DYNAMICS OF SMES AND LINKAGES WITH MULTINATIONAL

CORPORATIONS: SOUTH JOHOR, A CASE STUDY

APPROACHAsokkumar K.S. Malakolunthu asokmal2005@yahoo.com

Research AssociateAsia-Europe Institute, University of Malaya

West Lake Conference on Small and Medium Businesses

October 24-29, Hangzhou, PR China

BandarPenawar

Tg. Belungkor

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Mersing

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South China Sea

P. Gudang

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Kluang

Air Hitam

Yong Peng

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PAHANG

MELAKA

NEGERI SEMBILAN

Map 1.1: Development Regions of Johor

Legend1. South Johor (1,970 sq. km)2. Central Johor3. North Johor4. East Johor5. South most is Singapore (690 sq. km)

1999 2004

Number of firmsOutput in RM millionElectronicsElectricalAnnual growthEmploymentExports in RM million (2000)Imports in RM million (2000)

>900129.8 B42.8%57.2%18.4%381,000219.5155.0

>1000187.652%48%12.9%400,000269.6218.1

Table 1.1 Malaysia’s E&E Industry: Comparison

1999 and 2004

Theoretical FrameworkThe extent of knowledge flows and spillover that multinational intentionally or unintentionally engender at host sites depends on three main factors:

(1)The conduct (especially investment, technology and access to markets) of foreign and local firms;

(2) Technological gap between foreign and local firms; and

(3) Embedding environment at host-sites (e.g. domestic market, political stability, factor and raw materials inputs, and government policy, basic and high tech infrastructure, and skills development centres).

Framework of Analysis

This paper attempts to deepen the evolutionary approach by examining the impact of embedding environment on the technological levels of foreign and local firms.

More specifically it attempts to assess differences in technological capabilities between and within firms by ownership across a set of economies with differences in institutional and systemic strength.

The evolutionary logic leads to the assumption that inter-region firm level differences in technological capabilities would vary with differences in the science and technology infrastructure (see Dosi, 1982; Pavitt, 1984).

This paper extends this logic further by examining patterns of differences within SMEs, foreign firms and between them and local firms based on actual interviews.

Research MethodologyThis study surveyed two groups of E&E manufacturers, namely the large firms and SMEs both local and foreign owned.

The direct face to face method is used for the survey and this is complemented by the findings from an earlier related questionnaire survey.

Six major MNCs in the E&E industry located in South Johor are selected based on purposive sampling selection method and one was proposed by the SMI Association of South Johor and another proposed by the local E&E industry as the most successful local MNC.

Some successful and some not so successful SMEs were chosen to examine the reasons why they evolved they way they did.

Core Competences Mould and Die

Industry

Metal Stampi

ng Industr

y

Plastic Injection Industry

Electro-plating, die-casting, foam, PCB and

Others

Delivery 1 1 1 1Price competitiveness 2 1 1 2Quality competitiveness

1 2 1 2

Precision level/technology

2 3 1 2

Hands-on management 1 1 1 2Willingness to embrace new technology/educational level

1 1 1 2

Design capability 1 2 2 2Flexibility in production 2 1 1 1R&D 3 3 3 2

Table 1.2Summary of Core Competences of Supporting E&E SMEs

1 = strong competence, 2 = mixed competence, 3= weakSource: Author’s interview with the firms

Weaknesses Mould and Die

Industry

Metal Stampi

ng Industr

y

Plastic Injection Industry

Electro-plating, die-casting, foam, PCB and Others

Marketing 1 1 1 2Low technology 2 1 1 2Low automation 2 1 2 2Poor production planning 2 1 1 2Poor factory management (5S/Kaizen/QC/Layout

2 1 1 2

Human resource development/training

1 1 2 2

R&D Capability 2 1 1 2Price not competitive 1 2 2 2Need to develop own product/increase value added

2 1 1 2

Table 1.3Summary of Weaknesses of the Supporting E&E SMEs

1 = main weakness, 2 = mixed weaknessSource: Author’s interview with the firms

Indicator Total Values

SMEs (%)

Large (%)

Total (%)

No of firms 20,204 93.8% 6.2% 100%Total Output (RM million)

273,439 27.3% 72.7% 100%

Cost of Input(RM million)

201,901 27.8% 72.2% 100%

Value Added(RM million)

101,752 25.8%RM36,86

2

74.2%RM64,89

0

100%

Workers 1,449,000

38.9% 61.1% 100%

Fixed Asset(RM million)

112,831 27.6% 72.4% 100%

Table 1.4 Comparison of Indicators of SMEs and Large Industry, 2004

Source: SMIPD, MITI (2005)

Indicators Small Medium Large TotalGross output/worker(RM’000)

84.7 114.6 235.7 224.7

Value added/worker(RM’000)

27.2 34.8 53.3 51.6

Fixed assets/worker(RM’000)

37.6 40.9 53.9 52.7

Unit labour cost

0.14 0.11 0.06 0.06

Table 1.5 Productivity Indicators for the E&E sub-sector, 2004

Source: SMIPD (2005)

Some of the weaknesses can be categorized as below;

(i)Limited capability in meeting market liberalization and globalization

(ii) Limited capacity in technology management and knowledge acquisition

(iii) Low productivity (higher production cost)

(iv) Low product quality (high rate of rejection by MNCs)

(v) Shortage of critical manufacturing skills in new business environment; especially ICT, e-commerce

(vi) Limited access to finance and capital

(vii) General lack of knowledge in product certification, best manufacturing practices such as green production, etc.

The UNCTAD report went on to list four different types of linkages and spillover effects that are possible to foster between local SMEs and large firms.

Productivity gains

Factor cost advantage

Passive flexibility

Active flexibility

SMEs and Global Production Network

Low cost suppliers with limited organizational capability

Low cost suppliers mastering modern organizational principles

Innovative specialist supplier

Case studies of successful large firm-SME linkages in South Johor showed the following factors are important to foster such linkages:

(i)facilitation of SMEs’ access to large firms’ innovative processes;(ii) assignment of large firms’ staff including engineers and management consultants to SMEs; and (iii)phased upgrading of production capacities starting with operations, plant layout and moving on to design capability, flexible manufacturing, ISO certifications and R&D capabilities.

Conclusion and Policy Recommendation

The findings of these interviews confirmed the worrying trend in Malaysian SMEs that their specialization is of low technology and progression towards improvement is slow by industry standards.

Given the fact that spillovers can never be measured effectively and because it is the potential that developing economy governments should work towards appropriation at host-sites, the case is clear for shifting the focus of spillovers from actual to potential.

Rasiah, R. and M.Asokkumar., 2008. “Foreign Ownership, Technological Intensities and Economic Performance of Electronics Firms in Malaysia”, Asia Pacific Business Review, Vol. 14(3).