Malaysian Economy: © Oxford Fajar Sdn. Bhd. (008974-T) 2011

Malaysian Economy All Rights Reserved
© Oxford Fajar Sdn. Bhd. (008974-T) 2011 Ch. 5: ‹#›

Chapter 5
Industrial Policy and

Industrialization
Rajah Rasiah

Learning Objectives
 Main arguments on industrialization

 Malaysia’s industrial expansion in comparison with
other Southeast Asian market economies
 Malaysian government’s efforts to promote industrial
development
 Direction of industrialization in Malaysia
 Reasons behind slow industrialization since the turn
of the millennium

5.0 Introduction
 This chapter seeks to discuss Malaysia’s

industrialization experience with a strong focus on
the period after 1990.
 The rest of the chapter is organized as follows:
• Section 5.1 provides a theoretical guide to
explain why governments such as Malaysia
focused so much attention on manufacturing.
• Section 5.2 examines the different policies the
Malaysian government implemented to promote
industrialization in the country.

5.0 Introduction (cont.)
• Section 5.3 then analyzes growth, trade and

productivity trends in the manufacturing sector.
• Section 5.4 assesses the reasons why Malaysia
has been facing deindustrialization since the turn of
the millennium.
• The final Section 5.5 presents the conclusions and
policy implications.

5.1 Arguments on
Industrialization
 This section discusses critically the main arguments
on industrialization and how it should be promoted
 Origin of arguments supporting industrial policy
because of its ‘increasing returns’ properties
 Traditional neoclassical analysis of industrialization
and how it should be promoted
 New growth versions of neoclassical arguments on
industrialization
 Heterodox arguments on industrialization

5.2 Phases of Industrial
Policy
 The first phase of import substitution (IS), which was
launched with the Pioneer Industry Ordinance of 1958,
targeted protection on imports of final consumption of
goods (see Table 5.1)
 The first phase of export-orientation (EO) began with the
Investment Incentives Act of 1968 but enjoyed massive
expansion when the opening of Free Trade Zones and
Licensed Manufacturing Warehouses from 1972 stimulated
the relocation of labour-intensive multinational subsidiaries
from abroad.
 The opening of the export assembly zones followed after
manufacturing was identified as the engine of growth in the
New Economic Policy that was launched in 1971.

Policy (cont.)
 Foreign capital has had a strong role in the
development of manufacturing. The leading
manufacturing industry of electric-electronics is still
dominated by foreign ownership (see Table 5.2).
 The second phase of IS started with the promulgation of
the Heavy Industries Corporation of Malaysia (HICOM)
in 1980.
 The second phase of EO started in 1985 following the
introduction of the promotion of Incentives Act in 1985.
Generous incentives were offered to firms following the
introduction of the Industrial Master Plan (IMP) in 1986.

Policy (cont.)
 Massive inflows of foreign direct investment since
the second half of the 1980s provided the impetus
for the government to attempt industrial deepening
through the Action Plan for Industrial Technology
Development (APITD) in 1990.
 The Second Industrial Master Plan (IMP2) of 1996
and the Third Industrial Master Plan (IMP3) of 2006
sought to promote industrialization through
clustering.

Table 5.1 Industrial strategies and trade orientation, Malaysia, 1958–2010
Trade Period of
Phases Policy instruments
orientation dominance
Phase 1 IS1 1958–1968 Pioneer Industries Ordinance,1958
Phase 2 EO1–IS1 1968–1980 Investment Incentives Act, 196
Free Trade Zone Act 1971
Phase 3 IS1–IS2 1980–1985 Heavy Industries Corporation of Malaysia

(HICOM),1980
Phase 4 IS2–EO2 1985–2010 Industrial Master Plan,1986

Promotion of Investment Act, 1986
Action Plan for Industrial Technology
Development (APITD), 1990
IMP2,1996; IMP3 2006

Table 5.3 Foreign fixed assets in Malaysian manufacturing, 1968–2005 (%)
Industry 1968 1975 1980 1985 1990 1993 1998 2001 2005
Food and beverages 74 55 32 25 30 33 27 22 17
Tobacco 93 79 76 67 62 58 69 87 53
Textiles 52 63 54 48 61 64 76 71 67
Leather 17 48 48 54 59 57 61 33 28
Wood 15 8 13 9 19 36 27 19 19
Furniture and fixture 50 61 31 19 45 45 25 31 20
Paper, printing and
n.a. 16 10 20 14 13 10 10 12
publishing
Chemicals 53 63 53 16 24 25 46 6 6
Petroleum and coal 78 79 78 37 44 50 34 50 19
Rubber 14 42 46 42 55 51 50 42 36
Plastic n.a. n.a. 12 13 27 46 38 32 36
Non-metal mineral 57 52 19 32 33 39 34 24 22
Note: n.a. – not available (Continued…)

Industry 1968 1975 1980 1985 1990 1993 1998 2001 2005
Basic metal 49 42 35 32 17 33 30 16 12
Fabricated metal 66 59 26 23 30 56 36 36 29
Machinery 74 51 42 35 53 65 66 56 50
Electric/electronics 70 84 80 73 89 91 83 80 58
Transport equipment n.a. 51 32 15 25 35 29 8 10
Other manufacturing 60 69 57 53 69 81 56 53 49
Manufacturing 61 52 39 33 42 50 47 43 32
Note: n.a. – not available

5.3 From Expansion to
Slowdown
 The growth of manufacturing value-added hit double
digit figures until the mid-1990s before slowing down
(see Table 5.3).
 Malaysia enjoyed an expansion of the share of
manufacturing value added in GDP until 2000 after
which it has started to fall (see Table 5.4).
 Manufacturing performance on the basis of trade
balance, imports in domestic demand and export
intensity of output improved until 2000 before showing
some fall after that (see Tables 5.5, 5.6, 5.7 and 5.8).

5.3 From Expansion to
Slowdown (cont.)
 Revealed comparative advantage of the key export-
oriented industries fell over the period 1990–2007 (see
Table 5.9).
 Machinery (including electric-electronics) accounted for
half of manufactured exports over the period 1990–2008
(see Table 5.10).
 Annual average labour productivity of manufacturing
increased from 8.4% in 1990–1995 to 11.1% in 1995–
2000 before contracting by -1.4% in 2000–2005 and
growing again by 2.7% in 2005–2008 (see Table 5.11).
 The slowing down of manufacturing since shows clear
signs of deindustrialization since 2000.

Table 5.4 Sectoral GDP growth, Malaysia, 1990–2009
Sector 1990–1994 1995–1999 2000–2004 2005–2009

Agriculture 0.4 0.7 3.3 2.8
Mining 2.7 3.0 3.2 –1.3
Manufacturing 11.7 5.9 4.5 0.2
Construction 13.0 -1.7 1.6 4.2
Electricity, gas and water 14.9 4.8 5.4 2.8
Trade 12.8 3.8 4.2 7.7
Transport and communications 11.4 5.7 5.6 5.9
Financea 16.0 9.6 5.9 8.1
Public administration 5.7 4.5 5.8 6.9
Othersb 10.6 4.9 4.1 4.9
GDP 9.4 4.0 4.6 3.8
Note: a-refers to finance, insurance, real estate, and business services; b-refers to community, social
and personal services, producers of private non-profit services and domestic services of
households including owner-occupied dwellings

Table 5.5 Structure of GDP, Malaysia, 1990-2009 (%)
Sector 1990 1995 2000 2005 2009

Agriculture 15.2 12.9 8.6 8.4 9.5
Mining 11.8 6.2 10.6 14.4 12.9
Manufacturing 24.2 26.4 30.9 29.6 26.6
Construction 3.9 6.2 3.9 3.0 3.3
Electricity, gas and water 2.2 2.6 3.0 2.7 2.6
Trade 13.6 15.3 13.4 12.7 14.5
Transport and communications 5.9 6.7 7.0 6.9 6.8
Financea 9.0 11.6 13.5 12.5 13.7
Public administration 9.4 7.5 6.3 6.6 8.1
Othersb 6.4 6.7 6.0 5.3 5.2
GDPc 100.0 100.0 100.0 100.0 100.0
Note: a-refers to finance, insurance, real estate, and business services; b-refers to community, social
and personal services, producers of private non-profit services and domestic services of
households including owner-occupied dwellings; c-total exceeds GDP because of rounding.

Table 5.6 Manufacturing growth, Malaysia, 1990–2008
Industry 1990–1995 1995–2000 2000–2005 2005–2008

Food 12.2 10.7 3.0 8.9
Beverages –3.0 5.5 20.0 52.6
Tobacco products 15.2 –13.7 4.4 1.5
Textiles 17.1 6.8 –11.5 –5.1
Footwear (except rubber footwear) 10.2 7.3 –2.7 14.3
Wood products 16.4 3.8 –0.3 –6.8
Furniture and fixtures 35.8 19.3 2.6 –9.6
Printing, publishing and allied industries 17.9 5.1 4.5 1.7
Paper and paper products 20.3 15.0 –3.3 –4.9

Leather and leather products 29.4 –2.4 2.9 –34.9
Rubber products 13.6 7.6 –1.6 –27.3
(Continued…)

Industry 1990–1995 1995–2000 2000–2005 2005–2008
Chemicals and chemical products 12.5 12.0 12.3 2.8
Products of petroleum and coal 25.3 37.4 11.1 17.2
Non-metallic mineral products 16.7 4.4 1.3 31.2
Basic metal industries 8.7 10.2 4.4 7.6
Metal products 23.9 9.9 1.7 12.6
Machinery except electrical machinery 26.0 25.3 –16.5 3.8
Electrical machinery and electronics 26.8 12.1 0.5 –2.2
Transport equipment 17.6 6.5 4.6 3.2

Miscellaneous manufacturing
21.7 13.9 0.0 –31.5
industries
Manufacturing 11.6 5.8 4.9 4.0
Note: Growth rates computed using 2000 prices.

Table 5.7 Manufacturing trade balance, Malaysia, 1990–2008
Industry 1990 1995 2000 2005 2008

Food and beverages 0.594 0.641 0.520 0.594 0.159
Textile and garments 0.082 0.122 0.271 0.082 0.302
Wood 0.660 0.491 0.417 0.660 0.854
Chemicals –0.635 –0.428 –0.176 –0.635 0.174
Petroleum and coal 0.512 0.382 0.379 0.512 0.052
Rubber and plastics 0.218 0.177 0.106 0.218 0.734
Non-metallic mineral –0.464 –0.420 –0.156 –0.464 0.155
Basic metal –0.492 –0.517 –0.393 –0.492 –0.393
Machinery (including electric-
–0.093 –0.019 0.104 –0.093 0.087
electronics)
Transport equipment –0.598 –0.502 –0.518 –0.598 –0.407
Professional and scientific equipment –0.385 –0.279 –0.150 –0.385 –0.322
Others 0.357 0.024 0.223 0.357 0.288
Note: Formula used: (Xi - Mi)/(Xi + Mi), where X and M refer to exports and imports, of industry i.

Table 5.8 Imports in manufacturing domestic demand, Malaysia, 1990–2008
Industry 1990 1995 2000 2005 2008

Food and beverage 0.179 0.152 0.143 0.179 0.092
Wood 0.773 0.359 0.280 0.232 0.078
Chemicals 0.459 0.475 0.499 0.399 0.459
Non-metallic mineral 0.794 0.610 0.503 0.560 0.088
Basic metal 0.745 0.737 0.759 0.767 0.333
Machinery (including electric-electronics) 0.971 0.988 0.990 0.991 0.919
Transport equipment 0.742 0.666 0.386 0.434 0.424
Professional and scientific equipment 0.901 0.886 0.940 0.990 0.972
Others 0.364 0.618 0.888 0.954 0.430
Note: Formula used: Mi/(Yi–Xi+Mi) where M, X and Y refer to import, export and output respectively, of industry i.

Table 5.9 Export intensity of manufacturing output, Malaysia, 1990–2008
Industry 1990 1995 2000 2005 2008

Wood 0.953 0.622 0.486 0.415 0.519
Chemicals 0.159 0.266 0.411 0.365 0.546
Basic metal 0.499 0.472 0.579 0.585 0.178
0.835 0.858 0.962 0.977 0.931
electronics)
Others 0.312 0.670 0.724 0.901 0.517
Note: Formula used: Xi/Yi where X and Y refer to export and output, respectively, of industry i.

Table 5.10 RCA of selected manufacturing industries, Malaysia, 1990–2007
Industry 1990 2000 2007
Electric-electronics 10.405 9.857 8.594
Transport equipment 8.412 5.869 5.798
Textiles 1.500 1.596 1.351
Clothing 3.171 2.017 1.960
Note: Formula used: (Xmj/Xm)/(Xi/Xwi) where X refers to export of industry i, m to Malaysia, wi world exports
of industry i.

Table 5.11 Composition of manufacturing export, Malaysia, 1990–2008
Industry 1990 1995 2000 2005 2008

Wood 0.122 0.070 0.041 0.035 0.021
Chemicals 0.014 0.021 0.030 0.041 0.088
Basic metal 0.033 0.029 0.025 0.031 0.017
0.341 0.533 0.624 0.541 0.597
electronics)
Others 0.023 0.035 0.030 0.031 0.075
Note: Formula used: Xi/(Xi) where X refers to export of industry i.

Table 5.12 Average annual manufacturing labour productivity growth, Malaysia, 1990–2008
Industry 1990–1995 1995–2000 2000–2005 2005–2008

Food 7.5 56.7 –29.8 1.4
Beverages –4.6 3.4 13.1 42.1
Tobacco products –8.0 –4.4 11.5 17.2
Textiles 12.5 6.9 –8.8 –2.5
Footwear (except rubber footwear) –7.7 –11.2 –1.2 5.9
Wood products 5.9 6.6 –1.0 –3.8
Furniture and fixtures 10.9 8.3 –2.7 –5.5
Printing, publishing and allied
8.1 4.7 –2.3 –3.4
industries
Paper and paper products 8.5 6.4 –5.4 –4.4
Leather and leather products 19.1 2.1 2.2 –1.9
Rubber products 8.5 7.9 –3.8 –1.8
(Continued…)

Industry 1990–1995 1995–2000 2000–2005 2005–2008
Chemicals and chemical products 5.0 3.2 6.9 –5.2
Products of petroleum and coal 10.0 19.9 23.9 –5.6
Non-metallic mineral products 7.4 –1.7 –1.1 –8.5
Basic metal industries –1.6 9.7 1.4 8.2
Metal products 6.4 10.9 –4.9 1.6
Machinery except electric-electronics 6.3 29.7 –17.0 –3.4
Electric-electronics 12.4 7.9 1.4 0.3
Transport equipment 2.6 4.2 –7.8 –1.9
Others 14.9 10.5 –1.7 12.3
Manufacturing 8.4 11.1 –1.4 2.7
Note: Figures computed using 2000 prices for value added; formula used: value added divided by
employment.

5.4 Deindustrialization
Explanations
 Exhaustion in labour supply to support low-end
activities
 Low endowments in R&D indicators (Tables 5.14
and 5.15)
 Rising competition from China, Vietnam and
Philippines in light manufactured goods
manufacturing
 Growing demand-supply deficits in human capital
 Slow technological upgrading into higher value-
added activities

Table 5.13 Researchers and engineer (R&E) per million persons, 1996–2006
Country 1996 1998 2000 2002 2004 2006
Japan 4,907 5,162 5,098 5,072 5,299 5,148
Korea 2,190 2,005 2,317 3,002 3,276 4,162
Singapore 2,538 2,986 4,140 4,352 4,997 5,713
Taiwan 3,326 3,794 3,922 3,103 3,579 4,159
Malaysia 90 154 276 295 503 367

Table 5.14 Gross expenditure on R&D in GDP, 1990–2006 (%)
Country 1990 1992 1994 1996 1998 2000 2002 2004 2006
Japan 3.1 2.8 2.8 2.8 2.8 2.9 3.17 3.17 3.40
Korea 1.9 2.03 2.44 2.6 2.55 2.69 2.53 2.85 3.23
Singapore 0.9 0.97 1.13 1.45 1.76 1.92 2.16 2.24 2.39
Taiwan 1.7 1.75 1.82 1.88 1.98 1.96 2.2 2.44 2.58
Malaysia 0.37 0.37 0.34 0.22 0.39 0.49 0.69 0.63 0.64

5.5 Conclusions and Policy
Implications
 From reliance on agriculture and mining, Malaysia
successfully evolved as manufacturing sector that
became its leading GDP contributor in 1984 and since
1988.
 The lack of technological upgrading in the face of rising
competition from labour-rich countries such as China,
Philippines and Vietnam has slowed down
manufacturing growth.
 As a consequence, Malaysia has faced
deindustrialization since 2000.

Implications (cont.)
 If the successful routes taken by Japan, Korea and Taiwan
is to be followed, then policy should focus on connecting
the meso-organizations already launched horizontally with
the manufacturing firms—particularly national firms—and
impose performance standards and audits.
 It is also important to establish a framework for orientating
universities, intermediary organizations and firms (and
other economic agents) towards commercialization of
research and development.
 There must be a mechanism for vetting ex ante,
monitoring and ex post appraisal of technology transfer
agreements.

 A board comprising Malaysian experts from industry and
especially individuals with tacit knowledge acquired working
in globally renowned labs and multinationals should be
tapped to strengthen the regulatory framework used to
stimulate creative destruction and creative accumulation
activities in the manufacturing sector.
 In addition, given the strong rooting and the enabler
properties of the electric-electronics industry, the incubator
strategy linking universities, R&D labs and the eventual
firms but one that is led by Malaysians with tacit and
experiential knowledge of technology and markets should
be developed in the country to support the movement of
Malaysian firms to the technology frontier.

 These developments are critical for the Malaysian
economy to break out from the middle-income trap
and enter the group of high-income countries by
2020.

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Malaysian Economy All Rights Reserved

© Oxford Fajar Sdn. Bhd. (008974-T) 2011 Ch. 5: ‹#›

Industrial Policy and

Malaysian Economy All Rights Reserved

© Oxford Fajar Sdn. Bhd. (008974-T) 2011 Ch. 5: ‹#›

 Main arguments on industrialization

Malaysian Economy All Rights Reserved

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 This chapter seeks to discuss Malaysia’s

Malaysian Economy All Rights Reserved

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• Section 5.3 then analyzes growth, trade and

Malaysian Economy All Rights Reserved

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Malaysian Economy All Rights Reserved

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© Oxford Fajar Sdn. Bhd. (008974-T) 2011 Ch. 5: ‹#›

© Oxford Fajar Sdn. Bhd. (008974-T) 2011 Ch. 5: ‹#›

Malaysian Economy All Rights Reserved

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Phase 2 EO1–IS1 1968–1980 Investment Incentives Act, 196

Free Trade Zone Act 1971

Phase 3 IS1–IS2 1980–1985 Heavy Industries Corporation of Malaysia

Phase 4 IS2–EO2 1985–2010 Industrial Master Plan,1986

Malaysian Economy All Rights Reserved

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Note: n.a. – not available (Continued…)

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Transport equipment n.a. 51 32 15 25 35 29 8 10

Note: n.a. – not available

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Sector 1990–1994 1995–1999 2000–2004 2005–2009

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Sector 1990 1995 2000 2005 2009

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Industry 1990–1995 1995–2000 2000–2005 2005–2008

Printing, publishing and allied industries 17.9 5.1 4.5 1.7

Paper and paper products 20.3 15.0 –3.3 –4.9

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Chemicals and chemical products 12.5 12.0 12.3 2.8

Products of petroleum and coal 25.3 37.4 11.1 17.2

Non-metallic mineral products 16.7 4.4 1.3 31.2

Basic metal industries 8.7 10.2 4.4 7.6

Metal products 23.9 9.9 1.7 12.6

Machinery except electrical machinery 26.0 25.3 –16.5 3.8

Electrical machinery and electronics 26.8 12.1 0.5 –2.2

Transport equipment 17.6 6.5 4.6 3.2

Note: Growth rates computed using 2000 prices.

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