. This gives the SMEs a platform to market and showcase their companies.

2. Upgrading Technology

Technology provides SMEs with the opportunity to increase their efficiency and productivity with tools to better manage their business amidst the growing demands of the current market.

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3. Promoting the Application of ICT

ICT allows effective and speedy communications and can ensure timely responses to market requirements.

4. Research & Development (R & D) and Innovation

A total of RM280million was allocated to the Industry Research and Development Grant Scheme (IGS) and Commercialization of Research and Development Findings (CRDF) schemes under the 8^th Malaysian Plan.

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5. Productivity and Quality

Assistance programs are aimed at encouraging SMEs to acquire quality standards (health, safety, environment and labour) that will assist them to leverage their strengths.

6. Awards and Recognition

The government introduced various award programs to acknowledge companies that have attained excellence. Such programs include:

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• The Prime Minister’s Industry Excellence Award
• Productivity and Quality management Award (PQMA)
• Enterprise 50 Award (E50)

7. Access to Financing and Grants

The government has allocated substantial funds for borrowing by SMEs.

8. Supply of Skilled Labour

In regard to SMEs, SME Corp. Malaysia collaborates with around 20 skill centres to provide training to local SMEs in technical and managerial proficiencies. The Electrical and Electronics, automotive, machinery and engineering services are some of sectors receiving priority in terms of training.

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References

Ariff, M. and Abubakar, S.Y. (2004) Strengthening Entrepreneurship in Malaysia, pp. 2-12

Aris, N. M. (2006) SMEs: building blocks for economic growth. http://www.statistics.gov.my/conference/download.php?cat=1&id_file=22. – accessed 20/10/2014

ASEAN (2014) ASEAN Member States. http://www.asean.org/asean/asean-member-states – accessed 15/10/2014

BNM – Bank Negara Malaysia (2004), “National SME Council Meeting”, Press Release, Bank Negara Malaysia.

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Foon, L. S. & Eu-Gene, S. (2006) The Changing of Education in the Globalized World. Proceedings of Persidangan Kebangsaan IKS 2006, Kuala Lumpur: Universiti Utara Malaysia.

Decker, M., Schiefer, G. & Bulander, R. (2006). Specific challenges for small and medium-sized enterprises (SME) in M-business: a SME-suitable framework for mobile services. Proceedings of the International Conference on E-Business (ICE-B 2006), Setúbal, Portugal: INSTICC.

Department of Statistics, Malaysia (2014) Press Release Gross Domestic Product, 2nd Quarter of 2014. http://www.statistics.gov.my/portal/images/stories/files/LatestReleases/gdp/2014/GDP_PRESS_RELEASE_Q2_2014.pdf – accessed 20/10/2014

Economic Planning Unit, Prime Minister’s Department. Eighth Malaysia Plan, 2001-2005. Kuala Lumpur: Government Printers, 2001

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Harvie, C. (2004) East Asian SME capacity building, competitiveness and market opportunities in a global economy, pp 2-10

Index Mundi (2014), Malaysia Economy Profile 2014. http://www.indexmundi.com/malaysia/economy_profile.html – accessed 25/10/2014

Malaysia Airlines (2014) IMPACT OF MH370 TRAGEDY DENTS MALAYSIA AIRLINES Q2 2014 RESULTS http://www.malaysiaairlines.com/my/en/corporate-info/press-room/latest/mas_q2_2014_result.html accessed 5/11/2014

Malaysian Palm Oil Council (2014) Malaysian Palm Oil Industry. http://www.mpoc.org.my/Malaysian_Palm_Oil_Industry.aspx – accessed 5/11/2014

Ministry of International Trade and Industry, ‘MITI’ (1996) “Second Industrial Master Plan, 1996–2005 — Executive Summary”, MITI, Malaysia, pp. 10–13.

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Ministry of International Trade and industry, ‘MITI’ (2005), “The Third Industrial Master Plan (IMP3)” http://www.miti.gov.my/miti-imp3.html – accessed 25/10/2014

Yusoff, M.B., Hasan, F.A., Jalil, S.A., (2000) Globalisation, Economic Policy, and Equity: The Case of Malaysia, pp. 6-15 http://www.oecd.org/countries/malaysia/2682426.pdf – accessed 20/10/2014

Muhammad, Mohd Zulkifli, Char, Abdul Kamal , Yasoa, Mohd Rushdan bin and Hassan Zakiah, 2010. Small and Medium Enterprises (SMEs) Competing in the Global Business Environment: A Case of Malaysia. International Business Research, Vol.3, No1, pp. 66-72

Saleh, A.S. and Ndubisi, N.O. (2006) SME development in Malaysia: domestic and global challenges, pp. 12-25

Samad, N. A. (2007) Positioning Malaysian SMEs in the global. Proceedings of Persidangan Kebangsaan IKS 2007,Kota Kinabalu: Universiti Utara Malaysia.

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Second Malaysia Plan 1971-1975 (Kuala Lumpur: Government Press, 1971), p. 1. 2

SME Corp Malaysia (2014) About SME Corporation Malaysia. http://www.smecorp.gov.my/vn2/node/40 – accesssed 27/10/2014

Teoh, W. M. Y. & Chong, S. C. (2008) Improving Women Entrepreneurs in Small and Medium Enterprises in Malaysia: Policy Recommendations. Communication of the IBIMA, 2, pp. 31-38.

The Star (2014), Malaysia’s services sector to contribute more to economy. http://www.thestar.com.my/Business/Business-News/2014/08/18/Malaysias-services-sector-to-contribute-more-to-economy/?style=biz – accessed 25/10/2014

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Ritchie, B. & Brindley, C. (2000). Disintermediation, disintegration and risk in the SME global supply chain. Management Decision, 38(8), 575-583.

Wafa, S. A., Noordin, R. & Kim-Man, M. (2005). Strategy and performance of small and medium-size enterprises in Malaysia. Proceedings of the International Conference in Economics and Finance (ICEF), Labuan: Universiti Malaysia Sabah.

Wang, S. D. (2003). The implications of e-financing: implications for SMEs. Bulletin on Asia-Pacific Perspective 2003/2004. New York: United Nations.

Chart 1: GDP and Annual Percentage Change