Challenges
Although the Northern Corridor contributes to over a third of the country’s manufacturing exports, several challenges need to be addressed in order to further grow and strengthen this sector.
Increasing Competitiveness in Attracting Investments
Over the past decade, advances in automation have reduced the importance of labour costs in manufacturing, especially in the E&E sector. At the same time, other countries in the Region have become more competitive in attracting foreign investment. Many governments have also offered attractive incentives for companies to invest in their countries, and the offer of corporate tax exemption is therefore no longer a differentiator. Malaysia’s share of FDI in the region has decreased with rising regional competition from Vietnam and Thailand. Global players such as China and India are also attractive FDI destinations for investors.
Percentage Share of FDI Inflows in the Region 1985-2005
Source: World Investment Report (WIR)
Given that Malaysia lacks some of the advantages of these countries – for example, a huge domestic market and abundance of low-cost labour, Malaysia, and the NCER in particular, needs to become an attractive location for foreign and domestic investment by creating other strengths such as human capital and research excellence.
Increasing Value-Add
While output and exports of the E&E sector are high, the percentage of domestic value-add in output is still relatively low and there has not been an increase from 5 years ago. For example, in 2005, total output of the E&E sector in 2005 was RM282.8 billion and exports were RM265.1 billion. However, value-add was RM43.3 billion or 15.32% of output.
| 2000 | 2005 | |
|---|---|---|
| RM Million | ||
| Value-add of eletronics sector* | 37,342 | 43,321 |
| Total output of eletronics sector ** | 212,060 | 282,779 |
| value-add as percentage of production | 17.61% | 15.32% |
Electronics Sector Output and Value-Add, 2000 and 2005
*Source: Ninth Malaysia Plan, p. 109
**Source: Department of Statistics Yearbook, 2005, p. 99
In order to increase the sector’s contribution to the economy, industries in the Northern Corridor have to move to higher value-add activities and deepen their industry linkage. This will be facilitated by an enabling and competitive business environment, fostered by the Government.
Malaysia, and particularly the Northern Corridor, needs to take advantage of the companies and investments that are already in place in the assembly and test section of the high-tech electronics value chain, and encourage these companies to locate their design and R&D activities in Malaysia. This requires the Government to give assistance and incentives that would prompt these companies to locate such projects in the NCER. At the same time, continuous human capital development is required so that the labour force has skills and expertise aligned to the needs of industry.
Addressing Rural-Urban Migration
The concentration of manufacturing activities in the Northern Region has led to imbalanced industrialisation amongst the Northern Region states and rural-urban migration. This reinforces income inequality and poverty in the rural areas. There is a need to promote more balanced industrial development, offer a greater choice of employment opportunities in rural areas and prevent over-development of urban areas. This can be done, for example, by promoting certain types of manufacturing activities like downstream agriculture businesses in rural agricultural areas.