WITH THE TWIN blessings of geography and demography, Penang has been able to enjoy a deeply-etched history as a trading hub; first as a free port and then a Free Trade Zone (FTZ) industrial park – the first of which was created in Bayan Lepas in the early 1970s¹ by the Penang Development Corporation (PDC). Creating the FTZ proved an effective strategy in attracting foreign direct investment (FDI) for export-oriented industrialisation – it generated employment opportunities, foreign exchange earnings and economic development. To date, six industrial parks, namely Bayan Lepas Industrial Park; Mak Mandin Industrial Park; Seberang Jaya Industrial Park; Perai Industrial Park; Bukit Minyak Industrial Park and Penang Science Park; and Batu Kawan Industrial Park have been developed to accommodate the ever-growing manufacturing and support services activities in Penang. They are an important pillar of the state’s economy, and represent most evidently Penang’s industrial successes.

Cosmopolitan Development and Its Benefits

The cosmopolitan nature of Penang’s FTZ naturally makes for an ideal common ground for trading, and for exchanges of knowledge, technologies and cultures between the East and the West to occur. But it is also susceptible to challenging elements, ranging from social and environmental issues, and infrastructure and technology improvements to macro-economic fluctuations impacting the state’s revenue, employment, trade and foreign exchange earnings.

Today, Penang’s industrialisation focuses on higher value export-oriented industries and knowledge-based manufacturing and services, and its value-added profile has similarly seen remarkable changes (Figure 1). For instance, low-value industries have been substituted by higher value ones such as semiconductor and data storage; while new industries such as medical devices and software development have started to expand. In fact, foreign investments have helped to diversify industries within manufacturing and enhance cluster development, resulting in integrated chains in a number of sectors.

With a wealth of industrial experience and business acumen, Penang is now home to more than 300 reputable MNCs, bolstered by 3,000 highly competent SMEs.² MNCs are key drivers of the state’s economy, bringing in significant benefits through the creation of high-quality jobs and introducing modern production and management practices into the state. “MNCs in Penang have helped to build the local supply chain, as well as develop a lot of businesses in the state,” affirms Datuk Loo Lee Lian, CEO of InvestPenang. “They enhance the ecosystem of our promoted industries, for instance E&E (semiconductor, EMS and optoelectronics), medical devices, avionics, and food and halal industries; and help nurture local companies including EngTek, Inari, Globetronics, and QDos.” Many MNCs in Penang have also expanded from being manufacturing bases to Global Business Services (GBS). Penang currently has an established GBS environment with more than 60 companies.³

Most MNCs bring with them advanced business methods, with high standards in areas like production methods, safe working conditions, technology, as well as employee training programmes. Affiliation with such organisations strategically place local businesses in direct contact with these standards, and knowledge can be gained from so-called “Technology Transfer”. In fact, partnerships with MNCs may well enable local firms to enter and compete in a global market. The provision of world-class training, especially in new technologies and techniques, can also be expected for their employees. After all, an upskilled workforce is always beneficial. “With more training and development, the higher the chances are for our talents to take up local and international management roles,” says Loo.

UST Global, an IT and engineering services and solutions company in Penang, embodies this. “UST Global believes in ‘Transforming Lives’; the organisation creates talents through professional training and development programmes which, in turn, creates social value as well. The majority of our employees in Malaysia are local citizens. We hire them straight from the institutes and train them on projects; now they are managers, leaders and experts in their fields,” says UST Global Country Head, Amar Chhajer. In fact, the talent pool in Penang now has cumulative industrial experience that is in turn strengthened by technology upgrades and management know-how.

Likewise, Penang’s manufacturing sector is moving up the value chain, shifting from labour-intensive to automation; in 2018 the sector contributed RM39.5bil, or 43.3% of the state’s total GDP, to the overall economy.⁶ No doubt Penang is well-positioned as an investment haven, backed by excellent government support and well-developed infrastructures, including port and airport facilities. But policy instruments and attractive investment incentives aside, factors such as lower wages and an educated labour force with relatively good command of the English language, comparatively lower cost of doing business, and an appealing cosmopolitan living standard are equally important in luring foreign companies to set up operations here.

Investment figures record that Penang received RM13.3bil in approved manufacturing investment in the first nine months of 2019, with RM1.3bil worth of domestic investment and a total FDI of RM12bil – surpassing its figure for the whole of 2018 (RM5.8bil) by more than 100%. This represents about 23% of Malaysia’s total approved manufacturing investments. During the same period in 2019, Penang received the highest FDI in the country and second highest total capital investment among all states, after Selangor (RM16.4bil). This created about 15,013 jobs in the state.⁷ FDI is positively viewed in Penang since it is seen as a contributor to economic growth. The top three FDI contributors are the US, Singapore and the UK, with US companies contributing more than 50% of the total FDI (Figure 2). E&E (67.6%) remains the largest investment industry in the state.

Industrial parks drive Penang’s economic engine: “Apart from new investments, re-investments continue to shape and transform the industrial parks as companies move up the value chain, changing from low-mix, high-volume to high-mix, low-volume products. New requirements for technology bring in new investments, for example UST Global and Cerium Systems invested in Penang to serve clients that require digital technology solution support services,” explains Loo.

Social and Environmental Impacts

The economic growth produced by FDI is sometimes fuelled at the expense of the natural and social environment; however, this is dependent on the type of industry and investment. A comprehensive economic and policy model on sustainability is therefore vital, and the state government is vigilant of threats to sustainable development. “The state is focused on the promoted industries that suit its industry profile. The selection of priority industries is based on three main criteria, namely technology, value-add and sustainability,” says Loo. PDC’s land application and requirements stipulated by the Department of Environment serve to check and curb hazardous effects to the environment. Without these, companies will not be allowed to operate. Loo adds that the state is cautious with the use of its resources. She stresses that “when China decided to impose the ban on plastic waste import, Penang decided not to approve any new land sale or lease to companies involved in these activities, months before the federal government made their decision.”

With the rise of environmental awareness, more and more companies have focused their attention on environmental protection measures to identify, mitigate and even neutralise negative environmental externalities. For instance, international firms like Plexus have voluntarily reduced their waste generation and energy consumption. One such initiative is “going paperless” to eliminate or reduce the use of paper through a mobile app, a move easy enough for local industries to emulate.

Foreign investments bring in numerous expatriates for executing company tasks in subsidiary companies; and they bring with them their unique lifestyles and create a different type of economy, a niche market if you will, especially in areas with a large foreigner population.

Penang’s Investments Receive Boost from US-China Trade War

Thus far, Penang’s manufacturing industry has benefited from the US-China trade war, as global firms looking to escape the effects of the quarrel pour in investments and tap on factories here to produce goods.

“We have indirectly benefited from the trade war; some Chinese companies based in China have approached us as a subcontractor to ship their goods to the US,” says Lim Seng Beng, the deputy general manager of MeHow Medical, a Penang-based Chinese company. The trade war has also generated innumerable business opportunities for Penang-based US companies, as well as local companies. Globetronics, for one, has been receiving a high number of enquiries from industries operating in China which want to ship their products to the US via Malaysia.

A Way Forward

The smart technology era is upon us; to continue to lead by example, Penang needs to focus on industrial and technology upgrading, as well as cluster development. These tech companies are notable leaders in pushing boundaries and introducing innovations; a lot of money is typically invested in R&D and into developing competitive local talent. “Talent remains a most important asset, and the state continues to enhance its existing initiatives, especially in Science, Technology, Engineering and Mathematics (STEM), in their education and training,” says Loo.

“InvestPenang is cautiously optimistic of continued high-quality, high-technology investments which will create high-value jobs for the state in our promoted industries. We will continue to promote and deepen the value chain and the capability of equipment manufacturing (including automation and machining), semiconductor, high-value EMS, as well as medical technology. But to ensure continued investments, there is also an imperative need to overcome the hurdles of maintaining a talent pool that fits industry requirements, to have a better understanding of the impact of the state’s industries in contributing to Malaysia, and to streamline internationallybenchmarked incentives for target investments as well as agencies-in-charge.”

Footnotes:

¹Nesadurai, H. E. (1991). The free trade zone in Penang, Malaysia: Performance and prospects. Southeast Asian Journal of Social Science, 19(1/2), 103-138.
²Source: https://investpenang.gov.my/why-penang/
³Ibid.
⁴Kharas, H., Zeufack, A. and Majeed, H. (2010). Cities, people and the economy. A study on positioning Penang. Kuala Lumpur: Khazanah/World Bank.
⁵Penang Skilled Workforce Study. (2017). Labour Skills for Growth and Change. Penang Institute. Available from https:// penanginstitute.org/wp-content/uploads/jml/files/pg-skilledworkforce-study/Chapter1-10b_Low%20Res.pdf
⁶Department of Statistics, Malaysia.
⁷Source: Malaysian Investment Development Authority