Challenging new norms for the surviving SMES

DURING a prolonged economic crisis, Malaysian small and medium enterprises (SMES) are likely more vulnerable to an economic downturn due to their limited financial capabilities and high-dependence on banks’ credit compared to larger firms. On top of the financial aspects, SMES’ relative shortcomings in terms of technology and resources would also reduce their ability to weather any major economic turbulence.

In this article, we examine how SMES can increase their chances of surviving the Covid-19 crisis by addressing key structural issues.

Formalisation of informal sectors

The informal sector is regarded as the “grey economy” as it is not included in the gross domestic product (GDP) or gross national product (GNP) of a nation. This sector comprises self-employed workers who are not on payrolls, and businesses that are neither taxed nor monitored by the government.

According to an Informal Sector Survey conducted by the Department of Statistics Malaysia (DOSM) in 2019, there were 1.26 million (2017: 1.36 million) employed persons in the informal sector equivalent to 8.3% (2017: 9.6%) of total employment in Malaysia. Almost two thirds of employment in the informal sector were concentrated in the services sector (64.7 %) followed by construction (18.9 %) and manufacturing (16.0 %) sectors.

We would like to encourage these unregistered entities to formalise their businesses to foster long-term business sustainability and productive development. The stimulus measures announced by the government recently amid the Covid-19 pandemic are only applicable to businesses that have registered with the Companies Commission of Malaysia (SSM).

For this reason, unregistered businesses are not eligible to benefit from these stimulus measures and financial assistance. This could potentially lead to job losses especially among the daily wage earners, petty traders, hawkers and stall operators who comprise the largest group of the informal sector.

In order to attract more businesses within the informal sector to register themselves, the government could consider facilitating a friendlier regulatory framework as well as efficient promotion incentives. To this end, the regulatory component can simplify the registration process for informal enterprises and extend the benefits of formalisation. The high cost of registering and running formal enterprises are the main reasons for the large informal sector.

Easing regulatory framework would result in more businesses in the informal sector to be registered. Along with this, promotion incentives in terms of investment, employee job trainings and skill-upgrading courses could be provided to the newly formalised sector to help them grow. This should be oriented towards fostering employment and income generation with more formalised SMES in the long run. Consequently, this would increase value-added contribution to the nation’s GDP.

Adopting technology and leveraging on e-commerce

There is a vital need for registered SMES to review their business models and operations quickly to adapt to current market conditions and the ongoing Covid-19 pandemic. SMES should look into new business strategies to ensure long-term sustainability. Moving their businesses towards digital and online platforms is a key prerequisite to remain relevant and keep up with consumer demands. With many countries undergoing lockdown measures, people are becoming less dependent on brick and mortar outlets, and are performing more transactions online.

In this digital age, we are no longer defined by physical business premises and geographical locations. As such, adoption of e-commerce by SMES is critical to reduce costs, improve connectivity with customers, gain global market share, and streamline business processes.

Before the Covid-19 pandemic, information technology (IT) and digital infrastructure such as e-commerce among SMES were beginning to accelerate. However, the adoption of technology is not significant. Hence, SMES should further expedite their business digitalisation transformation to survive the current economic crisis that has led to disruption in many sectors. Innovation and technology adoption would assist SMES reap productivity gains, drive efficiency and boost growth through lower operational costs and enhanced supply chain continuity.

Besides e-commerce platforms, SMES should fully understand their businesses in terms of their target segments and product delivery in order to offer product differentiation. Businesses today are more competitive in the era of industrial revolution necessitating entrepreneurs to provide more niche goods and services to succeed.

Product differentiation and development strategies are essential to invent, or modify existing products and services to open up, new markets. These strategies typically emerge when there is little opportunity for new growth. At this point, creativity and innovation play key roles in establishing SMES that are capable of adapting to market changes.

Promoting R&D among SMES

According to the Network Readiness Index (NRI) Report 2019, Malaysia ranked 32nd out of 121 countries (Score: 63.76/100) in applying the opportunities offered by Information & Communication Technology (ICT).

Referring to the table above, research and development (R&D) expenditure by businesses, one of the prominent indicators of NRI had a relatively low score of only 20.64/100. This reflects ample room for Malaysia’s businesses sectors to expand their R&D with advanced technologies and investment in process automation.

It is critical for SMES to engage in R&D activities although they are in their early stages and are

resource-constrained. SMES’ contribution to R&D is also limited compared to large firms due to their resource constraints including capital, human resources and expertise. Additionally, SMES lack complementary assets for innovation, including intellectual property protection, compared to larger firms.

To overcome their limitations, SMES could potentially work with external resources to conduct R&D activities. They may also seek external funding or collaborate with other organisations to obtain advanced knowledge and carry out R&D activities (product design and testing, development of future products, improvement of current products or operating models) in the long term.

Furthermore, government interventions in addressing both the internal and external constraints faced by SMES would help in promoting R&D.

To resolve the issue of insufficient R&D investment by SMES, the government may consider providing indirect support through matching grants and networking with universities or other organisations. Alongside this, the government could possibly look into introducing various policy measures such as R&D subsidy and tax reduction, public innovation procurement and more friendly intellectual property rights to promote R&D and innovation by SMES.

These support schemes would eventually help SMES to continue attracting quality investments as well as gaining positive impact through innovation and increase higher value-added exports.

Continuous engagement in R&D and innovation are likely to reduce the reliance of SMES on foreign trading partners for raw material supplies that often result in higher production costs.

Up-skilling, re-skilling and creation of high skilled jobs

Common challenges across all SMES that impede productivity improvements include talent, technologies, business environment and industry structure. SMES are also experiencing skill gaps among their workers that are partly due to the mismatch between skills acquired by employees and skills required by employers. Notably, SMES remain dominated by semi-skilled workers at around 60% of the SME labour force followed by 25% highskilled workers.

Structurally, most industries in the domestic economy remain at the lower-end of the production value chain despite various incentives, limiting the creation of skilled jobs. According to DOSM, a total of 44,700 high-skilled jobs were created in 2019, which is relatively lower than 45,400 in 2018.

On the other hand, creation of semi-skilled and low-skilled jobs has been steadily increasing since 2017, with 51,100 and 8,100 jobs created respectively in 2019 (2018: 49,900; 5,800).

To attract higher quality investments, SMES should take the initiative to generate skilled jobs with higher productivity and wage. This must also take into consideration quality of innovation, automation, adoption of new technology and commercialisation of intellectual property. On top of creating high-skilled jobs, this would also play an important role in embracing the Industrial Revolution 4.0 with the rapidly evolving demand for skills in the labour market.

Increasing the number of high-skilled jobs could help to reduce the brain drain from the country. More skilled and high-skilled workers are prerequisites for our country economy to move up the value chain and be globally competitive.

For instance, SMES should accelerate the creation of high-growth and innovative sectors such as robotics, automotive, digital economy, biotechnology, renewable energy and many more. Emphasis should be given to the manufacturing and services sectors that have greater potential to advance towards more complex and higher value projects.

This could drive greater economic contribution by SMES through the creation of highskilled jobs, intensification of digitalisation efforts and enhancement of SMES’ integration into the supply chain.

With creation of high-skilled jobs, up-skilling and re-skilling are vital.

Enhancing the skills and capacities of all segments of the workforce is beneficial for an inclusive and equitable future. To make the most impactful investments, SMES need to improve their understanding of the skills that are readily available within the labour market and where the biggest skill gaps exist. This needs to be complemented with information about skills that are in great demand in the labour market, as well as how to provide appropriate re-skilling and up-skilling pathways

towards new employment opportunities.

Curtailing dependency on foreign labour

The share of foreign labour in Malaysia has been increasing since the 1990s due to the large demand for cheap labour. As of end2018, a relatively low 17.3% of SMES hired foreign workers. However, SMES are highly dependent on them. In a survey conducted by SME Corporation Malaysia (SME Corp) in 2019, 39.9% of SMES indicated that they had no intention of reducing their dependency on foreign workers.

The major factor for the overdependence on foreign labour in Malaysia is undoubtedly our reluctance to undertake the 3D (dirty, dangerous, demanding) jobs. While lowskilled foreign labour remains an extensive component of Malaysia’s economy, this factor is suppressing local wages and deterring the country’s progress towards becoming a high-productivity nation.

Malaysia’s secondary income continued to register higher deficit of Rm21.4bill in 2019 compared to Rm19.3bil in 2018 due to the larger outflow of foreign remittances by foreign labour. If SMES manage to reduce their dependency on foreign labour, the country could save a lot in foreign remittances. With domestic unemployment soaring to 5.3% in May, it is the right time for SMES to curb their over-reliance on foreign labour and absorb more locals into the labour market.

Malaysian SMES should seize the opportunity now for a more productive, sophisticated and sustainable path to economic growth. They need to address the key structural challenges and resolve related issues with greater clarity to ensure their long term sustainability, especially during this pandemic crisis.

The views expressed are the writer’s own.

“Notably, SMES remain dominated by semi-skilled workers at around 60% of the SME labour force followed by 25% high-skilled workers.”