TRANSPORT AND TRADE FACILITATION IN MALAYSIA AND LESSONS FOR VIETNAM

LIST OF ABBREVIATIONS Abbreviation Meaning APEC Asia-Pacific Economic Cooperation ASEAN Asia-Pacific Economic Cooperation ASEM Asia – European Meeting ETI Enabling Trade Index EU Europe

FACULTY OF ECONOMICS & INTERNATIONAL BUSINESS

-*** -

GRADUATION THESIS

Major: International Business Economics

TRANSPORT AND TRADE FACILITATION

IN MALAYSIA AND LESSONS FOR VIETNAM

TABLE OF CONTENT

LIST OF ABBREVIATIONS iv

LIST OF TABLES v

LIST OF FIGURES vi

INTRODUCTION 1

CHAPTER 1: GENERAL THEORY OF TRANSPORT AND TRADE FACILITATION 5

1.1 Overview of trade facilitation 5

1.1.1 Definition of trade facilitation 5

1.1.2 Benefits of trade facilitation 8

1.1.3 Issues of trade facilitation 9

1.2 Regional and international policies on trade facilitation 13

1.2.1 Policy framework 13

1.2.2 Regional and international organizations working on trade facilitation 14

1.2.3 International policies and strategies related to trade facilitation 20

1.3 Key performance indicators of trade facilitations 22

1.3.1 Logistics Performance Index (LPI) 22

1.3.2 Global Competitiveness Index (GCI) 24

1.3.3 Enabling Trade Index (ETI) 25

1.3.4 Global Connectedness Index (GCI – DHL) 25

1.3.5 Other indicators 26

CHAPTER 2: CURRENT STATUS OF THE DEVELOPMENT OF TRANSPORT TO FACILITATE TRADE IN MALAYSIA IN THE PERIOD 2005 - 2014 27

2.1 Overview of Malaysia’s economy 27

2.1.1 Geographic location and political situation of Malaysia 27

2.1.2 Economic situation of Malaysia 29

2.1.3 Foreign trade of Malaysia 30

2.1.4 Malaysia’s inward foreign direct investment 33

2.2 Overview of Malaysia government’s operation of transport and trade facilitation 34

2.2.1 Management of trade sector 34

2.2.2 Customs and other border agencies 35

2.2.3 Management of transport sector 35

2.2.4 Malaysia’s plans on investing in transport and logistics 36

2.2.5 Malaysia’s participation in international transport conventions and agreements 37

2.3 Malaysia’s indicators of trade facilitation 38

2.4 Transport infrastructure in Malaysia 40

2.4.1 Road infrastructure and network 40

2.4.2 Railway infrastructure and network 41

2.4.3 Maritime and ports infrastructure and network 42

2.4.4 Airport infrastructure and network 43

2.4.5 Inland waterway infrastructure and network 45

2.5 Transport corridors and international supply chains in Malaysia 45

2.5.1 Priority transport corridors 45

2.5.2 International supply chains integration 46

2.6 Transport and logistics services in Malaysia 46

2.6.1 Road freight transport services 46

2.6.2 Railway freight transport services 47

2.6.3 Maritime transport and port services 47

2.6.4 Air freight transport services 48

2.6.5 Inland waterway freight services 49

2.6.6 Freight forwarding and warehousing services 50

2.6.7 Express freight and postal services 50

2.7 Lessons learnt from transport and trade facilitation in Malaysia 51

CHAPTER 3: SUGGESTIONS TO DEVELOP TRANSPORT TO FACILITATE TRADE IN VIETNAM FROM 2015 TO 2020 BASED ON EXPERIENCES OF MALAYSIA 54

3.1 Vietnam’s practice of transport operation to facilitate trade in the period 2005 – 2014 54

3.1.1 Overview of Vietnam’s economic situation 54

3.1.2 Indicators of trade facilitation in Vietnam 58

3.1.3 Transport infrastructure in Vietnam 62

3.1.4 Transport corridors in Vietnam 68

3.1.5 Provision of logistics services in Vietnam 70

3.2 Government’s perspectives of transport and trade facilitation from 2015 to 2020 71

3.2.1 National dimensions 71

3.2.2 Organizational framework 72

3.2.3 Sectoral strategies 73

3.3 Recommendations to develop transport for trade facilitation in Vietnam based on experiences of Malaysia 74

3.3.1 Recommendation for transport infrastructure 75

3.3.2 Recommendation for transport corridors and international supply chains 76 3.3.3 Recommendation for mechanism of managing trade facilitation activities 77

3.3.4 Recommendation for transport and logistics services 78

CONCLUSION 80

LIST OF REFERENCES 82

APPENDIXES 88

LIST OF ABBREVIATIONS

Abbreviation Meaning

APEC Asia-Pacific Economic Cooperation

ASEAN Asia-Pacific Economic Cooperation

ASEM Asia – European Meeting

ETI Enabling Trade Index

EU European Union

FDI Foreign direct investment

GATT General Agreement on Tariffs and Trade

GCI Global Competitiveness Index

GSO General Statistics Office of Vietnam

HCMC Ho Chi Minh City

ITC International Trade Center

IWT Inland waterway transport

KLIA Kuala Lumpur International Airport

KTMB Keretapi Tanah Melayu Berhad

LPI Logistic Performance Index

LRT Light rail transit

MITI Ministry of International Trade and Industry, Malaysia MOIT Ministry of Industry and Trade, Vietnam

MOT Ministry of Transport, Vietnam

OECD Organization for Economic Co-operation and Development PPP Public – Private Partnership

RM Malaysia Ringgit

TEU Twenty-foot equivalent unit

UN COMTRADE United Nations Commodity Trade Statistics Database

UNCTAD United Nations Conference on Trade and Development UNECE United Nations Economic Commission for Europe

USD United State Dollar

VNR Vietnam Railway

VNRA Vietnam National Railway Administration

WEF World Economic Forum

WTO World Trade Organization

LIST OF TABLES

Table 1.1 Some Asia organization’s achievements in trade

Table 2.6 Recent and upcoming PPP projects in Malaysia (2011 -

Table 3.1 Top 10 highest value exporting products of Vietnam (2008

Table 3.2 ETI and some of its components of Vietnam (2009 - 2014) 61

Table 3.3 Transport infrastructure score and ranking of Vietnam and

LIST OF FIGURES

Figure 1.1 Three Pillars of Trade Logistics and Facilitation 10 Figure 1.2 Structure of policy framework for trade facilitation 13

Figure 2.1 Malaysia’s GDP growth from 1995 to 2014 (%) 29

Figure 2.2 Malaysia's foreign trade value and trade balance (2005 -

INTRODUCTION

1 Study background

Recently, joining more and more regional and international organizations, expanding diplomatic relations and making bilateral and multilateral cooperation agreements with various countries and territories have brought a plenty of opportunities for countries, especially for the developing ones The biggest advantage coming along with trade liberalization is that domestic firms are more likely to expand their business to international market, which means growth in exporting volume However, the domestic firms may hardly take all advantages from international trade liberalization if their countries fail to facilitate trade sector

In Vietnam, despite the fact that trade activities recently have been positively contributing to the economic growth with focus on exporting goods that we have comparative advantages in producing, the limitations in trade facilitation have still acted as burden for the development Some milestones had significantly great effects to export situation of Vietnam, such as: Vietnam became a member of ASEAN Free Trade Area (AFTA) in 1996; the bilateral trade between the U.S and Vietnam has developed rapidly after the signing of the U.S – Vietnam Bilateral Trade Agreement (BTA) in 2001; Vietnam became a member of WTO in 2007 and upcoming are various potential agreements such as ASEAN - Japan Free Trade Agreement, Trans-Pacific Strategic Economic Partnership Agreement (TPP), Vietnam - EU Free Trade Agreement and most importantly, ASEAN Economic Community (AEC) These events brought promising future to our trade liberalization and force the exporting volume to rise

What trade liberation has brought to the world economy is remarkable, but it will be exploited soon Consequently, Vietnam’s competitiveness in exporting could not be maintained strong and may not inactively respond in time to the changes in international market if we only based on the advantages of those affairs There has been extreme reduce in tariffs, with some kinds of goods the tariff is a mere of just over 0% In addition, the quota for many products has been eliminated It is evident that trade facilitation will help to boost our competitiveness, to launch fresh initiatives in new sectors and to take advantage of all chances given by trade

liberation Hence, the policy makers of Vietnam need to solve the questions: to facilitate trade, we should start from where and by which way?

Despite locating in the South East Asia region, and having various geographic, political and social characteristics as our nation, Malaysia is at higher level of economic development Mastering in creating a set of solutions to facilitate trade, Malaysia would definitely show valuable experiences and be a typical model for Vietnam in terms of building up and developing a country comprehensively

Regarding the mentioned background, in order to improve our competitiveness

in exporting and take advantage of opportunities offered by trade liberation, the issue of creating facilitation as a stable factor of development in trade should be paid appropriate attention The issue requires policy maker of Vietnam have a clear and comprehensive view on every related issues, and learn from other countries that have been successful on making economic environment convenient, especially Malaysia Realizing the essence, urgency of the topic and also possible positive outcome that might be produced during developing the transportation system with

purpose of facilitating trade as the Malaysian has done, the topic “Transport and

Trade facilitation in Malaysia and lessons for Vietnam” has been chosen for my

graduation thesis at Hanoi Foreign Trade University

2 Literature review

As analyzed above, due to the fact that trade liberation has provided us with a lot of opportunities, there have been many academic researches aiming at investigating its impacts to the economic situation, as well as producing recommendation to find the best way to improve Vietnam’s ability to expand our exporting market Meanwhile, the topic of trade facilitation has appeared lately and remained quite new It inarguably deserves more serious concerns from scientists During the time this thesis is written, there have been a few academic materials assessing either transportation situation or trade facilitation in Malaysia and Vietnam Needless to say, they are quite informative and worth for reference

Report of World Bank (WB) in 2013 named “Trade Facilitation, Value Creation, and Competitiveness: Policy Implications for Vietnam’s Economic Growth”

highlighted the 3 key dimensions of trade facilitation with focus on physical

characteristics of trade flows Another report of WB that went into details of many

aspects in creating trade facilitation named “Facilitating Trade through Competitive, Low Carbon Transport: The Case for Vietnam’s Inland and Coastal Waterways” wrote about the intervention of inland and coastal waterways

infrastructure together with relevant policies, theirs benefits and prospect in the

future “Trade facilitation: Malaysia's experience” by WTO is not less informative

than the 2 papers before as it pointed out what Malaysian did to facilitate trade mainly depending on adjusting customs and procedures However, it seemed hard

to find anyone with deep investigation in Malaysia transportation and trade facilitation As Malaysia and Vietnam are both in South East Asia region and share several similarities, it could be better if there was paper considering this issue of Malaysia and have a connection/comparison with Vietnam

3 Purpose of the thesis

The thesis details actual practices of developing transportation system to facilitate trade in Malaysia in the recent 10 years then analyze the problem in Vietnam within the same period of time Depending Malaysian’s experience, possible coordination among sectors and ministries would be considered so as to recommend feasible suggestions for Vietnam to build up, adjust and maintain the transport infrastructure to facilitate trade better

4 Research methodologies

In order to investigating in trade facilitation, the theoretical systems of reputable international organizations, especially the theory and regulations of WTO, have been used as basis of the thesis Moreover, the readers will find various sets of data to be quoted and combined in the content; those may come from the statistical data or reports of organizations like UN COMTRADE, WB Using that data helps

to make critical comparison, draw logical conclusion and get lessons learned from Malaysia Additionally, other methods such as inductive method, qualitative method and theoretical method will also be used

5 The subject and scope of the thesis

The subject of the thesis is trade facilitation in Malaysia, focusing on the changes in the effects of transport infrastructure and logistics services Combining

with the practices in Vietnam, the feasibility of solutions will be examined at the moments and give some recommendations for the development of transport in preference to support trade facilitation

The scope of the thesis: as it is impossible to cover all elements of trade facilitation, the thesis will specify one of them: transport infrastructure in the recent

10 years (from 2005)

6 Structure of the thesis

This thesis is divided into 3 chapters:

- Chapter 1: General theory of transport and trade facilitation

- Chapter 2: Current status of the development of transport to facilitate trade

in Malaysia in the period 2005 - 2014

- Chapter 3: Suggestions to develop transport to facilitate trade in Vietnam

from 2015 to 2020 based on experiences of Malaysia

CHAPTER 1: GENERAL THEORY OF TRANSPORT

AND TRADE FACILITATION

1.1 Overview of trade facilitation

1.1.1 Definition of trade facilitation

The majority of the world has been successful in reducing tariffs and eliminating commercial quotas in the recent few decades, which partially contribute

to the trend of globalization, especially in terms of international commerce There have been a enormous expansion and stronger connections within the international supply chains and international value chains between highly developed countries, developing ones and the others who are in the way of transforming This leads to the greater demand in supply sources all over the world and, consequently, the growth in materials/ goods distribution Together with the flourish of e-commerce, these above factors has been putting governments under pressures that requires regulations to be changed to suit with the overall movements of the development of the world economy and manage its operation better This demand roots in the reason that most of the obstacles with international business nowadays do not lie in tariff or quota, but in the lack of transparency of regulations and customs rules in transportation system, which cause the increase in both time and cost to do business transaction and decrease the effectiveness of the economy

The World Bank (2005) claimed that “Trade facilitation is imperative for

development” Indeed, investment in activities aiming at facilitating trade is

essential in order to have sustainable development It is evident that trade facilitation has played a key role in the development of economy in each country, and of the whole world in general, as it helps goods and services be delivered punctually with a lower cost, so it also helps to boost the competitiveness of each economy Based on that, countries can take advantages of every single chances brought by trade linearization It is believed that unless countries, especially those developing, make appropriate investments on port and road systems, improve the effectiveness in customs management and so on, they will fail to seize those opportunities

Being aware of the significance of facilitating trade at the beginning of 20thcentury, WTO members agreed that trade facilitation should be treated as one of the main issues to be considered Trade facilitation was first analyzed in details in the

1996 Ministerial conference which took place in Singapore The topic has received more and more concerns from not only authorities but also entrepreneurs all over the world afterwards In many agreements latter such as ACV, PSI, ROO, ILP, TBT, SPS and so on, there were some terms working on the simplification of trade procedures, which initially reflected the spirit of trade facilitation However, these remained quite simple and aimed only at cutting red tapes which, in the past, was used by various in order to protect domestic industry against external one Not until December 2013 did the WTO members come up with the final agreement about this

global issue, which was named “The Agreement on Trade Facilitation” It was

part of a wilder Bali package which is the outcome of the Ministerial Conference in Bali, Indonesia

According to ITC (2013): “There is no commonly – used definition of trade

facilitation” In other words, it is easy to find a lot of ways to approach to this term

Some originated from trustful sources could be as follows

In “The Agreement on Trade Facilitation”, WTO (2003) defined trade

facilitation as “the simplification and harmonization of international trade

procedures” with trade procedures being “the activities, practices and formalities involved in collecting, presenting, communications and processing data required for the movement of goods in international trade” The Trade

Facilitation Agreement comprises of provisions for expediting the movement, release and clearance of goods, including goods in transit Not only arranging measures for effective cooperation between customs and other appropriate governments on trade facilitation and customs compliance problem, it also contains provisions for technical support and capacity building in this section

For United Nations Economic Commission for Europe (UNECE) and its UN Centre for Trade Facilitation and Electronic Business (UN/CEFACT), trade facilitation is “the simplification, standardization and harmonization of procedures and associated information flows required to move goods from seller to buyer and

to make payment”; in which: simplification could be understood as process of

“eliminating all unnecessary elements and duplications in trade formalities, processes and procedures”, standardization could be seen as “the process of eliminating all unnecessary elements and duplications in trade formalities, processes and procedures” and standardization is the process of “alignment of national procedures, operations and documents with international conventions, standards and practices” Such a definition implies that not only the physical transit of goods is essential in a supply chain, but also the associated information flows What is more,

it includes, at the same time, all governmental agencies that intervene in the movement of goods, and different commercial entities that conduct business and move the goods This is in accordance with discussions on the issue ongoing at the

WTO at that time

Besides, World Bank (WB, 2006) claimed that “as the first generation of trade reforms, trade facilitation consists mainly of easing of border restrictions to merchandize trade and liberalization of foreign exchange markets, have been or are being implemented by the majority of developing countries” It is becoming obvious that their successful integration into the world economy increasingly depends on the realization of a series of complex, behind-border measures that fall under the heading of trade facilitation Broadly defined, these measures include anything from institutional and regulatory reform to customs and port efficiency and

are inherently far more intricate and costly to implement

In addition, other international organizations have once come up with the understanding of trade facilitation, such as UNCTACD, APEC and so on (see more

in the appendix 1) While the WTO’s definition above has been used as basis for WTO’s negotiation afterwards, the one of APEC might be broader as it encompasses also customs, transportation, goods transit, bank and insurance, business and telecommunications Despite the diversity in the definition of trade facilitation, it is evident that those all demand the higher level of simplification and harmonization in import – export process and transparency in trade regulations and operation They also target at minimizing the complexity and reducing cost during

doing business by using many methods

In short, the term “trade facilitation” within this thesis refers to the

adjustments in policy or procedures whose purpose is to cut down the cost and time

in goods transportation within a country or internationally, excluding tariffs, non – trade barriers and import quotas

1.1.2 Benefits of trade facilitation

Generally, all parties shall receive benefits in the event of favorable trade facilitation From the perspective of each country, it is obvious that the simpler the transactions process, the greater amount of goods to be traded, consequently the more tax coming to the pocket of the government In addition to this, a higher level

of effectiveness and transparency in providing public services will help authorities maintain a higher level of confidence and restrain fraud and eruption to make sure government’s income shall not be lost Moreover, trade facilitation will boost the competitiveness strengths of the economy, especially in terms of exporting, hence contribute to the growth of the economy and attract more foreign investment From the perspective of enterprise community, thanks to trade facilitation, it takes much less time for the freight to reach customers, which lead to a great fall in cost of inventory, transporting and others that might arise during the dead time That brings more competitive advantages to the business, especially one specializing in providing support services Besides these, due to the consistency and integrity in public services of the government like customs procedures or border managements, businesses can spend less time on paper work From the perspectives of customers, they are free from a great deal of cost due to cumbersome procedure or the likelihood of late delivery

Benefits brought about by trade facilitation could be observed at nationwide or international level For country management, minimizing delay and unnecessary costs are both positive for attracting foreign investment, assistance for the economy and creating more jobs World Bank (2012) shows that time to export goods from developing countries is 3 times higher than that from developed one The number of steps in exporting goods from developing countries is numerous, with many more signatures to be collected than those in developed one According to Organization for Economic Co-operation and Development (OECD, 2011) in a research named

“Trade cost: What have we learned”, one day decrease in time spent at sea could increase trade by about 4.5% for each country So here come 4 main benefits for countries, especially developing ones, to facilitate trade:

- Enhance competitive advantages in trade

- Invite foreign direct investment (FDI)

- Encourage small and medium enterprises to join international trade

- Accelerate the pace of economic growth

For regional or international management, the benefits of trade facilitation are undeniable For example, a recent WB research (Helble and Wilson, 2012) on aid effectiveness finds that 1 dollar of aid for trade facilitation translates into 70 dollars

in exports for recipients Another example is the APEC region: reforms in countries that perform below the regional average could increase intra-APEC trade by USD billion 245 (UNECE, 2010)

1.1.3 Issues of trade facilitation

As being analyzed above, trade facilitation aims at reduce time, cost and improve the reliability during doing business transaction However, until now, no assumption has been officially proved yet to indicate the sources of trade facilitation Alberto Perez and John Wilson (WB, 2010) claimed that measures leading to trade facilitation might be referred by 2 dimensions: one investing in physical (or hard) infrastructure (highway, railway, port, information technology) and the other focusing on regulatory reform (or soft infrastructure: the transparency and effectiveness of customs, border agencies; business environments and other institutions)

In order to have trade facilitation, each country should think about the following suggestions:

- Improve transportation services (including, but not limit to: transport infrastructure, freight services)

- Review legislation on trade

- Restructure supply chains

Those suggestions are displayed in figure 1.1 below, referred to as 3 pillars

Figure 1.1: Three Pillars of Trade Logistics and Facilitation

Source: WB, Trade Facilitation, Value Creation, and Competitiveness:

Policy Implications for Vietnam’s Economic Growth, 2013, p.20

The last pointed has been taken into consideration by UNECE (2013) as a crucial component in transportation, or exactly, a step in Buy-Ship-Pay model of UN/CEFACT In their opinion, adopting a supply chain perspective makes it possible to view and understand all possible processes and the inter-linkages between them It provides the framework to logically connect different actors, procedures and requirements in one picture of the trade environment In emphasizing the dependencies, it becomes clear that improvements are realized throughout the chain but changes in one area can easily be offset by stalemates in others

1.1.3.1 Transportation and logistics services

Logistics is the management of the flow of goods between the point of origin and the point of consumption in order to meet some requirements, of customers or corporations (Sunil Chopra and Peter Meindl, 2007, p.34) The resources managed

in logistics can include physical as well as abstract items The logistics of physical items usually involves the integration of information flow, material handling, production, packaging, inventory, transportation, warehousing, and often security

Domestic transportation is usually on the road, while international one mainly takes place on air or sea Additionally, this element includes services, equipments and infrastructure to link between different kinds of transport services (especially common in multimodal transport) Railway stations, seaports and cargo yard are used for transit goods in domestic transport, while seaports and airports suit with that purposes of international transport

It should be noted that this element also contains non-transport logistics services The most popular is cargo warehousing, along with other services offered

at warehouse like packaging, marking, inventory management, assembling Another one that might be involved by banks (with insurance or trade finance) is completing customs procedures Needless to say, the effectiveness of logistics services depends

on the quality of infrastructure and the diversity of services provided by governments and private businesses

Time and cost are the two factors used to measure the effectiveness of transportation and logistics services Sometimes, logistics key performance indicators (KPIs) also help to assess the ability to connect in transportation and customers’ satisfaction

In order to approach to trade facilitation, it should be highlighted that: Firstly, research on the issue should not only limit to congestion, but ought to include logistics services performed in that infrastructure Secondly, the cooperation between government agencies and private business is a must to enhance the effectiveness of logistics services in trade Well-planned infrastructure and transportation system help decrease the time and cost in goods transport In summary, improvements in transportation to facilitate trade can be gauged through time, cost and the level of uncertainty (or reliability) The table demonstrating impact of improvements in transport infrastructure and logistics services could be found in the the appendix 2

1.1.3.2 Trade regulatory procedures

Legislation on trade consists of all procedures and services related to goods transport passing through borders It contains the collection of tariffs, the performance of agreements, the restrictions of purchasing some particular kinds of

goods that might harms human health or community security and so on There are several reasons leading to the long time in following a procedure: cumbersome bureaucracy, inconsistent custom, lack of transparency in information, the absence

of information and communication technology

Obviously, essential adjustments should be taken place to simplify trade procedures, manage better the officials and have ground for trade facilitation

1.1.3.3 Restructuring supply chain organizations

The third factor to affect trade facilitation is the way to organize supply chain,

or in other word, restructuring the supply chains As being analyzed before, one of various targets of trade facilitation is to reduce cost in transport, so restructuring the supply chain can increase value added activities for domestic firms, minimize cost

of business support services and other ones that may arise during supply chains such

as cost of goods sold, cost of manufacturing

As intermediate products cross borders many times before being assembled into a final good, logistics costs are key for export competitiveness The Enabling Trade: Valuing Growth Opportunities program, conducted by the World Economic Forum, the World Bank and Bain & Co in 2012, indicated that reducing supply chain barriers could increase global gross domestic product (GDP) by USD 2.6 trillion, around 5% This estimate relies on countries improving just two key areas

of trade facilitation – border administration and transport and communications infrastructure – halfway to global best practice A less ambitious scenario, that of improvement halfway to regional best practice, would already lead to a global GDP boost of approximately USD 1.5 trillion, or 2.6% The highest relative GDP gains are focused in Africa and South-East Asia

More recent and deeper investigation of supply chain planning – both in global multinationals and companies which are not yet exporting but would like to – reveals a new focus Just as the reform drive shifted from tariff reduction to border management concerns, the new emphasis is on modularity and reliability behind the border Both experienced and budding exporters are keen to be able to set up their sourcing and distribution systems in a harmonized way across countries Ongoing research indicates that the key to this may be to convince officials in domestically

focused ministries and industries that trade facilitation should be part of their portfolio of concerns, rather than someone else’s problem

1.2 Regional and international policies on trade facilitation

1.2.1 Policy framework

The previous section has listed 3 things contributing to trade facilitation: transportation systems and logistics services, trade procedures and restructuring supply chain However, a policy framework is still in need to direct and control the

3 factors mentioned above A policy framework refers to both regional and international policies, which are deemed to be soft infrastructure and play a key role

in coordinating trading and transporting goods and logistics services

Figure 1.2: Structure of policy framework for trade facilitation

Source: National Committee for International Economic Cooperation, 2011 cited in WB, 2013, p.36

The upper figure illustrates the components of a policy framework

At the top of the triangle lie macroeconomic policies and strategies targeting at trade facilitation or going together with international agreements of trade promotion

which the nation participated in Basically, such policies and agreements shall navigate nationwide strategies of trade facilitation Moreover, there are also policies compatible with some particular regions or provinces, which help plan further programs or projects promoting local economy

In the middle of the triangle lie several institutions including both organizational structure (government agencies, official associations) and legal framework (law and legislation) Its purpose is to govern fair competition in trade by facilitating the economy and implement the policies or strategies in the upper part

- Organizational structure refers to a collection of management agencies

in charge of trade facilitation at a high level and organizations which are due to adhere the regulations mentioned in legal framework

- Legal framework refers to law and legislation governing trade, business activities, transport management, logistics development and building up infrastructure

At the bottom of the triangle lie trade competitiveness and transportation activities Once again, those 3 factors appearing here are including transport and logistics services, trade regulatory procedures and supply chain development

Synchronous cooperation of 3 parts of the triangle will surely increase trade competitiveness of any nation Trade competitiveness and facilitations activities should be conducted within legal framework and organizational structure to satisfy the demand of national policies/strategies and follow international agreements Smooth operation could be achieved as long as there is coordination between government and private sector

1.2.2 Regional and international organizations working on trade facilitation

Any country desiring to develop one (or more) of 3 pillars of trade logistics and facilitation needs well-planned organizational structure and legal framework as the basis to fulfill the policies/strategies (the top priority – at the top of the triangle) Such organizational structure and legal framework must, firstly, not cause any conflicts against any international agreements signed by the country itself, which are created and controlled by regional or international organizations What they try

to do are:

- Developing and administering international conventions and agreements on trade facilitation

- Developing relevant recommendations, guidelines, standards and other instruments

- Providing relevant technical assistance and capacity building to developing and transition economies

- Providing a platform for discussion of trade facilitation matters

Some organizations play key role all over the world on this issue They are:

1.2.2.1 World Trade Organization (WTO)

While there was no single agreement specifically focusing on a legal framework for measures relating to trade facilitation, WTO agreements covered some aspects of it

The Customs Valuation Agreement and the Agreement on Rules of Origin were both complementary General Agreement on Tariffs and Trade (GATT) agreements relating to the classification and valuation of goods for dispatch purposes The Agreement on Pre-shipment Inspection (WTO, 1994) seeks to establish regulations for conducting the pre-shipment inspection Some sources also believe that the Agreement on Technical Barriers to Trade (TBT) of the GATT

1994 (WTO, 1994) also has an impact on trade facilitation This agreement included regulations for the adoption of technical regulations and standards, and conformity assessment so that these regulations did not become obstacles to trade A similar approach was adopted to establish the Agreement on the Application of Sanitary and Phytosanitary Measures (SPS) In Articles V, VIII and X of GATT 1994 (WTO, 1994), other regulations on trade facilitation are presented At the WTO Ministerial Meeting held in Singapore in 1996, trade facilitation was officially included in the agenda for the next round of trade negotiations This round started officially in Doha in 2001 as the Doha Development, and still has been continuing

In negotiations WCO trade facilitation, WTO members seek to draft a new legal framework for trade facilitation

The crucial foundation for trade facilitation agreement was believed to lie in Articles V, VIII and X GATT 1994 These articles provided written rules that had arisen since 1947 and covering:

- Article V - Freedom of transit

- Article VIII - Fees and formalities connected with importation and exportation

- Article X - Publication and administration of trade regulations

These articles were successful at capturing the basic idea of what trade facilitation is about The process carried out in the Negotiating Group on Trade Facilitation (NGTF) has been reviewed whether those articles are sufficient to promote trade facilitation through efficient border management and effective domestic procedures The compulsory clarification and improvement of them has been based on proposals by WTO Member States

1.2.2.2 United Nation Economic Commission for Europe, with United Nations Centre for Trade Facilitation and Electronic Business (UNECE with UN/CEFACT)

One of the UNECE's most prioritized concerns toward trade activities is trade facilitation and e-commerce Within the UN system, UNECE is perceived as a focal point in those areas In 1960, its was a team was established by UNECE to work on the the issue all over the world, which was named Working Party No 4, then was replaced by the United Nations Center for Trade Facilitation and Electronic Business (UN/CEFACT) Its slogan is “Simple, Transparent and Effective Processes for Global Commerce” Recently, one of its more widely known recommendations is on Single Windows for export and import information submission (UNECE Rec.33) UNECE is also a co-founder of the United Nations Network of Experts for Paperless Trade in Asia and the Pacific (UNNExT)

The objective of the UNECE in the area of trade facilitation and e-commerce

is to assist countries and their institutions to develop their knowledge of facilitating national and international transactions, improve national competitiveness and their participation in global markets through the simplification and harmonization of processes, procedures and information flows In general, it operates to:

- Support and strengthen the capacity of national institutions for trade facilitation through advisory services and workshops

- Help set up national single windows for exportation - importation and information and its operation

- Analyze and streamline business processes to eliminate barriers and enhance business efficiency

- Support the replacement of electronic alternatives to paper documents

of the international supply chain

- Support business transactions without paper work

UN/CEFACT is a subsidiary body of the Intergovernmental Commission for Trade of the UNECE It is governed by a bureau consisting of a President and Vice-Presidents who oversees the management of the UN/CEFACT They formed a global representation of experts from intergovernmental organizations, country authorities and the business community

Up until now, UN/CEFACT has published:

- Technical standards, such as specifications illustrating how to develop one or more commercial standards and / or recommendations

- Commercial standards, such as specifications that provide relevant regulations, guidelines and/or principles within the framework of trade facilitation and e – commerce

- Recommendations on trade facilitation that formally guide public authorities, the private sector and the business community

1.2.2.3 World Bank (WB)

The WB’s trade facilitation tasks concentrate on cutting down the costs associated with transporting goods and services along international supply chain in terms of money, time or reliability It connects the poverty to international markets

by reducing trade costs or upgrading their employment, income and consumption opportunities, thereby contributing to the World Bank Group’s central mission of poverty reduction

Priorities for trade facilitation and logistics include:

- Trade finance

- Improving trade corridors and regional trade facilitation frameworks

- Enhancing the effectiveness of border management, including customs, police, health, quarantine, agriculture, immigration and standards agencies

- Promoting markets for logistics services

The WB has spent a great amount of budget on its institutional reform projects and financing of trade infrastructure A series of diagnostic and implementation tool were established by WB to help reformers to design and implement trade facilitation initiatives Furthermore, it has been widely known as one of the world’s most trustful sources of trade-related data and knowledge, technical assistance, project/donor coordination, advisory services, research, and provides supports for various external partnerships and global advocacy efforts

1.2.2.4 Other organizations

The 3 organizations above (WTO, UNECE, and WB) have been recognized for their enormous contribution to trade facilitation In addition, other international organizations have their own contributions into the policy framework of trade facilitation

The UN Economic Commission for Asia and the Pacific (UNESCAP) is a

UN’s regional commissions which was set up at the same time with OEEC, and is the regional development arm for the Asia-Pacific region Regarding trade facilitation, it supports countries by:

- Promoting simplification, harmonization and standardization of business processes to reduce costs and the time of transaction

- Facilitating trade and investment, particularly trade finance and trade online

- Enhancing the implementation of trade facilitation environment in the ESCAP region

ESCAP also runs projects for building up capacity, conducts researches, organizes intergovernmental meetings, and provides advisory services to its member states ESCAP has established, in cooperation with UNECE, the United Nations Network of Experts for Paperless Trade in Asia and the Pacific (UNNExT)

for capacity building in the area of trade facilitation and non-paper trade, taking advantage of the world-class expertise that exists in the region

In addition, ESCAP encourages research on trade facilitation through the Asia-Pacific Network for research and commercial training (ArtNet) and provides

an open platform for regional dialogue on trade facilitation among regional stakeholders by organizing the Asia Pacific Annual Forum in facilitating (APTFF),

in collaboration with the Asian Development Bank (ADB)

The Organization for Economic Co-operation and Development (OECD),

which had been initially the Organization for Economic Co-operation from 1947, was formed in 1961 It desires to "promote policies that will improve the economic and social well-being of people around the world" (OECD, 2005) It welcomes all countries and territories and currently has 34 members, ranging from Europe to North and South America OECD’s trade department has conducted various quantitative economic researches trade facilitation in terms of costs and benefits Another function of OECD is to plan cooperation for its members and assess the implementation between them (peer review)

The International Trade Center (ITC) has been jointly managed by WTO and

UN which totally concentrates on increasing exports from economies in transition and developing countries Its current program called “Trade Facilitation Programme Strategy” (TFPS), in the period between 2002 and 2015, sets target at boosting the competitiveness of the private area through improvements in export capacity, downgrade of transaction costs and strengthening regional integration using trade facilitation methods The application of the TFPS covers two main areas:

- Advising small and medium enterprises on exporting, in accordance with transit, border and customs formalities

- Strengthening private sector capacity in the area of trade facilitation and trade logistics services so that exporters comply with international requirements

Generally, in the Asia Pacific region, or the South East Asia area in particular, trade facilitation activities are mandated to follow agreements of regional

organizations, such as ASEAN, APEC or ASEM Summaries of those could be found in the table underneath

Table 1.1: Some Asia organization’s achievements in trade facilitation

No Organization Main achievements

- ASEAN trade in goods agreements (ATIGA)

- ASEAN Customs Code of Conduct

- ASEAN Single Window program (ASW)

- ASEAN Harmonization in Standards and Technical requirements

Important programs on trade facilitation made by APEC are:

- APEC Joint Action Plan on 15 areas, including: tariff, tariff barrier, investments …

non APEC Trade Facilitation Action Plan (TFAP) 1st phrase:

2002 – 2006; 2nd phrase: 2007 – 2010 (to decrease transaction cost)

1.2.3 International policies and strategies related to trade facilitation

Through the most recent century, it is a series of conventions that work together and make a solid legal framework for international commerce Without the appearance of such conventions, it would be extremely hard, or even impossible, to create and coordinate effectively a wide range of trade facilitation activities

Below are some imperative conventions having relations with or impact on trade facilitations:

- Chicago Convention on International Civil Aviation, 1944

- Convention on Facilitation of International Maritime Traffic, 1965 (FAL Convention, 1965)

- Convention on International Transport of Goods Under Cover of TIR Carnets, 1975 (TIR Convention, 1975)

- International Convention on the Harmonization of Frontier Controls of Goods, 1982

- Harmonized Commodity Description and Coding System, 1988 (HS Convention, 1988)

- WTO agreement on customs valuation, 1994

- Convention for the Unification of Certain Rules for International Carriage by Air, 1999 (Montreal Convention, 1999)

- Protocol of amendment to the International Convention on the simplification and harmonization of customs procedures, 1999 (Revised Kyoto Convention, 1999)

- United Nations convention on the use of electronic communications in international contracts 2005 (Convention on electronic communications, 2005)

- WTO Trade Facilitation Agreement, 2013

It should be highlighted that among those agreements/conventions/protocols, the last one – WTO Trade Facilitation Agreement, 2013 has direct effect on trade facilitation activities recently

In the modern and globalized world where trade barriers are going to be removed day by day, all countries prefer exportation to importation as they are aware that the more exporting contracts conducted, the more wealth their nations will absorb As a result, trade linearization is becoming a core part of international trade promotion orientation and trade facilitation is paid more attention from both economists and policy makers There will surely more and more forums and conference regarding this issue in the future, with expectation to new initiative at different levels (local, regional or international)

The following table shows detailed issues which policies/strategies of transportation and logistics services working on:

Table 1.2: Detailed issues of transportation and logistics services policies / strategies

Inland waterway

Transit point

Seaport Airport Border gate International

transportation

Sea transportation Air transportation Road transportation Transaction and

coordination

Combination of methods Logistics services

Source: WB, Trade Facilitation, Value Creation, and Competitiveness:

Policy Implications for Vietnam’s Economic Growth, 2013

It could be realized that there has been a connection between transport infrastructures, logistics services and trade facilitation The development of transportation in central area, main corridors and international entrance is a good source for trade facilitation In other words, an appropriate investment into infrastructure and logistics services is needed to facilitate trade better

1.3 Key performance indicators of trade facilitations

It is extremely important to analyze key performance indicators in assessing trade facilitation experiences in a particular country and giving recommendations This section will go into detail 4 key indicators related to trade facilitation activities and brief on some other ones

1.3.1 Logistics Performance Index (LPI)

The Logistics Рerformance Index (LРI) is an interactive and comрarative tool whose рurрose is to helр nations realize the challenges and chances they have to deal with in their рerformance on trade logistics and which imрrovement they can made Uр to 2014, the LРI allows more than 150 countries to make comрarison

The LРI is based on a worldwide survey of oрerators on the ground, including exрress carriers and global freight forwarders, рroviding assessment of the logistics

“friendliness” of the countries in which they run business and their counterрarts They combine meticulous рreрaration about the countries in which they work with qualitative evaluation of other countries where they do business with and exрeriences of global logistics environment Quantitative data suррlements feedback from oрerators on the рerformance of key comрonents of the logistics chain in the рartner nation

Consisting of quantitative and qualitative measures, LРI helрs build uр logistics friendliness for those countries It measures рerformance along the logistics suррly chain within a country and therefore offers two different рersрectives: domestic and international

Domestic LРI рrovides both quantitative and qualitative assessments of a

country by logistics exрerts working inside it It includes detailed information on institutions, the core logistics рrocesses, рerformance cost and time data and logistics environment

International LРI uses six key dimensions to comрare countries' рerformance

and also disрlays the derived overall LРI index The scorecard allows benchmark with the world (to disрlay world's best рerformer) and with the income or region grouр (with the oрtion to disрlay the income grouр’s or region’s best рerformer) on those indicators and the overall index The 6 key dimensions are:

- Custоms: Efficiency оf the clearance рrоcess by bоrder cоntrоl agencies (i.e., sрeed, simрlicity and рredictability оf fоrmalities), including custоms

- Infrastructure: Quality оf trade and transроrt related infrastructure (e.g.: infоrmatiоn technоlоgy, роrts, rоads, railrоads)

- Shiрments: Ease оf рreрaring cоmрetitive shiрments in terms оf рrice

- Cоmрetence and quality оf lоgistics services

- Tracking and tracing: Ability tо trace and track cоnsignments

- Timeliness: Whether shiрments reach роrt оf discharge at the schedule time оf destinatiоn оr nоt

Figure 1.3: Six key dimensions of LPI

Source: WB, Connecting to compete, 2014, p.7

The scorecards illustrate comparative performance—the dimensions demonstrate a scale from 1 (the lowest) to 5 (the highest), relevant to the possible comparison groups—of all countries (world), region and income groups

1.3.2 Global Competitiveness Index (GCI)

Global Competitiveness Index has been a core part of “Global Competitiveness Report” conducted by World Economic Forum (WEF) Its first edition was in 2004 Having based on the Growth Development Index and Business Competitiveness Index in the past, it succeeded at combining both macro and microeconomic aspects in to sole indicator

The most recent edition of this report published in 2014 benchmarked the competitiveness ability of nearly 150 countries with in-depth investigation into the drivers of their effectiveness and wealth The term “competitiveness” was understood as “the set of institutions, policies and factors that determine the level of productivity of a country” (WEF, 2014) The report acts as the most valuable evaluation of national competitiveness in comparison with other nations, providing

a background for policy dialogue among government, enterprises and citizens about the required actions to improve nation’s wealth The level of effectiveness, in turn, controls the amount of capital that can be earned by an economy In the edition, GCI suggested that country with higher level of innovation and citizens having higher level of vocational skills are motivated much better in terms of economic growth It also implied that cooperation among leaders of government, enterprises and society is required to address the burden after economic crisis and head to sustainable growth

The different aspects of GCI are captured in 4 pillars: inflation rate, corruption labor skills and infrastructure

1.3.3 Enabling Trade Index (ETI)

Enabling Trade Index has been the heart of “Global Enabling Trade Report”, a accomplishment of World Economic Forum The report was first published in 2008 and worked on more than 100 emerging countries Having built from trustful information and data of various international organizations like WTO, WB, UN, its index assesses the services, policies and factors that facilitate the trade in goods across borders through 4 central areas: business environment, border administration, communications infrastructure and transport, market access

1.3.4 Global Connectedness Index (GCI – DHL)

DHL Global Connectedness Index was created by Steven Altman and Pankaj Ghemawat of DHL (German logistics corporation) in 2011 to analyzes trends in information, capital, trade, and people flows crossing border It shows a specialized analysis of the extent of globalization state around the world The report containing DHL Global Connected Index is published on a yearly basis It works on the depth (the frequency and the volume of good traded between that country with the others), breadth (how many partner countries that a particular one have business relation with), and directionality (how easy it is for other countries to do business with) The latest edition just came to public in 2014, which updated the prompt recovery of the economy for all damages incurred during crisis in the period between 2007 and

2010 However, trade depth was maintained last year, so it still remains a burden for global connectivity Holland and Europe was regarded at the top connected country

and region consecutively Ranking the majority of nations around the world, GCI – DHL serves as the right arm for researchers and investors to have a clear view of potential economies, hence made a good advice/decision on places to invest At the same time, authorities also have a tool to point out their plus and minus point in terms of economics connectivity

be better to add in a few specialized indicators as below:

- Liner Shipping Connectivity Index (LSCI): was first published in 2003

CHAPTER 2: CURRENT STATUS OF THE DEVELOPMENT

OF TRANSPORT TO FACILITATE TRADE IN MALAYSIA

IN THE PERIOD 2005 - 2014

2.1 Overview of Malaysia’s economy

2.1.1 Geographic location and political situation of Malaysia

2.1.1.1 History and geographic location of Malaysia

From the end of 18th to the next century, the United Kingdom had founded colonies and dominions in the area of South East Asia near Pacific Ocean, which were later invaded by Japan from 1942 to World War II The territories governed by England on the Malay Peninsula then established the Federation of Malaya in 1948, which has no longer been colony since 1957 As the East Malaysian states of Sarawak and Sabah and the former British colonies of Singapore merged into the Federation in 1963, it is time Malaysia was born However, the country then had to fight against Indonesian’s intension to dominate, Philippine’s claim of Sabah and Singapore’s splitting from the Federation

Malaysia is located in middle South East Asia and shares borders with Singapore at south, Thailand at north and Indonesia at south and west It comprises

of two main parts: the first one is Peninsular Malaysia and the other is the states of

Sabah and Sarawak to the north of the island of Borneo, which lie across the

South China Sea The former is an area of forested mountain ranges ranging from the north to the south, on either side of which situates low-lying coastal plains The coastline length is roughly about 1,900km

The coast to the west includes mudflats and mangrove swamps which split into bays and inlets In the west, while the unsheltered east coast consists of tranquil beaches backed by dense jungle, the plains have been cleared and cultivated The main islands are Langkawi (a archipelago of 99 sub-islands), Penang and Pangkor off the west coast; and Tioman, Redang, Kapas, Perhentian and Rawa off the east coast In Malaysian Borneo, Sarawak has alluvial and, in places, swampy coastal plains with rivers penetrating the jungle-covered hills and mountains of the interior

Sabah has a narrow coastal plain which gives way to mountains and jungle Mount Kinabalu whose height is 4,094m, has been acknowledged as the top of Malaysia

2.1.1.2 Political situation and foreign relations of Malaysia

Malaysia is a country of constitutional monarchy federal election System of government modeled close to the Westminster parliamentary system, a legacy of British colonial rule Yang di-Pertuan Agong is the head of state, or usually known as the

"King" King was elected by a 5-year term from next nine episodes of the monarchy Malay states The rest four states have nominally head of governors, but not involve in recruiting According to unofficial agreement, Sultan will position by rotating monarchy holds nine states, the role of the monarch largely ceremonial since changes to the constitution in 1994 Legislative power is split among state and federal legislatures Executive authority is given to the Cabinet headed by Prime Minister

Malaysia is a one of the founders of the ASEAN, Organization of Islamic Cooperation (OIC), and also participates in many international organizations such as the

UN Economic Cooperation forum Asia - Pacific, and the non-Aligned Movement (NAM) In the past, Malaysia served as chairman of ASEAN, OIC, and NAM for several times Kuala Lumpur was the venue for the East Asia Summit in 2005

Malaysia has been successful in maintaining diplomatic relations with other members of ASEAN like Vietnam, Indonesia, the Philippines, Singapore, Laos, Cambodia, Myanmar, Brunei and Thailand At the moment, Malaysian embassies have been placed in all ASEAN countries as well as other ones and helped the nation get along with neighbors In addition, the relations of Malaysia with important partners such as European Union (EU), United States and Japan began to flourish

It could be generally concluded that Malaysia is a country of stable politics The nation has been managed by a democratically-elected coalition which always sticks closely with development plan of its economy A lot of appropriate measures, particularly the Economic Transformation Program (ETP), have been designed for the Government pledge implement on the suitable policies and provide enough support for the establishment of a ideal environment for investment and business This is to guarantee the investors that Malaysian government firm yet flexible enough to address their needs

2.1.2 Economic situation of Malaysia

Malaysia has a state – oriented and quite open market economy, which is relatively new in terms of industrialization The state plays a key yet decreasing role

in navigating economic activities through macroeconomic policies Malaysia's economy was considered as one of the most competitive market in Asia in the last financial year 2014 – 2015 The economy was ranked 6th in Asia region and 20th on the worldwide basis, that means even higher rank than that of South Korea, France and Australia (The World Economic Forum, 2014) GDP PPP of Malaysia’s economy in 2014 was USD 746.821 billion, which was left behind by 2 other ASEAN members: Indonesia and Thailand A quick comparison shall help us understand the growth speed of Malaysia: The PPP GDP was USD 383.6 billion, which was just a half of the figure in 2014, and the PPP per capita GDP was USD 8,100, which was around one third that in 2014

Figure 2.1: Malaysia’s GDP growth from 1995 to 2014 (%)

Source: Author (based on WB, Malaysia overview, 2015, available at: http://www.worldbank.org/en/country/malaysia/overview)

Having been a productive raw materials supplier (tin and rubber) since the end

of 1960s, at the moment Malaysia has a diversified economy and has been a leader

in terms of export volume of electrical appliances and relevant components, natural gas and palm oil Seriously suffering from Asian financial crisis in 1997/8, Malaysia quickly recovered and maintained the growth rate of above 5.5 % from

2000 to 2008 Once again, the nation was affected by the global financial crisis in

the following year but had an immediate recovery right then In 2014, GDP growth was measured at 6%

Together with remarkable growth, poverty was shown to have positive signs

as the proportion of the poor in Malaysian society declining from 49.3 % in 1970 to 1.0 % in 2014 Meanwhile, inequality in society reflecting through citizen income was quite high For example, the Gini coefficient of income inequality of Malaysia reached 0.4 in 2014, in comparison with 0.31 and 0.33 in the South Korea and Japan The stability of Malaysia's short term financial standpoint over the medium-term relies on the execution of structural changes to help abilities and rivalry inside the economy, alongside the monetary advancements in Malaysia's fare markets and patterns in worldwide oil and gas markets The fastened usage of profit upgrading changes to build the nature of human capital and make more rivalry in the economy will be a solution for Malaysia to secure an enduring spot among the positions of high-wage economies The country is making every effort to tackle the problems New Economic Model (NEM), which is a project to bring the country to high income level by 2020 but still makes sure growth is inclusive and sustainable, came into effect in 2010 The NEM incorporates various changes to accomplish monetary development that is fundamentally determined by the private area and forces Malaysian’s economy into higher level

2.1.3 Foreign trade of Malaysia

International trade value of Malaysia experienced remarkable increase in the recent decade with total trade value rising from RM 969 billion in 2005 (RM 536 billion exporting, RM 433 importing) to more than RM 1.45 trillion in 2014 (RM

766 billion exporting, RM 683 billion importing) More importantly, Malaysia has been good at maintaining the status of trade surplus by pushing exporting more than importing value throughout the period In the previous year, its trade balance reached RM 83 billion, just half of that figure right before global crisis in 2008 (RM

143 billion) In general, both import and export value tends to go up in the future Figure 2.2 describes the changes in foreign trade value in the recent decade

Figure 2.2: Malaysia’s foreign trade value and trade balance (2005 - 2014)

(Unit: RM billion)

Source: Author (based on data of Department of Statistics Malaysia, 2015)

The following 2 tables show top 5 exported (table 2.1) and imported (table 2.2) products which had the highest value in foreign trade record of Malaysia Top 5

in exportation include: electrical equipments which account for more than one forth

of total value; fuel and oil (one fifth of total value); machinery, nuclear reactors, boiler (more than 10% value); agricultural products (animals and vegetables) and rubbers, which account Similar to exportation, top 5 in importation also have: electrical equipments; fuel and oil; machinery, nuclear reactors, boiler which together contribute more than half of total value to importation The 2 others are: vehicles (not tramway and railway) and plastics

Table 2.1: Top 5 exported products of Malaysia in 2012 – 2013

(USD billion)

Proportion

in 2012 (%)

Value in 2013 (USD billion)

reactors, boilers 24,834,977 10.92 24,115,890 10.55 Animal, vegetable

fats and oils,

Table 2.2: Top 5 imported products of Malaysia in 2012 – 2013

(USD billion)

Proportion

in 2012 (%)

Value in 2013 (USD billion)

reactors, boilers 23,414,289 11.93 23,227,270 11.26 Vehicles other than

2.1.4 Malaysia’s inward foreign direct investment

Malaysia has been considered as a potential destination for foreign direct investment (FDI) The Malaysian policy environment for FDI inflows in the primary and secondary sectors has generally been liberated Ministry of international trade and industry (MITI) is the leading governmental organization whose function is to evaluate and approve inward FDI, together with investment incentives, since the execution of the Promotion of Investment Act of 1986 Malaysian Industrial Development Authority (MIDA), which is MITI’s sub-organization, is the central promotional agency that has been instrumental in attracting FDI inflows to Malaysia In spite of the liberalization efforts under both World Trade Organization initiatives and ASEAN Free Trade Area (AFTA), recent trends reflect a decrease in coming FDI flows into the country Except for the global downturn, causes of the collapse in inward FDI lie in intensive competition, especially from other emerging markets, for FDI Another factor that added to the competition for FDI inflows was the transformation from capital-intensive to knowledge-based industry of Malaysia, which took place while lacking of human resources and technological capabilities Slower development in manufacturing value added at the level of 2.2% per year from 2006 to 2010 and a severe fall in inward FDI in 2009 have again made the government to reconsider its FDI policies Inward FDI of Malaysia collapsed in 2009 as exports declined seriously FDI experienced its worst downturn of 81% in that year when Malaysia could not remain in top 10 Asia’s FDI destinations Furthermore, Malaysia attracted much less amount of FDI in 2009 compared to that of other ANSEAN countries like Indonesia, Thailand and Singapore (table 2.3) The private investment in Malaysia

in the period 2006 – 2010 was calculated at USD 108 billion, which was share by private domestic investment (72%) and inward FDI (28%) (Putrajaya, 2010, p.37) Except for the global recession, the remarkable decrease in FDI inflows could be arisen from two main factors In recent years, inward FDI has increasingly flowed into higher value added services sectors such as financial and shared services, which are believed to situate outside Malaysia The scale of investment in manufacturing, Malaysia’s key recipient sector of FDI, is more than in services, which is more