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UNIVERSITI PUTRA MALAYSIA
FACTORS INFLUENCING FOREIGN DIRECT INVESTMENT IN THE MANUFACTURING SECTOR OF MALAYSIA
ZULKORNAIN YUSOP
FEP 1992 3
� INFWE%«:ING F<m:ICB DlIm:'l' INVES'lJBfl' IN THE MANUFACroRING SEC'l\R OF MAI...AYSIA
by
ZOLJ«RQUN YUSOP
Thesis Subnitted in Partial Ful fi lment of the Requirements for the Degree of Master of Science in the
Facul ty of Econanics and Hanaqement , Universiti Pertanian Malaysia
March, 1992
I wish to express rnf deepest gratitude to the chainman of
the supervisory cannittee, Associate Professor Dr . Roslan A .
Ghaf far, for his time, patience, comments, guidance and
encouragement throughout the period of the study . My special
thanks are also due to two carmi. ttee members, Dr . Zakariah
Ab:iul Rashid and Associate Professor Haji Shahril Haji Alxiul
Karim, for their very useful advices and ccmnents .
I would also like to thank Universiti Pertanian Malaysia
for granting the study leave and providing financial support
during the period of my study .
A sincere appreciation also goes to all of the lecturers,
faculty staff and friends who were involved directly orC
indirectly in the study . Finally, I am very grateful to my
parents, my wife and son for their consistent rroral support,
encouragement and patience .
ii
Page
Ac:::KN<JolLEDGES
LIST OF TABLES . . • • . . . . . . • . . . . . . . . . . . . . . . . . . . . . . . . . . . . vii
LIST OF FIGURES ix
LIST OF ABBREVIATIONS x
ABSTRAK
I
xi
xiii
INTROOOCTION 1
Pattern of Foreign Direct Investment in Malaysia • . . . . • . . . . . . • • • . . . • . . . 1
Incentives for Investment in Manufacturing • • . . • . • . . . . • . • • . . • . • . . . • . . . . 10
Impact of Industrialization 16
Several Weaknesses of Industrialization in Malaysia . . . . • . . . • • . . . . . . . . . . . . . . . . • . . . . . . 26
Narrow-Based Industrialization
Lacking in the Use of Local Resources
Distribution of FDI
Statement of the Problem
Objectives of the Study
HypQthesis
Significance of the Study
iii
26
33
35
37
40
41
42
I I
I I I
LITERATURE REVIm . . . . . . . . . . . . . . . . . . . . . . . . . . . 44
Definition of Foreign Direct Investrrent 44
Mul tinational Corporation (MNC) 46
Importance of Foreign Direct Investrrent 49
Efforts to Promote Foreign Direct Invest.n'el1t . . . . . . . . . . . . . . . . . . . . . . . . . . . 52
Tax Incentive Scheme
Factors that Increase Foreign Direct Invest.n'el1t
Environmental Changes
Technological Changes
Structural Business Firm Changes
Devel opment of Foreign Direct Investment Theory
53
56
56
57
58
59
Comparative Advantage Theory . . . . . . . . . . . . . 61
Industrial Organization Theory . . . . . . . . . . . 65
Investment Theory
Survey on Detetminants of Foreign Direct Investment
ME:I'HODOLOGY
Introduction
Models for Foreign Direct
71
74
82
82
Invest.rr&1.t stOOi.es . • . • . . . • . . . . . . • . . . . . . . • . . . 84
Sarrpl e Population . . . . . . . . . . . . . . . . . . . . . . . . . . . 90
Quantitative Method . . • . . • . • . • • . • • . . . • • . . . . . . 91
Dependent Variabl e 92
Independent Variables 93
iv
IV
v
Characteristics of a Good Model ............. 100
Data Transformation
Qualitative Method
Econarrdc and Social Factors
Political and Policy Factors
Sample for the Questionnaire
RESULTS OF ANALYSIS
Empirical Analysis
Estimation of General Models
103
105
106
113
116
119
119
119
Modified Models . • . . • . . • • . . . . . . . . . . . . . . . . • 123
Analysis on the Results of Regressions . • • • • • • . . . . . . • • . • . . . . . . . . . . 129
Qualitative Results 137
Factors Affecting FDI Decision by MNCS in the Manufacturing Industries in Malaysia . • . . . . • . . • . • . . • . • . . . . . . . • . • • . • 137
Attractiveness of Malaysia as an
Investment Centre . . . . . . . . . . • . . . • • . . . . . . . . 145
Wea)messes and Limitations of Malaysia as an Investment Centre • • . • • • • • • . • • • • • • • . 149
Comparing the Qualitative and Quantitative Results
SUMMARY AND DMPLIClTION . . . . . . . . . . . . . . . . . . . . .
151
154
BIBLIOGRAPIiY • . . . . . . . . . . . . . . . . . • . . . • . . . . . . . . . . • . . 165
ADDITIONAL REFERmCE
APPmDICES
A Sal ient Features of Pioneer Industries Ordinances, 1958
v
172
173
B Investment Incentive Act , 1968 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 175
C Industrial Co-ordination Act ( ICA) , 1975 . . . . . . . . . . . . . . . . . . . . . . . . 181
D Industrial Master Plan . . . . . . . . . . • . . . . . . 183
E Recent ( 1985 ) Amendments to the Industrial Coordination Act ( ICA ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 185
F Praootion of Investrrent Act , 1986 . . . . . .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. 187
G Types of Investrrent Incentives . . . . . . . . . 191
H Questionn.a.ire .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. 195
VITA .. ...... .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. .. 203
Table
1
2
LIST OF TABLES
Malaysia : Gross Domestic Product by Industrial Origin (as percentage of GNP) • • • • • • • • • • • • • . .
Components of Malaysian Exports (as percentage of total val ue)
3 Malaysia : Gross National Products (GNP) , Gross Export Proceeds (GEP) and the
page
3
4
Ratio of GEP/CBP • . • • • • • • • • • • • • • • • • • • • . • • • • • • 6
4
5
6
7
8
9
10
11
12
Average World Prices of Selected Export Cammcdities . . . . . . . . . . . . . . . . • . . . . . . . . .
Malaysia : Average Annual Growth Rate of Major sectors (in percentage) . • . . . • . . . • . . . . . . . . . . .
Malaysia : Employment by Sector ( ' 000 ) . . . . . . . . .
Share of Foreign Equities in Malaysian Manufacturing : by cOlmtry (percentage of total ) . . . . . . . • . • . • . . . . . . . . . . .
Malaysia : NUlber of Approvals Granted for Establishment of Manufacturing Projects by Industry ( 1984-1989) . . . . . . . . . • . . . • . . . • . . . . • .
Malaysia : capital Investment in Approvals Granted for Establishment of Manufacturing Projects by Industry ( 1984-1989) . . . • . . . . . . . .
Malaysia : Potential Employment in Approvals Granted for Establ ishment of Mariufacturing Projects by Industry ( 1984-1989) . . . . . . . . . . . .
Malaysia : Export of Manufactured Goods (M$ lTd 11 iOIlS) . . . . . . . . • • . . . . . . . . . . . . . . • . . • . . .
Resul ts of RegressiOIlS
13 Regression Output and Covariance Matrik
7
14
18
21
27
28
31
32
121
for Equation [ 15] . . . . . . . . . . . . . . . . . . . . . . . . . . . 128
vii
14
15
16
Rank of Factors Direct Investment
Influencing Foreign . . . . . . . . . . . . . . . . . . . . . . . . . . .
Several Aspects of Malaysia Which Are trost Attractive to Foreign Investors . • . . . . • . . . . . .
Rank of Weaknesses and Limitations of Malaysia as an Investment Centre ........... .
viii
138
146
150
LIST OF FICDRES
Figure
1 Proposed Capital Investment in
Page
Malaysian Manufacturing . . . . . . . . . . . • . . • . . . • . . 20
2
3
Foreign Equity and Loan in Local Manufacturing , by country ( in 1989)
Malaysia : Net outflow of Investment Incane ( 1976-1988)
4 Malaysia : Ehployment by Industry
22
24
as at Decerri::>er I 1989 . . . . • • . • . . • . • . . . . . . . . . . . . 30
5 Rates of Inflation in Malaysia ( 1970-1988) 135
ix
ASFAN
EEC
ERP
FCC
FDI
GOP
GNP
GATT
IBRD
Lee
LDC
MIDA
NNe
NIC
OECD
RBI
SPEC
UNCTAD
UNDP
LIST OF ABBREVIATICIIS
Asean and Pacific Development Centre
Association of South-East Asian Nations
European Econanic CamImi. ty
Effective Rate of Protection
Foreign Control l ed Company
Foreign Direct Investment
Gross Domestic Product
Gross National Product
General Agreercent on Tariffs and Trade
International Bank for Reconstruction and Development
Local Control l ed Carpany
Less Developed Country
Malaysian Industrial Development Authority
Mininun Efficient Cost
Mul tinational Corporation
Newl y Industrialized Country
Organization for Econanic Co-operation and Development
Resource-Based Industry
South Pacific Bureau for Econanic Cooporatian
United Nations Conference on Trade and Developnent
United Nations Devel opment Programne
Abs t ract of the thesis presented to the senat e o f Universi ti Pertanian Malaysia i n partial ful fi lment of the requirements for the degree of Master of Science.
Chairman
Faculty
FACl'CES I NFW!2fC I NG FClm I af DI RI!rl' INVF.S'DtDfl' I N '!BE MMOF.P£TUR I r«J � c:e MALAYSIA
by
Zulkornain bin Yusop
March, 1992
Associate Professor Roslan A. Ghaffar, Ph. D .
Econanics and Management
This study is meant to identify local (cotmtry-related)
factors that affect foreign di rect investment ( FDI ) in the
manufacturing sector of Mal aysia . FDI in Mal aysia was
concentrated in the agricul tural and extracti ve industries
unti l the earl y post-independent period when ef forts to
diversify the country's econany were initiated. General ly,
industrial ization has brought several posi tive effects ·
however. it also features a few wea1messes such as narrow
manufacturing base and manufactured exports and under
uti l ization of l ocal resources . The di f ferent rates of
investment across the various manufacturing industries in the
cotmtry can be associated with the pattern of FOI which is
xi
concentrated in certain industries such as electrical and
textil e . Therefore , it is inportant to conduct a study on
factors affecting FOI in Malaysia so that policy-makers can
hopeful l y bene f i t f rom the f i ndings of the s tudy i n
making the appropriate policies to improve the distribution of
FOI across the manufacturing industries . Previous studies
show that FDI activities can be exp l ained by theory of
comparative advantage , indus t ri a l organization as wel l as
investment theory . To detetmine the factors influencing FOI in
the Malaysian manufacturing, both quantitative and qualitative
analyses were conducted. In the quantitative analysis , gross
national product (GNP) , level of external reserve ( lagged one
year) , interest rate, manufacturing output/GNP, current profit
of foreign contro l l ed manufacturing companies and total asset
of l oc a l f inanc i a l system show s i gni f i cant pos i t ive
rel ationship with FOI whi l e pub l i c investment rate shows
significant negative relationship . The qualitative analysis
concludes that economic and social stabi l ity ; f reedom of
repatriation; availability of efficient labour force; existence
o f phys i ca l infras t ructures ; e f f i c i ency o f f i nanc i a l
institutions ; tariff and trade protection; currency stabi lity;
market availabi l ity; and public sector efficiency are among the
roost inportant detetminants of FOI .
Abstrak tesis yang diken1.1kakan kepada Senat Uni versi ti Pertanian Malaysia sebagai memenuhi sebahagian daripada syaratsyarat untuk penganugerahan i jazah Master Sains .
FAKTCR-FAK'l'CR YANG Hl!MPDQRDHI PELAHJRM LMGSUNG ASING DI � PERKIINfCWf IWAYSIA
oleh
Zulkornain Yusop
Mac, 1992
Pengerusi Profesor Madya Roslan A. Gbaffar , Ph.D .
Fakulti Ekonani dan Pengurusan
Kajian ini bertujuan untuk mengenal pasti faktor-faktor
yang IneSTpengaruhi pelaburan langsung asing ( PLA ) dalarn sektor
pembuatan eli Malaysia . PLA di Malaysia telah terturpu pada
bidang pertanian dan industri -industri ekstraktif sehinggalah
pada peringkat awal selepas kemerdekaan apabila usaha-usaha
untuk mempelbagaikan ekonorrd negara bermul a . Pada amnya ,
proses perindustrian telah membawa beberapa kesan yang positif ,
tetapi terdapat juga beberapa kelemahan seperti asas industri
dan eksport barangan pembuatan yang sempit dan penggunaan
sumber-surber tEq)atan yang terhad. Ketidakseimbangan dalam
taburan pelaburan di kalangan berbagai industri perrbuatan di
seluruh negara ini adalah berhubung-kait dengan corak PLA yang
xiii
lebih cenderung kepada industri yang tertentu seperti industri
pembuatan barangan elektrik dan tekstil . Dengan itu, adalah
sangat penting untuk membuat satu kajian tentang faktor-faktor
yang InE!lTPengaruhi PLA kerana ianya bol eh memberi sunbangan yang
penting dalam usaha merangka pol isi -polisi yang sesuai bagi
menyeimbangkan taburan PLA di dalam sektor pembuatan di negara
ini . Kajian-kajian yang l epas menunjukkan bahawa aktiviti PIA
bol eh dite rangkan o l eh teori faedah berbanding , teori
organisasi perindustrian serta teori pelaburan. Untuk mengenal
pasti faktor-faktor yang mempengaruhi PLA dal am sektor
pembuatan di Mal aysia , kedua-dua anal isis kuantitatif dan
kual itatif telah dibuat . Dalam analisis kuantitatif , keluaran
kasar negara (KNK) , paras rizab l uar negeri , kadar faedah,
nisbah junlah pengeluaran sektor perd:ruatan/mK, untung semasa
syarikat pembuatan kawal an asing , serta juml ah harta dal am
sisten kewangan terrpatan memmjukkan perhubungan yang posi ti f
dengan PLA manakala kadar pelaburan awam menunjukkan perkaitan
yang negatif . Kesimpulan daripada anal isis kual i tati f
menggaIl'barkan bahawa kestabilan ekonani. dan politik; kehebasan
pengiriman serrul a untung dan royal ti ke negara asal ; kE!lIlldahan
infrastruktur; tenaga buruh yang cekap; kecekapan insti tusi
kewangan; tarif dan per l indungan perdagangan ; kestabi l an
rratawang; kewujudan pasaran; dan kelicinan sektor awam adalah
antara faktor terpenting yang InC!IIPengaruhi PLA .
xiv
afAPl'Jm 1
Ilfl'ROJlJCl'ICIf
Pattern of Foreign Direct Investment in Malaysia
Foreign investors have been invol ved in the economic
development of Malaysia since the beginning of the century with
British caJi>anies playing a leading role . They were engaged
rrainly in the agricultural and extractive industries for the
purpos e of supp l ying raw mate r i a l s to the Bri t i s h
manufacturing industries (Kanapathy, 1970 ) . In 1936, British
investment in plantation industries represented 70 percent of
its total investment in Malaya1 , 17 percent in mining and
13 percent in infrastructural development , commerce, banking
and transport ( Cal l is , 1942 : 10 9 ) . Invol vement by other
nationals was very minirral and this too was limited to the
American and French who were engaged in a smal l scale in tin
mining, and the Japanese who were in iron ore (Al l en and
Doni thorne , 1954 : 124-129 ) . The pattern of investment
which was concentrated in the agricultural (plantation) and
1 Prior to August 31 , 1957 , Malaya was a British colony . On 16th September, 1963 , together with sabah and Sarawak it fonned a new federation cal l ed Malaysia
1
e x t ractive indus t r i es prevai l ed unt i l the ear l y pos t
independent period when the government started to recognize the
need of di versi fying the comtry ' s econanic acti vi ties (Maisan,
1977 ) . The diversification was intended to reduce the over
dependence of the comtry ' s econatU' on the agricul tural and
prirrary carroodities during the early post-independent period
(Ho , 1983 and Fong, 1990 ) .
To i l lustrate the extent of the comtry ' s dependence on
the agricultural and primary carroodities (during the early
post-independent period) , in 1957 , agricul tural sector
accomted for about 46 percent of the total gross domestic
product (GDP) and about 62 percent of the total El'l'Pl oyment .
In 1960 and 1965 , agricul tural sector represented 38 percent
and 32 percent respectively of the comtry ' s total GDP (Tabl e
1 ) . In terms of export , rubber and tin constituted more than
80 percent of the comtry ' s gross export earnings in 1950s ,
and about 60 percent during 1960 and 1965 (see Table 2 for the
detail of Malaysian export carponents) .
The over dependence on the agricul tural and primary
carroodities was not without problems . As Ho ( 1983) stated,
there were four rrajor defects related to the country ' s over
concentration:
'aDl' 1
Nala'li.: 8rOll DoItItic Product b, IIdI.tri.1 Ori,il ( •• perceltate of ., )
1960 1965 1970 1975 1980
Agriculture, livestock, forestry, fishing 38 32 32 30 26
Mining 6 9 6 4 4
Manufacturing 9 10 12 14 17
ConstructioD 3 4 4 5 5
Financ., iDsuraDC' real estate, business 6 6 8 7 7 services
Other services 38 39 38 40 41
3
1985 1989
21 19
10 10
20 27
5 3
9 9
35 32
------------------------------.-------_._-----------------------------_._--------_._._-_.--_._-----
Total 100 100 100 100 100 100 100
I:::.:.:.:.: •• :.::::::::::::::::.::::.:::: •• :.: •• :.::.: ••• ::: •• ::.::.:::::::::::::::::: •• : •• :.:::::
Source: Malaysia, Ministry of Fill.C', EcolOlic Report, various issues
Yule Z
'c .... tJ If 1I1lpia IQlrtJ (II ,.re.tat. of total Ill,.)
4
:::::::::::::::::::::::::::::::::::::::::::::::::::::�:::::::::::::::::::::::::::::::::::::::::
ItelS\ tear
PetroleUi
111uufactured Products
lubber
Pall Oil
tiD
Others
1960
3.7
DI
44
1.7
16
34.6
1965 1970
2.0 16
Da 10
40 33
2.5 5
20.2 20
35.3
1975
9
17
20
14
24
1980
24
21
17.2
8.9
1.9
20
1915 1989
14
35 54.7
8 6.5
10 6.7
3.4 1.8
16.6 16.3
----------... -.--.-.. ---------�---------------------------------------------------_._.----_.-_.
fotll 100 100 100 100 laO 100 100
--------------------------------------------------------------------------------- ----------------.----------_._----------------------------------------------------------------------_._--_._.
1 l a D u fl c t u r e d p r o dac t s i D c lad e f o o d , b ef e r l,e s , t Ob ICCO, teltiles ud clothiD" load products, rubber products, cheaiclls ud petroleUi products, DOD-Ietilic IiDer11 product., letll products, electricil IDd electroDic IIchiDery lid Ipplillces, traDsport equipleDt lid others.
Source: lIallysia, liDistry of riDuce, ICODOIic leport, fariolS issues
5
(1 ) It increased the vulnerabil ity of the econany to
external fluctuation. Since the Malaysian economy was ( in
fact it sti l l is ) very rruch dependent on export sector as
reflected by the high ratios of gross export proceeds over
gross national product (Table 3 ) , the over concentration on the
exports and production of primary commodities made the economy
vulnerable to external fluctuation on which the government had
virtual ly no control. In other words , the econarrdc condition
which was characterized by heavy dependence on export with
narrow base ( l irni ted to a few primary ccmoodi ties ) was very
undesirable and had resulted in a l ess stable danestic econanic
condition because the booms and the depressions of the world
economy were often translated into fluctuations in the prices
o f the expo r t ed commodi t i es in the wor l d market . The
fl uctuations in the prices of rubber and ' tin can be seen in
Table 4 . The price o f rubber ( ribbed smoked sheet , RSSl )
dropped fran 108 . 08 sen (per lb) in 1960 to 70 .04 sen in 1965
and 56 . 43 sen in 1970 , increased to 141 . 68 sen in 1980 and
dropped to 85 . 59 sen in 1985 . Sindlarly the price of tin (M$
per torme) has been fluctuating over the last decades ( 6509 . 37
in 1960 , 11608 . 66 in 1965 and 10990 . 7 6 in 1970 ) . For crude
palm oi l , its price (M$ per tonne) had fluctuated fran 679 . 2
in 1960 to 828 . 3 in 1965 and down to 787 . 2 in 1970 .
table 3
lalarsia: Grall latioDal Product (GIP), Groll Illort Proceeds (GIP)
and Ratio of GIP/GiP
---------------------------------------------------------------------------------------------------- - - ----------------------
Year GNP GEP GlP/GNP ($ mill ion) ($ million) (\)
----- --------------------------------- - - ----------------------
1960 6649 3940 59.3
1965 8632 43 10 49.9
1970 1 1473 5602 48.8
1975 16015 9230 57.6
1980 49422 28 17 1 57.0
1985 72039 457 16 63.5
1989 96447 65800 68.2
------------------------------------------------------------------------------------------ ----------------------------------
Source: Mal aysia, Ministry of Finance, Economic Report, various issues
6
Tlbl. 4
AMra .. Iorld Prieel of Selected E.port eo.odiU ..
Vear\ Ite ..
1960
1965
1970
1975
1980
1985
1989
Ribbed Stoked Sh .. t (RSS1) (sea p.r lb.)
108.08
70.04 ( -35.2')
56.43 ( -19.4')
62.0 ( +9.9')
141.68 (+128.5' )
85.59 (-39.5')
119.05 (+39.0')
Tin (. per tOIl.e)
6509.37
11608.66 ( +78.3')
10990.76 ( -5.3')
15935.9$ ( +45.0')
35716.87 ( +124.n)
29680.00 ( -16.9\)
23020.00 ( -22.4t)
Crude Pal. Oil (. per tonlle)
679.2
828.3 ( +21.5')
787.2 ( -4.9')
1002.2 (+27.3\)
1211.5 ( +20.9\)
1046.0 (-13.7\)
822.2 ( -21.n)
===111= •• = ••••••••••••••••••••••••• :==.=.==.1.= ••• : •• === ••• ==.= ••••• ===.========
Not.: Fioures i. pIT.ath.s •• de.ote perc.lltlg. chlnges
Source: "Illy,il, Balk MegITI, auarterly Ecollo.it Bulletil, vlrious issuts.
7
8
( 2 ) The over concentration on agricul tural and primary
sector in the 1960s was so severe that aloost no industrial
developnent took place. The lack of danestic manufacturing
activities had made the country so dependent on the imports of
manufactured goods to an extent that even relatively simpl e
manufactured consurer items had to be imported . In addition,
it was very difficult to modernize other sectors of the economy
in the absence of industrial developnent .
(3 ) OVer dependence on agricul tural and primary sector
had also l ed to the creation of a dualistic econanic structure .
Since tin mines and rubber plantations were located only in
certain areas suitable for their developnent , and as demand for
the above two products was entirely fram the external sector ,
there was very limited link between these ' 'modern enclaves"
and the traditional agricultural sector . There was aloost no
transfer of technology or ski l l fram the modern sector to the
subsistence sector . As a result , only a smal l section of the
economy benefited from moderni zation brought about by the
devel opment of tin and rubber . This dual istic economi c
structure had accentuated the serious regi ona l and raci al
econanic disparities since a large portion of the indigeneous
popul ation were invol ved in the tradi tiona l subsistence
agricultural and not affected by modernization.
9
(4) The primary sectors , particularly agriculture had
di fficul ties in absorbing the fast growing l abour force
because they were not able to generate sufficient enployment
opportmi ties .
Maisan ( 1977) also concluded that the Malaysian econanic
condi tion during the earl y post-independent period whi ch
specialized in few primary products for export and dependent on
food and other cansuner manufactured goods on irrports , was very
undesirable . It i s al l eged that the average income elasticity
of demand for primary products is significantly l ower than the
average income elasticity of demand for manufactured goods in
the international market which impl ies that when there is an
increase in the level of income , the demand for manufactured
products wi l l increase more than the demand for primary
commodities (Flanders , 1969) . Therefore, specialization (by
less developed countries) in a few primary products for export
and dependent on iJT()Ort of manufactured products fran developed
countries (major exporters of manufactured goods) wil l l ead to
a greater income inequality between the devel oped and l ess
developed countries (Flanders , 1969 : 173 ) . A greater export of
primary products is requi red in order to pay for a
specific volure of imported manufactured goods . Thus , Malaysia
(during the early post-independent period) was in a way worse
off because it was specialized in a few primary products for
10
exports and dependent on irrports of rranufactured goods fran
developed countries .
The above problems related to the over concentration on
agricul tural and primary canoodities provided the irrpetus for
Malaysia to expand the production base and diversify export
(Maisan, 1977 and Ho , 1983) . In the process of di versi fying
the country ' s econ� , the government saw industrialization
( especial ly manufacturing sector) as one of the most �rtant
elements of diversification ( Osman Rani and Haf l ah , 1 9 90 ) .
Consequently, several incentives (wi l l be discussed later) were
introduced to attract foreign and l ocal investors into the
manufacturing sector (Leong, 1990 ) .
Incentives for Investment in Manufacturing
Since the commencement of Malaysia' s industrial ization
era, there have been several policy instrunents and strategies
adopted to promote industrial devel opment . Many incentives
have been offered to local and foreign investors investing in
the manufacturing industries (Asian and Pacific. Developnent
Centre (APDC) and South Paci f i c Bureau for Economic Co
operation ( SPEC) , 1987; and Yong , 1988) .
Initial l y , right after independence in 1957 ,
introduced Pioneer Industries Ordinance ( PIO) 1958
Malaysia
(Appendix