Strategic Policies for Digital Economic Transformation: The Case of Malaysia.

• Author: Lee, Cassey

1. Introduction

   Digital technologies have evolved and transformed economic activities in both developed and developing economies. Successive technological innovations have brought digital economic transformation based on digital technologies that create new and improved products and services as well as improve production and distribution processes. The other elements of digital economic transformation involve changes in consumption modes and patterns. Digital economic transformation is also a key component of the fourth industrial revolution which has been characterized by the fusion of the digital, biological, and physical worlds driven by a plethora of new technologies. These technologies include artificial intelligence, cloud computing, advanced robotics, 3D printing, the Internet of Things (IoT), gene editing, advanced wireless technologies, autonomous vehicles, nanotechnology, biotechnology, materials science, energy storage and quantum computing.

   From a growth and development perspective, policymakers have struggled to formulate and implement policies that could take advantage of the new and emerging economic opportunities brought about by changes in digital technologies. These policies include those aimed at promoting various types of investments--both in physical and human capital--as well as supporting and complementing activities that are important for digital transformation.

   This paper seeks to examine the evolution of Malaysia's strategic policies for digital economic transformation (DET). This is undertaken by examining the goals, investment outcomes and impact of these investment policies. Some of the research questions that guide this paper include: (i) how do we conceptualize DET policies? (ii) what is the current state of the digital economy in Malaysia? (iii) what are the DET policies that have been formulated and implemented in Malaysia? and (iv) what are the impact and prospects of DET policies in Malaysia?

   The outline of the paper is as follows. The next section provides a review of the literature. The third section provides an analysis of the range of strategic policies for digital economic transformation in Malaysia. The legal and regulatory frameworks are reviewed in the subsequent section. The fifth section takes stock of the state of digital transformation in Malaysia. The final section concludes.

2. Literature Review and Conceptual Framework: Strategic Policies for Digital Economic Transformation

   An analysis of strategic policies for digital economic transformation entails an understanding of what digital transformation and other related concepts mean. An assessment of these policies also requires an understanding of the literature in two areas--digital technologies (McAfee and Brynjolfsson 2017) and industrial policies (Harrison and Rodriguez-Clare 2010; Oqubay et al. 2020). These issues are discussed in this section.

   2.1 Definitions

   The OECD (2019a) provides concise definitions of three key terms in the study of digital transformation:

   * "Digitization is the conversion of analogue data and processes into a machine-readable format";

   * "Digitalization is the use of digital technologies and data as well as interconnection that results in new or changes to existing activities"; and

   * "Digital transformation refers to the economic and societal effects of digitization and digitalization".

   Digitization is a fundamental and basic process that converts data and information into a digital format, i.e., it creates a digital input. Digitalized data and information are used in communication and computation processes in production, distribution and consumption activities. In so far as this entails new activities, these processes involve digitalization with their broad effects being labelled digital transformation.

   It is perhaps useful to use the term "digital economic transformation" to narrow down the focus on the economic effects of digitization and digitalization. This type of transformation focuses on the digital economy. The OECD (2020) provides three tiers of measures/definitions for the Digital Economy:

   * Core measure: only includes economic activity from producers of ICT goods and ICT and information services;

   * Narrow measure: includes the core sector as well as economic activity derived from firms that are reliant on digital inputs; and

   * Broad measure: includes the first two measures as well as economic activity from firms significantly enhanced by the use of inputs.

   Drawing from these measures, OECD (2020) defines the digital economy that draws on the broad measure highlighted above:

   The Digital Economy incorporates all economic activity reliant on, or significantly enhanced by the use of digital inputs, including digital technologies, digital infrastructure, digital services and data. It refers to all producers and consumers, including government, that are utilizing these digital inputs in their economic activities.

   Based on these definitions and concepts, digital economic transformation entails the allocation of economic activity involving greater use of digital inputs.

   2.2 Digital Ecosystem and General Purpose Technologies

   There are many types of digital inputs and many ways in which they are used in production, distribution and consumption activities. The technologies underpinning digital inputs can be foundational in nature which renders them applicable to many types of uses (Table 1). Often, many types of interdependent technologies are used as digital inputs. The term "digital ecosystem" is sometimes used to describe the set of interdependent digital technologies (OECD 2019a). (1)

   General purpose technology (GPT) is another useful concept that can be used to further understand the nature of digital input. Lipsey, Bekar, and Carlaw (1998) define a GPT as "a technology that initially has much scope for improvement and eventually comes to be widely used, to have many uses, and to have many Hicksian and technological complementarities". (2) Bresnahan (2005) provides a more basic definition of GPTs: "a GPT is widely used, is capable of ongoing technical improvement and enables innovation in application sectors." An important feature of GPTs is the innovation complementarities or interactions between technological innovation in GPTs and innovation in application sectors which leads to sustained economic growth.

   To what extent is digital input a GPT? To answer this question, it is perhaps useful to unpack digital input. The current understanding of digital input has three key dimensions, namely: information, computation and communication--all of which are carried out in a digital format/medium. These features of digital inputs are not new. A brief historical detour might be useful to make better sense of the nature of digital inputs.

   The earliest implementation of mechanical digital computation can be traced back to the seventeenth century through the works of Blaise Pascal, Gottfried Wilhelm Leibniz and Charles Babbage. (3) Electronic digital computers emerged in the late 1930s to mid-1940s -- first using electric relays (switching devices), then vacuum tubes. The technology for modern electronic digital computers--the semiconductor device transistor--was invented in 1949 but only supplanted the vacuum tube in the late 1950s. The subsequent diffusion of electronic digital computers evolved with technological progress in the design and manufacturing of hardware (circuits, memory, etc.) resulting in widespread use in the 1980s and 1990s.

   The early technologies for digital communication involving the transmission of digital messages across networks were invented in the late 1960s. A slew of inventions such as network routers and file transmission and Internet protocols (FTP, TCP/IP) expanded digital communications and networks in the 1970s and 1980s. The advent of personal computers in the mid-1980s, combined with the invention of the World Wide Web (in 1990), the graphical browser (1993), search engines (1990s) and broadband infrastructure (ISDN/ADSL/fibre optic) have brought about the Internet as we know it today.

   Digital inputs are a form of GPT. Previous works, including Harris (1998) and Jovanovic and Rousseau (2005), have classified various forms of digital inputs such as computers and the Internet as GPTs. The terms "information technology" (IT) and "information and communication technology" (ICT) have also been used to describe digital inputs. (4) The above narratives suggest that the various types of digital inputs have evolved and the shifting combinations of different types of digital inputs have also brought about new applications. This has significant implications for policies aimed at developing the digital economy. Strategic policies to develop the digital economy may target some digital economy activities that are underpinned by specific sets of digital technologies. The mapping of digital inputs (technology and infrastructure) to applications and services may help identify key areas that require policy attention and support.

   2.3 Strategic Policies for Digital Economic Transformation as Industrial Policies

   Developing strategic policies for digital economic transformation is a fairly new phenomenon. The framework provided by studies on industrial policy could provide some useful insights on how to analyse the set of policies aimed at the digital economic transformation. The following segment provides a description of industrial policy and how policies for digital economic transformation share elements of industrial policy but also how they might differ from it.

   Industrial policy can be characterized as "government efforts to alter industrial structure to promote productivity-based growth" (Pangestu 2002). In more recent works on industrial policy, the goal of industrial policy has been expanded to include both structural transformation as well as catch-up. For example, Oqubay et al. (2020) define industrial policy as "a strategy that includes a range of...