6

1

Driving Towards High Income

Economy Through Innovation

By

Economic Planning Unit

Prime Minister’s Department15 May 2012

OUTLINE

• Introduction

• Macroeconomic strategy (10th Malaysia Plan)– Private sector roles

– Innovation-led growth

• E&E industry – Contribution to the economy

– Challenges

• Moving Up The Value Chain

6

2

3

1.6

2.0

2.9

3.2

5.4

5.5

6.1

7.0

7.2

8.4

8.6

9.1

6543 8

%

1297210

Japan

UK

US

Philippines

India

Thailand

Indonesia

Taiwan

Korea

Vietnam

Singapore

Malaysia

China 11.5

1.5

2.5

2.4

5.0

7.0

4.8

5.2

3.8

4.9

7.5

5.4

5.5

0 2 4 6 8 10

%

10.0

GDP growth1990-1997

GDP growth2000-2008

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

1970 1975 1980 1985 1990 1995 2000 2005 2010

USD

Vietnam

Thailand

Taiwan

South Korea

Singapore

Philippines

Malaysia

Japan

Indonesia

Hong Kong

China

GDP/capita: 1970 - 2008

Asian Financial

Crisis 1997/1998

����

����

. . . it has lost momentum since the Asian

Financial Crisis at the turn of the century . . .

. . . and risks being stuck in the

Middle Income group . . .

While Malaysia has made tremendous progress over the years, there are still economic issues and concerns to be addressed . . .

Downside Risks to GDP Growth…

Slowdown in global growth

Lower growth in private investment

Volatility of oil price

Geopolitical risks

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2

3

4

4

6

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However, we cannot afford to rest on our laurels given

the very real risk of decline – need great urgency to act

Thus, the Government is implementing 3 major

initiatives to transform the nation – the GTP, ETP & RTP

Economic growth will be private-sector driven & market-

based, with the Government committed in its role as

facilitator

Malaysia has transformed itself from a poor country to a

middle-income country

Going Going Going Going Forward: Malaysia is at a critical juncture in its Forward: Malaysia is at a critical juncture in its Forward: Malaysia is at a critical juncture in its Forward: Malaysia is at a critical juncture in its

development journey . . development journey . . development journey . . development journey . . .

5

These transformation agenda requires the concerted &

consistent effort of all stakeholders – the people, public

& private sector

o Reducing Crime

o Fighting Corruption

o Improving Student Outcomes

o Raising Living Standards of Low-Income Households

o Improving Rural Basic Infrastructure

o Improving Urban Public Transport

o Addressing Cost of Living

National Key Results Areas (NKRAs)

o International Standards and Liberalisation

o Government's role in business

o Human Capital Development

o Public Service Delivery

o Narrowing Inequality Gap

- Bumiputra Economic Transformation Roadmap

o Public Finance Reform

o 12 National Key Economic Areas (NKEAs)

Strategic Reform Initiatives (SRIs)

10th MP Strategic Thrusts

4 Pillars for National Transformation…NATIONAL TRANSFORMATION POLICY

TOWARDS ADVANCED HIGH INCOME ECONOMY

• Creating a conducive environment for unleashing economic growth

• Moving towards inclusive socio-economic development

• Developing and retaining a first-world talent base

• Building an environment that enhances quality of life

• Designing Government philosophy and approach to transform Malaysia

1MalaysiaPeople First, Performance NowPreserve and Enhance Unity in Diversity

Transformation of Government to be more effective in public service delivery

10th Malaysia Plan & 11th Malaysia Plan

Rural transformation to attract private investment, employment &

economic activities and encourage young people to return and serve

Government Transformation

Programme

Rural Transformation

Programme

Economic transformation towards a high

income country by 2020

Economic Transformation

Programme

Political Transformation

Programme

National Transformation Policy

Political transformation programme to complement the

economic and public delivery initiatives

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6

4

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Creating the environment for

unleashing economic growth

(including 12 NKEAs)

10MP Strategic

Thrusts . . .

Moving towards inclusive socio-

economic development

Developing & retaining a first-

world talent base

Building an environment

that enhances quality of life

Transforming government to

transform Malaysia

Macroeconomic Targets of the Tenth

Malaysia Plan

CHAPTER 2: BUILDING ON STRENGTHS OF THE PAST

� Achieving economic growth of 6.0%

per annum towards high income

growth

� Growth to be led by the private sector

� Narrowing down of the Federal

Government fiscal deficit

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Real GDP (RM billions) GNI per capita (RM thousands)

Macroeconomic Strategies: GDP is targeted to grow by 6% annually to achieve high-income nation

SOURCE: Economic Planning Unit and Department of Statistics Malaysia

740.3

449.3

552.1

6.0% p.a.

20151406 131211100908072005

38.8

26.4

19.1

8.0% p.a.

2015141312111009082005 0706

9thMP 10thMP 9thMP 10thMP

USD21,012

USD11,770

CHAPTER 2: BUILDING ON STRENGTHS OF THE PAST

CHAPTER 2: BUILDING ON STRENGTHS OF THE PAST

6% p.a.

2015

RM740.3 bn

-111.6%

116.0%

11.2%

13.9%

12.6%58.0%

2010

RM552.1 bn

-99.1%

109.9%

11.8%

10.2%

13.4% 53.6%

… GDP growth

Share to GDP by contribution

7.7

4.8

12.8

5.0

7.2

8.6

Exports

Imports

Public Consumption

Private Consumption

Public Investment

Private Investment

SOURCE: Economic Planning Unit

Overall

7.2

5.7

1.1

3.3

3.7

Services

Mining & Quarrying

Manufacturing

Construction

Agriculture

Private

Investment

9th MP ~ RM

71.2 billion per

annum

10th MP ~ RM

115.3 billion per

annum

Share to GDP by sector

Growth (%) per annum, 2011-2015 Growth (%) per annum, 2011-2015

Overall 6.0

… GDP growth6% p.a.

2015

RM740.3 bn

2.9%

6.6%

5.9%26.3%

61.1%

2010

RM552.1 bn

3.3%

7.5%

7.5% 26.7%

58.0%

6.0

Macroeconomic Strategies: GDP growth to be driven by private investment

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Private sector investment is

critical to achieving high income

status

Overall

GDP 6.04.2

Imports 8.62.8

Exports 7.21.8

Public

consumption 4.84.8

Public

investment 5.06.2

Private

consumption 7.76.5

Private

investment 12.82.01

1 Private investment contracted by 21.8% in 2009

Source: EPU

Growth rate, %10th MP

9th MP

Key new initiatives to drive competitiveness and private sector

investment

▪ Modern & market friendly business regulation

to make Malaysia one of the top 10 nations in

the WB Doing Business report by 2015, from

23rd in 2010

▪ Remove market distortions by rationalising

subsidies

▪ Introduce Competition Law to govern

all firms including GLCs against anti-

competitive practices

▪ Liberalise the services sectors

▪ Enhance the ease of doing business–

conduct a comprehensive review of business

regulations to reduce cost of doing business

and increase efficiency of competition;

Creating a private sector-led economy1

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▪ Structural changes needed to sustain growth

▪ To move from an economy that competes on cost and

natural resources, to one driven by productivity,

innovation and able to attract and retain talent,

companies and capital

▪ 7 core strategies

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Creating a private sector-led economy

Supporting innovation-led growth

Rationalising the role of government in business

Developing small and medium enterprises (SMEs)

as an engine of growth and innovation

Competing globally

Putting in place the infrastructure for growth

Focusing on key engines of growth

Creating the Environment for Unleashing Economy Growth

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Liberalising the Services Subsectors1• Further liberalise of 17 services subsectors in phases

Public-Private Partnership Facilitation Fund2

• Provide a tipping point of RM20 bn to assist the private sector develop projects with strategic value

Bolstering the Banking Industry, Finance & Capital Market3

• Income tax exemption of 70% for 5 years

• Withholding tax exemption on interest payments on borrowings

• Stamp duty exemption on loan & service agreements

Kuala Lumpur International Financial District4

• Income tax exemption of 100% for 10 years & stamp duty exemption on loan & service agreements for KLIFD status companies

• Industrial building allowance & accelerated capital allowance for KLIFD Marque status companies

• Income tax exemption of 70% for 5 years for property developers

Accelerating the Capital Market & Islamic Finance5

• Tax deduction on expenses incurred for sukuk wakala for 3 years

• Income tax exemption for non sukuk issuance

• Exchange traded funds of RM200 mil as seed monies

New Initiatives to Increase Private Investment…

Real Estate Investment Trusts6

• Provide a concessionary tax rate of 10% on dividends of non-corporate institutional & individual investors

Intensifying SMEs activities 7

• Provide a shariah-compliant SME financing fund of RM2 bn, SME Revitalisation Fund of RM100 mil, SME Emergency Fund of RM10 mil

Local Franchise Businesses8• Tax deduction for franchise fees borne by local

franchisees

Promoting Tourism Sector9• Pioneer status with income tax exemption of 70% or

Investment Tax Allowance of 60% for 5 years to hotel operators (4 & 5 star hotels) in Peninsular Malaysia

• Tax incentives to hotel operators in Sabah & Sarawak

• Corporatise the Malaysian Healthcare Travel Council to promote & develop Malaysia as a main destination for healthcare services

Review of Real Property Gains Tax Rates10

• 2% on properties held & disposed within 2 years, 5% on properties held & disposed within a period exceeding 2-5 years & no tax charged on properties held & disposed after 5 years

Strengthening MIDA11

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A broad range of actions will be taken to enable and support innovation-led growth

Innovative activity across the

Malaysian economy to ensure that

Malaysia becomes an efficient,

flexible, and vibrant business

environment

Shaping a supportive eco-system for innovation

▪ Improve education, e.g. globally headhunt best

academic leadership

▪ Put in place K-infrastructure

▪ Bias trade/investment policy towards innovation

▪ Reform insolvency law

▪ Professionalise incubator programs

Funding innovation

▪ Rationalise Public VC

▪ Provide public VC funding

as equity

▪ Set up a Business Growth

Fund

Creating innovation

opportunities

▪ Support though public

procurement

▪ Introduce

regulation/standards

▪ Attract global K-SMEs as

a catalyst

Supporting innovation-led growth2

Putting in place innovation enablers

▪ Institutional reforms:

– Innovation Malaysia, PM’s Dept - support NIC in setting strategic

directions; systematic evaluation of innovation policy and prog. to

ensure coherency

– MOSTI: policy setting; secretariat to NIC;

NSRC: set priority for R&D investment and evaluate outcomes

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What is Innovation?

• Innovation is the creation of better or moreeffective products, processes, services,technologies, or ideas that are accepted bymarkets, governments, and society.

• Innovation differs from invention in that innovation refers to the use of anew idea or method, whereas invention refers more directly to thecreation of the idea or method itself.

• Beyond technology innovation

• Helps improve productivity and welfare

• The foundation of competitiveness that leads to long-term prosperity

E&E Industry in Malaysia

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Transformed into a manufacturing & servicesTransformed into a manufacturing & servicesTransformed into a manufacturing & servicesTransformed into a manufacturing & services----based economybased economybased economybased economy

1970: US$15.8bn

2011: US$192.3bn

GDP increased by

12 times

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E&E

7.8%

Total E&E Contribution to GDP

Kind of Economic Activity 2006 (%) 2007 (%) 2008 (%) 2009 (%) 2010 (%)

Machinery and equipment 0.8 0.9 0.9 0.7 0.8

Basic metals 0.5 0.7 0.7 0.5 0.6

Electrical machinery and apparatus

0.6 0.7 0.6 0.5 0.7

Manufacture of radio, television and communication equipment and apparatus

6.8 6.2 5.7 4.9 5.7

TOTAL (%) 8.7 8.5 7.9 6.6 7.8

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E&E Products are the highest contributor to the

export of manufactured products

Exports of manufactured products accounted for 67.7% ofMalaysia’s total exports in 2011. It increased by 2% to RM470.3billion in 2011 from RM461 billion in 2010.

The top 5 major export products in 2011 are:

• electrical and electronic products RM236.5 billion• palm oil RM64.8 billion• liquefied natural gas RM50.0 billion• chemicals and chemical products RM47.2 billion• and refined petroleum products RM36.5 billion

Source: MIDA

Performance of E&E industry

Investments in Projects Approved by Major Industry, 2011 and 2010

Source: Malaysia Investment Performance 2011, MIDA

In 2011, the E&E industry remained the leading

industry in terms of number of projects approved (129

projects), as well as investments (RM 20 .1 billion)

Performance of E&E industry Cont

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E&E Facing Challenges

�Declining economic contribution: E&E export share fell

from 59% in 2000 to 41% in 2009

�Increasing competition from China and other Asian sites

�Concentration on assembly leads to lower value added

E&E industry needs to move up the value chain

Moving up the Value Chain (MUVC) Moving up the Value Chain (MUVC) ––

What It Is?What It Is?

• Measured by the amount of domestic value

added generated by globally competitive firms

operating in your country

• Is about producing more knowledge intensive

goods and services

• Is about building the capacity of local as well

as foreign firms to conduct more complex

tasks (R&D, marketing, branding, skill

intensive products) in your country

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Moving up the Value Chain (MUVC) Moving up the Value Chain (MUVC) ––

Why?Why?•Economic transformation - strategic shift tohigh value added and knowledge intensiveactivities.

•Competitiveness in higher value-add activitiesnecessitates specialization.

•Value Chain Analysis - identify nodes in globalproduction networks that generate highestvalue added.

•Policy initiatives to focus & exploitopportunities in identified nodes.

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Smile curve: value added Smile curve: value added

opportunities within the firmopportunities within the firm

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Devices

System

Value

Add

Idea

Generation

BOM

Explosion

Go To

Market

E&E NKEA: EPP Distribution

Mature Tech

Fabs

LED Packaging &

Equipment

IC Design

Substrates Components

Advanced

Packaging

LED Front-End

Operations

Cell & Wafer

producers

Test &

MeasurementSolar Module

ProducersLocal SSL

Champions

Automation

Equipment

Wireless

Communication

Transmission &

Distribution

Home Electrical

Appliances

Industrial

Design

Industrial

Design

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MUVC of the Solar Industry

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Solar industry global context: Solar industry global context:

rapid demand growth and falling prices rapid demand growth and falling prices

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Way Forward Way Forward

• Mindset change: focus on value added

– Target quality investment

– KPI should be value added

• MUVC is more than filling up the supply chain

– Filling up supply chain may not yield higher valueadded

– Supplier development absolutely critical

• Role of government is limited

– Public sector as facilitator – consulting extensivelywith stakeholders

– Private sector takes driving seat

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Way ForwardWay Forward

• Anticipate global and regional changes

– Need to understand global trends (‘connect globally,develop locally’)

– Need to be proactive

• Build technological & organizational capacity of localfirms

• Cluster development

– Development needs to be private-sector led

– Clusters can develop in unexpected directions

• Demand stimulation

– Domestic procurement

– Preferential pricing to local firms for inputs that generatehigh value added

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Cont

Thank you