Towards A Competitive Malaysia #19

Chapter 4: On Being Competitive (Cont’d)

Porter’s Business Competitive Index (BCI)

This microeconomic environment is the focus of Porter’s other extended study. He now has voluminous data on companies and industries in over 100 countries, ranging from poor African to First World countries.11 He surveyed senior business leaders in these countries and asked them to evaluate the basic factor issues as outlined in his earlier diamond model. He then estimated the “Business Competitive Index” (BCI) of that country. At the company level, there were questions as to the nature of the competitive advantage, spending on research and development, extent of branding and reliance on professional management, willingness to delegate authority, and the use of technology. The questions relating to national business climate queried matters relating to the factors of production (availability of capital, quality of human resources), as well as the state of the infrastructure, both physical and administrative.

Porter found that the BCI accounted for an astounding 83 percent of the variations in the economic performances between the countries. Being statistical studies, no inference could be made regarding causation. The high per capita GDP correlating with good schools and universities may be the effect, not the cause. When a country is rich it can afford to spend more on and thus have a better education system instead of the other way round of good schools causing the country to be rich.

The center now has data over five years and certain conclusions can be confidently drawn. One, for effective development, it is not enough to have sound macroeconomic policies, for if the microenvironment in which businesses operate is not conducive, the nation will not reap the maximal benefit. Two, these factors are all interrelated; they must be well coordinated for optimal results. The government may invest heavily in developing its human capital by building good schools and universities, but if its industries were not equipped to absorb those well-trained graduates, they will be wasted. Those under- and unemployed graduates represent a tremendous waste of precious human resources. Worse, they could also create their own social problems as a consequence of their frustrations. Or, these educational institutions would then serve as nothing more than talent factories for the developed countries as these graduates emigrate seeking better opportunities, as seen in India.

At another level, a country may have a well thought out privatization policy, but if the microenvironment in which these privatized companies operate were less than optimal—lack of professional management, political interference, undemanding customers—these enterprises would quickly deteriorate. They would then have to be re-nationalized, and an otherwise sensible policy would now have to be retracted in the face of public pressure. Malaysia is replete with such examples, from the national airline to public utilities.

The good news is that for the past few years Malaysia has improved its competitive standing as evaluated by Porter’s group. It suffered badly post-1997 but has now recovered. In the last (2003–04) survey, Malaysia stood at 27th, ahead of such European countries as Poland and Greece. Singapore is the only ASEAN nation ahead of Malaysia at being the 9th position.

When Malaysia was at its “factor driven stage” in the 1960s and 70s, the challenge was how to move beyond the competitive advantage based on cheap commodities. Malaysia could have developed industries based on those commodities and moved up the value chain by providing greater “added value” to the products exported, instead of only the raw materials. It could have developed an industry that would take full advantage of the versatile and resilient properties of natural rubber especially in extreme conditions. It could concentrate producing tires not for the mass market where synthetic rubber has a competitive price advantage, rather specialized ones for jet planes, heavy equipment, and sports cars, and manufacturing shock absorbers for earthquake proofing buildings. It could do the same thing with tin, as discussed earlier. Those niche markets are highly profitable.

Additionally, through biogenetic engineering, Malaysia could use rubber trees not only to produce the latex but also valuable proteins, as with the success of scientists at the Rubber Research Institute to produce transgenic rubber plants that carry the genes for the human blood protein, albumin.12 Imagine getting this important product from a tree instead of a blood donor, eliminating the risks for blood-borne diseases.

Similarly with the lumber industry, instead of exporting raw logs, export their high-value end products like finished furniture and engineered wooden trusses. Imagine the increase in value, apart from the expanded job opportunities.

One would think that where nature had generously endowed a country with abundant natural wealth like oil and gas, its people should enjoy high living standards. Yet when we look at Iraq and Iran, their oil bounties are more curse than blessing.

This “curse of abundance,” a country squandering its bountiful natural riches, is brought on by many factors.13 First, as the country is rich, it automatically invites interests from the powerful. America would not particularly care to liberate Iraq if all it had were barren sand. With foreign interests comes mischief in many forms, including invasion. Second, that wealth encourages the development of a strong state and a domineering leader. It would not be long before that leader becomes corrupt, confusing the state treasury with his private bank. The Sultan of Brunei has this particular difficulty. Third, such massive wealth does not encourage leaders and citizens to develop alternative skills. They are content living off their natural wealth. The Arabs and Brunei Malays are ready examples.

Malaysia has its broad goals and major policies mostly right. It is committed to expansion of foreign trade and attracting foreign investments. It has the right macro policies, as exemplified by its excellent infrastructures (telecommunications, highways, ports, and airports) and heavy investment in education. Malaysia is now rectifying the damage to its judicial system and addressing corruption and the need for greater transparency. It is trying, however awkwardly, to give its citizens greater freedom in order to encourage creativity.

It is at the microenvironment that Malaysia fails miserably. Companies still have difficulties securing the necessary permits to recruit much-needed foreign talent. Other hoops put up by local bureaucrats can be equally daunting as those with enterprises in the ambitious Multimedia Super Corridor (MSC) would attest.

To launch into its next trajectory of development, Malaysia must reexamine its assumptions and policies, both at the macro and micro levels. That will be the focus of the rest of my book. While we are all for progress and prosperity, nonetheless there are consequences inherent with such changes. The next chapter will dwell on some of those.

Next Chapter 5: Consequences of Progress and Prosperity