[Asian Economic Journui 1996, Voi. 10 No I ]
29
Foreign Investment and Industrialization in
Malaysia: Exports, Employment and Spillovers*
Premachandra Athukorala
Australian National Universiry
Jayant Menon
Monash University
Over the past two decades, there has been a decisive shift in trade and industry
policy in developing countries (DCs) away from import substitution and towards
export-orientation. As part of this policy shift, an increasing number of DCs have
become more receptive to foreign direct investment (FDI).Despite its policy
relevance, the literature on the role of FDI in export expansion, employment
generation and spillovers in DCs is sparse. This paper attempts to fill this gap
through a case study of the role of export-oriented FDI in Malaysia’s rapid industrialization. The overall conclusion of the paper is that export-oriented FDI has
brought significant returns to Malaysia principally because the general economic
climate has been favourable for the internationalization of production for a considerable period of time.
I. Introduction
Over the past two decades, there has been a decisive shift in trade and industry
policy in developing countries (DCs) away from import substitution and towards
export-orientation. As part of this policy shift, an increasing number of DCs
have become more receptive to foreign direct investment (FDI),marking a significant departure from the conventional distrust of FDI. Multinational enterprises (MNEs)’ are generally expected to play a major role in the process of
export-oriented industrialization by providing easy access to foreign markets
* We thank Richard Pomfret and an anonymous referee for comments. We are also grateful to
Anant Menon and Ong Hong Cheong for valuable discussions, and to various staff at the Malaysian
Department of Statistics and Saleha Abdul Rahman and Choo Wai Meng in particular from the
Malaysian Industrial Development Authority (MIDA) for providing access to unpublished data.
1. In line with standard practice in this area of study, the MNE is defined as an enterprise that owns
and controls business ventures in more than two countries, including its home country. When this
definition is used, the bulk (if not all) of FDI in a given host country can be considered as MNE
investment. The terms “foreign firm” and MNE are used interchangeably.
ASIAN ECONOMIC JOURNAL
30
and bringing in experience and expertise in the many complex facets of product
development and international marketing. In view of these considerations, enticing MNE participation has become an integral element of policy reforms toward
export-led industrialization in many DCs.
This new emphasis on FDI is not without its critics, however. By referring to
the conflict between the global profit-maximization objective of MNEs and the
national interest of the host DC, critics argue that there is little room for the host
DC to influence either the locational decision of MNEs or their production
performance. In this respect, the “footloose” nature of production and limited
technology and skill transfer are often highlighted as intrinsic limitations of FDI.
The purpose of this paper is to shed light on this debate by examining the case
of Malaysia. For the purpose of closer scrutiny, we select three key aspects of
the FDI-industrialization nexus: exports, employment and spillover effects.
Malaysia provides an interesting case study of this subject. Since the mid-l970s,
the Malaysian economy has experienced rapid growth and dramatic structural
transformation through the expansion of manufactured exports. According to
various indicators such as share of GDP, contribution to exports and employment generation, manufacturing is now the single most important sector of the
economy. On the strength of this growth record, which is indeed unique among
the DCs, Malaysia is now being hailed as the next Asian NIC (World Bank,
1993). The role of FDI is often cited as the most important contributory factor
behind this success story.
The paper is in five sections. Section I1 provides an overview of the foreign
investment climate since independence (1957), and patterns and characteristics
of FDI in Malaysia. The role of FDI in the recent surge of manufactured exports
and its economic implications is examined in Section 111. The contribution of
FDI to employment generation is analysed in Section IV. Linkages, technology
transfer and other spread effects of FDI are the subject matter of Section V. A
final section summarizes the key findings.
11. Policy Context and Trends and Patterns of Foreign Direct
Investment
The promotion of FDI, particularly in export-oriented manufacturing, has been
on the Malaysian policy agenda since the late 1960s (Ariff and Lim, 1987;
Nunnenkamp, 1991). In 1968, the Government enacted the Investment Incentives Act to promote manufacturing exports in response to the problem of internal market saturation faced by the manufacturing sector. The rich assortment of
incentives offered to export-oriented FDI by the Act included exemptions from
company tax and duty on imported inputs, relief from payroll tax, investment tax
credits and accelerated depreciation allowances on investment. This was followed by the introduction of the New Economic Policy (NEP) in 1970 which
earmarked the manufacturing sector as the growth sector to spearhead economic
restructuring and employment generation. The development of Free Trade Zones
FOREIGN INVESTMENT AND INDUSTRIALIZATION IN MALAYSIA
31
(FI’Zs) to entice foreign investor participation in this endeavour was a key
element of the NEP.’ It is important to note that while Malaysia is not to be outdone in the sphere of specific incentives, such incentive schemes are not unique
to Malaysia. Malaysia’s attractiveness for FDI cannot, therefore, be understood
without a close look at the general business environment as it relates to MNE
investment decisions.
The trade and industry policy regime of post-independent Malaysia has consistently been much more favourable to export producers than that of many other
countries in the region (Myint, 1967; Riedel, 1991). Even in the early years of
heavy emphasis on import substitution industrialization, domestic industries were
usually protected only through moderate rates of tariff rather than quantitative
restrictions (QRs) and exchange restrictions. These features of the trade regime,
coupled with prudent macro-management, were instrumental in avoiding significant exchange rate misalignment, and their deleterious effects on tradable goods
production. Moreover, the choice of tariffs rather than QRs as the instrument
of protection meant that the domestic incentive structure was not significantly
insulated from changes in world market prices.
FDI is by no means unrestricted in Malaysia. There are guidelines and regulations governing FDI in conformity with the country’s development priorities
and overall sociopolitical objectives, which may at times run counter to the
global profit maximization objective of MNEs (Ariff and Lim, 1987). Of particular relevance in this connection are attempts, under the NEP, to increase the
share of Bumiputras (Malays) in the corporate sector from 2% in 1970 to 30%
in 1990, and to reserve a certain percentage of employment in foreign ventures
for Bumiputras. However, the 70:30 Malaysian - foreign equity ownership ratio
represents a national target and is not meant to be implemented on an individual
company basis. In fact, 100% foreign ownership is allowed in export-oriented
ventures. Over the years, the government has also resorted to a more lenient
policy stance relating to Bumiputra employment quotas with a view to ameliorating its adverse impact on export-oriented FDI. Moreover, unlike governments
in many other DCs, the Malaysian government has taken care to make its policy
stance towards FDI unambiguous and transparent. The government has pursued
other specific objectives such as location of industries in “development areas”,
increasing the use of local inputs, and diverting investment to certain “priority”
industries. But, as in other East Asian export-oriented economies, these objectives have been pursued largely through prescriptive rather than proscriptive
methods.3 Guarantees against nationalization of foreign assets without compensation are provided by the Constitution, and investment guarantee agreements
have been concluded with several capital exporting countries.
2. The first FTZ was opened in Bayan Lepas (Penang) in 1972. By the end of the 1980s, Malaysia
had ten FTZs. For details see Rasiah (1993).
3 . This terminology is due to Bhagwati (1988, pp. 98-100). Under proscriptive regimes, activities
that are not specifically permitted tend to be prohibited. By contrast the prescriptive approach tends
to rely more on incentives to achieve desired objectives.
2696
49
536
96
25
29
84
469
242
346
11
95
9
24
209
82
152
19
147
72
38.91
11.66
18.61
34.78
26.17
42.24
79.64
3 1.58
92.59
43.94
46.06
31.80
76.34
53.81
47.83
13.48
3 1.03
9.96
53.05
78.10
1980
Percentage
6847
548
1160
196
46
718
418
195
116
1331
235
49
65
100
76 1
429
376
19
76
9
RM mil.
34.05
25.68
70.21
52.51
47.50
8.47
16.36
19.08
21.22
37.01
41.35
14.70
30.67
32.61
22.75
38.93
76.58
2 1.52
92.45
46.10
1986
Percentage
11074
loo0
378
79 1
53
213
48
238
608
1136
678
156
846
276
287
189
3546
28 1
235
115
RM mil.
42.40
30.41
63.64
61.41
58.89
19.10
44.86
13.53
25.30
45.31
54.85
27.86
32.65
16.81
29.7 1
52.94
88.96
25.18
97.11
42.91
1990
Percentage
19035
993
383
1119
54
61 1
126
282
1I30
1613
884
415
1241
807
596
280
7160
622
477
242
RM mil.
Source: Computed using unpublished returns from Malaysian Industrial development Authority’s Annual Survey of Companies in Production.
Total
Food
Beverages
Textiles
Leather products
Wood products
Furniture
Paper, printing products
Chemicals
Petroleum, coal products
Rubber products
Plastic products
Non-metallic minerals
Basic metal products
Fabricated metal products
Machinery
Electronics
Transport equipment
Scientific equipment
Miscellaneous
RM mil.
Table 1 The Share of Foreign Firms in Total Fixed Assets, (RM millions and percentage shares)
50.01
28.85
55.75
63.22
54.00
3 1.32
64.95
12.62
39.48
47.15
48.84
38.28
36.95
34.94
37.60
53.64
90.83
3 1.70
97.75
60.35
1992
Percentage
z
s
W
h,
3
n
\ 1
0
8
h
0
b
FOREIGN INVESTMENT AND 1NDVSTRIALlZATlON IN MALAYSIA
33
In the context of this favourable investment climate, FDI flows to Malaysia
have grown impressively over the past two decades. Foreign capital inflows
have increased almost ten-fold between 1987 and 1993. Since the mid-l980s,
FDI flows to Malaysia have been increasing at a faster rate than those to the
other ASEAN countries (Athukorala and Menon, 1995b). Since 1991, the volume of FDI flowing to Malaysia has remained higher than that to any of the
other ASEAN countries (UNCTC, 1991; UNCTAD-CTC, 1995).4The contribution of majority-owned foreign firms in total fixed assets in the manufacturing
sector increased from 39% in 1980 to 50% in 1992 (Table 1).
Historically, the UK has been the dominant source of FDI; at the time of
independence in 1957, the UK owned more than 90% of the stock of FDI in
Malaysia. The British dominance in FDI continued until the early 1970s, when
investment flows from the US, Japan and Germany began to expand rapidly in
export-oriented manufacturing (Junid, 1980). By the early 1980s, Japan had
become the largest single investor in terms of annual volume of inflow. The US
share in total FDI has varied between 3 and 28% in the 1980s, although this
share would be somewhat higher if only export-oriented investment were considered. Recent data exhibit a dramatic increase in the importance of FDI from
other developing countries in East Asia (Menon and Athukorala, 1995). The
share of approved investment accounted for by East Asian investors increased
from 21.75% in 1980 to 40.25% in 1994. According to data on investment
approvals, Taiwan displaced Japan as the largest investor in Malaysia in 1990
and 1994, with shares of 36 and 25.6%, respectively. However, in terms of total
accumulated investment (value of fixed assets), Japan is still the pre-eminent
investor, followed by Singapore, US, Taiwan and UK (Table 2, last row).
Virtually all FDI (mostly British) in pre-independent Malaysia was in the
primary sector (mainly in tin mines and rubber plantations) and related service
sectors. FDI flows to manufacturing began only in the late-1950s and, for the
next two decades, went predominantly into import-substitution production (Junid,
1980). Export-oriented FDI began to expand slowly but steadily from the mid1970s. By the late-l980s, FDI inflows had decisively shifted from production
for the domestic market to using Malaysia as a base for manufacturing for the
global market. The share of projects with an export orientation of 50% or more
increased from 24% of total approved projects during 1984-85 to about 82%
during 1988-89. The proportion of projects with an export orientation of 80%
or above increased from one-fifth of the total in 1984 to about three-quarters in
1989 (Ariff, 1991).
Foreign firms in export-oriented manufacturing are mostly in assembly operations in electrical goods and electronics, and diffused-technology consumer goods
production. However, in recent years, FDI has begun flowing into the production
of mature-technology final products such as radios, TVs, cameras, computers,
4. There is a sizeable literature that documents the trends and patterns of FDI flows to Malaysia;
see, for instance, Athukorala and Menon (1995a) and literature cited therein.
7.23
4.53
53.10
0.00
16.03
10.67
15.48
30.96
14.37
9.11
48.95
38.69
62.15
13.49
65.99
45.02
40.33
48.88
28.24
33.57
8137
15.47
0.21
14.10
0.76
2 1.69
0.76
1.88
2.93
0.01
3.91
1.16
0.72
0.55
1.01
0.03
5.92
3.28
0.08
6.75
5.02
1218
Japan
0.83
202
0.00
0.00
0.00
4.63
0.99
0.07
0.02
0.00
0.80
0.00
7.29
0.00
0.22
1.05
0.57
0.00
0.00
0.01
0.00
Korea
14.75
3576
33.21
56.75
11.42
12.97
10.70
10.05
38.45
24.4 1
2.59
11.93
18.36
30.5 1
23.43
13.44
21.17
9.33
7.16
10.53
38.41
Singapore
6.93
1680
1.22
0.00
1.77
23.93
38.37
64.12
2.39
0.40
0.00
2.29
3.58
0.42
3.65
7.08
5.41
11.29
2.76
3.61
6.46
Taiwan
6.33
1534
15.54
16.69
1.85
0.03
0.53
3.30
3.36
16.06
18.44
8.85
0.00
6.54
2.10
0.96
0.29
1.26
13.45
1.97
2.07
UK
9.99
242 1
2.12
7.44
0.34
0.00
0.06
5.34
38.15
11.10
7.67
16.00
0.94
0.87
0.89
0.77
3.70
18.78
9.77
0.00
10.89
us
22.58
5472
25.23
14.38
17.43
62.30
7.99
4.75
0.2 1
14.12
56.92
47.11
27.01
14.96
7.23
63.05
2.36
7.82
23.26
34.94
7.18
Other
100 (24239)
24239
100 (
100 (1259)
53)
100 ( 898)
100 ( 132)
100 ( 287)
100 (1519)
100 (2923)
100 ( 995)
100 ( 612)
100 (1311)
100 ( 806)
100 (1530)
100 ( 541)
100 (8066)
100 ( 919)
100 ( 461)
100 ( 272)
100 (1235)
100 ( 417)
Total (RM mil.)
Source: Computed using unpublished returns Erom Malaysian Industrial development Authority’s Annuul Survey of Companies in Pmducfion
Total: percentage
value (RM mil.)
Food
Beverages
Textiles
Leather products
Wood products
Furniture
Paper, printing products
Chemicals
Petrol, Coal
Rubber products
Plastic products
Non-metallic minerals
Basic metal products
Fabricated metal products
Machinery
Electronics
Transport equipment
Scientific equipment
Miscellaneous
Hone Kong
Table 2 Foreign Investment (Fixed Assets) in Manufacturing, by Industry and Country, 31 December 1993 (percentage shares)
a
5
u
3
h
2
FOREIGN INVESTMENT AND INDUSTRlALZATlON IN MALAYSIA
35
etc. This recent development is due mainly to the rapid improvement in the
quality of infrastructure and increasing domestic demand associated with increasing income levels in the country. Malaysia’s efforts in attracting FDI in the
electronics industry were so successful that by 1980 it had become the largest
developing-country exporter (and one of the world’s major exporters) of electronic components, particularly integrated circuits (Grunwald and Flamm, 1985).
The electronics industry accounted for 19% of foreign paid-up capital and 27.5%
of foreign-owned fixed assets in Malaysia at the end of 1989. Despite the rich
natural resource base of the country, recent foreign capital participation in
“modern” resource-based industries (i.e. in areas other than conventional plantation-based product sectors) does not appear to be significant, particularly as
compared to neighbouring Indonesia.’
111. FDI and Export Orientation
The export structure of Malaysia, as it evolved during the colonial era, was
characterized by heavy reliance on a limited range of primary commodities. In
the early 1970s, the share of manufactures6 in total merchandise exports was
around 10% (Table 3 ) . Since then, manufactured exports have emerged as the
most dynamic element in the export structure. Exports of manufactures grew (in
current US dollar terms) at an annual compound rate of 35% during 1980-92,
and by 1994 their share in total merchandise exports had reached 78% (Table
3). In the 1970s and early 1980s, resource-based manufacturing such as food,
beverages, tobacco, wood products and basic metals loomed large in the structure of manufactured exports. The transformation of Malaysia’s export structure
in line with emerging patterns of the international division of labour gathered
momentum only in the late 1980s; by the 1990s, the share of resource-based
exports had declined while the shares of electronics, electrical machinery and
appliances rose sharply. In 1994, electronics, electrical machinery and appliances accounted for over 60% of Malaysia’s total manufactured exports.
The share of Japanese firms in total manufactured exports from Malaysia
increased from 5.2% in 1972-73 to 7.9% in 1986 and to 9.8% in 1989. A similar
comparison for US firms was 33.6% in 1982-85 and 21.1 percent in 1977
(Naya, 1990; Ramstetter, 1993). Judging from the massive increase in exportoriented investment flows from the East Asian developing countries, the foreign
share in total exports would have increased significantly since the late 1980s
(Wells, 1993). Table 4 reports estimates of sales and exports (to the US) of US
affiliates in Malaysian manufacturing in 1987 and 1992. The export-sales ratio
for total manufacturing is greater than 50% in both years. Most of these exports
5. As a reflection of the historical pattern of FDI involvement in Malaysia, there is still a significant presence of foreign firms in the mining sector. Their share in total output, however, has been
declining steadily since the mid-1970s.
6. Manufactures is defined to include commodities belonging to sections 5-8 in the Standard
International Trade Classification (SITC).
100.00
11.9
598.5
100.00
23.2
6289.5
4.7
5.5
4.9
8.0
100.00
13.7
513.1
1.3
1.o
3.3
46.8
13.3
3. I
9.2
19.2
15.1
17.5
3.4
2.7
1.9
14.3
12.2
0.5
12.5
7.4
6.5
1981
18.6
4.0
5.8
5.8
6.6
33.6
2.2
2.7
1.3
11.0
1971
Source: Bank Negara Malaysia, Annual Report, Kuala Lumpur, various issues.
Total: percentage of manufactured exports
percentage of total exports
value of manufactured exports (RM mil.)
Food
Beverages and tobacco
Textiles, clothing, footwear
Wood products
Chemicals
Petroleum products
Rubber products
Nan-metallic minerals
Metal manufactures
Electronics, electrical machinery, appliances
Electronics
Electrical machinery
Electrical appliances
Transport equipment
Other manufacturing
1967
100.00
43.3
1.5126.0
5.7
0.2
10.9
3.5
4.0
4.2
1.o
1.3
3.5
55.7
38.3
3.5
13.5
4.5
5.5
1986
Table 3 Manufactured Exports by Industry, (percentage shares)
100.00
64.9
61440.8
3.4
0.3
7.7
2.8
2.9
1.9
2.8
1.4
3.0
58.0
21.2
30.9
5.9
5.4
10.4
1991
2
U
100.00
78.2
120200.3
3.8
1.8
2.3
1.2
3.0
63.5
20.7
37.5
5.3
4.8
8.0
m
W
::: $
2.4
0.2
1994
4
FOREIGN INVESTMENT AND INDUSTRIALIZATION IN MALAYSIA
37
Table 4 US Affiliates in Malaysian Manufacturing: Total Sales and Exports to the US,
(US millions and percentage shares)
Year
Sales
(US$ mil.)
Exports
(US$ mil.)
Export-Sales
Ratio
(a)
Electrical machinery
and electronics
Other
1987
1992
1987
1992
2139
3092
713
1867
1495
1891
40
812
69.89
61.16
5.61
43.49
Total
1987
1992
2852
4959
1535
2703
53.82
54.5 1
Source: Compiled from US Bureau of Economic Analysis, US Direct Investment Abroad: Operations of US Parent Companies and their Foreign AfSrliates, Washington, D.C.: US Bureau
of Commerce, 1987 and I992 issues.
emanate from affiliates in the electronics sector. While the share of exports in
sales in other sectors was about 6% in 1987, this had increased to more than
43% by 1992. In value terms, total manufacturing exports to the US increased
by more than 75% between 1987 and 1992.
It is important to note that the figure for net exports generated by foreign firms
is less than would be suggested by the gross figures reported in national trade
statistics. The available data suggest that the share of imported inputs in gross
export value of manufactured exports is as high as 75% (Onn, 1990). In addition, allowance has to be made for other leakages such as profit remittances, salaries of expatriates and payments of interest on foreign loans. Export-processing
investments also offer possibilities for evading taxes by setting transfer prices
such that profits are recorded largely elsewhere (Wells, 1993, p. 185).
Obviously, the higher the net foreign exchange component in exports, the
greater would be the benefit to the economy from FDI. However, overwhelming
reliance on per-unit net foreign exchange earnings as a performance criterion
can lead to the wrong policy prescriptions for the following reasons. First, the
country’s principal objective in export expansion is to generate the largest possible volume of net foreign exchange earnings, not to maximize net foreign
exchange earnings per unit of exports. In this respect, what is more relevant is
market potential. Only a small and shrinking share of manufactured exports
from DCs these days is resource-based (and hence high value-added) goods. On
the other hand, market potential for labour-intensive manufactured goods that
are made to local specifications in DCs is even more limited. The success in
increasing the volume of net foreign exchange earnings therefore depends crucially on the country’s ability to enter the fast-growing markets for made-toorder manufactured goods and assembly operations in vertically integrated
electronics and electrical industries which are essentially more import intensive
(Keesing and Lall, 1992, p. 179). Second, unlike import-substituting firms, the
ASIAN ECONOMIC JOURNAL
38
performance of export-oriented ventures is not subject to the “foreign exchange
constraint” (which was a dominant consideration in industry policy under the
import-substitution strategy). They create no drain on indigenous investible funds
and other scarce resources. In the worst case scenario, the total net foreign
exchange earnings would be equivalent to the payments to local labour (and tax
paid to the Malaysian government). Third, rapid growth of gross export earnings
per se can be considered an important policy objective yielding considerable
national benefits. Entering international markets in manufactures is a challenging task and, therefore, export growth (in gross terms) is widely used as an
indicator of efficiency and competitiveness of the domestic manufacturing sector. Thus, rapid export growth produces a conducive setting for further attraction
of FDI and the mobilization of foreign loanable funds at competitive rates.
Finally, there is evidence that the net foreign exchange earnings component
would tend to increase with the passage of time as foreign firms began to forge
backward linkages (see below).
From the point of view of the host country, local firms’ access to market
channels from the ICs is an important advantage offered by FDI. There is
mounting evidence to suggest the important role that foreign firms in general
play as catalysts for the development of local exporters (Wells, 1993; Keesing
and Lall, 1992). Following the entry of foreign firms into garments and other
light consumer goods industries in a given country, international buying groups
which have long-established market links with these firms also set up buying
offices in the country.’ These buying groups subsequently play a crucial role in
linking local firms up to highly competitive international markets for these products. Moreover, joint-venture operations with foreign investors provide local
entrepreneurs with an opportunity to acquire production and international marketing skills required for the successful operation of their own (independent)
production units. Thus, export diversification offered directly by the foreign
investors themselves may dramatically understate the actual contribution of these
firms.
IV. Employment
There has been a remarkable increase in the number of employment opportunities generated by FDI projects. For instance, in the electrical machinery industry
(including electronics)’ employment in US firms alone increased from 49,000 in
1977 to 86,000 in 1986 and to 135,000 in 1989 (Ramstetter, 1993, Table 10).
Total employment in Malaysian FTZs increased from 23 1,500 in 1972 to 920,600
7 International buying groups are world-wide purchasing organizations of large retail chains In
developed countries, which specialize in the purchase of labour-intensive manufactured goods such
as garments, toys, sports goods etc. For details on their role in the expansion of manufactured
exports from developing countries, see Keesing and La11 (1992).
8. Employment in the electronics sector provided more than 30% of total manufacturing employment in 1990.
FOREIGN INVESTMENT AND INDUSTRIALIZATION IN MALAYSIA
39
Table 5 Share of Foreign Firms in Production and Employment by Industry
(percentage shares)
~
~~
~
~~~
1983
Product ion
1985
1992
1983
Employment
1985
1992
Food
Textiles
Apparel
Leather products
Wood products
Furniture
Paper, printing
Chemicals
Petroleum, coal products
Rubber products
Plastic products
Non-metallic minerals
Basic metal products
Fabricated metal products
Machinery
Electronics
Transport equipment
Scientific equipment
Miscellaneous
28.93
42.86
31.25
0.00
4.5 1
2.56
2.22
26.33
79.76
42.48
6.72
2 1.45
46.79
24.61
26.50
82.85
21.69
90.91
55.77
18.71
43.38
44.19
0.00
7.55
2.00
4.74
20.37
88.13
41.63
7.09
13.91
32.81
11.92
28.49
80.07
14.38
96.36
56.86
23.64
47.06
39.61
33.33
10.26
32.50
10.26
25.27
95.26
42.46
19.59
17.97
35.62
16.38
62.35
85.52
13.30
100.00
58.82
19.60
30.85
30.43
0.00
2.87
3.70
2.43
31.07
40.63
33.77
9.45
10.40
20.90
13.15
16.16
83.16
8.16
91.15
56.38
16.92
32.87
39.85
3.03
5.77
3.06
3.44
30.00
32.69
33.67
8.10
10.53
15.57
8.88
16.78
80.13
6.67
95.04
62.07
14.94
33.48
38.72
38.89
11.58
27.17
10.59
31.18
40.00
42.71
22.40
19.12
26.03
17.17
47.98
85.09
10.93
100.00
75.81
Total
40.50
35.75
47.62
29.75
29.60
42.46
Source: Computed using unpublished returns from Malaysian Department of Statistics, Annuul Survey
of Manufactur-ing Industries.
in 1987 (Rasiah, 1993, Table 4.4). In general, the sub-sectors within manufacturing which have had the fastest growth of output and employment during the
1980s and 1990s are ones with greatest FDI participation. For instance, total
employment in the electronics industry, the major magnet of FDI, increased
from 78,000 in 1980 to 225,000 in 1992. While manufacturing employment
almost doubled between these two years, over 40% of this growth originated in
the electronics industry.’
Table 5 brings together data on the relative contribution of foreign firms to
sectoral production and employment in manufacturing. The percentage of workers employed in foreign firms increased from about 30% in 1983 to 42% in
1992. This increase in employment has been faster than the increase in the share
of output of these firms (from 41 to 48%). This suggests that with the rapid
expansion of export-oriented manufacturing, the structure of manufacturing production has become more labour-intensive over the years. This pattern is particularly noticeable in non-metallic minerals, basic metal products, fabricated
9. These estimates are based on unpublished data from the Annual Survey of Companies in Producrion conducted by MIDA.
ASIAN ECONOMIC JOURNAL.
40
metal products and miscellaneous manufacturing. In the case of electronics, the
employment and output shares have remained virtually unchanged at comparable levels. This reflects the fact that the export-oriented electronics industry has
been labour-intensive right from the start.
Employment patterns in export-oriented foreign firms (in particular those in
the electronics industry) is characterized by a heavy reliance on women workers
(Rasiah, 1993). In this context, it is often questioned whether the job opportunities created within export-oriented foreign firms are a “net” addition to employment (see, for instance, Lee, 1984). Unfortunately, data are not available to
provide a straightforward answer to this question. It is quite possible that these
firms have contributed first and foremost to a rise in the labour force participation rates, notably through the entry of young women into the labour force. In
the absence of FTZ employment opportunities, most of these young women
workers would probably have remained outside the labour force.
V. Linkages, Technology Transfer and Other Spread Effects
Given the overwhelming reliance on imported inputs, export-oriented foreign
firms are usually criticized for not having developed significant direct input
linkages (backward linkages) with the domestic economy. Indeed, the consensus
view from other country studies is that linkage effects of export-oriented firms
operating in light manufacturing and assembly activities are generally less than
those of import-substituting firms (Casson and Pearce, 1987, p. 109). This observed pattern can largely be explained in terms of the huge contrast between the
shortage-ridden overly protected suppliers’ markets for import-substituting products, and the extremely competitive buyers’ markets for goods exported to highincome countries. Unlike meeting consumer requirements in the former, producing
what is sought in the latter markets call for a vector of imported inputs meeting
exacting quality requirements and specifications. Substituting such inputs with
locally produced inputs of secondary quality may lead to significant market
losses, and the cost involved in correcting any potential defect in a further stage
may be prohibitive (Keesing and Lall, 1992; World Bank, 1993).
It would, therefore, seem unrealistic to expect foreign firms to forge greater
linkages at the formative stage of export-oriented industrialization. However,
there may be a tendency for these firms to increase their local purchases as their
operations in the given host country mature, provided the local business environment is conducive to such behaviour. This view is supported by studies of
foreign firm behaviour in Malaysia (Lim and Pang, 1991; Liebau and
Wahnschaffe, 1992; Aoki, 1992). Foreign firms operating in Malaysian FTZs
originally procured almost all of their inputs from abroad. The situation has,
however, changed rapidly since the latter half of the 1980s. For instance, according to a survey of Japanese firms operating in the Malaysian manufacturing
sector conducted by the Japanese external trade organization (JETRO), the share
of locally procured parts and materials in total output rose from 20% in 1987 to
FOREIGN INVESTMENT AND INDUSTRIALIZATION IN MALAYSIA
41
24% in 1989 (as quoted in Aoki, 1992). Part of this increase has been caused
by the rapid appreciation of the yen since 1985. In response to yen appreciation,
many intermediate-input producing firms in Japan have set up production bases
in Malaysia in order to maintain competitiveness in the supply of inputs to
Japanese firms operating in Malaysia (Aoki, 1992). Linkage formation is not
limited to firms of Japanese origin, however. For instance, in an extensive survey of semiconductor firms operating in Malaysia’s FTZs, Liebau and Wahnschaffe (1992) find convincing evidence of substantial integration of firms from
all countries into the domestic economy since the mid- 1980s, thus abandoning
the “satellite workbench” philosophy that first brought them there. Recently some
electronics firms have begun to produce silicon logs, the base material of most
semiconductor devices, locally (O’Brien, 1993).
Closely related to the linkage aspect of export-oriented FDI is its alleged
“footloose” nature. The critics of FDI argue that foreign companies engaged in
export-oriented manufacturing operate “with their bags packed” in readiness to
flee the scene as soon as wages begin to rise and tax incentives begin to expire.
The Malaysian experience suggests that such concern may be misplaced. For
instance, 19 of the 26 foreign semiconductor companies had exhausted their tax
holiday status by 1988, but all of them not only continued to operate but also
expanded their production in Malaysia during the ensuing years (The New Straits
Times,23/3/1988). With the development of expertise in Malaysia over the
years, many semiconductor firms which were originally involved in simple assembly-type activities, have relocated many end-of-line fabrication and final
assembly processes to Malaysia (Rasiah, 1993).
While the FTZs attracted most of the FDI initially, there has been growing
geographical dispersion introduced by recent FDI flows. While most FDI projects
were originally concentrated in the states of Selangor, Johore and Penang, an
increasing number of projects are being located in other states such as Perak,
Kedah, Negri Sembilan, Malacca, Sabah and Sarawak. There are a number of
factors that account for this new industrial pattern in geographic terms which
underlie the integration of FTZs into the wider economy. These include (i) the
vast improvements in infrastructure, (ii) the rising cost of land in congested
areas, particularly in the FTZs, (iii) the emergence of small and medium-sized
firms in the FDI profile, a result attributable mainly to the increase in Taiwanese
and Korean FDI, and (iv) the conducive policy environment - unlike in many
other countries, FTZs in Malaysia have not simply been appendages to a highly
regulated economy with a substantial anti-export bias; in fact, the relative attractiveness of FTZs has diminished over time.’”
The degree of technology transfer associated with FDI was very limited in
the initial stages. Labour in FTZs merely followed instructions from the parent
10. Unlike the case in a number of other countries, there has not been a mass migration of
domestic fiims to FTLs in Malaysia. It is not unusual for up to one-third of all firms in FTZs to he
fully-owned domestic fims (see Warr, 1990; ILO/UNCTC, 1988; Athukorala, 1995).
ASIAN ECONOMIC JOURNAL
42
plants. Over time, however, there has been some increase in local management
participation in the production process in electrical and electronic component
production factories. An increasing number of locals are being trained in
factories in home countries, and there have been many instances of Malaysian
professionals being called to parent plants to help reorganize and rationalize
production processes. For instance, Texas Instruments now send “Malaysian
engineers to the United States to solve their problems” (Microelectronic Monitor, 1987, 32), while Nissan Japan uses its Malaysian plant as a training base
(for personnel ranging from engineers to line workers) for its operations in
Pakistan (The Star, 20/12/1994).
In addition to these technological spillovers, the presence of foreign firms
seems to generate considerable information-related externalities which are not
directly reflected in market transactions and employment patterns. As we have
already noted, market information gained through joint-venture operations and
through international buyers who have come with foreign firms may have contributed to the export success of local firms. Foreign firms also expose the business community to examples of internationally-competitive industrial enterprises
and this demonstration effect is undoubtedly valuable, especially in the early
stage of industrialization.
Drawing upon the new (endogenous) growth theory, one can argue that bringing in new knowledge and entrepreneurial skills is the key advantage of FDI.
What this theory postulates is that ideas are as important as physical inputs, and
an economy can grow just because new ideas beget more new ideas. International trade and foreign investment can be looked upon as vehicles for not only
the transfer of goods and services but, more fundamentally, of ideas as well
(Romer, 1992; Ruffin, 1993). This aspect of the role of FDI is more subtle
because knowledge spill-over is an economy-wide issue, and is by no means
limited to the particular industry in which the foreign firm is located. The introduction of new ideas of efficient management, inventory systems, worker training,
or incentive systems may result in applications other industries.”
VI. Conclusion
Malaysia’s achievements in export-oriented industrialization over the past two
decades has been unique in the developing world. Much of the growth dynamism has emanated from export-oriented FDI. Perhaps the most impressive
contribution of FDI-led industrialization has been the enhancement of employment opportunities. The evidence supports the view that the expansion of domestic industry in developing countries in line with changes in internationalization
of production tends to favour labour-intensive activities. The Malaysian experience runs counter to the widely-held view that FDI-led industrialization tends to
11. The extent to which FDI brings economy-wide benefits can only be demonstrated, however,
by a more detailed analysis of FDI than has been possible in this study. Such an analysis would have
to focus on individual FDI workplacc experiences.
FOREIGN INVESTMENT AND INDUSTRIALIZATION IN MALAYSIA
43
be characterized by footloose firms and industries. The spread effects of FDI
through backward linkages and direct technology transfer seem limited, but
appear to be increasing. The evidence suggests that high import intensity and
limited linkages are not intrinsic features of FDI-led export expansion. These are
partly a reflection of the early stage of FDI participation in Malaysia, and there
are already signs that foreign firms are beginning to generate greater linkages
and spill-over effects. The signs are that, with the right policy environment and
incentive structure, foreign firms can play an important role in the process of
export-led industrialization in developing countries.
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