KUALA LUMPUR: Malaysia must strengthen the small and medium enterprises (SMEs) ecosystem especially with regard to early-stage financing, said Minister in the Prime Minister's Department (Economy) Datuk Seri Mustapa Mohamed.

He said supporting the SMEs and providing early-stage financing would be vital to facilitate productive and innovative firms.

"Innovation, as we all know, is one of the most impactful drivers of productivity improvements.

He said by doing so, Malaysian SMEs will enjoy higher productivity levels and close the gap with regional peers.

Mustapa said the SMEs, which comprise more than 97 per cent of firms operating in Malaysia, have an important role to play in its transition to a high-income economy.

"Malaysia is shifting towards innovation as the next engine of economic growth with multi-factor productivity expected to contribute 40 per cent to gross domestic product (GDP) growth.

"SMEs are also set to play a more important role in the economy, contributing about 45 per cent of the GDP and 25 per cent of total exports by 2025," he said.

Hence, he said that moving forward, integration of various policies and coordination among different ministries and agencies will be key in this agenda of innovation and reform.

Mustapa said the World Bank reports -- Assessment of the Start-up Financing Ecosystem and SME Program Efficiency Review provides recommendations, which will provide inputs towards Malaysia's goal to transform micro SMEs as new drivers of growth.

"We note the gaps identified by the two World Bank reports regarding the financing ecosystem for start-ups.

"One of the observations is that financing tends to be available for later stage start-ups rather than early stage," he said.

The World Bank reports also highlight the need for Malaysia to lower the barriers of entry for innovative firms and create a pipeline of possible unicorn firms in the future.

By 2025, Malaysia aims to have five unicorns and 5,000 start-ups.

"The availability of early-stage financing will be a potent tool to encourage the emergence of such innovative firms.

"The 'SME Program Efficiency Review' in particular will help us identify opportunities for reducing overlaps and increasing efficiencies and hence ensure that government programmes respond to the most pressing needs of SMEs,'' Mustapa said.

-- BERNAMA