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TABLE OF CONTENTS
I. GVC-Trade Dynamics in Malaysia.........................................................................3
II. GVC of Semiconductor.......................................................................................5
III. Participation Benefit/Constraints........................................................................7
 Benefits.............................................................................................................. 7
 Constraints.........................................................................................................7
IV. Policies Implications and Recommendations.......................................................8
 Policies Implications...........................................................................................8
 Recommendations:.............................................................................................9
V. References........................................................................................................... 11

TABLE OF ABBREVIATIONS

`E&E Electronics and Electrical

GVCs Global Value Chains

FTZs Free Trade Zones

MNCs Multinational Corporations

STEM Science, Technology, Engineering, and Mathematics

CA Comparative Advantage

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 I. GVC-Trade Dynamics in Malaysia
GVC-related trade is the measure of the value of goods or services exported by a sector that
crosses multiple countries (WITS 2019). Referred to figure 1, within 2000 - 2021, Malaysia’s
sectors contribution witness small changes in their values regarding a 5% range modification.
More than 90% of Malaysia GVC is contributed by the Manufacturing and Service sector,
which attributes more than 70% and 10% respectively. However, amid the deindustrialization
within the past 15 years and the lack of human capital and technology development, Malaysia
Manufacturing sector dropped from 79.81% in 2000 to 75.53% in 2021 of total GVC share,
(Grad Malaysia 2023). Regarding a very export-oriented position, the decline threatens
Malaysia GVC value and its “trade openness”.

Figure 1: Malaysia GVC-related trade values by sector in 2000 and 2021

Source: Adapted from WITS (n.d)

The year 2018 marked its heaviest slumped due to the US-China trade war as more than 50%
Malaysian exports to China were later passed over to the US. Thus, this figure underscored
an export-demand driven downturn followed by a drop in PMI and IIP, yet later recovered
when tariff barriers were removed (freemalaysiatoday 2019).

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 Share of Manufacturing Sector in Malaysia's GVC-related trade
82.00%
80.00%
78.00%
76.00%
Percentage

74.00%
72.00%
70.00%
68.00%
66.00%
64.00%
62.00%
2000 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Year

Figure 2: Share of manufacturing sector in Malaysia’s GVC

Source: Adapted from WITS (n.d)

Mostly contributed to the led of Manufacturing’s export were Electrical&Electronics sectors,

whose share of GVC-related trade increased from 23.35% in 2000 to 34.2% in 2021 with a
rate of 30% YoY (Figure 2; Biswas 2023). Following E&E, Rubber, beverage, and tobacco
are the next most contributing sectors to the Manufacturing group with more than 10% of the
share each in 2000; however, after two decades, only the food, beverage, and tobacco sector
can still contribute 13.75% to the total GVC-related trade of Malaysia, while the Rubber and
Plastics products accounted for 7% in 2021.

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Figure 3: Detail GVC of manufacturing trade by sector of Malaysia in 2000

Source: adapted from WTIS (n.d.)

Figure 4: Detail GVC of manufacturing trade by sector of Malaysia in 2021

Source: adapted from WTIS (n.d.)

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As the second largest contribution to GVC-related trade, Malaysia Service Sector witness a
positive trend. With the contribution of the retail trade of around 5% of share, the Export of
services increase its share from 14.27% in 2000 to 18.11% in 2021 (a 3.84% increment)
(Sunbiz 2023; Figure 3). Undergoing government policy, particularly the Malaysia Mega-
Sales Carnival and the retail outlets’ expansion, Malaysia has successfully attracted tourists
and locals, increasing shopping expenditure (Sauve 2018). Nevertheless, a steady decline in
value growth since 2019 was attributed to the impact of Covid-19 on both whole-sale and
retail-trade (28.2% and 32.4% drop respectively), causing business premises shut down and
social distancing (The Malaysian Reserve 2020). The tourism industry confronted the most
impact (83.4%) in 2020 as a result of mobility restriction and sales volume plummeted
(International Trade Council 2023)

Share of Service Sector in Malaysia's GVC-related trade

30.00%

25.00%
Percentage

20.00%

15.00%

10.00%

5.00%

0.00%
2000 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021

Year

Figure 5: Share of service sector in Malaysia’s GVC

Source: Adapted from WITS (n.d)
The mining and quarrying sector stayed at around 4% for the assigned period with trivial
increase in GVC share from 4.17% to 4.94% (Statista 2023). With the lowest value export of
goods and services in Malaysia, the Agriculture, Hunting, Forestry and Fishing, Construction,
Gas and Power supply sectors remain the share of around or less than 1% of the GVC-related
trade, showing that Malaysia has less focus on trading these products compared to the
aforementioned products.

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 II. GVC of Semiconductor

Semiconductor devices and electronic integrated circuits accounted for 65.2% of E&E
exports in 2022, estimated at US$67.83 billion (RM386.89 billion) (Matrade 2023),
strengthening Malaysia’s position as a global leading semiconductor manufacturer (figure B).

Figure 6: Key Semiconductor Manufacturing Nations

Source: adapted from MSIA (2023)

The history of semiconductor clusters can be traced back to the 1970s. The drawing up of
FTZs in the mid-1970s was more closely associated with the formation and growth of
Malaysia's semiconductor industry (Khaw 2023). To motivate MNCs to start manufacturing
facilities in the country, the government provides favourable tariffs, tax breaks, and business-
friendly environment (Nesadurai 1991). This attracted multinational firms' assembly plants,
particularly in Malaysia's electronics industry. Between 1970 and 2006, the number of
companies in the electronics field surged from 4 to 1,695 (Abad et al. 2015; WTO 1993),
underpinned by both backward and forward linkages with the GVC. The immunity from
import taxes on the raw materials, elements, and machinery provided by FTZs further
reduced production costs to facilitate cross-border trades and economic expansion.

In addition, Malaysia's involvement in the semiconductor GVC is partly attributable to its

CAs, which referred to lower opportunity cost compared to other nations (McLaren 2012).
The nation's CA is a pool of knowledgeable engineers and labourers who can contribute to

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the intricate procedures involved in the manufacture of electronics. Malaysia has invested in
building a workforce with the necessary skills and has advanced its technological capabilities,
especially in the E&E industry. Malaysia leads Southeast Asia in terms of graduation rates
(38.9%) according to UNESCO data from 2020. The high percentage of STEM education
attainment shows that Malaysian workers can operate efficiently in the electronics
manufacturing industry (ARC Group 2023). Moreover, Malaysia's geographic location is
favorable as located in the heart of Southeast Asia, and in the Strait of Malacca - the busiest
global shipping globally (MIDA n.d.). This provided Malaysia access to the biggest markets
for electronic goods in the Indo-Pacific region's economic hubs (ARC 2023), where
importing and exporting components remained economically and expeditiously.

III. Participation Benefit/Constraints

 Benefits
The participation of Malaysia in the GVC for the semiconductor industry encompasses
promising benefits for the country. By participating in GVC, Malaysia's semiconductor sector
would have the opportunity to access and be up-to-date with technological advancement and
innovation as their development is driven by advances in material science (ADB 2022). The
Semiconductor Industry Association (SIA 2016) emphasizes the importance of the value
chain in growth and innovation, as well as strengthening participating countries through
export opportunities. This interconnected ecosystem encourages technological advancements
such as energy-efficient sensing or modern automated manufacturing (SIA 2016). Therefore,
GVC is contributing to Malaysia economic growth with opportunities for high-value
manufacturing and job creation (Li et al. 2023). Malaysia GDP growth is expected to increase
driven by the significant growth of the semiconductor sector with a CAGR of around 7%,
strengthening to its strong position in the global supply chain of this industry (MIDA 2023)

 Constraints
However, Malaysia still faces several barriers, impacting on the success of participating in
GVC for the semiconductor sector. Owing to a high level of investment in R&D and capital
expenditure (around 22% and 26% of annual sales, respectively), Malaysia face challenges in
an in-depth understanding of the technical and large-scale specialized supply chain (Varas et
al.). Excessive investment along with supply chain disruption and rising material costs hinder
enterprises (MSIA 2023). This sector has suffered from Global Market Fluctuations due to

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the sluggish rebound of Global Semiconductor Sales and the poor demand of the end
markets, resulting in a cautious look for this sector (Business News 2023). Moreover, the
ongoing Trade Tensions between the US and China impact on the semiconductor industry
with manufacturing facilities in both Malaysia and China (Business News 2023). The decline
in exports and imports seems to negatively affect Malaysia’s trade performance (Jalil 2023).

IV. Policies Implications and Recommendations

 Policies Implications
Derived from the process of leveraging FDIs in Malaysia’s E&E sector, Quiang et.al (2021)
tied the second stage with facilities enhancement, workforce training, and economic
clustering under the Industrial Master Plan (Figure). The scheme required manufacturing
firms to contribute to the Human Resource Development fund, from which certified training
programs could be funded (Rasiah 2015), while fostering the establishment of the Malaysian
Technology Development Corporation, seeking ventures for the E&E sector’s R&D (Lai &
Yap 2004).

As a new wave of FDI entering Malysia in 1980s followed a 100% tax allowance for
qualified CAPEX (MIDA 2010), the Malaysian economy became more integrated into the
E&E GVC by providing adaptable workforce and investment incentives. Backward linkages
with foreign suppliers were on a trajectory growth from 10% in 1980s to 46% in 1996
(UNCTAD 2011) where firms such as Intel, committed to selected Malaysian SMEs as
suppliers (OECD 2018), yet access to higher value-added activities was limited (Wettasinghe
2001). Nevertheless, this period experienced booming E&E exports (28% to 61% of total
export value), tripled FDI inflows, and shifting labor structure towards manufacturing E&E
(Eltgen 2021).

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 Figure 7: Malaysian Electrical & Electronic exports
Source: adapted from The World Bank (n.d)

Malaysia's FDI inflow in phase 2(Current US$)

6000000000

5000000000

4000000000

3000000000
USD

2000000000

1000000000

0
81 982 983 984 985 986 987 988 989 990 991 992 993 994 995 996 997 998 999 000
19 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 1 2

Figure 8: Malaysian FDI inflows

Source: Adapted from The World Bank (2023)

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 Share of E&E Employment in Malaysian Workforce
25.00%

20.00%

15.00%

10.00%

5.00%

0.00%
1982 1983 1984 1985 1986 1987 1988 1989 1990 1992 1993 1995 1996 1997 1998 1999 2000

Figure 9: Share of E&E employers in Malaysian workforce

Source: Adapted from DOSM (2017)

 Recommendations:
The today Malaysian E&E industry continued to face several impediments in moving up the
GVC, stemming from lack of technology autonomy and insufficient talent workforce
(CSC 2020; Ismail 2001), justified by a steadily declining E&E exports (Figure). As Lee
(2019) concerned about low-value added function would be unsustainable in the long-run, the
participation of Malaysian semiconductor in GVC should be more self-controlled to enhance
its competitiveness. This necessitates major government intervention to overcome the
oligopolistic structure of semiconductor market (Grimes & Du 2022). Indeed, Malaysia
should leverage funding into joint venture with Integrated Design Manufacturing (IDM)
businesses for knowledge-sharing and technology-transfer objectives (Figure), while
encourage domestic IP usage under financial incentives for SMEs (ISDP 2018).

The latter obstacle refers to labour upskilling in an extent that labour cost competitiveness has
been diminishing in Malaysia and the need for capital-intensive production burgeoned
(Nambiar 2016). Thus, academic collaborations between universities, research entities, and
businesses is crucial in fostering innovation from industry projects (Motorola 2012). This
should be aligned with policies to avoid “brain drain” since earning gaps and R&D expense
in China, Korea, and Taiwan would encourage employment migration (Quiang et.al 2021.

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 Figure 10: Examples of foreign partnership with Chinese semiconductor firms
Source: adapted from Grimes & Du (2022)

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