Privatizing Proton is, to be sure, a promising move toward improving the domestic car manufacturer’s efficiency. The door is now open to new partnerships with global brands, which could give Proton access to the latest technologies and breathe new life into the company’s products.
Yet, if Proton hopes to secure these partnerships, the company must be free to choose its suppliers and employees without outside interference. Moreover, Proton will have little reason to improve its technological capabilities and efficiency if the existing regulatory framework remains unchanged and the company continues to receive the same largesse from the state that it has enjoyed since it was established.
In short, in the long run, Proton’s divestment by itself will not make the company more competitive internationally.
Proton’s sale needs to be followed by measures allowing all car manufacturers, domestic and foreign, to attract the finest talent and source the best components from the most efficient and reliable suppliers, permitting competition on a level playing field. In addition to giving Proton access to attractive partnerships and boosting its international competitiveness, Malaysia’s entire automobile sector will be revitalized as it becomes more attractive to foreign investors and more capable of producing at economic scale. Malaysia could even become Southeast Asia’s automotive production hub. Nearby Thailand and India are prime examples of the benefits Malaysia could reap by liberalizing its automobile sector.
Malaysia’s experience with its automobile sector holds important lessons for middle-income developing countries considering industrial policy as a means of nurturing new globally competitive industries and firms. First, this is arguably a high-risk strategy; very few countries have implemented industrial policies successfully. Second, any protection should be signaled from its inception as being temporary, with a clear timetable for withdrawal. Third, industries, not firms, should be targeted for support. Fourth, firms should be encouraged to achieve economies of scale by exporting and should be given the freedom to access the talent and components they need. Finally, without policy reforms that promote competition, privatization merely transfers economic rents from the public to the private sector.
Proton’s example is emblematic of efforts by several developing countries that have used state ownership and protective policies to push industrial policy objectives. But when such “infant-industry” policies fail to deliver, privatization alone is not the answer. It must be accompanied by a broader commitment to dismantle protective policies and promote competition to ensure further development is internationally competitive and builds on the country’s comparative advantage.