a profile of malaysia international sme. mapping current performance on national policies and...

8/19/2019 A Profile of Malaysia International SME. Mapping Current Performance on National Policies and Strategic Objectives

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The IUP Journal of Business Strategy, Vol. XI, No. 3, 201460

A Profile of Malaysian International Small

and Medium Enterprises:Mapping Current Performance on National

Policies and Strategic Objectives

Internationalization is recognized in many countries as an important resource for organizations’ growth and

expansion. In Malaysia, there have been numerous policies, strategies and support programs formulated by

the government aimed at fostering the development of internationalization of Small and Medium Enterprises

(SMEs). This paper intends to look into Malaysian policies on business internationalization and to derive

a profile of its international SMEs, with the aim of evaluating the effectiveness of these policies in developing

firm competitiveness in international markets. The findings revealed that Malaysian SMEs are still at their

early phase of involvement in international business, with a low portion of their markets, sales and profits

derived from internationalization, despite numerous policies, strategies and programs supporting their

internationalization development. This suggests that present policies and strategies concerning SMEs’

internationalization require urgent reviews and revisions to better suit their needs and the ever-changing

global environment. Policy makers are also advised to consider the relevance of various regulations which

may hamper the growth of SMEs at the international level.

Mohd. Najib Saad* and Aida Idris**

* Research Scholar, Graduate School of Business, Faculty of Business and Accountancy, University of Malaya,Kuala Lumpur, Malaysia; and is the corresponding author. E-mail: [email protected]

** Associate Professor, Faculty of Business and Accountancy, University of Malaya, Kuala Lumpur, Malaysia.E-mail: [email protected]

© 2014 IUP. All Rights Reserved.

Introduction

Internationalization is a key element of growth of a firm (Peng and Delios, 2006). It is especially

important for Small and Medium Enterprises (SMEs) since they generally have a small

financial base and a limited domestic scope (Barringer and Greening, 1998). Many SMEs

from developed nations are generating income in the foreign markets more than in the home

countries. These enterprises can be described as ‘born global’ or ‘instant internationals’

(traditional SMEs which enter international market almost from inception), ‘backsources’

(SMEs who re-concentrate their international activities back to the home base) and ‘bornregionals’ (SMEs that gain their force out of a local embeddedness and never shift capacity

beyond export activities) (Schulz et al., 2009). Due to the huge economic contributions of

SMEs, most countries have implemented policies with the objective to support them to


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61A Profile of Malaysian International Small and Medium Enterprises:Mapping Current Performance on National Policies and Strategic Objectives

increase their international activities and boost economic growth (EC, 2007). The most

observable approach in which governments can influence SMEs development is through

direct support policies and programs that are created to assist SMEs to overcome size-related

disadvantages (Smallbone and Welter, 2001).

In Malaysia, SMEs are considered as the backbone of economic growth in driving industrial

development (Amini, 2004; Radam et al., 2008; Hoq et al., 2009; and Khalique et al., 2011). At

present, there are approximately 645,000 SMEs, which account for 97.3% of total business

establishments. Malaysian SMEs have remained resilient since 2011, with the SME GDP

continuing to grow at a faster rate of 6.8% than the overall economy of 5.1%. Their positive

development over the years has resulted in SMEs’ contribution to GDP increasing gradually

from 29.4% in 2005 to 32.5% in 2011. However, this figure is still a long way from achieving

the national master plan target of 41% by 2020 (DOSM, 2011). As a strategy to achieve the

target, the government has increased efforts to strengthen the performance of SMEs by

formulating various policies, incentives and programs based on three main thrusts:

(1) strengthening the enabling infrastructure; (2) building firms’ capacity and capability;

and (3) enhancing firms’ access to financing (NSDC, 2009/10). The concern is that, while

these policies and programs may be able to improve the overall performance of local SMEs,

they appear to be too generic to have a significant impact on internationalization.

In view of the above, this paper was intended to look into the effectiveness of current

government policies and strategies concerning the internationalization of Malaysian SMEs.

By analyzing a profile of these firms, the study was able to conclude empirically the extent to

which Malaysian SMEs have met the desired targets specified by the government. The profile

included different aspects of internationalization of local SMEs and their performance

indicators, as follows: (1) percentage of companies’ total sales from international operations;

(2) percentage of companies’ profit from international operations; (3) total number of

companies’ international markets; (4) duration of companies’ involvement in international

operations; and (5) financial and non-financial performance of the companies. Discrepancies

between the profile and targets set by the government would suggest weaknesses in policy-

design and strategy-implementation and help identify areas for improvement. Hence, the

paper is expected to contribute to knowledge on Malaysian SMEs’ internationalization by

revealing specific policy-related issues which are impeding their development at present.

Literature Review

The paper discusses major dimensions of internationalization and firm performance

commonly found in the literature which can be used to compile a profile of international

businesses.

Dimensions of Internationalization

A comprehensive study by Sullivan (1994), conducted for the development of meaningful

measures of internationalization, concluded that foreign sales as a percentage of total sales is


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one of the most common and reliable measures of internationalization. In a separate research,

Reuber and Fischer (1997) considered three components for measuring theinternationalization of SMEs which include foreign sales as a percentage of total sales. These

components are: the percentage of the firm’s employees that spend over 50% of their time on

international activities, the geographic scope of sales of the firm, and foreign sales as a

percentage of total sales. Later, Contractor et al. (2003) measured internationalization through

the Eigenvector-weighted sum of foreign sales/total sales, number of foreign employees/

number of total employees and number of foreign offices/number of total offices. Overall, it

can be concluded that research has identified three major dimensions of internationalization,

namely, the extent, speed and scope of internationalization (Zahra and George, 2002). These

dimensions are elaborated as follows.

Extent or Degree of InternationalizationMost prior studies examined the extent or degree of internationalization (McDougall and Oviatt,

1996; Karagozoglu and Lindell, 1997; Reuber and Fischer, 1997; Burgel and Murray, 1998; and

Zahra et al., 2000), which is measured by the percentage of a firm’s sales generated from foreign

markets. Others have applied more than one factor in measuring this variable. For example,

Sullivan (1994) used foreign sales as a percentage of total sales, foreign assets as a percentage of

total assets and foreign subsidiaries as a percentage of total subsidiaries to measure the degree of

internationalization. Alternatively, Reuber and Fischer (1997) measured the degree of

internationalization of Canadian software firms using the percentage of foreign sales and the

percentage of employees that spend more than 50% of their time on international activities.

Speed of InternationalizationAlternatively, some studies were concerned with the speed of internationalization (Roberts

and Senturia, 1996; Lindquist, 1997; Fontes and Coombs, 1997; Reuber and Fischer, 1997;

and Burgel and Murray, 1998). This is broadly defined as the duration from the inception of

the firm to when the firm generates foreign sales. Reuber and Fischer (1997) further described

the duration that a firm operated domestically before generating any foreign sales as a ‘delay’

and treated it as a behavior of the firm, which indicates its international challenges and

strategies. Robert and Senturia (1996) too used speed as a measure of internationalization

and defined it as the time at which a firm first initiates its global activities.

Scope of Internationalization

Finally, the scope of internationalization is measured by the number of foreign markets

within which the firm operates. These foreign markets are categorized by countries or by

regions (Roberts and Senturia, 1996; Reuber and Fischer, 1997; Burgel and Murray, 1998; and

Zahra et al., 2000). Zahra et al. (2000), for example, measured the scope of internationalization

based on the number of foreign countries to which the firms sell their products. Likewise,

Reuber and Fischer (1997) viewed the scope of internationalization as the firm’s geographic

scope of sales.


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Firm Performance

Studies have suggested that internationalization leads to improved performance of SMEs(Hitt et al., 1997; Westhead et al., 2001; Lu and Beamish, 2006; and Pangarkar, 2008), regardless

of limitations in financial and human resources. However, measuring the performance of

international organizations is rather a complex problem. Past studies have studied the

performance outcomes of internationalization mostly from the financial perspective, using

measures such as return on equity, return on assets and growth of sales. Some empirical

studies on the relationship between internationalization and financial performance include

Bloodgood et al. (1996), who discovered a positive but marginally significant relationship

between the extent of internationalization and firm income, while McDougall and Oviatt

(1996) suggested that there is no relationship between internationalization and return on

investment of the firm. Despite these mixed empirical results, financial performance indicatorsare still very commonly used since they are more standardized and easily measured.

Business Internationalization Policies

The development of SMEs and diversification of their structure over time through

employment and output share, output composition, market orientation and location are

related to many factors including the level of economic development and government

promotion programs (Tambunan, 2008). At present, there is an increased acceptance of the

fact that SMEs contribute positively to the wider social and economic restructuring of a

country (Smallbone and Welter, 2001). So as to capture these economic and social benefits,

virtually all governments have become more supportive of this sector in recent years (Wren

and Storey, 2002). The most understandable way that a government can influence SMEs is

through direct support policies and programs that are planned to assist small firms overcome

size-related disadvantages (Smallbone and Welter, 2001). Government support programs in

terms of general financial support or preferential treatment for entrepreneurial ventures

(Spencer and Gomez, 2004), resources available through government procurement programs

(Doutriaux, 1998), tax incentives (Harrison and Mason, 1988), business development

assistance (Phillips, 1993), and export assistance (Reynolds, 1997) help to create a conducive

regulatory environment that can assist individual entrepreneurial efforts.

Acs et al. (2001) observed that government policies have an influence on the path of

internationalization of SMEs. In other words, specific policies and programs can help SMEs

to develop the most effective entry modes for their internationalization exercise, which

include joint ventures, subsidiaries, franchising, licensing, etc. besides exporting. Other studies

on internationalization policies (Kang and Park, 2012) indicated that their effects on SME

performance are not always direct. For example, while financial assistance can directly increase

the production capacity of a firm, this type of support can also indirectly improve its

innovativeness through the establishment of a research unit to pursue market knowledge

and product developments.


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Research Context

An Overview of Malaysian SMEsIn early history, the development of the Malayan economy (the country was then known as

the Malay Peninsula or Malaya) involved the trading of commodities such as porcelain and

spices. Later, throughout three hundred years of British rule, the economy mainly focused on

producing global commodities, especially tin, rubber and palm oil. This situation continued

even after the country secured independence in 1957, well into the 1970s. In the early 1980s,

SMEs in Malaysia were still largely in agriculture and small service sectors such as wholesaling,

retailing and restaurants (Ahmad, 2012).

The Malaysian economy took a turn in the late 1980s, when diversification from the

mining and agricultural sectors to manufacturing activities led to strong economic growth

(Aris, 2007). According to Gomez and Jomo (1998), as a major exporter of tin, rubber, palm

oil, pepper, tropical timber and petroleum, together with a fast developing manufacturing

sector, Malaysia was then widely recognized as one of the most successful countries in the

world. The manufacturing sector contributed to an increase in Malaysian exports, especially

of electrical and electronic products, and became the key factor in sustained economic growth.

This economic transformation led to the establishment of many SMEs in the manufacturing

sector. However, the development strategy for SMEs during that period mainly concentrated

on domestic markets, small-scale industries and in particular, the creation of the indigenous

commercial and industrial community (NSDC, 2005).

Since the mid-1990s, the role of SMEs in the development of the Malaysian economy has

become more significant. Due to the Asian financial crisis in 1997-1998, and other forces of

globalization, these enterprises were marked as a means for generating domestic-led

investment, stimulating economic expansion and increasing job opportunities in the country

(Aris, 2007). Subsequently, SMEs have been transformed and strengthened as a mechanism

to encourage domestic investment whilst providing significant links in the development of

a broad-based, globally competitive industrial sector in the future. Supported by the

government through various programs and incentives, local SMEs have grown tremendously

and can be found in a wide range of economic activities domestically. Rather than focusing

on just manufacturing and agricultural sectors, they are also extensively involved in services

and have proven to be resilient and sustainable (NSDC, 2009/10). However, little is known

about their status and performance in the international environment, and more studies areneeded to assess the effectiveness of existing internationalization policies and strategies set

by the government.

Definition of SME in Malaysia

Since there is no established worldwide definition of SMEs (Hooi, 2006; and Omar and

Ismail, 2009), most researchers have used their own definitions, according to their specific

focus (Abdullah and Bakar, 2002). From the perspective of international business, researchers


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and practitioners have defined SMEs based on the socioeconomic development of each country

(Chelliahet al.

, 2010). For example, in the United States, these enterprises are defined ascompanies with 500 or fewer employees (Cavusgil et al., 2008). Lin and Chaney (2007) defined

Taiwanese SMEs as business establishments with 650 employees or less.

In 2005, the National SME Development Council (NSDC) approved the use of standard

definitions for Malaysian SMEs in the manufacturing, manufacturing-related services, primary

agriculture and service sectors. This definition of SME is based on two criteria, i.e., the total

sales turnover/revenue by a business in a year, or the number of full-time employees by a

business. As shown in Table 1, SMEs in Malaysia can thus be categorized into three size-

groups: micro, small and medium. However, the actual sales and employees criteria may differ

within each group according to the sector in which the firm operates. For instance, a micro

enterprise in the manufacturing sector generates less than RM250,000 per annum but for

primary agriculture, the figure is only RM200,000 per annum.

Table 1: Definition of Small and Medium Enterprises in Malaysia

Size

Manufacturing

(Including Agro-Based)

and Manufacturing-

Related Services

Primary AgricultureServices Sector

(Including ICT)

Micro

Small

Medium

Annual Sales Turnover:Less than RM250,000 OR Number of Full-TimeEmployees: Less than 5

employeesAnnual Sales Turnover:From RM250,000 to lessthan RM10 mn OR Number of Full-TimeEmployees: From 5 to lessthan 50 employees

Annual Sales Turnover:From RM10 mn to lessthan RM25 mn OR Number of Full-TimeEmployees: From 50 to less

than 150 employees


employeesAnnual Sales Turnover:From RM200,000 to lessthan RM1 mn OR Numberof Full-Time Employees:From 5 to less than 20employees

Annual Sales Turnover:From RM1 million to lessthan RM5 million OR Number of Full-TimeEmployees: From 20 to less

than 50 employees


employeesAnnual Sales Turnover:From RM200,000 to lessthan RM1 mn OR Numberof Full-Time Employees:From 5 to less than 20employees

Annual Sales Turnover:From RM1 mn to less thanRM5 mn or Number of Full-Time Employees:From 20 to less than 50

employeesSource: National SME Development Council (NSDC), SME Annual Report 2011/12

Policies and Incentives for Malaysian SMEs Internationalization

To strengthen SMEs’ development and facilitate their growth in the global environment,

various incentives, programs and policies have been implemented by the government. These

include long-term strategic planning, export agents, financial agents, negotiators and tax

and incentives, which are further discussed below.


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Long-Term Strategic Planning

Long-term policies and institutional frameworks exist in the form of country-level masterplans. As a response to the Asian financial crisis of the late 1990s, the NSDC was established

in 2004 with the aim of formulating policies especially for SME development. The council

also works closely with other agencies, ministries, banks and financial institutions, giving

support to SMEs and monitoring their outcomes. Primary areas of focus have been captured

in the 8th Malaysia Plan (2001-2005), which emphasized the development of SMEs in the

manufacturing sector. Later, the 9th Malaysia Plan (2006-2010) and the Third Industrial

Master Plan (2006-2015) continued to outline key strategies for the development of SMEs by

enhancing their capabilities as regional and global entities. Funding and business advisory

services have been made available through central agencies such as the External Trade

Development Corporation, Technology Development Corporation and SME Corporation,

thereby increasing SMEs’ access to capital, as well as their productivity and market capacity.

Export Agent

The Malaysia External Trade Development Corporation (MATRADE) plays a significant

role as a facilitator for the internationalization of local SMEs. Numerous initiatives have

been launched by this agency to assist the engagement of these enterprises in export activities.

Mainly, the corporation is responsible for developing overseas markets for the products and

services of SMEs. Additionally, its Market Development Grant scheme provides assistance

in developing these export markets. Specific grants can be used for international trade fairs,

investments and trade missions, negotiations to access foreign markets, promotional activities

in export markets, initial investments in establishing offices abroad, outsourcing, monitoring

of international projects, contracts and tenders, and conducting offshore market research(MATRADE, 2009 and 2011).

Financial Agent

Besides management, production and marketing support for the internationalization of SMEs,

the Malaysian government also provides specific financial services for them to penetrate

overseas markets. The Multi-Currency Trade Financing scheme operated by EXIM Bank

facilitates financial transactions for SMEs, which include suppliers credit (financing that

enable exporters to execute orders in hand), overseas contract financing and export service

facility, buyer credit (loans granted to foreign buyers of Malaysian goods and services), Malaysia

Kitchen Financing Facility (designed to finance the establishment of Malaysian restaurants

overseas) and Overseas Project Financing (Exim Bank, 2006).

Negotiator

In order to create fair competition and opportunities for SME exporters, the Malaysian

government is actively involved in trade negotiations, and regional and bilateral trade

agreements to reduce trade barriers. However, the success of these G-to-G arrangements

depends highly on the ability of Malaysian SMEs to comply with market requirements in

terms of product quality, delivery schedules and pricing.


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Tax and Incentives

In a bid to encourage public-listed SMEs to expand and compete internationally, stampduties and real property gain taxes are exempted for any mergers and acquisitions undertaken

by companies listed on the Malaysian bourse. Malaysian-owned SMEs that acquire foreign-

owned firms to learn about high technology production or gain new export markets are also

granted a tax deduction equivalent to the acquisition costs for five years (SMIDEC, 2009).

Additionally, incentives and grants are provided to companies able to produce quality

Malaysian brands and distinguish its products in the global market. These incentives include

outsourcing inputs for business activities and seeking out lower cost inputs, increasing

productivity and upgrading technology, business collaborations to improve production, market

research and product development, creation of a pro-business environment, continued efforts

to enhance delivery systems and reduce the cost of doing business, and enhancing conditions

of market access through tariff negotiations under bilateral, regional and World TradeOrganization agreements.

Methodology

The current research applied a quantitative survey approach using self-administered

questionnaire (See Appendix) to collect data from a sample of Malaysian SMEs that were

operating internationally up to December 2013. Consistent with past practices (Roth, 1992;

Carpano et al., 1994; and Roth and O’Donnell, 1996), respondents chosen for the survey were

the owner or the highest ranking officer of the firm, who were the most knowledgeable about

their organizational characteristics, management style, international operations and

performance. Three main sources of SME directory were contacted to identify potentialrespondents, namely, the Federation of Malaysian Manufacturers (FMM), SME Corporation

Malaysia (SMECorp) and MATRADE. In this study, international SMEs were defined as for-

profit companies that engaged in exporting, importing, licensing or outsourcing activities,

franchising, joint-ventures and wholly-owned subsidiaries.

The above database produced a total of 1,200 SMEs as the study sample. Data collection

was carried out by mailing a covering letter explaining the purpose of the survey, a copy of the

questionnaire and a postage-paid envelope to all 1,200 firms. The questionnaire consisted of

three parts, described below:

• Part I – Demographic characteristics, i.e., form of ownership, location of headquarters,

business duration, industry type, annual sales and number of employees.

• Part II – International business characteristics, i.e., duration of international

operations, countries involved in internal transactions, number of foreign markets,

percentage of sales from international operations and percentage of profit from

international operations.

• Part III – Overall financial performance, i.e., the average over the past five years of

Return on Equity (ROE), Return on Assets (ROA) and sales growth.


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Within four months after mailing, a total of 252 questionnaires were returned, out of

which, 237 were fully completed. This yielded an effective response rate of 20%. After initialdata screening for missing data, outliers and normality, the Statistical Package for the Social

Science (SPSS) Version 18 was used to analyze the data and produce descriptive analyses of

the study such as means, standard deviations and frequencies.

Results

A descriptive analysis was performed to establish a profile of the respondents that participated

in this study. This profile is elaborated in the following sub-sections while key results of the

frequency analysis are summarized in Table 2.

Table 2: A Profile of Malaysian International SMEs

Duration of Time Company Experience in Current Industry

Period Frequency Percentage

Up to 1 year 0 0

2 – 5 years 57 24.1

6 – 10 years 63 26.6

11 – 15 years 36 15.2

16 – 20 years 25 10.5

More than 20 years 56 23.6

Total 237 100.0

Duration of Time Company Experience in International OperationsPeriod Frequency Percentage

1 – 5 years 118 49.8

6 – 10 years 62 26.2

11 – 15 years 15 6.3

16 – 20 years 14 5.9

More than 20 years 28 11.8

Total 237 100.0

International Business Transactions

Foreign Markets Frequency Percentage

ASEAN Countries 113 47.7

Asian Countries 85 35.9

North America Countries 9 3.8

European Union Countries 19 8.0

Other Countries 11 4.6

Total 237 100.0


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Table 2 (Cont.)

Number of International MarketsNo. of Countries Frequency Percentage

1 – 5 141 59.5

6 – 10 47 19.8

11 – 15 22 9.3

16 – 20 8 3.4

More than 20 19 8.0

Total 237 100.0

Total Sales from International Operations

Percentage of Sales Frequency Percentage

1 – 20 100 42.2

21 – 40 58 24.5

41 – 60 28 11.8

61 – 80 31 13.1

More than 80 20 8.4

Total 237 100.0

Profit from International Operations

Percentage of Profit Frequency Percentage

1 – 20 122 51.5

21 – 40 45 19.0

41 – 60 26 11.0

61 – 80 29 12.2

More than 80 15 6.3

Total 237 100.0

Average Return on Equity

Percentage of Return Frequency Percentage

–20 – 0 15 6.3

1 – 20 62 26.2

21 – 40 48 20.3

41 – 60 70 29.561 – 80 32 13.5

More than 80 10 4.2

Total 237 100.0

Average Return on Assets


–20 – 0 16 6.8


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Demographic Characteristics

Of the 237 SMEs surveyed, 12.2% of the respondents were sole proprietorships, while

partnerships and private limited companies constituted 11.4% and 76.4%, respectively. In

terms of geographical location, most of the firms were located in urban areas (60.3%), very

likely due to the good infrastructure and facilities available. The remaining 31.6% were in

suburban areas, whilst the rural areas accounted for 8%.

Further analysis revealed that out of the total number of respondents, 41.4% were involved

in manufacturing activities, 35.4% in services and 23.2% were directly involved in agricultural

businesses. Certain industry sectors were more heavily represented due to the concentration

of SMEs in areas that are economically developed and supported by the government. In the

manufacturing sector, more than half were in the three key subsectors, namely, food and

beverages (27.6%), electrical and electronics (16.3%), and textiles and apparels (15.3%).

Most of the respondents in the service sector were involved in professional services (27.4%),

wholesale and retail trade (19.0%) and transportation and telecommunication (14.3%),

followed by the agricultural sector which constituted 23.2% of the respondents, who weremainly involved in crop plantation and horticulture (67.3%) and poultry farming (23.6%).

Examination of the annual total sales of the manufacturing firms indicated that 57.1% of

the sample fell within the medium category with RM10 mn to RM25 mn annual total sales.

33.7% fell within the small category with RM250,000 to RM9.9 mn annual total sales, and

9.2% within the micro category with less than RM250,000 annual total sales. Therefore,

more than half of the manufacturing firms were generating sales at the higher end of the

survey range. With regard to the number of full-time employees, more than half of the

Table 2 (Cont.)

1 – 20 67 28.3

21 – 40 50 21.1

41 – 60 63 26.6

61 – 80 28 11.8

More than 80 13 5.5

Total 237 100.0

Average Growth of Sales

Percentage of Growth Frequency Percentage

–20 – 0 14 5.9

1 – 20 56 23.6

21 – 40 52 21.9

41 – 60 50 21.1

61 – 80 50 21.1

More than 80 15 6.3

Total 237 100.0



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manufacturers had between 51 and 150 employees (60.2%), while another 34.7% had between

5 to 50 employees, and only 5.1% had fewer than 5 employees.Similar to the manufacturing sector, most of the respondents in the services and

agricultural sectors had annual total sales within the medium category with RM1 mn to RM5

mn annual total sales (56.8%). 26.6% fell within the small category with annual total sales

between RM200,000 to RM999,999, and 16.6% were under the micro category with annual

total sales of less than RM200,000. In terms of employment, more than half of the respondents

within the services and agricultural sectors fell within the medium category, having between

20 and 50 employees (53.2%). Another 33.1% of these enterprises had between 5 and 19

employees, while the micro category comprised 13.7%.

About 24.1% of the participating firms began their operations less than 5 years ago, while

another 26.6% had been operating for 5 to 10 years, and 23.6% had an establishment of morethan 20 years. This indicates that the majority of the SMEs involved in this study had less

than 10 years’ business experience and were considered relatively young.

Speed of Internationalization

As for the duration of internationalization, nearly half of the participating firms (49.8%) had

been involved in international operations for 1 to 5 years and 26.2% for 6 to 10 years. At the

other end of the scale, only 12% had more than 20 years’ international experience. Therefore,

it is clear that most of the SMEs surveyed were in their early phase of involvement in

international business and very likely through low-level modes of entry with limited physical

presence in the foreign market such as exporting.

Scope of Internationalization

With regard to transactions, nearly half of the firms surveyed (47.7%) conducted them within

the ASEAN region, 35.9% with Asian countries and the remaining 16.4% with North

American, European Union and other countries around the world. This suggests that due to

their young age, a majority of the respondents have only conducted transactions with business

partners nearest to home, possibly because of a high degree of similarity between the two

markets. Similarly, a majority (59.5%) have transacted with fewer than 5 countries, while

19.8% have penetrated fewer than 10. This is again consistent with the short duration they

have spent as international players, and their choice of exporting as the entry mode.

Extent of Internationalization

Analysis of the percentage of sales from international operations shows that 42.2% of the

SMEs enjoyed between 1 and 20% sales from such sources, whereas 24.5% generated

international sales of between 21 and 40%. In addition, more than half of them (51.5%)

received between 1 and 20% profit from international sources and another 19% between 21

and 40%. This provides further evidence that a majority of the respondents were small global

players with relatively low levels of foreign sales and profits.


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Financial Performance

Financial performance analysis showed that over the past five years, the biggest group (29.5%of respondents) recorded a ROE of 41 to 60%. 26.2% of them managed to achieve a ROE of

between 1% and 20%, while 20.3% achieved 21% to 40%. In terms of ROA, 28.3% of the

respondents recorded 1% to 20% and 21.1% managed to achieve 21% to 40%. As for the

average sales growth, 23.6% of them generated 1% to 20%, and 21.9% had 21% to 40%.

Although these figures generally indicate a healthy financial performance among the

respondents, some attention must be drawn to those recording a negative performance. As

shown in Table 2, around 6% of the respondents had a negative average ROE, ROA and sales

growth in the past five years.

Discussion

The above findings suggest that a majority of the SMEs surveyed in this study were still in theearly stages of internationalization, having just 1 to 5 years’ experience in international

operations. Further analysis revealed a low penetration of foreign markets, with operations

in only 1 to 5 countries, particularly within the ASEAN region. More than half were

generating less than 40% of their total sales and profits from international operations.

However, analysis of financial performance showed that most of the firms generated healthy

rates of ROE, ROA and sales growth over the past five years. This suggests that, at present,

the financial success of most Malaysian international SMEs is still highly dependent on their

domestic operations. Hence, in the context of policy-setting and strategy-implementation,

there is a need to take a relook at the effectiveness of current internationalization policies

and strategies designed by the government.Policy-making in the entrepreneurship field is complex and messy (Asghar et al., 2011).

Many aspects of government policy affect different levels of entrepreneurial activity, for

example, regulatory policies, trade policies, labor market policies, regional development

policies, social policies, gender policies, etc. The mix of policy options will depend on various

factors including the prevailing attitude of the population towards entrepreneurship, the

structure of the labor force, the size and the role of government and the dominance of

existing levels of entrepreneurial activity (Lundstrom and Lois, 2005).

Earlier in the paper, it was mentioned that internationalization support programs for

Malaysian SMEs can be divided into five categories, namely, financial and credit assistance;

technical and vocational training programs; extension and advisory services; marketing andmarket research; and infrastructure support (Abdullah et al., 2001). An outstanding

characteristic of these programs, except for tax incentives, is that they are very much focused

on issues such as financing, market research, production capacity and infrastructure targeted

for exporters. Other modes of internationalization such as joint ventures, wholly-owned

subsidiaries, licensing, franchising, etc., have not received an equal emphasis. As a result,

Malaysian international SMEs have not been able to create a strong physical presence abroad

which is important in branding and customer relations.


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Additionally, the numerous agencies established to provide assistance and advice in

internationalization are not well-coordinated, often resulting in processes which are confusing

and tedious for business-owners. Duplication of functions too has rendered them less

productive and effective than they should be. A most common problem is the extent of

bureaucracy or ‘red tape’ which causes operational delays for businesses (Ariff and Abubakar,

2003). Gomez and Jomo (1998) also argued that government policies are more likely to

support larger corporations than SMEs. To be precise, better access to government tenders

and credit assistance have been granted to politically well-connected companies. These

practices have naturally produced negative effects for the SME sector which is already

struggling with a lack of capital, skills and experience, business networks and market knowledge

(Abu Bakar et al., 2006; Saleh and Ndubisi, 2006; Samad, 2007; and Hashim, 2012).

The above carries significant implications for practitioners, policy-makers and scholars

in international business and should provide lessons for future improvements. From amanagerial perspective, SMEs must realize the importance of exploring other modes of

internationalization besides exporting (Acs et al., 2001). Benchmarking themselves upon

successful Asian international firms such as Toyota, Samsung and AirAsia will reveal how

limited exporting is as a mode of entry, especially in their effort to penetrate markets in

developed countries. However, to create opportunities through more sophisticated entry

modes, entrepreneurs and managers must first equip themselves with excellent market

knowhow and business networks. This requires not only technical skills and experience, but

also expertise in cross-cultural, communication, negotiation and partnership management.

For policy-makers, there is a need to develop strategies and action plans which can cultivate

a more venturesome attitude among SMEs. Current programs that overemphasize exporting

must be reviewed and revised to motivate Malaysian international SMEs into becoming true

international players with a greater physical presence abroad. Obviously, this effort must be

extended beyond merely providing tax incentives for mergers and acquisitions. In this respect,

some policies and programs which deserve greater attention include the development of

skilled expatriate managers, introduction of internationalization subjects at lower levels of

education, and creation of a national identity which fosters strong international credibility.

Improving coordination among related agencies and streamlining their functions to reduce

red-tape should also be treated as a top priority.

Finally, the study should be able to stimulate further scholarly interest in policy effects on

SME internationalization, particularly in terms of developing a more refined framework

which takes into account contextual factors in a non-western setting. As earlier mentioned,studies (Smallbone and Welter, 2001; and Kang and Park, 2012) have suggested that

government policies and programs can affect SME internationalization both directly (e.g.,

improving production capacity) and indirectly (e.g., create research units which in turn

stimulate innovative organizational culture). Thus, in the context of Malaysia, it would be

interesting to examine whether current policies and programs are able to go beyond the

technical aspects of internationalization into softer yet more long-term areas of SME

development involving the entrepreneurial mindset and behaviors of the business community.


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Conclusion

Especially in developing economies, SMEs are often considered as the most important engineof job and wealth-creation, and the main tool for building national competitive advantage.

Since SMEs generally have a small financial base and a limited domestic scope,

internationalization has become a particularly important growth strategy for them. To help

SMEs overcome size-related disadvantages, various government policies and programs have

been implemented which have both direct and indirect effects on their internationalization

performance.

The current study was concerned with the effectiveness of Malaysian internationalization

policies and programs in developing the potential of home-grown SMEs as international

business players. Using a quantitative approach, a profile of Malaysian international SMEs

was generated which described their international business characteristics and performance.

The findings of the study indicate that although the overall financial performance of Malaysian

international SMEs is good, that success has been largely dependent on their domestic

operations. Furthermore, the number of foreign markets penetrated remains low, with a

geographical scope which is limited only to neighboring countries. An analysis of present

policies and programs suggested a tendency to emphasize exporting as the primary mode of

entry, while the potential of other entry models has been largely underdeveloped.

Hence, from the perspective of policy-setting and strategy-implementation, the study

has underlined the urgency of reviewing and revising current practices towards maximizing

opportunities through other entry modes besides exporting. For practitioners, policy-makers

and scholars, this involves a detailed understanding of both direct and indirect effects of

internationalization policies and programs on the entrepreneurial mindset and behavior of Malaysian SMEs. Clearly this topic deserves greater attention in future internationalization

research, especially in developing countries.

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Questionnaire

This questionnaire asks about your company’s international businesses and experiences.

It should take not more than 15 minutes of your time to complete this questionnaire.

The questions have no right or wrong answers and only assess your belief.

Please send the completed questionnaire back to the researcher.

Section 1

Company Information

1. Please check the category that best describes your company’s primary area of business:

a. Manufacturing:

Food and Beverages Wood and Wood Products

Rubber and Plastic Products Machinery and Equipment

Transportation Textiles and Apparels

Chemicals and Chemicals Metals and Metal Products

Products

Electrical and Electronics Non-Metallic Mineral Products

b. Services:

Education and Health Professional Services

Restaurant and Hotel Transportation and Communication

Computer Industry Services Wholesale and Retail Trade

Telecommunication Others (Please Specify) __________

c. Agriculture:

Plantation and Horticulture

Fishery

Poultry Farming

2. Approximately what are the annual total sales of your organization?

a. Manufacturing:

Large: More than RM25 mnMedium: RM10 Million – RM25 mn

Small: RM250, 000 –RM9.9 mn

Micro: Less than RM250, 000

b. Services and Agriculture:

Large: More than RM5 mn

Appendix


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Appendix (Cont.)

Medium: RM1 mn – RM5 mn

Small: RM200, 000 – RM999, 999

Micro: Less than RM200, 000

3. Approximately how many full-time employees does your company have?

a. Manufacturing:

Large: More than 150 employees

Medium: 51 – 150 employees

Small: 5 – 50 employees

Micro: Less than 5 employees

b. Services and Agriculture:

Large: More than 50 employees

Medium: 20 – 50 employees

Small: 5 – 19 employees

Micro: Less than 5 employees

4. Most of your international business transactions are conducted with __________

ASEAN Countries

Asian Countries

North American Countries

European Union Countries

Other Countries (Please Specify) _______________

5. Please rank the following entry strategies according to the rate of usage by your own

company, ranging from 1 (Low rate) to 6 (High rate).

Entry Strategy 1 2 3 4 5 6

1. Exporting / Importing

2. Licensing / Outsourcing Activities

3. Franchising

4. Joint Venture

5. Wholly Owned Subsidiary


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Appendix (Cont.)

6. Duration of your company’s experience in current industry.

Up to 1 year

2 – 5 years

6 – 10 years

11 – 15 years

16 – 20 years

More than 20 years

7. Location of your company’s Head Office.Urban

Suburban

Rural

8. Form of Ownership Status.

Sole-Proprietor

Partnership

Private Limited Company (Sendirian Berhad)

Others (Please Specify) ________________

9. Business Status.

Bumiputera

Non-Bumiputera

Section 2

The following statements pertain to the extent that your firm is involved in international

markets or international operations.

1. Please estimate the percentage of your company’s last year total sales from internationaloperations.

0%

1% – 20%

21% – 40%

41% – 60%


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Appendix (Cont.)

61% – 80%

More than 80%

2. Please estimate the percentage of your company’s last year profit from international

operations.

0%

1% – 20%

21% – 40%

41% – 60%

61% – 80%

More than 80%

3. Please indicate the total number of your company’s international markets.

0

1 – 5

6 – 10

11 – 15

16 – 20 More than 20

4. Please estimate how long your company has been actively involved in international

operations?

0

1 – 5 years

6 – 10 years

11 – 15 years

16 – 20 years

More than 20 years

Section 3

The following statements describe your company’s financial performance, ranging from 1

(0% and less), 2 (1% -20%), 3 (21% - 40%), 4 (41% - 60%), 5 (61% - 80%) and 6 (More

than 80%).


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Statement 1 2 3 4 5 6

1. Average Return on Equity (ROE)

over the past five years period.

2. Average Return on Assets (ROA)

over the past five years period.

3. Average growth of sales over the

past five years period.

Thank you for completing this questionnaire. Your response will be kept strictly

confidential.

If you like to receive an overall result of this study, please provide your contact information.

Name:

Address:

Tel:

Fax:

E-mail:

Kindly send the completed questionnaire back to the address provided on the envelope(attached with this questionnaire).

Reference # 33J-2014-09-04-01

Appendix (Cont.)


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