Why Malaysian frontier firms do not scale up

The recent World Bank report, Raising the Ceiling, Raising the Floor claims that Malaysia’s “frontier firms” are failing to scale up and absorb the broader workforce, leading to sluggish wage growth.

Frontier firms represent the top 10% of businesses in Malaysia by productivity, according to the World Bank, and cover all industries and business sizes.

They are highly efficient small enterprises and large corporations characterised by their ability to pay employees nearly three times the national median wage.

They tend to be concentrated in higher value-added sectors like semiconductors, electrical and electronics (E&E), advanced manufacturing, information and communications technology, and knowledge-intensive services.

As usual, the World Bank highlighted what we already know — that wages are sluggish and have decoupled from growth. Between 2010 and 2024, Malaysia’s real GDP increased by 82%, but median and average monthly wages only grew 43%.

They claim that wage growth is sluggish because frontier firms are failing to scale up — between 2010 and 2023 their share of employment in manufacturing fell from 36% to 33% and their market share fell from 80% to 71%.

Further, unlike advanced economies where frontier firms grow faster, Malaysian frontier firms grow more slowly than their sector peers. They do not tell us who these firms are, by the way.

As normal, the World Bank attributes this to institutional barriers, inefficient policies, regulatory red tape, gaps in financing and skills and the Groundhog Day brain drain trope. They ignore the RM40 billion financing allocated in the last two budgets.

Others argue that competitive advantage relies on innovation intensity and R&D, areas where Malaysian firms lag globally and warn that these firms must make the transition from an efficiency-driven economy to an innovation-driven economy to support long-term economic upgrading. Of course, “gomenshud” push this agenda.

While traditional analysis blames regulatory red tape, which I agree is a factor, the primary bottleneck for Malaysia’s frontier firms and SMEs is a combination of behavioural inertia, local market protection and institutional risk aversion.

Many of Malaysia’s most productive firms, including prominent household names, GLCs and private entities, simply experience “domestic satisfaction”.

They have competitive advantage locally, where they are protected so lack the drive to compete internationally. Staying small and domestic is a rational choice to protect existing revenue streams.

Additionally, fear of expropriation deters firms from expanding. Exceptional domestic success risks hostile takeovers or forced state control through GLIC funding. Grab is a good example, moving abroad for financing not because of funding gaps but to escape regulatory capture and potential expropriation.

For large companies, scaling requires foreign expansion because Malaysia’s 27 million adult consumer base is too small, yet entering external markets exposes them to global risks they are reluctant to face.

Similarly, the fact that only 15% of Malaysian SMEs export, comparable to Thailand (13%) and Mexico (15%) but vastly lower than the US (95%) or Estonia (75%), is fundamentally a behavioural and resource issue.

For most founders, SMEs function as an alternative to a formal job rather than a platform for global reach. These entities are inherently resource-constrained and risk-averse.

Navigating foreign compliance, logistics and market differences is prohibitively expensive and complicated. Staying small and local is easier and good enough.

However, scaling no longer demands risky, brick-and-mortar foreign investments. The digital economy renders the “small domestic market” argument obsolete.

Global sharing economy platforms and online shopping apps allow both SMEs and large firms to capture wider regional markets like Asean digitally.

By leveraging specialised institutional support, such as Malaysian Digital Economy Corporation’s (MDEC) sharing economy team, Malaysian firms can bypass traditional structural barriers, proving that scaling is limited more by corporate mindset than by national ecosystem constraints.

The views expressed are those of the writer and do not necessarily reflect those of FMT.