Productivity growth can make the years ahead much more prosperous
FOR 50 years, sustained growth in Malaysia was based on ever-expanding use of manpower and accumulation of fixed capital assets. Basic economics tells us this business model will eventually give way to the law of diminishing returns, that is, when increasing injections of labour and capital lead to lower rates of additions to output with each passing year.
The message: We can’t be expected to grow efficiently by simply doing more of the same.
To become an increasingly higher-income nation, we need to shift from the “old” resource-based economy to one that is innovation led. Empirical evidence suggests that the old strategies have delivered steadily worse results.
On the other hand, innovation is known to have driven one-half of US productivity growth over 60 years. McKinsey Global Institute notes: “Those innovations – in technology as well as products and business
processes – boosted productivity.” For us, only innovation can be relied upon to drive exponential growth.
By innovation, I mean fresh thinking and approaches that add value to consistently create wealth and social welfare. In the end, innovation drives productivity, and productivity drives the flow of real income.
History teaches us that a burst of productivity growth can make the years ahead much more prosperous. With higher pay, workers can still save and yet have enough left over to spend more to raise living standards.
However, economics is unsure about the predictability of innovation and productivity. Investors are notoriously fickle and entrepreneurs’ serendipity, usually random.
Then, there is the speed with which new products and services can be rolled out and brought to market. It was Paul J. Meyer who said: “Productivity is never an accident. It is always the result of a commitment to excellence, intelligent planning and focused efforts.” Perhaps, this can help make productivity growth somewhat more predictable.
In the United States, studies by my econometrics professor at Harvard, Dale Jorgenson, pointed to technology advancing less fast than in the decade before the recent recession. Consequently, productivity can be expected to slacken to around 1.5% annually, yielding potential GDP (or gross domestic product) growth for the United States as a whole at about 2%–2.5% a year over the next few years.
Nothing spectacular, but much better than Japan during the recent lost decade. As of now, continuing high unemployment and rising US GDP growth in the fourth quarter of 2009 and the first quarter of this year means an abrupt 7% annual rate gain in productivity. This reflects in part a reluctance to hire given the uncertainties. There was a similar knee-jerk reaction during the 2001 recession.
A rebound in electronics demand suggests perhaps the wave of technology advances that fuelled productivity in the years prior to 2008 may have some steam left.
Most now see Asia reviving nicely this year. This year’s first-quarter results and forecasts for the year are rather robust, thanks to government stimuli. The Asian Development Bank (ADB) and the World Bank now talk about 7.5%–8.5% growth for the year (5.5%–6% ex-China). But India and East Asia (China, South Korea, Taiwan) display more impressive productivity growth. Within Asean, the underlying productivity profile remains anaemic, especially the more mature among them.
For Malaysia, productivity growth averaged below 1% a year over past 20 years. That’s a setback. Hence, there is resurgent talk of reform and rebalancing in search of new directions. The ADB suggests finding ways to “shift the drivers of growth”.
Today, China and India are where the action is – they provide the learning laboratory for innovative practices and processes.
As Professor Bill Fischer of IMD (Switzerland) puts it: Whereas Japan’s management revolution was all about “lean”, China’s is all about “speed” – faster to produce, faster to market, faster across markets, faster to expand.
Today, China uses its competitive advantage and “Chineseness” to do things better. But not through conventional blockbuster innovation.
Government as an enabler
There is no prescription for how a country can create a culture of innovation and competitiveness. According to Joseph Stigliz, the 2001 Nobel laureate: “…But government does have a role – in education, in encouraging the kind of creative and risk taking that the scientific entrepreneurship requires, in creating the institutions that facilitate ideas being brought into fruition, and a regulatory and tax environment that rewards this kind of activity.”
Ironically, the US prowess in innovation owes much to government support. As Harvard professor Josh Lerner tells it, the early development of the Silicon Valley emanated from Pentagon contracts. As did the Internet, which grew out of a defence project initiated in 1969.
In Malaysia, development of new industries and restructuring of old ones (creative destruction) often require a nudge from the government in terms of subsidies, loans, infrastructure and other support.
In order to be successful, the government needs to (i) create a conducive climate for public-private collaboration – or as Harvard’s Dani Rodrik puts it: It requires a government “embedded” in the private sector, but not in bed with it; (ii) incentivise innovations with “rental” rewards through a credible patent system; and (iii) ensure “public goods” serving society are promoted in a transparent fashion.
Venture capital
From Asean to northeast Asia and from India to Japan, the big risk to innovative ventures remains the lack of ready access to finance. The onset of the great recession and damage done to the financial system have exacerbated this risk. Firms which depend on bank credit and private equity have been particularly vulnerable.
A recent IMF (International Monetary Fund) study of North American manufacturers estimates that a 1% rise in the corporate bond rate can lead to a 0.25% fall in productivity. This is a big deal.
Worst hit is venture capital (VC). During the best of times, VC funds were already hard to come by. In recent years, reflecting big losses (by foundations and endowments) on hedge funds, private equity, and stocks and shares, venture financing has become more risk-averse.
The same story hits Asia since innovative ventures are forced abroad for financing, even in cash-rich Japan. Worst hit are angels, early start-ups and intermediate-stage start-ups.
In Malaysia, the situation is worse. The bulk of VC monies comes from the government and start-up funding is virtually non-existent in practice. Not only are governing boards and top management of VC funds risk-averse, their fear of loss on their watch scares them.
Furthermore, the environment is set in a culture that does not readily take on risk. As I see it, a government that takes no risk in promoting innovative ventures is one that is likely to make the bigger error of not trying hard enough.
All is not lost. Studies at Harvard Business School have shown that venture financing during and soon after recessions is more successful per dollar spent in practice, than during booms when money flows easily. Indeed, entrepreneurship is resilient to business cycles, partly because many turn to self-employment when laid off or offered a chance to take on risk.
I am told that 40%–45% of corporates listed in the Fortune 500 were born during recessions. As one involved with VCs, I find little comfort in this. I certainly won’t bet on it.
Talent management
Human capital lies at the core of innovation. Raising productivity requires a labour force of high calibre – committed, motivated and skilled enough to drive transformational change based on excellence over the long term. It’s about trapping potentials through acquisition of new skill sets in designing new products and services, and devising new processes and systems to do things smarter and more efficiently. That’s what talent management is all about.
In terms of outcomes, this simply means encouraging businesses to invest in R&D, design, automation, software, training and the accumulation (also acquisition) of intellectual property. Concomitantly, we also need to pursue initiatives on the flip side – promote angel investors and start-ups through an incentive regime that rewards risk taking.
Angels nurture start-ups very early. Their involvement goes beyond funding. They provide hand-holding, mentoring, coaching, and access to business networks. Indeed, this link turns innovative ideas into commercial propositions.
All these need ready access to a talent pool of critical skills and expertise. They make the difference between success and failure; the difference between quality and quantity. In the end, they deliver products and services better, smarter and faster. That’s what productivity is all about.
The Economist Intelligence Unit’s August 2009 global survey on talent strategies identified critical constraints on talent in an enterprise’s capacity to innovate.
Externally these are (i) intense global competition, (ii) rapid turnover, and (iii) rising cost, whereas the internal limitations are (a) lack of collaboration and resource sharing within an organisation, and (b) business and talent strategy not aligned. They reflect the war on talent out there.
In today’s world, I believe competitive enterprises can’t afford to be insular. Indeed, they need to look outside for talent to survive. China and India are wooing their national talent from North America where they have been entrepreneurial drivers. Other parts of Asia are doing the same. Indications are that host advanced nations are fighting back.
They may not have to fight too hard. Between 1997 and 2002, I am told, close to two-thirds of foreigners who earned PhDs in science and engineering in the United States are still there. The “stay rates” are much higher among Chinese and Indians (80%–90%).
Talent scarcity is a global issue. It’s not confined to developed nations, where it’s very serious. By 2050, for the first time, sixtysomethings will exceed 15-year-olds or younger. Even populous nations like India and China lack skilled professionals. The high skills gap reflects inadequate quality education and education mismatch.
Malaysia is reported to have lost up to 400,000 (mostly professionals) to emigration over the past two years. We are told that one to two million Malaysians work abroad (again, mainly professionals).
In his book,
The Flight of the Creative Class, Professor Richard Florida states that skilled immigrants gravitate to global “talent magnets” centred on major cities which are open, tolerant and liberal with attractive living lifestyle.
He argues that as a “third-tier” global city, KL cannot engage successfully in the war on talent. To evolve into a human creative hub, KL’s ecosystem and outlook on excellence need to be radically transformed to reflect the true spirit of the New Economic Model.
This will require strong leadership, steadfast political will, and lots of time. Until this commitment is translated on the ground, Malaysia’s success in the talent war remains a serious challenge. Yet, without an adequate talent pool, innovative-led growth can only be sub-optimal.
What Are We To Do
By TAN SRI LIN SEE-YAN
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Former banker Dr Lin is a Harvard-educated economist and a British Chartered Scientist who now spends time teaching and promoting the public interest. Feedback is most welcome at
starbizweek@thestar.com.my. 
