Program : Degree

Course : Malaysian Economy

Code : ECMB313

Credit Hours : 03

Contact Hours : 03

Semester : Semester 1 Academic Year 2012/2013

Subject Synopsis

This course provides the student with an overview of the Malaysian economy - the role of the government and its economic interaction with other countries in the region. Topics such as government economic plans and policies, income distribution and poverty eradication, labour force and labour relations, the financial system and international trade and investment will be covered in this course.

Learning Outcomes

At the end of this course, students are expected to:

1. Critically analyse the Malaysian economy and its components.

2. Apprehend the economic development of the nation thus far.

3. Apprehend fundamental economic analysis provided by the media.

4. Rationally analyse the macro economy environment and the external factors in business decision-makings.

5. Assess, analyze and suggest appropriately methods on economy crisis.

6. Rationally analyse the implication of macro economy environment, current issues and implications of the current policies.

Tuesday, May 29, 2012

7: Other government policies

New Development Policy 1990-2000



    NDP is continuation of NEP to promote balance development.
    National unity  remains the ultimate goal of socio-economic development.
    It because united society is fundamental for social and political stability and sustained development.
    Development policies and strategies under the NDP take into account of the diversities of Malaysian.
   Maintains the basic strategies of the NEP because  poverty incidences still persist and income inequality between group actually widened.

        The strategies:
1. To reduce and eradicate poverty.
  2. To accelerate the process of restructuring   Malaysian society.
However besides retaining the basic strategies of NEP, NDP has four new dimension

Four new dimension
Shift the focus of anti-poverty strategy towards eradication of hard core poverty while at the same time reducing poverty.

 Focus on employment and rapid development of an active Bumiputra Commercial and Industrial Community

Rely more on the private sector to in involved in the restructuring objective by creating greater opportunities for its growth.

 Focus on human resource development as a fundamental requirement for achieving the objective of growth and distribution.

Development thrust for the NDP will encompass the following critical aspects: 
Growth and equity
A balance development
Reducing and eliminating the social and economic inequalities
Strengthening national integration
Developing a progressive society
Human resource development
Science and technology
Protection of environment and ecology




Sunday, May 27, 2012

1:Introduction to Malaysian Economy


THE CONCEPT OF ECONOMIC GROWTH AND ECONOMIC DEVELOPMENT

EG is the increase in a country’s national income, or sometimes its per capita national income. The ability of an economy to produce a greater level of outputs.

‘The steady process by which the productive capacity of the economic is increased over time to bring about rising levels of national income."

“If the country wants to achieve economic development , there must be an ability to maintain economy growth at the rate . 5%-7%”. Todaro (1985)

ECONOMIC DEVELOPMENT

Economic development is a broad and comprehensive concept. Changes in the social and economic equalisation, employment, education, current needs of society

It has both quantitative and qualitative dimensions as it involves much more than economic growth. The process of improving the quality of all human live.

DEVELOPMENT CONCEPT FROM CONVENTIONAL PERSPECTIVE

Socio-economic change means all citizen have equal opportunities in education, health, good and increase in social amenities for housing, health, water and electricity

Technological change means that there must be an innovation, the development of research and technology in the production of output and services

• Sectorial analysis

Economic status during independence

• Malaysian economy predominantly based on primary sector. It consists of agriculture and mining.
• 45.7% of GDP and 61.3% of employment.
• Rubber cultivation, limited palm oil plantation, rice cultivation, fishery and forestry activities.

• The secondary sector consists of some light manufacturing, building and construction. 11.1 % of GDP and 9.6% of employment.
• Repair of plantation and mining equipment and processing of agricultural produce.

• The tertiary sector based on trade and services.
• Exports exceed 50% GDP.
• Services contributes 11.1% of GDP
• A rate of population increase. Unemployment rate increases from 2% in1957 to 7 % in 1967 and 8% in 1970.

• Uneven distribution of income
• To increase more Malays into commerce and industries, incorporated Rural and Industrial Development Authority (RIDA).

• A low level of human resource development which resulted in a shortage of many skills required for development to take place.


Economic status during 1960s-1980s

• 1960s still heavily dependent on agriculture sector but did not provide enough growth impetus for overall economy.

• 1970s implementation of import substitution and export-oriented industrialization. An increasing degree of sectoral interlinkages and greater integration and strengthening of linkages within the economy.

• Manufacturing sector growth average 10.3% per annum during 1970-90, and 10.5% per year during 1991-1998. Agriculture decelerates in growth rate from 5% per annum in 1970s to 0.8% in 1990s.

• Manufacturing grew at an average of 7.7% between 1971 and 1998. The share of employment contribution increased from 9.1% in 1968 to 15.8% in 1980. It grew 8.6 % per annum between 1990 to 1998.
• The manufacturing sectors were electrical & electronic machinery and appliances, transport equipment, rubber, plastic, paper & wood industries.

• The quest for industrialization affected the country’s external trade pattern. Rubber, tin, sawn logs and timber accounted for 68% of total gross exports in 1960, but in 1980, it reduced to 32%. Manufactured products accounted for 17% in 1960, but increased to more than 27% in 1980.


Economic status during 1990s

• 1985, first Industrial Master Plan

• 1996, second Industrial master Plan

• Feature- shift of industrial focus from an investment driven economy (70s & 80s) to productivity driven economy (90s).

• Total factor productivity increased from 1.2% during 1970-90 to 2.5% during 1991-1995.

• 1997-98, financial crisis. Output contracted by 10.2% in 1998. The main reasons were the weak demand from the Asia-Pacific region and the depressed global market for semiconductors.

• In 1998, the agriculture sector declined by 4%. Reasons, lower external demand, labor shortages, unfavorable prices, reduced cultivated area and lower use.

• Sharp decline in prices and volume of shares traded on KLSE.

• The consumer price index peaked at 6.2 % and the producer price index peaked at 10.7 in 1998.

• Employment declined by 3% compared to a positive growth of 4.9% in 1996.

• Real aggregate consumption decline by 10.3%

• Gross national saving rose by 5.1%; constituted 41.2% of GNP. Gross domestic capital formation declining by 38.4%. Thus, the savings-investment gap turned around to register a record surplus of RM36.1 billion or 13.7 % of GNP.

• External debt declined by 6.4% to RM159.8billion in 1998. This decline was due to the reduction in short-term debt by 34% to RM28.5%.

• Overview of Malaysia’s Economic growth

YEAR ANNUAL GROWTH RATE

1960-1969 6.4%
1970-1979 7.7%
1980-1987 2.0%
1988-1989 7.4%
1990-1995 8.5%
1996-2000 7.0%
2001-2005 7.5%

• ASEAN economy

The Association of Southeast Asian Nations is a geo-political and economic organization of 10 countries located in Southeast Asia, which was formed on 8 August 1967 by Indonesia, Malaysia, the Philippines, Singapore and Thailand. Since then, membership has expanded to include Brunei, Burma (Myanmar), Cambodia, Laos, and Vietnam.

Its aims include the acceleration of economic growth, social progress, cultural development among its members, the protection of the peace and stability of the region, and to provide opportunities for member countries to discuss differences peacefully.
Economic Community

ASEAN has emphasized regional cooperation in the “three pillars” of security, sociocultural and economic integration. The regional grouping has made the most progress in economic integration, aiming to create an ASEAN Economic Community (AEC) by 2015. The AEC would have a combined population of over 560 million and total trade exceeding US$ 1,400 billion.

Free Trade Area
The foundation of the AEC is the ASEAN Free Trade Area (AFTA), a common external preferential tariff scheme to promote the free flow of goods within ASEANThe ASEAN Free Trade Area (AFTA) is an agreement by the member nations of ASEAN concerning local manufacturing in all ASEAN countries.
The AFTA agreement was signed on 28 January 1992 in Singapore.

When the AFTA agreement was originally signed, ASEAN had six members, namely, Brunei, Indonesia, Malaysia, the Philippines, Singapore and Thailand. Vietnam joined in 1995, Laos and Myanmar in 1997, and Cambodia in 1999.

The latecomers have not fully met the AFTA's obligations, but they are officially considered part of the AFTA as they were required to sign the agreement upon entry into ASEAN, and were given longer time frames in which to meet AFTA's tariff reduction obligations.

Comprehensive Investment Area
The ASEAN Comprehensive Investment Area (ACIA) will encourage the free flow of investment within ASEAN. The main principles of the ACIA are as follows
• All industries are to be opened up for investment, with exclusions to be phased out according to schedules
• National treatment is granted immediately to ASEAN investors with few exclusions
• Elimination of investment impediments
• Streamlining of investment process and procedures
• Enhancing transparency
• Undertaking investment facilitation measures

Full realization of the ACIA with the removal of temporary exclusion lists in manufacturing agriculture, fisheries, forestry and mining is scheduled by 2010 for most ASEAN members and by 2015 for the CLMV (Cambodia, Lao PDR, Myanmar, and Vietnam) countries.

Trade in Services
An ASEAN Framework Agreement on Trade in Services was adopted at the ASEAN Summit in Bangkok in December 1995. Under AFAS, ASEAN Member States enter into successive rounds of negotiations to liberalise trade in services with the aim of submitting increasingly higher levels of commitments.
The negotiations result in commitments that are set forth in schedules of specific commitments annexed to the Framework Agreement. These schedules are often referred to as packages of services commitments. At present, ASEAN has concluded seven packages of commitments under AFAS.

Single Aviation Market
The ASEAN Single Aviation Market (SAM), proposed by the ASEAN Air Transport Working Group, supported by the ASEAN Senior Transport Officials Meeting, and endorsed by the ASEAN Transport Ministers, will introduce an open-sky arrangement to the region by 2015.

The ASEAN SAM will be expected to fully liberalize air travel between its member states, allowing ASEAN to directly benefit from the growth in air travel around the world, and also freeing up tourism, trade, investment and services flows between member states.

Beginning 1 December 2008, restrictions on the third and fourth freedoms of the air between capital cities of member states for air passengers services will be removed, while from 1 January 2009, there will be full liberalization of air freight services in the region, while By 1 January 2011, there will be liberalization of fifth freedom traffic rights between all capital cities.
Free Trade Agreements With Other Countries

ASEAN has concluded free trade agreements with China, Korea, Japan, Australia and New Zealand In addition, it is currently negotiating free trade agreement with India (conclusion expected in April 2009) and with the European Union. Taiwan has also expressed interest in an agreement with ASEAN but needs to overcome diplomatic objections from China

ASEAN Charter
On 15 December 2008 the members of ASEAN met in the Indonesian capital of Jakarta to launch a charter, signed in November 2007, with the aim of moving closer to "an EU-style community" The charter turns ASEAN into a legal entity and aims to create a single free-trade area for the region encompassing 500 million people.

President of Indonesia Susilo Bambang Yudhoyono stated that "This is a momentous development when ASEAN is consolidating, integrating and transforming itself into a community.

It is achieved while ASEAN seeks a more vigorous role in Asian and global affairs at a time when the international system is experiencing a seismic shift," he added, referring to climate change and economic upheaval. Southeast Asia is no longer the bitterly divided, war-torn region it was in the 1960s and 1970s." The charter's aims included:
1. "Respect for the independence, sovereignty and territorial integrity of member states".
2. "Peaceful settlement of disputes".
3. "Non-interference in member states internal affairs".
4. "Right to live without external interference".

However, the ongoing global financial crisis was stated as being a threat to the goals envisioned by the charter, and also set forth the idea of a proposed human rights body to be discussed at a future summit in February 2009.

This proposition caused controversy, as the body would not have the power to impose sanctions or punish countries who violate citizens' rights and would therefore be limited in effectiveness.

Mind required

You begin by telling yourself that:

You will learn new things and acquire new knowledge

You need to be aware about Malaysia Economic Issues

You need to aspire to obtain an `A' grade in your exam

You need be diligent

You need to develop an analytical mind



SELAMAT DATANG

Saya secara rasmi ingin ucapkan selamat datang ke kuliah kepada pelajar UNITEN semester 1, sesi akademik 2013/2014.
Semoga kamu semua dapat menimba ilmu sebanyak mungkin ( menerusi ECMB 313 Malaysian Economy) mengenai situasi sosial-ekonomi di negara kita.
Semoga kita dapat menjalani semester ini dengan cemerlang...

Discipline required

Attending class without fail
Reading the required textbook or topics before class
Doing your assignments
Asking question on things you need to understand
Paying close attention in the class
Writing and keeping your note up to date
Reviewing the subject before attending class
Answering question in the class

TEXTBOOK AND REFERENCES

Each one must possess a textbook. In this subject we shall use text.

Main references 
  1. Poh Wai Ching., The Development of Malaysia Economy, Prentice Hall, Malaysia, 2007.or 2008.
  2. Habibah Lehar, The MALAYSIAN Economy Past and Present, UPENA (UiTM), Second Printing, 2007.
Additional references:

·   Ahmad Sarji ed, Malaysia’s VisiĆ³n 2020: Understanding the concept, Implications & Challenges’, Cetakan ke 3, Percetakan Cs, Pelanduk Publivation (M) Sdan. Bhd, 1993.
·        Akbal Abdullah & Ahmad Zaidi Johari, Globalisasi Ekonomi dan Strategi Malaysia, KUITTO, Cetakan Pertama 2003.
·         Just Faaland, Jack Parkinson et, Dasar Ekonomi Baru: Pertumbuhan Negara dan Pencapaian Ekonomi Orang Melayu’, Cetakan kedua, Ultimate Print Sdn Bhd, Petaling Jaya, 2002.
·         Mahathir Mohamad, Excerpts from the speeches of Mahathir Mohamad on the multimedia Super Corridor, Pelanduk Publication, 1998.
·      Mustafa Dakian, K- Ekonomi Pemancu Ekonomi di Malaysia, Utusan Publication & Distributors SDN BHD, Terbitan 2007.
·         Nor Aini Haji Idris et al. Kegawatan Ekonomi: Impak terhadap Golongan Berpendapatan Rendah, Dewan Bahasa dan Pustaka, Cetakan Pertama 2007.
·         Nurizan Yahaya, Kemiskinan dan Perumahan di Bandar: Peranan pemerintah dan penyelesaian, Cetakan pertama, Dewan Bahasa dan Pustaka, 1998.
·         Okposin S.B, Abdul Hamid A.H and Boon O.H., The Changing Phases of Malaysian Economy, Pelanduk Publications. 1999.
·         Okposin, Samual Bassy et (Ter), Perubahan Fasa Ekonomi Malaysia, ITNB, UP& D dan UPENA (UiTM), 2003.
·         Rahmah Ismail, `Ekonomi Pembangunan: Isu sumber Manusia’, Cetak pertama, Penerbit UKM, 2003.
·         Rahmah Ismail, `Dimensi Ekonomi Pembangunan: Teori dan Realiti’, Cetak pertama, Malindo Printers sdn bhd, Penerbit UKM, 2003.
·         Siwa C. and Hassan S.K, Ekonomi Malaysia, 3rd Edition, Kuala Lumpur: Longman Malaysia.




·         The Eighth Malaysia Plan and The Ninth Malaysia Plan.
·         The Economist.
·         The Far East Economic Review.
·         The New Straits Times.
·         The Star.

SYLLABUS CONTENT

Program : Degree
Course : Malaysian Economy
Code : ECOB313
Credit Hours : 03
Contact Hours : 03
Semester : Semester 1 Academic Year 2009/2010


COURSE DESCRIPTION

This course provides the student with an overview of the Malaysian economy- the role of the government and its economic interaction with other countries in the region. Topics such as government economic plans and policies, income distribution and poverty eradication, labour force and labour relations, the financial system and international trade and investment will be covered in this course.

COURSE OBJECTIVES

To provide students an understanding of the critical and analytical framework of the Malaysian economy and its components.
To provide students an understanding of the economic development of nation thus far
To provide an understanding to the economic changes and dynamics as highlighted by the media
To provided students an understanding on the macro economy environment and the external factors in business decision making

SYLLABUS CONTENT

Chapter & Topics

1. INTRODUCTION

· Social and political setting
· Sectorial analysis
· Overview of Malaysia’s Economic growth
· ASEAN economy

2. MALAYSIA’S SOCIAL AND ECONOMIC REFORM

· Malaysia Plan
· Poverty and New Economic Policy
· Agriculture: Issues and problems

Economic Development Plans
· The plan before independence
· The plan after independence

3. MALAYSIA’S SOCIAL AND ECONOMIC REFORM - INDUSTRIAL DEVELOPMENT

· Investment Incentive Act, Free Trade Zone Act,
· Industrial Master Plan
· Look East and Privatisation Policy

4. MALAYSIA’S ECONOMIC GROWTH

· Manufacturing sector as a leading sector
· Understanding the Foreign Direct Investment and
· Multi-National Corporations

5. FINANCIAL SECTOR

· Bank Negara Malaysia and its roles in promoting growth
· Development in Financial Market

6. ECONOMIC CRISIS

· Causes of economic crisis
· Approaches to vanquish the causes of economic crisis
· Effects of economic crisis to the economy

7. OTHER GOVERNMENT POLICIES

· National Development Policy
· National Vision Policy

WHY WE SHOULD STUDY THIS SUBJECT?

IS MALAYSIAN ECONOMY A DIFFICULT SUBJECT? WHY WE SHOULD STUDY THIS SUBJECT?

You have studied Micro and Macro economics, and now you will proceed to see how economic concepts related to economic situation in Malaysia. No new subject is easy, it is hard work required to make any subject become easy.

Malaysia Economy subject deals more with the macroeconomic concept that affecting a nation as a whole, for example economic growth, national income, inflation, unemployment and international trade.

We will start the subject with discussion of the historical and current social economy problems like poverty, employment and income distribution. The most important how the Malaysian government formulates policies to overcome the socio-economic problems will also discuss and we also evaluate measures taken by the government to salve these problems.

All Malaysian citizens are directly related to the Malaysian economy. We should know our country’s objective and vision. Did economic development plans help to solve the problems? What are the present socio-economic problems and what can be done to solve the problems? Every individual is affected by what is happening in the economy of the country and the world.

If you begin with a positive mind and attitude, you have won half the battle…

Thank You,
Mohamad Sukiman bin Ishak
MPA (UM,M'sia), BA (Econs,) (UM, M'sia)

6: The East Asian financial crisis

Four economic cycles

1973-75 recession
1980-81 downturn
1985-86 recession
1997-98 recession

Successful for two critical reasons:
• Effective economic management
• Interaction between cyclical and structural factors operating within the economy


1973-75 recession

• The country was at its early stage of rapid economics expansion.
• Due to world oil crisis.
• But Malaysia was not badly hit compare to most OPEC because Malaysia was not totally dependent on crude oil as the main source of growth.
• In fact, the average growth rate for the years between 1971 and 1975 was 8.0 % per annum. Except 1974-75, the growth arte was 0.8%.
• General price level was relatively stable due to the followings.

- the secular deterioration in the Malaysian terms of trade, especially the sharp reduction in the real price of rubber, had a dampening effect on m money income and demand.
- The Malaysian Ringgit appreciated in relation to the US dollar.
- During the 1970s Malaysia also cushioned the impact of imported inflation by successfully shifting to cheaper sources of imports.

1980-81, 1986-86

• The two downturns were similar in the sense that they had the normal indicators of the business cycle.
- Slow growth
- Depressed external demand
- The trade –off inflation


1997-98

• Causes of economic crisis

Two arguments

• One blames poor economic fundamentals and policy inconsistency.
- According to the “Fundamentalist” view, the Asian crisis was caused by serious structural problems along with policy inconsistencies.

- Many Asian governments provided implicit guarantees to the banking system, which often engaged in lending practices that favored financially unqualified borrowers. This meant that the governments’ implicit guarantees that created a sizable “ contingent fiscal liability”.

• The other argues that Asia fell victim to a financial panic, where negative sentiment became self-fulfilling.
- Self-fulfilling pessimism of international lenders as the root cause of the crisis.

- A classic bank run. In a bank run, if enough inventors are suddenly seized with panic and demand immediate payment, then financial intermediaries are forced to destructively liquidate long-terms assets at great loss. The problem is there is no lender of last resort, who can step in to provide the necessary liquidity that will end the panic.

Regional Fundamental before the financial crisis

• Massive infrastructure development (table 4.1)

• Increasing FDI prior to the crisis indicating investors’ confidence in the region and Asian in particular. (Table 4.2)

• Rising consumer demand and income showed the strength of domestic markets in the region. (Table 4.3)

• Strong employment and minimum unemployment rate in the region (table 4.4-4.6)

• Expanding intraregional trade enhanced by increased integration of production basis and cross-border growth triangles. (table 4.10)

Malaysian Fundamental before the financial crisis

• Price pressures were absent
- CPI average 2.7 %; rate of unemployment was 2.6%. Organization of Economic Cooperation and Development (OECD) countries was 7.5%.

• Malaysia’s exposure to external debt was comparatively low at RM115.1 billion or 44.1 % of GNP at the end of June 1997, mostly long-term in nature.

• The overall public sector account had been in surplus since 1994.

• International reserves held at BNM as at June 1997, amounted to US$27.4 billion which was sufficient to finance approximately 4.3 months of retained imports, a level; considered satisfactory by international standards.

• The risk-weighted capital ratio (RWCR) of the banking sector was 12 % as at end of June 1997, exceeding the Bank for International Settlements (BIS) minimum standard of 8%.

• The continued governance of the nation by the same coalition of political parties since independence contributed to political stability and inters-racial harmony.

• The predictability and consistencies of government policies provided certainty to the private sector.

• The low incidence of poverty and the increasing size of the middle class contributed directly to economic growth in terms of their enhanced capacity to spend as well as to invest.

Conclusion: These fundamental strengths indicate that the real cause of the crisis was not the vulnerability of the Malaysian economy, especially financial sector, but calculated speculative attacks by certain fund managers.

• Approaches to vanquish the causes of economic crisis

Managing with NEAC policies

• The NEAC was established to make concrete recommendations to the government to arrest the worsening economic situations and revitalize the economy.

• Objectives
- Stabilize the Ringgit
- Restore market confidence
- Maintain financial stability
- Strengthen macroeconomic fundamentals
- Continue the socio-economic agenda

Managing with IMF prescriptions

IMF approach in the crisis-affected countries was to demand a tightening of fiscal policy based on two arguments.

• First, it argued that in the presence of rapid capital flight, these countries need to reduce domestic demand to narrow their current-account deficits. Tightening fiscal policy was an effective way to do this.
• Government spending needs to be cut to make room for the expected expenditure necessary to bail out insolvent banks.

In Malysia, the initial approach adopted contained some features of the IMF prescription for economies in the region, but they caused severe liquidity problems, reduced accessibility to credit and thus, adversely affected the performance of the private sector and in turn, contribute to strains on economy.

The givernment consequently decided to change its course of action by relaxing the fiscal and monetary policies in mid-1998.

Look at figure 4.5 for chronological details of IMF prescriptions.

• Effects of economic crisis to the economy

Economic Impact
- Towards the end of 1997, GDP began to slow down and registered a negative growth beginning the first quarter of 1998.
- Slower employment growth, and increased unemployment as well as retrenchment.
- Price pressures arising mainly from the depreciation of the Ringgit. CPI peaked at 6.2 % in June 1998.
- Private investment has generally contracted mainly due to uncertainties arising from volatile exchange rates, decline in both local and external demand, existence of excess capacity and tight liquidity position encountered since the onset of the financial crisis in July 1997.
- KLSE declined by 44.9 % between July 1 to December 31, 1997. hit 262.7 points on September 1, 1998.
- NPL increased.

Socio-economic impact
- Drastic decline in share prices and value of property and a negative wealth effect and severely affected the consumption pattern of Malaysians. The poor performance of KLSE also seriously affected the ability to procure financing through stock market.
- The increased in interest rates following the crisis brought further hardship to the public at large as well as business in terms of higher debt service commitments.
- Adversely affected the share of Bumiputra ownership in the corporate sector.
- The currency depreciation affected the capacity to pursue education abroad.

Managing with NEAC policies

• The NEAC was established to make concrete recommendations to the government to arrest the worsening economic situations and revitalize the economy.

• Objectives
- Stabilize the Ringgit
- Restore market confidence
- Maintain financial stability
- Strengthen macroeconomic fundamentals
- Continue the socio-economic agenda

5: Central Bank and Financial System in Malaysia

Introcuction

The evolution of Malaysia’s financial sector after independence

• In the beginning, the monetary authority in the federation of Malaya was the Board of Commissioners of currency, Malaya and British Borneo.

• On January 24, 1959, central Bank of Malaysia was officially opened.

• The prime objectives of the bank have been to maintain a strong ringgit, promote financial stability and foster growth of a sound financial structure.

• Financial system was dominated by the branches of the British banks, designed to serve and promote the well-being of British

• Tun Ismail Mohamed Ali served as the second governor of Bank Negara from July 1962 to July 1980. He sought to promote and strengthen domestic banks to match the branches of the foreign banks in the country.

• During 1960s, the attention of our financial sector through Bank Negara was focused on building up the financial infrastructure. It witnessed the development of strong domestic commercial banks and widespread branching of banking services.

• Also set up during the period the Kuala Lumpur Stock Exchange (KLSE), discount houses, Pilgrims Management and Fund Board (LUTH), Pernas (the national investment and trading corporation), agriculture bank, Capital Issues Committee and Malaysian Industrial Development Finance.


• In the 1970s emphasis was put on in inculcating integrity and professionalism in bank management. Credit Guarantee Corporation was set up to ensure that small borrowers had access to bank credit at reasonable cost. Post office savings bank was introduced to mobilize small savings.

• Foreign exchange market was set up to serve the nation’s international trade but also to promoter Kuala Lumpur as an international centre for the trading of primary commodities. Merchant banks and development banks were set up.

• The Kuala Lumpur Commodity Exchange (KLCE) was established and a market for long term Malaysian Government securities was encouraged.

• In the 1980s, financial authorities adopted a stance of fostering greater financial discipline among the financial institutions, while ensuring that adequate bank credit was made available to private investors at reasonable cost. Bank Islam was set up in 1983 to promote the Islamic banking. First merger, United Asian Bank (UAB) merged with Bank of Commerce.

• Non-financial institution were revamped and strengthened to promote the growth of small-scale industries. Those involved were CGC, Bank Industri and Malaysia Export Credit Insurance Bhd.


• In the 1990s, the most important scenario was the complete deregulation of the interest rate regime. On February 1991, BLR of the banking institutions were completely freed from the administrative control of Bank Negara; that is, BLRs were allowed to be determined on the basis of each banking institutions’ own cost of fund. With effect from November 1995, each bank was allowed to quote its own BLR at any level subject to an industry ceiling rate.

• It permitted greater flexibility for banking institutions to respond more quickly to changes in market liquidity situations and also encouraged greater competition and efficiency within the banking industry.

• Securities Commission (SC) was set up on March 1, 1993. it becomes the watchdog for the securities, options and financial futures industries as well capital market instruments. SC absorbed the functions of the Capital Issues Committee and Panel on Takeovers and Mergers. Future Industry Act 1992 came into force on 1 March 1993.

• This act provides the underlying regulatory framework of the financial system. International Offshore Financial Center (IOFC) was established in October 1990. It enhances the contribution of the broad financial sector to economic growth. January 3, 1994, Islamic inter-bank money market was introduced, making Malaysia the first country with a full-fledged Islamic banking system which functions on a parallel basis with the conventional system.




• Bank Negara Malaysia and its roles in promoting growth

The entity responsible for overseeing the monetary for nation

Monetary policy
The actions of a central bank, currency board or other regulatory committee, the determine the size and rate of growth of the money supply, which in turn affects interest rates.

How the central bank influences an economy

i. Macroeconomic approach – when regulating inflation and price stability

ii. Microeconomic approach – when functioning as a lender of last resort


Macroeconomic influences
- As it is responsible for price stability, the central bank must regulate the level of inflation by controlling the money supplies by means of monetary policy.

- This open bank performs open market transaction that either inject the market with liquidity or absorb extra funs, direct affecting the level of inflation

Microeconomic influences
- A commercial bank offers funds, if the commercial bank does not have enough liquidity, the commercial bank can turn to central bank to borrow additional funds.

- The central bank may require all commercial bank to keep reserve/deposit ratio.

- Enforcing a policy of commercial bank reserves functions as another means to control money supply in the market.

FUNCTION OF CENTRAL BANK

1. Banker for currency issue
the central bank is the sole currency issuing authority in the country

2. Keeper of international reserve
- Holding of country’s official external reserve are centralized at the Central Bank.

- The Central Bank’s international reserve comprise gold, foreign exchange, reserve position with IMF and holding of special drawing rights.

- To safeguard the external value of ringgit, the Central Bank Act, 1958 provides for the maintenance of minimum external reserve backing of 80.59% against the currency issue


3. Government banker and financial advisor
- The Central Bank acts as a banker, fiscal agent and financial advisor to the government.

- Close cooperation between the government and the bank is also evident from the centralization of government deposit with bank.

- With this arrangement, government receipts, arising mainly from the new issue of government securities, tax, and dividend payments are placed with the bank and managed by the bank depending on the liquidity situation of the system.

- The central Bank manages the government accounts and performs the same functions as the commercial banks perform for their customer.

- The Central Bank also empowered to provide temporary advances to the government to cover ant deficit in the budget revenue.

- The Central Bank manages the public debt and is responsible for the floatation of government loans, both in Malaysia and abroad.

4. The agency responsible for monetary policies and management of the financial system.

- The Central Bank analyses and assesses the development in the international and domestic economy and highlight the area that need to be addressed.

- Central Bank undertakes economy intelligence and surveillance and carries out forecast on the economic condition of the country.

- Base on these assessments, CB presents policy recommendations at regular briefings to the Ministry of Finance as well as at various economic policy making forums at the national level.

5. Banker to the commercial bank
- Central Bank develops institutions and market infrastructure for the development of modern and strong financial systems to contributing to the strengthening of the foundation of the economy.

- Central Bank has built strong payments systems. These systems are regularly `upgraded’ to address the impact of technology on banking systems/ to promote a good credit among banking institutions. Central Bank also operates the Central Credit Reference Information System.

- This allows banking institution to make informed decisions on loan applications.

BANK NEGARA MALAYSIA (BNM)

It was established on 26 January 1959, under Central Bank of Malaya Ordinance, 1958, with following objectives:

i. to issue currency and keep reserves safeguarding the value of money

ii. to act as a banker and financial adviser to government

iii. to promote monetary stability and a sound financial structure

iv. to promote the reliable, efficient and smooth operation of national payment and settlement systems and to ensure that the national payment and settlement systems policy is directed to advantages of Malaysian

v. To influence the credit situation to the advantage of the country.


FUNCTIONS OF BANK NEGARA MALAYSIA

i. The BNM ensures that the availability and cost of money and credit in the economy are consonant with national macroeconomic objectives.

ii. The BNM acts as the banker for currency issue, keeper of international reserves and safeguarding the value of the ringgit, banker and financial adviser to the government, agency responsible for monetary policy and management of the financial system and banker to the banks.

iii. The goals of the BNM are to achieve sustained economic growth path, high level of employment, maintain stability in the purchasing power of the ringgit, eradication of poverty, to raise the living standard of Malaysians and to achieve a reasonable balance of payments position.





• Development in Financial Market

Recent challenges in the financial sector

The July 1997 currency attacked resulted in the value of Ringgit plummeting to a crisis level. There was some cause for concern before the crisis.
• The economic growth was above the potential output.

• The loss of efficiency in the economy.

• The rising current account deficit

• Excessive expansion to the non-traded sectors.

One of the main measures that the government has taken to tackle the crisis is the formation of the National Economic Action Council on January 7, 1998. Measures adopted were as follows.

• To bring loan classification standards to best practice and require 20% provisioning against the uncollateralized portion of substandard loans.

• To increase the minimum risk-weighted capital ratio (RWCR) of finance companies from 8% to 10% plus increasing the minimum capital funds of finance companies from RM5million to RM300 million and subsequently to RM600 million.


• To expand the capital adequacy framework to incorporate market risk and to reduce the single customer limit from 30% to 25% of capital funds.

• To have more intensive and rigorous supervision including conducting monthly stress tests on individual banking institutions.

• To stabilize the ringgit
• To restore market confidence
• To maintain financial market stability
• To strengthened economic fundamentals
• To continue the equity and socio-economic agenda
• To restore adversely affected sectors.

• To set up Pengurusan Danaharta Nasional Bhd (Danaharta), it is to purchase and manage NPLs with a gross value of RM5 million and above from financial institutions.

• This is to ensure these financial institutions refocus on lending to viable businesses and economic activities, which can support economic recovery. A sum of RM15 billion is expected to be acquired.

• To set up the national asset management company- Danamodal Nasional Bhd (Danamodal). It is to serve as a catalyst to consolidate and rationalize the banking sector as well as accelerate the formation of a core of a strong domestic banking institution which can spearhead the development of the banking system. It had injected a total of RM6.2 billion into 10 banking institutions in the form of Exchangeable Subordinated Capital Loans (ESCL)

• Corporate Debt Restructuring Committee (CDRC). It was set up to provide the forum for both debtors and creditors to work out their debt problems amicably and collectively. CDRC is to facilitate corporate debt restructuring to ensure that viable businesses continue to receive financing for their operations. Jobs and productive capacity will be preserved with minimal losses to creditors, shareholders and other stakeholders.

To further strengthen the economy, some selective exchange controls had been undertaken on September 1, 1998 as follows.

• Ringgit-dominated transactions among non-residents via non-resident external accounts.

• Outflows of short-term capital by requiring such inflows to remain in the country for a minimum period of one year.

• Import and export of ringgit by travelers, both residents and non-residents.
• Malaysian investments abroad which now require approval as there are insufficient funds to be taken out.

However, there are no controls on:

• Current account transactions

• Repatriation of interest, dividends, fees, commissions and the rental income from portfolio investment and other forms of ringgit assets.

• FDI inflows and outflows, including income and capital gains.

4: Malaysia's economy growth

• Manufacturing sector as a leading sector

Manufacturing Development in the 1960s & 1970s

• During the 1960s, industrial development reflected the country’s comparative advantage. Malaysia has comparative advantages of a well educated workforce and low labor cost. There was a shift in emphasis from import-substitution to the promotion of exports.

• Labor intensive industries flourished. Examples, textile & electronic, rubber & palm oil processing, and wood based industries.

• During the 1970s, the manufacturing sector became the leading sector in the expansion of the Malaysian economy and the main pillar for achieving the objectives of the NEP in terms of growth of output, restructuring, exports, income generation, and employment expansion.

• Manufacturing sector grew by 11.6% during 1971-72.

• Oil crisis hit in 1973-74.

• World recession during 1974-75.

• During 1976-80, the sector grew faster (14.3%) due to pioneer status; investment tax credit (under Investment incentives Act 1968). 1253 manufacturing products amounting to a total investment proposal of RM3.2 billion were carried out. Products involved are food manufacturing, industrial chemical, electronic and electrical, fabricated metal products, paper, printing and publishing, and wood based products.

• The bulk of the growth lied in the high growth in export sector. (Average of 18.8 %).


Manufacturing Development in the 1980s

• The success of the sector was due to first, the development of world trade. Second, the domestic market. Third, the Industrial Master Plan (IMP 1986-90).

• Key recommendation of IMP.
- fiscal incentive to promote investment
- to induce reinvestments, linkages, exports and training
- to foster industrial development
- to provide a more conducive environment for investment.
- Changes to legislation to promote further growth.
- Policies were made more attractive and procedures were simplified.
- Examples, the introduction of Promotion of Investments Act (PIA) 1986; the amendments made to the Income tax Act 1967 which provided liberal investment incentives to potential investors.
- More examples, the exemption order under the industrial Coordination Act (ICA) 1975 was liberalized to exempt manufacturing companies with share holders’ funds of less than RM2.5 million or 75 workers from being licensed.
- Also, liberalization of equity guidelines for foreign investment with a view to further enhances the pivoted role in the expansion of the investment activities.

• The sector managed to increase its growth from 4.6% in 1981 to 11.6% in 1984. The growth was due to resource-based industries (wood based and non-metallic minerals).

• For the period 1986-90, the main contributors to growth were the two non-resource based export industries- electrical & electronic and textiles.
• The rapid growth of the export contributed significantly to employment. Employment expanded rapidly by 8.6% during 1980s. In the later part of 1980s, the sector experiencing a tight labor market.


Manufacturing Development in the 1990s

• Measures to promote further were as follows.
o The review of investment incentives with objectives of encouraging investments more selectively, emphasizing towards achieving higher levels of local content, value added, technology development and intra-industries linkages.

o The restructuring and rationalization of the industrial base through the Industrial Adjustment Fund (IAF) 1991, aimed at increasing efficiency and competitiveness.

o The need to vigorously pursue FDI.

• The Domestic Investment Initiative (DII) was launched to encourage a higher level of domestic investments. Strategies included
- organizing campaign and investments promoting awareness
- encouraging increased domestic content
- strengthening and deepening the local capital market
- developing anchor companies and SMI to promote greater inter-industry linkages

• The hunt for FDI continues even in the years of economic crisis. As such FDI between 1997 and 1998 increased dramatically. Investment increased from RM11.5 billion in 1997 to RM13.1 billion in 1998.


• Understanding the Foreign Direct Investment

FDI Inflows and Malaysian Investments Abroad


The flow of FDI in Malaysia can be said to have evolved through four major phases.
• FDI in early development phase
• FDI in the import-substitution phase
• FDI in the export-led phase
• FDI inn the MSC development

FDI in the early development phase

• Took place before the First and second Malaysia Plan indicated that the Malaysian economy was heavily dependent on agricultural resources.
• 70% of FDI was in agriculture.
• Invested by British colonial masters mainly because to provide raw materials to feed the industries in Britain and Europe in general.
• FDI was greatly determined by the demands of agricultural sector.
• Rubber and tin contributed 86.3 % of GDP, 85.1% in 1955 and 79.9% in 1960.

FDI in the import-substitution phase

• Between 1965 and 1980, total FDI is estimated to have increased by 145% from RM300m to RM1.4b in 1980.
• Bulk of FDI was in manufacturing sector.
• Covered the periods of First, second and Third Malaysia Plan.
• Significance and dependence on agriculture was slowly being reduced.
• Contribution of agriculture declined to 31% of GDP in 1970, 28% in 1975 and 28% in 1980.
• Manufacturing sector was increasingly gaining prominence. 13% in 1970, 16% in 1975, and 20% in 1980.
• Investors were provided with various forms of incentives mainly to meet local market production.
• Joint ventures were highly encouraged.

FDI in the export-oriented phase

• Given the limited local market size, government embark on a market-oriented strategy or better known as export-led strategy.
• Between 1980 and 1995, Malaysia received FDI by TNCs totaling RM120b.
• By 1995, Malaysia was already the largest recipient of FDI in ASEAN.
• The massive influx of FDI meant job opportunities, shortage of manpower and less dependence on primary sector.
• Primary sector grew 0.8% in 1986 and 1.0% in 1988. Manufacturing grew 1.5% in 1986, and 4.0% in 1988.
• Since early 1990s, FDI flow has been directed to the high-tech industries in support of the establishment of MSC and the realization of Vision 2020.

FDI in the MSC Development Phase

• The successful attraction of FDI inflow between 1996 and 2020 is crucial to achieve industrialized status.
• To use information as a foundation in all aspects of its national development.
• The country’s comparative advantage lies in the development of MSC-seen as a ladder to leap from towards attaining a fully developed industrialized status.
• MSC covers an area 15 km by 50 km in size next to Putrajaya.
• The main purpose is to make the corridor as the center of electronic economic development.

FDI trend

- Two opposing view on the impact of FDI.

• First, FDI is beneficial to output, the standard of living, employment creation, technology transfer, external markets, balance of payments, various linkages, and above all, experience for local investors.
• Second, FDI tends to be more capital intensive and brings with it problems of high capital outflows in the form of future payments of dividends and other remittances abroad.

- FDI causes “crowding-out” or possible displacement of local entrepreneurship. Export-led entrepreneurship is limited particularly in perceiving opportunities in industrial ventures, in innovating, in scouting for technology and developing markets for long-term profits.

- Those who have concentrated on being labor-intensive have decided to upgrade to being capital-intensive.
- Foreign firms have found it viable to move downstream and upstream into the production of end products, thus forging linkages with the electronic components industry and providing substantial opportunities for small and medium scale industries.


Sources

During 1991 to 1997, most FDI came from five countries: Japan, US, Taiwan, Singapore, and Korea. They accounted for 67.4% of the total proposed FDI.

Distribution

- Japan, concentrated in electrical and electronics sector, chemical and chemical products and non-metallic mineral products.

- United States, concentrated in petroleum refining, electronic and electrical industry.

- Taiwan, concentrated in electronic, textiles, wood-based products and petroleum refining.

- Singapore, concentrated on electric and electronics sector, basic metal products and petroleum refining.

- Korean, concentrated on non-metal products, electric and electronic industry.


Contribution

• The manufacturing is the second largest contributor of employment after services, followed by agriculture, forestry, livestock and fishing, government services, construction, transport, storage and mining and quarrying.

• Based on MIDA approved investments, the number of potential jobs generated by FDI rose from 40351 in 1980 to 171646 in 1990. But, as FDI shifts in favor of capital investments to overcome labor shortages, the n umber of potential jobs dropped to 56835 in 1997.


The effect of an open economic policy

• Invest in Malaysia because of the country’s political stability and strong economic fundamentals

• Malaysian government had an open economy with tax incentives for foreign investment to attract more FDI.


Why open policy?

• The open policy is defined as promoting transparency in their operations in terms of export and import trading.

• Malaysia is not strong enough to be independent and stand solely on its own feet. Therefore, the open policy is an ideal means to boost sales with the involvement of foreign direct investment
• Malaysia would have been unable to achieve the current standard of living without the participation of FDI in recent years. In fact, the absence of active FDI would have a negative impact towards its economic growth.

Why Firms Invest Oversea?

I Perfect Market View

• The objective of the firm is to maximize profit. Accordingly, it is the search for locations with relatively higher profits that causes oversea investments.

• FDI flows out of countries with low returns to those expected to yield higher returns.

• Major criticism: First, firms are regarded as primitive with no distinction between complex conglomerates on one hand, and a sole trader on the other. Second, the approach neglected the fundamental importance of technology by TNC as major determinant of FDI


II. Market Imperfect View

• FDI is determined by monopolistic advantages possessed by firms.

• The host country possesses specific resources, cultural and institutional characteristics that are favorable to the firm so much so that they are willing to accept cost and risks associated with an oversea venture,


III. Product Life Cycle Theory

• A product goes through the cycle of birth, maturation, and standardization.

• In the first stage, when the product is new, it is produced by innovating firm in its home market, This is due to the fact that the absolute advantage in financial, organizational and intellectual resources to undertake the requisite research and development can only be met at home

• In the second stage, the product is mature. Some standardization is introduced in design and production. New competitions are introduced in the market either by producing exactly the same product or imitation. But in as much as the marginal production costs plus the transport costs of the goods exported by the “original investor” are lower than the average costs of prospective production in marketing, the investors would export and avoid FDI.

• In the final stage, the product goes through standardization. The priority then is the lowest cost supply point. The firm starts to invest abroad in cheaper locations and near foreign markets so as to exploit its technological quasi-rent to the utmost. The production then shift in location. It is an alternative to the export of a new product.

Comparative advantage Theory

The theory evolves around four major orientations:

• Japanese FDI-Natural resources orientation, labor orientation, and trade barrier induce market orientation.
- These are trade oriented.
- FDI are mostly aimed at exploiting natural resources and most output are shipped back to Japan.
- Profitable to established oversea operation because of domestic constraints on factors of production.


• American FDI- Oligopolistic market orientation.
- It is anti trade oriented.
- It is to serve the recipient country.
- It produces highly sophisticated, technology-based products for local markets.
- Anti trade for 3 reasons.
- First, the product life cycle type of FDI cuts-off the investing country’s own comparative advantage. As such FDI takes place to defend markets and maintain an oligopolistic position.
- Second, High-cost industries require protection from foreign competition.
- Third, The new industries, which it established in the host country, are unsuited to their factor proportions and therefore unlikely to be come internationally competitive.



Malaysia’s Direct Investment Abroad

• Malaysia’s direct investment abroad is determined by two sets of phenomenon.
- First, the objective conditions of profitability for capital as determined largely by factor prices.
- Second, a set of objective determinants.

• Malaysia’s direct investment abroad is unevenly distributed.
- Singapore as the biggest recipient, amounting to about 20% of the total for the period 1990-1997.
- Hong Kong is second and is aimed at taking advantage of the China market.
- Malaysia invests in U.K because of the European Single Market, research, and development and technology transfer. Example Proton taking over the prestigious British car producer, Lotus.


• And Multi-National Corporations

A multinational corporation (MNC) or transnational corporation (TNC), also called multinational enterprise (MNE), is a corporation or enterprise that manages production or delivers services in more than one country. It can also be referred to as an international corporation.

Multinational corporation (MNC) – a large company with plants or other direct investment in one or more foreign countries. It is also called an international corporation or a transnational corporation.

Typically, the multinationals have operated in developing countries, where they provide technology, finance capital, and marketing skills in return for a profitable market. But even advanced industrial nations may be the scenes of investment by multinational companies.

The power that multinationals can exert over foreign governments has been the target of criticism, but many host countries have imposed regulations that have given them a larger share of profits, jobs, and markets.

The first modern MNC is generally thought to be the British East India Company, established in 1600. Very large multinationals have budgets that exceed some national GDPs. Multinational corporations can have a powerful influence in local economies as well as the world economy and play an important role in international relations and globalization.

Market imperfections
A multinational enterprise is facing the paradox that although it doesn't have the contacts and knowledge of local customs and business practices as indigenous competitors and located in one country, it does business in another country. If there are unique assets of value overseas, why not sell or rent these assets to local entrepreneurs, who could then combine them with local factors of production at lower costs than those experienced by foreign direct investors?

The answer to this paradox is that there might be circumstances under which using market exchange to coordinate the behavior of agents located in two separate countries is less efficient than organizing their interdependence within a multinational firm. When this is the case, a firm located in one country may find it profitable to incur the additional costs of operating in a foreign environment.

The idea that MNEs owe their existence to market imperfections was first put forward by Hymer, Kindleberger and Caves.[2] The market imperfections they had in mind were, however, structural imperfections in markets for final products. Hymer, for example, considered two firms, each a final product monopolist in its own market, isolated from competition by high transportation costs and tariff and non-tariff barriers.

A decline in these costs exposed them to each other's competition and reduced their profits. A combination of the two firms, through merger or acquisition, into an MNE would then maximize their joint income by forcing them to take into account the gains and the losses competition inflicts on them.

The transformation of two domestic firms into one MNE thus internalized pecuniary externalities and produced a gain for the owners of these tow firms, but not necessarily for society, since it redistributed income towards the MNE and away from its customers.

A similar case arose when the technology had often few substitutes and the number of potential licensees in any given foreign market was also often limited, thus creating a biletaral monopoly. The consolidation of licensor and licensee within an MNE (by acqusition or merger of the potential licensee or by vertical integration of the innovator into overseas manufacturing) reduced haggling and made it easier to enforce price discrimination schemes across countries. This analysis of the reasons behind the emergence of multinational firms led Hymer to take a negative view of MNEs, which he considered an instrument for restraining competition between firms of different nations.

According to Hymer, market imperfections are structural, arising from structural deviations from perfect competition in the final product market due to exclusive and permanent control of proprietary technology, privileged access to inputs, scale economies, control of distribution systems, and product differentation], but in their absence markets are perfectly efficient.

By contrast, the insight of transaction costs theories of the MNEs, simultaneously and independently developed in the 1970s by McManus (1972), Buckley and Casson (1976), Brown (1976) and Hennart (1977, 1982), is that market imperfections are inherent attributes of markets, and MNEs are institutions to bypass these imperfections.

Markets experience natural imperfections, i.e. imperfections that are due to the fact that the implicit neoclassical assumptions of perfect knowledge and perfect enforcement are not realized.

International power

Tax competition

Multinational corporations have played an important role in globalization. Countries and sometimes subnational regions must compete against one another for the establishment of MNC facilities, and the subsequent tax revenue, employment, and economic activity.

To compete, countries and regional political districts sometimes offer incentives to MNCs such as tax breaks, pledges of governmental assistance or improved infrastructure, or lax environmental and labor standards enforcement.

This process of becoming more attractive to foreign investment can be characterized as a race to the bottom, a push towards greater autonomy for corporate bodies, or both.

However, some scholars, for instance the Columbia economist Jagdish Bhagwati, have argued that multinationals are engaged in a 'race to the top.' While multinationals certainly regard a low tax burden or low labor costs as an element of comparative advantage, there is no evidence to suggest that MNCs deliberately avail themselves of lax environmental regulation or poor labour standards. As Bhagwati has pointed out, MNC profits are tied to operational efficiency, which includes a high degree of standardisation.

Thus, MNCs are likely to tailor production processes in all of their operations in conformity to those jurisdictions where they operate (which will almost always include one or more of the US, Japan or EU) which has the most rigorous standards. As for labor costs, while MNCs clearly pay workers in, e.g. Vietnam, much less than they would in the US (though it is worth noting that higher American productivity—linked to technology—means that any comparison is tricky, since in America the same company would probably hire far fewer people and automate whatever process they performed in Vietnam with manual labour), it is also the case that they tend to pay a premium of between 10% and 100% on local labor rates.

Finally, depending on the nature of the MNC, investment in any country reflects a desire for a long-term return. Costs associated with establishing plant, training workers, etc., can be very high; once established in a jurisdiction, therefore, many MNCs are quite vulnerable to predatory practices such as, e.g., expropriation, sudden contract renegotiation, the arbitrary withdrawal or compulsory purchase of unnecessary 'licenses,' etc. Thus, both the negotiating power of MNCs and the supposed 'race to the bottom' may be overstated, while the substantial benefits which MNCs bring (tax revenues aside) are often understated.

Market withdrawal

Because of their size, multinationals can have a significant impact on government policy, primarily through the threat of market withdrawal.[8] For example, in an effort to reduce health care costs, some countries have tried to force pharmaceutical companies to license their patented drugs to local competitors for a very low fee, thereby artificially lowering the price. When faced with that threat, multinational pharmaceutical firms have simply withdrawn from the market, which often leads to limited availability of advanced drugs. In these cases, governments have been forced to back down from their efforts. Similar corporate and government confrontations have occurred when governments tried to force MNCs to make their intellectual property public in an effort to gain technology for local entrepreneurs.

When companies are faced with the option of losing a core competitive technological advantage or withdrawing from a national market, they may choose the latter. This withdrawal often causes governments to change policy. Countries that have been the most successful in this type of confrontation with multinational corporations are large countries such as United States and Brazil], which have viable indigenous market competitors.

Lobbying

Multinational corporate lobbying is directed at a range of business concerns, from tariff structures to environmental regulations. There is no unified multinational perspective on any of these issues. Companies that have invested heavily in pollution control mechanisms may lobby for very tough environmental standards in an effort to force non-compliant competitors into a weaker position.

Corporations lobby tariffs to restrict competition of foreign industries For every tariff category that one multinational wants to have reduced, there is another multinational that wants the tariff raised. Even within the U.S. auto industry, the fraction of a company's imported components will vary, so some firms favor tighter import restrictions, while others favor looser ones. Says Ely Oliveira, Manager Director of the MCT/IR: This is very serious and is very hard and takes a lot of work for the owner.

Multinational corporations such as Wal-mart and McDonalds benefit from government zoning laws, to prevent competitors from competing.

Many industries such as General Electric and Boeing lobby the government to receive subsidies to preserve their monopoly.

Patents

Many multinational corporations hold patents to prevent competitors from arising. For example, Adidas holds patents on shoe designs, Siemens A.G. holds many patents on equipment and infrastructure and Microsoft benefits from software patents.[12] The pharmaceutical companies lobby international agreements to enforce patent laws.

Government power

In addition to efforts by multinational corporations to affect governments, there is much government action intended to affect corporate behavior. The threat of nationalization (forcing a company to sell its local assets to the government or to other local nationals) or changes in local business laws and regulations can limit a multinational's power.

Micro-multinationals

Enabled by Internet based communication tools, a new breed of multinational companies is growing in numbers."How startups go global".

These multinationals start operating in different countries from the very early stages. These companies are being called micro-multinationals. What differentiates micro-multinationals from the large MNCs is the fact that they are small businesses.

Some of these micro-multinationals, particularly software development companies, have been hiring employees in multiple countries from the beginning of the Internet era. But more and more micro-multinationals are actively starting to market their products and services in various countries.

Internet tools like Google, Yahoo, MSN, Ebay and Amazon make it easier for the micro-multinationals to reach potential customers in other countries.

Service sector micro-multinationals, like Indigo Design & Engineering Associates Pvt. Ltd., Facebook, Alibaba etc. started as dispersed virtual businesses with employees, clients and resources located in various countries. Their rapid growth is a direct result of being able to use the internet, cheaper telephony and lower traveling costs to create unique business opportunities

3: Malaysia's social and economic reform - Industrial development

Introduction

Strategies for industrialization

Industrialization is characterized by specialization and division of labor, and involving the application of technology and mechanical power to improve production process.

i. import substitution
• It was embarked in 1960s for two main reasons. First, the rapid population growth and second, the need for diversification in the economy.

• Population growth by 3.3%, agriculture sector alone insufficient to absorb the increasing work force.

• Need to diversify to eliminate the total dependence on rubber and tin.

• Tariff advisory board was established to protect domestic market.

• Benefited by resource-based industries such as tobacco, furniture, rubber products, wood products, food, beverages, wearing apparels, printing & publishing, plastics, leather products, and electrical machinery.

• Serious shortcomings. First, the limitation of import substitution lies in the efficiency of the industry and the size of the market. Second, the small domestic market could not sustain the long term requirements of the strategy. Third, the objectives of the strategy were not fully achieved.


ii. Export orientation
• Introduction of Investment Incentives Act in 1968. This Act incorporating tax holidays to firms granted pioneer status, and additional tax holiday based on the nature of the product, the location of the firm, and the content of the local raw materials.

• Abolished Tariff Advisory Board and replaced with Federal Industrial Authority.

• Gives incentives rather than imposing controls, and measures

• Gives incentives to production for both domestic and export markets.

• Easier to detect effectiveness of export promotion policies because can be easily observed.

• Export promotion gives industries the opportunities to enlarge their markets and achieve greater economies of scale.

• Force industries to compete in the international markets.

• Success of this export oriented policies can be attributed to: 1. industries were simple and light industries. 2. Mainly labor intensive & Malaysia had abundant labor supply. 3. Use simple technology. 4. Use Malaysia abundant natural resources.


• Investment Incentive Act, Free Trade Zone Act,
The foundation of the AEC is the ASEAN Free Trade Area (AFTA), a common external preferential tariff scheme to promote the free flow of goods within ASEAN.
The ASEAN Free Trade Area (AFTA) is an agreement by the member nations of ASEAN concerning local manufacturing in all ASEAN countries. The AFTA agreement was signed on 28 January 1992 in Singapore.
When the AFTA agreement was originally signed, ASEAN had six members, namely, Brunei, Indonesia, Malaysia, the Philippines, Singapore and Thailand. Vietnam joined in 1995, Laos and Myanmar in 1997, and Cambodia in 1999.
The latecomers have not fully met the AFTA's obligations, but they are officially considered part of the AFTA as they were required to sign the agreement upon entry into ASEAN, and were given longer time frames in which to meet AFTA's tariff reduction obligations.
• Industrial Master Plan

• Look East and Privatisation Policy
Look East Policy
• Referred to the emulation of rapidly developing countries of the East- Japan, Korea & Taiwan..

• Important element of the policy: diligence and discipline in work, loyalty to the nation, group orientation, increasing national productivity, quality, upgrading efficiency, cutting cut waste and narrowing the gap between executives and workers.

• Heavy industry was emphasized due to first, the nation needed to reduce its dependence on imports of capital and intermediate goods to sustain the growth process. Second, it would generate a host of ancillary supporting industries which would promote immense forward & backward linkages in the manufacturing sector. Finally, it was vital for economic success.

• Emphasis on four areas:

i. expanding infrastructure facilities.

ii. Upgrading the quality of the workforce.
iii. Improving technology.

iv. Increasing investment in R & D.


Privatization program

In Malaysia, two main policies that are directly associated with privatization of public entities are the Privatization Policy (Dasar Pensawastaan Malaysia) and Malaysia Incorporated Policy (dasar Pensyarikatan Malaysia). Both policies were instituted in 1983.

The privatization policy

• To procure positive changes to the organization, management and the performance of the public enterprises that previously rested with the government.

• To reflect the government‘s commitment to reduce direct engagement in economics activities, reduce the level and the scope of public spending and allow market forces to govern the economy.

• It means the transfer of 3 components, namely government management responsibilities, assets (together with or without liabilities) or right to use the assets, and personnel.

Objectives of privatization
• To relieve the government‘s financial burden.
- the funds saved can be used to finance other economic development projects, concentrate on traditional functions of maintaining law and order.

• To improve work efficiency and productivity

• To facilitate economic growth

• Reduce the size and presence of the public sector in the economy
• To meet the new Economic policy (NEP)
The modes of privatization in Malaysia are as follows.

1. Sale of Equity
This method involves the transfer of three organization-related components, namely management responsibility, assets (together with or without liabilities) and personnel. It can be partial or complete sale of shareholdings in state-owned public company. Examples are Telekom, TNB, Proton.

2. Sale of assets
It involves the transfer of one, two or even all three components. For example, the case of quarries in Selangor, Perak, and Penang.

3. Lease of assets
It involves the transfer of rights to use assets for a specific period of time, for a specific amount of payment. For example, the lease of facilities to Malysiaan Airport Bhd. And Malaysian Railway (KTM)

4. Management Contract
Some government services were contracted out to the private sector. For instance, parking services and garbage disposal.

5. Management-Buy-Out (MBO)
It involves top management personnel of a company taking over the company that they are initially employed in.

6. Build-Operate-Transfer (BOT)
It entails the private sector constructing a facility using its own funds, operating it for a period known as a concession period and transferring it to the government at the end of the period.

7. Build-Operate (BO)
The “BO” is similar to the “BOT” method. However, BO does not involve the transfer of the facility to the government.

8. Build-Transfer
It is to accommodate innovative recommendations and requirements submitted by private sector.

The Malaysia Incorporated Policy (Dasar Pensyarikatan Malaysia)
It was launched on February 25, 1983. The main aim is to establish and strengthen cooperation that would benefit both the private and public sectors.

Several steps were taken to implement the policy.

• To reduce misunderstanding among private and public sectors.

• Both sectors should have one main goal, which is, to achieve national objectives.

• Both industries are responsible to promote and maintain a good image for the country.

• To change the rules and work procedures which are not appropriate in the public sector. The private sector should take the initiative to recommend suitable work procedures in the public sector.

• To enhance the relationship between government ministries, departments and statutory bodies.


The performance and accomplishments of privatization

• First, easing the government financial burden. For the period 1991 to 1995, the government saved RM51.59 billion on capital expenditure.

• Second, contributing efficiency and productivity of the private sector. Example, Telekom, the return on assets increases from 4.0 before privatization to 9.3 after privatization.

• Third, Malaysian companies that collaborated with foreign equity holders or management contracts will have the opportunities to be exposed to new technologies, expertise and skills that will improve production. Example, North-South Highway where Malaysians learn to adopt and manage new technologies in construction and transportation. The completed highway saves time and cost of transportation, which led to an increase in manufacturing activities.

• Fourth, it reduces the size and presence of the public sector in the economy. Between period 1991 to 1995, there were 204 public entities were privatized, hence, allowing the economy to be increasingly led by private sector.

• Finally, it encouraged Bumiputra participation in the economy, in line with the NEP.
Strategies that have been taken to implement Bumiputra participation are as follows.

• Implementing vendor-developemnt programs to develop SMI. For example, Proton, known as the “anchor company”, has established the Component Scheme program to source automobile parts from 64 SMI vendors.

• Imposing a condition that at least 30% of contract works of privatized projects are reserved for Bumiputra.



















Introduction

Strategies for industrialization

Industrialization is characterized by specialization and division of labor, and involving the application of technology and mechanical power to improve production process.

i. import substitution
• It was embarked in 1960s for two main reasons. First, the rapid population growth and second, the need for diversification in the economy.

• Population growth by 3.3%, agriculture sector alone insufficient to absorb the increasing work force.

• Need to diversify to eliminate the total dependence on rubber and tin.

• Tariff advisory board was established to protect domestic market.

• Benefited by resource-based industries such as tobacco, furniture, rubber products, wood products, food, beverages, wearing apparels, printing & publishing, plastics, leather products, and electrical machinery.

• Serious shortcomings. First, the limitation of import substitution lies in the efficiency of the industry and the size of the market. Second, the small domestic market could not sustain the long term requirements of the strategy. Third, the objectives of the strategy were not fully achieved.


ii. Export orientation
• Introduction of Investment Incentives Act in 1968. This Act incorporating tax holidays to firms granted pioneer status, and additional tax holiday based on the nature of the product, the location of the firm, and the content of the local raw materials.

• Abolished Tariff Advisory Board and replaced with Federal Industrial Authority.

• Gives incentives rather than imposing controls, and measures

• Gives incentives to production for both domestic and export markets.

• Easier to detect effectiveness of export promotion policies because can be easily observed.

• Export promotion gives industries the opportunities to enlarge their markets and achieve greater economies of scale.

• Force industries to compete in the international markets.

• Success of this export oriented policies can be attributed to: 1. industries were simple and light industries. 2. Mainly labor intensive & Malaysia had abundant labor supply. 3. Use simple technology. 4. Use Malaysia abundant natural resources.


• Investment Incentive Act, Free Trade Zone Act,
The foundation of the AEC is the ASEAN Free Trade Area (AFTA), a common external preferential tariff scheme to promote the free flow of goods within ASEAN.
The ASEAN Free Trade Area (AFTA) is an agreement by the member nations of ASEAN concerning local manufacturing in all ASEAN countries. The AFTA agreement was signed on 28 January 1992 in Singapore.
When the AFTA agreement was originally signed, ASEAN had six members, namely, Brunei, Indonesia, Malaysia, the Philippines, Singapore and Thailand. Vietnam joined in 1995, Laos and Myanmar in 1997, and Cambodia in 1999.
The latecomers have not fully met the AFTA's obligations, but they are officially considered part of the AFTA as they were required to sign the agreement upon entry into ASEAN, and were given longer time frames in which to meet AFTA's tariff reduction obligations.
• Industrial Master Plan

• Look East and Privatisation Policy
Look East Policy
• Referred to the emulation of rapidly developing countries of the East- Japan, Korea & Taiwan..

• Important element of the policy: diligence and discipline in work, loyalty to the nation, group orientation, increasing national productivity, quality, upgrading efficiency, cutting cut waste and narrowing the gap between executives and workers.

• Heavy industry was emphasized due to first, the nation needed to reduce its dependence on imports of capital and intermediate goods to sustain the growth process. Second, it would generate a host of ancillary supporting industries which would promote immense forward & backward linkages in the manufacturing sector. Finally, it was vital for economic success.

• Emphasis on four areas:

i. expanding infrastructure facilities.

ii. Upgrading the quality of the workforce.
iii. Improving technology.

iv. Increasing investment in R & D.


Privatization program

In Malaysia, two main policies that are directly associated with privatization of public entities are the Privatization Policy (Dasar Pensawastaan Malaysia) and Malaysia Incorporated Policy (dasar Pensyarikatan Malaysia). Both policies were instituted in 1983.

The privatization policy

• To procure positive changes to the organization, management and the performance of the public enterprises that previously rested with the government.

• To reflect the government‘s commitment to reduce direct engagement in economics activities, reduce the level and the scope of public spending and allow market forces to govern the economy.

• It means the transfer of 3 components, namely government management responsibilities, assets (together with or without liabilities) or right to use the assets, and personnel.

Objectives of privatization
• To relieve the government‘s financial burden.
- the funds saved can be used to finance other economic development projects, concentrate on traditional functions of maintaining law and order.

• To improve work efficiency and productivity

• To facilitate economic growth

• Reduce the size and presence of the public sector in the economy
• To meet the new Economic policy (NEP)
The modes of privatization in Malaysia are as follows.

1. Sale of Equity
This method involves the transfer of three organization-related components, namely management responsibility, assets (together with or without liabilities) and personnel. It can be partial or complete sale of shareholdings in state-owned public company. Examples are Telekom, TNB, Proton.

2. Sale of assets
It involves the transfer of one, two or even all three components. For example, the case of quarries in Selangor, Perak, and Penang.

3. Lease of assets
It involves the transfer of rights to use assets for a specific period of time, for a specific amount of payment. For example, the lease of facilities to Malysiaan Airport Bhd. And Malaysian Railway (KTM)

4. Management Contract
Some government services were contracted out to the private sector. For instance, parking services and garbage disposal.

5. Management-Buy-Out (MBO)
It involves top management personnel of a company taking over the company that they are initially employed in.

6. Build-Operate-Transfer (BOT)
It entails the private sector constructing a facility using its own funds, operating it for a period known as a concession period and transferring it to the government at the end of the period.

7. Build-Operate (BO)
The “BO” is similar to the “BOT” method. However, BO does not involve the transfer of the facility to the government.

8. Build-Transfer
It is to accommodate innovative recommendations and requirements submitted by private sector.

The Malaysia Incorporated Policy (Dasar Pensyarikatan Malaysia)
It was launched on February 25, 1983. The main aim is to establish and strengthen cooperation that would benefit both the private and public sectors.

Several steps were taken to implement the policy.

• To reduce misunderstanding among private and public sectors.

• Both sectors should have one main goal, which is, to achieve national objectives.

• Both industries are responsible to promote and maintain a good image for the country.

• To change the rules and work procedures which are not appropriate in the public sector. The private sector should take the initiative to recommend suitable work procedures in the public sector.

• To enhance the relationship between government ministries, departments and statutory bodies.


The performance and accomplishments of privatization

• First, easing the government financial burden. For the period 1991 to 1995, the government saved RM51.59 billion on capital expenditure.

• Second, contributing efficiency and productivity of the private sector. Example, Telekom, the return on assets increases from 4.0 before privatization to 9.3 after privatization.

• Third, Malaysian companies that collaborated with foreign equity holders or management contracts will have the opportunities to be exposed to new technologies, expertise and skills that will improve production. Example, North-South Highway where Malaysians learn to adopt and manage new technologies in construction and transportation. The completed highway saves time and cost of transportation, which led to an increase in manufacturing activities.

• Fourth, it reduces the size and presence of the public sector in the economy. Between period 1991 to 1995, there were 204 public entities were privatized, hence, allowing the economy to be increasingly led by private sector.

• Finally, it encouraged Bumiputra participation in the economy, in line with the NEP.
Strategies that have been taken to implement Bumiputra participation are as follows.

• Implementing vendor-developemnt programs to develop SMI. For example, Proton, known as the “anchor company”, has established the Component Scheme program to source automobile parts from 64 SMI vendors.

• Imposing a condition that at least 30% of contract works of privatized projects are reserved for Bumiputra.















Introduction

Strategies for industrialization

Industrialization is characterized by specialization and division of labor, and involving the application of technology and mechanical power to improve production process.

i. import substitution
• It was embarked in 1960s for two main reasons. First, the rapid population growth and second, the need for diversification in the economy.

• Population growth by 3.3%, agriculture sector alone insufficient to absorb the increasing work force.

• Need to diversify to eliminate the total dependence on rubber and tin.

• Tariff advisory board was established to protect domestic market.

• Benefited by resource-based industries such as tobacco, furniture, rubber products, wood products, food, beverages, wearing apparels, printing & publishing, plastics, leather products, and electrical machinery.

• Serious shortcomings. First, the limitation of import substitution lies in the efficiency of the industry and the size of the market. Second, the small domestic market could not sustain the long term requirements of the strategy. Third, the objectives of the strategy were not fully achieved.


ii. Export orientation
• Introduction of Investment Incentives Act in 1968. This Act incorporating tax holidays to firms granted pioneer status, and additional tax holiday based on the nature of the product, the location of the firm, and the content of the local raw materials.

• Abolished Tariff Advisory Board and replaced with Federal Industrial Authority.

• Gives incentives rather than imposing controls, and measures

• Gives incentives to production for both domestic and export markets.

• Easier to detect effectiveness of export promotion policies because can be easily observed.

• Export promotion gives industries the opportunities to enlarge their markets and achieve greater economies of scale.

• Force industries to compete in the international markets.

• Success of this export oriented policies can be attributed to: 1. industries were simple and light industries. 2. Mainly labor intensive & Malaysia had abundant labor supply. 3. Use simple technology. 4. Use Malaysia abundant natural resources.


• Investment Incentive Act, Free Trade Zone Act,
The foundation of the AEC is the ASEAN Free Trade Area (AFTA), a common external preferential tariff scheme to promote the free flow of goods within ASEAN.
The ASEAN Free Trade Area (AFTA) is an agreement by the member nations of ASEAN concerning local manufacturing in all ASEAN countries. The AFTA agreement was signed on 28 January 1992 in Singapore.
When the AFTA agreement was originally signed, ASEAN had six members, namely, Brunei, Indonesia, Malaysia, the Philippines, Singapore and Thailand. Vietnam joined in 1995, Laos and Myanmar in 1997, and Cambodia in 1999.
The latecomers have not fully met the AFTA's obligations, but they are officially considered part of the AFTA as they were required to sign the agreement upon entry into ASEAN, and were given longer time frames in which to meet AFTA's tariff reduction obligations.
• Industrial Master Plan

• Look East and Privatisation Policy
Look East Policy
• Referred to the emulation of rapidly developing countries of the East- Japan, Korea & Taiwan..

• Important element of the policy: diligence and discipline in work, loyalty to the nation, group orientation, increasing national productivity, quality, upgrading efficiency, cutting cut waste and narrowing the gap between executives and workers.

• Heavy industry was emphasized due to first, the nation needed to reduce its dependence on imports of capital and intermediate goods to sustain the growth process. Second, it would generate a host of ancillary supporting industries which would promote immense forward & backward linkages in the manufacturing sector. Finally, it was vital for economic success.

• Emphasis on four areas:

i. expanding infrastructure facilities.

ii. Upgrading the quality of the workforce.
iii. Improving technology.

iv. Increasing investment in R & D.


Privatization program

In Malaysia, two main policies that are directly associated with privatization of public entities are the Privatization Policy (Dasar Pensawastaan Malaysia) and Malaysia Incorporated Policy (dasar Pensyarikatan Malaysia). Both policies were instituted in 1983.

The privatization policy

• To procure positive changes to the organization, management and the performance of the public enterprises that previously rested with the government.

• To reflect the government‘s commitment to reduce direct engagement in economics activities, reduce the level and the scope of public spending and allow market forces to govern the economy.

• It means the transfer of 3 components, namely government management responsibilities, assets (together with or without liabilities) or right to use the assets, and personnel.

Objectives of privatization
• To relieve the government‘s financial burden.
- the funds saved can be used to finance other economic development projects, concentrate on traditional functions of maintaining law and order.

• To improve work efficiency and productivity

• To facilitate economic growth

• Reduce the size and presence of the public sector in the economy
• To meet the new Economic policy (NEP)
The modes of privatization in Malaysia are as follows.

1. Sale of Equity
This method involves the transfer of three organization-related components, namely management responsibility, assets (together with or without liabilities) and personnel. It can be partial or complete sale of shareholdings in state-owned public company. Examples are Telekom, TNB, Proton.

2. Sale of assets
It involves the transfer of one, two or even all three components. For example, the case of quarries in Selangor, Perak, and Penang.

3. Lease of assets
It involves the transfer of rights to use assets for a specific period of time, for a specific amount of payment. For example, the lease of facilities to Malysiaan Airport Bhd. And Malaysian Railway (KTM)

4. Management Contract
Some government services were contracted out to the private sector. For instance, parking services and garbage disposal.

5. Management-Buy-Out (MBO)
It involves top management personnel of a company taking over the company that they are initially employed in.

6. Build-Operate-Transfer (BOT)
It entails the private sector constructing a facility using its own funds, operating it for a period known as a concession period and transferring it to the government at the end of the period.

7. Build-Operate (BO)
The “BO” is similar to the “BOT” method. However, BO does not involve the transfer of the facility to the government.

8. Build-Transfer
It is to accommodate innovative recommendations and requirements submitted by private sector.

The Malaysia Incorporated Policy (Dasar Pensyarikatan Malaysia)
It was launched on February 25, 1983. The main aim is to establish and strengthen cooperation that would benefit both the private and public sectors.

Several steps were taken to implement the policy.

• To reduce misunderstanding among private and public sectors.

• Both sectors should have one main goal, which is, to achieve national objectives.

• Both industries are responsible to promote and maintain a good image for the country.

• To change the rules and work procedures which are not appropriate in the public sector. The private sector should take the initiative to recommend suitable work procedures in the public sector.

• To enhance the relationship between government ministries, departments and statutory bodies.


The performance and accomplishments of privatization

• First, easing the government financial burden. For the period 1991 to 1995, the government saved RM51.59 billion on capital expenditure.

• Second, contributing efficiency and productivity of the private sector. Example, Telekom, the return on assets increases from 4.0 before privatization to 9.3 after privatization.

• Third, Malaysian companies that collaborated with foreign equity holders or management contracts will have the opportunities to be exposed to new technologies, expertise and skills that will improve production. Example, North-South Highway where Malaysians learn to adopt and manage new technologies in construction and transportation. The completed highway saves time and cost of transportation, which led to an increase in manufacturing activities.

• Fourth, it reduces the size and presence of the public sector in the economy. Between period 1991 to 1995, there were 204 public entities were privatized, hence, allowing the economy to be increasingly led by private sector.

• Finally, it encouraged Bumiputra participation in the economy, in line with the NEP.
Strategies that have been taken to implement Bumiputra participation are as follows.

• Implementing vendor-developemnt programs to develop SMI. For example, Proton, known as the “anchor company”, has established the Component Scheme program to source automobile parts from 64 SMI vendors.

• Imposing a condition that at least 30% of contract works of privatized projects are reserved for Bumiputra.