OECD: Regulatory reforms needed to boost Malaysia’s business dynamism for robust post Covid-19 recovery

In the survey that was launched today, OECD said vibrant competition was an essential component of business dynamism as it fosters cost reductions, innovation and promotes productivity growth.  —  Picture by Firdaus Latif
In the survey that was launched today, OECD said vibrant competition was an essential component of business dynamism as it fosters cost reductions, innovation and promotes productivity growth. — Picture by Firdaus Latif

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KUALA LUMPUR, Aug 12 -- Reinvigorating business dynamism through regulatory reforms is necessary to achieve a robust post Covid-19 recovery in Malaysia as pandemic risks remain from the ongoing health crisis, the Paris-based Organisation for Economic Cooperation and Development (OECD) said today.

“Malaysia is a business-friendly country which attracts large flows of foreign direct investment and is well-integrated in global value chains.

“Nonetheless, further reforms to ease regulation and expand the digital economy will be essential to drive growth in the post-pandemic world and to ensure Malaysia fully benefits from today’s digital opportunities,” OECD Secretary-General Mathias Cormann said during the OECD Economic Survey: Malaysia 2021 press conference conducted virtually.

The survey that made use of OECD’s Product Market Regulation (PMR) Indicators (used to measure how regulatory policy affects competition in product markets) also clearly established that barriers to competition remain relatively high in Malaysia as compared to OECD countries.

“Starting a new business remains challenging due to the multiple licences and permits required by various levels of government.

“It’s true that enhancing competition can be uncomfortable, and can lead to social disruption, which must be well-managed. But boosting competition would be a powerful engine for progress in living standards,” he added.

In the survey that was launched today, OECD said vibrant competition was an essential component of business dynamism as it fosters cost reductions, innovation and promotes productivity growth.

OECD noted that Malaysia undertook a series of reforms to improve the business environment, including by streamlining regulations and administrative burdens for businesses, and establishing competition authorities.

“While Malaysia now ranks well compared to its Southe-ast Asian peers, there is room to reduce barriers to competition further, particularly in the energy and transport sectors, professional services and retail, where the OECD’s Product Market Regulation indicators show that regulations and procedures remain restrictive relative to OECD countries,” it said.

Citing Malaysia’s 126th place in terms of starting a business despite ranking 12th overall in the World Bank’s Doing Business in 2020, the survey said the data were also supported by the findings of the PMR indicators.

“A key determinant of business dynamism is how easy it is for new firms to enter the market, or entrepreneurs to start up new businesses.

“This is particularly important in the wake of the pandemic, which has resulted in multiple business failures.

“As Malaysia transitions to high-income status, the future sources of growth will increasingly need to shift to innovation and productivity gains, which calls for further improvements in business dynamism,” it said, adding that ensuring a regulatory environment encouraged effective competition for the long-term growth and sustainability of the country.

According to the PMR indicator findings, the survey said the process for registering a new business or company was relatively fast and inexpensive, but gaining the necessary licences and permits was more burdensome.

The survey also highlighted the lack of collaboration between different government bodies which was currently impairing business dynamism before suggesting that regulatory processes could be more transparent.

“Establishing a new business requires registration with five or more different entities, including tax authorities and social security institutions.

“Each registration must be undertaken separately, and can significantly add to the time taken to establish a new business.

“The different public bodies are incorporated as distinct statutory bodies, which becomes an obstacle in integrating registration processes because they cannot share financial resources and business registration data due to legislative and data protection constraints,” it said.

Accelerating digitalisation

The Covid-19 pandemic has brought about the importance of digitalisation for business activities across the globe and Malaysia where retail online sales in particular have continued growing during the crisis.

“Because of the pandemic, many small-medium enterprises (SMEs) have become aware of the importance of digital adoption.

“Nevertheless, a number of SMEs are less digital-savvy, so it is crucial to ensure that the digital divide among firms does not increase further.

“Moreover, the e-commerce participation rates of smaller firms were lower than of large firms, and the current situation is likely to remain the same despite the pandemic,” it said.

In order to stimulate Malaysia’s digital transformation, the survey recommended measures such as improving digital infrastructure, developing workers’ Internet skills and encouraging small firms — particularly older ones — to adopt new technologies.

It observed that SMEs tend to be slow in adopting these new digital tools in Malaysia and lagged behind in exploring overseas markets through digital means.

“Although overall profit margins would diminish because more e-commerce enhances competition between firms, it is still important to help the adoption of digital tools by SMEs.

“In this regard, many countries provide policy support to help SMEs accelerate their technology extension through financial or non-financial measures,” said the survey.

The complete digital copy of the survey can be obtained from the OECD’s website here.

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