MALAYSIA wants more scientists, engineers and technology creators. Prime Minister Datuk Seri Anwar Ibrahim recently renewed that ambition, calling for deeper participation in science and a continuous pathway connecting promising students with laboratories, universities, research institutions and industry.
Enrolment in science, technology, engineering and mathematics (STEM) subjects has risen from 40.95% in 2021 to 50.83% in 2024, although participation in pure science remains about 15.8%.
But suppose more students acquire sophisticated skills, more companies master advanced technologies and more Malaysian firms boost productivity. What happens next?
Creating productive firms and creating a more productive economy are not the same achievement.
Malaysia already has firms that perform remarkably well. The World Bank describes the top 10% of domestic firms in each sector as “frontier firms”. In 2022, workers in these companies earned almost three times as much, on average, as workers in the median Malaysian firm.
Yet even in manufacturing — the core driver of technical capability and exports — Malaysia's most productive enterprises have not steadily acquired greater economic weight. These frontier firms accounted for about 36% of manufacturing employment in 2010. By 2023, their share had fallen to around 33%. Market share fell even more sharply, dropping from around 80% to 71%.
These firms face another problem. The productivity gap between Malaysia's domestic frontier firms and the world's leading global firms has widened, particularly in digital- and knowledge-intensive sectors.
Even if local frontier firms continue to raise their internal efficiency, those gains yield limited national impact without deeper absorption of global technology and fuller integration into high-value supply chains.
And more importantly, a highly productive firm changes a national economy only so far if it stays small.
Consider how economic growth actually works at the ground level. A company finds a better way to produce a good or service. Greater productivity allows it to compete for customers, invest in new capacity and pay higher wages. As it expands, it pulls in workers and capital from elsewhere in the economy.
Competitors come under pressure to adapt or improve. Those that cannot keep pace eventually contract or shut down, releasing labour and capital to be redeployed by more dynamic, growing enterprises. This process, known to economists as allocative efficiency, is how success inside a single firm translates into broader national prosperity.
For knowledge to transform an economy, talent, investment and market share must gravitate naturally towards its most productive businesses.
Malaysia's economic machinery does not always make that transition easy. Capital and labour often remain trapped in less productive incumbents due to persistent structural frictions.
The World Bank points to regulatory barriers, uneven access to risk capital, limited product market competition and slow insolvency frameworks as key constraints on firm entry, expansion and orderly exit.
The OECD has similarly identified regulatory complexity, non-tariff compliance costs and obstacles to technology adoption as major hurdles that prevent smaller, innovative firms from scaling up.
This puts the current debate over STEM skills in a different light.
Malaysia certainly needs scientists and engineers with the technical capabilities required by increasingly complex industries. Yet more than one-third of tertiary graduates already experience skill-related underemployment, working in semi-skilled or low-skilled roles that do not draw on their qualifications. Employers, meanwhile, report chronic difficulties finding workers with specific technical skills.
This may seem paradoxical, but these two conditions can coexist quite easily.
An economy can suffer from specific skill shortages while simultaneously failing to make full use of the broad human capabilities it already possesses. If too few productive firms emerge and scale, there will simply be too few high-value jobs capable of absorbing an increasingly educated workforce.
The skills question therefore runs in both directions. Malaysia must ask whether its workers possess the capabilities that modern industry requires. But it must also ask whether enough dynamic firms exist that are capable of utilising the talent its education system produces.
The same two-sided logic applies to industrial policy.
Malaysia is investing heavily in technological capability, innovation ecosystems and higher-value activities under various national blueprints. Creating a promising startup, developing a capable local vendor or helping a firm master a sophisticated manufacturing process is an achievement.
But it is only an intermediate one.
What happens afterwards should become part of the national economic scoreboard. Do productive firms actually grow, hire and export? Do they expand into new markets and capture market share from less efficient competitors? Does private investment flow towards them?
A company's productivity advantage matters to the wider nation only when it begins altering where the economy's resources flow. The ultimate aim of economic policy should be to let market productivity, rather than administrative selection, historical legacy or firm size for its own sake, determine which enterprises acquire economic weight.
Productive firms need room to demonstrate their advantages and scale, while less productive ones must face the competitive pressure to reform or make way.
Malaysia's ambition to cultivate scientific talent and technological capability is well placed. But capability is only the start of the process. It transforms an economy only when market weight follows productivity.
Quah Boon Huat is a former sovereign credit rating analyst and policy analyst.