THE COMPETITIVENESS OF MANUFACTURING SECTOR IN NCER … · THE COMPETITIVENESS OF MANUFACTURING...

THE COMPETITIVENESS OF MANUFACTURING SECTOR IN NCER AND ECER REGIONS

FROM THE SHIFT-SHARE ANALYSIS PERSPECTIVE

MARINA BINTI ZAKARIA

This project is submitted in partial fulfillment of the requirements for degree of Bachelor of Economics with Honours

(Industrial Economics)

Faculty of Economics and Business UNIVERSITI MALAYSIA SARA W AK

2011

ABSTRACT

THE COMPETITIVENESS OF MANUFACTURING SECTOR IN NCER AND ECER REGIONS

FROM THE SHIFT-SHARE ANALYSIS PERSPECTIVE

By

Marina binti Zakaria

Malaysia has experienced the economics unbalanced among the regions for a

long time where in 2008, the states of Selangor, Penang and Johor altogether

accounted for more that one-half of the total gross output and total employment

especially in the manufacturing sector. If there are no considerations regarding

to this issue, the intention of Malaysia to be a developed country by 2020 is far

to achieved. In addition, the manufacturing sector is one of the most important

pillars to the growth of Malaysian economy. Therefore, this study is carried out

to investigate the local competitiveness potential for economic development of

mallufacturing sector by comparing the Northern Corridor Economic Region

(NCER) and the East Coast Economic Region (ECER) of Malaysia using the

shift-share approach. The result show that the NCER region is more attractive

compared to the ECER region either for investment or looking for jobs.

Therefore, the aggressive initiatives need to be taken to balance the economy

among regions especially in the ECER region.

I

ABSTRAK

DAYA SAING SEKTOR PEMBUATAN DI WILAYAH NCER DAN ECER DARI PERSPEKTIF ANALISIS SHIFT--SHARE

Oleh

Marina binti Zakaria

Bertahun lamanya Malaysia mengalami ketidakseimbangan ekonomi antara

wilayah dimana pada tahun 2008, negeri Selangor, Pulau Pinang dan Johor

dilaporkan menyumbang lebih daripada satu-setengah dari jumlah output

kasar dan jumlah tenaga kerja terutama di sektor pembuatan. Jika masalah ini

tidak dipertimbangkan, hasrat Malaysia untuk menjadi negara maju pada

tahun 2020 akan jauh dari kenyataan. Tambahan pula, sektor pembuatan

sangat penting bagi pertumbuhan ekonomi Malaysia. Oleh kerana itu,

penyelidikan ini dijalankan untuk mengkaji daya saing wilayah yang

berpotensi untuk pembangunan ekonomi sektor pembuatan dengan

membandingkan Wilayah Ekonomi Koridor Utara (NCER) dan Wilayah

Ekonomi Pantai Timur (ECER) di Malaysia, menggunakan pendekatan Shift-

share. Keputusan kajian menunjukkan bahawa wilayah NCER lebih menarik

perhatian para pelabur serta rakyat dalam mencari pekerjaan berbanding

wilayah ECER. Oleh kerana itu, inisiatif agresif perlu diambil untuk

mengimbangi ekonomi antara wilayah khususnya di wilayah ECER.

ACKNOWLEDGEMENT

,. j

Thanks to Allah for His divine grace, I can complete this research study within

the prescribed time despite facing many challenges during the completion of this

project. I would like to express my greatest appreciation to my supervisor, Encik

Mohd Khairul Hisyam Hassan for the guidance, criticism and support during

the process of completion this research paper.

In this opportunity, I would like to thank those who have involved directly as

well as indirectly in this project especially to my family for the financial support

and to my beloved friends for generating ideas and giving moral support.

I also would like to thank UNIMAS for the facilities provided especially GAlS

and also to the Department of Statistic Malaysia for providing the unpublished

data even though it need a long time to retrieved the data. Thank you to all the

parties involved.

Thank you.

I

TABLE OF CONTENTS

LIST OF TABLES x

LIST OF ABBREVIATIONS xu

CHAPTER 1: INTRODUCTION

1.1 Background of NCER 1

1.2 Background of ECER 3

1.3 Problem Statement 6

1.4 Objectives of Study 7

1.5 Significance of Study 8

1.6 Scope of Study 9

CHAPTER 2: LITERATURE REVIEW

2.1 Early Development 10

2.2 The Debate about Shift-Share in Forecasting 11

2.3 Alternative Model of Shift-Share 12

2.4 Application of Shift-Share in Manufacturing 14

2.5 Conclusion 18

CHAPTER 3: METHODOLOGY

3.1 Introduction 19

3.2 Conceptual Framework 20

3.3 Data 21

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Vll

CHAPTER 4: RESULT AND DISCUSSION

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4.1 Introduction 23

4.2 Calculation of the Shift-share Model in NCER Region 23

4.2.1 Value Added 23

4.2.2 Employment 26

4.3 Calculation of the Shift-share Model in ECER Region 29

4.3.1 Value added 29

4.3.2 Employment 31

4.4 Analysis by Component 34

4.4.1 Analysis by Component: NCER Region 35

4.4.2 Analysis by Component: ECER Region 37

4.5 Analysis by Selected Industries 39

4.5.1 Manufacture of Food Products and Beverages 39

4.5.2 Manufacture of Chemicals and Chemicals Products 40

4.5.3 Manufacture of Rubber and Plastic Products 41

4.5.4 Manufacture of Electrical and Electronics Products 41

4.6 Conclusion 42

CHAPTER 5: CONCLUSION AND POLICY IMPLICATION

5.1 Conclusion 44

5.2 Policy Implication 45

5.3 Limitation of Study and Recommendation 47

REFERENCES 48

VIll

- ..

APPENDIX A

Manufacturing's Value Added by Industries of NCER States and Malaysia 2000-2008 (RM million)

APPENDIXB

Total Employment of Manufacturing Sector by Industries of NCER States and Malaysia 2000-2008

APPENDIXC

Manufacturing's Value Added by Industries of ECER States and Malaysia 2000-2008 (RM million)

APPENDIXD

Total Employment of Manufacturing Sector by Industries of ECER

States and Malaysia 2000-2008

IX

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LIST OF TABLES

..

Table Page

1.1 Gross domestic product of NCER states and Malaysia 2005-2009 (RM million in 2000 prices) 2

1.2 Employment of NCER states and Malaysia 2000-2009 ( '000 persons) 3

1.3 Gross domestic product of ECER states and Malaysia 2005-2009

(RM million in 2000 prices) 4

1.4 Employment of ECER states and Malaysia 2000-2009 ('000

persons)

4.1 Shift-share analysis of value added NCER

(RM million)

4.2 Shift-share analysis of value added NCER (RM million)

4.3 Shift-share analysis of value added NCER

(RM million)

4.4 Shift-share analysis of total employment NCER 2005 (persons)

4.5 Shift-share analysis of total employment NCER

2008 (persons)

4.6 Shift-share analysis of total employment NCER

2008 (persons)

5

Malaysia 2000-2005

24

Malaysia 2005-2008 25

Malaysia 2000-2008

26

Malaysia 2000

27

Malaysia 2005

28

Malaysia 2000

28

x

I

...

4.7 Shift-share analysis of value added ECER Malaysia 2000-2005 (RM million) 29



4.10 Shift-share analysis of total employment ECER Malaysia 20002005 (persons) 32



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ANOVA

ECER SEZ

ECER

EU

GDP

NCER

US

MSIC 2000

LIST OF ABBREVIATIONS

Analysis of Variance-based

ECER Special Economic Zone

East Coast Economic Region

European Union

Gross Domestic Product

Northern Corridor Economic Region

United States

Malaysia Standard Industrial Classification 2000

Xll

CHAPTER ONE

INTRODUCTION

,.

1.1 Background of N CER

Government of Malaysia has come out with various initiatives to accelerate

economic growth and heighten income level of nation. One of the initiatives is

the Northern Corridor Economic Region development programme which

embraces the states of Perlis, Kedah, Penang and the north of Perak1• The

NCER initiative will progress from 2007 to 2025.

NCER has focus on two main objectives. First, the NCER target is to maximize

the economic potential of the region and eliminate the development and income

gap among the different regions in Malaysia. Second, the program aims to

heighten value-add and knowledge-based economic activities to heighten the per

capita income.

The vision of NCER to be a world-class economic region of choice by year 2025

which will catalyses by five missions. The five missions of NCER are to

accelerate economic growth by developing core economic sectors2, to address

socio-economic imbalances, to raise the capacity of knowledge and innovation, to

improve the quality of life and to strengthen institutional and implementation

capacity.

J The four districts in north of Perak that embrace within NCER are: Rulu Perak, Kerian, Kuala Kangsar and Larut Matang-Selama 2 The three core economic sectors in NCER are agriculture, manufacturing and tourism.

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The overall idea for NCER initiative is "increasing value-add from existing

industries", emphasizing transformation and expansion of the agricultural,

manufacturing, tourism and logistic sectors in the Region.

Table 1.1 shows the GDP of NCER states and Malaysia for 2005 and 2009.

Services sector plays an important role in NCER region since the services sector

contributed more than half of the GDP in NCER region for 2009 and 49.3

percent in 2005 compared to the manufacturing sector (39.6 percent in 2005 and

34.1 percent in 2009). Nevertheless, with compared to national level, the service

sector in NCER region only contribute around 17 percent for both years. The

share of manufacturing sector to the national level is 24.0 percent and 23.7

percent in 2005 and 2009 respectively. This value is the highest contributor

with compared to the other services in the region.

2005 2009 2005 2009

Table 1.1 Gross Domestic Product of NCER states and Malaysia 2005-2009 (RM million in 2000 prices)

Sector NCER

Agriculture 6,361 7,389 35,524 39,579 Mining and quarrying 127 139 42,439 40,202 Manufacturing 31,577 31,044 131,388 131,010 Construction 1,809 1,852 13,286 15,553

50,091Services Total

Source: Department of Statistics Malaysia, DOSM Note: Included total state ofPerak

The manufacturing sector also becomes the popular work destination in 2000

and 2005 even though the employment is slight decreasing from 2000 to 2005.

In 2009, the wholesale and retail trade, restaurants and hotels sector has took

over the work destination from manufacturing sector with 25.5 percent of the

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.. .,.

total employment in the regIOn. Nevertheless the difference is only a small

portion. The employment by sectors in NCER region is shown in the Table 1.2.

Table 1.2 Employment of NCER states and Malaysia 2000-2009 ('000 persons)

NCER MalaysiaSector

2000 2005 2009 2000 2005 2009 Agriculture, forestry, livestock and fishing 282 261 260 1,552 1,470 1,471 Mining and quarrying 5 5 8 28 36 63 Manufacturing 648 558 526 2,174 1,989 1,807 Electricity, gas and water 7 9 8 49 57 58 Construction 148 171 175 760 904 1,016 Wholesale and retail trade, restaurants and hotels

407 513 602 1,787 2,292 2,632

Transport, storage and communication 91 90 117 434 545 592 Finance, insurance, real estate and business services

73 107 159 474 706 873

Community, social and personal services 453 436 510 2,010 2,045 2,384 Total 2,115 2,150 2,364 9,269 10,045 10,897

Source: Department of Statistics Malaysia, DOSM Note: Included total state ofPerak

1.2 Background of ECER

Another initiative of government of Malaysia is East Coast Economic Region

(ECER) that inception in June 2008. ECER embrace the states of Kelantan,

Terengganu, Pahang and district of Mersing in Johor. ECER's population is

about 3.9 million which represents 14.5 percent of total population of Malaysia.

ECER has established a Master Plan that will be a guiding for development of

the Region till 2020 where NCER will be transformed into a major international

and local tourism destination, an exporter of resource based and manufactured

products, a vibrant trading centre and an infrastructure and logistics hub. The

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objectives of this plan also to eradicate poverty, and Improve mcomes and

distribution in a sustainable manner for ECER.

The ECER vision is to be a developed region by 2020 which defined by three

characteristics - distinctive, dynamic and competitive. ECER adopt the Mission

Trust from the Ninth Malaysia Plan - to move the economy up the value chain,

to raise the capacity of knowledge and innovation, to address persistent socio

economic inequalities constructively and productively, to improve the standard

and sustainability of the Quality of Life and to strengthen the institutional and

implementation capacity.

Table 1.3 Gross Domestic Product of ECER states and Malaysia 2005-2009 (RM million in 2000 prices)

ECER MalaysiaSector

2005 2009 2005 2009 Agriculture 6,549 7,163 35,524 39,579 Mining and quarrying 70 78 42,439 40,202 Manufacturing 10,836 11,320 131,388 131,010 Construction 990 1,250 13,286 15,553 Services 22,164 28,004 220,595 288,306

Total 40,609 47,815 443,232 514,650

Source: Department of Statistics Malaysia, DOSM Note: The district of Mersing do not included

Table 1.3 shows the GDP of ECER states and Malaysia by sectors for 2005 and

2009 with services sector become the major contributor for GDP of ECER region

which contributed more than half of regional share for both years. The share of

manufacturing sector to the region for 2009 is 23.6 percent followed by

agriculture (15.0 percent), construction (2.6 percent) and mining and quarrying

(0.2 percent) for that year.

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.. ,... Pusat Khidmat Mak.lumai A~"Jemik UNIVERSITI MALAYSIA SARAWAK

Agriculture sector contribute the largest share of employment to the region in

2000 with 27.1 percent. However the direction of employment shift to the

services sector for the year 2005 and 2009 which is the wholesale and retail

trade, restaurants and hotels sector is the major contributor with 24.2 percent

in 2005 and 24.7 percent in 2009. Community, social and personal services also

plays an important role since it contributed 23.3 percent in 2009 followed by

agriculture, forestry, livestock and fishing (19.6 percent), construction (12.3

percent), manufacturing (11.0 percent), finance, insurance, real estate and

business services (4.5 percent), transport, storage and communication (3.4

percent), electricity, gas and water (0.6 percent) and mining and quarrying (0.6

percent). This employment result shows in the Table 1.4.

Table 1.4 Employment of ECER states and Malaysia 2000-2009 ('000 persons)

ECER MalaysiaSector

2000 2005 2009 2000 2005 2009 Agriculture, forestry, livestock and fishing 319 296 294 1,552 1,470 1,471 Mining and quarrying 5 8 9 28 36 63 Manufacturing 160 154 165 2,174 1,989 1,807 Electricity, gas and water 5 7 10 49 57 58 Construction 121 145 184 760 904 1,016 Wholesale and retail trade, restaurants and hotels

226 316 371 1,787 2,292 2,632

Transport, storage and communication 44 48 51 434 545 592 Finance, insurance, real estate and business services

24 39 68 474 706 873

Community, social and personal services 276 293 349 2,010 2,045 2,384 Total 1,179 1,306 1,499 9,269 10,045 10,897

Source: Department of Statistics Malaysia, DOSM Note: The district of Mersing do not included

On August 2009, the ECER Special Economic Zone (ECER SEZ) was established

to farther enhance the Region's competitiveness. As the national development

catalyst for concentrated decentralization of economic activities in line with the

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New Economic Model, the ECER SEZ alms for a dynamic and competitive

Region of growth.

By 2020, the GDP (in 1987 prices) growth rate of ECER is expected to be

RM65.93 billion which ECER is expected to implement projects worth an

estimated RM112 billion in value. Specifically, the ECER SEZ is expected to

generate up to RM90 billion in investment with contribute RM23 billion to the

national GDP. The ECER SEZ also expected to create 220,000 new jobs out of

the 560,000 jobs identified under the ECER Master Plan.

1.3 Problem Statement

Manufacturing sector becomes a major contribution to the economic growth of

Malaysia after the service sector. For the last five years, the Ninth Malaysia

Plan also focused on increasing the value added in the manufacturing sector as

well as the Tenth Malaysia Plan which will accelerates the economic growth.

The New Economic Model also becomes one of the engines of economic growth to

fulfill the Vision 2020.

Since the industrialization is important for the growth of Malaysian economy to

achieve its vision, the manufacturing sector has shown to be the most important

in the growth of the nation. To achieve a developed country by 2020, the

development must initially develop from the regional itself.

6

The growth of regional also plays an important role to the growth of a country.

Selangor, Penang and Johor altogether accounted for more than one-half of total

gross output and total employment in the manufacturing sector in 2008 (Annual

Survey of Manufacturing Industries 2009, Department of Statistics Malaysia).

This economics unbalanced will widen the gap among the regions specifically in

the manufacturing sector.

Tenth Malaysia Plan also has reported that real investment output in NCER

and ECER are RM1.4 billion and RM2.06 billion respectively up to 30 December

2009. But these output still far away from the targeted investment for these

regions which are RM28 billion for NCER and RM20 billion for ECER.

Therefore, this study will investigates the persistent socio-economic inequalities

constructively and productively between the NCER and ECER regions with

compared to the national level of Malaysian economy and analyzes the

importance of the manufacturing sector as well as its contribution in relation to

job creations between NCER and ECER with approach of shift-share analysis.

1.4 Objective of Study

The main objective of this study is to investigate the competitiveness of the

manufacturing sector in NCER and ECER regions. The research objective

specifically presented as the following:

7

,... ,...

I. to determine the importance of the manufacturing sector III

contribution to regional economy in Malaysia;

11. to analyze the job creations in manufacturing sector between NCER

and ECER regions; and

111. to compare the advantages of the manufacturing sector between

NCER and ECER regions.

1.5 Significance of Study

Either we notice or not regional economy represents the national economy and

sometimes the industry may be booming in a region but the industry is actually

growing even faster at the national level and also vice versa. This study may

benefit many parties such as the region itself and also the investors as this

study is to analyze the competitiveness of the regions' industry and help their

high-performing.

This study might be useful for targeting industries that might has significant

future employment opportunities and identifying investment target. The role of

government in planning the regional economics also important in this regional

studies since this study provide the empirical evidence of the potential

industries that will accelerate the growth of region as well as Malaysia and

provides the job opportunities for the citizens.

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1.6 Scope of Study

This study uses the secondary data that obtained from the Department of

Statistic, Malaysia. The data are gathered from year 2000, 2005 and 2008 for

NCER and ECER regions as well as for Malaysia. This study compares the

competitiveness of manufacturing sector between two regions namely NCER

and ECER which divided into seventeen manufacturing industries for the years

reviewed.

The time-frame that are used are smaller compared to the time-series data

because the shift-share model may calculate the regional activity with the

minimum of available data (Heijman and Heide, 1998) and also useful for the

short-term projection.

This paper is divided into five chapters where the Chapter One will focus on the

introduction of the research, followed by Chapter Two which will discuss the

literature review in the various opinions of the previous researchers which is

related to this study.

Then the Chapter Three will focus on the methodology and conceptual

framework where as the empirical result and analysis of the result will be

discussed in the Chapter Four. Finally in the Chapter Five, the study will focus

on the conclusion and recommendation for overall of this study.

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CHAPTER TWO

LITERATURE REVIEW

....,..........

2.1 Early Development

For the past half century, a simple, fast and reasonably accurate method has

come out in the U.S. regional development studies to explain the

competitiveness of the region's industries and to analyze the local economic

base. Since its early development in 1960s, the shift-share analysis has become

increasingly popular despite having a long debate, criticism, a weak theoretical

foundation and ambiguous empirical support (Stevens and Moore, 1980).

Besides, they also claim that the shift-share analysis become increasingly

popular in forecasting the regional development because of two facts. First, the

shift-share model is a simple method that easily accessible published data which

make it fast and accurate. Second, the shift-share method has not yet been

criticized empirically.

Shift-share was first adopted in regional development study by Fuchs, Dunn

and Perloff, Dunn, Lampard and Muth (as cited by Herzog and Olsen, 1977).

Selting and Loveridge (1992) have noted that "classic" shift-share equation was

formalized by contribution of Fuchs (1962) and Ashby (1964). However, this

classical shift-share equation was criticized by Houston (1967) and Brown

(1969).

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...

2.2 The Debate about Shift-Share in Forecasting

Brown (1969) investigates the competitive component stability of shift-share

projection model using the manufacturing employment figures for Standard

Metropolitan Statistical Areas (SMSA's). The test was conducted for two-, three

and four-digit S.Le. categories to obtain the sensitivity of the model. He finds

that the competitive component is not stable and hence the technique is not

useful framework for regional projections.

On the other hand, Paraskevopoulos (1971) and Floyd and Sirmans (1973)

challenge the Brown's results and report that the regional share component is

stable over time. As a consequence, the regional share component can be used as

a planning and policy tool for regional economic analysis after requires some

modification in the model. Gerking and Barrington (1981) also report the

similar result and suggest that the regional share component is more stable in

the context of the linear rather than log-linear, covariance analysis model.

Gerking and Barrington using three tests for stability of the regional share

component, which are the cusum test, the cusum of squares test and the Farley

Hinich test. However, Brown (1971 and 1973) still argues that the shift-share

technique remains suspect.

Shift-share analysis also widely use as a forecasting tool in regional economic

study. James and Hughes (1973) have investigated the role of shift and share

analysis as a forecasting device using the annual employment data in two-digit

manufacturing industries for states in U.S. for the period 1947-1969. They

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suggest that the shift-share model is able to be applied for short-term rather

than long-term projections because of weighting problem. In addition to this

problem, the prediction of the shift-share model must be used with much of

caution.

A similar study by Hellman (1976) in forecasting the shift-share model in

regional projection has come up with two basic approaches. First, the researcher

must presume that the region is a different-unique entity from the nation and

must be treated separately. Next, is to employ the national projection by

analysis trends in the region's share of national activity. The study estimates

the implicit and explicit shift-share model of the employment levels in 65 three

digit manufacturing industries in New Jersey for a particular year, 1967. The

result shows that the explicit shift-share model is easy to specify and measure

the local-market oriented rather than to the export-oriented industries.

2.3 Alternative Model of Shift-Share

In conjunction of the competitive component weakness, Esteban-Marquillas

(1972) has come up with a new formulation called homothetic employment. The

modified formulation divides the dissimilar components of the shift-share

analysis, which are net shift, national growth and industry-mix effect in each

sector of each region clearly. Herzog and Olsen (1977) suggest that the modified

Esteban-Marquillas formulation has solved the problem of interwoven effect

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however creating the problem of weight. Nevertheless, this weighting problem

can be solved using short-term projection (James and Hughes, 1973).

Berzeg (1978) has analysed the regional development in Maryland using the

analysis of variance one-way and two-way layout. This approach has improved

the shift-share technique and eliminates the dependable problem on the level of

disaggregation across industries. He also claims that the extension to the two

way layout formulation has improved the shift-share model as a tool for

systematically analyzing trend of regional economic growth.

ANOVA shift-share model is the other alternative model that has been studied

by Knudsen (2000). He has examines the relationship between traditional and

ANOVA shift-share model. The empirical analysis shows that the ANOV A shift

share model provides a more satisfactory explanation of the changes in US

employment patterns over the study period. The traditional shift-share method

has been criticized because of its assumption concerning the linearity of regional

economic dynamics and its lack of ability to handle regional variation. Herzog

and Olsen (1977) also report the similar though which the two problems of the

traditional shift-share method are the problem of weights and the problem of

interwoven effects. However, the shift-share model still seems to have some

value in making ex post analyses of the component of regional employment

further change (Stevens and Moore, 1980) and this model also not yet been

criticized empirically (Rashid, 2003).

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2.4 Application of Shift-Share in Manufacturing

Reynolds (1980) investigates the shift-share analysis of regional and sectoral

productivity growth in different regional in Mexico during 1940 to 1970. The

shift of labour force from lower to higher productivity occupations in Mexico

occurred within production sectors, among sectors, and between regions of the

economy, as well as from rural to urban areas. A "pull" factor has point to

operate continually from 1940 into the 1960s, represents labour from primary

into secondary and tertiary occupations and sustaining strong absolute and

relative productivity gains in both sectors.

Shift-share analysis also has been used in determining the regional disparities

of labour productivity in manufacturing as the study by Ledebur and Moomaw

(1983). They have investigated the role of the shift-share analysis and the

result shows that industry-mix plays an important role in describing the

productivity disparities among regions.

Andrikopoulos (1990) in his study use the traditional form of the shift-share

model to analyze the manufacturing sector in the province of Quebec, Canada

and also the time-series data for twenty manufacturing industries of the two-

digit classification as the basis of his analysis. His study clearly point out that

the shift-share model is in fact a useful tool for analyzing historical employment

growth pattern.

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