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MALAYSIA ECONOMIC MONITOR Public Disclosure Authorized Growth Through Innovation

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MALAYSIA ECONOMIC MONITOR Public Disclosure Authorized Growth Through Innovation MALAYSIA ECONOMIC MONITOR Public Disclosure Authorized Growth through Innovation April 2010 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized • THE WORLD BANK MALAYSIA ECONOMIC MONITOR APRIL 2010 GROWTH THROUGH INNOVATION THE WORLD BANK This volume is a product of the staff of the International Bank for Reconstruction and Development / The World Bank. The findings, interpretations, and conclusions expressed in this volume do not necessarily reflect the views of the Executive Directors of The World Bank or the governments they represent. The pictures on the cover are attributed to David Blaikie (solar), Blue Ship (terminal), Marisa Strutt (towers), Roslan Tangah (school) under the Creative Commons License. The report is based on information available as of end of March, 2010. Please address queries and comments to: Philip Schellekens The World Bank 30th Floor, Siam Tower 989 Rama I Road, Pathumwan Bangkok 10330, Thailand [email protected] (662) 686-8300 www.worldbank.org/my CONTENTS PREFACE ........................................................................................................................................................ 9 EXECUTIVE SUMMARY ................................................................................................................................ 11 Recent Economic Developments and Outlook ................................................................................................ 11 Growth through Innovation ............................................................................................................................ 12 Improving the Capabilities for Innovation: Talent, Technology and Finance ......................................... 12 Enhancing the Driving Force of Innovation: Competition ...................................................................... 13 Enabling the Amplifiers of Innovation: Niches and Clusters .................................................................. 13 1. RECENT ECONOMIC DEVELOPMENTS ..................................................................................................... 17 Global Recovery Underway But Remains Fragile ............................................................................................ 17 Recovery in Malaysia Is Proceeding ................................................................................................................ 19 Recovery Is Also Gaining Breadth ................................................................................................................... 24 Inventories Move into the Spotlight ...................................................................................................... 24 Manufacturing Is Making a Come-Back ................................................................................................. 26 Commodities and E&E Exports Leading the Way ................................................................................... 27 Labor Market Is Churning ................................................................................................................................ 29 Movement of Workers Across Sectors Continued ................................................................................. 29 Industry Wage and Employment Dynamics Varied with Export Orientation ......................................... 35 Domestic Financial Conditions Remain Resilient ............................................................................................ 40 Earlier Volatility in Capital Flows Has Abated ................................................................................................. 41 Fiscal and Monetary Policy Adjustment Is Ongoing ........................................................................................ 50 2. ECONOMIC OUTLOOK ............................................................................................................................. 52 Global Recovery To Be Led by Developing Economies.................................................................................... 52 Recovery In Malaysia Expected to Gain Strength ........................................................................................... 54 Growth Expectations Upgraded ............................................................................................................. 54 Solid Growth to Resume in 2010 ............................................................................................................ 56 Fiscal and Monetary Policy Support to Unwind over 2010 .................................................................... 59 Risks to Near-Term Outlook Remain Significant .................................................................................... 60 Medium-Term Outlook Expected To Improve ................................................................................................ 61 A New Economic Model Has Been Proposed ......................................................................................... 61 Medium-Term Growth Set To Benefit .................................................................................................... 62 Reform Implementation Key Risk to Growth and Fiscal Sustainability .................................................. 66 3. GROWTH THROUGH INNOVATION ......................................................................................................... 70 Innovation is Key for Long-Term Prosperity .................................................................................................... 70 Why Does Innovaton Matter? ................................................................................................................ 71 What are the Drivers of Innovation-Led Growth?.................................................................................. 72 Does Innovation Produce Inclusive Growth? ......................................................................................... 74 Innovation Presents a Growing Challenge ...................................................................................................... 74 Broad Indicators Suggest Weakening Dynamism ................................................................................... 75 Productivity Growth Has Slowed Down ...................................................................................... 75 Export Mix Registered Growing Sophistication… ........................................................................ 76 … But Export Value Added Has Stagnated ................................................................................... 78 Surveys Reveal Need for More Innovation and Better Diffusion ................................................ 79 Narrow Indicators Point to Limited Improvement ................................................................................. 81 R&D Input Indicators Remain at Low Levels ................................................................................ 81 Patenting Activity Has Picked Up But Remains Low .................................................................... 82 The Innovation Challenge: Intensify and Broaden Innovation ............................................................... 84 Addressing the Innovation Challenge ............................................................................................................. 85 Facilitate or Orchestrate?....................................................................................................................... 85 Approaches to Policy Intervention .............................................................................................. 85 Scoping and Sequencing .............................................................................................................. 86 Improving Innovation Capabilities: Talent, Technology and Finance ..................................................... 89 Nurturing, Attracting and Retaining Talent ................................................................................. 89 Upgrading Home-Grown Technological Capabilities ................................................................... 93 Improving Access to Finance for Innovation ............................................................................. 102 Promoting the Driving Force of Innovation: Competition .................................................................... 105 Leveling the Playing Field .......................................................................................................... 106 Facilitating the Fluid Entry and Exit of Firms ............................................................................. 109 Supporting Labor Market Flexibility .......................................................................................... 110 Managing the Side Effects of Greater Competition................................................................... 110 Amplifying the Impact of Innovation: Niches and Clusters .................................................................. 115 Focusing Efforts on Selected Niches .......................................................................................... 115 Fostering Spatial Concentration in Clusters .............................................................................. 116 Conclusion ..................................................................................................................................................... 117 REFERENCES .............................................................................................................................................
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