Industrial Deepening in Malaysia: Policy Lessons for Developing Countries

Article excerpt

The Malaysian economy has undergone substantial industrial transformation, shifting from primary commodity production to manufacturing in slightly more than 5 decades since achieving independence. However, efforts to deepen manufacturing development have not succeeded in nurturing a critical mass of domestic entrepreneurs with indigenous innovative capacities as industrialization continues to be dependent on imported technology and capital. Instead, the manufacturing sector is facing premature deindustrialization. In view of these developments, this study aims to assess the extent of industrial deepening in a country through the development of linkages, as well as the key factors that have contributed to this. This has important policy lessons for other developing countries that are following similar export-oriented, foreign direct investment-led strategies for their industrial development. The main findings of this study indicate that while trade and investment policies have contributed to the development of the manufacturing sector, they have also fostered closer integration with the rest of the world rather than within the domestic economy. The electrical and electronics subsector has relatively weaker backward linkages than other subsectors in the economy. Deepening internal integration requires complementary labor, human capital, and technology policies that can facilitate the development of linkages in the manufacturing sector.

JEL classification: F13, F14, O25

(ProQuest: ... denotes formulae omitted.)

I. INTRODUCTION

The Malaysian economy has undergone substantial industrial transformation, shifting from primary commodity to manufacturing production in more than 5 decades since achieving independence in 1957. Sterling growth rates were achieved before the onset of the Asian financial crisis in 1997, leading to Malaysia's inclusion as one of the emerging tigers in the East Asian miracle (World Bank 1993). Real gross domestic product (GDP) grew at an average of 7%-8% per annum, while population growth averaged at 2.5% per annum and GDP per capita grew at 4.5%-5.5% per annum (Zainal 2009). Yet after the Asian financial crisis, Malaysia's economic development appears to have stalled as growth rates have faltered, averaging at 4.3% per annum for the period 20012009 (Government of Malaysia 2010). While per capita income has grown from $380 to $6,760 from 1970 to 2009, Malaysia appears to have remained in the middle-income category or the middle-income trap as per capita income of other East Asian countries, such as the Republic of Korea, has grown from $260 to $21,530 during the same period.

Numerous studies have shown that manufacturing development foster greater external integration with the world through trade and investment (Gangnes and Assche 2010). However, efforts to deepen manufacturing development have not succeeded in nurturing a critical mass of domestic entrepreneurs with indigenous innovative capacities that can move Malaysia up the value chain of production. Instead, the manufacturing sector is facing negative deindustrialization with falling trade performance as well as a slowing down in labor productivity in key subsectors such as electrical and electronics, textiles, and transport equipment (Rasiah 2008). In view of these developments, the objectives of this study are to assess the extent of industrial deepening in the country through the development of linkages as well as the key factors that have contributed to this development. This has important policy lessons for other developing countries that are also following similar export-oriented, foreign direct investment (FDI)-led strategies for their industrial development.

The paper is organized as follows: Section II summarizes key policy debates on linkage development in the literature before discussing the trade and investment polices used in different phases of industrialization in Section III. Section IV presents an overview of the manufacturing sector and the results of the computed linkages, while Section V discusses the main factors that have contributed to state of domestic linkage development. …