Knowledge Deepening and Industrial Change in Malaysia

Policy OptionsShahid Yusuf

DRGWorld Bank

February 25, 2008

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?

Growth Rates in East Asia

0.0

2.0

4.0

6.0

8.0

10.0

12.0

1995

2000

2006

Policy Options• Seven policies for enhancing Malaysia’s 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 R&D 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.

Industrial Focus• Malaysia’s 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 Malaysia’s 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.

Export Composition0

200

004

0000

600

008

0000

valu

e in

mill

ions

of U

S$

1995 2000 2005year

Primary Products Agro-BasedOther, Resource-Based Textile, garment & footwear

Other, Low-Technology AutomotiveProcess EngineeringElectronic & Electrical Other, High-Technology

Exports of Malaysia, by Type of Manufacture

Export Composition (excluding Electronics)

050

0010

0001

500

020

000

valu

e in

mill

ions

of U

S$

1995 2000 2005year

Primary Products Agro-Based

Other, Resource-Based Textile, garment & footwear

Other, Low-Technology Automotive

Process EngineeringOther, High-Technology

without Electronic & Electrical

Exports of Malaysia, by Type of Manufacture

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.

R&D Effort• R&D 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 R&D resources (both in terms of funding and R&D personnel) is not yielding fruitful outcomes for key leading subsectors (e.g. as measured by patents).

• Innovative western economies and Japan doubled R&D 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.

• R&D 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.

R&D Spending(as share of GDP)

China

Hong Kong, China

Japan

Korea, Rep.

Singapore

Thailand

Malaysia

01

23

4R

&D

Exp

endi

ture

as

Sha

re o

f GD

P(%

)

0 20000 40000 60000per capita GDP, constant 2000 US$

R&D Spending by Subsector

Top 5 Sectors with Highest R&D Spending in Malaysia

Sector Amount

(million RM) Manufacture of Motor Vehicle, Trailers and Semi-trailers 646.3 Manufacture of Office, Accounting and Computing Machinery 414.4 Manufacture of Radio, Television and Communication Equipment and Apparatus 396.3 Extraction of Crude Oil and Natural Gas; Service Activities Incidental to Crude Oil and Natural Gas Extraction Excluding Surveying 150.5 Manufacture of Electrical Machinery and Apparatus n.e.c. 117.8

R&D Spending by GRIs

Top 15 Fields of Emphasis by GRIs, 2004

description R&D (million ringgit) Share of Total

Crop Production 23.7 8.0% Pest and Disease Management 23.2 7.8% ICT Applications 18.2 6.1% Agricultural Engineering 15.1 5.1% Civil Engineering 12.4 4.2% Horticulture 10.9 3.7% Radiation Chemistry 10.5 3.5% Environmental Management and Bioremediation 9.3 3.1% Resource-Based Technology 8.0 2.7% Communication 7.4 2.5% Electrical and Electronic Engineering 7.3 2.5% Plant Biotechnology 7.1 2.4% Process Technology and Engineering 6.4 2.1% Soil and Water Sciences 5.5 1.9% Advanced Materials 5.4 1.8%

R&D Spending by Universities

Top 15 Fields of Emphasis by Universities, 2004

Description R&D Spending

(million Ringgit) Share Biochemistry 37.1 7.2% Manufacturing and Production Engineering 29.7 5.8% Communication 18.4 3.6% Education 16.5 3.2% Energy Technology 13.9 2.7% Mechanical Engineering 13.7 2.7% Automotive Engineering 12.2 2.4% Information Systems 11.6 2.3% Process Technology and Engineering 11.5 2.2% Electronic Materials 11.0 2.1% Mathematics 10.7 2.1% Resource-Based Technology 9.2 1.8% Condensed Matter Physics 9.0 1.8% Civil Engineering 8.2 1.6% Clinical Medicine 8.2 1.6%

Patents Granted by USPTO

Patents Granted by USPTO to Foreign Residents

2000 2001 2002 2003 2004 2005 2006 JAPAN 32,922 34,890 36,339 37,248 37,032 31,834 39,411 TAIWAN 5,806 6,545 6,730 6,676 7,207 5,993 7,919 KOREA 3,472 3,763 4,009 4,132 4,671 4,591 6,509 CHINA,HONG KONG S.A.R. 548 621 589 681 641 596 753 CHINA P.REP. 162 265 390 424 597 565 970 SINGAPORE 242 304 421 460 485 377 469 INDIA 131 180 267 356 376 403 506 MALAYSIA 47 56 62 63 93 98 131 THAILAND 30 47 61 47 28 25 42 PHILIPPINES 12 15 19 25 21 18 35 INDONESIA 14 10 15 12 23 23 16

Source: USPTO

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 R&D 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.

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.

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 R&D 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.

Knowledge Economy Potential

Number of GRIs

Putrajaya KL Penang Johor Malacca 7 22 1 1 0

Source: from EPU

Location of public and private universities

KL Penang Johor Malacca Cyberjaya Public 3 1 2 1 Private 8 0 0 0 2

Note: Only the main campuses are included in this table. Source: from EPU

Location of Headquarters

KL Putrajaya Penang Selangor Ipoh Perak 23 2 2 10 1 2

Source: Supplied by EPU

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.

E-Readiness Scores

E-Readiness Scores

Economy 2003 2004 2005 2006 2007 Singapore 8.20 8.02 8.18 8.24 8.60 Korea 7.80 7.73 7.66 7.90 8.08 Taiwan (China) 7.40 7.32 7.13 7.51 8.05 Japan 7.10 6.86 7.42 7.77 8.01 Malaysia 5.60 5.61 5.43 5.60 5.97 Thailand 4.20 4.69 4.56 4.63 4.91 India 3.90 4.45 4.17 4.25 4.66 China 3.80 3.96 3.85 4.02 4.43 Indonesia 3.30 3.39 3.07 3.39 3.39

International BandwidthCountry / Data 1998 1999 2000 2001 2002 2003 2004

Australia 375 730 2,455 7,025 10,498 12,583 22,056

Canada 8,278 8,278 34,868 55,623 89,273 172,529 217,521

China 143 351 2,799 7,598 9,380 27,216 74,429

Denmark 1,213 1,213 7,520 43,456 109,204 118,559 188,455

Finland 670 670 1,796 7,820 16,857 18,056 22,617

Germany 11,834 11,834 69,745 207,669 260,668 384,848 566,056

India 159 267 840 1,475 1,870 2,000 12,300

Indonesia 80 120 250 343 573 1,059 2,244

Ireland 239 239 917 4,203 13,501 20,139 24,587

Japan 830 2,643 7,200 22,705 30,286 75,946 132,608

Korea 250 1,251 2,268 5,432 17,207 42,000 71,380

MALAYSIA 85 188 540 733 1,321 2,308 3,193

Netherlands 10,874 10,874 68,079 173,154 167,232 253,831 334,578

New Zealand 35 150 250 1,900 2,303 3,315 4,575

Norway 583 583 3,928 21,637 22,696 33,930 43,019

Philippines 100 125 165 237 891 2,323 3,215

Singapore 90 845 2,249 2,639 5,898 15,564 24,704

Sweden 4,388 4,388 18,607 60,349 94,896 157,636 157,636

Switzerland 5,257 5,257 21,126 40,056 65,827 71,464 71,464

Thailand 37 118 268 642 1,011 1,438 3,006

United Kingdom 18,338 18,338 86,485 238,074 319,663 534,814 781,554

USA 27,388 27,388 111,307 273,770 381,693 708,599 970,594

Policy Suggestions: A Summing Up

• Malaysia should aim to double R&D 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.