A reform on Malaysia’s technology transfer program

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

Cherif, R & Hasanov, F 2015, ‘The leap of the tiger: how Malaysia can escape from the middle-income trap’, International Monetary Fund Working Paper WP/15/131, International Monetary Fund, .

Hill, H. 2012, ‘Malaysian economic development: looking backward and forward’, in Hill, H. Yean, T.S. and Zin, R.M.H. (eds.), Malaysia’s development challenges: graduating from the middle, London and New York: Routledge.

Jones, CI, Romer, PM 2010, ‘The new Kaldor facts: ideas, institutions, populations, and human capital’, American Economic Journal: Macroeconomics 2010, vol. 20, no. 1, pp. 224-245, < http://www.aeaweb.org/articles.php?doi=10.1257/mac.2.1.224>.

Karikomi, S 1998, ‘The development strategy for small and medium enterprises in Malaysia’, IDE APEC Study Centre, Working Paper Series 97/98 No. 4 .

Muro, M & Katz, B 2010, ‘The new cluster moment: how regional innovation clusters can foster the next economy’, Metropolitan Policy Program, < https://www.brookings.edu/wp-content/uploads/2016/06/0921_clusters_muro_katz.pdf>.

OECD, see Organization of Economic Cooperation and Development

Organization of Economic Cooperation and Development 2012, ‘Resurrecting industrial policy’, OECD Observer No. 292, .

Parker, J 2012, ‘Theories of endogenous growth’, Economics 314 coursebook, .

Rodrik, D 2003, ‘Introduction: what do we learn from country narratives?’, In search of prosperity, Princeton University Press.

Thiruchelvam, K 2013, ‘Malaysia’s quest for innovation: leveraging on science and technology’, 11^th Malaysia Plan kick off conference, viewed 4 August 2016, .

Will Indonesia learn her lesson from the Dutch Disease phase?

Inspired by Pierre van der Eng work

Indonesia experienced commodity boom several times. Before 1930 when there was a strong demand for sugar, the country increased its production and gained international trade surplus. In this time of Dutch colonialization, the trade was run without any policies of protection or transfer to other sectors. Resulting minimum utilization on the trade revenue for the country's capital stock which led to non-optimum long-term growth rate.

Then, came the time of oil boom in 1970s. In this era, the New Order implemented a trade protection for manufacturing and received high tax revenue from the oil extraction. The government at that time had medium term plans for the manufacturing sector which lead to industrialization, particularly of state-owned enterprises. Well-design development plan for the industry made slight Dutch Disease of commodity boom-bust and took Indonesia's industry to a step forward.

The world then experienced another commodity boom from early 2000 to the end of 2011, which was led by mining commodities such as coal and oil. Indonesia benefits from this boom indicated by strong GDP growth of around 6%, the highest after the Asian monetary crisis. However, the government on those years were relaxed, had unclear manufacturing policies, which intensified pressures to real effective exchange rate; thus, resulting industrial products less competitive. The recurring commodity boom in this cycle had no advantage in Indonesia's manufacturing sector. On the other hand, profit of mining sector which has low labor absorption could only be obtained by the businessman than the poor, resulting larger income gap.

So, will Indonesia learn her lesson from the recurring phase of commodity boom-bust? Or, will it only be a part of good-to-know economic history book? We will see in the next cycle....

Jokowi's Vision of the Economy : Investment-led Growth?

[Comments on Prof. Bambang Brodjonegoro's Public Lecture on 24 March 2016 in ANU]

Indonesia in the leadership of Mr. Joko Widodo has set it's goal to transform the economy from consumption-led growth to investment-led growth. An approach that has led several countries like Japan, Hong Kong, Taiwan, Singapore, South Korea and China from low income country to distinguished economic powers. These countries increase capacity of production and stimulate firms to increase their capital, and expect that bigger supply will eventually increase demand and support growth and employment. A side of the monetary terminology, investment-led growth may also means building a better human capital, i.e. health, education, and productivity.

For Indonesia, this could be a good solution since the country has strong demand, in particular household consumption which over the last decades consumption expenditure share has been around 60% of the GDP. With the strong growth of consumption accompanied by the supply side inelasticity, this has caused Indonesia is heavily reliant on import. An argument that support Jokowi's decision on this matter.

So where should the investment be directed to? First, investing to make production in Indonesia more efficient or in other words to lower the cost of production. Infrastructure is a good way to make logistic cost lower, additionally efforts like to reduce transportation barrier, red tapes are essentially needed. Java island, the biggest consumer and producer base, must have lower cost of distribution, on the other hand Eastern Indonesia infrastructure projects should also be mended. Another area of improvement, is the cost of energy. Until now, the availability and continuity of electricity is a big problem in Indonesia which leads to higher electricity cost of the industry. Second, producing the right product to meet domestic demand. We have seen how investment-led growth created Great Depression in America which the increase of supply insufficiently considers the power of demand. Thus, Indonesia should increase the basic industries and sectors, i.e. food, agriculture, processed food products.

Now, the next question is 'Can Indonesia achieve it?'. Challenges for the government are to ensure good business climate, reducing corruption and creating political stability, investment and infrastructure should avoid to compete over land which creates asset price hikes, plus the labor market and wage must be competitive. Financially, the financial sector should have the intermediation capacity to distribute loans, giving low cost of capital, and better resource allocation. This also means encouraging people to have higher saving rates, and curtailing consumptive. Business wise, does the firms eager to invest? since government capacity is limited, private business investment should be the locus of growth.

All in all investment led growth might look like a solution to Indonesia, however if planned carelessly would made investment wasteful. Moreover, excessive and wrongly directed expansionary policies may lead to stagflation like Japan.

[Journal Review] Urban Shopping Patterns in Indonesia and Their Implications for Small Farmers

By Nicholas Minot, Randy Stringer, C. Wendy J. Umberger, and Wahilda Maghraby 
Bulletin of Indonesian Economic Studies vol. 51 No. 3, December 2015

Indonesia is one of the emerging countriest with the largest middle income growth right after China and India. While it means that more people have higher income, it also cause many challenges. Urbanization has become a focus on demographic and also economics studies. This new wave has altered urban dwellers behavior particularly on purchasing channels to modern markets. These channels offer better buying experience, more hygienic products, and some retailers even have large networks whereas it is more accessible.

This study investigate on how the effect of Indonesia's modern retailer emergence on traditional channels and also sellers. A household survey was conducted in several cities and the result is regressed to know the factors affecting urban household buying behavior. Based on the research, people with high expenditure will prefer modern channels. Products which are famous in the modern market are industrial products, whilst perishable products are more commonly buy in traditional channels. Additionally, it also forecast the portion of modern channels like supermarket, mini-market, and wholesale sellers using the dominant factors, that was expenditure per capita.

It would be more resourceful if the paper compared the survey result with a similar survey conducted by Statistics Agency (Badan Pusat Statistik, BPS) Indonesia. BPS conducted a survey of consumption behavior every 5 years, called Survei Biaya Hidup (SBH). The respondents are urban dwellers living in more than 50 big cities across Indonesia. Respondents are told to write their every-day consumption and where they bought it in a log book. After several weeks, the survey officer would collect and aggregate the logbook to become the baseline of consumption to count inflation. The latest survey in 2012 covered a wide range of products, more than 400 commodities nation-wide, in traditional and modern market. For this reason, by incorporating this big scale of data, the analysis on urban consumer behavior in the paper would be more accurate.

Several variables in the equation may have multi-collinearity such as expenditure to education, and also having refrigerator with distance. People with higher education may have high income and resulting to higher expenditure. The latter variables can also relates to one another since people with refrigerator wouldn't mind to buy in further location, while those who don't have it will prefer closer location for frequent shopping.

An important variable should have been added in the research, which is price. The research have estimated the expenditure in modern channels to several variables like expenditure per capita, household characteristics, and travel time. However, comparing price of a product in traditional to modern market is crucial. Many competition theories, or even supply-demand interaction view price as an important variable. Middle income people who are dominant in the cities are price sensitive. Moreover, the result of the survey also indicated that price should have been an important factor, since in Indonesia dairy products, industrial products like eggs, or import products are usually cheaper in the modern market due to it's efficiency in handling and inventory cost. In addition, modern retailers  often subsidize those products to attract buyers. While perishable products, such as vegetables, fruits, and spices are cheaper in traditional markets since it's packaging cost and contract barrier are lower.

Lastly, to forecast consumer behavior, it should have include farmer's capacity on supplying the perishable products to the modern channels. Supply continuity and product quality are barriers that farmers must solved to increase their sales and could make a structural changes in consumer behaviors in the future. That is why, to predict modern contribution, the study firstly must answer 'Why it is cheaper to buy products in traditional market?' By answering this question will give accurate prediction of the future of supermarket.

The research can be downloaded here

First post, after a while

Many things had happened since my last blog note. Happy or sad moments in those several years have made me a better person. I cant complaint.. Being a single mother, and also the only child is challenging. Many responsibilities and issues to be solved everyday. But, the toughest part is not sharing our thoughts and problems.   One of my way out is catching up with a good friend. Random chats, laugh out loud, daydreaming are what  I love to do with a good friend. It's a good escape, a switch from my issues. And also, I like to see a good friend feeling happy talking to me, it makes me happy too.. :-)   I seldom talk what I feel to my friends. Not that I dont trust my friends, but I dont wanna be a burden to my friends and I dont like being dependent to others. Meeting up and make a good friend smile is good enough for me..   Another alternative is writing. I used to perceive blogging as an intellectual stimulation, but now it can be a RELEASE. It can be a theraphy for my soul, keep my feet on the ground, and make my head occupied with important matters. Thus, it's time for me to write regularly. And I will surely try to upload it in this blogspot..