Foreign Manufacturing Investments in Resource-Based Industries: Comparisons between Malaysia and Singapore 9789814376198

Table of contents :
CONTENTS
LIST OF TABLES
LIST OF FIGURES
ACKNOWLEDGEMENTS
I. INTRODUCTION
II. KEY ECONOMIC SECTORS OF MALAYSIA AND THAILAND
III. RESOURCE-BASED INDUSTRIES OF MALAYSIA AND THAILAND
IV. FOREIGN INVESTMENTS
V. SUMMARY AND POLICY IMPLICATIONS
APPENDIX I. Foreign Investments and Resource-Based Industries in Other ASEAN Countries
NOTES
BIBLIOGRAPHY
THE AUTHOR

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FOREIGN MANUFACTURING INVESTMENTS IN RESOURCE-BASED INDUSTRIES Comparisons between Malaysia and Thailand

The Institute of Southeast Asian Studies was established as an autonomous organization in 1968. It is a regional research centre for scholars and other specialists concerned with modem Southeast Asia, particularly the multi-faceted problems of stability and security, economic development, and political and social change. The Institute is governed by a twenty-two-member Board of Trustees comprising nominees from the Singapore Government, the National University of Singapore, the various Chambers of Commerce, and professional and civic organizations. A ten-man Executive Committee oversees day-to-day operations; it is chaired by the Director, the Institute's chief academic and administrative officer. The ASEAN Economic Research Unit is an integral part of the Institute, coming under the overall supervision of the Director who is also the Chairman of its Management Committee. The Unit was formed in 1979 in response to the need to deepen understanding of economic change and political developments in ASEAN. The day-to-day operations of the Unit are the responsibility of the Co-ordinator. A Regional Advisory Committee, consisting of a senior economist from each of the ASEAN countries, guides the work of the Unit.

FOREIGN MANUFACTURING INVESTMENTS IN RESOURCE-BASED INDUSTRIES

Comparisons between Malaysia and Thailand Mohd. lsmail Ahmad

Research Notes and Discussions Paper No. 71 ASEAN Economic Research Unit INSTITUTE OF SOUTHEAST ASIAN STUDIES 1990

Published by Institute of Southeast Asian Studies Heng Mui Keng Terrace Pasir Panjang Singapore 0511 All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, without the prior permission of the Institute of Southeast Asian Studies.

© 1990 Institute of Southeast Asian Studies

The responsibility for facts and opinions expressed in this publication rests exclusively with the author and his interpretations do not necessarily reflect the views or the policy of the Institute or its supporters. Cataloguing in Publication Data Mohd. Ismail Ahmad. Foreign manufacturing investments in resource-based industries: comparisons between Malaysia and Thailand. (Research notes and discussions paper/Institute of Southeast Asian Studies; no. 71) 1. Manufactures -Malaysia. 2. Manufactures -Thailand. 3. Investments, Foreign -Malaysia. 4. Investments, Foreign- Thailand. 5. Industry and state- Malaysia. 6. Industry and state - Thailand. I. Institute of Southeast Asian Studies (Singapore) Il. Title. ill. Series. DS501 !596 no. 71 1990 sls90-130628 ISBN 981-3035-69-2 ISSN 0129-8828 Printed in Singapore by Vetak Services

CONTENTS

List of Tables

vii

List of Figures

ix

Acknowledgements

xi

I

Introduction

1

11

Key Economic Sectors of Malaysia and Thailand

6

Ill Resource-Based Industries of Malaysia and Thailand

11

IV Foreign Investments

23

V

Summary and Policy Implications

49

Appendices

60

Notes

79

Bibliography

81

LIST OF TABLES

2.1 2.2 3.1 3.2 3.3 4.1 4.2 4.3 4.4 4.5 4.6 4.7 4.8 4.9 4.10 Appendix 2 Appendix 3 Appendix 4 Appendix 5 Appendix 6 Appendix 7

Gross Domestic Product by Industrial Origin, Malaysia Gross Domestic Product by Industrial Origin, Thailand Relative Importance of Domestic and Imported Inputs for Resource-based Manufacturing Industries in Malaysia, 1973 Proportions of Total Value-Added by Resource-based Manufacturing Industries, Malaysia Classification of Resource-based and Non-Resource-based Industries by Domestic Primary Input Contents Foreign Direct Investments in Malaysia and Thailand Investment Sources in Approved Projects in Thailand Sources of Foreign Equity in Approved Projects in Malaysia, 1982-87 Approved Investments in Malaysia by Industry and Source Approved Investments in Thailand by Sector and Source Share of Foreign Investments in RBI in Malaysia Major Manufactured Exports of Malaysia Index of Manufactured Exports of Malaysia Major Manufactured Exports of Thailand Index of Manufactured Exports of Thailand Approved Foreign Direct Investment Projects by Sector, Indonesia Approved Foreign Direct Investment Projects by Country of Origin, Indonesia Exports by Commodity Groups, Indonesia Approved Foreign Direct Investments by Country of Origin, Philippines Approved Foreign Investments by Sector, Philippines Principal Exports, Philippines

7 9 14 17 18 27 31 34 37 39 40 43 45 46 47 71 72

73

74 74 75

viii

List of Tables

Appendix 8

Production Index of Selected Manufactured Goods, Malaysia Appendix 9 Production Index of Selected Manufactured Goods, Thailand Appendix 10 Structure of ASEAN Manufacturing Value-Added, 1970--80

76 77

78

LIST OF FIGURES

1. Total Foreign Investments in Malaysia and Thailand

2. 3. 4. 5.

Total Japanese Investments in Malaysia and Thailand Investment Sources in Approved Projects in Thailand, 1982 and 1987 Sources of Foreign Equity in Approved Projects in Malaysia, 1982 Sources of Foreign Equity in Approved Projects in Malaysia, 1987

28 30 33 35 35

ACKNOWLEDGEMENTS

This project was supported and funded by the Institute of Southeast Asian Studies. I am grateful to the Institute for the project funding as well as for the appointment as Research Fellow at the Institute during the period of my sabbatical leave from April to December 1988. It was during that time that this research and writing was carried out. I wish to thank the Institute's Director, Professor K. S. Sandhu, and Dr Tan Loong Hoe, Co-ordinator of the ASEAN Economic Research Unit, for their valuable help and support. Thanks are also due to all Institute staff members who have helped in one way or another. Finally, I am also grateful to Universiti Pertanian Malaysia for granting me permission to carry out this research during the period of my sabbatical leave.

I

INTRODUCTION

The development of resource-based industries has featured importantly in the industrialization strategies of both Malaysia and Thailand. Agriculture had been the leading economic sector in the two countries until very recently. Since 1987 manufacturing has overtaken agriculture and is continuing to expand rapidly. Both governments are giving prominence to industrial development in their economic development strategies (Ng, Hirono and Siy 1986). Given that the two nations are noted to be resource-rich countries, it is only natural that resourcebased industrialization should become a cornerstone of their industrial policies. Resource-based industries (RBis), defined simply, are generally taken to mean those industries that are involved with the downstream processing and manufacturing of the country's agro- and mineral products, usually termed "primary industries". The discussions here will focus on the manufacturing industries that make use of the products of the primary industries and convert them into higher value-added finished and semi-finished goods. In a survey of resource-based industrialization in the developing countries (DCs), Roamer (1979) has attempted to shed light on the potential contribution of industrialization based on resource processing to efficient growth, employment creation, greater equity and economic independence. Two industrial strategies that are primarily based on the utilization of natural resources have been receiving emphasis in the developing countries. One is that of the more complete processing of raw materials for export; the other is the utilization of domestic resources mainly for domestic consumption. Generally, a major portion of resource commodities is exported in unprocessed form. There is, therefore, considerable scope for further processing or fabricating these products for export or for home use. However, since it is not obvious that resource-based industrialization is better suited to achieve national development goals than other potential strategies, the Roamer paper surveys the development literature to throw light on related issues of economic development. The highlights of his survey are as follows. With the exceptions of wood products, processing tends to have a high capital-labour ratio. Because of this, there is no presumption under the HeckscherOhlin model that the developing countries' abnndant supplies of labour would

2

Foreign Manufacturing Investments in Resource-based Industries

confer comparative advantage to RBis. However, the dominant costs in such industries are capital charges and raw material input and, because the most important factor substitution appears to be greater capital intensity to reduce raw material costs, countries with cheap capital- the industrial countries and, lately, the petroleum-exporting nations -appear to have comparative advantage. Lower transport costs as a result of substantial weight reduction in processing may counter this advantage for some stages of processing, but does not universally favour exporters from developing countries. However, higher transport costs favour importing countries in the further processing of metals into refined copper, aluminium metal and steel products. For food crops, weight loss may favour processing in developing countries, such as cocoa beans into butter, but the advantage can be cancelled by quality deterioration in transhipment (chocolate, roasted coffee and palm oil). Most major producers export sufficient quantities to achieve economies of scale typical of resource processing, but it acts as a barrier in processing for the domestic market in all except the largest DCs. External economies of industrialization are also thought to favour processing in the industrial countries, but potential linkages could stimulate some complementary investments in the DCs and enable them to enjoy the benefits of externalities over the long run. Because RBis are not impressive contributors to director indirect employment creation, they are likely to perpetuate the pattern of dualism and inequality present in typical resource-rich countries. However, this would not result in a substantially worse situation than any other industrialization strategy. Developing country exporters may be discouraged from entry into resource processing by the dominance of multinational firms in the metals and petroleum industries; by shipping conference freight rates that discriminate against processed commodities; and by tariff structures of importing countries that provide substantial, effective protection against many semi-processed exports of the DCs. Processing of natural resources for export tends to continue the broad pattern of trade, financial and technical dependence of developing countries, although market dependence may decrease at some stage of processing, and integration into processing and marketing may promote greater price and volume stability for exporters. Home-oriented RBis can avoid market dependence and develop under less stringent requirements behind trade barriers, but cannot escape outside dependence on technology, management and finance.

RBI Strategies Four different industrialization strategies that are being undertaken in developing countries have been identified in the literature (Roamer 1979). Each strategy emphasizes a different set of industries. Import substitution is the most widely

introduction 3

practised and documented strategy. The second is export substitution of labourintensive manufactures, typical of the outward-looking, market-oriented strategy of such countries as South Korea and Taiwan. The third, primary export processing, is based on the assumption that more processing or fabricating of (and hence more value-added from) primary product exports will advance the development of a country. This becomes an identifiable strategy, rather than an adjunct of other industrialization strategies, when policy-makers place a high priority on resource processing regardless of the characteristics of competing investments. Only a few well endowed countries, however, can make this an exclusive strategy for industrialization. 1 The fourth strategy, basic goods production, promotes industries using natural, agricultural and human resources, not mainly for export, but for domestic consumption. Reduced dependence on world trade becomes a principle aim of industrialization in contrast to countries in which primary exports are instrumental in purchasing intermediate and capital goods for import-substituting consumer-goods industries. Heavy industries, such as steel, chemicals and other engineering industries, are examples of this approach. This strategy has been typical for socialist countries such as China and North Korea. In Malaysia and Thailand, the earlier phases of industrialization were characterized by import-substitution but, with the increasing saturation of domestic markets and for other economic reasons, this has been replaced with exportsubstitution strategies, particularly in the 1980s. Export processing, which encompasses the processing and manufacturing of primary resource products, features importantly in this drive to develop export-oriented manufacturing industries. In Thailand, current industrial policies aim to promote manufactured exports, labour-intensive industries, and agriculture- or resource-based industries in order to solve the basic problems of unemployment, unequal distribution of wealth and income, and trade deficits (Ng, Hirono and Siy 1986). Investment promotions, both foreign and domestic, aimed at speeding up industrialization are undertaken by the Board of Investments (BOI). This government body is empowered to offer incentives, guarantees, measures to protect industries against competition, and special exemptions from various laws. In spite of the thrust towards export-oriented enterprises, the manufacturing sector is still characterized by import-substituting industries, many of which continue to enjoy protection from cheaper imports. However, with the increased emphasis on investment incentives for export-oriented industries, manufactured exports are expected to play an increasingly important role in the coming years. Malaysia has placed a fairly strong emphasis on exports in its drive for industrialization but has accorded some attention to the promotion of selected import-substituting industries, mainly in consumer durables, intermediate inputs and certain capital goods industries (Ng, Hirono and Siy 1986). In the export

4

Foreign Manufacturing Investments in Resource-based Industries

manufacturing sector, the direction of expansion is towards more capital- and technology-intensive products. Such manufactures would include wood, rubber, palm oil, petrochemical and other resource-based products, machinery, electronics, textiles and motor vehicles (UNIDO 1985). This policy has been labelled "industrial deepening", in which the strategy is to establish heavy and resourcebased industries which reduce dependence on foreign suppliers, and to promote forward and backward linkages that can strengthen the foundation for sustained industrial development (Ng, Hirono and Siy 1986). Malaysia too offers attractive packages of incentives to domestic as well as foreign investors, and in recent years there has been a concerted drive to encourage production for the export market. More attractive investment incentives and more liberal equity guidelines for foreign investors have been accorded, espedally to export-oriented investments. The right amounts of capital and appropriate and modem technologies are crucial requirements for the success of industrialization. It is well-known that for many developing countries these are important constraints to its industrialization efforts. Many DCs have augmented their scarce domestic capital resources by allowing foreign capital to come in and play a role in the industrialization process. Foreign capital has often been accompanied by an inflow of modem technologies, though there has been some debate regarding the extent of technology transfer to the host countries by foreign investors. However, it would be difficult to deny that the influx of foreign capital (and technology) has enabled many developing countries, including Thailand and Malaysia, to achieve a more rapid rate of industrial growth than would otherwise have been possible. As with any industrial development, resource-based industrial development too requires large amounts of capital and appropriate technologies. 2 Some of the required capital can be provided from the limited domestic sources but the others will have to come from foreign sources. Additionally, foreign capital sources often have important international market links that could be useful in removing or reducing the constraints facing the marketing of resource-based manufactured products internationally. Pradumna and Dowling (1988) analysed the effect of foreign capital on growth for a sample of nine Asian countries (including Thailand) using a simultaneous equation model. The major finding of their study was that foreign capital flows have made positive contributions to the growth of Asian developing countries. Foreign direct investment contributed to growth by augmenting resources available for capital formation and by improving investment efficiency, but foreign aid contributed only by aiding in capital formation and tended to reduce investment efficiency. The other major finding of the research was that export performance, growth of the labour force and the rate of domestic savings have also contributed favourably to growth. In relative terms, growth of the labour force and higher domestic savings contributed more than foreign capital flows.

Introduction

5

The policy implications of the findings are that countries wishing to achieve rapid economic growth should direct maximum efforts at increasing the productivity of labour and towards mobilizing domestic resources. However, the countries should continue to accept foreign capital in those areas in which domestic resources do not provide an adequate substitute. The final part of their paper addresses the question of which type of foreign capital DCs should encourage and the type of trade policy to adopt. The authors recommend, based on their analyses of relative productivity, that Asian DCs should attempt to attract foreign private investment (including long-term commercial credit), improve their export performance, and rely less on aid. Thus, the theoretical findings lend support to the current emphasis in Malaysia and Thailand on encouraging foreign direct investments and the weight placed on expanding export-oriented manufacturing industries. Resource-based industries have an important niche in the overall industrial structure and there is considerable potential for the further expansion of RBis, particularly exportoriented RBis within the context of industrial development in Malaysia and Thailand. The first part of this study will provide some background details of the Malaysian and Thai economic sectors and then go on to examine some of the features of resource-based industries and their current status in the two countries. The study will next focus on the patterns and characteristics of foreign investments in manufacturing in general, and particularly in RBI. The study will then look at aspects of resource-based industrial development in the context of the overall industrialization of the two countries. Finally, foreign investments and resourcebased industrial development in the other ASEAN countries will be examined briefly in the Appendices.

11

KEY ECONOMIC SECTORS OF MALAYSIA AND THAILAND

Tables 2.1 and 2.2 provide some background information on the Malaysian and Thai economies. In the context of this study, the information on the manufacturing sector would be of particular interest. Malaysia The Malaysian gross domestic product (GDP) growth rate has been reasonably high, as shown in Table 2.1. It was in the region of 6-7 per cent until the recession of 1985 when a negative growth rate of -1 per cent was recorded. Subsequently, there was a marginal improvement in growth in 1986 as the impact of the recession continued to be felt. However, the economy has begun to recover since mid-1987 as a result of improvements in external demand for manufactured exports and increased prices for commodities. The 1987 GDP growth rate improved significantly over the 1986 figure to record an impressive 5.2 per cent. The following year, 1988, proved to be even better. With the buoyant external demand for manufactured goods and stable and high prices for commodities, particularly rubber and oil palm, the Malaysian GDP growth rate climbed back to its pre-1985 levels by turning in a growth achievement of 7.4 per cent. It will be noticed that growth rates in the manufacturing sector were higher than the overall GDP growth rates. Prior to 1985, manufacturing growth had increased steadily to peak at 12.3 per cent in 1984. However, the recession in 1985 affected the sector adversely and resulted in a negative growth rate of -3.8 per cent, but it rebounded quite rapidly and has been growing impressively since then. Growth has been particularly encouraging after 1986: in 1987 a growth of 12.8 per cent was recorded, and in 1988 the rate was even higher at 15.5 per cent. As a recent Wall Street Journal (1 August 1988) article put it "manufacturing has been the big story of the (Malaysian) recovery. Spurred by overseas demand, the manufacturing sector accounted for 22 per cent of Malaysia's inflation-adjusted GDP in 1987, narrowly surpassing agriculture for the first time". Furthermore, as implied in this latter comment, agriculture which had been previously the most important economic sector in Malaysia, now takes second place. The country is noted particularly for its production of rubber, palm oil, and

TABLE2.1 Gross Domestic Product by Industrial Origin, Malaysia (In 1978 constant prices, in M$ million) 1983

1982 Value

%

Percentage annual growth rate (GDP) Percentage annual growth rate (manufacturing)

Value

%

$

$ Agriculture, livestock, forestry and fisheries 11,375 4,617 Mining and quarrying Manufacturing 9,668 Construction 2,598 721 Electricity, gas and water Transport, storage and canmunication 2,984 Wholesale and retail trade, 6,104 hotels and restaurants Finance, insurance, real estate, 4,231 and business services 6,027 Government services Other services 1,141 Less: Imputed bank service charge 1,152 Add: Import duties 2,116 50,430 GDP at maJtet prices

Value

1984

1985 %

$

2

3,464

6

12

7,107

8 12 2 3

4,892 6,817 1,249 1,595 2,522 57,741

20 11 20

1

11,623 6,073 11,711 2,988 890

1 6

3,138

6

12

6,583

8 12 2 2 4 100

4,570 6,328 1,193 1,397 2,429 53,582

5

5 100

Value

1987* %

$ 21 10 20

21 10 19

5

%

$ 11,914 5,985 11,263 2,738 948

11,302 5,342 10,429 2,867 798

23 9 19

Value

1986

Value

1988*

%

$

12,476 6,439 13,080 2,202 1,109

22

2

21 11 21 4 2

3,630

6

3,851

7

12

6,911

12

6,147

8 12 2 3 4 100

5,093 6,957 1,300 1,834 2,245 57,150

9 12 2 3 4 100

5,073 7,253 1;352 1,891 1,759 57,859

5

4 2

12,775 6,941 14,061 2,107 1,199

23 3 2

4,063

7

4,327

7

11

6,265

11

6,484

11

9 13 2 3 3 100

5,164 7,289 1,407 2,059 1,592 59,027

9 12 2 3 3 100

5,306 7;325 1,466 2,288 1,657 61,360

9 12 2 4 3 100

21 11

5.9

6.3

7.8

-1.0

1.2

5.2

7.4

5.6

7.9

12.3

-3.8

7.5

12.8

15.5

*Estimates by Ministry of Finance SOURCE: Ministry of Finance, Malaysia, &onomic Report 1988/1989.

%

$

12,389 6,433 12,111 2,355 1,027

5

Value

21

11

8 Foreign Manufacturing lnvestmenJs in Resource-based Industries

cocoa. Malaysia is the world's leading exporter of rubber and palm oil and is also an important supplier of cocoa, pepper, and timber products. Though agriculture is an extremely important sector, growth in this sector has been sluggish in recent years. Constraints of land and labour have made the further development of agricultural production tenuous. Consequently, there has been a relative decline in the importance of agriculture in the country's GDP as well as in its exports. In 1982, agriculture contributed 23 per cent to GDP but after 1983 declined to 21 per cent, and lost its premier position among the country's sectors to manufacturing in 1987. It will be noticed, too, that mining and quarrying contributed significantly to total production in the country and made up 10-11 per cent of GDP. The major part of this contribution comes from petroleum, which is now a crucial export earner for the country as well as a lucrative source of income for the government. Crude petroleum production in 1988 was in the region of 540,000 barrels per day. Malaysia continues to be the leading world exporter of tin, accounting for 30.5 per cent of total world exports in 1988 (Ministry of Finance, Malaysia, 1988), despite the fall in tin prices following the tin market crash in 1985. Thailand

Similar patterns can be seen in the case of Thailand (Table 2.2). Agriculture and manufacturing are the two leading sectors of the economy. The Thai economy did not suffer any negative growth during the 1985 recession year as Malaysia did. Thailand only recorded a reduced GDP growth rate of 3.2 per cent during that year. Prior to 1985 the Thai economy had achieved growth rates of 4-6 per cent per annum. The performance was lower than that for Malaysia, which averaged 6-7 per cent during the same period (1982-84). However, after 1985, the Thai economy grew strongly and rates of 6-9 per cent per annum were recorded. In 1987 and 1988 particularly, GDP growth rates seem to have been much higher that those reported for Malaysia. However, at the time of writing the 1987 and 1988 figures for the various sectors of the Thai economy were not available. Only the estimates for overall GDP growth and sectoral estimates for agriculture and manufacturing were available. The estimates indicate that the economy grew by 6-7 per cent in 1987 and the updated forecast released by the NESDB (National Economic and Social Development Board, Thailand) in mid1988 was a 9 per cent GDP growth rate for 1988. It can be seen from Table 2.2 that the Thai manufacturing sector increased its growth rate from 4 per cent in 1982 to 7 per cent in the following year. There was a slight decline in 1984 to 6 per cent but the rate fell drastically to 0.8 per cent during the recession year of 1985. Unlike Malaysia, however, there was no negative growth in that year. After 1985 there was rapid growth in

TABLE2.2 Gross Domestic Product by Industrial Origin, Thailand (In 1972 constant prices, in million baht) 1982

Agriculture (includes livestock, forestry, fisheries) Mining and quarrying Manufacturing Construction Electricity, gas and water supply Transportation and communication Wholesale and retail trade Banking, insurance and real estate Ownership of dwellings Public administration and defence Services Gross Domestic Product (GDP) Percentage Annual Growth Rate (GDP) Percentage Annual Growth Rate (manufacturing)

1983

1984

1985

1986

1987*

1988*

B

%

B

%

B

%

B

%

B

%

B

%

B

78,502 4,431 67,318 15,097 6,755 21,715 52,789 21,396 4,936 13,833 37,261

24 I 21

81,449 4,414 72,252 15,927 7,348 23,290 55,076 24,461 5,178 14,498 39,276

24 I 21

84,144 5,415 76,811 17,680 8,088 24,605 57,430 26,994 5,369 14,106 41,536

23 I 21

86,839 6,001 77,425 17,786 8,910 25,829 59,120 27,780 5,597 14,897 43,685

23 2 21

86,215 6,086 82,612 17,911 9,527 27,180 61,406 28,063 5,814 15,250 46,731

22 2 21

86,043 na 90,047' na na na na na na na na

22' 21 -

88,194 na 99,052 na na na na na na na na

5 2 7 16 7 2 4

11

5 2 7 16 7 2 4 11

343,169

324,033

5 2 7 16 7 I 4 11

362,178

5 2 7 16 7 1 4 12

373,869

5 2 7 16 7 2 4 12

386,795

-

-

411,937'

%

20 22

442,832'

4.1%

5.9%

5.5%

3.2%

3.5%

6.7%

9'

4.4%

7.3%

6.3%

0.8%

6.7%

9%'

10%'

*Estimates 'Estimates. na =not available. SOURCES: Bank of Thailand; and National Eoonomic and Social Development Board (NESDB).

10 Foreign Manufacturing Investments in Resource-based Industries

manufacturing, as was the case for Malaysia. Thai manufacturing grew by 6.7 per cent in 1986 and is expected to expand by 9 and 10 per cent in 1987 and 1988 respectively. These are lower than the growth rates reported for Malaysia (Table 2.1). However, the Thai figure for the two years are only estimates and it is anticipated that on final count the manufacturing growth rates may be higher, comparable to the growth figures for manufacturing in Malaysia. It is to be noted that as for the case of Malaysia, the manufacturing share of GDP in Thailand is now higher (beginning 1988) than that for agriculture. The share of agriculture in GDP dropped from 24 to 22 per cent between 1982 and 1987, whereas the share of manufacturing remained at 21 per cent during the same period. For 19S8, manufacturing emerged as the leading sector with an estimated 22 per cent share of GDP, while agriculture dropped to second place with a 20 per cent share. Despite agriculture's decline in position, the country is noted for its production of rice, maize, sugar-cane, rubber, soybean, tapioca, cotton, fruit and vegetables. Among Thai exports, rice, tapioca, rubber, maize and sugar feature prominently. However, growth in agriculture is sluggish at 2-3 per cent per annum. On the other hand, the manufacturing sector has been recording much higher growth rates of 7-10 per cent in recent years and is expected to continue growing at similar rates. The manufacturing sector in Malaysia has also been performing likewise. Thus, manufacturing is expected to maintain its current premier position among the economic sectors in both Thailand and Malaysia and become the engine of growth to lead both nations toNIC (newly industrializing country) status in the not too distant future.

Ill

RESOURCE-BASED INDUSTRIES OF MALAYSIA AND THAILAND

As stated earlier, in Chapter I, resource-based manufacturing industries are generally taken to mean those industries that are involved with downstream processing and manufacturing of the country's agro- and mineral products, that is, the products of the primary resource industries. In the past and to a great extent even today, these primary products (such as rubber, palm oil, tin and rubber) are being exported with only minimal processing, if any. It is in the countries that import these primary products that further processing and manufacturing into finished products take place. The implication is that much of the potential valueadded that comes from the further manufacturing of these primary products is lost to the developing countries that export them. Some ofthe theoretical considerations of resource-based industrialization were reviewed earlier. While constraints exist, so do opportunities for nations wishing to embark on RBI development. Careful study and planning is required by governments to select and promote the development of the right RBis within the context of the country's overall industrial development strategies. In 1987, 36 per cent of Thailand's exports (Bank of Thailand 1988) was made up of primary products, mainly rice, rubber, maize, tapioca products, prawns and sugar. In thecaseofMalaysia,47percentofexports in 1987 (Ministry of Finance, Malaysia 1987) was made up of primary products. However, 15 per cent of this was accounted for by crude petroleum and 4 per cent by liquefied natural gas (LNG). The remainder consisted largely of rubber, palm oil, sawlogs, tin and cocoa. Primary products, thus, make up nearly 40 per cent of exports of the two countries. The importance of primary commodities in the export structure also calls attention to the vast amounts of produce being exported without much processing or manufacturing. Such raw produce could potentially be used in domestic downstream processing and manufacturing activities to generate further value-added benefits to the country before export. Hence, in the industrialization of developing countries, including Malaysia and Thailand, an important consideration is the development ofRBis, particularly where an abundant supply of primary products is already available. Resource-based industrialization means that the developing (exporting) countries themselves undertake further downstream processing and manufacturing of the primary products before export, to the extent

12

Foreign Manufacturing lnveslmen/s in Resource-based Industries

feasible and possible. Resource-based manufacturing development would then become an important part of the country's overall industrialization policy. Obviously, there are constraints facing RBI development, such as constraints of capital, technology, and markets. Finished goods often face higher tariffs than primary commodities, and freight rates tend to discriminate against manufactured goods compared with the raw products. However, there exist avenues to overcome some of these disadvantages, such as the GSP (Generalised System ofPreferences) privileges available to developing countries to sell their manufactures in developed countries without incurring the high tariffs. Many developing countries, including Malaysia and Thailand, have not fully utilized their GSP privileges and quotas in many finished goods categories. Such avenues need to be explored vis-a-vis the marketing of resource-based manufactured products. There are no short-cuts to success, however. Quality and consistency must be maintained in order to capture markets. The success ofMalaysian manufacturers of gloves and latex-dipped products, which have now captured more than 90 per cent of this growing world market, is illustrative. The popularity of Thai textile and garment manufactures in the world market is another case in point. Recently, Thai shoe manufacturers have been making successful inroads in the European market. There are many other success stories especially in the surrounding countries of the region, including Singapore, Taiwan and South Korea. These nations have now become important suppliers of manufactured goods to the rest of the world. Thus, it is not unreasonable to assume that RB manufacturers in Malaysia and Thailand will be able to find markets for their products overseas. Obviously, they will have to undertake the usual market feasibility studies before embarking on the manufacturing project and product. There will be many constraints facing them but the Malaysian and Thai governments are also giving a tremendous helping hand. In Malaysia, for example, MEXPO (Malaysian Export Promotion Organisation) gives a helping hand to local manufacturers to find overseas markets. Moreover, private investors and businessmen are included in the country's numerous export promotion trips overseas. In this study, market availability is assumed. The research concentrates on the supply-side aspects ofRB manufacturing industries in Malaysia and Thailand. Despite the constraints of capital, technology, market challenges and the discrimination in freight rates for manufactured goods, it will be argued here that RBis have many features that make it desirable to place an adequate degree of emphasis on them in the overall industrialization strategies of Malaysia and Thailand.

Stages in Resource-based Manufacturing One of the problems encountered in a discussion of resource-based industries is the definition of RBI itself because of the heterogenous characteristics of

Resource-based Industries of Malaysia and Thailand 13

resource-based manufacturing industries (RBMI). There is a whole range of industries that fall within this classification of RBI. The industries vary greatly in the use of other RMBI products as inputs, that is, for some commodities more than one stage of manufacturing takes place. In a study of RB manufacturing in Malaysia, Shand and Ismail ( 1982) distinguished three stages ofRB manufacturing in order to define RBis more accurately. Each stage represents a successive step towards the production of the end product, though equally each stage could produce an end product. The RBI stages are illustrated in Table 3.1. Stage 1

Stage 2

Stage 3

The RBMI' s most important input is a product of a primary resource industry. (Primary resource industry refers to the basic agricultural and mineral industries such as rubber, palm oil, rice, livestock, fisheries, metal mining, and petroleum.) Examples of Stage 1 RBMI are rubber processing (here the most important input [92 per cent] is raw materials from the primary rubber planting industry); and sawmills and woodmills (here the most important input comes from the primary logging industry). The RBMI is one where the most important input is a product of a Stage 1 industry. For example, the most important single input (31 per cent) in the "Tubes, tyres and other products of rubber" industry was purchased from the Stage 1 industry of "Rubber Processing". Therefore, the "tubes, tyres and other products of rubber industry" is classified as a Stage 2 RBMI. It will be noticed that in a Stage 2 industry the most important input is not a primary resource industry input, but an input that has already undergone a certain degree of processing or manufacturing. In other words, a Stage 2 industry is a further step in the production chain of downstream manufacturing activities, and there is further value-added in going from one stage of manufacturing to the next. The RBMI's single most important input is a product of a Stage 2 industry. For example, the main input in "Beverages and Soft Drinks" (aS tage 3 RBMI) is "other food preparations" (a Stage 2 industry).

These stages in RB manufacturing are important for any meaningful discussion of the RB manufacturing industries. For example, an examination of the RBI figures by stage showed that in 1973, 70per cent of the RB manufactured products in Malaysia came from Stage 1 industries (Table 3.2). They were largely made up of first stage resource processing, and value-added was minimal. The higher value-added Stage 2 and Stage 3 RB manufactured products accounted for 23 and 7 per cent respectively. By 1981 Stage 1 RBMI products had contributed

TABLE 3.1 Relative Importance of Domestic and Imported Inputs for Resource-based Manufacturing Industries in Malaysia, 1973 Inputs at Marl