What can Bangladesh learn from Malaysia's resounding success?
Thursday, 20 September 2007
Dr. Momtaz Uddin Ahmed
THE success story of Malaysian economic development is a well rehearsal in the development literature and bears no repetition. A country heavily dependent on agriculture and primary commodities in 1960s has emerged as a modern export-driven economy spurred particularly by the growth of high-tech, knowledge-based and capital-intensive manufacturing industries in the recent years. To provide an example of Malaysia's strides towards growing into an industrialised nation, it is perhaps enough to note that the per capita gross national product (GNP) of the country rose by over 13 times in a period of less than forty years from a meager US $ 368 in 1970 to a staggering $5145 in 2006. Malaysia's total manufactured exports stood at US $ 163.6 billion in 2006 placing her as the world's 19th largest exporting country and 23rd largest importer (with import of US $ 146.51 billion) in the same year.
Though dubbed by many as a "lucky country" because of having a large agricultural and mineral resource base, the economic development of Malaysia was spearheaded by decisive and committed political leadership and pragmatic economic policies. While deliberate policy measures have been adopted to create a diversified and broad-based economy to ensure sustained economic growth, the country's enviable success in achieving rapid structural transformation of the national economy over the last forty years has been greatly contributed by spectacular growth in the modern manufacturing industries sector which is regarded as the engine of national economic growth. The manufacturing sector now contributes more than one-third (32%) of gross domestic product (GDP) and manufactured products make up more than 80% of the country's total exports.
This essay highlights major policy support, industrial promotion strategies and incentive structures and institutional framework for implementation of the policies and strategies underscoring Malaysia's rapid economic transformation through accelerated industrial development in the recent decades. The primary focus is on the investment promotion policies and strategies to demonstrate how pro-active policies and strategies and appropriate institutional framework have created a world class manufacturing base in Malaysia. The essay is based on author's personal experience and information gathered through consultations with relevant Government agencies of Malaysia as a member of a high powered Government delegation from Bangladesh visiting Malaysia for one week between July 19 and July 25, 2007.
The Government of Malaysia makes determined efforts towards achieving accelerated rate of industrial growth and enhancing global competitiveness of the modern industrial sector through the Ministry of International Trade and Industry (MITI), which as the apex policy making body spearheads the development of industrial activities in the country. The Malaysian Industrial Development Authority (MIDA), an agency under MITI, is in charge of the promotion and coordination of industrial development in the country.
Industrial development in Malaysia is being fostered by a unique combination of highly supportive government policies and an extensive array of fiscal and financial incentives offered to encourage investments by the domestic as well as foreign investors. The business-friendly government policies consist of a variety of policy elements such as liberal equity policies, attractive tax incentives, highly developed infrastructural facilities, sophisticated financial facilities and services, liberal trade regimes, intellectual property protection and industrial parks and free industrial zones (FIZs) facilities, etc., which have helped development of a highly diversified and competitive manufacturing and export base in Malaysia. Side by side with the highly supportive policy framework, the determined efforts of a strong and committed government have maintained a conducive business environment that provides the investors with opportunities for growth and profits. The pro-business commitment of the Government is reflected in its constant endeavours to obtain feedback from the business community through regular consultations with them. Such government-private exchange of views and dialogues create a highly interactive environment which facilitates participatory policy-making and democratic process of growth.
The generous investment incentives are provided to the industrial investors through liberal equity policy and a wide range of tax concessions. For example, the foreign investors are allowed 100% equity ownership, irrespective of the level of exports. There is no restriction on the repatriation of capital, interest and profits and dividends on the foreign companies investing in Malaysia. The overseas companies investing in the manufacturing sector are also allowed to employ expatriates where certain skills are not available in Malaysia. A company with foreign paid-up capital of US $ 2.0 million and above is allowed 10 expatriate posts, including five key posts which are permanently filled by the expatriate experts.
Direct and indirect tax incentives granted to the investors in manufacturing activities are quite comprehensive and attractive in Malaysia. Under the direct tax incentive structure partial or total relief from income tax payment is given for a specified period, while indirect tax incentives are available in the form of exemptions from payment of import duties, sales tax and excise duties.
The major tax incentives allowed to the companies investing in the manufacturing sector come through a variety of programmes which includes: Pioneer Status (PS) to encourage investments in the 'promoted areas', 'promoted products', and 'strategic projects' for attracting new investments in specific regions (i.e. the states of Sabah and Sarawak), relocation of manufacturing activities in the promoted areas and for encouraging investments in the areas of new and emerging technologies and industries with high value added and potentials of promotion of linkage.
A company granted pioneer status is allowed income tax exemption ranging from 70% to 100% of statutory income for a period of five to ten years. Investment tax allowances (ITA) of 60% to 100% on qualifying capital expenditure (i.e. expenditures on factory, plant, machinery or other equipments used for the approved projects) incurred are provided for a period of five to ten years. Further, a manufacturing company that has been in operation for at least 12 months and incurred "qualifying capital expenditure" to expand, modernise or automate its existing business or diversify its existing business into related products within the same industry are paid reinvestment allowances of 60% on qualifying capital expenditures. Additional investment allowances such as accelerated capital allowance for reinvestment in the promoted products, maintenance of the quality of power supply, quality of construction and safe and clean working environment are also available to both resident and non-resident companies.
A very notable dimension of industrial investment promotion in Malaysia is relatively low corporate tax rate which is quite attractive at 27% and is applicable to both resident and non-resident companies. Small and Medium scale companies with paid-up capital of RM (Malaysian Ringit) 2.5 million and below are eligible for a reduced cooperate tax of 20% on the chargeable income of upto RM 500,000. The tax rate on the remaining chargeable income is at 27% for the assessment year 2007.
In addition to these liberal fiscal and financial incentives, there are direct and indirect extensive non-financial support services which have greatly encouraged investments in Malaysia and maintained a vibrant business environment to attract large inflow of foreign investments in the country. Under its Third Industrial Master Plan (2006-2020), the Government has set a targeted investment plan of US $ 7.33 million annually in the manufacturing industries sector.
Malaysia possesses one of the most highly-developed infrastructure base among the newly industrialised countries of Asia. The total road mileage is reported to be 87,025 kilometres in 2007 of which 67,851 km consists of paved roads. Total railway tracks is reported to be 2270 kilometres in 2006 providing the country with an extensive road network. Peninsular Malaysia's network of well-maintained highways is comparable to that of many western developed countries. These highways link major growth centres to the countries seaports and airports and provide an efficient means of transportation of goods. To-day, 95% of the country's international trade is by sea via Malaysia's seven international sea ports which serve as the lifeblood of the trade links.
Malaysia has five world standard international airports with well-developed passenger and air cargo facilities. The country's newest and biggest air port, the Kuala Lumpur International Airport (KLIA), which opened for business in 1998 has an initial capacity of 25 million passengers and 650,000 tones of cargo per year. Thus, with a central location in the Asia-Pacific region, Malaysia has transformed herself into an ideal gateway to Asia. In 1999, Cyberjaya, Malaysia's first knowledge hub/city and the nucleus of the country's Multimedia Super Corridor (MSC) was built and opened in Putrajaya, the nation's new capital and the most modern and elegant architectural hub of Malaysia to constantly provide the necessary supply of knowledge workers to the growing and expanding knowledge industries in the country.
Currently, Malaysia has 305 Industrial Parks/Estates and 13 Free Industrial Zones (FIZs) which are developed throughout the country. Such new sites equipped with modern infrastructure facilities such as roads, electricity and water supplies and telecommunications are continuously being developed by state governments as well as private investors to meet growing demand. Industries in Malaysia are mostly located in these industrial parks and free industrial zones to take advantage of the extensive support facilities provided there at relatively economical rates.
The FIZs are export processing zones which cater to the needs of the export-oriented industries. Companies in the FIZs are allowed duty free imports of raw materials, components, parts, machinery and equipments directly required in the manufacturing processes. There are also specialised industrial parks which have been developed to cater to the needs of the specific industries. Examples of such parks include: Technology Park Malaysia (TPM), Kulim High-Tech Park (KTP), Selangor Science Park, Selangor Halal Hub (for food processing), Penang Biotech Industrial Park and Proton City Park.
The TPM and KTP are equipped with highly advanced and comprehensive facilities to cater to the needs of the technology-intensive and knowledge based industries with extensive research and development (Rand D) facilities.
Malaysia is also linked to the rest of the world through various fiber optics and satellite consortia such as FLAG, SE - MA - WE, APCN etc. Malaysia's telecommunications network development has been quite impressive in the last decade through use of latest digital and fiber optics technology which provides highly efficient telecommunication facilities to the industries and services at competitive prices.
The policies, incentives and facilities, designed and developed for promoting industrial investment are made available to the prospective entrepreneurs through MIDA which is the first point of contact to the investors willing to set up projects in manufacturing and its related services sectors in Malaysia. Established in 1967 under the Parliamentary Act 1965, MIDA is the principal government agency responsible for promotion and coordination of the manufacturing services sectors development in the country.
The major functions of MIDA are to: promote foreign and local investments in the manufacturing and services sectors, undertake planning for industrial development in Malaysia, recommend policies and strategies for industrial development to MITI, evaluate applications for manufacturing licenses and expatriate posts, tax incentives and duty exemptions, assist companies in the implementation and operation of their projects and help them with advisory services, and facilitate exchange of information and coordination among institutions engaged directly or indirectly with industrial development.
MIDA's operation's are decentralised within Malaysia with a branch network in 10 states within the country and well spread globally with a network of overseas offices covering North America, Europe and Asia-Pacific to assist potential investors interested in locating manufacturing bases in the ASEAN region. MIDA is also administratively highly decentralised in view of the fact that it has representation of the important and relevant line ministries in its Board of Directors including those form the Association of Banks in Malaysia and members from the private sector appointed by MITI. Functional decentralisation facilitating easy availability and quick and efficient delivery of services is also practiced through well-coordinated hierarchal distribution of services among its different organisational tiers, i.e. Chairman "Director General" Deputy Director Generals (I and II) and Managers for local and overseas offices. Additionally, representatives from the Government are also taken in the Board in such a way that it can deliver essential promotion and support services to the investors like a "One-stop" delivery agency.
Malaysia intends to join the league of the fully developed nations by the year 2020 under its "Vision 2020" programme and establish just and democratic society through maintaining sustained high growth, fully competitive, dynamic, robust and resilient economy. The important strategies envisaged to achieve the "Vision 2020" programme include: accelerated industrial development, export-led growth under a free enterprise system, characterised by an entrepreneurial economy, development of high-tech and knowledge-intensive industries and internalisation to closely integrate Malaysia with the global economy.
Thus, the important lessons that Bangladesh can draw from Malaysia for vigorous and successful promotion of industrial investment are immediately apparent which may include the following:
*A strong government commitment backed by determined and constant efforts towards creating and maintaining a vibrant and business-friendly investment climate;
* Open arm policy and generous incentive structures consisting of transparent, liberal, and effective policies and strategies to allure both foreign and domestic investors;
*A sufficiently broad based and decentralised institutional network to ensure speedy and effective delivery of promotional and support incentives and facilities in a cost-effective manner
*A well coordinated network of business promotion and advisory services delivery agencies geared to promote industrial investments spread throughout different regions of Bangladesh and in the overseas countries.
Needless to reiterate the Board of Investment (BOI) in Bangladesh now functioning as the sole government agency for investment promotion with highly centralised structure can be worth its name only if it is thoroughly restructured, reorganised and revamped along the lines of MIDA of Malaysia in terms of both organisational, functional and operational characteristics.
The author is Professor of Economics, University of Dhaka
THE success story of Malaysian economic development is a well rehearsal in the development literature and bears no repetition. A country heavily dependent on agriculture and primary commodities in 1960s has emerged as a modern export-driven economy spurred particularly by the growth of high-tech, knowledge-based and capital-intensive manufacturing industries in the recent years. To provide an example of Malaysia's strides towards growing into an industrialised nation, it is perhaps enough to note that the per capita gross national product (GNP) of the country rose by over 13 times in a period of less than forty years from a meager US $ 368 in 1970 to a staggering $5145 in 2006. Malaysia's total manufactured exports stood at US $ 163.6 billion in 2006 placing her as the world's 19th largest exporting country and 23rd largest importer (with import of US $ 146.51 billion) in the same year.
Though dubbed by many as a "lucky country" because of having a large agricultural and mineral resource base, the economic development of Malaysia was spearheaded by decisive and committed political leadership and pragmatic economic policies. While deliberate policy measures have been adopted to create a diversified and broad-based economy to ensure sustained economic growth, the country's enviable success in achieving rapid structural transformation of the national economy over the last forty years has been greatly contributed by spectacular growth in the modern manufacturing industries sector which is regarded as the engine of national economic growth. The manufacturing sector now contributes more than one-third (32%) of gross domestic product (GDP) and manufactured products make up more than 80% of the country's total exports.
This essay highlights major policy support, industrial promotion strategies and incentive structures and institutional framework for implementation of the policies and strategies underscoring Malaysia's rapid economic transformation through accelerated industrial development in the recent decades. The primary focus is on the investment promotion policies and strategies to demonstrate how pro-active policies and strategies and appropriate institutional framework have created a world class manufacturing base in Malaysia. The essay is based on author's personal experience and information gathered through consultations with relevant Government agencies of Malaysia as a member of a high powered Government delegation from Bangladesh visiting Malaysia for one week between July 19 and July 25, 2007.
The Government of Malaysia makes determined efforts towards achieving accelerated rate of industrial growth and enhancing global competitiveness of the modern industrial sector through the Ministry of International Trade and Industry (MITI), which as the apex policy making body spearheads the development of industrial activities in the country. The Malaysian Industrial Development Authority (MIDA), an agency under MITI, is in charge of the promotion and coordination of industrial development in the country.
Industrial development in Malaysia is being fostered by a unique combination of highly supportive government policies and an extensive array of fiscal and financial incentives offered to encourage investments by the domestic as well as foreign investors. The business-friendly government policies consist of a variety of policy elements such as liberal equity policies, attractive tax incentives, highly developed infrastructural facilities, sophisticated financial facilities and services, liberal trade regimes, intellectual property protection and industrial parks and free industrial zones (FIZs) facilities, etc., which have helped development of a highly diversified and competitive manufacturing and export base in Malaysia. Side by side with the highly supportive policy framework, the determined efforts of a strong and committed government have maintained a conducive business environment that provides the investors with opportunities for growth and profits. The pro-business commitment of the Government is reflected in its constant endeavours to obtain feedback from the business community through regular consultations with them. Such government-private exchange of views and dialogues create a highly interactive environment which facilitates participatory policy-making and democratic process of growth.
The generous investment incentives are provided to the industrial investors through liberal equity policy and a wide range of tax concessions. For example, the foreign investors are allowed 100% equity ownership, irrespective of the level of exports. There is no restriction on the repatriation of capital, interest and profits and dividends on the foreign companies investing in Malaysia. The overseas companies investing in the manufacturing sector are also allowed to employ expatriates where certain skills are not available in Malaysia. A company with foreign paid-up capital of US $ 2.0 million and above is allowed 10 expatriate posts, including five key posts which are permanently filled by the expatriate experts.
Direct and indirect tax incentives granted to the investors in manufacturing activities are quite comprehensive and attractive in Malaysia. Under the direct tax incentive structure partial or total relief from income tax payment is given for a specified period, while indirect tax incentives are available in the form of exemptions from payment of import duties, sales tax and excise duties.
The major tax incentives allowed to the companies investing in the manufacturing sector come through a variety of programmes which includes: Pioneer Status (PS) to encourage investments in the 'promoted areas', 'promoted products', and 'strategic projects' for attracting new investments in specific regions (i.e. the states of Sabah and Sarawak), relocation of manufacturing activities in the promoted areas and for encouraging investments in the areas of new and emerging technologies and industries with high value added and potentials of promotion of linkage.
A company granted pioneer status is allowed income tax exemption ranging from 70% to 100% of statutory income for a period of five to ten years. Investment tax allowances (ITA) of 60% to 100% on qualifying capital expenditure (i.e. expenditures on factory, plant, machinery or other equipments used for the approved projects) incurred are provided for a period of five to ten years. Further, a manufacturing company that has been in operation for at least 12 months and incurred "qualifying capital expenditure" to expand, modernise or automate its existing business or diversify its existing business into related products within the same industry are paid reinvestment allowances of 60% on qualifying capital expenditures. Additional investment allowances such as accelerated capital allowance for reinvestment in the promoted products, maintenance of the quality of power supply, quality of construction and safe and clean working environment are also available to both resident and non-resident companies.
A very notable dimension of industrial investment promotion in Malaysia is relatively low corporate tax rate which is quite attractive at 27% and is applicable to both resident and non-resident companies. Small and Medium scale companies with paid-up capital of RM (Malaysian Ringit) 2.5 million and below are eligible for a reduced cooperate tax of 20% on the chargeable income of upto RM 500,000. The tax rate on the remaining chargeable income is at 27% for the assessment year 2007.
In addition to these liberal fiscal and financial incentives, there are direct and indirect extensive non-financial support services which have greatly encouraged investments in Malaysia and maintained a vibrant business environment to attract large inflow of foreign investments in the country. Under its Third Industrial Master Plan (2006-2020), the Government has set a targeted investment plan of US $ 7.33 million annually in the manufacturing industries sector.
Malaysia possesses one of the most highly-developed infrastructure base among the newly industrialised countries of Asia. The total road mileage is reported to be 87,025 kilometres in 2007 of which 67,851 km consists of paved roads. Total railway tracks is reported to be 2270 kilometres in 2006 providing the country with an extensive road network. Peninsular Malaysia's network of well-maintained highways is comparable to that of many western developed countries. These highways link major growth centres to the countries seaports and airports and provide an efficient means of transportation of goods. To-day, 95% of the country's international trade is by sea via Malaysia's seven international sea ports which serve as the lifeblood of the trade links.
Malaysia has five world standard international airports with well-developed passenger and air cargo facilities. The country's newest and biggest air port, the Kuala Lumpur International Airport (KLIA), which opened for business in 1998 has an initial capacity of 25 million passengers and 650,000 tones of cargo per year. Thus, with a central location in the Asia-Pacific region, Malaysia has transformed herself into an ideal gateway to Asia. In 1999, Cyberjaya, Malaysia's first knowledge hub/city and the nucleus of the country's Multimedia Super Corridor (MSC) was built and opened in Putrajaya, the nation's new capital and the most modern and elegant architectural hub of Malaysia to constantly provide the necessary supply of knowledge workers to the growing and expanding knowledge industries in the country.
Currently, Malaysia has 305 Industrial Parks/Estates and 13 Free Industrial Zones (FIZs) which are developed throughout the country. Such new sites equipped with modern infrastructure facilities such as roads, electricity and water supplies and telecommunications are continuously being developed by state governments as well as private investors to meet growing demand. Industries in Malaysia are mostly located in these industrial parks and free industrial zones to take advantage of the extensive support facilities provided there at relatively economical rates.
The FIZs are export processing zones which cater to the needs of the export-oriented industries. Companies in the FIZs are allowed duty free imports of raw materials, components, parts, machinery and equipments directly required in the manufacturing processes. There are also specialised industrial parks which have been developed to cater to the needs of the specific industries. Examples of such parks include: Technology Park Malaysia (TPM), Kulim High-Tech Park (KTP), Selangor Science Park, Selangor Halal Hub (for food processing), Penang Biotech Industrial Park and Proton City Park.
The TPM and KTP are equipped with highly advanced and comprehensive facilities to cater to the needs of the technology-intensive and knowledge based industries with extensive research and development (Rand D) facilities.
Malaysia is also linked to the rest of the world through various fiber optics and satellite consortia such as FLAG, SE - MA - WE, APCN etc. Malaysia's telecommunications network development has been quite impressive in the last decade through use of latest digital and fiber optics technology which provides highly efficient telecommunication facilities to the industries and services at competitive prices.
The policies, incentives and facilities, designed and developed for promoting industrial investment are made available to the prospective entrepreneurs through MIDA which is the first point of contact to the investors willing to set up projects in manufacturing and its related services sectors in Malaysia. Established in 1967 under the Parliamentary Act 1965, MIDA is the principal government agency responsible for promotion and coordination of the manufacturing services sectors development in the country.
The major functions of MIDA are to: promote foreign and local investments in the manufacturing and services sectors, undertake planning for industrial development in Malaysia, recommend policies and strategies for industrial development to MITI, evaluate applications for manufacturing licenses and expatriate posts, tax incentives and duty exemptions, assist companies in the implementation and operation of their projects and help them with advisory services, and facilitate exchange of information and coordination among institutions engaged directly or indirectly with industrial development.
MIDA's operation's are decentralised within Malaysia with a branch network in 10 states within the country and well spread globally with a network of overseas offices covering North America, Europe and Asia-Pacific to assist potential investors interested in locating manufacturing bases in the ASEAN region. MIDA is also administratively highly decentralised in view of the fact that it has representation of the important and relevant line ministries in its Board of Directors including those form the Association of Banks in Malaysia and members from the private sector appointed by MITI. Functional decentralisation facilitating easy availability and quick and efficient delivery of services is also practiced through well-coordinated hierarchal distribution of services among its different organisational tiers, i.e. Chairman "Director General" Deputy Director Generals (I and II) and Managers for local and overseas offices. Additionally, representatives from the Government are also taken in the Board in such a way that it can deliver essential promotion and support services to the investors like a "One-stop" delivery agency.
Malaysia intends to join the league of the fully developed nations by the year 2020 under its "Vision 2020" programme and establish just and democratic society through maintaining sustained high growth, fully competitive, dynamic, robust and resilient economy. The important strategies envisaged to achieve the "Vision 2020" programme include: accelerated industrial development, export-led growth under a free enterprise system, characterised by an entrepreneurial economy, development of high-tech and knowledge-intensive industries and internalisation to closely integrate Malaysia with the global economy.
Thus, the important lessons that Bangladesh can draw from Malaysia for vigorous and successful promotion of industrial investment are immediately apparent which may include the following:
*A strong government commitment backed by determined and constant efforts towards creating and maintaining a vibrant and business-friendly investment climate;
* Open arm policy and generous incentive structures consisting of transparent, liberal, and effective policies and strategies to allure both foreign and domestic investors;
*A sufficiently broad based and decentralised institutional network to ensure speedy and effective delivery of promotional and support incentives and facilities in a cost-effective manner
*A well coordinated network of business promotion and advisory services delivery agencies geared to promote industrial investments spread throughout different regions of Bangladesh and in the overseas countries.
Needless to reiterate the Board of Investment (BOI) in Bangladesh now functioning as the sole government agency for investment promotion with highly centralised structure can be worth its name only if it is thoroughly restructured, reorganised and revamped along the lines of MIDA of Malaysia in terms of both organisational, functional and operational characteristics.
The author is Professor of Economics, University of Dhaka