This article first appeared in The Edge Malaysia Weekly on January 23, 2023 - January 29, 2023

WHEN China acceded to the World Trade Organization in 2001, not many would have expected the country to file a complaint on chip export restrictions imposed by the US — where more liberal economic and trade policies had originated from.

Today, however, the world is well acquainted with America’s protectionist turn on national security concerns — more so following severe global supply chain disruptions when the Covid-19 pandemic hit.

When questions arose over whether globalisation was dead, The Economist had in 2019 called the fragile state of international trade “slowbalisation”. Since then, discussions on global supply chain disruptions and geopolitical tensions have brought to the forefront terms like “reshoring”, “onshoring”, “nearshoring” and “friendshoring”, which essentially mean having strategic industries build their supply chains at home, close to home or only with friendly and allied countries — with priority on ensuring supply security rather than lowering production cost.

America’s US$52.7 billion CHIPS and Science Act, passed in July 2022 — which not only bolsters investments in domestic semiconductor manufacturing, but also blocks China’s access to US technology — epitomises geopolitical tensions that persist between the two global superpowers.

Indeed, the world is in a “low-growth, low-investment and low-cooperation” era, as noted in the World Economic Forum’s Global Risk Report 2023.

Speaking at a World Economic Forum panel discussion titled “Living with Risk” on Jan 20, Malaysia’s Minister of International Trade and Industry (Miti) Tengku Datuk Seri Zafrul Abdul Aziz noted how “friendshoring, reshoring and onshoring” dominated discussions at Davos, Switzerland, and reiterated his call for major economies to strike a balance between security and growth: “Impediment to trade is [an] impediment to growth … Trade matters because it brings prosperity.”

In an earlier interview with Bloomberg TV, Zafrul had called for the need to “go back to fundamentals” of trade, even though Malaysia is among beneficiaries as multinationals recalibrate their supply chains.

“In the short-to-medium term, I must admit that we do see some of the spillover [effects] from those concerns about supply chain resiliency and security because of geopolitics between US and China [but] in the long run, it would not be good,” Zafrul said, reminding that “the reason Malaysia and the world are trading is because it is something that is beneficial for all”.

At Davos, US-based chipmaker Intel Corp reiterated its 2021 commitment to invest more than RM30 billion in the expansion of its operations in Penang and Kulim, Kedah — a move that Zafrul said would create more than 4,000 jobs at Intel and over 5,000 jobs in the construction sector.

Malaysia, Zafrul said, is targeting 20% year-on-year growth in foreign direct investments (FDI) with emphasis on quality rather than just headline numbers on approved investments.

“Traditionally, measuring FDI is about the absolute dollar value … how much of that is realised, how much translated to jobs and what the spillover effects are. I think those are key and the number achieved has got to be one that focuses on the right kind of investments.”

Whatever one’s thoughts are on that, there is ample literature on the need for Malaysia to up its game in digitalisation and capacity building towards the desired high-tech, high-income status.

The right kind of FDI, with potential for deeper linkages to the global supply chain, can be a key avenue to bolster growth, but is perhaps not the most important. More on this later.

In a 2020 paper titled “Promoting Technology Transfer and Productivity Spillovers from Foreign Direct Investment (FDI)”, the World Bank Group noted that “the presence of foreign firms in the host economy can become a major driver of local firm productivity growth and offers opportunities for [ambitious] local firms to integrate in international production networks” and global value chains.

“Evidence suggests that backward linkages between multinational enterprises (MNEs) and local suppliers are the most important channels for technology and productivity spillovers to local firms,” its researchers wrote, adding that backward linkages — which tie local supplies tighter with their multinational customer — “can promote the diffusion of knowledge, spread good management practices and help domestic suppliers upgrade their technical and quality standards”.

Further, “rewarding MNEs [with matching grants] for training or upgrading the quality of local suppliers can change the cost and risk calculation for MNEs in terms of technology transfer and sourcing locally versus relying on their trusted foreign suppliers”, it adds, noting, though, that in practice, no MNE buyer would fully bear the cost of upgrading local supplies should there be a risk of other buyers free-riding.

And while investment incentives can be a tool for governments to influence MNEs’ sourcing decisions and promote backward linkages, the researchers reminded governments to be mindful of the cost on a country’s fiscal space. There is a need, they say, to not only ensure incentives are targeted to specific objectives but also analyse and monitor the benefits of tax revenue given up.

The researchers warn, though, that benefits like technology transfer would not automatically come to every country that opens its doors to multinationals but fails on execution: “Several market failures and challenges often prevent backward linkages from materialising.”

Apple Inc’s gargantuan precision manufacturing base in China, which is proving impossible to upend in the short-to-medium term amid US-China tensions, is perhaps the ultimate example of the kind of backward linkage that developing countries should strive to achieve.

A sizeable talent pool with sought-after skill sets is a big part of that binding ecosystem, without which China would probably not have advanced this much in just one lifetime.

According to the Financial Times, Apple CEO Tim Cook once said the iPhone maker cannot manufacture at scale in the US like in China because the number of tool and die makers in the US “wouldn’t fill the room”, whereas in China they would fill “several cities”.

Indeed, there is no moving up the value chain without digital infrastructure and skilled workforce to fill jobs and meet higher technical demands from multinational customers with high demand on quality.

Taiwan, home to global foundry TSMC, for instance, is reportedly allowing universities to recruit students majoring in semiconductors twice a year to nurture 10,000 chip experts every year.

South Korea, which aims to nurture one million digital experts by end-2026, said it will spend US$367 million (RM1.6 billion) this year, 12% more y-o-y, to nurture 52,000 digital talents in fast-growing sectors including the metaverse, artificial intelligence and cybersecurity.

Incidentally, South Korea and Taiwan — which can both make more advanced semiconductor chips than the players in America and China — are also global leaders when it comes to ensuring continuous expenditure in research and development (R&D).

South Korea, which has spent at least 3% of its gross domestic product on R&D since 2009, and upping that to over 4% of GDP in the past decade, is the global leader. In 2020, South Korea’s R&D spend was 4.8% of GDP, according to World Bank data. Taiwan also currently spends at least 3% of its GDP on R&D.

Under the National Fourth Industrial Revolution (4IR) Policy, which is supported by the Malaysia Digital Economy Blueprint launched in February 2021, Malaysia aims to raise gross expenditure on R&D (GERD) to 3.5% of GDP by 2030. As former minister in the Prime Minister’s Department (Economy) Datuk Seri Mustapa Mohamed stated in October 2021, GERD should reach 2.5% of GDP by 2025, from 1.04% in 2018.

Malaysia also aims to be among the top 20 on the Global Innovation Index (GII) ranking by 2030. Malaysia ranked 36 on the GII in 2021 and 2022, down from 33 in 2020 and 35 in 2019.

The various blueprints and policies show Malaysia knows what needs to be done on its journey towards greater digitalisation and sustainable development. The country’s desire to graduate to high-income, developed-nation status will remain out of reach the longer execution disappoints.

After all, as shown in research by Mariana Mazzucato, author of The Entrepreneurial State and professor in economics of innovation and public value at University College London, it was public investment in R&D by the US government that helped power the creation of 12 key technologies that make smartphones smart — including the internet, global positioning system (GPS), the touchscreen and Siri, the voice-activated artificial intelligence assistant — without which the creation of the iPhone may not have been possible.

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