ENTERPRISE S URVEYS ENTERPRISE NOTE S ERIES PERFORMANCE Firm Performance and the Business Environment in Malaysia: A Comparison with High-Income and Upper- 2019 Middle-Income countries Mohammad Amin and Yew Chong Soh F irm-level survey data on registered private rms reveal that rms in Malaysia have much lower labor productivity than their counterparts in 43 upper-middle-income and 14 high-income countries. It will be di cult for Malaysia to achieve the high-income status without a signi cant improvement in labor productivity of the private sector rms. e lower productivity of ENTERPRISE NOTE No . 37 Malaysian rms is pervasive and holds across sectors and rm-sizes. Drivers of productivity such as outward orientation of the rms, innovation, training of workers and top manager’s experience are all lagging in Malaysia compared to the high-income and upper-middle-income groups. Malaysia does outperform in terms of low regulatory burden on the rms and better quality of power supply. However, corruption and crime are worse in Malaysia than in the high-income and even upper-middle-income countries. Introduction done using nationally representative surveys of private rms conducted by the World Bank’s Enterprise Surveys Since its independence in 1957, Malaysia has (ES).2 Unless stated otherwise, all averages discussed witnessed sustained growth in income levels. e per below for HICs and UMIs are obtained by rst capita GDP growth rate over this period averaged 3.8 computing averages at the country level and then percent per annum, higher than most economies in the averaging across countries in the income group. Statistical world. Despite the impressive performance, there are signi cance (at the 10 percent level or less) of the concerns that the country may fall into a “middle-income di erences between Malaysia and the comparators trap”, and these concerns are ampli ed by the recent discussed is derived from rm-level regression analysis. growth slowdown and by the experience of several Unless stated otherwise, all the statistical di erences middle-income countries that have failed to transition to found persist even after taking into account other high-income status (see for example, Larson et al. 2016, potential explanations including rm-size (workers, logs), Flaaen et al. 2013). e emerging view is that productivity improvement rather than factor accumulation is the key WORLD BANK GROUP to maintaining high growth and achieving high-income Labor productivity is much lower in Figure 1 Malaysia than in HICs and UMIs status.1 us, the 11th Malaysia Plan (2016-2020) has set an ambitious target for labor productivity growth of 3.7 100,000 88,486 percent per annum compared with 2 percent per annum Annual sales per worker (in 2009 USD, 90,000 achieved during 2011 to 2015. e Plan envisages that 80,000 raising productivity requires a comprehensive set of 70,000 median values) policies to increase human capital development, promote 60,000 50,000 innovation, improve regulatory frameworks and further 40,000 regional integration by liberalizing trade and investment. 29,367 30,000 In this backdrop, the performance and structure of 20,000 private rms in Malaysia, and the business environment 10,000 10,549 they experience, is compared with that in 14 high-income 0 countries (HICs) and 43 upper middle-income countries Malaysia UMIs HICs (UMIs) for which comparable data are available. is is Source: Enterprise Surveys (2004-2014) Figure 2 Lower productivity of Malaysian firms vs. the comparators holds across sectors and firm-size 120,000 Annual sales per worker (in 2009 USD, median values) 110,815 97,499 100,000 95,028 83,764 79,083 80,000 64,783 60,000 40,899 40,000 30,120 33,456 28,763 28,403 20,946 20,000 14,065 10,127 9,846 9,846 12,787 11,031 0 Manufacturing Retail Other services Small Medium Large Sector Size Malaysia UMIs HICs Source: Enterprise Surveys (2004-2014) rms’ age, industry xed e ects (2-digit ISIC Rev. 3.1), annual growth rate of labor productivity over the last two direct exports (percent of annual sales), foreign ownership years is signi cantly lower in Malaysia (-0.3 percent per (present or not), and whether the rm is part of a larger annum) compared to HICs (1.8 percent per annum).3 organization. The lower labor productivity of Malaysian Labor productivity is much lower in Malaysia firms is pervasive and holds for all sectors and than in HICs, suggesting that the country may firm-size groups. be stuck in the middle-income trap. ere is a noticeable di erence in the level of labor Median annual sales per worker or labor productivity productivity by industry and rm-size groups in Malaysia is signi cantly lower in Malaysia than elsewhere ( gure 1). as well as the comparators ( gure 2). For instance, for the It is less than 12 percent of the level in HICs and about 35 case of Malaysia, median labor productivity for retail percent of the level in UMIs. e productivity gap rms is higher by about 40 percent compared with between Malaysia and HICs may be increasing as the manufacturing or other services rms; by size, median Figure 3 Malaysia lags comparators in important drivers of firm productivity 45 42% 40 39% 39% 37% 35 30 29% 25 20 18% 19% 14% 15 11% 11% 10% 10 4% 5% 5% 5 3% 0 Foreign ownership Exports (% of sales) Quality certification New product Training provided to (% of firms) introduced in last 3 workers (% of firms) years (% of firms) Malaysia UMIs HICs Source: Enterprise Surveys (2004-2014) 2 Figure 4 Available corruption indicators suggest that corruption is higher in Malaysia 40 38% 35 30 28% 25 Percentage (%) 22% 20 15 13% 13% 9% 10% 10 5 3% 4% 2% 1% 1% 0 Bribery depth Bribery Incidence Bribes are paid to "get things Bribe amount (% of sales) (% of transactions) (% of firms) done" (% of firms) paid to "get things done" Malaysia UMIs HICs Source: Enterprise Surveys (2004-2014) labor productivity of medium rms is higher by about 30 The quality of the business environment in percent of the level for small rms and 16 percent of the Malaysia vs. comparators shows mixed results. level for large rms. Despite these di erences, Malaysia While Malaysia outperforms HICs and UMIs in exhibits signi cantly lower labor productivity across all certain areas including regulatory burden on the rms and sectors and all rm-size groups compared to HICs and the quality of power supply, it lags in other areas such as UMIs.4 Figure 2 provides the necessary details. By region, corruption, crime, and access to nance. e percentage of the East Coast has the highest median labor productivity the senior management’s time spent in dealing with in Malaysia (USD 21,191). However, even this is much government regulations (“time tax”) - a broad measure of lower than the average for UMIs and HICs. regulatory burden on the rms - averages 3.1 percent in Malaysia compared to a signi cantly higher 8.9 percent in Malaysia lags HICs in various factors that are UMIs and 11.4 percent in HICs. Other indicators of known to contribute to firm productivity. regulatory burden such as the proportion of rms inspected by tax o cials and the number of visits or As the 11th Malaysia Plan highlights, human capital required meetings with tax o cials reveal a qualitatively development, innovation and global integration are similar picture. important drivers of rm productivity. Currently, Similarly, the quality of power supply in Malaysia is Malaysia seems to lag HICs and even UMIs in these areas impressive. A signi cantly smaller proportion of rms in ( gure 3). Regarding human capital and innovation, the Malaysia experienced power outages over the last year (19 ES data show that the top manager’s years of experience percent) compared to the case in UMIs (57 percent working in the industry, the percentage of rms that experienced power outages) and HICs (32 percent provide training to their workers, the percentage of rms experienced power outages). Further, a typical rm in that introduced a new product over the last 3 years, and Malaysia experienced only 0.6 hours of power outages per the percentage of rms that introduced a new product month over the last year, signi cantly lower than the 17 over the last 3 years that was also new to the industry are hours in UMIs5 and 1.5 hours in HICs. Corruption is an important area of concern for all signi cantly lower in Malaysia than in HICs and Malaysia. e ES provides information on the percentage of UMIs. In terms of the outward orientation of the rms as rms that were asked for a bribe payment for one or more captured by foreign ownership (the share of rm owned public transactions6 (Bribery incidence), the percentage of by foreigners), exporting activity (exports to sales ratio) such transactions for which a bribe payment was requested and having an internationally recognized quality from a rm (Bribery depth), percentage of rms that report certi cate, it is signi cantly lower in Malaysia than in rms like itself have to pay bribes to “get things done” and HICs. Malaysia also lags UMIs in these areas but not the amount of bribes paid (percentage of annual sales) to always signi cantly so. For instance, the percentage of the “get things done”. All these indicators show that corruption rm owned by foreigners averages a mere 1.5 percent in is signi cantly higher in Malaysia than in HICs and UMIs. Malaysia, signi cantly lower than the 9.2 percent in HICs. Figure 4 provides the details. 3 Figure 5 Malaysia lags HICs in access to finance 96% 100 91% 90 85% 80 75% 67% 70 61% 60 56% % of firms 50 46% 46% 41% 41% 40 32% 29% 30 20% 20 14% 10% 10% 10 6% 0 Fully financially Partially financially Financially Firm has overdraft Firm has loan Firm has constrained firms constrained firms unconstrained facility checking/savings firms account Malaysia UMIs HICs Source: Enterprise Surveys (2004-2014) Regarding access to nance, based on information Competition from informal firms is the most available in the ES on whether a rm applied for a loan commonly cited biggest obstacle by Malaysian during the last year and the reasons for not doing so if a firms. rm did not apply, a signi cantly larger proportion of rms in Malaysia are credit constrained than in HICs e ES asked rms about the biggest obstacle that ( gure 5). ere is no signi cant di erence between they face in conducting their business. A list of 15 Malaysia and UMIs here. e ES also provides obstacles was provided to choose from. Figure 6 shows the information on other measures of access to nance such as three most commonly chosen top obstacles. Competition whether the rm has an overdraft facility, whether the from informal rms is the most cited top obstacle in rm has an outstanding loan or a line of credit, and Malaysia. It is chosen by a signi cantly larger number of whether the rm has a checking or savings account. In all rms in Malaysia than in UMIs and HICs. In contrast, these indicators, Malaysia lags the HICs and signi cantly high tax rates is the biggest obstacle for a signi cantly so ( gure 5). larger proportion of rms in high-income countries Figure 6 Top three biggest obstacles (% of firms) 35 30% 30 24% 25 % of firms 20 15% 13% 13% 15 11% 12% 11% 10% 10 5 0 Practices of the informal sector Tax rates Obtaining licenses/permits Access to finance Tax rates Informality Tax rates Finance Informality Malaysia UMIs HICs Source: Enterprise Surveys (2004-2015) 4 relative to Malaysia. e same holds for UMIs vs. Malaysia 6. ese transactions involve applying for electricity connection, but the di erence here is not signi cant. water connection, construction permit, import license, operating license and in meeting with tax o cials. Conclusion References Labor productivity of registered private rms in Aiyar, Shekhar, Romain Duval, Damien Puy, Yiqun Wu, and Malaysia is much lower than in selected high-income Longmei Zhang (2013), “Growth Slowdowns and the countries as well as upper-middle-income countries. It is Middle-Income Trap,” IMF Working Paper 71, Washington, DC. highly unlikely that Malaysia can achieve its declared Eichengreen, B., D. Park, and K. Shin (2013), “Growth objective of becoming a high-income country without Slowdowns Redux: New Evidence on the Middle-Income Trap,” NBER Working Paper 18673 National Bureau of Economic signi cantly improving its productivity. Compared to Research, Cambridge, Massachusetts. high-income countries, Malaysia enjoys lower regulatory Flaaen, Aaron, Ejaz Ghani, and Saurabh Mishra (2013), “How to burden on the rms and a better quality of power supply. Avoid Middle Income Traps? Evidence from Malaysia,” Policy Research Working Paper Series 6427, World Bank, Washington, DC. However, Malaysia performs poorly vis-à-vis the Larson, Greg, Norman Loayza, Michael Woolcock (2016), “ e high-income countries in terms of corruption, crime, and Middle-Income Trap: Myth or Reality?” Research & Policy Briefs, access to nance. Outward orientation of the rms, No. 1 (March), World Bank. innovation activity, training of workers and managerial experience are some of the other determinants of productivity where Malaysia lags HICs. ese and other factors responsible for the low productivity of private rms in Malaysia should be addressed through appropriate policies. Notes 1. e literature has highlighted several factors in the context of middle-income countries and more broadly that may constrain growth. See for example, Eichengreen et al. (2013) and Aiyer et al. (2013). 2. ese surveys were conducted between 2005 and 2016. Income categorization follows the World Bank. e high-income countries included are Argentina, Chile, Croatia, Czech Republic, Estonia, Hungary, Israel, Latvia, Lithuania, Poland, Slovakia, Slovenia, Sweden, and Uruguay. 3. e di erence is statistically signi cant after controlling for the initial level of labor productivity (convergence e ect) but not otherwise. 4. e di erence in labor productivity here between Malaysia and UMIs for the manufacturing sector is not statistically signi cant unless the impact of foreign ownership on labor productivity is accounted for. 5. Average value of total hours of power outages for UMIs declines to 6 hours (from 17 hours) if we exclude Iraq and Lebanon that have unusually high levels of power outages. However, even after excluding these outlier countries, hours of power outages is signi cantly higher in UMIs than in Malaysia and this holds with or without controlling for the basic rm characteristics. e Enterprise Note Series presents short research reports to encourage the exchange of ideas on business environment issues. e notes present evidence on the relationship between government policies and the ability of businesses to create wealth. e notes carry the names of the authors and should be cited accordingly. e ndings, interpretations, and conclusions expressed in this note are entirely those of the authors. ey do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its a liated organizations, or those of the Executive Directors of the World Bank or the governments they represent. Global Knowledge & Research Hub in Malaysia 5