Chapter 1. Malaysia's Investment Climate Today
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Report No. 49137-MY Report No. 49137-MY Malaysia Productivity and Investment Climate Assessment Update Public Disclosure Authorized August 2009 Poverty Reduction and Economic Management Sector Unit East Asia and Pacific Region Malaysia Malaysia Assessment Update Climate and Investment Productivity Public Disclosure Authorized Public Disclosure Authorized Document of the World Bank Public Disclosure Authorized ACKNOWLEDGEMENTS This report is the result of fruitful collaboration between the Economic Planning Unit (EPU), Prime Minister’s Department, Malaysia, and the World Bank. The main data source for this report is the Malaysia Productivity and Investment Climate Survey (PICS) carried out by the Department of Statistics and EPU. Writing the report was a collaborative effort. The World Bank team included Xubei Luo (Task Leader, EASPR), Hiau Looi Kee (DECRG), Philip Schellekens (EASPR), Vatcharin Sirimaneetham (EASPR), Takanobu Terada (University of Maryland), and Charles Chatree Udomsaph (Georgetown University). Albert G. Zeufack managed the design and implementation of the Productivity and Investment Climate Survey and the project before moving to Khazanah. The report builds on the findings of Malaysia Firm Competitiveness, Investment Climate, and Growth report (World Bank, 2005). It was prepared under the overall guidance of Linda Van Gelder (Sector Manager) and Mathew A. Verghis (Lead Economist). Annette Dixon (Country Director) and Vikram Nehru (Sector Director) provided oversight. The World Bank peer reviewers for this report were Deepak Bhattasali (Lead Economist, SASEP) and Mary C. Hallward-Driemeier (Senior Economist, DECRG). Lynn M. Gross skillfully formatted and prepared the report. Susan Middaugh of Have Pen, Will Travel edited it. The report team benefited from inputs and consultations at different stages from stakeholders in Malaysia. We would like to sincerely thank the Economic Planning Unit, Department of Statistics Malaysia and other Ministries/agencies that participated in the PICS surveys either directly or indirectly. The team is grateful to Yukon Huang for fruitful discussions at various stages of the report’s preparation, to Ahmad Ahsan, Hamid R. Alavi, Vivian Hon, Yue Li, Omporn Regel, and Hong W. Tan for their useful suggestions and inputs. The team is also indebted to the workers and managers across Malaysia who devoted their time and provided information for the Productivity and Investment Climate Surveys. Table of Contents EXECUTIVE SUMMARY ......................................................................................................................................... I CHAPTER 1. MALAYSIA’S INVESTMENT CLIMATE TODAY ............................................................ 1 GROWTH, INVESTMENT AND PRODUCTIVITY IN MALAYSIA ................................................................. 2 PICS 2002 AND PICS 2007 ................................................................................................................................... 5 RECENT DEVELOPMENTS IN MALAYSIA’S INVESTMENT CLIMATE ..................................................... 7 Subjective Indicators ............................................................................................................................................ 8 Perceptions of the Three Top Constraints to Doing Business .............................................................8 Perception of the Severity of Investment Climate Constraints ............................................................9 Objective Indicators ........................................................................................................................................... 13 Infrastructure .........................................................................................................................14 Access to Finance ...................................................................................................................15 Regulatory Framework.............................................................................................................16 Tax Rate and Tax Administration ...............................................................................................18 Supply of Skills ......................................................................................................................19 Innovation/Technological Capabilities ........................................................................................20 Crime and Theft .....................................................................................................................21 MALAYSIA’S INVESTMENT CLIMATE FROM AN INTERNATIONAL PERSPECTIVE .......................... 22 CONCLUSIONS ................................................................................................................................................... 30 CHAPTER 2. FIRM PERFORMANCE IN THE MANUFACTURING SECTOR .................................. 32 MANUFACTURING SECTOR PERFORMANCE, PRODUCTIVITY GROWTH AND INVESTMENT CLIMATE ............................................................................................................................................................. 33 Manufacturing Sector Performance ................................................................................................................... 33 Productivity Growth and Investment Climate .................................................................................................... 36 MANUFACTURING SECTOR LABOR PRODUCTIVITY PERFORMANCE ................................................ 37 Measuring Labor Productivity ........................................................................................................................... 37 Performance at the National Level .................................................................................................................... 37 Performance at the Industry Level ..................................................................................................................... 39 Performance at the Regional Level .................................................................................................................... 40 TOTAL FACTOR PRODUCTIVITY AND INVESTMENT CLIMATE ............................................................ 41 Measuring Total Factor Productivity ................................................................................................................. 41 Total Factor Productivity in Malaysia ............................................................................................................... 42 Regressing Labor Productivity and TFP on Investment Climate Indicators and Firm Characteristics ............ 43 Correlations Between Firm Characteristics and Performance .......................................................................... 44 Correlations Between Investment Climate and Firm Performance .....................................................47 Correlations Between Changes in Investment Climate and Changes in Productivity .............................49 CONCLUSIONS ................................................................................................................................................... 50 CHAPTER 3. FIRM PERFORMANCE IN THE SERVICES SECTOR .................................................. 51 OVERALL SERVICES SECTOR PERFORMANCE .......................................................................................... 52 Performance at the National Level .................................................................................................................... 53 Performance at the Industry Level ..................................................................................................................... 57 Performance at the Firm Level .......................................................................................................................... 60 SKILLS SHORTAGE, INNOVATION READINESS, AND REGULATORY REGIMES IN SERVICES SECTOR ............................................................................................................................................................... 63 Skills Shortage .................................................................................................................................................... 63 Innovation Readiness ......................................................................................................................................... 65 Regulatory Regime ............................................................................................................................................. 68 FIRM PERFORMANCE AND INVESTMENT CLIMATE ................................................................................ 70 Correlates Between Firm Characteristics and Performance ............................................................................. 70 Impact of the Presence of Foreign Firms ........................................................................................................... 73 CONCLUSIONS ................................................................................................................................................... 73 CHAPTER 4. REGIONAL PERSPECTIVES OF INVESTMENT CLIMATE ....................................... 75 REGIONAL DEVELOPMENT CORRIDORS .................................................................................................... 76 REGIONS WITH THE BEST AND WORST