RATIONALE FOR THE KNOWLEDGE-BASED ECONOMY

To Achieve Sustainable Rapid Economic Growth Until the mid-1990s, Malaysia depended largely on capital investment to spearhead economic growth. It then initiated the strategy to shift from an inputdriven to a productivity-driven mode. The basis for this change was the declining marginal productivity of capital, reflected by the increasing incremental capital output ratio. The proportion of investment to GDP was at a high level and the country consistently experienced a resource gap making this position unsustainable in the long term. the Seventh Plan period, the transition to a productivity-driven economy was slow partly due to the large investments with long gestation periods as well as the decline in output as a result of the 1997 financial crisis. The lack of skilled manpower and technology advancement also contributed to this phenomenon.

The knowledge-based economy will complement efforts to improve economy-wide productivity through enhancement in TFP as it will add new value to existing activities and will be accompanied by improvements in technology, greater innovative capability and the input of higher skilled workforce. An assessment using input-output analysis confirms that knowledge-intensive industries have a higher value-added multiplier and higher productivity compared with non-knowledge intensive industries. 5.08 The knowledge-based economy will also spawn new activities for investment within existing industries as well as create new industries. The introduction of high-technology and knowledge-intensive production processes will offer new investment opportunities within existing industries.

The need to move along the value chain in terms of product design and development as well as packaging, marketing and distribution will open up investment opportunities in new industries. Knowledge-enabling industries, particularly in the area of information and communications technology (ICT), will also generate green areas of investment in the development of hardware and software as well as infrastructure. The premium given to conceptualizing and testing of new ideas in the knowledgebased economy will also become the seedbed for the creation of completely new products and services. The knowledge-based economy through its contribution to productivity enhancement and the generation of new areas of investment will, therefore, increase the long-term growth potential and provide the basis for continued sustainable rapid growth of the Malaysian economy during the OPP3 period.