Empowering SMEs through Belt and Road

One of the biggest threats to an ever closer economic integration between countries is the popular perception that it systematically favours the global elite at the expense of everyone else.

Here at home, despite the Malaysian government’s full acknowledg ment and support for promoting trade and investment under China’s Belt and Road Initiative (BRI), public concerns are rife, with many questioning China’s true intention behind the generous outpouring of financial assistance.

The relative ease in which the multinationals and the government agencies acquire information and participate in BRI-related policy consultations further reinforces this perception that the BRI, as with all other cross-border economic talks, is designed to only benefit the selected few.

In terms of resource allocation, there is a clear priority for governments to promote infrastructure building under the BRI banner with the expectations that it will help grow the economy at the macro level.

But the distribution of economic gains can only be made more equitable if the smaller businesses are also being given enough attention.

Small and medium enterprises (SMEs) are the “unsung heroes” who make up more than 90% of total business establishments in both Malaysia and China.

They play a far-reaching role in the economy through job creation, tax revenue, promoting innovation as well as reducing poverty and income inequality.

In fact, the stake is higher in China with SMEs contributing 60% and 80% of the country’s industrial output and employment respectively.

This is consistent with the make-up of China’s SMEs where 94% of them remain manufacturers.

On the other hand, SMEs in Malaysia are mainly service-oriented (89% of total SMEs) and they contribute to more than a third of the country’s economy.

Given the importance of SMEs to the economies of both countries, it is therefore crucial to generate greater awareness and sense of ownership in the BRI by the SMEs.

For a start, it is fundamental to review existing domestic policy frameworks and identify common challenges facing the SMEs from both Malaysia and China.

This is followed by potential policy actions from governments of the two countries where common domestic priorities can be better identified, and for policy orientations to be aligned wherever they can in order to realise the grand vision of the BRI.

Between 2011 and 2015, Chinese SMEs were experiencing falling revenue growth with the lowest rate registering at 3.5% in 2015, before picking up at 6% in the following year.

As a policy response, the Chinese government’s 12th Five-Year Plan aims to enhance SMEs’ capacity to develop “new, distinctive, specialised and sophisticated” industries with a targeted average annual growth rate of 8% during the five-year period. The Chinese president Xi Jinping has also laid out his vision of China becoming a nation with pioneering global innovation by 2050, thereby reaffirming a shift towards consumer-led innovation and for firms to compete and expand beyond borders. The Malaysian government is also looking at transforming the country into a service economy that is on par with advanced nations via the ambitious TN50 (National Transformation 2050).

While Malaysia’s SMEs are concentrated in the service sector, the corresponding economic value is still low compared to large private enterprises and government-linked corporations.

Therefore, strong emphasis needs to be given to assist SMEs in exports through investments in automation, data mining, digital and creative platforms.

Besides, the SME Corp Malaysia plays an instrumental role in coordinating entrepreneurship initiatives for the B40 (bottom 40%) households together with other ministries and relevant agencies in a joint effort to promote more equal distribution of gains.

While government’s targeted interventions remain key to developing competitiveness of SMEs, it is also necessary to identify the common costs of doing business in order to complement understanding of the nature of challenges faced by the SMEs in both countries.

Taxation has often been cited as particularly burdensome to SMEs. Business owners are of the view that profit margin is relatively small in SMEs and that multinational corporations are often the biggest winner in the global phenomenon of a race to the bottom.

On a policy level, it is therefore important for the two governments to identify key sectors where there is synergy in order to devise preferential tax arrangements that may help to spur cross-border trade by SMEs.

Industrial sectors such as renewable energy can be a good candidate given China’s rising awareness of low-carbon energy use.

China’s increasingly affluent middle class is also opening up greater opportunities in lifestyle products to which Malaysian SMEs can seek to add value.

Strong labour protection is not only seen as a fundamental human right, but also a hallmark of an advanced economy.

But, the upward revision in minimum wage and social insurance is putting pressure on the sustainability of many SMEs, especially if these additional costs are not commensurate with an increase in labour productivity.

A healthily growing economy may also mean that SMEs are competing for talents not just among themselves, but increasingly so against big private corporations.

As a result, the labour productivity is expected to rise faster in larger firms than SMEs, thereby further strengthen discontent with the idea of closer economic ties between countries.

While conventional wisdom argues that SMEs should make investment to generate upskilling in its productivity, many business operators would point at the challenge of gaining access to funding just to do so.

In addition, given the thin profit margin and fluctuating business environment, many SMEs owners may appear to be overly cautious when it comes to undertaking huge, one-off capital investment.

As such, it is vital for all interested governments, especially those identified along the BRI route, to consider pooling funds to enhance labour productivity and technological upgrading by setting up a multilateral capital development bank. Also, the bank can provide much needed expert advice to assist SMEs to prepare for making huge capital investment without jeopardising their normal operations.

Lastly, countries along the BRI route can take lessons from Malaysia’s Leading Entrepreneur Accelerator Platform (LEAP) where it helps to prepare SMEs to raise funds via the equity market.

Currently, 96% of SME funding in Malaysia comes from the banking sector, and the over-dependence on financial institutions can be better addressed if SMEs can raise funds more efficiently via the capital market.

So, the BRI countries may consider setting up an equity crowdfunding or other similar platform as means to facilitate investment and development of SMEs.

But underpinning a vibrant and competitive SMEs business environment is the ability of government agencies to act as drivers of change in the space of encouraging skills upgrading and financial assistance.

Much still has to be done to unleash the full entrepreneurial potentials of the small businesses.

Original article published in The Malaysian Reserve.

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