Role Of Smes In Economies Including Malaysia Economics Essay

One of the important elements of the developed and development economies is the small and the medium-sized enterprises (SMEs) sector. The SMEs sector in Malaysia has an important role in the national economy. Some of the contributions by the SMEs sectors are such as in terms of business units, employment opportunities and economic output. Another aspect that are contributed by this sectors in Malaysia are such as the regional income generation, savings, training, stimulation of competition, aiding large firms, introduction of the innovation, and as a seed-bed for growth (Hashim, 1999).

Type of Small and Medium-sized Enterprises (SMEs)

SMEs are categorized by different agencies based on various criteria. Practically, in Malaysia, SMEs are based on the criteria such as the number of the employees, amount of the capital, amount assets as well as the sales turnover. The small-sized enterprises is the one that comprises of less than 50 full-time employees and with the annual turn-over of not more than RM10 millions. On the other hand, the medium-sized enterprises is the enterprise with between 51 and 150 employees, and with an annual turnover of between RM10 million and RM25 million (MITI, 1998).

Development of Small and Medium-sized Enterprises (SMEs)

In Malaysia, the growth and the development of the SMEs sector was changing over the years which can be observed in the National Malaysia Plan. In the first Malaysia Plan (1966-1970) the government is focusing more in promoting the economic equity for the Bumiputera with 30% of ownership. In the second Malaysia Plan (1971-1975), the government expand this sector further by formulating and implementing the New Economic Plan. The aim is to reduce poverty among the Bumiputera since the income per capita gained by the Bumiputera is less than 50% of that of the Chinese (Chee, 1986). By the seventh Malaysia Plan (1996-2000) this sector has been distinct in the economic development. During this period, the SMEs comprise more than 80% of the manufacturing establishment. At present, under the 10th Malaysia Plan, the SMEs sector was undergone the transformation into a competitive corporation, this is in order to support and facilitate growth in the Malaysia economic.

Sectors in Small and Medium-sized Enterprises

Agriculture Sector

In agriculture sector, SMEs are involved in the production part such as the natural producers of rubber, paddy, oil palm, cocoa, pepper, herbs and vegetables. Another example is as the agricultural producers of poultry and fishery commodity.

Basic Raw Materials Sector

This sector is involving the participant of the small enterprises in activities such as the processing and the production of basic raw material such as raw food, ice, rattan, wood, textile, chemical, metallic and non-metallic materials.

General Business Sector

Enterprises that are operating in this category are including those involved in construction, wholesaling and retailing, transport and storage, personal services such as barber and beauty shop, travel agencies and laundries and as well as those who is providing services such as in hotel, restaurant and food catering business.

Manufacturing Sector

This category is comprising of those enterprises that are involving in the activities such as converting the raw materials into useful products such as food factories, bakeries, soft drink bottling and as well as paper mills. This category is the most important category as compared to the previous category. According to the National Productivity Cooperation (2001) of all the activities fall under this category, the food processing is the highest that is up to 20%.

2.0 Incentives Provided by Government Agencies

2.1 Government Agencies

The National SME Development Council (NSDC) was formed after SME highlighted in RMK-9 to guide and advise the government in development of their policies and coordinates all initiatives. Another word, NSDC is the highest policy-making body related to SME development with 19 members involved. It is chairman by Prime Minister, 18 Ministries and Government Agencies involved in SME development.

There is five of the main objective of NSDC; first objective is formulated broad policies and strategies to facilitate the overall development of SME’s across all sectors. It reviews the roles and responsibilities of Government Ministries and Agencies responsible for SME development, and as guide stakeholders to ensure effective implementation of SME development policies and actions plant. Another objective are encourage and strengthen role of the private sector in supporting development of SME’s, and NSDC provide emphasis to the development of Bumiputera SME’s across the economy.

2.1.1 SME Corporation Malaysia

SME Corporation or formerly known as the Small and Medium Industrial Development Corporation (SMIDEC) was established on 2 May 1996, its aimed at the manufacturing sector SME’s. It is provided the advisory, fiscal and financial assistance services to SME’s. On 2009, SME Corporation Malaysia was officially appointed as the new central agency for the development of SMEs in Malaysia. From the previously, the Bank Negara Malaysia was the central agency, also the secretariats to the NSDC. The incentives and programs implemented by SMIDEC are market development grant, industrial linkage program, product design grant, skills upgrading program, SME Expert Advisory Panel (SEAP), and enterprises 50 Award program.

SME Expert Advisory Panel (SEAP)

SEAP is a program implemented to strengthen technical advisory services to SME’s. In this program, the SME’s are given on-site assistance by the industry experts to transfer their technology knowledge and industry experience. It’s comprises retired experts from the industry and specific Government agencies. They provided the technical and advisory to assist SME in improving their operations and usiness best practices. As report at the end of year 2010, were 62 industrial experts in various disciplines appointed under this program. SMIDEC in order to provide SME’s with necessary technical and other to promote efficiency and productivity. Were the SME’s can claim up to RM 18,000 reimbursement for expenses incurred. The implementation mechanism of the SMEDEC divided into three phase. In the first phase, the activity is the experts will conduct free preliminary consultancy services. Second phase, experts will visit the factory sites of SME’s and undertake diagnostic audit SME’s. Experts also will make recommendations on the respective improvements. The activity of third phase is implementation of the recommended improvements from second phase diagnostic audit report.

Enterprise 50 Award Program

This program has jointly organized with Deloitte Kassim Chan. It aim at the organizing the achievements of home-grown companies, also it program will promoting them.

Skills Upgrading Program

SMIDEC collaborate with 41 Skills Development Centers (SDCs) offer this program aimed to SME employees that interested in enhancing their skills in technical and managerial levels, particularly in critical areas, such as the electrical and electronics, ICT industrial design and engineering fields also. The objective of this program are to enhance knowledge of the employees of the SME’s in managing business and to enhance the skills and capabilities of the owner or SME’s. For this program, 50% of grant on the training fees for technical and soft skills.

Product Design Grant

This grant allows up to RM 200, 000 to be disturbed to a company in order to aid in designing of the new and attractive product packaging and it enable to purchase the equipment and services as their need.

Industrial Linkage Program (ILP)

For example, SMIDEC sponsored SMIDEX convention, where SME’s getting to showcase their offerings. This program aim at the developing SME’s as possible suppliers Multi-National Corporation (MNCs) through the various of training program. The program was generated RM 335 million in actual of sales and the SMIDEX 2005 convention was generated RM 45 million in potential sales.

The grant schemes and soft loans provided by SME Corporation such as a grant for RosettaNet Standard Implementation, E-Manucfacturing Grant (ERP), grat for upgrading engineering design capabilities, grant for business planning and development (ITAF 1), matching grant for product and process improvement (ITAF 2), soft loan for SMEs, soft loan scheme for factory relocation and et cetera.

2.1.2 Ministry of Entrepreneur and Cooperative Development (MECD)

This ministry functions to promote the scheme and program to SME’s, which targets primarily for bumiputera, also open to all. Under the scheme of Franchise Development Assistance Scheme, MECD help to give training and advisory to the individual entrepreneurs on open a franchise out of their product or services. At the end, for this purpose, MECD organizes a seminars and conferences. Besides that, Franchisor Directories are produced by MECD to promote the local franchise and it offering grant up to RM 100, 000 for the marketing development for each franchise product.

Another program that organized by MECD is Vendor Development Program. Where this scheme provides the support via sponsorship and promotion to Bumiputera SME’s to keep on offering their services or products to the Government Companies Multi-National Corporation SME. This scheme also provided the advisory services and the technical training for SME’s.

MECD also organizing the program called “Showcase Usahawan”. Were this program is a special initiative to aim on promoting the local SME’s products and services to local and foreign market.

2.1.3 Malaysia External Trade Development Corporation (MATRADE)

The Malaysia External Trade Development Corporation (MATRADE) is formed by the Ministry of International Trade and Industry (MITI) in 1993. It’s established as the Malaysia country’s central export promotion agency that responsible for assisting Malaysia companies to export their products and services in international markets.

Furthermore, the specifies responsibilities and functions of the MATRADE are to formulation and implementation of exporting strategies, to undertakes trade promotion activities, conducts market research, develops database on trade, to carries out tranning programs, and also it’s provides services related to trade. MATRADE assists SMEs to export their product and service to countries across the international. It’s also helping the local firms to export and provides assistance to foreign companies seeking to the sources Malysia products and services from the local suppliers.

2.1.4 Malaysia Industrial Development Authority (MIDA)

MIDA was established in 1967 under the Ministry if International Trade and Industry (MITI) as the leading government agencies responsible for promoting and coordinating industrial development and investments in the manufacturing and services sectors in the country. It’s authority to promoting and coordinates industrial development and investments by approving manufacturing licenses, assessing applications for tax exemptions, import duty and also providing the various of incentives.

a) Main incentive offered by MIDA for the Agriculture and Food Sector

i) Pioneer Status

The companies producing promoted product or services in the manufacturing sector are eligible for Pioneer Status. Was a Pioneer Status company will enjoys exemption from income tax. This company will pay tax on 30% of its statutory income for five years, start from the first day of sale of the agriculture and food produce. Unabsorbed capital allowances accumulated losses incurred during the pioneer period can will be carried forward and deducted from the post pioneer income of the company.

ii) Investment Tax Allowance

The company that producing promoted products or engaged in promoted activities can apply for Investment Tax Allowance (ITA) as an alternative way for Pioneer Status. An allowance 60% is eligible for a company granted ITA on its qualifying capital expenditure incurred within 5 years from the first date of qualifying capital expenditure incurred.

Companies also can offset this type of allowance against 70% of their statutory income for every year of assessment. Any unutilized allowances can be carried forward to the subsequent years until completely utilized. The remaining 30% of the statunory income is taxed at the prevailing tax rate.

iii) Incentive for Food Production

At the level of farm and production or processing, the specific incentives are introduced to attracting the investment into food project. These incentives will enhance the supply of the raw material for the food processing sector, therefore reducing dependence on imports of such raw material. For this sector, the tax incentives are given to both of invested company and its subsidiary company that undertaking this food production sector. He tax incentives given are depend as follows:

A company which invest in its subsidiary company occupied in food production activities be able to considered for tax deduction equivalent to the amount of investment that made in that subsidiary.

For the subsidiary company responsibility to the food production activities e able to considered for a full tax exemption on its statutory income for the 10 years of assessment for new project or for the 5 years of assessment for expansion project. This exemption period is commences from the first years of the company derived statutory income.

iv) Incentives for Existing Companies which Reinvest

Existing companies that reinvest in the production of the food products qualifies for the same incentives for food production above for a period of five years. Where the food production project for both of new and existing companies should commence within a year from the date of incentives was approved.

v) Incentives for “Halal” Products

These categories of incentives are divided in four types of incentive, there are:

Incentives for Production of Halal Food

Halal Industry Development Corporation (HDC) incentives

Double Deduction for Expenses to Obtain Halal Certification and Quality Systems and Standards Certification

Incentives for Reinvestment in Food Processing Activities

2.1.5 Federal Agriculture Marketing Authority (FAMA)

FAMA responsibility to support of the agriculture business based of SMEs which has created specifically to oversee the development, marketing and promoting of the agriculture products. FAMA also function as a go-to entity for information on prices with a demand and supply situations through FAMA info portal.

2.1.6 Bank Negara Malaysia

Te Government of Malaysia has produced various financial assistance through the Bank Negara Malaysia to help SMEs finance their business operations and activities. All of these assistance programs are channeled through the participating f instituations such as banking instituations, development financial instituations (DFI), and ERF Sendirian Berhad. The government promoted the funds and guarantees through the Bank Negara.

2.2 Government Financial Institutions

2.2.1 SME Bank

The SME Bank was recognized to assume the complementary role of assisting the existing banking institutions in providing financial and business supporting services to the SMEs. This bank was beginning their operation on October 2005. The SME Bank provides equity financing, working capital, term loans, industrial hire purchase, leasing, factoring, contract financing, and bank guarantees in term of financing. Besides that, SME Bank also offers the business supporting services, likes a consultancy, preparation of business plans and professional advisory. The Bank also provide the professional advisory such as research and knowledge linkages, business matching, business conferences, and business assessment.

The SME Bank offers 5 specific loan schemes, were the target of all this 5 loan scheme are differently for 5 different types of small and medium sized enterprise. The 5 loan schemes are:

SME Professional loan

This financing provided for the professionals such as doctors, consultants, and pharmacists.

SME Start-UP

This loan schemes is financing project for commercialization.

SME Procurement

This is the financing for vendors with secured contracts.

SME Franchising

This scheme is reserve for the franchiser and franchisee.

SME Global

The loan scheme is for the business going global.

2.2.2 AgroBank

The ArgoBank, formerly known as the Bank Pertanian Malaysia Berhad was entablised to provide banking services, mainly financing to firms in the agriculture sector in this country. ArgoBank plays an important role in channeling financial assistance to small business in the agriculture sector. Agrobank currently functions to encourage and finance agricultural activities especially for micro business, SMEs and individual or private business. It play a fundamental role in boosting the agriculture development in Malaysia in financing for business in agriculture and agro related sectors. They have 11 types of financing offered:

Fund & food

Paddy Credit Scheme

Non-Food Agriculture Development Scheme

Micro Credit Schemes for Entrepreneurs

Youth Agriculture Scheme

Small and Medium Industries Fund

Fishery Boat financing Scheme

Special Fund for Fishery Sector

Agriculture Entrepreneurs Scheme for Graduates

Oil Palm Replanting Fund Food Production Credit scheme

Financing Scheme for Bumiputra & Industry Community.

2.2.3 Perbadanan Usahawan Nasional Berhad (PUNB)

PUNB is the national entrepreneur development corporation that a wholly-owned subsidiary of the Bumiputra Investment Foundation (BIF). The PUNB was established to helping in the development of bumiputra entrepreneurs in the country. It provided financing to help bumiputra to start-up their business, to assist them in expanding their business, mostly in the business areas such as food technology, agriculture products, biotechnology, medical, ICT, automotive, and et cetera. Where the financing provided by PUNB includes equity and loans facilities.

In the retailing area, PUNB more specifically offers 3 main types of financing schemes. Were the financing for all these schemes are based on the principles of Islamic finance. The three financing scheme is included:

Prosper Retailer Scheme,

Prosper Wholesale Scheme, and

Prosper Graduate Scheme.

The amount of these financing ranges is from RM 5,000 to RM 1 million, and the duration of repayment of the financial schemes is between 5 to 7 years.

Tax Incentives

Grant Assistance

Loans, Credit & Equity Participation

Infrastructure & Supporting Services

Pioneer Status

Investment Tax allowance (ITA)

Reinvestment Allowance (RA)

Double deduction of expenses incurred on broad advertising, export promotion, export credit insurance premiums and research & development.

Industrial Technical Assistance Fund (ITAF)

Skill Upgrading Program

Technology Acquisition fund (TAF)

Commercialization of Research & Development Fund (CRDF)

e-commerce Grant

factory auditing Scheme

Minimum Lending Guidelines for SMEs

Government Funded Financing Facilities

Credit Guarantees for SME Borrowers

Equity Financing & Venture Capital

Infrastructure Development Grant

Supporting services:

Technical & business advisory clinics & briefings

Information dissemination & promoting awareness

Product displays & business matching

Promoting of export by SMEs

Table 2.1: A general summary of various public sector incentives provided to SMEs.

3.0 SME’s Growth Potential Area

Employment distribution of SMEs in the Manufacturing Sector is high. According to SMIDEC, 94% of companies in the manufacturing sector are SMEs. They contribute 32% to the country’s GDP and employ 56% of the country’s workforce excluding the Government. As we know, the food processing industry in Malaysia is dominated by small and medium enterprises and as well as foreign companies that has invested and is known as Multinational Corporations (IMP3 2006).

The rising global demands for food bring more potential and opportunity for SMEs to create in market. The chance is become high by knowing trade is expected to expand with participation of new players and market. The more integrated global market, high chance for new opportunities and greater market access for Malaysia SMEs. Recognising this, the Government, under the 9MP and IMP3 has identified key growth areas for SMEs in food industry. There have three main area which high potential for SMEs to create new market. They are Halal industry and franchising in food sector with supporting strategic.

3.1 Halal Industry

Malaysia, foresees that there is great potential for developing and promoting halal

products and services for the global market. The Third Industrial Master Plan (IMP3) 2006-2020, specifies three main situations encouraging Malaysia to become a global halal hub for the production and trading in halal goods and services. These specifications are that the Muslim population is about 1.6 billion and is spread out across the world and therefore is estimated that by 2010, the global Muslim population will be approximately 3 billion.

Another specification is halal products and services are also gaining an increasing acceptability among non-Muslims. The global market value for trade in halal food and non-food products is estimated to be at US$2.1 trillion annually also the reason why SMEs create opportunity in this area. This market has therefore created an interest for food production by both Muslim and non-Muslim countries (Riaz and Chaudry, 2004).

Therefore, Mohammad Noorizzudin et al. (2007), states that one of the halal hub potential is to create opportunities for SMEs to penetrate into the halal market. This statement is supported by IMP3 (2006), which indicates that SMEs involve more than 80 percent of the total number of corporations in the food processing industry.

In order for Malaysia to be established as a global halal hub, the Malaysian government prefers in encouraging certification globally (Riaz and Chaudry, 2004). However, combinations practice of both standards where the halal standards are and international standard needs a balanced implementation when manufacturing or producing halal food or products.

3.2 Supporting Strategic for Achieve

In order to bring Malaysia towards halal hub there have several supporting strategic that government take for achieving that goal. They are leading the development by Halal standard, Malysia international Halal showcase, world Halal forum, creating Malaysian brand, incentive for Halal industry and Halal avenues.

3.2.1 Leading The Development by Halal Standard

The Halal Industry Development Corporation (HDC) was incorporated in 2006. Placed under the National Industry Task Force within the Prime Minister’s Department.HDC is tasked with realising Malaysia’s global Halal Hub ambitions by 2010. HDC coordinates efforts to review standards, development of local industry, promotion of Malaysian Halal products and services in international market. HDC is responsibilities to facilitate the growth and participation of Malaysian companies including SMEs in the Halal industry.

HDC establish a Halal Act in order to create focused and cohesive framework. So, HDC tied up with intelek certification by auditing and certification include ISO 90000 and global safety management standard including the British Retail Consortium Food Technical Standard (BRC) and Hazard Analysis & Critical Control Points (HACCP). From that, it will help HDC to come up with Halal standard guidelines and best practices.

3.2.2 Malaysia International Halal Showcase

Malaysian International Trade and Industry Ministry (MITI) and MATRADE with the support of the Ministry of Entrepreneur and Cooperative Development (MECD) was organised Malaysian International Showcase (MIHAS). This showcase is about halal product exhibition and more than 90 exhibitors from 18 countries participating, each year. The exhibitors are from the United States of America, China, South Africa, Australia, Iran, Pakistan,Thailand and Saudi Arabia (MECD, 2004).

The exhibition goes a long way towards promoting Malaysia as a Halal hub such as promote halal product Malaysian SMEs, showcasing the country’s holistic approach to Halal offerings which encompasses amongst others food and beverage, pharmaceutical products, Shariah compliant financing and logistic services. At MIHAS 2007, the showcase was held about five days. The yield from that showcase is confirmed in sales arising from the business matching sessions, worth RM213.9 million up 27% from last year’s RM168.3 million.

Apart from these, there are still deals worth more than RM400 million in the negotiation stage. The United Arab Emirates recorded the highest sales value with more than RM90 million, followed by the UK (RM41 million), Hong Kong (RM36 million) and France (RM20.1 million). The international showcase saw a total of 3,215 business meetings held between international buyers, exceeding the forecasted target of 2,757.The encouraging response signals the growing interest from the global community and the high sales value from non-muslim countries is a clear indication of the potential of Halal products (Mohammad Noorizzudin et al., 2007)

3.2.3 World Halal Forum

Organised exhibition and forum are the supporting strategic by government Malaysia to achieve Halal hub. World Halal Forum (WHF), brings together individuals from the private sector to deliberate on issues related to the Halal market and the application of Halal standards and accreditation. The third annual WHF in 2007, brought together 500 of the world’s key leaders of the Halal industry from the corporate sector, academics, Non Governmental Organisation (NGOs), Islamic organisations and Government representatives from around the world. The objective was to discuss challenges and business opportunities as well as to share knowledge and expertise during forum.

3.2.4 Creating a Malaysian Brand

In order to enhance the development of Halal industry, several programmes and events have been planned to promote Malaysia’s position in Global Halal arena. This involves the development of effective branding, marketing and promotional campaigns for Malaysia’s Halal initiatives. Example of programme or events is HalMart. This is the first integrated Halal retail outlet and the world’s first Halal supermarket.

Malaysian SMEs supporting by government agencies such MECD, Majlis Amanah Rakyat(MARA) and Small and Medium Indutries Development Corporation(SMIDEC) was initiated the opening of HalMart in Johor Bahru (SME, 2006). A further 100 stores will follow within the next two years via franchises and a licensing programme. At the end of 2006, HalMart had confirmed two licensees from Brunei and Indonesia, and in 2007 to open outlets in France and across Europe. HalMart’s prime focus is to act as a platform to promote products produced by local Halal food manufacturers through its international outlets. Currently, 211 local entrepreneurs manufacturing 50 different products have signed up to be HalMart suppliers.

3.2.5 Incentives for the Halal Industry

Plans are made to establish one-stop centres to monitor and assist Halal SMEs for certification,grants, marketing and investment. A total amount of RM95 million has been allocated for the Halal hub. A further RM50 million will be set aside to establish Halal parks, located in Pasir Mas, Kelantan; Chendering, Terengganu; Gambang, Pahang and Padang Besar, Perlis. In addition, RM20 million will be used for financing through the SME Bank.SME Bank helping entrepreneurs develop Halal products. HDC is involved in formulating the concept for Halal Parks. Halal Parks is the place or area designated for high-tech and modern factories for manufacturing of Halal product. It will serve as the state’s Halal Hub and first Agro-based Industrial Park. Taman Pengeluaran Produk Usahawan (TPPU) in Rembau and Serkam are in the process of being set up as collaborative ventures between MECD, Standard and Industrial Research Institute of Malaysia Bhd. (SIRIM) and SMIDEC with the land owners, Malaysian Industrial Estates Bhd. (MIEL) and the Melaka State Government.

3.2.6 Halal Avenues

This programme is organised by the the Ministry of Domestic Trade and Consumer Affairs (MDTCA). This programme is aim to introduce Malaysian products to the international market and be held in overseas such UK and France. This programme allows Malaysian SMEs can share their product knowledge and information with another country. The first promotion was held in London in March 2007 organised with Tesco. The programme saw the participation of 30 Malaysian SMEs showcasing 120 products. Business matching opportunities brought in orders worth RM17.9 million. Tesco has declared a commitment to buy RM1 billion worth of Halal goods from Malaysia about the next five years. This is to meet increasing customer demand for Halal products across 15 of its branches in the United Kingdom.

3.3 Franchising

Franchising area is a big business. Malaysian SMEs have to create opportunities to penetrate into huge market in food industry especially. Currently, there are 321 franchise systems in Malaysia with 197 home-grown franchise brands and 124 foreign franchises including food sector. The creation of an internationally will recognize Malaysian brand and the Government has highlighted franchising in the 9MP, as one of several strategies to promote a globally recognised Malaysian brand such as HalMart.

Various incentives and financing schemes are already available to SMEs contribute to franchising. The government has also established PNS (Perbadanan Nasional Berhad) to help develop the franchise sector. While PNS targets primarily Bumiputera entrepreneuers, nevertheless non-Bumiputeras are also allowed to participate in its various offerings. PNS also purchases stakes in various franchises in overseas. For example, 1901 Hot-Dogs and Gloria Jean’s Coffee, both of which started as small outlets then grown into a large market.

3.3.1 Available optional for franchising

1901 Hot Dog

1901 Hot Dogs is a popular Malaysian fast-food franchise that sells authentic American style hot dogs. Established in 1997, 1901 currently has 70 outlets in Malaysia and Singapore. 1901 offers three types of business models to entrepreneurs, namely, pushcart, mobile kiosk and snack cafe. In 2006, PNS acquired a substantial share holding in the franchisor company, Nineteen O One Sdn Bhd. With this cash injection, plans are in place to extend the brand’s presence to include Saudi Arabia, Thailand, Indonesia, United Arab Emirates and Egypt by 2008 and increase its overseas sales by 20%.

Gloria Jean’s Coffee Franchise

PNS Francais Sdn Bhd (PNSF) acquired the Gloria Jean’s Coffees Master Franchisee rights for Malaysia and Brunei in December 2006. The franchise agreement calls for the opening of 30 Gloria Jean’s stores in Malaysia over a five year period. Entrepreneurs can become part of