IN MALAYSIA, 98.5% of the 920,624 business establishments are small and medium enterprises (SMEs), serving as the backbone of the nation’s economy. 

However, despite their critical role, digital adoption among SMEs significantly lags behind larger enterprises, as highlighted by the World Bank. 

With digital technologies like artificial intelligence (AI) rapidly transforming industries, the readiness of SMEs to embrace this shift is paramount for ensuring sustained economic growth and positive revenue. 

Bridging this digital gap is not just important but urgent. SMEs must catch up to ensure not just their survival but also the sustained economic growth and positive revenue crucial for Malaysia’s future. 

Small and Medium Enterprises Association Malaysia (SAMENTA) revealed that many SMEs are not IT savvy. 

National secretary Yeoh Seng Hooi said they are dependent on the IT department and the vendor’s recommendation instead of recruiting in-house talent which can drive digitalisation. 

He added digitalisation costs can be paid for with matching grants or soft loans. 

“This is helpful for micro small and medium enterprises (MSME) to go online but not to implement customer relationship management or manufacturing execution systems,” he told The Malaysian Reserve (TMR). 

To address this problem, Yeoh urged SMEs to spearhead the digitalisation initiative by incorporating these tools into their business strategies and understand the process of digitalisation instead of relying on vendors. 

“There are many cases of SMEs investing in enterprise resource planning systems that were not so effective. 

“Systems consultants should better understand the business of the SMEs and recommend a modular strategy that is scalable and affordable,” he said. 

The Khazanah Research Institute (KRI) found that SMEs’ digital adoption is primarily in front-end computing devices and connectivity, with only 44% and 54% using cloud computing and data analytics. 

Digital Adoption Slowed Down Post-Covid-19

As of 2023 to 2024, a total of 21,591 SMEs have adopted digitalisation through Malaysia Digital Economy Corp’s (MDEC) 100 Go Digital initiative. 

MDEC CEO Mahadhir Aziz said SMEs adopted digital solutions and e-commerce during Covid-19 as survival tactics amid lockdowns and social distancing measures. Hence, accelerating digital adoption. 

“In the aftermath of the pandemic, while the initial surge may have moderated, the steadfast commitment to digital transformation persists, underscoring its enduring importance beyond immediate crisis responses,” he told TMR. 

MDEC has been empowering SMEs to fully benefit from digital transformation, thereby boosting their competitiveness and contributing to the overall growth of the digital economy. 

Malaysian SMEs face challenges in implementing digital solutions due to high initial investment costs, limited digital literacy and resistance to change. 

Therefore, MDEC provides financial assistance through grants and subsidies, promoting affordable solutions. 

It also offers skill development programmes, collaborations with educational institutions and consultancy services to help SMEs manage change and innovate. 

MDEC also supports cyber security measures, focusing on rural areas, and assists SMEs in integrating new digital solutions with existing processes. 

It also advocates for the development of digital infrastructure to bridge the digital divide. 

Mahadhir said over the next five years, digitalisation among Malaysian SMEs is projected to undergo significant growth and transformation. 

“These trends indicate a dynamic shift towards a more digitally savvy SME sector in Malaysia, supported by initiatives from organisations like MDEC to foster digital readiness and competitiveness,” he added. 

Malaysian SMEs are expected to adopt cloud computing, e-commerce growth, AI and automation, mobile solutions, sharing or gig economy platforms, cyber security focus, data analytics and sustainability technologies in the next five years. 

Mahadhir also expected cyber security measures to be prioritised and data analytics to transform insights and operational efficiency. Sustainability technologies will also be adopted to minimise environmental footprint. 

SMEs Digital Adoption Challenges

Monash University professor Niaz Asadullah said digital adoption among SMEs drives economic growth and job creation in Malaysia through multiple avenues, including expanding market reach, enhancing productivity and fostering innovation. 

He said access to online marketplaces can help SMEs in rural areas tap into consumer demand across distant locations and its critical impact for SMEs managed by elderly individuals and single mothers. 

He added that digital adoption enables SMEs to participate in the global value chain. “Digitisation streamlines accounting and business procedures, facilitating monetisation of transactions and creating additional revenue sources for the government.

“By integrating digital tools and expanding their footprint in the digital economy, SMEs can streamline operations, cut costs and enhance customer engagement, leading to increased sales and business expansion. This, in turn, creates new job opportunities,” he told TMR.

However, Niaz, who is also the South-East Asia lead of the Global Labour Organisation, attributed the slow adoption to two factors, namely low digital literacy and lack of awareness. 

He said despite various government-sponsored MSME digitalisation and automation subsidies, only a small fraction of businesses has developed clear digitalisation strategies. 

“Even with programmes like the SME Business Digitalisation Grant, 100 Go Digital and SMART Automation Grant offered by MDEC, many SMEs remain unaware of these opportunities, hindered by the complex application process and their own digital literacy limitations,” he added. 

Regarding enhancing digital transformation, Niaz noted the importance of new financial support schemes such as subsidies, grants, low-interest loans, tax incentives and favourable credit terms. 

Additionally, he stressed the value of government-funded training to upskill employees in digital competencies and initiatives to strengthen cyber security awareness and protection measures. 

He said despite existing policies and SME interest in digital transformation, challenges persist. 

“The New Industrial Master Plan 2030 outlines a roadmap for accelerating digital adoption, yet efficacy and outreach of current programmes from responsible agencies remain key concerns,” he added. 

Niaz said the need for scrutinising potential non-users or under-served beneficiaries to understand the low uptake of digital initiatives. 

He said to accelerate digital adoption, governance of existing MDEC schemes must improve, alongside educating SMEs about the economic benefits of these programmes. 

He emphasised that rationalising these schemes, particularly where redundancies and overlaps exist, is also critical. 

Niaz also said low productivity remains a significant industry-wide challenge in Malaysia. 

He said the country’s decline in the Global Competitiveness Index 2022 which underscores substantial gaps in research and development (R&D) and productivity among Malaysian SMEs compared to digi- tally advanced countries like Singapore and South Korea. 

“This disparity is rooted in lower R&D investment by Malaysian SMEs compared to regional ASEAN peers and their limited adoption of complex digital technologies due to technical capability gaps not seen in more advanced economies,” he said. 

Meanwhile, Putra Business School coursework programmes director Assoc Prof Dr Ahmed Razman Abdul Latiff said the main barrier to digital adoption for Malaysian SMEs is finance, as many of them lack sufficient funds for digitalisation and automation. 

He said the government should continue providing financial assistance such as grants or loans to SMEs to upgrade their operations through digitalisation and automation. 

“Simultaneously, there should be upskilling training programmes to enhance the skills of their workforce in managing digitised operations,” he told TMR. 

He acknowledged that digital adoption would reduce SMEs’ dependency on foreign workers, as some tasks become automated and require less manual labour. 

However, this will create a demand for high and medium-technical skill jobs among locals, contributing to job creation. 

“Ultimately, increased productivity through digital adoption will further boost the country’s economy,” he added. 

Urgent Need for Digital Transformation Among SMEs 

Incite Innovations Sdn Bhd group CEO Tham Lih Chung said the urgency for SMEs to embrace digital transformation cannot be overstated. He said as the business world increasingly ventures into the digital domain, those lagging behind face not only the risk of survival but also the challenge of thriving in a rapidly evolving economy. 

He said Malaysia Economic Monitor Febru- ary 2023: Expanding Malaysia’s Digital Frontier report has emphasised the performance gap among SMEs in Malaysia. 

“It highlights their vital role in the economy while underscoring a disproportionate contribution to economic activity. 

“The need for accelerated digital adoption within the SME sector is an undeniable call to action,” he said to TMR. 

Tham said Incite’s database paints a concerning picture, where only one in 20 SMEs in Malaysia has initiated digital transformation strategies, and shockingly, less than one in 15 businesses have a dedicated digital strategy team. 

These statistics go beyond mere numbers; they represent unexplored potential and missed opportunities. Malaysia finds itself trailing in the digital race, a stark contrast to its per capita income and economic potential. 

On the global stage, SMEs play a pivotal role, contributing up to 40% of GDP in emerging economies and generating seven out of 10 jobs. 

Tham explained that digital transformation should not merely boost revenue, as it should also reduce the overall cost of doing business. 

An incremental approach is key, ensuring a sustained strategy that becomes ingrained in the company culture, avoiding short-term fixes. 

He said resource allocation emerges as a critical challenge, demanding strategic decision-making tailored to the unique nature and goals of each business. 

“Established SMEs have a pivotal role to play by guiding their counterparts, sharing insights, understanding the pain points, and fostering collective growth through digital adoption. 

“Frequent monitoring and testing remain imperative, guiding teams to focus on digital investments that yield the most value and ensuring a dynamic and effective decision-making process,” he added. 

Strategies for SMEs Embracing Digital Adoption

Azwin Ecosystems PLT founder Shahril Azwin Zainul Abidin said digital adoption is crucial for SMEs in Malaysia, advocating a customised approach that avoids disruption while driving growth. 

Based on his experience, Shahril Azwin gave some tailored advice for SMEs considering digital adoption. 

Firstly, he said SMEs should assess their current digital capabilities by understanding where their business stands digitally, identify inefficiencies and prioritise improvements. 

“Educate yourself continuously about relevant digital technologies through workshops, webinars or expert consultations to ensure alignment with business goals,” he said. 

He said the importance of integrating digital tools while enhancing customer experience and managing cybersecurity risks responsibly, which Azwin Ecosystems encourages early education and strict access controls to protect digital assets. 

He said regular audits and hands-on training sessions ensure his team and clients navigate digital complexities effectively. 

Besides, he said that Azwin Ecosystems’ focus is on creating a secure digital environment while leveraging AI and other technologies to enhance efficiency and responsiveness. 

He added that adapting to market changes and continuous learning are essential for maintaining competitiveness and relevance. 

Shahril also pointed to the significance of investing in team training to maximise the benefits of digital tools and ensure successful digital adoption. 

He said adapting to rapid technological changes and evolving client needs is crucial, stressing on continuous learning and adaptation to ensure businesses remain competitive in a dynamic digital landscape. 

Moreover, he said it is important to embrace change and leverage opportunities for innovation and growth. 

Shahril also mentioned Azwin Ecosystems’ commitment to ongoing improvement and client-centric innovation, underscoring its dedication to advancing digital adoption in Malaysia’s SME sector. 

“By focusing on education, security and strategic implementation, we empower SMEs to thrive in an increasingly digital economy,” he said. 

Embracing Digital Transformation in Malaysia

New Digital Sdn Bhd CEO and founder Nhu Nguyen said that in Malaysia, there is an opportunity to harness the country’s multi-cultural and multilingual workforce to build a dynamic digital tech team. 

“Through observing industry trends and listening to customer feedback, we recognised that embracing digital technologies was essential to enhance customer experiences and gain a competitive edge,” she said. 

She said key challenges included employee resistance to change, initial technology investment costs and the necessity to upskill the workforce. 

She said in the case of SMEs, businesses were accustomed to traditional methods and hesitant about adopting new systems, on top of financial constraints that posed a significant obstacle, given the substantial upfront investment required for digital tools and platforms. 

Additionally, mastering new technologies involves a steep learning curve, necessitating comprehensive training programmes. 

Nevertheless, Nguyen emphasised that automating routine tasks can boost efficiency and productivity, while data analytics can provide deeper insights into market trends and customer behaviours. 

This will enable more informed decision-making and personalised customer experiences. 

Based in Penang, New Digital Sdn Bhd provides technologies and digital solutions for cross-border e-commerce in rising markets. 

“Our online presence has expanded, reaching a broader audience and driving sales growth. 

“Our multicultural and multilingual digital marketing and tech team has spurred innovation and effectively addressed workforce challenges, enhancing overall operational efficiency,” Nguyen said. 

The company also stresses on security measures, including firewalls, encryption and regular security audits to foster a vigilant culture against cyber threats. 

New Digital’s approach is to simplify digital technology adoption, selecting user-friendly platforms and partnering closely with vendors to provide comprehensive support and training. 

It breaks down the adoption process into manageable steps to help demystify technology and build client confidence. 

“Our digital tech team continues to play a pivotal role in overcoming challenges and enhancing cybersecurity measures, leveraging their diverse skill sets and perspectives. 

“By prioritising affordable yet state-of-the-art technologies, we aim to deliver robust solutions that meet the unique needs of SMEs, empowering them to compete effectively in the digital economy,” she said.