Effectiveness of financial incentives on SMEs' financial performance in Malaysia

Abstract

By focusing on three types of financial incentives: loans, tax incentives and working capital financing, this study examined the effectiveness of such incentives on the SMEs' financial performance in Malaysia. Despite the fact that the Government and various financial institutions in Malaysia are actively offering the financial incentives through many schemes and facilities, it is important to consider whether the SMEs are able to utilize the incentives efficiently to achieve greater competitiveness. This study identified debt ratio defined by total debts over total assets which were used as proxy for loans. Meanwhile, tax incentives granted to SMEs served as a proxy for tax incentives. This study also examined working capital defined by cash conversion cycle which served as a proxy for internal financing. By analyzing the audited financial statements of 1327 firm-years for the period of 2000 until 2010, the statistical results revealed that debts financing would reduce the financial performance of SMEs. The statistical results provided evidence that tax incentives granted could enhance SMEs' financial performance. However, no significant result was found on the relationship between working capital management and financial performance of SMEs. This study could assist the policy makers in evaluating the effectiveness of financial incentives programs for the sustainability and growth of SMEs.