Knowledge Economy

Rationale for the Knowledge-based Economy in Malaysia. Creation of favorable legal base and special economic incentives for the innovative economy. The comparison of Malaysian case with the Russian one. Chinese business and links with overseas Chinese.

Рубрика Экономика и экономическая теория
Вид дипломная работа
Язык английский
Дата добавления 09.07.2016
Размер файла 652,3 K

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Table of contents

Table of contents

List of tables and diagrams

1. Introduction

1.1 Rationale for the Knowledge-based Economy in Malaysia

1.2 Hypothesis, research objectives and research questions. Theoretical framework

1.3 Concept of the Knowledge-based Economy

1.4 The used sources and empirical literature review

2. Drivers and factors for the development of the Malaysian Knowledge-based Economy in the past 20 years

2.1 Models of factors which influence innovations

2.2 Governmental policies for the development of Knowledge-based Economy

2.3 Creation of favorable legal base and special economic incentives for the innovative economy

2.4 Education and training

2.5 Chinese business and links with overseas Chinese

2.6 Creation of good infrastructure

3. The characteristics of the Knowledge-based Economy in Malaysia

3.1 The first stages of the development of the Knowledge-based Economy. Malaysian Multimedia Super Corridor

3.2 Development of clusters in Malaysia

3.3 Building the knowledge-manpower in Malaysia

4. Current characteristics of the Malaysian economy and future challenges identification. Comparison with Russian case

4.1 The current trend in the development of Malaysian economy and future prospects

4.2 The comparison of Malaysian case with the Russian one


The list of sources and literature

List of tables and diagrams

Diagram №1 The interaction of different factors, encouraging implementation of innovations in Malaysia

Diagram №2 GDP per capita and the share of the Chinese population in the total population of the country

Diagram №3 The average monthly income of Chinese and Malay populations in Malaysia (U.S. dollars)

Table №1 Selected Multimedia Super Corridor indicators (2001-2015)

Diagram №4 Distribution by territories of urban GDP contribution in Malaysia

Diagram №5. Gross enrollment ratio in Malaysia, % (1999, 2006-2013)

Diagram №6 Number of employed persons by occupation in 2012 in Malaysia (`000)

Table №2 Research and development indicators in different countries (2002-2012)

Table №3 Research and development indicators in different countries (2002-2011)

1. Introduction

1.1 Rationale for the Knowledge-based Economy in Malaysia

Today Malaysia is included in the list of the Newly Industrialized countries (NICs). However, fifty years ago in the years after independence its economy was heavily dependent on agriculture and natural resources. In the 1950s and 1960s, the export of raw materials such as tin, iron ore and rubber was the main source of the country's income. During that time, cheap and low skilled labor force as well as land and natural resources were the main factors of production. In the period after independence, most of Malaysians were badly educated and only a small group of people, which was mostly consisted from wealthy Chinese population, was able to afford secondary and tertiary education.

From 1960s Malaysia began to transform its economy from agrarian into the agro-industrial and then to the industrial one. These changes led to the gradual development of industrial and financial sectors as well as infrastructure. Malaysian government created special incentives in order to establish favorable business and investment climate. The reasonable state investments, high profits from international trade, large inflows of foreign direct investment (FDI) and Malaysian cheap labor force caused the fast development of export-oriented sectors, in particular electrical and electronic sphere in the manufacturing industry.

Despite the changes that occurred in the structure of the economy and a significant increase in the share of the industrial sector in GDP, till the end of 1990s, to be more precise till the Asian financial crisis in 1997-1998, Malaysian economy was continued to be heavily depended on the cheap and unqualified labor force, export of assembling production, foreign direct investment and was quite invalid in terms of national capital productivity ratio. Although the share of FDI in GDP was high, the major inflow went to the primary and secondary sectors, while the modern tertiary industries were poorly developed and were not attractive for foreign investors during that period of time. For example, in 1993 the major part, namely 66 per cent of the foreign direct investments which accounted for 7.5 per cent in GDP,The World Bank, World Development Indicators, from (Accessed 15.02.2014). went to the manufacturing sectors, mostly to those fields that need a lot of unqualified workforce, such as the dirty production and assembling, 21 per cent belonged to the extraction and processing of oil and gas products and only 13 per cent was directed to the service sector.Jabatan Perangkaan Malaysia, Penunjuk Ekonomi Malaysia 2013, p. 12-15, from While production in Malaysia was capital- and labor-intensive, it used also to be resource-intensive, which had a negative impact on the eco-system of the country. Poon Wai Ching, The Malaysian economy. Second edition, Selangor, 2008, p. 160. In that period, the government realized that Malaysia was lacking a global competitiveness and it had launched the strategy of transformation of the economy from a natural resource dependent to a productivity-driven.

Moreover, nowadays Malaysia in terms of low-cost labor force cannot compete with other countries such as China, India and Vietnam because of their abundant cheap workforce. At the same time, information and knowledge start playing more important role in the whole world and are becoming the main factors for the competiveness of the country. That is why the importance of information and technical change along with the creation of the skilled labor force has received increasing attention from both researchers and policymakers.

In order to transform the economy into the Knowledge-based one, Malaysian government included the goals of advanced technology implementation and development of skilled labor force in the strategic plans. The Seventh Plan of the Malaysian economic development (1996-2000) is the first strategy where the development of Malaysia into the innovative economy was pointed out very clearly. According to it, Malaysian government is intended to develop and invest more money in high technologies and knowledge-intensive industries that have a higher productivity compared with others.Prime Minister Office of Malaysia, The Seventh Malaysia Plan (1996-2000), That is why during the mentioned period the government began shifting the focus of the strategy from the resource, capital and labor-intensive development to the growth driven by productivity and innovative technologies. It means that the additional output had to be generated by the increased efficiency as the result of the improvements in education system, increase in the expertise of employees as well as the rise in the high management knowledge, progress in the organization, the introduction of new technologies and innovations or improvement of the existing ones. Ibid. Malaysia also needs to develop different tools to transform its economy, called the Knowledge Infrastructure, which consists of several components, such as research and development system (R&D), intellectual property regime, the framework of technology transfer and special financial organization. Poon Wai Ching, The Malaysian economy. Second edition, Selangor, 2008, p. 134.

Another important point for the transformation for into the Knowledge-Based Economy is the creation of a strong intellectual property regime in order to establish the good protection of intellectual property rights. While the government has to set up efficient legal and financial base along with supporting environment, according to the Malaysian Planning Unit, the main drivers of the development of the Knowledge-based Economy should be in hands of the private sector. At the same time there should be a technology transfer system that enables the transfer of knowledge and technology from the laboratories and universities to the industry and business sectors.

It is very important to add, that Malaysia is multiethnic society, which consists of Malay, Chinese and Indian ethnic groups. Thus, special conditions should be created to provide all segments of Malaysian society without regard to the ethnic group with the access to the new opportunities. So, another important reason for the development of Knowledge-based Economy for Malaysia is to diminish and to narrow the gap among various socials groups and between urban and rural society.

All reasons given above have necessitated the implementation of the new development strategy, which could make Malaysia more competitive and increase the long-term economic growth in Malaysia in frame of the trend of globalization. The conversion into the Knowledge-based Economy is crucial for the sustainability of Malaysia as it has to compete with the lower-wage and resource-richer developing countries as China, India, Vietnam, Indonesia and Thailand. At the same time, Malaysia as a Newly Industrialized country still has to reach the level of development of the more advanced economies such as South Korea, Japan and Singapore.

In the context of the above discussion, Malaysian economic situation gives a very interesting empirical context for the research in the field of the Knowledge-based economic model and the development of the country.

1.2 Hypothesis, research objectives and research questions. Theoretical framework

Considering all stated above, this research paper challenges the view whether Malaysia has already entered in a new phase of development and is transforming its economic system towards a new type of the economy which is called the Knowledge-based Economy. It is assumed that under the current global economic situation the skilled labor force, an implementation of new technologies and innovations have the most important impact on the productivity level, the standards of living of the population and the overall development of the country. Author will also try to analyze and identify the other significant factors influencing the growth of this country and the results Malaysia has achieved in the innovation sphere by the year 2014.

The object of the research is the model of the Knowledge economy in Malaysia, where the production and implementation of knowledge and innovation play a crucial role in ensuring long-term sustainable development and global competiveness.

The subject of the thesis is the new forms of economic relations and the transformation of Malaysian economic system into the Knowledge-based one.

Research Objectives:

Firstly, the thesis focuses on the factors and reasons of the development of the Knowledge-based Economy, the impacts and consequences of the transition of economic system to an innovative frame and an integration of it into the world economy.

Secondly, the paper presents the study of Malaysian economic development, its main fields and directions through the aspects of knowledge-intensive industries building.

Thirdly, the researcher will try to evaluate advantages and disadvantages of the development of the Malaysian economy and the further steps of the government of the analyzed country. Some aspects of the implementation of the Knowledge-based model in Malaysia will be proposed to adopt in Russia.

The following research questions are expected to be answered in the thesis:

Q1 Which drivers and factors have been crucial for the development of the Malaysian Knowledge-based Economy in the past 15 years?

Q2 What are the characteristics of the Malaysian Knowledge-based Economy today?

Q3 What are the advantages and disadvantages of Malaysian economic system on the way of becoming the fully developed nation?

Q4 For the future, which drivers and policy changes will be crucial in transforming the Malaysian economic system further?

These questions put the new significance not only for Malaysia but also for the South-East Asian countries, which economy in the period from 1990s started to grow very fast.

To attain the mentioned goals different methods of study were used, including a genetic method to trace the process of Malaysian transformation, a typology and classification methods, method of factors modeling and comparison.

Structurally, the work consists of an introduction, three chapters, conclusions and a list of the sources and literature. In the introduction it is described the relevance of the study and the sources that were used. In this part of the study the author also provides a short overview on the structure of the thesis as well as the methods and a theoretical background of the concept of the Knowledge-based Economy and characteristics of it by different experts and scholars.

In the first chapter the author examines different drives and factors which influence the development of Knowledge-based Economy in Malaysia.

The second chapter is devoted to the main niches of the development of innovative economy. It introduces a detailed analysis and the impact on the development of the country of Malaysian Multimedia Super Corridor as well as clusters over the period from 2006 to 2014, their territorial and sectoral structure. In addition, it is examined the data set about the development and the quality of the manpower in Malaysia.

The third chapter provides the current characteristics of the Malaysian economic system and discuss the possible governmental measures that should have been taken to transform Malaysian economy further in the future. Briefly comparing the implementation of new technologies by Russia, the author suggests that some elements of the developmental framework in Russia might be adopted using the Malaysian case.

At the end of the thesis, it is formulated a conclusion to which the author arrived during the preparation of this paper.

The fundamental concepts presented in classic and contemporary works of Russian and foreign scientists, in materials of scientific conferences, symposia, etc. constituted the theoretical basis of the thesis.

In the research the author relies on the neoclassical economic theory, which was explored by Thorstein Veblen, Alfred Marshall, Carl Menger, William Stanley Jevons, Lйon Walras, John Bates Clark, etc. and tends to assume that there has emerged the new sub-field of the mentioned theory. The new sub-dimension has started to form after the Second World war, when the governments all over the world received the opportunity to spend more money on research and development not only in the fields needed for the defense industry but also in other sectors. At that time the issue of emergence of the new subdivision of economics, innovation or Knowledge-based Economics, had started to draw attention more intensively of the new generation of scientists. The main question is how innovations and technologies as well as qualification of labor force could affect economic growth.

Using the example of Malaysia, the author tries to show that innovation economy is a new phenomena which in some points complements the neoclassical theory and can explain critical issues of social-economic development of the late XXth and the beginning of the XXIst centuries.

According to the neoclassical theory, economic approach bases on the determination of prices, outputs, and income distributions in markets through supply and demand. Scholars assume that individuals and firms act rationally and independently and tend to minimize costs and maximize utility and profit using available information and factors of production. Wikipedia, Neoclassical economics, from (Accessed 17.11.2013). Another key economic principle of neoclassical theory is that the accumulation of capital drives economic growth. That belief spurs private and public savings of capital, which are in the center of model. In turn, savings create the capital pools to support investment, which drives further the economic growth.

Recognizing the positive contributions of the theory, the general neoclassical economic concept cannot prove some important points in the Knowledge-based Economy of the ХХIst century.

Although the accumulation of capital is the key point of the model, technology is outside of it. The researchers of the new sub-fields of the economy tend to assume that there are two more drivers for the development. They constructed a model where technology and qualified human capital are also the key incentives for the stable economic development. At the same time, institutional factor and productivity which is driven by knowledge and innovation also affect the rate of economic growth.

One more factor previously mentioned by the neoclassical economists is that the economy tends to the equilibrium in the market when the amount of goods or services bought by buyers is equal to the amount of those products that are manufactured by sellers.Peter Mulder, Henri L.F. De Groot, Marjan W. Hofkes, Economic growth and technological change: A comparison of insights from a neo-classical and an evolutionary perspective, Journal of Technological forecasting and Social Change (68), 2001, Amsterdam, The Netherlands, pp. 151-171.

There should be mentioned that implementation of innovation is an evolutionary process that takes place through the interaction of different institutions in special environment that supports technological change, entrepreneurial drive, and higher skills. Creation of innovations leads to the fact that the Knowledge-based Economy is always changing rather than seeking for the equilibrium.

Another point which in the innovation economy model is that individuals and firms are not necessarily rational actors because they do not always have full information to act rationally for maximizing their own self-interest.

In addition, sustained and permanent growth in frame of the Knowledge-based model requires active governmental control and intervention as the state has to create the favorable environment for innovation in technology, provide opportunities for competitive and high-quality education and good conditions for the national entrepreneurship development.

One more important point of the new sub-field of classical model is that economic growth and development of the countries all over the world is interdependent nowadays as knowledge flows across national borders, and that is why foreign trade and investment affect positively the methods of innovation and implementation of new technologies.Gavin Cameron, Innovation and Growth: a survey of the empirical evidence, Nuffield College, Oxford, UK, 1998, p.6, from; Erik Brynjolfsson and Lorin M. Hitt, Beyond Computation: Information Technology, Organizational Transformation and Business Performance, 2000, Journal of Economic Perspectives, Vol. 14, No. 4, pp. 23-48; Hans Loof and Almas Heshmati, On the relationship between innovation and performance: a sensitivity analysis, a Royal Institute of Technology, Industrial Economics and Management, The United Nations University, 2001,

All in all, using the described methods and theories the author will deeply explore and assess the development of the Knowledge-based Economy in Malaysia.

1.3 Concept of the Knowledge-based Economy

In order to analyze the transformation of Malaysian economy into the innovative system, the notion of Knowledge-based economy should be explained first. This concept is closely linked to two other notions: Knowledge itself and Information. The understanding of these terms might vary from one scientific school or institution to another. According to the Malaysian Economic Planning Unit, knowledge is “the sum of human capabilities, leadership assets and experience, technology and information capital, collaborative relationships, intellectual property, information stocks and abilities for shared learning and utilization that can be used to create wealth and foster economic competitiveness”. The official website of Economic Planning Unit Malaysia, New Economic Model for Malaysia, Putrajaya, Malaysia, 2013, p. 37, from

Over a long period of time many attempts have been made to give scientific classification to the notion of Knowledge itself. Usually, two types of knowledge are defined, namely explicit and tacit knowledge. Organization for economic cooperation and development, The knowledge-based economy, Paris, 1996, p. 10 from Explicit or objective knowledge can be articulated in formal language and transmitted among individuals. This kind of information is formal and systematic. In contrast, tacit knowledge are personal attainments based on people's experience and involving such factors as personal belief, customs and values. In addition, tacit knowledge is difficult to articulate, because it is very individual one that makes it hardly formalized and shared with others. At the same time, these two types of knowledge are interconnected as the tacit awareness forms the valuable part of objective knowledge including organizational culture, experiences and relationship.

Considering all stated above, the Knowledge-based Economy is explained as a production and services based on knowledge-intensive activities that contribute to an accelerated growth of technological and scientific advance. Walter W. Powell, Kaisa Snellman, The Knowledge Economy, Annual Review of Sociology, School of Education, Stanford University, Stanford, California, Vol. 30: 199-220, p. 198. Consequently, in this kind of economy the use of knowledge and information creates the most significant part of economic growth. While all traditional factors of production, such as capital, natural resources and work force are still very important, knowledge, technologies and skilled labor become the main factors of development and the most critical determinants for international competitiveness. Unlike most natural resources that might be exhausted, the knowledge has abundant resources that can be only extended. Thus, improvements in technological sphere might be integrated in every stage of the production process. That is why knowledge-based technologies and educated manpower are essential tools in order to innovate, create new ideas and apply modern technical devices.

In addition, there is no additional cost when information is distributed among other individuals. Therefore, knowledge can be both a factor of production and a commodity that can be traded. It has no location barrier and consequently may be transferred to the markets all over the world. This factor might cause the increase in the mobility of labor force and capital. Walter W. Powell and Kaisa Snellman, The Knowledge economy, School of Education and Department of Sociology, Stanford University, Stanford, California, 2004, p.17, from The mentioned tendency makes the exchange of factors of production cheaper and easier. Moreover, the fact of interchange of knowledge and business practices will lead to the creation of cosmopolitan society, which consists from the people of many nations. This assumption is proved by the fact that nowadays multinational companies open more and more branches overseas, engaging highly skilled professionals from abroad for the implementation and support of international practices and modern technologies.

Another characteristic of the Knowledge-based Economy is a high level of GDP per capita because investments in technologies cause increasing profit for the population.

Considering all stated above, nowadays information, knowledge and skilled labor force are becoming the key factors in the economic system. That is why to produce goods and services of high quality and to raise the level of competitiveness, the sufficient conditions have to be created.

1.4 The used sources and empirical literature review

Various studies of Russian and foreign experts are devoted to the development of the Knowledge-based Economy in the word, but at the same time case studies and the profound analysis of the development of innovations in Malaysia and its transformation into the fully developed nation are very rare, and would be valuable, that is why the author has decided to devote the thesis to the exploration of the Knowledge-based Economy in Malaysia.

While preparing the thesis, the lack of the necessary statistical data and the closed sources as well as the differences between national and international publications made the research more difficult. However, in the author's opinion Malaysian experience of the developing Knowledge-based Economy might be useful not only for developing countries, but also for Russia. That is another reason why there have chosen this issue for the research.

The main primary sources of the paper include different issues in the Malaysian language, such as the statistical materials of the Bank of Malaysia (Bank Negara Malaysia), Department of Industrial Development of Malaysia (Malaysian Industrial Development Authority), the Department of Statistics Malaysia (Jabatan Perangkaan Malaysia), Economic Planning Unit Malaysia (Unit Perancang Malaysia), documents of Ministry of Science, Technology and Innovation in Malaysia (Kementerian Sains, Teknologi dan Inovasi di Malaysia), publications of Malaysian Investment Development Authority (Lembaga Pembangunan Pelaburan Malaysia) and Security Commission of Malaysia (Suruhanjaya Sekuriti Malaysia), the archives of Malaysian Administrative Modernization and Management Planning Unit (Unit Perancangan Pengurusan) and Ministry of International Trade and Industry of Malaysia (Kementerian Perdagangan Antarabangsa dan Industri Malaysia) as well as data from the Official Malaysia's Trade and Industry Portal (Portal Perdagangan dan Industri Malaysia Rasmi) and different publications of texts of the Malaysian laws and regulations.

In the preparation of the research there were used different analytical publications of international organizations such as the World Bank, the International Monetary Fund, the Asian Development Bank, materials from the United Nations Conference on Trade and Development (UNCTAD), and the sources published on the website of the ASEAN and other international organizations.

Among the primary sources there should be particularly named the interviews with the Mrs. Ilham Nursyiqim Rosli who is the First Secretary in the embassy in Malaysia in the Russian Federation.

As for secondary sources it is important to call some Malaysian authors who focused their attention on the study of Knowledge-based Economy in Malaysia, such as Poon Wai Ching, Samuel Bassey Okpostin, Abdul Halim Abdul Hamid, Ong Hway Boon, and Helen ES Nesadurai along with J. Soedradjad Djiwandon, Abdul Shah, Premachandra Athukorala, Jayant Menon, Zaini Mahbar and Mohaini Tajuddin.

There should also be named the research "Internal and External Factors Influencing the Implementation and Diffusion of the Open Innovation Models: The Case of the Postal Sector" by Andrea Stuck. The publications "Beyond Computation: Information Technology, Organizational Transformation and Business Performance" by Fong Peng Chew and "Managing Information Strategically" by James McGee, Laurence Prusak, Philip J. Pyburn and "Investment in Human capital" by Theodore W. Schultz were very informative and useful for the thesis. While some authors, for example Joe Studwell in the book "How Asia Works: Success and Failure in the World's Most Dynamic Region", claim that the transformation of the Southeast countries is controversial, they do not deny that countries are making active efforts for developing and that the speed of development is high.

When doing the research about Knowledge-Based economy in Malaysia, the author was also studying different papers devoted to the related topic. One of them is the master thesis "An analysis of the effectiveness of government R&D policies on business R&D expenditure” done by Kaifeng Li in the Royal Institute in Technology, 2010. Kaifeng Li, An analysis of the effectiveness of government R&D policies on business R&D expenditure, the Royal Institute in Technology, Stockholm, Sweden, 2010,!/Menu/general/column-content/attachment/Kaifeng%20Li.pdf The author investigates the effectiveness of government R&D policies in 13 countries of the Organisation for Economic Co-operation and Development from 1985 to 2007 and tries to follow the historical arguments and examines the effectiveness of government R&D policies on business-funded R&D. Another thesis called Knowledge-based innovation and the benefits of clustering done by Amir Sasson in the Norwegian School of Management, 2010. Knowledge-based innovation and the benefits of clustering, Amir Sasson, Norwegian School of Management, 2010 It analyses how different measures of knowledge affect the impact of innovation in firms and to what extent this relationship is moderated by clustering.

Some aspects of the problem are reflected in the research of Pr. Dr. Rudnev V.S. in the book "Malaya in the period from 1945 to 1963", in the publication of the Zeribolv V. S. "External Economic Relations of Malaysia", Bylinyak S.A. "ASEAN in the international economic relations", Dr. Rostov S.N. "The economic problems of the countries of South-East Asia", and Pahomova L. F. "Models of the prosperity: Singapore, Malaysia, Thailand, Indonesia".

Useful information related to the examined issue and the history of Malaysia is contained in the work of Pr. Dr. Tyurin V.A. ("History of Malaysia. Brief sketch"), in the book of Tsiganov V.A. and Tyurin V. A. ("History of Malaysia in twentieth century") as well as researches of other authors such as Pogadaev V.A., Zhulev I. F, Koloskov B. T. and Urlyapov V.F., which give an idea of ??the political component of the economic processes taking place in Malaysia in the post-colonial and periods.

Finally, I should mention the monograph of Pr. Dr. Andrianov V.D. "Newly industrializing countries in the world capitalist economy" and the monograph of Bylinyak S.A. "Developing countries. World economic problems in an interdependent world" as well as the books of Arkhipov V.Y., Dr. Boytsov V.V., Borisov D.B., Kokorev V.B. and some other researches which help to understand better the processes taking place in the economy of the South-East Asian region, including Malaysia.

The problem of the implementation of the Knowledge-based Economy and the transformation of Malaysia into the fully developed country "Developed country is a sovereign state that has a highly developed economy and advanced technological infrastructure relative to other less industrialized nations. Most commonly, the criteria for evaluating the degree of economic development are gross domestic product, per capita income, level of industrialization, amount of widespread infrastructure and general standard of living", - Developed Economy Definition, Investopedia,, (Accessed 19.01.2014). is a subject of interest not only of the scholars but also of the wider community, so this issue is often covered in Malaysian periodicals on the Malaysian and English languages. These publications include Utusan Malaysia, Berita Harian, Business Times Malaysia, and others.

The historiography devoted to the Knowledge-based Economy is quite long. Different social scientists and academicians such as Gavin Cameron, Hans Loof, Theodore W. Schultz, Richard L. Nelson and Edmund S. Phelps have examined the transition from an economy based on natural resources to the economy grounded on the intellectual assets and innovations. The analysis shows that the process of transformation is tied to the improvement of the level of education and the development of new industries, such as computer technologies, electronic financial services, insurance, business services, biotechnology as well as communication services.

In this context, the term Innovation should be explained first. According to the Business dictionary, this term is defined as a process of transformation and implementation of a particular idea into a product or service that are creating a new value. Business Dictionary,, (Accessed on 21.11.2013). Innovation also improves the process of production. Joseph Schumpeter is often labeled as a first scientist who tried to explain innovations and new approaches to manufacturing technologies as one of the principal driving forces for long-term economic growth. According to Schumpeter, technological innovation is a new and extended combination of means of production, which are implemented in the business cycles and changes them. The scholar also says that innovation includes several stages, namely the introduction of a new product, the implementation of advanced methods of production, the new sources of supply, opening of new markets as well as the implementation of innovative form of business organization. The Malaysian government has also given the definition to Innovation as “the implementation of new or improved characteristics of the product, process, organization and methods of marketing in a business activities, workplace organization and external relations”.

Economic significance of innovations was proved by other scientists, for example by Gavin Cameron in his article Innovation and Growth: a survey of the empirical evidence (1998). The mentioned study shows that significant economic growth can only be created when the factors are used in new and more efficient ways. Generally, the main idea of this study repeats the basic principles of Schumpeter's research.

In modern literature, innovation is also described as one of the primary drivers for the development of Knowledge-based Economy. In the scientific literature the term Knowledge Economy itself has a wide range of interpretations. Although there is wide recognition of the importance of knowledge in fostering economic growth, there are different approaches to this concept. The oldest approach, given in 1960s, focuses on the development of new industries based on science and their significant role in socio-economic change. A core idea of the mentioned approach is that theoretical knowledge is a source of innovation.

Most theorists think that a highly educated workforce fosters innovation. According to the article of Theodore William Schultz (1991), investments in human capital are the main factors of production efficiency in economically advanced countries. The scholar also mentions that to raise competitiveness, firms need qualified workforce with the ability of quickly learning. It is especially important in industries with rapid technological change, where success and competitiveness are dependent on the speed of the implementation of innovations. In addition, according to the research of Richard L. Nelson and Edmund S. Phelps (1966), the firms with innovative ability need to train both managers and line workers. The increase of the number of well qualified labor force has often been explained by skill-based technological change. Many technological innovations require workers with complementary skills and knowledge about technology, which leads to an increase in demand for educated workers. At the same time, low-skilled positions are made redundant, which decreases the need for less-educated manpower.

Moreover, it is acknowledged that some of the new jobs that have been created over the past two decades are fundamentally different. These kinds of jobs tend to favor educated workers over those with less education and skills. More education transfers into higher earnings.

Based on the theories above and empirical investigations of the issue, the author thinks that there is a strong link between the level of education in firms and the impact of innovation.

Furthermore, in emerging and developing countries, the Knowledge-based Economy is usually associated with the high inflow of FDI. For example, according to the Deputy Prime Minister Muhyuddin Yassin, Malaysia is welcoming foreign investment in technological sectors from developed countries. It will help to develop creativity, innovation and bring new knowledge that cannot be achieved without the inclusion of foreign direct investment. Newspaper Utusan Malaysia, Kita perlu banyak FDI Perancis, issue from 06.11.2013, from The consequence of the external investment is also related to the changes in the labor market and rise of the new economic sectors.

One more approach to the Knowledge-based Economy is focusing on the role of learning and innovations in privates firms. James McGee, Laurence Prusak; Philip J Pyburn, Managing Information Strategically, Wilmington, NC, U.S.A.) 1994, Some private enterprises are very active in knowledge production, transfer of technology and its implementation in the production process. The theory is proven by the fact that discoveries and innovations differ from other inputs as they fuel further innovation.

In this context, it is important to note that there were debates among scholars about whether particular industries were especially knowledge-intensive and that they make greater contribution to the growth of productivity (Brynjolfsson&Hitt 2000, Gordon 2000). Erik Brynjolfsson and Lorin M. Hitt, Beyond Computation: Information Technology, Organizational Transformation and Business Performance, 2000, Journal of Economic Perspectives, Vol. 14, No. 4, pp. 23-48.

Conventional economic theory views economic growth as a result of two factors such as labor productivity growth and labor supply growth (Solow, 1957). Solow, Robert M, Technical Change and the Aggregate Production Function. Review of Economics and Statistics, Vol. 39, No. 3. (Aug., 1957), pp 312-320, Manpower productivity growth depends on capital intensity and labor quality, while growth in multifactor productivity results from technical progress and improved efficiency.

Earlier research works on knowledge incentives make an attempt to explain on how knowledge spillovers take effect and how they help to develop innovative economy. For example, D. Power and M. Lundmark (2004) argue that exchanges of knowledge occur through labor mobility, both international and within the country. Power, D. &, M., 2004. Working through knowledge pools: labor market dynamics, the transference of knowledge and ideas, and industrial clusters. Urban studies, 41(5), 1025-1040. The exchange of people between labor markets therefore has important consequences for industrial functioning and innovation. Innovation mobility speeds up the exchange of ideas and learning process. Besides, it created special network between people from all over the world.

Despite the recognition of the importance оf R&D and the creation of the Knowledge-based Economy for long-run economic growth and living standards, it is commonly argued that social optimal research and development level cannot be reached without government intervention and Malaysia is a very good example of it. In this country, the main incentives for the development of the knowledge-based economy are given by the state. This idea was developed in the papers of Guellec and van Pottelsberghe (2000). Dominique Guelleca, Bruno van Pottelsberghe de la Potterie, The internationalization of technology analyzed with patent data, OECD, Directorate for Science, 2000, In the beginning of the XXI century Lццf and Hesmati Hans Loof and Almas Heshmati, On the relationship between innovation and performance: a sensitivity analysis, a Royal Institute of Technology, Industrial Economics and Management, The United Nations University, 2001, also argued the rationale of government intervention in the innovation system.

Different empirical studies show that the contribution of skilled labor force, adoption of new technologies and investments in new spheres exceeds the contribution of other investments but only coupled with organizational changes. In a series of studies scholars Brynjolfsson & Hitt (1995, 1996, 2000) and Black & Lynch (2000, 2001) demonstrate that technology enables complementary organizational investments, which, in turn, reduce costs and improve output quality and thus lead to the increase of long-term productivity.

To sum it up, in this part of the paper there was analyzed as a new sub-field of the neoclassical theory where innovations started to be essential for the economic growth as well as reviewed the empirical literature and researches devoted to the concept of Knowledge-based Economy. The analysis shows that previous studies applied various methods and used different data sets to justify the model of Knowledge-based Economy. Most of the researchers demonstrated positive dependence of innovation, new technologies, faster expansion of information and better quality of labor force to the economic growth, which demonstrates the effectiveness and explicative power of the Knowledge-based economy for the economic development of the countries.

2. Drivers and factors for the development of the Malaysian Knowledge-based Economy in the past 20 years

The transformation of Malaysian economy into the Knowledge-based one occurs in all socio-economic spheres of the country. By the fact that the changes in all countries take place in different ways, the World Bank Institute elaborated the special guidance, called the Knowledge Assessment Methodology (KAM), which might be helpful to measure the economic success of the innovation economy.

The designed framework indicates that for the implementation of a Knowledge-based Economy a country should develop a number of the key pillars, namely effective government institutions and economic incentives, well-developed education and training system, ICT and infrastructure as well as an effective system of research and development. Although the World Bank elaborated the mentioned structure for all developed countries, the number economic incentives might vary from one country to another due to the different initial conditions.

For the fast transformation of Malaysian economy into the Knowledge-based one, this country needs to use both external and internal drivers. In science, it is called the open model of implementation of innovations. This model has several advantages. First, nowadays in the era of globalization the international exchange in ideas is crucial for the further performance. It very important especially for the developing countries, which still are lacking of their own capabilities to establish modern base of research and development. That is why emerging countries try to create favorable business climate to attract foreign direct investment which bring not only capital but also new forms of management and contribute to the adaptation of modern technologies. In contrast, in the close model, where only internal factors should be used, enterprises have to generate their own ideas and then develop, build, market, finance, and support them on their own self-sufficient way. That is why the close paradigm needs very strict control and ownership of the Intellectual property. This model was widely used in the beginning of the twentieth century when universities and governments were not involved in the commercial trade of scientific innovations. Some companies therefore decided to begin their own research and development. However, this paradigm is hardly possible in today's globalizing environment.

2.1 Models of factors which influence innovations

Nowadays there exist different open models which describe the factors influencing the implementation of innovations. In this section the author will briefly present four of them and combine them in one model convenient for Malaysian case.

First, the author would like to examine the model of holistic innovation management. The model concentrates on the very innovation process and marks out four major areas of influence such as customer, competitor, employee, and political and international system. Andrea Stuck, Internal and External Factors Influencing the Implementation and Diffusion of the Open Innovation Models: The Case of the Postal Sector, Bern, 2009, p. 7 from The factors are critical for the planning and implementation of innovations and lead to the creation of new technologies. According to this concept, creation of innovations requires a holistic or general view of how business creates and captures value. The process concentrates on the targeted customers group and the ideas presented by business and channels should organize an internal and external chain of business.Marianne Stokholm, A Holistic Approach to Interdisciplinary Innovation Supported by a Simple Tool, H-STAR, Stanford University, California, 2009, p.3 from In addition, the adaptation of new technologies depends on the increased capabilities of the employees and a well developed innovation network as well as the sustainable social and political system in the country. Orientation on customer and governmental politics is an important competitive advantage which can reduce the market uncertainty. In this case, the major challenge for the government is to forecast the customer needs and transform them into marketable solutions. Consequently an advanced processes consequently need new capabilities and qualified labor force.

Moreover, for the creation of reasonable innovation system all factors should be linked with each other. This fact is proved in the chain-linked innovation model of Kline and Rosenberg (1986). According to the researchers, the external forces affect the development of the market as well as the organize different interactions between the various stages of the implementation of new technologies.Andrйanne Lйger, Sushmita Swaminathan, Innovation Theories: Relevance and Implications for Developing Countries, France, 2006, p.3 from The example of Malaysia also shows that absolutely different factors contribute to the development of this country and when interacting they create special condition for the development of the Knowledge-based Economy.

The third model, which will be presented here is the Service innovation model. According to it, there can be identified nine major external factors influencing the creation of innovations. They are divided into two major groups such as industry-related external factors which are political, legal, cultural, economic, ecological, and technological ones and firm-specific external factors like partners, customers and competitors.Andrea Stuck, Internal and External Factors Influencing the Implementation and Diffusion of the Open Innovation Models: The Case of the Postal Sector, Bern, 2009, p. 7 from

In the modern world where international cooperation and trade considerably influence the performance of the country, the challenge to implement open innovation models depends not only on external factors but also on different internal determinants.

The study of Gassmann and Enkel (2005) had elaborated the model that includes external and internal drivers. According to this frame, implementation of innovation differs in many aspects regarding exterior factors like the economic sector, field of knowledge, type of innovation, historical period, and the country concerned.Fagerberg, J., Mowery, D.C. & Nelson, R.R., Innovation Process, The Oxford Handbook of Innovation.Oxford: Oxford University Press, 2005, p.87.

The authors also assume that a competition in one sector among different countries makes the integration of knowledge faster.

Although all described models are reasonable, no one of them can be completely applied to the Malaysian case. That is why the author has decided to combine them and elaborate the individual model for the Malaysian case (see Diagram №1).

The main drivers for the development of Knowledge-based economy in Malaysia are effective governmental institutions and policies, development of human capabilities, implementation of new technologies, creation of infostructure and infrastructure as well as creation of research and development institutions and the encouragement of business for the implementation of technologies. The author also tends to assume that the active participation of Chinese business in Malaysia and close relationship of Malaysian Chinese with the overseas Chinese people also spurs on the economic growth and accelerate the process of implementation of high tech. Convenient geographical location of Malaysia, its proximity to the markets of the U.S. and Japan also can be mentioned as the initial favorable conditions for both economic growth and attraction of modern technologies from overseas countries.


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