Penang’s Investment Numbers

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There has been plenty of press coverage singing praises of Penang’s 2010 investment figures due to the fact that the state, which makes up eight per cent of the nation’s economy, managed to capture a quarter of total investment for Malaysia. Rather than looking at specific peaks and troughs, Penang’s share of capital investment in the nation would be better analysed over the long term.

Introduction

“There are no free rides” as the saying goes. To have output and growth, we need to make investments. Sir Roy Harrod in 1939 and Evsey Domar in 1946 made the connection between capital inputs and production outputs, saying that economic growth is investment inputs divided by the capital to output ratio (for the moment ignoring capital depreciation for convenience).

Since it is difficult to measure the size of the entire stock of capital, economic growth is usually estimated on the basis of incremental capital and output. The incremental capital to output ratio or ICOR is the amount of investments made in the year divided by the change in gross domestic product or GDP.


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