Friday, June 5, 2009

The continuing relevance of SMEs in the "new economy" (and fiscal policy suggestions)

It is true that the services sector is fast becoming a major revenue source for Malaysia. In fact, it is the fastest growing sector of the economy. The Ministry of International Trade and Industry's recent pronouncements confirms this.

At the same time, by the recent initiatives of one of MITI's agencies, SMIDEC, MITI is has also shown that it regards the SME component of the manufacturing sector as being a highly important part of the Malaysian economy. This is good and sensible.

Sadly, the SMEs are still dogged by poor forward planning.

Characteristics of SMEs
SMEs are businesses that are born from Malaysians that have a thirst for independence and a sense of adventure. All SME owners used to be a part of a larger set-up. They used to be employees.

When opportunities came by, these entrepreneurs grabbed it. Using whatever financial resources they could find, they rented premises, bought equipment, hired people, called up old business contacts and, off they went.

Many fell by the wayside. Many succeeded.

Some SME owners have been able to parlay their initial success by transforming the nature of their businesses. Through organic growth they moved up the value chain.

Others, through prompting from business partners, were made aware of new businesses that there was a demand for.

Those that provided ancillary services and goods for the large corporations, especially in the electrical and electronics sector and, automotive sector, have found that they are not immune from global economic forces. These SMEs are recoiling with few alternatives in sight.

All the SMEs share one challenge, though. They lack the resources for forward planning. This is in the area of Research and Development.

What is R&D, really?
To many, R&D means having a room full of gleaming equipment and technicians in white lab-coats pottering around with graph pads looking at beakers, Bunsen burners and coloured liquids bubbling away.

To others, R&D means a geeky, bespectacled, skinny fellow staring at several computer screens with reams of paper strewn all over the cubicle.

The reality of R&D for SMEs is quite different.

What is R&D to an SME, really?
To an SME owner, R&D means any of the following:

Staff-pinching. Lure technicians with the know-how away from another organisation to help start-up a new business or, a new production process. Lure marketing stars away from another organisation to create the new business unit with a ready maket demand.

Visit other countries. This is to get an idea of the next stage of development and, the new products that the SME's existing production lines can adapt to.

Call it innovation. Call it copy-catting. Call it underhand.

But, this is the reality of what an SME can do to conduct "R&D" given limited resources.

This is how the Japanese and South Koreans has done it. And, how they have excelled at it.

The Chinese (as in the People's Republic of China) experience is a little different. Due to their sheer size, people with superior technologies have actually begged to set up shop there. So, all the Chinese had to do was to reverse engineer everything worth reverse engineering right in their own backyard.

What's my point?
Malaysia is a small economy by global standards. But, (with a tip of the hat to E.E. Schumacher) small can be quite beautiful.

My point is that while much of our resources can and, should be poured into services sectors like tourism (which is a big revenue earner) there is a need for fiscal policy that is directed towards encouraging all levels of R&D.

By "all levels of R&D" I mean, not just providing incentives and allowances for the creation of laboratories and clean rooms and, attendant equipment.

Tax deductions on expenses that can be classified as R&D
There is a need for incentives and allowances for SMEs to claim tax deductions for expenses incurred for non-traditional R&D methods.

For example, if the SME owner travelled to Salt Lake City, Utah and stayed a week and, I attach profiles of companies or products manufactured or services provided there which is similar to the activities that the SME is providing, that the SME can learn and benefit from, then the SME should be entitled to claim a double deduction or triple deduction. Of course, there must be a cap on the number of SME representatives. Probably limited to two claims.

If the SME subscribes to an online service or publication that is related to the SME's activities, then the SME should be entitled to claim a double deduction or triple deduction.

If the SME participates in a local or international conference or meeting that is related to the SME's activities, then the SME should be entitled to claim a double deduction or triple deduction.

In other words, MITI needs to work with the Ministry of Finance and the Inland Revenue Board (IRB/LHDN) to facilitate this.

My penultimate point for reiteration is that a broader, more liberal, more amplified fiscal approach should be taken for the incentivising of R&D in Malaysian SMEs.

This will catalyse greater awareness of innovative ideas for SMEs.

It is one instance where copy-catting is rewarded. If in doubt, don't just ask me, ask the Japanese and South Koreans.


walla said...

The government puts in two stimulus packages for infrastructure but there is none for the backbone of our manufacturing sector.

The difference is that while both create jobs, manufacturing also creates tax revenue. However, under prevailing situations, infrastructure demand can be coaxed up quickly but manufacturing demand needs more grunt and leg work.

Thus the incentives so proposed should be created and added to the present list ( which should then be reviewed in terms of their overall and specific effectiveness in achieving SME growth in this country in the past ten years. The review should then seek to make the incentives more effective even if it will mean repartitioning allocations around so that more can be moved into those which have delivered good results.

One must admit there is not much lab R&D in this country outside the public universities so it remains to ask and assay answers why.

Perhaps it's due again to management profiles. Many of the SMEs start from zero. The people are entrepreneurs first, then managers. They have small paid-up capital, some idea, a bit of skills, and a small network of contractors and buyers. For tasks which need specific skills, they get outside help. Sometimes they recruit their relatives. Often it has to do with their management style which is akin to patriarchy used to exert control over their small and tight outfits. Their psyche is who to trust, their daily question, cashflow, and their main task, sell. Design and make are given's.

But it is design-and-make which is the key. Therein the dichotomy. The national thrust should be to accelerate value inputs into the processes of design and make. Otherwise how are our SME products (services) going to make a difference on the world markets? Everyone else is doing the same thing, running their cylinders on the same business model.

In short, we need to change our entire national SME operating model.

walla said...

As mentioned by the blogger, those value inputs are specific informational and generic intellectual. These can be made bespoke for each SME concerned. But one should go one step further. Rather than give double or triple tax deduction, they should be expensed off completely as full contributions from the new and augmented national SME fund.

Meanwhile, a new global marketing program for our SMEs. One, every SME must have a website. The fund can pay for it. The website should be harnessed to a few local emarketplaces. The local emarketplaces should be honed for global positioning in the same way that alibaba is associated with China's SMEs. It's not very costly to have an active website. It's also much cheaper and faster than sending out brochures and catalogs besides providing direct interaction. This is so jurassic. So twitter the website as well and introduce social marketing through product blogs with all their affiliate linkaging networks. Our SMEs need to cast their nets wider and let the mouse do the walking. The caveat is that the content must have some standard. Too many of the write-ups make sighing a national pastime.

Two, there should be concentration of consultancies for SMEs under some national umbrella entity which can be fully private, or private with government support and endorsement. The consultancies can provide the mezzannine or bridging value inputs to complete the circuit before idea is taken to design to make. By idea, one also means canvassing and interpreting market data in such format as avails insights for design and make. The consultancies can also be to source venture funding for each bespoke project, or to assemble engineering, technical, branding and marketing inputs that will add incremental value that will score in the minds of global prospects. If you throw a stone right out your window now, you will probably hit one of them consultants.

Three, the way applications for funds are evaluated and disbursed should be sensitized and made above board to such a level of professional standard that it will put the banks loan divisions to shame and hopefully public calumny.

SMEs are a national survival priority so don't muck around on policies and preferences.

Fourthly, extend the development of the SMEs backwards.... all the way to the education of the people who will later become the entrepreneurs to start their SME companies. If some of them come from the non-national schools, create some industrial awareness programs for them. Get them enrolled as well for post-school classes in vocational training so that they can get some familiarities on industrial matters ahead of their ventures; they may even later be able to provide vacational training in their factories to the students from those schools. The adult education (cough) function of bodies like Smidec, contractors associations, guilds and so on should be enhanced even further. Let's say Porter or Kotler or Deming comes to town and gives a fee-jawdropping seminar. One attendee should be able to summarize the ideas and discuss matters in the light of local experience with other SMEs in a subsequent get-together. Do evening talks. Have a party. The government should provide suitable and free venues. The attendees can pay a token sum for the utilities and maybe refreshments and use of technical equipment.

Fifthly, there are a lot of things which Mida can do. And do in concert with each state's investment office and all of our consulate offices overseas. You just need to refine the network in such a way as to tap the new operating model that's still unsharpened right to this fullstop ->.

Please continue.

flyer168 said...

De minimis,

Obviously both the Government & the Chambers have different agendas....

Maybe they should both be "Up Front, Admit their SHORTCOMINGS, Look & Learn" from the Best Proven & Successful Models relevant to the Malaysian needs before thinking Global, etc.


Get the Objective, Overview, POLICY & IMPLEMENTATION right in the first place....

Typical example we can STUDY....

Policy Address 2001


All of us at the Chamber appreciate the achievements of your Administration in the four years since the return of sovereignty to China.

Economically, it has not been an easy time for the Hong Kong SAR, with many challenges stemming from the impact of the Asian financial crisis and its aftermath and, now, a broader slow down in the global economy to contend with. Despite this, we remain confident in the future progress and prosperity of the SAR.

Our theme this year, Shaping Asia's World City in a Difficult Global Environment, picks up on the Government's ¡§branding Hong Kong¡¨ initiative and refers to the need to advance the SAR's role as an international city in an increasingly difficult global economic environment. Our submission begins with three brief commentaries, then moves on to some specific issues.

A Voice for Business
As in previous years, the purpose of this letter is to update you on our views ahead of your Policy Address to the Legislative Council on October 10.

We have consulted widely with our members in its preparation and met with your Central Policy Unit (CPU) to talk over some of the key issues.

For the Chamber, this exercise is very much a ¡§bottom-up¡¨ process, with contributions from both our ¡§local¡¨ and ¡§international¡¨ members.

Being the last Policy Address in your historic inaugural term as the SAR¡¦s first Chief Executive, we appreciate that it will need to outline the many achievements the past 50 months. This is as it should be, given the SAR¡¦s significant progress since the return of sovereignty to China on 1 July 1997.

Nevertheless, the clear message from our consultations with our members and others is that the broad thrust of your address this year should be,

above all, forward-looking and confidence building.

While the gains made, and the obstacles overcome by the SAR in the past 50 months are considerable, there are still many uncertainties ahead and many issues to be addressed.

These should be the focus of attention in the 2001 Policy Address.

Recommendation: We would like to see a overwhelmingly forward-looking and confidence-building speech rather than a retrospective one.
A Snapshot of the Issues
Looking back over our previous submissions, one thing that is immediately apparent is simply the number of issues highlighted.

Priorities have changed over time as old issues have been addressed, or new concerns have arisen. But some issues seem to be perennial - the prospects for the economy, better education and training, the state of the property market and improvements in the environment and quality of life. They also include such things as relations with southern China (and the Pearl River Delta), Budget matters, continuing Civil Service reform and greater accountability within the Administration.

Others, hardly mentioned at the time of our submission on the eve of your first Policy Address, are far more prominent today, such as the development of the information technology sector, including all aspects of e-business, and building Hong Kong as a World Class City ¡V Asia¡¦s World City. Challenges and opportunities loom large in the emergence of the Mainland onto the world stage, including its accession to the World Trade Organization (WTO). The opening of the West and the 2008 Olympics are also in this category.


flyer168 said...


De minimis,

Recommendation: This year's Policy Address should highlight these developments, with all their local and international ramifications.

Communicating Success
Emerging very strongly from this year¡¦s consultation process is the enormous appreciation there is of the SAR¡¦s progress since its inception. Another is the confidence there is in its future, despite the short term economic problems now being experienced. What our members continue to believe to be necessary, however, is far better communication of the SAR¡¦s successes and its strengths in the regional context and in relation to the Mainland of China, particularly on the global stage.

The ¡§Asia¡¦s World City¡¨ initiative is viewed positively and as useful tool in promoting Hong Kong¡¦s strengths to the rest of the World and thereby positively influencing global perceptions of the SAR. Hong Kong may have fallen down in this respect in the past and needs to move aggressively to ¡§sell¡¨ its advantages in the future. The SAR also needs to be more consistent in delivering a more positive message to a global audience. Such an approach would not only produce benefits in selling Hong Kong abroad, but also help boost domestic community confidence in the SAR¡¦s immediate future.

Recommendation: The Policy Address should build on the ¡§Asia¡¦s World City¡¨ theme to boost local confidence and exploit what is a positive initiative in ¡§branding Hong Kong¡¨ for the world market.

The Economic and Business Situation
Recent media reports have suggested this year¡¦s Policy Address could well contain some innovative measures aimed at boosting economic and business confidence. These would be welcome.

The deterioration in the general economic and business outlook since the beginning of the year is of serious concern to the Chamber. The dramatic slowing in the United States¡¦ economy, Japan¡¦s struggle to emerge from its decade-long economic lethargy, and the renewed weakness in Europe have all been important in this. So, too, has the marked deterioration in conditions in most of East Asia, outside of Japan.

The Hong Kong SAR has been fortunate, to date, that the economy of the Mainland of China has held up reasonably well, but the recent emergence of weaknesses in even the Mainland¡¦s external trade may not bode well for the SAR¡¦s economic outlook in the immediate future. We recognize that the continued opening of the Mainland economy offers great opportunities for the SAR, but we are also aware of the prospects for greater competition as a result. WTO entry for China will be particularly important in this equation.

There is little the Hong Kong SAR Administration can do about the external factors adversely affecting the local economy. However, there may be opportunities in stimulating domestic demand, for both consumption and investment purposes, improving Hong Kong¡¦s competitive position and addressing the structural imbalances that appear to have emerged, partly as a result of the development of the ¡§new economy¡¨ and partly due to developments on the Mainland itself.

With hindsight, it is apparent that the performance of the local economy has been decidedly mixed since the Asia financial crisis first hit in mid-to-late 1997. The year 2000 performance was an aberration caused by the dramatic increase in external trade and the bubble. Domestically, there has been a persistent deficiency of confidence. Deflation has continued. The residential property market has remained weak. Savings have risen sharply and bank-lending for domestic purposes has been lacklustre (both despite lower interest rates). Retail sales have continued to be weak in dollar value terms, although volumes have risen (a result of greater throughout of merchandise at deflated prices).


flyer168 said...


De minimis,

Tourism numbers have recovered to record levels, but spending by visitors has remained poor, with spending per capita continuing to decline. Furthermore, increasing numbers of visitors (more than 35 per cent in the first half of this year) are not even staying in Hong Kong for one night. They arrive and leave the same day. This may add to Hong Kong¡¦s role as air transport hub, but it does little else to stimulate the local economy.

A key aim of this year¡¦s address should be to boost community confidence in the local, domestic, economy, encouraging consumers and investors to look beyond the immediate economic reversal to the healthier longer-term outlook. Consumers should be urged to put aside some of their caution, investors to look to the future with more confidence. The responsible authorities in the travel and tourism sector should be encouraged to find new ways, not just to attract greater numbers of visitors, but to get them to stay in Hong Kong longer. It cannot be left to the opening of the Disney theme park in 2005 to provide a boost to arrivals and increase travel-related revenues. All these are areas where sound domestic policies and the right encouraging words can make a difference, especially when they come from the Chief Executive....more

To me this strong policy & recommendations are relevant in our Bolehland's 2009 & beyond context to STUDY for INNOVATIVE THINKING but not COPY in TOTO....

Band Aid Ad-Hoc recommendations are the nett result of "Defective Objective, Policy & Implementation" in the first place.


de minimis said...

walla and flyer168

Your comments are multi-layered and addresses very specific matters that I will enjoy ruminating over. Many thanks. Keep em comin!