How industrial is Penang?

Since the 1970s, Penang has seen itself as an industrial centre for the country. But what do we know about our investors, be they foreign or local? And how effective are investments in our key industries? What are the jobs they create, and how many? And do our industries differ in significant ways from those found in other parts of the country?

What is the growth potential of industrial investments?

Everybody knows that output can only come with inputs. Factory operations rely not only on labour and raw materials but also on machines and infrastructure. Production capacity increases as investments increase, and this capacity put into operation gives us output. Economists have a keen interest in the relation between investment input and production output.

While we can assume that technology affects how much input is required to achieve a certain output, reliable data on investments and on output are complicated by decisions made in immediate response to market demands, which go up and down every few years or so.

Chart 1 shows data on Malaysia’s investments in the manufacturing sector as well as the year-to-year changes in manufacturing output. If we assume theoretically that investments made now will increase output many years hence, then the annual increase in manufacturing output since the early 90s may perhaps be attributed to the sharp rise in investments made aft er 1988. Since 1997, the wide swings in output were most likely to have been caused by turbulence brought by the East Asian financial crisis.

What new jobs have been created through investment projects from 2009?
The types of enterprises investments go into in Penang vary year to year. In 2009, medical devices ranging from masks to disposable medical electrodes and orthopaedic implants received the highest investments (each investment project valued at more than RM100mil) with each project creating, on average, more than 300 jobs. Another area of high investment was light emitting diodes or LED where each project created more than 200 jobs. Other high value investment and employment creating projects involved integrated circuits or ICS and biopharmaceuticals. Tool and die machining and the production of specialised parts and components that go into final products made up the most varied and numerous investment projects, even though on average they were relatively small (RM10mil or so) in capital outlay and therefore could only create relatively fewer jobs, as can be seen on Table 1.

How many jobs do investment projects create in Penang?

Most people have come to realise that 2009 was a slump year for the economy, which contracted by three percent. Investments in industry in Penang probably created fewer than 8,000 new jobs in total. This was not an encouraging sign since this makes up only one- and-a-half per cent of Penang’s half million people workforce. If we assume that the population grows at more than two per cent a year, new jobs are not being created fast enough. But then again, manufacturing makes up only half of Penang’s economy, which means that if the other half of the economy is able to invest and create as many new jobs, the actual situation would not be too bad.

Job creation through investments in industry fared much better in previous years. Chart 2 shows the number of jobs created since 1983. The four-year moving average gives a clearer picture since this smooths out peaks and slumps that occur in certain years. It can be seen that in the last decade some 12,000 new jobs were created every year through investments in Penang’s industries.

Who are the foreign investors in Penang’s economy?

If you suppose that people from rich countries are those most likely to invest outside their own countries, you would be quite correct. Chart 3 shows the country of origin of foreign investments in Penang’s industries according to per capita income measured in purchasing power parity (i.e., adjusted for what one American dollar can buy when spent in these countries). It can be seen that most countries that invested in Penang in 2009 were the richer ones, ranging from Luxembourg (ranked first) to Hong Kong (ranked 28th). However, being rich says nothing about the amount they invested, because the same chart shows that comparatively lower income countries like Taiwan and China invested much more in volume in Penang than the rich ones.

Perhaps the amount of investments depended on trade links. Unfortunately, trade data specific to Penang is unavailable. Using total trade data (exports plus imports) for Malaysia, Chart 4 shows that there was little association between the amount of trade on one hand and the amount of investments on the other. The countries that invested in Penang in 2009 can be divided into three groups: those that traded a lot with Malaysia, those that traded less, and those that hardly traded at all with Malaysia. If we were to add up the total amount invested in Penang in 2009 by countries in each of the three groups, we find that they amount to about the same, which tells us that trade linkage has not been a significant factor where foreign investments in Penang were concerned.

Do investments in Penang occur in the same sectors as the country?

When we compare Penang with Malaysia, we need to keep in mind that less than six per cent of the country’s population live in the state, while the state economy contributes more than eight per cent to the country’s gross domestic product or GDP. However, if we focus only on the manufacturing sector, Penang’s contribution is more than 16% of Malaysia’s manufacturing output.

Manufacturing output should give some indication of the amount of investment put in, and hence investments in Penang’s industries would make up an important share of the total investments made in Malaysia as a whole.

Chart 5 shows that in 2009, the largest amount of investments for projects approved in Malaysia went to the chemicals and chemical products sector, totalling about RM8bil. Although the amount of investments (RM445mil) in this sector was also sizeable in Penang, it made up only six per cent of the country’s total. Across the various sectors, the share of investments in Penang’s industries tended to be less than 16%, suggesting that should investments fall relative to the national share, Penang’s contribution to the country’s manufacturing sector would drop.

The only exception was the electronics and electrical products sector. In 2009, investment projects approved for this sector in Penang had a combined value of rm502mil, which was nearly 20% of the rm2.6bil worth of projects approved for the same sector in Malaysia as a whole. This suggests that the perception that Penang is an important manufacturing hub in Malaysia (five per cent of the population contributing 16% of the total manufacturing output), may be wrong. Indeed, Penang may be only an electronics and electrical manufacturing hub, and little more than that.

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