Financing Technology-Based Smes in Malaysia

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Ismail Ab.Wahab

Malaysian Entrepreneurship Development Centre (MEDEC)
Faculty of Business Management
Universiti Teknologi Mara,
40450 Shah Alam, Selangor, Malaysia

Siti Zahrah Buyong

Entrepreneurial Research and Support Centre (ESRC)
Faculty of Business Management
Universiti Teknologi Mara
40450 Shah Alam, Selangor, Malaysia


This paper reports the empirical study that examined the current financing practices and problems of technology-based small and medium enterprises (TBSMEs) in Malaysia. The study shows that, in addition to entrepreneurs’ personal savings and profits retained in the firms, most Malaysian TBSMEs have approached external sources to finance business development. Firms that use external finance rely heavily on debt finance. This empirical evidence confirms the “pecking order theory” as most of the firms follow some preferences in financing. The heavy reliance on debt finance provides an evidence of the existence of an ‘external equity gap’ among TBSMEs. Whilst most firms which applied for financial assistance managed to obtain some amount of funding, there is evidence of some deficiencies in the funding market serving TBSMEs. The amount obtained is insufficient to finance research and development and business expansion, and some financiers require an unreasonable amount of collateral.

Keywords: Financing, small and medium enterprise, small business, technology-based SME, Malaysia


Technology-based small and medium enterprises (TBSMEs) are an important source of both product and process innovation. These enterprises have an important role to play in the emergence of new technology-based sectors of industry and in preserving and enhancing the economic competitiveness of the established industries. It has been acknowledged that having a strong domestic technology sector is essential to the long-term health of an economy (Standeven, 1993).

Over the past decades, many developments have occurred in public and private sector markets serving SMEs in Malaysia. The Malaysian government has established a number of specialised financial institutions and funding schemes aimed at ensuring that SMEs have access to credit at reasonable cost, quickly and with a minimum of paperwork. Despite the wide range of finance options, it is commonly reported that some SMEs have been facing difficulties in obtaining external finance (e.g. Mahmud, 1981; Chee, 1986 & 1992; Salleh et al., 2004).

This paper reports the empirical study that examined the current financing practices and problems of Malaysian TBSMEs in terms of the patterns and sources of external finance and the existence of difficulties in raising external finance.


Baseline Census of Establishments and Enterprises 2005 reported that SMEs accounted for 99 percent of total business establishments, and contributed to 38 percent of total output of these establishments. In terms of employment, SMEs accounted for 55 percent of total workforce of business establishments in the agriculture, manufacturing and services sectors.

Since 1996, both Seventh Malaysia Plan (1996-2000) and Eighth Malaysia Plan (2001-2005) have introduced key support measures, notably fiscal incentives, and offered additional programmes to facilitate the expansion and modernisation of SMEs. During Eighth Malaysia Plan, more than 4 billion ringgit had been approved for the development of SMEs. A total of RM577 million was allocated from this amount for financing SMEs.

The launching of Ninth Malaysia Plan (2006 – 2010) is the latest attempt by the Government to plan comprehensively for the development and promotion of SMEs. Over the five-year period, the Government will promote SMEs with high innovation capabilities to become part of the global supply chain.

The National SME Development...
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