Academic journal article Journal of Southeast Asian Economies

Government Policies, Regional Trading Agreements and the Economic Performance of Local Electronics Component Producing SMEs in Malaysia

Academic journal article Journal of Southeast Asian Economies

Government Policies, Regional Trading Agreements and the Economic Performance of Local Electronics Component Producing SMEs in Malaysia

Article excerpt

Several governments, including Malaysia's, have promoted small and medium enterprises (SMEs) for the socio-economic benefits such policies bring. Since the 1990s, Malaysian SMEs have progressed to take advantage of the exporting opportunities opened up by regional trading arrangements (RTAs). Using the electronics industry, which is prevalent in the manufacturing sector of Malaysia, this paper seeks to analyse the relationships between size and technological and performance variables. While foreign electronics firms in Malaysia have been thoroughly studied in the past, this paper focuses on national firms, which have been understudied thus far. SMEs show stronger participation in exports to ASEAN countries than large firms. Size did not matter in the intensity of use of technological capability variables. The government's initiatives to support them with ICT infrastructure, and trade promotion may have been successful. Also, RTAs show significant importance as the relationship between firms using them and intensity of exports to ASEAN and Northeast Asia is positive and strong. Also, while the incidence of participation in in-house R&D (IHRD) and training expenditure in payroll (TEP) is higher among firms that have used RTA instruments compared to firms that have not, firm size was not significant.

Keywords: Government policy, regional trading agreements, electronics components, small and medium enterprises, Malaysia.

1. Introduction

The importance of small and medium enterprises (SMEs) in economic development is now widely acknowledged (Acs and Audretsch 1988). (1)

However, despite the significant role they play, this class of firms has historically been vulnerable to competition. This is due to their size disadvantage, especially in industries characterized by scale economies. Although the evolution of science parks and university-industry research linkages has enabled SMEs to participate in R&D-intensive activities, minimum scale efficiencies are still important in scale-based industries, such as automobile assembly, wafer fabrication, and integrated circuits and printed circuit board assemblies (Rasiah 2003). SMEs are also prone to market failures because of information asymmetries, especially when faced with weak institutions. There are also other impediments, such as access to finance, legal constraints, skills shortages and limited technological capabilities that hinder the capacity of SMEs to compete with large firms. Despite these shortcomings, governments continue to promote their development as they are not only competitive in scope-oriented activities, but also act as a conduit to stimulate entrepreneurship. The focus on SMEs have taken on a new dimension in Malaysia following the streamlining of trade and investment policies in the ASEAN Economic Community (AEC) that came into effect in 2015.

Hence, this paper seeks to examine government policies to promote SMEs in Malaysia in general, and the influence of regional trading agreements on the export performance of national electronic component firms in particular. The in-depth analysis is confined to the electronic industry to obtain an informed industry-specific assessment of SMEs. National firms were preferred for this exercise because their participation in export markets is far less than foreign MNCs that primarily engaged in export-oriented assemblies. Also, there has already been considerable work on foreign electronics firms in Malaysia (Rasiah 1988, 1994, 1995, 1998, 2010; Narayanan and Lai 2000), but not on national firms. Therefore, to fill this gap, this paper uses a large set of data on national firms--the first of its kind. The rest of the paper is organized as follows: section 2 discusses the significance of SMEs in Malaysia's economy; section 3 discusses government policies targeted at promoting SME development; section 4 presents the methodology and data used in the paper; section 5 analyses the results; and section 6 concludes. …

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