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The international dimension of economic activities

Brief background to economic globalization

Global forces and transnational flows are becoming more and more dominant at the national as well as local levels. This became discernible in the late 1980s because improving communications technology brought about an elaborate communications infrastructure and institutional arrangements that facilitated international exchange. Time and cost distances were reduced as a result of the 'communications revolution" (Knight, 1989). Consequently, commercial, intellectual, scientific, and cultural exchanges across national boundaries are now becoming very common.

Globalization is basically a post-colonial, post-World War II phenomenon and began with direct investment by industrial corporations and the establishment of production operations outside their own countries. The foundations of the present global economy were laid by US corporations (eager, 1975). This was later followed by European firms when London was able to regain its role as a centre of international finance (King, 1990). Today, the formation of major trade blocs, which seems to be gaining momentum, is accelerating the globalization of economic activities. This is because, as trade barriers are removed within a trade area, non-members are placed at a disadvantage by being left out of such a major market unless they have direct foreign investment. As the power of global economic forces is just beginning to be felt, regional and national markets are gradually being integrated into the expanding global systems through trade, travel, investment, and technology transfer.

In fact, an international framework of organizations is evolving to facilitate and govern transaction flows that weave national systems into the global fabric. These can be seen in the form of IGOs (international government organizations), TNCs (transnational corporations, both industrial and service conglomerates), and philanthrophic and cultural foundations. An analysis of 10,000 major public international organizations (IGOs and NGOs) indicates that two-thirds of the secretariats of these organizations are located in 73 cities in the world, with Paris ranking as the highest (866 secretariats) and Kuala Lum pur ranking 40th, with 37 principal or regional secretariats (Knight, 1989). As industrial corporations expand their operations, nonindustrial corporations, banks, and advanced service firms specializing in banking, finance, insurance, management consultancy, engineering, and advertising services are also internationalizing their operations in order to meet the growing needs of their clients. This section will attempt to study the pattern of direct foreign investment in the industrial sector first, followed by some of the advanced service sectors such as merchant banking, advertising, and aviation and tourist statistics, to show the increasing globalization of the country's activities.

Globalization in the manufacturing sector

In the 1980s, the main catalyst in the growth of the Malaysian economy was the expansion of the industrial sector resulting from the outward-looking industrialization strategy and the encouragement of export-platform industries (Ahmad Sarji, 1988). The manufacturing sector was not only the leading growth quarter but also the largest generator of employment opportunities. In 1990, the manufacturing sector contributed 79,900 new jobs, accounting for 31.6 per cent of all new jobs created in the country (Malaysia, 1991a). The export of manufactured goods increased and was worth M$46,654 million in 1990. The increase in the exports of manufactured goods may be attributed to the increasing numbers of export-oriented projects, increased productivity of existing firms, and the country's export strategies, especially the increased demand for electrical and electronic products and resource-based products. The manufacturing sector also performed well in domestic-oriented industries, principally the transport equipment industry, which increased by 37.6 per cent over the previous year. Thus, the growing internationalization of the Malaysian economy in the manufacturing sector over the period 19801990 is clear, which had concomitant implicit or unintended spatial consequences for antecedent urban growth and development.

The account of development in manufacturing in Malaysia since Independence may be conveniently divided into two periods. The first was the import-substitution industrialization period from 1957 through to the late 1960s when links with the outside world were largely by virtue of its colonial status. During this period, industrial growth was attributed to import-substitution efforts, particularly between 1963 and 1968. Industrial growth during the period 1968-1971, however, was due more to domestic demand expansion (Kamal Salih, 1988). By then, substitution appears to have been exhausted and caused an increase in import inputs at the process level. It was only logical that the industrial development strategy be geared towards export orientation.

The second phase of export-oriented industrialization from the 1970s onwards was marked by the rapid growth of industrialization, which was encouraged through the development of Free Trade Zones (FTZs) and other incentives under the 1968 and 1974 Acts. The advancement of a large export sector usually requires the presence of multinational corporations to provide the capital, technology, and access to foreign distribution networks. As Malaysia began to ease its control of direct foreign investment, the number of approved foreign investment projects from more than 45 countries increased almost tenfold between 1981 and 1990. Many of these involved transnational corporations related to the semi-conductor industry. By 1986, there were 23 semi-conductor assembly firms, 15 of which were located in Penang, which represented the largest single concentration of offshore semi-conductor assembly plants in the third world (Kamal Salih et al., 1987).

The nature of foreign investment may be further highlighted. During the period 1981-1990, a total of 6,138 industrial projects were approved, providing job opportunities for some 837,829 persons. The total proposed capital investment of these projects amounted to M$80,303.8 million, of which 35.5 per cent was proposed called-up capital while the balance was in the form of loans. For the period 1981 to 1990, out of the total proposed called-up capital of M$28,477.6 million, 48 per cent was from domestic sources while foreign equity made up the remaining 52 per cent. In terms of the total proposed capital investment in approved projects, 49.9 per cent, or M$40,150 million, between 1981 and 1990 was from foreign sources. Table 10.4 shows that Japan, with a total foreign investment of M$10,219.9 million, was the major source of foreign investment. It was followed by Taiwan (M$9,681.4 million), Singapore (M$3,057.6 million), the United Kingdom (M$2,375.1 million), the United States (M$2,138.0 million), Hong Kong (M$1,382.6 million), and Indonesia (M$1,326.5 million). Foreign capital investment from these seven countries alone constituted 75.2 per cent of the total foreign capital investment. In 1990, the major sources of foreign investment, in order of importance, were Taiwan, Japan, the United States, Singapore, the Republic of Korea, the United Kingdom, Indonesia, and Iran. These eight countries constituted 86 per cent of the total. The unusually large investment from Indonesia and Iran was for joint projects to produce petroleum products.

Table 10.4 Direct foreign investment by country of origin, 1981-1990

Source: Unpublished data from Malaysian Industrial Development Authority, Malaysia.

Table 10.5 Direct foreign investment in approved projects by industry, 1981-1990

Source: Unpublished data from Malaysian Industrial Development Authority, Malaysia.

The main areas of foreign capital investment in projects approved between 1981 and 1990 were electrical and electronic products, basic metal products, chemicals and chemical products, petroleum products, wood and wood products, and food products (table 10.5). In terms of fixed assests, of the 3,520 companies in production in the manufacturing sector, 40.2 per cent of the total was from foreign investment, largely from Japan, Singapore, the United States, and the United Kingdom (table 10.6). Out of the 906 projects approved in 1990, 21.7 per cent were wholly owned, 40.8 per cent were joint ventures between Malaysians and foreign investors, and 37.5 per cent were wholly foreign owned. Of the joint ventures, 41.9 per cent were with majority Malaysian equity, 52 per cent were with majority foreign equity. Twenty-five of the projects approved in 1990 involved capital investment of more than M$100 million.

Table 10.6 Major sources of foreign investment in fixed assets, 1990

Source: Unpublished data from Malaysian Industrial Development Authority, Malaysia.

Thus, it is very clear that, in the manufacturing sector, foreign investment plays a very important role in the economic buoyancy of the country. In fact, in line with the priority areas identified in the Second Outline Perspective Plan (Malaysia, 1991b), the promotion strategies are to relate to resource-based industries, high value-added, high-technology industries, and small- and medium-scale supporting industries. These strategies will be intensified in all technology- and capital-exporting countries with "immediate potential" such as Japan, Taiwan, Germany, the United States, the United Kingdom, Singapore, and Hong Kong.

It is also quite clear from tables 10.4 and 10.6 that Asian private sector investment is particularly important, especially from Japan, Taiwan, Singapore, and Hong Kong. In the early 1970s, of direct foreign investment flows into South-East Asia, 12 per cent was from Japan, 20 per cent from Europe, and more than 50 per cent from the United States. By 1990, however, Japanese direct foreign investment surged to nearly 40 per cent of the total. This is a clear indication of the increasingly important role played by Japan (Hirokazu, 1989). The question, then, is whether the investment flows from these Asian countries will be sustained, because funds are also being attracted to the European Union as well as to the United States (Jegathesan, 1991). More relevant to the present discussion is the significance of this facet of increasing globalization in the manufacturing industry as regards the urban system. This will be discussed in the next section. What is quite clear, however, is that any change in the global economy, particularly in the economic performance of the ANICs (Asian newly industrialized countries of South Korea, Taiwan, Hong Kong, and Singapore), which are among the top foreign investors in Malaysia, will have a prospective influence on Malaysia's industrialization strategies through direct foreign investment and subsequently on the urban environment. That being the case, urban growth will be driven by globalization rather than by nationalization.

Merchant banking

The preceding discussion has dealt in detail with the pattern of direct foreign investment in industry in the country. In the area of financial banking, too, foreign interest has been felt since the 1970s. In the 1970s, an important development in the financial world was in the domestic merchant banking industry, known otherwise as investment houses, investment finance corporations, or finance and security companies. These play a significant role in developing local money markets and the stock exchange. As manufacturers require more long-term investment capital, the merchant banks, which are actually partnerships between foreign experience, capital, and technology and local businesses and finance companies, provide or arrange for much of the loans required through international connections and imported skills (Skully, 1983). Unlike foreign banks, the merchant banks are generally established not as local branches of their overseas parents but as locally incorporated enterprises and are also locally managed. The first such merchant bank was established on 8 October 1970-Chartered Merchant Bankers (Malaysia) Bhd. Since then some 12 such merchant banks have been established. In part, this may be due to the situation of high capital mobility in Malaysia (Haque & Montiel, 1991). The number of merchant banks has been stabilized because the Malaysian government feels that the present number of firms is more than adequate for the country's needs.

Table 10.7 shows the pattern of ownership equities in the various merchant banks in Malaysia. Some 11 countries, namely, the United States, Japan, Hong Kong, Kuwait, Saudi Arabia, France, Germany, Switzerland, the United Kingdom, the Philippines, and Australia, have invested in these financial ventures, even though Malaysian equity in each of the merchant banks is in the majority. An analysis of the pattern of location of these merchant banks reveals that all 12 merchant banks were located in Kuala Lumpur and only two of them had branches in other parts of the country in Penang, Kuching, Kota Kinabalu, and Johore Bahru.

Table 10.7 Equity distribution of merchant banks in Malaysia

Source: Skully (1983).

Global advertising

Although global advertising in Asia is only just beginning, the development of universal media in Malaysia is making itself felt very strongly. In fact, the Asia-Pacific region is expected to lead the growth in the advertising industry in the 1990s. Growth in "global media reach," whether in billboards, journals, magazines, newspapers, cinemas, radios, televisions, and other electronic media, in Malaysia is so alarming that it has led to what has been termed "advertising clutter." For instance, the number of TV commercials per day has increased rapidly. In 1989, there were 264 TV commercials per day; in 1990, it was 382; and in 1991 it was 435. The increase in advertisement expenditure (Adex) is attributed to the buoyant economy of the country. Between 1988 and 1991, Adex grew by approximately 25 per cent per year. In 1988, it was M$0.5 billion (US$200 million) but in 1991 it was estimated to have reached almost M$1 billion (US$400 million). The largest contributor was tobacco advertising (16 per cent of Adex), but the biggest growth was in the apparel, financial services, and entertainment sectors - categories directly associated with a form of "corporate posturing."

Clearly, as the various economic activities expand their global activities, international advertising firms also need to position themselves in Malaysia in order to meet the growing needs of their clients in the competitive world. DY & R. one of the world's fastest-growing international advertising agencies, with offices in Malaysia, Thailand, Taiwan, China, Australia, New Zealand, the Philippines, Singapore, Japan, Hong Kong, Indonesia, and India, maintained that the growth in advertising in Malaysia would be limited only by the shortage of talent pool. The increase in global advertising can be seen by the fact that, out of 44 advertising agencies in Malaysia in 1991, one was wholly foreign owned and 45.5 per cent were joint ventures with other companies from the United States, the United Kingdom, Singapore, and Japan. In terms of locational distribution, 63.6 per cent were located in Kuala Lumpur, and another 31.8 per cent in other parts of the Klang Valley. Only two were located outside the KLCUR area (Asian Advertising, 1991).

Air traffic and tourist flows

The integration of the national market into the expanding global system may also be seen in air traffic and tourist flows. Figure 10.2 shows the trend charts for air traffic statistics for the period 19811990 for total commercial aircraft movements, total passenger movements, total cargo movements, and total mail movements. Commercial aircraft movements were steady around 200,000 until 1987 but reached some 280,000 in 1990 (Malaysia, 1985a, 1990). Passenger movements, stable in the first half of the 1980s at around 10 million, began to rise in the latter half. The volume of cargo movements steadily increased, with a sharp rise from 1989. A rising trend in all these activities is to be expected in a developing country like Malaysia.

Table 10.8 shows the percentage increase in traffic movements according to the domestic and international contribution. What is interesting is the contribution of international movements to the trends. International aircraft movements increased by 42 per cent between 1985 and 1990, whereas international passenger movements increased by 78 per cent. International cargo movements showed a substantial increase of 117.9 per cent in the latter half of the 1980s. All these trends indicate the increasing integration of Malaysia into the global economy.

The very rapid growth of international tourist travel worldwide has been one of the most notable phenomena in recent years. The organization of tourist travel has increasingly reflected the almost universal extension of global commodity production into the service sector (Britton, 1982). Table 10.9 shows the tourist arrivals in Peninsular Malaysia, Sabah, and Sarawak from 1980 to 1990. It is obvious from the table that, apart from Sabah, which shows a fluctuation over the period, the pattern of tourist arrivals was one of consistent increase for Sarawak and Peninsular Malaysia. In 1980, total arrivals in Malaysia as a whole were about 2.2 million, but these rose to 3.1 million in 1985 and 7.4 million in 1990 - an increase of some 230 per cent over the ten years.

These tourists originated largely from other ASEAN countries (75 per cent), with Singapore and Thailand being the major sources. In 1980, outside of ASEAN countries, the major sources of tourists were Japan, Australia, the United States, India, the United Kingdom, and Hong Kong. This was basically the trend until 1989 when other major sources included Taiwan, West Germany, and South Korea. By 1990, the major sources of tourists continued to widen to include (on the basis of more than 30,000 tourists per year) the Middle East, Scandinavia, France, and Belgium.

Trend Charts

Fig. 10.2 Air traffic movements, 1981-1990 (Source: Malaysia, 1990) - Commercial Aircraft Movements

Fig. 10.2 Air traffic movements, 1981-1990 (Source: Malaysia, 1990) - Passenger Movements

Fig. 10.2 Air traffic movements, 1981-1990 (Source: Malaysia, 1990) - Cargo Movements

Fig. 10.2 Air traffic movements, 1981-1990 (Source: Malaysia, 1990) - Mail Movements

Table 10.8 Analysis of air traffic statistics by domestic and international distribution, 1985 and 1990

Sources: Malaysia (1985a, 1990).

Table 10.9 Tourist arrivals in Peninsular Malaysia, Sabah, and Sarawak, 1980-1990

Source: Tourist Development Corporation, Malaysia.

Table 10.10 shows the distribution of hotel guests in Malaysia. It is clear from the table that foreign guests have been concentrating in Kuala Lumpur and Penang. This may be partially explained by the fact that the major international airports in the country are located in Kuala Lumpur and Penang. Further, the capital area has also been the favoured spot for holding international conferences, meetings, conventions, exhibitions, and sporting events. For instance, in 1984, 75 per cent of such meetings were held in the capital region, and in 1991, although the number of conferences had increased from 70 to 118, the proportion that took place in Kuala Lumpur remained the same (Malaysia, 1984/85, 1991c).

Table 10.10 The distribution of foreign hotel guests in Malaysia, 1990

Source: Unpublished data from Tourist Development Corporation, Malaysia.

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