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