Covid-19 A wake-up call against loosing out

Kuala Lumpur, 15 September 2020 – The Institute for Democracy and Economic Affairs (IDEAS) or IDEAS organised the 3rd Kuala Lumpur Roundtable (KLR) this week to discuss policy choices for Malaysia’s recovery.

One of the main topic of discussion was on Malaysia’s high regional supply chain integration and how to attract foreign direct investment.

Malaysia is also a regional manufacturing hub for high-tech sectors, boosting long-term industrial development and upgrading.

IDEAS recommends that the government should support measures to enhance MNC-SME linkages so that SMEs can transition out of low-value adding activities.

Members of the Roundtable highlighted policies to aid in attracting FDI as part of the recovery.

“Better targeting of tax incentives, a sustainable, gradual plan to reduce foreign labour dependence and promote skills and digitalisation, and trade liberalisation, including CPTPP and RCEP ratification,” the forum was told.

COVID-19 RECOVERY

The Roundtable also highlighted that a clear, transparent political process is needed to support good policy-making for the COVID-19 recovery.

Several prominent figures in Malaysia’s policy, economic and corporate circles attended the event.

Given Malaysia’s relative success on the public health front, the discussion centred around Malaysia’s long-term COVID-19 economic recovery strategy.

This in conjunction with the recent release of IDEAS’ new briefing paper titled “COVID-19 Recovery Strategy: Malaysia as a Regional Manufacturing Hub.

The paper, co-authored by Research Manager of IDEAS Lau Zheng Zhou and Natasha Tan, encourages Malaysia to revisit its macroeconomic principles and priorities for post-COVID growth and development.

This is especially timely given the current supply-chain relocations, with many firms considering relocating their production hubs, especially to the ASEAN region.

Due to Malaysia’s deep integration into existing global and regional supply chain participation, the country is in a good position to attract these FDI flows.

“In light of these supply-chain reconfigurations, alongside our competitiveness in specific sub-sectors and relative success in flattening the COVID-19 curve, members of the Roundtable urge the government to take advantage of this window of opportunity to attract much-needed FDI.”

Commenting on this issue, Lau, states that “Malaysia should prioritise the development of regionally competitive, high-technology sub-sectors, as attracting FDI in these industries will help form the basis for our long-term development and industrial upgrading.

“However, investment incentives alone will not be sufficient. We should prioritise a ‘race to the top’ approach in encouraging foreign investment, through fostering good institutions and developing physical and human capital.”

SMES AND MNCS

In order to adopt the role of a regional manufacturing hub, there should be a greater domestic focus on nurturing a sophisticated domestic industrial ecosystem in strategic sub-sectors.

Yet the lack of compatible SMEs in these industries remains an issue, highlighting the importance of SME upgrading and realignment to better meet the needs of relocating MNCs.

The government should continue to support SMEs in transitioning out of low-value adding activities, to better facilitate the creation of a sophisticated supply network.

In addition, the briefing paper draws attention to the weak linkages between MNCs and domestic SMEs.

Strengthening the partnership between both types of firms will maximise the spill-over benefits from FDI—including knowledge and technological diffusion—enabling SME supplier firms to increase their competitiveness and resilience.

The KLR members highlighted key action items to achieve this FDI-driven recovery, namely, more explicit targeting of tax incentives, a sustainable, gradual plan to reduce dependence on foreign labour and promote skills and digitalisation, and trade liberalisation, including ratification of the CPTPP and RCEP.