THE PENANG EXPORT HUB - PART 6
Conclusion The Penang export hub has matured and consolidated its position within global production networks over the past four decades. Concerns that the Malaysian industry has ‘reached a point of saturation and its survival depends on the capacity to climb up the technology ladder’, and that ‘Malaysia’s manufacturing performance has stalled over time and the sector remains at odds with the objective of ‘moving up the value chain’ are certainly not consistent with Penang’s recent growth experience. As a result of increasing domestic wages and the emergence of competing low-cost production locations, Penang’s attractiveness for low-end activities and final assembly within global production chains has been rapidly eroding over the past two years. But this has not resulted in a hollowing out of the Penang export hub. Firms involved in design, assembly and testing activities in the electronics and electrical goods value chain have begun to expand and consolidate their operations in Penang. More importantly, based on the early-mover advantage in electronics and the skilled labour pool developed over the years, the production base has begun to diversify into a number of electronics-related dynamic product lines with brighter growth prospects. These include medical services and equipment, LEDs, and photovoltaic design and development. China’s rise as the premier assembly centre does not seem to have crowded out Penang’s export performance. On the contrary, there appears to be a complementary relationship between China’s rise as the premier assembly centre within global production networks and export performance in Penang. Rapid expansion of final assembly in China has been accompanied by a notable shift in MNE operations in Penang towards high-value component design, assembly and testing in the global value chain. Reflecting this structural shift, expansion of exports from Penang in recent years has been driven predominantly by price increases rather than volume expansion. What explains Penang’s success? Penang started the process of export-oriented industrializations with some unique advantages. It had a long tradition of both English and Chinese education, with a literacy rate well above the national average. From the colonial era it inherited fairly well developed trade-related infrastructure and institutions. However, these initial advantages would not have been translated into a notable economic success if it were not for a proactive state government led by Chief Minister Lim Chong Eu, who embarked on a visionary strategy to unleash the island’s growth potential. The strategy carefully mitigated the adverse impact of the affirmative action elements of the 1971 New Economic Policy on private-sector initiatives, while benefiting from Malaysia’s long-standing commitment to an open trade and investment policy stance, and emphasis on export-oriented growth. Penang is a unique example of government marrying its job creation policy objectives with emerging opportunities for international specialization by linking its economy to global production networks. The state government not only attracted foreign investors, but also helped them become deeply rooted in the economy through a well-designed investment promotion strategy including FTZ status, infrastructure development, skills development and vocational training, and forging links between local and foreign firms. It is hazardous to make sweeping generalization from a single case study. However, the experience of Penang does offer a number of policy insights that may be useful to policymakers in other countries in designing foreign direct investment (FDI) policy, especially in the context of the ongoing process of global production sharing. Institutional reformsThe policy reforms began by forming a new statutory body, PDC as the principal development agency independent of the formal government structure. The carefully designed autonomous organizational structure enabled PDC to effectively perform its role as the centre point of formulating, implementing and coordinating the export-oriented industrialization strategy. PDC was successful in creating in the business community an impression of a unified and cooperative team with a firm commitment to promoting FDI. Focused investment promotionAfter the failure of initial attempts at import-substitution industrialization, the state government of Penang made a clear and decisive policy shift to export-oriented industrialization, with the electronics industry – broadly defined to include both electronics and electrical goods – as the key focus of investment promotion. Once the import substitution projects proved to be commercial failures, they were swiftly abandoned, without trying to keep them alive through direct subsidies. The choice of electronics as the priority sector nicely matched Penang’s source endowment and unfolding opportunities for international specialization. The choice of electronics as the priority sector at the outset also helped in designing an investment promotion strategy with an industrial cluster focus. The cluster approach provided a viable setting for promoting MNE-SME linkages within the export hub. It also created a ‘skill pool’ which turned out to be the major attraction of Penang as an attractive location for MNEs in a wide range of industries with an electronics base. Effective personal involvement from the top level of governmentChief Minister Lim Cong Eu played an active personal role in the process, sending a clear, consistent message to investors about development priorities. He chaired the State Planning and Development Committee, the apex policymaking body of PDC, and led investment missions to the major home countries of prospective investors. The long tenure of the Chief Minister and his top management team for over two decades helped to assure consistent policy and built investor confidence. Post-investment carePDC created an institutional mechanism to maintain close links with both MNE affiliates and local firms operating in Penang. This helped policymakers stay-abreast of investor requirements and thus continuously adapt to the changing investment climate. More importantly, this receptivity approach helped to engage the foreign firms already operating in Penang in the investment promotion campaign. PDC often used references from these firms to confirm the government’s commitment to investment promotion. Infrastructure development PDC effectively used FTZs and industrial estates as the vehicles for focused infrastructure development for successful global integration of the Penang economy. It successfully addressed the problem of land scarcity faced in accommodating foreign investors by creating an innovative land bank through market acquisition of private land and reclamation. Vocational training and skill developmentAt the formative stage of the export hub, PDC played an important facilitating role in labour absorption by the newly established MNEs by conducting vocational training programmes. When skill shortages began to hamper the expansion of electronics industry by the late 1980s, PDC joined with MNEs to establish the PSDC. The federal government also helped skill development at the firm level by offering general tax deductions on MNEs’ contributions to PSDC schemes and their own skill development efforts. Fostering MNE-local firm linksFrom the inception, PDC placed emphasis on developing a domestic supplier network around the branch plants of MNEs. This helped increase the economic impact of MNE presence on the domestic economy through a multiplier effect and was instrumental in anchoring foreign investors in the export hub through tighter and more appropriate supplier relationships. The domestic vendor networks that initially evolved around semiconductor assembly facilitated the subsequent diversification of the production base of the export hub into other product lines such as consumer electronics and computer peripherals, and more recently to LEDs and medical devices.
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