The Impact of MNC Investments in Malaysia, Singapore & Thailand 9789814380386

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IMPACT

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-

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~NC INVESTMENTS

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M A L A Y S I A, SINGAPORE & THAILAND

The Institute of Southeast Asian Studies (ISEAS) was established as an autonomous organization in 1968 . It is a regional research centre for scholars and other specialists concerned with modern Southeast Asia, particularly the many-faceted problems of stability and security, economic development, and political and social change. The Institute is governed by a twenty-two-member Board of Trustees comprising nominees from the Singapore Government, the National University of Singapore, the various Chambers of Commerce, and professional and civic organizations. A ten-man Executive Committee oversees day-to-day operations; it is chaired by the Director, the Institute's chief academic and administrative officer. The ASEAN Economic Research Unit (AERU) is an integral part of the Institute, coming under the overall supervision of the Director who is also the Chairman of its Management Committee. The Unit was formed in 1979 in response to the need to deepen understanding of economic change and political developments in ASEAN. A Regional Advisory Committee, consisting of a senior economist from each of the ASEAN countries, guides the work of the Unit.

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IMPACT o j - - --

MNC INVESTMENTS

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M A L A Y S I A, SINGAPORE & THAILAND

S. NATARAJAN TANJUAYMIANG

I5EA5 ASEAN Economic Research Unit INSTITUTE OF SOUTHEAST ASIAN STUDIES

Published by Institute of Southeast Asian Studies Heng Mui Keng Terrace Pasir Panjang Road Singapore 0511 All rights reserved . No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying , recording or otherwise, without the prior permission of the Institute of Southeast Asian Studies .

©

1992 Institute of Southeast Asian Studies

The responsibility for facts and opinions in this publication rests exclusively with the authors and their interpretations do not necessarily reflect the views or the policy of ISEAS or its supporters .

Cataloguing in Publication Data Natarajan , S. The impact of MNC investments in Malaysia, Singapore and Thailand / by S. Natarajan and Tan Juay Miang . 1. International business enterprises- Malaysia . 2 . International business enterprises- Singapore . 3 . International business enterprises- Thailand . 4. Malaysia- Industries. 5. Singapore- Industries. 6. Thailand- Industries. I. Tan, Juay Miang . II. Title . HD 2903 N27 1992 s1s92-38516 ISBN 981-3016-28-0 (soft cover) ISBN 981-3016-29-9 (hard cover) Designed by Design Objectives Pte Ltd Printed by Spectrum Press Pte Ltd

CONTENTS

List ofTables Foreword Introduction 1

MNCs and Industrial Upgrading in Singapore, Malaysia and Thailand 1 2

Investment Patterns of MNCs in the ASEAN-3 13

3 Labour Supply and Manpower Development

4 Infrastructure Development

5 Transfer of Technology

37

47

6 Conclusion: The Impact of MNCs in the ASEAN-3 and Outlook for the Future 57

21

LIST

TABLES

OF

1

Singapore's Investment Commitments in Manufacturing, by Country of Origin, 4 2

Investments in Malaysia: Approved Projects, 1980-89 7

3 Investments in Thailand

9

4 Growth Rates of Real GNP and Exports , 1986-89 11

5 Exports of Manufactured Goods of Thailand, Malaysia and Singapore, 1978 and 1988 12

6 Singapore's Engineering and Technician Enrolment, and Graduates from Institutions of Higher Learning 24 7 Malaysia's Output of Degree Holders by Engineering Course in Local Institutions,

1985-90

26

8 Malaysia's Institutional Supply of Engineering Manpower, 1985-95 28

FOREWORD

I

n the 1960s and 1970s, Singapore was one of the very few Third World countries to welcome multinational corporations (MNCs) to set up business. The conventional wisdom at that time, as explained in a torrent of academic literature, was that MNCs represented the power and wealth of the rich nations, the First World. Their purpose in investing in Third World countries was to exploit them.

This attitude had two consequences. First, governments in Third World countries discouraged MNCs from direct investment. Next, they grouped themselves into international alliances to confront the rich countries. The most famous of these groups came into being under the auspices of the United Nations in UNCTAD (United Nations Conference on Trade and Development). The purpose ofUNCTAD in time became no less than the establishment of a New International Economic Order (NIEO) in which rich countries would share their wealth with poor countries in a more just world order. NIEO did not take root. In the meantime, Third World countries which welcomed MNC direct investment prospered. Singapore was the first country in Southeast Asia to adopt this policy in the manufacturing, financial and tourist industries. Soon, MNCs spread their operations to our neighbours, first Malaysia, then Thailand and later Indonesia. All these countries have benefited from MNC operations. There are indications that some Third World countries which previously opposed MNC direct investment are changing their minds. For example, Vietnam, once the most militarist and xenophobic country in Southeast Asia, has opened its doors toMNCs. This study traces the operations ofMNCs in Singapore, Malaysia and Thailand. The data collection in field studies was done by two officers of the Singapore Economic Development Board, Mr TanJuay Miang and Mr Suresh Natarajan. Their write-up was reviewed and edited by Mr Patrick Daniel.

Dr Goh Keng Swee Deputy Chairman Monetary Authr»"ity oJSingapr»"e March 1992

INTRODUCTION

S

ince the mid-1980s, the economic strategies of Singapore, Malaysia and Thailand (or the ASEAN-3 in short) have shown a remarkable degree of convergence in one important respect: all three have adopted export-led, foreign investment-driven growth strategies. They rely chiefly on multinational corporations (MNCs) to develop export-oriented industries in the non-resource-based sector. Although Singapore is often grouped with the "little dragons" of East Asia - the newly-industrialized economies (NIEs) of Hong Kong, Taiwan and South Korea- it differs from the NIEs in that its export orientation does nor depend on local entrepreneurs or local capital inputs but on MNC investments. In this respect, Singapore now has more in common with Malaysia and Thailand.

This convergence of economic strategies among the ASEAN-3 raises a number of interesting questions. The first is: what factors brought about this convergence' The answer is by no means clear, especially since the convergence was a recent phenomenon. Singapore was the first among the ASEAN-3 to welcome MNCs in large numbers in the early 1960s. This was at a time when the wisdom of such a strategy was often questioned. In fact, much of the literature on development economics at the time was distinctly anti-MNCs and full of foreboding about the dangers of dependency on MNCs and of neo-colonialist exploiration. 1 While Singapore, with its tiny domestic market, adopted the strategy out of necessity, Malaysia and Thailand had larger domestic markets and initially rook the more prevalent route of import-substituting industrialization. It was only in the mid-1980s that the latter made decisive policy shifts away from import substitution. This raises a further question: what part did the MNCs themselves play in bringing about these policy shifts? Put another way, did MNC investment patterns in Southeast Asia, and in particular the benefits they brought Singapore, influence the governments of Malaysia and Thailand to reshape their policies? The reliance on MNCs also raises another set of questions. In the past, each country focused on activities that made best use of its natural resources. Now, however, despite the vast differences in factor endowments, their economic activities show a far greater degree of overlap, especially in areas where they have attracted large amounts of MNC investments. Has this overlap led to greater competition among the three economies? Or have the benefits of MNC investments been large enough to allow for more complementarity and specialization? The answers are important as

they will influence the future direction of the policies and strategies of the ASEAN-3. More specifically, will there be head-on competition or are there synergies that will push the ASEAN-3 towards greater co-operation? Interestingly, recent new initiatives, such as the "growth triangle" co-operation among Singapore, Malaysia's southern-most state of Johor, and Indonesia's Riau Islands, as well as the proposal for an ASEAN Free Trade Area (AFTA), point towards greater regional economic co-operation and complementarity. Will this be the direction of the future tide or will critics of regional co-operation be proven right' These questions form the basis of this study, but it focuses in particular on the part played by MNC investments. It analyses the impact they have made and whether they have led to greater competition or to greater complementarity among the ASEAN-3. Chapter 1 reviews the industrial policies of the ASEAN-3, in particular those concerning foreign direct investment. The rest of the study relies chiefly on a survey of MNCs which have operations in at least two of the ASEAN-3 . The aim of the survey was to assess their investment patterns, the motivation behind their investment decisions and their view of the operating environments in the three countries. The methodology involved an initial q uestionnaire survey of MNCs in the manufacturing sector, followed by a detailed examination of the operations of thirty selected MNCs. The survey was conducted mainly in Singapore and supplemented by visits to Malaysia and Thailand (in mid-1989) and discussions held there with MNC executives and government officials. The broad findings of the survey are presented in Chapter 2. Specific issues highlighted by the MNCs, such as labour supply and manpower development, infrastructure development and technology transfer, are discussed in Chapters 3. to 5. The conclusions of the study are presented in Chapter 6. As most of the MNCs requested for confidentiality in the responses they gave, no references are made to the names of the MNCs except where permission has been obtained. The authors would like to record their gratitude to Dr Goh Keng Swee, Deputy Chairman of the Monetary Authority of Singapore, who not only conceived the outline for this study but also provided guidance on the survey methodology. Material was also drawn from a paper prepared by Dr Goh, Singapore and the Developmental Issues of the 1990s, presented at a symposium in San Francisco in March 1990 2 The authors, however, rake full responsibility for the results and conclusions of the study. Finally, the authors wish to thank the Institute of Southeast Asian Studies in Singapore which generously sponsored the study.

MNCs AND INDUSTRIAL UPGRADING IN SINGAPORE, MALAYSIA AND THAILAND

S

P A

G E

2

outheast Asia's relationship with foreign companies go back a long way, at least to the colonial era of the British and the Dutch. In the case of Singapore and Malaysia, the British East India Company played a major economic role in the 1800s. Although Thailand was never colonized, it too had extensive dealings with foreign companies. However, the activities of foreign companies in those days were primarily exploitative, the aim being to source spices and other raw materials for consumers in their home countries. Following independence from the colonial powers in the post-World War II period, governments in the Southeast Asian countries had to draw up their own economic strategies. These strategies, and the circumstances and factors they had to take into account, are well documented. 3 This chapter focuses in particular on the strategies adopted by the ASEAN-3 to promote foreign direct investments (FDI) and woo MNCs to set up export-oriented factories in their countries. It outlines the strategies adopted by each country and the changes they made, and highlights the results achieved. The chapter concludes with an analysis of the impact of these strategies in terms of the growth of manufactured exports and the countries' overall economic performance.

THE ECONOMIC ASEAN-3

STRATEGIES

OF

THE

Singapore: A Pioneer in MNC-led Industrialization Singapore's blueprint for export-oriented industrialization; drawn up immediately after separation from Malaysia in 1965, called for internationalization of almost all its economic activities. The key strategy was vigorous promotion of foreign direct investments to achieve rapid export-oriented industrialization. This was a bold move at the time, untried elsewhere; its long-term effects could, therefore, not be foretold. Nevertheless, the legal and institutional framework for this policy was quickly laid within the first few years. The Economic Expansion Incentives (Relief from Income Tax) Act of 1967 provided a structure of fiscal incentives for foreign investors, the main one being a tax-free holiday of up to ten years for "pioneer" activities. Government agencies were revamped to launch an aggressive investment promotion drive overseas and to provide the infrastructure and facilities needed by MNCs. At the same time, its earlier import-substitution policies were quickly dismantled and import tariffs removed . THE IMP AC T OF MNC INVESTMENTS IN MA LA YSIA , SINGAPORE A ND THAILAND

The industrialization drive met with almost immediate success, despite the withdrawal of British military troops in 1968 and the resulting loss of some 16 per cent of gross domestic product (GDP) and 20 per cent of direct and indirect employment. 4 The period up to 197 3 saw an economic boom, generated by a surge of foreign investments as MNCs sought a low-cost base for labour-intensive operations. Manufacturing value-added grew by an annual rate of 22 per cent (at constant prices) in the five years 1969-73. The end of Singapore's labour surplus stage came by 1972, with unemployment reduced to 4.7 per cent.5 Then began Singapore's upgrading phase, initially disrupted by the oil crisis-induced recession of 1974-75 but which resumed with even greater vigour at the end of the seventies. The government saw the need for greater selectivity in the industries it promoted to achieve more efficient labour usage. Sustained educational and training programmes were also mounted and intakes for engineering courses were expanded at the universities and polytechnics. By 1979, a new strategy had been promulgated, emphasizing high value-added products made by technology-intensive industries. The strategy was spear-headed by a remarkable policy shift: a three-year "wage correction" policy where wages were mandated to be increased by up to 20 per cent a year across-the-board. This was considered necessary to force the pace of restructuring by MNCs away from labourintensive and low-skill operations. Another aim was to check the influx of lowly-skilled foreign workers who, by 1980, comprised a worryingly large 11 per cent of the work-force.6 An improved array of fiscal and other incentives was also put in place, emphasizing activities such as research and development (R&D), and information technology. The result was a wave of new industries in the early 1980s: chemical process industries (including petrochemicals and pharmaceuticals); precision engineering (such as optical components and high-tolerance metal components); high-end electronics (such as industrial electronics and high-grade components); and R&D in areas like biotechnology and electro-optical applications. The government also embarked on a comprehensive programme to promote computer literacy and gave incentives for computer-based automation in industry. This brought continued high GDP growth, although the profitability ofMNCs suffered because of the big rise in wages. 7 MNCS AND INDUSTRIAL UPGRADING IN SINGAPORE. MALAYSIA AND THAILAND

P A

G E

TABLE 1 SINGAPORE'S INVESTMENT COMMITMENTS IN MANUFACTURING, BY COUNTRY OF ORIGIN

(Gross fixed assets in S$ million)

Country

1980 1

1981

1982 2

1983

1984

1985

1986

1987

1988

1989

United States Japan Europe European Community (EC) United Kingdom Netherlands Germany France Italy Other EC Countries Sweden Switzerland Other European Countries Others

505.7 135.3 360.4 269.9 129.5 1.0 69.2 18.8 45.4 6.0 53 .6 35.8 1.1 187.7

674.4 212.1 228.7 166.3 83.1 1.2 11.5 1.7 62 .5 6.3 38.3 17.0 7.2 106.2

533.0 73.7 421.8 386.9 283.1 62.8 31.4 1.3 2.4 5.9 11.1 22.0 1.8 133.9

571.7 166.6 394.1 338.8 207.5 99.2 12.8 6.8 5.1 7.4 12.5 15.4 27.4 137.4

809.9 166.6 325.1 318.9 186.6 70.3 14.3

427.3 244.1 201.0 180.9 69.4 75.2 20.1 15.1

44.8 2.9 0.3 2.7 3.3 37.1

1.1 14.9 4.7 0.5 15.6

443.4 493.8 218.8 204.8 93.4 57.1 16.7 27.8 5.1 4.7 5.4 7.7 0.9 34.6

643.5 601.1 285 .8 241.0 42.4 70.9 90.3 15 .2 22.0 0.2 8.7 27.8 8. 3 17.6

586.6 691.3 358.1 345.1 56.6 82.9 46.7 86.0 68.0 4.9

520.2 541.2 544.2 525.4 174.6 174.0 26.4 106.0 32.8 11.6

10.1 2.9 21.7

0.9 18.0 19.8

224.4 1,189.1

641.6 1,221.4

542 .0 1,162.5

506.0 1,269.8

493.7 1,334.7

232.4 888.0

259.0 1,190.6

295.0 1,448.0

349.6 1,657 .8

333.3 1,625.4

Local)1,41 3. 5

1,863.0

1,704.5

1,775.8

1,828.4

1,120.4

1,450.0

1,743.0

2,007.4

1,958.7

Singapore Foreign

TOTAL (Foreign Note: Data excludes

&

-

-

(1) S$800 million investment commitments in the petrochemical complex.

Table 1 shows the investment commitments in Singapore's manufacturing sector in the period 1980-89. Japanese MNCs overtook U.S. companies as the top foreign investor in manufacturing, although the United States remained the largest investor in cumulative terms . The increased inflow of Japanese investments was due to the rise in the value of the yen as well as labour shortages in Japan, which led Japanese companies to shift some of their operations overseas. Compared to foreign investments, local investments in the manufacturing sector have remained much smaller, totalling less than a quarter of the investments by MNCs. Some analysts attribute Singapore's recession of 1985-86 to the harsh restructuring measures of the early 1980s, although adverse worldwide and regional conditions clearly also played a big part. 8 The measures recommended by the joint government-private sector Economic Committee in 1986, aimed at cutting business costs and improving the operating environment for companies, brought rapid results. GDP growth was restored to 8.8 per cent in 1987, and 11.4 per cent in 1988.9 Forced in part by its continuing labour shortage, Singapore entered the 1990s having successfully realigned its economy towards high-technology activities.

Malaysia: The New Economic Policy (NEP) and MNCs Malaysia's socio-economic development has undergone three distinct phases. In the 1960s, its economy was dependent mainly on the export of rubber and tin. But efforts were made to diversify its economy and promote import-substituting industries. In 1970, following ethnic riots in the country the year before, it implemented a controversial New Economic Policy (NEP) whose hallmark was an attempt to redress the perceived income and wealth inequalities between Malays, or bumiputera (sons of the soil), and other ethnic groups. A key target was to raise bumiputera equity ownership from 5 per cent to 30 per cent by 1990. Throughout the 1970s, high commodity prices and increasing exports of petroleum products meant big trade surpluses for the country. Manufactured exports also went up, partly the result of official encouragement given to agro-based industries. Another reason was that Singapore-based electronic companies, facing labour shortages in the island, began to set up plants in Malaysia, mainly in Penang. The first

MNCS AND INDUSTRIAL UPGRADING IN SINGAPORE . MALAYSIA AND THAILAND

P A G E

to set up operations in Penang was National Semiconductor in 1972. By 1987, Penang had attracted 38 electronic companies, employing 26,400 workers. This helped Penang's GDP (in constant prices) to more than treble between 1971 and 1985. 10 The year 1982 marked a watershed for Malaysia. Depressed commodity prices and the more difficult external environment revealed several basic weaknesses in its economic structure. Apart from a declining contribution by its agricultural sector, its industrial base was built on narrow foundations- mainly low-end electronics, textiles and garments, and import-substituting products. An industrial master plan (IMP) was commissioned to identify new strategies for industrialization. The IMP, completed in 1985, set out a ten-year blueprint for both resource-based and other industries. Electronics was seen as a strategic industry and the plans included a move into high-end areas, such as industrial electronics and communications equipment.11 P A G E

6

The IMP also addressed Malaysia's manpower deficiencies , in particular the shortage of engineers and technicians. It forecast a growth in the number of engineers and technicians from 12,000 to 47,000 by 1995. However, a glaring shortcoming was that the plans to produce more engineers and technicians fell far short of this target. The IMP also concluded that Malaysia did not have the trained manpower to absorb or adapt technology in the way Japan and the NIEs have done. Such findings, coupled with the shock of a recession in 1985-86, led to policy changes aimed at reviving growth. The most significant change was in the NEP's equity ownership requirements. Whereas previously, all approved investment proj ects had to have 30 per cent local bumiputera ownership, fully foreign-owned projects were now allowed if 80 per cent of output was exported. (This meant that MNCs had taxfree access to the domestic market for 20 per cent of their output.) The result of this concession, effective up to the end of 1990, was an immediate deluge of foreign investments, especially from Japan and Taiwan. This was also aided by a battery of incentives similar to those offered by Singapore - tax holidays, as well as generous tax allowances for capital spending and re-investments. Table 2 shows the rapid growth in investments, in particular the huge jumps in 1988 and 1989 to M$4 billion. By 1989, THE I MPACT OF MNC INVESTMENTS IN MALAYSIA .

S I NGAPO~E

AND THAILAND

TABLE 2 INVESTMENTS IN MALAYSIA: APPROVED PROJECTS , 1980 - 89

1980

1981

1982

1983

1984

1985

1986

1987

1988

459 45 ,51 7 751.0

596 56,636 1,509.8

468 37,663 1,747.8

490 43,537 1,022.5

749 56,831 1,213.4

625 53,597 1,823.7

447 40,230 1,878.8

333 60,068 1,529.4

732 142,875 3,469.7

792 5,691 176,628 71 3,582 4,603 .4 19,549.5

288.0 17.5 199.9 247.6

532 .9 136.5 364.4 476.0

496.3 494.1 238.4 519.0

455.0 5.2 266.0 296.3

448.2 67.2 422.6 275.4

951.7 41.1 506.0 324.9

641.8 65.2 647 .3 524.4

212.1 238.1 329.2 750.0

418.7 403.9 636.6 2,010.5

451.1 126.7 624.4 3,401.2

Loan ($ million) Local Foreign

1,351.8 869.9 481.9

2,938.6 2,105.3 833.3

3,687.0 2,579.4 1,107.6

1,335.6 1,002.8 332.8

2,587 .7 2,145.1 442.6

3,863.2 3,228.8 634.4

3,284.4 2, 121.0 1,163.4

2,404.5 1,094. 5 1,310.0

5,624.2 2,756.7 2,867.5

7,612.0 34,689.0 2,360.5 20,264.0 5,25 1.5 14,425.0

Total Proposed Capital Local Foreign

2,102.8 1,373.3 729.5

4,448.4 3,139.1 1,309.3

5,434.8 3,808.2 1,626.6

2,358.1 1,729.0 629.1

3,801.1 3,083. 1 718.0

5,686.9 4,727.6 959.3

5, 163.2 3,475.3 1,687.9

3,933.9 1,873.9 2,060.0

9,093.9 4,215.9 4,878.0

12,215.4 54,238. 5 3,562.7 30,988.1 8,652.7 23,250.4

Fixed Assets Local Foreign

1,643.6 1,044.0 599.6

3,742.5 2,76 1.4 981.1

4,5 06.6 3, 11 2.5 1,394.1

1,928.4 1,434.0 494.4

3,910.8 5,956.2 3,288.8 51,147.0 622.0 809.2

4,220.8 2,988.5 1,232.3

3,157.2 1,426.2 1,731.0

Number Potential Employment Proposed Called-Up Capital ($ million) Malaysian Equity ($ million) Bumiputera Public Corporations Non-Bumiputera Foreign Equity ($ million)

SOURCE: Malays ian Industrial Development Authority.

1989

Total

4,895.8 1,595.5 4,234.8 8,825.4

10,737 .2 10,839.7 50,643.0 6,475.8 3,125.8 30,804.0 4,261.4 7,213.9 19,839.0

manufacturing accounted for 23 per cent of GDP, almost achieving the 24 per cent target set by the NEP. t2 Japan remains the largest foreign investor, followed by Taiwan which has recently overtaken Singapore. However, another factor has been the wave of Singaporebased MNCs relocating parts of their operations to Malaysia, in particular Johor. In June 1991, the Malaysian Government unveiled a New Development Policy (NDP) which took over where the NEP left off. While retaining the as-yet-unattained equity distribution target, the time-frame for achieving it has been left open-ended. t3 The NDP is more pragmatic and seeks to strike a balance between economic growth and equity. More importantly, concessions such as 100 per cent ownership for foreign subsidiaries have been retained.

Thailand: A Latecomer to MNC-led Growth P

A

G

E

8

The Thai Government has been promoting private investment in manufacturing since its First National Development Plan of 1961-66. However, the explicit aim was import-substitution, and the taxation system was designed to g ive tariff protection to domestic producers. In the Third Plan ( 197 2-7 6), attention was paid to export industries and the Export Promotion Act 1972 was enacted . However, even with the subsequent Investment Promotion Act of 1977 and a revamping of the Thai Board of Investment (BOI), import controls continued to be enforced in response to pleas for protection. It was not until the Fifth Plan (1982-86) that foreign manufacturing investment began to make an impact with the BOI's active promotion efforts (see Table 3). Thailand's import-substitution phase, especially in the 1960s and early 1970s, succeeded in bringing down imports of consumer goods - but not imports of raw materials and fuel. In other words, the overall import replacement was small. The dependence on fuel and raw material imports became especially evident in the early 1980s when Thailand ran into balance of payments difficulties. Nevertheless , by 1983 the share of manufacturing value-added in GDP had risen to a significant 21 per cent, compared to 13 per cent in 1960 and 17 per cent in 1972. t" Foreign investments began pouring into Thailand only after 1987 , boosting GDP growth to beyond 8 per cent a year. Like Singapore

THE IMPACT OF MNC INVESTMENTS IN MALAYSIA , SINGAPORE AND THAILAND

TABLE 3 INVESTMENTS IN THAILAND

1982

1983

1984

1985

1986

1987

1988

Applications No. of Applications Total Investment (million baht) Total Registered Capital (million baht) No. of Thai Employees

188 20,313 4,751 34,588

342 56,079 10,284 72,516

330 40,405 10,059 99,658

325 59,583 14,997 78,420

431 59,688 14,339 79,921

1,058 209,029 57,198 332,568

2,125 530,292 139,389 532,175

Applications Apprrwed No. of Approvals Total Investment (million baht) Total Registered Capital (million baht) No. of Thai Employees

97 9,168 2,746 19,161

140 8,989 3,294 26,703

266 33,202 7,997 51 ,654

210 54,197 7,421 59,374

295 34,610 9,203 60,234

625 67,290 18,878 204,113

1,454 200,894 60,297 350,251

Apprrwals Cancelled No. of Approvals Total Investment (million baht) Total Registered Capital (million baht)

25 3,425 876

31 4,078 1,125

21 2,090 726

34 3,450 691

73 4,018 1,462

44 3,607 1,610

72 10,279 2,974

Projects Starting Operations No. of Projects Starting Operations Total Investment (million baht) Total Registered Capital (million baht) No. of Thai Employees

79 10,244 2,942 13,629

107 10,924 3,391 15,323

76 7,225 1,920 12,135

78 8,201 2,275 14,401

145 20,809 3,932 25,178

172 18,577 5,022 38,102

224 17,930 8,268 46,198

SOURCE: Board of Investment, Thailand.

and Malaysia, the Thai authorities offered a wide range of incentives to approved foreign investors. They included a tax holiday for up to eight years and other privileges. Compared to annual average applications of 330 projects, the BOI received 2,125 project applications in 1988; if all are implemented, they will amount to total investments of 530 billion baht (see Table 3). Among the ASEAN-3, Thailand has emerged as the chief beneficiary of the recent outflow of investments from Japan and the NIEs. As in Malaysia, the importance of U.S. investments has declined relative to those of Japan and Taiwan. In fact , Taiwan's cumulative investments since 1960 (11.5 per cent of total investments) have already overtaken those of the United States (9.8 per cent). Japan is far ahead with a 44 per cent share. 15

PAGE

10

However, Thailand's sudden investment boom, which exceeded all expectations, has had the result of severely straining the country's infrastructure. These bottlenecks, and the country's ambitious plans to improve its infrastructure at huge cost, is discussed in Chapter 4.

MNC

INVESTMENTS

IN

THE

ASEAN-3

The surge of investments by MNCs in Malaysia and Thailand, and the resulting boom in manufactured exports, have been the factors behind their exceptionally fast GDP growth rates in recent years. As seen in Table 4, growth rates in Thailand and Malaysia have, in fact, surpassed that of Singapore. In Singapore's case, it had all along grown at more than 8 per cent (except in the recession years) principally because of MNC investments. Thus, all three are now on fast-growth tracks, with MNCs serving as the engine of growth. As Goh 16 points out, the exceptionally fast growth in exports (see Table 5) means that Malaysia and Thailand can join the "four dragons" if their exports maintain current trends. By 1988, manufactured exports had accounted for 58 per cent of Thailand's total exports, and 57 per cent in the case of Malaysia. This compared with Singapore's 72 per cent, Hong Kong's 92 per cent and Taiwan's and South Korea's 93 per cent. If allowance is made for the fact that Malaysia and Thailand are also big exporters of primary produce, their lower ratio is perhaps to be expected. In any event,

THE IMPACT OF MNC INVESTMENTS IN MALAYSIA . SINGAPORE AND THAILAND

the fact remains that .Malaysia and Thailand are now not far behind in the league of manufacturing exporters.

TABLE 4 GROWTH RATES OF REAL GNP AND EXPORTS, 1986 - 89

(In per cent)

1986

1987

1988

Thailand Real GNP Growth Export Growth

4.2 20.7

8.5 28.5

11.1 34.6

11 .0*

Malaysia Real GNP Growth Export Growth

2.6 -7.1

5.4 28.0

9.5 22.3

7.7* 22.4*•

Singapore Real GNP Growth Export Growth

1.8 -2.4

8.8 23.1

11.0 31.2

9.2 10.2

1989

NA

* Denotes estimates a

Estimated from export figures Ganuary-October 1989) published in Trade Summary, by the Department of Statistics, Malaysia.

SOURCES: Bank of Thailand, Quarterly Bulletin, March 1989; Ministry of Finance, Malaysia, Economic Report 1989190; and Ministry of Trade and Industry, Singapore, Economic Survey of Singapore, various issues.

MNC S AND INDUSTRIAL UPGRADING IN SINGAPORE, MALAYSIA AND THAILAND

P A G E

1 1

TABLE 5 EXPORTS OF MANUFACTURED GOODS OF THAILAND , MALAYSIA AND SINGAPORE 1978 AND 1988

[In US$ million) Countries of Destination United States J apan EEC Rest of the world Total PAGE

Thailand

Malaysia

Singapore

1978

1988

1978

1988

1978

1988

302 217 379 467

2339 1389 1777 3776

733 283 454 1017

3048 627 1597 4957

11 34 194 646 2674

8679 1424 4254 13891

1365

928 1

2487

10229

4648

28248

12

SOURCES: Various issues of Singapore Trade Statistics, Imports & Exports; Malaysian Trade Statistics, Exports & Re-exports; and Foreign Trade Statistics of Thailand.

THE IMPACT OF MNC INVESTMENTS IN MALAYSIA , SINGAPORE AND THAILAND

INVESTMENT PATTERNS OF MNCs· IN THE ASEAN-3

BROAD

RESULTS

OF

THE

MNC

SURVEY

Methodology

I

P A GE

14

n order to study the investment patterns of the MNCs and the impact they have had on the ASEAN-3, the authors felt that one way was to focus on MNCs with operations in at least two of the three countries and compare their operations in each location. These were identified from a questionnaire survey of 570 MNCs operating in Singapore. The companies were all in the manufacturing sector and from a cross-section of industries - food, chemicals, electronics, fabricated metal products, precision engineering, and so forth . The MNCs, the majority of whom were from the United States, Japan and Europe, were asked if they had manufacturing operations in Malaysia and Thailand, and if so, to provide details on: the date they established operations in the ASEAN-3; the products they made; the number of staff they employed in each location; and the linkages between their operations. From the responses, thirty MNCs were selected for a more detailed study, based on a further questionnaire survey and interviews with key personnel in the three countries.

Initial Questionnaire Survey Findings From the initial survey of 570 MNCs, a total of 510 (89.5 per cent) responded to the questionnaire. Of these, 128 companies (25 per cent) indicated that in addition to their Singapore operation they also had operations in Malaysia and/or Thailand. An analysis of the sequence of their investments yielded the following result: • 91 of the 128 (or 71 per cent) started production in Singapore before establishing operations in Malaysia and/or Thailand; • 30 companies (23 per cent) started operations in the other two countries before coming to Singapore; • the remaining 7 companies (6 per cent) started operations in the ASEAN-3 at about the same time. The ninety-one MNCs which started operations in Singapore before moving to Malaysia and/or Thailand formed a large enough group from which a sample could be drawn for further detailed study. They also formed a broad spread in terms of origin - mainly J apanese, American and European companies and 100 per cent foreign-owned in almost all cases. The majority were in the electronics-related THE IMPACT OF MNC INVESTME NTS IN MALAYSIA. SINGAPORE AND THA I LAND

industries, engaging in the manufacture of semiconductors, disk drives, consumer electronics, wire harnesses and connectors, etc. The authors decided to focus their study on this group as they felt it best represented MNC investments in the ASEAN-3 . The thirty companies that started operations first in Malaysia and/or Thailand - mainly in food, chemicals and consumer electronics indicated that the import substitution policies of the 1960s and the existence in those countries of fairly large protected markets had been a major factor in their investment decisions. Even the consumer electronics companies in this group cited the tariff protection they enjoyed as a crucial factor . The authors decided not to examine this group further as the investment decisions of these MNCs were made under previous policy regimes. Three broad trends emerged from the responses given by the ninetyone companies when asked about the linkages between their ASEAN-3 operations: 1. A number of companies said that they were initially cautious in their overseas investments and chose Singapore because of its political stability, good infrastructure, skilled work-force and investment incentives. Having successfully operated in Singapore for a number of years and obtained a better understanding of the region, they then used Singapore as a base or a "springboard" from which to expand into the region. Malaysia and Thailand were their preferred choices as these two countries were industrializing rapidly, possessed the basic physical infrastructure and had a readily trainable work-force. The returns of the ninety-one companies showed that they created an estimated 77,000 jobs in Malaysia and 50,000 jobs in Thailand.

2. In terms of the product mix among their ASEAN-3 operations, the MNCs generally adopted a "decanting" approach, that is, they transferred product lines from their Singapore operation when these became no longer as profitable as before - mainly because of increasing costs and labour shortages in Singapore. They cited the lower cost of production and abundant labour force in Malaysia and Thailand as the main reasons for choosing these two countries to transfer such product lines to. They also indicated that this decanting process was a continuous one, with increasingly

INVE STM ENT PATTERN S OF MNCs IN THE ASEAN·J

PAGE

15

sophisticated product lines being transferred to the Malaysian and Thai operations over time. 3. A number of companies indicated that as product lines were transferred out, the Singapore operation served as the technical support centre for their operations in Malaysia and/or Thailand. They saw this as a logical arrangement, given the experience and expertise gained by their Singapore staff. Several companies said that technical personnel from the Singapore operation had played an important role in setting up their Malaysian and/or Thai operations. They had also helped to train staff in these new plants and acted as "trouble shooters" until such time as the technical staff in these "offshore" locations were ready and competent. A number of companies had also brought Malaysian and Thai staff to their Singapore operation for training prior to the start-up of their offshore plants. This was considered cheaper than sending them to their horne country for training. P A GE

16

Findings of the Detailed Study From the group of ninety-one MNCs which first started operations in Singapore and subsequently branched out to Malaysia and/or Thailand, thirty were selected for further detailed study based on another questionnaire survey and subsequent interviews (conducted in mid-1989) with their key executives. Of the thirty, fifteen were Japanese firms, eleven were American and the remaining four European. The biggest number, fourteen, had established operations in Malaysia, while thirteen had moved to Thailand. The remaining three had set up operations in both Malaysia and Thailand. All thirty had retained their operations in Singapore in a restructured form. The majority of the thirty companies were in the electronics-related industries (so was the group of ninety-one companies from which they were selected, as indicated earlier). But the breakdown by product lines showed a wide range: • four in semiconductors • five in consumer electronics • three in disk drive manufacture • three in wire and wire-harness manufacture • one in printed circuit board (PCB) assembly manufacture TH E IMPACT OF MNC INVESTMENTS IN MALAYSIA , SINGAPORE AND THAILAND

• • • • • • •

five in the chemicals/petroleum/rubber group four in precision engineering one in toy manufacture one in optical products manufacture one in industrial machinery manufacture one in manufacture of compressor motors one in communications equipment manufacture.

The detailed questionnaire sent to the companies sought information on the following : nationality and ownership structure; fixed asset investments; products manufactured; sources of materials used; employment and training provided; costs, wages, value-added and profitability; and reasons for their investment decisions. The questionnaires were sent to the Singapore plant as well as to the subsidiaries or associated companies in Malaysia and/or Thailand. The questionnaire survey was supplemented by interviews with key personnel from the respective plants. PAGE

One readily apparent feature of the thirty MNCs was that they could be distinguished by the period they began production in Singapore. A number established operations as early as the 1960s when the government began actively promoting foreign investments to soak up the large pool of unemployed workers. Most of these were, therefore, of the labour-intensive kind and low in technology application. They included assembly of integrated circuits, and manufacture of toys and consumer electronic products. These activities matched the low skills of the work-force then. Those that came in the 1970s were more capital- and technology-intensive, again in response to the government's upgrading efforts at the time. By then the work-force was at near full-employment and the skill levels had improved. The companies which set up operations in the late 1970s and 1980s were mainly in the "high-tech" electronics and precision engineering sectors. They made products like Winchester disk drives, precision parts and die-casted pares. Interestingly, even the companies that were engaged in these hightech products generated a significant number of jobs in Singapore. For example, one American company rapidly expanded its production capacity within a very short period and employed 12,000 workers at its peak. Another trend was that even among this group of companies, substantial upgrading had taken place in the short INVESTMENT PATTHNS OF MNCs IN THE ASEAN·3

17

time they had been in Singapore. For example, an American disk drive maker started off with 20 mega-byte (MB) 5.5-inch drives ~ went on to introduce higher capacity drives of up to 85 MB and had plans to make the latest 3.5-inch drives of up to 90 MB. The specific issues highlighted by the detailed responses, such as labour and manpower development, infrastructure and technology transfer, are discussed in subsequent chapters. The following are seven broad findings that emerged:

PAGE

18

1. In addition to their original investments in Singapore and the subsequent investments in the region, all thirty companies had invested further in their Singapore operation, either to expand production or to make new products. In other words, although th had used the "decanting" approach discussed earlier, all of them h beefed up their Singapore operation even as they used the Republ as the springboard for their regional investments. One example w~ a Japanese integrated circuit (IC) maker which started off as a labour-intensive maker of wire harnesses and connectors. It moved the operation to Johor but restructured the Singapore operation bJ introducing an entirely new IC product line. In other cases, the upgrading of the Singapore operation took other forms, ranging from significant automation efforts to introducing product and process R&D. The reasons for such restructuring and upgrading h to do with factors such as Singapore's manpower development, infrastructure and operating environment vis-a-vis the region. TheJ will be discussed in detail in subsequent chapters. 2. For the fourteen companies that expanded into Malaysia, the southern-most state of Johor was the preferred location. The main reasons given had to do with proximity to Singapore. This allowed fo closer supervision and support; ease of commuting to and fro by managerial and technical personnel from Singapore (which obviated t need to station expatriate staff in the Johor plant); and an overall reduction in the cost of the Johor operation. The study also showed tl the linkages between Singapore and Johor were strong. In a number~ cases, the Johor operation had served, initially at least, as a "satellite" make components and sub-assemblies which were then brought bad Singapore for final assembly and testing before export to world mark~ TheJohor operations also relied on Singapore's infrastructure, such a.< its banking and financial services, and telecommunications.

THE IMPACT OF MNC INVESTMENTS IN MALAYSIA,

SINGAPO~E

AND THAILAND

3. In addition to Johor, the other preferred locations in Malaysia were Penang and the Kuala Lumpur-Klang Valley belt. Penang's attractions were its skilled work-force and the record it had developed over the years of being an electronics centre. Its infrastructure was also considered to be quite well developed. The Kuala Lumpur-Klang Valley belt had also enjoyed rapid growth in the past few years as companies had been attracted there because of its closeness to the capital city. Kuala Lumpur's trained urban workforce was also cited as an important factor. 4. As companies moved further away from Singapore, the linkages inevitably got weaker in comparison to Johor. However, a number of companies still practised a regional mode of operation, with their plants in Penang or Kuala Lumpur closely linked to the Singapore operation. For example, an American disk drive maker produced some of its sub-assemblies in its Penang factory before bringing them back to Singapore for final assembly and testing. This particular company assessed that Johor had become too "crowded" and this factor outweighed its proximity to Singapore; it had chosen Penang instead for the reasons cited earlier - that is, its record as an electronics centre and its skilled work-force. 5. The thirteen companies that expanded into Thailand had all sited their plants in Bangkok and its outskirts. No company had ventured beyond this area (the Eastern Seaboard was not ready when they started operations in Thailand). The main reason for the concentration in and around Bangkok was the need to use the Klong Toey river port for its exports. Bangkok's abundant pool of cheap labour was another important factor. Even in the case of Thai investments, the linkages with Singapore remained, although to a far less extent than in the case of Johor. Using another example of an American disk drive maker, the assembly of the head stack and head gimbal was done in Thailand while the final assembly and testing was done in Singapore. 6. Although most of the initial investments in the region were in sub-assembly manufacture and part of a satellite operation, the evidence suggested that the process did not end there. As the Malaysian and Thai operations became more established and competent, companies moved out more sophisticated product lines

INVESTMENT PATTERNS OF MNCs IN THE ASEAN-3

P A G E

1 9

from Singapore. The satellite operations have thus undergone continual upgrading until they develop the capability to manufacture "stand-alone" products. In fact, in the case of one Japanese company which followed this process, its Thai satellite eventually eclipsed the Singapore operation. At the time of the study, it was considering setting up its first offshore R&D unit in Thailand instead of Singapore. It judged that its Thai plant had more potential for growth and was not hampered by labour shortages. 7. Not all companies, however, took the sub-assembly route to distributing its activities within the ASEAN-3. Some transferred a full product line from the outset. These usually involved less sophisticated products. But even in these cases, some technical assistance from the Singapore operation had been necessary and the linkages have remained. P AG E

20

THE I MPACT OF MNC INVESTMENTS IN MALAYSIA . SI NGAPORE AND THAILAND

LABOUR SUPPLY AND MANPOWER DEVELOPMENT

R

esponses from the thirty MNCs shortlisted for the detailed ' study indicated that labour supply and the training and development of manpower were critical factors in their investment decisions. All cited Singapore's superior work-force as one of their chief reasons for investing in Singapore. At the same time, however, they cited Singapore's shortage of labour, particularly at the operator level, as the reason why they had moved out some of their operations. Their main reason for choosing Malaysia and Thailand as the preferred new location was precisely the availability of a large pool of low-cost trainable workers.

PAGE

22

Based on the responses from the thirty companies interviewed as well as additional research, this chapter reviews the labour supply situation in each of the three countries. It also covers the important but often neglected role of manpower training and development, particularly in technical disciplines. In addition, it surveys the quality of the work-force in each of the ASEAN-3 and their wages and benefits. The conclusions, presented at the end of the chapter, assess whether labour constitutes a competitive factor in the ASEAN-3, or whether the differences in labour resources have instead led to greater complementarity among them.

THE

LABOUR

SUPPLY

SITUATION

Singapore Following the strong recovery of the Singapore economy from the 1985/86 recession, companies have faced a tight labour market at all levels of the work-force - from production operators to postgraduate researchers. With a total work-force of only 1.25 million, demand for labour has outstripped supply, especially after the economy bounced back strongly from the 1.6 per cent decline in GDP in 1985 to 11 per cent growth in 1988. The MNCs indicated that the most serious labour shortage in Singapore occurred at the operator level. Shortages at other levels exist but are not as critical. With the general population now becoming better educated, not only is their entry into the job market increasingly being delayed but they are no longer attracted by low-level, low-paying jobs in industry. The shortage has been

THE IMPACT OF MNC INVESTMENTS IN MALAYSIA , SINGAPORE AND THAILAND

compounded by the government's decision to clamp down on the use of foreign workers, most of whom do operator-level jobs. With effect from 1 January 1990, the allowable dependency on foreign workers in each enterprise has been brought down from 50 per cent to 40 per cent. This means that companies that previously used the full 50 per cent quota of foreign workers will either have to replace 10 per cent of their work-force with local workers or automate their operations and make do with fewer workers. Most of the MNCs indicated that they had undertaken significant automation of their Singapore plants with a view to reducing their need for operators. But beyond this, they have adopted two other strategies. One is to set up satellite operations in nearby locations, especially Johor, to undertake the more labour-intensive part of the operations. (As discussed earlier, this means making sub-assemblies and components in the region and shipping them back to Singapore for final assembly and testing before exporting them to world markets.) A second strategy has been to sub-contract the production of sub-assemblies and components to supporting industries in Singapore as well as the other ASEAN countries. This move has led to the creation of a pool of supporting industries in these countries. While there is an acute shortage of production operators, the situation with professionals and technical staff is less severe. This has been the direct result of a large planned expansion in the intakes at the engineering faculties of the two universities and at the two subprofessional-level polytechnics. Table 6 shows the big jump in enrolment and graduation figures for engineers and technicians in Singapore in recent years. In 1988, the Council for Professional and Technical Education, chaired by the Minister for Trade and Industry, further reviewed the manpower projections and recommended additional increases in the intakes of engineers and technicians. The two universities will raise their annual engineering intake to 1,440, while the polytechnics will raise theirs to 4,380_17 The recent big rises in enrolment and the high entry standards mean that Singapore's existing institutions will find it difficult to substantially raise intakes further. In addition to its universities and polytechnics, Singapore is unique in having set up "special-to-type" technical training institutes geared specifically for the needs of industry. These were established with LABOUR SUPPLY AND MANPOWER DEVELOPMENT

PAGE

23

TABLE 6 SINGAPORE 'S ENGINEERING AND TECHNICIAN ENROLMENT, AND GRADUATES FROM INSTITUTIONS OF HIGHER LEARNING

Year

P A G E

2 4

1960 1965 1970 1975 1980 1985 1986 1987 1988 1989

Engineers Graduates Enrolment

643 1,159 1,636 4,061 4, 560 4,339 4,725 5,5 35

66 231 265 769 924 907 1,025 1,280

Technicians Graduate Enrolment

1,027 1,108 3,386 8,341 10,401 15,830 17,482 18,043 18,465 18,394

56 133 456 1,350 1,755 3,375 3,81E 4,31t 5,10t 5,23(

the assistance of several MNCs and with foreign governments (Germany, France, and Japan). The training at these institutes focuses on four main areas: tool and component design and manufacturing; production technology and automation; mechatronics; and industrial electronics. In 1988, these institutes produced 1,095 skilled craftsmen and technicians. In addition to this, the Vocational and Industrial Training Board (VITB) runs several institutes to train lower-level skilled manpower (at secondary school level) for industry. Its output in 1988 was 9,025 .18 Another factor needs to be mentioned: the admission of foreign professionals and managers. The Singapore Government has all alon: adopted a liberal policy and has allowed MNCs to bring in managerial-level staff from their home countries. Government agencies have also mounted recruitment drives at American and British universities to attract graduates of Asian origin in discipline: where local supply has been inadequate. These policies have helped to further ease the shortage at the professional level. By contrast, however, the government has continued to impose strict controls on the entry of unskilled or semi-skilled workers.

TH E I M PA C T O F M N C I N V ESTM ENT S I N M ALA YS IA , SI NG AP OR E AND TH A ILA N D

Malaysia

The Malaysian economy has also recovered remarkably well from the 1985 recession. Responses from the thirty companies have indicated that the supply of labour is generally adequate for current needs in the Klang Valley area and in Penang. However, the labour situation in South Johor is tight, with imminent shortages expected at all levels. Two factors account for this. One is that a large number of Johoreans have been attracted to Singapore by the higher wages and better working conditions. The second is the boom in the Johor economy in line with Malaysia's economic recovery, but boosted further by the spillover of growth from Singapore. A significant flow of migrant workers to Johor from the northern Malaysian states, particularly from Pahang, Terengganu and Kelantan, in search of employment has helped to ease the situation somewhat. At the technician level, however, the companies have indicated that there is a shortage of supply in Malaysia. The problem appears to have been worsened by the fact that technical training has not been in line with the needs of industry. Companies, therefore, have to "retrain" these graduates and allow time for them to learn the skills and become productive on the job. Table 7 shows the planned output of engineers and technicians in Malaysia from 1985 to 1990. At the professional level, Malaysia also suffers from a shortage of engineers although there appears to be an adequate overall supply of graduates. Again, the problem seems to be a mismatch between the training provided and the skills needed by companies. This has resulted in a large number of unemployed graduates trained in subjects such as commerce, history and Islamic studies. As at mid1988, there were about 5,500 unemployed professionals registered with the Manpower Department. The Public Services Department, which registers unemployed government scholars, had 14,000 on the unemployed roll in mid-1988.19 As recently as 1985, the demand for engineers in Malaysia was low~ as reflected in the fact that only 12,000 out of the manufacturing work-force of 500,000 were engineers.20 There was thus no difficulty in meeting this demand, especially through engineers trained overseas. (It is estimated that 80 per cent of Malaysia's engineers are trained overseas. A significant number are Malay scholarship holders

LABOUR SUPPLY AND MANPOWER DEVELOPMENT

P A G E

25

TABLE 7 MALAYSIA'S OUTPUT OF DEGREE HOLDERS BY ENGINEERING COURSE IN LOCAL INSTITUTIONS, 1985 -

Year

1985

1986

1987

1988

1989

90

1990

Total

Courses 182

182 218 151 155 20 20 22 22

231 155 190 20 20 22 22

1,057 1,107

-

-

8 20

19 22

9

9

182 202 128 151 20 20 22 22

399

618

674

747

790

842

4,070

Output of Other Degree Courses 2

5,695

6,109

6,822

7,499

7,910

8,171

42,206

Overall T oral

6,094

6,727

7,496

8,246

8,700

9,013

46,276

Engineering ' Civil Engineering Mechanical Engineering Electrical Engineering Chemical Engineering Marine Engineering Petroleum Engineering Aeronautical Engineering

147 108 47 81 -

Toea! Output of Engineers

% of Engineering Courses to Other Degree Courses

16

6.5 %

182 201 99 99

9.2 %

182 147 127 168

9.0%

Engineering courses offered by University of Malaya. There is no breakdown. These are all other degree courses besides engi neering offered by local universities. SOURCE: Economic Planning Unit, Malaysia, unpublished figures. 1

2

10%

9%

9.3 %

707 844 60 87 124 84

9.6%

who end up in government service holding administrative and other non-technical jobs.)21 However, the situation has changed in recent years and shortages have arisen, despite the planned output increases in the Industrial Master Plan drawn up in 1985. The projected supply figures are given in Table 8.

Thailand The single most important feature of Thailand's labour situation is that only 12 per cent of the work-force of 29 million are employed in manufacturing. About 65 per cent of the Thai work-force is still engaged in the agricultural sector. The agricultural sector has, however, declined in importance and was overtaken in 1981 by manufacturing as the major contributor to Thailand's GDP. This has meant that Thailand still has a large labour surplus and can draw on irs pool of agricultural workers to man new industries. There has already been considerable migration of former agricultural workers to the cities, in particular to Bangkok, in search of work in factories . This trend is expected to continue, with the result that the industrial work-force will increase further in the coming years. The study confirmed that at the operator level, Thailand is blessed with an abundant supply of workers. A number of companies have commented that they face no difficulty recruiting production workers even when required by the thousands. An American disk drive manufacturer hired 3,000 workers within a few months of its decision to start up in Bangkok. It now employs about 12,000 workers in irs various plants in Bangkok. This abundant supply of workers has been a major factor behind the phenomenal rise in foreign direct investment into Thailand in the last few years, especially in assembly-related operations in consumer electronics, disk drives, and semiconductors. It is usual in Thailand to find facilities employing two to three thousand operators working on assembly lines. This abundant supply has also attracted MNCs operating in Singapore to set up satellite operations in Thailand, in much the same way they have done in Johor. Such operations, as noted earlier, have since been gradually upgraded to the manufacture of stand-alone products.

LABOUR SUPPLY AND MANPOWER DEVELOPMENT

P AG E

2 7

TABLE 8 MALAYSIA'S INSTITUTIONAL SUPPLY OF ENGINEERING MANPOWER , 1985 - 95

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

Degree Diploma Overseas Degree (Est) Overseas Diploma (Est)

399 1,536 2,600 650

618 1,606 2,600 650

674 1,749 2,600 650

747 1,898 2,600 650

790 1,973 2,600 650

842 2,133 2,600 650

978 2,277 2,600 650

1,135 2,432 2,600 650

1,318 2,597 2,600 650

1,530 2,774 2,600 650

1,776 2,962 2,600 650

Total

5,185

5,474

5,673

5,895

6,013

6,225

6,505

6,817

7,165

7,554

7,988

Engineers and Technicians

Estimated Total Output 1985 - 95

=

70,494 (7 ,050 p.a. with 3,250 Overseas, i.e. 46%)

Production/Process Workers

Certificates (Public) Certificates (Private) Overseas Certificates (Est)

12,284 2,003 2,300

14,910 2,301 2,300

15,540 2,653 2,300

17,797 3,064 2,300

20,023 3,543 2,300

22,551 4,102 2,300

25,464 4,734 2,300

28,754 5,463 2,300

32,468 6,310 2,300

36,663 7,275 2,300

41,399 8,395 2,300

Total

16,587

19,511

20,493

23,161

25,866

28,953

32,498

36,517

41,078

46,238

52,094

Estimated Total Output 1985-95

=

342,996

1985 and 1990. Note: Outputs from local institutions from 1991-95 are estimates based on output growth rates between SOURCE: Industrial Master Plan, 1985, Tables B-III-19, B-III-20, B-III-21.

However, the situation is very different at the professional and technical level. A study conducted by the Thailand Development and Research Institute in 1988 found that there were serious shortages of graduate manpower in all areas of science and technology, especially in engineering and basic science disciplines. The estimate of current demand for engineers is about 7,000 per year as against only 2,700 engineering graduates produced per year. 22 Thai students have traditionally concentrated on the liberal arts and have shied away from the hard sciences. It will take some years to reverse this trend. Similar shortages exist in post-graduate manpower in virtually all areas of specialization. As a result, there is now considerable poaching of engineers by newly-established companies. One company reported that a new engineer would normally stay at his first job for no more than one to two years; after that his market value increased by between 50 and 200 per cent and he would inevitably move on to another company. Another trend, which has ameliorated the situation somewhat, is the movement of talent from the public to the private sector. The main reason is the wide disparity in wages. A private sector professional can command five to seven times the salary of a middle-ranking civil servant of 5,000 to 7,000 baht a month. 23 Most Thai policy-makers blame the current shortage of qualified technical personnel on the unexpected boom in foreign investments. Several remedies have been put in place by the authorities to rectify the situation. An example is the urgent project by the Ministry of University Affairs to create 1,600 additional places each year for engineering students at the eight public and four private universities. 24 This project was implemented in June 1989. In addition, most universities are doing all they can to increase their enrolment of engineering students. Chulalongkorn University, for example, is hoping to "convert" its science students to do engineering. Mter reading science for the first one to two years, they are allowed to switch to engineering for the next two to three years before graduating as full-fledged engineers. One problem confronting the universities is that they have themselves suffered a brain drain of experienced lecturers to the private sector. To remedy this, the Ministry of University Affairs started a scholarship scheme in 1990 to send bright students overseas to do post-graduate degrees and return to jobs as university lecturers. LABOUR SUPPLY AND MANPOWER DEVELOPMENT

PAGE

29

WORKFORCE

QUALITY

Singapore Most of the MNC executives interviewed in this study expressed satisfaction with the quality of Singapore's work-force at all levels. In particular, professional and technical staff are rated highly. One consequence is that MNCs have increasingly cut down on the number of expatriates from the parent company and have used local personnel t run their Singapore operations. It is not unusual to find only one or tw expatriates in MNCs and local staff holding all other senior appointments. In one of the American disk drive companies, a Singaporean heads the entire Far East operation and ranks as senior vic president in the corporate hierarchy. A Singaporean also heads a large Japanese precision ball-bearing maker as its Singapore managir director.

P AG E

3 0

Unfortunately, at the operator level, education levels still tend to b low, with the majority having less than six years of primary education. The situation is made worse by the presence of large numbers of lowly-educated foreign workers. The government is making an effort to mount "continuing education" for older worke1 While some improvement is being made, it will take many years before any major impact can be seen. A common complaint raised by Singapore-based MNC executives i: the high turnover rate at all levels as a result of the tight labour market. The problem has been compounded by the poaching of experienced staff by newly-established companies. The reduction of the allowable foreign worker dependency ratio, from 50 per cent tc 40 per cent from January 1990, has worsened the situation further. The study revealed, however, that companies with enlightened human resource management practices have been able not only to attract high quality staff but retain them too. Turnover rates at sue companies are lower than 5 per cent but the companies said they had to work hard to keep things that way.

Malaysia MNC executives in Malaysia were generally satisfied with the quality of the work-force. A general observation was that most ne" workers needed some form of in-house training to acclimatize therr

THE IMPACT OF MNC INVESTMENTS IN MALAYSIA. SINGAPORE AND THAILAND

the factory environment. This means new workers take some time settle in and become productive on the job. This is particularly true of technicians and engineers whose training lacks hands-on experience and industry exposure. to to

A major concern voiced was that, because local institutions use Bahasa Malaysia as the medium of instruction, local graduates lack proficiency in English. This hampers their ability to absorb new technology fully and slows down the process of technology transfer from the MNCs. One result has been that technical support from their home countries or from their Singapore operation is necessary. Another concern voiced by MNC executives was the requirement to hire bumiputera (sons of the soil) at all levels of the company's operations. MNC executives said that while they supported this policy, they feared their operations might be adversely affected if it was enforced too rigorously.

Thailand MNC executives rated the Thai work-force as excellent. Thai workers are generally hardworking and have an excellent work ethic. The Buddhist religion and the country's social history have allowed for an employer-worker relationship akin to that of guardian and ward. Employee loyalty, once won, is long-lasting if employees are treated with kindness, courtesy and dignity. The education levels of production workers vary considerably. The better ones have twelve years of high school education. But the majority of migrant workers from the north and northeast have at most six years of primary education. There is a huge pool of primary school leavers because students who cannot afford or do not want to pursue a university education normally drop out after primary school. They view six years of secondary schooling as a waste compared to the opportunity of an early start at a job. While MNC executives are happy with the quality of Thai technical graduates, they are hard to come by, as noted earlier. A frequent complaint is the mismatch between academic training and the needs of industry. Most companies find it necessary to "retrain" technical and vocational graduates. One company said that it preferred to employ ordinary high-school leavers and train them on the job,

LABOUR SUPPLY AND MANPOWER DEVELOPMENT

P A G E

3

rather than employ technical graduates who demand higher pay anc positions. The inability of most Thai workers to speak English was cited as a weakness. Most production operators speak no English at all. Middl managers usually know enough English to act as middlemen. The communication gap is especially a problem in Japanese MNCs where English is the only common language. The problem of excessive job-hopping among professionals and technicians, discussed earlier, has prevented some MNCs from fully transferring know-how to their local technical staff for fear of losin! them to their competitors. Fortunately, job-hopping has not spread to lower level staff. Turnover among production workers was reported to be a low 1-2 per cent a year.

PAGE

32

WAGES

AND

BENEFITS

While most of the MNCs were concerned about rising wages in Singapore, they felt that this was not the major problem confrontir their operations. Most companies said that wages account for only 10-15 per cent of the total cost of production, with raw materials accounting for the major component of 70-80 per cent. Companies are more concerned with the tight labour market and the inadequa supply of workers. Compared to Singapore, wages in Thailand are much lower at all levels. Most companies follow the minimum wage structure for the production operators. In Bangkok, this works out to about 76 baht a day and is lower in the outlying areas. 25 American MNCs tend t1 pay a slight premium to attract more qualified workers. One American company paid such a premium to select its 500 workers from a crop of 3,000 applicants. The starting pay for graduate engineers in Thailand has risen sharply in recent years from about 4,000-5 ,000 baht a month to about 8,000-10,000 baht.26 This trend is expected to continue, given the persistent mismatch between demand and supply of eng meers.

THE IMPACT OF MNC INVESTMENTS IN MALAYSIA, SINGAPORE AND THAILAND

Unlike Thailand, Malaysia has no minimum wage regulations. On average, wages for manufacturing workers vary from M$6 a day for the unskilled, to M$7 to M$10 a day for semi-skilled workers. Skilled workers start at M$15 a day. 27 Additional benefits for workers in Singapore, Malaysia and Thailand are broadly similar, covering areas such as medical benefits, free transport, free uniforms, subsidized meals, paid medical leave and annual vacations. The only exception is that Thailand has no central provident fund or pension scheme. In Singapore, workers contribute 22.5 per cent of their wages to their Central Provident Fund (CPF) account while the employer contributes a further 17.5 per cent. Similarly, in Malaysia, the contributions to the Employees Provident Fund (EPF) are 9 per cent and 11 per cent respectively for employee and employer.

LABOUR: ASEAN-3

A

COMPARISON

OF

THE

One clear conclusion from the comparisons made of the labour situation in the ASEAN-3 is that Singapore and Thailand are at opposite ends of the labour spectrum. Whereas Singapore's most critical shortage is at the operator level, Thailand has an abundant supply that is unlikely to be exhausted for a good number of years to come. In fact, its low-cost but hardworking and dedicated production work-force is its most attractive feature for MNCs. On the other hand, while Singapore has succeeded in increasing its enrolment and graduation of engineers and technicians, Thailand is facing a severe mismatch in the supply and demand of trained manpower. Thailand's shortage of engineers has caused severe jobhopping and escalating wages. This alone indicates that a considerable degree of complementarity exists between Singapore and Thailand, at least in the use of labour resources . At this stage of Thailand 's development of its industrial sector, it will stand to gain most from labour-intensive operations. This is especially true of the electronics industry where moving beyond the labour-intensive phase will require increasingly large inputs of engineering and technical expertise. Singapore, on the other hand , will have to shed further its labour-intensive activities

LABOUR SUPPLY AND MANPOWER DEVELOPMENT

PAGE

33

(including some of those producing high-tech products such as disk drives which employ a large number of production workers). It should capitalize on knowledge-intensive activities that will make best use of its well-trained engineers. In the case of Malaysia, its labour situation sits between that of Thailand and Singapore. Unlike Singapore, it has an adequate supply of operator-level manpower but shortages are imminent in certain regions, notably Johor. Compared to Thailand, however, it is at a clear disadvantage. As for the training of engineers and technicians, it has yet to achieve the same strides made by Singapore, although its situation is not as severe as in Thailand.

PAGE

34

Being in this middle-of-the-road position makes Malaysia's competitive advantage nebulous. Its best strategy might well be to develop niches in targeted industries and to derive maximum benefits from linkages with Singapore and Thailand. Such a move will result in greater complementarity with Singapore in particular. In the longer run, given that Thailand's shortage of engineers will persist, it is quite likely that the northern states of Malaysia, notably Penang, could also develop linkages with Thailand's new Eastern Seaboard development in the same way that Johor has done with Singapore. The supply of trained engineers and technicians is an area that both Thailand and Malaysia need to pay greater attention to if they want to ascend the technological ladder in the electronics industry. As pointed out by Goh, 28 Singapore confronted this problem a decade earlier because of its earlier experience in the electronics industry. Although both countries have made detailed projections of their engineering and technical manpower needs, their conclusions are not encouraging. Malaysia's output of engineers and technicians is projected to increase to about 8,000 by 1995 .29 This number, which includes engineers trained abroad, is based on the optimistic assumption that all of them will return home. This compares with Singapore's 1989 output of 6,500 locally-trained engineers and technicians .-10 Given Malaysia's larger size, theprojected number is unlikely to meet the country's future needs. In the case of Thailand, calculations made by the Thailand Development Research Institute have forecast that under an optimistic scenario of 8 per cent annual GDP growth, the country will have to grapple with an engineer shortage of 6,5 00 in 1991, growing to over 27,000 by the year 200l.ll THE IMPACT OF MNC INVESTMENTS IN MALAYSIA . SINGAPORE AND THAILAND

In Singapore's case, it will have to resolve somehow the labour shortage at the operator level. Its quandary is that even high-tech industrial activities require a minimum critical size and a certain number of operators. A continued shortage of production workers might mean erosion of its industrial base in the medium term and the loss of good opportunities. One solution would be for it to undergo further restructuring and "hollowing out" of more of its labour-intensive operations, such as in garment manufacture, to free operators for new high-tech activities. The other alternative would be for it to relax its strict control of unskilled and semi-skilled foreign workers. If neither of this takes place, the only logical outcome in the longer term would be a migration of its engineers and technicians to countries like Malaysia and Thailand to fill well-paying vacancies there.

P AGE

LABOUR SUPPLY AND MANPOWER DEVELOPMENT

35

T

he quality of infrastructure was cited by MNCs as being a big factor in their investment decisions. This includes: utilities and telecommunications; land and industrial estates; seaports and airports; and land transport. This chapter compares the adequacy of infrastructure in the ASEAN-3 and the part this played in the investment decisions of MNCs. The results are based on interviews with the thirty selected MNCs and other independent research. The conclusions are presented at the end of the chapter.

UTILITIES

AND

TELECOMMUNICATIONS

Utility supply in Singapore was rated as well-developed and reasonably priced. Breakdowns or disruptions in the supply of power and water are infrequent and this has helped to ensure smooth factory operations. Statistics compiled by the Public Utilities Board show that Singapore's electricity rates are comparable to those in Malaysia and cheaper than those in Thailand. PAGE

38

Singapore's water supply situation is, however, an area of concern. A large portion of Singapore's potable water is sourced from Johor. Large industrial consumers of water, such as refineries, and paper and pulp factories, indicated that this might impose constraints on their long-term growth. Companies said that where feasible, they tried to recycle water to optimize its usage. Singapore's telecommunications facilities were rated as excellent, with international direct dialling (IDD) facilities to almost all countries. The outgoing IDD rates charged by the Telecommunication Authority of Singapore (Telecom) are generally lower than incoming rates. Several MNCs indicated that they were considering setting up regional data and communications centres in Singapore to co-ordinate the electronic transmission of data and information to their various operations in the region. In the case of Malaysia, its utility supply and telecommunications facilities were considered adequate. The need is for continual upgrading and expansion of these services, especially with the large number of new operations coming on-stream. Occasional disruptions are usually restored quickly and do not seriously affect factory operations. However, there is room for improvement and upgrading

THE IMPACT OF MNC INVESTMENTS IN MALAYSIA. SINGAPORE AND THAILAND

of these services in outlying areas and smaller towns. Electricity tariffs are comparable to those in Singapore but water is much cheaper. The situation in Thailand stands in marked contrast to Singapore and Malaysia in a number of respects. Water supply did not surface as a problem, but most MNCs resorted to the digging of deep wells for their industrial water needs. However, due to soil subsidence problems, it has become difficult to get permits to dig deep wells in the Bangkok area. Although MNCs have expressed satisfaction that Thailand's power supply has improved considerably, they are concerned that supply may not be able to meet the projected increased demand. Many projects approved by the Thai Board of Investment over the past few years are beginning to come on-stream. The Electricity Generating Authority of Thailand (EGAT) has warned that the country could face partial or nation-wide blackouts as it is unable to cope with the ever-increasing demand for electriciry. 32 Thailand's telecommunications facilities are also a cause of some concern. Telephone lines are inadequate (telephone ownership averages 1.8 phones per hundred people, compared to forty-three in Singapore and Hong Kong, twenty-nine in Taiwan and eighteen in Korea.) 33 The Telephone Organisation of Thailand (TOT) is unable to meet current demand, let alone projected demand. This is considered a serious deficiency that is likely to impose constraints on the growth of companies operating in Thailand, especially those that depend on speed of information.

LAND

AND

INDUSTRIAL

ESTATES

The MNCs in Singapore were happy with the services provided by the Jurong Town Corporation (JTC), the principal developer and manager of industrial estates. JTC offers potential investors a number of options - from land for a customized factory built by the investor to ready-built standard factories of various sizes. To optimize land usage, most standard factories are "flatted" buildings of as high as eight stories where investors can lease any number of floors . Companies were in particular pleased that JTC provides all

INFRASTRUCTURE DEVELOPMENT

PAGE

39

the necessary infrastructural back-up to their industrial estates and standard factories -power and water supply, telecommunications, and so forth. They were also satisfied with the JTC's thirty-year lease term, with an option to renew for another thirty years, and consider this long enough to fully recover their capital investments. The only complaint, however, was that Singapore's lease charges anc land costs were much higher than those offered by neighbouring countries. The high lease charges and land costs mean that landintensive operations are uncompetitive in Singapore. A number of electronic companies indicated that although they were satisfied wit their operations in flatted factories , the need to move materials fron one floor to another was a disadvantage compared to a straight-run production line in a landed factory .

PAGE

40

Unlike Singapore where industrial land is scarce, land in Malaysia and Thailand is abundant and usually cheap. In Malaysia, each statt has its own agency responsible for the development of industrial estates. The various state development agencies compete with each other for foreign investments and have resorted to offering land at bargain prices to entice foreign investors. This has led to some speculative buying by investors. Land speculation has been aided b} regulations that allowed foreign investors to obtain 70 per cent loG financing for the purchase of industrial land. However, to curb speculation and to protect banks in the event of a property price collapse, a recent ruling has limited local financing of such deals to only 50 per cent.34 The MNCs studied indicated they were satisfied with the infrastructural support for those industrial estates sited within or near large towns, such as those in Penang and the Klang valley ne< Kuala Lumpur. However, those in outlying areas suffer some deficiencies, especially inadequate power supply and telephone lines This has compounded the problems for factories in such areas whicl often have to build hostels near their factories to accommodate workers (their "catchment" for the supply of workers extend to as far as 150 km). The MNCs were happy with the fairly long lease terms of sixty years plus an additional thirty-year option. In Thailand, estates built by the Industrial Estate Authority of Thailand (IEAT), which was set up in 1972 for this purpose, THE IMPACT OF MNC INVESTMENTS IN MALAYSIA. SINGAPORE AND THAILAND

provide comprehensive infrastructure and utilities and are well-served by the domestic transport system. However, ready-built factories are not available and investors have to build their own. Quick start-ups are thus not possible. Goh 35 cited evidence that MNCs who have not been able to get a quick start-up in Thailand have moved to Malaysia. However, the MNCs said that with good planning, reasonably-sized factories can be built fairly quickly in 12-18 months. A growing trend in Thailand is for industrial estates to be developed and operated by private concerns. One successful example is the Nava Nakorn Industrial Estate located 21 kilometres north of Bangkok's Don Muang airport. Singapore government-owned business agencies are also engaged in developing an 800-acre industrial park in the province of Ayutthaya, 60 kilometres north of Bangkok. 36 In addition, some companies develop industrial estates for their own needs and sell or lease excess space to other foreign investors. The Toshiba group has developed such an estate near Lat Krabang. Land prices in Thailand have gone up substantially over the last few years as a result of the flood of foreign investors. Land speculation has also forced prices up. (Under Thai law, foreigners cannot own land. But foreign-owned companies can buy land for their factories if they have been encouraged to come to Thailand by the BOI. Foreign speculators have, however, used local residents as their frontmen to purchase land. In response to protests from the local community, the government has stepped in to take action against such violations.) 37 Despite the appreciation in land prices, land is relatively cheap. It is not unusual for MNCs to purchase 30,00050,000 square metres of land to build a 15,000-20,000 square metre factory, with the large excess reserved for future expansion. Foreign investors are greatly attracted by the ability to build spacious and well-laid-out factories at reasonable prices. This is one of Thailand's strongest selling points.

AIRPORTS

AND

SEAPORTS

Airports in the ASEAN-3 are generally well-served by international airlines, with frequent flights and connections. Subang airport in

INFRASTRUCTURE DEVE LOPMENT

PAGE

41

Kuala Lumpur has less traffic than Singapore's Changi airport and Bangkok's Don Muang airport, but all three provide efficient aircargo and passenger services. Singapore's Changi airport received acclaim from the MNCs for its efficient and user-friendly services. As for Don Muang, which has reached maximum capacity, the indications are that it is becoming increasingly difficult to book flights in and out of Bangkok. This has partly been due to the boom in tourist arrivals over the last few years. Bangkok will need a second international airport soon if it is to cater to the expected growth in air-cargo and passenger traffic.

PAGE

42

As for seaports, Singapore has emerged as the leading hub and .transhipment port in the region. W ith the growing trend for cargo to be shipped in containers, and with container ships becoming larger, they now tend to call only at major hubs to collect containers that have been centralized there. The hubs in turn serve various other ports in the region by means of feeder services. Singapore's natural advantage of strategic location has been further boosted by the wide range of services it provides - warehousing, bunkering, ship chandling and supplies, and ship repair. The Singapore port has also ceaselessly expanded and upgraded its facilities, especially to cater for container traffic. In Malaysia, the government has stepped up efforts to upgrade its various ports. Its major seaport, Port Klang, has the attributes to be a world-class deep seaport. It is heavily used by factories in the Klang valley but the government is actively promoting its use by companies in other locations as well. Besides Port Klang, West Malaysia has three other smaller ports - at Penang, Pasir Gudang in Johor, and Kuantan in Pahang. All three serve as feeder ports to Port Klang or to the Singapore port. The Kuantan .port, located on the peninsula's east coast, is virtually unoperational during the monsoon season because of bad sea conditions. The MNCs operating in Malaysia are generally satisfied with the country's seaport facilities and services. But companies operating in the southern states tend to ttuck their cargo down to Singapore for shipment from its port. Those operating in the northern states use Port Klang. In any event, those using container shipments rely on

THE IMPACT OF MNC INVESTMENTS IN MALAYSIA, SINGAPORE AND THAILAND

feeder services to ship their containers to Singapore for transhipment to other countries. In Thailand, the Klong Toey river port in Bangkok is the only major port. It has reached its maximum annual handling capacity of 700,000 containers (TEUs or twenty-foot equivalents) and is currently operating beyond this leveP8 Congestion has therefore become a major problem at Klong Toey. Several MNCs complained of delays in shipments of machinery, raw materials and finished products, which have seriously affected operations in some cases. The Port Authority of Thailand (PAT) has taken several measures to overcome the congestion at Klong Toey. These include the purchase of more mobile and gantry cranes, priority berthing for high-volume liners, provision of private berths and the expansion of the area provided for stuffing and unstuffing containers. Despite these measures, however, the current export boom is likely to result in worsening congestion. A trial project was recently launched to allow liners to use the Royal Thai Navy port at Sattahip to help ease the congestion at Klong Toey. 39 The root cause of the congestion problem at Klong Toey is that it is a river port with a draft of only 8-9 metres. The shipping lane has to be frequently dredged to prevent silting. The draft limitation means that only coastal vessels can call at Klong Toey and use must be made of deeper seaports at either Singapore or Hong Kong for transhipment on to bigger ocean-going liners. To overcome this, Thailand has decided to build a deep-seaport at Laem Chabang as part of the Eastern Seaboard development. The new port, costing 8.5 billion baht (S$375 million) when completed in 1991 will serve as Thailand's new commercial gateway. It will be equipped to handle 4 million tons of containerized and break-bulk cargo by 1995, and excess cargo which cannot be handled at Klong Toey will be diverted there. The new port will also serve the two major industrial estates in the Eastern Seaboard. 40

LAND

TRANSPORT

The land transport network is well developed in Singapore and Malaysia. As a small island, Singapore has been able to develop a

INFRASTRUCTURE DEVELOPMENT

PAGE

43

comprehensive network of roads and highways. Road congestion has been avoided largely through tight controls over the ownership of cars and other road vehicles. Malaysia has also spent significant sums of money to upgrade and develop the road network it inherited from the British. In particular the North-South and East-West highways, which were built at huge cost, will efficiently serve the whole peninsula when fully built.

PAGE

44

Thailand also has a comprehensive network of roads and highways. Unfortunately, in the Bangkok area, the road system has not been able to cope with the large increase in the number of vehicles in recent years. In the first half of 1988 alone, vehicle sales jumped a staggering 43 per cent. With the current economic boom and the prospect of more industrial projects coming on-stream in the Bangkok area, there is an imminent danger of the traffic situation reaching a point of paralysis. The MNCs have complained that much time is wasted in the transport of goods and people. Bangkok's traffic situation is expected to improve only in the mediwr term when industries move out of the Bangkok area to the Easterr Seaboard. The completion of the deep-sea port in 1991 will also resul1 in diverting container traffic away from Bangkok. In the short term, th< best solution appears to be the growing trend to privatize the buildint of roads and highways. Private companies are granted concessions t( operate toll highways for a number of years in return for buildint highways at its own cost. This "build-operate-transfer" method ha: proven to be quite successful.

INFRASTRUCTURE: COMPARE

HOW

THE

ASEAN-3

Among the ASEAN-3, Singapore has done best in providing a comprehensive infrastructure for companies to operate efficiently. Its particular strength is in anticipating future needs and taking decisions speedily, often involving vast sums of money to finance infrastructure expansion and upgrading . All facilities are thus well provided for - utilities, telecommunications, airports, seaports, roads and highways, and industrial estates. This has clearly been a strong draw for foreign companies, particularly those that run global

THE IMPACT OF MNC INVESTMENTS IN MALAYSIA . SINGAPORE AND THAILAND

operations requiring speed of communications and efficient transportation. Its main drawback, however, is the cost of industrial land which is considerably higher than in Malaysia and Thailand. Nevertheless, except for land-intensive operations, the indications are that this higher cost is offset by its efficiency and other advantages. Thailand is clearly the most seriously affected by infrastructural bottlenecks. The most severe is the road congestion problem in the Bangkok area, which will ease only when companies relocate to the Eastern Seaboard and the new port is built there. The Thai authorities will also have to address the inadequacy of its power supply and telephone lines to cater to the projected demand from operations that are already coming on-stream. In the short- to medium-term, companies will have to cope with the road and port congestion and the inadequacy of its power and telecommunications systems. Counter-balancing these problems, however, is the huge advantage of cheap land. P A G E

However, among the ASEAN-3, Thailand has drawn up the most ambitious long-term infrastructural development plans. The Eastern Seaboard development has already been mentioned. It will cover over 13 square kilometres and the total investment in the first two developments there (the Laem Chabang complex and Map Ta Phut industrial zone) will exceed US$6 billion.4 1 Other economic zones are also being developed, such as the Songkhla Lake basin in the south and Chiang Mai in the northwest. Other plans include the development of five "regional urban centres" in various parts of the country. These development projects will radically alter Thailand's industrial infrastructure, paving the way for even more foreign investments. With the development projects already under way and the long-term prospect of a better infrastructure, it appears likely that companies will cope with the current difficulties. In Malaysia's case, its infrastructure appears adequate in almost all respects. There seems to be, however, room for improvement, especially in servicing the needs of outlying industrial estates. An added factor is the competition among state development agencies in wooing foreign investors. This competition, if not overdone, will help to keep Malaysia's competitiveness sharp.

INFRASTRUCTURE DEVELOPMENT

4 5

Overall, it can be said that each of the ASEAN-3 sees the need to have an efficient infrastructure if it is to make its operating environment conducive for MNCs. In fact, the desire to attract more MNCs has been the chief reason for the improvements made to its infrastructure. With the exception of airports and seaports, where there is considerable competition among the three to become the hub for the region, other infrastructural developments have not been motivated by regional competition. In the case of seaports, Singapore's position as the transhipment hub is envied by Malaysia. The practice of Johor factories trucking their cargo to the Singapore port continues to be a sore point for the Malaysian authorities. There is also competition to become the air hub of the region, this time between Thailand and Singapore. This competition is likely to continue in the foreseeable future, with all three countries actively improving their facilities . For as long as no beggar-thy-neighbour policies are pursued, the competition will bring healthy benefits to all, particularly to companies operating in the ASEAN-3. PAGE

46

THE IMPACT OF MNC INVESTMENTS IN MALAYSIA. SINGAPORE AND THAILAND

TRANSFER OF TECHNOLOGY

THE

EXPERIENCE

OF

THE

ASEAN·3

S

ingapore's experience with industrialization, as well as the more recent experiences of Malaysia and Thailand, has proven that an MNC-led industrialization strategy can lead to rapid ascent up the technology ladder. This experience disproves the Marxist-inspired development economics of the 1950s and 1960s which harped on the dangers of exploitation by MNCs and a dependency on foreign agents. What the early development economists failed to foresee was the global nature of MNC operations and the tremendous opportunities provided by the international division of labour.

PAGE

48

Although it cannot be denied that the ASEAN-3 are dependent on MNCs to generate growth, this dependency has proven to be mutually beneficial. While MNCs benefit from low-cost production bases, the host countries have found that, through MNCs, they have ready access to capital resources, technological know-how, up-to-date products, modern managerial and technical expertise, and global markets. This chapter analyses the manner and extent to which this was achieved in the ASEAN-3. Apart from examining the flow of technology from the more advanced countries to the host ASEAN countries, an assessment will also be made of the intra-ASEAN technology flows based on the experience of the MNCs studied. Technology is defined here in its broadest sense to include knowledge of modern scientific methods that can be applied to the production and distribution of goods and services. Defined this way, technology is embodied both in the hardware of machinery and equipment and in the "software", that is, the people who operate, maintain, adapt and develop these machines. A number of studies on technology transfer in ASEAN have been done by Nathabhol, 42 Osman-Rani et al.,43 Ng et al. 44 and Chng et al. 45 Chng et al. lists three distinct components of technology that can be transferred: 1.

physical assets, such as plant, machinery and equipment;

2. information, both technical and commercial, relating to such matters as process know-how; choice of technology; engineeri~g

THE IMPACT OF MNC INVESTMENTS IN MALAYSIA. SINGAPORE AND THAILAND

design and plant construction; organization and operating methods; quality control; and market characteristics; 3. human skills, especially those possessed by specialized professionals and engineers. One other way of looking at technology transfer is to examine the channels through which the transfer takes place. The following are generally considered to be some of the principal channels: • • • • • • •

foreign direct investment turn-key arrangements purchase of machinery and equipment licensing and management agreements technical assistance contracts direct employment of foreign experts training of local staff

Whichever way it is looked at, it is quite clear that the physical transfer of technology from an advanced country to a less-advanced country is a step that is distinct from transferring technology from one set of people to another. While the physical transfer of machinery and equipment is, in most cases, a necessary first step, the more important is the transfer of information and skills to the citizens or residents of the recipient country. The latter transfer is more important as information and skills are acquired and ultimately reside in human beings. This "personal" aspect (as opposed to the "locational" aspect) of technology transfer covers technology-specific skills and know-how from the lowest level of operators right up to R&D scientists and engineers. This two-step view of technology transfer is useful as it highlights an important precondition on the part of the recipients: there must be locals with the capability to absorb the new knowledge and skills. If this precondition is not met, only a "locational" transfer of technology will take place. Furthermore, the larger the pool of indigenous trained, or at least trainable, manpower, the greater is the pace and scope of the second step of the transfer process.

Singapore's Experience From the MNCs studied, it is clear that the transfer of technology is more advanced in Singapore than in Malaysia or Thailand . The TRANSFER OF TECHNOLOGY

PAGE

49

signal proof of this is the fact that several .M:NCs have entrusted the entire management of the Singapore operation to local managers. As was noted earlier, even Japanese companies - often thought to be the least willing to transfer know-how and skills - have begun to appoint Singaporean managing directors. In most other .M:NCs in Singapore, except for one or two expatriate staff, the rest of the senior appointments, both technical and managerial, are held by locals.

PAGE

50

The products manufactured in Singapore, in particular the technology they embody and the upgrading that has taken place, are a good reflection of the technical expertise that Singapore has acquired. The Dutch .M:NC, Philips, for example, which started simple assembly work in Singapore in 1951 now employs more than 5,000 employees. Half of its 500 engineers are engaged in designing and developing a range of consumer products as well as their production lines. The U .S. electronics firm, Hewlett Packard, increased its engineers from 54 in 1980 to more than 300 and is hoping to achieve autonomy from its U .S. parent in product development. 46 Many other examples can be cited. A semiconductor company started with the basic assembly and testing of low-capacity integrated circuits (ICs), but progressed to being the region's first wafer diffusion plant. A Japanese maker of colour TV glass panels I applied state-of-the-art technology to its Singapore plant which made it more advapced than its parent facility. Most printed circuit board (PCB) assemblies have switched to the latest auto-insertion and surface-mount technology (SMT). Many .M:NCs have also invested substantially in automation and have introduced robots. In most cases, the newly automated lines have been designed with the help of local engineers. Further proof of effective technology transfer can also be seen from two other trends: 1. Singapore engineers and technical staff have been used to help set up satellite operations in Malaysia and/or Thailand. Apart from helping to ensure a smooth start-up, they have helped in training staff in the satellite operation and have served as "trouble shooters".

THE IMPACT OF MNC INVESTMENTS IN MALAYSIA . SINGAPORE AND THAILAND

2. Several local engineers and technicians working for MNCs have acquired sufficient skills and expertise to set up their own enterprises in supporting industries to supply parts and components to MNCs. Such transfers of expertise have played an important part in building up a pool of indigenous supporting industries in Singapore. An important factor behind Singapore's successful acquisition of technology from MNCs has been its national policies regarding technology transfer. From the outset, it adopted a nondiscriminatory, no-restrictions policy on foreign investments and on the import of foreign technology in particular. It also imposed no restriction on equity participation; almost all MNCs operating in Singapore are 100 per cent foreign-owned. In fact, Singapore's experience has shown that local equity ownership or partnership is not an important factor in the transfer of technology from MNCs (except perhaps at the very advanced stages of the process). It has also not imposed any restrictions on the employment of expatriate staff or on the terms and conditions of technology agreements. MNCs considered this important and have felt all the more confident that whatever proprietary technology is transferred to the host operation remains within the confines of wholly-owned subsidiaries. Another cornerstone of Singapore's national policy has been its emphasis on manpower training and development. As was seen in Chapters 1 and 2, it has taken bold steps to expand its engineering and technical training institutions and has forced the pace of industrial upgrading through a "wage correction" or high-wage policy. Its policy of sending the brightest students to top universities abroad has also ensured a broad pool of local talent who can absorb new technologies. More than anything else, its manpower policies have been the key to its rapid ascent up the technology ladder.

Technology Transfer in Malaysia and Thailand In the case of Malaysia, its move to expand its manufacturing base arose from a need to diversify its economy and reduce its dependence on its agricultural and resource-based sector. As seen earlier, it initially adopted an import-substitution strategy, investing

TRANSFER OF TECHNOLOGY

PAGE

51

in indigenous large-scale industries such as cement and iron and steel. Active promotion of foreign investments came later; even then, the government imposed equity participation restrictions within the scope of its New Economic Policy (NEP). It was only after a policy shift in the mid-1980s that wholly-owned foreign enterprises were allowed.

P A G E

5 2

Unlike Singapore, however, Malaysia has imposed controls on the inflow of technology to ensure that such flows are orderly and beneficial to the economy. Under this policy, any agreement signed between a foreign company and its local partner has to be screened and approved by the government's Technology Transfer Unit. The unit's role, which has not changed, is to ensure that there are no restrictions on the transfer of technology by the foreign party and that a fair price is paid for the technology provided. The unit has, for example, issued guidelines on the payment of technical fees and royalties. In some instances, it has eliminated certain provisions in agreements relating to prices to be paid for the use of licensed products. Whether these measures have been beneficial to Malaysia is uncertain. However, the unit appears to have had some success in encouraging Malaysian firms to expand their information base on available technologies and to attach greater importance to the question of choice of technologies.47 Ng48 has noted that there is now increasing awareness that the selection and effective adaptation of technology cannot proceed without a technically-skilled manpower base. The government's 1985 Industrial Master Plan dwelt at some length on manpower development but, as noted earlier, the projected increases in engineers and technicians are unlikely to meet the country's future needs. This will inevitably hamper the technology transfer in Malaysia. Of the ASEAN-3, Thailand has made the slowest start in technology transfer. Only in recent years has the importance of science and technology in its economic development been given official recognition. As noted by Nathabhol,' 9 Thailand has not drawn up any explicit policy on the technology transfer aspect of foreign investments. However, the Thai Board of Investment has recently begun to pay close attention to the level of technology being brought into the country by investors. It has specifically THE IMPACT OF MNC INVESTMENTS IN MALAYSIA, SINGAPORE AND THAILAND

stated that in assessing projects for the award of incentives, one criterion is that modern machinery and equipment must be used. 50 In cases where old process technology is to be used, its efficiency has to be certified by a reliable institution before the Board approves its installation. Thailand's main drawback is its relatively small pool of scientists and engineers. As noted earlier, it has the most severe shortage of trained manpower among the ASEAN-3 . Not only has this hampered technology transfer but MNCs have indicated that jobhopping among engineers and technicians has prevented them from imparting know-how. In part, the shortage is due to the recent flood of foreign investment projects. Another reason, however, is that only in its current development plan for 1987-91 have manpower development policies been spelt out in the area of science and technology. The plan has also called for the setting up of a new Technology Transfer Centre to collect, evaluate and disseminate foreign technological information for local business and industry. The Thai Institute of Scientific and Technological Research has been made responsible for the adaptation of foreign technology, while the Industrial Finance Corporation is to provide low-interest loans to encourage the use and adaptation of foreign technology.51

The Electronics Industry: A Case Example In his study, Goh 52 included a review of the development of the electronics industry in Singapore. This serves as a good case example as it gives a clear insight into the process of, as well as the possibilities for, acquisition of technology in the thriving global electronics industry. This is especially relevant to the ASEAN-3 as electronics is now the leading industry in all three countries. Apart from the fast growth in market size and rapid advances in technology, Goh highlighed another important feature of the industry: application of its products to many fields - computers, consumer electronics, aviation and defence products, communications equipment, machine tools and robots, and industrial control systems. Furthermore, each electronic product makes use of many components and sub-assemblies. The result is that the industry produces a very wide range of final products as well as components. It is this range of products that has allowed for a division of labour that is

TRANSFER OF TECHNOLOGY

P A G E

5 3

international in scale. This factor has enabled the distribution of activities within the ASEAN-3 and the "decanting" process described in Chapter 2. The wide scope of activities also means that countries can find a technological niche within a broad spectrum: from simple assembly of ICs to applied research at the frontiers of micro-electronics. Against this backdrop, Goh identified four ways that Singapore's electronics industry advanced from its start in 1968 with the arrival of two American semiconductor companies: 1. Movement from manual assembly operations to semi-automated assembly and testing, and finally to highly-automated assembly and testing. 2. Development of supporting industries supplying a whole range of parts and components - lead frames; ceramic packaging; "burnin" services; tools, dies and moulds; assembly and testing equipment; epoxy molding resins, and so forth. P A G E

5 4

3. Introduction of new products, such as disk drives; this generated another host of supporting industries producing components such as spindle motors, magnetic heads, thin-film media, etc. 4. Introduction of new activities, involving higher technology, delegated from the parent operation. Examples are product development and component sourcing. The advances on these four ·fronts are a measure of the technology transfer that has taken place in Singapore's electronic industry. At the same time, it is also a measure of the opportunities to be grasped by Malaysia and Thailand which have already made promising starts in this industry. One estimate is that by the year 2000 the US$250 billion computer systems market will grow to as high as US$800 billion, while the consumer electronics market will grow to US$150 billion from its current US$75 billion.53 One particular feature of the industry makes the opportunities especially abundant, namely, the inability of the advanced countries to engage in volume production on a low-cost basis at home. Singapore's experience has been that, in some areas, once the production technology for a new product has been tested in a pilot run in the home country, it is immediately transferred to Singapore

THE IMPACT OF MNC INVESTMENTS IN MALAYSIA , SINGAPORE AND THAILAND

for volume production. This implies speed of technology transfer (at least in the "locational" sense initially). The ultimate result is that Singapore-based MNCs are able to produce the latest products using the latest technology.

INTRA·ASEAN

TECHNOLOGY

TRANSFERS

One final aspect remains to be studied, namely, the transfer of technology within ASEAN. The main channel for this has been direct investments by Singapore-owned companies and relocation of production by Singapore-based MNCs. Singapore has traditionally been a major investor in Malaysia. Data from the Malaysian Industrial Development Authority (MIDA) shows that from 1980 to June 1988, Singapore's cumulative investments totalled M$515 million, second only to Japan. 54 Singapore is also a major investor in Thailand. Data from the Thai Board of Investment showed that for 1988, for example, Singapore was its seventh largest investor with approved investments of 470 million baht. 55 Although a detailed analysis of these investments will be necessary before firm conclusions can be drawn, it is likely that these investments have been a channel for the transfer of expertise and technology. Singapore-based MNCs have perhaps been the main channel for intra-ASEAN technology transfers. As described earlier, MNCs have used Singapore as a springboard for investments in the region. To the same extent that Singapore acquired technical expertise from these MNCs, so too will Malaysia and Thailand. The description of the electronics industry given above indicates that considerable scope exists for further such transfers in the coming years.

TRANSFER OF TECHNOLOGY

PAGE

55

" ~·

''

CO.NCLUSION:

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. 'THE. 'IMP!~Cf .:. ~:: '

(2

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OF MNCs,. IN ·

THE ASEAN-3 ..·AND .0U.TLOOK . FOR T.HE·' ~. '

J

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FUTURE

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POLICY SHIFTS AND SINGAPORE'S "DEMONSTRATION EFFECT"

T

P A G E

5 8

he recent foreign investment boom in Malaysia and Thailand has brought the economies of the ASEAN-3 much closer together, at least in their openness to foreign investments and in their reliance on MNCs as agents of export-led development. All three countries now welcome foreign companies and offer a roughly similar range of tax incentives and other privileges. In Malaysia's case, the policy changes of 1986, after the shock of the 1985-86 recession, were a major factor. The main change was to allow MNCs 100 per cent ownership of their subsidiaries, which led to a deluge of foreign investments. In the case of Thailand, the boom appears to be the result of active promotion at a time when Japanese companies were increasingly looking for low-cost offshore production bases. Of the ASEAN-3, Thailand has been the biggest beneficiary of the recent outflow of investments from not only Japan but also the United States, Europe and the NIEs, in particular Taiwan. There is also evidence that Singapore's earlier experience with an MNCled policy played a part in the convergence of the ASEAN-3's strategies. In fact, this was a factor behind the policy shifts by the Malaysian and Thai authorities who had to look for new engines of growth and new ways to diversify their economies. By the mid-1980s, the benefits of Singapore's policy of playing host to MNCs were unambiguous. It had rapidly acquired the latest technology and a capability to produce upto-date and high-value products and services. For two decades its economic performance surpassed that of Malaysia and Thailand which had adopted inward-looking policies that relied on their own resources and inputs. In other words, Singapore's policy had a "demonstration effect": it proved that a dependency on MNCs did not result in a oneway outflow of benefits to foreign agents but instead led to benefits that were mutual and considerable. It also showed that through MNCs, a developing country could readily plug into world markets, tap managerial and technical expertise, and have access to foreign capital. Apart from this demonstration effect, there were concrete spin-off benefits that flowed from Singapore's earlier experience with MNCs. This began as early as 1972 when Singapore's labour shortage led its electronics companies to relocate part of their labour-intensive operations to Malaysia, in particular to Penang. By the mid-1980s, this THE IMPACT OF MNC INVESTMENTS IN MALAYSIA . SINGAPORE AND THAILAND

flow to Malaysia and also to Thailand had helped both countries to develop a sizeable export-oriented electronics industry. When the policy shifts of the late 1980s made the operating environment for MNCs even more hospitable, many more such relocations took place, with Singapore-based companies transferring or "decanting" some of their product lines. In Malaysia's case, Johor was the main beneficiary, because of its proximiry to Singapore. At first, the MNCs set up "satellite" plants with the Singapore operation as the centre. But the evidence suggests that this "decanting" process was a continuous one, with more sophisticated product lines being transferred over time. As was seen in Chapter 2, this process continued until the Malaysian and Thai plants developed the capabiliry to produce high-end stand-alone products, independent of the Singapore operation. In one case at least, the satellite plant eventually eclipsed the Singapore-based operation. The best example of these spin-off benefits is seen in the electronics industry. The MNC survey found that the majority of Singapore-based companies that branched into either Malaysia or Thailand were electronics companies. The detailed study of thirty MNCs found that they chose to expand into Malaysia and Thailand after they had developed familiarity with operating in Southeast Asia and confidence in the region's future. The proximity to Singapore was also a major factor as it allowed for back-up services and expertise from the Singapore plant As a result of this process, all three countries have now developed considerable capability in the electronics industry, although in different niches. In fact, the ASEAN-3 are now poised to make even more rapid progress in the industry if they take the right steps to grasp the opportunities available. As was seen in Chapter 5, the industry's main feature is its wide range of products and services and their application to many fields - from computers and consumer electronics to aviation and defence products. Few other industries offer such a wide scope of capabilities and opportunities. The industry's growth potential is also huge. The US$250 billion computer systems market alone is forecast to grow to as high as US$800 billion by the year 2000. 56

GROWTH

IS

NOT

A

.ZERO-SUM

GAME

Several commentators have expressed the view that growth in one ASEAN country will be at the expense of its neighbours. This view has not been borne out by the findings of the study. Again, the electronics industry serves as the best example. Firstly, as noted CONCLUSION : THE IMPACT OF MNCs IN THE ASEAN·3 AND OUTLOOK FOR THE FUTURE

PAGE

59

earlier, the industry's scope is wide and the opportunities are therefore abundant. This makes it unlikely that any one country can hog the entire range of opportunities. One of the study's findings was that even as Singapore-based companies relocated part of their operations to Malaysia and Thailand, the Singapore operation benefited by upgrading to new product lines and higher-technology activities. The study also found that a key factor in this upgrading process was the ability to absorb technological expertise, and this varied in each of the ASEAN-3 . Whereas Singapore was at the higher end and had begun to develop R&D capability, Thailand's strength was at the labour-intensive end of assembly and production. Malaysia's capability was between that of Singapore and Thailand.

PAGE

60

Furthermore, resource endowments- in particular, land and labourvary considerably among the ASEAN-3. There are also significant differences in other prerequisites, such as telecommunications, transportation, land and other infrastructure. In fact, the evidence points clearly to a far greater degree of complementarity than . competition among the ASEAN-3. Thailand's chief advantages are cheap industrial land and plentiful supply of low-cost yet hardworking production operators. Its drawbacks are an over-strained, congested infrastructure - everything from roads and ports to utility supply and telephone lines - and a severe shortage of engineers and technicians. This is diametrically opposed to Singapore's position. Apart from being land-scarce, Singapore's most critical shortage is in operator-level workers; its strengths are its well-trained engineers and technicians and an efficient infrastructure. Malaysia's position is again mid-way in this spectrum. These widely differing comparative advantages point to the possibility of each country occupying quite different niches. This is clearly the case at the moment, as seen from the "decanting" process among Singapore-based MNCs as they branch into Malaysia and Thailand. The indications are that the situation is likely to change only in the medium to long term because, as was seen in Chapters 2 and 3, significant changes to the relative advantages of the ASEAN-3 will take some time to effect. One cause for the misconception that growth is a zero-sum game lies in the intensity of the aspirations of Malaysia and Thailand to ascend the technology ladder and catch up with Singapore. This is to be expected and the findings in fact show that continuous THE IMPACT OF MNC INVESTMENTS IN MALAYSIA , SINGAPOH AND THAILAND

technological upgrading has taken place. However, as noted earlier, the future pace of progress depends on each country's ability to absorb technical expertise. This in turn is dependent on its national policies on manpower training and development, especially in the technical disciplines. Here again, the present position in each country varies. Singapore succeeded in raising its supply of engineers and technicians after determined efforts in the late 1970s. It drastically expanded intakes and enrolment and set up a new technological institute to produce engineers. It also set up "specialto-type" institutes to train technicians in special skills required by industry, such as in tool and component design and industrial electronics. In the case of Malaysia and Thailand, however, they focused on the supply of graduate manpower only in the mid-1980s. Even with expansion in training intakes, the projected supply of engineers and technicians in the 1990s is far short of the expected demand. The projected shortages are especially critical in Thailand where a shortfall of more than 27,000 is expected by the year 200!.5 7 This is likely to be the critical factor restraining technological upgrading in Thailand and Malaysia. Already, with the shortage of Thai engineers causing rapid staff turnover in factories, MNCs have indicated that they are unwilling to pass on skills to Thai engineers for fear of losing them to competitors. A further factor is that the operations ofMNCs in the ASEAN-3 are part of a wider global network of activities. Each location is therefore part of a "global value-added chain" and there are many ways for each node to add value to the products and services. Whatever the aspirations of the ASEAN-3, the corporate headquarters of MNCs ultimately decide how to configure their operations to maximize profits, taking into account the strengths and weaknesses of each location. In fact, the evidence indicates that with the recent massive inflows of MNC investments, their networks have led to greater integration of the ASEAN-3 's economies. This fact alone underlines the impact that MNCs have had. Whether further integration will take place will depend on the freedom MNCs are given to operate. In this respect, Singapore has provided the most liberal environment for MNCs, with no restrictions on the transfer of funds, the technology used or the employment of expatriate staff. In the case of Thailand, MNCs must meet a number of requirements, such as using domestic resources CONCLUSION : THE IMPACT OF MNCs IN THE ASEAN·3 AND OUTLOOK FOR THE FUTURE

PAGE

61

and helping to develop the country's hinterland. In Malaysia's case, the wealth distribution targets set out in the New Economic Folic: of 1970-90, in particular the need to have local bumiputera equity participation and to employ bumiputera staff, have discouraged MNCs. This is seen from the fact that a deluge of investments resulted when the restrictions were lifted and MNCs were allowed fully-owned subsidiaries. MNCs have also indicated that with the shortage of suitably qualified manpower, their operations ·may be affected if the requirement to hire bumiputera is enforced too rigorously. In the final analysis, whether restrictions are imposed 01 MNCs by a particular country ultimately affects the role that they will play in their global chain of operations.

INTRA·ASEAN

PAGE

62

COMPETITION

Although the study's findings point to specialization among the ASEAN-3 within the framework of a global division of labour, thf are obviously some areas where there is direct competition. One example is in the development of seaports and airports. In both these areas, the nature of global operations calls for one location to serve as the regional hub, with other locations serving as feeder points. It is, therefore, not surprising that there is rivalry to becorr the regional hub and to grab the benefits of this status. Singapore' seaport has established itself as the hub, especially for container traffic. Its strategic location and history as an entrepot ensured this, did its continued investments in modern facilities. Malaysia has made determined efforts to develop its own ports, especially Port Klang, to wrest hubbing services away from Singapore. As for airports, there is continuing rivalry between Singapore's Changi airport and Bangkok's Don Muang airport to be the premier Southeast Asian hub. Changi currently has the edge because of its recent far-sighted expansion, whereas Don Muang has reached maximum capacity. The indications are that this rivalry to become the regional shippi1 and aviation hubs will continue, judging from the large-scale developments in all three countries. Thailand's plans are the most ambitious. A new US$375-million deep-sea port at Laem Chaban.!' part of the huge Eastern Seaboard development, is expected to sen as its new commercial gateway when completed in 1991. Malaysia

THE IMPACT OF MNC INVESTMENTS IN MALAYSIA , SINGAPORE AND THAILAND

has also invested heavily in its sea and air ports, and Port Klang is expected to be privatized soon. These developments will improve the infrastructure in Thailand and Malaysia, which have already come under strain with the recent surges in foreign investments. Companies operating in the two countries will clearly stand to benefit. The expansions will also cater to the added demands from the projects expected to come on-stream in the next few years. But to the extent that they are designed to attain the status of regional hubs, they could represent a degree of over-investment and excessive expenditure of scarce capital. One other area of competition is in services. Currently, Singapore's drive to become a "total business centre", providing a comprehensive range of services, has made it the region's service centre. Apart from transportation, Singapore has established a lead in telecommunications, banking and financial services, international trading and a host of other specialized business services. In 1986, a new promotion effort was mounted to encourage MNCs to set up operational headquarters in Singapore, to service their regional and Asia-Pacific operations everything from component sourcing to fund management.58 Already, Malaysia and Thailand are also vying for this business and are actively urging their foreign companies to establish headquarters in their own capitals. While healthy competition in this area is to be expected, if such efforts have the effect of restricting the freedom of MNCs to distribute their activities in the most efficient way, they could redound to the disadvantage of Malaysia and Thailand in the long run .

THE

LONGER

TERM

OUTLOOK

Although Thailand was a late starter in attracting MNCs and is suffering severe infrastructural bottlenecks, it has drawn up the most comprehensive development plans among the ASEAN-3 in an effort to build up its industrial base. Unlike Singapore and Malaysia, it still has a huge labour surplus of former agricultural workers seeking manufacturing jobs. As discussed in Chapter 3, Thai production workers are hardworking and loyal. Industrial land is cheap and MNCs are attracted by the prospect of building spacious, well-laid out production lines at very reasonable cost. The current road and port congestion in Bangkok is likely to ease considerably once

CONCLUSION : THE IMPACT OF MNCs I N TH E ASEAN·3 AND OU TL OOK FOR THE FU TURE

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63

companies relocate to the huge 13-square kilometre Eastern Seaboard development and to other new indu5trial zones being developed around the country. Given the good prospects for future growth, companies are likely to cope with the current bottlenecks. Thailand's biggest long-term weakness is its shortage of engineers and technicians, which is likely to persist for some time. However, the opportunities for growth based on labour-intensive manufacturing are enormous. In all probabiliry, Thailand will not only maintain its high export growth and economic performance but is also likely to become a modern industrial state and the next newly-industrialized economy.

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64

Malaysia's prospects for further progress are also excellent. With the more pragmatic New Development Policy unveiled in 1991 which continues to allow foreign companies a free hand to operate, it too is likely to maintain its high export growth and overall GDP expansion. However, its relative competitive position lies between that of Thailand and Singapore. Its best prospect appears to be to focus on strategic industries such as electronics, and develop linkages with operations in Singapore, Thailand and the region. It will also have to draw up more ambitious manpower development programmes and expedite their implementation if it is to enhance . its ability to rapidly acquire technological expertise. In the case of Singapore, it will have to address the critical shortage of workers at the operator level. The quandary it faces is that even high-tech manufacturing operations require a certain minimum number of production operators. Failure to address this critical shortage could result in lost opportunities in manufacturing. It might also have to contend with a migration of its engineers and technicians, to fill well-paying vacancies in countries like Thailand and Malaysia. On the other hand, its prospects in the area of services appear excellent, especially in view of the continued good growth in Malaysia and Thailand. Despite the rivalry from its neighbours in services, it is likely to remain the regional hub for a wide and comprehensive range of services.

THE IMPACT OF MNC INVESTMENTS IN MALAYSIA, SINGAPORE AND THAILAND

N 0 TE5

1.

See, for example, Abdul A. Said and Luiz R . Simmons, eds., The New Sovereigns: Multinational Corporations as World PIJWers (New Jersey: Prentice-Hall, 1975).

2.

Goh Keng Swee, Singapore and the Developmental Issues of the 1990s (Paper presented at the Walter & Phyllis Shorensstein Symposium on "Economic Challenges in the Asia-Pacific Region", organised by the Institute of South East Asian Studies, University of California, Berkeley, San Francisco, 28 March 1990).

3.

See, for example, Steven W. Kohlhagen, "Host Country Policies and MNCs - The Pattern of Foreign Investment in South East Asia", Columbia Journal of World Business (Spring 1977), pp. 4958. P AG E

4. Chng Meng Kng, Linda Low, Tay Boon Nga and Amina Tyabji, Technology and Skills in Singapore (Singapore: Institute of Southeast Asian Studies, 1986), pp. 3-8.

5. Ibid.

6. Ibid. 7.

Report of the Economic Committee, The Singapore Economy: New Directions (Singapore: Ministry of Trade and Industry, February 1986), pp. 43-44.

8.

Ibid., pp. 37-46.

9.

Ministry of Trade and Industry, Singapore, Economic Survey of Singapore, 1987 and 1988.

10. Penang, Malaysia - Investment Guide, lOth edition (Penang Development Corporation).

6 5

1

11. UNIDO, Medium and Long Term Industrial Master Plan, Malaysia, 1986-1995 - R&D and Technology Policies, Volume Ill Part 6 (Malaysia, 1985), p. 77 . 12. Ministry of Finance, Malaysia, Economic Report, 1989/90 (Kuala Lumpur: National Printing Department, 1989). 13. Malaysia, Second Outline Perspective Plan, 1991-2000 (Kuala Lumpur: National Printing Department, 1991). 14. Board of Investment, Thailand. 15. Ibid. 16. Goh Keng Swee, op. cit. 17. Ibid. P A G E

6 6

18. Ministry of Trade and Industry, Singapore, Economic Survey of Singapore, 1989. 19. Ministry of Finance, Malaysia, Economic Report, 1989/90. 20. UNIDO, op. cit. 21. Ibid. 22. Business Review, "Thai Labour Facing a Tighter Market" (Bangkok, Thailand), August 1989. 23. Private discussions with MNC executives. 24. Goh Keng Swee, op. cit. 25 . Private discussions with MNC executives. 26. Private discussions with MNC executives. 27 . Private discussions with MNC executives.

28. Goh Keng Swee, op. cit. 29. UNIDO, op. cit. 30. Ministry of Trade and Industry, Singapore, Economic Survey of Singapore, 1989. 31. Thailand Development Institute, The Science & Technology Manpower Situation in Thailand. An Analysis of Supply and Demand Issues (Bangkok, April 1988). 32. Asian Wall Street journal, 1 November 1988. 33. Ibid. 34. Straits Times (Singapore). 35. Goh Keng Swee, op. cit. 36. Straits Times (Singapore), 29 December 1989. 37 . Asian Wall Street Journal, 16 February 1989. 38. Nation (Bangkok), 12 January 1989. 39. Private discussions with Thai officials. 40. Board of Investment, Thailand, Thailand into the 1990s - The Strategic Opportunities for Partnership (Thailand, April 1989). 41. Ibid . 42. Nathabhol Khanthachai, et al., Technology and Skills in Thailand (Singapore: Institute of Southeast Asian Studies, 1986). 43. Osman-Rani H., et al., Technology and Skills in Malaysia (Singapore: Institute of Southeast Asian Studies, 1986). 44. Ng C. Y., et al. Technology and Skills in ASEAN - An Overview (Singapore: Institute of Southeast Asian Studies, 1986).

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67

45. Chng Meng Kng, et al., Technology and Skills in Singapwe (Singapore: Institute of Southeast Asian Studies, 1986). 46. Discussions with company executives. 47. Osman-Rani H., op. cit. 48. Ng et al., op. cit. 49. Nathabhol et al., op. cit .. 50. Board of Investment, Thailand. 51 . Ibid. 52. Goh Keng Swee, op. cit. P A G E

6 8

53 . Economic Development Board, Singapore. 54. Malaysian Industrial Development Authority, Malaysia. 55 . Board of Investment, Thailand. 56. Economic Development Board, Singapore. 57. Goh Keng Swee, op. cit. 58. Report of the Economic Committee, Singapore, op. cit.

THE

AUTHORS

Mr Suresh Natarajan was a scholar under the EDB-Sundstrand Engineering Scholarship Programme. He graduated from the University of Illinois with a B.Sc. (Electrical Engineering) in 1985 and M.Sc. (Electrical Engineering) in 1987. On completion of his studies, Mr Natarajan joined the Singapore Economic Development Board EDB as a Senior Officer in the Industry Development Division. Mr Tan Juay Miang holds a Bachelor in Chemical Engineering from the University of Adelaide, Australia (1981), and a Masters in Business Administration, National University of Singapore (1988). Mr Tan was with the Anti-Pollution Unit in the Prime Minister's Office and the Ministry of Environment from 1981 to 1988. He joined the Singapore Economic Development Board for a short stint, and is now with the Marketing Division in Shell Singapore. PAGE

6~