1. 10 th _ 11 th October 2015 Tehran, Iran,

2.  Introduction  Background  Methodology  Findings  Policy implications  Conclusion

3.  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

4.  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

5. SL PB: production block SL: service link

6.  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.

7.  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

8.  Under equilibrium conditions, open input- output 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

9. Output growth (1) ∆X = R μ 1 ∆D + R∆E + Rμ 1 ∆AX 0 + R∆μ(A 0 X 0 + D 0 ) (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

10.  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 Where ν = primary input including value added coefficient, ;b = Leontief coefficient, and σ = multiplier for sector k

11.  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

12.  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

13.  Classification of sectors by Export Oriented (EO) and Non- Export 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

14. 2005 NOTE: Sector 74 = Semi-Conductor Devices, Tubes and Circuit Boards Sector 75 = TV, Radio Receivers & Transmitters & Asso. Goods

15. 2005 NOTE: Sector 21 = Oils and Fats Sector 6 = Oil Palm

16. 2010 NOTE: Sector 74 = Semi-Conductor Devices, Tubes and Circuit Boards Sector 75 = TV, Radio Receivers & Transmitters & Asso. Goods

17. 2010 NOTE: Sector 21 = Oils and Fats Sector 6 = Oil Palm

18. 2010 NOTE: Sector 74 = Semi-Conductor Devices, Tubes and Circuit Boards Sector 75 = TV, Radio Receivers & Transmitters & Asso. Goods

19. Source of DemandFormula OVERALL 1991-20051991-2010 Export DD R(E1-E0)%51.04%43.62% Domestic DDR(μ1(D1-D0))% 12.44%25.98% Intermediate DDR(μ1(A1-A0)X0)% 7.73%9.36% Import SubsR((μ1-μ)(A0X0+D0))% 28.80%21.05% TOTAL 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,

20. Source of Demand Resource BasedNon-Resource Based 1991-20051991-20101991-20051991-2010 Export DD57.33%49.87%48.39%39.64% Domestic DD4.04%17.86%15.98%31.14% Intermediate DD8.02%6.90%7.60%10.91% Import Subs30.60%25.37%28.04%18.30% TOTAL100.00%  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.

21. Overall 0.62 EO 0.58 EORB 0.65 RBM 0.59 RBNM 0.86 EONRB 0.54 NRBM 0.36 NRBNM 0.71 NEO 0.77 NEORB 0.82 RBM 0.73 RBNM 0.83 NEONRB 0.76 NRBM 0.51 NRBNM 0.76 NOTE:Number in parentheses represent the number of sector Number in italics represent the VA multiplier of the activity CPO (21) – 0.751 Petroleum Refinery (44) – 0.593 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 Semi-conductor devices (74) – 0.343 TV, Radio & transmitter (75) – 0.220 Oil Palm (6) – 0.844

22. Overall 0.70 EO 0.67 EORB 0.69 RBM 0.65 RBNM 0.86 EONRB 0.65 NRBM 0.41 NRBNM 0.78 NEO 0.80 NEORB 0.85 RBM 0.66 RBNM 0.87 NEONRB 0.80 NRBM 0.00 NRBNM 0.80 NOTE:Number in parentheses represent the number of sector Number in italics represent the VA multiplier of the activity Semi-conductor devices (74) – 0.359 TV, Radio & transmitter (75) – 0.477 Semi-conductor devices (74) – 0.359 TV, Radio & transmitter (75) – 0.477 CPO (21) – 0.811 Petroleum Refinery (44) – 0.731 CPO (21) – 0.811 Petroleum Refinery (44) – 0.731 Crude Oil & Natural Gas (13) – 0.915 Oil Palm (6) – 0.876

23.  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

24. Overall 0.17 EO 0.14 EORB 0.12 RBM 0.13 RBNM 0.08 EONRB 0.15 NRBM 0.09 NRBNM 0.21 NEO 0.30 NEORB 0.30 RBM 0.26 RBNM 0.31 NEONRB 0.30 NRBM 0.19 NRBNM 0.30 CPO (21) - 0.250 Petroleum Refinery (44) – 0.066 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 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

25. Overall 0.20 EO 0.18 EORB 0.13 RBM 0.14 RBNM 0.09 EONRB 0.22 NRBM 0.12 NRBNM 0.27 NEO 0.28 NEORB 0.17 RBM 0.19 RBNM 0.17 NEONRB 0.31 NRBM 0.00 NRBNM 0.31 CPO (21) – 0.186 Petroleum Refinery (44) – 0.071 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 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

26.  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

27. Overall 0.45 EO 0.44 EORB 0.53 RBM 0.46 RBNM 0.78 EONRB 0.39 NRBM 0.26 NRBNM 0.51 NEO 0.47 NEORB 0.52 RBM 0.47 RBNM 0.52 NEONRB 0.47 NRBM 0.32 NRBNM 0.47 CPO (21) - 0.501 Petroleum Refinery (44) – 0.527 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 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

28. Overall 0.49 EO 0.48 EORB 0.56 RBM 0.50 RBNM 0.75 EONRB 0.42 NRBM 0.28 NRBNM 0.49 NEO 0.51 NEORB 0.67 RBM 0.47 RBNM 0.70 NEONRB 0.47 NRBM 0.00 NRBNM 0.47 CPO (21) – 0.617 Petroleum Refinery (44) - 0.647 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 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

29.  Operating surplus (OS) multiplier has increased slightly from 2005 to 2010  NEO has bigger OS multiplier  NEORB has bigger OS multiplier in 2010

30. Overall 1.87 EO 1.86 EORB 1.95 RBM 2.12 RBNM 1.37 EONRB 1.82 NRBM 1.75 NRBNM 1.88 NEO 1.89 NEORB 1.68 RBM 2.09 RBNM 1.60 NEONRB 1.91 NRBM 2.30 NRBNM 1.91 CPO (21) – 2.751 Petroleum Refinery (44) – 2.079 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 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

31. Overall 1.75 EO 1.77 EORB 1.94 RBM 2.09 RBNM 1.42 EONRB 1.65 NRBM 1.44 NRBNM 1.75 NEO 1.66 NEORB 1.43 RBM 2.07 RBNM 1.35 NEONRB 1.72 NRBM 0.00 NRBNM 1.72 CPO (21) – 2.660 Petroleum Refinery (44) – 1.716 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 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

32.  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

33. CPO (21) – 0.238 Petroleum Refinery (44) – 0.391 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 Semi-conductor devices (74) – 0.652 TV, Radio & transmitter (75) – 0.776 Overall 0.37 EO 0.41 EORB 0.33 RBM 0.40 RBNM 0.13 EONRB 0.45 NRBM 0.63 NRBNM 0.28 NEO 0.22 NEORB 0.18 RBM 0.26 RBNM 0.17 NEONRB 0.23 NRBM 0.34 NRBNM 0.23 Important to know the primary input multiplier: 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

34. CPO (21) – 0.192 Petroleum Refinery (44) – 0.270 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 Semi-conductor devices (74) – 0.639 TV, Radio & transmitter (75) – 0.521 Overall 0.30 EO 0.33 EORB 0.31 RBM 0.36 RBNM 0.14 EONRB 0.34 NRBM 0.58 NRBNM 0.22 NEO 0.20 NEORB 0.15 RBM 0.33 RBNM 0.13 NEONRB 0.20 NRBM 0.00 NRBNM 0.20 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

35.  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

36.  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

37.  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

38.  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