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TPPA – The Winners and the Losers

How will Malaysian firms and Penang’s industries fare once the mega-FTA is in place?

The Trans-Pacific Partnership Agreement (TPPA) is a comprehensive free trade agreement (FTA) that involves 12 Pacific Rim countries: Singapore, Brunei, New Zealand, Chile, the US, Australia, Peru, Vietnam, Malaysia, Mexico, Canada and Japan.

Recently, three reports on the TPPA that relates to Malaysia have been issued. The first report by PricewaterhouseCoopers (PwC), “Study on Potential Economic Impact of TPPA on the Malaysian Economy and Selected Key Economic Sectors”, viewed the potential economic costs and benefits to Malaysia using a Computable General Equilibrium (CGE) model. PwC concluded that the TPPA will benefit the textiles, E&E, automotive, and plastics products and wood products sectors. The effect is neutral for the construction, palm oil, and retail and pharmaceuticals sectors, but it will be negative for the oil and gas sector.

The second report (“National Interest Analysis of Malaysia’s Participation in the Trans-Pacific Partnership”) by the Institute of Strategic and International Studies covers national interests. Weighing the opportunity cost of not joining, the report concluded that the TPPA is in line with national interests and that it “should still set into motion significant structural changes that will result in net positive outcomes”.

The third report by the United Nations Conference on Trade and Development (UNCTAD), “Trans-Pacific Partnership Agreement (TPPA): Implications for Malaysia’s Domestic Value-Added Trade”, highlights the shortcomings in the use of CGE models to analyse trade agreements. Instead, the report uses domestic value added (DVA). It concludes that “Malaysia will experience a decline in its DVA exports of US$17bil on an average per annum. This will lead to deterioration in its BOT[1] with TPPA partner countries”.

According to the first report by PwC, the TPPA will benefit the E&E sector. Image credits: Ivan Lim
According to the first report by PwC, the TPPA will benefit the E&E sector. Image credits: Ivan Lim

Evaluating Competitiveness

Our study differs from the abovementioned ones in several ways. We focus on the competitiveness of Malaysian firms measured against their peers using: 1) a sample of TPPA countries; 2) countries which are keen to join the TPPA but are not currently part of the 12 founding partners; and 3) other countries with similar levels of development compared to Malaysia.

In our report (available from www., Malaysian firms are categorised into: 1) Government Linked Companies (GLCs) or companies with significant Bumiputera ownership (Bumi); 2) large private non-GLCs; and 3) small companies. Under carve-out clauses in the Malaysia chapters in the TPPA, the first category of firms enjoys certain exemptions and exclusions. Unless firms in the second category operate in certain industries, they will not be included in carve-out clauses in the TPPA. Firms in the last category consist of those that have actively traded stocks and are not in the FBMKLCI index. These are proxies for small and medium-sized entities.

We evaluate firm competitiveness from four angles. Firstly, we look into firm size as measured by market capitalisation and total assets. Larger firms are likely to be more competitive due to their ability to raise finances, achieve operational efficiencies, negotiate better business terms and participate in innovation. They are also more likely to attract better talents and be able to capitalise on the TPPA. These are all expected economies of scale.

Secondly, we use stock market valuation metrics such as Price-Earnings, Price-Sales and Market-to-book-value ratios to infer the firms’ competitiveness as perceived by the market. Generally, a higher ratio implies that the firm has higher growth. Besides, as stocks can be used as acquisition currencies, highly rated firms can acquire other firms using their paper.

Thirdly, we look at firm level leverage using net debt per share scaled by stock price, total debt to capital employed, total debt to total assets and total debt to total equity ratios. We are cognisant of corporate finance theories of optimal leverage ratios and of the fact that industry dynamics often determine leverage. Higher or lower leverage need not necessarily indicate better competitiveness; nevertheless, a cross-sectional comparison within an industry or sector would give an idea of the firm’s need and access to capital.

Lastly, we assess the firm’s competitiveness using profitability as measured by return on asset. This ratio captures the return on investment and firms’ ability to earn profits from its capital base.

Our sample includes over 3,000 firms from 13 countries in Asia, functioning between 1997 and 2015. We further subdivide our sample firms into 10 major industries and 41 sectors. We specifically investigate the period after 1997 because the Asian Financial Crisis that broke out that year provides a good structural break and would have synchronised the economic cycle of many countries in our sample.

Intel's early days in Penang. The state is a major receiver of FDIs in Malaysia.
Intel's early days in Penang. The state is a major receiver of FDIs in Malaysia.


Key Findings

Malaysian firms are generally smaller measured by market capitalisation and have smaller Total Assets; they are disadvantaged in achieving economies of scale. Larger firms in Malaysia are more reliant on borrowings versus smaller firms and versus their large overseas peers. Malaysian GLCs are fairly competitive versus their foreign peers, and large GLCs/Bumis are generally much larger and are higher rated, with access to borrowings. Arguably, these firms may be much better placed to compete as well as benefit from the TPPA, whereas smaller firms in Malaysia are generally substantially smaller than the large ones, have lower leverage, are lowly rated by the stock market (with market valuation less than book value) and are less profitable in many industries. These firms are likely to feel the competitive pressure arising post-TPPA.

Our analysis by industries and sectors shows that small firms are generally not competitive. This is quite apparent in the oil and gas industry, where the smaller players are either loss-making or earning profits that are lowest among their peers. Among banks in Malaysia, although they have profitability comparable to their peers and above average stock market ratings, they are reasonably small as measured by Total Assets. Hence, they may not be able to compete effectively. Perhaps due to these reasons, there are exclusion clauses covering both industries. As expected, technology firms in Malaysia are not competitive; however, due to rapid technological changes, our methodology which uses historical data may not capture the future opportunities in technology.

Firms not competitive in the basic materials industry are only concentrated in the mining sector. Malaysian firms operating in chemicals, forestry and paper, and industrial metals and mining sectors are reasonably competitive. Within industrial firms, apart from one non-GLC firm, E&E equipment companies exhibit below average competitiveness performance. As a whole, Malaysian firms in the consumer services industry are reasonably competitive, but may suffer more pressure from external competition due to their high debt, lower profits and smaller scale.

On the other hand, Malaysian consumer goods firms, in particular food producers, seem to demonstrate size, leverage, profitability and stock market ratings that indicate that they are reasonably competitive. This also applies to the telecommunications industry where GLC/ Bumi firms, non-GLC firms and even small firms have competitiveness.

The TPPA debate in Malaysia has also touched on healthcare issues. Although lacking in scale, Malaysia has two small but highly profitable firms in the pharmaceutical and biotechnology sector. Nevertheless, Malaysia leads in the healthcare equipment and services sector; Malaysian private health company IHH Healthcare is very large and is highly rated by the stock market. A high quality healthcare system is dependent on many factors such as accessibility to the best drugs, good delivery of service and protection of intellectual properties. Our findings show that while Malaysia lags in healthcare R&D, it leads in the delivery and private provision of healthcare.

The utilities industry is highly regulated and considered strategic in many countries. We find that Malaysian utilities perform well on many aspects and should be able to capitalise on the opportunities arising from TPPA.

In conclusion, our analysis shows that there are TPPA “winners” and “losers”. While joining the TPPA could be a strategic decision for Malaysia, the right balance needs to be struck such that the “losers” (whether individuals or businesses) can have an alternative path of developing.

Although exclusion clauses can alleviate competitive forces in the short term, this may come at the expense of long-term development potential. This is particularly so due to the negative signals sent from the exclusion clauses. Malaysia may have lost an opportunity to undertake fundamental reforms to increase its competitiveness.

In this situation, we may have won the battle in getting the necessary domestic acceptance to join the TPPA, but lost the war in not addressing the structural issues impeding Malaysia’s ability to attract capital, retain talent and incubate innovative ideas.

Motorola office at Bayan Lepas.
Motorola office at Bayan Lepas.


TPP and its Impact on Penang

With the implementation of this mega-trade agreement, new chances and challenges will arise for Penang’s common people as well as business community.

Penang's economy is an open one and is therefore strongly sensitive to external macro-economic factors. In 2014, its exports and imports amounted to RM173bil and RM155bil respectively. Its GDP was RM67bil, and its exports and imports were 250% and 230% of GDP, indicating that Penang is an economy even more open than Malaysia’s

The services and manufacturing industries contribute almost equally towards the state’s GDP at over 47%. Bayan Lepas and other industrial areas in the state contribute significantly to the world’s E&E market, and Penang actually leads in the field of medical devices, shared services outsourcing (SSO), tourism, medical tourism and financial services in the region.

Additionally, Penang is a major receiver of Foreign Direct Investments (FDIs) in Malaysia. According to Ministry of International Trade and Industry (Miti) statistics, FDIs accounted for RM64.9bil of RM86.1bil total investments received by Penang from 1980 to 2014, creating over 400,000 jobs.

The Importance of Close Ties with World Economies

The recent study by PwC[2] projects an increase of US$107bil-US$211bil in GDP over the period of 2018-2027 for Malaysia, raising the GDP by 0.60-1.15 percentage points. Reduction in nontariff measures (NTMs) is expected to be the main contributor to these gains. Nonparticipation in the TPPA would result in an opportunity cost to growth[3] of 0.62-1.18 percentage points in 2027. The E&E, automotive and plastics industries can expect output growths of 0.60-1.22, 0.47-0.86 and 0.42-0.66 percentage points respectively in 2027. Growth in these industries, which form a significant part of Penang’s manufacturing sector, would add to Penang’s income.

Monthly trade data show that Penang recorded trade surpluses since January 2005 for most months except in March 2008, and August and October 2014, peaking in May 2008 at RM8.1mil. This demonstrates that Penang is a net exporter to the rest of the world. Collectively, TPPA partners contributed RM108.8bil (37.14%) to Penang’s trade volume in 2013, with RM53.4bil in exports and RM55.4bil in imports (2013). Penang was a net importer of goods from TPPA member countries in 2012 (-RM3.06bil) and 2013 (-RM1.93bil), and a net exporter to TPPA countries from January-November 2014 (RM3.5bil).

Ranked by the sum of imports and exports, three TPPA members (the US, Japan and Singapore) are among Penang’s 10 largest trading partners. In total, these countries represent RM35.2bil (2013) or 13.8% of total exports. Additionally, four TPPA member countries (the US, Japan, Singapore and Vietnam) are present in Penang’s top 10 sources of imports, amounting to a total of RM52.8bil or 37.4% (2013).

The TPPA’s impact on Penang’s trade balance will depend primarily on its influence on Penang’s present and future trade relations with TPPA countries, particularly the US, Japan, Singapore and Vietnam, assuming the importance of these countries as Penang’s main trading partners persists into the future. Other TPPA countries will likely have large potential for trade growth with Penang[4].



At the national level, PwC expects exports and imports to rise following the TPPA, but imports are expected to rise faster than exports (0.65-1.17 percentage points; 0.54 - 0.90 percentage points). Thus, Malaysia’s trade surplus is expected to decrease in size. While a shrinking trade surplus is not inherently bad, an increase in imports could adversely impact the fortunes of less competitive local firms. Assuming Penang is a net importer to TPPA countries, Penang’s trade surplus can be expected to decrease following the TPPA[5].

With the agreement signed, Penang will likely continue to receive large amounts of FDI. These investments should increase the value-added export to further develop the state's output in terms of high-quality products. As Penang is export-oriented, companies will surely benefit from a more liberalised market. Bigger companies with sound financial foundations will gain from newly opened key markets. Smaller and medium-sized companies are likely to face more competition from international players and should upgrade their facilities to meet advanced international standards to sell their products.

Along with the many initiatives by the state government, the promotion of value-adding industries and high-quality exports to increase the BOT is important in order for Penang's economy to benefit from the TPPA. Additionally, Penang must continue to attract high-quality companies to produce in Penang as well as ensure an excellent workforce and education; producing more value-added products is essential if Penang is to benefit from the agreement in the future.

As markets open up between TPPA member countries, imports are likely to rise. The accessibility of foreign products will be easier for Malaysian consumers and prices are likely to drop.

Chinese tourists in George Town, on an incentive trip last year. Private investments encouraged by the TPPA will likely increase growth in Penang's tourism industry, but not without drawbacks. Image credits: Pocket News
Chinese tourists in George Town, on an incentive trip last year. Private investments encouraged by the TPPA will likely increase growth in Penang's tourism industry, but not without drawbacks. Image credits: Pocket News

Impacts on Various Industries


SSO investments to Penang would largely come from TPPA countries, especially the US and Singapore, given that the TPPA accords more favourable terms for investors (in “National Treatment”, “Minimum Standard of Treatment” and “Market Access to Cross-border Trade in Services”). Penang would be appreciated as an attractive place for more business process outsourcing (BPO) and knowledge process outsourcing (KPO) investment projects. These new investments would naturally create more high income jobs for local residents. As a result, the average household income in Penang will increase.

However, under TPPA, the government will no longer be able set any requirement conditions for investments on the transfer of technology, production process or other proprietary knowledge. A shortage of skilled workers may be the impediment for Penang to gain the maximum benefits from TPPA investments in SSO.


Given the upward trend in tourism in terms of number of visitors to Penang, more investment interest from TPPA countries (especially Singapore) would be aimed at properties and tourism-related businesses such as accommodation, and food and beverages. However, most tourism-related job opportunities would still largely be limited to local residents, such as tour guides and taxi drivers. Besides, professions such as valuers and quantity surveyors in the property sector value chain are also limited to local players. Also stipulated in the TPPA carve-outs (Annex I), foreigners are not allowed to operate Malaysian cuisine restaurants, supermarkets, mini markets, textile shops and so on. However, they could own and operate hypermarkets, departmental stores, franchise businesses and convenience stores, once they fulfil certain conditions set in Annex I. Hence, private investments encouraged by the TPPA will likely increase growth in Penang’s tourism industry, albeit with a small increase in TPPA visitors (apart from Singapore).

The drawbacks are, under the TPPA, foreign-owned incorporations would be treated no differently from local enterprises; therefore, foreign-owned incorporations would have more advantages due to the large capital they bring in. This might pose strong competition to some domestic businesses – increased foreign investment in hoteliers and eateries might displace or drive out traditional businesses in the historic town enclave, thus risking affecting the intangible value of the Unesco World Heritage Site. Overdevelopment in tourism might affect the local environment and multicultural dynamics too.

Medical operation in progress. While Malaysia lags in healthcare R&D, it leads in the delivery and private provision of healthcare.
Medical operation in progress. While Malaysia lags in healthcare R&D, it leads in the delivery and private provision of healthcare.


Medical Tourism

There will be lower import cost for "state-of-the-art" healthcare facilities and medical diagnostic equipment and products after tariff and non-tariff measures are removed under the TPPA. A large majority of these are imported from Japan and the US. The purchase of these items would propel Penang to become a high-tech medical city that is affordable for the local public and medical tourists. All medical practitioners holding professional medical jobs such as doctors, nurses and dentists would still be restricted only to qualified locals.

However, there may possibly be a higher cost for some patented drugs and treatments, since the prices are subject to the cost-setting practices of patented drugs which would be conferred with strengthened IP protection under the TPPA’s “Intellectual Property” chapter. The advantages of data exclusivity and effective market monopoly may indirectly give patent owners a free hand in setting their drug price. Most of the patented drugs are foreign-owned. There is also the important element of biologics, which some argue is the bedrock for biotechnology – the future development in medicine.


More diverse new financial services and products would be expected from TPPA countries, especially the US, to serve Penang’s growing business/commerce community. More opportunities will also be created for collaboration or partnership between domestic and TPPA foreign firms on untapped financial market segments. Free movement of business persons across TPPA borders would encourage TPPA nationals, including Malaysians, to go abroad without bothersome immigration restrictions.

Financial activities are largely still actively controlled, monitored and safeguarded by Bank Negara Malaysia (BNM), as stipulated in the protective measures in Annex III. Regarding market access to new financial products which may have toxic derivatives, authorisation must be obtained from the federal government and BNM. Under Article 11.7, the authorities may refuse authorisation within a reasonable period of time, on prudential grounds. However, the use of capital controls is still restrictive (i.e. only in the event of serious balance of payments and external financial difficulties or threats, or in exceptional circumstances) and probably not adequate for regulating capital flows to promote financial stability in Malaysia.

Medical devices. There will be lower import cost for “state-of-the-art” medical diagnostic equipment and products after tariff and non-tariff measures are removed.
Medical devices. There will be lower import cost for “state-of-the-art” medical diagnostic equipment and products after tariff and non-tariff measures are removed.


Local agricultural producers may be able to increase their export to TPPA countries due to lower trade barriers and tariff elimination. Aquaculture is a fast growing industry in Penang, enjoying 36.7% and 20.9% annual growth rate respectively in wholesale value and production quantity from 2009 to 2014[6]. Consumers would also benefit from the cheaper import of agricultural products from TPPA countries; however, some consumers may be wary about potentially increased quantity of imported genetic-modified agricultural products being introduced into the local market.

The majority of agricultural lands would still be controlled by local producers. The Penang state government preserves its functions in granting approvals concerning any acquisition or dealings of land by foreigners or foreign-owned enterprises for agricultural purposes. Also, Malaysia reserves the right to adopt or maintain any measures relating to wholesale and distribution services of agricultural products. Therefore, local jobs would be protected.  Fishermen at Pulau Betong. Malaysia is a strong exporter of fishery products. Robert Haandrikman

The Benefits of an Open Tender System

The Penang state government also preserves its authority in granting approvals concerning any acquisition or dealings of land by foreigners or foreign-owned enterprises. TPPA countries may provide advanced technology in public transportation at a lower cost due to lower trade barriers and favourable investment terms. Imports of construction machinery and materials would be cheaper from TPPA countries, especially the US and Japan. More engineers, architects and professional surveyors will be employed and supplied from Malaysia. However, the construction sector in Malaysia is still too reliant on foreign labour (35% sector employment in 2013). More active growth of the sector would mean a greater need for foreign labour unless there is a change in construction techniques.

The successful and critically appraised open tender system practised by the state government can be continued as usual. All state procurements under RM200,000 will not be contested by foreigners and will still be exclusively reserved for Bumiputera contractors.

In conclusion, the TPPA will engender winners and losers in both Penang and Malaysia. There is high potential for additional competition for local small and medium-sized companies against international competitors. Under the TPPA, Penang's economy will remain more open and will continue to attract international investors and FDIs. On the federal level, Malaysia indeed loses the chance for fundamental reforms. Even though Malaysia included the sound protectionism of the country's key industries, such as oil and gas, in its terms, Penang will enjoy a more liberalised and open market post-TPPA – but only if the right policies and plans are in place.

  • [1]Balance of trade.
  • [2]PwC (2015), “Study on Potential Economic Impact of TPPA on the Malaysian Economy and Selected Key Economic Sectors”.
  • [3]i.e. reduction in growth from a scenario in which TPP is absent + forgone benefits that could have been gained from joining the TPP.
  • [4]The TPPA may also have an effect on trade with non-TPPA nations, as Penang producers may substitute products imported from non-TPPA nations with cheaper products from TPPA nations following the reduction in trade barriers, resulting in a reduction of welfare (trade diversion).
  • [5]This was not the case in January-November 2014.
  • [6]Ong Wooi Leng, “Baiting a billion-ringgit aquaculture industry”, Penang Monthly, January 2016.

Lim Kim-Hwa, PhD, is CEO and head of Economics at Penang Institute, fellow in Finance and Financial Reporting at University of Cambridge and associate chartered accountant of the Institute of Chartered Accountants in England and Wales.

Tim-Niklas Schoepp is COO and visiting analyst in Economics at Penang Institute.

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