FDI, GOVERNMENT POLICY AND INDUSTRIAL TRANSFORMATION

IN MALAYSIA

Rajah Rasiah

UNU-INTECH

1 INTRODUCTION

• Analytic framework

• Initial structure

• Industrial policy

• FDI-driven manufactured exports

• Domestic manufactured exports

• Policy Implications

2 FRAMEWORK• Cumulative dimension of technical change:

Learning and Innovation from TNCs- indirectly through licensing, reverse engineering,

adaptation and eventually innovation- directly through foreign direct investment

• Industrial policy focus - FDI-Local firms Sequential changes in policy emphasis over

transition Ethnic restructuring

3 INITIAL STRUCTURE• Primary sector specialization under British rule

- Rubber and tin exports

• Sector and regional poverty and inequality, and ethnic identification problems

• Education and other basic infrastructure concentrated in West Malaysia and in urban centers

• Ethnic polarization and inter-ethnic tensions (May 13 1969 bloodshed)

Figure 4: Share of Manufactured Exports and Imports in GDP

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10

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30

40

50

60

70

80

90

100P

erce

nt

Manufactured Export

Manufactured Import

4 INDUSTRIAL POLICY• IS I - 1958- Application of import tariffs on final consumer goods without any

other significant interventions- MIDA formed in 1964

• New Economic Policy of 1971-90 and New Development Policy of 1991-- Poverty Alleviation and Restructuring along ethnic lines basis of

development- Manufacturing identified as engine of growth

• EOI I - 1972-80 - FDI with focus on investment, export and employment• Opening of FTZs and LMWs from 1972• ICA - 1975 - ownership regulations on inward-oriented investment• 1981-85 - Emphasis on IS 2

- Focus on domestic investment in Heavy and Process Industries- Steel, automobiles, cement, processed palm oil

• 1986-90 Resumption of EO1 Strategy (IMP1)• Technological Deepening Efforts

- APITD - 1990; HRDF - 1992; MTDC/MIGHT - 1993; IMP2 - 1996; MSC/MDC - 1997

• 1998-2002 - Strategic focus on sequencing relaxed

Table 1: Foreign Fixed Assets Ownership in Malaysian Manufacturing, 1968-98 (%)

1968 1975 1980 1985 1990 1993 1998 Food 74 55 32 25 30 33 27 Beverages and tobacco 93 79 76 67 62 58 69 Textiles 52 63 54 48 61 64 76 Leather 17 48 48 54 59 57 61 Wood 15 8 13 9 19 36 27 Furniture and fixture 50 61 31 19 45 45 25 Paper, printing, publishing Na 16 10 20 14 13 10 Chemicals 53 63 53 16 24 25 46 Petroleum and coal 78 79 78 37 44 50 34 Rubber 14 42 46 42 55 51 50 Plastic na na 12 13 27 46 38 Non-metal mineral 57 52 19 32 33 39 34 Basic metal 49 42 35 32 17 33 30 Fabricated metal 66 59 26 23 30 56 36 Machinery 74 51 42 35 53 65 66 Electric/electronics 70 84 80 73 89 91 83 Transport equipment Na 51 32 15 25 35 29 Other manufacturing 60 69 57 53 69 81 56 Manufacturing 61 52 39 33 42 50 47

Source: Rasiah (1995: 111); MIDA, unpublished data.

4 FDI-DRIVEN MANUFACTURED EXPORTS

• Political stability, good basic infrastructure, literate reserve labour and strong government incentives and support attracted FDI

• TNC-driven electronics exports• External market penetration, foreign exchange,

employment• Creation of experiential and tacit knowledge and

the evolution of differentiation and division of labour in Penang. Truncated operations in KL, Selangor, N Sembilan, Melaka and Johor restricted differentiation and division of labour.

4 FDI-DRIVEN MANUFACTURED EXPORTS

• Transition from importing to adaptation and process R&D.

• High-tech deepening efforts from 1990 – APITD, HRDF, MTDC, MIGHT, IMP2 and MSC failed to take non-resource product firms to the paths achieved by Korea and Taiwan. Lack of human capital strategies constrained movement of firms to use higher R&D activities. R&D-intensity of firms much lower than in Korea and Taiwan (ethnic restructuring hampered human capital supply).

• Regional market customization in some firms

5 DOMESTIC-DRIVEN MANUFACTURED EXPORTS

• Palm oil

- Against advice from foreign experts, government introduced subsidies and promoted PPO from CPO.

- World’s largest exporter of PPO and firms operate at the technology frontier

- Expansion into kernel oil

- Extensive focus on diversification into oleo-chemicals

- Model for other countries

• Automobiles- Heavy reliance on foreign technology- Domestic technology especially since acquisition of Lotus.- Protection and domestic rents still prime source of profits- Bilateral trading arrangement prime focus of exports- Facing constraints of liberalization from TRIMs and AFTA process.

Table 3: Manufacturing Export Structure, Malaysia, 1968-97

xi/xi 68 73 79 85 90 97

Food 0.175 0.196 0.123 0.127 0.081 0.023 Beverage and Tobacco 0.009 0.029 0.025 0.002 0.002 0.005 Textile and garment 0.014 0.061 0.072 0.1 0.105 0.048 Wood 0.034 0.097 0.043 0.028 0.031 0.041 Chemical 0.03 0.052 0.034 0.033 0.031 0.051 Rubber 0.009 0.017 0.016 0.009 0.012 0.025 Non-metal mineral 0.008 0.011 0.01 0.011 0.018 0.011 Iron and steel 0.005 0.019 0.015 0.01 0.014 0.010 Metals 0.658 0.433 0.307 0.14 0.042 0.036 Machinery 0.025 0.038 0.037 0.051 0.086 0.042 Electrical machinery 0.007 0.021 0.284 0.446 0.534 0.710 Transport equipment 0.026 0.027 0.033 0.043 0.045 0.031

Source: Computed from Malaysia, External Trade Statistics, 1969; 1974 1980; 1986; 1991; 1998

Table 2: Technological intensity of Electronics Firms, Malaysia, Taiwan and Korea,2000

Malaysia Taiwan t Malaysia Korea tAll 0.310 0.687 -8.668* 0.310 0.635 -6.361*Foreign 0.309 0.629 -5.444 0.309 0.665 -5.302*

SI

Local 0.317 0.718 -4.856* 0.317 0.619 -3.008*All 0.470 0.386 2.016** 0.470 0.314 4.016*Foreign 0.475 0.319 2.829* 0.475 0.361 2.072**

HR

Local 0.454 0.421 0.408 0.453 0.288 2.343**All 0.487 0.447 1.037 0.447 0.358 3.083*Foreign 0.479 0.452 0.507 0.479 0.358 2.507**

PT

Local 0.333 0.505 -2.543* 0.333 0.357 -0.747All 0.088 0.546 -10.737* 0.088 0.212 -4.265*Foreign 0.103 0.423 -6.928* 0.103 0.225 -2.807*

RD

Local 0.033 0.610 -6.584* 0.033 0.205 -3.583*Note: Samples include 46 ( 36 foreign and 10 local) firms from Malaysia, 38 (13 foreign and 25 local)firms in Taiwan and 43 (15 foreign and 28 local) firms in Korea; * and ** refer to t statistics significant at1% and 5% respectively; SI, HR, PT and RD refer to skills-intensity, and human resource, processtechnology and R&D capabilities respectively. See Rasiah (2004) for the computation of these variables.

Source: Computed from ADB (2001-2002) and UNU-INTECH (2002) survey using Stata 7.0 Packaged.

Table 4: Manufacturing Trade Ratios, Malaysia, 1968-97

(xi-mi)/ (xi+mi)

68 73 79 85 90 97

Food -0.562 -0.358 -0.274 -0.308 -0.163 -0.454

Beverage and Tobacco -0.752 -0.106 0.15 -0.8 -0.509 0.061

Textile and garment -0.897 -0.482 -0.058 0.106 0.159 0.233

Wood 0.778 0.935 0.913 0.874 0.932 0.848

Chemical -0.736 -0.628 -0.71 -0.721 -0.672 -0.040

Rubber -0.149 0.23 0.47 0.113 0.342 0.754

Non-metal mineral -0.665 -0.507 -0.335 -0.518 -0.038 -0.213

Iron and steel -0.91 -0.78 -0.759 -0.826 -0.738 -0.709

Metals 0.707 0.627 0.57 0.252 -0.307 -0.147

Machinery -0.824 -0.778 -0.706 -0.746 -0.573 0.023

Electrical machinery -0.877 -0.723 -0.031 -0.037 0.1 -0.026

Transport equipment -0.808 -0.813 -0.652 -0.624 -0.595 -0.561

mi/(yi+mi-xi)

Food 0.623 0.51 0.227 0.234 0.277 0.220

Beverage and Tobacco 0.221 0.188 0.17 0.12 0.141 0.177

Textile and garment 0.789 0.416 0.41 0.635 0.813 0.608

Wood 0.025 0.011 0.01 0.014 0.012 0.081

Chemical 0.03 0.023 0.017 0.006 0.009 0.052

Rubber 0.429 0.225 0.491 0.586 0.457 0.087

Non-metal mineral 0.129 0.094 0.068 0.052 0.093 0.280

Iron and steel 0.616 0.259 0.306 0.251 0.198 0.532

Metals 0.569 0.357 0.802 0.669 0.89 0.728

Machinery 0.82 0.64 0.685 0.948 0.806 0.729

Electrical machinery 0.873 0.647 0.669 0.987 0.902 0.827

Transport equipment 0.869 0.822 0.81 0.839 0.834 0.594

xi/yi

68 73 79 85 90 97

Food 0.316 0.329 0.143 0.139 0.216 0.096 Beverage and Tobacco 0.039 0.157 0.217 0.015 0.051 0.196 Textile and garment 0.17 0.199 0.382 0.683 0.857 0.714 Wood 0.17 0.257 0.176 0.17 0.254 0.516 Chemical 0.179 0.275 0.235 0.098 0.196 0.048 Rubber 0.017 0.032 0.055 0.041 0.094 0.406 Non-metal mineral 0.088 0.096 0.114 0.084 0.246 0.201 Iron and steel 0.167 0.167 0.24 0.084 0.15 0.162 Metals 0.889 0.612 0.919 0.73 0.604 0.419 Machinery 0.506 0.408 0.488 0.917 0.819 0.373 Electrical machinery 0.16 0.11 0.728 0.99 0.94 0.819 Transport equipment 0.393 0.287 0.398 0.394 0.419 0.292

Source: Computed from Malaysia, External Trade Statistics, 1969; 1974 1980; 1986; 1991; 1998; Malaysia, Industrial Surveys, 1969; 1974 1980; 1986; 1991; 1998

Figur e 2: C ompos ition of V alue A dded, E lec tr ic and E lec tr onic s , M alays ia, 1990- 2003

0

50000

100000

150000

200000

250000

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

Year

RM M

illion

Semiconductors Electronic equipment and parts Consumer electronics Industrial and commercial electronics Electronic Industry mach & equip House electronics

Table 9: World Palm Oil and Related Production, 1990-2010 (‘000 tonnes)

Palm Oil ProductionMalaysia Indonesia Nigeria I. Coast Colombia Thailand PNG Ecuador Others Total

1990 6095 2413 580 270 226 226 145 120 878 109531999 10553 6060 720 282 500 410 270 220 1262 20277

2010* 14708 12607 897 545 564 682 373 355 1743 32474

Palm Kernel Oil ProductionMalaysia Indonesia Nigeria I. Coast Colombia Thailand PNG Others Total

1990 827 229 146 24 24 21 12 165 14481999 1339 633 190 30 40 39 29 202 2502

2010* 1824 1563 111 68 70 85 46 216 3983Note: * - Forecasted.

Source: MPOB, 2000

6 POLICY IMPLICATIONS• Successful FDI inflows and expansion in

especially FDI-driven electronics, and domestic driven PPO.

• Strategic FDI-targeting policy• Cumulative dimension of learning and innovation;

FDI’s direct and indirect role in the processes • Dynamics of industrial policy: Initial structure and

specific strategies tied to development policy objectives and options available - small domestic market drove FDI toward reliance on external markets; Export diversification to ensure sustainable financing of infrastructure build up.

6 POLICY IMPLICATIONS

• Economic restructuring policies avoided collision with FDI strategies (except for 1980-85) and hence continued to keep strong FDI presence.

• Weak human capital development policy constrained transition to R&D activities in non-resource based firms – partly constrained by ethnic restructuring policies.

• While the ICA favourably exempted FDI, it constrained both direct support of independent non-Malay firms as well as the supply of human capital.

SELECTED RELATED AUTHOR’S PAPERS

• 1994 “Flexible Production Systems and Local Machine Tool Subcontracting: Electronics Component Transnationals", Cambridge Journal of Economics, 18(3): 79-98.

• 1995 Foreign Capital and Industrialization in Malaysia, Basingstoke: Macmillan.

• 1996 “Institutions and Innovations: Moving Towards the Technology Frontier in the Electronics Industry in Malaysia”, Journal of Industry Studies, 3(2): 79-102.

• 1996 "Manufacturing as Engine of Growth and Industrialization in Malaysia", Managerial Finance, 22(6).

• 1996 "Changing Organisation of Work in Malaysia's Electronics Industry", Asia Pacific Viewpoint, 37(1).

SELECTED RELATED AUTHOR’S PAPERS

• 1997, "Class. Ethnicity and Economic Development in Malaysia", Rodan G, Robison R. and Hewisen, K. (eds), Political Economy of Southeast Asia, Sydney: Oxford University Press .

• 1999 "Malaysia's National Innovation System", Jomo K.S. and Felker G. (eds), Technology, Competitiveness and the State, London: Routledge.

• 1999 (edited with Jomo K.S and Greg Felker). (eds), Industrial Technology Development in Malaysia: Firm and Industry Studies, London: Routledge

• 2000 (with Osman R.H. and Rokiah Alavi) “Changing Dimensions of Malaysian Trade”, International Journal of Business and Society, 1(1): 1-35.

• 2001 “Labour and Work Organisation in Malaysia’s Proton”, Hutchison J. and Brown A. (eds), Organising Labour in Globalising Asia, London: Routledge.

SELECTED RELATED AUTHOR’S PAPERS

• 2001 (with Anita Doraisamy) “Incentives and Industrialisation in Malaysia, Jomo K.S. (ed), Southeast Asia and Industrialization, Basingstoke: Pelgrave.

• 2001 “Southeast Asia’s Ersatz Miracle” Jomo K.S. (eds), Southeast Asia and Industrialization, Basingstoke: Pelgrave.

• 2001 “Politics, Institutions and Flexibility: Microelectronics Transnationals and Machine Tool Linkages in Malaysia”, Deyo F.C, R.F. Doner and Hershberg E. (eds), Economic Governance and the Challenge of Flexibility in East Asia, Boston: Little and Rowland.

• 2001 (with Ishak Shari) “Market, Government and Malaysia’s New Economic Policy”, Cambridge Journal of Economics, 25(1): 57-78.

• 2002 “Government-Business Coordination and Small Enterprise Performance in the Machine Tools Sector in Malaysia”, Small Business Economics, 18(1-3): 177-195.

SELECTED RELATED AUTHOR’S PAPERS

• 2002 “Systemic Coordination and the Knowledge Economy: Human Capital Development in Malaysia’s MNC-driven Electronics Clusters”, Transnational Corporations, 11(3): 89-132.

• 2003 “Industrial Technology Transition in Malaysia” Sanjaya Lall and Shujiro Urata (eds), Technology Development in East Asia, Cheltenham: Edward Elgar.

• 2003 (with Michael Best) Malaysian Electronics at the Crossroads, Technical working paper, Vienna: UNIDO.

• 2004 Foreign Firms, Technological Capabilities and Economic Performance: Evidence from Africa, Asia and Latin America, London: Edward Elgar.