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Deciphering why Malaysia is alluring for Japanese investors and what it means for SMEs

Deciphering why Malaysia is alluring for Japanese investors and what it means for SMEs

20 Dec 2023

Small and medium enterprises (SMEs) play an instrumental role in Malaysia’s economy. They represent a remarkable 97% of its companies and contribute half of the country’s employment. However, the Covid-19 pandemic laid bare vulnerabilities within this ecosystem, impacting productivity and emphasising the imperative for sustainable strategies. In response to this transformative event, seasoned business owners have begun to look beyond the boundaries of their organisations.

Mergers and acquisitions (M&A) have come to the forefront as a possible strategic avenue, aligning personal aspirations seamlessly with overarching business objectives. External partners and investors can help address pressing challenges, including the intricate management of cash flow and the vital process of digital transformation.

Japan’s corporate leaders have increasingly shown a strong interest in Malaysia. This magnetic allure is deeply rooted in various factors that harmoniously converge to create a unique opportunity. The region’s rapid economic growth, coupled with a burgeoning middle class and escalating consumer expenditures, paint a canvas of promise.

What makes Malaysia so attractive?

In this landscape, Japanese enterprises perceive Malaysia not only as a strategic gateway but as a dynamic launchpad into the rapidly expanding Southeast Asian market. They adeptly harness Malaysia’s abundant resources and robust connectivity to achieve their ambitions. Positioned as one of the region’s most accessible economies, Malaysia’s business-friendly and multilingual environment and competitive operational costs further sweeten the proposition.

Japan’s significance to Malaysia’s economy is undeniable. It is, in fact, one of the country’s most prominent sources of foreign direct investment (FDI), injecting an impressive RM91 billion (US$27 billion) in 2022, leading to the creation of 336,000 jobs, according to Malaysia’s Ministry of Finance. Japan is Malaysia’s fourth-largest trading partner with a trade volume of RM181 billion (US$41 billion).

The great momentum of growing intra-Asian trade flows is uplifting Malaysia’s SMEs. However, many small business owners find themselves devoid of the resources and insights needed to fully harness the potential of international trade. Strategic expansion, such as through acquisitions, becomes a challenge that seems elusive.

Beyond that, concerns have arisen over business succession risks, financial constraints, and the complexities of regulatory compliance. In the face of these multifaceted challenges, a crucial question arises: how can the cherished legacy of small Malaysian businesses be fortified in an era defined by increasingly globalised economies?

Japanese investors appreciate the repertoire of skilled workers and professionals, as well as the agility to meet the demands of thriving industries, particularly in manufacturing. This prowess has been meticulously nurtured through Malaysia’s robust emphasis on technical and vocational education, ensuring that its youth is equipped with the aptitudes and skills that are so pivotal in the contemporary economy.

The cultural component

The promising partnership hinges not only on the tangible aspects of economic prowess but also on the intangible bedrock of culture, values and business etiquette. It encompasses a deep-seated respect for hierarchy, an appreciation for decision-making processes and a reverence for seniority.

The relationship thrives upon the nurturing of enduring relationships. As Japanese investors engage with their Malaysian counterparts, the importance of forging robust personal connections takes centre stage. These interactions manifest not only within formal meetings, but also find resonance within the nuances of informal gatherings, underpinning the foundation of effective engagement within the intricate sphere of Japanese business culture.

Japanese counterparts offer solutions to many of these challenges, given their shared affinity with Malaysia’s small business sector. In Japan, SMEs account for approximately 99% of all enterprises, mirroring their significance within Malaysia. These entities play a central role in upholding local economic stability and community livelihoods.

However, the ageing management and the scarcity of potential successors strain many firms. Data from the Small and Medium Enterprise Agency forecasts that by 2025, nearly 2.5 million Japanese SMEs will be helmed by individuals over 70 years of age. A declining population results in a shrinking domestic market, propelling the need to seek growth overseas.

Furthermore, plummeting birth rates and an ageing population exert pressure on the labour market. Innovation and technological advancement offer a sustainable solution for the future, alleviating immediate strains. Malaysian companies stand to benefit from Japanese expertise in research and development, manufacturing, services and coveted management methodologies, positioning themselves to navigate forthcoming transformations. It encompasses exposure to refined management practices and also offers a gateway into Japan’s sophisticated consumer market.

In this context, we posit that embracing M&A serves as a strategic beacon for SMEs. M&A assumes a pivotal role for Japanese enterprises seeking a foothold in the Asian market, with Malaysia serving as a pivotal gateway. Through M&A, Japanese investors secure a bridgehead to Malaysia’s growing consumer base and the array of regional prospects it offers. This symbiotic relationship emerges as an avenue for both nations to foster growth, cultivate resilience and embark on a journey of shared prosperity.

Source: The Edge Malaysia