22.12.2016 - Natural Sciences Sector

Can Malaysia avoid the middle-income trap?

© Bazuki Muhammad/Reuters, Dr Kastoori Karupanan demonstrates the Digital Autopsy at a mortuary in Kuala Lumpur Hospital.

Malaysia is considered an upper middle-income country. The Najib Razak coalition government estimates that 6% annual growth is necessary to reach high-income status by 2020. This is a somewhat higher rate than both the average for the previous decade and the World Bank’s projection for 2016 and 2017 of about 4.2% growth. The UNESCO Science Report observes that ‘a greater focus on innovation will be necessary to reach [the government’s] goal’.

Innovation for inclusive development has risen in the public policy agenda and is currently being widely discussed in Malaysia, in a context of low farm productivity, increasing health-related problems, natural disasters, environmental problems and even monetary inflation. In 2014, the government launched transdisciplinary research grants with the objective of including societal benefits among the performance criteria at Malaysia’s research universities and providing incentives to promote science in support of poverty alleviation and sustainable development.

On 16 November 2016, Malaysia ratified the Paris Agreement. According to the World Resources Institute, Malaysia contributed about 0.9% of global greenhouse gas emissions in 2012, taking into account land-use changes and forestry. The UNESCO Science Report: towards 2030 observes that ‘although Malaysia remains committed to reducing its carbon emissions by 40% by 2020 over 2012 levels, as pledged by the Malaysian prime minister at the climate summit in Warsaw in 2013, it faces growing sustainability challenges’.

In January 2014, Selangor, the most developed of Malaysia’s federated states, experienced water shortages. These were not caused by lack of rainfall – Malaysia lies in the tropics – but by high pollution levels and the drying of reservoirs as a consequence of overuse. Land clearing and deforestation remain major concerns, causing landslides and population displacements. Malaysia is the world’s second-biggest producer of palm oil after Indonesia, the two countries contributing about 86% of all palm oil in 2013, according to the World Wildlife Fund’s 2013 Palm Oil Buyer’s Scoreboard.

Since the 1990s, palm oil exports have represented the third-largest category of Malaysian exports after fossil fuels (petroleum and gas) and electronics. About 58% of Malaysia remained forested in 2010. With the government having committed to preserving at least half of all land as primary forest, Malaysia has little latitude to expand the extent of land already under cultivation. Rather, it will need to focus on improving productivity.

The rapid expansion of exports in electronics from the 1970s onwards has turned Malaysia into a major hub for the production of high-tech goods. Today, Malaysia is highly integrated in global trade, with manufacturing contributing over 60% of its exports. Half of these exports (49%) were destined for the East Asian market1 in 2010, compared to just 29% in 1980. Over the past 15 years or so, the share of manufacturing in GDP has gradually declined as a natural consequence of the concomitant growth in services as a corollary of greater development. Modern manufacturing and services are deeply intertwined, as high-tech industries often have a massive services component. The development of the services sector is thus not, in itself, a cause for concern.

More worrying is the fact that the shift towards services has neglected the development of high-tech services. Moreover, although the volume of manufacturing has not declined, less value is being added to manufactured goods than before. As a consequence, Malaysia’s trade surplus declined from 144 529 ringgits (MYR) in 2009 to MYR 91 539 in 2013 and Malaysia has been losing ground in high-tech exports.

High-tech manufacturing has stagnated in absolute terms in recent years and its share of global added value has slipped from 0.8% in 2007 to 0.6% in 2013. Over the same period, Malaysia’s global share of high-tech exports (goods and services) has contracted from 4.6% to 3.5%, according the World Trade Organization. The contribution of high-tech industries to national GDP has likewise dropped.

Malaysia also needs to reduce its reliance on oil and gas extraction. In 2014, oil and gas contributed nearly 32% of government revenue. Although natural gas represented about 40% of Malaysia’s energy consumption in 2008, there have been gas shortages since 2009, owing to the combination of a declining domestic gas supply and rising demand. To compound matters, the sharp drop in global oil prices between July and December 2014 forced the government to cut expenditure in January 2015 to maintain its budget deficit at 3%. A recent budget review indicates that Malaysia will not be able to rely on its natural resources to propel itself towards high-income status by 2020.

Rising inequality is a growing concern in Malaysia, with the disparity between the top 20% income-earners and the bottom 40% widening. The government’s Subsidy Rationalization Programme, which had first been rolled out in 2010 with little effect, moved into high gear in 2014 with three consecutive increases in natural gas prices in a single year. The removal of energy subsidies, coupled with the introduction of a general sales tax on consumer goods in April 2015, is expected to increase the cost of living.

The four out of ten Malaysians in the lowest income bracket are also increasingly exposed to social and environmental risks. The incidence of dengue increased by 90% in 2013 over the previous year, for instance, with 39 222 recorded cases, in a trend which may be linked to deforestation and/or climate change. The rising crime rate is another concern.

Malaysia will not avoid the middle-income trap without business

Without a doubt, research is contributing far more to the country’s development than a decade ago. Between 2008 and 2012, research spending rose from 0.79% to 1.13% of GDP. This is all the more remarkable in that GDP grew steadily over the same period. Malaysia now plans to raise this ratio to 2% of GDP by 2020. Whether or not it reaches this target will depend largely upon the dynamism of the business enterprise sector.

Research and development (R&D) are conducted predominantly in large-scale enterprises in the electronics, automotive and chemical industries. Small and medium-sized enterprises contribute little, even though they make up 97% of all private firms.

The fact is that most of the small and medium-sized enterprises that work as subcontractors for multinational firms have remained confined to the role of original equipment manufacturers. They need greater support in accessing the requisite knowledge, skills and financing, if they are to participate in original design and original brand manufacturing.

One key strategy has been to connect small and medium-sized enterprises to the incubation facilities in the country’s numerous science and technology parks. These science and technology parks benefit from government incentives designed to stimulate commercialization, including the TechnoFund and E-science Fund. There is a need, however, to ensure that these public goods effectively target the commercialization of knowledge, with a minimum rate of failure in translating these grants into products and services worth commercializing.

After all, Malaysia’s chances of becoming a high-income country by 2020 will depend upon how well it succeeds in stimulating the commercialization of technology and innovation.

Foreign multinational firms are generally engaged in more sophisticated R&D than national firms. However, even the R&D conducted by foreign firms tends to be confined to process and product improvements, rather than pushing back the international technology frontier. Moreover, foreign multinationals are heavily dependent on their parent and subsidiary firms based outside Malaysia for personnel, owing to the lack of qualified human capital and research universities within Malaysia to call upon.

A group of ten multinationals have decided to act. Agilent Technologies, Intel, Motorola Solutions, Silterra and six other multinationals established a platform in 2012 to promote collaborative research among industry, academia and the government to satisfy the research needs of the electrical and electronics industries, which employ nearly 5 000 research scientists and engineers in Malaysia. These multinational firms generate close to MYR 25 billion (circa US$ 6.9 billion) in annual revenue and spend nearly MYR 1.4 billion on research and development. They have utilized government research grants extensively since the government decided in 2005 to extend these grants beyond domestic firms to multinational beneficiaries. Besides research, the focus is on talent development, the ultimate aim being to help the industry add greater value to its products.

The need to develop endogenous research

The government is keen to develop endogenous research, in order to reduce the country’s reliance on industrial research undertaken by foreign multinational companies. By financing graduate study, the government helped to double enrolment in PhD programmes between 2007 and 2010. It has also introduced incentives to woo expatriates back home through the Returning Expert Programme and plans to become the sixth-largest destination for international university students by 2020. The creation of the ASEAN Economic Community in 2015 should also spur scientific co-operation among member countries.

The creation of these research universities resulted from the government’s Higher Education Strategy of 2006. A parallel goal of the strategy was to raise government spending on higher education.  By financing graduate students, for instance, the government doubled enrolment in doctoral programmes between 2007 and 2010. The number of full-time equivalent researchers in Malaysia tripled between 2008 and 2012 (from 16 345 to 52 052), carrying the researcher density to 1 780 per million inhabitants in 2012, which is well above the global average (1 083).

Losing ground in high-tech exports

Of some concern is that Malaysian high-tech industries are contributing much less to manufactured exports than they did a decade ago. Even though patent applications with the Malaysian patent office have increased steadily over the years, there still seems to be little return on investment in R&D. Domestic applications also seem to be of lower quality than those of foreign applicants, with a cumulative grants-to-application ratio of 18% between 1989 and 2014, against 53% for foreign applicants over the same period.

In addition, academic or public research organizations in Malaysia appear to have a limited ability to translate research into intellectual property rights. The Malaysian Institute of Micro-electronic Systems, Malaysia’s forefront public R&D institute, which was corporatized in 1992, contributed 45–50% of Malaysia’s patents filed in 2010 but the low citations that have emerged from those patents suggest that the commercialization rate is low.

A need to increase the rate of return on research

The low commercialization rate can largely be attributed to a lack of university–industry collaboration, rigidities in research organizations and problems with co-ordinating policies. Universities seem to confine the commercialization of their research results to specific areas, such as health and ICTs. In 2010, the government established the Malaysian Innovation Agency to spur the commercialization of research.

Five years after its inception, the Malaysian Innovation Agency had made a limited impact on commercialization thus far, owing to the unclear delineation of its role in relation to the Ministry of Science, Technology and Innovation and the agency’s limited resources. Nevertheless, there is some evidence to suggest that the agency is beginning to play a catalytic role in driving commercialization and an innovative culture, especially as regards innovation beyond the hardware industry, which is where firms offering services, such as airline services, are active.

One interesting public–private funding model involves the Malaysian Palm Oil Board, a public body born of the merger of the Palm Oil Research Institute of Malaysia and the Palm Oil Registration and Licensing Authority in 2000, by act of parliament. Through a tax levied on every tonne of palm oil and palm kernel oil produced in the country, the oil palm industry funds many of the research grants provided by the Malaysian Palm Oil Board. These grants amounted to MYR 2.04 billion (circa US$ 565 million) between 2000 and 2010.

The Malaysian Palm Oil Board supports innovation in areas such as biodiesel and alternate uses for palm biomass and organic waste. Its research into biomass has led to the development of wood and paper products, fertilizers, bio-energy sources, polyethylene sheeting for use in vehicles and other products made of palm biomass.

Source: Rasiah, R. and Chandran V.G.R. (2015) Malaysia. In: UNESCO Science Report: towards 2030

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