As a small, open, and upper middle-income economy, Malaysia relies on international trade to sustain its economy.
This is reflected in the trade to gross domestic product ratio consistently surpassing 100 per cent from 1979 until 2020, according to data from the World Bank. In 2020, the ratio was 116.5 per cent.
Small and medium-sized enterprises (SMEs) in the services sector represent 85.5 per cent of SMEs in Malaysia and 9.1 per cent of total exports in 2019.
So, stepping up the internationalisation of these SMEs is paramount to achieve the target in the 12th Malaysia Plan 2021–2025 of increasing SME contribution to GDP to 45 per cent and contribution to exports to 25 per cent in 2025.
However, SMEs face challenges in venturing into international markets, such as low export capabilities, little understanding of foreign markets, limited access to financing, inadequate knowledge of competitors, and constraints in human capital.
Innovation is also an area they are lacking. Addressing these issues is pertinent as Malaysian SMEs have become increasingly involved in global trade and require competitive strategies.
The government has provided various support programmes from financing, capacity and capability building to market information and others to help SMEs venture into international markets.
Various free trade agreements (FTAs) and mutual recognition arrangements have also been signed at the bilateral, regional, and multilateral levels to help Malaysian companies penetrate FTA partner countries.
Alas, the international performance of SMEs in the services sector remained weak as reflected in the widening services trade deficit.
In 2020, the deficit was RM47.4 billion, our highest ever. The question is, how do we nudge these SMEs into international markets?
First, to play in bigger oceans, SMEs' attention, belief formation, choice and determination need to be focused on the importance of going international.
SMEs also need to think regional or international even if they are newly established. They must realise the vast opportunities available in international markets.
They must be willing to gain new experience even if they had failed in previous ventures.
Second, our SMEs and the intervention programmes offered by various parties need to focus on enhancing human capital.
SMEs need to move away from the traditional way of managing human capital by embedding knowledge in all aspects of human resource management, including recruitment, training and development, compensation, and others.
Third, SMEs need to focus on building dynamic capabilities in entrepreneurial orientation, foreign market knowledge, building networking, and marketing and technological capabilities.
Fourth, focus on improving the capability of SMEs in the services sector to innovate. Equipping human capital with dynamic capabilities may lead to the creation of innovative offerings.
SMEs need to continuously invest in this aspect in light of the dynamic nature of businesses and international markets.
Finally, government support is also pertinent to help SMEs penetrate international markets. A study showed that government support has the strongest effect in international performance.
In formulating intervention strategies for SMEs, the government may need to pay attention to the nature of service firms. This is in light of the differences between service firms and those in other sectors or industries.
In short, a tailored export development model is needed for service firms as replicating the model used by the goods sector may not yield optimum outcomes.
This pertains to the high reliance of SMEs on human capital in creating and delivering innovative services that could facilitate their internationalisation.
To conclude, SMEs in the services sector need to invest in building human capital to create innovative offerings that could influence their international performance.
At the same time, SMEs should invest in enhancing their capabilities in entrepreneurial orientation, marketing and technological capability, networking, and foreign market knowledge to optimise their capability to innovate.
Government support is also pertinent and need to be leveraged by SMEs in the services sector, which are known to have limited resources, innovative capability, and market knowledge in order to grow and perform better internationally.
The writer is a federal government officer with a PhD in Business Economics