This article first appeared in Forum, The Edge Malaysia Weekly on March 11, 2024 - March 17, 2024

Last month, the Institute for Capital Market Research (ICMR) hosted an excellent launch of its new report, Market-based Financing for SMEs in Malaysia. As Asian Development Bank economist Shigehiro Shinozaki reported, micro, small and medium enterprises (MSMEs) account for 96.6% of the number of enterprises in Asia, hire 55.8% of employees, contribute 28% towards GDP output and 26.3% of exports. In Malaysia, SMEs contribute 38% to GDP and one million SMEs receive half of the business loans from the banking system by value.

As the ICMR report summarised, 64% of SMEs have experience raising market-based funding, but they face complex and lengthy procedures and stringent requirements, high funding costs and a surprising lack of outreach by industry players. It recognised that market-based funding for SMEs must address their life-cycle funding needs, and we need to strengthen the SME ecosystem beyond pure financing. Money alone does not make unicorns.

Specifically, SMEs need risk capital, growth capital and late-stage capital. Banks can provide payment and working capital funding, but in the long run, it is equity or capital to cushion risk for innovation and entrepreneurship that may be the key to breaking out of the SME low level trap. In other words, SMEs need more than just money — they need to be coached in knowledge, technology and know-how to advance in their market sophistication. Such coaching skills are scarce, personal, time-consuming and very valuable, which many SMEs cannot afford.

The Securities Commission Malaysia (SC) has been at the forefront of trying to promote SME capital fundraising, with the excellent introduction of crowdfunding, P2P financing, and the ACE and LEAP markets.

According to the SC’s data, the amount raised from the SME Capital Market in 2023 was RM6.27 billion, which saw 5,499 SMEs mobilise 4.8% of Malaysia’s total capital market fundraising. This has grown at a seven-year compound annual growth rate (CAGR) of the SME Capital Market fundraising of 23%. At the same time, private equity and venture capital (PE/VC) have grown at a five-year CAGR of 21%, with RM1.6 billion disbursed in 2023. There were 137 PE/VC management firms funding 1,446 MSMEs between 2007 and 2023, with an average investment of RM6.8 million per company.

In an age of greater uncertainty and risks from geopolitical factors, demographics, climate change, digital disruption and increasing competition, the role of equity capital to support SME growth becomes more urgent than ever. Growing debt means more systemic fragility.

Mainstream policy support for the SME sector often draws on the Silicon Valley economic model (carnegieendowment.org), which has several key components: (1) venture capital as the core funding mechanism for high-growth start-ups; (2) flexibly deployed human capital drawing upon global talent; (3) robust and multifaceted university-industry ties; (4) direct and indirect government support; (5) an industrial structure of symbiosis between large firms and start-ups; and (6) a robust support ecosystem of professional service firms, such as law firms, accounting firms, and start-up accelerators, incubators and supporters.

In other words, Silicon Valley incubation of high-tech start-ups depends on the intense collaboration of knowledge (university-business-government), PE/VC and Nasdaq IPO/exit funding mechanisms, symbiosis between large and small companies, and an ecosystem of supporting services and logistics.

The Taiwan/Singapore/China model of supporting high tech in science parks is a clever evolution from the Silicon Valley model. The Singaporean model, which initially took on attributes of the Taiwan Hsinchu Science Park, provides excellent foreign direct investment attraction for picked multinational tech corporations wishing to locate in Singapore Jurong Industrial Park, with support from excellent logistics services such as tax, customs and supply chain support. On top of that, various Singapore funds, such as GIC and Temasek or government-linked companies that would want to partner for technological access, would also offer capital and investment funds. The Singapore model has developed a whole range of top universities to provide talent for these companies.

After 2000, the Chinese learnt from the Singapore model, which meant clusters of science and tech parks developed in Zhongguancun in Beijing, around Hangzhou, Wuhan, Xian and Shenzhen. Shenzhen was most successful, even though the city lacked world-class universities, because it attracted the best and brightest of young talent from all over China, and its proximity to Hong Kong meant that good companies could access capital from outside China. High-tech companies with potential could list as American Depository Receipts to trade in New York, so that entrepreneurs and PE/VC funds would have an exit strategy in terms of monetising unicorn start-ups. Listing was also available in the Shanghai, Shenzhen, Hong Kong and now Beijing stock markets.

Looking at the Silicon Valley of Southeast Asia, Penang, which is the sixth largest global production centre of semiconductors, we see that its strength is clearly tech related, but it lacks direct access to a researchers’ pool in terms of collaboration with Malaysian research universities, as well as the presence of tech-specific PE/VC funds. The success of these funds in Silicon Valley, Taiwan and China shows that you need tech insiders who understand the market potential of various SME start-ups to help coach them to become successful.

The 2022 World Bank study of the digitisation potential of SMEs in Malaysia showed that after the Covid-19 pandemic, e-commerce took off significantly. However, Malaysian companies are just beginning to assess how artificial intelligence (AI) and large learning models can aid them in improving productivity and competitiveness. This is not about a select few who can make it, but about broadening the base of talent who understand the market potential of AI and digital finance, commerce, production and logistics that will give Malaysian SMEs a comparative advantage in global and regional competition. Transformation is not just at the elite big company level, but at the broad SME bulge bracket. From the talent of many flowers, will there be blooms that reach the unicorn stage?

The policy issue therefore is that without an ecosystem approach, it will be difficult to incubate Malaysian unicorns and start-ups. Failure is inevitable, but we must try so that each generation of Malaysian entrepreneurs learns from their mistakes and succeeds at the next round.

An ecosystem approach means that we cannot achieve tech competitiveness in silos, with different departments or agencies competing or overlapping with each other to help SMEs, without understanding that the needs of different SMEs are very different, requiring huge skills to coach them in different domains — marketing, finance, production, design, logistics and human resource management. The public “good” in terms of hard and soft infrastructure is still lacking or incomplete in many parts, with universities not yet geared to serve the needs of entrepreneurs, especially in the high-tech area. This is not just in R&D but also in training the graduates who have the creativity and flexibility to learn new work quickly.

Further, subsidising education and training without taking into consideration the income levels of trainees may mean that trained personnel will find better salaries abroad. Thus, it is critical that Malaysia evolves a complete holistic policy on how to upgrade workers salaries and productivity to break out of our middle income trap. Our government-linked companies have maintained good infrastructure, but they are not the top value creators in terms of attraction for foreign investors other than being steady dividend providers. They have yet to show how they link up and develop successful SMEs within their supply chain.

The Magnificent Seven in the US show that if there are corporate champions, the market will be buoyant and foreign capital will flow in. The European and Chinese stock markets show why the lack of such attractive companies makes their market liquidity and market capitalisation lag. This is a chicken-and-egg issue that only a collective private-public-academic effort can solve. I have always advocated that we have a proper conversation on a whole-of-society approach to take Malaysia to the next developmental model. The government calls this the Madani Economy, but not everyone understands deeply how to implement it in an effective manner.

Trust is generated not by vision but by execution. Malaysia’s MSMEs are competitive globally, but how to network them together to go up the tech and advanced path is the real policy challenge.

Tan Sri Andrew Sheng is a Distinguished Fellow of the Institute for Capital Market Research

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