seu 228 malaysian economy - manufacturing, fdi & sustainability

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SEU 228 Ekonomi Malaysia: Sektor Pembuatan, FDI & Kelestarian Compiled by Dr. Radziah Adam Guest lecture on April 16 th , 2015, DK Z

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Page 1: 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

Page 2: SEU 228 Malaysian Economy - Manufacturing,  FDI & Sustainability

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

Page 3: SEU 228 Malaysian Economy - Manufacturing,  FDI & Sustainability
Page 4: SEU 228 Malaysian Economy - Manufacturing,  FDI & Sustainability

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

Page 5: SEU 228 Malaysian Economy - Manufacturing,  FDI & Sustainability

Stages of Industrialization & FDI

http://www.grips.ac.jp/teacher/oono/hp/course/lec07_industry/stages.gif

Page 6: SEU 228 Malaysian Economy - Manufacturing,  FDI & Sustainability

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

Page 7: SEU 228 Malaysian Economy - Manufacturing,  FDI & Sustainability

MALAYSIA STANDARD INDUSTRIAL CLASSIFICATION (MSIC) 2000

Primary Sector

Secondary Sector

Tertiary @ Services Sector

Page 8: SEU 228 Malaysian Economy - Manufacturing,  FDI & Sustainability

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

Page 9: SEU 228 Malaysian Economy - Manufacturing,  FDI & Sustainability
Page 10: SEU 228 Malaysian Economy - Manufacturing,  FDI & Sustainability
Page 11: SEU 228 Malaysian Economy - Manufacturing,  FDI & Sustainability

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

Page 12: SEU 228 Malaysian Economy - Manufacturing,  FDI & Sustainability

Foreign vs. Domestic: Sectoral Investment, 2013

Source: http://www.mida.gov.my/env3/uploads/PerformanceReport/2013/IPR2013

Page 13: SEU 228 Malaysian Economy - Manufacturing,  FDI & Sustainability

Foreign vs. Domestic: Sources of Manufacturing Investment, 2013-2012

Page 14: SEU 228 Malaysian Economy - Manufacturing,  FDI & Sustainability

New investment in Manufacturing Industries, 2013

Page 15: SEU 228 Malaysian Economy - Manufacturing,  FDI & Sustainability

Export-Oriented Manufacturing Industries, 2013

Page 16: SEU 228 Malaysian Economy - Manufacturing,  FDI & Sustainability

Source of FDI in Manufacturing, 2013

Page 17: SEU 228 Malaysian Economy - Manufacturing,  FDI & Sustainability

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

Page 18: SEU 228 Malaysian Economy - Manufacturing,  FDI & Sustainability
Page 19: SEU 228 Malaysian Economy - Manufacturing,  FDI & Sustainability

Current scenario

19

Page 20: SEU 228 Malaysian Economy - Manufacturing,  FDI & Sustainability

Stages of Industrialization

Page 21: SEU 228 Malaysian Economy - Manufacturing,  FDI & Sustainability

Timeline:

21http://www.dipity.com/Radziah/Malaysia-Industrial-Policies/

Page 22: SEU 228 Malaysian Economy - Manufacturing,  FDI & Sustainability

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

Page 23: SEU 228 Malaysian Economy - Manufacturing,  FDI & Sustainability

Industrialization in Malaysia

23Source: Rokiah Alavi, 1996, Industrialisation in Malaysia: Import Substitution and Infant Industry Performance, Routledge.

Page 24: SEU 228 Malaysian Economy - Manufacturing,  FDI & Sustainability

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

Page 25: SEU 228 Malaysian Economy - Manufacturing,  FDI & Sustainability

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

Page 26: SEU 228 Malaysian Economy - Manufacturing,  FDI & Sustainability

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

Page 27: SEU 228 Malaysian Economy - Manufacturing,  FDI & Sustainability

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

Page 28: SEU 228 Malaysian Economy - Manufacturing,  FDI & Sustainability

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

Page 29: SEU 228 Malaysian Economy - Manufacturing,  FDI & Sustainability

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

Page 30: SEU 228 Malaysian Economy - Manufacturing,  FDI & Sustainability

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

Page 31: SEU 228 Malaysian Economy - Manufacturing,  FDI & Sustainability

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

Page 32: SEU 228 Malaysian Economy - Manufacturing,  FDI & Sustainability

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

Page 33: SEU 228 Malaysian Economy - Manufacturing,  FDI & Sustainability

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

Page 34: SEU 228 Malaysian Economy - Manufacturing,  FDI & Sustainability

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

Page 35: SEU 228 Malaysian Economy - Manufacturing,  FDI & Sustainability

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

Page 36: SEU 228 Malaysian Economy - Manufacturing,  FDI & Sustainability

36

What’s next? K-economy

Page 37: SEU 228 Malaysian Economy - Manufacturing,  FDI & Sustainability

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?

Page 38: SEU 228 Malaysian Economy - Manufacturing,  FDI & Sustainability

38

What’s next?

Page 39: SEU 228 Malaysian Economy - Manufacturing,  FDI & Sustainability

39

Page 40: SEU 228 Malaysian Economy - Manufacturing,  FDI & Sustainability

What & Why of FDI

Page 41: SEU 228 Malaysian Economy - Manufacturing,  FDI & Sustainability

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

Page 42: SEU 228 Malaysian Economy - Manufacturing,  FDI & Sustainability

Why? Role of FDI in Malaysian Economy

1. to generate economic growth by increasing domestic capital

formation

42

Page 43: SEU 228 Malaysian Economy - Manufacturing,  FDI & Sustainability

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

Page 44: SEU 228 Malaysian Economy - Manufacturing,  FDI & Sustainability

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

Page 45: SEU 228 Malaysian Economy - Manufacturing,  FDI & Sustainability

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

Page 46: SEU 228 Malaysian Economy - Manufacturing,  FDI & Sustainability

Why? Role of FDI in

Malaysian Economy

2. to fuel export growth

46

Page 47: SEU 228 Malaysian Economy - Manufacturing,  FDI & Sustainability

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

Page 48: SEU 228 Malaysian Economy - Manufacturing,  FDI & Sustainability

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

Page 49: SEU 228 Malaysian Economy - Manufacturing,  FDI & Sustainability

Why? Role of FDI in

Malaysian Economy

49http://competitiveness.in/wp-content/uploads/2012/02/FDI-MNEs_Mind_Map.jpg

Page 50: SEU 228 Malaysian Economy - Manufacturing,  FDI & Sustainability

Why? Role of FDI in

Malaysian Economy

4. lead to higher employment through the expansion of the economy &

job creation

50

Page 51: SEU 228 Malaysian Economy - Manufacturing,  FDI & Sustainability

Why? Role of FDI in

Malaysian Economy

5. as the agent of transformation in the Malaysian economy

51

Page 52: SEU 228 Malaysian Economy - Manufacturing,  FDI & Sustainability

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

Page 53: SEU 228 Malaysian Economy - Manufacturing,  FDI & Sustainability

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

Page 54: SEU 228 Malaysian Economy - Manufacturing,  FDI & Sustainability

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

Page 55: SEU 228 Malaysian Economy - Manufacturing,  FDI & Sustainability

Source: http://www.oecd.org/media/oecdorg/satellitesites/stisusman/478375063dimensional.JPG

Three-Dimensional Aspects of Sustainable Manufacturing

Page 56: SEU 228 Malaysian Economy - Manufacturing,  FDI & Sustainability

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."

Page 57: SEU 228 Malaysian Economy - Manufacturing,  FDI & Sustainability

Source: http://www.mel.nist.gov/msid/SSP/images/sustainable-_ladscape.jpg

Product LifeCycle Approach:

Page 58: SEU 228 Malaysian Economy - Manufacturing,  FDI & Sustainability

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

Page 59: SEU 228 Malaysian Economy - Manufacturing,  FDI & Sustainability

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

Page 60: SEU 228 Malaysian Economy - Manufacturing,  FDI & Sustainability

Source: http://www.theguardian.com/world/2014/feb/06/bangladesh-garment-factories-child-labour-uk

Sample Case 3

Page 61: SEU 228 Malaysian Economy - Manufacturing,  FDI & Sustainability

Source: http://www.frost.com/prod/servlet/cio/188029182

Stages of Green Manufacturing

Page 62: SEU 228 Malaysian Economy - Manufacturing,  FDI & Sustainability

What are the benefits of sustainable manufacturing?

Source: http://www.oecd.org/innovation/green/toolkit/48704993.pdf

Page 63: SEU 228 Malaysian Economy - Manufacturing,  FDI & Sustainability

Interested to find out more? Let’s do research…

Source: http://www.sciencedirect.com/science/article/pii/S0925527311002179

Page 64: SEU 228 Malaysian Economy - Manufacturing,  FDI & Sustainability

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

Page 65: SEU 228 Malaysian Economy - Manufacturing,  FDI & Sustainability
Page 66: SEU 228 Malaysian Economy - Manufacturing,  FDI & Sustainability

https://play.kahoot.it/#/lobby?quizId=29ad5fbc-a5cf-4111-b1a2-3aa8a0c30c8c