Money & Entrepreneurship: Crossroads of creative destruction

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In his book Capitalism, Socialism and Democracy, Joseph Schumpeter set out the idea that innovation leads to gales of “creative destruction” as it causes old ideas, technologies and equipment to become obsolete. He states that the question is not “how capitalism administers existing structures... [but] how it creates and destroys them”. He believes creative destruction is the essence of continuous progress and improves the standards of living of society at large.

I believe Malaysia is now at a crossroads, where the old economic order is becoming obsolete and a new economic order is necessary to continue the progress of the last 30 years and to improve the living standards of its citizens. The fact that we are at a crossroads today, coupled with a global crisis of confidence and ebbing confidence in the leadership of this country, is critical to the future of our new Prime Minister Datuk Seri Najib Razak as it is to the future of Malaysia itself.

However, knowledge that we are at such a crossroads affords us the luxury to change direction and that is what Najib has to do. He can be the architect of a new economy, based on innovation and creatively destroying the old economic order, so that the nation can set itself on a new direction of prosperity.

This change is similar to what former prime minister Tun Dr Mahathir Mohamed did when he came to power. Until the 1970s, Malaysia was an agrarian economy dependent for its growth on rubber, cocoa and palm oil as well as tin mining. What Mahathir did was turn a small agrarian economy into a high growth industrial economy by adopting friendly export-oriented policies and by encouraging the formation of export based manufacturing industries. He fostered this growth through a stable government and inviting foreign direct investments (FDI) in these industries.

However, the world has moved on and export manufacturing that is dependent on abundant low-cost labour has moved to countries that are still relatively economically under-developed with large population bases, like China, India and Vietnam. Malaysia, with its smaller population and higher relative labour costs, is losing out, with FDI moving to those countries in search of cheap labour.

The world has moved on, but we are still stuck in the 1980s mentality of labour intensive industries. Hence, despite all the progress we have made in the last 30 years, we still have factory workers earning less than RM1,000 a month and university graduates still earning only between RM1,500 and RM2,000 a month upon graduation. Amazingly, that was what it was in the 1980s and 1990s and it’s the same today. This simply means our citizens have made little economic progress in 20 years. So, despite the many gleaming buildings and wonderful highways, to the majority of Malaysians there has been no economic progress, only economic stagnation, despite 30 years of economic growth.

The main cause of this is the policies we continue to adopt, especially our dependence on labour intensive, low-cost manufacturing and resource-based industries. Let us be very clear about this: traditional manufacturing jobs have moved to other countries; our oil and gas and timber resources will be depleted in another 10 to 15 years; there will be a glut of crude palm oil in 15 years’ time when Indonesia will probably produce three times our production of palm oil; tourism will be highly competitive especially with the integrated casino resorts in Singapore, and tax-free pioneer status and similar policies will be offered by just about every country in the region to attract FDI.

In 15 years time, we will be in no man’s land, competing with all our neighbours for the same FDI and highly choosy investors who will go where the offer is the best. That will mean the lowest cost offer. If we don’t do anything today, then the future for our children is very bleak indeed. I cannot imagine factory workers still earning below RM1,000 a month and graduates less than RM2,000 even after 2020, but that is the most likely outlook unless we do some creative destruction of our own economy, before it is destroyed by competition in the future.

So, what should we do? First, we must not just pay lip service to the change agenda, we must instead make a constructive and conscious decision to turn our economy and our policies around completely. The focus of our future must be on a “brain economy”, where innovation and brain power is the cornerstone of economic policies.

We must gradually stop the hiring of cheap, low-cost, under-educated labour that powers the labour-intensive industries. Manufacturers must be told that over the next five years, import of cheap labour will be phased out completely and only manufacturing that uses high technology and information technology will be encouraged. Existing manufacturing plants also have to upgrade their operations to high-tech operations or lose their tax incentives. In future, only high-tech manufacturing FDI will be allowed.

Next, we must seriously look at advanced manufacturing and follow the direction of Japan and Germany in using technology intensive plants and equipment for manufacturing and move up the value chain into design and development and phase out original equipment manufacturing (where someone else designs the product and owns the brand but we provide the low-cost manufacturing base).

We must also increase the support and effort towards information and communications technology (ICT) and biotechnology industries. While the support seems adequate, it is not sufficient if we are to move to the next level of growth. After 12 years, the Multimedia Super Corridor is maturing. We have created many ICT companies which are now exporting their products and services globally, and we must increase the support given to these companies to grow even further. We have done well but we can and must do more.

The biotechnology industry is now showing signs of success with more than 100 Bionexus companies (many of which are already profitable) and plenty of biotech and agritech R&D being done in our universities. These need to be commercialised but for it to happen, technology and education industry policies need to be liberalised and this can only be led by the Ministry of Higher Education and Ministry of Science, Technology and Innovation. We need to be more progressive if we are to move our universities to the next level of commercialisation success. The R&D is being done, but commercialisation is being held back by poor policies and guidelines.

We also need to create more competition and we need to reward the progressive universities by giving them more incentives to create new R&D&C (research and development and commercialisation). For a brain economy to succeed, we need to have the brains in the first place and here, we need to improve the quality of education at all levels, from schools to universities. Just because more students have 20 As does not make them smarter, because it is not the number of As but the quality of the As that matter. Our standards must be improved and we must follow international standards, not create our own lower standards just to show more As. By doing that, we are doing a huge disservice to our children because their future will be impacted by the quality of their education.

The country must change and we must create an economy that is based on science and technology and on creativity and innovation. It is a very difficult proposition and it is precisely because of that that we must do it. If it is simple, other nations will also imitate what we do and that creates competition like what we are facing today. But by taking the difficult road, we can create high-level competencies and capabilities for our citizens and that will secure our future and create the “brain economy” we need to survive and prosper. Maybe then, our factory workers will earn RM5,000 a month and not need resort to selling goreng pisang and tosai to supplement their income. We owe that much to our children and that’s what the new PM should do.

Dr V Sivapalan is passionate about entrepreneurship and he blogs at www.docsiva.org

This article appeared in Netvalue2.0, the technology section of The Edge Malaysia, Issue 751, April 20-26, 2009.