Shifts in global trade patterns, coupled with rapid technological changes are presenting challenges to sustaining growth. Therefore, a transition to a more knowledge-based growth model is now ever more urgent in the current uncertain global context.

The economic shocks of the COVID-19 crisis has spelled major impacts for firms across the globe. In the short term, the crisis threatens to cause numerous bankruptcies and layoffs in the private sector, particularly among SMEs. Once mobility restrictions and mandatory lockdowns are removed, thus allowing businesses to reopen – many firms, including both larger corporations and SMEs, will have not escaped unscathed and may face the risk of insolvency.

Firms may stand a better chance during times of crises by harnessing technological and innovative capacity to adapt. Innovative capacity can help firms to pivot to new ways of generating revenue.

In the current crisis, some businesses are repurposing their production lines, and regulatory authorities need to strike a balance to support them as they make these shifts.

For example, textile companies are switching production lines from producing garments to making hygienic masks and medical robes, cosmetic companies are making hand sanitizers, hotels are becoming quarantine centers, distilleries are creating disinfecting alcohol, and automotive companies are evaluating options to produce urgently needed medical devices, such as ventilators.

Building up capacity and capabilities to produce simple products is comparably easy and can be achieved quickly. However, a lack of technological capability in producing complex medical equipment has become a major hurdle for factories looking to shift their production lines. There is a role for strengthening research capacity and helping countries develop science and technology policies that would help increase capacity to reverse-engineer, adopt, and adapt technologies to local needs.

Such belief is ubiquitous among policymakers alike. In order to chart a fruitful path forward to begin this transformation, a clear definition of what an innovation-led knowledge economy is necessary.

First, incentives to develop entrepreneurship with the efficient use of existing and new knowledge can be encouraged by a supportive economic and institutional ecosystem. Second, raising an educated and skilled talent pool is important to cultivate professionals that can create, share, and use knowledge effectively. Third, as innovation brings forth new ways to improve processes across varieties of interlinked sectors and industries, effective communication, dissemination, and processing of information is vital to ensure adaptation. And finally, this growing stock of global knowledge can be leveraged by a system of firms, research centers, universities, and other organizations to adapt to local needs, and in turn, create new technologies.

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The COVID-19 Crisis and Global Value Chains: What Does it Mean for SMEs in Malaysia?

The global economic system has grown to be increasingly integrated. Almost 50% of global trade today involves Global Value Chains (GVCs) that have been an important source of growth and poverty reduction.

The global economic disruptions that have ensued due to the current COVID-19 pandemic will likely affect countries that heavily rely on trade in goods and services and that are deeply inserted in GVCs, such as Malaysia. This makes Malaysia particularly vulnerable to supply shocks, since vital sources of inputs may be shut down or countries may start imposing export restrictions. Moreover, the recent growth of GVCs means that, even more than in past crises, the COVID-19 shock is affecting many locations suddenly and simultaneously. This leads to a mutual amplification of reverberations, as the health of any economy must depend on the health of other economies supplying inputs or buying outputs, directly or indirectly.

GVCs are becoming more knowledge-intensive and reliant on high-skill labor, with investments in intangible assets (e.g. R&D, brands, IP) increasing from 5.5% to 13.1% of revenue across value chains since 2000. Moreover, technology and innovation have, on balance, boosted trade and led to the emergence of new traded goods and services. In fact, in 2017, 65% of trade were in categories that did not exist in 1992. Malaysia is deeply embedded within GVCs and has sought to upgrade its position in them. This is particularly true of the E&E sector. Accounting for 98.5% of total firms in Malaysia, and the bulk of production and employment, small and medium-sized enterprises (SMEs) are a crucial component of Malaysia’s economic growth strategy.

New technologies associated with the 4th Industrial Revolution (Industry 4.0) are transforming production processes by reducing the importance of low wages in determining competitiveness. The COVID-19 pandemic has increased the benefits SMEs could derive from using new technologies – e.g. for remote work, and online business platforms. E-commerce and digital payments should also be further encouraged through regulatory reforms and measures to foster innovation. It is thus imperative that Malaysia focuses on building its capabilities in terms of skilled workforce and adoption of technologies, especially amongst SMEs, across the board.

In response to the Industrial Revolution 4.0, the government has launched the Industry4WRD: National Policy on Industry 4.0 to drive digital transformation in various sectors in Malaysia, aiming to be an Industry 4.0 hub in Southeast Asia. In order to achieve this ambition, firms, especially SMEs, would need to aggressively adopt new technologies and effectively participate in GVCs. Measures to boost jobs and private investment, particularly by SMEs, through increased digital adoption are an important step in this direction.

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The above is an extract from an article written by Smita Kuriakose, Senior Economist for the World Bank’s Finance, Competitiveness and Innovation Global Practice in Malaysia.

The full article appears in the April 2020 issue of the Development Digest: Navigating a New Normal, a half-yearly publication that features key works from teams based at the World Bank Group Global Knowledge and Research Hub in Malaysia.