Small and Medium Enterprises (SME): Key To Achieving Developed Country Status

Small and Medium Enterprises (SMEs) play crucial roles in the development of economy in all countries. In fact, it is the health and the business eco-system in which SMEs operate that determine economic destiny of a country.

Many companies that we know today started as SMEs which include many global names like Ali Baba, Microsoft, KFC, Coca Cola and many more such well known names. They started small with interesting ideas, then found willing financiers that helped them to grow.

Definition of SMEs differs from country to country, often in terms of sales revenue, paid capital and number of employees. This classification allow governments to tailor legislations and financing facilities to these companies, with a view to nurture healthy operating and growth environment. In Malaysia SMEs are classified as in the table below:

In the United States, 99.9% of all businesses were small businesses in 2018 and they accounted for 44% of US GDP.

In China SMEs grew exponentially from 13 mil in 2012 to 43 mil establishments in 2020. They account for 90% of all enterprises, 60% of GDP and 80% of employment in the country..

SMEs are the backbone of Europe’s economy. They represent 99% of all businesses in the EU. They employ around 100 million people, account for more than half of Europe’s GDP and play a key role in adding value in every sector of the economy. 

In Malaysia SMEs account for 38.2% of the country’s GDP in 2020, 13.5% of our export and 48% of employment. Compared with statistics of the major countries mentioned earlier, Malaysia is obviously still far behind and has more room for growth. There are a total of 1,226,494 MSMEs in 2021, accounting for 97.4% of total establishments in the country, including 964,495 micro sized firms.

SMEs need a special eco-system to nurture healthy growth, namely existence of an efficient financing eco-system in the form of Private Equity Financing, in particular the Venture Capital Financing.

The contributions of Venture Capital financing are crucial for SME development, as proven in other countries such as The United States, China, Korea and Singapore. There are many global Venture Capital companies operating in the region, and some domestic ones in Malaysia. They are now focusing on ASEAN as their immediate growth area.

Venture Capital is part of the wider Private Equity Investment of the financial sector. It is important for growth of SME sector in a way that it creates synergy between the finance provider and entrepreneurs in the SME sector, especially for the Start-ups and young enterprises..

At the initial stage, this synergy provides the stage for vigorous development of ideas or skills that future entrepreneurs and  young graduates  possess, into  workable start up ventures.  Venture Capital firms would provide initial capital to them, who normally don’t have assets to pledge. With Venture Capital providers, these young entrepreneurs can just pledge their company shares without any other collateral. More fund would be provided in the same way as the new entrepreneur progresses. Such arrangements can be made in spite of the high risk investment scenario, as long as both parties understand that the Venture Capital financier deserves higher return than normal  in such a risky  financial eco-system.

A  friend who has been in the venture capital business for a long time told me that high risk can be partly mitigated when their Venture Capital company also provide mentoring and coaching to the young entrepreneurs. This is also a form of synergy where both the Venture Capital provider and the fund recipient (entrepreneur) have to fully commit to the program for mutual protection and benefits. Such commitment would increase the success rate among participants.

Venture Capital started in the United States where it played crucial role in the development of the Silicon Valley. Inevitably the US Venture Capital size is the largest equivalent 0.69% of the GDP in 2019 compared with China at 0.46%. Elsewhere in Korea it is at 0.18% and Singapore at 1.7%. Malaysia is behind at 0.13% but ahead of Indonesia at 0.06% of theGDP. However Malaysia’s Venture Capital is 40% funded by GLCs and ASB and other government institutions,  meaning that ours is just about the level of Indonesia in the aspect of private venture capital. As Indonesia is viewed by investors as the more attractive investment destination, in the near future,  Malaysia will likely lose out in  the private Venture Capital funding. This situation is detrimental to future growth of  our SMEs. and would leave Malaysia trapped in the middle income level. The table below shows comparative importance of Venture Capital in selected countries.

In view of our country’s enonomic risks stated above, it is recommended that the government look further into Venture Capital funding of SMEs. There should be a need to evaluate and improve our existing legal  and incentive framework for the Venture Capital sector with a view to promote rapid growth of  SMEs and the economy as a whole.

Venture Capital Sector should be the best approach forward for the country as it would attract more private investment capital, at the same time it would comparatively need less of Government funding to make it a success.

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DAH IKHWAN

Reference:

(1) MVCA Organisation-Malaysian VC data
(2) Venture Capital Investment OECD
(3) China Venture Capital Investment
(4) Havard Business Review:How Venture Capital Works
(5) Countries by GDP