PETALING JAYA: Malaysia’s ability to participate in high-value-added segments of green-product markets is constrained by a lack of large domestic firms investing in technology development.
In its paper Building a Sustainable Industrial Base: Malaysia’s Green Transition, Khazanah Research Institute (KRI) said a number of local companies are stuck in low-value-added segments of the global value chain because of the domination of global firms.
“While business groups could foster innovation and market entry, political dynamics and limited state capacity to manage rent-seeking have hindered the development of competitive capabilities,” KRI said in the paper.
According to KRI, the last two decades have seen Malaysia experience de-industrilisation due to a decline in the manufacturing sector’s share of gross domestic product and employment.
This had become a concern because manufacturing drives innovation, the creation of jobs needing high skills and technological progress.
The decline together with the failure to shift to high-value-added industries, has been exacerbated by competition from other nations like Vietnam and China.
“Without a strong industrial base, Malaysia risks losing its advantage, making it harder to develop emerging sectors like green technologies, as seen in China’s success in the solar and electric-vehicles industries,” KRI said.
On top of that, the lack of skilled talent to support the growth of high-tech industries has also been an ongoing challenge, even as local STEM (science, technology, engineering or mathematics) graduates find themselves unemployed due to lack of demand in relevant sectors and declining investment in research and development.
KRI said this was particularly evident in the electrical and electronics sector where the number of high-skilled positions has stagnated despite claims of a talent shortage.
The research institute said this might be because industries cannot transition to higher value-added functions without significant government support, even with more graduates.
Currently, Malaysia’s industrial policy is constrained by the World Trade Organisation’s regulations and free-trade agreements, as well as tariffs.
“Malaysia also faces fiscal limitations due to the government’s focus on reducing deficits and new laws that cap fiscal deficits and government debt. These factors reduce the government’s ability to use industrial policies or fiscal expansion to support domestic industries,” it said.
KRI said, meanwhile, green-industrialisation policies could lead to paradoxical effects if not appropriately balanced for local environmental conditions.
For instance, a heavy policy commitment to reduce greenhouse-gas emissions may still leave industries involved unprepared to deal with climate impacts.
While South-East Asia is one of the most climate-vulnerable regions, Malaysia’s historical contribution to global emissions is less than 0.4%.
To mitigate these factors, KRI called for the expansion or modernisation of technology-related state-owned enterprises or to incentivise firms to transition into technology-centric sectors to absorb skilled labour.
It also said new tax measures should be explored to overcome fiscal constraints, as well as introduce new industrial policies to counter deindustrialisation and support the growth of competitive, technology-driven businesses.
“Other recommendations include integrating climate-adaptation policies more thoroughly into future climate strategies. Government and firm-level policies should place greater emphasis on industry adaptation to build long-term economic resilience,” KRI said.
