This document discusses findings from research on the sources of Malaysia's national income across four chapters: 1) Domestic demand contributes significantly to GDP but imports are overestimated, underestimating trade's contribution. 2) Policy decisions based on single multipliers can misrepresent impacts; appropriate multipliers depend on goals. Key sectors consistently contribute high value-added. 3) Manufacturing zones contribute substantially to exports but with higher foreign content, lowering domestic value-added. 4) Small and medium enterprises are highly linked to but not integrated with large sectors; they produce with higher value-added intensity than larger sectors.

1. WHERE DOES OUR
NATIONAL INCOME
COME FROM?
CHAPTER WHAT PEOPLE BELIEVE WHAT THE FINDINGS TELL
1. Contribution Of International
Trade to the Economy
• Domestic demand contributes extensively to the Malaysian GDP.
• Misallocation of import components resulting in the overestimation of domestic demand contribution and
underestimation of net trade contribution to GDP.
2. Interlinkages in the Malaysian
Economy
• Policy decisions are made based on the a single multiplier measure.
• Choice of appropriate multiplier to estimate economic policy impact depends on the outcome desired: for
focus on growth, use the size-adjusted value-added multiplier; for focus on return on investment, use the
conventional value added multiplier.
• Malaysia is a diversified economy.
• Malaysia is not a diversified economy. We depends on Oils and Fats, Wholesale and Retail Trade, and
Transport across four decades.
3. Domestic and Foreign Value-
added in Free Zones
• High spillover effects from the operation of manufacturing firms in
FIZs to other domestic firms.
• Lower spillover effects from manufacturing firms in FIZs to firms located outside FIZs due to special
incentives such as duty-free imports.
• High value added creation by manufacturing firms in FIZs.
• Domestic value added is lower for manufacturing firms located inside FIZs due to the role of processing
trade in FIZs.
4. The Role of Small and Medium
Enterprises
• The impacts of final demand growth equally trickle down to SMEs.
• The impacts does not trickle down equally to SMEs because of weak industrial network between SMEs and
large firms.
• SMEs are less capable of penetrating international markets.
• Output of medium firms are primarily produced for export market rather than used for domestic
consumption.
INTERNATIONAL
TRADE
DOMESTIC
PRODUCTION
FREE ZONES SMEs
1
3
2
4
Sector A Sector B
Sector C Sector D
Domestic Economy
Imports
Capital
Labor
Tax
Exports
Domestic
Demand
Input
Output
SOURCE OF NATIONAL INCOME

2. • Both conventional and import-adjusted approach provide
similar findings for total GDP from 2010-2014. However, the
percentage contribution of domestic demand component to
total GDP is vastly different.
• The conventional approach tends to overestimate the
contribution of domestic demand and underestimate the
contribution of net trade to GDP.
• There are several sectors that have consistently appeared in the
top 20 size-adjusted value-added multipliers based on the
analysis on 1983, 1991, 2000 and 2010 IO tables (see rows
Accommodation and Restaurant to Wholesale and Retail
Trade).
• There are sectors that have started to become prominent in
recent decades (see rows Industrial Chemicals to Insurance).
CHAPTER 1 - Contribution of International Trade to the Economy
CHAPTER 2 - Interlinkages in the Malaysian Economy
Contribution of domestic demand and export to GDP, 2010– 2014
(percentage of GDP)
Top 20 sectors with the highest size-adjusted value added multiplier from the
1983, 1991, 2000 and 2010 IO tables

3. • In 2010, activities within FIZs contributed approximately 18%
(RM85b) to the total Malaysian manufacturing exports.
However, foreign content for the FIZ Manufacturing sector is
found to be higher as compared to domestic Manufacturing
sector.
• Hence, domestic value-added or export earnings generated
from exports from FIZs is smaller than the manufacturing firms
operating under the non-FIZ regime.
• There is a loose connection between SMEs and large-sized
sectors in the production chains. SMEs are found to be highly
linked to large-sized sectors, but large-sized sectors are less
integrated with SMEs.
• Additionally, the production of small-sized sectors is associated
with higher value-added intensity. Of the total output produced
by small-sized sectors, 50.6% (RM142.1b) is value-added,
compared to 30.1% (RM63.9b) and 30.7% (RM401.1b) by
medium and large-sized sectors respectively.
CHAPTER 3 - Domestic and Foreign Value-added in Free Zones
CHAPTER 4 - The Role of Small and Medium Enterprises
Domestic value-added and foreign content in exports, 2010 (%)
Production linkages between small, medium and large-sized sectors and the
interactions with import market, 2010