SEU 228 Malaysian Economy - Manufacturing, FDI & Sustainability
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Transcript of SEU 228 Malaysian Economy - Manufacturing, FDI & Sustainability
SEU 228 Ekonomi Malaysia: Sektor Pembuatan, FDI &
Kelestarian
Compiled by Dr. Radziah Adam
Guest lecture on April 16th, 2015, DK Z
Learning Outcomes:
At the end of this session, learner(s) will be able:
a) To explain the link between industrialization and
contributions of the manufacturing sector as well as
FDI in Malaysia
b) To review the pattern & strategy of Malaysia’s
industrialization with emphasize on the role of the
government & FDI in manufacturing sector
c) To explain the concept of sustainable manufacturing
What is industrialization?
• Industrial sector is defined to include
mining, manufacturing, construction,
utilities and transportation.
Do watch: The Industrial Revolution: History of Industrialisationhttps://youtu.be/4zlkB0sfDUY?list=PLKGe4uoUdoh8RbyB-lABJLqUPQrmM2_Kx
Stages of Industrialization & FDI
http://www.grips.ac.jp/teacher/oono/hp/course/lec07_industry/stages.gif
WHAT IS MANUFACTURING?
INPUT
• K• L
OUTPUT
• Final @ consumer goods
• Intermediate @industrial goods
Creation of new commodities @ in value addition
Manufacturing & processing of items
Physical transformation
MALAYSIA STANDARD INDUSTRIAL CLASSIFICATION (MSIC) 2000
Primary Sector
Secondary Sector
Tertiary @ Services Sector
MALAYSIA STANDARD INDUSTRIAL CLASSIFICATION (MSIC) 2000
http://statistics.gov.my/dosm/uploads/files/4_Portal%20Content/3_Methods%20%26%20Classifications/3_Codes%20%26%20Classifications/3_Economic%20Classifications/msic2000.pdf
Sectoral Shares of GDP (est. 2014)
Agriculture
Industry
Services
https://www.cia.gov/Library/publications/the-world-factbook/fields/2012.html
Agriculture 9.3
Industry 34.7
Services 56
Malaysia’s GDP driven mainly by services, manufacturing sectorsRead more:http://www.theborneopost.com/2012/04/20/malaysias-gdp-driven-mainly-by-services-manufacturing-sectors/#ixzz3XRRhrd2g
Foreign vs. Domestic: Sectoral Investment, 2013
Source: http://www.mida.gov.my/env3/uploads/PerformanceReport/2013/IPR2013
Foreign vs. Domestic: Sources of Manufacturing Investment, 2013-2012
New investment in Manufacturing Industries, 2013
Export-Oriented Manufacturing Industries, 2013
Source of FDI in Manufacturing, 2013
http://www.miti.gov.my/cms/documentstorage/com.tms.cms.document.Document_77a6edc8-c0a8156f-4b8f2f00-d53a67ce/Malaysia%20Investment%20Performance%20Report%202013.pdf
Current scenario
19
Stages of Industrialization
Timeline:
21http://www.dipity.com/Radziah/Malaysia-Industrial-Policies/
Industrialization in Malaysia
Stages Strategies1867-1957; 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 competitiveness22
Industrialization in Malaysia
23Source: Rokiah Alavi, 1996, Industrialisation in Malaysia: Import Substitution and Infant Industry Performance, Routledge.
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)
24
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
25
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).
26
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
27
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
28
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.
29
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 manufacturing30
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
31
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
32
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
33
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 sectors34
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
35
36
What’s next? K-economy
37http://www.miti.gov.my/cms/documentstorage/com.tms.cms.document.Document_77a6edc8-c0a8156f-4b8f2f00-d53a67ce/Malaysia%20Investment%20Performance%20Report%202013.pdf
What’s next?
38
What’s next?
39
What & Why of FDI
What is 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)
41http://economics.dstcentre.com/The%20Changing%20Role%20Of%20FDI%20In%20The%20Malaysian%20Economy%20By%20Azmi%20Shahrin.pdf
Why? Role of FDI in Malaysian Economy
1. to generate economic growth by increasing domestic capital
formation
42
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).
43
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.”
44
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)
45
Why? Role of FDI in
Malaysian Economy
2. to fuel export growth
46
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”
47
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
48
Why? Role of FDI in
Malaysian Economy
49http://competitiveness.in/wp-content/uploads/2012/02/FDI-MNEs_Mind_Map.jpg
Why? Role of FDI in
Malaysian Economy
4. lead to higher employment through the expansion of the economy &
job creation
50
Why? Role of FDI in
Malaysian Economy
5. as the agent of transformation in the Malaysian economy
51
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.”
52
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)
53
Sustainable Manufacturing
“Sustainable manufacturing is all about being resource efficient, and that can be about reducing costs, which can be about reducing the amount of materials from an input perspective or reducing the cost in terms of disposal costs.
Source: http://www.manmonthly.com.au/features/understanding-environmental-sustainability-in-manu
Source: http://www.oecd.org/media/oecdorg/satellitesites/stisusman/478375063dimensional.JPG
Three-Dimensional Aspects of Sustainable Manufacturing
Definition:
"Sustainable manufacturing is a systems approachfor the creation and distribution (supply chain) ofinnovative products and services that: minimizesresources (inputs such as materials, energy, water,and land); eliminates toxic substances; andproduces zero waste that in effect reduces greenhouse gases, e.g., carbon intensity, across the entirelife cycle of products and services."
The US Department of Commerce’s Sustainable Manufacturing Initiative defines
'sustainable manufacturing' as:
A technical version of this definition is as follows :
"the creation of manufactured products that useprocesses that minimize negative environmentalimpacts, conserve energy and regular resources,are safe for employees, communities, andconsumers and are economically sound."
Source: http://www.mel.nist.gov/msid/SSP/images/sustainable-_ladscape.jpg
Product LifeCycle Approach:
Sample Case 1
Source: http://www.dailymail.co.uk/news/article-3039046/Read-never-buy-bag-supermarket-salad-farmworkers-treated-like-slaves-live-filthy-conditions-major-stores-promise-inquiry.html
More: http://www.independent.co.uk/news/business/news/undercover-panorama-reporters-reveal-working-conditions-at-factory-making-apple-products-in-china-9934861.html
Source: http://www.theguardian.com/technology/2014/dec/19/apple-under-fire-again-for-working-conditions-at-chinese-factories
Sample Case 2
Source: http://www.theguardian.com/world/2014/feb/06/bangladesh-garment-factories-child-labour-uk
Sample Case 3
Source: http://www.frost.com/prod/servlet/cio/188029182
Stages of Green Manufacturing
What are the benefits of sustainable manufacturing?
Source: http://www.oecd.org/innovation/green/toolkit/48704993.pdf
Interested to find out more? Let’s do research…
Source: http://www.sciencedirect.com/science/article/pii/S0925527311002179
Learning Outcomes:
At the end of this session, learner(s) will be able:
a) To explain the link between industrialization and
contributions of the manufacturing sector as well as
FDI in Malaysia
b) To review the pattern & strategy of Malaysia’s
industrialization with emphasize on the role of the
government & FDI in manufacturing sector
c) To explain the concept of sustainable manufacturing
https://play.kahoot.it/#/lobby?quizId=29ad5fbc-a5cf-4111-b1a2-3aa8a0c30c8c