Outside of the Klang Valley in Selangor, Penang is next largest manufacturing centre for Malaysia. This fact is obviously not lost on Lim Guan Eng's Penang state government. Using InvestPenang as the primary investment-seeking vehicle, Guan Eng and his team has assiduously sought to bolster and expand Penang as an attractive manufacturing hub. The challenges are daunting though not insurmountable. Let's look at InvestPenang's challenges in the broader context of Malaysia and ASEAN.
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A disturbing trend of MNC relocation/divestment from Malaysia
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Recent studies show that Malaysia has been the country most affected by divestments (9 cases) i.e. MNCs choosing to relocate away from Malaysia, accounting for approximately 25 percent of all divestments by Japanese MNCs from the ASEAN region. Penang, as we know, was not spared.
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Labor cost consideration appears to have been the major driving factor, because in 5 out of these 9 cases labor costs were reported as one of the main reasons for divestment. Although the wage level in Malaysia is significantly lower than many Asian countries, it is still higher than that in other countries such as China and Thailand.
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The increasing occurrence of divestments in Penang and Malaysia as a whole probably indicates that Japanese firms are in a later stage of cost-driven divestments and relocations, where the main divestments in Asian counties have already largely been accomplished.
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China the big winner?
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China appears to be the biggest winner during the late 1990s, despite the 5 divestments that took place in the country. China stands out as the most important country for relocation, hosting more than 60 percent of all identified relocations (16 out of 25).
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The rivalry between ASEAN countries and China in terms of attracting FDI is evident, as most affiliates or production lines that were relocated to China (12 out of 16 in the late 1990s) were originally located in one of the ASEAN countries (Singapore, Malaysia, Thailand and Indonesia).
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Studies also show that this rivalry might not to be too harmful for ASEAN countries. Out of these 12 relocations, only 5 involved actual closure of the affiliate, whereas in the other 7 cases only a product line is relocated. Moreover, all these 12 relocations involved production of relatively low-end products, such as tape recorders (Asahi Corporation), PC keyboards (Minebea), low-end air-conditioner (Matsushita) or scanners (Seiko Epson).
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Studies also reveal that there is no evidence that ASEAN have lost competitiveness in higher-end and more technologically advanced production activities, and the only relocation case of which China is the country of divestment (instead of country of relocation) is additional evidence that China is still a secondary choice for Japanese firms producing high-end products: Sony moved its production of camcorders, designated for the US market, from China back to Japan, in an attempt to shorten delivery time and to better control over product quality.
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Impact of MNC FDI investment decisions
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Given the major role played by foriegn direct investment (FDI) in industrialization and economic growth of East Asian countries, systematic shifts in Asian investment strategies of multinational
firms carry important economic implications for short-run economic performance and long-run development of these countries. Therefore, it is crucial for policy-makers and researchers to have a clear and thorough understanding of the nature, pattern and possible impacts of these shifts, to formulate sensible policy suggestions.
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Three Asian production network (APN) configuration strategies can be identified: geographic concentration, focusing on key-product markets, and outsourcing. Geographic concentration strategies, the concentration of roduction of a certain product in a single (low-cost) location, are followed to benefit from scale economies. The ongoing trade and investment liberalization efforts by ASEAN countries and their trade partners have made geographic concentration strategies more attractive.
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Focusing on key-product markets and outsourcing strategies are chosen to allow corporate resources to be freed for technology intensive and higher value-added activities. Japanese electronics firms are withdrawing from lower technology and commodity markets where they are facing intense competition from other Asian firms, such as market for TVs and scanners. With outsourcing strategies, firms divest their own production facilities, and outsource production to outside original equipment manufacturing (OEM) or electronic manufacturing services (EMS) firms, to focus in-house production on innovative products.
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Studies show that APN reconfiguration efforts by MNC pose challenges for host countries, but also open new opportunities. To properly address these challenges and opportunities, policy-makers in ASEAN countries will have to devise institutional and policy innovations, and adjust the industrialization trajectory of the country to make it more compatible with the changing pattern of APN configuration of multinational firms in the region.
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First of all, the footloose nature of FDI is clearly illustrated by the relocation patterns of Japanese electronics firms in Asia. Comparative advantages based solely on low labor costs appear less sustainable, and once these advantages deteriorate in one location, FDI pursuing such advantages will pack up and move to another location.
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The footloose nature of FDI requires two possible responses: host countries can offer benefits to selectively attract those investments that are less footloose, or take measures to increase the local embeddedness of foreign investments. Good examples for the first approach are recent efforts by several ASEAN countries, such as Singapore, Malaysia and Thailand, to encourage MNC to co-locate service and headquarter coordination functions with their manufacturing roles. -
Regional headquarters or operational headquarters status have been assigned, by these countries, to those MNC who invest in affiliates that are established to provide managerial and
technical support to affiliates in the whole East Asia area, and such status entitles the MNC to subsidies and other benefits.
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With regard to increasing local embeddedness of FDI, host countries can choose to cultivate regional industrial clusters in the country, through upgrading capabilities of local manufacturing firms and supporting industries, increasing the sophistication of skills and knowledge of local workers and managers, and improving the quality of industry-specific infrastructure.
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Industrial clusters are highly attractive to foreign investment. These clusters might become increasingly important, as more MNC have opted for a geographic concentration strategy for their APN configuration. In the electronics industry, several of such industrial clusters have emerged in ASEAN countries, such as wafer fabrication in Singapore and Malaysia, electronic home appliances in Malaysia, and disk-drive assembly in Thailand.
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New opportunities for ASEAN countries arise from the increasing importance of MNC strategies to outsource manufacturing activities to subcontractors and EMS providers to free themselves from routine production and to focus on technology intensive and value-added manufacturing. ASEAN countries might be able to transform their existing production bases in the electronics industry into more integrated and innovation-oriented manufacturing operations capable of providing more sophisticated EMS operations.
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Leading EMS providers in Asia, such as Solectron and Flextronics, have established major manufacturing sites in Malaysia. However, the systematic outsourcing trend led by major multinational firms also poses a threat to ASEAN countries. MNC engaged in outsourcing might be less likely to upgrade local capabilities of affiliates, and investments by large scale subcontractors, such as EMS providers in the electronics industry, are likely to be even more footloose because of higher sensitivity to differences in cost and productivity advantages of different locations.
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Studies also show that all is not lost. There is a remarkable resilience of electronics manufacturing investments in ASEAN countries despite the emergence of China as the major host country for electronics MNC. Nevertheless, the ‘China issue’ still needs to be addressed by ASEAN countries. The ASEAN area can still be made more attractive to MNC by further efforts to create an integrated trade and investment area.
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Even in the electronics industry, which is the most open sector in the region in terms of trade and investment liberalization, bolder measures, such as a complete removal of tariffs for electronics products, can still be taken.
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Principal source: René Belderbos, Jianglei Zou (2006) Foreign Investment, Divestment and Relocation by Japanese Electronics Firms in East Asia; Asian Economic Journal 20 (1) , 1–27
