SMEs: Building Blocks for Economic Growth

National Statistics Conference

Department of Statistics, Malaysia
4-5 September 2006

SMEs: BUILDING BLOCKS FOR ECONOMIC GROWTH

by:

Normah Mohd. Aris

Chief Statistician
Department of Statistics, Malaysia

1. Introduction

1.1 SMEs have been the backbone of economic growth of an

economy in driving industrial development. Due to their
sheer numbers, size and nature of operations, this segment
of the economy in promoting endogenous sources of growth
and strengthening the infrastructure for accelerated
economic expansion and development in Malaysia has been
recognised.

1.2 The potential of SMEs to promote domestic-led growth in new

and existing industries and to strengthen the resilience of the
economy in a competitive and challenging environment are
inarguable. Economic growth in developed countries such as
Japan, Korea, Taiwan and many others, were significantly
generated by SME activities. The percentage contribution of
SMEs to GDP/total value added range from 50% in Korea,
55.3% in Japan, 57.0% in Germany, 60% in China compared
to 47.3% attained by Malaysia.

1.3 In order to determine the role of SMEs in the economic

growth of Malaysia, it will be meaningful to assess their
contribution in the three (3) main sectors of the economy,
manufacturing, services and agriculture. Data for this
analysis is obtained through a baseline Census conducted by
the Department of Statistics in 2005.

2. The Need to Develop SMEs

2.1 Primary industries were the leading sector of the Malaysian

economy for a long time before 1990 as agriculture; mining
and quarrying represented 36.9% of GDP. However,
Malaysia has been successful in transforming the commodity-
based economy to an industrialized economy, with

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SMEs: Building Blocks for Economic Growth

manufacturing activities gradually becoming the leading

growth sector such that the proportion of manufacturing
sector to GDP rose from 19.8% in 1978 to 31.6% in 2005.

2.2 The economic crisis of 1997-1998 has taught us that the

country cannot be overly dependent on foreign direct
investment to stimulate economic development. Many
foreign investors withdrew their investments and relocate to
new destinations which are more profitable, especially those
that offer cheaper labour costs. SMEs have been targeted as
the mechanism in generating domestic-led investment and
stimulate economic expansion. While Malaysia has been able
to attract FDI, boost domestic production and exports and
create employment opportunities, however, its efforts to
strengthen the industrial linkages and enhance the
institutional framework have been in part, constrained by the
lack of a centralised and comprehensive national database
for the development of SMEs. The establishment of a
comprehensive, current, coordinated and relevant SME
statistics is crucial to facilitate informed decision-making,
formulate development policies, evaluate and monitor
contribution to the economy and performance of SMEs.

2.3 Realising the role of SMEs, the government’s commitment

and concern for the development of SMEs was reinforced
when the National SME Development Council, chaired by the
Prime Minister of Malaysia, was set up in August 2004. This
Council represents the highest-level policymaking body to
chart the direction and strategies for the development of
SMEs. Among the initiatives announced include the
formulation of broad policies and targeted strategies for the
development of SMEs across all sectors; the adoption of
specific and standard definition for SMEs according to
economic activity; the establishment and maintenance of a
comprehensive National SMEs database; the expansion of
development support programmes and facilities to enhance
access to financing.

3. Census of Establishments and Enterprises 2005

3.1 In line with the aspirations of the Council, the Department of

Statistics, Malaysia (DOS) as the largest depository of data
for the government, has been entrusted with the
responsibility of creating a comprehensive national SME
database. The action plan outlined includes:

i. a nation-wide Census of Establishments and

Enterprises (reference year 2003) covering the main
economic sectors of manufacturing, services and
agriculture conducted in 2005;

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SMEs: Building Blocks for Economic Growth

ii. establishment of a frame/database which includes data

harmonisation and integration between the various
providers of SME information.

3.2 This paper will present the findings from the baseline Census
2005 undertaken by DOS and the simultaneous efforts
undertaken by DOS in the creation of the database.

4. Frame

4.1 The tasks undertaken in preparing the Census frame include:

i. obtaining a list of all companies and businesses

registered with Companies Commission of Malaysia
(CCM) in the selected sectors;

ii. establishments / enterprises not registered will be

sourced from relevant Ministries and agencies involved
in SME development;

iii. data cleansing and screening.

4.2 The construction of the Census frame was in essence the

Central Registry System (CRS) of companies and businesses
maintained and coordinated by DOS. This registry contains
only information with respect to manufacturing, services
including distributive trade sectors. Its main source has been
the companies and businesses registered with the Companies
Commission of Malaysia (CCM).

4.3 The additional sources for the frame was all establishments
and entrepreneurs registered with the Ministries and related
agencies such as Ministry of Agriculture and Agro-based
Industry, Ministry of Human Resources, Ministry of
Entrepreneur and Co-operative Development, Ministry of
Plantation Industries and Commodities, Bank Negara
Malaysia, Employees Provident Fund, Inland Revenue Board,
Small and Medium Industries Development Corporation,
Credit Guarantee Corporation, Multimedia Development
Corporation, Local Authorities, etc.

4.4 The list of establishments and entrepreneurs obtained from

the agencies mentioned above totalled 4.6 million. In order
to derive the Census frame, the various lists had to be
screened, matched, verified and updated to eliminate
duplication.

4.5 From a total of 4.6 million, the Census frame finally

comprised a total of 1,733,550 establishments/
entrepreneurs in the manufacturing, services and agriculture
sectors:

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SMEs: Building Blocks for Economic Growth

Table 1: Distribution of establishments by sector

Sector No. of %
establishments

Manufacturing 85,946 5.0

Services 1,523,842 87.9

Agriculture 123,762 7.1

Total 1,733,550 100.0

4.6 Issues and Challenges:

i. The gigantic task of frame creation initially outlined for

nine (9) months, from September 2004 to June 2005,
had to be completed in three (3) months, mid Nov.
2004 to mid March 2005;

ii. Ideally, registration numbers of establishments should

facilitate the process of checking and matching;
however these were not available or incomplete;

iii. Frames of agencies were stored in different formats

with different identifiers of establishments, thus
making the job of matching extremely difficult and
cumbersome; often manual matching had to be done;

iv. Operating status of the establishments (reference year

2003) were not easily determined from the lists
provided; names, addresses incomplete, post codes
and description of activity (industry) codes were not
available;

v. In the case of entrepreneurs (borrowers from the

bank), names are repeated according to type of loan;
overlapping of names of establishments /
entrepreneurs.

4.7 The benefits however, derived from this massive exercise, is

the updating of the Central Registry System of DOS. Here
posting of current information from the Census as well as the
availability of the establishment frame for the agriculture
sector augurs well for sampling purposes. This too will be
extended to the construction and mining and quarrying
sectors after the completion of the Economic Census 2006.

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SMEs: Building Blocks for Economic Growth

5. Profile of SMEs

5.1 Highlights

5.1.1 SMEs in Malaysia account for 99.2% or 518,996 of

SMEs: Building Blocks for Economic Growth

5.1.5 SMEs are mainly concentrated in the Central Region

(W.P. Kuala Lumpur and Selangor), accounting for
37.1%. Johor is next with 10.4%. The rest of the
states accounted for less than 10%, with Perlis
registering only 1.1%.

5.2 SMEs in Manufacturing

5.2.1 SMEs in the manufacturing sector accounted for 96.6%

(37,866) of total establishments. Micro establishments
are 55.3% with a contribution of 2.3% to output and
1.6% to value added. On the other hand, medium-
sized establishments (5.2%) accounted for 62.1% of
output and 51.0% of value added.

5.2.2 34.9% of the output of this sector is contributed by

SMEs. The contribution by medium establishments is
62.1% and small establishments, 35.6%. Micro
establishments accounted 55.3% of total SMEs; its
contribution in terms of output was only 2.3%.

5.2.3 The largest number of SMEs is found in the traditional

sectors of textiles and apparels (23.2%), metal and
non-metallic mineral products (16.7%) and food and
beverages (15.0%) whereby collectively they generate
more than half of the total value added of the sector.

Chart 1: Output of SMEs in manufacturing

sub-sectors, 2003

RM52.0 billion
27.1%

RM84.4 billion
44.1%

RM17.8 billion
9.3%

RM16.3 billion
8.5%
RM9.5 billion
RM11.7 billion 4.9%
6.1%

Food products & beverages

Metal & non-metallic mineral products
Rubber & plastics products
Chemical products
Petroleum products
Other sub-sectors

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SMEs: Building Blocks for Economic Growth

5.2.4 In terms of employment generation, the four sub-

sectors of food and beverages; wood products and
furniture; metal and non-metallic mineral products;
and rubber and plastic products contributed more than
half of the employment of SMEs.

5.3 SMEs in Services

5.3.1 SMEs account for 99.4% (449,004) of total

establishments in the services sector. The profile
indicates that 80.4% of SMEs are characterized as
micro, 17.6% as small and 2.0% as medium.

5.3.2 More than half of SMEs (55.3%) are concentrated in

the wholesale and retail sector, 14.5% in restaurants
and hotels and 6.2% in transport and communications.

5.3.3 Output generated by SMEs is 56.7% of total output

(RM361.7 billion) in the services sector. SMEs in
restaurants (including cafes, coffee shops, hawkers
and stalls) accounted for 85.1% of output of the
restaurant services; followed by real estate activities
(79.3%); retail (79.1%); business / management
consultancy (74.2%) and professionals (71.7%). In
contrast, SMEs in telecommunications contributed
1.9%, showing the dominance of large establishments.

5.4 SMEs in Agriculture

5.4.1 SMEs in the agriculture sector account for 99.2% of

the 32,397 establishments covered. 93.4% (29,985)
of SMEs are concentrated in the micro category.

5.4.2 SMEs contribute 42.1% (RM8.7 billion) to total output.

The largest share of output is contributed by the
growing of crops, market gardening, horticulture and
livestock farming (72.2%).

5.4.3 Workers employed by SMEs number 131,130 or 57.5%

of total workers in the agriculture sector. Micro
establishments are characterized by a high percentage
of working proprietors and active business partners,
97.5%.

5.4.4 In states where agriculture predominate as the main

economic activity, therein lies the concentration of
SMEs. Kedah has the highest number, 8,803 (27.4%)
followed by the east coast states with 26.6%.

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SMEs: Building Blocks for Economic Growth

5.5 Employment by Qualification

5.5.1 The percentage of persons engaged by qualification in

SMEs is not significantly different from that of large
establishments. The services sector employ degree
and diploma / STPM holders, 27.9%, compared to
14.3% and 5.2% for manufacturing and agriculture
respectively. Does this indicate that technology
adoption by SMEs in both these sectors in Malaysia is
still low?

Table 3: Persons Engaged by Qualification - SMEs 2003

Diploma/ SPM
Degree STPM and below Total

SMEs 4.1 10.2 85.7 100.0

Manufacturing
Large 5.9 11.5 82.6 100.0

Services SMEs 7.6 20.3 72.1 100.0

Large 12.8 19.5 67.7 100.0

SMEs 1.1 4.1 94.7 100.0

Agriculture
Large 1.3 2.6 96.1 100.0

5.6 Women in SMEs

5.6.1 The participation of women in small and medium

enterprises in 2003 is 1,121,687 or 36.8% of total
employment. A proxy for women entrepreneurs
obtained from the Census results i.e. working
proprietors and active business partners, indicate
30.3%.

5.6.2 The percentage of female employees in the category,

managerial and professional, is 48.5%, clerical,
production and operative workers category, 40.8% and
technical and supervisory 21.1%.

5.6.3 In the manufacturing sector in 2003, women workers

employed in the managerial and professional category
is 26.8% compared to 21.2% in Census 2000. The
corresponding numbers in the technical and
supervisory category are 17.0% and 15.3%. Women
entrepreneur participation in SMEs has increased from
18.0% in 2000 to 27.8% in 2003.

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SMEs: Building Blocks for Economic Growth

5.7 Sources of Financing

5.7.1 With strong support from the government to boost

economic growth
SMEs: Building Blocks for Economic Growth

5.8 Marketing and Promotion Activities

5.8.1 Basing on the responses in the Census, only 12.9% of

SMEs promote their products. The medium commonly
use is media promotion followed by local trade expo
and brand names, each respectively accounting for
4.9%, 2.8% and 2.5%.

Table 5: Marketing and Promotion Activities - SMEs, 2003

Marketing activities Total Manufacturing Services Agriculture

% % % %
Media promotion 4.9 10.9 4.7 0.7
Local trade expo 2.8 7.8 2.5 1.0
Overseas trade expo 0.6 3.1 0.4 0.1
Linkages with foreign 1.1 4.0 0.9 0.1
companies

Brand name 2.5 9.9 2.0 0.2

Others* 1.0 1.1 1.1 0.5

Total 12.9 36.8 11.6 2.6

Note: * including Franchise operations and Owned or managed by franchisor.

5.9 Export-oriented Enterprises1

5.9.1 The action plan promulgated for SMEs is to look

towards non-traditional markets for export
opportunities. In 2003, SMEs that qualify as an
export-oriented industry constitute only 0.4% while
generating an output of 8.5%, 6.4% of value-added
and engaging 2.7% of employment. The
manufacturing sector contributes 18.5% of output,
21.5% value-added and generates 11.1% employment
although the number of SMEs involved is only 3.0%.

5.9.2 The potential for agriculture and services sectors to be

an export-oriented industry is 0.2% of total SMEs.

1
The establishment is assumed as an export-oriented industry if it’s export-product of 50%
and more.

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SMEs: Building Blocks for Economic Growth

Table 6: Contribution by Export Oriented SMEs, 2003

Sector Type of No. of Output Value Employment

Establishment establishments Added
% % % %
Manufacturing Export oriented 3.0 18.5 21.5 11.1

Services Export oriented 0.2 0.7 0.7 0.3

Agriculture Export oriented 0.2 0.2 1.3 1.7

Total Export oriented 0.4 8.5 6.4 2.7

6. The Future

6.1 National SME Database

Besides the undertaking and completion of the Census, the

ensuing task of DOS is the establishment and maintenance of
the National SME database. Data from the Census will serve
as baseline information for the database which will, among
others, focus on:

i. harmonising of information across identified sources

and providers of SME information, including common
classifications;

ii. system of integrating data in various agencies; and

iii. maintenance and updating of data on a regular basis.

This development of the system is planned from mid 2006

and is targeted to be operational by 2007. Items of
information in the database should conform to key areas
such as:

i. Overview/Status of SME development

ii. Contribution to the economy

iii. Financial management

iv. Access to financing

v. Production and operational management

vi. Access to technology and technological advancement

vii. Human resource

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SMEs: Building Blocks for Economic Growth

viii. Marketing and promotion

ix. Access to government assisted programmes

Ministries and agencies must be committed and provide full

cooperation in the implementation and success of the
database. The regularity of data needed, the frequency of
updating, the standardization of information and the
production of regular reports are issues that are currently
addressed.

6.2 Economic Census, 2006

The Economic Census (reference year 2005) which is being

conducted by DOS, provides continuing work on updating of
SME indicators in monitoring economic growth. Through this
census, data on the construction and mining / stone
quarrying sectors in respect of SMEs will be collected. In
addition, data on content writing, home stay, chalets, dialysis
centres, dietetics and nutrition services, can also be
obtainable.

7. Conclusion

The potential of Malaysia SMEs to contribute significantly to

economic growth are demonstrated by their contribution to output,
their numbers (half a million) and substantially employment
generation (labour-intensive). Our large SMEs base is capable of
providing immense opportunities for SMEs to become catalyst in the
economy. With the adoption by the Government of a more
comprehensive approach towards SME development such as
increasing their access to financing, providing greater access to
business facilities locally and abroad, enabling the business
infrastructure, the way forward for SMEs then is for themselves to
enhance human capital development, be adaptive in the use of
information technology and improve their operations and productive
capabilities to move up the value chain in order to remain
competitive. SMEs must be strengthened to be the next engine of
growth. To summarize, the Ninth Malaysia Plan envisage “to
develop competitive and resilient SMEs that are equipped with
strong technical and innovation capacity as well as managerial and
business skills” to innovate the country to higher economic growth.

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SMEs: Building Blocks for Economic Growth

Bibliography

1. Bank Negara Malaysia, “National SME Development Council”,

reports of various meetings.

2. Department of Statistics (2006), “Census of Establishments and

Enterprises 2005, Preliminary Report – Profile of Small and Medium
Enterprises”.

3. Department of Statistics (2001), “Census of Manufacturing

Industries”.

4. Bank Negara Malaysia (2003), “A Comprehensive Framework for

the Development of Small and Medium Enterprises in Malaysia”.

5. Government of Malaysia (2006), Ninth Malaysia Plan, 2006-2010,

Kuala Lumpur.

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