The issue now is how Malaysia can gain a competitive edge, continue to increase the standard of living of its people and to sustain economic growth in a new political economic environment. What strategies should the public and private sectors adopt to enhance competitiveness? What are the factors that will determine competitiveness? And how can Malaysia utilize its resources effectively in this challenging environment? According to the World Competitive Yearbook 2006 by the International Management Development, Malaysia is currently ranked 23 out of 61 countries. This is an improvement compared to 2005’s ranking of 28. No doubt the current economic scenario has changed. But the analysis has shown a fair view of where we stand in the international arena.
Nonetheless, according to the World Bank’s Ease of Doing Business Survey 2005, Malaysia was ranked only 21st, behind Singapore, which is ranked 2nd and Thailand, 20th. In the survey, Malaysia did not do well in the categories of dealing with licences, registering property and enforcing contracts. Other than a world-class infrastructure and a competitive package of incentives, international investors require an efficient policy framework and a hassle-free operating environment. Among the key issues which Malaysia will have to address is investment red tape. For example, property transactions in Kuala Lumpur require 8 to 12 months to receive FIC and Land Office approvals compared to less than seven days in some countries in the region. Hoteliers also complain that they require 75 different licences to operate in Malaysia. MNCs also face difficulties in getting approvals for bringing in their own specialised employees.
We cannot deny that the assessment on competitiveness will continue to push Malaysia to re-think and restructure economic fundamentals, and reposition businesses and government policies to handle unpredictable events that may arise from the volatile globalised economy. We need to recognize and be aware of changes taking place in the new economy. Businesses that are quick to recognize these changes will be the first to grab the opportunities and those businesses that are slow to respond will be bound to face problems in the new economy. At this juncture, allow me to briefly go through the definition of competitiveness and explain why nations compete. I will also highlight key factors that will determine competitiveness and strategies to further enhance competitiveness.
There are many interpretations of competitiveness. Some equate competitiveness to the performance of an economy. The recent idea of sustainable growth takes both hard and soft attributes such as personal security, education and raising standards of living. It promotes the idea that current growth should take account of the impact on the future generation. The OECD has defined competitiveness as “the degree of which a company can, under free and fair market conditions, produce goods and services which meet the test of international markets, while simultaneously maintaining and expanding the real incomes of its people over the long term”.
The fundamental of competition among the nations and enterprises is to increase the standard of living. Enterprises are no doubt the main engines of a country’s competitiveness. In addition, government also plays an important role in shaping the environment in which enterprises can operate effectively and efficiently, and hence contribute to productive growth and competitiveness. Macroeconomics indicators have traditionally been and still are significant today in determining and identifying growth factor and competitiveness. Growth conditions such as aggregate savings and investment, private and government support in innovation, ideas across sectors and those from foreign economies, sophistication of consumers driving productivity, quality of inputs, and the suppliers help in the assessment of a nation’s competitiveness.
On the other hand, one cannot deny the important factors at the firm level that determine competitiveness. For example, managerial skills, knowledge, education, marketing and uniqueness of products have an impact on productivity. Firms with good strategies and operations, political stability and the quality of the microeconomic business environment, coupled with sound macroeconomic policies will bring about economic growth and enhance a nation’s competitiveness.
Noting the importance to compete effectively for economic growth is undeniably the interplay of teamwork from both the public and the private sectors, let us now explore the factors that are affecting competitiveness. Key factors that affect competitiveness can broadly be classified into 3 levels:
a. aggregate macroeconomics and growth conditions,
b. national level,
c. and firm level.
All these levels are not separate elements but complimentary to one another.
Firstly, macroeconomic indicators and growth conditions such as aggregate investments and savings, private and public institutions that support innovations (academic, research institutes), ideas across sectors, ideas from foreign economies (venture capital, tax laws, strategic alliances), intensity of rivalry, sophistication of consumers driving productivity and local suppliers and their support in innovations have traditionally been and still are important today in determining competitiveness.
At the national level, we have to explore the quality of the business environment. Michael Porter’s diamond model has been popular in explaining four primary conditions that determine the competitiveness of a nation.
a. Quality of inputs (human resources, physical infrastructure);
b. Sophistication of supplier (components, machinery, clusters of related firms);
c. Local demand for advanced products and processes,
d. Rules and regulations governing the vitality of competition and incentives for productive modes of rivalry.
The first condition-quality of inputs can be divided into basic and advanced factors. Basic factors would include the country’s physical resources, climate and geography and demographics. Advanced factors are a product of investment by the individual, government and firms. The are:
a. quantity, skills and cost of labour;
b. knowledge stock such as technological knowledge, marketing knowledge, managerial knowledge that affect the quantity and quality of the goods and services;
c. the amount and cost of capital resources that is available to finance industry;
d. the type, quality and user cost of the infrastructure such as transportation, health care systems that affect the quality of life.
Sophistication of suppliers relate to supporting industries vertical and horizontal support. Vertical support relates to the presence of internationally competitive suppliers to ensure cost and delivery effectiveness. Horizontal support relates to the presence of internationally competitive related industries to coordinate and share activities with and encourage competition. Local demand factor is determined by the sophistication of local buyers, the size and growth of demand, and the internationalization of demand. Structure of firms and rivalry relates to management ideologies, company goals, employee motivation and the amount of rivalry.
The government plays an important role in the diamond model as government can influence all four Porter’s determinants through a variety of actions like providing subsidies to firms directly or indirectly such as in monetary form and infrastructure, tax codes, regulation of capital markets, and education policies that will affect the skills of workers. Another point is on the role of chance in the model. Random events can either benefit or harm a firm’s competitive positions. For example, technological inventions, acts of war and price shock.
Thirdly, firm level focuses on the quality on managerial skills, knowledge, physical capital, good marketing practices, uniqueness of products and more.In the modern economy, nations do not compete with products and services alone but with brains. The ability of a nation to build knowledge workers via a good education and training system is vital for competitiveness. How a nation prevents a brain drain, and attract and retain talents is critical for prosperity and to compete in the global markets. A well functioning and efficient financial system including an efficient and resilient banking and payment system is important for competitiveness. It is also the key for financial system to contribute towards competitiveness of the economy. At the same time, the resilience of the financial system should be able to withstand the destabilizing shocks to the system.
Institutional developments will be important in ensuring sustainability of performance of an economy. One key area is developing strong private and public institutions. Good corporate governance such as having effective boards of directors, strong internal controls, reliable accounting systems, audits and enforcement to ensure compliance are important.
The 10 golden rules of competitiveness listed by The World Competitiveness Yearbook are:
a. Create a stable and predictable legislative environment,
b. Work on a flexible and resilient economic structure,
c. Invest in traditional and technological infrastructure,
d. Promote private savings and domestic investments,
e. Develop aggressiveness on the international markets as well as attractiveness for foreign direct investments,
f. Focus on quality, speed and transparency in government and administration,
g. Maintain a relationship between wage levels, productivity and taxation,
h. Preserve the social fabric by reducing wage disparity and strengthening the middle class,
i. Invest heavily in education and in the life-long training of the labour force.
j. Balance the economies of proximity and globalization to ensure substantial wealth creation, while preserving the value systems that citizen’s desire.
SMIs development, restructuring and reforms are important to promote SMIs to be competitive regionally. SMIs constitute 92 percent of the manufacturing establishments. SMIs need to upgrade skills, manage appropriate technology, secure market niches, expand industrial networking, and acquire knowledge and quality assurance to ensure the creation of added value and competitiveness through productivity. In this respect, initiatives to develop SMIs by a number of agencies are being reviewed to address issues of viability and survival after AFTA.
We also need to close the knowledge gap to nurture creative and competitive human resources. Today, nations do not compete on products and services alone but with brains, education and know-how. Competitiveness relying on a cheap labour force is only temporary. Thus, building an educated and skilled workforce is significant for competitiveness. In line with the greater focus on human capital development, a total of RM45.1 billion was allocated under the Ninth Malaysia Plan to implement the various education and training programmes. To meet the Knowledge-economy requirements, human resource skills need to be upgraded and to generate knowledge workers to meet industry demand.
In an increasingly competitive global economy, the ability to leverage on Science, Technology and Innovation will become strategically more important in national development. Rapid advancements and the pervasive role of STI in the global economy require that the nation build upon and enhance its capability and capacity in STI in order to tap into potential wealth creating opportunities. Therefore, the Government has place greater emphasis on capacity building and strengthening the National Innovation System to build upon leading-edge technologies and know-how. Towards this end, the target will be to increase national R&D expenditure to 1.5 per cent of GDP by 2010 with private sector expenditure of more than 70 per cent. In addition, measures will be undertaken to achieve the target of 50 research scientists and engineers per 10,000 labour force by 2010. Hence under the Ninth Plan, an allocation of RM5.3 billion will be provided for STI initiatives to strengthen the NIS. In line with the focus towards downstream R&D activities and commercialisation, 67.9 percent will be allocated for R&D, technology acquisition and commercialisation of research.
There is a need to enhance general corporate sector resilience by ensuring businesses remain agile and are able to increase returns to shareholders and investors. The reorganization of business strategies and focus, rationalization and consolidation of operations as well as process restructuring will optimize group strength financially and operationally. One of the many important factors that determine a country’s competitiveness is related to value system and cultural impact. The Asian value system is generally based on the Confucian principles of hard work, loyalty, discipline, saving and education. This system is closely correlated to the support of competitiveness. Where do Malaysians stand in view of our multiracial background? Given a multiracial and multicultural background of Malaysians, I believe that we can create synergies that are supported by a good value system and the right attitude that will further bring Malaysia to a higher level of productivity and enhance competitiveness.
The transition from a Production-economy to a K-economy requires a change in mindset. The Government will continue to give priority to building knowledge workers. Policies, strategies and actions are taken to improve skills and competencies of the workforce to meet the new challenges of the K-economy. Certainly this must be complemented by the necessary changes of mindsets amongst the public sector employees and officials, in order to move away from the traditional functions of governance and, of regulating business, to one of partnership with business, motivated by the awareness of the need for the country, and the private sector, to be highly competitive to meet the challenges of the market.
What is important is for the business community to continue to assume its role as the engine of economic growth, optimizing on the opportunities created, and investing in activities which have been identified and promoted by the government, both in the traditional and new sectors. The government’s commitment is to continue to improve upon the public sector delivery system, at all levels of government, in order for it to function effectively and efficiently as the facilitator of private sector endeavour. Finally, the process of globalisation, and the advances in communications technology in particular, have brought peoples of the world closer. But, this increasingly integrated world, at the same time, has also made people feel an even greater need to defend and champion their particular belief-systems, values and principles at all cost.
Hence, in our country, we should never take our diversity for granted. Indeed, we are proud to say that we have successfully managed our religious and ethnic diversity with consciousness and sensitivity. In matters of race relations, we have managed to maintain harmony by an unwritten code of mutual respect and accommodation. We celebrate our diversity, not simply because it gives us a good name internationally as a working multi-cultural society, but because we know that this very diversity is in fact a source of our strength and of our competitive advantage.