WHAT ARE THE BARRIERS TO SCALING?
Economists and the World Bank note that allocative inefficiency, driven by interconnected structural constraints and frictions within the business environment, remains a central bottleneck to Malaysia’s growth.
Vijil of the World Bank said that any of Malaysia’s frontier small-and medium-sized enterprises (SMEs) which have plans of expanding will have to navigate restrictive, overlapping and cumbersome regulatory and a government-to-business (G2B) services efficiency environment.
For instance, she noted that building and operating a new production facility requires navigating a maze of construction permits and operating licences, a complex process that varies depending on the nature, location, and sector of the business.
“Inconsistent application of regulations and a lack of coordination across various public sector entities add delays, costs and uncertainty, resulting in approvals that can take 24 to 36 months.
“If your new production line depends on imported inputs, obtaining a single import licence takes two months on average, more than four times as long as in aspirational peers. Also, 20 per cent of Malaysian businesses reported that their prices are regulated, twice the rate of aspirational peers, distorting investment incentives,” she said.
Vijil added that capital misallocation remains a challenge, with frontier SMEs and young, highly productive startups continuing to face gaps in access to finance.
She also highlighted skills shortages, noting that firms often struggle to find workers with the capabilities they need most.
“Over one in five exporting firms (and similar patterns in innovating firms) identify an inadequately educated workforce as their biggest operational constraint,” said Vijil.
The World Bank report also said there were signs of brain drain of Malaysian inventors, with Malaysian inventive capacity increasingly being captured by foreign firms.
The report found that the number of Malaysian-invented patents owned by foreign applicants worldwide has increased sharply, while those owned by Malaysian applicants have remained largely stagnant and jointly-owned ones have declined.
It said that as a consequence, the share of Malaysian invented patents owned by Malaysian entities has decreased from around 62 to 63 per cent in the early 1990s to lower than 20 per cent by 2020.
“Overall, the limited performance of Malaysia in technology generation and commercialiation over the last decade suggests that the binding constraint is the business environment influencing firms’ dynamics, rather than limited inventors’ capabilities,” read the report.
Ultimately, these compounding local constraints do more than just stall internal growth, they actively drive firms out of the country.
Economist Geoffrey Williams, director of Williams Business Consultancy, cited the example of technology and ride-hailing firm Grab that left Malaysia for Singapore because of funding hurdles, regulatory capture, and freer overseas markets.
“It had funding issues in Malaysia and went overseas for finance but there was also a fear of expropriation or regulatory capture. Overseas markets are freer,” he told CNA.
Grab was initially established and launched in Malaysia in 2012, but moved its headquarters to Singapore two years later.
The firm has since morphed into one of Southeast Asia’s most valuable tech startups, operating in more than 200 cities across eight countries.
Williams also believed that some of Malaysia’s most productive frontier firms are failing to scale up because they are satisfied with their capture of the domestic market share.
“They have a clear competitive advantage domestically but not internationally and so they stick to local markets which may be protected for them,” he said.
But besides structural barriers such as cumbersome regulations, slow insolvency processes, or capital misallocation, Williams said that there are underlying behavioural factors such as protected status in local markets and the fear of expropriation.
“If companies are too successful they become targets for hostile takeovers. If they access funds from government linked investment companies, they become government controlled,” he said.