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World Journal of Social Sciences
Vol. 2. No. 6. September 2012 Issue. Pp. 218 – 230
Innovative Capacity, Human Capital and Its Contibution To
Economic Development In Malaysia
Nor Fatimah Che Sulaiman
1
,Suriyani Muhamad
2
, and Nur Azura Sanusi
3
Recent theoretical contributions to the growth literature emphasize the role
of human capital in the process of economic growth. The most crucial
element in economic growth is the link between innovations and economic
development. This relation is bidirectional: which is, innovation can foster
economic development and some level of economic development is needed
to produce innovations. Malaysia’s Prime Minister in his Budget 2012
address in Parliament announced various incentives to encourage human
capital development as well as instill a culture of innovation to move the local
economy to a higher level. To transform productivity, significant
improvements are required. Therefore, skilled human capital is vital for
Malaysia’s economic growth. An important factor for sustainable economic
growth in an increasingly competitive business world which thrives on a
knowledge-based environment is to have skilled and knowledgeable
workers. Malaysia government has pursued a strategy, which is Economic
Transformation Programme (ETP) to achieve high-income status and to
propel our economy to achieved Vision 2020. With the National Key
Economic Area (NKEA) and National Key Reformation Area (NKRA) in ETP
that focused on the future generations, the Human Capital Development
Strategic Reform Initiative (SRI) is a critical enabler for Malaysia to transform
the workplace as well as the workforce. One of the policy recommendations
is focusing on up-skilling and upgrading the workforce. This paper highlights
that skilled human capital and innovative capacity are crucial elements in
driving Malaysia’s economic growth.
Field of Research: Innovative Capacity, Skilled Human Capital, Economic
Development, Knowledge-based Economy
JEL Codes:I25, J24, O15, O31
1. Introduction
Vision 2020 is a Malaysianideal introduced by the forth Prime Minister of Malaysia,
Mahathir bin Mohamad during the tabling of the Sixth Malaysia Plan in 1991. The vision
calls for the nation to achieve a self-sufficient industrialized nation by the year 2020. In
order to achieve Vision 2020, Mahathir lamented that the nation required an annual
growth of 7% over the thirty-year periods (1990–2020), so that the economy would be
eightfold stronger than its 1990 GDP of RM115 billion. This would translate to a GDP of
1
Nor Fatimah Che Sulaiman, Faculty of Management and Economics, University Malaysia Terengganu.
Email: n.fatimah@umt.edu.my
2
Suriyani Muhamad, Faculty of Management and Economics, University Malaysia Terengganu. Email:
suriyani_md@umt.edu.my
3
Nur Azura Sanusi, Faculty of Management and Economics, University Malaysia Terengganu. Email:
nurazura@umt.edu.my
Sulaiman, Muhamad & Sanusi
219
RM920 billion (in 1990 Ringgit terms) in 2020. Along with that, to ensure Malaysia
achieves Vision 2020, the fifth Malaysia’s Prime Minister, Abdullah bin Badawi initiated
five regional economic corridors, namely the Northern Corridor Economic Region
(NCER); Iskandar Malaysia, East Coast Economic Region (ECER); Sarawak Corridor of
Renewable Energy (SCORE); and Sabah Development Corridor (SDC). These
economic corridors are very important to propel the economic growth of this country.
The government has introduced these economic development corridors as part of
nationwide development efforts. Malaysia’s Prime Minister Dato’ Sri NajibTunRazak has
pursued this strategy, which is Economic Transformation Programme (ETP) to achieve
high-income status and to propel our economy to achieved Vision 2020. To ensure
Malaysia sustain a high economic development and achieve Vision 2020, not only
economic corridors but ETP also play important role.
With the Education National Key Economic Area (NKEA) and National Key Reformation
Area (NKRA) in ETP that focused on the future generations, the Human Capital
Development Strategic Reform Initiative (SRI) is a critical enabler for Malaysia to
transform the workplace as well as the workforce. One of the policy recommendations is
focusing on up-skilling and upgrading the workforce. Human capital is critical to the
success of the economic development in Malaysia.To transform productivity, significant
improvements are required. About 32 percent of Gross National Index (GNI)
contribution, require direct investments in human capital (Prime Minister's Department,
2010). This paper will examine the innovative capacity of Malaysia human capital and
economic development, as above mentioned fact, that human capital is the crucial
factor in economic growth. The research will examine the connection between
innovative capacity, human capital, and economic development. Gössling and Rutten
(2007) stated that, the most crucial element in economic growth is the link between
innovations and economic development. This relation is bidirectional: which is,
innovation can foster economic development and some level of economic development
is needed to produce innovations.
According to Malaysia’s Prime Minister, Dato’ Sri Mohd Najib bin Tun Haji Abdul
Razak, human resource plays a key role in maintaining a competitive business
advantage in any given industry. In ETP and economic corridors, strong emphasis on
human capital development ensures a steady supply of skilled and semi skilled
manpower to meet the needs of the expanding industrial and services sectors. An
important factor for sustainable economic growth in an increasingly competitive
business world which thrives on a knowledge-based environment is to have skilled and
knowledgeable workers. Therefore, skilled workforce is vital for the economic
development in Malaysia. Government will be constantly aware of these fast-changing
trends and requirements in identifying the future supply and demand for human capital.
In ETP and regional economic corridors, education sector plays important role. Such as,
education is an economic driver and a catalyst for growth in this country. Furthermore,
education is a key enabler that supports the growth of other sectors such as agriculture,
manufacturing and tourism in terms of human resource and capability
development.Success of the ETP and economic corridors depend not only on a quality
education, acquiring knowledge and in-depth expertise in science and technology but
Sulaiman, Muhamad & Sanusi
220
also in entrepreneurship and innovation to fulfill the desired human capital requirements
in the country’s future development.
This paper is a theoretical paper based on later empirical paper. Hence, this paper will
cover the following objectives. First, this paper will examine the relationship between
human capital and innovative capability towards economic development. Second, this
paper will determine the important factors to strengthen the human capital that will
foster innovative performance.
The outline for this paper is organized as follows. It provides an overview of the
economic development in Malaysia. The review begins by discussing the problem in the
current Malaysia situation. Then, it discusses the importance of innovative capacity and
human capital to the economic development in Malaysia. This section reviews previous
studies on relationship between innovation and economic development. Then it reviews
the importance of human capital to economic development. Next, this section discusses
the relationship between human capital and innovation and both will contribute to the
greater economic activity. This chapter continues with the discussion of the importance
of knowledge-based economy as the platform for Malaysia to achieve Vision 2020. Last
but not least, it reviews the Malaysia’s ranking in World Competitive Yearbook.
2. Literature Review
2.1 The Malaysian Situation
Malaysia is at a critical point in its economic development. It is more difficult to generate
high rates of economic growth in an increasingly competitive global economy. Growth
can no longer be taken for granted, but needs to be earned.Therefore, Malaysia
government has pursued a strategy to achieve high-income status. The government has
embarked on an Economic Transformation Programme (ETP) to propel our economy to
achieved Vision 2020. Successful implementation of the ETP will see Malaysia’s
economy undergo significant changes to resemble other developed nations.A large part
of the reason for this relatively poor growth performance has been low innovation
capacity in human capital (Performance Management & Delivery Unit, PEMANDU).
Therefore, significant improvements are required such as, enhanced investments in
human capital has to be made to support a high-skilled, knowledge-based and
innovation-intensive economy. Graph 1 shows GDP in Malaysia from 1985-2011.
Sulaiman, Muhamad & Sanusi
221
Graph 1
Sources: Economic Planning Unit, Ministry of Finance, Department of Statistics & Bank Negara Malaysia
To ensure Malaysia sustain a high economic development, ETP and economic corridors
play important role. During the Ninth Malaysia Plan, the Federal Government embarked
on a number of initiatives to promote balanced regional development and accelerate
growth in designated geographic areas. The 10th Malaysia Plan built on the Ninth
Malaysia Plan by prioritising and accelerating the development of urban conurbations
focusing on five corridors, in addition to the Greater Kuala Lumpur/Klang Valley
development. Each corridor consists of high-density clusters with sectoral and
geographical advantages. By adopting a cohesive approach to the progressive
development of the five regional cities economic corridors, Malaysian will enjoy much
stronger economic growth as a nation. (Dato’ Sri Najib Tun Razak, Prime Minister of
Malaysia). Not only that, by coordinating execution and monitoring, the aim to achieve
high-income nation status will not only be achievable and sustainable but will also be
inclusive, enabling all Malaysians in all regions to enjoy a high quality of life.
The development, up-skilling, upgrading and delivery of the right talent (Strategic
Reform Initiative, National Economic Advisory Council) required to drive growth in
priority sectors is the key ingredient in the overall socio-economic development of the
nation and is one of the main considerations for investors in selecting potential
investment locations.
Table 1 shows Innovation Capacity Index (ICI) from 2010-2011 in high income
countries. Malaysia is clustered as upper middle income country and Malaysia ICI rank
and score are, 39 and 56.4. To achieve high economic development nation, Malaysia
has to be in higher ICI rank and knowledge-based economy such as Korea. The
knowledge-based economy will provide Malaysia the platform to sustain a rapid rate of
economic growth and enhance international competitiveness so as to achieve the
objectives of Vision 2020. This paper highlights that skilled human capital and
innovative capacity are crucial elements in driving Malaysia’s economic growth.
Sulaiman, Muhamad & Sanusi
222
Table 1: Innovation Capacity Index (ICI) 2010-2011: Country Clusters
High-Income Countries
Name of country
ICI Score
Name of country
ICI Score
Sweden
80.3
Portugal
56.7
Switzerland
78.1
Italy
56.7
Finland
76.1
Malta
54.6
United States
74.8
Greece
49.9
Denmark
74.3
Taiwan
72.5
Canada
73.6
Israel
67.5
Netherlands
72.8
Republic of Estonia
60.5
Luxembourg
72.2
Hungry
56.8
Republic of Korea
72.1
Slovak Republic
56.7
Norway
72.0
Cyprus
55.2
New Zealand
71.3
Republic of Croatia
53.2
United Kingdom
71.3
Trinidad and Tobago
47.7
Japan
70.2
Singapore
76.7
Australia
69.4
Hong Kong SAR
71.4
Ireland
69.1
United Arab Emirates
58.9
Iceland
69.0
Bahrain
57.0
Germany
68.9
Qatar
55.9
Austria
66.7
Saudi Arabia
54.1
Belgium
66.1
Oman
51.8
France
65.3
Kuwait
51.3
Republic of Slovenia
59.1
Spain
58.8
Sources: Innovation of Development Report, 2010-2011.
2.2 The Importance of Human Capital and Innovation in Economic Development
The paper is motivated by Strulik’s (2005) statement that while economic growth is
explained through innovation, it is ultimately driven by (educated) human capital. At the
same time the innovativeness of a particular region attracts educated human capital to
that region (Faggian and McCann, 2009). Numerous studies and comparative research
elaborate aspects of the innovative and technological capacities of individual regions
and countries. As the literature on innovation systems and clusters suggests, innovation
performance is unevenly distributed across the geographical landscape (Moodyson et
al., 2008). That is why this paper highlights that skilled human capital and innovative
capacity are crucial elements in driving Malaysia’s economic growth.
The second main element in empirical investigation concerns human capital education,
which is viewed here as a workforce characteristic related to education, knowledge, and
skills, as described in previous literature on human capital (Alquézar Sabadie and
Johansen, 2010). In the past few years, human capital theory (Schultz, 1961; Becker,
1964 and Mincer, 1974) has attracted much attention by confirming the causal
relationship between education and economic growth, especially in a developing
economy like Malaysia. This is because the human capital theory maintains that
economic development can be achieved and sustained by an educated and productive
workforce. Since the explication of the human capital theory, many studies have been
Sulaiman, Muhamad & Sanusi
223
conducted in both developed countries (Cohn and Addison, 1998) and developing
countries (Psacharopoulos, 1985 and Psacharopoulos, 1994). Most studies support a
positive causal relationship between formal education and increased earnings in
developed countries.
Human capital, generally seen as a set of knowledge, abilities and skills of the
individuals, used in the activities that stimulate economic growth and development, was
considered to be a stimulus of the innovation process. In the economic literature, it was
mentioned that there are three types of human capital: firm-specific human capital,
industry-specific human capital and individual-specific human capital. In a paper, titled
‘Human Capital and Innovation’, Popescu Cristian stated that the first two types of
human capital refer to the abilities and knowledge valuable only within a specific firm or
industry, they have a limited impact on the innovative activity within a region or state. In
contrast with these two, individual-specific human capital implies knowledge that is
applicable to a large range of firms and industries. Considering that individuals abilities
and skills that can be improved and so they can change the way they act, human
capitalis seen to be an important source of competitive advantage to individuals,
organizations and even to societies, having a huge capacity of innovation induction.
The focus in this paper is individual-specific human capital, i.e. one’s general ability and
skills in terms of education, physical condition and overall economic well-being. That is,
although we believe that industry-related expertise is an important driver for local
innovative activity, we take more of a macro-approach towards the effect of human
capital on economic success by focusing on the societal impact of human capital
measured as a combination of the overall educational attainment, economic resources
and physical well-being of a country’s citizens. One could argue that economic
resources and physical well-being are potential outcomes rather than indicators of
human capital. For instance, Maskell and Malmberg (1999) argued that some regions
may be more viable and economically successful than others based on factors such as
the availability of knowledge and skills. However, we will check whether and how our
representation of a country’s overall humancapital is related to a proxy of the level of
business expertise and skills relevant to innovation, i.e. the number of professionals
active in R&D-related activities.
Individual-specific human capital refers to knowledge that is applicable to a broad range
of firms and industries; it includes general managerial and entrepreneurial experience
(Pennings et al. 1998), the level of academic education and vocational training (Hinz
and Jungbauer-Gans 1999), the individuals’ age, and total household income (Kilkenny
et al. 1999). Prior research has shown that one’s overall level of human capital has an
impact on economic success, both at the business level and the macro-level. For
instance, Kilkenny et al. (1999) discussed a human capital model for success and
suggested that business success is positively related to one’s level of training, overall
business experience and total income. Also, Prais (1995) examined how a country’s
education and training system may foster overall productivity. For instance, this author
pointed to the need to have the correct balance of educational resources devoted to
general academic issues and matters directly connected to professional life, as well as
Sulaiman, Muhamad & Sanusi
224
to stimulate vocational training in order to provide future employees with job-specific
technical skills.
The relationship between human capital and innovation at the country level is grounded
in what Bourdieu (1986) termed as ‘conversions’, that is different forms of capital can be
converted into resources and other forms of economic payoff. At the individual level, this
conversion process has been studied and validated by a number of researchers (Becker
1964, Gradstein and Justman 2000). In general, the argument is that those who are
better educated, have more extensive work experience, and invest more time, energy,
and resources in honing their skills are better able to secure higher benefits for
themselves, and at the same time are better able to contribute to the overall well-being
of the society. For instance, Maskell and Malmberg (1999) argued that the overall stock
of knowledge and skills in a society or region may enhance its overall competitiveness.
Further, innovation, as a knowledge-intensive activity, is expected to be related to
human capital in multiple ways. Black and Lynch (1996) proposed that investment in
human capital through on-the-job training and education are the driving force behind
increases in productivity and competitiveness at the organizational level. Along the
same lines, Cannon (2000) argued that human capital raises overall productivity at the
societal level as the human input to economic activity in terms of physical and
intellectual effort increases. The overall growth in economic activity generates, then,
higher needs for new processes and innovations to further support this growth.
Ewers (2007), states that the presence of skilled human capital fosters innovation and
generates greater economic activity. Empirical studies confirm this, as it has been
shown that the higher the investment of a society in the quality of education and the
higher the educational level of a region, the higher the innovation activity output of that
region (Varsakelis, 2006; Gössling and Rutten, 2007). Furthermore, for regions the
negative effect of having a large, less educated population is a key factor in explaining
poor innovative performance (Bilbao-Osorio and Rodríguez-Pose, 2004). Thus, some
researchers have concluded that, although there is no direct causality between
educated human capital and economic growth, education positively affects economic
development through innovation and technological progress (Strulik, 2005). The more
straightforward connection between workforce education and economic development
has also been documented (Tsai, 2010).
To summarize, economic development can be achieved by individual specific human
capital that has certain level of innovative capability. The presence of skilled human
capital will foster innovation and generates greater economic development.
Sulaiman, Muhamad & Sanusi
225
3. The Findings
3.1 Knowledge-based Economy
The knowledge-based economy will provide Malaysia the platform to sustain arapid rate
of economic growth and enhance international competitiveness so as to achieve the
objectives of Vision 2020. It will also strengthen Malaysia’s capability to innovate; adapt
and create indigenous technology; and design, develop and market new products,
thereby providing the foundation for endogenously-driven growth. In addition, the
knowledge-based economy will complement and accelerate the change from an input-
driven to a productivity driven growth strategy and then innovation driven strategy. In
this respect, the fuller recognition of the role of knowledge input will enhance the
productive capacity of the traditional factors of production as wellas generate new
sources of growth. This, in turn, will expand the production possibility frontier of the
Malaysian economy.
Human capital is the key driver of growth in the knowledge-based economy and will
determine the competitive position of the nation. The successful development of the
knowledge-based economy will, therefore, largely depend on the quality of the
education and training system. The institutional framework to ensure an adequate
supply of appropriately qualified and skilled manpower and to continuously retrain them,
will be put in place.Vocational and technical education andtraining will be given greater
prominence and will be refocused to produce theskills required by the knowledge-based
economy. In addition, teaching methods will be transformed to promote creativity,
originality, innovation as well as thinking and analytical skills. The use of IT as a tool for
teaching and learning will be made more pervasive.
Concerted efforts will be taken to increase enrolment at the tertiary level,particularly for
science and technical courses. Public and private tertiary institutions need to become
more market-driven and proactive by moving beyond traditional areas to new fields of
education required by a maturing knowledge-based economy.They will be required to
enhance the standard of education and produce highly employable manpower. The
quality of the teaching profession will also be improvedby attracting better qualified
people into the teaching profession, undertaking aprogramme of continuous training,
and reviewing their scheme of service interms of remuneration and promotion
opportunities.
A system of life-long learning has been promoted to ensure that workers can
continuously upgrade their skills and knowledge in order to remain relevantin the
environment of rapidly changing technology and work processes as wellas to nurture a
learning society. Both the public and private sectors will be encouraged to set up the
necessary infrastructure to facilitate life-long learning.In this regard, educational
institutions will be required to introduce flexible learning approaches in terms of duration
of course, entry requirements and modeof teaching as well as ensure affordability.
Community colleges and resourcecenters will be set up to increase accessibility to
acquire and disseminate knowledge.Firms and industries will be encouraged to provide
incentives to their employeesto relearn and continuously upgrade their skills. Towards
Sulaiman, Muhamad & Sanusi
226
this end, financial institutions will be encouraged to provide low interest loans to those
interested in upgrading their skills.
Malaysia needs to harness its potential to drive the key sectors in Science and
Technology (S&T) and R&D and become a competitive knowledge-based economy. To
provide the impetus for S&T and R&D initiatives, the public sector will increase the
proportion of the budget allocated for this purpose. The funding mechanism for R&D
activities will be streamlined to ensure optimum utilization of funds. Proposals for
research will be evaluated by a panel of experts, including foreigners, in the proposed
area of research. The corporate sector, including the small-and medium-scale
enterprises (SMEs), will be provided significant incentivesto allocate a greater
proportion of their revenue for R&D.
The knowledge-based economy will present Malaysia the way forward to achieve
sustainable rapid growth and remain globally competitive in both medium and long term.
In order to be a knowledge-based economy, it is essential to address the constraints
and resolve them swiftly. Malaysia has to set some of the basic foundations of a
knowledge-based economy and efforts has to be taken in the key areas such as human
capital development, S&T and R&D, financing and equity, which are fundamental to
building Malaysia in becoming knowledge-based economy.
3.2 Malaysia In World Competitive Yearbook
The Institute for Management Development (IMD)World Competitiveness Yearbook
2011 ranked Malaysia at 16th position in overall performance out of 59 economies
(2010:10th out of 58 economies). This places Malaysia among the top 20 countries
such as Canada, Denmark, Finland, Norway, and Australia. The five most competitive
economies are Hong Kong, United States, Singapore, Sweden and Switzerland.The
competitiveness performance of the 59 economies is shown in Table 2.
Sulaiman, Muhamad & Sanusi
227
Table 2:
In the overall performance, Malaysia was ranked 16th out of 59 economies compared to
10th position last year. Malaysia’s overall performance at 16th position is due to the
perception data specifically in the Government Efficiency and Business Efficiency
factors. Among 13 Asia-Pacific countries, Malaysia is ranked 5th ahead of China, New
Zealand, Korea, Japan, Thailand, India and Indonesia. Malaysia maintained its 2nd
position after Taiwan among 29 economies in the category of countries with GDP per
capita less than USD20,000.
The performance of Malaysia over a 5-year period in the overall scoreboard and in the
four factors is shown in Table 3. We will briefly discuss about Infrastructure factor.
Sources: IMD World Competitiveness Yearbook 2011
Sulaiman, Muhamad & Sanusi
228
Table 3: Malaysia’s Competitiveness Ranking
Sources: IMD World Competitiveness Yearbook 2011.
In the Infrastructure factor, AgensiInovasi Malaysia (AIM) has been established under
the Prime Minister’s Office with the aim to identify R&D projects with the potential to be
commercialized. To date, 8 projects have been identified ready to be taken to the
commercial world with their hidden wealth worth RM316 billion expected to be
unleashed by the second quarter of 2012. The Government has also implemented the
National Broadband Initiative (NBI) in 2010. The latest being the Government’s
announcement on the Digital Malaysia Master Plan which aims to develop an
ecosystem that encourages wider ICT usage.
The IMD suggested that Malaysia should continue with the vision of achieving High
Income Economy. Longterm strategies to achieve sustainable growth, solid institutions
and a national culture that emphasizes innovation and the accumulation of knowledge,
will augur well for Malaysia.
Therefore, this paper has discussed and highlighted that skilled human capital and
innovation are truly crucial elements in driving Malaysia towards Vision 2020 to achieve
high economic development. Based on the analysis and findings from above mentioned
fact, this theoretical paper has covered the objectives for this study. Later, this paper will
be developed into the empirical paper.
4. Conclusion
Considering the information mentioned above, we can conclude that the human capital
is a strong catalyst of innovation. There is a double way relation between the capacity of
innovation induction and the stock of human capital. The practice generated by
innovation may imply the construction of some connections that involves a better
knowledge, training and a support for the continuing preparation process. The
competition generates innovation among firms but it also primes a process of human
capital accumulation, at an individual level. In order to cope in the innovative
environment, the employees need to make efforts in accumulation and developing their
own innovative capacities.
Sulaiman, Muhamad & Sanusi
229
The conclusion has to be taken in consideration, especially because we have to identify,
at a national level, which are the best ways to become competitive and to profit by the
good rate of economic growth that we have. It is necessary to start a strengthening
process of human capital. The process implies accumulation through learning, through
education. An important role in this case plays the state, which, through its policies, can
foster individual behaviors. A good financing of education and research, and a careful
social policy may involve positive effects, encouraging on medium and long term.
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