ENHANCING ORGANIZATIONAL PERFORMANCE OF MALAYSIAN SMEs THROUGH HUMAN RESOURCE MANAGEMENT (HRM) PRACTICES AND ORGANIZATIONAL INNOVATIVE CAPABILITY: IntroductionIt has long been acknowledged that SMEs contribute significantly to overall economic performance in Malaysia. However, the performance of SMEs still has not reached the stage of full potential. Although the number of SMEs hit more than 90% of the total establishments in most countries, including Malaysia, it does not show the strength of a company or industry. In fact, SMEs have been very fragile and more vulnerable to the external environment (NSDC, 2012). This was proven during the current global economic and financial crisis and the 2011 catastrophe in Australia, Japan, New Zealand and the United States (US); Malaysian SMEs also indirectly suffered the impact of the crisis through trade channels of lower export demand and the slowdown in capital flows that affect investment. As declared in the report on the annual survey of manufacturing industries, 2010, following the downturn from the global economic and financial crisis in 2009, SMEs in the manufacturing sector registered a negative growth of 5.6%, which was in line with the overall performance of the manufacturing sector, which recorded a negative growth of 10.7%.

The SME value added also showed a decrease of RM1, 735 million from RM 35,457 million in 2008 to RM 33, 722 million in 2009. This indicates that the decline of SMEs growth is very drastic, compared to four years back, where SMEs showed an increase in healthy growth in 2005 (3.2%), 2006 (7.2%), 2007 (11.8%), and 2008 (12%) as illustrated in Chart 1.1 below. In addition, the literature also found that the failure rate of SMEs is extremely high. Firms may fail at different stages. Some of the firms fail in their early stages while others fail after a few years of their establishment. For instance, a study by USA Small Business Administration noted that some 25% of small enterprises fail within two years, and 63% fail within six years. It was also reported that this similar rate of failure occurred in the UK, the Netherlands, Ireland, Japan, and Hong Kong. Meanwhile, Shepherd and Wiklund also disclosed that almost 50% of new firms survive up to six years and then die off. Similarly, in Malaysia, a report from Portal Komuniti KTAK, 2006, has revealed that the failure rate among SMEs was as high as 60% (N. H. Ahmad & Seet, 2009), and this figure is considered quite alarming.
Among the reasons that most SMEs did not survive in the industry was due to the lack of competitiveness, especially during the economic crisis. This was proven during the economic crisis in 2009; it was found that many SMEs were unable to survive. On the other hand, when the economy recovered in 2010, SMEs recorded the highest growth rate in the manufacturing sector by 11.4%, followed by the service sector (6.8%), construction (5.1%) and agriculture (2.1%) (NSDC, 2011). This improved performance of SMEs in the manufacturing sector was due to the various government stimulus programs under the Economic Transformation Program (ETP) that provide a spillover effect on suppliers thereby benefit SMEs in the manufacturing sector (NSDC, 2011). Thus, it indicates that the SMEs suffered from lack of preparedness, are yet to be considered independent, and still rely on government support to cope with any possibility contingencies in the future. As a result, it is crucial to investigate the reasons behind the high failure rate and low performance among Malaysian SMEs. credit


Chart 1.1: Contribution of SMEs output and value added to the manufacturing sector, 2005-2009