Enterprise Surveys Enterprise Note Series Trade What Do Exporters in Malaysia Look Like? 2017 Mohammad Amin, Jean Arlet and Hulya Ulku H ow do Malaysia’s exporting firms perform in areas key to the long-term competitiveness of the country, such as productivity or innovation? What obstacles do they face? This note aims to provide insights into these questions using recent Enterprise Surveys data from the World Bank Group. Introduction Eastern Europe (2013),5 Turkey (2015) and Sweden (2014). Enterprise Note No. 34 Global economic integration has accelerated in the past The countries are selected based on their comparability to decades with an unprecedented increase in world trade Malaysia and the availability of recent ES data. Sweden is from 25 percent of GDP in 1960 to 58 percent in 2015.1 included in the analysis as a benchmark for an industrialized Malaysia, along with many of its regional peers, is one of economy that is among the global leaders in export, the biggest beneficiaries of the globalized world. In 2015, productivity, R&D and innovation. Malaysia ranked 14th in merchandise trade share of GDP Throughout the analysis, a distinction is made between among 165 economies.2 Early studies investigating gains SMEs vs. large firms and high-tech vs. low-tech firms in from trade focused on inter-sectorial differences across order to explore heterogeneity across size and industry. The countries, while subsequent research has revolved around approach is in line with recent evidence that puts firm- imperfect competition, firm-heterogeneity and within heterogeneity at the forefront of trade analysis.6 For firm- industry re-allocation of resources from less to more size, we follow the ES definition of SMEs (less than 100 efficient firms.3 full-time permanent employees) and large businesses (100 Notwithstanding the extensive research on trade, much or more employees). High-tech and low-tech industries remains to be done to better understand the drivers and are determined using standard NACE classification.7 benefits of exporting at the country level. For example, Throughout, exporting firms are defined as those that export are exporting firms in Malaysia more productive and 5 percent or more of their annual sales directly. The sample innovative than non-exporting firms, and is the gap wider for Malaysia includes 564 manufacturing firms for which than in other countries? Does foreign ownership promote information is available on exports. Of these, 59 percent are exports for large and small exporters equally? What aspects SMEs and the rest are large firms; by industry, 48 percent of the business environment are most troublesome to are high-tech and the rest are low-tech firms. The analysis World Bank Group exporters in Malaysia? focuses on exporting firms in Malaysia, thus non-exporters This note explores the above questions for Malaysia’s in Malaysia as well as exporting firms in other parts of the manufacturing sector, drawing on a recent survey of formal world are used as benchmarks. There are 260 exporting private firms conducted by the World Bank’s Enterprise (46%) and 304 non-exporting (54%) firms in the Malaysia Surveys (ES). Note that the survey is representative of survey sample. all manufacturing firms in the country with 5 or more employees. A common sampling methodology, stratified Manufacturing firms in Malaysia export random sampling, and a common questionnaire ensure under one-third of their sales, lower than cross-country comparability. Data collection for Malaysia was done in 2015-16. For benchmarking, the following that of firms in other countries comparator groups are used: ASEAN (2015-16) – excludes Malaysia has the highest share of exporting firms Malaysia, Singapore, Myanmar and Brunei,4 high-income compared to other economies in the study. Similarly exports of a typical firm in Malaysia, as a share of its Foreign ownership is associated with higher annual sales, are 18 percent, the second highest after export share in Malaysia but not as much as high-income Eastern Europe (21%). However, at the elsewhere aggregate level, the export share of firms is about 30 Existing literature suggests a strong positive relationship percent of their total annual sales, higher than Turkey between foreign ownership and exporting activity.8 (14%) and Sweden (25%), but lower than ASEAN (35%) Potentially, this happens because foreign ownership and high-income Eastern Europe (37%). This is mainly improves firm-productivity due to transfer of modern because exporting activity in Malaysia’s manufacturing technology and investments, allowing the local firm to sector is less inclined towards large firms compared with compete better in foreign markets; foreign owners also have ASEAN and high-income Eastern Europe (figure 1), better information on foreign markets thanks to their global adversely affecting its total export share. distribution networks and ties with firms located abroad. An overwhelmingly large proportion of exporting Consistent with these findings, in Malaysia, foreign-owned activity in Malaysia is done by high-tech firms, which firms are much more likely to export than firms that are fully include both traditional exports of electrical equipment domestically owned (81% vs. 42%, respectively). A similar and chemical products. At the extensive margin, high- pattern is observed in the comparator countries with foreign- tech firms in Malaysia are more than twice as likely to owned firms being 1.5 to 4.5 times as likely to export as the export than low-tech firms (64% of high-tech vs. 31% of remaining firms. low-tech firms export). In contrast, high-tech firms are However, the relationship between export volumes and as likely to export as low-tech firms in ASEAN (14%), foreign ownership is much weaker in Malaysia than elsewhere less likely in Sweden (44% vs. 59%), and only 1.4 times (figure 2). Foreign-owned firms account for only 13 percent as likely in Turkey and high-income Eastern Europe. A of the total exports in Malaysia compared with a much roughly similar picture emerges regarding exports as a higher figure of 60 percent for ASEAN and 75 percent for percentage of annual sales of a typical firm. High-tech Sweden. This is despite the fact that the foreign ownership firms in Malaysia provide about 90 percent of the total in Malaysian firms is similar to that in the comparator exports of all private firms. The corresponding figure economies. There are a number of potential reasons why for the comparator countries is much lower, ranging foreign ownership may not boost exports much. For instance, between 38 percent (Turkey) and 67 percent (high- foreign investment may simply displace domestic savings income Eastern Europe). adding little to overall investments or it may be concentrated in sectors where the country does not necessarily enjoy a comparative advantage. It may also be the case that transfer Figure 1 Exporting activity in Malaysia is less Figure 2 In Malaysia, firms with foreign prevalent in large firms in contrast to ownership contribute less to some comparator countries exporting activity than domestically- 60 owned firms compared to other countries Total exports of all firms as % of their 50 50 43 Average exports of a firm as percent 50 46 40 32 39 total sales 40 34 30 28 25 24 28 of its sales 30 21 20 17 18 20 16 16 14 9 8 10 10 6 4 0 0 Malaysia ASEAN HI Eastern Turkey Sweden Malaysia ASEAN HI Eastern Turkey Sweden Europe Europe ■ SME (<100) ■ Large (100 and over) ■ Domestically-owned firms ■ Foreign-owned firms Source: Enterprise Surveys 2013–2015, World Bank Group. ASEAN Source: Enterprise Surveys 2013–2015, World Bank Group. ASEAN excludes Malaysia, Singapore, Myanmar and Brunei. excludes Malaysia, Singapore, Myanmar and Brunei. 2 of technology via foreign investment is restricted to low-end productive than SMEs and low-tech firms, respectively technology. Which of these reasons, among others, explain —a gap that is more pronounced than in other countries the findings above is an important area for future research. (figure 3).11 Vis-a-vis the comparator economies, both exporting and non-exporting SMEs and large firms in Both large and high-tech exporters in Malaysia have one of the lowest labor productivity rates, Malaysia are more productive than their along with ASEAN. non-exporting counterparts as well as exporting SMEs and low-tech firms Large and high-tech exporting firms in Malaysia are more likely to invest in R&D The relationship between productivity and exporting has long been scrutinized by researchers. The consensus is that and introduce organizational and process there is a strong positive relationship between productivity innovation than other exporting and non- and exporting; however, factors driving this relationship exporting firms differ. Some studies show that productive firms self-select R&D, along with knowledge and human capital stock, is themselves into exporting, while others demonstrate one of the most important determinants of innovation and that exporting causes firms to become more productive growth.12 Available evidence suggests that Malaysia does well due to, for example, greater competitive pressure and in R&D activity. For example, it ranks 33rd out of 129 and learning-by-exporting. 43rd out of 116 countries in terms of average R&D share In the case of Malaysia, there is no significant difference of GDP and number of researchers during 2004–2014, in labor productivity between a typical exporting and respectively, placing second in ASEAN after Singapore.13 non-exporting firm.9 However, this overall result masks Consistent with the literature showing a positive link sharp differences by firm-size and industry. Large and between exporting, R&D and innovation activity,14 the ES high-tech Malaysian exporters are on average 2 and 1.5 data reveal that exporting firms in Malaysia and elsewhere times as productive as their non-exporting counterparts.10 are at least twice as likely to invest in R&D as non-exporting In contrast, SMEs and low-tech exporters in Malaysia firms, across most size and industry categories.15 Among are only about two-thirds and half as productive as their exporters, large and high-tech firms outperform SMEs non-exporting counterparts. There are also big differences and low-tech firms in all countries (figure 4). Interestingly, within the group of exporters. That is, in Malaysia, large Malaysia’s large and high-tech exporters have the second and high-tech firms are around 1.6 and 8.7 times more highest share of firms investing in R&D, after Sweden, Figure 3 Large and high-tech exporters have the highest productivity among Malaysia’s firms Firms by size Firms by technology class 80 68 70 Median productivity of exporters 61 63 60 60 49 ($1,000) 40 33 33 32 20 16 15 14 10 12 11 4 0 Malaysia ASEAN HI Eastern Turkey Malaysia ASEAN HI Eastern Turkey Europe Europe ■ SME (< 100) ■ Large (100 and over) ■ High-tech ■ Low-tech Source: Enterprise Surveys 2013–2015, World Bank Group. ASEAN excludes Malaysia, Singapore, Myanmar and Brunei. All numbers are rounded up to the nearest integer. Median productivities of Sweden’s exporting firms are exceedingly higher than those of other economies (e.g. SMEs: 281; large firms: 406; high-tech: 262; low-tech: 503), therefore they are not reported in the figures. 3 Figure 4 Malaysia’s large and high-tech exporting firms have the second highest percentage of firms investing in R&D after Sweden 80 Firms by size Firms by technology class Percent of exporters investing in R&D 71 58 60 48 40 41 38 37 40 34 30 28 24 22 23 19 19 20 20 17 11 13 8 0 Malaysia ASEAN HI Eastern Sweden Turkey Malaysia ASEAN HI Eastern Sweden Turkey Europe Europe ■ SME (< 100) ■ Large (100 and over) ■ High-tech ■ Low-tech Source: Enterprise Surveys 2013–2015, World Bank Group. ASEAN excludes Malaysia, Singapore, Myanmar and Brunei. while its large and high-tech non-exporters have the third problems faced by exporters vary sharply depending on highest share among non-exporters. their firm-size and industry (figure 5). Notably, high tax The ES also provides information on whether a firm is rates—the most commonly chosen top obstacle by large involved in product, process or organizational innovation exporters and high-tech exporters—does not figure among during the last three years. All three types of innovation the top 3 most commonly chosen biggest obstacles for tend to be more likely among exporters than non-exporters SME and low-tech exporters. in Malaysia and comparator economies, across most size Examining further firms’ perceptions about the top and industry categories.16 Much like the results on R&D obstacle in Malaysia, inadequate power supply stands out presented above, large and high-tech exporting firms of for the sharp contrast between exporters and non-exporters. Malaysia have the second highest share of innovators after Exporting firms are much more likely than non-exporters to Sweden.17 One exception concerns product innovation, rank inadequate power supply as the top obstacle and this where they lag behind other countries.18 holds across firm-size and industry groupings. For instance, large exporters are about three times as likely to rank power High tax rates and unreliable power supply are the two most commonly chosen top obstacle by exporting firms in Malaysia Figure 5 The top obstacles for Malaysian exporters vary by firm size and The Enterprise Surveys ask firms to rank the biggest industry obstacle to their operations from a list of fifteen obstacles. Percent of rms stating the top three obstacles For exporting firms, the most commonly chosen top 30 27 obstacle was high tax rates (chosen by 19.2% of the firms), 25 24 24 24 closely followed by inadequate power supply (18.7%) and 19 to their businesses 20 obtaining business licenses and permits (11%). High tax rates and power unreliability are not as troubling to non- 15 13 12 11 11 11 11 exporters; 10.9 percent of them see the former obstacle as 10 10 their biggest concern and 1.9 percent select the latter. The ES also provides information on the absolute severity of 5 the various obstacles to firms’ operations. These reveal a 0 similar picture in that high tax rates and inadequate power lic ity s ty ity s y Ele ort ins ort g g g g ate ate t sin sin sin sin ici ici il ine ctric p p tab xr xr en en en en ctr ctr ns ns supply are a more severe obstacle for exporting than non- Tra Tra lic lic lic Ta Ta Ele Ele ess ss ess ess cal exporting Malaysian firms. sin sin sin liti s Bu Bu Bu Bu Po As the discussion above and the broader literature suggest, ■ Large (100 and over) ■ SME (<100) ■ High-tech ■ Low-tech firm-size and industry play a critical role in exporting decisions and behavior. Hence, it is not surprising that the Source: Enterprise Surveys 2013–2015, World Bank Group.  4 takes more time for exporting firms to obtain an operating Figure 6 Unlike in other countries, obtaining license or import license in Malaysia than in several middle- business licenses and permits is among income economies like Indonesia, Thailand, and Turkey.21 the three most commonly chosen top obstacle for Malaysian exporters Conclusion Taking advantage of recent Enterprise Surveys data, 30 30 this note aims to provide a first set of observations on 26 24 the performance and regulatory constraints of Malaysia’s Percent of rms stating the top three 25 23 exporting firms. The findings provide some interesting obstacles to their businesses 20 19 19 18 18 19 19 insights. For instance, surprisingly, manufacturing firms in 16 15 Malaysia export a lower share of their sales than in other 15 11 13 12 countries. This is because exporting firms are less likely to 10 be large businesses, adversely affecting export volumes. In addition, Malaysian exporters consider an unreliable power 5 supply as a much greater obstacle to operations, compared 0 to non-exporter firms. wo ity s wo e eg nce Ele ates en y rs du to f es rs bo o fin rs Ta ers s ty wo r g ion Large and high-tech exporters of Malaysia are more ate ted cto it ted inanc rke rke ss orke sin ici rat ted bil ess tric rk a t xr xr orl oliti lectr e ca nsta ula orl cce Tax du mal s c Ac ed w Ta productive than other exporters and non-exporters of lic E i t y e cal rr y e ss r t orl Info ca ca ca ce sin Malaysia, although they are less productive than their du du La Bu A P ye ye counterparts in most of the comparator economies. In orl Po Po Po Po ■ Malaysia ■ ASEAN ■ HI Eastern Europe ■ Sweden ■ Turkey addition, consistent with the existing research, large and high-tech exporters in Malaysia are more likely to invest in R&D and introduce process or organizational innovation Source: Enterprise Surveys 2013–2015, World Bank Group.  ASEAN than other firms in Malaysia and in comparator economies, excludes Malaysia, Singapore, Myanmar and Brunei. except Sweden. In light of the findings presented here and in other unreliability as the top obstacle than large non-exporters studies, promoting large and high-tech firms in the export (24% vs. 8%). This is surprising given that power outages sector may improve Malaysia’s trade volumes, productivity typically affect all firms in a given area. and innovation. Several questions, however, remain to A potential explanation is that exporting firms in Malaysia be explored. For instance, why are Malaysia’s exporting may be engaged in industries where electricity is more SMEs and low-tech firms underperforming in terms of critical, arguably industries such as non-metallic and plastic productivity and innovation; why is the contribution to production and chemicals and chemical products, where total exports of foreign-owned firms’ low in Malaysia; and Malaysian exporters are concentrated.19 Another possibility why do unreliable electricity and business licensing stand is that relative to non-exporters, exporting firms may be out as major preoccupations for the country’s exporters? disproportionately located in areas with worse quality of power supply. The ES data confirm these explanations; Notes once differences in firms’ location and industry are taken 1. World Development Indicators, 2016. into account, the proportion of exporting vs. non-exporting 2. World Development Indicators, 2016. firms perceiving electricity as the top obstacle is similar.20 3. See for example, Westphal, 1990; De Loecker, 2007; Melitz, 2003. 4. ASEAN sample here includes Cambodia, Indonesia, Lao PDR, The Philippines, Thailand, and Vietnam, which have ES data. Survey was Power unreliability is the biggest concern of conducted in 2015-16. Malaysia is excluded to isolate its impact on ASEAN exporters, while business licensing is a ASEAN’s figures. 5. High-income Eastern Europe (also referred to as HI Eastern Europe major hurdle specific to Malaysia in the figures) includes Croatia, Czech Republic, Estonia, Hungary, The three most commonly chosen top obstacles by Latvia, Lithuania, Poland, Slovak Republic, Slovenia. Data for these Malaysian exporters shows some overlap with exporters in countries was collected in 2013. 6. See for example, Melitz, 2003. other countries (figure 6). High tax rates are common to 7. Classification is based on NACE Rev. 2 3-digit level codes. Low-tech Malaysia as well as high-income Eastern Europe and Turkey, category here includes both low-tech and low mid-tech industries while power unreliability is a significant hurdle to firms such as food, furniture, garments, leather, paper, textiles, tobacco, in Malaysia and ASEAN. On the other hand, obtaining basic metals, fabricated metals, non-metallic mineral products, business licenses and permits is among the three most plastic and rubber, refined petroleum and other low and low-mid commonly chosen top obstacle for Malaysian exporters but tech manufacturing. High-tech category includes both high mid-tech and high-tech industries, such as chemicals and chemical products, not for exporters elsewhere. In fact, the ES data show that it 5 electronics, machinery and equipment, transport, precision and other 21. According to ES, it takes on average 11.1 days for exporters in Malaysia high mid-tech and high-tech manufacturing. to obtain a business license. In contrast, it takes on average 7.8 days in 8. See for example, Bernard and Jensen, 2004; Alvarez and López, 2005. Indonesia, 1.7 days in Thailand and 8.6 days in Turkey. Similarly, it 9. Labor productivity is computed as real sales in USD per full-time takes 10.6 days to obtain an import permit for exporters in Malaysia employee. We use median values throughout. Median productivity compared to 7.6 days in Indonesia or 5.2 days in Thailand. of exporting and non-exporting firms of Malaysia is same at USD 12,000. 10. Results for non-exporting firms are not reported in the figures. References 11. In the non-export sector, the median productivity of Malaysia’s firms Abotsi, A.K. 2016. “Power Outages and Production Efficiency of Firms in thousands USD is: SME: 15; large: 8; high-tech: 22; low-tech: 9. in Africa.” International Journal of Energy Economics and Policy 6(1): 12. See for example, Romer, 1990; Aghion and Howitt, 1998; 98-104. Ulku, 2007. Aghion, P., and P. Howitt. 1998. Endogenous Growth Theory. Cambridge, 13. World Development Indicators, 2016. During the same time, Sweden MA: MIT Press. and Turkey had 3.34% and 0.78% in R&D share of GDP, and Alam, A. 2013. “Electric power consumption, foreign direct investment 5,663 and 843 in number of researchers, respectively. Denmark, and economic growth. A comparative study of India and Pakistan.” Finland, Israel, Japan, Korea and Sweden were in the top 10 in both World Journal of Science, Technology and Sustainable Development indicators. 10(1): 55-65. 14. See for example, Shafi’i and Ismail, 2007. Alby, P., J-J. Dethier, and S. Straub. 2013. “Let There be Light! Firms 15. The only two exceptions are that in Malaysia non-exporting SMEs Operating under Electricity Constraints in Developing Countries.” and in Sweden non-exporting low-tech firms are slightly more World Bank Economic Review 27(1): 109-132. likely to invest in R&D than their exporting counterparts. Alvarez, R., and R.A. López. 2005. “Exporting and Performance: 16. The only exception to this in Malaysia is that non-exporting SMEs Evidence from Chilean Plants.” Canadian Journal of Economics 38(4): and low-tech firms are more likely to introduce process innovation 1384–1400. than their exporting counterparts. Bernard, A.B., and J.B. Jensen. 2004. “Why Some Firms Export?” The 17. In both process and organizational innovation, Malaysia’s exporting Review of Economics and Statistics 86 (2): 561–569. SMEs and low-tech firms are among the lowest performers, while De Loecker, J. 2007. “Do exports generate higher productivity? Evidence its non-exporting SMEs and low-tech firms are among the highest from Slovenia.” Journal of International Economics 73: 69-98. performers in their respective groups in economies included in Melitz, M.J. 2003, “The Impact of Trade on Intra-Industry Reallocations the study. and Aggregate Industry Productivity.” Econometrica 71(6): 18. Among the exporting firms of Malaysia, 16% of large firms, 6% 1695-1725. of SMEs and about 13% of high- and low-tech firms introduced Roberts, M., and J. Tybout. 1997. “An Empirical Model of Sunk Costs product innovation during 2012-2014, while among the non- and the Decision to Export.” American Economic Review 87(4): exporters, 10% of large firms, 4% of SMEs, 10% of high-tech and 545–564. 2% of low-tech firms introduced a new product. Romer, P.M. 1990. “Endogenous Technical Change.” Journal of Political 19. Alby et al., 2011, find that returns to investment in sectors that Economy 98: 71–102. are very reliant on electricity, such as chemical industries, are Shafi’i, M., and N.W. Ismael. 2015. “Innovation and Productivity: disproportionately impacted by power outages. Alam, 2013, and Evidence from Firm Level Data on Malaysian Manufacturing Sector.” Abotsi, 2016, find that, in India and Africa (respectively), an increase International Journal of Economics and Management 9 (1): 93–114. in the frequency of power outages disproportionately lowers the Ulku, H. 2007. “R&D, Innovation, and Growth: Evidence from Four output of the electricity-intensive industries. Manufacturing Sectors in OECD countries.” Oxford Economic Papers 20. This holds separately for the sample of SMEs and large firms. It also 59: 513–535. holds for the full sample provided that differences in firm-size (SME Westphal, L. 1990. “Industrial policy in an export-propelled economy: vs. large) is taken into account. A simple logit regression was used for lessons from South Korea’s experience.” Journal of Economic these results. Perspectives 4: 41–59. World Bank. 2016. World Development Indicators 2016. Washington, DC: World Bank. The Enterprise Note Series presents short research reports to encourage the exchange of ideas on business environment issues. The notes present evidence on the relationship between government policies and the ability of businesses to create wealth. The notes carry the names of the authors and should be cited accordingly. The findings, interpretations, and conclusions expressed in this note are entirely those of the authors. They do not necessarily represent the views of the International Bank for Reconstruction and Development/World Bank and its affiliated organizations, or those of the Executive Directors of the World Bank or the governments they represent. 6