SMEs in Malaysia still lag in digital adoption – World Bank

• Digital adoption among the country’s SMEs still lag behind those of large firms
• Most firms are interested in government assistance to drive digital solutions adoption 
• SMEs have been underperforming, and the crisis exacerbates the productivity gap

In Malaysia, an overwhelming 98.5% of the 920,624 business establishments in Malaysia are small and medium enterprises (SMEs). Despite being the backbone of the country’s business environment, digital adoption among SMEs lags behind that of larger enterprises, according to the World Bank Malaysia.

The bank, in its 24th Malaysia Economic Monitor: Weathering the Surge report said, “The pandemic has exposed the gaps and exacerbated the vulnerabilities in Malaysia’s private sector. This is especially the case for SMEs, which have been hard hit by both demand and supply shocks. In general, small firms continue to experience more severe revenue shocks than medium and large firms and the same goes for non-exporters compared to exporters.”

As of 2019, SME contribution to the country’s overall GDP stood at 38.9%. That same year, SMEs employed about 7.3 million people, contributing to nearly half (48.4%) to the country’s employment. SMEs in Malaysia are classified into three categories: micro, small, and medium. Micro-enterprises make up 76.5% of Malaysian SMEs. In contrast, medium-sized enterprises comprise only 2.3% of SMEs.

According to the World Bank, Malaysia’s SMEs have been underperforming when compared against peer countries, both in terms of output and productivity levels. World Bank Vice President for East Asia and Pacific Region, Victoria Kwakwa, said “Real-time surveys have shown that Malaysian firms are more vulnerable than their regional peers and that the pandemic is exacerbating issues that the country’s private sector was already grappling with before the pandemic. As a post-pandemic recovery will largely be driven by the private sector, efforts should be made to enhance the resilience of this sector over the medium-to-long term.”

Digital divide among businesses in Malaysia

As more business establishments participate in the digital economy, firms that are left out of this digital revolution will likely struggle to survive, let alone thrive. The World Bank’s report indicated that SMEs in the Southeast Asian-nation have been underperforming and the crisis exacerbates the productivity gap. “Malaysia has a high number of SMEs, but they account for a low share of the activity. Digital adoption among SMEs lag behind those of large firms and firms are interested in government’s assistance for the adoption of digital solutions.”

Only about one in three businesses in Malaysia have implemented digital transformation strategies, while less than one in four businesses have a dedicated digital strategy team. Malaysia also has “fewer businesses with websites, and fewer secure servers than per capita income would predict” compared to other countries. As of 2017, only 37.8% of business establishments in Malaysia have a web presence. 

The World Bank also stated that “large export-oriented firms dominate the digital economy as they adopt e-commerce at higher rates than SMEs.” According to Khazanah Research Institute, digital adoption by SMEs is most concentrated in front-end computing devices and connectivity (below 85%), and least prevalent in back-end business processes such as inventory management (14%) and order fulfillment software (11%). Furthermore, only 44% and 54% of SMEs use cloud computing and data analytics, respectively. For comparison, by 2014, 85% of SMEs in Singapore used cloud computing.

The way forward to harness digital adoption

Given these challenges, policies could be developed to encourage universal digitalisation by businesses, and to bridge the digital divide between firms in the burgeoning digital economy. The goal of such policies is to build an inclusive digital economy so that all parties can reap the benefits of the digital age. Lack of technological knowledge, organizational silos, and costs involved, however, remain barriers to digitalization. 

Thus, it is crucial that inclusive policies be put in place to encourage digitalization by firms of all sizes and to close the digital divide between firms in Malaysia. Perhaps it is time to rethink a few factors including the right digital governance policies, reducing the costs of digitalization, improve the technical skills of the workforce, plus a combination of competition and data protection regulations may help close the digital divide between firms.

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