FOREIGN CAPITAL AND INDUSTRIALIZATION IN MALAYSIA

STUDIES IN TilE ECONOMIES OF EAST AND SOUTII-EAST ASIA

General Editors: Peter Nolan, Lecturer in the Faculty of Economics and Politics, University of Cambridge, and Fellow and Director of Studies in Economics, Jesus College, Cambridge, England; and Malcolm Falkus, Professor of Economic History, University of New England, Armidale, New South Wales, Australia

In the last decades of the twentieth century the small and medium-sized nations of East and South-East Asia have begun a process of potentially enormous political and economic transformation. Explosive growth has occurred already in many parts of the region, and the more slowly­growing countries are attempting to emulate this vanguard group. The impact of the region upon the world economy has increased rapidly and is likely to continue to do so in the future.

In order to understand better economic developments within this vast and diverse region, this series aims to publish books on both contemporary and historical issues. It includes works both by Western scholars and by economists from countries within the region.

Published titles include:

Rajeswary Ampalavanar Brown INDIAN CAPITAL AND THE ECONOMIC TRANSFORMATION

OF MODERN SOUTII-EAST ASIA

John Butcher and Howard Dick THE RISE AND FALL OF REVENUE FARMING

Mark Cleary and Shuang Yann Wong OIL, DEVELOPMENT AND DIVERSIFICATION IN

BRUNEI DARUSSALAM

Yujiro Hayami and Toshihiko Kawagoc TilE AGRARIAN ORIGINS OF COMMERCE AND INDUSTRY

Medhi Krongkaew (editor) TIIAILAND'S INDUSTRIALIZATION AND ITS CONSEQUENCES

Rajah Rasiah FOREIGN CAPITAL AND INDUSTRIALIZATION IN MALAYSIA

Foreign Capital and Industrialization in Malaysia

Rajah Rasiah Lecturer, Faculty of Economics Universiti Kebangaan, Malaysia

©Rajah Rasiah 1995 Softcover reprint of the hardcover 1st edition 1995 978-0-333-61505-8

All rights reserved. No reproduction, copy or transmission of this publication may be made without written permission.

No paragraph of this publication may be reproduced, copied or transmitted save with written pennission or in accordance with the provisions of the Copyright, Designs and Patents Act 1988, or under the terms of any licence permitting limited copying issued by the Copyright Licensing Agency, 90 Tottenham Court Road, London WI P 9HE.

Any person who does any unauthorised act in relation to this publication may be liable to criminal prosecution and civil claims for damages.

First published in Great Britain 1995 by MACMILLAN PRESS LTD Houndmills, Basingstoke, Hampshire RG21 2XS and London Companies and representatives throughout the world

A catalogue record for this book is avai !able from the British Library.

Transferred to digital printing 1998 02/780

First published in the United States of America 1995 by Scholarly and Reference Division, ST. MARTIN'S PRESS, INC., 175 Fifth A venue, New York, N.Y. !0010

Library of Congress Cataloging-in-Publication Data Rasiah, Rajah. Foreign capital and industrialization in Malaysia I Rajah Rasiah. p. em. (Studies in the economies of East and South-East Asia) Includes bibliographical references and index.

I. Malaysia-Manufactures-Foreign ownership. 2. Industries­-Malaysia-Foreign ownership. 3. Investments, Foreign-Malaysia. I. Title. II. Series: Studies in the economies of East and South-East Asia HD9736.M32R37 1995 338.8'886897--dc20 94-31773

ClP

ISBN 978-1-349-39258-2 ISBN 978-0-230-37758-5 (eBook)DOI 10.1057/9780230377585

ISBN 978-0-312-12405-2

ISBN 978-0-312-12405-2

To Dayita

Contents

List of Tables ix

List of Figures xii

List of Appendices xiii

Acknowledgements xv

1 Introduction 1

2 Foreign Manufacturing Capital in Developing Economies 5

2.1 Historical Overview 2.2 Economic Arguments 2.3 Neoclassical 2.4 Structural 2.5 Marxist 2.6 Alternative Framework 2.7 Summary

3 Manufacturing in Colonial Malaya

3.1 Classification Problems 3.2 Framework of Analysis 3.3 Pre-Colonial Malaya 3.4 Colonial Malaya 3.5 Manufacturing Linkages 3.6 Summary

4 Manufacturing Branches

4.1 Framework of Analysis 4.2 Industrial Policy 4.3 FDB/LDB Classification 4.4 Performance of Manufacturing Branches 4.5 Summary

5 Manufacturing Industries

5.1 Framework of Analysis 5.2 Industrial Policy

vii

6 9 9

21 30 40 42

45

46 47 48 49 56 67

74

74 76 82 84 97

104

104 105

Vlll Contents

5.3 Foreign Ownership 110 5.4 Performance of Manufacturing Industries 112 5.5 Summary 131

6 Foreign Firms 133

6.1 Framework of Analysis 133 6.2 AA and BA Briefly 136 6.3 Branch Share 138 6.4 Direct Pecuniary Linkages 139 6.5 Direct Technological Linkages 141 6.6 Summary 161

7 Local Firms 165

7.1 Framework of Analysis 165 7.2 Machine Tool Firms 167 7.3 Textile and Garment Firms 176 7.4 Human Capital Transfer 182 7.5 Host Government's Role 188 7.6 Summary 194

8 Conclusions and Policy Implications 197

Notes and References 207

Bibliography 231

Index 252

List of Tables

2.1 Sectoral distribution of foreign direct investment, 1970-90 (US$Billion) 8

3.1 Manufacturing employment, Malaya, 1947 and 1957 60 3.2 Output growth in selected manufactures, Malaya,

1953-55 61 3.3 Factories employing power driven machinery, Malaya,

1955 64 4.1 Proposed investments in manufacturing projects approved,

1983-88 (Million SDRs) 78 4.2 Foreign share in manufacturing, Malaysia, 1968-91 (%) 81 4.3 Sectoral output growth, Malaysia, 1956-90 83 4.4 Sectoral employment growth, Malaysia, 1961-90 83 4.5 FDB!LDB classification 85 4.6 Growth and composition of FDBs and LDBs, 1968-90 86 4.7 FDB-LDB manufacturing output elasticities, Malaysia 87 4.8 FDB-LDB manufacturing output GOP elasticities,

Malaysia, 1972-90 88 4.9 Capital-intensity and productivity growth in FDBs and

LOBs, 1968-90 89 4.10 Trade indicators, FDBs and LDBs, 1968-90 92 4.11 Trade elasticities, FDBs and LOBs, 1968-90 93 4.12 Direct and total linkages, Malaysian economy, 1970,

1978 and 1983 96 5.1 Protection and subsidies in manufacturing, Malaysia 108 5.2 Foreign share in fixed assets in manufacturing industries,

Malaysia, 1968-90 (%) 111 5.3 Growth and composition of manufacturing industries,

Malaysia, 1968-90 113 5.4 Industry-manufacturing output elasticities, Malaysia,

1960-90 116 5.5 Industry-manufacturing output elasticities, Malaysia,

1972-90 117 5.6 Capital-intensity and productivities in Manufacturing,

Malaysia 1968-90 119 5.7 Trade indicators, manufacturing industries, 1968-90 122

ix

X List of Tables

5.8 Trade elasticities, manufacturing industries, 1968-90 125 5.9 Direct interindustry purchases and sales, Malaysian

economy, 1970-83 128 5.10 Direct and total linkages, Malaysian economy, 1970,

1983 & 1983 129 6.1 AA's and BA's contribution in electric/electronics and

textile/garment industries, Malaysia, 1972-90 (%) 139 6.2 Direct local purchases, AA, 1972-90 (M$Million) (1978

prices) 140 6.3 Direct local purchases, BA, 1972-90 (M$Million) (1978

prices) 141 6.4 Direct sales, BA, 1972-90 (M$Million) (1978 prices) 141 6.5 AA's local machine tool sourcing, 1973-90 (M$'000)

(1978 prices) 142 6.6 AA's machinery structure, 1972-90 147 6.7 BA 's local intermediate sales, 1981-90 (M$Million)

(1978 prices) 149 6.8 Employment structure and labour turnover rates, AA,

1972-90 152 6.9 Manpower training, AA, 1972-90 (numbers) 153 6.10 Flexible production techniques in training, AA, 1980-90

(%) 154 6.11 Skill emphasis in operator's work, AA, 1972-90 (%) 155 6.12 Employment structure and labour turnover rates, BA,

1972-90 156 6.13 Manpower training, BA, 1973-90 (numbers) 157 6.14 Skill emphasis in operators' evaluation, BA, 1973-90 158 7.1 Export/output ratios, AA' s local linked firms, 1980-90

(%) 172 7.2 Export markets, local machine tool firms, 1990 (M$'000) 173 7.3 Employment structure, AA's local linked firms, 1975-90 175 7.4 Annual growth rates, AA' s local linked firms, 1972-90

(%) 177 7.5 Composition of CNC and automated machinery in total

machinery, AA's local linked firms, 1975-90 (%) 178 7.6 Composition of fibre, yam and fabric purchases of local

linked firms, 1990 (%) 179 7.7 Main machinery of BA's local linked textile firms, 1990 181 7.8 Employment structure, BA' s local linked firms, 1990 182 7.9 Former foreign electronics firms' employees in local

firms, 1990 183

List of Tables xi

7.10 Relevance of AA's workers' skills to local firms, 1990 185 7.11 Former foreign textile and garment firms' employees in

local firms, 1990 186 7.12 Relevance of BA's worker skills to local firms, 1990 187

List of Figures

3.1 Foreign ownership in tin and rubber, Malaya, 1910-41, 47-57 (%) 51

3.2 Tin smelting and rubber processing value added, Malaya, 1916-37, 1947-57 (1947 prices) 58

4.1 Foreign manufacturing investment in Malaysia, 1971-88 80 6.1 AA 's subsidiaries in Malaysia, 1990 137 6.2 BA's textile subsidiaries in Malaysia, 1990 138 6.3 AA's local machine tool purchases, annual growth rates,

1974-90 143 6.4 AA's local machine tool links, 1990 144 6.5 Exchange rates, the Ringgit against the SDR, Yen and US$,

1972-90 145 6.6 BA's local sales links, 1990 148 6.7 BA's local intermediate sales, annual growth rates,

1982-90 150 6.8 Technical assistance to local institutions, AA and BA,

1990 159 7.1 Machine tool sourcing links, local firms, 1990 168 7.2 Local machine tools, main buyers, 1980-90 (1978 prices) 171 7.3 Production planning and control techniques introduced in

AA's local linked firms, 1982-90 173 7.4 Forward textile sales, BA's local linked firms, 1990 178

xii

List of Appendices

2.1 A Comment on the Internationalization of Capital Approach 44

3.1 Basic Statistics on Tin and Rubber, Malaya, 1871-1957 69 3.2 Sectoral Employment, Malaya, 1947 and 1957 72 3.3 Malaya's Trade Structure, 1953-57 (%) 73 4.1 A Comment on Conventional Usage of Employment

Elasticity and Capital Intensity Measures 99 4.2 Principal Incentives for Manufacturing, Malaysia, 1988 100 4.3 Real Effective Exchange Rate Movements, Malaysia,

1976-90 103 6.1 Relationship Between Lm/Tm, and ¥/M1 and ¥/M2,

1980-90 163 7.1 Local Machine Tool Purchases, Seven Foreign Firms,

1980-90 (1978 Prices) 196 7.2 Machine Tool Sourcers of 9 Local Firms, 1990 196

xiii

Acknowledgements

This book was originally submitted for a doctoral degree at the University of Cambridge in 1992. I have benefited immensely from the advice and encouragement of numerous people in the course of writing the thesis. I owe my biggest debt to my supervisors, Michael Landesmann and John Sender, who were always willing to discuss my ideas until they accorded sufficient clarity.

My special thanks to Peter Nolan, Frank Wilkinson and Massoud Kazanas for their incisive comments. I am also grateful to Bruce McFarlane, Cliff Pratten, Geoff Harcourt, Jomo K.S., Alice Amsden, Johan Saravanamuttu, John McCombie, Hajoon Chang, Ajit Singh, Pat Northover, Bob Rowthom, John Weiss, Michael Best, Paul Dunne, Gabriel Palma, Tim Harper, Krishna Kuman, Harsha Aturupane and John Thobum for reading parts of the thesis.

The research reported in this book would not have been possible with­out the generous financial support of several organizations and individuals. The British Council, the Cambridge Political Economy Trust, the United Nations Industrial Development Organization, the National University of Malaysia, the Kuok Foundation, Standard Chartered and Mr Siew Nim Chee offered the financial awards that saw me through my study at Cam­bridge (1989-92). My special thanks to Bruce McFarlane and Johan Saravanamuttu for their encouragement. I am indebted to Jomo K.S. whose recommendations were crucial in obtaining most of the financial resources that facilitated my trip to Cambridge.

I also wish to thank the following individuals who patiently responded to my research questions: Datuk Chet Singh, Lim PaoLi, Gopalan Nair, Mukunden Menon, Ganesh, Evelyn Teng, Anna Ong, Lai Wan, Khaziah, Mohamad Razi, Mercer Curtis, Lee Clarke, Anuar Mohd. Noor, Tan K.H, Tan Y.H., Lai P.Y., Lee O.K., Brian Ho, Arif Nun, Alfred Teh, Raymond Teoh, Lob K.T, Wong, Choong, Balasubramiam, Colin MacDonald, Vijaya Kumar, Palasandaram, Gerald Quah, Kumarasingam, Vasudevan, Majid, Lim, Dominic, Heng H.L, Cheah C.J, Gabriel and Koay K.H. for helping me in various ways. And my thanks to the other employees of the state organizations, and companies in Malaysia that made my research trip in 1990/91 a fruitful one.

Most of all, I wish to thank Krishna and Dayita who have been very understanding throughout. My parents have always been caring

XV

xvi Acknowledgements

and concerned with whatever I did. I wish to also thank all our family members.

Last but not least, I wish to extend my appreciation to each and every­one who has helped me.

RAJAH RAsiAH