A Comparative Study on Development of MSMEs and Policies in Indonesia and Malaysia

Abstract

Based on secondary data and existing literature, this paper discusses current development of micro, small and medium enterprises (MSMEs) and their main constraints in two key member states of ASEAN, Malaysia and Indonesia. The selection of these two countries is based on two main considerations. First, Malaysia and Indonesia (together with Singapore and Thailand) have been the key engines of economic growth in ASEAN. Second, given their huge number, MSMEs in these two states are expected to play a key role in the development of ASEAN MSMEs as well as in contributing to economic growth of the region. The paper also discusses MSMEs development policies in these two countries.

Full text

International Journal of Small and Medium Enterprises and Business Sustainability ,Vol.1, No.4 (July 2016), pp 74 - 103
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A Comparative Study on Development of MSMEs and
Policies in Indonesia and Malaysia
Nurulhasanah Abdul Rahman
Management Section,
School of Distance Education
Universiti Sains Malaysia
Email: hasanah.rahman89@yahoo.com
Zulnaidi Yaacob
Management Section,
School of Distance Education
Universiti Sains Malaysia
Email: zulnaidi@usm.my
Ida Busneti
Center for Industry, SME and Business Competition Studies
University of Trisakti, Indonesia
Email: idabusneti67@gmail.com
Tulus Tambunan
Center for Industry, SME and Business Competition Studies
University of Trisakti, Indonesia
Email: ttambunan56@yahoo.com
Abstract
Based on secondary data and existing literature, this paper discusses current development of
micro, small and medium enterprises (MSMEs) and their main constraints in two key member
states of ASEAN, Malaysia and Indonesia. The selection of these two countries is based on two
main considerations. First, Malaysia and Indonesia (together with Singapore and Thailand) have
been the key engines of economic growth in ASEAN. Second, given their huge number, MSMEs in
these two states are expected to play a key role in the development of ASEAN MSMEs as well as
in contributing to economic growth of the region. The paper also discusses MSMEs development
policies in these two countries.
Key words: MSMEs, MSEs, Malaysia, Indonesia, ASEAN,
JEL codes: O1, O2, P5
Introduction
Historically, micro, small and medium enterprises (MSMEs) have been played an
important role in economic development in Southeast Asia (ASEAN). In all countries in
the region, MSMEs are very numerous, amounting to, on average, almost 99% of total
enterprises across sectors. They have always been the main drivers of domestic

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economic activities, contributing to more than 50% to the formation of gross domestic
product (GDP). The enterprises have also been the primary source of employment
creation, which mean that they have made a significant contribution to government
efforts in the region to reduce unemployment, especially among youths, relatively low
educated workers and women.
This paper discusses briefly current development of MSMEs and their main
constraints in two major important countries in the region, namely Malaysia and
Indonesia. The selection of these two countries is based on two considerations. First,
Malaysia and Indonesia (together with Singapore and Thailand) have been the key
driven of economic growth in ASEAN. Second, given their huge number, MSMEs in these
two member states are expected to play a key role in the development of ASEAN MSMEs
as well as in contributing to economic growth of the region.
In Malaysia, SME Corporation Malaysia (SME Corp. Malaysia) is a Central
Coordinating Agency under the Ministry of International Trade and Industry Malaysia
that formulates overall policies and strategies for MSMEs and coordinates the
implementation of MSME development programs across all related Ministries and
Agencies. It acts as the central point of reference for research and data dissemination on
MSMEs, as well as, provides advisory services for MSMEs in Malaysia. In Indonesia, this
responsibility lies with the Ministry for Cooperative and SMEs. This paper also discusses
briefly policies to promote MSMEs in Malaysia and Indonesia
The Importance of MSMEs
From a worldwide perspective, it has been recognized that MSMEs play a vital
role in economic development, as they have been the primary source of
job/employment creation and output growth. Even now it is generally believed that

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sustainable and inclusive economic development depends to a large extent on the
extensive of a vibrant private sector, in particular MSMEs. In developing countries, these
enterprises have also a crucial role to play because of their potential contributions to
employment creation, development of domestic manufacturing industry, improvement
of income distribution, poverty reduction, development of rural economy, export
growth of non-primary commodities, especially manufactured products, and
development of local entrepreneurship.
The importance of this category of enterprises is very obvious because of their
unique characteristics as compared to LEs, which include the followings. First, their
number is huge, and especially micro and small enterprises (MSEs) are scattered widely
throughout rural areas and therefore they may have a special ‘local’ significance for the
rural economy. In countries like Indonesia, the Philippines, Viet Nam and many others
in Asian developing region, a vast majority of MSEs located in rural areas are family
businesses which have been operating since the colonial era. Their existence for many
years reflects traditional skills in making some goods (e.g. furniture, chicken tools,
leather products including footwear) owned by villagers passed traditionally from one
generation to the next that have been taken place for decades. Second, as being
populated largely by firms that have considerable potential for employment growth, the
development or growth of these enterprises constitutes a significant element of policy
to generate employment and income and hence to reduce poverty. Awareness of this
fact may also explain the growing emphasis on the role of MSMEs, especially MSEs in
rural social and economic development. In many Asian developing countries like
Indonesia, Thailand and Viet Nam, the agricultural sector has been shown to be unable
to absorb the increasing population in the rural areas. As a result, migration from
villages to urban areas or big cities has increased dramatically, causing high

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unemployment rates and related socio-economic problems in many cities. While, on the
other hand, non-farm activities in rural areas, especially rural industries have been
shown to be quite a dynamic part of the rural economy. Therefore, governments in
these countries have been giving serious efforts to support rural industries as they have
a great potential to generate rural productive employment, and in this respect MSMEs
has been expected to play the key role since rural industries consist largely of this
category of enterprises. Third, MSMEs use technologies that are in a general sense more
‘appropriate’ as compared to advanced technologies used by LEs to factor proportions
and local conditions. In Indonesia, for instance, various raw materials are locally
available but capital including human capital is very limited, particularly in rural areas.
For this reason, MSMEs especially in rural areas are considered very important to
process local primary commodities to generate more value added for the local as well as
national economy. Fourth, not only that the majority of MSMEs are located in rural
areas, they are also mainly agricultural based as well as agricultural oriented activities.
Therefore, governments efforts to support these enterprises must also be seen as an
indirect way to support the development of agriculture, either through backward
production linkages with the sector (e.g. food processing industries) and forward
production linkages (e.g. industries manufacturing agricultural tools and other inputs).
Fifth, most MSMEs, especially MSEs, finance their operations overwhelmingly by
personal savings of the owners, supplemented by gifts or loans from relatives or from
local informal moneylenders, traders, input suppliers, and/or in the form of payments
in advance by consumers. Based on this fact, there is another important role that these
enterprises can play, namely, as a means to allocate rural savings that otherwise would
be used for unproductive purposes. In other words, if productive activities were not
available locally in rural villages, rural rich or wealthy farm households might keep and

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save their any surplus money for zero interest inside their homes because in many
villages in countries like Indonesia, the Philippines, Viet Nam, Cambodia, and Lao PDR,
there are no banks or other formal non-bank financial institutions, and so for
individuals/households in these villages access to banks are difficult (if not impossible)
and costly since they must go to nearby towns or cities, and it means transportation
costs and time consuming. Or, otherwise, they use their wealth to buy land, cars,
motorcycles, or houses and other unnecessary consumption luxury goods which are
often considered by many people in villages as status symbols. Sixth, although in general
people in rural areas are poor or from low-income group, many poor villagers are able
to save and invest a small amount of money either from their salaries as local civil
servants or teachers or from their revenues as farmers; and they are willing to take
risks in doing so. In this respect, MSMEs provide a good starting point for the
mobilization of both villagers’ talents as entrepreneurs and their capital; while, at the
same time, rural MSMEs can function as an important sector providing an avenue for
testing and developing rural entrepreneurial ability. Seventh, although many goods
produced by MSMEs are also bought by consumers from the middle and high-income
groups, it is generally evident that MSMEs' products are overwhelmingly simple
consumer goods, such as clothing, furniture and other articles and household items
made from wood, bamboo and rattan, leather products including footwear, and various
metal products. These products cater the needs of local poor or low-income consumers.
The enterprises are also important for securing the basic necessities for the poor.
However, many MSMEs also produce simple production tools, equipments, and
machines to meet demands of farmers and producers in the industrial, trade,
construction, and transport sectors (Tambunan, 2015).

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MSMEs in Malaysia
Definition
The definition of MSME in Malaysia (including micro business) refers to the total
number of employees and the firm’s sales turnover (Omar, et al. 2009) as tabulated in
Table 1. The description of small business from SME Corp. Malaysia (2014a) stated that
MSME segregation depends on the sales turnover. Since 2005, the MSME definition is
broader as the sectors are divided into two main sectors namely 1) Manufacturing
(which also covers Manufacturing-related services) and 2) Primary agriculture and
Services (including ICT). The provision for Manufacturing sector comprise of sales
turnover of less than RM25 million OR full-time employees is less than 150. On the
other hand, for Primary agriculture and Services, the prerequisite for sales turnover
must be less than RM5 million OR full-time employees is less than 50 (SME Corp.
Malaysia, 2014a). Starting of January 2014, the MSME definition is revised as the
existing definition has been in place for the past nine years and due to many
developments in Malaysian economy. As such, the price inflation, structural changes and
change in business trends. All of these factors have been taken into account with the
new definition (SME Corp. Malaysia, 2014a). For instance, MSMEs across all sectors, the
sales turnover must be less than RM50 million or full-time employees not exceeding
200 full-time employees (revised 1 January 2014). For more details, refer to Table 1.
MSMEs in Malaysia have a significant contribution towards the GDP and
employment. According to the report by Department of Statistics Malaysia (2015), this
sector contributes 33.1% of the national’s GDP and share 56% of the total employment
opportunity. There are 97.3% of Malaysian business are MSMEs (Hashim, 2015). There
is two percent decrease from previous Economic Census 2011 (99%). The reasons are

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related to the expansion of current MSMEs to large business and also business closure.
It is aligned with other neighbouring countries that showed the fluctuation of MSME
establishments (Hashim, 2015). Refer to Table 2 for a comparison of selected MSME
profile in South East Asia countries.
Table 1 MSME Definition in Malaysia
Category
Micro
Small
Medium
Manufacturing
Sales
turnover of
less than
RM300,000
OR
Less than 5
full-time
employees.
Sales turnover from
RM300,000 to less than
RM15 million
OR
Full-time employees from
5 to less than 75
Sales turnover from RM15
million to not exceeding
RM50 million
OR
Full-time employees from
75 to not exceeding 200
Services and Other
Sectors
Sales turnover from
RM300,000 to less than
RM3 million
OR
Full-time employees from
5 to less than 30
Sales turnover from RM3
million to not exceeding
RM20 million
OR
Full-time employees from
30 to not exceeding 75
Source: SME Corp. Malaysia (2014a).
Table 2 Selected profile of MSMEs in South East Asian countries
Countries
Number of
MSME (%)
Total
Employment (%)
Gross Domestic
Product (GDP) (%)
Export (%)
Malaysia
97.3
57.5
33.1
19
Indonesia
99
97.2
57.8
15.8
Singapore
99
70
14.8
*no data
found
Philippines
99.5
61
35.7
20
Thailand
99.5
84
38.7
29.5
Sources: Ministry of Trade and Industry Singapore (2016); SMECorp. Malaysia (2015);
Wignaraja (2013); APEC (2013); Tambunan (2013); Aldaba (2013)
Current MSME Development and Main Constraints
MSME development in Malaysia is at a high pace because a lot of assistance is
targeted to promote entrepreneurship (Ariff and Abubakar, 2003). Malaysian MSMEs
had shown a remarkable change in terms of its economic contribution (Hussain, et al.,
2010; Khan and Khalique 2014; Ghee, et al.,2015) and national employment

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opportunity (Islam, 2010; Schaper, 2014). In fact, Hashim (2015) proposed that MSME
is one of the possible solutions to achieve a high income nation and Vision 2020. Vision
2020 was drafted by former Malaysian Prime Minister, Tun Mahathir Mohamad in 1991
(Economic Planning Unit, 1991). The main aspiration of Vision 2020 is to modernize
and develop our country based on our own model. In order to achieve Vision 2020,
there is an urgency to have transformation drivers in terms of economic, social and
governmental aspect (Teh, 2009; Islam, 2010). Therefore, the government had outlined
inclusive framework comprising four main pillars to drive change (National Economic
Advisory Council, 2009). The first pillar is 1Malaysia concept. It was introduced in 2009
with the aim to preserve and enhance unity with diversity. The next pillars are
Government Transformation Programme (GTP) in 2010 to ensure effective delivery of
government services and Economic Transformation Programme (ETP) for economic
growth (GTP Roadmap, 2009; National Economic Advisory Council, 2009). Also, New
Economic Model (NEM) aspires to propel Malaysia to be an advanced nation with
inclusiveness and sustainability aligned with the goals proposed in Vision 2020. Apart
from 1Malaysia, GTP, ETP and NEM, Malaysia Plan is among the pioneer development
plan for MSMEs (GTP Roadmap, 2009). Since the First Malaysia Plan (RMK1), numerous
programs are meant to boost domestic market and eradicate poverty. Hence, more
developmental programs are designed for MSMEs as they are part of economic
navigation towards Vision 2020.
Malaysia Plan is one of the main drivers to guide Malaysian trade and industry to
achieve a higher income nation. Since its first plan, numerous economic changes had
been introduced and transformed Malaysia from agriculture-based economy to a more
dynamic market (Farouk, 2012). Therefore, MSMEs are entrusted with more
responsibilities in strengthening the national's economy. The role of MSME in Malaysian

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economic development has shown tremendous contribution to Malaysia especially in
terms of economic performance and job employment (Husin and Ibrahim, 2014).
Although their existence was affected by challenges and weakness of small scale
business, the MSMEs in Malaysia continued to survive until now. Notwithstanding the
effort from government, MSMEs and entrepreneurship is one of the key players in
Malaysia economic growth. Tracing back to the First Malaysia Plan, it is the very first
blueprint in developing Malaysia since Independence Day in 1957. The First Malaysia
Plan (1966-1970) is targeted to support economic equity which is 30% ownership for
the Bumiputera (indigenous people) in economy that was dominated by Chinese firms
(Economic Planning Unit, 2001). The Second Malaysia Plan (1971-1975) is more
comprehensive towards MSMEs as more policies are aims to uphold the local product
and industry. New Economic Policy (NEP) was implemented to improve Bumiputera’s
per capita income and promote entrepreneurship among them (Hashim, 2000). Other
than that, NEP is also aims to increase employment, production and ensure higher
income among citizen as well as to achieve regional dispersion of businesses to secure
better use of the natural resources in Malaysia.
Moving forward to the third until seventh Malaysia Plan (from 1976-2000),
tremendous change had occurred in Malaysian economy with the major contribution of
MSMEs. For instance, the Third Malaysia Plan (1976-1980) acknowledges MSMEs as the
platform to improve economy and restructuring racial economic imbalance (Hashim,
2000). Looking at the importance of MSMEs, Small Enterprise Division was introduced
under the Ministry of Trade and Industry (MITI) in June 1981. After that, under the Fifth
Malaysia Plan (1986-1990), the government started to expand from domestic market to
overseas (Economic Planning Unit, 2012). Besides, research and development (R&D)
with business incentives are introduced to equip MSMEs for more innovative products

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with customer-friendly features (Yee, 2015). The government emphasizes on MSME
export with improvement and modernized products (Hashim, 2000). Moreover, the
Sixth Malaysia Plan (1991-1995) demonstrates that government recognized more
MSME potentials especially in terms of domestic investment. More gateways and efforts
have been carried out to encourage MSMEs for international market. In addition to that,
Ministry of Entrepreneur Development (MED) has been introduced to provide guidance,
training, advice and sponsorship to entrepreneurs (Ariff and Abubakar, 2003).
Subsequently, it changed its name to Ministry of Entrepreneur and Cooperative
Development (MeDC) in 2004 with the similar agendas to accelerate the creation of
Bumiputera Commercial and Industrial Community (BCIC) and achieve 30% equity by
the year 2020 (Hamidon, 2014). See Table 3 for a brief Summary of MSME development
in Malaysia.
According to Malaysia External Trade Development Corporation - MATRADE
(2013), there are numerous ways to tap global market with innovative local products.
Given that allocation and funds for MSMEs are available, it is depends on their efforts to
venture into international business. Among the main government supports for MSMEs
are start-up assistance, business support and to some extent involving MSME
internationalization process (Hamidon, 2014). It has been reported that local products
such as Focus Point (optical/eyewear retail), Voir (multi-brand fashion wear) and Daily
Fresh (snack food retailer) had penetrate global market in Brunei, Dubai, Shanghai and
Indonesia (Lynn, 2015). Penang Regional Development Authority or PERDA is a good
interpretation of an agency (among others in Malaysia) that promotes MSME
development. With the aim to equip entrepreneurs with necessary skills to survive,
PERDA also provide guidance to potential MSMEs to globalize their products/services.
Among programs arranged for MSMEs are entrepreneurship trainings, product

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marketing courses, business centre, incubator projects and MSME consultation with
invited speakers from successful MSMEs (PERDA, 2016).
Table 3 Brief Summary of MSME development in Malaysia
Year
MSME Development
Remark
Long Term Agenda
1991
Vision 2020 - To modernize and
develop Malaysia country based on
own (local) model
1Malaysia, GTP, ETP & NEM are four main
pillars to drive Malaysian change
2009
1Malaysia – To emphasize ethnic
harmony, national unity, and
efficient governance in Malaysia
The values of 1Malaysia: Perseverance, A
Culture of Excellence, Acceptance, Loyalty,
Education, Humility, Integrity and Meritocracy.
2010
GTP - To address seven key areas
concerning the people of the
country.
Areas are: 1) Reducing Crime. 2) Fighting
Corruption. 3) Improving Student Outcomes. 4)
Raising Living Standards of Low-Income
Households. 5) Improving Rural Basic
Infrastructure. 6) Improving Urban Public
Transport. 7) Addressing Cost of Living.
2010
ETP – To lead Malaysia into a high
income economy by the year of 2020
To improve Malaysia's gross national income
(GNI) to US$523 billion by 2020, per capita
income from US$6,700 to at least US$15,000
and meeting the World Bank's threshold for
high income nation
2010
NEM - To transform Malaysian
economy to become one with high
incomes and quality growth by 2020
At the time of the plan's unveiling in 2010, per
capita annual income in Malaysia stood at
RM23,100 (approximately $7,000 in US
currency). The plan's stated goal is to reach
RM49,500 (US$15,000).
Malaysia Five-Year Plan
1966
Malaysia Plan - To promote the
welfare of all citizens, and improve
the living conditions in rural areas,
particularly among low-income
groups
Targeted to support economic equity which is
30 percent ownership for the Bumiputera
(indigenous people) in economy. Also, to uphold
the local product and industry for SME
development.
Sources: Hashim (2000); Economic Planning Unit (2001); Teh (2009); GTP Roadmap (2009);
Islam (2010); Farouk (2012); Hamidon (2014)
Looking at another angle, the development of Malaysian MSMEs is also indirectly
draw attention to its challenges. As governments are trying to improve the current
market for MSMEs, the vast establishment of new business creates new issues. Similarly
in other South East Asian countries, the main issue for MSMEs is related to the financial
support (Aldaba, 2013; Gunto and Alias, 2013; Khan and Khalique, 2014). In addition to

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that, lack of access to technology and skills are the second highest reason for business
closure (Beh, 2013; Kazimoto, 2014). In fact, by comparing MSME challenges in other
South East Asia countries, the highest barrier to local business is the access to
finance/credit (Wignaraja, 2014). Also, most of MSMEs in ASEAN economies recorded
“other” and “Practices of competitors in informal sector” as their main constraints in
business. These practices refer to a variety of negative activities such as smuggling
product/goods, price fixing, anti-competitive practices and poach of skilled workers.
Worth to note that, Malaysia is the only country that perceived these practices as less
serious than other ASEAN economies. This data suggest that Malaysian MSMEs have
higher level of trust among them (Table 4).
Table 4 MSMEs Constraints in ASEAN
Countries
Main Constraint (%)
Less Serious Constraint (%)
Malaysia
Tax Rates (31.1)
Supply of telecommunication (9.3)
Indonesia
Access to finance (38.6)
Supply of telecommunication (6.6)
Philippin
es
Competitors practices: Informal sector
(44.5)
Supply of telecommunication (7.6)
Thailand
Political instability/economic
uncertainty (84)
Access to land (11.7)
Vietnam
Access to finance (39.4)
Political instability/economic
uncertainty (2.3)
Source: Wignaraja (2014)
Government Agencies for MSMEs and MSME Development Policy
Small and Medium Industries Development Corporation (SMIDEC) was
established in 1996 to spur the MSME development by providing financial assistance,
advisory services, business facilities and other support programs (Khan and Khalique,
2014). SMIDEC aims to develop Malaysian MSMEs to be competitive in the global
market. In 2004, National SME Development Council (NSDC) was established as the
highest policy-making body to formulate strategies for MSME development across all
economic sectors. The set up of NSDC is also to coordinate tasks from various ministries

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and agencies to ensure effective implementation of MSME development programs in
Malaysia. In 2007, under the Ninth Malaysia Plan (2006-2010), there is a remarkable
change to Malaysian MSMEs. Government intensifies MSME support with the
establishment of numerous new agencies and assistance to the start-up company.
However, at the same time, some of the policies have low public participation and affect
the policy performance (Ariff and Abubakar, 2003) which leads to the establishment of
SMECorp. Malaysia. It was introduced to become a central reference for any MSME
related issues, act as the information centre and advisory service to MSMEs (SME Corp.
Malaysia, 2013). Since that, SME Corp Malaysia is the central coordination agency for all
MSME programs, policies and strategies for MSME development.
Moving on to the latest development of MSME in 21st century is relying on how
innovation and technology had changed the world of marketing across countries.
According to Hashim (2015), CEO for SME Corp. Malaysia, MSME development is a new
strategy for better economic growth for Malaysia. As at January 2015, 97.3% of business
establishment in Malaysia is derived from MSME which account for 645,136 businesses.
The service oriented firms alone represent 90% of the business and overall, MSMEs had
achieved 33.1% of GDP with 19% of export earnings. Since 2010 to 2014, Malaysian
GDP is rising up to 5.5% to 6% whereby for the MSMEs, the GDP is accelerating its
growth by 6.5% to 7% (Hashim, 2015). By comparing the GDP for Malaysian economy
and MSMEs, the latter one is portraying a higher rate. With this regard, MSMEs
contribution is estimated to boost Malaysian economy in the near future. Further, this is
the reason that placed MSMEs as a significant to the research focus in current literature.
By comparing to the GDP around the world, the standard MSME GDP for low
income countries is at 16% while for middle income countries is at 39%. As a note to
Malaysian, in order to become a high income country, the contribution of MSME’s GDP is

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should be at least at 51% (SME Corp. Malaysia, 2015). However, as at January 2015,
Malaysian MSME’s GDP is not even touching the middle income nations’ GDP for MSMEs.
In fact, align with the intensive efforts by government and non-profit bodies to promote
MSMEs; Malaysia is ranked as number one for six consecutive years for Access to credit
since 2007 which reflects a strong financing network in Malaysia (Hashim, 2015). MSME
developments for the new century are diverse and targeted to foster further growth of
local products and services. Among the current policies or programs are including Third
Industrial Master Plan - IMP3 (2006-2015), Tenth Malaysian Plan – RMK10 (2011-
2015), Economic Transformation Plan – ETP (2011-2020) and SME Master Plan (2012-
2020).
The Third Industrial Master Plan (IMP3) highlights Malaysia development
program for the year 2006 to 2015 (Table 5). With the theme towards global
competitiveness, IMP3 aims to achieve long-term global competitiveness through
transformation and innovation of the manufacturing and services sectors. Therefore,
vast development programs marked for MSMEs are inclusive. For instance, among IMP3
thrusts are developing and promoting Malaysian brands, nurturing domestic companies
(including GLCs and MSMEs) to become globally competitive and enhancing Bumiputera
human capital (Hasbullah, 2015). At the same time, the Tenth Malaysian Plan – RMK10
(2011-2015) sets the stage for major structural transformation that a high-income
economy requires (Economic Planning Unit, 2014). In addition, it is aligned with the
objective of New Economic Model (NEM). One of the critical pillars in achieving Vision
2020 is the Economic Transformation Programme (ETP). It is meant to transform
Malaysia into a developed and competitive economy whose people enjoy a high quality
of life and high level of income from growth that is both inclusive and sustainable
(National Economic Advisory Council, 2009). Strategic Reform Initiatives (SRI) is the

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driver to form the basis of the relevant policy measures under ETP (Prime Minister
Office, 2014). Considering the significant of MSME in Malaysian economy, new
approaches are launched as new way of doing business. Among policy measures are
include creating eco-system for MSMEs and innovation, promote MSME growth,
improve entrepreneurial skills, flexibility funding and many more (National Economic
Advisory Council, 2009).
Table 5 Current MSME Policies/Programs
Year
MSME Policies/programs
Remarks
2006
Third Industrial Master Plan - IMP3
(2006-2015)
IMP3 aims to achieve long-term global
competitiveness through transformation and
innovation of the manufacturing and services
sectors
2011
Tenth Malaysian Plan – RMK10
(2011-2015)
Major structural transformation that a high-
income economy requires – ETP, NEM, GTP and
SRI. SRI stands for Strategic Reform Initiatives
2011
Economic Transformation Plan –
ETP (2011-2020)
SRI- The driver to form the basis of the relevant
policy measures under ETP
2012
SME Master Plan (2012-2020)
This plan highlights : Finance,
internationalization to promote greater
regionalization, technology adoption, raising
awareness for Intellectual Property (IP) adoption
and having business continuity plans
Sources: Prime Minister Office (2014); National Economic Advisory Council (2009); Hashim
(2015); Hasbullah (2015)
In addition to that, a much more systematic approach is introduced which is SME
Master Plan. It is known as ‘game changer' to accelerate the MSME growth to achieve
high income nation status by 2020. The Masterplan will be for all MSMEs in Malaysia,
irrespective of sector, gender, geographical region and ethnic background (SMECorp.
Malaysia, 2013). According to the SME Annual Report 2014/15, on the long-term
development of MSMEs, the international community focuses on several areas to
alleviate the constraints to MSME growth and promote long-term sustainability. As
such, finance, internationalization to promote greater regionalization, technology

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adoption, raising awareness for Intellectual Property (IP) adoption and having business
continuity plans are highlighted (SMECorp. Malaysia, 2014b). SME Masterplan
highlights the registration and licensing of business to enhance ease of doing business.
In the new global economy, technology and innovation play a crucial role in promoting
local products and services. In that sense, SME Master plan established technology
commercialization platform and foster inclusive innovation. The inclusive innovation
includes ‘Innovation targeted at masses’ and 'Innovation from grassroots' to empower
the local MSMEs (SMECorp. Malaysia, 2013). This plan is the most reviewed programs
for MSMEs and targeted to improve MSMEs contribution to GDP in Malaysia. Also, it
aims to move up the value chain as currently MSMEs are concentrated in low value-
added activities. In a long run, it is expected to vision MSMEs with globally competitive
across all sectors that enhance wealth creation and contribute to the social well-being
(see Table 5).
MSMEs in Indonesia
Definition and Key Characteristics
In Indonesia there are several definitions of MSMEs, depending on which agency
provides the definition. However, Indonesia has also a national law on MSMEs. The
initial law was issued in 1995 by the State Ministry for Cooperative and SME, namely
the Law on Small Enterprises Number 9 of 1995. It defines a small enterprise (SE) as a
business unit with total initial assets of up to Rp 200 million, not including land and
buildings, or with annual sales of a maximum of Rp 1 billion, and a medium enterprise
(ME) as a business unit with annual sales of more than Rp 1 billion but less than Rp 50
billion. Although the law does not explicitly define microenterprises (MIEs), data from
the State Ministry for Cooperative and SME on SEs also include MIEs. In 2008, the

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Ministry issued the new Law on MSMEs Number 20, replacing the 1995 Law. According
to this new law, MSMEs are those annual sales/turnovers up to Rp 50 billion and fixed
investment (excluding land and building) less than Rp 10 billion (Table 6).
Table 6 Definition of MSMEs by the Law No.20, 2008
Size category
Annual Sales/turnover
Fixed/productive assets
MIE
≤Rp300mi
≤Rp50m.
SE
> Rp300m - ≤ Rp2500m.
> Rp50m. - ≤ Rp500m.
ME
>Rp2500m - ≤ Rp50b.
>Rp500 m. - ≤Rp10 b.
Source: Menegkop & UKM (www.depkop.go.id).
Besides this law, the National Agency of Statistics (BPS) has its own definition
based on total employees, namely MIEs, SEs, and MEs are units with 1-4, 5-20, 20-99
workers (not including the owners), respectively. Units with workers more than 99
persons are considered as large enterprises (LEs). In reality, however, these
subcategories of MSMEs in Indonesia (as in other developing countries) are not only
different in total number of employees, annual revenues, or value of invested
capital/assets as criteria to define them, they can also be distinguished easily from each
other by reference to their different characteristics. Such characteristics include
formality or ways of doing business, market orientation, social-economic profiles of
their owners/producers, nature of employment, organization and management system,
degree of mechanization (nature of production process), sources of main raw materials
and capital, location, external relationships, motivation, level of entrepreneurship, and
degree of women’s involvement as entrepreneurs (Table 7). As said before, in
Indonesia, probably in other countries, more women entrepreneurs are found in MSMEs
than in LEs, and within the MSMEs group, MIEs have more women as business owners
than in SEs and MEs for the following two key reasons: (i) for conducting activities in
MIEs, not so much capital, advanced technologies and high formal skills are needed,
because in general MIEs are very simple income generating activities such as food

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production, food stalls, shops selling basic goods, trade, and handicraft; (ii) because of
simple and very small activities, no special space is needed and especially for married
women, they are more easy in using their time between servicing their customers an
doing their required domestic works.
Table 7 Main Characteristics of MIEs, SEs, and MEs in Indonesia.
Aspect
MIEs
SEs
MEs
Formality
operate in informal sector,
unregistered & pay no
taxes
some operate in formal
sector, registered & pay
taxes
all operate in formal
sector, registered & pay
taxes
Location
Majority in rural areas/
villages
Many in urban
areas/cities
Mostly in urban
areas/cities
Organization &
management
- run by the owner
- no internal labor division
-no formal management &
accounting system
(bookkeeping)
- run by the owner
- no labor division
(majority),
-majority no formal
management and
accounting system
(bookkeeping)
-many hire professional
managers, -many have
labor division, formal
organizational structure &
formal accounting system
(bookkeeping)
Nature of employment
majority use unpaid
family members
some hired wage laborers
-all hired wage laborers
-some have formal
recruitment system
Nature of production
process
- degree of mechanization
very low/mostly manual
- low level of technology
some use up-to-date
machines
many have high degree of
mechanization/access to
modern technology
Market orientation
majority sell to local
market and for low-
income consumers
-many sell to national
market and export
-many serve also middle
to high-income group
-all sell to national market
and many also export
- all serve middle and
high-income consumers
Social & economic profiles
of owners
- low or uneducated
- from poor households
- some have good
education, and from non-
poor households
- majority have good
education
- many are from wealthy
families
- motivation: profit
Sources of inputs
- majority use local raw
materials and use own
money
- some import raw
materials
-some have access to bank
and other formal credit
institutions
- many use imported raw
materials
- majority have access to
formal credit sources
External networks
- majority have no access
to government programs
and no business linkages
with LEs
- many have good
relations with government
and have business
linkages (such as
subcontracting) with LEs .
- majority have good
access to government
programs
- many have business
linkages with LEs.
Motivation
to survive
- some for profit, some for
survival
Profit maximalization
Level of entrepreneurship
Low
Medium
High
Women entrepreneurs
ratio of female to male as
entrepreneurs is high
ratio of female to male as
entrepreneurs is high
ratio of female to male as
entrepreneurs is low
Sources: Tambunan (2012, 2016)

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Current Development and Main Constraints
As in many developing countries, MSMEs in Indonesia are very numerous,
amounting to almost 58 million in 2013 (Table 8). They have always been the main
drivers of domestic economic activity in Indonesia, accounting for more than 99% of all
existing firms across sectors. They provide employment opportunities for over 90% of
the country’s workforce. Especially MSEs, they generate a significant amount of not only
primary but also in many cases, secondary income sources for low-income households.
For instance, in many small or poor farm households, men (husband) work in the field
while women (their wives) own small businesses at home making simple handicraft
items or food products, or running small shops selling basic need items.
Table 8 Total enterprises by size category in all economic sectors in Indonesia,
2009-2013 (units)
Size category
2009
2010
2011
2012
2013
MIE
52,176,795
53,207,500
54,559,969
55,856,176
57,189,393
SE
546,675
573,601
602,195
629,418
654,222
ME
41,133
42,631
44,280
48,997
52,106
LE
4,677
4,838
4,952
4,968
5,066
Total
52,769, 280
53,828,570
55,211,396
56,539,559
57,900,787
Sources: Menegkop & UKM (www.depkop.go.id) and BPS (www.bps.go.id).
Production in MSMEs also continue to increase every year, with the exceptional
in 1998 when Indonesia was hit severely by the Asian financial crisis during the period
1997-1998, which led the country's economy for the first time since the independence
in 1945 to experience a negative growth up to 13% in 1998 (Figure 1). In that particular
year, when the crisis reached its climax, many MSMEs had to reduce their production or
out of business for at least three main reasons: (i) imported raw materials they used
increased significantly in rupiah as the country currency depreciated more than 200%,
(ii) domestic demand dropped as many employees in LEs became unemployed because

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many big companies and banks collapsed, and (iii) loan from bank became very
expensive as interest rate increased significantly or access to it became very difficult.
Figure 1 Growth of Value Added in MSMEs, 1997-2013
(Rp billions in constant market price),
Source: Menegkop & UKM (www.depkop.go.id)
MSMEs' share of GDP has always been higher that that of LEs. As can be seen in
Figure 2, in 2006, at constant market price, MSMEs contributed 58.49% to the formation
of Indonesian GDP, and the latest data which are available show that their share has
increased slightly to around 60.34%. But this figure does not mean that the
performance of this category of enterprises is much better than that of LEs. It is simply
because the number of units of MSMEs is very huge. As in other countries, they are the
majority of enterprises in Indonesia. This suggests thus that the level of labour
productivity in MSMEs is much lower as compared to that in LEs. Within the MSMEs
themselves, the GDP share of MSEs are always higher than that of MEs (not shown in

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this figure). Again, this is mainly because MSEs dominate MSMEs in term of number of
units
The majority of MSMEs in Indonesia are engaged in the agricultural sector,
including animal husbandry, forestry, and fisheries. The second important sector for
MSMEs is trade, hotel and restaurants, and within this sector, women as business
owners are dominant in retail trade and restaurants (Table 9). In the manufacturing
industry, Indonesian MSMEs are traditionally not as strong compared to LEs or to MSMEs
in Asian developed economies like Japan, Taiwan, and South Korea (where traditionally
they are well presented in production linkages with LEs as suppliers or vendors, especially
in the automotive, electronics, and machineries industries). This Indonesian structure of
MSMEs by sector is, however, not unique to Indonesia. It is a key feature of this category of
enterprises in developing countries, especially in countries where the level of
industrialization and income per capita are relatively low. Within the industry
manufacturing, units owned or managed by women are mainly found in food processing
and handicraft industries.
Figure 2 GDP Shares of MSMEs and LEs in Indonesia, 2006 and 2013 (%)
Sources: Menegkop & UKM (www.depkop.go.id), BPS (www.bps.go.id)

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Table 9 Distribution of MSMEs GDP by Key Sectors, 2007-2011 (%)
2007
2008
2009
2010
2011
-Agriculture
-Trade
-Services
-Transportation
-Manufacturing industry
-Others
24.4
27.1
17.9
6.4
16.2
8.0
26.1
25.5
17.0
5.9
16.7
8.8
27.4
24.2
16.5
5.5
16.4
9.9
27.8
24.4
16.4
5.5
16.4
9.6
23.5
26.7
16.8
5.1
18.3
9.6
Sources: Menegkop & UKM (www.depkop.go.id), BPS (www.bps.go.id)
Further, based on national survey data by National Statistics Agency (BPS) on
MSEs in the manufacturing industry, Table 10 highlights the main constraints faced by
these enterprises. It shows that only a very small proportion of the surveyed
respondents indicated that high energy prices or short supply of energy as a serious
constraint. However, the proportion of those considering high price or short supply of
fuel/energy as their most serious problem has been found to vary by groups of industry.
Table 10 MSEs in the Manufacturing Industry by Main Constraints in Indonesia,
2010 and 2013
2010
2013
Status
Total units
%
Total units
%
Have no serious obstacles
599,591
21.94
839,903
24.57
Have serious obstacles
2,133,133
78.06
2,578,463
75.43
Total respondents
2,732,724
100.00
3,418,366
100.00
Serious obstacles:
Total units
%
Total units
%
Lack of capital
806,538
37.81
957,339
37.13
Marketing difficulties
495,100
23.21
535,176
20.76
Lack or high prices of raw materials
483,581
22.67
629,542
24.42
Other main constraints
184,516
8.65
267,612
10.38
High labour costs or lack of skilled
workers
88,952
4.17
102,611
3.98
Transportation / distribution
obstacles
39,676
1.86
39,255
1.52
High price or short supply of energy
34,770
1.63
46,928
1.82
Total respondents
2,133,133
100.00
2,578,463
100.00
Sources: Tambunan (2008a,b) and BPS (2010, 2013)
MSMEs Development Policies
The Indonesian government always sees the existence of MSMEs in the country
is very important, especially for the following two considerations, namely poverty

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reduction through employment creation and GDP growth, either directly, i.e. MSMEs
produce final goods or services for the market, or indirectly through subcontracting
with LEs, including in Indonesia located foreign companies. Therefore, since the
beginning of the New Order era (1966) up to the present time, numerous types of
government direct intervention to support the development and growth of these
enterprises have been tried at one time or another. Many promoting programs have
been introduced and implemented, which include various subsidized credit schemes,
such as credit for small farmers and village cooperatives (KUD), credit for village units
(KUPEDES), and small-scale credit (KIK, KMKP, KUK, and recently KUR); development of
small rural development banks (BKD); technical assistance; trade promotion; and many
human resource development/vocational trainings in production technique, general
management (MS/MUK), entrepreneurships, and many others.
In 1995 the Indonesian government introduced the basic law regarding
MSMEs, i.e. the 1995 Small Enterprise Act No. 9. The purpose of this law is to assist the
activation of MSMEs to lead to further development in the economy as a whole, and also
to provide a legal framework upon which these enterprises may develop. In 1998,the
Government Ordinance for the Development of Small Enterprises No. 32 was enacted.
This government ordinance sets out policies for the development of MSMEs that are
strong and independent, which are also a source of strength in the development of the
national economy. In 2008, the government issued the new Law on MSMEs Number 20,
replacing the 1995 Law. The main point of the revision is that because of the current
fast changing economic conditions and globalization, the definition for “small
enterprise” no longer supports fair and effective policy development, and based on
these conditions there is a need for a separation into MIEs, SEs, and MEs. The main
important points in this new law include the followings (OSMERI, 2008):

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i. the expansion of funding sources for MSMEs, and the necessary strengthening of
the credit guarantee system. For this purpose, state owned companies (BUMN)
maintain a proportion of their profits for financing of MSMEs, providing credit
guarantees, and the central and regional governments and industry contribute,
as well as assistance from overseas, and the central and regional governments
combine to provide capital for micro and small enterprises;
ii. for MSEs to obtain funding, they must meet the application conditions, whereby
loans are based on a strict financial examination, and the ability to repay the loan
and related interest is called into question. For the development of SMEs, the
central and regional governments promote access to the capital markets and
obtain investment funds and operating funds, and make the restructuring of bad
loans to medium enterprises by developing financial institutions and also
increasing export financing functions;
iii. regarding subcontracting by LEs, the LEs are to provide the appropriate amount
of raw materials at a fair price, and expand fair funding and payment systems
and provide cooperation in leadership and technological development for
production and management skills, and not make unilateral decisions;
iv. the merger of MSEs with foreign companies is set out in a separate law;
v. where MEs or LEs exercise control over MSEs under a cooperative relationship,
they shall each be fined up to 10 billion rupiah and 5 billion rupiah respectively;
and
vi. entities that use the name of a MIE, SE, or ME to obtain favorable lending
conditions and to obtain unfair profits shall be subject to imprisonment for up to
5 years and a fine of up to 10 billion rupiah.

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Since the beginning of the so-called reformasi era soon after the fall of the
Soeharto regime in May 1998, policies for the development of MSMEs are set out in the
country's mid-term plan, which is included in the Masterplan for the Acceleration and
Broadening of Indonesian Economic Development 2011-2025 (MP3EI), The following
five points are the aims for the development of MSMEs in the mid-term plan:
i. to increase productivity of MSMEs;
ii. to increase the proportion of MIEs and to a certain extent, SEs, still operating
informally, in formal sectors;
iii. to increase the exports of MSMEs;
iv. to develop systems for new business training based on technological
developments; and
v. to improve qualitatively cooperatives to supports MSMEs.
As lack of access to financing is among several serious constraints facing many
Indonesian MSMEs, providing special credit schemes to the enterprises has been among
key elements of MSMEs promotion policies in Indonesia. In response to the fact that
many MSMEs, especially MSEs, have no valuable assets as bank collateral, Indonesia
government has established Credit Guarantee Corporation (CGC) in 2007, based on the
National Enterprise Financing Presidential Directive No. 5 of 2007 was promulgated in
November 2007. Its main aim of the establishment is to help especially MSEs which do
not have any or not enough collateral. The most popular credit scheme for especially
MIEs introduced some years ago is KUR (people based small business loans). This is a
non-collateral based credit scheme which is guaranteed by insurance companies. The
major points are the followings (OSMERI, 2008):
i. loans guaranteed up to a maximum of 500 million rupiah;
ii. annual interest on loans at a maximum of 16 per cent per annum;

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iii. for credit guarantees, 70 per cent of the risk shall be borne by credit guarantors
and 30 per cent of the risk shall be borne by financial institutions;
iv. fees for the guarantee shall be 1.5 per cent of the amount of the loan, and this
expense shall be covered from the national finances; and
v. financial institutions responsible for conducting management examinations of
companies that have borrowed funds.
The main policy challenge into the near future will be to speed up the
development of technology based MSMEs, preferably in the kind of technology that
conforms to the current global discourse on sustainable development that embeds with
three key domains, namely:
i. environmental sustainability,
ii. social sustainability, and
iii. economic sustainability.
In that spirit, the main feature of the development policies for MSMEs consists of:
(a) improvement of their access to technology, (b) improvement of their access to
finance, (c) improvement of their access to market, including abroad, (d) technology
diffusion and commercialization scenarios through business incubation and partnership
with LEs, including foreign direct investment (FDI) (e.g. subcontracting arrangements),
and (e) provision and creation of conducive environment to support new business
ventures.
Conclusion
In this comparative review, Malaysia has a single official definition of MSMEs
whereas Indonesia has a few definitions as provided by different agencies. A further

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review on the development and challenges of MSMEs of both countries leads to these
main conclusion:
(i) the MSMEs contributes significantly to the economy growth of both countries,
Indonesia and Malaysia. The both governments have implemented various
strategies, plans, and policies to support the development of MSMEs. The current
direction is on developing more vibrant MSMEs that can compete globally by
producing a high-quality product that are innovative and technology driven; and
(ii) two main constraints of MSMEs in both countries are financial and marketing
related issues. As in many other countries, MSMEs in Indonesia and Malaysia are
having constraints of inadequate capital in expanding their business. Although there
are many efforts done by various government agencies to overcome this issue, the
accessibility of MSMEs towards the financial assistance provided is still a problem
that needs to be addressed. Also, most of MSMEs are also unable to market their
product to the international level due to inadequate marketing skills and financial
constraints. This situation has a negative impact towards the competitiveness of
MSMEs particularly in reaching the international market.
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