By Dr Carmelo Ferlito
“In essence, technological development can occur when Keynesian animal spirits, or positive profit expectations, are awakened and find the right environment for meaningful competition. Within these competitive processes, concentration dynamics emerge, enabling further technical progress through the exploitation of economies of scale.”
One of the main weaknesses, although not extensively discussed in policy debates, is the fragmented nature of Malaysian capitalism, encapsulated by the dichotomy between Micro, Small and Medium Enterprises (MSMEs) and large corporations.
In 2021, Malaysia had a total of 1,259,234 registered firms, with 1,226,494 being MSMEs (97.4%). This implies that, in terms of numbers, MSMEs nearly encompass the entire landscape of operating firms in Malaysia. Notably, 964,495 firms (76.59% of the total and 78.64% of MSMEs) were microenterprises, 242,540 (19.26%) were small firms, and only 19,459 (1.55%) were medium-sized enterprises.
MSMEs Snapshot
MSMEs play a crucial role, with the majority operating in services and employing nearly half of the workforce across various industries.
Sector Distribution
Service Sector: 83.85%
Construction: 8.01%
Manufacturing: 5.84%
Agriculture: 1.93%
Mining: 0.37%
Workforce Impact (2021)
Overall MSME Employment: 47.2%
Agriculture: 42.2%
Construction: 48.2%
Services: 49.5%
Manufacturing: 46.2%
Mining & Quarrying: 27.9%
The partial picture that emerges so far is that a country’s economy is dominated, in terms of the number of firms, by microbusinesses. MSMEs, in their entirety, represent more than 97% of the registered firms and employ almost half of the workforce. However, the question remains: How much do these MSMEs contribute to the national economy?
When we look at MSMEs’ contribution to the Gross Domestic Product (GDP), the figures tell a distinct story. In 2021, MSMEs accounted for 37.36% of Malaysia’s GDP, slightly down from 38.13% in 2020 and 38.86% in 2019. Notably, their impact was more significant in agriculture (55.25%) and construction (48.27%), while their contribution was less than 40% in services and manufacturing and just 2.79% in mining.
The data is straightforward: 97.4% of Malaysian firms contributed 37.36% to the GDP, while the remaining 2.6% (large enterprises) generated 62.64%.
The dispersed nature of Malaysian capitalism—which I would define as an archipelago—is confirmed by one of the most used indexes to measure industrial concentration, the Herfindahl–Hirschman Index (HHI). According to the guidelines of the United States Department of Justice, an industry is highly concentrated when HHI is above 2,500 (and up to the maximum level of 10,000), moderately concentrated with an HHI between 1,500 and 2,500, and an index below 1,500 characterises a low level of concentration.
According to the data collected by the World Integrated Trade Solution (WITS), provided by the World Bank, the Herfindahl-Hirschman (HH) market concentration index for Malaysia was 800 between 2015 and 2018. However, it increased to 900 in 2019 and further rose to 1,000 in 2020. Therefore, despite experiencing an upward trend in recent years, the level of market concentration in Malaysia remains low. This aligns with the depiction of a dispersed archipelago of firms emerging from the data provided by the Department of Statistics Malaysia (DOSM) mentioned above.
Following the traditional textbook definition of competition, an economist should be pleased to observe the low level of concentration within Malaysian capitalism and the prevalence of a model of semi-perfect competition. However, my stance is critical in this regard.
In fact, I believe that such a capitalistic structure poses an obstacle to addressing some of the most debated topics in policy conversations. The first concern is related to low wages and social mobility: as per the ongoing debate, Malaysia faces challenges with low and stagnant wages, and this condition acts as an incentive for the phenomenon of brain drain.
The situation is accompanied by a rise in skill-related underemployment. The upward trend in skill-related underemployment predates the Great Lockdown, and, although moderating, it remained high at 36.7% in Q2-2022, significantly exceeding the 31.4% recorded in 2017.
However, a fragmented structure of capitalism is not solely a barrier to wage increases and social mobility. Two additional challenges that necessitate the promotion of industrial concentration are social protection and technical progress. These issues also hold considerable significance in policy discussions.
The Malaysian social protection system is often deemed inadequate and a hindrance in the battle against poverty. While global experience teaches us that large-scale government-run welfare systems are inefficient and economically unsustainable, the only path for employees to access better social protection conditions is to work for large enterprises. These companies, generally more resilient to economic crises, are better positioned to provide comprehensive protection, including medical coverage.
In the current stage of capitalism’s evolution, as described by Joseph A. Schumpeter (Business Cycles, 1939; Capitalism, Socialism and Democracy, 1942) and later by his disciple Paolo Sylos Labini (Oligopoly and Technical Progress, 1957), technological leaps are conceivable only within the process of industrial concentration. These advancements occur not as a result of government planning but rather emerge from economies of scale precisely fostered by the competitive process.
Furthermore, and precisely for this reason, technological leaps cannot be enforced through centralised policy decisions. New production techniques, ceteris paribus, will only be adopted if they are anticipated to yield a greater “return from a given investment of factors” (F.A. Hayek, The Pure Theory of Capital, 1941).
From a policy perspective, the initial step should involve removing policy-induced obstacles to the process of industrial concentration. A case in point is the rice industry, which is artificially kept fragmented and underdeveloped due to unfavourable policies.
Strategies to Boost Entrepreneurial Growth
Trade Liberalisation
Why? Access to a broader market leads to higher demand.
How? It motivates enterprises to grow and fosters international competition through economies of scale.
Entrepreneurial Networks
What? Cooperative partnerships among companies via a “Contract of Network.”
Why? Enhances collaboration, facilitates sharing of information and provides mutual support.
Benefit: Special fiscal treatment to encourage and reward entrepreneurial collaboration.
Implementing these strategies can empower entrepreneurs, facilitate market access and create a supportive environment for business growth.
In essence, technological development can occur when Keynesian animal spirits, or positive profit expectations, are awakened and find the right environment for meaningful competition. Within these competitive processes, concentration dynamics emerge, enabling further technical progress through the exploitation of economies of scale.
ABOUT THE WRITER
Dr Carmelo Ferlito (born in Verona, Italy, in 1978) serves as the CEO of the Center for Market Education (CME) and is a senior fellow at the Institute for Democracy and Economic Affairs (IDEAS) in Kuala Lumpur, Malaysia. Additionally, Dr Ferlito works as a research advisor for Provalindo Nusa Property in Jakarta, Indonesia. He holds the position of visiting professor at Taylor’s University in Subang Jaya, Malaysia, and is a Senior Fellow (Southeast Asia) at the Property Rights Alliance in Washington, DC, USA.
