Download High-Tech Industrial Options for Late Starting Middle Income

Malaysia 2.0:
What Will It Take
Shahid Yusuf
Kaoru Nabeshima
DRG
World Bank
July, 2007
1
Malaysia 1.0
1970-2007
• Resource-based growth – tree crops, tin,
petroleum
• FDI supported processing and assembly of
manufactures
• Main driver of growth: exports
• Principal sources of comparative advantage:
low wages, low overheads, political and macro
stability, adequate infrastructure, acceptable
business environment, and steadily improving
manufacturing capability
2
Worrying Developments
• External competition increasing, especially
from China, India, and Vietnam
• Rate of GDP growth has slowed and below
potential; private investment low
• TFP increase modest, innovativeness weak
• Growth potential of industrial processing
becoming exhausted and that of tree crop
agriculture is limited
• Quality of labor skills not improving, technical
manpower emigrating
• FDI below past levels
3
Why the Next Ten Years Are
So Critical
• Current petroleum resources running out: could impact
on budget, imports, and domestic production costs
• Technological race accelerating and cost of catching
up increasing
• Low wage, low tech model not viable for a $5,000 per
capita economy ($10,000 PPP)
• Growth and export competitiveness depends on
productivity, innovation. Incremental process
innovation must be complemented by significant
design and product innovation
• Raising quality of technical skills and innovation
capability can take a decade, at least
4
Models for the 2.0 Economy
• Finland: Resource rich
• Switzerland: industrial tradition, multiple
lucrative niche activities, location
• Ireland, Israel, Taiwan (China): Resource
poor, large diaspora
• Korea, Singapore, Shanghai: Resource
poor
5
Key Elements of Successful
Models
• Strong development agencies with focused strategies: all
economies except Switzerland
• Heavy emphasis on high quality secondary and tertiary education
with priority for S&E. Reliance on elite universities, meritocratic
and intensely competitive system. Excellence of general
schooling supported by targeted vocational and technical training
• FDI led industrialization and upgrading of industry supported by
government skills development, technology, infrastructure, and
exchange rate policies: Ireland, Singapore, Israel, (Shanghai)
• Domestic corporate sector led industrial upgrading supported by
public spending on infrastructure and services: Korea, Taiwan
(China), Switzerland, Finland, (India)
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Key Elements of Successful
Models
• Industrial upgrading linked to increased spending on
R&D, mainly by private sector
• Deep pools of knowledge workers. All economies
have between one and three clusters
• Significant role of diaspora and immigration of
knowledge workers, providers of risk capital: Israel,
Ireland, Taiwan (China), (Shanghai)
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From 1.0 to 2.0:
Building Blocks for Malaysia
• Manufacturing capability in MNC subsidiaries and
some GLCs/local companies in electronics, chemicals,
engineering, and agro industries
• Skilled manufacturing workforce especially in
electronics, petrochemicals
• Good transport, energy, and IT infrastructure
• Institutions supporting IP, standards, certification and
accreditation
• Strong incentive regime for FDI, R&D, investment
• Financial system and domestic savings
• Cluster-based, concentrated development in a few
urban centers with high standards of livability
8
Transition to 2.0:
How Long Would It Take?
• Building domestic corporate sector: 2030 years, including for India/China
• Building innovation capability: 20 years
• Building world class, business service
providers: 20 years
9
Missing Elements
• Industrially and geographically focused strategy and
strong agency to play coordinating/implementing role
• Major domestic corporations to upgrade, diversify, and
globally market Malaysian products
• Weak entrepreneurship, few new starts and private
venture capitalists to assist new firms
• World class universities and research institutes to
provide technology leadership, facilities, and
opportunities for diversification and hybridization
• Deep, diversified base of domestic SMI suppliers. MNC
related vertical integration limited
• Support from Malaysian diaspora or immigration of
foreign S&E workers
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• Urgency
An Action Plan:
Five Year Horizon
• Identifying 2-3 growth driving industries with long-run potential
• Working with corporate sector to make Malaysian companies into
world class providers with international brand recognition
• Developing clusters of SMIs to backstop these activities in 3 urban
centers.– e.g. new, high tech manufacturing in Penang/NE, ITES
in KL/Klang Valley, medium tech/traditional industries in Johor
• Augmenting capabilities of existing labor force through targeted
professional and vocational training using PSDC and other models
• Building a multimodal transport system to tightly link three urban
regions to create strongly integrated system
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An Action Plan:
Ten Year Horizon
• Improving quality of secondary level schooling,
especially science, math, and communication skills
• Developing 2-3 world class universities and upgrading
quality, basic research and early stage technology
development in steps: a new breed of motivated and
educated students needed for Malaysia 2.0
– Issues to be addressed: longer-term financing, competition
among institutions, finding teachers, changing mindset and
attitudes of students
• Cultivating strengthening university-industry links to
reinforce technology-led strategy
• Engaging and attracting back talented, experienced,
wealthy, and well-connected members of Malaysian
diaspora
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Concluding Remarks
• Industrial countries are aiming for 3.0.
Competition at 1.0 is intensifying. Striving
to achieve 2.0 is not an option for
Malaysia. It is a necessity
13
Thank You
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