MALAYSIA is in the midst of an interesting flux of events that has culminated in such a manner as to challenge our policy makers.
The landscape for industrial policy and investment lies in shifting grounds that have assumed a complicated pattern that is almost kaleidoscopic.
We can disentangle the fragments to find such varied elements as Chinas continued surge ahead; the flurry of free trade arrangements that present themselves; the demands that come from negotiations at the World Trade Organisation.
There are new competitors that were not prominent 10 years ago.
There are new rules that were not an issue earlier on. And there is a search for new and more complex industries that will be the future source of growth.
The implications of this scenario are tremendous. It signals a move into a new era. It also means that politicians and policy makers can no longer travel along well-traversed ground.
The China element is not daunting, at least for the moment. We have convinced ourselves that China is good at low-end manufacturing.
The fact that the institutional foundations for a vibrant capitalist system is still not in place gives us much respite.
We also feel that we are ahead on the knowledge-economy achievement curve. It is pertinent to note that some surveys indicate that many multinational companies have found their experience in China to be less satisfactory and profitable than expected.
How, then, do we rationalise the rising foreign direct investment that seeks China? First, China, by virtue of its huge population, provides a certain market for foreign investment. Second, China with its large supply of cheap labour can be the workshop for the world.
Chinas progress can be felt more palpably, perhaps, a decade or two later. And the trigger will come not because of its low production costs, but because of its highly skilled human capital.
The trends in published research are one indicator of what is to come. Researchers from Chinese physicists have been submitting more than 1,000 papers a year to top physics journals in recent times.
American contributions accounted for only about 30% of published articles in 2003, down from 61% in 1983. China is not the sole cause for this phenomenon, but it is certainly an important variable.
One cannot ignore the fact that about 400 foreign companies have set up research centres in China. Most of them have been established to do research that will result in important product innovation.
A lot of US companies set up research and development units overseas to improve production processes or modify products to suit local tastes. But it is a different story when they are being established because of the countrys scientific excellence. That, it seems, is the case with China.
Perhaps, China does present more opportunities than threats at the moment. But time does not end at the present moment, and we need to prepare our economy for a target period that lies 10 or 20 years ahead.
In practical terms this implies that we must not discount the fact that China has the capability of producing a high quality, technologically competent workforce.
What is frightening is the prospect of having a competitor which can offer superior skills as well as an environment with low production costs. The way China is going it just about might be able to do that.
Gone are the days when it was sufficient to offer tax holidays, open free trade zones, and supply utilities at attractive rates. A whole new host of issues has arisen. These days, investors are interested in such things as the intellectual property rights regime in a country.
An adequate legal framework is not sufficient; it has to be effectively implemented. Malaysia does not fare too poorly in this area.
Malaysias integration into the global economy will mean that it will have to wrestle with thornier issues such as competition policy and law, affirmative action policies, and Government procurement. This, to be sure, is only a partial list.
Those who choose to be critical of the Government, or who are nostalgic of the demise of socialism, will find the mention of these questions distasteful. Yet, these issues stare at us and it is, indeed, the scramble to invite investment, to generate jobs and to ensure economic growth which needs to be grappled with.
One must not have the impression that the Government is not reacting promptly or appropriately to the challenges that it faces. Not too long back, the Government relaxed its requirements on the equity participation of foreign companies.
Late last month, Prime Minister Datuk Seri Abdullah Ahmad Badawi announced that the Foreign Investment Committee (FIC) would take on a new role.
Investors will only be required to make a declaration that they have or will fulfil the conditions stipulated and that they will comply with any conditions imposed by the FIC. This simplification of the bureaucratic process is indicative of the Prime Ministers sensitivity to the changing climate of investment.
If we can continue to develop our human capital and readjust our institutional framework to align it with global requirements, then we can be certain of maintaining our lead. Then, there will be no need to fear China or India, or even worry about Vietnam.
l The author is a Research Fellow at the Malaysian Institute of Economic Research (MIER)