On 16 February 2008, Malaysian Business published a list of the richest business people in Malaysia. The list produced no surprises, though only if viewed within the context of Malaysia’s recent corporate history. However, a careful analysis of this list draws attention to two important public policy issues: the promotion of domestic enterprise and the continued implementation of affirmative action, both of which have a profound bearing on social relations. As campaigns for the 12th General Election commence, it is crucial that these policies be re-assessed and receive public and rational debate.

Robert Kuok remains Malaysia’s richest businessman, while the other by-now familiar names in the list include T. Ananda Krishnan (Maxis and Astro), Quek Leng Chan (Hong Leong group), Syed Mokhtar Albukhary (Albukhary Foundation), Teh Hong Piow (Public Bank), Lim Kok Thay (Genting), Tiong Hiew King (Rimbunan Hijau group), Vincent Tan (Berjaya Group), Azman Hashim (Amcorp Group) and Yeoh Tiong Lay (YTL Corp). What is most interesting about this list is not just its multi-ethnic composition, but also that it comprises individuals who are among Malaysia’s most well-connected businessmen. Companies owned by Kuok, Teh, Lim, Azman, Syed Mokhtar and Yeoh have secured important licences in the manufacturing, banking, gaming and power generation sectors, while Ananda and Tan have received lucrative privatised gaming and telecommunications projects.

The government’s professed reasons for distributing concessions selectively include the need to expedite industrialization, advance domestic capital to curb Malaysia’s dependence on foreign firms to drive economic growth, and ensure ethnic coexistence through fairly equitable distribution of the wealth generated. The aim to selectively cultivate firms to drive industrialization and promote the growth of modern domestic industry is not unique to Malaysia. The governments of the United States, Germany and Japan, particularly in the early phase of these countries’ industrialization drive, had adhered to the argument that they had to nurture and protect infant industries in their "catching-up phase".

The cultivation of this policy eventually led to the emergence of a vast industrial base comprising large, medium and small-sized firms, many with the capacity to compete internationally. Similar linkages between government and business, involving a focus on priority sectors that would drive industrialization, promote domestic capital and bring about structural change, including the reduction of poverty, had occurred in South Korea and Taiwan. In Malaysia, however, this nurturing of entrepreneurial firms by the government was tempered by a serious lack of transparency and debates about implementing affirmative action along ethnic lines. These issues would eventually serve to undermine Malaysia’s endeavour to create major domestic firms in the industrial and manufacturing sectors.

What stands out about this list of the most prominent businessmen in the country is that none of the enterprises owned by these individuals has secured a national or international presence in the manufacturing or the industrial sector, with the possible exception of firms within the Hong Leong group. Interestingly, Hong Leong’s primary concession from the government was a banking licence, not one for manufacturing. Among ethnic Malay business people, no prominent person currently owns a major quoted industrial firm in spite of substantial government support for this community in this sector. Most Malays continue to be involved in finance, construction and property development.

Affirmative action: The vendor system

A fundamental feature of affirmative action was the targeting of Malays within the business community as recipients of government-created concessions to promote the rise of Bumiputera-owned conglomerates. This form of ethnic targeting, implemented over the past thirty years, was introduced to rectify inequities in corporate ownership and control patterns that had emerged during British colonial rule. Ethnic targeting was to have a major bearing on the shape of capital formation and development.

One policy mechanism long in use to advance Bumiputera participation in manufacturing is the vendor system. The vendor system, for example, had been a core component of the national car project, Proton, introduced in the early 1980s. To promote Bumiputera enterprise, firms were preferentially accorded the rights to supply Proton with locally-produced goods for the national car. The vendor system was, however, unsuccessful in developing the rise of Bumiputera firms in the automobile industry, while Proton model cars were themselves hardly reputed as being equipped with quality material produced at affordable rates. It was this that ultimately undermined the national car project.

The case of the Proton vendor system suggests that an attempt to anchor fledgling firms onto established enterprises would end up only weakening the prospects of the latter. The outcome of the vendor system also suggests that selective intervention to promote Bumiputera capital had failed, though not because of inadequate state support. This same vendor system might have produced different results had contracts been issued to companies with the capacity to produce high quality products at reasonable rates, which would probably have held the Malaysian car project in better stead. The government has now long been searching for a foreign partner to salvage the national car enterprise.

This policy of tying small Malay firms to large-scale government companies to help them gain greater access to the market has been an expensive and unsuccessful endeavour. An obvious policy lesson here is that business development strategies should be universal in orientation, not targeted at specific communities, to ensure that the recipients of government concessions are able to sustain themselves in a competitive environment.

Sustaining big business

Apart from pointing to the failure of affirmative action and selective patronage to promote the rise of a Malay-owned industrial base, another interesting feature stands out from this list of the Malaysian rich. Only very few of the companies of these prominent business people have their roots in enterprises established in the colonial period. Among the most prominent business people of that era were Eu Tong Sen, Lau Pak Kuan, Loke Yew, Tan Kah Kee and Lee Kong Chian, who had secured considerable interests in the banking, manufacturing, tin mining and rubber plantation sectors. Most of the companies established by these businessmen during colonial rule were, however, not sustained into the modern period.

By the late 1960s, just before the introduction of the New Economic Policy (NEP), the most prominent companies were Kuala Lumpur-Kepong (Lee Loy Seng), Federal Flour (Robert Kuok), Asia Motor Co. (Phang family), Cycle & Carriage (Chua family), Lee Rubber Selangor (Lee Kong Chian), Tan Chong Motors (Tan family) and Empat Nombor Ekor (Lim family). Only one, Manilal & Sons, was Indian owned (by the Patel family). Only a handful of the descendants of the owners of these firms now appear in the list of the richest Malaysian business people.

A more important point emerges from comparing the leading manufacturing firms of the 1960s with those of the present period. Only about twenty of the top 100 publicly-listed firms at the turn of this century have listed manufacturing as their primary activity. A majority of these firms are foreign-owned – Rothmans, Nestle, Malayan Cement, Carlsberg, Guiness Anchor, RJ Reynolds, Malaysian Oxygen, Kedah Cement and Shell, an indication that local manufacturing companies of the colonial period had not managed to grow in size, with possibly one exception, the Hong Leong group. Three of these 20-odd companies belong to this group – Malaysian Pacific Industries (MPI), which is involved in the electronics sector, OYL Industries, producer of air-conditioning products, and Hong Leong Industries, a tiles manufacturer.

Most of the domestic manufacturing firms in the top 100 are Chinese-owned, a feature of this sector since Independence. A comparison of the top 100 companies in the 1960s with that of the present crop of major quoted firms indicates that there has been no enterprise that has managed to retain its position as a leading manufacturer. This uncovers an important point. The eventual decline and demise of manufacturing enterprises that had emerged during the colonial period was due to their failure to invest in new plants and equipment, to introduce new products and to pursue new markets.

Policy lessons

There are important policy reasons for the existence of only a handful of large entrepreneurial firms with a long history. The government’s inability to develop large or medium-sized firms in manufacturing can be attributed to its unwillingness to incorporate firms or people who already had some expertise in the industry. Furthermore, when compared to industrialized East Asia, Malaysian firms have fared relatively poorly in terms of their investment in research and development (R&D). The fall of manufacturing firms is principally due to their failure to invest sufficiently in production, distribution and organization.

This failure can be attributed to limited government support and encouragement for R&D. While industrialized East Asian countries spend between 2 and 3 per cent of their annual gross national income on research and development, Malaysia’s total expenditure for this has hovered at a mere 0.4 per cent. There is also much evidence to suggest that the government has not disciplined companies privy to concessions by ensuring they invested in R&D to enhance their manufacturing capacity.

In spite of recent government policies favouring small firms, similar deficiencies in production and distribution pattern prevail among the latter, mainly because of their inadequate aid from the government for R&D. This is imperative as small firms across the globe have shown that they are capable of being more responsive to market needs as they are far more flexible and better equipped for engendering and adopting innovations. In Taiwan, the government has acknowledged the importance of the small firm in terms of promoting innovation and generating employment. In Singapore, also, after a long cultivation of government-owned companies, there has been much emphasis on supporting small- and medium-scale enterprises as a means to promote entrepreneurial capacity.

In Malaysia, the long-drawn and high degree of government intervention in the corporate sector, through selective patronage and affirmative action, has not served to encourage a majority of non-Bumiputera businesses in manufacturing to invest further in their enterprise. Inevitably, companies that may have had the capacity to upgrade their technology have been constrained from emerging to help foster domestically-driven industrialization.

Another important reason as to why large industrial firms have failed to evolve is that UMNO’s primary concern had been to ensure that the ethnic Chinese did not enhance their ownership and control of the corporate sector. But the government need not have feared Chinese dominance in the economy. Studies now reveal that common ethnic identity has not served to unify members of this community nor is it the crucial factor contributing to the sustained presence of Chinese-owned capital. Similarly, a common "Malay" identity does unify this business community, even including those businesses owned by people who have shared the same political patron.

Studies have shown that continued promotion of affirmative action that discriminates against ethnic Chinese enterprises has served to generate intense intra-ethnic business competition, not cooperation. The Malaysian Business list does not even hint of the existence of business ties among the richest Chinese business people, through joint ownership of an enterprise. The diversity in their business styles, in terms of size, type of ownership and management and areas of business, perhaps explains why Chinese firms seldom cooperate or work with each other. Those ethnic Chinese who have made the foray into joint ownership have ended up at loggerheads with each other, a feature not uncommon in most partnerships. Furthermore, most Chinese owners of companies are reluctant to merge with other firms, for to do so would mean sharing control of the enlarged enterprise, when the desire is to go it alone.

Given their long exposure to intense competition and their huge presence in the manufacturing sector, Chinese enterprises remain an important avenue through which the government can promote the rise of an independent domestic industrial base. This is crucial if Malaysia hopes to reduce its dependency of foreign firms in this sector. With greater government support, and with policies that transcend racial lines, it is highly likely that the dynamism of private companies that clearly prevails in the corporate sector can be productively exploited, helping them to move up the technological ladder, possibly even evolving into firms that have a notable presence internationally.

Affirmative action in the corporate sector has done little to appreciably improve the economic position of the vast majority of Bumiputeras. For this reason, the policy should ideally move towards the removal of the ethnic criterion in the allocation of concessions to develop key economic sectors. Attempts by the government to hinder the development of enterprises owned by minority communities will inevitably impede enterprise expansion and growth on the whole, a scenario which the Malaysian economy can ill afford. More importantly, long-term implementation of affirmative action along ethnic lines, will only serve to reinforce racial identities, suppress commonalities and draw protests from marginalized communities who see themselves as being treated as outcasts in their own nation.

TERENCE GOMEZ is Research Coordinator as the United Nations Research Institute for Social Development (UNRISD).