A new vision for SMEs – turning the policy paradigm on its head

By Jason Loh,

Our SMEs have a critical role to play if we are to renew, transform and rebalance our economy.

Therefore, there should be a new vision for our small and medium-sized enterprises (SMEs) where greater State intervention is called for not only to ensure that they survive to restart and move on to sustained recovery or “revitalisation” – which is the current phase of the government’s overall strategic plan (6Rs) to cope with the fallout from the Covid-19 outbreak – but also in the longer-term to becoming the lead engine of our economy.

This would represent the strategic move from being the backbone towards assuming the role of the limbs in driving and propelling forward the entire body.

In other words, the existing policy paradigm is turned on its head with SMEs at the forefront and driver’s seat as the catalyst and impetus of economic growth.

It would also benefit the government-linked companies (GLCs) and foreign investors as the spill-over effect is reversed.  

Our SMEs’ potential can be seen in their contribution to the gross domestic product (GDP) which is set to reach or surpass the 50% mark within the next decade. According to the Department of Statistics (DOSM), SMEs contributed 38.9% of the GDP in 2019 which roughly translates into RM586.9 billion in nominal terms, and constitute 7.3 million strong out of the nearly 15 million total workforce or at 48.4 per cent.

The call for a new vision is made all the more urgent with SMEs continuing their appeal to the government for help even as Budget 2021 has been announced, with a total of 32,469 such businesses forced to shut down permanently between March and September (with job losses running into the hundreds of thousands), reflecting the dire straits from the twin supply and demand shocks which chain effect continues to reverberate as caused by the very restrictive movement control order (MCO) in the initial phase.

Concretely, the government should clearly conceptualise our domestic direct investment (DDI) as a core strategic focus in its 6R-recovery plan. In practice, the government is already committed to jumpstart our DDI by promoting the e-commercialisation, digitalisation and automation of our SMEs.

The purpose is to promote and incentivise the move from DDI for the SMEs by the government towards DDI by SMEs for the government (in terms of tax and employment dividends).

In looking at the DDI of our SMEs, we see that it already slumped in the aftermath of the Asian Financial Crisis (1997/98).

According to empirical studies, causes are attributed to both:

  • continuing dominance of big private players, i.e. our GLCs alongside the conglomerates and top corporations on the one hand; and
  • FDI, on the other.

The role of GLCs as also part of the private sector – and hence representing crowding-in when it comes to fiscal policy – tend to produce the following two effects:

  • crowding in of SMEs in the short-run, i.e. only for the duration of the contract of procurement; and so
  • crowding out of SMEs in the long-run.

By contrast, FDI tends to crowd out SMEs in the short-run but crowd in for the long-run.

This is because the supply chain becomes localised over time.

Other factors include industrial and capital market policies. And not State or government intervention in the form of fiscal policy itself.

Going forward, it’s expected that the government will redress this fundamental situation in relation to our DDI.

This by rebalancing the country’s economic dependency and shift gear – in line with the Shared Prosperity Vision (SPV) – to compensate for the “loss decades” of SMEs.

The emphasis in the short-term and beyond should be on direct (instead of indirect) involvement or participation of SMEs.

In this regard, the Ministry of Finance (MOF), Ministry of Economic Affairs (MEA), Ministry of International Trade & Industry (Miti), and Ministry of Entrepreneur Development and Cooperatives (Medac) are the key players – alongside their respective agencies such as SME Corporation, SME Bank, Teraju (Bumiputera Agenda Steering Unit), etc.

Existing high-level or strategic policy frameworks should be re-activated.

These include the National Entrepreneurship Policy or DKN (2030) – which is oriented towards creating a vibrant and conducive eco-system for entrepreneurs to thrive and flourish (Strategic Thrust 1).

Towards that end, the government should accelerate the Vendor Development Programme or VDP (Strategic Thrust 5) and internationalisation of Malaysian SMEs or MSMEs (Strategic Thrust 6) that leverages on the domestic and global supply chain opportunities, respectively.     

With the DKN 2030, the SME Masterplan (2012-2020) which expires this year could also be readjusted and readapted in light of Covid-19.

GLCs will have to compete with SMEs for the VDP (procurement). Simultaneously, SMEs will also increase their participation in the FDI supply chain.

Some complementary policy recommendations by EMIR Research are as follows:

  1. To ensure SME representation in all trade and investment missions by the government at regional and global levels.
  • To boost and strengthen SME linkages and production network in the context of Asean – thus enabling SMEs to contribute towards intra-Asean trade and investment flows as well as regional integration.

This could be done through the pre-existing Asean Inclusive Business Framework within the broader structure of the Asean Economic Community (AEC).

Furthermore, the SMEs of Malaysia, Singapore, Thailand and Indonesia to enhance cooperation and involvement in e.g. the Indonesia-Malaysia-Thailand Growth Triangle or IMT-GT and the Singapore-Johor-Riau Growth Triangle (SIJORI).

The conceptualisation of both Growth-Triangles could be renewed to include tourism (marine and eco-tourism, as examples), FDI destination and export hub to other emerging markets.

By extension, both at the bilateral and multilateral levels, efforts should be intensified to match and support the SME nexus with other regional counterparts such as in East Asia (e.g. China). In turn, this will indirectly boost DDI; and

  • As part of the job creation strategy of the government, a holistic approach and further integration and coordination of youth entrepreneurship and SME development should come under a single body, perhaps a reactivated National Entrepreneur and SME Development Council (NESDC) chaired by the Prime Minister or as it is to come under the newly set up the National Employment Council.

May these trying times be seen as a golden opportunity for the government to re-envision and further elevate the role and place of our SMEs in our economy.

Jason Loh Seong Wei is Head of Social, Law & Human Rights at EMIR Research, an independent think tank focussed on strategic policy recommendations based on rigorous research.

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