10th _ 11th October 2015
Tehran, Iran,
 Introduction
 Background
 Methodology
 Findings
 Policy
implications
 Conclusion




Ricardian and Heckscher-Ohlin models are insufficient to
explain trade and industrial development as regards to
the differences between resource and non-resource
based industries.
Since 1990s trade not dependent only on differences in
factor endowments and technology but also on regional
production networks and GVC.
Fragmented production networks and global value
chains (GVCs) characterize trade and investments
GVCs are the norm now


Value chain - full range of activities that firms perform to
bring a product from its conception to end-use and
beyond
The activities that comprise a value chain can be
contained within a single firm or divided among different
firms
SL
SL
SL
SL
SL
PB: production block
SL: service link



The overall objective is to explain the
industrial and trade policy within the context
of broader national economic policy
objectives.
It explains how the differences in the
production performance between resource
and non-resource based industries are
affected by GVC.
Specifically, it will explain the contribution of
components of final demand to output
growth and estimate their primary inputs
multipliers.
 The
paper uses standard decomposition of
output growth analysis, attributing output
growth to Domestic demand expansion,
Export demand expansion, Intermediate
demand expansion and Import substitution
 Under
equilibrium conditions, open inputoutput relation can be postulated as:
X= D + W + E-M,
where
X = vector of gross output
D = vector of domestic final demand
W = matrix of intermediate demand
E = vector of export demand
M = vector of imports
Output growth (1)
∆X = R μ1 ∆D + R∆E + Rμ1∆AX0 + R∆μ(A0X0 + D0)
(1)
(2)
(3)
(4)
(5)
is decomposed into that due to
(2) domestic demand expansion
(3) export demand expansion
(4) intermediate demand expansion
(5) import substitution demand

I-O analysis is appropriate for study of GVCs
 The input from one firm or a subsidiary of the firm is used
as an input for another firm
 The international fragmentation of production focuses on
the imported input shares of gross output, total inputs or
exports
 Multipliers calculated using following formula:
Where ν = primary input including value added
coefficient,
;
b = Leontief coefficient, and
σ = multiplier for sector k
Malaysia’s input-output tables for the years
1991, 2005 and 2010.
 deflate all the tables into a common base year.
 Aggregating and conforming all the three years’
classifications
 Weighted average using sectoral output as
weight
 GVC analysis examines products exported from
Malaysia
 Propose to examine exports to major export
markets such as China, Singapore, USA, Europe
and Japan


The following will be calculated
–

Value added of main export categories
– Value of compensation of employee and operating surpluses
– Key multipliers
• Value added multiplier
• Compensation of employee multiplier
• Operating surplus multiplier
• Output multiplier
• Imported commodity multiplier
We are proposing for policy recommendations to undertake focus
groups discussion (FGD), which will be held with:
– Government agencies (i.e. MITI, SME Corp)
– Trade associations (FMM)
– Chambers of commerce

Classification of sectors by Export Oriented (EO) and NonExport Oriented (NEO), also by Resource Base (RB) and
Non-Resource Base (NRB).
 Legend:
•
•
•
•
•
•
•
•
•
•
EO
= export oriented
NEO
= non-export oriented
EORB
= export oriented resource base
EONRB = export oriented non-resource base
NEORB = non-export oriented resource base
NEONRB = non-export oriented non-resource base
RBM
= resource base manufacturing
RBNM
= resource base non-manufacturing
NRBM
= non-resource base manufacturing
NRBNM = non-resource base non-manufacturing
Compensati
on
Employee
4%
Operating
Surplus
8%
Sector 74
Compensation
Employee
1%
Intermediate
Input
45%
Imported
Commodity
43%
Operating
Surplus
1%
Sector 75
Intermediate
Input
42%
Imported
Commodity
56%
2005
NOTE: Sector 74 = Semi-Conductor Devices, Tubes and Circuit Boards
Sector 75 = TV, Radio Receivers & Transmitters & Asso. Goods
Compensatio
n Employee
2%
Operating
Surplus
Sector 21
Sector 6
Operating
Surplus
35%
Imported
Commodity
6%
Intermediate
Input
82%
Compensation
Employee
28%
2005
NOTE: Sector 21 = Oils and Fats
Sector 6 = Oil Palm
Intermediat
e Input
30%
Imported
Commodity
7%
Operating
Surplus
16%
Sector 74
Sector 75
Operating
Surplus
24%
Intermediate
Input
21%
Intermediate
Input
16%
Compensation
Employee
6%
Imported
Commodity
57%
Compensation
Employee
13%
Imported
Commodity
47%
2010
NOTE: Sector 74 = Semi-Conductor Devices, Tubes and Circuit Boards
Sector 75 = TV, Radio Receivers & Transmitters & Asso. Goods
Compensation
Employee
Operating
Surplus
Sector 21
Sector 6
Intermediate
Input
17%
Imported
Commodity
Operating
Surplus
61%
Compensation
Employee
14%
Intermediate
Input
90%
2010
NOTE: Sector 21 = Oils and Fats
Sector 6 = Oil Palm
Imported
Commodity
8%
Operating
Surplus
16%
Sector 74
Sector 75
Operating
Surplus
24%
Intermediate
Input
21%
Intermediate
Input
16%
Compensation
Employee
6%
Imported
Commodity
57%
Compensation
Employee
13%
Imported
Commodity
47%
2010
NOTE: Sector 74 = Semi-Conductor Devices, Tubes and Circuit Boards
Sector 75 = TV, Radio Receivers & Transmitters & Asso. Goods
Source of Demand
Export DD
Domestic DD
Intermediate DD
Import Subs
TOTAL


Formula
OVERALL
1991-2005
1991-2010
R(E1-E0)%
51.04%
43.62%
R(μ1(D1-D0))%
12.44%
25.98%
R(μ1(A1-A0)X0)%
7.73%
9.36%
R((μ1-μ)(A0X0+D0))%
28.80%
21.05%
100.00%
100.00%
In 1991-2005, export demand has shown the highest contribution to
output growth, followed by Import substitution.
While in 1991-2010, it is slightly decrease in export demand
contribution to output growth,
Source of Demand
Resource Based
Non-Resource Based
1991-2005
1991-2010
1991-2005
1991-2010
Export DD
57.33%
49.87%
48.39%
39.64%
Domestic DD
4.04%
17.86%
15.98%
31.14%
Intermediate DD
8.02%
6.90%
7.60%
10.91%
Import Subs
30.60%
25.37%
28.04%
18.30%
TOTAL
100.00%
100.00%
100.00%
100.00%


With respect to sources of output growth, Resource Based industry
is more dependent on export demand, while Non-Resource Based
industry is more dependent on domestic demand.
In both industries, Domestic Demand become more significant over
the period in contributing to output growth.
Overall
0.62
•
•
EO
NEO
0.58
0.77
EORB
EONRB
NEORB
NEONRB
0.65
0.54
0.82
0.76
RBM
RBNM
NRBM
NRBNM
RBM
RBNM
NRBM
NRBNM
0.59
0.86
0.36
0.71
0.73
0.83
0.51
0.76
CPO (21) –
0.751
Petroleum
Refinery (44) –
0.593
•
•
Crude Oil &
Natural Gas (13)
– 0.892
•
Semi-conductor
devices (74) – 0.343
TV, Radio &
transmitter (75) –
0.220
•
Oil Palm (6) –
0.844
NOTE: Number in parentheses represent the number of sector
Number in italics represent the VA multiplier of the activity
Overall
0.70
•
•
EO
NEO
0.67
0.80
EORB
EONRB
NEORB
NEONRB
0.69
0.65
0.85
0.80
RBM
RBNM
NRBM
NRBNM
RBM
RBNM
NRBM
NRBNM
0.65
0.86
0.41
0.78
0.66
0.87
0.00
0.80
CPO (21) –
0.811
Petroleum
Refinery (44) –
0.731
•
•
Crude Oil &
Natural Gas (13)
– 0.915
•
Semi-conductor
devices (74) – 0.359
TV, Radio &
transmitter (75) –
0.477
•
Oil Palm (6) –
0.876
NOTE: Number in parentheses represent the number of sector
Number in italics represent the VA multiplier of the activity





Value added (VA) multiplier over time period has increased
NEO has bigger VA multiplier
Resource base multiplier bigger than non-resource base
RBNM bigger than RBM
NRBM is smallest
Overall
0.17
•
•
EO
NEO
0.14
0.30
EORB
EONRB
NEORB
NEONRB
0.12
0.15
0.30
0.30
RBM
RBNM
NRBM
NRBNM
RBM
RBNM
NRBM
NRBNM
0.13
0.08
0.09
0.21
0.26
0.31
0.19
0.30
CPO (21) - 0.250
Petroleum
Refinery (44) –
0.066
•
•
Crude Oil &
Natural Gas (13)
– 0.039
•
Semi-conductor
devices (74) – 0.102
TV, Radio &
transmitter (75) –
0.068
•
Oil Palm (6) –
0.354
NOTE: Number in parentheses represent the number of sector
Number in italics represent the CE multiplier of the activity
Overall
0.20
•
•
EO
NEO
0.18
0.28
EORB
EONRB
NEORB
NEONRB
0.13
0.22
0.17
0.31
RBM
RBNM
NRBM
NRBNM
RBM
RBNM
NRBM
NRBNM
0.14
0.09
0.12
0.27
0.19
0.17
0.00
0.31
CPO (21) – 0.186
Petroleum
Refinery (44) –
0.071
•
•
Crude Oil &
Natural Gas (13)
– 0.061
•
Semi-conductor
devices (74) - 0.096
TV, Radio &
transmitter (75) –
0.161
•
Oil Palm (6) –
0.170
NOTE: Number in parentheses represent the number of sector
Number in italics represent the CE multiplier of the activity

Compensation employee (CE) multiplier has increased from
2005 to 2010
 NEO has bigger CE multiplier
 NEORB and NEONRB has bigger CE multiplier
 RBNM has smallest CE multiplier
Overall
0.45
•
•
EO
NEO
0.44
0.47
EORB
EONRB
NEORB
NEONRB
0.53
0.39
0.52
0.47
RBM
RBNM
NRBM
NRBNM
RBM
RBNM
NRBM
NRBNM
0.46
0.78
0.26
0.51
0.47
0.52
0.32
0.47
CPO (21) - 0.501
Petroleum
Refinery (44) –
0.527
•
•
Crude Oil &
Natural Gas (13) –
0.853
•
Semi-conductor
devices (74) - 0.241
TV, Radio &
transmitter (75) –
0.152
•
Oil Palm (6) –
0.490
NOTE: Number in parentheses represent the number of sector
Number in italics represent the OS multiplier of the activity
Overall
0.49
•
•
EO
NEO
0.48
0.51
EORB
EONRB
NEORB
NEONRB
0.56
0.42
0.67
0.47
RBM
RBNM
NRBM
NRBNM
RBM
RBNM
NRBM
NRBNM
0.50
0.75
0.28
0.49
0.47
0.70
0.00
0.47
CPO (21) – 0.617
Petroleum
Refinery (44) 0.647
•
•
Crude Oil &
Natural Gas (13)
– 0.830
•
Semi-conductor
devices (74) – 0.261
TV, Radio &
transmitter (75) –
0.314
•
Oil Palm (6) –
0.699
NOTE: Number in parentheses represent the number of sector
Number in italics represent the OS multiplier of the activity

Operating surplus (OS) multiplier has increased slightly from
2005 to 2010
 NEO has bigger OS multiplier
 NEORB has bigger OS multiplier in 2010
Overall
1.87
•
•
EO
NEO
1.86
1.89
EORB
EONRB
NEORB
NEONRB
1.95
1.82
1.68
1.91
RBM
RBNM
NRBM
NRBNM
RBM
RBNM
NRBM
NRBNM
2.12
1.37
1.75
1.88
2.09
1.60
2.30
1.91
CPO (21) – 2.751
Petroleum
Refinery (44) –
2.079
•
•
Crude Oil &
Natural Gas (13)
– 1.307
•
Semi-conductor
devices (74) – 1.821
TV, Radio &
transmitter (75) –
1.752
•
Oil Palm (6) –
1.545
NOTE: Number in parentheses represent the number of sector
Number in italics represent the output multiplier of the activity
Overall
1.75
•
•
EO
NEO
1.77
1.66
EORB
EONRB
NEORB
NEONRB
1.94
1.65
1.43
1.72
RBM
RBNM
NRBM
NRBNM
RBM
RBNM
NRBM
NRBNM
2.09
1.42
1.44
1.75
2.07
1.35
0.00
1.72
CPO (21) – 2.660
Petroleum
Refinery (44) –
1.716
•
•
Crude Oil &
Natural Gas (13)
- 1.188
•
Semi-conductor
devices (74) – 1.375
TV, Radio &
transmitter (75) –
1.274
•
Oil Palm (6) –
1.337
NOTE: Number in parentheses represent the number of sector
Number in italics represent the output multiplier of the activity
Output multiplier has decreased from 2005 to 2010 – from
1.87 to 1.75
 NEO has larger output multiplier than EO in 2005; but in 2010
the output multiplier for EO is larger than NEO

Overall
Important to know
the primary input
multiplier:
0.37
•
•
EO
NEO
0.41
0.22
EORB
EONRB
NEORB
NEONRB
0.33
0.45
0.18
0.23
RBM
RBNM
NRBM
NRBNM
RBM
RBNM
NRBM
NRBNM
0.40
0.13
0.63
0.28
0.26
0.17
0.34
0.23
CPO (21) – 0.238
Petroleum
Refinery (44) –
0.391
•
•
Crude Oil &
Natural Gas (13)
-0.105
•
Semi-conductor
devices (74) – 0.652
TV, Radio &
transmitter (75) –
0.776
•
Oil Palm (6) –
0.152
NOTE: Number in parentheses represent the number of sector
Number in italics represent the imported commodity multiplier of the
activity
Overall
0.30
•
•
EO
NEO
0.33
0.20
EORB
EONRB
NEORB
NEONRB
0.31
0.34
0.15
0.20
RBM
RBNM
NRBM
NRBNM
RBM
RBNM
NRBM
NRBNM
0.36
0.14
0.58
0.22
0.33
0.13
0.00
0.20
CPO (21) – 0.192
Petroleum
Refinery (44) –
0.270
•
•
Crude Oil &
Natural Gas (13)
– 0.087
•
Semi-conductor
devices (74) – 0.639
TV, Radio &
transmitter (75) –
0.521
•
Oil Palm (6) –
0.127
NOTE: Number in parentheses represent the number of sector
Number in italics represent the imported commodity multiplier of the
activity





Import multiplier over time period has decreased
EO has bigger multiplier
Non--Resource base multiplier bigger than resource base
RBM bigger than NRBM
RBNM is smallest in both EO and NEO







It is necessary to increasing participation in GVCs: VA for 74
and 75 low; but VA for 21 high
Multiplier lowest for 74 and 75
It is crucial to increase VA to ensure economic growth
Sophistication index in those products is low
While ideally we should aim for high ranked in both VA and
sophistication index of our exports, most of ours are high in
VA but low in sophistication index (normally found in primary
commodity) or worse still low in both (normally found in E&E
and wearing apparels).
Productivity and technological sophistication should be
upgraded
If above not done, then there will be participation in GVCs
without much gain to the country that hosts GVCs

Strategies taken in Malaysia to increase benefit from
participation in GVCs:
– Fostering environment for knowledge-intensive production
– Enhancing investment incentives, including those for FDI
– Upgrading human capital by reforming the labor market
and its supply side, the education sector
– Attracting knowledge-intensive and technology-intensive
investments and discouraging labor-intensive investments
– Encouraging technology transfer
– Enhancing SME development for a more sustainable and
inclusive industralization
– Setting up science and technology parks






Industrial and trade policy should be viewed as part and parcel of
national economic policy, especially with regards to value creation.
Fragmented production networks and global value chains (GVCs)
characterize trade and investments today
Key sectors in the economy may be based on factor endowments in
determining comparative advantage, which under dynamic setting
can be created through structural reform.
While structural reform is always relevant at all time, phasing out its
implementation and prioritize amongst its varieties is more critical
It is not enough to promote a country to participate in GVCs whose
economic and social implications must also be looked into
While VA is important in ensuring economic growth product
sophistication will ensure sustainability in economic development
and growth