FDI, GOVERNMENT POLICY AND INDUSTRIAL TRANSFORMATION IN MALAYSIA

1. FDI, GOVERNMENT POLICY AND INDUSTRIAL TRANSFORMATION IN MALAYSIA Rajah Rasiah UNU-INTECH

2. 1 INTRODUCTION • Analytic framework • Initial structure • Industrial policy • FDI-driven manufactured exports • Domestic manufactured exports • Policy Implications

3. 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

4. 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)

6. 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

8. 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.

9. 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

10. 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.

16. 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.

17. 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.

18. 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 ofIndustry 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).

19. 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 ofBusiness 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.

20. 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.

21. 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.