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Malaysia must shift gears to innovation hub

Malaysia must shift gears to innovation hub

20 Mar 2024

By Zarina Nalla 

Prime Minister Datuk Seri Anwar Ibrahim’s international efforts are yielding promising results.

Recent trips secured potential investments from Germany (RM45.4 billion) and China (RM170 billion) in crucial sectors like semiconductors, aerospace and medical devices.

This aligns with Malaysia’s strategic goal of attracting foreign direct investment (FDI) that fosters technological advancement and propels the nation towards becoming a high-income economy.

Data from the Malaysian Investment Development Authority (Mida) confirms a significant rise in approved investments in 2023, reaching RM329.5 billion, with FDI being the major contributor.

Beyond securing financial commitments, a critical evaluation of the incoming investments is crucial. ESG (environmental, social and governance) considerations must be factored in to ensure responsible business practices.

Furthermore, alignment with Malaysia’s long-term economic goals is essential.

Investments should contribute to technological advancement and propel the nation towards a high-income status. To achieve this, a robust framework for monitoring, evaluation, and facilitation is necessary.

Malaysia’s economic story is one of remarkable transformation. From its roots in agriculture, the nation transitioned into a manufacturing powerhouse, with the electronics and electrical (E&E) sector serving as its driving force.

This strategy fuelled rapid economic growth, propelling Malaysia towards becoming a middle-income economy. However, a crucial element has been missing: A strategic shift towards climbing the value chain.

Malaysia holds a significant share of the global E&E market (13.6 per cent). However, its contribution lies primarily in low-value assembly and packaging. This translates to limited technological advancement and a workforce skilled in routine tasks.

While this approach has yielded economic benefits, it presents a significant challenge: Can Malaysia achieve its aspirations of becoming a high-income nation solely by relying on assembly-based activities?

An unfortunate consequence of over-dependence on assembly has been the neglect of domestic research and development (R&D) capabilities. This has not only limited technological innovation but also hindered the creation of high-skilled jobs within the E&E sector.

According to the World Bank, Malaysia’s spending on R&D as a percentage of GDP is significantly lower compared to regional competitors like Singapore and South Korea.

This lack of investment translates to a dearth of cutting-edge research facilities, limited opportunities for domestic talent to contribute to innovation, and ultimately, an economy susceptible to the whims of the global market.

The path forward necessitates a paradigm shift in Malaysia’s approach to FDI. Moving beyond simply attracting large-scale investments, the focus must be on strategic FDI that aligns with the nation’s long-term economic goals.

Identifying and qualifying the type of investments being poured into Malaysia require a special skill set. The newest kid on the block is impact investments.

The relevant agencies should screen business proposals carefully before giving the green light. One must keep in mind that the end goal is to fulfill strategic growth for the nation: these investments must add value to our economy and help us move closer towards being a high-income nation.

We need to break out of the middle-income trap, a challenge which has been discussed for decades.

Perhaps it is time for the government to organise announcements around actualized investment numbers as well?

Focusing solely on approved investments paints an incomplete picture of economic progress. Placing greater emphasis on actualised investments and making this data readily available provides a clearer understanding of the tangible outcomes achieved through FDIs.

Approved investments require at least 18 to 24 months to come to fruition, more often than not, investors make U-turns for various reasons which include obstacles faced in soliciting approvals or identifying local partners or talent even.

The facilitation of investments is another matter we are still grappling with today.  Bureaucratic hurdles and inefficiencies in infrastructure development act as significant deterrents to the business community.

Former minister Tan Sri Rafidah Aziz who served over three administrations was quoted to have said that we should be more focused on action. She also recommended that a council be established, one chaired by our prime minister himself, focusing on the facilitation of investment.

The issue of land approvals, basic utilities have been problematic since yester years. When will such unnecessary barriers be overcome?

How can we address the issue of talent needed for these investments? The World Bank has expressed that investors need talent much more than tax incentives.

There has been much debate on the subject of our nation’s brain drain. When we don’t pay our workers well, we cannot expect productivity says some economists. We have been blamed for under-paying our talent and hence we lose them to our neighbour.

Others express that because our economic activities are low-end in nature, talent with special skills cannot find suitable jobs and leave. A vicious cycle.

Several countries like Singapore and South Korea have successfully leveraged strategic FDI to achieve remarkable economic transformation.

We can learn from their experiences. Realising this vision requires a collective effort from various stakeholders. With this, we can then hope to see the revival of Malaysia’s economic story, and one that is more resilient to face the future.

*The writer is former chief operating officer and former acting CEO of Malaysian Institute of Economic Research.

Source: NST