Contribution of Small and Medium Enterprise (SMEs) to Malaysia’s Economy

Wong, Dollphin Jia Nee (2025) Contribution of Small and Medium Enterprise (SMEs) to Malaysia’s Economy. Final Year Project (Bachelor), Tunku Abdul Rahman University of Management and Technology.

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Abstract

This study investigates the contribution of Small and Medium Enterprises (SMEs) to Malaysia’s economic development from 1989 to 2022, employing the Autoregressive Distributed Lag (ARDL) model and Error Correction Model (ECM) to assess both short- run and long-run dynamics. The empirical analysis reveals a strong long-term relationship between SME activity and national economic growth, particularly through contributions to GDP, employment generation, and export performance. While SMEs demonstrate resilience and sectoral diversity, especially in services and manufacturing. Their short- term performance remains vulnerable to external shocks, highlighting the need for adaptive and supportive policy frameworks. The research also underscores the role of SMEs in improving the unemployment rate and productivity, with particular emphasis on the significance of loan allocations. Government-backed financial initiatives such as TEKUN Nasional and iTEKAD have shown potential in enhancing SME productivity and innovation. Despite notable progress, structural challenges persist, including limited access to formal financing, technological gaps, and uneven policy implementation. Grounded in the Endogenous Growth Theory, the findings highlight the importance of internal factors such as human capital and innovation in sustaining SME-driven growth. The study concludes by recommending targeted interventions to improve financial inclusion, digital readiness, and workforce capabilities, thereby reinforcing the role of SMEs as engines of inclusive and sustainable economic development in Malaysia.