Academic journal article Innovation: Organization & Management

Product and Process Innovation in Malaysian Manufacturing: The Role of Government, Organizational Innovation and Exports

Academic journal article Innovation: Organization & Management

Product and Process Innovation in Malaysian Manufacturing: The Role of Government, Organizational Innovation and Exports

Article excerpt

Innovation is seen as a major drive of economic growth and firms' performance (Chudnovsky, López, & Pupato, 2006; Stock, Greis, & Fischer, 2002). Although the importance of innovation is figured as a vital factor in firms' performances, stud- ies examining the determinants of innovation are still far from complete. A large number of studies focus on the importance of size (Laforet, 2008; Lee & Xia, 2006; Pla-Barber & Alegre, 2007), owner- ship (Love, Roper, & Du, 2009; Molas-Gallart & Tang, 2006) and the firms' internal resources such as human resource practices and other dynamic capabilities (Chen & Huang, 2009; Leskovar- Spacapan & Bastic, 2007), lacking analysis on the role of institutions (government support), organi- zational innovation or change and export market expansions or internalization. For instance, Sanidas (2004) contends that the issue of organizational innovation is less explored. More importantly, its effects on technical product and process innovation are not fully documented. In addition, evidence at firm level on the determinants of innovation by distinguishing product and process innovation is still lacking (Mol & Birkinshaw, 2009; Raymond & St-Pierre, 2010), and more so for developing countries like Malaysia. It is important to address this gap in research to provide insights to help policy makers to assess the importance of govern- ment incentives as well as internal firm capabilities e.g., organization innovation/change and export capability. This paper is designed to address a num- ber of interesting questions relevant for developing countries. First, the paper assesses the effectiveness of government supports especially the tax and non- tax incentives (e.g., technical supports) in promot- ing innovation at firm level. Second, the paper examines the role of a firm's organizational innova- tion or changes, namely, knowledge management practices and integrated structures and export capability in improving innovative capabilities of firms. This is done by framing the determinants of process and product innovation capability using the firm theory controlling for other firm-specific variables like size and ownership in the context of the Malaysian manufacturing sector.

The selected case study of the Malaysian manufacturing sector is interesting in a number of ways. Malaysia has recorded an impressive per- formance in the manufacturing sector. The sector contributed 81.6% to gross exports and 31.6% to Malaysia's GDP in 2005. This dramatic economic growth is often attributed to Foreign Direct Investment (FDI). The Plaza Accord in 1985 and the withdrawal of the generalized system of pref- erential treatment in 1988 boosted FDI inflows to Malaysia. The Investment Act of 1986 further stimulated FDI. This policy provided many incen- tives, including pioneer status tax holidays, larger investment tax allowances for expansion projects, tax deductions for export promotions, the estab- lishment of Free Trade Zones and other types of incentives to attract FDI. Malaysia further relaxed restrictions on capital ownership by foreign com- panies, thus improving FDI in Malaysia in the late 1980s. Malaysia's initial attraction to foreign investors came from its basic infrastructure, polit- ical stability liberal policies and low-wage labor market. However, rapid globalization and other emerging markets such as China and India make these factors less appealing in attracting FDI. Conversely the sustainability of FDI-led growth may begin to erode due to the new challenges. It is crucial for the Malaysian manufacturing sec- tor to focus on building technological capabili- ties and innovation to maintain competitiveness. For this reason, the Malaysian government has been emphasizing innovative developments at the firm level as the drive to economic performance (Malaysia, 2010a, 2010b).

Due to the evolution of industrial development in Malaysia (from import substitution to export promotion strategies and from low tech to high tech industries) and the industry's lagging perfor- mance at the innovation frontier, the government's role in stimulating technological advancement is critical. …

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