Introduction
The world’s economy is divided into several stages, of which the countries with lower stages are formulating different ways to step up the ladder by achieving higher growth. Furthermore, middle income countries are finding ways on how to thrust themselves to the high income status. Some, like Taiwan and South Korea, have achieved the higher status faster than the others, such as Malaysia. Malaysia is blessed with geographical advantages, macroeconomic and political stability, and trade openness (Cherif & Hasanov, 2015 p.4). For almost 50 years it has sustained a steady growth and in the next few years it may achieve the high-income status. But, why does the set of advantageous has not support Malaysia to achieve high-income status faster?
Discussion on economic growth has defined many growth determinants with the most recent theory is Romer’s endogenous growth. It emphasizes the importance of technological progress on productivity and it’s spill-over effects to economic development. Malaysia’s economic openness has created an opportunity for export, the establishment of foreign companies to operates and invest in the country, and most importantly technology transfer to the domestic firms. However, the spill-over effects are limited (Cherif & Hasanov, 2015) which hinder the higher rate of technological diffusion and the emergence of innovation driven local champions.
To help improve the diffusion flow in the economy, the government implement Vendor Development Program (VDP) which then was revised to Industrial Linkage Program (ILP). It is targeted to industrial clusters, with multinational companies (MNCs) as the anchor firms and their domestic supplier as the vendor firms. The program has helped to increase knowledge transfer; however, the result is below optimal (Karikomi, 1998). This paper would like to recommend a reform of the ILP structure to generate active linkages. To be precise, this paper suggests that instead the MNCs, the local suppliers should be the leader of the partnership along with enhancement of the research institutions’ role in the program. Accordingly, it will improve the spill-over effect, transforming to knowledge based economy, and therefore resulting rapid economic growth.
Industrial policy to accelerate economic growth
Technological progress and spill-over are crucial to achieving higher economic growth. Malaysia has a stagnant growth over the years with a tendency of a slower pace in recent periods (Hill, 2012 p. 28), while other countries who had the same initial condition in the 1970s has achieved high-income status (Cherif & Hasanov, 2015 p. 5). Why growth rate can change over time and the income per capita differentials among countries has become a topic of interest to many economists, with Romer’s theory of endogenous growth emerged to answer the question (Parker, 2012 p.2). The theory suggests that technological progress is needed so that the country achieve higher economic growth, or else it will decelerate and converge to it’s steady state growth. On doing this, economists promote to embrace openness which then is assumed to give spill-over effects to the economy (i.e. Jones & Romer, 2010; Rodrik, 2003). The spill-over will then creates technological progress and sustain a higher economic growth.
However, there are barriers on Malaysia’s trade openness spill-over effect. Interconnectivity through trade and FDI has played an important role in Malaysia’s economy, as it improves export sophistication, industrial sector, and investment in the country. Nevertheless, there is a hurdle on the diffusion. Malaysia’s technological diffusion is less than 5% of total public R&D projects, and less than 3% were commercialized (Thiruchelvam, 2013 p. 21). One of the reasons is the growth seems to be segregated for the foreign companies excluding domestic firms with lower competitive advantage (Cherif & Hasanov, 2015 pp. 10-11). To overcome this problem, government intervention is needed to improve the knowledge flows.
Government intervention particularly through industrial policy is not necessarily to pick a winner, instead, it can be used to rebalance the economy and fix market failures. Industrial policy, particularly subsidies and promotion of champions, can discourage competition and heavily influence by political interest. On the other side, a sound industrial policy should avoid targeting particular firms, instead, it should support a range of technologies and players, promote competition, and assure accountability (OECD, 2012). Accordingly, Malaysian government designed ILP program to fix diffusion failures on a range of industrial subsectors. Through ILP, technological diffusion and innovation are expected to grow knowledge capital which then can improve the economy.
Why local firms gain limited benefit from the ILP ?
The ILP program gives the advantage for the local firms in the MNCs supply chain to receive technical assistance, management support, and the market for their products from the MNCs or the anchors. Karikomi (1998, p. 23) evaluated that the program was participated by 27 anchors and their first and second tier domestic suppliers. The MNCs reported that there is an improvement in the suppliers’ product quality, sales, and price. Furthermore, the MNCs benefited from operational expenses tax deductions and creating domestic value chains.
Nevertheless, the partnership is heavily driven by the MNCs since they do the planning, implementation, and evaluation which resulted from a more one-way partnership in ILP. Japanese Chamber of Trade and Industry in Malaysia (JACTIM) stated that most of the suppliers are very dependent on the anchor’s support. In addition, some MNCs complaint that their participation in the program was due to the political pressure from the government (Karikomi, 1998 pp. 24-26).
The institutional structure of the ILP program creates a disadvantageous in achieving a higher rate of technology transfer and the emergence of innovation driven local winners. The local firms participating in the program does not take a step further to develop a new product or more effective production. The main cause of this problem are the local firms are passive participants and the research institutions are only connected to the MNCs. The limited partnership between the local firms and research institutions hinder the opportunity of innovation cooperation. These institutional features differentiate Malaysia’s ILP with Muro & Katz (2010) examples of successful clusters in USA, Germany, and Canada whereas the local firms are the leader and research institutions are the main partner in the clusters.
Recommendation
To overcome the problems of low involvement of local firms and disruption in innovation flows, this paper proposes that the local firms should be the leader with the support of the research institutions. Local firms of each ILP group should choose a local firms leader. The leader then plan the assistance needed from the MNCs or having the planning role, in contrast of the existing structure, which the MNCs do all the planning. The partnership should develop a two-way communication between the research institutions to provide prototype and the local firms to test the product’s marketability so that the cluster become an incubator and creating a cycle of technology development of a series of testing and prototyping through the local firms and research institutions interactions.
Nevertheless, there would be two major problems arise in the program, which are choosing the wrong leader and the MNCs disapproval with the proposed plan. First of all, the chosen local firm can be politically strong but have a lack of technical capacity. Since there is a strong influence from the government to the business sector, it is possible that a strong candidate of a local firm is politically linked with the ruling government. In addition, a more active local firm can be seen to overpower a less dominant firm. Therefore, research institution and anchor companies should work together and assess the technical capacity of each local supplier in choosing the leader. The assessment should be accountable and transparent to the public so that avoiding political conflict. By increasing the transparency, the ILP can choose the local leader without political pressures. In addition, the candidates should have the willingness to actively participate as a leader and also supporting other local firms in the ILP.
Secondly, local firm’s proposed plan can be rejected by the MNCs due to technical and financial constraints. In planning a technical assistance, research institutions should play an important role to formulate it. The research institution as a neutral-side and a think-tank should accommodate technological adoption needs from the local firms and also the demand of product quality and price while taking account technical and financial constraints of the MNCs. The proposed plan then reviewed and discussed together with the ILP participants to reach consensus.
In addition, local firms’ leadership in the program must be supported by a strong human capital. Technological adoption involves a complex interaction between human capital and institutions. The local firms should have a qualified human capital to support the program. On doing this, the government should specifically respond to the local firms’ need through enhancing the role of research institution. The research institutions should conduct training programs to develop talent pool specifically for each type of industry.
Conclusion
Take-off growth can be achieved through technological progress by promoting economic openness while assuming there is a knowledge spill-over. However, the spill-over in Malaysia is hampered and a reform in the industrial policy is needed. Malaysia has implemented a program called ILP to increase the effectiveness of the technology diffusion. However, the program has not ensured the emergence of competitive local firms which are able to create marketable high technological products. On doing so, a reform in ILP structure is crucial by enhancing the role of local firms and research institution.
To achieve the technological frontier, Malaysia needs a total reform on the manufacturing industry, political institutions, and socio-cultural structure. Nevertheless, deep and extensive reforms are often not the best way, only a significant and focus reform is needed to have the biggest and fastest effect.
(1596 words)
References
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