SME digital economic outlook

by: Prof. Yeah Kim Leng, Director of Economic Studies Program at Jeffrey Cheah In­stitute on Southeast Asia

In Malaysia’s dynamic business landscape, SMEs can become disruptors, be disrupted or continue to operate in the business-as-usual (BAU) ways. For many SMEs, the BAU option across many industries is shrinking as new competitors emerge from within the country and from abroad.

The BAU approach in the digital age is being threatened by various disruptive forces. These include changes in demographic make-ups, tastes and preference, digital globalisation, technological advancements and policy shifts. The constant change and innovations require SMEs to be agile, creative and innovative.

The last three forces, namely, globalisation, technology and policy changes, are relevant in discussing how the recently launched Digital Free Trade Zone (DFTZ) will affect the business environment for SMEs in the years ahead.

While global financial and trade flows have levelled off after the global financial crisis, digital globalisation continues to record explosive growth. This is measured by cross-border bandwidth and digital flows of information, internet searches, video, communication and e-commerce.

Internet technology, especially digital platforms, is transforming the way business is conducted. It is creating markets and user communities on a global scale. Through digital platforms, businesses can create and reach a huge potential customer base. As one writer puts it succinctly, it is transforming small SMEs into “micro-multinationals”.

Familiar names such as Alibaba, eBay, Amazon, Uber and Airbnb have created new platforms for e-commerce and online businesses that have steadily encroached into conventional markets and transformed the ways in which businesses are organised and competitive advantages are created.

Business-as-usual models are threatened when

  • Customers are not able to get what they want and where they want it (e.g. taxis, hotels)
  • Customers must buy the whole product or service when they need only part of it (e.g. insurance, full service airlines)
  • Product offering, pricing and advertising are not effective (supermarkets, bookstores, restaurants, resorts, colleges, hospitals)
  • There are intermediary fees and middle-men (e.g. financial products, money changers)
  • Customers must obtain the product in person (e.g. groceries, rental cars)
  • There is high potential for network effects (e.g. trading platforms, online education, training and research services, information and research networks, payment systems)
  • There is entrenched physical distribution or retail networks (postal networks, taxi and bus services, insurance agencies)
  • Information transparency between customers and suppliers is low (e.g. used car dealerships, lending activities)
  • Product or service could be enhanced through information or social media (financial products, personal services, educational and training services
  • Lack of dominant platform governing interactions between users and suppliers (wholesaling and retailing, payment systems, exporting and importing)

The broad intention of a DFTZ, as in the case of the conventional free trade zone, is to reduce the regulatory and administrative impediments for moving goods across borders. Within the geographically defined free trade zone, goods can be imported, handled, manufactured or reconfigured, and re-exported without tariffs and customs’ intervention.

The EFTZ that has been created in collaboration with Alibaba is aimed at facilitating e-commerce, defined as the online purchase of goods and services. E-commerce also covers the transmission of funds or data over an electronic network, primarily the internet. The online transactions are categorised as business-to-business (B2B), business-to-consumer (B2C), consumer-to-consumer (C2C) or consumer-to-business (C2B).

With the establishment of a logistics hub and an internet hub in Malaysia, Alibaba is poised to increase its market penetration in Malaysia and the Southeast Asian region. While concerns have been expressed over the risk of it becoming a conduit for cheap imported goods and an increase in foreign competitors, SMEs must be proactive to leverage on the opportunities that will be created with the direct presence of Alibaba.

Just as Amazon has launched new business models to further leverage its user base and logistics capabilities, and used its tangible server assets to offer cloud-based labour services (Mechanical Turk) that match freelance workers with demand for their labour, we can expect Alibaba to introduce new platforms to boost wholesale trade in goods and services that can enable Malaysian SMEs to become “micro-multinationals”.

The fear of monopoly and unfair trade practices in the DFTZ is mitigated by the intense competition among major and emerging digital agencies, the openness of internet-based markets, and wider benefits of inclusive growth for SMEs for which the creation of the DFTZ is aimed at.

The outlook for SMEs therefore increasingly hinges on their ability to harness digital technology and tap into trading opportunities made available by global digital platforms and the supporting infrastructures and logistics catalysed by the DFTZ.

It is hoped that more SMEs will prosper by riding on Alibaba platforms as well as through the increased participation of local and foreign e-commerce players in the specially created digital economic zone. Malaysian consumers will not only be spoilt for choice but also enjoy lower prices due to cost savings made possible by increased competition, enhanced efficiency and greater economies of scale.

By Prof. Yeah Kim Leng | 29 April 2017 

Professor Yeah Kim Leng is the Director of Economic Studies Program at Jeffrey Cheah In­stitute on Southeast Asia at Sunway University and Professor of Eco­nomics at Sunway University Business School. He is also an external member of Bank Negara Malaysia’s Monetary Policy Committee. The views expressed in this article are his own.

First appeared in the Malaysian Insight

Modified by Low Wai Sern