The Future of Industrial Policy: A Greener Way

Ahmad Hazim bin Khairul | Spring 2025

Is a Small Country Scalable? 

The world economy is approximately $106.17 trillion in size, with ASEAN (Southeastern  Asian Nations) contributing roughly $3.8 trillion, which is only 3.6% of world GDP. In  comparison, China alone accounts for almost 18% of world GDP, while the U.S. is  responsible for approximately 25%. As a Malaysian, one cannot help but wonder: Can our  resource-endowed country—stuck in the middle-income trap—surpass richer economies? We  aspire to industrialize, develop high-tech sectors, and compete in the global market, but we  lack the deep capital buffers, cutting-edge technology, and geopolitical influence that  developed economies have accumulated over decades. This disparity raises an underlying  question: How do the smaller nations such as Malaysia end up being major players in the  global economy when they lack the economic clout of larger nations? How does a small  nation cope in a world where the rules have been set by those who are already ahead? 

 

China once faced the same puzzle. In 1990, its GDP stood at around $360 billion, and that  accounted for less than 2% of the GDP of the entire world. Skip a few decades to 2023, and  China’s GDP stands at comfortably more than $17.7 trillion, currently contributing nearly  18% of the world’s GDP. Hardly a couple of decades back, it was only a cheap manufacturing  hub with limited technological capacity. Yet, through strategic industrial policies riding on  technology, China became a dominant force in electric vehicles (EVs), battery technology,  artificial intelligence (AI), and renewable energy. Can other emerging economies— particularly the smaller ones—do the same? While China’s enormity enabled it to bargain  from strength, the current world order is shifting. Climate change pressures, AI-powered  automation, and changes in economic policies require new strategies. Therefore, what are the  implications for Malaysia and other middle-income nations? 

 

China’s Industrial Policy: The Catch-Up Model? 

China got mired in low-cost manufacture in the final decades of the 20th century, when  wealthier nations dominated high-technology industries. It pursued industrial policies that  pressured foreign firms to transfer technology and invest locally as a quid pro quo for market  access. This was most evident in the car market, where overseas car manufacturers were  forced to form joint ventures (JVs) with local companies, ensuring mutual technical  knowledge exchange. The intention was clear: absorb foreign technology, develop home  industry, and over time outperform foreign competition. The impact of such policies has  been transformative. 

 

China controlled EV sales in 2023, producing 60% of worldwide volume, with BYD  outselling Tesla in terms of units. It now controls 75% of lithium-ion battery production  globally, led by CATL and BYD, and in AI, the world’s second-largest investor behind the  U.S., with Tencent, Alibaba, and Baidu being its leaders in machine learning and automation.  Worth in purchasing power parity (PPP) terms, China’s economic output is more than $30  trillion, and its economy is currently the largest one in PPP terms even though it still lags  behind the U.S. when measured by nominal GDP. Apart from the statistics, China’s industrial  quality has undergone a tremendous change. During 2001-2014, Chinese-produced car  breakdown rates decreased by 75%, reducing the performance deficit with foreign players  substantially. In 2014, defect rates declined by 33%, enabling local automakers to compete at  the international level. This rapid change has given rise to self-reliance in core sectors, and China has emerged a global leader in batteries, EVs, and AI-based technologies. However,  this model has not been as successful for every sector and group. While it has propelled  China’s export industries, China’s rural sector and small businesses have struggled to match  the country’s technology-driven industrial transformation. Relying on mass industrial policy  means its rewards go primarily to state-backed companies and large cities, with wealth  inequality continuing to be a long-standing problem. 

 

For the smaller economies, this model will both pose a threat and an opportunity. China  benefited from scale, low wages, and state control, while it could be challenging for smaller  nations to adopt similar policies without sacrificing something. The big question is: Is it  possible for smaller nations to follow a similar model to stimulate their industrialization  without provoking geopolitical backlash or exacerbating inequality? 

 

Malaysia in the Fourth Industrial Revolution: Opportunity or Risk? 

The Fourth Industrial Revolution is reshaping economies through AI, automation, and  sustainability. Nations that adapt will thrive, while those that lag risk stagnation. Malaysia  stands at a crossroads—can it transition from a middle-income economy to a high-tech leader? 

 

Malaysia must place strategic bets in industries with long-term growth potential. Green  technology presents the opportunity to dominate solar energy, battery storage, and green  hydrogen, with the global green economy expected to reach $10 trillion by 2050. The shift to  renewable energy can enhance energy security, lower long-term electricity costs, and create  high-value jobs. However, countries that are at the forefront of this industry, such as  Germany and China, have achieved this by decades-long industrial planning and massive  subsidies. Without a similar commitment, Malaysia risks becoming an importer of green  technology rather than a producer. Success in this sector would be measured in terms of the  percentage of power from renewables, energy import bill savings, and local production of key  battery and solar components. 

 

Semiconductors are another high-potential industry, as they power everything from consumer  goods to AI-driven automation. The global semiconductor market is valued at over $600  billion annually, and Malaysia is already active in chip testing and assembly. But it still  depends on foreign firms for design and fabrication, meaning it can’t yet grasp the most  profitable segments of the business. Taiwan’s TSMC reached world leadership through  focused industrial policy and government-backed R&D, proving that success in  semiconductors is within reach with the correct investment. Success for Malaysia in this  sector will be tracked through the growth in semiconductor exports, R&D spend in Malaysia,  and the ratio of high-value semiconductor jobs created in Malaysia. 

 

AI and automation are perhaps the most exciting and disruptive fields of the Fourth Industrial  Revolution. AI is predicted to contribute over $15.7 trillion to the world economy by 2030,  revolutionizing industries from healthcare to logistics. Countries that get in early on AI  research, infrastructure, and policy will reap a productivity and innovation dividend. AI is  one of the most open industries for small countries, in contrast to green tech and  semiconductors, since it doesn’t require massive physical infrastructure. Singapore has  aggressively positioned itself as an AI hub through investments in AI laboratories, investing  in data infrastructure, and developing regulations attractive to global tech firms. All this  Malaysia can also do, but only if it prioritizes education reform, digital infrastructure development, and AI entrepreneurship. Some possible metrics of success of AI adoption  would be the jobs created, AI-led businesses, and AI contribution to national GDP. 

 

For all its potential, industrial change also involves sacrifices. Green technology, while  promising, requires highly skilled labor, so legacy energy sector employees may find it  difficult to make the transition. The semiconductor industry is competitive and capital intensive, so it would be difficult for Malaysia to take a leading role without forceful policy  intervention and long-term investment. AI and automation, while generating new high-wage  industries, will also eliminate more jobs than they generate in the short term in  administrative, retail, and low-skilled service occupations. Unless Malaysia invests in reskilling workers and institutes policies for sharing the benefits of AI-driven growth,  economic inequality could rise rather than fall. 

 

The final challenge is to ensure that industrial growth translates into real income growth for  Malaysians. China’s industrial policies miraculously expanded its GDP, but wage growth has  lagged behind economic expansion in some sectors, leading to unrest amidst national  prosperity. Malaysia stands the risk of doing the same if it prioritizes high-tech development  without also addressing wage stagnation, cost-of-living hikes, and inequality. GDP growth is  not alone a sufficient measure of success—purchasing power, median wages, and access to  high-paying jobs must increase for industrial policies to be considered successful. 

 

Malaysia stands at a tipping point. The Fourth Industrial Revolution will create new winners  and losers, and the decisions of today will determine whether Malaysia can join the high income group or remain mired in economic stagnation. While there is no perfect strategy, a  balanced policy that marries smart industrial policy, investment in human capital, and  strategic geopolitical positioning will ensure that economic transformation will serve not just  the interests of corporations and investors but also those of the broader population. The  question is whether Malaysia will take control of its industrial fate, or remain a follower in a  world defined by others’ innovation.

 

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  1. “Quid Pro Quo, Knowledge Spillovers and Industrial Quality Upgrading: Evidence  from the Chinese Auto Industry,” with Jie Bai, Shengmao Cao, and Shanjun Li.  NBER working paper 27644. Conditional Acceptance at American Economic  Review. 

2. World Economic Forum. (2025). The future of jobs report 2025 .  https://www.weforum.org/publications/the-future-of-jobs-report-2025/digest/ 3. World Bank. (2025). Global economic prospects: GDP data . Retrieved from  https://www.worldbank.org/en/publication/global-economic-prospects