IS MALAYSIA TOO DEPENDENT ON INTERNATIONAL TRADE?

Transcription

1 IS MALAYSIA TOO DEPENDENT ON INTERNATIONAL TRADE? Ahmed Munawar: Siti Hajar Mohmed Noorhayati Md. Daud Raz Izyantie Wahezar Rahman - 1 -

2 Contents INTRODUCTION... 3 METHODOLOGY... 4 PART A: ANALYSIS OF TRADE PATTERNS OF EXPORTS AND IMPORTS OF GOODS... 5 The percentage of total export and total import to the GDP... 5 The positive correlation between export and GDP... 5 PART B: DIRECTION OF TRADE Advantages that can be gain of being dependant on few important markets Disadvantages that are faced of being dependant on few important markets PART C: COMPARISON OF DEPENDENCY WITH OTHER COUNTRIES Dependency by exports and imports Exports by products classifications Imports by economic classification Dependency by foreign direct investment PART D: ANALYSIS OF FOREIGN DIRECT INVESTMENT OF MALAYSIA CHALLENGES FACED BY MALAYSIA TRADE SOME OF THE MAIN GOVERNMENT POLICIES CONCLUSION AND RECOMMENDATIONS RECOMMENDATIONS REFERENCES

3 INTRODUCTION Malaysia is one of the fastest growing economies in the World. Even after the 1997 crisis, Malaysia s economy continued to grow which by the end of 1999 recorded a growth rate of more than 4 per cent, following negative growth in 1998, and in many ways, a Third World success story. More than three decades of sustained growth and structural diversification have reduced the economy s reliance on two main primary products, rubber and tin. The last two decades observed a structural shift in the Malaysian economy - from a primary commodity trading and import substitution - based economy to a highly diversified and export - led economy. The manufacturing and service sectors had become the major GDP contributors with each accounting 33% and 42% of the GDP respectively in The contribution of agriculture and forestry sectors declined from 29% in 1970 to about 13% during the said period. By 1995, the manufacturing sector accounted nearly 80% of the country s export. The share of commodity sector (palm oil, cocoa, rubber, etc) has declined from 75% (1980) to 20%. Electrical and electronic machinery and appliances are the predominant component of manufactured exports - accounting about half of the export. Its share continued to increase where it reached two-thirds in The share of other manufactured products - like wood, rubber, chemical, petroleum, iron and steel has remained constant, although, in volume terms, they have registered increases Today, Malaysia is one of the largest manufacturers of semi-conductors and electronic and electrical products. In the mid 1990s, more than 30 per cent of its electronic products were exported to the US. In 1997, the manufacturing sector accounted for about 34 per cent of GDP compared to 12.7 per cent by the agricultural sector. In 1997, the manufacturing sector contributed about 12.5 per cent to GDP growth relative to 1.3 per cent by the agricultural sector (Bank Negara, 1998). In fact, manufactured goods accounted for 73.7 per cent of total Malaysian exports in 1997, suggesting an export-oriented industrialization.. Malaysia is a trading nation, with exports and foreign direct investment playing an important role in its economy. The recent sharp slowdown in the U.S. economy, and Japan's further weakening, - 3 -

4 pose major challenges for Malaysia's trade and investment outlook and thus to Malaysia's shortand medium-term economic prospects. Indeed, the Central Bank predicts that growth will fall to between 5% and 6% in 2001, mainly due to the slowdown in exports to the United States (the Asian Development Bank has forecast growth of 4.9% in 2001), notwithstanding simulative fiscal measures adopted in March This raises the question of whether Malaysia's economic policy has perhaps over-emphasized exports at the expense of domestic demand (i.e. national saving is excessive), making it too dependent on foreign markets (and a narrow range of products, namely electronics). METHODOLOGY In our project we have looked into the issue of dependency of international trade for Malaysian growth in three main categories. Firstly by showing the trend in the exports and imports over the period in relation to GDP and seeing how its composition has changed over the period. Next we looked into the direction of trade, where the exports and imports and going to and by analyzing the market structure for Malaysian economy. Thirdly, we compared with one of the ASIAN member country, namely Thailand and also we looked a briefly into Korean economy to see how these economies were doing in terms of dependence on the international trade for growth. In the latter part we have looked into some key issue like FDI, challenges faced by Malaysian economy because of the pattern of trade and we also looked into some policy measures undertaken by the government to deal with the issues in hand. The two countries Thailand and Korea has been considered for comparison after looking into there industry structure and economic performance. Both countries started there development almost same duration that of Malaysia, and has undergone a similar trend in the economic direction. They almost have similar economic resources and know how, but Korea still seems far ahead in some areas than Thailand or even Malaysia. The other base was to select one country from ASIAN region and one from the so called Tiger economic of Asia. For the first, we selected Thailand, and for the latter we chose Korea

5 PART A: ANALYSIS OF TRADE PATTERNS OF EXPORTS AND IMPORTS OF GOODS To see whether Malaysia is too depended on international trade, here we will analyze the trade pattern, to see the trends in the import and export for Malaysia over the last ten years in comparisons with the GDP for the economy. The percentage of total export and total import to the GDP (Figure A 1.0) Based on, Figure A1.0, we can see that the percentage of total export and total import to total GDP is high and increasing over the years. During 1990s the percentage of export to GDP is more than 100 % in most the time, except for While the percentage of total import, though it less than 100% after mid 1990s, the proportion in still relatively higher with regard to GDP. This shows that we depend on export and import (i.e..international trade), for income and growth. The positive correlation between export and GDP After testing the correlation between export and GDP and import and GDP, we found that both export and import are positively correlated with GDP. For the period of 1981 to 2001, the correlations are for export-gdp and for import-gdp. If we compare the movement of export to the GDP in Figure A 1.1, we will find that most of the time, they are moving in the same direction except for 1989 and 1991, where their correlations are negative during these two years. After 1991, the correlations between these variable are positively higher ( and during compared to and during for export-gdp and import-gdp), where they are moving in the same way at most of the time. This positive correlation between export-gdp and import-gdp implies that any increase or decrease in export and import can cause the GDP to also increase or decrease. This means that the value of Malaysia GDP is influenced and strongly related to export and import (international trade)

6 Implications of having a high percentage of Exports to GDP a. Strengths Higher export helps us to strengthen the current account in the balance of payments account. The increasing trade balance offset the deficit caused by services balance in the current account. As the services balance in the current account is always in deficit, which is increasing over the years, we need higher trade balance to offset this deficit to strengthen the current account. This can only be achieved if we had a higher and increasing export. According to Figure A 1.2 we found that during the periods when exports are relatively high (higher trade surplus), the current account balance was relatively strong. This was because the deficit in services account can be compensated by the larger amount of trade surplus. Moreover, by looking at Figure A1.3, we will find that there are positive correlation between trade balance and current account balance, where both are moving in the same direction throughout 1981 to During the period of (except for , 1996, 1998 and 2000), the strength and weakness of the current account balance are determined by the trade balance. b. Weaknesses In contrast to the strengths, the relationship between trade balance (and export) and current account balance also has its own downside. Since they are positively related at most of the time, any contraction in exports or trade balance can give bad impact to the current account balance. This was proven when the current account balance felt due to the reduction in trade balance during , and At the same time, our dependency on international trade also exposes Malaysian economy to the external economic conditions. In this case, anything that occurs internationally such as economic slump will affect Malaysian economy directly. This was the case when GDP felt by almost -30% following the trade deficit of RM6334 million in

7 Within our dependency on international trade, we found few characteristic attributed by this dependency. They are: I. The concentration of export earning to manufactured export. In this case, referring to Figure A1.5, we can see that the amount of manufactured goods that being exported for the period of are very high. Its proportion to the total exports (Figure A1.6) increased from 59 percent in 1990 to 85 percent in This shows that the main contributor to our export earnings is manufactured export. Within this context, we depend on electronics and electrical (E&E) products that encounters for about more than 50 percent of gross export in 1985, 1990 and While for other products, their portions are less than 15 percent for the period of 1880 to 1995, and most are decreasing in numbers as well as proportions. The increasing amount of electronic and electrical goods being exported throughout the period shows that we depend on this product for our foreign exchange earnings. (Table A1.0) Implications of having high concentration of export earning to manufactured export a. Strength The increasing role of manufactured export can reduce our dependency on primary export which is elastic in nature. By reducing its dependency on primary commodity export, Malaysia can avoid the risk of fluctuation in commodity export prices. At the same time, it enables us to react to the exchange rate changes, where we can effort to increase the amount of our export when the there is increase in external demand due to the increase in our competitiveness during the period of weaker ringgit. This is because by relying on manufactured goods for our export, we can easily react (increase export volume) when the demand for it increases due to cheaper price when ringgit depreciates against the importer s currency and vice versa. Based on Figure A1.7, we can see that after ringgit depreciated, the volume of commodities that are being exported did not increase. Instead, the volume of tin export dropped sharply, while - 7 -

8 others are relatively stable. Since the primary exports are not that flexible, the focus on manufactured exports can give us this advantage. Besides that, our focus on manufactured export also contributes to the diversification of export products for Malaysia. This diversification is important, since any downturn in one type of export can be offset by other export. In other words, when the economic condition and global demand do not favor primary goods or its price fall and hurt export earnings, this situation can be compensated by the other. For example, when the export value for rubber and crude oil felt by -12.4% and -10.3% in 1992, our export still able to grew by 17% in that year. In 1999, the declined in export value of agricultural commodities due to weaker price was offset by the increase in the export value of manufactured goods. As a result, we manage to earn even higher export earnings of RM Mill in 1999 compared to RM Mill in 1998 or 16% increase (BNM report 1999).By depending on manufactured export therefore, can help Malaysia to reduce the risk caused by the volatility of commodity prices. b. Weaknesses The higher growth rate in manufactured export and its prospect may affect the primary export. From Table A1.1, we can see that throughout 1985 to 1995, the share of primary exports to total export are decreasing from 57% in 1985 and 40.1% in 1990 to only about 18.9% in 1995, while the share of manufactured exports to total export are rising from 32% and 59.3% in 1985 and 1990 to almost 80% in 1995 (5 th Malaysia Plan). In 1999, its share amounted to 85%, reflecting the further contraction in the share of primary export (Table A1.1). This situation can hurt our export earnings during the periods when there is surplus of manufactured goods in the world market. In the year 1996 for example, the increased in global competition and declined in price of memory chips for electronic and electrical has caused the rate of increase in export and import to be relatively lower as per 1995 increased (from 20% in 1995 to 6.5% in 1996). The export performance is worsened since the amount of electronic and electrical export represented more than 50 percent of the total export for (BNM report, 1996)

9 II. Depend on import for export The dependency of Malaysia export to import content reflected through the positive correlation (0.986) between import and export. The line graph in Figure A1.2 explain this relationship when most of the time, both export and import moved in the same direction, while the growth rate both are increasing during the period, except for the early 1980s and late 1990s where the growth for import contracted compared to the growth in export, and for the late 1980s where export growth felt, while import growth increased (Figure A1.4). However, these situations cannot counter the fact that export and import are directly related. This is because, the drop in import growth in early 1980s is due to the reduction in development expenditure by the government, while in the late 1990s, it is caused by the contraction in import that caused by the reduction in the volume (esp. capital goods as the domestic demand felt) as well as the postponement of big and less important projects by the government (BNM). Implications of Dependant on import for export a. Strength The strength of our dependency on import relies on the fact that both intermediate and investment goods are essential to the production activity. Even if imports exceed exports, it is not necessarily a bad thing if imports were used to increase the nation s productive capability (Pang 1996). This is because without these goods, we cannot produce the final products. Even if we can, without the intermediate and investment goods, we won t be able to produce it efficiently. By referring to figure 6, we will notice that the proportion of intermediate good being imported for manufacturing is almost 50% of the manufactured export. This reflects the importance of import to our export. b. Weaknesses However, this situation of higher import content of export is unfavorable to the trade balance. According to line graph in Figure A2.2, since both export and import keep on increasing, while both of them are very high, it results to a lower trade balance. Besides that, too much dependent on import for export may result to the contraction of foreign exchange earnings earned through export. This is because the payments that have to be made for - 9 -

10 import may offset our export earnings and affect the income earned through export. In this case, if our export is less than import or slightly higher than import, we will left with only smaller, or even negative income. In addition, higher import content of export makes it difficult for Malaysia to benefit from weaker ringgit, since the increase in import price (when ringgit depreciates) constraint us from reducing our export price. As a result, instead of declines, our export price may increase or a least being unchanged due to the increase in the production cost. PART B: DIRECTION OF TRADE Over the last 30 years, our international trade had been increasing in both export and import and Malaysia is too dependent on few countries for international trade. Among Malaysia traditional partners is US, Japan, Hong Kong, Taiwan, South Korea, EU, Singapore and Thailand but Malaysia major trading partners are US, Japan, Singapore and EU. And these four partners accounted for 56% of Malaysia s total trade in From the Table B1.0 we can see that Malaysia are overly dependent on the US and Japan. Our total trades with US keep increasing from year 1985 to 2000 (from 14% (1985) to 17% (1990) to 18% (1995) to 19% (2000)). From 1982 to 2000 our trade account with US mostly had a positive balance (surplus) with the rapid increase in the export sector except in early 1980s (in 1982 deficit of USD 782 million, in 1983 deficit of USD 263 million and 1984 deficit of USD 64 million). From the Table B1.3 shows that 76.8% total export to US is from electrical and an electronics product which is almost 53% of Malaysia total export. From here we can also said that Malaysia is also too dependent on electrical and electronics products for international trade since US is the largest market for electrical and electronics exports and this percentage is keep increasing from the last year which is 77.4%. The increase was attributed to increase investment in new technology, rapid technological innovation and the growing usage of the internet by businesses and consumers in the US. 1 Malaysia was the seventh largest sources of electrical and electronics products for the US with a share of 6.5% followed by Japan, Mexico, PRC, Canada and Republic of Korea. US also remained as the main export market for Malaysia s textiles and apparel amounted 31.2% of Malaysia total export for year 2000 and valued at RM 3.2 billion compared to RM 3 billion in MITI 2000, pg

11 By year 2000, US remained the largest trading partner and replacing Japan which was the largest one from As we can see from the Table B1.0, in 2000 Malaysia total trade with US is 19% compared to Japan which is 17% compared in 1995 which shows that our total trade with Japan is 20% but with US only 18%. The reason behind this is because of depreciation in Yen that result our import to Japan decreasing. As in the case of trading with Japan we can see from the Table B1.0 that our trade balance with them almost had a negative balance (deficit) with the rapid increase in the import sector except in mid and late 1980s (in 1984 surplus of USD 78 million, in 1985 surplus of USD 951 million, in 1986 surplus of USD 1036 million and in 1987 surplus of 754 million). The largest deficit that we face is in 1995 which is USD million. This shows that we are importing more than our exporting which does not give us good feeling about the international trade. From the Table B1.4 shows that 49.5% total export to Japan is from electrical and an electronics product which is almost 25% of Malaysia total export in The increase was due largely to a sustained demand for IT products for example personal computers and the introduction of digital broadcasting. 2 Malaysia maintained the position as the forth largest supplier of integrated circuit (ICs) to Japan after US, Taiwan and Republic of Korea. Same situation as US, we also can also say that Malaysia is dependent on electrical and electronics for international trade in 2000 after the rubber products that we are exporting to Japan. In term of international trade, Japan is the third largest export destination market after US and Singapore in Our export grew by 29.1% to RM 48.7 billion while import grew by 27.3% to RM 65.9 billion. 3 As we can see from the GRAPH B1.4 and Table B1.0 attached, our export to Japan start to decrease from late 1980s as our export to US increasing. Compared with percentage of import, we can see it start to increase from late 1980s but start to decrease after mid 1990s. As we compared to other countries such as Thailand and Korea we can see that there are also depending on few markets and their main market are the same with us which is US and Japan (refer to Table B1.1 & Table B1.2). In case of Thailand their trades balance with US is positive 2 MITI 2000, pg MITI 2000, pg

12 balance (surplus) with the rapid increase in the export sector except in early 1980s where they have been deficit of USD 263 million in 1982, deficit of USD 346 million in 1983, deficit of USD 136 in 1984 and the largest surplus they attained in 2000 which are amounted to USD 8043 million (refer Table B1.1). Looking at Thailand trade balance with Japan we can see that they are having almost negative balance except in 1988 where they faced with surplus of USD 644 but the largest deficit between Thailand and Japan is on 1995 which is amounted to USD million. From the GRAPH B 1.2 & B1.3, we can see that Thailand are exporting more to US but importing more from Japan. Among the product that they are commonly export to US is integrated circuit (ICs) which is 40.8% of their total export followed by electronics component which is 34% in In 2000, Thailand are exporting more manufacturing, agriculture and agro industrial product to their main market. Thailand export to US increasing from late 1980s but due to the economic crisis the percentage start to decline, but after that they manage to increase their export back. Their import to US is higher from late 1980s until late 1990s where it started to decrease. Compared with Thailand export to Japan, from Table B1.1 and GRAPH B 1.2 we can see that after the economic crisis in 1997 and 1998 the percentage is decreasing but Thailand import to Japan is at a good condition in early 1990s but start to decline in late 1990s. Thailand prime export destination to US, ASEAN, EU and Japan fell by 10.7%, 6.4%, 4.1% and 1.2% but export to emerging markets in South Asia, South America and Middle East grew substantially in 2000 and shrank in 2001 but export to Africa rose by 15.5% due to a 60% increase in rice export to Nigeria while export to Eastern Europe steeped up only slightly by 2.6%. 5 When we referred to Korea (refer Table B 1.2), we can see that their trade balance with US almost balance between positive and negative throughout these 20 years from 1982 to Thailand face with deficit with US in 1991, 1992, 1994, 1995, 1996 and 1997 and the largest deficit is in 1996 which is USD million but their highest surplus is in year 1987 which amounted to USD 9621 million. As their trade balance with Japan, they had a negative balance (deficit) through out this 20 years and the greatest deficit they attained is in year 1995 which amounted to USD million. 4 Bank of Thailand 5 Bank of Thailand

13 Among Korea main export product to US and Japan is electrical and electronics but the percentage have been decreasing by 22.8% compared to 2002 due to fall in the price of semiconductors and the inactivity of the world information technology industry. Korea import also decreased due to lower demand for raw materials caused by the inactive domestic business conditions and export decrease, the import in the electronics industry sector amounted only to USD 35.5 billion showing a decrease of 19.2% compared to As we can see from the Graph B1.0, Korea export to US is in the good condition in early 1980s but as years pass by it start to decline and their export to US only increasing after the economic crisis in late 1990s. Looking at their import with US Graph B1.1 shows that the percentage is between 20% to 25% from early 1980 but in year 2000 Korea import to US start to declining below 20% of their total import in that year. As their export with Japan is concerned the percentage is between 15% to 21% in 1980s but it start to decline below 10% of their total export in 1990s but they managed to increased it back in 2000 which is 12% of their total export. Korea export to Japan also increasing in early 1980s but start to decline in mid 1980s until late 1990s but same situation as their export, they managed to increase their import after the economic crisis. By referring to the in Bank of Korea, it shows that they are exporting more electrical and electronics products to this two main market which is transmission apparatus incorporating reception appliances, digital products, vehicle, spark-ignition engine and many others electronics product. In 1998, Korea export of transistor to US is 22.8% of their total export which is among the highest percentage of export to Korea. As we can see from Graph B1.6, Korea is exporting more to US in 1980s compared to Malaysia and Thailand before their export start to decline in early 1990s. Due to their declining in export to US we can see that both Malaysia and Thailand export to US is increasing almost at the same level. In term of importing to US (refer Graph B1.7), still Korea is leading but Thailand import to US is the smallest percentage compared to others Korea and Malaysia is in the range of 10% to 15% of their total import. 6 Bank of Korea

14 Looking at export to Japan, Graph B1.8 & Graph B1.9 shows that Malaysia conquered the market in early 1980s but the situation change in early 1990s when Japan preferring to Thailand products and start to importing less from Malaysia. Same situation is applied in the case of import to Japan whereby Thailand products conquered the market followed by Malaysia. As of Malaysia we can see our import start to decline after mid 1990s but we managed to recover and increase the percentage after the economic crisis. 1. Advantages that can be gain of being dependant on few important markets As far as the discussion is concern, too dependent on international trade also give us some advantages. Since US and Japan is the main market for the world, as they keep developing their demand for import goods will also increasing. Therefore we can always increase our production in order to fulfill their higher demand. Malaysia is not the only country that dependent on US and Japan but almost all countries in the world. Therefore it is not a big problem to us for being dependence. As we know US is a big country with a higher population. Their domestic demand also higher that might result their domestic supplier unable to provide everything and satisfy every individual needs. This will result them with the need of external supplier to maximize the satisfaction of their citizen which Malaysia can play a role by being a supplier to them. As mentioned above, by referring to tables and graphs attached we can see that as our exports to US keep increasing we can gain benefit since the value of Dollar is higher. When US doing internal trade with us, they will pay by using US Dollar and therefore we can bring a lot of profit inflows from outside. Since we are also dealing with other big market such as Japan, logically as our export increase our profit will also follow the same. By being a supplier to this two main market it can also being one ways of attracting Foreign Direct Investment (FDI) to Malaysia. Since they are using our products this can make them become interested to know our countries which managed to fulfill their demand. As a result they will come here and try to established their own company or corporation since from the product that we are exporting give a perception to them that Malaysia is one of developing countries that going to have a good future in the economy and maybe we will manage to give an impact to the

15 international trade. Through FDI, the foreign company will create a new job scope to Malaysia citizens. Therefore by increasing FDI indirectly can help us to increase the employment rate. Another benefit that we mange to get by depending on this international trade, is where we can increase our productivity. As we know, we are not the only country that having international trade with US and Japan that result Malaysia to compete with other countries such as Thailand, Korea, Singapore, EU and many other countries. If other countries for example Thailand and Korea manage to produce a higher quality product with a lowest cost will be one of advantages for them. This two main market will change their trading from Malaysia products to Thailand product because their price is much lower and the quality of the products produce is very good. Therefore in order for Malaysia to maintain a good percentage or even increasing our rate of trading with US and Japan, we have to make more research and development (R&D) in certain areas. Through R&D program, we will try to increase our knowledge about the products that will satisfy the demand of US and Japan residents. But that s not all since through R&D also we our self can benefit in the future from the result of the research. We will manage to know on which area we are not performing the best and result us to find a ways to overcome it. Malaysia also will try to produce a good product with higher quality in order to compete with Thailand through the result of R&D. Indirectly, these programs will also creating many job opportunities since we need professionals person to perform the research on certain areas. In the present time, the government is giving more emphasize to conduct more research and the universities also are offering many new courses for example biotechnology. As we know that at US this technology have being use many year earlier than us, therefore it will be a good step for Malaysia to follow the same. As we have graduate from such specific areas, our process of R&D will be much easier rather than delegate this R&D program to someone who does not have any qualification or even any knowledge about those area. Malaysia will also have considerable advantage; if we can develop new technologies in industries we have expertise knowledge (like Palm oil industry) so that we can be as a pioneer in certain areas. If we are able to manage and perform well in those new areas, it will result other country to become interested to do the same. Therefore, they will send their delegation or engineers to Malaysia in order to learn our knowledge in the industry, and this indirectly will give Malaysia

16 good reputation. We also can increase students and other researchers who will be eager to learn the new technology and they will come to Malaysia and to study how we are processing and producing the good. Maybe we also can share our new technology with other countries since they want to learn form us and we can also learn their technology. 2. Disadvantages that are faced of being dependant on few important markets Being dependence to US and Japan not only give us advantages but there are also some weaknesses of doing so. As we know our export and import is targeted on few markets and if those market face any economic downturn it will result us of having a dramatic impact on the whole economy as well. Just as a growing economy benefits most of the individuals who participate in it, a shrinking economy may also hurts individuals. When US or Japan are in the recession their demand to the imported goods will decrease and since we are exporting to them we can also being effected. This is the big problem of being too dependent on them. During their recovery stage, they will try their best to control the market and make sure their outflows of money are increasing since they need the money to overcome their problems. This situation will result them to pull back their FDI which that have given to Malaysia. The reason behind this is because they have to make sure and stabilize their main company or headquarters in their own country in order to make sure they can save their company from being effected more worsen. As a result they will sell their company at Malaysia and we will be at loss of good foreign companies as well as further technological transfer since they return back to their country. (This is a remote case of a large company in most cases.) Another disadvantage of being dependence on few markets is that we have to compete with other countries such as Thailand and Korea who are also producing and exporting same goods to similar countries. This has caused major problems for Malaysian economy over the years to increase the production of those products. For example nowadays, we are quite competitive with Thailand as we know their labor cost is much cheaper than us that the market price of their product is much lower compared to us. This will make US and Japan to buy the product form Thailand instead of Malaysia since the price of our products is much higher. In the case of Korea, their products are of high quality than that of Malaysia. Their product quality is much advance from Malaysia and this had resulted, US and Japan to buy from them

17 Other than reason mentioned above, we also cannot increase our product base to of these goods to cater for local needs since we are producing and exporting product based on the demand of the citizens of other countries. Therefore we have to produce a good that only can satisfy their demand. We cannot be produce other things since they may not like it or even consume it. Therefore this will limited our creativeness in creating something new for our own needs. PART C: COMPARISON OF DEPENDENCY WITH OTHER COUNTRIES The fact that Malaysia is very reliable on the international trade has been proven before by observing through the significant high percentage of the export and import as the total amount of Malaysia s Gross Domestic Product (GDP). For the purpose to see whether conditions of Malaysia s dependency will give a significant difference between Malaysia over the other countries, Thailand and Korea has been taken to make a comparison with the Malaysia. 1. Dependency by exports and imports a. Malaysia Refer to Table C 1.0 in the appendix, Malaysia has a very high percentage of export and import over the total amount of GDP with almost 26 percent over the total amount of GDP in 1981 and has been increasing year by year to 41 percent over the total amount of GDP in As time goes by, the percentage of export in Malaysia has been increasing to more than 100% percent in Meanwhile, the import of Malaysia also recorded a high percentage with 25 percent over the total amount of GDP in 1981 and has been increasing in 1990 to 41 percent over the total amount of GDP. This situation is continuing in 2000 that the import in 2000 also recorded a high percentage with percent over the GDP.( Refer to Table A 1.0) Driving largely by growth by the manufactured products, mostly electric and electronic products, the volume of Malaysian exports is now nearly three times as high as a percentage of GDP as 25 years ago. Thus, this can be the strong evidence of the condition that Malaysia is dependent on the international trade. Without the contribution of the huge amount of export and import, the total amount of GDP wills not that high

18 b. Thailand The dependency on the international trade also can be seen in Thailand like Malaysia, they also have a higher percentage of international trade than Malaysia. As Table C1.1 shows, in 1970, almost 15 percent of their total GDP was consists of export components. This has been significantly increasing to 54 percent in For the import side, 19.4 percent of import components was contributed in the total GDP amount on 1970 and has been increasing to 43 percent in This has been indicated that the international trade gave a very much contributions to the performance of the economic conditions in Thailand year by year. Thus, the dependency of Thailand to the international trade also can be proven through those figures, as what we have done to prove that Malaysia is dependent on the international trade. So that, the economic condition that Malaysian relies on the international trade is not the only one because in the case of the rest of the world, the other countries also have a significantly same conditions. Most of Thailand's major exports which grew considerably in value in 2000 were capital intensive industrial goods such as computers & parts, integrated circuits (IC), vehicles & parts, plastic pellets, radios, TV & parts, iron & steel products, chemical products. Labor intensive industrial goods with strong growth were garments, while agricultural goods which increased substantially in export value were rubber, chilled & frozen shrimps, and so on. c. Korea Korea can also be said that they are dependent on the international trade, but in their case, their level of dependency is not as high as the case of Malaysia and Thailand. In 1971, only 15 percent of the total amount of GDP was consists of export component, and it has been increasing year by year until it reached 45 percent in Meanwhile, in 1971, the total amount of GDP consists of 26 percent of import components, and in 2000, the percentage increased to 42 percent. This is proved by looking at the Table B17 in the appendix. Exports by products classifications The export earnings in Malaysia are concentrated on manufactured goods and it consists of mainly the electric and electronics components such as semi-conductors, electronic equipment and parts, as well as the electrical machinery and appliances. This condition was mainly due to the structural

19 transformation that has been experienced by Malaysian through these years. The focus of economic activity was not only concentrated to the agricultural products as time passes by, because the Malaysian Economy then put more emphasizes on producing the manufacturing and industrial products. Because manufactured exports have tended to be less volatile than commodity trade, the move towards manufacturing has meant that economic growth in Malaysia has been relatively stable, in spite of a vulnerability to externally induced fluctuations created by the country s openness and trade dependence. Table C 1.3 has proved the statement. As Malaysia focusing on manufactured goods in their exports, Thailand also give the same indicator. The concentration of the manufacturing products in export components also can be seen in Thailand economy. In Table C 1.4, in the early 1950, Thailand s economy was only focusing on the agricultural sector products. As the structural transformation taking place, modern industrialization in Thailand started only in the early 1960s. During the middle of 1970s, the components of manufactured goods ranging from cement to watch parts, and including canned fruit, garments, chemical products, transport equipment and television sets. Meanwhile, in the mid-1980s, textiles, rubber products, processed foods, integrated circuits, metal products, jewelry, footwear, and furniture has been given more emphasizes in the commodities to be exported. As referred to the table, the total export of Thailand consists of 82% of manufactured goods in 1997 and 1998, and 84% in Two of the main goods that Thailand manufactures for export are Computers Peripherals and Electronic Components. As looked at the exports by product classifications, most of the export was focused on the manufactured goods. As the percentage of manufactured goods was higher for both countries, one can conclude that Malaysia and Thailand, both depends on the international trade. Korea also has the same conditions as what Malaysia and Thailand has been experienced. Most of their export components were consists of the manufacturing goods. Most of those manufactured goods that has been exported exceed the rest which are agriculture, hunting, forestry and fishing, mining and quarrying, electricity, gas and water, construction, wholesale and retail trade, restaurants and hotels, transport, storage and communication, finance, insurance, real estate and business services and community, social and personal services

20 Imports by economic classification There are certain categories in import components in Malaysia, which are capital goods, intermediate goods, consumption goods and dual use goods. Capital and intermediate good are needed for production activities, so that Malaysia needs to buy those stuffs from other countries to run the production. Thus, the trade with the other countries is very significant to run the production. See Table C1.5. In the case of Thailand, a high degree of diversification has taken place in the industrial sector throughout the past two decades. As a result, industrial activity in Thailand today has become more evenly distributed among many groups of industries and is more complex than in the 1960s. The growth of manufacturing output during the 1960s was characterized by import substitution. The dependency of Thailand to the international trade can be proved by looking to the large number of capital and intermediate goods imported. For each and every year, these kinds of goods have been the highest goods to be imported. The importance of importing those goods indicates that Thailand also was very dependent on the international trade, as the case of Malaysia. See Table C Dependency by foreign direct investment Foreign Direct Investment has played a leading role in many of the economies of the region, particularly in export sectors, and has been a vital source of foreign capital during the economic crisis. Although only a small share of total investment or employment in the economy, FDI has been a key factor driving export-led growth in Southeast Asia. a. Malaysia Malaysian economy has been diversified away from commodities and into manufacturing, reversing the relative roles of agriculture and manufacturing. This structural transformation is more concentrated in terms of trade, as export have shifted from commodities, primarily rubber and tin, to manufactured goods, mostly electronic goods. As can be seen from the table, Malaysia is too dependent on FDI, especially on the manufacturing sector. In fact, as a Malaysia focusing a very big percentage of the total exports on the manufacturing products, consequently Malaysia is depends on the FDI on the export industry. See Table C 1.7 & Table C

21 b. Thailand In the case of Thailand, FDI plays a key role in the process of structural transformation. Electronic products, particularly computer parts and integrated circuits, make up to almost one third of the country s total exports. These sectors are dominated by foreign multinational enterprises, MNEs. Through inward investment, Thailand has become the ninth largest exporter of computers during the 1990s, with computer exports growing fourfold in the past five years. In the early stages of its development, the Thai economy was dominated by local capital. Foreign investors tended to focus on those sectors where the government promoted import substitution. But the situation changed in the second half of 1980 when Thai benefited from a massive relocation of production away from Japan and Newly Industrialization Economy (NIE). FDI inflows took off dramatically after 1987 as compared to the previous year which are in the very modest level. It peaked in The share of FDI flows in gross fixed capital formation rose from 4% ( ) to 10% from but dropped again to 3.5% in Manufacturing represents the largest sector for inward investment. Over one quarter of manufacturing investment is in the electrical equipment sector. The electronic industry has the highest FDI ratio, with foreign investment constituting about 95% of total investment. Automotive and metal-working industries accounted to 80% of total promoted projects. See Table C 1.9. c. Korea For the past three decades, Korea has been one of the fastest growing economies in the world. Even after the foreign currency crisis at the end of With the implementation of the new administration in February 1998, the nation set as its goal the furtherance of democracy throughout society and of market principles in the economy. Korea has as its target nothing less than being reformed haven for foreign corporations, and is taking every step necessary to induce the inflow of foreign capital. Korea has been experienced an annual economic growth rate of almost 7.47 percent from year 1990 to On 1997, the total amount of its Gross Domestic Product was about $444.7 billion. From the total amount volume of the trade in Korea which is $280.7 billion, $136.2 billion was consists of the export components, while $144.5 billion of the trade volume was consists of the import part. Basically, the rapid growth was happened in the automotive, machinery, electronics, and information industries. Generally, by industry, as the case of Malaysia and Thailand, the FDI

22 was put much more concentration to the manufacturing and service sectors. It shows the similar increases in FDI. In 1999, 594 cases of FDI were recorded in the manufacturing sector, which resulted in a total investment of $7.1 billion and accounted for 45.9% of total FDI. By business type, the order is as follows: electricity and electronics industry ($3 billion), chemical engineering business ($726 million), transportation instruments ($662 million), machinery ($648 million). The service sector recorded 1,480 cases of FDI this year, which resulted in a total investment of $8.4 billion and accounted for 53.8% of total FDI. By business type, the order is as follows: financial business ($2.3 billion), communications and others ($2.7 billion), hotel ($817 million), and insurance ($ 510 million). Those sectors are the most significant in the performance of the economy. The high rate of investment put in the Korea indicates that Korea is also dependent on the international trade as what Malaysia and has encountered before. (Bank of Korea Annual Report, 2000) PART D: ANALYSIS OF FOREIGN DIRECT INVESTMENT OF MALAYSIA A look at historical data shows that for decades Malaysia s growth has been driven largely by external factors, in particular, FDIs and international trade. The bitter experience of the Asian financial crisis of , demonstrate quite clearly that being too dependent on the external environment will render the economy vulnerable to changes in the external factors, which are very much beyond control. FDI had played a vital role in the development process of Malaysia before and after independence. In the early development phase, majority of the FDIs was concentrated in the agriculture sector. One estimate puts it that about 70% of FDI in Malaysia during the early development was in agriculture (Edward, 1994, page 120). In the Import substitution and Export oriented phase, FDI was targeted mainly to the manufacturing sector. Between 1965 and 1980, total FDI was estimated to have increased by 147% from RM 300 million to 1.4 billion in Between 1980 and 1995, Malaysia received FDI by TNCs totaling RM 120 billion. 7 The importance of FDI in the total investment of the 7 The Changing Phases of Malaysian Economy, 1999, p:

23 country increased. In 1981 the share of FDI to total investment was 29%, 33% in 1986 and 54% in And by 1995, Malaysia was one of the largest recipients of in ASEAN. (Table D 1.0) It can observed that from early 1980, that mot of the FDI I in the manufacturing sector especially the Electrical& Electronic (E& E) products and food proceeding industries. (Table D1.1 and 1.2). From bank Negara statistics, the main sources of FDI inflows into Malaysia were United Kingdom, Hong Kong, Japan, Singapore, Taiwan and United States of America. US was the main source of FDI n the oil sector and in manufacturing sector Japan was the leading in the early 1980, but Taiwan and US overtook in 1990s.( Table D1.3,1.4) Implications of the pattern of FDI received This show that, in the development process of Malaysia, foreign investments has played major role and this suggest that Malaysia is over dependence on the flow of FDI for growth. The major engine of growth was the manufacturing sector, and in this sector the dominance of foreign companies can be seen from the Table D1.5 and D1.6.The MIDA data show that foreign direct investment in the manufacturing sector has increased in absolute value, 34% in 1990 and was 44.5% in This increase in investment was highest in the E&E sector and it share rose from 40% in 1985 to 73% in And E&E has been the most important manufactured export commodity playing the major role in the export led growth. In "Foreign Direct Investment: A study of Malaysia's Balance of Payments position", Phang Hooi Eng, a Senior Manager in the Economics Department at Bank Negara Malaysia (the Malaysian central bank) she explained that, in the manufacturing sector, regardless of whether firm were foreign or local, less than 20% concentrated on the domestic market. 8 But the foreign firms play vital role in the export market of Malaysia than the local firms. She find that comparing local and foreign firm, the latter were more export orientated 37% of foreign and 20% of local export more than 70% of their total output. (Table D1.7).Thus, this also reveals that the performance of manufacturing sector is highly dependent on the international trade since most of the manufacturing firms exports most of their production. 8 "Foreign Direct Investment, 1998,p,

24 In her book Phang Hooi Eng has also done an extensive study on the impact of FDI on Malaysian economy. The study, "Foreign Direct Investment: A study of Malaysia's Balance of Payments position", uses a variety of data sources to look at the direct effects of FDI on the BOP. But given the difficulties of finding appropriate shadow prices for evaluating various inputs and outputs, and the need to break down foreign contribution into its financial and technological components, the study has not attempted to measure the "total" effects on the economy, but only discusses the indirect effects. And while FDI brings both benefits and ill-effects, the study advocates measures that the government could take to encourage domestic investment and, at the least will not favor foreign investment at the expense of local. The country, she adds, has to adopt a more selective approach to promoting and encouraging FDI, since FDI "also has an important negative effect on the country's balance of payments." On this, and some other matters, Phang's study, based on data, contradicts the bald dismissal of these negative effects by a WTO Senior Advisor, Zdenek Drabek. In a paper published in the FONDAD publications to promote the MAI, Drabek says the arguments of critics about FDI's adverse effects on BOP, savings and, through decapitalization effect, on domestic growth, "are not viable" and receive "declining support from academics, policy-makers, journalists and other experts as "there is no theoretical reason" to provide support for these ideas. Drabek paper, presented in November 1997 (four months after the meltdown of Asian markets began), says the empirical evidence also contradicts these fears "as illustrated by the economic successes of Southeast Asian countries." Phang finds that foreign firms in Malaysia are more export-oriented, but they also have higher import content. While for local firms, import content decreased from 0.22 in 1981 to 0.18 in 1985, and increased again to 0.22 in 1988, for foreign firms the import ratio in the manufacturing sector rose from 0.41 in 1981 to 0.45 in 1985, dipping slightly to 0.43 in This can explained part of the story why Malaysia has high import content in their export. It is because of the production pattern of the Multinational operating in the region. She added that since the electronics industry is the most important in the manufacturing sector in terms of output, exports and imports, the significant difference between local and foreign firms will have a significant impact on the BOP. 9 DOS Annual Financial Survey of Limited Companies

25 Looking at sources of growth for local and foreign firms and effects of import substitution, exportexpansion and growth in domestic demand, Phang finds while some industries developed in response to the export market, others expanded in tandem with the country's industrialization. The non-ferrous metal industry was developed to cater to the domestic market, and thus contributed to an import-substitution growth. But when it was unable to cope with high local demand, more had to be imported, resulting in a negative trade balance. The industries with highly negative import substitution effects were also those which were most outstanding in export-expansion-- telecommunications and sound recording equipment, chocolate and sugar confectionary, petroleum and coal products, footwear and other industries. Phang says that the discussion of various elements in the study shows that while FDI stimulates and generates trade, its net contribution to the country's balance of payments is very much reduced by outflows due to the higher import propensities of foreign firms, repatriation of investment income, technical and royalty payments and freight and insurance payments. At the macro-level, data presented by Phang shows that the direct effects of FDI on the BOP had been negative over , peaking in 1984 with a net drain of Malaysian Ringit (RM) 3.2 billion, and only RM 0.4 billion less than value of gross FDI inflows in that year. "This study," says Phang in her conclusions "shows that FDI has both negative and positive effects on the country's BOP. While it is true that in the early period of the 1980s, FDI provided the catalyst for economic growth and provided employment opportunities, the country has to adopt a more selective approach to promoting and encouraging FDI because it also has important negative effects." CHALLENGES FACED BY MALAYSIA DUE TO DEPENDENCE ON INTERNATIONAL TRADE 1. To reduce import contents of export products This has been one of the main challenges faced by the economy. Import of capital and intermediate goods have followed the pace of industrialization. Imports of intermediate good increased from RM126.3 billion in 1995 to RM billion and imports of capital and intermediate goods accounted for 88.9% of total imports. (See Table D1.8)

26 2. Making manufacturing sector more diversified The role of E & E in the manufacturing sector remained high and increased 64.3%, to 65.3 over 1997 to Within in the sub sector of E& E it mainly concentrated electronic machinery, apparatus and applicants and parts 46.8 %( 98) and include Semi-conductors and intergraded circuits as major share.( See Appendix I) Electrical and electronic machinery and appliances are the predominant component of manufactured exports - accounting about half of the export. Its share continued to increase where it reached two-thirds in The share of other manufactured products - like wood, rubber, chemical, petroleum, iron and steel has remained constant, although, in volume terms, they have registered increases. In the early 1980s, about three quarter of the electrical and electronic products comprised thermionic valves, tubes and photocells. In 1986, about 84% of the total electric and electronics exports were electronic components (Table D1.9). The dependency of the electrical and electronic sector on this product has somewhat lessened in the 1990s where other product categories have registered tremendous growth. By 1995 electronic components such as semi-conductors, thermionic valves, tubes and cells only account about 43% of the total electrical and electronic exports while consumer electronics such as telecommunication equipment, sound recorders or reproducers, radio-broadcast and television receivers, office machines and automatic data processing (adp) have all registered increasing trend. The share of consumer electronics increased from 14% in 1986 to 25% in 1995, while industrial electronics increased from 2% to 31% during the same period. The above statistics indicate the importance of electrical and electronic sector in the manufacturing industry. 3. To increase FDI growth rate and increasing domestic investment There has been more competition to attract more FDI as other countries in the region are becoming adequate destinations for foreign investments. There has been heavy competition from countries like Thailand, Indonesia etc. The government also has faced problems in encouraging local investment as the incentives given to foreign firm "Crowd out" domestic investors. This problem has been discussed in Foreign Direct Investment by Phang Hooi Eng. Similarly, foreign firms are more dominance only one sector, that is E& E sector and Chemical products total 73.4% (97)

27 4. To increase the market based of exports As discussed above the market of Malaysia key exports had been concentrated for main four players: US, Japan, Singapore and EU accounted for 64.9% (99). This has caused reliance on this market for growth. Thus, Malaysia need to find new markets to diversify the markets based of the economy. 5. Formation of AFTA The formation of AFATA wills surly pose more challenges to the economy. This will open up of domestic market for duty free imports from member courtiers. The most heavily hit industry would be the car industry and for this reason government has asked to include it the exclusion category for Malaysia. In addition, it will also pose more challenges and opportunities to attract FDI as all members will have an equal footing in access to the large market of AFAT. 6. Newly emerging markets China's large domestic market has attracted considerable FDI in the 1990s. The fall in NIE-3 investment in ASEAN in the first half of the nineties (Table D 2.0) can be attributed to the shift in their investment to China due to the similarity of culture and the ease of a common language. The competitive pressures have also been compounded by the similarity industries targeted for development with the help of FDI. As shown in Table D 2.1, the machinery and transport equipment sub sector is the largest sub-sector for China, Malaysia and Singapore in According to Takeuchi (1999a), should China succeed in developing a highly integrated production structure domestically, then the scope for complementary relationships between ASEAN and China will be reduced. 7. Increasing competitiveness for manufacture of Exports Das (1998) studied the changing comparative advantage and the changing composition of the exports for several Asian economies in relationship with the economic transformation in these countries, especially within the manufacturing sector. This was in turn manifested in -" changes in the comparative advantage of their manufacturing exports. For example, Das found during , Malaysia experienced a decline in the revealed comparative advantage index values (RCA) for mineral intensive and agricultural intensive exports (Table D 2.2). This pattern was also observed

28 for all the ASEAN-5 countries with the exception of Indonesia that experienced a converse improvement in the RCA of these exports. On the other hand, all 5 countries witnessed an improvement in their RCA index values for technology-intensive, human capital intensive and capital intensive exports. Similarly, all with the exception of Singapore also saw an improvement in the RCA index values for labor-intensive exports.( Tham Siew-Yean, 2001) Das's analysis further reveals that Malaysia together with other ASEAN countries' is moving toward technology intensive export lines. In particular by 1996, Das noted electronics exports such as PCs, semiconductors, color televisions, VCRs, office-automation machines, and other electronics (from SITC 74, 75 and 76) became the most important exports for Singapore, Korea, Malaysia, China and Taiwan, in that order. Table D 2.3 shows that although RCA index for Malaysia for High tech Exports fell from 2.53 to 2.02 between , it steadily rose again in the subsequent years. (In 1997 it also fell quite sharply) The study made by Fatimah and Mad Nasir indicates that(1996) that consumer electronic products such as telecommunication equipment and Automotive data processing machines are highly competitive in the export market as reflected in their increasing share and strengthening revealed comparative advantage. This study provide a similar finding, that is, radio broadcast receivers (one of the products in the consumer electronic category) can be regarded as an export item that is competitive relative to other products such as electrical apparatus, thermionic valves, tubes and photocells. The CMS (Constant market Share) 10 analysis indicates that besides size of market, the export gain to the country is also due to her ability to compete in the world market. Both CMS and RCA analyses indicate that among the five products studies, consumer electronic items such as radio-broadcast receivers and telecommunication equipment indicate the highest competitive ability. (Fatima Mohd. Arshad, 1997) In fact, the nation's competitive edge hinges crucially on the cheapness of her labour - an advantage which is slowly eroding due to the increase of average wage rate (8-10% increase for year between , Bank Negara, 1994). The pull of cheap labour from Vietnam, India and China may pose a real threat to the nation as most of these foreign controlled firms consider labour 10 The CMS model as a methodological tool was first applied in an analysis of the export growth of a country by Tyszynki

29 cost as the second most important factor in influencing their investment decision (Bank Negara, 1992). The other pertinent labour issues are: scarcity of labour, and under-skilled workforce. High cost of labour may encourage these firms to depart to countries where labour costs are relatively low. Hence, there is a need to look into the issue of increasing productivity either through automation or highly trained workers. (Fatima Mohd. Arshad, 1997) As applied to Malaysia, the scope for further improvement in her competitive strength is wide and challenging. The challenges in the future are: the need to develop own indigenous technology so as to reduce dependency on imported technology which is costly. Secondly, to build up an industrial base this utilizes domestic rather then foreign investment. Lastly, it is also a challenge to enhance the linkages between the local SMIs and the large companies in order to ensure better utilization of local resources. SOME OF THE MAIN GOVERNMENT POLICIES Import Substitution policy (1960s) This has been one of the key policies during the early years of NEP. The main aim of it is to reduce import and to expand export through tariff and non tariff protection. During that time Effective Protection Rate rose from 25% to 65% (62-65) Edward, This was governed using the Formation of Tariff body. It was shown that it was not so successful as manufactured imports increased by 11%& while exports increased 9.7% (63-68). Industrial Master plan Industrial master plan 1, ( ) and Industrial master plan 2( ) The Industrial Master plan formed during 1980 was the main policy that guided the industrialization of the Malaysia. It was formed to guide the development of the manufacturing sector. IMP provides a framework for ensuring a more diversified and integrated manufacturing sector and foundation for it sustained growth. It was used in the Development of export led growth both resourced based and none resourced based and development of Heavy industries as well. In the plan rational approach, development objectives are first propounded and then the necessary recourses and policies, including government incentives are directed towards achieving those objectives. Market force play their part by ensuring all active efficiency within the framework of

30 the plane. The main function of the IMP was to indicate to private investors the targets and goal of the government, in terms of industrial development and to coordinate the various functions of government departments. IMP has achieved it major goals, that is to ensure both continued growth in the manufacturing sector and its diversification in order to include new manufacturing industries both in the resource based industries and non resources based industries. (6th Malaysian Plan) The second Industrial master Plan is a continuation of the first wit the commitment to propel Malaysia to become a fully developed nation by It emphasis the necessity to accelerate the production of value added use of human resources as well as intensive use of knowledge and information in production process. In this sense it emphasis improving productivity and competitiveness. In IMP2, two new strategies highlighted are Manufacturing plus Strategy and Cluster based industrial development. The former is about moving along the value chain from assembly based low value added activities towards higher value added activities. The latter is development of competitive industrial clusters through integration of key industries. We will see some of the key policies undertaken under this main policy. Strategies and policy thrust 1. Strengthening the manufacturing base by developing strong industrial clusters As mention above this is one of the key issue of IMP2 and this is done in order to diversify and broaden the manufacturing base of the export. The strategic thrust will be to promote greater interindustry and sectoral linkages in line with the industrial cluster plan. To do so, key factors such a critical mass of entrepreneur firms, networking capabilities, technology management, technology transition and kill formation will be focused on. Greater coordination is required at the state level to stimulate the growth dynamic of clusters. 2. New industries for growth target. In order to diversify the market base, new industries had been highlighted in the Eight Malaysian Plan. The two main are Automotive Industry and Aerospace Industry. The Automotive Industry is focused as it s a growing industry with high value added and to support the industrialization process. To support this, the key strategies will be to develop capabilities and

31 production technique, improving R& D, and design work a well a strengthening the distribution network and marketing expertise. As for the Aerospace industry in its early stage of development, local capabilities are developed especially in repair, overhaul, and maintenance activities of the aviation subsector. 3. Policies to attract more FDI Since FDI is important in the development process of Malaysian economy, government has taken many new policies to attract more FDIs. They include giving more tax holiday and more incentives and reducing government red tapes a far as possible. The most recent of all is the change in the Ownership rules for foreign companies. Ownership rules are loosened allowing foreign investors 100 percent ownership in manufacturing operations that they establish. This will allow foreign investors 100 percent ownership in manufacturing firms they set up. The new rules have been in effect since June and illustrate how hard the country has been hit by the advent of China into the world s commerce. Previously, only special industries or those that exported 80 percent of their output, were eligible for 100 percent foreign ownership 4. Enhancing the local production of capital and intermediate goods to reduce import intensity and foster industrial development Import substitution practice to be conducted for specific goods, if imports value exceeding RM 100 million per year. (Cylinder blocks liners for engines, gear and gearing packing, warping machinery, flat rolled products, aluminum plates, and sheet and strips. etc.) In addition, to promote more local production, outsourcing is encouraged among the industries. 5. Enhancing competitiveness through productivity improvements Active promotion of productivity will be undertaken to increase the awareness and understanding of the importance of productivity and quality. In this regard, programmes such as productivity and quality (P& Q) awards, P& Q training and system development programmes will be undertaken. Encouragement will be given to use of high technology and R& D like giving grants. Likewise, Increasing ICT application to increase efficiency will be also emphasis

32 6. Export promotion This will include establishment of regional display and distribution centers in selected oversea mark and participating in more world trade fairs in abroad as well. In addition, development of new markets in Central Asia, Middle East, South America, and Eastern Europe has been given high priority as to make the market more diversify as possible. 7. Developing resilient SME This has been undertaken according to The Small and Medium Industry Development Plan (SMIDP). This will enhance transformational form labour intensive of more to that on capital, knowledge and technology. Government had made provision of RM 31.9(in the 8 NEP) million for the development of SMEs. In addition training programmes to increase entrepreneur skills will also be undertaken as part of the policy. QUICK LOOK AT PERFORMANCE AND PROGRESS 1. Exports of Manufactured goods Manufacturing sector contracted by 5.1% in (Table D 2.4) This was due to weak performance of the exports oriented industries as results of decline in global demand for electronic products and components. But the weak performance was cushioned by the reliance in the growth domestic oriented industries mainly to construction related materials, transport equipment, consumer products, and resource based industries. (Table D 2.5).Table D 2.6 reflects the weak external demand for E& E in the world market. But semiconductor and other electronic component remained top contributors to the E& E sales. Exports as a whole grew by 7.8% in the second quarter of The electrical and electronic sector saw a 7% drop in exports despite strong growth in semi-conductor exports (up 27%). This is on account of continued falls in the export of most electrical goods and of electronic components and parts. The electrical and electronic sector as a whole seems now to be losing its share of Malaysia's exports, falling from 58% in 2000, to 55% last year and to 50% in Q1 of this year. The fear is that this is due to competition from China rather than just weaker US demand. The fact that high-end exports of semi-conductors to the US are doing well tends to support this. By contrast, palm oil, chemicals, crude oil, LNG and refined petroleum exports are all up by between 33-72%

33 on the same quarter last year and together now make up over 20% of Malaysia's exports. (Bank Negara Quarterly Report, 2003) 2. Import growth Still the imports are concentrated within the intermediate goods E&E accounted for 51.9% of total imports of manufactured goods (2001) (Table D 2.7) Electrical machinery apparatus and appliance (76.9%) constitute the products group of E& E imports followed by office machinery and automatic processing equipment (13.5%) 3. Productivity & Value added Malaysia productivity recorded growth of 11.1% which was below that of China at 13.7(Table D 2.8) In term of the Value added in the manufacturing sector also Malaysia has not done so bad, but the lagged behind China again (Table D 2.9) In term of machinery and Transport equipment, there ha been progress, but the rate is low in compared to the region. In the E&E sectors, also there was increase in the productivity due to the application of advanced technology and information and Communication technology (ICT) (See Table D 3.0) The value added per employee was increased by employment of trained workers reducing labor cot per employee. Labour cost competitiveness was also enhanced through reduction on cost and initiatives on quality. But as can be seen by the Table D 3.0, Value added in content remains to be low. This is manly attributed due to the high import components in the manufacture of E&E products. 4. FDI As seen from the Graph 1.0, FDI has never reached the pre crisis for Malaysia as well for other countries in the region. This can be seen even from the Table 3.1. A recent made by World Bank( 2001) showed that Malaysia is now no longer in the top 25 destinations for FDIs, after being in the 22 nd placing in the last two years has somewhat heightened the concerns. This finding was based on a survey conducted by the firm involving some 1,000 of the world s largest corporations

34 Looking at the Tables 3.2& 3.2, it can be observed that the E& E industries remained leading FDI (51.4%) in terms of total investment approved. Foreign investment totaled RM 9.4 billion of which 52% were for expansion/diversification and Domestic investments lower still in E & E. Major sources of FDI are USA and Japan total of RM billion each, followed by PRC with RM 3 billion. Others include Germany. Singapore, Taiwan

35 CONCLUSION AND RECOMMENDATIONS This study was conducted to see whether Malaysia is too dependent on international trade for growth of the economy. The analysis was looked into three main areas, trade pattern of the exports and imports in relation to GDP, the direction of exports and imports, and lastly by comparing with similar countries (namely Thailand, and Korea). From the study of the imports and exports in relation to GDP, we observed that there is a very high correlation between these three variables. The exports and imports as percentage of GDP reveal that it is quite high in relation to Malaysia. The role of export in the development process was clearly seen, with the growth of manufacturing sector and Electronic and Electrical products dominating the exports of manufactured goods of non resourced based sector. This shows the dependent of not only of exports to growth, but also on one main industry( E&E) The imports structure of goods shows that imports of intermediate goods and capital goods are the highest and they are used mainly in the production of Exported manufactured goods. Thus, there was a very high import content in the export of manufactured goods especially in the E & E industry. As for the direction of trade, Malaysian economy had been concentrated in few major markets, namely US, Japan and Singapore. This has made dependent on these economies for growth of Malaysian economy. With the economic downturn in these economies, especially Japanese economy, Malaysian economy had also been heavily hit. From the comparison with Thailand and Korea, it reveals that the pattern observed for Malaysia is not unique and it had been integral part of these two economies as well. Thus, we can say Malaysia is dependent on international trade for growth of economy, but not too dependent as some observes has pointed out. Even though E &E sector had been dominance in the exports of manufactured goods, within E&E, there are many sub sectors. (See Appendix II) As for market base, inter-asian trade has been showing promising over the years. However, the fact remains that Malaysia is quite dependent on international trade and there are many problems associated with that especially in the case of Malaysia. One of the main problems is the dependence on the FDI, another external factor, for the growth of the manufacturing sector

36 And the amount of FDI arriving had been low in compared with the mid 1990s due to the competition from emerging markets like China.. It has been seen from the study, their dominance is very high in the exports market than the domestic market. And research finding has revealed that for Malaysia, the total effect of FDI had been negative. Overall, Malaysian exports of manufactured goods has been found to be competitive, but the value added has been low in compared to other regional countries. The qualities of goods need to be increased in order to compete with countries having same product base. The performance of the E&E sector in recent time had been sluggish, as the world demand has been low and there has been excess supply of E& E goods in the market decreasing the overall prices of them. Government has taken initiatives to strengthening the exports sector, by promoting productivity and high quality products. Under the Industrial master Plan (1& 2); new policies have been taken like promoting cluster industries, and expanding the role played by SMEs in the economy. RECOMMENDATIONS To make economy more resilience to face the short run business cycles, government needs to make resilient domestic economy to cushion the global impact. Similarly the private sector needs to be encouraged to manage risk better especially the local producers. They need to take own initiatives to develop the key industries and thus, government can reduce direct involvement in such sectors. The export led growth of the economy need to be taken to the next level, by giving more focused on the service sector for growth so that the dependence on one main sector can be reduced. There is plenty of room for growth in the service sector and it need to be started from the service activities that support the manufacturing sector, like shipping industry. The dependence on FDI for new technology and growth still need to be maintained, but future inflow of new FDIs need to be screened and FDI needs to be attracted to new industries that need to be developed and not to already developed industries

37 The market based of the economy need to be diversified more by increasing trade with-in the ASIAN region not only to Singapore, but across other member countries. The role of SMIs needs to be further expanded by them helping to set up and continue their business by giving them more access to funds and market opportunities as. Improving quality of goods need to be given utmost importance so that they can reach international standards and this will enable them even to compete in the international market. Malaysia need to diversify away from low value added manufactured goods to high value added industries within the manufactured industries so that return gained would be higher. For this, the role of ICT needs to be increased and it needs to be more readily available to producers

38 In future, the depended on international trade for economic growth seems to increase as we step into a more globalize world. This would pose more challenges and opportunities as well. To survive in the high competitive world, Malaysian producers need to increase the quality of their goods and improve the productivity of the export industry. If this can be achieved, then being dependent on international trade will not be such big fuss. This is because Malaysia will then have a good position in the world trade market with high quality competitive products available in the country. In any case, if Malaysia wants to sustain the growth of the economy, developing a resilient domestic market will be crucial. And it can play a vital role in reaching the Vision 2020 of being a developed nation in the near future

39 REFERENCES Asian Development Bank (1998), Asian Development Outlook, Oxford University Press Annual Reports of Bank of Korea, 2000 Annual Reports of Bank of Thailand, 2000 Annual Reports ( ) of, Bank Negara Malaysia Kuala Lumpur, Malaysia Das, Dilip K, Changing Comparative Advantage and the changing Composition of Asian Exports, World Economy, 1998 International Trade and Industry Report 2000, Ministry of International Trade and Industry, Kuala Lumpur, Malaysia Pang Teck Wai (1996), Economist Roundtable. The 1996 National Economic Forum: Reducing Balance of Payments Deficit-Challenges and Response Phang Hooi Eng, Foreign Direct Investment in Malaysia, Pelanduk Publication (M) sdn Bhd, Malaysia, 1998 Malaysia (1998), Yearbook of Statistics, Department of Statistics, Government Printers, Kuala Lumpur Mid term Reviews of National Economic Plans of Malaysia (2-8), , Kuala Lumpur: Economic Panning Unit Mohamed, Zain M. (1998), Assessing the Competitiveness of the Malaysian Electronic and Electrical industry: Part 3 Competitive Position and Strategies. Malaysian Management Review 33, No.1,

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