Nothing short of a "radical change in our approach to economic development" is required to achieve the new Malaysian government’s growth objectives, the primary one being to turn the nation into a high-income economy. That is the gist of the New Economic Model (NEM) announced March 30, 2010, by Prime Minister Najib. Previous economic plans worked well, delivering "outstanding performance, permitting Malaysia to provide for the health and education of its people, largely eradicate poverty, build a world-class infrastructure and become a major exporter globally," notes an excerpt from the NEM’s executive summary.

Ultimately, the goal is for Malaysia to remain a key destination for capital investment from abroad and from within. The Malaysian Investment Development Authority (MIDA) reports strong figures for 2009, but the new government is looking forward with plans for future investment rather than presume strong investment performance in the past will necessarily continue.

In 2009, total approved investments in the manufacturing sector amounted to US$9.5 billion — 766 projects — with foreign investments claiming $6.5 billion, or 68.4 percent, and domestic investments $3.1 billion, or 32.6 percent. In 2010, the January to June period saw $4.1 billion in approved investments in the manufacturing sector — 455 projects — with $1.8 billion (43.9 percent) from domestic investments and $2.3 billion (56.1 percent) from foreign investors. In the services sector, 2,730 investments worth $11.3 billion were approved in 2009, with the vast majority — 91.2 percent — domestic investments.

Toward Vision 2020

A new strategy for growth must be enacted to keep Malaysia on schedule to meet the Vision 2020 goal of being a fully developed economy by 2020. That vision, put forth in 1991 by former Prime Minister Mahathir bin Mohamed, aims to make Malaysia a market known widely as being market led, well-governed, regionally integrated, entrepreneurial and innovative. The NEM and a more recent document, the 10th Malaysian Plan, are designed to be the booster shots necessary to sustain and fuel economic growth to the finish line.

Among the economic hurdles to overcome are these identified in the New Economic Model: a slowing economic engine; lackluster private investment due in part to government involvement; dependence on external markets, with exports concentrated in electronics and commodities — mainly petroleum and palm oil; and too few skilled jobs. The result of these forces is a "middle income trap" where a market faces competition from other low-cost economies and no new viable niches or strategic reform plans are evident that can generate stronger economic growth.

At the same time, the NEM maintains, Malaysia has key advantages that will make possible the government’s plan to bring about sustainable economic growth for all Malaysians. These include a world class infrastructure that facilitates electronics manufacturing and exports and sets the stage for a growing logistics cluster; a mature manufacturing base; a location conducive to regional logistics hubs; and cultural, ethnic and biological diversity.

Strategy and Tactics

Malaysia’s New Economic Model can be viewed as a strategic plan for the next 10 years, one that shifts the focus from centralized, top-down economic growth to decentralized, private-sector-driven growth. The 10th Malaysia Plan (10MP), introduced to Parliament by the Prime Minister on June 10, is a more tactical plan for the 2011-to-2015 period, with specific measures for improving the quality of life and making Malaysia a key global competitor for capital investment.

The Plan touches virtually every aspect of Malaysian society, from healthcare to labor to education to infrastructure. And, fittingly, the 10th Malaysia Plan has 10 main premises on which all of the plan’s recommendations are based. They are:

• Internally driven, externally aware
• Leveraging on diversity internationally
• Transforming to high income through specialization
• Unleashing productivity-led growth and innovation
• Nurturing, attracting and retaining top talent
• Ensuring quality of opportunities and safeguarding the vulnerable
• Concentrated growth, inclusive development
• Supporting effective and smart partnerships
• Valuing environment endowments
• Government as a competitive corporation

Five key strategies will guide the government’s execution of the 10th Malaysia Plan. They are (1) designing government philosophy and approach to transform Malaysia using NKRA (National Key Result Areas) methodology; (2) creating a conducive environment for unleashing economic growth; (3) moving towards inclusive socio-economic development; (4) developing and retaining a first-world talent base; and (5) building an environment that enhances quality of life.

Of these five, the second — on unleashing economic growth — requires attention here from those seeking Southeast Asian locations in which to prosper in the years ahead. The Prime Minister explains Malaysia’s plan: "The main approach in transforming to a high income economy will be to adopt strategies based on specialization, given that strong and sustainable competitiveness is difficult to achieve without specialization."

The Plan will focus on 12 NKEAs (National Key Economic Areas) with the potential to generate high income. They are: (i) Oil and gas; (ii) Palm oil and related products; (iii) Financial services; (iv) Wholesale and retail; (v) Tourism; (vi) Information and communications technology (ICT); (vii) Education services; (viii) Electrical and electronic; (ix) Business services; (x) Private healthcare; (xi) Agriculture; and (xii) Greater Kuala Lumpur. On the last item, the government is including Malaysia’s capital city as an NKEA, given its potential to become a world-class city that can by itself be a driver of economic growth.

"In addition, the application of high technology will be emphasized in the development of NKEAs," noted Prime Minister Najib. "Technology platforms such as biotechnology, nanotechnology and high-end engineering will further increase the impact of the NKEAs on economic growth. For economic sectors which are not listed as NKEAs, such as green technology, automotive, aerospace and logistics, the development of these sectors will continue to be driven by relevant ministries, agencies and councils."

New Heights on the Value Chain

MIDA is working on all aspects of the 10th Malaysia Plan, whether manufacturing- or services-based, because all related sectors must contribute to economic growth. "Based on the new economic model, the 10th Malaysia Plan targets GDP growth of 6 percent per annum in the next five years," notes MIDA Director-General Datuk Jalilah Baba. "During the 10MP period, private investment is targeted to grow at 12.8 percent, or RM115 billion, per annum. Both the manufacturing and services sectors assume a pivotal role in contributing to the growth of private investments. The manufacturing and services sectors are envisaged to grow at 5.7 percent and 7.2 percent respectively during the 10MP."

To meet these economic goals, industries are encouraged to shift from low-value-added products and services to higher-value-added and knowledge-intensive industries with greater specialization in the 12 economic areas targeted by the 10th Malaysia Plan. "Greater contribution from new sources of growth with high-value-added elements will ultimately lead to a more diversified economy with increased share of high-value-added and knowledge-intensive activities to GDP," says Datuk Jalilah Baba.

Industry sectors will need to be more efficient, and they will need to invest in technology to that end. At the same time, she adds, MIDA will encourage progressive integration of the manufacturing and services sectors so they are more competitive regionally and globally. "MIDA’s role in ensuring the success of the country’s transformation is pivotal. In addressing the challenges ahead, MIDA is adopting a more focused and targeted approach as well as intensifying its efforts in attracting quality investments in the new growth areas and emerging technologies, high-value-added industries, high technology and capital-intensive industries, knowledge-intensive industries and R&D activities in line with the government’s effort to become a high-income nation by 2020."

To achieve these goals, several changes are taking place at MIDA, including these:

• MIDA has been empowered by the government with the necessary authority to negotiate directly with investors and targeted projects;
• MIDA has been designated as the central investment promotion agency for the manufacturing and services sectors, excluding utilities and financial services, to better coordinate the various investment promotion bodies in Malaysia;
• MIDA will be corporatized to give it the necessary organizational flexibility to attract and retain the manpower it needs to be an internationally competitive investment promotion agency, allowing MIDA to act quickly to engage investors more effectively;
• MIDA will work closely with a soon-to-be-established Talent Corporation — a government-run department in the Prime Minister’s office — to identify skills and talents domestically and abroad required by industries in priority economic sectors.

Medical Device Project
Illustrates Sector’s Potential

Though not a direct result of these strategies, St. Jude Medical’s recently announced plan to invest 108 million Malaysian ringgits (US$30 million) in a 300,000-sq.-ft (27,870-sq.-m.) facility in Penang is no less welcome. When open in 2011, the facility will house four levels of administrative space and three levels of manufacturing operations. The company will employ 300 initially and has plans to hire upwards of 1,000 in due course. Also competing aggressively for the facility was Singapore, according to published reports. Based in St. Paul, Minn., St. Jude Medical develops medical devices and services in the cardiac, neurological and chronic pain arenas. SJM products include pacemakers, cardioverter defibrillators and leads, which are used in pacemaker implantation.

Why Malaysia?

"St. Jude Medical has experienced significant, sustained growth in recent years, both in the U.S. and around the world," says Toby Andersson, managing director of the Penang operation. "The new facility in Malaysia expands our manufacturing capabilities and will help us to meet demand for our cardiac rhythm management technologies."

Andersson says the Malaysian government was "very industry friendly" and has been very supportive as it prepares to commence operations. Penang is a particularly good fit for SJM, he says, because of its long history of electronics manufacturing that is "in many ways similar to our manufacturing, hence the knowledge base here is very attractive for us."

Each new location in St. Jude Medical’s portfolio presents challenges and opportunities, says Andersson. In Penang, this can be seen in the area of employee training.

"Employees currently undergo extensive training, which includes not only learning the manufacturing process itself and how to build the device, but also teaching about the conditions which require the devices and how the devices are implanted," he explains. "Because of the quality and detail required to manufacture these lifesaving devices, the training process can take up to three months. So the challenge is the time it takes to properly train, and the opportunity is that once the employee is trained that they are quite knowledgeable about the manufacturing process and can feel good about the impact of creating a device that could possibly save a life."

The medical device sector is central to Malaysia’s past, present and future prospects as an economic power. More than 180 companies in the sector are operating in Malaysia, employing more than 36,000, many of whom work at small- and medium-sized enterprises. But multinationals operate there as well, specializing in such higher-value products as orthopedic products, surgical instruments, medical electrodes, catheters and others.

Efforts to develop this sector already underway include broadening the range of products toward the higher end; promoting domestic and foreign direct investment in the sector; expanding the range of support industries and services; and strengthening the institutional support for enhancing human resource development, research and development and compliance to international standards and regulations.

Electronics Investors Weigh In

Meanwhile, capital investors from around the globe have announced projects in recent months, especially in the electrical and electronics (E&E) industry. MIDA reports a Western Digital investment of $400 million for a facility in Petaling Jaya, Selangor, for production of disk drives commencing in 2010. The company also has operations in Penang, where it plans to upgrade its R&D center and media component production operation. Headquartered in Lake Forest, Calif., Western Digital, the largest E&E employer in the country with a payroll of 24,000, has operated in Malaysia for most of its 40 years in business and has developed close working relationships with Malaysian universities as a measure for ensuring a skilled local work force. Flextronics subsidiary Vista Point Technologies, based in Milpitas, Calif., is expanding its operation in Selangor with a $55-million investment in new equipment for production of its optomechatronics components used in mobile imaging and other applications. This expansion brings the electronics company’s investment in Malaysia to $109 million. And Ibiden Co. Ltd., a leading Japanese electronics company, is preparing to begin production of high-density printed wiring boards at a new plant in the Penang Science Park in Bukit Minyak, Bukit Mertajam, in 2011. The company supplies parts for smart phones and PCs, among other products, and demand for Ibiden’s components requires greater production volumes.

Sun Spots: Solar Newcomers
Are Already in Expansion Mode

Malaysia is also working aggressively to promote the solar energy industry, especially the manufacture of photovoltaic cells and solar modules. And it has a head start by virtue of its high-end electronics industry. MIDA Director-General Datuk Jalilah Baba explains: "Malaysia is one of the major production centers in the world for the semiconductors industry, and this augurs well for attracting further investments in solar photovoltaic manufacturing."

Three leading global manufacturers of photovoltaic products already have Malaysian operations. First Solar Malaysia Sdn. Bhd. and Q-Cells Malaysia Sdn. Bhd. already export thin-film solar modules and solar cells, respectively, and Sunpower Malaysia Manufacturing Sdn. Bhd. is building its manufacturing plant for production of photovoltaic wafers, cells, modules and panels.

First Solar broke ground in 2007 on its first facility in the Kulim Hi-Tech Park in Kedah, where it has since expanded significantly with the addition of three more plants.

In Sarawak, meanwhile, Tokuyama Corporation has built its first manufacturing plant outside Japan at the Samalaju Industrial Park for polycrystalline silicon production. Whether in Kedah or Sarawak, these manufacturers are finding the labor (thousands of employees per project) and utilities (electricity and industrial water, among others) they require.

"The good infrastructure and human resources in the country are being further enhanced to cater to the growing needs of the solar industry in the country, while the supporting industry and suppliers are encouraged to take advantage of the growth opportunity of the solar cluster in Malaysia," says MIDA’s Director-General.

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This investment profile was prepared under the auspices of the Malaysian Investment Development Authority. For information on investing in Malaysia, visit www.mida.gov.my.