This article first appeared in Digital Edge, The Edge Malaysia Weekly on December 26, 2022 - January 1, 2023

With the appointment of Datuk Seri Anwar Ibrahim as prime minister and the formation of his cabinet, the nation can finally hope that Malaysia will have a chance to shine again after multiple political upheavals and the end of the pandemic. Anwar faces a significant challenge because Malaysia has not only lost its Asian Tiger status but has also fallen far behind its neighbours such as Indonesia and Vietnam. We have been a nation in decline compared to our neighbours and have been stuck in the middle-income trap for decades. All is not lost, however, as good plans, policies and execution can bring the good times back, provided we make a major pivot from business as usual to a disruptive transformation of the economy and our mindset.

Despite moving from an agrarian economy in the 1970s to a manufacturing economy today, we are still largely a low-techno­logy manufacturing economy and also a resource-dependent economy — primarily oil, gas and palm oil. The only saving grace is the semiconductor sector, most of which is based in Penang and Kedah, where multinational companies (MNCs) rule the roost with a few Malaysian companies servicing these multinationals.

According to the Department of Statistics Malaysia, MSMEs (micro, small and medium enterprises) account for a massive 97.4% of all business establishments in the country. Of these, 78.6% are microenterprises, 19.8% are small enterprises and 1.6% are medium enterprises. Only 2.6% of business establishments in Malaysia are large enterprises, which include MNCs.

The vast majority of microenterprises are in the services sector with only 5.8% in manufacturing.

This is a clear indicator that Malaysia’s economy is not a high-tech economy but similar to that of an underdeveloped nation where most people work in micro- and small-scale low-value businesses. So, despite having a per capita income comparable to that of a middle-income country, we have been unable to break free from this bind because the vast majority of businesses are small and low-tech. Hence, we are stuck in the middle-income trap.

Being the perennial optimist, I still think we can fix this problem, but it will take a massive effort on the part of the government and businesses as well as necessitate the adoption of technology on a large scale.

We have many, many road maps, blueprints, frameworks and policy papers but almost all of these are incremental in nature and not disruptive. We have used the word “transformation” but what have we achieved that has been truly transformative? Our economy is still dependent on low-level manufacturing, palm oil, oil and gas, the same as it was 30 years ago.

The only truly transformative policy was the Multimedia Super Corridor (MSC) initiative in 1996, and although we have achieved some success with government adoption of technology, we have somewhat stalled over the last two decades.

It is time to use technology to disrupt the whole economy.

We need to look at every sector of the economy and determine how technology can be a disruptive force for good. Technology transcends all aspects of business and life. Yet we have low-tech manufacturing, we sell mostly crude palm oil with hardly a downstream industry to speak of and we do not have a large chemicals industry despite the fact we produce plenty of oil and gas.

Our financial sector is only just being transformed, though most banks are still not digital enough; agriculture is still at low productivity levels with minimal adoption of technology; transport and logistics are still essentially the same as they were decades ago with old inefficient diesel lorries the norm and warehouses that are not automated with zero use of robotics. I could go on and on.

It is not for a lack of start-ups in Malaysia building useful technology. Far from it, as I have seen many start-ups developing all sorts of technology. The problem instead lies with businesses that are reluctant to adopt technology because they fear it and because business as usual is still profitable, there is no desire to bother with technology. Of course, many business owners are also highly dependent on cheap foreign labour to keep the business running with the government constantly bowing to their demands to keep hiring cheap labour. As long as this goes on, businesses have an excuse not to adopt technology, and we will always remain a low-productivity, cheap labour-driven nation in a middle-income trap.

Perhaps it is time for the government to use the carrot and stick approach to cajole, persuade or force businesses to reduce their dependence on foreign labour and to adopt more technology because, in the long run, technology adoption will improve productivity and make companies more profitable.

We need to reward businesses that adopt technology and penalise those that do not. For example, the government can provide matching grants or interest-free loans to businesses that adopt local home-grown technology in all sectors. Whether it is in the service, manufacturing or retail sectors, businesses will adopt more technology if there is some sort of funding available to encourage them to do so.

We have offered the SME Digitalisation Grant and Smart Automation Grant under the Malaysia Digital Economy Corporation (MDEC) and Malaysian Investment Development Authority (Mida) respectively and these have helped companies reduce the cost of technology adoption. However, these were limited funds and they were not provided over the long term so not all companies could benefit from them. It is time to look at such grants on a much longer-term basis — perhaps between five and 10 years — so that more companies can benefit from it.

To encourage the adoption of local technology, we can even offer a double tax benefit so that they also save on taxes.

The stick should be that the government will gradually remove the use of foreign labour in most of these sectors, say over five years, and remain steadfast so that these sectors will be forced to adopt new technology. Even in the construction industry, the use of industrialised building systems can significantly reduce the use of foreign labour.

I remember a few years ago, from my hotel window in Perth, Australia, I observed a condominium complex being built. Over a six-hour day, they put up four floors of the apartment and they had only about six workers to install prefabricated walls and floors. It was truly amazing. The same building in Malaysia would have required 20 workers and they would only complete one floor a day if at all. It is all about technology.

Whether it is manufacturing, agriculture, construction or the services sector, transformative technology is currently available that can disrupt the current way of doing business and move these sectors to a whole new level. However, adoption is not happening because business people are too set in their ways, and as long as there is no need, they will not adopt new technology. They are too comfortable and the government is too amenable to their requests for cheap labour so they do not bother to improve.

However, it is exactly this attitude that is keeping us behind our neighbours and this makes it difficult to get out of the middle-income trap.

With a new government in place and a smart minister in the person of Rafizi Ramli, we need to take real action to truly transform the economy. We need to study each sector, understand the technologies available and develop policies that encourage adoption (the carrot) and policies that get businesses out of their comfort zones (the stick) so the nation can be pulled out of its stupor and dragged into the 21st century to have a highly productive, high-tech-driven economy.

If we do not do this now, we will continue to fall behind — not just to Indonesia and Vietnam but soon Thailand and the Philippines will also overtake us — and it will be an opportunity lost. We will not recapture the mantle of an Asian Tiger but will instead be nothing more than an Asian kitten. That would be a very sad thing indeed.

Dr Sivapalan has a PhD in Venture Capital from University of Edinburgh, Scotland, is co-founder and senior partner of Scaleup Malaysia Accelerator (www.scaleup.my) and adjunct professor at the School of Science and Technology, Sunway University. He is the author of the book Supercharge Your Startup Valuation.

Save by subscribing to us for your print and/or digital copy.

P/S: The Edge is also available on Apple's AppStore and Androids' Google Play.