This study examines whether the horizontal inequality policies in Malaysia that preferentially target the indigenous ethnic groups (Bumiputera) are the ideal tool to reduce racial conflict. It also reviews whether the employment of race-based (Bumiputera-biased) policies is an effective method to help nurture highly entrepreneurial small- and medium-sized enterprises (SMEs). The case of large Bumiputera enterprises indicates that horizontal inequality-based policies has unproductive outcomes. Although well-connected Malay “corporate captains” did emerge by the mid 1990s, many of them lost control of their businesses during the 1997–98 Asian financial crisis, and these conglomerates did not actively foster Bumiputera SMEs. Malaysia has well-formulated programs that support SMEs, but their procedures, specifically involving creating Bumiputera capital as well as redistributing equity, do not promote an environment for productive entrepreneurship. The new economic policy regime, recently unveiled, continues emphasizing the distribution of wealth along ethnic lines at its essence, although now the emphasis will be on “picking winners” from among entrepreneurial Bumiputeras in a transparent manner. These assertions will not result in a fairer system of picking and supporting Bumiputera SMEs as these documents do not discuss devolution of power to key oversight institutions to ensure checks and balances in the award of state-generated rents.

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