Malaysia's Green Industrialization: Challenges and Opportunities
Historical Context
Green issues and industrialisation have been intertwined in Malaysia since the colonial era, when the British exploited the region for tin and rubber, introducing scientific forestry for resource management. Post-independence, Malaysia implemented environmental regulations in the 1970s and advocated for a balanced approach between environmental and development objectives in the 1990s. Over the past three decades, Malaysia's policies have increasingly aligned with international standards like ESG and net-zero emissions driven by its reliance on foreign direct investment (FDI) and participation in global value chains (GVCs), highlighting the strong influence of investment priorities on environmental policies.
Malaysia's Industrialization Phases
Since Malaysia's independence in 1957, the country has experienced several industrialisation phases. Malaysia's industrialisation began with import substitution in the 1950s, followed by export-oriented industrialisation in the late 1960s. A second round of import substitution focused on heavy industries from 1981 to 1985, followed by another export-oriented phase in the mid-1980s.
Key Green Industrialization Policies
Key green industrialisation and economy policies began in 2009. Key policies introduced included the National Green Technology Policy, National Renewable Energy Policy and National Climate Change Policy. Subsequent initiatives such as the Renewable Energy Act (2011), Net Energy Metering (2016) and the establishment of Green Technology Corporation supported green technology. Fiscal incentives like the Green Investment Tax Allowance (GITA) were also introduced. In 2023, the government launched the National Energy Transition Roadmap (NETR) and the New Industrial Master Plan (NIMP).
Key Sectors
Key sectors driving Malaysia's green industrialisation include Electrical and Electronics (E&E), solar photovoltaics and resource-based industries. Industrial policies have supported their growth making them significant contributors to Malaysia's net exports. However, these industries face various challenges and implications.
Challenges and Implications
Climate Vulnerability vs. Emissions Focus
Emissions-centric green industry policies could leave Malaysia's industries vulnerable to climate change. If not properly balanced with local environmental conditions, such policies may divert resources from climate adaptation efforts that require context-based solutions. Southeast Asia is one of the most climate-vulnerable regions yet Malaysia's historical contribution to global emissions is less than 0.4%.
Impact on Indigenous Communities
Malaysia's industrialisation has marginalised the Orang Asli, who face poverty, poor education and displacement from their lands due to large-scale agriculture. Government plans like cash crop schemes lack consultation and fail to align with their needs. To prevent further exclusion, development must involve the Orang Asli, respect their rights and provide targeted education and job opportunities, particularly in green industries.
Premature Deindustrialization
Malaysia has experienced premature deindustrialisation for the past two decades, threatening the development of green industries. Deindustrialisation is concerning as manufacturing drives innovation, technological progress and high-skill job creation. Without a strong industrial base, Malaysia risks losing these advantages, making it harder to develop green technologies.
Policy Constraints
Trade agreements and fiscal limitations constrain industrial policies. Malaysia's industrial policy space is constrained by WTO rules and free trade agreements that limit tools like tariffs and export incentives and impose stricter intellectual property and investment regulations. Additionally, Malaysia faces fiscal limitations due to the government's focus on reducing deficits and new laws that cap fiscal deficits and government debt. These factors reduce the government's ability to use industrial policies or fiscal expansion to support domestic industries.
Talent and Coordination Challenges
Malaysia's high-tech industries face talent shortages and coordination problems. Malaysia faces a shortage of high-skilled talent to support the growth of high-tech industries. However, many STEM graduates are underemployed due to limited demand for skilled workers and declining R&D investment. The core issue is a coordination problem: even with more graduates, industries may not shift to higher value-added functions without substantial government support.
R&D Limitations
Malaysia's R&D efforts have been hindered by underutilisation of investments and weak collaboration between research institutions and industry. Unlike successful catch-up countries, institutions focus more on commercialising R&D outputs than addressing industrial technology needs. Initiatives like MIMOS have had limited success and the E&E sector remains in low-value-added segments. The lack of innovation-driven firms and strong corporate R&D policies has prevented industrial upgrading.
Structural and Political Barriers
Political and structural challenges hinder the development of competitive local firms. The lack of domestic firms investing in technology development keeps many companies in low-value segments of global value chains. While business groups could drive innovation and market entry, political dynamics and early market liberalisation have weakened innovation and delayed industrial upgrading.
Policy Recommendations
Strengthening Industrial and Technological Foundations
Malaysia should combat deindustrialisation through targeted industrial policies, fostering competitive and innovative firms and promoting technological upgrades. Expanding state-owned enterprises and encouraging private-sector innovation can absorb skilled labour and drive knowledge-intensive growth. R&D efforts must align with industry needs and be supported by global technology transfers.
Addressing Fiscal Constraints and Building Resilience
Fiscal space can be expanded through tax reforms and carefully managed monetary financing, mitigating inflation and currency risks. Strong political coalitions and strategic governance are essential to support industrial policy, drive innovation, and create competitive national champions. Climate adaptation must also feature prominently in green industrial strategies.
Promoting Social Equity and Inclusivity
Policies should address the socioeconomic challenges of vulnerable and disadvantaged groups, such as the Orang Asli, by improving access to education, healthcare, and economic opportunities while ensuring respect for their rights. Inclusive development is crucial for equitable participation in green industrialisation initiatives.
