THE newly-themed policy agenda of “Malaysia Madani” is a good starting point to describe Malaysia’s pursuit of the next chapter of its economic recovery. This new approach by the government, “combines established practices with new methods designed to cope with emerging issues and uncertainties”.
With government debt levels remaining close to their statutory limit of 65% of GDP and fiscal space narrowing, a private sector- led growth model that reinvigorates the economy and promotes a resilient and sustainable growth model becomes vital.
The world has come to a challenging period for export-driven growth models. The scene is similar for Malaysia’s openly traded economy. Expanding Malaysia’s digital frontier can be a critical economic response to changing global trade patterns, rapid technological shifts, and geopolitical risks.
Malaysia aims to pivot from traditional sources of growth. Digital technology diffusion and innovation can drive towards achieving high productivity and high-value growth.
Malaysia’s digital economy has already been growing rapidly over the past decade. The Covid-19 pandemic that began in 2020 has further accelerated this trend. How-ever, digitalisation has yet to reach its potential in the economy.
The recent World Bank Business Pulse surveys show that the depth and breadth of small and medium-sized enterprises’ (SMEs) digitalisation remains limited, suggesting a growing risk of a digital divide forming in the country. Larger firms (80%) are more likely to invest in more sophisticated digital solutions than smaller ones (54%). Larger businesses invested in digital solutions covering broader business functions, including more advanced backend functions.
Another recent World Bank report, Digitalizing SMEs to Boost Competitiveness, found that, on average, large firms invested five times more relative to sales revenues than small ones. Working jointly with private sector associations and private training providers, the government could develop coaching for SMEs to understand better how to integrate digital solutions in their business operations. Combining digital programmes and tools with digital skills programmes could amplify the impact of these programmes, especially for SMEs.
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In addition to SME digitalisation, innovative startups can be a way to re-energise the private sector. However, the level of investment has yet to arrive at conducive financing conditions for startups to thrive. Another recent report, the Assessment of the Malaysian Start-Up Financing Ecosystem, found that venture capital activities in the country are relatively low compared with the region in relation to its level of economic development. Further, public support is concentrated in the more advanced stages of innovative activities.
To bring convergence to this critical area of innovation, firms need to be supported to raise capital at earlier and riskier stages of the innovation cycle. Once this is addressed, by rebalancing public support to earlier and risker stages of the innovation cycle, more innovative and new venture activities can flourish.
The RM1.4bil Dana Penjana fund was a welcome initiative to “crowd-in” private capital and invest in early-stage startups. It would be essential to find ways to sustain this success and scale up the potential impact of these initiatives to support high-growth innovative firms.
(The crowding-in effect refers to an increase in private investment due to increased public investment.)
Reinvigorating investments in research and development (R&D) activities is also pivotal if the effort to drive an innovation-led economy is to be successful.
Malaysia is off its targeted gross public expenditure on R&D of 2% of GDP. After a steady increase up until 2016, expenditure dropped from 1.4% of GDP in 2016 to 1% in 2018. Like public firms, private firms are also less likely to spend on R&D than their regional peers.
It is encouraging that the government established the Malaysian Research Accelerator for Tech-nology & Innovation (MRANTI) which aims to accelerate the creation and commercialisation of technology and innovation – to reorient technology transfer and commercialisation programmes to be more responsive to industry needs.
The key is to provide an enabling environment for MRANTI to play a catalytic role in translating research into industry-relevant outputs and crowd-in ideas as well as private capital financing.
The Malaysian government is committed to becoming carbon neutral as early as 2050. This requires driving ESG (environmental, social, and corporate governance) adoption among SMEs for sustainability and to remain competitive in the current global context.
Addressing SME digitalisation with being ESG-compliant will be key to Malaysia’s successful implementation of the National Invest-ments Aspirations Framework, which aims to ensure Malaysia is a competitive destination for high-value investments delivering sustainable and holistic economic growth.
The Madani policy embraces six core values: keMampanan (sustainability), kesejAhteraan (prosperity), Daya cipta (innovation), hormAt (respect), keyakiNan (trust) and Ihsan (compassion). With the right enabling foundations, these principles could breathe meaning into resilient and sustainable growth that is private-sector led.
Smita Kuriakose is a World Bank senior economist in the areas of Finance, Competitiveness and Innovation.
