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SME development and technology upgrading in Malaysia: lessons for the Philippines.


Small- and medium-scale enterprises (SMEs) play a significant role in developing economies. Among their contributions are as follows: (a) they address poverty by creating jobs and by increasing incomes; (b) they disperse economic activities in the countryside, and provide broad-based sources of growth; (c) they serve as suppliers and providers of support services for large enterprises; (d) they stimulate entrepreneurial skills among the populace; and (e) they act as incubators for developing domestic enterprises into large corporations.

SMEs typically comprise the bulk of business enterprises in both developed and developing countries. They also employ a large segment of a country's workforce, and contribute significantly to national output (see Table 1).

It is acknowledged that a strong, dynamic and efficient SME sector plays a key role "in creating international competitive advantage" (Hall, 2003), and ensures sustainable economic development (APBSD, 2004). However, SMEs in developing economies face various issues and constraints (e.g. limited financial resources, lack of managerial expertise and competent personnel; limited access to market information) that threaten their sustainability.

A key challenge for most SMEs is being able to engage in innovative activities and to upgrade their technological capabilities in order to meet more demanding market requirements for better quality and lower prices, to adapt to changes in consumer profiles and preferences, and to keep up with increasingly stiff competition. To succeed in this endeavor, they must overcome several obstacles, including high innovation costs, low customer interest in product innovation, high risks related to innovation activities, absence of financial resources, absence of skilled workers, regulations and technical standards, organizational constraints, absence of information on technology, and absence of market information (Caputo, Cucchiella, Fratocchi, Pelagagge, and Scacchia, 2002).

There is, therefore, a need to create a business environment that will encourage SMEs to not only improve their organizational capabilities to innovate and upgrade, but also to leverage on the resources of other organizations such as government agencies, universities, financial institutions, and other private firms.

Not surprisingly, governments have given increased attention and resources to SME development for a variety of reasons. Poverty alleviation and employment generation have typically been cited as goals in supporting SMEs in developing Asian economies, especially during the 1970s and the 1980s. However, when the Asian financial crisis of the late 1990s exposed the vulnerability of affected economies, support directed at SMEs shifted to programs that encouraged technological upgrading so as to broaden and deepen the industrial structure. This is especially critical for the second-tier newly-industrializing economies (NIEs) of Southeast Asia (i.e. Indonesia, Malaysia, Thailand, the Philippines, and Vietnam), which cannot anymore rely on resource-based and low-cost labor advantages to sustain their economic growth.

This paper looks into the key programs and activities undertaken by the Malaysian government to overcome important challenges in promoting technology upgrading and innovation in its SME sector. (1) It is hoped that the Philippines' own efforts to enhance the competitiveness of its SMEs through technology upgrading will benefit from insights gained from the experience of Malaysia, which has made significant inroads in coordinating its SME development efforts and linking these closely to overall socio-economic goals.

This paper begins with a brief review of some basic concepts that underpin this study. It proceeds to discuss the key issues concerning technology upgrading of SMEs in Malaysia, followed by a description of specific programs and activities that have been undertaken to address the constraints faced by Malaysian SMEs. By juxtaposing the Malaysian experience with available literature on SME development and technological upgrading in developing economies, we derive several insights that might be relevant to policymakers and other key players involved in SME development efforts in the Philippines and in other similarly situated developing economies.


Innovation and the innovation process

McAdam and Armstrong (2001) defined innovation as "the harnessing of creative ability within individuals and the workforce in response to change, by doing things differently or better across products, processes or procedures." Their definition is an attempt to integrate previous definitions derived from literature (Mogee and Schact, 1980; Drucker, 1985; Mole and Elliot, 1987; and Brown, 1994).

For other authors, 'innovation' must be distinguished from 'upgrading'. Kaplinsky and Morris (2003), for example, defined 'innovation' as the ability "to ensure continuous improvement in product and process development" and 'upgrading' as innovation that is placed in a relative context, i.e. how fast the process is undertaken compared to competitors. Giuliani, Pietrobelli, and Rabellotti (2003), on the other hand, defined upgrading as "innovating to increase value added", one that can be achieved "by entering higher unit value market niches, by entering new sectors, or by undertaking new productive (or service) functions."

Tidd, Bessant and Pavitt (1997) offer a useful framework for determining the type of innovation adopted by firms. They said that innovation can be reckoned in terms of what is changed (i.e. product, service, or process) and of the perceived extent of change (i.e. incremental transformation and radical transformation). An alternative would be the classification scheme utilized by Kaplinsky and Morris (2003) and by Humphrey and Schmitz (2003), who identified four trajectories that firms can adopt in pursuing the objective of upgrading: process upgrading, product upgrading, functional upgrading, and chain (or inter-sectoral) upgrading. These categories, according to Humphrey and Schmitz (2003) "are finding rapid acceptance in the international debate", and suggest that firms can, indeed, follow a hierarchy of upgrading as suggested by Gereffi (1999).

For Virasa and Tangjitpiboon (2000), technological innovation activities are all those scientific, technological, organizational, financial and commercial steps that actually, or are intended to, lead to the implementation of new or improved products and processes. The main activities involved are the acquisition of knowledge (patents, licenses, technical services, etc.), the acquisition of machinery and equipment, and various other preparations for production delivery, including tooling up, staff training, marketing, and R&D.

Gudmundson, et. al. (2003) concluded that "the innovation process is complex," an observation shared by other innovation scholars such as Tidd, et. al. (1997), who said that "technological opportunities and threats are often difficult to identify, innovation strategies difficult to define, and outcomes difficult to predict." This is due to the large number of variables that have been associated with innovation in a number of studies such as those undertaken by Damanpour (1991), Link and Bozeman (1991), and Scherer (1991). In fact, there are several innovation models, as summarized by Gudmundson, et. al. (2003), that attempted to explain the innovation process within organizations. These include the models developed by West and Farr (1989), by Woodman, Sawyer, and Griffin (1993), and by Hauser (1998).

The context of innovation

Innovations undertaken by firms do not take place in a vacuum, since firms are open systems that operate within a broader business environment. Businesses must take into consideration the industry and sector to which they belong, their relative size within their industry, the life cycle of technology, and their relative position in supply chains. Worth noting, therefore, are the studies done by Gereffi (1994, 1999 and 2001), and other scholars building on his work (Lee and Chen, 2000; Schmitz and Knorriga, 2000; Bair and Gereffi, 2001; Bazan and Navas-Aleman, 2001; Kishimoto, 2002; and Humphrey and Schmitz, 2003). These studies provide empirical evidence that innovation and upgrading practices of firms are influenced by how they are inserted in global value chains and by their relationships with other productive players in the chain.

There has also been increasing awareness that innovation "implies processes of change undertaken by firms that are affected by a broad set of economic, political, social, cultural, scientific and technological issues" (Arocena and Sutz, 2000). It is in the general framework or "climate" generated by these issues that firms decide and undertake innovative activities. This gave rise to the concept of national innovation system (NIS), which can be defined as:

"an interactive system of existing institutions, private and public firms (either large or small), universities and government agencies, aiming at the production of science and technology within national borders. Interaction among these units may be technical, commercial, legal, social, and financial as much as the goal of the interaction may be development, protection, financing or regulation of new science and technology" (Niosi, et. al., 1996).

An NIS has also been defined "as a historically grown subsystem of the national economy in which various organizations and institutions interact with and influence one another in the carrying out of innovative activity" (Balzat and Hanusch, 2004).

The various definitions of NIS recognize the need to reckon innovative activity beyond the product and process innovations of firms and industries. Other factors such as "learning processes, incentive mechanisms, or the availability of skilled labor", as well as the interplay between organizations and institutions, are highlighted as well (Balzat and Hanusch, 2004).

Over the years, the NIS approach "disseminated rapidly through the economics of innovation literature" having been applied to reveal the structure of, and the main actors involved in, innovation processes not only in highly industrialized countries but in developing countries as well (Balzat and Hanusch, 2004). This led to the introduction of related approaches, some of which have gained currency in the innovation literature over the past few years. Among the alternatives to the concept of national innovation systems are the following: regional innovation systems, sectoral innovation systems, technological systems, and industrial clusters.

In line with the spirit of innovation systems, Virasa and Tangjitpiboon (2000) proposed a conceptual model that illustrates the context within which firms undertake innovation activities. According to them, a firm's innovation activities are determined by firm-specific conditions, demand conditions, country-specific conditions, and supporting conditions, which, in turn, are influenced and surrounded by the intermediate environment and the greater environment related to the firms' business operations.

Approaches for supporting innovation and technology upgrading

A good starting point to promote innovation is to improve a country's absorptive capacity. Public policy can initially focus on enhancing knowledge flows in an economy. Among the strategies identified by Feinson (2003) to address this goal are the following: (a) acquiring foreign technology (i.e. importing capital goods; attracting foreign direct investments); (b) using and diffusing technologies (i.e. establishing institutions and networks that dissipate the tacit and codified knowledge underlying novel technological systems; subcontracting); (c) improving and developing technology (i.e. incremental improvements in processes, inputs, or equipment; formal R&D once developing firms reach a certain stage of technological proficiency); (d) investing in human capital from the primary / secondary level to the university level; (e) establishing R&D laboratories to undertake reverse engineering, to tailor technologies that fit the needs of specific customers, and to keep pace with international and industry trends.

Carlsson (2002) suggested that public policy should focus on removing obstacles to creativity and on fostering entrepreneurship, rather than on taking new initiatives (e.g. formation of new clusters). He argued that formation of new clusters can be facilitated, but not directed, and that planning cannot replace the imaginative spark that creates innovation. However, once clusters form, "a comprehensive set of facilitating policies, from information provision and networking to revision of existing tax codes, regulations, labor laws, etc., may be necessary." In short, the primary role of public policy is to create incentives to filling gaps of competence blocs, removing bottlenecks, achieving critical mass, and addressing deficiencies in the entrepreneurial climate.

Changes in the global business environment, differences in the levels of economic development, and unique cultural contexts have led to a variety of approaches in formulating policies and implementing programs that support innovation and technology upgrading in developing countries, particularly in Southeast Asia. According to Turpin, et. al. (2002), significant developments that have contributed to these new approaches include the following:
 Recognition that there is little national economic benefit in
 strengthening knowledge producing and support institutions
 independently from technology capacity building in wealth creating
 firms. This has reinforced a growing trend among governments to
 focus explicitly on firms as the prime agents of innovation
 supported by specialist capabilities and technical services
 provided by public institutions.

 Majority of important decisions within firms concerning what to
 produce and how to produce it is crucially influenced by the way in
 which the owners and managers of firms respond to the incentives
 available to them. There has been a growing emphasis in most
 countries to design and introduce financial incentives to stimulate
 technology development in firms that can maximize the flow of
 technical skills and knowledge throughout (as well as beyond) the
 sector in which they are operating.

 Recognition that learning and technology acquisition is a
 continuous, cumulative and incremental process. Associated with
 this has been the need to bridge local, national and international
 knowledge and innovation systems, rather than focusing on
 developing an isolated national innovation system.

 Recognition of the importance of industry clustering in the process
 of collective acquisition of skills and the diffusion of technology
 among smaller firms. This has moved the policy focus away from
 single sectors and toward the identification of clusters of sectors
 and interacting firms and institutions and emphasized the salience
 of knowledge networks rather than simply technology itself in
 driving innovation.

 Technological systems vary in character and extent within national
 economies and consequently lead to different technological
 capabilities. In some regions there are particularly dynamic
 innovation environments where information and knowledge are rapidly
 diffused. This raises the capacity of firms and support
 institutions and reduces uncertainty and risk.

 While the globalization of multinational firms has progressed there
 has been a trend toward increased localization of many decisions
 within these firms and an industrial reliance on knowledge
 intensity rather than capital or labour intensity.


Policy environment

Among the thrusts of the Ninth Malaysia Plan (9MP), which covers the period 2006-2010, are to move the economy up the value chain, to raise the capacity for knowledge and innovation, and to address persistent socio-economic inequalities constructively and productively. Part of the initiatives being undertaken to achieve these goals are strategies aimed at SME development, which has been identified as one of the government's key priorities. Under the 9MP, the principal SME policy is "the development of a competitive, innovative and technologically strong SME sector that is able to contribute to the domestic economy and to compete globally" (SME Annual Report 2006). Strategies are directed at acquiring technologies to propel SMEs up the value chain in the manufacturing, agriculture and services sector.

Priority has been given to programs that encourage collaborative ventures among MNCs, government-linked companies (GLCs) and SMEs to facilitate technology transfer and skills development and marketing, and that create links to enable SMEs to become reliable suppliers for global outsourcing networks. Moreover, entrepreneurship programs, including advisory and outreach services, have been expanded to equip SMEs with new and improved management and business practices, methods in production, quality improvement, marketing and distribution. Also given attention are programs that further develop technical skills amongst SMEs, especially in generating innovation and creating economic value from knowledge application.

The priority given to SME development is likewise reflected in the Third Industrial Master Plan (IMP3). The IMP3 recognizes the need to strengthen the core competencies of SMEs, to enhance their entrepreneurial skills particularly in financial management and marketing, to upgrade their technological capabilities, to help them conform to international regulations and standards needed to successfully penetrate overseas markets, and to create a conducive business environment by providing a supportive regulatory and institutional framework.

To provide a roadmap for government ministries and related agencies involved in SME development, the National SME Development Council established the national SME Development Blueprint, an annual action plan (first implemented in 2006) that outlines objectives, strategies and targets, as well as key programs and financial commitments, for SME development in a particular year.

The Blueprint "acts as a coordinated platform" for concerned ministries and agencies to implement comprehensive programs meant to support SMEs in a holistic manner. The following strategic thrusts were identified to guide the implementation of these programs: (a) enhancing the competitiveness of SMEs; (b) capitalizing on outward investment opportunities; (c) driving the growth of SMEs through technology, knowledge and innovation; (d) instituting a more cohesive policy and supportive regulatory and institutional framework, and (e) enhancing the growth and contribution of SMEs in the services sector.

Institutional set-up

In Malaysia, policymaking is the responsibility of the National SME Development Council (NSDC), which was established in June 2004 during the 8MP and IMP2 periods. The Council, chaired by the Prime Minister, represents the Government's top-level commitment to promote SME development.

Specifically, the NSDC aims to formulate broad policies and strategies to facilitate the overall development of SMEs across all sectors; review the roles and responsibilities of government ministries and agencies (i.e. the "stakeholders") responsible for SME development; enhance cooperation and coordination, as well as guide stakeholders to ensure effective implementation of SME development policies and action plans; encourage and strengthen the role of the private sector in supporting the overall development of SMEs; and provide emphasis to the development of Bumiputera SMEs across all sectors of the economy (

There are at least 12 ministries and 38 agencies supporting the government's SME development efforts. Each of these organizations has been tasked with specific development objectives aimed at particular target groups.

Taking the lead in the implementation of SME development programs is the Ministry of International Trade and Industry (MITI), which has several attached agencies, namely the Malaysian Industrial Development Authority (MIDA), the National Productivity Corporation (NPC), the Malaysia External Trade Development Corporation (MATRADE), the Malaysian Industrial Development Finance Berhad (MIDF), and the Small and Medium Industries Development Corporation (SMIDEC).

Other government ministries that are involved in programs that address SME concerns are as follows: Ministry of Agriculture and Agro-based Industry, Ministry of Domestic Trade and Consumer Affairs, Ministry of Entrepreneur and Cooperative Development, Ministry of Human Resources, Ministry of Plantation Industries and Commodities, Ministry of Rural and Regional Development, Ministry of Science, Technology and Innovation, Ministry of Tourism, Ministry of Culture, Arts and Heritage, Ministry of Housing and Local Government, and Ministry of Higher Education.

Also performing critical roles in SME development are other government agencies such as Bank Negara Malaysia, Export-Import Bank of Malaysia Berhad, Malaysian Venture Capital Management Berhad, and Malaysia Debt Ventures Berhad; the accredited skills development centers located throughout the country; and the various industry associations led by the Federation of Malaysian Manufacturers (FMM) and the National Chamber of Commerce and Industry of Malaysia (NCCIM).


Many of the strategies and programs implemented by government have resulted into positive gains for the SME sector in Malaysia, as can be gleaned from official statistics of the number of programs administered, the amount of money released, and the total number of beneficiaries. In 2006 alone, a total of 213 major programs, involving a total expenditure of RM7.8 billion, were implemented. These programs focused on enhancing the capacity and capability of SMEs, particularly in the areas of entrepreneurship development, marketing and promotion, product development and technology enhancement. It was estimated that the implementation of these programs benefited more than 287,000 SMEs (SME Annual Report 2006).

These gains notwithstanding, there remains a lot to be done to further strengthen the innovative capacity and global competitiveness of Malaysian SMEs, and to ultimately deepen the country's industrial structure. In fact, Bank Negara Malaysia's SME Survey in 2001 revealed that Malaysian SMEs are still mostly inward-looking and are faced with constraints in management and technological capabilities, limiting their ability to compete and to add value effectively. This is consistent with an earlier observation of Lall (1999) that the bulk of the Malaysian industry sector "consists of small traditional firms using low-technology and low-skill technologies."

In this section, we focus on developments in three major areas: (1) providing financial assistance for technological upgrading; (2) strengthening SME linkages with large firms and universities; and (3) developing human capital. Since these areas have been the target of various programs and incentives, it would be interesting to examine the efforts that have been undertaken and to see the progress that has so far been made.

Financial assistance for technological upgrading

Recognizing the financial constraints faced by many SMEs, the government offers incentives in the form of grants and soft loans that are provided by various ministries and their agencies. Funds are also channeled through developmental financial institutions as well as commercial financial institutions. Worth noting are the various matching grants that are meant to finance product and process improvement, quality certification and management system improvements, market development, skills upgrading, factory audit, and acquisition of strategic technology (see Table 2). An example of these grants is the MOSTI-administered Technology Acquisition Fund (TAF). The Fund aims to promote technology upgrading through the introduction and utilization of technologies in the manufacturing and physical development of existing and new products or processes; and to increase wealth creation and technology content of Malaysian companies through the acquisition of foreign technology (i.e. licensing, non-exclusive purchase of technology, or outright purchase of technology).

Project proposals eligible for consideration under the TAF must be listed in the following priority technology clusters: biotechnology, agriculture, ICT, and industrial (e.g. advanced materials, advanced manufacturing, alternative energy). Funding is up to a maximum of 50% of project cost or RM2 million, whichever is lower, depending on the merits of each application. In 2006, eight companies were recipients of funds worth RM8 million.

Aside from grants, the government also offers a variety of loans, such as the Fund for Small and Medium Industries 2, New Entrepreneurs Fund 2, Rehabilitation Fund for Small Businesses, Bumiputera Entrepreneur Project Fund, New Trade Finance Products for SMEs, Soft Loan for Small and Medium Enterprises, Soft Loan Scheme for Factory Relocation, and Soft Loan Scheme for ICT Adoption.

SMIDEC, in its 2005 Annual Report, revealed the following:
 The number of approvals for grants and soft loans in 2005 increased
 by 48.4 per cent to 1,465 compared with 987 approvals in 2004. The
 total value of loans increased from RM42.9 million in 2004 to
 RM104.6 million in 2005. Of the 1,465 approvals, 1,316 were for
 grants, amounting to RM19.8 million, while 149 were for soft loans
 valued at RM84.8 million.

 From the total grants approved, RM6 million were for the Market
 Development Grant, comprising 881 projects. This was followed by
 324 projects under the Productivity and Quality Improvement and
 Certification Grant, valued at RM7.7 million, and 61 projects under
 the Product and Process Improvement Grant, valued at RM4.8 million.

 Some grants had few takers, such as the Matching Grant for Business
 Start-Ups. According to SMIDEC, the low response was due to the
 perception that undertaking the studies is costly and has no
 immediate benefit to business operations.

 Under the soft loan schemes, a total of RM84.8 million were
 disbursed to MIDF to assist SMEs in fixed assets, working capital,
 and project financing. A total of RM4.5 million loans were
 disbursed under the Soft Loan for Factory Relocation, which
 encouraged SMEs to relocate their operations to approved industrial
 sites. Moreover, a total of RM2.8 million was disbursed under the
 Soft Loan for ICT Adoption, enabling 16 successful SME applicants
 to invest on requisite software, hardware, and ICT training.

Strengthening SME linkages

As mentioned earlier, SMEs must not only seek to improve their organizational capabilities, but also learn how to leverage on the resources of other organizations, especially large firms and producers of knowledge such as universities and research institutes.

Linkage with MNCs

An important strategy to promote 'technological deepening' through technology spillovers is encouraging linkages among large firms (particularly MNCs) and local SMEs. The expectation is that through subcontracting linkages, SMEs are able to benefit from the technical assistance, information, and training provided by large foreign and local companies to their suppliers.

The influx of MNCs in Malaysia during the FDI boom of the late 1980s and early 1990s, however, did not result in the expected degree of technology transfer. While Malaysian companies have increasingly mastered operational technologies due to their relationship with MNCs either as suppliers or as service providers, few have graduated to higher-value activities such as designing, branding, and high-level R&D because these activities were being done by the MNCs themselves. In short, local firms have succeeded in undertaking process and product upgrading because of the requirements of their MNC clients, but they are not likely to engage in functional upgrading because this would mean encroaching on their clients' turf. Many of these local firms belong to captive value chains, in which "radical product and functional upgrading may be restricted by the interests of the lead firm" (often the large MNC) (Humphrey and Schimtz, 2000; 2003).

To address this situation, the Malaysian government revised its industrial development policy to encourage technology spillovers and to speed up industrial deepening. One major program geared towards this goal is SMIDEC's Industrial Linkage Program (ILP), which fosters partnership between SMEs and large-scale industries (LSIs). Under the ILP, support is given to enhance the capacity and capability of local SMEs in meeting quality, technical specifications and delivery schedules, as well as in maintaining cost and price competitiveness. By participating in the ILP, SMEs are expected to achieve a high level of competency in supplying parts and components required by the LSIs, which could pave the way for their entry into the regional and global markets.

According to the SMIDEC Annual Report 2005, 1,088 SMEs from various sectors were registered under the ILP, out of which 415 SMEs (38.1%) were linked to MNCs and large companies. In 2005 alone, the 157 SMEs that were linked to LSIs generated potential sales amounting to RM96.8 million. During the same period, a total of 108 SMEs in the food and nonfood sectors were linked by SMIDEC to hypermarkets as potential suppliers. Out of these, 31 SMEs have been appointed, with total sales valued at RM2.1 million. Six have progressed to become suppliers to the hypermarkets under their in-house brand.

Another key program is the Vendor Development Program (PPV), which is administered by the Ministry of Entrepreneur and Cooperative Development (MECD). Launched in 1998, the PPV supports the localization program emphasized by government in order to increase local content of manufactured goods.

Under the program, SMEs are given opportunities to become vendors through outsourcing activities established by anchor companies (local conglomerates, GLCs and MNCs). Facilities such as financing, training and technical support services are provided by government, with cooperation from technical agents, anchor companies, as well as banks and financial institutions. The PPV's main objective is "to develop SMI entrepreneurs as component manufacturer and suppliers, as well as service providers, to local conglomerates and MNCs for local and international markets (MECD Annual Report 2005).

In implementing the PPV, the MECD has established industrial networks and collaboration with certain industries to identify new potential sectors for vendor development. It also collaborates with technical agencies, specifically SIRIM Berhad, Kulim Technology Park Corporation (KTPC), National Productivity Centre (NPC) and Malaysian Timber Industrial Board (MTIB) to increase product quality, productivity, as well as the technical and technological knowledge of the vendor companies.

For the 8MP, MECD had targeted to appoint and develop a total of 175 SMI vendor companies. As of the end of 2005, the total number of vendors developed reached 135 companies, an achievement of 77%. From 1998 to 2005, a total of 391 SMI vendor companies had been appointed and developed in various fields (see Table 4). Of the total, 255 companies (65%) are still operational. Most of which are involved in domestic markets, while a few have already exported their products to the international markets. According to MECD, "continuous efforts are being made to assist SMI vendor companies to increase sales through market acquisition from non-anchor companies."

From 1998 to 2005, 94 anchor companies had been listed as participating under the PPV (see Table 5). The anchor companies' participation helps Bumiputera (native Malay) SMI entrepreneurs to increase the existing vendor companies' sales and market coverage, as well as to increase the volume of purchase of Bumiputera products by MNCs and GLCs. This is reflected in the increase of 17.5% in the percentage of estimated sales from vendor companies to anchor companies in 2005 compared to 2004.

However, the participation of MNCs in the PPV has decreased, given the voluntary nature of the program. MECD attributed this to "the absence of attractive incentives offered by the government to draw the MNC's interests to join PPV." MECD acknowledged that "the existing incentives such as income tax reduction on expenditures involving training, development and product testing upon SMI vendor companies are quite insignificant in terms of value." A more compelling reason is that MNCs would rather acquire components' supply from external sources with more competitive pricing. This implies that many local SMI vendors, in spite of the support they got from the PPV, have yet to achieve a certain level of competitiveness in relation to foreign suppliers.

SME linkages--the Penang experience

Much has been written about the success of Penang in strengthening the capabilities of local firms through technology absorption and diffusion (Rasiah, 1995; 1999; 2001; Narayanan, 1997; Lall, 1999; Best, 2007). Linkage development became evident in Penang by the late 1980s, during which a number of semiconductor MNCs sponsored the growth of some locally-owned machine tool suppliers. This was followed by the establishment of several assembly subcontractors who formed long-term supply relationships with local audio companies and computer electronics MNCs.

According to Felker and Jomo (2007), the Penang Development Corporation (PDC) played a pivotal mediating and supporting role in encouraging linkage growth. As MNC's local sourcing grew, the PDC surveyed likely supplier firms, published sourcing guides, helped suppliers locate in the FTZs, and assisted them in winning investment incentives from the federal investment agency, MIDA.

Today, Penang has world-class manufacturing capabilities in mass production, including JIT and TQM systems, with a number of examples of flexible mass production. More importantly, there has been a transition to a regional supply base with a growing degree of local horizontal integration. Proof is the emergence of a locally-owned supplier base with increasing capabilities in technology management (Best, 2007). In other words, there is a relatively higher level of technology diffusion in Penang (as compared to the Klang Valley), as evidenced by a much higher proportion of local outsourcing by local firms to second and third tier suppliers (Rasiah, 1994; Narayanan, 1997; Best, 2007).

Linkages with universities and public research institutes

Ideally, collaboration between producers of knowledge (i.e. universities and public research institutions) and users of knowledge (i.e. firms) will allow both parties to leverage on the physical and human resources of each other. More importantly, this collaboration is essential "so that the fruits of public R&D can contribute towards the acquisition and strengthening of the nation's technological capabilities" (Thiruchelvam, 2004).

However, a government survey of 5,232 research projects carried out during the 1990s in public research institutes (PRIs) and universities found that only 5.1 per cent had resulted in commercial applications (Utusan Malaysia, 24 January 2004, as cited by Felker and Jomo, 2007). This was largely due to the weak linkage between universities and PRIs with the private sector.

Among the reasons for the weak linkage, according to Thiruchelvam (2004), are as follows:
 Heavy dependence of universities and PRIs on funding provided by
 the Intensification of Research in Priority Areas (IRPA) program.
 Since funding is quite easy to obtain, there was no motivation for
 universities and PRIs to aggressively reaching out to industry.

 Failure to enforce self-financing targets for research undertaken
 by PRIs and universities due to weak implementation capacity Lack
 of incentives for researchers to collaborate with industry, coupled
 with the perception that working with industry is 'second class'
 compared to doing academic research

 Industry's lack of confidence in the ability of universities and
 PRIs to address their problems due to several factors, including
 poor adherence to tight timelines by university staff, and lack of
 customer-service mentality among universities and PRIs

 Inability of PRIs and universities to address the need of industry
 for simple adaptations or improvements to existing processes rather
 than for sophisticated technologies

 Inability of PRIs and universities to promote their research
 findings in terms that businesses best comprehend, i.e. cost
 savings or increased profits / sales

 Government funding mechanisms only cover core research aspects of a
 project and not subsequent related activities that are crucial in
 transforming it to a form readily-adopted by the end-user. Funding
 for pre-technical, prototype construction, design/engineering,
 technical extension and marketing activities undertaken by PRIs and
 universities are not provided. As a result, most research outputs,
 especially from universities, are at a stage where further
 development work is required before they can be adopted by

Several steps have been taken to strengthen the linkage between universities / PRIs and industry. For example, several public universities in Malaysia have set up Innovation and Commercialization Centers (ICCs) that are tasked not only to find commercial applications for technologies developed by academic staff, but also to promote collaboration between university researchers and corporations (or entrepreneurs) that are interested in licensing these technologies or developing these technologies further into commercially viable products.

These initiatives, however, are still at the initial stages and are hampered by several problems (e.g. capability of university researchers to translate their research jargon into a language understandable to business people; managing the expectations of interested companies / entrepreneurs concerning the readiness of prototypes to be produced in commercial quantity, and settling intellectual property issues) (2)

Other government initiatives that address the above-mentioned constraints are the Technology Development Cluster Program and the Commercialization of Research and Development Fund (CRDF).

The Technology Development Cluster Program, which is spearheaded by the Malaysian Technology Development Corporation (MTDC), aims to develop a cluster of high-technology companies operating within universities and research institutes in an environment that enables interaction and enhances collaboration. It is hoped that this collaboration will accelerate the commercialization activities of both local universities and research institutions.

Three incubation centers are fully operational. These are the UPM-MTDC Technology Center (located at Universiti Putra Malaysia in Selangor), which specializes in ICT, multimedia, and agricultural biology; the UKM-MTDC Technology Center (located at Universiti Kebangsaan Malaysia in Selangor), which specializes in biotechnology; and the UTM-MTDC Technology Center (located at Universiti Teknologi Malaysia in Johor), which specializes in advanced engineering and life sciences (MTDC, 2007). As at end 2006, these three centers host a total of 48 companies.

Also administered by the MTDC is the Commercialization of Research and Development Fund (CRDF), which has been redesigned in line with the goals of the 9MP. Among its goals are to increase the commercialization of science, technology, and innovation (STI) products and processes developed by universities, research institutions, and companies; to increase wealth creation and technology content of SMEs and large corporations through the commercialization of R&D done by local universities and research institutions; and to foster greater collaboration between universities / research institutions and industry.

Funds are available to parties that intend to commercialize public sector R&D results via a start-up company, or to existing SMEs that want to engage in commercial production of any locally generated R&D results. To ensure the effective utilization of the funds, approved grants are disbursed either on a matching or reimbursement basis according to the claims submitted by the grant recipient, and in stages, subject to the satisfactory progress of the project in terms of deliverables and milestones reached.

Developing human capital

Human capital development is a key element in upgrading the technological capabilities of firms. Recognizing this, the Malaysian government has initiated various training programs to enhance the skills and quality of personnel in SMEs. While some of the training courses offer general business skills and management training, the majority are specifically designed to upgrade human resource skills needed in certain industries.

Coordination of training requirements of SME

The National SME Development Council has mandated Pembangunan Sumber Malaysia Bhd. (PSMB), an agency under the Ministry of Human Resources (MOHR), to co-ordinate and to oversee training and human resource development for SMEs. Under PSMB, training needs are analyzed and programs are kept in line with SME requirements, from the most basic to the more technically advanced. PSMB also administers the Government's Human Resources Development Fund (SME Annual Report 2006).

Among the major initiatives of PSMB in 2006 are as follows: (a) Introduction of an SME Training Accreditation System into the Myskill Card in order for SME employers to keep a record of employee training; (b) Establishment of six training committees were established by PSMB to identify SME training needs and to ensure that courses met specific and targeted requirements; (c) Train-the-Trainer and "Evaluation of Training Effectiveness" sessions for up to 250 government officers who disseminate information to SMEs about training programs; (d) Launching of the HRD Portal, a web-based portal that acts as an online training resource centre for employers, employees and training providers. The portal allows SMEs to register for training courses, to access up-to-date information on available courses, seminars, conferences, and events on human resource training. The portal also disseminates information on the training programmes offered by 29 Ministries and Agencies that are involved in capacity building for SMEs.

Productivity training

In 2006, the National Productivity Corporation (NPC) conducted a total of 215 training programmes benefiting 3,542 SMEs, focusing on Quality Management Systems, Leadership and Management Development, Production Management, Process Improvement and Customer Excellence. To further strengthen its efforts, the NPC linked up with the regional Asian Productivity Organization (APO). Aiming to enhance the productivity and competitiveness of SMEs located in its member countries, the APO has established a Best Practice Network (BPN), which generates, shares, and transfers knowledge on best practices for the use of national productivity organizations like the NPC. The APO Best Practices Network developed a set of key performance indicators (KPIs) for SMEs to generate, share and transfer knowledge on best practices that will assist organizations in enhancing productivity and competitiveness.

Skills Development Centers

Responding to MNCs' complaints, the government acted to build a network of industrial skills institutions responsive to the changing needs of high-technology investors. In 1989, the Penang State government helped to found Penang Skills Development Center, which is managed by a committee of representatives from the firms, and supported by the State government in the form of land and personnel. The PSDC provides advanced training to industrial workers, technicians and engineers in one of Malaysia's major electronic industrial zones. Under the auspices of the Penang Development Corporation (PDC), the PSDC has played the role of "expanding the supply of technically trained workers 'in synch' with the development of technology management capabilities of enterprises in the state" (Best, 2007). Using this as a model, the federal government encouraged other states with industrial concentrations, including Selangor, Kedah, and Johor, to set up similar industry-managed training centers during the 1990s.

The federal government matched these initiatives by negotiating with the British, German, French, and Japanese governments to set up specialized training institutes, as Singapore had done a decade earlier. By 2001, the state skills development centers had trained 153,455 workers, and the 'bilateral' training institutes had graduated 7,374 trainees. Four private sector centers had enrolled 122,107 trainees, the vast majority of them in the Federation of Malaysian Manufacturers' Institute of Manufacturing courses (Felker and Jomo, 2007).

Grant for Skills Upgrading

The Scheme is aimed at enhancing the skills and capabilities of employees of SMEs in the technical and managerial levels, particularly in critical areas such as the electrical and electronics, information technology, industrial design and engineering fields. SMIDEC has appointed 22 training providers to undertake technical skills for SMEs, including skills development centers (SDCs) in Sarawak, Johor, Penang, Terengganu, Pahang, Kedah, Perak, Selangor, Negeri Sembilan, Malacca and Sabah. Other accredited training institutes are the following: German-Malaysian Institute (GMI), Malaysia Finance Institute (MFI), SIRIM Bhd, Technology Park Malaysia (TPM), Malaysian Institute for Nuclear Technology Research (MINT), National Productivity Corporation (NPC), Kumpulan IKRAM Sdn Bhd, National Institute of Occupational Safety and Health (NIOSH), Institute of Global Management (IGM), Bureau of Innovation and Consultancy, and University of Malaya Center for Continuing Education (UMCCed).

Assistance is given in the form of a matching grant where 50% of the cost of training is borne by the government and the remainder by the applicant. In addition, the remaining costs can also be claimed through the Human Resource Development Fund (HRDF).

In 2006, a total of 1,447 SME employees attended various skills development training programs implemented by the 22 SDCs appointed by SMIDEC under the Skills Upgrading Program. The variety of available courses from these appointed SDCs range from technical skills to soft skills in marketing and management in critical areas such as the electrical and electronics, information technology, industrial design and engineering fields. SDCs were also required to install a tracking mechanism to monitor the career progress of their trainees.

Human Resource Development Fund

Recognizing that an acute shortage of skilled labor was a basic constraint on technological upgrading, the government reformed incentives related to human capital formation. In 1993, the government replaced an existing tax incentive for corporate training expenses with the Human Resources Development Fund (HRDF), an industry sector-wide payroll levy and training subsidy scheme. Firms employing more than 50 workers were required to contribute one per cent of their payrolls to the Fund, and could apply for reimbursement of a percentage of expenses on approved training programs or submit their in-house annual training plans for approval.

Over the next decade, the Fund collected some RM1.03 billion in employer payroll levies. In 1996, the government extended the scheme to small and medium sized industries (SMIs), with a RM20 million allocation to offer an enhanced training subsidy. By the end of 2001, though, only 17 per cent of these funds had been disbursed, and only 3 per cent of the country's SMIs had enrolled in the training program (Felker and Jomo, 2007).

Talent crunch remains

According to Jomo (2007), Malaysia has decent primary education, high literacy rates and widespread acquaintance with the English language. It also has rising enrolments at higher levels of secondary and tertiary education. All these have provided a trainable and efficient basic workforce, which sustained industrial development quite effectively before the 1990s. However, this level of formal skill creation is not sufficient to meet the technological needs of the expanding high technology sector, or to manage a large increase in the technological levels of SMEs.

There is growing evidence of skills shortages at all levels, particularly in technical fields. Businesses complain about the constraints to upgrading and deepening posed by the lack of particular skills, and by high turnover rates for middle level skilled employees (Jomo, 2007). These are symptoms of weaknesses in Malaysia's higher educational structure, which has tended to neglect industry's technical needs. Tertiary enrolment rates, especially in technology-related subjects, leave much to be desired. According to Lall (1995, as cited by Jomo, 2007), there are large gaps between demand and supply at all levels of skill and for all types of education. For example, Malaysia lacks engineering and science graduates, and needs a tenfold increase in science and engineering graduates as a proportion of the population to achieve the same levels found in Singapore, South Korea, and Taiwan (Best, 2007).

Reforms, however, are underway especially with the formulation of the National Higher Education Strategic Plan 2007-2010 and the National Higher Education Action Plan 2007-2010, which are meant to transform the state of higher education in Malaysia.


Before I list down insights gained from the Malaysian experience, a brief comparison of the SME environment in Malaysia and the Philippines is in order. In terms of SME profile, SMEs (including micro-businesses) constitute 99.2% in Malaysia and 99.6% in the Philippines. SMEs account for 56.4% of total employment in Malaysia compared to 69.9% of total employment in the Philippines. SMEs in both countries contribute about one-third of value-added to their respective economies.

In terms of the legal framework, the Philippines has special laws for SMEs, such as the Magna Carta for Small Enterprises (R.A. No. 6977 as amended by R.A. No. 8289) and the Barangay Micro Business Enterprises Act of 2002 (R.A. No. 9178). This is not the case in Malaysia. Both countries, though, have included incentives for SMEs in their investment laws, tax laws, and free zones acts.

Table 6 shows that while the institutional frameworks of the two countries are quite similar, there are marked differences in several areas.

First, SME development efforts in Malaysia are closely linked to overall economic goals as evidenced by the explicit references made by the SME Development Blueprint to the Ninth Malaysia Plan and the Industrial Master Plan. In the Philippines, the SME Development Plan does not refer to the Medium-Term Development Plan, at all, probably because the overall goals for SME development are spelled out in the special SME laws that were mentioned earlier.

Second, the strategic thrust of Malaysian SME development is clearly to enhance SME competitiveness in the regional and global arena, as can be gleaned by the programs and incentives offered by various government agencies. While the SME Development Plan of the Philippines also states the need to develop managerial and technological capabilities to enhance competitiveness in global markets, support programs and incentives are clearly aimed towards poverty reduction and employment generation. Moreover, the increased priority given to potential growth areas (e.g. manufacturing-related services, medical devices, metal products, transport services and logistics, professional and management services, ICT) supports the global aspirations of the Malaysian government for its SMEs. SME development efforts in Philippines, on the other hand, still prioritize the traditional sectors (e.g. food industry, organic and natural products, wearables), which is consistent with its welfare goals.

Obviously, the SME development efforts in the two countries are largely influenced by their levels of economic development. Given the relatively advanced state of its economy, Malaysia has the resources to provide a comprehensive and integrated package of programs and incentives for its SME sector. The Philippines, on the other hand, has to deal with scarce resources that might be better spent for basic infrastructure, which has been neglected over the past few years.

The differences in economic development, notwithstanding, there are useful insights that the Philippines can derive from the Malaysian case.

Link SME development efforts to overall socio-economic goals

This has allowed the Malaysian government to design a comprehensive set of programs and incentives that reinforce each other. Having a coordinating agency like SMIDEC also helps in reducing duplications and in maximizing the effectiveness of programs offered to SMEs. To be sure, some of the programs offered by the government (particularly those administered by the MECD) are still driven by the spirit of the National Economic Policy (NEP), which aimed to increase the wealth of the indigenous Bumiputera population through affirmative action programs. However, the goals and strategies stated in both the 9MP and IMP3 have served to redirect resources to more growth-oriented programs.

Adjust policies and programs to fit environmental realities

Over the years, Malaysia has adapted its technology policy "in response to evolving global about key sources of competitiveness" (Felker and Jomo, 2007). For example, the failure of the 'science push' model of innovation led the government to a more systemic approach to national innovation. This is clearly shown in the new policies and institutional reforms that were introduced to make public technology agencies and programs more responsive to the needs of industry. Policies to attract FDI have also been revised to speed up technology diffusion, particularly in identified industrial areas.

Design support programs and incentives to fit the specific needs of SMEs

According to the National Survey of Innovation 2000-2001 conducted by the Malaysian Science and Technology Information Centre (MASTIC, 2003), around 95% of the innovating companies (or 245 firms) reported that they did not receive any government support or incentives. MASTIC concluded that government support, though important for some firms, are deemed as completely irrelevant by other companies. This explains why some government programs (e.g. Matching Grant for Business Start-Ups) are not fully-utilized despite the availability of funds.

In the MASTIC survey, it would appear that the innovating companies are encouraged by market-driven factors to innovate. The main reasons firms engage in innovation are the following: (a) to improve product quality, (b) to extend product range, (c) to open up new markets or to increase market share, (d) to improve product flexibility, and (e) to fulfill certain regulations or standards. By designing programs to cater to the specific needs of industry, resources could be channelled from underutilized programs to those that would have greater impact on firms. This is a valuable lesson for the Philippines, which could not afford to pour in its limited resources on ill-designed government programs (Habaradas, 2007).

Strengthen the formal education system

The human capital deficiencies that are beginning to affect high-technology businesses in Malaysia highlight the importance of strengthening the formal education system. The reforms spelled out in the National Higher Education Strategic Plan 2007-2010 and the National Higher Education Action Plan 2007-2010 are a step in the right direction. The success of these plans, however, is largely dependent on the financial resources provided by the Malaysian government to its public universities. This might be difficult to replicate in the Philippines, where government subsidy for public universities has been dwindling over the years.

Encourage private sector participation

Forging consensus among stakeholders is imperative. The experience of Penang clearly shows the importance of closely engaging the private sector in coming up with initiatives that are meant to benefit them. Recognition must be given to the Penang State government for its success in establishing the trust needed to sustain this public-private sector partnership. It is conceivable that the same collaborative spirit can be nurtured in several areas in the Philippines, especially in cities and provinces that have been blessed with dynamic local government officials. The economic successes of Cebu, Davao, and Naga, among others, are testaments to this.

In conclusion, we can say that setting up the appropriate legal framework and providing the physical infrastructure is important in promoting technological upgrading among SMEs in a developing economy. However, building the social infrastructure is the more critical challenge. This requires a sustained effort in nurturing trust and in fostering the spirit of collaboration among the key actors (i.e. government, educational and training institutions, financial institutions, and businesses) of the national innovation system.


I would like to thank the Nippon Foundation Fellowships for Asian Public Intellectuals (API Fellowship Program) for the funding support that enabled me to gather data used in this paper.


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(1) This paper utilized secondary data (e.g. annual reports, publications and program brochures) collected from various government ministries and agencies (e.g. MITI, MECD, MOSTI, MOHR, MOHE, MIDA, SMIDEC, NPC, MATRADE, MTDC, MDeC, SME Bank, and Bank Negara Malaysia), and primary data gathered through personal interviews with key government personnel, businessmen, and academics during the author's four-and-a-half month research fellowship in Malaysia, which was sponsored by the Nippon Foundation's Asian Public Intellectuals (API) Fellowship Program.

(2) Communication with Dr. Fauziah Md. Desa, Deputy Director of the Innovation and Commercialisation Centre of Universiti Putra Malaysia; Dr. Bahari Belaton, Acting Research Dean, Office of Research Platform of Universiti Sains Malaysia; Mr. V.V. Sarachandran (Corporate and Legal Manager), Mr. Abdul Hamid Abd. Wahab (Group Marketing Manager), and Mr. Azizi Ibrahim (Group Marketing Executive) of USAINS Holding Sdn Bhd.

Raymund B. Habaradas, De La Salle University--Manila
Table 1: Contribution of SMEs to selected Asian economies

 Country Measures used in definition
 of SME

China (2004) Employment, sales and assets
Indonesia (2006) Employment, sales and assets
Korea (2003) Employment and assets
Malaysia (2005) Employment and sales
Philippines (2003) Employment and assets
Singapore (2004) Employment and fixed assets
Thailand (2002) Employment and fixed assets
Vietnam (2002) Employment

 Country % of total % of total % of SME
 number of workforce contribution
 firms to GDP

China (2004) 99 75 56
Indonesia (2006) 99.9 99.6 57
Korea (2003) 99.8 86.5 49.4
Malaysia (2005) 99.2 56.4 32
Philippines (2003) 99.6 69.9 32
Singapore (2004) 90 45 25
Thailand (2002) 99.6 69 38.9
Vietnam (2002) 99.9 77.3 n/a


China and Medium Size Enterprises Main Source of
Indonesia APEC--SME Profile (
Korea - Small and Medium Business Administration (SMBA)
Malaysia Census of Establishment and Enterprises 2005
Philippines Census on Business Establishments
Singapore Environment for SMEs in Singapore
Thailand White Paper on SMEs in Thailand 2002, OSMEP
Vietnam Establishments Census 2002

Table 2: Financial assistance for Malaysian SMEs

 Name of grant / fund Description

Matching Grant for Government shoulders 50% of approved
Business Start-Ups project cost. Maximum grant per
 application: RM40,000. Eligible expenses
 include the following: preparation of
 business plan, related feasibility
 studies, rental of incubators and business
 premises up to 24 months, rental of
 equipment and machineries related to
 incubator rental, development of
 prototype, and product sample and testing

Matching Grant for Government shoulders 50% of approved
Product and Process project cost. Maximum grant per
Improvement application: RM500,000. Eligible expenses
 include: technology feasibility studies,
 fees for technology transfer, development
 of prototypes and system design, product
 testing, product registration, marking and
 labeling, machine and equipment testing
 and calibration, initial patent
 registration / patent search / IP
 protection, etc.

Matching Grant for Government shoulders 50% of approved
Certification and Quality project cost. Maximum grant per
Management System application: RM250,000. Eligible expenses
 include those incurred in obtaining
 certification and quality management
 systems such as ISO 13485, ISO 14000, ISO
 22000, Hazard Analysis Critical Control
 Point (HACCP), Halal certification, Good
 Manufacturing Practice (GMP),
 Occupational, Safety and Health Management
 System (OSHA), etc.

Grant for Enhancing Government shoulders 50% of the cost of
Marketing Skills of training. Scheme covers the participation
SMEs or training fees for approved courses
 under the following general categories:
 Sales Performance Training, Customer
 Services Training, and Marketing.

Matching Grant for Government shoulders 50% of approved
Enhancing Product project cost. Maximum grant per
Packaging application: RM200,000. Eligible expenses
 include cost and services for designing,
 packaging, marking and labeling, and
 expenses incurred for trade mark and
 patent registration, and purchase of
 related machinery and equipment.

Matching Grant for Government shoulders 50% of approved
Development and project cost. Maximum grant per
Promotion of Halal application: RM150,000. Expenses incurred
Products in developing halal products are eligible,
 including: product development and product
 formulation, sample testing, acquisition
 of machinery and equipment, renovation
 expenditure for compliance to halal
 certification requirement, etc.

Grant for Skills Government shoulders 50% of the cost of
Upgrading training. Remaining costs can be claimed
 through HRDF. Scheme is aimed at enhancing
 the skills of SMEs in the technical and
 managerial levels, particularly in
 critical areas such the electrical and
 electronics, information technology,
 industrial design and engineering fields.

Grant for RosettaNet Government shoulders 50% of approved
Standard Implementation project cost. Maximum grant per
 application: RM100,000. Provides
 assistance for local companies to
 implement the complete RosettaNet
 Standard, the adoption of which allows
 companies to conduct business
 electronically through common codes for
 sourcing parts and components with their
 partners, suppliers and buyers.

Matching Grant for Companies can obtain a 50% reimbursable
Market Development matching grant on the approved cost of the
 eligible activities, which include the
 following: participation in trade and
 investment missions, export market study,
 participation in local or overseas
 international trade fairs, initial cost of
 setting up office overseas, etc.

Brand Promotion Grant Aims to develop and promote in the
 international market, brand names owned by
 Malaysian companies for products and
 services originating from Malaysia; 100%
 reimbursable grant for the development and
 promotion of brand up to RM1 million (for

Source: SMIDEC Policies, Incentives, Programmes and Financial
Assistance for SMEs, summarized by author

Table 3: Summary of approved grants for SMEs

Name of grant / fund No. of approved Value (RM)

Matching Grant for Certification and 324 7.68 million
Quality Management System

Matching Grant for Market Development 881 6.0 million

Matching Grant for Product and 61 4.84 million
Process Improvement

Matching Grant for Development and 10 1.54 million
Promotion of Halal Products

Matching Grant for Enhancing Product 16 490000
Packaging, Design and

Labelling Capabilities

Grant for RosettaNet Standard 18 390000

Matching Grant for Business Start-Ups 2 25000

Source: SMIDEC Annual Report 2005, summarized by author

Table 4: Number of vendor companies by sector until 31 December 2005 *

No. Fields Vendors %

1 Wooden furniture 91 23.3
2 Automotive including motorcycle 76 19.4
3 Electrical and electronics 75 19.2
4 Building equipment 34 8.7
5 Shipbuilding and repair 24 6.1
6 Filming 23 5.9
7 Petroleum and gas 22 5.6
8 Telecommunications 17 4.3
9 Food 11 2.8
10 Services 10 2.6
11 Multimedia 5 1.3
12 Machinery and engineering 3 0.8
 Total 391 100.0

* Cumulative total since 1988; Source: MECD 2005 Annual Report

Table 5. Total number of anchor companies by sector in 2005 *

No. Sector Vendors %

1 Electrical and electronics 41 43.6
2 Wooden furniture 14 14.9
3 Building equipment 6 6.4
4 Automotive 5 5.3
5 Film production 4 4.3
6 Telecommunications 3 3.2
7 Food 3 3.2
8 Services 3 3.2
9 Shipbuilding and repair 2 2.1
10 Aerospace 2 2.1
11 All others 11 11.7

* Cumulative total since 1988; Source: MECD 2005 Annual Report

Table 6: Overview of SME policy, framework, and development efforts
--Malaysia and the Philippines compared

 Areas of Malaysia Philippines

Legal framework Laws Special laws for SMEs

 * Promotion of * Magna Carta for Small
 Investments Act of Enterprises
 1986 * Barangay Micro Business
 * Income Tax Act 1967 Enterprises Act of 2002
 * Customs Act 1967
 * Sales Tax Act 1972 Laws
 * Excise Tax 1976
 * Free Zones Act 1990 * RA 7916--Special
 Economic Zones Act
 * RA 7227--Clark and
 Subic Special Economic
 and Freeport Zone
 * RA 8424--Tax Reform Act
 * EO 226--Omnibus
 Investment Code;
 Investment Priorities
 * RA 7459--Programs on
 Science and Technology,
 Investors and Invention
 Incentives Act
 * RA 7844--Export
 Development Act of 1994

SME policy SME development SME development plan has
 blueprint closely linked no explicit reference to
 to overall economic country's Medium-term
 goals; explicit Development Plan (MTDP)
 reference to Ninth
 Malaysia Plan (9MP) and
 Industrial Master Plan

Institutional Policy making: National Policy making: SME
framework SME Development Council Development Council
 Lead agency: Ministry of Lead agency: Department
 International Trade and of Trade and Industry
 Industry No. of departments
 No. of ministries involved: 5
 involved: 11 Support network: special
 Support network: special government agencies and
 government agencies, training institutions,
 commercial and commercial and
 developmental financial developmental financial
 institutions, skills institutions, local
 development centers, government units, private
 various industry sector services, NGOs,
 associations various industry

Resources for Comprehensive set of Limited funds for SME
SME development programs and incentives development due to fiscal
 supported by financial constraints

Strategic SME development driven SME development largely
thrusts by need to enhance driven by the intent to
 competitiveness in address poverty and to
 regional & global arena. provide domestic

Priority Increased attention Priority given to the
sectors given to potential traditional sectors (e.g.
 growth areas, especially food industry, organic
 services (e.g. transport and natural products,
 services and logistics, wearables)
 professional and
 management services,

Infrastructure More developed Less developed
support infrastructure for human infrastructure; limited
 capital development, funding for public
 technological upgrading, universities; limited
 industrial linkages, and programs for
 SME advisory services technological upgrading
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Title Annotation:Small and medium scale enterprises
Author:Habaradas, Raymund B.
Publication:Journal of International Business Research
Geographic Code:9MALA
Date:Mar 1, 2008
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