Infernal Ramblings
A Malaysian Perspective on Politics, Society and Economics

Why Can't Businesses Expand?

Written by johnleemk on 12:37:57 pm Jul 8, 2007.
Categories: ,

There is a remarkable lack of competitive enterprises in Malaysia. Although this is most apparent at the level of large corporations, there is also a deficit of successful entrepreneurs at the lower levels.

That is not to say that there aren't smalltime entrepreneurs. There are plenty — look at any street corner and you are likely to find Ramly burger vendors, ais kacang hawkers, and the like.

The problem is, none of these people ever seem to be successful. Humans are naturally enterprising — even the worst economic basket case has its entrepreneurs — but humans expect rewards for their enterprise. The Malaysian economy does not seem to reward enterprise.

In a free market, the good entrepreneurs would be rewarded with greater profits and thus the power to expand their business. The poor ones would make losses and leave the market in the long run.

I assume that the poor entrepreneurs end up quitting, since we see businesses closing all the time. But how come the good businesses don't expand? Why are there so few homegrown shopping centres, so few homegrown restaurant chains, so few homegrown manufacturing giants?

If Malaysian entrepreneurs make profits, they seem to choose to stuff them under their mattresses or burn them rather than investing them in expanding their businesses. Shaving with Occam's razor, the likeliest conclusion is that the good entrepreneurs make roughly the same amount of profit as average entrepreneurs, and thus lack sufficient resources to expand their businesses.

Alternatively, we could argue that although these entrepreneurs have the financial resources to expand, they are constrained by other restrictions such as legal problems and the stifling of new entrants to the larger market.

If you ask me, it is fairly obvious that our economy is not operating under a truly free market system, but rather is shackled by government control. This is particularly obvious at the macro level, but the same insidious stuff seems to be occurring even when it comes to dealing with small entrepreneurs.

Nearly every successful business story in Malaysia is the result of government intervention. Those few who have largely made it on their own, like Lim Goh Tong, did so by entering a business with huge profits — the business of taking money from the ignorant who gamble away their earnings. (And even then, if not for government regulation of the casino industry, Lim's profits might have been severely reduced by competition.)

Smalltime entrepreneurs find it hard to expand for a number of reasons, I believe. One is the legality of their existing business — many vendors openly operate in areas where such hawking is ostensibly forbidden.

Because they are thus technically in the black market, as the Peruvian economist Hernando de Soto has noted, they find it difficult to secure credit to expand, and also run the risk of everything going to waste if the police get tough, creating a disincentive to invest too much in their business.

This problem could be solved by simply issuing licences to those who want to hawk in such restricted areas, for a price. Those who cause too much problems to the community, such as vendors who park their mobile stands at places where they cause significant traffic disruption, can have their licences revoked, without harming those entrepreneurs who operate without harming the community.

The issue of stifled competition is another one. Some might accuse multinationals, such as Tesco and McDonald's, of erecting barriers to entry in the market. This is perfectly possible, but I argue that there is another, perhaps more likely possibility.

That is, entrance to the larger market for successful entrepreneurs is restricted by bureaucratic red tape. It may simply be too troublesome for potential franchisees to wade through the cesspools of bureaucratic paperwork and pay bribes just to get their businesses approved. This is a problem multinationals are not likely to face, because the same bureaucrats are more likely to respect the economic power a multinational corporation holds.

These are all hypotheses — I don't pretend that they are the whole, or even part of the answer to the question of why businesses in Malaysia can't expand. But the basic problem exists, and unless we can find the source of this problem, our economy will continue to be reliant on a transient natural resource instead of the permanent enterprise of our people.

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Infernal Ramblings is a Malaysian website focusing on current events and sociopolitical issues. Its articles run the gamut from economics to society to education.

Infernal Ramblings is run by John Lee. For more, see the About section. If you have any questions or comments, do drop him a line.

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