SMEs are growing at about 30% faster than the average growth of the economy in Malaysia, the latest annual report for SME Corp, the agency that co-ordinates SME development in Malaysia reveals.
SMEs grew at 7.1% in the last 10 years, well above the 4.9% growth of the economy during the same period, says the report released last month.
Writing in the report Malaysia's Prime Minister Najib Razak (pictured above) attributes the strong SME growth to a collaborative effort between all ministries and agencies working towards a common goal.
Last year the government carried out 139 SME programmes totalling support valued at RM5.1 billion, which benefited more than 500,000 small firms. A total of 12.1 billion ringgits ($2.9 billion) has been allocated for SME development this year.
The annual report also reveals that the contribution of SMEs to overall gross domestic product (GDP) increased to 35.9% in 2014, up from 32.2% in 2010.
Najib, who also chairs the SME Development Council, said small firms had remained resilient despite factors like weak global growth and recent reforms at home such as the subsidy rationalisation, implementation of the minimum wage and more recently the introduction of the Goods and Services Tax.
This year, Malaysian SMEs are expected to continue to expand by 5% to 5.5%.
New definition behind growth
In 2014 alone SMEs grew at 13.6%, compared to 6% growth by the economy. The strong SME growth can be largely attributed to the one-off effect of the new definition for SMEs which came into effect in January last year. It includes over 8,000 companies which were formerly classified as large firms.
However even under the old definition, the sector would have grown by 7.9%.
Under the new SME definition, SMEs last year accounted for 65% of employment (above the target set under the country's SME Masterplan), up from 57.5% in 2013.
Over the years, labour productivity gap between large firms and SMEs has improved, albeit gradually.
In 2013, SME labour productivity was 2.7 times lower than the large firm productivity, a decline from 2.8 times in 2010 (2005: 3.2 times). However, in 2014, the labour productivity gap reversed to widen to 3.3 times between large firms and SMEs due mainly to the increase in the numbers of employees working with SMEs.
Malaysia’s SME Master Plan 2012–2020 aims to accelerate the growth of SMEs by increasing the sector’s share in employment (65% share by 2020), GDP share (41%) and exports (23% share) and by boosting productivity of small firms. Some of the targets were revised this year from the original ones contained in the Master Plan.
To meet these targets the government will address red tape, foster innovation among SMEs, ensure that innovative firms have access to finance, help business owners with management training, improve market access for products and services and improve infrastructure.
Portal, procurement plan
Under the plan a business registration and licensing portal is expected to be ready by end of this year, according to the annual report. The integration of registration and licenses will be done in stages as it involves all three levels of government.
Plans are also afoot to introduce a specific government procurement policy for SMEs announced by Najib in January, in which state-owned enterprises will be encouraged to allocate 30% of the annual procurement budget to buying goods and services from SMEs.
This week in its proposals for the 2016 budget, SME Corp called for among other things tax incentives as well as assistance for SMEs to go abroad.
The agency's chief executive Datuk Hafsah Hashim said the proposals are aimed at assisting SMEs "tide over" the current economic situation and sustain their business.
In June Najib said any incentives would need to be based on criteria such as productivity, export value and job creation.
Malaysia's SME Masterplan may be one of the best example of how an emerging economy can plan targeted support to SMEs (see this post).
The country is also one of the easier places in the world to do business in (ranked 18 by the World Bank), is fairly competitive (also 18th, in WEF's latest Global Competitiveness Report) and among the easiest in the world to access finance.
But it still faces some significant challenges. Key among these is the low number of adults involved in starting and running a new business (see this earlier post).
The other is its race-based policies which despite having given indigenous Malays a leg up have yet to create enough such entrepreneurs that can stand on their own feet - as any real entrepreneur should (see this post, and this one.
Malaysia's SME Masterplan is an impressive document. More challenging may prove to be how to address the more intangible things, such as creating a culture of entrepreneurship.
Timm is a South African who writes on small business. He is currently based in Cape Town, South Africa. Follow Small Business Insight on Twitter at @Smallbinsight and on Facebook.
Stephen Timm is a