Small and medium enterprises – The Drivers of Change

loading

Defining SMEs

The substantial role of small and medium enterprises (SMEs) in the domestic economy as an agent of growth has generally been recognised throughout the world. How are small and medium sized enterprises defined? According to the United Nations Industrial Development Organisation (Unido), the definition of SMEs is a significant issue for policy development and implementation, and depends primarily on the purpose of classification. Therefore, there are various definitions and criteria of SMEs adopted by different countries – some refer to the number of employees as their key criterion for SMEs, others use invested capital, whereas some use a combination of the number of employees, invested capital, sales and industry type. Figure 1 shows the definition of SMEs in selected regional countries.

FIGURE 1: DEFINITION OF SMEs IN SELECTED REGIONAL COUNTRIES

In Malaysia, we adopted a common definition of SMEs to facilitate identification of SMEs in the various sectors and subsectors. An enterprise is considered an SME in each of the respective sectors based on the number of fulltime employees or annual sales turnover.

(a) "Small and medium enterprises in the manufacturing, manufacturing- related services and agro-based industries are enterprises with fulltime employees not exceeding 150 OR with annual sales turnover not exceeding RM25mil."

(b) "Small and medium enterprises in the services, primary agriculture and information & communication technology (ICT) sectors are enterprises with fulltime employees not exceeding 50 OR with annual sales turnover not exceeding RM5mil."

Issues and challenges

Despite the long recognised importance of SMEs and availability of various financial, technical, marketing and management assistance programmes as well as incentives by various public agencies, local SMEs still face major challenges. The challenges of business entry, survival and growth are often substantial. SMEs generally lack resources and capability compared to their larger counterparts.

Lack of financial strength

Financial resource is one of the important factors determining the survival and growth of SMEs. However, SMEs in general have experienced difficulty in obtaining credit or financing from commercial banks. SMEs are often regarded as perceived highrisk borrowers, mainly due to low capitalisation and insufficient assets, vulnerability to market fluctuations, high close down rates, as well as failure to meet loan application conditions.

A quick check on bank loan data showed that as of March 31, 2011, more than 60% of the loans approved were for the purchase of landed properties and transport vehicles. Only about a quarter of the loans were approved as working capital for business entities (Figure 2).

On the other hand, although financial assistance and incentives are offered by public authorities for SMEs, the approval period and process are perceived to have much room to improve. SMEs that plan to expand their production capacity and technological capability to meet export demand may miss the boat or lose the window of business opportunity should they not have access to loan/financial assistance to make timely investments.

Limited market access

Most of the SMEs rely on the domestic market and have a small clientele. In Penang, SMEs in the manufacturing industry are often dependent on multinational corporations (MNCs) located in the state or country. These MNCs source parts, components, materials and services from the local suppliers. Often there are a large number of suppliers and only limited customers, resulting in a situation where the bargaining power of SMEs/suppliers is weak and unequal, and most of the time they have to absorb the costs and risks. Furthermore, though MNCs have been the key engine of growth of Penang’s manufacturing industry for almost four decades, there is still the possibility of these operations relocating out if Penang or Malaysia loses its competitive advantage.

FIGURE 2: LOAN BY PURPOSE FROM COMMERCIAL AND INVESTMENT/MERCHANT BANKS IN PENANG, ASAT MARCH 31, 2011

Limited market access Most of the SMEs rely on the domestic market and have a small clientele. In Penang, SMEs in the manufacturing industry are often dependent on multinational corporations (MNCs) located in the state or country. These MNCs source parts, components, materials and services from the local suppliers. Often there are a large number of suppliers and only limited customers, resulting in a situation where the bargaining power of SMEs/suppliers is weak and unequal, and most of the time they have to absorb the costs and risks. Furthermore, though MNCs have been the key engine of growth of Penang’s manufacturing industry for almost four decades, there is still the possibility of these operations relocating out if Penang or Malaysia loses its competitive advantage.

Shortage of skilled and talented human resources

Human resource is another main challenge for SMEs that have limited access to skilled and talented workforce, as local SMEs have to compete with MNCs or large local companies for skilled manpower. In general, SMEs have a less conducive work environment, lower pay scale, narrow fringe benefits as well as limited long-term career prospects. Not many SMEs have a clearly structured human resource policy; as a result, these smaller players tend to be left with more operational and lower technical workers compared to knowledge or skilled personnel (who are able to undertake research, design and development activities) who are likely to be engaged by MNCs or large firms.

Moreover, most of the employees of SMEs do not undergo formal training on a regular basis. The majority of them are trained on the job. The reasons why many SMEs cannot send staff out for formal training is because their daily operations would be affected due to the small workforce size, and there may be a worry that if employees receive too much training and become too skilful, they may be poached by competitors or larger firms.

SMEs also expressed their concerns on what would be the likely impact of the soon-to-be implemented minimum wage – the minimum wage rate, how much it will affect the operating costs, review of the manpower required, substitution of labour with machinery, product pricing, etc.

Lack of technological and innovation capabilities

Most of the local SMEs lag behind in technological, design and development and innovation capabilities. Absence or lagging of technological and innovation competencies and effort have constrained local SMEs from moving up the value chain and entering the competitive global market.

Primarily due to financial constraints and/or lack of priority from top management, the majority of the local SMEs spend negligible amounts or nothing on research and development (R&D). In fact, it is not just total R&D expenditure that counts, SMEs also experienced difficulty in getting skilled knowledge-based personnel to undertake R&D.

What has been done by the state?
Apart from the federal assistance to the SMEs, the state has also acknowledged the crucial role of SMEs in the domestic economy. Recently, the state, through the Penang Development Corporation (PDC), investPenang (IP) and Penang Science Council, has announced the establishment of an incubator hub - the SME Centre, at Phase IV Bayan Lepas FIZ. The aim is to spawn and develop local innovative SMEs, as well as to become a showcase of Penang’s abilities to potential foreign investors.

Land at the Batu Kawan industrial site will also be developed for a sustainable SME village cluster that adheres to international standards, in the near future. The state hopes the local SMEs will be able to increase their competitive edge, not only to support the MNCs in Malaysia but to compete internationally as global suppliers or even Malaysian brand names.

Furthermore, the Penang Career Assistance and Training (CAT) Centre, which was set up during global financial crisis in 2009, has revised its focus and emphasis to training, retraining and attracting new talents.

IP, together with the Small and Medium Enterprises Market Advisory Resource & Training (Smart) Centre, organises a number of regular talks, workshops and seminars to enhance the attitude and management capabilities of local entrepreneurs, as well as to share various pertinent and current industrial information with local SMEs.

Moving ahead: some suggestions

Enhancing human resource development

Skilled human resources are a critical requirement for competitiveness and technological mastery. In order to move up the value chain and remain competitive, the shortage of skilled manpower or knowledge workers needs to be addressed urgently. The workforce in Penang has to gear towards higherend value chain management capabilities.

The government, institutions of higher learning, training institutions and the industry have to work closely to seek a solution to bridge the “skills mismatch” gap of local graduates, as often cited by industry leaders and players. Enhancing linkages between local universities and SMEs through internships and research projects could perhaps soften the skills shortage and mismatch issues and improve graduates’ industry readiness in the near future.

Financing technology for SMEs

Instead of being the passive receivers of technology and continuing to use outdated production processes, access to financial resources for new technology is crucial for SMEs to enhance their competitiveness and to compete in global markets. However, financing for new or appropriate technology is considered high risk by the commercial banks, as the possible returns from the technology investment usually require a lengthy period and rewards are highly uncertain. Moreover, the commercial banks usually lack capacity in evaluating technology-related projects.

Commercial banks should be encouraged to offer or give more attention to technology financing, by developing new and more flexible financial products on technology-related projects for SMEs. In order to address the capacity gap of commercial banks in the evaluation of technology-related projects, perhaps the state, with the collaboration of Penang Science Council, could consider providing training, advisory and technology appraisal or benchmarking services to commercial banks in the area of financing technology.

Technological development and innovation

SMEs that are innovative and able to master high-tech activities would stand a better chance of participating in higher-margin value-added activities and be more competent in the fast changing segment of world trade. R&D offers significant benefits for existing or even industrial latecomers, in enabling reverse engineering, as well as developing and deepening technological know-how and capabilities. Instead of asking SMEs, that have limited resources, to set up their own R&D laboratories and facilities, local universities or research houses could play a more prominent role and provide open laboratories with appropriate R&D facilities and equipment for local entrepreneurs.

Instead of asking SMEs, that have limited resources, to set up their own R&D laboratories and facilities, local universities or research houses could play a more prominent role and provide open laboratories with appropriate R&D facilities and equipment for local entrepreneurs.

The proposed SME Centre should be selective in its approach and house local SMEs that are innovative and different from conventional organisations. This approach is imperative to encourage and spawn innovative local entrepreneurs as well as to exhibit local capabilities and attract higher-end foreign investors to the state.

Strengthening MNC-SME linkages

Penang, which has been the manufacturing location of choice for MNCs for decades, should fully tap into the presence of these global players. MNCs play a large role in technology development for local SMEs. The state and local SMEs should make specific efforts to further strengthen the MNCSME linkages and enhance the transfer of technology and management capabilities from MNCs to local enterprises via coaching, mentoring and local supplier training programmes as well as sub-contracting arrangements.

Promoting SMEs’ export competitiveness

Though SMEs represent the bulk of business establishments in the country, the share of SME exports still remains less significant. Local SMEs, in general, lack sufficient global market intelligence and international export standard/specification information. In order to promote SMEs’ export competitiveness and fulfil stringent market demand, the SME Centre should work closely with Malaysia External Trade Development Corporation (Matrade), SME Corp, the industrial community and local universities to share subscriptions to market intelligence and technical journals, as well as to offer guidance and support on marketing issues for local entrepreneurs.

Green business opportunities for SMEs

The concern about climate change and other environmental issues is increasing. Consumers are converting their environmental concerns into action with their spending, and people are willing to put out extra to “go green”.

Green technologies, energy-saving or eco-products and many eco-friendly alternatives (either a product or process, from food to high-tech products) that offer consumers a greener choice in their daily lives, are becoming increasingly popular. This new area has also loosened government purse strings, and there are plenty of federal government grants and funding available for green technology projects.

Conclusion

SMEs are the key drivers and backbone of economic growth, job creation and social development. Strong and dynamic SMEs would provide a solid ground to improve the per capita income and enhance the standard of living of many Malaysians. Besides government policy, incentives and assistance, positive attitude, strong will, determination, creativity and innovation are, in fact, critical characteristics that determine the success of a business. The local SMEs should capitalise innovatively on the resources they already have to spark the next wave of possibility.

1 Spring Singapore.
2 Osmep (Office of Small and Medium Enterprises Promotion, Thailand).
3 Ministry of SME and Cooperatives (Law 9 of 1995), Indonesia.
4 Small and Medium Enterprise Administration, Ministry of Economic Affair, Taiwan (the definition of SMEs was revised and issued on July 5, 2005).
5 Small and Medium Business Administration, South Korea.

Lim Wei Seong is the head of the Economics and Entrepreneurship Programme at the Penang Institute. He has been in the socioeconomic research field for more than 15 years.
Teoh Ai Ping is currently a senior lecturer and a member of the SME Assist cluster at Universiti Sains Malaysia. She has also been involved in several consultancy projects with SMEs and MNCs.



Related Articles

FEATURE
Dec 2010

Transforming bus stops to transform city living

Suzy Sulaiman urges a rethink of the way we use our bus stops in order to empower citizens and town planners.

FEATURE
Oct 2013

The future MUST BE GREEN

The environment should not take a back seat in the face of development.

FEATURE
Feb 2013

Legacies of Leprosy

Descendants of Penang's leprosy patients attempt to reconnect with their past.

FEATURE
Apr 2011

Eco-towns – the Asian experience

At the Seventh Asia-Pacific Eco-Business Forum, the future of Asian Eco-towns comes into focus.