Knowledge Deepening and Industrial Change in Malaysia Policy Options

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Knowledge Deepening and Industrial Change in
MalaysiaPolicy Options

• Shahid Yusuf
• DRG
• World Bank
• February 25, 2008

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Malaysian Context

• Growth during 2000-2007 has slowed averaging 5.0
  per annum as against 7.3 during the 1990s.
• The growth of TFP averaged 1.3 percent per annum
  during 2000-2005.
• Rate of saving in 2006 was 36 of GDP but
  investment rate, which has been falling, was 19
  in 2006.
• Population/workforce is growing at about 2 per
  annum (not including migrants).
• Policy questions Can Malaysia achieve higher
  growth, in the 6 range? If so, which industrial
  sector(s) (including services) could serve as the
  main engines of growth?

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Growth Rates in East Asia
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Policy Options

• Seven policies for enhancing Malaysias growth
  prospects
• Strengthen the leading sectors (electronics,
  electrical engineering, food processing, wood
  products and palm oil)
• Re-evaluate future role of auto and auto parts
  industries
• Focus RD and applied technology development on a
  limited number of fields
• Raise supply and quality of human capital,
  especially in STEM skills
• Encourage major domestic firms to take the lead
  in targeting and assimilating foreign
  technologies and building own research capacity
• Concentrate efforts to improve knowledge economy
  potential in a few selected cities where major
  universities, HQs, logistics capabilities, and
  urban amenities are present
• Enhance quality and capacity of IT
  infrastructure.
• Successful outcome requires combining
  well-targeted policies identified above with
  market signals.

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Industrial Focus

• Malaysias revealed comparative and innovation
  advantages, export performance, in-bound FDI,
  manufacturing capacity, and new starts all point
  to electronics, electrical engineering
  industries, food processing, wood products and
  palm oil, as the current and future leading
  sectors.
• There is little evidence that other industrial or
  services subsectors are emerging with the
  potential to serve as leading sectors.
• The key to increasing domestic value added and
  improving competitiveness lies in raising the
  technological capabilities of the key industries.
• This has to come from the greater efforts by the
  domestic firms. MNCs have not contributed much
  to Malaysias technological capabilities in the
  past, and are unlikely to do so in future in view
  of the intensifying global competition and MNCs
  guarding their intellectual properties more
  tightly.

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Export Composition
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Export Composition (excluding Electronics)
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Industrial Focus (continued)

• The emphasis on key leading subsectors needs to
  be complemented with a reassessment of policy
  support for the automotive sector.
• The future outlook of the automotive sector in
  Malaysia needs to be viewed with reference to
  acquired capabilities, apparent potential given
  domestic market saturation, and the emergence of
  automotive clusters in Thailand, China, and
  India.
• Consolidation and restructuring of this industry
  could enhance competitiveness and free up
  resources to be reallocated to other more
  promising sectors.

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RD Effort

• RD by firms, universities and research
  institutes in Malaysia is on a limited scale
  (0.7 of GDP) and widely dispersed across fields.
  Spreading the small amount of RD resources (both
  in terms of funding and RD personnel) is not
  yielding fruitful outcomes for key leading
  subsectors (e.g. as measured by patents).
• Innovative western economies and Japan doubled
  RD expenditures from 1 of GDP to 2 of GDP in
  about ten years.
• China and Korea were also able to double
  expenditures in that time period.
• RD efforts should be coordinated among different
  entities and focused on fewer areas that are
  viewed as having good longer term prospects.
• Innovation within the universities should be
  encouraged with the proper institutional support
  (such as technology commercialization offices,
  incentives to staff to conduct and commercialize
  research, better liaison with firms, and
  involvement of universities in regional
  development programs).
• Intermediary institutions to facilitate more
  efficient technology transfers from universities
  and GRIs to firms would also help.

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RD Spending(as share of GDP)
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RD Spending by Subsector
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RD Spending by GRIs
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RD Spending by Universities
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Patents Granted by USPTO
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Role of Major Firms

• Leading Malaysian firms need to base future
  competitiveness on technology acquisition and
  incremental in-house innovation.
• Currently technology licensing accounts for (1
  of GDP) compared to 10 of GDP in Ireland and 7
  in Singapore.
• A technology led strategy for Malaysian firms
  could entail (besides higher RD spending), a
  global market orientation for manufacturing
  firms, investment in equipment embodying advanced
  technology, open innovation practices, closer
  ties with local and foreign research
  universities, and networked alliances with
  overseas firms to absorb ideas and guide strategy.

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Human Capital

• Efforts to increase the supply of science,
  technology, engineering, and math (skills) must
  continue (with the help of university reform),
  alongside parallel improvement in English and IT
  skills.
• Private firms must raise their own outlay on
  training so as to strengthen the skills of those
  who are already employed. Upgrading and expanding
  public training institutions and streamlining the
  application and approval processes for firms to
  utilize these skill development centers, would
  complement in-house actions of firms.

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Dynamic Urban Regions

• The geography of innovation strongly favors large
  urban centers with diverse economic activities,
  which benefit from urbanization economies.
• Experience of advanced countries points to
  significant concentration of patents issued,
  high-tech employment, and venture capital in a
  few large urban centers and established
  industrial clusters.
• Innovation is an urban phenomenon. A high
  percentage of new ideas typically comes from the
  large core urban centers. This is true for the
  US, Japan, and other East Asian economies.
• The ingredients of a dynamic innovative urban
  center are a collection of leading universities
  (suppliers of skills and basic research),
  corporate HQs (much RD is done near to HQs),
  availability of other supporting business
  services (law firms, finance including VCs,
  management consultants, accountants, logistics
  experts, etc.).
• In addition, the city needs to be able to attract
  knowledge workers by offering affordable housing,
  social services, and urban amenities.

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Knowledge Economy Potential
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IT Infrastructure

• ICT infrastructure and IT skills contribute to
  firm-level productivity, Availability, pricing
  and accessibility of telecom services also linked
  to research collaboration, community networking,
  international connectivity, local economic
  development, formation of software clusters and
  innovations related to IT and multi-media.
• Investment is needed in soft and hard IT
  infrastructure (e.g. to increase bandwidth) so as
  to improve the access to information, and
  facilitate exchange of ideas with others and
  innovation.

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E-Readiness Scores
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International Bandwidth
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Policy Suggestions A Summing Up

• Malaysia should aim to double RD spending from
  public and private sources over the next ten
  years. This must be supported by higher education
  policies and incentives that raise quality and
  volume of STEM training.
• The larger firms, public and private, need to
  take the lead role in industrial deepening
  through backward and forward integration and by
  stimulating knowledge assimilation as well as
  domestic innovation.
• Measures to strengthen the knowledge economy must
  be concentrated on at the most one or two urban
  areas where the main universities and corporate
  headquarters are located.
• Urban centers must create the environment and
  culture which will attract and retain talented
  people from Malaysia and overseas. This calls for
  a mix of policies including policies affecting
  urban design.
• A dynamic urban knowledge environment which is
  conducive to the exchange of ideas, to both
  research and business related networking, and to
  innovation, demands an IT infrastructure that is
  comparable to the best in Asia.
• Polices that enhance openness and market
  competition can reinforce technological
  upgrading.
• Better, more detailed and current data to monitor
  changes in innovativeness and productivity across
  subsectors and increasing access to public data
  to encourage research on socio-economic issues,
  would assist in policy formulation.