Agglomeration in Practice: The Malaysian Experience in Diversifying - - PowerPoint PPT Presentation

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Agglomeration in Practice: The Malaysian Experience in Diversifying Manufacturing

Mohamed Rizwan Habeeb Rahuman Kevin Wong Tho Foo Rachel Cho Suet Li

Economics Research Workshop Sasana Kijang, Bank Negara Malaysia 1 December 2014

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 Highlighting the main factors contributing to Malaysia's successful diversification in manufacturing, key benefits and direction going forward  Malaysia has transformed the economy from relying solely on the primary sector to a more diversified base, led by manufacturing and services

• Malaysia has achieved a unique agglomeration in manufacturing through diversification, unlike regional and

advanced countries that moved up the value chain via specialisation

• Hence, Malaysia as a resource-based country has largely avoided the 'resource curse' and demonstrated

better economic development relative to its peers (e.g. Venezuela, Nigeria, several Middle East economies)

• Evidence that agglomeration and comparative advantage can go hand-in-hand, as long the country practices

normal agglomeration in diversifying within its boundary of factor endowment (Epifani, 2001)

Key findings

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Malaysia: A unique example of agglomeration in manufacturing

Malaysia successfully implemented the rarely-used agglomeration strategy for manufacturing by building capabilities and strengths in diverse industries

Key success factors Export-oriented industrial base Abundant natural resources Structural transformation across the country Result: Consistent manufacturing growth and contribution to GDP and exports 1 2 3

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From primary-driven 'niche industries' to 'multi-sector agglomeration'

Heavy dependence on raw commodities until mid-1980s

20 40 60 80 100 GDP Export % 1960e 1980 Source: DOSM Share of primary sector

Multi-sector agglomeration Horizontal diversification Vertical diversification Locational diversification Strategy: Import substitution Strategy: Export orientation Policy-induced diversification since mid-1980s (Malaysia Incorporated Policy, Promotion of Investment Act, Industrial Master Plans)

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Horizontal diversification to restructure the economic base

Structural transformation from primary sector to

• ther sources of growth

20 40 60 Primary commodities Manufacturing Services % 1980 2012 Source: DOSM Share of GDP 10 20 30 40 1980 1985 1990 1995 2000 2005 2010 RM bil Source: DOSM, World Bank, BNM estimates By sector (%) 1990-1999 2000-2009 2010-2013 Manufacturing 63 41 45 Services 15 37 29 Oil and gas 17 17 24 Others 5 5 2 Total net FDI inflows

Significant foreign direct investment inflows post-1980s particularly into manufacturing

PIA (1986) 2013: RM38 bil 1980: RM2 bil

6 20 40 60 80 Primary commodities Resource-based manufacturing E&E % 1980 2012

Vertical diversification to move up the value chain

Shift from upstream to downstream production

Source: DOSM Share of export

Raw / basic commodities Crude petroleum Natural rubber Crude palm oil Advanced / complex products Petrochemicals Oleochemicals Refined petroleum and palm oil Rubber gloves Prophylactic products Export diversification toward resource-based and E&E industries

7 10 20 30 40 % 2011 2013

Higher technology attained through development of E&E industries

Source: Gartner Share of Malaysia semiconductor sales Source: MAEI

Innovation of semiconductors beyond PCs (tablets, mobile, automotive, cloud storage, IoT) Shift from low value-added to high value-added activities (front- and back-end operations)

Value chain of E&E in Malaysia

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20 40 60 80 100 % Services Manufacturing Agriculture Mining and Quarrying Construction Import Duties

Locational diversification to spread the benefits evenly

Establishment of economic corridors, with no industries concentrated in a particular corridor

Source: DOSM Share of GDP by state (2013) Source: DOSM, MIER

Presence of manufacturing in almost every state ensured income distribution across country

Five economic corridors across Malaysia

E&E PCRP TEO PCRP PCRP E&E TEO E&E E&E PCRP PCRP TEO E&E PCRP Electronics & electrical Petroleum, chemicals, rubber & plastic products Transport equipment & other manufactures Legend

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Key benefits of manufacturing diversification in Malaysia

Deepening the forward and backward linkages in the overall supply chain

• Ensuring inter-dependence and inter-

connectedness between upstream and downstream activities

• Higher value-added output produced and

retained within domestic economy Efficient reallocation of surplus labour from upstream agriculture to downstream manufacturing Moderating the impact of commodity price volatility Participation in the global value chain (GVC)

• Increase in labour productivity
• Higher income and consumption for rural

and urban workers

• Balanced investment between productive

non-commodity and commodity sectors

• Reducing risks of price and terms-of-trade

shocks emanating from natural resources

• Tradable industries benefited from regional

comparative advantage and access to global markets

• Opportunities to leverage on geographical

and agglomeration dynamics in Asia-Pacific

4 3 1 2

Average (RM) 1980-1990 2000-2010 Avg mfg sales per worker 54,036 309,596 Disp income per cap 3,448 12,004

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Results of diversification seen in the increasing degree

• f intensity across industries

Evidence from the evolution of Malaysian Input-Output Tables over the years

Source: JICA, DOSM

• Through the decades, the intensity of economic activities had risen significantly and shifted from being

concentrated to become more diverse across inter-connected industries

• The increasing darker shades correspond to higher value-added generated from inter-linkages

among industries, highlighting the extent of diversification

Example: Rubber industry Output Latex Output Latex Smoked sheet Output Rubber and nitrile gloves, bearings, tyres, prophylactics Input Natural and synthetic rubber, natural gas Input Natural rubber Input Natural rubber

11 15.0 41.3 85.0 58.7 20 40 60 80 100 1993 2012 % Downstream Upstream PETRONAS revenue by activity

Degree of diversification, however, varies across industries - some better than others

• Significant diversification into downstream

manufacturing (1980s-1990s) − Low crude oil and natural gas prices − Higher post-tax profits

• PETRONAS: Championing investment
• Evolution from basic upstream to complex products
• Moving toward resource-based services

 Oil and gas industry

Source: PETRONAS

 Rubber industry Palm oil industry Heavy industries (steel and automotive)

• Initially driven by SMEs who eventually became

world leaders in rubber gloves and prophylactic products − Top Glove, Supermax, Kossan, Hartalega, Karex − Low input costs − Availability of low-cost foreign labour

• Lagged in venturing into downstream production

relative to regional competitors

• Lack of comparative advantage
• Dependent on import substitution policy to remain

competitive

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Moving forward…

• Fundamental catalyst for greater value-added, job creation and capital accumulation in Malaysia
• Continued investment in knowledge capital imperative to move up the value chain

− Attract and develop high-skilled labour force − Automation as substitute for labour-intensive production

• Differentiation into higher value-added products
• Further progress critical for Malaysia to advance toward high-income nation status by 2020
• Human capital (talent shortage)
• Depletion of natural resources
• Increasing pressure from regional and global competitors

Broad-based impact of diversification Malaysia could not afford to rest on its laurels Key challenges remain

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Thank you