Start-ups and MSMEs — why small is beautiful

 

Malaysia is awash with start-ups as well as micro, small and medium-size enterprises (MSMEs), yet many fail to scale up or attract investors.

When searching for factors behind this we need to acknowledge the misconception that start-ups and MSMEs are interested in growing their business and looking for investors in the first place. Most are not.

In Malaysia 98% of the 1.5 million companies registered with the Companies Commission of Malaysia (SSM) are SMEs and 78% or 1.2 million of these are micro-enterprises with fewer than five people.

There are 9.2 million enterprises, 7.7 million (84%) sole proprietors and 1.5 million (16%) partnerships.

Many do not have regular income because they run on a project basis. They have no intention of growth or becoming major players. Their aim is simply to raise enough revenue to cover their costs and salaries and pay the owner some return on the investment.

Many people start up a business because they cannot find formal employment with a decent income and the flexibility and independence for a good work-life balance. So start-ups, SMEs and micro-enterprises are actually just a substitute for a formal job.

If they grow too big or too fast it becomes very complicated to manage very quickly, especially from a regulatory perspective.

If they keep their revenue below RM500,000 for example they have no need to bother with the sales and service tax (SST).

If their profits are low they avoid corporate taxes. If they do not employ people they pay no EPF, Socso or employee insurance.

Since this is the aim of most start-ups they will not grow, they don’t need investment and they resist outside investors or taking on debt because they will have more liabilities and risks.

They also do not want investors who will cause them trouble or even try to take over their business.

Staying small is easier, more sustainable and delivers enough income for themselves, their employees and their families.

This is all they need, they have no intention of becoming large or even finding markets outside their immediate locality.

Most MSMEs face only normal business challenges, such as payroll, chasing payments and juggling cash-flow unless they have ambitions to grow the business into something big.

Then they struggle with finances, finding loans, regulations, providing documents to access grants and SME support schemes, raising initial capital, saving capital to invest in growth, employment regulations, the list is endless.

All of these things are a management nightmare with constant threat of compounds for non-compliance.

This is why companies keep it simple and stay small and why the government must change the way it supports these MSMEs.

The first step is to understand the aims of MSMEs and acknowledge that their ambitions may be modest but are nonetheless honest and worthwhile.

Not everyone can or should be an entrepreneur but there are many with the appetite, acumen and aptitude to succeed on a small-scale.

Second policies should promote competition, choice and creativity by reducing crowding-out by GLCs and opening markets to SMEs.

Ending preferential vendor programmes and Ali Baba policies is a key part of this, as is responsible privatisation of tens of thousands on GLC subsidiaries which gain access to GLC contracts denied to private entrepreneurs.

Third policies should facilitate the market by changing the regulations and rules to keep daily costs low, cash-flows healthy and compliance simple.

The “government knows best” attitude must end to allow the market to regulate itself.

Above all support through grants and soft loans should be replaced with support through the tax system, for example a zero tax on profits below RM600,000.

Coupled with a bonfire of red-tape this will allow entrepreneurs to stay small, beautiful and successful. - FMT

The views expressed are those of the writer and do not necessarily reflect those of MMKtT.