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					            Malaysia and the Challenges of Globalization:
                     An Economic Perspective

                                Mansor Md. Isa
                     Faculty of Business and Accountancy
                             University of Malaya
                       50603 Kuala Lumpur, Malaysia

Paper presented at the “10th Biennial Tun Abdul Razak Conference”, Multicultural
         Center, Ohio University, Athens, Ohio, USA, 11-12 May 2007.

                Malaysia and the Challenges of Globalization:
                         An Economic Perspective
                          Mansor Md. Isa, University of Malaya

1. Introduction
One of the main focus of the third Malaysia’s Outline Perspective Plan that was termed
as the National Vision Policy that runs over a 10-year period 2001-2010 was stated as
“enhancing competitiveness to meet the challenges of globalization and liberalization”. In
fact similar assertion was already made in the previous 10- year plan, the National
Development Policy, 1991-2000. It was towards the end of the eighties and into the
nineties that the Malaysian government gave explicit recognition to the need of our
industries to increase its competitiveness to face the world of globalization. However,
enhancing competitiveness is just one of many responses towards globalization which
itself has many facets of interpretations.
         Globalization may be defined as a process of promoting greater movement of
people, goods, capital and ideas due to increase economic integration especially in the
form of trade and investments as manifested in efforts by many countries to remove trade
and travel barriers. In many respects, globalization is not a totally a new phenomenon as
people have been interacting economically, socially and politically, with each other from
great distances for centuries. What is really new is that the pace of this interaction has
accelerated dramatically in the last few decades, as countries have opened their
economies to trade and capital through the implementation of free- market economic
systems and the reduction in barriers to international trade.
         The term globalization in the economic sense can be broadly defined as a process
relating to the integration of economies worldwide where world economy is viewed as a
single market and production area with regional or sub-sectors rather than a set of
national economies linked by trade and investment flows. In addition it is characterized
by cross border operations of economic activities in terms of investment, financing,
technology utilization, production and marketing with the aims of achieving cost
         The term globalization is often used in tandem with the term liberaliza tion. In fact
liberalization is a response to or resulting from globalization. If countries were to obtain
maximum benefit from globalization they need to liberalize or “open- up” domestic
market. Liberalization include the reduction of tariff and non-tariff barriers; deregulation
of domestic laws, rules and procedures such as the relaxation of investment and capital
flows between countries; and enhanced transparencies in policies and practices.

2. The Blessings of Globalization
Logically globalization should bring more benefits than costs to all participating
countries. In a rather slanted view, Griswold, 2000 insisted that the less-developing
countries (LDCs) have the most to gain from engaging in the global economy. First, they
gain access to much larger markets, both for imports and exports. On the import side,
consumers gain access to a dramatically larger range of goods and services, raising their
real standard of living. Domestic producers gain access to a wider range and better
quality of intermediate inputs. On the export side, domestic industries can enjoy a

quantum leap in economies of scale by serving global markets in addition to selling in
domestic market. However in order to benefit from international trade industries in LDCs
must achieve global competitiveness in their production and marketing activities.
         Second, LDCs that open themselves up to international trade and investment gain
access to a much higher level of technology. This confers on LDCs a "late-comer's
advantage": rather than bearing the cost of expensive R & D, LDCs can import the
technology off the shelf. They can incorporate new technology by importing capital
equipment that embodies the latest advances and computers with the latest software.
Foreign Direct Investments (FDIs) and subsidiaries of multinational companies also bring
with them new production techniques and employee training that bolsters the host
nation's stock of human capital. In order to ensure smooth technology transfer however,
host countries must educate and equip its human resource to be technology literate.
         Third, engagement in the global economy provides capital to fuel future growth.
Most LDCs are people-rich and capital-poor. In a few countries in Asia, the level of
domestic savings has been high enough to finance domestic investment, but typically the
domestic pool of savings in an LDC is inadequate. Global capital markets can fill the gap,
allowing poor nations to accelerate their pace of growth. A poor country that closes its
door or fails to maintain sound domestic policies will forfeit the immense benefits this
capital can bring. However, we have also witnessed many examples of financial
globalization resulting in economic turmoil and crisis. The East Asian financial crisis in
1997 was a case in point.
         Fourth, globalization offers hope to the poor countries. Just as more open trade
tends to promote economic growth, growth in turn leads to poverty reduction. The
greatest reductions in poverty in the last twenty years have occurred in nations that have
moved decisively toward openness and domestic liberalization. The wealthiest nations
and regions of the world – Western Europe, the United States, Canada, Japan, Hong
Kong, Taiwan, South Korea, Singapore –are all trade-orientated. Their producers are
competing successfully with other multinational producers in the global marketplace. In
contrast, the poorest regions of the world – the Indian subcontinent and sub-Saharan
Africa – remain the least friendly to foreign trade. And those countries that have moved
decisively towards openness like Chile, China, and Poland, among others have reaped
real (in the case of China, spectacular) gains in living standards.

3. Malaysia’s “Involvement” in Globalization
3.1 Malaysia and Global Trade
Malaysia has long felt that the most effective ways to develop its economy is through
industrialization programs and the fastest way to do this was by inviting foreign direct
investments (FDI). Since domestic market was limited in size, Malaysia has been
aggressively exporting its industrial products to the world. It may be said that our
economic success has been largely due to external trade.
         Table 1 shows the ratio of external trade to gross domestic product (GDP) of
several selected countries for the years 1999 and 2000. Malaysia is ranked number three
in the list, preceded only by Singapore and Hong Kong. The fact that Singapore and
Hong Kong top the list is not surprising as both island states traditionally function as
entree ports and export outlets for their hinterlands. The trade to GDP ratio of 2.3

garnered by Malaysia means that the total size of Malaysia’s external trade was 2.3 times
the size of its GDP.

                                       Table 1
       Ratio of External Trade to GDP for Selected Countries for 1999 and 2000.
                     Merchandise Ratio       Service Ratio       Total Trade Ratio
      Country          1999       2000     1999       2000       1999        2000
 Singapore            3.099      2.953     0.581      0.523      3.680      3.476
 Hong Kong            2.234      2.562      n.a.      0.410       n.a.      2.972
 Malaysia             1.333      2.013     0.208      0.295      1.541      2.307
 Canada               0.438      0.758     0.080      0.113      0.518      0.871
 South Korea          0.534      0.728     0.076      0.135      0.610      0.863
 New Zealand          0.441      0.545     0.131      0.175      0.572      0.719
 Germany              0.460      0.563     0.077      0.114      0.537      0.677
 United Kingdom       0.413      0.439     0.100      0.147      0.513      0.586
 France               0.371      0.466     0.111      0.110      0.482      0.577
 Australia            0.264      0.347     0.075      0.091      0.339      0.438
 USA                  0.158      0.207     0.040      0.048      0.198      0.255
 Japan                0.171      0.177     0.041      0.038      0.213      0.215
Source: World Develop ment Indicators, 2002, The World Ban k

        Table 2 shows the direction of external trade (exports and imports) between
Malaysia and other selected countries/regions for the first-half of the years 2002 and
2003. The major export markets for Malaysia are the USA (about 21% of total export),
Singapore 17%, Japan 10% and European Union 12%. ASEAN countries excluding
Singapore take about 9% of Malaysia’s export. Major import sources include USA and
Japan with each supplying about 18% of Malaysia’s needs, Singapore 12% and EU 11%,
and ASEAN 11%. An additional point to note from the table is that, except with Japan,
trade balance with all countries and regions are largely positive in Malaysia’s favor. In
view of its dependent on external trade, it would be wise for Malaysia to take the forces
of globalization in a very serious manner, especially in relation to developed countries
such the USA, Europe and Australia, as these are our largest trade partners.

                                           Table 2
      Malaysia: Direction of External Trade for Selected Countries/Regions, 2002-2003,
                                 January-June (USD million)
        Country/Region                  Export            Import        Trade Balance
                                    2002     2003      2002     2003    2002     2003
 United States                         9,352     8,044    6,804    6,112    2,548    1,932
 %                                      21.0      16.9     17.6     16.1
 Singapore                             7,712     7,996    4,673    4,631    3,038    3,365
 %                                      17.3      16.8     12.1     12.2
 Japan                                 5,042     5,426    6,817    6,719    -1,774   -1,293
 %                                      11.3      11.4     17.7     17.7
 European Union                        5,535     6,140    4,350    4,479    1,185    1,660
 %                                      12.4      12.9     11.3     11.8
 ASEAN (excluding Singapore)           4,092     4,426    4,178    4,404      -87       23
 %                                       9.2       9.3     10.8     11.6
 Australia                              957      1,142     682      607       275      535
 %                                       2.1       2.4      1.8      1.6
 TOTAL                                44,570     47,595   38,594   37,962   5,976    9,633
Source: Econo mic Reports (2002-2003 and 2003-2004)

3.2 Malaysia and Global Investments
Immediately after gaining independence, Malaysia embarked on economic diversification
programs that focused on the development of the industrial sector, commercialization of
agriculture and development of a modern services sector. The development and
expansion of the industrial sector was made possible through large inflows of FDIs,
principally from multinational companies based in UK, USA and Japan. To attract these
inflows Malaysia introduced various forms of investment incentives.
        One of the important incentives was the granting of Pioneer Status to foreign
investors through the Pioneer Status Act of 1958 that allowed tax holidays to a maximum
of eight (8) years depending mainly on the amount of capital invested. Those who did not
qualify for Pioneer Status may qualify for other tax benefits such as investment tax
allowance, industrial adjustment allowance, infrastructure allowance, double deduction
for promotion of exports, incentives for the multimedia super corridor, incentives for
strategic knowledge-based company, incentives for the manufacture of machinery and
equipment, incentives for manufacturing related services, etc.
        Malaysia’s strength in fundamentals such as trade openness, legal protection of
patents, low tax rates, commitment to market pricing, a highly educated workforce, an
efficient and diversified financial system, strong corporate governance, well-developed
infrastructure and a wide array of tax incentives continue to be recognized as strong
points in attracting FDI. Based on the various incentives offered, Malaysia received large
inflows of FDIs that significantly contributed towards the development and expansion of
the industrial and services sectors and, to some extent, the agricultural sector. Within a

short period of time Malaysia moved ahead from import substitution industries in the
1960s, to export oriented (1970s), and followed by the heavy industries (1980s). Today,
Malaysia is amongst the world’s largest producer and exporter of electric and electronic
goods, textiles and other related products. Exports of manufactured goods for 2003
account to 82 percent of the total exports.
        The UNCTAD World Investment report 2003 listed Malaysia as one of the top
ten economies with the largest FDIs. 1 This is shown in Figure 1 and Table 3. As shown
by the table in 2002 Malaysia attracted some USD3.2 billion investments (or about 0.5
percent of the world’s total FDI). The largest recipient seems to be Peoples Republic of
China with a whopping USD53 billion of FDI inflows.

                                                     Figure 1
                                 Top 10 Developing Economy FDI Recipients in 2002.

           USD billion




















         Source: UNCTA D (fro m Bank Negara Malaysia Annual Report, 2003)

    Bank Negara Malaysia Annual Report, 2003.

                                            Table 3
             FDI Inflows by Selected Host Country/Region, 1991-2002 (USD million)
       Host       1991-96      1997      1998       1999       2000     2001      2002
     Country (Ann..Avg)
    Malaysia        5,438      6,323    2,714      3,895       3,788     554      3,203
    North Afr       1,615      2,716    2,882      3,569       3,125    5,474     3,546
    (6 countr)
    European       87,584    127,888 249,934 475,542         683,883 389,432 374,380
    Asia2          31,564     49,199 28,839       39,390      84,139   41,827 37,121
    Singapore       6,856     13,533    7,594     13,245      12,464   10,949     7,655
    Japan            890       3,225    3,192     12,742       8,323    6,243     9,326
    World         280,550    476,934 683,211 1,096,554 1,200,783 711,445 647,363
 Refers to former group of 15 nations
 Refers to West Asia, Central Asia, and South, East and South-East Asia
Source: World Investment Report, 2003, UNCTAD, Un ited Nations

        Table 4 shows the outflow of FDIs by selected home country/region for the period
1991-2002. Again, the European Union tops the list with a total of FDI outflow of
USD394 billion or 60 percent of the world’s total in 2002. This is to be expected as it is
normally developed countries that would be keen to explore outward investments as they
possess the necessary capital and know-how desperately needed by the developing
countries. Malaysia, being a developing country however, is beginning to get into the act
of investing abroad albeit on a very modest scale – its FDI outflows for the year 2002
amounts to USD1.2 billion or about 0.2 percent of the world’s total.

                                         Table 4
           FDI Outflows by Selected Home Country/Region, 1991-2002 (USD million)
      Home       1991-96      1997     1998       1999       2000     2001     2002
     Country (Ann.Avg)
    Malaysia       1,656      2,675     863       1,422      2,025     267     1,238
    North            27        476      367        313        228      202      267
    European     127,762 220,953 415,367 731,068           819,169 451,911 394,146
    Asia2         31,564     49,199 28,839       39,390     84,139   41,827 37,121
    Singapore      2,967      8,955     380       5,397      6,061    9,548    4,082
    Japan         20,943     25,994 24,151       22,745     31,557   36,333 31,481
    World        280,550 476,934 683,211 1,096,554 1,200,783 711,445 647,363
1. Refers to former group of 15 nations
2. Refers to West Asia, Central Asia, and South, East and South -East Asia
Source: World Investment Report, 2003, UNCTAD, Un ited Nations

        To realize the full potential of trade and investments and to achieve the economies
of scale, a country needs also to engage in reverse investments, that is, to invest in other
countries. This enables a country to search for new opportunities in overseas markets,
especially for export oriented home industries. Table 5 shows Malaysia’s gross overseas

investments by host countries for the years 1999 to 2002. The data in the table show the
outflow of funds for various purposes, such as direct equity investments, purchase of real
estates and extension of loans to non-residents abroad, and capital invested or loans
extended by foreign-owned companies in/to their parent companies abroad. As such this
table may not reflect the true FDI outflow activities of Malaysia. Keeping these in mind,
US seem to be the largest recipient of Malaysia’s gross overseas investments. This may
be due to the presence of many US multinationals that transfer funds back to their
         Malaysia has obviously reaped tremendous gain from its success in attracting
FDIs. Among others FDIs has contributed to rapid economic growth in the seventies and
eighties that was badly needed to redistribute wealth in order correct economic
imbalances among different races that existed since independence. However, the s ituation
of overly dependent on FDIs, has also led to a host of economic problems, such as (i)
lack of transfer of technology leading to continuous dependence on imported
technologies; (ii) failure to improve unemployment problems because of the adoption o f
capital- intensive technologies; (iii) persistent deficits in the services account of the
balance of payments account resulting from continuous repatriation of investment
incomes abroad; and (iv) restriction in the growth of local technology, expertise and
                                           Table 5
            Malaysia's Gross Overseas Investment by Host Country1 (in USD million)
       Country                         1999          2000          2001         2002
     United States                   135.00       1032.63      1056.32       1503.68
     Singapore                       430.26        768.42       547.89         278.16
     Netherlands                       27.37          0.53      139.74         244.21
     Indonesia                       104.74        141.05       442.89         236.84
     Hong Kong China                 114.47         41.58         26.32        107.89
     United Kingdom                  145.53        140.00         71.05        105.26
     People's ROC                      52.89        40.26         82.37         80.53
     Australia                         27.37        19.21         80.00         45.26
     Japan                             41.84        21.84         15.26         37.37
     Sudan                                 -             -          3.95        32.89
     Ireland                            1.05          1.32             -        32.11
     Vietnam                           37.37        13.16         23.16         20.26
     India                             26.58          5.79        11.32         20.00
     Philippines                       26.32        28.68         14.21         15.53
     Thailand                          39.74        76.84         35.26         11.84
     Chinese Taipei                     7.37          7.89          2.63         8.95
     Germany                            8.68          7.37          5.53         7.63
     Pakistan                          50.53        41.05         55.00          7.37
     Korea                              3.68          4.21          3.68         0.53
     Ohters2                        2243.15       1242.11       832.63       1526.16
     TOTAL                          3523.95       3633.95      3449.21       4322.11
Source: Bank Negara Malaysia Annual Report, 2003, p32)
1. Refers to direct equity investments, purchase of real estates and extension of loans to non -residents
abroad, and capital invested or loans extended by foreign -owned companies in/to their parent co mpanies

2. Includes Labuan International Off-Shore Financial Center, which is treated as non-resident for exchange
control purposes.

3.3 Malaysia and Global Finance
Free flow of financial resources is of course o ne aspect of globalization. Malaysia’s
experience in this respect is best explained by analyzing the 1997 financial crisis when it
was caught somewhat off- guard. It began with the forced devaluation of its currency and
this triggered various waves other financial repercussions – credit squeeze among
borrowers, especially those borrowing from abroad, scaling down of corporate
investments and production, scaling down of consumer expenditure, banks facing non-
payment of loans and stock market plummeted to an all time low. For example, in US
dollar terms, Malaysian stock prices were reduced to just 22% of what it was before the
         Why was there a currency crisis in the first place? From an academic point of
view one could offer several reasons. Firstly, the pace of economic growth in the first
half of the nineties was too rapid that it became unsustainable – a state of overheating of
sort. Secondly there was excessive credit growth that led to overleveraging the economy.
The loan to GDP ratio climbed from 97% in 1990 to 145% in 1997. Thirdly, there was a
prolonged current account deficit and short-term capital inflows beginning in 1993 and
continued until the time of the crisis. These factors resulted rapid domestic monetary
growth of nearly 20% leaving the market flushed with liquidity. A great amount of this
liquidity was channeled to non-productive purposes such as to finance share market and
real estate speculation. It was estimated that these two sectors received almost half of
total bank loans in 1997. There was noticeable escalation in asset prices that were not
justified by their fundamental values. Share prices as measured by the Kuala Lumpur
Composite Index rose from 500 in 1990 to a staggering 1200 in the first quarter of 1997.
         All these problems were seen to have contributed to a gradual deterioration in the
currency value. Indeed the warning signs were clear that the pace of economic growth
was unsustainable and an economic crisis was inevitable. But no one predicted the
timing, speed and magnitude of the crisis. What triggered the devaluation was the
manipulation of currency traders. Those who doubt this expla nation need only to look at
the many speeches and writings of the former Prime Minister of Malaysia, Mahathir
Mohamed in the years following the crisis (see for example Mahathir 2000).
         Malaysia’s immediate policy response was to adopt the IMF style deflationary
policies. Government expenditure was cut drastically in the October 1997 budget
announcement. This was followed by further austerity announcements in December 1997.
At the same time interest rate was hiked up. However, these measures failed to revive the
economy. Instead it went into “formal” recession with negative GNP in the first half of
1998. There was a sharp fall in bank lending and an increase in non-performing loans
leading to liquidity crisis in the banking sector. The share market went further down.
         After about one year adopting the IMF style policies, it was obvious that intended
results were not forthcoming. On 1st September 1998, the government decided on drastic
policy reversals: Imposition of capital controls beginning from September 1998, adoption
of expansionary policies - increase government spending and lowering of interest rates,
reduction of Statutory Reserve Ratio from 8% to 4%, and issuance of directives forcing
banks to achieve 8% loan growth for 1998.

4. Challenges and Policy Response
As globalization can bring benefits and costs to a country, Malaysia needs to follow
appropriate strategies reap maximum benefits and to prevent the adverse effects.
Malaysia in a way has been blessed to have experienced both worlds. It is often heard
from the voices of developing countries that globalization is invented by the rich and
developed countries to serve their own purposes but is detrimental to developing
countries. These accusations are often heard in the context of bilateral and multilateral
trade negotiations under GATT and later WTO framework. But as we have seen
globalization is more than just trading. One needs to take a holistic approach in dealing
with economic globalization.
        Malaysia has taken multi- faceted strategies to continuously prepare itself to be
able to become a smart player in the world of globalization. In fact the whole of national
development policies are geared towards preparing the country for higher economic
growth while at the same time to cope with and to benefit from globalization.

4.1 Management of Domestic Economy
It has been almost 10 years since Malaysia suffered the economic crisis brought about by
its currency devaluation fiasco. Although the crisis has resulted in serious setbacks in
long-term development plans, recovery was brisk. After registering a negative GDP
growth in the crisis year of 1998, we have since registered positive growth ranging from
4% to 6% with inflation kept well below 3%. The challenge ahead is spelled out very
clearly in the current Outline Perspective Plan (2001-2010) as well as the Ninth Malaysia
Plan (2006-2010). The emphasis must be to maintain economic growth, stability and
sustainability and to reinforce the implementation of structural policies that will make the
economies more flexible, encourage diversification, and reduce their vulnerability to
exogenous shocks.
         Rising capital flows place additional burdens on banking regulation and
supervision, and require more flexible financial structures. This aspect of globalization
thus confronts the country with a new challenge to accelerate the development and
liberalization of financial markets, and to enhance the ability of financial institutions to
respond to the changing international environment. Malaysia has been given a rude wake-
up call when its currency was devalued in 1997. To this, Malaysia responded by engaging
in a quick and decisive reformation of the banking sector.

4.2 Banking Reforms
On 29th July 1999, the Central Bank of Malaysia announced its effort to consolidate the
fragmented local banking institutions into a few large banking groups. At the time of the
announcement there were 21 domestic commercial banks, 25 finance companies and 12
merchant banks. The central bank envisaged that there would be only six banking groups
when the consolidation program is completed, each providing a complete range of
banking services. This announcement, although not unexpected, came rather abruptly
during the time the country was recuperating from the 1997 financial crisis. The crisis,
among others, has exposed the vulnerabilities of a fragmented banking system. Many
banks experienced extreme liquidity squeeze and saddled with unprecedented amount of
nonperforming loans. The troubled banks are only saved from bankruptcy by the swift
action of the government to refinance the nonperforming loans and to recapitalize ailing

banks. Taking lessons from the crisis, it is inevitable that a rationalization and
consolidation program of the banking sector need to be taken so that the banking sector is
able to withstand such future shocks.
         It has long been felt that having many small banks, leads to inefficiency and
structural weakness in the banking system. At the same time, Malaysia has to liberalize
its financial sector in conjunction with the AFTA and WTO programs. With the increased
pace of globalization and financial liberalization, the local banks have little choice but to
become stronger and more efficient. The consolidation program is expected to result in
the strengthening of the banking sector. Active negotiations among the banking
institutions took almost a year when finally the Central Bank approves a final list of 10
anchor banks.

4.3 Education Reforms
In the last two decades or so the demand for higher education in Malaysia increased
tremendously, fueled by the rapid economic growth and prosperity. Since places in local
universities were limited Malaysia had been aggressively sending students overseas,
especially to United States and United Kingdom. However, the financial crisis of 1997-98
had resulted in the cost of overseas education to Malaysia to be prohibitively expensive.
We were forced to consider alternative strategies. We improved local educational
infrastructure by building more universities and colleges and upgrading existing ones.
The high demand for tertiary education is being absorbed by local universities and
colleges. The need to send students overseas has greatly diminished, except for selected
disciplines. At the same time, more foreign students, especially from developing
countries, are now coming to Malaysia for their tertiary education.
         In 2005 Malaysia has 17 public and 22 private universities compared to 11 and 16
public and private universities respectively five years ago, representing a 44% increase in
half a decade. Total enrolment in local universities degree programs increased from
260,000 in year 2000 to 313,000 in 2005 representing a 21% increase. At Diploma level,
the number increased by more than 100% over the 5-year period, from 209,000 in 2000
to 441,000 in 2005.
         The importance of education has long been recognized by Malaysian population
and government. It is no longer adequate to possess abundance of natural wealth if the
society does not have the knowledge and know-how to add value to the raw materials. As
experienced by almost all developing countries, becoming a mere supplier of raw
materials only served to enrich the developed countries while themselves getting
minimum benefits. In order to correct the situation, developing countries need to take a
serious look at their education system, especially at the tertiary level, with the aim of
creating a knowledge-based society, capable of producing things from our own raw
materials, or imported raw materials.
         In today's world of globalization, tertiary education is basic education, and should
be accessible to the masses, no longer to a selected few. This is especially true for
Malaysia with its aspiration to achieve the status of a developed country by year 2020. In
year 2000, about 25 percent of the university going age cohort enters tertiary education. 2
This is a far cry from the percentages for developed countries; for example USA 81%,

    Ministry of Education Malaysia (2001).

Australia 72%, UK and Canada 60%, Germany and Japan around 50%. 3 Our target is by
year 2020 this percentage will increase to 60 percent, which would be at par with that of a
developed country. It’s a daunting task indeed.

4.4 Development of Small and Medium Scale Industries (SMIs)
Presently, the small and medium scale industries constitute about 80 percent of the
manufacturing establishments in Malaysia and they are mostly owned and managed by
local investors. However, their investment is less than half of the total investment while
their contribution to the manufacturing sector value-added is a just a third. They are
plagued by various problems such as inadequate capital, poor managerial, marketing,
production skills, and low technology. These problems resulted in poor quality products
that are not competitive even in domestic market let alone in international markets.
        Malaysia realizes the potential of SMIs in the industrialization process and the
importance of this sector to generate business opportunities, employment, income and
reduction of poverty. Therefore Malaysia has decided to improve the capability of SMIs
to supply the intermediate inputs to the larger firms and encourage these SMIs to export
their products, especially in the light of the establishment of AFTA in 2003. The focus of
the activities of the SMIs is in the supportive industries producing parts and co mponents,
mould and die, testing and tool making, and high quality casting and forgings. The
linkage between the SMIs and the larger firms are done through subcontracting
arrangements. The government provides infrastructure facilities to SMIs and relocates
them from the congested urban areas to the less developed regions by building industrial
complexes to promote R&D activities, improve productivity, and competitiveness. This is
necessary to increase the local content of manufactured goods and pave the way for
industrial expansion through industrial linkages.

4.5 Development of Science and Technology and R&D
Malaysia considers science and technology as an important vehicle to meet the challenges
of globalization. Toward this end the government has encouraged students to undertake
science and technology in the secondary and tertiary education. This is to increase the
number of scientists, creates conducive environment for activities in R&D, improve
creativity and innovativeness, productivity and competitiveness. The government has also
emphasized the technical and vocational training to provide sufficient number of skilled
and semi-skilled labor force.
         Malaysia has already achieved satisfactory level of competence in R&D in
agriculture such as in rubber and oil palm. But R&D in the industrial sector is at a low
level. In year 2000 national R&D expenditure in relation to GDP was only 0.5%,
compared to Germany 2.3%, USA 2.5%, Japan 2.8 and South Korea 2.9%. Although
national budget on R&D is on the rise, it is still a far cry compared to the amounts spent
by developed countries.
         Additionally, Malaysia has also taken the initiative to upgrade the R&D facilities
in the universities and science and technology parks to provide better environment for the
R&D activities. Fiscal incentives are extended to the private sector to encourage them to
participate in education, training and R&D.

    World Bank (2002)

4.6 The Challenge of Liberalization
As Suppermanian 2000 puts it, the trend towards liberalization is not only irreversible,
but the pace can only intensify and accelerate. Malaysia recognizes that there are benefits
to be derived from liberalization. Thus far Malaysia’s liberalization initiatives have
enabled her to effectively respond to the challenges and opportunities of an increa singly
globalize economy. These policies had resulted in expansion of exports, FDI inflows,
accelerated the industrialization process, aided the technology transfer process and
evolved Malaysia into a production base of high quality products.
        However, unfettered liberalization could also adversely affect the domestic
industry if they do not have the capacity to compete. The scheduling of liberalization
measures is crucial so as to ensure that the domestic sector is sufficiently prepared – it
has to be done gradually and progressively to avoid any major disruption or dislocation.
Commitments made should be properly sequenced and phased as domestic industries
acquired the necessary competitive strength.

Defined as a process of promoting greater movement of people, goods, capital and ideas
due to increase economic integration especially in the form of trade and investments,
globalization should serve to benefit all participating countries regardless of their
development stages, if properly and fairly executed. It therefore presents great challenge
to governments and policy makers to devise appropriate strategies in order to benefit
from globalization. Studies indicated that countries that opened their markets stand to
gain and experience greater development compared to autarky countries. The benefits
include rapid economic growth, increase in social welfare and reduction of poverty,
acquisition of technology and accessibility of foreign capital.
        Malaysia’s involvement in globalization activities may be divided into three broad
categories – international trade, investments and capital flows. In trading, Malaysia is
currently rank number 17 in the world’s trading countries based on the size of its
international trade compared to its GDP. In investments, Malaysia has been net recipient
of FDIs since its independence, but in the last decade it has begun investing abroad as
well. FDIs have been very important elements in making Malaysia’s industrialization
program a success. Malaysia has also benefited a great deal from liberalizing its financial
market to facilitate capital flows that has greatly facilitated FDIs. However, unfettered
short-term fund flows and unregulated currency trading have resulted in the currency and
economic crisis in 1997. Malaysia’s response in liberalizing the financial market and
reforming the banking sector should benefit the country in the long run.
        The challenges of globalization facing Malaysia are many. Basically it has to
balance the need to open- up its market and the need to safeguard its local industries. With
clear globalization and liberalization strategies, these two needs need not be mutually
exclusive. But proper scheduling needs to be made for gradual opening- up in order to
allow sufficient preparation by domestic industries to upgrade their competitiveness. At
macro level, Malaysia needs, among other things: first, to manage its domestic economy
to maintain a sustainable pace of development while at the same time be heavily involved
in globalization activities. Second, it should continue to monitor the liberalization of
financial markets in order to attract capital flows and to improve its resilience to external
shocks. Third, it should reform its higher education very quicky in order to create a

knowledge-based society. Compared to developed countries, Malaysia has still a long
way to go in providing higher education to its population. Fourth, it has to allocate more
resources, financial, facilities and human, to expedite R&D activities. Compared to
developed countries, Malaysia’s current R&D expenditure is very small.


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