Malaysian’ Small and Medium Enterprises’ (SMEs) Perceived Challenges Associated to Internationalisation Activity:
A Reflection on the Belt and Road Initiative (BRI)
Chu-Le Chong1*, Poh-Chuin Teo2, Theresa C. F. Ho2, Chew-Keong Wai1, Mui-Yin Chin1
1 Faculty of Accountancy, Finance and Business, Tunku Abdul Rahman University College, Kuala Lumpur, Malaysia
2 Azman Hashim International Business School, Universiti Teknologi Malaysia, Kuala Lumpur, Malaysia
*Corresponding Author: [email protected] Accepted: 1 June 2020 | Published: 15 June 2020
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Abstract: The Belt and Road Initiative (BRI) that launched by the Chinese government has gained the attention of the world since the introduction of it by President Xi Jinping in 2013.
Regardless the promising associated economic and non-economic related benefit, this Initiative gas also been regarded as something of a double-edged sword, which potentially presents risks caused by the poor economic fundamentals and weak domestic institutions of their major participating countries due to high debt burdens involving in fiscal risks. This cross-sectional study aimed to examine the perceived challenges of Malaysian Small and Medium-Sized Enterprises (SMEs), particularly on their internationalisation activities associated with the BRI. Interestingly, both perceived financial and non-financial challenges are pretty huge. Hence, implications of study have been discussed and suggestions are provided to both policy makers and market practitioners. The discussion of this paper ended with research limitations and recommendations for future studies.
Keywords: Belt and Road Initiative (BRI), Malaysia, Small and Medium Enterprises (SMEs), Perception, Challenges, Internationalisation
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1. Introduction
The Belt and Road Initiative (BRI) that launched by the Chinese government has gained the attention of the world since the introduction of it by President Xi Jinping during his visit to Kazakhstan in 2013. Based on United Nations Development Programme (2020), the main objective of BRI is to increase connectivity between China and the member countries via five pillars, which include economy and non-economic benefits such as infrastructure and other connectivity related investments, policy coordination, unimpeded trade, financial integration, and people-to-people bonds. To achieve the above purposes, China provide huge financing and investment out flows to BRI partner countries. Following its objective, BRI is able to boost world trade and the volume of global export is foreseen to increase due to the reduction in trade costs (The World Bank, 2019).
For all of its advantages, the BRI is something of a double-edged sword. Similar to many major infrastructure projects, the BRI presents risks caused by the poor economic fundamentals and weak domestic institutions of their major participating countries. The risks
high debt burdens involving in fiscal risks. Besides, as the BRI involves many countries in the project, the BRI host countries may face high governance risks, particularly on corruption and procurement practices. Moreover, due to the vast geographic reach of the BRI, it would generate traffic pollution (air and noise pollution), topographical and hydrological damage (increased sedimentation and induced flooding) (Helsingen et al., 2018), as well as affect biodiversity (Bruschi et al., 2015).
Malaysia is currently one of the member countries of BRI while Small and Medium Enterprises (SMEs) play a pivotal part in Malaysian economy. In accordance with SME Annual Report 2017/18, SMEs contributed more than one-third of Malaysian economy. It has outperformed the overall economy with the average growth rate of 6.6% compared to 5.2% of the overall GDP (Gross Domestic Production) growth rate from the period of 2011 to 2017.
In addition, the contribution of SMEs to Malaysian GDP increased by 4.9% from 2010 to 2017. Furthermore, its contribution continue to surge in 2018 as its contribution increased by another 1.2% compared to 2017. In a nutshell, its contribution to Malaysian GDP is remarkable with 38.3% in 2018 (SME Corporation Malaysia, 2019).
In terms of disaggregated industry contribution, it is noted manufacturing industry contributed the second largest total SME GDP with 21.5% compared to overall GDP of 23%.
Nevertheless, the agriculture, construction and mining and quarrying industry contributed 11.2%, 5.8% and 0.4% respectively to SME GDP (SME Annual Report 2017/18). In view of the importance of SMEs on Malaysian economy, empirical findings of SMEs from emerging countries are still lacking (Senik et al., 2014). Thus, this is important to bridge the gap by examining the perceived challenges of SMEs particularly on their internationalisation activities associated with the BRI. The outcome of this paper will enlighten both policy makers and market practitioners in transforming the challenges into opportunities and reap the benefits of BRI by providing the necessary assistance by the federal government.
2. Literature Review
Perceived challenges associated to internationalization of SMEs
A rising number of SMEs have been trying to exploit new environmental conditions, i.e.
entering new markets through internationalization (Lee, 2013; Daszkiewicz and Wach, 2012).
This is consistent with European Commission (2007) who claimed that internationalisation and international entrepreneurship among SMEs has remained as a significance topic due to the experiential growth effect of cross-border business opportunity and the ability of SMEs to stay competitive in national, regional and global economy. This realization was further discussed in the SME Master Plan (2012-2020) and MATRADE (Malaysia External Trade Development) to promote internationalization by proposing HIP4 (4th high impact program) or Going Export Programme (GoEx). SMEs can take advantages from Go-Ex programme to:
1) gain export know how in international market; 2) expand a beneficial network between buyer and seller and 3) get a funding of RM50,000 or reimbursable 50:50 matching grant.
The aim of Go-Ex programme is to increase SMEs contribution to total exports to 23 percent in 2020 (MATRADE, 2018). The intention of SME Master Plan was to encourage SME to adopt e-commerce, stay innovative, develop human capital resources and improve its distribution network (Lee, 2013). Nevertheless, the acceptance of e-commerce among SMEs in developing countries like Malaysia is still in nascent stage compared to those big companies and multinational corporations (MNCs) (Rahayu and Day, 2015).
SMEs may be finding it hard to go global due to several challenges to the internationalization of SMEs. Therefore, it is vital for owners of SMEs to reevaluating their internationalisation strategies in the light of today’s anti-globalisation sentiments (Sinkovicsa, Kurt and Sinkovics, 2018). In evaluating their challenges to internationalization, SMEs are noted of lacking resources (Saffu, Walker and Mazurek, 2012) such as financial resources (OECD, 2009), managerial capacity, trained personnel, capacity in R&D (Research and Development) (Orser et al., 2008), ICT (Information and Communication Technology) and facilities (Milesi et al., 2007; Xinhua, 2019). Mahajar and Hashim (2002) also found out some challenges to internationalization like safeguarding regulation that imposed by foreign government, poor planning of distribution network, inadequate expertise in trading prospect abroad, insufficient knowledge in cross-border commercial activity, lacking of foreign marketing connections and limited number of representative in foreign markets.
Malaysia is an emerging economy that is progressively assisting SMEs to become international players (SME Corp, 2019). According to MITI (Ministry of International Trade and Industry), Malaysia was ranked the 26th largest exporter in the world in 2019. As of 2019, the People’s Republic of China (14.2%), Singapore (13.9), United States (9.7%), Hong Kong (6.7%) and Japan (6.6%) are Malaysia’s top five trading partners, contributing to 51.1 percent Malaysia’s total trade (MITI 2019). Since China is Malaysia’s major trading partner, it is vital for SMEs to effectively respond to challenges and opportunities in both domestic and China market especially in the new era whereby BRI will affect all types of businesses in the globe. Although initially the BRI focused on infrastructure which only benefit large enterprise firms, it will evolve into a multidimensional business ecosystem that demands more people-to-people connectivity that would spark opportunities in trade, services, logistics, catering, hospitality, tourism, education, production sharing and investment – all of which require SME involvement (Careem, 2017). Therefore, SMEs should seek investment opportunities in the BRI, as total investments led by China are estimated to rise drastically from the initial US$1 trillion (RM4.2 trillion) (The Star, 2019). In addition, China’s vast market has provided numerous opportunities in trade, investment and business. Its economic reforms and further opening up have opened up new investment opportunities and spurred the emergence of new trading zones, particularly along the BRI routes. The BRI has engaged almost 70 countries and multilateral international organisations, creating a huge opportunity that SMEs should also participate in (Zhang, 2018). To reap more benefits from BRI, this study will explore and understand the perceived challenges associated to internationalisation of Malaysian SMEs, and provide guidances to the relevant parties to improve the trade between Malaysia and China.
3. Methodology
Data was collected cross-sectionally and the data collection method was person-administered survey. The sampling method was judgmental sampling. This study targeted 150 SMEs, but the researchers managed to increase the number of responses to 200 responses. However, one (1) (0.5%) of the response was incomplete, and hence the usable responses were 199 responses (99.5%). A questionnaire had been developed. The first part of the questionnaire included questions on the background information of firms and respondents. Information such as gender, age, industry type, state of operations, years of operation, and company size were captured in this section. The following part of the survey instrument was designed to capture information on perceived challenges associated with the internationalization activities related to BRI. The respondents will rate their agreement based on five-point Likert scale
4. Findings
Most of the representative of the SMEs are male (65.3%) and are in the age bracket of 36-34 years old (27.1%) and 46-55 years old (25.1%). Private limited manufacturing SMEs formed the majority of the respondent’s company (40.7%) followed by sole proprietorship (32.2%) and partnership (25.6%). Majority of the SMEs participating in this research are in the service industry (64.8%). The sample also indicates that majority of the SMEs participating in this research are in Kuala Lumpur (38.7%), Selangor (23.1%) and Pulau Pinang (12.6%).
Most of the SMEs in this study have been operating for 11-15 years (24.1%) followed by 5- 10 years and more than 20 years both with the same percentage of 22.6%. Majority of the SMEs in this study have 1-50 employees (81.9%), followed by SMEs with 51-100 employees (12.1%).
Reliability test was next performed on the measurements of perceived challenges. Cronbach’s alpha of 0.935 revealed that the set of measurement was highly reliable. Subsequently, descriptive statistics related to challenges were presented in Table 1. Generally, all the challenges recorded mean values of above the midpoint 2.50. Lack of home government assistance/assistance scored the highest with a mean value of 3.81, followed by excessive transportation cost (3.74), lack of managerial capacity (3.71) and lack of financial resources (3.62). The distribution values reported through skewness and kurtosis are less than ±1 as recommended by Hair et al. (2014) indicating that the pattern of responses is considered a normal distribution.
Table 1 Descriptive Analysis on Internationalsiation Challenges
Challenges
Minimum Maximum Mean Std. Deviation Skewness Kurtosis
Lack of home government
assistance/incentives 1 5 3.81 0.995 -0.488 -0.393
Excessive transportation costs
1 5 3.74 0.985 -0.717 0.295
Lack of managerial capacity
1 5 3.71 0.972 -0.453 -0.316 Unable to obtain reliable foreign representative
1 5 3.68 0.973 -0.38 -0.249
Inadequate trained personnel Lack of financial resources
1 1
5 5
3.67 3.62
0.954 1.002
-0.35 -0.542
-0.317 -0.106 Inability to contact potential China customer
1 5 3.61 1.043 -0.453 -0.386 Lack of capacity in research and development of
offerings 1 5 3.6 1.01 -0.375 -0.484
Limited information 1 5 3.57 0.992 -0.408 -0.279
Difficulty in matching competitors’ prices
1 5 3.54 1.076 -0.48 -0.253 Unable to design good promotion and marketing
campaigns 1 5 3.53 0.989 -0.331 -0.332
Unable to identify foreign business opportunity 1 5 3.48 1.019 -0.401 -0.332
Outdated equipment and facilities 1 5 3.31 1.089 -0.243 -0.512
Outdated ICT 1 5 3.24 1.082 -0.217 -0.542
5. Discussion
The main target of this study was to discover the problems and challenges faced by Malaysia SMEs in internationalisation activities. The empirical result above has indicated the biggest challenges to Malaysian SMEs for internationalization is lacking of government assistance and incentives. This might because most of SMEs are not aware of the government incentive or do not know how to get assistance from the federal government whenever they are having problem in internationalization activities. This has yield significance comprehension showing that the support programmes are not applicably attended on the most notable factors affecting SMEs internationalisation. Lacking of government assistance and incentives were emphasised as the most quoted internationalisation challenges among the researchers claiming that communication gaps between government and SMEs continue to be a critical issue for them (Khoo, 2010). To compete in the international commercial atmosphere, most of the SMEs still need support or assistance from the government to internationalise their business. This is also supported by Samad (2007) who claimed that the responsibility of government is to inspire SME companies to move to greater standard and acquire favourable position in the current information era.
Excessive transportation cost has been underlined as a second challenge to the internationalisation of SMEs. A similar primacy of cost challenges was reported by Daszkiewicz and Wach (2012), claiming that high transportation cost that caused by direct export through a foreign agent, a foreign distributor, a representative office and an own foreign distribution network. To alleviate this challenge, MATRADE was selected as the executive entity of the support programmes to bring up local SMEs to become more robust and aggressive in the international environment. The support programmes like Go-Ex programme which aims to resolve issues encounter by SMEs on new market entry due to the greater initial expenses and the short of insights about emerging markets and competition (SME Corp Malaysia, 2019).
Third challenge arising from lacking of managerial capacity to SME internationalisation. A study of Laghzaoui (2011) reported that a poor managerial skills can restrict the SME to internationalise their commercial activity because the managerial capacity is essential to recognise and seek for future prospect in the markets abroad. This could be explained why most the SMEs cited inadequate trained personnel as forth challenge to the internationalisation of SMEs. At the level of authority, the Malaysian government should provide a clear path for SMEs to be involved in the BRI. This is because BRI is a transnational and complex project. Therefore, government should give more exposure to SMEs to enhance their export skills in administrating some projects in the BRI, in order to avoid slow down and excess of its expenditure.
To enhance SME’s managerial capacity and increase trained personnel, SMEs are
The employees need to be assisted access to ICT and e-commerce inside the organization, in order to be sensitive on the foreign business opportunity. This is because over relying on the national sales is not a wise decision for SMEs, as SMEs be supposed to consider the global market as the BRI used to be a stepping stone for SMEs to expand their business (Lee, 2018).
In view of this, Alibaba Group (the Chineses enormous online business service provider) is also participating in the BRI to stimulate the cross-border business of SME by establishing a eWTP (Electronic World Trade Platform (Khin et al., 2019). SMEs can benefit from a series of preferential policies provided by the eWTP in customs clearance, settlement exchanges and tax refunds (Xinhua, 2019). Hence, the SME owners must assist their employees to use the platform effectively to boost the sales of their products or services outside the country.
Unable to obtain reliable foreign representative has been emerged as a fifth challenge among the responding firms. This is somehow consistent with Crick (2007) who underscored the problem of tracing and acquiring a reliable agent in the intended export destination as the greatest obstacle for SMEs to internationalise their business. This is because numerous of SMEs in developing countries having limited knowledge in expand its distribution channels and thus they need a foreign trade specialist to facilitate all the trading activities on behalf of them. To alleviate this problem, MATRADE has launched SME partnership programme with large corporation by offering some incentive on the partnership. This is because large corporation can share their financial strength and distribution networks with SMEs, since SMEs may not have it given their limited resources to expand their business internationally.
6. Conclusion
This study has discussed the top five perceived challenges to internationalisation SMEs, with the views of unveiling fresh perspective into these challenges. The lacking of home government assistance/incentive, excessive transportation costs, lacking of managerial capacity, inadequate trained personnel and unable to obtain reliable foreign representative has created the top five barriers for SMEs when they want to exploit international market.
Therefore, government may provide incentives and assistance to promote greater involvement of SMEs in cross border trade with the view of lesser trade cost and time as well as increase effectiveness through BRI. To encourage SMEs to involve in internationalisation activity, government may reduce their import duties, lower port charges, and lower duties for imported consumables. On top of policy level, government could introduce better training incentives to encourage SMEs enhancing their managerial and technical skills to deal with internationalisation. This is because the ultimate success of the BRI will be judged based on the extent the infrastructure built under the BRI umbrella is used by traders including SMEs.
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