THE years 2024 to 2025 have been a challenging, and survival-mode period for many micro, small and medium enterprises (MSMEs), characterised by rising operational and compliance costs, regulatory and tax changes, profit margins being severely squeezed by inflation and increased business costs, tight cash flow conditions as well as worker shortages for some sectors.
It was a double whammy for SMEs – not only did they face soaring domestic operating costs, but also coped with significant foreign competition pressures amid the shift in global trade policy and ongoing geopolitical uncertainties.
While many SMEs maintained “cautious optimism” and continued to operate, their profit margins were severely squeezed by high operating costs and rising competition.
Foreign competition has intensified to a point that is causing disruption to domestic SMEs, with many local players describing the current environment as a “suffocating” battle for survival.
The influx of foreign businesses, for some, have bypassed local intermediaries, leveraging capital resources and digital platforms, alongside scale advantages to penetrate local market.
In many cases, foreign firms use strategic agility and “involution” (intense, high-volume competition) to outperform domestic rivals.
They leverage domestic digital ecosystem and superior technology, offering competitive prices, effectively catching up to or surpassing local SMEs in operational speed and efficiency as well as services.
For example, foreign companies are aggressively leveraging their strong product branding and visibility at home base, operational efficiency, and cultural as well as language narratives to expand into overseas market.
Their domestic market presence covers broadly from the manufacturing, trading, construction and services into direct-to-consumer, branded retail.
Additionally, MSMEs are facing a challenging “hyper-competitive” environment from foreign businesses, which are leveraging visa-free facility to Malaysia, to conduct hand-on market survey and business opportunities, and, in some cases, operate without proper work permits.
The impacted retail services are freelance jobs, renovation, lifestyle offerings, wedding services and trading services.
Following constant feedback, including on the ground checking from the business groups and chambers, the government is actively monitoring and managing the impact of foreign businesses.
We welcome the formation of a multi-ministry task force in February 2026, to tackle the negative impacts of certain foreign business activities and the misuse of social visit passes by foreign nationals.
The task force covers legal, policy, enforcement, and monitoring aspects to ensure a fair and competitive business environment for local entrepreneurs.
To be led by the Finance Ministry, the task force members comprise the Investment, Trade and Industry Ministry or Miti, Home Ministry or KDN, Domestic Trade and Cost of Living Ministry or KPDN, Entrepreneur and Cooperatives Development Ministry or Kuskop, and the Housing and Local Government Ministry or KPKT.
Following an influx of foreign food and beverage (F&B) brands and retail expansion, KPDN is reviewing 2020 guidelines to impose tighter controls on new branch approvals for foreign entities starting in 2025.
There are loopholes in the guidelines, which are outdated, among other things, the number of square feet for the construction of specialised F&B outlets before approval is granted.
It cited an example of an overseas F&B brand that received construction approval, adding that the number of outlets has now reached its limit.
Introduced in the 2025 budget, “Made by Malaysia” initiative and supply chain incentives have been established to encourage multinational corporations (MNCs) and large firms to increase local sourcing, strengthen local supply chains, and fill industrial gaps.
While promoting market and trade openness, Malaysia has generally adopted a “mixed” approach, combining free-market principles with strategic government guidance to foster the growth of domestic industries, particularly SMEs.
Competition is viewed as an inevitable, even necessary, compelling domestic businesses to enhance their resilience and avoid complacency.
Businesses want a regulatory environment that ensures a level playing field, conforming to regulations and fair business practices.
Recognising MSMEs as a vital engine of growth, we propose a four-pronged approach to helping local enterprises in strengthening their competitive edge and continue growing as champions.
First approach is to review outdated regulations to protect the interests of local enterprises while supporting a fair, rules-based, and well-regulated business environment.
These include to review “Guidelines on Foreign Participation in the Distributive Trade Services Malaysia” (Guidelines) with a view of enforcing it, and provides a clearer and expanded Negative List, which “prohibits” or “restricts” certain industries, including reviewing the procedures of scrutinising of business applications by the local authorities (PBT) in coordination with KPDN; considering to raise the current threshold of minimum capital requirement for foreign establishments from RM1mil to RM2mil to obtain a wholesale and retail trade licence.
In comparison with countries in Asean, the threshold of minimum capital is 100 million baht or RM13mil in Thailand; Indonesia is around US$610,000; and Philippine is around US$430,000.
Additionally, to encourage domestic-foreign business partnerships as well as integration with domestic SMEs in local supply chains, can consider to implement local content requirements such as sourcing of raw materials and employment of local manpower.
Second approach is to strengthening enforcement operations through coordinated and inter-agency efforts to combat complex, multi-faceted compliance issues, such as unauthorized employment, tax evasion, and unlicensed business activities. By pooling resources, market intelligence, and surveillance from local governments, tax authorities, and labor departments, enforcement becomes more effective, efficient, and better targeted.
Third approach is to ensure foreign direct investment (FDI) complements rather than dominates domestic industries. We must encourage FDI in new and growing sectors such as advanced technology and green industries, with a major emphasis on enhancing local supply chain linkages with domestic SMEs. FDI and foreign businesses should be discouraged in sectors that Malaysian industries already have sufficient capacity as these would contribute to over-capacity, resulting in a supply glut and unhealthy price war.
Fourth approach is to set up a centralized and comprehensive database listing all legally registered foreign businesses in Malaysia. A single repository enables better planning, improves data accuracy, and facilitates real-time decision-making. The database would provide a single authoritative source to verify and track operational status, ownership, and other relevant details, enhancing transparency, oversight, and market monitoring.
How can SMEs compete in domestic market in a globalized world? SMEs are no longer protected from foreign competition and local buyers and suppliers are becoming more sophisticated. To compete effectively, SMEs must adapt and reshape themselves to facilitate adjustments and enhance learning for their growth and business development.
As foreign businesses often bring in scale and competitive pricing, local SMEs must differentiate themselves through better customers’ experience, localized knowledge advantage by continued adaption of products to meet local tastes, implementing competitive pricing and enhancing local marketing efforts. Domestic businesses must utilize targeted advertising, build partnerships with foreign partners, and strengthen distribution channels to improve products’ visibility and accessibility.
Competitive pressure forces domestic companies to proactively innovate, improve efficiency, and build stronger, more adaptable operational structures to survive and thrive, and in some cases, government’s supports are needed.
An effective policy mix with a whole-of-government coordination involves aligning various policy instruments and measures across different Ministries and government agencies are needed to lower the barriers for unleashing SMEs potential to scale up and ride on opportunities to grow in both domestic and international markets.
This means setting favourable framework conditions, including broad-based support and targeted interventions for SMEs. These include ease of regulatory and compliance costs, offering tailored support and diverse financing options (financial institutions and capital markets) involve leveraging digital platforms, regulatory reforms, and alternative financing instruments, access to skills, digital transformation tools, innovation and knowledge networks as well as information access.
Lee Heng Guie is the executive director of the Socio-Economic Research Centre. The views expressed here are the writer’s own.
