Malaysia: Redefining SMEs

Jul 2014
Malaysia, July, 14 2014 - The SME sector currently contributes about 33.1% of the national economy, but the Government aims to raise the contribution of SMEs to 41% by 2020.

When Karl Friedrich Benz started Benz & Cie in 1883 to produce industrial machines, little did he know he would make history in the automotive world.

The German engine designer and car engineer was later granted the patent for the first vehicle powered by a gasoline engine, known as the Benz Patent-Motorwagen (or motorcar) in 1886.

What started as a six-employee company in Mannheim, Germany, now employs over 270,000 employees worldwide with revenue of ‚29.5bil (RM127.7bil) in the first quarter of this year, on 565,800 vehicles sold.

Benz is just one of the many success stories of how a company, which started as a small- and medium-sized enterprise (SME), can grow through various stages including a merger with Gottlieb Wilhelm Daimler’s auto company in 1926 to form Daimler-Benz AG, which is now part of Daimler AG, a global automotive company.

It is no surprise that governments around the world take SME development seriously as they have the potentiol to one day become a juggernaut and contribute to a nation’s gross domestic product (GDP), employment and exports.


Locally, SMEs have been a national priority since 2004 with the establishment of the National Small and Medium Enterprise Development Council (NSDC).


A high-level council chaired by the prime minister and members comprising ministers and head of agencies, it decides on the overall policy direction for SMEs in Malaysia.

SME Corp chief executive officer Datuk Hafsah Hashim says the council ensures efficacy in implementation of SME programmes by reducing duplications across ministries.

“It is an important platform for resolving issues concerning SMEs. All this has resulted in improvements to the SME ecosystem as well as providing greater focus to small farmers, contractors, manufacturers and service providers,” she said.

Hafsah said, ever since it began taking SME development seriously, the nation has benefited as a whole with the average annual SME’s GDP growth (6.3%) exceeding the overall GDP growth of the country (4.7%) from 2006 to 2012.

The SME sector currently contributes about 33.1% of the national economy, but the Government aims to raise the contribution of SMEs to 41% by 2020.

To have the right policies to assist SMEs, SMEs must first be defined.

Rebranding SMEs

When the Small and Medium Industries Development Corporation (now renamed SME Corp) was first established in 1996, its focus was only on the manufacturing sector and manufacturing-related services (MRS).

“Hence, the term commonly used was small and medium industries (SMIs). They were then defined as businesses having sales turnover of less than RM25mil and full-time employees of less than 150,” Hafsah said.

In 2005, the Government decided to promote small and medium businesses across all sectors, introducing the term SME.

The definition for the manufacturing sector and MRS was similar to the earlier one, except the businesses needed to only fulfil either one of the criteria to be classified as an SME, whereas previously they had to meet both the criteria.

For the services and agriculture sectors, SMEs were defined as firms with sales turnover of less than RM5mil or full-time employment of less than 50 workers.

The definition of an SME was again updated early this year to include a broader definition, taking into account price inflation since 2005 and other factors, including structural changes in the economy.


Hafsah added the redefinition simplifies things for both SMEs and the authorities in terms of understanding and implementation.


“This helps to identify the right target group that needs to be supported to grow them into bigger entities, and the definition has to remain relevant until 2020 in line with the timeline of the SME Masterplan,” she said.

With that in mind, the bar for SMEs in manufacturing were raised to a sales turnover of not exceeding RM50mil or full-time employees not exceeding 200 workers. For services and other sectors, SMEs are those with a sales turnover of not exceeding RM20mil or full-time employees not exceeding 75 workers.

Targeted assistance

Generally, the Government acts as a facilitator to create a conducive ecosystem for all business, including SMEs, multinational corporations and large firms.

In addition to that, particular attention is given to SMEs as, globally, they face some common constraints due to their size.

“In this context, Malaysia reviewed the definition of SMEs to ensure we have identified the right target group to provide capacity-building programmes, financial assistance and other forms of aid,” she said.

Last year, SME development programmes were implemented by 15 ministries and more than 61 agencies.

A total of 157 programmes were implemented with a total expenditure of RM12bil, benefiting over 800,000 of participants from SMEs and those involved with the SME sector.

This year, a total of 154 programmes have been planned and are being implemented with a budget of RM13.3bil. This is expected to benefit over 500,000 participants.


Hafsah added the new definition would be a good basis to begin the implementation the High Impact Programmes (HIP) under the SME Masterplan.


The six HIPs are intended to raise the overall productivity of SMEs and enhance their ability to innovate, creating more high-growth firms and global champions.

Four of the HIPs, involving the of integrating business registrations and licensing to facilitate financing for SMEs in the start-up and early stage, was launched by Prime Minister and NSDC chairman Datuk Seri Najib Razak during the 16th NSDC meeting earlier this month.

Besides programmes by the ministries and agencies, banks have also put in place microfinancing and other special financing facilities that SMEs can apply for.

“SME development also has a socio-economic dimension as most of the microenterprises can be elevated through productivity gains and raised incomes,” she said.

Based on the new definition, she said SMEs are estimated to represent more than 98% of the total business establishments in the country, compared with 97.3% based on the earlier definition used in the Economic Census 2011.

Another aspect of the new definition is that entities that are part of another holding company will no longer enjoy the status of an SME.

Despite the increase in the number of SMEs after the redefinition, she said it is unlikely to lead to new budget allocation for SMEs.

“We do not think that the redefinition is going to put constraints on ministries and agencies as there are still many programmes that are not fully utilised by SMEs,” she said.


Source : The Star

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