Markets vs. Government. Foreign Direct Investment and Industrialization in Malaysia

This paper examines the changing role of government and foreign firms in Malaysia’s industrialization process. Economists have held different views on the role of government in industrialization. Some believed that the developing world was full of market failures and the only way in which poor countries could escape from their poverty traps was through the forceful intervention. Others opposed to this view argued that government failure was by far the bigger evil and that it should allow the market to steer the economy. Reality has been different from expectation for either side. From a country dependent on agriculture and primary commodities in the sixties, Malaysia has today become an export-driven economy spurred by high technology, knowledge based and capital intensive industries. The market oriented economy and the government’s strategic industrial policy that maintain a business environment with opportunities for growth and profits have made the country a highly competitive manufacturing and export base. Multinationals have been at the forefront in this process and working hand in hand with the government through a process known as “hand holding”. As firms move up the value chain their requirements change, and, to remain competitive in a global environment, the government has had to change its policies and approach to ensure that this objective is not compromised. In 2006 the government identified the service sector as the new driver for growth, which suggests a new era in industrialization. Based on this evidence we conclude that, for successful industrialization, developing countries will require flexible governments that facilitate the development of the private sector. This approach will generate greater benefits than would otherwise occur if developing countries were to adopt either government or market based development trajectories.