Chapter 3
The
emergence and evolution of multinational corporations (MNCs) from Malaysia
The emergence
of Malaysia-based multinational corporations: Economic and political
development
style='mso-bidi-font-weight:bold'>
style='font-family:Arial'>Transformation from the British Colonial period to
the 1970s
style='font-family:Arial;mso-bidi-font-weight:bold'>To understand the origins
of Malaysia-based MNCs is to understand the economic and political history of
Malaysia (formerly known as Malaya on that particular of time) as a British
colonial heritage. The cession of Penang by Sultan of Kedah to the British East
India Company in 1786, the formation of the Straits Settlements uniting
Malacca, Penang and Singapore in 1826, the designation of this settlement as
Crown colony in 1867, and the independence of Malaya from the British in 1957,
had important implications on the emergence of the first Malaysian-based
multinational corporations.
style='font-family:Arial'>Historically, in general, the development of the
Malaya economy was largely a function of the British Colonial Administrative
State interest and attention (Edmund and Jomo, 1997). Prior to 1957, the
Malaysian economy was heavily dependent on primary products
EN-US;mso-fareast-language:EN-US'>specifically tin and rubber to generate
growth, and employment. The prosperity of many British trading companies namely
Sime Darby Corporation, London Tin Corporation, Anglo Malayan Tin Limited,
Kinta Kellas Tin Mining Limited and Malayan Tin Dredging Limited derived from
these two main products. A
diversification into palm oil began in the late 1960s, and about the same time,
forest resources in the form of saw logs and swan timber proved to be the
leading primary commodities. During British control, a well-developed system of
public administration was established, public services were extended and
large-scale rubber and tin production was developed (Edmund and Jomo, 1997).
Immigrants from China and India were brought to Malaysia for construction of
public works and also as labourers in production sectors. They were not only
needed as additional manpower but also for their skills and technology. In
comparison with the indigenous population, they were found to be more advanced
in nature and highly developed (Lim, 1967).
Development strategy: From
export-oriented to import-substitution industrialisation
style='mso-bidi-font-weight:bold'>
style='font-family:Arial'>The 1960s for Malaysia was an era of import
substitution (Federation of Malaysian Manufacturers, 2003). During this period,
Malaysia was faced with the problem of high unemployment when it rose to more
than 8 per cent. At the same time, the economy depended largely on the export
of primary commodities such as rubber and tin which rendered the country
susceptible to price fluctuations in the world markets. There was the added
problem of income disparity among its population. The need to diversify the
economic base was therefore imperative.
style='font-family:Arial'>The Government’s support during the 1960s was limited
to providing a favourable climate for private investment. In addition to the
provision of tax incentives, the Government provided infrastructure such as
industrial estates, power and telecommunication facilities. The Malaysian
Industrial Development Authority (MIDA) was established in 1967 to promote and
coordinate industrial development in the country. The Pioneer Industries
(Relief from Income Tax) Ordinance in 1958 was replaced by the Investment
Incentives Act 1968 which provided a wider assortment of tax incentives. During
the 1960s, the private sector was left to assume the lead role in determining
the pattern of industrial development and this resulted in the establishment of
industries such as food, beverages & tobacco industries, printing and publishing
industries, building materials industries and chemical & plastic
industries, basically for the domestic market.
According to Kokko (2002),
EN-US;mso-fareast-language:EN-US'>import substitution strategy was the dominant
strategy from the 1950s until about 1970s, although trade barriers were
significantly lower than in other developing countries. The average effective
rate of protection was around 7 percent, compared with a range of 25 to 92
percent in other economies at a similar level of development (World Bank
1993:134). One reason for the relatively mild protection was the colonial
tradition of a liberal stance to trade and industry (Athukorala and Menon
1997:64), but the political structure of the country was also an important
determinant. The majority ethnic Malays dominated politics but had relatively
little economic power, whereas the ethnic Chinese controlled most modern sector
activities but had little political power. The bias against agriculture was
also less serious than in many other countries, because of the economic and
political importance of the mining and plantation sector.
From import substitution
industrialisation to export-oriented strategy
The era
of 1970s and thereafter saw the implementation of the export-oriented strategy
in Malaysia. After an initial period of import substitution, Malaysia has
gradually turned to more open and export oriented policies. The 1980s and 1990s
saw the successful entrance of Malaysia into the world export market
characterized by a much more complex international environment than in the last
few years (Kokko, 2002).
Economic
growth during this time was the result of this policy shift from import
substitution to export promotion (Ramasamy, 2000). By promoting exports,
initially with primary commodities and later with manufactured goods, Malaysia
became an active global player. The proportion of exports to GDP, even as late
as 1987 was 55.7 percent. In 1999, however, the size of exports was much larger
than GDP at 107.4 percent. On the import side, in 1987, the proportion was 39.4
percent, while in 1999 it was 83.3 percent. Malaysia, thus, can be considered
to be among the most open economies in the world.
industrialization for Malaysia proceeded relatively smoothly, according to
Ramasamy, even though the above shift did not involve the introduction of a
neutral trade regime (i.e., first-best trade reforms). However, even during its
import-substituting phase, Malaysia has never discriminated strongly against
other traded goods nor did it overvalue its currency as was the case in other
developing countries pursuing import substitution policies. Though there was a
wide divergence in its tariff rates, Malaysia's overall simple average tariff
rate on manufactured goods was relatively low. Malaysia also did not make much
use of non-tariff barriers (NTBs) to protect its manufacturing sector (Naya
1988: 87).
promoting manufactured exports was the establishment of export-processing zones
(EPZs) in the early 1970s. In these EPZs, the exporting companies were allowed
to import duty-free raw materials, parts, and components subject to the
requirement that their entire output would have to be exported. Aside from
Singapore, which can be considered as one whole export-processing zone,
Malaysia has been the most successful country among the ASEAN countries in
effectively operating its EPZs within the context of a relatively open economy,
an able and generally honest bureaucracy, and a location strategy which linked
these EPZs in an efficient way to the country's good transport infrastructure
(Hill 1997: 8).
established its EPZs at a time when internationally integrated production of
electronics goods was growing rapidly. Under this production system vertically
integrated electronics transnational corporations (TNCs), particularly from the
U.S., relocated the labor- intensive processes in the chain of the whole
production process of an electronics product to low wage production sites in
Southeast Asia, particularly Malaysia, because of its good physical
infrastructure and its liberal foreign investment regime which allowed foreign
investors to establish fully-owned subsidiaries (Hill 1997: 8; Helleiner 1973:
26-31).
export-oriented industrialization has been criticized as they are basically
export enclaves, generating little, if any, local linkages. The reason for this
is that virtually all the plants in these EPZs are basically highly
import-intensive assembling operations, thus generating neither significant
domestic value nor extensive backward linkages with the local economy. On the
other hand, EPZs are useful in providing job opportunities for low skill labour
as well as in establishing a country's international reputation as a reliable
exporting country by virtue of its reliance on TNCs (Hill 1995: 12).
The development of New Economic Policy
style='font-family:Arial'>The New Economic Policy (1970-1990), otherwise known
as NEP, came into effect during this period to address racial and regional
imbalances in ownership and control of wealth (Kokko, 2002). According to
EN-US;mso-fareast-language:EN-US'>Shamsul (1997), the NEP can be said to be the
product of the effort of Tun Razak, who was Prime Minister at the time, and his
“back room boys,” comprised of Malay bureaucrats, academics, and technocrats,
most of whom were also responsible for the successful organization of the
Kongres Ekonomi Bumiputera in 1965 and 1968. In fact, a group of them produced
a book called Revolusi Mental (1970), edited by Senu A. Rahman, in an
attempt to provide a kind of a conceptual framework for a plan of action for
the future of the Malay cause. The 1969 ethnic riot also encouraged many
Malaysians to search for explanations, and many books were published with that
intention.
In the
NEP, it was specifically mentioned that within two decades (1971–90) the
successful implementation of the policy should create a community of Malay
entrepreneurs. This was to be done not only through direct government
intervention and economic support but also through an aggressive training and
educational strategy to create much needed professionally trained Malay
manpower. Malays were to participate in various fields that they had not
ventured before, positions involving “mental production” processes such as
bureaucrats, company executives, technocrats, academics, accountants,
electronics engineer, information technology specialists, and a host of other
professions demanding high or specialist education and training. Within two
decades, the implementation of the NEP has successfully created and expanded
the Malay middle class and new rich. In fact, many of its members have become
extremely rich and are now active corporate players in the country and
globally.
However,
according to Shamsul (1986), the NEP, through the implementation of its first
objective of “poverty eradication,” has also created many new rural-based Malay
entrepreneurs. Most of them are not involved in “mental production” process,
like their educated urban counterparts. They are usually involved in the
traditional, manually oriented small and medium businesses, such as
construction, manufacturing of food products and handicrafts goods, in
wholesaling of primary commodity items, or in retail activities. Most of these
emerging Malay new rich have been politically active or connected to the local
UMNO, and some of them are top district-level UMNO politicians. They have
managed to turn rural development projects, initially aimed at eradicating
poverty, into rich financial resources for themselves, by establishing their
own companies and then awarding them lucrative government contracts. However,
without the support, both capital and skill of local Chinese tycoons, the rural
Malay new entrepreneurs could never have achieved their present level of
success, and certainly not within such a short time. Of course, the Chinese towkays,
like their Malay partners, benefited tremendously, in financial terms, from
this fulfilling and harmonious interethnic relationship (Gomez 1990, 1991,
1994).
Moreover,
under the NEP, manufacturing firms with more than 25 employees were required to
get a business license, which was not granted unless NEP ownership and
employment guidelines were followed. Malays were also granted privileged access
to subsidized credit, share ownership, and business opportunities in the
private sector (Athukorala and Menon 1997:65).
The
impact of the NEP was notable. With an average growth rate of 8 percent, GDP
doubled between 1971 and 1980. Foreign investment inflows to the export
processing zones grew rapidly and manufactured exports expanded at a rate of
nearly 29 percent per year between 1971 and 1980 (Linnemann 1987: 369). By
1980, 70 percent of manufactured exports originated in the export processing
zones. Yet, Malaysia remained primarily a raw material exporter: manufactures
only accounted for 19 percent of total exports. The slow structural changes in
industry and export composition were seen as a reason to promote state-owned
heavy industry. The first step in this direction was the establishment of the
Heavy Industries Corporation of Malaysia in 1980. The government provided the
Corporation’s initial capital of USD 57 million and guaranteed subsequent
credits at subsidized rates, as well as protection from imports and favorable
government procurement. Over the following years, the Heavy Industries
Corporation set up several joint ventures with foreign firms, in areas like
petrochemicals, iron and steel, cement, paper and paper products, machinery,
building materials, and transport equipment. By the mid-1980s, Malaysia had 867
corporate public enterprises, more than a third of which were in manufacturing
(Athukorala and Menon 1997:65). Altogether, they accounted for some 20 percent
of GDP at the time.
style='font-family:Arial'>Development and Characteristics of Indigenous
Malaysian Multinationals
style='font-family:Arial;mso-bidi-font-weight:bold'>
Early Contribution by the
Chinese Community
According
to Shamsul (1997), Chinese migrants flocked into Malaysia since the
mid-nineteenth century. Many locals, particularly Malay nationalists, felt that
these migrants took away some opportunities that should have been made
available to them. The Malay nationalists argued that before the coming of
these migrants, including the European colonialists, Malays enjoyed a period of
economic independence and were involved in sophisticated commerce dealings.
Native commerce, they argued, was arrested and indigenous economic development
marginalized by colonial subjugation and immigrant encroachment, hence
contributing to Malay economic backwardness.
Mahathir,
in a series of articles written for the Sunday Times (September 1948–
April 1950), also lamented about exploitation done by Chinese middlemen to
rural Malays in dealing with property, land, and money issues. This was the
time when most plantations, mining, and even the urban commercial sector, was
dominated by the Chinese, along with the British nationals.
Dominance by the Government
Controlled
Torii
(1997) remarked that the most salient feature of the mode of implementation of
the NEP was, as Tun Razak himself enunciated, the government’s “direct
involvement or participation in economic activities” in such forms as direct
intervention into the market by state administrative agencies and the
establishment of joint ventures using state funds. All existing studies agree
that state intervention in the economy was the most important characteristic of
the NEP. The second characteristic was that under the NEP, the area of state
intervention was expanded from agriculture and rural development as in the
1960s into the industrial and commercial sectors. Emphasis was placed on the
fostering of bumiputera enterprises and entrepreneurs in the commercial and
industrial sectors. The third characteristic, which reflected the first, was
the establishment of systems for the creation of individual Malay shareholders
as a means to achieve the goal of restructuring equity ownership in favor of
Malays (Faaland, Parkinson, and Saniman
1990).
Dominance by politically
influential businessmen
style='mso-bidi-font-weight:bold'>
Shamsul
classified the Malaysian contemporary elite into two distinct classes: the
“old,” manually oriented middle class (e.g., small business people and the
self-employed) and the “new,” mentally oriented middle class (e.g.,
professionals and bureaucrats). The latter is mainly based in big cities, such
as Kuala Lumpur, Penang, Johor Bahru, Kuching, and Kota Kinabalu. But the
former is based both in big cities and in rural towns and villages. There is a
noticeable difference between these two categories of middle classes. Those in
the “old,” manually oriented middle class, most of whom are rural based, seemed
to be dominated by the rentier kind, comprised of individuals who have little
or no previous background in the world of business. Most of them are children
of Malay peasants. They or their family members are not seriously involved in
business except as “sleeping partners” to Chinese towkays, earning large
sums of money as commissions for getting government contracts using their
politi-cal positions or contacts. They are between forty-five and fifty years
of age, with a secondary school education but an enormous political power base,
built at the local level over years of working and living in the rural areas.
They became rich and joined the middle class through the business of
development projects for the rural poor.
Shamsul labeled them as “accidental entrepreneurs”
because they did not have any family background or experience in the world of
business and commerce nor their children later became entrepreneurs. They
struggled and survived to remain in the middle class mainly through political
patronage and money politics. In short, their material success was solely
dependent on their political success. According to a retired cabinet minister,
such politicians will “ . . . continue to buy political positions in order to
create more money thus creating more opportunities for himself and his clan to
continue to remain in power.” They are caught in a vicious circle of money
politics, or, in Frederick Bailey’s term, the politics of “stratagems and
spoils.”
Shamsul
called them the Malay rentier middle class politicians. Their position is
described as telor dihujung tandok (literally, an egg perched
precariously on a sharp horn), and their success or survival is largely
dependent on personal resource, initiative, and deception. Their rise and
continued existence as a class of economic and political middleman, who are not
highly educated but are extremely influential and powerful in rural areas,
survived heavily on patronage politics which now takes the form of money
politics within the UMNO (Gomez 1990).
The Evolution of
Malaysia-based multinational corporations: International expansion and outward
investment
Development of Malaysian multinationals
style='font-family:Arial;mso-bidi-font-weight:bold'>Malaysia is becoming a
favorite location of multinational corporations (MNCs) for regional
manufacturing-related operations, according to Malaysian International Trade
and Industry Minister Dato' Seri Rafidah Aziz. Reportedly, as of the end of May
2003, the Malaysian Government has approved 636 representative offices, 335
regional offices, 52 operational headquarters and 47 international procurement
centres (IPCs). Rafidah further said that the Government would continue to
facilitate foreign firms wishing to established service-related operations in
the country.
style='font-family:Arial'>Distribution of Malaysia Outward investment (1970 –
present)
style='mso-bidi-font-weight:bold'>
abroad is about US$1 billion. A larger portion of these investments (between 57
and 83 percent) have gone to other Asian economies while a relatively smaller
portion to the developed Organisation for Economic Cooperation and Development (
EN-US;mso-fareast-language:EN-US'>OECD) economies. Specifically, Malaysia’s
investment mainly went to Singapore and Australia. Its investments in other
ASEAN economies accounted for about 7 percent.
style='font-family:Arial;color:black'>Experts say that Malaysia's outward
investments in the past 12 years have gone on a rollercoaster ride. They began
low in number and declined some before rising and reaching its peak. The
decline in outward investments, according to many, is due the slowing economy
in the United States. They say that Malaysia’s outward investments will only
continue to improve only if U.S. economy improves.
style='font-family:Arial'>Present and Future Challenges
Ramasamy
said that with the advent of globalization, the Malaysian domestic market is
only temporary. The true potential of a company, he says, can be proven only if
it is not swept away by the currents of globalization. As a matter of fact,
firms need not go overseas to compete with foreign multinationals. Many experts
agree that local firms should benchmark against successful multinationals and
find a niche in the local that these MNCs have overlooked.
Moreover,
experts said that there is a need to emphasize the need to build on cultural
strengths rather than clashing with its weakness. The strong inter-personal
relationships that exist in the Malaysian setting, as is in the case of Latin
America, need to be capitalized to create a new business culture which will
emphasize cooperation rather than competition. This, they said, goes on to say
that mindset change can only be acquired by “internal motivation, not by
external injection”. In other words, managers have to be convinced that a mind
set change is inevitable if they want to survive in the globalization process.
Once the commitment is there, the question of how to change is secondary. This
can be done by practicing more a democratic style of management and control
(for example, listening more to subordinates, allowing more participation and
involvement of subordinates etc.) and undergoing relevant training (confidence
building, team building etc.).
Summary
Malaysian economic journey, from the nation’s transformation from the British
colonial period, to its shifts in development strategy: from export-oriented to
import-substitution industrialization in the 1960s, then returning to
export-oriented strategy in the 1970s, and finally, to the establishment of the
New Economic Policy. These phases in Malaysia’s economic development were not
without the main actors that played major roles in their respective eras: there
were the Chinese immigrants in the early days, the government, and the
influential businessmen-politicians. The evolution of these Malaysian MNCs were
also tackled, specifically their expansion and outward investments.
economists on Malaysia MNCs potential in surviving the globalization era. With
this, experts said that there is a need to emphasize the need to build on
Malaysian cultural strengths rather than clashing with its weakness. The strong
inter-personal relationships that exist in the Malaysian setting, as is in the
case of Latin America, need to be capitalized to create a new business culture
which will emphasize cooperation rather than competition.
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