Malaysia is on its way to becoming the fifth so-called "tiger," or newly industrialized economy, of East Asia, along with Taiwan, Korea, Hong Kong, and Singapore. The country has averaged a real 9.6% growth in GDP over the past eight years. Its goal is to increase trade at an average annual rate of 8.5%. While Malaysia is somewhat behind Singapore in its development, it has a clear vision of its goal for the year 2020. Malaysia has a population of 20 million people producing an adjusted GDP of $171 billion. It has a free market economy with an 8-9% growth each year (GDP growth for 1995 was 9.6%). At the time of the WTEC team's visit, the country had an inflation rate of 3.4-4% and an unemployment rate of 2.5% for its labor force of 9 million.

Malaysia is larger, more geographically dispersed, and richer in natural resources than Singapore. It has a total land area of 329.8 square kilometers and consists of a peninsular area (East Malaysia) and Sabah and Sarawak (West Malaysia) on the island of Borneo. Malaysia is a multilingual culture. The major languages are Bahasa Malaysian and English (the official business language), with Chinese, Tamil, and Hindi also spoken by many of its residents. Malaysia is an Islamic state that has succeeded in balancing religious fundamentalism with pragmatism in application of its laws and business environment. Malaysia practices parliamentary democracy and has been a stable, single government since achieving independence in 1957.

Malaysia enjoys a unique situation at this point of its development history. It currently enjoys trade benefits through GATT's Generalized System of Preferences (GSP) and unilateral trade agreements, and it now has the infrastructure, technological expertise, and manufacturing diversity to meet the demands for high quality of its firms' customers and pass the content hurdles set out in the international trade agreements. The confluence of these events supports capital investment from a variety of sources (the United States, Japan, and Europe, as well as other Asian countries such as Taiwan). Malaysia is working with Singapore and Indonesia to further develop and refine supplies of water and power for the region. Malaysia's petroleum reserves are adequate to supply domestic needs and still export.

Malaysia's Industrial Strategy

Malaysia's geographic location, deep-water ports, modern airports and transportation system, telecommunications, and reliable power and water facilities provide investors with an attractive infrastructure backed by an investment-friendly environment that allows up to 100% foreign ownership. The main economic growth segments are manufacturing, agriculture, and tourism. Malaysia is among the world's leading exporters of semiconductors, air conditioners, rubber gloves, and consumer electronics. The country has 11 Free Trade Zones (FTZs) as incentives to develop specific geographic areas. Within the FTZs, companies are subject to minimum customs formalities and are exempt from import duties on raw material, machinery, and component parts. The government has created monetary exchange control regulations that ease the transfer of funds for approved projects. It offers attractive tax incentives for promoted investments, ranging from "pioneer status" (partial exemption from income tax payments) to investment tax allowances and abatements for exports and deductions for R&D training. Operations must provide partial ownership to indigenous peoples (Bumiputra) before listing on the stock market can occur.

Penang, the second smallest state in Malaysia, has a manufacturing economy that accounts for nearly half of the country's GDP. There are currently six different industrial parks in Penang to support Malaysian manufacturing industry. Through the Penang Development Corporation, Penang has developed significant investment for the past 20+ years, primarily in electronics. In terms of technology deployment in advanced electronics manufacturing, a summary of Solectron's operations in Malaysia vs. other locations (Table 4.5) indicates there is virtually no delay time in getting the latest technologies in Penang. Although California is the leader in U.S. electronics technology, Solectron in Malaysia will have some capability before its California operations begin. As another indicator, Intel Corporation has invested $800 million in its Penang facility.

Table 4.5
Solectron's Electronics Capabilities in Penang, Malaysia, and Other Locations

C = being considered, D = being deployed, P = in production

The Malaysian Technology Development Corporation (MTDC) provides seed capital to companies interested in investing in Malaysia. The MTDC also provides capital to Malaysian companies that are involved in technology-based operations, in order to enhance their competitiveness. The objectives of the MTDC are (1) to develop indigenous technology, (2) to facilitate the absorption of technology developed by universities and institutions, (3) to transfer technology to local companies by gaining access to foreign technologies, and (4) to develop venture capital activities in Malaysia. Like Singapore, Malaysia also emphasizes interregional investment and technology transfers. The goal is to develop new markets and sources of low-end products.

Malaysia's Vision 2020

The government of Malaysia has provided a clear vision to its companies and their employees: to reach the standard of living of industrialized countries by the year 2020. This plan, called Vision 2020,3 is accelerating Malaysia's shift to high-technology industries. Specific objectives include accelerated industrial restructuring, technological upgrading, human resource development, and industrial linking. Malaysia's seventh development plan emphasizes the capabilities of its manufacturing sector by producing higher-value-added products and developing workers better capable of meeting the requirements of more sophisticated manufacturing processes. The plan focuses on development of industry, academic, and government relationships. The government is developing preemployment schools to train employees with strong work ethics and loyalty to company and country. It has also developed high-tech industrial parks to allow for the concentration of industry, research and development, and academic institutions. The government is also supporting industry with technical training programs and research programs at universities.

The Penang Economic Council drafted the Penang Strategic Development Plan in 1991 to support Vision 2020. Specific strategies included the promotion of skill-intensive, technology-intensive, and high-value-added industries through building an R&D infrastructure, including technology parks, and a supportive culture with a qualified workforce. In order to attract skilled workers from other states and countries, Penang is creating a competitive wage policy that will change its manufacturing core competence from labor-intensive to capital-intensive manufacturing. Companies from Japan, the United States, Taiwan, Singapore, Hong Kong, and Germany invested over RM4 15 billion (about $6 billion) in 1995. Malaysia continues to follow in the path of Singapore, developing close relationships with foreign and local industry participants. For example, Intel assembles its Pentium chips and does much of its packaging research and development in Malaysia, and Motorola has its premier packaging group in Malaysia.

Malaysia is a founding member of and plays a strong leadership role in ASEAN. The country is also involved in the General Agreement on Trade and Tariffs (GATT) and the World Trade Organization (WTO). Among the newly industrialized economies of East Asia, only Malaysia enjoys preferences under the General System of Preferences (GSP). GSP was intended to help developing countries grow their economies. It provides special access to first-world countries' markets, and industry protection measures that give local companies a competitive advantage. To attract companies and investments, Malaysia is reducing corporate tax rates from 32% to 30%. It will also reduce withholding taxes from 20% to 15% on interest payments made to nonresidents, and reduce the taxes on technical fees and royalties from 15% to 10%. Import duties are being reduced on more than 2,600 items, and sales tax on machinery parts and components and imported heavy machinery will be abolished.

Malaysia's Electronics Industry

The electronics industry plays a major role in Malaysia's development plan. It grew 29% in 1995 and 21.6% in 1994. Malaysia is a major producer of ICs, semiconductors, capacitors, and wafers. More than 80 companies produce PC-based components, subassemblies, or peripherals there. As a leading exporter of electronic components, the government is committed to increasing the value-added level of products. Under the Action Plan for Industrial Technology Development, it has targeted both upstream and downstream industries for development with the goal of becoming an R&D center. Downstream, motherboards and non-CRT displays are targeted. A major upstream project in Kulim Hi-Tech Park (financed by U.S. investments) will emphasize production of software, IC and wafer fabrication, including multilayer, coextruded, electron-beam cross-linked polyolefins, shrink films, and high definition displays (HDD). HDD has been designated as a strategic industry with a 10-year tax holiday. R&D incentives provide 5-year pioneer status and tax allowances on R&D investments. Matching grants and industrial building allowances of 10% are available. Capital allowances, tax exemptions on machinery and equipment for R&D, and relaxed tax conditions for expatriate and foreign workers support investment. In addition, seven of Malaysia's 11 FTZs are devoted to electronics: Batu Berendam (Malacca), Ulu Klang (KL), Bayan Lepas (Penang), Prai (Penang), Technology Park (KL), Kulim Hi-Tech Park (Kedah), Shah Alam (Selangor), and Subang Hi-Tech Park (Selangor).

In conclusion, Malaysia has the infrastructure, technology, manufacturing capabilities, and trade advantages that ensure its continued development. To reach a developed status by 2020, the targets are to increase domestic investments, to continue to diversify the economic base, to continue to develop and advance technological innovations, and to continue to develop R&D in education, training, and technology centers. The country's seventh development plan supports the goals of Vision 2020. The Technology Park of Malaysia will accelerate R&D developments in information technology, biotechnology, electronics, microelectronics, resource-based technology, telecommunications technology, aerospace, defense, and materials technologies. The government supports increased education, technical institutes, trade, telecommunications, mass transit, and recruitment of technical experts. The country is exporting its labor-intensive industries and importing laborers from countries like Bangladesh, Indonesia, and the Philippines. Technical agreements and consortia are being developed for advanced technologies like ball grid arrays. The goal of the manufacturing sector is to grow 10.5% annually and contribute 37.2% to GDP and account for 82% of total export earnings by 2000. Improved education, advanced technology, and ASEAN cooperation and investment are all expected to help make Malaysia a major world force in electronics.

3 See footnote 1.

4 RM is abbreviation for Malaysian currency, ringgits.

Published: May 1997; WTEC Hyper-Librarian