Friday, September 17, 2021

High value, not high tech, will refresh investments

Malaysia’s new investment strategy to be announced this week must avoid the fundamental error that equates high tech with high value when social costs are not taken into account.

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The announcement that International Trade and Industry Minister Mohamed Azmin Ali will table a Cabinet paper on Malaysia’s new investment policy this week is welcome news. Less welcome are the reports that it focuses on innovation, technology and digital investments which raises concerns that it might miss the target in creating wider value in the economy.

The announcement comes hard on the heels of Microsoft’s US$1 billion (RM4.1 billion) five-year investment in Malaysia which is expected to generate US$4.6 billion (RM19 billion) in revenue and create around 19,000 jobs for Malaysians, including 4,000 related to information technology.

While this investment signals foreign investor confidence in Malaysia, we must also clarify whether the RM19 billion in revenue will benefit Malaysians more widely or whether it will just be absorbed into Microsoft’s global revenue stream.

When businesses evaluate investments they do so in financial terms, using risk-adjusted return on investment for example. Policymakers must evaluate the wider economic impact not just the private financial impact on Microsoft nor the high-tech nature of the investment. Neither of these measure total value added.

For example, the 4,000 technology-related jobs are welcome but what about the remaining 15,000? Are they high-tech, high-value added jobs too? What will be the spillover to the local economy? Will Malaysian firms benefit in the Microsoft supply chain and if so, what will the benefit be?

We had a similar narrative welcoming high-tech foreign investors when Volkswagen announced its new, high-tech, 50,000 square-foot supply-chain and logistics hub, otherwise called a warehouse, in Johor.

This is certainly a high-tech investment by a world-class company but the technology used automates the warehouse processes and reduces the need for employees. This lowers costs, improves productivity and raises profits which will be absorbed outside of Malaysia into the global profit of the Volkswagen group.

It is an example of a high-tech, low-cost and low value-added investment to Malaysia which boosts the profitability of global mega brands but adds relatively little locally. Relatively few Malaysians will be employed for example and, as in the Microsoft case, a large number will not be high-tech, high-paid jobs.

Take another example from home-grown tech-driven investments such as Grab, the e-hailing app that has now expanded into a wide range of product segments. The e-hailing app itself is novel, if not very high-tech and even the business model is innovative while drawing on similar models such as its erstwhile competitor, Uber.

The “success” of this company is demonstrated to many people not just by its growth and market capture but also by the US$39.6 billion (RM163 billion) valuation placed on its upcoming public listing. What fewer people notice is that it had cumulated losses of US$10 billion (RM41 billion) and net losses of more than US$2 billion (RM8.2 billion) for at least three consecutive years up to 2020, according to documents released prior to its listing announcement.

Also, while many people point to the creation of much needed employment, especially during the pandemic, we are beginning to recognise that these are very low-paid and precarious jobs with few, if any, social protections such as insurance, medical or pension cover. Indeed just as these jobs have boomed during the lockdown, there are signs that they will bomb after the lockdowns when demand is expected to plummet.

In addition, we all know that although Grab originated in Malaysia it is now a Singapore-based company so most of the revenue and profits will accrue outside of Malaysia. The value added here, such as it is, will be measured in low-paid, precarious jobs driven by high-tech, multinational investments. The costs of social protection will fall either on the drivers and riders or on the Malaysian taxpayer.

For the avoidance of doubt, none of the companies have done anything wrong and we hope that the investments will be successful. Nonetheless, they are examples of a fundamental error in the presentation of policy that equates high-tech with high value.

It does not follow that innovation will lead to net economic value added if those innovations replace people through automation. Technology and especially the technology of the Fourth Industrial Revolution or Industry 4.0 can and does have the effect of creating profits for company owners at the expense of their employees. Automation, digitalisation and robotisation at the heart of the Industry 4.0 is specifically designed to reduce costs by replacing people.

This does not mean that we should resist such technology like 19th century Luddites, who destroyed weaving looms to save jobs. Rather it means that we must anticipate the economic and social effects of such innovations and provide a plan within the new investment policy to mitigate the worst effects.

In the language of the social market economy we must not privatise the profits and socialise the costs but combine a market-friendly investment environment with social policies that establish both fair competition and social equity.

The government’s new investment policy must recognise that left to its own devises a market driven approach to high-tech investments may lead to the low-cost development model that they are trying to avoid.

They should adopt the idea of ordoliberalism, or ordered liberal markets, which emphasises the need for the state to create policies that ensure that the free market produces results as close to its theoretical potential as possible. There must a sense of social justice and solidarity so that the economic growth from high-tech investments facilitates poverty reduction and prevents widening income disparities to the disadvantage of certain sections of the population.

For this reason the new investment policy must focus on high-value investment not just high-tech investment otherwise we will face a post-Covid environment of low-cost jobs, precarious employment and displaced workers with no real prospect of high-value, high-salary work.

Geoffrey Williams is an economist at Malaysia University of Science and Technology in Kuala Lumpur.

The views expressed in this article are those of the author(s) and do not necessarily reflect the position of MalaysiaNow.

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