Repressive regulation is causing irreparable damage to the nation

 

From Murray Hunter

Malaysia’s highly regulated economy is stagnating in innovation, as incentive is being drained from the business community.

Today, Malaysia is one of the most highly regulated economies. This restricts and makes business cumbersome, destroying an environment that should be primed for innovation. With GDP plunging from the Covid-19 crisis, business innovation should be one of the key drivers for recovery.

Business innovation is not about digitisation and Industry 4.0 as the 12th Malaysia Plan would make us believe. Innovation is about facilitating creativity, new ideas, that couple with appropriate technologies to create value-added new products and services.

This is not always about capital, and investment, rather it’s about creating an environment to nurture the correct mindset.

Macro-policy

The NEP hinders the development of new innovative supply chain systems that may potentially bring the government sector savings and better quality products and services, than relying on a cohort of supplies that see the government sector as a captive market. An open market for procurement would save the government massive amounts on purchasing budgets. Malaysia is one of the few countries in the world where the government doesn’t seem to have a concern about buying better.

Higher education – research

Within the public higher education sector, it’s clearly evident that the employment of academic staff is restricted primarily to Bumiputeras.

This policy has not only seen the stagnation of Malaysian universities in international university rankings, but local private universities are now rising above public universities. This is also costing Malaysia in domestic innovation and development of local intellectual property. The absence of meritocracy in who works in Malaysian public universities is compromising the nurturing of homegrown innovation. University research should be a massive incubator for innovation, where restrictive employment practices are hampering this potential. There can be no Silicon Valley without opening up public university research to domestic meritocracy.

Equity rules

The pending imposition of the 51% Bumiputera equity rule in the freight forwarding industry has signalled a message that successful businesses are not wanted. There are already stories of non-Bumiputera freight forwarders preparing to relocate to Indonesia, Singapore, and Australia. Some are reconstituting their businesses as foreign companies which can be 100% owned. This will bring an outflow of profits, and Malaysian ports will be treated eventually as nothing more than feeder and transhipment ports in the future. Restriction of who can own a business is not conducive to innovation. Restrictive equity laws just encourage the best and most innovative companies to leave and go off-shore.

Loss of incentive

The requirement for 51% Bumiputera equity in SMEs across a number of industries, along with the requirement of companies dealing with the government to have at least 30% Bumiputera equity has lasting consequences.

Having a business idea, the capital required, and access to potential markets is not enough in Malaysia. Non-Bumiputera entrepreneurs must also find a Bumiputera partner to invest in the firm. This is highly impractical if innovation is to be nurtured from the enterprise start-up, where entrepreneurs must undertake tireless work, risk, and uncertainty for months or even years, most often without any wage or income.

In such situations, it is difficult, if not impossible to find willing investors or investors who won’t exploit the situation. Bumiputera investors would not be willing to take the same risks. Most want a guaranteed income, regardless of the stage of growth of the company, or performance. There are very few Bumiputera venture capitalists within Malaysia’s population.

The Bumiputera equity rules are totally unsuitable if Malaysia seeks to become a creative nation, using the innovation engine to grow and add value to the economy. The rhetoric of Malaysia transforming from a low cost, low technology economy to an innovation-led Industry 4.0 economy just doesn’t match the regulations in place today. There is no incentive, it’s just not going to happen.

Equity rules are promoting inequality

Malaysia’s equity policy requiring either 30% or 51% Bumiputera equity, depending upon the circumstances, favours the wealthier Bumiputeras to invest and get richer, thus further widening the wealth gap. There is little if any benefit of equity requirements in assisting poorer Bumiputeras to increase their income and wealth. They are the forgotten Bumiputeras in the government’s over-regulation of equity. The Bumiputera equity rules are helping the rich get richer and the poor becoming relatively poorer.

The flight of companies

Malaysia has long been a net exporter of capital, exceeding capital inflows. YTL divested power assets to 1MDB, primarily because tariff rates are controlled by the federal government. The Kuok family has for a long time been slowly moving out their business interests outside of Malaysia. AirAsia decentralised across the region due to high costs in Malaysia and bigger traffic opportunities. Liberty Shipping has moved to Singapore. Hyundai closed its Asia Pacific headquarters in Malaysia and relocated to Indonesia, due to a lack of a policy roadmap for the creation of the electric car industry. Tesco divested its assets in Malaysia. The IBM Global Delivery Centre relocated its head office out of Malaysia.

Malaysian innovated Grab set up its head office in Singapore rather than Malaysia. Other Malaysian high-tech companies chose to start-up outside the country including Coin Gecko, a platform for multiple crypto-currency comparisons, and BigPay, a Malaysian banking app went to Singapore.

Brain drain

Malaysia is one of the countries most affected by brain drain. About 1.7 million Malaysians are working overseas, with 54% in Singapore, 15% in Australia, 10% in the United States, and 5% in the United Kingdom. This is reported to be caused by the lack of career prospects in Malaysia, not only for non-Bumiputeras but for Bumiputeras as well. Many Malays have gone overseas to work in higher education, medicine, research and the management sectors. Many blame the repressive corporate culture within Malaysian universities, civil service, and corporations.

Malaysia will be greatly disadvantaged during the region’s recovery from the Covid-19 crisis if it doesn’t have domestic driven innovation to attract international high-tech investment. At the same time, Malaysia’s infrastructure and cost base are relatively unattractive compared to other locations like Thailand, Vietnam, and Indonesia. This means Malaysia will lose out big time, where pundits are expecting a renaissance in innovation-based businesses as the world comes out of the pandemic. - FMT

Murray Hunter is an FMT reader.

The views expressed are those of the writer and do not necessarily reflect those of MMKtT.