This is a compilation of resources for a guest lecture/discussion session for SPA 507 Issues in Malaysian Economy, in MPA programme, School of Social Science.

1. SPA 507 Issues in
Malaysian Economy: FDI &
Manufacturing Sector
Compiled by Dr. Radziah Adam, PPPJJ
1

2. Current scenario
2
http://www.miti.gov.my/cms/documentstorage/com.tms.cms.document.Document_8fe91317-c0a8156f-4b8f2f00-b41b196b/MITI%20Weekly%20Bulletin%20Volume%20280%20-
%204%20March%202014.pdf

3. Global FDI
inflows
3
Developing economies again
attracted more FDI than
developed countries in 2013. With
historically high levels of FDI
inflows recorded in Asia, Latin
America and the Caribbean, the
developing world attracted
US$759 billion of global FDI
inflows (52%) in 2013, slightly
more (6%) than the US$715
billion achieved the year before
but 32 per cent more than the FDI
inflows into developed economies
(US$576 billion).
http://www.mida.gov.my/env3/uploads/PerformanceReport/2013/IPR2013

4. Global FDI
inflows
4

5. Current scenario
5
http://www.miti.gov.my/cms/documentstorage/com.tms.cms.document.Document_8fe91317-c0a8156f-4b8f2f00-b41b196b/MITI%20Weekly%20Bulletin%20Volume%20280%20-
%204%20March%202014.pdf

6. Current scenario
6

7. Current scenario
7

8. Current scenario
8

9. Current scenario
9

10. Learning
Outcomes:
To review the pattern & strategy of
Malaysia’s industrialization with
emphasize on the role of the
government in manufacturing sector &
FDI:
• What, Why, Where from, Where to &
Determinants - of FDI
• Stages of Industrialization
10

11. What? FDI
• a category of international investment
that reflects the objective of a resident
in one economy (the direct investor)
obtaining a lasting interest in an
enterprise resident in another economy
(the direct investment enterprise);
≥10% of the ordinary shares @ voting
power (IMF, 1993)
11
http://economics.dstcentre.com/The%20Changing%20Role%20Of%20FDI%20In%20The%20Malaysian%20Economy%20By%20Azmi%20Shahrin.pdf

12. Why? Role of FDI
in Malaysian Economy
1. to generate economic growth by
increasing domestic capital formation
12

13. Why? Role of FDI
in Malaysian Economy
• “FDI has been an important source of
economic growth for Malaysia, bringing in
capital investment, technology &
management knowledge needed for
economic growth.” Using time series data
(1970-2005), there is significant
relationship between economic growth &
FDI inflows in Malaysia (Mun, Lin, & Man,
2008).
13

14. Why? Role of FDI
in Malaysian Economy
(Karimi & Yusop, 2009):
• “No strong evidence of a bi-
directional causality & long-run
relationship between FDI &
economic growth (1970-2005). This
suggests that FDI has indirect effect
on economic growth in Malaysia.”
14

15. Crowding Out?
Do public investment and FDI crowd in or
crowd out private domestic investment in
Malaysia?
• Using multivariate cointegration
techniques, both public investment & FDI
are found to be complementary to, rather
than competing with private domestic
investment (PDI). (Ang, 2009)
15

16. Why? Role of FDI
in Malaysian Economy
2. to fuel export growth
16

17. Why? Role of FDI
in Malaysian Economy
(Goh, Wong, & Tham, 2013):
“findings reveal that inward FDI
conforms to the observed pattern of a
complementary relationship between
FDI and trade”
17

18. Why? Role of FDI
in Malaysian Economy
3. to facilitate the transfer of new
technology
“FDI provides the fastest and most effective
way to deploy new technologies in
developing host countries (UNCTAD 2000)”
• indirectly through licensing, reverse
engineering, adaptation & eventually
innovation by MNCs
18

19. 19
APAKAH
TEKNOLOGI?
• Def: Pengetahuan teknik
untuk mengeluarkan
output dalam perusahaan.
Mengandungi komponen: Fizikal
(mesin) & Manusia (pengetahuan)
• PENGUKURAN
TEKNOLOGI
Jumlah daya pengeluaran
faktor (Total Factor
Productivity, TFP)
mengukur sumbangan
teknologi
• Teknologi vs. Teknik?
• TEKNOLOGI
TERKANDUNG
(embedded) Teknologi
yang terdapat dalam
modal @ kelengkapan
jentera
ataupun buruh
• TEKNOLOGI TERPISAH
Teknologi yang menjadi
sisa dan menjelaskan
pertumbuhan output bukan
disebabkan oleh modal @
buruh.

20. 20
Q = T f( K, L ); fungsi pengeluaran Cobb Douglas
Qt = TtKt
βLt
1-β, dgn Tt= T0eαt;
Qt = T0eαt Kt
βLt
1-β
Q = output/keluaran;
K= modal; β = keanjalan output modal
L= buruh; 1-β = keanjalan output buruh
T= teknologi; menentukan anjakan fungsi pengeluaran
SUMBANGAN TEKNOLOGI:
PERTUMBUHAN EKONOMI

21. 21
Daya Pengeluaran
Faktor Keseluruhan
(TFP)
Αlpha (α) adalah terpisah & eksogen; bukan
berpunca drp input modal atau buruh. Sebaliknya,
berpunca drp kecekapan-X, kaedah yang
lebih baik, organisasi yang lebih baik.
Jumlah daya pengeluaran faktor (TFP)
= α, nisbah keluaran benar & faktor benar
= pertumbuhan output yg tidak boleh
dijelaskan oleh pertambahan jumlah input

22. FDI Spillovers
22

23. Why? Role of FDI
in Malaysian Economy
23
http://competitiveness.in/wp-content/uploads/2012/02/FDI-MNEs_Mind_Map.jpg

24. Why? Role of FDI
in Malaysian Economy
4. lead to higher employment through the
expansion of the economy & job creation
24

25. Why? Role of FDI
in Malaysian Economy
5. as the agent of transformation in the
Malaysian economy
25

26. Why? Role of FDI
in Malaysian Economy
(Karim & Ahmad, 2009): Poverty
Reduction
“The empirical (data for 1984-2005)
results show that the FDI coefficient has
a statistically significant negative sign,
suggesting that the poverty incidence
could be reduced by increasing FDI
inflows into the (13+1) Malaysian states.”
26

27. Why? Role of FDI
in Malaysian Economy
FDI, Growth & the Environment: Impact
on Quality of Life in Malaysia
• benefits and costs of FDI?
• “The results indicated that environmental
Kuznets curve exists and foreign direct
investment increases environmental
degradation.” (Hitam & Borhan, 2012)
27

28. Where from?
Sources of FDI
28

29. Where from?
Sources of FDI
29

30. Where to?
Sub-sectors
30

31. Where to?
Sub-sectors
31

32. Where to?
ASEAN competition
32

33. Where to?
ASEAN competition
33

34. Where to?
ASEAN competition
34

35. Where to?
NEXT SECTOR
35
“Studies have also shown that the services sector of
developed countries contributed as much as 70% of GDP.
The Malaysian Services sector currently accounts for about
half of GDP. Thus there is clearly a potential for foreign
investment into the Malaysian services sector.”

36. Socialism &
Market
Failures
Role of Govt.
36
Capitalism &
Government
Failures Increasing role of Govt.
Different views on the role of government in industrialization:
“The market oriented economy & the government's strategic
industrial policy that maintain a business environment with
opportunities for growth & profits have made Malaysia a
highly competitive manufacturing & export base.” (Mun, Lin,
& Man, 2008)

37. Timeline:
37
http://www.dipity.com/Radziah/Malaysia-Industrial-Policies/

38. Industrialization
in Malaysia
Stages Strategies
1867-1957; colonial rule export of agricultural products and minerals,
mainly rubber & tin, under free market
a. 1957 (independence) -
late 1960s
import substitution industrialization (ISI)
b. Early 1970s (10 years) new focus on export oriented
industrialization (EOI); BUT limited linkages
between foreign & domestic firms
c. 1981 - 1986 second round of ISI
d. 1987 – 1997 (pre-crisis) return to EOI
e. from 2006 onwards move towards global competitiveness
38

39. Industrialization
in Malaysia
39Source: Rokiah Alavi, 1996, Industrialisation in Malaysia: Import Substitution and Infant Industry Performance, Routledge.

40. Industrialization:
Stage a. ISI
• to encourage foreign investors to set up
production, assembly & packaging plants in
the country to supply finished goods
previously imported from abroad
• the government directly & indirectly
subsidized the establishment of new
factories & protected the domestic market
(Jomo, 1993)
40

41. Industrialization:
Stage I - ISI
• government focused on the development of
infrastructure & the rural sector, while
industrialization was left to the private sector
• enacted the Pioneer Industries (Relief from
Income Tax) Ordinance (PIO) of 1958, &
also created the Malaysian Industrial
Development Finance Corporation, which
was responsible for providing investment
capital & for the development of industrial
estates
41

42. Industrialization:
Stage I - ISI
• ISI helped to diversify the economy, to
reduce excessive dependency on
imported consumer goods & to utilize
some domestic natural resources.
• Created opportunities for employment &
contributed to economic growth (Alavi,
1996).
42

43. a. ISI (1957-1968)
• Substitute imported consumer goods with local production
(to reduce import leakage & generate employment)
• Use of fiscal incentives (subsidies & taxes) as industrial
promotion tools; provision of extensive infrastructure
(industrial estates, power & communication facilities)
Tariff protection not used extensively(1958-mid 1960s) due
to:
• Govt feared deterring imports, which was a major source
of revenue
• Rubber and tin producers were worried that increase
import duties would increase costs and pressure wage
increases
43

44. a. ISI (1957-1968)
• Contribution of manufacturing to GDP increased from 8%
(1957) to 9% (1960-1965) but rose to 12% (1969)
• Growth rate of manufacturing 10.2% in 1960s
44

45. SETBACKS OF ISI
• Dependence on import of capital & intermediate goods
aggravated BOP
• Linkages with rest of the economy was weak & limited
• Did not create enough employment opportunities &
unable to reduce unemployment rate substantially.
Employment grew slowly because screw driver
industries only introduced final touches to consumer
goods production to enjoy the incentives.
• Small domestic market. No pressure to seek foreign
markets & unable to compete in overseas markets. In
1970, manufacturing only accounted for 12% of overall
exports.
45

46. Industrialization:
Stage b. EOI
• outward looking export orientation to revive manufacturing
growth & employment absorption
• 1971: FTZs were established. Duty free import parts &
components and export products without customs formalities
• Rising competition & production costs in DCs were driving
foreign assembly & processing operations away to LDCs
Cheap & docile labour important – labour regulations
tightened to favour transnational operation (TU not allowed in
electronics industry until 1989 & thereafter only in-house
unions were permitted)
• 75% of FTZ are foreign-owned & industries involved are
mostly EO industries, e.g. E&E products, textiles, food
manufacturing
46

47. Industrialization:
Stage b. EOI
• 1975: Industrial Coordination Act to provide
coordination & orderly development of manufacturing
activities. To encourage joint venture projects to
increase Malaysian participation
• Although protectionist policies were blamed for
inefficiency& lack of competitiveness of IS industries,
they were further strengthened during EO phase to
enable industries to develop and meet foreign
competition
47

48. SETBACKS OF
EOI
• Firms in the FTZ could import parts & components duty
free - encouraged firms to use imported parts
• By the end of 1970s govt recognised that the export of
manufactured good was limited to a narrow range of
products and there was minimum integration between IS
and EO sectors.
• Absence of linkage between domestic economy and FTZ
• Policy discourages FTZ firms from making downstream
investment since these investments would not enjoy the
same incentives as those in FTZ
48

49. Industrialization:
Stage c. ISI2
• Heavy industries established (inspired by success of
Japan, South Korea)
• To broaden the industrial sector; promote greater
linkages with domestic economy; to provided basis for
acquisition and development of indigenous technology.
• Active government participation in country’s industrial
development (PROTON and Perwaja Steel)
• Promoted industries (Proton, Perwaja Steel, Kedah
Cement) by use of tariff and quotas, duty exemptions,
other investment incentives, e.g. pioneer status
49

50. SETBACKS of
ISI2
• Poor performance in 1980s due to economic slowdown & finally
recession in 1985. Falling commodity price, appreciation of yen
& rise in yen-denominated debt service, slowdown in electronics
export, rise in imports (infrastructural & heavy industry items)
aggravated current account balance
• Recession in 1985/86 & Heavy Industries Corporation of
Malaysia (HICOM) encountered problems (excess capacity,
market glut, heavy debts).
• The promoted heavy industries during IS2 phase- high-capital
intensity, long gestation period, substantial economies of scale.
• Costs of production & management were high relative to
international competitors. The markets were small
• Lack of linkages with other sectors
50

51. Industrialization:
Stage d. EOI2
• Initial failure of IS2 and recession of 1980s forced govt to
renew emphasis on foreign capital and EO from 1986 to
generate investment and employment.
• Policies concentrated on providing incentives and
infrastructure development.
• Processing of approvals simplified
• Tax and tariff holidays
• Exporters allowed greater access to subsidized interest
(4%) credit prior to or upon shipment of products
51

52. Determinants of
FDI inflow
(Ang, 2008)
• the results suggest that increases in
the level of financial development,
infrastructure development, & trade
openness promote FDI
• higher statutory corporate tax rate &
appreciation of the real exchange rate
appear to discourage FDI inflows.
52

53. Determinants of
FDI inflow
(Fakhreddin, Nezakati, & Vaighan, 2011):
• “positive & significant effect of (a)
domestic credit to private sector
provided by banking system & (b)
development expenditure of
government on FDI.”
• “negative & significant effect of (c)
corruption on FDI's growth”
53

54. Determinants of
FDI inflow
(Choong & Lam, 2010): “Using Granger
causality test, we find that there exist
unidirectional causality from real GDP of
both Malaysia & China (larger potential
demand for their products), degree of
openness (more liberalized economic
reforms) & literacy rate (human capital
development) to FDI inflow.”
54

55. Determinants of
FDI inflow (by industry)
to ASEAN (Indonesia, Malaysia, Philippines, Thailand, and
Vietnam):
“results show that GDP of the host & home
countries, GDP per capita of the host & home
countries, industry imports from home
country, industry exports to home country,
industry tariff rates, & industry output levels
all have a positive effect on FDI. Distance,
wage & education have a negative effect on
FDI.” (Changwatchai, 2010)
55

56. 56

57. 57
http://www.miti.gov.my/cms/documentstorage/com.tms.cms.document.Document_77a6edc8-c0a8156f-4b8f2f00-
d53a67ce/Malaysia%20Investment%20Performance%20Report%202013.pdf

58. 58

59. 59

60. Food for thought?
60

61. Learning
Outcomes:
To review the pattern & strategy of
Malaysia’s industrialization with
emphasize on the role of the
government in manufacturing sector &
FDI
• What, Why, Where from, Where to &
Determinants - of FDI
• Stages of Industrialization
61

62. References:
Abdul-Rahim, A.S., The Changing Role Of FDI In The Malaysian Economy - An Assessment, Retrieved from
http://economics.dstcentre.com/The%20Contributions%20Of%20Foreign%20Direct%20Investments%20In%20The%20Development%20Of%20Mal
aysia%20by%20Azmi%20Shahrin.pdf
Fakhreddin, F., Nezakati, H., & Vaighan, B. M. (2011). The determinants of FDI inflow in manufacturing sector of Malaysia. Journal for International
Business and Entrepreneurship Development, 5(4), 299–314. doi:http://dx.doi.org/10.1504/JIBED.2011.042386
Goh, S. K., Wong, K. N., & Tham, S. Y. (2013). Trade linkages of inward and outward FDI: Evidence from Malaysia. Economic Modelling, 35, 224–
230.
Hitam, M. Bin, & Borhan, H. B. (2012). FDI, Growth and the Environment: Impact on Quality of Life in Malaysia. Procedia - Social and Behavioral
Sciences. doi:10.1016/j.sbspro.2012.08.038
Karim, N., & Ahmad, S. (2009). Foreign Direct Investment: Key to Poverty Reduction in Malaysia. IUP Journal of Applied Economics, 8(5), 55–65.
Retrieved from
http://search.ebscohost.com/login.aspx?direct=true&profile=ehost&scope=site&authtype=crawler&jrnl=09726861&AN=44622926&h=B4jE4%2B0m3
RQ2JZhdrw6q7cZbu8UkFCEIRGXseuRitrx2dWK0V9%2Blsu8JaFhcEZpxnoLufny19xTYuQy3tVbtSA%3D%3D&crl=c
Karimi, M. S., & Yusop, Z. (2009). FDI and Economic Growth in Malaysia. Munich Personal RePEc Archive, (14999). Retrieved from
http://mpra.ub.uni-muenchen.de/14999/
Khalifah, N. A., & Adam, R. (2009). Productivity Spillovers from FDI in Malaysian Manufacturing: Evidence from Micro-panel Data. Asian Economic
Journal, 23(2), 143–167. doi:10.1111/j.1467-8381.2009.02011.x
Kinuthia, B. K. (2011). Markets vs. government foreign direct investment and industrialization in Malaysia . Mercados O Gobierno: Inversión
Extranjera Directa E Industrialización En Malasia, 20(2), 409–443. Retrieved from http://www.scopus.com/inward/record.url?eid=2-s2.0-
83455200093&partnerID=40&md5=32519a60d72a484ab87d47f7cc6b2563
Mun, H.W., Lin, T.K. & Man, Y.K. (2008). FDI and Economic Growth Relationship: An Empirical Study on Malaysia. International Business Research,
1, 11–18.
Rajah Rasiah, FDI, Government Policy And Industrial Transformation In Malaysia , UNU-INTECH
H. Osman-Rani, H. & Mohd. Haplah Piei, Malaysia's Industrialisation and Trade: Issues, Options and Strategies, Journal Ekonomi Malaysia, 21 & 22
(1990) 13-44. Retrieved from http://www.ukm.my/fep/jem/pdf/1990-21-22/jeko_21-1.pdf
Rokiah Alavi, 1996, Industrialisation in Malaysia: Import Substitution and Infant Industry Performance, Routledge.
62