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Institute for Trade Studies and Research
Ministry of Industry, Mine and Trade Islamic Republic of Iran
High-Level Symposium on Industrial and Trade policies: Promoting Exports and Developing Employment
Malaysian Experience in Moving up Global Value Chains in Resource-Based
Industries
Zakariah Abdul Rashid
Malaysian Institute of Economic Research10th _ 11th October 2015
Tehran, Iran,
Outline
Introduction Background Methodology Findings Policy implications Conclusion
Introduction
Ricardian and Heckscher-Ohlin models are insufficient to explain trade and industrial development as regards to the differences between resource and non-resource based industries.
Since 1990s trade not dependent only on differences in factor endowments and technology but also on regional production networks and GVC.
Fragmented production networks and global value chains (GVCs) characterize trade and investments
GVCs are the norm now
What are GVCs?
Value chain - full range of activities that firms perform to bring a product from its conception to end-use and beyond
The activities that comprise a value chain can be contained within a single firm or divided among different firms
Before Fragmentation
PBSL
SLSL
SL SL
PB
PB
PB
PB
Old Factory
PB: production blockSL: service link
After Fragmentation
Objectives The overall objective is to explain the
industrial and trade policy within the context of broader national economic policy objectives.
It explains how the differences in the production performance between resource and non-resource based industries are affected by GVC.
Specifically, it will explain the contribution of components of final demand to output growth and estimate their primary inputs multipliers.
Methodology
The paper uses standard decomposition of output growth analysis, attributing output growth to Domestic demand expansion, Export demand expansion, Intermediate demand expansion and Import substitution
Methodology
Under equilibrium conditions, open input-output relation can be postulated as:
X= D + W + E-M,
where
X = vector of gross output
D = vector of domestic final demand
W = matrix of intermediate demand
E = vector of export demand
M = vector of imports
Methodology
Output growth (1)
∆X = R μ1 ∆D + R∆E + Rμ1∆AX0 + R∆μ(A0X0 + D0)
(1) (2) (3) (4) (5)
is decomposed into that due to
(2) domestic demand expansion
(3) export demand expansion
(4) intermediate demand expansion
(5) import substitution demand
Methodology
I-O analysis is appropriate for study of GVCs The input from one firm or a subsidiary of the firm is used
as an input for another firm The international fragmentation of production focuses on
the imported input shares of gross output, total inputs or exports
Multipliers calculated using following formula:
Where ν = primary input including value added coefficient,; b = Leontief coefficient, and
σ = multiplier for sector k
Sources of Data
Malaysia’s input-output tables for the years 1991, 2005 and 2010.
deflate all the tables into a common base year. Aggregating and conforming all the three years’
classifications Weighted average using sectoral output as weight GVC analysis examines products exported from
Malaysia Propose to examine exports to major export
markets such as China, Singapore, USA, Europe and Japan
Methodology The following will be calculated
– Value added of main export categories– Value of compensation of employee and operating surpluses– Key multipliers
• Value added multiplier• Compensation of employee multiplier• Operating surplus multiplier• Output multiplier• Imported commodity multiplier
We are proposing for policy recommendations to undertake focus groups discussion (FGD), which will be held with:
– Government agencies (i.e. MITI, SME Corp)– Trade associations (FMM)– Chambers of commerce
Methodology Classification of sectors by Export Oriented (EO) and Non-
Export Oriented (NEO), also by Resource Base (RB) and Non-Resource Base (NRB).
Legend: • EO = export oriented• NEO = non-export oriented• EORB = export oriented resource base • EONRB= export oriented non-resource base• NEORB= non-export oriented resource base • NEONRB = non-export oriented non-resource base • RBM = resource base manufacturing• RBNM = resource base non-manufacturing• NRBM = non-resource base manufacturing• NRBNM = non-resource base non-manufacturing
Input Structure
Intermediate Input45%
Imported Commodity
44%
Compensation Employee
4%
Operating Surplus8%
Sector 74
Intermediate Input42%
Imported Commodity
56%
Compensation Employee
1%
Operating Surplus1%
Sector 75
2005NOTE: Sector 74 = Semi-Conductor Devices, Tubes and Circuit Boards
Sector 75 = TV, Radio Receivers & Transmitters & Asso. Goods
Input Structure
Intermediate Input82%
Imported Commodity
6%
Compensation Employee
2%
Operating Surplus10%
Sector 21
2005
NOTE: Sector 21 = Oils and FatsSector 6 = Oil Palm
Intermediate Input30%
Imported Commodity
7%Compensation
Employee28%
Operating Surplus
34%
Sector 6
Input Structure
Intermediate Input21%
Imported Commodity
57%
Compensation Employee
6%
Operating Surplus
16%
Sector 74
Intermediate Input16%
Imported Commodity
47%
Compensation Employee
13%
Operating Surplus
24%
Sector 75
2010NOTE: Sector 74 = Semi-Conductor Devices, Tubes and Circuit Boards
Sector 75 = TV, Radio Receivers & Transmitters & Asso. Goods
Input Structure
Intermediate Input90%
Imported Commodity
4%
Compensa-tion Em-ployee
2%
Operating Surplus
4%
Sector 21
2010
Intermediate Input17%
Imported Commodity
8%
Compensation Employee
14%
Operating Surplus
61%
Sector 6
NOTE: Sector 21 = Oils and FatsSector 6 = Oil Palm
Input Structure
Intermediate Input21%
Imported Commodity
57%
Compensation Employee
6%
Operating Surplus
16%
Sector 74
Intermediate Input16%
Imported Commodity
47%
Compensation Employee
13%
Operating Surplus
24%
Sector 75
2010NOTE: Sector 74 = Semi-Conductor Devices, Tubes and Circuit Boards
Sector 75 = TV, Radio Receivers & Transmitters & Asso. Goods
Source of Overall Output Growth
Source of Demand FormulaOVERALL
1991-2005 1991-2010
Export DD R(E1-E0)% 51.04% 43.62%
Domestic DD R(μ1(D1-D0))% 12.44% 25.98%
Intermediate DD R(μ1(A1-A0)X0)% 7.73% 9.36%
Import Subs R((μ1-μ)(A0X0+D0))% 28.80% 21.05%
TOTAL 100.00% 100.00%
In 1991-2005, export demand has shown the highest contribution to output growth, followed by Import substitution.
While in 1991-2010, it is slightly decrease in export demand contribution to output growth,
Important to identify source of output growth in Resource Based & Non-Resource Based
Industries
Source of DemandResource Based Non-Resource Based
1991-2005 1991-2010 1991-2005 1991-2010
Export DD 57.33% 49.87% 48.39% 39.64%
Domestic DD 4.04% 17.86% 15.98% 31.14%
Intermediate DD 8.02% 6.90% 7.60% 10.91%
Import Subs 30.60% 25.37% 28.04% 18.30%
TOTAL 100.00% 100.00% 100.00% 100.00%
With respect to sources of output growth, Resource Based industry is more dependent on export demand, while Non-Resource Based industry is more dependent on domestic demand.
In both industries, Domestic Demand become more significant over the period in contributing to output growth.
Overall0.62
EO0.58
EORB0.65
RBM0.59
RBNM0.86
EONRB0.54
NRBM0.36
NRBNM0.71
NEO0.77
NEORB0.82
RBM0.73
RBNM0.83
NEONRB0.76
NRBM0.51
NRBNM0.76
Important to know the primary input multiplier: Value Added (VA) Multiplier 2005
NOTE: Number in parentheses represent the number of sectorNumber in italics represent the VA multiplier of the activity
• CPO (21) – 0.751
• Petroleum Refinery (44) – 0.593
• Crude Oil & Natural Gas (13) – 0.892
• Semi-conductor devices (74) – 0.343
• TV, Radio & transmitter (75) – 0.220
• Oil Palm (6) – 0.844
Overall0.70
EO0.67
EORB0.69
RBM0.65
RBNM0.86
EONRB0.65
NRBM0.41
NRBNM0.78
NEO0.80
NEORB0.85
RBM0.66
RBNM0.87
NEONRB0.80
NRBM0.00
NRBNM0.80
NOTE: Number in parentheses represent the number of sectorNumber in italics represent the VA multiplier of the activity
Important to know the primary input multiplier: Value Added Multiplier 2010
• Semi-conductor devices (74) – 0.359
• TV, Radio & transmitter (75) – 0.477
• CPO (21) – 0.811
• Petroleum Refinery (44) – 0.731
• Crude Oil & Natural Gas (13) – 0.915
• Oil Palm (6) – 0.876
Discussion
Value added (VA) multiplier over time period has increased NEO has bigger VA multiplier Resource base multiplier bigger than non-resource base RBNM bigger than RBM NRBM is smallest
Overall0.17
EO0.14
EORB0.12
RBM0.13
RBNM0.08
EONRB0.15
NRBM0.09
NRBNM0.21
NEO0.30
NEORB0.30
RBM0.26
RBNM0.31
NEONRB0.30
NRBM0.19
NRBNM0.30
Important to know the primary input multiplier: Compensation Employee (CE) Multiplier 2005
• CPO (21) - 0.250• Petroleum
Refinery (44) – 0.066
• Crude Oil & Natural Gas (13) – 0.039
• Semi-conductor devices (74) – 0.102
• TV, Radio & transmitter (75) – 0.068
• Oil Palm (6) – 0.354
NOTE: Number in parentheses represent the number of sectorNumber in italics represent the CE multiplier of the activity
Overall0.20
EO0.18
EORB0.13
RBM0.14
RBNM0.09
EONRB0.22
NRBM0.12
NRBNM0.27
NEO0.28
NEORB0.17
RBM0.19
RBNM0.17
NEONRB0.31
NRBM0.00
NRBNM0.31
Important to know the primary input multiplier: Compensation Employee Multiplier 2010
• CPO (21) – 0.186• Petroleum
Refinery (44) – 0.071
• Crude Oil & Natural Gas (13) – 0.061
• Semi-conductor devices (74) - 0.096
• TV, Radio & transmitter (75) – 0.161
• Oil Palm (6) – 0.170
NOTE: Number in parentheses represent the number of sectorNumber in italics represent the CE multiplier of the activity
Discussion
Compensation employee (CE) multiplier has increased from 2005 to 2010
NEO has bigger CE multiplier NEORB and NEONRB has bigger CE multiplier RBNM has smallest CE multiplier
Overall0.45
EO0.44
EORB0.53
RBM0.46
RBNM0.78
EONRB0.39
NRBM0.26
NRBNM0.51
NEO0.47
NEORB0.52
RBM0.47
RBNM0.52
NEONRB0.47
NRBM0.32
NRBNM0.47
Important to know the primary input multiplier: Operating Surplus (OS) Multiplier 2005
• CPO (21) - 0.501• Petroleum
Refinery (44) – 0.527
• Crude Oil & Natural Gas (13) – 0.853
• Semi-conductor devices (74) - 0.241
• TV, Radio & transmitter (75) – 0.152
• Oil Palm (6) – 0.490
NOTE: Number in parentheses represent the number of sectorNumber in italics represent the OS multiplier of the activity
Overall0.49
EO0.48
EORB0.56
RBM0.50
RBNM0.75
EONRB0.42
NRBM0.28
NRBNM0.49
NEO0.51
NEORB0.67
RBM0.47
RBNM0.70
NEONRB0.47
NRBM0.00
NRBNM0.47
Important to know the primary input multiplier: Operating Surplus Multiplier 2010
• CPO (21) – 0.617• Petroleum
Refinery (44) - 0.647
• Crude Oil & Natural Gas (13) – 0.830
• Semi-conductor devices (74) – 0.261
• TV, Radio & transmitter (75) – 0.314
• Oil Palm (6) – 0.699
NOTE: Number in parentheses represent the number of sectorNumber in italics represent the OS multiplier of the activity
Discussion
Operating surplus (OS) multiplier has increased slightly from 2005 to 2010
NEO has bigger OS multiplier NEORB has bigger OS multiplier in 2010
Overall1.87
EO1.86
EORB1.95
RBM2.12
RBNM1.37
EONRB1.82
NRBM1.75
NRBNM1.88
NEO1.89
NEORB1.68
RBM2.09
RBNM1.60
NEONRB1.91
NRBM2.30
NRBNM1.91
Important to know the primary input multiplier: Output Multiplier 2005
• CPO (21) – 2.751• Petroleum
Refinery (44) – 2.079
• Crude Oil & Natural Gas (13) – 1.307
• Semi-conductor devices (74) – 1.821
• TV, Radio & transmitter (75) – 1.752
• Oil Palm (6) – 1.545
NOTE: Number in parentheses represent the number of sectorNumber in italics represent the output multiplier of the activity
Overall1.75
EO1.77
EORB1.94
RBM2.09
RBNM1.42
EONRB1.65
NRBM1.44
NRBNM1.75
NEO1.66
NEORB1.43
RBM2.07
RBNM1.35
NEONRB1.72
NRBM0.00
NRBNM1.72
Important to know the primary input multiplier: Output Multiplier 2010
• CPO (21) – 2.660• Petroleum
Refinery (44) – 1.716
• Crude Oil & Natural Gas (13) - 1.188
• Semi-conductor devices (74) – 1.375
• TV, Radio & transmitter (75) – 1.274
• Oil Palm (6) – 1.337
NOTE: Number in parentheses represent the number of sectorNumber in italics represent the output multiplier of the activity
Discussion
Output multiplier has decreased from 2005 to 2010 – from 1.87 to 1.75
NEO has larger output multiplier than EO in 2005; but in 2010 the output multiplier for EO is larger than NEO
Important to know the primary input multiplier: Imported Commodity Multiplier 2005
• CPO (21) – 0.238 • Petroleum
Refinery (44) – 0.391
• Crude Oil & Natural Gas (13) -0.105
• Semi-conductor devices (74) – 0.652
• TV, Radio & transmitter (75) – 0.776
Overall0.37
EO0.41
EORB0.33
RBM0.40
RBNM0.13
EONRB0.45
NRBM0.63
NRBNM0.28
NEO0.22
NEORB0.18
RBM0.26
RBNM0.17
NEONRB0.23
NRBM0.34
NRBNM0.23
Important to know the primary input
multiplier:
• Oil Palm (6) – 0.152
NOTE: Number in parentheses represent the number of sectorNumber in italics represent the imported commodity multiplier
of the activity
Important to know the primary input multiplier: Imported Commodity Multiplier 2010
• CPO (21) – 0.192• Petroleum
Refinery (44) – 0.270
• Crude Oil & Natural Gas (13) – 0.087
• Semi-conductor devices (74) – 0.639
• TV, Radio & transmitter (75) – 0.521
Overall0.30
EO0.33
EORB0.31
RBM0.36
RBNM0.14
EONRB0.34
NRBM0.58
NRBNM0.22
NEO0.20
NEORB0.15
RBM0.33
RBNM0.13
NEONRB0.20
NRBM0.00
NRBNM0.20
• Oil Palm (6) – 0.127
NOTE: Number in parentheses represent the number of sectorNumber in italics represent the imported commodity multiplier
of the activity
Discussion
Import multiplier over time period has decreased EO has bigger multiplier Non--Resource base multiplier bigger than resource base RBM bigger than NRBM RBNM is smallest in both EO and NEO
Policy Implications
It is necessary to increasing participation in GVCs: VA for 74 and 75 low; but VA for 21 high
Multiplier lowest for 74 and 75 It is crucial to increase VA to ensure economic growth Sophistication index in those products is low While ideally we should aim for high ranked in both VA and
sophistication index of our exports, most of ours are high in VA but low in sophistication index (normally found in primary commodity) or worse still low in both (normally found in E&E and wearing apparels).
Productivity and technological sophistication should be upgraded If above not done, then there will be participation in GVCs without
much gain to the country that hosts GVCs
Policy Implications
Strategies taken in Malaysia to increase benefit from participation in GVCs:– Fostering environment for knowledge-intensive production– Enhancing investment incentives, including those for FDI– Upgrading human capital by reforming the labor market and its
supply side, the education sector– Attracting knowledge-intensive and technology-intensive
investments and discouraging labor-intensive investments– Encouraging technology transfer– Enhancing SME development for a more sustainable and
inclusive industralization– Setting up science and technology parks
Conclusion
Industrial and trade policy should be viewed as part and parcel of national economic policy, especially with regards to value creation.
Fragmented production networks and global value chains (GVCs) characterize trade and investments today
Key sectors in the economy may be based on factor endowments in determining comparative advantage, which under dynamic setting can be created through structural reform.
While structural reform is always relevant at all time, phasing out its implementation and prioritize amongst its varieties is more critical
It is not enough to promote a country to participate in GVCs whose economic and social implications must also be looked into
While VA is important in ensuring economic growth product sophistication will ensure sustainability in economic development and growth
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